Court Opinion

ID: 2658729
Source: CourtListenerOpinion
Date Created: 2014-03-31 10:18:54.985699+00
Date Added: 2024-06-11T09:14:07.756863
License: Public Domain

UNITED STATES DISTRICT COURT
                            FOR THE DISTRICT OF COLUMBIA

U.S. SECURITIES AND EXCHANGE
COMMISSION,

       Plaintiff,
               v.                                         Civil Action No. 11-895 (JEB)
e-SMART TECHNOLOGIES, INC., et al.,

       Defendants.

                         MEMORANDUM OPINION AND ORDER

       The Securities and Exchange Commission filed this suit against e-Smart Technologies,

Inc., three other companies, and five individuals, asserting numerous violations of the securities

laws. One of those individuals, Defendant Robert J. Rowen, has now filed a Motion to Dismiss,

contending that this Court has no jurisdiction over him, that venue is improper here, and that the

SEC’s Complaint is legally insufficient. Finding Rowen not to prevail on any of his arguments,

the Court will deny the Motion.

I.     Background

       The SEC alleges that e-Smart is a technology business engaged in selling an

identification-verification system called a “smart card.” Compl., ¶ 16. Among its various

misdeeds, e-Smart is alleged to have “engaged in an unregistered offering of millions of shares

of its securities in violation of Section 5 of the Securities Act.” Id., ¶ 61. This was

accomplished through a sham “convertible loan scheme.” Id., ¶ 64.

       From 2005-07, Defendant Rowen and two other individuals “solicited investors to

purchase e-Smart stock” and “were paid a 5-10% commission . . . for each sale of e-Smart

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shares they facilitated.” Id., ¶ 75. “Rowen accomplished at least 20 transactions which brought

in over $350,000 and sold over 4.5 million e-Smart shares.” Id., ¶ 78. At the time, Rowen was

not “registered with the Commission as a broker-dealer or associated with a registered broker-

dealer.” Id., ¶ 79. As a result, the two counts of the Complaint against Rowen allege that he

violated the Securities Act, 15 U.S.C. §§ 77e(a) and 77e(c), by selling unregistered securities,

see Compl., ¶¶ 90-93, and violated the Exchange Act, 15 U.S.C. § 78o(a), by selling securities

without being registered as a broker or dealer. Compl., ¶¶ 113-15.

       Rowen filed his Motion to Dismiss on July 8, 2011. After initial briefing had been

completed, the Court asked for supplemental briefs on the applicability of the recent D.C.

Circuit decision on venue in SEC v. Johnson, 650 F.3d 710 (D.C. Cir. 2011). The matter is now

ripe for decision.

II.    Legal Standard

       In evaluating Defendant’s Motion to Dismiss, the Court must “treat the complaint’s

factual allegations as true . . . and must grant plaintiff ‘the benefit of all inferences that can be

derived from the facts alleged.’” Sparrow v. United Air Lines, Inc., 216 F.3d 1111, 1113 (D.C.

Cir. 2000) (quoting Schuler v. United States, 617 F.2d 605, 608 (D.C. Cir. 1979)) (internal

citation omitted); see also Jerome Stevens Pharms., Inc. v. FDA, 402 F.3d 1249, 1253 (D.C. Cir.

2005). This standard governs the Court’s considerations of Defendant’s Motions under both

Rules 12(b)(1) and 12(b)(6). See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974) (“in passing on a

motion to dismiss, whether on the ground of lack of jurisdiction over the subject matter or for

failure to state a cause of action, the allegations of the complaint should be construed favorably

to the pleader”); Walker v. Jones, 733 F.2d 923, 925-26 (D.C. Cir. 1984) (same). The Court

need not accept as true, however, “a legal conclusion couched as a factual allegation,” nor an

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inference unsupported by the facts set forth in the Complaint. Trudeau v. Fed. Trade Comm’n,

456 F.3d 178, 193 (D.C. Cir. 2006) (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986))

(internal quotation marks omitted).

        To survive a motion to dismiss under Rule 12(b)(1), a plaintiff bears the burden of

proving that the Court has personal jurisdiction over a defendant. FC Inv. Group LC v. IFX

Markets, Ltd., 529 F.3d 1087, 1091 (D.C. Cir. 2008) (citing Reuber v. United States, 787 F.2d

599 (D.C. Cir. 1986)). A court has an “affirmative obligation to ensure that it is acting within

the scope of its jurisdictional authority.” Grand Lodge of Fraternal Order of Police v. Ashcroft,

185 F. Supp. 2d 9, 13 (D.D.C. 2001). For this reason, “‘the [p]laintiff’s factual allegations in the

complaint . . . will bear closer scrutiny in resolving a 12(b)(1) motion’ than in resolving a

12(b)(6) motion for failure to state a claim.” Id. at 13-14 (quoting 5A Charles A. Wright &

Arthur R. Miller, Federal Practice and Procedure § 1350 (2d ed. 1987) (alteration in original)).

Additionally, unlike with a motion to dismiss under Rule 12(b)(6), the Court “may consider

materials outside the pleadings in deciding whether to grant a motion to dismiss for lack of

jurisdiction.” Jerome Stevens, 402 F.3d at 1253; see also Venetian Casino Resort, L.L.C. v.

E.E.O.C., 409 F.3d 359, 366 (D.C. Cir. 2005) (“given the present posture of this case – a

dismissal under Rule 12(b)(1) on ripeness grounds – the court may consider materials outside

the pleadings”).

       Rule 12(b)(6) provides for the dismissal of an action where a complaint fails “to state a

claim upon which relief can be granted.” When the sufficiency of a complaint is challenged

under Rule 12(b)(6), the factual allegations presented in it must be presumed true and should be

liberally construed in plaintiff’s favor. Leatherman v. Tarrant Cty. Narcotics & Coordination

Unit, 507 U.S. 163, 164 (1993). The notice pleading rules are “not meant to impose a great

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burden on a plaintiff,” Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 347 (2005), and he or she

must thus be given every favorable inference that may be drawn from the allegations of fact.

Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 584 (2007). Although “detailed factual

allegations” are not necessary to withstand a Rule 12(b)(6) motion, Twombly, 550 U.S. at 555,

“a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that

is plausible on its face.” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (internal quotation

omitted). Plaintiff must put forth “factual content that allows the court to draw the reasonable

inference that the defendant is liable for the misconduct alleged.” Id. Though a plaintiff may

survive a 12(b)(6) motion even if “recovery is very remote and unlikely,” Twombly, 550 U.S. at

555 (citing Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)), the facts alleged in the complaint

“must be enough to raise a right to relief above the speculative level.” Id. at 555.

III.   Analysis

       Rowen relies on three separate grounds in bringing this Motion. First, he claims that he

“is not subject to the personal jurisdiction of this court.” Mot. at 3. Second, he asserts that

venue in the District of Columbia is improper, which should yield a dismissal or a transfer to

“the District Court nearest to Mr. Rowen’s residence.” Id. Third, he maintains that “[t]he

complaint is defective and insufficient in failing to show with any degree of specificity as to how

Mr. Rowen is alleged to have violated any law.” Id. The Court will address each in turn.

       A. Personal Jurisdiction

       The SEC alleges that Rowen violated the Securities Act, 15 U.S.C. §§ 77e(a) and (c), and

the Exchange Act, 15 U.S.C. § 78o(a). Compl., ¶¶ 90-93, 113-15. He argues that the pled

violations have nothing to do with the District of Columbia, thus depriving this jurisdiction of

minimum contacts with – and, hence, jurisdiction over – him. His interpretation of the law of

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personal jurisdiction is too narrow. The aforementioned statutes provide for very broad service

of process. See § 78aa (“process . . . may be served in any other district of which the defendant

is an inhabitant or wherever the defendant may be found”) (emphasis added); § 77v(a) (same).

Congress “uses language permitting service ‘wherever the defendant may be found,’” when it

“intends to permit nationwide personal jurisdiction.” Dynegy Midstream Services v.

Trammochem, 451 F.3d 89, 95-96 (2d Cir. 2006) (citing § 78aa as example) (further citation

omitted). Numerous circuits have “uniformly held that ‘[w]hen the personal jurisdiction of a

federal court is invoked based upon a federal statute providing for nationwide or worldwide

service, the relevant inquiry is whether the respondent has had sufficient minimum contacts with

the United States.’” SEC v. Carrillo, 115 F.3d 1540, 1543 (11th Cir. 1997) (quoting In re

Application to Enforce Admin. of Subpoena of SEC v. Knowles, 87 F.3d 413, 417 (10th Cir.

1996)) (emphasis added); see also Warfield v. Alaniz, 569 F.3d 1015, 1029 (9th Cir. 2009) (as

long as defendant has minimum contacts with United States, any federal court has personal

jurisdiction over him under Exchange Act). Rowen never denies his contacts with the United

States as a whole; indeed, he would have difficulty so doing since he lives in California. His

argument on personal jurisdiction thus cannot prevail.

       B. Venue

       The SEC’s argument as to venue is not as straightforward. Under both the Securities Act

and the Exchange Act, venue is proper “in the district wherein the defendant is found or is an

inhabitant or transacts business.” 15 U.S.C. §§ 78aa, 77v(a). Those provisions are clearly not

applicable here for this California-based Defendant. The statutes, however, have other venue

options. Under the former, venue also lies “in the district where the offer or sale took place, if

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the defendant participated therein.” § 77v(a). Under the latter, it also lies “in the district wherein

any act or transaction constituting the violation occurred.” § 78aa.

        In SEC v Johnson, the D.C. Circuit reversed the district court’s holding that venue was

proper under the Exchange Act where the SEC relied upon “the co-conspirator theory of venue.”

Id. at 713-15. The defendant there had “allegedly aided and abetted a scheme, a material part of

which occurred in the District of Columbia.” Id. at 713 (internal quotation marks omitted). In

reversing, the Court held, “If the only act allegedly done in this district is not linked to [the

defendant] in any of the ways listed in § 78aa, then no ‘theory’ can supply the deficiency.” Id. at

715. The SEC argues that the venue analysis under the Exchange Act here is different from

Johnson because “Rowen failed to register with the SEC as a broker-dealer,” which registration

occurs here in Washington. Pl. Supp. Mem. at 5. The Court need not reach this question

because venue does lie here under the Securities Act.

        Under the Securities Act, the question is twofold: did an offer or sale take place in

Washington, and did Rowen participate in it? The answers are yes. Once again, the Court, at

this stage of the proceedings, is not acting as a factfinder, but is, instead, bound by the facts set

forth in the Complaint, particularly where Defendant has offered no other facts on venue aside

from general denials. The Complaint alleges that “e-Smart operated primarily from the residence

of its CEO, Mary A. Grace, in the Georgetown area of Washington, DC,” Compl., ¶ 16, and that

Grace and e-Smart sold shares of unregistered stock in the form of a convertible loan scheme

wherein investors sent e-Smart money, and Grace, after a number of fraudulent steps, then

authorized the issuance of shares. Id., ¶¶ 61-65. This is certainly sufficient to allege the sale of

stock took place in the District of Columbia.

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       The Complaint further alleges that Rowen participated: “Rowen solicited investors to

purchase e-Smart stock,” id., ¶ 75, and he “accomplished at least 20 transactions which brought

it over $350,000 and sold over 4.5 million e-Smart shares.” Id., ¶ 78. Since their sales,

according to the Complaint, were accomplished “through the loan scheme,” id., ¶ 75, and since

Grace in Washington conducted all such sales, it is clear that Rowen participated in a sale of

unregistered stock that took place in this judicial district. The Court, therefore, is not relying on

the impermissible co-conspirator theory of venue, but rather on Rowen’s direct participation in

sales that occurred here. Venue thus may lie in the District of Columbia. See Gambone v. Lite-

Rock Drywall Corp., 124 Fed.Appx. 78, 80 n.2 (3d Cir. 2005) (“Moreover, because the

transaction the complaint alleges ‘defraud[ed Plaintiffs] of funds’ was the sale of stock in

Pennsylvania, we read the complaint to allege that Luongo, although physically in Arizona,

participated in that Pennsylvania sale. Thus, even § 22 of the '33 Act is of no avail to Luongo.”)

(emphasis original).

       Given that venue lies here for the Securities Act count, pendent venue is appropriately

applied to the Exchange Act claim, even assuming venue is not otherwise proper, a decision the

Court does not make. “Whether to apply the principle of pendent venue in any given case is a

discretionary decision, based on applicable policy considerations. Some of these considerations

will be the same as those that support the exercise of pendent jurisdiction – judicial economy,

convenience, avoidance of piecemeal litigation, and fairness to the litigants.” Beattie v. United

States, 756 F.2d 91, 103 (D.C. Cir. 1984), overruled on other grounds by Smith v. United States,

507 U.S. 197 (1993). Here, all of the factors favor the exercise of pendent venue since the two

counts are very closely linked in their predicate facts, and there are several co-defendants

properly venued here.

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       Just because venue is proper here in Washington does not necessarily mean that Rowen is

forever stuck here. He may at some point move for a change of venue in the interest of justice

under 28 U.S.C. § 1404. If this venue is currently more appropriate for all other parties, his

success may be unlikely, yet, in the event other Washington-based Defendants settle, see Joint

Motion to Extend [ECF No. 25] and he remains, he may have an increased chance of a transfer.

That, of course, is not for the Court to opine on now.

       C. Sufficiency of Complaint

       Last, Defendant spends much of his Reply strenuously denying he committed any

wrongdoing and naming witnesses he says would support him, see id. at 1-3, 8, but he is

neglecting the central standard of a motion under Rule 12(b)(6) – namely, the Court must

presume Plaintiff’s allegations true at this juncture. See Section II, supra (setting forth the law

and citing cases). As previously explained, the Complaint alleges that Defendant, by

communication in interstate commerce, solicited investors and sold over 4.5 million shares of e-

Smart, even though no registration statement was in effect for the securities and he was not

registered with the Commission as a broker-dealer or associated with a registered broker-dealer.

Id., ¶¶ 78-79, 91-92, 114. As such conduct is prohibited by 15 U.S.C. § 77e(a) and § 78o(a)(1),

the SEC has sufficiently made out a claim on which relief may be granted.

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IV.   Conclusion

      Because none of Defendant Rowen’s arguments passes muster, the Court ORDERS that:

      1. Defendant’s Motion is DENIED; and

      2. He shall file an Answer on or before Dec. 30, 2011, or risk the entry of default.

                                                   /s/ James E. Boasberg
                                                   JAMES E. BOASBERG
                                                   United States District Judge
Date: December 12, 2011

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