Securities and Exchange Commission v. Perkins

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF NORTH CAROLINA

WESTERN DIVISION

No. 5:19–CV–0243–BR

SECURITIES AND EXCHANGE )

COMMISSION, )

)

Plaintiff, )

v. ) ORDER

)

ALTON PERKINS, et al., )

)

Defendants. )

This matter is before the court on Alton Perkins (“Perkins”), the Alton and Xiang Mei

Lin Perkins Family Trust (the “Family Trust”), Yilaime Corporation of NC (“Yilaime NC”),

Perkins Hsu Export Corporation (“PHE”), Yilaime Corporation of Nevada (“Yilaime NV”), and

AmericaTowne Holdings, Inc.’s (“AmericaTowne”) (collectively “defendants”) motion to

dismiss the United States Securities and Exchange Commission’s (“SEC”) complaint pursuant to

Federal Rule of Civil Procedure 12(b)(6). (DE # 21.) Also, before the court is defendant

Mabiala Phuati’s (“Phuati”) pro se motion to dismiss. (DE # 13.) These motions have been

fully briefed and are ripe for disposition.

I. BACKGROUND

The SEC’s allegations follow. Perkins, a resident of Wake Forest, North Carolina, is the

Chairman, Chief Executive Officer (“CEO”), and majority shareholder, of Yilaime NC, PHE,

AmericaTowne, and Yilaime NV. (See Compl., DE # 1, ¶ 14.) Phuati, a resident of Knightdale,

North Carolina, was the Vice-Chairman and Managing Director of Yilaime NC and a Senior

Executive Vice President of AmericaTowne. (Id. ¶ 19.) Phuati resigned on 5 June 2018. (Id.)

Yilaime NC is a North Carolina corporation formed in May 2013. (Id. ¶ 15.) PHE is a Nevada

corporation formed in October 2013 with its principal place of business in Raleigh, North

Carolina. (Id. ¶ 16.) AmericaTowne is a Nevada corporation, formerly known as ATI Modular

Technology Corporation (“ATI”), formed on 1 August 2018. (Id.) Yilaime NV is a Nevada

corporation formed in March 2013, with its principal place of business in Las Vegas. (Id. ¶ 18.)

The Family Trust “was formed on or about January 1, 2014. Perkins and his wife are the

grantors and investment trustees of the trust and had full control over the trust at all relevant

times.” (Id. ¶ 20.)

Yilaime NC and PHE issued three Regulation D offerings raising $1.1 million between

January 2014 and April 2015. (Id. ¶ 26.) Yilaime NC issued one stock offering, raising

$843,265, and one bond offering, raising $37,000. (Id. ¶ 26 (graph).) PHE issued one bond

offering, raising $175,916. (Id.) For each offering, Yilaime NC and PHE filed a Form D with

the SEC claiming that the offerings were exempt from registration pursuant to 17 C.F.R. §

230.506 (“Rule 506(b)”). (Id. ¶ 27.) In actuality, the offerings were not exempt. (Id. ¶¶ 28, 31.)

Further, Perkins and Yilaime NC made misrepresentations and omissions involving “investment

proceeds, entity expenses, related party transactions and Perkins’[s] own compensation.” (Id. ¶

32.)

Securities filings related to two AmericaTowne contracts are also at issue. “Perkins

directed AmericaTowne to misrepresent in AmericaTowne’s public filings that the company had

two large contracts, collectively worth approximately $2 million. In reality, each was of limited

or no value.” (Id. ¶ 44.) The first contract was with a Nigerian export company “FEMEB” for a

shipment of machinery and other equipment from Taiwan to Nigeria. (Id. ¶ 45.) The contract

provided FEMEB pay AmericaTowne $849,000, with $25,000 due at signing. (Id. ¶ 46.)

The second contract was with the Export Company1 for $1 million, with $10,000 due at

signing. (Id. ¶ 52.) On 22 February 2017, AmericaTowne filed a Form 8-K announcing the 15-

year contract. (Id. ¶ 51.) No later than April 2017, Perkins and AmericaTowne knew that the

contract with the Export Company was of little or no value. (Id. ¶ 53.) Besides the $10,000 due

at signing, no money has been paid under the Export Company contract. (Id. ¶ 55.)

As a result, the SEC alleges various violations of 15 U.S.C. §§ 77e (“Section 5”) and 77q

(“Section 17”), of the Securities Act of 1934 (“Securities Act”); 15 U.S.C. §§ 78j (“Section 10”)

and 78m (“Section 13”) of the Securities Exchange Act (“Exchange Act”); and 17 C.F.R. §§

240.10b-5 (“Rule 10b-5”), 240.12b-20 (“Rule 12b-20”), 240.13a-1 (“Rule 13a-1”), 240.13a-11

(“Rule 13a-11”), and 240.13a-13 (“Rule 13a-13”).

II. DISCUSSION

“A district court should dismiss a complaint pursuant to Rule 12(b)(6) if, accepting all

well-pleaded allegations in the complaint as true and drawing all reasonable factual inferences in

the plaintiff’s favor, the complaint does not allege enough facts to state a claim to relief that is

plausible on its face.” Vitol, S.A. v. Primerose Shipping Co., 708 F.3d 527, 539 (4th Cir. 2013).

“[T]he court need not accept the [plaintiff’s] legal conclusions drawn from the facts, nor need it

accept as true unwarranted inferences, unreasonable conclusions, or arguments.” Philips v. Pitt

Cty. Mem’l Hosp., 572 F.3d 176, 180 (4th Cir. 2009) (internal quotation marks and citation

omitted). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need

detailed factual allegations, . . . a plaintiff’s obligation to provide the grounds of his

1 The SEC identifies this entity as the “Export Company” in its complaint, but defendants identify the name of the

corporation as “Blessed Auto.” (See Mem. Supp. Mot. Dismiss, DE # 22, at 6.) In its response, the SEC continues

to use the name “Export Company.” (Resp. Opp’n, DE # 27, at 17.) Thus, for purposes of this 12(b)(6) motion, the

court will employ the name the SEC uses in the complaint, “Export Company.”

entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the

elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555

(2007); accord Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).2

A. Fraud Claims [Counts One, Two, and Three]

Defendants contend the SEC fails to state a claim as to Counts One, Two, and Three,

alleging violations of Sections 17(a)(1), (2), and (3) of the Securities Act, Section 10(b) of the

Exchange Act, and Rule 10b-5, (collectively the “fraud claims”), against Perkins, Yilaime NC,

and PHE. Specifically, they contend the SEC fails to sufficiently allege intent to defraud in the

form of a material misrepresentation and/or omission. (See Mem. Supp. Mot. Dismiss, DE # 22,

at 10–11.)

In its complaint, the SEC contends Perkins, Yilaime NC, and PHE made misstatements

and/or omissions involving the following material facts as to one or more of the offerings: (1)

Perkins would receive investor money for trademark use; (2) Perkins was the owner of the

trademarks; (3) Perkins would receive founder’s stock in exchange for one of his trademarks;

and (4) Perkins pled nolo contendere to a felony fraud offense in 2000 and received a cease and

desist order in 2008 concerning a failure to disclose that plea. (Compl., DE # 1, ¶¶ 32–41; Resp.

Opp’n, DE # 27, at 10.) The SEC contends each act amounts to a material misrepresentation

and/or omission. (Resp. Opp’n, DE # 27, at 10–11.)

Establishing a violation of Rule 10b–5 requires proof that the

defendant made (1) material misrepresentations or materially misleading

2 The parties disagree whether the court should consider the exhibits submitted by defendants in conjunction with

the instant motion to dismiss. The court “may [] consider documents attached to the complaint, see Fed. R. Civ. P.

10(c), as well as those attached to the motion to dismiss, so long as they are integral to the complaint and

authentic[,]” Philips v. Pitt Cty. Mem’l Hosp., 572 F.3d 176, 180 (4th Cir. 2009). For a document to be integral to

the complaint, “it must be clear on the record that no dispute exists regarding the authenticity or accuracy of the

document. It must also be clear that there exist no material disputed issues of fact regarding the relevance of the

document.” Faulkner v. Beer, 463 F.3d 130, 134 (2d Cir. 2006) (internal citation omitted); accord Harty v. Luihn

Four, Inc., 747 F. Supp. 2d 547, 551 (E.D.N.C. 2010), aff’d, 453 F. App’x 347 (4th Cir. 2011). Because these

conditions have not been met, the court will not consider the subject exhibits.

omissions, (2) in connection with the purchase or sale of securities, (3) with

scienter. Proving a violation of § 17(a)(1) requires substantially similar

proof: ‘(1) material misrepresentations or materially misleading omissions,

(2) in the offer or sale of securities, (3) made with scienter.’ To establish a

violation of § 17(a)(2) or (3), the SEC need only show that the first two

elements of § 17(a)(1) were committed with negligence. Finally, the ‘in

connection with the purchase or sale of” and ‘in the offer or sale of’

elements of Rule 10b–5 and § 17(a) can be interchangeable.

SEC v. Radius Capital Corp., 653 F. App’x 744, 749 (11th Cir. 2016) (internal quotation marks

and citations omitted); see also Aaron v. SEC, 446 U.S. 680, 697 (1980). To show materiality of

an omission, “there must be a substantial likelihood that the disclosure of the omitted fact would

have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of

information made available.” Basic Inc. v. Levinson, 485 U.S. 224, 231–32 (1988); accord

Greenhouse v. MCG Capital Corp., 392 F.3d 650, 656 (4th Cir. 2004). “The role of the

materiality requirement is not to ‘attribute to investors a childlike simplicity’ but rather to

determine whether a ‘reasonable investor’ would have considered the omitted information

significant at the time.” Hillson Partners Ltd. P’ship v. Adage, Inc., 42 F.3d 204, 213 (4th Cir.

1994) (quoting Basic, 485 U.S. at 232–34); see also Greenhouse, 392 F.3d. at 656 (finding, on

the other hand, that a reasonable investor is not “an ostrich, hiding her head in the sand from

relevant information”). “The ‘total mix’ of information available varies on a fact-specific and

case-by-case basis . . . . [A] court ruling on a 12(b)(6) motion may look to ‘documents or articles

cited in the complaint, SEC filings, press releases, stock price tables, and other material on which

the plaintiff’s allegations necessarily rely.’” Greenhouse, 392 F.3d at 656–57 (citing Morris v.

Wachovia Sec., Inc., 277 F. Supp. 2d 622, 629 (E.D. Va. 2003) (citing In re The First Union

Corp. Sec. Litig., 128 F. Supp. 2d 871, 883 (W.D.N.C. 2001))).

Here, the SEC sufficiently alleges that Perkins’s failure to disclose his nolo contendere

plea as the Chairman, CEO, and majority shareholder of Yilaime NC and PHE was a material

omission. Defendants are correct that “Section 10(b) and SEC Rule 10b-5 do not create an

affirmative duty to disclose any and all material information,” including “mere generic assertions

of legal compliance.” Singer v. Reali, 883 F.3d 425, 440 (4th Cir. 2018). However, disclosure

of material information is required to make statements, in the light of the circumstances under

which they are made, not misleading. Id.; see 17 C.F.R. § 240.10b-5. The SEC claims that by

failing to disclose his nolo contendere plea to fraud while “touting” his business reputation and

history, Perkins has omitted a material fact. (See Compl., DE # 1, ¶¶ 39, 40). The court agrees.

The SEC has sufficiently alleged, at a minimum, a material omission.3 See United States v.

Bachynsky, 415 F. App’x 167, 171–72 (11th Cir. 2011) (finding an investor’s failure to disclose

prior convictions, a lost medical license, and securities-fraud prohibitions, when positive aspects

of his reputation were used to solicit new investors, a material omission); SEC v. Merch. Capital,

LLC, 483 F.3d 747, 771 (11th Cir. 2007) (“a reasonable investor. . . is naturally interested in

whether management is following the law in marketing the securities”). The motion to dismiss

as to the fraud claims will be denied.

B. Securities Registration Violation4 [Count Five]

Defendants contend the SEC fails to state a claim as to Count Five, violations of Sections

5(a) and (c) of the Securities Act against Perkins and Yilaime NC, on two grounds. First, that

“[t]he SEC fails to identify which offering specifically violated Section 5 of the Securities Act,

and other than a cursory recitation of the elements, fails to provide any specific facts.” (Mem.

3 Section 17(a) and Rule 10b-5 require only a single misstatement or omission to amount to a violation. See e.g., 17

C.F.R. § 240.10b-5 (“any untrue statement of a material fact or to omit to state a material fact”). Accordingly, the

court does not address the other three allegations of material omission or misrepresentation.

4 Defendant Phuati, a pro se party, filed a combined answer and motion to dismiss. (DE # 13.) The SEC filed a

response. (Resp. Opp’n, DE # 23.) Phuati provides no legal grounds entitling him to dismissal, rather, he affirms or

denies various contentions made in the complaint against him. (See DE # 13, at 2). These denials and affirmations

do not provide a basis for dismissal pursuant to Rule 12(b)(6), and in the alternative, the SEC has stated a claim for

[whatever claim SEC alleges, failure to register securities?]against Phuati, (Compl., DE # 1, ¶¶ 74–77; accord Resp.

Opp’n, DE # 23, at 3–4, 8). Phuati’s motion will be denied.

Supp. Mot. Dismiss, DE # 22, at 12.) Second, that the SEC has failed to provide an explanation

of why the Rule 506 exemption would not apply to Yilaime NC’s Regulation D offerings. (Id.)

1. Elements of Claim

Sections 5(a) and (c) of the Securities Act . . . prohibit any person,

directly or indirectly, from using the mails or any other means of interstate

commerce to offer or sell a security unless it is registered with the

Commission or is exempt from registration. Scienter is not an element of a

§ 5 violation. Once the Commission makes a prima facie case that the securities

sold were not registered, the defendants bear the burden of demonstrating that they

were entitled to an exemption.

SEC v. Causwave, Inc., No. 1:15CV1068, 2018 WL 4625407, at *5 (M.D.N.C. Sept. 26, 2018)

(internal quotations and citations omitted). “In order to establish a prima facie case for a

violation of [Section] 5 of the Securities Act, the SEC must demonstrate that (1) the defendant

directly or indirectly sold or offered to sell securities; (2) through the use of interstate

transportation or communication and the mails; (3) when no registration statement was in effect.”

SEC v. Calvo, 378 F.3d 1211, 1214 (11th Cir. 2004) (citation omitted). “[W]hile a plaintiff is

not required to plead facts that constitute a prima facie case in order to survive a motion to

dismiss, see Swierkiewicz v. Sorema N.A., 534 U.S. 506, 510–15[] (2002), ‘[f]actual allegations

must be enough to raise a right to relief above the speculative level.’” Coleman v. Maryland

Court of Appeals, 626 F.3d 187, 190 (4th Cir. 2010), aff’d 566 U.S. 30 (2012).

Here, SEC has sufficiently alleged factual allegations to raise a right to relief above a

speculative level for a Section 5 violation. The SEC alleges Pekins, Yilaime NC, and Phuati

offered and sold securities in connection with the two Yilaime NC offerings. (Compl., DE # 1,

¶¶ 26, 74.) The SEC contends that neither offering was registered with the SEC. (Id. ¶ 76.)

2. Rule 506(b) Exemption

In its complaint, the SEC alleges defendants did not properly follow Rule 506(b). (See

Compl. DE # 1, ¶ 28.) Further, the SEC contends any exemption from registration requirements

under Rule 506(b) is “an affirmative defense that would be inappropriate to resolve at this

motion to dismiss stage.” (Resp. Opp’n, DE # 27, at 16.)

Under Rule 506(b), securities are exempt from registration if they

are private offerings. A security qualifies as a private offering if there are

fewer than 35 non-accredited investors of securities in the offering, and each

non-accredited investor has such knowledge and experience in financial and

business matters that he is capable of evaluating the merits and risks of the

prospective investment.

SEC v. Schooler, 905 F.3d 1107, 1114 n.3 (9th Cir. 2018). However, “Rule 506(b) [] prohibits

an issuer or ‘any person acting on its behalf’ from selling or offering to sell securities ‘by any

form of general solicitation or general advertising.’” SEC v. Schooler, No. 3:12–CV–2164–

GPC–JMA, 2015 WL 2344866, at *2 (S.D. Cal. May 14, 2015) (quoting 17 C.F.R. §

230.502(c)); see also Ciuffitelli v. Deloitte & Touche LLP, No. 3:16–CV–00580–AC, 2018 WL

4568737, at *6 (D. Or. Aug. 1, 2018), report and recommendation adopted, 2018 WL 4568586

(D. Or. Sept. 21, 2018) (finding that under the specific conditions in 17 C.F.R. § 230.506(b) and

general conditions of 17 C.F.R. § 230.502(c), a securities issuer may not engage in general

solicitation or advertising and qualify for a Regulation D exemption); accord Eliminating the

Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A

Offerings, 78 Fed. Reg. 44771-01 (July 24, 2013) (to be codified at 17 C.F.R. pt. 230, 239 &

242). A Rule 506 exemption is an affirmative defense. See Schooler, 2015 WL 2344866, at *1;

Ciuffitelli, 2018 WL 4568737, at *6.

Here, the SEC sufficiently alleges that the conditions of Rule 506(b) were not met. In its

complaint, the SEC contends that “Perkins and Yilaime NC: (a) failed to conduct due diligence

with respect to whether the prospective investors were accredited or sophisticated, and (b) sent

emails generally soliciting investors.” (Compl. DE # 1, ¶ 28.) Further, Perkins did not adhere to

the requirement that investors submit questionnaires concerning their accredited status, nor did

he provide audited financial statements. (Id. ¶ 31.) As a result, “several investors in the Yilaime

NC stock offering were not accredited investors.” (Id. ¶ 30.) Given these contentions, it does

not clearly appear on the face of the complaint that a Rule 506 exemption applies. See Goodman

v. Praxair, Inc., 494 F.3d 458, 464 (4th Cir. 2007) (internal citations and quotation marks

omitted) (“[A] motion to dismiss filed under Federal Rule of Procedure 12(b)(6), which tests the

sufficiency of the complaint, generally cannot reach the merits of an affirmative defense, . . . in

the relatively rare circumstances where facts sufficient to rule on an affirmative defense are

alleged in the complaint, the defense may be reached by a motion to dismiss filed under Rule

12(b)(6). This principle only applies, however, if all facts necessary to the affirmative defense

clearly appear[ ] on the face of the complaint.”). The motion to dismiss as to Count Five will be

denied.

C. Securities Reporting Violation [Count Six]

Defendants contend the SEC has failed to state a claim as to Count Six, violations of

Section 13(a) of the Exchange Act, against AmericaTowne. Defendants contend ATI,

AmericaTowne’s merged entity, complied with the Exchange Act as to the FEMEB and Export

Company contracts in amended disclosures on Forms 10-Q and 10-K. (Mem. Supp. Mot.

Dismiss, DE # 22, at 14–15.) Additionally, defendants contend the laws and regulations that

govern public reporting do not contain requirements or guidance regarding the content of those

reports, and accordingly, ATI’s reliance on expert accounting and auditing professionals was

sufficient. (Id.)

In its complaint, the SEC contends that AmericaTowne violated various securities

regulation provisions: Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and

13a-13. (Compl., DE # 1, ¶ 80.) Specifically, the SEC alleges AmericaTowne filed three forms,

a 10-K, 10-Q, and an amended 8-K, with false information. (Id. ¶¶ 42–55.)

Under [Section 13(a) of the Exchange Act] an issuer of securities

must file with the SEC “(1) such information and documents . . . as the

Commission shall require” and “(2) such annual reports . . . certified if

required by the rules and regulations of the Commission by independent

public accountants, and such quarterly reports . . . as the Commission may

prescribe.” The SEC has promulgated several regulations to enforce this

rule: (1) an issuer must add to any required filing “such further material

information . . . as may be necessary to make the required statements . . .

not misleading,” 17 C.F.R. [§] 240.12b-20; . . . and (3) an issuer shall “file

a quarterly report on Form 10-Q,” 17 C.F.R. [§] 240.13a-13.

SEC v. Jacoby, No. CV CCB–17–3230, 2018 WL 3732102, at *10 (D. Md. Aug. 3, 2018); see

generally U.S. ex rel. Jones v. Collegiate Funding Servs., Inc., 469 F. App’x 244, 257 (4th Cir.

2012) (issuers must file a Form 8-K as needed (citing 17 C.F.R. § 240.13a-11)); Matrix Capital

Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172, 178 (4th Cir. 2009) (issuers must file a

Form 10-K annually).

Here, the SEC has sufficiently alleged that AmericanTowne misrepresented material

information in three of its filed forms. (See Compl., DE # 1, ¶¶ 44–55.) The SEC alleges that

“Perkins directed AmericaTowne to misrepresent in AmericaTowne’s public filings that the

company had two large contracts, collectively worth approximately $2 million. In reality, each

was of limited or no value.” (Id. ¶ 44.) The SEC contends that on 19 August 2016, Perkins

received notice that FEMEB was unable to perform under its contract, (id. ¶ 47), but on 14

November 2016, in its quarterly Form 10-Q, AmericaTowne listed $849,000 in revenue from the

contract. (Id. ¶ 49.) Later, on 14 April 2017, AmericaTowne filed a Form 10-K for the period

ending on 31 December 2016, with a sales return of $849,000, despite the fact FEMEB had

never paid the $849,000. (Id. ¶ 50.) Additionally, no later than April 2017, the SEC alleges

Perkins and AmericaTowne knew that the contract with the Export Company was valueless, (id.

¶ 53), but on 14 November 2017, AmericaTowne filed an amended Form 8-K representing the

agreement between the parties remained in full force and effect. (Id.) Company revenue and

contract status are clearly material information for investors.

Further, Rule 12b-20 plainly requires an issuer to provide any material information as

may be necessary to make required statements, such as those provides in Forms 10-Q, 10-K, and

8-K, in the light of the circumstances under which they are made, not misleading. See 17 C.F.R.

§ 240.12b-20. Whether defendant complied with Rule 12b-20 is in dispute. Such a dispute is

factual in nature, and “[a] motion to dismiss under Rule 12(b)(6) . . . does not resolve contests

surrounding the facts, the merits of a claim, or the applicability of defenses.” Republican Party

of N. Carolina v. Martin, 980 F.2d 943, 952 (4th Cir. 1992). The motion to dismiss as to Count

Six will be denied.

D. Aiding and Abetting Claims [Counts Four and Seven]

In its complaint, the SEC brings Count Four against Yilaime NV based upon its aiding

and abetting the conduct pled in Counts One, Two and Three, (Compl., DE # 1, at 20), and Count

Seven against Perkins based upon his aiding and abetting conduct pled in Count Six, (id. at 23).

Defendants do not advance an argument specifically as to these counts; rather, it appears they

rely on the dismissal of the underlying counts to dismiss the aiding and abetting claims. Because

the underlying counts are not being dismissed, the motion to dismiss as to Count Four and Count

Seven will be denied.

Ht. CONCLUSION

For the foregoing reasons, Phuati’s motion to dismiss is DENIED, (DE # 13), and

defendants’ motion to dismiss is DENIED, (DE # 21).

This 2 January 2020.

ae

Ent LS

W. Earl Britt

Senior U.S. District Judge

12