United States District Court, D. Massachusetts
ORDER TO SHOW CAUSE
1, 2019, Auctus Fund, LLC ("Auctus") initiated this
action in federal court on the basis of diversity
jurisdiction. Compl. Demand Jury Trial ¶ 6,
(''Compl."), ECF No. 1. At a hearing on July 1,
2019, the Court ordered Auctus to submit its membership
information within two weeks so that the Court could verify
its jurisdiction. Electronic Clerk's Notes, ECF No. 11;
see also Wolf v. Altitude Costa LLC, 347 F.Supp.3d
106, 109 (D.P.R. 2018) (observing that, for diversity
jurisdiction purposes, "[a]n LLC shares the citizenship
of all its members'') (citing D.B. Zwirn Special
Opportunities Fund, L.P. v. Mehrotra, 661 F.3d 124, 125
(1st Cir. 2011) (per curiam)).
weeks have passed, and Auctus has not submitted its
membership information to the Court. It instead filed an
amended complaint. First Am. Compl. Demand Jury ¶ 6
("Am. Compl."), ECF No. 12. Accordingly, the Court
ORDERS Auctus to show cause within the week why it has not
submitted that information.
the amended complaint predicates federal jurisdiction only on
its newly added claims that arise under the Securities Act of
1933 and the Securities Exchange Act of 1934. See
id. (citing 28 U.S.C. § 1331; 15 U.S.C. § 77a
et seq. (the "Securities Act"); 15 U.S.C.
§§ 78a et seq. (the "Securities
Exchange Act"). It does not claim that the Court has
diversity jurisdiction. See id.
another pending matter involving Auctus, the Court noted its
"grave doubt" that similar Auctus
"instruments constitute securities under the Securities
Exchange Act of 1934" and that the antifraud provisions
of the Securities Act applied to those instruments.
See Order Show Cause 2, Auctus Fund, LLC v.
Sunstock, Inc., Civ. A. No. 18-12568-WGY (D. Mass. May
6, 2019) (the "Sunstock Litigation"), ECF
No. 43. There, the Court noticed that the parties labeled the
instruments as notes that matured in nine months, and so on
their face appeared to fall outside the scope of the
Securities Exchange Act. See id. at 2-3 (citing 15
U.S.C. §§ 78c; 78j(b)); compare Am. Compl.
Ex. B at 1, ECF No. 12-3 (indicating note issued on April 27,
2018 with a maturity date nine calendar months later, January
27, 2019). The Court also did not see evidence of a viable
claim under the antifraud provisions of the Securities Act
because Auctus's complaint did not allege that it
purchased the instrument in a public offering. See
Order to Show Cause 3-4, Sunstock Litigation (citing
15 U.S.C. § 771(a)(2); Gustafson v. Alloyd Co.,
513 U.S. 561, 584, (1995)); compare Am. Comp., Ex.
A. § 1.2.b, ECF No. 12-2 (representing that Auctus
"is an 'accredited investor' as that term is
defined in Rule 501(a) of Regulation D"); compare
also Am. Compl. (no allegations that Auctus purchased
instrument in public offering).
Court previously thought these defects "possibly
divest[ed] the Court of subject matter jurisdiction."
Id. at 2 (citing Bell v. Hood, 327 U.S.
678, 682-83 (1946) (providing that the Court may dismiss a
purported federal claim "for want of jurisdiction where
the alleged claim clearly appears to be immaterial and made
solely for the purpose of obtaining jurisdiction or where
such a claim is wholly insubstantial or frivolous"). In
its response to the order to show cause, however, Auctus
relied on the Ninth Circuit's decision in Securities
and Exchange Commission v. R.G. Reynolds Enterprises,
952 F.2d 1125 (9th Cir. 1991). Pls. Auctus Fund, LLC's &
EMA Financial, LLC's Prelim. Statement Resp. to
Court's Order Show Cause Dated May 6th, 2019 at 4-6
("Resp."), Sunstock Litigation, ECF No.
45. In R.G. Reynolds Enterprises, the Ninth Circuit
followed the Second, Fifth, Seventh, Tenth, and District of
Columbia Circuits in ruling that "the mere fact that a
note has a maturity of less than nine months does not take
the case out of [the Securities Acts], unless the note fits
the general notion of 'commercial paper.'" 952
F.2d at 1132 (citations and internal quotation marks
Auctus did not defend its claim under the antifraud
provisions of the Securities Act, the Court concluded that
Auctus had provided enough in its response to demonstrate
that it had "colorable securities law claims" under
the Securities Exchange Act. Order 1, Sunstock
Litigation, ECF No. 48
the briefing in the Sunstock Litigation satisfied
the Court as to its jurisdiction over the Securities Exchange
Act claim, the Court still has qualms about the securities
claims in this case. See Order Show Cause at 2-4,
Sunstock Litigation; Order 1, Sunstock
Litigation. The Ninth Circuit's decisions do not
control this Court, and its R.G. Reynolds
Enterprises decision appears to rely on the lack of
legislative history to dispense with the plain meaning of the
Securities Exchange Act's words. See 952 F.2d at
1132 (reasoning that because the legislative history to the
Securities Act indicated that it only sought to exempt
commercial paper, the silence of the legislative history of
the Securities Exchange Act on that point meant the drafters
intended the same understanding).
Court is chary to accept the absence of legislative history
to rule that the legislature meant something other than what
it said. See id. at 1131-33. The Court begins its
interpretation of a statute from the statute's language
and relies on the premise that "the words Congress
chose, if not specially defined, carry their plain and
ordinary meaning." Stornaway Fin. Corp. v. Hill (In
re Hill), 562 F.3d 29, 32 (1st Cir. 2009) (citing
Boivin v. Black, 225 F.3d 36, 40 (1st Cir. 2000)).
In some cases, courts depart from plain meaning if its
"application would bring about results that are . . .
antithetical to Congress's discernible intent."
United States v. Gordon, 875 F.3d 26, 34 (1st Cir.
2017) (quoting Hill, 562 F.3d at 32, and citing
Church of the Holy Trinity v. United States, 143
U.S. 457, 459 (1892)).
the Supreme Court has taken such an approach to interpret
technical terms such as "notes" under the
securities laws. See Reves v. Ernst & Young, 494
U.S. 56, 63 (1990) (explaining that "the phrase any
'note' should not be interpreted to mean literally
'any note,' but must be understood against the
backdrop of what Congress was attempting to accomplish in
enacting the Securities Acts"). The Court thus reads the
Securities Exchange Act to exempt notes (that would otherwise
be securities under the Reves test) with a maturity
date nine months or less from the time of issuance. See Order
to Show Cause 2-3, Sunstock Litigation (citing 15
U.S.C. § 78j(b); Reves, 494 U.S. at 63).
"nine months" does not appear to be a technical
term that requires the Court to resort to legislative intent
to interpret it. See Hill, 562 F.3d at 32 (citing
Boivin, 255 F.3d at 8). In any event, the Court is concerned
about relying on the absence of legislative history to show
that the plain meaning of "nine months" is
"antithetical to Congress's discernible
intent." See Gordon, 875 F.3d at 34.
the Court hereby ORDERS Auctus to show cause within 21 days
why the Court ought not dismiss Auctus's securities law
count for failure to state a claim. See Wyatt v.
Boston, 35 F.3d 13, 14-15 (1st Cir. 1994)
("[A] district court may, in appropriate
circumstances, note the inadequacy of the complaint and, on
its own initiative, dismiss the complaint. Yet a court may
not do so without at least giving plaintiffs notice of the
proposed action and affording them an opportunity to address
the issue.") (quoting Literature, Inc. v.
Quinn, 482 F.2d 372, 374 (1st Cir. 1973)); Order to Show
Cause 3-4, Sunstock Litigation (identifying the
Court's issues with the Securities Act claim).
Auctus neither demonstrates that diversity jurisdiction
exists nor shows its allegations amount to even one viable
securities law claim, this Court shall dismiss the securities
law count and decline to exercise supplemental jurisdiction
over Auctus's state law claims. See Rossi v.
Gemma, 489 F.3d 26, 39 (1st Cir. 2007) ("As a
general principle, the unfavorable disposition of a
plaintiff's federal claims at the early stages of a suit
. . . will trigger the dismissal without prejudice of any
supplemental state-law claims.") (quoting Rodriguez
v. Doral Mortg. Corp., 57 F.3d 1168, 1177 (1st Cir.
1995) and citing 28 U.S.C. § 1367(c) (3)) .