Securities and Exchange Commission v. Sripetch ( 2020 )

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 SECURITIES AND EXCHANGE Case No.: 20-cv-01864-H-AGS COMMISSION, 12 ORDER: Plaintiff, 13 v. (1) GRANTING PLAINTIFF’S 14 MOTION FOR A PRELIMINARY ONGKARUCK SRIPETCH; AMANDA 15 INJUNCTION; AND FLORES; BREHNEN KNIGHT; 16 ANDREW MCALPINE, ASHMIT [Doc. No. 6.] PATEL; MICHAEL WEXLER; 17 DOMINIC WILLIAMS; ADTRON INC. (2) GRANTING JOINT REQUEST 18 a/k/a STOCKPALOOZA.COM; ATG FOR ENTRY OF AN ORDER INC.; DOIT, LTD.; DOJI CAPITAL, 19 MODIFYING THE PRELIMINARY INC.; KING MUTUAL SOLUTIONS INJUNCTION 20 INC.; OPTIMUS PRIME FINANCIAL INC.; ORCA BRIDGE; REDLINE 21 [Doc. Nos. 19, 26-1.] INTERNATIONAL; and UAIM 22 CORPORATION, 23 Defendants. 24 On September 22, 2020, Plaintiff Securities and Exchange Commission filed an ex 25 parte motion for a temporary restraining order against Defendants Ongkaruck Sripetch, 26 Brehnen Knight, Ashnmit Patel, and Amanda Flores. (Doc. No. 6.) On September 22, 27 28 1 2020, the Court held a telephonic hearing on Plaintiff’s motion for a TRO, and the Court 2 granted Plaintiff’s motion and entered the requested TRO.1 (Doc. Nos. 11, 12.) 3 The Court held an order to show cause hearing on October 5, 2020. (Doc. No. 16.) 4 Following the hearing: (1) the Court temporarily granted the SEC’s motion for a 5 preliminary injunction; (2) the Court converted the September 22, 2020 TRO into a 6 preliminary injunction; and (3) the Court scheduled a further hearing on the SEC’s motion 7 for a preliminary injunction. (Doc. No. 17.) 8 On October 9, 2020, Defendants Sripetch and Flores filed a motion to modify the 9 preliminary injunction. (Doc. No. 19.) On October 30, 2020, the SEC filed a response to 10 Defendants Sripetch and Flores’s motion for modification of the injunction. (Doc. No. 26.) 11 In the filing, the SEC explains that it and Defendants Sripetch and Flores have reached an 12 agreement to resolve the asset freeze issues raised in Defendants’ motion for modification. 13 (Id.) Along the filing, the SEC submitting a joint proposed modification order from itself 14 and Defendant Sripetch. (Doc. No. 26-1.) 15 On November 30, 2020, the Court vacated the further hearing on the SEC’s motion 16 for a preliminary injunction. (Doc. No. 27.) For the reasons below, the Court grants 17 Plaintiff SEC’s motion for a preliminary injunction, and the Court grants Plaintiff SEC and 18 Defendant Sripetch’s joint request for entry of an order modifying the preliminary 19 injunction. 20 BACKGROUND 21 On September 21, 2020, Plaintiff SEC initiated the present action against Defendants 22 Ongkaruck Sripetch, Amanda Flores, Brehnen Knight, Andrew McAlpine, Ashmit Patel, 23 Michael Wexler, and Dominic Williams (“the Individual Defendants”) and against 24 Defendants Adtron Inc. aka Stockpalooza.com, ATG Inc., DOIT Ltd., Doji Capital, Inc., 25 King Mutual Solutions Inc., Optimus Prime Financial Inc., Orca Bridge, Redline 26 27 1 On September 30, 2020, counsel for Plaintiff SEC filed a declaration stating that Defendants 28 Sripetch, Flores, Knight, and Patel were served with copies of the TRO, the complaint, and the motion for 1 International, and UAIM Corporation (“the Entity Defendants”). The SEC alleges that, 2 from at least August 2013 through at least February 2019, the Defendants worked as a 3 network to engage in stock “scalping” schemes to manipulate the common stock of at least 4 20 companies. “Scalping” is “a known practice whereby the owner of shares of a security 5 recommends that security for investment and then immediately sells it at a profit upon the 6 rise in the market price which follows the recommendation.” SEC v. Abellan, 674 F. Supp. 7 2d 1213, 1219 (W.D. Wash. 2009); see Lowe v. SEC, 472 U.S. 181, 224 (1985) (White, J., 8 concurrence) (describing “scalping” as where “a person associated with an advisory service 9 ‘purchas[es] shares of a security for his own account shortly before recommending that 10 security for long-term investment and then immediately sell[s] the shares at a profit upon 11 the rise in the market price following the recommendation.’” (quoting SEC v. Capital Gains 12 Research Bureau, Inc., 375 U.S. 180, 181 (1963))). 13 In each of the alleged schemes, a subset of the Defendants would begin by obtaining 14 stock in a certain microcap company that is thinly traded,2 and they would usually hold 15 that stock in the name of one of the Entity Defendants. (Doc. No. 1, Compl. ¶¶ 31-32; Doc. 16 No. 6-1 at 2.) Next, some of the Defendants would promote the company at issue. (Id.) 17 In most instances, a Defendant or Defendants paid an intermediary entity, which then wired 18 the funds, minus a commission, to third-party promoters who would run promotional 19 campaigns for the stock. (Id.) In some instances, Defendant Adtron – a company owned 20 and controlled by Defendant Sripetch – would also conduct a promotional campaign. (Id.) 21 Then, shortly after the beginning of the promotional campaign, Defendants would sell, or 22 “dump,” the relevant stock at inflated prices caused by the promotions. (Id.) Plaintiff SEC 23 asserts that these practices mislead the public and constitute illegal “scalping” that violates 24 certain anti-fraud provisions of the federal securities laws. (Doc. No. 6-1 at 2; Doc. No. 1, 25 Compl. ¶ 33.) 26 27 2 “Microcap stocks are defined based on the market capitalization of the issuer; these stocks tend to 28 have a share price of less than one cent.” SEC v. Alpine Sec. Corp., 354 F. Supp. 3d 396, 406 (S.D.N.Y. 1 On September 21, 2020, Plaintiff SEC filed a complaint against Defendants Sripetch, 2 Flores, Knight, McAlpine, Patel, Wexler, Williams, Adtron, ATG, DOIT, Doji, King 3 Mutual, Optimus Prime, Orca Bridge, Redline, and UAIM, alleging various claims for: 4 violations of Sections 9(a) and 10(b) of the Exchange Act; violations of Sections 5(a), 5(c), 5 and 17(a) of the Securities Act; violations of Rule 10b-5; and aiding and abetting violations 6 of those provisions. (Doc. No. 1.) On September 22, 2020, Plaintiff SEC filed an ex parte 7 motion for a temporary restraining order against Defendants Sripetch, Knight, Patel, and 8 Flores. (Doc. No. 6.) On September 22, 2020, the Court granted Plaintiff’s motion and 9 entered the requested TRO. (Doc. No. 12.) On October 5, 2020, the Court temporarily 10 granted the SEC’s motion for a preliminary injunction, and the Court converted the 11 September 22, 2020 TRO into a preliminary injunction. (Doc. No. 17.) 12 By the present motion, Plaintiff SEC moves for a preliminary injunction. (Doc. No. 13 6.) Specifically, the SEC requests an order enjoining and restraining Defendants Sripetch, 14 Knight, Patel, and Flores from violating the antifraud provisions of the securities laws and 15 prohibiting them from destroying documents. (Id. at 1.) In addition, the SEC requests: (1) 16 an asset freeze in the amount of $979,473.12 and an accounting as to Sripetch; and (2) an 17 asset freeze in the amount of $1,051,612.60 and an accounting as to Patel.3 (Id.) In 18 addition, Plaintiff SEC and Defendant Sripetch jointly request that the Court enter their 19 joint proposed order to modify the preliminary injunction. (Doc. No. 26-1.) 20 /// 21 /// 22 /// 23 24 25 26 3 In its motion for a TRO, the SEC requested an asset freeze as to Defendant Knight in the amount of $687,032.27 and an accounting. (Doc. No. 6 at 1.) The Court granted this request and included this 27 specific relief in the TRO. (Doc. No. 12.) At the October 5, 2020 order to show cause hearing, the SEC 28 requested that the asset freeze be lifted as to Defendant Knight. (Doc. No. 17.) The Court granted the 1 DISCUSSION 2 I. Legal Standard 3 A preliminary injunction is “an extraordinary remedy at may only be awarded upon 4 a clear showing that the plaintiff is entitled to such relief.” Winter v. Nat. Res. Def. 5 Council, Inc., 555 U.S. 7, 22 (2008). It is “a device for preserving the status quo and 6 preventing the irreparable loss of rights before judgment.” Sierra On-Line, Inc. v. Phoenix 7 Software, Inc., 739 F.2d 1415, 1422 (9th Cir. 1984). A district court may enter a 8 preliminary injunction only “upon a clear showing that the plaintiff is entitled to such 9 relief.” Winter, 555 U.S. at 22; see also Granny Goose Foods, Inc. v. Bhd. of Teamsters 10 & Auto Truck Drivers Local No. 70 of Alameda Cty., 415 U.S. 423 (1974) (explaining that 11 the party seeking the preliminary injunction “bears the burden of demonstrating the various 12 factors justify[] preliminary injunctive relief”). “The grant or denial of a motion for a 13 preliminary injunction lies within the discretion of the district court.” Johnson v. California 14 State Bd. of Accountancy, 72 F.3d 1427, 1429 (9th Cir. 1995). 15 In a typical case, “[a] plaintiff seeking a preliminary injunction must establish that 16 he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the 17 absence of preliminary relief, that the balance of equities tips in his favor, and that an 18 injunction is in the public interest.” Winter, 555 U.S. at 20. Nevertheless, “[b]ecause the 19 SEC is a governmental agency acting as a ‘statutory guardian charged with safeguarding 20 the public interest in enforcing the securities laws,’” in evaluating a motion for a 21 preliminary injunction by the SEC, courts employ “a two part factor test requiring the SEC 22 to show ‘(1) a prima facie case of previous violations of federal securities laws, and (2) a 23 reasonable likelihood that the wrong will be repeated.’” SEC v. Blockvest, LLC, No. 24 18CV2287-GPB(BLM), 2019 WL 625163, at *4 (S.D. Cal. Feb. 14, 2019) (quoting SEC 25 v. Mgmt. Dynamics, Inc., 515 F.2d 801, 808 (2d Cir. 1975); SEC v. Unique Fin. Concepts, 26 Inc., 196 F.3d 1195, 1199 n. 2 (11th Cir. 1999)); see, e.g., SEC v. Schooler, 902 F. Supp. 27 2d 1341, 1344 (S.D. Cal. 2012) (applying the two-part test); SEC v. Muehler, No. 28 218CV01677CASSKX, 2018 WL 1665637, at *5 (C.D. Cal. Apr. 4, 2018) (same); SEC v. 1 San Francisco Reg’l Ctr. LLC, No. 17-CV-00223-RS, 2017 WL 1092315, at *2 (N.D. Cal. 2 Mar. 23, 2017) (same); SEC v. Capital Cove Bancorp LLC, No. SACV15980JLSJCX, 3 2015 WL 9704076, at *5–6 (C.D. Cal. Sept. 1, 2015) (same); SEC v. Path Am., LLC, No. 4 C15-1350JLR, 2015 WL 13866539, at *6 (W.D. Wash. Oct. 6, 2015) (same); see also SEC 5 v. United Fin. Grp., Inc., 474 F.2d 354, 358 (9th Cir. 1973) (“A prima facie case of the 6 probable existence of fraud and mismanagement was demonstrated by the SEC. Such a 7 showing is sufficient to call into play the equitable powers of the court.” (footnote 8 omitted)). 9 II. Analysis 10 A. Whether the SEC Has Established a Prima Facie Case of Violations of Federal 11 Securities Laws 12 i. Claims for Violations of Section 17(a) of the Securities Act, Section 13 10(b) of the Exchange Act, and Rules 10b-5(a) and (c) against Sripetch, 14 Flores, and Knight 15 Plaintiff SEC alleges claims against Defendants Sripetch, Flores, and Knight for 16 violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and 17 Rule 10b–5. (Doc. No. 1, Compl. ¶¶ 132-43; see Doc. No. 6-1 at 19-21.) “Section 17(a) 18 of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b–5, prohibit 19 fraudulent conduct or practices in connection with the offer or sale of securities.” SEC v. 20 Dain Rauscher, Inc., 254 F.3d 852, 855 (9th Cir. 2001). “These antifraud provisions 21 prohibit schemes to defraud, and they prohibit ‘making a material misstatement or omission 22 in connection with the offer or sale of a security by means of interstate commerce.’” SEC 23 v. Stein, 906 F.3d 823, 830 (9th Cir. 2018) (quoting Dain Rauscher, 254 F.3d at 855–56). 24 Thus, liability under these provisions requires evidence of: (1) a material misrepresentation 25 or omission; (2) in connection with the purchase or sale of a security; (3) with scienter; and 26 (4) by means of interstate commerce. SEC v. Todd, 642 F.3d 1207, 1215 (9th Cir. 2011); 27 Dain Rauscher, 254 F.3d at 855–56. 28 1 “For a misrepresentation to be material, ‘there must be a substantial likelihood that 2 the disclosure of the omitted fact would have been viewed by the reasonable investor as 3 having significantly altered the “total mix” of information made available.’” Todd, 642 4 F.3d at 1215 (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231–32 (1988)). Turning to 5 scienter, “[s]cienter is ‘a mental state embracing intent to deceive, manipulate, or 6 defraud.’” SEC v. Rubera, 350 F.3d 1084, 1094 (9th Cir. 2003) (quoting Ernst & Ernst v. 7 Hochfelder, 425 U.S. 185, 194 n. 12 (1976)). “Reckless conduct may also constitute 8 scienter.” Todd, 642 F.3d at 1215. “Reckless conduct is a highly unreasonable act or 9 omission that is an ‘extreme departure from the standards of ordinary care, and which 10 presents a danger of misleading buyers or sellers that is either known to the defendant or 11 is so obvious that the actor must have been aware of it.’” Id. (quoting (citing Dain 12 Rauscher, 254 F.3d at 856)). 13 Here, the SEC asserts that Defendants Sripetch, Flores, and Knight violated Section 14 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b–5 by engaging 15 in an illegal stock “scalping” scheme. (Doc. No. 6-1 at 19-22.) “Scalping” is the “practice 16 whereby the owner of shares of a security recommends that security for investment and 17 then immediately sells it at a profit upon the rise in the market price which follows the 18 recommendation.” Abellan, 674 F. Supp. 2d at 1219. 19 The evidence in the record shows that from 2013 to 2019, Defendants Sripetch, 20 Flores, and Knight engaged in over twenty stock scalping schemes. During this period, 21 Defendant Sripetch either directly or through one of the Entity Defendants under his control 22 (Adtron, King Mutual, or Optimus Prime (which he controlled with Flores)) paid stock 23 promoters to run promotional campaigns for certain stocks. (Doc. No. 6-3, Tong Decl. ¶¶ 24 9, 13, 20, Ex. N; see also Doc. No. 6-1 at 6-8.) During some of these campaigns, 25 Defendants Sripetch, Flores, and Knight also directly promoted the stock through 26 Stockpalooza.com, which was owned and controlled by Sripetch via Adtron. (Doc. No. 6- 27 3, Tong Decl. ¶¶ 18-19, Ex. P.) Then, during these promotional campaigns, Defendants 28 Sripetch, Flores, and Knight, either directly or indirectly through one of the Entity 1 Defendants would sell shares of the relevant stocks at inflated prices. (See id. ¶ 9, Ex. N; 2 see also Doc. No. 6-1 at 6-8.) 3 The SEC argues that these facts are sufficient to establish a prima facie case for 4 violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and 5 Rule 10b–5. The Court agrees. 6 As to the “material misrepresentation or omission” element, for each of the schemes, 7 Defendant Sripetch either directly or through one of the Entity Defendants under his control 8 (Adtron, King Mutual, or Optimus Prime (which he controlled with Flores)) paid stock 9 promoters to run promotional campaigns for certain stocks. (Doc. No. 6-3, Tong Decl. ¶¶ 10 9, 13, 20, Ex. N; see also Doc. No. 6-1 at 6-8.) These promotional campaigns either: (1) 11 were silent on whether the funder of the promotion intended to sell his shares in the 12 companies’ stock; or (2) made statements such as “the third party may have shares and may 13 liquidate it, which may negatively affect its stock price” or “the third party . . . could very 14 well be selling shares of the companies’ stock at the same time the profile is being 15 disseminated to potential investors.” (Doc. No. 6-3, Tong Decl. ¶ 22.) In addition, during 16 some of these campaigns, Defendants Sripetch, Flores, and Knightly also directly promoted 17 the stock at issue through Stockpalooza.com, which was owned and controlled by Sripetch. 18 (Id. ¶¶ 18-19, Ex. P.) The Stockpalooza.com promotional materials stated that “[w]hen 19 Stockpalooza.com receives free or restricted shares as a compensation for a profiled 20 company, Stockpalooza.com may sell part of all of such shares during the period in which 21 Stockpalooza.com is performing such services.” (Id. ¶ 21, Ex. P.) 22 The SEC contends that these statements and omissions are misleading because they 23 did not fully disclose the Defendants’ then-present intent, as the promotions’ ultimate 24 funders, to sell the promoted stock. (Doc. No. 6-1 at 10-12, 19-20.) The Court agrees that 25 the statements and omissions in the promotions at issue are sufficient to satisfy the 26 “material misrepresentation or omission” element. See, e.g., SEC v. Recycle Tech, Inc., 27 No. 12-21656-CIV, 2013 WL 12063952, at *5 (S.D. Fla. Sept. 26, 2013) (finding a 28 complaint sufficiently identified material misrepresentations and omissions and noting that 1 “[w]hile the newsletters stated that Defendants ‘may sell part or all’ of its Recycle Tech 2 stock, they failed to disclose that they were definitively selling Recycle Tech shares 3 immediately after issuing the newsletters promoting the stock”); SEC v. Corp. Relations 4 Grp., Inc., No. 6:99CV1222ORL28KRS, 2003 WL 25570113, at *8 (M.D. Fla. Mar. 28, 5 2003) (“[T]he ‘from time to time’ language is inadequate to convey the reality of the Veitia 6 Defendants’ stock sales, which were intentionally timed rather than coincidental with the 7 publications.”); Abellan, 674 F. Supp. 2d at 1219 (“Scalping . . . constitutes fraud or deceit 8 for purposes of establishing violation of the Exchange Act.”); Zweig v. Hearst Corp., 594 9 F.2d 1261, 1266–67 (9th Cir. 1979), abrogated on other grounds by Hollinger v. Titan 10 Capital Corp., 914 F.2d 1564 (9th Cir. 1990). In addition, the Court notes that it is of no 11 consequence that some of the statements or omission were made by third parties because 12 Defendant Sripetch either directly or through one of the Entity Defendants paid those third 13 parties to make the statements and omissions at issue. See Janus Capital Grp., Inc. v. First 14 Derivative Traders, 564 U.S. 135, 142 (2011) (“For purposes of Rule 10b–5, the maker of 15 a statement is the person or entity with ultimate authority over the statement, including its 16 content and whether and how to communicate it.”). 17 As to the “in connection with” element, the misrepresentations and omissions at 18 issue were made during promotional campaigns that recommended the purchase of certain 19 stocks. This is sufficient to satisfy the “in connection with” element. See Corp. Relations 20 Grp., 2003 WL 25570113, at *9 (“[T]he Veitia Defendants’ omission of material 21 information was ‘in connection with’ the purchase or sale of securities. The Veitia 22 Defendants were acquiring stock and then selling that stock while recommending that their 23 readers purchase those same stocks.”); SEC v. Blavin, 557 F. Supp. 1304, 1310–11 (E.D. 24 Mich. 1983) (“Nor can there be any dispute that the statements were made in connection 25 with the purchase and sales of securities. The sole purpose of the newsletters was to 26 recommend the purchase of certain stock, which was exactly the same stock that Blavin 27 was contemporaneously buying and selling.”). 28 1 As to the “scienter” element, Defendants Sripetch, Flores, and Knight’s repeated 2 pattern over a six-year period of acquiring stock in a company, followed by paying for the 3 promotion of that stock, and then selling that stock at a profit demonstrates at least reckless 4 intent and is sufficient to satisfy the scienter element. See, e.g., Corp. Relations Grp., 2003 5 WL 25570113, at *9 (“The Veitia Defendants’ repeated pattern of purchasing the securities 6 of fourteen companies over a two-year period followed by touting and sales at a 7 tremendous profit shows repeated, willful activity. . . . The Defendants’ scalping 8 practice—the acquisition of stock, followed by touting of that stock in an effort to drive up 9 the price, followed by a sale of that stock at a substantial profit—shows an intent to 10 manipulate the market in a manner proscribed by the securities laws.”); Recycle Tech, 2013 11 WL 12063952, at *6 (“Defendants’ acts of selling their Recycle Tech stock directly 12 contradicted their recommendation to investors to purchase Recycle Tech stock. This 13 establishes scienter.”); Abellan, 674 F. Supp. 2d at 1219 (“Scienter is . . . evident where 14 persons engage in ‘scalping.’”); Blavin, 760 F.2d at 712 (“At a minimum, Blavin recklessly 15 failed to disclose that he was trading in stocks that his newsletter recommended . . . .”). 16 Finally, as to the “interstate commerce” element, the misrepresentations at issue 17 were made via email over the internet. This is sufficient to satisfy the “interstate 18 commerce” element. See, e.g., Recycle Tech, 2013 WL 12063952, at *7 (finding the 19 “interstate commerce” element satisfied where the representations at issues were made 20 through the internet); see also SEC v. Levin, No. 12-21917-CIV, 2013 WL 594736, at *12 21 (S.D. Fla. Feb. 14, 2013) (“[T]he Internet, which necessarily includes email, is an 22 ‘instrumentality of interstate commerce.’”). In sum, the SEC has demonstrated a prima 23 facie case against Defendants Sripetch, Flores, and Knight for violations of Section 17(a) 24 of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b–5. 25 ii. Claim for Violation of Section 9(a) of the Exchange Act against 26 Sripetch and Knight 27 Plaintiff SEC also alleges a claim against Defendants Sripetch and Knight for 28 violation of Section 9(a)(1) of the Exchange Act. (Doc. No. 1, Compl. ¶¶ 156-58; see Doc. 1 No. 6-1 at 22-23.) “Section 9(a)(1) explicitly forbids several common types of market 2 manipulation, known as matched orders and wash sales, that involve fictitious transactions 3 and do not result in any change of beneficial ownership.” SEC v. Masri, 523 F. Supp. 2d 4 361, 366 (S.D.N.Y. 2007) (footnotes omitted); see 15 U.S.C. 78i(a)(1); Ernst & Ernst v. 5 Hochfelder, 425 U.S. 185, 205 n.25 (1976). “In order ‘[t]o make out a violation of 6 subsection 9(a)(1) . . . , a plaintiff must prove the existence of (1) a wash sale or matched 7 orders in a security [,] (2) done with scienter [and] (3) for the purpose of creating a false or 8 misleading appearance of active trading in that security . . . .’” SEC v. Malenfant, 784 F. 9 Supp. 141, 144 (S.D.N.Y. 1992) (quoting Chemetron Corp. v. Bus. Funds, Inc., 682 F.2d 10 1149, 1163 (5th Cir. 1982)); accord SEC v. Competitive Techs., Inc., No. 11 CIV.A.3:04CV1331(JCH, 2005 WL 1719725, at *6 (D. Conn. July 21, 2005); see 12 AnchorBank, FSB v. Hofer, 649 F.3d 610, 616 (7th Cir. 2011). 13 “‘Wash’ sales are transactions involving no change in beneficial ownership.” 14 Hochfelder, 425 U.S. at 205 n.25. “‘Matched’ orders are orders for the purchase sale of a 15 security that are entered with the knowledge that orders of substantially the same size, at 16 substantially the same time and price, have been or will be entered by the same or different 17 persons for the sale/purchase of such security.” Id.; see SEC v. Kwak, No. CIVA 304-CV- 18 1331 JCH, 2008 WL 410427, at *1 (D. Conn. Feb. 12, 2008) (“A matched trade takes place 19 when a person buys or sells a stock, with knowledge that a substantially offsetting 20 transaction is going to be entered into by someone, in order to mislead others about the 21 extent of the activity in, or the market for, a given stock.”). 22 The evidence in the record shows that Sripetch and Knight engaged in several 23 matched orders and washed trades in VMS stock in advance of implementing a stock 24 scalping scheme for that stock. (Doc. No. 6-3, Tong Decl. ¶¶ 9, 27, Ex. N.) Specifically, 25 the evidence shows that between March 17, 2016 and May 25, 2016, Sripetch and Knight 26 sold large volumes of VMS stock back and forth to each other while raising the prices of 27 the orders over time from $1.67 per share to $2.07 per share during this period. (Id. ¶ 27.) 28 The evidence also shows that during this period, Knight engaged in several wash trades 1 where he sold shares of VMS between two accounts that he owned at increasing prices. 2 (Id.) For many of the days during this period, Sripetch and Knight’s trades represented 3 100% of the total daily reported trading volume for VMS. (Id.) Further, at the conclusion 4 of this period, in May-June 2016 and August-December 2016, Sripetch and Knight 5 engaged in a stock scalping scheme with VMS stock. (See id. ¶ 9, Ex. N.) 6 This evidence is sufficient to demonstrate a prima facie case against Defendants 7 Sripetch and Knight for violation of Section 9(a)(1). The evidence shows that Defendants 8 Sripetch and Knight engaged in several matched orders and washed trades. Further, the 9 timing and frequency of these manipulative trades is sufficient to demonstrate scienter and 10 that these trades were done for the purposes of creating the false or misleading appearance 11 of trading in VMS. In sum, the SEC has demonstrated a prima facie case against 12 Defendants Sripetch and Knight for violation of Section 9(a)(1) of the Exchange Act. 13 iii. Claim for Aiding and Abetting Securities Fraud Against Patel 14 Plaintiff SEC alleges claims against Defendant Patel for aiding and abetting 15 violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and 16 Rule 10b–5. ((Doc. No. 1, Compl. ¶¶ 144-51; see Doc. No. 6-1 at 23-24.) To establish a 17 claim for aiding and abetting securities fraud, the SEC must demonstrate: “(1) the 18 existence of an independent primary wrong, (2) actual knowledge or reckless disregard by 19 the alleged aider and abettor of the wrong and of his or her role in furthering it, and (3) 20 substantial assistance in the wrong.” Levine v. Diamanthuset, Inc., 950 F.2d 1478, 1483 21 (9th Cir. 1991); see Ponce v. SEC, 345 F.3d 722, 737 (9th Cir. 2003). “The element of 22 substantial assistance is met when, based upon all the circumstances surrounding the 23 conduct in question, an individual’s actions are a ‘substantial causal factor’ in bringing 24 about the primary violation.” SEC v. Hurd, No. CV1304464RGKJCGX, 2014 WL 25 12561073, at *6 (C.D. Cal. Feb. 21, 2014) (citing Rolf v. Blyth, Eastman Dillon & Co., 26 Inc., 570 F.2d 38, 48 (2d Cir. 1978)). 27 The evidence in the record shows that Defendant Patel held brokerage accounts in 28 his name that sold stocks in many of the stock scalping schemes conducted by the other 1 Defendants. (Doc. No. 6-3, Tong Decl. ¶¶ 8, 9, 17, 29, Ex. N.) The evidence further shows 2 that following these sales, Patel would remit over 50% of the proceeds to the stock sales to 3 accounts owned by entities that were controlled by Sripetch, Flores, and/or Knight. (See 4 id. ¶ 29 (showing $919,050 remitted to Orca Bridge, $23,700 remitted to King Mutual, and 5 $67,067 remitted to Optimus Prime). 6 This evidence is sufficient to demonstrate a prima facie case of aiding and abetting 7 against Defendant Patel. As to the first element, the SEC has demonstrated a prima facie 8 case that Defendants Sripetch, Flores, and Knight engaged in various stock scalping 9 schemes in violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange 10 Act, and Rule 10b–5. See supra. As to the second element, Patel’s sale of stocks and 11 sharing of profits during those stock scalping schemes is sufficient to constitute 12 “substantial assistance” to Defendants Sripetch, Flores, and Knight’s violations of the 13 securities laws. As to the third element, the Court agrees with the SEC that this evidence 14 is also sufficient to establish Patel’s scienter. The SEC notes that if Patel legitimately 15 owned the stocks he sold, then there would be no need for him to kickback over 50% of 16 the proceeds he received from the sales of those stocks to other Defendants. (Doc. No. 6- 17 1 at 24.) As such, the SEC has demonstrated a prima facie case against Defendant Patel 18 for aiding and abetting securities fraud. 19 B. Whether the SEC Has Demonstrated a Reasonable Likelihood That the 20 Violations Will Be Repeated 21 “Once the SEC has established a prima facie case of the alleged Securities Act and 22 Exchange Act violations, whether a preliminary injunction should issue turns on the 23 likelihood that defendants will commit future violations.” Muehler, 2018 WL 1665637, at 24 *8. “The likelihood of future violations depends on the totality of the circumstances, and 25 the existence of past violations may give rise to an inference that there will be violations 26 in the future.” Id. (citing SEC v. Murphy, 626 F.2d 633, 655 (9th Cir. 1980)). In predicting 27 likelihood, a court may consider the degree of scienter and the recurrent nature of the 28 conduct. Id. 1 The evidence in the record shows that Defendants Sripetch, Flores, Knight, and Patel 2 engaged in or aided and abetted stock scalping schemes that spanned from at least 2013 to 3 2019 and involved the common stock of at least 20 different companies. (See Doc. No. 6- 4 3, Tong Decl. ¶ 9, Ex. N.) In light of the recurrent nature of these schemes over a long 5 period of time, the SEC has demonstrated a high likelihood of future violations. 6 C. Winter Factors 7 Although the Court has evaluated the present motion for a preliminary injunction 8 under the above two-part test, the Court notes that even if it were to employ the standard 9 four-factor test for injunctive relief set forth in Winter, the SEC has demonstrated that it is 10 entitled to a preliminary injunction. As shown above, the SEC has demonstrated a 11 likelihood of success as to its various claims against Defendants Sripetch, Flores, Knight, 12 and Patel for violations of securities laws. See supra. Further, because the SEC has 13 demonstrated a likelihood of success on its claims for violations of securities laws, the SEC 14 has also demonstrated a likelihood of irreparable injury. See United States v. Nutri-cology, 15 Inc., 982 F.2d 394, 398 (9th Cir. 1992) (“In statutory enforcement cases where the 16 government has met the ‘probability of success’ prong of the preliminary injunction test, 17 we presume it has met the ‘possibility of irreparable injury’ prong because the passage of 18 the statute is itself an implied finding by Congress that violations will harm the public.”). 19 In addition, the balance of equities favors the SEC as Defendants’ stock scalping scheme 20 is prohibited and serves no legitimate purpose. Finally, an injunction prohibiting 21 Defendants Sripetch, Flores, Knight, and Patel from committing future violations of 22 securities laws is in the public interest. See SEC v. Mizrahi, No. CV 19-2284 PA (JEMX), 23 2019 WL 3241185, at *4 (C.D. Cal. Apr. 10, 2019) (“The SEC is authorized by Congress 24 to enforce securities laws and to safeguard the public. Thus, the SEC’s requested 25 preliminary injunction enjoining Defendants from committing future violations of 26 securities laws is in the interest of the public.”). 27 /// 28 /// 1 D. Asset Freeze 2 “‘[F]ederal courts have inherent equitable authority to issue a variety of “ancillary 3 relief” measures in actions brought by the SEC to enforce the federal securities laws.’” 4 SEC v. Hickey, 322 F.3d 1123, 1131 (9th Cir. 2003); see also In re San Vicente Med. 5 Partners Ltd., 962 F.2d 1402, 1406 (9th Cir. 1992) (“Generally, federal courts enjoy wide 6 discretion in fashioning relief and protective measures in SEC actions.”). This includes 7 the authority to issue an asset freeze. See, e.g., Hickey, 322 F.3d at 1131. 8 “The purpose of an asset freeze is to prevent the dissipation and waste of assets so 9 that they will be available for disgorgement.” SEC v. Janus Spectrum LLC, No. CV-15- 10 609-PHX-SMM, 2016 WL 614002, at *4 (D. Ariz. Feb. 16, 2016) (citing Hickey, 322 F.3d 11 at 1132); see SEC v. Infinity Grp. Co., 212 F.3d 180, 197 (3d Cir. 2000) (internal citations 12 omitted) (“A freeze of assets is designed to preserve the status quo by preventing the 13 dissipation and diversion of assets.”). “A party seeking an asset freeze must show a 14 likelihood of dissipation of the claimed assets, or other inability to recover monetary 15 damages, if relief is not granted.” Johnson v. Couturier, 572 F.3d 1067, 1085 (9th Cir. 16 2009); accord Schooler, 902 F. Supp. 2d at 1359. The determination of whether to issue 17 an asset freeze is committed the district court’s discretion. See Hickey, 322 F.3d at 1128 18 (reviewing the issuance of an asset freeze for abuse of discretion); Reebok Int’l, Ltd. v. 19 Marnatech Enterprises, Inc., 970 F.2d 552, 563 (9th Cir. 1992) (same). 20 The SEC has shown a likelihood of dissipation absent an asset freeze as to 21 Defendants Sripetch and Patel. The SEC has presented evidence showing that the bank 22 accounts of King Mutual, which is controlled by Sripetch, have been closed or largely 23 emptied. (See Doc. No. 6-3, Tong Decl. ¶¶ 5, 7, 30.) This supports the issuance of an asset 24 freeze. See SEC v. Credit First Fund, LP, No. CV 05-8741DSFPJWX, 2006 WL 4729240, 25 at *15 (C.D. Cal. Feb. 13, 2006). In addition, Sripetch is a Thai citizen, and Patel is a 26 Canadian citizen. (Doc. No. 6-3, Tong Decl. ¶¶ 5, 8.) This raises concerns that they have 27 little incentive to keep any assets within the jurisdiction of this Court. These facts also 28 support the issuance of an asset freeze. See, e.g., SEC v. Gonzalez de Castilla, 145 F. 1 Supp. 2d 402, 420 (S.D.N.Y. 2001) (“[B]ecause each of these defendants is a citizen and 2 resident of Mexico with Mexican and other off-shore bank accounts (and therefore the 3 capacity to transfer the funds beyond the jurisdiction of this Court), the SEC has met its 4 burden to justify extending the asset freeze until the trial or resolution of this matter.”); 5 SEC v. Dubovoy, No. CV 15-6076, 2015 WL 6122261, at *9 (D.N.J. Oct. 16, 2015) 6 (“[T]he fact that Mr. Amaryan, who controls the foreign entities, lives abroad raises a 7 serious concern that he may transfer corporate funds beyond the Court’s jurisdiction and 8 dissipate the assets available for any eventual award.”). In sum, the SEC has demonstrated 9 the need for an asset freeze as to Defendants Sripetch and Patel. As a result, the Court 10 grants the SEC’s request for an asset freeze against Defendants Sripetch and Patel in the 11 amounts requested. 12 In their motion to modify the preliminary injunction, Defendants Sripetch and Flores 13 request a modification of the SEC’s proposed asset freeze as to Sripetch to allow Sripetch 14 access to certain funds and assets otherwise subject to the asset freeze in order to pay for 15 reasonable living expenses. (Doc. No. 19 at 1.) Subsequently, the SEC filed a response 16 stating that the parties have reached an agreement as to the asset freeze issue; and the SEC 17 and Defendant Sriptech submitted a joint proposed order to modify the preliminary 18 injunction. (Doc. Nos. 26, 26-1). As such, the Court grants the parties’ joint request to 19 modify the preliminary injunction, and the Court will issue the joint proposed modification 20 order. Cf. SEC v. Bivona, No. 16-CV-01386-EMC, 2016 WL 2996903, at *3 (N.D. Cal. 21 May 25, 2016) (citing FTC v. Trek All., Inc., 81 F. App’x 118, 119 (9th Cir. 2003)) 22 (explaining that whether to modify an asset freeze is a matter for the Court’s discretion); 23 SEC v. Private Equity Mgmt. Grp., Inc., No. CV 09-2901 PSG (EX), 2009 WL 2058247, 24 at *3 (C.D. Cal. July 9, 2009) (“Courts regularly hold that they have discretion to modify 25 the asset freeze to release funds to pay living expenses.”). 26 E. Other Relief 27 In its motion, the SEC also requests an order for Defendants Sripetch, Knight, and 28 Patel to provide a verified written accounting and an order prohibiting Defendants Sripetch, 1 || Flores, Knight, and Patel from destroying documents. (Doc. No. 6-1 at 1,27.) The SEC 2 ||explains that an accounting is critical to identifying assets for disgorgement and civil 3 || penalties, as well as determining which defendant obtained particular monies from each of 4 20 instances of scalping identified in their motion. (Id. at 27.) 5 ‘““(F]ederal courts have inherent equitable authority to issue a variety of “ancillary 6 ||relief’ measures in actions brought by the SEC to enforce the federal securities laws.’” 7 || Hickey, 322 F.3d at 1131; also San Vicente Med. Partners Ltd., 962 F.2d at 1406 8 ||(“Generally, federal courts enjoy wide discretion in fashioning relief and protective 9 || measures in SEC actions.”). Based on the evidence and arguments presented by the SEC, 10 || the Court concludes that the requested relief is appropriate. As such, the Court grants the 11 ||SEC’s request for an accounting as to Defendants Sripetch, Knight, and Patel and an order 12 || prohibiting the destruction of documents as to Defendants Sripetch, Flores, Knight, and 13 ||Patel. See, e.g., Credit First Fund, 2006 WL 4729240, at *15 (ordering an accounting and 14 || prohibiting the destruction of any related documents). 15 CONCLUSION 16 In sum, Plaintiff SEC has demonstrated that it is entitled to the requested preliminary 17 ||injunctive relief. As such, the Court grants Plaintiff SEC’s motion for a preliminary 18 ||injunction, and the Court grants Plaintiff SEC and Defendant Sripetch’s joint request for 19 |lentry of an order modifying the preliminary injunction. The Court will issue the 20 || preliminary injunction and the requested modification order in separate and concurrently 21 || filed orders. 22 IT IS SO ORDERED. 23 || DATED: November 2, 2020 24 U1 iMeeg HUFF, Tred 25 UNITED STATES DISTRICT COURT 26 27 28