Securities and Exchange Commission v. Bronson et al

Filing 21

OPINION AND ORDER: Defendants' Motion To Dismiss is denied. The Clerk of Court is respectfully directed to terminate the pending motion. (Dkt. No. 17.) SO ORDERED. (Signed by Judge Kenneth M. Karas on 3/31/2014) (lnl)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
Case No. 12-CV-6421 (KMK)
-vOPINION AND ORDER
EDWARD BRONSON and
E-LIONHEART ASSOCIATES, LLC,
d/b/a FAIRHILLS CAPITAL,
Defendants,
-andFAIRHILLS CAPITAL, INC.,
Relief Defendant.

Appearances:
Kevin McGrath, Esq.
Wendy Tepperman, Esq.
William Edwards, Esq.
Securities and Exchange Commission
New York, NY
Attorneys for Plaintiff
Alex Lipman, Esq.
Ashley Baynham, Esq.
James Michael Smith, Esq.
Nixon Peabody LLP
New York, NY
Attorneys for Defendants
Edward Bronson, E-Lionheart Associates, LLC, and
Fairhills Capital, Inc.
KENNETH M. KARAS, District Judge:
Plaintiff, the United States Securities and Exchange Commission (“SEC”) filed a
Complaint against Edward Bronson (“Bronson”) and E-Lionheart Associates, LLC

(“E-Lionheart” and, with Bronson, collectively “Defendants”), alleging violations of the
securities registration requirements under Sections 5(a) and 5(c) of the Securities Act of 1933
(the “Securities Act”), 15 U.S.C. §§ 77e(a) and 77e(c). The SEC also asserts a claim of unjust
enrichment against Relief Defendant Fairhills Capital, Inc. (“FCI” or “Relief Defendant”).
Bronson, E-Lionheart, and FCI jointly filed a Motion to Dismiss, which, for the reasons stated
herein, is denied.
I. Background
A. Factual Background
1. Bronson’s and E-Lionheart’s Penny Stock Scheme
The SEC alleges that Edward Bronson, operating through E-Lionheart, a company of
which he is the sole managing member, engaged in a scheme to purchase shares of penny stocks
from issuing companies and quickly resell them in violation of the applicable registration and
resale restrictions under the Securities Act.1 According to the SEC, by purchasing the securities

1

“Penny stocks” are securities issued by small companies that trade at less than $5 per
share. See Penny Stock Rules, U.S. Sec. and Exch. Comm’n, http://sec.gov/answers/penny.htm
(last visited Mar. 26, 2014). Penny stocks are not typically sold on securities exchanges, but
rather are traded in an over-the-counter market. See SEC v. China Energy Sav. Tech., Inc., No.
06-CV-6402, 2009 WL 875997, at *4 (E.D.N.Y. Mar. 27, 2009) (noting that penny stocks are
“generally sold in the over-the-counter . . . market and generally not listed on an exchange”)
(internal quotation marks omitted) (alteration in original).
The specific penny stocks at issue in this case allegedly were quoted and traded on OTC
Link, an electronic quotation and trading system. (Compl. ¶ 10.) Penny stocks may be difficult
to accurately price and are particularly susceptible to market manipulation due to the lack of
liquidity in the market, minimal standard requirements for over-the-counter trading, paucity of
publicly available information on the companies issuing these stocks, and the fact that many of
these companies are either newly formed or approaching bankruptcy. See The Lowdown on
Penny Stocks, Investopedia (Mar. 24, 2012), http://www.investopedia.com/articles/03/
050803.asp. Accordingly, penny stocks are considered to be particularly high risk and not
suitable to all investors. See China Energy, 2009 WL 875997, at *4 (noting that the penny stock
market is “highly speculative,” and “‘[b]ecause it is wrapped in secrecy and operates in relative
obscurity, the penny stock market lends itself to manipulation far more easily than a market
2

directly from the issuing companies at a discounted rate and reselling the same securities to the
public at the current over-the-counter market rate, the Defendants could turn a quick profit.
(Compl. ¶¶ 15–17, 25–31.)
Specifically, according to the SEC, Defendants followed a familiar pattern to effectuate
the alleged scheme. (Id. ¶ 15.) “Operating from E-Lionheart’s office in White Plains, Bronson,
or E-Lionheart personnel acting at Bronson’s direction, ‘cold called’ OTC Link quoted
companies to ask if they were interested in obtaining capital.” (Id.) If the cold call was met with
interest, “Bronson, or E-Lionheart personnel acting at his direction, would offer to buy stock in
the company at a rate that was deeply discounted from the price the company’s stock was then
trading at.” (Id.) If the offer was accepted, “Bronson (or E-Lionheart personnel acting at his
direction) prepared a subscription agreement and other documents to effect the transaction.” (Id.
¶ 16.)
Notwithstanding that “all” the Defendants’ activities allegedly occurred in New York,
and “irrespective of the location of the company’s business, the subscription agreement
represented that the company was making an offering of its stock that was exempt from
registration because it was being made pursuant to Rule 504(b)(1)(iii) of Regulation D and a
Delaware state law exemption from registration [§ 73-207(b)(8)].” (Id. ¶ 19.) An attorney
“referred and/or paid by Bronson, but purportedly acting on the company’s behalf, provided an
opinion letter to the company’s transfer agent asserting that the securities could be issued

where information is readily available and circulated to investors.’”) (alteration in original)
(quoting H.R. Rep. No. 101-617 (1990), reprinted in 1990 U.S.C.C.A.N. 1408, 1422)).
3

without a restrictive legend” based on these supposed exemptions.2 (Id.) This made it possible
for Defendants to resell the securities in the public marketplace. (Id. ¶¶ 20–21.) Yet, the
attorney providing this opinion about Delaware law was not licensed to practice in Delaware.
(Id. ¶ 21.) Indeed, the SEC claims that the securities transactions that formed the alleged scheme
had little to no nexus to Delaware. The securities themselves were allegedly sent to
E-Lionheart’s White Plains business address and “[m]any of the companies that issued the
securities had no business operations in Delaware.” (Id. ¶ 22.)
The SEC alleges that, upon receipt of the shares, Defendants quickly resold them to the
public, sometimes in multiple tranches, supposedly acting under the exemption-from-resale
restrictions provided in the aforementioned SEC rule and Delaware Code provision. (Id. ¶¶ 16,
17, 20.) Defendants allegedly replicated this method of purchasing and quicky reselling newly
issued shares multiple times with approximately 100 different issuers, and repeated the process
several times with the same issuer. (Id. ¶ 18.) According to the SEC, the public investors, who
had no access to the type of information typically contained in a registration statement, bought
the securities at approximately double the price paid by Defendants. (Id. ¶ 17.) Since August
2009, Bronson and E-Lionheart are alleged to have reaped profits of more than $10 million
through this scheme. (Id. ¶ 1.)

2

According to the Complaint,
[c]ompanies use transfer agents to keep track of the individuals and entities
that own their stock. In the absence of a registration statement, transfer
agents will issue stock certificates bearing a ‘restrictive legend’—indicating
limitations on the transfer or sale of the security—unless the transfer agent
receives assurances in the form of an attorney opinion letter that adequately
explains why it is lawful to issue the certificates without a restrictive legend.

(Compl. ¶ 20.)
4

2. Role of Fairhills Capital, Inc.
The SEC further alleges that Bronson secreted assets from the stock-flipping scheme in
Relief Defendant FCI, a Delaware corporation which was formed in 2010, registered to the same
White Plains address as E-Lionheart, and features Bronson as its President and owner. (Id. ¶ 9.)
Within a week of FCI’s registration to do business in New York, Bronson allegedly transferred
$10,000 from E-Lionheart’s account to FCI. (Id. ¶ 32.) According to the SEC, Bronson
subsequently transferred $600,000 from an account held by E-Lionheart to FCI. (Id. ¶ 34.) “The
overwhelming majority of transactions in FCI’s bank account” were “transfers to-and-from ELionheart’s principal bank account.” (Id. ¶ 35.) And, one of the few transfers out of FCI’s bank
account not directed at E-Lionheart was an alleged $35,000 payment to an attorney acting on
behalf of an issuer in connection with a sale of securities to E-Lionheart. (Id.) Indeed,
according to the SEC, none of the securities sold by Defendants involved transactions on FCI’s
behalf, and the transferred proceeds were not in return for any consideration. (Id.) Finally, FCI
allegedly holds title to a Land Rover, a Ferrari, a Rolls Royce, and a Mercedes Benz, the title of
which was formerly held by Bronson. (Id. ¶ 33.) The SEC seeks to reclaim these assets by
naming FCI as a Relief Defendant under a theory of unjust enrichment. (Id. ¶¶ 40–41.)
B. Procedural Background
The SEC filed the Complaint on August 22, 2012, asserting violations of Sections 5(a)
and 5(c) of the Securities Act against Bronson and E-Lionheart and alleging a claim for unjust
enrichment against FCI. (Dkt. No. 1.) On February 1, 2013, Defendants served a Motion To
Dismiss, (Dkt. No. 17), and supporting Memorandum of Law (Defs.’ Mem. of Law in Supp. of
Mot. To Dismiss (“Defs.’ Mem.”) (Dkt. No. 18)), to which the SEC served a Memorandum of
Law in Opposition on March 1, 2013 (Pl.’s Mem. of Law in Opp. to Defs.’ Mot. To Dismiss
5

(“Pl.’s Mem.”) (Dkt. No. 19)). Defendants filed a Reply Memorandum of Law on March 15,
2013. (Defs.’ Reply Mem. of Law in Supp. of Mot. To Dismiss (“Defs.’ Reply Mem.”) (Dkt.
No. 20).)
II. Discussion
A. Standard of Review
In considering a motion to dismiss pursuant to Rule 12(b)(6), the Court is required to
construe the factual allegations contained in the Complaint as true and draw all reasonable
inferences in favor of the plaintiff. See Ruotolo v. City of New York, 514 F.3d 184, 188 (2d Cir.
2008) (“We review de novo a district court’s dismissal of a complaint pursuant to Rule 12(b)(6),
accepting all factual allegations in the complaint and drawing all reasonable inferences in the
plaintiff’s favor.” (internal quotation marks omitted)); Gonzalez v. Caballero, 572 F. Supp. 2d
463, 466 (S.D.N.Y. 2008) (same). Moreover, “[i]n adjudicating a Rule 12(b)(6) motion, a
district court must confine its consideration to facts stated on the face of the complaint, in
documents appended to the complaint or incorporated in the complaint by reference, and to
matters of which judicial notice may be taken.” Leonard F. v. Isr. Disc. Bank of N.Y., 199 F.3d
99, 107 (2d Cir. 1999) (quotation marks omitted).
The Supreme Court has held that “[w]hile a complaint attacked by a Rule 12(b)(6)
motion to dismiss does not need detailed factual allegations, a plaintiff’s obligation to provide
the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a
formulaic recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555 (2007) (second alteration in original) (citations omitted). Instead,
the Supreme Court has emphasized that “[f]actual allegations must be enough to raise a right to
relief above the speculative level,” id., and that “once a claim has been stated adequately, it may
6

be supported by showing any set of facts consistent with the allegations in the complaint,” id. at
563. Plaintiffs must allege “only enough facts to state a claim to relief that is plausible on its
face.” Id. at 570. But if a plaintiff has “not nudged [its] claims across the line from conceivable
to plausible, the[] complaint must be dismissed.” Id.; see also Aschroft v. Iqbal, 556 U.S. 662,
679 (2009) (“Determining whether a complaint states a plausible claim for relief will . . . be a
context-specific task that requires the reviewing court to draw on its judicial experience and
common sense. But where the well-pleaded facts do not permit the court to infer more than the
mere possibility of misconduct, the complaint has alleged—but it has not ‘show[n]’—‘that the
pleader is entitled to relief.’” (alteration in original) (citation omitted) (quoting Fed. R. Civ. P.
8(a)(2))).
“A court may dismiss a claim on the basis of an affirmative defense raised in the motion
to dismiss, only if the facts supporting the defense appear on the face of the complaint, and it
appears beyond doubt that the plaintiff can prove no set of facts in support of his claim that
would entitle him to relief.” Mabry v. Neighborhood Defender Serv., 769 F. Supp. 2d 381, 395
(S.D.N.Y. 2011) (internal quotation marks omitted) (citing United States v. Space Hunters, Inc.,
429 F.3d 416, 426 (2d Cir. 2005)); see also Iowa Pub. Emps.’ Ret. Sys. v. MF Global, Ltd., 620
F.3d 137, 145 (2d Cir. 2010) (“An affirmative defense may be raised by a pre-answer motion to
dismiss under Rule 12(b)(6) . . . if the defense appears on the face of the complaint.” (internal
quotation marks omitted) (alteration in original)) (quoting Pani v. Empire Blue Cross Blue
Shield, 152 F.3d 67, 74 (2d Cir. 1998)).

7

B. Analysis
1. Legal Landscape
a. Federal and State Securities Registration Requirements
A basic overview of the applicable securities laws is necessary to understand how
Defendants’ scheme is alleged to have operated and how Defendants claim their behavior was
lawful. Under Section 5 of the Securities Act, securities offered for sale must be registered by
filing a registration statement with the SEC, unless a statutory exemption to the registration
requirement applies. See 15 U.S.C. § 77e. Registration “protect[s] investors by promoting full
disclosure of information thought necessary to informed investment decisions.” SEC v. Ralston
Purina Co., 346 U.S. 119, 124 (1953); see also Adato v. Kagan, 599 F.2d 1111, 1115–16 (2d
Cir. 1979) (“The securities acts are designed to protect investors by promoting full disclosure of
information thought necessary to informed investment decisions.” (internal quotation marks
omitted)). “To fulfill that goal, registration statements filed with the SEC make available to the
public certain information about the company and the offered security.” SEC v. Luna, No. 10CV-2166, 2014 WL 794202, at *7 (D. Nev. Feb. 26, 2014) (citing 15 U.S.C. §§ 77f(a), (d)).
Specifically, “[r]egistration statements must disclose, among other things, identifying
information about the business, its officers, and its underwriters; information about the purposes
for which the security is being offered to supply funds and the amounts which will be devoted to
those purposes; and information about the business’s financial health.” Id. (citing 15 U.S.C. §§
77f, 77g, 77aa). “Companies that have registered securities under the Securities Act must also
abide a regime of regular reporting of material information established in the Securities
Exchange Act of 1934.” SEC v. Platforms Wireless Int’l Corp., 617 F.3d 1072, 1085 (9th Cir.
2010). Consequently, “[w]hen a company fails entirely to register its securities and nonetheless
8

proceeds to sell them generally to the public, . . . the entire system of mandatory public
disclosure is evaded to public detriment.” Id. at 1085–86.
To state a cause of action under Section 5 of the Securities Act, the SEC must show “(1)
lack of a registration statement as to the subject securities; (2) the offer or sale of the securities;
and (3) the use of interstate transportation or communication and the mails in connection with
the offer or sale.” SEC v. Cavanagh, 445 F.3d 105, 111 n.13 (2d Cir. 2006) (internal quotation
marks omitted). “Section 5 ‘imposes strict liability on offerors and sellers of unregistered
securities’ regardless of any degree of fault, negligence or intent on the seller’s part.” SEC v.
StratoComm Corp., — F. Supp.2d —, 2014 WL 689116, at *16 (N.D.N.Y. Feb. 19, 2014)
(quoting SEC v. Calvo, 378 F.3d 1211, 1215 (11th Cir. 2004)). “Once a prima facie case has
been made, the defendant bears the burden of proving the applicability of an exemption.”
Cavanagh, 445 F.3d at 111 n.13; see also SEC v. Verdiramo, 890 F. Supp. 2d 257, 268
(S.D.N.Y. 2011) (same). “Registration exemptions are construed strictly to promote full
disclosure of information for the protection of the investing public.” Cavanagh, 445 F.3d at 115;
see also SEC v. Ishopnomarkup.com, Inc., No. 04-CV-4057, 2007 WL 2782748, at *3 (E.D.N.Y.
Sept. 24, 2007) (“Registration exemptions are construed strictly to promote full disclosure of
information for the protection of the investing public.”).
When Congress enacted the Securities Act, it expressly provided that existing state
securities legislation should remain in effect. See 15 U.S.C. § 77r (1994) (“Nothing in this
subchapter shall affect the jurisdiction of the securities commission (or any agency or office
performing like functions) of any State or Territory of the United States, or the District of
Columbia, over any security or any person.”). “State securities laws, commonly referred to as
‘blue sky laws,’ have existed since the early part of the twentieth century.” Daniel J. Barrison,
9

Comment, State Blue Sky Laws: An Alternative to the Federal Securities Laws and States
Common Law in Third-Party Accountant Malpractice Cases, 57 Temp. L.Q. 601, 642 (1984)
(footnote omitted); see also Edgar v. MITE Corp., 457 U.S. 624, 641(1982) (noting that “[s]tates
have traditionally regulated intrastate securities transactions”).3 The Supreme Court has upheld
the states’ authority to enact such laws against Commerce Cause challenges. See Hall v.
Geiger-Jones Co., 242 U.S. 539 (1917); Caldwell v. Sioux Falls Stock Yards Co., 242 U.S. 559,
567 n.68 (1917); Merrick v. N.W. Halsey & Co., 242 U.S. 568 (1917). “The Court's rationale for
upholding blue-sky laws was that they only regulated transactions occurring within the
regulating States.” Edgar, 457 U.S. at 641; see also Hall, 242 U.S. 557–58 (“The provisions of
the law . . . apply to dispositions of securities within the state, and while information of those
issued in other states and foreign countries is required to be filed, they are only affected by the
requirement of a license of one who deals with them within the state. . . . Such regulations affect
interstate commerce in [securities] only incidentally.”). Today, every state has its own securities
legislation, each with myriad regulations. See J. Liam Gruzs, Note, Responding to an
Unforeseen Variation: Why Ohio Should Provide a Statutory Right of Rescission to All
Defrauded Parties in a Stock-for-Stock Exchange, 43 Val. U. L. Rev. 307, 312 (2008) (noting
that every state and territory has promulgated state securities regulation). However, even though
“the American Bar Association, North American Securities Administrators Association
(NASAA) and the SEC approved the Uniform Securities Act in 1956, state blue sky laws lack
uniformity in many areas, including registration requirements and exemptions therefrom.”

3

The term “blue sky laws” is said to reflect the evil against which the laws are
aimed—that is, “speculative schemes that have no more basis than so many feet of ‘blue sky.’”
Hall v. Geiger-Jones Co., 242 U.S. 539, 550 (1917) (some internal quotation marks omitted).
10

William K. Sjostrom, Jr., Going Public Through an Internet Direct Public Offering: A Sensible
Alternative for Small Companies?, 53 Fla. L. Rev. 529, 545 (2001) (footnotes omitted).
b. Federal Law Exemptions to Registration—Regulation D and Rule 504
Registered securities offerings can be expensive, time consuming, and burdensome,
especially for smaller companies. Id. at 575 n.76 (“Initial public offerings are expensive. . . .
[and] also [are] costly in terms of time as personnel must be diverted from their regular duties to
gather information, aid in preparing the offering documents and contribute to marketing the
deal.”). Thus, for certain emerging companies, “a registered offering is not an option for them.
That leaves exempt offerings, or, in other words, offerings conducted in compliance with
exemptions from registration.” William K. Sjostrom, Jr., Relaxing the Ban: It’s Time to Allow
General Solicitation and Advertising in Exempt Offerings, 32 Fla. St. U. L. Rev. 1, 8 (2004).
“The most commonly relied-on exemptions for stock offerings by emerging companies are those
provided by Regulation D under the Securities Act.” Id. “Regulation D, adopted in 1982, was
designed to facilitate capital formation while protecting investors by simplifying and clarifying
existing exemptions for private or limited offerings, expanding their availability, and providing
more uniformity between federal and state exemptions.” Revisions of Limited Offering
Exemptions in Regulation D, Securities Act Release No. 27922, Investment Company Act
Release No. 33-8828, 72 Fed. Reg. 45,116-01, 45,116 (proposed Aug. 3, 2007); see also Bryn
Vaaler, Financing a Small Business in Mississippi: A Practitioner’s Guide to Federal and State
Securities Exemptions Part I, 63 Miss. L.J. 129, 142 (1993) (“The purpose of Regulation D was
to streamline and coordinate the limited offering and nonpublic exemptions under sections 3(b)
and 4(2) of the Securities Act in order to provide a more coherent pattern of exemptive relief
(particularly aimed at the capital formation needs of small business) and to achieve uniformity
11

between state and federal exemptions in order to facilitate capital formation consistent with the
protection of investors.”). “Regulation D provides exemptions from Securities Act registration
for securities offerings under three separate rules: Rules 504, 505 and 506.” Revision of Rule
504 of Regulation D, the “Seed Capital” Exemption, Securities Act Release No. 33-7644, 64
Fed. Reg. 11,090-01, 11,090 (Mar. 8, 1999). Of these, Rule 504 is the only relevant exemption
at issue in this case. Rule 504, promulgated pursuant to section 3(b) of the Securities Act, is
known as the “seed capital” exemption and is limited to offerings by non-reporting companies
that do not exceed an aggregate annual amount of $1 million. See 72 Fed. Reg. at 45,133. Rule
504 places “substantial reliance upon state securities laws,” but it does not exempt stock
offerings from federal anti-fraud and other civil-liability provisions. 64 Fed. Reg. at 11,090.
“Rule 504 sets forth the requirements for four separate exemptions from the registration
requirements of the Securities Act.” 75 Fed. Reg. at 45,133. “Among these is Rule
504(b)(1)(iii), which provides an exemption from registration for offers and sales of securities
that are conducted ‘according to state law exemptions from registration that permit general
solicitation and general advertising so long as sales are made only to “accredited investors” as
defined in [Rule 501(a)].’” Id. (alteration in original) (footnote omitted); see also 17 C.F.R.
§ 230.504(b)(1)(iii) (1999).4 Thus, for a Rule 504(b)(1)(iii) exemption to apply, (a) a security
sale or offer must be made exclusively according to state law exemptions from registration; (b)
these state law exemptions must permit general solicitation and general advertising; and (c) the
purchasers of the securities must be “accredited investors.” See 17 C.F.R. § 230.504(b)(1)(iii).

4

An “accredited investor” is defined as a person or entity that falls within one of several
categories under 17 C.F.R. § 230.501(a), the applicable portions of which are discussed in
greater detail below. See 17 C.F.R. § 230.501(a).
12

“Securities sold without registration in reliance on this provision are not subject to the
limitations on resale established in Rule 502(d) and, as such, are not ‘restricted securities . . . .’”
72 Fed. Reg. at 45,133; see also 17 C.F.R. § 230.504(b)(1) (providing an exemption for
transactions that meet the requirements of Rule 504(b)(1)(i)–(iii) from the resale restrictions
imposed by 17 C.F.R. § 230.502(d) (“Except as provided in § 120.504(b)(1), securities acquired
in a transaction under Regulation D . . . cannot be resold without registration under the Act or an
exemption therefrom.”)).5
The SEC added Rule 504(b)(1)(iii) as a new exemption to Rule 504 in 1999 in an attempt
“to apply the appropriate federal securities law treatment to offerings made under state
registration exemptions that satisfied its conditions.” 72 Fed. Reg. at 45,133. This addition was
“part of a series of changes designed to deter abusive practices in Rule 504 offerings while not
impeding legitimate ‘seed capital’ offerings.” Id. at 45,134. In particular, the SEC “had been
concerned for some time with abusive practices in Rule 504 offerings, many of which involved
‘pump and dump’ schemes for securities of non-reporting companies that traded over the
counter. Id.6 According to the SEC, these problematic offerings “generally involved the
securities of ‘microcap’ companies, i.e., those characterized by thin capitalization, low share

5

As Defendants note, in 2007 the SEC considered changing Rule 504(b)(1)(iii) to deem
securities issued thereunder to be “restricted securities,” thus barring their immediate re-sale.
See 72 Fed. Reg. at 45,134. This proposed change apparently was driven by concerns shared by
the SEC and state securities regulators about abusive “pump and dump” practices involving Rule
504(b)(1)(iii) offerings. Id. Ultimately, the SEC did not adopt the proposed changes. See
Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings, 76 Fed. Reg.
31,518, 31,519 (June 1, 2011).
6

See United States v. Downing, 297 F.3d 52, 54 (2d Cir. 2002) (describing an alleged
“pump and dump” scheme as one where “the schemers [first] artificially inflate, or ‘pump,’ the
price of [a] stock by bribing stock promoters to sell it, and [then] ‘dump’ the stock once the price
[becomes] sufficiently high” (alterations in original) (internal quotation marks omitted)).
13

prices, limited public information and little or no analyst coverage.” 64 Fed. Reg. at 11,091.
Added to the mix were “market innovations and technological changes, most notably, the
Internet,” which “created the possibility of nation-wide Rule 504 offerings for securities of nonreporting companies that were once thought to be sold locally.” Id.
2. “Accredited Investor” Status of Bronson and E-Lionheart
As noted, for a sale or offering to qualify for a registration exemption under Rule
504(b)(1)(iii), it must be made only to “accredited investors” as defined in Rule 501(a) of
Regulation D. See 17 C.F.R. § 230.504(b)(1)(iii). If Defendants were not “accredited investors”
in the transactions at issue here, then they would have no basis to invoke the Rule 504(b)(1)(iii)
exemption. The Securities Act defines an “accredited investor” as a person or entity falling
within one of several categories. See 17 C.F.R. § 230.501(a). Defendant Bronson claims
accredited-investor status as either a “natural person whose individual net worth, or joint net
worth with that person’s spouse, exceeds $1,000,000,” or as a “natural person who had an
individual income in excess of $200,000 in each of the two most recent years or joint income
with that person’s spouse in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year.” (See Defs.’ Mem. 10 n.5);
see also 17 C.F.R. §§ 230.501(a)(5), (a)(6) (setting forth net-worth and income requirements,
respectively). Defendant E-Lionheart claims accredited-investor status as an “entity in which all
of the equity owners are accredited investors,” pursuant to Rule 501(a)(8), as Bronson is asserted
to be the sole managing member of E-Lionheart. (See Defs.’ Mem. 10 n.5; see also Compl.
¶ 8.); see also 17 C.F.R. § 230.501(a)(8). Put another way, if Bronson is an “accredited
investor,” then so too is E-Lionheart; if he is not, then E-Lionheart is not.

14

The facts as currently pled in the Complaint are insufficient for the Court to conclusively
determine Defendants’ status throughout the entire duration of the alleged scheme. The
Complaint acknowledges Bronson’s ownership of E-Lionheart, but it does not contain
allegations establishing Bronson’s status as an “accredited investor.” For example, while the
Complaint alleges that Defendants made more than $10 million in profits in a scheme for which
the proceeds were “approximately double the price at which E-Lionheart had acquired the
shares,” (Compl. ¶ 10, 19), it does not calculate Bronson’s net worth or detail his income history
(or his spouse’s, if he had one). And, the Court will not infer Defendants’ eligibility to make
these investments as accredited investors simply from the fact that Defendants are alleged to
have illegally made millions of dollars from their scheme. See Mabry, 769 F. Supp. 2d at 395
(“A court may dismiss a claim on the basis of an affirmative defense raised in the motion to
dismiss, only if the facts supporting the defense appear on the face of the complaint, and it
appears beyond doubt that the plaintiff can prove no set of facts in support of his claim that
would entitle him to relief.” (internal quotation marks omitted) (emphasis added)); St. John’s
Univ., N.Y. v. Bolton, 757 F. Supp. 2d 144, 157 (E.D.N.Y. 2010) (“Dismissal is proper only
when, drawing all reasonable inferences in favor of the plaintiff, the court concludes that the
plaintiff’s own factual allegations prove the defendant’s [affirmative] defense.” (emphasis
added)); In re Top Tankers, Inc. Sec. Litig., 528 F. Supp. 2d 408, 416–17 (S.D.N.Y. 2007)
(denying motion to dismiss based on affirmative defense that was unsupported by factual
allegations in the complaint). See generally Davis v. Ind. State Police, 541 F.3d 760, 763 (7th
Cir. 2008) (concluding that Twombly “did not revise the allocation of burdens concerning
affirmative defenses,” and restating the rule that “[c]omplaints need not anticipate, and attempt
to plead around, potential affirmative defenses”).
15

When the SEC made this very point, Defendants simply retorted that it “cannot be taken
seriously.” (Defs.’ Reply Mem. 4 n.2.) Defendants’ summary rejection of this claim largely
relies on the profits the SEC alleges Defendants illicitly reaped as a result of the supposed
scheme. (Id.) Yet, even taking the SEC’s allegations regarding the total ill-gotten gains of
Defendants accumulated by the end of the alleged scheme, there is simply no allegation that
Bronson or E-Lionheart qualified as an “accredited investor” in every transaction executed
during the scheme, especially those occurring in the very early stages. Indeed, there are no
allegations about any of these early transactions, including, for example, any assertions
regarding the value of these transactions or Bronson’s income or net worth at the time these
transactions were executed. Moreover, even if Bronson has profited handsomely from the stock
scheme described in the Complaint, there are no allegations in the Complaint itself about
Bronson’s net worth, which could have been minimized by any debts he also might have
incurred during the time period, or what income Bronson has made (or has reported he made).
The Court recognizes that Defendants may be able to establish, with readily available
evidence, that Bronson and/or E-Lionheart were “accredited investors” throughout the history of
the alleged scheme, but in considering their Motion To Dismiss the Court may not consider such
evidence. See In re Top Tankers, Inc. Sec. Litig., 528 F. Supp. 2d at 416–17 (denying motion to
dismiss based on affirmative defense unsupported by facts in the complaint, even though factual
basis for the affirmative defense could easily be established by “three or four depositions of key
witnesses”). Thus, based on the allegations in the Complaint, or the lack thereof, regarding
Bronson’s net worth and income during the existence of the alleged scheme, the Court cannot
conclude that as a matter of law Defendants satisfy Rule 510(b)(1)(iii)’s accredited-investor
requirement and denies Defendants’ Motion for this reason.
16

3. Applicability of Delaware Security Act § 73-207(b)(8)
Even if the Complaint established that Defendants were accredited investors throughout
the duration of the alleged scheme, and therefore, that they could invoke Rule 504(b)(1)(iiii), the
Court would nonetheless deny Defendants’ Motion. Based on the allegations in the Complaint,
the SEC has pled a prima facie case that Defendants have violated Section 5 of the Securities
Act. No registration statement was filed or in effect as to the securities at issue; Defendants,
directly or indirectly, sold or offered to sell these securities; and Defendants used interstate
transportation or communication means and/or the mails. Defendants do not contest this.
Instead, they assert, as an affirmative defense, that the securities at issue were exempt from the
registration requirements under Rule 504(b)(1)(iii) and a provision of the Delaware Securities
Act.
As discussed above, to qualify for an exemption from the federal securities-registration
requirements under Rule 504(b)(1)(iii), (1) the offer and sale must be made “[e]xclusively
according to state law exemptions from registration,” (2) the state law exemption must “permit
general solicitation and general advertising,” and (3) the sale must be made “only to ‘accredited
investors’ as defined in § 230.501(a).” 17 C.F.R. § 230.504(b)(1)(iii). According to Defendants,
“the Delaware Securities Act prohibits the offer or sale of any security in Delaware unless (1) it
is registered, (2) the security or transaction is exempt, or (3) the security is a federally covered
security.” (Defs.’ Mem. 10 (citing Del. Code Ann. tit. 6, § 73-202).) They further claim that the
securities transactions at issue in this case were exempt from any registration requirements under
Delaware Securities Act § 73-207(b)(8).7 (Defs.’ Mem. 10–11.) This section provides a

7

Prior to 2011, including during the period when Defendants were relying on the
exemptions provided by this section, this provision existed in the Delaware code at § 7309(b)(8).
17

registration exemption for “[a]ny offer or sale to a bank, savings institution, trust company,
insurance company, investment company . . . , pension or profit-sharing trust, or other financial
institution or institutional buyer, or to a broker-dealer, whether the purchaser is acting for itself
or in some fiduciary capacity.” Del. Code Ann. tit. 6, § 73-207(b)(8). Defendants assert that
E-Lionheart qualifies as an institutional buyer and therefore falls within the Delaware law
exemption.8 (Defs.’ Mem. 10 n.5.) They further assert that § 73-207(b)(8) applies because the
parties to the securities transactions at issue so stipulated in the subscription agreements.
(Compl. ¶ 19; Defs.’ Mem. 14-15.)
The SEC challenges Defendants’ invocation of § 73-207(b)(8) on two grounds. First, the
SEC contends that the securities transactions executed as part of the alleged scheme “had either
no nexus, or an insufficient nexus, to Delaware.” (Compl. ¶ 22.) Thus, according to the SEC,
Defendants cannot rely on the Delaware Securities Act, and the specific exemption provided
therein, to invoke Rule 504(b)(1)(iii). Second, the SEC argues that this provision does not
“permit ‘general solicitation and general advertising,’ as required by Rule 504(b)(1)(iii).” (Id.
¶ 23.)

78 Del. Laws ch. 175 (2011). To avoid potential confusion, the Court will refer to this provision
by its current location in the Delaware code, § 73-207(b)(8).
8

In the SEC’s Opposition to Defendants’ Motion To Dismiss, the Commission argues
that the “type of state law exemption the Commission had in mind when it enacted SEC Rule
504(b)(1)(iii)” is embodied by Delaware Rule 503, not the state registration exemption provided
by Delaware §73-207(b)(8). (Pl.’s Mem. 10–11.) Defendants do not assert an affirmative
defense under Delaware Rule 503, however. Thus, Defendants contend that the SEC’s argument
regarding Rule 503 is “entirely irrelevant,” as “more than one exemption was available” to
Defendants. (Defs.’ Reply Mem. 9.) As such, the Court will assess only the affirmative defense
asserted by Defendants under Delaware § 73-207(b)(8).
18

According to Defendants, the SEC’s nexus claim is “irrelevant as a matter of law, ”
because “[n]othing in rule 504(b)(1)(iii) requires that the offer or sale occur in, or have any
connection to, the state in which the issuer is claiming an exemption.” (Defs.’ Mem. 11.) As
support for this point, Defendants purport to rely on the language of Rule 504(b)(1)(iii) itself,
particularly as compared to the language of the other two subsections of Rule 504(b)(1).9 (Id. at
12.) As Defendants explain, “[b]oth subsection (i) and subsection (ii) of Rule 504(b)(1) require
that the offers and sales are made ‘in one or more states’ that either ‘provide for the registration
of securities’ . . . or ‘have no provision for the registration of the securities’ so long as the
securities have been registered in at least one state that provides for registration.” (Id. (citing
Rule 504(b)(1)(i), (b)(1)(ii)).) “In contrast,” Defendants argue, Rule 504(b)(1)(iii) “does not
require that the offers or sales be made ‘in one or more states,’” but only “provides that the
offers or sales must be made ‘according to state law exemptions.’” (Id.)

9

Rule 504(b)(1) provides for an exemption from the federal security-registration
requirement for offers or sales of securities made:
(i) Exclusively in one or more states that provide for the registration of the securities,
and require the public filing and delivery to investors of a substantive disclosure
document before sale, and are made in accordance with those state provisions;
(ii) In one or more states that have no provision for the registration of the securities
or the public filing or delivery of a disclosure document before sale, if the securities
have been registered in at least one state that provides for such registration, public
filing and delivery before sale, offers and sales are made in that state in accordance
with such provisions, and the disclosure document is delivered before sale to all
purchasers (including those in the states that have no such procedure); or
(iii) Exclusively according to state law exemptions from registration that permit
general solicitation and general advertising so long as sales are made only to
“accredited investors” as defined in [Rule 510(a)].
17 C.F.R. § 230.504(b)(1).
19

When interpreting a rule, the Court must begin with the plain language used therein. See
Resnik v. Swartz, 303 F.3d 147, 151 (2d. Cir. 2003) (“In interpreting an administrative
regulation, as in interpreting a statute, we must begin by examining the language of the provision
at issue.”). In so doing, the Court is to give the Rule’s “terms, read in their appropriate context,
their ordinary, common meaning . . . .” Duarte-Ceri v. Holder, 630 F.3d 83, 92 (2d Cir. 2010);
see also Bilski v. Kappos, 130 S. Ct. 3218, 3226 (2010) (“[I]n all statutory construction, unless
otherwise defined, words will be interpreted as taking their ordinary, contemporary, common
meaning.” (internal quotation marks and alterations omitted)); Alhovsky v. NYC Dep't of Parks &
Recreation, No. 11-CV-3669, 2012 WL 3552916, at *2 (S.D.N.Y. Aug. 16, 2012) (“‘[W]hen
interpreting a statute or regulation, we are required to read that statute or regulation as a whole, .
. . since the meaning of [its] language, plain or not, depends on context.’” (quotation marks
omitted and second alteration in original) (quoting Rock of Ages Corp. v. Sec'y of Labor, 170
F.3d 148, 155 (2d Cir.1999)).
Looking at the plain language of Rule 504(b)(1), the Court is unpersuaded by
Defendants’ argument. First, subsections (i) and (ii) differ in their language because they govern
transactions where a registration statement has been filed in one or more states. In short, both
subsections (i) and (ii) provide exemptions from the federal registration requirements only when
the offer or sale complies with all applicable state blue sky laws, even extending applicable state
compliance requirements to cover states without registration requirements in order to qualify for
federal registration exemption. In this way, subsections (i) and (ii) provide exemptions from
federal registration requirements when state-law registration compliance would supplant the
need for federal registration because no state’s registration requirements would be violated and
buyers in states without regulations would benefit from the registration requirements from other
20

states. Yet, the subsection (iii) exemption does not depend on the filing of a registration
statement. Instead, it covers certain offers or sales that are exempt from registration under state
law, thus obviating the need to reference registration requirements in any particular state.
Therefore, the omission of the phrase in subsection (iii) “in one or more states” has no legal
consequence.
Second, Defendants’ claim that subsection (iii) “merely provides that the offers and sales
be made ‘according to state law exemptions,’ (Def.’s Mem. 12), but not in the state whose
exemption is invoked, is improper as it reads out the term “exclusively.” By using that term, the
SEC plainly required that the offers or sales were exempt in each state where they occurred.
Indeed, the use of the word “exclusively” in subsection (i) only fortifies the point. Subsection (i)
provides an exemption for offers and sales made “[e]xclusively in one or more states that
provide for the registration of securities . . . and are made in accordance with those state
provisions.” 17 C.F.R. § 230.504(b)(1)(ii). In contrast, subsection (ii) permits sales in states
other than the state of registration, but only if the registration statement is filed in at least one
state and all investors receive the requisite disclosure documents, and, therefore, does not use the
term “exclusively.” Id. § 230.504(b)(1)(ii). Thus, both subsections (i) and (iii) use the word
“exclusively” to define and limit the exemptions in each: subsection (i) exempts only those
offers and sales made “exclusively” in those states where a registration statement is filed;
subsection (iii) exempts offers and sales made “exclusively” in those states where applicable
exemptions are permitted. If subsection (iii) operated the way Defendants assert—that is, to
allow for offers or sales of securities if exempted in only one state, then subsection (iii) would
read like subsection (ii). Moreover, Defendants’ reading of subsection (iii) would allow issuers
to make offers or sales of securities nationwide, under the supposed auspices of a single state’s
21

exemption regime, even if that exemption conflicted with the laws of every other state. Yet, any
such offers or sales could not be “exclusively according to state law exemptions,” as they could
be partially according to and partially contrary to state law exemptions. Moreover, Defendants
provide no explanation as to how to square their proposed reading of the Rule (which would
require only one state’s exemption requirements be met) with the use of the plural “exemptions”
in subsection (iii). If this subsection could be satisfied by complying with only one of multiple
applicable state exemptions, it would presumably use the singular “exemption.” Thus, the Court
concludes that the language of Rule 504(b)(1)(iii) requires compliance with those state-law
exemptions where the securities are offered or sold, and rejects Defendants’ contention that
compliance with one state’s exemption requirements is sufficient for federal exemption
purposes.
Finally, even if the Court were to accept Defendants’ proposed interpretation of Rule
504(b)(1)(iii) and agree that this regulation requires only satisfaction of one state’s registrationexemption provision in order to qualify for a federal registration exemption, and assuming
Defendants could demonstrate that a particular state’s exemption requirements had been
satisfied, the Court would still need to determine whether the state-law exemption Defendants
invoke applies to the transactions alleged in the Complaint.
Defendants claim that the subscription agreements between Defendants and the issuing
companies, which provided that § 73-207(b)(8) governed the transactions, are sufficient to
trigger application of Rule 504(b)(1)(iii). (Defs.’ Mem. 13.) In support of this contention,
Defendants rely on Delaware case law describing the ability of “Delaware citizen[s]” to choose
Delaware common law in commercial relationships, (id. at 15), and some authority for the

22

proposition that Delaware’s long-arm statute can apply when the parties agree to be governed by
Delaware law. Defendants’ claims outreach the supporting authority.
State statutes are generally presumed to apply only within the jurisdictional boundaries of
the state. See O’Neill v. Mermaid Touring, Inc., — F. Supp. 2d —, 2013 WL 4829266, at *4
(S.D.N.Y. Sept. 10, 2013) (recognizing the “settled rule of statutory interpretation [ ] that unless
expressly stated otherwise, no legislation is presumed to be intended to operate outside the
territorial jurisdiction of the state . . . enacting it”) (alterations in original) (internal quotation
marks omitted); Valentine v. NebuAd, Inc., 804 F. Supp. 2d 1022, 1027 n.3 (N.D. Cal. 2011)
(recognizing the existence of a “presumption against extraterritoriality, which provides that state
laws may not be applied to conduct occurring outside [their] borders” (internal quotation marks
omitted)); 73 Am. Jur. 2d Statutes § 243 (2014). Indeed, as noted, the Supreme Court relied on
the limited territorial reach of state blue sky laws to reject Commerce Clause challenges to them.
See Edgar, 457 U.S. at 641. The Delaware Securities Act is no exception, as Delaware courts
have held that the Delaware Securities Act only applies where “there is a sufficient nexus
between Delaware and the transaction at issue.” Vichi v. Koninklijke Philips Elecs., N.V., No.
2578-VCP, 2009 WL 4345724, at *19 (Del. Ch. Dec. 1, 2009); see also Singer v. Magnavox Co.,
380 A.2d 969, 981 (Del. 1977) (interpreting the “Delaware Securities Act as a Blue Sky Law
governing transactions which are subject to Delaware jurisdiction under traditional tests,” and
finding that the Delaware Securities Act did not apply to the challenged transaction because
“[p]laintiffs [were] residents of Pennsylvania and were not solicited [in Delaware]. Nor [did] it
appear that the contract was made in Delaware nor that any part of the ‘sale’ occurred [there].”),
overruled on other grounds by Weinberger v. UOP, Inc., 457 A.2d 701, 715 (Del. 1983); accord
JAC Holding Enters. v. Atrium Capital Partners, LLC, — F. Supp. 2d —, 2014 WL 643808, at
23

*24 (E.D. Mich. Feb. 10, 2014) (“The Delaware courts have held that the Delaware Securities
Act imposes liability only where the transaction in question bears a ‘sufficient nexus’ to the
State.”).
Therefore, for Defendants to successfully assert a Delaware registration exemption as a
basis for an their affirmative defense in their Motion To Dismiss, it must be clear on the face of
the Complaint that the Delaware Securities Act applies to the transactions at issue. However, the
Complaint contains the following allegations that, for purposes of this Motion, are assumed to be
true: (1) E-Lionheart, while a Delaware limited liability company, has at all times relevant here
maintained its sole business address in White Plains, New York, and also does business as
“Fairhills Capital,” (Compl. ¶ 8); (2) Bronson is a New York resident and the sole managing
member of E-Lionheart, (id. ¶ 7); (3) FCI, while a Delaware corporation, maintains the same
business address as E-Lionheart in White Plains, New York, (id. ¶ 9); (4) Bronson and ELionheart “did not prepare, negotiate or execute any of the subscription agreements or other
transactional documents in Delaware,” (id. ¶ 22); (5) the securities were sent to E-Lionheart’s
business in White Plains, (id.); and (6) the attorneys who prepared opinion letters to the issuers
were not licensed to practice in Delaware and the transfer agents to whom the opinion letters
were sent were not located in Delaware, (id.). Regarding the issuers themselves, the Complaint
alleges that “many” of them “had no business operations in Delaware.” (Id.) Put another way,
based on these allegations, Defendants are not able to establish a territorial nexus between the
securities transactions at issue and Delaware, other than the fact that E-Lionheart is a Delaware
limited liability company.
From this list of allegations, the only possible nexus between Delaware and the
transactions allegedly comprising the illicit scheme is that E-Lionheart was incorporated in
24

Delaware. (Compl. ¶ 8.) However, the case law is clear that incorporation alone is not a
sufficient nexus to trigger application of Delaware’s Securities Act. See Singer, 380 A.2d at 981
(holding that a Delaware corporation is not bound by the Securities Act “simply because the
company is incorporated” there); see also JAC Holding Enters., 2014 WL 643808, at *24 (“The
only connection to Delaware that emerges from the pleaded facts . . . is that JAC is chartered
there. But the Delaware Supreme Court ‘do[es] not read the [Delaware Securities] Act as an
attempt to introduce Delaware commercial law into the internal affairs of corporations merely
because they are chartered” in Delaware (brackets in original)); Dofflemyer v. W.F. Hall Printing
Co., 558 F. Supp. 372, 377 n.78 (D. Del. 1983) (“The parties have not suggested that there is any
connection between the events challenged in the present action and the State of Delaware, other
than the fact that the defendant corporations are incorporated here. . . . Thus, on the basis of
these facts, it is clear from Singer that a Delaware court would not entertain an action under the
Delaware Blue Sky law.”).10 Given the factual allegations in the Complaint, and “according to
the law” of Delaware, there is an insufficient nexus between the transactions and Delaware to
allow Defendants to invoke § 73-207(b)(8). Accordingly, the Court denies Defendants’ Motion
To Dismiss.11

10

While no party has raised this point, Defendants’ claim that the Delaware Securities
Act could be chosen by issuers to govern securities that were not offered or sold to or from
Delaware might raise serious Commerce Clause questions. See In re Nat’l Century Fin. Enters.,
Inc. Inv. Litig., 755 F. Supp. 2d 857, 888 (S.D. Ohio 2010) (dismissing securities-fraud claim
based on Ohio securities laws because application of Ohio’s law to transactions wholly outside
of Ohio would “violate the extraterritoriality principle of the Commerce Clause”); cf. A.S.
Goldmen & Co. v. N.J. Bureau of Sec., 163 F.3d 780, 788 (3d Cir. 1999) (rejecting Commerce
Clause challenge to application of New Jersey securities laws because the seller offered and sold
the securities from New Jersey).
11

Because the Court agrees with the SEC that Defendants have not established a
sufficient nexus between the transactions at issue in this case and Delaware, it need not and does
25

4. Unjust Enrichment of Fairhills Capital, Inc.
Relief Defendant FCI further moves to dismiss the SEC’s claim of unjust enrichment
with respect to the automobiles in its possession, arguing that the SEC fails to “allege that the
source of the money [used] to purchase these automobiles came from ill-gotten proceeds, let
alone the alleged profits of the Rule 504 transactions.” (Defs.’ Mem. 20–21.) In order to
prevent unjust enrichment, the Court “may order disgorgement against a relief defendant who is
not accused of wrongdoing in a securities enforcement action provided that the defendant: ‘(1)
has received ill-gotten funds; and (2) does not have a legitimate claim to those funds.’” SEC v.
Aronson, No. 11-CV-7033, 2013 WL 4082900, at *13 (S.D.N.Y. Aug. 6, 2013) (quoting SEC v.
Cavanagh, 155 F.3d 129, 136 (2d Cir. 1998), reconsidered in part by 2013 WL 6501324
(S.D.N.Y. Dec. 11, 2013)). In applying this remedy, the court need not limit disgorgement to the
actual assets received by the relief defendant. See SEC v. Spongetech Delivery Sys., Inc., No.
10-CV-2031, 2011 WL 887940, at *9 n.6 (E.D.N.Y. Mar. 14, 2011) (“To hold . . . that a court
may order a defendant to disgorge only the actual assets unjustly received would lead to absurd
results. . . . [F]or example, a defendant who was careful to spend all the proceeds of his
fraudulent scheme, while husbanding his other assets, would be immune from an order of
disgorgement.” (alterations in original) (internal quotation marks omitted)). Instead,
disgorgement merely demands return of a sum equal to the amount wrongfully obtained. See
FTC v. Bronson Partners, LLC, 654 F.3d 359, 374 (2d Cir. 2011) (noting that “‘disgorgement is
an equitable obligation to return a sum equal to the amount wrongfully obtained, rather than a
requirement to replevy a specific asset’” (quoting SEC v. Banner Fund Int'l, 211 F.3d 602, 617

not consider the question of whether § 73-207(b)(8) permits general solicitation and advertising.
26

(D.C. Cir. (2000))); see also SEC v. Contorinis, — F.3d —, 2014 WL 593484, at *4 (2d Cir.
Feb. 18, 2014) (noting that “disgorgement is required whether the insider trader has put his
profits into a bank account, dissipated them on transient pleasures, or given them away to
others”).
Here, the SEC has pled that FCI “obtained proceeds from Defendants’ unlawful conduct”
and “has no legitimate claim to these funds.” (Compl. ¶ 41.) The Complaint alleges that the
“overwhelming majority” of FCI’s assets were transfers from E-Lionheart, (id. ¶ 35), including a
single day’s transfer of more than $600,000, (id. ¶ 34), and the titles to at least one of four
automobiles (id. ¶ 33). Furthermore, the Complaint asserts that FCI’s bank account is being
used to hold “certain portions of [Bronson’s] illegal trading activity.” (Id. ¶ 36.) As such, the
SEC has satisfactorily pled a claim of unjust enrichment against FCI. While the SEC has not
specifically pled that the automobiles possessed by FCI must be disgorged, a defendant may be
expected to liquidate assets if necessary to satisfy a disgorgement order. See, e.g., SEC v.
Universal Express, Inc., 546 F. Supp. 2d 132, 137–38 & n.7, 142 (S.D.N.Y. 2008) (holding the
defendant in contempt for failing to satisfy a disgorgement order and noting that defendant
“failed to liquidate” any of his multiple properties or three vehicles and continued to spend
extravagantly). The Court finds no basis for limiting Plaintiff’s properly pleaded unjust
enrichment claim to exclude certain assets in FCI’s possession, including the aforementioned
automobiles. FCI’s Motion To Dismiss this claim is therefore denied.

27

III. Conclusion
For the reasons stated above, Defendants' Motion To Dismiss is denied. The Clerk of
Court is respectfully directed to terminate the pending motion. (Dkt. No. 17.)
SO ORDERED.
Dated: March 31 , 2014
White Plains, New York

.KA
UNI ED STATES DISTRICT JUDGE

28