Securities and Exchange Commission v. Honig

Background

The Securities and Exchange Commission accused Robert Ladd, the chief executive officer of MGT Capital Investments, Inc., of securities-law violations connected to the alleged activities of a group of investors. The SEC alleged that the group manipulated MGT’s stock and failed to disclose its combined ownership. The opinion addressed only Ladd’s motion to dismiss.

The SEC alleged that MGT’s May 9, 2016 announcement falsely stated that John McAfee had sold his former company to Intel for $7.6 billion. The SEC said McAfee had instead left that company and sold his shares before Intel acquired it. The SEC also alleged that Ladd paid a promoter to repeat the message, sold MGT shares after the announcement, and helped members of the investor group exercise warrants after the stock price increased.

The SEC separately alleged that Ladd failed to disclose the group’s combined beneficial ownership in MGT’s 2015 Form 10-K and November 2015 Form S-1 filings. It also alleged that Ladd aided and abetted the group’s securities-law violations. Ladd sought dismissal of these claims and asked the court to strike allegations concerning 2012 and 2013 conduct and an October 2015 filing.

Legal standards

For a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the court accepts well-pleaded factual allegations as true and asks whether they plausibly state a claim. Securities-fraud allegations also must identify the alleged fraudulent statements, who made them, when and where they were made, and why they were fraudulent.

Earlier allegations and motion to strike

The SEC’s amended complaint was filed on March 8, 2019. Ladd argued that allegations about 2012 and 2013 conduct were outside the five-year limitations period and should be removed. The court denied the motion to strike because the earlier conduct could be relevant background evidence concerning Ladd’s knowledge, intent, plan, or lack of mistake regarding later events. The court did not decide that the earlier conduct itself was timely for purposes of liability.

McAfee announcement

The court denied Ladd’s motion to dismiss the claims based on the McAfee announcement. It held that the allegation that McAfee had sold his company to Intel for billions of dollars was sufficiently important to a reasonable investor to satisfy the materiality requirement at the pleading stage. The court also found that the SEC adequately alleged that Ladd acted with the required fraudulent intent or recklessness because he had been introduced to McAfee and information about McAfee’s history was publicly available.

Ladd argued that the market already knew the truth, relying on older filings, news reports, and a Wikipedia entry. The court rejected that argument at this stage, finding that these sources did not provide sufficiently direct or timely corrective information to overcome the allegedly false press release and promotional article.

The court also denied Ladd’s motion to dismiss the Securities Act claim based on the McAfee announcement. That claim did not require proof of fraudulent intent; the SEC needed only to allege the required misleading conduct and negligence-based liability.

Beneficial-ownership disclosures

The court granted Ladd’s motion to dismiss the claims based on the alleged failure to disclose the investor group’s beneficial ownership in MGT’s 2015 Form 10-K and Form S-1. The court held that the SEC had not adequately alleged the specific disclosure duty it relied on or that the omitted ownership information was material. These claims were dismissed without prejudice, and the SEC was allowed to replead them.

Aiding and abetting

The court denied Ladd’s motion to dismiss the aiding-and-abetting claims. It found that the SEC plausibly alleged that the investors acted as a group, including through negotiations involving Ladd, coordinated trading, and their combined ownership of more than 16 percent of MGT. The SEC also adequately alleged that Ladd knew about the group’s conduct, based on his communications referring to the investors and the group, as well as his alleged earlier involvement with the group’s promotional activities. Ladd did not challenge whether his alleged conduct amounted to substantial assistance, so the court allowed these claims to proceed.

Other allegations and final disposition

The court dismissed with prejudice the claims concerning the 2012 and 2013 Seeking Alpha articles and the October 2015 Form 8-K allegations because the SEC did not contest dismissal on those grounds. For the Third and Fourth Claims for Relief, the court denied dismissal in part as to the McAfee allegations and granted dismissal in part as to the other allegations. The beneficial-ownership allegations were dismissed without prejudice so they could be repleaded; the older article and October 2015 Form 8-K allegations were dismissed with prejudice.

The court denied Ladd’s motion to strike. It denied his motion for oral argument as moot. The SEC was granted leave to file a Second Amended Complaint limited to repleading the beneficial-ownership allegations in the 2015 Form 10-K and Form S-1. The opinion states that Ladd’s motion to dismiss the Third and Fourth Claims for Relief was granted in part and denied in part, his motion to dismiss the Seventh and Eighth Claims for Relief was denied, and his motion to strike was denied.