U.S. S.E.C. v. Park

• Decision Date: 04 May 2000
• Docket Number: No. 00 C 0049.,00 C 0049.
• Citation: 99 F.Supp.2d 889
• Parties: UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Gun Soo Oh PARK, a/k/a Tokyo Joe, and Tokyo Joe's Societe Anonyme Corp., Defendants.
• Court: U.S. District Court — Northern District of Illinois

99 F.Supp.2d 889

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Gun Soo Oh PARK, a/k/a Tokyo Joe, and Tokyo Joe's Societe Anonyme Corp., Defendants.

No. 00 C 0049.

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

May 4, 2000.

COPYRIGHT MATERIAL OMITTED

MEMORANDUM OPINION

KOCORAS, District Judge.

This matter comes before the Court on Defendants' motion to dismiss pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b). For the reasons set forth below, the Court denies Defendants' motion to dismiss.

BACKGROUND

Plaintiff, the United States Securities Exchange Commission (the "SEC"), filed a four count complaint against Defendants Yun Soo Oh Park, a.k.a. Tokyo Joe ("Park"), and Tokyo Joe's Societe Anonyme Corp. (collectively, the "Defendants"), as a result of Defendants' conduct on their web site, which allegedly violates various SEC regulations. For the purposes of this motion, the Court is obligated to assume the truth of the facts alleged in the SEC's complaint.

The allegations of the complaint include the following. On or about April 6, 1998, Park incorporated Societe Anonyme Corp. as a New York corporation. Park is the sole officer and shareholder and operated the corporation from his home in New York. On or about July 23, 1999, Societe Anonyme Corp. changed its name to Tokyo Joe's Societe Anonyme Corp. (hereinafter "Societe Anonyme"). Neither of these corporations ever registered with the SEC in any manner.

In 1997, Park began posting messages on various public financial Internet bulletin boards, which allow people to electronically post and reply to messages regarding stocks, investing, and other financial subjects. During 1998, Park posted thousands of messages under the names "Tokyo Joe" or "TokyoMex." In early 1998, individuals from these bulletin boards began directly contacting Park, soliciting further information about stock picks and trading. As a result, in March 1998, Park created an e-mail list and sent individuals on the list his stock picks. In April 1998, Park established an Internet web site called Tokyo Joe's Café, from which people could receive e-mail alerts regarding Park's stock picks for a fee of $29 per month. This web site operated until late June or early July 1998, and Park never collected any fees in connection with this site.

In or about July 1998, Park set up Tokyo Joe's, another Internet site, at tokyo-joe.com, which continues to operate under Park's control. From about July 1998 to about December 1998, Tokyo Joe's consisted of two areas. One was a limited area of the web site accessible to the general public, and the other consisted of a more expanded area of the web site accessible only to fee paying members. From about July 1998 to about November 1998, the fee was $299 per year to become a Societe Anonyme member. Members receive, among other things, exclusive e-mails of Park's daily stock picks and unlimited access to the members-only areas of Park's web site. In November 1998, the fee structure changed so that new members paid either $249 for six months or $49 per month to become members. In or about December 1998, Park added a "chat room" to the members-only area of the web site. The chat room serves as a forum in which Park conducts two-way electronic dialogues with Societe Anonyme members about Park's stock picks and other investment advice. In January 1999, Park increased the membership fee, which covered the access to the chat room, to $100 per month. Between July 1998 and May 1999, Societe Anonyme's membership increased from about 200 to 3,800 subscribers. In or about June 1999, Park again revised Societe Anonyme's fee structure so that new or renewing members paid $100 per month, but in addition had to pay another $100 per month to access the interactive chat room. According to the SEC, Park collected over $1.1 million dollars in Societe Anonyme membership fees.

Through the web site, Park e-mails, posts, and discusses various stock picks, reactions to the day's markets, and trading tips. He updates the information on his web site at irregular intervals throughout the day. Generally, Park first composes and sends e-mail alerts about his stock picks and also posts them on the members-only portion of the web site. Then, Park discusses his stock picks in the members-only chat room, after which Park may post some of his picks on the public portion of his web site, which is accessible to all Internet users. Finally, Park often posts his picks on public Internet bulletin boards.

Through his advice to the thousands of members on his web site, the SEC alleges that Park was essentially able to manipulate and affect the price of stocks he would buy and sell. For example, he would purportedly encourage members to buy shares of certain stocks, which he also already owned, in order to inflate the price, and then he would reap the benefit by selling his shares profitably, a practice known as scalping. Thus, often, Park would be selling the same stock he was advising his members to purchase. In addition, Park would often recommend holding a stock for several days, claiming that it would hit a target price, while Park was meanwhile immediately selling his stock or placing limit orders below his expressed target price. In order to convince investors to follow his advice, Park would allegedly post effusive testimonials and false and misleading performance results. Park would also misrepresent that Societe Anonyme was buying a certain stock when it in fact already owned the stock or was selling it. Moreover, Park never revealed any of his true interests in the stocks he was recommending to his members to buy and sell. The SEC also claims that Park "touted" the stock of a certain company in exchange for receipt of stock or other compensation from that company.

As a result of Defendants' activities on the web site, the SEC filed four counts. Count I alleges a violation of § 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. Count II claims a violation of § 17(b) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 77q(b). The SEC alleges in Count III violations of § 206(1) of the Investment Advisers Act of 1940 (the "Advisers Act"), 15 U.S.C. § 80b-6(1). Finally, in Count IV, the SEC alleges violations of § 206(2) of the Advisers Act, 15 U.S.C. § 80b-6(2).

Defendants moves to dismiss the SEC's complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b). Specifically, Defendants move to dismiss Counts III and IV, claiming that they are not subject to the Advisers Act because Defendants did not provide "personalized" investment advice. Further, Defendants argue that through its claims in Counts III and IV, the SEC is attempting to regulate Defendants' editorial content regarding investing in violation of Defendants' First Amendment rights. Defendants also move to dismiss Count I, arguing that the SEC's allegations that Defendants failed to disclose material information to subscribers does not state a claim because Defendants did not have a duty to disclose the alleged information. In addition, Defendants move to dismiss the SEC's complaint in its entirety for failing to meet the requirements of Rule 9(b). According to Park, all the SEC's claims are grounded in or sound in fraud, and must therefore be plead with particularity as required by Rule 9(b).

LEGAL STANDARD

The purpose of a motion to dismiss pursuant to Rule 12(b)(6) is to test the sufficiency of the complaint, not to decide the merits of the case. A defendant must meet a high standard in order to have a complaint dismissed for failure to state a claim upon which relief may be granted. In ruling on a motion to dismiss, the court must construe the complaint's allegations in the light most favorable to the plaintiff and all well-pleaded facts and allegations in the plaintiff's complaint must be taken as true. Bontkowski v. First Nat'l Bank of Cicero, 998 F.2d 459, 461 (7th Cir.1993), cert. denied, 510 U.S. 1012, 114 S.Ct. 602, 126 L.Ed.2d 567 (1993). The allegations of a complaint should not be dismissed for failure to state a claim "unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). Nonetheless, in order to withstand a motion to dismiss, a complaint must allege facts sufficiently setting forth the essential elements of the cause of action. Lucien v. Preiner, 967 F.2d 1166, 1168 (7th Cir.1992), cert. denied, 506 U.S. 893, 113 S.Ct. 267, 121 L.Ed.2d 196 (1992).

In reviewing a Rule 12(b)(6) motion to dismiss for failure to state a claim, the court is limited to the allegations contained in the pleadings themselves. Documents incorporated by reference into the pleadings and documents attached to the pleading as exhibits are considered part of the pleadings for all purposes. See Fed. R.Civ.P. 10(c). In addition, "documents that a defendant attaches to a motion to dismiss are considered a part of the pleadings if they are referred to in the plaintiff's complaint and are central to her claim." Venture Associates Corp. v. Zenith Data Systems Corp., 987 F.2d 429, 431 (7th Cir. 1993). With these principles in mind, the Court evaluates Defendants' motion.

DISCUSSION

I. Counts III and IV

Defendants move to dismiss Count III and IV, arguing that the Advisers Act does not apply to them because they are not "investment advisers" thereunder since they never rendered any personalized investment advice. Defendants also argue that application of the Advisers Act to Defendants' activities would violate the First Amendment. The Court will address each of these arguments in turn.

A. Applicability of the Advisers Act

The SEC brings Counts III and IV against Defendants under the Advisers Act, claiming that Park and ...