Securities and Exchange Commission v. Im
OPINION AND ORDER: re: 17 MOTION to Dismiss Plaintiff's Complaint (ECF No. 1) filed by James H Im. For the foregoing reasons, the motion to dismiss is DENIED. Im shall file an answer within fourteen days of this order. The Clerk of Court is directed to close the motion at Docket Number 17. SO ORDERED. (Signed by Judge J. Paul Oetken on 2/12/2018) (ama)
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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
SECURITIES AND EXCHANGE
OPINION AND ORDER
-vJAMES H. IM,
J. PAUL OETKEN, District Judge:
This is a securities fraud case involving trading in commercial mortgage-backed
securites. According to the SEC, James Im lied to his customers about the price he had paid for
securities he was trying to resell. According to Im, he was just a salesman haggling for a good
deal. Im moves to dismiss the Complaint. For the reasons that follow, the motion is denied.
James Im was co-head of the commercial mortgage-backed securities (“CMBS”) trading
desk for Nomura Securities International. (Compl. ¶ 18.) CMBS are asset-backed bonds whose
underlying assets are commercial real estate loans. (Compl. ¶ 19.) CMBS are not publicly
listed, so trading generally takes place through dealers like Nomura. (Compl. ¶ 20.) Nomura
buys CMBS from its customers and resells them to other customers for a profit. (Compl. ¶ 25.)
The SEC alleges that Im misled Nomura’s customers in the following ways:
Im misrepresented the prices at which Nomura had bought the securities.
For example, when trying to sell CMBS, Im told potential customers that
he had bought the securities at a high price, in an attempt to get the
customer to pay a high price.
Im misrepresented the profit that Nomura was making on the deals—i.e.,
the difference between Nomura’s buying price and Nomura’s selling
price. For example, when selling securities, Im would try to raise the
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selling price by telling potential customers that Nomura’s profit was
lower than what it actually was.
Im misrepresented whether Nomura actually owned the securities it was
trying to sell. For example, when trying to sell securities to potential
buyers, Im told the buyer that he was still negotiating with third-party
sellers when, in reality, Nomura already owned the securities.
Im told potential customers about negotiations and conversations that
never actually took place in an attempt to close sales.
(Compl. ¶¶ 25–35.)
The Complaint alleges that Im’s fraudulent behavior generated hundreds of thousands of
dollars for Nomura’s CMBS trading desk. (Compl. ¶ 5.) Im received bonuses totaling $3.79
million, based in part on his fraudulent behavior. (Compl. ¶¶ 5, 80.)
The Complaint asserts that Im’s behavior violated Section 17(a) of the Securities Act of
1933, Section 10(b) of the Securities Exchange Act of 1934, and SEC Rule 10b–5. See 15
U.S.C. § 77q(a); 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b–5. The Complaint also alleges that
Im’s conduct aided and abetted Nomura’s violations of those laws. The Complaint seeks
injunctive relief, disgorgement, and monetary penalties.
To survive a motion to dismiss for failure to state a claim, plaintiffs must plead “only
enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly,
550 U.S. 544, 570 (2007). A claim is facially plausible when plaintiffs plead facts that would
allow “the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft
v. Iqbal, 556 U.S. 662, 678 (2009). “Courts must accept as true all well-pleaded factual
allegations in the complaint, and ‘draw [ ] all inferences in the plaintiff’s favor.’” Goonan v.
Fed. Reserve Bank of New York, 916 F. Supp. 2d 470, 478 (S.D.N.Y. 2013) (quoting Allaire
Corp. v. Okumus, 433 F.3d 248, 249–50 (2d Cir. 2006)).
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Im makes three arguments for dismissal: (1) that the Complaint does not adequately
allege that his misrepresentations were material, (2) that the Complaint does not adequately
allege that he acted with scienter, and (3) that the Complaint does not adequately allege aidingand-abetting liability. Each is discussed in turn.
Does the Complaint Adequately Allege Materiality?
“A misrepresentation is material under Section 10(b) of the Securities Exchange Act and
Rule 10b–5 where there is ‘a substantial likelihood that a reasonable investor would find the . . .
misrepresentation important in making an investment decision.’” United States v. Litvak, 808
F.3d 160, 175 (2d Cir. 2015) (alteration in original) (quoting United States v. Vilar, 729 F.3d 62,
89 (2d Cir. 2013)). But where the misstatements are “so obviously unimportant to a reasonable
investor that reasonable minds could not differ on the question of their importance,” the
misstatements may be immaterial as a matter of law. Wilson v. Merrill Lynch & Co., Inc., 671
F.3d 120, 131 (2d Cir. 2011) (quoting Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985))
(internal quotation marks omitted).
Im argues that his negotiating counterparts were sophisticated buyers, and that it was
normal—and expected—for parties to overstate their bargaining positions in search of the best
deal. He argues that buyers relied on their detailed market analysis, rather than Im’s unsolicited
statements about Nomura’s buying price, when making purchasing decisions.
The leading case here is United States v. Litvak, 808 F.3d 160 (2d Cir. 2015). Litvak was
criminally indicted for lying to potential customers about the price his firm had paid for
mortgage-backed securities. A jury convicted Litvak of securities fraud. On appeal, Litvak
argued that his misstatements were, as a matter of law, immaterial to a reasonable investor
because they did not relate to the underlying value of the securities. The Second Circuit
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disagreed, holding that the question of materiality—a mixed question of law and fact—was
properly reserved for the jury’s determination. The court pointed to the fact that several of
Litvak’s counterparties testified that the misrepresentations were important to them. Id. at 175–
76. For that reason, the court concluded that the buying price was a potentially material term.
The court also relied on the “longstanding principle enunciated by the Supreme Court
that § 10(b) should be construed not technically and restrictively, but flexibly to effectuate its
remedial purposes, and to protect against fraudulent practices, which constantly vary.” Id. at 177
(quoting Parkcentral Global Hub Ltd. v. Porsche Auto. Holdings SE, 763 F.3d 198, 221 (2d Cir.
2014) (per curiam) (internal quotation marks omitted)). The court concluded:
Finding Section 10(b) inapplicable here, as a matter of law, would
require an impermissibly technical and restrictive construction.
There is no dispute that Litvak misrepresented facts related to the
securities transactions at issue, and that several of his counterparties’
representatives testified at trial that they considered the
misrepresentations meaningful in the course of those transactions
and that they or their employers were harmed by Litvak’s
misleading course of conduct. . . . Thus, enforcement of Section
10(b) here is consistent with the Supreme Court’s instruction to
apply the statute flexibly . . . and with the statute’s purpose of
“remedy[ing] deceptive and manipulative conduct with the potential
to harm the public interest or the interests of investors.”
Id. (quoting Parkcentral Global Hub, 763 F.3d at 221, 209) (citations omitted).
Litvak is dispositive here. Im’s burden on this motion is a high one: he can prevail only
by showing that his misstatements are “so obviously unimportant to a reasonable investor that
reasonable minds could not differ on the question of their importance.” Wilson, 671 F.3d at 131.
But while Im’s motion argues that misstating one’s buying price cannot be material, Litvak holds
that it can. For now, it is enough for the SEC to allege that Im misstated Nomura’s buying price,
that the buying price is an important data point in the CMBS industry, and that the misstatements
affected the price that Nomura’s customers were willing to pay. This is why materiality “will
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rarely be dispositive in a motion to dismiss.” In re Morgan Stanley Info. Fund Sec. Litig., 592
F.3d 347, 360 (2d Cir. 2010); see also United States v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir.
1991) (noting that the Supreme Court has identified materiality as “especially well suited for jury
Does the Complaint Adequately Allege Scienter?
Im’s second argument is that the Complaint does not adequately allege scienter. “To
plead scienter under § 10(b) and Rule 10b-5, Plaintiffs must ‘state with particularity facts giving
rise to a strong inference that the defendant acted with the required state of mind.’” Menaldi v.
Och-Ziff Capital Mgmt. Grp. LLC, 164 F. Supp. 3d 568, 585 (S.D.N.Y. 2016) (quoting Tellabs,
Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 321 (2007)). “A strong inference of
fraudulent intent may be established either (a) by alleging facts to show that defendants had both
motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong
circumstantial evidence of conscious misbehavior or recklessness.” IKB Int’l S.A. v. Bank of Am.
Corp., 584 Fed. App’x. 26, 27–28 (2d Cir. 2014) (quoting Lerner v. Fleet Bank, N.A., 459 F.3d
273, 290–91 (2d Cir. 2006)).
Im argues that he had no motive to commit fraud. Even though the Complaint alleges
that his bonuses were tied to his sales figures, Im points to the Second Circuit’s opinion in ECA,
Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., which held that the
mere fact that a corporate executive’s compensation is tied to corporate earnings is too
Im points to the Seventh Circuit’s decision in United States v. Weimert, which
held that misstating one’s negotiating position—for example, saying “this is my final offer”
when it really is not—is too immaterial to constitute wire fraud. 819 F.3d 351, 358 (7th Cir.
2016). However, Weimert dealt with the mail and wire fraud statutes, which are significantly
different from securities statutes. See Litvak, 808 F.3d at 177 (noting the broad remedial scope
of Section 10(b)). Moreover, Litvak is binding authority on this Court, while Weimert is not.
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generalized to constitute motive to defraud. 553 F.3d 187, 201 (2d Cir. 2009). However, Im’s
financial gain was far more direct here: per the Complaint, Im made $3.79 million in bonuses
from Nomura based in significant part on the performance of the CMBS desk, which was
inflated through the alleged fraud. See ECA, 553 F.3d at 201 (acknowledging that incentive pay
could constitute motive to defraud if there is “a direct link between the compensation package
and the fraudulent statements”).
The Complaint also adequately alleges “strong circumstantial evidence of conscious
misbehavior or recklessness.” IKB, 584 Fed. App’x. at 27–28. Specifically, the Complaint
alleges that, after lying to a customer about the price at which Nomura bought CMBS, Im had
the following electronic conversation with the trader who had sold him the securities:
Im: he paid 78-24
Im: i told him i [bought] at 78-8 actually
Seller: nice one.
(Compl. ¶ 45.)
Im makes a fairly strong counterargument that the fact that he told a counterparty—with
whom he would presumably make deals in the future—about his misstatements shows that this
practice was commonplace in the industry and not fraudulent. However, at this point in the case,
the role of the seller in this scheme is unclear. As a result, the Court cannot read that
conversation to completely negate the scienter allegations. Moreover, the fact that Im asked the
seller to keep quiet renders “the inference of scienter cogent and at least as compelling as any
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opposing inference one could draw from the facts alleged.” Tellabs, 551 U.S. at 324. Time and
discovery may indeed show that Im’s statements were commonplace in the industry, and that
nobody really relied on them. But for now, the Complaint adequately alleges the elements of
Does the Complaint Adequately Allege Aiding and Abetting?
Im’s final argument is that the Complaint does not adequately allege that he aided and
abetted Nomura’s violations of the securities laws.
In order for a defendant to be liable as an aider and abettor in a civil enforcement action,
the SEC must prove: “(1) the existence of a securities law violation by the primary (as opposed
to the aiding and abetting) party; (2) ‘knowledge’ of this violation on the part of the aider and
abettor; and (3) ‘substantial assistance’ by the aider and abettor in the achievement of the
primary violation.” SEC v. DiBella, 587 F.3d 553, 566 (2d Cir. 2009) (quoting Bloor v. Carro,
Spanbock, Londin, Rodman & Fass, 754 F.2d 57, 62 (2d Cir. 1985)).
This argument fails too. Nomura is potentially liable for Im’s actions under the doctrine
of respondeat superior. Therefore, the Complaint properly alleges the three elements of aidingand-abetting liability: (1) Nomura violated the securities laws, (2) Im knew of the violation, and
(3) Im substantially assisted Nomura’s violation. See S.E.C. v. Tourre, No. 10 Civ. 3229, 2014
WL 61864, at *7 (S.D.N.Y. Jan. 7, 2014) (“[T]he fact that [the defendant] was an employee of
[his employer], acting within the scope of his employment . . . is sufficient to establish that he
aided and abetted a fraud by [his employer] . . . . Based on the evidence that there was a
fraudulent scheme to mislead investors, the jury could reasonably conclude that the scheme was
executed by [defendant’s employer] through its agents (of which [defendant] was one), and that
[defendant] then aided and abetted that primary violation. . . .”); see also id. (collecting cases).
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For the foregoing reasons, the motion to dismiss is DENIED. Im shall file an answer
within fourteen days of this order. The Clerk of Court is directed to close the motion at Docket
Dated: February 12, 2018
New York, New York
J. PAUL OETKEN
United States District Judge
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