United States Securities and Exchange Commission v. Friedland

          OPINION AND ORDER DENYING MOTION TO DISMISS

          MARCIA S. KRIEGER CHIEF UNITED STATES DISTRICT JUDGE

         THIS MATTER comes before the Court pursuant to the Relief Defendants' Motion to Dismiss (# 47), the Plaintiff's (“SEC”) response (# 49) and the Relief Defendants' reply (# 50).^[1]

         FACTS

         According to the Amended Complaint (# 45), Defendant Jeffrey Friedland is a longtime participant in the field of medical marijuana. In 2014, Mr. Friedland purchased shares of a company called OWC Pharmaceutical Research Corp. (“OWC”), an Israeli company involved in the business of medical marijuana research. In January 2016, Mr. Friedland and his company, Defendant Global Corporate Strategies (“Global”), entered into an agreement with OWC by which Mr. Friedland would provide Investor Relations Services to OWC - specifically, Mr. Friedland would “writ[e] news releases, shareholder letters, corporate summaries, ” and engaged in various other communications with third parties to promote OWC. In exchange, OWC would provide Global with a substantial minority interest in OWC's stock.

         OWC did not disclose the nature of its relationship with Mr. Friedland, identifying him only as an “investor.” Mr. Friedland also “made numerous statements promoting OWC stock to investors without ever disclosing” the nature of his agreement with OWC or OWC's payments to him.

         In January 2017, Mr. Friedland desired to sell Global's OWC stock. Along with his wife, Relief Defendant Kathy Friedland, he formed Relief Defendant Lane 6552 (“Lane”), a business entity that Ms. Friedland would control but which had “no apparent business purpose or operations other than to receive and then sell Global's OWC stock.” While Mr. Friedland was actively promoting OWC and informing investors that his investment in OWC was “a very, very long-term situation, ” he requested OWC's transfer agent to remove the restrictive legend on the vast majority of OWC shares held by Global and to reissue them to Lane.

         The SEC contends that Mr. Friedland made various false representations to the transfer agent about the cost of Global's acquisition of OWC shares and the price that Lane would pay Global to acquire them. The transfer agent eventually reissued the shares to Lane, and Mr. Friedland began attempting to sell the shares via Lane. He encountered some difficulty with certain brokers and clearing firms who were hesitant to complete the trades, and Mr. Friedland made misleading representations to those brokers and agents in order to induce them to sell the shares. Eventually, Mr. Friedland, through Lane, retained a different broker (again making certain false representations to that broker about Lane's acquisition of the OWC stock), and in March 2017, sold the bulk of the OWC shares through Lane. (Later, Mr. Friedland made false representations that allowed another one of his companies, Defendant Intiva Pharma (“Intiva”), to remove the restrictive legend and liquidate its own holdings of OWC shares.) All the while, Mr. Friedland continued to promote OWC stock without revealing his role in the business or liquidation of Global's holdings in OWC.

         Ultimately, the Friedlands used the proceeds of the sale of Global's (then Lane's) OWC stock to purchase various pieces of real estate, including a home in Snowmass, Colorado. They later transferred title to the house to Relief Defendant Aspen Upper Ranch (“Aspen”), and deposited funds from sale of OWC stock into Relief Defendant The Jeffrey and Kathy Friedland Irrevocable Trust (“the Trust”).

         Based on these allegations, the SEC asserts claims against Mr. Friedland, Global, and Intiva for securities fraud in violation of the Securities Act, 15 U.S.C. § 77a, and the Exchange Act, 15 U.S.C. § 78a; maintenance of a scheme to defraud asserted under both acts, and various other claims. As to the Relief Defendants, the SEC alleged that they were liable for equitable disgorgement because they received funds or property that were the proceeds of or traceable to the securities law violations alleged against Mr. Friedland.

         All of the Defendants (apparently except Aspen) now move (# 47) to dismiss the claims in the Amended Complaint, arguing that: (i) the SEC's claims fail to plead the alleged fraudulent statements with particularity as required by Fed.R.Civ.P. 9(b); (ii) the SEC fails to allege a colorable claim under the Securities Act for failing to disclose compensation because OWC, not Mr. Friedland, made some of the offending statements, because the statements do not “describe a security, ” because Mr. Friedland sufficiently disclosed all of the pertinent information, and because the SEC fails to adequately allege Mr. Friedland's scienter; (iii) as to the securities fraud claims under the Exchange Act, the SEC has not alleged any material omission, has not sufficiently alleged Mr. Friedland's duty to speak, and has not adequately alleged scienter; (iv) the scheme to defraud claims are insufficiently specific and are an attempt to evade the pleading requirements for misstatements; and (v) the claim against the Relief Defendants should be dismissed because there is no allegation that they received a benefit at anyone's expense.

         ANALYSIS

         A. Standard of review

         In reviewing a motion to dismiss pursuant to Rule 12(b)(6), the Court must accept all well-pleaded allegations in the Amended Complaint as true and view those allegations in the light most favorable to the nonmoving party. Stidham v. Peace Officer Standards & Training, 265 F.3d 1144, 1149 (10th Cir. 2001) (quoting Sutton v. Utah State Sch. for the Deaf & Blind, 173 F.3d 1226, 1236 (10th Cir. 1999)). The Court must limit its consideration to the four corners of the Amended Complaint, any documents attached thereto, and any external documents that are referenced in the Amended Complaint and whose accuracy is not in dispute. Oxendine v. Kaplan, 241 F.3d 1272, 1275 (10th Cir. 2001); Jacobsen v. Deseret Book Co., 287 F.3d 936, 941 (10th Cir. 2002); Dean Witter Reynolds, Inc. v. Howsam, 261 F.3d 956, 961 (10th Cir. 2001).

         A claim is subject to dismissal if it fails to state a claim for relief that is “plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). To make such an assessment, the Court first discards those averments in the Complaint that are merely legal conclusions or “threadbare recitals of the elements of a cause of action, supported by mere conclusory statements.” Id. at 678-79. The Court takes the remaining, well-pleaded factual contentions, treats them as true, and ascertains whether those facts (coupled, of course, with the law establishing the requisite elements of the claim) support a claim that is “plausible” or whether the claim being asserted is merely “conceivable” or “possible” under the facts alleged. Id. What is required to reach the level of “plausibility” varies from context ...