Securities and Exchange Commission v. McCabe

Filing 27

MEMORANDUM DECISION AND ORDER granting in part and denying in part 16 Motion to Dismiss for Failure to State a Claim. Signed by Judge Ted Stewart on 11/26/13. (ss)

IN THE UNITED STATES COURT FOR THE DISTRICT OF UTAH
CENTRAL DIVISION

SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,

MEMORANDUM DECISION AND
ORDER GRANTING IN PART AND
DENYING IN PART DEFENDANT’S
MOTION TO DISMISS

vs.

COLIN MCCABE (d/b/a ELITE STOCK
REPORT, THE STOCK PROFITEER, and
RESOURCE STOCK ADVISOR),

Case No. 2:13-CV-161 TS

Defendant.

This matter is before the Court on Defendant Colin McCabe’s Motion to Dismiss.1 For
the reasons set forth below, the Court will grant in part Defendant’s Motion without prejudice,
and deny the remainder of the Motion.
I. BACKGROUND
Defendant is a stock promoter who publishes, on his own, three newsletters containing
stock recommendations. In 2006, Defendant began publishing the Elite Stock Report under his

1

Docket No. 16.
1

own name. The other two newsletters are published under pseudonyms. In 2009, Defendant
began publishing the Stock Profiteer under the name Joe Marino, and the Resource Stock
Advisor under the name Roger Gaines. Subscribers paid annual fees to receive Defendant’s
newsletters. Defendant was also paid by companies to promote their stock in separate
advertisements. Over the years, Defendant received more than $16 million for his promotion
work. The SEC alleges that Defendant recommended these stocks to his paid subscribers based
on misrepresentations and without disclosing the payments he received to promote the stocks. In
particular, an advertisement published under the Elite Stock Report masthead described Guinness
Exploration, Inc.’s (“Guinness”) acquisition of property in Yukon gold territory. The SEC
alleges that Defendant’s statements in that publication were misrepresentations. Consequently,
the SEC brought this enforcement action alleging violations of § 10(b) of the Securities and
Exchange Act of 1934 and Rule 10b-5(b), promulgated thereunder. On July 22, 2013, Defendant
filed a Motion to Dismiss all of Plaintiff’s claims.
II. DISCUSSION
Plaintiff alleges Defendant violated § 10(b) of the Securities Exchange Act of 19342 and
Rule 10b-5(b),3 promulgated thereunder. “The scope of Rule 10b-5 is coextensive with the
coverage of § 10(b).”4 Therefore, “in an SEC enforcement action” pursuant to § 10(b) and Rule
10b-5(b), Plaintiff must prove that Defendant “(1) made a misrepresentation or omission, (2) of

2

15 U.S.C. § 78j(b) (2006).

3

17 C.F.R. § 240.10b-5(b) (2013).

4

SEC v. Wolfson, 539 F.3d 1249, 1256 n.11 (10th Cir. 2008) (quoting SEC v. Zandford,
535 U.S. 813, 816 n.1 (2002)).
2

material fact, (3) with scienter, (4) in connection with the purchase or sale of securities, and (5)
by virtue of the requisite jurisdictional means.”5 Plaintiff advances three theories to support
Defendant’s liability under § 10(b) and Rule 10b-5(b).
First, Plaintiff argues that Defendant misrepresented the research that supported the stock
recommendations contained in Defendant’s various newsletters. In response, Defendant argues
that Plaintiff’s Complaint fails to plead with sufficient particularity and relies on statements that
are puffery, immaterial, or were not made in connection with the purchase or sale of a security.
Second, Plaintiff argues that Defendant failed to disclose payments Defendant received
from the companies whose stock Defendant promoted in various newsletters. In response,
Defendant argues that Defendant did not have a fiduciary relationship with the newsletter
subscribers and therefore lacked a duty to disclose any such payments. Moreover, Defendant
contends that Plaintiff is unable to demonstrate scienter because Defendant had no reason to
mislead the subscribers to his newsletters.
Third, Plaintiff argues that Defendant made misrepresentations regarding Guinness’s
assets to bolster Defendant’s recommendation to purchase Guinness stock. In response,
Defendant argues that Plaintiff mischaracterizes Defendant’s statements about Guinness’s assets,
that the statements were immaterial, and that Plaintiff failed to allege falsity of one of the
statements.
On a 12(b)(6) motion to dismiss, the Court must “accept as true all well-pleaded factual
allegations . . . and view these allegations in the light most favorable to the plaintiff.”6 “[C]ourts
5

Id. at 1256.

6

Smith v. United States, 561 F.3d 1090, 1098 (10th Cir. 2009).
3

must consider the complaint in its entirety, . . . [including] documents incorporated into the
complaint by reference . . . .”7 “To survive a motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to ‘state a claim for relief that is plausible on its
face.’”8 But, the Court “will disregard conclusory statements.”9
Claims for securities fraud are subject to the heightened pleading standard reflected in
Rule 9(b) of the Federal Rules of Civil Procedure.10 “In alleging fraud or mistake, a party must
state with particularity the circumstances constituting fraud or mistake. Malice, intent,
knowledge, and other conditions of a person’s mind may be alleged generally.”11 “As
interpreted, the rule requires a plaintiff to identify the time, place, and content of each allegedly
fraudulent representation or omission, to identify the particular defendant responsible for it, and
to identify the consequences thereof.”12
Defendant argues that all three of Plaintiff’s theories fail; consequently, Defendant argues
that all claims should be dismissed for failure to state a claim.
A.

MISREPRESENTED RESEARCH
Plaintiff argues that Defendant misrepresented the extent of the research Defendant

conducted in support of the stock recommendations he published in various newsletters and that
7

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007).

8

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550
U.S. 544, 570 (2007)).
9

Khalik v. United Air Lines, 671 F.3d 1188, 1191 (10th Cir. 2012).

10

See Karacand v. Edwards, 53 F. Supp. 2d 1236, 1242 (D. Utah 1999).

11

Fed. R. Civ. P. 9(b).

12

Karacand, 53 F. Supp. 2d at 1241 (citing Schwartz v. Celestial Seasonings, Inc., 124
F.3d 1246, 1251 (10th Cir. 1997)).
4

Defendant published newsletters under pseudonyms to bolster the stock recommendations he
made in his own name. Defendant argues that (1) Plaintiff failed to plead the alleged
misrepresentations with sufficient particularity; (2) the statements describing Defendant’s
research were mere puffery; (3) Defendant’s use of a pseudonym and references to a research
team were not material; (4) Plaintiff failed to allege that the research claims were
misrepresentations; and (5) many of the statements regarding Defendant’s research were not
made in the newsletters, but on websites and that these statements did not reference any
particular security and therefore were not made in connection with a security.
1.

Pleading with Particularity

Defendant argues that Plaintiff’s Complaint fails to plead with sufficient particularity the
alleged misrepresentation regarding the research conducted in support of Plaintiff’s stock
recommendations. “At a minimum, Rule 9(b) requires that a plaintiff set forth the who, what,
when, where and how of the alleged fraud.”13 Plaintiff’s Complaint includes the following
general description of the alleged misrepresentations:
Beginning in 2006, when [Defendant] began publishing Elite Stock Report, and in
2009, when [Defendant] began publishing The Stock Profiteer and Resource
Stock Advisor, [Defendant] falsely claimed that his Elite Stock Report, The Stock
Profiteer and Resource Stock Advisor publications were the result of extensive
research conducted by researchers with relevant expertise and contacts. In fact,
[Defendant]’s research was limited to reviewing issuer filings with the
Commission, press releases, and the issuer website. He did not have any
assistance in researching stocks or writing his publications. These false and
misleading statements are believed to have continued through 2011, when

13

Two Old Hippies, LLC v. Catch the Bus, LLC, 784 F. Supp. 2d 1200, 1208 (D. N.M.
2011) (citation and internal quotation marks omitted).
5

[Defendant] claims to have ceased publishing Elite Stock Report, The Stock
Profiteer and Resource Stock Advisor.14
Plaintiff’s Complaint goes on to allege more specific facts:
In the January 2009 issue of Elite Stock Report, [Defendant] falsely
claimed that “[w]e research every company intensely and no company gets the go
ahead unless they pass the ‘Profit-Potential Checklist.’ One of the must-haves on
that list is a high probability of big, juicy returns. Triple-digits minimum.” . . .
Elite Stock Report’s website also falsely claimed that [Defendant]
identified his recommendations “[t]hrough his network of global connections” and
claimed that “his contacts extend deep into the world’s hottest resource
investment zones—particularly Asia, Europe, and of course, North
America—resulting in a wealth of knowledge and opportunity for his readers.” . . .
....
Similarly, [Defendant] falsely represented on The Stock Profiteer website
that a “research team” made the stock recommendations in The Stock Profiteer.
[Defendant] claimed that “[o]ur research team has hundreds of information
sources and contacts, and years of experience in the analysis of small stocks.” . . .
[Defendant] claimed on the Stock Profiteer website that his researchers
applied a “scientific (and proven) selection methodology to small stocks” . . . [and
that] recommended stocks were identified by “my time-tested, proprietary
investing methodology.” . . .
[Defendant] also misled readers about who prepared The Stock Profiteer
publications. . . . The Stock Profiteer publications consistently stated that Joe
Marino was the editor [even though] Joe Marino never existed and is an alias used
by [Defendant].
[Defendant] made similar false statements with respect to Resource Stock
Advisor in various publications between 2009 and 2011. . . . Resource Stock
Advisor’s website claimed that [Roger Gaines] is “[a] highly-trained economist
who can spot trends before they happen, Roger Gaines spent most of the last
decade either working ‘in the trenches’ of Wall Street or traveling the globe in
search of the world’s best resource investment opportunities.” However, Roger
Gaines never existed and is simply another alias used by [Defendant].
[Defendant] has no experience “working ‘in the trenches’ of Wall Street” . . .
[and] did not travel the world in search of resource companies to recommend to
his readers.15

14

Docket No. 2 ¶ 19.

15

Id. ¶¶ 20–21, 23–26 (second alteration in original).
6

Plaintiff alleges with particularity where, how, and to whom Defendant made the
statements—by publishing the statements to readers of Defendant’s newsletters and on the
newsletters’ websites. Plaintiff also states with particularity the timing of at least one
misrepresentation—the January 2009 issue of the Elite Stock Report. Finally, Plaintiff alleges
with particularity the consequence of the statements—that readers were misled by the statements.
In so doing, Plaintiff satisfied the heightened pleading standards under Rule 9(b) and “nudged
[its] claims across the line from conceivable to plausible.”16 Therefore, the Court finds that
dismissal on these grounds is not proper.
2.

Puffery

Defendant argues that Plaintiff’s allegations concerning misrepresented research are
based on statements that are mere puffery and therefore are not material statements sufficient to
satisfy the second element of a § 10b claim.
“A statement or omission is only material if a reasonable investor would consider it
important in determining whether to buy or sell stock.”17 The Tenth Circuit has recognized that
puffing statements are immaterial as a matter of law.18 “[V]ague statements of corporate
optimism”—often called puffing statements—“are typically forward-looking statements, or are
generalized statements of optimism that are not capable of objective verification.”19 Similarly, a
puffing statement is a “rosy affirmation commonly heard from corporate managers and

16

Twombly, 550 U.S. at 570.

17

Grossman v. Novell, Inc., 120 F.3d 1112, 1119 (10th Cir. 1997).

18

SEC v. Curshen, 372 F. App’x 872, 879 (10th Cir. 2010).

19

Grossman, 120 F.3d at 1119.
7

numbingly familiar to the marketplace—loosely optimistic statements that are so vague, so
lacking in specificity, or so clearly constituting the opinions of the speaker, that no reasonable
investor could find them important to the total mix of information available.”20
Defendant correctly points the Court to many puffing statements quoted in Plaintiff’s
Complaint, such as: Defendant’s research was “extensive,” “in-depth,” and “ground breaking”;
recommended stocks must show “a high probability of big, juicy returns”; and a certain
investment was a “sure-fire grandslam.”
However, some of Defendant’s statements are objectively verifiable assertions that could
affect a reasonable investor’s decision to purchase a stock. For example, Plaintiff alleges that
Defendant’s statements imply that Defendant’s stock recommendations were supported by
research derived from the work of a team comprised of multiple analysts, with significant
experience and contacts. Whether research has been subjected to the scrutiny of an experienced
team is objectively verifiable and would likely be a highly relevant consideration for a reasonable
investor. Second, Plaintiff alleges that Defendant misrepresented the metrics by which he
selected stocks to recommend. Defendant claimed to use a “time-tested proprietary investing
methodology” whereby any stock Defendant recommended satisfied criteria Defendant described
as the “Profit-Potential Checklist.” Plaintiff alleges that no such system existed; rather, Plaintiff
alleges, Defendant recommended the stock of companies who had paid Defendant to promote
their stock. Defendant’s use of a methodology based on returns is objectively verifiable and the
absence of one would likely affect a reasonable investor’s decision to invest based on

20

Curshen, 372 F. App’x at 879.
8

Defendant’s recommendation. Based on the foregoing, the Court finds that dismissal on these
grounds is not proper.
3.

Pseudonyms

Defendant argues that his alleged use of pseudonyms was not material because the names
under which Defendant published would not have had significance to an investor. Defendant
directs the Court’s attention to language from SEC v. Pirate Investor, LLC,21 where the Fourth
Circuit describes the materiality of a statement in relation to the speaker’s identity22—in
particular, Defendant characterizes the rule as requiring the speaker to be purporting to
communicate inside information or that the speaker be so notorious (such as Warren Buffett) that
any investor would follow the speaker’s recommendation. Defendant’s interpretation overstates
the holding and would transform the Tenth Circuit’s formulation of materiality in this context.
First, the Fourth Circuit explains that the statement at issue in Pirate Investor was
material because the speaker claimed to communicate inside information.23 That court does not
articulate a rule requiring such a claim for a statement to be material. Rather, under the Fourth
Circuit’s rationale, a speaker claiming to communicate inside information is a sufficient, but not
necessary, condition for materiality. This holding is therefore inapplicable to the instant case.
Second, as described above, in the Tenth Circuit, “[a] statement or omission is only material if a
reasonable investor would consider it important in determining whether to buy or sell stock.”24

21

580 F.3d 233 (4th Cir. 2009).

22

Id. at 240–41.

23

Id. at 241.

24

Grossman, 120 F.3d at 1119.
9

When applying the Tenth Circuit’s standard, this Court has described a two-step test for
materiality: “A court must first determine whether the information would be considered
important by a reasonable investor; if so, the court must then determine whether the information
would still be considered important in light of other information already available to the
market.”25
Plaintiff’s Complaint alleges that Defendant published under three separate names to
promote the stocks of companies. Plaintiff’s allegations regarding Defendant’s alias, Joe Marino,
do not contain explicit indications that a reasonable investor would rely on any recommendations
by Joe Marino. The allegations describe an announcement made to Defendant’s existing
subscribers recommending Joe Marino’s new newsletter. Taking these facts in the light most
favorable to Plaintiff, it is reasonable to infer that subscribers are more likely to find Defendant’s
recommendations credible, including those about Joe Marino’s abilities. After all, the
subscribers paid an annual fee to receive Defendant’s recommendations. The subscribers
presumably valued Defendant’s recommendations. As such, Defendant’s statements under the
name Joe Marino would be important to a reasonable investor and would be considered
important in light of the other information available in the market, and are therefore material.
Plaintiff has also properly pleaded allegations regarding the materiality of statements by
Defendant’s other alias, Roger Gaines. Plaintiff alleges that Defendant’s Resource Stock
Advisor website described Roger Gaines as “[a] highly-trained economist who can spot trends
before they happen, [and who] spent most of the last decade either working ‘in the trenches’ of

25

Karacand, 53 F. Supp. 2d at 1242.
10

Wall Street or traveling the globe in search of the world’s best resource investment
opportunities.”26
Defendant asserts that he holds a bachelor’s degree in Economics. Setting aside the
question of whether a bachelor’s degree, on its own, justifies the description of “highly trained”
in the context of stock market analysis, Plaintiff’s allegations are sufficient for other reasons.
Plaintiff alleged Defendant neither worked on Wall Street nor traveled the world researching
resource companies. It is self-evident that Defendant promoted these credentials in an attempt to
convince investors to follow his advice while publishing under the alias Roger Gaines. Where,
as Plaintiff has alleged, Defendant coordinated the messages of his various publications to
promote certain stocks, it seems likely that a reasonable investor would be influenced by
statements made by Defendant under the Roger Gaines pseudonym and that those statements
would still be important to the investor in light of other information available in the market.
Based on the foregoing, the Court finds that dismissal on these grounds is not proper.
4.

Misrepresentation of Research Claims

Defendant argues that because Plaintiff’s allegations are based on puffing statements, the
allegations regarding deficient research amount to nothing more than allegations that Defendant
conducted no research at all. As such, Defendant argues, because Plaintiff did not plead that
Defendant conducted no research, then the claim fails for lack of a misrepresentation. As
explained above, Defendant’s arguments regarding puffing statements fail. Plaintiff alleges, with

26

Docket No. 2 ¶ 26.
11

particularity, objectively verifiable misrepresentations about the nature of Defendant’s research.
Therefore, dismissal on these grounds is not proper.
5.

“In Connection With” a Security

Defendant argues that most of the statements relied on by Plaintiff were not made in the
subscriber newsletters but were instead made on websites advertising the newsletters;
consequently, these statements were not made in connection with the sale of a security.
Defendant also argues that many of these statements do not refer to any particular security, but
are merely generalized statements about the newsletters or Defendant’s business.
“The Supreme Court has consistently embraced an expansive reading of § 10(b)’s ‘in
connection with’ requirement,”27 however, § 10(b) “must not be construed so broadly as to
convert every common-law fraud that happens to involve securities into a violation.”28 The
statute should be interpreted “flexibly to effectuate its remedial purpose.”29 As such, “it is
enough that the fraud alleged ‘coincide’ with a securities transaction.”30 “The Tenth Circuit has
held that ‘misrepresentations meant to induce a party to purchase a security or to influence an
investment decision are made in connection with the purchase or sale of a security.’”31
Plaintiff alleges that in January 2009, the Elite Stock Report—published under
Defendant’s own name—contained misrepresentations about the research supporting

27

Wolfson, 539 F.3d at 1262.

28

Zandford, 535 U.S. at 820.

29

Id. at 819.

30

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 85 (2006).

31

SEC v. Smart, 678 F.3d 850, 857 (10th Cir. 2012) (quoting Wolfson, 539 F.3d at 1262).
12

Defendant’s stock recommendations.32 Defendant allegedly claimed, “We research every
company intensely and no company gets the go ahead unless they pass the ‘Profit-Potential
Checklist.’ One of the must-haves on that list is a high probability of big, juicy returns. Tripledigits minimum.”33 The Elite Stock Report’s website allegedly claimed that the report’s research
derives from a “network of global connections” that “extend deep into the world’s hottest
resource investment zones—particularly Asia, Europe, and of course North America—resulting
in a wealth of knowledge and opportunity.”34 The Stock Profiteer’s website made similar claims:
“Our research team has hundreds of information sources and contacts, and years of experience in
the analysis of small stocks.”35
Nearly all of Plaintiff’s research allegations describe statements made on the websites of
Defendant’s newsletters. Plaintiff alleges misrepresentations about research in the Elite Stock
Report’s January 2009 issue, but does not allege any specific statements in that issue regarding a
particular security. Instead, Plaintiff’s allegations of specific stock recommendations focus on
Defendant’s promotion of Global Health Ventures Inc. stock in the October 9, 2009 issue of the
Elite Stock Report and multiple Stock Profiteer mailings between October 9, 2009 and May
2010; Guinness Exploration’s stock in the Elite Stock Report beginning in January 2010; and
Titan Oil & Gas, Inc.’s stock in the Resource Stock Advisor from January 2010 to March 2011.
Plaintiff has failed to allege—with the particularity required by Rule 9(b)—facts demonstrating

32

Docket No. 2 ¶¶ 20, 22.

33

Id. ¶ 20.

34

Id. ¶ 21.

35

Id. ¶ 23.
13

that Defendant’s statements about research coincide with a particular securities transaction;
instead, as pleaded, the statements appear to be general statements promoting the newsletters
themselves, unconnected to promoting any particular security. Although Plaintiff has alleged
with particularity Defendant’s research statement in the January 2009 issue of the Elite Stock
Report, Plaintiff has not alleged with particularly any stock recommendations in that same issue,
such that the alleged misrepresentations could be said to coincide with a securities transaction.
Based on the foregoing, the Court finds that Plaintiff has failed to allege with sufficient
particularity how Defendant’s research statements were made in connection with the purchase or
sale of a security and will grant in part Defendant’s Motion to Dismiss, without prejudice, on
Plaintiff’s misrepresented research theory.
B.

FAILURE TO DISCLOSE PAYMENTS
Defendant argues that he did not have a fiduciary relationship with the newsletter

subscribers and therefore had no duty to disclose any payments received for promoting certain
stocks. Moreover, Defendant argues that Plaintiff cannot demonstrate scienter because
Defendant had no reason to mislead Defendant’s loyal, paying subscribers by promoting
valueless stocks.
1.

Duty to Disclose

“A failure to disclose is actionable as fraud under § 10(b) of the Securities Exchange Act
of 1934 only if ‘one party has information that the other party is entitled to know because of a
fiduciary or other similar relation of trust and confidence between them.’”36 As a newsletter
36

SEC v. Cochran, 214 F.3d 1261, 1264 (10th Cir. 2000) (quoting Chiarella v. United
States, 445 U.S. 222, 228 (1980)).
14

publisher, Defendant was not in a traditional fiduciary role vis-à-vis Defendant’s subscribers. In
the Tenth Circuit, “a duty to disclose under § 10(b) may be present if . . . a state statutory or
common law recognizes a fiduciary or similar relationship of trust and confidence giving rise to
such a duty between the defendant and the plaintiff.”37 Under this analysis, the Court applies the
law of the state of the locus of the parties’ relationship.38 But the nature of the Defendant’s
relationship with his subscribers is such that it is difficult to determine any particular locus.
Plaintiff alleges that Resource Stock Advisor operated using a Utah mailing address, so
the Court will look to Utah law to determine whether a duty to disclose arises from a state statute
recognizing a relationship of trust and confidence.
Utah’s Uniform Securities Act (“Act”) states,
(1) It is unlawful for any person who receives any consideration from
another person primarily for advising the other person as to the value of securities
or their purchase or sale, whether through the issuance of analyses or reports or
otherwise to:
....
(b) engage in any act, practice or course of business which operates or
would operate as a . . . deceit upon the other person . . . .39
Under Utah law, Defendant had a duty to not engage in conduct that would deceive the
paying subscribers to Defendant’s newsletter. The Act also explains that the term “deceit” is
“not limited to [its] common-law meaning[].”40 Black’s Law Dictionary defines deceit as “[t]he

37

Id. at 1265.

38

Id.

39

Utah Code Ann. § 61-1-2 (2011).

40

Id. § 61-1-13(o).
15

act of intentionally giving a false impression.”41 The New Oxford American Dictionary’s
definition is similar: “the action or practice of deceiving someone by concealing or
misrepresenting the truth.”42 Under either the common law meaning reflected in Black’s Law
Dictionary or the standard usage meaning reflected in the New Oxford American Dictionary, a
person paid to provide investment advice likely acts deceitfully by failing to disclose material
information regarding the reliability of the analysis—such as financial motives that might
influence the advice. Therefore, the relevant inquiry is whether the payments received by
Defendant to promote certain companies’ stock is material information, such that the omission of
this information would act to misrepresent the truth or give a false impression.
To determine whether information is material, this Court has applied the following test:
“A court must first determine whether the information would be considered important by a
reasonable investor; if so, the court must then determine whether the information would still be
considered important in light of other information already available to the market.”43
When seeking insight into the stock market in the hope of investing wisely, the
reasonable investor would likely find it important that a stock advisor was being paid at that time
to promote certain stocks and that the advisor’s recommendations were not impartial.
Defendant’s publication of two different newsletters under pseudonyms underscores the
materiality of this information. Defendant bolstered the recommendations in the Elite Stock
Report with the other two newsletters. Consequently, Defendant was able to manipulate the
41

Black’s Law Dictionary 465 (9th ed. 2009).

42

New Oxford American Dictionary 448 (3d ed. 2010).

43

Karacand, 53 F. Supp. 2d at 1242.
16

other information available in the market—providing confirmation that the recommendations in
the Elite Stock Report were impartial and well founded. Subscribers to the Elite Stock Report
would consider it important that the publisher of the Elite Stock Report was being paid to
promote recommended stocks in other publications.
Defendant argues that recognizing a duty to disclose such payments would create
absurdly expansive paid-promoter liability, whereby any promoter would be required to disclose
prior payments in any reference to any stock that the promoter previously promoted. The Tenth
Circuit’s materiality test does not lead to such an expansive result. Rather, under that test, a
paid-promoter would not have a duty to disclose prior payments that are no longer materially
relevant to stocks presently being promoted. Based on the foregoing, the Court finds that
dismissal on these grounds is not proper.
2.

Scienter

Defendant argues that Plaintiff’s claim fails for lack of scienter because Defendant had no
rational reason to make misrepresentations to paying subscribers of the newsletters.
In the Tenth Circuit, “recklessness satisfies the scienter requirement” of § 10(b).44
“Recklessness is defined as ‘conduct that is an extreme departure from the standards of ordinary
care, and which presents a danger of misleading buyers or sellers that is either known to the
defendant or is so obvious that the actor must have been aware of it.’”45

44

Hackbart v. Holmes, 675 F.2d 1114, 1117 (10th Cir. 1982), abrogated on other grounds
by Anixter v. Home-Stake Prod. Co., 939 F.2d 1420 (10th Cir. 1991).
45

Dronsejko v. Thornton, 632 F.3d 658, 665 (10th Cir. 2011) (quoting City of Phila. v.
Fleming Cos., Inc., 264 F.3d 1245, 1258 (10th Cir. 2001)).
17

The Tenth Circuit implicitly acknowledged the existence of some duty of care owed by
penny-stock newsletter publishers to their subscribers in United States v. Wenger.46 In Wenger,
the court affirmed the publisher’s conviction for securities fraud under § 10(b) for failing to
disclose material facts that would have affected his subscribers’ decisions to invest in the
recommended stocks. Specifically, the publisher failed to disclose the fact that the publisher was
selling stock in the company being promoted in the publisher’s newsletter.47
Here, Plaintiff sufficiently pleaded facts indicating Defendant similarly misled buyers and
likely breached his duty of care by recommending stocks in Defendant’s newsletters without
disclosing the payments Defendant received to promote those stocks. Moreover, Defendant had
a rational reason to make misrepresentations to the subscribers: Plaintiff alleges that Defendant’s
multi-publication operation “had the effect of quickly boosting the volume and price of the
stocks he recommended,”48 thereby providing Defendant with the ability to claim that he had
made profitable recommendations in the past. Based on the foregoing, the Court finds that
dismissal on these grounds is not proper.
C.

MISREPRESENTATIONS ABOUT GUINNESS
Plaintiff alleges that Defendant made the following misrepresentations about Guinness:
[Defendant] falsely represented that Guinness had acquired an 8,000 acre property
in the middle of the Tintina Gold Belt in the Yukon Territory of Canada well
before discoveries in May 2009 turned the region into “a red-hot area play.”
[Defendant] also claimed that the property held “an estimated recoverable
resource in excess of 1 million ounces of gold.”
46

427 F.3d 840 (10th Cir. 2005).

47

Id. at 843.

48

Docket No. 2 ¶ 17.
18

. . . In fact, Guinness had not purchased the relevant property until
November 2009—well after the May 2009 discoveries that [Defendant] claimed
increased the value of the property. . . . Moreover, Guinness never claimed that its
property held “an estimated recoverable resource in excess of 1 million ounces of
gold” . . . .49
Defendant argues that the timing of Guinness’s property acquisition is misstated by
Plaintiff and, in any event, immaterial. Defendant also argues that Plaintiff misstates
Defendant’s statements regarding the amount of gold associated with Guinness’s property.
Finally, Defendant concedes that Guinness never asserted that its property held an estimated 1
million ounces of gold. Instead, Defendant points out that Defendant made the assertion, and
argues that Plaintiff failed to allege falsity of Defendant’s assertion. Plaintiff’s Complaint
incorporates by reference the February 2010 Elite Stock Report and Defendant attached
significant portions of the document to his Motion to Dismiss. Because the document was
incorporated by reference in the Complaint and its authenticity is not disputed, the Court will
evaluate the newsletter along with Plaintiff’s allegations.
1.

Misstated Timing

Defendant argues that Plaintiff’s Complaint incorrectly claims that Defendant’s
newsletter advised readers that Guinness acquired the property prior to May 2009. It is not clear
that this is correct. Moreover, construing the facts in the light most favorable to Plaintiff leads
the Court to a different interpretation. Plaintiff alleges that Defendant advised his subscribers
that Guinness obtained its property before the region turned into a “red-hot area play” as a result
of the May 2009 discovery, but that Guinness in fact obtained the property in November 2009,

49

Id. ¶¶ 34–35.
19

long after values had increased. Therefore, the Court finds that Plaintiff pleaded facts consistent
with the statements contained in the February 2010 newsletter incorporated by reference, and
consequently, dismissal is not appropriate on these grounds.
2.

Timing Immaterial

Defendant also briefly argues that the timing of Guinness’s property acquisition is not a
material statement because an investor would only be concerned with Guinness’s ownership at
the time the statement was made and the value of the property, not whether Guinness had
obtained the property months earlier. Defendant’s own newsletter colorfully describes why the
timing of Guinness’s acquisition would be material to an investor:
[W]hat makes Guinness Exploration so special?
Listen, for starters their land was acquired well before the staking rush
turned the entire region into a red-hot area play. That means they had their pick
before everyone else. It’s a bit like they were the first in line at a buffet—they had
their choice of the best of everything[,] while everyone else got the leftovers.50
As Defendant explained in the newsletter, the timing was precisely the reason why
Guinness stock was a wise investment. If Guinness truly did have its choice of the best land in
this gold-rich zone, then Guinness was more likely to discover gold, which would raise
Guinness’s stock value. Therefore, the Court finds that dismissal on these grounds is not proper.
3.

Gold Content Misstated

Plaintiff alleges that Defendant “claimed that [Guinness’s] property held an estimated
recoverable resource in excess of 1 million ounces of gold.”51 Defendant argues that this is a
misstatement. Rather, Defendant argues that he made this claim about a larger zone within
50

Docket No. 16 Ex. A, at 4.

51

Docket No. 2 ¶ 34 (internal quotation marks omitted).
20

which Guinness’s property was located. Referring to the newsletter itself, Defendant’s exact
language is as follows: “[Guinness] acquired an advanced property over a zone with 8,000 meters
of drilling and 400 drill holes—and an estimated recoverable resource in excess of 1 million
ounces of gold.”52
This sentence fairly supports the two opposing interpretations advanced by the parties.
The use of the word “over” could mean that Guinness’s property encompasses the entire zone
that possibly contains gold. On the other hand, it could mean that Guinness’s property is a
smaller portion of a larger zone, and that the larger zone possibly contains the gold. A statement
on a subsequent page of the newsletter is potentially illuminating: “If [Guinness] is sitting in a
million-ounce gold zone . . . then we’re looking at a project that is potentially worth several
hundred million dollars.”53 Here, Defendant describes Guinness’s property as sitting in the zone,
not on the zone. This statement favors Defendant’s interpretation. Nonetheless, this is a close
call, with plausible interpretations supporting either party’s position. But, viewing the facts in
the light most favorable to Plaintiff, a plausible interpretation of the newsletter supports
Plaintiff’s allegation. Therefore, the Court finds that dismissal on these grounds is not proper.
4.

Failure to Allege Falsity

Finally, Defendant argues that Plaintiff failed to allege the falsity of the statement
concerning the amount of gold in Guinness’s property. Defendant argues that Plaintiff’s
Complaint explains that Defendant made the statement, but that the statement was untrue
because Guinness never made the statement. In making his argument, Defendant omits a key
52

Docket No. 16 Ex. A, at 4.

53

Id. at 6.
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phrase in Plaintiff’s allegation. Alleging the falsity of Defendant’s representation, Plaintiff
states, “Guinness never claimed that its property held ‘an estimated recoverable resource in
excess of 1 million ounces of gold,’ and [Defendant]’s representations in this regard were false
and misleading.”54 Viewing the facts in the light most favorable to Plaintiff, Plaintiff alleges that
Defendant made representations regarding the amount of gold in Guinness’s property and that
those representations were false and misleading. Therefore, the Court finds that dismissal on
these grounds is not proper.
III. CONCLUSION
Based on the foregoing, it is hereby
ORDERED that Defendant’s Motion to Dismiss (Docket No. 16) is GRANTED IN
PART as to Plaintiff’s misrepresented research theory, and DENIED IN PART as to Plaintiff’s
other theories. Pursuant to the terms of this Order, Plaintiff’s misrepresented research theory
claim is dismissed without prejudice.
DATED November 26, 2013.
BY THE COURT:

____________________________________
TED STEWART
United States District Judge

54

Docket No. 2 ¶ 36.
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