Securities & Exchange Commission v. Garber
959 F. Supp. 2d 374
S.D.N.Y.2013Background
- SEC alleges Defendants purchased and resold over a billion unregistered penny stock shares in dozens of Penny Stock Companies between 2007–2010.
- Defendants allegedly claimed two exemptions from registration: Rule 504(b)(l)(iii) and Rule 144; Rule 504 scheme is not at issue in this decision.
- Rule 144 scheme involved converting debt to securities (Convertible Debt Scheme) and selling unrestricted shares; debt was not a security, undermining Rule 144 eligibility.
- Defendants allegedly sourced aged debt, obtained attorney opinions asserting debt was securitized, and sold shares with knowledge or reckless disregard of the debt’s non-security nature.
- Complaint seeks injunctive relief, disgorgement, interest, penalties, penny stock bars, and conduct-based injunction for Garber.
- The court addresses Rule 12(b)(6) challenges, determines the Rule 144 claims are adequately pled, and discusses the role of attorney opinions in the misrepresentations.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the FAC adequately pleads scienter for Rule 10(b) claims | SEC argues FAC shows strong inference of fraud and personal benefit | Defendants contend scienter is not adequately pled | FAC plausibly alleges strong inference of fraudulent intent |
| Whether Rule 144 misstatement claims survive after Janus and related authority | SEC contends misstatement theory remains viable under scheme liability | Defendants argue misstatements were not made by them | Claims survive; attorney opinions are not sole makers of the misstatements under Schemes liability. |
| Whether attorney opinions can be treated as the ‘maker’ under Rule 10b-5(b) and Sec. 17(a) | Attorneys’ opinions are instrumental and Defendants controlled communication | Janus limits liability to makers of statements | Janus does not foreclose liability; statements attributed to Defendants through control of communication and scheme. |
Key Cases Cited
- Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (U.S. 2011) (maker of a statement under Rule 10b-5(b) liability not attributed to others in a scheme)
- Iqbal v. Ashcroft, 556 U.S. 662 (U.S. 2009) (pleading standards; plausibility and two-pronged approach)
- Ganino v. Citizens Utils. Co., 228 F.3d 154 (2d Cir. 2000) (circumstantial evidence of scienter; scheme liability)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (strong inference of scienter; market manipulation claims)
- Kalnit v. Eichler, 264 F.3d 131 (2d Cir. 2001) (facts supporting scienter and motive/entitlement)
- SEC v. Monarch Funding Corp., 192 F.3d 295 (2d Cir. 1999) (securities fraud scheme liability principles)