Court Opinion

ID: 9352797
Source: CourtListenerOpinion
Date Created: 2023-01-09 20:00:52.720434+00
Date Added: 2024-06-11T17:02:34.822902
License: Public Domain

NOT RECOMMENDED FOR PUBLICATION
                                File Name: 23a0014n.06

                                           No. 22-5358

                          UNITED STATES COURT OF APPEALS
                               FOR THE SIXTH CIRCUIT                                   FILED
                                                                                 Jan 09, 2023
                                                     )                       DEBORAH S. HUNT, Clerk
 CBA PHARMA, INC.,
                                                     )
        Plaintiff-Appellant,                         )
                                                     )          ON APPEAL FROM THE
 v.                                                  )          UNITED STATES DISTRICT
                                                     )          COURT FOR THE EASTERN
 RAY A. PERRY, in his official capacity as Secretary )          DISTRICT OF KENTUCKY
 of The Kentucky Public Protection Cabinet,          )
                                                     )                                 OPINION
        Defendant-Appellee.
                                                     )

Before: BOGGS, KETHLEDGE, and WHITE, Circuit Judges.

       BOGGS, Circuit Judge. This case arises from a state investigation of a consumer

complaint of securities fraud. While the underlying issue is whether the state action is pre-empted

by federal securities law, we must first determine if the case is ripe for adjudication and whether

we have subject-matter jurisdiction.

                                         I. Background

       CBA Pharma, Inc., is a Nevada corporation with its principal place of business in

Lexington, Kentucky. CBA has raised tens of millions of dollars for the development of a cancer-

treatment drug which is currently undergoing the final phase of clinical trials as part of its

Investigational New Drug Application (“INDA”) with the U.S. Food and Drug Administration.

CBA has also developed a dietary supplement, which it markets as Bright Star. CBA drug-

development activities have been funded solely through private stock offerings to accredited

investors. Two of those investors, Mr. and Mrs. Shiff, who had invested $2,000,000 in 2016 and
No. 22-5358, CBA Pharma, Inc. v. Perry

2017, came to believe that CBA was abandoning efforts to develop the cancer drug in order to

focus on marketing Bright Star. CBA alleges that the Shiffs began to explore ways to replace the

company’s president, Mike Putnam, with the encouragement and assistance of Chief Operating

Officer, Beth Gudeman.

        In January 2021, the enforcement branch of the Kentucky Public Protection Cabinet, the

Department of Financial Institutions (“DFI”), informed CBA that Mrs. Shiff had filed a complaint

and that DFI was initiating an investigation for potential securities-law violations. DFI issued a

subpoena for various information, including descriptions of fundraising activities; the progression

and status of its INDA with the FDA; the percentage of funds raised that were used toward the

approval of the INDA; stockholder lists; voting-trust agreements; balance sheets and general

ledgers; and advertising and promotional materials.

        DFI also sent a document entitled “Enforcement Questionnaire” to a small number of

shareholders (exact number unknown) which included questions such as: “Detail information

provided during the transaction that you think may not have been true and/or complete,” and

“[d]etail information not provided during the transaction that you think may have affected your

decision to be involved.” In its complaint, CBA alleges that the Enforcement Branch Manager at

DFI, Jeff Jacob, initiated DFI’s investigation of CBA to assist the Shiffs in their efforts to take

over the company. CBA alleges that the Enforcement Questionnaire, in both title and substance,

was an effort by DFI to drum up additional complaints and intimidate existing shareholders. CBA

therefore states that it does not want to comply with DFI’s subpoena to provide the names of all

its investors.

        In March 2021, CBA filed suit in federal district court for injunctive and declaratory relief

to stop DFI’s investigation on grounds that state regulation of the sale of securities is preempted

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by the Federal National Securities Markets Improvement Act of 1996 (“NSMIA”). 15 U.S.C.

§ 77r. DFI filed a Federal Rule of Civil Procedure 12(b)(6) motion to dismiss for failure to state

a claim upon which relief could be granted because DFI had taken no administrative action beyond

an initial investigation, CBA had suffered no injury, and, if DFI were to bring an action against

CBA after it completes its investigation, CBA could administratively contest those findings of

alleged violations pursuant to Kentucky Revised Statutes (“KRS”) Chapter 13B. The district court

granted the12(b)(6) motion on grounds that DFI’s investigation was ongoing and incomplete, and

thus not ripe for adjudication. CBA filed this appeal.

                                     II. Statutory Framework

       NSMIA, which amended Section 18(a)(1)(A) of the 1933 Securities Act, 15 U.S.C.

§ 77r(a)(1)(A), preempts certain state regulations with respect to “covered securities”:

       (a) Scope of exemption. Except as otherwise provided in this section, no law, rule,
       regulation, or order, or other administrative action of any State or any political
       subdivision thereof - (1) requiring, or with respect to, registration or qualification
       of securities, or registration or qualification of securities transactions, shall directly
       or indirectly apply to a security that - (A) is a covered security; or (B) will be a
       covered security upon completion of the transaction . . . .

15 U.S.C. §§ 77r(a)(1)(A)-(B). A “covered security” includes any security exempt from federal

securities registration pursuant to the rules and regulations issued under§ 4(a)(2) of the 1933

Securities Act. Brown v. Earthboard Sports U.S.A., Inc., 481 F.3d 901, 909 (6th Cir. 2007).1

       But, federal preemption of state regulation of covered securities is not absolute, as NSMIA

preserves state jurisdiction over fraud and deceit violations involving covered securities:

1
  NSMIA examples of a "covered security" also include securities listed on a national securities
exchange, securities issued by a federally registered investment company, and securities offered
to investors that have either substantial net worth or investment sophistication. 15 U.S.C.
§§ 77r(b)(1)-(4).

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No. 22-5358, CBA Pharma, Inc. v. Perry

       Preservation of authority. (1) Fraud authority. Consistent with this section, the
       securities commission (or any agency or office performing like functions) of any
       State shall retain jurisdiction under the laws of such State to investigate and bring
       enforcement actions, in connection with securities or securities transactions . . . with
       respect to . . . fraud or deceit . . . .
15 U.S.C. § 77r(c)(1)(A)(i).

       In 1960, the Securities Act of Kentucky (“Securities Act”), also known as the Kentucky

Blue Sky law, was passed to “[p]rotect investors by preventing investment fraud and related illegal

conduct . . . .” KRS § 292.530(1)(a). The law’s interpretation and administration are to be

coordinated with federal regulation of securities. KRS § 292.530(2). The Securities Act makes it

unlawful

       for any person, in connection with the offer, sale, or purchase of any security,
       directly or indirectly: (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 the light of the
       circumstances under which they are 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.

KRS § 292.320. The Kentucky Blue Sky law gives DFI broad authority to investigate consumer

complaints. KRS § 292.460(1)(a). This broad authority exists

       [e]ven if one were to regard the request for information in this case as caused by
       nothing more than official curiosity, nevertheless law-enforcing agencies have a
       legitimate right to satisfy themselves that corporate behavior is consistent with the
       law and the public interest . . . . [It] is sufficient if the inquiry is within the authority
       of the agency, the demand is not too indefinite and the information sought is
       reasonably relevant.

Dolomite Energy, LLC v. Commonwealth of Ky. Off. of Fin. Insts., 269 S.W.3d 883, 886 (Ky. Ct.

App. 2008) (internal citations omitted).

       An investigation by DFI is not a final administrative action. Procedurally, if DFI believes

that its investigation reveals a violation, the investigated party receives notice and has the

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No. 22-5358, CBA Pharma, Inc. v. Perry

opportunity to be heard at an administrative hearing pursuant to KRS Chapter 13B. The DFI

commissioner would then issue a final order based on his review of the hearing officer’s

recommendation and the record. KRS § 13B.120. After the issuance of a final order, a party can

appeal to the Franklin County Circuit Court. KRS § 292.337; KRS § 13B.140.

       Considering this statutory framework, CBA requests that we reverse the district court’s

ruling that the case was unripe; determine the scope of the NSMIA preemption; remand for entry

of a declaratory judgment that all CBA securities are covered securities under NSMIA (and

therefore preempted from DFI investigation) and that the fraud-and-deceit exception does not

justify DFI’s investigation; and order DFI to terminate its investigation of CBA. DFI argues that

it has not committed a “final agency action” and therefore that the case is not ripe for adjudication.

And even if it were ripe, DFI argues that it was properly investigating CBA under the authority

provided by the Kentucky Blue Sky law and as allowed under the fraud-and-deceit exception of

NSMIA.

                                           III. Ripeness

       The threshold issue here is ripeness, which we review de novo. Ammex, Inc. v. Cox, 351

F.3d 697, 706 (6th Cir. 2003). “A court lacks jurisdiction over the subject matter if the claim is

not yet ripe for judicial review.” Norton v. Ashcroft, 298 F.3d 547, 554 (6th Cir. 2002). “A claim

is not ripe for adjudication if it rests upon ‘contingent future events that may not occur as

anticipated, or indeed may not occur at all.’” Texas v. United States, 523 U.S. 296, 300 (1998)

(quoting Thomas v. Union Carbide Agric. Prods. Co., 473 U.S. 568, 580–581 (1985)). Until an

administrative agency has taken “some concrete action applying [a] regulation to the claimant’s

situation in a fashion that harms or threatens to harm him,” a matter arising from such a regulation

is not yet ripe for review. Lujan v. Nat’l Wildlife Fed’n, 497 U.S. 871, 891 (1990). A ripeness

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inquiry “arises most clearly when litigants seek to enjoin the enforcement of statutes, regulations,

or policies that have not yet been enforced against them.” Ammex, Inc., 351 F.3d at 706. And, in

the context of injunctive and declaratory relief where the remedies are discretionary, “courts

traditionally have been reluctant to apply them to administrative determinations unless these arise

in the context of a controversy ‘ripe’ for judicial resolution.” Abbott Lab’ys v. Gardner, 387 U.S.

136, 148 (1967).

       To determine whether a pre-enforcement challenge is ripe, we consider whether the issues

are fit for judicial review and if the parties will suffer hardship if we withhold adjudication. Id.,

387 U.S. at 148–49. In considering the former, we look at the extent to which our legal analysis

would benefit from having a concrete factual context and the extent to which the enforcement

authority’s legal position is subject to change before enforcement. Ammex, 351 F.3d at 706.

       Here, DFI has taken no enforcement action and is merely investigating alleged fraud. CBA

filed this lawsuit specifically “to stop or severely curtail an investigation” by DFI. Legal analysis

of the preemption issue at this stage would be premature, as the controversy lacks, and would

benefit from, a concrete factual context. Ammex, 351 F.3d at 707 (The “need for more factual

development . . . weigh[ed] against ripeness” where a party was “not challenging a specific rule or

finding of the [investigating authority], but rather the general applicability of a statutory scheme

to its conduct” by arguing the scheme is preempted by federal law). The investigation has not

concluded, DFI has made no findings or alleged any wrongdoing by CBA, and DFI has not decided

if it will, in fact, take any action against CBA. See, e.g., Univ. of Med. & Dentistry of New Jersey

v. Corrigan, 347 F.3d 57, 69 (3d Cir. 2003) (determining an action to enjoin an investigation was

not ripe because “an investigation is the beginning of a process that may or may not lead to an

ultimate enforcement action”).

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       Since DFI has not even taken a legal position on whether it will bring an action against

CBA, that position certainly is subject to change.         E.g., Ibid. (“[T]he possibility that no

enforcement action may be taken is real for several reasons, not least of which is that the inspector

general may change her mind on one or more issues along the way.”). Even if this investigation

were considered a final action, which it is not, see, e.g., Ass'n of Am. Med. Colls. v. United States,

217 F.3d 770, 781 (9th Cir. 2000) (“An investigation, even one conducted with an eye to

enforcement, is quintessentially non-final as a form of agency action.”), CBA has failed to exhaust

its administrative remedies under the Kentucky Blue Sky law and doing so would give DFI

opportunities to change its legal position.

       The harms that CBA points to do not outweigh these considerations. CBA can challenge

the scope of DFI’s subpoena in a subpoena-enforcement action. See Google, Inc. v. Hood, 822

F.3d 212, 224 (5th Cir. 2016). And concerns that the investigation will harass and intimidate

shareholders are speculative. Although CBA alleges that its relationship with its investors is

harmed by the investigation, no allegations suggest that any investors contacted by DFI pulled

their investments, threatened to pull their investments, or reconsidered the investment relationship.

CBA also contends the costs of complying with DFI’s document requests will cause harm, but the

record does not reflect (or estimate) what the costs will be. Further, even if CBA had sufficiently

elaborated on the asserted harms, this factor would not tip the scales in favor of ripeness. See

Ammex, Inc., 351 F.3d at 709 (“[W]hatever hardship Ammex incurs by waiting for enforcement is

not enough to outweigh the above-considered factors weighing against ripeness here.”); see also

Babbitt v. United Farm Workers Nat. Union, 442 U.S. 289, 300 (1979) (“Even though a challenged

statute is sure to work the injury alleged, however, adjudication might be postponed until ‘a better

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factual record might be available.’” (quoting Regional Rail Reorganization Act Cases, 419 U.S.

102, 143 (1974))).

       Therefore, this case is not ripe for judicial adjudication.

                                 IV. Injunctive and Declaratory Relief

       If this case were ripe, CBA’s requests for injunctive and declaratory relief should be

decided by the district court. Because this case is not ripe, we lack jurisdiction over these issues.

                                            V. Conclusion

       For the reasons set forth above, we AFFIRM the district court and hold that this case is not

ripe of judicial adjudication.

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