Securities and Exchange Commission v. Honig

Background

The Securities and Exchange Commission (SEC) sued Robert Ladd and other defendants over alleged securities-law violations involving a group of investors called the “Honig Group.” This opinion addressed Robert Ladd’s motion to dismiss. The opinion identifies Ladd as the chief executive officer of MGT Capital Investments, Inc.

The SEC alleged that the Honig Group used “pump-and-dump” schemes involving several companies. As to MGT, the SEC alleged that the group acquired shares, arranged promotional activity, coordinated trades, and later sold shares after the company’s stock price increased.

The SEC’s allegations against Ladd included:

- Ladd signed and released a May 9, 2016 announcement stating that John McAfee had sold his antivirus company to Intel for $7.6 billion. The SEC alleged that McAfee had left the company and sold his shares years before Intel acquired it. - Ladd allegedly paid a promoter to repeat the McAfee claim without disclosing the payment. - Ladd allegedly failed to disclose the Honig Group’s combined beneficial ownership of MGT in a 2015 Form 10-K and a November 2015 Form S-1 filing. - Ladd allegedly aided and abetted securities-law violations by the Honig Group.

Motion to strike earlier allegations

Ladd asked the court to strike allegations concerning Seeking Alpha articles from 2012 and 2013 because those events were outside the applicable five-year limitations period. The SEC argued that the earlier events were relevant background evidence concerning Ladd’s knowledge, intent, plan, or lack of mistake regarding later conduct.

The court denied the motion to strike. It held that the earlier allegations could be relevant and admissible as background, including to show Ladd’s knowledge of the Honig Group and its methods. The court did not hold that the earlier conduct itself was timely for purposes of imposing liability.

McAfee announcement

The court denied Ladd’s motion to dismiss the claims based on the McAfee announcement under Section 10(b) of the Securities Exchange Act, Securities and Exchange Commission Rule 10b-5, and Section 17(a)(2) of the Securities Act.

For the Exchange Act claims, the court held that the SEC adequately alleged that the statement was material. A reasonable investor could consider the background and accomplishments of MGT’s incoming chief executive significant. The court also rejected dismissal based on the “truth on the market” defense, which asserts that a misstatement is not material when the truth was already sufficiently known to investors. The court found that the older filings and articles cited by Ladd did not provide enough corrective information to overcome the contemporaneous false statement at the pleading stage.

The court also held that the SEC adequately alleged scienter, meaning the required wrongful state of mind for a securities-fraud claim. The SEC alleged facts supporting an inference that Ladd knew, or was reckless in not knowing, the correct history of McAfee’s company before issuing the announcement.

The court applied the same basic analysis to the Section 17(a)(2) claim. That provision does not require proof of a particular state of mind, and the court held that the SEC could pursue the Section 17(a)(2) theory alongside its Exchange Act claims.

Beneficial-ownership omissions

The court granted Ladd’s motion to dismiss the claims based on the alleged failure to disclose the Honig Group’s beneficial ownership in MGT’s 2015 Form 10-K and November 2015 Form S-1. The court held that the SEC had not adequately alleged either the specific disclosure duty applicable to the filings or that the omitted information was material.

The court stated that the SEC appeared to be relying on Item 403 of Regulation S-K, which requires disclosure of a person or group known to the company to own more than five percent of a class of voting securities. But the amended complaint did not identify that regulation or allege the required duty with sufficient specificity. The court also found that the SEC did not allege that the omission was material.

The court granted the SEC leave to replead these allegations. It therefore did not decide Ladd’s alternative arguments about whether the Honig Group was adequately alleged to be a group under the applicable securities rules or whether Ladd knew about the group.

Aiding-and-abetting allegations

The court denied Ladd’s motion to dismiss the aiding-and-abetting allegations. It held that the SEC plausibly alleged an underlying securities-law violation by members of the Honig Group, Ladd’s knowledge of those violations, and Ladd’s substantial assistance.

The court found the alleged group agreement plausible based on the negotiations for the MGT share purchase, the group’s alleged ownership of more than 16 percent of MGT, and other alleged coordinated conduct. The court also relied on Ladd’s emails referring to multiple investors and to Honig’s “group,” as well as the alleged history between Ladd and the group. Ladd did not contest whether his actions would amount to substantial assistance if he knew of the group’s violations.

Disposition

The court’s conclusion states that Ladd’s motion to dismiss the Third and Fourth Claims for Relief was denied in part as to allegations relating to the McAfee announcement and granted in part as to the other allegations. It states that the Seventh and Eighth Claims for Relief were dismissed, while also granting the SEC leave to file a Second Amended Complaint repleading the Seventh and Eighth Claims and the Third and Fourth Claims concerning the alleged beneficial-ownership omissions.

The order separately states that allegations concerning the 2012 and 2013 Seeking Alpha articles and the October 2015 Form 8-K were dismissed with prejudice. It also states that Ladd’s motion for oral argument was denied as moot. The clerk was directed to terminate the listed motions.