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Securities and Exchange Commission v. One or More Unknown Traders in the Common Stock of Certain Issuers

January 14, 2008

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
ONE OR MORE UNKNOWN TRADERS IN THE COMMON STOCK OF CERTAIN ISSUERS, DEFENDANTS, AND JSC PAREX BANK, RELIEF DEFENDANT.



The opinion of the court was delivered by: Ricardo M. Urbina United States District Judge

Document No. 31

MEMORANDUM OPINION

GRANTING THE PLAINTIFF'S MOTION TO DISMISS THE RELIEF DEFENDANT'S CROSS-CLAIMS

I. INTRODUCTION

Plaintiff Securities and Exchange Commission ("the plaintiff" or "SEC") brings this action against multiple unknown defendants ("trader defendants") who allegedly participated in a trading scheme that violated Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) ("Exchange Act") and Rule 10b-5, 17 C.F.R. § 240.10b-5. The trader defendants anonymously traded in securities through brokerage accounts titled in the name of JSC Parex Bank ("Parex"), a business entity in Latvia. Therefore, the plaintiff named Parex as a relief defendant, asking the court to compel Parex to disgorge assets obtained as a result of the trader defendants' actions.

On May 29, 2007, Parex filed cross-claims against the trader defendants for a variety of contractual and common-law claims.

Alleging that Section 21(g) of the Exchange Act ("§ 21(g)") requires the dismissal of cross-claims and counterclaims arising out of an SEC enforcement action, on July 6, 2007 the plaintiff filed a motion to dismiss Parex's cross-claims. Parex opposes the motion, urging the court that § 21(g) does not act as a categorical bar to its cross-claims. Because the court concludes that § 21(g) precludes Parex's cross-claims, the court grants the plaintiff's motion to dismiss them.

II. BACKGROUND

A. Factual History

As pertinent to the resolution of this motion, the complaint alleges the following facts: Between December 2005 and December 2006, the trader defendants purchased and sold shares of common stock of fifteen issuers. Compl. ¶ 8. Utilizing "a modern-day, technological version of the traditional 'pump-and-dump' market manipulation scheme," the trader defendants began by purchasing shares of stock in thinly-traded companies. Id. ¶ 1. Then, they invaded online brokerage accounts of investors at U.S. brokerage dealers to purchase and sell shares of the stocks they previously purchased, creating the appearance of trading activity which increased the value of the stock. Id. When the prices of the stocks increased to their satisfaction, the trader defendants sold their shares at the inflated price. Id. In perpetrating the scheme, the trader defendants masked their identities, in part, "by trading anonymously through the domestic brokerage accounts of Latvian-based Relief Defendant JSC Parex Bank." Id. ¶ 2. The defendants' scheme generated at least $732,941.00, which is held in Parex accounts. Id. ¶ 3. It also caused losses to the U.S. brokerage dealers in excess of $2 million. Id.

B. Procedural History

On March 6, 2007, the plaintiff brought this suit against the trader defendants, alleging that their actions violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5. Specifically, the plaintiff asked the court to temporarily and permanently enjoin the trader defendants from future violations of these provisions, and to compel them to disgorge the profits obtained in the above-outlined scheme and to pay penalties and interest. See generally Compl. In addition, the plaintiff requested that the court require Parex to disgorge all assets obtained as a result of the trader defendants' illegal actions. Id. That same day, the court granted the plaintiff's ex parte request for a temporary restraining order. On March 14, 2007, the court entered the plaintiff and Parex's stipulated order which acted, inter alia, to freeze the assets of the trader defendants. Order (Mar. 14, 2007).

Parex answered the complaint on May 29, 2007, filing cross-claims against the trader defendants for breach of contract, breach of good faith and fair dealing, common law fraud, common law indemnification, contractual indemnification and contribution. Relief Def. JSC Parex Bank's Answer and Cross-Claims ¶¶ 13-29. On July 6, 2007, the plaintiff moved to dismiss Parex's cross-claims because, in its view, § 21(g) bars cross-claims and counterclaims arising out of an SEC enforcement action. Pl.'s First Mot. to Dismiss Relief Def.'s Cross-Claims ("Pl.'s Mot."). Parex protests that "Section 21(g) does not automatically preclude ...


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