U.S. Sec. & Exch. Comm'n v. Crowe, Case No. 2:16–CV–36

• Decision Date: 20 October 2016
• Docket Number: Case No. 2:16–CV–36
• Parties: UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Robert B. CROWE, Defendant.
• Court: U.S. District Court — Southern District of Ohio

216 F.Supp.3d 852

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.Robert B. CROWE, Defendant.

Case No. 2:16–CV–36

United States District Court, S.D. Ohio, Eastern Division.

Signed October 20, 2016

Daniel J. Hayes, Alyssa A. Qualls, U.S. Securities and Exchange Commission, Chicago, IL, for Plaintiff.

Charles Rockwell Saxbe, Celia M. Kilgard, Taft Stettinius & Hollister LLP, Columbus, OH, W. Stuart Dornette, Taft Stettinius & Hollister, Cincinnati, OH, for Defendant.

OPINION & ORDER

ALGENON L. MARBLEY, UNITED STATES DISTRICT JUDGE

This case comes before the Court on Defendant Robert B. Crowe's Motion to Dismiss under Federal Rule of Civil Procedure 12(b)(6). The United States Securities and Exchange Commission ("SEC") filed a four-count complaint against Robert B. Crowe, alleging violations of Section 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act"), Rule 10b–5 thereunder, and Section 17(a) of the Securities Act of 1933 ("Securities Act").¹ In his Motion to Dismiss the SEC's complaint, Defendant raises the following arguments: (1) that his conduct does not fall under the Adviser's Act Rule 206(4)–5, adopted to regulate "pay-to-play" schemes involving state pension funds; (2) that the SEC's complaint belongs in state, not federal, court, under state election laws rather than federal securities laws; (3) that the SEC failed to allege fraud "in connection with" a securities transaction; and (4) that the SEC inadequately pled scienter, as required for its aiding and abetting claims. As explained below, Mr. Crowe's arguments lack merit. Accordingly, the Court DENIES his Motion to Dismiss the SEC's complaint for failure to state a claim.

I. BACKGROUND

A. Factual History

This action concerns a purported "pay to play" scheme by a financial firm seeking to win business from the State of Ohio. (Compl., Doc. 1, at ¶¶ 1–2.) The Ohio Treasurer is the custodian of certain state funds' assets, including the assets of four Ohio public pension funds: the Ohio Police and Fire Pension Fund, the Ohio Public Employees Retirement System, the State Teachers Retirement System of Ohio, and the School Employees Retirement System of Ohio. (Id. at ¶¶ 2–3; Ohio Rev. Code § 113.051(A) ). Custodial services include, "among other things, receiving and delivering cash and securities for the pension funds, safekeeping the funds' assets, securities transaction settlement, income collection, and recordkeeping[,]" in addition to "investing the funds' daily cash balances into money market mutual funds or other short-term investment securities." (Compl., Doc. 1, at ¶ 4.)

The Ohio Treasurer does not perform these custodial services itself; rather, under Ohio law, the Treasurer contracts with Ohio banks to do so ("Custodian Banks"). (Id. at ¶ 3.) Because Ohio Custodian Banks cannot provide custodial services for international investment assets, and because each of the four pension funds holds such assets, the Ohio Treasurer directs the Ohio Custodian Banks to subcontract with banks that can provide these custody services ("Subcustodians" enter into the subcontracts, or "Global Custody Contracts"). (Id. ) The Ohio Treasurer selects Subcustodians through a bidding process "structured to be awarded solely on the basis of the submitted bids." (Id. at ¶ 30.) In January 2010, the Treasurer, Kevin Boyce, solicited bids for Subcustodians via a Request for Information on the Treasurer's website. (Id. at ¶ 29.) State Street Bank and Trust Company ("State Street"), assisted by its Senior Vice–President and head of Public Funds, Vincent J. DeBaggis, submitted a bid. (Id. at ¶¶ 18, 29.)

A few weeks after Treasurer Boyce solicited bids, DeBaggis hired Mohamed Noure Alo, an immigration attorney and friend of Deputy Ohio Treasurer Amer Ahmad,² as a "lobbyist" for State Street. (Id. at ¶¶ 19, 30, 31.) DeBaggis knew that Alo had no lobbying experience; yet, on February 10, 2010, DeBaggis entered into a contract with Alo whereby State Street would pay him $8,000 per month. (Id. at ¶ 32.) If State Street won two or more Global Custody Contracts, State Street would pay Alo more. (Id. ) Alo told DeBaggis, and later Mr. Crowe, "that he had to pay approximately half of these fees to Ahmad [,]" and that, in exchange, "Ahmad would award at least two of the Global Custody Contracts to State Street." (Id. at ¶ 33.) State Street paid Alo $16,000 on February 23, 2010, purportedly for two months' work. (Id. at ¶ 34.)

The alleged kickbacks were not enough for Ahmad, however. According to Alo, Ahmad also told State Street that it "needed to make significant cash contributions to Treasurer Boyce's election campaign fund." (Id. at ¶ 35.) By January 2010, Treasurer Boyce had raised significantly less money than his challenger, Josh Mandel. (Id. at ¶ 27.) If Boyce were not re-elected in November 2010, Ahmad would not be able to keep his job, and he would not be able to make money from illicit schemes. (Id. at ¶ 26.)

State Street, upon learning of Ahmad's expectation, hired a well-known fundraiser and lobbyist, Mr. Crowe, who was the co-chair of the government relations practice at the law firm Nelson Mullins Riley & Scarborough, LLP ("Nelson Mullins"). (Id. at ¶¶ 15, 36–37.) On March 3, 2010, Mr. Crowe met with Ahmad, among others, and described fundraisers and other ways in which he could help raise money for Treasurer Boyce's campaign. (Id. at ¶ 37.) Ahmad apparently did not have much interest in fundraisers; after the meeting, Ahmad cut to the chase and demanded from DeBaggis contributions of between $20,000 and $25,000 within five days. (Id. ) Mr. Crowe strategized with DeBaggis over how to meet Ahmad's demand, knowing: (a) the maximum campaign contribution limits for individual donors; (b) that an Ohio Treasurer's campaign would not be widely followed and Boyce was not widely known; and (c) that, without disclosing the conflict of interest, neither State Street nor Alo could contribute money to the Ohio Treasurer while also seeking business from him. (Id. at ¶¶ 38–39.)

Mr. Crowe and DeBaggis then approached Alo and asked that Alo wire to Crowe the entire $16,000 services fee that he had received from State Street. (Id. at ¶ 40.) Alo protested; since he had to pay Ahmad half of his fee in kickbacks, the requested wire would put Alo in a deficit. (Id. at ¶ 41.) Crowe and DeBaggis convinced Alo to wire the $16,000, which he did on March 4, 2010, based on promises that Alo would recoup that money, and earn more, if Ahmad awarded State Street the promised Global Custody Contracts. (Id. at ¶¶ 41–42.)

Mr. Crowe then wrote a check to Boyce's campaign for $11,300, the maximum individual campaign contribution limit, and asked other individuals to contribute in their own names. (Id. at ¶ 43.) He bundled his $11,300 check with a $3,000 check from a Crowe-controlled Nelson Mullins PAC and individual contributions from two Nelson Mullins employees. (Id. at ¶ 44.) The Nelson Mullins employees did not actually contribute their own money to Treasurer Boyce's campaign because Mr. Crowe reimbursed them via checks (dated March 5, 2010 and March 8, 2010, respectively) drawn on his personal bank account. (Id. at ¶ 45.) Five days after Ahmad's monetary demands, Mr. Crowe sent the four campaign contribution checks to Alo. (Id. at ¶ 44.) Alo forwarded the checks to Boyce's campaign committee with a cover letter, written by Mr. Crowe, that neglected to mention that Crowe had filtered State Street funds through his own bank account, or that he had reimbursed the Nelson Mullins employees for their contributions. (Id. at ¶¶ 44, 46.)

On March 29, 2010, Ahmad awarded three of the four Global Custody Contracts to State Street, prompting State Street to increase its monthly retainer to Nelson Mullins and its monthly fee to Alo. (Id. at ¶ 47.)

On April 26, 2010, Mr. Crowe held, but did not attend, a fundraiser for the Ohio Treasurer in Los Angeles, California. (Id. at ¶ 48.)

In May and June of 2010, the news media raised questions of fraud based on State Street's having hired Alo, a friend of Ahmad, "just days before [State Street] was awarded the Global Custody Contracts." (Id. at ¶ 49.) Mr. Crowe called Ahmad about these allegations; Ahmad's response, "that the Treasurer's challenger was aggressive and well financed, and that ‘this was just the beginning[,]’ " apparently did not placate Mr. Crowe. (Id. at ¶ 50.) Mr. Crowe subsequently cancelled a fundraiser planned for June 1, 2010. (Id. )

On June 30, 2010, DeBaggis executed the Global Custody Contracts, failing to mention the kickbacks to Ahmad or the campaign contributions filtered through Mr. Crowe's bank account, and certifying that "State Street had not, and would not, provide any public officials or employees with anything of value ‘as to manifest a substantial and improper influence’ with respect to that person's duties." (Id. at ¶¶ 53–55.)

Because Ahmad remained concerned that Treasurer Boyce was lagging behind his challenger in campaign contributions, he demanded a meeting with DeBaggis and Mr. Crowe on July 12, 2010. (Id. at ¶ 56.) At the meeting, which only DeBaggis attended, Ahmad demanded further campaign contributions, and threatened rescission of the contracts "based on viable technical issues, or if the Treasurer's challenger were elected[.]" (Id. at ¶¶ 57–58.) DeBaggis called Mr. Crowe for help in meeting Ahmad's demands, which purportedly prompted a worried Mr. Crowe to send a "dummy invoice" to Alo for the $16,000 that Alo had previously wired to him for "mentoring services." (Id. at ¶¶ 60–61.) The invoice was postmarked July 12, 2010, but was dated February 15, 2010. (Id. at ¶ 60.) Mr. Crowe printed the invoice on Nelson Mullins letterhead, yet Nelson Mullins had no knowledge of the mentoring contract, the invoice, or the invoice's payment. (Id. at ¶¶ 61–62.)

Mr. Crowe allegedly never provided mentoring services to Alo. (Id. at ¶ 63.) Indeed, Alo told the Federal Bureau of Investigation ("FBI") in November 2010 that "[Alo] had...