Securities & Exchange Commission v. Greenstone Holdings, Inc., 954 F. Supp. 2d 211

Background

Greenstone converted into a public company and, from 2006–2008, issued millions of unregistered shares through a public offering process managed in part by transfer agent CST.
Rule 144(k) then allowed certain securities issued in exchange for restricted securities held over two years to be sold publicly without registration; transfer agent CST required legal opinion letters to issue shares without restrictive legends.
Attorney Virginia K. Sourlis wrote a January 11, 2006 opinion letter stating that convertible promissory notes had been issued to various vendors on or before January 10, 2004, assigned to investors on January 10, 2006, and that the notes had been held for at least two years.
The convertible notes Sourlis described did not exist; the statements in her opinion letter about the notes, assignments, consideration, and holding period were false.
CST relied on opinion letters (including Sourlis’s) and issued over six million Greenstone shares without restrictive legends; CST would not have issued shares without such an opinion.
The SEC moved for summary judgment on Section 5 (unregistered offer/sale) and Section 10(b); court previously granted aiding-and-abetting liability for Section 10(b) and reserved decision on Section 5; this opinion grants summary judgment for the SEC on Section 5 and denies Sourlis’s motion.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Sourlis "offered or sold" unregistered securities under Section 5 by providing a false opinion letter	Sourlis’s opinion letter was necessary to CST’s issuance; without it the shares would not have been issued, so she engaged in steps necessary to distribution	Her letter was only one of several documents; CST needed an exhibit showing number of shares and other attorneys also provided opinions, so her role was not a necessary substantial participation	Court held Sourlis’s letter was sufficient participation: CST would not have issued shares without it, so Section 5 liability attaches
Whether scienter is required for Section 5 liability	SEC: scienter not required for Section 5 participation liability	Sourlis: argued defenses including lack of reliance or diligence issues by transfer agent	Court confirmed scienter is not required and transfer agent’s conduct does not absolve liability
Whether a later-time holding or other Rule 144 provisions created an exemption/safe harbor for Sourlis	SEC: no exemption applies because the underlying promissory notes did not exist and other Rule 144 conditions were not shown to be met	Sourlis: argued issuance occurred more than a year after her letter and relied on Rule 144(d)(1) timing/safe-harbor	Court rejected the safe-harbor claim: nonexistent notes undermine applicability and other Rule 144 requirements were not satisfied; even if notes existed, they likely were not "securities" under Reves
Whether multiple attorneys’ similar false opinions or transfer agent laxity absolve Sourlis	SEC: multiple culpable actors does not negate Sourlis’s necessary participation	Sourlis: pointed to other opinion letters and CST’s alleged lack of diligence	Court held other attorneys’ involvement or CST’s potential lack of diligence do not absolve Sourlis’s liability

Key Cases Cited

Europe & Over. Commodity Traders, S.A. v. Banque Paribas London, 147 F.3d 118 (2d Cir. 1998) (elements of a Section 5 claim include offer/sale, lack of registration, and interstate use)
SEC v. Chinese Consol. Benevolent Ass’n, Inc., 120 F.2d 738 (2d Cir. 1941) (non-transferring persons may be liable if they engaged in steps necessary to distribution)
SEC v. Universal Express, Inc., 475 F. Supp. 2d 412 (S.D.N.Y. 2007) (Section 5 necessary-participant test and no scienter requirement)
SEC v. Cavanagh, 445 F.3d 105 (2d Cir. 2006) (discussing prima facie burdens and defenses in SEC enforcement)
Reves v. Ernst & Young, 494 U.S. 56 (1990) (test for determining whether an instrument is a "security")