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Securities and Exchange Commission v. Jankovic

United States District Court, S.D. New York

March 21, 2017

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
JOHN JANKOVIC, Defendant.

          OPINION AND ORDER

          KATHERINE POLK FAILLA, District Judge

         Between 2009 and 2011, Defendant John Jankovic (“Defendant”) was the Chief Executive Officer (“CEO”) of Premiere Power, LLC (“Premiere”), which was touted as an energy company. Premiere had no revenues. It did, however, raise nearly $2, 000, 000 in interim financing from investors. Sandra Dyche, who brokered investments for Premiere, raised $1, 500, 000 of this money from a single investor, Moon Joo Yu. But not all of Yu's investment actually went to Premiere: Instead, Dyche siphoned $1, 000, 000 from Yu's investment to cover legal expenses Dyche and others had incurred in connection with a lawsuit against another failed energy company, 21st Century Morongo Energy, LLC (“Morongo”). Premiere raised the remainder of its interim financing from a group of investors who attended the company's December 22, 2009 investors meeting (the “Investors Meeting”), during which Defendant distributed a Preliminary Information Memorandum (“PIM”) that contained multiple misstatements about Premiere.

         In 2015, Plaintiff Securities and Exchange Commission (the “SEC”) initiated this civil enforcement action against Defendant. The SEC argues that in the process of actually (or ostensibly) raising money for Premiere, Defendant violated (i) Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5; and (ii) Sections 17(a)(1), (a)(2), and (a)(3) of the Securities Act of 1933, 15 U.S.C. § 77q(a)(1)-(3).

         Pending before the Court is the SEC's motion for summary judgment. In opposition, Defendant argues, inter alia, that he lacked the requisite mental state to be liable for any of the offenses the SEC has charged. Liability under Section 10(b), Rule 10b-5, and Section 17(a)(1) requires proof of scienter. Section 17(a)(2) and (3) only require proof of negligence. Defendant insists that he possessed no culpable mental state. And to this end, he asserts that he relied in good faith on representations that other individuals who worked for Premiere - including Dyche, Thomas Gudgel, and Jerry Jankovic (Defendant's father) - made to him about the contents of the PIM, and about the disclosures Premiere made to its investors.

         What this case boils down to, then, is a state-of-mind question: What was Defendant's mental state when he made misstatements and omissions to Premiere's investors? Construing the evidence in the light most favorable to Defendant, there is a genuine dispute of material fact as to whether Defendant acted with scienter, and that dispute precludes the Court from entering summary judgment on the SEC's Section 10(b), Rule 10b-5, and Section 17(a)(1) claims. But the undisputed facts of this case establish that Defendant was negligent.[1] In consequence, the Court will grant summary judgment in favor of the SEC on its Section 17(a)(2) and (3) claims. Accordingly, and for the reasons set forth below, the Court grants in part, and denies in part, the SEC's motion for summary judgment.

         BACKGROUND[2]

         Defendant's alleged misconduct falls into two categories. First, the SEC faults Defendant for not disclosing to one of Premiere's investors, Yu, that part of her $1, 500, 000 investment in Premiere would be used to cover legal costs from the Morongo litigation. Second, the SEC identifies a number of allegedly material misstatements in the PIM, which Defendant assisted in preparing and disseminated at the Investors Meeting.

         These two breeds of alleged misconduct have overlapping timelines: Yu, for example, attended the Investors Meeting, though at that point she had already invested in Premiere. Consequently, the Court will recount this case's history thematically rather than chronologically, because this approach better captures the two strains of fraud that Defendant abetted and perpetrated. The Court will first take account of Yu's investment against the backdrop of the Morongo lawsuit. It will then consider the PIM, the Investors Meeting, and the investments Premiere received after the Investors Meeting. And because this Opinion ultimately turns on Defendant's mental state, the Court will take care to address Defendant's account of what he did and did not know as this case's operative events unfolded.

         A. Factual Background

         1. The Morongo Litigation and Yu's Investment in Premiere

         In 2001, Dyche and Jerry Jankovic founded Morongo as an Arizona LLC. (Groves Decl., Ex. 10). Like Premiere, Morongo was an energy company with the stated goal of developing a power plant on Indian territory. (Id.). And like Premiere, Morongo produced more litigation than energy. In 2006, two individuals who invested a combined $1, 200, 000 in Morongo - Byung Chul An and Hyang Ok An (the “Ans”) - sued Dyche, Jerry Jankovic, Morongo, and others in New York State Supreme Court. (Id., Ex. 11). In their complaint, the Ans sought recovery against Jerry Jankovic and Dyche under, inter alia, common-law theories of fraud, negligent misrepresentation, and conversion. (Id. at ¶¶ 66-91). On August 30, 2007, a default judgment was entered against several of the defendants in that matter, including Jerry Jankovic and Morongo (but not Dyche). (Id., Ex. 12).

         Sometime in 2009, Defendant learned from his father that Morongo had been sued by its investors. (Groves Decl., Ex. 3 at 30:19-31:19, 173:8-21). And by the date of the Investors Meeting (December 22, 2009), Defendant understood that his father was a named defendant in that action. (Id., Ex. 4 at 32).

         2009 was also the year that Defendant, Jerry Jankovic, and Gudgel formed Premiere as a Delaware LLC. (Groves Decl., Ex. 1). By Defendant's account, Premiere was in the “power and utilities” business, and part of its business model included building a power plant “[o]n tribal land” in Oklahoma. (Id., Ex. 4 at 7:18-9:9). During Defendant's tenure with the company, Premiere did not issue a formal operating agreement to create an official Board of Directors. (Def. 56.1 ¶ 13). The PIM, however, identified Jerry Jankovic as Premiere's Chairman, and identified Gudgel as a member of Premiere's Board of Directors and “a named partner of … a full service law firm in Tulsa, Oklahoma.” (Groves Decl., Ex. 2 at 10344, 10348). In his summary-judgment submissions, Defendant refers to Gudgel as “Premiere's [G]eneral [C]ounsel.” (Def. 56.1 ¶ 83). However, although Defendant evidently believed that Gudgel filled this role for Premiere (see Groves Decl., Ex. 3 at 21:18-20), Gudgel himself never believed that he was the company's General Counsel (Groves Supp. Decl., Ex. 50 at 22:17-24:25).

         Between July and December 2009, Defendant worked as a consultant for Premiere. (See, e.g., Groves Decl., Ex. 18 at 31:5-8). By the date of the Investors Meeting (and possibly before then), Defendant was Premiere's CEO. (Id., Ex. 3 at 45:13-46:14).

         It was Defendant's belief that, in the company's initial stages, Premiere needed to raise $2, 000, 000 in interim financing (although that target increased over time). (Groves Decl., Ex. 4 at 48:23-50:8). Dyche, a member of Premiere's Board of Directors, “was involved in raising” this money; Defendant has described Dyche as a “broker” for Premiere. (Def. 56.1 ¶ 12; see Groves Decl., Ex. 3 at 92:22-93:1, 153:11-16). Dyche also spoke the Korean language. (Groves Decl., Ex. 3 at 85:12-13, 94:15-24). It was Dyche who solicited Premiere's first investor, Yu, to contribute $1, 500, 000 towards Premiere's interim-financing goal. (Groves Decl., Ex. 39, ¶¶ 12-13). On December 9, 2009, Yu signed a Subscription Agreement, which indicated that Yu would receive a 0.60% ownership interest in Premiere in exchange for her $1, 500, 000 investment. (Groves Decl., Ex. 19; Def. 56.1 ¶ 22). Defendant received Yu's Subscription Agreement via email on December 13, 2009. (Groves Decl., Ex. 19).

         Yu made her investment in three equal tranches: (i) “[o]n December 9, 2009, … Yu gave Dyche $500, 000 in cash[, ]” (Pl. Reply 56.1 ¶ 99); (ii) “[o]n December 14 and 15, 2009, ” Yu wired $500, 000 to Premiere's Bank of America account in two separate installments (id.; Groves Decl., Ex. 20 at 2); and (iii) “[s]ometime after December 15, 2009, Yu gave Dyche another $500, 000, ” although Yu “does not recall the method [by] which the payment was made and cannot locate any document to track the payment” (Pl. 56.1 Reply ¶ 100).

         Not all of Yu's $1, 500, 000 investment actually went to Premiere. Instead, Dyche used $1, 000, 000 of Yu's investment to pay “for legal fees” incurred in the Morongo litigation and, more troublingly, to contribute towards a $2.3 million settlement in that case. (Groves Decl., Ex. 22, ¶ 11). Dyche, Defendant admits, “stole” this $1, 000, 000. (Def. 56.1 ¶¶ 28, 38, 74).

         Just what Defendant knew about Dyche's plan is a matter of considerable debate between the parties. There is no question that, in 2009, Defendant understood that Dyche planned to give part of Yu's investment to the Ans, the plaintiffs in the Morongo case. And on September 15, 2009, Defendant sent an email to Jerry Jankovic and Thomas Gudgel attaching a draft letter (nominally written by Jerry Jankovic) that was addressed to the Ans. (Groves Decl., Ex. 13; see also id., Ex. 14). The letter asked the Ans to “drop any and all legal actions against [Morongo], Jerry Jankovic, [and Dyche]” in exchange for “a 2% ownership interest in Premiere.” (Id., Ex. 13; Def. 56.1 ¶ 20). The letter explained that Morongo and Premiere would facilitate this transaction through a share swap: Under a “new ownership structure, ” 500, 000 shares of Morongo, which were then held by an affiliated entity, 21st Century Energy Holdings, LLC, would be “exchange[d] … for 2, 000, 000 shares … of Premiere.” (Groves Decl., Ex. 13). And on December 10, 2009, Defendant sent Gudgel and Dyche an email, copying Jerry Jankovic, that stated in relevant part: “Sandra, your proposed buy-out of the An interest will serve the same purpose as the An settlement[.]” (Id., Ex. 16).

         By Defendant's account, Yu's Subscription Agreement tipped him off to the fact that something may have been amiss with Yu's investment. After all, Yu's Subscription Agreement indicated that she was receiving a 0.60% stake in Premiere in exchange for $1, 500, 000 - but in fact, Yu had wired only $500, 000 into Premiere's bank account. (Groves Decl., Ex. 3 at 111:12-12:4). Defendant spoke with Gudgel about this “gap” between the Subscription Agreement and Yu's actual investment in Premiere, and then the two called Dyche. (Id. at 111:19-12:18, 113:15-17). Dyche told Defendant and Gudgel that she would handle Yu's $1, 500, 000 investment as follows: “[$]500, 000 would come into Premiere, ” Dyche would “hang on to [$]500, 000[, ] [a]nd … there was [$]500, 000 still sitting offshore” that Yu was “trying to liquidate.” (Id. at 112:5-12).

         In explaining her plans for this second $500, 000 block - the money Dyche planned to “hang on to” - Dyche told Defendant and Gudgel “that she was going to use it to buy the Ans['] shares.” (Groves Decl., Ex. 3 at 112:19-22). Importantly, Defendant cannot recall whether Dyche told him that she was going to purchase the Ans' shares in Morongo or in Premiere. (See Id. at 112:23-13:2, 161:20-65:5; see also Def. 56.1 ¶ 23 (“Dyche told [Defendant] that she planned on having $500, 000 of the Yu's investment be used to purchase Premiere shares owned by the Ans (Premiere shares in the name of Morongo) … instead of using those funds to purchase new shares directly from Premiere.”)).

         During this December 2009 phone call, Defendant and Gudgel explained to Dyche “that she needed to update” Yu's Subscription Agreement and “make sure that [Yu] understood what [she] was buying.” (Groves Decl., Ex. 3 at 113:3-19). Defendant expected that Dyche “would … have a transparent conversation” with Yu to explain that $500, 000 of her investment would be going to the Ans. (Id. at 113:20-15:3; see also Id. at 115:21-16:13). And Defendant expected that in engineering this transaction with the Ans, Dyche would “follow ethical guidelines” to ensure that it proceeded “the same as any other stock purchase[].” (Id., Ex. 4 at 79:13-21).

         Neither expectation materialized. Dyche did not fix the “gap” in Yu's Subscription Agreement or communicate with Yu about the An buyout before the Investors Meeting. And Defendant spoke with Dyche ahead of the Investors Meeting to “remind[] her that” the discrepancy in Yu's Subscription Agreement “needed to be resolved.” (Grove Decl., Ex. 3 at 119:9-19). But Dyche did not resolve this issue. Even though Yu attended the Investors Meeting, Dyche did not tell Yu at the meeting that she planned to use Yu's money to purchase the Ans' shares. (Id., Ex. 18 at 143:6-44:15, 145:14-23).

         Defendant did not speak with Yu at the Investors Meeting, either. (Groves Decl., Ex. 18 at 143:25-44:6). Relatedly, Defendant did not discuss the Morongo litigation at all during the Investors Meeting. (Groves Decl., Ex. 3 at 99:5-7). Nor did Defendant follow up with Dyche after the Investors Meeting to make sure that she resolved the “discrepancy” between Yu's Subscription Agreement and Yu's actual investment in Premiere. (Id., Ex. 18 at 145:24-46:9).

         To the contrary, Defendant perpetuated this “discrepancy.” “In January 2010, ” Defendant signed a Certificate of Ownership indicating that Yu and her daughter held a 0.60% interest in Premiere. (Groves Decl., Ex. 23; Def. 56.1 ¶ 76).[3] Defendant characterizes the certificate's reference to Yu holding a 0.60% interest, when only $500, 000 of her investment had actually gone to Premiere, as “an inadvertent error.” (Def. 56.1 ¶ 76; accord Groves Decl., Ex. 4 at 157:15-58:23 (“Unfortunately, [that] was an error, and I just didn't catch it.”)). And on February 10, 2010, Defendant wrote a letter to Yu that also referred to her “0.60% membership in Premiere.” (Id., Ex. 24). Defendant claims that he is “horrified that” this error “slipped through.” (Id., Ex. 4 at 160:14-19).

         2. The PIM, the Investors Meeting, and the Investments Premiere Received After the Investors Meeting

         On December 22, 2009, Defendant, Dyche, Gudgel, and other representatives from Premiere held the Investors Meeting in the offices of a prominent New York City law firm. (Groves Decl., Ex. 4 at 23:7-24:11; Def. 56.1 ¶ 30). At the meeting, Defendant distributed copies of the PIM to the investors in attendance, although Defendant insists that it was Dyche who gave “the PIM to the individuals who actually invested in Premier[e].” (Def. 56.1 ¶ 31). Defendant admits, however, that he took the lead in addressing investors at the Investors Meeting, and that he delivered a PowerPoint presentation that mirrored the PIM's content. (Groves Decl., Ex. 4 at 24:16-25:6, 25:15-26:10).

         The PIM contained numerous misstatements. Page Two of the PIM warranted that Premiere “ha[d] taken reasonable care to ensure that the information” in the PIM was “true and accurate in all material respects.” (Groves Decl., Ex. 2 at 10330). But many of the PIM's representations were untrue and inaccurate, and a few of those representations merit attention here:

i) The PIM listed a former Oklahoma Congressman (the “Congressman”) as a member of Premiere's Board of Directors. (Groves Decl., Ex. 2 at 10346).[4] The PIM also claimed that this Congressman held a 1% equity interest in Premiere. (Id. at 10342). That Congressman “ha[d] never agreed to serve” on Premiere's Board. (Id., Ex. 28, ¶ 4). In July 2009, Defendant contacted this Congressman by e-mail and telephone to discuss “joining Premiere's Board of Directors.” (Def. 56.1 ¶ 43). As of the day of the Investors Meeting, however, Defendant had received no confirmation from the Congressman that he would be joining Premiere's Board. (Id. at ¶ 44). It is Defendant's contention that he relied on Jerry Jankovic's representations that he would “manag[e] Premiere's relationship with” the Congressman. (Id. at ¶¶ 43-44). Defendant also claims that Jerry Jankovic told him that the Congressman “had agreed to be on Premiere's Board of Directors.” (Id. at ¶ 43).
ii) The PIM identified the Managing Executive Director of an energy company (the “Managing Director”) as a member of Premiere's Board of Directors and the company's “President, Facility Operations.” (Groves Decl., Ex. 2 at 10352). Like the Congressman, the Managing Director was purported to hold a 1% stake in Premiere. (Id. at 10342). But although the Managing Director had had “hypothetical” “discussions with Jerry Jankovic about” joining Premiere, he “never committed to serving … as a member of” Premiere's Board, and never agreed “to serv[e] … as an executive of” the company. (Id., Ex. 31, ¶¶ 4, 7-8). Defendant understood that the Managing Director wished to serve as a Premiere “Board advisor[]” and receive an “interest” in the company, but that the Managing Director would only become an official member of the Board “once [Premiere's] permanent financing was in place.” (Def. 56.1 ¶¶ 49-50).
iii) The PIM stated that an Oklahoma accounting firm (the “Oklahoma Accounting Firm”) would handle Premiere's “outsourced accounting and bookkeeping.” (Groves Decl., Ex. 2 at 10361). That firm, however, never agreed to work with Premiere. (Id., Ex. 36, ¶¶ 3-9). Here too, it is Defendant's contention that he relied on Jerry Jankovic's representation that this “information was accurate.” (Def. 56.1 ¶¶ 57-58).
iv) Finally, the PIM identified a nationally known accounting firm (“National Accounting Firm”) as an “Affiliate” of Premiere's “Corporate Holdings” division. (Groves Decl., Ex. 2 at 10357). But the National Accounting Firm never had a relationship of any sort with Premiere. (Id., Ex. 34, ¶ 3). Defendant asserts that the PIM listed the National Accounting Firm as an Affiliate “at the direction of Dyche and Jerry Jankovic based on an independent relationship that Defendant understood they had formed with” that entity. (Def. 56.1 ¶ 56).

         Defendant disclaims responsibility for these errors. He admits that he was “one of the authors of” the PIM, along with Dyche, Gudgel, and Jerry Jankovic. (Groves Decl., Ex. 3 at 77:13-18; id., Ex. 9 at 6). Indeed, the first page of the PIM lists Defendant as an “Author[]” of the document. (Id., Ex. 2 at 10328). And Defendant ensured that the parts of the PIM he wrote himself - like his personal biography and “some of the pro forma information” - were accurate. (Id., Ex. 3 at 86:2-15). Defendant also claims that in the process of drafting the PIM, he consulted with the New York City law firm that hosted the Investors Meeting. (Id. at 87:1-88:11).

         But Defendant also contends that much of the information in the PIM “was given to” him by other Premiere executives. (Groves Decl., Ex. 18 at 103:20-104:7). Defendant - who became Premiere's CEO just before the Investors Meeting - claims that he “trust[ed]” Dyche, Gudgel, Jerry Jankovic, and others “to provide accurate information” for the PIM. (Id. at 104:11-19).

         One more point about the Investors Meeting bears mention here. Defendant recalls that he (and other Premiere representatives) spent one hour of the meeting addressing the assembled investors, and that “[a]bout half that time” consisted of Dyche translating the presentation into Korean. (Groves Decl., Ex. 18 at 131:23-132:11). When Defendant concluded his presentation, he left the room “for up to three hours” while Dyche spoke with the investors. (Id. at 133:23-134:3).

         The Investors Meeting bore fruit for Premiere. On December 23, 2009, Hyun Ja Kim and Jae Duk Kim executed a Subscription Agreement indicating that they would purchase a 0.12% stake in the company in exchange for $300, 000, and “wrote a check to Premiere for” the full amount of their investment that same day. (Def. 56.1 ¶¶ 64-66). And in March 2010, another investor, Hee Rak Kim, invested $150, 000 in Premiere in exchange for a 0.06% interest in the company. (Id. at ¶¶ 69-71).

         Premiere's investments were processed as follows: In December 2009, Defendant handled Premiere's wire transfers through its Bank of America account. (Groves Decl., Ex. 3 at 45:3-12). Premiere's bank statement for that month shows three deposits: (i) an $80, 000 deposit from Yu on December 14; (ii) a $420, 000 deposit from Yu on December 15; and (iii) a $300, 000 “counter credit” on December 30, which Defendant believes reflects Hyun Ja Kim's and Jae Duk Kim's investment. (Id. at 292:17-94:21; id., Ex. 20 at 1). These were the first payments Premiere received. (Id., Ex. 3 at 295:19-21). The December bank statement also reflects several outgoing wire transfers: some to Defendant, some to Jerry Jankovic, and some to other individuals and entities. (Id., Ex. 20 at 3-4). And Premiere's March 2010 bank statement reflects a $150, 000 “counter credit” on March 16, which Defendant believes corresponds to Hee Rak Kim's investment. (Id., Ex. 3 at 296:16-97:2; id., Ex. 20 at 7). This March 2010 statement indicates that on March 18, 2010, $100, 000 was wired out of Premiere's account and into an account held by Morongo. (Id., Ex. 20 at 7; see also id., Ex. 3 at 297:3-98:22).

         Defendant's “active role” with Premiere “ceased in summer of 2011.” (Groves Decl., Ex. 4 at 11:18-21). He left Premiere, officially, on January 1, 2012. (Id., Ex. 18 at 25:23-24). One of the reasons Defendant stopped working for Premiere was his belief that he “did not have proper transparency and control of the company during [his] tenure.” (Id. at 48:9-12). For that, he blames his father, Jerry Jankovic. (Id. at 48:13-24). In particular, one “important issue” that Defendant felt Jerry Jankovic did not explain clearly was the “restructuring of shares between him and … Dyche for past companies they were involved in[, ] [a]nd plans about how they were going to settle with the Ans.” (Id. at 49:5-50:15). Premiere, Defendant concedes, “never generated any revenues or dividends.” (Def. 56.1 ¶ 73).

         B. Procedural Background

         On September 18, 2014, Moon Joo Yu, Amy Yu, and Hee Rak Kim sued Premiere Power, Dyche, Defendant, Jerry Jankovic, and others. (Yu v. Premiere Power LLC, No. 14 Civ. 7588 (KPF), Dkt. #1). Their complaint alleges that Defendant, Jerry Jankovic, Dyche, and Premiere violated, inter alia, Section 10(b) and Rule 10b-5. (Id. at ¶¶ 75-81). That case is marked as related to the instant case, assigned to the undersigned, and still ongoing.

         On February 20, 2015, the SEC initiated the instant action by filing its Complaint against Defendant, Jerry Jankovic, and Premiere. (Dkt. #1). Because neither Jerry Jankovic nor Premiere appeared in this matter, on October 9, 2015, the Court entered default judgments against both parties. (Dkt. #35, 36).

         On July 27, 2016, the SEC filed its motion for summary judgment and supporting papers. (Dkt. #43; see also Dkt. #47-49). Defendant responded on August 30, 2016 (Dkt. #54-56), and briefing concluded when the SEC submitted its reply on September 14, 2014 (Dkt. #59-61).

         DISCUSSION

         A. Motions for Summary Judgment Under Federal Rule of Civil Procedure 56

         Rule 56(a) instructs a court to “grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “When ruling on a summary judgment motion, the district court must construe the facts in the light most favorable to the non-moving party and must resolve all ambiguities and draw all reasonable inferences against the movant.” Pace v. Air & Liquid Sys. ...


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