Securities & Exchange Commission v. BIH Corp.
5 F. Supp. 3d 1342, 2014 U.S. Dist. LEXIS 32695 (2014)
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Rule of Law:
Summary judgment is improper when a defendant's sworn declaration creates a genuine issue of material fact by directly contradicting the plaintiff's evidence regarding the defendant's participation in, and scienter related to, alleged securities violations.
Facts:
- BIH Corporation was a Nevada-based penny stock company headquartered in Fort Myers, Florida.
- BIH's website identified 'Cris Galo' as its President and CEO, portraying him as a successful entrepreneur with a benevolent business philosophy.
- Beginning in March 2008, BIH issued a series of press releases announcing major corporate actions and business deals.
- An April 2008 press release stated BIH had acquired a company named Baron, which had supposedly secured a 'very substantial' contract to install beverage systems at Citi Field in New York.
- From June to December 2008, subsequent press releases announced an unsolicited offer for BIH's stock, a plan to sell Baron, a promise to pay shareholders a cash dividend, and a multi-million dollar renovation deal Baron allegedly signed with Applebee's.
- The press releases repeatedly assured shareholders that BIH's board, including Galo, was acting in their best interests.
- Despite issuing a final press release in January 2009 stating it had provided the requisite notice to issue the dividend, BIH never paid the promised cash dividend to its shareholders.
Procedural Posture:
- The Securities and Exchange Commission (SEC) filed a complaint against BIH Corporation, Edward W. Hayter, and other defendants in the U.S. District Court for the Middle District of Florida.
- Defendants Hayter and Burmaster filed a Motion to Transfer or Dismiss, which the court denied.
- Hayter filed an Answer and Affirmative Defenses, and later filed an Amended Answer.
- Several other defendants settled or had default judgments entered against them, leaving Hayter and Burmaster as the primary remaining defendants.
- The SEC filed a Motion for Summary Judgment against Hayter and the remaining defendants.
- Hayter filed a joint Opposition to the SEC's motion for summary judgment.
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Issue:
Is summary judgment appropriate in a securities enforcement action where the defendant submits a sworn declaration disputing his role as a necessary participant in the sale of unregistered securities and his scienter regarding allegedly fraudulent corporate statements, thereby creating genuine issues of material fact?
Opinions:
Majority - Steele, J.
No. Summary judgment is inappropriate because genuine issues of material fact remain regarding defendant Edward W. Hayter's liability. For the claim of selling unregistered securities, Hayter's declaration denies that he structured the transactions or approached the individuals involved, creating a factual dispute as to whether he was a 'necessary participant' or 'substantial factor' in the sales. For the fraud claims, Hayter's declaration states he was only a consultant, that he believed the information he received for press releases was plausible, and that Galo was a real person, which directly conflicts with the SEC's evidence and creates a factual dispute regarding Hayter's conduct and scienter. Because scienter is also a required element for aiding and abetting liability, that claim also cannot be resolved on summary judgment.
Analysis:
This decision highlights the high threshold for granting summary judgment in cases where a defendant's state of mind, such as scienter, is a central element of the claim. It demonstrates that a defendant's sworn declaration directly contradicting the plaintiff's evidence can be sufficient to establish a 'genuine issue of material fact,' thereby preventing a pre-trial resolution. This reinforces the judiciary's role in reserving credibility determinations and the weighing of conflicting evidence for the trier of fact, such as a jury, rather than for a judge on a paper record. The ruling underscores the difficulty plaintiffs face in winning complex fraud cases without a full trial, even with substantial documentary evidence and witness testimony.
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