Securities and Exchange Commission v. GPL Ventures LLC

Background

The Securities and Exchange Commission brought claims under Sections 15(a) and 17(a) of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The defendants who filed these motions were the GPL Defendants—GPL Ventures LLC, GPL Management LLC, Alexander J. Dillon, and Cosmin I. Panait—and HempAmericana, Inc. and its CEO, Salvador E. Rosillo. The opinion states that Lawrence B. Adams died after the complaint was filed.

The SEC alleged that the GPL Defendants acquired discounted shares in about 140 microcap issuers and sold them publicly after promotional campaigns increased the stocks’ prices. According to the complaint, the GPL Defendants secretly funded or directed promotional activity while not disclosing their ownership and plans to sell. The opinion used HempAmericana as an example. It described allegations that the GPL Defendants bought more than 1.5 billion HempAmericana shares for $7.4 million, funded promotional activity through HempAmericana and Seaside Advisors, LLC, and later sold the shares for more than $18.4 million.

Legal standard

For a motion to dismiss for failure to state a claim, the court assumed the complaint’s factual allegations were true and asked whether they plausibly showed that the defendants could be legally responsible. The court did not decide whether the allegations would ultimately be proven.

Claims against the GPL Defendants

The court held that the complaint plausibly alleged that the GPL Defendants engaged in the business of buying and selling securities and therefore may have acted as unregistered dealers or broker-dealers in violation of Section 15(a). The allegations described regular activity involving numerous issuers, purchases conditioned on promotional campaigns, and later sales for profit. The court rejected the argument that the GPL Defendants could not be dealers because they had no customers or did not provide services.

The court also held that the complaint plausibly alleged control-person liability against Dillon and Panait under Section 20(a). Control-person liability is secondary liability for someone who controlled a person or entity that committed a primary securities violation. The complaint alleged that Dillon and Panait co-owned and controlled the GPL Entities. The court further held that the SEC did not need to allege a specific state of mind for the Section 15(a) violation.

The court also found plausible claims under Section 10(b), Rule 10b-5, and Section 17(a). It concluded that the complaint alleged that the GPL Defendants misrepresented their involvement in stock promotions to brokers and orchestrated a scheme designed to increase stock prices before selling their shares. The court rejected the argument that Supreme Court decisions concerning who may be liable for misleading statements barred scheme-based liability. It found that the allegations described the GPL Defendants as active participants in the alleged scheme, not merely passive beneficiaries.

Claims against HempAmericana and Rosillo

The court found that HempAmericana’s offering circulars were plausibly misleading and that the alleged omissions were material, meaning important to a reasonable investor. The circulars described marketing and sales spending in a way that could suggest promotion of HempAmericana’s products, while the complaint alleged that a substantial portion of the funds was used to promote the stock itself and to facilitate the GPL Defendants’ sales.

The court stated that liability did not depend only on whether HempAmericana or Rosillo personally made the promotional statements. The complaint plausibly alleged that they participated in the broader scheme by accepting the GPL Defendants’ investments, hiring Seaside as allegedly required, and helping route funds to promotional activity. The court also found a sufficient allegation of the required intent for the fraud claims, based on allegations that HempAmericana and Rosillo knew how the investment proceeds would be used and participated in the arrangements.

Disposition

The court denied the GPL Defendants’ motion to dismiss and denied HempAmericana and Rosillo’s motion to dismiss. The defendants were ordered to answer the complaint, and the parties were ordered to make initial disclosures. The court scheduled an initial case-management conference for February 25, 2022.