United States District Court, S.D. New York
OPINION & ORDER
M. WOOD, UNITED STATES DISTRICT JUDGE.
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.
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.
will therefore go forward on all of these issues, as well as
any other issues properly before the Court.
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, 6; AGF II Resp.,  ¶ 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.
Relevant Procedural History
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.
Summary Judgment Standard
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)).
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).
Securities Fraud Standard
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
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.
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).