Securities and Exchange Commission v. Hurgin

Background

Ability Computer & Software Industries Ltd. was a private company that sold cell phone and satellite interception products. Anatoly Hurgin and Alexander Aurovsky co-founded and co-owned Ability. Hurgin was its chief executive officer, and Aurovsky was its chief technology officer. In 2015, Cambridge Capital Acquisitions Corporation acquired Ability through a merger, creating the public company Ability, Inc.

The Securities and Exchange Commission alleged that Hurgin and Aurovsky violated federal securities laws in connection with the merger. The Commission alleged that Hurgin created a false impression that Ability had more than $65 million in existing customer orders, much of it from Mexico’s federal police, when many of those orders allegedly did not exist. It also alleged that Hurgin falsely represented that Ability owned and had developed ULIN, when Ability was operating under a reseller agreement with ULIN’s owner, Telcostar. The Commission alleged that Aurovsky should have reviewed and corrected misleading statements in the merger proxy materials.

Hurgin disputed those allegations. He maintained that Ability had both written and verbal orders, and that some expected revenue failed to materialize because of events after the merger. He also maintained that Ability’s role as a ULIN reseller was consistent with its usual and disclosed business model. Aurovsky maintained that he played no role in the merger. Ability and Ability, Inc. had previously entered consent judgments concerning their liability, leaving the claims against Hurgin and Aurovsky at issue in these motions.

Claims and Summary-Judgment Standard

The Commission asserted securities-fraud claims against Hurgin under Section 10(b) of the Securities Exchange Act and Rule 10b-5, and under Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act. It asserted claims against Aurovsky under Sections 17(a)(2) and 17(a)(3) of the Securities Act. The Commission also asserted claims against both defendants under Section 14(a) of the Exchange Act and Rule 14a-9, which concern misleading proxy materials.

Summary judgment is appropriate only when the evidence shows no genuine dispute about an important fact and the moving party is entitled to judgment under the law. The court must view reasonable factual inferences in favor of the party opposing the motion. It may not decide witness credibility or weigh competing evidence. Whether a defendant acted with the required intent or care is generally a factual question for the jury.

Disputes Concerning Hurgin

The Commission argued that the proxy materials misleadingly described Ability’s backlog as consisting of signed purchase orders. The court concluded that the Commission could not prevail merely by identifying a false statement. For the intentional-fraud claims, it had to show that Hurgin acted with intent to deceive or reckless disregard for the truth. For the other claims, it had to show at least negligence, including that the alleged proxy misstatement resulted from Hurgin’s negligent conduct.

The court found evidence supporting both sides. The August 2015 financial spreadsheet described the backlog as “actual PO’s,” but evidence indicated that the person who prepared it understood that phrase to include verbal orders. Hurgin also offered evidence that Ability had received payments on verbal orders and that he told Cambridge management that much of the backlog was verbal. The Commission argued that there were no verbal orders, but the court found that issue disputed.

The court likewise found factual disputes about the alleged $100 million deal involving 52 prisons and the reasons the expected Mexican revenue did not materialize. Hurgin offered evidence that later events, including a change in Mexico’s cellular network and a reseller’s failure to pay, affected the expected revenue. The court also noted that the Commission had not offered evidence connecting Hurgin to Cambridge’s decision not to include an unfavorable due-diligence report in the proxy materials.

There were also disputes about ULIN. It was undisputed that Ability was a reseller under an agreement requiring it to share half of its ULIN revenue with Telcostar. But Hurgin offered evidence that he became involved with ULIN when it was still a concept, helped design its appearance, and understood that Ability would later acquire it. He also said that he used the phrase “only owner” to mean that Ability was the only company then authorized to sell ULIN. The court could not decide whether to believe Hurgin or Cambridge’s chief executive, who testified that Hurgin had lied about ULIN being proprietary.

Finally, the parties disputed whether Hurgin misled shareholders about ULIN’s projected revenue, its development status, and the effect of the reseller agreement on that revenue. The court held that a jury would have to decide whether Hurgin’s statements were intentionally, recklessly, or negligently misleading.

Disputes Concerning Aurovsky

The court noted that Aurovsky did not make statements to Cambridge shareholders and did not participate in preparing the proxy materials. The Commission’s theory was that he nevertheless had a duty to review and correct the materials because he was Ability’s chief technology officer and co-owner, signed the merger agreement, consented to the use of his name in the proxy, and was identified as becoming a director and chief technology officer of Ability, Inc.

The court declined to decide as a matter of law whether Aurovsky had such a duty. It explained that the evidence raised a factual question about whether there was a substantial connection between the use of Aurovsky’s name and the proxy solicitation. The court also found a factual dispute about whether Aurovsky reviewed the proxy with Hurgin’s assistance. Because the court could not resolve competing interpretations of Aurovsky’s testimony on summary judgment, it could not decide whether he acted negligently.

Disposition

Judge Mary Kay Vyskocil denied the Commission’s motion for summary judgment, denied Hurgin’s motion for summary judgment, and denied Aurovsky’s motion for summary judgment. The court held that disputed facts prevented judgment for either side on the claims against Hurgin and on both claims against Aurovsky. The court did not determine whether either defendant violated the securities laws; it left those factual questions for further proceedings.