SEC informant-turned-defendant-turned-accuser loses contempt case

(Reuters) - In a 2020 decision refusing to shut down a U.S. Securities and Exchange Commission investigation of the Bahamian operations of a securities dealer named Guy Gentile, the 3rd U.S. Circuit Court of Appeal rather dryly observed, “Guy Gentile and the Securities and Exchange Commission are not strangers.”

That's a bit of an understatement – and, unfortunately for Gentile, a ruling this week from U.S. District Judge Brian Martinotti of Newark, New Jersey, means that his peculiar entanglement with securities regulators won’t end anytime soon. Martinotti denied Gentile’s motion to hold the SEC in contempt for filing a new suit in federal court in Miami after the commission opted against raising the same allegations in an amended complaint before the New Jersey judge.

As you scratch your head over the preceding sentence – holding the SEC in contempt for filing a lawsuit? – allow me to offer the necessary background on Gentile’s tumultuous relationship with the SEC and the FBI. It began, by Gentile’s account, in 2012 when the once high-flying trader agreed to become a cooperating witness, rather than face arrest, in the government's investigation of illegal pump-and-dump securities schemes.

Gentile has said that his cooperation resulted in dozens of arrests and millions of dollars in disgorgement by securities fraudsters, but the worm apparently turned when, by his account, he ceased cooperating with the government in 2015. In 2016, Gentile was indicted by New Jersey federal prosecutors and civilly charged by the SEC for participating in two alleged penny-stock manipulation schemes dating back to 2008.

Gentile managed to get both cases tossed, but not without considerable effort by his defense counsel, Adam Ford of Ford O'Brien Landy. The indictment was dismissed on timeliness grounds in 2017. So was the SEC case, but it was revived by the 3rd Circuit in 2019. Finally, in 2020, Martinotti once again dismissed the SEC’s case on the pump-and-dump allegations.

But the SEC wasn’t yet done with Gentile. SEC lawyers told Martinotti as he weighed dismissal of the pump-and-dump case that investigators from the commission’s Miami office were probing Gentile’s Bahamian brokerage, which was suspected of operating as a haven for U.S. day traders who wanted to avoid trading restrictions. Martinotti said in an order he would not consider the Bahamas allegations unless the SEC laid them out in an amended complaint. The judge gave the SEC time to file a new complaint, but the government opted not to, so Martinotti dismissed the New Jersey case with prejudice.

As the SEC investigated the Bahamas brokerage, Gentile and his lawyer, Ford, went on the offense. First, Ford filed a suit in New Jersey, seeking a declaration that the Florida investigation was illegal and that subpoenas issued by the SEC in connection with the probe should be quashed. The SEC won dismissal of that suit, in a ruling affirmed by the 3rd Circuit in 2020.

Then, after the SEC sued Gentile and other defendants in 2021 in federal court in Miami, requesting an injunction to block Gentile from allegedly using his Bahamas operation to help day traders circumvent U.S regulations, Gentile and Ford went back to Martinotti with a novel argument. The New Jersey judge, they argued, told the SEC back in 2020 that if the commission wanted to bring claims related to Gentile’s Bahamas brokerage, “they must be included in a further amended complaint,” the Gentile motion said. But instead of meeting the judge's deadline and adding those claims, Gentile and his lawyer said, the SEC engaged in forum-shopping, repackaging its allegations and suing in Miami.

Gentile asked Martinotti to hold the SEC in contempt for violating his order to amend its complaint in the original New Jersey case to include the Bahamas allegations. He called upon the judge to fine the SEC unless the commission withdrew the Florida case.

The SEC, as you can guess, opposed the contempt motion. Gentile, it said, fundamentally misunderstood that the Miami investigation of his Bahamas operation was completely separate from the New Jersey investigation of the alleged pump-and-dump scheme.

“These are separate cases, investigated and filed by separate SEC offices, involving different allegations of violations of the federal securities laws which occurred at different times and in different locations,” the SEC brief said.

The commission said it had mentioned the Bahamas conduct in the New Jersey case only to show Martinotti why the SEC needed an injunction to bar Gentile from continuing to violate securities laws. And Martinotti’s order dismissing the New Jersey pump-and-dump case, the SEC said, did not say anything that precluded the SEC from bringing a different case alleging different facts in a different jurisdiction.

Martinotti agreed in his March 28 ruling, which adopted a similar recommendation from U.S. Magistrate Judge Edward Kiel. A dismissal with prejudice, Martinotti said, is not the same thing as a filing injunction that would restrict subsequent pleadings. And despite Gentile’s arguments, the judge said, there was no such injunction in his 2020 order dismissing the SEC’s pump-and-dump case.

Gentile counsel Ford said in an email that his client isn’t done fighting. “Mr. Gentile is disappointed in Judge Martinotti's decision, but he looks forward to winning his case against the SEC in the Miami action,” Ford said. (One would expect no less, given the bellicosity of the litigation so far.)

The SEC declined to comment.

Gentile’s recently filed answer in the Miami case asserts, among other affirmative defenses, that the SEC has unclean hands because U.S. investigators explicitly directed Gentile to ensnare U.S. traders with his Bahamas brokerage. Gentile said he can’t be held liable for conduct that the government was not only aware of but actually pushed him to engage in.

It’s a bold claim, but boldness is Gentile’s litigation calling card.

Read more:

Twice-sued ex-broker accuses SEC of forum-shopping

Securities regulator can't be sued over investigation - 3rd Circuit

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