U.S. District Judge Julie S. Sneed issued an order on Tuesday saying the SEC has sufficiently pleaded its counts against Ashraf Mufareh, his wife Asmahan Mufareh and their company OnPassive LLC.
The SEC launched its suit against the couple and OnPassive last year, claiming they fraudulently raised $108 million from more than 800,000 investors across the globe from July 2018 till the time the suit was filed for a purported artificial intelligence development company.
Investors were pitched the opportunity to purchase a position in a multilevel marketing, or MLM, pyramid structure for $97, which would purportedly lock in their positions before the launch of any product and before others bought into the scheme.
The defendants moved to dismiss the suit in November, arguing in part that the SEC's claims about their business model fail to show how it is illegal.
However, Judge Sneed noted on Tuesday that much of the amended complaint is devoted to describing the alleged scheme, including how Mufareh started it, how it worked, the strategies he and OnPassive used to continue it, the fake review websites they created, the amount of money that investors were told they would receive, and the dates on which Mufareh and OnPassive engaged in misconduct.
"The amended complaint frequently answers the 'who, what, when[,] where, and how' questions concerning the alleged scheme," the order states.
The defendants also argued that the suit should be dismissed because the amended complaint does not allege any actionable misstatements or omissions to constitute securities fraud, nor does it adequately allege scienter by Mufareh.
However, Judge Sneed disagreed. First, she said that, as OnPassive's CEO, Mufareh possessed significant information about the purported investment program that was contrary to the public statements he made. The judge also said the defendants' failure to disclose OnPassive's involvement amounts to a material omission.
She added that none of the identified challenged statements are "unimportant enough to a reasonable investor to justify their dismissal as puffery at the pleading stage," and the defendants' use of disclaimers does not render any of the challenged statements inactionable.
Next, Judge Sneed said the complaint's allegations that Mufareh and OnPassive falsely advertised "outlandish potential passive or 'residual' returns to investors that could last 'for life,'" and that Mufareh used investor funds to further the scheme and pay for his and his wife's personal expenses all support a claim of scienter.
The defendants also argued for dismissal, saying the entire amended complaint is full of shotgun pleading since it is "replete with conclusory, vague, and immaterial facts not obviously connected to any particular cause of action."
However, Judge Sneed again disagreed on Tuesday, saying the complaint contains "general factual allegations that are relevant to [almost] all of [the SEC's] claims."
Finally, the judge declined to dismiss Mufareh's wife, Asmahan Mufareh, as a relief defendant under the equitable theory of unjust enrichment. The defendants argued that Asmahan Mufareh did not receive anything other than routine compensation.
But Judge Sneed said, "given the well-supported allegations that Mr. Mufareh acted as OnPassive's CEO and Mrs. Mufareh merely received funds from her husband and used them for personal expenses, the amended complaint adequately pleads that Mrs. Mufareh' acted as a mere conduit of proceeds from the underlying statutory violation[s]' allegedly committed by Mr. Mufareh and OnPassive."
The SEC declined to comment on Wednesday, and counsel for the defendants did not immediately respond to requests for comment.
The SEC is represented in-house by Michael J. Friedman.
The Mufarehs and OnPassive are represented by Christopher Garcia, William O. Reckler, Alexis Kellert Godfrey and Alexander L. Mills of Latham & Watkins LLP, and John E. Clabby and Jason A. Perkins of Carlton Fields.
The case is Securities and Exchange Commission v. Mufareh et al., case number 6:23-cv-01539, in the U.S. District Court for the Middle District of Florida.
--Editing by Vaqas Asghar.
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