United States Securities and Exchange Commission v. Carebourn Capital, L.P. et al

1
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION,
Plaintiff,
v.
CAREBOURN CAPITAL, L.P.;
CAREBOURN PARTNERS, LLC; and
CHIP ALVIN RICE;
Defendants.
No. 21-cv-2114 (KMM/JFD)
ORDER
The parties agree it is time for this civil-enforcement action to come to an end, but
they disagree on how. Plaintiff United States Securities and Exchange Commission
(“SEC”) asks the Court to voluntarily dismiss the action without prejudice (Dkt. 247),
whereas Defendants Carebourn Capital, L.P., Carebourn Partners, LLC, and Chip Alvin
Rice (together “Defendants”) seek a dismissal with prejudice. Defendants also ask the
Court to sanction the SEC under Rule 11 of the Federal Rules of Civil Procedure or its
inherent power, or to award fees under the Equal Access to Justice Act. (Dkt. 259.) For
the reasons that follow, the Court grants the SEC’s motion to dismiss without prejudice
and denies Defendants’ motion for sanctions.
BACKGROUND
The SEC filed this case in September 2021 (Dkt. 1), alleging that Defendants
bought and sold billions of newly issued shares of microcap securities without registering
as a “dealer” in violation of the Securities Exchange Act of 1934 (Exchange Act). See 15
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 1 of 22

2
U.S.C. § 78o(a)(1). On September 27, 2023, this Court granted the SEC’s motion for
summary judgment on liability and denied Defendants’ cross-motion for summary
judgment. (Dkt. 177.) The Court found that there was no dispute that Defendants acted as
a dealer, used the mails or others means of interstate commerce in their business,
purchased and sold securities, and failed to register as a dealer with the SEC or to
associate with an entity registered with the SEC, as required by law. (See id. at 13–14, 16,
32–33.) The Court also found that Defendants met the statutory definition of a “dealer”
under 15 U.S.C. §§ 78c(a)(5)(A)–(B), because they bought and sold securities for their
own account as part of a regular business. (See generally id.) The Court enjoined
Defendants from future violations of the Exchange Act’s dealer-registration provision,
imposed a three-year penny-stock bar, required Defendants to disgorge significant profits
and pay prejudgment interest, and ordered Defendants to surrender remaining shares of
certain stock for cancellation. (Dkt. 229.)
On November 5, 2024, Defendants filed an appeal with the United States Court of
Appeals for the Eighth Circuit. (Dkt. 231.) On June 5, 2025, while the appeal was
pending, the SEC filed a motion asking the Eighth Circuit to remand the matter to this
Court so that the SEC could file a Rule 60(b) motion asking this Court to vacate portions
of its remedies order. Specifically, the SEC advised: “On May 22, 2025, following the
change in administration, as an ‘exercise of its discretion and as a policy matter,’ the
Commission voluntarily dismissed several pending, pre-final judgment enforcement
actions alleging that the defendants acted as unregistered ‘dealers.’” SEC v. Carebourn
Cap., L.P., No. 24-3280 (8th Cir. June 5, 2025) (SEC’s Motion to Remand at 3). The
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 2 of 22

3
Eighth Circuit granted the SEC’s motion, vacated “the order(s) on appeal,” and remanded
the case to this Court “for further proceedings in light of the recent action taken by the
United States Securities and Exchange Commission on May 22, 2025, as detailed in the
[SEC’s motion].” (Dkt. 236.)(Id.)
Specifically, the vacated “order(s) on appeal” included:
• Order granting in part and denying in part the SEC’s motion to strike
Defendants’ affirmative defenses (Dkt. 63 (Apr. 12, 2022));
• Order denying Defendants’ motion for judgment on the pleadings (Dkt. 76
(May 24, 2022));
• Order denying Defendants’ motion for costs and attorney’s fees (Dkt. 164
(July 19, 2023));
• Order granting the SEC’s motion for summary judgment and denying
Defendants’ cross-motion for summary judgment, issued by United States
Magistrate Judge John F. Docherty (Dkt. 177 (Sept. 27, 2023));
• Order denying Defendants’ request for a jury trial on remedies (Dkt. 182
(Nov. 22, 2023));
• Order granting in part the SEC’s motion for remedies (Dkt. 229 (Sept. 20,
2024)); and
• Order entering final judgment against Defendants (Dkt. 230 (Sept. 23,
2024)).
(Dkt. 231.) The Eighth’s Circuit mandate issued on August 11, 2025, and this Court held
a status conference to obtain input from the parties on next steps. (Dkts. 238–39.)
In September 2025, the SEC filed a motion to dismiss the case voluntarily and
without prejudice, and Defendants filed their motion for sanctions.1 (Dkts. 247, 252.) The
parties’ motions are now fully briefed, and the Court addresses them below.
1 The matter was temporarily stayed from October 7, 2025 through November 14,
2025 during a lapse in appropriations. (Dkts. 265, 266.)
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 3 of 22

4
DISCUSSION
I. The SEC’s Motion to Dismiss
A. Rule 41(a)(2) Standard
The SEC moves for dismissal of this action, without prejudice, pursuant to Federal
Rule of Civil Procedure 41(a)(2). (Dkt. 249 at 1.) Under that rule, “an action may be
dismissed at the plaintiff’s request only by court order, on terms that the court considers
proper.” Fed. R. Civ. P. 41(a)(2). Unless an order dismissing a case under Rule 41(a)(2)
specifies otherwise, the dismissal is without prejudice. Id.
The district court has discretion to grant or deny a plaintiff’s motion to dismiss a
suit voluntarily. Beavers v. Bretherick, 227 Fed. App’x 518, 520 (8th Cir. 2007). “When
deciding whether to allow voluntary dismissal, the court should consider ‘whether the
party has presented a proper explanation for its desire to dismiss; whether a dismissal
would result in a waste of judicial time and effort; and whether a dismissal will prejudice
the defendant.’” C.H. Robinson Worldwide, Inc. v. Traffic Tech, Inc., 161 F.4th 1101,
1108 (8th Cir. 2025) (quoting Graham v. Mentor Worldwide LLC, 998 F.3d 800, 804–05
(8th Cir. 2021)). However, courts should not allow a party to dismiss a case “merely to
escape an adverse decision [or] to seek a more favorable forum.” Id. (quoting Graham,
998 F.3d at 805).
Applying Rule 41(a)(2), courts consider whether allowing a plaintiff to dismiss a
case without prejudice will cause a defendant “legal prejudice,” or “something other than
the necessity that defendant might face of defending another action.” Mullen v. Heinkel
Filtering Sys., Inc., 770 F.3d 724, 728 (8th Cir. 2014) (quoting Kern, 738 F.2d at 970).
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 4 of 22

5
Legal prejudice does not include the burden and expense of having to respond to
discovery or the loss of tactical advantages. Id. And it is “more than the fact that a
defendant might have to defend another action.” Blaes, 858 F.3d at 513.
“[D]istrict courts … retain discretion to guard against abuse and to dismiss with
prejudice in appropriate cases.” United States v. $32,820.56 in United States Currency,
838 F.3d 930, 936 (8th Cir. 2016). In considering whether voluntary Rule 41(a)(2)
dismissals should be with or without prejudice, the Eighth Circuit has provided the
following guidance:
Under Rule 41(a)(2), dismissals sought by the plaintiff are
without prejudice unless the district court’s order specifies
otherwise. Thus, Rule 41(a)(2) implicitly permits the district
court to dismiss an action with prejudice in response to a
plaintiff’s motion for dismissal without prejudice. When a
plaintiff requests dismissal without prejudice and the district
court intends to dismiss with prejudice, however, the district
court must give the plaintiff notice of its intention and a
chance to withdraw the request and proceed with litigation.
Otherwise, the district court would deny the plaintiff the
option of trying the case on the merits, because unlike a
dismissal without prejudice, a dismissal with prejudice
operates as a rejection of the plaintiff's claims on the merits
and res judicata precludes further litigation.
Jaramillo v. Burkhart, 59 F.3d 78, 79 (8th Cir. 1995) (internal citations omitted).
Other courts have noted that “dismissal with prejudice is the most severe sanction
that a court may apply, and its use must be tempered by a careful exercise of judicial
discretion.” United States v. $70,670.00 in U.S. Currency, 929 F.3d 1293, 1301 (11th Cir.
2019) (cleaned up). Dismissal with prejudice should occur only in cases with “a clear
record of delay or contumacious conduct by the plaintiff.” Id. (quotation omitted); see
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 5 of 22

6
also Clouse v. Big Sandy Reg. Det. Ctr., 289 F.R.D. 452, 454 (E.D. Ky. 2013) (noting
that courts consider “excessive delay and lack of diligence on the part of the plaintiff”
among other factors in deciding whether to dismiss with or without prejudice).
B. Analysis
In addressing the relevant factors below, the Court is mindful that the real question
in this case is not whether it should be dismissed, but whether the dismissal should be
with or without prejudice. The SEC provides a proper explanation for its request to
dismiss this action and the court finds it was made in good faith. See SnugglyCat, Inc.,
953 F.3d 522, 528 (8th Cir. 2020) (noting that the district court “expressly found the
motion [for voluntary dismissal was] made in good faith”). The SEC does not seek
dismissal to escape an adverse decision or to shop for a more favorable forum. And
dismissal of the action will not legally prejudice Defendants because it will not deprive
them of any substantive defense or claim in the litigation. There is no record of delay or
contumacious conduct by the SEC in this case. See $70,670.00 in U.S. Currency, 929
F.3d at 1301. Accordingly, the Court finds that dismissal is clearly appropriate and that it
should be without prejudice.
Proper Explanation. First, the SEC has presented a proper explanation for its
desire to dismiss the litigation. Following the 2024 presidential election and the
subsequent change in the administration, the SEC made a discretionary policy choice to
no longer pursue several unregistered-dealer cases, including this one. The SEC
apparently made that choice based on new agency priorities. The Eighth Circuit has
previously approved the government’s dismissal of an action without prejudice following
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 6 of 22

7
a change in policy, and this Court is aware of no authority to the contrary. See United
States v. $32,820.56 in United States Currency, 838 F.3d 930, 937 (8th Cir. 2016)
(stating that an executive agency’s “exercise of its prosecutorial discretion and a desire to
allocate resources elsewhere” was “a valid reason for seeking dismissal”).
Arguing to the contrary, Defendants suggest that the SEC does not offer a proper
explanation for seeking to dismiss, the agency’s actions before the Eighth Circuit reflect
an effort to avoid an unfavorable decision on appeal, and the agency pursued the action in
bad faith.2 (Dkt. 259 at 12–13.) But the record simply does not support Defendants’
assertion. Initially, the SEC prevailed on its claims in this Court and obtained most of the
relief it requested. After Defendants appealed, the SEC asked the Eighth Circuit to
remand the matter so it could file a Rule 60 motion in this Court to amend the judgment
to undo some of the relief that the SEC received. The Eighth Circuit took that approach
because the SEC identified a policy change adopted by a new administration. Nothing in
the record signals that the SEC changed course because an adverse ruling by the Eighth
Circuit was imminent.
In support of their argument that the Court should reject the SEC’s proffered
explanation for seeking dismissal, Defendants do not identify any reason to think that the
SEC is trying to avoid an adverse decision when it has already prevailed on the merits of
its claims. Defendants do not identify any caselaw addressing similar circumstances
where a court has reached that conclusion. Instead, Defendants point only to previous
2 As explained below in Part II, Defendants’ claim that this litigation was pursued
in bad faith is without merit.
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 7 of 22

8
internal disputes within the SEC about the propriety of pursuing enforcement actions
given the limits of then-existing agency guidance on who must register as a “dealer”
under the Exchange Act. But it is unclear how that debate shows that the SEC’s current
motivation for seeking a remand from the Eighth Circuit and dismissal of this action is to
avoid an adverse decision on the merits. Based on the record and the timing of the SEC’s
request, the request is clearly a result of the change in administration and the agency’s
priorities rather than bad faith.
Because the SEC has provided a valid explanation for seeking dismissal now and
is not seeking to dismiss the action to avoid an adverse ruling or to shop for a more
favorable forum, the Court finds these considerations weigh in favor dismissing the
action without prejudice.
Waste of Time and Effort. This case was heavily litigated. It progressed through
discovery, involved significant briefing on dispositive motions, and, ultimately, resulted
in a judgment in favor of the SEC and an appeal. Indeed, to progress to the point where
judgment was entered in favor of the SEC, the parties engaged in significant pre-trial
motion practices, extensive discovery, and several rounds of dispositive motion briefing
at summary judgment and regarding remedies. But the fact that substantial time and effort
has already been expended does not necessarily mean that a dismissal without prejudice
will waste resources. The Eighth Circuit has approved dismissals without prejudice in
other cases that have progressed to similar stages. See, e.g., $32,820.56 in United States
Currency, 838 F.3d at 933, 937–38 (affirming dismissal without prejudice after close of
discovery with trial several months away); Blaes v. Johnson & Johnson, 858 F.3d 508,
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 8 of 22

9
513–14 (8th Cir. 2017) (affirming dismissal without prejudice after two years of litigation
and significant court involvement in discovery and motion practice); Metro. Fed. Bank of
Iowa, F.S.B. v. W.R. Grace & Co., 999 F.2d 1257, 1262–63 (8th Cir. 1993) (affirming
dismissal without prejudice after defendant’s motion for summary judgment was filed);
Kern v. TXO Prod. Corp., 738 F.2d 968, 971 (8th Cir. 1984) (affirming voluntary
dismissal without prejudice where plaintiff had only one witness left to call at trial).
Still, the Court acknowledges that it has invested significant effort ruling on the
parties’ disputes in this case and the parties have, likewise, spent considerable time,
effort, and money in the litigation. Nobody is getting that time or money back, and
because the orders on appeal have been vacated in response to the SEC’s about-face,
dismissing this case without prejudice means that none of the claims and defenses will
have been finally adjudicated.3 At the same time, if the Court grants the SEC’s motion to
dismiss without prejudice it is extremely unlikely that the SEC will ever refile the same
claims against Defendants. This means that dismissal will not involve the time and
3 Cases often consider an objecting defendant’s request that if a Rule 41(a)(2)
dismissal is without prejudice, it be conditioned upon a requirement that the plaintiff pay
the defendant’s fees and costs incurred in the litigation. Blaes, 858 F.3d at 516
(remanding because “the amount of effort invested and the stage to which the case had
progressed required an analysis of whether costs and expenses should be awarded”);
Corning Inc. v. Wilson Wolf Mfg. Corp., 639 F. Supp. 3d 877, 883 (D. Minn. 2022). But
in those cases, defendants have specifically raised that issue, and Defendants have not
done so here. Accordingly, the Court finds any argument for conditioning dismissal
without prejudice on a payment of fees and costs has been waived. Moreover, the parties
do not direct the Court’s attention to any case in which a court has conditioned a federal
agency’s dismissal without prejudice on the government’s payment of the defendant’s
fees and expenses following a post-election policy change.
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 9 of 22

10
expense of relitigating the SEC’s claims. Under these circumstances, the Court finds this
factor does not require dismissal with prejudice.
Legal Prejudice. The last factor for the Court to consider is whether granting the
SEC’s request for dismissal without prejudice will cause Defendants to suffer legal
prejudice. Defendants argue that failing to dismiss this case with prejudice will harm
them in several ways: the reputational harm from the SEC’s allegations and pursuit of
this case, which has labeled them as bad actors and a “risk” for insurance purposes, will
linger; the SEC subjected them to years of expensive, protracted litigation, which could
recur; the litigation has caused serious stress and anxiety for Mr. Rice that is ongoing;
and they face the risk of future litigation that would deprive them of a statute-of-
limitations defense and other tactical advantages. (See generally Dkt. 259.)
These asserted harms do not constitute the kind of “legal prejudice” contemplated
by the caselaw.4 See $70,670.00 in United States Currency, 929 F.3d at 1300 (explaining
that the “crucial question” is whether “the defendant [would] lose any substantial right by
the dismissal”); see also SEC v. One or More Unknown Purchasers of Sec. of Telvent Git,
SA, No. 11-cv-3794, 2013 WL 1683665, at *2 (S.D.N.Y. Apr. 17, 2013) (“It is the
4 While the Court does not doubt that the litigation has had a negative effect on
Defendants’ businesses and reputations, as well as Mr. Rice’s own reputation and mental
health, Defendants rely primarily on out-of-circuit case law to support consideration of
these types of harm. They point only to one Eighth Circuit decision, Paulucci v. City of
Duluth, 826 F.2d 780, 783 (8th Cir. 1987), but there the court merely observed that the
“Third Circuit identified other types of prejudice which might support the denial of a
motion for voluntary dismiss” such as “emotional and psychological trauma associated
with the experience of defending another lawsuit[.]” Id. (citing Ferguson v. Eakle, 492
F.2d 26, 29 (3d Cir. 1974)). But the Paulucci court did not weigh that factor in its
analysis and Defendants point to no other case in which the Eighth Circuit has applied it.
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 10 of 22

11
regrettable inevitability of litigation that most lawsuits harm the reputations of their
defendants. Therefore, [if] the filing of a lawsuit against them amounts to ‘substantial
prejudice’ [that] would eliminate the possibility of dismissal without prejudice in very
many, if not most lawsuits.”).
Only Defendants’ argument regarding the statute of limitations requires any
additional comment. It is true that a defendant suffers “clear legal prejudice” when a case
is dismissed under Rule 41(a)(2) “in the face of a valid statute of limitations defense.”
Metro. Fed. Bank of Iowa, F.S.B. v. W.R. Grace & Co., 999 F.2d 1257, 1262–63 (8th Cir.
1993). However, Defendants have not shown that granting the SEC’s motion to dismiss
will deprive them of a statute-of-limitations defense. In fact, Defendants currently have
no such defense in this action. But if the Court dismisses this case without prejudice, and
if the SEC decides to refile this suit, which is extremely unlikely, the Defendants’
timeliness defense to such future litigation would only improve.5
The Court finds Defendants’ remaining arguments lack merit. For these reasons,
the SEC’s motion to voluntarily dismiss this action without prejudice is granted.
5 The SEC moved for summary judgment on Defendants’ statute of limitations
defense (Dkt. 127 at 36–37), and the Court found that Defendants waived any argument
related to that defense (Dkt. 177 at 33–34). The statute of limitations is five years for the
SEC’s claims for a civil penalty and disgorgement. See 28 U.S.C. § 2462; 15 U.S.C.
§ 78u(d)(8)(A); see also Kokesh v. SEC, 581 U.S. 455, 466–67 (2017). With respect to
the SEC’s request for injunctive relief and a penny stock bars, the statute of limitations is
ten years. 15 U.S.C. § 78u(d)(8)B). If it hasn’t expired already, the five-year limitations
period soon will, and therefore, any effort to refile this suit by the SEC would mean that
the Defendants could raise the time bar in a way they cannot in this action.
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 11 of 22

12
II. Defendants’ Motion for Sanctions
Next, the Court turns to Defendants’ request for sanctions. Defendants seek
sanctions against the SEC pursuant to Rule 11 of the Federal Rules of Civil Procedure
and the Court’s inherent authority, or, in the alternative, an award of attorney’s fees and
costs under the Equal Access to Justice Act (EAJA). Specifically, Defendants argue that
the SEC engaged in “misconduct of the legal process” and “arguably vindictive litigation
practices against Defendants.” (Dkt. 254 at 2.) Defendants’ motion is denied in all
respects.
A. Legal Standards
Rule 11
“The primary purpose of Rule 11 sanctions is to deter attorney and litigant
misconduct[.]” Vallejo v. Amgen, Inc., 903 F.3d 733, 747 (8th Cir. 2018) (quotation and
bracket omitted). Courts may impose sanctions under Rule 11 under the following
circumstances:
when a pleading, written motion or other paper (1) is
submitted to the court for an improper purpose, such as to
harass or to cause unnecessary delay or needless increase in
the cost of litigation; (2) is not supported by existing law or a
nonfrivolous argument for the extension, modification or
reversal of existing law; or (3) if the allegations contained
therein lack evidentiary support.
R&A Small Engine, Inc. v. Midwest Stihl, Inc., 471 F. Supp. 2d 977, 978–79 (D. Minn.
2007) (quotation omitted). Before signing a document filed with a court, Rule 11 requires
counsel to “conduct a reasonable inquiry into the factual and legal basis for a claim.”
Igbanugo v. Minn. Off. of Laws. Pro. Resp., 56 F.4th 561, 567 (8th Cir. 2022) (citing
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 12 of 22

13
Coonts v. Potts, 316 F.3d 745, 753 (8th Cir. 2003)). “In determining whether sanctions
are warranted, the court considers whether a reasonable and competent attorney would
believe in the merit of the argument.” R&A Small Engine, Inc., 471 F. Supp. 2d at 979
(cleaned up).
Rule 11 has a “safe harbor” provision under which a litigant seeking sanctions
must make the motion “separately from any other motion,” serve the motion on the
allegedly sanctionable party prior to filing, and wait at least 21 days after serving it to file
the motion to allow the other party to withdraw or correct the improper filing. Fed. R.
Civ. P. 11(c)(2). This “safe-harbor provision is a strict procedural requirement,” and
failure to provide advance notice of the motion requires denial of the request for
sanctions. See Caranchini v. Nationstar Mortg., LLC, 97 F.4th 1099, 1102–03 (8th Cir.
2024) (quoting Star Mark Mgmt., Inc. v. Koon Chun Hing Kee Soy & Sauce Factory,
Ltd., 682 F.3d 170, 175 (2d Cir. 2012)).
Inherent Authority
Within the courts’ inherent authority “to manage their own affairs so as to achieve
the orderly and expeditious disposition of cases[,]” Goodyear Tire & Rubber Co. v.
Haeger, 581 U.S. 101, 107 (2017) (quoting Link v. Wabash R. Co., 370 U.S. 626, 630–31
(1962)), is the power “to fashion an appropriate sanction for conduct which abuses the
judicial process,” id. (quoting Chambers v. NASCO, Inc., 501 U.S. 32, 44–45 (1991)).
For example, if a party acts in bad faith, the court may require that party “to reimburse
legal fees and costs incurred by the other side.” Goodyear, 581 U.S. at 107. However,
because a court’s inherent powers are “very poten[t],” courts should “exercise[] [them]
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 13 of 22

14
with restraint and discretion.” Schlafly v. Eagle F., 970 F.3d 924, 936–37 (8th Cir. 2020)
(quoting Chambers, 501 U.S. at 44–45). Any attorney’s-fees sanction imposed by the
court for bad-faith litigation conduct must be purely compensatory—it “may not impose
an additional amount as punishment for the sanctioned party’s misbehavior.” Goodyear,
581 U.S. at 108. Federal courts have discretion in determining whether to impose
sanctions under their inherent power. See Chambers, 501 U.S. at 55 (reviewing the
district court’s imposition of sanctions under its inherent power for abuse of discretion);
Schlafly, 970 F.3d at 937 (referring to the district court’s “informed discretion”).
“[A]n award of attorneys’ fees is permissible under a court’s inherent powers as
long as the person being sanctioned has demonstrated bad faith.” Willhite v. Collins, 459
F.3d 866, 870 (8th Cir. 2006) (citing Roadway Express, Inc. v. Piper, 447 U.S. 752, 766–
67 (1980)).6 Actions in litigation may constitute “bad faith” if a party “intentionally
advanced a frivolous contention for an ulterior purpose, such as harassment or delay.”
Actors’ Equity Ass’n v. Am. Dinner Theatre Institute, 802 F.2d 1038, 1043 (8th Cir.
1986).
6 As the undersigned has previously explained, existing caselaw indicates that a
finding of bad faith is required for an attorney’s-fees sanction under a court’s inherent
power. Smith v. Bradley Pizza, Inc., No. 17-cv-2032 (WMW/KMM), 2018 WL 2538362,
at *3 (D. Minn. June 4, 2018) (Menendez, M.J.). Even if a showing of bad faith is not
strictly required to impose an attorney’s-fees sanction under the Court’s inherent power,
for all the reasons discussed below, the Court finds that such a sanction would be
unwarranted under the circumstances of this case.
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 14 of 22

15
EAJA
Under the EAJA,
a court shall award to a prevailing party other than the United
States fees and other expenses . . . incurred by that party in
any civil action . . . brought by or against the United States in
any court having jurisdiction of that action, unless the court
finds that the position of the United States was substantially
justified or that special circumstances make an award unjust.
28 U.S.C. § 2412(d)(1)(A). The government’s position is “substantially justified” when it
“has a reasonable basis in law and fact.” United States v. Hurt, 676 F.3d 649, 652 (8th
Cir. 2012) (quoting Bah v. Cangemi, 548 F.3d 680, 683–84 (8th Cir. 2008)).
B. Analysis
Defendants argue that the Court should impose sanctions on the SEC for two
reasons. First, Defendants claim that the SEC made a “misrepresentation” to the Court by
“argu[ing] that the Commission’s definition of the rule was clear and without dispute.”
(Dkt. 254 at 6.) In making this argument, they point to statements made by SEC
Commissioner Mark Uyeda indicating that the commissioners themselves were not in full
agreement about the SEC’s so-called “dealer rule,” which was adopted in February
2024.7 According to Defendants, neither the SEC nor their counsel disclosed
Commissioner Uyeda’s position to the Court or to Defendants, which constituted a
sanctionable misrepresentation. Second, Defendants assert that the SEC’s claims were not
pursued in good faith because after the SEC adopted the “Dealer Rule,” a federal district
7 See Further Definition of “As a Part of a Regular Business” in the Definition of
Dealer and Government Securities Dealer in Connection With Certain Liquidity
Providers, 89 Fed. Reg. 14938 (Feb. 29, 2024).
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 15 of 22

16
court in Texas vacated that rule as having been improperly issued by the SEC in two
separate decisions. See Nat’l Ass’n of Priv. Fund Managers v. SEC, No. 4:24-cv-00250-
O, 2024 WL 4858589, at *8–10 (N.D. Tex. Nov. 21, 2024) (“NAPFM”); Crypto Freedom
All. of Tex. v. SEC, No. 4:24-cv-00361-O, 2024 WL 4858590, at *5 (N.D. Tex. Nov. 21,
2024) (“CFAT”). (See Dkt. 254 at 11–13.) Alternatively, Defendants argue that they are
entitled to recover their reasonable attorney’s fees under the EAJA because they are a
prevailing party, and the SEC’s position was not substantially justified. (Dkt. 254 at 16–
17.) As explained below, Defendants’ position is meritless.
Rule 11 Sanctions. Critically, with respect to Rule 11, Defendants are not entitled
to sanctions because they failed to show compliance with the rule’s safe-harbor
provision. Caranchini, 97 F.4th at 1102–03; see also e.g., Backpage.com, LLC v. Schmitt,
No. 4:17-CV-1951 PLC, 2019 WL 2285909, at *11 (E.D. Mo. May 29, 2019) (“A district
court abuses its discretion if it awards Rule 11 sanctions based on a motion that does not
comply with the safe harbor provision in that the motion ‘was not made separately from
other motions or requests and the moving party did not serve a prepared motion on the
party to be sanctioned 21 days prior to making any request for Rule 11 sanctions to the
court.’” (quoting Gordon v. Unifund CCR Partners, 345 F.3d 1028, 1030 (8th Cir. 2003))
(cleaned up)). Defendants do not suggest that they complied with any part of this
procedural requirement or even attempted to do so. (Dkt. 272 at 6 n.1 (noting, in
opposition to Defendants’ motion for sanctions, their failure to comply with the
applicable procedural requirements); Dkt. 274 at 4–5 (arguing that the requirements are
not mandatory without refuting claims of noncompliance).) The safe-harbor provision is a
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 16 of 22

17
“strict procedural requirement,” Caranchini, 97 F.4th at 1102 (quoting Star Mark Mgmt.,
Inc., 682 F.3d at 175), and Defendants’ failure to comply with it in any respect is an
independent and sufficient basis to deny any request for sanctions under Rule 11.
Even aside from Defendants’ failure to comply with Rule 11’s safe-harbor
provision, Defendants point to nothing in the record to demonstrate that the SEC violated
Rule 11. In fact, they hardly engage with the rule or the required showing in a meaningful
way. They provide no evidence to suggest that the SEC submitted anything to the Court
for an improper purpose, such as to harass Defendants, unnecessarily delay the litigation,
or needlessly increase the cost of litigation. Fed. R. Civ. P. 11(b)(1). Nor have they
shown that the SEC filed its complaint or moved for any relief without support in existing
law. Fed. R. Civ. P. 11(b)(2). And they do not suggest that the SEC’s complaint or any of
its motions lacked evidentiary support. Fed. R. Civ. P. 11(b)(3).
The closest Defendants get to addressing Rule 11’s substantive prohibitions is
their argument that the SEC lacked sufficient legal support for the claim that Defendants
were required to register as “dealers” under the Exchange Act based on their conduct.
Defendants suggest that the SEC should never have brought its dealer-registration claim
against them because the SEC knew when filing this lawsuit that the claim was
unsupported by law and the lawsuit fundamentally unfair. (See Dkt. 274 at 5 (“The SEC’s
complaint was intentionally frivolous and vexatious.”).) But in so doing, they rely on
events that occurred long after the SEC filed this case to support their position. Both
Commissioner Uyeda’s statements expressing misgivings about the dealer rule and the
Northern District of Texas rulings vacating the Dealer Rule in the NAPFM and CFAT
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 17 of 22

18
cases occurred years after the SEC brought this action. Indeed, before these events
occurred, this Court had already ruled in favor of the SEC on the issue of Defendants’
liability under the Exchange Act’s dealer-registration requirement. (Dkt. 177.)
Giving them the benefit of the doubt, perhaps Defendants also mean to suggest
that the SEC should have withdrawn its failure-to-register claim based on Commissioner
Uyeda’s comments8 or, later, when the Northern District of Texas’s decisions in NAPFM
and CFAT were issued. Cf. Actors’ Equity Ass’n, 802 F.2d at 1042 (indicating that
imposition of attorney’s fees may be appropriate where arguments are made that are
“frivolous, unreasonable, groundless, or where the party continued to litigate after it
clearly became so”). But both have to do with concerns about the propriety of the
adoption of the Dealer Rule specifically, and the SEC’s claims in this case do not depend
on the type of trading activity that the Dealer Rule was intended to address. The SEC’s
claims in this case are based on Section 15(a)(1) of the Exchange Act, and that statutory
definition is what the SEC asked this Court to apply when the agency moved to strike
certain affirmative defenses, sought summary judgment, and later requested that the
Court award particular forms of relief. Even now, with the SEC’s motion for voluntary
dismissal, the SEC is not asking the Court to enforce or implement the administrative
Dealer Rule in any way.
Under these circumstances, the Court finds no support for Defendants’ request for
Rule 11 sanctions.
8 Defendants’ suggestion that the SEC made a misrepresentation by failing to
disclose Commissioner Uyeda’s comments is unpersuasive because those comments were
made publicly.
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 18 of 22

19
Inherent Power. Defendants do not differentiate between Rule 11 and the Court’s
inherent power to impose sanctions in their opening memorandum and instead advance
the same rationale in support of both bases for sanctions. Of course, Defendants’ failure
to comply with Rule 11’s requirements does not prevent the Court from finding
misconduct sanctionable under its inherent power. But for the same substantive reasons
that Defendants’ request for attorney’s fees under Rule 11 is denied, the Court declines to
exercise its inherent power to sanction the SEC by requiring it to pay Defendants’ fees.
Defendants have made no showing that the SEC filed this case in bad faith; they have not
demonstrated that the SEC made any misrepresentation to the Court or to Defendants at
any point in the litigation; the SEC did not advance any frivolous arguments; and there is
no evidence that the SEC took any action in the case for an improper purpose. The
request for sanctions under the Court’s inherent power is, therefore, denied.
Fees and Costs under the EAJA. Finally, the Court finds that Defendants are not
entitled to an award of attorney’s fees under the EAJA. Because the Court concludes that
dismissal without prejudice is appropriate, Defendants are not a prevailing party. Cf.
SnugglyCat, Inc. v. Opfer Commc’ns, Inc., 953 F.3d 522, 527 (8th Cir. 2020) (concluding
that a party was not a “prevailing party” and therefore could not obtain attorney’s fees
under the Lanham Act because the case was dismissed without prejudice) (citing
Advantage Media, L.L.C. v. City of Hopkins, 511 F.3d 833, 837 (8th Cir. 2008)).
Defendants rely on cases that are distinguishable. In Securities Exchange
Commission v. Comserv Corporation, which Defendants cite in their reply (Dkt. 274 at
16), there was no dispute that the defendant was a prevailing party after the SEC failed to
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 19 of 22

20
obtain any relief in the district court, and the defendant “was found not to have
committed the alleged violations and no injunction was granted.” 908 F.2d 1407, 1412
(8th Cir. 1990). Here, in contrast, the SEC voluntarily changed its position, which led the
Eighth Circuit to vacate this Court’s orders on appeal so the SEC could move for
dismissal of this case. Under these circumstances, Defendants are not a “prevailing party”
such that they are entitled to attorney’s fees.
Moreover, even if Defendants qualified as prevailing parties, the SEC’s position in
this litigation was substantially justified and thus precludes an award of attorney’s fees.
Multiple decisions in other unregistered-dealer cases supported the SEC’s position
throughout this case. See, e.g., SEC v. Keener, 580 F. Supp. 3d 1272, 1286–89 (S.D. Fla.
2022), aff’d, 102 F.4th 1328 (11th Cir. 2024); SEC v. Almagarby, No. 17-cv-62225-CIV-
COOKE/HUNT, 2021 WL 4461831, at *3 (S.D. Fla. Aug. 16, 2021), aff’d in part and
rev’d in part on other grounds, 92 F.4th 1306 (11th Cir. 2024); SEC v. Fierro, No. 20-
02104 (GC), 2023 WL 4249011, at *7 (D.N.J. June 29, 2023). This Court’s decisions
denying Defendants’ motion to dismiss, denying Defendants’ motion for summary
judgment, granting the SEC’s motion for summary judgment, and granting the SEC’s
request for remedies also indicate that the agency’s position in the litigation was
substantially justified. See United States v. Thouvenot, Wade & Moerschen, Inc., 596
F.3d 378, 382 (7th Cir. 2010) (noting “a presumption that a government case strong
enough to survive both a motion to dismiss and a motion for summary judgment is
substantially justified”). Moreover, nothing Defendants point to now causes the Court to
second-guess its previous conclusions that the SEC’s claim finds support in the plain
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 20 of 22

21
language of the Exchange Act and the extensive evidence of Defendants’ microcap
securities transactions. In short, there was ample basis in both law and fact for the SEC’s
position in this case, and Defendants arguments otherwise have no legal basis. (Dkt. 274
at 19–20.)
Finally, contrary to Defendants’ contention, the Eighth Circuit’s judgment
vacating this Court’s orders on appeal does not show that the SEC lacked a substantial
justification for its position. The remand here was not the result of any determination by
the Eighth Circuit that the SEC’s unregistered-dealer claim lacked evidentiary or legal
support. Rather, the Court of Appeals vacated the orders on appeal after the SEC sought a
remand in light of the agency’s recent dismissal of other enforcement cases involving
alleged unregistered dealers engaged in conduct similar to that of Defendants.
In sum, there is no basis to impose sanctions on the SEC or to permit Defendants
to recover an award of their attorney’s fees under Rule 11, the court’s inherent authority,
or the EAJA. Therefore, Defendants’ motion is denied.9
ORDER
For the reasons set forth above, IT IS HEREBY ORDERED THAT:
1. Plaintiff’s Motion to Voluntarily Dismiss Without Prejudice (Dkt. 247) is
GRANTED;
9 The Court also finds that Defendants’ request for costs under the EAJA is
unsupported. The EAJA states that costs are recoverable by a prevailing party in a civil
action brought by a federal agency, unless a statute provides otherwise. 28 U.S.C.
§ 2412(a)(1). Under Section 27 of the Exchange Act, recovery of costs against the SEC is
prohibited. 15 U.S.C. § 78aa(a) (“No costs shall be assessed for or against the
Commission in any proceeding under this chapter brought by or against it in the Supreme
Court or such other courts.”).
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 21 of 22

22
2. Defendants’ Motion for Sanctions and Costs (Dkt. 252) is DENIED; and
3. This action is DISMISSED WITHOUT PREJUDICE.
Let Judgment be entered accordingly.
Date: March 10, 2026 s/Katherine Menendez
Katherine Menendez
United States District Judge
CASE 0:21-cv-02114-KMM-JFD Doc. 276 Filed 03/10/26 Page 22 of 22