Securities and Exchange Commission v. Wealth Strategy Partners, LC et al

Filing 33

ORDER denying 24 motion to dismiss. Signed by Judge James D. Whittemore on 6/4/2015. (KE)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
TAMPA DIVISION
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
Case No. 8:14-cv-02427-T-27TGW

vs.
WEALTH STRATEGY PARTNERS, LC,
HARVEY ALTHOLTZ, STEVENS
RESOURCE GROUP, LLC, and GEORGE
Q. STEVENS.,
Defendants.

I
------------------------------------------------ORDER
BEFORE THE COURT is Defendants Wealth Strategy Partners, LC and Harvey Altholtz' s
Motion to Dismiss Amended Complaint (Dkt. 24), and Plaintiff's response in opposition (Dkt. 30).
Upon consideration, the motion is DENIED.
BACKGROUND
The SEC brought this lawsuit against Defendants Wealth Strategy Partners, LC ("WSP"),
Harvey Altholtz, Stevens Resource Group, LLC ("SRG"), and George Q. Stevens, alleging violations
of the federal securities laws. SRG and Stevens entered into consent judgments approved by the
Court in December 2014. (Dkts. 16, 17).
Altholtz created two private investment funds, The Adamas Fund, LLP ("Adamas") and The
Stealth Fund, LLP ("Stealth," collectively with Adamas, the "Funds") in 2007. (Dkt. 21

~

26).

Adamas and Stealth primarily invested in small publicly-traded companies (the "Portfolio

1

Companies"). (Id.

~~

principal of WSP. (Id.
until April 2010. (Id.

26-27). WSP was the general partner for both Funds, and Altholtz was the
~

28). The Funds raised nearly $31 million in investments from April 2007

~~ 29-30). WSP received a management fee

and an incentive fee of 30% of the Funds' quarterly net profits.

of 2.5% of the Funds' asset values
(Id.~

36).

The SEC alleges that WSP and Altholtz (collectively referred to as "Defendants") violated
the securities laws in three different ways. First, the SEC alleges that Altholtz and WSP failed to
disclose to investors a series of guarantees made and loans received by the Funds, as part of a scheme
to misrepresent the true value of the Funds to current and potential investors. Altholtz family trusts
made loans to Stealth's Portfolio Companies in 2009, in an attempt to increase the value of the
underlying assets of Stealth. (Id.

~~

46-48). Stealth then guaranteed the Altholtz loans made to the

Portfolio Companies, in violation of its operating agreement.

(Id.~~ 46-48,

56-58). Also, WSP and

an Altholtz family trust made loans to the Funds, which the Funds were obligated to pay back at high
interest rates. (Id.

~~ 66-72).

Second, the SEC alleges that newsletters sent to investors in Stealth and

Adamas, authored by Stevens and Altholtz, contained misrepresentations about the financial health
of several of the Portfolio Companies. (Id.

~~

77-94). The effect of these newsletters was to

misrepresent the value of the underlying assets of the Funds. (Id.) Third, the SEC alleges that in
2010, Altholtz sold securities in Adamas for the benefit of a family trust, but told other investors not
to redeem their investments in Adamas, because Adamas lacked sufficient funds or other investors
would be harmed. (Id.

~~

95-99).

2

Altholtz and WSP move to dismiss the Amended Complaint, claiming the alleged actions
and omissions do not violate the securities laws. 1
STANDARD

A complaint should contain a "short and plain statement of the claim showing that the
pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). The complaint must "plead all facts establishing
an entitlement to relief with more than 'labels and conclusions' or a 'formulaic recitation of the
elements ofa cause of action."' Resnickv. AvMed, Inc., 693 F.3d 1317, 1324 (11th Cir. 2012)
(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 554, 555 (2007)).
"[O]nly a complaint that states a plausible claim for relief survives a motion to dismiss."

Ashcroft v. Iqbal, 556 U.S. 662, 679 (2008) (citing Twombly, 550 U.S. at 556). "A claim has facial
plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged." Id. at 678 (citing Twombly, 550
U.S. at 556). This plausibility standard "asks for more than a sheer possibility that a defendant has
acted unlawfully." Id (citing Twombly, 550 U.S. at 556). "Determining whether a complaint states
a plausible claim for relief will ... be a context-specific task that requires the reviewing court to
draw on its judicial experience and common sense." Id. at 679 (citing Iqbalv. Hasty, 490 F.3d 143,
157 (2d Cir. 2007), rev 'd sub nom. Ashcroft v. Iqbal, 556 U.S. 672 (2009)). Where the well-pleaded
facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has
not shown that the pleader is entitled to relief. Id

1 Defendants attach nine documents to the motion to dismiss. Only documents incorporated by reference into
the complaint which are central to the SEC's claim and undisputed may be considered at this stage. Horsley v. Feldt, 304
F.3d 1125, 1134 (11th Cir. 2002). Here, these documents include the Adamas and Stealth operating agreements, private
placement memoranda, two of the allegedly misleading newsletters, and a note issued in conjunction with an Altholtz
loan to a Portfolio Company. (See Dkt. 24-1to24-9). The other documents will be disregarded.

3

:~

All of the factual allegations contained in the complaint must be accepted as true for the
purposes of a motion to dismiss, but this tenet is "inapplicable to legal conclusions." Id at 678.
"While legal conclusions can provide the framework of a complaint, they must be supported by
factual allegations." Id. at 679. All reasonable inferences must be drawn in the plaintiff's favor. St.

George v. Pinellas Cnty., 285 F.3d 1334, 1337 (11th Cir. 2002).
DISCUSSION

Elements of Securities Law Claims
The SEC contends the loans made to the Funds and the guarantees made by the Funds
violated Section l 7(a)(l) of the Securities Act, 15 U.S.C. § 77q(a)(l) (Count I); Sections l 7(a)(2)
and l 7(a)(3) of the Securities Act, 15 U.S.C. § 77q(a)(2) and (a)(3) (Count N); Section lO(b) of the
Exchange Act, 15 U.S.C. § 78j(b), and Rule lOb-5, 17 C.F.R. § 240.10b-5(a), (b), and (c) (Count
VII); Section 206(4) and Rule 206(4)-8(a) of the Advisers Act, 15 U.S.C. § 80b-6(4) and 17 C.F.R.
§ 275.206(4)-8(a) (Count XII); and aided and abetted violations ofSection206(4) and Rule 206(4)8(a) of the Advisers Act (Count XIII).
The SEC contends that the alleged misleading statements in the newsletters violated Section
l 7(a)(l) of the Securities Act(Countll), Sections 17(a)(2) and l 7(a)(3) of the Securities Act (Count
V), and Section lO(b) of the Exchange Act and Rule lOb-5 (Count VIII).
Finally, the SEC contends that the preferential redemptions violated Section 17(a)(l) of the
Securities Act (Count 111), Sections 17(a)(2) and 17(a)(3) of the Securities Act (Count VI), and
Section lO(b) of the Exchange Act and Rule lOb-5 (Count IX). 2

2

Counts X and XI are only against Stevens and SRG, and therefore are not subject to the motion.

4

To establish a violation of Section 17(a)( 1) of the Securities Act, the SEC must prove ( 1)
misrepresentations or misleading omissions that were material, (2) in the offer or sale of securities,
(3) made with scienter. SEC v. Monterosso, 756 F.3d 1326, 1333-34 (11th Cir. 2014) (citing SEC

v. Merch. Capital, LLC, 483 F.3d 747, 766 (11th Cir. 2007) and Aaron v. SEC, 446 U.S. 680, 697
(1980)). For Sections 17(a)(2) and (a)(3), the first two elements arethe same, but the SEC need only
show negligence. Id. The elements of a Section 1O(b) and Rule 1Ob-5 violation are "substantially
similar" to a Section 17(a)(1) claim, and require (1) a material misrepresentation or materially
misleading omission, (2) in connection with the buying or selling or securities, (3) made with
scienter. Id. The SEC may establish the requisite scienter for both the 17(a)(l) and the IO(b) claims
with a "showing of knowing misconduct or severe recklessness." SEC v. Carriba Air, Inc., 681 F.2d
1318, 1324 (11th Cir. 1982). The test for materiality is "whether a reasonable man would attach
importance to the fact misrepresented or omitted in determining his course of action." Merch.

Capital, 483 F.3d at 766 (quoting Carriba Air, 681 F.2d at 1323 (internal citation omitted)).
To establish violations of Section 206(4) and Rule 206(4) of the Advisers Act, the SEC must
prove (1) the Defendants were investment advisers, (2) in interstate commerce, (3) who engaged in
a transaction or pattern of business, (4) which was fraudulent, deceptive, or manipulative. 15 U.S. C.
§ 80b-6(4); see US. v. Elliott, 62 F.3d 1304, 1312 (11th Cir. 1995) (explaining intent of Advisers
Act was to prohibit a broad range of fraudulent practices). Facts that establish violations of other
anti-fraud securities laws, including Section 17(a) and Section 1O(b), also establish violations of
Section206 ifthe defendant is an investment adviser. SECv. Young, 2011WL1376045, at *7 (E.D.
Pa. Apr. 12, 2011) (quotingSECv. Haligiannis, 470 F. Supp. 2d373, 383 (S.D.N.Y. 2007)). Finally,
to establish aiding and abetting violations of the securities laws, the SEC must show (1) the

5

defendant had knowledge of (2) a primary violation of the securities laws and (3) knowingly
rendered substantial assistance. 15 U.S.C. § 78t; Woodward v. Metro Bank ofDallas, 522 F.2d 84,
97 (5th Cir. 1975);3 SECv. BIHCorp., No. 2:10-CV-577-FTM-29, 2011 WL3862530, at *6 (M.D.
Fla. Aug. 31, 2011) (citing SEC v. Monterosso, 768 F. Supp. 2d 1244, 1269 (S.D. Fla. 2011)).
Loans and Guarantees (Counts I. IV. and VII)

Altholtz and WSP raise several arguments related to the loans and guarantees, many ofwhich
relate to multiple counts. They argue the loans and guarantees were (1) not fraudulent, (2) not
material, (3) did not involve misrepresentations or omissions, (4) did not result in money accruing
to either Defendant, (5) and that neither Defendant acted with scienter. These arguments are
unavailing.
First, Altholtz and WSP argue that the loans and guarantees to the Funds and Portfolio
Companies did not constitute fraud, because the cash benefitted the funds. To the extent this
argument turns on proximate cause or damages, it is not well taken. While private parties bringing
securities fraud claims must prove they relied on allegedly fraudulent misstatements or omissions
and those misstatements or omissions caused their damages, the SEC, as enforcer of the securities
laws, need not do so. SEC v. Morgan Keegan & Co., Inc., 678 F.3d 1233, 1244 (I Ith Cir. 2012).
To the extent Defendants' contentions are directed to the materiality element, they also fail.
The SEC alleges that Stealth's undisclosed guarantee of loans to the Altholtz family trusts exposed
Stealth to additional liability, hid the true financial health of Stealth and certain of the Portfolio
Companies, and masked the actual use of investor funds. (Dkt. 21 ,, 49-52). The SEC also alleges

3 The Eleventh Circuit has adopted as binding precedent all decisions the former Fifth Circuit made prior to
October 1, 1981. Bonner v. City ofPrichard, 661 F.2d 1206, 1209 (11th Cir. 1981).

6

WSP made undisclosed loans directly to Adamas and Stealth in violation of the Adamas and Stealth
operating agreements. (Id~~ 64-65). The SEC alleges repayment of these loans depleted the assets
of the Funds, based on the duration ofthe loans and their high interest rates. (Id. ~~ 65-72). WSP and
Altholtz dispute the SEC's factual allegations and inferences, but at this stage, it is inappropriate to
weigh the evidence to decide a mixed question oflaw and fact. See In re Unicapital Corp. Sec. Litig.,
149 F. Supp. 2d 1353, 1364 (S.D. Fla. 2001).
Next, Defendants challenge the existence ofmaterial misrepresentations or omissions related
to the loans and guarantees. As stated, material misrepresentations or omissions are a required
element of claims based on Sections l 7(a)(l), (2), and (3) of the Securities Act, and Section IO(b)
and Rule 1Ob--5 of the Exchange Act. Defendants argue that the SEC has not identified an omission
that is both material and would render the statements actually made misleading, relying on Matrixx

Initatives v. Siracusano, 131 S. Ct. 1309, 1321 (2011).
An omission constitutes securities fraud when there is a duty to disclose, which "may arise

from a defendant's previous decision to speak voluntarily." Finnerty v. Stiefel Labs., Inc., 756 F.3d
1310, 1316 (11th Cir. 2014), cert. denied, 135 S. Ct. 1549 (2015); FindWhat Investor Grp. v.

FindWhat.com, 658 F.3d 1282, 1299 (11th Cir. 2011). This includes a duty to revise previous
statements that were true at the time they were made, but later became misleading. Id at 1317.
The SEC alleges that the operating agreements of both Adamas and Stealth stated that WSP
and WSP's affiliates were prohibited from making loans to Adamas and Stealth, (Dkt. 21~~55, 64),
but that WSP and Altholtz-controlled trusts in fact made loans to Adamas and Stealth. (Id.

~

65).

Accordingly, the SEC has pleaded that Defendants made omissions with regard to the loans that
rendered previous statements misleading.

7

The SEC alleges thatthe Funds guaranteed loans made by WSP and other Altholtz-controlled
entities to the Portfolio Companies. (Id. ,, 44-49). However, the SEC alleges neither the Defendants
nor the Funds disclosed that the Funds' assets could be used to guarantee loans made by WSP or
Altholtz. (Id.,, 50, 56-57, 60). This failure to disclose, the SEC alleges, meant that investors were
unaware of how their resources were used and concealed the true value of the Portfolio Companies
and the Funds. (Id. ,, 50-52, 58-59). In July 2009, Altholtz sent an email to investors seeking
permission to make the guarantees, but did not reveal the guarantees had already been made. (Id
, 61). Based on these allegations, the SEC has sufficiently pleaded that Defendants made material
omissions with regard to the guarantees.
Defendants next argue that the SEC has not alleged that either Altholtz or WSP received
money or property by means of the challenged guarantees or loans, which is a required element of
a Section 17(a)(2) claim. This argument fails, because the SEC has alleged that the value of the
Funds was misstated by the guarantees and loans, and that WSP and Altholtz were compensated
based on the value of the Funds. (Dkt. 21,,36, 43, 58).
Finally, Defendants contend that the SEC has not sufficiently alleged that WSP and Altholtz
acted with scienter with regard to the guarantees and loans. To state a claim under Rule 1Ob-5, the
SEC must allege that the material misstatements or omissions were made with scienter. FindWhat

Investor, 658 F.3d at 1299. Scienter requires "intent to defraud or severe recklessness." Id. (quoting
Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 594 F.3d 783, 790 (11th Cir. 2010)).
And severe recklessness requires:
[H]ighly unreasonable omissions or misrepresentations that involve not merely
simple or even inexcusable negligence, but an extreme departure from the standards
of ordinary care, and that present a danger of misleading buyers or sellers which is
either known to the defendant or is so obvious that the defendant must have been

8

aware of it. Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1238 (11th Cir. 2008)
(quotingBryantv.AvadoBrands, Inc., 187F.3d 1271, 1282n.18(11thCir.1999)).
The SEC has sufficiently alleged scienter for both WSP and Altholtz. As stated, the SEC
alleges that the loans were made in violation of both of the Funds' operating agreements. (Dkt. 21

iii! 66, 69). The SEC has also alleged that guarantees were used to artificially prop up the values of
the Portfolio Companies, which in turn inflated the value of the Funds, while at the same time
increasing their liability, unbeknownst to other investors. (Id

iii! 46, 50-52). Viewing these and the

other factual allegations of fraudulent intent in aggregation, as permitted by Phillips v. Scientific-

Atlanta, Inc., 374 F.3d 1015, 1016-17 (11th Cir. 2004), the SEC's allegations are sufficient to satisfy
the standard of severe recklessness, if not outright fraudulent intent.

Loans and Guarantees as Investment Advisers (Counts XII and XII)
Counts XII and XIII are based on the same factual allegations regarding the loans and
guarantees as Counts I, IV, and VII, but bring claims under the Advisers Act and related regulations,
and for aiding and abetting violations of the Advisers Act. Defendants challenge these claims
primarily on the contention that WSP and Altholtz were not registered investment advisers until
January 2010, and the misrepresentations alleged in the complaint occurred before that time. They
argue that because they were not registered investment advisers, they are not subject to the Advisers
Act.
This argument is unavailing for two reasons. First, based on the allegations in the complaint,
notwithstanding their registration status, WSP and Altholtz were investment advisers prior to 2010,
because they "for compensation, engage[d] in the business of advising others . . . as to the
advisability of investing in, purchasing, or selling securities." 15 U.S.C § 80b-2(a)(l l). As the

,,

controlling entity and individual of Stealth and Adamas, both of which solicited capital from

9

investors and invested funds on their behalf, WSP and Altholtz "exercised ... control over what
purchases and sales are made with investors' funds, [which] is considered to be investment advice
for purposes of the [Advisers] Act." United States v. Ogale, 378 Fed. App'x 959, 960 (11th Cir.
2010) (citing United States v. Elliott, 62 F.3d 1304, 1310 (11th Cir. 1996) and Abrahamson v.

Fleschner, 568 F.2d 862, 871 (2d Cir. 1977)). Second, the complaint alleges WSP and Altholtz
registered as investment advisers in January 2010. (Dkt. 21iii!17-18). Investments were solicited
for both Funds until April 2010, without disclosure of the loans, guarantees, or other allegedly
fraudulent conduct. (Id iii! 30, 68, 70). Therefore, the motion to dismiss is due to be denied with
regard to Counts XII and XIII.
Newsletters (Counts II, V, and VIID
Defendants challenge the claims related to the newsletters on five separate grounds. First,
they argue that the newsletters were not distributed in connection with the offer or sale of a security,
as required for claims based on Section 17(a)(2) and Rule lO(b}-5. Second, they argue the
newsletters did not include material misrepresentations. Third, they contend for the purposes of
Section 17(a)(2), WSP and Altholtz were not negligent, as they only relied on Stevens' work. Fourth,
they maintain no inference of scienter can be drawn from their conduct. Finally, they claim that they
were not the makers of the statements in the newsletters. None of these arguments support dismissal.
Defendants' first argument is that the newsletters were not distributed in connection with an
offer, purchase, or sale of a security, because the newsletters were published in 2009 and 2010, after
the initial offering period for the Funds was closed. As an initial matter, this argument appears to be
directed only to Adamas. The complaint alleges Stealth's offering period lasted until November
2009, and the misrepresentations were from December 2008 until September 2009. (Dkt. 21iii!29,

10

39, 77-81 ). With respect to Adamas, the newsletters in question were in December 2008 and March
2009. (Id. ifif 78, 89). However, the SEC alleges that although the primary offering period for
Adamas closed prior to the newsletters, the Defendants continued to offer interests in Adamas until
April 2010. (Id if 30). Therefore, the complaint sufficiently alleges the newsletters were distributed
in connection with the offer or sale of a security.
Next, Defendants contend that the newsletters do not contain material misrepresentations.
Defendants note that the SEC has focused on a minority of statements in the newsletters, and the
statements themselves can be read in a non-misleading way. However, at this stage, the SEC's
allegations are minimally sufficient. The complaint alleges that a newsletter stated that one of
Stealth's Portfolio Companies was profitable based on selling energy drinks, when in fact it was not.

(Dkt. 21if77). Another newsletter stated that a different Portfolio Company in which both Funds
had invested held $4 million in cash, when those funds were actually from Stealth's capital infusion.

(Id. if 78). The complaint also alleges false statements and omissions about Portfolio Companies
Access Key and ICCW relating to their profitability and revenue generation. (Id. ifif 84-85, 89-91).
At this stage, taking the well-pied facts as true, these allegations suffice as material
misrepresentations and omissions.
The state of mind required for Sections 17(a)(2) is negligence. Aaron v. SEC, 446 U.S. 680,
701 (1980). Defendants argue they were not negligent in making the statements in the newsletters,
as required by Section l 7(a)(2), because Stevens prepared the newsletters and the SEC did not allege
facts showing that the Defendants could not rely on him. However, the SEC has alleged that Altholtz
reviewed the newsletters and had personal knowledge of many of the Portfolio Companies in
question. (Id. ifif 75, 86, 92). Indeed, Altholtz was listed as the author of some of the newsletters.

11

(Id) The SEC has sufficiently alleged Defendants acted negligently in the drafting and dissemination
of the newsletters.
Scienter is required for claims based on Section 17(a)(l) and Rule lOb-5. The SEC's
allegations regarding Defendants' knowledge of the Portfolio Companies true strength, juxtaposed
against the statements in the newsletters, are sufficient to raise an inference of intent to defraud or
severe recklessness, as required to show scienter. See FindWhat Investor Group, 658 F.3d at 1299.
Defendants' final argument related to the newsletters is based on the Supreme Court's
decision in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011). In Janus

Capital, the Supreme Court held only the "maker" of a statement, meaning ''the person or entity with
ultimate authority over the statement, including its content and whether and how to communicate
it," is liable for violations of Rule lOb-5. Id. at 2302. Defendants contend Altholtz and WSP were
not "makers" of the relevant statements in light of the test.

Janus Capital applies only to claims based on Rule 10b-5(b), not claims based on Section
17(a), Section lO(b), and other parts ofRule lOb-5. See SECv. Monterosso, 756F.3dat1334. Even
if Janus Capital does apply to Rule 1Ob-5 with regard to the newsletters, the factual allegations in
the complaint are sufficient to support a finding that Defendants were the makers of the statements
in the newsletters, based on their control over the newsletters. (Dkt.

21~~28,

40, 75). See Janus

Capital, 131 S. Ct. at 2302.
·'

Preferential Redemptions (Counts III. VI. and IX)

The final conduct at issue is the allegedly preferential redemptions from the Funds by the
Defendants. Defendants argue these claims fail because there were (1) no false representations (2)
made in connection with the offer or sale of a security, (3) and Defendants had no duty to

12

subordinate their withdrawal requests to other withdrawal requests. More generally, Defendants
argue that unfair conduct does not violate the anti-fraud provisions of the securities laws without a
showing of deception. Defendants' arguments are unavailing.
The contention that there were no false representations or omissions made in connection with
the offer or sale of a security is belied by the complaint. The SEC alleges that in early 2010, investors
sought to redeem their investments in Adamas, and were told by Altholtz there was not sufficient
cash on hand to redeem their investments without harming other investors. At the same time,
Altholtz allegedly made a redemption payment of$60,200 to his family's trust from Adamas. (Dkt.
21

~~

95-99). These allegations are sufficient to satisfy the misrepresentation requirement, as well

as satisfying the requirement that they were made in connection with the offer or sale of a security.
Defendants' claim based on an alleged lack of duty fares no better. The SEC's contention is
that Alholtz engaged in fraudulent practices by redeeming his investment while telling investors they
could not redeem their own funds, not that he had a duty not to redeem his investments or to allow
other investors to do so. These allegedly fraudulent practices are an adequate factual basis to support
a claim for violations of the securities laws.
Finally, as Defendants state, Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 475-76 (1977)
stands for the proposition that unfair acts do not violate the anti-fraud statutes without deception.
However, the SEC has alleged "some element of deception" in the preferential redemptions here,
not simply that investors were treated "unfairly." Id. at 476-77. Therefore, the claims based on the
preferential redemptions will not be.dismissed.

13

Scheme Liability
Section 17(a)(l) and (a)(3) and Rule 10b-5(a) and (c) make it unlawful to use fraudulent
schemes or deceptive devices in connection with the sale of securities. SEC v. St. Anselm

Exploration Co., 936 F. Supp. 2d 1281, 1298 (D. Colo. 2013) (citingSECv. Zandford, 535 U.S. 813,
819 (2002)). See SEC v. Goble, 682 F.3d at 944. Defendants contend to state a claim based on
scheme liability, the SEC must allege conduct that goes beyond misrepresentations and omissions
subject to Rule 1Ob-5(b). See Public Pension Fund Group v. KV Pharmaceutical Co., 679 F.3d 972,
987 (8th Cir. 2012) ("[A] scheme liability claim must be based on conduct beyond
misrepresentations or omissions actionable under Rule 10b-5(b)."); WPP Luxembourg Gamma

ThreeSarlv. Spot Runner, Inc., 655F.3d1039, 1057 (9th Cir. 2011) (same);Lentellv. Merril/Lynch
& Co., 396 F.3d 161, 177 (2d Cir. 2005) (same). The SEC argues scheme liability can be based on

misrepresentations and omissions, citing a recent decision of the Commission interpreting the scope
of Rule 10b-5(a) and (c). Jn the Matter ofJohnP. Flannery &James D. Hopkins, SEC Release No.
3981, 2014 WL 7145625, at *12-13 (Dec. 15, 2014).
This dispute need not be resolved at this time, because even accepting for purposes of this
motion Defendants' narrower definition of scheme liability, the SEC has sufficiently alleged a claim
based on scheme liability. The complaint alleges that Defendants used loans and guarantees and
preferential redemptions as part of a scheme to disguise and artificially inflate the value ofthe Funds.
While some of Defendants' conduct was based on misrepresentations and omissions, it also included
actions that allegedly went beyond statements, including the guarantee of loans by Stealth, which
inflated the value of its Portfolio Companies; the loans made by the Altholtz-controlled entities to
Stealth and Adamas at a high interest rate; and the preferential redemptions of Altholtz investments.

14

...

(See Dkt. 21

~~

46-49, 52, 59, 66-72, 95-99). Defendants argue that their disclosure of Stealth's

guarantees undermines the claim that they were fraudulent. As the SEC responds, however, that
disclosure was made after the allegedly fraudulent conduct had occurred. Accordingly, the motion
to dismiss will be denied with regard to scheme liability.
Remedies

Defendants raise a series of related challenges to the remedies sought by the SEC. First, they
contend that claims for penalties based on conduct before September 25, 2009 are time barred.
Second, they contend the SEC's request for disgorgement is legally flawed. Finally, they seek to
strike the SEC's demand for declaratory relief.
First, Defendants contend that the SEC's claims for penalties based on conduct before
September 25, 2009, five years before the filing of the first complaint, are barred by the statute of
limitations in 28 U.S.C. § 2462. 4 In Gabelli v. SEC, the Supreme Court held that the five year clock
begins to run when the fraud occurs. 133 S.Ct. 1216, 1220-21 (2013). However, the disgorgement
and injunctive relief sought by the SEC is not subject to the statute of limitations in 28 U.S.C. §
2462, so long as the relief sought is to remedy past wrongs or prevent future harms. See generally
SEC v. Jones, 476 F. Supp. 2d 374, 380-81 (S.D.N.Y. 2007). The SEC also argues some of the

misrepresentations continued after September 25, 2009, and therefore civil penalties may be
imposed.
At this point, it would be premature to dismiss the SEC' s claims for penalties. The SEC seeks
disgorgement and injunctive relief for the same conduct, which is not subject to the five-year time

4 As the securities laws generally do not contain statutes oflimitations, the general provision in 28 U.S.C. §
2462 applies. See Gabelli, 133 S.Ct at 1219; SEC v. Huff, 758 F. Supp. 2d 1288, 1337 (S.D. Fla. 2010).

15

bar. Further, the question of continuing misrepresentations poses an additional question requiring
factual development. Defendants' contentions related to the statute of limitations are better suited
for summary judgment.Accord Wiandv. Wells Fargo Bank, N.A., No. 8:12-cv-557-T-27EAJ, Dkt.
37 p. 8 (M.D. Fla. Aug. 2, 2012).
For related reasons, the arguments against disgorgement are not well taken at this time.
Notwithstanding Defendants' arguments, the complaint adequately alleges that Defendants received
management fees and a percentage of profits based on the performance of the Funds. (Dkt. 21 if 36).
The crux of the SEC' s claims based on loans and guarantees and the newsletters is that those actions
and statements affected the value of the Funds, which would have necessarily modified the
management fees and percentage of profits received by Defendants. Defendants provide no authority
that indicates these sources of income to Altholtz and WSP are not subject to disgorgement.
Finally, Defendants seek to dismiss the SEC's request for declaratory relief. However, the
SEC seeks such a declaration in the context of a court order imposing civil penalties, disgorgement
and other injunctive relief. At this juncture, there is no reason to dismiss the request for declaratory
relief.
CONCLUSION

Accordingly, Defendants Wealth Strategy Partners, LC and Harvey Altholtz's Motion to
Dismiss Amended Complaint (Dkt. 24) is DENIED. Defendants shall answer the Amended
Complaint within fourteen (14) days.

"!:.
DONE AND ORDERED t h i s £ day of June, 2015.

Copies to: Counsel of Record

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