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Securities and Exchange Commission v. Alternate Energy Holdings, Inc.

United States District Court, D. Idaho

May 13, 2014



EDWARD J. LODGE, District Judge.


On April 13, 2013, United States Magistrate Judge Ronald E. Bush issued a Report and Recommendation ("Report"), recommending that default be entered against Defendant Alternate Energy Holdings, Inc. and that Plaintiff's Motion for Summary Judgment be granted in part and denied in part. (Dkt. 242.) In the same document, Magistrate Judge Bush issued an Memorandum Decision and Order ("Order") regarding Plaintiff's Motion to Strike, Motion to File Supplemental Amended Complaint, Motion for Order to Show Cause and Freeze, and Motion to Seal. (Dkt. 242.)

Any party may challenge a magistrate judge's proposed recommendation by filing written objections to the Report within fourteen days after being served with a copy of the same. See 28 U.S.C. § 636(b)(1); Local Civil Rule 72.1(b). The district court must then "make a de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is made." Id. The district court may accept, reject, or modify in whole or in part, the findings and recommendations made by the magistrate judge. Id .; see also Fed.R.Civ.P. 72(b).

Defendant Donald L. Gillispie filed objections to the Report arguing it incorrectly concluded as a matter of law that summary judgment should be granted as to Plaintiff's First and Second Claims for Relief. (Dkt. 244.) Plaintiff, the Securities and Exchange Commission ("SEC"), also filed objections to the Report arguing the Court should enter summary judgment on its Sixth Claim for Relief and that this Court should order that certain assets be frozen as requested. (Dkt. 243.) The matter is now ripe for the Court's consideration. See Local Civil Rule 72.1(b)(2); 28 U.S.C. § 636(b)(1)(B).


The SEC, initiated this action by filing a Complaint raising allegations of federal securities law violations against Defendants Alternate Energy Holdings, Inc. ("AEHI"), its founder and Chief Executive Officer, Donald Gillispie, and its Senior Vice-President of Administration and Secretary, Jennifer Ransom. (Dkt. 1, 87.) Also named are the Relief Defendants Bosco Financial, LLC ("Bosco") and Energy Executive Consulting, LLC ("Energy Executive").

In the Second Amended Complaint the SEC raises claims for: 1) Violations of Section 17(a) of the Securities Act by AEHI and Gillispie; 2) Violations of Section 10(b) of the Exchange Act and Rule 10b-5 by AEHI and Gillispie; 3) Violations of Section 13(a) of the Exchange Act and Rule 13a-11 by AEHI; 4) Aiding and Abetting Violations of 10(b) of the Exchange Act and Rule 10b-5 by Gillispie and Ransom; 5) Violations of Section 16(a) of the Exchange Act and Rule 16a-3 by Gillispie and Ransom; and 6) Violations of Section 5(a) and 5(c) of the Securities Act by AEHI and Gillispie. (Dkt. 87.)

The claims generally relate to the Defendants' alleged illegal manipulation of the public market price for AEHI stock and defrauding of individuals who purchased the company's stock. (Dkt. 87.) The SEC alleges the Defendants engaged in a "pump and dump scheme" whereby they pumped up the price and volume of AEHI's stock to artificially high levels and then dumped the stock through secret sales. In particular, the SEC alleges the Defendants used mass email distributions of offering documents called Private Placement Memoranda ("PPMs") and other materials to solicit potential investors through supporters, paid promoters, and other finders; inviting them to forward the PPMs on to potential investors. (Dkt. 87 at ¶ 16.) In these solicitations and materials, the SEC alleges, the Defendants made false and misleading statements and/or material omissions all intended to induce unsophisticated investors into purchasing AEHI stock in violation of the antifraud provisions of the federal securities law.

The SEC filed a Motion for Partial Summary Judgement against AEHI and Mr. Gillispie as to the First, Second, and Sixth Claims for relief. (DKt. 166.) The Report granted summary judgment as to the First and Second claims but not the Sixth Claim. (Dkt. 242.) The SEC also filed Motions to Freeze certain assets that Magistrate Judge Bush denied. (Dkt. 241, 264.) The SEC has asked this Court to set aside the Magistrate Judge's orders and issue an order freezing the assets. The Court finds as follows.


Pursuant to 28 U.S.C. § 636(b)(1)(C), this Court "may accept, reject, or modify, in whole or in part, the findings and recommendations made by the magistrate judge." Where the parties object to a report and recommendation, this Court "shall make a de novo determination of those portions of the report which objection is made." Id. Where, however, no objections are filed the district court need not conduct a de novo review. In United States v. Reyna-Tapia, 328 F.3d 1114, 1121 (9th Cir. 2003), the court interpreted the requirements of 28 U.S.C. 636(b)(1)(C):

The statute [28 U.S.C. § 636(b)(1)(C)] makes it clear that the district judge must review the magistrate judge's findings and recommendations de novo if objection is made, but not otherwise. As the Peretz Court instructed, "to the extent de novo review is required to satisfy Article III concerns, it need not be exercised unless requested by the parties." Peretz, 501 U.S. at 939 (internal citation omitted). Neither the Constitution nor the statute requires a district judge to review, de novo, findings and recommendations that the parties themselves accept as correct. See Ciapponi, 77 F.3d at 1251 ("Absent an objection or request for review by the defendant, the district court was not required to engage in any more formal review of the plea proceeding."); see also Peretz, 501 U.S. at 937-39 (clarifying that de novo review not required for Article III purposes unless requested by the parties)....

See also Wang v. Masaitis, 416 F.3d 993, 1000 & n.13 (9th Cir. 2005). Furthermore, to the extent that no objections are made, arguments to the contrary are waived. See Fed.R.Civ.P. 72; 28 U.S.C. § 636(b)(1) (objections are waived if they are not filed within fourteen days of service of the Report and Recommendation). "When no timely objection is filed, the Court need only satisfy itself that there is no clear error on the face of the record in order to accept the recommendation." Advisory Committee Notes to Fed.R.Civ.P. 72 (citing Campbell v. United States Dist. Court, 501 F.2d 196, 206 (9th Cir.1974)).

In this case, the Court has conducted a de novo review of those portions of the Report to which the parties have objected. The Court has also reviewed the entire Report as well as the record in this matter for clear error on the face of the record and finds as follows.


I. Default as to AEHI

Footnote one of the Report recommends that default be entered against AEHI for failing to appear after its counsel has withdrawn. (Dkt. 242 at 3 n. 1.) AEHI filed an opposition to the Report asking that it be allowed to appear through new counsel and defend itself on the merits. (Dkt. 254, 255.) The SEC has responded disputing the procedural history as portrayed by AEHI and arguing that, regardless of the ruling on entry of default, summary judgment should be entered against AEHI. (Dkt. 256.) Further, the SEC asserts that AEHI's actions in failing to retain counsel have delayed resolution of this matter and, in particular, its Motions to Freeze.

The record reflects that counsel for AEHI was allowed to withdraw on September 6, 2012. (Dkt. 211.) In the Order granting withdraw the Court gave AEHI twenty-one days in which to file a written notice as to how it would be represented in the matter and advised that failure to appear in the action could result in default. (Dkt. 211.) Unbeknownst to the Court, AEHI's board of directors apparently decided not to hire new counsel to defend the company until trial. (Dkt. 255 at 4.) Since that time, AEHI has retained new counsel and has filed a notice of appearance of its new counsel - albeit untimely. (Dkt. 253) (Dkt. 255 at 6.) AEHI argues because there is no prejudice or culpable conduct resulting from its failure to file a notice of appearance, default should not be entered and it should be allowed to defend itself on the merits of the claims. (Dkt. 255.)

The Court has reviewed the issue and concludes default need not be entered at this time. New counsel for AEHI has now appeared in the case. Although some prejudice may have occurred due to the delay in new counsel appearing, the Court finds it is most appropriate to resolve the case on its merits. Accordingly, the Court will not enter default against AEHI at this time. Failure to comply with the Court's orders in the future, however, may be met with a different result.

II. Defendants' Objections to Report

Defendants object to the Report's recommendation that summary judgment be granted on the SEC's First and Second Claims arguing reasonable jurors may differ as to whether: 1) the PPMs, press releases, and letter to shareholders were false and/or misleading in light of the total mix of information available to shareholders at the time and 2) the Defendants acted with the necessary scienter under Section 10b and Rule 10b-5 and/or whether Defendants breached a standard of care under Section 17(a). (Dkt. 244.) In response to these objections, the SEC asserts that Defendants have failed to raise a triable issue of fact on either determination and have not offered any evidence to support their arguments. (Dkt. 249.)

The Court has reviewed the Report, the arguments made on these objections, the parties' initial briefing on the Motion and the entire record herein. Having done so, this Court agrees with the Report's conclusions that summary judgment is appropriate on the First and Second Claims. The Magistrate Judge employed the correct standard of law in analyzing the claims and properly applied the facts of this case to the law in reaching his decision. This Court too has reviewed the record and arrived at the same conclusion as that stated in the Report. The Court adopts the Report's conclusions and analysis on this issue. (Dkt. 242 at 11-17.) The public announcements made by Defendants are, at the very least, misleading and possibly false in regards to material information. Further, the Defendants acted with the requisite level of scienter and/or a reckless disregard for the truth when issuing the public announcements containing the material misstatements in connection with securities offerings of AEHI. Accordingly, for the reasons stated in the Report, the Court will grant the Motion for Summary Judgment as to the First and Second Claims.

III. Plaintiff's Objections to Report

A. Motion for Summary Judgment on Sixth Claim

The SEC objects to the Report's recommendation that the Motion for Summary Judgment be denied as to the Sixth Claim for Relief - violations of Section 5 of the Securities Act. (Dkt. 243.) On this Claim, the Report concluded it had not been shown that, as a matter of law, AEHI's stock offerings were one integrated offering and that they were public offerings. (Dkt. 242 at 5-11.) The SEC does not challenge the law cited in the Report but, instead, argues the application of the record to the law is erroneous. (Dkt. 243 at 1, 5.) The SEC argues the Defendants failed to raise a genuine issue of material fact establishing their offers and sales of securities were exempt from the applicable registration requirement of the Securities Act. The SEC further objects to the Report asserting it improperly shifted the burden by requiring the SEC to disprove the exemption to the registration requirement. (Dkt. 243.) Defendants respond stating the Report properly analyzed the Claim and denied the Motion as to that Claim because a question of fact exists as to whether the stock offerings were private offerings and/or integrated. (Dkt. 248.)

Section 5 of the Securities Act, 15 U.S.C. § 77e, "make[s] it unlawful to offer or sell a security in interstate commerce if a registration statement has not been filed as to that security, unless the transaction qualifies for an exemption from registration." SEC v. Platforms Wireless Intern. Corp., 617 F.3d 1072, 1085 (9th Cir. 2010). "To prove a violation of Section 5, the SEC must demonstrate that: (1) there was not a registration statement in effect as to the underlying securities; (2) the defendants directly or indirectly sold or offered to sell the securities; and (3) the sale or offer was made through interstate commerce or the mails." SEC v. Phan, 500 F.3d 895, 902 (9th Cir. 2007). There is no ...

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