Securities & Exchange Commission v. Sourlis
851 F.3d 139
2d Cir.2016Background
- Virginia K. Sourlis, an attorney, wrote a January 11, 2006 opinion letter (the "Sourlis Letter") opining that certain Greenstone Holdings, Inc. shares could be issued without a restrictive legend.
- The letter relied on representations that original convertible notes and unaffiliated note holders existed and had owned the notes for two years; the convertible notes did not exist.
- Using the Sourlis Letter, Greenstone issued 6,150,000 unrestricted (unregistered) shares in February 2007 that were later sold to the public.
- The SEC sued; the district court granted summary judgment holding Sourlis liable under Section 5 of the Securities Act, as a primary violator of Section 10(b) and Rule 10b-5, and as an aider and abettor under Section 20(e).
- The Superseding Final Judgment ordered Sourlis to pay $57,284.83 (penalty, disgorgement, prejudgment interest) and barred her permanently from participating in penny-stock offerings.
- Sourlis appealed, arguing no duty to the investing public, that intervening fraud by others absolved her, and that penalties/injunction were unwarranted; the Second Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Liability under §5 (unregistered public offering) | Sourlis's opinion letter enabled issuance and sale of unregistered shares; she engaged in steps necessary to distribution | Letter merely legal advice; no direct sale or transfer; no duty to protect investors | Affirmed: attorney letter was necessary to issue shares; §5 liability proper |
| Aiding and abetting §10(b)/Rule 10b-5 under §20(e) | Letter knowingly/recklessly provided substantial assistance to fraud by misrepresenting factual bases | She lacked actual knowledge the letter would be used later; did not see the attached allocation exhibit | Affirmed: misrepresentations about speaking to note-holders and reckless failure to verify meet §20(e) standards |
| Primary liability under §10(b)/Rule 10b-5 | False statements of fact in the letter (about her knowledge) were material and made with scienter (recklessness/knowing falsity) | Letter was a one-time opinion, not a fraudulent device; lacked intent/scienter | Affirmed: false statements about facts she claimed to know support primary liability |
| Remedies: civil penalty and injunctive relief | SEC: penalties and permanent penny-stock bar appropriate given culpability and risk of future violations | Sourlis: isolated occurrence; penalty and injunction excessive | Affirmed: equitable remedies within court's discretion; record shows culpability and risk warranting relief |
Key Cases Cited
- SEC v. Cavanagh, 445 F.3d 105 (2d Cir. 2006) (elements required to state a Section 5 violation)
- SEC v. Pentagon Capital Mgmt. PLC, 725 F.3d 279 (2d Cir. 2013) (elements of a §10(b)/Rule 10b-5 claim)
- SEC v. Obus, 693 F.3d 276 (2d Cir. 2012) (scienter can be established by intent or recklessness)
- Chinese Consol. Benevolent Ass'n, 120 F.2d 738 (2d Cir. 1941) (persons not transferring title may be liable under §5 if they engage in steps necessary to distribution)
- SEC v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir. 1996) (district court's broad equitable power to craft remedies for securities violations)