Securities and Exchange Commission v. Blackburn et al

Filing 91

ORDER & REASONS: granting in part and denying in part 18 Defendant Lee C. Schlesinger's Partial Motion to Dismiss; Defendant Lee C. Schlesinger's Partial Motion to Dismiss (Rec. Doc. 18) is GRANTED IN PART, inasmuch as the Court concl udes that Plaintiff's Complaint fails to meet the pleading requirements, and DENIED IN PART, as to Defendant's request for a dismissal with prejudice of Plaintiff's claims. Plaintiff shall file an amended complaint within twenty-one (21) days from entry of this order; otherwise the aforementioned claims against Defendant will be dismissed. Signed by Judge Carl Barbier on 9/10/15. (sek)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA

SECURITIES AND EXCHANGE
COMMISSION

CIVIL ACTION

VERSUS

NO: 15-2451

RONALD L. BLACKBURN, ET AL

SECTION: “J”(1)

ORDER & REASONS
Before the Court is Defendant Lee C. Schlesinger’s Partial
Motion to Dismiss (Rec. Doc. 18), Plaintiff’s opposition thereto
(Rec. Doc. 39), and Defendant’s reply (Rec. Doc. 43). Having
considered the motion and legal memoranda, the record, and the
applicable

law,

the

Court

finds

that

the

motion

should

be

GRANTED IN PART and DENIED IN PART.
FACTS AND PROCEDURAL BACKGROUND
On

December

Commission

(“SEC”)

15,

2014,

filed

a

the

Securities

Complaint

against

and

Exchange

Defendants

for

various claims under the Securities Act of 1933 (“Securities
ACT”) and the Securities Exchange Act of 1934 (“Exchange Act”).
The

Complaint

Defendants

to

alleges
defraud

a

widespread

investors

scheme

and

by

violate

the

individual

the

antifraud,

registration, and reporting provisions of the federal securities
laws

with

respect

to

Defendant

Treaty

Energy

Corporation

(“Treaty”), a publicly traded oil and gas company. According to
the SEC, Defendants Ronald Blackburn, Andrew Reid, Bruce Gwyn,

Michael Mulshine, Lee Schlesinger, and Samuel Whitley carried
out this scheme between 2009 and 2013 by (1) concealing that
Blackburn,
officer

a

and

convicted

felon,

director;

(2)

controlled

engaging

in

Treaty
a

as

false

de

facto

promotional

campaign intended to artificially inflate Treaty’s stock price,
including issuing a January 2012 press release falsely claiming
a

major

oil

strike

in

Belize;

(3)

perpetuating

a

fraudulent

trading scheme involving the issuance and transfer of restricted
and unrestricted Treaty stock through which Defendants raised
millions
unwitting

of

investors;

unregistered
Complaint

dollars

offering

alleges

selling
and
of

that

virtually

(4)
oil

as

conducting

and
a

worthless

gas

an

working

result

of

stock

illegal
interests.

their

to
and
The

misconduct,

Defendants reaped illicit profits of over $4.9 million.
The

SEC

purports

to

allege

claims

against

Schlesinger,

Treaty’s former Chief Investment Officer, for securities fraud
in violation of Section 17(a) of the Securities Act, 15 U.S.C. §
77q(a); Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b);
and Rule 10b-5 thereunder and for aiding and abetting Treaty’s
reporting violations under Section 13(a) of the Exchange Act, 15
U.S.C. § 78m(a), and Rules 12b-20, 13a-1, 13a-11, and 13a-13

2

thereunder. 1

(Rec.

Schlesinger

knowingly

Doc.

1,

at

or

25-28.)

recklessly

The

SEC

claims

participated

that

in

and

furthered the scheme by failing to disclose the fact that Treaty
was

controlled

offerings
assistance

of

by

Blackburn,

engaging

restricted

stock,

Treaty

its

to

in

and

in

unregistered

providing

violations

of

public

substantial

the

reporting

provisions. Id. at 9-11, 16-18, 28. The SEC seeks to enjoin
Schlesinger

from

violating,

directly

or

indirectly,

Section

17(a) of the Securities Act, Section 10(b) of the Exchange Act,
and

Rule

10b-5

thereunder;

from

aiding

and

abetting

any

violation of Section 13(a) of the Exchange Act and Rules 12b-20,
13a-1,

13a-11,

and

13a-13

thereunder;

and

from

acting

as

an

officer or director of any issuer that has a class of securities
registered

under

Section

12

of

the

Exchange

Act

or

that

is

required to file reports under Section 15(d) of the Exchange
Act. Id. at 30-32. In addition, the SEC also seeks disgorgement
and the imposition of a civil monetary penalty. Id. at 31.
Schlesinger

filed

the

instant

Partial

Motion

to

Dismiss

(Rec. Doc. 18) on February 2, 2015. The SEC filed its response
on March 19, 2015, and on April 2, 2015, Schlesinger filed a
reply. This case was transferred to this Court from the United

1

The SEC also alleges claims against Schlesinger under Section 5 of the
Securities Act and Section 16(a) of the Exchange Act. However, Schlesinger
does not seek dismissal of those claims in the instant motion.

3

States District Court for the Eastern District of Texas on June
30, 2105. The Court now considers the motion on the briefs.
PARTIES’ ARGUMENTS
Defendant
aforementioned

asks

this

claims

Court

against

to

him

dismiss

with

the

prejudice.

SEC’s

Defendant

argues that the SEC fails to allege facts with particularity as
to Schlesinger and instead makes generalized allegations about
“Treaty Officers” and “Treaty Defendants” as groups. 2 (Rec. Doc.
18,

at

7.)

Though

the

SEC

alleges

that

the

Treaty

Officers

knowingly failed to disclose that Blackburn maintained control
over Treaty, Defendant argues that the SEC fails to indicate the
manner in which Schlesinger should have disclosed this alleged
omission or that Schlesinger owed a duty to disclose the alleged
omission. Id. at 10. Likewise, as for the alleged affirmative
misrepresentations of the Treaty Officers and Treaty Defendants,
Defendant

argues

that

the

Complaint

is

“devoid

of

factual

allegations identifying the specific time, place, and contents
of the false representations allegedly made by Schlesinger.” Id.
at 11.
Regarding
violations

of

the

SEC’s

Section

13(a)

claim
and

for
rules

aiding

and

abetting

thereunder,

Defendant

argues that the SEC fails to plead with sufficient particularity
2

The Complaint defines “Treaty Officers” as Reid, Gwyn, Schlesinger, and
Mulshine, and defines “Treaty Defendants” as Blackburn and the Treaty
Officers. (Rec. Doc. 1, at 8.)

4

that

Schlesinger

knew

of

the

alleged

facts

omitted

from

the

reports or that he knew that this information was supposed to be
disclosed. Id. at 15. In addition, Defendant argues that the SEC
fails to plead with particularity that Schlesinger knew that any
shares

he

improperly

received

were

transferred

improper,

these

shares

that
to

he

Gwyn,

knowingly
or

that

he

and
was

aware of or assisted Gwyn in selling these shares prior to the
conclusion of the restricted period. Id. at 16.
In opposition, the SEC argues that the Complaint clearly
defines the participants in the scheme, including Schlesinger,
as

“Treaty

Officers”

and

“Treaty

Defendants”

and

does

not

conflate factual allegations without distinguishing individual
defendants and their respective roles. (Rec. Doc. 39, at 5.) For
example, the Complaint identifies Schlesinger as Treaty’s Chief
Investment Officer and claims that Schlesinger signed Treaty’s
annual

reports

Furthermore,

on
the

Form
SEC

10-K

in

argues

2011
that

and
its

2012.

Id.

at

5-6.

allegations

are

sufficiently specific despite some of the Defendants’ conduct
being “lumped together” because Treaty is a corporation that can
act

only

through

its

officers

and

directors.

Id.

at

6.

Therefore, the SEC argues that it has alleged a plausible claim
against Schlesinger on the ground that he signed the 2011 and
2012 Forms 10-K, which failed to disclose Blackburn’s role at

5

the company and “intentionally obfuscated his role through vague
references

to

transactions

with

a

‘related

party,’

‘major

shareholder,’ or ‘affiliate.’” Id.
With

respect

to

its

claim

for

aiding

and

abetting

violations of Section 13(a), the SEC argues that the Complaint
contains factual allegations that, when taken as true, plausibly
support

a

conclusion

that

Schlesinger,

as

Treaty’s

Chief

Investment Officer, knew that Treaty’s public filings during the
relevant period failed to disclose Blackburn’s control of the
company and contained materially false and misleading statements
about the purported Belize oil strike. Id. at 8. Furthermore,
the

SEC

argues

Schlesinger

that

the

substantially

Complaint

sufficiently

assisted

Treaty’s

alleges

violations

that
by

signing the false and misleading Forms 10-K for 2011 and 2012.
Id.

at

pleading

9.

In

any

case,

requirements

Schlesinger

for

do

aiding

the

SEC

argues

not

apply

to

and

abetting

that
its

the

heightened

claim

Treaty’s

against
reporting

violations because proof of fraudulent intent is not required
under Section 13(a). Id. at 8. Lastly, in the event that the
Court is inclined to grant any portion of Defendant’s motion,
the SEC respectfully requests that the Court grant it leave to
amend the Complaint. Id. at 9.

6

LEGAL STANDARD
Typically, a plaintiff’s complaint must 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
“give the defendant fair notice of what the claim is and the
grounds upon which it rests.” Dura Pharm., Inc. v. Broudo, 544
U.S. 336, 346 (2005). The allegations “must be simple, concise,
and direct.” Fed. R. Civ. P. 8(d)(1).
However, allegations of fraud must meet a higher standard
than the basic notice pleading required by Rule 8. “In alleging
fraud

or

mistake,

a

party

must

state

with

particularity

the

circumstances constituting fraud or mistake.” Fed. R. Civ. P.
9(b).

Importantly,

relaxes

the

though,

particularity

the

second

requirement

sentence
for

of

Rule

conditions

of

9(b)
the

mind, such as scienter. Tuchman v. DSC Commc'ns Corp., 14 F.3d
1061,

1068

(5th

Cir.

1994).

“Malice,

intent,

knowledge,

and

other conditions of a person's mind may be alleged generally.”
Fed. R. Civ. P. 9(b). The particularity requirement of Rule 9(b)
does not render the principles of simplicity established by Rule
8 inapplicable; the two rules must be read in harmony. Williams
v. WMX Techs., Inc., 112 F.3d 175, 178 (5th Cir. 1997).
“Under

Rule

12(b)(6),

a

claim

may

be

dismissed

when

a

plaintiff fails to allege any set of facts in support of his

7

claim which would entitle him to relief.” Taylor v. Books A
Million,

Inc.,

296

F.3d

376,

378

(5th

Cir.

2002)

(citing

McConathy v. Dr. Pepper/Seven Up Corp., 131 F.3d 558, 561 (5th
Cir. 1998)). To survive a Rule 12(b)(6) motion to dismiss, the
plaintiff must plead enough facts to “‘state a claim to relief
that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S.
544,

570

(2007)).

plaintiff

pleads

reasonable

A

claim

facts

inference

is

that

that

facially

allow

the

the

defendant

plausible
court
is

when
“draw

the

to

the

liable

for

the

misconduct alleged.” Id. A court must accept all well-pleaded
facts as true and must draw all reasonable inferences in favor
of the plaintiff. Lormand v. U.S. Unwired, Inc., 565 F.3d 228,
232-33 (5th Cir. 2009); Baker v. Putnal, 75 F.3d 190, 196 (5th
Cir. 1996). The court is not, however, bound to accept as true
legal
U.S.

conclusions
at

678.

couched

as

“[C]onclusory

factual

allegations.

allegations

or

legal

Iqbal,

556

conclusions

masquerading as factual conclusions will not suffice to prevent
a motion to dismiss.” Taylor, 296 F.3d at 378.
DISCUSSION
A.

Judicial Notice of Public SEC Filings
In its opposition, the SEC asks the Court to take judicial

notice of Treaty’s SEC filings on Form 10-K for the years 2011

8

and 2012. (Rec. Doc. 39, at 3 n.2.) Generally, in deciding a
motion to dismiss for failure to state a claim, a court may rely
on

only

the

complaint

and

its

proper

attachments.

Fin.

Acquisition Partners LP v. Blackwell, 440 F.3d 278, 286 (5th
Cir.

2006).

However,

a

court

may

also

consider

“documents

incorporated into the complaint by reference, and matters of
which a court may take judicial notice.” Tellabs, Inc. v. Makor
Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). Moreover, when
deciding

a

securities

motion

to

actions,

“a

dismiss
court

a
may

claim

on

the

consider

the

pleadings

in

contents

of

relevant public disclosure documents which (1) are required to
be filed with the SEC, and (2) are actually filed with the SEC.”
Lovelace v. Software Spectrum Inc., 78 F.3d 1015, 1018 (5th Cir.
1996). “Such documents should be considered only for the purpose
of determining what statements the documents contain, not to
prove the truth of the documents' contents.” Id.
Accordingly,

the

Court

will

consider

the

contents

of

Treaty’s 2011 and 2012 Forms 10-K for the purpose of determining
what

statements

the

documents

contain.

The

Court

will

not,

however, consider these documents to prove that Schlesinger was
a Director of Treaty, a fact that the SEC has not alleged in its
Complaint. To do so would be to consider the documents to prove

9

the

truth

of

their

contents,

which

is

impermissible.

See

Lovelace, 78 F.3d at 1018.
B.

Claims for Securities Fraud
To state a claim for securities fraud under Section 10(b)

of the Exchange Act or Rule 10b-5 3 in an SEC enforcement action,
the

SEC

must

allege

facts

that,

if

true,

establish

(1)

a

misstatement or omission (2) of material fact (3) in connection
with the purchase or sale of a security (4) made with scienter.
SEC v. Gann, 565 F.3d 932, 936 (5th Cir. 2009) (citing Aaron v.
SEC, 446 U.S. 680, 691 (1980)). A fact is considered material 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.” Basic Inc. v. Levinson, 485 U.S. 224, 231-32
(1988). 4

For

defined

as

the
“a

purposes
mental

of

securities

state

embracing

fraud,
intent

scienter
to

is

deceive,

manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S.
185, 193 n.12 (1976).
The
violation

elements
of

constituting

Section

17(a)(1)

3

a

prima
of

the

facie

showing

Securities

Act

of

a
are

The scope of liability under Section 10(b) of the Exchange Act and Rule 10b–
5, 17 C.F.R. § 240.10b-5, is the same. SEC v. Zandford, 535 U.S. 813, 816 n.1
(2002).
4
The determination as to whether the allegations in the complaint
sufficiently establish materiality is best left to resolution by a
dispositive motion. See Barrie v. Intervoice-Brite, Inc., 397 F.3d 249, 257
(5th Cir. 2005).

10

essentially the same as the elements of a violation of Section
10(b) of the Exchange Act. SEC. v. Monarch Funding Corp., 192
F.3d

295,

308

(2d

Cir.

1999).

Scienter,

however,

is

not

an

element of a claim under Section 17(a)(2) or Section 17(a)(3).
Meadows v. SEC, 119 F.3d 1219, 1226 n.15 (5th Cir. 1997) (citing
Aaron, 446 U.S. at 697). Under these subsections, the plaintiff
need only show that the defendant acted with negligence. Id.;
Aaron, 446 U.S. at 702.
Securities

fraud

pleading

requirements

Equities,

Inc.,

claims

540

of
F.3d

are

Rule
333,

subject
9(b).

338-39

to

the

Dorsey
(5th

heightened

v.

Cir.

Portfolio
2008).

The

heightened pleading standard of Rule 9(b) “provides defendants
with fair notice of the plaintiffs' claims, protects defendants
from harm to their reputation and goodwill, reduces the number
of strike suits, and prevents plaintiffs from filing baseless
claims and then attempting to discover unknown wrongs.” Tuchman,
14

F.3d

at

1067.

The

Fifth

Circuit

interprets

Rule

9(b)

strictly, “requiring a plaintiff pleading fraud to specify the
statements

contended

to

be

fraudulent,

identify

the

speaker,

state when and where the statements were made, and explain why
the statements were fraudulent.” Dorsey, 540 F.3d at 339. In
cases

alleging

a

fraudulent

omission

of

facts,

Rule

9(b)

requires the plaintiff to plead “the type of facts omitted, the

11

place in which the omissions should have appeared, and the way
in which the omitted facts made the representations misleading.”
Carroll

v.

Fort

James

Corp.,

470

F.3d

1171,

1174

(5th

Cir.

2006). Put simply, Rule 9(b) requires the complaint to set forth
“the who, what, when, where, and how” of the events at issue,
similar to “the first paragraph of any newspaper story.” DiLeo
v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990); accord
Dorsey, 540 F.3d at 339.
The SEC alleges throughout its Complaint that the Treaty
Officers and/or the Treaty Defendants violated the securities
laws by failing to disclose material information. However, Rule
9(b)

requires

allegedly

a

plaintiff

fraudulent

to

statements

plead
were

with
made

specificity
by

each

which

defendant.

Unimobil 84, Inc. v. Spurney, 797 F.2d 214, 217 (5th Cir. 1986).
One of the purposes of Rule 9(b) is to guard against “guilt by
association.” United States ex rel. Clausen v. Lab. Corp. of
Am., 290 F.3d 1301, 1308 (11th Cir. 2002). For this reason,
general allegations that “lump all defendants together, failing
to

segregate

the

alleged

wrongdoing

of

one

from

those

of

another,” do not satisfy Rule 9(b). In re Urcarco Sec. Litig.,
148 F.R.D. 561, 569 (N.D. Tex. 1993) aff'd sub nom. Melder v.
Morris, 27 F.3d 1097 (5th Cir. 1994). Thus, the complaint “may
not

group

the

defendants

together;

12

instead,

it

must

plead

specific facts that satisfy the Rule 9(b) requirements as to
each

defendant.”

In

re

Pool

Prods.

Distrib.

Mkt.

Antitrust

Litig., 988 F. Supp. 2d 696, 723 (E.D. La. 2013); cf. Southland
Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 365
(5th Cir. 2004). Therefore, in determining whether the SEC has
met the requirements of Rule 9(b), the Court will consider only
allegations that are specific to Schlesinger.
First, the Complaint must identify statements contended to
be

fraudulent.

Schlesinger

and

In

the

other

instant

case,

Treaty

the

Officers

SEC

failed

alleges
to

that

disclose

“Blackburn’s criminal history or connection to, and influence
over, the company . . . and instead generically referred to him
as a ‘majority shareholder,’ ‘affiliate,’ or ‘related party’” in
their

SEC

Complaint
omissions,

filings.

(Rec.

adequately
and

when

Doc.

1,

identifies
and

where

at

the

8-9.) 5

alleged

the

Accordingly,

the

misstatements

and

statements

were

made:

“Treaty’s 2011 and 2012 Forms 10-K.” Id. at 9.

5

The SEC claims that this was materially misleading because, although
Blackburn purported to act as a consultant for Treaty, Blackburn “actually
acted as a de facto officer of the company [and] directed its day-to-day
operations from its 2008 formation through, at least, September 2013.” (Rec.
Doc. 1, at 8.) For example, the Complaint alleges that Blackburn was at one
time Treaty’s majority shareholder; was paid nearly twice as much as Reid,
the highest paid Treaty Officer; worked in the same office as Reid, Gwyn, and
Schlesinger; frequently communicated with the Treaty Officers about day-today operations; directed the actions of the Treaty Officers; oversaw an oil
and gas drilling program in Belize; paid for Treaty expenses with proceeds
from sales of his own Treaty stock; managed Treaty’s funds and dictated how
money would be spent; negotiated loans on behalf of Treaty; and directed and
approved the content of certain press releases. Id. at 8-9.

13

Next, the Complaint must identify Schlesinger as the maker
of the statements. A corporate official who on behalf of the
corporation signs a document that is filed with the SEC that
contains material misrepresentations, such as a fraudulent Form
10–K, “makes” a statement and may be liable for making a false
statement, regardless of whether he participated in the drafting
of the document. In re Enron Corp. Sec., Derivative & ERISA
Litig., 258 F. Supp. 2d 576, 587 (S.D. Tex. 2003); see also
Blackwell, 440 F.3d at 287 (“Corporate statements can be tied to
officers if plaintiffs allege they signed the documents on which
the statements were made . . . .”); In re Cabletron Sys., Inc.,
311 F.3d 11, 41 (1st Cir. 2002) (holding that outside directors
who

signed

a

Form

10-K

“accepted

responsibility

for

its

contents”); Howard v. Everex Sys., Inc., 228 F.3d 1057, 1061
(9th Cir. 2000) (holding that an officer who signs a fraudulent
Form 10-K with scienter can be liable for securities fraud).
Here,

the

Complaint

alleges

that

Schlesinger,

a

corporate

officer, signed Treaty’s 2011 and 2012 Forms 10-K. (Rec. Doc. 1,
at

10.)

Schlesinger

Therefore,
as

the

the

Complaint

maker

of

sufficiently

statements

identifies

contended

to

be

fraudulent.
In addition to identifying Schlesinger as the maker of the
statements

in

question,

the

Complaint

14

must

also

adequately

allege scienter as to Schlesinger in particular. “Scienter must
be

shown

because

note

every

misstatement

or

omission

in

a

corporation’s disclosures gives rise to a Rule 10b-5 claim.”
Tuchman, 14 F.3d at 1067. Rule 9(b) provides that scienter may
be

“alleged

generally.”

However,

the

Fifth

Circuit

has

made

clear that Rule 9(b) requires more than a simple allegation that
a

defendant

had

fraudulent

intent.

Id.

at

1068.

To

plead

scienter adequately, a plaintiff “must set forth specific facts
supporting

an

inference

of

fraud.”

Dorsey,

540

F.3d

at

339.

“Alleged facts are sufficient to support such an inference if
they either (1) show a defendant's motive to commit securities
fraud

or

(2)

identify

circumstances

that

indicate

conscious

behavior on the part of the defendant.” Id.
As to a defendant’s motive to commit securities fraud, the
Fifth

Circuit

has

made

clear

that

“certain

motives

alleged,

especially those universal to corporations and their officers,
do not suffice to establish an inference of fraud.” Flaherty &
Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200,
213 (5th Cir. 2009) (holding that alleged motive to increase the
value of personal stock holdings by withholding information to
induce

investor

participation

in

a

tender

offer

was

insufficient); see also Melder, 27 F.3d at 1102 (holding that
alleged

motive

to

inflate

price

15

of

company

stock

to

enhance

value

of

defendants’

personal

holdings

was

insufficient);

Tuchman, 14 F.3d at 1068 (holding that alleged motive to inflate
stock

price

and

insufficient).

value

“Corporate

of

defendants’

officers

are

investments

not

liable

for

was
acts

solely because they are officers, even where their day-to-day
involvement in the corporation is pleaded.” Blackwell, 440 F.3d
at 287.
In

the

instant

case,

the

SEC

alleges

that

Schlesinger

“acted intentionally, knowingly or with severe recklessness with
respect

to

Complaint

the

truth.”

does

not

(Rec.

set

Doc.

1,

forth

at

26.)

sufficient

However,

facts

the

showing

Schlesinger’s motive to commit securities fraud. The SEC alleges
that the Treaty Defendants were motivated to conceal Blackburn’s
role “to lure prospective investors to the company in order to
sell them restricted common stock at a discount market price.”
(Rec. Doc. 1, at 16.) As a result of the Treaty Defendants’
misrepresentations
obtained

money

and

from

omissions

investors

in

who

SEC

filings,

purchased

stock

“Treaty
in

the

company, the Treaty Officers received salaries, and the Treaty
Officers

.

.

.

received

Treaty

stock

they

later

sold

for

profits.” Id. at 11. The SEC does not plead any facts showing
Schlesinger’s
allegations

motive
of

the

in

particular.

Treaty

Officers’

16

Moreover,
motives

the

general

to

attract

investors, enhance the value of their personal stock holdings,
and

obtain

officers

salaries

and

do

are

not

universal

establish

to

an

corporations

inference

of

and
fraud.

their
See

Flaherty, 565 F.3d at 213.
The
indicate

Complaint

also

conscious

fails

behavior

to

identify

on

the

circumstances

part

of

that

Schlesinger.

According to Fifth Circuit precedent, pleading specific facts
that

demonstrate

conscious

behavior

“employs

an

even

‘more

stringent standard’ than the motive requirement.” Flaherty, 565
F.3d

at

213.

circumstantial
Tuchman,

14

Under

this

allegations

F.3d

at

1068.

standard,
must

be

Here,

“the

strength

correspondingly

the

Complaint

of

the

greater.”

alleges

that

Schlesinger was appointed to his position as Chief Investment
Officer by Blackburn in 2011, Schlesinger worked in the same
office as Blackburn, and Schlesinger was one of the officers who
signed the 2011 and 2012 Forms 10-K. (Rec. Doc. 1, at 7-10.) The
Complaint

does

not

allege

that

Schlesinger

certified

the

accuracy and completeness of Treaty’s 2011 and 2012 forms, as it
does for Defendants Reid and Gwyn. Id. at 10. Nor does the
Complaint allege any fact that makes it reasonable to believe
that Schlesinger knew that any of the SEC filings he signed were
materially misleading or that he should have known. At most, the
SEC’s allegations indicate that Treaty’s 2011 and 2012 Forms 10-

17

K were incomplete; however, such an allegation falls far short
of identifying conscious behavior on the part of Schlesinger.
See

Lovelace,

78

F.3d

at

1020.

Therefore,

the

SEC

has

not

alleged specific facts sufficient to indicate that Schlesinger
omitted material information from the 2011 and 2012 Forms 10-K
with scienter. Without such a showing, the Complaint fails to
state a claim against Schlesinger for securities fraud.
C.

Claims for Aiding and Abetting Violations of Section 13(a)
and Related Rules
The SEC claims that Schlesinger aided and abetted Treaty’s

violations of Section 13(a) of the Exchange Act and Rules 12b20, 13a-1, 13a-11, and 13a-13 thereunder. (Rec. Doc. 1, at 28.)
Section

13(a)

and

Rules

13a–1,

13a–11,

and

13a–13

require

issuers of registered securities to file with the SEC annual
reports on Form 10–K, current reports on Form 8–K, and quarterly
reports on Form 10–Q. See 15 U.S.C. § 78m(a); 17 C.F.R. §§
240.13a-1,

240.13a-11,

240.13a-13.

In

addition,

Rule

12b-20

requires the issuer to disclose any material information as may
be necessary to ensure that the reports are not misleading. Id.
§

240.12b-20.

“clear

and

The

reporting

unequivocal,

and

provisions
they

are

of

Section

satisfied

13(a)

only

by

are
the

filing of complete, accurate and timely reports.” SEC v. IMC
Int'l, Inc., 384 F. Supp. 889, 893 (N.D. Tex. 1974).

18

Section 20(e) of the Exchange Act authorizes the SEC to
bring claims for aiding and abetting primary violations of the
federal securities laws. See 15 U.S.C. § 78t(e). To state a
claim for aiding and abetting, the SEC must allege facts that,
if

true,

establish

securities

“(1)

violation;

that

(2)

the

that

primary

the

party

aider

and

committed
abettor

a

had

‘general awareness’ of its role in the violation; and (3) that
the

aider

and

abettor

knowingly

rendered

‘substantial

assistance’ in furtherance of it.” Abbott v. Equity Grp., Inc.,
2 F.3d 613, 621 (5th Cir. 1993). The Fifth Circuit considers the
elements

of

“general

awareness”

and

“knowing

substantial

assistance” to be “a single scienter requirement that varies on
a sliding scale from ‘recklessness’ to ‘conscious intent.’” Id.
Generally,

the

However,

if

evidence

that

plaintiff

there
the

is

must

“some

assistance

show

conscious

special

duty

to

violator

the

of

intent.

Id.

disclosure,

or

was

in

unusual

character and degree,” then a recklessness standard applies. Id.
The parties spend a considerable portion of their briefs
arguing

over

whether

the

heightened

pleading

requirements

of

Rule 9(b) apply to claims under Section 13(a). (See Rec. Doc.
39, at 7-8, 8 n. 6; Rec. Doc. 43, at 4-5.) The SEC argues that
Rule 9(b) does not apply because “Section 13(a) is not a fraud
claim and proof of fraudulent intent is not required.” (Rec.

19

Doc.

39,

at

8.)

However,

the

Complaint

does

not

purport

to

allege a claim against Schlesinger for a primary violation of
Section 13(a); it alleges that Schlesinger aided and abetted
Treaty’s violation. Therefore, the proper inquiry is not whether
Rule 9(b) applies to a claim for violating Section 13(a), but
rather

whether

it

applies

to

the

SEC’s

allegations

that

Schlesinger aided and abetted such a violation.
Rule 9(b) applies to allegations of fraud and scienter,
“whether they are part of a claim of fraud or not.” Lone Star
Ladies Inv. Club v. Schlotzsky's Inc., 238 F.3d 363, 368 (5th
Cir. 2001). Accordingly, any allegations of fraudulent conduct
or

scienter

requirements

must
of

still

Rule

satisfy

9(b).

Id.

the

If

heightened

particular

pleading

allegations

of

fraud or scienter are insufficiently pleaded under Rule 9(b), a
court should “disregard” those allegations. Id. The court should
then examine the allegations that remain and determine whether
they state a claim. Id.
As

discussed

above,

a

prima

facie

claim

for

aiding

and

abetting a violation of securities laws involves an underlying
requirement of scienter. See Abbott, 2 F.3d at 621. Rule 9(b)
applies

to

those

allegations

of

scienter.

Accordingly,

the

Complaint must allege specific facts that support an inference
of

Schlesinger’s

conscious

intent

20

or,

alternatively,

the

Complaint

may

allege

that

Schlesinger

had

a

special

duty

to

disclose or that his assistance was unusual in character and
degree, and he acted recklessly.
At

the

very

least,

the

Complaint

must

allege

facts

to

support an inference that Schlesinger acted recklessly. In the
Fifth

Circuit,

“recklessness”

is

“limited

to

those

highly

unreasonable omissions or misrepresentations that involve . . .
an extreme departure from the standards of ordinary care [and]
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 aware of it.” Abbott, 2 F.3d at 621 n.25 (quoting
Broad

v.

Rockwell

Int'l

Corp.,

642

F.2d

929,

961

(5th

Cir.

1981)).
In the instant case, the SEC’s aiding and abetting claim
against Schlesinger is based on the same alleged facts as its
securities fraud claim. That is, Schlesinger signed two Forms
10-K that failed to disclose Blackburn’s role in the company,
despite being appointed to his position by Blackburn and working
in the same office as Blackburn. (Rec. Doc. 1, at 7-10.) These
allegations do not support an inference that Schlesinger acted
with conscious intent or that his actions involved an “extreme
departure from the standards of ordinary care.” See Abbott, 2
F.3d at 621 n.25. Even if the Court assumes, without deciding,

21

that the Complaint sufficiently pleads a primary violation, it
fails to allege sufficient facts to show Schlesinger’s general
awareness and knowing substantial assistance. Accordingly, the
Complaint fails to state a claim against Schlesinger for aiding
and abetting violations of Section 13(a).
D.

Relief Available When Heightened Pleading Requirements Have
Not Been Met
Although the Court concludes that the SEC’s Complaint fails

to meet the pleading requirements, dismissal with prejudice is
not required. In Hart v. Bayer Corp., the Fifth Circuit noted
that

“a

plaintiff's

requirements

[of

failure

Rule

to

the

should

9(b)]

meet

not

specific

pleading

automatically

or

inflexibility [sic] result in dismissal of the complaint with
prejudice to re-filing.” 199 F.3d 239, 248 n.6 (5th Cir. 2000).
A court may dismiss the claim, but “it should not do so without
granting leave to amend, unless the defect is simply incurable
or the plaintiff has failed to plead with particularity after
being

afforded

repeated

opportunities

to

do

so.”

Id.

The

decision whether to grant a plaintiff leave to amend pleadings
is within the sound discretion of the district court. Norman v.
Apache Corp., 19 F.3d 1017, 1021 (5th Cir. 1994). In determining
whether to allow an amendment of the pleadings, a court should
consider

undue

delay,

undue

prejudice,

timeliness

of

the

amendment, and futility of the amendment. Foman v. Davis, 371

22

U.S.

178,

182

(1962).

After

considering

the

aforementioned

factors, the Court concludes that the SEC should be given an
opportunity to amend the Complaint.
CONCLUSION
Accordingly,
IT IS HEREBY ORDERED that Defendant’s Partial Motion to
Dismiss (Rec. Doc. 18) is GRANTED IN PART, inasmuch as the Court
concludes that Plaintiff’s Complaint fails to meet the pleading
requirements, and DENIED IN PART, as to Defendant’s request for
a

dismissal

with

prejudice

of

Plaintiff’s

claims.

Plaintiff

shall file an amended complaint within twenty-one (21) days from
entry of this order; otherwise the aforementioned claims against
Defendant will be dismissed.
New Orleans, Louisiana this 10th day of September, 2015.

CARL J. BARBIER
UNITED STATES DISTRICT JUDGE

23