A federal District Court dismissed the Securities and Exchange Commission’s securities fraud claims under § 10(b) of the Securities Exchange Act of 1934 and § 17(a) of the Securities Act of 1933 against defendant Clark, who was allegedly engaged in a “pump and dump” scheme involving Roanoke Technology Corporation stock. According to the Complaint, Roanoke’s president and CEO, Smith, who was also named as a defendant, issued misleading press releases to inflate the value of Roanoke’s stock, and then sold the Roanoke stock to reap the benefits. During that time, Smith and Clark allegedly engaged in a kickback scheme to help Smith “funnel money” out of Roanoke. Pursuant to the alleged scheme, Clark received Roanoke stock as payment for consulting services he did not provide and paid a portion of the proceeds from the sale of such stock to Smith in the guise of a loan.
Notwithstanding the alleged kickback scheme, which the Court accepted as true for purposes of the dismissal motion, the Court ruled that the SEC had failed to show a “connection” between Clark’s “bad acts” and the fraudulent sale of Roanoke stock. The Court noted the SEC’s failure to allege that Clark was aware of the falsity of Smith’s public statements (allegedly made to inflate the value of the stock) or that Clark had made any misleading statements. The Court held that “simply listing Clark’s ‘bad acts’ on the one hand and his securities transactions on the other,” without alleging any fraudulent conduct in which Clark engaged (e.g., whom he intended to defraud and misrepresentations directed to that end) or that he aided and abetted Smith’s fraud, was insufficient to state a claim under § 10(b). (Securities And Exchange Commission v. Roanoke Technology Corp., 2006 WL 3813755 (M.D. Fla. Dec. 26, 2006))