No Veil-Piercing for Stock Trading Fraud

In the Securities and Exchange Commission’s complaint that defendants’ “Teach Me to Trade” training programs carried out a scheme to dupe inexperienced investors into buying seminar packages and trading stocks, the Alexandria U.S. District Court dismisses the SEC’s claim for piercing the corporate veil to hold two individual defendants liable, but says the SEC can pursue its claim for violations of § 10(b) of the Securities & Exchange Act of 1934 and SEC Rule 10b-5.

The SEC claims defendants used lies and misrepresentations about their background and expertise as traders, through seminars, software and mentoring sessions and marketing in free workshops for novice investors at hotels and in television infomercials.

This case was brought on March 11, 2008, but was stayed pending resolution of a criminal case against the two individual defendants, Linda Woolf and David Gengler, involving much of the same conduct at issue here. On May 7, 2009, defendants were convicted of conspiracy to commit mail and wire fraud and substantive wire fraud, but the district court later granted their motions for judgment of acquittal.

The court denies the motion to dismiss on the grounds that the SEC has not shown that the activities alleged were “in connection with” a securities transaction. The court holds the SEC has adequately pleaded violations of § 10(b) and Rule 10b-5 because its complaint includes detailed allegations that defendants made false statements to potential investors while inducing those investors to enter securities transactions. The court dismisses the complaint with respect to defendants’ personal liability for the alleged securities fraud. The court holds that the SEC complaint does not contain sufficient pleading to support its alter ego theory for piercing the corporate veil and holding defendants personally liable for the alleged fraud because it does not include allegations that these individual defendants and their respective corporate entities were united by interest and ownership or that the individual defendants controlled and used the corporate entities to perpetuate the alleged fraud.

The SEC argues the individual defendants committed the violations as officers of Hands On Capital and Lashaico, respectively, which were independent contractors for TMTT entities. The SEC alleges Woolf was president of Hands On Capital and Gengler was president of Lashaico. The complaint does not allege any contractual relationship between TMTT entities and either Woolf or Gengler as individuals. According to the complaint, Gengler’s appearances at TMTT workshops were pursuant to an “independent contractor” arrangement between Lashaico and entities affiliated with TMTT. The SEC alleges a similar contractual relationship between TMTT entities and Hands On Capital with respect to the payment of Woolf’s commissions from the sale of TMTT goods and services.

The complaint does not allege Woolf and Gengler controlled and used the corporate entities in order to perpetuate securities fraud. The complaint also fails to plead that the observance of the corporate form in this case would sanction a fraud, promote injustice or  result in an injustice. That the individual defendants were officers of the corporate defendants is not enough to support an alter ego theory that would justify setting aside the corporate fiction and holding the officers personally liable.

SEC v. Woolf (Lee) No. 1:08cv235, Dec. 13, 2011; USDC at Alexandria, Va. VLW 011-3-670, 21 pp.