Securities and Exchange Commission v. Thompson et al

Filing 64

OPINION AND ORDER: re: 42 MOTION to Dismiss the Complaint filed by Anthony J. Thompson, Jr. For the reasons set forth above, Thompson's motion for summary judgment (ECF No. 42) is DENIED. Discovery remains stayed in this matter until A ugust 11, 2017 or the resolution of the parallel criminal proceeding, whichever is earlier. (See ECF No. 39.) The parties shall provide another update to the Court on the status of the parallel criminal proceeding not later than June 1, 2017, or within two weeks of the resolution of any appeals to the Appellate Division, whichever comes first. The Clerk of Court is directed to terminate the motion at ECF No. 42. SO ORDERED. (Signed by Judge Katherine B. Forrest on 3/02/2017) (ama)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
SECURITIES AND EXCHANGE
:
COMMISSION,
:
:
Plaintiff,
:
:
-v:
:
ANTHONY J. THOMPSON, JR., JAY FUNG,
:
and ERIC VAN NGUYEN,
X
:
:
Defendants,
:
:
-and:
JOHN BABIKIAN and KENDALL THOMPSON, :
:
:
Relief Defendants,
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NEW YORK COUNTY DISTRICT ATTORNEY, :
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:
Intervenor.
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USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: March 2, 2017

14-cv-9126 (KBF)
OPINION & ORDER

KATHERINE B. FORREST, District Judge:
This is an enforcement action brought by the New York office of the
Securities and Exchange Commission (“SEC”) against defendants Anthony J.
Thompson Jr., Jay Fung and Eric Van Nguyen—three alleged penny stock
promoters—and three relief defendants. (ECF No. 1 (“Compl.”) ¶¶ 9-13.) The SEC
alleges that, from November 2009 to September 2010, defendants conducted five
penny stock “pump-and-dump”/“scalping” schemes in which they touted certain
securities to the investing public without disclosing the extent of their financial
stakes in those securities. The SEC alleges that, in perpetrating these schemes, the

defendants violated several provisions of the securities laws: Section 10(b) of the
Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated
thereunder, as well as Sections 17(a) and 17(b) of the Securities Act of 1933
(“Securities Act”).
The SEC instituted this action after its Florida office prosecuted Thompson
and other defendants for securities violations in connection with a penny stock
scheme involving a separate issuer, and after the New York office unsuccessfully
engaged in settlement negotiations with Thompson. This case is in the early stages.
Discovery has been stayed until the earlier of August 11, 2017 or the resolution of a
parallel criminal proceeding that Thompson is currently defending in New York
state court. (ECF No. 39.)
Now before the Court is Thompson’s motion for summary judgment. (ECF
No. 42.) Thompson originally filed the motion as a motion to dismiss; the Court
converted it to one for summary judgment because Thompson cited materials
outside the pleadings. (ECF No. 47.) Thompson advances three arguments in
support of his motion. First, he asserts that this action is barred in its entirety by
the Florida Action under principles of res judicata. Second, he argues that the SEC
should be obligated to settle the charges against him under principles of New York
contract law or promissory estoppel. Third, Thompson submits that the SEC has
failed to allege securities laws violations against him as a matter of law.
For the reasons set forth below, Thompson’s motion for summary judgment
(ECF No. 42) is DENIED.
2

I.

BACKGROUND1
A.

The Florida Action

From 2009 to 2010, Thompson was the managing director of OTC Solutions
LLC (“OTC Solutions”), a now-defunct Maryland company that published and
disseminated newsletters touting penny stock companies. (See Plaintiff’s Responses
to Defendant Anthony J. Thompson’s Local Rule 56.1 Statement of Undisputed
Facts (“Pl.’s 56.1”, ECF No. 55) ¶¶ 1-2; see also Compl. ¶ 9.)
On May 2, 2012, the SEC filed an enforcement action in the United States
District Court for the Southern District of Florida against Recycle Tech., Inc.
(“Recycle Tech.”), Kevin Sepe, Ronny J. Halperin, Ryan Gonzalez, Thompson, OTC
Solutions, Pudong LLC (“Pudong”), Jay Fung and David Rees (the “Florida Action”).
(Pl.’s 56.1 ¶ 9; see also S.E.C. v. Recycle Tech, Inc. et al., No. 12-cv-21656-JAL (S.D.
Fl.), ECF No. 1.) The SEC filed an amended complaint on August 17, 2012 in which
Sepe, Halperin and Rees were no longer named defendants. (Declaration of Peter
Pizzani, dated October 20, 2016 (“Pizzani Decl.”, ECF No. 54), Ex. B (“Florida
Compl.”).) The SEC alleged that, from January through March 2010, defendants—
along with Sepe, Halperin and Rees—perpetrated a penny stock pump-and-dump
scheme involving the stock of a single issuer, defendant Recycle Tech. (Pl.’s 56.1 ¶
9; see also Florida Compl. ¶ 1.) The complaint portrays Sepe, Gonzalez and
Halperin as the architects of the scheme. (See, e.g., Florida Compl. ¶¶ 1-2.) The
SEC alleged that these three individuals set up a series of transactions through

1

The facts set forth herein are undisputed unless otherwise noted.

3

which their private sham company—developed for purposes of the scheme—
acquired control of and merged into Recycle Tech, a publicly traded penny stock
company. (Id. ¶¶ 22-52.). Sepe and Gonzalez then allegedly “pumped” Recycle
Tech’s stock by issuing false and misleading press releases on behalf of the
company. (Id. ¶¶ 53-64.) The SEC alleged that Sepe enlisted Thompson to
participate in the scheme by touting Recycle Tech stock in OTC Solution’s
newsletters. (Id. ¶¶ 65-68.) In exchange, Sepe allegedly arranged for Recycle Tech
to issue Thompson 2.325 million shares of Recycle Tech stock. (Id.) The SEC
further alleged that Thompson failed to adequately disclose his (and his companies’)
financial holdings in, and intent to sell, Recycle Tech stock. (Id.) The SEC made
similar allegations against Fung, who also allegedly received 2.325 million shares of
Recycle Tech stock for touting the company in Pudong’s newsletters. (Id.)
As a result of these allegations, the SEC claimed that Thompson violated
Sections 5(a), 5(c), 17(a) and 17(b) of the Securities Act, as well as Section 10(b) of
the Exchange Act and Rule 10b-5. (Id. ¶ 7.) By way of relief, the SEC sought a
declaratory judgment that Thompson had violated these laws, a permanent
injunction barring him from violating them in the future, disgorgement of ill-gotten
gains, civil monetary penalties and a “penny stock bar” prohibiting him from
participating in any offering of penny stock. (Id. at 26-28.)
In July 2013, while the Florida Action was pending, the SEC’s New York
office began investigating Thompson, OTC Solutions, Fung and Pudong for conduct
involving issuers other than Recycle Tech. (See Declaration of Brent Baker, dated
4

August 15, 2016 (“Baker Decl.”, ECF No. 44), Ex. 12; see also Pl.’s 56.1 ¶ 13.) Some
discovery in the Florida Action concerned these other issuers. (See Pl.’s 56.1 ¶¶ 1012.) On October 7, 2013, for instance, the SEC served interrogatories requesting
that Thompson and OTC Solutions identify all issuers that they promoted through
email newsletters from January 1, 2009 through December 31, 2010. (Pl.’s 56.1 ¶
10; Baker Decl., Exs. 7, 8.) Also on October 7, 2013, the SEC requested that
Thompson and OTC Solutions produce all of their email newsletters from January
1, 2009 through December 31, 2010, and all email newsletters, regardless of time
period, concerning the issuers Mass Hysteria Entertainment Company, Inc. (“Mass
Hysteria”), Blue Gem Enterprise, Inc. (“Blue Gem”) and Lyric Jeans, Inc. (“Lyric
Jeans”). (Pl.’s 56.1 ¶ 11; Baker Decl., Exs. 9, 10.) In addition, during Thompson’s
deposition in the Florida Action, the SEC asked questions relating to Blast
Applications Inc. (“Blast”), Smart Holdings, Inc. (“Smart Holdings”), Blue Gem and
Lyric Jeans. (Pl.’s 56.1 ¶ 12; Baker Decl., Exs. 6, 11.)
On October 31, 2013, the parties appeared at a discovery hearing before the
Honorable John J. O’Sullivan to address whether the SEC’s discovery requests
about issuers other than Recycle Tech. were relevant to—and hence discoverable
in—the Florida Action. (See Pl.’s 56.1 ¶ 14; Baker Decl., Exs. 14, 15.) Thompson
and OTC Solutions argued that such discovery was inappropriate because it
exceeded the scope of the Florida Action and overlapped with matters then under
investigation by the SEC’s New York office. (See Baker Decl, Ex. 14 at 53:8-16
(stating that “the SEC seems to want to expand the Recycle Tech case to include the
5

same things that the New York office is currently investigating” and “the SEC
trying to get information on two separate fronts is inappropriate.”); see also Pl.’s
56.1 ¶ 14.) The SEC argued that information about other issuers was necessary to
establish that the defendants’ securities violations were ongoing and continuing, a
factor required for the injunctive relief sought in the Florida Action. (See Baker
Decl., Ex. 14 at 54:21-55:5; see also id. at 56:11-57:12.) Judge O’Sullivan ruled in
favor of the SEC. He found that the requested documents were “relevant to this
lawsuit, even though they don’t involve the exact claim in this lawsuit” and ordered
their production. (Baker Decl., Ex. 14 at 57:13-22; see also id., Ex. 15 (written order
following hearing stating “the documents discussed during the hearing regarding
the New York SEC investigation are relevant and discoverable.”); Pl.’s 56.1 ¶ 16
(same).) He also ordered that Thompson and OTC Solutions respond to the SEC’s
interrogatories about issuers other than Recycle Tech. (Baker Decl., Ex. 15.)
Thompson and OTC Solutions agreed with the SEC to settle the Florida
Action in early 2014. (See Pl.’s 56.1 ¶ 20; see also Baker Decl., Exs. 21-24.) On
February 14, 2014, the Court entered final judgment against Thompson, which
effected the settlement terms (Baker Decl., Ex. 23) to which Thompson had
consented (id., Ex. 21). (See also Pl.’s 56.1 ¶ 23.) Pursuant to that consent
judgment, Thompson agreed to disgorge $349,504.61 of ill-gotten gains resulting
from the Recycle Tech scheme and $23,735.15 in prejudgment interest, and to pay
$120,000 in civil monetary damages. (Baker Decl., Ex. 23 at 70-71; Pl.’s 56.1 ¶¶ 2223.) The Court also entered a penny stock bar against Thompson (Baker Decl., Ex.
6

23 at 73) and enjoined him from violating Sections 5(a), 5(c) and 17(a) of the
Securities Act, as well as Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder (id. at 68-70)—all of the laws he was charged with
violating except Section 17(b) of the Securities Act. (See also Pl’s. 56.1 ¶¶ 22-23.)
In paragraph 8 of the consent to final judgment, Thompson represented that he
entered into the consent voluntarily and 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 Thompson or anyone acting on his behalf to enter
into this Consent.
(Baker Decl., Ex. 21 ¶ 8.) In paragraph 12 of the consent, Thompson further agreed
that the consent judgment “resolves only the claims asserted against Thompson in
this civil proceeding.” (Id. ¶ 12 (emphasis added).)2
B.

The New York Investigation

As described above, in July 2013, while the Florida Action was pending, the
SEC’s New York office began investigating Thompson, OTC Solutions, Fung and
Pudong for securities violations relating to penny stock issuers other than Recycle
Tech, the subject issuer in the Florida Action. (See Baker Decl., Ex. 12; see also
Pl.’s 56.1 ¶ 13.) Thompson’s submissions in connection with the instant motion
extensively set forth the details of the New York investigation and ensuing
The full text of paragraph 12 of the consent reads, “Consistent with 17 C.F.R. § 202.5(f), this
Consent resolves only the claims asserted against Thompson in the civil proceeding.” (Id. (emphasis
added).) 17 C.F.R. § 202.5(f) provides that an individual who consents to settle an SEC enforcement
action “does so solely for the purpose of resolving the claims against him in that investigative, civil,
or administrative matter and not for the purpose of resolving any criminal charges that have been,
or might be, brought against him.”. 17 C.F.R. § 202.5(f). Although 17 C.F.R. § 202.5(f) relates
exclusively to successive criminal prosecutions, the reference to 17 C.F.R. § 202.5(f) in paragraph 12
of the consent does not limit the scope of that provision; rather, it merely reflects that paragraph 12
is “consistent with” 17 C.F.R. § 202.5(f).
2

7

settlement negotiations that preceded the filing of this lawsuit. (See, e.g., Pl.’s 56.1
¶¶ 24-44; ECF No. 43 at 21-26.) Virtually all of these facts are proffered in support
of Thompson’s breach of contract and promissory estoppel arguments. Given that
this action is in the beginning stages, and that the Court finds summary judgment
inappropriate on these bases at this time (and, as presented, the defenses raise
triable issues in all events), the Court does not believe it necessary to wade into the
particulars of these facts. For purposes of resolving this motion, the Court notes
that, from December 2013 to August 2014, Thompson’s counsel engaged in
settlement discussions with various Division of Enforcement (“DOE”) attorneys that
culminated in Thompson executing an Offer of Settlement and escrowing settlement
funds pursuant to that document. (See, e.g., Pl.’s 56.1 ¶¶ 24-44; Baker Decl., Exs.
25-32.) The parties dispute whether the DOE attorneys had authority to bind the
DOE to recommend the proposed settlement to the full Commission. Thompson
submits that DOE attorneys represented that the proposed settlement would be
recommended to the full Commission for approval, but that this never came to
fruition. (See, e.g., Pl.’s 56.1 ¶¶ 34-44; ECF No. 43 at 23-26.) Both parties agree
that, at some point during the negotiations, then-Director of the DOE, Andrew
Ceresney, informed Thompson’s counsel that any agreement by DOE staff would be
final and binding only if approved by him personally, and that the DOE had no
obligation to recommend the Offer of Settlement to the Commission because he had
not approved it. (Pl.’s 56.1 ¶ 44.)

8

C.

The Instant Action

On November 17, 2014, the SEC commenced the instant action against
defendants Thompson, Fung and Van Nguyen and relief defendants Babikian and
Thompson. (Id. ¶ 45; see also Compl.) The SEC’s allegations revolve around five
alleged “pump-and-dump”/“scalping” schemes carried out from November 2009
through September 2010 to inflate the price of penny stocks issued by five issuers:
Blast, Smart Holdings, Blue Gem, Lyric Jeans and Mass Hysteria. (See Compl. ¶
1.) The complaint does not mention Recycle Tech, the issuer in the Florida Action,
or Sepe, Gonzalez and Halperin, the organizers of the scheme alleged in that case.
The SEC alleges, inter alia, that Thompson, acting through OTC Solutions
and other entities he controlled, issued misleading newsletters that touted these
stocks’ value without disclosing that he had, and intended to sell, significant
holdings thereof. (Id. ¶¶ 1-4.) Although many of the newsletters contained
disclaimers listing that Thompson’s entities owned a particular amount of stock in
the touted companies, the SEC alleges that these amounts understated the true
extent of Thompson’s holdings. (E.g., ¶¶ 24, 44, 67, 82, 93.) The SEC makes similar
allegations against Fung and Van Nguyen, who allegedly caused entities they
controlled to issue similarly misleading newsletters. (Id. ¶¶ 1-4.)3
As a result of this alleged conduct, the SEC claims that Thompson violated
Sections 17(a) and 17(b) of the Securities Act, Section 10(b) of the Exchange Act and
Rule 10b-5 thereunder. (Id. ¶¶ 100-10.) The SEC seeks a permanent injunction
The Court refers the reader to the allegations set forth in the Complaint for a full recitation of the
facts alleged by the SEC.
3

9

restraining Thompson from violating Section 17(b), and orders requiring him to
provide sworn accountings of his profits and assets, to disgorge any ill-gotten gains
arising from the five alleged schemes and to pay civil monetary penalties. (Id. at
27-29.)
This action runs parallel to criminal proceedings instituted by the New York
County District Attorney against Thompson and others in New York state court.
(ECF No. 6; see also ECF No. 63 (letter dated February 14, 2017 noting that
parallel criminal proceedings remain pending).) On January 23, 2015, upon hearing
from the parties and the New York County District Attorney, the Court stayed this
action for a period of one year, or resolution of the criminal proceeding, whichever
occurred earlier. (ECF No. 22.) On January 28, 2016, the Court extended the stay
by six months. (ECF No. 35.) On July 11, 2016, the Court extended the stay of
discovery for a period of one year or resolution of the criminal proceeding, whichever
is earlier, but otherwise lifted the stay. (ECF No. 39.)
On August 15, 2016, Thompson filed the instant motion. (ECF No. 42.)
Although Thompson styled it as a motion to dismiss the complaint pursuant to
Federal Rule of Civil Procedure 12(b)(6), his supporting brief cited the evidentiary
record. (See ECF No. 43; see also Baker Decl. (attaching 34 exhibits).) Accordingly,
on August 30, 2016, the Court converted Thompson’s motion to dismiss to a motion
for summary judgment, provided Thompson with an opportunity to submit
additional materials and extended the timeline for the SEC to oppose the motion.
(ECF No. 47.) The motion came fully briefed on January 27, 2017. (ECF No. 58.)
10

II.

RELEVANT LEGAL PRINCIPLES
A.

Summary Judgment

Summary judgment may not be granted unless a movant shows, based on
admissible evidence in the record, “that there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of law”. Fed. R.
Civ. P. 56(a). The moving party bears the initial burden of demonstrating “the
absence of a genuine issue of material fact”. Celotex Corp. v. Catrett, 477 U.S. 317,
323 (1986). When the moving party does not bear the ultimate burden on a
particular claim or issue, it need only make a showing that the non-moving party
lacks evidence from which a reasonable jury could find in the non-moving party's
favor at trial. Id. at 322-23.
In making a determination on summary judgment, the court must “construe
all evidence in the light most favorable to the nonmoving party, drawing all
inferences and resolving all ambiguities in its favor”. Dickerson v. Napolitano, 604
F.3d 732, 740 (2d Cir. 2010) (citing LaSalle Bank Nat’l Ass’n v. Nomura Asset
Capital Corp., 424 F.3d 195, 205 (2d Cir. 2005)). Once the moving party has
discharged its burden, the opposing party must set out specific facts showing a
genuine issue of material fact for trial. Wright v. Goord, 554 F.3d 255, 266 (2d Cir.
2009). “A party may not rely on mere speculation or conjecture as to the true
nature of the facts to overcome a motion for summary judgment,” as “mere
conclusory allegations or denials cannot by themselves create a genuine issue of
material fact where none would otherwise exist”. Hicks v. Baines, 593 F.3d 159,
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166 (2d Cir. 2010) (internal quotation marks, citations and alterations omitted). In
addition, “only admissible evidence need be considered by the trial court in ruling
on a motion for summary judgment”. Porter v. Quarantillo, 722 F.3d 94, 97 (2d Cir.
2013) (internal quotation marks, citation and alterations omitted).
B.

Motion to Dismiss

To survive a motion to dismiss under Federal Rule of Civil Procedure
12(b)(6), “the plaintiff must provide the grounds upon which his claim rests through
factual allegations sufficient ‘to raise a right to relief above the speculative level.’”
ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (quoting
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). In other words, the complaint
must allege “‘enough facts to state a claim to relief that is plausible on its face.’”
Starr v. Sony BMG Music Entm't, 592 F.3d 314, 321 (2d Cir. 2010) (quoting
Twombly, 550 U.S. at 570). “A claim has facial plausibility when the plaintiff pleads
factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (citing Twombly, 550 U.S. at 556).
In applying this standard, the Court accepts as true all well-pled factual
allegations, but does not credit “mere conclusory statements” or “[t]hreadbare
recitals of the elements of a cause of action.” Id. (citing Twombly, 550 U.S. at 555).
The Court will give “no effect to legal conclusions couched as factual allegations.”
Port Dock & Stone Corp. v. Oldcastle Ne., Inc., 507 F.3d 117, 121 (2d Cir. 2007)
(citing Twombly, 550 U.S. at 555). A plaintiff may plead facts alleged upon
12

information and belief “where the facts are peculiarly within the possession and
control of the defendant.” Arista Records, LLC v. Doe 3, 604 F.3d 110, 120 (2d Cir.
2010) (citations omitted). But, if the Court can infer no more than the mere
possibility of misconduct from the factual averments—in other words, if the wellpled allegations of the complaint have not “nudged [plaintiff's] claims across the line
from conceivable to plausible”—dismissal is appropriate. Twombly, 550 U.S. at 570;
see also Starr, 592 F.3d at 321 (quoting Iqbal, 556 U.S. at 679).
In deciding a motion to dismiss under Rule 12(b)(6), the Court may consider
documents referenced in the complaint or relied upon in framing the complaint. See
DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010) (“In considering a
motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6), a district
court may consider the facts alleged in the complaint, documents attached to the
complaint as exhibits, and documents incorporated by reference in the complaint.”);
Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002) (“Where plaintiff
has actual notice of all the information in the movant's papers and has relied upon
these documents in framing the complaint, the necessity of translating a Rule
12(b)(6) motion into one under Rule 56 is largely dissipated.”) (internal quotation
marks, alteration and citation omitted).
C.

Res Judicata

“‘Under the doctrine of res judicata, or claim preclusion, a final judgment on
the merits of an action precludes the parties or their privies from relitigating issues
that were or could have been raised in that action.’” TechnoMarine SA v. Giftports,
13

Inc., 758 F.3d 493, 499 (2d Cir. 2014) (quoting St. Pierre v. Dyer, 208 F.3d 394, 399
(2d Cir. 2000)). The doctrines applies to final judgments entered by courts and, in
some instances, finalized settlements. Greenberg v. Bd. of Governors of Fed.
Reserve Sys., 968 F.2d 164, 168 (2d Cir. 1992).
Res judicata is an affirmative defense. TechnoMarine SA, 758 F.3d at 499.
To assert the defense, “a party must show that (1) the previous action involved [a
final] adjudication on the merits; (2) the previous action involved the plaintiffs or
those in privity with them; and (3) the claims asserted in the subsequent action
were, or could have been, raised in the prior action.” Id. (quoting Monahan v.
N.Y.C. Dep’t of Corr., 214 F.3d 275, 285 (2d Cir. 2000)) (alterations omitted). “The
burden is on the party seeking to invoke res judicata to prove that the doctrine bars
the second action.” Computer Assocs. Int’l, Inc. v. Altai, Inc., 126 F.3d 365, 369 (2d
Cir. 1997) (citation omitted).
The third prong requires courts to assess the similarity of the claims asserted
in the prior and instant actions. Courts must first assess whether “‘. . . the second
suit involves the same ‘claim’—or ‘nucleus of operative fact’—as the first suit.’”
Waldman v. Vill. of Kiryas Joel, 207 F.3d 105, 108 (2d Cir. 2000) (quoting
Interoceanica Corp. v. Sound Pilots, Inc., 107 F.3d 86, 90 (2d Cir. 1997)). “Whether
a claim that was not raised in the previous action could have been raised therein
‘depends in part on whether the same transaction or connected series of
transactions is at issue, whether the same evidence is needed to support both
claims, and whether the facts essential to the second were present in the first.’”
14

TechnoMarine SA, 758 F.3d at 499 (quoting Woods v. Dunlop Tire Corp., 972 F.2d
36, 38 (2d Cir. 1992)); see also Interoceanica Corp., 107 F.3d at 90 (quoting Nat’l
Labor Relations Bd. v. United Techs. Corp., 706 F.2d 1254, 1260 (2d Cir. 1983)).
“To determine whether two actions arise from the same transaction or claim, we
consider ‘whether the underlying facts are related in time, space, origin, or
motivation, whether they form a convenient trial unit, and whether their treatment
as a unit conforms to the parties' expectations or business understanding or usage.’”
TechnoMarine SA, 758 F.3d at 499 (quoting Pike v. Freeman, 266 F.3d 78, 91 (2d
Cir. 2001)); see also Waldman, 207 F.3d at 108 (quoting Interoceanica Corp., 107
F.3d at 90). “[T]he fact that both suits involved essentially the same course of
wrongful conduct is not decisive; nor is it dispositive that the two proceedings
involved the same parties, similar or overlapping facts, and similar legal issues.”
Interoceanica Corp., 107 F.3d at 91; S.E.C. v. First Jersey Sec., Inc., 101 F.3d 1450,
1463 (2d Cir. 1996) (internal citations omitted); see also Proctor v. LeClaire, 715
F.3d 402, 412 (2d Cir. 2013) (“The fact that several operative facts may be common
to successive actions between the same parties does not mean that a judgment in
the first will always preclude litigation of the second.”) (citing Interoceanica Corp.,
107 F.3d at 91).
D.

Settlement Negotiations with the SEC

Although courts ordinarily uphold settlements where the attorney had
“apparent authority to settle . . ., and the opposing counsel has no reason to doubt
that authority”, Fennell v. TLB Kent Co., 865 F.2d 498, 502 (2d Cir. 1989) (citing
15

Int’l Telemeter Corp. v. Teleprompter Corp., 592 F.2d 49, 55 (2d Cir. 1979)),4 the
doctrine of apparent authority does not apply to government attorneys, see Doe v.
Civiletti, 635 F.2d 88, 96 (2d Cir. 1980) (“[I]t is axiomatic that the United States is
not bound by the unauthorized acts of its agents.”); Fed. Crop Ins. Corp. v. Merrill,
332 U.S. 380, 384 (1947) (“[A]nyone entering into an arrangement with the
Government takes the risk of having accurately ascertained that he who purports to
act for the Government stays within the bounds of his authority.”); see also United
States v. Zenith-Godley Co., 180 F. Supp. 611, 615-16 (S.D.N.Y. 1960), aff’d, 295
F.2d 634 (2d Cir. 1961) (citing Merrill, 332 U.S. at 384); Berns & Koppstein, Inc. v.
Commodity Credit Corp., 271 F. Supp. 433, 436 (S.D.N.Y. 1967) (citing ZenithGodley Co., 180 F. Supp. 611); Littlejohn v. Washington Metro. Area Transit Auth.,
No. 90-1724 (RCL), 1992 WL 122755, at *2 (D.D.C. May 28, 1992) (citing United
States v. Dist. of Columbia, 669 F.2d 738, 748 n.13 (D.C. Cir. 1981)).
Thus, agreements with the SEC, and indeed any governmental agency, are
binding only if the staff attorneys that negotiated the agreement followed proper
procedures, i.e., had actual authority to bind the government. The policies and
procedures governing the SEC’s Division of Enforcement are set forth in SEC
regulations, 17 C.F.R. § 200 et seq., and an internal but publicly available manual
“Apparent authority is ‘the power to affect the legal relations of another person by transactions
with third persons, professedly as agent for the other, arising from and in accordance with the
other's manifestations to such third persons.’” Fennell, 865 F.2d at 502 (quoting Restatement
(Second) of Agency § 8 (1958)) (emphasis omitted). “[I]n order to create apparent authority, the
principal must manifest to the third party that he ‘consents to have the act done on his behalf by the
person purporting to act for him.’” Id. (quoting Restatement (Second) of Agency § 8) (emphasis
omitted). Thus, an attorney has apparent authority to settle a case only if the client makes direct
representations to that effect to the opposing party’s counsel. Id. (holding that plaintiff’s counsel had
no apparent authority to settle case because plaintiff “made no manifestations to defendants’ counsel
that [his attorneys] were authorized to settle the case.”).
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16

entitled the SEC “Enforcement Manual”, see S.E.C. Enforcement Manual § 1.1,
available at https://www.sec.gov/divisions/enforce/enforcementmanual.pdf (last
visited March 2, 2017).
The DOE is responsible for investigating potential violations of the federal
securities laws and conducting the Commission’s enforcement activities. See 17
C.F.R. § 200.19b; S.E.C. Enforcement Manual § 1.4.1. The Division consists of a
staff of attorneys, among others, headed by a Director. While the Commission has
delegated certain authority to the Director of the DOE to carry out these duties,
settlements require approval by the Commission.5 See 17 C.F.R. §§ 200.19b,
200.30-4; S.E.C. Enforcement Manual § 2.5.1. (See also Pizzani Decl. ¶ t.) To
obtain approval to enter into a settlement, the Division submits an “action
memorandum” for the Commission’s review “that sets forth a Division
recommendation and provides a comprehensive explanation of the
recommendation’s factual and legal foundation.” S.E.C. Enforcement Manual
§ 2.5.1. The Commission then considers and votes on the Division’s
recommendation. Id. § 2.5.2.
E.

Section 17(b)

Section 17(b) of the Securities Act targets “scalping”, a practice in which the
owner of a security recommends it for investment and then sells it at a profit. See
Aaron v. S.E.C., 446 U.S. 680, 692 (1980) (defining “scalping” in context of
Investment Advisers Act of 1940); S.E.C. v. Huttoe, No. 96-2543 (GK), 1998 WL
The term “Commission” refers to the five presidential appointees, or commissioners, who head the
agency. See 17 C.F.R. § 200.10 (“The Commission is composed of five members . . . appointed by the
President, with the advice and consent of the Senate, for 5-year terms”).
5

17

34078092, at *7 (D.D.C. Sept. 14, 1998) (defining “scalping” where defendant was
charged with violating Section 17(b), among other securities laws). Section 17(b)
“was designed to protect the public from publications that ‘purport to give an
unbiased opinion but which opinions are in reality being paid for.’” S.E.C. v.
Gorsek, 222 F. Supp. 2d 1099, 1105 (C.D. Ill. 2001) (quoting United States v. Amick,
439 F.2d 351, 365 (7th Cir. 1971)).
To that end, Section 17(b) makes it unlawful to:
publish, give publicity to, or circulate any notice, circular, advertisement,
newspaper, article, letter, investment service, or communication which,
though not purporting to offer a security for sale, describes such security for a
consideration received or to be received, directly or indirectly, from an issuer,
underwriter, or dealer, without fully disclosing the receipt, whether past or
prospective, of such consideration and the amount thereof.
15 U.S.C. § 77q(b); see also S.E.C. v. Monarch Funding Corp., No. 85-cv-7072 (LBS),
1996 WL 348209, at **5-6 (S.D.N.Y. June 24, 1996). Thus, Section 17(b) does not
impose a ban; it regulates through disclosure. Scalping is permitted, provided the
individual with the vested interest in the stock discloses the extent of his financial
stake in the subject securities.
F.

Section 10(b), Rule 10b-5 and Section 17(a)

Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder
prohibit fraud in connection with the purchase or sale of securities. See 15 U.S.C. §
78j; 17 C.F.R. § 240.10b-5. These provisions prohibit both material misstatements
and omissions, see 17 C.F.R. § 240.10b-5(b), and deceptive conduct, see 17 C.F.R. §
240.10b-5(a), (c), in connection with the purchase or sale of securities. While Rule
10b-5(b) targets misleading disclosures, Rules 10b-5(a) and (c) target deceptive
18

conduct. S.E.C. v. Lee, 720 F. Supp. 2d 305, 325 (S.D.N.Y. 2010); see also Wilson v.
Merrill Lynch & Co., Inc., 671 F.3d 120, 129 (2d Cir. 2011) (“Section 10(b), in
proscribing the use of a ‘manipulative or deceptive device or contrivance,’ prohibits
not only material misstatements but also manipulative acts.’”) (quoting ATSI
Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007)); United States
v. Finnerty, 533 F.3d 143, 148 (2d Cir. 2008) (“‘Conduct itself can be deceptive,’ and
so liability under § 10(b) or Rule 10b-5 does not require ‘a specific oral or written
statement.’”) (quoting Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S.
148, 158 (2008)).
To establish a Rule 10b-5(b) disclosure violation, the SEC must prove that
the defendant (1) made one or more misstatements of material fact, or omitted to
state one or more material facts that the defendants had a duty to disclose; (2) with
scienter; (3) in connection with the purchase or sale of securities. See Lentell v.
Merrill Lynch & Co., 396 F.3d 161, 172 (2d Cir. 2005) (setting forth requisite
elements for private plaintiffs); In re IBM Sec. Litig., 163 F.3d 102, 106 (2d Cir.
1998) (same); see also Lee, 720 F. Supp. 2d at 324-25 (stating that, unlike private
litigants, the SEC is not required to prove investor reliance, loss causation or
damages). To establish a deceptive conduct claim under Rules 10b-5(a) or (c), the
SEC must allege that the defendant (1) committed a manipulative or deceptive act;
(2) in furtherance of the alleged scheme to defraud; and (3) with scienter. Lee, 720
F. Supp. 2d at 325 (quoting In re Global Crossing, Ltd. Sec. Litig., 322 F. Supp. 2d

19

319, 336 (S.D.N.Y. 2004)). A “manipulative or deceptive act” is “some act that gives
the victim a false impression.” Finnerty, 533 F.3d at 148.
Section 17(a)(1) of the Securities Act makes it unlawful to “employ any
device, scheme, or artifice to defraud” in the offer or sale of securities. 15 U.S.C. §
77q(a)(1). “Essentially the same elements are required under Section 17(a)(1)” as
under Section 10(b) and Rule 10b-5, except that Section 17(a)(1) requires proof of a
connection with the “offer or sale” of securities, instead of the “purchase or sale” of
securities. S.E.C. v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999).
Section 17(a)(3) of the Securities Act prohibits defendant from engaging “in
any transaction, practice, or course of business which operates or would operate as a
fraud or deceit upon the purchaser.” 15 U.S.C. § 77q(a)(3). Unlike for Section 10(b)
and Section 17(a)(1), “[s]cienter is not required to prove a defendant violated
[Section 17(a)(3)]. A showing of negligence is sufficient.” S.E.C. v. Ginder, 752 F.3d
569, 574 (2d Cir. 2014) (internal citations omitted); see also Aaron, 446 U.S. at 70102. “To properly state a claim under Section 17(a)(3), the necessary elements are
the same as those for Section 10(b) and 17(a)(1), although plaintiff need not allege
or prove scienter.” S.E.C. v. Glantz, No. 94-cv-5737 (CSH), 1995 WL 562180, at *5
(S.D.N.Y. Sept. 20, 1995) (citations omitted); see also S.E.C. v. Norton, No. 95-cv4451 (SHS), 1997 WL 611556, at *3 (S.D.N.Y. Oct. 3, 1997) (citations omitted).
Section 10(b), Rule 10b-5 and Section 17(a) all sound in fraud. Accordingly,
to state a violation of these provisions, the plaintiff must state “the circumstances
constituting fraud or mistake” with “particularity”. Fed. R. Civ. P. 9(b); see also
20

Lee, 720 F. Supp. 2d at 325 (“In order to state a claim under Sections 17(a) of the
Securities Act [and] 10(b) of the Exchange Act . . . , the heightened pleading
standard of Federal Rule of Civil Procedure 9(b) must be satisfied.”).
III.

DISCUSSION
Thompson asserts that the SEC should be barred from bringing this action

under res judicata, that the SEC should be compelled to settle the action pursuant
to Thompson’s Offer of Settlement and that the SEC’s claims fail on the merits. The
Court denies each of Thompson’s applications.
A.

Res Judicata

Thompson first argues that res judicata bars the claims asserted in this
action because they were already finally adjudicated in the Florida Action. (See
ECF No. 43 at 27-33.) The Court disagrees. While the first two elements of the res
judicata test are satisfied here,6 the third element is not. That is, the claims
asserted by the SEC in this case were not, and could not have been, raised in the
Florida Action, see TechnoMarine SA, 758 F.3d at 499, because the instant action
does not involve the same “claim” or “nucleus of operative fact” as the allegations in
that suit, see Waldman, 207 F.3d at 108.
In the Florida Action, the SEC alleged a penny stock “pump-and-dump”/
“scalping” scheme involving a single issuer, Recycle Tech. (See Florida Compl.) The

The first two elements of the res judicata test are satisfied and not in dispute. First, the Florida
Settlement plainly resolved all claims asserted in that action. See Greenberg, 968 F.2d at 168 (“Res
judicata applies to judgments by courts . . . . Settlements may also have preclusive effect.”) (citations
omitted); see also Monahan, 214 F.3d at 285 (noting neither party contested that settlement
agreement resolving agency enforcement action was a final adjudication to which res judicata
applied). Second, the SEC is the plaintiff in both actions.
6

21

scheme was allegedly run by Sepe, Gonzalez and Halperin. (Id. ¶¶ 1-2.) The SEC
alleged that, with the help of a legal adviser, these individuals acquired control of
Recycle Tech in January 2010 and began issuing misleading press releases touting
Recycle Tech stock in mid-February 2010. (Id. ¶¶ 22-64.) The SEC further alleged
that Thompson (and his company, OTC Solutions) became involved in late February
2010 after the scheme was underway, and only after being approached by Sepe. (Id.
¶¶ 65-68.) In settling the Florida Action, Thompson agreed that the judgment
resolved only the claims asserted against him in that case. (Baker Decl., Ex. 21 ¶
12.)
The SEC’s allegations in this action differ markedly from those in the Florida
Action. First, the five penny stock schemes alleged here involve issuers not
mentioned in the Florida Complaint: Blast, Smart Holdings, Blue Gem, Lyric Jeans
and Mass Hysteria. Recycle Tech—the only issuer mentioned in the Florida
Complaint—appears nowhere in the instant complaint. Further, although
Thompson and Fung are defendants to both suits, the SEC alleges they played far
more significant roles here than in the Florida Action. Whereas in the Florida
Action, the SEC alleged that Thompson and Fung were mere participants in the
Recycle Tech scheme, here the SEC alleges that Thompson and Fung “conducted”
the subject schemes without solicitation or participation by anyone else. (E.g.,
Compl. ¶¶ 1-2.) Notably, the SEC does not presently allege that Sepe, Halperin and
Gonzalez played any part in the five schemes at issue here, let alone the
supervisory roles they played in the Recycle Tech scheme. Indeed, these three
22

individuals are not mentioned in the instant complaint. Third, the SEC does not
allege that the five issuers here engaged in any actionable touting activity
themselves, such as by issuing press releases similar to those allegedly issued by
Recycle Tech in the Florida Action. The touting activity at issue here consists only
of statements made in newsletters disseminated by promotional entities allegedly
controlled by the defendants.
These differences illustrate that the Recycle Tech scheme and the five
schemes alleged here do not form a “connected series of transactions”. See
TechnoMarine SA, 758 F.3d at 499. Rather, the allegations in this lawsuit are
based on different facts and evidence than the allegations underlying the Florida
Action. As a result, res judicata does not bar this enforcement action. See
Interoceanica Corp., 107 F.3d at 91 (“A first judgment will generally have preclusive
effect only where the transaction or connected series of transactions at issue in both
suits is the same, that is where the same evidence is needed to support both claims,
and where the facts essential to the second were present in the first.”); First Jersey
Sec., Inc., 101 F.3d at 1464 (citing Second Circuit cases holding that where second
litigation involves different transactions than the first, res judicata does not bar
second lawsuit).
The Court reaches this conclusion even though, as Thompson points out,
there are some significant similarities between the two sets of schemes. The Court
acknowledges, for instance, that the lawsuits both involve penny stock frauds
carried out before the Florida Action was filed (in 2012) by some of the same
23

individuals, namely Thompson and Fung, and the defendants are charged with
violating the some of the same securities statutes. These similarities, however, are
insufficient to invoke res judicata here. While the two lawsuits clearly involve a
similar course of misconduct, some of the same parties, and some overlapping facts
and legal issues, such commonalities are not dispositive. See Interoceanica Corp.,
107 F.3d at 91; Greenberg, 968 F.2d at 168; Computer Assocs. Int’l, Inc., 126 F.3d at
369.
First Jersey Securities is instructive. See 101 F.3d 1450. In that case, the
SEC alleged that First Jersey, a broker-dealer, and its CEO engaged in a scheme to
fraudulently induce customers to buy six particular securities at artificially
excessive prices, yielding massive profits for the defendants. Id. at 1456.
Defendants argued that the action was barred under res judicata by a settled SEC
administrative proceeding brought against First Jersey and a number of its
principals a few years prior. Id. at 1462. The Second Circuit rejected the res
judicata defense even though the two lawsuits involved the some of the same
defendants, a similar course of fraud and two of the same securities. Id. at 1464.
Despite these similarities, res judicata did not apply because “the second litigation
involved different transactions, and especially subsequent transactions” and, as a
result, “[t]he claim that First Jersey defrauded customers in the sale, purchase, and
repurchase of certain securities in 1975-1979 is not the same as the claim that First
Jersey defrauded customers in the sale, purchase, and repurchase of other
securities in 1982-1985.” Id. As in First Jersey Securities, res judicata is
24

inappropriate here because the Florida Action and the present action involve
different transactions. The commonalities between the schemes alleged in the two
lawsuits are overwhelmed by the volume of divergent allegations concerning
different issuers, different perpetrators and different touting activity.
Thompson’s contention that overlapping discovery in this case and the
Florida Action justifies the application of res judicata is also incorrect. In the
Florida Action, the SEC sought discovery as to issuers other than Recycle Tech for
the limited purpose of establishing that Thompson’s violations were continuous an
ongoing, a requirement to impose the sought injunctive relief. (See Baker Decl., Ex.
14 at 54:21-55:5; see also id. at 56:11-57:12.) In ordering such discovery to proceed,
Judge O’Sullivan specifically noted that the requested documents did not “involve
the exact claim in this lawsuit”. (Id. at 57:13-22.) It would be inappropriate to
invoke res judicata to bar this action based exclusively on discovery admitted for
purposes of fashioning relief, but not establishing liability, in the prior action. That
is because, “[f]or purposes of res judicata, [t]he scope of litigation is framed by the
complaint at the time it is filed.” Proctor, 715 F.3d at 412 (citing Computer Assocs.,
126 F.3d at 369-70); see also First Jersey Sec., Inc., 101 F.3d at 1465 (“The notion
that the agency must either perpetually expand its charges to pursue new unlawful
acts in an ongoing proceeding or lose the ability to pursue the persistent violator for
misdeeds between the start and conclusion of the proceeding would in effect confer
on the miscreant a partial immunity from liability for future violations. Such a

25

notion is both antithetical to the regulatory scheme and inconsistent with the
doctrine of res judicata.”).
B.

Settlement Negotiations with the SEC

Thompson next seeks summary judgment that the SEC’s Division of
Enforcement had, and breached, an enforceable obligation to recommend that the
Commission approve his proposed settlement. (See ECF No. 43 at 33-41.) He
requests specific performance under New York contract law or, in the alternative,
promissory estoppel. (Id.) First, “specific performance” is an affirmative request for
relief and not properly before the Court on this motion. Defendant’s request for
dismissal also fails at the outset because the ultimate relief sought by Thompson
could only arise if the Commission were required to accept the DOE’s proposed
settlement. That is not the case, as Thompson concedes. (See id. at 34.)
Nevertheless, the even more limited summary judgment Thompson seeks is
inappropriate on grounds of breach of contract or promissory estoppel. First, at the
very least, there are triable issues on these questions. Second, it is well settled that
the Government is only bound by agreements entered into by individuals with
actual authority to bind the Government. See Doe, 635 F.2d at 96; Merrill, 332 U.S.
at 384; Zenith-Godley Co., 180 F. Supp. at 615-16; Berns & Koppstein, Inc., 271 F.
Supp. at 435; Littlejohn, 1992 WL 122755, at *2. At this stage, Thompson’s breach
of contract argument fails because there is an insufficient basis to find that the SEC
lawyers with whom his lawyer negotiated lacked actual authority to bind the DOE
to recommend the proposed settlement to the Commission. Thompson’s counsel was
26

informed at the time that this authority is vested exclusively in the Director of the
DOE. (Pl.’s 56.1 ¶ 44.) On the record before the Court, Andrew Ceresney, the thenDirector of the DOE, gave no such approval here. (Id.)
C.

The Sufficiency of the Fraud Allegations

The remainder of Thompson’s motion seeks dismissal of the SEC’s claims
under Section 17(b), Section 10(b), Rule 10b-5 and Section 17(a). (See ECF No. 43
at 42-57.) As the Court has explained, this motion was converted from a motion to
dismiss to one for summary judgment. The Court converted the motion so that it
could consider the extensive materials that Thompson proffered, and, frankly, to
preclude any potential argument that it was procedurally improper for the Court to
consider materials outside the pleadings. Having reviewed the parties’
submissions, it is clear to the Court that, in this portion of the motion, Thompson
challenges the sufficiency of the allegations reflected on the face of the complaint.
While Thompson has submitted certain materials to demonstrate the lawfulness of
his conduct, he does not cite them here.7 Nor has the SEC responded by citing
materials outside the complaint.8 (See ECF No. 53 at 39-55.) Thus, given the early
stage of the case and the parties’ framing of their arguments, the Court finds it
appropriate to evaluate the sufficiency of the SEC’s fraud allegations under Rule
12(b)(6), leaving Thompson’s liability as a question for another day.
The only material outside the complaint Thompson cites in this portion of the motion is a
disclaimer that is referenced in the complaint. (Compare ECF No. 43 at 47 (quoting
Explicitpicks.com disclaimer) with Compl. ¶ 44 (referencing disclaimer).)
7

The only material outside the complaint the SEC cites here is a decision in the Florida Action that
it submitted as an attachment to a declaration. (See ECF No. 53 at 42 (quoting Pizzani Decl., Ex.
E).) The Court considers this a legal citation.
8

27

1.

Section 17(b)

Thompson argues that the SEC has failed to properly allege a Section 17(b)
violation because the newsletters disclosed that Thompson’s companies received
compensation, that they had the ability to sell during the promotion and that they
were not “not unbiased”. (See ECF No. 43 at 47.) Section 17(b), however, requires
more. Under that provision, individuals publicizing stock in which they deal must
disclose not only their “receipt” of compensation, but also the “the amount thereof”.
15 U.S.C. § 77q(b); see also United States v. Ware, 577 F.3d 442, 448 (2d Cir. 2009)
(“Any receipt and amount of [] compensation are material information, the
disclosure of which is required by law.”) (citing 15 U.S.C. § 77q(b)).
Although many of the newsletters disclosed a particular amount of
compensation defendants’ companies received for their touting activities, the SEC
alleges these disclosures vastly understated that amount. (Compare Compl. ¶ 16
(stating OTC Solutions acquired 18 million Blast shares) with id. ¶ 24 (stating
Thompson’s ExplicitPicks.com disclaimers misstated amount as 6 million shares);
(compare id. ¶ 33 (stating Thompson’s Microcapster acquired 3.7 million shares of
Blue Gem) with id. ¶ 44 (stating ExplicitPicks.com disclaimer misstated amount as
1.5 million shares); compare id. ¶ 55 (stating OTC Solutions acquired 35 million
shares of Lyric Jeans) with id. ¶ 67 (stating that “disclaimers misstated the
consideration received for the promotional efforts”); id. ¶ 82 (“While
OxofWallStreet.com disclosed that it was paid $375,000 for the promotion,
Thompson, who controlled OxofWallStreet.com, in fact received $1.1 million for
28

promoting Smart Holdings.”); compare id. ¶ 89 (stating that OTC Solutions acquired
212,000 shares of Mass Hysteria and Microcapster acquired 1.8 million shares of
Mass Hysteria) with id. ¶ 93 (stating that “disclaimers misstated the consideration
received for the promotional efforts”).)
Thompson’s arguments with regard to these allegations are unpersuasive.
Although he quotes at length from an exemplar disclaimer that discloses an amount
of compensation received, he does not comment on the accuracy of that amount.
(See ECF No. 43 at 47.) At this stage, the Court declines to make a finding as to the
accuracy of the disclaimers.
Contrary to Thompson’s assertion, this Court’s Section 17(b) analysis
comports with the opinion issued in the Florida Action dismissing the SEC’s Section
17(b) claims. See S.E.C. v. Recycle Tech, Inc., No. 12-cv-21656 (Lenard/O’Sullivan),
2013 WL 12063952 (S.D. Fla. Sept. 26, 2013). In that case, the sole basis for the
SEC’s Section 17(b) claim was that defendants’ newsletters allegedly misidentified
the source of consideration received. Id. at *8. The Honorable Joan Lenard
dismissed the Section 17(b) claim, finding that Section 17(b) does not require
disclosure of the source of consideration received. Id. **8-9. Critically, the SEC did
not allege in the Florida Action, as it does here, that the newsletters failed to
accurately disclose the amount of consideration received. Id. at *8. In fact, it was
undisputed that Thompson’s newsletters accurately disclosed both the receipt of
consideration and the amount received. Id. Thus, Judge Lenard’s dismissal of the
Section 17(b) claim does not suggest, as Thompson argues, that Section 17(b) only
29

requires disclosure that the published opinions “were bought and paid for” and
“unbiased”. (See ECF No. 43 at 47.) Section 17(b) plainly also requires disclosure of
the amount of compensation received. Consequently, the Court declines to dismiss
the Section 17(b) claim.9
2.

Section 10(b), Rule 10b-5 and Section 17(a)

Thompson also contends that the Court should also dismiss the SEC’s Section
10(b), Rule 10b-5 and Section 17(a) claims. Thompson puts forth a variety of
arguments in this regard: (1) that all of the SEC’s claims premised on alleged
omissions fail because Thompson lacked a generalized duty to disclose; (2) that
Thompson’s statement that he “may” sell the touted stock was not materially
misleading; (3) that the failure to disclose the correct compensation received is
immaterial; (4) that the SEC failed to alleged that Thompson knew that certain
statements were false; (5) that Thompson’s failure to disclose that he was acting in
concert with other individuals was not actionable; (6) that certain statements are
immaterial puffery or non-actionable opinions; and (7) that the bespeaks caution
doctrine immunizes any alleged misrepresentations and omissions. As discussed
below, all of these arguments lack merit.10

In the potion of his motion addressing the SEC’s Section 17(b) claim, Thompson additionally argues
that the Section 17(b) claim should be dismissed because (1) there was no duty to disclose the
number or identity of companies promoting the subject stock and (2) Thompson’s disclosure that he
“may” sell the stock sufficed under Section 17(b). (See ECF No. 43 at 48-50.) The Court considers
these arguments irrelevant to the sufficiency of the SEC’s Section 17(b) claim and instead addresses
them in the context of the SEC’s Section 10(b), Rule 10b-5 and Section 17(a) claims.
9

In setting forth these arguments, Thompson often does not distinguish among Section 10(b), Rule
10b-5, Section 17(a)(1) and Section 17(a)(3). As noted above, with the exception of the scienter
element, these statutory provisions have similar requirements. The Court references the applicable
statutory provision only where it is material to the analysis.
10

30

a)

Lack of Generalized Duty to Disclose

Thompson first alleges that the SEC’s omissions-based disclosure claims fail
because Thompson lacked a generalized duty to disclose the allegedly omitted
information. (See ECF No. 43 at 42-45.) Thompson correctly recognizes that
omissions are only actionable when there is a duty to disclose. (See ECF No. 43 at
44 (citing Chiarella v. United States, 445 U.S. 222, 228 (1990).) However, he
mistakenly contends that such a duty arises only in the context of a “fiduciary or
trust relationship” that does not exist here. (Id. at 44-45.) That contention is
wrong.
As a general matter, Section 10(b), Rule 10b-5 and Section 17(a) require that
when a company (or individual) “speaks”, it must disclose all information necessary
to make its statement(s) not materially misleading—even where there is otherwise
no independent duty to disclose. See In re Vivendi, S.A. Sec. Litig., 838 F.3d 223,
258 (2d Cir. 2016) (quoting Meyer v. Jinksolar Holdings Co., Ltd., 761 F.3d 245, 250
(2d Cir. 2014)) (“It is well-established in this Circuit that ‘once a company speaks on
an issue or topic, there is a duty to tell the whole truth,’ ‘[e]ven when there is no
existing independent duty to disclose information’ on the issue or topic.”); Caiola v.
Citibank, N.A., 295 F.3d 312, 331 (2d Cir. 2002) (“[T]he lack of an independent duty
[to disclose] is not . . . a defense to Rule 10b-5 liability because upon choosing to
speak, one must speak truthfully about material issues.”); United States v.
Donovan, 55 F. App’x 16, 22 (2d Cir. 2003) (explaining that, under Section 17(a), “a
duty to disclose may arise during a securities transaction if omission of a material
31

fact would make another statement misleading”, i.e., “even in the absence of a
fiduciary duty”) (citing 15 U.S.C. § 77q(a)). Thus, “‘. . . so-called ‘half-truths’—
literally true statements that create a materially misleading impression—will
support claims for securities fraud.” Wilson, 671 F.3d at 130 (quoting S.E.C. v.
Gabelli, 653 F.3d 49, 57 (2d Cir. 2011)).
Many courts have found that scalpers have a duty to disclose their financial
interests in touted securities so that their promotional materials are not materially
misleading. See, e.g., Mausner v. Marketbyte LLC, No. 12-cv-2461-JM (NLS), 2013
WL 12073832, at **7-8 (S.D. Cal. Jan. 4, 2013) (finding that publishers of an online
newsletter had a duty to disclose that companies whose stock they touted
compensated them in cash, company stock, or both); United States v. Cannistraro,
800 F. Supp. 30, 82 (D.N.J. 1992) (finding that stock brokers’ statements regarding
certain securities “were rendered incomplete and misleading in that they failed to
provide the complete picture, i.e., that the author and disseminators of the
statements were financially interested in the success of the securities in the
market.”); S.E.C. v. Blavin, 557 F. Supp. 1304, 1312 (E.D. Mich. 1983), aff'd, 760
F.2d 706 (6th Cir. 1985) (finding that unregistered investment advisor’s “failure to
disclose his substantial ownership of stock in the companies he was touting, and his
intent to sell them soon after recommending that they be bought, was a material
omission in violation of § 10(b).”).
In addition, some courts have found that scalpers have a relationship or trust
or confidence with their subscribers that gives rise to a duty to disclose their
32

interests in touted stock. See, e.g., S.E.C. v. Park, 99 F. Supp. 2d 889, 889-90 (N.D.
Ill. 2000) (denying motion to dismiss Section § 10(b) and Rule 10b-5 claims against
promoters because “it is possible that Defendants may have a relationship of trust
and confidence with its subscribers so as to impose on them a duty to disclose their
scalping activity”); Zweig v. Hearst Corp., 594 F.2d 1261, 1268 (9th Cir. 1979)
(finding that newspaper columnist who served as “an informal financial adviser” to
his readers and who “benefited from his relationship with his readers” had a duty to
disclose his stock ownership because “with knowledge of the stock’s market and an
intent to gain personally, he encouraged purchases of the securities in the
market.”).
Under both lines of cases, the SEC’s allegations are sufficient to state a
claim; the SEC has not failed to assert an actionable duty to disclose.
b)

Failure to Disclose Intent to Sell

Thompson next challenges the SEC’s allegations that the newsletters’
disclaimers were materially misleading because they “misstated the Defendants’
intentions with respect to the shares they held”, stating that they “‘may’ sell their
shares when, in fact, their intent all along was to sell their entire positions, if
possible” and, “[i]n fact, at the time of many of these these misleading disclosures
Defendants had already begun the process of selling their positions.” (See Compl.
¶¶ 25 (Blast); 45 (Blue Gem); 68 (Lyric Jeans); 83 (Smart); accord ¶ 94 (Mass
Hysteria).) Thompson contends that the disclosures that he “may” sell the five

33

issuers’ stock were not materially misleading. (See ECF No. 43 at 49-50.) He raises
two arguments in this regard, neither of which succeeds at this stage.
Thompson first argues that a “will sell” disclosure would not have been
appropriate because penny stocks trade in thinly traded markets where there may
not always be an opportunity to sell. (See ECF No. 43 at 49.) The SEC does not
contend, however, that Thompson should have made a definitive “will sell”
disclosure. Rather, the SEC argues that defendants should have disclosed that
their “intent all along was to sell their entire positions, if possible”. (Compl. ¶¶ 25,
45, 68, 83, 94 (emphases added).) This allegation is sufficient to pass muster.
Thompson further argues that the “may sell” disclosure was not materially
misleading because this language conveys that Thompson was permitted, but not
required, to sell. (See ECF No. 43 at 49-50.) Thompson bases this argument
exclusively on Wilson. See 671 F.3d 120. In Wilson, plaintiff, a purchaser of
auction rate securities (“ARS”) for which Merrill Lynch served as the broker-dealer,
sued Merrill Lynch for market manipulation under Section 10(b) and Rule 10b-5(a)
and (c). Id. at 123-24. Plaintiff alleged that Merrill Lynch manipulated the ARS
market by placing “support bids” in auctions where it served as sole or lead dealer
without adequately disclosing the practice. Id. at 124. The district court granted
Merrill Lynch’s motion to dismiss. Id. at 127-28. At issue on appeal was whether
Merrill Lynch’s disclosure that it “may routinely” place such bids was incomplete
and misleading in light of the fact that, according to plaintiff, Merrill Lynch placed
such bids in every auction. Id. at 131.
34

The Second Circuit concluded that Merrill Lynch’s disclosures were not
materially misleading for two reasons. The Second Circuit first found that, contrary
to plaintiff’s argument on appeal, the complaint itself did not adequately plead that
Merrill Lynch always placed support bids in every ARS auction. Id. at 132-33.
Thus, the Court held that, “If Merrill’s intention was, as [plaintiff] alleges, to place
support bids in every single auction unless it decided to let certain auctions fail or
withdraw from the market altogether, we think that Merrill fairly disclosed that
intention by stating that it ‘may routinely’ place such bids.” Id. at 133 (emphasis
added). The Second Circuit also reasoned that although plaintiff “read[] the word
‘may’ as speaking to the likelihood that Merrill would place support bids, an
investor could more easily understand the word as disclosing merely that Merrill
was permitted, but not required, to place” such bids. Id.
The circumstances in this case are materially different from those in Wilson,
requiring a different result. To begin with, Wilson involved a market manipulation
claim, whereas here, Thompson challenges a disclosure claim. Further, unlike in
Wilson, where plaintiff alleged that Merrill Lynch intended to place support bids in
only some circumstances—that is, in all auctions except those it decided to let fail or
from which it sought to withdraw—see id., here the SEC alleges that Thompson
always intended to sell the issuers’ stock (see Compl. ¶¶ 3, 25, 45, 68, 83, 94). This
distinction is critical. In Wilson, the Second Court found adequate a disclosure
reflecting some uncertainty (Merrill Lynch “may routinely” place support bids) in
part because the plaintiff alleged that Merrill Lynch harbored an uncertain intent
35

(the intent to place support bids “unless” it decided otherwise). Here, by contrast,
the SEC has alleged that Thompson intended to always sell his shares wherever
possible. In this context, the SEC’s allegations are sufficient at this stage.
Moreover, the Court finds it more plausible here than in Wilson that a
reasonable investor would construe the word “may” as “speaking to the likelihood”
of Thompson selling as opposed to disclosing that Thompson “was permitted, but
not required” to sell. See Wilson, 671 F.3d at 133. In Wilson, the disclosure at issue
appeared in a document describing auction practices and procedures alongside at
least two other statements describing what Merrill Lynch was “permitted” to do.
See id. at 125-26. Given the complexities of the ARS market, and the context of the
disclosures, it would be reasonable to construe the phrase “may” as describing
Merrill Lynch’s authority to place support bids. The word “may” can naturally take
on a different meaning where, as here, it appears in short disclaimers referring to
sales in the general market, as opposed to documents describing complicated
procedures governing a self-created auction.
c)

Failure to Disclose Correct Compensation Received

Thompson next submits that a disclosure that he received 1.5 million shares
of Blue Gem when he actually received more than 3 million shares is immaterial as
a matter of law. (ECF No. 43 at 55.) The Court disagrees. The Second Circuit has
recognized that “[a]ny receipt and amount of [] compensation are material
information”. Ware, 577 F.3d at 448. Disclosures misstating the amount of
compensation received are actionable not only under Section 17(b), but also under
36

Section 10(b), Rule 10b-5 and Section 17(a). The SEC’s allegation is sufficient to
pass muster.
d)

Failure to Allege Knowledge of Falsity

Thompson next argues that certain statements are not actionable because the
SEC failed to allege Thompson knew they were false. (See ECF No. 43 at 55-57
(discussing Compl. ¶¶ 40 (alleging that newsletter described a research analyst that
favored the touted stock as independent without disclosing that it in fact was
funded by one of the defendants), 90 (alleging that newsletter misleadingly stated
that “Mass Hysteria’s core management team had a combined $1.36 billion in box
office sales.”).) In both instances, however, the SEC alleged that Thompson (and
the other defendants) either “knew that many or all of their statements were false
and/or misleading or recklessly disregarded their truth or falsity.” (Compl. ¶ 42;
accord id. ¶ 91.) The SEC’s allegations thus state a claim.11
e) Failure to Disclose that Thompson Was Acting in Concert
with Other Individuals
Thompson next seeks dismissal on the basis that, contrary to the SEC’s
allegations, he was not required to disclose that he was acting in concert with other
newsletter publishers in promoting the stock. (See ECF No. 43 at 48-49.)
Thompson argues that this information is not required under Section 17(b), and

The Court notes that, in his motion, Thompson asserts that the allegation regarding the movie
industry experience of Mass Hysteria’s management team is not false and is based on the “film
credits and careers of Mass Hysteria’s management, Dan Grodnik and Pat Proft, who were
associated with franchises such as National Lampoon, Naked Gun and Scary Movie”. (ECF No. 43 at
56-57.) Thompson cites no support in the record for the statement. Therefore, the Court does not
credit this statement for purposes of resolving this motion.
11

37

that “there is no principled basis on which to invent and superimpose on the statute
a disclosure obligation regarding the extent or mechanics of a promotion.” (Id. at
49.)
Thompson misunderstands the nature of the SEC’s allegations in this regard.
The SEC does not assert that disclosure of this information was required under
Section 17(b). Instead, the SEC asserts that acting in concert with other newsletter
publishers is itself deceptive conduct that violates Section 10(b) and Rule 10b-5(a)
and (c) and Sections 17(a)(1) and (3). (See ECF No. 53 at 46-48.) Thompson does
not challenge this allegation.
f)

Statements of Corporate Optimism and Opinion

Thompson also asserts that certain statements are immaterial puffery or
non-actionable statements of opinion. (See ECF No. 43 at 50-57.) The first
grouping of statements he challenges on this ground are optimistic, forward-looking
statements about the future performance of the Blast, Blue Gem and Lyric Jeans
penny stocks being touted in particular newsletters. (See Compl. ¶¶ 19 (statement
that Blast is a “hidden gem” that “could be ready to make a power move” and could
“potentially explode . . . towards $.10 or higher” and that Thompson (and others)
“believe Blast is flying under the radar” and that “there are amazing gains to be
made here”) (cited in ECF No. 43 at 52), 36-37 (statements that Blue Gem stock
“could” rise to $1.00 per share and that defendants’ analysts were “absolutely
confident in their products, business model and management!”) (cited in ECF No. 43
at 55), 58 (statement that Lyric Jeans “has the potential to bring our subscribers
38

monster returns” and “has more fundamentals than any other stock our team has
been able to find at these price levels”) (cited in ECF No. 43 at 56).)
Statements of general corporate optimism generally do not give rise to
securities violations. IBEW Local Union No. 58 Pension Trust Fund & Annuity
Fund v. Royal Bank of Scotland Grp., PLC, 783 F.3d 383, 392 (2d Cir. 2015)
(citations omitted); see also Rombach v. Chang, 355 F.3d 164, 174 (2d Cir. 2004)
(explaining that, “[u]p to a point, companies must be permitted to operate with a
hopeful outlook”). However, “opinions or predictions are not per se inactionable
under the securities laws.” In re Int’l Bus. Machines Corporate Sec. Litig., 163 F.3d
102, 107 (2d Cir. 1998) (citations omitted). “Statements regarding projections of
future performance may be actionable under Section 10(b) or Rule 10b-5 if they are
worded as guarantees or are supported by specific statements of fact, or if the
speaker does not genuinely or reasonably believe them.” Id. (citations omitted); see
also Kleinman v. Elan Corp., plc, 706 F.3d 145, 153 (2d Cir. 2013) (“Subjective
statements can be actionable only if the ‘defendant’s opinions were both false and
not honestly believed when they were made.’”) (quoting Fait v. Regions Fin. Corp.,
655 F.3d 105, 113 (2d Cir. 2011)). Here, the SEC plausibly alleges that Thompson
(and the other defendants) did not reasonably believe their statements.12 See In re

With respect to the Blue Gem, Lyric Jeans, Smart Holdings and Mass Hysteria promotions, the
SEC alleges that “Defendants either knew that many or all of their statements were false and/or
misleading or recklessly disregarded their truth or falsity.” (See Compl. ¶¶ 42 (Blue Gem), 65 (Lyric
Jeans), 80 (Smart Holdings); accord id. ¶ 91 (Mass Hysteria).) Likewise, with respect to the Blast
promotion, the SEC alleges that “Defendants failed to inform investors that their own undisclosed
trading contributed to much of the favorable price movements and increase in volume” they
predicted, an allegation that suggests they did not reasonably believe that the securities
independently had the touted value. (See id. ¶ 22.)
12

39

Int’l Bus. Machines Corporate Sec. Litig., 163 F.3d at 107. These allegations suffice
to state a claim.
The Supreme Court’s decision in Omnicare, Inc. v. Laborers Dist. Council
Constr. Indus. Pension Fund—a case upon which Thompson heavily relies—does
not counsel a different result. See 135 S. Ct. 1318 (2015). Omnicare involved
securities fraud claims premised on opinion statements in registration statements.
The opinion construed Section 11 of the Securities Act, an antifraud provision not at
issue here. See 15 U.S.C. § 77(k)(a). Nevertheless, insofar as Omnicare does apply
here,13 it supports, rather than undermines the Court’s finding that the projections
are actionable. Omnicare’s central holding is that an opinion statement in a
registration statement is actionable “if either ‘the speaker did not hold the belief she
professed’ or ‘the supporting fact she supplied were untrue.’” See Tongue, 816 F.3d
at 209 (quoting Omnicare, 135 S. Ct. at 1327). This standard is wholly consistent
with the “reasonable belief” standard that precludes dismissal here.
The second allegation Thompson challenges as a non-actionable opinion is an
alleged statement, in a newsletter, comparing OTC Solution’s Smart Holdings
listing to an initial public offering. (See Compl. ¶ 75 (statement that a listing of

The Second Circuit has not directly held that Omnicare applies to Section 10(b), Rule 10b-5 or
Section 17(a) claims. However, several recent cases suggest that Omnicare would apply to all
antifraud provisions of the securities laws. In Tongue v. Sanofi, the Second Circuit applied
Omnicare to securities fraud claims arising under Section 10(b), Rule 10b-5 in addition to Section 11
without distinguishing among those provisions. See 816 F.3d 199, 211-12 (2d Cir. 2016). Further, in
Cox v. Blackberry Ltd., the Second Circuit described Omnicare as a “significant development” that
occurred after the district court rendered its decision on a Section 10(b) and Rule 10b-5 claim. See
660 F. App’x 23, 25-26 (2d Cir. 2016). Lastly, in Special Situations Fund III QP, L.P. v. Deloitte
Touche Tohmatsu CPA, Ltd., the Second Circuit assumed, arguendo, that Omnicare applied to a
securities fraud claim under Section 18 of the Exchange Act and construed the claim under the
Omnicare standard. See 645 F. App’x 72, 76 n.3 (2d Cir. 2016), cert. denied, 137 S. Ct. 186 (2016).
13

40

Smart Holdings on OTC’s marketplace was “‘like’ an initial public offering, giving
investors a first look at the company”); see also id. ¶ 80 (“Among other things,
Defendants knew or recklessly disregarded the fact that a listing on the OTC Link
market place was not like an IPO.”).) While there is some subjectivity inherent in
any comparison statement, at this stage of the case, the Court finds that the crux of
this allegation appears to be factual. The alleged fact conveyed through the
statement was that investors would have the opportunity to invest in Smart
Holdings in the first instance. The SEC alleges that this representation was
materially misleading because there had previously been a forward stock split
resulting in defendants and several other entities owning substantial portions of the
outstanding Smart Holdings stock. (See Compl. ¶ 73.) This allegation suffices to
state a claim.
g)

Bespeaks Caution Doctrine

Thompson lastly argues that the newsletters’ forward-looking statements are
not actionable because they are “accompanied by cautionary language and extensive
disclaimers” that bespeak caution. (ECF No. 43 at 54.) The SEC responds that the
bespeaks caution doctrine does not apply here, but that even if it did, Thompson
does not satisfy its requirements. (See ECF No. 53 at 53.)
At the outset, the Court notes that the federal securities laws have two
separate, but similar, protections for forward-looking statements: the common law
bespeaks caution doctrine and the statutory safe harbor of the Private Securities
Litigation Reform Act (“PSRLA”). See Iowa Pub. Emps.’ Ret. Sys. v. MF Global,
41

Ltd., 620 F.3d 137, 141-42 (2d Cir. 2010) (distinguishing bespeaks caution doctrine
from PSLRA safe-harbor provision); Rombach, 355 F.3d at 173 (same). Both hold
that forward-looking statements are non-actionable if they are accompanied by
sufficient cautionary language. See Rombach, 355 F.3d at 173.
The Court agrees with the SEC that the PSLRA’s statutory safe harbor does
not apply here. There are two independent reasons. The first is that the safe
harbor applies only to private actions, not enforcement actions. See 15 U.S.C. § 77z2(c) (providing that safe harbor for forward-looking statements applies only in
private actions); 15 U.S.C. § 78u-5(c) (same); see also S.E.C. v. U.N. Dollars Corp.,
No. 01-cv-9059 (AGS), 2003 WL 192181, at *2 (S.D.N.Y. Jan. 28, 2003), aff'd sub
nom. S.E.C. v. Harris, 96 F. App'x 778 (2d Cir. 2004); S.E.C. v. E-Smart Techs., Inc.,
74 F. Supp. 3d 306, 324 (D.D.C. 2014). The second is that the statutory bespeaks
caution doctrine does not apply to penny stocks. See 15 U.S.C. § 77z-2(b)(1)
(providing that statutory safe harbor does “not apply to a forward-looking statement
. . . that is made with respect to the business or operations of the issuer, if the issuer
. . . issues penny stock”); 15 U.S.C. § 78u-5(b)(1)(C) (same); see also U.N. Dollars
Corp., 2003 WL 192181, at *2.
The Court notes, however, that Thompson did not attempt to invoke the
PLSRA safe harbor. His motion expressly references the “bespeaks caution
doctrine”, not the statutory protection, and exclusively cites authority interpreting
the common law doctrine. (See ECF No. 43 at 54 (citing Virginia Bankshares v.
Sanberg, 501 U.S. 1097 (1991); Harden v. Raffensberger, Hughes & Co., Inc., 65
42

F.3d 1392 (7th Cir. 1995); San Leandro Emergency Med. Grp. Profit Sharing Plan v.
Phillip Morris Cos., Inc., 75 F.3d 801 (2d Cir. 1996); and In re Sec. Litig., 383 F.
Supp. 2d 566 (S.D.N.Y. 2005)).) There is no doubt that the common law bespeaks
caution doctrine invoked by Thompson applies in enforcement actions and actions
involving penny stocks. See S.E.C. v. Meltzer, 440 F. Supp. 2d 179, 191 (E.D.N.Y.
2006) (rejecting bespeaks caution doctrine on the merits in enforcement action
involving promotions of penny stock). The Court does not understand the SEC to
argue otherwise.14
The Court concludes that, at this stage of the case, the bespeaks caution
doctrine appears to be inapplicable. To begin with, many of the allegations
Thompson identifies are not covered by the doctrine because they are statements
concerning present facts, not forward-looking statements. (See Compl. ¶ 40
(allegation that newsletters referred to a company that recommended Blue Gem
shares was an independent analyst, when it in fact was funded by Van Nguyen)
(cited in ECF No. 43 at 55), 44 (allegation that ExplicitPicks.com disclosed he
received 1.5 million shares of Blue Gem stock in the promotion, when it in fact
received more than 3.7 million shares) (cited in ECF No. 43 at 55), 75 (allegation
that newsletter stated Smart Holdings listing was “like” an initial public offering,
when it in fact was not) (cited in ECF No. 43 at 56), 90 (allegation that newsletter
stated that Mass Hysteria’s management team had a combined $1.36 billion in box
Although the SEC states, in its opposition, that the “bespeaks caution defense” does not apply in
enforcement actions or in actions involving penny stocks, it cites primarily to the PSLRA safe harbor
and cases construing it. (See ECF No. 53 at 53 (citing 15 U.S.C. §§ 77z-2(c), 77z-2(b)(1), 78u5(b)(1)(C); U.N. Dollars Corp., 2003 WL 192181; E-Smart Techs., Inc., 74 F. Supp. 3d 306, but also
United States v. Levy, No. 11-cr-62 (PAC), 2014 WL 1483964 (S.D.N.Y. Apr. 9, 2014)).)
14

43

office sales experience, when they in fact did not) (cited in ECF No. 43 at 56-57).)
“It is settled that the bespeaks-caution doctrine applies only to statements that are
forward-looking.” Iowa Pub. Emps.’ Ret. Sys., 620 F.3d at 142 (citing P. Stolz
Family P’ship L.P. v. Daum, 355 F.3d 92, 96-97 n.3 (2d Cir. 2004)).
The balance of the statements Thompson identifies as protected by the
bespeaks caution doctrine are the above-described forward-looking statements
concerning the future performance of the Blast, Blue Gem and Lyric Jeans stocks.
(See Compl. ¶¶ 19, 36-37, 58.) These statements fall within the ambit of the
bespeaks caution doctrine because they are prospective. See P. Stolz Family P’ship,
355 F.3d at 96-97.
Even so, however, the doctrine certainly does not require dismissal at this
stage. The bespeaks caution doctrine renders forward-looking statements nonactionable only if the speaker “warns of the specific contingency that lies at the
heart of the alleged misrepresentation.” See id. at 97 (citing Hunt v. Alliance N.
Am. Gov’t Income Trust, Inc., 159 F.3d 723, 729 (2d Cir. 1998)). In I. Meyer Pincus
& Associates, P.C. v. Oppenheimer & Co., Inc., for example, the Second Circuit
applied the bespeaks caution doctrine to statements that securities offered in a
prospectus “frequently” traded at a premium because the prospectus also disclosed
that the shares “frequently” traded at a discount and that the offeror could not
predict the shares’ ultimate trading prices. See 936 F.2d 759, 762-63 (2d Cir. 1991).
Similarly, in Luce v. Edelstein, the Second Circuit applied the bespeaks caution
doctrine to statements in an offering memorandum concerning the potential cash
44

and tax benefits of the offered securities because the memorandum also warned
investors that the predictions were “necessarily speculative in nature”, that “no
assurance could be given that these projections would be realized”, and that “actual
results may vary from the predictions and these variations may be material.” See
802 F.2d 49, 56 (2d Cir. 1986) (alterations omitted).
Unlike in I. Meyer Pincus and Luce, the disclaimers Thompson identifies do
not appear to bespeak caution about the newsletters’ optimistic price projections.
Thompson cites language informing prospective investors about the source of the
information, instructing them not to “rely solely on the information presented”, and
advising them to conduct their own due diligence. (See ECF No. 43 at 54.) These
disclosures do not expressly warn of the specific risk inherent in the projections,
however: that the optimistic price increases might not come to fruition.
Consequently, the bespeaks caution doctrine does not require dismissal.15
IV.

CONCLUSION
For the reasons set forth above, Thompson’s motion for summary judgment

(ECF No. 42) is DENIED. Discovery remains stayed in this matter until August 11,
2017 or the resolution of the parallel criminal proceeding, whichever is earlier. (See
ECF No. 39.)

The bespeaks caution doctrine does not appear to apply at this stage for the additional reason that
the SEC has alleged that Thompson knew the price projections were untenable. See Rombach, 355
F.3d at 173 (“‘The doctrine of bespeaks caution provides no protection to someone who warns his
hiking companion to walk slowly because there might be a ditch ahead when he knows with near
certainty that the Grand Canyon lies one foot away.’”) (quoting In Re Prudential Sec. Inc. P'ships
Litig., 930 F. Supp. 68, 72 (S.D.N.Y. 1996)).
15

45

The parties shall provide another update to the Court on the status of the
parallel criminal proceeding not later than June 1, 2017, or within two weeks
of the resolution of any appeals to the Appellate Division, whichever comes
first.
The Clerk of Court is directed to terminate the motion at ECF No. 42.
SO ORDERED.
Dated:

New York, New York
March 2, 2017

KATHERINE B. FORREST
United States District Judge

46