141 F. Supp. 3d 675 | E.D. Tex. | 2015
MEMORANDUM OPINION AND ORDER DENYING CROSS MOTIONS FOR SUMMARY JUDGMENT
Pending before the court are Plaintiffs Motion for Summary Judgment (Dkt.43), Defendants’ Amended Response (Dkt.55-1), and Plaintiff s Reply (Dkt.,52); and Defendants’ Motion for Summary Judgment (Dkt.46), Plaintiffs Response (Dkt.49), Defendants’ Reply (Dkt.50), and' Plaintiffs Sur-Reply (Dkt.54).
For the reasons set forth herein, Plaintiffs Motion for Summary Judgment (Dkt.43) is GRANTED IN PART AND DENIED IN PART and Defendant’s Motion for Summary Judgment (Dkt.46) is DENIED.
I. Background
Jossef Káhlon a/k/a Yossef Kahlon, a resident of New York, is the sole owner and managing member of TJ Management Group, LLC (TJM), a New York limited liability company with its principal place of business in New York, New York.
Summary judgment shall be granted “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
III. Analysis
To establish a prima fade violation of 15 U.S.C. § 77e(a) and (c), the SEC must show that “(1) no registration statement was in effect as to the securities, (2) the defendant sold or offered to sell these securities, and (3) interstate transportation or communication and the mails were used in connection with the sale or offer of sale.”
It is undisputed that Defendants bought and sold stocks that were not registered utilizing the facilities of interstate commerce. Therefore, the SEC has made out its prima facie case of a violation of Section 5 of the Securities Act, and the court considers Defendants’ affirmative defense. Defendants assert that the transactions at issue are exempt from the Securities’ Act registration requirements under Rule 504(b)(l)(iii) of Regulation D and Texas law. The SEC contends that as applied by Defendants no such exemption exists under these facts. “Because defendants bear the burden of proof of establishing an exemption, for the SEC to prevail on [its] summary judgment motion, it need only point to a lack of evidence that would enable a reasonable jury to find that defendants qualify for an exemption.”
“A defendant can prove an exemption applies by showing either (1) the intrastate exemption applies under section 3(a)(ll) of the Securities Act, 15 U.S.C. § 77c(a)(ll), (2) the private placement exemption applies under section 4(2) Of the Securities Act, 15 U.S.C. § 77d(2), or (3) that an exemption under Regulation D, 17 C.F.R. § 230.504-6, applies.”
Rule 504(b)(l)(iii) provides an exemption-from registration for offers and sales of securities that are conducted “[exclusively according to state law exemptions from registration that permit general solicitation and general advertising so long as sales are made only to ’accredited investors’ as defined in § 230.501(a)”.
Defendant argues that the exemptions found in 504(b)(l)(iii) and Sections 107.2 and 109.4 of Title 7 of the Texas Administrative Code “mean that an accredited institutional investor, or investors in aggregate, may invest up to $1,000,000 per
There is no evidence put forth by Defendant to show that these transactions fall within the exemption from registration under Rule 504(b)(l)(iii). Even though Defendant registered TJM as a foreign corporation in Texas and conducted some business here related to the purchase of a single parcel of real property, there is no evidence that the transactions at issue took place exclusively under Texas law such that the transactions would be eligible for a Rule 504 exemption. The exemption upon which Defendants rely applies to the offers and sales (or the transactions) themselves, not to the individuals involved in executing the transactions.
Further, even if the court were to find that the transactions occurred exclusively in accordance with Texas law, Defendant has put forth no evidence to show that he or TJM was an accredited investor at the time of the transactions.
Defendant contends that “[t]he strongest argument against the SEC’s case revolves around due process, agency overreach and the" very real danger that the SEC’s unapologetic official policy of ’regulation through enforcement’ poses to private investors.”
Accordingly, Plaintiffs motion for summary judgment with regard to Defendant’s liability is GRANTED and Defendant’s motion for summary judgment with regard to his affirmative defense is DENIED. However, the court does not hold that Plaintiff has met its burden of proof on its motion with regard to the remedies. The court finds that there are genuine factual issues with regard to the factors the court must consider in assessing Plaintiffs requests for equitable and injunctive relief. Therefore, Plaintiffs motion for summary judgment with regard to remedies is DE^ NIED. The appropriateness of such remedies shall be determined after a trial or evidentiary hearing.
IV. Conclusion
Plaintiffs Motion for Summary Judgment (Dkt.43) is GRANTED IN PART and DENIED IN PART and Defendant’s Motion for Summary Judgment (Dkt.46) is DENIED. The parties are ORDERED to confer no later 15 days from the date of this order and submit a joint proposed amended scheduling, order to govern the remainder of this litigation.
IT IS SO ORDERED.
. For ease of reference, the court refers to the Defendants collectively.
. 15 U.S.C. § 77e.
. 15 U.S.C., §§ 77e(a), (c); S.E.C. v. Luna, 2:10-CV-2166-PMP-CWH, 2014 WL 794202, at *1 (D.Nev. Feb. 26, 2014).
. Dkt. 1 ¶ 7.
. 7 Tex. Admin. Code §§ 109.4, 107.2 (State
. Fed. R. Civ. P. 56(a) (emphasis added).
. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
. Id.
. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
. Liberty Lobby, 477 U.S. at 250, 106 S.Ct. 2505.
. Evans v. City of Bishop, 238 F.3d 586, 589 (5th Cir.2000).
. Celotex, 477 U.S. at 325, 106 S.Ct. 2548; Payne v. Sw. Bell Tel., L.P., 562 F.Supp.2d 780, 783 (E.D.Tex.2005).
. Celotex, 477 U.S. at 322 n. 3, 106 S.Ct. 2548; see also Fed. R. Civ. P. 56(c)(1) ("A party asserting that a fact cannot be or is genuinely disputed must support the assertion by citing to particular parts of materials in the record ... or showing that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact.”).
. Wallace v. Tex. Tech Univ., 80 F.3d 1042, 1047 (5th Cir.1996) (internal quotation marks omitted).
. Stults v. Conoco, Inc., 76 F.3d 651, 656 (5th Cir.1996).
. E. D. Tex. Civ. R. CV-56(c).
. SEC v. Cont'l Tobacco Co., 463 F.2d 137, 155 (5th Cir. 1972).
. Id. at 156; see also SEC v. Spence & Green Chem. Co., 612 F.2d 896, 901-02 (5th Cir. 1980).
. S.E.C. v. Offill, Civil Action No. 3:07-cv-1643-D, 2012 WL 246061, at *4 (N.D.Tex. Jan. 26, 2012).
. S.E.C. v. Earthly Mineral Solutions, Inc., 2:07-CV-1057 JCM (LRL), 2011 WL 1103349, at *2 (D.Nev. Mar. 23, 2011).
. S.E.C. v. Luna, No. 2:10-cv-2166-PMP-CWH, 2014 WL 794202, at *8 (D.Nev. Feb. 26, 2014).
. Id.
. 17 C.F.R. § 230.504(b)(1)(iii).
. S.E.C. v. Bronson, 14 F.Supp.3d 402, 410 (S.D.N.Y.2014) (emphasis added).
. Id. (quoting 72 Fed. Reg. at 45, 133).
. 17 C.F.R. § 230.500(f).
. Dkt. 55-1 at 10.
. 17 C.F.R. § 230.504(b)(1) ("To qualify for exemption under this § 230.504,' offers and sales must satisfy the terms and conditions. ..”) (emphasis added); see also S.E.C. v. Offill, Civil Action No. 3:07-cv-1643-D, 2012 WL 246061, at *4 (N.D. Tex. Jan. 26, 2012 (assessing exemptions under 15 U.S.C. § 77d(1)).
. Bronson, 14 F.Supp.3d at 415 (emphasis added).
. Id. at 408 (citing Edgar v. MITE Corp., 457 U.S. 624, 641, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982); Hall v. Geiger-Jones Co., 242 U.S. 539, 557-58, 37 S.Ct. 217, 61 L.Ed. 480 (1917)).
. The court also finds it significant that in its "Securities Subscription Agreement” with My Vintage Baby, Defendant represented that it “has substantial assets and operations in Texas and investment decision involved its presence in Texas----” Dkt, 43-11 ¶ G (emphasis added). Defendant has not put forth any evidence that would show its "investment” in any of these companies had anything to do with its" limited business in Texas related to a single parcel of real property. Presumably, the individuals that reviewed these transactions and continued to do business with Defendants while relying on the exemption were depending on Defendants’ representations. Nonetheless, the fact that brokerages continued to work with Defendants is not evidence that the transactions at issue qualified for the exemption. Additionally, the SEC has put forth evidence that Kahlon’s representation that he was purchasing the stocks as an investment is directly contradicted by his- deposition testimony. Dkt, 49 at 9, citing to Dkt. 43-1 at 43,
.See Dkt. 54 at 5. Defendants state that "Defendants established that fact in its [sic] Motion,, and the SEC does not even address that evidence. (See Defendants’ Motion at 3 ¶ 5).” Paragraph 5 on page 3 of Defendants’ motion reads "TJM complied with all requirements — state and federal — of that exemption for all of its Rule 504 transactions, including each of the transactions at issue in this case. In fact, TJM’s business grew to have trading accounts with the largest and most sophisticated names in the securities business, such as E*Trade, Citi, Jeffries, Goldman Sachs,
. Dkt. 54 at 6.
. U.S. S.E.C. v. ConnectAJet.com, Inc., 3:09— CV-1742-B, 2011 WL 5509896, at *4 (N.D.Tex. Nov. 9, 2011) (quoting S.E.C. v. Friendly Power Co. LLC, 49 E. Supp. 2d 1363, 1368 (S.D.Fla. 1999)).