Securities and Exchange Commission v. Global Investment Strategy UK Ltd.

Background

The Securities and Exchange Commission alleged that Global Investment Strategy UK Ltd. (“GIS”), a United Kingdom-based financial-services firm, provided securities-clearing and settlement services to more than 600 U.S. customers from 2015 through 2019. The customers traded securities issued by U.S. entities. According to the complaint, GIS charged commissions and other fees, provided credit or margin, handled clearing and settlement, and had not registered with the SEC as a broker-dealer as required by Section 15(a) of the Securities Exchange Act of 1934.

The SEC also alleged that John William Gunn, GIS’s founder, chairman, compliance officer, and principal, aided and abetted GIS’s violation. The complaint alleged that Gunn directed and participated in GIS’s operations, solicited U.S. customers, communicated with U.S. customers and broker-dealers, traveled to the United States to meet customers, and helped establish trading accounts.

Defendants’ Motions

Gunn moved under Federal Rule of Civil Procedure 12(b)(5), which permits dismissal for insufficient service of process. He argued that mailing the summons and complaint to his business address in the United Kingdom was improper because it was not his residence or domicile. The court held that service by international mail complied with the applicable federal rules and the Hague Convention. The court also noted that the service was reasonably calculated to provide notice and that Gunn actually received notice, including through a press release acknowledging the complaint. The court denied Gunn’s motion based on insufficient service.

Gunn separately moved under Rule 12(b)(2), which permits dismissal for lack of personal jurisdiction. The court held that Gunn was not subject to general jurisdiction because he resided in Hong Kong, but that he was subject to specific jurisdiction. The court relied on allegations that Gunn traveled to the United States, solicited U.S. customers, communicated with U.S. customers, helped establish accounts at U.S. broker-dealers, and participated in transactions involving securities traded on U.S. exchanges. The court concluded that these contacts were sufficient and that Gunn could reasonably anticipate being sued in the United States over conduct involving those transactions. The court denied this part of the motion.

GIS and Gunn also moved under Rule 12(b)(6), which tests whether a complaint states a legally sufficient claim. They argued that GIS was not engaged in brokerage activity, that the SEC lacked authority because the Federal Reserve Board regulates lending, that the transactions lacked a sufficient domestic connection, that GIS qualified for an exemption under Rule 15a-6, and that the SEC had not adequately alleged Gunn’s required knowledge or recklessness.

Court’s Analysis of the Claims

The court held that the complaint plausibly alleged that GIS acted as a broker. The alleged activities included handling customer funds and securities, providing credit in connection with securities transactions, regularly participating in the U.S. securities business, receiving transaction-based commissions, and performing clearing and settlement services. The court rejected the argument that Federal Reserve Board authority over lending prevented the SEC from regulating brokerage activity.

The court also held that the complaint plausibly alleged domestic transactions within the reach of Section 15(a). The allegations involved U.S. customers acquiring U.S. securities in the United States through U.S.-registered broker-dealers. The fact that GIS performed clearing and settlement in London did not defeat the domestic connection alleged in the complaint.

The court ruled that Rule 15a-6’s safe-harbor exemption was an affirmative defense. An affirmative defense generally must be raised by the defendant rather than anticipated and disproved in the complaint. The court therefore held that the alleged safe harbor was not a basis for dismissing the SEC’s complaint at this stage.

As to Gunn, the court held that the complaint plausibly alleged the elements of aiding and abetting: a primary violation by GIS, Gunn’s knowledge or reckless disregard of that violation, and substantial assistance. The court concluded that the allegations about Gunn’s management role, compliance responsibilities, customer communications, account assistance, and involvement in trading and margin matters supported an inference that he knew the relevant facts and substantially assisted GIS.

Disposition

The court denied Defendants’ Motion to Dismiss. It denied Gunn’s challenges based on insufficient service and lack of personal jurisdiction, and it denied the Rule 12(b)(6) challenge brought by GIS and Gunn. The court canceled the scheduled oral argument and directed that the initial case-management conference proceed.