United States Securities and Exchange Commission v. Stone

Background

The Securities and Exchange Commission (SEC) filed an amended complaint alleging that David Lee Stone and John D. Robson violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 by deceptively obtaining and trading on Motley Fool stock recommendations before they were publicly released. The SEC also alleged that Robson aided and abetted Stone’s violations under Section 20(e) and acted unlawfully through Stone under Section 20(b). Against Harold J. Stone, Gwendolyn Stone, Justin Blakesley, and Brett R. Adams, whom the complaint identified as relief defendants, the SEC sought disgorgement of money and assets allegedly derived from Stone’s and Robson’s securities-law violations.

According to the amended complaint, Stone obtained login credentials that did not belong to him and used them to access Motley Fool recommendations before publication. He allegedly traded ahead of the announcements and shared information with Robson. The SEC alleged that Robson and accounts associated with Stone’s family members, Blakesley, and Adams followed similar trading patterns and earned substantial profits. These facts were allegations from the amended complaint, which the court accepted as true for purposes of the motions.

Motions and legal standard

Robson, Blakesley, Adams, and Harold Stone each sought dismissal under Federal Rule of Civil Procedure 12(b)(6), which asks whether a complaint plausibly states a legal claim. Harold Stone had already filed an answer, so the court treated his motion as one for judgment on the pleadings under Rule 12(c). The standard was the same: the court accepted the complaint’s factual allegations as true and drew reasonable inferences for the SEC, but did not accept legal conclusions automatically.

Robson’s motion

The court denied Robson’s motion in all respects.

For the Section 10(b) and Rule 10b-5 claim, the court held that the amended complaint adequately alleged scienter, meaning an intent to deceive or at least recklessness approaching intentional misconduct. The court pointed to allegations that Robson repeatedly traded on information that supposedly almost guaranteed favorable price movements, despite Stone’s refusal to explain how he obtained it and Stone’s instructions to follow guidelines intended partly to avoid regulatory attention.

The court also held that the SEC adequately alleged aiding and abetting under Section 20(e). The complaint plausibly alleged a primary securities-law violation by Stone, Robson’s knowledge or recklessness regarding that violation, and substantial assistance through Robson’s participation in the trading scheme and compliance with measures intended to avoid detection.

For the Section 20(b) claim, the court held that the statute does not require proof that Robson controlled Stone. The court also rejected Robson’s argument that the statute requires a separate causation allegation. It concluded that the complaint plausibly alleged that Robson used Stone to obtain the Motley Fool recommendations and then traded on them with the required mental state.

Finally, the court rejected Robson’s argument that the SEC could not seek disgorgement because no harmed investors had been identified. The court read the Supreme Court’s decision in SEC v. Liu as not foreclosing disgorgement when identifying or distributing funds to harmed investors may be infeasible. The court left open whether a future disgorgement order directing funds to the Treasury would satisfy the requirement that equitable relief benefit investors. Robson’s request to bar the SEC from seeking disgorgement was denied.

Blakesley’s motion

The court denied Blakesley’s motion to dismiss the disgorgement claim. It held that, as a relief defendant, Blakesley did not need to be alleged to have committed securities fraud or acted with scienter. The SEC instead needed to plausibly allege that Blakesley received ill-gotten funds and lacked a legitimate claim to them.

The court found those allegations sufficient. It cited allegations that Blakesley’s account traded almost exclusively in Motley Fool recommendations before public announcements, that 37 of 39 purchases of relevant call options occurred after communications between Stone and Robson, that the account mirrored their trading, that the account generated more than $1 million, and that account logins shared significant Internet Protocol address overlap with the other accounts. The court also rejected Blakesley’s argument that disgorgement was unavailable under Liu.

Adams’s motion

The court denied Adams’s motion to dismiss the disgorgement claim. It rejected Adams’s interpretation of Liu as limiting disgorgement to culpable actors and rejected his arguments that the SEC had not adequately alleged that his funds were ill-gotten. Applying its reasoning concerning Blakesley, the court held that the complaint sufficiently alleged that Adams received ill-gotten gains to which he did not have a legitimate claim.

Harold Stone’s motion

Harold Stone had answered the amended complaint before filing his motion under Rule 12(b)(6). The court therefore construed the motion as one for judgment on the pleadings under Rule 12(c) rather than treating it as procedurally barred. The court denied that motion, holding that the complaint sufficiently alleged that Harold Stone received ill-gotten funds to which he lacked a legitimate claim and that the SEC was not barred from seeking disgorgement.

Disposition

The court ordered that Robson’s Rule 12(b)(6) motion be denied; Blakesley’s Rule 12(b)(6) motion be denied; Adams’s Rule 12(b)(6) motion be denied; and Harold Stone’s Rule 12(c) motion for judgment on the pleadings be denied. Robson, Blakesley, and Adams were directed to answer the amended complaint within 21 days. The decision addressed only whether the SEC’s allegations could proceed, not the ultimate merits or liability of the defendants.