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Securities and Exchange Commission v. Zouvas

United States District Court, D. Arizona

August 23, 2019

Securities and Exchange Commission, Plaintiff,
Luke C. Zouvas, et al., Defendants.


          Honorable Steven P. Logan United States District Judge.

         Before the Court is Plaintiff SEC's (the “SEC”) Partial Motion for Summary Judgment (Doc. 145)[1]; Defendant Larson, Jorgenson, and Schipretts' Response (Doc. 163), [2] Defendant Robb's Response (Doc. 177), [3] and Defendant Zouvas's Response (Doc. 179)[4]; and Plaintiff's Reply to Defendants Larson, Jorgenson, and Schiprett (Doc. 171), [5]Plaintiff's Reply to Defendant Robb (Doc. 181), and Plaintiff's Reply to Defendant Zouvas (Doc. 182).[6]

         Also before the Court is Defendant Larson, Jorgenson, and Schipretts' Motion for Summary Judgment (Doc. 153), [7] the SEC's Response (Doc. 159), [8] and Defendant Larson, Jorgenson, and Schipretts' Reply (Doc. 173).[9]

         I. BACKGROUND[10]

         Israeli accountant, Asher Zwebner (“Zwebner”), organized Crown Dynamics (“Crown”), a shell company. At the time of Crown's initial public offering (“IPO”), Amir Rehavi (“Rehavi”) and Chanah Zehavi (“Zehavi”) were Crown's sole director and officer. Following a 3-for-1 split stock before the IPO, Crown's original subscription consisted of 7.5 million free-trading shares (the “Free-Trading Shares”), which various Israeli residents held (the “Israeli Subscribers”), and 9 million restricted shares (the “Restricted Shares”), which were held by Rehavi and Zehavi. In Fall 2011, Defendant Zouvas was approached by Defendant Larson to conduct due diligence on Crown on behalf of Airware Labs. Corporation (“Airware”), a company who wanted assistance in reverse merging Crown into a publicly-traded corporation. Defendant Zouvas conducted due diligence on Crown, which consisted of reviewing various documents.

         Ultimately, the merger with Airware fell through, and a potential reverse merger with Steven Aninye (“Aninye”) and his company, Zorah, LLC (“Zorah”), came to fruition.[11] Defendant Robb recommended a reverse merger, and Larson suggested Crown.[12]Larson asked Zouvas to handle the formalities. Because Zouvas had just performed due diligence on Crown for the merger with Airware, he did not conduct due diligence on Crown for its potential merger with Zorah. Eventually, the parties settled on terms, and Larson loaned $300, 000 to Aninye so he could purchase shares.[13] Once the funds from Larson were deposited into Zouvas's trust account-on behalf of Aninye-Zouvas sent $231, 127 of the $300, 000 to Israeli bank accounts held by Zwebner and Caroline Adler “(“Adler”). Zwebner told Zouvas that Adler would distribute the funds to the Israeli Subscribers.

         With the reverse merger complete, Larson and Robb asked Zouvas to transfer the Free-Trading Shares from the Israeli Subscribers and to the investor group, which included Jorgenson and Schiprett.[14] In so doing, Jorgenson and Schiprett acquired 1, 312, 500 shares. Zouvas also received shares in Crown, in exchange for his legal services, from an Israeli Subscriber, Shira Mizrahi. Larson did not know Mizrahi. Jorgenson and Schiprett subsequently sought to deposit their shares in a brokerage account, and upon request for verification of payment, Zouvas confirmed that he had received the consideration for the shares from Jorgenson and Schiprett and had remitted it to the Israeli Subscribers.

         Larson eventually hired the Ritman Agency (“Ritman”) to engage in a 90-day marketing campaign for Crown. Larson was the point of contact for Ritman and would review and edit materials provided to him by Ritman. Similarly, Robb prepared press releases. Ultimately, the Ritman campaign resulted in 83, 760 shares being purchased by Ritman's broker network.


         A court must grant summary judgment “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). Material facts are those facts “that might affect the outcome of the suit under the governing law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A genuine dispute of material fact arises if “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Id. In other words, where different inferences can be drawn, summary judgment is inappropriate. Boulder Oro Valley LLC v. Home Depot USA Inc., No. CV-17-00453-TUC-DCB, 2019 WL 2106419, at *1 (D. Ariz. Mar. 26, 2019) (quoting Sankovich v. Life Ins. Co. of North Am., 638 F.2d 136, 140 (9th Cir. 1981)).

         The party moving for summary judgment bears the initial burden of informing the court of the basis for its motion and identifying those portions of the record, together with affidavits, which it believes demonstrate the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323. If the movant is able to do so, the burden then shifts to the non-movant who “must do more than simply show that there is some metaphysical doubt as to the material facts, ” and, instead, must “come forward with ‘specific facts showing that there is a genuine issue for trial.'” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986).


         A. The SEC's Partial Motion for Summary Judgment

         The SEC argues that Defendants are liable for scheming to defraud under Section 17(a)(3) of the Securities Act, 15 U.S.C. section 77q(a)(3), because their actions “demonstrate their negligent involvement in a scheme to manipulate the market for Crown stock.” (Doc. 145 at 8.)


         Section 17(a)(3) Discussion

         a. Defendant Zouvas

         As to Defendant Zouvas, the SEC argues that Zouvas failed in his due diligence duties. (Doc. 145 at 9.) It argues that Zouvas should have verified that the Israeli Subscribers were in fact legitimate investors, should have inquired into whether Zwebner was authorized to act on their behalf, and should have verified the various documents' authenticities. (Doc. 145 at 9, 11-12; Doc. 171 at 9-10.) It further argues that Zouvas was “not justified in relying on the signature guarantees affixed to the stock certificates” and that he “should have known he could not rely on the SEC's declaration of effectiveness of Crown's Form S-1.” (Doc. 145 at 10; Doc. 171 at 6-7.) Therefore, the SEC argues that “it was Zouvas' negligence at the outset that substantially assisted the other Defendants in this case.” (Doc. 145 at 10, 12.)

         Zouvas argues that he made a reasonable determination not to track down the Israeli Subscribers based on the information provided to him by Zwebner. (Doc. 179 at 3.) He argues that the SEC's expert on the standard of care for attorneys does not take away the negligence claim from the jury. (Doc. 179 at 3.) He argues that, in fact, the SEC's own expert admitted that attorneys are given leeway in their due diligence duties, and, thus, based on these facts-which show a slue of documentation supporting the reasonable inference that Zwebner was the Israeli Subscribers' agent and that the documentation was legitimate-a jury could easily find that he acted reasonably under the circumstances when he reviewed the documentation. (Doc. 179 at 4-5.)

         b. Defendants Larson, Jorgenson, and Schiprett

         As to Defendants Larson, Jorgenson, and Schiprett, the SEC argues that Jorgenson and Schiprett were negligent in:

“(i) selling Crown shares that were not lawfully paid for; (ii) sending their brokerage an attestation letter saying they had paid the consideration for the shares; (iii) investing in Crown without realizing there was no active market for the stock; (iv) not knowing they were part of an investor group that controlled the entire supply of Crown's free-trading stock; and (v) selling Crown stock into a market that was primed and inflated by Larson's and Robb's marketing efforts.”

(Doc. 171 at 10-11.)

         Defendants Schiprett and Jorgenson argue that the SEC has not provided any evidence to support its claims that Schiprett and Jorgenson were negligent because their actions were proper and legal. (Doc. 163 at 2.) They argue that there is no duty under the securities laws that (1) requires an investor to research a company before it invests in its stock or (2) that an investor may not buy stock in a company where the market is new, and the investor will be buying all or a majority of the shares. (Doc. 163 at 2-4.) They also argue that it was perfectly proper for them to rely upon “investment advice of a knowledgeable [and long-time] friend.” (Doc. 163 at 2, 4.) They argue that they did, indeed, buy and acquire Crown stock “because Larson recommended that they do so.” (Doc. 163 at 3.) They argue that “There is nothing negligent - or in any other way wrongful - about any of that.” (Doc. 163 at 3.)

         As to Larson, the SEC argues that he was negligent in:

“(i) directing Zouvas to disburse the free-trading shares to Jorgenson, Schiprett, and the investor group; (ii) advising Jorgenson and Schiprett when and how to sell the stock, and actually selling Jorgenson's shares for him; (iii) funding the Ritman Campaign with information he should have known was misleading, while knowing that Aninye desperately needed capital in order to make Crown the success Ritman was telling the market it would be; and (iv) engaging in wash trades to give the market the impression there was interest in the stock.”

(Doc. 171 at 11.)

         Larson argues that directing and advising Jorgenson and Schiprett to buy and sell Crown shares was completely legitimate. (Doc. 163 at 4.) He argues that he was not the person who recommended the reverse merger with Zorah; rather, he simply “suggested that Crown was a viable vehicle to effect the merger after Aninye had decided to proceed with it.” (Doc. 163 at 4.) He argues that his actions regarding the Ritman campaign were proper because there is ample evidence supporting the conclusion that he believed the Ritman campaign's materials were accurate and that he was justified in relying upon Aninye's financial forecast of Crown. (Doc. 163 at 5-6.) He argues that he engaged Ritman for the purpose of encouraging investor interest in Crown stock, which is a legitimate and normal practice. (Doc. 163 at 4.) He further argues that he was not negligent in “making a market for the stock” because “selling shares into a new trading market (or recommending that somebody else do so) is neither negligent not wrongful.” (Doc. 163 at 6.) As to wash trades, he argues that he engaged in no such thing and, instead, “placed small buy orders in excess of the number of shares available on offer.” (Doc. 163 at 7.) He argues that, in any event, the SEC has not provided any evidence to suggest that the number of shares he traded was sufficient to “create the appearance of a larger market.” (Doc. 163 at 7.)

         c. Defendant Robb

         The SEC argues that Robb was negligent in being intimately involved in the division of Crown shares, approving and submitting press releases knowing that Aninye needed capital, and because Robb was responsible for the press releases' accuracy. (Doc. 145; Doc 181.) Specifically, it argues that Robb facilitated Crown's reverse merger with Zorah and the distribution of stock. (Doc. 145 at 10.) The SEC also argues that Robb's and Larson's “investors” acquired Crown's Free-Trading Shares without paying for them. (Doc. 145 at 12.) It further argues that Robb “primed Crown for sale by inflating the stock price.” (Doc. 145 at 14.)

         Defendant Robb argues that he did nothing wrong and that his involvement with Crown was perfectly legitimate. (Doc. 177 at 1.) Specifically, he argues that, though he did speak with Larson regarding Zorah, he did not have any agreement with Aninye to divide Crown shares as result of the merger nor did he have any involvement in negotiations for the sale of Crown stock with the investors he “introduced” to Crown. (Doc. 177 at 2.) He argues that there is no evidence to support the accusation that he directed Crown shares to be transferred from the Israeli Subscribers to the investors he introduced to Crown. (Doc. 177 at 3.) He also argues that he believes the shares were, in fact, purchased by the investors from the Israeli Subscribers, noting that “Zouvas took care of the sale of stock.” (Doc. 177 at 3.) Regarding the Ritman campaign, he argues that he sought the advice of Zouvas, through Larson, to make sure the campaign “was legal and compliant with securities laws.” (Doc. 177 at 3.) Robb also argues that, to the extent anyone is “at fault for any press releases with incorrect information in them, ” the fault is attributable to Aninye. (Doc. 177 at 3.) He argues that any information he received for the press releases came from Aninye and that Aninye “always authorized the content and the dissemination of all press releases issued by Crown.” (Doc. 177 at 3.) Further, he argues that he cannot be held accountable for knowing Crown was “in desperate need of capital” because Robb “was not involved in the business operations of the company.” (Doc. 177 at 4.)

         2. Section 17(a)(3) Analysis

         a. Failure to Comply/Objections

         The SEC argues that the Court should strike various statements of fact-or admit them-in Defendant Larson, Schiprett, Jorgenson, and Zouvas' Controverting Statement of Facts because they did not comply with Local Rules 7.2(m)(2) and 56.1(b). (Doc. 171 at 6-7; Doc. 182 at 5.) The SEC further argues that it has cured two technical defects, pointed out by Defendants Larson, Schiprett, and Jorgenson regarding its Exhibit 33 and Mr. Cangiano's and Mr. Robbin's expert disclosure reports; thus, arguing the Court is now able to review those documents. (Doc. 171 at 7-8.) Moreover, the SEC argues that the Court should overrule Defendant Larson, Schiprett, and Jorgensons' objections as to the other exhibits it mentions in their Response because the documents had already been authenticated “during the depositions that took place in this matter.” (Doc. 171 at 7, citing Doc. 172 ¶¶ 7-28.) Lastly, Defendants Larson, Jorgenson, and Schiprett argue that the Court should disregard certain sections in Mr. Cangiano's report because they are “impermissible generalization[s] not tailored to the facts of ...

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