CBA Pharma Inc. v. Ray Perry

NOT RECOMMENDED FOR PUBLICATION
File Name: 23a0014n.06
No. 22-5358
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT FILED
Jan 09, 2023
) DEBORAH S. HUNT, Clerk
CBA PHARMA, INC.,
)
Plaintiff-Appellant, )
) ON APPEAL FROM THE
v. ) UNITED STATES DISTRICT
) COURT FOR THE EASTERN
RAY A. PERRY, in his official capacity as Secretary ) DISTRICT OF KENTUCKY
of The Kentucky Public Protection Cabinet, )
) OPINION
Defendant-Appellee.
)
Before: BOGGS, KETHLEDGE, and WHITE, Circuit Judges.
BOGGS, Circuit Judge. This case arises from a state investigation of a consumer
complaint of securities fraud. While the underlying issue is whether the state action is pre-empted
by federal securities law, we must first determine if the case is ripe for adjudication and whether
we have subject-matter jurisdiction.
I. Background
CBA Pharma, Inc., is a Nevada corporation with its principal place of business in
Lexington, Kentucky. CBA has raised tens of millions of dollars for the development of a cancer-
treatment drug which is currently undergoing the final phase of clinical trials as part of its
Investigational New Drug Application (“INDA”) with the U.S. Food and Drug Administration.
CBA has also developed a dietary supplement, which it markets as Bright Star. CBA drug-
development activities have been funded solely through private stock offerings to accredited
investors. Two of those investors, Mr. and Mrs. Shiff, who had invested $2,000,000 in 2016 and
No. 22-5358, CBA Pharma, Inc. v. Perry
2017, came to believe that CBA was abandoning efforts to develop the cancer drug in order to
focus on marketing Bright Star. CBA alleges that the Shiffs began to explore ways to replace the
company’s president, Mike Putnam, with the encouragement and assistance of Chief Operating
Officer, Beth Gudeman.
In January 2021, the enforcement branch of the Kentucky Public Protection Cabinet, the
Department of Financial Institutions (“DFI”), informed CBA that Mrs. Shiff had filed a complaint
and that DFI was initiating an investigation for potential securities-law violations. DFI issued a
subpoena for various information, including descriptions of fundraising activities; the progression
and status of its INDA with the FDA; the percentage of funds raised that were used toward the
approval of the INDA; stockholder lists; voting-trust agreements; balance sheets and general
ledgers; and advertising and promotional materials.
DFI also sent a document entitled “Enforcement Questionnaire” to a small number of
shareholders (exact number unknown) which included questions such as: “Detail information
provided during the transaction that you think may not have been true and/or complete,” and
“[d]etail information not provided during the transaction that you think may have affected your
decision to be involved.” In its complaint, CBA alleges that the Enforcement Branch Manager at
DFI, Jeff Jacob, initiated DFI’s investigation of CBA to assist the Shiffs in their efforts to take
over the company. CBA alleges that the Enforcement Questionnaire, in both title and substance,
was an effort by DFI to drum up additional complaints and intimidate existing shareholders. CBA
therefore states that it does not want to comply with DFI’s subpoena to provide the names of all
its investors.
In March 2021, CBA filed suit in federal district court for injunctive and declaratory relief
to stop DFI’s investigation on grounds that state regulation of the sale of securities is preempted
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by the Federal National Securities Markets Improvement Act of 1996 (“NSMIA”). 15 U.S.C.
§ 77r. DFI filed a Federal Rule of Civil Procedure 12(b)(6) motion to dismiss for failure to state
a claim upon which relief could be granted because DFI had taken no administrative action beyond
an initial investigation, CBA had suffered no injury, and, if DFI were to bring an action against
CBA after it completes its investigation, CBA could administratively contest those findings of
alleged violations pursuant to Kentucky Revised Statutes (“KRS”) Chapter 13B. The district court
granted the12(b)(6) motion on grounds that DFI’s investigation was ongoing and incomplete, and
thus not ripe for adjudication. CBA filed this appeal.
II. Statutory Framework
NSMIA, which amended Section 18(a)(1)(A) of the 1933 Securities Act, 15 U.S.C.
§ 77r(a)(1)(A), preempts certain state regulations with respect to “covered securities”:
(a) Scope of exemption. Except as otherwise provided in this section, no law, rule,
regulation, or order, or other administrative action of any State or any political
subdivision thereof - (1) requiring, or with respect to, registration or qualification
of securities, or registration or qualification of securities transactions, shall directly
or indirectly apply to a security that - (A) is a covered security; or (B) will be a
covered security upon completion of the transaction . . . .
15 U.S.C. §§ 77r(a)(1)(A)-(B). A “covered security” includes any security exempt from federal
securities registration pursuant to the rules and regulations issued under§ 4(a)(2) of the 1933
Securities Act. Brown v. Earthboard Sports U.S.A., Inc., 481 F.3d 901, 909 (6th Cir. 2007).1
But, federal preemption of state regulation of covered securities is not absolute, as NSMIA
preserves state jurisdiction over fraud and deceit violations involving covered securities:
1
NSMIA examples of a "covered security" also include securities listed on a national securities
exchange, securities issued by a federally registered investment company, and securities offered
to investors that have either substantial net worth or investment sophistication. 15 U.S.C.
§§ 77r(b)(1)-(4).
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Preservation of authority. (1) Fraud authority. Consistent with this section, the
securities commission (or any agency or office performing like functions) of any
State shall retain jurisdiction under the laws of such State to investigate and bring
enforcement actions, in connection with securities or securities transactions . . . with
respect to . . . fraud or deceit . . . .
15 U.S.C. § 77r(c)(1)(A)(i).
In 1960, the Securities Act of Kentucky (“Securities Act”), also known as the Kentucky
Blue Sky law, was passed to “[p]rotect investors by preventing investment fraud and related illegal
conduct . . . .” KRS § 292.530(1)(a). The law’s interpretation and administration are to be
coordinated with federal regulation of securities. KRS § 292.530(2). The Securities Act makes it
unlawful
for any person, in connection with the offer, sale, or purchase of any security,
directly or indirectly: (a) To employ any device, scheme, or artifice to defraud;
(b) To make any untrue statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in the light of the
circumstances under which they are made, not misleading; or (c) To engage in any
act, practice, or course of business which operates or would operate as a fraud or
deceit upon any person.
KRS § 292.320. The Kentucky Blue Sky law gives DFI broad authority to investigate consumer
complaints. KRS § 292.460(1)(a). This broad authority exists
[e]ven if one were to regard the request for information in this case as caused by
nothing more than official curiosity, nevertheless law-enforcing agencies have a
legitimate right to satisfy themselves that corporate behavior is consistent with the
law and the public interest . . . . [It] is sufficient if the inquiry is within the authority
of the agency, the demand is not too indefinite and the information sought is
reasonably relevant.
Dolomite Energy, LLC v. Commonwealth of Ky. Off. of Fin. Insts., 269 S.W.3d 883, 886 (Ky. Ct.
App. 2008) (internal citations omitted).
An investigation by DFI is not a final administrative action. Procedurally, if DFI believes
that its investigation reveals a violation, the investigated party receives notice and has the
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opportunity to be heard at an administrative hearing pursuant to KRS Chapter 13B. The DFI
commissioner would then issue a final order based on his review of the hearing officer’s
recommendation and the record. KRS § 13B.120. After the issuance of a final order, a party can
appeal to the Franklin County Circuit Court. KRS § 292.337; KRS § 13B.140.
Considering this statutory framework, CBA requests that we reverse the district court’s
ruling that the case was unripe; determine the scope of the NSMIA preemption; remand for entry
of a declaratory judgment that all CBA securities are covered securities under NSMIA (and
therefore preempted from DFI investigation) and that the fraud-and-deceit exception does not
justify DFI’s investigation; and order DFI to terminate its investigation of CBA. DFI argues that
it has not committed a “final agency action” and therefore that the case is not ripe for adjudication.
And even if it were ripe, DFI argues that it was properly investigating CBA under the authority
provided by the Kentucky Blue Sky law and as allowed under the fraud-and-deceit exception of
NSMIA.
III. Ripeness
The threshold issue here is ripeness, which we review de novo. Ammex, Inc. v. Cox, 351
F.3d 697, 706 (6th Cir. 2003). “A court lacks jurisdiction over the subject matter if the claim is
not yet ripe for judicial review.” Norton v. Ashcroft, 298 F.3d 547, 554 (6th Cir. 2002). “A claim
is not ripe for adjudication if it rests upon ‘contingent future events that may not occur as
anticipated, or indeed may not occur at all.’” Texas v. United States, 523 U.S. 296, 300 (1998)
(quoting Thomas v. Union Carbide Agric. Prods. Co., 473 U.S. 568, 580–581 (1985)). Until an
administrative agency has taken “some concrete action applying [a] regulation to the claimant’s
situation in a fashion that harms or threatens to harm him,” a matter arising from such a regulation
is not yet ripe for review. Lujan v. Nat’l Wildlife Fed’n, 497 U.S. 871, 891 (1990). A ripeness
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inquiry “arises most clearly when litigants seek to enjoin the enforcement of statutes, regulations,
or policies that have not yet been enforced against them.” Ammex, Inc., 351 F.3d at 706. And, in
the context of injunctive and declaratory relief where the remedies are discretionary, “courts
traditionally have been reluctant to apply them to administrative determinations unless these arise
in the context of a controversy ‘ripe’ for judicial resolution.” Abbott Lab’ys v. Gardner, 387 U.S.
136, 148 (1967).
To determine whether a pre-enforcement challenge is ripe, we consider whether the issues
are fit for judicial review and if the parties will suffer hardship if we withhold adjudication. Id.,387 U.S. at 148–49. In considering the former, we look at the extent to which our legal analysis
would benefit from having a concrete factual context and the extent to which the enforcement
authority’s legal position is subject to change before enforcement. Ammex, 351 F.3d at 706.
Here, DFI has taken no enforcement action and is merely investigating alleged fraud. CBA
filed this lawsuit specifically “to stop or severely curtail an investigation” by DFI. Legal analysis
of the preemption issue at this stage would be premature, as the controversy lacks, and would
benefit from, a concrete factual context. Ammex, 351 F.3d at 707 (The “need for more factual
development . . . weigh[ed] against ripeness” where a party was “not challenging a specific rule or
finding of the [investigating authority], but rather the general applicability of a statutory scheme
to its conduct” by arguing the scheme is preempted by federal law). The investigation has not
concluded, DFI has made no findings or alleged any wrongdoing by CBA, and DFI has not decided
if it will, in fact, take any action against CBA. See, e.g., Univ. of Med. & Dentistry of New Jersey
v. Corrigan, 347 F.3d 57, 69 (3d Cir. 2003) (determining an action to enjoin an investigation was
not ripe because “an investigation is the beginning of a process that may or may not lead to an
ultimate enforcement action”).
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Since DFI has not even taken a legal position on whether it will bring an action against
CBA, that position certainly is subject to change. E.g., Ibid. (“[T]he possibility that no
enforcement action may be taken is real for several reasons, not least of which is that the inspector
general may change her mind on one or more issues along the way.”). Even if this investigation
were considered a final action, which it is not, see, e.g., Ass'n of Am. Med. Colls. v. United States,
217 F.3d 770, 781 (9th Cir. 2000) (“An investigation, even one conducted with an eye to
enforcement, is quintessentially non-final as a form of agency action.”), CBA has failed to exhaust
its administrative remedies under the Kentucky Blue Sky law and doing so would give DFI
opportunities to change its legal position.
The harms that CBA points to do not outweigh these considerations. CBA can challenge
the scope of DFI’s subpoena in a subpoena-enforcement action. See Google, Inc. v. Hood, 822
F.3d 212, 224 (5th Cir. 2016). And concerns that the investigation will harass and intimidate
shareholders are speculative. Although CBA alleges that its relationship with its investors is
harmed by the investigation, no allegations suggest that any investors contacted by DFI pulled
their investments, threatened to pull their investments, or reconsidered the investment relationship.
CBA also contends the costs of complying with DFI’s document requests will cause harm, but the
record does not reflect (or estimate) what the costs will be. Further, even if CBA had sufficiently
elaborated on the asserted harms, this factor would not tip the scales in favor of ripeness. See
Ammex, Inc., 351 F.3d at 709 (“[W]hatever hardship Ammex incurs by waiting for enforcement is
not enough to outweigh the above-considered factors weighing against ripeness here.”); see also
Babbitt v. United Farm Workers Nat. Union, 442 U.S. 289, 300 (1979) (“Even though a challenged
statute is sure to work the injury alleged, however, adjudication might be postponed until ‘a better
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factual record might be available.’” (quoting Regional Rail Reorganization Act Cases, 419 U.S.
102, 143 (1974))).
Therefore, this case is not ripe for judicial adjudication.
IV. Injunctive and Declaratory Relief
If this case were ripe, CBA’s requests for injunctive and declaratory relief should be
decided by the district court. Because this case is not ripe, we lack jurisdiction over these issues.
V. Conclusion
For the reasons set forth above, we AFFIRM the district court and hold that this case is not
ripe of judicial adjudication.
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