Sec. & Exch. Comm'n v. Hurgin
| Decision Date | 04 September 2020 |
| Docket Number | No. 19-cv-5705 (MKV),19-cv-5705 (MKV) |
| Citation | 484 F.Supp.3d 98 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Anatoly HURGIN, Alexander Aurovsky, Ability Computer & Software Industries Ltd., and Ability Inc., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Donald W. Searles, Securities and Exchange Commission, Los Angeles, CA, for Plaintiff.
Jason P. Gottlieb, Daniel Cahen Isaacs, Edward Paul Gilbert, Morrison Cohen, LLP, New York, NY, for Defendants.
The Securities and Exchange Commission brings this action against two Israeli citizens, Anatoly Hurgin and Alexander Aurovsky, and two entities, Ability Computer & Software Industries ("Ability") and Ability, Inc. The Commission alleges that the defendants committed fraud and violated proxy solicitation rules in connection with a merger between Ability and Cambridge Capital Acquisition Corp., a publicly-traded U.S. company, that resulted in the formation of Ability, Inc., which is also a publicly-traded U.S. company. The entities have entered into consent decrees with the Commission. Aurovsky moves to dismiss the claims against him for lack of personal jurisdiction, under Rule 12(b)(2) of the Federal Rules of Civil Procedure, and for failure to state a claim, under Rule 12(b)(6). Hurgin moves to dismiss the claims against him under Rule 12(b)(6). For the reasons set forth below, the motions to dismiss are DENIED.
Ability Computer & Software Industries ("Ability") was a business based in Tel Aviv, Israel that sold cell phone and satellite interception products. Cmpl. ¶ 23. Anatoly Hurgin and Alexander Aurovsky co-founded and co-owned the company. Id. Hurgin was the CEO, and Aurovsky was the chief technology officer ("CTO"). Id. ; see also id. ¶¶ 13, 14. Both Hurgin and Aurovsky live in Israel. Id. ¶¶ 13, 14. Neither holds any securities licenses or has ever been registered with the SEC in any capacity. Id.
Cambridge Capital Acquisitions Corporation ("Cambridge") was a publicly-traded U.S. company. Id. ¶¶ 15–16. It was a special purpose acquisition company, meaning it was formed to make money for its investors by acquiring or merging with some other, "target" company. Id . In December 2013, Cambridge conducted an initial public offering ("IPO") that raised about $81 million, but it would have to return that money to its shareholders if it did not combine with a target company within 24 months. Id. ¶ 17–19.
In December 2015, Cambridge merged with Ability. Id. ¶ 15. The resulting company is Ability Inc. Id. It is a publicly-traded U.S. company. Id. ¶ 12. Hurgin is a "co-controlling shareholder, CEO, and chairman of the board" of Ability Inc. Id. ¶ 13. Aurovsky is a "co-controlling shareholder, CTO, and a board member" of Ability Inc. Id. ¶ 14.
Cambridge identified Ability as a potential target company in or around June 2015. Id. ¶ 22. It was a small company with about twelve employees and a few contractors. Id. ¶ 25. In 2013, it made about $5.6 million in revenue. Id . In 2015, it made about $22.1 million. Id.
In August 2015, "Hurgin created, or caused to be created, a financial forecast ... that was sent to Cambridge" in connection with the potential merger. Id. ¶ 26. An Excel spreadsheet laid out the specific details. Id. The forecast predicted that the company would make up to $110 million in 2016. Id. ¶ 27. "There were two significant components of this forecast: (1) the ‘backlog’ ... of customer orders Ability already had in place; and (2) the ‘pipeline’ ... of the probable future orders." Id.
The spreadsheet represented that the backlog of orders was worth $65.7 million. Id. ¶ 28. It contained a list of customer orders, and it "incorrectly represented that the backlog was backed by actual purchase orders from Ability's customers." Id. ¶ 29. A key component of the backlog was from a Latin American police agency, "Ability's single largest customer."
Id. ¶ 30. The police agency accounted for a huge percentage of its revenues in past years. See id. "Of the $65.7 million in backlog revenue" in the spreadsheet "80% of it, or about $52 million, was from that police agency." Id. ¶ 31.
Cambridge hired two companies to evaluate the potential merger, Prometheus Financial Advisory Ltd. and Economics Partners, LLC. Id. ¶¶ 35–36. Both "received and relied on information provided by Ability and Hurgin, including the August 2015 spreadsheet" of backlog and pipeline orders. Id. ¶ 37. Economics Partners, however, also conducted its own due diligence. Id. ¶¶ 37–39. It requested copies of the purchase orders supporting the backlog figure, and Ability acknowledged that it did not have signed purchase orders for about two-thirds of the backlog, "only verbal agreements with customers." Id. ¶¶ 39–41.2 As a result, Economics Partners reported that the "high rate of projects with no [signed purchase orders] in the backlog could indicate a significant risk." Id. ¶ 42. The Economics Partners report also highlighted the risk from the fact that "most" of the backlog was from one Latin American police agency. Id. ¶ 43. Prometheus, on the other hand, did not conduct its own due diligence. It issued a report stating that the backlog was "comprised of signed purchase orders" and projecting that Ability would earn $108 million in 2016. Id. ¶¶ 46–47.
In September 2015, Cambridge and Ability entered into a merger agreement, which both Hurgin and Aurovsky signed [ECF #48-1 ("Merger Agreement") at 85, 86].3 "As the controlling shareholders of Ability, each holding 50% of Ability's shares, both Hurgin's and Aurovsky's consent to the merger was necessary." Cmpl. ¶ 153. "Both Hurgin and Aurovsky consented to the merger." Id. ¶ 154.
"The next step was to solicit and obtain shareholder approval for the proposed merger." Id. ¶ 55. Hurgin played the "central role," id. ¶ 150, but Aurovsky "spoke with Hurgin on a daily basis and knew that Ability was negotiating an agreement to merge with Cambridge, and that Ability would become a public company, trading on a U.S. stock exchange," id. ¶ 151. "Both Hurgin and Aurovsky permitted the used of their names to solicit proxies, consents, and authorization related to the proposed merger." Id. ¶ 155. Specifically, each "signed a form on November 17, 2015, attached as Exhibit 99.4 to Amendment No. 2 of the Form S-4 registration statement, consenting to the use of his name in the Proxy Statement as a person who would become a director of Ability Inc." Id. ¶¶ 156, 157. The proxy solicitation materials described Hurgin and Aurovsky as "highly-talented ... industry professionals" who would bring their skills and "wide network of contacts in the fields of security and intelligence" to the company after the merger. Id. ¶ 160. The Commission alleges that their "qualifications and continued participation in the newly formed public company were essential to soliciting Cambridge shareholders to vote in favor of the merger." Id. ¶ 168.
At the end of September 2015, "Hurgin, along with Cambridge's CEO and others, conducted an investor roadshow in New York City." Id. ¶ 57. But the "September roadshow failed to commit investors to support the proposed merger, in part due to concerns about Ability's financial forecast." Id. ¶ 66. "In an October 6, 2015 email, Cambridge's CEO reported to Hurgin and others that at least three potential investors expressed the following concerns after the roadshow: ‘[n]one of them believes [Ability's financial] forecast,’ ‘[t]hey all think Ability got hot for a year with the Latin American projects,’ ‘[n]one of them believes it is sustainable,’ and ‘they all think Ability doesn't believe in its own growth.’ " Id. ¶ 67. Investors also raised the concern that "Ability's business was project-based and therefore did not have a recurring revenue stream." Id. ¶ 68.
In late November and early December 2015, Ability and Cambridge conducted another roadshow, with Hurgin as the key presenter (the "November 2015 roadshow"). Id. ¶ 70. There, Hurgin represented verbally and in a PowerPoint presentation that Ability had developed and owned a "game changing" interception product for mobile devices called ULIN. Id. ¶¶ 75–77. Hurgin stated that " Id. ¶ 76. He "stated that Ability owned the ULIN product, explaining ‘today we are Ability the only owner for this technology.’ " Id. And he represented "that ULIN was ‘based on a recurring revenue model.’ " Id. ¶ 77. Hurgin also represented that Ability had a "three-year deal" with the Latin American police agency. Id. ¶ 79.
Under the Merger Agreement, Ability and Cambridge were jointly responsible for the preparation of the proxy materials for the proposed merger that were sent to shareholders and filed with the Commission. Id. ¶ 87–91; see also, e.g. , Merger Agreement at 50 (); Cmpl. ¶ 150 (). When the companies filed the Proxy Statement with the Commission, they attached both the Merger Agreement and the Prometheus report, which incorrectly stated that the backlog was comprised of signed purchase orders, among other attachments. Cmpl. ¶¶ 98–102. They did not attach or mention the Economics Partners report, which highlighted the risks of the merger. Id. ¶ 61. The proxy materials also included the November 2015 roadshow transcript and PowerPoint slides, which included Hurgin's representations about Ability owning ULIN and...
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