908 F. Supp. 2d 402
S.D.N.Y.2012Background
- SEC sues StarMedia former executives, including Morales, for accounting fraud; Morales moves for summary judgment on remaining claims.
- Central scheme involves incremental revenue transactions with AdNet, HMP, and MVS; StarMedia restated revenue and disclosed investigation in 2001.
- Morales served as StarMedia's Vice President for Finance (and possibly controller) during 1998–2001, reporting to the CFO, Steven Heller.
- StarMedia restated its 2000 and first two quarters of 2001, acknowledging improper recognition of revenues tied to the AdNet/HMP/MVS transactions.
- SEC relies on Morales’s wiring of funds and signing management representation letters as evidence of aiding and abetting; Morales argues limited role and lack of knowledge.
- Court denies Morales's summary judgment on all asserted claims and denies, without prejudice, Morales’s motion to suppress Regan’s expert testimony, with a trial plan to follow.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Aiding and abetting 13(a) violation | Morales aided StarMedia's misstatements. | Insufficient knowledge or substantial assistance; limited role. | Genuine issues of material fact preclude summary judgment |
| Aiding and abetting 13(b)(2)(A) violation | Morales knew or consciously disregarded misstated books and records. | No sufficient proof of knowledge or direct involvement. | Genuine issues of material fact; summary judgment denied |
| Direct Rule 13b2-1 violation | Morales acted unreasonably and aided falsification of books/records. | Reasonableness defense; no follow-up inquiry expected. | Material facts in dispute; summary judgment denied |
| Direct Rule 13b2-2 violation | Signing management representation letters without knowledge of falsity breached duty. | Does not admit falsity or require defendant's knowledge. | Genuine issues of material fact; summary judgment denied |
Key Cases Cited
- SEC v. Espuelas, 579 F. Supp. 2d 461 (S.D.N.Y. 2008) (aiding-and-abetting standard for Exchange Act claims)
- SEC v. Espuelas, 767 F. Supp. 2d 467 (S.D.N.Y. 2011) (restatement evidence sufficiency for material misstatement)
- SEC v. Apuzzo, 689 F.3d 204 (2d Cir. 2012) (standard for aiding and abetting knowledge and substantial assistance; proximate-cause discussion)
- SEC v. DiBella, 587 F.3d 553 (2d Cir. 2009) (relationship of knowledge and substantial assistance in securities cases)
- SEC v. Lucent Tech., Inc., 610 F. Supp. 2d 342 (D. N.J. 2009) (necessity of showing knowledge to prove aiding and abetting)
- Cedric Kushner Promotions, Ltd. v. Cadillac Fairview, 417 F. Supp. 2d 326 (S.D.N.Y. 2006) (defendant's reliance on supervisor not establishing lack of knowledge; reasonableness standard)
- In re Atlas Air Worldwide Holdings, Inc. Sec. Litig., 324 F. Supp. 2d 474 (S.D.N.Y. 2004) (restatement as evidence of material misstatement)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (recklessness standard for 13(b)(2) liability)
- SEC v. Kushner Promotions, 417 F. Supp. 2d 326 (S.D.N.Y. 2006) (illustrates knowledge standard in securities cases)