## Facts

- Emil Botvinnik was a registered representative associated with a New York brokerage firm, Myers Associates, LP (later known as Windsor Street Capital, LP).
- The SEC alleged that from about June 2012 through November 2014, Botvinnik defrauded five retail customers by recommending and executing a high-frequency, short-term trading strategy.
- According to the SEC, the strategy was structured to generate commissions and other transaction costs that made customer profits highly unlikely.
- The SEC alleged the customers’ accounts showed turnover ratios and cost-to-equity ratios exceeding industry indicators of excessive trading.
- Based on the alleged transaction costs, the customers would have needed annual returns of about 31% to 150% merely to break even.
- The SEC alleged Botvinnik represented that his strategy would be profitable while concealing or failing to disclose the true trading costs and the resulting risk of loss.
- The SEC alleged the customers collectively suffered about $2.7 million in losses, while Botvinnik received about $3.7 million in compensation tied to the trading.
- The SEC sued Botvinnik for violations of the antifraud provisions, including Securities Act § 17(a), Exchange Act § 10(b), and Exchange Act Rule 10b-5.
- Botvinnik moved to dismiss under Rule 12(b)(6), arguing the complaint did not plead fraud with sufficient specificity and did not adequately plead churning-related elements such as control, excessiveness, and the customers’ lack of informed consent.

## Issues

1. Whether the SEC’s complaint plausibly alleged, consistent with Rule 9(b) and Twombly/Iqbal, that Botvinnik engaged in a fraudulent excessive-trading (churning) scheme in violation of Securities Act § 17(a), Exchange Act § 10(b), and Rule 10b-5.
2. Whether the SEC adequately alleged material misstatements or omissions about the strategy’s profitability, costs, and risks.
3. Whether the SEC adequately alleged that Botvinnik exercised control (including de facto control) over the customers’ accounts for purposes of a churning theory.
4. Whether the SEC adequately alleged scienter for the Exchange Act § 10(b)/Rule 10b-5 claims (and for § 17(a)(1) to the extent scienter was required).

## Decision

- The court denied Botvinnik’s Rule 12(b)(6) motion to dismiss.
- The court held the SEC plausibly pled a fraudulent excessive-trading scheme based on detailed allegations about the accounts’ turnover and cost-to-equity ratios and the near-impossibility of profitability once costs were considered.
- The court found the complaint adequately alleged materially misleading statements and omissions, including portraying the strategy as profitable while concealing transaction costs that required implausibly high break-even returns.
- The court concluded the SEC plausibly alleged control at the pleading stage, including that customers relied on Botvinnik’s recommendations and that he effectively directed trading even if accounts were not formally discretionary.
- The court held the SEC sufficiently alleged the required state of mind for the fraud claims at issue at the motion-to-dismiss stage, relying on the alleged magnitude of costs, customer harm, and compensation incentives.
- The court directed that if the SEC did not seek leave to amend, Botvinnik must answer the complaint within a set time after entry of the opinion and order.

## Legal Principles

- To plead a churning-based fraud theory, the SEC must plausibly allege that (1) trading was excessive in light of the customer’s objectives and circumstances, (2) the broker controlled the account (including through de facto control), and (3) the customer did not provide knowing and intelligent consent to the trading and its risks.
- Turnover rates and cost-to-equity ratios can support an inference of excessive trading, especially when paired with allegations that transaction costs made profitability unlikely.
- A broker’s control may be shown at the pleading stage by allegations that the broker recommended the trades, the customer relied on the broker’s guidance, and the broker effectively directed trading activity, even where an account is nominally non-discretionary.
- Materiality may be plausibly alleged where statements or omissions concern the real cost of a trading strategy and whether the strategy could reasonably be expected to generate profits after commissions and other charges.
- Scienter for Exchange Act § 10(b) and Rule 10b-5 may be inferred from allegations that the broker pursued trading that predictably harmed customers while generating substantial commissions, together with allegations of concealment or misleading sales talk about profitability and risk.
- Fraud claims must satisfy Rule 9(b)’s particularity requirement, but at the motion-to-dismiss stage the SEC can plead a churning scheme through account-level metrics, time period, participants, and the nature of the deceptive conduct, without listing every transaction.

## Conclusion

The court held that the SEC’s complaint, based on alleged excessive trading, high turnover and cost-to-equity ratios, implausible break-even return requirements, and misleading statements and omissions about profitability and costs, plausibly stated antifraud claims under Securities Act § 17(a), Exchange Act § 10(b), and Rule 10b-5, so the case proceeded past the pleading stage.


Securities and Exchange Commission v. Botvinnik, 2019 WL 4738900 (2019)