United States Securities and Exchange Commission v. Benger et al

Filing 413

MEMORANDUM Opinion and Order. The defendants motion to dismiss 349 is DENIED. Signed by the Honorable Jeffrey Cole on 3/21/13. Notice mailed by judge's staff (ntf, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION,
Plaintiff,
v.
STEFAN H. BENGER, et al.,
Defendants.

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No. 09 C 676
Magistrate Judge Cole

MEMORANDUM OPINION AND ORDER
The Securities Exchange Commission (“SEC”) claims that the defendants engaged in an
international boiler room scheme targeting some 1400 foreign investors. The scheme took in
approximately $44 million primarily through the sale of U.S. penny stock. It is alleged that of the
proceeds, the defendants skimmed 60% for themselves and the foreign boiler room operators who
answered to them as commissions. The penny stock companies – the companies the investors were
investing in – realized less than 40% of the proceeds. The SEC says that the investors never saw the
distribution or escrow agreements that broke down the distribution percentages. They did see the
stock purchase agreements but, in those documents, the defendants claimed there were no
commissions and that only 1% of an investment didn’t go to the companies – it went to a nominal
transaction fee. The foreign boiler room operators allegedly used high pressure sales tactics, false
identities, and fraudulent misrepresentations to make sales while the defendants distanced
themselves, concealing the extent of their involvement and claiming ignorance of the sales process.
See generally S.E.C. v. Benger, 2013 WL 593952 (N.D.Ill. 2013).

In Count IV of the Second Amended Complaint, the SEC charges the movant – Philip T.
Powers – and Global Financial Management, LLC (“GFM”) and Frank I. Reinschreiber with aiding
and abetting in violation of 10(b) of the Exchange Act, 15 U.S.C. 78j(b), and Rule 10b-5, 17 C.F.R.
§ 240.10b-5, promulgated thereunder. Mr. Powers asks that Count IV be dismissed pursuant to
FedR.Civ.P. 9(b). The Rule requires that “a party must state with particularity the circumstances
constituting fraud . . . .” See Tricontinental Industries, Ltd. v. PricewaterhouseCoopers, LLP, 475
F.3d 824, 833 (7th Cir. 2007). Mr. Powers contends that the SEC has fallen short of that mark by
impermissibly lumping him in with Mr. Reinschreiber and GFM, and alleging nothing more than that
he was a principal of GFM, controlled GFM, and served as an escrow agent. (Dkt. #350,
Memorandum in Support of Powers’ Motion to Dismiss, at 3). There are no allegations, according
to Mr. Powers, that says what he did to provide substantial assistance to the scheme as part of GFM.
(Dkt. #350, Memorandum in Support of Powers’ Motion to Dismiss, at 3-4). Mr. Powers also
contends that discovery has shown that he “did not receive a penny of compensation from [GFM],
never signed a check, never initiated a wire transfer, never sent a letter, did not maintain an office
at [GFM], never communicated with any issuers or purchasers as a representative of [GFM] and
exercised no control over the day to day operations of [GFM].”

(Dkt. #350, Memorandum in

Support of Powers’ Motion to Dismiss, at 4).
Mr. Powers’ motion is somewhat curious. First of all, it’s his second try at dismissing the
aiding and abetting allegations against him. On his first go-round, Judge Lefkow determined that
the SEC alleged that Mr. Powers:
played an integral part in the completion of the sale to the investor by, inter alia,
taking custody of and distributing the investors’ funds according to the terms of the
escrow agreements, which were corollaries to the distribution agreements; receiving
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and processing the signed SPAs, which failed to disclose the exorbitant commissions;
communicating the receipt of those SPAs to the issuers; and sending the investors
their share certificates, which, as far as the investors’ knew, meant that their total
consideration have been transmitted to the issuer. Thus, Powers’ actions were, as the
SEC contends, essential to the completion of the sales at issue.
SEC v. Benger, 697 F.Supp.2d 932, 942-43 (N.D.Ill. 2010). It’s unclear what has changed in the
interim. The SEC’s allegations certainly didn’t erode into inadequacy over the intervening months.
More importantly, contrary to Mr. Powers’ present criticisms, the SEC’s complaint goes
beyond stating that he was a principal at GFM and an escrow agent. It alleges that Mr. Powers and
Mr. Reinschreiber controlled GFM, and that they, and their company, acted as escrow agents for
several of the issuers of stock sold through the boiler room scheme. (2AC, ¶¶ 14, 22, 49). Mr.
Powers was one of the defendants who drafted the template contract documents, including escrow,
distribution, and share purchase agreements. All the defendants then approved, adopted, and
implemented the documents. (2AC, ¶ 20).
Once investors transferred their funds to the escrow agents in Illinois, (including Mr.
Powers), the escrow agents disbursed the funds in accordance with the escrow and distribution
agreements. (2AC, ¶¶ 28, 49). They wired commission payments to accounts in countries like
Switzerland and Cypress – nations known to have strong banking secrecy laws. The escrow agents,
including Mr. Powers, then finalized the transactions by causing share certificates to issue to the
investors. Letters accompanying the certificates sent from Illinois to the foreign investors noted the
number of shares purchased, but never the commissions paid, and misleadingly (it is alleged) told
the investors they had received “Total Consideration.” The movants reaped at least $6.9 million in
investor funds for their efforts. (2AC, ¶¶ 31, 50). According to the Second Amended Complaint,
there was an air of legitimacy lent to the scheme by the fact that GFM was a U.S.-based company,
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and Mr. Powers had a law firm. (2AC, ¶ 22). That, at least, is the import of the stock purchase
agreement. While the escrow agents, therefore, could not maintain their anonymity, they did
conceal the existence of the other defendants and the sales agents, and claimed that they were
uninvolved in the scheme beyond the collection of the investors’ money. (2AC, ¶ 32). But the SEC
claims they knew full well what was going on. Notably, at one point in the scheme, it is alleged that
Mr. Powers expressed concern over being put in a position to “know” who the brokers were and be
liable for their sales practice abuses. (2AC, ¶ 34). The SEC claims that the efforts of Mr. Powers,
Mr. Reinschreiber, and GFM provided knowing and substantial assistance to the other defendants’
boiler room scheme. (2AC. ¶ 89).
What more Mr. Powers wants from the SEC in the way of allegations is difficult to say; his
memorandum in support of his motion to dismiss is rather terse. It left the SEC somewhat confused
as how to respond (Dkt. #364, Plaintiff SEC’s Response, 2-5) since the brief does not get very
specific, and his arguments do not get developed until his reply brief. But, of course, that is too late.
See Bodenstab v. County of Cook, 569 F.3d 651, 658 (7th Cir.2009) (party waived arguments that
were not developed until the reply brief); Harper v. Vigilant Ins. Co., 433 F.3d 521, 528 (7th Cir.
2005)(“The argument is more developed in Harper's reply brief, but this is too little, too late . . . .”).
As for his list of things that have come to light in discovery, that has no bearing on a Motion
to Dismiss. The question is not whether the SEC will prevail when it presents its evidence, but
whether its allegations, taken as true, state a claim against Mr. Powers. Skinner v. Switzer, 131 S.Ct.
1289, 1296 (2011); McCauley v. City of Chicago, 671 F.3d 611, 616 (7th Cir. 2011). Because the
allegations against Mr. Powers “plausibly suggest an entitlement to relief,” Ashcroft v. Iqbal, 556
U.S. 662, 681 (2009), and because Rule 9(b)’s strictures have been satisfied, Mr. Powers’ motion
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to dismiss is not persuasive.
CONCLUSION
The defendant’s motion to dismiss [# 349] is DENIED.

ENTERED:_____________________________________
UNITED STATES MAGISTRATE JUDGE
DATE: 3/21/13

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