Opinion
Case No. 23-CV-23749-RAR
2024-05-03
SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Shannon WESTHEAD, et al., Defendants.
Amie Riggle Berlin, United States Securities and Exchange Commission, Miami, FL, for Plaintiff. Allison Beth Kernisky, Stephen Patrick Warren, Holland & Knight LLP, Miami, FL, Ellen Ross Belfer, Hilgers Graben PLLC, Miami, FL, Scott F. Mascianica, Hilgers Graben PLLC, Dallas, TX, for Defendant Shannon Westhead. Matthew Louis Minsky, George Bochetto, Pro Hac Vice, Bochetto and Lentz, PC, Philadelphia, PA, for Defendants Alec Vagnozzi, Pisces Income Fund, LLC, Pisces Income Fund Parallel, LLC, Albert Vagnozzi, Capricorn Income Fund I, LLC, Capricorn Income Fund Parallel, LLC.
Amie Riggle Berlin, United States Securities and Exchange Commission, Miami, FL, for Plaintiff. Allison Beth Kernisky, Stephen Patrick Warren, Holland & Knight LLP, Miami, FL, Ellen Ross Belfer, Hilgers Graben PLLC, Miami, FL, Scott F. Mascianica, Hilgers Graben PLLC, Dallas, TX, for Defendant Shannon Westhead. Matthew Louis Minsky, George Bochetto, Pro Hac Vice, Bochetto and Lentz, PC, Philadelphia, PA, for Defendants Alec Vagnozzi, Pisces Income Fund, LLC, Pisces Income Fund Parallel, LLC, Albert Vagnozzi, Capricorn Income Fund I, LLC, Capricorn Income Fund Parallel, LLC. ORDER DENYING MOTION TO DISMISS RODOLFO A. RUIZ II, UNITED STATES DISTRICT JUDGE
THIS CAUSE comes before the Court on Defendants Shannon Westhead, Michael Tierney, Merchant Services Income Fund, LLC, and Merchant Services Income Fund Parallel, LLC's Motion to Dismiss the Complaint, [ECF No. 31] ("Motion"). Having reviewed the Motion, the SEC's Response, [ECF No. 37], Defendants' Reply, [ECF No. 38], Defendants' Notice of Supplemental Authority, [ECF No. 55], the SEC's Response to Defendants' Notice of Supplemental Authority, [ECF No. 57], the record, applicable law, and being otherwise fully advised, it is hereby
ORDERED AND ADJUDGED that the Motion is DENIED as set forth herein.
BACKGROUND
This case centers around the allegedly unregistered Complete Business Solutions Group ("CBSG") securities offering. Compl. ¶ 1. Generally, the SEC alleges that certain "Agent Fund Managers," including Defendants Westhead and Tierney, "operated their own securities offerings in an orchestrated effort to funnel investor money to CBSG in exchange for CBSG promissory notes." Compl. ¶¶ 1-2. In furtherance of this scheme, Tierney and Westhead allegedly made multiple misrepresentations and omitted material facts about the securities offerings. Compl. ¶ 7. Tierney and Westhead allegedly "tout[ed] CBSG's success while omitting to disclose the criminal record of CBSG's principal, Joseph LaForte, who had two felony convictions, and fail[ed] to disclose regulatory actions against CBSG by Pennsylvania, Texas, and New Jersey state securities regulators." Compl. ¶ 7.
Specifically, the SEC alleges that from September 2019 to March 2020, Westhead and Alec Vagnozzi operated the Agent Fund Pisces Income Fund, LLC ("Pisces")—which was formed for the purpose of raising investor money for the registered CBSG offering. Compl. ¶ 76. Using Pisces, Westhead allegedly helped raise "more than $15 million for CBSG through the offer and sale of Pisces promissory notes to at least 80 investors, and then funneled the investors' money to CBSG for the purchase of CBSG promissory notes issued to Pisces." Compl. ¶ 3. Likewise, the SEC alleges that from January 2019 to March 2020, Tierney operated Merchant Services Income Fund, LLC ("MSI")—which was formed for the purpose of raising investor funds for the unregistered CBSG offering. Compl. ¶ 5. Using MSI, Tierney raised "more than $32 million from at least 70 investors and then funneled the investors' money to CBSG for the purchase of CBSG promissory notes issued to MSI." Compl. ¶ 5.
From October 2019 to March 2020, Westhead allegedly "touted CBSG's track record as a leader in the Merchant Cash Advance ("MCA") industry but failed to disclose CBSG's regulatory history" or the criminal history of CBSG's principal, Joseph LaForte. Compl. ¶ 86. Westhead allegedly knew about multiple regulatory actions against CBSG by no later than October 2019. Compl. ¶¶ 87-88. Similarly, the SEC alleges that Westhead knew about LaForte's criminal convictions and his role at CBSG by no later than October 2018. Compl. ¶ 93. Despite this knowledge, Westhead allegedly solicited an investor "with initials F.B. to invest in Pisces [in November 2019] through email and touted CBSG's track record as a leader in the MCA industry, but failed to disclose the Pennsylvania or New Jersey Actions or that CBSG was managed by a convicted felon" or the criminal history of LaForte. Compl. ¶ 95.
Similarly, from August 2018 to March 2020, Tierney "touted CBSG's track record as a leader in the MCA industry but failed to disclose CBSG's regulatory history and that CBSG was operated by a convicted felon." Compl. ¶ 121. Tierney allegedly knew about the Pennsylvania Regulatory Action, New Jersey Regulatory Action, and Texas Regulatory Action by no later than April 2020. Compl. ¶ 118. Similarly, the SEC alleges that Tierney knew about LaForte's criminal convictions and his role at CBSG by no later than November 2018. Compl. ¶ 119. Despite this knowledge, Tierney allegedly "solicited an investor located in Holland, Pennsylvania with initials R.F. to invest in MSI through email and touted CBSG's track record as a leader in the MCA industry, but failed to disclose the Pennsylvania Action or that CBSG was managed by a convicted felon." Compl. ¶ 122.
The scheme allegedly came to a head in March of 2020, when Tierny and Westhead notified investors that, due to the Covid-19 pandemic, CBSG would default on the notes CBSG had issued to the Agent Funds. Compl. ¶ 9. Westhead and Tierney quickly formed the Pisces Income Fund Parallel, LLC ("Pisces Parallel") and the Merchant Services Income Fund Parallel, LLC ("MSI Parallel") (collectively, the "Parallel Agent Funds"). Compl. ¶ 8. Westhead and Tierney reportedly offered "their existing investors promissory notes issued by the Parallel Agent Funds, which would replace the promissory notes Pisces, Capricorn, and MSI had issued to investors." Compl. ¶ 9. The SEC further alleges that, under the Parallel Agent Funds' notes, investors received lower investment returns. Compl. ¶ 9. From October 2019 to April 2020, CBSG allegedly paid Pisces more than $935,000 in compensation for raising investor funds for the unregistered CBSG offering. Compl. ¶ 101. Of that compensation, Westhead allegedly received more than $260,000 as payment for raising investor funds for the unregistered CBSG offering. Compl. ¶ 102.
Based on this alleged conduct, the SEC brings eight claims against Defendants Westhead and Tierney: sale of unregulated securities in violation of Sections 5(a) and 5(c) of the Securities Act of 1933, 15 U.S.C. § 77a et seq. ("Securities Act") (Count I); fraud in violation of Section 10(b) and Rule 10b-5(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. ("Exchange Act") (Count II); violation of Section 10(b) and Rule 10b-5(b) of the Exchange Act (Count III); violation of Section 10(b) and Rule 10b-5(c) of the Exchange Act (Count IV); violation of Section 17(a)(1) of the Securities Act (Count V); violation of Section 17(a)(2) of the Securities Act (Count VI); violation of Section 17(a)(3) of the Securities Act (Count VII); and violation of Section 15(a) of the Exchange Act (Count VIII). As to Defendants MSI and MSI Parallel, the SEC brings only one claim: the sale of unregistered securities in violation of Sections 5(a) and 5(c) of the Securities Act (Count I).
The Court notes that the Complaint contains two distinct claims labeled "Count VI" in what appears to be a scrivener's error. For clarity, the Court will refer to the claim set out in Paragraphs 151-153 as Count VI and the claim set out in Paragraphs 154-156 as Count VII.
LEGAL STANDARD
To survive a motion to dismiss under Fed. R. Civ. P. 12(b)(6), "a complaint must include 'enough facts to state a claim to relief that is plausible on its face.' " Hunt v. Aimco Properties, L.P., 814 F.3d 1213, 1221 (11th Cir. 2016) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). When reviewing a motion to dismiss pursuant to Rule 12(b)(6), a court must accept as true all factual allegations contained in the complaint, and the plaintiff should receive the benefit of all favorable inferences that can be drawn from the facts alleged. See Chaparro v. Carnival Corp., 693 F.3d 1333, 1335 (11th Cir. 2012); Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Although the court is required to accept as true all allegations contained in the complaint, courts "are not bound to accept as true a legal conclusion couched as a factual allegation." Twombly, 550 U.S. at 555, 127 S.Ct. 1955 (quotation omitted); Iqbal, 556 U.S. at 678, 129 S.Ct. 1937.
ANALYSIS
As an initial matter, clarification as to which Defendants are seeking relief via the present Motion is warranted. Defendants Shannon Westhead, Michael Tierney, Merchant Services Income Fund, LLC, and Merchant Services Income Fund Parallel, LLC jointly filed the Motion to Dismiss. Mot. at 1. And while Defendants admit that "the arguments [in the Motion to Dismiss] focus on the allegations concerning Ms. Westhead," they claim that "Defendants Michel Tierney, Merchant Services Income Fund, LLC, and Merchant Services Income Fund Parallel, LLC join in the motion to dismiss, given the similarity of factual allegations, and the legal arguments presented herein to the extent they apply to them." Mot. at 1 n.1. Thus, while the Court will properly refer to the instant Motion as one advanced by multiple Defendants, it is not the job of the Court to act as counsel for Defendants Michel Tierney, Merchant Services Income Fund, LLC, and Merchant Services Income Fund Parallel, LLC—against whom the SEC alleges a related but unique set of facts. Nor will the Court consider a hypothetical set of arguments not actually raised as to Defendants Michel Tierney, Merchant Services Income Fund, LLC, and Merchant Services Income Fund Parallel, LLC. Accordingly, the Court will consider only the arguments actually raised in the Motion to Dismiss as to Defendant Shannon Westhead.
With that in mind, Defendants raise several arguments in favor of Westhead's dismissal. First, Defendants claim that the SEC does not satisfy the heightened pleading standards of Federal Rule of Civil Procedure 9(b) because "it fails to allege particularized facts about the most critical aspects of Ms. Westhead's misconduct." Mot. at 7. Second, Defendants argue that fraud claims "hinge on a deficient omissions-only theory that fails under well-established precedent." Id. Third, Defendants maintain that the SEC has failed to allege any misconduct beyond "purported misstatements" which is insufficient under recent precedent. Id. Fourth, Defendants claim that the SEC has failed to sufficiently allege that Westhead had "a mental intent to deceive her investors." Id. Fifth, Defendants argue that the SEC's claim that Westhead acted as an unregistered broker fails based on the documents referenced in the Complaint. Id. Finally, Defendants maintain that the SEC fails to adequately allege that Westhead sold CBSG securities—directly or indirectly—"as the documents referenced by the SEC's Complaint evidence that she did not sell CBSG securities at all." Id. The Court will address each of these arguments in turn.
I. The Complaint is Sufficiently Specific to Comply with Rule 9(b).
Defendants claim that the SEC does not satisfy the heightened pleading standards under Rule 9(b) because "it fails to allege particularized facts about the most critical aspects of Ms. Westhead's misconduct." Mot. at 7. Securities fraud claims are subject to the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure. S.E.C. v. City of Miami, Fla., 988 F. Supp. 2d 1343, 1353 (S.D. Fla. 2013). Rule 9(b) requires a party to "state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed. R. Civ. P. 9(b). The Eleventh Circuit has explained that:
While Rule 9(b) does not abrogate the concept of notice pleading, it plainly requires a complaint to set forth (1) precisely what statements or omissions were made in which documents or oral representations; (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) them; (3) the content of such statements and the manner in which they misled the plaintiff; and (4) what the defendant obtained as a consequence of the fraud.FindWhat Inv. Grp. v. FindWhat.com, 658 F.3d 1282, 1296 (11th Cir. 2011). Under Rule 9(b), it is "sufficient to plead the who, what, when, where, and how of the allegedly false statements and then allege generally that those statements were made with the requisite intent." Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1237 (11th Cir. 2008).
To establish a violation of Section 10(b) and Rule 10b-5, the SEC must prove Westhead made (1) material misrepresentations or materially misleading omissions, (2) in connection with the purchase or sale of securities, (3) with scienter. See S.E.C. v. Merch. Cap., LLC, 483 F.3d 747, 766 (11th Cir. 2007). The elements of a Section 17(a)(1) claim are "substantially similar": (1) material misrepresentations or materially misleading omissions, (2) in the offer or sale of securities, (3) made with scienter." Id. With regard to these claims and the negligence-based claims under Sections 17(a)(2) and (3), courts have required the plaintiff to meet the Rule 9(b) heightened pleading standard. See S.E.C. v. RPM Int'l, Inc., 282 F. Supp. 3d 1, 13 (D.D.C. 2017); S.E.C. v. Wey, 246 F. Supp. 3d 894, 910-11 (S.D.N.Y. 2017).
Westhead argues that the SEC's fraud claims (Counts I-VI) must be dismissed because the SEC has failed to comply with Rule 9(b)'s heightened pleading requirement. Specifically, she claims that the SEC does not "provide any particularized allegations with regard to the purported fraudulent conduct of Ms. Westhead" such as "where and to whom did she purportedly make her fraudulent statements." Mot. at 6-7. She further argues that the SEC has failed to allege whether Westhead "specifically sp[oke] on the topics of Mr. LaForte's criminal background or CBSG's criminal history" as well as "when and what did Ms. Westhead allegedly [know] about LaForte's criminal background." Mot. at 7. The Court disagrees.
Under Rule 9(b), it is sufficient for the SEC to "plead the who, what, when, where, and how of the allegedly false statements and then allege generally that those statements were made with the requisite intent." Mizzaro, 544 F.3d at 1237. The Complaint alleges that Westhead "falsely told investors and prospective investors that the offerings comply with the securities laws and that the [private placement memoranda ("PPMs")] contained all the information a person would want to know in order to make an informed investment decision." Compl. ¶ 85. It further alleges that Westhead "touted CBSG's track record as a leader in the MCA industry but failed to disclose CBSG's regulatory history and Joseph LaForte's criminal background." Compl. ¶ 86. These misrepresentations took place over a six-month period, during which Westhead "solicited investors through telephone calls, emails, and/or in-person meetings." Compl. ¶ 81. Adding even more specificity by way of example, the Complaint alleges that, "in November 2019, Westhead solicited an investor located in Chad's Fort, Pennsylvania with initials F.B. to invest in Pisces through email and touted CBSG's track record as a leader in the MCA industry, but failed to disclose the Pennsylvania or New Jersey Actions or that CBSG was managed by a convicted felon." Compl. ¶ 95. As to meeting the requirement for general allegations regarding intent, the SEC alleges that Westhead knew about regulatory action against CBSG by no later than October 2019 and LaForte's criminal convictions by no later than October 2018, Compl. ¶¶ 91-93, but nevertheless continued to make affirmative misrepresentations and/or omissions. The Court finds these allegations sufficient to comply with Rule 9(b).
Defendants argue that "the SEC does not allege that Ms. Westhead knew LaForte 'co-founded CBSG with his spouse,' 'acted as the de facto CEO of CBSG' or 'was introduced to some investors as CBSG's President.' " Mot. at 6. This "lack of clarity" is allegedly "fatal to the SEC's fraud claims." Id. However, the Complaint specifically alleges that Westhead knew that LaForte "managed CBSG by no later than October 2018." Compl. ¶ 93. Regardless of whether Westhead knew of LaForte's exact title, Westhead allegedly knew that La Forte had a documented criminal history and "managed" CBSG—while failing to disclose this to investors. Such allegations are sufficient to meet pleading requirements under Rule 9(b).
Further, the string cite of cases Defendants rely upon in favor of dismissal are inapposite. In S.E.C. v. Levin, it is true that the court found "it is not clear that the [offending] statements were actually misrepresentations between December 2007 and July 2008, and, without more specific allegations of when the [offending] PowerPoints were presented, the Complaint does not necessarily allege that any misrepresentations were made to investors." No. 12-21917, 2013 WL 594736, at *8 (S.D. Fla. Feb. 14, 2013). In other words, the issue in Levin was one of timing; namely, whether the PowerPoints were misrepresentations at the time they were presented. However, unlike in Levin, the Complaint here specifically alleges that Westhead made the problematic statements or omissions after she learned about the regulatory and criminal actions against CBSG and LaForte respectively. See Compl. ¶¶ 22-23, 81-82, 85-86, 103-107. Allegations that Westhead knew a statement was incorrect or misleading by omission when she made it distinguishes this case from Levin.
Defendants also mistakenly rely on Sec. & Exch. Comm'n v. McKelvey. There, the Court required amendment because the Complaint "simply allege[d] a broad-based scheme that lasted the period of January 2007 through December 2013" and was "devoid of specific dates connecting the conduct and misrepresentations of [the defendants] to a specific date and time." No. 15-80496, 2015 WL 11254728, at *5 (S.D. Fla. Nov. 10, 2015). That is not the case here. For starters, the Complaint focuses its allegations on a much narrower time-frame—September 2019 (when Pisces was formed) through July 2020 (when the SEC filed its first related enforcement action). Compl. ¶¶ 2, 76. Moreover, the Complaint here contains specific dates connecting the conduct and misrepresentations by Westhead to a specific time frame—as well as to a specific recipient. See Compl. ¶ 95. These facts distinguish the present case from McKelvey.
The Court also finds that these same facts distinguish the present case from S.E.C. v. Spinosa, 31 F. Supp. 3d 1371, 1375 (S.D. Fla. 2014) (dismissing fraud claim where allegations failed to disclose recipients of alleged misstatements).
In sum, based on the foregoing, the Court finds that the SEC has complied with Rule 9(b)'s heightened pleading requirement. Accordingly, Counts I-VI do not warrant dismissal.
II. The SEC has Adequately Pled Fraud Under Rule 10-5(b) and Section 17(a)(2).
The Court now turns to whether the SEC has sufficiently alleged violations of the Securities Acts' antifraud provisions. The SEC alleges that Defendants' actions violated Section 10(b) and Rule 10b-5 of the Exchange Act and Section 17(a) of the Securities Act—two very similar statutes. The main difference between the two is that "§ 10(b) and Rule 10b-5 apply to acts committed in connection with a purchase or sale of securities while § 17(a) applies to acts committed in connection with an offer or sale of securities." S.E.C. v. Maio, 51 F.3d 623, 631 (7th Cir. 1995) (emphasis in original); see also S.E.C. v. Big Apple Consulting USA, Inc., 783 F.3d 786, 795 (11th Cir. 2015) ("Though Rule 10b-5 regulates a different activity, i.e., the "purchase or sale" of securities rather than their "offer or sale," it borrows much, though not all, of its language from § 17(a).").
Rule 10b-5 and Section 17(a) both include three subsections. Rule 10b-5(a) makes it unlawful to "employ any device, scheme, or artifice to defraud"; subsection (b) makes it unlawful to "make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made . . . not misleading"; and subsection (c) makes it unlawful to "engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person." 17 C.F.R. § 240.10b-5(a)-(c). Similarly, Section 17(a)(1) makes it unlawful "to employ any device, scheme, or artifice to defraud"; subsection 17(a)(2) makes it unlawful "to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made . . . not misleading"; and subsection 17(a)(3) makes it unlawful "to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser." 15 U.S.C. § 77q(a).
Accordingly, to allege claims under Section 17(a)(1)-(3), Section 10(b), and Rule 10b-5(a)-(c), the SEC must show: (1) a device, scheme, artifice to defraud; a material misrepresentation or omission; or an act, practice, or course of business which would operate as a fraud or deceit; (2) in the offer of or in connection with the purchase or sale of a security; and (3) in interstate commerce. See S.E.C. v. Quiros, No. 16-21301, 2016 WL 11578637, at *12 (S.D. Fla. Nov. 21, 2016). For claims under Section 17(a)(1) and Rule 10b-5, the SEC must also allege facts supporting scienter. Merch. Cap., 483 F.3d at 766. The SEC need only demonstrate negligence for claims under Sections 17(a)(2) and (3). Id.
Finally, during the period in which this present Motion was under advisement, the Supreme Court issued additional guidance as to the reach of Rule 10b-5(b). Macquarie Infrastructure Corp. v. Moab Partners, L.P., 601 U.S. 257, 258-60, 144 S.Ct. 885, 218 L.Ed.2d 214 (2024). Macquarie addresses whether "pure omissions" are also actionable under Rule 10b-5(b), and holds that they are not. As the Court explained, "a pure omission occurs when a speaker says nothing, in circumstances that do not give any special significance to that silence." Id. at 258.
In an abundance of caution, the Court allowed supplemental briefing on Macquarie's potential impact on this litigation prior to issuing the present Order. See [ECF Nos. 55-57].
Defendants raise two arguments in favor of dismissing Count III and Count VI as to Westhead. First, they argue that "[b]ecause the SEC has not identified any half-truth (or any statement at all) made by Ms. Westhead about either LaForte's criminal history or the state regulatory actions against CBSG, she had no duty to disclose them"—and furthermore, even if there was a duty to disclose, Westhead's statements are mere puffery. Mot. at 10-11. Second, Defendants argue that Count VI specifically should be dismissed because the SEC has failed to properly allege that Ms. Westhead obtained money "by means of" a misrepresentation or omission. Mot. at 11. The Court will address each argument in turn.
A. Validity of the Omission
1. Duty to Disclose
Rule 10b-5 prohibits not only literally false statements, but also any omissions of material fact "necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b). "By voluntarily revealing one fact about its operations, a duty arises for the corporation to disclose such other facts, if any, as are necessary to ensure that what was revealed is not 'so incomplete as to mislead.' " FindWhat Inv. Grp., 658 F.3d at 1305 (quoting Backman v. Polaroid Corp., 910 F.2d 10, 16 (1st Cir. 1990)). "Even absent a duty to speak, a party who discloses material facts in connection with securities transactions assumes a duty to speak fully and truthfully on those subjects." Id. (citation omitted). A statement is misleading if "in the light of the facts existing at the time of the [statement] . . . [a] reasonable investor, in the exercise of due care, would have been misled by it." Id. (quoting SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 863 (2d Cir. 1968)). Thus, the " 'appropriate primary inquiry' is 'into the meaning of the statement to the reasonable investor and its relationship to truth.' " Id.
Defendants claim that "[b]ecause the SEC has not identified any half-truth (or any statement at all) made by Ms. Westhead about either LaForte's criminal history or the state regulatory actions against CBSG, she had no duty to disclose them." Mot. at 10. As the SEC correctly notes, it alleges that Westhead falsely told prospective investors that "the offerings comply with the securities laws," "the PPMs contained all the information a person would want to know in order to make an informed investment decision," and CBSG had a "track record as a leader in the MCA industry." Compl. ¶¶ 85-86. These statements firmly remove Westhead from the safe harbor for "pure omissions." See Macquarie, 601 U.S. at 258-60, 144 S.Ct. 885. Further, the SEC alleges that at the time these statements were made, CBSG was in fact facing multiple regulatory actions—in addition to the existing criminal convictions against LaForte. Compl. ¶¶ 89-93. Taking the SEC's allegations as true, the Court finds that the SEC has sufficiently alleged an omission that "[a] reasonable investor, in the exercise of due care, would have been misled by [ ]" considering "the facts existing at the time of the [statement]." FindWhat Inv. Grp., 658 F.3d at 1305 (citation omitted).
2. Materiality - Puffery
The test for materiality in the securities fraud context is "whether a reasonable man would attach importance to the fact misrepresented or omitted in determining his course of action." S.E.C. v. Merchant Capital, LLC, 483 F.3d 747, 766 (11th Cir. 2007). Materiality is an objective inquiry involving the significance of an omitted or misrepresented fact to a reasonable investor. See S.E.C. v. Morgan Keegan & Co., 678 F.3d 1233, 1245 (11th Cir. 2012). Furthermore, the materiality test "requires delicate assessments of the inferences a reasonable [investor] would draw from a given set of facts" and "these assessments are peculiarly ones for the trier of fact." Id. at 1245-46. Accordingly, "[a] statement that is vague, generalized, non-verifiable, or mere corporate puffery is immaterial because a reasonable investor would not make a decision based on such a statement." Thorpe v. Walter Inv. Mgmt., Corp., No. 14-20880, 2014 WL 11961964, at *12 (S.D. Fla. Dec. 23, 2014). For that reason, mere puffery cannot form the basis for a Rule 10(b) claim or a Rule 10b-5 claim. See Philadelphia Fin. Mgmt. of San Francisco, LLC v. DJSP Enters. Inc., 572 F. App'x 713, 716 (11th Cir. 2014) (finding that statements about the "rigor" of defendant's processes, the "efficiency" and "accuracy" of its operations, and its "effective" staff training were not material because the statements did not assert specific and verifiable facts).
"Materiality is itself a mixed question of law and fact." Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307, 1320 (11th Cir. 2019). Moreover, a conclusion that a statement constitutes puffery "doesn't absolve the reviewing court of the duty to consider the possibility—however remote—that in context and in light of the 'total mix' of available information, a reasonable investor might nonetheless attach importance to the statement." Id. Accordingly, "when considering a motion to dismiss a securities-fraud action, a court shouldn't grant unless the alleged misrepresentations—puffery or otherwise—are 'so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance.' " Id. (citation omitted).
Defendants argue that the SEC's "half-truth theory" is premised on "generalized statements that Ms. Westhead allegedly made about CBSG's 'track record' " and such statements are inactionable puffery. Mot. at 10. And while this is a closer call, the Court disagrees. When taking all allegations as true and drawing all inferences in favor of the SEC, and in light of the "total mix" of available information, a reasonable investor may have attached importance to the statements that CBSG had a proven track record of success and was in compliance with securities laws. Similarly, reasonable minds could conclude that LaForte's criminal history was material to investors. See, e.g., S.E.C. v. Prater, 289 F. Supp. 2d 39, 52-53 (D. Conn. 2003) ("The failure to disclose anywhere on the websites or in other materials any information about [Defendant's] extensive criminal history, including convictions for fraud, would certainly constitute a material omission which a reasonable investor might view as important in deciding whether to trust their money with [Defendant] or his company."); S.E.C. v. Cap. Cove Bancorp LLC, No. 15-00980, 2015 WL 9704076, at *6 (C.D. Cal. Sept. 1, 2015) (finding that in using an alias, defendant "omitted and never disclosed [his] criminal history when soliciting investments" and that this omission was material); United States v. Hatfield, 724 F. Supp. 2d 321, 328 (E.D.N.Y. 2010) ("It is well-settled that information impugning management's integrity is material to shareholders."). Likewise, reasonable minds could differ as to the importance of Westhead's alleged representation that the PPMs contained all the information an investor needed to make an informed decision. Accordingly, Counts III and VI do not warrant dismissal.
B. "By Means of" the Omission
As discussed above, Section 17(a)(2) makes it "unlawful for any person in the offer or sale of any securities . . . directly or indirectly . . . to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact." 15 U.S.C. § 77q(a). Defendants argue that the SEC has failed to establish a claim under Section 17(a)(2) because "the SEC merely alleges that Pisces received funds in connection with its separate investment in CBSG and that Ms. Westhead received compensation from Pisces." Mot. at 11. The SEC responds, without providing any case law in support, that it has satisfied its burden by pleading a "flow of funds" from CBSG to Pisces "with a portion going to investors as their returns and the balance being split between Westhead and her partner as their compensation." Resp. at 15.
As Defendants have correctly pointed out, other courts in this District have found similar allegations insufficient because "Section 17(a)(2)'s statutory provision, on its face, imposes liability upon the defendant only when he personally obtains money or property." United States Sec. & Exch. Comm'n v. Sandoval, No. 17-20301, 2018 WL 11353292, at *10 (S.D. Fla. Apr. 11, 2018). The SEC failed to respond to this point. However, the Court's own research reveals that "there is disagreement among [ ] courts as to whether . . . an individual defendant must personally obtain money or property, or whether it is sufficient that the defendant obtained money or property for his employer" for purposes of Section 17(a)(2). Id. at *8. Other courts, both within and outside this District, have held that increased compensation from an employer for fraudulent transactions is sufficient to satisfy Section 17(a)(2). See Spinosa, 31 F. Supp. 3d at 1379 ("The plain meaning of 'indirectly obtaining money' may include receiving increased compensation based on the volume of business enlarged by the alleged fraudulent activity."); S.E.C. v. Stoker, 865 F. Supp. 2d 457, 463 (S.D.N.Y. 2012) (noting "it is sufficient under Section 17(a)(2) for the SEC to allege that [defendant] obtained money or property for his employer while acting as its agent, or, alternatively, for the SEC to allege that [defendant] personally obtained money indirectly from the fraud" when defendant's compensation increased dramatically around the time of the alleged fraud); S.E.C. v. Mudd, 885 F. Supp. 2d 654, 670 (S.D.N.Y. 2012) (holding bonus based on company's performance as well as defendant's performance qualified as "obtaining money under section 17(a)(2)").
The split between courts here largely results from the varying interpretations of what exactly "directly or indirectly" is meant to modify in Section 17(a)(2). Courts that read the statute more broadly to impose liability for compensation by a defendant's employer find that "directly or indirectly" modifies "to obtain money or property' " and therefore "the plain meaning of 'indirectly obtaining money' may include receiving increased compensation [from an employer] based on the volume of business enlarged by the fraudulent activity." Spinosa, 31 F. Supp. 3d at 1379. Conversely, courts that read the statute narrowly to foreclose liability for anything other than direct personal compensation find that "directly or indirectly" modifies "how [the money] is obtained" not "who may obtain the money or property." Sandoval, 2018 WL 11353292, at *10. Having carefully reviewed Section 17(a)(2), as well as the well-reasoned decisions by courts on both sides of the split, the Court finds that "directly or indirectly" modifies "to obtain money or property." The plain meaning and text of the statute do not require that a defendant obtain funds personally or directly; indeed, "all three prongs of liability under Section 17(a) are preceded by the common modifier 'directly or indirectly.' " Stoker, 865 F. Supp. 2d at 463; see also Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts § 19, at 147 (2012) (explaining that when there is a straightforward, parallel construction that involves all nouns or verbs in a series, a prepositive or postpositive modifier normally applies to the entire series). Therefore, the SEC need only allege that Westhead received additional compensation from CBSG for defrauding investors in Pisces or Pisces Parallel.
With that understanding, the SEC has sufficiently alleged a violation of Section 17(a)(2). See Compl. ¶¶ 6-7, 35-36, 44-48, 76, 97-102. Accordingly, Count VI does not warrant dismissal.
III. The SEC has Sufficiently Alleged Scheme Liability.
Scheme liability under Rule 10b-5(a) or (c) arises when an individual, either directly or indirectly, "employ[s] any device, scheme, or artifice to defraud, . . . or [ ] engage[s] in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5. To state a claim under Rule 10b-5(a) and (c) and Section 17(a)(1), the SEC must show that (1) the defendant committed a deceptive or manipulative act (2) in furtherance of the alleged scheme to defraud (3) with scienter. S.E.C. v. Glob. Dev. & Env't Res., Inc., No. 08-00993, 2008 WL 11338454, at *3 (M.D. Fla. Nov. 26, 2008); Quiros, 2016 WL 11578637, at *12. Section 17(a)(3) requires only a showing of negligence. Id.
Traditionally, claims under subsections (a) and (c) for scheme liability are viewed as distinct from claims under subsection (b) because the former "make deceptive conduct actionable, as opposed to . . . deceptive statements." In re Cognizant Tech. Sols. Corp. Sec. Litig., No. CV166509ESCLW, 2020 WL 3026564, at *18 (D.N.J. June 5, 2020). Circuits, including the Second, Eighth, and Ninth Circuits, have held that a scheme liability claim must be based on conduct beyond misrepresentations or omissions actionable under Rule 10b-5(b). See Pub. Pension Fund Grp. v. KV Pharm. Co., 679 F.3d 972, 987 (8th Cir. 2012); WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039, 1057 (9th Cir. 2011); Lentell v. Merrill Lynch & Co., 396 F.3d 161, 177 (2d Cir. 2005).
The Supreme Court provided additional guidance as to the scope of Rule 10b-5(a) and (c) in Lorenzo. There, the Supreme Court considered "whether those who do not 'make' statements . . . but who disseminate false or misleading statements to potential investors with the intent to defraud, can be found to have violated the other parts of Rule 10b-5, subsections (a) and (c) . . ." Lorenzo v. Sec. & Exch. Comm'n, 587 U.S. 71, 74, 139 S.Ct. 1094, 203 L.Ed.2d 484 (2019). The Court reasoned that Rule 10b-5(a) and (c) "capture a wide range of conduct," including "the dissemination of false or misleading statements with intent to defraud . . . even if the disseminator did not 'make' the statements and consequently falls outside subsection (b) of the Rule." Id. at 71, 139 S.Ct. 1094. The Court further explained that there is "considerable overlap among the subsections" of Rule 10b-5 as "each succeeding prohibition was . . . meant to cover additional kinds of illegalities—not to narrow the reach of the prior sections." Id. at 80, 139 S.Ct. 1094. Thus, the Lorenzo Court emphasized that there is no basis to find that each subsection of Rule 10b-5 "should be read as governing different, mutually exclusive, spheres of conduct." Id. It specifically concluded that "dissemination of false or misleading statements with intent to defraud can fall within the scope of subsections (a) and (c) of Rule 10b-5." Id. at 78, 139 S.Ct. 1094.
Guided by Lorenzo, this Court previously concluded in related litigation that the SEC had adequately pleaded violations of Rule 10b-5(a) and (c) and Section 17(a)(1) and (3) by alleging that the defendants "each made material misrepresentations and/or omissions with scienter in the offer and sale of the Par Funding promissory notes." Sec. & Exch. Comm'n v. Complete Bus. Sols. Grp., Inc., 538 F. Supp. 3d 1309, 1340 (S.D. Fla. 2021). However, in the present case, the Court will also consider intervening guidance on Lorenzo from the Second and Sixth Circuits.
In Sec. & Exch. Comm'n v. Rio Tinto plc, the Second Circuit considered whether Lorenzo abrogated previous Second Circuit precedent holding that "misstatements and omissions cannot form the 'sole basis' for liability" under Rule 10b-5(a) and (c). 41 F.4th 47, 53 (2d Cir. 2022) (quoting from Lentell v. Merrill Lynch & Co., 396 F.3d 161, 171 (2d Cir. 2005)). Ultimately, it determined that its Lentell precedent was consistent with Lorenzo. Id. Based in part on the fact that "misstatements or omissions were not the sole basis for scheme liability in Lorenzo," the Second Circuit read Lorenzo much more narrowly to hold only that " 'dissemination of false or misleading statements with intent to defraud' does come within the scheme subsections." Id. Similarly, the Sixth Circuit reasoned that Rule 10b-5 prohibits "employ[ing] any device, scheme, or artifice to defraud" while "Rules 10b-5(a) and (c) encompass conduct beyond disclosure violations"—and "[a] scheme-liability claim is therefore different and separate from a nondisclosure claim." Teamsters Loc. 237 Welfare Fund v. ServiceMaster Glob. Holdings, Inc., 83 F.4th 514, 525 (6th Cir. 2023).
With this caselaw in mind, the Court returns to the present facts. Here, Defendants argue that the Court should read Lorenzo narrowly, follow the Second and Sixth Circuit precedents, and dismiss the scheme liability claims against Westhead because "the SEC fails to allege Ms. Westhead engaged in any conduct beyond the alleged omissions." Mot. at 13. However, in making this argument, Defendants forget a crucial fact: the SEC alleges that Westhead disseminated misleading statements in the form of PPMs. Compl. ¶ 85. Under Defendants' own precedent, that is sufficient to survive a motion to dismiss. See Rio Tinto plc, 41 F.4th at 53 ("Lorenzo tells us that dissemination is one example of something extra that makes a violation a scheme."). Moreover, dissemination of fraudulent statements is clearly sufficient under Lorenzo itself. Lorenzo, 587 U.S. at 78, 139 S.Ct. 1094 ("[D]issemination of false or misleading statements with intent to defraud can fall within the scope of subsections (a) and (c) of Rule 10b-5."). Accordingly, dismissal of the SEC's scheme liability claims is not appropriate here.
IV. The SEC has Sufficiently Alleged Scienter.
As discussed above, to establish a violation of Section 10(b) or Rule 10b-5(a)-(c) or Section 17(a)(1), the SEC must also allege that Westhead acted with scienter. See Merch. Cap., LLC, 483 F.3d at 766. Scienter is "a mental state embracing intent to deceive, manipulate, or defraud." S.E.C. v. Ginsburg, 362 F.3d 1292, 1297 (11th Cir. 2004) (internal quotations and citation omitted). Scienter can be established by a showing of knowing misconduct or severe recklessness. S.E.C. v. Monterosso, 756 F.3d 1326, 1335 (11th Cir. 2014). To show severe recklessness, the SEC must demonstrate "that the defendant's conduct was an extreme departure of the standards of ordinary care, 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." Id. (quoting SEC v. Carriba Air, Inc., 681 F.2d 1318, 1324 (11th Cir. 1982)). Circumstantial evidence may be used to support a strong inference of scienter. City of Miami, 988 F. Supp. 2d at 1360.
The SEC need only plead scienter generally. S.E.C. v. Levin, No. 12-21917, 2013 WL 5588224, at *13 (S.D. Fla. Oct. 10, 2013). However, it must still "allege plausible facts or suggest reasonable inferences that, if taken as true, would support a finding of scienter." S.E.C. v. Mannion, 789 F. Supp. 2d 1321, 1342 (N.D. Ga. 2011); see also S.E.C. v. Ustian, 229 F. Supp. 3d 739, 774 (N.D. Ill. 2017) ("In SEC enforcement actions, Rule 9(b) allows mental states to be alleged generally, yet there must still be some basis for believing the plaintiff could prove scienter.") (quotation omitted). The Court determines scienter by examining all allegations in the aggregate rather than sole allegations in isolation. Phillips v. Scientific-Atlanta, Inc., 374 F.3d 1015, 1016-17 (11th Cir. 2004).
To establish negligence for purposes of Sections 17(a)(2)-(3), the SEC must show a failure to exercise a standard of reasonable care. City of Miami, 988 F. Supp. 2d at 1362; see also S.E.C. v. Hughes Capital Corp., 124 F.3d 449, 453-54 (3d Cir. 1997) (describing negligence in the securities context as the failure to exercise reasonable care or competence). Factual allegations supporting an inference of scienter will also satisfy the lower standard of negligence required for claims under Sections 17(a)(2) and (3) of the Securities Act. S.E.C. v. Coplan, No. 13-62127, 2014 WL 695393, at *4 (S.D. Fla. Feb. 24, 2014).
Defendant argues that the SEC's Section 10(b) or Rule 10b-5(a)-(c) and Section 17(a)(1) claims should be dismissed because the SEC has failed to allege that Westhead acted with scienter when she failed to disclose CBSG's regulatory troubles or LaForte's criminal history. Mot. at 14. Defendants further argue that the Complaint "recites in rote fashion that Ms. Westhead 'knew' about LaForte's criminal history and the state regulatory actions" and "lacks any context as to Ms. Westhead's state of mind or intent and fails to link her knowledge and her use of that knowledge to allegedly deceive or defraud investors." Id. The SEC responds that Westhead's conduct is evidence of scienter—and points to the Complaint's allegations that "Westhead knew about LaForte's criminal history and failed to disclose said information to investors . . . all while engaging in the misrepresentations and omissions in order to lure investors so she could funnel money to CBSG in the CBSG offering in exchange for compensation." Resp. at 17. The Court agrees.
The SEC's allegations are sufficient to support an inference of scienter. The SEC alleges that Westhead knew about the Pennsylvania Regulatory Action by no later than October 2019 and the Texas Regulatory Action by no later than April 2020. Compl. ¶¶ 87, 91. The SEC similarly alleges that Westhead knew about the New Jersey Regulatory Action as early as October 2019 and no later than April 2020. Compl. ¶ 89. The SEC further alleges that Westhead knew of LaForte's management role within the company and his criminal history by no later than October 2018. Compl ¶ 93. Despite allegedly having this knowledge, Westhead failed to disclose this information to investors. Compl. ¶ 95. Additionally, Westhead allegedly distributed PPMs that did not contain any of this information—but falsely told investors the PPMs contained all the information they needed. Compl. ¶ 85. This purported concealment of damaging information is enough to support an inference of scienter at the pleading stage under Rule 10b-5(a)-(c) and Section 17(a)(1).
V. The SEC has Adequately Alleged Unregistered Broker Activity.
Section 15(a)(1) disallows "any broker or dealer which is . . . a natural person not associated with a broker or dealer . . . to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security . . . unless such broker or dealer is registered [with the Commission]." 15 U.S.C. § 78o(a)(1). The registration exemption in Section 78o(a)(1) for persons associated with a broker-dealer "applies only if the person is acting within the 'scope' of his or her association with the member firm." Roth v. S.E.C., 22 F.3d 1108, 1109 (D.C. Cir. 1994). Additionally, Section 3(a)(4) of the Exchange Act defines "broker" generally as "any person engaged in the business of effecting transactions in securities for the account of others." § 78c(a)(4). The terms "engaged in the business" and "effecting transactions" are not defined by statute.
When determining whether an individual acted as a broker, courts consider whether the person (1) works as an employee of the issuer, (2) receives a commission rather than a salary, (3) sells or earlier sold the securities of another issuer, (4) participates in negotiations between the issuer and an investor, (5) provides either advice or a valuation as to the merit of an investment, and (6) actively (rather than passively) finds investors. S.E.C. v. Kramer, 778 F. Supp. 2d 1320, 1334 (M.D. Fla. 2011). These factors are not exclusive and no particular number of them must be satisfied for a person to be a broker. Id. However, some courts have held that "the most important factor in determining whether an individual or entity is a broker" is the "regularity of participation in securities transactions at key points in the chain of distribution." Id. (quoting from S.E.C. v. Bravata, No. 09-12950, 2009 WL 2245649, *2 (E.D. Mich. 2009)). Here, Defendants raise three arguments in favor of dismissing the SEC's claim for unregistered broker activity.
First, Defendants argue that the SEC's Section 15(a) claim can arise only in connection with CBSG's promissory note offering (and not the offering by Pisces) because "officers, employees, and partners of an issuer need not register as broker-dealers before selling the issuer's securities provided they comply with certain requirements." Mot. at 16. Under Defendants' theory, Westhead did not need to register as a broker under Section 15(a) because she falls within the provision's exemption for "a natural person [ ] associated with a broker or dealer." § 78o(a)(1). In response, the SEC offers only a recitation of their allegations, Resp. at 18, which ignore the clear point of law raised by Defendants: brokers are exempt from Section 78o(a)(1)'s registration requirements when they are "acting within the 'scope' of [their] association with the firm." Roth, 22 F.3d at 1109. Indeed, in accordance with the SEC's own allegations, Westhead was acting within her role at Pisces at the time of the Pisces offering. Compl. ¶¶ 76-101. While this would be fatal to the SEC's claim as to the Pisces offering, Defendants forget that the SEC also alleges that Pisces was never registered with the Commission as a broker-dealer—or in any other capacity. Compl. ¶ 11. Therefore, taking the SEC's allegations as true, Westhead was never "associated with a broker or dealer" and cannot be exempt from Section 78o(a)(1)'s registration requirements in connection with the Pisces offering. Accordingly, the SEC's Section 15(a) claim may arise both in connection with CBSG's offer of promissory note securities and the separate offering by Pisces.
Second, Defendants argue that "Ms. Westhead had no involvement in effectuating transactions for others concerning CBSG" and therefore the SEC cannot establish "regularity of participation," much less any participation at all. Mot. at 17. Defendants further claim that Westhead acted at the direction of Dean Vagnozzi and relied on legal advice offered by Eckert Seamans Cherin & Mellott, LLC to structure the transaction such that "Pisces separately invested with CBSG [and] Pisces—not Pisces's investors—purchased a security in a separate offering pursuant to separate agreement terms." Mot. at 17. While this is certainly Westhead's theory of the case regarding her conduct and motivations, at this stage in the proceedings, the Court must look to the SEC's allegations and accept them as true. Chaparro, 693 F.3d at 1335.
Specifically, the SEC has alleged that Westhead formed Pisces as part of a scheme "for the purpose of raising investor money for the unregistered CBSG offering" and used Pisces to "raise[ ] more than $15 million for CBSG through the offer and sale of Pisces promissory notes to at least 80 investors." Compl. ¶¶ 1-3, 6-7, 11, 43-48, 76-86, 95-102. The SEC alleges that this scheme took place over an extended period of time and relied on Westhead's misrepresentations to succeed. Id. Drawing all inferences in favor of the SEC, and weighing the factors set forth in Kramer, the Court finds that the SEC has sufficiently alleged a violation of Section 15(a).
Defendants also argue that the Court should consider the Pisces Operating Agreement, the PPM, and the Note Purchase Agreement with CBSG—which are referenced in the Complaint and attached to the Motion—in ruling on this argument. Mot. at 2. However, in a motion to dismiss, a court may only consider a document referenced in the complaint that is not in dispute. Harris v. Ivax Corp., 182 F.3d 799, 802 n.2 (11th Cir. 1999). Here, the entire thrust of the SEC's case is that the aforementioned documents were fraudulent and contained misrepresentations. Moreover, the Court declines, at this stage, to adjudicate the inconsistencies between the SEC's allegations and the representations made in these documents. Accordingly, the Court will not consider the content of the Pisces Operating Agreement, the PPM, and the Note Purchase Agreement with CBSG in the manner requested by Defendants.
Third, Defendants argue that the SEC must sufficiently allege that Westhead was acting as an agent for investors in CBSG because the Exchange Act defines a broker as a person "engaged in the business of effecting transactions in securities for the account of others." Mot. at 17 (citing to § 78c(a)(4)) (emphasis added). Defendants further claim that the "SEC's failure to allege such an agency relationship between Ms. Westhead and any investors for some investment in CBSG (or other securities) is fatal to this claim." Id. However, as discussed above, see supra at 1305, the SEC's Section 15(a) claim may arise both in connection with CBSG's offer of promissory note securities as well the separate offering by Pisces. And regardless, as the Court has already found, there are sufficient allegations that Westhead acted as a broker to investors. See Compl. ¶¶ 1-3, 6-7, 11, 43-48, 76-86, 95-102. Moreover, the cases cited by Defendants in support of their claim only support the Court's finding here.
In Kramer, it is true that the court granted summary judgment on a Section 15(a) claim because the defendant acted as a facilitator rather than a broker. 778 F. Supp. 2d at 1339. However, that defendant's conduct "consisted of nothing more than bringing together the parties to a transaction" and it was another party who fulfilled Westhead's role—namely, "convincing investors to entrust him with assets," "effect[ing] securities transactions for those investors," and receiv[ing] commission." Id. Therefore, Kramer does not support dismissal in the present case. Indeed, Kramer provides that Westhead's role of "recommending a particular investment . . . typically occurs in an array of different commercial activities and professional pursuits, including brokering." Id. at 1334.
Similarly, in Sec. & Exch. Comm'n v. Mapp, the court did find that the defendant was "merely facilitating securities transactions rather than performing the functions of a broker" in part because "the Commission presented no evidence of Paxton possessing 'authority over the accounts of others.' " 240 F. Supp. 3d 569, 592 (E.D. Tex. 2017). However, that holding was premised on the fact that the defendant "did not perform the functions" of a broker, which includes "analyzing the financial needs of an issuer, . . . discussion of details of securities transactions, making investment recommendations, and prior involvement in the sale of securities." Id. (citing SEC v. Offill, No. 3:07-cv-1643-D, 2012 WL 246061 (N.D. Tex. Jan. 26, 2012)). Such is not the case here, where the SEC alleges that Westhead provided investment recommendations, touted the success of CBSG for the purposes of securing investment, and was involved across multiple offerings. Compl. ¶¶ 3, 86. Accordingly, dismissal of the SEC's Section 15(a) claim is not warranted.
VI. The SEC has Properly Alleged an Unregistered Offer of CBSG Securities Under Sections 5(a) and (c) of the Securities Act.
Section 5 of the Securities Act provides that "unless a registration statement is in effect as to a security," it is unlawful for any person to directly or indirectly "make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security" or "to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale." 15 U.S.C. § 77e(a). To establish a prima facie case for a Section 5 violation, the SEC must prove three elements: "(1) no registration statement was in effect as to the securities, (2) the defendant sold or offered to sell these securities, and (3) interstate transportation or communication and the mails were used in connection with the sale or offer of sale." Sec. & Exch. Comm'n v. Levin, 849 F.3d 995, 1001 (11th Cir. 2017) (citation omitted). To demonstrate that a defendant sold securities, the SEC must prove that the "defendant was a 'necessary participant' or 'substantial factor' in the illicit sale." S.E.C. v. Calvo, 378 F.3d 1211, 1215 (11th Cir. 2004).
Defendants argue that the SEC has failed to allege that Westhead directly or indirectly sold CBSG securities at all. Mot. at 18. Defendants further argue that there can be no allegation that Westhead played a significant role in the distribution of CBSG securities because "the investors, as that term is used by the SEC, did not invest in CBSG at all" as "[Westhead's] entity (Pisces) was itself [the] investor in the CBSG offering." Mot. at 19. The SEC responds that it properly alleges that Westhead participated in the unregistered CBSG offering by "creating Pisces Fund for purposes of raising money for CBSG's offering, soliciting investor funds for that purpose, and funneling investor money to CBSG in the unregistered CBSG offering." Resp. at 19 (citing to Compl. ¶¶ 1-3, 6-9, 11, 33-49, 76-86, 95-102).
The Court finds S.E.C. v. Imperiali, Inc. instructive. 594 F. App'x 957 (11th Cir. 2014). There, the defendant argued he did not violate Section 5(a) and (c) because he did not personally sell securities through cold-calling investors and therefore did not meet the elements of the statute. Id. at 960. The Eleventh Circuit again emphasized that the relevant inquiry is whether "[the defendant] was a 'substantial factor' in the sale of securities" when not registered to do so. Id. (citing Calvo, 378 F.3d at 1214). And because the defendant in that case prepared statements to tout the unregistered stock, filed a Form D that included information about the stock, and acted as a "closer" for sales to investors, the Eleventh Circuit found that the defendant was a substantial factor in the sale of securities. Id.
The same is true here. The SEC avers that Westhead "touted CBSG's track record as a leader in the Merchant Cash Advance ("MCA") industry" in order to facilitate investment. Compl. ¶ 86. Westhead also allegedly provided misleading PPMs to further incentivize investment. Compl. ¶ 85. And the SEC further alleges that Westhead formed Pisces for the very purpose of creating a vehicle by which investors could participate in the CBSG offering. Compl. ¶ 76. Taking these allegations as true, and drawing all inferences in favor of the SEC, the Court finds that the SEC has adequately alleged that Westhead was a substantial factor in the sale of CBSG securities. Accordingly, dismissal of this claim is not appropriate.
CONCLUSION
For the foregoing reasons, it is ORDERED AND ADJUDGED that Defendants' Motion to Dismiss, [ECF No. 31], is DENIED.
DONE AND ORDERED in Miami, Florida this 3rd day of May, 2024.