SEC v. Riel: Summary Judgment & Default Judgment Granted
In SEC v. Riel, No. 5:15-CV-1166 (MAD/DEP), 2017 BL 342140 (N.D.N.Y. Sept. 27, 2017), the United States District Court for the Northern District of New York granted in part and denied in part the Security Exchange Commission’s (“SEC”) motion for summary judgment against Charles Riel III (“Riel”), and granted the SEC’s motion for default judgment against REinvest, LLC (“REinvest”) (collectively “Defendants”), for Defendants’ violations of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933 (“Securities Act”), and Riel’s alleged violations of Sections 20(a) and 20(e) of the Exchange Act, and Section 15(b) of the Securities Act.
According to the allegations, Riel formed REinvest in 2008, and was the company’s sole member. Riel, through phone and email communications and two websites, claimed REinvest offered high yield returns through investment in commercial real estate. Between 2010 and 2014, five investors invested $285,000 with REinvest in exchange for promissory notes. According to the complaint, Riel used most of the funds for his own expenses, used a later investor’s funds to repay an earlier investor, and lost nearly $30,000 of an investor’s funds in undisclosed futures trading. Additionally, Riel provided several investors false account statements purporting to show high yields on their investments. In early 2014, after the SEC initiated its investigation into Riel and REinvest’s actions, Riel contacted his most recent investors to “clarify” that their arrangements with REinvest were private-loan arrangements rather than investments. In September 2015, the SEC filed its complaint against Riel and REinvest. At his deposition, Riel asserted his Fifth Amendment privilege in response to all substantive questions. REinvest did not appear in court to answer the claims against it.
Rule 10b-5 prohibits a person from making a material misrepresentation, with scienter, in connection with the purchase or sale of securities. Scienter can be established by showing false statements were made “with the intent to deceive, manipulate, or defraud.” Section 17(a) prohibits a person from using any means of interstate commerce to make material misrepresentations in the offer or sale of a security. Additionally, Section 15(b) prohibits aiding and abetting violations of the Securities Act, and Section 20(e) prohibits aiding and abetting violations of the Exchange Act. Finally, Section 20(a) holds control persons liable for the fraud of entities they control.
The court held Riel’s assertion of his Fifth Amendment privilege, and conclusory denials, failed to raise an issue of material fact and the SEC was entitled to summary judgment. The court found the SEC allegations established Riel made false and misleading statements to his investors through his websites and phone and email conversations, those statements were material because they were significant in the investors’ decisions to invest with REinvest, and they were made with the intent to defraud which demonstrated scienter. The court found Riel’s actions, as the owner and sole employee of REinvest, were imputed to REinvest, for the same violations. Based on these findings, the court held Defendants liable for violations of Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act. Furthermore, the court determined Riel knowingly and substantially assisted in REinvest’s violations, and was liable for both aiding and abetting claims. Finally, the court did not find Riel liable under the control person liability claim, under Section 20(a) of the Exchange Act, because it determined Riel could not be held liable under both Section 10(b) and 20(a) for the same underlying conduct.
For the above reasons, the court granted in part and denied in part the SEC’s motion for summary judgment against Riel, and granted the SEC’s motion for default judgment against REinvest. The court permanently restrained Defendants from further violations of Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act, ordered the Defendants to pay disgorgement of $197,500, plus prejudgment interest of $27,875.20, and ordered Riel to pay a civil penalty of $125,000.
The primary documents for this case may be found on the DU Corporate Governance website.