Securities and Exchange Commission v. Fiore, No. 18-CV-5474 (KMK)

• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)
• Writing for the Court: KENNETH M. KARAS, United States District Judge
• Citation: 416 F.Supp.3d 306
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Joseph A. FIORE, Berkshire Capital Management Company, Inc., and Eat at Joe's, Ltd. n/k/a SPYR, Inc., Defendants.
• Docket Number: No. 18-CV-5474 (KMK)
• Decision Date: 25 September 2019

416 F.Supp.3d 306

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
Joseph A. FIORE, Berkshire Capital Management Company, Inc., and Eat at Joe's, Ltd. n/k/a SPYR, Inc., Defendants.

No. 18-CV-5474 (KMK)

United States District Court, S.D. New York.

Signed September 25, 2019

416 F.Supp.3d 312

John J. Bowers, Esq., Paul W. Kisslinger, Esq., Securities and Exchange Commission, Washington, DC, Counsel for Plaintiff.

Alexander B. Spiro, Esq., Crystal Nix-Hines, Esq., Quinn Emmanuel Urquhart & Sullivan, LLP, New York, NY and Los Angeles, CA, Counsel for Defendants.

Marc S. Gottlieb, Esq., Ortoli Rosenstadt LLP, New York, NY, Counsel for Defendants.

OPINION & ORDER

KENNETH M. KARAS, United States District Judge:

The Securities and Exchange Commission (the "SEC" or "Plaintiff") brings this Action against Joseph A. Fiore ("Fiore"), Berkshire Capital Management Company, Inc. ("Berkshire"), and Eat at Joe's, Ltd. n/k/a SPYR, Inc. ("Eat at Joe's") (collectively, "Defendants"), alleging that Defendants engaged in manipulative trading practices in violation of federal securities laws, in violation of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a) ; Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5 ; Sections 9(a)(1) and (2) of the Exchange Act,

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15 U.S.C. §§ 78i(a)(1), (2) ; Section 20(b) of the Exchange Act, 15 U.S.C. § 78t(b) ; Section 13d of the Exchange Act, 15 U.S.C. § 78m(d), and Rule 13d-1 thereunder, 17 C.F.R. § 240.13d-1 ; and Section 7(a) of the Investment Company Act, 15 U.S.C. § 80a-7(a). (See Compl. ¶¶ 1–9 (Dkt. No. 2).) Before the Court is Defendants' Motion To Dismiss the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) (the "Motion"). (See Not. of Mot. (Dkt. No. 26).) For the reasons stated below, Defendant's Motion is denied.

I. Background

A. Factual History

The following facts are taken from the SEC's Complaint, and are assumed true for the purpose of resolving the instant Motion.

1. Relevant Parties and Entities

Joseph Fiore "owns and controls Berkshire and is the Chairman of the Board of Directors of SPYR, Inc., previously known as Eat at Joe's." (Compl. ¶ 13.) From April 2013 to March 2014 (the "Relevant Period"), (id. ¶ 2), Fiore maintained and controlled six brokerage accounts held in the name of Berkshire and six brokerage accounts held in the name of Eat at Joe's, (id. ¶ 13). Berkshire is a New York private equity firm that provides financing to penny stock companies. (Id. ¶ 14.) Eat at Joe's is a Nevada corporation of which Fiore served as chief executive officer ("CEO"), chief financial officer ("CFO"), and chairman of the board, and owned more than 50% of its common stock. (Id. ¶ 15.) In early 2015, Eat at Joe's changed its name to SPYR, Inc., and shifted the focus of its business from "developing, owning, and operating theme restaurants" to "digital publishing and advertising and the development of mobile applications and games." (Id. )

Non-party Plandai Biotechnology, Inc. ("Plandai") is a Nevada corporation with its principal offices located in London, England. (Id. ¶ 17.) "Plandai purports to be in the business of producing botanical extracts from live plant material, including from green tea leaves, tomatoes, and more recently, marijuana, for the nutraceutical and pharmaceutical industries." (Id. ) Plandai's stock was a "penny stock," as defined by the Exchange Act; at all relevant times, Plandai's stock traded at less than $5.00 per share. (Id. ¶ 18.)

2. The Promotional Campaign

In early 2011, Fiore was introduced to Plandai's CEO, and they entered into a business relationship. (Id. ¶ 19.) Plandai's common stock was registered with the SEC pursuant to § 12(g) of the Exchange Act, and was quoted on OTC Link under the ticker symbol "PLPL." (Id. ¶ 17.) Fiore acquired a large supply of Plandai stock through several separate transactions. (Id. ¶ 20.) Specifically, Fiore, through Berkshire and Eat at Joe's, beneficially acquired 5.5 million shares of Plandai stock as part of merger transactions between Plandai and its predecessor, Diamond Ranch Ltd. ("Diamond Ranch"). (Id. ) Additionally, pursuant to a stock transfer agreement, the parties converted approximately $2.6 million in debt that Diamond Ranch purportedly owed to Berkshire, Eat at Joe's, and certain of Fiore's close associates and beneficially-owned companies, into 14 million shares of Plandai common stock. (Id. ) Of those shares, Berkshire received 2 million, Eat at Joe's received 3.5 million, and Fiore's associates received the remaining 8.5 million. (Id. ) Fiore later purchased 4.5 million of these shares from his associates "at below market prices," and soon after sold 3.5 million of them into the market for a large profit. (Id. ¶ 21.)

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In March 2013, Fiore met with Plandai's CEO in New York City, and Fiore agreed to promote Plandai stock. (Id. ¶ 22.) Beginning in April 2013, Fiore organized and funded a campaign promoting the stock, including by paying for the campaign with funds that he funneled through Berkshire, in order to sell his shares at a profit, a practice known as "scalping." (Id. ¶ 23.)¹

Fiore directly paid at least five promoters to promote Plandai stock, and indirectly paid at least twenty others to do so through two intermediary consulting companies. (Id. ) In total, Fiore paid promoters at least $2,137,000 to promote penny stocks, including Plandai, with approximately $675,000 going to the two intermediary consulting companies. (Id. ¶ 24.) The promoters primarily distributed promotional materials through bulk emails and in posts on websites they controlled, targeting retail investors and encouraging them to buy Plandai stock. (Id. ¶ 26.) Fiore allegedly remained deeply involved in the promotional process, including by providing promoters with information and press releases about Plandai for use in their promotional materials, and by reviewing their materials and informing Plandai when he felt a promoter was underperforming. (Id. ¶¶ 27–28, 31.)

The promotional campaign emphasized the investment merits of Plandai stock and often included specific recommendations to buy Plandai stock, without disclosing that Fiore was actively selling that stock. (Id. ¶ 32.) For example, on April 29, 2013, a promoter paid by Fiore issued an eighteen-page "research report" that included a positive review of Plandai, and was accompanied by a "Speculative BUY" rating. (Id. ¶ 32(a).) The same day and the following day, Fiore directed the sale of at least 55,629 shares of Plandai common stock from accounts held by Berkshire and Eat at Joe's. (Id. ) On October 4, 2013, a third-party promoter retained by one of the consulting firms on behalf of Fiore disseminated a "Street Alert" on Plandai that stated:

Put everything we've told you together and you have a money making opportunity with PLPL like no other – and when it starts to run it's going to run fast, so get in while you can. Go with the experts. Buy PLPL now! ... Keep a very close eye on this fast innovative play today. PLPL could tear up the charts once again. PLPL looks ready to lock and load!! Be prepared for an exciting trading session. This is an opportunity that you will not want to miss!

(Id. at ¶ 32(b).) On the same day, and on October 7, 2013, Fiore directed the sale of at least 70,633 shares of Plandai common stock from accounts held by Berkshire and Eat at Joe's. (Id. ) On January 23, 2014, a promoter paid directly by Fiore issued a research report that included positive reports about the company and included a "Speculative BUY" rating; the same day and the following day, Fiore directed the sale of at least 227,200 shares of Plandai common stock from accounts held by Berkshire and Eat at Joe's. (Id. ¶ 32(c).) On February 12, 2015, a third-party promoter retained by one of the consulting firms on behalf of Fiore disseminated a "Stock Alert" on Plandai that indicated, "PLPL is a huge proven winner for us in the past and it was arguably the breakout company of the entire junior markets in early 2014," and concluded, "PLPL looks ready to lock and load!! Be prepared for an exciting trading session. This is an opportunity that you will not want to miss!" (

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Id. ¶ 32(d).) That same day and the following day, Fiore directed the sale of at least 1,148,078 shares of Plandai common stock from accounts held by Berkshire and Eat at Joe's. (Id. ) Fewer than half the promotions contained disclaimers indicating that the promoter was compensated for promoting the stock, or disclosing that Berkshire "may own" or "may sell" Plandai stock. (Id. ¶ 34.) Most promotions did not contain this disclaimer, and none of them disclosed that Berkshire and Fiore "beneficially owned, intended to sell[,] and were actively selling shares of Plandai stock." (Id. )

Fiore's actions demonstrate that he "clearly intended to sell throughout the Relevant Period." (Id. ¶ 41.) For example, at least two of the brokerage accounts from which Fiore sold Plandai stock identified "liquidation" among the objectives for the accounts. (Id. ¶ 41.) Furthermore, Fiore completed and signed at least five documents that were sent to brokerage...