U.S. Sec. & Exch. Comm'n v. Ahmed

• Decision Date: 29 March 2018
• Docket Number: Civil No. 3:15cv675 (JBA)
• Citation: 308 F.Supp.3d 628
• Parties: UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Iftikar AHMED, Defendant, and Iftikar Ali Ahmed Sole Prop; I–Cubed Domains, LLC; Shalini Ahmed; Shalini Ahmed 2014 Grantor Retained Annunity Trust; Diya Holdings LLC ; Diya Real Holdings, LLC; I.I. 1, a minor child, by and through his next friends Iftikar and Shalini Ahmed, his parents; I.I. 2, a minor child, by and through his next friends Iftikar and Shalini Ahmed, his parents; and I.I. 3, a minor child, by and through his next friends Iftikar and Shalini Ahmed, his parents, Relief Defendants.
• Court: U.S. District Court — District of Connecticut

308 F.Supp.3d 628

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.Iftikar AHMED, Defendant,andIftikar Ali Ahmed Sole Prop; I–Cubed Domains, LLC; Shalini Ahmed; Shalini Ahmed 2014 Grantor Retained Annunity Trust; Diya Holdings LLC ; Diya Real Holdings, LLC; I.I. 1, a minor child, by and through his next friends Iftikar and Shalini Ahmed, his parents; I.I. 2, a minor child, by and through his next friends Iftikar and Shalini Ahmed, his parents; and I.I. 3, a minor child, by and through his next friends Iftikar and Shalini Ahmed, his parents, Relief Defendants.

Civil No. 3:15cv675 (JBA)

United States District Court, D. Connecticut.

Signed March 29, 2018

John B. Hughes, U.S. Attorney's Office, New Haven, CT, Nicholas Peter Heinke, Jeffrey E. Oraker, Mark Lander Williams, Terry R. Miller, U.S. Securities and Exchange Commission, Denver, CO, for Plaintiff.

Iftikar Ahmed, pro se.

Alexander Sakin, Jonathan Harris, L. Reid Skibell, Priya Chaudhry, Steven Gabriel Hayes–Williams, Harris, St. Laurent & Chaudhry LLP, New York, NY, David B. Deitch, Harris, St. Laurent & Chaudhry LLP, Reston, VA, Kristen Luise Zaehringer, Paul E. Knag, Murtha Cullina, LLP, Stamford, CT, for Defendants.

RULING ON ALL PARTIES' MOTIONS FOR SUMMARY JUDGMENT ON LIABILITY

Janet Bond Arterton, U.S.D.J.

I. Introduction...636

II. Background...637

A. Overarching Facts...637

B. Procedural History...638

C. Defendant's Assertion of his Fifth Amendment Right...638

D. Defendant's Fraudulent Conduct...638

1. Company A ...638

2. Company B ...639

3. Company C ...640

4. Company D ...642

5. Company E ...644

6. Company F ...645

7. Company G ...645

8. Company H ...647

9. Company I ...647

10. Company J ...648

III. Discussion...648

A. Standard on Summary Judgment and Effect of Adverse Inference...648

B. Defendant's Claims he was Treated Unfairly are Without Merit...649

C. Kokesh Does not Require Dismissal of Claims Against Relief Defendants in the Pending Summary Judgment Proceedings...650

D. Defendant's Conduct Violated the Advisers Act, Securities Act, and Exchange Act...652

1. Fraud Under the Advisers Act ...652

a. Defendant is an Investment Adviser...652

b. Defendant Violated Sections 206(1), (2), (4), and Rule 206(4)–8...653

i. Defendant's Fraud was Directed Towards Clients and Investors ...654

ii. Negligence or Scienter ...655

iii. Breach of Fiduciary Duties ...655

c. Section 206(3)...655

2. The Exchange Act and Securities Act ...657

a. Material Misrepresentations/use of a Fraudulent Device...657

b. Scienter...658

c. In Connection With a Purchase or Sale of Securities...658

d. Territorial Requirements...660

i. Morrison and Subsequent Case law ...660

ii. The Intention of the Parties ...663

iii. The SEC's Evidence is Sufficient to Establish Domesticity ...664

IV. Conclusion...673

I. Introduction

Plaintiff, the United States Securities and Exchange Commission ("SEC") alleges that Defendant Iftikar Ahmed ("Mr. Ahmed") violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b–5 (Count One), Section 17(a) of the Securities Act of 1933 ("Securities Act") (Count Two), and Section 206 of the Investment Advisers Act ("Advisers Act") (Counts Three, Four, and Five).¹ (Second Am. Compl. ("SAC") [Doc. # 208].) In Counts Six through Fourteen, the SEC seeks equitable disgorgement against each respective Relief Defendant.

The Court bifurcated summary judgment, with this first stage addressing only liability, and a second stage addressing the appropriate relief, if needed, or in the alternative, a trial on liability will be held. All three parties move for summary judgment.² (See Def.'s Mot. for Summ. J. [Doc. # 616]; Relief Defs.' ("RD") Mot. for Summ. J. [Doc. # 618–2]; PL's Mot. for Summary Judgment [Doc. # 622].) The Court held oral argument on February 28, 2018.

The SEC alleges that Defendant "systematically used fraudulent and deceptive means to divert more than $67 million from funds he advised" while employed by venture capital firm Oak Investment Partners ("Oak") "into his personal bank accounts, before funneling much of his ill-gotten gains into assets and accounts in the name of his wife in order to conceal his fraud and protect the assets from confiscation."

(PL's Mot. for Summ. J. at 1.) In response, neither Defendant nor Relief Defendants argue that Defendant did not commit the alleged frauds, instead contending primarily that Defendant should not be held liable because (1) certain fraudulent acts are time-barred by the statute of limitations, (2) the fraud was not sufficiently connected to securities transactions, and (3) the underlying securities transactions are not sufficiently domestic to be within the reach of the United States securities laws.

For the reasons that follow, the SEC's Motion for Summary Judgment is granted. Defendant and Relief Defendants' Motions for Summary Judgment are denied.

II. Background

A. Overarching Facts³

Oak Management Corporation ("OMC") is the investment manager for various venture capital investment funds, which raise money from investors (ranging from state and municipal pension funds to individual investors) and, in turn, invest those monies in various types of securities. (SEC Loc. R. 56(a) 1 Statement of Facts ("SOF") at X–4.) Defendant joined Oak in 2004 where he worked as an investment professional and a managing member of entities that serve as general partners of certain Oak funds. (SOF ¶ X–5.) Defendant was responsible for, among other things, identifying companies in which Oak funds might invest ("portfolio companies"), recommending investments, and negotiating the terms of investments with portfolio companies. (Id. ¶¶ X–6 to X–9.)

To enter into a securities transaction, Oak entities memorialized an agreement to consummate a purchase or sale in written agreements, typically share purchase agreements ("SPAs"), merger agreements or tender offer agreements. (Id. ¶ X–25.) The SEC's allegations focus on a series of such transactions relating to ten companies, described in the Second Amended Complaint as Companies A through J, all of which involved Defendant. In essence, and as described infra in detail with respect to each transaction, Defendant opened bank accounts he alone controlled that were deceptively titled in the name of Oak and its portfolio companies, which he then used to divert monies intended for Oak funds or its portfolio companies into his and his wife's personal bank accounts.

B. Procedural History

On April 2, 2015, before the SEC initiated this action and unrelated to this action, Defendant was arrested and charged with insider trading. See United States v. Kanodia , et al., No. 1:15–cr–10131–NMG–MBB, 2015 WL 12672172 (D. Mass. Apr. 1, 2015) (Docs. ## 3–4). Defendant's bond was set at $9 million and, as a condition of release pending his criminal trial, his travel was restricted to Connecticut, New York, and Massachusetts. See United States v. Ahmed , No. 3:15–mj–00052–WIG (D. Conn. Apr. 2, 2015) (ECF 4 & 8 at ¶ 7(f) ); United States v. Kanodia, et al. , No. 1:15–cr–10131–NMG–MBB (D. Mass. Apr. 21, 2015) (ECF 19).

On May 6, 2015, the SEC filed its Complaint [Doc. # 1] and an emergency motion [Doc. # 2] for a temporary restraining order freezing assets and asking for a preliminary injunction. The following day, the Court entered [Doc. # 9] a temporary restraining order freezing assets of Defendant and certain Relief Defendants up to approximately $55 million, and scheduled a preliminary injunction hearing. At some point in May, prior to the preliminary injunction hearing, Defendant fled from the United States to his native country—India—where he remains to this day.

On August 12, 2015, after a two day evidentiary hearing, the Court granted [Doc. # 113] the SEC's motion for a preliminary injunction. This hearing transcript is posted on the docket, to which Defendant has access.

C. Defendant's Assertion of his Fifth Amendment Right

Defendant answered [Doc. # 218] the SEC's Second Amended Complaint on April 22, while represented by counsel, "assert[ing] his right under the Fifth Amendment to the Constitution of the United States and applicable laws and statutes not to be compelled to be a witness against himself ..." in response to the SEC's allegation of fraud. (See SEC Ex. 1; SOF ¶ X–1.) In discovery, among other things, the SEC requested "all communications ... with any of the Relief Defendants regarding any of the allegations in the Complaint," "all communications ... with any individuals from Companies A–I regarding any of the allegations in the Complaint," and "all communications ... with any individual from Oak, and Oak Fund, Oak Funds investors, or an Oak Fund portfolio company regarding any of the allegations in the Complaint." (SEC Ex. 12 at 11–13.) In response to the SEC's Requests for Admission and Interrogatories, Defendant invoked his Fifth Amendment right against self-incrimination. (SOF ¶¶ X–1, X–16.) In response to the SEC's Document Requests, Defendant claimed to have no responsive documents. (Id. ¶ X–16.)

D. Defendant's Fraudulent Conduct

1. Company A

In August 2014, Defendant proposed via email that Oak Fund XIII purchase 124,378 Series A shares of Company A from Company A's holding company, the "BVI Company," at a price of $28.50 per share, for a total purchase price of $3,544,773. (SOF ¶ A–1.) He buttressed his proposal with favorable comments on Company A's financial condition, but before Oak Fund XIII purchased the shares, Defendant received a copy of Company A's most recent board package, which included lower estimated financial results for Company A than the figures Defendant reported in his proposal to Oak. (Id. ¶ A–2.) On August 11, Oak approved Defendant's proposed purchase of Company A shares and executed the stock purchase agreement on behalf of Oak Fund XIII. (Id. ¶ A–6.)

Defendant then induced Oak Fund XIII to pay an inflated purchase price by emailing Oak what appeared to be the deal documents already executed by the seller with the purchase price of $3,544,733. (Id. ¶ A–7.) However,...