SECURITIES AND EXCHANGE COMMISSION v. JOSEPH A. FIORE, BERKSHIRE CAPITAL MANAGEMENT COMPANY, INC., and EAT AT JOE‘S, LTD. n/k/a SPYR, INC.
No. 18-CV-5474 (KMK)
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
09/25/19
KENNETH M. KARAS, United States District Judge
OPINION & ORDER
Appearances:
Paul W. Kisslinger, Esq.
Securities and Exchange Commission
Washington, DC
Counsel for Plaintiff
Alexander B. Spiro, Esq.
Crystal Nix-Hines, Esq.
Quinn Emmanuel Urquhart & Sullivan, LLP
New York, NY and Los Angeles, CA
Counsel for Defendants
Marc S. Gottlieb, Esq.
Ortoli Rosenstadt LLP
New York, NY
Counsel for Defendants
KENNETH M. KARAS, United States District Judge:
The Securities and Exchange Commission (the “SEC” or “Plaintiff“) brings this Action against Joseph A. Fiore (“Fiore“), Berkshire Capital Management Company, Inc. (“Berkshire“), and Eat at Joe‘s, Ltd. n/k/a SPYR, Inc. (“Eat at Joe‘s“) (collectively, “Defendants“), alleging that Defendants engaged in manipulative trading practices in violation of federal securities laws, in violation of
I. Background
A. Factual History
The following facts are taken from the SEC‘s Complaint, and are assumed true for the purpose of resolving the instant Motion.
1. Relevant Parties and Entities
Joseph Fiore “owns and controls Berkshire and is the Chairman of the Board of Directors of SPYR, Inc., previously known as Eat at Joe‘s.” (Compl. ¶ 13.) From April 2013 to March 2014 (the “Relevant Period“), (id. ¶ 2), Fiore maintained and controlled six brokerage accounts held in the name of Berkshire and six brokerage accounts held in the name of Eat at Joe‘s, (id. ¶ 13). Berkshire is a New York private equity firm that provides financing to penny stock companies. (Id. ¶ 14.) Eat at Joe‘s is a Nevada corporation of which Fiore served as chief executive officer (“CEO“), chief financial officer (“CFO“), and chairman of the board, and owned more than 50% of its common stock. (Id. ¶ 15.) In early 2015, Eat at Joe‘s changed its name to SPYR, Inc., and shifted the focus of its business from “developing, owning, and operating theme restaurants” to “digital publishing and advertising and the development of mobile applications and games.” (Id.)
Non-party Plandai Biotechnology, Inc. (“Plandai“) is a Nevada corporation with its principal offices located in London, England. (Id. ¶ 17.) “Plandai purports to be in the business of producing botanical extracts from live plant material, including from green tea leaves, tomatoes, and more recently, marijuana, for the nutraceutical and pharmaceutical industries.” (Id.) Plandai‘s stock was a “penny stock,” as defined by the Exchange Act; at all relevant times, Plandai‘s stock traded at less than $5.00 per share. (Id. ¶ 18.)
2. The Promotional Campaign
In early 2011, Fiore was introduced to Plandai‘s CEO, and they entered into a business relationship. (Id. ¶ 19.) Plandai‘s common stock was registered with the SEC pursuant to
Fiore directly paid at least five promoters to promote Plandai stock, and indirectly paid at least twenty others to do so through two intermediary consulting companies. (Id.) In total, Fiore paid promoters at least $2,137,000 to promote penny stocks, including Plandai, with approximately $675,000 going to the two intermediary consulting companies. (Id. ¶ 24.) The promoters primarily distributed promotional materials through bulk emails and in posts on websites they controlled, targeting retail investors and encouraging them to buy Plandai stock. (Id. ¶ 26.) Fiore allegedly remained deeply involved in the promotional process, including by providing promoters with information and press releases about Plandai for use in their promotional materials, and by reviewing their materials and informing Plandai when he felt a promoter was underperforming. (Id. ¶¶ 27-28, 31.)
The promotional campaign emphasized the investment merits of Plandai stock and often included specific recommendations to buy Plandai stock, without disclosing that Fiore was actively selling that stock. (Id. ¶ 32.) For example, on April 29, 2013, a promoter paid by Fiore issued an eighteen-page “research report” that included a positive review of Plandai, and was accompanied by a “Speculative BUY” rating. (Id. ¶ 32(a).) The same day and the following day, Fiore directed the sale of at least 55,629 shares of Plandai common stock from accounts held by Berkshire and Eat at Joe‘s. (Id.) On October 4, 2013, a third-party promoter retained by one of the consulting firms on behalf of Fiore disseminated a “Street Alert” on Plandai that stated:
Put everything we‘ve told you together and you have a money making opportunity with PLPL like no other - and when it starts to run it‘s going to run fast, so get in while you can. Go with the experts. Buy PLPL now! . . . Keep a very close eye on this fast innovative play today. PLPL could tear up the charts once again. PLPL looks ready to lock and load!! Be prepared for an exciting trading session. This is an opportunity that you will not want to miss!
(Id. at ¶ 32(b).) On the same day, and on October 7, 2013, Fiore directed the sale of at least 70,633 shares of Plandai common stock from accounts held by Berkshire and Eat at Joe‘s. (Id.) On January 23, 2014, a promoter paid directly by Fiore issued a research report that included positive reports about the company and included a “Speculative BUY” rating; the same day and the following day, Fiore directed the sale of at least 227,200 shares of Plandai common stock from accounts held by Berkshire and Eat at Joe‘s. (Id. ¶ 32(c).) On February 12, 2015, a third-party promoter retained by one of the consulting firms on behalf of Fiore disseminated a “Stock Alert” on Plandai that indicated, “PLPL is a huge proven winner for us in the past and it was arguably the breakout company of the entire junior markets in early 2014,” and concluded, “PLPL looks ready to lock and load!! Be prepared for an exciting trading session. This is an opportunity that you will not want to miss!” (Id.
Fiore‘s actions demonstrate that he “clearly intended to sell throughout the Relevant Period.” (Id. ¶ 41.) For example, at least two of the brokerage accounts from which Fiore sold Plandai stock identified “liquidation” among the objectives for the accounts. (Id. ¶ 41.) Furthermore, Fiore completed and signed at least five documents that were sent to brokerage firms where Berkshire and Eat at Joe‘s maintained accounts that held Plandai stock, disclosing his intent to sell stock from those accounts. (Id. ¶ 42.) For example, on November 8, 2013, in connection with his deposit and intended sale of 1.25 million shares of Plandai stock owned by Eat at Joe‘s, Fiore submitted a representation letter to his brokerage firm in which he certified, “I have sold, or am in the process of selling, the above referenced [Plandai] shares,” and from November 2013 through January 2014 he did, in fact, sell all the shares referred to in the letter. (Id. ¶ 43.)
During the Relevant Period, Fiore sold 11,961,898 shares of Plandai from accounts held at six brokerage firms in the names of Fiore, Berkshire, and Eat at Joe‘s; the three entities collectively received proceeds totaling approximately $11,521,778 from the sales. (Id. ¶¶ 46-47.) On at least 90 occasions, Fiore sold Plandai stock within a week or less of the publication of a promotion that he had paid for, including seventy-three occasions when he sold on the same day. (Id. ¶ 48.) During the Relevant Period, Fiore sold Plandai stock on at least 176 of the 252 trading days, and his trading often “comprised a significant portion of the daily market volume in Plandai stock“; by contrast, Fiore did not sell any shares of Plandai stock in the public market in the three months preceding the start of the promotional campaign. (Id. ¶ 50.) Fiore received no compensation from Plandai or anyone else for promoting Plandai stock. (Id. ¶ 44.)
3. Market Manipulation
Fiore also made targeted purchases of Plandai stock to artificially increase the market activity and stock price of Plandai. (Id. ¶ 52.) For example, in late June to early July 2013, Fiore purchased Plandai stock “in anticipation of and to offset the potential market impact of” the impending publication of a July 6, 2013 article in the Seattle Times that was highly critical of Plandai and its senior management. (Id. ¶ 53.) On eighteen trading days from June 25, 2013 to July 22, 2013, Fiore bought more Plandai shares than he sold, and his purchasing accounted for a significant portion of the market volume in Plandai stock. (Id. ¶ 55.) Fiore‘s trades “set the closing price for Plandai stock on eleven of these eighteen trading days.” (Id.) During this time, Fiore also paid for promotional materials that drew attention to the active trading in Plandai stock. (Id. ¶ 56.)
In December 2013, the month prior to the legalization of marijuana in Colorado and Washington, and shortly after Plandai had announced its entry into the medical marijuana industry, Fiore “bought more Plandai stock than he sold.” (Id. ¶ 57.) In February 2014, Fiore purchased a total of 4.5 million shares of Plandai stock for
The SEC alleges that Fiore used “three well-known methods for manipulating the market for Plandai stock: wash and matched trades, marking the close, and painting the tape.” (Id. ¶ 64.)
a. Matched and Wash Trades
The SEC alleges that on “at least fourteen occasions from May 2013 to June 2013,” Fiore executed matched and wash trades by buying and selling “exactly the same amount of Plandai stock at exactly the same price with no change in beneficial ownership, through accounts he controlled in the name of himself, Berkshire, and Eat at Joe‘s.” (Id. ¶¶ 67-68 (listing examples of matched and wash trades).)2 Fiore engaged in similar trading activity on at least sixteen occasions from May 2013 to December 2013. (Id. ¶ 69 (listing examples).)
b. Marking the Close
The SEC alleges that Fiore repeatedly “marked the close” by executing trades “at or near the close of the market to attempt to raise the closing price of Plandai stock and create the false and misleading appearance that it was the result of legitimate market demand.” (Id. ¶ 70.)3 Fiore “set the closing price of Plandai stock on at least eighteen trading days” from May 2013 to September 2013. (Id. ¶¶ 70-71; see also id. ¶ 72 (listing examples of Fiore marking the close).)
c. Painting the Tape
Fiore allegedly “painted the tape” from May 2013 to September 2013 by “initiat[ing] multiple offers to purchase Plandai stock on the same day, and within the same short period of time, often at increasing purchase prices to artificially inflate the stock price and create the false and misleading appearance that the increase was the result of legitimate market demand.” (Id. ¶ 73; see also id. ¶¶ 74-75 (listing examples of Fiore “painting the tape“).)4
4. False and Misleading Statements
In furtherance of the scheme, Fiore allegedly made false and misleading statements to brokerage firms in connection with the sale of Plandai securities. (Id. ¶ 78.) For example, on January 27, 2014,
5. Failure to Disclose Beneficial Ownership
Fiore beneficially owned more than five percent of the outstanding shares of Plandai common stock at various times, but allegedly failed to file the required Schedule 13D with the SEC that would have publicly disclosed his ownership. (Id. ¶¶ 38, 86-88.) By failing to make the required disclosure, Fiore further concealed his ownership and sales of Plandai stock during the course of the scheme. (Id. ¶ 90.)
6. Eat at Joe‘s Operated as an Unregistered Investment Company
The SEC alleges that Eat at Joe‘s claimed to “develop, own[,] and operate theme restaurants called ‘Eat at Joe‘s,‘” but in reality, operated only one restaurant, a cheesesteak stand in the Philadelphia airport that reported recurring operational losses. (Id. ¶ 92.) For at least the years 2013 and 2014, Eat at Joe‘s allegedly acted primarily as a securities investment company. (Id. ¶ 93.) Fiore frequently used Eat at Joe‘s as a vehicle to buy and sell Plandai and other penny stocks acquired from Berkshire in a 2003 related party agreement. (Id. ¶ 94.) According to SEC filings, Eat at Joe‘s had acquired approximately 30 million shares of penny stock companies from Berkshire by May 21, 2013, with a stated face value of over $7.5 million, including approximately 3.5 million shares of Plandai with a stated face value of over $1.5 million. (Id. ¶¶ 94-95.) Eat at Joe‘s “also purchased numerous shares of Plandai and other issuers on the open market and in private transactions.” (Id. ¶ 95.) The SEC alleges that because its investment assets exceeded forty percent of total assets at the end of 2013 and 2014, Eat at Joe‘s was operating as an unregistered investment company within the meaning of the Investment Company Act. (Id. ¶ 97.)
7. Causes of Action
The SEC asserts eight causes of action based on the above allegations. The first four causes of action are for deceptive conduct in connection with Defendants’ purchase, sale, and promotion of Plandai stock, in violation of
B. Procedural History
The SEC filed the operative Complaint on June 18, 2018. (Compl.) On November 2, 2018, with leave of the Court, Defendants filed the instant Motion to Dismiss. (Not. of Mot.; Defs.’ Mem. in Supp. of Mot. (“Def.‘s Mem.“) (Dkt. No. 27); Defs.’ Decl. in Supp. of Mot. (“Defs.’ Decl.“) (Dkt. No. 28); Decl. of Marc S. Gottlieb, Esq. in Supp. of Mot. (“Gottlieb Decl.“) (Dkt. No. 29).) The SEC filed a response on December 7, 2018, (Dkt. No. 30), and filed an amended version on December 14, 2018. (Pl.‘s Mem. in Opp‘n to Mot. (“Pl.‘s Mem.“) (Dkt. No. 31).) Defendants filed a reply on December 20, 2018. (Defs.’ Reply Mem. in Further Supp. of Defs.’ Mot. (“Defs.’ Reply“) (Dkt. No. 32).)
II. Discussion
A. Standard of Review
“While a complaint attacked by a
“[W]hen ruling on a defendant‘s motion to dismiss, a judge must accept as true all of the factual allegations contained in the complaint.” Erickson v. Pardus, 551 U.S. 89, 94 (2007) (per curiam); see also Nielsen v. Rabin, 746 F.3d 58, 62 (2d Cir. 2014) (“In addressing the sufficiency of a complaint we accept as true all factual allegations . . . .” (quotation marks omitted)); Aegis Ins. Servs., Inc. v. 7 World Trade Co., 737 F.3d 166, 176 (2d Cir. 2013) (“In reviewing a dismissal pursuant to
B. Analysis
1. Sections 17(a) and 10(b)-5
Similarly,
a. Deceptive Conduct under 10b-5(a) and (c)
Defendants argue that “[w]hether cast as an omission or a misrepresentation of a material fact, or as a market manipulation, the Complaint lacks the requisite specificity necessary to survive a motion to dismiss.” (Defs.’ Mem. 5.) Defendants specifically argue, relying on Janus Capital Group v. First Derivative Traders, 564 U.S. 135 (2011), that Fiore cannot be primarily liable under
However, “[t]he Supreme Court‘s recent ruling in SEC v. Lorenzo forecloses [D]efendants’ . . . argument in this case.” S.E.C. v. SeeThruEquity, LLC, No. 18-CV-10374, 2019 WL 1998027, at *5 (S.D.N.Y. Apr. 26, 2019) (citing Lorenzo v. S.E.C., 139 S. Ct. 1094 (2019)). In Lorenzo, the Supreme Court rejected Defendants’ argument, instead holding that “dissemination of false or misleading statements with intent to defraud can fall within the scope of subsections (a) and (c) of
Here, the SEC alleges a deceptive scheme involving multiple forms of market manipulation, as well as various misstatements or omissions, which, combined with a misleading promotional campaign, were designed to convince the public that there was more market interest in Plandai stock than in fact existed, encouraging the public to buy Plandai and then allowing Fiore to sell his shares at a profit. (See Pl.‘s Mem. 12 (alleging scheme liability in violation of
b. Misstatements or Omissions under 10b-5(b)
The SEC also argues that Fiore made material misstatements to brokers in violation of
The SEC has therefore adequately alleged misrepresentations in connection with the sale of securities.
c. Materiality
Defendants argue that the SEC fails to plead that the alleged omission of Fiore‘s ownership of Plandai stock from the promotional materials was material. To fulfill the materiality requirement, “there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.‘” ECA, Local 134 IBEW Joint Pension Tr. of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 197 (2d Cir. 2009) (”ECA“) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988)); see also Halperin v. eBanker USA.com, Inc., 295 F.3d 352, 357 (2d Cir. 2002) (“The touchstone of the inquiry is not whether isolated statements within a document were true, but whether [the] defendants’ representations or omissions, considered together and in context, would affect the total mix of information and thereby mislead a reasonable investor regarding the nature of the securities offered.” (citation omitted)); Ganino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000) (“At the pleading stage, a plaintiff satisfies the materiality requirement . . . by alleging a statement or omission that a reasonable investor would have considered significant in making investment decisions.” (collecting cases)). Materiality depends on all relevant circumstances, and a complaint normally should not be dismissed based on materiality “unless [the statements or omissions] are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance.” ECA, 553 F.3d at 197 (quotation marks omitted) (quoting Ganino, 228 F.3d at 162); see also Halperin, 295 F.3d at 359 (“[A] complaint fails to state a claim of securities fraud if no reasonable investor could have been misled about the nature of the risk when he invested.” (emphasis omitted)).
Defendants briefly argue that the alleged misrepresentations, omissions, and deceptive conduct were not material because “it is widely assumed that promotional campaigns have been funded by someone[,] and knowledge of the practice is incorporated into the market price.” (Defs.’ Mem. 10.) The Court disagrees. First, the SEC has alleged an overarching deceptive scheme, only part of which is the failure to disclose ownership of Plandai stock to promoters; “considered together and in [the] context” of the promotional and market manipulation scheme, including Fiore‘s failure to register his more than 5% interest in Plandai and his use of multiple entities and individuals to allegedly conceal his ownership, the omission of his interest “would affect the total mix of
Corp., 2015 WL 5031232, at *12 (holding the plaintiffs stated
d. Scienter
”
Here, there are ample allegations to support a reasonable inference of scienter. The SEC alleges that Fiore owned and sold a significant amount of Plandai shares, and stood to make significant profits if the stock price was inflated during the Relevant Period. While the “mere desire to increase . . . stock prices does not give rise to a ‘strong inference’ of fraudulent intent,” In re Refco, Inc. Sec. Litig., 503 F. Supp. 2d 611, 645 (S.D.N.Y. 2007), Fiore also allegedly engaged in various deceptive trading practices, including marking the close, matched and wash trades, and painting the tape, while he was paying for promotion of the stock, and actively selling it while encouraging others to buy. See S.E.C. v. Competitive Techs., Inc., No. 04-CV-1331, 2005 WL 1719725, at *1, *6 (D. Conn. July 21, 2005) (holding the SEC sufficiently alleged scienter where it “allege[d] that [the] defendants acted with the purpose of creating a false appearance of active trading . . . and the purpose of inducing others to trade in the stock” through practices such as marking the close, painting the tape, and matching orders); S.E.C. v. Schiffer, No. 97-CV-5853, 1998 WL 226101, at *3 (S.D.N.Y. May 5, 1998) (denying motion to dismiss where the complaint “state[d] a reasonably inferable claim that [the defendant] executed a series of intra-day and ‘marking the close’ transactions, knowing or reckless to the fact that he was effecting an illegal manipulative scheme“).
Taken together, and drawing all inferences in the SEC‘s favor, these allegations are sufficient to create a plausible inference of scienter “at least as compelling as any opposing inference one could draw from the facts alleged.” Tellabs, 551 U.S. at 324; see also S.E.C. v. Aly, No. 16-CV-3853, 2018 WL 1581986, at *23 (S.D.N.Y. Mar. 27, 2018) (holding scienter established based on, inter alia, “the benefits [the defendant] received from the scheme,” and the “temporal proximity between [the defendant‘s] filing of the Schedule 13D and [his] sale of his call options” (alteration omitted)), reconsideration denied, 2018 WL 4853031 (S.D.N.Y. Oct. 5, 2018); S.E.C. v. Dubovoy, No. 15-CV-6076, 2016 WL 5745099, at *5 (D.N.J. Sept. 29, 2016) (finding temporal proximity between the defendant‘s trades and the publication of press releases supported an inference of intent to participate in alleged fraud); Abellan, 674 F. Supp. 2d at 1219 (“Scienter is . . . evident where persons engage in ‘scalping.‘“); In re Alstom SA, 406 F. Supp. 2d 433, 456 (S.D.N.Y. 2005) (holding the plaintiffs sufficiently alleged scienter where “it is at least arguable that [the defendant] deliberately omitted adequate information about its vendor financing arrangements from its public statements, and thus portrayed the performance of [a particular division] far more favorably than the full facts warranted“); S.E.C. v. Schiffer, No. 97-CV-5853, 1998 WL 307375, at *6 n.32 (S.D.N.Y. June 11, 1998) (“When a person who has a ‘substantial, direct pecuniary interest in the success of a proposed offering takes active steps to effect a rise in the market’ in the security, a finding of manipulative purpose is prima facie established.” (italics and alteration omitted) (quoting Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787, 795 (2d Cir. 1969))). Accordingly, the SEC has alleged
For the reasons stated, the SEC has sufficiently alleged a deceptive scheme in violation of
e. Market Manipulation
The SEC also asserts claims for market manipulation in violation of
It shall be unlawful for any person, directly or indirectly, . . . [f]or the purpose of creating a false or misleading appearance of active trading in any security . . . to effect any transaction in such security which involves no change in the beneficial ownership thereof, or . . . to enter an order or orders for the purchase [or sale] of such security with the knowledge that an order or orders of substantially the same size, at substantially the same time, and at substantially the same price, for the sale of any such security, has been or will be entered by or for the same or different parties.
Defendants did not expressly move to dismiss the SEC‘s claims under
In any event, Defendants’ arguments that the SEC failed to plead market manipulation even with respect to its
2. Section 7(a) of the Investment Company Act
Defendants argue that the SEC‘s claim against Eat at Joe‘s for violation of
Under
Defendants argue that Eat at Joe‘s is exempt from registration requirements because it has never been primarily engaged in securities investment, and that instead its primary focus was the operation of theme restaurants. (Defs.’ Mem. 20-22.) The SEC responds that the exception does not apply, given that “the scope of the company‘s investing and trading in securities dwarfed any other operations.” (Pl.‘s Mem. 26.)
Here, consideration of the Tonopah factors suggest that, based on the allegations in the Complaint, Eat at Joe‘s was required to register as an investment company under
Defendants ask the Court to take judicial notice of “all form 10-K public filings referenced” to establish that Eat at Joe‘s was primarily engaged in non-investment activity. (Defs.’ Mem. 21 n.5.) Defendants argue that based on the company‘s 10-K filings, Eat at Joe‘s is analogous to the company the Seventh Circuit held was not required to register as an investment company in S.E.C. v. National Presto Industries, Inc., 486 F.3d 305 (7th Cir. 2007). In National Presto Industries, the Seventh Circuit reversed a grant of summary judgment in favor of the SEC, relying heavily on an evidentiary record that confirmed that “[r]easonable investors would [have] treat[ed] Presto as a[] [military products] operating company rather than a competitor with a closed-end mutual fund.” 486 F.3d at 315.
Here, it would be inappropriate to consider Eat at Joe‘s 10-K filings to determine whether Eat at Joe‘s was exempt from registration because it would require considering the documents for their truth. Although courts may take judicial notice of “legally required public disclosure documents filed with the SEC,” DoubleLine Cap. LP v. Odebrecht Fin., Ltd., 323 F. Supp. 3d 393, 434 (S.D.N.Y. 2018), they may “not take judicial notice of the documents for the truth of the matters asserted in them, but rather to establish that the matters had been publicly asserted,” Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d 406, 424 (2d Cir. 2008) (citation, quotation marks, and alterations omitted). Here, Defendants ask the Court to consider the truth of the SEC filings’ contents and hold as a matter of law that the statements made therein establish that Eat at Joe‘s was primarily involved in the business of “creating American Diner themed restaurants, not investing.” (Defs.’ Mem. 21.) Because considering such statements for their truth would be improper at this stage, the Court declines to take judicial notice of the information in the 10-Ks. See In re Bear Stearns Cos., Inc. Sec., Derivative, & ERISA Litig., 763 F. Supp. 2d 423, 582 (S.D.N.Y. 2011) (taking judicial notice of SEC filings with respect to “the fact that these documents contain certain information,” but declining to “accept these documents for the truth of the matters asserted in them“), on reconsideration, 2011 WL 4072027 (S.D.N.Y. Sept. 13, 2011), and on reconsideration, 2011 WL 4357166 (S.D.N.Y. Sept. 13, 2011).5
For these reasons, Defendants’ Motion To Dismiss the SEC‘s
3. Section 13(d) of the Exchange Act and Rule 13d-1
The SEC alleges that Fiore never filed a Schedule 13D form within ten days of the acquisition of more than five percent of Plandai stock, as required by
Here, Defendants argue that Fiore should not be held liable for violating
Because the SEC has adequately pled that Fiore failed to comply with
4. Statute of Limitations
Defendants argue that the SEC‘s
Specifically, Defendants argue that because the “Relevant Period” discussed in the Complaint began in April 2013, and the Complaint was not filed until June 18, 2018, any and all claims in the Complaint arising from events before June 18, 2013 are time-barred. (Id.) Defendants also argue that the SEC cannot rely on a “continuing violations” theory of liability in order to litigate claims arising from actions outside the statutory term, as the Second Circuit has not adopted such a theory, and “most courts in this circuit have been skeptical of [the doctrine‘s] application in securities cases.” (Id. at 27.)
The SEC argues that all of the proceeds that Defendants received from their alleged violations were received on or after June 18, 2013, within the statute of limitations period. (Pl.‘s Mem. 29.) Moreover, the SEC argues that any information “concerning early conduct [is] included to support claims for injunctive and equitable relief, which are not subject to the five-year statute of limitations, and to provide necessary context to understand the Defendants’ fraudulent scheme.” (Id.)
“[T]he statute of limitations is normally an affirmative defense, on which the defendant has the burden of proof.” Bano v. Union Carbide Corp., 361 F.3d 696, 710 (2d Cir. 2004) (citations omitted). As a result, a claim should only be dismissed
Here, the SEC has alleged a fraudulent scheme involving conduct that occurred both within and before the statute of limitations. Specifically, the Complaint contains allegations of matched and wash trades executed between May 8, 2013 and June 28, 2013, (Compl. ¶¶ 68-69), marking the close between May 3, 2013 and July 10, 2013, (id. ¶ 72), painting the tape on May 3, 2013, (id. ¶ 74), manipulative limit orders on July 9, 2013, (id. ¶ 75), fraudulent and misleading statements to brokerage firms between November 8, 2013 and January 27, 2014, (id. ¶¶ 78-84), and failure to disclose beneficial ownership of more than five percent of Plandai‘s shares and operation as an unregistered investment company at various times within the Relevant Period, (id. ¶¶ 85-90).
Defendants argue that any claims supported in part by conduct that occurred prior to June 18, 2013 must nonetheless be dismissed because the Second Circuit does not apply the continuing violations doctrine in securities cases. (Defs.’ Mem. 27.) “The continuing violations doctrine operates to delay the triggering of a statute of limitations where a continuing violation is occasioned by continual unlawful acts, not continual ill effects from a single violation.” In re Comverse Tech., Inc. Sec. Litig., 543 F. Supp. 2d 134, 155 (E.D.N.Y. 2008) (citation and quotation marks omitted). Courts within the Second Circuit have reached “diametrically opposite conclusions” regarding whether the continuing violations doctrine applies in securities fraud cases. Freihofer v. Vt. Country Foods, Inc., No. 17-CV-149, 2019 WL 2995949, at *3 (D. Vt. July 9, 2019) (collecting cases); compare In re Beacon Assocs. Litig., 282 F.R.D. 315, 324 (S.D.N.Y. 2012) (holding that “continuing misrepresentations mean that [the] [p]laintiffs’ claims are not untimely, given the rule, adopted by the majority of courts in this Circuit, that the statute of repose first runs from the date of the last alleged misrepresentation regarding related subject matter” and collecting cases (citation and quotation marks omitted)), with Comverse Tech., 543 F. Supp. 2d at 155 (“The weight of authority in this circuit is skeptical of the application of the continuing violations doctrine in securities fraud cases.” (collecting cases)).
In light of the fact that all of the SEC‘s claims survive based on timely-pled allegations alone, the Court declines to determine at this stage whether the potential inapplicability of the continuing violation doctrine bars consideration of, and damages for, conduct that occurred prior to June 18, 2013. At the summary judgment stage, with the benefit of a developed factual record, Defendants may again raise the argument that some or all of the SEC‘s claims are time-barred. See Comverse Tech., 543 F. Supp. 2d at 155 (finding it “prudent to defer consideration of [the statute of limitations] issue until the factual record . . . is more fully developed” in light of the fact that it implicates “an uncertain area of the law,” and because “it is difficult to determine [at the motion to dismiss stage] whether the factual predicate required for application of the continuing violations doctrine . . . has been
5. Disgorgement
Defendants argue that the SEC failed to properly plead a claim for disgorgement because disgorgement is an equitable remedy, not a separate cause of action. (Def.‘s Mem. 22-23.) Defendants are correct that “[d]isgorgement is merely an equitable remedy rather than a cause of action.” Teachers Ins. & Annuity Ass‘n of Am. v. CRIIMI MAE Servs. Ltd. P‘ship, 681 F. Supp. 2d 501, 512 n.60 (S.D.N.Y. 2010) (citing Cavanagh, 445 F.3d at 117), aff‘d, 481 F. App‘x 686 (2d Cir. 2012); see also S.E.C. v. Contorinis, 743 F.3d 296, 301 (2d Cir. 2014) (“Disgorgement serves to remedy securities law violations by depriving violators of the fruits of their illegal conduct.“); F.T.C. v. Bronson Partners, LLC, 654 F.3d 359, 372 (2d Cir. 2011) (comparing disgorgement to other “equitable remedies,” and stating that “disgorgement is a distinctly public-regarding remedy“).
However, to the extent the SEC seeks disgorgement as an equitable remedy, it has adequately pled facts supporting entitlement to the remedy. “Once the district court has found federal securities law violations, it has broad equitable power to fashion appropriate remedies, including ordering that culpable defendants disgorge their profits.” S.E.C. v. Razmilovic, 738 F.3d 14, 31 (2d Cir. 2013) (citation and quotation marks omitted), as amended (Nov. 26, 2013). Because the SEC has sufficiently pled securities fraud claims, it may seek disgorgement of any “illegally derived” proceeds it ultimately is able to prove, see id., subject to the statute of limitations, see Kokesh v. S.E.C., 137 S. Ct. 1635, 1639 (2017) (“Disgorgement in the securities-enforcement context is a ‘penalty’ within the meaning of
6. Liability Against Each Defendant
Defendants argue that the SEC failed to state claims against Berkshire and Eat at Joe‘s because the Complaint contained “no direct allegations of wrongdoing” by Berkshire and Eat at Joe‘s
7. Section 20(b)
III. Conclusion
For the foregoing reasons, Defendant‘s Motion To Dismiss is denied. The Court will hold a conference on November 6, 2019 at 11:30 a.m. to discuss the status of
SO ORDERED.
Dated: September 25, 2019
White Plains, New York
KENNETH M. KARAS
United States District Judge
Notes
Not later than 180 days after the date on which Commission staff provide a written Wells notification to any person, the Commission staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent to not file an action.