SEC v. Carrillo Huettel LLP Et Al Doc 28 Filed 21 May 13

7/30/2019 SEC v. Carrillo Huettel LLP Et Al Doc 28 Filed 21 May 13

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

SECURITES AND EXCHANGE

COMMISSION,

Plaintiff,

v.

CARRILLO HUETTEL LLP, et al.

Defendants.

:

:

:

:

:

:

:

Civil Action No. 13-cv-01735 (GBD)

MEMORANDUM OF LAW IN SUPPORT OF

DEFENDANT LUNIEL DEBEER'S MOTION TO DISMISS

DAVID U. GOUREVITCH, PCDavid U. Gourevitch, Esq. (DG8795)875 Third Avenue, 28th Floor

New York, New York 10022Telephone No: (212) 355-1300Fax No: (646) 365-8818Attorney for Defendant Luniel deBeer

Case 1:13-cv-01735-GBD Document 28 Filed 05/21/13 Page 1 of 28


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TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ......................................................................................................... iii

POINT I

PRELIMINARY STATEMENT .........................................................................................1

POINT II

THE SEC BREACHED THE ATTORNEY-CLIENT PRIVILEGE ..................................2

POINT III

THE SECS ALLEGATIONS .............................................................................................5

POINT IV

ARGUMENT.....................................................................................................................13

A. The Securities Fraud Claim Should Be Dismissed............................................14

B. The Aiding and Abetting Claim Must be Dismissed.........................................21

C. The Control Person Liability Claim Must Be Dismissed .................................22

D. The Section 5 Liability Must Be Dismissed .......................................................23

POINT V

CONCLUSION..............................................................................................................................24



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iii

TABLE OF AUTHORITIES

Page

Cases

Aaron v. SEC,446 U.S. 680 (1980)...........................................................................................................15

Anwar v. Fairfield Greenwich Ctd.,728 F. supp. 372 (S.D.N.Y. 2010) .....................................................................................20

Ashcroft v. Iqbal,556 U.S. 662 (2009)...........................................................................................................13

ATSI Communications, Inc. v. Shaar Fund, Ltd.,493 F.3d 87 (2d Cir. 2007).................................................................................................22

Bell Atl. Corp. v. Twombly,

550 U.S. 544 (2007)......................................................................................................13,14

Bloor v. Carro, Spanbock, Londin, Rodman & Fass,754 F.2d 57 (2d Cir. 1985)............................................................................................20,21

CLAC Fin. Batucha Inv. Mgmt. v. Perrigo Co.,2010 U.S. Dist. Lexis 105185 (S.D.N.Y. 2010) ................................................................22

Devaney v. A.P. Chester,813 F.2d 566 (2d Cir. 1987)...............................................................................................16

Dirks v. SEC,463 U.S. 646 (1983)...........................................................................................................16

Ernst & Ernst v. Hochfelder,425 U.S. 185 (1976)...........................................................................................................16

Haines v. Ligget,975 F.2d 81 (3d Cir. 1992)...................................................................................................4

In re Agape Litig. v. Cosmo,773 F. Supp. 2d 298 (E.D.N.Y. 2011) ...............................................................................20

In re Citigroup Inc. Sec. Litig.,330 F. Supp. 2d 367 (S.D.N.Y. 2004)................................................................................16

In re Napster, Inc. Copyright Litig.,479 F.3d 1093 (9th Cir. 2006) .............................................................................................4

In re NYSE Specialists Sec. Liti.,503 F.3d 89 (2d Cir. 2007).................................................................................................14



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Kalnit v. Eichler,264 F.3d 141 (2d Cir. 2001)...............................................................................................16

Lerner v. Fleet Bank, N.A.,459 F.3d 273 (2d Cir. 2006)...............................................................................................21

Morgan Stanley Co. v. Archer Daniels Midland Co.,

570 F. Supp. 1529 (S.D.N.Y. 1983)...................................................................................15

Novak v. Kasaks,216 F.3d 300 (2d Cir. 2000)...............................................................................................19

SEC v. Cohmad,2010 U.S. Dist. Lexis 8597 (S.D.N.Y. 2010) ....................................................................16

SEC v. Elliot,

2011 WL 3586454 (S.D.N.Y August 11, 2011) ................................................................24

SEC v. Espuelas,579 F. Supp.2d 461 (S.D.N.Y. 2008).................................................................. 15,16 & 20

SEC v. Landberg,836 F. Supp.2d 148 (S.D.N.Y. 2011).................................................................................21

SEC v. Parnes,2001 WL 1658275 (S.D.N.Y. 2001)..................................................................................17

SEC v. Universal Express, Inc.,475 F. Supp. 2d 412, 422 (S.D.N.Y. 2007)........................................................................23

Shields v. Citytrust Bancorp, Inc.,25 F.3d 1124, 1128 (2d Cir. 1994)................................................................................20,21

South Cherry Street v. Hennessee Group,573 F.3d 98, 109 (2d Cir. 2009).........................................................................................21

Tellabs, Inc. v. Makor Issues & Rights, Ltd.551 U.S. 308 (2007)...........................................................................................................17



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RULES AND STATUTES

Page

Fed. R. Civ. P. 9(b) .........................................................................................................Passim

Fed. R. Civ. P 12(b)(6),....................................................................................................Passim

Rule 13(d) ..................................................................................................................................7

Rule 10(b)-5.............................................................................................................. 15,16 & 21

Section 17(a)(1)-(3) of the Securities Act..........................................................................16, 21

Section 10(b) of the Exchange Act ..........................................................................................21



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a non-lawyer and a corporate officer, deBeer was entitled to rely on counsel when it came to

securities law issues. The Complaint further vitiates scienterby implicitly conceding that deBeer

never sold a single share of stock during this alleged pump and dump, despite his ownership of

40% of Pacific Blue. What could possibly be more inconsistent with participation in a pump-

and-dump than holding one's sizeable stock position?

Not surprisingly, then, the Complaint is devoid of factual allegations showing that deBeer

knowingly participated in a fraud, as required by Rule 9(b). There are no allegations whatsoever

that the Kirks took deBeer into their confidence. Instead, the Complaint describes the Kirks as

having gone to great lengths to conceal the fraud. It alleges that they transferred their Tradeshow

and Pacific Blue stock through a succession of offshore corporations to mask, conceal and hide

their ownership. Stripped of the conclusory allegations, the Complaint pleads no facts

whatsoever indicating that deBeer knew the Kirks owned the offshore corporations -- much less

that they were orchestrating a "pump-and-dump" scheme. The rigorous pleading requirements of

Rule 9(b) were designed to protect defendants such as deBeer from this sort of unsupported and

conclusory ipse dixitallegations. These pleading requirements require the dismissal of the

Complaint. See SEC v. Cohmad, 09-CV-5680, 2010 U.S. Dist. Lexis 8597 (S.D.N.Y. 2010) at

*4-5 (one who conducts normal business activities while ignorant that those activities are

furthering a fraud is not liable for securities fraud").

II. THE SEC BREACHED THE ATTORNEY-CLIENT PRIVILEGE

In its investigation, the SEC knowingly and intentionally read, reviewed and incorporated

into its investigation of Pacific Blue documents and information protected by the attorney-client

privilege and work product doctrine. Initially the SEC said that it would seek a judicial

determination that the crime-fraud exception applies by means of a motion to compel. However,



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it inexplicably changed its mind, did an end-run around judicial review and sought and obtained

the documents from third parties without the financial wherewithal or legal interest to defend the

privileges. Obtaining judicial review priorto invading the privilege would have been the only

responsible course of action;1 multiple courts have held that the privilege holder must have an

opportunity to be heard in court before the privilege can be breached.

On September 9, 2011, the SEC issued a subpoena to Pacific Blue requesting, inter alia,

communication between Pacific Blue and Carrillo Huettel.2 See Gourevitch Dec. Ex B. (Letter

dated January 26, 2012, Gourevitch to Newville). Pacific Blue withheld the documents based

upon the attorney-client privilege and work product doctrines and produced a privilege log. Id.

Ex. B. On September 9, 2011, the SEC issued a new subpoena for the documents to Joel

Franklin ("Franklin") as chief executive of Pacific Blue, requesting, inter alia, communications

between Pacific Blue and Carrillo Huettel. Id. Franklin responded that Pacific Blue had asserted

the privilege; that the subpoena encompassed privileged documents; and that he could not

provide them. Id. Ex. A (Letter dated November 3, 2012, Cotton to Newville). The SEC stated

that it planned to move to compel in order to obtain a judicial declaration as to whether the

crime-fraud exception applied. Id. Ex. D (Letter dated January 30, 2013, Gourevitch to

Newville). On December 6, 2011, apparently realizing Franklin lacked the financial wherewithal

to defend the privilege, the SEC instead made an end-run around judicial review: it issued a

second subpoena to Franklin in his personal capacity. Id. In response, Franklin reiterated that

1 Since there was no allegation of ongoing harm and since the investigation had been long-standing and therefore norisk of undue delay, the SEC's decision to circumvent judicial review is inexplicable and indefensible. While theSEC never explained its change of heart about seeking judicial review, a reasonable inference is that it avoided

judicial review out of concern that a court might not agree with it about the crime fraud exception.

2 The correspondence with the SEC is attached as exhibits to the Declaration of David U. Gourevitch (referred to

hereinafter as "Gourevitch Dec."). deBeer respectfully asks the Court to take judicial notice of the correspondence .



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the documents were privileged but produced them anyway, explaining that he lacked the

financial wherewithal to challenge the subpoena or to defend the privilege:

While the requested documents appear to contain certain attorney client communicationsbetween Pacific Blue Energy Corporation and its outside counsel and may be sodesignated by other parties, Mr. Franklin has determined to deliver them to the

Commission as he does not have the financial ability to challenge the subpoena's broadscope or defend any claim of privilege.

Id. Ex. B (quoting letter from Cotton to Newville regarding production). On January 27, 2012,

the SEC acknowledged that its staff had undertaken "an initial review" of the documents. Id.

Ex. C (Letter dated January 27, 2012, Newville to Gourevitch). On January 23, 2012, deBeer

wrote the SEC, demanded the immediate return of all privileged documents and assurances that

the SEC would not incorporate them in its investigation. Id. Ex. D. The SEC never responded.3

We know of no instance in which a government in a civil investigation has, as here,

circumvented judicial review. Every circuit of which we are aware has held that in a civil

investigation, the privilege holder must be afforded an opportunity to rebut the claims of an

exception to the privilege prior to the production of privileged documents. See e.g. In re

Napster, Inc. Copyright Litig., 479 F.3d 1093 (9th Cir. 2006) (privilege holder has right to

introduce countervailing evidence if discovery of privilege communications is requested);

Haines v. Ligget, 975 F.2d 81, 97 (3d Cir. 1992) (holding that party invoking privilege has

absolute right to hearing when attorney-client privilege is challenged). The SEC's after-the-fact

claim in the Complaint that Carrillo Huettel participated in the fraud cannot justify its

unwaranted intrusion on the privilege, particularly given that the claim is conclusory and

unsupported and may be based on privileged communications.

3 On information and belief, the SEC also interviewed Franklin about privileged communications between PacificBlue and Carrillo Huettel and may also have obtained documents from third parties providers such as email serverswith no interest in protecting the privilege.



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III. THE SEC'S ALLEGATIONS4

The SEC alleges that the Kirks, a Canadian family, aided by Carrillo Huettel, acquired

Tradeshow and Pacific Blue; transferred their stock in Tradeshow and Pacific Blue to offshore

corporations they secretly owned in order to conceal their continued ownership of the stock;

orchestrated an email and telemarketing campaign to promote the stock by means of baseless

predictions of dramatic price appreciation; and sold their stock to the investing public. deBeer

served as president and chief executive of Tradeshow and chairman of Pacific Blue. Carrillo

Huettel, a law firm specializing in securities transactions, represented Tradeshow and Pacific

Blue. Compl. 15. In its capacity as corporate counsel, Carrillo Huettel crafted the transactions;

drafted the public filings and corporate documents and opined that they complied with federal

securities laws. See e.g. id., 3-4, 75, 80-82. As a non-lawyer, deBeer was entitled to rely on

corporate counsel's opinions on matters of securities law, particularly complex ones.

The SEC's claims against deBeer stem from documents drafted or approved by Carrillo

Huettel: (1) annual and quarterly company reports the SEC says should have, but did not

disclose, the Kirks' stake in the companies by virtue of their ownership of offshore corporations

that, in turn, owned stock in Tradeshow and Pacific Blue, (Compl. 42-45), (2) corporate press

releases that were accurate but the SEC alleges were "misleading" because they not disclose the

Kirks' scheme, (id. 45-46, 73), (3) a stock purchase agreement the SEC alleges was inaccurate

because it did not disclose that the purchase price was paid by a third party, (id. 84), (4) a

payment by the Kirks to deBeer that the SEC says should have been disclosed in the annual and

quarterly reports (id. 36, 44-45); and (5) corporate certifications the SEC alleges were

misleading because they did not treat the Kirks as "affiliates" of the issuer, ( id. 122-28).

4 As is required on a motion to dismiss pursuant to Rule 12(b)(6), the allegations in the Complaint are deemedaccurate for purposes of this motion.



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A. Formation and Ownership of the Issuers

The SEC alleges that Bruce Kirk founded Tradeshow in 2003 to sell consumer products

at tradeshows and shopping malls. He owned owed 50-60 % of the outstanding shares. Compl.

32. On October 30, 2007, deBeer was promoted to chief executive officer and president. See

id. at 34. In June 2008, Bruce Kirk gifted 10 million shares (43 % of the outstanding stock) to

his son John Kirk. See id. at 37. In August 2009, John Kirk instructed Tradeshow's transfer

agent to reissue 9.2 million shares (40% of the outstanding stock) to nine companies that John

Kirk, along with his brother, Ben Kirk, and John Boyle controlled. See id. 38.

In September 2009, the Kirks purchased a second company which they renamed Pacific

Blue to develop alternative energy. See id. at 77. deBeer became chairman of Pacific Blue;

Joel Franklin became the chief executive. Id. 78. The law firm Carrillo Huettel arranged for

4.9 % of the stock to be distributed to John Kirk, Dr. Luis Carrillo and various foreign nominee

entities controlled the Kirks to keep their holdings "secret," "to conceal the true ownership" of

the shares and "to give the misleading impression" that shares were held by various independent

entities, each of which owned less than 5%. See id. 80, 82; see also id. 3 ("Kirks and Boyle

mask[ed]" their ownership and control of Pacific Blue by transferring blocks of shares through "a

complex web of dozens of offshore nominee entities.").

Although never specifically articulated, the SEC's theory appears to be that John Kirk,

Ben Kirk, Dylan Boyle and James Hinton, along with Dr. Luis Carrillo and Louis Carrillo with

respect to Pacific Blue acted as a "group" for purposes of Rule 13(d); that their ownership

interests should, therefore, have been combined under Rule 13(d); and that because they

collectively owned more than 5% of the stock, they, Tradeshow and Pacific Blue should have

disclosed that interest and their status as "control persons" and "affiliates."



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However, the Complaint is conspicuously devoid of allegations that deBeer knew the

Kirks owned the offshore corporations -- much less the factual allegations required by Rule 9(b)

about how, when, where and from whom he might have discovered this critical information --

despite the Kirks' efforts to conceal their ownership. Nor is there any allegation that deBeer

knew about the "pump-and-dump." These omissions are fatal to the Complaint.

Moreover, the Complaint itself vitiates scienter: it alleges Carrillo Huettel drafted the

public filings and rendered opinions that the corporations were not "affiliates" of the company,

i.e., that they were not under common control of a single owner. Given the Kirks' efforts to

conceal their ownership and counsel's opinions that neither the offshore corporations nor the

Kirks were affiliates, the SEC should face heavy burden in demonstrating knowledge and

scienter. Instead, it weakly alleges deBeer knew the Kirks owned "a control block" of Tradeshow

shares. Compl. 39. Even this conclusory allegation is completely unsupported. 5 Based on this

deficiency alone, the Complaint should be dismissed.

B. Annual and Quarterly Reports

The Complaint alleges that Tradeshow's 2009 and 2010 annual reports and Pacific Blue's

2009 Form 10-K and 2009 Forms 10-Q were inaccurate because they stated that no individual or

corporation owned more than 5 % of the stock. Id. 42(a), 92-96. The filings were accurate.

The Complaint alleges that the offshore corporations each owned less than 5% of the stock.

Compl. 38, 84-85. The SEC's apparent theory is that because the Kirks owned the offshore

corporations, the offshore corporations' interests in Tradeshow and Pacific Blue should have

been treated, under Regulation S-K, as under the ownership of the Kirks; that the Kirks, thus,

5 The Complaint implies, without specifically stating, that deBeer knew the Kirks owned a "control block" (whateverthat means) by dint of his "control" of Tradeshow's shareholder list. Id. 39. "Control" of a shareholder list is notthe same as (a) physical possession of the list and (b), more importantly, reading it. Even if deBeer had possessionof and actually read the list (neither of which is alleged anywhere in the Complaint), it would not have disclosed theKirks' ownership of a "control block." The Complaint alleges that the Kirks transferred all of their Tradeshow sharesto "nominee entities." Id. 37. The shareholder list, at most, would only disclose only the names of the offshorecorporations and not the Kirks' ownership of those corporations.



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owned more than 5% of the outstanding shares; and that that would have been disclosed in the

issuers' public filings.6 Suffice it to say that Carrillo Huettel, as corporate counsel, issued

opinions to the contrary, upon which deBeer was entitled to rely upon. For example, the

Complaint alleges that the law firm "drafted all of Pacific Blue's SEC filings," id. 98, including

December 9, 2009 Form 8-K listing deBeer and Franklin as the only officers, directors or

beneficial owners of more than 5% of Pacific Blue. Id. 99.7 Equally importantly, the

Complaint does not allege that deBeer knew that the Kirks owned the offshore corporation. The

short of it is that deBeer signed annual reports that corporate counsel drafted and for which he is

not alleged to have had any information proving them to be inaccurate.

C. Press Releases

The SEC alleges that deBeer approved and released dozens of press releases on behalf of

Tradeshow with updates about corporate developments. Compl. 46. Strikingly, the SEC does

not contest the accuracy of the press releases. Instead, it alleges that they were "misleading"

because they failed to disclose that their "underlying purpose" (as well as the "primary purpose"

of Tradeshow) was to increase demand for the company's shares and thereby the price. Id. 46.

Given the undisputed accuracy of the releases, the SEC's disclosure theory is mind-bogglingly

overbroad. The "underlying purpose" of most corporate press releases is to promote a positive

corporate event and thereby generate interest in the stock. Similarly, shareholders usually expect

that increasing the company's stock price is at least one of the company's "primary purpose[s]."

If non-disclosure of an objective of increasing share price rendered a press release misleading,

6 The Complaint also alleges that the Kirks served as de facto investment bankers, promoters and investor relationsconsultants to Tradeshow. Id. 42. However, these are just conclusory legal conclusions intended to conceal theabsence offactualsupport for the complaint.

7 The SEC also alleges that Carrillo Huettel instructed the chief executive of Pacific Blue to sign a "related party"worksheet for the auditors identifying Franklin as the only company affiliate and not identifying the Kirks or theiralleged related entitles as affiliates. Compl. 100.



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virtually all press releases would become subject to charges of being fraudulent. 8 No court of

which we are aware has ever adopted this novel and stunningly overreaching theory.

D. Stock Purchase Agreement

Carrillo Huettel drafted an "affiliate stock purchase agreement" which stated that deBeer

purchased 40% of Pacific Blue's shares for $80,000. Compl. 83-84. The Complaint alleges

the agreement was "false[]" and a "sham" because Kirk paid for the shares. That is sheer

nonsense. To be false, the agreement would have had to state clearly and unequivocally that

deBeer personally paid for the stock. The Complaint does not allege that. Instead, it merely

alleges that it "stated that deBeer had purchased 40% for $80,000." Id. 84.9 In short, the SEC's

claims of falsity are just plain laughable. There is no substance whatsoever.

E. Payment By Kirks to deBeer

In September and October 2009, the Kirks and Boyle wired deBeer $330,000 from the

sale of Tradeshow stock, which the SEC histrionically brands a "kickback." Compl. 36, 44-

45, 92, 93-95. There is nothing inherently improper about the transfer. The Complaint does not

allege a quid pro quo; an improper agreement of any kind; or even that the transfer was

conditioned or contingent or, indeed, connected to anything deBeer did or did not do on behalf of

Tradeshow or Pacific Blue. Absent evidence of an illegal agreement and quid pro quo, the

SEC's characterization of this as a "kickback" is nothing but an ad hominem attempt to plaster

over the lack of substantive factual allegations. A kick-back generally is defined as a bribe

pursuant to an agreement to engage in an unlawful conduct. The Complaint alleges no such

8 The Complaint makes much to do about nothing. For example, it alleges "an almost daily stream ofcommunications" between deBeer and the Kirks regarding Tradeshow press releases. Compl. 35. Missing,however, is any allegation that, amidst this "almost daily stream " was anything untoward or misleading. Nor does itidentify the time period of the correspondence and releases, the substance of the correspondence and releases, or anyof a myriad of other critical details.

9 The Complaint concedes that the stock was duly paid for. Id.



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thing. It is precisely this sort of pleading of unsupported legal conclusions that courts ignore in

determining whether a Complaint survives a motion to dismiss under Rule 12(b)(6).

As a fallback, the SEC labels the payment "undisclosed compensation," assuming

without alleging (much less providing facts to support the allegation), that (a) it was

compensation paid in connection with Tradeshow or Pacific Blue and (b) there was an

unspecified obligation to disclose it. Item 404(b) of Regulation S-K, 17 C.F.R. 229.404(b)

[Related Party Transactions] requires disclosure in Form 10-K of:

...any transaction since the beginning of the registrant's last year or any currentlyproposed transaction in which the registrant was or is to be a participant and the amountinvolved exceeds $120,000 and any related party had or will have a direct or indirectmaterial interest. (emphasis added.)

Item 404(b) does not apply because Tradeshow and Pacific Blue are not alleged to be

participants in the transaction. Item 402 of Regulation S-K, 17 C.F.R. 229.402 [Executive

Compensation] requires disclosure of compensation paid to company executives for services

rendered to the registrant. The Complaint does not allege that the payment was on account of

services deBeer rendered to Tradeshow or Pacific Blue.

F. Email and Telemarketing Campaign

In 2009, the Kirks formed Skymark and ESR to promote Tradeshow. Skymark and ESR

emailed subscribers and called potential investors to recommend Tradeshow. The SEC alleges

that Skymark and ESR depicted themselves as an independent research service, without

disclosing that they owned millions of shares of Tradeshow, and as predicting dramatic increases

in the stock price without a reasonable basis. The Kirks and Boyle allegedly sold Tradeshow

shares during the period of the promotion. In April 2010, Skymark and ESR promoted Pacific

Blue as their next stock pick. The Kirks released an analyst's report that they characterized as

independent and sent emails predicting dramatic increases in the stock price. The Complaint



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described the promotion campaign as solely the doing of the Kirks (with some unspecified

involvement from Carrillo Huettel). It does not allege that deBeer knew about the predictions of

dramatic price increases or that he participated in the promotional campaign.

In a desperate bootstrap, the SEC alleges that deBeer knew Skymark and ESR promoted

Tradeshow while falsely claiming to be independent. Compl 63. First, the Complaint itself

contradicts the allegation. It alleges that Skymark and ESR disclosed that each had been paid

$5,000 and would be paid another $5,000 a month by a third party for their research, i.e., that

their research had been bought and paid for. Id. 57. Elsewhere, the Complaint alleges not that

Skymark and ESR falsely claimed to be independent, but rather that they merely did not disclose

the Kirks' interest. Second, deBeer's knowledge of the false claim of independence -- if that is

the allegation the SEC finally settles on -- presumes a chain of knowledge on deBeer's part, none

of which is alleged. It presumes that deBeer knew that (a) the Kirks owned the offshore

corporations, (b) the Kirks owned Skymark and ESR, (c) the Kirks intended to pump the stock,

then sell it, and (d) deBeer believed the Kirks had an obligation to disclose their interest in

Skymark and ESR. None of this is alleged. Third, the Complaint is devoid of facts to support its

claims.

G. StreetSweeper Article

On February 24, 2010, The StreetSweeper.org published an article titled, "Tradeshow

Marketing Knows How to Sell Its Stock." Compl. 69. The article highlighted the Kirks'

connection to Skymark and Tradeshow. Id. After the article was published, Tradeshow's stock

fell. On February 26, 2010, deBeer on behalf of Tradeshow issued a press release drafted or

approved by Carrillo Huettel, id. 75, stating that there were "significant number of

inaccuracies within the associated report that are not based on fact." Id. 73. deBeer called the

article part of an "intentional attempt to falsely discredit our company" and that "organized stock



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shorting activities behind this smear campaign ... may account for the sudden erratic trading in

our company's stock...We have engaged legal counsel on this matter and we will do everything

in our power to rise above this unfortunate and untimely attempt at deprecation and stock

manipulation."

What the Complaint did not disclose is that TheStreetSweeper.org includes a Gambino

associate who pleaded guilty to securities fraud and money laundering and later to racketeering. 10

The Complaint, moreover, does not allege that the press release was false. Instead, it alleges that

the response was misleading "because they failed to disclose the truth: as the article implied

[emphasis added], the Kirks and Boyle controlled Skymark whose purpose was simply to

promote the common stock of Tradeshow." Compl. 73. Never before has an accurate corporate

press release, drafted or approved by corporate counsel in response to an online article linked to

a convicted felon and organize crime associate, been alleged to be fraudulently misleading

because of its failure to address the implications of the online article.

H. Corporate Resolutions

Carrillo Huettel rendered written legal opinions that the offshore corporations were not

affiliates of the company and by implication that the Kirks did not own these corporations. See

Compl. 129-33. In line with this guidance, deBeer provided corporate resolutions drafted by

Carrillo Huettel taking the same position, i.e., asserting that the offshore corporations were not

directors, officers or affiliates of the issuer as the term is used in paragraph (a) of Rule 144 of the

10 TheStreetSweeper.org's advisory board includes Hunter Adams whom "knows stock manipulation

firsthand...government investigators accused him of manipulating worthless penny stocks. He pled guilty to twoconspiracy charges -- for securities fraud and money laundering -- and served time for his crimes. Years later, he

pled guilty to racketeering charges." http://thestreetsweeper.org/cleanupcrew.html. The government, moreover,alleged that he was an associate of the Gambino family. TheStreetSweeper.org acknowledges that it may take short

positions in the companies about which it writes. see http://thestreetsweeper.org/legaldisclaimer.html. The SECbelittles the company concerns about what the SEC characterizes as a "mysterious" shorting scheme. Given that thewebsite run by a known felon discloses shorting of companies about which it writes negative articles as a possibility,the SEC's characterization is misleading (at best).



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Securities Act of 1933 and that they were benefit owners of 5% or more of the shares of

Tradeshow and Pacific Blue. Compl. 122-28. The rules on aggregating share ownership by

"groups" or entities under common beneficial ownership for purposes of the 5% Rule 144

threshold are arcane, complex and, typically, the province of corporate counsel. Assuming that

the SEC is correct on the law, the Complaint cannot support the inference that in relying on

Carrrillo Huettel's expertise, deBeer, a non-attorney, acted in a highly unreasonable manner,

particularly since it does not allege that he knew that the Kirks owned the corporations.11 The

SEC's allegation that deBeer knew the Kirks beneficially owned more than 5 % of Tradeshow

stock is conclusory and devoid of facts that might support such an allegation.

IV. ARGUMENT

To survive a motion to dismiss under Rule12(b)(6) of the Federal Rules of Civil

Procedure, a Complaint must contain "sufficient factual matter, accepted as true, to state a claim

to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). However,

"the tenet that a court must accept as true all of the allegations contained in the Complaint is

inapplicable to legal conclusions, couched as factual assertions." Id. Put differently, allegations

phrased as legal conclusions need not be accepted as true. Bell Atl. Corp. v. Twombly, 550 U.S.

544, 570 (2007). "Threadbare recitals of the elements of a cause of action, supported by mere

conclusory statements, do not suffice." Iqubal, 556 U.S. at 678. Rather, "a Complaint must

contain sufficient factual matter accepted as true to state a claim to relief that is plausible on its

face. " Id., quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). Where a Complaint

pleads facts that are merely consistent a defendant's theory of liability, it stops short of the line

between possibility and plausibility of entitlement of relief. Id.

11 The complaint alleges that the offshore corporations were owned by John Kirk, Ben Kirk, Dylan Boyle, and JohnHinton (collectively referred to hereinafter, for purposes of this motion, as "the Kirks.") Tradeshow.



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A "court need not accord legal conclusions, deductions, or opinions couched as factual

allegations a presumption of truthfulness.'" SEC v. Espuelas, 579 F. Supp.2d 461 (S.D.N.Y

2008) (quoting In re NYSE Specialists Sec. Liti., 503 F.3d 89, 95 (2d Cir. 2007)). Labels and

conclusions or formulaic recitations of elements of a cause of action are insufficient. Bell Atl.

Corp, 550 U.S. at 555. Consideration is generally limited to factual allegations in the Complaint.

Id. However, the Court may consider documents of which the plaintiff knew or possessed an

relied upon in framing the Complaint, and the court may take judicial notice of public records.

Id. For purposes of this motion, we ask the Court to take judicial notice of correspondence

relating to the SEC's invasion of the attorney-client during its investigation of this case. 12

This Complaint not only does not establish a rational inference that deBeer knowingly

and intentionally participated in the Kirks' fraud, it does just the opposite: it establishes that

outside counsel guided the transactions at every step; drafted the corporate documents and public

filings; and issued legal opinions that they complied with applicable law. Although the

Complaint alleges that Carrillo Huettel participated in the fraud, it does not allege that deBeer

knew this or had any reason not to rely on counsel's draftsmanship and opinions. The SEC tries

to gloss over this deficiency with conclusory labels and legal conclusions but they're inadequate

to survive a motion to dismiss. Twombly, 550 U.S. at 555. Second and importantly, the

Complaint alleges deBeer owned 40 percent of Pacific Blue but does allege he ever sold a share.

If anything, then, he was the victim of the pump-and-dump.

A. The Securities Fraud Claims Should Be Dismissed13

To state a claim under 10(b) of the Exchange Act, 15 U.S.C. 78j(b), and Rule 10b-5, 17

C.F.R. 240.10b-5, the SEC must plead non-conclusory facts showing that the defendant (1) made

12 See Dec. Exhs. A-D.

13 The Complaint's First Claim for Relief, 172-75, alleges deBeer violated 17(a)(1)-(3); the Second Claim forRelief, 176-78 alleges that deBeer violated 10(b) and Rule 10b-5.



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a material misrepresentation or omission as to which he had a duty to speak or used a fraudulent

device, (2) with scienter, (3) in connection with the purchase or sale of securities. Espuelas, 579

F. Supp. 2d at 472. Claims under 10(b) and Rule 10b-5 are subject to Rule 9(b), Fed. R. Civ. P.

which requires that an "ample factual basis must be supplied to support the charges of fraud." Id.

at 469. SEC v. Cohmad Securities Corp., 09-CV-5680, 2010 U.S. Dist. Lexis 8597 (S.D.N.Y.

2010 at 5. Section 17(a), 15 U.S.C 77q(a), "applies only to sellers." Aaron v. SEC, 446 U.S.

680, 687 (1980). As there is no allegation that deBeer sold any securities, the 17(a) claims

should be dismissed. Morgan Stanley Co. v. Archer Daniels Midland Co., 570 F. Supp. 1529,

1536 (S.D.N.Y. 1983); see also Espuelas, 579 F. Supp. 2d at 469 (Rule 9(b) applies to 17(a)

claims). Accordingly, the arguments below should apply to 17(a).

1. The Alleged Misstatements and Omissions Are Not Material

The Complaint alleges a "pump-and-dump" scheme. The Kirks initiated a telemarketing

and email campaign in which they predicted dramatic increases in the stock price and investors

based upon those predictions and with little or no effort to verify them. Had they actually read

Tradeshow or Pacific Blue's annual and quarterly reports in which the SEC alleges false

statements, they would have learned that Tradeshow and Pacific Blue earned little or no revenue.

For example, for the fiscal year ended May 31, 2010, Tradeshow reported revenue of only

$32,085 and a net loss of $614,912. Compl. 66. Not surprisingly, therefore, the Complaint does

not allege that any investors ever read the companies' reports or that the misrepresentations they

supposedly contained were material to, or a proximate cause of, the Kirks' fraud.

Skymark and ESR, moreover, disclosed that their research had been bought and paid for.

The Complaint alleges that they informed investors that each had received $5,000 and expected

an additional $5,000 a month for the "research." Given that investors were on notice that the

research was hardly disinterested, it cannot be argued that any misstatements about whether the



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Kirks were "affiliated" with or "control persons of" the company the annual or quarterly reports,

which the investors didn't read, were material to the fraud.

2. The Complaint Fails to Plead Fraudulent Intent

Scienteris a "mental state embracing intent to deceive, manipulate or defraud." Tellabs,

Inc. v. Makor Issues & Rights, Ltd. 551 U.S. at 308, 319(2007); Ernst & Ernst v. Hochfelder,

425 U.S. 185, 198-99 (1976) (intentional and willful standard); Dirks v. SEC, 463 U.S. 646, 664

(1983) ("a violation may be found only where there is 'intentional or willful' conduct designed to

deceive or defraud investors..."). Although Rule 9(b) states that malice, intent and knowledge

may be averred generally, the Second Circuit requires that a securities fraud Complaint must

allege facts that "give rise to a strong inference of fraudulent intent." Kalnit v. Eichler, 264 F.3d

141 (2d Cir. 2001) (citation omitted); SEC v. Parnes, 2001 WL 1658275, at *5 (S.D.N.Y. 2001).

Where a fraud action is brought against individual officers of a company, the plaintiff must

allege that the individual defendant "personally knew of, or participated in, the fraud." In re

Citigroup Inc. Sec. Litig., 330 F. Supp. 2d 367, 381 (S.D.N.Y. 2004)(citation omitted).

Under Rule 9(b), the SEC must plead "the events which they claim give rise to an

inference of knowledge." Devaney v. A.P. Chester, 813 F.2d 566, 568 (2d Cir. 1987) (citing

other Second Circuit cases). As the Second Circuit explained:

Appellants' complaint contains nothing more than the sort of conclusory allegations ofknowledge which were found insufficient in Connecticut National Bank. After statingthat Solomon Brothers was retained by AMI to assist in the sale of the company and thatSalomon distributed to CB&R a prospectus on AMI which contained allegedly false andmisleading information, the complaint simply alleges that Salomon Brothers knew thatAMI management did not subscribe to the optimistic outlook reflected in the prospectus.

The complaint does not allege any facts to suggest who at Salomon possessed theknowledge, when and how they obtained the knowledge or even why anyone at SalomonBrothers should have known that the views expressed in the prospectus did not represent

the true beliefs of AMI management.

Id. (emphasis added). The same reasoning applies here with greater force.



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First, the few facts pleaded in the Complaint actually vitiate scienterby establishing that

(a) outside counsel crafted the transactions; drafted the public filings and transactional

documents; and opined that the transactions were lawful; and (b) deBeer owned 40% of Pacific

Blue but is not alleged to have sold a share (rendering him, if anything, a victim). In particular,

the Complaint alleges that Carrillo Huettel effectively opined that the offshore corporations were

not "affiliates" of the issuer and that their interests in Pacific Blue should not be combined for

purposes of Rule 144 purposes. Surely deBeer was entitled to rely on outside counsel's opinion

on legal questions typically within the province of counsel. Nothing in the Complaint suggests

that reliance on Carrillo Huettl would have been unreasonable or "extreme departure" from the

standards of ordinary care. Having thus undermined any finding ofscienter, the SEC faces an

especially heavy burden of pleading facts that establish it.

Second, utterly missing from the Complaint is any allegation -- much less facts to support

these allegations -- that deBeer knew anything about the "pump-and-dump" and more

particularly that he knew the following allegations:

i. the Kirks were stock promoters;

ii. the Kirks owned offshore corporations that, in turn, owned Tradeshow and Pacific

Blue stock; that the Kirks and Boyle had transferred their stock to these corporations to conceal

or mask their continued ownership of Tradeshow and Pacific Blue; and that because the Kirks

owned the offshore corporations and were acting as a "group," according to the SEC, their

ownership positions should have been aggregated for disclosure purposes;

iii. the Kirks and Boyle owned Skymark and ESR;

iv. the annual and quarterly reports that deBeer signed were allegedly false;

v. the corporate resolutions that Carrillo Huettel drafted were allegedly false;



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vi. the Kirks and Boyle used Skymark and ESR to inflate the price of Tradeshow and

Pacific Blue stock by means of false and misleading promotions predicting dramatic increases in

the price of the stock;

vii. the Kirks and Boyle "secretly" dumped the shares owned by the offshore

companies they "secretly" owned into the artificial demand that they "secretly" created;

viii. Carrillo Huettel were "central participants" in the Kirks' alleged scheme and that

under the guise of providing legal services, helped the Kirks and Boyle acquire the Pacific Blue

shell and mask their ownership of Tradeshow and Pacific Blue stock by transferring blocks of

stock through a web of offshore corporations; or

ix. money allegedly transferred to him by the Kirks came from the sale of Tradeshow

stock. Indeed, the Complaint alleges throughout that the Kirks went to great lengths to conceal

what they were doing. There is no allegation that the Kirks took deBeer into their confidence

and told him about the "pump-and-dump."

Third, the Complaint instead rests on the sort of recitations and bald conclusions that

Rule 9(b) is supposed to prevent. It asserts, with no factual support, that deBeer "knew" that the

Kirks and Boyle owned more than 5 % of the stock., id. 39, 126, 128. This is flatly

inconsistent with the absence of any allegation that deBeer knew the Kirks or Boyle owned the

offshore corporations (which, in turn, owned the Tradeshow and Pacific Blue stock) or that the

Kirks and Boyle owned 5% of the stock in their own names. It also is a legal (not factual)

conclusion because it does not specify how many shares or what percent they owned; how he

came to acquire this information; who told him; when, why, how or under what circumstances.

Just alleging a conclusion does not satisfy Rule 9(b).

Equally deficient is the Complaint's unsupported claim that deBeer knew Skymark and

ESR falsely held themselves out as independent. First, the Complaint contradicts itself. In the



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preceding paragraph, it alleges that Skymark's and ESR did not disclose their ties to the Kirks (as

opposed to having made false statements about their independence) and, elsewhere, alleges that

they disclosed that their research was bought and paid for. Second, there is no allegation deBeer

knew the Kirks owned Skymark and ESR. Having failed to allege that linchpin, the Complaint

cannot reasonably claim deBeer knew Skymark and ESR were not being accurate when they held

themselves out as independent. Third, the Complaint alleges no facts to support any portion of

this claim. Fourth, even if deBeer knew that Skymark held itself out as independent, so what?

He has no obligation to correct misstatements by third parties.

In view of the rigorous pleading requirements of Rule 9(b), the dearth of specific factual

allegations to support its otherwise conclusory assertions is fatal to the Complaint. The rigorous

pleading standards for securities fraud claims are designed to protect defendants against

unsupported allegations fraud and reputation damage such allegations cause. These standards

require dismissal of the SEC's factually deficient Complaint. "Boilerplate allegations that the

defendant[] knew" are insufficient to plead scienter. In re Sotheby's Holdings, Inc., No. 00 Civ.

1041, 2000 U.S. Dist. Lexis 12504 at * 22 (S.D.NY. 2000). "[T]he relaxation of Rule 9(b)'s

specificity requirement for scienter must not be mistaken for [a] license to base claims on fraud

on speculation or conclusory allegation." Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128

(2d Cir. 1994).

The SEC also fails to plead either "severe recklessness" or "motive and opportunity" as a

basis for scienter. Reckless conduct is "at least conduct which is highly unreasonable and which

represents an extreme departure from the standards of ordinary care to the extent that the danger

was either known to the defendant or so obvious that the defendant must have been aware of it.

Espuelas, 579 F. Supp. 2d at 469 (quoting Novak v. Kasaks, 216 F.3d 300, 307-08 (2d Cir.

2000). Recklessness is a "state of mind approximating actual intent, and not merely a heightened



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form of negligence." South Cherry Street v. Hennessee Group, 573 F.3d 98, 109 (2d Cir. 2009).

Motive and opportunity requires pleading "the means and likely prospect of achieving concrete

benefits of the means alleged." Id.

Here there is no allegation that the money deBeer received was contingent on or even

connected to his doing anything. The SEC's pleading strategy as to scienter is to couple factual

allegations with a conclusory allegation of fraudulent intent -- that deBeer knew that documents

were false. SEC v. Landberg, 836 F. Supp. 2d at 155 (citations and quotation omitted). Such a

pleading method does not satisfy the pleading requirement [of Rule 9(b)] because "such

allegations are so broad and conclusory as to be meaningless." Id. (quoting Shields, 25 F.3d at

1129).

B. The Aiding and Abetting Claim Must be Dismissed

The Complaint alleges that deBeer violated Section 17(a)(1)-(3) of the Securities Act.

Compl. 172-75. The elements and pleading standards are essentially the same as Section

10(b) claims, although scienter is not an element of subsection (a)(2) or (a)(3). Accordingly, the

Complaint must establish with facts a "strong inference" that (1) the Kirks committed a securities

fraud, (2) deBeer had "actual" knowledge of the fraud, (3) substantially assisted the harm on

which primary liability is predicated. In re Agape Litig. v. Cosmo, 773 F. Supp. 2d 298, 308

(E.D.N.Y 2011) (citing Anwar v. Fairfield Greenwich Ctd., 728 F. supp. 372, 442 (S.D.N.Y.

2010)). Substantial assistance is shown only if the defendant "proximately caused the harm ... on

which the primary liability is predicated." Bloor v. Carro, Spanbock, Londin, Rodman & Fass,

754 F.2d 57, 62 (2d Cir. 1985). Allegations of a "but for" causal relationship are insufficient."

Bloor, 754 F.2d at 63. Assuming for the sake of argument that the Complaint succeeds in

pleading the Kirks committed fraud, it utterly and completely fails to allege facts that deBeer

"actually knew of the fraud" or that he "substantially assisted it."



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If anything, the Complaint demonstrates the opposite: The SEC alleges that (a) the Kirks

went to considerable lengths to conceal their continued ownership of the Tradeshow and Pacific

Blue; (b) Carrillo Huettel guided the corporate transactions and opined the transactions were

lawful (c) deBeer owned 40% of Pacific Blue, but does not allege he ever sold a single share.14

Further, deBeer cannot possibly have aided and abetted a scheme if he did not have actual

knowledge of the object of the scheme, i.e., to "pump-and-dump" the stock. The allegations of

knowledge on deBeer's part are not more than vague recitations of merely legal conclusions,

unsupported by factual assertions.

The "substantial assistance" requirement imposes another insurmountable obstacle to this

Complaint. The SEC cannot establish that deBeer proximately caused the fraud. To plead

proximate causation, the SEC would have to establish that the losses incurred by Tradeshow and

Pacific Blue investors were a "direct and foreseeable result" of deBeer's conduct. Bloor, 754

F.2d at 62-63. The Complaint, however, cannot connect investors' losses to the company's

allegedly false annual and quarterly reports. Because the Complaint does not allege facts

showing that deBeer had "actual knowledge" of the alleged fraud and proximately caused it, the

aiding and abetting claim should be dismissed.

C. The Control Person Liability Claim Must Be Dismissed

The Complaint's sixth cause of action (Compl. 189-94) based upon control person

liability must similarly be dismissed. To allege a prima facie case of control person liability, a

plaintiff must show (1) a primary violation by the controlled person, (2) a control of the primary

violator by the defendant, and (3) the defendant was, in some meaningful way, a culpable person

14 Even red flags that might have put deBeer on notice do not suffice to satisfy the "actual knowledge" standard.Lerner v. Fleet Bank, N.A., 459 F.3d 273, 294 (2d Cir. 2006). The court held that, even though the red flags mighthave put the defendants on notice of "some impropriety," id., the "alleged facts do not give rise to the 'stronginference' required by [Rule] 9(b) of actual knowledge" of the fraud. Based on the allegations here, no plausible

inference can be drawn that deBeer had actual knowledge of the Kirks' alleged "pump-and-dump" scheme .



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in the controlled person's fraud." ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87,

108 (2d Cir. 2007). To withstand a motion to dismiss, a section 20(a) claim must allege

particularized facts of the control person's conscious misbehavior or recklessness. CLAC Fin.

Batucha Inv. Mgmt. v. Perrigo Co., 2010 U.S. Dist. Lexis 105185 at *26 (S.D.N.Y. 2010). More

than negligence is required. The plaintiff must plead facts supporting a strong inference that the

alleged person had an awareness of the fraud. For the reasons explained above, the SEC has

fallen short of satisfying the requirement. The Complaint establishes, if anything, just the

opposite: (a) outside counsel guided the corporate transactions, drafted the public filings and

transactional documents and opined that the transactions complied with applicable laws and

regulations, and (b) deBeer owned but is not alleged to have sold 40% of Pacific Blue. The SEC

does not (and could not) allege that he knew about the pump-and-dump or that the Kirks owned

the offshore corporations that held stock in Pacific Blue and Tradeshow.

D. The Section 5 Liability Must Be Dismissed

The SEC's eleventh and twelfth claim must be dismissed against deBeer because he did

not sell or offer to sell unregistered securities. The SEC must allege facts establishing three

prima facie elements for a violation of Section 5: (1) the defendant directly or indirectly sold or

offered to sell securities; (2) no registration statement was in effect for the securities; and (3)

interstate means were used in connection with the sales." SEC v. Universal Express, Inc., 475 F.

Supp. 2d 412, 422 (S.D.N.Y. 2007). The SEC does not allege that deBeer had any direct

involvement in the sale of unregistered securities. The SEC must demonstrate that he was a

"necessary participant" or "substantial factor" in the offer and sale of unregistered securities.

While the Complaint alleges that deBeer provided resolutions for Pacific Blue that certain shares

were validly issued and free trading, it, importantly, does not allege that the stock was ever

issued as free-trading or that it was ever sold. Nor does it allege that deBeer was the "one who



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plan[ned] the scheme or at least [was] a substantial motivating factor behind it." SEC v. Elliot,

09 Civ. 7594, 2011 WL 3586454 (S.D.N.Y August 11, 2011). The failure to allege facts

demonstrating that he was a proximate cause of the sale of unregistered stock requires the

dismissal of these claims.

V. CONCLUSION

For the reasons set forth above, deBeer respectfully moves this Court to dismiss the

Complaint against him or, in alternative, to authorize deBeer to conduct discovery in the full

nature and extent of the SEC's invasion of the attorney client privilege and work product

doctrine.

Date: May 17, 2013

Respectfully submitted,

DAVID U. GOUREVITCH, PC

/S/ David Gourevitch

David U. Gourevitch, Esq.(DG8795)

[email protected]

875 Third Avenue, 28th Floor

New York, New York 10022

Telephone No.: (212) 355-1300

Fax No.: (646) 365-8818

Attorney for Defendant Luniel deBeer


SEC v. Carrillo Huettel LLP Et Al Doc 28 Filed 21 May 13

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