Sec. & Exch. Comm'n v. Thompson

• Decision Date: 02 March 2017
• Docket Number: 14–cv–9126 (KBF)
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Anthony J. THOMPSON, Jr., Jay Fung, and Eric Van Nguyen, Defendants, and John Babikian and Kendall Thompson, Relief Defendants, New York County District Attorney, Intervenor.
• Court: U.S. District Court — Southern District of New York

238 F.Supp.3d 575

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v. Anthony J. THOMPSON, Jr., Jay Fung, and Eric Van Nguyen, Defendants,andJohn Babikian and Kendall Thompson, Relief Defendants,New York County District Attorney, Intervenor.

14–cv–9126 (KBF)

United States District Court, S.D. New York.

Signed March 2, 2017

Andrew Matthew Calamari, Howard A. Fischer, Thomas Peter Smith, Securities & Exchange Commission, New York, NY, for Plaintiff.

Maranda E. Fritz, Thompson Hine LLP, New York, NY, Mark J. Astarita, Sallah Astarita & Cox LLC, New Jersey, NJ, for Defendants.

OPINION & ORDER

KATHERINE B. FORREST, United States District Judge

This is an enforcement action brought by the New York office of the Securities and Exchange Commission ("SEC") against defendants Anthony J. Thompson Jr., Jay Fung and Eric Van Nguyen—three alleged penny stock promoters—and three relief defendants. (ECF No. 1 ("Compl.") ¶¶ 9–13.) The SEC alleges that, from November 2009 to September 2010, defendants conducted five penny stock "pump-and-dump"/"scalping" schemes in which they touted certain securities to the investing public without disclosing the extent of their financial stakes in those securities. The SEC alleges that, in perpetrating these schemes, the defendants violated several provisions of the securities laws: Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b–5 promulgated thereunder, as well as Sections 17(a) and 17(b) of the Securities Act of 1933 ("Securities Act").

The SEC instituted this action after its Florida office prosecuted Thompson and other defendants for securities violations in connection with a penny stock scheme involving a separate issuer, and after the New York office unsuccessfully engaged in settlement negotiations with Thompson. This case is in the early stages. Discovery has been stayed until the earlier of August 11, 2017 or the resolution of a parallel criminal proceeding that Thompson is currently defending in New York state court. (ECF No. 39.)

Now before the Court is Thompson's motion for summary judgment. (ECF No. 42.) Thompson originally filed the motion as a motion to dismiss; the Court converted it to one for summary judgment because Thompson cited materials outside the pleadings. (ECF No. 47.) Thompson advances three arguments in support of his motion. First, he asserts that this action is barred in its entirety by the Florida Action under principles of res judicata . Second, he argues that the SEC should be obligated to settle the charges against him under principles of New York contract law or promissory estoppel. Third, Thompson submits that the SEC has failed to allege securities laws violations against him as a matter of law.

For the reasons set forth below, Thompson's motion for summary judgment (ECF No. 42) is DENIED.

I. BACKGROUND¹

A. The Florida Action

From 2009 to 2010, Thompson was the managing director of OTC Solutions LLC ("OTC Solutions"), a now-defunct Maryland company that published and disseminated newsletters touting penny stock companies. (See Plaintiff's Responses to Defendant Anthony J. Thompson's Local Rule 56.1 Statement of Undisputed Facts ("Pl.'s 56.1", ECF No. 55) ¶¶ 1–2; see also Compl. ¶ 9.)

On May 2, 2012, the SEC filed an enforcement action in the United States District Court for the Southern District of Florida against Recycle Tech., Inc. ("Recycle Tech."), Kevin Sepe, Ronny J. Halperin, Ryan Gonzalez, Thompson, OTC Solutions, Pudong LLC ("Pudong"), Jay Fung and David Rees (the "Florida Action"). (Pl.'s 56.1 ¶ 9; see also S.E.C. v. Recycle Tech, Inc. et al. , No. 12–cv–21656–JAL (S.D. Fl.), ECF No. 1.) The SEC filed an amended complaint on August 17, 2012 in which Sepe, Halperin and Rees were no longer named defendants. (Declaration of Peter Pizzani, dated October 20, 2016 ("Pizzani Decl.", ECF No. 54), Ex. B ("Florida Compl.").) The SEC alleged that, from January through March 2010, defendants—along with Sepe, Halperin and Rees—perpetrated a penny stock pump-and-dump scheme involving the stock of a single issuer, defendant Recycle Tech. (Pl.'s 56.1 ¶ 9; see also Florida Compl. ¶ 1.) The complaint portrays Sepe, Gonzalez and Halperin as the architects of the scheme. (See, e.g. , Florida Compl. ¶¶ 1–2.) The SEC alleged that these three individuals set up a series of transactions through which their private sham company—developed for purposes of the scheme—acquired control of and merged into Recycle Tech, a publicly traded penny stock company. (Id. ¶¶ 22–52.). Sepe and Gonzalez then allegedly "pumped" Recycle Tech's stock by issuing false and misleading press releases on behalf of the company. (Id. ¶¶ 53–64.) The SEC alleged that Sepe enlisted Thompson to participate in the scheme by touting Recycle Tech stock in OTC Solution's newsletters. (Id. ¶¶ 65–68.) In exchange, Sepe allegedly arranged for Recycle Tech to issue Thompson 2.325 million shares of Recycle Tech stock. (Id. ) The SEC further alleged that Thompson failed to adequately disclose his (and his companies') financial holdings in, and intent to sell, Recycle Tech stock. (Id. ) The SEC made similar allegations against Fung, who also allegedly received 2.325 million shares of Recycle Tech stock for touting the company in Pudong's newsletters. (Id. )

As a result of these allegations, the SEC claimed that Thompson violated Sections 5(a), 5(c), 17(a) and 17(b) of the Securities Act, as well as Section 10(b) of the Exchange Act and Rule 10b–5. (Id. ¶ 7.) By way of relief, the SEC sought a declaratory judgment that Thompson had violated these laws, a permanent injunction barring him from violating them in the future, disgorgement of ill-gotten gains, civil monetary penalties and a "penny stock bar" prohibiting him from participating in any offering of penny stock. (Id. at 26–28.)

In July 2013, while the Florida Action was pending, the SEC's New York office began investigating Thompson, OTC Solutions, Fung and Pudong for conduct involving issuers other than Recycle Tech. (See Declaration of Brent Baker, dated August 15, 2016 ("Baker Decl.", ECF No. 44), Ex. 12; see also Pl.'s 56.1 ¶ 13.) Some discovery in the Florida Action concerned these other issuers. (See Pl.'s 56.1 ¶¶ 10–12.) On October 7, 2013, for instance, the SEC served interrogatories requesting that Thompson and OTC Solutions identify all issuers that they promoted through email newsletters from January 1, 2009 through December 31, 2010. (Pl.'s 56.1 ¶ 10; Baker Decl., Exs. 7, 8.) Also on October 7, 2013, the SEC requested that Thompson and OTC Solutions produce all of their email newsletters from January 1, 2009 through December 31, 2010, and all email newsletters, regardless of time period, concerning the issuers Mass Hysteria Entertainment Company, Inc. ("Mass Hysteria"), Blue Gem Enterprise, Inc. ("Blue Gem") and Lyric Jeans, Inc. ("Lyric Jeans"). (Pl.'s 56.1 ¶ 11; Baker Decl., Exs. 9, 10.) In addition, during Thompson's deposition in the Florida Action, the SEC asked questions relating to Blast Applications Inc. ("Blast"), Smart Holdings, Inc. ("Smart Holdings"), Blue Gem and Lyric Jeans. (Pl.'s 56.1 ¶ 12; Baker Decl., Exs. 6, 11.)

On October 31, 2013, the parties appeared at a discovery hearing before the Honorable John J. O'Sullivan to address whether the SEC's discovery requests about issuers other than Recycle Tech. were relevant to—and hence discoverable in—the Florida Action. (See Pl.'s 56.1 ¶ 14; Baker Decl., Exs. 14, 15.) Thompson and OTC Solutions argued that such discovery was inappropriate because it exceeded the scope of the Florida Action and overlapped with matters then under investigation by the SEC's New York office. (See Baker Decl, Ex. 14 at 53:8–16 (stating that "the SEC seems to want to expand the Recycle Tech case to include the same things that the New York office is currently investigating" and "the SEC trying to get information on two separate fronts is inappropriate."); see also Pl.'s 56.1 ¶ 14.) The SEC argued that information about other issuers was necessary to establish that the defendants' securities violations were ongoing and continuing, a factor required for the injunctive relief sought in the Florida Action. (See Baker Decl., Ex. 14 at 54:21–55:5; see also id. at 56:11–57:12.) Judge O'Sullivan ruled in favor of the SEC. He found that the requested documents were "relevant to this lawsuit, even though they don't involve the exact claim in this lawsuit" and ordered their production. (Baker Decl., Ex. 14 at 57:13–22; see also id. , Ex. 15 (written order following hearing stating "the documents discussed during the hearing regarding the New York SEC investigation are relevant and discoverable."); Pl.'s 56.1 ¶ 16 (same).) He also ordered that Thompson and OTC Solutions respond to the SEC's interrogatories about issuers other than Recycle Tech. (Baker Decl., Ex. 15.)

Thompson and OTC Solutions agreed with the SEC to settle the Florida Action in early 2014. (See Pl.'s 56.1 ¶ 20; see also Baker Decl., Exs. 21–24.) On February 14, 2014, the Court entered final judgment against Thompson, which effected the settlement terms (Baker Decl., Ex. 23) to which Thompson had consented (id. , Ex. 21). (See also Pl.'s 56.1 ¶ 23.) Pursuant to that consent judgment, Thompson agreed to disgorge $349,504.61 of ill-gotten gains resulting from the Recycle Tech scheme and $23,735.15 in prejudgment interest, and to pay $120,000 in civil monetary damages. (Baker Decl., Ex. 23 at 70–71; Pl.'s 56.1 ¶¶ 22–23.) The Court also entered a penny stock bar against Thompson (Baker Decl., Ex. 23 at 73) and enjoined him from violating Sections 5(a), 5(c) and 17(a) of the Securities Act, as well as Section 10(b) of the Exchange Act and Rule 10b–5 promulgated thereunder (id. at 68–70)—all of the laws he was charged with violating except Section 17(b) of the Securities Act. (See also Pl's. 56.1 ¶¶ 22–23.) In paragraph 8 of the consent to final judgment, Thompson represented that he entered into the consent voluntarily and that:

no

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