Source: https://www.scribd.com/document/323276831/Attorney-Gregg-Jaclin-Motion-to-Dismiss-SEC-fraud-charges
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Attorney Gregg Jaclin Motion to Dismiss SEC fraud charges | Sec Rule 10b 5 | Public Law
Attorney Gregg Jaclin Motion to Dismiss SEC fraud charges
Uploaded by Teri Buhl
Gregg Evan Jaclin former co-founder of NJ-based law firm Anslow+Jaclin responds to the SEC enforcement action claiming he was a co-conspirator in a Shell Factory Scheme. Jaclin tries to blame the lawyers who worked for him making false SEC filings. The SEC is asking for Jaclin to be barred from the microcap space.
Attorney Gregg Jaclin Motion to Dismiss SEC fraud ...
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Case 2:16-cv-03250-ODW-E Document 17 Filed 08/10/16 Page 1 of 19 Page ID #:77
R. Thomas, Cal Bar. No. 179327
Email: jthomas@thomaslawllc.com
2 Mark D. Hunter, (admitted pro hac vice)
3 Email: mhunter@htflawyers.com
4 Attorneys for Defendant Gregg E. Jaclin
50 S. Steele St., Ste. 250
6 Denver,
Telephone: 720.330.2805
7 Fax: 720.330.2806
Taubman Fischer LLC
Gables, Florida 33134
Telephone: 305.629.8816
10 Fax: 305.629.8877
Case No. 2:16-cv-03250-ODW (Ex)
DEFENDANT GREGG E.
JACLIN’S NOTICE OF MOTION
AND MOTION TO DISMISS;
MEMORANDUM OF POINTS
AND AUTHORITIES IN SUPPORT
IMRAN HUSAIN and GREGG EVAN Date:
Date Action Filed: May 12, 2016
TO THE CLERK OF THE ABOVE-ENTITLED COURT AND TO
24 ALL PARTIES AND THEIR ATTORNEYS OF RECORD:
PLEASE TAKE NOTICE that on September 26, 2016 at 1:30 p.m. or as
26 soon thereafter as counsel may be heard in the above-captioned Court, located at
27 312 N. Spring Street, Los Angeles, CA 90012, Defendant Gregg E. Jaclin, through
28 his counsel, will and hereby does move the Court pursuant to F.R.C.P. 12(b)(6) for
Case 2:16-cv-03250-ODW-E Document 17 Filed 08/10/16 Page 2 of 19 Page ID #:78
1 an order (1) dismissing the SEC’s First, Second, Fourth, and Eighth Claims for
2 Relief; (2) partially dismissing the SEC’s Fifth and Sixth Claims for Relief; and (3)
3 dismissing the SEC’s claims for penalties and disgorgement to the extent those
4 claims rely on conduct occurring before March 1, 2011.
This Motion is based on this Notice of Motion, the following Memorandum
6 of Points and Authorities, the pleadings and papers of record, and such other
7 evidence and argument as may be presented to the Court at or before the hearing of
8 this Motion.
This motion is made following the conference of counsel pursuant to
10 L.R. 7-3, which took place on August 3, 2016.
/s/Jeffrey R. Thomas
Jeffrey R. Thomas
Attorneys for Defendant Gregg E. Jaclin
Case 2:16-cv-03250-ODW-E Document 17 Filed 08/10/16 Page 3 of 19 Page ID #:79
MEMORANDUM OF POINTS AND AUTHORITIES .......................................................................... 5
ARGUMENT ................................................................................................................................... 7
A. The Standard for Dismissal Under F.R.C.P. 12(b)(6). ................................................................. 7
B. The Fourth Claim Should Be Dismissed Because the SEC Impermissibly Alleges a “Scheme”
as a “Back Door” into Primary Liability. ............................................................................................. 7
C. The Second Claim Should Be Dismissed Because It (1) Impermissibly Alleges “Scheme”
Liability and (2) Is Barred by Janus. .................................................................................................... 9
D. The Fifth and Sixth Claims Should Be Dismissed to the Extent They Impermissibly Allege
Secondary “Scheme” Liability under Sections 17(a)(1) and (3) and Rule 10b-5(a) and (c). .......... 11
E. The Fourth and Sixth Claims Should Be Dismissed to the Extent They Rely on Purportedly
Fraudulent Statements by Companies Other Than New Image, Health Directory, or Movie
Trailer. ................................................................................................................................................... 12
F. The First Claim Should Be Dismissed Because Registration Statements Were in Effect and
Mr. Jaclin Cannot Be Liable as a “Participant.” ............................................................................... 13
The Eighth Claim Should Be Dismissed Because the SEC Does Not Plead Facts Sufficient
to Show “Substantial Assistance.” ....................................................................................................... 16
Any Claims for Penalties and Disgorgement Should Be Dismissed as Time Barred to the
Extent They Rely on Conduct Occurring Before March 1, 2011. ..................................................... 16
CONCLUSION ............................................................................................................................. 18
Case 2:16-cv-03250-ODW-E Document 17 Filed 08/10/16 Page 4 of 19 Page ID #:80
3 Ashcroft v. Iqbal, 556 U.S. 662 (2009) ......................................................................................................... 7
Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) ......................................................................................... 7
Gabelli v. SEC, 133 S. Ct. 1216 (2013) ...................................................................................................... 16
Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) ........................................ 8, 11
SEC v. Apuzzo, 689 F.3d 204 (2d Cir. 2012) ........................................................................................ 12, 16
SEC v. Brown, 740 F. Supp. 2d 148 (D.D.C. 2010) ...................................................................................... 9
SEC v. Goldstone, 952 F. Supp. 2d 1060 (D.N.M. 2013) ............................................................................. 9
SEC v. Graham, 823 F.3d 1357 (11th Cir. 2016)......................................................................................... 16
SEC v. Kelly, 817 F. Supp. 2d 340 (S.D.N.Y. 2011) ........................................................................ 8, 10, 11
SEC v. Lucent Techs., Inc., 610 F. Supp. 2d 342 (D.N.J. 2009) ................................................................... 8
SEC v. Murphy, 626 F.2d 633 (9th Cir. 1980) ............................................................................................ 14
SEC v. Perry, No. CV-11-1309 R, 2012 WL 1959566 (C.D. Cal. May 31, 2012) ..................................... 11
SEC v. Rind, 991 F.2d 1486 (9th Cir. 1993) ................................................................................................ 17
SEC v. St. Anselm Exploration Co., 936 F. Supp. 2d 1281 (D. Colo. 2013) ................................................. 8
SEC v. Zandford, 535 U.S. 813 (2002) ....................................................................................................... 12
14 Statutes
15 U.S.C. § 77d(a)(2) .................................................................................................................................. 13
15 U.S.C. § 77e ........................................................................................................................................... 13
15 U.S.C. § 77q(a) ...................................................................................................................................... 10
28 U.S.C. § 2462 ................................................................................................................................... 16, 17
17 C.F.R. § 240.10b-5 ................................................................................................................................... 8
F.R.C.P. 12(b)(6) .......................................................................................................................................... 7
Case 2:16-cv-03250-ODW-E Document 17 Filed 08/10/16 Page 5 of 19 Page ID #:81
The SEC alleges that Imran Husain was an undisclosed control person and
4 promoter of nine public companies (the “Companies”). Assuming that to be true,
5 Mr. Jaclin did not know of Husain’s true role with the Companies. Further, Mr.
6 Jaclin did not draft the registration statements or other SEC filings that allegedly
7 failed to disclose Husain’s role with the Companies and, in most cases, did not
8 review them. Rather, other lawyers at Mr. Jaclin’s firm were responsible for
9 drafting the filings, and they did so relying on standard corporate records,
10 including shareholder lists, subscription agreements, and corporate formation
11 documents. None of those records showed Husain to be a promoter or control
12 person of the Companies. Importantly, Mr. Jaclin did not receive stock in the
13 Companies and did not otherwise benefit financially from his involvement with the
14 Companies, other than earning standard legal fees. In short, liability for violating
15 the federal securities laws, if any, rests with Husain and the Companies, not Mr.
16 Jaclin.
As discussed below, this Court should dismiss the SEC’s First, Second,
18 Fourth, and Eighth Claims on the ground that those Claims fail to state a claim on
19 which relief can be granted. The SEC’s Fourth Claim for fraud under Section
20 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder should be
21 dismissed because the SEC impermissibly attempts to impose “back door” liability
22 by casting a “misstatement” case as a “scheme” case and because the SEC fails to
23 adequately plead the “in connection with” requirement with respect to allegedly
24 fraudulent statements pertaining to all but three of the Companies. The SEC’s
25 Second Claim for fraud under Section 17(a) of the Securities Act of 1933 should
26 be dismissed because it impermissibly attempts to impose scheme liability and
27 because it is barred by the U.S. Supreme Court’s decision in Janus Capital Group,
28 Inc. v. First Derivative Traders and its progeny. The SEC’s First Claim for
Case 2:16-cv-03250-ODW-E Document 17 Filed 08/10/16 Page 6 of 19 Page ID #:82
1 violation of the Securities Act’s registration provisions should be dismissed
2 because registration statements were in effect for any pre-merger offers or sales,
3 any such offers or sales were exempt from registration, and the SEC has pled
4 insufficient facts to support a claim for participant liability with respect to post5 merger offers or sales. The SEC’s Eighth Claim for aiding and abetting Section 5
6 violations should be dismissed because it fails to plead facts sufficient to establish
7 “substantial assistance.”
This Court should also dismiss the SEC’s Fifth Claim for aiding and abetting
9 Section 17(a) violations to the extent it impermissibly attempts to impose
10 secondary scheme liability and the SEC’s Sixth Claim for aiding and abetting Rule
11 10b-5 violations to the extent it impermissibly attempts to impose secondary
12 scheme liability and fails to adequately plead facts establishing the “in connection
13 with” requirement.
Finally, the Court should dismiss as time barred the SEC’s request for
15 penalties and disgorgement to the extent those requests rely on conduct occurring
16 before March 1, 2011.
Case 2:16-cv-03250-ODW-E Document 17 Filed 08/10/16 Page 7 of 19 Page ID #:83
The Standard for Dismissal Under F.R.C.P. 12(b)(6).
A complaint must plead “enough facts to state a claim to relief that is
4 plausible on its face” to survive dismissal under F.R.C.P. 12(b)(6). Bell Atl. Corp.
5 v. Twombly, 550 U.S. 544, 570 (2007). A claim is facially plausible when the
6 plaintiff “pleads factual content that allows the court to draw the reasonable
7 inference that the defendant is liable for the misconduct alleged.” Ashcroft v.
8 Iqbal, 556 U.S. 662, 678 (2009). Facts that are merely consistent with unlawful
9 conduct are not sufficient, and the complaint’s allegations must permit the court to
10 infer more than the mere possibility of misconduct. Id. Moreover, the complaint’s
11 factual allegations must be sufficient to “raise a right to relief above the speculative
12 level.” Twombly, 550 U.S. at 555. “[A] plaintiff’s obligation to provide the
13 ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions,
14 and a formulaic recitation of the elements of a cause of action will not do.” Id.
15 (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986)) (alterations in original).
16 Finally, while a court must accept all allegations in a complaint as true, that is not
17 the case with legal conclusions. Iqbal, 556 U.S. at 678. That is, “[t]hreadbare
18 recitals of the elements of a cause of action, supported by mere conclusory
19 statements, do not suffice.” Id.
The Fourth Claim Should Be Dismissed Because the SEC Impermissibly
Alleges a “Scheme” as a “Back Door” into Primary Liability.
Rule 10b-5 under the Securities Exchange Act of 1934 (“Exchange Act”)
23 states that “[i]t shall be unlawful for any person [in connection with the purchase
24 or sale of any security]
To make any untrue statement of a material fact or to
Case 2:16-cv-03250-ODW-E Document 17 Filed 08/10/16 Page 8 of 19 Page ID #:84
made, in the light of the circumstances under which they were made,
not misleading, or
To engage in any act, practice, or course of business
6 17 C.F.R. § 240.10b-5.
The SEC does not allege that Mr. Jaclin is primarily liable under subsection
8 (b) of Rule 10b-5, apparently acknowledging that Janus Capital Group, Inc. v.
9 First Derivative Traders, 564 U.S. 135 (2011) and its progeny preclude such
10 liability. Instead, the SEC asserts a claim for “scheme” liability under subsections
11 (a) and (c) of Rule 10b-5. To prevail on a claim for scheme liability under Rule
12 10b-5(a) or (c), the SEC must prove that Mr. Jaclin: (1) committed a deceptive or
13 manipulative act, (2) in furtherance of an alleged scheme to defraud, (3) with
14 scienter. SEC v. Lucent Techs., Inc., 610 F. Supp. 2d 342, 350 (D.N.J. 2009).
“Scheme liability under subsections (a) and (c) of Rule 10b-5 hinges on the
16 performance of an inherently deceptive act that is distinct from an alleged
17 misstatement.” SEC v. Kelly, 817 F. Supp. 2d 340, 344 (S.D.N.Y. 2011) (emphasis
18 added). The Southern District of New York in Kelly dismissed a similarly
19 deficient claim, explaining that “courts have routinely rejected the SEC’s attempt
20 to bypass the elements necessary to impose ‘misstatement’ liability under
21 subsection (b) [of Rule 10b-5] by labeling the alleged misconduct a ‘scheme’
22 rather than a ‘misstatement.’” Id. at 343. The court admonished the SEC for using
23 scheme liability as “a ‘back door into liability for those who help others make a
24 false statement or omission in violation of subsection (b) of Rule 10b-5.’” Id.
This back-door approach has been consistently rejected by other federal
26 courts. See, e.g., SEC v. St. Anselm Exploration Co., 936 F. Supp. 2d 1281, 129827 99 (D. Colo. 2013) (“liability does not arise simply by virtue of repackaging a
28 fraudulent misrepresentation a ‘scheme to defraud’ … Rather scheme liability
Case 2:16-cv-03250-ODW-E Document 17 Filed 08/10/16 Page 9 of 19 Page ID #:85
1 requires proof of participation in an illegitimate, sham, or inherently deceptive
2 transaction where the defendant’s conduct or role has the purpose and effect of
3 creating a false appearance … Stated differently, scheme liability exists only where
4 there is deceptive conduct going beyond misrepresentations”); SEC v. Goldstone,
5 952 F. Supp. 2d 1060, 1235-36 (D.N.M. 2013) (“[t]he fatal problem with the
6 SEC’s allegations of scheme liability is that, apart from the alleged
7 misrepresentations and omissions … none of the conduct the SEC references in
8 furtherance of the scheme is inherently deceptive”); SEC v. Brown, 740 F. Supp.
9 2d 148, 172 (D.D.C. 2010) (“to establish primary liability under Rule 10b-5(a) or
10 (c), the alleged conduct must be more than a reiteration of the misrepresentations
11 underlying the Rule 10b-5(b) misstatement claims”).
Here, despite the SEC’s attempt to characterize this case as a scheme case, it
13 is plainly a misstatement case. The sole bases for the SEC’s Fourth Claim for
14 scheme liability under Rule 10b-5(a) and (c) are alleged misrepresentations in SEC
15 filings made by the Companies – i.e., the alleged failure to disclose (a) Husain as a
16 control person or promoter and (b) pending deals concerning two of the Companies
17 – Movie Trailer and Health Directory. Such allegations do not give rise to scheme
18 liability and, for that reason, the SEC’s Fourth Claim should be dismissed.
The Second Claim Should Be Dismissed Because It (1) Impermissibly
Alleges “Scheme” Liability and (2) Is Barred by Janus.
Section 17(a) of the Securities Act of 1933 (“Securities Act”) states that “[i]t
22 shall be unlawful for any person in the offer or sale of any securities …
to obtain money or property by means of any untrue
statement of a material fact or any omission 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
Case 2:16-cv-03250-ODW-E Document 17 Filed 08/10/16 Page 10 of 19 Page ID #:86
to engage in any transaction, practice, or course of
business which operates or would operate as a fraud or deceit upon the
purchaser.”
4 15 U.S.C. § 77q(a).
The SEC’s Section 17(a)(1) and (3) Claims Impermissibly
Allege “Scheme” Liability.
“As with Rule 10b–5, subsections (1) and (3) of Section 17(a) apply
8 to scheme liability and subsection (2) applies to misstatement liability.”
9 Kelly, 817 F. Supp. 2d at 345. For the reasons discussed above, the SEC has
10 impermissibly attempted to cast a misstatement case as a scheme case, and
11 its claim for violations of Securities Act Section 17(a)(1) and (3) should
12 therefore be dismissed.
As stated, Rule 10b-5(b) provides that it is unlawful for any person “[t]o
The SEC’s Section 17(a)(2) Claim Is Barred Under Janus.
15 make any untrue statement of a material fact” in connection with the purchase or
16 sale of a security. In Janus Capital Group, Inc. v. First Derivative Traders, the
17 U.S. Supreme Court addressed claims under Section 10(b) and Rule 10b-5(b)
18 based on misstatements in prospectus materials issued by Janus Investment Fund.
19 The plaintiffs alleged that Janus Capital Management, the fund’s investment
20 adviser and administrator, violated Rule 10b-5(b) because it had been significantly
21 involved in the creation of the allegedly misleading statements. The plaintiffs
22 alleged that the adviser had a close relationship with the fund, exercised significant
23 influence over the fund and its prospectus disclosures, and was understood by
24 investors to be the “maker” of disclosures issued by the fund. The Supreme Court
25 held that the adviser did not “make” the allegedly false statements within the
26 meaning of Rule 10b-5(b) and therefore could not be primarily liable. In so doing,
27 the Supreme Court stated, “the maker of a statement is the person or entity with
Case 2:16-cv-03250-ODW-E Document 17 Filed 08/10/16 Page 11 of 19 Page ID #:87
1 ultimate authority over the statement, including its content and whether and how to
2 communicate it.” Janus Capital Group, Inc., 564 U.S. at 142.
This Court has held that Janus’s requirement that a primary violator under
4 Rule 10b-5(b) be the “maker” of the fraudulent statement applies to claims under
5 Section 17(a)(2) as well. See SEC v. Perry, No. CV-11-1309 R, 2012 WL
6 1959566, at *8 (C.D. Cal. May 31, 2012) (“[t]his requirement applies to claims
7 under both Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b–5
8 promulgated thereunder, and Section 17(a) of the Securities Act of 1933”) (citing
9 SEC v. Global Express Capital Real Estate Inv. Fund, I, LLC, 289 F. App’x 183,
10 186 (9th Cir. 2008) and SEC v. Dain Rauscher, Inc., 254 F.3d 852, 855–56 (9th Cir.
11 2001)). Other courts are in accord. See, e.g., Kelly, 817 F. Supp. 2d at 345 (“[t]o
12 succeed on a misstatement claim under either Rule 10b–5(b) or Section 17(a)(2),
13 the SEC must prove that the defendant made materially false statements or
14 omissions”) (emphasis in original).
Like its Rule 10b-5 claim, the SEC’s Section 17(a)(2) claim is based solely
16 on allegations that SEC filings made by the Companies failed to disclose (a)
17 Husain as a control person or promoter and (b) pending deals concerning two of
18 the Companies. And there is no dispute that the statements at issue were made by
19 the Companies, and not by Mr. Jaclin or his law firm. See, e.g., Complaint at ¶¶
20 14-22, 61, 78, 156. Under these circumstances, Janus and its progeny, including
21 pronouncements by this very Court, preclude liability under Rule 17(a)(2).
The Fifth and Sixth Claims Should Be Dismissed to the Extent They
Impermissibly Allege Secondary “Scheme” Liability under Sections
17(a)(1) and (3) and Rule 10b-5(a) and (c).
To establish aiding and abetting liability under the federal securities
26 laws, “the SEC must prove: (1) the existence of a securities law violation by
27 the primary (as opposed to the aiding and abetting) party; (2) knowledge of
28 this violation on the part of the aider and abettor; and (3) ‘substantial
Case 2:16-cv-03250-ODW-E Document 17 Filed 08/10/16 Page 12 of 19 Page ID #:88
1 assistance’ by the aider and abettor in the achievement of the primary
2 violation.” SEC v. Apuzzo, 689 F.3d 204, 211 (2d Cir. 2012). As discussed
3 above, this is a misstatement case under Section 17(a)(2) and Rule 10b-5(b),
4 not a scheme case under Section 17(a)(1) and (3) or Rule 10b-5(a) and (c).
5 It follows that the SEC cannot establish the first element of liability for
6 aiding and abetting the scheme liability provisions: the existence of a
7 primary violation. The Fifth and Sixth Claims should therefore be dismissed
8 to the extent they allege secondary violations of those provisions.
The Fourth and Sixth Claims Should Be Dismissed to the Extent They
Rely on Purportedly Fraudulent Statements by Companies Other Than
New Image, Health Directory, or Movie Trailer.
To establish liability under Section 10(b) and Rule 10b-5, the SEC must
13 show that a fraudulent statement or omission was made “in connection” with the
14 purchase or sale of a security. See 17 C.F.R. § 240.10b-5; SEC v. Zandford, 535
15 U.S. 813, 819 (2002). Here, the SEC alleges that only three of the Companies –
16 New Image, Health Directory, and Movie Trailer – were publicly traded before
17 being sold to the shell company purchasers. See Complaint at ¶ 92. Accordingly,
18 for the other six Companies, the “in connection with” requirement can be satisfied
19 only by (1) sales to the shell company purchasers or (2) sales in the public markets
20 after the Companies were sold to the shell company purchasers.
Two of the Companies – Comp Services and Counseling International –
22 were never sold to shell company purchasers because the SEC issued stop orders
23 suspending the effectiveness of their registration statements before any such sales
24 occurred. See Complaint at ¶¶ 21(d), 22(c). Indeed, the SEC does not allege that
25 any sales of stock of these two Companies occurred after the initial registration
26 statements were filed. Compare ¶¶ 21 and 22 with ¶¶ 14-21.
For the other four Companies – PR Complete, Ciglarette, Resume in
28 Minutes, and Rapid Holdings – the SEC cannot plausibly claim that any allegedly
Case 2:16-cv-03250-ODW-E Document 17 Filed 08/10/16 Page 13 of 19 Page ID #:89
1 fraudulent statements in pre-merger filings were “in connection with” the sales to
2 the shell company purchasers, as those purchasers knew the Companies to be shells
3 and therefore were not deceived in any way. See Complaint at ¶¶ 79-93. Nor can
4 the SEC plausibly claim that any allegedly fraudulent statements were “in
5 connection with” any post-merger stock sales, as (1) none of the Companies had
6 any connection to Husain after the mergers, and (2) each of the Companies filed a
7 “Super 8-K” after its reverse merger, and before any shares were publicly traded,
8 disclosing all of the material information required in a registration statement for
9 the new company. See Complaint at ¶ 91.
Based on the foregoing, the SEC’s own allegations establish that any
11 fraudulent statements or omissions in any pre-merger filings relating to any of the
12 Companies other than New Image, Health Directory, and Movie Trailer were not
13 “in connection with” the purchase or sale of a security.
The First Claim Should Be Dismissed Because Registration Statements
Were in Effect and Mr. Jaclin Cannot Be Liable as a “Participant.”
Securities Act Section 5 prohibits (1) the offering of a security for sale
17 unless a registration statement has been filed (Section 5(c)) and (2) the selling of a
18 security unless a registration statement is “in effect.” (Section 5(a)). See 15 U.S.C.
19 § 77e. These prohibitions are subject to numerous exemptions, including
20 exemptions for “transactions by an issuer not involving any public offering” –
21 otherwise known as the “private offering” exemption. Securities Act Section 4(2),
22 15 U.S.C. § 77d(a)(2).
In its First Claim, the SEC contends that Mr. Jaclin committed direct
24 violations of Sections 5(a) and (c) in connection with the offers or sales of stock of
25 six of the Companies. The SEC does not allege that Mr. Jaclin offered or sold
26 stock. See Complaint at ¶¶ 132, 133 (stating that the offers and sales upon which
27 the SEC relies were offers and sales of stock (1) “by defendant Husain of [the]
28 shell companies” (Complaint at ¶ 133) and (2) “by the shell company purchasers”
Case 2:16-cv-03250-ODW-E Document 17 Filed 08/10/16 Page 14 of 19 Page ID #:90
1 (Complaint at ¶ 132)). Rather, the SEC appears to rely on a “participant liability”
2 theory for its Section 5 claim against Mr. Jaclin. See Complaint at ¶¶ 105-111.
The SEC’s Section 5 claim against Mr. Jaclin fails with respect to any offers
4 or sales “by defendant Husain” or “by the shell company purchasers,” for two
5 reasons. First, for any offers or sales “by defendant Husain” (Complaint at
6 Complaint at ¶ 133), registration statements were, contrary to the SEC’s
7 contention, in effect for each of the six Companies for which Section 5 violations
8 are alleged. See Complaint at ¶ 106 (identifying the six Companies for which
9 Section 5 violations are alleged); ¶¶ 14(b), 15(b), 16(b), 18(b), 19(b), and 20(b)
10 (stating that registration statements were effective for those six Companies).
11 Further, even if registration statements were not in effect – which they were – any
12 such transactions were plainly exempt under various provisions of the federal
13 securities laws, including Securities Act Section 4(2).1 For example, for each
14 Company, any such offers or sales were by Husain to a single purchaser – the shell
15 company purchaser. See Complaint at ¶¶ 79-93 (alleging that for each Company
16 the “Straw Shareholders,” which the SEC alleges were in fact Husain, sold the
17 shares to the shell company purchaser). Such private, one-to-one transactions
18 cannot plausibly be construed as transactions involving a “public offering.”
Second, any offers or sales “by the shell company purchasers” (Complaint at
20 ¶ 132), were far too attenuated from any actions by Mr. Jaclin for “participant
21 liability” to attach. For “participant liability” to attach, a person must be both a
22 “necessary participant” and “substantial factor” in the sales transaction. SEC v.
23 Murphy, 626 F.2d 633, 650 (9th Cir. 1980). The necessary participant test “is
24 equivalent to the first prong of [a] proximate cause analysis,” asking “whether, but
25 for the defendant’s participation, the sale transaction would not have taken place.”
26 Id. at 651.
The SEC alleges that, “[f]or each of the six offerings, Husain was the issuer.”
Case 2:16-cv-03250-ODW-E Document 17 Filed 08/10/16 Page 15 of 19 Page ID #:91
The substantial factor test, however, requires more than a finding of “but
2 for” causation:
“Prior to the issuance of a security, numerous persons perform
mechanical acts without which there could be no sale. For example, a
printer may prepare key documents or a bank may advance cash to a
customer upon the customer’s presentation of an instrument and then
pass the instrument to another person. Both would satisfy a “but for”
causation test, but these acts nonetheless do not render the defendants
sellers … Before a person’s acts can be considered the proximate
cause of a sale, his acts must also be a substantial factor in bringing
about the transaction.”
12 Id. at 650.
Here, any offers or sales occurring after each Company’s reverse
14 merger were too remote in time and otherwise far too attenuated from any
15 legal work that Mr. Jaclin or his firm may have done to establish participant
16 liability. The SEC does not allege that Mr. Jaclin sold stock or had any role
17 in effecting sales transactions for others. Further, the post-merger sales
18 typically occurred many months after the registration statement and other
19 documents at issue were filed (see Complaint at ¶ 106) and after the
20 Company – with its new business, new shareholders, and new officers and
21 directors – had filed a “Super 8-K” disclosing all of the material information
22 required in a registration statement. (See Complaint at ¶ 91). Under these
23 circumstances, Mr. Jaclin cannot plausibly be deemed a “substantial factor”
24 in any post-merger offers or sales.
Case 2:16-cv-03250-ODW-E Document 17 Filed 08/10/16 Page 16 of 19 Page ID #:92
The Eighth Claim Should Be Dismissed Because the SEC Does Not
Plead Facts Sufficient to Show “Substantial Assistance.”
In its Eighth Claim, the SEC alleges that Mr. Jaclin aided and abetted
4 Section 5 violations by the purchasers of six of the Companies. As noted, to
5 establish aiding and abetting liability under the federal securities laws, the
6 SEC must prove “substantial assistance” by the alleged aider and abettor.
7 Apuzzo, 689 F.3d at 211. For the same reasons that Mr. Jaclin cannot be
8 deemed to have been a “substantial factor” in any unregistered, non-exempt
9 post-merger offers or sales (discussed above), Mr. Jaclin cannot be deemed
10 to have offered “substantial assistance” in achieving any primary violation
11 of Section 5.
Any Claims for Penalties and Disgorgement Should Be Dismissed as
Time Barred to the Extent They Rely on Conduct Occurring Before
28 U.S.C. § 2462 states that “an action ... for the enforcement of any civil
16 fine, penalty, or forfeiture ... shall not be entertained unless commenced within five
17 years from the date when the claim first accrued.” Section 2462 bars any SEC
18 action for penalties brought more than five years after the allegedly fraudulent
19 conduct occurred. Gabelli v. SEC, 133 S. Ct. 1216, 1224 (2013). Accordingly,
20 any claim for penalties based on conduct occurring on or before March 1, 2011 is
21 time-barred and should be dismissed.2
Similarly, Section 2462 bars any SEC action for disgorgement brought more
23 than five years after the allegedly fraudulent conduct occurred. SEC v. Graham,
24 823 F.3d 1357, 1363-64 (11th Cir. 2016). In Graham, the Eleventh Circuit ruled
The SEC filed this action on May 12, 2016, but Mr. Jaclin and the SEC entered into a tolling
27 agreement that tolled the running of any applicable statutes of limitation from March 1, 2016
through May 12, 2016.
Case 2:16-cv-03250-ODW-E Document 17 Filed 08/10/16 Page 17 of 19 Page ID #:93
1 that “for the purposes of § 2462 forfeiture and disgorgement are effectively
2 synonyms; § 2462’s statute of limitations applies to disgorgement…. We find no
3 meaningful difference in the definitions of disgorgement and forfeiture.” Id. at
4 1363. On that basis, the Graham court held that “the SEC is time-barred from
5 proceeding with its claims for declaratory relief and disgorgement because, under
6 the plain meaning of 28 U.S.C. § 2462, these remedies are a penalty and a
7 forfeiture, respectively.” Id. at 1364. Based on that reasoning, any claim for
8 disgorgement based on conduct occurring on or before March 1, 2016 is time9 barred and should be dismissed.3
While the Ninth Circuit in SEC v. Rind, 991 F.2d 1486 (9th Cir. 1993) concluded that the SEC
was not bound by a statute of limitations, that court did not consider the applicability of Section
Case 2:16-cv-03250-ODW-E Document 17 Filed 08/10/16 Page 18 of 19 Page ID #:94
Based on the foregoing, Mr. Jaclin respectfully requests that the Court grant
3 his Motion to Dismiss without leave to amend. Specifically, Mr. Jaclin requests
4 that the Court:
Dismiss the SEC’s First, Second, Fourth, and Eighth Claims for
6 Relief;
Dismiss the SEC’s Fifth Claim for Relief to the extent it alleges
8 secondary scheme liability;
Dismiss the SEC’s Sixth Claim for Relief to the extent it (a) alleges
10 secondary scheme liability and (b) relies on purportedly fraudulent statements by
11 Companies other than New Image, Health Directory, or Movie Trailer; and
Dismiss the SEC’s claims for penalties and disgorgement to the extent
13 those claims rely on conduct occurring before March 1, 2011.
Case 2:16-cv-03250-ODW-E Document 17 Filed 08/10/16 Page 19 of 19 Page ID #:95
I hereby certify that, on August 10, 2016, I electronically filed the foregoing
3 DEFENDANT GREGG E. JACLIN’S NOTICE OF MOTION AND
4 MOTION TO DISMISS; MEMORANDUM OF POINTS AND
5 AUTHORITIES IN SUPPORT with the Clerk of Court using the CM/ECF
6 system which will send notification of such filing to the following e-mail
7 address(es):
8 Amy J. Longo
9 LongoA@sec.gov
TerceroR@sec.gov
11 George B. Newhouse, Jr.
12 george.newhouse@dentons.com
mdhunter@htwlaw.com
14 Ho-El Park
15 hpark@hparklaw.com
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