Securities and Exchange Commission v. Fiore et al
Filing
33
OPINION AND ORDER: For the foregoing reasons, Defendant's Motion To Dismiss is denied. The Court will hold a conference on November 6, 2019 at 11 :30 a.m. to discuss the status of the case. The Clerk of the Court is respectfully requested to terminate the pending Motion. (Dkt. No. 26.) SO ORDERED. (Signed by Judge Kenneth M. Karas on 9/25/2019) (jca)
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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
No. 18-CV-5474 (KMK)
v.
JOSEPH A. FIORE, BERKSHIRE CAPITAL
MANAGEMENT COMPANY, INC., and EAT
AT JOE’S, LTD. n/k/a SPYR, INC.,
OPINION & ORDER
Defendants.
Appearances:
John J. Bowers, Esq.
Paul W. Kisslinger, Esq.
Securities and Exchange Commission
Washington, DC
Counsel for Plaintiff
Alexander B. Spiro, Esq.
Crystal Nix-Hines, Esq.
Quinn Emmanuel Urquhart & Sullivan, LLP
New York, NY and Los Angeles, CA
Counsel for Defendants
Marc S. Gottlieb, Esq.
Ortoli Rosenstadt LLP
New York, NY
Counsel for Defendants
KENNETH M. KARAS, United States District Judge:
The Securities and Exchange Commission (the “SEC” or “Plaintiff”) brings this Action
against Joseph A. Fiore (“Fiore”), Berkshire Capital Management Company, Inc. (“Berkshire”),
and Eat at Joe’s, Ltd. n/k/a SPYR, Inc. (“Eat at Joe’s”) (collectively, “Defendants”), alleging that
Defendants engaged in manipulative trading practices in violation of federal securities laws, in
violation of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a); Section 10(b) of the
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Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5;
Sections 9(a)(1) and (2) of the Exchange Act, 15 U.S.C. §§ 78i(a)(1), (2); Section 20(b) of the
Exchange Act, 15 U.S.C. § 78t(b); Section 13d of the Exchange Act, 15 U.S.C. § 78m(d), and
Rule 13d-1 thereunder, 17 C.F.R. § 240.13d-1; and Section 7(a) of the Investment Company Act,
15 U.S.C. § 80a-7(a). (See Compl. ¶¶ 1–9 (Dkt. No. 2).) Before the Court is Defendants’
Motion To Dismiss the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) (the
“Motion”). (See Not. of Mot. (Dkt. No. 26).) For the reasons stated below, Defendant’s Motion
is denied.
I. Background
A. Factual History
The following facts are taken from the SEC’s Complaint, and are assumed true for the
purpose of resolving the instant Motion.
1. Relevant Parties and Entities
Joseph Fiore “owns and controls Berkshire and is the Chairman of the Board of Directors
of SPYR, Inc., previously known as Eat at Joe’s.” (Compl. ¶ 13.) From April 2013 to March
2014 (the “Relevant Period”), (id. ¶ 2), Fiore maintained and controlled six brokerage accounts
held in the name of Berkshire and six brokerage accounts held in the name of Eat at Joe’s, (id.
¶ 13). Berkshire is a New York private equity firm that provides financing to penny stock
companies. (Id. ¶ 14.) Eat at Joe’s is a Nevada corporation of which Fiore served as chief
executive officer (“CEO”), chief financial officer (“CFO”), and chairman of the board, and
owned more than 50% of its common stock. (Id. ¶ 15.) In early 2015, Eat at Joe’s changed its
name to SPYR, Inc., and shifted the focus of its business from “developing, owning, and
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operating theme restaurants” to “digital publishing and advertising and the development of
mobile applications and games.” (Id.)
Non-party Plandai Biotechnology, Inc. (“Plandai”) is a Nevada corporation with its
principal offices located in London, England. (Id. ¶ 17.) “Plandai purports to be in the business
of producing botanical extracts from live plant material, including from green tea leaves,
tomatoes, and more recently, marijuana, for the nutraceutical and pharmaceutical industries.”
(Id.) Plandai’s stock was a “penny stock,” as defined by the Exchange Act; at all relevant times,
Plandai’s stock traded at less than $5.00 per share. (Id. ¶ 18.)
2. The Promotional Campaign
In early 2011, Fiore was introduced to Plandai’s CEO, and they entered into a business
relationship. (Id. ¶ 19.) Plandai’s common stock was registered with the SEC pursuant to
§ 12(g) of the Exchange Act, and was quoted on OTC Link under the ticker symbol “PLPL.”
(Id. ¶ 17.) Fiore acquired a large supply of Plandai stock through several separate transactions.
(Id. ¶ 20.) Specifically, Fiore, through Berkshire and Eat at Joe’s, beneficially acquired 5.5
million shares of Plandai stock as part of merger transactions between Plandai and its
predecessor, Diamond Ranch Ltd. (“Diamond Ranch”). (Id.) Additionally, pursuant to a stock
transfer agreement, the parties converted approximately $2.6 million in debt that Diamond Ranch
purportedly owed to Berkshire, Eat at Joe’s, and certain of Fiore’s close associates and
beneficially-owned companies, into 14 million shares of Plandai common stock. (Id.) Of those
shares, Berkshire received 2 million, Eat at Joe’s received 3.5 million, and Fiore’s associates
received the remaining 8.5 million. (Id.) Fiore later purchased 4.5 million of these shares from
his associates “at below market prices,” and soon after sold 3.5 million of them into the market
for a large profit. (Id. ¶ 21.)
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In March 2013, Fiore met with Plandai’s CEO in New York City, and Fiore agreed to
promote Plandai stock. (Id. ¶ 22.) Beginning in April 2013, Fiore organized and funded a
campaign promoting the stock, including by paying for the campaign with funds that he funneled
through Berkshire, in order to sell his shares at a profit, a practice known as “scalping.” (Id.
¶ 23.) 1
Fiore directly paid at least five promoters to promote Plandai stock, and indirectly paid at
least twenty others to do so through two intermediary consulting companies. (Id.) In total, Fiore
paid promoters at least $2,137,000 to promote penny stocks, including Plandai, with
approximately $675,000 going to the two intermediary consulting companies. (Id. ¶ 24.) The
promoters primarily distributed promotional materials through bulk emails and in posts on
websites they controlled, targeting retail investors and encouraging them to buy Plandai stock.
(Id. ¶ 26.) Fiore allegedly remained deeply involved in the promotional process, including by
providing promoters with information and press releases about Plandai for use in their
promotional materials, and by reviewing their materials and informing Plandai when he felt a
promoter was underperforming. (Id. ¶¶ 27–28, 31.)
The promotional campaign emphasized the investment merits of Plandai stock and often
included specific recommendations to buy Plandai stock, without disclosing that Fiore was
actively selling that stock. (Id. ¶ 32.) For example, on April 29, 2013, a promoter paid by Fiore
issued an eighteen-page “research report” that included a positive review of Plandai, and was
accompanied by a “Speculative BUY” rating. (Id. ¶ 32(a).) The same day and the following day,
Fiore directed the sale of at least 55,629 shares of Plandai common stock from accounts held by
1
Scalping is “a practice in which the owner of a security recommends it for investment
and then sells it at a profit.” S.E.C. v. Thompson, 238 F. Supp. 3d 575, 590 (S.D.N.Y. 2017)
(citations omitted).
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Berkshire and Eat at Joe’s. (Id.) On October 4, 2013, a third-party promoter retained by one of
the consulting firms on behalf of Fiore disseminated a “Street Alert” on Plandai that stated:
Put everything we’ve told you together and you have a money making opportunity
with PLPL like no other – and when it starts to run it’s going to run fast, so get in
while you can. Go with the experts. Buy PLPL now! . . . Keep a very close eye
on this fast innovative play today. PLPL could tear up the charts once again. PLPL
looks ready to lock and load!! Be prepared for an exciting trading session. This is
an opportunity that you will not want to miss!
(Id. at ¶ 32(b).) On the same day, and on October 7, 2013, Fiore directed the sale of at least
70,633 shares of Plandai common stock from accounts held by Berkshire and Eat at Joe’s. (Id.)
On January 23, 2014, a promoter paid directly by Fiore issued a research report that included
positive reports about the company and included a “Speculative BUY” rating; the same day and
the following day, Fiore directed the sale of at least 227,200 shares of Plandai common stock
from accounts held by Berkshire and Eat at Joe’s. (Id. ¶ 32(c).) On February 12, 2015, a thirdparty promoter retained by one of the consulting firms on behalf of Fiore disseminated a “Stock
Alert” on Plandai that indicated, “PLPL is a huge proven winner for us in the past and it was
arguably the breakout company of the entire junior markets in early 2014,” and concluded,
“PLPL looks ready to lock and load!! Be prepared for an exciting trading session. This is an
opportunity that you will not want to miss!” (Id. ¶ 32(d).) That same day and the following day,
Fiore directed the sale of at least 1,148,078 shares of Plandai common stock from accounts held
by Berkshire and Eat at Joe’s. (Id.) Fewer than half the promotions contained disclaimers
indicating that the promoter was compensated for promoting the stock, or disclosing that
Berkshire “may own” or “may sell” Plandai stock. (Id. ¶ 34.) Most promotions did not contain
this disclaimer, and none of them disclosed that Berkshire and Fiore “beneficially owned,
intended to sell[,] and were actively selling shares of Plandai stock.” (Id.)
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Fiore’s actions demonstrate that he “clearly intended to sell throughout the Relevant
Period.” (Id. ¶ 41.) For example, at least two of the brokerage accounts from which Fiore sold
Plandai stock identified “liquidation” among the objectives for the accounts. (Id. ¶ 41.)
Furthermore, Fiore completed and signed at least five documents that were sent to brokerage
firms where Berkshire and Eat at Joe’s maintained accounts that held Plandai stock, disclosing
his intent to sell stock from those accounts. (Id. ¶ 42.) For example, on November 8, 2013, in
connection with his deposit and intended sale of 1.25 million shares of Plandai stock owned by
Eat at Joe’s, Fiore submitted a representation letter to his brokerage firm in which he certified, “I
have sold, or am in the process of selling, the above referenced [Plandai] shares,” and from
November 2013 through January 2014 he did, in fact, sell all the shares referred to in the letter.
(Id. ¶ 43.)
During the Relevant Period, Fiore sold 11,961,898 shares of Plandai from accounts held
at six brokerage firms in the names of Fiore, Berkshire, and Eat at Joe’s; the three entities
collectively received proceeds totaling approximately $11,521,778 from the sales. (Id. ¶¶ 46–
47.) On at least 90 occasions, Fiore sold Plandai stock within a week or less of the publication of
a promotion that he had paid for, including seventy-three occasions when he sold on the same
day. (Id. ¶ 48.) During the Relevant Period, Fiore sold Plandai stock on at least 176 of the 252
trading days, and his trading often “comprised a significant portion of the daily market volume in
Plandai stock”; by contrast, Fiore did not sell any shares of Plandai stock in the public market in
the three months preceding the start of the promotional campaign. (Id. ¶ 50.) Fiore received no
compensation from Plandai or anyone else for promoting Plandai stock. (Id. ¶ 44.)
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3. Market Manipulation
Fiore also made targeted purchases of Plandai stock to artificially increase the market
activity and stock price of Plandai. (Id. ¶ 52.) For example, in late June to early July 2013, Fiore
purchased Plandai stock “in anticipation of and to offset the potential market impact of” the
impending publication of a July 6, 2013 article in the Seattle Times that was highly critical of
Plandai and its senior management. (Id. ¶ 53.) On eighteen trading days from June 25, 2013 to
July 22, 2013, Fiore bought more Plandai shares than he sold, and his purchasing accounted for a
significant portion of the market volume in Plandai stock. (Id. ¶ 55.) Fiore’s trades “set the
closing price for Plandai stock on eleven of these eighteen trading days.” (Id.) During this time,
Fiore also paid for promotional materials that drew attention to the active trading in Plandai
stock. (Id. ¶ 56.)
In December 2013, the month prior to the legalization of marijuana in Colorado and
Washington, and shortly after Plandai had announced its entry into the medical marijuana
industry, Fiore “bought more Plandai stock than he sold.” (Id. ¶ 57.) In February 2014, Fiore
purchased a total of 4.5 million shares of Plandai stock for $1.35 million from his sister, a
director of Eat at Joe’s, and employees of Berkshire and a restaurant that Fiore owned; he then
“quickly sold 3.5 million of these shares in the public market for proceeds of approximately
$5.65 million.” (Id. ¶ 58.) The SEC alleges that these “buying efforts, coupled with [Fiore’s]
promotional campaign, were deceptive actions, designed to create the false perception of
liquidity and market demand and to offset downward pressure on the stock price caused by
negative press[] and his own undisclosed selling of Plandai shares in the accounts he controlled.”
(Id. ¶ 59.) Both market demand for, and the share price of, Plandai stock increased significantly
over the Relevant Period. (Id. ¶ 60.)
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The SEC alleges that Fiore used “three well-known methods for manipulating the market
for Plandai stock: wash and matched trades, marking the close, and painting the tape.” (Id. ¶ 64.)
a. Matched and Wash Trades
The SEC alleges that on “at least fourteen occasions from May 2013 to June 2013,” Fiore
executed matched and wash trades by buying and selling “exactly the same amount of Plandai
stock at exactly the same price with no change in beneficial ownership, through accounts he
controlled in the name of himself, Berkshire, and Eat at Joe’s.” (Id. ¶¶ 67–68 (listing examples
of matched and wash trades).) 2 Fiore engaged in similar trading activity on at least sixteen
occasions from May 2013 to December 2013. (Id. ¶ 69 (listing examples).)
b. Marking the Close
The SEC alleges that Fiore repeatedly “marked the close” by executing trades “at or near
the close of the market to attempt to raise the closing price of Plandai stock and create the false
and misleading appearance that it was the result of legitimate market demand.” (Id. ¶ 70.) 3
Fiore “set the closing price of Plandai stock on at least eighteen trading days” from May 2013 to
September 2013. (Id. ¶¶ 70–71; see also id. ¶ 72 (listing examples of Fiore marking the close).)
2
“Matched orders are ‘orders for the purchase or sale of a security that are entered with
the knowledge that orders of substantially the same size, at substantially the same time and price,
have been or will be entered by the same or different persons for the sale/purchase of such
security.’” S.E.C. v. Competitive Techs., Inc., No. 04-CV-1331, 2005 WL 1719725, at *6 (D.
Conn. July 21, 2005) (quoting S.E.C. v. U.S. Envtl. Inc., 155 F.3d 107, 109 (2d. Cir. 1998)).
3
“‘Marking the close’ is defined as the practice of repeatedly executing the last
transaction of the day in a security in order to affect its closing price.” S.E.C. v. Masri, 523 F.
Supp. 2d 361, 369 (S.D.N.Y. 2007) (citation and some quotation marks omitted).
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c. Painting the Tape
Fiore allegedly “painted the tape” from May 2013 to September 2013 by “initiat[ing]
multiple offers to purchase Plandai stock on the same day, and within the same short period of
time, often at increasing purchase prices to artificially inflate the stock price and create the false
and misleading appearance that the increase was the result of legitimate market demand.” (Id.
¶ 73; see also id. ¶¶ 74–75 (listing examples of Fiore “painting the tape”).) 4
4. False and Misleading Statements
In furtherance of the scheme, Fiore allegedly made false and misleading statements to
brokerage firms in connection with the sale of Plandai securities. (Id. ¶ 78.) For example, on
January 27, 2014, Fiore signed and submitted to “Broker B” a document titled “Customer Stock
Deposit Representations” in connection with an Eat at Joe’s deposit of 2,000,000 shares of
Plandai stock in a brokerage account. (Id. ¶ 79.) The document included several allegedly false
representations, including: affirmations that Eat at Joe’s would not sell Plandai shares through
other broker-dealers while the shares held at Broker B remain unsold, that Eat at Joe’s had not
and would not engage in selling or promotional efforts, and that Eat at Joe’s was in compliance
with securities laws. (Id. ¶ 80.) On November 8, 2013, and January 27, 2014, Fiore signed and
submitted two “Shareholder Representation Letters” to “Broker C” in connection with sales of
1,250,000 shares of Plandai stock. (Id. ¶ 81.) The letters included multiple alleged
misrepresentations, including: affirmations that neither Fiore nor any related person would make
any payment in connection with the sale of Plandai stock to anyone other than “the usual and
4
“‘Painting the tape’ signifies creating an appearance of trading activity without an actual
change in beneficial ownership.” Nanopierce Techs., Inc. v. Southridge Cap. Mgmt. LLC., No.
02-CV-767, 2002 WL 31819207, at *5 n.8 (S.D.N.Y. Oct. 10, 2002).
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customary broker’s fee or commissions,” and that neither Fiore nor any related person had buy or
sell orders open with any other broker, dealer, or bank, nor would he place any such order. (Id.)
5. Failure to Disclose Beneficial Ownership
Fiore beneficially owned more than five percent of the outstanding shares of Plandai
common stock at various times, but allegedly failed to file the required Schedule 13D with the
SEC that would have publicly disclosed his ownership. (Id. ¶¶ 38, 86–88.) By failing to make
the required disclosure, Fiore further concealed his ownership and sales of Plandai stock during
the course of the scheme. (Id. ¶ 90.)
6. Eat at Joe’s Operated as an Unregistered Investment Company
The SEC alleges that Eat at Joe’s claimed to “develop, own[,] and operate theme
restaurants called ‘Eat at Joe’s,’” but in reality, operated only one restaurant, a cheesesteak stand
in the Philadelphia airport that reported recurring operational losses. (Id. ¶ 92.) For at least the
years 2013 and 2014, Eat at Joe’s allegedly acted primarily as a securities investment company.
(Id. ¶ 93.) Fiore frequently used Eat at Joe’s as a vehicle to buy and sell Plandai and other penny
stocks acquired from Berkshire in a 2003 related party agreement. (Id. ¶ 94.) According to SEC
filings, Eat at Joe’s had acquired approximately 30 million shares of penny stock companies
from Berkshire by May 21, 2013, with a stated face value of over $7.5 million, including
approximately 3.5 million shares of Plandai with a stated face value of over $1.5 million. (Id.
¶¶ 94–95.) Eat at Joe’s “also purchased numerous shares of Plandai and other issuers on the
open market and in private transactions.” (Id. ¶ 95.) The SEC alleges that because its
investment assets exceeded forty percent of total assets at the end of 2013 and 2014, Eat at Joe’s
was operating as an unregistered investment company within the meaning of the Investment
Company Act. (Id. ¶ 97.)
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7. Causes of Action
The SEC asserts eight causes of action based on the above allegations. The first four
causes of action are for deceptive conduct in connection with Defendants’ purchase, sale, and
promotion of Plandai stock, in violation of Section 17(a) of the Securities Act, Section 10(b) of
the Exchange Act and Rule 10b-5 thereunder, and Section 9(a)(1) and (2) of the Exchange Act.
(See id. ¶¶ 101–14.) The fifth cause of action is for violation of Section 20(b) of the Exchange
Act based on the use of third-party promoters. (See id. ¶¶ 115–18.) The sixth cause of action is
against Fiore for his failure to disclose his more than five percent beneficial ownership of
Plandai in violation of Section 13(d)(1) of the Exchange Act and Rule 13d-1 thereunder. (See id.
¶¶ 119–23.) The seventh cause of action is against Eat at Joe’s for failure to register as an
investment company, in violation of Section 7(a) of the Investment Company Act. (See id.
¶¶ 124–29.) The final cause of action is for disgorgement of unlawful proceeds arising from the
identified violations. (See id. ¶¶ 130–32.)
B. Procedural History
The SEC filed the operative Complaint on June 18, 2018. (Compl.) On November 2,
2018, with leave of the Court, Defendants filed the instant Motion to Dismiss. (Not. of Mot.;
Defs.’ Mem. in Supp. of Mot. (“Def.’s Mem.”) (Dkt. No. 27); Defs.’ Decl. in Supp. of Mot.
(“Defs.’ Decl.”) (Dkt. No. 28); Decl. of Marc S. Gottlieb, Esq. in Supp. of Mot. (“Gottlieb
Decl.”) (Dkt. No. 29).) The SEC filed a response on December 7, 2018, (Dkt. No. 30), and filed
an amended version on December 14, 2018. (Pl.’s Mem. in Opp’n to Mot. (“Pl.’s Mem.”) (Dkt.
No. 31).) Defendants filed a reply on December 20, 2018. (Defs.’ Reply Mem. in Further Supp.
of Defs.’ Mot. (“Defs.’ Reply”) (Dkt. No. 32).)
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II. Discussion
A. Standard of Review
“While 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 [her] entitlement 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) (citations,
alterations, and quotation marks omitted). Indeed, Rule 8 of the Federal Rules of Civil
Procedure “demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “Nor does a complaint suffice if it tenders naked
assertions devoid of further factual enhancement.” Id. (alteration and quotation marks omitted).
Instead, a complaint’s “[f]actual allegations must be enough to raise a right to relief above the
speculative level.” Twombly, 550 U.S. at 555. Although “once a claim has been stated
adequately, it may be supported by showing any set of facts consistent with the allegations in the
complaint,” id. at 563, and a plaintiff must allege “only enough facts to state a claim to relief that
is plausible on its face,” id. at 570, if a plaintiff has not “nudged [its] claim[] across the line from
conceivable to plausible, the[] complaint must be dismissed,” id.; see also Iqbal, 556 U.S. at 679
(“Determining whether a complaint states a plausible claim for relief will . . . be a contextspecific 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.’” (citation omitted) (second alteration in original) (quoting Fed. R. Civ. P.
8(a)(2))); id. at 678–79 (“Rule 8 marks a notable and generous departure from the
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hypertechnical, code-pleading regime of a prior era, but it does not unlock the doors of discovery
for a plaintiff armed with nothing more than conclusions.”).
“[W]hen ruling on a defendant’s motion to dismiss, a judge must accept as true all of the
factual allegations contained in the complaint.” Erickson v. Pardus, 551 U.S. 89, 94 (2007) (per
curiam); see also Nielsen v. Rabin, 746 F.3d 58, 62 (2d Cir. 2014) (“In addressing the sufficiency
of a complaint we accept as true all factual allegations . . . .” (quotation marks omitted)); Aegis
Ins. Servs., Inc. v. 7 World Trade Co., 737 F.3d 166, 176 (2d Cir. 2013) (“In reviewing a
dismissal pursuant to Rule 12(b)(6), we . . . accept all factual allegations in the complaint as
true . . . .” (alteration and quotation marks omitted)). Further, “[f]or the purpose of resolving [a]
motion to dismiss, the Court . . . draw[s] all reasonable inferences in favor of the plaintiff.”
Daniel v. T & M Prot. Res., Inc., 992 F. Supp. 2d 302, 304 n.1 (S.D.N.Y. 2014) (citing Koch v.
Christie’s Int’l PLC, 699 F.3d 141, 145 (2d Cir. 2012)).
B. Analysis
1. Sections 17(a) and 10(b)-5
Rule 10b-5 states, in relevant part, that it is “unlawful for any person . . . (a) [t]o employ
any device, scheme, or artifice to defraud”; “(b) [t]o make any untrue statement of a material fact
or to omit to state a material fact necessary in order to make the statements made . . . not
misleading”; or “(c) [t]o engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person.” 17 C.F.R. § 240.10b-5. To establish a
violation of subsection (b), the SEC must allege that the defendant “(1) made a material
misrepresentation or a material omission as to which he had a duty to speak, or used a fraudulent
device; (2) with scienter; (3) in connection with the purchase or sale of securities.” S.E.C. v.
Frohling, 851 F.3d 132, 136 (2d Cir. 2016) (citation and quotation marks omitted). To establish
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a violation of subsections (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.” Thompson, 238 F. Supp. 3d at 591 (citations omitted). A “manipulative or deceptive
act” is “some act that gives the victim a false impression.” United States v. Finnerty, 533 F.3d
143, 148 (2d Cir. 2008). The requisite state of mind, scienter, requires an “intent to deceive,
manipulate or defraud.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007)
(citation and quotation marks omitted). Additionally, “[m]arket manipulation comprises a class
of conduct prohibited by Section 10(b), which typically involves practices such as wash sales,
matched orders, or rigged prices, that are intended to mislead investors by artificially affecting
the market activity.” Fezzani v. Bear, Stearns & Co., 384 F. Supp. 2d 618, 641 (S.D.N.Y. 2004)
(citation and quotation marks omitted), on reconsideration in part, No. 99-CV-793, 2004 WL
1781148 (S.D.N.Y. Aug. 10, 2004).
Similarly, Section 17(a) forbids: “(1) the direct or indirect use of any device, scheme, or
artifice to defraud; (2) obtaining money or property through misstatements or omissions of
material facts; and (3) any transaction or course of business that operates as a fraud or deceit
upon a purchaser of securities.” S.E.C. v. Yorkville Advisors, LLC, 305 F. Supp. 3d 486, 510
(S.D.N.Y. 2018) (citing 15 U.S.C. §§ 77q(a)(1)–(3)). The first subsection requires proof of
scienter, while the other two sections require only proof of negligence. See Aaron v. S.E.C., 446
U.S. 680, 697 (1980) (“[T]he language of § 17(a) requires scienter under § 17(a)(1), but not
under § 17(a)(2) or § 17(a)(3).”). “The elements of a claim under § 17(a) . . . are essentially the
same as the elements of claims under § 10(b) and Rule 10b-5.” Frohling, 851 F.3d at 136
(citation, alteration, and quotation marks omitted). Because “[s]ection 10(b), Rule 10b-5[,] and
[s]ection 17(a) all sound in fraud[,] . . . the plaintiff must state the circumstances constituting
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fraud or mistake with particularity.” Thompson, 238 F. Supp. 3d at 591 (citing Fed. R. Civ. P.
9(b)) (quotation marks omitted); see also S.E.C. v. Lee, 720 F. Supp. 2d 305, 325 (S.D.N.Y.
2010) (same).
a. Deceptive Conduct under 10b-5(a) and (c)
Defendants argue that “[w]hether cast as an omission or a misrepresentation of a material
fact, or as a market manipulation, the Complaint lacks the requisite specificity necessary to
survive a motion to dismiss.” (Defs.’ Mem. 5.) Defendants specifically argue, relying on Janus
Capital Group v. First Derivative Traders, 564 U.S. 135 (2011), that Fiore cannot be primarily
liable under Rule 10b-5 because he did not “make” any statement or omission. (Defs.’ Mem. 6–
7.) In Janus, the Supreme Court held that “[f]or purposes of Rule 10b-5, the maker of a
statement is the person or entity with ultimate authority over the statement, including its content
and whether and how to communicate it.” Janus Cap., 564 U.S. at 142.
However, “[t]he Supreme Court’s recent ruling in SEC v. Lorenzo forecloses
[D]efendants’ . . . argument in this case.” S.E.C. v. SeeThruEquity, LLC, No. 18-CV-10374,
2019 WL 1998027, at *5 (S.D.N.Y. Apr. 26, 2019) (citing Lorenzo v. S.E.C., 139 S. Ct. 1094
(2019)). In Lorenzo, the Supreme Court rejected Defendants’ argument, instead holding that
“dissemination of false or misleading statements with intent to defraud can fall within the scope
of subsections (a) and (c) of Rule 10b-5,” and that even a disseminator who did not “make” the
misstatements as defined by Janus can thus be held liable as a primary violator. Lorenzo, 139 S.
Ct. at 1100–01; see also Set Cap. LLC v. Credit Suisse Grp. AG, No. 18-CV-2268, 2019 WL
3940641, at *14 n.6 (S.D.N.Y. Aug. 16, 2019) (“[E]ven if the . . . [d]efendants did not ‘make’
the [misleading statement] for the purposes of Rule 10b-5(b), [the] [p]laintiffs would still have a
viable claim under Rule 10b-5(a), (c) for employment of a scheme to defraud investors using the
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[misleading statement].” (citing Lorenzo, 139 S. Ct. at 1100–01)). Therefore, even if the SEC
“[had] not allege[d] [Fiore] ‘made’ a misstatement in furtherance of this scheme, thereby
prohibiting liability solely under subsection (b) of Rule 10b-5,” the Court’s analysis would be the
same “because “subsection (a) and (c) . . . do not require an individual ‘make’ a false statement
to establish liability.” S.E.C. v. Strebinger, 114 F. Supp. 3d 1321, 1329, 1331 (N.D. Ga. 2015)
(holding the SEC “appropriately allege[d] a claim under Section 10(b)” where the defendant
allegedly “failed to file a Schedule 13D after acquiring more than 5% of [the promoted
company’s] stock,” contributed to, edited, and otherwise provided information for independent
research reports promoting the stock and “helped arrange the[ir] dissemination,” and then “sold
his stock . . . for a substantial profit”); see also S.E.C. v. Pentagon Cap. Mgmt. PLC, 725 F.3d
279, 287 (2d Cir. 2013) (noting that subsection 10b-5(b) “was the only subsection at issue in
Janus” and holding that the defendant’s “fraudulent activities independently satisfy the
requirements of scheme liability under Rule 10b-5(a) and (c) and Section 17(a)”); S.E.C. v.
Killion, No. 16-CV-621, 2017 WL 7052310, at *8 n.69 (S.D. Tex. Mar. 24, 2017) (noting the
defendant’s “argument that Janus applies equally to claims of scheme liability has been
repeatedly rejected by courts, which generally hold that Janus’s applicability is limited to Rule
10b-5(b)” (citations and quotation marks omitted) (collecting cases)); S.E.C. v. Garber, 959 F.
Supp. 2d 374, 380 (S.D.N.Y. 2013) (“The textual basis for Janus does not extend to claims based
on schemes to defraud under Rule 10b-5(a) and (c), which do not focus on the ‘making’ of an
untrue statement. By the same logic, Janus would not affect claims under Section 17(a)(1) . . . .”
(citations omitted)).
Here, the SEC alleges a deceptive scheme involving multiple forms of market
manipulation, as well as various misstatements or omissions, which, combined with a misleading
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promotional campaign, were designed to convince the public that there was more market interest
in Plandai stock than in fact existed, encouraging the public to buy Plandai and then allowing
Fiore to sell his shares at a profit. (See Pl.’s Mem. 12 (alleging scheme liability in violation of
§ 10b-5(a) and (c) and § 17(a)).) These allegations are sufficient to establish scheme liability in
violation of the securities laws. See SeeThruEquity, 2019 WL 1998027, at *5 (holding the SEC
stated 10b-5 claim where the “complaint alleges that the defendants’ entire business model,
beyond any [specific] misstatements or omissions, is deceptive,” including allegations that they
“repeatedly made false or misleading statements in their research reports, press releases, and
website”); In re CytRx Corp. Sec. Litig., No. 14-CV-1956, 2015 WL 5031232, at *12 (C.D. Cal.
July 13, 2015) (noting that “the Rule 10b-5(b) ‘maker’ limitation described in Janus is
inapplicable to scheme liability claims” and holding the plaintiffs stated a 10b-5(a) and (c) claim
where they alleged the defendants “participated in the preparation of and/or disseminated or
approved” false and misleading statements); S.E.C. v. China Ne. Petroleum Holdings Ltd., 27 F.
Supp. 3d 379, 392 (S.D.N.Y. 2014) (“[T]he SEC has competently pled the existence of a larger
scheme, one that went beyond mere misrepresentations to investors, whereby [the] defendants
enriched themselves and their families at shareholders’ expense.”); S.E.C. v. Abellan, 674 F.
Supp. 2d 1213, 1219 (W.D. Wash. 2009) (holding the SEC stated a 10b-5 claim where the
defendants allegedly “created a fraudulent scheme whereby they (1) obtained significant blocks
of [a particular] stock without registering the transaction; (2) artificially inflated the stock price
by engaging in a fraudulent promotional campaign in which they failed to disclose their intent to
sell their holdings . . . ; and then (4) dumped the stock on the unsuspecting public for substantial
profits”). Therefore, the Court finds the SEC has sufficiently pled deceptive conduct.
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b. Misstatements or Omissions under 10b-5(b)
The SEC also argues that Fiore made material misstatements to brokers in violation of
Rule 10b-5(b). (Pl.’s Mem. 20–21.) Specifically, the SEC alleges that Fiore made affirmative
misrepresentations to brokers in connection with selling his Plandai stock, including affirmations
that Eat at Joe’s would not sell Plandai shares through other broker-dealers, that Eat at Joe’s had
not and would not engage in selling or promotional efforts, that neither Fiore nor any related
person would make any payment in connection with the sale of Plandai stock to anyone other
than “the usual and customary broker’s fee or commissions,” and that neither Fiore nor any
related person had buy or sell orders open with any other broker, dealer, or bank, nor would he
place any such order. (Compl. ¶¶ 80–81.) Defendants argue that the representations were in fact
“accurate,” although they cite no caselaw in support of their position that the Court should decide
that the statements were accurate as a matter of law at this stage. Taking the SEC’s allegations as
true and drawing all inferences in its favor, the Complaint sufficiently alleges that Fiore’s
representations to brokers were untrue in light of the alleged scheme to promote Plandai stock
and manipulate its price while concealing ownership. Set Capital, 2019 WL 3940641, at *13
(holding the plaintiffs sufficiently alleged a materially misleading statement because it would
“inarguably have misled a reasonable investor,” and noting that “[f]or the purposes of Rule 10b5, the veracity of a statement or omission is measured not by its literal truth, but by its ability to
accurately inform rather than mislead” (citations and quotation marks omitted)); In re BioScrip,
Inc. Sec. Litig., 95 F. Supp. 3d 711, 727 (S.D.N.Y. 2015) (holding the plaintiffs “adequately
alleged a misstatement” where, “[c]onstruing the allegations in [the] [p]laintiffs’ favor, . . . the
inference is available that a reasonable investor could have read” the statements to mean the
company had no pending investigatory requests, even if the statements “were not literally false”).
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The SEC has therefore adequately alleged misrepresentations in connection with the sale of
securities.
c. Materiality
Defendants argue that the SEC fails to plead that the alleged omission of Fiore’s
ownership of Plandai stock from the promotional materials was material. To fulfill the
materiality requirement, “there must be a substantial likelihood that the disclosure of the omitted
fact would have been viewed by the reasonable investor as having significantly altered the ‘total
mix’ of information made available.’” ECA, Local 134 IBEW Joint Pension Tr. of Chi. v. JP
Morgan Chase Co., 553 F.3d 187, 197 (2d Cir. 2009) (“ECA”) (quoting Basic Inc. v. Levinson,
485 U.S. 224, 231–32 (1988)); see also Halperin v. eBanker USA.com, Inc., 295 F.3d 352, 357
(2d Cir. 2002) (“The touchstone of the inquiry is not whether isolated statements within a
document were true, but whether [the] defendants’ representations or omissions, considered
together and in context, would affect the total mix of information and thereby mislead a
reasonable investor regarding the nature of the securities offered.” (citation omitted)); Ganino v.
Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000) (“At the pleading stage, a plaintiff satisfies
the materiality requirement . . . by alleging a statement or omission that a reasonable investor
would have considered significant in making investment decisions.” (collecting cases)).
Materiality depends on all relevant circumstances, and a complaint normally should not be
dismissed based on materiality “unless [the statements or omissions] are so obviously
unimportant to a reasonable investor that reasonable minds could not differ on the question of
their importance.” ECA, 553 F.3d at 197 (quotation marks omitted) (quoting Ganino, 228 F.3d
at 162); see also Halperin, 295 F.3d at 359 (“[A] complaint fails to state a claim of securities
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fraud if no reasonable investor could have been misled about the nature of the risk when he
invested.” (emphasis omitted)).
Defendants briefly argue that the alleged misrepresentations, omissions, and deceptive
conduct were not material because “it is widely assumed that promotional campaigns have been
funded by someone[,] and knowledge of the practice is incorporated into the market price.”
(Defs.’ Mem. 10.) The Court disagrees. First, the SEC has alleged an overarching deceptive
scheme, only part of which is the failure to disclose ownership of Plandai stock to promoters;
“considered together and in [the] context” of the promotional and market manipulation scheme,
including Fiore’s failure to register his more than 5% interest in Plandai and his use of multiple
entities and individuals to allegedly conceal his ownership, the omission of his interest “would
affect the total mix of information and thereby mislead a reasonable investor regarding the nature
of the securities offered.” Halperin, 295 F.3d at 357 (citation omitted); see also S.E.C. v. U.S.
Envtl., Inc., 155 F.3d 107, 112 (2d Cir. 1998) (holding that a defendant was a primary violator of
§ 10(b) where he “did not simply fail to disclose information when there was no duty to do so,
. . . or fail to prevent another party from engaging in a fraudulent act,” but also “himself
committed a manipulative act by effecting the very buy and sell orders that manipulated [the
defendant company’s] stock upward” (citation, alterations, and quotation marks omitted)).
Second, the fact that “it is widely assumed that promotional campaigns have been funded by
someone,” (Defs.’ Mem. 10 (emphasis added)), has not prevented courts from finding that failing
to disclose a beneficial interest in promoted stock and a present intent to sell is a material
omission under the securities laws. See Thompson, 238 F. Supp. 3d at 597 (“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.” (collecting cases)); In re CytRx
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Corp., 2015 WL 5031232, at *12 (holding the plaintiffs stated 10b-5(a) and (c) claims based on
scheme that “included conduct beyond [misleading] statements, including the hiring of
promoters, planning and editing well-timed article releases with targeted content to artificially
inflate the value of company stock and raise revenue, and covering up the [c]ompany’s
involvement”); S.E.C. v. Corp. Rels. Grp., Inc., No. 99-CV-1222, 2003 WL 25570113, at *8
(M.D. Fla. Mar. 28, 2003) (“[T]he fact that the . . . [d]efendants were selling their stock at the
same time they were encouraging their readers to buy would clearly be material to reasonable
investors.”); S.E.C. v. Blavin, 557 F. Supp. 1304, 1312 (E.D. Mich. 1983) (holding the defendant
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)”). Third and finally, “[m]ateriality is a mixed question
of law and fact, which ought not to be resolved on a motion to dismiss unless the alleged
misstatements or omissions are so obviously unimportant to a reasonable investor that reasonable
minds could not differ on the question of their importance.” S.E.C. v. Shapiro, No. 15-CV-7045,
2018 WL 2561020, at *5 (S.D.N.Y. Jun. 4, 2018) (quoting ECA, 553 F.3d at 197),
reconsideration denied, 2018 WL 5999607 (S.D.N.Y. Nov. 15, 2018). Accordingly, the Court
declines to find at this stage that the omissions were immaterial.
d. Scienter
“Section 10(b) requires plaintiffs to plead scienter, ‘a mental state embracing intent to
deceive, manipulate, or defraud.’” Schiro v. Cemex, S.A.B. de C.V., No. 18-CV-2352, 2019 WL
3066487, at *8 (S.D.N.Y. July 12, 2019) (quoting Tellabs, 551 U.S. at 319). To survive a motion
to dismiss, a plaintiff must allege facts such that “a reasonable person would deem the inference
of scienter cogent and at least as compelling as any opposing inference one could draw from the
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facts alleged.” Tellabs, 551 U.S. at 324. “[T]he scienter requirement is met where the complaint
alleges facts showing either [(1)] a motive and opportunity to commit the fraud, or [(2)] strong
circumstantial evidence of conscious misbehavior or recklessness.” Emps.’ Ret. Sys. of Gov’t of
the Virgin Islands v. Blanford, 794 F.3d 297, 306 (2d Cir. 2015) (citation and quotation marks
omitted). A plaintiff need not present direct evidence of scienter: “[c]ircumstantial evidence can
support an inference of scienter in a variety of ways, including where defendants ‘(1) benefitted
in a concrete and personal way from the purported fraud; (2) engaged in deliberately illegal
behavior; (3) knew facts or had access to information suggesting that their public statements
were not accurate; or (4) failed to check information they had a duty to monitor.’” Id. (ultimately
quoting Novak v. Kasaks, 216 F.3d 300, 311 (2d Cir. 2000)).
Here, there are ample allegations to support a reasonable inference of scienter. The SEC
alleges that Fiore owned and sold a significant amount of Plandai shares, and stood to make
significant profits if the stock price was inflated during the Relevant Period. While the “mere
desire to increase . . . stock prices does not give rise to a ‘strong inference’ of fraudulent intent,”
In re Refco, Inc. Sec. Litig., 503 F. Supp. 2d 611, 645 (S.D.N.Y. 2007), Fiore also allegedly
engaged in various deceptive trading practices, including marking the close, matched and wash
trades, and painting the tape, while he was paying for promotion of the stock, and actively selling
it while encouraging others to buy. See S.E.C. v. Competitive Techs., Inc., No. 04-CV-1331, 2005
WL 1719725, at *1, *6 (D. Conn. July 21, 2005) (holding the SEC sufficiently alleged scienter
where it “allege[d] that [the] defendants acted with the purpose of creating a false appearance of
active trading . . . and the purpose of inducing others to trade in the stock” through practices such
as marking the close, painting the tape, and matching orders); S.E.C. v. Schiffer, No. 97-CV5853, 1998 WL 226101, at *3 (S.D.N.Y. May 5, 1998) (denying motion to dismiss where the
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complaint “state[d] a reasonably inferable claim that [the defendant] executed a series of intraday and ‘marking the close’ transactions, knowing or reckless to the fact that he was effecting an
illegal manipulative scheme”).
Taken together, and drawing all inferences in the SEC’s favor, these allegations are
sufficient to create a plausible inference of scienter “at least as compelling as any opposing
inference one could draw from the facts alleged.” Tellabs, 551 U.S. at 324; see also S.E.C. v.
Aly, No. 16-CV-3853, 2018 WL 1581986, at *23 (S.D.N.Y. Mar. 27, 2018) (holding scienter
established based on, inter alia, “the benefits [the defendant] received from the scheme,” and the
“temporal proximity between [the defendant’s] filing of the Schedule 13D and [his] sale of his
call options” (alteration omitted)), reconsideration denied, 2018 WL 4853031 (S.D.N.Y. Oct. 5,
2018); S.E.C. v. Dubovoy, No. 15-CV-6076, 2016 WL 5745099, at *5 (D.N.J. Sept. 29, 2016)
(finding temporal proximity between the defendant’s trades and the publication of press releases
supported an inference of intent to participate in alleged fraud); Abellan, 674 F. Supp. 2d at 1219
(“Scienter is . . . evident where persons engage in ‘scalping.’”); In re Alstom SA, 406 F. Supp. 2d
433, 456 (S.D.N.Y. 2005) (holding the plaintiffs sufficiently alleged scienter where “it is at least
arguable that [the defendant] deliberately omitted adequate information about its vendor
financing arrangements from its public statements, and thus portrayed the performance of [a
particular division] far more favorably than the full facts warranted”); S.E.C. v. Schiffer, No. 97CV-5853, 1998 WL 307375, at *6 n.32 (S.D.N.Y. June 11, 1998) (“When a person who has a
‘substantial, direct pecuniary interest in the success of a proposed offering takes active steps to
effect a rise in the market’ in the security, a finding of manipulative purpose is prima facie
established.” (italics and alteration omitted) (quoting Crane Co. v. Westinghouse Air Brake Co.,
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419 F.2d 787, 795 (2d Cir. 1969)). Accordingly, the SEC has alleged sufficient information to
justify a reasonable inference of scienter.
For the reasons stated, the SEC has sufficiently alleged a deceptive scheme in violation of
§§ 17(a), 10(b), and Rule 10b-5. Accordingly, Defendants’ Motion To Dismiss those claims is
denied.
e. Market Manipulation
The SEC also asserts claims for market manipulation in violation of §§ 9(a)(1) and (2).
Section 9(a)(1) provides:
It shall be unlawful for any person, directly or indirectly, . . . [f]or the purpose of
creating a false or misleading appearance of active trading in any security . . . to
effect any transaction in such security which involves no change in the beneficial
ownership thereof, or . . . to enter an order or orders for the purchase [or sale] of
such security with the knowledge that an order or orders of substantially the same
size, at substantially the same time, and at substantially the same price, for the sale
of any such security, has been or will be entered by or for the same or different
parties.
15 U.S.C. § 78i(a)(1). Section 9(a)(2) makes it unlawful for one or more persons to “effect . . . a
series of transaction in any security . . . creating actual or apparent active trading in such security,
or raising or depressing the price of such security, for the purpose of inducing the purchase or
sale of such security by others.” Id. § 78i(a)(2). “On a market manipulation theory under [§] 9 a
complaint must allege: (1) a series of transactions in a security creating actual or apparent trading
in that security or raising or depressing the price of that security, (2) carried out with scienter, (3)
for the purpose of inducing the security’s sale or purchase by others, (4) was relied on by the
plaintiff, (5) and affected plaintiff’s purchase or selling price.” Fezzani, 384 F. Supp. 2d at 637
(citation and quotation marks omitted). The Complaint alleges three forms of conduct that the
SEC argues constitute market manipulation under these provisions: matched and wash trades,
marking the close, and painting the tape. (Pl.’s Mem. 17.)
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Defendants did not expressly move to dismiss the SEC’s claims under §§ 9(a)(1) and (2),
although they generally assert that the Complaint “should be dismissed in its entirety.” (Defs.’
Mem. 2.) Moreover, courts in the Second Circuit have expressly held that §§ 9(a)(1) and (2) of
the Exchange Act forbid the type of conduct alleged. See S.E.C. v. Masri, 523 F. Supp. 2d 361,
366 (S.D.N.Y. 2007) (noting that § 9(a)(1) “explicitly forbids several common types of market
manipulation, known as matched orders and wash sales, that involve fictitious transactions and
do not result in any change of beneficial ownership,” while § 9(a)(2) “more broadly prohibits
securities transactions that create actual or apparent active trading in such security, or raise or
depress the price of such security, for the purpose of inducing the purchase or sale of such
security by others.” (alterations and quotation marks omitted) (citing 15 U.S.C. §§ 78i(a)(1),
(2))); see also S.E.C. v. Kwak, No. 04-CV-1331, 2008 WL 410427, at *1 (D. Conn. Feb. 12,
2008) (noting that “matched trade[s]” violate § 9(a)(1) and “marking the close” violates
§ 9(a)(2)); Schiffer, 1998 WL 307375, at *6 (“[U]nder Section 9(a) of the Exchange Act, when a
series of transactions that have raised or depressed a stock price (or have created actual or
apparent sales volume) is carried out for the purpose of inducing others to buy or sell that stock,
a market manipulation has occurred.”). Because Defendants made no specific argument with
respect to whether the SEC has stated claims under § 9(a), and caselaw makes clear that the
alleged conduct is the precise conduct § 9(a) was enacted to address, the Court will not dismiss
those claims. See Sharette v. Credit Suisse Int’l, 127 F. Supp. 3d 60, 103 n.10 (S.D.N.Y. 2015)
(noting that the defendants’ motion “argues exclusively that [the] [p]laintiffs have not
[sufficiently] alleged . . . claims for market manipulation and misrepresentation in violation of
Section 10(b) and Rule 10b-5—citing to case law applicable only to those sections—and with no
separate discussion of [the elements] under Section 9,” and therefore construing the motion “as
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arguing only that [the] [p]laintiffs have failed to [sufficiently plead] their claims pursuant to
Section 10(b) and Rule 10b-5” and declining to “discuss the standards applicable to analyzing
such claims—or the sufficiency of the [complaint’s] allegations under—Section 9”).
In any event, Defendants’ arguments that the SEC failed to plead market manipulation
even with respect to its § 10(b) claims are unavailing. Defendants argue that the SEC failed to
state a market manipulation claim because it “does not even attempt to allege that the trading
activity actually impacted the market.” (Defs.’ Mem. 16.) However, courts have upheld marketmanipulation-based enforcement actions on manipulative intent alone. See Koch v. S.E.C., 793
F.3d 147, 153–54 (D.C. Cir. 2015) (“[I]ntent—not success—is all that must accompany
manipulative conduct to prove a violation of the Exchange Act and its implementing
regulations.” (citation omitted)); S.E.C. v. Lek Sec. Corp., 276 F. Supp. 3d 49, 60 (S.D.N.Y.
2017) (noting that “manipulative conduct need [not] be successful in order to violate the
securities laws” (citing Koch, 793 F.3d at 153–54)); Masri, 523 F. Supp. 2d at 367–72 (analyzing
the limited caselaw addressing whether intent alone can support a market manipulation claim,
and concluding that “if an investor conducts an open-market transaction with the intent of
artificially affecting the price of the security, and not for any legitimate economic reason, it can
constitute market manipulation”); S.E.C. v. Martino, 255 F. Supp. 2d 268, 287 (S.D.N.Y. 2003)
(noting that “an attempted manipulation is as actionable as a successful one,” and “the SEC need
not identify a specific victim who acted upon the manipulation”); cf. C.F.T.C. v. Amaranth
Advisors, L.L.C., 554 F. Supp. 2d 523, 533 (S.D.N.Y. 2008) (“A claim for attempted
manipulation . . . does not require that the CFTC assert that an attempt to manipulate prices
would, in fact, affect market prices.” (collecting cases)). Accordingly, the SEC need only allege
sufficient facts to establish “that defendants . . . engaged in conduct designed to deceive or to
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defraud investors, and . . . that defendants acted with scienter,” S.E.C. v. Cavanagh, No. 98-CV1818, 2004 WL 1594818, at *25 (S.D.N.Y. July 16, 2004), aff’d, 445 F.3d 105 (2d Cir. 2006),
and it has done so here by alleging that Defendants engaged in a scheme involving, among other
things, wash trading, marking the close, and painting the tape, conduct that courts have
specifically identified as potentially deceptive, see Santa Fe Indus. v. Green, 430 U.S. 462, 476
(1977) (noting that market manipulation “refers generally to practices, such as wash sales,
matched orders, or rigged prices, that are intended to mislead investors by artificially affecting
market activity”); accord Masri, 523 F. Supp. 2d at 366; Fezzani, 384 F. Supp. 2d at 641.
Specifically, the SEC identifies fourteen occasions from May 2013 to June 2013 in which Fiore,
through Berkshire and Eat at Joe’s, allegedly bought and then, within minutes or even seconds,
sold the exact same quantity of Plandai stock. (Compl. ¶ 68.) On sixteen more occasions from
May 2013 to December 2013, Fiore, through Eat at Joe’s and Berkshire, bought and sold
identical or substantially similar amounts of Plandai stock within minutes of each other. (Id.
¶ 69.) From May 2013 to September 2013, the SEC alleges that Fiore repeatedly executed trades
at or near the close of the market, and that he in fact succeeded in setting Plandai’s closing price
on at least eighteen trading days during this time. (Id. ¶ 72.) During that same period, the SEC
alleges that Fiore repeatedly “painted the tape” by initiating multiple offers for Plandai stock on
the same day within a short period of time, “often at increasing purchase prices to artificially
inflate the stock price,” and lists several examples of this conduct. (Id. ¶¶ 73–76.) Finally, the
SEC alleges that the promotional campaign described in the Complaint, (id. ¶¶ 22–51), included
promotions paid for by Fiore “that explicitly referenced the increased trading activity” that had in
many cases resulted from Fiore’s own trading, (id. ¶ 77). Viewed as a whole, these allegations, if
proven true, support the SEC’s theory that Fiore, using his control over Berkshire and Eat at
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Joe’s, engaged in a scheme in which he sought to deceive potential investors into believing that
Plandai stock was being actively traded and increasing in value as a result of typical market
activity. These allegations are sufficient to give rise to an inference that Defendants’ conduct
was done with the intent to deceive investors. See Masri, 523 F. Supp. 2d at 372 (holding the
SEC stated market manipulation claim where it “alleged that (1) [the] defendants conducted
activity within several minutes of the close of trade; (2) the transactions constituted a large
majority of the purchases that day; (3) [a defendant] had outstanding put options expiring that
day that he did not wish to be assigned; and (4) by purchasing 200,000 shares, [that defendant]
was able to avoid being assignment of these options”); Competitive Techs., 2005 WL 1719725, at
*5 (denying motion to dismiss 10b-5 market manipulation claim because “it is clear that the
pattern of phone calls between [the defendants] in relation to the pattern of [a defendant’s]
trading, as well as the substance of the phone . . . , constitute strong circumstantial evidence of
conscious misbehavior”); Schiffer, 1998 WL 226101, at *3 (holding the SEC stated a market
manipulation claim where the complaint “establishe[d] an association between [the defendants],
and states a reasonably inferable claim that [one defendant] executed a series of intra-day and
‘marking the close’ transactions, knowing or reckless to the fact that he was effecting an illegal
manipulative scheme”). Accordingly, the SEC has sufficiently alleged market manipulation in
violation of the Exchange Act.
2. Section 7(a) of the Investment Company Act
Defendants argue that the SEC’s claim against Eat at Joe’s for violation of § 7(a) of the
Investment Company Act, based on its failure to register as an investment company, should be
dismissed because Eat at Joe’s was exempt from the registration requirement. (See Defs.’ Mem.
19–22.)
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Under § 7(a) of the Investment Company Act, a company must register as an investment
company if it “is engaged or proposes to engage in the business of investing, reinvesting,
owning, holding, or trading in securities, and owns or proposes to acquire investment securities
having a value exceeding 40 per centum of the value of such issuer’s total assets (exclusive of
Government securities and cash items) on an unconsolidated basis.” 15 U.S.C. § 80a-3(a)(1)(c).
Notwithstanding this language, a company is not an investment company if it is “primarily
engaged . . . in a business . . . other than that of investing, reinvesting, owning, holding, or
trading in securities.” Id. § 80a-3(b)(1).
In determining whether a company is an investment company, the SEC considers “[(1)]
the company’s historical development, [(2)] its public representations of policy, [(3)] the
activities of its officers and directors, and, most important, [(4)] the nature of its present assets,
and [(5)] the sources of its present income.” Moses v. Black, No. 78-CV-1913, 1981 WL 1599, at
*6 (S.D.N.Y. Feb. 3, 1981) (quoting Tonopah Mining Co., 26 S.E.C. 426, 427 (1947)); see also
Lyft, Inc., Investment Company Act Release No. 33399, 2019 WL 1199584, at *3 (Mar. 19,
2019) (noting that in determining whether an issuer is “primarily engaged” in a non-investment
company business, the SEC considers “(a) the company’s historical development, (b) its public
representations of policy, (c) the activities of its officers and directors, (d) the nature of its
present assets, and (e) the sources of its present income” (citing Tonopah Mining)).
Defendants argue that Eat at Joe’s is exempt from registration requirements because it has
never been primarily engaged in securities investment, and that instead its primary focus was the
operation of theme restaurants. (Defs.’ Mem. 20–22.) The SEC responds that the exception does
not apply, given that “the scope of the company’s investing and trading in securities dwarfed any
other operations.” (Pl.’s Mem. 26.)
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Here, consideration of the Tonopah factors suggest that, based on the allegations in the
Complaint, Eat at Joe’s was required to register as an investment company under §7(a). First,
although Eat at Joe’s may have begun life as a restaurant company, and later transitioned to a
company dedicated to “digital publishing and advertising and the development of mobile
applications and games,” (Compl. ¶ 15; see also Def.’s Mem. 20), the Complaint alleges that
throughout the Relevant Period, Eat at Joe’s and its officers (namely, Fiore) engaged in
significant securities trading activity, (Compl. ¶¶ 93–94). Second, the SEC alleges that
“investment securities constituted approximately 52 percent to 65 percent” of Eat at Joe’s assets
on an unconsolidated basis on December 31, 2013, and “between 62 percent and 80 percent” of
Eat At Joe’s assets by December 31, 2014. (Id. ¶ 96.) Finally, the SEC notes that Eat at Joe’s
operated only one restaurant between 1997 and 2014, and that it “reported recurring losses from
operations.” (Id. ¶ 92.) These allegations, if true, suggest that Eat at Joe’s was an investment
company.
Defendants ask the Court to take judicial notice of “all form 10-K public filings
referenced” to establish that Eat at Joe’s was primarily engaged in non-investment activity.
(Defs.’ Mem. 21 n.5.) Defendants argue that based on the company’s 10-K filings, Eat at Joe’s is
analogous to the company the Seventh Circuit held was not required to register as an investment
company in S.E.C. v. National Presto Industries, Inc., 486 F.3d 305 (7th Cir. 2007). In National
Presto Industries, the Seventh Circuit reversed a grant of summary judgment in favor of the
SEC, relying heavily on an evidentiary record that confirmed that “[r]easonable investors would
[have] treat[ed] Presto as a[] [military products] operating company rather than a competitor with
a closed-end mutual fund.” 486 F.3d at 315.
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Here, it would be inappropriate to consider Eat at Joe’s 10-K filings to determine whether
Eat at Joe’s was exempt from registration because it would require considering the documents
for their truth. Although courts may take judicial notice of “legally required public disclosure
documents filed with the SEC,” DoubleLine Cap. LP v. Odebrecht Fin., Ltd., 323 F. Supp. 3d
393, 434 (S.D.N.Y. 2018), they may “not take judicial notice of the documents for the truth of
the matters asserted in them, but rather to establish that the matters had been publicly asserted,”
Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d 406, 424 (2d Cir. 2008) (citation, quotation
marks, and alterations omitted). Here, Defendants ask the Court to consider the truth of the SEC
filings’ contents and hold as a matter of law that the statements made therein establish that Eat at
Joe’s was primarily involved in the business of “creating American Diner themed restaurants, not
investing.” (Defs.’ Mem. 21.) Because considering such statements for their truth would be
improper at this stage, the Court declines to take judicial notice of the information in the 10-Ks.
See In re Bear Stearns Cos., Inc. Sec., Derivative, & ERISA Litig., 763 F. Supp. 2d 423, 582
(S.D.N.Y. 2011) (taking judicial notice of SEC filings with respect to “the fact that these
documents contain certain information,” but declining to “accept these documents for the truth of
the matters asserted in them”), on reconsideration, 2011 WL 4072027 (S.D.N.Y. Sept. 13, 2011),
and on reconsideration, 2011 WL 4357166 (S.D.N.Y. Sept. 13, 2011). 5
For these reasons, Defendants’ Motion To Dismiss the SEC’s § 7(a) claim against Eat at
Joe’s is denied.
5
Defendants assert that the 10-K filings show that the SEC was placed “on notice” that
Eat at Joe’s was primarily engaged in the business of operating theme restaurants; however, this
assertion does nothing to undermine the SEC’s allegation that despite their public appearance
and statements, Eat at Joe’s was in fact an investment company, and that it concealed that fact by
holding itself out as primarily a restaurant operator. The characterization of Eat at Joe’s in the
company’s 10-Ks is thus perfectly consistent with the SEC’s allegations that Eat at Joe’s
intentionally concealed its status as an investment company.
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3. Section 13(d) of the Exchange Act and Rule 13d-1
The SEC alleges that Fiore never filed a Schedule 13D form within ten days of the
acquisition of more than five percent of Plandai stock, as required by § 13(d) of the Exchange
Act and Rule 13d-1. (Compl. ¶¶ 120–22.) Defendants argue that Plandai’s public filings
indicated that it was not a Section 12 reporting company, and that Fiore therefore “had no way of
ascertaining that he was subject to this statutory filing requirement.” (Defs.’ Mem. 24.) The
SEC argues that “[s]cienter is not an element of a § 13(d) violation,” and thus that ignorance is
no excuse. (Pl.’s Mem. 25 (citing SEC v. McNulty, 137 F.3d 732).) The SEC further argues that
“whether Fiore acted reasonably or appropriately under the circumstances is a mixed issue of fact
and law that is inappropriate on a motion to dismiss.” (Id. (citing Sapirstein-Stone-Weiss Found.
v. Merkin, 950 F. Supp. 2d 621, 629 (S.D.N.Y. 2013)).)
Section 13(d) states that “[a]ny person who, after acquiring . . . the beneficial ownership
of any equity security . . . is directly or indirectly the beneficial owner of more than 5 per centum
of such class shall, within ten days after such acquisition,” file with the SEC a statement
containing certain information. 15 U.S.C. § 78m(d). “Schedule 13D is a disclosure report
required under [§] 13(d) of the Exchange Act to be filed by any person who ‘is directly or
indirectly the beneficial owner of more than five percent’ of the stock of any class of a public
company’s outstanding stock.” S.E.C. v. Wyly, 788 F. Supp. 2d 92, 97 (S.D.N.Y. 2011), modified
in part on reconsideration, 950 F. Supp. 2d 547 (S.D.N.Y. 2013). “For the purpose of
determining if the reporting requirements of Section 13(d) have been met, a potential filer may
rely upon ‘information set forth in the issuer’s most recent quarterly or annual report . . . unless
he knows or has reason to believe that the information contained therein is inaccurate.’” In re
Luxottica Grp. S.p.A., Sec. Litig., 293 F. Supp. 2d 224, 234 (E.D.N.Y. 2003) (quoting 17 C.F.R.
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§ 240.13d–1(j)). The Second Circuit has specifically held that “scienter is not an element of civil
claims under” § 13(d). S.E.C. v. McNulty, 137 F.3d 732, 741 (2d Cir. 1998) (affirming district
court’s ruling that “lack of scienter would not be a defense to the claims,” and finding that the
ruling “was consistent with precedent in this Circuit and with the Commission’s interpretive
regulations” (citing S.E.C. v. Koenig, 469 F.2d 198, 200 (2d Cir. 1972))).
Here, Defendants argue that Fiore should not be held liable for violating § 13(d) because
he acted in reliance on Plandai’s public filings, which incorrectly stated that Plandai was not a
Section 12 reporting company. (Def.’s Mem. 24–25; see also Defs.’ Decl. Exs. F at 32, G at 24,
H at 26, I at 34 (Plandai’s 10-K forms from 2011–2014).) Although Fiore may be able to
establish a defense if he reasonably relied on Plandai’s inaccurate filings, Fiore’s reasonable
reliance is a mixed question of fact and law that cannot be resolved solely from the facts alleged
in the Complaint. Cf. Cohn v. Kind, LLC, No. 13-CV-8365, 2015 WL 9703527, at *3 (S.D.N.Y.
Jan. 14, 2015) (noting that reasonable reliance “is a question of fact inappropriate for resolution
on a motion to dismiss”); Gen. Motors Corp. v. Watson Enters., Inc., No. 04-CV-120, 2004 WL
2472268, at *5 (D. Conn. Oct. 27, 2004) (denying motion to dismiss and noting that “[w]hether
[the plaintiff] was justified in relying upon [the defendant’s] representations presents a question
of fact”).
Because the SEC has adequately pled that Fiore failed to comply with § 13(d), and
Fiore’s defense would require the Court to consider facts outside the Complaint, Defendants’
Motion To Dismiss this claim is denied.
4. Statute of Limitations
Defendants argue that the SEC’s § 17(a), 10(b), and disgorgement claims are barred in
whole or in part by the five-year statute of limitations imposed by 28 U.S.C. § 2462, which holds
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that the statute of limitations “for the enforcement of any civil fine, penalty, or forfeiture,
pecuniary or otherwise” is five years. (Def.’s Mem. 25 (quoting 28 U.S.C. § 2462).)
Specifically, Defendants argue that because the “Relevant Period” discussed in the Complaint
began in April 2013, and the Complaint was not filed until June 18, 2018, any and all claims in
the Complaint arising from events before June 18, 2013 are time-barred. (Id.) Defendants also
argue that the SEC cannot rely on a “continuing violations” theory of liability in order to litigate
claims arising from actions outside the statutory term, as the Second Circuit has not adopted such
a theory, and “most courts in this circuit have been skeptical of [the doctrine’s] application in
securities cases.” (Id. at 27.)
The SEC argues that all of the proceeds that Defendants received from their alleged
violations were received on or after June 18, 2013, within the statute of limitations period. (Pl.’s
Mem. 29.) Moreover, the SEC argues that any information “concerning early conduct [is]
included to support claims for injunctive and equitable relief, which are not subject to the fiveyear statute of limitations, and to provide necessary context to understand the Defendants’
fraudulent scheme.” (Id.)
“[T]he statute of limitations is normally an affirmative defense, on which the defendant
has the burden of proof.” Bano v. Union Carbide Corp., 361 F.3d 696, 710 (2d Cir. 2004)
(citations omitted). As a result, a claim should only be dismissed on a motion to dismiss based
on a statute of limitations defense “if the factual allegations in the complaint clearly show that
the claim is untimely,” and if “drawing all reasonable inferences in favor of the plaintiff, the
court concludes that the plaintiff’s own factual allegations prove the defendant’s statute of
limitations defense.” St. John’s Univ. v. Bolton, 757 F. Supp. 2d 144, 157 (E.D.N.Y. 2010)
(citing, inter alia, Harris v. City of New York, 186 F.3d 243, 250 (2d Cir. 1999)).
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Here, the SEC has alleged a fraudulent scheme involving conduct that occurred both
within and before the statute of limitations. Specifically, the Complaint contains allegations of
matched and wash trades executed between May 8, 2013 and June 28, 2013, (Compl. ¶¶ 68–69),
marking the close between May 3, 2013 and July 10, 2013, (id. ¶ 72), painting the tape on May
3, 2013, (id. ¶ 74), manipulative limit orders on July 9, 2013, (id. ¶ 75), fraudulent and
misleading statements to brokerage firms between November 8, 2013 and January 27, 2014, (id.
¶¶ 78–84), and failure to disclose beneficial ownership of more than five percent of Plandai’s
shares and operation as an unregistered investment company at various times within the Relevant
Period, (id. ¶¶ 85–90).
Defendants argue that any claims supported in part by conduct that occurred prior to June
18, 2013 must nonetheless be dismissed because the Second Circuit does not apply the
continuing violations doctrine in securities cases. (Defs.’ Mem. 27.) “The continuing violations
doctrine operates to delay the triggering of a statute of limitations where a continuing violation is
occasioned by continual unlawful acts, not continual ill effects from a single violation.” In re
Comverse Tech., Inc. Sec. Litig., 543 F. Supp. 2d 134, 155 (E.D.N.Y. 2008) (citation and
quotation marks omitted). Courts within the Second Circuit have reached “diametrically
opposite conclusions” regarding whether the continuing violations doctrine applies in securities
fraud cases. Freihofer v. Vt. Country Foods, Inc., No. 17-CV-149, 2019 WL 2995949, at *3 (D.
Vt. July 9, 2019) (collecting cases); compare In re Beacon Assocs. Litig., 282 F.R.D. 315, 324
(S.D.N.Y. 2012) (holding that “continuing misrepresentations mean that [the] [p]laintiffs’ claims
are not untimely, given the rule, adopted by the majority of courts in this Circuit, that the statute
of repose first runs from the date of the last alleged misrepresentation regarding related subject
matter” and collecting cases (citation and quotation marks omitted)), with Comverse Tech., 543
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F. Supp. 2d at 155 (“The weight of authority in this circuit is skeptical of the application of the
continuing violations doctrine in securities fraud cases.” (collecting cases)).
In light of the fact that all of the SEC’s claims survive based on timely-pled allegations
alone, the Court declines to determine at this stage whether the potential inapplicability of the
continuing violation doctrine bars consideration of, and damages for, conduct that occurred prior
to June 18, 2013. At the summary judgment stage, with the benefit of a developed factual
record, Defendants may again raise the argument that some or all of the SEC’s claims are timebarred. See Comverse Tech., 543 F. Supp. 2d at 155 (finding it “prudent to defer consideration of
[the statute of limitations] issue until the factual record . . . is more fully developed” in light of
the fact that it implicates “an uncertain area of the law,” and because “it is difficult to determine
[at the motion to dismiss stage] whether the factual predicate required for application of the
continuing violations doctrine . . . has been met”). 6
6
Defendants also argue that the Court lacks jurisdiction over this Action because the SEC
failed to bring suit within 180 days of providing Defendants with a written Wells notification, as
required by Section 929U of the Dodd-Frank Act. (Defs.’ Mem. 27–28 (citing 15 U.S.C. § 78d5(a)(1)).) Section 929U provides:
Not later than 180 days after the date on which Commission staff provide a written
Wells notification to any person, the Commission staff shall either file an action
against such person or provide notice to the Director of the Division of Enforcement
of its intent to not file an action.
15 U.S.C. § 78d-5(a)(1). The statute includes a procedure for extending that deadline for
“certain complex actions.” See 15 U.S.C. § 78d-5(a)(2). The only courts to have considered
Defendants’ argument have rejected it, holding that the rule is an internal directive and not a
jurisdictional bar. See Montford & Co. v. S.E.C., 793 F.3d 76, 83 (D.C. Cir. 2015) (holding “that
the 180-day time period is not jurisdictional”); S.E.C. v. NIR Grp., LLC, No. 11-CV-4723, 2013
WL 5288962, at *5 (E.D.N.Y. Mar. 24, 2013) (“Every relevant authority supports the conclusion
that expiration of the 180-day deadline imposed by section 929U does not create a jurisdictional
bar to SEC enforcement actions.”); S.E.C. v. Levin, No. 12-CV-21917, 2013 WL 594736, at *13
(S.D. Fla. Feb. 14, 2013) (holding that Section 929U “imposes only an internal deadline on the
SEC, not a private right to be free from agency action occurring beyond the internal deadline”).
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5. Disgorgement
Defendants argue that the SEC failed to properly plead a claim for disgorgement because
disgorgement is an equitable remedy, not a separate cause of action. (Def.’s Mem. 22–23.)
Defendants are correct that “[d]isgorgement is merely an equitable remedy rather than a cause of
action.” Teachers Ins. & Annuity Ass’n of Am. v. CRIIMI MAE Servs. Ltd. P’ship, 681 F. Supp.
2d 501, 512 n.60 (S.D.N.Y. 2010) (citing Cavanagh, 445 F.3d at 117), aff’d, 481 F. App’x 686
(2d Cir. 2012); see also S.E.C. v. Contorinis, 743 F.3d 296, 301 (2d Cir. 2014) (“Disgorgement
serves to remedy securities law violations by depriving violators of the fruits of their illegal
conduct.”); F.T.C. v. Bronson Partners, LLC, 654 F.3d 359, 372 (2d Cir. 2011) (comparing
disgorgement to other “equitable remedies,” and stating that “disgorgement is a distinctly publicregarding remedy”).
However, to the extent the SEC seeks disgorgement as an equitable remedy, it has
adequately pled facts supporting entitlement to the remedy. “Once the district court has found
federal securities law violations, it has broad equitable power to fashion appropriate remedies,
including ordering that culpable defendants disgorge their profits.” S.E.C. v. Razmilovic, 738
F.3d 14, 31 (2d Cir. 2013) (citation and quotation marks omitted), as amended (Nov. 26, 2013).
Because the SEC has sufficiently pled securities fraud claims, it may seek disgorgement of any
“illegally derived” proceeds it ultimately is able to prove, see id., subject to the statute of
limitations, see Kokesh v. S.E.C., 137 S. Ct. 1635, 1639 (2017) (“Disgorgement in the securitiesenforcement context is a ‘penalty’ within the meaning of § 2462, and so disgorgement actions
Defendants’ argument that the Court lacks jurisdiction over this Action is therefore without
merit.
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must be commenced within five years of the date the claim accrues.”). The SEC’s cause of
action for disgorgement thus survives as an equitable remedy.
6. Liability Against Each Defendant
Defendants argue that the SEC failed to state claims against Berkshire and Eat at Joe’s
because the Complaint contained ”no direct allegations of wrongdoing” by Berkshire and Eat at
Joe’s themselves “other than that Fiore is alleged to have acted through Berkshire and [Eat at
Joe’s].” (Def.’s Mem. 18.) In fact, however, the Complaint details numerous instances of trade
matching between Berkshire, Eat at Joe’s, and Fiore, (see Compl. ¶ 68), many instances of both
Fiore and Berkshire marking the close, (see id. ¶ 72), and several instances of Berkshire and
Fiore painting the tape, (see id. ¶ 75). The SEC also alleges that Fiore “owned and controlled”
Berkshire, and that he “effectively controlled Eat at Joe’s,” and that he conducted the alleged
transactions through brokerage accounts held in their names. (Id. ¶¶ 13–15.) These allegations
are sufficient to state claims against Eat at Joe’s and Berkshire, based both on the direct
allegations of misconduct against them, and the allegations that Fiore, the owner of Berkshire
and the Chairman, majority shareholder, CEO, and CFO of Eat at Joe’s, carried out the scheme
via his complete control of these two entities. See In re Eletrobras Sec. Litig., 245 F. Supp. 3d
450, 472 (S.D.N.Y. 2017) (denying motion to dismiss scheme liability claim by corporate
defendant where a high-level officer committed deceptive acts through the company and the
company benefitted from the misconduct); In re Bristol Myers Squibb Co. Sec. Litig., 586 F.
Supp. 2d 148, 170 (S.D.N.Y. 2008) (holding the plaintiffs stated a 10(b) claim against a
defendant who “made no public statements himself,” but whose “behavior [wa]s at the heart of
[the defendant corporation’s] false and misleading conduct”); cf. In re Marsh & Mclennan Cos.,
Inc. Sec. Litig., 501 F. Supp. 2d 452, 481 (S.D.N.Y. 2006) (“While there is no simple formula for
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how senior an employee must be in order to serve as a proxy for corporate scienter, courts have
readily attributed the scienter of management-level employees to corporate defendants.”
(collecting cases)); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Young, No. 91-CV-2923, 1994
WL 88129, at *15 (S.D.N.Y. Mar. 15, 1994) (dismissing claim where the plaintiff made
generalized allegations against four defendants as a group, and noting that “pleading requires
[the] plaintiffs to identify the specific defendant charged with committing a particular predicate
act, rather than collectivizing a group of defendants as [the] plaintiffs have done here”).
7. Section 20(b)
Section 20(b) of the Exchange Act makes it “unlawful for any person, directly, or
indirectly, to do any act or thing which it would be unlawful for such person to do under the
provisions of this chapter or any rule or regulation thereunder through or by means of any other
person.” 15 U.S.C. § 78t(b). The SEC alleges that Fiore and Berkshire violated § 20(b) by using
third-party promoters to promote Plandai stock without disclosing their beneficial ownership and
intent to sell. (Compl. ¶ 117.) Defendants argue that the claim fails because the SEC “has not
alleged an independent unlawful act by any defendant,” because Fiore and Berkshire had no duty
to disclose their interest. (Defs.’ Mem. 18.) Because the Court has already rejected that
argument, and Defendants make no other argument with respect to this claim, Defendants’
Motion To Dismiss the SEC’s § 20(b) claim is denied. See Strebinger, 114 F. Supp. 3d at 1334
(holding the SEC stated claim under 20(b) where the defendant “contributed to the false or
otherwise misleading information contained” in reports issued by third parties).
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III. Conclusion
For the foregoing reasons, Defendant's Motion To Dismiss is denied. The Court will
hold a conference on November 6, 2019 at 11 :30 a.m. to discuss the status of the case. The Clerk
of the Court is respectfully requested to terminate the pending Motion. (Dkt. No. 26.)
SO ORDERED.
Dated: September'5" , 2019
White Plains, New York
40
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