Sec. & Exch. Comm'n v. Revelation Capital Mgmt., Ltd., 14–CV–645 (VEC)
| Citation | 246 F.Supp.3d 947 |
| Decision Date | 27 March 2017 |
| Docket Number | 14–CV–645 (VEC) |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. REVELATION CAPITAL MANAGEMENT, LTD., Christopher P.C. Kuchanny, Defendants. |
| Court | United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York |
Kevin C. Lombardi, Charles Derrick Stodghill, Richard Edward Simpson, Securities and Exchange Commission, Washington, DC, for Plaintiff.
Howard Schiffman, Schulte, Roth & Zabel LLP, Washington, DC, Jack Yoskowitz, Julia Karen Tebor, Thomas Ross Hooper, Seward & Kissel LLP, New York, NY, for Defendants.
Plaintiff Securities and Exchange Commission ("SEC") brought this enforcement action against Defendants Revelation Capital Management, Ltd. ("Revelation Capital") and Christopher P.C. Kuchanny (collectively, Defendants), alleging that Defendants violated Rule 105 of Regulation M, 17 C.F.R. § 242.105. The parties have cross-moved for summary judgment.1 For the following reasons, Defendants' motion for summary judgment is GRANTED, and the SEC's cross-motion for summary judgment is DENIED.
Most of the material facts in this case are undisputed. Kuchanny is the founder, CEO, and portfolio manager of Revelation Capital, a hedge fund manager. Def. 56.1 Stmt. ¶¶ 1–2. At all times relevant to this action, Revelation Capital and Kuchanny were in Bermuda. Def. 56.1 Stmt. ¶¶ 1–2. Non–party Central Fund, which is headquartered in Canada, is an investment holding company that buys and holds refined gold and silver bullion. Def. 56.1 Stmt. ¶ 4. Central Fund lists its shares on the New York Stock Exchange ("NYSE") under the symbol CEF and on the Toronto Stock Exchange under the symbols CEF.A and CEF.U. Pl. 56.1 Stmt. ¶ 5; Answer ¶ 17, Dkt. 17.
Between November 3, 2009, and November 9, 2009, Revelation Capital sold short approximately 1.3 million shares of Central Fund on the NYSE at an average price of $14.07 per share. Pl. 56.1 Stmt. ¶ 53; Answer ¶ 17.2 These short sales were executed "through a brokerage account at MF Global Inc. in New York, New York." Answer ¶ 9. MF Global, the broker, used a third-party trading platform to execute the trades. Def. 56.1 Stmt. ¶¶ 14–15. The short sales were cleared and settled through Revelation Capital's prime brokerage account in London. Def. 56.1 Stmt. ¶ 15.
On or around November 9, 2009, Canadian broker-dealer CIBC World Markets, Inc. ("CIBC") signed an engagement letter for a potential offering of Central Fund shares (the "Offering"). Def. 56.1 Stmt. ¶¶ 17–18; Pl. 56.1 Stmt. ¶ 56; Yoskowitz Ex. 6.3 After the close of trading that day, Central Fund issued a press release announcing a "proposed underwritten offering by CIBC." Pl. 56.1 Stmt. ¶ 58, Def. 56.1 Stmt. ¶ 23; Yoskowitz Ex. 9. The issue was offered in U.S. dollars only. Yoskowitz Ex. 6 at 15; Yoskowitz Exs. 9, 10.
Scott Smith, CIBC's representative for the Offering, contacted Kuchanny to inquire whether Revelation Capital was interested in participating in the Offering. Def. 56.1 Stmt. ¶ 34. The following morning, after dickering over the price, Kuchanny agreed to buy $56 million shares at a 5.5% premium to the landed net asset value ("NAV") of Central Fund. Yoskowitz Ex. 11; Def. 56.1 Stmt. ¶¶ 24, 37; SEC Opp. at 4.4 Although the SEC disputes whether Kuchanny was legally bound, the SEC acknowledges that failing to honor the offer would have been "very difficult" from a "practical and business perspective." Pl. 56.1 Stmt. ¶ 38.
Later that morning (November 10, 2009), CIBC and Central Fund participated in a pricing call during which CIBC advised Central Fund of the size of its order book, and CIBC orally committed to enter into an underwriting agreement. Def. 56.1 Stmt. ¶ 40; Pl. 56.1 Stmt. ¶ 59. Based on the orders in CIBC's book, Central Fund calculated the amount of gold and silver to purchase and placed its order with CIBC, which purchased the gold and silver bullion on behalf of Central Fund. Def. 56.1 Stmt. ¶ 41. Ultimately, CIBC agreed to purchase almost 17 million shares of Central Fund at $13.56 USD per share. Def. 56.1 Stmt. ¶ 44.5 After the pricing call, CIBC contacted purchasers, including Revelation Capital, and confirmed the number of shares that they had purchased. Def. Stmt. 56.1 ¶ 45. Smith confirmed Revelation Capital's purchase of approximately four million shares at $13.56 per share. Def. 56.1 Stmt. ¶ 45.
In the afternoon on November 10, 2009, CIBC and Central Fund executed an underwriting agreement ("Underwriting Agreement") in Toronto. Def. 56.1 Stmt. ¶ 48. Defendants admit that upon the execution of the Underwriting Agreement, "CIBC became contractually obligated, subject to certain conditions precedent, to purchase shares equivalent in number to the shares for which it had firm bids at the time of the pricing call, which had taken place prior to the execution of the underwriting agreement." Def. 56.1 Resp. ¶ 62. Central Fund filed a Prospectus Supplement that described CIBC's underwriting obligation as follows: "[t]he Underwriters are ... obligated to take up and pay for all of the securities if any of the securities are purchased under the Underwriting Agreement." Pl. 56.1 Stmt. ¶ 61.
Once the Offering closed on November 17, 2009, the shares issued pursuant to the Offering were issued to the Central Depository for Securities ("CDS") in Canada. Def. 56.1 Stmt. ¶ 49. The share certificate for the Offering shares was transferred to CDS by a Canadian company. Def. 56.1 Stmt. ¶ 50. The proceeds of the purchases of the Offering shares were wired to CIBC in Canada, and the net proceeds were then wired to Central Fund in Canada. Def. 56.1 Stmt. ¶ 51; Yoskowitz Ex. 3 ("Spicer Tr.") at 85:8–86:4. The Offering was registered with the Canadian regulatory authority and cross-registered with the SEC pursuant to the Multijurisdictional Disclosure System ("MJDS"), which facilitates cross-border filings of Canadian–issued offerings in the United States. Def. 56.1 Stmt. ¶¶ 7–8; Yoskowitz Ex. 10; Spicer Tr. at 71:3–4; SEC Opp. Ex. 2 at 28:5–16.
In January 2014, the SEC brought this enforcement action against Defendants, alleging that Defendants had violated Rule 105 of Regulation M, 17 C.F.R. § 242.105. Rule 105 prohibits, during a certain restricted period of time, any person who has sold short securities that are the subject of a registered offering from purchasing the offered securities. 17 C.F.R. § 242.105(a).6 Rule 105 applies to offerings that are conducted on a firm commitment basis. 17 C.F.R. § 242.105(c). The SEC alleges that Defendants violated Rule 105 by purchasing shares in the Offering after having sold short the same securities during the restricted period. Compl. ¶¶ 2, 16–17. According to the SEC, Defendants made approximately $1.37 million in profits from the short sales. Compl. ¶¶ 2, 18.
Defendants move for summary judgment, arguing that Rule 105 does not apply to the transactions at issue (1) because of Morrison v. National Australia Bank Ltd. , 561 U.S. 247, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010), and (2) because the Offering was not conducted on a firm commitment basis. The SEC cross-moves for summary judgment on liability, arguing the opposite. For the following reasons, Defendants' motion is GRANTED, and the SEC's cross-motion is DENIED.
Summary judgment is appropriate when "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a) ; see also Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). "A genuine dispute exists when the evidence is such that, if the party against whom summary judgment is sought is given the benefit of all permissible inferences and all credibility assessments, a rational factfinder could resolve all material factual issues in favor of that party." SEC v. Sourlis , 851 F.3d 139, 144 (2d Cir. 2016) (citing Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) ). "Summary judgment is appropriate when there can be but one reasonable conclusion as to the verdict, i.e. , it is quite clear what the truth is, and no rational factfinder could find in favor of the nonmovant." Id. at 144 (citations and internal quotation marks omitted).
The non-moving party, however, "must do more than simply show that there is some metaphysical doubt as to the material facts" and "may not rely on conclusory allegations or unsubstantiated speculation." Jeffreys v. City of New York, 426 F.3d 549, 554 (2d Cir. 2005) (citations and internal quotation marks omitted). Rather, the nonmoving party must come forward with "specific facts showing that there is a genuine issue for trial." Weinstock v. Columbia Univ. , 224 F.3d 33, 41 (2d Cir. 2000) (quoting Anderson , 477 U.S. at 256, 106 S.Ct. 2505 ).
Defendants argue that pursuant to Morrison v. National Australia Bank Ltd. , 561 U.S. 247, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010), the Court should hold that Rule 105 is inapplicable to Defendants' trades. The SEC counters that Morrison may not even apply to Rule 105, but if it does apply, the transactions at issue in this case are domestic and hence subject to Rule 105 under Morrison . The Court agrees with Defendants that Defendants' transactions are not subject to Rule 105 under Morrison .7
In accordance with the presumption against extraterritoriality, Morrison held that section 10(b) of Exchange Act is applicable "only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States." 561 U.S. at 273, 130 S.Ct. 2869. For securities not listed on a domestic exchange, "the exclusive focus [is] on domestic purchases and sales," id. at 268, 130 S.Ct. 2869 (emphasis in original). Put differently, Morrison established two tests for determining whether securities transactions are "domestic": "transactions in securities listed on domestic exchanges and domestic transactions...
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§ 5.09 Trading
...Oct. 31, 2021). For an instance in which a party was found not to have violated Rule 105, see SEC v. Revelation Capital Management, 246 F. Supp.3d 947 (S.D.N.Y. 2017). The court came to this conclusion because the activities relating to the purchase of the securities in the subject offering......