United States District Court, N.D. Illinois, Eastern Division
For United States Securities and Exchange Commission, Plaintiff: Jonathan Stephen Polish, LEAD ATTORNEY, U.S. Securities and Exchange Commission, Senior Trial Counsel, Division of Enforcement, Chicago, IL; Daniel J. Hayes, United States Securities and Exchange Commission, Senior Trial Counsel/Enforcement Division, Chicago, IL; Eric A. Celauro, John E Birkenheier, John J. Sikora, Jr., Kent W. McAllister, Securities & Exchange Commission, Chicago, IL.
For Stefan H. Benger, SHB Capital, Inc., Defendants: Howard J. Stein, LEAD ATTORNEY, Attorney at Law, Chicago, IL.
Jason B Meyers, Defendant, Pro se, Chicago, IL.
Philip T Powers, Defendant, Pro se, Chicago, IL.
For Philip T Powers, Defendant: Nancy L. Hendrickson, Hendrickson Law Firm, Chicago, IL; Philip Thomas Powers, Greenberg Traurig, LLP, Chicago, IL.
For Frank I Reinschreiber, Global Financial Management, LLC, Defendants: Peter B. Shaeffer, Attorney at Law, Chicago, IL.
For CTA Worldwide Services, SA, Relief Defendant, Stephan von Hase, Relief Defendant, Defendants: James Arthur McGurk, LEAD ATTORNEY, Law Offices of James A. McGurk, P.C., Chicago, IL.
For Pamela Benger, Intervenor: Linda M. Babich, LEAD ATTORNEY, Law Office of Linda M. Babich, Chicago, IL.
JEFFREY N. COLE, UNITED STATES MAGISTRATE JUDGE.
MEMORANDUM OPINION AND ORDER
The Securities Exchange Commission (" SEC" ) has charged the defendants with having engaged in an international boiler room scheme targeting some 1400 foreign investors. The alleged scheme took in approximately $44 million primarily through the sale of penny stock. Of the proceeds, the defendants skimmed 60% as purported commissions for themselves and the foreign boiler room operators who answered to them. The stock companies in which the investors were investing realized less than 40% of the proceeds.
The SEC alleges that the investors never saw the distribution or escrow agreements that broke down the distribution percentages. They did see the stock purchase agreements, drafted by the movants, but, in those documents, the defendants claimed there were no commissions, and that only 1% of an investment didn't go to the companies -- it went to a nominal transaction fee. The foreign boiler room operators used high pressure sales tactics, false identities, and fraudulent misrepresentations to make sales while the defendants distanced themselves, concealing the extent of their involvement and claiming ignorance of the sales process. See generally S.E.C. v. Benger, 2013 WL 593952 (N.D.Ill. 2013).
Count IV of the Second Amended Complaint charges the movants -- Philip T. Powers, Global Financial Management, LLC (" GFM" ) and Frank I. Reinschreiber -- with having aided and abetted violations of 10(b) of the Exchange Act, 15 U.S.C. 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5 by other defendants (" The defendants" ). Mr. Powers and Mr. Reinschreiber controlled GFM, and they and their company acted as escrow agents for several of the issuers of stock sold through the alleged boiler room scheme. (2AC, ¶ ¶ 14, 15, 22, 49). Mr. Powers was one of the defendants who drafted the template contract documents, including the Escrow, Distribution, and Share Purchase Agreements, signed by each of the foreign purchasers. The defendants approved, adopted, and implemented the documents. (2AC, ¶ 20).
Once investors transferred their funds to the escrow in Illinois, the movants disbursed the funds in accordance with the Escrow and Distribution Agreements. (2AC, ¶ 49). They wired commission payments to accounts in countries like Switzerland and Cypress -- nations known to have strong bank secrecy laws. The movants then caused the share certificates received from the sellers of the stock to be sent to the foreign investors in their respective countries. Letters accompanying the certificates noted the number of shares purchased, but never the commissions paid. Instead, the letters said that the issuers of the shares had received " Total Consideration." The movants reaped at least $6.9 million in investor funds for their efforts. (2AC, ¶ ¶ 31, 50).
The movants also lent an air of legitimacy to the scheme -- they were U.S.-based, and Mr. Powers had a law firm. (2AC, ¶ 22). While the movants, therefore, could not maintain their anonymity, it is alleged that they concealed the existence of the
other defendants and the sales agents and claimed that they were uninvolved in the scheme beyond the collection of the investors' money. (2AC, ¶ 32). But the SEC claims they knew full well what was going on. Notably, at one point in the scheme, Mr. Powers allegedly expressed concern over being put in a position to " know" who the brokers were and consequently being liable for their sales practice abuses. (2AC, ¶ 34). Through their efforts, the SEC claims the movants provided knowing and substantial assistance to the other defendants' boiler room scheme. (2AC. ¶ 89).
The movants ask that Count IV be dismissed pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim. They argue that the SEC has: (1) failed to plead a primary violation of Rule 10b-5(b) by failing to allege the Distribution Defendants " made" the fraudulent statements required by Rule 10b-5(b) in the security purchase agreements; (2) failed to allege that they committed violations of Rules 10b-5(a) or 10b-5(c); and (3) failed to allege a duty of ...