U.S. Sec. & Exch. Comm'n v. John T. Place, Paul G. Kirk, John P. Kirk, Global Transition Solutions, Inc.

• Decision Date: 14 February 2019
• Docket Number: CIVIL ACTION NO. 16-4291
• Parties: UNITED STATES SECURITIES AND EXCHANGE COMMISSION, v. JOHN T. PLACE, PAUL G. KIRK, JOHN P. KIRK, GLOBAL TRANSITION SOLUTIONS, INC., and GLOBAL TRANSITION SOLUTIONS, LLC
• Court: U.S. District Court — Eastern District of Pennsylvania

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, v. JOHN T. PLACE, PAUL G. KIRK, JOHN P. KIRK, GLOBAL TRANSITIONSOLUTIONS, INC., and GLOBAL TRANSITION SOLUTIONS, LLC

CIVIL ACTION NO. 16-4291

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

February 14, 2019

MEMORANDUM RE: MOTION FOR SUMMARY JUDGMENT

Baylson, J.

I. Introduction

In this case, the Securities and Exchange Commission ("SEC") alleges that the brokerage firms Global Transition Solutions, Inc. and Global Transition Solutions, LLC (together, "GTS"); John Kirk, GTS, LLC's President; Paul Kirk, GTS's General Counsel and Chief Operating Officer; and John Place, GTS, LLC's Chief Executive Officer, committed securities fraud by misleading current and prospective clients about the true nature of their costs in connection with portfolio transitions. The Complaint alleges four causes of action under federal securities laws.

1. Count I: Violations of Section 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 against Defendants John Kirk; Paul Kirk; John Place; GTS, Inc.; and GTS, LLC.

2. Count II: Violations of Section 15(c)(1) of the Exchange Act against Defendant GTS, Inc.

3. Count III: Control personal liability under Section 20(a) of the Exchange Act for violations of Exchange Act Sections 15(c)(1) and 10(b) and Rule 10b-5 thereunder against Defendants John Kirk, Paul Kirk, and John Place.

4. Count IV: Liability under Section 20(e) of the Exchange Act for aiding and abetting violations of Exchange Act Section 15(c)(1) against Defendants John Kirk, Paul Kirk, and John Place.

The SEC seeks permanent injunctions against Defendants to enjoin them from engaging in acts, practices, and courses of business alleged in the Complaint; disgorgement of all profits realized from Defendants' unlawful conduct; and civil penalties pursuant to Section 21(d)(3) of the Exchange Act. (ECF 1, "Compl." ¶ 8.)

The SEC has moved for summary judgment on liability on its claims under Sections 10(b) and 20(a) of the Exchange Act against Defendants John and Paul Kirk (together, "the Kirks" or "Defendants")-Counts I and III of the Complaint. There is no Motion for Summary Judgment on the SEC's claims under Sections 15(c)(1) or Section 20(e) of the Exchange Act-Counts II and IV of the Complaint. For the reasons discussed below, the SEC's Motion for Summary Judgment is granted in part and denied in part.

II. Undisputed Facts

The Court included a detailed description of the undisputed facts in the Opinion denying Defendants' Motion for Summary Judgment on statute of limitations grounds. (See ECF 67; 2018 WL 6727998, at *1-3 (E.D. Pa. Dec. 21, 2018) (Baylson, J.).) Therefore, the Court refers to the facts within the statutory period-after August 8, 2011-that are summarized in that Opinion, and does not repeat them here.

III. Procedural History

On August 8, 2016, Plaintiff SEC filed the Complaint in this Court against Defendants GTS, the Kirks, and Place, alleging that all Defendants violated federal securities laws by failing to disclose all sources of compensation to clients between October 2006 and February 2014. (ECF 1.) The Kirks filed an Answer to the Complaint on April 7, 2017 (ECF 25). The SEC filed a Notice of Dismissal as to Defendant GTS, LLC under Rule 41(a)(1)(A) on April 21, 2017 (ECF 29).

On June 15, 2018, the SEC filed a Consent Motion for Entry of Judgment on Liability against Place (ECF 42), along with the Consent of Place (ECF 43, Ex. 1). That same day, the SEC also filed a Motion for Summary Judgment on liability on its Section 10(b) and 20(a) claims-Counts I and III of the Complaint-against the Kirks (ECF 44, "MSJ"). The Kirks filed an Opposition on August 10, 2018 (ECF 48, "Opp'n"), and the SEC filed a Reply on September 7, 2018 (ECF 50, "Rep.").

Also on June 15, 2018, the Kirks filed a Motion for Summary Judgment, contending that the SEC's claims against them-Counts I, III, and IV of the Complaint-should be dismissed as time-barred (ECF 45). The SEC filed an Opposition in response on August 10, 2018 (ECF 49), and the Kirks filed a Reply on September 7, 2018 (ECF 51).

On October 18, 2018, the Court ordered the Kirks to file a Response to the SEC's Statement of Facts, specifically indicating its contentions as to material facts that are not in dispute (ECF 53). Per the Court's order, Defendants filed a Response on November 1, 2018 (ECF 54). Defendants moved for leave to file an amended Response to the SEC's Statement of Facts and amended Declarations of the Kirks on November 2, 2018 (ECF 55). The amended Response was attached to the Motion for Leave to Amend as Exhibit A (ECF 55 Ex. A).

Following a November 8, 2018 hearing on all open motions (ECF 57), this Court issued an Order granting the SEC's Consent Motion for Entry of Judgment of Liability against Place, overruling Defendants' general objections to the SEC's Statement of Facts, ordering Defendants to file a Second Amended Response and Seconded Amended Declarations in response to the SEC's Motion for Summary Judgment on liability, and allowing the SEC to file annotated slides and a Reply to the Second Amended Response (ECF 61). Defendants filed a Second Amended Response and Second Amended Declarations of the Kirks on November 15, 2018 (ECF 62, "Defs.' Am.SOF"; id. Ex. 1, "Am. John Kirk Decl."; id. Ex. 2, "Am. Paul Kirk Decl."). The SEC filed a Reply and annotated slides on November 26, 2018 (ECF 65, "Am. Rep."; id. Ex. 1, "SEC Slides"), and Defendants filed slides in response on December 3, 2018 (ECF 66). On December 21, 2018, the Court denied the Kirks' Motion for Summary Judgment as to the statute of limitations (ECF 67, 68).

IV. Parties' Contentions

A. SEC's Motion for Summary Judgment

The SEC contends that Defendants are liable for securities fraud under three theories: (1) GTS and the Kirks misled clients by failing to disclose the commissions GTS earned in connection with transactions in violation of Section 10(b) of the Exchange Act and Rule 10b-5(b); (2) GTS and the Kirks engaged in a scheme to defraud clients in violation of Section 10(b) of the Exchange Act and Rule 10b-5(a) and (c); and (3) the Kirks are liable for GTS's fraudulent misconduct as control persons of GTS under Section 20(a) of the Exchange Act. (MSJ at 4.)

First, the SEC argues that the Kirks misled clients in violation of Rule 10b-5(b) because they made the following misrepresentations to current and prospective clients, directly and through GTS: (1) that GTS only earned explicitly disclosed commissions and fees on client transactions; (2) that GTS did not have conflicts of interest with clients, and its sole mission was to reduce client costs; and (3) that GTS's clients' transition costs were attributable only to market and timing costs. (Id. at 25.)¹

According to the SEC, the Kirks were the "makers" of these fraudulent statements, as required for direct liability under Rule 10b-5(b). (Id. at 26.) Specifically, the SEC alleges that John Kirk was a "maker" of GTS representations because he scripted or approved GTS messages and held the power to both edit communications and prohibit sales staff from deviating from pre-approved messages. (Id.) The SEC also contends that Paul Kirk was a "maker" of GTS statements to clients and consultants because GTS did not make statements without his approval. (Id. at 27; ECF 44 Ex. 2, "SEC SOF" ¶ 49.)

Second, the SEC contends that John and Paul Kirk engaged in a scheme to defraud customers in violation of Rule 10b-5(a) and (c) by falsely labeling trading profits as "transaction cost analysis" ("TCA") in invoices sent to routing brokers ("BORs"), by concealing the markup² and markdown revenue³ from James Zogby, the owner of GTS, Inc.; by diverting the revenue to a bank account that Zogby did not control or monitor; and by approving reports generated by GTS that deceived clients about the nature of their costs. (MSJ at 34-35.) The SEC also avers that John Kirk committed fraud by hiding GTS's true sources of revenue from GTS's sales staff, who he knew were interacting with clients. (Id. at 35.)

In support of its securities fraud claims under Rules 10b-5(a), (b), and (c), the SEC contends that both Defendants acted with the requisite scienter. (Id. at 38-39.) The SEC argues that JohnKirk, a securities professional, knew that GTS's primary revenue source derived from markups and markdowns on trading in connection with client transitions and yet concealed this information from clients, consultants, and sales staff despite a duty to disclose it. (Id.) Similarly, the SEC contends that Paul Kirk, also a licensed securities professional, knew that GTS shared in profits with BORs in connection with client transitions, but nevertheless signed contracts that misrepresented or materially omitted the truth about how GTS earned money. (Id. at 40.) The SEC further contends that because Paul Kirk was GTS's compliance representative and General Counsel, his material misrepresentations and omissions were reckless as a matter of law. (Id. at 40-41.)

Lastly, the SEC contends that Defendants are liable for GTS's securities fraud as control persons of both GTS, Inc. and GTS, LLC because they aided and abetted GTS, Inc.'s violations of Section 10(b) of the Exchange Act. (Id. at 42-43.) In particular, the SEC argues that GTS committed securities fraud by concealing from clients that it shared in markup and markdown revenue with BORs and by delivering post-trade reports that mispresented the nature of clients' inflated costs. (Id.) According to the SEC, Defendants are liable for GTS's alleged fraud because they exerted control over GTS and neither ignored nor attempted to prevent GTS's fraudulent conduct. (Id. at 44-45.)

B. The Kirks' Opposition to the SEC's Motion for Summary Judgment

In response, Defendants contend that GTS disclosed to its customers that it received both commissions and fees, that GTS's use of and fee sharing agreements with BORs did not raise clients' costs, and...