Securities and Exchange Commission v. Present

Filing 216

District Judge Leo T. Sorokin: ORDER entered denying 186 Plaintiff's Motion for Summary Judgment. The Court will hold a Status Conference on Friday, April 28, 2017 at 3:00 p.m. to establish the trial date. Counsel may appear by phone, and should notify the Clerk if they intend to do so. (Montes, Mariliz)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
__________________________________________
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SECURITIES AND EXCHANGE COMMISSION, )
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Plaintiff,
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v.
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Case No. 14-cv-14692-LTS
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HOWARD B. PRESENT,
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Defendant.
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ORDER
April 27, 2017
SOROKIN, D.J.
Plaintiff Securities and Exchange Commission has filed a Motion for Summary Judgment
(Doc. 186) against Defendant Howard B. Present. After careful review of the voluminous record
and a lengthy helpful argument from counsel, for the reasons that follow, the Court DENIES the
Motion.
“[A] court may grant summary judgment only where there is no genuine issue of material
fact and the moving party is entitled to judgment as a matter of law.” Perez v. Lorraine
Enterprises, Inc., 769 F.3d 23, 29 (1st Cir. 2014) (citing Fed. R. Civ. P. 56(a)). “A ‘genuine’
issue is one on which the evidence would enable a reasonable jury to find the fact in favor of
either party.” Id. (citation omitted). “A ‘material’ fact is one that is relevant in the sense that it
has the capacity to change the outcome of the jury’s determination.” Id. (citation omitted).
“When the movant bears the burden of proof at trial, he must demonstrate every element of his
case such that no reasonable trier of fact could find other than for him.” Harley-Davidson Credit
Corp. v. Galvin, 807 F.3d 407, 411 (1st Cir. 2015) (citations, internal quotation marks, and
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modifications omitted). “When considering the summary judgment record, all reasonable
inferences are to be drawn in favor of the party opposing summary judgment, . . . just as all
disputed facts are viewed in the light most favorable to him.” Thompson v. Cloud, 764 F.3d 82,
87 (1st Cir. 2014) (citation, internal quotation marks, and modifications omitted).
The facts are essentially as follows: Defendant, the founder and former CEO of the
investment advisory firm F-Squared, repeatedly claimed that one of F-Squared’s products, an
investment model called “AlphaSector,” was based on a strategy that was used to manage live
client assets since April 2001, and had significantly outperformed the S&P 500 index during that
time. See Doc. 206 at 32. In fact, according to Plaintiff, AlphaSector was based on an algorithm
that “was developed in the summer of 2008,” so Defendant’s claims about the AlphaSector
model’s performance before that time were materially misleading. Id. at 52; Doc. 1 at 2-3.
Viewing all disputed facts in the light most favorable to Defendant and drawing all
reasonable inferences in his favor, his advanced possible defenses for which he has summary
judgment record support include: (1) Jay Morton, the head of the company that developed the
model which F-Squared acquired and marketed as AlphaSector, told Defendant a version of the
model had been used to manage live client assets since April 2001, see Doc. 188-91 at 26; (2)
Defendant relied on subordinates to handle much of the due diligence regarding the acquisition,
see id. at 12-13, and assumed one of them would have told him if there was evidence
contradicting Morton’s claim; and (3) Defendant did not believe the 2008 algorithm altered the
model so much that he could not discuss the model’s pre-2008 performance when speaking to
potential clients, see Doc. 206 at 32 (noting that marketing materials for AlphaSector claimed its
“analytical engine” was “developed over 7+ year period”).

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Each of Plaintiff’s legal claims requires showing either scienter or negligence on
Defendant’s part. See Doc. 1 at 44-47; SEC v. Tambone, 550 F.3d 106, 146 (1st Cir. 2008),
withdrawn, 573 F.3d 54 (1st Cir. 2009), reinstated in relevant part, 597 F.3d 436, 450 (1st Cir.
2010); see also United States v. Bailey, 696 F.3d 794, 809 (9th Cir. 2012); 15 U.S.C. §§ 80b6(1), (2), (4); id. § 80b-7. “Scienter is an intention to deceive, manipulate, or defraud.” Flannery
v. SEC, 810 F.3d 1, 9 (1st Cir. 2015) (citations and internal quotation marks omitted).
Negligence, in this context, requires showing a defendant failed “to employ reasonable care to
avoid misleading” investors. Tambone, 550 F.3d at 146 (citation and internal quotation marks
omitted).
With respect to any counts that require showing scienter, viewing the record in the light
most favorable to Defendant, a reasonable trier of fact could find: (1) Morton told Defendant,
and Defendant believed him, that a version of the model had been used to manage live assets
since April 2001; and (2) Defendant did not think the 2008 algorithm was so transformative that
it would be deceptive to tout the model’s performance before 2008. If a jury made these
findings, it could then conclude Defendant had no intent to deceive, manipulate, or defraud.
Thus, Plaintiff is not entitled to summary judgment on any claims that require showing scienter.
Cf. SEC v. Locke Capital Management, Inc., 794 F. Supp. 2d 355, 365-67 (D.R.I. 2011)
(granting summary judgment against a defendant on the issue of scienter, where there was
“overwhelming evidence” she had simply fabricated a client).
With respect to any counts that require showing negligence, viewing the record in the
light most favorable to Defendant, a reasonable trier of fact could find that it was reasonable for
Defendant to: (1) believe Morton’s alleged claim that a version of the model had been used to
manage live assets since April 2001; (2) rely on employees to handle much of the due diligence

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surrounding the acquisition of the model; and (3) assume one of his employees would have told
him if there was evidence contradicting Morton’s alleged claim. If a jury made these findings, it
could then conclude Defendant employed reasonable care to avoid misleading investors. Thus,
Plaintiff is not entitled to summary judgment on any claims that require showing negligence. Cf.
SEC v. Gruss, __ F. Supp. 3d __, 2017 WL 1169622, at *58-59 (S.D.N.Y. 2017) (granting
summary judgment against defendant on issue of negligence, where (1) defendant acknowledged
knowing his actions were at least likely prohibited; (2) two colleagues told defendant they were
concerned about the propriety of his actions; and (3) defendant never sought legal advice
regarding their propriety).
For these reasons, Plaintiff’s Motion for Summary Judgment (Doc. 186) is DENIED.
The Court will hold a status conference on Friday April 28, 2017, at 3:00 p.m. to establish the
trial date. Counsel may appear by phone, and should notify the Clerk if they intend to do so.

SO ORDERED.
/s/ Leo T. Sorokin
Leo T. Sorokin
United States District Judge

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