SEC v. Mapp: SEC's Motion for Summary Judgment Granted in Part and Denied in Part
In SEC v. Mapp, No. 4:16-CV-00246, 2017 BL 401498 (E.D. Tex. Nov. 8, 2017), the United States District Court for the Eastern District of Texas granted in part and denied in part the Securities and Exchange Commission’s (“SEC”) motion for summary judgment and denied William E. Mapp’s (“Defendant”) partial motion for summary judgment.
According to the allegations, Defendant raised approximately $26 million in private securities offerings as CEO for Servergy, Inc., (“Servergy”) from November 2009 to September 2013. Defendant received over $1.4 million in investments from Caleb White (“White”) through Dominion Joint Venture Group No. 1, 2, and 3 (collectively “Dominion JVs”). Servergy also secured $19.4 million from broker dealer WFG Investments, Inc. (“WFG”). Severgy did not file a registration statement for any of its securities offerings. Plaintiffs further alleged Servergy claimed to only accept investments from accredited investors however, this was not the case. From 2012 to 2013, Defendant secured various non-binding pre-orders for units of Servergy’s new computer server. Defendant subsequently emailed investors a memorandum and conducted live presentations announcing the pre-order sales projections at over 2,000 units. In March 2013, a prospective client withdrew its pre-order for 1,000 units. Servergy, alledgedly, did not amend its projections on pre-orders in the memorandums sent out to targeted investors. The SEC claimed Defendant violated sections 5(a), 5(c), and 17(a) of the Securities Act, and sections 10(b) of the Exchange Act and Rule 10b-5 thereunder.
A prima facie case for violations of Section 5(a) and 5(c) of the Securities Act is established by showing a defendant (1) offered or sold a security; (2) there was no registrations statement on file with the SEC or in effect as to the security; and (3) the defendant used interstate transportation, or communication, or the mails in connection with the offer or sale. A defendant may be liable as a participant in a Section 5 violation if the defendant’s role in the transaction was significant, acting as both a necessary participant and a substantial factor in the sales transaction. Section 17(a)(2) of the Securities Act makes it unlawful to “obtain money or property by means of an untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. Rule 10b-5 prohibits the use of any device, scheme, or artifice to defraud and or engage in any act, practice or course of business that operates or would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security.
Since the SEC sought relief in the form of civil money penalties, Defendant asserted the form of relief sought by the SEC against him was time-barred by 28 U.S.C. § 2462 five-year limitation period. SEC argued that the five-year limitation would not apply because the majority of Defendant’s alleged conduct occurred after the date five-years preceding the SEC complaint.
Defendant further asserted he did not receive compensation that could be attributed to the alleged misrepresentations, in violation of Section 17(a)(2). SEC argued that Defendant’s salary was wholly dependent on the investor funds obtained through alleged misrepresentations.
Responding to Section 5 violations, Defendant asserted he did not personally offer or sell the securities because he was neither a “necessary participant” nor a “substantial factor” in the Dominion JV investments. Defendant maintained a substantial amount of the investment offerings were attributable to White, creating a factual dispute in establishing Mapp as a substantial participant in Servergy security distribution.
The court determined Defendant failed to demonstrate that the injunction sought by SEC constituted a penalty. Therefore, the court found Defendant failed to carry his initial burden of showing the absence of a genuine issue of material fact. Additionally, given Defendant admitted to receiving five million shares of Servergy stock in October of 2009, the court determined a material fact existed as to whether Defendant obtained money or property as a result of the alleged misrepresentation. The court determined SEC failed to establish a prima facie Section 5 violation against Defendant, because Defendant created a factual issue with regard to whether or not his involvement with Dominion JV rose to the level of participant liability. The court found SEC had not provided sufficient evidence to conclusively prove the amount of pre-orders listed in investor information was inaccurate. Thus, the court concluded Defendant’s pre-order statements did not, as a matter of law, constitute material misrepresentations or omissions under Rule 10b-5 and Section 17(a).
For the foregoing reasons, the court denied Defendant’s partial motion for summary judgment, and denied SEC’s motion for summary judgment, except for the integration of the offerings.
The primary materials for this case may be found on the DU Corporate Governance website.