Securities and Exchange Commission v. Hand et al

Filing 53

Judge Allison D. Burroughs: MEMORANDUM AND ORDER entered. Hand's motion for sanctions [ECF No. 48 ] is DENIED. SO ORDERED.(McDonagh, Christina)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
v.
JEHU HAND and ANTONIO KATZ,
Defendants.

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Civil Action No. 15-cv-14109-ADB

MEMORANDUM AND ORDER DENYING MOTION FOR SANCTIONS
BURROUGHS, D.J.
The Securities and Exchange Commission (“SEC”) commenced this action against Jehu
Hand on December 10, 2015, alleging violations of Section 10(b) of the Exchange Act of 1934
and Rule 10b-5 thereunder; violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of
1933 (“Securities Act”); and aiding and abetting violations of Sections 5(a) and 5(c) of the
Securities Act. [ECF No. 1]. On July 29, 2019, the parties filed a motion seeking approval of a
consent judgment as to Hand, attaching a consent agreement signed by Hand. [ECF Nos. 43; 431]. That same day, the Court granted the motion and entered final judgment in the matter,
thereby terminating the case. [ECF Nos. 44, 45]. 1 Currently before the Court is Hand’s motion

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A copy of the Consent Judgment and Order on the Motion to Approve Consent Judgment were
mailed to Hand on July 29, 2019, [ECF No. 46], but were returned as undeliverable on August 6,
2019, [ECF No. 47], despite the fact that the Court used Hand’s then-current mailing address.
Hand notes that he did not receive notice as to whether the SEC “accepted the proposed consent
to judgment” and states that “the filed consent” was not served upon him. [ECF No. 48 at 3].
The SEC’s certificate of service accompanying the motion seeking approval of a consent
judgment includes the same address the Court used on July 29, 2019. [ECF No. 43 at 5; ECF
No. 47 at 2]. Regardless, Hand does not dispute that the case is no longer pending. See [ECF
No. 48 at 3].

for sanctions. [ECF No. 48]. For the reasons set forth more fully below, Hand’s motion is
DENIED.
I.

BACKGROUND AND PROCEDURAL HISTORY
On the same day that the SEC filed a complaint in this matter, [ECF No. 1], a grand jury

in the District of Massachusetts returned an indictment against Hand regarding nearly identical
conduct: a pump-and-dump scheme involving the stock of Greenway Technology, [Case 1:15-cr10386-WGY, ECF No. 11]. On August 31, 2016, the Department of Justice moved to intervene
and to stay this matter pending resolution of the parallel criminal proceeding. [ECF No. 6]. On
October 4, 2016, the Court granted the motion to intervene and stayed this matter. [ECF No. 13].
On May 21, 2018, a jury entered a guilty verdict convicting Hand of six counts alleged in a
Superseding Indictment. [Case 1:15-cr-10386-WGY, ECF No. 173]. On July 11, 2018, the SEC
moved to lift the stay in this matter, [ECF No. 16], and on July 12, 2018, the Court granted the
motion, [ECF No. 17].
As noted above, the parties entered into a consent agreement and the Court entered a final
judgment in this matter on July 29, 2019. [ECF Nos. 43; 43-1; 44; 45]. On November 12, 2019,
Hand filed the instant motion seeking sanctions pursuant to Federal Rule of Civil Procedure
11(c). [ECF No. 48]. The SEC filed its opposition to the motion on November 26, 2019, [ECF
No. 51], and Hand filed a reply brief on December 10, 2019, [ECF No. 52].
II.

DISCUSSION
Hand alleges that, at the time of filing its civil complaint against him in December 2015,

the SEC knew the allegations in its complaint were false, in violation of Federal Rule of Civil
Procedure 11(b)(3). [ECF No. 48 at 2–3]. As a result, Hand seeks sanctions against the SEC
under Federal Rule of Civil Procedure 11(c), arguing that, despite entering into a consent

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agreement to resolve this matter, he did not waive his right to seek sanctions against the SEC.
[Id. at 4]. The SEC objects to Hand’s motion on several grounds, including that the consent
agreement specifically prevents Hand from contesting the factual allegations of the complaint,
and further that Hand’s criminal conviction supports the allegations in this parallel civil case.
[ECF No. 51 at 1–2].
A.

Terms of the Consent Agreement

As the SEC observes, one of the terms of the consent agreement signed by Hand on May
24, 2019, is his promise “not to take any action or make or permit to be made any public
statement denying, directly or indirectly, any allegation in the complaint or creating the
impression that the complaint is without factual basis . . . .” [ECF No. 43-1 at 4]. The consent
agreement also includes an acknowledgement by Hand that he entered into the consent
agreement under his own free will: “Defendant enters into this Consent voluntarily and
represents that no threats, offers, promises, or inducements of any kind have been made by the
Commission or any member, officer, employee, agent, or representative of the Commission to
induce Defendant to enter into this Consent.” [Id. at 2].
Hand states that he “was obliged to settle” this matter but does not claim that he entered
into the consent agreement under duress. See [ECF No. 48 at 4]. His motion for sanctions
expressly denies the factual allegations in the SEC’s complaint: “The Complaint is based upon a
series of unsupported factual allegations.” [Id. at 14; see also id. at 4–14 (denying specific
allegations from the Complaint)]. Hand’s statements therefore contravene the terms of his
consent agreement. See [ECF No. 43-1 at 4]. Although Hand may regret his decision to enter
into the agreement, he is bound by its terms, particularly since he has benefited from the consent

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agreement to the extent that the case against him was terminated and the SEC did not seek a civil
monetary penalty against him. [ECF No. 43 at 4].
B.

Appropriateness of Rule 11 Sanctions

As to the substance of the Rule 11 claim, Federal Rule of Civil Procedure 11(b)(3)
requires a party presenting a pleading before the Court to certify that “the factual contentions
have evidentiary support or, if specifically so identified, will likely have evidentiary support after
a reasonable opportunity for further investigation or discovery . . . .” Fed. R. Civ. P. 11(b)(3).
The First Circuit has held that “[w]hether a filer breached these duties ‘depends on the objective
reasonableness of the [filer’s] conduct under the totality of the circumstances.’” Eldridge v.
Gordon Bros. Grp., LLC, 863 F.3d 66, 87–88 (1st Cir. 2017) (quoting Navarro-Ayala v. Nunez,
968 F.2d 1421, 1425 (1st Cir. 1992)).
Rule 11(b)(3) does not require a party to have evidence supporting each allegation at the
time of filing. As the First Circuit has stated, “[i]t is not necessary . . . ‘that an investigation into
the facts be carried to the point of absolute certainty.’ . . . Rather, it is sufficient if a factual
contention ‘will likely have evidentiary support after a reasonable opportunity for further
investigation or discovery.’” CQ Int’l Co. v. Rochem Int’l, Inc., USA, 659 F.3d 53, 63 (1st Cir.
2011) (first quoting Dubois v. U.S. Dep’t of Agric., 270 F.3d 77, 82 (1st Cir. 2001), then quoting
Fed. R. Civ. P. 11(b)(3)). The fact that a grand jury returned an indictment against Hand on the
same day that the SEC filed this case, with the two cases alleging parallel conduct, provides
objectively reasonable support for the SEC’s decision to file a civil complaint against Hand. In
addition, the fact that Hand was convicted by a jury in a criminal case in which the burden of
proof was beyond a reasonable doubt is further indication that the agency had support for the

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allegations in its complaint or would have “after a reasonable opportunity for further
investigation or discovery.” See Fed. R. Civ. P. 11(b)(3).
In light of the consent agreement precluding Hand from seeking this remedy and the jury
verdict in the parallel criminal proceeding, the Court finds that, under the totality of the
circumstances, the SEC’s complaint did not violate Rule 11(b)(3) and therefore sanctions
pursuant to Rule 11(c) are not warranted.
III.

CONCLUSION
Accordingly, for the reasons explained above, Hand’s motion for sanctions [ECF No. 48]

is DENIED.
SO ORDERED.
December 17, 2019

/s/ Allison D. Burroughs
ALLISON D. BURROUGHS
U.S. DISTRICT JUDGE

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