Securities & Exchange Commission v. BIH Corporation et al
Filing
45
OPINION AND ORDER denying 28 Motion to transfer or dismiss. Signed by Judge John E. Steele on 8/31/2011. (RKR)
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
FORT MYERS DIVISION
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
vs.
Case No.
2:10-cv-577-FtM-29DNF
BIH CORPORATION, WAYNE A. BURMASTER,
EDWARD A. HAYTER, NORTH BAY SOUTH
CORPORATION,
BARON
INTERNATIONAL
INC., THE CADDO CORPORATION, BEAVER
CREEK FINANCIAL CORPORATION,
Defendants.
___________________________________
OPINION AND ORDER
This matter comes before the Court on Defendants’ Motion to
Transfer or Dismiss and Memorandum of Law (Docs. ##28, 29).
The
Securities and Exchange Commission (SEC) filed a Response (Doc.
#40).
Defendants seek to transfer this case to the Eastern
District of New York, or in the alternative, to dismiss Counts II-V
of the Complaint.
I.
The SEC (plaintiff or SEC) alleges that from 2008 through at
least March 2009, defendants Wayne A. Burmaster, Jr. (Burmaster)
and Edward W. Hayter (Hayter) implemented a “pump-and-dump” scheme
involving the sale of unregistered shares of BIH Corporation’s
(BIH) stock.
(Doc. #1, ¶1.)
The SEC claims that defendants
artificially pumped up the price of BIH stock only to dump it on
unsuspecting investors in order to reap over a million dollars in
illicit gains.
The Complaint alleges that BIH was a penny stock traded on the
Pink Sheets, and claimed to be a holding company specializing in
the restaurant and hospitality industry.1
The SEC alleges that
Hayter and Burmaster pumped up the price of BIH stock by: (1)
Creating a fictitious alter ego named Cris Galo (Galo), who was
allegedly an accomplished entrepreneur and acting as the president
and chief executive officer of BIH; (2) Disseminating false and
misleading press releases; and (3) Placing false information on
BIH’s website regarding, among other things, the identity of the
individuals directing BIH’s affairs, BIH’s operations and business
relationships, and BIH’s stock and dividend payments.
Hayter and
Burmaster then illegally distributed BIH’s stock to three codefendant corporations, North Bay South Corporation (North Bay
Corp.), Bimini Reef Real Estate, Inc. (Bimini Inc.) and Riverview
Capital, Inc. (Riverview Inc.). (Id., ¶2.) Defendants then dumped
more than $1 million of BIH’s stock on investors and divided the
proceeds
among
International,
themselves
Inc.
(Baron
and
“Relief
Inc.),
Beaver
Defendants”
Creek
Baron
Financial
Corporation (BCFC), and The Caddo Corporation (Caddo Corp.). (Id.)
1
BIH was previously known as Prime Restaurants, Inc. (Doc. #1,
¶ 4.)
-2-
The parties and participants are a diverse lot.
During the
relevant time period, Hayter and Burmaster are alleged to have
controlled BIH from New York.
(Id., ¶¶4-6.)
BIH, however, is a
Nevada corporation and represented to its investors that its
principal place of business was in Fort Myers, Florida.
North Bay
Corp. is controlled by Burmaster, but incorporated in Texas and
headquartered in Houston, Texas. (Id., ¶7.) BCFC is controlled by
Hayter, but incorporated in Minnesota and headquartered in Edina,
Minnesota.
Caddo Corp. is also run by Hayter but incorporated in
Texas and headquartered in Houston, Texas.
(Id., ¶¶13-14.)
Baron, Inc. is a New Jersey corporation headquartered in West
Orange, New Jersey.
residents.
All of Baron’s principals are New Jersey
(Doc. #30, ¶13).
Non-party Christian Gallo, a.k.a.
Cris Galo, is a resident of Staten Island, New York.
(Id., ¶15.)
Bimini, Inc. is a Texas corporation that previously maintained an
office in Minnesota and was controlled by defendant Christopher L.
Astrom
(Astrom).
Riverview
Inc.
is
a
Minnesota
corporation
headquartered in Bloomington, Minnesota and controlled by defendant
Damian B. Guthrie (Guthrie). Guthrie and Astrom reside in Florida.
(Id., ¶¶8-11.)2
2
On October 25, 2010, the Court entered consent judgments
against Riverview Inc., Bimini Inc., Guthrie, and Astrom. (Docs.
## 24, 25.)
-3-
II.
Defendants first request that this Court transfer venue from
the Middle District of Florida to the Eastern District of New York
pursuant to 28 U.S.C. § 1404(a) and Fed. R. Civ. P. 12(b)(3).
For
the reasons set forth below, the Court declines to do so.
“For the convenience of parties and witnesses, in the interest
of justice, a district court may transfer any civil action to any
other district or division where it might have been brought.”
U.S.C. §
1404(a).
District
courts have
broad
28
discretion in
determining whether to transfer a case to another district.
Brown
v. Conn. Gen. Life Ins. Co., 934 F.2d 1193, 1196-97 (11th Cir.
1991); England v. ITT Thompson Indus., Inc., 856 F.2d 1518, 1520
(11th Cir. 1988).
clause, the
In the absence of a contractual forum selection
burden
is
on
defendants
to
establish
that
their
suggested forum is more convenient than the forum chosen by the
plaintiff.
In re Ricoh Corp., 870 F.2d 570, 573 (11th Cir. 1989).
“[P]laintiff’s choice of forum should not be disturbed unless it is
clearly outweighed by other considerations.” Robinson v. Giarmarco
& Bill, P.C., 74 F.3d 253, 260 (11th Cir. 1996)(citation omitted).
Courts engage in a two-step analysis under 28 U.S.C. § 1404(a)
to determine the propriety of transfer to another district court.
First,
courts
determine
whether
the
action
brought” in the proposed transferee court.
“might
have
been
This requires that the
case could have been brought in the transferee district at the time
-4-
the action was filed.
Hoffman v. Blaski, 363 U.S. 335, 341 (1960).
Second, courts assess whether convenience and the interest of
justice require transfer to the requested forum. See Jewelmasters,
Inc. v. May Dep't Stores, 840 F. Supp. 893, 894-95 (S.D. Fla.
1993)(citing Cont’l Grain Co. v. The Barge FBL-585, 364 U.S. 19, 80
S.
Ct.
1470
convenience
(1960)).
of
the
Section
witnesses;
1404
(2)
factors
the
include
location
of
(1)
the
relevant
documents and the relative ease of access to sources of proof; (3)
the convenience of the parties; (4) the locus of operative facts;
(5) the
availability
of
process
to
compel
the
attendance of
unwilling witnesses; (6) the relative means of the parties; (7) a
forum's familiarity with the governing law; (8) the weight accorded
a plaintiff's choice of forum; and (9) trial efficiency and the
interests of justice, based on the totality of the circumstances.
Manuel v. Convergys Corp., 430 F.3d 1132, 1135 n.1 (11th Cir.
2005).
As a threshold matter, defendants must show that the action
could have been brought in the Eastern District of New York.
An
action “might have been brought” in a proposed transferee court if:
(1) the court had jurisdiction over the subject matter of the
action; (2) venue is proper there; and (3) the defendant is
amenable to process issuing out of the transferee court.
Windmere
Corp. v. Remington Prods., Inc., 617 F. Supp. 8, 10 (S.D. Fla.
1985).
There
is
no
issue
with
-5-
respect
to
subject
matter
jurisdiction3,
1391(b).
and
venue
is
likely
proper
under
28
U.S.C.
§
But defendants have failed to demonstrate that each of
them would have been subject to personal jurisdiction in the
proposed transferee forum.
A conclusory statement that all of the
defendants “reside and conduct their business in New York” is
insufficient.4
Additionally,
defendants
have failed
to
demonstrate
that
consideration of the relevant factors establishes that the Eastern
District of New York is the more appropriate venue for this case.
Some, perhaps most, of the potential witnesses reside in New York,
although some reside in Florida. While defendants contend that the
various agreements and press releases at issue are located in New
York, such documents can be brought to Florida without undue
hardship or expense. The convenience of the parties tilts in favor
of the defendants, but only slightly.
It is true that defendants
3
Subject matter jurisdiction is conferred by 15 U.S.C.§§ 77t,
77v, and 15 U.S.C. §§ 78u, 78aa.
4
For example, Baron is a New Jersey Corporation headquartered
in West Orange, New Jersey (doc. #1, ¶12) and Baron’s principals
are New Jersey residents (doc. #30, ¶13).
Defendants have not
demonstrated that Baron’s contacts with New York were sufficient
for the Eastern District Court of New York to exercise in personam
jurisdiction at the time the SEC initiated this action. At this
stage, Baron’s desire to transfer venue, and implied consent to
jurisdiction in New York is insufficient. See Hoffman v. Blaski,
363 U.S. 335, 342-43 (1960)(“We do not think the s 1404(a) phrase
‘where it might have been brought’ can be interpreted to mean []
‘where it may now be rebrought, with defendants’ consent.’”); see
also 15 C. Wright, A. Miller and E. Cooper, Federal Practice and
Procedure § 3845 (1976).
-6-
will be inconvenienced by a trial in Florida because all of them
reside in New Jersey or New York, and that the SEC has a major
regional office in New York. However, the SEC office investigating
this matter is located in Miami, Florida and merely shifting the
inconvenience from one party to another is insufficient to support
a transfer.
SEC v. Pattiz, 1981 WL 1614, No. 81-Civ-0064 (Mar. 26,
1981)(citation omitted).
More importantly, the SEC alleges that defendants disseminated
the allegedly false press releases from Fort Myers.
Assuming the
truth of this allegation, the Court finds that the misconduct
occurred in Fort Myers.
See, e.g., In re Nemetron Corp. Sec.
Litig., 30 F. Supp. 2d 397, 404 (S.D.N.Y. 1998)(“Misrepresentations
and omissions are deemed to ‘occur’ in the district where they are
transmitted or withheld, not where they are received.”).5
Both
district courts are familiar with the governing law and either one
would have the ability to compel the attendance of witnesses.
See
15 U.S.C. §77v; 15 U.S.C. §78aa (allowing for service of nationwide
subpoenas in securities fraud actions).
The New York action which
defendants argue is related to this case has now been dismissed.
Considering the totality of the circumstances, the Court finds
5
Even if it is later shown that defendants disseminated the
press releases from New York, the Court finds that defendants have
not made a sufficient showing with respect to the remaining factors
to warrant transfer.
-7-
insufficient reason to disturb the plaintiff’s choice of forum.
The Court, therefore, will deny the motion to transfer.
III.
Defendants alternatively seek dismissal of Counts II-V of the
Complaint for failure to state a claim.
Counts II through IV
allege fraud against BIH, Burmaster and Hayter in violation of
Sections 17(a)(1)-(3) of the Securities Act, 15 U.S.C. § 77q(a),
Section 10(b) and rule 10b-5 of the Exchange Act, 15 U.S.C §
78j(b). Count V is asserted against Burmaster and Hayter only, and
alleges aiding and abetting BIH’s violations of Section 10(b) and
Rule 10b-5.
In deciding a motion to dismiss, the Court must accept all
factual allegations in a complaint as true and take them in the
light most favorable to plaintiff. Erickson v. Pardus, 551 U.S. 89
(2007); Christopher v. Harbury, 536 U.S. 403, 406 (2002).
survive dismissal,
the
complaint’s
allegations
must
“To
plausibly
suggest that the [plaintiff] has a right to relief, raising that
possibility
above
a
speculative
level;
if
plaintiff’s complaint should be dismissed.”
v.
Ground
Down
Eng’g,
Inc.,
540
F.3d
they
do
not,
the
James River Ins. Co.
1270,
1274
(11th
Cir.
2008)(citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56
(2007)). Defendant’s reliance on the former “no set of facts” rule
(Doc. #29, p. 7) is misplaced.
-8-
Allegations of security fraud are subject to the heightened
pleading standards of Federal Rule of Civil Procedure 9(b).
Rule
9(b) requires that a party alleging fraud “state with particularity
the circumstances constituting the fraud.”
The Eleventh Circuit
has cautioned that “Rule 9(b) must not be read to abrogate rule 8,
however, and a court considering a motion to dismiss for failure to
plead
fraud
with
particularity
should
always
be
careful
to
harmonize the directives of rule 9(b) with the broader policy of
notice pleading.” Friedlander v. Nims, 755 F.2d 810, 813 n.3 (11th
Cir. 1985).
A.
Counts II-IV: Fraud in Violation of Sections 17(a)(1)-(3)
of the Securities Act, Section 10(b) and Rule 10b-5 of the Exchange
Act.
Section 17(a) of the Securities Act, Section 10(b) of the
Exchange Act and Rule 10b–5, all proscribe fraudulent conduct in
the offer or sale of securities.
Section 10(b) of the Exchange Act
makes it unlawful:
... for any person, directly or indirectly, by the use of
any means or instrumentality of interstate commerce or of
the mails, or of any facility of any national securities
exchange—... (b) To use or employ, in connection with the
purchase or sale of any security ..., any manipulative or
deceptive device or contrivance in contravention of such
rules and regulations as the Commission may prescribe as
necessary or appropriate in the public interest or for
the protection of investors.
15 U.S.C. § 78j(b).
The SEC's Rule 10b–5, promulgated thereunder,
states that,
-9-
It shall be unlawful for any person, directly or
indirectly, by the use of any means or instrumentality of
interstate commerce, or of the mails or of any facility
of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make
the statements made, in the light of the circumstances
under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon
any person, in connection with the purchase or sale of
any security.
17 C.F.R. § 240.10b–5.
“Section 10(b) was designed to protect
investors involved in the purchase and sale of securities by
requiring full disclosure.”
SEC v. DCI Telecomms., Inc., 122 F.
Supp. 2d 495, 498 (S.D.N.Y. 2000)(citing Santa Fe Indus., Inc. v.
Green, 430 U.S. 462, 477–78, 97 S. Ct. 1292, 51 L. Ed. 2d 480
(1977)).
The scope of liability is the same under section 10(b)
and Rule 10b–5.
See SEC v. Merch. Capital, LLC, 483 F.3d 747, 766
n. 17 (11th Cir. 2007); SEC v. Zandford, 535 U.S. 813, 816 n. 1,
122 S. Ct. 1899, 153 L. Ed. 2d 1 (2002).
To prove a violation under § 10(b), the SEC must show the
defendants: (1) employed a device, scheme or artifice to defraud or
made materially false statements; (2) in connection with the
purchase or sale of securities; (3) using an instrumentality of
interstate commerce; and (4) with scienter.
Merchant Capital, 483
F.3d at 766 (citing Aaron v. SEC, 446 U.S. 680, 695, 100 S. Ct.
-10-
1945,
64
L.
Ed.
2d
611
(1980)).
substantially similar proof.”
Section
17(a)
“requires
SEC v. Wolfson, 539 F.3d 1249, 1256
(10th Cir. 2008)(quoting SEC v. First Jersey Sec., Inc., 101 F.3d
1450, 1467 (2d Cir. 1996)).
Section 17(a) of the Securities Act provides that it is
unlawful for any person, directly or indirectly, in the offer or
sale of securities:
(1) to employ any device, scheme, or artifice to defraud,
or
(2) to obtain money or property by means of any untrue
statement of a material fact or any omission to state a
material fact necessary in order to make the statements
made, in light of the circumstances under which they were
made, not misleading; or
(3) to engage in any transaction, practice, or course of
business which operates or would operate as a fraud or
deceit upon the purchaser.
15 U.S.C. § 77q(a).
SEC
must
prove
(1)
“To show a violation of section 17(a)(1), the
material
misrepresentations
or
materially
misleading omissions, (2) in the offer or sale of securities, (3)
made with scienter.”
Merchant Capital, 483 F.3d at 766 (citing
Aaron, 446 U.S. at 697, 100 S. Ct. 1945).
However, to prove a
violation of section 17(a)(2) or (3), “the SEC need only show (1)
material misrepresentations or materially misleading omissions, (2)
in the offer or sale of securities, (3) made with negligence.”
(citing Aaron, 446 U.S. at 702, 100 S. Ct. 1945).
Id.
“The principal
difference between § 17(a) and § 10(b) lies in the element of
-11-
scienter, which the SEC must establish under § 17(a)(1), but not
under § 17(a)(2) or § 17(a)(3).”
Wolfson, 539 F.3d at 1256.
Unlike private securities enforcement actions, the SEC need not
prove reliance or injury under § 17 or § 10(b).
Id. at 1258 n.14,
1260 n.17.
The Complaint alleges that Hayter, Burmaster and BIH made
numerous false statements in press releases and on BIH’s website,
regarding the identity of the individuals directing BIH’s affairs,
BIH’s operations and business relationships, and BIH’s stock and
dividend payments. (Doc. #1, ¶¶15, 20, 21, 22, 24, 25, 26, 27, 28,
29, 30, 31, 32, 33, 34, 35, 36, 37.)
The Court finds that the SEC
has sufficiently alleged the falsity of the representations.
The Court also finds that the SEC has sufficiently alleged the
materiality of the misrepresentations.
“The test for determining
materiality is whether a reasonable man would attach importance to
the fact misrepresented or omitted in determining his course of
action.”
1982).
SEC v. Carriba Air, Inc., 681 F.2d 1318, 1323 (11th Cir.
Materiality, though, is a question of fact that may rarely
be resolved at the motion to dismiss stage.
In re Unicapital Corp.
Secs. Lit., 149 F. Supp. 2d 1353, 1364 (S.D. Fla. 2001).
the
alleged
misrepresentations
or
omissions
are
so
“Only if
obviously
unimportant to an investor that reasonable minds cannot differ on
the question of materiality is it appropriate for the district
court to rule that the allegations are inactionable as a matter of
-12-
law.”
Id. (quoting Weiner v. Quaker Oats Co., 129 F.3d 310, 317
(3d Cir.1997)).
and
Hayter
Here, the Complaint alleges that BIH, Burmaster
created
a
fictitious
president
and
CEO
and
misrepresented his credentials, lied or exaggerated about various
business deals and promised to pay a cash and stock dividend, when
in fact the company was in no position to do so.
that
there
is
misrepresentations
a
substantial
would
The Court finds
likelihood
significantly
investor chose to invest money with BIH.
that
influence
these
whether
an
Therefore, the SEC has
sufficiently alleged materiality.
The
SEC
must
also
allege
that
the
acts
were
done
scienter, an “intent to deceive, manipulate, or defraud.”
Ernst v. Hochfelder, 425 U.S. 185, 193 (1976).
established
by
a
showing
of
knowing
with
Ernst &
“Scienter may be
misconduct
or
severe
recklessness.” SEC v. Carriba Air, Inc., 681 F.2d 1318, 1324 (11th
Cir. 1982). Recklessness requires a showing of conduct that was an
extreme departure from standards of ordinary care which presented
a danger of misleading buyers or sellers that either was known or
was so obvious that the company must have been aware of it.
Id.
(citing SEC v. Southwest Coal & Energy Co., 624 F.2d 1312, 1321
(5th Cir. 1980)).
Here, the SEC has alleged that BIH, Burmaster
and Hayter were intentionally deceitful and, at a minimum, were
severely reckless.
According to the Complaint, defendants created
-13-
a fictitious president and CEO and made various false statements
which they knew were false when made.
To determine whether these actions occurred “in connection
with” the purchase or sale of securities, the SEC need only show “a
fraudulent scheme in which the securities transactions and breaches
of fiduciary duty coincide.”
SEC v. Zandford, 535 U.S. at 825;
accord Jacobini v. KPMG LLP, 314 F. Supp. 2d 1172, 1179 (M.D. Fla.
2004).
This standard is to be interpreted flexibly to effect the
purposes of the protective statute.
Zandford, 535 U.S. at 819.
Here, the SEC has alleged that during the time period in which the
fraudulent press releases were made, BIH’s stock price and trading
volume increased.
Prior to this period, BIH’s trading volume was
approximately 1.36 million shares at an average per share price of
$0.0017; during, it rose to approximately 4.8 million shares and a
per share price high of $0.05.
(Doc. #1, ¶38.)
adequately
Burmaster
alleged
that
BIH,
and
Thus, the SEC has
Hayter
acted
“in
connection with” the purchase or sale of securities.
Accordingly, the Court finds that Counts II-IV are adequately
pled.
Defendants’ motion to dismiss these counts for failure to
state a claim is, therefore, denied.
B.
Count V: Aiding and Abetting BIH’s Violations of Section
10(b) and Rule 10b-5 of the Exchange Act.
In Counts II-IV, discussed above, the SEC alleges that Hayter
and Burmaster are liable for primary violations of the anti-fraud
-14-
provisions of Section 10(b) and Rule 10b-5 on the theory that they
caused
BIH’s
defraud.6
alleges
misstatements
and
participated
in
a
scheme
to
In Count V of the Complaint, the SEC alternatively
that
Hayter
and
Burmaster
are
liable
for
secondary
violations of the anti-fraud provisions pursuant to an aiding and
abetting theory of liability.
“A defendant who is not himself a primary violator, but has
knowledge
of
a
primary
violation
and
provides
substantial
assistance in it, is liable as an aider and abettor.”
SEC v.
Monterosso, 768 F. Supp. 2d 1244, 1269 (S.D. Fla. 2011).
Any
person guilty of aiding and abetting a violation of the securities
laws may be subject to the same penalties.
See 15 U.S.C. § 78t
(“[A]ny person that knowingly or recklessly provides substantial
assistance to another person in violation of a provision of this
title, or of any rule or regulation issued under this title, shall
be deemed to be in violation of such provision to the same extent
as the person to whom such assistance is provided.”).
To state a
claim for aider and abettor liability, the SEC must allege that (1)
a principal committed a primary violation; (2) the aider and
abettor provided “substantial assistance” to the violator; and (3)
6
See SEC v. May, 648 F. Supp. 2d 70, 77 (D.D.C. 2009)(“[T]he
SEC need not prove that the defendant actually made a
misrepresentation or omission for primary liability—it need only
show that he “caused the misstatements and omissions to be made,
and knew that the statements were calculated to reach investors.”).
-15-
the aider and abettor acted with scienter.
SEC v. Johnson, 530 F.
Supp. 2d 315, 322 (D.D.C. 2008)(citing Graham v. SEC, 222 F.3d 994,
1000 (D.C. Cir. 2000)).
Here, the SEC has identified BIH as the principal violator,
and alleged, with sufficient factual detail, that Burmaster and
Hayter knowingly and willfully or recklessly provided “substantial
assistance” to BIH.
Thus, the Court finds that Count V has been
properly pled.
Accordingly, it is now
ORDERED:
BIH Defendants’ Motion to Transfer or Dismiss (Doc. #28) is
DENIED.
DONE AND ORDERED at Fort Myers, Florida, this
August, 2011.
Copies:
Counsel of record
-16-
31st
day of
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