Securities and Exchange Commission v. Norstra Energy Inc.
1:15-cv-04751
S.D.N.Y.Aug 17, 2016Background
- Norstra Energy (an OTC-traded microcap) was the subject of a paid promotional campaign in 2013 organized by Arista/Full Service Media (FSM); FSM hired copywriter Todd Weintz and campaign manager William Kaitz.
- Eric Dany, editor of the "Stock Prospector" and "Mutual Fund Prospector," was retained and paid to lend his name/brand as the campaign’s endorser; materials bore his headshot, signature, and first-person statements.
- Promotional materials touted massive short-term gains, alleged large oil resources (8.5 billion barrels), and urged readers to "Buy shares of Norstra (NORX) now," while containing a small-font disclaimer labeling the pieces as paid advertisements.
- E-mail chains and contracts show Dany reviewed, suggested edits, approved final proofs, and exercised control over some content and distribution decisions; FSM distributed the materials by bulk mail and e-mail to millions, including Dany’s subscribers.
- SEC suspended Norstra trading and brought a Rule 10b-5(b) enforcement action against Norstra, its CEO, and Dany; Dany moved for summary judgment arguing he did not “make” the alleged misstatements; SEC moved for partial summary judgment on the "in connection with" and interstate commerce elements.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Dany "made" the alleged misstatements under Rule 10b-5(b) (Janus test) | SEC: The promotions are repeatedly attributed to Dany (headshot, "My name is Eric Dany," signature) and emails show he exercised authority over content and approval, so he is a maker. | Dany: He only drafted small portions and made minor edits; he did not have "ultimate authority" and thus did not "make" the statements. | Denied for Dany: Attribution plus evidence of content control create a triable issue that Dany made the statements under Janus. |
| Whether the misstatements were made "in connection with" the purchase or sale of securities | SEC: The campaign was designed and targeted to induce purchases ("Buy shares now"), sent to investors (including Dany’s subscribers), and intended to ramp up trading. | Dany: The promotion was so hyperbolic that reasonable investors would not rely on it; it was merely promotional/advertorial. | Held for SEC (partial SJ): The materials were reasonably calculated to influence investing public and were intended to induce purchases; therefore they were "in connection with" securities transactions. |
| Whether the jurisdictional interstate-commerce element of Rule 10b-5(b) is satisfied | SEC: The campaign used e-mail, the Internet, and mail to disseminate the alleged misstatements nationwide. | Dany: Implied suggestion the materials were created but not distributed. | Held for SEC (partial SJ): Undisputed evidence shows distribution by e-mail and U.S. mail (millions sent); interstate commerce element satisfied. |
| Summary judgment posture | SEC: Partial SJ appropriate on "in connection with" and interstate-commerce elements; Dany’s SJ should be denied because factual disputes remain. | Dany: Entitled to SJ on "maker" issue; other elements contested. | Court: Granted SEC partial SJ (on "in connection with" and interstate commerce); denied Dany’s SJ on "maker" issue. |
Key Cases Cited
- Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (Sup. Ct. 2011) (defendant must have "ultimate authority" over content/communication to be the maker of a statement)
- S.E.C. v. Zandford, 535 U.S. 813 (Sup. Ct. 2002) (Rule 10b-5 "in connection with" purchase or sale requirement)
- SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968) (broad standard: statements made in a manner reasonably calculated to influence investors can be "in connection with" securities transactions)
- SEC v. Pirate Investor LLC, 580 F.3d 233 (4th Cir. 2009) (promotional newsletters can satisfy the "in connection with" element where aimed to induce trades; suggested non-mandatory factors for the inquiry)