United States Securities and Exchange Commission v. Mack

Background

The Securities and Exchange Commission (SEC) sued Jeffrey C. Mack and Lawrence C. Blaney, who were officers of the now-defunct Digiliti Money Group, Inc. The SEC alleged that the defendants inflated Digiliti’s reported revenue to make the company appear profitable and attract investors.

According to the complaint, Mack and Blaney arranged undisclosed side agreements with Digiliti’s largest customer, identified as Customer Number 1. Those agreements allowed the customer to cancel contracts without payment or penalty. The SEC alleged that Digiliti nevertheless recorded revenue from the contracts, including contracts that were signed after the relevant reporting periods but backdated so they could be counted in earlier quarters.

The SEC alleged that the inflated figures appeared in financial statements, required filings, and press releases. Digiliti completed a public offering on March 10, 2017, after also raising more than $7 million through a private placement of convertible notes. The customer later canceled the contracts, causing Digiliti to write off more than $1.8 million. Digiliti restated its financial reports and eventually went out of business.

Motion to Dismiss

The complaint contained 15 counts alleging substantive or aiding-and-abetting violations of securities laws. Blaney moved to dismiss the claims involving sections 17(a)(1) through 17(a)(3) of the Securities Act of 1933 and sections 10(b) and 13(a) of the Securities Exchange Act of 1934, along with related rules. He did not seek dismissal of three counts involving Exchange Act section 13(b)(5) and related rules.

Under Rule 12(b)(6), a complaint survives if its factual allegations, accepted as true at this stage, make liability reasonably plausible. The court does not decide whether the allegations are ultimately proven on such a motion.

Court’s Analysis

The court rejected Blaney’s argument that the complaint improperly used “group pleading.” It found that the complaint specifically described his conduct, including emails to Customer Number 1 and Mack concerning the alleged scheme.

The court also rejected the argument that the complaint was a “shotgun” pleading. Although the counts incorporated the factual allegations, the court concluded that the claims all concerned securities fraud and that the facts were connected to those claims.

The court further held that the complaint adequately alleged Blaney’s intent and motive. It cited his position as a company officer, his interest in the company going public, and a $30,000 bonus awarded after the initial public offering. The court therefore denied dismissal of the section 17(a)(1) and section 10(b) claims.

For the section 17(a)(2) claim, the court ruled that the statute did not require Blaney personally to make the relevant statement or omission. Instead, it required that he obtain money or property through a material misstatement or omission connected to an offer or sale of securities. The court found the allegation that Blaney was awarded a $30,000 bonus sufficient at the pleading stage.

Finally, the court held that the SEC adequately alleged Blaney’s knowledge for the aiding-and-abetting claims. Although the complaint did not expressly say that Blaney knew the side agreements would lead to false financial statements, it alleged that he made the agreements knowing and intending that they would falsely support Digiliti’s financial results for stock offerings. The court also noted that Blaney’s emails supported that allegation.

Disposition

The court concluded that the complaint sufficiently stated claims for relief and ordered that Blaney’s Motion to Dismiss be DENIED. The order did not decide whether the SEC would ultimately prove its allegations.