Sec. & Exch. Comm'n v. Rayat

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SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. HARMEL S. RAYAT, AND RENOVACARE INC., Defendants.

No. 21-cv-4777 (LJL)

United States District Court, S.D. New York

August 24, 2022

OPINION AND ORDER

LEWIS J. LIMAN, UNITED STATES DISTRICT JUDGE

The United States Securities and Exchange Commission (“SEC” or “Plaintiff”) moves pursuant to Rules 15(a), 16(b) and 21 of the Federal Rules of Civil Procedure to file an amended complaint and to join new parties. Dkt. No. 85. Proposed additional defendants Jeetenderjit Singh Sidhu (“Sidhu”), Jatinder Bhogal (“Bhogal”), and Sharon Fleming (“Fleming”) (collectively, “Proposed Defendants”) move to intervene and oppose the amendment. Dkt. Nos. 92, 97, 99. The SEC does not oppose the motions of the Proposed Defendants to intervene for the limited purpose of responding to the SEC's motion to amend, see Dkt. No. 104 at 1, and the motions to intervene therefore are granted. See Lopez v. Bell Sports, Inc., 2014 WL 6473533, at *2 (E.D.N.Y. Nov. 18 2014) (“Several district courts adjudicating motions to join new defendants have allowed the proposed new defendants to intervene for the limited purpose of opposing joinder.”). This opinion and order addresses Plaintiff's motion to amend and join new parties.^[1]

BACKGROUND

I. Procedural History

The initial complaint (“Original Complaint”) in this case was filed on May 28, 2021. Dkt. No. 1. It charges defendants Harmel S. Rayat (“Rayat”) and RenovaCare, Inc. (“RenovaCare”) (collectively “Defendants”) with committing securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b) and Rules 10b-5(a), (b), and (c), promulgated thereunder, 17 C.F.R. § 240.10b-5(a)-(c), and making false statements in an SEC filing in violation of Section 15(d) of the Exchange Act, 15 U.S.C. § 78o(d), and Rules 15d-11 and 12b-20, promulgated thereunder, 17 C.F.R § 240.15d-1 12b-20. RenovaCare is a public company purportedly engaged in the business of developing medical devices, whose stock traded as a penny stock. During the period relevant to the Original Complaint, RenovaCare generated no revenue. Dkt. No. 1 ¶¶ 10, 11. Rayat, a Canadian national, has been the majority and controlling shareholder of RenovaCare and served as Chairman of its Board of Directors. Id. ¶ 9. In summary, the Original Complaint alleges that from July 2017 until January 2018, Defendants engaged in a scheme to artificially inflate the trading price of RenovaCare stock by making false and misleading representations about RenovaCare through a purported third-party stock promoter, all without revealing the promoter's relationship to the Defendants and lying when asked about their relationship with the promoter. The Defendants then attempted to and did profit from the StreetAuthority's promotion of RenovaCare.

More specifically, the Original Complaint alleges that Defendants secretly disseminated false and misleading information about RenovaCare and its experimental medical device for treating burn wounds, “SkinGun,” through an online financial publishing company, StreetAuthority, LLC (“StreetAuthority”), which was owned and operated by a long-time friend of Rayat. The Defendants concealed their involvement in disseminating the information by arranging for the payments to StreetAuthority to be paid through a third-party investor relations company that Rayat had hired in the past for other promotional campaigns.^[2] Rayat would later replace that investor relations company with another investor relations company. Then, after the stock price of RenovaCare had increased to historically high prices while StreetAuthority's promotion was active, Rayat and his close associates successfully sold shares in the company. The Original Complaint identifies several transactions that were allegedly part of the scheme: Rayat exercised warrants to purchase RenovaCare shares in June 2017; he purchased shares of RenovaCare through a private placement in July 2017; he attempted to sell shares during the promotion through two brokerages; a friend of Rayat purchased shares at a below-market price in October 2017; and “Rayat's long-time friend and the officer manager of Rayat's real estate firm sold millions of dollars of RenovaCare stock at historically high prices while StreetAuthority's promotion was active.” Id. ¶ 80.

On or around January 2, 2018, OTC Markets Group Inc., which supervised the market on which RenovaCare's stock was quoted, sent RenovaCare a letter demanding that it make public disclosures concerning its involvement in the StreetAuthority promotion. Id. ¶¶ 47-50. On January 8, 2018, RenovaCare issued a press release (the “January 8 Press Release”) falsely denying that it had been involved in the creation and distribution of the promotional materials prepared by StreetAuthority and stating that it was “not affiliated in any way” with the authors of the StreetAuthority report or its publisher. Id. ¶¶ 60-69. The Original Complaint does not name the owner of StreetAuthority (alleged to have formed the agreement with Rayat), the investor relations companies and their principals, or the close associates of Rayat who engaged in the trading of RenovaCare stock or were otherwise involved in the promotion.

Discovery in the case commenced on August 12, 2021 when the Court entered its first Case Management Plan and Scheduling Order. Dkt. No. 17. Throughout the course of the litigation, the parties requested numerous extensions to address issues raised by the Covid-19 pandemic, the international scope of the case, and Defendants' election to change counsel. The Court's initial Case Management Plan and Scheduling Order provided that any motion to amend or join additional parties would be filed no later than September 13, 2021 and that all discovery would be completed by March 25, 2022. Id. On December 23, 2021, the parties submitted a joint motion to extend the discovery cutoff to May 24, 2022, noting that as a result of logistical challenges and the fact that almost all witnesses were non-parties with separate counsel (and that three of those witnesses resided abroad), they had been able to complete only one deposition. Dkt. No. 40. The Court granted that motion and entered a new Case Management Plan and Scheduling Order providing that all discovery was to be completed by May 24, 2022. Dkt. No. 43. On March 1, 2022, the parties submitted a second joint motion to extend the discovery schedule. Dkt. No. 53. This motion acknowledged that no new depositions had been taken since the prior extension was granted in December 2021, and it ascribed that delay to the challenges in scheduling depositions due to concerns arising from the resurgence of Covid-19 in late 2021 to early 2022 and the substitution of new counsel for defendants. Id. at 2. At the parties' request, the Court entered an Amended Case Management Plan and Scheduling Order providing that all discovery was to be completed by August 15, 2022. Dkt. No. 54.

On May 24, 2022, the parties submitted a third joint motion to extend the discovery cutoffs, seeking a new deadline for the close of fact discovery of August 30, 2022, and a close of all discovery of October 30, 2022. Dkt. No. 77. The joint letter motion stated that the parties had been able to conduct additional depositions, including that of Sidhu,^[3] but it noted that they had been forced to postpone three non-party depositions after several individuals working on the matter contracted Covid-19, and that the parties contemplated taking additional depositions as discovery progressed (including the depositions of the Defendants). Id. at 1. Thus, as of late May 2022, four depositions had been taken. The letter announced that the SEC was filing a separate letter with the Court addressing the possibility that it would seek leave of the Court to file an amended complaint, stating that the SEC did not believe that such a possibility materially affected the current request for an extension. Id. at 2.

That same day, the SEC filed a letter indicating that as a result of discovery it had recently obtained, it was considering asking the Court for leave to amend the Complaint. Dkt. No. 78. The letter advised that the process of obtaining approval from the Commission-which would be necessary before any amendment could be filed-would typically take four to six weeks but that the SEC staff would explore options to expedite review. Id. It also expressed the SEC's view that the amendment would not substantially broaden the scope of discovery. Id.

The Court granted the motion and scheduled the close of fact discovery for August 30, 2022 and the close of all discovery for October 30, 2022. Dkt. No. 79.^[4]

As of today, seven witnesses have been deposed. Dkt. No. 95 at 8. Defendants have produced over 5,000 records in discovery and answered two sets of interrogatories. Id.

On July 25, 2022, the SEC filed this motion to file an amended complaint and to join additional parties along with a memorandum of law in support. Dkt. Nos. 85-86. Defendants filed a memorandum of law in opposition to the motion on August 8, 2022, Dkt. No. 95, and the SEC filed a reply memorandum in further support of its motion on August 15 2022, Dkt. No. 103. Meanwhile, on August 5, 2022, the Court received a letter from counsel for Fleming stating her opposition to the motion, Dkt. No. 91, and a letter from counsel for Bhogal stating the same, Dkt. No. 96. The Court issued an order that the letters would not be considered by the Court unless counsel for the non-parties filed a motion to intervene. Dkt No. 94. Sidhu filed a motion to intervene and a memorandum in support of that motion on August 8, 2022. Dkt. Nos. 92-93. Fleming filed a motion to intervene and a memorandum of law in...