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United States Securities and Exchange Commission v. Wey

United States District Court, S.D. New York

March 27, 2017

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
BENJAMIN WEY, NEW YORK GLOBAL GROUP, TIANYI WEI, MICHAELA WEY, ROBERT NEWMAN, WILLIAM UCHIMOTO, and SEREF DOGAN ERBEK, Defendants, and ADVANTAGE CONSULTANTS, LTD., YORK CAPITAL MANAGEMENT, LTD., FOUR TONG INVESTMENTS, LTD., STRONG GROWTH CAPITAL, LTD., MEDIAN ASSETS INVESTMENTS, LTD., and HAN HUA, LTD., Relief Defendants.

          MEMORANDUM AND ORDER

          P. Kevin Castel United States District Judge

         The Securities and Exchange Commission (“SEC”) brings this action for violations of the Securities Act of 1933 (“Securities Act”), the Securities and Exchange Act of 1934 (“Exchange Act”), and the rules promulgated thereunder, against New York Global Group (“NYGG”), a New York-based company and several individual defendants. The SEC's allegations relate to an alleged fraudulent scheme orchestrated primarily by Benjamin Wey, the founder of NYGG. Wey established NYGG to help Chinese companies access public markets in the United States, often through reverse mergers with publicly-traded U.S. shell companies. In addition to NYGG, Wey and his family members controlled a number of other corporations, referred to in the complaint as “nominees.” Wey used these nominees to secretly gain controlling interests in the Chinese companies who were clients of NYGG and then manipulated the securities markets in order to profit from these controlling interests. As a result of the scheme, defendants Benjamin Wey, his sister Tianyi Wei, and his wife Michaela Wey (together the “Weys”), allegedly received millions of dollars in illicit profits while defendants William Uchimoto, Robert Newman, and Seref Dogan Erbek received fees for legal and brokerage services rendered in furtherance of the scheme. The Second Amended Complaint (the “complaint”) charges the individual defendants with personally violating the securities laws as well as aiding and abetting the violations of other defendants. Defendants Uchimoto, Newman, and Erbek have moved to dismiss the claims against them. For the reasons set forth below, defendants' motions are granted in part and denied in part.

         BACKGROUND

         The following facts are derived from the SEC's complaint and are accepted as true for the purpose of this motion. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). All reasonable inferences are drawn in favor of the SEC as the non-movant. See In re Elevator Antitrust Litig., 502 F.3d 47, 50 (2d Cir. 2007).

         I. The Defendants.

         Benjamin Wey was the founder and principal of NYGG and exercised ultimate decision-making authority and control over NYGG. (Compl. ¶ 16).

         NYGG is a Delaware corporation headquartered in New York with a second office in Beijing, China. (Compl. ¶ 17). Wey established NYGG to help Chinese companies (the “NYGG clients”) raise capital and access public markets in the United States, often through reverse mergers with publicly-traded U.S. shell companies. (Compl. ¶ 18). Among the NYGG clients at issue in this motion are Deer Consumer Products, Inc. (“Deer”), SmartHeat, Inc. (“SmartHeat”), and CleanTech Innovations, Inc. (“CleanTech”). (Compl. ¶¶ 44-46).

         Tianyi Wei, who resides in China, is Benjamin Wey's sister and manager of the NYGG office in Beijing. (Compl. ¶ 20).

         Michaela Wey is Benjamin Wey's wife and resides in New York where she is a licensed attorney. (Compl. ¶ 22).

         Robert Newman is an attorney who is licensed to practice in New York. (Compl. ¶ 24). He was hired by several NYGG clients as corporate counsel at the direction of Benjamin Wey. (Compl. ¶ 25).

         William Uchimoto is an attorney who is licensed to practice in Pennsylvania. (Compl. ¶ 26). At the direction of Benjamin Wey, he was hired by two NYGG clients, Deer and SmartHeat, to assist them in obtaining listings on the NASDAQ. (Compl. ¶¶ 11, 27).

         Seref Dogan Erbek resides in Switzerland and worked for a Geneva-based firm that provided “financial and fiduciary services” to several of the nominees controlled by the Weys. (Compl. ¶ 28). Erbek also facilitated stock trades in Deer and CleanTech, both clients of NYGG. (Compl. ¶ 29).

         II. The Alleged Fraudulent Scheme.

         a. Creating a Network of Nominees.

         According to the SEC, the first step in Benjamin Wey's scheme involved creating a network of corporate entities and individuals, referred to in the complaint as “nominees, ” that were controlled by Benjamin Wey, his sister Tianyi Wei, and/or his wife Michaela Wey. (Compl. ¶¶ 3, 30). These nominees included Michaela Wey's mother, father, and sister, Tianyi Wei's then-minor child, and Advantage Consultants, Ltd. (“ACL”), York Capital Management, Ltd. (“York Capital”), Four Tong Investments, Ltd. (“Four Tong”), Strong Growth Capital, Ltd. (“Strong Growth”), Median Assets Investments, Ltd. (“Median Assets”), Han Hua, Ltd. (“Han Hua”), Guo Sheng, Ltd. (“Guo Sheng”), Futmon Holding, Ltd., (“Futmon”), Bicornio Real Estate SA, (“Bicornio”), Roosen Commercial Corporation, (“Roosen”), Wolf Enterprises, Ltd., (“Wolf”), Harlesden Assets, Ltd., (“Harlesden”), and Finchley International Investments, Ltd. (“Finchley”). (Compl. ¶ 30).

         The corporate nominees were incorporated abroad and controlled by Benjamin Wey, Tianyi Wei, and Michaela Wey. (Compl. ¶¶ 31-43). For example, the complaint explains that ACL is a limited liability corporation incorporated in the British Virgin Islands. (Compl. ¶ 31). From mid-2007 to late 2008, Tianyi Wei was the director, sole owner, and signatory for ACL's corporate actions as well as a bank account in ACL's name. Id. Documents show that Tianyi Wei granted Benjamin Wey trading authority over a Swiss brokerage account in ACL's name managed by Erbek. Id.

         b. Controlling the NYGG Clients.

         The SEC claims that Benjamin Wey used the nominees to gain control over large blocks of the NYGG client corporations' securities. (Compl. ¶ 48). This was accomplished in two ways: (1) by issuing shares to Benjamin Wey and his associates, and (2) through reverse mergers.

         The first way Benjamin Wey secretly gained control of the NYGG clients' stock was by causing those clients to issue shares to his relatives and to NYGG employees which were then deposited into accounts controlled by the Weys. Id. For example, according to the SEC, between 2008 and 2012, Benjamin Wey himself, through Newman, or through an NYGG employee, directed the NYGG clients' transfer agents to transfer shares to and from various nominee brokerage accounts. (Compl. ¶ 58). The Weys opened these brokerage accounts in the names of nominees, but they were actually controlled by Benjamin Wey who used the accounts to trade, and profit, from shares of NYGG clients. (Compl. ¶¶ 50-57). Benjamin Wey and his associates also paid Erbek to open and maintain similar brokerage accounts in Switzerland. (Compl. ¶ 54).

         Not only did Benjamin Wey profit from the sales of these NYGG client shares, he also caused the NYGG clients to pay millions of dollars in fees to nominees that he and his family controlled for services that were never meaningfully rendered. (Compl. ¶¶ 59, 112, 113). These fees were paid by the NYGG clients without Benjamin Wey ever having disclosed his relationship to the nominees. (Compl. ¶ 59).

         The second way Benjamin Wey allegedly gained control of the NYGG clients was by arranging reverse mergers between the clients and U.S. shell companies which he secretly controlled, leaving him with control of significant holdings in the public companies that resulted from the merger. (Compl. ¶ 60). First, Benjamin Wey, with the help of Tianyi Wei and Newman, who was hired by the NYGG clients as corporate counsel, would locate a publicly-traded shell company in the U.S. and purchase that shell company by “arranging ownership” in the names of individuals associated with Benjamin Wey, Tianyi Wei, and NYGG. Id. Then, they would arrange for shares to be transferred from the shell company's original shareholders to nominees controlled by the Weys. Id. Finally, Benjamin Wey, along with Newman and NYGG employees, would arrange for an NYGG client to reverse merge with the shell company, now controlled, secretly, by the Weys' nominees. Id.

         By virtue of their ownership interests in the nominees, and therefore the shell companies, Benjamin Wey and his family members ended up with undisclosed control of more than 10 percent of the publicly-traded shares of the newly formed companies. (Compl. ¶ 62). In order to make this ownership interest particularly profitable, Benjamin Wey and Newman convinced the NYGG clients to enter into lock-up agreements that prevented the companies' officers and directors from selling their shares for a three year period. (Compl. ¶ 63). This left the nominees, controlled by the Weys, with control over the majority of the freely-traded NYGG client stock which in turn allowed the Weys to manipulate the market for those shares with the help of Erbek and Newman. (Compl. ¶ 63).

         c. Concealing Control Over the NYGG Clients.

         In order to conceal the connection between the Weys, the nominees, and the NYGG clients, Benjamin Wey and Newman, with the help of Erbek and others, made material misstatements and misrepresentations to NASDAQ, underwriters and others.

         i. Misstatements to Underwriters.

         In April 2009, Benjamin Wey persuaded SmartHeat, an NYGG client, to hire ACL as a strategic business consultant in connection with a public offering of SmartHeat stock in November 2009. (Compl. ¶ 72). However, Wey did not disclose the fact that his sister, Tianyi Wei, was the sole director and owner of ACL or that he himself had trading authority over ACL brokerage accounts. (Compl. ¶¶ 31, 72). SmartHeat agreed to pay ACL $3.9 million and a contract was prepared by Newman in April 2009 for Benjamin Wey to sign on ACL's behalf. (Compl. ¶ 72).

         When the primary underwriter for the SmartHeat offering inquired as to the identities of ACL's owners and as to Benjamin Wey's affiliation to ACL so as to properly disclose the ACL consulting fee in SmartHeat's offering documents, Wey and Newman both mislead the underwriter. (Compl. ¶¶ 73-75). Instead of disclosing that his sister, Tianyi Wei, who was an NYGG manager in Beijing, had served as the sole director and owner of ACL, Wey falsely told the underwriter that neither he nor NYGG had any affiliation with ACL. (Compl. ¶ 74). Newman allegedly knew of Benjamin Wey's connections to ACL but instead of disclosing those connections, he directed the underwriter to contact a person in China who Benjamin Wey identified as ACL's Chief Financial Officer. (Compl. ¶ 75). That person then falsely denied that ACL had any contacts in the United States but failed to respond to the underwriter's request that he execute a certification to that effect. (Compl. ¶ 75).

         The underwriter also requested that ACL execute a certification representing that it was comprised solely of non-U.S. persons located outside of the United States. (Compl. ¶¶ 73, 76). In response, Benjamin Wey directed the underwriter to Erbek who then directed the underwriter to a Bahamian consulting company that Erbek claimed was ACL's sole director. (Compl. ¶ 76). Both Erbek and Newman helped to get the certification signed by the Bahamian company and sent to the underwriter, despite allegedly knowing that the claim that ACL was comprised solely of non-U.S. persons outside of the United States was materially false. Id.

         The complaint alleges that Benjamin Wey and Newman similarly mislead the same underwriter in connection with a December 2009 capital financing for Deer in which Deer paid ACL over $3 million in fees. (Compl. ¶ 77). As in the SmartHeat offering, ACL executed a certification that contained the same misrepresentation that it was comprised solely of non-U.S. persons. Id. These misrepresentations and omissions by Benjamin Wey and Newman allegedly caused the offering documents for both Deer and SmartHeat to be materially misleading because they did not disclose Wey's association with ACL. (Compl. ¶ 78).

         ii. Misstatements to NASDAQ.

         In 2011, NASDAQ requested, through Newman, as counsel for Deer and SmartHeat, that Deer and SmartHeat both disclose any relationships, past or present, between each company and Benjamin Wey, Tianyi Wei, NYGG, Strong Growth and other entities. (Compl. ¶79). In letters that Newman signed and sent to NASDAQ he described a “limited relationship that included introducing underwriters to Deer and SmartHeat and being acquainted with officers and directors of Deer and SmartHeat.” Id. Newman sent these letters despite allegedly knowing that Benjamin Wey and NYGG were considerably more involved with Deer and SmartHeat having conducted financial modeling for both companies, chosen their lawyers and accountants, reviewed drafts of their SEC filings, identified and recommended individuals to serve as directors, advised as to pending litigation and discussed non-public information with company officers. (Compl. ¶ 80). Newman also failed to disclose to NASDAQ that the Weys controlled substantial holdings of Deer and SmartHeat stock through the nominees. (Compl. ¶ 79).

         d. Obtaining NASDAQ Listings for Deer and SmartHeat.

         In order to develop the market for the shares of the newly-public NYGG clients, and thereby maximize profits from the scheme, Benjamin Wey fraudulently obtained NASDAQ listings for SmartHeat and Deer with the help of Uchimoto. (Compl. ¶ 82). SmartHeat and Deer sought to be listed on the NASDAQ in 2008 and 2009 respectively. (Compl. ¶ 83). At the time, NASDAQ Rule 4310(c)(6) required that a company have at least 300 “round-lot shareholders” or shareholders owning at least 100 shares of common stock. Id. However, neither SmartHeat nor Deer satisfied this requirement. Id. Therefore, Benjamin Wey, with the help of Tianyi Wei and Uchimoto, artificially inflated the number of Deer and SmartHeat round-lot shareholders by directing the Deer and SmartHeat transfer agents to transfer shares held by Tianyi Wei, her minor child, and Wolf to Benjamin Wey's friends, family members, business associates (including Newman, Uchimoto, and Uchimoto's wife) in round-lot increments. (Compl. ¶¶ 83-84).

         Once these transfers were complete, SmartHeat and Deer reported to NASDAQ in September 2008 and June 2009 respectively that they each satisfied the round-lot shareholder requirement. (Compl. ¶ 87). However, in order to evaluate trading interest, NASDAQ asked Uchimoto, as Deer and SmartHeat's listing counsel, about the circumstances by which many of the round-lot shareholders had received their shares. Id. Uchimoto explained that he, his spouse, and others each owned 100 shares which were gifted to him “by a social friend in China, ” who he later identified as Tianyi Wei, “who [was] a shareholder and not an affiliate of the Company.” (Compl. ¶ 88). Uchimoto later stated that he had met Tianyi Wei on one occasion, briefly at an airport, and that the social friend he originally referred to was actually Benjamin Wey rather than Tianyi Wei.[1] Id. The SEC claims that Uchimoto's statements to NASDAQ were alternatively misleading - because if he had met Tianyi Wei only once at an airport he did not have a social relationship with her - or false - because Benjamin Wey was affiliated with “the Company” at all relevant times.[2] Id.

         NASDAQ then informed Uchimoto that it did not count gifted shares towards its minimum shareholder requirement, apparently because they do not establish the trading interest necessary to provide the liquidity needed to promote fair and orderly markets. (Compl. ¶¶ 87, 89). As a result, Uchimoto allegedly suggested to Benjamin Wey that they have the previously gifted shares placed into brokerage accounts which had the effect of aggregating the shares such that it was no longer evident to NASDAQ that many of the shareholders held only 100 share round lots. (Compl. ¶ 89). According to the SEC, Uchimoto then falsely reported to NASDAQ that Deer and SmartHeat satisfied the round-lot shareholder requirement without counting the gifted shares, when in reality the gifted shareholders, whose shares were now held in brokerage accounts, were still included in the total shareholder count submitted to NASDAQ. (Compl. ¶ 90). NASDAQ ultimately approved SmartHeat and Deer for listing on January 29, 2009 and July 16, 2009 respectively. Id.

         e. Market Manipulation.

         In order to profit from his control of the freely-traded shares of the newly-public NYGG clients, Benjamin Wey, with the help of Erbek, Newman, Tianyi Wei, and Michaela Wey, manipulated the market for Deer and CleanTech securities. (Compl. ¶ 91).

         i. Manipulation of Deer Market.

         In 2010, Benjamin Wey convinced Deer to initiate a stock repurchase program by assuring the company that it would not have to spend any money to fund it. (Compl. ¶ 93). Instead, the funding was to be provided by the exercise of warrants held by nominees including ACL, Strong Growth, Bicornio, Roosen, Futmon, and Wolf. Id. In reality, Benjamin Wey treated the nominees interchangeably and the funding came only from Strong Growth and Tianyi Wei. Id. This funding was transferred into Newman's trust account and then transferred into a brokerage account in Deer's name that Newman had set up so that he and Benjamin Wey could execute the repurchases. (Compl. ¶ 94). Although Newman allegedly knew that Tianyi Wei was Benjamin Wey's sister and an employee of NYGG, and that Benjamin Wey and NYGG had advised Deer, he did not question Tianyi Wei's involvement in the Deer repurchase plan. (Compl. ¶ 95).

         While the Deer brokerage account repurchased its own stock using the funds provided by Tianyi Wei and Strong Growth, other brokerage accounts in the names of Tianyi Wei and Strong Growth sold hundreds of thousands of shares of Deer stock for over $5.5 million dollars. (Compl. ¶ 97). During this time, the repurchase plan helped to maintain the share price of Deer shares. Id.

         Benjamin Wey had Newman distribute the Deer shares purchased using the nominees' warrants among several nominees in amounts that did not match the number of warrants each nominee possessed or exercised. (Compl. ¶ 98). In fact, one nomine, Guo Sheng, received Deer shares despite possessing no warrants at all. Id.

         On another occasion, nominee brokerage accounts in Switzerland acted together to maintain the price of Deer stock above $11.00 per share by selling large amounts of Deer stock at a profit while also purchasing Deer stock whenever the price dropped to $11.00. (Compl. ¶¶ 101-02).

         ii. Manipulation of CleanTech Market.

         Benjamin Wey and his associates also worked to manipulate the market for CleanTech securities by maintaining a share price over $5.00. (Compl. ¶ 99). In 2010, a brokerage account in Tianyi Wei's name executed the first trades in CleanTech stock by purchasing 1, 000 shares from a brokerage account in the name of Guo Sheng, a nominee which Tianyi Wei controlled. Id. Although nothing had happened to justify a price increase between the offering and this first sale on the secondary market, the purchase price jumped from $3.00 at offering to $5.10. Id. According to the SEC, Benjamin Wey “touted” this 70 percent price increase in communications with potential investors. Id.

         In February 2011, Benjamin Wey, or someone else acting at his direction, also instructed Erbek to make sure that shares of CleanTech traded at $5.00. (Compl. ¶ 100). Erbek followed these instructions by using the Swiss brokerage accounts that he controlled to purchase CleanTech shares at prices close to $5.00 allegedly in an effort to drive the price upward. Id.

         f. Evading Disclosure Requirements.

         Beneficial owners of more than five percent of any issuer's shares are legally required to report their total holdings in that issuer to the SEC using Schedules 13D or 13G. (Compl. ¶ 103). These requirements apply to single investors and to multiple investors acting as a group for the purpose of “acquiring, holding, or disposing of securities of an issuer.” Id. The Weys avoided these disclosure requirements by directing Erbek to structure the nominees' holdings such that no one entity or individual ever held more than a five percent beneficial ownership interest in any NYGG client. (Compl. ¶ 104). Based on emails obtained through a search warrant, the SEC claims that Erbek knew about the SEC reporting requirements and understood that his job was to structure the nominees' holdings so as to avoid triggering those requirements. (Compl. ¶ 105).

         However, even if no one nominee or individual held a beneficial interest greater than five percent in any NYGG client, the Weys were still obligated to report their holdings because, by virtue of their control over the nominees, they effectively controlled more than five percent of the outstanding shares in several NYGG clients. (Compl. ¶¶ 106-07). In addition, the Weys, and the nominees were also “sufficiently interrelated that they constituted a group for the purposes of the filing requirements of Exchange Act Section 13(d) and Regulation 13D-G.” (Compl. ¶ 108). Yet Benjamin Wey, Tianyi Wei, and Michaela Wey repeatedly failed to file the required forms with the SEC. Id.

         Benjamin Wey did have Newman file Schedule 13Ds in two instances although both filings were materially false. (Compl. ¶ 109). Newman filed a Schedule 13D for Futmon in 2010 that failed to disclose that Benjamin Wey and Tianyi Wei were beneficial owners of some Deer stock described in the disclosure. Id. Newman filed another Schedule 13D in 2010 on behalf of Tianyi Wei which explained that she had sole voting and dispositive power over shares of Deer stock without including shares of Deer held by nominees for which she was the sole shareholder, officer, or director. Id. According to the SEC, Newman knew or was reckless in not knowing that these two 13D filings were materially false. (Compl. ¶ 111).

         III. Procedural History.

         The SEC filed this action on September 10, 2015. (Dkt. 1). The complaint was amended for the first time on November 9, 2015. (Dkt. 5). At a conference held on June 8, 2016, the Court stayed the action against Benjamin Wey pending the resolution of the criminal case against him. (Dkts. 102-03). Defendants Uchimoto, Newman, and Erbek then moved to dismiss the amended complaint. (Dkts. 106, 108, 111). Thereafter, the SEC sought, and was granted permission to amend the complaint a second time in response to the arguments raised in the defendants' motions to dismiss. (Dkt. 118). The defendants did not oppose this amendment. (Dkt. 121). The SEC filed a Second Amended Complaint on August 5, 2016. (Dkt. 123). Defendants then filed their motions to dismiss the Second Amended Complaint, (Dkts. 124, 127, 130), and the SEC subsequently voluntarily dismissed its claim against Uchimoto for aiding and abetting violations of Section 17(a) of the Securities Act on October 5, 2016. (Dkt. 138).

         DISCUSSION

         I. Legal Standards on Motion to Dismiss.

         Pursuant to Rule 12(b)(6), Fed. R. Civ. P., to survive a motion to dismiss, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Iqbal, 556 U.S. at 678 (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The Court must examine only the well-pleaded factual allegations, ignoring any legal conclusions, “and then determine whether they plausibly give rise to an entitlement to relief.” Id. at 679. When reviewing a motion to dismiss pursuant to Rule 12(b)(6), a court “may consider any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit.” ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007).

         In addition, Rule 9(b) of the Federal Rules of Civil Procedure imposes a heightened pleading standard on complaints alleging securities fraud. Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir. 2000). The SEC need not, however, satisfy the pleading requirements of the Private Securities Litigation Reform Act (“PSLRA”). SEC v. China Ne. Petroleum Holdings Ltd., 27 F.Supp.3d 379, 387 (S.D.N.Y. 2014) (citing SEC v. Dunn, 587 F.Supp.2d 486, 501 (S.D.N.Y. 2008)). Under Rule 9(b), parties alleging fraud must “state with particularity the circumstances constituting fraud.” For example, a plaintiff alleging fraudulent misstatements satisfies Rule 9(b) by: (1) specifying the fraudulent statements, (2) identifying the speaker, (3) stating where and when the statements were made, and (4) explaining why the statements were fraudulent. See Novak, 216 F.3d at 306. Rule 9(b) further provides that “[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally.”

         II. Claims Pursuant to Section 10(b), Rule 10b-5, and Section 17(a).

         Section 10(b) of the Exchange Act, in relevant part, makes it unlawful “for any person . . . [t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe.” 15 U.S.C. § 78j(b). Rule 10b-5 implements Section 10(b) and provides that it shall be unlawful:

(a) To employ any device, scheme, or artifice to defraud,
(b) 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, in light of the circumstances under which they were made, not misleading, or
(c) To engage 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. Section 17(a) of the Securities Act similarly prohibits fraud in the “offer or sale of any securities.” 15 U.S.C. § 77q(a).

         To violate Section 10(b) and Rule 10b-5, “a party must have (1) made a material misrepresentation or a material omission as to which he had a duty to speak, or used a fraudulent device; (2) with scienter; (3) in connection with the purchase or sale of securities.” SEC v. Pentagon Capital Mgmt. PLC, 725 F.3d 279, 285 (2d Cir. 2013) (citation and quotation marks omitted). The elements of a claim under Section 17(a) of the Securities Act are “essentially the same” as those required to prove fraud under Section 10(b). SEC v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999). However, the SEC need not prove that the defendants acted with scienter to succeed on a claim under subsections 17(a)(2) or 17(a)(3). See Aaron v. SEC, 446 U.S. 680, 697 (1980). Instead, “[a] showing of negligence is sufficient.” SEC v. Ginder, 752 F.3d 569, 574 (2d Cir. 2014).[3]

         A. William Uchimoto.

         According to the SEC, Benjamin Wey directed the NYGG clients to hire Uchimoto to provide legal services. (Compl. ¶ 11). Uchimoto's practice was “dominated” by representation of NYGG clients. (Compl. ¶ 27). During the relevant period, NYGG clients accounted for three of Uchimoto's top five clients and the majority of his billings. Id. Additionally, Uchimoto's billing records allegedly reflect extensive communication with Benjamin Wey about the shareholder count for SmartHeat's NASDAQ application. (Compl. ¶ 86).

         The SEC claims that Uchimoto violated Section 10(b) and Rule 10b-5 of the Exchange Act, and Section 17(a) of the Securities Act in two ways. First, by making a material misrepresentation to NASDAQ that his clients met the round-lot shareholder requirement without counting gifted shareholders despite knowing that those shareholders were still included in the total number submitted to NASDAQ. (Compl. ¶ 90). Second, by allegedly participating in a fraudulent scheme by (1) misleading NASDAQ about the relationship between himself and the individual who had given him and others shares as gifts (2) by suggesting that the gifted shares to be placed in brokerage accounts which had the effect of concealing the identities and holdings of each shareholder from NASDAQ; and (3) by falsely representing to NASDAQ that his clients met the minimum shareholder requirement for listing on NASDAQ without counting shareholders who had received shares as gifts. (Compl. ¶¶ 88-90).

         a. Misrepresentation Claims Under Rule 10b-5(b) and Section 17(a)(2).

         i. Rule 10b-5(b) and Section 17(a)(2): Particularity.

         As an initial matter, Uchimoto contends that the SEC has failed to plead the underlying conduct on which it bases its misrepresentation claims with sufficient particularity.

         Although the Court must assume all well-pleaded factual allegations in the complaint are true, the SEC must plead “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. In addition, a “complaint alleging securities fraud must satisfy Rule 9(b) . . . which requires that ‘the circumstances constituting fraud . . . be stated with particularity.'” ATSI, 493 F.3d at 99 (quoting Rule 9(b), Fed. R. Civ. P.). This rule “serves to provide a defendant with fair notice of a plaintiff's claim, safeguard his reputation from improvident charges of wrongdoing, and protect him against strike suits.” Id. (citing Rombach v. Chang, 355 F.3d 164, 171 (2d Cir. 2004)).

         Rule 9(b) requires a complaint alleging securities fraud based on misstatements to “(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” Id. (citing Novak, 216 F.3d at 306). However, “[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally.” Rule 9(b), Fed R. Civ. P. In the course of his representation of SmartHeat and Deer, the SEC alleges that Uchimoto made a material misstatement by telling NASDAQ that his clients met the minimum shareholder requirement without counting shareholders who had received their shares as gifts, when those shareholders were in fact still included in the total count. (Compl. ¶¶ 88, 90).

         This allegation fails to meet the heightened standard of pleading imposed by Rule 9(b) principally because the complaint fails to identify whether this statement, and in fact all of Uchimoto's allegedly fraudulent conduct, was made in connection with the SmartHeat listing application or the Deer application. SmartHeat and Deer went through the listing process at different times and SmartHeat was successfully listed on the NASDAQ in January 2009, several months before Deer even began the listing process. (Compl. ¶¶ 87, 90). However, the complaint does not indicate whether Uchimoto's statements were made in connection with the SmartHeat listing application, the Deer listing application, or both. Similarly, while the complaint alleges that Uchimoto suggested that Benjamin Wey move shares into brokerage accounts after being told that ...


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