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Securities and Exchange Commission v. Strategic Global Investments, Inc.

United States District Court, S.D. California

April 17, 2017




         This is a Securities and Exchange Commission enforcement action against Defendants Strategic Global Investments, Inc. and Andrew Fellner related to their entrance into the Colorado retail marijuana industry. Plaintiff's First Amended Complaint alleges that in early 2014, Defendants issued press releases and a Form 1-A Filing that contained false and misleading information in violation of Section 10(b) of the 1934 Securities Exchange Act and SEC Rule 10b-5 promulgated thereunder, and Section 17(a)(2) of the 1933 Securities Act. (ECF No. 18 at 9.) In addition, the operative complaint alleges that Defendant Fellner aided and abetted Defendant Strategic's violations of the same. (Id. at 10-11.)

         Plaintiff SEC now moves for summary judgment against Defendants Strategic and Fellner as to their violations of Section 10(b) of the 1934 Exchange Act and SEC Rule 10b-5 only. (ECF No. 22.) Defendants oppose the motion. (ECF No. 24.) The Court held a hearing on Plaintiff's motion for partial summary judgment on March 16, 2017. (See ECF No. 31.) Having considered the parties' papers, supporting evidence, and oral arguments, and for the reasons set forth below, the Court hereby GRANTS Plaintiff's motion. (ECF No. 22.)


         Defendant Strategic is a San Diego-based, Delaware corporation that was formed in 2008. (ECF No. 18, ¶ 11; ECF No. 19, ¶ 9.) Strategic's common stock is a penny stock that is traded on the OTC Pink marketplace. (ECF No. 18, ¶¶ 11-12; ECF No. 19, ¶¶ 9-10; ECF No. 24 at 2.)

         Defendant Fellner, a resident of Carlsbad, California, acquired a controlling interest in Strategic in 2010. (ECF No. 18, ¶ 13; ECF No. 19, ¶ 11.) Fellner serves as the Chief Executive Officer, Secretary, Treasurer, and Sole Director of Strategic. (Id.)

         A. Legalization of Recreational Marijuana in Colorado

         On November 6, 2012, Colorado voters approved Amendment 64, which legalized recreational marijuana in Colorado as a matter of state law. On December 10, 2012, the State of Colorado amended its constitution to provide that the use of marijuana should be legal in the state and regulated in a manner similar to alcohol. Colo. Const. art. 18, § 16(1)(a). On May 28, 2013, the Colorado legislature enacted the Colorado Retail Marijuana Code, Colo. Rev. Stat. § 12-43.4-101 et seq., which provides the statutory framework for the regulation of retail marijuana establishments in the State. Two aspects of the constitutional amendment and its implementing regulations are relevant to this action.

         First, the Colorado Retail Marijuana Code prohibits all retail marijuana establishments, including marijuana cultivation facilities, from operating until licensed by the Colorado State Licensing Authority and approved by the local jurisdiction. Colo. Rev. Stat. §§ 12-43.4-103(17), -309(2) (2016). At all times relevant to this action, the Code prohibited the issuance of a marijuana cultivation facility license to “[a]n owner who has not been a resident of Colorado for at least two years prior to the date of the owner's application.” Colo. Rev. Stat. § 12-43.4-306(k) (2013). The Code defined “owner” to mean “any person having a beneficial interest, as defined by the state licensing authority in a retail marijuana establishment other than a holder of a permitted economic interest.” Colo. Rev. Stat. § 12-43.4-103(12) (2013).

         The Colorado State Licensing Authority promulgated rules related to Colorado's Retail Marijuana Code on September 9, 2013. See 1 Colo. Code Regs. § 212-2 (2013). The rules further defined “owner” as “the Person or Persons[1] whose beneficial interest in the license is such that they bear risk of loss other than as an insurer, have an opportunity to gain profit from the operation or sale of the establishment, and have a controlling interest in a Retail Marijuana Establishment license, and includes any other Person that qualifies as an Owner pursuant to Rule R 204.” 1 Colo. Code Regs. § 212-2.103 (2013). Rule R 204.D stated that “ownership of a share or shares in a corporation . . . which is licensed . . . constitutes ownership and a direct financial interest.” 1 Colo. Code Regs. § 212-2.204 (2013).

         Second, the constitutional amendment provides that any county, municipality, or city may enact an ordinance to prohibit the operation of marijuana cultivation facilities, marijuana product manufacturing facilities, marijuana testing facilities, or retail marijuana stores. Colo. Const. art. 18, § 16(2)(e), (5)(f). In March 2013, Teller County, Colorado, exercised the option to prohibit the operation of all marijuana establishments, including marijuana cultivation facilities, within the unincorporated boundaries of its county. Teller County, Colo., Ordinance 18 (March 14, 2013).

         B. Defendants' Involvement in the Colorado Marijuana Industry

         On February 5, 2014, Defendant Strategic entered into a Stock Purchase Agreement with Robert Coffy through which Strategic purchased the only-issued share of common stock in BearPot, Inc., a Colorado Corporation and controlling entity of an existing marijuana cultivation facility in Teller County, Colorado. (See ECF No. 22-14.) At the time that Strategic acquired BearPot, BearPot's assets included “equipment with a market value of $10, 000” and “living plants that are healthy and growing and have a market value of $5, 000.” (Id., ¶ 2.01(f).) BearPot did not own any real property and was leasing its marijuana cultivation facility. (Id., ¶ 2.01(g).) Although the Stock Purchase Agreement was executed on February 5, 2014, Robert Coffy did not incorporate BearPot in Colorado until February 14, 2014. (ECF No. 22-15 at 4.)

         Between February 10, 2014, and March 27, 2014, Defendant Strategic issued six press releases via the website that chronicled its acquisition of BearPot and entrance into Colorado's recreational marijuana market. (ECF Nos. 22-7 to 22-12.) Defendant Strategic specifically identified the purpose of the shareholder letter quoted in the February 24, 2014 press release as being to update existing shareholders and potential investors about Strategic's developments related to its newly acquired Colorado marijuana cultivation facility. (ECF No. 22-9 at 2.) The content of the press releases is the subject of the instant motion and discussed in greater detail throughout this order.

         By the third quarter of 2014, Strategic decided not to obtain any marijuana licenses from the State of Colorado and not to pursue further its marijuana business. (ECF No. 24 at 3-4.) Strategic abandoned BearPot in October 2014. (Id. at 4.)

         C. SEC Subpoena

         On July 9, 2014, the SEC issued to Strategic a subpoena seeking documents that supported some of the statements Strategic made in its February and March 2014 press releases. (ECF No. 22-13.) Specifically, the SEC requested that Strategic produce “[a]ll documents evidencing, showing, and reflecting Bearpot's marijuana facility, including . . . the location and/or address of such facilities” (Request No. 4), “[d]ocuments sufficient to identify the location, specifications . . . and ownership of [the] ‘Marijuana Growing facility located in Teller County, Colorado, ' as described in a press release issued by [Strategic] on February 20, 2014” (Request No. 10), “[a]ll applications, permits, licenses, and other documents provided to or issued by the State of Colorado, Colorado's Marijuana Enforcement Division, or any other regulatory agency in the State of Colorado in connection with [Strategic]'s and Bearpot's entrance into the marijuana industry” (Request No. 17), and “[a]ll documents evidencing, showing, and reflecting Bearpot's authorization by the State of Colorado to cultivate, grow, and/or sell marijuana” (Request No. 18). (Id. at 6-8.)

         Strategic responded to the SEC's subpoena on August 18, 2014. (ECF No. 22-16.) In response to Request No. 4 regarding the location of the marijuana cultivation facility, Strategic produced the documents bates numbered STRATEGIC 00020-STRATEGIC 00030, which consist of several March 2014 invoices for marijuana cultivation equipment that BearPot purchased. (ECF No. 22-16 at 2; ECF No. 34-18 at 21-31.) The invoices provide no information as to the location of BearPot's marijuana cultivation facility. (See id.) Strategic's August 18, 2014 subpoena response did not address Request No. 10 regarding the location, specifications, and ownership of the marijuana cultivation facility. (See ECF No. 22-16.) In response to Request No. 17 regarding any permits and licenses issued by Colorado regulatory agencies, Strategic responded, “No documents.” (ECF No. 22-16 at 3.) In response to Request No. 18 regarding BearPot's authorization by the State to grow or sell marijuana, Strategic responded, “No documents, other than the laws of the state of Colorado.” (Id.)

         Strategic provided the SEC with a supplemental response to the July 9, 2014 subpoena on August 28, 2014. (ECF No. 22-17.) In its supplemental response to Request No. 4, Strategic produced the documents bates numbered STRATEGIC 00097- STRATEGIC 000104, which consist of a list of BearPot's January-July 2014 banking transactions, several receipts from May and June 2014 BearPot purchases, a copy of a June 1, 2014 check written by BearPot for “Equipment, ” and two invoices, one of which was for electrical services performed at 847 Ridge Road, Divide, Colorado, on or around March 17, 2014. (ECF No. 22-17 at 2; ECF No. 34-19 at 2-9.) In response to Request No. 10, Strategic produced the documents bates numbered STRATEGIC 000105-STRATEGIC 000111, which consist of an unsigned residential lease for the property located at 847 Ridge Road, Divide, Colorado. (ECF No. 22-17 at 2; ECF No. 34-19 at 10-16.) The parties stipulate that the Ridge Road property is located in unincorporated Teller County. (ECF No. 22-3, ¶ 4.)


         Plaintiff SEC commenced this action by filing a complaint in this Court on February 29, 2016. (ECF No. 1.) It filed an amended complaint on July 22, 2016. (ECF No. 18.) Defendants answered Plaintiff's amended complaint on August 8, 2016. (ECF No. 19.)

         Plaintiff filed the instant motion for partial summary judgment on December 20, 2016. (ECF No. 22.) Defendants filed their opposition to Plaintiff's motion on January 17, 2017. (ECF No. 24.) Plaintiff filed a reply in support of its motion on January 20, 2017. (ECF No. 26.) The Court heard oral arguments on Plaintiff's motion on March 16, 2017. (ECF No. 31.) As directed by the Court (see ECF No. 32), on March 29, 2017, Plaintiff filed the Appendix to the November 14, 2016 stipulation of the parties (ECF No. 34), which had been previously filed as Exhibit 1 to the declaration of Andrew O. Schiff filed in support of the SEC's motion for partial summary judgment (see ECF No. 22-3).


         Federal Rule of Civil Procedure 56 empowers the Court to enter summary judgment on factually unsupported claims or defenses and thereby “secure the just, speedy and inexpensive determination of every action.” Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986). Summary judgment is appropriate if the materials in the record, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a); Albino v. Baca, 747 F.3d 1162, 1168 (9th Cir. 2014) (en banc).

         Each party's position as to whether a fact is disputed or undisputed must be supported by: (1) citation to particular parts of materials in the record, including but not limited to depositions, documents, declarations, or discovery; or (2) a showing that the materials cited do not establish the presence or absence of a genuine dispute or that the opposing party cannot produce admissible evidence to support the fact. Fed.R.Civ.P. 56(c)(1). The Court may consider other materials in the record not cited to by the parties, but it is not required to do so. Fed.R.Civ.P. 56(c)(3). If a party seeking summary judgment supports its motion by declaration, the declaration must set out facts that would be admissible in evidence and show that the declarant is competent to testify on the matters stated. Fed.R.Civ.P. 56(c)(4). An affidavit will not suffice to create a genuine issue of material fact if it is “conclusory, self-serving . . . [and] lacking detailed facts and any supporting evidence.” FTC v. Publ'g Clearing House, Inc., 104 F.3d 1168, 1171 (9th Cir. 1997).

         When the party seeking summary judgment has carried its burden under Rule 56(c), the burden shifts to the nonmoving party, who “must do more than simply show that there is some metaphysical doubt as to the material facts.” Scott v. Harris, 550 U.S. 372, 380 (2007) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986)). The nonmoving party “must come forward with specific facts showing that there is a genuine issue for trial.” Matsushita, 475 U.S. at 587. If the nonmoving party fails to make a sufficient showing of an element of its case, the moving party is entitled to judgment as a matter of law. Celotex, 477 U.S. at 325.

         IV. ...

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