415 F.Supp.3d 853 (N.D.Ill. 2019), 19 C 1711, United States Securities & Exchange Commission v. River North Equity LLC

Docket Nº:No. 19 C 1711
Citation:415 F.Supp.3d 853
Opinion Judge:Honorable Thomas M. Durkin, United States District Judge
Party Name:UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. RIVER NORTH EQUITY LLC, Edward M. Liceaga, Michael A. Chavez, Nanotech Entertainment, Inc., Nanotech Gaming, Inc., David R. Foley, and Lisa L. Foley, Defendants.
Attorney:Daniel J. Hayes, Christine Bautista Jeon, Richard Gregory Stoltz, Robert MacDonald Moye, United States Securities and Exchange Commission, Chicago, IL, for Plaintiff. Mark David Hunter, Hunter Taubman Fischer & LI LLC, Coral Gables, FL, for Defendants River North Equity LLC, Edward M. Liceaga. Ma...
Case Date:December 04, 2019
Court:United States District Courts, 7th Circuit, Northern District of Illinois

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415 F.Supp.3d 853 (N.D.Ill. 2019)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.

RIVER NORTH EQUITY LLC, Edward M. Liceaga, Michael A. Chavez, Nanotech Entertainment, Inc., Nanotech Gaming, Inc., David R. Foley, and Lisa L. Foley, Defendants.

No. 19 C 1711

United States District Court, N.D. Illinois, Eastern Division

December 4, 2019

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Daniel J. Hayes, Christine Bautista Jeon, Richard Gregory Stoltz, Robert MacDonald Moye, United States Securities and Exchange Commission, Chicago, IL, for Plaintiff.

Mark David Hunter, Hunter Taubman Fischer & LI LLC, Coral Gables, FL, for Defendants River North Equity LLC, Edward M. Liceaga.

Marina Stefanova, Pro Hac Vice, DLA Piper LLP, Dallas, TX, Richard Matthew Hiller, Jonathan D. King, DLA Piper LLP, Chicago, IL, for Defendant Michael A. Chavez.

Robert A. Shipley, Shipley Law Group, Ltd., Chicago, IL, for Defendant Nanotech Entertainment, Inc., Nanotech Gaming, Inc., David R. Foley, Lisa L. Foley.

MEMORANDUM OPINION AND ORDER

Honorable Thomas M. Durkin, United States District Judge

Before the Court in this enforcement action by the United States Securities and Exchange Commission ("SEC") is defendants River North Equity, LLC ("River North") and Edward M. Liceaga’s partial motion to dismiss, and defendant Michael A. Chavez’s motion to dismiss (River North, Liceaga and Chavez together, "Defendants"). R. 36; R. 40. For the following reasons, the Court denies both motions.

Standard

A Rule 12(b)(6) motion challenges the "sufficiency of the complaint." Berger v. Nat. Collegiate Athletic Assoc., 843 F.3d 285, 289 (7th Cir. 2016). A complaint must provide "a short and plain statement of the claim showing that the pleader is entitled to relief," Fed.R.Civ.P. 8(a)(2), sufficient to provide defendant with "fair notice" of the claim and the basis for it. Bell A. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). This standard "demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). While "detailed factual allegations" are not required, "labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555, 127 S.Ct. 1955. The complaint must "contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955). " ‘A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.’ "

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Boucher v. Fin. Sys. of Green Bay, Inc., 880 F.3d 362, 366 (7th Cir. 2018) (quoting Iqbal, 556 U.S. at 678, 129 S.Ct. 1937). In applying this standard, the Court accepts all well-pleaded facts as true and draws all reasonable inferences in favor of the non-moving party. Tobey v. Chibucos, 890 F.3d 634, 646 (7th Cir. 2018).

Background

This case involves the stock distribution of two microcap companies under the control of David Foley: NTEK and NTGL. According to the complaint and of relevance here, Foley caused those companies to issue him over 1 billion shares of stock. He and his wife Lisa Foley then orchestrated the sale of those shares at discounted prices to defendant River North in dozens of transactions through River North’s Director of Business Development, Chavez. River North’s president and sole manager Liceaga then quickly resold the stock to investors in unregistered transactions, paying some of the proceeds back to the Foleys. The SEC brought a nine-count complaint against the Defendants, the Foleys, and others regarding this and related conduct. R. 1. River North and Liceaga then filed a partial motion to dismiss certain of the claims against them, R. 36, and Chavez filed a separate motion seeking dismissal of all claims against him, R. 40. The following counts are at issue for purposes of resolving those motions: Count VII, alleging that River North acted as an unregistered dealer and Chavez as an unregistered broker in violation of Section 15(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78o(a)(1), in connection with those transactions; Count VIII, alleging that Liceaga and Chavez aided and abetted River North’s Section 15(a) violations; and Count IX, alleging that Liceaga is liable in the alternative as a control person for River North’s violations.

Analysis

Preliminary matters. Certain considerations underlie the Court’s decision. First, and as the parties acknowledged, there is no binding authority construing either "dealer" or "broker" under Section 15(a). And the majority of the decisions the parties cite were on summary judgment or following a bench trial. In fact, only one decision, SEC v. Mapp, 240 F.Supp.3d 569 (E.D. Tex. 2017), granted a motion to dismiss a Section 15(a) claim, and the Court views it as an outlier.

Next, while the parties agree that the Court should consider all of the circumstances surrounding the transactions in question in making its determinations on those issues, and that certain factors— discussed later— are relevant to its analysis, they also agree that no factor controls, and that the SEC need not plausibly allege the presence of each factor, so long as it has alleged some. SEC v. Benger, 697 F.Supp.2d 932, 945 (N.D. Ill. 2010). Indeed, the presence of even a single factor may be enough.

Further, although Defendants contend that many of the SEC’s allegations are conclusory, in so arguing, Defendants ignore that the Seventh Circuit allows a plaintiff to supplement allegations in responding to a Rule 12(b)(6) motion, provided the supplemental allegations are consistent with the complaint. Geinosky v. City of Chi., 675 F.3d 743, 745-46 n.1 (7th Cir. 2012); Forseth v. Vill. of Sussex, 199 F.3d 363, 368 (7th Cir. 2000). Here, the SEC’s response is consistent with its complaint in all relevant respects, so the Court considers the allegations there in ruling on Defendants’ motions.

Finally, and as the Court stated at oral argument, although Defendants are correct that the SEC is not entitled to any leniency for pleading deficiencies, the fact that it conducted a pre-suit investigation

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does not mean that a higher pleading standard applies either. Instead, like any plaintiff, to survive Defendants’ motions, the SEC need only satisfy the standard outlined above. The Court now turns to the merits of Defendants’ respective motions, beginning with River North and Liceaga’s.

River North and Liceaga’s Motion. River North argues that it acted as a trader, not a dealer, so Section 15(a)’s registration requirement did not apply. Liceaga argues by extension that it could not be liable for aiding and abetting River North, or for control person liability, because there was no Section 15(a) violation to begin with. Accordingly, the Court first addresses whether the SEC has plausibly alleged that River North acted as a "dealer."

The broker-dealer registration requirement is "of the utmost importance in effecting the purposes of the Act," as it enables the SEC to "exercise discipline over those who may engage in the securities business," and "establishes necessary standards with respect to training, experience, and records." Benger, 697 F.Supp.2d at 944 (quoting Celsion Corp. v. Stearns Mgmt. Corp., 157 F.Supp.2d 942, 947 (N.D. Ill. 2001)). As such, the Exchange Act broadly defines "dealer" as "any person engaged in the business of buying and selling securities...for such person’s own account." Section 3(a)(4)(A), 15 U.S.C. § 78c(a)(5)(A). Under what has become known as the "trader exception," however, a person who buys or sells securities "not as part of a regular business" is not a dealer. Section 3(a)(5)(B), 15 U.S.C. § 78c(a)(5)(B).

The "dealer" definition has not been...

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