     14-2301-cv(L), 14-2937-cv(XAP), 15-3978-cv
     SEC v. Sourlis


 1                                UNITED STATES COURT OF APPEALS

 2                                    FOR THE SECOND CIRCUIT

 3                                              ------

 4                                        August Term, 2015

 5   (Submitted: April 27, 2016                                 Decided: December 6, 2016)

 6                     Docket Nos. 14-2301-cv(L), 14-2937-cv(XAP), 15-3978-cv

 7   _________________________________________________________________

 8   SECURITIES AND EXCHANGE COMMISSION,

 9                                      Plaintiff-Appellee-Cross-Appellant,

10                                           - v. -

11   VIRGINIA K. SOURLIS,
12                                      Defendant-Cross-Claimant-Appellant-Cross-
13                                      Appellee,

14   JOHN B. FROHLING, HISAO SAL MIWA,
15
16                                      Defendants-Cross-Claimants-Cross-Defendants,

17   DANIEL D. STARCZEWSKI, THOMAS F. PIERSON,

18                                      Defendants-Cross-Defendants,

19   GREENSTONE HOLDINGS, INC., JOE V. OVERCASH, JR., FRANK J. MORELLI, III,
20   JAMES S. PAINTER, III,

21                                      Defendants,

22   ACTIVE STEALTH, LLC, BAF CONSULTING, INC., BLUEWATER EXECUTIVE
23   CAPITAL, LLC, EMERGING MARKETS CONSULTING, LLC, KCS REFERAL
24   SERVICES, LLC, MBA INVESTORS, LTD., NEW AGE SPORTS, INC., POWER
25   NETWORK, INC., PROJECT DEVELOPMENT, INC., SEVILLE CONSULTING, INC.,
 1   STARR CONSULTING, INC., TUSCANY CONSULTING, INC., YT2K, INC.,

 2                                 Relief-Defendants.*
 3   _________________________________________________________________

 4   Before: KEARSE, POOLER, and DRONEY, Circuit Judges.

 5                  Appeals in Nos. 14-2301 and 15-3978 by defendant attorney from a November 25,

 6   2015 final judgment of the United States District Court for the Southern District of New York, Miriam

 7   G. Cedarbaum, Judge, granting plaintiff Securities and Exchange Commission's motion for summary

 8   judgment in this enforcement action, holding defendant liable for securities laws violations (§ 5 of the

 9   Securities Act of 1933, 15 U.S.C. § 77e; and, as both a primary actor and an aider and abetter, § 10(b)

10   of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R.

11   § 240.10b-5) in connection with a false opinion letter she wrote, enabling an impermissible public

12   offering of unregistered shares of stock of defendant Greenstone Holdings, Inc.; ordering her to pay

13   a total of $57,284.83 as a civil penalty, disgorgement, and prejudgment interest; and permanently

14   barring her from participating in certain stock offerings. Defendant contends principally that she did

15   not have a duty to protect the interests of the investing public, and she challenges the imposition of

16   a civil penalty and an injunction.

17                  In Nos. 14-2301 and 15-3978, we affirm the final judgment. The cross-appeal by the

18   SEC, No. 14-2937, challenging a 2012 interlocutory order that was superseded by the final judgment,

19   is dismissed as moot.**




     *      The Clerk of Court is directed to amend the official caption in these appeals to
            conform with the above.

     **     Originally filed as a summary order on July 8, 2016, this decision is now being published
            as an opinion on motion of the Securities and Exchange Commission dated November 14,
            2016, granted on December 1, 2016.

                                                        2
 1                                   ALLAN A. CAPUTE, Special Counsel to the Solicitor,
 2                                        Washington, D.C. (Anne K. Small, General Counsel,
 3                                        Michael A. Conley, Deputy General Counsel, Jacob H.
 4                                        Stillman, Solicitor, Securities and Exchange
 5                                        Commission, Washington, D.C., on the brief), for
 6                                        Plaintiff-Appellee-Cross-Appellant.

 7                                   VIRGINIA K. SOURLIS, pro se, Red Bank, New Jersey,
 8                                        Defendant-Cross-Claimant-Appellant-Cross-Appellee.




 9   KEARSE, Circuit Judge:

10                   In these consolidated appeals, filed or reinstated following a remand for final resolution

11   of pending claims, see SEC v. Frohling, 614 F. App'x 14 (2d Cir. 2015), defendant-cross-claimant-

12   appellant-cross-appellee Virginia K. Sourlis pro se appeals from a November 25, 2015 Superseding

13   Final Judgment of the United States District Court for the Southern District of New York, Miriam G.

14   Cedarbaum, Judge, in this enforcement action brought by the Securities and Exchange Commission

15   ("SEC") in connection with public offerings of unregistered shares of stock of defendant Greenstone

16   Holdings, Inc. ("Greenstone"). The district court granted a motion by the SEC for summary judgment

17   on issues of liability, holding Sourlis--an attorney who wrote a January 11, 2006 opinion letter

18   ("Sourlis Letter") relating to one of the offerings--liable for violating § 5 of the Securities Act of 1933

19   ("Securities Act"), 15 U.S.C. § 77e; violating § 10(b) of the Securities Exchange Act of 1934

20   ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5; and aiding

21   and abetting violations of § 10(b) and Rule 10b-5, in violation of § 20(e) of the Exchange Act,

22   15 U.S.C. § 78t(e). The Superseding Final Judgment orders Sourlis to pay a total of $57,284.83 as

23   a civil penalty, disgorgement, and prejudgment interest, and permanently bars her from participating

24   in so-called "penny stock" offerings, i.e., offerings of "any equity security that has a price of less than

                                                         3
 1   five dollars, except as provided in Rule 3a51-1 under the Exchange Act," Superseding Final Judgment

 2   at 4.

 3                   In Nos. 14-2301 and 15-3978, Sourlis principally contends that she was entitled to

 4   summary judgment in her favor, arguing that she "did not owe a duty to protect the interests of the

 5   investing public" (e.g., Sourlis brief on appeal at 1, 26), and that the actual offering of the stock that

 6   was the subject of her opinion letter was intervening fraudulent conduct by other defendants that

 7   relieved her of responsibility. She also challenges the court's imposition of a civil penalty and its

 8   injunctive order. For the reasons that follow, we find no error in the district court's determinations of

 9   liability and no abuse of discretion in its remedial order. We assume the parties' familiarity with the

10   underlying facts and procedural history of the case.



11   A. Liability

12           Section 5 of the Securities Act makes it unlawful, directly or indirectly, to publicly offer or sell

13   unregistered stock, see 15 U.S.C. § 77e, unless the offering is covered by an exemption. The stock

14   certificate for unregistered shares not covered by an exemption--"restricted" stock--normally bears a

15   legend stating that the shares have not been registered and cannot lawfully be sold until they are

16   registered. The pertinent exemption in this case, as it existed at the relevant time, allowed stock to

17   be issued without the restricted-stock legend if the recipients were persons unaffiliated with the stock's

18   issuer, and if at least two years had elapsed since the shares were owned by the issuer or a person

19   affiliated with the issuer, see SEC Rule 144(k), 17 C.F.R. § 230.144(k) (2005). The two-year

20   requirement was satisfied if unaffiliated persons acquired the shares in exchange for "consideration

21   consisting solely of other securities of the same issuer" that had been received at least two years

22   earlier, as the shares were deemed to have been acquired from the issuer at the time the surrendered

                                                          4
 1   securities had been acquired. Id. § 230.144(d)(3)(ii) (2005) (emphasis added). "To state a cause of

 2   action under Section 5, one must show '(1) lack of a [required] registration statement as to the subject

 3   securities; (2) the offer or sale of the securities; and (3) the use of interstate transportation or

 4   communication and the mails in connection with the offer or sale.'" SEC v. Cavanagh, 445 F.3d 105,

 5   111 n.13 (2d Cir. 2006) (quoting Europe & Overseas Commodity Traders, S.A. v. Banque Paribas

 6   London, 147 F.3d 118, 124 n.4 (2d Cir. 1998)). A person not directly engaged in transferring title of

 7   the security can be held liable under § 5 if he or she "engaged in steps necessary to the distribution of

 8   [unregistered] security issues." SEC v. Chinese Consolidated Benevolent Ass'n, 120 F.2d 738, 741

 9   (2d Cir. 1941).

10                     Section 10(b) of the Exchange Act and Rule 10b-5, which prohibit fraud in the

11   purchase or sale of a security, are violated if a person has "'(1) made a material misrepresentation or

12   a material omission as to which he had a duty to speak, or used a fraudulent device; (2) with scienter;

13   (3) in connection with the purchase or sale of securities.'" SEC v. Pentagon Capital Management

14   PLC, 725 F.3d 279, 285 (2d Cir. 2013) (quoting SEC v. Monarch Funding Corp., 192 F.3d 295, 308

15   (2d Cir. 1999)), cert. denied, 134 S. Ct. 2896 (2014). A false statement was made with the requisite

16   scienter if it was made with the "intent to deceive, manipulate, or defraud." SEC v. Obus, 693 F.3d

17   276, 286 (2d Cir. 2012) (internal quotation marks omitted). "[S]cienter may be established through

18   a showing of reckless disregard for the truth, that is, conduct which is highly unreasonable and which

19   represents an extreme departure from the standards of ordinary care." Id. (internal quotation marks

20   omitted).

21                     Summary judgment may be granted "if the movant shows that there is no genuine

22   dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ.

23   P. 56(a). A genuine dispute exists when the evidence is such that, if the party against whom summary

                                                        5
 1   judgment is sought is given the benefit of all permissible inferences and all credibility assessments,

 2   a rational factfinder could resolve all material factual issues in favor of that party. See, e.g., Anderson

 3   v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Summary judgment is appropriate when "there can

 4   be but one reasonable conclusion as to the verdict," id. at 250, i.e., "it is quite clear what the truth is,"

 5   Poller v. Columbia Broadcasting System, Inc., 368 U.S. 464, 467 (1962) (internal quotation marks

 6   omitted), and no rational factfinder could find in favor of the nonmovant. We review the district

 7   court's grant of summary judgment de novo, applying the same standards that govern the district

 8   court's consideration of the motion. See, e.g., Aulicino v. New York City Department of Homeless

 9   Services, 580 F.3d 73, 79 (2d Cir. 2009).

10                   The district court concluded that there was no genuine issue of material fact as to

11   Sourlis's liability under § 5 of the Securities Act with respect to more than 6 million Greenstone shares

12   to which her January 11, 2006 opinion letter pertained. It is undisputed that the Greenstone shares in

13   question were not registered. Sourlis opined that shares could lawfully be issued as unrestricted shares

14   to recipients who were acquiring them in exchange for certain convertible notes. The Sourlis Letter

15   stated that she was relying on "information and representations furnished by . . . the Original Note

16   Holders to me," and that "I have been informed by the Original Note Holders" that none of them were

17   affiliated with the issuer and that the Original Note Holders had owned the notes for at least two years.

18   (Sourlis Letter at 2.) The record established, however, that "the convertible notes described by Sourlis

19   did not even exist." SEC v. Greenstone Holdings, Inc., 954 F.Supp.2d 211, 213 (S.D.N.Y. 2013).

20   Accordingly, many of the statements in the Sourlis Letter were necessarily false. See id. On the basis

21   stated in the Sourlis Letter, which was approved by defendant John B. Frohling, Greenstone's

22   securities counsel, 6,150,000 Greenstone shares were issued in February 2007 as unrestricted shares,

23   allowing them to be sold to the public despite the fact that they were unregistered. The court

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 1   concluded that Sourlis's role

 2                  satisfie[d] the requirement that she directly or indirectly offered to sell
 3                  securities. [Greenstone's transfer agent] required a legal opinion letter
 4                  providing the authority to issue the unregistered shares without a restrictive
 5                  legend. It would not have issued the shares without Sourlis's letter. This is
 6                  sufficient to hold an attorney liable under Section 5.

 7   Id. at 214. We see no error in this conclusion.

 8                  The district court also found Sourlis liable under § 20(e) of the Exchange Act because

 9   her letter aided and abetted violations of § 10(b) and Rule 10b-5 by others. See Order dated November

10   16, 2012, entered November 20, 2012 ("November 20 Order"), incorporated in the Superseding Final

11   Judgment. Sourlis challenges this conclusion, arguing, as she did in the district court, that she had no

12   actual knowledge that her January 2006 letter would be used for the issuance of unrestricted stock a

13   year later, and that she had no knowledge of the exhibit that was eventually attached to the letter. The

14   court found that the attachment (which specified the persons who were to receive the shares and the

15   number of shares each was to receive) was not the problem; the problem "was the contents of the

16   letter" (Hearing Transcript, November 16, 2012 ("Tr."), at 32). Although § 20(e) as it existed at the

17   time of the Sourlis Letter pertained to "any person that knowingly provide[d] substantial assistance"

18   to a primary violator of the securities laws, 15 U.S.C. § 78t(e) (2000), it did not, unlike certain other

19   sections of the Exchange Act, state that in order to be liable the person must have had actual

20   knowledge, see, e.g., Exchange Act § 21E, 15 U.S.C. § 78u-5(c)(1)(B) (for claims of fraud in forward-

21   looking statements, requiring proof that the statements were made with "actual knowledge" of falsity).

22   See generally SEC v. Big Apple Consulting USA, Inc., 783 F.3d 786, 798-801 (11th Cir. 2015). The

23   district court concluded that the requirements of § 20(e) were met because Sourlis's election not to

24   insist on seeing the notes discussed in her opinion letter was at the very least reckless (see Tr. 36-37

25   ("even if it were not intentionally done, it was so reckless," in light "of its importance to the

                                                        7
 1   transaction")), and that her misrepresentations that she had spoken to the original note holders were

 2   misrepresentations as to her knowledge and hence were knowingly false (see id. at 35-36).

 3                  We see no error in the district court's rejection of Sourlis's arguments. Sourlis's letter

 4   began by stating that her "opinion has been requested with respect to the issuance of shares (the

 5   'Shares') . . . upon the conversion of [certain] . . . Convertible Notes" (Sourlis Letter at 1), and it

 6   concluded that "the Shares underlying the Note [sic] may be issued . . . without a legend pursuant to

 7   the Securities Act" (id. at 2 (emphasis in original)). Between stating its purpose and its legal

 8   conclusion, the "letter represented as fact matters that were contrary to fact"; Sourlis represented in

 9   the letter more than once that she "had spoken to the original note-holders," a representation as to her

10   own "knowledge," although "there is no dispute that in fact she did not speak to those original note-

11   holders"; thus, a "critical statement of fact underpinning the opinion" was false because "no original

12   note-holders existed and indeed no notes existed" (Tr. 35). The Sourlis Letter itself makes clear that

13   its purpose was to state whether unrestricted stock could be issued in exchange for the supposed notes.

14   Its misrepresentations underlying its conclusion that such shares could, consistent with the Securities

15   Act, be issued without a restrictive legend plainly enabled Frohling to instruct Greenstone's transfer

16   agent to issue, in exchange for nonexistent notes, unrestricted stock that was then sold by the

17   recipients. The district court did not err in ruling as a matter of law that Sourlis, in violation of

18   § 20(e), aided and abetted violations of § 10(b) and Rule 10b-5.

19                  The district court subsequently ruled that Sourlis's knowingly false statements that she

20   had spoken to the note holders, along with her misrepresentations as to facts she had not verified, also

21   warranted holding her liable as a primary violator of § 10(b) and Rule 10b-5. (See Hearing Transcript

22   July 21, 2015, at 4, 21-22.) That ruling, reflected in the Superseding Final Judgment, is amply

23   justified by the record described above.

                                                        8
 1                  In No. 14-2937, the SEC cross-appealed to challenge so much of the district court's

 2   November 20 Order as had denied its motion for partial summary judgment holding Sourlis liable

 3   under § 10(b) and Rule 10b-5 as a primary violator. Since the Superseding Final Judgment holds

 4   Sourlis liable under those provisions as a primary violator, the SEC's cross-appeal is moot.



 5   B. Relief

 6                  "Once the district court has found federal securities law violations, it has broad

 7   equitable power to fashion appropriate remedies," SEC v. First Jersey Securities, Inc., 101 F.3d 1450,

 8   1474 (2d Cir. 1996) ("First Jersey"), cert. denied, 522 U.S. 812 (1997), and its choice of remedies is

 9   reviewable for abuse of discretion, see, e.g., id. at 1474-77; SEC v. Contorinis, 743 F.3d 296, 301 (2d

10   Cir. 2014), cert. dismissed, 136 S. Ct. 531 (2015). Sourlis, in addition to denying any responsibility

11   in connection with the unlawful issuance of the 6,150,000 shares to which her opinion letter pertained,

12   argues that that letter was a one-time occurrence that did not warrant a civil penalty or injunctive

13   relief.

14                  Civil monetary penalties are authorized by the Securities Act and the Exchange Act for

15   both deterrent and punitive purposes. See, e.g., SEC v. Razmilovic, 738 F.3d 14, 38-39 (2d Cir. 2013).

16   And injunctive relief is

17                  particularly within the court's discretion where a violation was founded on
18                  systematic wrongdoing, rather than an isolated occurrence, . . . and where the
19                  court views the defendant's degree of culpability and continued protestations
20                  of innocence as indications that injunctive relief is warranted, since "persistent
21                  refusals to admit any wrongdoing ma[k]e it rather dubious that [the offenders]
22                  are likely to avoid such violations of the securities laws in the future in the
23                  absence of an injunction."

24   First Jersey, 101 F.3d at 1477 (quoting SEC v. Lorin, 76 F.3d 458, 461 (2d Cir. 1996) (other internal

25   quotation marks omitted) (emphases ours)).

                                                        9
 1                   We see no abuse of discretion here, given the record in this case as to Sourlis's lack of

 2   concern as to whether her representations of fact were true or false and her continued manifestation

 3   of a lack of concern for her responsibilities under the federal securities laws. (See, e.g., Hearing

 4   Transcript, April 2, 2014, at 8, 13, 15 (district court's references to Sourlis's "untruths," her willingness

 5   to make statements--with "absolutely no reason" to believe them correct--"on which other people's

 6   money depends," and her "failure to accept any responsibility").)



 7                                                CONCLUSION



 8                   We have considered all of Sourlis's appellate arguments and have found in them no

 9   basis for reversal. The district court's Superseding Final Judgment against Sourlis is affirmed. The

10   SEC's cross-appeal in No. 14-2937 is dismissed.




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