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Securities and Exchange Commission
v.
Mintz
1:23-cv-03201.
District Court, D. New Jersey.
Mar 18, 2024.

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY CAMDEN VICINAGE

U.S. SECURITIES AND EXCHANGE COMMISSION, Plaintiff, Civil Action No. 23-3201 (RMB/AMD) v. OPINION HAL D. MINTZ and SABBY MANAGEMENT, LLC, Defendants.

APPEARANCES: Daniel J. Maher Edward J. Reilly U.S. SECURITIES & EXCHANGE COMMISSION 100 F. Street NE Washington, D.C. 20549

On behalf of Plaintiff U.S. Securities & Exchange Commission

Jay S. Auslander (pro hac vice) Aari Itzkowitz (pro hac vice) Michael Van Riper WILK AUSLANDER LLP 825 Eighth Avenue, Suite 2900 New York, New York 10019

On behalf of Defendants Hal D. Mintz and Sabby Management LLC RENÉE MARIE BUMB, Chief United States District Judge:

This is a civil enforcement action by the U.S. Securities and Exchange Commission (“SEC” or “Commission”) against Defendants Hal D. Mintz (“Mintz”) and Sabby Management, LLC (“Sabby”) (collectively, “Defendants”) for violations of federal securities laws. In the main, the SEC alleges that between March 2017 and May 2019 Mintz orchestrated a “naked” short-selling scheme involving the securities of 10 issuers in circumvention of Regulation SHO, to the tune of $2 million of ill-gotten

gains. [Compl. ¶¶ 1–8, Docket No. 1.] Before the Court is Defendants’ Motion to Dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). [Docket No. 10.] Seeking partial dismissal of the SEC’s Complaint, Defendants argue that a subset of the SEC’s allegations—the “additional abusive trading” identified in paragraphs 96 through 99 of the Complaint, and Appendix A attached thereto (and to this

Opinion)—fails to comply with the heightened pleading standards of Federal Rule of Civil Procedure 9(b). They also contend that the SEC’s claims for civil monetary penalties and disgorgement are time-barred, in part, pursuant to 28 U.S.C. § 2462. Having considered the parties’ submissions, the Court resolves the Motion without oral argument. Fed. R. Civ. P. 78(b); L. Civ. R. 78.1(b). For the reasons expressed

herein, the Motion will be GRANTED, in part, and DENIED, in part. * * * I. FACTUAL BACKGROUND1 As the SEC summarizes, “From at least March 2017 through May 2019, Mintz,

a highly experienced trader, through Sabby, used his knowledge to game the markets and carry out Defendants’ fraudulent scheme by repeatedly circumventing trading rules involving at least 10 issuers on behalf of two private funds managed by Defendants.” [Compl. ¶ 1.] In particular, the SEC accuses Defendants of carrying out a fraudulent scheme involving two forms of abusive trading in violation of Regulation

SHO and applicable federal securities laws. First, Defendants allegedly mismarked sales of securities as “long,” when they should have been marked as “short,” because Defendants were not “deemed to own” the securities being sold at the time and did not have a net long position in such securities. [Id. ¶ 2.] This enabled them to disguise certain sell orders and avoid

complying with Regulation SHO’s “locate” requirements. [Id. ¶¶ 2–3 (citing 17 C.F.R. § 242.200–242.204).] Second, Defendants allegedly marked and sold certain shares “short” when they knew or were reckless in not knowing that they had not borrowed or located such shares, as required. [Id. ¶ 2.] These trades also failed to comply with the “locate” requirements of Regulation SHO and, for positions in which Defendants

1 As explained below, see infra § III.A., the Court draws all factual allegations from the Complaint and accepts all well-pleaded allegations as true. See Evancho v. Fisher, 423 F.3d 347, 350–51 (3d Cir. 2005) (“When considering a Rule 12(b)(6) motion, we are required to accept as true all allegations in the complaint and all reasonable inferences that can be drawn therefrom, and view them in the light most favorable to the plaintiff.”) (citations omitted). failed to deliver the securities by their settlement date, constituted “naked” short selling. [Id.] Defendants’ scheme allegedly enabled them to reap at least $2 million of ill-gotten gains. [Id. ¶ 3.] While their scheme is described in greater detail below, the Court only recites those factual allegations that it deems necessary to resolve the pending Motion to Dismiss. The parties agree that Defendants’ Motion is not claim- or case-dispositive. A. The Defendants. Sabby is a Delaware limited liability company that was established in 2011. [Compl. ¶ 16.] Since July 12, 2013, Sabby has been registered with the SEC as an investment adviser. [Id.] During the period relevant to this action, Sabby maintained an office in Saddle River, New Jersey. [Id.] Sabby’s business consists of managing two private funds—Sabby Healthcare Master Fund, LTD (the “Healthcare Fund”) and Sabby Volatility Warrant Master Fund, LTD (the “Warrant Fund”) (collectively, the “Private Funds”)—from which it earns management and performance fees. [Id.] The Healthcare Fund, a Cayman Islands entity, is a master hedge fund. [Id. ¶ 17.] At the beginning of the relevant period, it had a gross asset value of $400 million. [Id.] As of its most recent public filing, the Healthcare Fund had a gross asset value of $16 million and 28 beneficial owners. [Id.] As of September 30, 2022, Mintz held a 7.3% equity interest in the Healthcare Fund. [Id.] The Warrant Fund, also a Cayman Islands entity, is a master private equity fund. [Id. ¶ 18.] At the beginning of the relevant period, it had a gross asset value of $60 million. [Id.] As of its most recent public filing, the Warrant Fund had a gross asset value of $182 million and 73 beneficial owners. [Id.] As of September 30, 2022, Mintz held a 39.9% equity interest in the Warrant Fund. [Id.] Mintz, now a resident of Miami, Florida, was the principal and managing partner of Sabby during the relevant period. [Id. ¶ 15.] He had “primary responsibility for making investment decisions, including daily securities trading decisions, for the Private Funds.” [Id.] The SEC alleges that, because of his position, “Sabby is liable for Mintz’[s] conduct.” [Id.] During the relevant period, Sabby’s investment strategy involved participating in secondary offerings by issuers, including common and convertible securities. [Id. ¶ 37.] On October 14, 2015, the SEC instituted cease-and-desist proceedings against Sabby for violations of Rule 105 of Regulation M of the Securities Exchange Act of 1934. [Id. ¶ 16.] The SEC imposed a cease-and-desist order, disgorgement of $184,747.10, and a civil penalty of $91,669.95. [Id.] B. Short Selling and Regulation SHO. As this action regards an alleged “long[-]running fraudulent scheme involving abusive ‘naked’ short selling, order mismarking, and other violative trading” by Defendants, [Compl. ¶ 1], the Court provides a brief overview of short selling and Regulation SHO.[2] A “short sale” is defined as “any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller.” 17 C.F.R. § 242.200(a). “Short selling can be a logical trading strategy for a trader who believes that the price of shares is likely to decline over the near-term.” SEC v. Colonial Inv. Mgmt. LLC, 659 F. Supp. 2d 467, 470 (S.D.N.Y. 2009) (citing Levitin v. PaineWebber, Inc., 159 F.3d 698, 700 (2d Cir. 1998)). In a fairly recent case, the Supreme Court summarized the mechanics of a short-sale transaction: A typical short sale of a security is one made by a borrower, rather than an owner, of stock. In such a transaction, a person borrows stock from a broker, sells it to a buyer on the open market, and later purchases the same number of shares to return to the broker. The short seller’s hope is that the stock price will decline between the time he sells the borrowed shares and the time he buys replacements to pay back his loan. If that happens, the seller gets to pocket the difference (minus associated transaction costs). Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning, 578 U.S. 374, 377 (2016). In principle, there is nothing wrong with short selling. See ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 101 (2d Cir. 2007) (“[S]hort selling—even in high volumes— is not, by itself, manipulative.”). “The Commission has long held the view that short selling provides the market with important benefits, including market liquidity and pricing efficiency.” SEC Release No. 34-59748, 74 Fed. Reg. 18042, 18044 (Apr. 20, 2 This background material is drawn from the Complaint, [see Compl. ¶¶ 24– 36], and the Court’s review of applicable law. 2009). Still, “[a]lthough short selling serves useful market purposes, it also may be used to illegally manipulate stock prices.” Id. In a “naked” short sale, by contrast, “the seller has not borrowed (or otherwise obtained) the stock he puts on the market.” Manning, 578 U.S. at 377 (emphasis added); accord Compl. ¶ 24 (“A ‘naked’ short sale generally refers to selling short without having borrowed or arranged to borrow securities to make delivery to the buyer within the standard settlement period [three days].”). Sometimes, sellers “intentionally fail to deliver securities as part of a scheme to manipulate the price of a security, or possibly to avoid borrowing costs associated with short sales.” “Naked” Short Selling Antifraud Rule, SEC Release No. 34-58774, 73 Fed. Reg. 61666, 61667 (Oct. 17, 2008). This abusive practice can serve to “drive down a company’s stock price.” Id. at 61670. In 2004, the SEC adopted Regulation SHO “in part to address problems associated with persistent fails to deliver securities and potentially abusive ‘naked’ short selling.” Id. at 61667. Regulation SHO thus requires broker-dealers to comply with a series of obligations. First, Rule 200(g) of Regulation SHO requires broker-dealers to mark all sell orders of any equity security as “long,” “short,” or “short exempt.” 17 C.F.R. § 242.200(g). The Court refers to this provision as the “marking” requirement. A sell order may be marked “long” only if the seller of the security is “deemed to own” it, see id. § 242.200(b)–(f) (outlining the circumstances under which a person shall be “deemed to own” a security), and the security to be delivered “is in the physical possession or control” of the broker-dealer or the broker-dealer reasonably believes that it will be. Id. § 242.200(g)(1). A seller of convertible securities is not “deemed to own” the underlying security until that person “has tendered such security for conversion or exchange.” Id. § 242.200(b)(3). “A sale order shall be marked ‘short exempt’ only if the provisions of § 242.201(c) or (d) are met.”3 Id. § 242.200(g)(2). Otherwise, any sale of a security that the seller does not own must be marked “short.” See id. § 242.200(a) and (g). Second, before accepting a short sale order or effecting a short sale for its own account (with certain exceptions not relevant here), broker-dealers must document the source of the securities being sold. 17 C.F.R. § 242.203(b)(1)(iii). Specifically, a broker-dealer must have borrowed the security, have entered into a bona-fide arrangement to borrow the security, or have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due. See 17 C.F.R. § 242.203(b)(1)(i)–(iii). This is generally referred to as the “locate” requirement. See Elec. Trading Grp., LLC v. Banc of America Sec. LLC, 588 F.3d 128, 135 (2d Cir. 2009). Third, Regulation SHO requires participants of a registered clearing agency to immediately purchase shares to close out of a fail-to-deliver position in “threshold securities” if the fails to deliver persist for 13 consecutive settlement days. See 17 C.F.R. § 242.203(b)(3). Threshold securities are generally equity securities with large 3 The Court observes that this action does not involve any “short exempt” securities. [See generally Compl.] and persistent “fails to deliver.” Id. § 242.203(c)(6). This is generally referred to as the “delivery” requirement. See Elec. Trading Grp., 588 F.3d at 135–36. C. Mintz’s Role in Sabby’s Operations. As noted above, Mintz had primary responsibility for making investment decisions for the Private Funds. [Compl. ¶¶ 15, 37.] The SEC further alleges that Sabby’s policies and procedures vested Mintz with responsibility for “knowing whether the Private Funds had a net short or long position in an issuer’s stock and whether each sale of an issuer’s stock was a short sale or a long sale.” [Id. ¶ 38.] In fact, Sabby’s policies and procedures required Mintz or his trading designee to consult Sabby’s trading records before a short sale order could be place, including (i) “a list of available locates provided on a daily basis from Prime Broker 1”;4 (ii) “Sabby’s trading log to see how many shares of the issuer had been sold short so far that day”; and (iii) “short sales executed through brokers not reflected in Sabby’s trading log.” [Id. ¶ 39.] “Mintz was responsible for reporting any instance where a locate was not properly obtained, for reviewing all short sale reports for accuracy, and for ensuring that all orders, including short sale orders, were marked correctly.” [Id. ¶ 40.] 4 “Prime Broker 1” is alleged to be “a broker-dealer used by Sabby to maintain custody of the securities of both the Warrant Fund and the Healthcare Fund.” [Compl. ¶ 21.] D. The Alleged Fraud.

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APPENDIX A Issuer Fund(s) Locates Number Total Naked Short Sales Total Naked Profit After Acquiring Date Range Reset Engaged in of Orders With False Short Sale Orders Short Sales Shares For Delivery Provision Trading Occasion Representations Mismarked as Shares & s Locates Concerning Long Sales Proceeds Denied Locates Issuer 1 Warrant 67,760 1,100 68,860 $202,810 3/15/2017 – No Fund and 3/17/2017 Healthcare $438,578 Fund

Issuer 2 Warrant 877,540 0 877,540 $347,270 7/26/2017 No Fund and Healthcare $1,470,521 Fund Issuer 3 Warrant 45 280,150 0 280,150 $307,390.75 7/28/2017 – No Fund and 7/31/2017 Healthcare $727,818 Fund Issuer 4 Warrant 0 381,642,544 381,642,544 $204,169.89 6/25/2018 – No Fund 7/6/2018 $922,689 Issuer 5 Warrant 0 527,778 527,778 $81,691 7/11/2018 – Yes. Naked Fund 7/12/2018 short sold $412,241 400,150 shares in advance of a warrant conversion price reduction effective July 12, 2018, and exercised warrants after the conversion price reduction. Issuer 6 Warrant 7,638,623 0 4,596,514 $83,222 7/20/2018 – No Fund 7/23/2018 $329,597

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APPENDIX A

Issuer 7 Warrant 210,939 0 196,262 $341,184 2/25/2019 – No Fund 3/5/2019 $343,226 Issuer 8 Warrant 119,181 0 119,181 $345,242. 5/1/2019 – No Fund 5/6/2019 $944,101.


1 Alleged Misstatements and Scheme Liability. Defendants argue that the SEC’s § 10(b) and Rule 10b-5 claim must be dismissed as to the Appendix A issuers because the SEC has failed to identify misstatements with particularity and only vaguely references a “fraudulent trading scheme.” [Defs.’ Br. at 10.] Defendants assert that the SEC has failed to provide the “who, what, when, where, and how” of the alleged fraud. [See id. at 10–12.] In response, the SEC submits two arguments. First, it argues that Rule 9(b) does not require that it plead every detail of every alleged fraud forming the basis of its Complaint. [Pl.’s Opp’n at 4–5.] Rather, because the SEC is alleging a fraudulent scheme or pattern of fraudulent conduct, it need only supply a representative sample of the alleged fraud. [Id. at 6.] Second, in any case, the SEC argues that its allegations are sufficient to state a plausible claim for fraud under Rule 10b-5(a), (b), and (c) as to Defendants’ trading in all ten issuers. [Id. at 7–9.] The Court first considers whether the SEC can meet Rule 9(b)’s particularity requirements by pleading representative examples of fraud. In support of its position, the SEC leans heavily on two False Claims Act (“FCA”) cases: United States ex rel. Joshi v. St. Luke’s Hosp., Inc., 441 F.3d 552 (8th Cir. 2006) and Foglia v. Renal Ventures Mgmt., LLC, 754 F.3d 153 (3d Cir. 2014). In Joshi, a doctor (Dr. Joshi) brought a qui tam action under the FCA against a hospital (St. Luke’s) and its chief of anesthesiology (Dr. Bashiti). 441 F.3d at 553–54. He alleged that the hospital and the chief of anesthesiology conspired and submitted false claims to the government seeking payment for anesthesia services, medical supplies, and prescriptions. Id. Examining the sufficiency of his allegations of fraud, the court agreed that the doctor had failed to satisfy Rule 9(b)’s particularity requirement. See id. at 556 (“Simply put, the complaint fails to identify specifically the ‘who, what, where, when, and how’ of the alleged fraud.”). Recognizing, however, that the doctor had alleged a wide-ranging fraudulent scheme—a “systematic practice of St. Luke’s and Dr. Bashiti submitting and conspiring to submit fraudulent claims over a sixteen-year period”—the court explained that Rule 9(b) provides some latitude: Clearly, neither this court nor Rule 9(b) requires Dr. Joshi to allege specific details of every alleged fraudulent claim forming the basis of Dr. Joshi’s complaint. However, to satisfy Rule 9(b)’s particularity requirement and to enable St. Luke’s and Dr. Bashiti to respond specifically to Dr. Joshi’s allegations, Dr. Joshi must provide some representative examples of their alleged fraudulent conduct, specifying the time, place, and content of their acts and the identity of the actors. Id. at 557. In Foglia, the Third Circuit considered a split between the circuits on what a plaintiff must show at the pleading stage to satisfy Rule 9(b)’s particularity requirement in the context of an FCA action. 754 F.3d at 155. The Foglia court observed that the Fourth, Sixth, Eighth, and Eleventh Circuits require a plaintiff to show “representative samples” of the allegedly fraudulent conduct, specifying the time, place, and content of the acts and the identity of the actors. Id. at 155–56 (citing Joshi, 441 F.3d at 557) (other citations omitted). Contrasting those courts’ approach with the “more nuanced” reading of the First, Fifth, and Ninth Circuits, the Foglia court determined that the “nuanced” approach would suffice: to satisfy Rule 9(b) for a claim under the FCA, it is sufficient for a plaintiff to allege “ ‘particular details of a fraudulent scheme paired with reliable indicia that lead to a strong inference that claims were actually submitted.’ ” Id. at 156 (quoting United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009)); see also id. at 157–58. Having reviewed these cases, the Court is not persuaded that the “relaxed” approach to Rule 9(b)’s particularity requirement in the FCA context is applicable to a securities fraud action. While some courts appear to credit this approach in actions brought by the SEC under federal securities laws, see, e.g., SEC v. Bluepoint Inv. Counsel, LLC, 2021 WL 719647, at *15 (W.D. Wis. Feb. 24, 2021) (“[D]istrict courts in this circuit have held that ‘a plaintiff who pleads a fraudulent scheme involving numerous transactions over a period of years need not plead specifics with respect to every instance of fraud, but it must at least provide representative examples.’ ”) (cleaned up) (quoting United States ex rel. Grenadyor v. Ukranian Vill. Pharmacy, Inc., 895 F. Supp. 2d 872, 878 (N.D. Ill. 2012)), this Court is not aware of binding authority in the Third Circuit authorizing it to do so. In fact, the Fifth Circuit in Grubbs—a case that the Foglia court endorsed in adopting a “nuanced” approach to satisfying Rule 9(b)’s particularity requirement in an FCA action, see Foglia, 754 F.3d at 156—even contrasted claims under the FCA from securities fraud claims. See Grubbs, 565 F.3d at 189 (“[A] claim under the False Claims Act and a claim under common law or securities fraud are not on the same plane in meeting the requirement of ‘stat[ing] with particularity’ the contents of the fraudulent misrepresentation.”) (alteration in original). Therefore, the Court concludes that the SEC cannot avoid Rule 9(b)’s particularity requirements as to the Appendix A transactions by reference to their representative sample theory and a body of FCA cases. As the SEC contends that each transaction identified in Appendix A constitutes a § 10(b) violation, the Appendix A allegations must themselves be sufficiently stated with particularity. Still, the SEC need not rely on the FCA’s “nuanced” pleading standard to clear this sticky wicket: Rule 9(b) does not require the SEC to allege “every material detail of the fraud, such as the date, location, and time,” so long as it uses “alternative means of injecting precision and some measure of substantiation into [its] allegations of fraud.” In re Rockefeller, 311 F.3d at 216 (citation omitted). Ultimately, the question is whether the allegations are sufficient to “place the defendant on notice of the ‘precise misconduct with which it is charged.’ ” Frederico, 507 F.3d at 200 (quoting Lum, 361 F.3d at 223–24) (cleaned up). In this sense, SEC’s allegations concerning Issuers 1 and 2 should inform the Court’s consideration of Appendix A as it asks whether the table contains the material details of allegedly violative trading as part of a “long running fraudulent scheme” to circumvent Regulation SHO. Here, the SEC alleges that Defendants (a) submitted false trading orders to executing broker-dealers for long sales as to the issuers identified in Appendix A when the Private Funds did not have net long positions or (b) submitted short sale trading orders to executing broker-dealers for short sales as to the issuers identified in Appendix A while misrepresenting that Defendants had obtained sufficient “locates.” [Compl. ¶ 98; see also infra App’x A.] In other words, the SEC alleges that Defendants engaged in the exact same two forms of abusive trading in the securities of the Appendix A Issuers as described concerning the securities of Issuers 1 and 2. [Pl.’s Opp’n at 6–9; Compl. ¶¶ 41–95.] While the SEC cannot rely on “representative examples” of adequately pleaded trading violations to bootstrap inadequately pleaded trading violations, see supra at pp. 29–31, each instance of Defendants’ allegedly abusive trading should be considered together. This action only involves two forms of circumventing Regulation SHO. Consider the SEC’s allegations concerning Defendants’ trading in Issuer 4 as an example. The SEC alleges that, between June 25 and July 6, 2018, Defendants submitted orders on behalf of the Warrant Fund to an executing broker-dealer for sales of 381,642,544 shares of Issuer 4 that were marked as long sales when, in fact, they were short sales. [Compl. ¶ 98; see infra App’x A, Row 5.] This instance of “naked” short selling resulted in $204,169.89 of profits. [Id.] The SEC argues that “there is absolutely no ambiguity about what Defendants did and why it was wrong.” [Pl.’s Opp’n at 7.] The Court must agree. Though it may be unorthodox to rely on an appendix containing a table to supply the material allegations of fraud, the Court will not prioritize form over substance. The Complaint and the information contained in Appendix A together contain the necessary facts to comply with Rule 9(b)’s particularity requirement and survive dismissal. As to Issuer 4, the SEC alleges that Defendants—through the Warrant Fund managed by Sabby and controlled by Mintz—authorized the “naked” short sales, submitting mismarked orders to executing broker-dealers (who); that the short sale orders were mismarked as long sales (how); that the orders resulted in the sale of 381,642,544 shares of Issuer 4 (what); that such sales reaped over $200,000 in proceeds (why); and that such conduct occurred between June 25 and July 6, 2018 (when). [Compl. ¶ 98; see infra App’x A, Row 5.] These allegations plainly refer to the material misstatements giving rise to the alleged § 10(b) violation—i.e., that the short sale orders were mismarked as long sales, in contravention of Regulation SHO (i.e., 17 C.F.R. § 242.200(g)). See Kearns, 691 F. Supp. 2d at 614 (explaining that, to state a prima facie violation of § 10(b) and Rule 10b-5, the SEC must, among other things, identify that the defendant made a misrepresentation). Accordingly, the information contained in Appendix A is sufficient to place Defendants on notice of the precise misconduct with which they are charged.17, 18 See Frederico, 507 F.3d at 200. Defendants also submit that the SEC has failed to sufficiently allege scheme liability under Rule 10b-5(a) or (c). [Defs.’ Br. at 10–11; Defs.’ Reply Br. at 10–12.] A party can incur liability for employing a fraudulent scheme or engaging in any fraudulent act in connection with the purchase or sale of any security, even without making an oral or written statement. See Stoneridge Inv. Partners, LLC v. Scientific- Atlanta, 552 U.S. 148, 158 (2008). To state a claim for scheme liability under Rule 17 In so holding, the Court rejects Defendants’ argument that the Complaint fails to explain Mintz’s role in the Appendix A transactions and to attribute particular misstatements to him. [Defs.’ Reply Br. at 7.] The SEC has alleged that Mintz, as the principal and managing partner of Sabby during the relevant period, had responsibility for making investment decisions for the Private Funds and the obligation to consult trading records prior to authorizing a sale order. [Compl. ¶¶ 15, 37–39.] It further alleges, as to each Appendix A transaction, whether Mintz authorized orders with false information about the number of locates obtained or orders that were mismarked as long sales. [Id. ¶¶ 98; App’x A.] While the level of detail that the SEC includes is indisputably less than its allegations regarding the allegedly violative trading in Issuers 1 and 2, the SEC has set forth sufficient information to enable Defendants to discern the material allegations of fraud as to each Appendix A Issuer. See SEC v. Gu, 2022 WL 2753478, at *3 (D.N.J. July 13, 2022) (“Despite Defendant’s protests, he is not prevented from meaningfully being able to respond to the Complaint . . . This Court will therefore deny his motion.”) (internal quotation marks omitted). 18 While the Court concludes that, in this instance, the SEC’s allegations are sufficient to comply with Rule 9(b)’s heightened pleading requirements, this Opinion should not be construed as an open-ended approval of the SEC’s practice more generally—i.e., summarizing material allegations of fraud in an appendix attached to the operative complaint. In another case, this practice may require the SEC to replead its allegations in narrative form and in separately numerated paragraphs to clarify the circumstances of fraud as to each occurrence. For the reasons already explained, however, this result will not be required here, but the SEC is forewarned. 10b-5(a) or (c), the SEC must allege “(1) that the defendant committed a deceptive or manipulative act, (2) in furtherance of the alleged scheme to defraud, (3) with scienter.” Lucent II, 610 F. Supp. 2d at 350. “[M]isstatements and omissions can form part of a scheme liability claim, but an actionable scheme liability claim also requires something beyond misstatements and omissions, such as dissemination.” SEC v. Rio Tinto plc, 41 F.4th 47, 49 (2d Cir. 2022); see also Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005). Here, Defendants contend that the SEC has not pleaded a single fraudulent scheme, but rather attempted to plead multiple schemes involving different issuers and transactions. [Defs.’ Reply Br. at 10.] Defendants also argue that reliance on scheme liability cannot save the SEC’s failure to identify particular misstatements attributable to each Defendant. [Id. at 10–11.] Neither argument is convincing. Viewing the information identified in Appendix A in the context of the SEC’s other allegations concerning trading in the securities of Issuers 1 and 2, [Compl. ¶¶ 41– 95], the Court concludes that the SEC has identified deceptive conduct independent of its allegations that Defendants made false or misleading statements. As noted above, the SEC alleges that Defendants “submitted” false and misleading trade order instructions or false and misleading representations concerning the number of “locates” obtained. [Compl. ¶ 98.] A fair inference from these allegations is that Mintz authorized the dissemination of false information and participated in concealing information from executing broker-dealers. As to Issuers 1 and 2, for instance, Mintz allegedly resisted efforts by Executing Broker-Dealer A to obtain documentation to confirm that Defendants had a sufficient number of “locates” prior to submitting their short sale orders. [Id. ¶¶ 61–69.] The SEC also alleges that Defendants were previously sanctioned for violating Rule 105 of Regulation M on two occasions, resulting in the imposition of a cease-and-desist order, disgorgement, and a civil penalty.19 [Id. ¶ 16.] The Appendix A transactions, in this light, are alleged to be “part of a fraudulent scheme to circumvent trading rules.” [Id. ¶ 97.] Based on these allegations, the Court determines that the SEC has sufficiently identified the circumstances of the alleged fraudulent conduct—repeated circumvention of Regulation SHO and efforts to conceal Defendants’ scheme. See Lorenzo v. SEC, 587 U.S. __, __, 139 S. Ct. 1094, 1101 (2019) (observing that the words “device,” “scheme” and “artifice” in Rule 10b- 5 “capture a wide range of conduct”). Though based on the alleged misstatements, the SEC’s scheme liability claim contains the “something extras” required to survive dismissal. See Stubos, 634 F. Supp. 3d at 201. 19 The SEC permissibly identifies that Sabby has been previously sanctioned by the Commission for improper short sales, [Compl. ¶ 16], and the Court recognizes that this allegation is relevant here. However, in connection with identifying Sabby’s Regulation M violations, it labels Sabby a “recidivist,” [id. ¶ 1], and impugns Mintz’s reputation accordingly. This is inappropriate. Rule 105 of Regulation M has a different set of requirements from Regulation SHO. The Court exercises its authority to strike the SEC’s reference to Sabby as a “recidivist” as impertinent and scandalous. See Fed. R. Civ. P. 12(f)(1) (recognized that a court may sua sponte “strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter”).
2 Scienter. Next, the Court considers Defendants’ argument that the SEC’s § 10(b) claim must be dismissed because it fails to allege any plausible inference of scienter in connection with Defendants’ trading in the Appendix A issuers. [Defs. Br. at 12–14.] As noted, a claim under § 10(b) of the Exchange Act and Rule 10b-5 thereunder requires a showing of scienter. SEC v. Infinity Grp. Co., 212 F.3d 180, 191–92 (3d Cir. 2000) (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976); Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 272–73 (3d Cir. 1998); and McLean v. Alexander, 599 F.2d 1190, 1196–97 (3d Cir. 1979)). “Scienter is ‘a mental state embracing intent to deceive, manipulate or defraud,’ . . . [and] the scienter required for securities fraud includes recklessness.” Infinity Grp., 212 F.3d at 192 (quoting Hochfelder, 425 U.S. at 193 n.12). To establish scienter, the SEC must either (1) “identify circumstances indicating conscious or reckless behavior by defendants or (2) allege facts showing both a motive and a clear opportunity for committing the fraud.” In re Burlington Coat Factory, 114 F.3d at 1422 (citation omitted); see SEC v. Lucent Techs., Inc. (Lucent I), 363 F. Supp. 2d 708, 717 (D.N.J. 2005) (applying these standards in an SEC enforcement proceeding); SEC v. Rivero, 2023 WL 2238700, at *8 (D.N.J. Feb. 27, 2023) (same); SEC v. RRBB Asset Mgmt., LLC, 2021 WL 3047081, at *2 (D.N.J. July 20, 2021) (same). “To establish a corporation’s scienter, the mental state of an officer acting on the corporation’s behalf may be imputed to it.” SEC v. Cooper, 142 F. Supp. 3d 302, 313 (D.N.J. 2015) (Bumb, J.). The SEC need not allege scienter with particularity, but its allegations must support a plausible inference of scienter. See Fed. R. Civ. P. 9(b) (“Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.”); Dubovoy, 2016 WL 5745099, at *5 (explaining that in a securities fraud action, the SEC need only allege facts that give rise to a plausible inference of scienter) (citing McGee, 895 F. Supp. 2d at 683). Here, the Court is satisfied that the SEC has alleged circumstances suggesting that Defendants knowingly or recklessly engaged in the alleged fraud. As noted above, the SEC alleges that, in each instance identified in Appendix A, Defendants “knowingly and recklessly” either submitted (a) false and misleading sale orders or (b) short sale trading instructions while misrepresenting that they had a sufficient number of “locates.” [Compl. ¶ 98.] Defendants engaged in these two forms of abusive trading, the SEC alleges, because “it was profitable to do so and more profitable than following the requirements of Regulation SHO.” [Id. ¶ 99.] The SEC also asserts that the Appendix A transactions are materially similar to Defendants’ trading in the securities of Issuers 1 and 2, as further evidenced by “Sabby’s prior history of short sale violations in connection with Rule 105 of Regulation M.” [Id. ¶ 97; see also id. ¶¶ 41– 95.] In this vein, the SEC alleges that Defendants concealed their misconduct as to such issuers: Mintz misstated the source of the “locates” for Defendants’ trades in the securities of Issuer 1 when there were no locates on file. [See id. ¶¶ 63–64.] He later acknowledged that he was personally aware of the Warrant Fund’s position in the common stock of Issuer 1 on June 21 and 22, 2018; that Defendants had not tendered their convertible securities prior to placing the trades; and that Defendants’ trades as to Issuer 1 were mismarked. [Id. ¶ 71.] Considering these allegations in their totality and situating the Appendix A transactions in their proper context—as part of a relevantly similar pattern of circumventing the requirements of Regulation SHO for years—the Court concludes that the SEC has raised a plausible inference that Defendants knowingly or recklessly engaged in the alleged fraud. See Dubovoy, 2016 WL 5745099, at *5 (explaining that allegations concerning similar trading pattern, among other things, supported inference that defendant intended to participate in the alleged fraud); SEC v. Riel, 282 F. Supp. 3d 499, 521 (N.D.N.Y. 2017) (explaining that, to state a claim for securities fraud based on recklessness, it suffices to allege a defendant’s knowledge of facts that are contradicted by public statements) (citation omitted); SEC v. Constantin, 939 F. Supp. 2d 288, 308 (S.D.N.Y. 2013) (“Representing information as true while knowing it is not, recklessly misstating information, or asserting an opinion on grounds so flimsy as to belie any genuine belief in its truth, are all circumstances sufficient to support a conclusion of scienter.”) (citation and internal quotation marks omitted). Separately, the Court is satisfied that the SEC has pleaded sufficient facts to show that Defendants had both the motive to engage in abusive trading in circumvention of Regulation SHO and the clear opportunity to do so. Avoiding the “locate” requirements and failing to deliver securities by their settlement date enable a trader to manipulate the price of a security and avoid borrowing costs, leaving the trader with more money in his pockets. See “Naked” Short Selling Antifraud Rule, SEC Release No. 34-58774, 73 Fed. Reg. 61666, 61667 (Oct. 17, 2008) (observing that sellers sometimes “intentionally fail to deliver securities as part of a scheme to manipulate the price of a security, or possibly to avoid borrowing costs associated with short sales.”). No reasonable reading of the Complaint could generate doubt about Defendants’ alleged motive here: avoiding the costs associated with applicable regulatory requirements to earn Defendants higher (illicit) profits. See, e.g., Rivero, 2023 WL 2238700, at *9 (“As for motive and opportunity, money is the motive[.]”); RRBB Asset Mgmt., 2021 WL 3047081, at *5 (explaining that the SEC had alleged motive because defendant “could profit handsomely” from trading decisions). Similarly, Defendants’ opportunity to mismark sale orders and lie to executing broker- dealers about the number of “locates” they had obtained and to profit accordingly is obvious, and Defendants do not argue otherwise. Accordingly, the Court concludes that the SEC has satisfied its burden to plead scienter “generally.” See Fed. R. Civ. P. 9(b); Lucent I, 363 F. Supp. 2d at 717.
3 Group Pleading. Finally, the Court addresses Defendants’ argument that the SEC’s claim under § 10(b) and Rule 10b-5 must be dismissed because it impermissibly “lumps Defendants” together. [Defs.’ Br. at 14–15 (citing Kennilworth Partners L.P. v. Cendant Corp., 59 F. Supp. 2d 417, 430 (D.N.J. 1999)).] It is true that a plaintiff does not state a claim for securities fraud against a group of defendants with the requisite particularity when it fails to state the role each defendant played in the fraud. See Kennilworth, 59 F. Supp. 2d at 428–29, 430 (dismissing § 10(b) and Rule 10b-5 claims because plaintiffs “lump[ed] the defendants together and ma[de] general conclusory allegations of wrongdoing”). This result follows from Rule 9(b)’s particularity requirement. Id. Accordingly, the purpose of the proscription against group-pleading in this context is to ensure each defendant has notice of the “precise misconduct” with which he is charged. See id. (citing Rolo v. City Inv. Co. Liquidating Tr., 155 F.3d 644, 658 (3d Cir. 1998)). Here, unlike in Kennilworth and the other cases that Defendants cite in their moving brief,20 the SEC is not asserting § 10(b) and Rule 10b-5 claims against a group of defendants who each have different roles in the alleged fraudulent scheme. Rather, as the only actor, Mintz is alleged to be at the center of the scheme, and Sabby is alleged to be liable for Mintz’s conduct because Mintz acted in furtherance of the fraud on the entity’s behalf. [See Compl. ¶ 15 (referring to Mintz as the principal and managing partner of Sabby and stating that, “[b]ecause of his position, Sabby is liable for Mintz’s conduct”).] It is thus clear what Mintz’s role was in the alleged fraud. Courts typically reject the impermissible-group-pleading argument where, as here, a defendant’s role in an alleged fraud is readily discernable from the pleading. See, e.g., SEC v. Mannion, 789 F. Supp. 2d 1321 (N.D. Ga. 2011) (rejecting defendants’ argument that pleading conflated their conduct and engaged in conclusory group pleading). 20 See Ingris v. Borough of Caldwell, 2015 WL 3613499, at * 5 (D.N.J. June 9, 2015); Russo v. Thor Indus., Inc., 2020 WL 5868801, at *3 (D.N.J. Oct. 1, 2020); Lucent I, 363 F. Supp. 2d at 724. Moreover, there is no suggestion in the pleading that Sabby is liable for conduct that is independent of or separate from Mintz’s actions. In other words, the SEC asserts that Sabby is vicariously liable for Mintz’s scheme to circumvent Regulation SHO. In such circumstances, courts look to agency-law principles and consider the conduct and scienter of the primary violator to determine whether the corporate defendant can be liable under § 10(b) and Rule 10b-5. See SEC v. Complete Bus. Solutions Grp., Inc., 538 F. Supp. 3d 1309, 1336 (S.D. Fla. 2021) (“The principles of agency may be used to impute the actions of corporate officers and directors to the corporation itself . . . in essence, making the corporation liable under § 10(b) and Rule 10b-5.”) (cleaned up) (quoting APA Excelsior III, L.P. v. Windley, 329 F. Supp. 2d 1328, 1353 (N.D. Ga. 2004)). Because the Court has concluded that the SEC’s allegations are sufficient against Mintz, it can readily impute his conduct and scienter to Sabby. See Cooper, 142 F. Supp. 3d at 316–17 (“Because Cooper has the requisite scienter, it may be imputed to the Cooper Companies as well.”) (citing Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1106–07 (10th Cir. 2003)); CFTC v. Traders Glob. Grp. Inc., 2023 WL 7545316, at *11 (D.N.J. Nov. 14, 2023) (“Overall, the Court finds that the CFTC has met its prima facie burden to show scienter as to Defendant Kazmi, based on his own knowledge, and his relationship to Mr. Dentrinos and iSRisk. And, as the sole executive of Traders Global, Defendant Kazmi’s scienter may be imputed to the corporate Defendants.”). The SEC’s theory of fraud is sufficient to clear the pleading stage of this action. V. CONCLUSION For the reasons expressed above, Defendants’ Motion to Dismiss will be GRANTED, in part, and DENIED, in part. An Order shall issue separately. s/Renée Marie Bumb RENÉE MARIE BUMB Chief United States District Judge DATED: March 18, 2024