Opinion
Case No.: 6:02-cv-431 Orl-18KRS
October 15, 2002
ORDER
THIS CAUSE comes before the Court upon Defendant Aaron Tsai's motion to dismiss Counts III and IV of the complaint (Doc. 21, filed 19 June 2002), to which Plaintiff has responded in opposition. (Doc. 29, filed 31 July 2002.)
I. BACKGROUND
The United States Securities and Exchange Commission ("the S.E.C.") alleges that Aaron Tsai ("Tsai") illegally aided Jui-Teng and Yuchin Lin ("the Lins") in a scheme to drive up the price of Surgilight, Inc. ("Surgilight") stock. The S.E.C. argues that while the Lins controlled the scheme, Tsai provided crucial assistance for which he garnered over one million dollars. Accepting all well-pleaded facts as true, the Court assumes the following facts:
Surgilight specializes in the acquisition and development of laser technologies for surgical uses. On 31 March 1999, Tsai orchestrated a "reverse merger" through which Surgilight merged with MAS III, a publicly-held "shell company," and became a publicly traded company. In exchange for the reverse merger, Tsai received 8.7% of Surgilight's common stock and $100,000. After the reverse merger, Tsai resigned his Surgilight board position, but continued to assist the Lins. Tsai filed all required S.E.C. paperwork and retained a market maker for Surgilight. Moreover, Tsai insured that Surgilight could be sold to public investors by listing Surgilight on the Over-the-Counter Bulletin Board.
In a reverse merger, a privately-held company merges with a publicly-held "shell" company, thereby rendering the privately-held company's stock publicly tradeable.
Around the time of the reverse merger, the Lins created two brokerage accounts. From August to November 1999, the Lins and Tsai transferred Tsai's common stock acquired in the reverse merger into the accounts. On at least one occasion, Tsai transferred stock directly into the brokerage accounts. On another occasion, he transferred 100,000 shares to unknowing friends, then had the shares transferred to the brokerage accounts. On still another occasion, Tsai and the Lins transferred over 500,000 shares to 20 purported Taiwanese residents. These shares also found their way to the brokerage accounts approximately one month later. Tsai and the Lins did not file the required S.E.C. registration statements for these transfers.
The Lins and Tsai used these brokerage accounts in connection with a "pump and dump" scheme, in which they used false press releases to increase Surgilight stock value. Specifically, the press releases stated that Surgilight completed laser technology that could reverse the effects of presbyopia, a widespread vision disorder. Surgilight stock increased from $2.50 to over $25 during this time. Surgilight issued its first false press release on 13 December 1999. Between December 1999 and February 2000, Surgilight issued at least four other false press releases and hired a consultant who posted approximately 100 internet messages about Surgilight.
Over this time period, the Lins used sales and purchases of Surgilight stock from the brokerage accounts to account for approximately one-third of overall Surgilight trading volume. This activity created the appearance of a stable and liquid security. Acting with knowledge of the scheme, Tsai sold his Surgilight stock at the height of Surgilight's price between 18-31 January 2000, for at least $1 million. Shortly thereafter, Surgilight stock began losing value rapidly. By 8 April 2002, it was valued at 30 cents per share.
The S.E.C. brings two causes of action against Tsai: aiding and abetting the Lins' violations of section 10b-5 of the Securities and Exchange Act, and violating S.E.C. registration provisions. Tsai contends in his motion to dismiss that the S.E.C. has failed to state a claim under which relief may be granted. In response to Count III, Tsai argues that the S.E.C. does not meet the requisite pleading standards regarding Tsai's scienter for aiding and abetting. In response to Count IV, Tsai contends that no registration violations took place.
15 U.S.C. § 77e(a) and 77e(c).
II. DISCUSSION A. Motion to Dismiss
For purposes of a motion to dismiss, a court must view the allegations of the complaint in the light most favorable to the plaintiff. Fed.R.Civ.P. 12(b)(6); Scheuner v. Rhodes, 416 U.S. 232, 236 (1974);Jackson v. Okaloosa County. Fla., 21 F.3d 1531, 1534 (11th Cir. 1994). Furthermore, a court must accept all reasonable inferences from the complaint and consider all allegations as true. Id. A court may not, however, accept conclusory allegations and unwarranted factual deductions as true. Gersten v. Rundle, 833 F. Supp. 906, 910 (S.D. Fla. 1993) (citing Associated Builders. Inc. v. Alabama Power Co., 505 F.2d 97, 100 (5th Cir.
1974)). Only pleadings and attached written exhibits may be considered in making these determinations. See Fed.R.Civ.P. 10(c); GSW. Inc. v. Long County. Ga., 999 F.2d 1508, 1510 (11th Cir. 1993). Unless it appears beyond doubt that a plaintiff can prove no set of facts entitling him to relief, a complaint should not be dismissed for failure to state a claim. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Hunnings v. Texaco. Inc., 29 F.3d 1480, 1484 (11th Cir. 1994).
B. Count III: Aiding and Abetting
The S.E.C.'s first claim against Tsai is for aiding and abetting the Lins' securities violations. Aiding and abetting is established by demonstrating that: 1) another party violated the securities laws; 2) the accused is generally aware of his role in the improper activity; and 3) the accused aider and abettor knowingly rendered substantial assistance. 15 U.S.C. § 78t(e); In Checkers Sec. Litigation, 858 F. Supp. 1168, 1178-79 (M.D. Fla. 1994) (citing Rudolph v. Arthur Andersen Co., 800 F.2d 1040, 1045 (11th Cir. 1986). "General awareness" is generally inferred from the surrounding circumstances. Woods v. Barnett Bank, 765 F.2d 1004, 1009 (11th Cir. 1985). "Knowledge" may be shown "by circumstantial evidence, or by reckless conduct, but . . . the proof must demonstrate actual awareness of the party's role in the fraudulent scheme." Id. (quoting Woodward v. Metro Bank of Dallas, 522 F.2d 84, 96 (5th Cir. 1975.) Whether the assistance was "substantial" depends on the totality of the circumstances. Checkers, 858, F. Supp. at 1179 (citing Woods, 765 F.2d at 1010). A private plaintiff may not maintain an aiding and abetting lawsuit. Central Bank of Denver. N.A. v. First Interstate Bank of Denver. N.A., 511 U.S. 164, 176 (1994).
The S.E.C., a non-private plaintiff, has alleged facts sufficient to establish an aiding and abetting claim against Tsai. The complaint properly alleges that the Lins, acting knowingly or with severe recklessness, violated securities laws by undertaking and executing a pump and dump scheme. Moreover, the complaint states that Tsai knowingly participated in the scheme and provided substantial assistance.
The Eleventh Circuit's scienter standard for securities violations is severe recklessness. Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1283 (11th Cir. 1999).
Tsai's participation in the scheme consisted of: 1) orchestrating the reverse merger; 2) further assisting Surgilight in becoming a publicly-traded company; 3) depositing large numbers of shares in brokerage accounts used to mislead investors; and 4) selling 63, 200 shares at the stock's highest price with knowledge of the scheme. By themselves, Tsai's first three alleged actions at most establish an inference of wrongdoing. Specifically, the complaint alleges that Tsai knowingly deposited shares into the brokerage accounts. The complaint does not allege that Tsai purposefully deposited shares into the brokerage accounts to create the appearance of a liquid security, the specific purpose of the pump and dump scheme. The complaint does, however, enumerates facts demonstrating a strong inference that Tsai made brokerage account deposits for this sole reason. This inference is neither conclusory nor unwarranted, but rather represents sound deductive reasoning gleaned from the facts contained in the complaint. See Gersten, 833 F. Supp. at 910 (citing Associated Builders, 505 F.2d at 100).
More glaringly, the complaint alleges that Tsai, acting with knowledge of the pump and dump scheme, sold 63,200 Surgilight shares at their highest value for $1 million. This allegation alone is sufficient to survive a motion to dismiss, and cuts to the very essence of aiding and abetting liability established by both statute and case law. 15 U.S.C. § 78t(e); Woods, 765 F.2d at 1010.
Tsai's argument that these allegations do not allege fraud with requisite particularity are unpersuasive. Courts addressing aiding and abetting liability after the Private Securities Litigation Reform Act of 1995 ("PSLRA") still cite Woodward's definition of "knowledge" as it relates to aiding and abetting. See Woodward, 522 F.2d at 96 (stating that "knowledge" may be shown by circumstantial evidence or reckless conduct, but must demonstrate actual awareness of the party's role in the fraudulent scheme); Smith v. First Union Nat'l Bank, No. 00-4485-CIV, 2002 WL 31056104 at *2 (S.D.Fla. Aug. 23, 2002) (citing Woodward).
The S.E.C's allegations demonstrate circumstantial evidence and reckless conduct, if not outright knowledge of Tsai's aiding and abetting. Regardless, the S.E.C.'s allegation that Tsai, acting with knowledge of the Lins' scheme, sold his Surgilight shares at the height of the stock's price is sufficient to survive a motion to dismiss in the pre-PSLRA or post-PSLRA landscape. See generally Nicole M. Briski, Comment, Pleading Scienter Under the Private Securities Litigation Reform Act of 1995. 32 Loy. U. Chi. L. J. 155-204 (Fall 2000) (a comprehensive look at the pleading standards required in different Circuit Courts of Appeal necessary to survive a motion to dismiss both before and after the PSLRA's enactment).
C. Count IV: Registration Statements
The S.E.C. also alleges that Tsai violated registration provisions of the Securities and Exchange Act by selling unregistered Surgilight stock on several occasions. 15 U.S.C. § 77e. These allegations address two Surgilight stock sales: a transfer to two friends, and a transfer to 20 Taiwanese investors. These transferred shares found their way into the brokerage accounts central to the pump and dump scheme shortly thereafter. Tsai attached purportedly valid registration statements to his motion to dismiss to validate the first transfer and contends that the second transfer was exempt from registration. The Court again finds Tsai's arguments unpersuasive.
The complaint alleges that the registration statements filed in connection with the first transfer were not valid. The complaint further alleges that Tsai retained control of the transferred shares and that the "transfers" merely concealed Tsai's involvement in the pump and dump scheme. These allegations are sufficient to defeat a motion to dismiss, as the Court will not assess the truth of the registration statements filed at this stage of litigation. Bryant, 187 F.3d at 1278.
Tsai did not file a registration statement for the second transfer and contends that it was exempt from registration. The Securities Act exempts transactions of all persons except issuers, underwriters, and dealers. 15 U.S.C. § 77d(1). The complaint properly alleges that Tsai was a "control person" of Surgilight, which consequently made him an affiliate of the company and therefore unqualified for registration exemptions. Whether Tsai is a "control person is an issue of fact that the Court will not address at this stage of litigation. See. e.g., S.E.C. v. Lybrand, 200 F. Supp.2d 384, 395 (S.D.N.Y. 2002) (citing S.E.C. v. Cavanagh, 1 F. Supp.2d 337, 360 (S.D.N.Y. 1998), aff'd 155 F.3d 129 (2d Cir. 1998)) ("The determination of whether a person occupies a `control' position does not turn upon a single factor such as stock ownership, but rather `depends upon the totality of the circumstances, including an appraisal of the influence the individual has on the management and policies of a company."').
III. CONCLUSION
For the foregoing reasons, the S.E.C. has properly alleged that Tsai aided and abetted the Lins' securities laws violations and violated S.E.C. registration provisions. Defendant's motion to dismiss (Doc. 21. filed 19 June 2002), is DENIED.
DONE and ORDERED