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Securities and Exchange Commission v. Gentile

United States District Court, D. New Jersey

December 13, 2017

GUY GENTILE, Defendant.



         This matter comes before the Court by way of Defendant Guy Gentile's Motion to Dismiss Plaintiff Securities and Exchange Commission's First Amended Complaint ("FAC"). (ECF No. 50 ("Def. Mov. Br.")). Plaintiff has submitted opposition (ECF No. 54 ("Pl. Opp. Br.")), which Defendant has replied to. (ECF No. 23 ("Def. Rep. Br.")). The Court decides this matter without oral argument pursuant to Rule 78 of the Federal Rules of Civil Procedure. For the reasons set forth below, the Court grants Defendant's Motion to Dismiss.

         I. BACKGROUND[1]

         Plaintiff brings the within action seeking "equitable" relief in connection with "two penny stock manipulation schemes [allegedly] perpetrated by [Defendant] Gentile." (FAC ¶ 1). These schemes allegedly began in April of 2007 and ended approximately in June 2008. (Id.). The 2007 scheme "involved the stock of Raven Gold Corporation" ("RVNG Scheme"), while the 2008 scheme "involved the stock of Kentucky USA Energy, Inc." ("KYUS Scheme"). (Id.). Plaintiffs FAC asserts the following causes of actions: 1) Count I - "Violations of Sections 5(a) and 5(c) of the Securities Act;" 2) Count II - "Violations of Section 17(b) of the Securities Act;" 3) Count III - "Violations of Section 17(a) of the Securities Act;" 4) Count IV - "Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder;" and 5) Count V - "Aiding and Abetting Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder." (FAC ¶¶ 86-100).[2]Plaintiff seeks two "equitable" forms of relief for the aforementioned violations: 1) an "obey-the-law" injunction; and 2) a "penny stock" bar. (FAC at 25-26, "Prayer For Relief).

         The Court need not restate the intricate details of the schemes as Defendant's Motion to Dismiss requests dismissal of the FAC pursuant to the statute of limitations, and there is no dispute that, as previously stated, Defendant's alleged criminal activity ended as of June 2008. (See Crim. No. 16-CT-155, December 21, 2016 Transcript at 41:21-42:11; see also FAC ¶ 1; Def Mov. Br. at 3-4; Pl. Opp. Br. at 4-6). Specifically, Defendant moves to dismiss the FAC asserting it is untimely pursuant to the statute of limitations set forth in 28 U.S.C. § 2462. (Def. Mov. Br. at 9). Plaintiff opposes Defendant's Motion asserting that the relief sought in the FAC is not punitive and therefore not subject to the five-year statute of limitations. (See generally Pl. Opp. Br.).


         To withstand a motion to dismiss for failure to state a claim, "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556). "The plausibility standard is not akin to a 'probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id.

         To determine the sufficiency of a complaint under Twombly and Iqbal in the Third Circuit, the court must take three steps: first, the court must take note of the elements a plaintiff must plead to state a claim; second, the court should identify allegations that, because they are no more than conclusions, are not entitled to the assumption of truth; finally, where there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief. See Connelly v. Lane Constr. Corp., 809 F.3d 780, 787 (3d Cir. 2016) (citations omitted). "In deciding a Rule 12(b)(6) motion, a court must consider only the complaint, exhibits attached to the complaint, matters of public record, as well as undisputedly authentic documents if the complainant's claims are based upon these documents." Mayer v. Belichick, 605 F.3d 223, 230 (3d Cir. 2010).

         Defendants may prevail on the statute of limitations at the motion to dismiss stage "if the time alleged in the statement of a claim shows that the cause of action has not been brought within the statute of limitations." See Robinson v. Johnson, 313 F.3d 128, 135 (3d Cir. 2002) (citation omitted); Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380 (3d Cir. 1994). "If the bar is not apparent on the face of the complaint, then it may not afford the basis for a dismissal of the complaint under Rule 12(b)(6)." Cain v. Dep't of Pub. Welfare, 442 Fed.Appx. 638, 638 (3d Cir. 2011) (quoting Bethel v. Jendoco Constr. Corp., 570 F.2d 1168, 1174 (3d Cir. 1978)).

         III. ANALYSIS

         The resolution of Defendant's Motion turns on whether the reliefs sought by Plaintiff are penal. This is because 28 U.S.C. § 2462 provides that "an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued..." 28 U.S.C. § 2462 (emphasis added). The parties all agree, and this Court has previously found, that Defendant's allegedly illegal conduct ended in June of 2008. Accordingly, if Defendant is subject to Section 2462's five-year statute of limitation, Plaintiff had until June of 2013 to institute the within action. However, Plaintiff filed this action in March 2016. As noted above, Section 2462's statute of limitations only applies when the action brought by the Government seeks a remedy that is penal in nature. Hence, if this action is subject to Section 2462, it is untimely. However, if this action is not subject to Section 2462, it may proceed in due course. Thus, whether Plaintiffs demanded reliefs are penal in nature is dispositive.[3]

         Courts throughout the country have consistently held that a remedy, including an injunction, is penal in nature when it serves no retributive or remedial purpose and merely seeks to punish an individual. See, e.g., Johnson v. SEC, 87 F.3d 484, 488 (D.C. Cir. 1996); SEC v. Jones, 476 F.Supp.2d 374, 381 (S.D.N.Y. 2007); SEC v. Alexander, 248 F.R.D. 108, 115-16 (E.D.N.Y. 2007). "Penalty" is defined as ''punishment imposed on a wrongdoer.'" Penalty, Black's Law Dictionary (10th ed. 2014), available at Westlaw BLACKS (emphasis added). In discussing Section 2462, the Tenth Circuit interpreted the term "penalty" "as a sanction or punishment imposed for violating a public law which goes beyond compensation for the injury caused by the defendant." United States v. Telluride, 146 F.3d 1241, 1245-46 (10th Cir. 1998) (emphasis added). The D.C. Circuit has explained that a penalty is "a form of punishment imposed by the government for unlawful or proscribed conduct, which goes beyond remedying the damage caused to the harmed parties by the defendant's actions.'''' Johnson, 87 F.3d at 488 (emphasis added). The Second Circuit has noted that "[a]n injunction, while not always a 'drastic remedy' as appellants contend, often is much more than the 'mild prophylactic'" and that "[i]n some cases the collateral consequences [of an injunction] can be very grave." SEC v. Commonwealth Chem. Sec, Inc., 574, F.2d 90, 99 (2d Cir. 1978) (citations omitted).

         Recently, the Supreme Court discussed Section 2462's applicability with respect to disgorgement. See Kokesh v. SEC, 137 S.Ct. 1635 (2017). While the remedy therein differs from the one in the matter sub judice (i.e., disgorgement versus injunction), the Supreme Court's reasoning is quite instructive. Consistent with the above law, the Court found that "[p]enal laws, strictly and properly, are those imposing punishment for an offense committed against the State." Kokesh, 137 S.Ct. at 1642 (citations and internal quotation marks omitted). The Court concluded that "[w]hen an individual is made to pay a noncompensatory sanction to the Government as a consequence of a legal violation, the payment operates as a penalty." Id. at 1644 (emphasis added).

         As discussed above, Plaintiff seeks two remedies. The first is the so called "obey-the-law" injunction. (FAC at ...

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