Securities and Exchange Commission v. AIC, Inc. et al

Filing 30

ORDER denying 14 Motion to Change Venue; denying 16 Motion for More Definite Statement. Signed by Magistrate Judge H Bruce Guyton on 9/7/11. (ABF) Modified on 9/7/2011 to indicate c/m to pro se parties (ABF).

UNITED STATE DISTRICT COURT
EASTERN DISTRICT OF TENNESSEE
AT KNOXVILLE
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,

V.
AIC, INC., et al.,
Defendants.

)
)
)
)
)
)
)
)
)
)
)

No. 3:11-CV-176
(VARLAN/GUYTON)

MEMORANDUM AND ORDER
This case is before the undersigned pursuant to 28 U.S.C. § 636, the Rules of this Court, and
the order of the District Judge [Doc. 27] referring Defendants’ and Relief Defendants’ Motion to
Transfer Venue [Doc. 14] and Defendants’ and Relief Defendants’ Motion for a More Definite
Statement [Doc. 16] to this Court for disposition.
Now before the Court are the Defendants’ and Relief Defendants’ Motion to Transfer Venue
[Doc. 14] and Defendants’ and Relief Defendants’ Motion for a More Definite Statement [Doc. 16].
The Securities and Exchange Commission (“the Commission”) has responded in opposition to these
motions. [Docs. 21 and 22]. The Defendants and Relief Defendants (collectively “the Defendants”)
have filed a final reply [Doc. 23], and the Commission has made a sur-reply, [Doc. 28]. The Court
finds that the Motion to Transfer Venue and the Motion for a More Definite Statement are now ripe
for adjudication, and for the reasons more fully stated below, the Court will DENY the motions.

I.

BACKGROUND
The Commission filed the Complaint on April 15, 2011, alleging that Defendant Nicholas

D. Skaltsounis, founder and President of Defendant AIC, Inc. (“AIC”), orchestrated an offering fraud
and Ponzi scheme. [Doc. 1 at ¶ 1]. The Commission alleges that the scheme “operated through the
sale of millions of dollars of AIC promissory notes and stock through misleading and false
representations and disclosures that masked the underlying financial hardship of AIC and its inability
to pay promised returns without using new investor money.” [Doc. 1 at ¶ 1].
The Commission maintains that from January 2006 through November 2009, AIC and
Skaltsounis, directly and through representatives offered and sold more than 7.7 million dollars in
AIC common stock, preferred stock, and promissory notes to at least 74 investors in 14 states,
including the State of Tennessee. [Doc. 1 at ¶ 2]. Defendants John R. Graves and John B. Guyette
were representatives, associated with Defendant Community Bankers Securities, LLC, a brokerdealer allegedly owned by AIC, and they are alleged to have offered or sold the stock and notes.
[Doc. 1 at ¶ 2].
The Commission alleges that AIC promised to pay interest and dividends on these
investments, ranging from 9 to 12.5 percent, despite knowing that it did not have the money to pay
those returns. [Doc. 1 at ¶ 3]. The Commission maintains that AIC grew more in debt each year, and
“the only significant source of money available to pay investor principal, interest, and dividends was
money raised from the sale of new AIC investments.” [Doc. 1 at ¶ 3]. It is alleged that, in offering
and selling these investments, Defendant Skaltsounis, Defendant Guyette, and Defendant Graves,
and at least one other individual misrepresented and omitted material information relating to the risk

2

associated with the investments, the rates of return on the investments, and how AIC would use the
proceeds of the investments. [Doc. 1 at ¶ 5].
The Commission states that the alleged scheme collapsed in December 2009, when the
Defendants’ ability to solicit investments faltered. [Doc. 1 at ¶ 6]. The Commission alleges that, as
a result, the majority of the AIC investors did not receive their promised returns and lost their entire
principal investments. [Doc. 1 at ¶ 6].
The Commission alleges that the Defendants violated Sections 5(a), 5(c), and 17(a) of the
Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5
thereunder. [Doc. 1 at ¶ 7]. It is the Commission’s position that Defendants AIC and Community
Bank Securities are liable as controlling persons under Section 20(a) of the Exchange Act and that
Defendant Graves also violated Sections 206(1) and 206(2) of the Investment Advisors Act of 1940.
[Doc. 1 at ¶ 7]. The Commission maintains that, as a result of the Defendants’ illegal conduct,
Allied Beacon Partners, Inc., Advent Securities, Inc., and CBS Advisors, LLC, received ill-gotten
gains to which they have no legitimate claim. [Doc. 1 at ¶ 8].
In its Complaint, the Commission moves the Court to enter a final order: enjoining the
Defendants from violating the Securities Act and the Exchange Act, ordering the Defendants to
disgorge any and all ill-gotten gains together with prejudgment interest, ordering the Defendants to
pay appropriate civil penalties, retaining jurisdiction over this action for purposes of enforcing any
final judgment, and any further relief that the Court may deem appropriate. [Doc. 1 at 31-32].

3

II.

POSITIONS OF THE PARTIES
In the Motion to Transfer Venue, the Defendants move the Court to transfer this action to the

United States District Court for the Eastern District of Virginia, Richmond Division, for all further
proceedings and trial. [Doc. 14 at 1]. In support of this request, the Defendants argue that: the
Commission engaged in “forum shopping” in selecting this venue; litigation of this action in
Tennessee will bankrupt the Defendants; the Commission would not be harmed by a transfer of
venue; the Defendants’ necessary witnesses are citizens of Virginia; the majority of the witnesses
in this action live and work in Virginia; boxes of paperwork related to this action are located in
Richmond; and the Defendants will receive a more speedy trial in Virginia.
The Commission responds that each of the Relief Defendants applied for or obtained
registration to sell securities in Tennessee, was registered as an investment adviser in Tennessee, or
obtained a certificate to transact business in Tennessee and had an appointed registered agent in
Tennessee. [Doc. 22 at 2]. The Commission maintains that if venue is proper as to any one of the
Defendants, as it is here, then venue is proper as to the entire case. [Doc. 22 at 1-2]. The
Commission argues that the Defendants have not met their burden of showing that the Commission’s
forum choice, which is entitled to substantial deference, should be disturbed.
In the Motion for a More Definite Statement, the Defendants move the Court to order the
Commission to file a more definite statement of its Complaint. The Defendants argue that the
Complaint [Doc. 1] is so vague and ambiguous that Defendants cannot reasonably prepare a
response. The Defendants seek clarification of terms used in the Complaint, such as “investors” and
“written materials.” They also request that the Commission be ordered to specify its allegations of
wrongdoing and clarify how the Defendants were unjustly enriched.
4

The Commission responds that the Complaint “contains thirty-two pages of detailed
allegations regarding the defendants’ misconduct, the role of each individual defendant, the various
fraudulent investments offered or sold to investors, and the material misrepresentations and
omissions made by the defendants.” [Doc. 21 at 2]. The Commission argues that the Defendants can
dispute these allegations through their answer and may seek additional information about the
allegations through discovery. [Doc. 21 at 2].

III.

ANALYSIS
The Court will address the Motion to Transfer Venue [Doc. 14] and Motion for a More

Definite Statement [Doc. 16] in turn.
A.

Motion to Transfer Venue
The Court finds that venue in the Eastern District of Tennessee is proper as to all of the

Defendants, and the Court concludes that venue should not be transferred to the Eastern District of
Virginia.
1.

Venue is Proper as to All of the Defendants
Pursuant to Section 22, of the Securities Act of 1933, 15 U.S.C. § 77v,
The district courts of the United States and the United States courts
of any Territory shall have jurisdiction of offenses and violations
under this subchapter and under the rules and regulations
promulgated by the Commission in respect thereto, . . . , of all suits
in equity and actions at law brought to enforce any liability or duty
created by this subchapter. Any such suit or action may be brought
in the district wherein the defendant is found or is an inhabitant or
transacts business, or in the district where the offer or sale took place,
if the defendant participated therein, and process in such cases may
be served in any other district of which the defendant is an inhabitant
or wherever the defendant may be found.

15 U.S.C. § 77v(a).
5

Other courts addressing this provision have explained, “Section 22 of the ‘33 Act, 15 U.S.C.
§ 77v, affords the federal securities plaintiff resolution of his claim by a federal judicial forum, with
a broad choice of venue and concomittant nationwide service.” Coffey v. Dean Witter Reynolds, Inc.,
640 F.Supp. 874, 876 (D.Colo. 1986). In explaining the breadth of this venue, the District Court for
the Western District of Virginia, noted:
[A]lthough venue is a notion personal to each defendant, [a] court’s
jurisdiction over [a securities] action does not depend on whether
each defendant performed an ‘act or transaction’ in this forum
district. In a multi-defendant and multi-forum securities action where
plaintiff alleges a common scheme of acts and transactions to violate
the securities laws, venue once established for any of the defendants
in the forum, establishes venue for all defendants wherever found;
this is so even in the absence of any acts by a particular defendant
within that district.
Sohns v. Dahl, 392 F. Supp. 1208, 1214 (D.C. Va. 1975).
In this case, the Court finds that at least two of the Relief Defendants transact business in the
Eastern District of Tennessee. Relief Defendant CBS Advisors was registered as an investment
advisor with the State of Tennessee. [Doc. 1 at ¶ 18]. Relief Defendant Allied Beacon Partners, Inc.,
formerly known as Waterford Investor Services, Inc., has been registered to sell securities with the
State of Tennessee since 2006. [Doc. 1 at ¶ 19]. Allied Beacon obtained a certificate to transact
business in Tennessee, has a registered agent in Tennessee [Doc. 22-5], and held out its Vice
President of Business Development as being based in Maryville, Tennessee, [Doc. 22-2 at 3]. The
Court concludes that these activities are sufficient to meet the “transacts business” standard
contained in Section 22. Zorn v. Anderson, 263 F. Supp. 745, 747 (S.D.N.Y. 1966) (finding
registration with the Secretary of State and having a sales office satisfied the standard).

6

Having found that venue is proper as to CBS Advisors and Allied Beacon, the Court also
finds that venue is proper as to the remaining Defendants. See Sohns, 392 F. Supp. at 1214. Thus,
the Court finds that venue in the Eastern District of Tennessee is appropriate.
2.

Venue Will Not Be Transferred to the Eastern District of Virginia
Notwithstanding the above, the Defendants move the Court to transfer this action to the

Eastern District of Virginia, Richmond Division, for all further proceedings and trial.
“For the convenience of parties and witnesses, in the interest of justice, a district court may
transfer any civil action to any other district or division where it might have been brought.” 28
U.S.C. § 1404. “In deciding whether to transfer a case because the forum is inconvenient, the Court
is to consider the following factors: (1) the location of willing and unwilling witnesses; (2) the
residence of the parties; (3) the location of sources of proof; and (4) the location of the events that
gave rise to the dispute.” DeRoyal Indus., Inc. v. Hendricks Orthotic Prosthetic Enter., Inc., 2005
WL 1804528, 5 (E.D. Tenn. July 28, 2005). In short, the Court may consider any factor that may
make any eventual trial easy, expeditious, and inexpensive. Id. (citing Cherokee Exp. Co. v.
Chrysler Int’l Corp., 142 F.3d 432 (6th Cir.1998)).
The Court has considered each of the above factors, and the Court finds that a transfer is not
appropriate.
The Court finds that the locations of witnesses do not necessitate transferring this action.
While some of the Defendants may be located in Virginia, the Commission states that there are
numerous victims of the alleged scheme in this venue, and the Court has the ability to subpoena
those witnesses found outside this District whose testimony is required in this district, see 15 U.S.C.
§ 78aa(a) (“In any action or proceeding instituted by the Commission under this chapter in a United
States district court for any judicial district, a subpoena issued to compel the attendance of a witness
7

or the production of documents or tangible things (or both) at a hearing or trial may be served at any
place within the United States.”)
The Court, further, finds that the residence of the parties does not necessitate a change of
venue. The Commission represents that, while the Defendants have connections to Virginia, many
of the Defendants reside in other states, like Florida and Colorado. [See Doc. 22 at 14].
The Court finds that the location of sources of evidence in this case do not necessitate a
transfer. The Commission represents that the Defendants have already produced “voluminous”
documents to the Commission as part of the pre-filing investigation of this case. [Doc. 22 at 14].
Any relevant documents may be brought to this District for trial, either physically or electronically,
without expending substantial time and resources.
Finally, the Court finds that events giving rise to this dispute occurred in the Eastern District
of Tennessee. The Commission alleges that “[t]ransactions constituting violations of the federal
securities laws . . . occurred within this judicial district.” [Doc. 1 at ¶ 11]. Specifically, the
Commission maintains:
[A] significant number of AIC investors are and were residents of this
judicial district, Defendant Skaltsounis and Broker A [Carol LaRue]
met with investors and prospective investors in this judicial district,
fraudulent written materials relating to the AIC Investments were sent
to investors in this judicial district, oral misrepresentations were
directed to investors in this judicial district, and Defendant CB
Securities had an office in this judicial district (in Maryville,
Tennessee) from which AIC Investments were fraudulently offered
and sold.
[Doc. 1 at ¶ 11].
Thus, after considering the facts of this case, the parties’ positions, and the applicable factors,
the Court finds that the Defendants’ request for a transfer of venue, pursuant to 28 U.S.C. § 1404 is
not well-taken. Moreover, the Court finds no support for the Defendants’ assertion that they “may
8

be prejudiced in Tennessee,” or that this case will languish on this Court’s docket. The parties will
receive a fair and timely disposition of this case.
Finally, the Court finds that the Defendants’ contention that this dispute is governed by a
forum selection clause is not well-taken. The statement that investors “have the right to initiate a
suit . . . in either the Circuit Court of the City of Richmond or County of Henrico, Virginia[,]” and
its accompanying remarks, [Doc. 23-2 at 2], do not affect the jurisdiction and venue conferred upon
this Court by the applicable federal securities laws.
Accordingly, the Defendants’ and Relief Defendants’ Motion to Transfer Venue [Doc. 14]
will be DENIED.

B.

Motion for a More Definite Statement
Pursuant to Rule 12 of the Federal Rules of Civil Procedure, “A party may move for a more

definite statement of a pleading to which a responsive pleading is allowed but which is so vague or
ambiguous that the party cannot reasonably prepare a response.” Fed. R. Civ. P. 12(e).
In support of their Motion for a More Definite Statement, the Defendants argue that the
Commission has presented a Complaint [Doc. 1] that is so vague and ambiguous that the Defendants
cannot properly respond. The Defendants maintain that the Commission has, inter alia, failed to:
identify investors who were allegedly defrauded, properly explain terms like “disclosure
documentation” and “written materials,” specify the allegedly unlawful statements made by the
Defendants, and detail the other alleged wrongdoing.
The Court has considered the Defendants’ allegations of deficiency and has reviewed the
Complaint, and the Court finds that the Motion for a More Definite Statement is not well-taken. The

9

Complaint is not so vague or ambiguous that the Defendants cannot reasonably respond.
Accordingly, the Motion for a More Definite Statement [Doc. 16] will be DENIED.

IV.

CONCLUSION
Based upon the foregoing, the Court finds that the Defendants’ and Relief Defendants’

Motion to Transfer Venue [Doc. 14] and Defendants’ and Relief Defendants’ Motion for a More
Definite Statement [Doc. 16] are not well-taken, and they are DENIED.
IT IS SO ORDERED.
ENTER:
/s H. Bruce Guyton
United States Magistrate Judge

10