Securities and Exchange Commission v. Mapp, III et al

BRIEF

E.D. Tex.December 13, 2017

DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page i THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TEXAS SHERMAN DIVISION SECURITIES & EXCHANGE COMMISSION, Plaintiff, v. WILLIAM E. MAPP, III, Defendant. § § § § § § § § § Case No. 4:16-CV-00246 ______________________________________________________________________________ DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW ______________________________________________________________________________ GREENBERG TRAURIG, LLP Jason S. Lewis Texas Bar No. 24007551 lewisjs@gtlaw.com David W. Klaudt Texas Bar No. 00796073 klaudtd@gtlaw.com Amanda R. McKinzie Texas Bar No. 24088028 mckinziea@gtlaw.com Natalie D. Thompson Texas Bar No. 24088529 thompsonna@gtlaw.com 2200 Ross Avenue, Suite 5200 Dallas, Texas 75201 (214) 665-3600 (Telephone) (214) 665-3601 (Facsimile) ATTORNEYS FOR WILLIAM E. MAPP, III Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 1 of 21 PageID #: 5462 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page i TABLE OF CONTENTS I. Introduction ......................................................................................................................... 1 II. Legal Standards ................................................................................................................... 1 III. Argument ............................................................................................................................ 2 A. Mapp is Entitled to Judgment as a Matter of Law on the Commission’s Scheme Liability Claims ......................................................................................... 2 B. Mapp is Entitled to Judgment as a Matter of Law under Rule 10b-5(b) ................ 3 1) There is Legally Insufficient Evidence of Any Misrepresentation or Omission ..................................................................................................... 3 2) No Reasonable Jury Could Find that Mapp Acted with Scienter ............... 5 C. Mapp is Entitled to Judgment as a Matter of Law under Section 17(a) ................. 7 D. Mapp is Entitled to Judgment as a Matter of Law under Section 5(a) and (c) ............................................................................................................................ 8 1) Mapp Cannot be Personally Liable Because He Was Neither a “Necessary Participant” Nor a “Substantial Factor” in Servergy’s Offers and Sales of Securities ..................................................................... 9 2) Servergy’s Offerings Should Not Be Integrated ....................................... 10 3) Regulation D, Rule 506, is Established as a Matter of Law ..................... 11 4) The Rule 508 Safe Harbor is Established as a Matter of Law .................. 14 IV. Conclusion and Prayer ...................................................................................................... 15 Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 2 of 21 PageID #: 5463 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page ii TABLE OF AUTHORITIES Page(s) Cases Boeing Co. v. Shipman, 411 F.2d 365 (5th Cir. 1969) (en banc), overruled on other grounds by Gautreaux v. Scurlock Marine, Inc., 107 F.3d 331 (5th Cir. 1997) .......................................1, 2 Dennis v. Gen. Imaging, Inc., 918 F.2d 496 (5th Cir. 1990) .....................................................................................................8 Etshokin v. Texasgulf, Inc., 612 F. Supp. 1220 (N.D. Ill. 1985) ..........................................................................................13 Faye L. Roth Revocable Tr. v. UBS Painewebber, Inc., 323 F. Supp. 2d 1279 (S.D. Fla. 2004) ....................................................................................12 Goodwin Properties, LLC v. Acadia Grp., Inc., No. 01-49-P-C, 2001 WL 800064 (D. Me. July 17, 2001) ......................................................12 Hunter v. Knoll Rig & Equip. Mfg. Co., 70 F.3d 803 (5th Cir. 1995) .......................................................................................................2 Mary S. Krech Tr. v. Lakes Apartments, 642 F.2d 98 (5th Cir. 1981) .....................................................................................................11 Owens v. Jastrow, 789 F.3d 529 (5th Cir. 2015) .....................................................................................................5 Pinnacle Commc’ns Int’l, Inc. v. Am. Family Mortg. Corp., 417 F. Supp. 2d 1073 (D. Minn. 2006) ....................................................................................12 Reeves v. Sanderson Plumbing Products, Inc., 530 U.S. 133 (2000) ...................................................................................................................2 SEC v. Blackburn, 156 F. Supp. 3d 778 (E.D. La. 2015) ...................................................................................9, 10 SEC v. Burns, No. CIV.84-0454, 1986 WL 36318 (S.D. Cal. Feb. 19, 1986) ..................................................7 SEC v. CMKM Diamonds, Inc., 729 F.3d 1248 (9th Cir. 2013) ...................................................................................................9 SEC v. Continental Tobacco Co. of S.C., 463 F.2d 137 (5th Cir. 1972) .....................................................................................................8 SEC v. Daifotis, No. C-11-00137, 2011 WL 2183314 (N.D. Cal. June 6, 2011), modified on reconsideration 2011 WL 3295139 (N.D. Cal. Aug. 1, 2011) ..................................................7 SEC v. Gann, 565 F.3d 932 (5th Cir. 2009) .....................................................................................................3 Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 3 of 21 PageID #: 5464 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page iii SEC v. Hopper, No. CIV.04-1054, 2006 WL 778640 (S.D. Tex. Mar. 24, 2006)...............................................7 SEC v. Levin, 849 F.3d 995 (11th Cir. 2017) .................................................................................................14 SEC v. Murphy, 626 F.2d 633 (9th Cir. 1980) .....................................................................................................9 SEC v. Phan, 500 F.3d 895 (9th Cir. 2007) .....................................................................................................9 SEC v. Syron, 934 F. Supp. 2d 609 (S.D.N.Y. 2013)........................................................................................7 SEC v. Ustian, 229 F. Supp. 3d 739 (N.D. Ill. 2017) .........................................................................................7 Supernova Sys., Inc. v. Great Am. Broadband, Inc., No. 1:10-CV-319, 2012 WL 425552 (N.D. Ind. Feb. 9, 2012) ...............................................12 Union Nat. Bank of Little Rock v. Farmers Bank, Hamburg, Ark., 786 F.2d 881 (8th Cir. 1986) ...................................................................................................14 Wright v. Nat’l Warranty Co., 953 F.2d 256 (6th Cir. 1992) ...................................................................................................12 Statutes Securities Act of 1933 § 4 ..............................................................................................................11 Securities Act of 1933 § 5(a) .....................................................................................................8, 15 Securities Act of 1933 § 5(c) .....................................................................................................8, 15 Other Authorities 15 C.F.R. §§ 230.500–.508 ........................................................................................................9, 11 17 C.F.R. § 30.501(a)(8) ................................................................................................................12 17 C.F.R. § 230.501(a)(5) ..............................................................................................................11 17 C.F.R. § 230.501(a)(6) ..............................................................................................................11 17 C.F.R. § 230.502(b) ..................................................................................................................11 17 C.F.R. § 230.506(b) ............................................................................................................11, 12 17 C.F.R. § 230.506(b)(2) ..............................................................................................................11 17 C.F.R. § 230.508(a)(1)–(3) .......................................................................................................14 17 C.F.R. § 230.508(a)(2) ..............................................................................................................14 81 Fed. Reg. 83494-01 (Nov. 21, 2016) ..........................................................................................9 Fed. R. Civ. P. 50(a) ....................................................................................................................1, 2 Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 4 of 21 PageID #: 5465 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page iv RESTATEMENT (SECOND) OF AGENCY § 14C (1958) ......................................................................13 Rule 10b-5 ........................................................................................................................................1 Rule 10b-5(a) ...................................................................................................................................2 Rule 10b-5(b) ...................................................................................................................................3 Rule 10b-5(c) ...................................................................................................................................2 Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 5 of 21 PageID #: 5466 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page 1 Defendant William E. Mapp, III (“Mapp”) hereby respectfully submits his brief in support of his oral motion for judgment as a matter of law pursuant to Federal Rule of Civil Procedure 50(a): I. INTRODUCTION The Commission has not put on legally sufficient evidence to support its claims. As to Rule 10b-5 and Section 17(a), the evidence shows that Mapp did not make any material misrepresentations or omissions and there is no evidence of scienter. There is likewise no evidence of any independently deceptive conduct that could support a fraudulent scheme. As to Section 17(a)(2), there is additionally no evidence that Mapp obtained money or property as a result of any misrepresentation or omission. There is no evidence that Mapp acted negligently. The Commission has likewise failed to establish its prima facie case under Section 5, as it has failed to show that Mapp was both a necessary participant and a substantial factor in Servergy’s sales of securities. Independently, no reasonable jury could fail to find that Servergy’s offerings were exempt from registration under Regulation D. Mapp respectfully requests that the Court enter judgment as a matter of law on all claims. II. LEGAL STANDARDS A defendant is entitled to judgment as a matter of law when, after the plaintiff has been “fully heard,” no reasonable jury could find in favor of the plaintiff. FED. R. CIV. P. 50(a). Rule 50(a) provides that “where there is no legally sufficient evidentiary basis for a reasonable jury to find for [a] party on [an] issue, the court may determine the issue against that party and may grant a motion for judgment as a matter of law against that party.” The case should only be submitted to the jury if there is evidence of “such quality and weight that reasonable and fair- minded men in the exercise of impartial judgment might reach different conclusions.” Boeing Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 6 of 21 PageID #: 5467 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page 2 Co. v. Shipman, 411 F.2d 365, 374 (5th Cir. 1969) (en banc), overruled on other grounds by Gautreaux v. Scurlock Marine, Inc., 107 F.3d 331 (5th Cir. 1997). The court should grant the Rule 50(a) motion “[i]f the facts and inferences point so strongly and overwhelmingly in favor of one party that the Court believes that reasonable men could not arrive at a contrary verdict.” Id. Although the court is to “draw all reasonable inferences in favor of the nonmoving party” and “may not make credibility determinations or weigh the evidence,” Reeves v. Sanderson Plumbing Products, Inc., 530 U.S. 133, 150 (2000), “[a]mere scintilla of evidence is insufficient to present a question for the jury,” Boeing, 411 F.2d at 374. As such, a plaintiff’s claim that is supported by no more than a scintilla of evidence should not be submitted to the jury. See Hunter v. Knoll Rig & Equip. Mfg. Co., 70 F.3d 803, 808 (5th Cir. 1995). Moreover, where legal grounds support disposition of a plaintiff’s claims irrespective of the evidence presented, judgment as a matter of law is appropriate. III. ARGUMENT A. Mapp is Entitled to Judgment as a Matter of Law on the Commission’s Scheme Liability Claims Commission does not have legally sufficient evidence of any independently or inherently fraudulent acts, so judgment should be entered in Mapp’s favor on its scheme liability claims under Rule 10b-5(a) and (c) and Section 17(a)(1) and (3). There is absolutely no evidence that the Elliott Labs test was manipulated. 1 The SEC’s only evidence pertinent to the Elliott Labs is that it tested a prototype motherboard, but that fact is clear on the face of the report issued by Elliott Labs, so no investor could have been deceived by that distinction. [Ex. P-8.] There is no evidence that Servergy tasked Elliott Labs with testing 1 Moreover, throughout this case the SEC’s pleadings alleged on that Mapp and Servergy misrepresented the significance of the report, not that it was manipulated; Mapp therefore objects to the submission of this theory to the jury on the grounds that it was not timely pled. Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 7 of 21 PageID #: 5468 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page 3 the prototype motherboard (instead of a complete server, which did not yet exist in 2010) to deceive investors or that any were deceived. There is likewise no evidence that Mapp instructed Servergy’s engineers to manipulate the prototype motherboard prior to the test in order to effect the results. Rai and Mapp both testified that the report was not manipulated in any way. Likewise there is no evidence of independently deceptive conduct at presentations to investors, including through “demonstrations.” If anything, a demonstration comparing the CTS- 1000 to an (allegedly) non-comparable server constitutes a misrepresentation regarding the characteristics of the servers. In any event, the Commission’s own expert compared the CTS- 1000 to the type of “pizza box” Dell server that was also present at certain Servergy presentations. It is therefore undisputed that the two servers could properly be compared. And the SEC has no evidence to support the theory that any such demonstration was or could have been deceptive to potential investors. B. Mapp is Entitled to Judgment as a Matter of Law under Rule 10b-5(b) To establish its claims under Rule 10b-5(b), the SEC must prove by a preponderance of the evidence that Mapp “(1) made a misstatement or omission (2) of material fact (3) in connection with the purchase or sale of securities (4) with scienter.” SEC v. Gann, 565 F.3d 932, 936 (5th Cir. 2009). 1) There is Legally Insufficient Evidence of Any Misrepresentation or Omission The Commission has not met its burden to show legally sufficient evidence of any material misrepresentations or omissions by Mapp. As to the number of orders and pre-orders, there is no evidence that the number of pre- orders listed was false. The evidence shows that even after the Koerr pre-order was cancelled, Servergy had received additional pre-orders, including one for 1,000 units from Rock Place. It is clear on the face of the PPM that the reference to “25 orders” is a typo and intended to refer to Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 8 of 21 PageID #: 5469 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page 4 pre-orders, given that the language appears in a section with that title and that, in the context of the PPM, Servergy did not yet have a market-ready server to sell and was not taking binding orders. Moreover, there is no evidence that this information would have been material to the reasonable investor. As to the alleged failure to amend the number of pre-orders, there is no evidence the numbers were false. As noted above, evidence shows that Servergy’s pre-order numbers changed during the relevant time period. The Commission has not carried its burden to show any evidence the numbers were not accurate. The statement during the WFG Advisors Call that Servergy then had 2,000 pre-orders, even if false (and there is no evidence it was), is inactionable as a matter of law. This statement was not directed at investors; it was internal to WFG. There is absolutely no evidence the statement was played for or repeated to any investor or potential investor. The statement is likewise immaterial; there is no evidence any investor relied or would have relied on this number. With regard to the fact that the CTS-1000 utilizes a 32-bit server, there is no evidence to support a duty to disclose. Servergy did not make any related statements about the server’s processor that were rendered misleading by a failure to specify that the server utilized a 32-bit chip. It cannot be assumed, as the Commission would have it, that every technical specification for the CTS-1000 was material and a required disclosure. And the Commission has put forward no evidence this information would have been material to a reasonable investor; there is no evidence of any investor asking for this information or placing weight on it. Finally, there is no evidence that any data contained in the chart found on page 27 of the PPM was false. True statements are not misrepresentations. Because it cannot show falsity, the Commission contends the chart was misleading, but there is no indication any investor was or Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 9 of 21 PageID #: 5470 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page 5 would have been misled by the chart. Moreover, there is no evidence of materiality; the chart buried on page 27 of a 58 page offering document, and there is no evidence that a single investor considered it important in their decision to invest. Investor Mayeux testified to the factors he considered material, which did not include this chart or such technical specifications. Likewise, there is no evidence that Mapp made any statement to investors or potential investors with regard to Amazon, much less that any such statement was material. Statements to non-investors are inactionable as a matter of law, as the Court has recognized by excluding this allegation from the jury instructions. In an abundance of caution, Mapp moves for judgment as a matter of law on this theory of liability. 2) No Reasonable Jury Could Find that Mapp Acted with Scienter To establish scienter, the SEC must show that Mapp acted with “an intent to deceive, manipulate, defraud or severe recklessness.” Owens v. Jastrow, 789 F.3d 529, 535 (5th Cir. 2015) (citation omitted). Severe recklessness is: limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standard of ordinary care, and that present a danger of misleading . . . which is either known to the defendant or is so obvious that the defendant must have been aware of it. Id. at 536 (citation omitted) (emphasis added). The Commission does not have legally sufficient evidence of scienter: no reasonable jury could conclude, based on the evidence, that Mapp acted with intent to deceive, manipulate, or defraud. The evidence that Mapp acted in good faith (and without scienter) is overwhelming, and no reasonable jury could find scienter. As to the “pre-orders” section of the PPM, the evidence is conclusive that Mapp did not have access to up to the minute pre-order numbers and that he relied on numbers provided by Mr. Smith and Will Mapp. He believed in good faith that the numbers were accurate. And the evidence shows that even after the Koerr pre-order was Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 10 of 21 PageID #: 5471 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page 6 cancelled, Servergy received at least one addition 1,000-unit pre-order [Ex. D-24], which further supports Mapp’s good-faith belief. And the PPM supplement is no evidence of scienter. The evidence shows that Mr. Smith conceived of the supplement along with WFG, and no one suggested to Mapp that the pre-orders section should be updated with current numbers. And by July 2013, when the PPM supplement began to be discussed between Servergy and WFG, the evidence shows that Mapp’s involvement in fundraising had been minimized. Indeed, he did not even see the final PPM supplement before it was released. The Commission has put forward no coherent theory that Mapp acted with intent to deceive in failing to supplement the “pre-orders” section of the PPM. As to the alleged omission of information regarding the CTS-1000’s 32-bit processor, there is no evidence that Mapp intentionally or recklessly withheld this information from investors. There is no evidence any investor asked Mapp (or anyone at Servergy) for this information or was otherwise interested in this specific specification of the CTS-1000. The evidence shows Mapp relied on Servergy’s technical team for technical details and on those with capital raise experience, such as Lance Smith and WFG, regarding what information needed to be disclosed. As to the chart on page 27 of the PPM, Mapp testified that he did not understand the difference between power rating and power supply. There is no evidence that Mapp knew any statements on the chart could be misleading; the evidence shows that Mapp is not an engineer and does not have the detailed technical knowledge to check the substance of every technical statement. Rather, he reasonably relied on Servergy’s staff to provide their expertise. There is legally insufficient evidence of scienter as to the PPM chart. Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 11 of 21 PageID #: 5472 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page 7 And Mapp testified that no one ever told him Servergy’s statements were misleading: not Wade Cramer, not Jack Smith, not Vihar Rai (who testified he’d never heard Mapp mislead anyone), not Lance Smith, not Michael Holder, and not Caleb White. Likewise, investor Rusty Mayeux testified he had never been misled by Mapp. The Commission has put forward no evidence to suggest any possible motive to deceive investors. Mapp acted at all times in good faith and without scienter, and no reasonable jury could conclude otherwise. C. Mapp is Entitled to Judgment as a Matter of Law under Section 17(a) As discussed above, there is legally insufficient evidence of independently deceptive conduct such that the Commission’s claims under 17(a)(1) and (3) fail as a matter of law; and there is legally insufficient evidence of any material misrepresentation or omission by Mapp such that the Commission’s Section 17(a)(2) claim also fails as a matter of law. In addition, no reasonable jury could find liability under Section 17(a)(2) because there is legally insufficient evidence that Mapp obtained money or property by means of a material misrepresentation or omission. There is no evidence that Mapp personally obtained any money or property. Though Servergy obtained investments, that the defendant’s employer obtained money is insufficient to satisfy this element. 2 Here, the evidence established that Mapp did not even take his contractual salary during his tenure as Servergy’s CEO. Receipt of a salary—and an incomplete salary at that—is not caused by the alleged misrepresentations, even if the salary is paid by an entity that received the investments. Simply receiving a salary is too “tenuous” a connection to establish liability under Section 17(a)(2). See SEC v. Syron, 934 F. Supp. 2d 609, 2 See SEC v. Ustian, 229 F. Supp. 3d 739, 775 (N.D. Ill. 2017); SEC v. Syron, 934 F. Supp. 2d 609, 640 (S.D.N.Y. 2013); SEC v. Daifotis, No. C-11-00137, 2011 WL 2183314, at *10 (N.D. Cal. June 6, 2011), modified on reconsideration 2011 WL 3295139 (N.D. Cal. Aug. 1, 2011); SEC v. Hopper, No. CIV.04-1054, 2006 WL 778640, at *12 n.20 (S.D. Tex. Mar. 24, 2006); SEC v. Burns, No. CIV.84-0454, 1986 WL 36318, at *3–4 (S.D. Cal. Feb. 19, 1986). Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 12 of 21 PageID #: 5473 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page 8 637 (S.D.N.Y. 2013). No reasonable jury could find that Mapp personally obtained anything at all by means of the alleged misrepresentations and omissions. There is likewise legally insufficient evidence of negligence. The evidence shows that Mapp relied on Servergy’s CFO, COO, and other employees to provide relevant information, and that it was reasonable for him to do so. He relied on Smith and Will Mapp to provide information about the number of pre-orders; he did not monitor pre-orders himself on a day to day basis or have access to such information. It is reasonable for a CEO in Mapp’s position to delegate these tasks. He likewise reasonably relied on Will Mapp, as drafter of the chart found on page 27 of the PPM, as well as on Smith’s review of that chart. Mapp testified he believed the chart had been reviewed from a technical perspective. Smith took the lead in working with WFG to prepare the PPM, including this new section. Mapp likewise reasonably relied on Smith and WFG, including WFG’s securities counsel, to determine what parts of the PPM needed to be supplemented. There is no evidence anyone ever suggested that the pre-orders section needed to be supplemented. As to the alleged omission to state that the CTS-1000 utilized a 32-bit processor, Mapp reasonably relied on Servergy’s engineers to determine which technical specifications were important enough to be disclosed to investors. There is legally insufficient evidence of negligence. D. Mapp is Entitled to Judgment as a Matter of Law under Section 5(a) and (c) To establish a prima facie case for violation of Securities Act Section 5(a) and (c), which prohibit the unregistered sale of securities, the Commission must prove (1) that Mapp offered or sold securities; (2) that the securities were not registered; and (3) that Mapp used the “facilities of interstate commerce” to offer and sell the securities. Dennis v. Gen. Imaging, Inc., 918 F.2d 496, 503 (5th Cir. 1990). If the SEC makes out its prima facie case, the burden shifts to Mapp to show an exemption from the registration requirements. SEC v. Continental Tobacco Co. of S.C., Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 13 of 21 PageID #: 5474 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page 9 463 F.2d 137, 155 (5th Cir. 1972). Regulation D provides such exemptions. See 15 C.F.R. §§ 230.500–.508. 3 1) Mapp Cannot be Personally Liable Because He Was Neither a “Necessary Participant” Nor a “Substantial Factor” in Servergy’s Offers and Sales of Securities The Commission must show that Mapp offered or sold the securities. Although “liability under Section 5 is not limited to the person or entity that ultimately passes title to the security”— Servergy—other persons that the Commission seeks to hold responsible as “participants” in the transaction must have had a “significant” “role in the transaction.” SEC v. Blackburn, 156 F. Supp. 3d 778, 797 (E.D. La. 2015) (quoting SEC v. Murphy, 626 F.2d 633, 649 (9th Cir. 1980)). “A defendant plays a significant role when he is both a ‘necessary participant’ and ‘substantial factor’ in the sales transaction.” Blackburn, 156 F. Supp. 3d at 797 (quoting Murphy, 626 F.2d at 652). “A participant’s title, standing alone, cannot determine liability under Section 5, because the mere fact that a defendant is labeled as a . . . CEO . . . does not adequately explain what role the defendant actually played.” SEC v. CMKM Diamonds, Inc., 729 F.3d 1248, 1258 (9th Cir. 2013). More than but-for causation is required, id. at 1255, and participant liability requires a high level of involvement, see, e.g., SEC v. Phan, 500 F.3d 895, 906 (9th Cir. 2007). The Commission has not carried its burden to show that Mapp was both a necessary participant and a substantial factor in Servergy’s securities offerings. Mapp was Servergy’s CEO, but his title alone is insufficient to establish the elements of participant liability. The evidence shows that Mapp participated in providing information about the company to potential investors, but that the mechanics of implementing investments were carried out by other Servergy 3 Regulation D was substantially (though not materially as to the provisions at issue in this case) amended by the Commission in 2016 with a May 2017 effective date. See 81 Fed. Reg. 83494-01 (Nov. 21, 2016). All citations are to the versions of the regulatory provision effective during the time of Servergy’s offerings. Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 14 of 21 PageID #: 5475 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page 10 employees, including its CFO Michael Holder. Mr. Holder was responsible for verifying that investors met the accreditation requirements and consummating investment transactions. “A defendant may be liable as a participant in a Section 5 violation if the defendant’s role in the transaction is significant.” Blackburn, 156 F. Supp. 3d at 797 (citation omitted). The evidence shows Mapp provided ideas and vision for the company; there is no evidence he was a but-for cause of any investment transactions. In particular, the SEC has not shown that Mapp had a significant role in the Dominion Joint Venture transactions it alleges did not qualify for the Regulation D exemptions (thus creating Section 5 liability). The evidence is overwhelming that Mapp was not involved in organizing or administering the Dominion Joint Venture investments. The Dominion Joint Ventures were set up by Caleb White, and even within Servergy it was Mr. Holder, not Mapp, who was the primary point of contact for the Dominion Joint Ventures. Mapp was not a necessary participant in Servergy’s securities sales, and he was certainly not a “substantial factor.” 2) Servergy’s Offerings Should Not Be Integrated The Court has ruled that Servergy’s four offerings should be integrated as a matter of law. But the parties’ stipulations establish that Servergy treated the offerings separately, and the evidence at trial has shown that the WFG offering functioned separately as a go-to-market raise implemented by WFG and Mr. Smith, without more than minimal involvement from Mapp. The entire character of the offerings changed in February 2013. The four offerings should not be integrated, and, alternatively, the WFG offering should be treated separately from Series A, B, and C. As such, any failure to qualify under Regulation D based on the Dominion Joint Ventures is properly limited to only the offering in which that entity invested, which includes at most Series A, B, and C, without any effect on the WFG offering. There is no allegation that any WFG Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 15 of 21 PageID #: 5476 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page 11 Offering investor was not accredited. Mapp respectfully requests that the Court determine as a matter of law that the offerings are separate (and not integrated). 3) Regulation D, Rule 506, is Established as a Matter of Law Even if the Commission had sufficient evidence to establish its prima facie case, submission would be inappropriate because no reasonable jury could fail to find the offerings exempt from registration. Mapp has established exemption under Regulation D as a matter of law. The Commission has promulgated Regulation D, 17 C.F.R. §§ 230.500–.508, to provide an exemption from registration pursuant to Section 4 of the Securities Act of 1933. The purpose of Regulation D is “to provide objective standards upon which businessmen may rely.” Mary S. Krech Tr. v. Lakes Apartments, 642 F.2d 98, 102 (5th Cir. 1981). Servergy’s securities offerings qualified for the exemption provided by Regulation D § 506(b). 17 C.F.R. § 230.506(b). Section 506(b) applies when, inter alia, an offering is sold to accredited investors and up to thirty five other purchasers (i.e., investors who are not accredited investors). 17 C.F.R. § 230.506(b)(2). If the offering includes sales to “other purchasers,” certain additional financial information must be provided. 17 C.F.R. § 230.502(b). Section 501(a) defines the regulatory term “accredited investor” to include, in relevant part, a “person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person”: • Any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000. 17 C.F.R. § 230.501(a)(5). • Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.17 C.F.R. § 230.501(a)(6). Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 16 of 21 PageID #: 5477 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page 12 • Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person, meaning someone who either alone or with his purchaser representative has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment; or • Any entity in which all of the equity owners are accredited investors. 17 C.F.R. § 30.501(a)(8). The Rule 506 exemption is established as a matter of law. The Commission alleges that the Dominion Joint Ventures were not accredited investors because some of their members did not meet the individual accreditation requirements. There is no evidence that anyone at Servergy knew or should have known that Robert Storck or Caleb White (the only two Dominion Joint Venture members the SEC has alleged were not accredited investors individually) did not meet the accredited investor requirements. And there is no evidence that anyone at Servergy was aware Mr. Storck invested through Dominion Joint Venture 2 even after Servergy made clear that, without meeting the accredited investor requirements, he could not invest in Servergy. Servergy reasonably believed the three Dominion Joint Ventures were accredited investors. And all of the Dominion Joint Ventures had certified to Servergy that they met the accreditation standards. (Exs. P-80, P-81 and P-82.) As a matter of law, companies may rely on such certifications. See, e.g., Wright v. Nat’l Warranty Co., 953 F.2d 256, 260–61 (6th Cir. 1992); Supernova Sys., Inc. v. Great Am. Broadband, Inc., No. 1:10-CV-319, 2012 WL 425552, at *5 (N.D. Ind. Feb. 9, 2012); Pinnacle Commc’ns Int’l, Inc. v. Am. Family Mortg. Corp., 417 F. Supp. 2d 1073, 1083 (D. Minn. 2006): Faye L. Roth Revocable Tr. v. UBS Painewebber, Inc., 323 F. Supp. 2d 1279, 1301 (S.D. Fla. 2004); Goodwin Properties, LLC v. Acadia Grp., Inc., No. 01-49-P-C, 2001 WL 800064, at *7 (D. Me. July 17, 2001). No reasonable jury could fail to find that Servergy reasonably believed the Dominion Joint Ventures qualified as accredited investors. Rule 506 is established as a matter of law. Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 17 of 21 PageID #: 5478 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page 13 Likewise, Servergy reasonably believed it had no more than thirty-five non-accredited investors. Servergy treated each Dominion Joint Venture as a single investor (see Exs. P-80, P- 81 and P-82) and, as noted, relied on their attestations. At most, Servergy had three “other purchasers” under Regulation D. Even if the Dominion Joint Ventures did not qualify as accredited investors such that each member is counted separately, the evidence is that at most three were not accredited (Robert Storck, his brother, and Caleb White). In light of the attestation that all were accredited, Servergy reasonably believed there were no more than thirty five. White testified he had no reason to believe any of the Dominion Joint Venture members were not accredited. He also testified that Mapp and Servergy made it clear that the offering was only open to accredited investors. In any event, White’s knowledge of facts (if there were any) calling into doubt the Dominion Joint Ventures’ accreditation qualifications is not legally sufficient evidence to negate Servergy’s reasonable belief. A director is not an agent of the corporation. RESTATEMENT (SECOND) OF AGENCY § 14C (1958). As one court has explained in an analogous case involving an outside director: As a matter of law, an individual director is not the agent of the corporation or its shareholders. He has no power of his own to act on the corporation’s behalf. . . . And since directors have no power to bind the corporation, except when acting collectively and as a board, the great weight of authority supports the rule that notice of facts casually acquired by individual directors, when they do not communicate their knowledge to the other directors or officers, and do not act officially in the matter, is not notice to the corporation. Etshokin v. Texasgulf, Inc., 612 F. Supp. 1220, 1225 (N.D. Ill. 1985) (internal citations and quotation marks omitted). White was not acting on behalf of Servergy or as its agent when setting up the Dominion Joint Ventures; he was acting on his own or, if anything, on behalf of the Dominion Joint Ventures. And there is no evidence he shared any pertinent facts with Mapp Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 18 of 21 PageID #: 5479 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page 14 or any other Servergy board member. White had no authority to bind Servergy with regard to the Dominion Joint Ventures. Moreover, “[w]here it is in a director’s interest to conceal his or her knowledge, or where the director is acting outside the scope of his or her official duties, the director’s knowledge will not be imputed to the [company].” Union Nat. Bank of Little Rock v. Farmers Bank, Hamburg, Ark., 786 F.2d 881, 887 (8th Cir. 1986). Here, although White was informed myriad times that only accredited investors could invest in Servergy, he had incentive to hide relevant facts from Servergy in order to obtain compensation based on the Dominion Joint Venture investments. 4) The Rule 508 Safe Harbor is Established as a Matter of Law Regulation D provides a safe harbor where a failure to comply with its requirements (1) “did not pertain to a term, condition or requirement directly intended to protect that particular individual or entity;” (2) “was insignificant with respect to the offering as a whole;” and (3) “[a] good faith and reasonable attempt was made to comply with all applicable terms, conditions and requirements of [Section 506].” 17 C.F.R. § 230.508(a)(1)–(3); see SEC v. Levin, 849 F.3d 995, 1002–06 (11th Cir. 2017). Section 508 provides that certain failures to comply are to be “deemed significant”; the only such requirement relevant here is the requirement that Servergy have 35 or fewer accredited investors or that it reasonably believe it had 35 or fewer non-accredited investors. See 17 C.F.R. § 230.508(a)(2). As noted above, Servergy understood the Dominion Joint Ventures to each be a single, accredited investor and treated them as such. Any failure to provide sufficient financial information to the Dominion Joint Ventures did not touch on a requirement intended to protect the Dominion Joint Ventures, as under these circumstances the Dominion Joint Ventures had ample access to information about Servergy. Caleb White, the organizer of the Dominion Joint Ventures, sat as an independent director on Servergy’s board. Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 19 of 21 PageID #: 5480 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page 15 And any such failure was insignificant to the offering as a whole. The Dominion Joint Ventures invested a total of $1,411,982.00. Out of the roughly $26 million dollars raised by Servergy, the inclusion of that amount of non-accredited sales is insignificant. This is particularly true as to the WFG offering, which raised approximately $20 million and did not include any of the Dominion Joint Ventures (or any other non-accredited investor). Finally, the evidence that Servergy made a good faith and reasonable attempt to comply with Regulation D is conclusive. It is undisputed that Servergy made its Regulation D filings with the Commission, reporting the offerings, that it consistently limited its offering activities to accredited investors, and that it verified accredited investor status through Nondisclosure Agreements and subscription agreements from each investor. The evidence that Servergy made every effort to comply with Regulation D is overwhelming. Mapp is entitled to judgment as a matter of law under Section 5(a) and (c). IV. CONCLUSION AND PRAYER The Commission has failed to carry its burden to establish any violation of the securities laws. Mapp respectfully requests that the Court enter judgment as a matter of law on the Commission’s claims under Section 10(b) of the Exchange Act and Rule 10b-5, Section 17(a) of the Securities Act, and Section 5(a) and (c) of the Securities Act. Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 20 of 21 PageID #: 5481 DEFENDANT WILLIAM E. MAPP, III’S BRIEF IN SUPPORT OF MOTION FOR JUDGMENT AS A MATTER OF LAW Page 16 Respectfully submitted, /s/ David W. Klaudt Jason S. Lewis Texas Bar No. 24007551 lewisjs@gtlaw.com David W. Klaudt Texas Bar No. 00796073 klaudtd@gtlaw.com Amanda R. McKinzie Texas Bar No. 24088028 mckinziea@gtlaw.com Natalie D. Thompson Texas Bar No. 24088529 thompsonna@gtlaw.com GREENBERG TRAURIG, LLP 2200 Ross Avenue, Suite 5200 Dallas, Texas 75201 (214) 665-3600 (Telephone) (214) 665-3601 (Facsimile) ATTORNEYS FOR WILLIAM E. MAPP, III CERTIFICATE OF SERVICE I hereby certify that the foregoing document was served on all counsel of record via the Court’s CM/ECF system this 13th day of December, 2017. /s/ David W. Klaudt David W. Klaudt Case 4:16-cv-00246-ALM Document 178 Filed 12/13/17 Page 21 of 21 PageID #: 5482