Securities and Exchange Commission v. Hurgin

Background

The Securities and Exchange Commission sued Anatoly Hurgin, Alexander Aurovsky, Ability Computer & Software Industries Ltd., and Ability Inc. The Commission alleged that the defendants committed securities fraud and violated proxy-solicitation rules in connection with a merger between Ability and Cambridge Capital Acquisition Corp. The entity defendants entered into consent decrees with the Commission. Hurgin and Aurovsky moved to dismiss the claims against them.

Ability was based in Tel Aviv, Israel, and Hurgin and Aurovsky were its co-founders and co-owners. Hurgin was its chief executive officer, and Aurovsky was its chief technology officer. The Commission alleged that Hurgin played a central role in the merger and that Aurovsky consented to the transaction, signed the merger agreement, and consented to the use of his name in proxy materials.

The Commission alleged that Ability and Hurgin provided Cambridge with a financial forecast projecting up to $110 million in 2016 revenue. The forecast included a $65.7 million backlog, much of which allegedly was not supported by signed purchase orders and depended heavily on business from one Latin American police agency. The Commission also alleged that Hurgin represented that Ability owned a mobile-device interception product called ULIN, although Ability allegedly was only a reseller under an agreement that shared revenue with the product’s owner and imposed a penalty if sales fell below a specified amount. The Commission further alleged that the proxy materials included a report incorrectly stating that the backlog consisted of signed purchase orders while omitting another report that highlighted risks concerning unsigned orders.

Claims and Motions

The Commission asserted three claims against Hurgin: fraud involving the purchase or sale of securities under Section 10(b) of the Securities Exchange Act and Rule 10b-5; fraud in the offer or sale of securities under Section 17(a) of the Securities Act; and misleading proxy materials under Section 14(a) of the Exchange Act and Rule 14a-9.

Against Aurovsky, the Commission asserted claims under Sections 17(a)(2) and 17(a)(3) of the Securities Act and under Section 14(a) and Rule 14a-9. Aurovsky moved to dismiss for lack of personal jurisdiction—meaning he argued that the court lacked authority over him—and for failure to state a legally sufficient claim. Hurgin moved to dismiss for failure to state a claim.

Court’s Analysis

The court held that the Commission plausibly alleged claims against Hurgin. At the motion-to-dismiss stage, the court had to accept the complaint’s factual allegations as true and draw reasonable inferences for the Commission. The court concluded that the alleged statements about ULIN could be materially misleading because ownership differed from reselling or licensing the product, and because the alleged reseller agreement affected Ability’s revenues and potential liabilities.

The court also concluded that the Commission adequately alleged that Hurgin omitted important facts about the Latin American police agency. The complaint alleged that Hurgin knew that police personnel who had verbally agreed to purchase Ability’s products had been terminated before the roadshow and proxy vote. The court ruled that general warnings about possible risks of doing business in Latin America did not necessarily disclose problems that had already occurred.

The court further held that the Commission plausibly alleged misleading statements and omissions concerning Ability’s backlog and pipeline. Although Hurgin argued that he did not personally make the statement that the backlog consisted of signed purchase orders, the court found that the complaint adequately alleged that he had ultimate authority over the proxy materials and responsibility for including one report and excluding another.

The court declined to resolve Hurgin’s arguments about scienter, which means an intent to deceive or reckless disregard for the truth, on a motion to dismiss. It concluded that the allegations, if true, could support an inference of that mental state, particularly regarding the ULIN statements and omissions.

As to Aurovsky, the court held that the Commission made the required initial showing of personal jurisdiction. The court relied on allegations that Aurovsky was a 50-percent owner whose consent was necessary for the merger, signed the merger agreement, consented to the use of his name in the proxy statement, and knew about the merger. The court also considered the merger agreement’s provision submitting the parties to courts in New York in disputes connected with the agreement and transaction.

The court separately held that the Commission plausibly alleged negligence-based claims against Aurovsky under Sections 17(a)(2) and (3), Section 14(a), and Rule 14a-9. The court ruled that these claims did not require the Commission to allege that Aurovsky personally drafted or distributed the misleading statements. It also held that the allegations about his ownership, participation, signatures, expected role in the public company, and consent to use of his name were enough to allow the claims to proceed.

Disposition

The court denied the defendants’ motions to dismiss. It directed the defendants to file their answers by September 22, 2020. The opinion did not determine whether the Commission would ultimately prove its claims.