United States Securities and Exchange Commission v. Collector's Coffee Inc. et al

Filing 976

DECISION AND ORDER: Accordingly, for the reasons stated above, it is hereby ORDERED that the motion of the plaintiff Securities and Exchange Commission for summary judgment on Count Five of the First Amended Complaint (Dkt. No. 134) is GRANTED, and it is further ORDERED that the motions of the Defendants Mykalai Kontilai and Collector's Coffee Inc. for summary judgment of on Count Five of the First Amended Complaint are DENIED. SO ORDERED. (Signed by Judge Victor Marrero on 11/17/2021) (js)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-----------------------------------X
11/17/21
UNITED STATES SECURITIES AND
:
EXCHANGE COMMISSION,
:
:
Plaintiff,
:
:
19 Civ. 4355 (VM)
- against :
:
COLLECTOR’S COFFEE INC., et al.,
:
DECISION AND ORDER
:
Defendants.
:
-----------------------------------X
VICTOR MARRERO, United States District Judge.
In May 2019, the United States Securities and Exchange
Commission

(“SEC”)

brought

civil

fraud

charges

against

Mykalai Kontilai (“Kontilai”) and Collectors Coffee, Inc.
(“CCI,” and collectively with Kontilai, “Defendants”). Now
before the Court are the parties’ cross-motions for Summary
Judgment on Count V of the Amended Complaint (Dkt. No. 134)
pursuant to Federal Rule of Civil Procedure 56. (See “SEC
Motion,” Dkt. No. 879; “Kontilai Motion,” Dkt. No. 887; “CCI
Motion,” Dkt. No. 888.) For the reasons stated herein, the
Court GRANTS the SEC Motion for summary judgment and DENIES
the Kontilai and CCI Motions for summary judgment.
I.
A.

BACKGROUND

RELEVANT PROCEDURAL BACKGROUND
Count

Defendants

V

of

the

violated

Amended
Rule

Complaint

21F-17

of

the

alleges

that

Exchange

Act

the
by

impeding individuals’ communication with the SEC regarding

1

potential

securities

laws

violations

by

enforcing

or

threatening to enforce confidentiality agreements that would
prevent individuals’ communications thereof. On June 26,
2020, Defendants filed a motion to “dismiss, strike portions
of, and enter judgment on the pleadings” of the Amended
Complaint. (See “Motion,” Dkt. No. 416.) On May 17, 2021,
Magistrate

Judge

Recommendation

Gorenstein

recommending

submitted

the

Court

a

deny

Report
the

and

Motion,

specifically holding that Count V survived the Defendants’
arguments related to its legal sufficiency. (See “R&R,” Dkt.
No. 918.) On May 24 and June 1, 2021, the Court received
Defendants’

short-form,

(Dkt.

No.

922.),

and

long-form,

(“Objections,” Dkt. No. 926), objections to Magistrate Judge
Gorenstein’s R&R. The SEC opposed the Objections on June 15,
2021. (See “Opposition,” Dkt. No. 930.)
In their motion before Magistrate Judge Gorenstein,
Defendants argued that the SEC’s Rule 21F-17 claim should be
dismissed as “barred by the litigation privilege” and outside
the

SEC’s

rulemaking

authority.

(See

Motion

at

3,

9.)

Magistrate Judge Gorenstein rejected both arguments, finding
that no litigation privilege had ever been applied to bar a
federal cause of action, nor did Defendants’ Rule 21F-17

2

arguments address the salient points regarding the SEC’s
rulemaking authority. (See R&R at 9-11.)
In their motions before this Court, Defendants then
objected to Magistrate Judge Gorenstein’s R&R on two points.
First, Defendants argued that in promulgating Rule 21F-17,
the SEC exceeded its statutory authority. (Objections at 35.) Second, Defendants argued that Rule 21F-17 violates the
First Amendment of the United States Constitution. (Id. at
13-14.).

On

July

21,

2021,

the

Court

rejected

those

objections, finding that Rule 21F-17 was promulgated using
proper rulemaking authority and otherwise was not improper
under the First Amendment. (See “Order,” Dkt. No. 940.)
On April 16, 2021, defendant Kontilai filed a letter
pursuant to Section II.A. of the Court’s Individual Practices
requesting a premotion conference to obtain permission to
file a motion for summary judgment on all claims in the
Amended

Complaint.

(See

Dkt.

No.

887.)

That

same

day,

defendant Collector’s Coffee Inc. (“CCI”) filed a similar
letter. (See Dkt. No. 886.). The SEC filed an opposition to
these two letter requests on April 26, 2021. (See Dkt. No.
898.)
The SEC also filed a letter pursuant to Section II.A. of
the

Court’s

Individual

Practices

requesting

a

premotion

conference and leave to file a motion for partial summary

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judgment as to Count V. (Dkt. No. 879.) Kontilai and CCI filed
oppositions on April 23, 2021. (See Dkt. Nos. 895, 896.)
On June 17, 2021, the Court denied each of these requests
insofar as they requested a conference and further briefing
on the parties’ anticipated motions. (See Dkt. No. 934.) In
that Order, the Court denied Defendants’ request to file full
summary judgment motions and instead indicated it would treat
the

parties’

correspondence

as

a

fully

briefed

summary

judgment motion focused only on Count V of the Amended
Complaint. 1 On July 1, 2021, the Defendants submitted an
additional letter “clarifying the relevant undisputed factual
record.” (See Dkt. No. 938.)
B.

FACTUAL BACKGROUND 2
The

Court

restricts

its

discussion

of

the

factual

background of this matter to those facts relevant only to
Count V of the Amended Complaint. In 2015, CCI and Kontilai

1

See Kapitalforeningen Lægernes Invest. v. United Techs. Corp., 779 F.
App’x 69, 70 (2d Cir. 2019) (affirming the district court ruling
deeming an exchange of letters as fully submitted motion).
2

Except as otherwise noted, the following background derives from the
facts as set forth by Defendants in their Rule 56.1 statement of
undisputed material facts. (See “Defs SUMF,” Dkt. No. 938.) The Court has
also considered the full record submitted by the parties, including
factual averments and admissions made previously in the record. No further
citations to the record will be made herein except as specifically quoted.
The Court construes any disputed facts discussed in this section and the
justifiable inferences arising therefrom in the light most favorable to
the nonmovant for each motion, as required under the standard set forth
in Section II below.

4

entered into a stock purchase agreement with investors (“2015
Investor Agreement”) that contained, in part, a provision
which stated the investors agreed they would not:
directly or indirectly, individually, collectively or
otherwise, contact any third-party, including, but not
limited to governmental or administrative agencies or
enforcement bodies, for the purpose of commencing or
otherwise prompting investigation or other action
relative to [Collectors Café] or the subject matter
herein.
(Defs SUMF, at 2, Exhibit 1.) On June 26, 2017, CCI, Kontilai,
and

two

resolve

investors
prior

entered

investor

into

settlement

litigation

(the

agreements

“2017

to

Settlement

Agreement”). Much like the 2015 Investor Agreement, the 2017
Settlement Agreement contained a provision that stated:
The Shareholders, for themselves and their counsel and
advisors, confirm that they are not aware of, and have
not had to date, and will not initiate on a going forward
basis, any communications with any regulatory agencies
such as the United States Securities and Exchange
Commission or any other Federal, State, or Local
governmental agency concerning the matters related to
this Agreement. Nothing herein would prevent the parties
from responding to, and/or fully complying with, a
subpoena or other governmental and or regulatory
compulsory process.
(Defs SUMF, at 2, Exhibit 2.)
Finally, it is undisputed that the Defendants actually
enforced these provisions in at least one instance, suing an
investor for breach of the confidentiality clause after they
communicated with the SEC. (See “Answer,” Dkt. No. 241 at ¶

5

6.)

The

Defendants

likewise

admit

they

“informed

other

investors about this lawsuit.” (See id.)
C.

THE PARTIES’ ARGUMENTS
The SEC argues that summary judgment should be granted

in its favor on Count V because there is no dispute as to the
conduct underlying its Rule 21F-17 claim. The SEC argues the
only issue about which the parties disagree is whether the
Defendants’

conduct

actually

violates

Rule

21F-17,

and

whether the Rule was promulgated appropriately and is not
otherwise unconstitutional. The SEC contends the clear text
of Rule21F-17 incorporated the conduct at issue here, and the
rule was promulgated in a valid exercise of the Commission’s
authority.
Defendants respond that Rule 21F-17 should be struck
down because the SEC exceeded its statutory authority in
promulgating Rule 21F-17. And, Defendants argue, Rule 21F-17
violates

the

First

Amendment

of

the

United

States

Constitution. Finally, Defendants argue that their conduct
does not violate Rule 21F-17 because no investor that was
allegedly impeded was ever an employee of the Defendants.
II.

LEGAL STANDARD

In connection with a motion for summary judgment under
Federal Rule of Civil Procedure 56, “[s]ummary judgment is
proper if, viewing all the facts of the record in a light

6

most favorable to the non-moving party, no genuine issue of
material fact remains for adjudication.” Samuels v. Mockry,
77 F.3d 34, 35 (2d Cir. 1996) (citing Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 247-50 (1986)). The role of a court
in ruling on such a motion “is not to resolve disputed issues
of fact but to assess whether there are any factual issues to
be tried, while resolving ambiguities and drawing reasonable
inferences against the moving party.” Knight v. U.S. Fire
Ins. Co., 804 F.2d 9, 11 (2d Cir. 1986).
The moving party bears the burden of proving that no
genuine issue of material fact exists or that, because of the
paucity of evidence presented by the nonmovant, no rational
jury could find in favor of the nonmoving party. See Gallo v.
Prudential Residential Servs., L.P., 22 F.3d 1219, 1223–24
(2d Cir. 1994). “[T]he mere existence of some alleged factual
dispute between the parties will not defeat an otherwise
properly

supported

motion

for

summary

judgment;

the

requirement is that there be no genuine issue of material
fact.” Anderson, 477 U.S. at 247–48.
In determining whether the moving party is entitled to
judgment as a matter of law, the court must “resolve all
ambiguities and draw all justifiable factual inferences in
favor of the party against whom summary judgment is sought.”
Major League Baseball Props., Inc. v. Salvino, Inc., 542 F.3d

7

290, 309 (2d Cir. 2008). Though a party opposing summary
judgment may not “rely on mere conclusory allegations nor
speculation,” D’Amico v. City of New York, 132 F.3d 145, 149
(2d Cir. 1998), summary judgment is improper if any evidence
in the record allows a reasonable inference to be drawn in
favor of the opposing party, see Gummo v. Village of Depew,
75 F.3d 98, 107 (2d Cir. 1996).
III. DISCUSSION
The Court has discussed extensively the legal issues
raised by Defendants in their oppositions to summary judgment
in

the

denying

Order
the

adopting
motion

to

Magistrate
dismiss

Judge
the

Gorenstein’s

Amended

R&R

Complaint.

Defendants here essentially repeat the same legal arguments
with respect to the SEC’s rulemaking authority and the First
Amendment. While this circumstance may not be Defendants’
fault, as they submitted briefing for this motion prior to
the Court’s Order rejecting a legal attack on Rule 21F-17,
nonetheless – for the same reasons the Court elaborated on in
its Order - the Court is still not persuaded that Rule 21F17 exceeds the SEC’s rulemaking nor that it violates the First
Amendment. Therefore, as to the legal arguments raised, the
Court reaffirms its conclusion that Rule 21F-17 constitutes
an appropriate exercise of the SEC’s rulemaking authority and
does not violate the First Amendment.

8

The only issue that remains to be resolved is whether
Defendants’ conduct actually violates Rule 21F-17. On this
point, the Court readily concludes that it does. Rule 21F-17
prevents any “person” from taking “any action to impede an
individual from communicating directly with the Commission
staff about a possible securities law violation, including
enforcing,

or

threatening

to

enforce,

a

confidentiality

agreement . . . with respect to such communications.” See 17
C.F.R. § 240.21F-17(a). The undisputed facts show that (1)
the Defendants entered into confidentiality agreements with
investors that expressly prevented them from communicating
with the SEC regarding securities laws violations and (2) the
Defendants actually sued to prevent such communications and
advertised

those

suits

in

order

to

chill

further

communication. These are undoubtedly “action[s] to impede”
communications,
prohibits

especially

“enforcing,

or

where

the

threatening

Rule
to

explicitly

enforce”

such

agreements. The Court therefore concludes that the Defendants
are liable on the SEC’s fifth claim.
IV.

ORDER

Accordingly, for the reasons stated above, it is hereby
ORDERED that the motion of the plaintiff Securities and
Exchange Commission for summary judgment on Count Five of the

9

First Amended Complaint (Dkt. No. 134) is GRANTED, and it is
further
ORDERED

that

the

motions

of

the

Defendants

Mykalai

Kontilai and Collector’s Coffee Inc. for summary judgment of
on Count Five of the First Amended Complaint are DENIED.
SO ORDERED.
Dated: New York, New York
17 November 2021

_________________________
__
_______________
___
_ __
_________________________
VICTOR MARRERO
VICTOR MARRERO
VICTOR ARR
U S D
U.S.D.J.
U.S.D.J.

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