Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 1 of 34 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ) SECURITIES AND EXCHANGE COMMISSION, ) ) Plaintiff, ) ) v. ) Case No. 1:17-cv-2630 (JFK) ) MUSTAFA DAVID SAYID and ) NORMAN T. REYNOLDS, ) ) Defendants. ) ) PLAINTIFF S MEMORANDUM OF LAW IN SUPPORT OF MOTION FOR SUMMARY JUDGMENT Richard M. Harper II (Admitted Pro Hac Vice) Michael J. Vito (Admitted Pro Hac Vice) Dahlia Rin (Admitted Pro Hac Vice) SECURITIES AND EXCHANGE COMMISSION Boston Regional Office 33 Arch Street Boston, MA 02110 (617) 573-8979 (Harper direct) (617) 573-4590 (fax) harperr@sec.gov (Harper email)
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 2 of 34 Table of Contents INTRODUCTION...1 FACTS...2 I. Sayid, Nouveau and the SEC s prior enforcement action...2 II. Sayid s search for Aged-Debt to offer and sell stock...4 III. Sayid s negotiation with Affa, Brown and the Belizean nominee entities...4 IV. Reynolds and the requests for an opinion letter to remove resale restriction...6 V. Reynolds issuance of opinion letters...8 VI. Reynolds duty of care...13 VII. Sayid s receipt of $25,000 as share of sale proceeds...14 ARGUMENT...15 I. Sayid and Reynolds violated of Section 5 of the Securities Act...15 II. Sayid and Reynolds violated the anti-fraud provisions of the Federal securities laws...19 A. Sayid made false statements of material fact and obtained money through their use...20 B. Sayid used a deceptive device...21 C. Sayid acted with scienter...21 D. Reynolds obtained money by making false statements of material fact...22 E. Reynolds acted with scienter...23 F. Reynolds acted negligently in violating his duty of care...27 CONCLUSION...29 i
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 3 of 34 Table of Authorities Supreme Court of the United States Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011)...22 Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976)...23 Second Circuit Court of Appeals SEC v. Frohling, 851 F.3d 132 (2d Cir. 2016)... 15-16, 18 SEC v. Ginder, 752 F.3d 569 (2d Cir. 2014)...27 SEC v. Obus, 693 F.3d 276 (2d Cir. 2012)...23 SEC v. Cavanagh, 445 F.3d 105 (2d Cir. 2006)...7 SEC v. Kern, 425 F.3d 143 (2d Cir. 2005)...6 SEC v. Research Automation Corp., 585 F.2d 31 (2d Cir. 1978)... 20-21, 23 SEC v. Frank, 388 F.2d 486 (2d Cir. 1968)...24 United States District Courts SEC v. Sayid, 17-cv-2630-JFK, 2018 WL 357320 (S.D.N.Y. Jan. 10, 2018)... 19, 26 & n.2, 29 SEC v. DiMaria, 207 F. Supp.3d 343 (S.D.N.Y. 2016)...23 In re Braskem S.A. Sec. Litig., 246 F. Supp.3d 731 (S.D.N.Y. 2017)...22 SEC v. Cole, 12-cv-8167, 2015 WL 5737275 (S.D.N.Y. Sept. 19, 2015)...27 St. Paul Mercury Ins. Co. v. M & T Bank Corp., 12-cv-6322-JFK, 2014 WL 641438 (S.D.N.Y. Feb. 19, 2014)...15 SEC v. Syron, 934 F.Supp.2d 609 (S.D.N.Y. 2013)...23 SEC v. Czarnik, 10-cv-745-PKC, 2010 WL 4860678 (S.D.N.Y. Nov. 29, 2010)... 15-16 SEC v. Greenstone Holdings, Inc., 10-cv-1302-MGC, 2012 WL 1038570 (S.D.N.Y. Mar. 28, 2012)...18, 25 SEC v. Ramoil Mgmt., Ltd., 01-cv-9057-SC, 2007 WL 3146943 (S.D.N.Y. Oct. 25, 2007)...18, 20, 23 SEC v. Save the World Air, Inc., 01-cv-11586, 2005 WL 3077514 (S.D.N.Y. Nov. 15, 2005)... 23-24 SEC v. Credit Bancorp Ltd., 195 F. Supp.2d 475 (S.D.N.Y. 2002)...24 Statutes 15 U.S.C. 77e...6, 15 15 U.S.C. 77d(a)...6 15 U.S.C. 77q(a)...19 15 U.S.C. 78j(b)...19 Code of Federal Regulations 17 C.F.R. 240.10b-5...19 ii
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 4 of 34 INTRODUCTION Defendant Mustafa David Sayid ( Sayid ), a New York attorney, offered and sold fifty million restricted shares of common stock of Nouveau Holdings., Ltd. ( Nouveau ), formerly known as Spectrum Acquisition Holdings, Inc. ( Spectrum ), to three Belizean nominee entities, who were represented and controlled by two stock promoters named Michael Affa ( Affa ) and Mitchell Brown ( Brown ). After the sale of these fifty million restricted shares, Sayid committed fraud by facilitating Affa and Brown s unlawful resale of at least five million of these shares, in unrestricted form, through the making of false statements and use of deceptive devices. In order to remove the restrictive legend from these unregistered securities, Nouveau s transfer agent, Transfer Online, required an attorney opinion letter opining that the shares qualified for an exemption from registration. At Brown s request, Sayid hired another lawyer, defendant Norman Reynolds ( Reynolds ), to write two such legal opinion letters to Transfer Online, opining that proposed issuances qualified for removal of restriction under Securities Act Rule 144. To obtain these Rule 144 opinions, Sayid lied to Reynolds and gave Reynolds stock transfer agreements that were falsely backdated over one year to make it appear the agreement s execution complied with Rule 144 s one-year holding period. And, once Transfer Online received Reynolds letters and issued the shares to the Belizean nominee entities, Sayid provided Affa and Brown with conversion notices and affiliate letters necessary to deposit the restrictionfree shares in trading accounts. Once Affa and Brown deposited the shares, they conducted a paid promotional campaign (blasting emails touting Nouveau s stock to unsuspecting penny stock investors), and sold the unrestricted Nouveau stock, reaping hundreds of thousands of dollars in profit. Following the pump and dump campaign, Brown delivered $25,000 to Sayid as a share of the sale proceeds.
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 5 of 34 Reynolds also indirectly sold this Nouveau common stock because he issued the two Rule 144 opinion letters that were necessary to, and a substantial factor in, the resale of this stock. The transfer agent would not have permitted issuance of the restriction free shares without Reynolds letters. Further, Reynolds committed securities fraud when he issued these letters because he knew or was reckless in disregarding the fact that Sayid purported to have a stock transfer agreement that was falsely backdated for the purpose of meeting Rule 144 s one-year holding period. Reynolds acted with scienter because (i) Sayid presented Reynolds with obviously conflicting and suspicious information concerning the execution date of the operative stock transfer agreement, (ii) Reynolds had an ethical and legal duty to have a reasonable basis for opining on the agreement s effective date, and (iii) Reynolds abdicated his professional obligation by issuing the two opinion letters without conducting any investigation to discover the truth of the conflicting dates, effectively ignoring them, and, instead, allowed Sayid to choose which date to use. Reynolds failure to investigate in the face of such conflicting and suspicious information concerning a key legal requirement was simultaneously negligent and a reckless complicity in Sayid s fraud. FACTS I. Sayid, Nouveau and the SEC s prior enforcement action Sayid is a New York-licensed securities attorney who maintained an office in Apartment 8E, West 57th Street in Manhattan. Plaintiff s LR 56.1 Statement of Facts in Support of Its Motion for Summary Judgment ( SoF ), 1. Nouveau was a Nevada corporation, whose 2013 Annual Report states that its officers and directors were located at Sayid s law office at Suite 8E, West 57th Street. Id., 3. In 2009, Nouveau operated under the name Spectrum Acquisition Holdings Corp. ( Spectrum ) and was the corporate successor of two prior corporate entities: 2
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 6 of 34 Barona Enterprises, Inc. ( Barona ), from March 1987 to April 1996, and First American Railways, Inc. ( First American ), from April 1996 to September 2007. Id., 3-4. Barona has never filed a registration statement with the Commission. Id., 5. Although First American filed a Form SB-2 registration for an offering of common stock in August 1996, several years later, in December 2004, the company filed a Form 15 to voluntarily deregister its stock. Id., 6. Since December 2004, neither First American, nor its corporate successors, Spectrum or Nouveau, have filed a registration statement with the Commission. Id., 6-7. Starting in 2009 and continuing until approximately January 2012, Spectrum was one of a group of public companies that was the subject of an investigation by the Securities and Exchange Commission. SoF, 10. The SEC s investigation focused on the companies and their relationship to a person named Nicholas Geranio ( Geranio ). Id. During the course of the investigation, Sayid represented both the companies and certain individuals that were part of the SEC s investigation, including Geranio and another individual named Keith Field. Id., 11. In January 2012, the SEC staff served Sayid with Wells Notices of the staff s intent to recommend enforcement actions against Geranio, Field and two alleged alter-ego companies, the Good One, Inc. and Kaleidoscope Real Estate, Inc. Id., 12. On May 16, 2012, the SEC filed a complaint against Geranio, Field and Geranio s alterego companies, alleging that they committed securities fraud in the operation of a boiler room scheme using Geranio s control over Spectrum and seven other public companies whose stocks were quoted on the OTC Bulletin Board or OTC Link, including Green Energy Live, Inc., Mundus Group, Inc., Wyncrest Group, Inc., Deltron, Inc., and Insight Management Corp. (collectively, with Spectrum, the Geranio Public Companies ). Id., 13. The SEC s complaint alleged that Geranio, and others working as his direction, facilitated the boiler room scheme by 3
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 7 of 34 creating the public companies, including Spectrum, installing the management, and instructing management how to run the companies for the scheme s benefit. Id., 14. II. Sayid s search for Aged-Debt to offer and sell stock On May 30, 2012, approximately two weeks after the SEC filed its complaint, Sayid sent an email to the persons who were in nominal positions of control in each of the Geranio Public Companies that had been the subject of the SEC s investigation. SoF, 15. In the email, Sayid told these persons that he had met with several operating companies with revenues that want to be public, and understand the nuances of being public. Id., 16. Sayid searched for operating companies on behalf of the Geranio Public Companies because they did not have revenues from their own operations. Id., 17. In the same May 30, 2012 email, Sayid told these persons to [p]lease let me know ASAP, whether the company has any non-affiliated aged debt (over one year old). Id., 18. Sayid asked them to find this debt because he expected their future securities transactions to involve a conversion of their debt to equity. Id., 19. In June 2012, Sayid emailed Spectrum s President, Dale Henry, to look for aged company debt in the form of Sayid s own legal fees that could be turned into free trading shares. Id., 20-21. III. Sayid s negotiation with Affa, Brown and the Belizean nominee entities According to Sayid s deposition testimony, starting sometime in April 2012 and continuing through August 2013, he negotiated a securities transaction with Michael Affa ( Affa ) and Mitchell Brown ( Brown ), two men who purported to represent Belizean nominee entities that were interested in acquiring debt of a public company that could be converted to stock. SoF, 22. These men have since pled guilty to criminal securities fraud charges concerning the pump-and-dump manipulation of other issuers common stock (Amogear, Inc. and Greenway Technologies). Id., 22. 4
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 8 of 34 According to Sayid, he negotiated with Brown and Affa to sell Spectrum stock to these Belizean nominee entities by way of outstanding debt owed to Sayid s law firm, Sayid and Associates, LLP. Id., 23. Specifically, Sayid offered this securities transaction by proposing a three-way agreement pursuant to which (i) Sayid would assign Nouveau debt owed to his law firm to the Belizean nominee entities; (ii) the Belizean nominee entities would pay Sayid $50,000 in exchange for assignment of this unpaid debt, and (iii) Nouveau would pay the outstanding assigned debt by issuing 50 million shares of stock to the Belizean nominee entities. Id.. Sayid drafted an agreement called a debt settlement agreement to memorialize the parties anticipated agreement. Id., 24. As drafted, the debt settlement agreement was made and entered into by three parties: (i) the Assignor Creditor, Sayid & Associates, LLP, (ii) the Assignee Creditors, the Belizean nominee entities, and (iii) the Debtor, Spectrum. Id., 25. According to Sayid, he negotiated the detailed terms of the debt settlement agreement with the Belizean nominee entities through at least September 25, 2012. Id., 27. In April 2013, Spectrum changed its name to Nouveau. SoF, 29. By June 2013, Sayid was still sending Affa and Brown multiple emails attaching copies of draft debt settlement agreements for the proposed Spectrum transaction. Id., 30. In the same month, the number of Belizean nominee entities changed from five to three entities. Id., 31. As of June 14, 2013, the agreement was not finalized or executed Sayid still needed from Affa and Brown the names of the three Belizean entities to include in the draft debt settlement agreement. Id., 32. According to Sayid s deposition testimony, he received the final go ahead from Affa that the Belizean nominee entities were ready to proceed with the debt settlement agreement transaction in August 2013. Id., 33. Between April 2012 and August 2013, Sayid had informed Nouveau s President, Dale Henry, that debt settlement agreement negotiations were ongoing, 5
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 9 of 34 but did not provide more detail than that. Id., 34. In August 2013, Sayid received a signature page from Affa with signatures on behalf of the Belizean nominee entities, and, on August 2, 2013, Sayid emailed the agreement to Henry for Nouveau s execution. Id., 35-36. The debt settlement agreement Sayid emailed to Henry purported to be executed on September 25, 2012. Id., 37. Sayid, however, had not presented Henry with a debt settlement agreement to sign on Nouveau s behalf prior to August 2013. Id., 38. Sayid s email to Henry attaching the agreement was also copied to defendant Norman Reynolds, a Houston-based attorney. Id., 36, 49. IV. Reynolds and the requests for an opinion letter to remove resale restriction Section 5 of the Securities Act makes it unlawful, directly or indirectly, to publicly offer or sell unregistered stock, see 15 U.S.C. 77e, unless the offering is covered by an exemption. See, e.g., 15 U.S.C. 77d(a). Because Section 5 applies to sales, as opposed to the physical securities, when a purchaser of securities resells securities, the resale transaction, just like the initial issuer transaction, must either be registered or have a valid exemption from registration. 15 U.S.C. 77e; SEC v. Kern, 425 F.3d 143, 147-48 (2d Cir. 2005). Consistent with this legal requirement, Nouveau s transfer agent, Transfer Online, issued stock not covered by a registration statement as restricted stock, which bore a restrictive legend on the certificate. SoF, 41. For resale transactions by persons other than issuers, underwriters or dealers, Section 4(1) of the Securities Act provides an exemption from Section 5 s registration requirement. 15 U.S.C. 77d(a)(1). To provide greater certainty and certainty to issuers and investors, the SEC published Rule 144 to delimit the definition of underwriter and provide a safe harbor to persons who comply with the requirements of the Rule in resale transactions. Kern, 425 F.3d at 6
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 10 of 34 148. To comply with Rule 144, a person ordinarily must meet numerous requirements concerning public information, holdings periods, number of shares, manner of sales, and notice to the Commission. Id. (citing 17 C.F.R. 230.144(c)-(h)). The exemption exists primarily to allow the free trading of already issued securities. SEC v. Cavanagh, 445 F.3d 105, 111 n.14 (2d Cir. 2006). In order to remove a legend on restricted stock using Rule 144, Transfer Online required the stock holder to provide an attorney opinion letter, opining that the proposed restriction-free stock issuance complies with Rule 144 s applicable requirements. SoF, 42. In connection with the shares that would be issued as part of the debt settlement agreement, Brown asked Sayid to assist in obtaining an attorney opinion letter for the benefit of the Belizean entities to send to Transfer Online. Id., 43. Sayid agreed to provide the assistance to move [the transaction] along. Id. On July 29, 2013, Sayid emailed Reynolds that Sayid wanted 2 Debt to Equity Opinions: One for SPAH investors/purchasers and One for M. David Sayid, 1 and attached a copy of the debt settlement agreement that was not signed by any party. Id., 44-47. Then, four days later, on August 2, 2013, Sayid copied Reynolds on his email to Dale Henry requesting execution of the debt settlement agreement backdated to September 25, 2012. Id., 49. Three days later, on August 5th, Sayid emailed Reynolds again stating that [i]n connection with the debt to equity legal opinion, the three Belizean nominee entities have requested one million (1,000,000) shares each be free trading from their 16,666,666 share allotment for each investor. Thus, three (3) separate one million shares (1,000,000) of NHLI shall be opined upon and forwarded to Transfer On Line.... Id., 50. In other words, Sayid asked Reynolds to opine that 3 million shares of Nouveau stock could be issued to the Belizean nominee entities without a 1 SPAH was the ticker symbol for Spectrum. SoF, 46. 7
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 11 of 34 restrictive legend. Sayid asked Reynolds to base the issuance of those shares on the debt settlement agreement backdated to September 25, 2012. V. Reynolds issuance of opinion letters With regard to the proposed reissuance of Nouveau stock to the Belizean nominee entities without restriction in August 2013, Rule 144 required: (i) that the Belizean nominee entities not be affiliates of Nouveau; (ii) that Nouveau not be a shell company, and (iii) that the Belizean nominee entities had owned the shares of Nouveau for at least one year. SoF, 51. For the one-year holding period, ownership means that the Belizean entities needed to have bought and paid for the shares. Id., 52. Both Reynolds and Sayid were familiar with Rule 144 and its requirements, and both had written Rule 144 opinion letters for clients in the past. Id., 53-55. Reynolds has written over 400 such letters since he started writing them in 2004 or 2005. Id., 55. According to Reynolds, as part of his regular course of action in reviewing convertible instruments for compliance with Rule 144 s requirements, he checks the date of the instrument and that it was paid for. Id., 56. After reviewing the Nouveau debt settlement agreement dated September 25, 2012, Reynolds emailed Sayid on August 5, 2013, saying: Unless I m missing something, you have not held the securities for one year. Since the issuer is a non-reporting company, a minimum of one year must elapse before you can sell the securities under Rule 144. You acquired the securities on September 25, 2012. Id., 57. Later that same day, Sayid replied to Reynolds, saying that his debt was over three years old and that he had an opinion letter from another lawyer who approved a similar transaction. Id., 58. Sayid attached an opinion letter from a lawyer named Thomas Boccieri (hereinafter Boccieri Opinion Letter ), and told Reynolds, Please use the same opinion as it was presented to two different transfer 8
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 12 of 34 agents and passed with flying colors. Id. Reynolds reviewed the Boccieri Opinion Letter, which based the one-year holding period on the date of Sayid s engagement letter with Nouveau (rather than the date the Belizean nominee entities acquired the convertible right to the stock), and disagreed with Boccieri s analysis. Id., 59-60. On August 6, Reynolds emailed Sayid rejecting Boccieri s reasoning, stating: I am not convinced that your Engagement Letter constitutes a security in the context of Rule 144. I could write an opinion on September 25, 2013. If you need an opinion now, I suggest you use Mr. Boccieri. Id., 61. On the next day, August 7, 2013, Sayid responded by emailing Reynolds that he had starting negotiating the sale of his debt sometime in February 2012. Id., 62. Sayid further told Reynolds that [w]e have several executed copies of the debt settlement agreement and then listed five particular agreements by date: June 4, 2012, June 7, 2012, July 17, 2012, September 7, 2012, and September 25, 2012. Id. Sayid then told Reynolds, I can forward them to you as well. The three (3) investors have stated that they wanted the earliest executed copy (June 4, 2012) to be forwarded. I forwarded the latest executed copy (September 25, 2012) to you as opposed to the earliest. Please let me know if you would like the earlier executed copies of the debt settlement agreement. Id. By reply email on August 7, Reynolds told Sayid that he would review the earlier executed copies and told Sayid: Please send all of the executed agreements. Id., 63. Later the same day, Sayid emailed Reynolds unexecuted copies of four purported debt settlement agreements. Id., 64. In the body of the email, Sayid told Reynolds: I have signature pages for the July 17th, 2012, September 7, 2012 and, of course, September 25, 2012. I will continue to look for the signature pages for the June 2012 dates. Id. Two days later, on August 9, 2013, Reynolds emailed Sayid an executed opinion letter without ever receiving an executed copy of a debt settlement agreement dated July 17, 2012. Id., 9
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 13 of 34 65. Reynolds opinion letter was addressed to Nouveau s transfer agent, Transfer Online, and, in the first sentence of the letter, Reynolds told Transfer Online: On July 17, 2012, more than one year ago, that certain Debt Settlement Agreement (the Debt Settlement Agreement ) was executed by Spectrum Acquisition Holdings Corp., now known as Nouveau Holdings, Ltd. and the other parties to the agreement. Id., 66. Reynolds letter repeatedly describes the sale and assignment as occurring on July 17, 2012. Id., 66-68. The letter then informs Transfer Online that the Belizean nominee entities each desire to have the Issuer issue to each of them 1,000,000 shares of the common stock of the Issuer, which shares were deemed purchased on July 17, 2012, more than one year ago. Id., 69. The letter then analyzes whether the proposed issuance of 1,000,000 shares to each of the Assignee Creditors could be issued free of restrictions pursuant to Rule 144. Id., 70. With regard to the holding period, Reynolds opines: More than one year has elapsed since each of [the Belizean nominee entities] purchased and paid for the 1,000,000 shares on July 17, 2012. Therefore, pursuant to Rule 144(d)(1)(iii), the shares have a holding period beginning on July 17, 2012, more than one year before any desired transfer of the shares. Id., 71. Finally, Reynolds opinion letter tells Transfer Online: Pursuant to Rule 144, a certificate representing 1,000,000 shares may be issued to each of [the Assignee Creditors] free of any restrictions, and may be sold free of restriction in the manner provided by Rule 144. Id., 72. According to Reynolds, his basis for using the July 17, 2012 date for the debt settlement agreement s execution, as opposed to the other five dates Sayid had represented the agreement had been executed, was to ask Sayid which one to use. Id., 73. After receiving Reynolds opinion letter, Sayid emailed Dale Henry the next day, August 10, 2013, and requested that Henry execute a signature page for the debt settlement agreement dated July 17, 2012. Id., 74. In that email, Sayid told Henry that Norman [Reynolds] wants to 10
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 14 of 34 use the July 17, 2012 Debt Settlement Agreement as opposed to the September 25, 2012 version. Id., 75. On or about August 10, 2013, Henry signed the signature page backdated to July 17, 2012 and returned it to Sayid, who forwarded it to Reynolds on August 11, 2013. Id., 76. The next day, August 12, 2013, Reynolds reminded Sayid that Reynolds needed the signatures of the Belizean nominee entities as well, and Sayid responded the same day emailing Reynolds a signature page of the Belizean nominee entities backdated to July 17, 2012. Id., 77. At the same time Sayid was working on getting Reynolds an executed agreement backdated to July 17, 2012, he was also using Reynolds August 9 opinion letter to get Nouveau shares issued to the Belizean nominee entities without restriction. On August 11, 2013, Sayid emailed Henry a copy of Reynolds opinion letter and requested that Henry forward the legal opinion to Transfer Online to free up the shares for the three Belizean nominee entities. Id., 78. Henry then forwarded the letter to Transfer Online, as requested. Id., 79. Relying on Reynolds August 9th opinion letter that the share issuance complied with Rule 144, on August 27, 2013, Transfer Online issued 3,000,000 shares of unrestricted or free trading Nouveau stock to the three Belizean nominee entities 1,000,000 shares to each of them. Id., 80. On September 6, 2013, Sayid emailed Reynolds requesting another Rule 144 legal opinion letter for Nouveau stock to be issued to the Belizean nominee entities through the debt settlement agreement. Id., 81. Sayid told Reynolds that he needed another legal opinion identical in form to the previous one that you issued. Id., 82. For the new opinion letter, Sayid told Reynolds that this time the issuance would be for 4,999,999 shares to the same three Belizean nominee entities. Id., 83. On the same day, Reynolds responded to Sayid s email by providing a signed opinion letter addressed to Transfer Online. Id., 84. Reynolds September 11
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 15 of 34 6th opinion letter concluded that that the proposed issuance of 1,666,666 shares of Nouveau stock to each of the Belizean nominee entities could be issued free of restrictive legend because the proposed issuance complied with the requirements of Rule 144, including the applicable oneyear holding period. Id., 85, 90-92. Like the August 9 letter, Reynolds September 6 letter told Transfer Online that the sale and assignment by the debt settlement agreement met the one-year holding period because it occurred on July 17, 2012. Id., 86-89. On September 9, 2013, Henry emailed Reynolds September 6th opinion letter to Transfer Online for the agent s issuance of Nouveau shares without restrictive legends to the Belizean nominee entities. Id., 93. Relying on Reynolds September 6th opinion letter that the share issuance complied with Rule 144, on September 12, 2013, Transfer Online issued 4,999,998 shares of unrestricted or free trading Nouveau stock to the three Belizean nominee entities 1,666,666 shares to each of them. Id., 94. Transfer Online would not have issued the unrestricted, free-trading Nouveau shares to the Belizean nominee entities pursuant to Reynolds opinion letters if it had known that the parties to the debt settlement agreement dated July 17, 2012 had executed the document in August 2013, but backdated the agreement to make it appear that it had been executed on July 17, 2012. Id., 95. Reynolds was paid for both Rule 144 opinion letters he issued for the benefit of the Belizean nominee entities. Id., 96. Reynolds typically charged clients between $300 and $350 for opinion letters like the ones issued to Transfer Online. Id., 97. On or about August 28, 2013, Reynolds received $350 from Sayid in payment for the August 9th opinion letter. Id., 98. After issuance of the September 6th opinion letter, Reynolds received another payment of $350 from Sayid. Id., 99. 12
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 16 of 34 VI. Reynolds duty of care Attorneys writing opinion letters for the removal of restriction on securities are professionals who have an ethical obligation to have a reasonable basis for believing the facts stated in the opinion are true. SoF, 100. As outlined in the ABA s Formal Opinion 335 on writing opinion letters involving the sale of unregistered securities, the attorney should, in the first instance, make inquiry of his client as to the relevant facts and receive answers. If any of the alleged facts, or the alleged facts taken as a whole, are incomplete in a material respect; or are suspect; or are inconsistent; or either on their face or on the basis of other known facts are open to question, the lawyer should make further inquiry. Id., 101. Under this professional ethical standard, the actual execution date of the Nouveau s debt settlement agreement was a material part of Reynolds opinion letter to Transfer Online. Id., 102. When Reynolds received the unexecuted debt settlement agreement dated July 17, 2012 from Sayid in August 2013, Reynolds had incomplete or inconsistent information concerning the execution date of the debt settlement agreement. Id., 103. Under the applicable standard of care, Reynolds should not have issued the opinion letter dated August 8, 2013 without first receiving an executed copy of the debt settlement agreement dated July 17, 2012. Id., 104. Further, a lawyer has a duty to go beyond the representations on the face of documents where, for example, the lawyer had information available to him that was contrary to whatever the representation was that was made to him. Id., 105. And, [w]here the lawyer concludes further inquiry of a reasonable nature would not give him sufficient confidence as to the relevant facts, or for any other reason he does not make the appropriate further inquiries, he should refuse to give the opinion. Id., 106. 13
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 17 of 34 VII. Sayid s receipt of $25,000 as share of sale proceeds Pursuant to the debt settlement agreement and Reynolds opinion letters, approximately 8 million shares were issued to the Belizean nominee entities that were controlled by Michael Affa. SoF, 107. In order to facilitate getting the issued Nouveau shares deposited in trading accounts, Sayid provided Affa and Brown with affiliate letters and conversion letters for the Belizean nominee entities to execute. Id., 108. At least five million of the restriction-free Nouveau shares were deposited in accounts of the Belizean entities controlled by Affa. Id., 109. Starting on approximately September 9, 2012, Brown and Affa facilitated a publicity campaign to tout Nouveau stock and promote investor interest. Id., 110. Affa and Brown paid approximately $220,000 to multiple promoters who sent out blasts of email messages to lists of penny stock investors. Id., 111. These emails touted Nouveau stock to investors. Id., 112. Brown and Affa paid some of the promoters prior to the start the promotional campaign. Id., 113. They paid other promoters only on the come or after Affa s entities sold Nouveau stock during and following the campaign. Id., 114. In total, the Belizean entities sold approximately four million of the restriction free shares issued to them pursuant to the debt settlement agreement and Reynolds opinion letters. Id., 115. According to Brown, the sales of Nouveau stock by the Belizean nominee entities generated approximately $275,000 in proceeds. Id., 116. On October 1, 2013, after the promotional campaign concluded, Brown wired Sayid $25,000 as a share of the proceeds from the sale of Nouveau shares transferred through the parties debt settlement agreement. Id., 117. 14
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 18 of 34 ARGUMENT Rule 56 of the Rules of Civil Procedure provides that [a] moving party is entitled to summary judgment when the evidence, viewed in the light most favorable to the non-movant, shows that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. St. Paul Mercury Ins. Co. v. M & T Bank Corp., 12-cv-6322- JFK, 2014 WL 641438, at *3 (S.D.N.Y. Feb. 19, 2014) (quoting Fed. R. Civ. P. 56(a)). The movant bears the initial burden of demonstrating the absence of a genuine issue of material fact. Id. (quoting Celotext Corp. v. Catrett, 477 U.S. 317, 323 (1986)). If the moving party meets that burden, the opposing party must then come forward with specific evidence demonstrating the existence of a genuine dispute of material fact. Id. The mere existence of a scintilla of evidence in support of the non-movant s position will be insufficient; there must be evidence on which the jury could reasonably find for the non-movant. Id. (quoting Hayut v. State Univ. of N.Y., 352 F.3d 733, 743 (2d Cir. 2003)). Summary judgment is appropriate where there can be but one reasonable conclusion as to the verdict,... it is quite clear what the truth is,... and no rational factfinder could find in favor of the nonmovant. SEC v. Frohling, 851 F.3d 132, 136 (2d Cir. 2016) (internal citations omitted). I. Sayid and Reynolds violated of Section 5 of the Securities Act Section 5 of the Securities Act requires that all non-exempt securities offered for sale to the public be registered with the Commission prior to the offer or sale of such securities. SEC v. Czarnik, 10-cv-745-PKC, 2010 WL 4860678, at *11 (S.D.N.Y. Nov. 29, 2010); 15 U.S.C. 77e. In order to establish liability for a Section 5 claim, the Commission must prove (1) lack of a [required] registration statement as to the subject securities; (2) the offer or sale of the securities; and (3) the use of interstate transportation or communication and the mails in 15
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 19 of 34 connection with the offer or sale. SEC v. Frohling, 851 F.3d 132, 136 (2d Cir. 2016) (quoting SEC v. Cavanagh, 445 F.3d 105, 111 n.13 (2d Cir. 2006)). The Commission, however, is not required to show that a defendant acted with scienter. Czarnik, 2010 WL 4860678, at *11. Further, even if a defendant is not directly engaged in transferring title of a security, that person can be held liable under 5 if he or she engaged in steps necessary to the distribution of [unregistered] security issues. Frohling, 851 F.3d at 136 (quoting SEC v. Chinese Consolidated Benevolent Ass n, 120 F.2d 738, 741 (2d Cir. 2941). The necessary participant test... essentially asks whether, but for the defendant s participation, the sale transaction would not have taken place in other words, whether the defendants acts were a substantial factor in the sale transactions. Czarnik, 2010 WL 4860678, at *11 (quoting SEC v. Universal Exp., 475 F. Supp.2d 412, 422 (S.D.N.Y. 2007)). Here, there is no genuine dispute of material fact that Sayid directly engaged in the offer and sale of Nouveau common stock in violation of Section 5. According to Sayid s own admissions, he directly offered the issuance of Nouveau stock as part of transaction in which he would be paid for assigning his debt to Affa s Belizean nominee entities in a three-way transaction. SoF, 22-27. He drafted the three-way debt settlement agreement and presented it to Affa. Id., 24, 30-32. In conducting these negotiations with Affa, Sayid did not include Nouveau s President, Dale Henry. Id., 34-38. He only presented the agreement to Henry in August 2013, once Affa gave the go ahead on the negotiated terms, and Sayid needed a company signature to complete the agreement s execution. Id., 36-38. And, in October 2013, Sayid received payment representing a share of the proceeds from the Belizean entities sale of those shares. Id., 117. 16
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 20 of 34 Even if Sayid were not liable as a direct seller (which he is), he would still be liable under Section 5 as a necessary participant and substantial factor in the unlawful sale of Nouveau stock. With respect to the offer and sale of fifty million shares of Nouveau common stock to the Belizean entities through the debt settlement agreement, there is no genuine dispute of material fact that Sayid s acts were a substantial factor. He is the one who proposed the sale of his law firm s debt to facilitate the transfer of common stock from Nouveau to the Belizean entities. SoF, 22-27. Without his firm s debt, the sale transaction would not have occurred. Likewise, with respect to the Belizean entities subsequent resale of that common stock to the public, there is no dispute of fact that Sayid was a substantial factor in that offering and resale. As Sayid has admitted, Brown came to him for help obtaining an attorney opinion letter for the benefit of the Belizean entities to send to Transfer Online. Id., 43. Sayid agreed to provide the Belizean entities with this assistance to move [the transaction] along. Id. Sayid thereafter solicited Reynolds and repeatedly emailed him to request the drafting of a Rule 144 opinion letter for the issuance of unrestricted, free trading Nouveau common stock. Id., 44-50. Sayid fabricated backdated debt settlement agreements to meet Rule 144 s one-year holding period and sent them to Reynolds as a false basis for the required opinion letters. Id., 49, 64, 76-77. Once Reynolds drafted the completed opinion letters, Sayid paid Reynolds fee. Id., 96-99. And, following receipt of the first completed opinion letter, Sayid emailed Henry a copy of it and requested that Henry forward the legal opinion to Transfer Online to free up the shares for the three Belizean entities. Id., 78. Then, in order to facilitate getting the issued Nouveau shares deposited in trading accounts, Sayid provided Affa and Brown with affiliate letters and conversion letters for the Belizean nominee entities to execute. Id., 108. As Sayid indisputably facilitated each step necessary to get these shares offered, sold, and issued to the Belizean entities in unrestricted 17
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 21 of 34 form, there is no question that he was a substantial factor in the resale of Nouveau s common stock to the public. See SEC v. Greenstone Holdings, Inc., 10-cv-1302-MGC, 2012 WL 1038570, *11 (S.D.N.Y. Mar. 28, 2012) (finding defendants actions necessary to issuance of unregistered shares were sufficient for Section 5 liability). Reynolds is likewise liable under Section 5 as a necessary participant in the resale transactions of the Belizean entities. Transfer Online required an attorney opinion letter for removal of a stock legend restricting resale transactions. SoF, 42. For both proposed resale transactions, Reynolds provided an opinion letter declaring that the parties executed the debt settlement agreement on July 17, 2012 and concluding that [p]ursuant to Rule 144, a certificate representing [the proposed] shares may be issued to each of [the Assignee Creditors] free of any restrictions, and may be sold free of restriction in the manner provided by Rule 144. Id., 65-92. And, Transfer Online would not have re-issued those shares free of restrictive legend without Reynolds opinion letters. Id., 95. As the Second Circuit has recognized, where a transfer agent would not have issued unregistered securities but for the defendant attorney s opinion letter, Section 5 imposes liability for the attorney s necessary participation in the unlawful issuance of those shares. Frohling, 851 F.3d at 137 (affirming summary judgment Section 5 liability for attorney author of opinion letters where district court found issuer s transfer agent would not have issued any unregistered shares without the letters); see also SEC v. Ramoil Mgmt., Ltd., 01-cv-9057-SC, 2007 WL 3146943, *10 (S.D.N.Y. Oct. 25, 2007) (finding Section 5 liability against attorney where opinion letter was required by SEC rule for registration of shares). Finally, with respect to the other elements of Section 5 liability, there is no genuine dispute of material fact (i) that Nouveau did not have a registration statement in effect for any 18
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 22 of 34 offer or sale of securities; SoF, 3-7; or (ii) that the activities undertaken by Sayid, Reynolds, Brown, and Affa to accomplish the offering and sale of Nouveau common stock were conducted by email and phone, and thereby used interstate communication channels. See, e.g., id., 22-36, 43-50, 57-65, 74-79, 81-84, 108. II. Sayid and Reynolds violated the anti-fraud provisions of the Federal securities laws To establish liability under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, the SEC must prove that the defendants (1) made a material misrepresentation or a material omission as to which they had a duty to speak, or used a fraudulent or deceptive device, (2) with scienter; (3) in connection with the purchase or sale of securities. 15 U.S.C. 78j(b); 17 C.F.R. 240.10b-5; see SEC v. Sayid, 17-cv-2630, 2018 WL 357320, *3 (S.D.N.Y. Jan. 10, 2018) (citing 15 U.S.C. 78j(b) and SEC v. Pentagon Capital Mgmt. PLC, 725 F.3d 279, 285 (2d Cir. 2013)). To establish liability under Section 17(a)(1) of the Securities Act, the SEC must prove that the defendants used any device, scheme, or artifice to defraud in the offer or sale of securities. 15 U.S.C. 77q(a)(1); see Sayid, 2018 WL 357320, at *3 (citing SEC v. Yorkville Advisors, LLC, No. 12-cv-7728-GBD, 2013 WL 3989054, at *2 (S.D.N.Y. Aug. 2, 2013)). To establish the defendants liability under Section 17(a)(2) of the Securities Act, the SEC must prove that they obtained money or property by means of any misstatements or omissions about material facts in the offer or sale of securities. 15 U.S.C. 77q(a)(2); Sayid, 2018 WL 357320, at *3 (citing Yorkville Advisors, 2013 WL 3989054, at *2). The elements of a claim under Section 17(a) of the Securities Act in the offer or sale of a security are essentially the same as those required to prove fraud under Section 10(b). Sayid, 2018 WL 357320, at *3 (quoting SEC v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999)). To establish liability for violation 19
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 23 of 34 of Section 17(a)(2), however, the Commission need not prove the defendant acted with scienter. Proof of negligence will suffice. Id. A. Sayid made false statements of material fact and obtained money through their use There is no genuine dispute of material fact that Sayid made false statements to obtain Reynold s Rule 144 opinion letters that enabled the issuance of eight million shares of Nouveau common stock for resale without restriction. Reynolds initially rejected Sayid s proposed basis for the Rule 144 opinion letter because the first debt settlement agreement that Sayid forwarded (purported to be executed on September 25, 2012) did not meet the one-year holding period. SoF, 57. After Reynolds subsequently rejected the reasoning of the Boccieri Opinion letter, Sayid s response was to lie and tell Reynolds that there were multiple executed versions of this debt settlement agreement dated in June and July 2012. Id., 58-62. That, of course, was impossible because Sayid had not presented Nouveau with any debt settlement agreement for execution until August 2013. Id., 33-38. There is also no genuine dispute of material fact that Sayid s false statements were material. To remove the restriction applicable to the resale of unregistered securities, Transfer Online required an attorney opinion letter concluding that the requirements of Rule 144 have been met. SoF, 42. In order to get Reynolds opinion, Sayid lied about having copies of executed debt settlement agreements that met the one-year holding period. Id., 62-64. Without Sayid s false claim to have an earlier executed debt settlement agreement, Reynolds would not have issued his Rule 144 opinion letter, and Transfer Online would not have issued the shares. Id., 61-95; see also Ramoil Management, Ltd., 2007 WL 3146943, at *7 (finding clear evidence of materiality where transfer agent would not have issued shares without false statements); see also SEC v. Research Automation Corp., 585 F.2d 31, 35-36 (2d Cir. 1978) 20
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 24 of 34 (summary judgment on materiality appropriate where reasonable minds cannot differ on importance of fact to investor). There is also no genuine dispute of material fact that Sayid obtained money by means of his false statements. Sayid s false backdating caused Reynolds to issue both opinion letters to Transfer Online, which issued the restriction free shares to the three Belizean nominee entities. See SoF 61-95. These Belizean entities sold the shares, and Brown paid Sayid $25,000 for his share of the proceeds from those sales. Id., 107-117. B. Sayid used a deceptive device There is also no genuine dispute of material fact that Sayid bolstered his false statements with a deceptive and fraudulent device the backdated versions of the Nouveau debt settlement agreement. It is undisputed, by Sayid s own admission, that he did not ask Nouveau to sign the debt settlement agreement until he first sent Dale Henry a copy on August 2, 2013. SoF, 34-38. Yet, Sayid had Henry sign falsely backdated agreements to make it appear that Nouveau had entered into the debt settlement agreements in 2012. Id., 36-38, 74-77. And, Sayid presented Reynolds with multiple falsely backdated agreements as the purported basis for Reynolds Rule 144 opinion letters, which caused Transfer Online to issue almost eight million shares of Nouveau common stock to the Belizean nominee entities without restriction on resales. Id., 36-38, 62-94. C. Sayid acted with scienter Finally, there is no dispute of material fact that Sayid made these false statements and used this fraudulent and deceptive device with scienter. He knew Nouveau had not executed any debt settlement agreement until August 2013. SoF, 34-38. And, conscious of that fact, Sayid falsely claimed that Nouveau had executed the debt settlement agreement in 2012, and provided 21
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 25 of 34 Reynolds with multiple versions of the debt settlement agreement falsely backdated to 2012. Id., 62-64 (false statements), 36-38, 62-64, 74-77 (deceptive devices). D. Reynolds obtained money by making false statements of material fact There is no genuine dispute of material fact that Reynolds opinion letters made false statements of fact. Those letters stated, repeatedly, that the parties executed the debt settlement agreement on July 17, 2012. SoF, 66-71, 86-91. Those statements were false. Id., 34-38, 74-76. There is also no genuine dispute of material fact that Reynolds made those false statements. Reynolds wrote the letters, addressed them to the transfer agent that required the opinion letter for removal of restriction, signed the letters, and delivered them to Sayid. Id., 65-66, 82-86. And, there is also no question the Reynolds was the person with ultimate authority over the opinion letters content and whether to issue the letters at all. Reynolds initially refused to write the opinion letter, twice. Id., 57-61. Reynolds, alone, decided whether Sayid had provided him with a reasonable basis to opine that the debt settlement agreement was executed on a date early enough to comply with the Rule 144 one-year holding period. See Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011) ( the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it ); In re Braskem S.A. Sec. Litig., 246 F. Supp.3d 731, 764 (S.D.N.Y. 2017) (finding defendant maker of statement because he personally signed filings). There is no genuine dispute of material fact that Reynolds false statements were material or that he obtained money through their use. Transfer Online required an attorney opinion letter for the reissuance of restricted shares without a restrictive legend. SoF, 42. Based on this requirement, Transfer Online would not have reissued the Nouveau shares removing the 22
Case 1:17-cv-02630-JFK-OTW Document 98 Filed 02/11/19 Page 26 of 34 restrictive legend if it had known Reynolds statements regarding the one-year holding period were false. Id., 95; see, e.g., Ramoil Management, Ltd., 2007 WL 3146943, at *7 (finding clear evidence of materiality where transfer agent would not have issued shares without false statements); see also SEC v. Research Automation Corp., 585 F.2d 31, 35-36 (2d Cir. 1978) (summary judgment on materiality appropriate where reasonable minds cannot differ on importance of fact to investor). And Reynolds charged Sayid money for writing these opinion letters, and received $700 directly from Sayid. SoF, 96-99; see also SEC v. DiMaria, 207 F. Supp.3d 343, 358 (S.D.N.Y. 2016) (concluding defendant obtains money when he personally receives payment); SEC v. Syron, 934 F.Supp.2d 609, 637-40 (S.D.N.Y. 2013) (ruling obtaining means to personally gain money or property). E. Reynolds acted with scienter There is also no genuine dispute of material fact that Reynolds acted with scienter when he told Transfer Online that the debt settlement agreement had been executed on July 2012. Liability for violation of Section 10(b) of the Exchange Act and Section 17(a)(1) of the Securities Act requires proof that the defendant acted with scienter, which is a mental state embracing an intent to deceive, manipulate, or defraud. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 & n.12 (1976). In the Second Circuit, this scienter may be established through a showing of reckless disregard for the truth, that is, conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care. SEC v. Obus, 693 F.3d 276, 286 (2d Cir. 2012). The Court may infer scienter from circumstantial evidence where the defendant (1) knew facts or had access to information suggesting that his public statements were not accurate, (2) failed to check information he had a duty to monitor, SEC v. Save the World Air, Inc., 01-cv-11586, 2005 WL 3077514, *11 (S.D.N.Y. Nov. 15, 2005) (quoting Novak 23