Securities and Exchange Commission v. Alternate Energy Holdings, Inc et al
MEMORANDUM DECISION AND ORDER denying 201 Motion to Strike ; granting 216 Motion to Supplement; granting in part and denying in part 219 Motion for Order to Show Cause; granting 222 Motion to Seal Document. Signed by Judge Ronald E. Bush. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (cjm)
UNITED STATES DISTRICT COURT
DISTRICT OF IDAHO
SECURITIES AND EXCHANGE COMMISSION,
Case No.: 10-CV-00621-EJL-REB
REPORT AND RECOMMENDATION
ALTERNATE ENERGY HOLDINGS, INC.,
DONALD L. GILLISPIE, and JENNIFER
PLAINTIFF’S MOTION FOR
(Docket No. 166)
BOSCO FINANCIAL, LLC, and ENERGY
EXECUTIVE CONSULTING, LLC,
MEMORANDUM DECISION AND
PLAINTIFF’S MOTION TO STRIKE
(Docket No. 201)
PLAINTIFF’S MOTION TO FILE
(Docket No. 216)
PLAINTIFF’S MOTION FOR ORDER
TO SHOW CAUSE
(Docket No. 219)
PLAINTIFF’S MOTION TO SEAL
(Docket No. 222)
Currently pending before the Court are Plaintiff Securities and Exchange Commission’s
(1) Motion for Summary Judgment Against Defendants Alternate Energy Holdings, Inc. and
Donald Gillispie (Docket No. 166); (2) Motion to Strike, and Objections to, Defendants’ Joint
Statement of Disputed Material Facts (Docket No. 201); (3) Motion to File Supplemental
Amended Complaint, Pursuant to FRCP 15(d) (Docket No. 216); (4) Motion for Order to Show
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 1
Cause and Order Freezing $2 Million Held by Black and Lobello, LLC (Docket No. 219); and
(5) Motion to Seal Certain Exhibits Filed Inadvertently (Docket No. 222). Having carefully
considered the record, heard oral argument, and otherwise being fully advised, the undersigned
enters (1) a Report and Recommendation as to the Motion for Summary Judgment, and (2) a
Memorandum Decision and Order as to the Motion to Strike, Motion to File Supplemental
Amended Complaint, Motion for Order to Show Cause, and Motion to Seal.
I. GENERAL BACKGROUND
Plaintiff, the Securities and Exchange Commission (the “Commission’) charges
Defendants Alternate Energy Holdings, Inc. (“AEHI”) and its chief executive, Donald Gillispie
(“Gillispie’), with a far-reaching scheme to defraud the investing public in violation of the
federal securities laws. See Mem. in Supp. of MSJ, p. 1 (Docket No. 167). Among other things,
the Commission alleges that AEHI, through Gillispie, illegally manipulated the public market
price for AEHI stock to create the illusion of value for new investors, failed to disclose and/or
made false reports in violation of reporting requirements, and concealed millions of dollars of
payments to himself and Defendant Jennifer Ransom (“Ransom”). See id.
Such allegations have led to the following claims raised by Plaintiff: (1) violations of
section 17(a) of the Securities Act against AEHI and Gillispie (First Claim for Relief); (2)
violations of section 10(b) of the Exchange Act and Rule 10b-5 against AEHI and Gillispie
(Second Claim for Relief); (3) violations of section 13(a) of the Exchange Act and Rule 13a-11
by AEHI (Third Claim for Relief); (4) aiding and abetting violations of 10(b) of the Exchange
Act and Rule 10b-5 against Gillispie and Ransom (Fourth Claim for Relief); (5) violations of
section 16(a) of the Exchange Act and Rule 16a-3 against Gillispie and Ransom (Fifth Claim for
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 2
Relief); and (6) violations of sections 5(a) and 5(c) of the Securities Act by AEHI and Gillispie
(Sixth Claim for Relief). See Am. Compl. at ¶¶ 86-103 (Docket No. 87).
The Commission’s Motion for Summary Judgment does not address all of its claims;
rather the Commission is moving for summary judgment on its claims that AEHI and Gillispie
conducted an illegal, unregistered stock offering, and that they repeatedly misled investors about
the status of the AEHI’s funding. See Mem. in Supp. of MSJ, p. 1 (Docket No. 167). These
arguments speak to the Commission’s First, Second, and Sixth Claims for Relief.1
Plaintiff’s Motion for Summary Judgment: Standard of Review
Summary judgment is used “to isolate and dispose of factually unsupported claims . . . .”
Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986). It is “not a disfavored procedural
shortcut,” but rather is “the principal tool[ ] by which factually insufficient claims or defenses
[can] be isolated and prevented from going to trial with the attendant unwarranted consumption
of public and private resources.” Id. at 327. “[T]he mere existence of some alleged factual
On August 8, 2012 (after AEHI filed its opposition to the Commission’s Motion for
Summary Judgment), AEHI’s counsel filed an unopposed “Motion to Leave to Withdraw as
Counsel to [AEHI].” See Mot. to Withdraw (Docket No. 202). On September 6, 2012, the
undersigned granted AEHI’s counsel’s request, pursuant to certain (since-satisfied) conditions
dealing with notice to AEHI of its counsel’s withdrawal. See 9/6/12 Order (Docket No. 211) and
9/6/12 Cert. of Serv. (Docket No. 212). In granting AEHI’s request to withdraw, the Court gave
AEHI 21 days to file a written notice “stating how and by whom it will be represented.” See
9/6/12 Order, p. 2 (Docket No. 211). Moreover, the Court indicated that, “[p]ursuant to District
of Idaho Local Civil Rule 83.6(c)(2), if [AEHI] fails to appear in this action, a default against
such party shall be entered by the Court.” See id. AEHI failed to appear after its counsel’s
withdrawal. Therefore it is hereby recommended that the district judge enter a default against
AEHI. Despite the undersigned’s recommendation that a default against AEHI be entered, the
Court will nonetheless consider the arguments raised in its opposition to the Commission’s
Motion for Summary Judgment vis à vis the Commission’s claims against Gillispie given the
latter’s joinder/incorporation of AEHI’s arguments relating thereto. See AEHI’s Opp. to MSJ, p.
1 (Docket No. 197).
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 3
dispute between the parties will not defeat an otherwise properly supported motion for summary
judgment; the requirement is that there be no genuine issue of material fact.” Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986).
However, the evidence, including all reasonable inferences which may be drawn
therefrom, must be viewed in a light most favorable to the non-moving party (see id. at 255) and
the Court must not make credibility findings. Id. Direct testimony of the non-movant must be
believed, however implausible. Leslie v. Grupo ICA, 198 F.3d 1152, 1159 (9th Cir. 1999). On
the other hand, the Court is not required to adopt unreasonable inferences from circumstantial
evidence. McLaughlin v. Liu, 849 F.2d 1205, 1208 (9th Cir. 1988).
The moving party bears the initial burden of demonstrating the absence of a genuine
issue of material fact. Devereaux v. Abbey, 263 F.3d 1070, 1076 (9th Cir. 2001). To carry this
burden, the moving party need not introduce any affirmative evidence (such as affidavits or
deposition excerpts) but may simply point out the absence of evidence to support the nonmoving
party’s case. Fairbank v. Wunderman Cato Johnson, 212 F.3d 528, 532 (9th Cir. 2000).
This shifts the burden to the non-moving party to produce evidence sufficient to support a
jury verdict in its favor. Anderson, 477 U.S. at 256-57. The non-moving party must go beyond
the pleadings and show “by [its] affidavits, or by the depositions, answers to interrogatories, or
admissions on file” that a genuine issue of material fact exists. Celotex, 477 U.S. at 324.
However, the Court is “not required to comb through the record to find some reason to
deny a motion for summary judgment.” Carmen v. San Francisco Unified Sch. Dist., 237 F.3d
1026, 1029 (9th Cir. 2001) (quoting Forsberg v. Pac. Northwest Bell Tel. Co., 840 F.2d 1409,
1418 (9th Cir. 1988)). Instead, the “party opposing summary judgment must direct [the Court’s]
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 4
attention to specific triable facts.” Southern California Gas Co. v. City of Santa Ana, 336 F.3d
885, 889 (9th Cir. 2003). A statement in a brief, unsupported by the record, cannot be used to
create an issue of fact. Barnes v. Independent Auto. Dealers, 64 F.3d 1389 n. 3 (9th Cir. 1995).
Defendants’ Alleged Violations of Securities Act Section 5 – Sixth Claim for Relief
Section 5 of the Securities Act provides that it is unlawful for any person to use the
channels of interstate commerce to sell a security unless a registration statement is in effect as to
such security. See 15 U.S.C. § 77e(a). To establish a prima facie violation of Section 5, the
Commission must prove three elements: (1) that the defendant directly or indirectly sold or
offered to sell securities; (2) that no registration statement was in effect for the securities; and (3)
that interstate means were used in connection with the offer or sale. See Mem. in Supp. of MSJ,
p. 8 (Docket No. 167) (citing SEC v. Calvo, 378 F.3d 1211, 1214 (11th Cir. 2004); Murphy, 626
F.2d at 640). Once the Commission has established a prima facie case, the burden shifts to the
defendant to show that the securities were exempt from the registration requirement. See Mem.
in Supp. of MSJ, p. 9 (Docket No. 167) (citing SEC v. Ralston Purina Co., 346 U.S. 119, 126
Arguing that (1) AEHI and Gillispie2 offered and sold AEHI’s common stock to
hundreds of investors, (2) AEHI never filed a registration statement with the Commission
concerning the issuance of any AEHI securities, and (3) AEHI and Gillispie utilized interstate
commerce in selling AEHI securities, the Commission argues that it has established the prima
facie elements of a Section 5 violation. See id. at pp. 9-10. In response, AEHI points out that
As to individuals, such as Gillispie, the prima facie case is met when the person
“engaged in steps necessary to” and was a “substantial factor in” an unregistered distribution.
See Mem. in Supp. of MSJ, p. 9 (Docket No. 167) (citing SEC v. Murphy, 626 F.2d 633, 649-50
(9th Cir. 1980); SEC v. Phan, 500 F.3d 895, 906 (9th Cir. 2007)).
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 5
the Section 5 registration requirement does not apply to “transactions by an issuer not involving
any public offering.” See AEHI Opp. to MSJ., p. 7 (Docket No. 189) (quoting 15
U.S.C.§ 77d(a)(2)); see also SEC v. Murphy, 626 F.2d 633, 640 (9th Cir. 1980) (“Section 5 of the
1933 Act forbids the offer or sale of unregistered securities in interstate commerce, . . . but
[Section] 5 does not apply if the securities are exempt from registration as a private offering.”).
Implicitly then, AEHI and Gillispie contend that the at-issue offering(s) – represented by AEHI’s
private placement memoranda (“PPMs”) – is/are, in fact, private offerings and, therefore, exempt
from any registration requirement.3
In the Ninth Circuit, the question of whether a securities offering constitutes a public
offering considers: “(1) the number of offerees, (2) the sophistication of the offerees, (3) the size
and manner of the offering, and (4) the relationship of the offerees to the issuer.” See Western
Fed. Corp. v. Erickson, 739 F.2d 1439, 1442 (9th Cir. 1984). AEHI and Gillispie presume
(though this Court is not necessarily convinced (see infra)) that the Commission seeks to
establish the existence of a public offering here (at least toward establishing the first and third
elements referenced immediately above) by arguing that AEHI’s PPMs over time constituted a
single, “integrated” offering and, more to the point, that issues of material fact exist to preclude
such a conclusion. See, e.g., AEHI’s Opp. to MSJ, p. 8 & 13 (Docket No. 189) (“Since the SEC
has staked its Section 5 claim on a finding of integration . . . .”).
Considering AEHI’s argument in this respect, five factors guide the characterization of
whether arguably separate offerings are effectively one integrated offering: (1) whether the
Exemptions from registration provisions are construed narrowly to further the purpose
of the Securities Act: “‘To provide full and fair disclosure of the character of the securities, . . .
and to prevent frauds in the sale thereof . . . .’” See Murphy, 626 F.2d at 641 (9th Cir. 1980)
(quoting Securities Act of 1933, Ch. 38, Tit. 1, 48 Stat. 74 (1933)).
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 6
offerings are part of a single plan of financing; (2) whether the offerings involve issuance of the
same class of securities; (3) whether the offerings are made at or about the same time; (4)
whether the same kind of consideration is to be received; and (5) whether the offerings are made
for the same general purpose. See Murphy, 626 F.2d at 645. AEHI contends that issues of fact
(relative to the first, third, and fifth factors only) prevent a finding as a matter of law that its
multiple offerings (via its PPMs) should be integrated into a single offering. See AEHI’s Opp. to
MSJ, pp. 9-12 (Docket No. 189). On balance, the Court agrees.
As to the first factor – whether the offerings are part of a single plan of financing – AEHI
disputes the Commission’s argument that its PPMs “purportedly sought to finance the initial
stages of its nuclear project.” See id. at p. 10 (citing Mem. in Supp. of MSJ, p. 11, n.2 (Docket
No. 167)). Pointing to particular PPMs that allegedly identify different capital-raising projects,4
AEHI asserts that “each PPM identifies a list of varying . . . business activities of AEHI for the
use of the proceeds” and, “[f]urther, none of the PPMs were identical with respect to the projects
for which the offering was raising capital.” See Joint. Stmt. of Disp. Facts, No. 10 (Docket No.
190). The Commission counters by noting that each PPM “seek[s] capital for AEHI’s purported
nuclear project by one name or another,” while also challenging AEHI’s position in this point as
“simply a post hoc fabrication.” See Reply in Supp. of MSJ, pp. 8-9 (Docket No. 200).
Regardless, the ultimate denouement of the issue becomes one in which, where inferences are
Within Exhibit A to Jane E. Nilan’s Declaration, AEHI identifies these projects (and
their references to AEHI’s corresponding PPMs) as (in alphabetical order): Advanced Nuclear
Plant Project, AEHI China Ltd., AEHI Korea, CO2 Removal, Coal-Diesel Conversion, Colorado
Energy Park, Energy Neutral, Inc., Energy Saving Fuel Additive, Green World Water, Idaho
Energy Complex, Idaho Nuclear Power Project, International Reactor, Inc., Lightening
Harvesting, Tar Sands Reactor, and Urban Mini-Reactors. See Ex. A to Nilan Decl. (Docket No.
191, Att. 1) (“I prepared Exhibit A by reviewing the contents of all of the Private Placement
memoranda (“PPMs”) . . . and summarizing them in the attached chart.”).
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 7
considered in favor of the non-movant, the Court cannot properly rule as a matter of law. These
various projects may or may not speak to a unified plan toward financing only AEHI’s nuclear
project. AEHI is entitled to have a jury decide that question.
As to the third factor – whether the offerings are made at or about the same time – AEHI
highlights the fact that the different offerings/PPMs sought funding over the course of more than
four years. See AEHI’s Opp. to MSJ, p. 11 (Docket No. 189) (“An offering made years after the
original offering should not be viewed as ‘integrated’ with it.”) (emphasis in original). This
misses the point, according to the Commission, when “[t]he question of integration turns on the
length of periods between offerings, not the total duration.” See Reply in Supp. of MSJ, p. 7
(Docket No. 200) (emphasis in original) (citing Murphy, 626 F.2d at 646 (“The separation in
time from one system offering to the next suggest that the offerings were not integrated . . . .”)).
The Commission correctly highlights the fact that the PPMs, each seeking to raise capital,
persisted over long and overlapping periods of time (particularly when also recognizing that
AEHI’s consistent monthly stock sales apparently did not correlate with the timing of AEHI’s
referenced 23 offerings/PPMs (see Reply in Supp. of MSJ, pp. 7-8 (Docket No. 200)).
Nonetheless, in a summary judgment context, the Court is not prepared to say as a matter of law
that, from beginning to end, the PPMs as a whole represent one integrated offering “made at or
about the same time.” The arguably nuanced differences between each PPM (which the
Commission does a commendable job attempting to discount – at least in certain instances (see
id.)) is just too undeveloped by the existing record, leaving questions of material fact. These
relative unknowns, coupled with the reality that the allegedly integrated PPMs took place over a
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 8
multi-year span (assuming the Commission even argues for integration (see infra)), prevent a
finding of integration premised upon this factor.
As to the fifth factor – whether the offerings are made for the same general purpose –
AEHI again argues, as it did in regard to the first factor (see supra), that “raising . . . money for
various projects of the same company cannot equate with making offerings for the ‘same general
purpose.’” See AEHI’s Opp. to MSJ, p. 12 (Docket No. 189). For the reasons already discussed,
the Court agrees (at least insofar as a question of fact exists to prevent a contrary finding as a
matter of law (see supra)), especially when realizing, as AEHI notes, that AEHI’s “projects”
allegedly relate to different businesses in different markets – e.g., producing energy-efficient
homes, lightening harvesting, a joint venture in China, and an energy park in Colorado. See
AEHI’s Opp. to MSJ, p. 12, n.8 (Docket No. 189).
Thus, to the extent the Commission’s Section 5 claim is conditioned upon a finding of
integration, that claim must survive summary judgment given the presence of disputed facts
relating thereto. However, if particular (as opposed to integrated) PPMs are shown to represent
public offerings requiring registration, summary judgment may be appropriate. However, it is
not clear if the Commission is attempting to make such an argument here. See, e.g., Mem. in
Supp. of MSJ, pp. 11 & 12 (Docket No. 167) (stating that AEHI acknowledges sending “its offer
to at least 850 individuals” and commenting that, “[w]ith large offerings like AEHI’s that exceed
$5 million . . . .”). Despite the burden that AEHI and Gillispie have at trial to prove an exclusion
to the registration requirements (in this case, that the offerings are private, not public), to prevail
in this procedural setting, it is the Commission’s burden to show that certain PPMs are indeed
public offerings with no corresponding registration statements. See Murphy, 626 F.2d at 641
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 9
(“On a motion for summary judgment, however, ‘it is the moving party who carries the burden of
proof; he must show that no genuine issue of material fact exists . . . even though at trial his
opponent would have the burden of proving the facts alleged’ . . . . Thus, the SEC was entitled
to summary judgment only if it demonstrated that there was no genuine issue of material fact as
to [defendant’s] affirmative defense or that, viewing the evidence and the inferences which could
be drawn therefrom in the light most favorable to [defendant], the SEC was clearly entitled to
prevail as a matter of law.”) (citing Doff v. Brunswick Corp., 372 F.2d 801, 805 (9th Cir. 1996)
The Commission has not satisfied such a burden. Here, the current record does not
support a finding that specific PPMs were, in fact, public offerings (admittedly beyond the
elements needed for the Commission to establish a prima facie case, but nonetheless necessary
in order to prevail on summary judgment), capable of supporting a Section 5 violation. As AEHI
puts it: “Plaintiff simply has not proffered any evidence to prove (1) the number of offerees for
any particular offering, (2) whether that number supports a finding that the offering was a public
offering, and (3) how the factor of the number of offerees would be weighed in balancing it with
the other factors for determining the existence of a public offering.” See AEHI’s Opp. to MSJ,
pp. 13-14 (Docket No. 189); see also id. at pp. 14-18 (discussing additional inability to gauge (1)
offerees’ sophistication (or if exemption applies dealing with non-accredited investors), (2) size
and manner of offering, and (3) relationship of offerees to issuer without examining PPMs
individually). In short, the Commission’s failure to comprehensively dissect individual PPMs
toward satisfying the factors comprising a related public offering preclude a finding that AEHI
and Gillispie violated Section 5 of the Securities Act at this time. The Court acknowledges that
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 10
such an effort would be a time-consuming one, and perhaps that fact is why the Commission
chose not to approach individual PPMs as a basis for seeking summary judgment upon the
claims in its Complaint. But, it is the Commission’s chore, no one else’s, and if it is not done,
the Court cannot conjure up a substitute.
The Court does not suggest in such an observation, or make any finding (or even an
endorsement) that the PPMs are limited, purely private offerings – if anything, the current record
implies to the contrary. Even so, AEHI’s arguments, combined with the lacking record thus far,
inject a level of uncertainty that prevents a finding as a matter of law on the issue. It is therefore
recommended that the Commission’s Motion for Summary Judgment be denied in this limited
Defendants’ Alleged Violations of Securities Act Section 17(a) and Exchange Act
Section 10(b), and Rule 10b-5 – First and Second Claims for Relief
The parties do not dispute the underlying law applicable to the Commission’s fraud
claims. Section 10(b) of the Exchange Act and Rule 10b-5 make 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, [t]o make any untrue statement of 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 . . . in
connection with the purchase or sale of any security.
See 15 U.S.C. § 78j(b) & 17 C.F.R. § 240.10b-5(b). Similarly, Section 17(a)(2) of the Securities
Act makes it “unlawful for any person, directly or indirectly, in the offer or sale of any securities
Because the undersigned’s recommendation in this regard is independent of the
admissibility of certain materials objected to by AEHI (see AEHI’s Opp. to MSJ, pp. 3-7
(Docket No. 189) (arguing that “numerous documents” offered in support of Commissioner’s
Motion for Summary Judgment are inadmissible)), the Commission’s related Motion to Strike
(Docket No. 201) is rendered moot. Therefore, it is hereby ordered that the Commission’s
Motion to Strike is denied.
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 11
. . . 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 statement made, in light of the
circumstances under which they were made, not misleading . . . .” See 15 U.S.C. § 77q(a)(2).6
Violations of Exchange Act Section 10(b) and Rule 10b-5 require proof of scienter,
defined as a “knowing or intentional” misconduct. See Ernst & Ernst v. Hochfielder, 425 U.S.
185, 193, 197-99 (1976). Proof of scienter may be satisfied by evidence of recklessness, defined
as misconduct that is “so obvious that the actor must have been aware of it.” See Hollinger v.
Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir. 1990); see also Gebhart v. SEC, 595 F.3d
1034, 1041 (9th Cir. 2010) (“Scienter may be established, therefore, by showing that the
defendants knew their statements were false, or by showing that defendants were reckless as to
the truth or falsity of their statements.”).7 However, scienter is not necessary to prove violations
of Securities Act Section 17(a)(2); rather, proof of negligence is required. See Aaron v. SEC,
446 U.S. 680, 701-02 (1980); Phan, 500 F.3d 895, 908.
Arguing that, even while AEHI repeatedly acknowledged that adequate funding was
critical to its plans to build a nuclear power plant in Idaho, the Commission contends that AEHI
Under either Section/Rule, “the standard of materiality is an objective one” – “[a]
statement is material if ‘a reasonable investor would have considered it useful or significant.’”
See United States v. Jenkins, 633 F.3d 788, 802 (9th Cir. 2011) (quoting United States v. Smith,
155 F.3d 1051, 1064 (9th Cir. 1998)). When materiality is contested, summary judgment is
proper “only if materiality is ‘so obvious that reasonable minds [could] not differ’.” See Provenz
v. Miller, 102 F.3d 1478, 1489 (9th Cir. 1996) (quoting Fecht v. Price, 70 F.3d 1078, 1080 (9th
Cir. 1995)); see also Phan, 500 F.3d 895, 908 (“The antifraud provisions’ materiality element is
satisfied only if there is ‘a substantial likelihood that the disclosure of the omitted fact would
have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of
information made available.’”) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988)).
“[S]ummary judgment on the scienter issue is appropriate only where ‘there is no
rational basis in the record for concluding that any of the challenged statements was made with
requisite scienter.’” Provenz, 102 F.3d at 1490 (quoting In re Software Toolworks, 38 F.3d 1078,
1088 (9th Cir. 1994)).
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 12
“never obtained funding for the nuclear project.” See Mem. in Supp. of MSJ, p. 5 (Docket No.
167) (“From inception through the end of 2010, AEHI’s financial statements reflected no
financing other than from the proceeds of its unregistered offering.”). Yet, pointing to AEHI’s
PPMs, press releases, and at least one letter to shareholders, the Commission argues that AEHI
“announced to investors and the market that it had secured funding for its project.” See id. For
AEHI’s June 4, 2007 PPM stated that the Idaho Energy Complex “has
obtained $3.5 billion in funding.” See Ex. 5 to Tashjian Decl. (Docket No.
174) (emphasis in original).
AEHI’s December 1, 2008, February 13, 2009, September 9, 2009, and
December 31, 2009 PPMs stated that the Idaho Energy Complex “is funded
and seeking NRC approval.” See Ex. 10, 13-15 to Tashjian Decl. (Docket
Nos. 174 & 175).
AEHI’s January 13, 2009 PPM stated that the Idaho Energy Complex “has
funding arrangements and is seeking process approvals.” See Ex. 11 to
Tashjian Decl. (Docket No. 174).8
On June 26, 2007, AEHI issued a press release titled “Alternate Energy
Holdings (AEHI) Secures $3.5 Billion in Funding for Proposed Idaho
Energy Complex.” See Ex. 17 to Tashjian Decl. (Docket No. 175)
(emphasis in original). The press release went on to state that Cobblestone
Financial Group, Inc. (“Cobblestone”) “has provided the company with a
letter of intent to fund 100% of AEHI’s proposed Idaho Energy Complex
(IEC), estimated at $3.5 billion.” See id.9
The Commission claims that Gillispie distributed the PPMs in e-mail messages
soliciting investment in AEHI. See UF No. 16 (Docket No. 168) (referencing Exs. 24-25, 27-28,
32-35 to Tashjian Decl. (Docket Nos. 175-177)).
In actuality, Cobblestone “provided a letter of intent to arrange 100% financing of cost
for the IEC project . . . .” See Ex. 63 to Tashjian Decl. (Docket No. 186). To be sure, in a
subsequent “Financing Agreement and Engagement Letter,” AEHI “acknoweldge[d] and
agree[d] that Cobblestone does not guarantee that a [funding] Commitment can be obtained.”
See Ex. 64 to Tashjian Decl. (Docket No. 186).
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 13
On December 6, 2007, AEHI issued a press release titled “AEHI Receives
$150 Million Private Placement Commitment Letter for Idaho Nuclear
Reactor Project.” See Ex. 18 to Tashjian Decl. (Docket No. 175) (emphasis
in orginal). According to the press release, AEHI had received a $150
Million “commitment letter” from Silverleaf Capital Partners, LLC
(“Silverleaf”) and that “AEHI will allocate these funds for the purchase of
the nuclear plant site.” See id. Moreover, within the press release, Gillispie
stated that “[t]his provides the initial funding to launch an important project
for Idaho and western energy needs.” See id.10
Despite earlier claims that the Idaho Energy Complex was already funded
(see supra), on June 5, 2009, AEHI issued a press release titled “AEHI Signs
Agreement with Source Capital Group to Fund Idaho Nuclear Site.” See
Ex. 19 to Tashjian Decl. (Docket No. 175) (emphasis in original).
On September 9, 2009, Gillispie sent a signed letter to AEHI shareholders,
discussing AEHI’s progress towards completing the Idaho nuclear power
plant and claiming that “[w]e have a funding commitment from Source
Capital for the site.” See Ex. 20 to Tashjian Decl. (Docket No. 175).
See Mem. in Supp. of MSJ, pp. 5-7 (Docket No. 167).
According to the Commission, these announcements constituted knowing and/or reckless
material misrepresentations in violation of Securities Act Section 17(a) and Exchange Act
Section 10(b) and Rule 10b-5. See Mem. in Supp. of MSJ, pp. 16-20. (Docket No. 167). The
First, (1) PPMs containing statements that AEHI “has obtained $3.5 billion in funding,”
“is funded and seeking NRC approval,” and “has funding arrangements and is seeking process
Though less egregious than the Cobblestone press release, the “commitment letter”
from Silverleaf did not provide funding for AEHI as the press release hints; instead, the
agreement with Silverleaf contemplated that the parties would use their “best efforts to complete
due diligence and preparation of Equity Investment documents.” See Ex. 22 to Tashjian Decl.
(Docket No. 175). It is unclear whether AEHI seeks to strike Exhibit 22. On the one hand,
AEHI seeks its exclusion (see AEHI Opp. to MSJ, p. 4 (Docket No. 189)); on the other hand,
Gillispie invites the Court to compare Exhibit 22 to the press release (see Gillispie Opp. to MSJ,
p. 7 (Docket No. 197)).
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 14
approvals”; along with (2) press release headlines touting that AEHI secured $3.5 billion in
funding, received a $150 million private placement commitment letter, and signed an agreement
with Source Capital Group (reiterated in a letter to shareholders) suggest that AEHI’s Idaho
Energy Complex was either actually funded or well on its way to being funded.11 At best, such
statements are misleading; at worst, they are outright false. They flatly misstate the true status of
AEHI’s funding since there is no dispute that the Idaho Energy Complex was never funded. See,
e.g., Gillispie Depo. at 192:25-193:13, attached as Ex. 48 to Tashjian Decl. (Docket No. 182)
(acknowledging that, as of March 31, 2009, Idaho Energy Complex was not funded).12
Second, funding was critical to AEHI’s existence. Therefore, statements descriptive of
historical fact that relate to AEHI’s funding would no doubt be considered useful or significant
to a reasonable investor in AEHI and, therefore, material.13 The only reasonable inference for
Gillispie’s characterization of the PPMs statements as “nonsensical” and/or that they
must have been “altered” (see Gillispie Opp. to MSJ, p. 9 (Docket No. 197) is unpersuasive
when considering the number of such statements and their consistency with related press
Additionally, Gillispie asserted the Fifth Amendment privilege when questioned about
the PPMs’ “funding references” (as well as Cobblestone, Silverleaf, Source Capital Group, and
the September 9, 2009 letter to investors). See Gillispie Depo. at 24:13-41:3; 70:10-71:11;
71:12-74:17; 78:16-79:14, attached as Ex. 50 to Tashjian Decl. (Docket No. 182). It is true that
“‘the Fifth Amendment does not forbid adverse inferences against parties to civil actions when
they refuse to testify in response to probative evidence offered against them.’” See SEC v.
Jasper, 678 F.3d 1116, 1125 (9th Cir. 2012) (quoting Baxter v. Palmigiano, 425 U.S. 308, 318
(1976)). However, courts should “analyz[e] each instance where the adverse inference was
drawn, or not drawn, on a case-by-case basis under the microscope of the circumstances of that
particular civil litigation. . . . . In each particular circumstance, the competing interest of the
party asserting the privilege, and the party against whom the privilege is invoked must be
carefully balanced.” See Doe ex rel. Rudy-Glanzer v. Glanzer, 232 F.3d 1258, 1265 (9th Cir.
2000). Though not necessary here, given the existence of additional evidence within the record
supporting the fact that AEHI, through Gillispie, made untrue statements of fact, such an
inference would likely apply here.
Gillispie responds that there is no “evidence that any investor in fact . . . was mislead
by [the statements] or confused by them, or considered them to be important to his or her
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 15
the inclusion of such statements within the above-described PPMs and press releases was to
encourage people to invest money in AEHI – the essence of materiality.14 From the
undersigned’s perspective, these statements’ materiality is so obvious under the circumstances
presented by the record that reasonable minds could not differ. See TSC Indus., Inc. v.
Northway, Inc., 426 U.S. 438, 450 (1976) (omissions and/or misrepresentations are material as
matter of law if they involve facts that are “‘so obviously important to an investor, that
reasonable minds cannot differ on the question of materiality’”) (quoting Johns Hopkins Univ. v.
Hutton, 422 F.2d 1124, 1129 (4th Cir. 1970)); Murphy, 626 F.2d at 653 (“Surely the materiality
of information relating to financial condition, solvency, and profitability is not subject to serious
challenge.”); SEC v. Recile, 10 F.3d 1093, 1097 (5th Cir. 1993) (false statements regarding
financing “amply satisfy the materiality element of a securities fraud claim.”).
Third, a reasonable juror could not find that Gillispie lacked sufficient scienter. As the
founder, CEO, and Chairman of AEHI, Gillispie was aware of the false statements contained
within AEHI’s PPMs he disseminated. Further, he wrote the deceptive press releases and letter
to AEHI investors. Gillispie knew that AEHI had not secured funding, yet created the illusion of
just the opposite to mislead investors and secure their money. At the very least, Gillispie acted
with a reckless disregard for the truth when he made the misstatements in connection with
investment decision. See Gillispie Opp. to MSJ, pp. 10-11 (Docket No. 197). However, reliance
on false statements is not an element of the Commission’s fraud claim. See SEC v. Rana
Research Inc., 8 F.3d 1358, 1363-64 (9th Cir. 1993) (unlike private plaintiff, SEC is not required
to establish reliance for Section 10b or Rule 10b-5 securities fraud action).
Contrary to Gillispie’s arguments (see Gillispie Opp. to MSJ, pp. 7-8, 10 (Docket No.
197)), “risk disclosures” in the PPMs and “safe harbor” language in the press releases do not
undo the fact that those PPMs and press releases paint AEHI’s funding as a current, up-to-date
fact. Nowhere do they disclose that AEHI had actually not obtained funding.
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 16
offering AEHI securities. Such conduct sufficiently represents scienter under the Exchange Act
while necessarily subsuming Gillispie’s negligence under the Securities Act.
Because the undersigned finds that Gillispie knowingly and/or recklessly made material
misrepresentations in violation of the Exchange Act and Securities Act, it is therefore
recommended that the Commission’s Motion for Summary Judgment be granted in this limited
Plaintiff’s Motion to File Supplemental Amended Complaint
On or around November 1, 2012, the Commission filed its Motion to File Supplemental
Amended Complaint, Pursuant to FRCP 15(d). The Commission’s proposed Supplemental
Amended Complaint “seeks the freeze and transfer of $2 million that AEHI recently transferred
to Relief Defendant Black & LoBello, LLC pursuant to an undisclosed sham transaction that
dissipated nearly all of AEHI’s remaining investor funds.” See Proposed, Supp. Am. Compl., ¶ 5
(Docket No. 216, Att. 1); see also infra.
Responses to the Commission’s effort to amend its pleadings were due on or before
November 26, 2012. To date, no existing party has objected and, similarly, during the Court’s
January 9, 2013 oral argument, no existing party expressed any objection to the Commission’s
request. See Dist. Idaho Loc. Civ. R. 7.1(e)(1) (“[I]f an adverse party fails to timely file any
response documents required to be filed under this rule, such failure may be deemed to constitute
a consent to the . . . granting of said motion . . . .”).
Therefore, Plaintiff’s Motion to File Supplemental Amended Complaint (Docket No.
216) is hereby granted.
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 17
Plaintiff’s Motion for Order to Show Cause and Order Freezing $2 Million Held by
Black and Lobello, LLC
In June 2012, AEHI and Hamilton Guaranty Capital, LLC (“Hamilton”) entered into a
Financial Service Agreement (the “Financial Service Agreement”) that required approximately
$2 million (the “Advance Payment”) to be deposited by AEHI into an escrow account controlled
by Black & Lobello, LLC (“Black and Lobello”), a Las Vegas, Nevada law firm. Shortly after
the Advance Payment was deposited with Black & Lobello, a dispute arose between AEHI and
Hamilton concerning the terms of the Financial Service Agreement and the party that was
entitled to receive the Advance Payment. In August 2012, after receiving conflicting demands
for the Advance Payment, Black & Lobello filed a Complaint for Interpleader against AEHI and
Hamilton in Nevada state court. In September 2012, the Nevada state court ordered that (1) the
Advance Payment be placed in a blocked account that cannot be accessed without further order
of the court, and (2) that the matter be resolved by mandatory binding arbitration pursuant to the
terms of the Financial Service Agreement.
Through its Motion for Order to Show Cause and Order Freezing $2 Million Held by
Black and Lobello, LLC (“Motion to Freeze”), the Commission argues that, in direct
contravention to this Court’s February 14, 2011 Order on Order to Show Cause,15 Gillispie
In relevant part, Judge Lodge’s February 14, 2011 Order on Order to Show Cause
Defendant AEHI agrees that it shall, within thirty (30) days of this Order, and every
thirty (30) days thereafter unless ordered otherwise by this Court, provide to the
Commission a complete and accurate accounting of all of its expenditures that equal
or exceed $2,500.00 (the “Monthly Accounting”). The expenditures covered by the
Monthly Accounting shall include, but not be limited to, transactions that have the
effect of transferring, assigning, selling, hypothecating, changing, wasting,
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 18
secretly transferred the $2 million Advance Payment to Black and Lobello’s escrow account. As
a result, the Commission moves for an order (1) directing AEHI and Gillispie to show cause why
they should not be held in contempt of the Court’s February 14, 2011 Order, and (2) freezing the
$2 million held in Black and Lobello’s escrow account, “thereby preserving the funds from
waste and dissipation until further order of this Court.” See Mot. to Freeze, p. 1 (Docket No.
As indicated during the January 9, 2013 hearing, the Court chose not to hear argument on
the issue of AEHI’s and/or Gillispie’s alleged contempt.16 As to this Court’s authority to freeze
the $2 million Advance Payment that is already the subject of an interpleader action in another
court, the undersigned questions his inherent jurisdiction to grant the relief the Commission now
seeks – even if inclined to do so. In other words, it has not been shown (and the undersigned is
likewise not convinced) that this Court can order either (1) the Nevada state court to follow this
Court’s direction concerning the distribution of the interpleaded funds, or (2) Black and Lobello
not to disburse those amounts to a party found to be entitled to the same following an arbitration
award or order of the court.
dissipating, converting, concealing, encumbering, or otherwise disposing of, in any
manner, funds, assets, securities, claims, or other property wherever located and for
any purpose. . . . .
See 2/14/11 Order at ¶ 6, pp. 3-4 (Docket No. 56). The Commission argues that “AEHI did not
provide the Commission with an accounting of the transfer of funds, nor did it disclose the
commitment of funds to its shareholders or the investing public” in violation Judge Lodge’s
Order. See Mot. to Freeze, p. 1 (Docket No. 219).
Therefore, at this time, the Court will deny as moot the Commission’s Motion to
Freeze in this limited respect. Upon resolution of the alternate issue raised within the Motion to
Freeze (the handling of the $2 million Advance Payment), the Commission is free to renew its
contempt arguments at a later date.
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 19
Therefore, to address the Commission’s concerns, while still keeping intact all relevant
parties’ interests in the Advance Payment while the Nevada state court proceeding runs its
separate course, this Court orders that, once either an informal agreement between AEHI and
Hamilton is reached, an arbitration award is issued, or a court order is entered regarding the $2
million Advance Payment’s apportionment (whichever occurs first, even if preceding a court
order disposing of the interpleader action or confirming any arbitration award), (1) Gillispie and
AEHI17 immediately inform this Court of the status relating thereto (through a formal filing in
this action, served upon all parties to this action), and (2) any and all funds reverting back to
AEHI be frozen until either AEHI, Gillispie, and/or the Commission moves to set aside this
Order freezing those funds. Until then, AEHI and Gillispie may not expend such funds.18 The
Commission’s Motion to Freeze is therefore granted in this limited respect.19
For the foregoing reasons, IT IS HEREBY RECOMMENDED that:
Default be entered against AEHI;
The Court realizes that this Decision recommends that AEHI be defaulted from this
action. Therefore, to the extent the Court’s Order in this respect speaks to AEHI, the Court
maintains continuing jurisdiction over it for this specific purpose. Regardless, any duty owed by
AEHI is similarly shared by Gillispie and subject to this Court’s mandate.
The Court recognizes the potential need to utilize those funds sooner rather than later
in order to support particular business needs moving forward. With that in mind, if necessary,
AEHI and/or Gillispie are free to file an emergency motion seeking relief from this Court’s
order, while requesting this Court’s immediate consideration. Under such a circumstance, the
Court expects to hold a hearing to resolve the matter, after expedited briefing on the issue. In
any event, the parties also must continue to comply with Judge Lodge’s February 14, 2011 Order
on Order to Show Cause (see supra).
The Commission’s related, unopposed Motion to Seal Certain Exhibits Filed
Inadvertently (Docket No. 222) is hereby granted.
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 20
The Commission’s Motion for Summary Judgment Against Defendants Alternate
Energy Holdings, Inc. and Donald Gillispie (Docket No. 166) be GRANTED, in part, and
DENIED, in part, as follows:
The Commission’s Motion for Summary Judgment be DENIED as to
Gillispie’s alleged violations of Securities Act Section 5 – Sixth Claim for Relief; and
The Commission’s Motion for Summary Judgment be GRANTED as to
Gillispie’s alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b),
and Rule 10b-5 – First and Second Claims for Relief.
Pursuant to District of Idaho Local Civil Rule 72.1(b)(2), a party objecting to a
Magistrate Judge’s recommended disposition “must serve and file specific, written objections,
not to exceed twenty pages . . . within fourteen (14) days . . ., unless the magistrate or district
judge sets a different time period.” Additionally, the other party “may serve and file a response,
not to exceed ten pages, to another party’s objections within fourteen (14) days after being
served a copy thereof.”
For the foregoing reasons, IT IS HEREBY ORDERED that:
The Commission’s Motion to Strike, and Objections to, Defendants’ Joint
Statement of Disputed Material Facts (Docket No. 201) is DENIED;
The Commission’s Motion to File Supplemental Amended Complaint, Pursuant to
FRCP 15(d) (Docket No. 216) is GRANTED;
The Commission’s Motion for Order to Show Cause and Order Freezing $2
Million Held by Black and Lobello, LLC (Docket No. 219) be GRANTED, in part, and
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 21
DENIED, in part, as follows:
The Commission’s Motion for Order to Show Cause be DENIED as moot,
without prejudice to re-submit at a later date; and
The Commission’s Motion for Order Freezing $2 Million Held by Black
and Lobello LLC be GRANTED only insofar as, to the extent any funds revert back to AEHI
after the Nevada Court resolves the interpleader action, and at the moment of such event, those
funds shall be frozen until either AEHI, Gillispie, and/or the Commission moves to set aside this
Order freezing those funds. The Commission’s request in all other respects is DENIED.
The Commission’s Motion to Seal Certain Exhibits Filed Inadvertently (Docket
No. 222) is GRANTED.
DATED: March 13, 2013
Honorable Ronald E. Bush
U. S. Magistrate Judge
REPORT AND RECOMMENDATION/MEMORANDUM DECISION AND ORDER - 22
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