SECURITIES AND EXCHANGE COMMISSION v. GEORGE STUBOS, et al.
22-cv-04674 (LJL)
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
10/10/2022
USDC SDNY DOCUMENT ELECTRONICALLY FILED DATE FILED: 10/10/2022
LEWIS J. LIMAN, United States District Judge:
The United States Securities and Exchange Commission (“SEC“) brings this action against Defendant George Stubos (“Stubos“) and Relief Defendant Dori-Ann Stubos (“Dori-Ann“) (collectively, “Defendants“). The SEC alleges claims against Stubos for fraud in the offer or sale of securities in violation of
Defendants move the Court for an order dismissing the complaint pursuant to
The SEC‘s complaint in this case (“Complaint“) alleges a pump-and-dump scheme.2 According to the Complaint, Stubos engaged in a sophisticated scheme from at least March 2012 through at least April 2015 in which he fraudulently concealed from investors that he, in concert with others, controlled the stock of at least two small and thinly traded U.S. companies. Dkt. No. 1 ¶ 1. While concealing his control of the companies, Stubos sought to increase demand for the companies’ stock through funding various promotions touting the stock. Id. ¶¶ 2-3. As the price and trading value of the stock increased as a result of the promotions, Stubos secretly sold shares into the market. Id. ¶ 3. Stubos also allegedly engaged in manipulative trading that created the false perception of active trading in the penny stocks. Id. ¶¶ 4, 36-37, 41-45.
Stubos is a Canadian citizen and resident of Vancouver, British Columbia, Canada. Id. ¶ 11. In June 2007, he was barred by the British Columbia Securities Commission from participating in the securities industry or acting as a director or officer of any issuer for two years and from participating in any investor relations activities for two years. Id. In September 1998, Stubos was barred by the Vancouver Stock Exchange (“Exchange“) from the Exchange for one year followed by one year of supervision and was ordered to pay fines and disgorgement for trading in a client account without the client‘s permission. Id. ¶ 11.
Dori-Ann is a Canadian citizen and resident of Vancouver, Canada. Id. ¶ 12. She is the wife of Stubos. Id.
The Complaint focuses on two companies that were vehicles of Stubos‘s fraud, and whose stock he controlled, promoted, manipulated, and sold. The first company is Petrosonic Energy Inc. (“Petrosonic“), a Nevada corporation with its principal place of business in Los Angeles, California, purportedly in the business of petroleum refining. Id. ¶ 14. The second company is Ener-Core, Inc. (“Ener-Core“), a Delaware corporation with its principal place of business in Laguna Niguel, California, purportedly engaged in the business of designing and manufacturing systems producing continuous energy. Id. ¶ 15. The common stock of both companies was registered with the SEC under
Stubos effectuated the fraud utilizing the illicit services of Frederick L. Sharp and his employees (the “Sharp Group“). Id. ¶ 24. During the relevant period, the Sharp Group helped facilitate illegal stock sales in the public securities markets and helped its clients who were public company control persons conceal their identities when selling the stock of companies they controlled. Id. ¶ 25. In order to help its clients conceal their identities as control persons, the Sharp Group offered a variety of services including: forming and providing
Stubos became a client of the Sharp Group in 2012. Id. ¶ 28. Shortly after, he transferred his control position in Petrosonic to the Sharp Group; as of December 2012, Stubos, through the Sharp Group, held 56% of its outstanding shares and therefore was an “affiliate” (i.e., someone who either controls, is controlled by, or under common control with, an issuer) of Petrosonic. Id. ¶¶ 17, 28. Using various nominee companies supplied by the Sharp Group, “Stubos caused the Sharp Group to strategically split” his holdings of Petrosonic stock into blocks of less than 5% of the total outstanding stock to be held in the name of each nominee company. Id. ¶ 29. This splitting of his holdings was performed to avoid reporting requirements and restrictions and scrutiny by brokerage firms and other market participants like transfer agents. Id. ¶¶ 29, 31.
From 2012 through 2014, Stubos secretly funded promotions of Petrosonic stock to generate investor interest in the stock, increase demand for the stock, and drive up Petrosonic‘s stock price and trading volume. Id. ¶ 32. To hide his involvement, he used the Sharp Group to make payments to various stock promoters, funneled Sharp Group proceeds to a Washington state corporation that he controlled to pay U.S. promoters, and used a foreign entity created by the Sharp Group to hire stock promoters. Id. ¶¶ 32-33. The promotions did not disclose that they were paid for by an affiliate of the issuer. Id. ¶ 34. As the price and trading volume of Petrosonic stock began to rise in response to each of the promotions, Stubos began selling his shares into the market via the Sharp Group-administered nominee companies. Id. In all, Stubos generated approximately $18.5 million in net trading proceeds. Id. “While Stubos was selling millions of shares of Petrosonic penny stock through the Sharp Group during the promotions he funded, he also directed manipulative trading to drive up the price and liquidity of the stock he was trying to sell.” Id. ¶ 36.
From 2013 through 2014, Stubos engaged in a similar scheme involving the securities of Ener-Core. Id. ¶ 38. In April 2013, he purchased the public shell company which later became Ener-Core from another Sharp Group client for $325,000. Id. ¶ 38. Following the purchase, Stubos‘s account at Sharp Group held virtually all of the purportedly unrestricted and restricted shares of Ener-Core that had been issued by the company and Stubos controlled over 99% of the company‘s purportedly unrestricted stock as of June 2013. Id. ¶ 39. Beginning in May 2013, the Sharp Group transferred Stubos‘s Ener-Core holdings to its nominee companies, splitting those shares into blocks of less than 5% of the total outstanding stock; it then deposited those shares with brokerage firms in order to be ready for sale to the market. Id. ¶ 40.
After engaging in these schemes, the proceeds of Stubos‘s sales of Petrosonic and Ener-Core stock were transferred to Stubos‘s account, which he used for his personal benefit. Id. ¶¶ 46-47. Stubos also directed the Sharp Group to wire approximately $3.6 million of his improper trading proceeds to an account he controlled at a Panamanian broker-dealer firm (the “Panamanian Account“). Id. ¶¶ 48-49. In May 2013, approximately $3.6 million was wired from the broker-dealer holding the Panamanian Account to a title company in California, which in turned purchased a property in Palm Springs, California in the name of Dori-Ann Stubos. Id. ¶ 50. The SEC alleges that: “Through this transfer, Stubos gave his illicit sale proceeds to Dori-Ann Stubos for no legitimate purpose or consideration.” Id.
Stubos generated approximately $11 million in illicit profits from his sales of Petrosonic and Ener-Core shares. Id. ¶ 2.
PROCEDURAL HISTORY
The SEC filed its Complaint on June 6, 2022. Id. The Complaint alleges claims against Stubos for fraud in the offer or sale of securities in violation of
Defendants filed their motion to dismiss the Complaint and accompanying memorandum of law on July 29, 2022. Dkt. Nos. 42-43. The SEC filed a memorandum of law in opposition to the motion on September 2, 2022. Dkt. No. 44.4 The Defendants
LEGAL STANDARD
“A court facing challenges as to both its jurisdiction over a party and the sufficiency of any claims raised must first address the jurisdictional question” and must dismiss the action against any defendant over whom it lacks personal jurisdiction. Lugones v. Pete & Gerry‘s Organic, LLC, 2020 WL 871521, at *2 (S.D.N.Y. Feb. 21, 2020) (quoting Cohen v. Facebook, Inc., 252 F. Supp. 3d 140, 148 (E.D.N.Y. 2017)); see
To survive a motion to dismiss pursuant to
DISCUSSION
Defendants move to dismiss the claims against Stubos on three grounds: (1) the Court lacks personal jurisdiction over Stubos; (2) the claims in the Complaint are time-barred; and (3) the allegations of the Complaint fail to state a claim for relief under any of the statutes pleaded. Defendants also move to dismiss the claim against Dori-Ann on the basis that no such claim can survive in the absence of a viable claim against Stubos.
I. Personal Jurisdiction
“[T]he
For the minimum contacts inquiry, a court must determine “whether the defendant has sufficient contacts with the forum state to justify the court‘s exercise of personal jurisdiction.” Id. Where the plaintiff alleges violations of the federal securities laws, “the minimum-contacts test . . . looks to contacts with the entire United States rather than with the forum state.” S.E.C. v. Straub, 921 F. Supp. 2d 244, 253 (S.D.N.Y. 2013) (Sullivan, J.) (citation omitted); see S.E.C. v. Sharef, 924 F. Supp. 2d 539, 544 (S.D.N.Y. 2013) (“A nonresident defendant sued under the Exchange Act need not have minimum contacts with the state seeking to exercise personal jurisdiction; rather the only contacts required are with the United States as a whole.“); S.E.C. v. Softpoint, Inc., 2001 WL 43611, at *3-4 (S.D.N.Y. Jan. 18, 2001) (Lynch, J.). The “foreign actor‘s activity in relation to the United States” therefore must be “sufficiently extensive and regular to make the possibility of litigation in the United States a foreseeable risk of the business.” Straub, 921 F. Supp. 2d at 254 (alterations adopted) (quoting Leasco, 468 F.2d at 1341 n.11).
If the defendant has minimum contacts with the forum state, the court then turns to whether the exercise of personal jurisdiction would be reasonable under the circumstances of the case. See Softpoint, Inc., 2001 WL 43611, at *2. In determining the reasonableness of exercising jurisdiction in connection with a particular defendant, courts must evaluate:
(1) the burden that the exercise of jurisdiction will impose on the defendant; (2) the interests of the forum state in adjudicating the case; (3) the plaintiff‘s interest in obtaining convenient and effective relief; (4) the interstate judicial system‘s interest in obtaining the most efficient
resolution of the controversy; and (5) the shared interest of the states in furthering substantive social policies.
Metro. Life Ins., 84 F.3d at 568 (citing Asahi Metal Indus. Co. v. Superior Ct. of California, Solano Cnty., 480 U.S. 102, 113-14 (1987)).
Personal jurisdiction “may be defeated where the defendant presents ‘a compelling case that the presence of some other considerations would render jurisdiction unreasonable.‘” Id. (quoting Burger King Corp. v. Rudzewicz, 471 U.S. 462, 477 (1985)). The burden is on the defendant to demonstrate that the assertion of jurisdiction in the forum will “make litigation ‘so gravely difficult and inconvenient’ that a party unfairly is at a ‘severe disadvantage’ in comparison to his opponent.” Burger King, 471 U.S. at 478 (citation omitted). “The reasonableness inquiry is largely academic in non-diversity cases brought under a federal law which provides for nationwide service of process because of the strong federal interests involved.” Straub, 921 F. Supp. 2d at 259 (quoting S.E.C. v. Syndicated Food Servs. Int‘l, Inc., 2010 WL 3528406, at *3 (E.D.N.Y. Sept. 3, 2010)); accord Softpoint, 2001 WL 43611, at *5.
Stubos argues that this Court lacks personal jurisdiction over him, as he is a Canadian citizen living and working in Canada during the relevant period and there is no allegation that he “ever traded in, traveled to, or otherwise targeted the United States to further the purported scheme.” Dkt. No. 43 at 15. He also claims that it would violate due process for the Court to assert jurisdiction over him based on the activity of third parties—here, the Sharp Group. Id. In response, the SEC argues that personal jurisdiction is sufficiently supported by allegations, among others, that Stubos “directed thousands of trades for Petrosonic and Ener-Core stock utilizing and manipulating the quotation services provided for those stocks by OTC Markets located in New York City” and that his sale of those shares “directly impacted U.S. investors who purchased those shares.” Dkt. No. 44 at 21. The SEC states that “Stubos’ use and manipulation of the quotation services provided by New York‘s OTC Markets to sell stock to investors throughout the United States alone satisfies the minimal contacts requirement.” Id.
The SEC has pleaded sufficient facts to establish a basis for personal jurisdiction. Accepting the facts as alleged by the SEC in the Complaint, Stubos directed the sale of millions of his own shares of Petrosonic and Ener-Core (both U.S. companies) on the public market using the U.S. Over-the-Counter (“OTC“) Markets based in New York City and thereby induced U.S. investors to buy his interest in those companies. Dkt. No. 1 ¶¶ 1-3, 18, 32-37, 40-45. As part of the same scheme, he also engaged in manipulative trading of Ener-Core shares using the services of the U.S. OTC Markets to create the false appearance of active trading and to inflate the price of the stock, id. ¶¶ 36, 41-45, 47, and funneled Sharp Group proceeds to a Washington state corporation that he controlled to pay U.S. promoters for Petrosonic and Ener-Core stock in furtherance of his scheme, id. ¶¶ 32-33. Those facts are sufficient to demonstrate that Stubos engaged in activity abroad that had a “direct and unmistakably foreseeable effect within the United States.” Unifund, 910 F.2d at 1033; see Straub, 921 F. Supp. 2d at 253-56. Stubos‘s activities “created the near certainty that United States shareholders . . . would be adversely affected.” Softpoint, 2001 WL 43611, at *6 (quoting Unifund, 910 F.2d at 1033); see Leasco, 468 F.2d at 1341 (the effect must occur “as a direct and foreseeable result of the conduct
It is insufficient that Stubos is a Canadian citizen who did not step foot in the United States during the relevant time period. The SEC is not powerless to prosecute those who violate the securities laws of the United States from abroad. See Unifund, 910 F.2d at 1033 (personal jurisdiction extends to one who commits insider trading from abroad); Straub, 921 F. Supp. 2d at 254 (“[A] defendant‘s physical absence from a forum is insufficient to defeat personal jurisdiction.“). Nor is it fatal that Stubos allegedly committed his fraud through the offices of the Sharp Group, rather than directly. While the Due Process test looks to the contacts “that the ‘defendant himself’ creates with the forum State,” Walden v. Fiore, 571 U.S. 277, 284 (2014) (quoting Burger King Corp., 471 U.S. at 475), “[i]t is well established that a defendant can ‘purposefully avail itself of a forum by directing its agents or distributors to take action there,‘”5 Charles Schwab Corp. v. Bank of Am. Corp., 883 F.3d 68, 84 (2d Cir. 2018) (quoting Daimler AG v. Bauman, 571 U.S. 117, 135 (2014)). This is also not “the rare case where the reasonableness analysis defeats the exercise of personal jurisdiction.” Straub, 921 F. Supp. 2d at 259. While Defendants may prefer to litigate this case in a different country, Defendants do not even argue that the “burden on them would be ‘severe’ or ‘gravely difficult.‘” Id.
The district court decision in S.E.C. v. Carrillo Huettel LLP, 2014 WL 12785242 (S.D.N.Y. June 4, 2014), which Defendants rely on in arguing that personal jurisdiction does not exist, is not to the contrary. In that case, the district court denied the SEC‘s request to amend its claims against a defendant to add allegations that the defendant (a Mexican national) directed his Canadian broker to sell shares of stock that were the subject of a pump-and-dump scheme to a United States purchaser. Id. at *4. In denying the request, the court noted that the SEC conceded that the defendant had given his son (another defendant in the case) trading authority and power of attorney over the relevant brokerage account. Id. In light of the known trading authority and power of attorney of the son over the account, the court concluded that the “proposed amended claims” give “no factually based indication of who was actually directing the sale of stock from [the] brokerage account.” Id. In this case, by contrast, the allegations of the Complaint—which the Court must accept as true establish that it was only ever Stubos who was directing the sale of his own shares by the Sharp Group. Accordingly, the SEC has properly alleged personal jurisdiction over Stubos.
II. Statute of Limitations
Stubos also moves to dismiss the SEC‘s claims against him—which were filed over
Stubos‘s argument centers on whether the five-year statute of limitations contained in
Except as otherwise provided by Act of Congress, an action, suit, or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five year from the date when the claim first accrued if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon.6
Id. A claim accrues under
Although there had been disagreement among courts about whether the statute of limitations in
On January 1, 2021, after the Court‘s decisions in Kokesh and Liu, Congress enacted the NDAA, Pub. L. No. 116-283, § 6501, 134 Stat. 3388, 4626 (2021). The NDAA, in relevant part,
extended the statute of limitations for SEC scienter-based claims for disgorgement to ten years and created a ten-year statute of limitations for equitable remedies including injunctions and bars.
Defendants argue that the five-year statute of limitations in
and (ii) the NDAA does not apply retroactively to revive the SEC‘s scienter-based claims against him. Id. at 10-14. Defendants argue that, to hold otherwise, would violate the ex post facto clause of the United States Constitution. Id.
In addressing this argument, the Court first addresses whether—absent the NDAA—the five-year statute of limitations in
A. Section 2462
To start, it is clear that absent the NDAA, the SEC‘s claims for disgorgement against Stubos would be barred by the five-year statute of limitations under
Yet, while it is clear that prior to the NDAA, the SEC‘s enforcement action for disgorgement would be time barred under
While “courts are divided on whether an injunction can ever be a
The Court agrees that injunctive relief, if properly granted and fashioned, does not constitute a penalty. Penalties are sought “for the purpose of punishment, and to deter others from offending in like manner.” Kokesh, 137 S. Ct. at 1642 (citation omitted). A penalty is essentially backward looking—it seeks to punish a defendant for their past wrongs and, by doing so, deter others from such conduct in the future. This backward-looking feature of a penalty distinguishes it from injunctive relief the objective of which is “solely to prevent threatened future harm.” Arthur Lipper Corp. v. S.E.C., 547 F.2d 171, 180 n.6 (2d Cir. 1976); see Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 61 (1975) (“The historic injunctive process was designed to deter, not to punish.“); S.E.C. v. Moran, 922 F. Supp. 867, 889 (S.D.N.Y. 1996) (Newman, J.) (same); 13 Moore‘s Federal Practice - Civil § 65.02 (2022) (“The purpose of injunctive relief is to prevent future harm.“). Evidence of a past violation, while often necessary, is not sufficient for an injunction; instead, the SEC must show “some cognizable danger of recurrent violation, something more than the mere possibility which serves to keep the case alive” for an injunction. S.E.C. v. Am. Bd. of Trade, Inc., 751 F.2d 529, 537 (2d Cir. 1984) (Friendly, J.). The SEC must “go beyond the mere facts of past violations and demonstrate a realistic likelihood of recurrence.” S.E.C. v. Commonwealth Chem Sec., Inc., 574 F.2d 90, 99-100 (2d Cir. 1978)
(Friendly, J.). The key purpose of injunctive relief is thus remedial—i.e., to prevent future wrongs—and not to “address wrong that have already been committed.” 13 Moore‘s Federal Practice - Civil § 65.02 (2022).
While injunctive relief deters, the deterrent effect of injunctive relief is wholly different from that of a penalty. Penalties serve “to deter others from offending in like manner.” Kokesh, 137 S. Ct. at 1642. By contrast, injunctive relief serves to prevent, and thus to deter, the defendant him or herself from offending in a like manner in the future. Injunctive remedies, as discussed, are tailored to deter future violations of law by that individual; not to punish the defendant and, through that punishment, send a message to those in the community not to do similar bad acts. Moreover, to the extent that some deterrence of others does result from the imposition of an injunction against a particular defendant, such a result is “simply an incidental effect of” the injunctive relief. Id. at 1643; see Collyard, 861 F.3d at 765 (“[D]eterrence is an ‘incidental effect’ of this injunction, not its primary purpose.“). It is not its primary purpose. This distinguishes injunctive relief from disgorgement, which is primarily aimed at deterring violations of the securities laws. Kokesh, 137 S. Ct. at 1643.
Because of its essentially remedial purposes, injunctive relief, properly granted and fashioned, is not a penalty. The SEC‘s claims for injunctive relief are not subject to the five-year statute of limitations contained in
time the injunction is requested, a threat of future illegal conduct exists. That requirement addresses many of the concerns that motivate statutes of limitations in the first place. “Statutes of limitations are intended to ‘promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared.” Gabelli, 568 U.S. at 448 (citation omitted). “The theory is that even if one has a just claim it is unjust not to put the adversary on notice to defend within the period of limitation.” Am. Pipe & Const. Co. v. Utah, 414 U.S. 538, 554 (1974) (citation omitted). These concerns about lack of notice or surprise, however, are addressed implicitly
The Court also declines to follow the single case on which Defendants rely in support of their argument that injunctions are
Finding that
With respect to the SEC‘s non-scienter-based claim under
With respect to the SEC‘s scienter-based claims, Defendants argues that they are time-barred as the NDAA does not apply retroactively. Dkt. No. 43 at 10. Specifically, Defendants argue that the scienter-based claims expired in April 2020 under the five-year statute of limitations contained in
Courts do not lightly interfere with settled expectations. In light of the presumption against retroactive legislation, “[u]nless Congress clearly expresses its intent to the contrary,” a court must “presume that a law has no retroactive application to conduct predating it.” Domond v. I.N.S., 244 F.3d 81, 85 (2d Cir. 2001). “Retroactivity analysis requires two steps.” Id. In the first step, the court must “determine whether Congress has expressly prescribed the statute‘s proper reach.” Landgraf v. USI Film Prod., 511 U.S. 244, 280 (1994). If not, then the court turns to the second step and must “determine whether the new statute would have retroactive effect.” Id.
The parties’ dispute concerns the first step of the analysis and whether the NDAA contains an explicit retroactivity grant. As described, NDAA provides that its new ten-year limitations period “shall apply with respect to any action or proceeding that is pending on, or commenced on or after, the date [January 1, 2021] of enactment of this Act.” NDAA § 6501(a)(3).
The retroactivity of the NDAA has been addressed by a number of courts, including in this District. See, e.g., S.E.C. v. Hallam, 42 F.4th 316, 335 (5th Cir. 2022) (noting that the NDAA makes clear that it is retroactive and applies to a case still on appeal); S.E.C. v. Fowler, 6 F.4th 255, 260 n.5 (2d Cir. 2021) (“A recent amendment to the Exchange Act took the SEC‘s claims for disgorgement and injunctive relief outside of the ambit of
But while the NDAA‘s retroactive application to cases pending at the time of its enactment is well-established, whether the NDAA applies retroactively to cases that were “commenced on or after” January 1, 2021, as is true of the SEC‘s claims here, apparently has been addressed in only one prior case. In S.E.C. v. Sharp, 2022 WL 4085676, at *11 (D. Mass. Sept. 6, 2022), Judge Young considered “whether the language ‘ending on, or commenced on or after’ creates the same explicit mandate of retroactivity for cases ‘commenced . . . after’ the statute‘s passage” and held that “it does.” Id. at *11 (citation omitted). In reaching that decision, the court noted that this phrase “the words ‘commenced . . . after’ cannot be divorced from the context of their placement adjacent to the word ‘pending,” which expressly applies retroactively. Id. The court further noted that:
If this Court read only “pending on” to apply retroactively, and not “commenced on or after,” it would lead to an irrational outcome: (1) a case filed before or on December 31, 2020 seeking disgorgement for pre-January 1, 2016 conduct would receive the extended statute of limitations and be timely, and (2) a case filed January 2, 2021 seeking to reach the very same conduct would be untimely. SEC-enforcement actions would be able to reach more—or less—allegedly violative conduct, simply by virtue of their filing date under the exact same statutory scheme. Furthermore, reading the statute in this way would reward the SEC for filing what the Defendants argue are stale claims before the statute‘s enactment and penalize it for doing so once it arguably possessed such authority.
Id. The court also found that the “legislative history of the NDAA supports this conclusion.” Id. at *12. The court stated that “there is an indication that Congress’ intent was to reverse the effects of the Supreme Court‘s decision in Kokesh” in passing the amendments in the NDAA and “[r]etroactivity adequately fulfills Congress’ intent to undo the effects of Kokesh.” Id.
The reasoning of the district court in Sharp is convincing. The words “pending on” clearly envision—as other courts have held—that the statute of limitations contained in the NDAA has some retroactive effect and, in turn, revives some previously time-barred claims. These words “pending on” only have effect if the NDAA‘s expanded statute of limitations applies to resurrect these claims that were previously time-barred. Otherwise, application of the NDAA to “pending” claims would be purposeless. The only claims that would not have expired in cases that were “pending” on the effective date (and thus that would have been filed before the effective date) would already have been timely under the five-year statute of limitations previously in effect. The Court would be required to presume that Congress added the word “pending” for no reason, contrary to the “so-called surplusage canon—the presumption that each word Congress uses is there for a reason.” Advoc. Health Care Network v. Stapleton, 137 S. Ct. 1652, 1659 (2017); see Williams v. Taylor, 529 U.S. 362, 364 (2000) (“[C]ourts must give effect, if possible, to every clause and word of a statute.” (citation omitted)). Thus, the NDAA has to have some retroactive effect and ability to restore stale claims at least as to cases that already were filed and thus were pending on the effective date.
It follows as a matter of basic statutory interpretation, however, that if the application of the NDAA to cases “pending” on the date of the enactment of the Act is to revive otherwise stale claims, its application to cases “commenced on or after” the date of enactment must also be to revive otherwise stale claims. The operative language that the new statute of limitations “appl[ies]” refers indistinguishably both to actions or proceedings that are “pending” on the date of enactment and to those that are “commenced on or after” the date of enactment. If the effect of the application of the NDAA to pending cases is to revive otherwise stale claims, its effect as to its application to cases commenced after the date of enactment must be the same. To hold otherwise would require this court to find that the single word “app[lies]” has two entirely different meanings (one retroactive and the other not) simultaneously. See Erlenbaugh v. United States, 409 U.S. 239, 243 (1972) (“[A] legislative body generally uses a particular word with a consistent meaning in a given context.“); cf. Gustafson v. Alloyd Co., 513 U.S. 561, 573 (1995) (“[W]e cannot accept the conclusion that this single operative word means one thing in one section of the Act and something quite different in another.”), and would produce internal inconsistencies in the statute, see United States v. Turkette, 452 U.S. 576, 580 (1981) (“[I]nternal inconsistencies in the statute must be dealt with.“). Furthermore, to hold that this retroactivity only extends to pending claims, and not to claims “commenced on or after” the enactment of the NDAA, would produce absurd results, NDAA § 6501(a)(3), as Judge Young details. A defendant who defrauded innocent investors could keep his ill-gotten gains from conduct occurring on January 1, 2016, if the SEC did not file suit until January 3, 2021, while another defendant whose fraudulent conduct dated back almost five years earlier would be subject to disgorgement as long as the SEC brought suit two days earlier. See Gibbons v. Bristol-Myers Squibb Co., 919 F.3d 699, 705 (2d Cir. 2019) (“[A] statute should be interpreted in a way that avoids absurd results.” (cleaned up)). The defendant who assumed—based on the law existing at the time he was sued—that the SEC could not seek disgorgement would be deprived of that reasonable expectation and the SEC would be rewarded for filing a claim for relief that at the time was plainly meritless. At the same time, the SEC attorney who prudently waited to see if the Congress acted on the Kokesh decision would be punished for the care she exercised. Such a construction would “yield absurd results.” See United States v. Scott, 990 F.3d 94, 122 (2d Cir.), cert. denied, 142 S. Ct. 397 (2021).
The same result follows from application of the canon that courts “assume that Congress is aware of existing law when it passes legislation,” Miles v. Apex Marine Corp., 498 U.S. 19, 32 (1990), and of “the judicial background against which it [was] legislat[ing],” Dekalb Cnty. Pension Fund v. Transocean Ltd., 817 F.3d 393, 409 (2d Cir. 2016) (citation omitted). That judicial background includes the Supreme Court‘s 1994 decision in Landgraf. There, the Court held that provisions of the Civil Rights Act of 1991 expanding the monetary relief available under
The NDAA was passed after Landgraf and Martin and against the backdrop of their approach to retroactivity. Those decisions detailed what Congress would need to say if it wished to convey a “determinate meaning” of retroactivity. Landgraf, 511 U.S. at 259. And, Congress, in passing the NDAA, chose to adopt the language that the Supreme Court stated in Landgraf would convey a “determinate meaning” of retroactivity virtually verbatim. Thus, fidelity to legislative intent as well as to the notion that Congress means what it says when it adopts language that has been defined to have an explicit statutory interpretation require that this Court interpret the NDAA to apply retroactively and to revive previously time-barred claims both in pending cases and in subsequently filed cases.
This interpretation is further supported by the legislative history of the NDAA. See Unicolors, Inc. v. H&M Hennes & Mauritz, L. P., 142 S. Ct. 941, 948 (2022) (“[T]hose who consider legislative history will find that history persuasive here.”); Enter. Mortg. Acceptance Co., LLC, Sec. Litig. v. Enter. Mortg. Acceptance Co., 391 F.3d 401, 408 (2d Cir. 2004), as amended (Jan. 7, 2005) (looking to legislative intent to determine retroactivity of the statute). In asking Congress to pass legislation expanding the statute of limitations for disgorgement actions, the SEC repeatedly expressed concern not only with the effects of Kokesh on a going-forward basis but with its untenable result on a backward-looking basis. The SEC noted that fraudsters who had obtained hundreds of millions of dollars of ill-gotten gains at the expense of members of the public would be able to retain those funds instead of having them returned to the victims through disgorgement.10 For example, shortly before
understanding and agreement of these long-running concerns: Representative Ben McAdams, a-cosponsor of that bill, stated that the bill “would reverse the Kokesh decision” and was directly responsive to then-Chairman Clayton‘s concern that the Kokesh decision had prevented the SEC from pursuing over a billion dollars in disgorged funds. 165 Cong. Rec. H8930–31 (daily ed. Nov. 18, 2019); Regents of Univ. of California v. Pub. Emp. Rels. Bd., 485 U.S. 589, 596 (1988) (looking to statements of sponsor of amendment to determine congressional intent). He further noted that the decision allowed Kokesh to keep millions of dollars “that won‘t find its way back to the investor victims.” 165 Cong. Rec. H8930. The other co-sponsor of that earlier bill, Representative Bill Huizenga, pointed out that the effect of Kokesh was to allow Kokesh “the fraudster... to keep nearly $30 million of what he stole from small-dollar Main Street investors,” noting “I don‘t think any of us can look at that and feel good about that current situation.” 165 Cong. Rec. H8931. This history supports that Congress‘s intent in expanding the statute of limitations for disgorgement actions was to give the SEC the power to remove ill-gotten gains from their wrongful holder and to return those funds to the harmed investors. It would disserve that intent to hold that the SEC can prove that Stubos obtained, and still enjoys the benefits of, millions of dollars of funds from innocent retail investors who believed that the price they were paying for the Petrosonic stock and Ener-Core stock was the true price and that
Defendants’ arguments to the contrary rely primarily on the Second Circuit‘s decision in Enterprise Mortgage Acceptance Co., 391 F.3d 401. In that case, the Second Circuit considered whether provisions of the newly enacted Sarbanes-Oxley Act of 2002 (“SOX”), which extended the statute of limitations for private civil actions for fraud under the federal securities laws had retroactive effect to revive previously expired claims. Id. at 403. Section 804(b) of the statute provided that the revised statute of limitations “shall apply to all proceedings addressed by this section that are commenced on or after the . . . date of enactment of this Act.” Id. at 406 (citation omitted). Another provision of the statute, Section 804(c), stated: “Nothing in this section shall create a new, private right of action.” Id. (citation omitted). The court concluded that the new statute of limitations did not revive stale private claims “[b]ecause the language of Section 804 does not unambiguously revive previously stale securities fraud claims, and because Section 804‘s legislative history does not suggest that Congress intended to provide for retroactive application of the revised statute of limitations.” Id. at 406. The court recognized that Section 804(b) was “perhaps most naturally read as applying to any proceeding” commenced after the passage of the Act, but stated that did not lead to the conclusion that a claim that had expired would be revived. Id. at 406–07. In other words, the language could be given meaning by holding that it applied to cases commenced after the Act‘s passage, but not with the effect that already-expired claims would be restored. The Second Circuit also held that there was a “lack of clarity that result[ed] from the tension that may be implied between [Sections] 804(b) and 804(c),” the latter of which provided that nothing in the section would “create a new, private right of action.” Id. at 407. The court noted that Section 804(c) “undermine[d] plaintiffs’ contention that, in enacting Section 804, Congress made its intentions for retroactivity unmistakably clear” because “[w]here a plaintiff is empowered by a new statute to bring a cause of action that previously had no basis in law, a new cause of action has, in some sense of the word, been created.” Id. Finally, the court stated that “[i]t also bears noting that the legislative history of Section 804 does not clearly indicate that Congress intended that Section 804 apply retroactively to revive expired securities fraud claims.” Id. at 408.
The NDAA has none of the features that the court in Enterprise Mortgage relied on to conclude that the retroactive effect of SOX was ambiguous. In passing the NDAA, Congress did not just provide that the extended statute of limitations would apply to proceedings “commenced on or after” the date of its enactment. It stated that the limitations period would apply to proceedings “pending on, or commenced on or after” the date of its enactment. NDAA § 6501(a)(3). The law also does not contain the language that the court concluded in Enterprise Mortgage created ambiguity, specifically that the limitations period was not intended to create a new cause of action. The effect of holding that the NDAA is retroactive would also, unlike in Enterprise Mortgage, not be to create a new cause of action; it merely empowers the SEC to obtain relief on behalf of harmed investors in connection with a cause of action that is otherwise timely. Moreover, as noted, in passing the NDAA, the legislative history supports that Congress possessed an intent to allow the SEC additional time to pursue on behalf of those harmed investors the more than $1 billion that was being held by the persons who harmed them.
The Court also rejects Defendants’ argument that the retroactive application of the NDAA here would violate the ex post facto clause of the United States Constitution. “The ex post facto clause forbids retroactive application of penal legislation, not civil legislation.” Domond v. I.N.S., 244 F.3d 81, 87 (2d Cir. 2001). In determining whether legislation is “penal” or “civil,” courts “ordinarily defer to the legislature‘s stated intent” and “only the clearest proof will suffice to override legislative intent and transform what has been denominated a civil remedy into a criminal penalty.” Smith v. Doe, 538 U.S. 84, 92 (2003) (citation omitted). Here, the statutory scheme evinces a clear intent that disgorgement is a civil penalty, not a criminal penalty. See
For these reasons, the Court agrees with the holding in Sharp and holds that the NDAA applies retroactively to revive time-barred claims that were commenced on or after the NDAA was enacted and within ten-years after they accrued. Because the parties do not dispute that the SEC brought its claims for disgorgement against Stubos within ten-years of accrual, these claims are timely.
III. The SEC Adequately Pleads Violations of Section 10(b) and Section 17(a)
Defendants also argues that the Complaint warrants dismissal for failure to
First, Defendants argue that the SEC‘s stock promotion claims under
Furthermore, while the Second Circuit has held that “scheme liability” claims require “something beyond misstatements and omissions, such as dissemination,” the Second Circuit did not hold that “dissemination” of a false statement is the only way to prove such claims. Rio Tinto plc, 41 F.4th at 49 (emphasis added). To the contrary, the Second Circuit noted that “dissemination is one example of something extra that makes a violation a scheme.” Id. at 54 (emphasis added). The Supreme Court has further stated “that the capacious words and ‘expansive language’ of ‘device,’ ‘scheme’ and ‘artifice” in Rule 10b-5 and
Second, Defendants argue that the stock promotion claims require dismissal for the separate reason that they fall short of the strict pleading standard of
Finally, Defendants contend that the SEC fails to plead market manipulation under
raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.” S.E.C. v. Fiore, 416 F. Supp. 3d 306, 325 (S.D.N.Y. 2019) (quoting
IV. Claim Against Relief-Defendant
Defendants also move to dismiss Count Four of the Complaint against Dori-Ann, arguing that “no such claim can survive in the absence of a viable claim against Mr. Stubos.” Dkt. No. 43 at 1 n.1. For the reasons discussed, viable claims against Stubos do exist and thus the Court declines to dismiss this count against Dori-Ann on this basis.
CONCLUSION
The motion to dismiss is DENIED.
The Clerk of Court is respectfully directed to close Dkt. No. 42.
SO ORDERED.
Dated: October 10, 2022
New York, New York
LEWIS J. LIMAN
United States District Judge
Notes
Oversight of the SEC‘s Division of Enforcement: Hearing Before the H. Fin. Servs. Comm. (May 16, 2018), https://www.sec.gov/news/testimony/testimony-oversight-secs-division-enforcement; see also Testimony on “Oversight of the U.S. Securities and Exchange Commission” Before the S. Comm. On Banking, Housing, and Urban Affairs (Dec. 11, 2018), https://www.sec.gov/news/testimony/testimony-oversight-us-securities-and-exchange-commission-0 (testifying about Kokesh and stating “[s]aid simply, if the fraud is well-concealed and stretches beyond the five-year limitations period applicable to penalties, it is likely that we will not have the ability to recover funds invested by our retail investors more than five years ago“).In certain cases, Kokesh threatens to severely limit the recovery available to harmed investors. Wrongdoers should not benefit because they succeeded in concealing their misconduct. While we appreciate the need for clear statutes of limitations, we are concerned with an outcome where some investors must shoulder additional losses—and the fraudulent actor is able to keep those ill-gotten gains—because those investors were tricked early in a scheme rather than later.