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

Background

The Securities and Exchange Commission (SEC) sued Carebourn Capital, L.P., Carebourn Partners, LLC, and Chip Alvin Rice, whom the court collectively called “Defendants.” The SEC alleged that Defendants operated a regular business of buying and selling securities for their own account without registering as dealers under the Securities Exchange Act of 1934.

According to the complaint, Defendants bought convertible promissory notes from penny-stock issuers, converted the notes into newly issued shares at substantial discounts, and quickly sold the shares through brokers into the public market. The SEC alleged that Defendants conducted more than 100 transactions involving about 40 issuers, sold more than 17.5 billion shares, and earned more than $13.9 million in net profits between January 2017 and July 2021. The SEC sought a permanent injunction, disgorgement of alleged ill-gotten gains with prejudgment interest, civil penalties, and a penny-stock participation bar.

Motion and arguments

Defendants moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). That motion uses the same standard as a motion to dismiss for failure to state a claim: the court accepts the complaint’s factual allegations as true and determines whether the alleged facts plausibly support legal relief.

Defendants argued that the SEC had not adequately alleged that they were dealers, partly because their sales occurred through brokers and involved only their own accounts. They also argued that the statutory definition of “dealer”—a person engaged in the business of buying and selling securities for that person’s own account through a broker or otherwise—was too vague to give fair notice of what conduct required registration. Finally, Defendants argued that the SEC had not adequately alleged entitlement to disgorgement.

Court’s analysis

The court held that the complaint adequately stated a claim that Defendants were required to register as dealers. The alleged solicitation of penny-stock issuers, favorable transaction terms, discounts, transaction fees, large volume of transactions, rapid resale of shares, and nearly $14 million in profits plausibly indicated a regular business of buying and selling securities rather than merely personal investing.

The court rejected Defendants’ argument that dealer activity requires transactions for customers or clients. The statutory definition covers purchases and sales for a person’s own account, and the reference to transactions “through a broker or otherwise” meant that sales through brokers could still fall within the definition. The court also declined to apply the SEC’s multi-factor guide as a required checklist at the pleadings stage, explaining that the issue involved a fact-intensive analysis.

The court rejected the due-process challenge. It concluded that the statutory definition was not so unclear that it provided no rule or standard, and that it gave a reasonably clear basis for determining whether registration was required. The court also declined to dismiss the SEC’s request for disgorgement because deciding whether particular forms of disgorgement were legally available would be premature before the facts and legal issues were more fully developed.

Disposition

The court denied Defendants’ Motion for Judgment on the Pleadings, ECF No. 52. The order allowed the SEC’s claims and requested disgorgement remedy to proceed at this stage; it did not enter a final determination of liability or decide the ultimate amount or availability of relief.