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Securities and Exchange Commission v. American Growth Funding II, LLC

United States District Court, S.D. New York

March 29, 2018

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
AMERICAN GROWTH FUNDING II, LLC, PORTFOLIO ADVISORS ALLIANCE, INC., RALPH C. JOHNSON, HOWARD J. ALLEN III, and KERRI L. WASSERMAN, Defendants.

          OPINION & ORDER

          KIMBA M. WOOD, UNITED STATES DISTRICT JUDGE.

         Plaintiff Securities and Exchange Commission ("SEC") brings this Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 17(a)(1), (2), and (3) of the Securities Act action against Defendants American Growth Funding II, LLC ("AGF II"), Portfolio Advisors Alliance, Inc. ("PAA"), Ralph C. Johnson, Howard J. Allen III, and Kerri L. Wasserman. The SEC alleges that Defendants violated these securities laws by making various false statements, and has now moved for summary judgment.

         As discussed in detail below, the SEC's motion for summary judgment is DENIED, because (1) there is a material dispute of fact over whether the representations in the 2011 PPM that AGF II had been audited in the past were material misrepresentations; (2) there is a material dispute of fact over whether the representations in the 2012 PPM that AGF II had been audited in the past were material misrepresentations; (3) there is a material dispute of fact over whether the representations in the Operating Agreement attached to the 2011 and 2012 PPMs that AGF II would be audited within 90 days of the fiscal year, were material misrepresentations; (4) there is a material dispute of fact over whether the representations in the 2011 and 2012 PPMs that Anthony Cappaze was "Chief Underwriting Officer" and Ted Rea was "Executive Vice President of Business Development" were false or misleading; (5) there is a material dispute of fact over whether the representations in the October 8, 2013 email that AGF IPs financial statements were "being done" by Evangelista and were "unexpectedly delayed" were false or misleading; and (6) there is a material dispute of fact regarding whether it was materially misleading for AGF IPs monthly account statements not to include information about the quality of AGF II's investments.

         Trial will therefore go forward on all of these issues, as well as any other issues properly before the Court.

         I. BACKGROUND

         A. Factual Background[1]

         Johnson is and was the president and chief executive officer of AGF II, a company that raises capital from investors and uses the proceeds to provide loans to businesses. (PAA Resp., [2]¶ 2, 6; AGF II Resp., [3] ¶ 2, 6.) AGF II serves as an "investor pool, " meaning it receives money from investors in exchange for a preferred interest rate. (PAA Resp., ¶ 43; AGF II Resp., ¶ 43.) AGF II issued private placement memoranda in 2011 and 2012 (separately, the "2011 PPM" and the "2012 PPM"). (PAA Resp., ¶ 32; AGF II Resp., ¶ 32.) From June 1, 2012 to December 31, 2013, PAA sold $6.9 million worth of units in AGF II to investors; Allen, in particular, sold $4 million worth of AGF II units. (PAA Resp., ¶ 157-58; AGF II Resp., ¶ 157-58.) The SEC contends that in connection with raising money for AGF II, Defendants made various representations or omissions to investors and potential investors that were false or misleading, including misrepresentations in the 2011 and 2012 PPMs.

         B. Relevant Procedural History

         The SEC filed this action on February 3, 2016. (See ECF Nos. 1, 6.) On April 22, 2016, Defendants filed their Answers. (ECF Nos. 30, 32.) On June 9, 2017, after the discovery period ended, the SEC moved for summary judgment. (ECF No. 119.)

         II. LEGAL STANDARD

         A. Summary Judgment Standard

         Summary judgment is appropriate where the moving party shows 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). In determining whether there is a "genuine" dispute as to material fact, "a court must construe the evidence in the light most favorable to the nonmoving party, drawing all inferences in that party's favor." Jeffreys v. City of New York, 426 F.3d 549, 553 (2d Cir. 2005) (citing Niagara Mohawk Power Corp. v. Jones Chern., Inc., 315 F.3d 171, 175 (2d Cir. 2003)). The burden of showing that "no [dispute as to any] material fact exists lies with the party seeking summary judgment." Id. (citing Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970)).

         To demonstrate the existence of a genuine issue of material fact, "[t]he opposing party must come forward with affidavits, depositions, or other sworn evidence as permitted by Fed.R.Civ.P. 56, setting forth specific facts showing there exists a genuine issue of material fact." Rule v. Brine, Inc., 85 F.3d 1002, 1011 (2d Cir. 1996). The nonmoving party successfully demonstrates a genuine issue of material fact if the record is such that "a reasonable jury could return a verdict for the nonmoving party." Fincher v. Depository Tr. & Clearing Corp., 604 F.3d 712, 720 (2d Cir. 2010) (quoting Roe v. City of Waterbury, 542 F.3d 31, 35 (2d Cir. 2008)) (internal quotation marks omitted).

         B. Securities Fraud Standard

         Section 10(b) of the Exchange Act and Rule 10b-5 "prohibit fraud in the purchase or sale of a security." SEC v. Frohling, 851 F.3d 132, 136 (2d Cir. 2016) (citation and internal quotation marks omitted). Those provisions are violated where a person "(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." Id.

         "A fact is to be considered material if there is a substantial likelihood that a reasonable person would consider it important in deciding whether to buy or sell shares." Azrielli v. Cohen Law Offices, 21 F.3d 512, 518 (2d Cir. 1994). To determine whether a statement is materially misleading, the court must determine "whether defendants' representations, taken together and in context, would have misl[ed] a reasonable investor about the nature of the [securities]." Olkey v. Hyperion 1999 Term Tr., Inc., 98 F.3d 2, 5 (2d Cir. 1996) (quoting McMahan & Co. v. Wherehouse Entertainment, Inc., 900 F.2d 576, 579 (2d Cir. 1990)) (internal quotation marks omitted; brackets in original). On summary judgment, materiality can be determined as a matter of law "[o]nly if the established omissions are so obviously important to an investor, that reasonable minds cannot differ on the question of materiality." TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450 (1976) (citation and internal quotation marks omitted). "For an omission to be actionable, the securities laws must impose a duty to disclose the omitted information." Resnik v. Swartz, 303 F.3d 147, 154 (2d Cir. 2002). The mere fact that information "may be relevant or of interest to a reasonable investor" does not require disclosure. Id.

         Section 17(a) of the Securities Act prohibits fraud in the "offer or sale" of securities. Frohling, 851 F.3d at 136 (citation and internal quotation marks omitted). Its elements are "[e]ssentially the same" as the elements for claims under Section 10(b) and Rule 10b-5. Id. (citation and internal quotation marks omitted; brackets in original). With respect to claims under sections 17(a)(2) or (3), however, proof of negligence is sufficient to establish liability. SEC v. Ginder, 752 F.3d 569, 574 (2d Cir. 2014).

         III. DISCUSSION

         A. ...


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