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Securities and Exchange Commission v. Perkins

United States District Court, E.D. North Carolina, Western Division

January 2, 2020

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
ALTON PERKINS, et al., Defendants.

          ORDER

          W. EARL BRITT SENIOR U.S. DISTRICT JUDGE.

         This matter is before the court on Alton Perkins (“Perkins”), the Alton and Xiang Mei Lin Perkins Family Trust (the “Family Trust”), Yilaime Corporation of NC (“Yilaime NC”), Perkins Hsu Export Corporation (“PHE”), Yilaime Corporation of Nevada (“Yilaime NV”), and AmericaTowne Holdings, Inc.'s (“AmericaTowne”) (collectively “defendants”) motion to dismiss the United States Securities and Exchange Commission's (“SEC”) complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). (DE # 21.) Also, before the court is defendant Mabiala Phuati's (“Phuati”) pro se motion to dismiss. (DE # 13.) These motions have been fully briefed and are ripe for disposition.

         I.BACKGROUND

         The SEC's allegations follow. Perkins, a resident of Wake Forest, North Carolina, is the Chairman, Chief Executive Officer (“CEO”), and majority shareholder, of Yilaime NC, PHE, AmericaTowne, and Yilaime NV. (See Compl., DE # 1, ¶ 14.) Phuati, a resident of Knightdale, North Carolina, was the Vice-Chairman and Managing Director of Yilaime NC and a Senior Executive Vice President of AmericaTowne. (Id. ¶ 19.) Phuati resigned on 5 June 2018. (Id.) Yilaime NC is a North Carolina corporation formed in May 2013. (Id. ¶ 15.) PHE is a Nevada corporation formed in October 2013 with its principal place of business in Raleigh, North Carolina. (Id. ¶ 16.) AmericaTowne is a Nevada corporation, formerly known as ATI Modular Technology Corporation (“ATI”), formed on 1 August 2018. (Id.) Yilaime NV is a Nevada corporation formed in March 2013, with its principal place of business in Las Vegas. (Id. ¶ 18.) The Family Trust “was formed on or about January 1, 2014. Perkins and his wife are the grantors and investment trustees of the trust and had full control over the trust at all relevant times.” (Id. ¶ 20.)

         Yilaime NC and PHE issued three Regulation D offerings raising $1.1 million between January 2014 and April 2015. (Id. ¶ 26.) Yilaime NC issued one stock offering, raising $843, 265, and one bond offering, raising $37, 000. (Id. ¶ 26 (graph).) PHE issued one bond offering, raising $175, 916. (Id.) For each offering, Yilaime NC and PHE filed a Form D with the SEC claiming that the offerings were exempt from registration pursuant to 17 C.F.R. § 230.506 (“Rule 506(b)”). (Id. ¶ 27.) In actuality, the offerings were not exempt. (Id. ¶¶ 28, 31.) Further, Perkins and Yilaime NC made misrepresentations and omissions involving “investment proceeds, entity expenses, related party transactions and Perkins'[s] own compensation.” (Id. ¶ 32.)

         Securities filings related to two AmericaTowne contracts are also at issue. “Perkins directed AmericaTowne to misrepresent in AmericaTowne's public filings that the company had two large contracts, collectively worth approximately $2 million. In reality, each was of limited or no value.” (Id. ¶ 44.) The first contract was with a Nigerian export company “FEMEB” for a shipment of machinery and other equipment from Taiwan to Nigeria. (Id. ¶ 45.) The contract provided FEMEB pay AmericaTowne $849, 000, with $25, 000 due at signing. (Id. ¶ 46.)

         The second contract was with the Export Company[1] for $1 million, with $10, 000 due at signing. (Id. ¶ 52.) On 22 February 2017, AmericaTowne filed a Form 8-K announcing the 15-year contract. (Id. ¶ 51.) No. later than April 2017, Perkins and AmericaTowne knew that the contract with the Export Company was of little or no value. (Id. ¶ 53.) Besides the $10, 000 due at signing, no money has been paid under the Export Company contract. (Id. ¶ 55.)

         As a result, the SEC alleges various violations of 15 U.S.C. §§ 77e (“Section 5”) and 77q (“Section 17”), of the Securities Act of 1934 (“Securities Act”); 15 U.S.C. §§ 78j (“Section 10”) and 78m (“Section 13”) of the Securities Exchange Act (“Exchange Act”); and 17 C.F.R. §§ 240.10b-5 (“Rule 10b-5”), 240.12b-20 (“Rule 12b-20”), 240.13a-1 (“Rule 13a-1”), 240.13a-11 (“Rule 13a-11”), and 240.13a-13 (“Rule 13a-13”).

         II. DISCUSSION

         “A district court should dismiss a complaint pursuant to Rule 12(b)(6) if, accepting all well-pleaded allegations in the complaint as true and drawing all reasonable factual inferences in the plaintiff's favor, the complaint does not allege enough facts to state a claim to relief that is plausible on its face.” Vitol, S.A. v. Primerose Shipping Co., 708 F.3d 527, 539 (4th Cir. 2013). “[T]he court need not accept the [plaintiff's] legal conclusions drawn from the facts, nor need it accept as true unwarranted inferences, unreasonable conclusions, or arguments.” Philips v. Pitt Cty. Mem'l Hosp., 572 F.3d 176, 180 (4th Cir. 2009) (internal quotation marks and citation omitted). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, . . . a plaintiff's obligation to provide the grounds of his entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007); accord Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).[2]

         A. Fraud Claims [Counts One, Two, and Three]

         Defendants contend the SEC fails to state a claim as to Counts One, Two, and Three, alleging violations of Sections 17(a)(1), (2), and (3) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5, (collectively the “fraud claims”), against Perkins, Yilaime NC, and PHE. Specifically, they contend the SEC fails to sufficiently allege intent to defraud in the form of a material misrepresentation and/or omission. (See Mem. Supp. Mot. Dismiss, DE # 22, at 10-11.)

         In its complaint, the SEC contends Perkins, Yilaime NC, and PHE made misstatements and/or omissions involving the following material facts as to one or more of the offerings: (1) Perkins would receive investor money for trademark use; (2) Perkins was the owner of the trademarks; (3) Perkins would receive founder's stock in exchange for one of his trademarks; and (4) Perkins pled nolo contendere to a felony fraud offense in 2000 and received a cease and desist order in 2008 concerning a failure to disclose that plea. (Compl., DE # 1, ¶¶ 32-41; Resp. Opp'n, DE # 27, at 10.) The SEC contends each act amounts to a material misrepresentation and/or omission. (Resp. Opp'n, DE # 27, at 10-11.)

Establishing a violation of Rule 10b-5 requires proof that the defendant made (1) material misrepresentations or materially misleading omissions, (2) in connection with the purchase or sale of securities, (3) with scienter. Proving a violation of § 17(a)(1) requires substantially similar proof: ‘(1) material misrepresentations or materially misleading omissions, (2) in the offer or sale of securities, (3) made with scienter.' To establish a violation of § 17(a)(2) or (3), the SEC need only show that the first two elements of § 17(a)(1) were committed with negligence. Finally, the ‘in ...

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