The United States District Court for the Middle District of Florida has denied the defendants’ motion to dismiss a complaint alleging violations of Section 10(b) of the 1934 Securities and Exchange Act and Securities and Exchange Commission Rule 10b-5. The plaintiffs alleged that the defendants exercised control over entities that defendants knew were making false statements of material fact to lure investors into a Ponzi scheme involving purchases of point-of-sale debit and credit card terminals. The defendants allegedly controlled and engaged in a fraudulent scheme that raised more than $20 million from approximately 300 investors. The individual defendants moved to dismiss the complaint, arguing that the plaintiffs had failed to adequately allege either control person liability or scienter.
The Court held that the plaintiffs had adequately alleged control person liability and scienter. In particular, one of the defendants argued that the complaint’s specific allegations of wrongdoing related to actions taken by people other than the defendant. The Court found that defendant’s argument was a fundamental misunderstanding of control person liability, which provides that a person with the power to control the primary violator’s actions can be liable for that wrongdoing. In addition, the Court found that the complaint adequately alleged scienter by asserting that the companies operated at a deficit from the time of their inception, that the defendants knew they could not deliver on promises made to investors, and that two other companies owned by the defendants had violated securities laws in Pennsylvania and Maryland yet the defendant continued to operate an identical company in Florida. (Gustin v. Hoffman, No. 6:08-cv-57-Orl-31DAB, 2009 WL 604957 (M.D.Fla. Mar. 9, 2009))