United States Securities and Exchange Commission v. Carebourn Capital

Case: United States Securities and Exchange Commission v. Carebourn Capital, L.P.; Carebourn Partners, LLC; and Chip Alvin Rice Court: U.S. District Court, District of Minnesota Judge: Katherine Menendez, United States District Judge Date: March 10, 2026 Docket: No. 21-cv-2114 (KMM/JFD)

Background

The SEC filed this civil enforcement action in September 2021 alleging that Carebourn Capital, L.P., Carebourn Partners, LLC, and Chip Alvin Rice (collectively, 'Defendants') bought and sold billions of newly issued shares of microcap (very small company) securities without registering as a 'dealer' as required by Section 15(a)(1) of the Securities Exchange Act of 1934, 15 U.S.C. § 78o(a)(1).

On September 27, 2023, the court granted the SEC's motion for summary judgment (a ruling before trial based on undisputed facts) and denied the defendants' cross-motion for summary judgment. The court found the defendants met the statutory definition of a 'dealer' — they bought and sold securities for their own account as part of a regular business. The court entered a final judgment that: enjoined (legally prohibited) the defendants from future violations of the dealer-registration requirement; imposed a three-year penny-stock bar; required disgorgement (repayment) of significant profits plus prejudgment interest; and ordered surrender of remaining shares for cancellation.

Defendants appealed to the U.S. Court of Appeals for the Eighth Circuit in November 2024. While the appeal was pending, in June 2025 the SEC asked the Eighth Circuit to remand (return) the case to the district court, explaining that on May 22, 2025, following a change in presidential administration, the SEC had voluntarily dismissed several pending enforcement actions alleging unregistered-dealer violations as 'an exercise of its discretion and as a policy matter.' The Eighth Circuit granted the remand and vacated (nullified) all orders on appeal, which encompassed virtually every significant ruling in the case, including the summary judgment order, the remedies order, and the final judgment. The case returned to the district court, where in September 2025 the SEC moved to dismiss without prejudice under Federal Rule of Civil Procedure 41(a)(2), and Defendants moved for sanctions.

The SEC's Motion to Dismiss (Rule 41(a)(2))

Analysis

- Proper Explanation: The court found the SEC offered a valid, good-faith explanation: a genuine policy change adopted by the new administration resulting in discontinuation of unregistered-dealer enforcement cases. The court cited Eighth Circuit precedent approving an executive agency's dismissal based on 'prosecutorial discretion and a desire to allocate resources elsewhere.' The court rejected the defendants' argument that the SEC was trying to avoid an adverse appellate ruling, noting the SEC had already prevailed on the merits and obtained most of the relief it sought. No imminent adverse ruling was identified in the record.

- Waste of Resources: The court acknowledged the case was heavily litigated — extensive discovery, dispositive motions, a judgment, and an appeal — and that judicial and party resources could not be recovered. However, citing multiple Eighth Circuit decisions approving without-prejudice dismissals at comparable or later stages, the court found that if the SEC filed no new action (which the court found extremely unlikely), there would be no relitigation cost. The court also noted that defendants had not requested any condition requiring the SEC to pay their costs as a price of dismissal without prejudice, and found any such argument waived.

- Legal Prejudice: The court found no cognizable legal prejudice to defendants. It rejected as legally insufficient the defendants' claimed harms: reputational damage, emotional and financial costs of past and potential future litigation, and stress and anxiety to Mr. Rice. As to the statute of limitations: the court found defendants currently had no statute-of-limitations defense available (having previously waived it in this action) and that any refiled case would only improve defendants' timeliness position because the five-year limitations period for civil penalties and disgorgement (28 U.S.C. § 2462) was soon to expire or had already done so.

Defendants' Motion for Sanctions (Rule 11, Inherent Power, and EAJA)

Rule 11 Sanctions

Rule 11 of the Federal Rules of Civil Procedure requires attorneys to certify that filings are not submitted for improper purposes, are supported by existing law or a nonfrivolous argument, and contain factually supported allegations. Rule 11 also has a 'safe harbor' provision: a party seeking sanctions must file the motion separately, serve it on the opposing party at least 21 days before filing with the court (to allow withdrawal or correction), and comply strictly with this procedure.

The court denied Rule 11 sanctions on two independent grounds. First, Defendants failed entirely to comply with the safe-harbor provision — they did not serve a separate sanctions motion on the SEC 21 days before filing, a strict procedural requirement whose violation alone is sufficient to deny the motion. Second, on the merits, Defendants failed to show that the SEC filed anything for an improper purpose, without legal support, or without evidentiary support. The court found that Defendants' two main contentions — that the SEC misrepresented the clarity of the dealer-registration rule by not disclosing SEC Commissioner Mark Uyeda's internal dissenting views, and that the SEC's claims were invalidated by a Texas federal court's later vacatur of the administratively adopted 'Dealer Rule' — were unavailing. Commissioner Uyeda's statements were made publicly (negating any concealment theory), and both those statements and the Texas decisions (NAPFM and CFAT) occurred years after the SEC filed this case and after this court had already ruled in the SEC's favor on liability. Moreover, the SEC's claims rested on the statutory text of Section 15(a)(1) of the Exchange Act, not on the separately adopted administrative Dealer Rule.

Inherent Authority

Federal courts have inherent power to sanction bad-faith litigation conduct, including by awarding attorney's fees. The court denied sanctions under this authority for the same substantive reasons: no showing of bad faith, no misrepresentation, no frivolous arguments, and no improper purpose. The court emphasized that any such award must be purely compensatory, not punitive.

Equal Access to Justice Act (EAJA)

The EAJA, 28 U.S.C. § 2412(d)(1)(A), allows a party that prevails against the federal government in litigation to recover attorney's fees unless the government's position was 'substantially justified' (meaning it had a reasonable basis in law and fact).

The court denied EAJA fees on two independent grounds. First, because the case was dismissed without prejudice, Defendants are not a 'prevailing party' — the Eighth Circuit has held that a party is not a prevailing party when a case is dismissed without prejudice. Second, even if Defendants qualified as prevailing parties, the SEC's position was substantially justified throughout the litigation: multiple other courts had upheld the SEC's unregistered-dealer theory; this court had denied the defendants' motions to dismiss and for summary judgment and granted the SEC's motion; and the Eighth Circuit's vacatur of this court's orders resulted from the SEC's own policy change, not from any determination that the SEC's legal or factual position was unsound. The court also noted that costs against the SEC are prohibited by Section 27 of the Exchange Act, 15 U.S.C. § 78aa(a).

Final Order 1. Plaintiff's Motion to Voluntarily Dismiss Without Prejudice (Dkt. 247) — GRANTED. 2. Defendants' Motion for Sanctions and Costs (Dkt. 252) — DENIED. 3. This action is DISMISSED WITHOUT PREJUDICE.