United States Securities and Exchange Commission v. Rogas

Background

The SEC sued Adam P. Rogas and Paul G. Korol, former executives of NS8, Inc., along with NS8 FP, LLC, MVP 2020, LLC, and Rogassi Enterprises, LLC, which the complaint identified as relief defendants. The SEC alleged that, from at least 2018 through 2020, Rogas altered bank-account statements to greatly exaggerate customer payments to NS8. The company allegedly relied on the falsified information in preparing financial statements that were provided to investors and potential investors.

The SEC alleged that Korol served as NS8’s Chief Customer Officer and was also a board member. According to the complaint, Korol attended a 2018 meeting where Rogas presented inflated customer and revenue figures. An employee then raised concerns with Korol about the figures. The SEC also relied on messages in which Korol discussed NS8’s financial condition, acknowledged that the company’s revenues were incorrect, sought investors, helped arrange a secondary offering, sold his NS8 shares, and encouraged an employee not to disclose harmful information about NS8 or Rogas.

The SEC alleged that Korol sold 1,312,458 NS8 shares to NS8 FP on August 19, 2019, for $6,221,182.17. The SEC sought disgorgement, meaning repayment of alleged ill-gotten gains, as well as other securities-law remedies. Rogas had separately pleaded guilty to securities-fraud crimes in a criminal case. The opinion also states that Rogas and the relief defendants had reached a settlement in principle except for one unresolved issue.

Korol’s Motion

Korol moved to dismiss the claims against him under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim, and Rule 9(b), which requires fraud to be pleaded with particularity. The SEC alleged that Korol violated the antifraud provisions of the Securities Exchange Act of 1934 and the Securities Act of 1933, including scheme-liability provisions, and aided and abetted Rogas’s securities fraud.

Scheme Liability

The court held that the SEC adequately pleaded scheme liability under Rule 10b-5(a) and (c) and Sections 17(a)(1) and (3) of the Securities Act. Scheme liability concerns deceptive conduct undertaken with fraudulent intent. The court explained that the SEC had to identify the deceptive acts, the defendants who performed them, when they occurred, and their effect on investors.

The court concluded that the SEC identified conduct beyond merely repeating Rogas’s alleged false statements. The complaint alleged that Korol introduced investors to Rogas, arranged securities transactions, helped raise money for NS8, and sold his own NS8 shares while knowing or being reckless about the company’s financial problems. The court found these allegations sufficiently particular under Rule 9(b).

Knowledge and Intent

The court also found that the complaint adequately alleged scienter, a required state of mind that can include intentional misconduct or recklessness. The allegations included Korol’s attendance at a meeting where inflated financial information was presented, an employee’s warning that the information seemed implausible, Korol’s statements about NS8’s lack of money and incorrect revenues, and his request not to know the numbers being given to investors. The court stated that these allegations supported an inference of at least recklessness and potentially actual knowledge.

Aiding and Abetting

The court held that the SEC adequately alleged that Korol aided and abetted Rogas’s securities-law violations. The SEC alleged the existence of Rogas’s primary violation, Korol’s knowledge of it, and Korol’s substantial assistance through investor introductions, dissemination of false financial information, fundraising, securities transactions, and conduct involving the employee who allegedly could have disclosed information about the fraud.

Disgorgement

The court rejected Korol’s challenge to the SEC’s request for disgorgement. It held that, because the SEC adequately pleaded securities-fraud claims, the SEC could seek disgorgement of illegally derived proceeds that it ultimately proved. The complaint alleged that Korol received at least $6,221,182.17 from fraudulent conduct.

Disposition

The court denied Korol’s motion to dismiss. The court also ordered a status conference with the parties and principals for April 9, 2024, at 2:00 p.m. in Courtroom 17B.