United States District Court, S.D. New York
MEMORANDUM AND ORDER
Kevin Castel United States District Judge
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
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).
Wey was the founder and principal of NYGG and exercised
ultimate decision-making authority and control over NYGG.
(Compl. ¶ 16).
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).
Wei, who resides in China, is Benjamin Wey's sister and
manager of the NYGG office in Beijing. (Compl. ¶ 20).
Wey is Benjamin Wey's wife and resides in New York where
she is a licensed attorney. (Compl. ¶ 22).
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).
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).
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).
The Alleged Fraudulent Scheme.
Creating a Network of Nominees.
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. ¶
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.
Controlling the NYGG Clients.
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.
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).
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. ¶
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.
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).
Concealing Control Over the NYGG Clients.
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.
Misstatements to Underwriters.
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).
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. ¶
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.
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).
Misstatements to NASDAQ.
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).
Obtaining NASDAQ Listings for Deer and SmartHeat.
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).
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. 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. Id.
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.
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. ¶
Manipulation of Deer Market.
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).
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.
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
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).
Manipulation of CleanTech Market.
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.
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.
Evading Disclosure Requirements.
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).
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.
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).
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).
Legal Standards on Motion to Dismiss.
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).
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
Claims Pursuant to Section 10(b), Rule 10b-5, and 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
(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
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).
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.
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).
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).
Misrepresentation Claims Under Rule 10b-5(b) and Section
Rule 10b-5(b) and Section 17(a)(2): Particularity.
initial matter, Uchimoto contends that the SEC has failed to
plead the underlying conduct on which it bases its
misrepresentation claims with sufficient particularity.
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)).
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).
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 ...