United States Securities and Exchange Commission v. Collector's Coffee Inc.

Background

The SEC brought civil-fraud charges against Mykalai Kontilai and Collector’s Coffee Inc. Count Five of the amended complaint alleged that the defendants violated Exchange Act Rule 21F-17, which bars a person from taking action to impede an individual from communicating directly with SEC staff about a possible securities-law violation. The rule specifically prohibits enforcing or threatening to enforce a confidentiality agreement concerning those communications.

The parties filed cross-motions for summary judgment, a procedure allowing judgment without a trial when no genuine dispute about an important fact requires a trial. The motions addressed only Count Five. The SEC sought judgment in its favor; Kontilai and Collector’s Coffee Inc. sought judgment in theirs.

Relevant Agreements and Conduct

In 2015, Collector’s Coffee Inc. and Kontilai entered into a stock-purchase agreement with investors containing a provision stating that the investors would not contact third parties, including government or enforcement agencies, to prompt an investigation or other action concerning Collector’s Coffee Inc. A 2017 settlement agreement similarly stated that the shareholders, their counsel, and their advisers would not initiate communications with regulatory agencies, including the SEC, about matters related to the agreement, while preserving the ability to respond to subpoenas or other compulsory government process.

The defendants admitted that they enforced these provisions at least once by suing an investor for allegedly breaching a confidentiality clause after communicating with the SEC. They also admitted informing other investors about that lawsuit.

Arguments and Prior Rulings

The defendants argued that Rule 21F-17 exceeded the SEC’s statutory rulemaking authority and violated the First Amendment. They also argued that their conduct did not violate the rule because none of the investors allegedly impeded from communicating with the SEC had been an employee of the defendants.

The court had previously rejected the defendants’ challenges to the rule’s statutory authority and constitutionality. In this decision, the court reaffirmed that Rule 21F-17 was a proper exercise of the SEC’s rulemaking authority and did not violate the First Amendment.

Court’s Analysis

The court held that the undisputed facts established a violation of Rule 21F-17. The defendants entered into agreements that expressly prevented investors from communicating with the SEC about securities-law violations. They also sued to prevent such communications and publicized those lawsuits in a way that could discourage further communications. The court concluded that these actions were actions to impede communications within the rule’s express prohibition on enforcing or threatening to enforce confidentiality agreements.

The court therefore concluded that the defendants were liable on the SEC’s fifth claim.

Disposition

The court granted the SEC’s motion for summary judgment on Count Five of the First Amended Complaint. It denied the summary-judgment motions of Mykalai Kontilai and Collector’s Coffee Inc. on Count Five. The opinion does not state a separate remedy or penalty in this order.