Opinion
1:21-CV-832-DAE
11-13-2023
SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. LEENA JAITLEY, D/B/A MANAGED OPTIONS TRADING and OPTIONS BY PROS, Defendant, and TARABEN PATEL and OTA, LLC, Relief Defendants.
REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
MARK LANE UNITED STATES MAGISTRATE JUDGE
TO THE HONORABLE DAVID EZRA UNITED STATES DISTRICT JUDGE:
Before the court is Plaintiff Securities and Exchange Commission's Motion for Partial Summary Judgment (Dkt. 50) and Relief Defendant OTA, LLC's (“OTA”) Motion to Set Aside Entry of Default (Dkt. 52). After reviewing the entire case file, relevant case law, and the parties' briefing and parties' exhibits, and determining that a hearing is unnecessary the undersigned submits the following Report and Recommendation to the District Court.
United States District Judge David A. Ezra referred the Motion to the undersigned for a report and recommendation as to the merits pursuant to 28 U.S.C. § 636(b)(1)(B), Rule 72 of the Federal Rules of Civil Procedure, and Rule 1(d) of Appendix C of the Local Rules of the United States District Court for the Western District of Texas. Text Order, May 11, 2023.
United States District Judge David A. Ezra referred the Motion to the undersigned for a report and recommendation as to the merits pursuant to 28 U.S.C. § 636(b)(1)(B), Rule 72 of the Federal Rules of Civil Procedure, and Rule 1(d) of Appendix C of the Local Rules of the United States District Court for the Western District of Texas. Text Order, Apr. 3, 2023.
I. Background
SEC brings this suit alleging that Defendant Leena Jaitley ran a stock options trading scheme and defrauded clients. SEC alleges that from at least 2018 to September 2021, Jaitley used two websites that she created and operated purportedly to profitably trade stock options on clients' behalf. SEC alleges that the through the websites-doing business as OptionsbyPros (“OBP”) and Managed Option Trading (“MOT”)-Jaitley engaged in a fraudulent scheme to defraud investors.
SEC alleges the scheme functioned as follows. Jaitley falsely claimed, among other things, that OBP and MOT (a) used a unique, proprietary trading system designed to generate profits, (b) had a long record of successful investing, and (c) employed multiple traders in New York with experience at large and reputable broker-dealers. Jaitley also created, solicited, or published glowing testimonials and positive reviews by supposed clients, including on the OBP and MOT websites. And some, if not all, of the positive reviews and testimonials posted on the OBP and MOT websites were false and fabricated by Jaitley.
SEC contends that the only “traders” at OBP and MOT were Jaitley and, possibly, Jaitley's now-deceased father, Raojibhai Patel (Mr. Patel). Mr. Patel was a former engineer and at the time of the scheme was in his eighties, in poor health, and may have been suffering from dementia. They operated out of their homes in Austin, Texas, not New York. Neither had any unique, proprietary trading system that would reliably produce profits; a history of successful options trading; or any relevant education, training, or professional experience.
SEC states that although Jaitley, through OBP and MOT, initially made money for some clients, both entities often lost all or most of the money in their clients' accounts through volatile, high-risk, and ultimately unprofitable trades. When clients complained about trading losses, Jaitley, using an alias and posing as a representative of OBP or MOT, often responded by email or text message to disavow any responsibility and blamed the client or someone else for the losing trades.
SEC asserts that Jaitley's alleged scheme resulted in at least fifteen individuals (“the Clients”) losing investment principal of around $808,000. The Clients also paid approximately $525,000 in fees to MOT and OBP. One client paid approximately $150,000 to OBP after being convinced to do so in a purported effort to recover his trading losses. In total, the Clients lost approximately $1.48 million by retaining MOT and OBP's services.
SEC alleges Jaitley violated the anti-fraud provisions of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77a, et seq.; the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78a, et seq.; and the Investment Advisers Act of 1940 (“Advisers Act”), 15 U.S.C. § 80b-1, et seq. SEC asserts four causes of action against Jaitley: (1) violations of the Antifraud Provisions of the Securities Act Section 17(a) or 15 U.S.C. § 77q(a); (2) violations of Antifraud Provisions of the Exchange Act Section 10(b) or 15 U.S.C. § 78j(b)] and Rule 10b-5 or 17 C.F.R. § 240.10b-5; (3) violations of the Antifraud Provisions of the Advisers Act Section 206(1) or 15 U.S.C. § 80b-6(1); and (4) violations of the Antifraud Provisions of the Advisers Act Section 206(2) or 15 U.S.C. § 80b-6(2). SEC asserts one cause of action-a claim for equitable relief-against the Relief Defendants.
The relief SEC seeks from Jaitley and the Relief Defendants is: (i) permanent injunctive relief; (ii) disgorgement of allegedly ill-gotten gains; (iii) accrued prejudgment interest on those gains; and (iv) civil monetary penalties.
SEC now moves for partial summary judgment, specifically as to liability on the four securities fraud claims. Dkt. 50 at 1, 8. Jaitley opposes SEC's Motion. Dkt. 56.
II. Summary Judgment Standard
Summary judgment is appropriate under Rule 56 of the Federal Rules of Civil Procedure only “if the movant shows there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law.” FED. R. CIV. P. 56(a). A dispute is genuine only if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 254 (1986).
The party moving for summary judgment bears the initial burden of “informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrates the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The burden then shifts to the nonmoving party to establish the existence of a genuine issue for trial. Matsushita Elec. Indus. Co., v. Zenith Radio Corp., 475 U.S. 574, 585-87 (1986); Wise v. E.I. Dupont de Nemours & Co., 58 F.3d 193, 195 (5th Cir. 1995). The parties may satisfy their burdens by tendering depositions, affidavits, and other competent evidence. Est. of Smith v. United States, 391 F.3d 621, 625 (5th Cir. 2004).
The court will view the summary judgment evidence in the light most favorable to the nonmovant. Griffin v. United Parcel Serv., Inc., 661 F.3d 216, 221 (5th Cir. 2011). The nonmovant must respond to the motion by setting forth particular facts indicating that there is a genuine issue for trial. Miss. River Basin All. v. Westphal, 230 F.3d 170, 174 (5th Cir. 2000). “After the non-movant has been given the opportunity to raise a genuine factual issue, if no reasonable juror could find for the non-movant, summary judgment will be granted.” Id.
III. Summary Judgment Analysis
SEC contends that summary judgment is proper because there is no genuine dispute that Jaitley recklessly or knowingly made material misrepresentations to Clients in connection with the offer, purchase, and sale of securities or that she employed schemes or artifices to defraud Clients while acting as an investment advisor in violation of federal securities laws. Dkt. 50 at 8.
For her part, Jaitley contends that summary judgment should be denied because Mr. Patel's deposition testimony creates factual disputes because he stated that he was the owner and operator of OBP and MOT.
A. Preliminary Note: Jaitley's Response
There are two refrains in Jaitley's short Response (Dkt. 56): First, “There is no admissible evidence that Jaitley X [where “X” is the element of a violation of a statute or a rule].” Dkt. 56 at 5:17, 21, 26-27; id. at 6:2, 17-18, 24. She also “disputes that she violated” various statutes and rules. Id. at 5:13, 20, 25. She argues these statements indicate that there is a genuine dispute of material facts.
Jaitley's second refrain is that she “contends she did not control or operate OBP/MOT” and that Mr. Patel “did not contend” that Jaitley “assisted him with operating OBP/MOT.” Id. at 6:3-4, 18-20, 25; 7:2-3. Jaitley suggests that these assertions along with Mr. Patel's deposition testimony “provide[] further evidence that” Jaitley's conduct is disputed. Id. at 6:12-14, 20-22, 27-28. She then argues that summary judgment should be denied.
Jaitley's repeated general disputes and broad contentions are not enough to create a genuine dispute of material fact. Once the movant satisfies its burden, the burden shifts to the nonmovant to “come forward with competent summary judgment evidence of the existence of a genuine fact issue.” Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 587 (1986). The nonmovant-Jaitley-must “go beyond the pleadings and by her own affidavits, or by the ‘depositions, answers to interrogatories, and admissions on file,' designate ‘specific facts showing that there is a genuine issue for trial.'” Celtic Marine Corp. v. James C. Justice Cos. Inc., 760 F.3d 477, 481 (5th Cir. 2014) (quoting Celotex, 477 U.S. at 324). A nonmovant “cannot defeat summary judgment with conclusory allegations, unsubstantiated assertions, or ‘only a scintilla of evidence.'” Turner v. Baylor Richardson Med. Ctr., 476 F.3d 337, 343 (5th Cir. 2007) (quoting Little v. Liquid Air, 37 F.3d 1069, 1075 (5th Cir. 1994)). “[S]elf-serving allegations are not the type of significant probative evidence required to defeat summary judgment.” Kariuki v. Tarango, 709 F.3d 495, 505 (5th Cir. 2013) (quoting United States v. Lawrence, 276 F.3d 193, 197 (5th Cir. 2001)). Thus, nonmovants' responses comprising “unsubstantiated assertions” and “conclusory allegations are not competent summary-judgment proof and thus are insufficient to defeat a motion for summary judgment.” Lake Travis Citizens Council v. Ashley, 2016 WL 5296870, at *1 (W.D. Tex. March 14, 2016) (Yeakel, J.). The nonmovant's burden is to “identify specific proof in the record, and articulate the precise manner in which that proof supports [the] claim.” Id. at *1. Accordingly, Jaitley's assertions that she “disputes that she violated” the law and her contentions “that she did not violate” the law cannot create a genuine dispute as to a material fact.
The movant meets its burden “if the movant shows there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law.” FED. R. CIV. P. 56(A).
Jaitley's general disputes and broad contentions, see supra at 5, and her pointing to the entirety of Mr. Patel's deposition testimony do not meet her burden to “come forward with competent summary judgment evidence of the existence of a genuine fact issue.” See Matsushita, 475 U.S. at 587. Although, Mr. Patel's deposition testimony is evidence, stating what he “did not contend” in his testimony does not amount to identification of specific facts that create a genuine dispute. See, e.g., Dkt. 56 at 6:11-12.
If Mr. Patel's deposition testimony contains specific facts that create a genuine dispute, it is “not the court's responsibility to hunt through the summary judgment record to determine if [Jaitley's] arguments are supported by the record.” Scott v. Youth & Family Alliance, 2020 WL 10759438, at *1 (W.D. Tex. Aug. 4, 2020) (Lane, Mag. J.). Indeed, “Rule 56 does not impose upon the district court a duty to sift though the record in search of evidence to support an opposition.” Lubbe v. Milanovich, 2022 WL 3129106, at *3 (W.D. Tex. Feb. 25, 202) (Lane, Mag. J.) (quoting Ragas v. Tenn. Gas Pipeline Co., 136 F.3d 455, 458 (5th Cir. 1998)).
Additionally, Mr. Patel's deposition testimony is not competent summary judgment evidence. “[W]hen the sole evidence purporting to create a genuine issue of a material fact and thus preclude summary judgment is an affidavit that conflicts with [other evidence], [the Fifth Circuit has] required an explanation of the conflict.” Copeland v. Wasserstein, Perella & Co., 278 F.3d 472, 482 (5th Cir. 2002). Indeed, “vague, self-serving and conclusory affidavits from [] friends attesting to [general traits or actions] . . . are entirely insufficient to create a genuine issue of material fact.” Kariuki, 709 F.3d at 505.
Mr. Patel's deposition testimony is vague and conclusory (not to mention confusing) and conflicts with other evidence. For example, in response to several basic questions, such as “Did anybody ever speak to a client . . . by telephone?” Mr. Patel answered: “No. I don't know.” Dkt. 56-2 at 22: 1-6. But more than one client listened to more than one recorded telephone call. Dkt. 50 at 6 n.25 (citing P-32 & P-31). Yet Jaitley does not explain this conflict. The telephone-related questions and others that conflict with the evidence produced by SEC and for which Jaitley provides no explanation indicate that Mr. Patel's deposition testimony is not competent summary judgment evidence.
Examples of other problematic answers to questions include (Mr. Patel's answers to the SEC questions in bold):
- “So is it true that [MOT] had a 16-year track record at some point?” “No. I don't know.” Well, you said that [MOT] started, I believe, in 2019. Right?” “Yes.” “How could it have a 16-year track record?” “I don't know.” Dkt. 56-2 at 37:1-7.
- “Do you have any other email addresses that you use?” “I don't know.”Id. At 31:14-18.
- “Did [MOT or OBP] have any affiliation with Goldman Sachs or former Goldman Sachs employees?” “No. I don't know.” “Did any Goldman Sachs or former Goldman Sachs employees assist you with [MOT or OBP]?” No, sir. I don't know.”Id. at 37:1-7.
Because Jaitley relies on essentially the same two arguments-arguments that do not meet her burden-and points to the same evidence-noncompetent evidence-in her Response to SEC's Motion, the undersigned will not reproduce the above analysis for each element of each claim and instead will refer to this section as appropriate.
B. Antifraud Provisions
SEC brings its first and second causes of action under Section 17 of the Securities Act, 15 U.S.C. § 77q(a), and Section 10(b) and Rule 10b-5 of the Exchange Act, 15 U.S.C. § 78j(b) and 17 C.F.R. § 249.10b-5. A defendant violates these “Antifraud Provisions” if SEC by a preponderance of the evidence establishes: (1) defendant made a material misrepresentation or omission of material fact or employed a fraudulent scheme or engaged in an act that operated as a fraud; (2) with the required mental state; (3) in connection with the purchase, offer, or sale of any security; and (4) used or caused the use of interstate commerce. SEC v. Gann, 565 F.3d 932, 936 (5th Cir. 2009). Courts often analyze the Antifraud Provisions together because “the proscriptions of [S]ection 17(a) are substantially the same as those of [S]ection 10(b) and [R]ule 10b-5.” SEC v. Helms, No. A-13-CV-01036 ML, 2015 U.S. Dist. LEXIS 110758, at *38 (W.D. Tex. 2015) (quoting SEC v. Spence & Green Chem. Co., 612 F.2d 896, 903 (5th Cir. 1980)); SEC v. Farias, No. SA-20-CV-00885-XR, 2022 U.S. Dist. LEXIS 135868, at *8 (W.D. Tex. 2022, X. Rodriguez, J.); SEC v. Milles, No. 1:19-CV-714-RP, 2022 U.S. Dist. LEXIS 11989, at *6 (W.D. Tex. 2022, Pitman, J.).
1. First element: Material misrepresentations or employment of fraudulent devices and schemes
Courts often find violations of Section 17 and Rule 10b-5 when a defendant disseminates a materially false or misleading statement to potential investor or otherwise perpetuates a scheme with intent to defraud. Lorenzo v. SEC, 139 S.Ct. 1094, 1101-02 (2019); SEC v. Silea, 2022 WL 269105, at *3-12 (E.D. Tex. Jan. 27, 2022). SEC asserts two theories to meet the first element, a material misrepresentation theory and a fraudulent scheme theory.
i. Material misrepresentation theory
Misstatements are material if “the information disclosed, understood as a whole, would mislead a reasonable potential investor.” SEC v. Sethi, 910 F.3d 198, 206 (5th Cir. 2018); Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 38 (2011) (“materiality is satisfied when there is 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”). The terms “device,” “scheme,” “act,” and “practice” in Rule 10b-5 and Section 17 are “expansive” and meant to “capture a wide range of conduct.” Lorenzo, 139 S.Ct. at 1101-02.
SEC argues there is no genuine dispute that Jaitley made three categories of material misrepresentations in violation of Section 17(a)(2) and Rule 10b-5(b). Dkt. 50 at 24.
First, SEC contends there is no genuine dispute that Jaitley misrepresented the number of traders associated with OBP/MOT as well was their purported experience and record. Id. SEC cites a recorded call between Jaitley and Client 2 in which Jaitley told Client 2 that “we have 80 traders” and that she and her colleagues at OBP/MOT have over twenty years' experience working for Goldman Sachs. Id. at 25 (citing P-24 at 33:8-22; P-32 at 6-11). SEC also cites evidence that no one other than Jaitley (and possibly Mr. Patel) was affiliated with OPB/MOT. P-31 ¶¶9, 21, 22; see, id. ¶24; P-5 at 6-7.
“For 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 Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011).
Second, SEC alleges that Jaitley misrepresented OBP/MOT's trading methods. SEC cites evidence that OBP/MOT did not use stops or other methods to prevent losses. Dkt. 50 at 25 (citing P-62 ¶9; P-31 ¶¶11, 31). SEC cites a recorded call between Jaitley and Client 2 in which Jaitley told Client 2 the opposite: “we always have stops in place when we're trading,” P-24 at 9:7-8, repeating via email that “your expectations really should be stops are used.” P-32 ¶16; see also, Dkt. 50 at 25.
SEC argues this was material also “because reasonable investors would consider OBP/MOT's trading methods important in deciding to trust Jaitley with their funds.” Dkt. 50 at 25. In support of this argument, SEC cites SEC v. World Tree Financial., LLC, for the proposition that failure to disclose a manipulative trading method is a material misrepresentation because of the “substantial likelihood that a reasonable investor would consider [it] important in making a decision to invest.” 43 F.4th 448, 461 (5th Cir. 2022).
Third, SEC alleges that Jaitley misrepresented OBP/MOT's location. SEC cites the OBP/MOT websites and a recorded call with Client 2 in which Jaitley claimed that the companies' offices were at 200 Park Avenue in New York, New York. Dkt. 50 at 26. SEC argues that this was false because Jaitley lived in Austin, Texas for the entire relevant period and that there is no evidence that Jaitley or OBP/MOT ever had operations in New York. SEC argues this misrepresentation was material because some Clients were more likely to invest with Jaitley and OBP/MOT based on the false representation that her trading operation was based in New York. Id. (citing P-31 at 15; P-32 at 4-5).
In support of this argument, SEC cites an insurance case from the Middle District of Georgia, in which the federal district court applied Georgia state law. The undersigned is of the opinion that citation to this case is neither here nor there. The case is not persuasive authority and detracts from SEC's argument.
SEC argues that each of the above misrepresentations individually and collectively were material because the information disclosed would mislead a reasonable potential investor. Dkt. 50 at 26 (citing Sethi, 910 F.3d at 206). Indeed, Clients reported that these misrepresentations misled them. See, e.g., P-31 at ¶¶4, 5, 10, 12, 17 & 25.
Jaitley's Response to SEC's argument and evidence is that she “disputes that she” violated Section 17 and Rule 10b-5. Dkt. 56 at 5. She asserts that there is no admissible evidence that she made any misrepresentations, resulting in a genuine dispute that should preclude summary judgment. For the reasons stated in Section III(A), supra at 5-7, Jaitley is incorrect, and the undersigned declines to repeat why here.
The Supreme Court has held that materiality can be “resolved as a matter of law by summary judgment” when information is “so obviously important to an investor that reasonable mind cannot differ on the question of materiality.” TSC Industry, Inc. v. Northway, Inc., 426 U.S. 438, 405 (1976); Basic Inc. v. Levinson, 485 U.S. 224, 232 (1988) (adopting the TSC Industries standard of materiality for the § 10(b) and Rule 10b-5 context). And the Fifth Circuit has held “a reasonable investor would have wanted to know the true identity of who was leading a company.” SEC v. Blackburn, 15 F.4th 676, 680 (5th Cir. 2021) (affirming summary judgment). The evidence shows that Jaitley made misrepresentations of obviously important information, including the identity of who was running OBP/MOT's operations, and the evidence shows that Clients report being misled by those misstatements. Accordingly, the undersigned concludes that Jaitley made material misrepresentations to Clients as a matter of law. Thus, SEC has satisfied the first element of a violation of Section 17 and Rule 10b-5 under a material misrepresentation theory.
ii. Fraudulent scheme theory
To establish liability under a scheme liability theory, a plaintiff must prove that “the defendant . . . engaged in conduct that had the principal purpose and effect of creating a false appearance of fact in furtherance of the scheme.” SEC v. Farmer, No. 4:14-CV-2345, 2015 U.S. Dist. LEXIS 136702, at *41 (S.D. Tex. 2015) (quoting Simpson v. AOL Time Warner, Inc., 452 F.3d 1040, 1048 (9th Cir. 2006), vacated on other grounds by Simpson v. Homestore.com, Inc., 519 F.3d 1041 (9th Cir. 2008)). Because “the concept of ‘scheme liability' recognizes that because ‘conduct itself can be deceptive,' a defendant may incur primary liability for securities fraud without making or using an ‘oral or written statement.'” Id. (quoting Stoneridge Inv. Partners v. Scientific-Atlanta, 552 U.S. 148, 158 (2008)). Scheme liability provisions are broad and “capture a wide range of conduct.” Lorenzo, 139 S.Ct. at 1101.
But “where ‘the core misconduct alleged is in fact a misstatement, it [is] improper to impose primary liability . . . by designating the alleged fraud a ‘manipulative device' rather than a ‘misstatement.'” Farmer, 2015 U.S. Dist. LEXIS 136702, at *41-42. “Scheme liability thus ‘hinges on the performance of an inherently deceptive act that is distinct from an alleged misstatement.'” Id. (citing cases).
SEC argues that “Jaitley's use of fake names was intended to create the false appearance that OBP/MOT was staffed by an extended team of traders.” Dkt. 50 at 28. SEC argues further that Jaitley's use of fake names was “fraudulent conduct falling within scheme liability.” Id. SEC cites Jaitley's use of fake names. Id. (citing P-36 at 65, 79 & 113). Jaitley's use of fake names is remarkably similar to her misstatements about the number of employees affiliated with OBP/MOT. SEC succeeded on its material misrepresentation theory, and the undersigned declines to find that the use of fake names to create an appearance of an extended team of traders was distinct enough from the use of fake names misstating the extent of the team of traders. But this conclusion does not defeat SEC's fraudulent scheme theory.
SEC also argues that there is no genuine dispute that Jaitley furthered her scheme in violation of Sections 17(a) and (c) and Rules 10b-5(a) and (c) by directing Clients to post fake, favorable reviews about OBP/MOT. Id. SEC cites Client 3's declaration identifying an email sent by Jaitley and false statements in an online review. Id. (citing P-33 at 8-9)SEC contends the false reviews had the purpose and effect of creating the false appearance that OBP/MOT were successful businesses with satisfied customers. Id.
SEC also cites its Requests for Admission (“RFAs”) (Dkt. 51-37) in which it requested Jaitley:
- Request No. 9: “Admit that you drafted, posted, or caused to be posted testimonials or reviews on websites, as alleged in the Complaint at ¶¶22-24.”
- Request No. 10: “ Admit that you solicited persons to post testimonials or reviews on websites, as alleged in the Complaint at ¶¶22-24.”The matters are deemed admitted because Jaitley did not respond to the SEC's RFAs within 30 days nor did she seek to withdraw her default admissions. FED. R. CIV. P. 36(A); Carney v. IRS (In re Carney), 258 F.3d 415, 419 (5th Cir. 2001) (affirming summary judgment based on default admissions).
SEC identifies evidence that Jaitley's conduct-encouraging Clients to post false reviews or posting false reviews herself-had the purpose or effect of creating the false appearance of fact-that OPB/MOT was well-regarded by clients-to further the options trading scheme. SEC has carried its burden on the fraudulent scheme theory, demonstrating that there is no genuine dispute of a material fact. Jaitley did not meet her burden. Thus, SEC has satisfied the first element of a violation of Section 17 and Rule 10b-5 under a fraudulent scheme theory.
The Supreme Court has held that an individual violates Rules 10b-5(a) and (c) so long as the individual disseminated a false statement to investors with intent to defraud, even if the individual did not have final authority over the substance of that statement. Lorenzo, 139 S.Ct. at 1101.
Jaitley's Response to SEC's argument and evidence is that she “disputes that she” violated Section 17(a)(1) and (3) and Rule 10b-5(a) and (c). Dkt. 56 at 5. She asserts that there is no admissible evidence that she made any misrepresentations, resulting in a genuine dispute that should preclude summary judgment. For the reasons stated in Section III(A), supra at 5-7, Jaitley is incorrect.
2. Second element: Mental state
The Antifraud Provisions have a mental state element. Some of the Antifraud Provisions require proof of scienter; others require only negligence. Aaron v. SEC, 446 U.S. 680, 695 (1980). Violations of Section 17(a)(1), Section 10(b), and Rule 10b-5 require proof of scienter, id. at 695-96, which is a mental state embracing the intent to deceive, manipulate, or defraud. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Scienter is established by showing a defendant acted intentionally or with severe recklessness. See Broad v. Rockwell Int'l Corp., 642 F.2d 929, 961 (5th Cir. 1981); Sethi, 910 F.3d 198, 206 (5th Cir. 2018) (“To prove scienter, the SEC need only prove that the defendant acted with severe recklessness.”) (citing Broad, 642 F.2d at 961).
“Severe recklessness is defined as ‘those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.'” Sethi, 910 F.3d 198, 206 (5th Cir. 2018) (quoting Broad, 642 F.2d at 961-62). “[A]ttempts to avoid detection of ‘are characteristic of a scheme to defraud.'” SEC v. Farias, No. SA-20-CV-00885-XR, 2022 U.S. Dist. LEXIS 135868, at *13 (W.D. Tex. 2022) (quoting SEC v. Milles, No. 1:19-CV-714-RP, 2022 U.S. Dist. LEXIS 11989, at *12 (W.D. Tex. 2022)).
Evidence of scienter is reinforced by the adverse inference to be drawn from (repeated) invocation of the Fifth Amendment right against self-incrimination during a deposition. SEC v. Silea, No. 4:20-CV-737-SDJ, 2022 U.S. Dist. LEXIS 15101, at *32 (E.D. Tex. 2022); Farace v. Indep. Fire Ins., 699 F.2d 204, 210 (5th Cir. 1983) (explaining that “while a person may refuse to testify during civil proceedings on the ground that his testimony might incriminate him . . . refusal to testify may be used against him in a civil proceeding”).
SEC asserts that there is no genuine dispute that Jaitley acted with scienter because she made statements with severe recklessness or intent to deceive. Dkt. 50 at 29. For example, SEC contends that Jaitley necessarily knew neither she nor Mr. Patel had decades financial services experience at Goldman Sachs. Id. SEC then contends similarly that Jaitley knew OBP/MOT did not employ numerous traders or use proprietary trading techniques. Id. SEC also contends that Jaitley knew she and OBP/MOT were not in New York. Id. Finally, SEC further contends that Jaitley's “evasive conduct,” such using fake names and blocked phone numbers, “demonstrate her culpable mental state”-scienter. Id. at 30.
In support of its argument, SEC cites SEC v. Milles for the proposition that when a person is one of the only people at an organization to take an action, that person “would have been aware” of basic facts about the organization. 2022 WL 206808, at *5 (W.D. Tex. Jan. 24, 2022). SEC cites SEC v. Farmer for the proposition that where a defendant's statements “contain[] misrepresentations about regarding the [d]efendant's own actions, there is no question that [d]efendant was aware of the false or misleading nature of the[] representations.” 2015 WL 5838867, at *11-12 (S.D. Tex. Oct. 7, 2015). SEC also argues, citing SEC v. Holschuh, that a “scheme to defraud may well include later efforts to avoid detection of the fraud,” 694 F.2d 14344 (7th Cir. 1982), and that “evidence of scienter is reinforced by the adverse inference to be drawn from [Jaitley's] repeated invocation of [her] Fifth Amendment right[s].” Dkt. 50 at 30 (citing Silea, 2022 WL 269105, at *12).
SEC's summary judgment evidence, case law, and Jaitley's failure to carry her burdenestablish that there is no genuine dispute about Jaitley's scienter.
Jaitley's Response to SEC's argument and evidence is that she “[t]here is also no admissible evidence that Jaitley acted with scienter.” Dkt. 56 at 6. She also states that “Mr. Patel did not contend . . . that Jaitley assisted him with operating OBP/MOT,” resulting in a genuine dispute that should preclude summary judgment. Id. For the reasons stated in Section III(A), supra at 5-7, Jaitley is incorrect.
Violations of Sections 17(a)(2) and (a)(3) require the SEC to establish the defendant's negligence. “[U]nlike liability under section 17(a)(1), liability under section 17(a)(2) or 17(a)(3) does not require proof of scienter.” SEC v. Life Partners Holdings, Inc., 854 F.3d 765, 786 (5th Cir. 2017). “[T]he burden to prove negligence is lesser than the burden to establish scienter ....” SEC v. Stack, No. 1:21-CV-00051-LY, 2021 U.S. Dist. LEXIS 196878, at *17 (W.D. Tex. 2021); SEC v. Sneed, Civil Action No. 3:20-CV-2988-S-BH, 2021 U.S. Dist. LEXIS 179239, at *28 (N.D. Tex. 2021) (noting that a showing of scienter also meets the lesser burden of negligence for Sections 17(a)(2) and (a)(3)).
SEC argues that because “there is no genuine dispute as to Jaitley's scienter, the evidence as to her negligence is even stronger because a lesser showing is required.” Dkt. 50 at 30 (citing SEC v. Sneed, Civil Action No. 3:20-CV-2988-S-BH, 2021 U.S. Dist. LEXIS 179239, at *28 (N.D. Tex. 2021).
SEC is correct. Because the undersigned concluded that there is no genuine dispute about Jaitley's scienter, the undersigned concludes that the SEC has necessarily met the lesser burden of establishing negligence required by Sections 17(a)(2) and (a)(3). Accordingly, the second element of a Section 17 and Rule 10b-5 violation is met.
3. Third element: Conduct in connection with the purchase or sale of a security
Misrepresentations are “‘in connection with' the purchase or sale of securities if there is a relationship in which the fraud and the stock sale coincide or are more than tangentially related ....” to real or purported transactions in covered securities. Roland v. Green, 675 F.3d 503, 511 (5th Cir. 2012) (emphasis in original) (quoting Madden v. Cowen & Co., 576 F.3d 957, 966 (9th Cir. 2009)) (citing Kircher v. Putnam Funds Tr., 547 U.S. 633, 644 (2006)).
“[T]here is tension in the law between following the Supreme Court's command that ‘in connection with' must be interpreted broadly, and its concurrent instruction that the same language “must not be construed so broadly as to convert every common-law fraud that happens to involve [covered] securities into a violation of § 10(b).” Roland, 675 F.3d at 518 (citations omitted).
SEC argues there is no genuine dispute that Jaitley's conduct with OBP/MOT coincided with the purchase or sale of securities. Dkt. 50 at 32. SEC alleges that Jaitley's conduct led to Clients trusting her with funds in their brokerage accounts and that she used those funds to transact in securities. Id. In support of this assertion, SEC cites Client 1's declaration and Client 1's brokerage statement, which reflects securities transactions entered into by OBP/MOT. Id. (citing e.g., P-31, P-28, P-29 & P-20).
Because SEC has carried its burden and Jaitley has not, there is no genuine dispute as to a material fact, and SEC has established the third element of a Section 17 and Rule 10b-5 claim.
Jaitley's Response to SEC's argument and evidence is that she “[t]here is also no admissible evidence that Jaitley acted in connection with the purchase or sale of a security.” Dkt. 56 at 6. She also “contends that she did not control or operate OBP/MOT” and states that “Mr. Patel did not contend . . . that Jaitley assisted him with operating OBP/MOT.” Id. She suggests these assertions result in a genuine dispute that should preclude summary judgment. Id. For the reasons stated in Section III(A), supra at 5-7, Jaitley is incorrect.
4. Fourth Element: Use of interstate commerce
The “interstate commerce” element may be met through “emails, phone calls, and wire transfers, to communicate with investors.” SEC v. Helms, No. A-13-CV-01036 ML, 2015 U.S. Dist. LEXIS 110758, at *39 (W.D. Tex. 2015).
SEC argues there is no genuine dispute that Jaitley used instrumentalities of interstate commerce because Jaitley used email to communicate with Clients and used bank wires to transfer funds. Dkt. 50 at 33. SEC cites emails from Jaitley to Clients requesting bank wires and a bank wire as evidence. Id. (citing e.g., P-17, P-55 & P-51).
Because SEC has carried its burden and Jaitley has not, there is no genuine dispute as to a material fact, and SEC has established the fourth element of a Section 17 and Rule 10b-5 claim.
Jaitley's Response to SEC's argument and evidence is that she “[t]here is also no admissible evidence that Jaitley transacted in interstate commerce.” Dkt. 56 at 6. She also “contends that she did not control or operate OBP/MOT” and states that “Mr. Patel did not contend . . . that Jaitley assisted him with operating OBP/MOT,” Id. She suggests these assertions result in a genuine dispute that should preclude summary judgment. Id. For the reasons stated in Section III(A), supra at 5-7, Jaitley is incorrect.
5. Section 17(a)(2) additional fifth element: Obtain money or property
Section 17(a)(2) has another requirement that a defendant “obtain money or property” by means of a false or misleading statement. 15 U.S.C. § 77q(a)(2).
SEC argues there is no genuine dispute on this element because Jaitley, among other things, obtained money from Clients by charging them account opening fees and management fees as well as a percentage of profits. Dkt. 50 at 33. SEC cites agreements between OBP/MOT and Client 1 and declarations of Clients 1, 2, 3, and 4 regarding charging fees and payment of fees. Id. (citing, e.g., P-28; P-29; P-31 ¶5; P-32 ¶¶43, 45; P-32 ¶¶5-12 & P-54 ¶5).
Because SEC has carried its burden, and Jaitley did not respond specifically to SEC's argument and evidence for this element, and because there is no genuine dispute of material fact, SEC has met the extra fifth element of a Section 17(a)(2) claim.
6. Conclusion as Section 17 and Rule 10b-5 claims
Summary judgment is appropriate when there is no genuine dispute of any material fact as to each element of a claim. SEC has met is burden and demonstrated that there are no genuine disputes as to any material facts of the four elements of its Section 17(a)(1) and (3) claims and Rule 10b-5(a), (b) and (c) claims or to any material facts of the five elements of a Section 17(a)(2) claim. Accordingly, the undersigned will recommend that the District Court grant SEC's Motion for Partial Summary Judgment.
C. SECTIONS 206 CLAIMS
“[C]onduct falling within § 17(a)(1) and (3) will fall within the analogous provisions of §206 when committed by an investment adviser against a client or prospective client.” SEC v. Seghers, 298 Fed.Appx. 319, 327-28 (5th Cir.2008) (“The language of . . . §206 of the Investment Advisors Act is drawn from § 17(a)(1) and (3) of the Exchange Act ....”) (citing Steadman v. SEC, 603 F.2d 1126, 1134 (5th Cir.1979)). “Scienter is required to show a violation of §206(1)” and “negligence is sufficient to show a violation of §206(2).” Steadman, 603 F.2d at 1134. “Facts supporting a Securities Act Section 17(a) or an Exchange Act Section 10(b) violation by an investment adviser will also support a showing of a Section 206 violation under the Advisers Act.” Dembski v. SEC, 726 Fed.Appx. 841, 844 (2d Cir. 2018). Thus, the only additional elements the SEC needs to prove to establish Section 206 violations is that the defendant's conduct occurred while acting as an investment adviser for a client. See id.
Section 202(a)(11) defines an investment adviser as “any person who, for compensation, engages in the business of advising others, . . . as to the value of securities or as to the advisability of investing in, purchasing, or selling securities.” 15 U.S.C. § 80b-2(a)(11). Persons who manage the funds of others and are compensated by a salary or a percentage of profits are “investment advisers” within the meaning of the statute. See SEC v. Haarman, 2022 WL 2782648, at *3 (W.D. Tex. Jan. 25, 2022) (collecting cases) Report and Recommendation adopted by 2022 WL 2763163 (W. D. Tex. March 11, 2022) (Yeakel, J.).
SEC argues there is no genuine dispute about this element because Jaitley managed OBP/MOT Clients' funds and received fees for that management. Dkt. 50 at 35. SEC cites agreements regarding fee arrangements between OBP/MOT and Client 1 and Client 2's declarations referencing Jaitley's commission on profits. Id. (citing, e.g., P-28, P-29 & P-32 at 12).
SEC has carried its burden, and Jaitley has not. Because SEC identified summary judgment evidence supporting each element of violations of Sections 206(1) and (2) and because there is no genuine dispute of a material fact, the undersigned will recommend the District Court grant summary judgment for SEC on its third and fourth and causes of action, the § 206 claims.
Jaitley's Response to SEC's argument and evidence is that she “[t]here is also no admissible evidence that Jaitley acted with scienter.” Dkt. 56 at 7. She also stats that “since Jaitley contends that she did not violate the Antifraud Provisions and did not engage in the alleged conduct with Clients, she could not have acted as an investment adviser ....” Id. She goes on: “For this reason, Jaitley contends that she did not violate Section 206(1) and (2) and summary judgment should be denied . . . .” Id. For the reasons stated in Section III(A), supra at 5-7, Jaitley is incorrect and has not carried her burden.
IV. Conclusion as to Summary Judgment
At bottom, resolution of the Motion is straightforward. Although SEC's claims have multiple, similar-but-not-quite-the-same elements that required analysis, resolution comes down to SEC carrying its burden to point to evidence in the summary judgment record in support of the elements of its claims and Jaitley's failure to carry hers to identify specific pieces of evidence that reflect a genuine dispute of a material fact. Jaitley's general disputes and broad contentions as well as her non-specific, general reliance on Mr. Patel's deposition testimony (testimony that is not competent summary judgment evidence) was nowhere near sufficient to carry her burden to show a genuine dispute of material fact.
Because a dispute is genuine only if the evidence is such that a reasonable jury could return a verdict for the nonmoving party, Anderson, 477 U.S. at 254, and because only SEC carried its summary judgment burden, the undersigned will recommend that the District Court grant SEC's Motion for Partial Summary Judgment.
V. Motion to Set Aside Default: Federal Rule of Civil Procedure55
Under Rule 55, a district court “may set aside an entry of default for good cause.” FED. R. CIV. P. 55(c). “The language of this rule is discretionary, and ‘the decision to set aside a default is committed to the sound discretion of the trial court.'” Moreno v. Lg Elecs., USA, 800 F.3d 692, 698 (5th Cir. 2015) (quoting In re Dierschke, 975 F.2d 181, 183 (5th Cir. 1992)). District courts generally should grant motions to set aside a default unless the default was willful, the plaintiff will be prejudiced, or the defendant has no meritorious defense. Dierschke, 975 F.2d at 183-84. This is because “courts universally favor trial on the merits.” Id. at 183 (internal quotation marks omitted).
VI. Default Set Aside Analysis
Relief Defendant OTA moves that to set aside the Clerk's entry of default, contending that the docket and pleadings “clearly demonstrate that [OTA] had not failed to plead or otherwise defend” when the Clerk entered default. Dkt. 52 at 2. SEC opposes OTA's motion. Dkt. 55.
Under Rule 55 trial courts have discretion to set aside a default, Moreno, 800 F.3d at 698, and the Fifth Circuit is clear that motions to set aside should generally be granted. Dierschke, 975 F.2d at 183-84. When determining whether good cause to set aside a default has been shown, a district court generally examines “[t]hree factors”: “(1) whether the failure to act was willful; (2) whether setting the default aside would prejudice the adversary; and (3) whether a meritorious claim has been presented.” Effjohn Int'l Cruise Holdings v. A&L Sales, 346 F.3d 552, 563 (5th Cir. 2003) (quoting Lacy v. Sitel Corp., 227 F.3d 290, 292 (5th Cir. 2000)). As “[t]hese factors are not exclusive,” “[o]ther factors may be considered, such as whether the party acted expeditiously to correct the default.” Id. (citing Dierschke, 975 F.2d at 184; see also Moreno, 800 F.3d at 698. But again, “district courts generally should grant motions to set aside a default unless the default was willful, the plaintiff will be prejudiced, or the defendant has no meritorious defense.” Id. (citing Dierschke, 975 F.2d at 183-84).
In analyzing OTA's Motion, the undersigned employed a timeline and reproduces it here:
- SEC files suit against all defendants September 20, 2021. Dkt. 1.
- OTA answered on November 30, 2021. Dkt. 8.
- OTA (purporting to be represented by counsel) joins Jaitley's response to
SEC's Motion to Strike Defendants' Answer and Affirmative Defenses. December 27, 2021. Dkt. 12.
- SEC files a proposed scheduling order in which SEC presumes OTA is represented by counsel. January 12, 2022. Dkt. 15.
- Jaitley and Relief Defendant Patel filed Amended Answers. March 25, 2022. Dkts. 21 & 22.
- SEC moves that the clerk enter default as to OTA. April 4, 2022. Dkt. 23.
- Clerk's Entry of Default as to OTA. April 8, 2022. Dkt. 23.
- Counsel for OTA signed Joint Status Report. June 14, 2022. Dkt. 28.
- Counsel for OTA admitted Pro Hac Vice. June 22, 2022. Dkt. 33.
- OTA files Amended Answer. October 4, 2022. Dkt. 40.
- OTA move to set aside default. March 7, 2023. Dkt. 52.
This case is a somewhat close call because OTA has not vigorously defended this action. Still, OTA has defended. And OTA's counsel declared under penalty of perjury that she and (to her knowledge) Jaitley (OTA's sole member) contacted “dozens of attorneys to represent [] OTA” to no avail. Dkt. 52-1 ¶5. OTA's counsel also represents that “[p]rior counsel for the SEC, Paul Kisslinger, agreed to unopppose [sic] [] OTA's motion to set aside default judgment [sic].” Id. ¶7. Thus, the undersigned concludes that OTA's default was not willful.
The undersigned shares SEC's frustrations, including that OTA violated a court orderAccordingly, the non-exclusive, discretionary factors weigh ever so slightly in OTA's favor, and the undersigned will recommend the District Court set aside the Clerk's entry of default against OTA.
“This Court will not tolerate any continued discovery delays or abuse [by Jaitley or Relief Defendant Taraben Patel].” Dkt. 42 (Order Granting SEC's Motion to Compel and to Extend the Discovery Period).
VII. Recommendations
For these reasons, the undersigned RECOMMENDS that Plaintiff SEC's Motion for Partial Summary Judgment (Dkt. 50) be GRANTED.
SEC suggests that if the default is lifted, OTA be required to provide complete response to SEC's discovery requests and be required to sit for a deposition even though discovery has closed. Dkt. 55 at 2.
The undersigned FURTHER RECOMMENDS that Relief Defendant OTA, LLC's Motion to Set Aside Entry of Default (Dkt. 52) also be GRANTED and that the District Court vacate the Clerk's Entry of Default (Dkt. 24).
In light of this Report and Recommendation, the referral to the magistrate should be ended.
VIII. Objections
The parties may object to this Report and Recommendation. A party filing objections must specifically identify those findings or recommendations to which objections are being made. The District Court need not consider frivolous, conclusive, or general objections. See Battles v. United States Parole Comm'n, 834 F.2d 419, 421 (5th Cir. 1987).
A party's failure to file written objections to the proposed findings and recommendations contained in this Report within 14 days after the party is served with a copy of the Report shall bar that party from de novo review by the District Court of the proposed findings and recommendations in the Report and, except upon grounds of plain error, shall bar the party from appellate review of unobjected-to proposed factual findings and legal conclusions accepted by the District Court. See 28 U.S.C. § 636(b)(1)(C); Thomas v. Arn, 474 U.S. 140, 150-53 (1985); Douglass v. United Services Auto. Ass'n, 79 F.3d 1415 (5th Cir. 1996) (en banc).