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Securities and Exchange Commission v. Jones

United States District Court, D. Massachusetts

January 5, 2018

SECURITIES AND EXCHANGE COMMISSION
v.
CHERYL L. JONES MEMORANDUM AND ON MOTION TO DISMISS BY DEFENDANT CHERYL L. JONES

          RICHARD G. STEARNS UNITED STATES DISTRICT JUDGE.

         The Securities and Exchange Commission (SEC) alleges that defendant Cheryl Jones was a “necessary and substantial” participant in a Ponzi scheme orchestrated by her brother, Mark Jones. According to the Complaint, Cheryl Jones (hereafter Jones) sold unregistered (and worthless) securities in violation of Sections 5(a) and 5(c) of the Securities Act of 1933. Jones filed a motion to dismiss, asserting, among other defenses, that the SEC's claims are time-barred under the five-year statute of limitations that applies to actions for civil penalties brought under Section 5 of the Act.[1] The court, by way of a September 20, 2017 order, authorized limited discovery on Jones's statute of limitations defense (including her deposition), and permitted each side to supplement the briefing. Because there is no record support for the allegation that Jones sold or offered to sell unregistered securities during the limitations period (or was during that time a necessary and substantial participant in the sale or offer of sale of the securities at issue), the court will grant summary judgment to Jones pursuant to Fed.R.Civ.P. 56.

         BACKGROUND

         Jones is a resident of Washington, DC, where she works as a licensed real estate agent. Her brother, Mark Jones, was the subject of civil and criminal penalties arising out of an investment fund (the Bridge Fund) that he created and managed between 2007 and 2015. The Bridge Fund promised investors that their money would be used to extend short-term “bridge loans” to Jamaican companies that had been approved for commercial bank loans but were in need of interim financing until the loans closed. In truth, Mark Jones (in classic Ponzi fashion) siphoned off some of the funds for his personal use while using the rest to pay off investors whose suspicions were or might be aroused. When the music came to a grinding halt, Mark Jones fessed up and pled guilty. He was sentenced to seventy months' imprisonment, and eventually incurred a default judgment in a parallel civil case, which called for a disgorgement in the amount of $3, 822, 973.48, and payment of a civil penalty of $160, 000.

         The SEC then turned its sights on Cheryl Jones, whose good fortune it had been to be one of the early investors in the Bridge Fund. Jones allegedly recruited new investors to the scheme in exchange for which she received commissions and a monthly retainer from her brother.[2] The SEC brought this securities fraud lawsuit against Jones on July 3, 2017.[3] In the Complaint, the SEC seeks disgorgement of the moneys Jones is said to have reaped from the hustle, as well as a permanent injunction restraining her from further violations of Section 5.

         This court, noting that under 28 U.S.C. § 2462, claims for disgorgement and civil penalties “shall not be entertained unless commenced within five years from the date when the claim first accrued, ” ordered discovery on the timeliness of the SEC's claims, limited to the exchange of interrogatories, requests for documents, and Jones' deposition, and further confined to potentially pertinent conduct occurring during the limitations period - that is, from July 3, 2012, to July 3, 2017.[4] See Order of September 20, 2017, Dkt # 16. Discovery has now closed, and the parties have filed additional briefs, with Jones renewing her Motion to Dismiss and the SEC filing a Supplemental Opposition. See Dkt #s 17 and 18.

         DISCUSSION

         As a rule, when evaluating a motion to dismiss at the pleading stage, the court follows a familiar path and “accept[s] as true all well-pleaded facts set out in the complaint and indulge[s] all reasonable inferences in favor of the pleader.” SEC v. Tambone, 597 F.3d 436, 441 (1st Cir. 2010) (en banc). “Factual allegations must be enough to raise a right to relief above the speculative level, ” and a mere “formulaic recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). However, in this case, the court permitted discovery and the introduction of documents outside the pleadings for the narrow purpose of determining whether the SEC's Complaint was timely. While as an apothegmatical matter, “Fed. R. Civ. P. 12(b) has been interpreted to require the district court to expressly notify the parties of its intention to convert” a motion to dismiss to a motion for summary judgment, E.E.O.C. v. Green, 76 F.3d 19, 24 (1st Cir. 1996), the First Circuit “does not mechanically enforce” the notice requirement. Chaparro-Febus v. Int'l Longshoremen Ass'n, Local 1575, 983 F.2d 325, 332 (1st Cir. 1992).

         Indeed, a formal notice may be supererogatory, and the failure to provide it harmless, “when the opponent has received the affidavit and materials, has had an opportunity to respond to them, and has not controverted their accuracy, ” id. (internal quotation marks and citation omitted). So it is here. This is not a circumstance where “discovery has barely begun and the nonmovant has had no reasonable opportunity to obtain and submit additional evidentiary materials to counter the movant's” showing. Whiting v. Maiolini, 921 F.2d 5, 7 (1st Cir. 1990). Rather, the parties were expressly informed that the court viewed the statute of limitations as potentially dispositive, were permitted to take discovery on that issue, and were allowed to submit the fruits of that discovery for the court's consideration. The court will therefore treat Jones's motion as one for summary judgment, and will grant relief “if [she] shows that there is no genuine dispute as to any material fact and [she] is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a).

         To make out a prima facie case for a violation of Section 5, the SEC must show that: (1) no registration statement was in effect for the securities in question at the time they were sold; (2) the defendant directly or indirectly sold or offered to sell the securities; and (3) the sale or offer of sale was made through interstate commerce.[5] See SEC v. CMKM Diamonds, Inc., 729 F.3d 1248, 1255 (9th Cir. 2013). Courts interpreting the “sale” element have concluded that it may be satisfied by a showing that a defendant was a “necessary participant” or a “substantial factor” in the unregistered sale or offer of sale. See Zacharias v. SEC, 569 F.3d 458, 464 (D.C. Cir. 2009) (applying “substantial factor” test); see also SEC v. Holschuh, 694 F.2d 130, 140 (7th Cir. 1982) (“[T]he relevant inquiry in an enforcement action is whether the evidence shows that the defendant was a substantial and necessary participant in the sales transactions.”); cf. SEC v. Saxena, 26 Fed. App'x 22, 23 (1st Cir. 2001) (per curiam) (noting that defendant had violated Sections 5(a) and 5(c) by “participating in the offer or sale of unregistered securities in interstate commerce or through the mails.”).

         The SEC relies on four items of evidence in an attempt to meet its burden of establishing that Jones “directly or indirectly offered to sell or sold the securities, ” SEC v. Esposito, 260 F.Supp.3d 79, 88 (D. Mass. 2017) (citing SEC v. Spence & Green Chem. Co., 612 F.2d 896, 901-902 (5th Cir. 1980), after July 3, 2012. Specifically:

(1) Mark Jones paid the Defendant a 10% commission on securities purchased by eight investors to whom she had introduced him; (2) the Defendant communicated from time to time (in some cases, frequently) with five of the eight investors; (3) the Defendant spoke with Mark Jones about how to address the investors' concerns because, as she put it on one occasion, she was “making sure we're on the same page!!”; and (4) three of the investors with whom the Defendant was in contact purchased more than $540, 000 of additional securities from Mark Jones.

Pl's Supp. Opp'n to Def's Motion to Dismiss, Dkt # 17, at 8. Ensemble, the SEC argues, “[t]his evidence supports a reasonable inference that the three investors would not have purchased the additional securities but for the Defendant's efforts to maintain the relationship and address their concerns, ” and that this inference in turn “supports a finding that the Defendant was a necessary participant and a substantial factor” in her brother's scheme. Id.

         This is pretty thin gruel. As to the receipt of commissions, there is no record evidence tying the money that Jones received from her brother to investors or investments that she recruited or solicited after the limitations period had run (as opposed to those that she recruited or solicited prior to July 3, 2012). While Jones readily admits to having introduced some of her friends to her brother in 2008 and 2009, [6] and to having received commissions as a result of ...


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