United States District Court, S.D. New York
OPINION & ORDER
VALERIE CAPRONI, United States District Judge.
Securities and Exchange Commission (“SEC”)
brought this enforcement action against Defendants Revelation
Capital Management, Ltd. (“Revelation Capital”)
and Christopher P.C. Kuchanny (collectively, Defendants),
alleging that Defendants violated Rule 105 of Regulation M,
17 C.F.R. § 242.105. The parties have cross-moved for
summary judgment. For the following reasons, Defendants'
motion for summary judgment is GRANTED, and the SEC's
cross-motion for summary judgment is DENIED.
the material facts in this case are undisputed. Kuchanny is
the founder, CEO, and portfolio manager of Revelation
Capital, a hedge fund manager. Def. 56.1 Stmt. ¶¶
1-2. At all times relevant to this action, Revelation Capital
and Kuchanny were in Bermuda. Def. 56.1 Stmt. ¶¶
1-2. Non-party Central Fund, which is headquartered in
Canada, is an investment holding company that buys and holds
refined gold and silver bullion. Def. 56.1 Stmt. ¶ 4.
Central Fund lists its shares on the New York Stock Exchange
(“NYSE”) under the symbol CEF and on the Toronto
Stock Exchange under the symbols CEF.A and CEF.U. Pl. 56.1
Stmt. ¶ 5; Answer ¶ 17, Dkt. 17.
November 3, 2009, and November 9, 2009, Revelation Capital
sold short approximately 1.3 million shares of Central Fund
on the NYSE at an average price of $14.07 per share. Pl. 56.1
Stmt. ¶ 53; Answer ¶ 17. These short sales were
executed “through a brokerage account at MF Global Inc.
in New York, New York.” Answer ¶ 9. MF Global, the
broker, used a third-party trading platform to execute the
trades. Def. 56.1 Stmt. ¶¶ 14-15. The short sales
were cleared and settled through Revelation Capital's
prime brokerage account in London. Def. 56.1 Stmt. ¶ 15.
around November 9, 2009, Canadian broker-dealer CIBC World
Markets, Inc. (“CIBC”) signed an engagement
letter for a potential offering of Central Fund shares (the
“Offering”). Def. 56.1 Stmt. ¶¶ 17-18;
Pl. 56.1 Stmt. ¶ 56; Yoskowitz Ex. 6. After the close
of trading that day, Central Fund issued a press release
announcing a “proposed underwritten offering by
CIBC.” Pl. 56.1 Stmt. ¶ 58, Def. 56.1 Stmt. ¶
23; Yoskowitz Ex. 9. The issue was offered in U.S. dollars
only. Yoskowitz Ex. 6 at 15; Yoskowitz Exs. 9, 10.
Smith, CIBC's representative for the Offering, contacted
Kuchanny to inquire whether Revelation Capital was interested
in participating in the Offering. Def. 56.1 Stmt. ¶ 34.
The following morning, after dickering over the price,
Kuchanny agreed to buy $56 million shares at ¶ 5.5%
premium to the landed net asset value (“NAV”) of
Central Fund. Yoskowitz Ex. 11; Def. 56.1 Stmt. ¶¶
24, 37; SEC Opp. at 4. Although the SEC disputes whether Kuchanny
was legally bound, the SEC acknowledges that failing to honor
the offer would have been “very difficult” from a
“practical and business perspective.” Pl. 56.1
Stmt. ¶ 38.
that morning (November 10, 2009), CIBC and Central Fund
participated in a pricing call during which CIBC advised
Central Fund of the size of its order book, and CIBC orally
committed to enter into an underwriting agreement. Def. 56.1
Stmt. ¶ 40; Pl. 56.1 Stmt. ¶ 59. Based on the
orders in CIBC's book, Central Fund calculated the amount
of gold and silver to purchase and placed its order with
CIBC, which purchased the gold and silver bullion on behalf
of Central Fund. Def. 56.1 Stmt. ¶ 41. Ultimately, CIBC
agreed to purchase almost 17 million shares of Central Fund
at $13.56 USD per share. Def. 56.1 Stmt. ¶
After the pricing call, CIBC contacted purchasers, including
Revelation Capital, and confirmed the number of shares that
they had purchased. Def. Stmt. 56.1 ¶ 45. Smith
confirmed Revelation Capital's purchase of approximately
four million shares at $13.56 per share. Def. 56.1 Stmt.
afternoon on November 10, 2009, CIBC and Central Fund
executed an underwriting agreement (“Underwriting
Agreement”) in Toronto. Def. 56.1 Stmt. ¶ 48.
Defendants admit that upon the execution of the Underwriting
Agreement, “CIBC became contractually obligated,
subject to certain conditions precedent, to purchase shares
equivalent in number to the shares for which it had firm bids
at the time of the pricing call, which had taken place prior
to the execution of the underwriting agreement.” Def.
56.1 Resp. ¶ 62. Central Fund filed a Prospectus
Supplement that described CIBC's underwriting obligation
as follows: “[t]he Underwriters are . . . obligated to
take up and pay for all of the securities if any of the
securities are purchased under the Underwriting
Agreement.” Pl. 56.1 Stmt. ¶ 61.
the Offering closed on November 17, 2009, the shares issued
pursuant to the Offering were issued to the Central
Depository for Securities (“CDS”) in Canada. Def.
56.1 Stmt. ¶ 49. The share certificate for the Offering
shares was transferred to CDS by a Canadian company. Def.
56.1 Stmt. ¶ 50. The proceeds of the purchases of the
Offering shares were wired to CIBC in Canada, and the net
proceeds were then wired to Central Fund in Canada. Def. 56.1
Stmt. ¶ 51; Yoskowitz Ex. 3 (“Spicer Tr.”)
at 85:8-86:4. The Offering was registered with the Canadian
regulatory authority and cross-registered with the SEC
pursuant to the Multijurisdictional Disclosure System
(“MJDS”), which facilitates cross-border filings
of Canadian-issued offerings in the United States. Def. 56.1
Stmt. ¶¶ 7-8; Yoskowitz Ex. 10; Spicer Tr. at
71:3-4; SEC Opp. Ex. 2 at 28:5-16.
January 2014, the SEC brought this enforcement action against
Defendants, alleging that Defendants had violated Rule 105 of
Regulation M, 17 C.F.R. § 242.105. Rule 105 prohibits,
during a certain restricted period of time, any person who
has sold short securities that are the subject of a
registered offering from purchasing the offered securities.
17 C.F.R. § 242.105(a). Rule 105 applies to offerings
that are conducted on a firm commitment basis. 17 C.F.R.
§ 242.105(c). The SEC alleges that Defendants violated
Rule 105 by purchasing shares in the Offering after having
sold short the same securities during the restricted period.
Compl. ¶¶ 2, 16-17. According to the SEC,
Defendants made approximately $1.37 million in profits from
the short sales. Compl. ¶¶ 2, 18.
move for summary judgment, arguing that Rule 105 does not
apply to the transactions at issue (1) because of
Morrison v. National Australia Bank Ltd., 561 U.S.
247 (2010), and (2) because the Offering was not conducted on
a firm commitment basis. The SEC cross-moves for summary
judgment on liability, arguing the opposite. For the
following reasons, Defendants' motion is GRANTED, and the
SEC's cross-motion is DENIED.
judgment is appropriate when “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); see also Celotex Corp. v.
Catrett, 477 U.S. 317, 322 (1986). “A genuine
dispute exists when the evidence is such that, if the party
against whom summary judgment is sought is given the benefit
of all permissible inferences and all credibility
assessments, a rational factfinder could resolve all material
factual issues in favor of that party.” SEC v.
Sourlis, No. 14-2301-CV(L), 2016 WL 7093927, at *2 (2d
Cir. Dec. 6, 2016) (citing Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986)). “Summary judgment
is appropriate when there can be but one reasonable
conclusion as to the verdict, i.e., it is quite
clear what the truth is, and no rational factfinder could
find in favor of the nonmovant.” Id. at *2
(citations and internal quotation marks omitted).
non-moving party, however, “must do more than simply
show that there is some metaphysical doubt as to the material
facts” and “may not rely on conclusory
allegations or unsubstantiated speculation.”
Jeffreys v. City of New York, 426 F.3d 549, 554 (2d
Cir. 2005) (citations and internal quotation marks omitted).
Rather, the nonmoving party must come forward with
“specific facts showing that there is a genuine issue
for trial.” Weinstock v. Columbia Univ., 224
F.3d 33, 41 (2d Cir. 2000) (quoting Anderson, 477
U.S. at 256).
argue that pursuant to Morrison v. National Australia
Bank Ltd., 561 U.S. 247 (2010), the Court should hold
that Rule 105 is inapplicable to Defendants' trades. The
SEC counters that Morrison may not even apply to
Rule 105, but if it does apply, the transactions at issue in
this case are domestic and hence subject to Rule 105 under
Morrison. The Court ...