Yi v. GTV Media Group, Inc.

Background

Plaintiffs Jianhu Yi and Quiju Jia sued GTV Media Group Inc. (GTV), Saraca Media Group Inc. (Saraca), and Wengui Guo. The complaint asserted three counts arising from alleged sales of unregistered securities and alleged sales by an unregistered broker-dealer:

- Count One alleged violations of Sections 5 and 12(a)(1) of the Securities Act of 1933. - Count Two alleged control-person liability under Section 15 of the Securities Act. - Count Three alleged a violation of Section 15(a) of the Securities Exchange Act of 1934.

The complaint alleged that Guo established GTV, controlled GTV and Saraca, promoted investments in GTV stock and G Coins, and solicited investors through videos, online materials, and an article published by GNews, a website allegedly controlled by Guo. Yi signed a subscription agreement for GTV stock after being solicited by Guo. The plaintiffs alleged that they wired $180,000 for GTV stock and $30,000 for G Coins, and sought to recover $210,000, 8% interest dating from May 2020, and attorneys’ fees.

Motion and legal standard

Guo’s premotion letters were treated as a motion to dismiss the claims against him under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. At this stage, the court accepts well-pleaded factual allegations as true and asks whether they plausibly support liability; it does not weigh the evidence.

Guo argued that Count One lacked allegations showing that he acted to serve his own financial interests or those of the securities’ owner. He argued that Count Two merely repeated the legal definition of control without supporting facts. For Count Three, he argued that Section 15 of the Exchange Act does not provide a private right of action. The plaintiffs argued that Guo’s extensive solicitation efforts supported Count One, that control was a fact-intensive issue, and that private plaintiffs could seek rescission.

Court’s analysis

Count One. The court denied dismissal of Count One. Under Section 12(a) of the Securities Act, an individual may be liable when he successfully solicits a securities purchase while motivated at least partly by a desire to serve his own financial interests or those of the securities’ owner. The court found that the allegations that Guo created GTV, acted as its co-founder and apparent spokesman, promoted the investments extensively, and announced that he had raised hundreds of millions of dollars supported a reasonable inference that he acted for his own financial interests or GTV’s financial interests. The allegations that the plaintiffs invested after being solicited by Guo were also sufficient at the dismissal stage.

Count Two. The court dismissed Count Two without prejudice. Control-person liability requires allegations of a primary securities-law violation and the defendant’s control over the primary violator. The complaint stated that Guo controlled GTV and Saraca and possessed power over their management and policies, but the court found those statements conclusory. The complaint did not allege that Guo was an officer or director of either entity or provide facts showing how he controlled them. The court stated that Guo’s role in creating GTV, promoting investments, and claiming responsibility for raising money might show participation in the alleged securities violations, but did not by itself show the control required for control-person liability.

Count Three. The court dismissed Count Three without prejudice. It concluded that Section 15 of the Exchange Act provides no private right of action. The plaintiffs’ argument that they could seek rescission did not change the result because rescission in this setting is available under Section 29(b), not Section 15, and the complaint did not assert a Section 29(b) claim. The court also stated that the complaint did not allege that the subscription agreement required the defendants to register as broker-dealers, which would be necessary for the asserted rescission theory.

Disposition

The court ordered that Guo’s motion to dismiss was granted in part as to Counts Two and Three, which were dismissed without prejudice, and denied in part as to Count One. The plaintiffs were ordered, within 20 days of the order, either to file an amended complaint or notify the court that they wished to rely on the complaint as filed.