United States Securities and Exchange Commission v. Carebourn Capital
United States Securities and Exchange Commission v. Carebourn Capital, L.P.; Carebourn Partners, LLC; and Chip Alvin Rice
- Katherine Menendez
- 0:21-cv-02114
- U.S. District Court · District of Minnesota
- 22
Counsel of record per CourtListener. Firm names are approximate.
In SEC v. Carebourn Capital, Judge Menendez dismissed the SEC's unregistered-dealer enforcement action without prejudice and denied defendants' motion for sanctions.
Companies and individuals who have faced or may face SEC enforcement actions alleging they acted as unregistered securities dealers, as well as parties in any federal civil case where a plaintiff seeks voluntary dismissal after extensive litigation or where defendants seek sanctions against a government agency following a post-election policy reversal.
What happened
In SEC v. Carebourn Capital, L.P., the U.S. Securities and Exchange Commission sued Carebourn Capital, L.P., Carebourn Partners, LLC, and Chip Alvin Rice in 2021, alleging they bought and sold billions of shares of small-company stocks without registering as a 'dealer' as required by federal securities law. The court previously ruled in favor of the SEC on liability and entered judgment against the defendants, but after a change in presidential administration, the SEC changed course, dropped similar cases nationwide, and asked the appeals court to send the case back so it could seek dismissal. The Eighth Circuit Court of Appeals vacated the prior rulings and returned the case to the district court, where both sides filed competing motions about how the case should end.
The defendants argued the case should be dismissed with prejudice — meaning the SEC could never bring the same claims again — and sought financial sanctions against the SEC, claiming the agency had acted in bad faith, made misrepresentations, and pursued a legally unsupported case. They also sought attorney's fees under a federal law called the Equal Access to Justice Act, which allows certain parties who prevail against the government to recover their legal costs. The SEC opposed all of this and asked only for dismissal without prejudice, citing its new policy priorities following the change in administration.
Judge Katherine Menendez granted the SEC's motion to dismiss the case without prejudice and denied all of the defendants' requests for sanctions and fees. The court found the SEC gave a valid explanation — a post-election policy change — for walking away from the case, that there was no evidence of bad faith or forum-shopping, and that defendants would not suffer legally recognized harm from a dismissal without prejudice. On sanctions, the court found that defendants failed to follow the required procedural steps for seeking Rule 11 sanctions, and that the SEC's legal position was always well-supported by law and fact. Because the case was dismissed without prejudice rather than decided in defendants' favor, they did not qualify as a 'prevailing party' entitled to attorney's fees.
The detailed version
- United States Securities and Exchange Commission v. Carebourn Capital · No. 0:21-cv-02114
- Katherine Menendez
- Mar. 10, 2026
Background
The U.S. Securities and Exchange Commission (SEC) filed this civil enforcement action in September 2021, alleging that Carebourn Capital, L.P., Carebourn Partners, LLC, and Chip Alvin Rice (collectively, 'Defendants') bought and sold billions of newly issued shares of microcap (very small company) securities without registering as a 'dealer' in violation of Section 15(a)(1) of the Securities Exchange Act of 1934, 15 U.S.C. § 78o(a)(1).
On September 27, 2023, the court (then handled by United States Magistrate Judge John F. Docherty) granted the SEC's motion for summary judgment — a ruling on the legal merits without a trial — finding no genuine dispute that Defendants acted as unregistered dealers. The court imposed an injunction against future violations, a three-year penny-stock bar, disgorgement of profits, prejudgment interest, and an order to surrender certain shares for cancellation.
Defendants appealed to the U.S. Court of Appeals for the Eighth Circuit. While the appeal was pending, following the 2024 presidential election and change in administration, the SEC voluntarily dismissed several similar pending enforcement actions as a policy matter. The SEC then asked the Eighth Circuit to remand the case so it could seek to vacate portions of the remedies order in this court. The Eighth Circuit granted that request, vacated the orders on appeal (which included the summary judgment ruling, the remedies order, and the final judgment, among others), and returned the case to the district court. In September 2025, the SEC moved to voluntarily dismiss the case without prejudice under Federal Rule of Civil Procedure 41(a)(2), while Defendants moved for sanctions.
The SEC's Motion to Dismiss Without Prejudice
Legal Standard
Under Rule 41(a)(2) of the Federal Rules of Civil Procedure, once a defendant has answered or moved for summary judgment, a plaintiff may voluntarily dismiss its own case only by court order, 'on terms that the court considers proper.' Unless specified otherwise, such a dismissal is without prejudice — meaning the plaintiff could theoretically refile. The district court has discretion to grant or deny the motion and to determine whether dismissal should be with or without prejudice. Key factors include: (1) whether the plaintiff has offered a proper explanation for wanting to dismiss; (2) whether dismissal would waste judicial time and effort; and (3) whether dismissal would cause 'legal prejudice' to the defendant — meaning the loss of a substantial right, not merely the burden of defending another future lawsuit.
Dismissal with prejudice — which operates as a final rejection of the plaintiff's claims on the merits and bars any future suit on the same grounds under the doctrine of res judicata — is the most severe sanction available and requires a clear record of delay or obstinate conduct by the plaintiff. If a court intends to dismiss with prejudice when the plaintiff only requested dismissal without prejudice, it must first give the plaintiff notice and an opportunity to withdraw the request and proceed to trial.
Analysis
Proper Explanation
The court found that the SEC offered a valid, good-faith explanation for seeking dismissal: a discretionary policy change made by the new administration, which chose to no longer pursue unregistered-dealer cases. The court noted that the Eighth Circuit has previously approved government dismissals following policy changes and found nothing in the record to suggest the SEC was seeking dismissal to escape an adverse ruling — especially since the SEC had already prevailed on the merits in this court before seeking dismissal. Defendants' arguments that the SEC was acting in bad faith or fleeing an unfavorable appellate outcome were rejected as unsupported by the record.
Waste of Time and Effort
The court acknowledged that the litigation was extensive — involving discovery, multiple rounds of dispositive briefing, a final judgment, and an appeal — and that vacating all prior orders means none of the claims or defenses were finally adjudicated. However, the court found this factor did not require dismissal with prejudice, noting that Eighth Circuit precedent permits dismissal without prejudice even in heavily litigated cases. The court also noted it was extremely unlikely the SEC would ever refile these claims, meaning the risk of duplicative litigation was low. The court also found that Defendants had waived any argument for conditioning dismissal without prejudice on payment of their fees and costs, since they did not specifically raise it.
Legal Prejudice to Defendants
Defendants argued they would suffer legal prejudice from a dismissal without prejudice because of reputational harm, insurance classification as a 'risk,' ongoing stress and anxiety for Mr. Rice, the expense of years of litigation, and the potential loss of a statute-of-limitations defense in future proceedings. The court rejected all of these. Under controlling caselaw, 'legal prejudice' means loss of a substantial right in the litigation — not reputational harm, litigation expense, or emotional distress, which are common consequences of any lawsuit. On the statute of limitations, the court found Defendants currently had no such defense in this case (having waived it), and that any future refiling by the SEC — which the court called 'extremely unlikely' — would actually improve Defendants' timeliness defense because the limitations period (five years for civil penalty and disgorgement claims; ten years for injunctive relief and penny-stock bars) would have run further, or entirely, by then.
The court granted the SEC's motion and dismissed the action without prejudice.
Defendants' Motion for Sanctions
Rule 11 Sanctions
Rule 11 of the Federal Rules of Civil Procedure allows courts to sanction parties or attorneys who file papers for an improper purpose, without legal support, or without evidentiary support. Critically, Rule 11 contains a 'safe harbor' provision: before filing a sanctions motion, the moving party must serve the motion on the opposing party and wait at least 21 days to allow that party to withdraw or correct the offending filing. This is a strict procedural requirement.
The court denied Rule 11 sanctions for two independent reasons. First, Defendants admitted they did not comply with the safe-harbor provision in any respect, which alone required denial. Second, even setting that aside, Defendants failed to make any substantive showing that the SEC violated Rule 11. The SEC's claims were grounded in Section 15(a)(1) of the Exchange Act, not in the administrative 'Dealer Rule' adopted in February 2024 (which a Texas federal court later vacated). Commissioner Uyeda's dissenting views about the Dealer Rule — raised publicly — and the Texas court decisions occurred years after this lawsuit was filed and after this court had already ruled in the SEC's favor. Those later events did not retroactively render the SEC's original complaint frivolous or unsupported.
Inherent Authority Sanctions
Federal courts have inherent power to sanction parties for bad-faith litigation conduct, including by ordering payment of attorney's fees. However, this power must be exercised with restraint and requires a finding of bad faith — intentionally advancing a frivolous argument for an improper purpose such as harassment or delay. The court found no evidence of bad faith: the SEC made no misrepresentations, did not file frivolous arguments, and did not pursue the case for an improper purpose. The court declined to exercise its inherent authority to impose sanctions.
Equal Access to Justice Act (EAJA) Fees
The Equal Access to Justice Act, 28 U.S.C. § 2412(d)(1)(A), allows a party that prevails against the United States in a civil action to recover attorney's fees and expenses, unless the government's position was 'substantially justified' (meaning it had a reasonable basis in law and fact) or special circumstances make an award unjust.
The court denied EAJA fees on two independent grounds. First, because the case was dismissed without prejudice — not decided in Defendants' favor on the merits — Defendants are not a 'prevailing party' under controlling caselaw. The Eighth Circuit's vacatur of this court's orders was the result of the SEC's own voluntary policy change, not a determination that the SEC's claims lacked merit. Second, even if Defendants were a prevailing party, the SEC's position was substantially justified throughout the litigation. The court pointed to multiple other federal court decisions supporting the SEC's unregistered-dealer theory, as well as this court's own rulings in the SEC's favor at multiple stages. The Eighth Circuit's vacatur did not reflect any appellate finding that the SEC's legal position was unsound. The court also found that Defendants' request for costs under the EAJA was independently barred by Section 27 of the Exchange Act, which prohibits assessment of costs for or against the SEC in proceedings under that statute. 15 U.S.C. § 78aa(a).
Disposition
The court granted the SEC's motion to voluntarily dismiss the action without prejudice and denied Defendants' motion for sanctions and costs in its entirety. The action is dismissed without prejudice, and judgment is to be entered accordingly.
Read the full 22-page opinion on CourtListener, the free public archive maintained by the Free Law Project.