United States District Court, D. Massachusetts
Sorokin United States District Judge.
Securities and Exchange Commission has filed a Motion for
Summary Judgment (Doc. 186) against Defendant Howard B.
Present. After careful review of the voluminous record and a
lengthy helpful argument from counsel, for the reasons that
follow, the Court DENIES the Motion.
court may grant summary judgment only where there is no
genuine issue of material fact and the moving party is
entitled to judgment as a matter of law.” Perez v.
Lorraine Enterprises, Inc., 769 F.3d 23, 29 (1st Cir.
2014) (citing Fed.R.Civ.P. 56(a)). “A
‘genuine' issue is one on which the evidence would
enable a reasonable jury to find the fact in favor of either
party.” Id. (citation omitted). “A
‘material' fact is one that is relevant in the
sense that it has the capacity to change the outcome of the
jury's determination.” Id. (citation
omitted). “When the movant bears the burden of proof at
trial, he must demonstrate every element of his case such
that no reasonable trier of fact could find other than for
him.” Harley-Davidson Credit Corp. v. Galvin,
807 F.3d 407, 411 (1st Cir. 2015) (citations, internal
quotation marks, and modifications omitted). “When
considering the summary judgment record, all reasonable
inferences are to be drawn in favor of the party opposing
summary judgment, . . . just as all disputed facts are viewed
in the light most favorable to him.” Thompson v.
Cloud, 764 F.3d 82, 87 (1st Cir. 2014) (citation,
internal quotation marks, and modifications omitted).
facts are essentially as follows: Defendant, the founder and
former CEO of the investment advisory firm F-Squared,
repeatedly claimed that one of F-Squared's products, an
investment model called “Alpha Sector, ” was
based on a strategy that was used to manage live client
assets since April 2001, and had significantly outperformed
the S&P 500 index during that time. See Doc. 206
at 32. In fact, according to Plaintiff, Alpha Sector was
based on an algorithm that “was developed in the summer
of 2008, ” so Defendant's claims about the Alpha
Sector model's performance before that time were
materially misleading. Id. at 52; Doc. 1 at 2-3.
all disputed facts in the light most favorable to Defendant
and drawing all reasonable inferences in his favor, his
advanced possible defenses for which he has summary judgment
record support include: (1) Jay Morton, the head of the
company that developed the model which F-Squared acquired and
marketed as Alpha Sector, told Defendant a version of the
model had been used to manage live client assets since April
2001, see Doc. 188-91 at 26; (2) Defendant relied on
subordinates to handle much of the due diligence regarding
the acquisition, see id. at 12-13, and assumed one
of them would have told him if there was evidence
contradicting Morton's claim; and (3) Defendant did not
believe the 2008 algorithm altered the model so much that he
could not discuss the model's pre-2008 performance when
speaking to potential clients, see Doc. 206 at 32
(noting that marketing materials for Alpha Sector claimed its
“analytical engine” was “developed over 7
Plaintiff's legal claims requires showing either scienter
or negligence on Defendant's part. See Doc. 1 at
44-47; SEC v. Tambone, 550 F.3d 106, 146 (1st Cir.
2008), withdrawn, 573 F.3d 54 (1st Cir. 2009),
reinstated in relevant part, 597 F.3d 436, 450 (1st
Cir. 2010); see also United States v. Bailey, 696
F.3d 794, 809 (9th Cir. 2012); 15 U.S.C. §§
80b-6(1), (2), (4); id. § 80b-7.
“Scienter is an intention to deceive, manipulate, or
defraud.” Flannery v. SEC, 810 F.3d 1, 9 (1st
Cir. 2015) (citations and internal quotation marks omitted).
Negligence, in this context, requires showing a defendant
failed “to employ reasonable care to avoid
misleading” investors. Tambone, 550 F.3d at
146 (citation and internal quotation marks omitted).
respect to any counts that require showing scienter, viewing
the record in the light most favorable to Defendant, a
reasonable trier of fact could find: (1) Morton told
Defendant, and Defendant believed him, that a version of the
model had been used to manage live assets since April 2001;
and (2) Defendant did not think the 2008 algorithm was so
transformative that it would be deceptive to tout the
model's performance before 2008. If a jury made these
findings, it could then conclude Defendant had no intent to
deceive, manipulate, or defraud. Thus, Plaintiff is not
entitled to summary judgment on any claims that require
showing scienter. Cf. SEC v. Locke Capital Management,
Inc., 794 F.Supp.2d 355, 365-67 (D.R.I. 2011) (granting
summary judgment against a defendant on the issue of
scienter, where there was “overwhelming evidence”
she had simply fabricated a client).
respect to any counts that require showing negligence,
viewing the record in the light most favorable to Defendant,
a reasonable trier of fact could find that it was reasonable
for Defendant to: (1) believe Morton's alleged claim that
a version of the model had been used to manage live assets
since April 2001; (2) rely on employees to handle much of the
due diligence surrounding the acquisition of the model; and
(3) assume one of his employees would have told him if there
was evidence contradicting Morton's alleged claim. If a
jury made these findings, it could then conclude Defendant
employed reasonable care to avoid misleading investors. Thus,
Plaintiff is not entitled to summary judgment on any claims
that require showing negligence. Cf. SEC v. Gruss,
__ F.Supp.3d __, 2017 WL 1169622, at *58-59 (S.D.N.Y. 2017)
(granting summary judgment against defendant on issue of
negligence, where (1) defendant acknowledged knowing his
actions were at least likely prohibited; (2) two colleagues
told defendant they were concerned about the propriety of his
actions; and (3) defendant never sought legal advice
regarding their propriety).
these reasons, Plaintiff's Motion for Summary Judgment
(Doc. 186) is DENIED. The Court will hold a status conference
on Friday April 28, 2017, at 3:00 p.m. to establish the trial
date. Counsel may appear ...