United States Securities & Exchange Commission v. Landberg
836 F. Supp. 2d 148
S.D.N.Y.2011Background
- SEC brought action against Landberg, Kramer, Gould, Barsuk, West End entities and relief defendants for securities-law violations.
- Gould, CFO of West End, allegedly participated in and concealed a fraud scheme involving misstatements and misappropriation of investor assets.
- West End operated private funds (Franchise Fund and Hard Money Fund) that invested in restaurant loans and real estate loans, with IRA funds held in trust and subject to commingling prohibitions.
- Investors funded the funds through 2009; the Complaint alleges false statements, inflated returns, and asset transfers to mask liabilities.
- Allegations include interfund transfers, overvaluation of assets, improper withdrawals from the IRA, and use of IRA funds for unauthorized investments.
- Gould allegedly knew or was reckless about cash-flow problems, falsified financial statements, and distributed misleading reports to investors.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the SEC stated a claim under Rule 10b-5 and §17(a) | SEC pleads material misrepresentations and nexus to securities transactions with scienter. | Gould argues lack of dispositive statements or improper scienter; misapplication of Janus. | SEC stated plausible claims under Rule 10b-5 and §17(a). |
| Whether the SEC adequately pled scienter for §10(b)/Rule 10b-5 and §17(a) | Complaint shows strong inference of conscious or reckless misconduct by Gould. | Gould contends insufficient knowledge and reliance on others; attempts to minimize culpability. | Sufficient facts alleged; strong inference of scienter established. |
| Whether the SEC adequately pled aiding and abetting violations under §206(1), (2), (4) and Rule 206(4)-8 | Gould knowingly aided primary violations and provided substantial assistance. | Gould argues retroactive recklessness standard and insufficient knowledge. | Claims for aiding and abetting securities violations denied or not granted at dismissal stage; court finds sufficient allegations. |
| Whether injunctive relief is warranted | Past conduct suggests likelihood of future violations; remedy appropriate. | Not explicitly stated in the excerpt; Gould challenges likelihood factors. | Judgment denying dismissal of injunctive relief; likelihood of recurrence found. |
| Whether paragraph 78 should be struck as irrelevant | Not applicable to merits; could show consciousness of guilt. | Paragraph 78 is prejudicial and irrelevant. | Strike denied without prejudice; issue resolvable in limine. |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (Supreme Court 2009) (pleading must include plausible claims, not mere conclusory statements)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (Supreme Court 2007) (dismissal standard requires plausible entitlement to relief)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir.2000) (strong inference standard for scienter in pleading)
- Ganino v. Citizens Utils. Co., 228 F.3d 154 (2d Cir.2000) (materiality and nexus required for securities fraud pleadings)
- Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (Supreme Court 2011) (maker of statements and attribution of claims; ultimate authority over statements)
- S.E.C. v. McNulty, 137 F.3d 732 (2d Cir.1998) (recklessness and scienter standards in fraud actions)
- In re Refco, Inc. Sec. Litig., 503 F. Supp. 2d 611 (S.D.N.Y.2007) (group pleading doctrine and defendants' responsibility for statements)
- Gabelli v. SEC, 653 F.3d 49 (2d Cir.2011) (recklessness sufficiency and injunction considerations in SEC actions)
- Dabit v. Merrill Lynch, 547 U.S. 71 (Supreme Court 2006) (fraud need only coincide with a securities transaction)