Love In the Time of Covid Expires for SEC

October 2, 2020

In Gabriel Garcia Marquez's "Love in the Time of Cholera," young Florentino and Fermina fall in love, but Fermina's father isn't a big fan of his daughter's suitor, and, sadly, things don't go smoothly for the youngsters. They break up and Femina eventually marries Dr. Urbino, who dad likes a lot. Florentino professes his undying love for Femina but isn't exactly faithful. Dr. Urbino does his best to combat cholera. Sadly, there's the parrot, the tree, the ladder, and Dr. Urbino falls to his death. In the end, Florentino and Femina get back together. Trust me, Marquez does the story far more justice than the hatchet job that I just performed upon it. Speaking of time and cholera, in a recent SEC case, a federal court wasn't all that impressed during this time of Covid with the SEC's time-keeping -- or lack thereof. Yeah, I know, that's one hell of a segue!  

In the Time of Covid

The SEC charged Christopher Joseph Bongiorno and Jason Allan Arthur with:

Count One:  violation of 15 U.S.C. §78o(a)(1), which prohibits the sale of securities by unregistered brokers or dealers; and
Counts Two and Three: securities fraud in violation of 15 U.S.C. §77q(a) and 15 U.S.C. § 78j(b), respectively. 

During the SEC investigation, both Defendants asserted their Fifth Amendment privilege against self-incrimination and refused to testify. Securities and Exchange Commission, Plaintiff, v. Christopher Joseph Bongiorno and Jason Allan Arthur, Defendants (Complaint, United States District Court for the Northern District of Ohio ("NDOH"), 20-CV-00469 / February 28, 2020), 

From At Least Through At Least

As set forth in part in the "Summary of the Action" portion of the SEC Complaint:

1. From at least September 2015 through at least November 2018 (the "Relevant Period"), Christopher Joseph Bongiorno and Jason Allan Arthur (collectively, "Defendants") solicited numerous investors throughout the United States to purchase the securities of at least two microcap issuers, US Lighting Group, Inc ("USLG") and Petroteq Energy, Inc. ("PQEFF"). 

2. In connection with their work as securities solicitors, Defendants engaged in fraud by (1) lying to USLG and investors about their identities; (2) recruiting and paying other unregistered individuals to engage in securities solicitations; (3) in the case of Arthur, lying to an investor about his compensation; and, (4) in the case of Bongiorno, misappropriating investor funds. 

3. While engaged in this conduct, Defendants were neither registered with the Commission as brokers or dealers nor associated with a broker or dealer registered with the Commission. 

4. Defendants received transaction-based compensation or commissions for their solicitation activities, which generally amounted to approximately 40% to 50% of investment proceeds from USLG and an average of 39% from PQEFF. 

5. In total, Arthur received transaction-based compensation or gross commissions of at least $1,174,057.10 and Bongiorno received at least $2,356,358.91 from USLG and PQEFF during the Relevant Period. . . . 

Motions to Dismiss Counts Two and Three

In Securities and Exchange Commission, Plaintiff, v. Jason Allan Arthur, at [sic] al., Defendant (Memorandum of Opinion and Order, NDOH, 20-CV-00469 / September 29, 2020), Defendants Arthur and Bongiorno each filed a Motion to Dismiss or, in the alternative, a Motion for a More Definite Statement. Defendants moved to dismiss Counts Two and Three, which Plaintiff SEC opposed. 
Defendants argued in part that Counts Two/Three do not satisfy the heightened pleading requirements of FRCP 9(b). 

SIDE BAR: Federal Rule of Civil Procedure Rule 9(b):

Rule 9. Pleading Special Matters
. . .

(b) Fraud or Mistake; Conditions of Mind. In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.

Defendant Arthur's Arguments

Defendant Arthur argues that the SEC Complaint fails to adequately allege the time, place, and contents of the alleged misrepresentations. In response, the SEC asserts that the Complaint specifies months and years when the cited misrepresentations/omissions occurred. The Court reviewed the Complaint and found that it had not complied with the requirements of FRCP Rule 9(b). Pointedly, as to Arthur's contentions, the Court found in pertinent part that:

[P]aragraph one alleges a three-year long time period, suggesting an ongoing and pervasive scheme. But, the allegations that plaintiff points to, which purportedly give more detailed allegations, do not contain any further time-specific facts. Plaintiff does point to paragraphs 30-33, which outline one example of Arthur cold-calling an investor on behalf of USLG. Those allegations, however, do not assist plaintiff. The complaint alleges only that "a Fort Worth investor" purchased USLG stock in or around September 2016 and October of 2016. The complaint does not contain any allegation (even generically) as to when Arthur made any alleged misrepresentations to this unidentified investor. The Court notes that it is not suggesting that plaintiff need allege the precise time or even exact date that Arthur made telephone calls to investors, as Rule 9(b) does not require as much. As set forth above, however, the Sixth Circuit has repeatedly held that Rule 9(b) requires allegations directed at the "time" of the alleged fraud. Here, other than generically identifying a three-year time period during which defendants allegedly engaged in fraud, the complaint contains no allegation directed at the timing of any specific instance of alleged fraud.1 This does not satisfy Rule 9(b). See, e.g., U.S. ex rel. Bledsoe v. Community Health Sytsm, Inc., 342 F.3d 634, 643 (6th Cir. 2003)("Notably, the amended complaint failed to set forth dates as to the various FCA violations..."). 

The Court further finds that the complaint falls far short of satisfying Rule 9(b) with regard to the sale of PQEFF stock. There are no allegations directed at misrepresentations made by Arthur in connection with PQEFF. Rather, the complaint generally alleges that Arthur operated by using a fictitious name, cold-called investors, and obtained funds. The one transaction identified in the complaint involving PQEFF is alleged to have been undertaken by defendant Bongiorno, not Arthur. . . .
= = = = =
Footnote 1: The complaint does identify when investors purchased stock, but those allegations are not directed at when defendant Arthur made any misrepresentations. 

at Pages 6 - 7 of the Opinion

Defendant Bongiorno's Arguments

Defendant Bongiorno's argument largely mirrors that of Arthur's, and, the Court found that the Complaint failed to comply with the requirements of FRCP Rule 9(b). As to Bongiorno's contentions, the Court found in pertinent part that:

[W]ith respect to the sale of USLG stock, the complaint contains the same general allegations set forth above. The only arguable allegation that contains any specificity is set forth in Paragraph 29, which alleges as follows: 

For example, with respect to one investor from Mosinee, Wisconsin, Bongiorno, using the name John Powers, cold called the investor, told the investor about USLG, and said that the value of USLG shares was about to increase. Based on these and other representations, the investor purchased a total of 69,000 shares of USLG for a total investment of $23,500 made between November 14, 2016 and January 29, 2019. 

This allegation, however, indicates that purchases were made by the investor over a more than two-year time period. Yet, the allegation is completely silent as to when Bongiorno contacted the investor. In addition, the allegation references "other representations," but it is not clear if the other representations were made during only one call, or whether plaintiff is alleging that Bongirono contacted the investor and made representations multiple times during this two-year period. . . .

at Pages 7 - 8 of the Opinion

In addressing Bongiorno's sales of PQEFF stock, the Court referenced Paragraph 38 of the Complaint:

. . . Bongiorno told the Mosinee, Wisconsin, investor over the phone that PQEFF had developed a cost-efficient process to extract oil from reclaimed oil sands, which would translate into a high rate of return on an investment. Based on these and other representations, the investor purchased a total of $15,000 in PQEFF stock in two separate purchases made in or around January 2017 and November 2017.

The Court's analysis of the above portion of the Complaint found that although the dates of the investor's purchases are noted, there is no such specification of the dates when Bongiorno's alleged representations were made. Additionally, the Court notes its concern about allegations in the Complaint pertaining to  Bongiorno's conduct whereby he allegedly directed an investor to remit funds:

[I]t is not clear how Bongiorno is alleged to have "directed" the investor to remit funds, as there are no facts discussing any contact between Bongiorno and the California investor. 

at Page  9 of the Opinion

By Your Leave?

Accordingly, the Court granted the Motions to Dismiss, found the Motions for a More Definitive Statement moot, and dismissed Counts Two and Three. Count One remains pending. Finally, in a a gentle reprimand, the Court notes that:

[P]laintiff asks that, should the Court find dismissal appropriate, it be granted leave to amend. The Court does not grant leave to amend a complaint when the request is filed in a brief in opposition. The Court notes, however, that the pleading amendment deadline is December 31, 2020. Prior to this date, leave to amend is not required.

at Pages 9 - 10 of the Opinion

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