Opinion
Case No. 2:03CV914 DAK
December 8, 2003
MEMORANDUM DECISION AND ORDER
This matter is before the court on (1) Defendants David M. Wolfson, NuWay Holding, Inc., and Momentous Group LLC's Motion to Dismiss; (2) Defendants Carlucci and GG Capital's Motion to Dismiss; (3) Defendant NCI Holdings, Inc.'s Motion to Dismiss; and (4) Defendants F10 Oil Gas Properties, Inc., Jon H. Marple, and Mary E. Blake's Motion to Dismiss. A hearing on the motions was held on November 24, 2003. At the hearing, David M. Wolfson ("Wolfson"), NuWay Holding, Inc. ("NuWay"), and Momentous Group LLC ("Momentous") (collectively referred to as the "Wolfson Defendants") were represented by Mark W. Pugsley. Defendants Gino Carlucci ("Carlucci") and GG Capital, LLC ("GG") were represented by Jeffrey W. Shields. Defendant NCI Holdings, Inc. ("NC1H") was represented by Michael Golightly. Defendants F10 Oil Gas Properties, Inc. ("F10"), Jon H. Marple, and Mary E. Blake ("Blake") (collectively referred to as the "F10 Defendants") were represented by Richard Weed, who appeared via telephone and submitted his clients' motion on the briefs. Plaintiff Securities and Exchange Commission (the "Commission") was represented by Karen L. Martinez. Before the hearing, the court considered carefully the memoranda and other materials submitted by the parties. Since taking the matter under advisement, the court has further considered the law and facts relating to all the motions to dismiss. Now being fully advised, the court renders the following Memorandum Decision and Order.
I. FACTS ALLEGED BY THE COMMISSION
The following allegations have been taken, substantially verbatim, from the Commission's Complaint, and, for purposes of these motions to dismiss, are accepted as true.
A. OVERVIEW
The Commission has alleged that Defendants collectively engaged in a massive scheme to defraud foreign investors of more than $16 million by deceiving investors into believing that they were investing in small United States companies. According to the Complaint, Defendants sold shares in five microcap companies to investors located primarily in the United Kingdom. The Commission contends that Defendants lied to the investors about the companies they promoted and kept the vast majority of investor funds for themselves, allowing only a minuscule amount of the funds to go to the companies they promoted. The Commission also alleges that some principals of the small companies misled investors and manipulated the price of their companies to make it appear that the stock price of the company was increasing. In reality, the Commission asserts, the increases in share price were attributable to purchases and sales by company insiders or other Defendants.
B. DEFENDANTS
Wolfson, of Salt Lake City, is President of NuWay and controls Momentous and Leeward Consulting Group, LLC ("Leeward"). NuWay is a Utah corporation based in Salt Lake City. Momentous is a Utah limited liability company based in Salt Lake City, Utah. Wolfson is its sole member Leeward is also a Utah limited liability company based in Salt Lake City, Utah.
Carlucci, of Salt Lake City, Utah and Arizona, controls G G and is the former President of NCIH. Carlucci served as the escrow agent for several issuers who offered their stock through Sukumo Limited. G G Capital is a Utah and Arizona limited liability company that operates from Salt Lake City, Utah, and Mesa, Arizona.
Sukumo Limited ("Sukumo"), a.k.a. The Sukumo Group, the Fujiwara Group, First Chartered Capital Corporation, First Colonial Trust, First China Capital, and International Investment Holding, is a British Virgin Islands corporation that appears to be operating out of Thailand and Laos, People's Democratic Republic ("Laos"). Sukumo marketed the stock of Stem Genetics, Inc. ("Stem Genetics"), F10, Diversified Financial Resources Corporation ("Diversified"), Valese Holdings, Inc. ("Valese"), and NCIH to overseas investors in the United Kingdom, Australia, and New Zealand.
Michael Sydney Newman (a.k.a. Marcus Wiseman), apparently a citizen of the United Kingdom living in Thailand or Laos, is the President of Sukumo and its numerous related entities.
Stem Genetics is a Nevada Corporation headquartered in Salt Lake City. Stem Genetics offered its stock to foreign investors through Sukumo. Howard H. Robertson, M.D. ("Robertson"), Salt Lake City, Utah, is the new President of Stem Genetics.
F10 Oil is a Nevada corporation with offices in Willis, Texas, and Newport Beach, California. F10 offered its stock to foreign investors through Sukumo. Jon H, Marple, of Willis, Texas, and Newport Beach, California, was President of F10 until July 23, 2003, when he resigned and was replaced by Charles Blake, his brother-in-law. Jon H. Marple is now a consultant to F10. Mary E. Blake, also of Willis, Texas, and Newport Beach, California, is Jon H. Marple's wife and Chief Financial Officer of F10. Jon R. Marple, of Colorado Springs, Colorado, is the President of Grateful internet Associates, LLC, a Colorado limited liability company, and the son of Jon H. Marple,
Diversified is a Delaware Corporation based in San Diego, California, and Salt Lake City, Utah. Diversified offered its stock to foreign investors through Sukumo. John Chapman ("Chapman"), of San Diego, California, and Salt Lake City, Utah, is the President of Diversified.
Valese is a New Jersey corporation based in Addison, Texas, Valese offered stock to foreign investors through Sukumo. Jeremy D. Kraus ("Kraus"), of Addison, Texas, is Chairman and CEO of Valese. Samuel Cohen ("Cohen"), of New York, New York, is President of Valese.
NCIH is a Nevada corporation headquartered in Salt Lake City, Utah. Until early September 2003, Carlucci was President of NCIH. While Carlucci was President of NCIH, NCIH offered stock to overseas investors through Sukumo.
C. THE COMMISSION'S ALLEGATIONS
Since in or about October 2002, Wolfson and Sukumo (a boiler room apparently operating from Thailand and Laos), have conducted an unlawful scheme to mislead and defraud more than one thousand overseas investors, located primarily in the United Kingdom, through the sale of stock in Stem Genetics, F10, Diversified, Valese, and NCIH. Starting in at least February 2003, Carlucci joined Wolfson's and Sukumo's unlawful scheme to mislead and defraud overseas investors through the sale of stock in Stem Genetics, F10, Diversified, Valese, and NCIH. More than $16.3 million has been raised through these overseas offerings from January 1, 2003, through September 30, 2003.
A "boiler room" is a business operation in which sales people, working off lists, make cold calls over the telephone to potential purchasers of securities and, using prepared scripts and high pressures sales tactics, sell securities to investors at inflated prices and/or for high commissions that are not disclosed as such to potential investors.
After locating companies that wished to raise money through an overseas offering (such as F10, Diversified, and Valese), or forming their own companies (Stem Genetics and NCIH), Wolfson, Carlucci, and entities controlled by them have arranged Offshore Stock Purchase Agreements ("Offshore Agreements") between the companies and Sukumo, whereby Sukumo ostensibly has agreed to purchase up to 10 million shares of each issuer's stock, usually for 30% of the bid price.
Despite the language in the Offshore Agreements, Sukumo never purchased the stock from the issuers and never assumed the risk that it would not be able to resell the stock to overseas investors. Instead, Sukumo acted as a sales agent for the issuers. Sukumo's brokers cold called potential investors and provided follow-up information to the potential investors through e-mail or facsimile transmissions, including wire transfer information, so that investors could wire their money to escrow accounts in the United States, For performing these services, Sukumo received 70% of the investor funds.
Once an investor verbally agreed to purchase shares through Sukumo, Sukumo sent a Trade Confirmation to the investor by e-mail or by facsimile. The Trade Confirmation lists the name of the company, the number of shares that the investor has agreed to buy, the price per share, the sub-total for the shares, the commission, and the total price for the transaction. The Trade Confirmations generally lists a 2% commission for Sukumo, although some brokers gave investors discounted commissions of 1% or no commission at all.
Investors do not wire their funds to Sukumo, but, rather, to escrow accounts in Salt Lake City, Utah; Mesa, Arizona; or Phoenix, Arizona. The escrow accounts are opened by Carlucci or by Wolfson's employees. Carlucci and Wolfson's employees then serve as the escrow agents for the accounts.
Sukumo sends a Stock Purchase-Floor Transaction Confirmation Receipt ("Confirmation Receipt") to the investors by e-mail or facsimile. The Confirmation Receipt also falsely states that Sukumo is receiving a 2% commission. Wolfson and Carlucci saw multiple copies of investor Trade Confirmations and/or Confirmation Receipts. Sukumo representatives have telephoned Wolfson, Carlucci, and the escrow agents several times a week to discuss the flow of money into the escrow accounts.
The escrow agents take the investors' contact information from the Confirmation Receipt and instruct the issuers' transfer agents to issue stock certificates to the investors from the 10 million shares issued to Sukumo. Once the transfer agents issue stock certificates to the investors and issue new certificates to Sukumo for the balance, the escrow agents mail the stock certificates bearing the Regulation S restriction legend to the overseas investors.
The escrow agents have distributed the invested funds among Sukumo, the issuer, and entities controlled by Wolfson, generally keeping a small portion of the funds for themselves as escrow fees. After the escrow fees have been deducted, Sukumo received 70% of the invested funds, and the remaining 30% has been divided between the issuer and Wolfson's entities based on a Finder's Agreement. Sukumo's 70% share of the proceeds are wired to off-shore bank accounts in Laos.
Sukumo intentionally misleads investors about:
(i) Sukumo's Sales Commission. The statements sent to investors reflect that the commission is only 2%. Sukumo does not disclose to investors that it receives a 70% commission.
(ii) Restricted Shares. Sukumo also tells investors that the shares they are purchasing are free-trading shares and failed to disclose to investors that their shares are restricted shares.
(iii) Business Developments. Sukumo regularly misrepresents facts about the operations and prospects of the companies it is marketing.
Sukumo has been selling shares to investors at or slightly below the market price for the security as quoted on the OTC Bulletin Board ("OTCBB"). Wolfson and certain individuals affiliated with the issuers, however, have been manipulating the market price for F10, Diversified, and Valese stock through open market purchases of the stock, Sukumo encourages potential investors to check the quoted price for the issuers' stock. The sole exception to this practice has been Stem Genetics, which has never traded publicly.
The OTCBB is a regulated quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter ("OTC") equity securities. An OTC equity security generally is any equity that is not listed or traded on Nasdaq(r) or a national securities exchange. OTCBB securities include national, regional, and foreign equity issues, warrants, units, American Depositary Receipts, and Direct Participation Programs.
1. The Scheme to Defraud
a. Wolfson's, Sukumo's, and Carlucci's Actions to Defraud Investors
Wolfson arranged for a number of microcap companies, among them F10, Diversified, Valese, and NCIH, to use Sukumo to market shares of those companies through Regulation S distributions to foreign investors. The issuers located by Wolfson have few or no operations, but were interested in selling securities to raise capital.
As President of NuWay, Wolfson arranged for these issuers to offer large blocks of stock to Sukumo, which then sells the securities to foreign investors for a 70% commission from the proceeds. Wolfson or entities controlled by him take between 15% to 20% of the proceeds, and the issuers receive the remaining 15% or less. Acting singly or in concert with others, NuWay employees drafted the Offshore Agreements between the issuers and Sukumo, and the Finder's Agreements between the issuers and Wolfson and his entities. Wolfson retains NuWay employees and others to serve as escrow agents. The escrow agents manage the accounts into which the offering proceeds are wired, distribute the offering proceeds, cause Confirmation Receipts to be sent to the investors, and deliver stock certificates to investors.
Sukumo solicits investors located primarily in the United Kingdom, Australia, and New Zealand via telephone to purchase securities in a number of companies. Sukumo provides more detailed information regarding the issuers by e-mail or facsimile to investors who express an interest, and then follows up with high-pressure sales techniques. Sukumo primarily has offered investors securities that are quoted on the OTCBB, although it has also pitched shares of Stem Genetics, which was characterized as "pre-IPO" stock.
Newman signs the Offshore Agreements with the issuers on behalf of Sukumo and its aliases, including First Chartered Capital Corporation ("First Chartered"), First Colonial Trust ("First Colonial"), First China Capital ("First China"), and International Investment Holding. Newman signed the Offshore Agreement with F10 as M. Wiseman.
By the end of March 2003, Carlucci was working as the escrow agent for Diversified and Stem Genetics and intending to work as the escrow agent for Valese. On or about March 14, 2003, Carlucci opened an account at a Bank One branch in Mesa, Arizona, under GG's name, for use as the Stem Genetics Escrow Account. On or about March 17, 2003, Carlucci incorporated Valese Escrow, LLC, in Arizona. On or about March 19, 2003, Carlucci opened an account under Valese Escrow, LLC, at AmTrust Bank. On or about March 21, 2003, Carlucci opened an account for Diversified Financial Resources, LLC ("Diversified Escrow") at Washington Mutual in Phoenix, Arizona. On or about April 3, 2003, Carlucci opened another account for Diversified Escrow at Bank One in Mesa, Arizona. Investors directed funds to both of these accounts, and Carlucci made disbursements from both accounts. By or in about April 2003, Carfucci was working in Salt Lake City, Utah, at the extra desk in Wolfson's NuWay office. Wolfson and Carlucci collaborated on a number of projects, including projects related to Sukumo.
Although on paper Carlucci was just the escrow agent for Diversified and Stem Genetics, in or about mid-May 2003, Carlucci traveled to the Cayman Islands at the request of Newman to set up accounts for Newman. The tickets to the Cayman islands were paid for out of investor funds wired to the Diversified Escrow account. On or about May 22, 2003, Carlucci opened two more accounts at Bank One in Mesa, Arizona. The first account was a corporate account for NCIH, The second was an escrow account for NCIH that had Carlucci and his friend, Jeff Cancilla ("Cancilla"), listed as signatories.
Cancilla served as the escrow agent for NCIH, although the bank statements for the escrow account went to Carlucci's post-office box in Arizona. In addition to his role as the escrow agent for NCIH, Cancilla also worked as the escrow agent for F10. At some point, Cancilla moved to Salt Lake City, Utah, and works as a NuWay employee.
In or about late May 2003, Carlucci traveled with Wolfson to Thailand and Laos, ostensibly to meet Newman for the first time. Upon his return from his meeting with Newman, Carlucci, as President of NCIH, executed an Offshore Agreement with Sukumo. In or about August 2003, Carlucci and Wolfson traveled back to Thailand and Laos, ostensibly at their own initiative, to meet again with Newman and Sukumo. After their return, the escrow agents for the issuers were directed to wire Sukumo's funds to a new bank account in the name of International Investment Holding at the Vientiane branch of the Laos-Viet Bank.
b. Stem Genetics
In or about April 2002, Allen Wolfson, David Wolfson's father, created a Nevada shell corporation named Stem Genetics. Contrary to the representations made on its website and in its filings with the Commission, Stem Genetics has never had researchers, research space, a research plan, nor were its officers aware of any research conducted by or on behalf of the company.
Stem Genetics executed three Offshore Agreements with Sukumo-one with First Chartered in April 2002, one with Sukumo in May or June 2002, and one in July 2003. Stem Genetics did not disclose these Offshore Agreements or its plans to sell Regulation S stock in its Form SB-2 filings. Rather, when describing its plan of distribution in its July 17, 2002, filing and its August 2, 2002, amended filing, Stem Genetics stated that it planned to sell a maximum of 1,500,000 shares of Stem Genetics through Robert Youngblood, Stem Genetics' nominal President, on a "self-underwritten" basis, without any selling agents.
Stem Genetics did not file a Form 8-K to announce its Offshore Agreement with Sukumo to sell stock. Sukumo marketed the shares of Stem Genetics to investors in the United Kingdom. Sukumo misrepresented the following facts about Stem Genetics:
(i) The amount of commissions it received. Sukumo representatives told investors that Sukumo would receive a 1% or 2% commission. Instead, Sukumo received 70% of the share price.
(ii) The initial "float" price. Investors were told that the shares, when listed, would sell for $7.00 or more per share. Investors were told they could purchase shares in a "pre-IPO" deal for $5.75. There was never to be an initial public offering ("IPO") of Stem Genetic shares. Instead, Stem Genetics was effecting a Regulation S offering to foreign investors through Sukumo,
(iii) The business operations of Stem Genetics. Sukumo representatives directed investors to the Stem Genetics website and to false filings with the Commission and told investors that Stem Genetics had received a substantial research grant from the United States government, that it had substantial research and scientific resources, and that it was actually engaged in stem cell research. These statements were false. Stem Genetics was nothing more than a shell company without resources.
As of June 30, 2003, Stem Genetics had raised more than $5 million through its offering. Of that amount, Sukumo has received more than $4 million. Stem Genetics has received approximately $761,000. David Wolfson has received approximately $78,000 personally or through entities controlled by him. Although there have been nominal presidents at the helm of Stem Genetics since its inception, the company has at all times been controlled and operated by Allen Wolfson or David Wolfson. Starting in at least December 2002, David Wolfson worked side by side with his father, Allen Wolfson, who was about to face trial on criminal securities fraud charges in New York and who was transferring a number of his business deals to David Wolfson to run while Allen Wolfson served possible prison time.
After Allen Wolfson left Salt Lake City, David Wolfson re-named his father's company, Feng Shui Consulting, Inc. ("Feng Shui") as NuWay, and relocated the offices. Stem Genetics was one of the companies formerly associated with Feng Shui that David Wolfson transferred to NuWay.
Wolfson knew that Stem Genetics had no operations, no researchers, no facilities, and had taken no steps to develop operations, researchers, or facilities. Wolfson also knew that since in or about October 2002, Sukumo had been selling shares in Stem Genetics to overseas investors pursuant to the Offshore Agreement negotiated by his father. Indeed, through entities controlled by him, Wolfson was receiving $0.50 for every share of Stem Genetics stock sold by Sukumo. Wolfson's entities received the disbursement from the escrow accounts in Salt Lake City and Mesa, Arizona, to which investors wired their money.
In or about May or June 2002, Robert Youngblood agreed to serve as the President of Stem Genetics as a favor to his long-time friend, Allen Wolfson. Youngblood was the nominal President of Stem Genetics but did not do anything as the President of Stem Genetics and his name was not on the corporate bank account. On or about March 3, 2003, Youngblood resigned from his position as President of Stem Genetics.
Upon Youngblood's resignation in or about early March 2003, Wolfson asked Laura Henderson ("Henderson"), NuWay's paralegal, to serve as Stem Genetics' President. Henderson drafted the documents that Wolfson requested and signed documents that he provided to her.
Wolfson opened two new Stem Genetics accounts in April 2003 at Community First Bank in Salt Lake City, Utah. Wolfson and a NuWay employee that he appointed as a director of Stem Genetics had signature and withdrawal authority over both Stem Genetics accounts. Henderson did not.
In early June 2003, Henderson resigned her paralegal position at NuWay and her position as President of Stem Genetics. Wolfson did not replace her until July 2003, when he interviewed and hired Robertson as the new President of Stem Genetics. Robertson does not have any experience with designing, overseeing, or conducting medical research. In or about July 2003, Wolfson directed Robertson to sign a Consulting Agreement between Stem Genetics and NuWay that was retroactive to April 2003, and that retroactively justified as compensation certain funds that Wolfson had taken from Stem Genetics' corporate account. In or about July 2003, Wolfson had Robertson execute a new Offshore Agreement with Sukumo that made up to 10 million additional shares available for Sukumo's purchase.
Although he did not draft the text for the new Stem Genetics website, Robertson reviewed the website text and made small changes to it. Robertson knew that the website stated that Stem Genetics was conducting research, and that the website stated that there were researchers at Stem Genetics who had made discoveries with adult stem cells. Robertson knew that potential and actual investors were visiting the website and relying upon the information contained on the website because he has spoken with a number of investors who reached him with the contact information provided on the website. When he spoke by telephone to the investors who called him, Robertson told the investors that Stem Genetics was a company with ongoing operations.
Robertson also posted a message to the UK investors on an investors' message board. Robertson's posted message to investors refers them to Stem Genetics' website, states that the website is accurate, and states that Stem Genetics' registration statement was withdrawn because it was misleading. Robertson received at least $13,000 to move from Pine, Arizona, to Salt Lake City, Utah, so that he could devote himself to Stem Genetics full-time. He appointed his wife, Jami Robertson, as Vice-President of Stem Genetics and charged her with the details of running the business, despite her lack of any scientific or research experience and her failure to graduate from high school. She receives at least $2,000 a month from the company.
From in or about April 2002, Stem Genetics has had active websites. The first website had a link to Stem Genetics' filings with the Commission. Stem Genetics' filings were registration statements on Form SB-2 that misrepresented the company's research and the structure of Stem Genetics' relationship with Sukumo. The first website was active until on or after June 13, 2003, when Wolfson replaced it with a new website, designed by a NuWay employee.
Both websites affirmatively misrepresent the management of Stem Genetics by listing the names and curricula vitae of various Scientific Advisory Board members, as if the company had a functioning advisory management team. The first website affirmatively misrepresented Youngblood as the President of Stem Genetics after he had resigned. Both websites affirmatively misrepresent Stem Genetics as a company with on-going research, researchers, and discoveries.
On July 18, 2002, Stem Genetics filed a registration statement on Form SB-2 with the Commission; an amendment to the registration statement was filed on August 7, 2002. On the second and third pages of both of its filed registration statements, Stem Genetics falsely stated that it was currently conducting research focused on new storage techniques, research techniques, therapies, and products based on the company's genetic discoveries with adipose stem cells. Stem Genetics also falsely stated that the potential for stem cells in tissue engineering and restorative treatment such as reconstructive and cosmetic surgery was of particular focus to its researchers, and that it provided cutting edge genetic research.
The registration statement was withdrawn on April 15, 2003, without having become effective.
Stem Genetics did not conduct research, had not made genetic discoveries with adipose stem cells, did not have any researchers, and its officers were never aware of any research conducted by or on behalf of the company. In its filings, Stem Genetics failed to disclose its Offshore Agreements with First Chartered and Sukumo and its Finder's Agreement with Feng Shui and/or entities controlled by Wolfson. Stem Genetics did not tile a Form 8-K to disclose the Offshore Agreements or the Finder's Agreement.
c. F10
On or about December 18, 2002, F10 entered into an Offshore Agreement to sell Sukumo up to 10 million shares of F10 stock at 30% of the bid price for F10 stock. Jon H. Marple signed the agreement for F10 and M. Wiseman signed as the President and CEO of Sukumo.
Jon R. Marple introduced his father, Jon H. Marple, and F10 to Wolfson and NuWay, who, in turn, made the connection with Sukumo. In return for those introductions, F10 paid Jon R. Marple through his company, Grateful Internet, 10% of the funds that it received from the Sukumo offering. The money has been wired to Grateful Internet directly from an escrow account established on its behalf. These payments were not disclosed until the filing of F10's Form 10KSB, at least seven months after Sukumo began selling F10 shares.
In or about December 2002, F10, Feng Shui, and Leeward entered into a Finder's Agreement whereby a total of 17.5% of the bid price would be paid to Feng Shui and Leeward. This Finder's Agreement was amended in or about March 2003 to give 17.5% of the bid price to NuWay. The amended agreement was filed as an exhibit to F10's July 11, 2003, 10-KSB filing,
The agreement between F10 and NuWay states that NuWay will provide certain merger and acquisition services to F10, Nowhere in the agreement, or in the F10 July 11, 2003, Form 10-KSB itself, is there any disclosure that Wolfson and NuWay would engage in a program of purchasing F10 shares in conjunction with sales of stock by Grateful Internet to support the price of F10 stock.
The Offshore Agreement between F10 and Sukumo was also attached as exhibits to F10's July 11, 2003, Form 10-KSB filing. The Offshore Agreement is misleading in that it states that Sukumo is buying the shares for its own account or for accounts over which it has discretionary authority.
In or about July 2003, F10's new escrow agent, Cancilla, opened a new F10 escrow account at Wells Fargo's Gateway branch. In late July 2003, investors started wiring their funds to the new account. Distributions to F10, NuWay, Grateful Internet Associates, and Sukumo were made from the account. On or about August 29, 2003, Sukumo received its share into a new account in the name of International Investment Holding, maintained at the Vientiane branch of the Lao-Viet Bank.
Also on or about August 29, 2003, Cancilla directed a $43,000 payment to G G from F10's escrow account. On or about September 4, 2003, Cancilla directed a $12,000 payment to G G from F10's escrow account. On or about September 12, 2003, Cancilla directed a $302,298.44 payment to G G from F10's escrow account. F10 did not disclose these disbursements.
From the time Sukumo started offering F10's stock to overseas investors through September 30, 2003, more than $5.8 million flowed through the F10 escrow accounts in Salt Lake City, Utah. Sukumo received approximately $2.2 million from the sale of F10 stock. F10 only received 12.5% of the sales price of the stock sold on its behalf by Sukumo. As of September 30, 2003, F10 had received approximately $695,000 from the offering of its stock. In contrast, NuWay has received approximately $990,000 from the offering.
Jon H. Marple and Jon R. Marple knew that Sukumo never purchased the stock from F10 and that Sukumo acted as an agent of F10 to sell F10 stock to foreign investors for a 70% commission. Jon H, Marple and Jon R. Marple also knew that the Wolfson-related entities received a total of 17.5% of the proceeds. Jon H. Marple entered into these arrangements with Sukumo and Wolfson's entities because his company needed the money and F10 would have been forced into bankruptcy without an influx of cash. Jon H. Marple and Blake used F10's corporate account, however, for their personal benefit. At the time that F10 supposedly was in dire need of money, Jon H. Marple and Blake each were receiving approximately $10,000 a month in compensation from F10 pursuant to employment contracts signed on February 1, 2002. In addition, Jon H. Marple and Blake used funds in F10's corporate account to pay various personal credit cards, and F10 paid Jon H. Marple's medical expenses that, over a period of several months, totaled at least $18,000.
On February 13, 2003, F10 filed a Form 10-QSB with the Commission for the quarter ended December 31, 2002. The disclosures in this filing were minimal. The only disclosure made in that filing regarding F10's agreement with Sukumo was that F10 had issued 10 million shares of stock to Sukumo. The filing on Form 10-QSB stated that F10 would receive approximately 12.5% of its bid price per share, that the agreement had been signed on December 10, 2002, and that no shares had been sold as of December 31, 2002. The filing on Form 10-QSB stated that F10 started receiving funds in January 2003.
F10's filing on Form 10-QSB with the Commission does not disclose that Sukumo keeps 70% of the proceeds as commission. F10 does not disclose in its February 14, 2001, filing on Form 10-QSB that it had entered into an agreement with Jon R. Marple and Grateful Internet to pay them 10% of the proceeds F10 received from Sukumo in return for Jon R. Marple's introduction of his father, Jon H. Marple, to Wolfson. There was no disclosure on Form 10-QSB that Wolfson's entities were keeping a total of 17.5% of the offering proceeds. Jon H. Marple, as CEO, and Mary E. Blake, as CFO, certified the Form 10-QSB filing.
In its Form 10-KSB for the year ended March 31, 2003 (which was filed on July 11, 2003, several weeks after F10 had received investigative subpoenas from the Commission), the company dramatically changed its disclosure. This filing on Form 10-KSB finally discloses the relationship with Grateful Internet and the payments to the Wolfson entities.
The Form 1 0-KSB states that Sukumo is purchasing stock from F10, when it is not, and fails to disclose Sukumo was receiving 70% of the sales price of the stock as commission. The Form 1 0-KSB was signed and certified by Jon H. Marple, as CEO, and Blake, as CFO. On September 5, 2003, F10 filed a Form 8-K with the Commission to announce that it had provided notice to Sukumo of its intent to terminate the agreement. F10 established 30 days to complete any on-going transactions.
From January 2003, when Sukumo started selling F10 stock, through September 2003, a total of 23,400 shares of F10 stock were traded at prices ranging from $1.30 to $2.25 a share. Most of the retail trading involved sales of stock by Jon R. Marple through Grateful Internet and matching purchases of the shares by Wolfson through Momentous.
From March 1, 2003, through July 9, 2003, only 1,892 shares were purchased in retail transactions; all of those purchases were by Wolfson trading for the account of Momentous. During that same period, Jon R. Marple, trading through Grateful Internet, sold 1,750 shares, or virtually all the retail selling. Most of Jon R. Marple's sales were on the same day as Wolfson's purchases.
Wolfson and Marple placed matched orders to manipulate the price of F10 stock at a time when Sukumo was aggressively marketing F10 shares to overseas investors at prices tied to the quoted prices of F10 stock on the OTCBB.
d. Diversified
Diversified's relationship with Sukumo is reflected in two series of agreements. The first series of agreements is dated on or about March 21, 2003. The Offshore Agreement with Sukumo stated that Sukumo would purchase up to 10 million shares of stock from Diversified for 30% of the bid price. Chapman, Carlucci, and Sukumo signed an Escrow Agreement dated March 27, 2003, pursuant to which Carlucci agreed to serve as the Escrow Agent for sales of stock to Sukumo. Momentous and NuWay were to receive a total of 13% of the proceeds, NuWay ultimately received approximately 15% of the proceeds.
On or about February 9, 2003, Carlucci, on behalf of Diversified Escrow, an Arizona limited liability company that he incorporated, signed a Confidentiality Agreement with Chapman to cover discussions with Chapman about serving as the escrow agent for Diversified's anticipated Offshore Agreement with Sukumo. By the end of March 2003, investors were wiring funds into the Diversified Escrow account that Carlucci opened at Washington Mutual in Phoenix, Arizona. On or about April 14, 2003, Carlucci made the first wire transfer from the Diversified Escrow account at Washington Mutual to Newman's account at Thai Military Bank.
On or about April 29, 2003, the first investor wired funds into the Diversified Escrow account that Carlucci had opened at Bank One in Mesa, Arizona. On or about May 22, 2003, Carlucci made the first wire transfer from the Bank One account to Newman's account at Thai Military Bank, in addition to making disbursements to Diversified's corporate account and to NuWay, Carlucci made several transfers to Wolfson's personal accounts.
Despite the fact that Sukumo began selling Diversified stock at the end of March 2003, Diversified failed to disclose in a Form 10-KSB filed on April 18, 2003, and a Form 10-QSB filed on May 15, 2003, the existence of the Sukumo Offshore Agreement and the Finder's Agreement, and the ongoing sales of its stock. Chapman signed and certified both filings.
On May 23, 2003, two days after Diversified re-executed the agreements with Sukumo, Diversified filed a Form 8-K with the Commission to disclose the terms of the new Offshore Agreement with Sukumo. The filing did not disclose that Sukumo was not actually purchasing the stock. The Form 8-K failed to disclose that Sukumo had already been selling Diversified stock to overseas investors for nearly two months. The Form 8-K did not disclose that Wolfson was receiving funds from the escrow account, or that NuWay would be receiving funds from the escrow account.
Diversified's disclosures misrepresent the company's actual arrangement with Sukumo. Contrary to the representations in Diversified's filings, Sukumo did not purchase stock from Diversified and then resell it to investors. Rather, Sukumo solicited investments and received a 70% commission that was only paid to Sukumo after Carlucci received funds from investors and Trade Confirmations and/or Confirmation Receipts from Sukumo.
On June 19, 2003, Diversified amended its escrow agreement with Diversified Escrow to increase Carlucci's fee from .05% of the funds paid into the escrow account by investors to 6% of the funds for serving as Di versified's escrow agent. This increase in the escrow fee was negotiated to enable Carlucci to pay his legal fees connected to the Commission's investigation. Although Diversified filed three Forms 8-K and one Form 10-KSB with the Commission after the change in the escrow agreement, the increased fee to Carlucci was never disclosed.
From March 20, 2003, when Diversified signed its Offshore Agreement with Sukumo, a total of 30,200 shares of Diversified stock were traded at prices ranging from $1.01 to $2.65 a share. The total volume of Diversified's stock sales from February 2003 through July 31, 2003, was 14,000 shares. All the retail trading in the stock involved purchases by Chapman through an account he controlled at Des Jardins Securities in Montreal. All of these purchases were made from Newbridge Securities in Boca Raton, Florida. Newbridge had an arrangement with Chapman whereby it would purchase any Diversified stock that came on the market and would then sell the stock to Des Jardins. Chapman purchased any stock that came on the market through the trading account that he controlled at Des Jardins.
Chapman, the president of Diversified, manipulated the price of Diversified at a time when Sukumo was aggressively marketing Diversified shares to overseas investors at prices tied to the quoted prices on the OTCBB. Diversified never disclosed that Chapman was manipulating the price of the company's stock.
e. Valese
In January 2003, Wolfson, through Momentous and Leeward, helped Valese orchestrate an offering of up to 10 million shares of its common stock to overseas investors through a Sukumo alias, First Chartered. Newman, acting as the CEO of First Chartered, signed the Offshore Agreement with Valese. Cohen, acting as the President of Valese, executed the agreement on January 10, 2003. Under the agreement with First Chartered, Valese was to receive 30% of the bid price of the stock on the day of purchase.
There is some discrepancy as to which entity was actually a party to the agreement because the Offshore Agreement is between Valese and First Chartered, but in its filings with the Commission, Valese discloses an agreement as with First China Capital, Inc., ("First China"), also allegedly a Chinese corporation based in Beijing.
On January 10, 2003, Valese entered into a Finder's Agreement with Momentous and Leeward whereby Valese agreed to give Momentous and Leeward each 33% of the funds that Valese received pursuant to the Offshore Agreement. Therefore, after Sukumo received its 70% share, Valese received less than 10% of the proceeds. Valese has never disclosed the agreement between Valese, Momentous, and Leeward.
As with the Offshore Agreements with Stem Genetics, F10, and Diversified, the transaction is described as if First Chartered is buying Valesc's stock for 30% of the bid price, when, in fact, First Chartered was acting as a sales agent for Valese and being paid a 70% commission once Valesc's escrow agent received funds from foreign investors solicited by First Chartered.
On or about April 15, 2003, Valese filed its Form 10-KSB with the Commission and disclosed that on January 22, 2003, it had entered into an arrangement with First China Capital, Inc. ("First China"), a Chinese corporation based in Beijing, whereby First China was authorized to purchase up to 10 million shares of Valesc's common stock for 30% of the bid price as reflected on the OTCBB on the date of purchase; in fact, the agreement was actually entered into with First Chartered.
The filing does not disclose that First China receives a 70% commission for selling the shares. Nor does the filing make any disclosure regarding the agreements between Valese and Momentous and Valese and Leeward pursuant to which approximately two-thirds of the funds received by Valese under the agreement with First China have been paid to entities controlled by Wolfson. The Form 10-KSB was signed and certified by both Kraus and Cohen.
On September 2, 2003, Valesc filed a Form 10-QSB/A in which it reiterated this brief disclosure about its agreement with First China and updated the revenues received pursuant the agreement. As of June 30, 2003, Valese stated that it had received net proceeds of approximately $105,800. Again, there was no disclosure on Form 10-QSB/A that First China was being paid a 70% commission for acting as a sales agent for Valese and that as of June 30, 2003, more than $1 million had been wired to Valesc's escrow account. Also, Valese again failed to disclose its payments to Momentous and Leeward. Kraus and Cohen certified the filing.
From May 1, 2003, through July 31, 2003, a total of 42,700 shares of Valese common stock were traded on the OTCBB at prices ranging from $.70 to $1.20 a share. At least half of this trading involved wholesale transactions between brokerage firms.
During this time, which coincided with the overseas distribution being effected by First Chartered/First China, Kraus purchased 7,950 shares and Cohen purchased 6,800 shares for a total of 14,750 Valese shares. These purchases typically took place when the price of Valese stock had fallen somewhat, and these trades nearly always resulted in an increase in the price of Valese stock. For example, on July 25, 2003, the price of Valese stock was $.75 a share. After purchases of 200 shares on July 28 and 200 shares on July 30, the price of the stock increased to approximately $1.10 a share for the next five days. A month later, when the price dropped to $.76 a share on September 5, purchases of 300 shares, 1200 shares and 500 shares on the next three trading days brought the price back up to approximately $1.10.
Again, on September 23, when the price of Valese stock fell to $.85 a share, purchases of 100 shares and 600 shares on the next two trading days brought the price of the stock back up to $1.10 a share. Through these purchases, the price of Valese stock was maintained at around $1.10 a share, which was the approximately price at which First Chartered/First China sold the shares to overseas investors.
Since the price paid by overseas investors was tied to the quoted bid price for the stock, Kraus and Cohen's purchasing activity has resulted in more money flowing to Valese from Sukumo's sales. Potential investors have not been told that Valesc's stock price is being manipulated by Kraus and Cohen at the same time Valese is benefitting from the overseas distribution of Valese shares.
f. NCIH
Carlucci acquired NCIH, formerly Vector Holdings Corp., in early 2003. Carlucci was listed as the President, CEO, CFO, and/or Director of NC1H. On June 25, 2003, NCIH filed a Form 8-K with the Commission disclosing its June 24, 2003, Offshore Agreement with Sukumo, NCIH does not disclose that Sukumo acts as a sales agent for NCIH, receives a 70% commission, and never actually purchases the stock. Carlucci signed the Form 8-K as NCIH's CEO, President, and Director.
In its Form 10-QSB for the quarter ended June 30, 2003, filed on August 8, 2003, NCIH made a brief mention of Sukumo's right to purchase up to 10 million shares of the company's stock (without specifying the amount of the offering proceeds that ultimately would be disbursed to NCIH) and referred to the June 25, 2003, Form 8-K filing. Carlucci certified and signed the Form 10-QSB.
By August 8, 2003, however, Carlucci knew that Sukumo was being paid 70% of the funds received from investors because the bank statements for the NCIH escrow account were sent to his post office box in Mesa, Arizona. Those statements listed wire transfers from the escrow account to the Newman account at the Thai Military Bank amounting to 70% of the funds received. Moreover, as the escrow agent for Diversified and Stem Genetics, Carlucci also knew that Sukumo received 70% of the proceeds in both of those deals.
Carlucci knew that the disclosures in NCIH's filings omitted to disclose the actual compensation being paid to Sukumo for marketing NCIH's shares to investors. Carlucci also knew that Sukumo never purchased stock from the issuer for the purpose of reselling the stock. Carlucci also knew that Sukumo acted as a sales agent that marketed the stock to foreign investors and was then paid a 70% commission by NCIH when investors wired funds into the escrow account.
D. THE CLAIMS ASSERTED BY THE COMMISSION
The Commission has asserted the following claims against all Defendants: (1) Employment of a Device, Scheme or Artifice to Defraud, a violation of Section 17(a)(1) of the Securities Act [ 15 U.S.C. § 77q(a)(1)]; (2) Fraud in the Offer and Sales of Securities, a violation of Section 17(a)(2) and 17(a)(3) of the Securities Act [ 15 U.S.C. § 77q(a)]; (3) Fraud in Connection with the Purchase and Sale of Securities, a violation of Section 10(b) of the Exchange Act [15 U.S.C, § 78j(b)] and Rule 10b-5 thereunder [ 17 C.F.R. § 240.10b-5].
In its Fourth Cause of Action, the Commission has asserted a claim for Manipulation, a violation of Section 10(b) of the Exchange Act [ 15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [ 17 C.F.R. § 240.10b-5] against Defendants Wolfson, Momentous, Jon R. Marple, Grateful Internet, Chapman, Kraus, and Cohen. The Commission, in its Fifth Cause of Action, has asserted a claim for False Filings with the Commission, a violation of Section 13(a) of the Exchange Act [ 15 U.S.C § 78m(a)] and Rules I2b-20, 13a-1, and 13a-13 [ 17 C.F.R. § 240.12b-20, 240.13a-1, 240.13a-11, and 13a-13] against Defendants F10, Diversified, Valese, and NCIH. In its Sixth Cause of Action, it has asserted a claim for Aiding and Abetting False Filings with the Commission, a violation of Section 13(a) of the Exchange Act [ 15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-1, 13a-11, and 13a-13 [17C.F.R. § 240.12b-20, 240.13a-1, 240.13a-11, and 13a-13] against Defendants Jon H. Marple, Blake, Chapman, Kraus, Cohen, and Carlucci. Additionally, in its Seventh Cause of Action, the Commission has asserted a claim for Falsely Certifying Filings with the Commission, a violation of Section 13(a) of the Exchange Act [ 15 U.S.C. § 78m(a)] and Rule 13a-14 thereunder [17 C.F.R. § 240.131-14] against Jon H. Marple, Blake, Chapman, Kraus, Cohen, and Carlucci. Finally, in its Eighth Cause of Action, the Commission has asserted a claim for Offer and Sale of Securities by Unregistered Broker or Dealer, a violation of Section 15(a) of the Exchange Act [ 15 U.S.C. § 78o(a)] against Sukurno and Newman.
E. DEFENDANTS' MOTIONS
Through their motions, the Wolfson Defendants, Carlucci, GG, NCIH, and the F10 Defendants assert that this court has no subject matter jurisdiction over the claims against them because of the predominantly foreign nature of the alleged fraud. Defendants argue that the alleged conduct that took place in the United States was, at most, merely preparatory to the fraud and does not satisfy the requirements for this court to exercise jurisdiction over the claims against them. NCIH also moves for dismissal of the claims against it on the additional basis that the allegations against it are not plead with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure ("FRCP").
The F10 Defendants concede that the Commission has alleged facts to support subject matter jurisdiction as to the Fifth, Sixth, and Seventh Causes of Action against them. See F10 Defendants' Memorandum in Support of Motion to Dismiss at 2 n. 1.
II. STANDARD OF REVIEW
When considering the Defendants' motions to dismiss under 12(b)(1) and NCIH's motion under 12(b)(6), the court must accept the factual allegations in the Complaint as true and draw all reasonable inferences from those facts in favor of the Commission. Seamons v. Snow, 84 F.3d 1226, 1231-32 (10th Cir. 1996); Interbrew S.A. v. Edperbrascan Corp., 23 F. Supp.2d 425, 427 (S.D.N.Y. 1998),
III. DISCUSSION REGARDING SUBJECT MATTER JURISDICTION
It is well recognized that the Securities Exchange Act is silent as to its extraterritorial application. Itoba Ltd. v. LEP Group PIC, 54 F.3d 118, 121 (2nd Cir. 1995). Courts that have previously addressed this issue have created two basic tests for subject matter jurisdiction: (1) the "conduct" test, which in essence asks whether the fraudulent conduct that forms the alleged violation occurred in the United States; and (2) the "effects" test, which asks whether conduct outside the United States has had a substantial adverse effect on American investors or security markets. See Robinson v. TCI/US West Comms., Inc., 117 F.3d 900, 905 (5th Cir. 1997); Starlight Int'l, Inc. v. Herlihy, 13 F. Supp.2d 1178 (D. Kan, 1998). Either test may independently establish jurisdiction, or an "admixture" of the two may also establish jurisdiction. See Robinson, 117 F.3d at 905; Itoba Ltd., 54 F.3d at 122 (finding that there is "no requirement that these two tests be applied separately and distinctly from each other" and that "an admixture or combination of the two often gives a better picture of whether there is sufficient United States involvement to justify the exercise of jurisdiction by an American court.").
The circuits are divided as to precisely what conduct is necessary to satisfy the conduct test, although the courts all base their requirements on the idea that "Congress did not want `the United States to be used as a base for manufacturing fraudulent security devices for export, even when these are peddled only to foreigners.'" Robinson, 117 F.3d at 905 (quoting IIT v. Vencap, Ltd., 519 F.2d 1001, 1017 (2nd Cir. 1975)). The more restrictive position, generally that the domestic conduct must have been of "material importance" or "significant" to the fraud and have "directly caused" the alleged loss — is followed in the Second, Fifth, and District of Columbia Circuits. See id. In contrast, the Third, Eighth, and Ninth Circuits generally require some lesser quantum of conduct. See id. "To the extent that these cases represent a common position, it appears to be that the domestic conduct need be only significant to the fraud rather than a direct cause of it." Id. at 906.
See Securities Exchange Comm'n v. Berger, 322 F.3d 187, 192-93 (2nd Cir. 2003); 619 F.2d 909, 918-21 (2nd Cir. 1980); Itoba, 54 F.3d at 122; Psimenos v. E.F. Hutton Co., 722 F.2d 1041, 1045-46 (2nd Cir. 1983); Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 993 (2nd Cir. 1975); Leasco Data Processing Equip. Corp., v. Maxwell, 468 F.2d 1326, 1334-37 (2nd Cir. 1972); Robinson, 117 F.3d at 905; Zoelsch v. Arthur Andersen Co., 824 F.2d 27, 29-30 (D.C. Cir. 1987).
See, e.g., SEC v. Kasser, 548 F.2d 109, 114 (3rd Cir 1977) (holding that the test is whether "at least some activity designed to further a fraudulent scheme occurs within this country"); Continental Grain (Australia) Pty. Ltd. v. Pacific Oilseeds, Inc., 592 F.2d 409, 418 (8th Cir 1979) (finding jurisdiction where defendants used instrumentalities of interstate commerce and their "conduct in the United States was in furtherance of a fraudulent scheme and was significant with respect to its accomplishment"); Grunenthal GmbH v. Hotz, 712 F.2d 421, 424-25 (9th Cir. 1983) (expressly adopting Continental Grain test).
The Second Circuit has stated that "[i]n considering the conduct test, we have held that jurisdiction exists only when substantial acts in furtherance of the fraud were committed within the United States, and that the test is met whenever (1) the defendant's activities in the United States were more than `merely preparatory' to a securities fraud conducted elsewhere and (2) the activities or culpable failures to act within the United States directly caused the claimed losses." Securities and Exchange Comm'n v. Berger, 322 F.3d 187, 193 (2nd Cir. 2003) (quotations and internal citations omitted).
The court recognizes that the Second Circuit has special expertise in matters pertaining to securities and that it has been referred to as "the Mother Court" in area of securities law. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 762 (1975) (Blackmun, J., dissenting); Kasser, 548 F.2d at 115 n. 29.
In arguing that this court does not have subject matter jurisdiction, the Defendants in this case urge the court to follow the Second Circuit's approach, requiring the domestic conduct to have been "of material importance" to and have "directly caused" the alleged fraud.
The Tenth Circuit has not expressly ruled on the issue. The Tenth Circuit, in United International Holdings, Inc. v. Wharf (Holdings) Ltd., 210 F.3d 1207 (10th Cir. 2000), noted that it had subject matter jurisdiction in that case because the antifraud provisions of the Securities Exchange Act "prohibit fraud in the sale of securities when significant conduct occurs in the United States or conduct occurs anywhere and has substantial effects on investors in the United States." Id. at 1223 (citing Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 993 (2nd Cir. 1975). The Tenth Circuit's cursory determination regarding subject matter jurisdiction in United was made in the context of concluding that the defendant had not presented any choice of law issue with respect to the plaintiff's 10b-5 claim, and that it was "sufficient that the antifraud provisions of the Securities Exchange Act reach[ed] [the defendant's] conduct." Id. In articulating the test for subject matter jurisdiction, the United court did not recognize the conflict in the circuits, as it likely would if it were staking out its position on the quantum of conduct required to satisfy the conduct test, Moreover, the proposition for which Bersch is cited is merely a general statement regarding the conduct and effects tests, which can be found in almost any Circuit Court opinion — on either end of the spectrum — addressing this subject matter jurisdiction issue.
Thus, contrary to the argument advanced by some of the Defendants in this case, the Tenth Circuit has not adopted the Bersch conduct test. Indeed, in United Holdings, the Tenth Circuit also stated that "[s]ince conduct material to the completion of the fraud occurred in the United States, jurisdiction is appropriate despite the fact that additional relevant conduct occurred abroad." Id. The Tenth Circuit did not use the "directly caused" language contained in Bersch. To the contrary, based on the language used by the Tenth Circuit, its test, could be characterized as being similar to the less restrictive tests of the Eighth and Ninth Circuits. See Continental Grain (Australia) Ply. Ltd. v. Pacific Oilseeds, Inc., 592 F.2d 409, 418 (8th Cir 1979) (finding jurisdiction where the defendants used instrumentalities of interstate commerce and their "conduct in the United States was in furtherance of a fraudulent scheme and was significant with respect to its accomplishment"); Grunenthal GmbH v. Hotz, 712 F.2d 421, 424-25 (9th Cir. 1983) (adopting Continental Grain).
Pursuant to the Tenth Circuit's articulation of the conduct test, this court finds that the Defendants' motions to dismiss based on lack of subject matter jurisdiction fail. Based on the conduct alleged by the Commission, all Defendants "engaged in conduct material to the completion of the fraud" in the United States. Thus, as in United Holdings, "jurisdiction is appropriate despite the fact that additional relevant conduct occurred abroad." United, 210 F.3d at 1223.
Defendants in this action have taken a piecemeal — or defendant-by-defendant — approach regarding their motions to dismiss, addressing only the specific conduct alleged against each moving Defendant. Because the Commission has not challenged this approach, the court has considered each Defendant's conduct independently in concluding that subject matter jurisdiction exists over the claims asserted against each Defendant. It is unclear, however, whether such a piecemeal approach is correct or whether the court should aggregate Defendants' conduct in considering whether it has subject matter jurisdiction. In Cromer Finance Ltd. v. Berger, 2003 WL 21436164 (June 23, 2003, S.D.N.Y.), for example, the defendant made the argument that its conduct could not be aggregated with the conduct of any other defendant in assessing jurisdiction. The court, however, found that the defendant was "wrong about the standard for subject matter jurisdiction. The issue is whether the court has jurisdiction over the transaction, not whether it separately has jurisdiction over the particular acts committed by each defendant in connection with the transaction." Id. at *4. In the instant case, subject matter jurisdiction would be all the more certain under an aggregated approach.
Even if the Tenth Circuit were to more directly consider the issue and adopt the Second Circuit's conduct test, this court finds that it still has jurisdiction over the claims against all of the Defendants because the court finds that, drawing all inferences in favor of the Commission, (1) the conduct of each Defendant was more than `merely preparatory' to the alleged securities fraud conducted abroad, and (2) the activities or culpable failures to act within the United States directly caused the claimed losses.
Moreover, it is uncertain that even the Second Circuit would require direct causation in circumstances such as those presented in the instant case. First, the SEC need not prove that any investor has sustained a loss as a result of a defendant's fraudulent activities in order to secure injunctive relief. See SEC v. Capital Gains Research Bureau, 375 U.S. 180, 191-92 (1963); SEC v. Kasser, 548 F.2d 109, 114 n. 22 (3rd Cir. 1977). In Securities Exchange Commission v. Berger, 322 F.3d 187 (2nd Cir. 2003), the Second Circuit recognized that the Commission need not prove losses and that, "where the SEC brings suit prophylactically, it will be necessary to modify the conduct test to account for the fact that no harm or loss has occurred." Berger, 322 F.3d at 193 n. 2. The Berger court declined to further address the issue because the SEC was not acting prophylactically in that case. Id. n. 2. In the instant case, the SEC maintains that it need not prove losses, although losses are certainly implied in its Complaint. Thus, there is no guidance as to how the Second Circuit would treat the situation alleged in the instant case,
Further, in Berger, the defendant, relying on Bersch, argued that his actions were insufficient to confer jurisdiction because the activity directly causing harm to investors occurred in Bermuda. Id. at 194. The Second Circuit emphasized that "the holding in Bersch was limited to jurisdiction over class action lawsuits on behalf of unnamed foreigners." Id. at 195 (emphasis added). The court went on to explain that "[w]e expressly noted in Bersch that "Congress did not mean the United States to be used as a base for fraudulent securities schemes even when the victims are foreigners, at least in the context of suits by the SEC or by named foreign plaintiffs." Id. at 195 (emphasis in Berger). The court found that the holding in Bersch was based on the fact that "the United States activities [were] merely preparatory . . . and [were] relatively small in comparison to those abroad." Id. The court found that the fraudulent conduct was carried out by the defendant in New York, even though the statements that ultimately conveyed the fraudulent information to investors were prepared and mailed in Bermuda. Id. at 194.
In this case, as in Berger, Plaintiff is not a proposed class of foreign citizens, but, rather, the Commission. Most of the Defendants are American citizens. The issuers are all United States issuers, and all, with the exception of Stem Genetics, had allegedly filed documents with the Commission, Among other things, Offshore Agreements were allegedly drafted, and at least partially signed, in the United States. Telephone calls and fax transmissions were allegedly made between Utah and Laos and/or Thailand. Money was allegedly wired to bank accounts in Utah and Arizona, and money was allegedly distributed by the escrow agents from these accounts in amounts that differed from the Confirmation Orders that were sent to the investors. Alleged agreements to manipulate stock prices were reached in the United States, and stock prices were allegedly manipulated in the United States. The Stem Genetics website, based in the United States, allegedly contained false information. In addition, even though false statements were allegedly made by individuals abroad, the fraudulent conduct was allegedly masterminded and carried out in the United States. The conduct in the United States was far more than "merely preparatory." Thus, under any conduct test, the court finds that, in the present action against each of the Defendants, subject matter jurisdiction is appropriate in this court. "Congress would have wished the precious resources of the United States courts and law enforcement agencies to be devoted to [this action] rather than [to] leave the problem to foreign countries." Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 985 (2nd Cir. 1975).
Because the court finds that jurisdiction clearly exists pursuant to the conduct test, the court need not consider whether jurisdiction over the instant action might also be based on the effects test. See Psimenos v. E.F. Hutton Co., 722 F.2d 1041, 1045 (2nd Cir. 1983). Additionally, the court declines to dismiss this case on Defendants' Carlucci and GG's request that this court decline to exercise jurisdiction based on their argument that the interests of the victims of the alleged securities fraud would be better served by an action brought in England by the Financial Services Administration Authority.
IV. DISCUSSION REGARDING NCIH'S 9(b) MOTION
NCIH argues that the Complaint fails to comply with FRCP 9(b). It claims that no fraudulent statements, omission or actions are set forth with regard to NCIH that state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. It claims that the Complaint fails to allege any basis upon which NCIH acted either knowingly or recklessly with regard to actions pertaining to the sales of stock that form the basis of the SEC's Complaint.Given the alleged facts detailed above, the court finds that the Commission has met the heightened pleading standard of FRCP 9(b). The Commission has adequately plead scienter, as the scienter of NCIH's officers and directors, specifically Carlucci, can be imputed to NCIH.