Securities and Exchange Commission v. Bell ( 2012 )

UNITED STA'I`ES DIS'I`RICT COURT
FOR THE I)IS'I`RICT OF COLUMBIA
secretaries AND ExcnANcs
commission
Plai“'“lff= civil Acti@n N@. 07-120 (CKK)
V.
JosEPH GRENDYS, et at.,
Defendants.
MEMORANDUM OPINI`ON
(.¥aiiuary 04, 201 2)
Plaintiff Securities and Exchange Commission ("SEC") filed the Complaint alleging
Defendant joseph Grendys and three co-Defendants aided and abetted violations of the Securities
and Exchange Act of 1934 (“Exchange Aot"), 15 U.S.C. § 78a et seq. Mr. Grendys is the only
remaining defendant in this action, and has filed the instant [63] l\/Iotion for Summary Judgineiit
and [67] Motion to Stril7 U.S. 242, 255 (1986). “If material facts are at issue, or, though undisputed, are
susceptible to divergent inferences, summary judgment is not available." Moore v. Harzmarz, 571
F.3d 62, 66 (I).C. Cir. 2009) (citation omitted).
The mere existence of a factual dispute, by itself, is insufficient to bar summary
judgment See Liberty Lobby, 477 U.S. at 248. "Only disputes over facts that might affect the
outcome of the suit under the governing law will properly preclude the entry of sunnnary
judgment." Ia'. For a dispute about a material fact to be "genuine," there must be sufficient
admissible evidence that a reasonable trier of fact could find for the noninoving party. Ia’. The
Court must determine "whether the evidence presents a sufficient disagreement to require
submission to a jury or whether it is so one-sided that one party must prevail as a matter of law."
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Ia’. at 251-52. "If the evidence is merely colorable, or is not sufficiently probative, summary
judgment may be granted." Id. at 249~50 (internal citations oniitted). The adverse party must
"do more than simply show that there is some metaphysical doubt as to the material facts."
Matsushz'ta E!ec. Indus. C0. v. Zeizz'th Radi'o Corp., 475 U.S. 574, 586 (1986). Conclusory
assertions offered without any factual basis in the record cannot create a genuine dispute See
Ass’n ofFli`ghl Artendani.‘s-CWA v. US. Dep’t ofTi/'arisp., 564 F.3d 462, 465-66 (D.C. Cir. 2009).
IV. DISCUSSION
The Complaint alleges three violations of securities law by Defendant: (l) aiding and
abetting violation of Section IO(b) of the Exchange Act and Exchange Act Rule IOb-S; (2) aiding
and abetting violation of Section l3(a) of the Exchange Act; and (3) aiding and abetting
violations of Sections l3(b)(2)(A)-(B) and l3(b)(5) and Exchange Act Rule l3b2~l .‘ Rule
lO(b)(S) provides it is unlawful for any person "by the use of any means or instrumentality of
interstate commerce," to "employ any device, scheme, or artifice to defraud." }7 C.F.R. §
240.l0b-5. Specifically, the SEC alleges Defendant aided and abetted a scheme to materially
inflate the operating income recorded by USF in its financial stateinents, which were included in
Royal Ahold’s SEC filings and other public statements Section l3(a) of the Exchange Act
provides that issuers of securities registered with the SEC must file with the Commission certain
annual and quarterly reports. 15 U.S.C. § '/Srn(a). ln this case, the SEC alleges Defendant aided
and abetted Royal Ahold’s filing of a materially false and misleading annual report (Form ZO-F),
which included the inflated operating income reported by USF. Finally, Sections
l3(b)(2)(A)-(B) and l3(b)(5) require issuers to (l) keep books and records that "in reasonable
§ All statutes and regulations cited by the Court refer to the version in effect during the
relevant portion of 2002.
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detail, accurately and fairly reflect” the transactions and assets of the issuer; (2) maintain a
system of internal accounting controls sufficient to meet certain proscribed standards; and (3)
that no person shall knowingly circumvent the internal controls or falsify the required books. 15
U.S.C. § ”!Sm(b). The SEC alleges Defendant aided and abetted Royal Ahold’s failure to keep
accurate records and circumvent the system of internal controls that verified the accuracy of those
records.
A. Ai'di'iig aiid Abetfiiig Liabi`lify
ln this Circuit, to prove aiding and abetting, the SEC must show:
(1) another party has committed a securities law violation ("primary violation");
(2) the accused aider and abetter has a general awareness that his role was part of an
overall activity that was improper; and
(3) the accused aider and abetter knowingly and substantially assisted the principal
vio1ation.
Investors Research Corp. v. SEC, 628 F.Zd 168, 178 (D.C. Cir. 1980). This test "strikes the
correct balance between the public interest in enforcing the securities laws and the danger of
unduly burdening" the companies governed by the securities laws. Id. For purposes of this
motion, Defendant does not dispute the SEC has met its burden to prove a primary violation.
Def.’s Mot. at 23. However, Defendant argues that under the second element, the SEC must
prove Defendant had "actual knowledge" of the primary violation, rather than a "general
awareness" of overall improper activity. The Court previously rejected this argument in denying
l)efendant’s [16] l\/Iotion to l`)ismiss. See 09/28/08 Mem. Opin., ECF No. [36], at 8. Despite
Defendant’s assertion that the Court’s prior Order is incorrect (see Def.’s Reply at 9), the Court
declines to revisit the issue. The SEC provides sufficient evidence to raise a genuine dispute as
to whether Defendant actually knew of the primary violation, and thus summary judgment is
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inappropriate regardless of what scienter standard the Court employs.
In terms of the final eleinent, substantial assistance, the parties agree that the SEC must
show Defendant "in some sort associate[d] himself with the venture, that he participate[d] in it as
something that he wishe[dj to bring about, that he [sought] by his action to make it succeed.”
Zoelsch v. Arthur Anderseii & Co., 824 F.2d 27, 36 (D.C. Cir. 1987) (quoting Nye & Ni'essen v.
Um`ted States, 336 U.S. 613, 619 (1949)) (internal quotation inarks omitted) abrogated on other‘
grounds by Morri`son v. Nat ’l Austrafi'a Bank Ltd., 130 S. Ct. 2869 (2010). ln other words, the
primary violation must be a "direct or reasonably foreseeable result" of the aider and abettor’s
conduct. SEC v. Johnsoiz, 530 F. Supp. 2d 325, 337 (D.D.C. 2008).
Defendant attempts to inject an additional requirement into the aiding and abetting
standard by contending that the Exchange Act provides only for aiding and abetting a primary
violation, rather than aiding and abetting some other party’s aiding and abetting of a primary
violation. ln Defendant’s view, in counts two and tliree, the SEC has only alleged that Mr.
Grendys aided and abetted USF’s aiding and abetting of Royal Ahold’s violations of the
Exchange Act. The SEC does dispute Defendant’s construction of the statute, but rather argues
"the Commission’s Complaint alleges that Defendant is liable for aiding and abetting Ahold’s
(not USF’s) violations by helping USF, Ahold’s wholly-owned subsidiary, to conceal a
fraudulent scheme." Pl.’s Opp’n at 22.
Defendant obfuscates the issue by cloal734 F.2d 47, 54 (D.C. Cir. 1984).
In evaluating a motion for summary judgment a court should weigh . . . the need
for cross-examination . . . in relation to the evidentiary materials, the general
desirability of demeanor testimony, the . . . access to proof by the opposing party
to the movant and the desirability that the case receive the full exploration of a
trial. In this case, a factfinder could choose not to believe [defendant’s]
self-serving, albeit plausible, assertions.
Id. Defendant’s claim that this testimony is "uiicontroverted," (Def.’s Mot. at 31), is meaningless
in this case where the extent of Defendant’s knowledge is "l695 F. Supp. 800 (D.N.J. 1988) is likewise unhelpful
to Defendant The Laven court granted summary judgment in favor of the defendants because (l)
plaintiffs failed to provide evidence the defendants knew of the underlying fraud; and (2), the
defendant’s alleged conduct---signing a materially false prospectus~~-was insubstantial Id. at
810. lt is true that the defendants could not have "consciously intended" (in the words of Mr.
Grendys) to assist a fraud they were unaware of. However, in this case the SEC has provided
sufficient evidence of Mr. Grendys’ knowledge of the primary violation, thus any action taken in
support of those violations was intentional, regardless of what Mr. Grendys’ motive might have
been.
Finally, the court in Moss v. Morgan Stanley lnc., 553 F. Supp. 1347 (S.D.N.Y. 1983)
found there were insufficient allegations of substantial assistance because the claim was based on
Morgan Stanley’s inaction, yet the complaint failed to allege a duty to disclose Id. at 1358. As
explained below the inaction/duty to disclose theory of liability does not apply to this case.
Ultiinately, the Moss court dismissed the aiding and abetting claim against l\/lorgan Stanley
without any reference to inotive, providing no aid to Defendant’s argument Contrary to
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Defendant’s argument, there is evidence in the record that Mr. Grendys had a motive to submit a
false and misleading Audit Confinnation Letter, but even if such evidence was lacking the SEC
provided sufficient evidence of l\/Ir. Grendys’ intent to aid and abet the primary violations even
absent an articulated motive to do so.
2. Proximate Cause
Albeit less clear, Defendant’s proximate cause argument seems to be that Mr. Grendys’
conduct was not the proximate cause of the primary violations because (l) he had no duty to
show the side letter to D&T; (2) the Audit Confirrnation Letter was in fact accurate as to the
amounts received by USF; and (3) nothing would have changed if Mr. Grendys had simply
thrown away the Audit Confiiination Letter, rather than submitting it to D&T.
First, Defendant argues Mr. Grendys cannot be held liable because he had no duty to
disclose the side letter, or in other words, to actively provide correct information to D&T. The
cases relied on by the Defendant for this argument are inapposite. See Chi'arella v. Um`ted Stares,
445 U.S. 222 (l980) (finding no duty to disclose non-public information regarding an impending
takeover before trading in the target company’s securities); Di`rks v. SEC, 681 F.2d 824, 837
(D.C. Cir. 1982) (finding defendant had a duty to disclose non-public information or refrain from
trading in certain securities). The only case cited by Defendant remotely analogous to this case is
SEC v. Apuzzo, where on a motion to dismiss, the court found the SEC failed to sufficiently
allege substantial assistance by the defendant where there was no allegation that defendant
provided any information to the relevant outside auditors. 758 F. Supp. 2d l36, 153 (D. Coiin.
20l0). By contrast, Mr. Grendys is alleged to have actively provided false information to USF’s
auditors, which if true, may form the basis for aiding and abetting liability, regardless of Mr.
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Grendys’ lack of a duty to disclose information. Nevertheless, the SEC does not dispute that Mr.
Grendys did not have any positive duty to disclose information to D&T. Pl.’s Opp’n at 35 ("lt is
true Mr. Grendys was under no obligation to respond at all to the audit confirmation and could
have simply discarded the letter in his circular file."). Rather, the SEC contends, and there is
sufficient evidence in the record from which the trier of fact could conclude, that Mr. Grendys
provided false information to USF’s auditors in furtherance of USF’s scheme to defraud
However, by conceding Mr. Grendys had no duty to disclose, the SEC has a more difficult time
establishing causation. See infra.
Defendant’s second and third arguments regarding proximate cause simply restate the
same contention: nothing would have changed if Mr. Grendys had simply thrown away the Audit
Confirination Letter rather than submitting it to D&T. For its part, the SEC argues that if Mr.
Grendys had provided the information outlined in the side letter to D&T, the fraud would have
been discovered, thus submission of the false Audit Confirniation Letter substantially assisted the
fraud. The problem with the SEC’s argument is that elsewhere in its brief, the SEC concedes
that Mr. Grendys was under no obligation to provide the side letter (or the information contained
therein) to D&T. See Pl.’s Opp’n at 35. The SEC cannot base its theory of causation on the
notion that Mr. Grendys substantially assisted the fraud by failing to provide information he
admittedly had no obligation to provide. 'I`he SEC must show that the primary violations were a
"reasonable and foreseeable result" of providing only the Audit Confirmation Letter, not Mr.
Grendys’ failure to provide the side letter as well.
Defendant attempts to disprove any claim of causation by arguing that the fraud would
have continued unnoticed had Mr. Grendys simply ignored the Audit Confinnation Letter and
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submitted nothing to D&'l`. Although the bulk of the record focuses on the flawed theory of
causation emphasized by the SEC, there is sufficient evidence in the record to show a genuine
dispute as to whether the fraud would have been discovered if Mr. Grendys had refused to sign
and submit the Letter. Plaintiff’ s expert Mr. Douglas R. Carmichael testified that if the auditors
did not receive a response to a confirmation letter, they would employ "alternative procedures,"
including examination of the underlying documents, to verify the information contained in the
confirmation letter. Carmichael Dep. l68:5-l69:l8. l\/lr. Kesler, who led the audit team from
D&T that performed the USF audit in question, testified that "virtually without exception, those
confirrnatioiis were signed by the recipients and returned to us confirming the amounts" were
correct. Kesler Dep. l94:l8-l95:l0. Mr. Grendys himself signed and returned a confirmation
letter for the audits performed in connection with Royal Ahold’s acquisition of USF and FY
2000. Pl.’s Ex. 9, l0; see also Grendys Dep. 66:22-70:21. The trier of fact could conclude that
if Mr. Grendys had failed to return the Audit Confiimation Letter, then the "alternative
procedures" that D&T would have used to confirm the promotional allowance income from Koch
Poultry would have revealed the fraud. As Defense counsel noted, this is entirely a speculative
exercise; each party "may have very basis in the world for giving ftheir] opinion, but because it
never actually happened that way, {they] are speculating what might have happened under a
hypothetical set of circumstances." Carmichael Dep. 223:4-8. ln light of the limitations this
hypothetical endeavor places on the ability of either party to provide evidence of causation, the
Court finds the SEC has provided enough evidence to avoid summary judgment and will allow
the trier of fact to decide the issue of causation.
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V. CONCLUSION
For the foregoing reasons, the Court finds the SEC has provided sufficient evidence in the
record to create a genuine dispute as to Mr. Grendys’ liability for aiding and abetting violations
of the Exchaiige Act. A reasonable trier of fact could conclude from the evidence submitted that
Mr. Grendys had actual knowledge of the primary violations, knew the information he was
providing in the Audit Confiimation Letter was false or misleading, and that his conduct
substantially assisted the primary violations. Therefore the Defendant’s l\/Iotion for Summary
judgment is DENIED. Furthermore, the SEC’S pleadings substantially conformed Local Civil
Rule 7(h), and many of Defendant’s objections are baseless Therefore, Defendant’s Motion to
Strike is likewise DENIED.
An appropriate Order accompanies this Memorandum Opinion.
Date: January 04, 2012
/s/
COLLEEN KOLLAR-KOTELLY
United States District Judge
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