United States District Court, D. Massachusetts
MEMORANDUM AND ORDER
ALLISON D. BURROUGHS, UNITED STATES DISTRICT JUDGE
Securities and Exchange Commission (“SEC”) filed
this civil enforcement action against two corporate entities
and four individuals, alleging that they schemed to offer or
sell securities without registration or exemption in
violation of federal securities laws and regulations. [ECF
No. 1] (“Complaint”). The Court has entered
default judgments against both of the corporate entities and
one of the individuals, see [ECF Nos. 63, 64, 91],
leaving three individual defendants, including Renee
Galizio. Pending before the Court is the SEC's
motion to strike the majority of the affirmative defenses
asserted in Galizio's amended answer to the Complaint.
[ECF No. 83]. For the following reasons, the SEC's motion
detailed description of the alleged fraudulent scheme at the
heart of the Complaint is set forth in the Court's prior
memoranda. See [ECF Nos. 62, 90]. Galizio, however,
is not accused of being a central player in that scheme, and
only one of the five claims in the Complaint is asserted
against her. See Compl. ¶¶ 64-79.
Specifically, she is accused of purchasing one million shares
of restricted stock for $5, 000 between August and September
2014, id. ¶ 50, and then selling those shares
in October 2014 for $73, 009. Id. ¶ 57.
According to the SEC, Galizio's sale violated Section 5
of the Securities Act of 1933, 15 U.S.C. § 77e, because
it occurred during the pendency of the one-year holding
period that SEC Rule 144 imposes on such shares. See
Compl. ¶¶ 75-9; [ECF No. 84 at 2].
March 15, 2017, with leave of the Court, Galizio filed an
amended answer to the Complaint. [ECF No. 81]. Her amended
answer limns sixteen affirmative defenses, twelve of which
the SEC moves to strike, in whole or in part, pursuant to
Fed.R.Civ.P. 12(f). The challenged affirmative defenses come
in three flavors: (1) that Galizio acted at all times in good
faith, in reasonable reliance upon the advice of others, or
lacked a culpable state of mind; (2) that the allegations,
conduct complained of in the Complaint, and the resulting
harm were caused by persons over whom Galizio had no control;
and (3) that Galizio's conduct was isolated or
Court has “broad discretion” to “strike
from a pleading an insufficient defense or any redundant,
immaterial, impertinent, or scandalous matter.”
Fed.R.Civ.P. 12(f); SEC v. Durgarian, 477 F.Supp.2d
342, 360 (D. Mass. 2007), aff'd sub nom. SEC v.
Papa, 555 F.3d 31 (1st Cir. 2009). Nevertheless, Rule
12(f) motions “are narrow in scope, disfavored in
practice, and not calculated readily to invoke the
court's discretion, ” Boreri v. Fiat
S.p.A., 763 F.2d 17, 23 (1st Cir. 1985), as striking is
generally considered a “drastic remedy.”
Manning v. Boston Med. Ctr. Corp., 725 F.3d 34, 59
(1st Cir. 2013) (quoting 5C Charles Alan Wright, et. al.,
Federal Practice & Procedure § 1380 (3d ed. 2011)).
“In assessing whether a motion to strike should be
granted, the Court must bear in mind that such motions are
rarely granted absent a showing of prejudice to the moving
party.” Lexington Luminance LLC v. TCL Multimedia
Tech. Holdings, Ltd, No. 16-11458, 2017 WL 3795769, at
*1 (D. Mass. Aug. 30, 2017); see 5C Charles Alan
Wright, et. al., Federal Practice & Procedure § 1382
(3d ed. 2017) (“[A] motion to strike frequently has
been denied when the court believes that no prejudice could
result from the challenged allegations, even though the
offending matter literally is within one or more of the
categories set forth in Rule 12(f).”).
seeks to strike Galizio's affirmative defenses because
they are immaterial to her liability under the relevant
federal securities laws. Galizio is accused of violating
Section 5 of the Securities Act of 1933, which makes it
unlawful for anyone to sell, directly or indirectly,
securities by using any means or instruments of interstate
commerce without an effective registration statement, or to
offer to buy or sell securities unless a registration
statement has been filed. Compl. ¶¶ 75-79; 15
U.S.C. § 77e(a), (c). As the Court explained in two
prior decisions in this case, see [ECF Nos. 62, 90],
a prima facie case for a violation of Section 5
requires a showing that: (1) no registration statement was in
effect as to the securities; (2) the defendant directly or
indirectly offered to sell or sold the securities; and (3)
the offer or sale was made in connection with the use of
interstate transportation, communication, or the mails.
See SEC v. Spence & Green Chem. Co., 612 F.2d
896, 901-02 (5th Cir. 1980). If a prima facie case
is established, the burden shifts to the defendant to
demonstrate his entitlement to an exemption from Section 5.
Id. at 902.
that framework in mind, the Court addresses each group of
affirmative defenses challenged by the SEC.
Galizio Acted in Good Faith or in Reasonable Reliance, and
Lacked a Culpable Mental State (Fifth and Seventh through
Thirteenth Affirmative Defenses)
maintains that, because the elements of a Section 5 violation
do not require any showing as to the defendant's mental
state, Section 5 articulates a strict liability offense. As a
result, Galizio's defenses pertaining to her good faith
or reasonable reliance on the advice of others are immaterial
to the issue of liability and should be stricken. Galizio
argues that the First Circuit has yet to decide what, if any,
mental state is required for a Section 5 violation and that
this unsettled state of the law precludes striking her
the SEC does not identify any case in which the First Circuit
explicitly describes Section 5 as a “strict
liability” offense, and the Court has located none, the
case law is nonetheless fairly clear on this point. Decisions
by district courts in this Circuit-including by this Court in
this case-have described Section 5 liability without imposing
a mental state requirement, thus implying that it is a strict
liability offense. See SEC v. Esposito, No.
16-10960, 2017 WL 1398318, at *5 (D. Mass. Apr. 14, 2017);
SEC v. Esposito, No. 16-10960, 2017 WL 388800, at *4
(D. Mass. Jan. 27, 2017); SEC v. Tropikgadget FZE,
146 F.Supp.3d 270, 280 (D. Mass. 2015); SEC v.
Smith, No. 14-192, 2015 WL 4067095, at *9 (D.N.H. July
2, 2015) (“Section 5 imposes no scienter
requirement.”). The lack of a required mental state
“is in accord with the majority of circuit courts that
have considered the question.” SEC v. CMKM
Diamonds, Inc., 729 F.3d 1248, 1256-57 (9th Cir. 2013)
(collecting cases from Fifth, Seventh, and Eleventh
Circuits). Galizio relies only upon cases from the D.C.
Circuit, none of which impose a scienter requirement for
Section 5 liability but merely note that the D.C. Circuit has
not definitively decided the question. See, e.g.,
SEC v. E-Smart Techs., Inc., 74 F.Supp.3d 306, 324
(D.D.C. 2014) (citing Zacharias v. SEC, 569 F.3d
458, 466 (D.C. Cir. 2009)).
the case law does not require proof of the defendant's
mental state for Section 5 liability, Galizio's
affirmative defenses claiming good faith, reasonable
reliance, or lack of an otherwise culpable mental state are
immaterial to the issue of her liability. That being said,
however, the SEC has failed to demonstrate any prejudice that
would necessitate striking these affirmative defenses.
Accordingly, the Court will not strike them, but ...