United States Securities and Exchange Commission v. Carebourn Capital, L.P.

Background

The Securities and Exchange Commission (SEC) sued Chip Alvin Rice and Carebourn Capital, L.P., alleging that they bought and sold newly issued microcap securities without complying with dealer-registration requirements under the Securities Exchange Act of 1934. The SEC also alleged that funds received from the activity were transferred to Carebourn Partners, LLC, which should be required to return those funds. The defendants argued that they did not regularly buy or sell securities on the public market, did not claim to be registered broker-dealers, and did not offer investment advice or solicit securities transactions for third parties.

The defendants’ answer included three challenged affirmative defenses. An affirmative defense is a reason a defendant argues that the plaintiff’s claim should not succeed even if the complaint’s factual allegations are assumed. The Second Defense asserted that the claims violated due process because the defendants lacked fair notice that their conduct could be unlawful. The Third Defense asserted that the SEC should be prevented from bringing claims inconsistent with its published guidance and no-action letters. The Tenth Defense asserted that misconduct by SEC agents tainted the enforcement action.

The SEC moved under Federal Rule of Civil Procedure 12(f) to strike those defenses. Rule 12(f) permits a court to remove an insufficient, redundant, immaterial, impertinent, or scandalous defense from a pleading. The SEC argued that the defenses were legally insufficient and that the defendants had not pleaded supporting facts with the particularity required by Rule 9(b), which applies to allegations of fraud or mistake.

Analysis

The court declined to strike the Second Defense. It concluded that nothing in the record showed that the due-process defense was based on fraud, so Rule 9(b) did not apply. The court also found that, although the defense would be narrow and difficult to establish, the SEC had not identified controlling authority that barred a due-process defense as a matter of law.

The court also declined to strike the Third Defense. It found that the estoppel theory did not allege fraud or a misrepresentation that induced reasonable, harmful reliance, so Rule 9(b) did not apply. Although estoppel against the government is generally disfavored and rarely succeeds, the cited authorities did not establish that the defense was legally unavailable in every circumstance. The SEC’s motion to strike the Third Defense was therefore denied.

The court similarly found that Rule 9(b) did not require striking the Tenth Defense. The defendants’ reference to misconduct did not necessarily allege fraud, and the SEC had not shown that the defense involved fraud. The court also found no controlling precedent absolutely foreclosing every unclean-hands defense against the government.

Nevertheless, the court granted the SEC’s motion to strike the Tenth Defense. The defendants’ explanation—that the SEC brought the case to help Darkpulse, Inc., avoid contractual obligations to Carebourn—consisted of conclusory assertions and did not identify facts showing that SEC counsel or another government agent acted in bad faith or inequitably. The court stated that even if the defendants proved the facts described in their briefing, those facts would not establish the defense. Keeping the defense would also invite unnecessary discovery into the SEC’s investigation and create disputes that would not streamline the litigation.

Disposition

The court ordered that the SEC’s motion to strike was GRANTED IN PART and DENIED IN PART. The motion was granted to the extent that the Tenth Affirmative Defense was stricken, and it was denied in all other respects. The order did not decide the SEC’s underlying allegations or whether the defendants violated the securities laws.