Case 1:21-cv-06814-AKH Document 62 Filed 01/18/22 Page 1 of 23
`
` -against-
`
`GPL VENTURES LLC, GPL MANAGEMENT
`LLC, ALEXANDER J. DILLON, COSMIN I.
`PANAIT, HEMPAMERICANA, INC.,
`SALVADOR E. ROSILLO, SEASIDE
`ADVISORS, LLC, and LAWRENCE B.
`ADAMS,
`
`
`
`
`
`
`
`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
`
`
`
`---------------------------------------------------------- X
`
`
` :
`
`SECURITIES AND EXCHANGE
` :
`ORDER AND OPINION
`COMMISSION,
` :
`DENYING THE MOTIONS TO
` :
`
`DISMISS THE COMPLAINT
` :
`Plaintiff,
`
` :
` :
` :
` :
` :
` :
` :
` :
` :
`
`Defendants.
` :
`---------------------------------------------------------- X
`
`ALVIN K. HELLERSTEIN, U.S.D.J.:
`
`
`
`21 Civ. 6814 (AKH)
`
`
`
`
`
`Plaintiff Securities and Exchange Commission (“SEC” or “Plaintiff”) filed this
`
`action against Defendants GPL Ventures LLC (“GPL Ventures”), GPL Management (“GPL
`
`Management”), (collectively, the “GPL Entities”), and the GPL Entities’ co-owners, Alexander
`
`J. Dillon (“Dillon”) and Cosmin I. Panait (“Panait”), (collectively, the “GPL Defendants”);
`
`HempAmericana, Inc. (“HempAmericana”) and its Chief Executive Officer (“CEO”) Salvador E.
`
`Rosillo (“Rosillo”); and Seaside Advisors, LLC and its CEO, Lawrence B. Adams (“Adams”),1
`
`alleging violations of Sections 15(a) and 17(a) of the Securities Act of 1933, 15 U.S.C. §§ 77 et
`
`seq., and Section 10(b) and Rule 10b-5 of the 1934 Securities Exchange Act, 15 U.S.C. § 78 et
`
`seq.2 Complaint (“Compl.”), ECF No. 1. The GPL Defendants and HempAmericana and
`
`
`1 After this Complaint was filed, Adams passed away.
`2 The GPL Defendants are collectively charged with violating Section 15(a); Dillon and Panait are charged with
`control person liability under Sections 15(a) and 20(a); the GPL Defendants, HempAmericana, and Rosillo are
`charged with violating Section 17(a); Seaside and Adams are charged with violating Section 17(a)(1), (3); and all
`Defendants are charged, across two counts, with violating Section 10(b) and Rule 10b-5.
`
`
`
`1
`
`

`

`Case 1:21-cv-06814-AKH Document 62 Filed 01/18/22 Page 2 of 23
`
`Rosillo, in separate motions, move to dismiss for failure to state a claim. ECF Nos. 51, 53. Both
`
`motions are denied.
`
`BACKGROUND
`
`
`
`
`
`The following facts are taken from the SEC’s Complaint, which I must “accept[]
`
`as true” for the purpose of deciding this motion. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
`
`The Complaint generally describes the GPL Defendants’ business as a series of scalping
`
`schemes, whose operational aspects are illustrated through the HempAmericana Scalping
`
`Scheme. While the concept of the scheme is relatively simple, the number of individuals alleged
`
`to have participated in effectuating the scheme makes this case appear more complex.
`
`Accordingly, for clarity, I first identify the relevant players and then turn to the remainder of the
`
`substantive allegations.
`
`The Relevant Players
`
`
`
`The GPL Entities – GPL Ventures, GPL Management, Dillon, and Panait
`
`GPL Entities are in the business of privately acquiring and publicly selling the
`
`securities of microcap issuers. Compl. ¶ 23. Dillon and Panait co-own the GPL Entities, and
`
`Dillon previously held a Series 7 securities license and was briefly employed at a registered
`
`broker-dealer from April 2013 to July 2013. Id. ¶¶ 24–25. Neither of the GPL Entities is
`
`registered with the SEC, and neither Dillon nor Panait is associated with a registered broker or
`
`dealer. Id. ¶ 4.
`
`
`
`HempAmericana and Rosillo
`
`HempAmericana researches, develops, and sells products made of industrial
`
`hemp, and Rosillo is its CEO. It filed a certification and notice of termination of registration
`
`under Exchange Act Section 12(g) or suspension of duty to file reports under Sections 13 and
`
`
`
`2
`
`

`

`Case 1:21-cv-06814-AKH Document 62 Filed 01/18/22 Page 3 of 23
`
`15(d) on June 12, 2015. Since its incorporation in 2014, HempAmericana has never been
`
`profitable, generating but $9,727 in revenues from 2017 through May 2020. Id. ¶¶ 47–48.
`
`Disclosure statements filed on OTCMarkets’ website have stated that the company must raise
`
`funds in order to finance operations; however, HempAmericana has not filed financial
`
`information with OTCMarkets since July 2020. Id. ¶¶ 49–50.
`
`
`
`Seaside and Adams
`
`Seaside is a consulting firm for various microcap companies that assists with
`
`marketing, public relations, and general business advice, and Adams is its owner and CEO. Id. ¶
`
`28–29. Seaside sub-contracts others, including Individual A, to undertake promotional
`
`campaigns to increase stock prices. Id. ¶ 57.
`
`
`
`
`
`Individual A
`
`
`
`Individual A is a professional stock promoter who operates promotional
`
`campaigns to increase the prices of stocks. Id. ¶¶ 43, 57. He hires other promoters or
`
`middlemen, who in turn, hire yet other promoters, to promote stocks, and as is relevant here,
`
`received compensation from Seaside.
`
`The Scalping Scheme and the GPL Entities’ Business Model
`
`Since at least early 2017 and continuing to the present, the GPL Defendants have
`
`been privately acquiring large blocks of discounted shares of stock in approximately 140
`
`microcap issuers and publicly selling those blocks into the market for their own account,
`
`generating gross proceeds of at least $81 million.” Id. ¶¶ 2, 4, 33. Dillon and Panait coordinate
`
`and authorize all of the GPL Entities stock trading. Id. ¶ 34.
`
`The GPL Defendants engage in “scalping”—secretly funding promotional activity
`
`in microcap issuers whose stock they trade. Id. ¶ 8. Scalping involves a defendant (i) acquiring
`
`
`
`3
`
`

`

`Case 1:21-cv-06814-AKH Document 62 Filed 01/18/22 Page 4 of 23
`
`shares of a stock for his own benefit prior to recommending or touting that very stock to others,
`
`(ii) failing to disclose in the tout the full details of his ownership of the shares and his plans to
`
`sell them, and (iii) proceeding to sell his shares following the tout’s dissemination, and into the
`
`share price and trading volume increases triggered by his touting. Id. ¶ 9. The scheme works as
`
`follows. The GPL Defendants engage cold-callers to pitch GPL Ventures to publicly traded
`
`microcap issuers, offering capital infusions to support the issuers’ operations, or pitching or
`
`providing services, such as installing an “investor relations” firm, or introducing an in-house
`
`accountant to assist with preparing the issuers’ financial statements. Id. ¶¶ 35–36. Once an
`
`issuer agrees to be funded, the GPL Defendants acquire large blocks of the issuer’s unrestricted
`
`stock at a steep discount, either by: 1) purchasing aged convertible notes from the issuer’s
`
`debtholders, which notes the GPL Defendants then convert into shares; or 2) purchasing shares
`
`directly from the issuer through qualified Reg. A offerings. Id. ¶ 37. The GPL Defendants
`
`generally sell newly acquired shares into the market before purchasing new blocks in the same
`
`issuer. Id. ¶ 38.
`
`The HempAmericana Scalping Scheme
`
`From 2017 through at least late 2019, the GPL Defendants’ scalping activities
`
`included buying and selling large blocks of HempAmericana securities, generating profits of
`
`approximately $11 million. Id. ¶¶ 10, 41. Dillon oversaw this scheme. Id. ¶ 53. The Complaint
`
`describes the HempAmericana scheme as follows: (1) the GPL Defendants repeatedly acquired
`
`stock purportedly sold pursuant to the Reg. A registration exemption, conditioned on a portion of
`
`the stock sales proceeds being sent by the issuer to Seaside; (2) Seaside then paid Individual A, a
`
`professional stock promoter; (3) Individual A hired promoters, or middlemen, who in turn hired
`
`other promoters, to promote the stock; (4) the GPL Defendants sold the stock during the
`
`
`
`4
`
`

`

`Case 1:21-cv-06814-AKH Document 62 Filed 01/18/22 Page 5 of 23
`
`promotional campaigns, which did not disclose that the promotions were indirectly funded by the
`
`issuer, HempAmericana, using the proceeds received from the GPL Defendants, the most
`
`significant purchaser in the issuer’s qualified Reg. A offerings, or that the GPL Defendants
`
`intended to sell their large stock holdings during the promotion. Id. ¶ 43. To deposit and sell
`
`their HempAmericana shares, the GPL Defendants told their brokers that they were not involved
`
`in the promotional activities; the “Use of Proceeds” representations in HempAmericana’s Reg. A
`
`offering circulars also do not mention that significant portions of the stock sales proceeds would
`
`be used for stock promotion. Id. ¶¶ 44–45. Instead, the Reg. A offering circulars, which Rosillo
`
`and HempAmericana filed with the SEC, along with offering statements on Forms 1-A, state that
`
`the capital raised would be used “to grow [HempAmericana’s] business.” Id. 54.
`
`Shortly after HempAmericana’s first Reg. A capital raise was qualified on June
`
`29, 2017, Rosillo began issuing unrestricted Reg. A shares to the GPL Defendants, and from July
`
`2017 to November 2019, the GPL Defendants sequentially acquired the majority of the issued
`
`unrestricted shares. Id. ¶ 51–52. Dillon would purchase additional tranches of shares in the Reg.
`
`A offerings, only if the GPL Defendants could successfully sell their existing shares into the
`
`market. Id. ¶ 53.
`
`The GPL Defendants also conditioned their investment in HempAmericana upon
`
`HempAmericana hiring Seaside to promote the company’s stock and using a portion of the GPL
`
`Defendants’ investment to fund a marketing campaign to promote the stock. Id. ¶ 56–57.
`
`Accordingly, Dillon introduced Rosillo to Adams and Individual A, and required that Rosillo
`
`hire Seaside as a “consultant;” Seaside would then sub-contract Individual A to undertake a
`
`wide-ranging promotional campaign to enable the GPL Defendants to sell their shares at a profit.
`
`Id. ¶ 57. HempAmericana only publicly disclosed that it retained Seaside as a consultant. Id. ¶
`
`
`
`5
`
`

`

`Case 1:21-cv-06814-AKH Document 62 Filed 01/18/22 Page 6 of 23
`
`58. The GPL Defendants further directed the specific split of offering proceeds between
`
`HempAmericana and Seaside. For example, in August 2017, when the GPL Defendants
`
`purchased 16 million shares of stock for $80 million, the funds went to a HempAmericana
`
`escrow account, from which Dillon instructed that $50,000 be sent to HempAmericana and
`
`$30,000 to Seaside. Id. ¶¶ 59–60.
`
`Once Seaside received the GPL Defendants’ money through HempAmericana, it
`
`forward varying amounts, but generally more than half, to Individual A for promotional activity.
`
`Id. ¶ 61. Of the $7.4 million in stock purchase proceeds that the GPL Defendants paid to
`
`HempAmericana, $2.18 million was paid by HempAmericana to Seaside, and Seaside forwarded
`
`nearly sixty percent to Individual A. Id. ¶ 62. Individual A was in direct communications with
`
`both Rosillo and the GPL Defendants, and Dillon and Rosillo were fully aware of Individual A’s
`
`role in promoting HempAmericana Stock. Id. ¶ 63. In May 2019, for example, Adams assured
`
`Individual A that he would be compensated for his promotional efforts, but the funds could not
`
`come directly from the escrow account because the GPL Defendants’ brokerage firm would not
`
`so permit; thus, the funds would come from Rosillo. Id. ¶ 64. And in June 2019, in reference to
`
`the GPL Defendants’ budget for promotions, Dillon indicated that he understood Individual A
`
`and Adams to be one and the same, and that they split the money. Id. ¶ 65.
`
`Individual A used HempAmericana proceeds from the GPL Defendants’ stock
`
`purchase to hire two kinds of people to promote the stock: First, he hired people whom he
`
`understood to have email lists or social media mechanisms that would enable them to get buyers
`
`into the stock, apparently with the promise of buying cheaper stock in advance of the promotion,
`
`and second, he hired people who would in turn pay others to engage in more traditional
`
`promotional activity during the actual “pump.” Id. ¶¶ 67–69. In January 2018, for example, the
`
`
`
`6
`
`

`

`Case 1:21-cv-06814-AKH Document 62 Filed 01/18/22 Page 7 of 23
`
`GPL Defendants purchased $170,000 of HempAmericana stock. $70,000 of the sales proceeds
`
`went to Seaside, and $55,000 of that amount went to Individual A, who in turn paid an entity,
`
`“Entity A.” Id. ¶ 70. Later that month, another entity, “Entity B,” put out email blasts
`
`promoting HempAmericana stock and disclosing that it was compensated by Entity A, which
`
`was described as a non-affiliated third party. Id. ¶ 71. The promotion’s disclaimer said that
`
`Entity B did not own any shares in HempAmericana and made no reference to anyone intending
`
`to sell shares into the promotion. Id. ¶ 72. The promotions did not disclose HempAmericana or
`
`the GPL Defendants as the ultimate source of funding for the promotions, nor did they disclose
`
`Seaside or Individual A’s roles in facilitating payment from the GPL Defendants to downstream
`
`promoters, or any affiliation between Seaside, Individual A, and HempAmericana. Id. ¶¶ 74–75.
`
`During the course of the HempAmericana scalping scheme, the GPL Defendants
`
`paid $7.4 million to acquire more than 1.5 billion shares of HempAmericana stock and, in
`
`conjunction with Individual A’s promotional activity, they sold the shares for more than $18.4
`
`million, generating approximately $11 million in illegal profit. Id. ¶ 79. Individual A generally
`
`kept Dillon apprised of the promotions, advising on when the buying volume would increase and
`
`on the strategy for selling the stock, and on at least one occasion, requested that Dillon sell some
`
`stock into the market at a lower pre-promotion price to enable Individual A’s “guys,” i.e., his
`
`sub-promoters, to get in the stock more cheaply due to an apparent shortfall in Individual A’s
`
`spending for promotion. Id. ¶¶ 80–81. Nevertheless, in response to repeated requests from the
`
`GPL Defendants’ broker-dealers for affirmation as to whether the GPL Defendants were
`
`involved in stock promotions, when the GPL Defendants sought to depot and sell the shares
`
`obtained from HempAmericana and other issuers, Dillon and Panait repeatedly assured the
`
`broker-dealers that they were not involved in any promotional activity. Id. ¶¶ 82–83. Such
`
`
`
`7
`
`

`

`Case 1:21-cv-06814-AKH Document 62 Filed 01/18/22 Page 8 of 23
`
`assurances included numerous deposit request forms, in which they denied to Broker-Dealer A,
`
`for example, that they were “currently promoting” HempAmericana, and denied, “at any time
`
`while selling the securities on deposit in the account,” having any “plan to promote or engage a
`
`third party to promote . . . the issuer’s securities.” Id. ¶ 84. Dillon also directly denied
`
`involvement in stock promotion when confronted by Broker-Dealer A’s compliance personnel.
`
`Id. ¶ 85.
`
`As to Rosillo and HempAmericana, in connection with HempAmericana’s four
`
`qualified Reg. A offerings, Rosillo signed and certified the company’s filings with the SEC, and
`
`each offering circular represented that HempAmerciana planned to sue the offering proceeds to
`
`“grow its business.” Id. ¶ 87–88. A table in the offering circular estimated that HempAmericana
`
`planned to allocate offering proceeds across the following categories: “Marketing and marketing
`
`staff,” “Sales and sales staff,” “Inventory,” “Distribution/production warehouse,” “Factory,
`
`Equipment and Machinery,” “Other staff and operating costs,” and “Investments in hemp-related
`
`going concerns (including licenses).” Id. ¶ 89–90. A further explanation for the Marketing and
`
`Sales categories, for which a combined total of up to twenty percent of expected proceeds were
`
`allocated, provided: “Marketing and Sales will largely be related to the hiring and payment of a
`
`human sales team as well as advertising costs associated with online advertising platforms such
`
`as Google Adwords (sic) and Facebook, as well as paying directly to websites per their ad and
`
`affiliate programs.” HempAmericana never disclosed it intended to use a substantial portion of
`
`the stock sale proceeds—ultimately approximately twenty-nine percent—toward promoting the
`
`stock rather than growing or marketing the company’s products and business. Id. ¶ 92.
`
`Plaintiff alleges that Defendants violated the federal securities laws and brings
`
`charges under: (i) Section 15(a) of the Exchange Act against the GPL Defendants for failing to
`
`
`
`8
`
`

`

`Case 1:21-cv-06814-AKH Document 62 Filed 01/18/22 Page 9 of 23
`
`register as a broker-dealer; (ii) Section 15(a) against Dillon and Panait for control person
`
`liability; (iii) Section 17(a) of the Securities Act against the GPL Defendants, HempAmericana,
`
`Rosillo, Seaside, and Adams for employing a scheme to defraud purchasers; and (iv) Section
`
`10(b) of the Exchange Act and Rule 10b-5 against the GPL Defendants, HempAmericana,
`
`Rosillo, Seaside, and Adams for material misstatements or omissions as part of a scheme to
`
`defraud.
`
`The GPL Defendants, and HempAmericana and Rosillo, each move to dismiss the
`
`complaint for failure to state a claim for relief. See Motion to Dismiss by the GPL Defendants
`
`(“MTD GPL”), ECF No. 54; Motion to Dismiss by HempAmericana and Rosillo (“MTD
`
`Hemp”), ECF No. 52.
`
`I. Legal Standard
`
`DISCUSSION
`
`To survive a motion to dismiss, “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) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
`
`“A claim has facial plausibility when the plaintiff pleads factual content that allows the court to
`
`draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. When
`
`considering a motion to dismiss a complaint under Rule 12, the Court must “accept[] all of the
`
`complaint's factual allegations as true and draw[] all reasonable inferences in the plaintiff's
`
`favor.” McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007); Gregory v.
`
`Daly, 243 F.3d 687, 691 (2d Cir. 2001), as amended (Apr. 20, 2001). However, the Court is “not
`
`bound to accept as true a legal conclusion couched as a factual allegation.” Iqbal, 556 U.S. at
`
`678. The Court is limited to a “narrow universe of materials.” Goel v. Bunge, Ltd., 820 F.3d
`
`554, 559 (2d Cir. 2016). “Generally, [courts] do not look beyond ‘facts stated on the face of the
`
`
`
`9
`
`

`

`Case 1:21-cv-06814-AKH Document 62 Filed 01/18/22 Page 10 of 23
`
`complaint, . . . documents appended to the complaint or incorporated in the complaint by
`
`reference, and . . . matters of which judicial notice may be taken.’” Id. (quoting Concord
`
`Assocs., L.P. v. Entm't Props. Tr., 817 F.3d 46, 51 n.2 (2d Cir. 2016)) (alterations in original).
`
`II. Analysis
`
`
`
`
`
`
`
`A. The GPL Defendants
`
`
`
`
`
`1. Section 15(a)
`
`
`
`a. Unregistered Broker-Dealer Activity
`
`Section 15(a) of the Exchange Act makes it unlawful for an unregistered broker or
`
`dealer to “make use of the mails or any means or instrumentality of interstate commerce to effect
`
`any transactions in, or to induce or attempt to induce the purchase or sale of, any security.” 15
`
`U.S.C. § 78o(a)(1). The Act defines a dealer as “any person engaged in the business of buying
`
`and selling securities for his own account, through a broker or otherwise.” 15 U.S.C. §
`
`78c(a)(5)(A).
`
`The GPL Defendants make several arguments as to why they cannot be held
`
`liable for violating Section 15(a), none of which is persuasive. I address each in turn.
`
`First, they argue that they do not engage in “the business of buying or selling
`
`securities” or in dealer conduct, within “the ordinary meaning” of those phrases, under FINRA
`
`Rules, or other SEC guidance, such as a no-action letters, including one from 1977. MTD GPL,
`
`at 11–27. Curiously, the GPL Defendants neither cite nor discuss Martino in their opening brief,
`
`instead appearing to treat the question as one of first impression. They rely on irrelevant cases
`
`construing the term “dealer,” including an 1880 case from the North Carolina Supreme Court
`
`and a 1929 case from the Texas Court of Appeals, both of which quite obviously pre-date the
`
`passage of the 1933 Securities Act, and neither of which has any bearing on the meaning of
`
`federal securities laws. The brief nevertheless opines ad nauseum on how the GPL Defendants’
`
`conduct does not amount to being in “the business of buying and selling securities.”
`
`
`
`10
`
`

`

`Case 1:21-cv-06814-AKH Document 62 Filed 01/18/22 Page 11 of 23
`
`The Complaint alleges that the GPL Defendants’ business involved orchestrating
`
`scalping schemes, whereby the GPL Defendants would acquire securities in companies,
`
`contingent upon those companies working with a third-party promoter. The promoter would
`
`then market and drive up the price of the stock, at which point the GPL Defendants would sell
`
`their shares for a profit. The target company and the promoter would share the value of the GPL
`
`Defendants initial investment. Even applying “the ordinary meaning,” I find that the Complaint
`
`plausibly alleges that the GPL Defendants were engaged in “the business of buying and selling
`
`securities” for the simple fact that the scheme, in fact, involved buying and selling securities.
`
`The GPL Defendants next emphasize that they had no customers and provided no
`
`services, and therefore, cannot be dealers. See MTD GPL, at 22–26. They focus on the selling
`
`aspect of their activities and argue that, at most, they engage in conduct typical of a trader. They
`
`further fault the Complaint for “say[ing] nothing about temporal duration” and direct my
`
`attention to SEC guidance from 1975 and a treatise authored by FINRA’s chief legal officer in
`
`support of the proposition that to satisfy the dealer definition, there must be “offsetting two-sided
`
`activity” or “conjunctive buying and selling.” Id. at 26. These arguments are without merit.
`
`Under Martino and the SEC’s guidance, the relevant focus is on “the activities that the person or
`
`business performs,” not whether a person or business has “customers” or “provides services.”
`
`Alternatively, the Defendants assert that Due Process precludes a finding that they
`
`are dealers, arguing that endorsing the SEC’s “novel interpretation” of dealer and imposing
`
`liability would contravene the Due Process Clause. See MTD GPL, at 27–31. The Due Process
`
`Clause is not implicated here. Ignorance of the law provides no defense, and imposing liability
`
`upon a person who fails to apprise himself of the law violates no constitutional rights.3
`
`
`3 Even if such a principle existed, it would not save the GPL Defendants here. The Complaint alleges that Dillon
`previously had a Series 7 securities license and was previously briefly employed at a registered broker-dealer. From
`this, I would plausibly infer that Dillon was aware of the registration requirements and knew or should have known
`that failing to register as required would expose himself or the relevant entity to liability under Section 15(a).
`
`
`
`11
`
`

`

`Case 1:21-cv-06814-AKH Document 62 Filed 01/18/22 Page 12 of 23
`
`Turning to relevant precedent, as noted above, in determining whether an
`
`individual or entity is required to register under Section 15(a), courts consider whether the
`
`individual or entity may be “characterized by ‘a certain regularity of participation in securities
`
`transactions at key points in the chain of distribution.’” SEC v. Martino, 255 F. Supp. 268, 283
`
`(S.D.N.Y. 2003). They further consider “whether the alleged broker [or dealer] satisfies some of
`
`the following factors: 1) is an employee of the issuer; 2) received commissions as opposed to a
`
`salary; 3) is selling, or previously sold, the securities of other issuers; 4) is involved in
`
`negotiations between the issuer and the investor; 5) makes valuations as to the merits of the
`
`investment or gives advice; and 6) is an active rather than passive finder of investors.” SEC v.
`
`CKB168 Holdings, Ltd., 210 F. Supp. 3d 421, 453 (E.D.N.Y. 2016) (internal quotation marks
`
`and citation omitted) (noting that most courts do not require the SEC to establish all factors, but a
`
`combination of factors establishing a defendant acted as a broker); see also SEC v. Rabinovich &
`
`Assocs., LP, No. 07-CV-10547, 2008 U.S. Dist. LEXIS 93595, at *5 (S.D.N.Y. Nov. 18, 2008)
`
`(“Among the activities indicative of being a broker are soliciting investors, participating in the
`
`securities business with some degree of regularity, and receiving transaction-based
`
`compensation.”); see also SEC, Guide to Broker-Dealer Registration (Apr. 2008), available at
`
`http://www.sec.gov/divisions/marketreg/bdguide.htm, at 4-5 (“In order to determine whether [an
`
`individual] . . . is a broker, we look at the activities that the person or business actually
`
`performs,” and ask, for example, whether it “participate[s] in important parts of a securities
`
`transaction, including solicitation, negotiation, or execution of the transaction,” receives
`
`“transaction-related compensation,” and/or “handle[s] the securities or funds of others in
`
`connection with securities transactions.”).
`
`I find that Plaintiff plausibly states a claim against the GPL Defendants under
`
`Section 15(a). The Complaint describes a course of conduct characterized by a certain regularity
`
`of participation in securities transactions at key points. It alleges that the GPL Defendants would
`
`
`
`12
`
`

`

`Case 1:21-cv-06814-AKH Document 62 Filed 01/18/22 Page 13 of 23
`
`provide an initial investment and purchase securities, and after the promoter successfully drove
`
`up the price by marketing the securities, the GPL Defendants would then sell their shares back
`
`into the market. And it alleges that the GPL Defendants regularly orchestrated this scheme,
`
`citing HempAmericana as an illustration, in which Defendants solicited investors, albeit
`
`indirectly, through the third-party promoter, effectively acting as middlemen. And it alleges that
`
`the GPL Defendants have orchestrated this scheme with numerous issuers since 2017,
`
`demonstrating “regularity of business activity.” See Martino, 255 F. Supp. 2d at 283–84
`
`(holding that defendants “plainly acted as unregistered brokers” where defendants “regularly
`
`solicited overseas clients” to engage in securities transactions, “regularly acted as middlemen
`
`between the U.S. sellers and foreign purchasers[,]” were not employed by their clients,
`
`“participated in the sale of stock of numerous issuers over a period of several years,” and
`
`“assisted in negotiating the stock sales at issue”).
`
`As to the Martino factors, first, quite obviously, none of the GPL Defendants are
`
`employees of HempAmericana, and therefore, did not receive a salary from HempAmericana.
`
`The Complaint alleges that the GPL Defendants bought and sold securities in numerous
`
`microcap issuers—that the scheme as alleged was the GPL Defendants’ business model. Their
`
`initial investments in microcap issuers were conditioned upon use of consultants that would drive
`
`up the price of the stock through promotional campaigns, the purpose of which was to enable the
`
`GPL Defendants to sell their shares and recoup their initial investments at a profit, a sort-of
`
`commission-based return for their initial investments. Further, the GPL Defendants advised the
`
`microcap issuers on who those consultants should be, or in the case of HempAmericana, required
`
`that it use Seaside.
`
`While the Complaint does not specifically allege that the GPL Defendants were
`
`involved in the negotiations between issuers and investors, it does allege that the GPL
`
`Defendants were involved in negotiating the rates paid to third-party promotional consultants,
`
`
`
`13
`
`

`

`Case 1:21-cv-06814-AKH Document 62 Filed 01/18/22 Page 14 of 23
`
`who in turn, were charged with encouraging investors to purchase the stock. And the Complaint
`
`specifically alleges that the GPL Defendants instructed the target companies to share
`
`Defendants’ initial investment with the promoter and directed the precise numerical split. In
`
`sum, I find that the Complaint plausibly alleges that the GPL Defendants’ business model
`
`involved a regularity of business activity largely approximating that of a broker-dealer, requiring
`
`them to register with the SEC. Because neither of the GPL Entities was so registered, and
`
`neither Dillon nor Panait was associated with a registered broker-dealer, Plaintiff plausibly
`
`alleges that the GPL Defendants violated Section 15(a). See SEC v. Martino, 255 F. Supp. 2d at
`
`283–84; see also SEC v. Hansen, No. 83-CV-3692, 1984 U.S. Dist. LEXIS 17835, at *10–11
`
`(S.D.N.Y. Apr. 6, 1984) (holding that defendant acted as an unregistered broker in violation of
`
`section 15(a)(1) where he was paid commission, rather than a salary, previously sold securities of
`
`another issuer, and actively and aggressively found investors); see also SEC v. Margolin, No. 92-
`
`CV-6307, 1992 U.S. Dist. LEXIS14872, at *5 (finding likelihood that defendant was an
`
`unregistered broker where, among other things, defendant “participated in dozens of transactions
`
`for various clients,” demonstrating “regularity of business activity which supports the statutory
`
`definition of broker or dealer”).4
`
`Accordingly, the motion to dismiss the Section 15(a) claims against the GPL
`
`Defendants is denied.
`
`
`
`b. Control Person Liability
`
`Control person liability under Section 20(a) is “a form of secondary liability,
`
`under which a plaintiff may allege a primary violation by a person controlled by the defendant
`
`
`4 Neither Martino nor SEC Guidance requires “offsetting two-sided activity” as a prerequisite to finding broker-
`dealer activity, but even assuming such a requirement existed, the Complaint does allege “conjunctive buying and
`selling” and a temporal duration—it alleges that they purchased shares through an orchestrated investment and
`waited for the promoter to market and drive up the price of the shares before selling their shares back into the
`market.
`
`
`
`14
`
`

`

`Case 1:21-cv-06814-AKH Document 62 Filed 01/18/22 Page 15 of 23
`
`and culpable participation by the defendant in the perpetration of the fraud.” Suez Equity
`
`Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 101 (2d Cir. 2001) (citing SEC v. First
`
`Jersey Secs., Inc., 101 F.3d 1450, 1472 (2d Cir. 1996)). To state a claim under Section 20(a), a
`
`plaintiff must allege at least two elements: (1) “a primary violation by [a] controlled person” and
`
`(2) direct or indirect “control of the primary violator by the defendant.” First Jersey, 101 F.3d at
`
`1472. Control may be established by showing that the defendant possessed, either directly or
`
`indirectly, “the power to direct or cause the direction of the management and policies of a
`
`person, whether through the ownership of voting securities, by contract, or otherwise.” 17
`
`C.F.R. § 240.12b-2; see In re Inc. Sec. Litig., 294 F. Supp. 2d 392, 414–15 (S.D.N.Y. 2003)
`
`(noting that the court in First Jersey adopted the definition of control in 17 C.F.R. § 12b-2 as the
`
`standard for a Section 20(a) claim); accord. Dover Ltd. v. A.B. Watley, Inc., 423 F. Supp. 2d 303,
`
`326 (S.D.N.Y. 2006).
`
`The Complaint plausibly and adequately alleges such liability. As discussed
`
`above, it plausibly alleges a Section 15(a) violation, and that Defendants Dillon and Panait were
`
`co-owners and in control of GPL Ventures and GPL Management. Their status as co-owners
`
`easily satisfies the test. See In re Cannavest Corp. Sec. Litig., 307 F. Supp. 3d 222, 253
`
`(S.D.N.Y. 2018) (finding allegations of control liability against a defendant who was the creator,
`
`majority owner, and a director of the primary violator, and defendant who was the chief
`
`executive officer, president, and director, “easily [met] the test”).
`
`Defendants Dillon and Panait argue that the Complaint fails to state a claim for
`
`control person liability because it does not adequately allege their “culpable” participation. They
`
`rely on In re Cannavest Corp. Sec. Litigation, for the proposition that “[t]he majority view in this
`
`direct appears to be that allegations of ‘culpable’ participation are essential to a section 20(a)
`
`control-person claim, and that ‘a plaintiff must plead “particularized