Sec. & Exch. Comm'n v. Woolf
| Decision Date | 13 December 2011 |
| Docket Number | Case No. 1:08–cv–235. |
| Citation | 835 F.Supp.2d 111 |
| Court | U.S. District Court — Eastern District of Virginia |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Linda WOOLF, et al., Defendants. |
OPINION TEXT STARTS HERE
Erica Yvette Williams, Moira Thomasine Roberts, John Bowers, Securities and Exchange Commission, Washington, DC, Peter Sangjin Hyun, U.S. Attorney's Office, Alexandria, VA, for Plaintiff.
Sarah Byer Miller, Mark Schamel, Womble Carlyle Sandridge & Rice PLLC, Washington, DC, for Defendants.
THIS MATTER is before the Court on Defendants Linda Woolf, David Gengler, Lashaico, Inc. (“Lashaico”), and Hands On Capital, Inc.'s (“Hands On Capital”) Motion to Dismiss, under Federal Rule of Civil Procedure 12(b)(6), the Complaint filed by the Securities and Exchange Commission (“the SEC”). This case is about the SEC's complaint that Defendants carried out a scheme to dupe inexperienced investors into buying seminar packages and trading stocks with lies and misrepresentations about their background and expertise as traders. The SEC alleges that “Teach Me to Trade” (“TMTT”) seminars, software, and mentoring sessions were marketed in free workshops for novice investors at hotels and in television infomercials. According to the SEC's Complaint, Defendants Woolf and Gengler, through independent contractor relationships Defendants Lashaico and Hands On Capital had with entities associated with TMTT, violated § 10(b) of the Securities Exchange Act of 1934 (“the Act”) and SEC Rule 10b–5 by lying about their expertise in securities investment, their financial success in the stock market, and investment services they sold in order to induce the novice investors to purchase TMTT packages and to trade in stocks using TMTT investment strategies and advice from TMTT instructors and mentors. The Complaint asserts that Woolf, as president of Hands On Capital, is an alter ego of Hands On Capital and that Gengler, as president of Lashaico, is that corporation's alter ego as grounds for holding Woolf and Gengler personally liable for the alleged fraud.
Defendants contend that the SEC fails to state a claim for securities fraud because the Complaint does not allege that Defendants induced investors to make any particular stock transaction and therefore Defendants' allegedly false statements were not made “in connection with the purchase or sale of securities,” as required to state a claim under § 10(b) and Rule 10b–5. Defendants contend further that the SEC's Complaint does not set forth sufficient facts to support the SEC's “alter ego” claim and that the Complaint uses the “alter ego” label without factual allegations that would warrant piercing the corporate veil of limited liability.
There are two issues before the Court: (1) whether the SEC sufficiently pleads violations of § 10(b) of the Act and SEC Rule 10b–5 where the Complaint alleges that Defendants lied about their financial investment background and expertise and advised novice investors to trade securities in hotel seminars and televised infomercials; and (2) whether the SEC's Complaint sets forth sufficient facts to warrant piercing the corporate veil and holding Defendants Woolf and Gengler personally liable for the fraud allegedly committed under independent contractor agreements between TMTT entities and corporate entities of which Woolf and Gengler were officers.
The SEC brought this suit alleging that Defendants' involvement with “Teach Me to Trade” (“TMTT”), which encompassed hotel seminars and televised infomercials about trading securities where Defendants Woolf and Gengler misrepresented their background and expertise in trading securities and induced participants to trade securities, violated the anti-fraud provisions of § 10(b) of the Act and SEC Rule 10b–5.1 The SEC moves the Court to permanently enjoin Linda Woolf, David Gengler, Lashaico, and Hands On Capital from such alleged fraudulent conduct and order these defendants to disgorge all gains made in connection with this conduct.
This case was brought on March 11, 2008 but was stayed pending resolution of a criminal case against Woolf and Gengler involving much of the same conduct at issue in this case. See U.S. v. Gengler, No. 1:08cr12, 2009 WL 5549225 (E.D.Va. Oct. 23, 2009). During the 16–day jury trial in that case, Woolf and Gengler moved for a judgment of acquittal pursuant to Federal Rule of Criminal Procedure 29. Id. at *1. On May 7, 2009, the defendants were convicted of conspiracy to commit mail and wire fraud and substantive wire fraud. Id. United States District Judge Anthony J. Trenga subsequently granted their motion for judgment of acquittal. Id. The government's appeal to the United States Court of Appeals for the Fourth Circuit was dismissed on November 10,2010, and Woolf and Gengler were acquitted.
Defendants' Motion to Dismiss the SEC's civil Complaint is now before this Court. In its Complaint, the SEC alleges the following facts, which are taken as true for the purposes of this motion under Rule 12(b)(6) only.
Linda Woolf and David Gengler appeared in televised infomercials and made presentations at workshops promoting personal mentoring services, software, and classes purported to assist users and participants in trading securities. Compl. ¶ 1. The workshops, titled “Teach Me to Trade” (“TMTT”), were held at various hotels across the country, and TMTT seminar and software packages were sold at these events for approximately $11,000–$40,000. Compl. ¶ 20. TMTT has been owned by Whitney Information Network, Inc. (“WIN”) since 2002. Compl. ¶ 11. Gengler was paid approximately $2.25 million to sell TMTT packages from 2002 to 2007 through an independent contractor relationship between Lashaico and entities affiliated with TMTT, including WIN. Compl. ¶¶ 7, 9. Woolf was paid approximately $4 million to sell TMTT packages from 2003 to 2006 through an independent contractor relationship between Hands On Capital and entitles affiliated with TMTT, including WIN. Compl. ¶¶ 8, 10. Woolf is president of Hands On Capital, and Gengler is president of Lashaico. Compl. ¶¶ 9, 10. Lashaico and Hands On Capital's primary income has been commissions paid from WIN, which were typically 10% or 15% of sales at workshops. Compl. ¶¶ 9, 10, 33.
In their workshop and infomercial appearances, Woolf and Gengler lied and misrepresented their background and expertise as traders to convince potential investors in their workshop and television audiences that they could expect to make extraordinary profits trading securities if they purchased TMTT packages and followed TMTT trading strategies. Compl. ¶ 1. Woolf and Gengler also urged potential investors to engage in securities transactions and provided specific advice about particular transactions. Compl. ¶ 1. As a result of Woolf and Gengler's presentations and inducements, investors traded in securities using TMTT strategies, and many of them lost money. Compl. ¶ 55, 56.
Among Woolf and Gengler's misrepresentations were that both were expert securitiestraders who had purchased TMTT packages and made extraordinary profits by trading securities using TMTT trading strategies. Compl. ¶¶ 2, 25, 36. Woolf and Gengler made specific sales pitches to inexperienced investors and claimed that they could show them how to make substantial income from trading securities. Compl. ¶¶ 16, 17, 29. In truth, neither Woolf nor Gengler had purchased TMTT packages, and, according to their federal income tax returns, neither made the substantial gains from trading that they had claimed to make during their workshop and infomercial appearances. Compl. ¶¶ 35, 36. Woolf has never declared a securities trading profit, and, despite his claims about success using option and short-term trading strategies, Gengler declared more short-term capital losses than short-term capital gains on his tax returns. Compl. ¶ 36. Neither Woolf nor Gengler disclosed that they were paid commissions to sell TMTT packages. Compl. ¶ 33.
Woolf and Gengler made several misrepresentations about their background. In a TMTT infomercial, Woolf represented that she had known nothing about stocks before attending TMTT workshops but, within a matter of weeks, replaced her entire income using TMTT trading methods. Compl. ¶ 16. She represented that she now made more money trading for 30 minutes a day than she had made in any of her prior careers. Compl. ¶ 16. Gengler claimed to have been in substantial debt before contacting TMTT but was now a successful trader who was able to spend most of his day with his family after a brief time trading each day. Compl. ¶ 17. Gengler also made the false claim that he was sought out to direct trading in securities brokerage accounts and received a share of profits for this service. Compl. ¶ 27. At TMTT workshops, Woolf and Gengler made false claims that they had each gone into debt in order to purchase TMTT goods and services and urged members of their audiences to do the same. Compl. ¶¶ 23, 24, 26, 31.
Additionally, Woolf and Gengler made false claims about the success rate of former TMTT students and the accuracy of predictions of short-term stock market movements using TMTT strategies. Compl. ¶¶ 30, 37.
Having misrepresented their background and expertise as well as the success of TMTT strategies, Woolf and Gengler went on to advise and even urge investors to engage in actual securities transactions. Woolf and Gengler advised investors to open brokerage accounts and to trade securities within two weeks of the workshop and at least once per week thereafter. Compl. ¶¶ 39, 40. They also advised investors to increase the size of their securities trades in the weeks following the workshop. Compl. ¶ 41. Woolf and Gengler discussed and provided advice about specific securities and trading devices. Compl. ¶¶ 42, 45. They also encouraged investors to participate in TMTT mentoring sessions in which mentors would guide them...
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