Securities & Exchange Commission v. Frohling
2016 U.S. App. LEXIS 21678
| 2d Cir. | 2016Background
- John B. Frohling, Greenstone's securities counsel (2006–2008), wrote, approved, or concurred in 11 opinion letters that purported to clear unregistered Greenstone shares for public sale under Rule 144(k).
- The opinion letters represented that recipients acquired the shares "solely" in exchange for older Greenstone securities and thus could be issued without restricted legends; those representations were false in multiple instances (e.g., Morelli Group remit of proceeds to Greenstone; non‑existent convertible notes relied on in the Sourlis letter).
- The district court granted the SEC summary judgment on liability under Securities Act §5, §17(a), Exchange Act §10(b), and Rule 10b‑5, finding Frohling’s opinion letters were material misrepresentations and that his participation was substantial to the unlawful offerings.
- The court found Frohling had the requisite scienter based on documentary evidence (emails) and his deposition admissions (including that he knew the Morelli Group would transfer proceeds to Greenstone and that he received shares via his own opinion letters and sold many of them).
- The Superseding Final Judgment ordered Frohling to pay $204,161.86 (civil penalty, disgorgement, prejudgment interest) and permanently barred him from participating in penny‑stock offerings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Liability under §5 for enabling public sales of unregistered stock | Frohling’s opinion letters directly enabled distribution; transfer agent would not have issued unrestricted shares absent them | Frohling contends he was not the transferor and did not effectuate the sales | Held for plaintiff: Frohling substantially participated and is liable under §5 |
| Scienter for §10(b)/Rule10b‑5 and §17(a) | Documentary emails and Frohling’s deposition admissions show he knew the exemptions were false (e.g., Morelli proceeds sharing; non‑existent notes); reckless or intentional conduct | Frohling claims he did not know the letters were false and his testimony creates a genuine dispute | Held for plaintiff: no genuine issue as to knowledge; evidence supports scienter (intent/reckless disregard) |
| Appropriateness of summary judgment | SEC: record (emails, admissions, contemporaneous documents) leaves no reasonable dispute on material facts and scienter | Frohling: deposition denial creates factual issue precluding summary judgment | Held for plaintiff: applying summary judgment standards, only one reasonable conclusion supports summary judgment |
| Remedies (disgorgement, prejudgment interest, civil penalties, injunction) | Remedies are equitable and calibrated to deprive ill‑gotten gains, deter, and prevent recurrence; injunction warranted given systematic wrongdoing and lack of remorse | Frohling argued against relief scale and permanent bar | Held for plaintiff: remedies upheld as within district court’s broad equitable discretion |
Key Cases Cited
- SEC v. Cavanagh, 445 F.3d 105 (2d Cir. 2006) (elements of §5 claim and liability for those who facilitate unregistered offerings)
- Europe & Overseas Commodity Traders, S.A. v. Banque Paribas London, 147 F.3d 118 (2d Cir. 1998) (standards for §5 claim elements)
- Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (U.S. 1986) (summary judgment standards and genuine issue analysis)
- Poller v. Columbia Broadcasting System, Inc., 368 U.S. 464 (U.S. 1962) (when summary judgment is appropriate because truth is clear)
- Aulicino v. New York City Dep't of Homeless Servs., 580 F.3d 73 (2d Cir. 2009) (appellate review of summary judgment standards)
- SEC v. Pentagon Capital Mgmt. PLC, 725 F.3d 279 (2d Cir. 2013) (elements of §10(b) and Rule 10b‑5 claims)
- SEC v. Monarch Funding Corp., 192 F.3d 295 (2d Cir. 1999) (fraud elements in securities context)
- SEC v. Obus, 693 F.3d 276 (2d Cir. 2012) (scienter established by intent to deceive or reckless disregard)
- First Jersey Securities, Inc. v. SEC, 101 F.3d 1450 (3d Cir. 1996) (equitable remedial powers: disgorgement purpose and injunctive relief considerations)
- SEC v. Razmilovic, 738 F.3d 14 (2d Cir. 2013) (civil penalties purposes: deterrent and punitive)
- SEC v. Contorinis, 743 F.3d 296 (2d Cir. 2014) (standard of review for remedial orders)
- SEC v. Lorin, 76 F.3d 458 (2d Cir. 1996) (injunction appropriate where systematic wrongdoing and refusal to admit misconduct indicate risk of recurrence)