Securities & Exchange Commission v. StratoComm Corp.
2 F. Supp. 3d 240
N.D.N.Y.2014Background
- StratoComm, a Delaware penny-stock telecom company (incorporated 1997), sold ~62 million shares raising ~$4M from >100 investors between 2007–2010 without filing an offering registration or providing audited financials or an offering memorandum.
- Roger Shearer: founder, sole director, CEO, largest shareholder during the relevant period; he drafted/approved company press releases and the Executive Informational Overview and authorized stock issuances.
- Craig Danzig: investor relations executive (formerly licensed broker whose license lapsed in 2000); marketed StratoComm stock, used the Executive Overview as a sales tool, and received a performance-based discretionary bonus; he was not registered as a broker during 2007–2010.
- Company publications (Nov. 20, 2007 and Jan. 29, 2008 press releases; Sept. 2, 2008 Executive Informational Overview; May 5, 2009 press release) represented that StratoComm had developed, sold, or installed a Transitional Telecommunications System (TTS) and related multimillion-dollar contracts.
- Undisputed facts: StratoComm had never built or tested an operational TTS, never possessed an aerostat, had no revenue from TTS sales, lacked funding to build prototypes, and received no deposits on the announced "sales." Danzig and Shearer knew the company lacked an operational TTS.
- Procedural posture: SEC moved for partial summary judgment on liability for all claims; StratoComm and Shearer opposed; Danzig (pro se) did not respond; the court granted the SEC’s motion and found liability on each asserted claim.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether StratoComm’s press releases and Executive Overview were false or misleading in violation of Section 10(b)/Rule 10b-5 and Section 17(a) | Statements falsely portrayed an existing, tested, sellable product and multi-million dollar sales when none existed; dissemination coincided with stock sales, so statements were made in connection with securities transactions | Shearer/StratoComm claimed statements described progress, proprietary payload existed, or were qualified (e.g., contracts expected to result in sales); argued renderings were not presented as existing systems | Court: Statements were materially false/misleading as a matter of law; summary judgment for SEC on antifraud claims |
| Whether defendants acted with scienter / were controlling or culpable participants (10b-5, Section 20(a), aiding & abetting) | Shearer knowingly prepared/approved false statements and had control; Danzig knew untrue statements and used the Overview to sell stock—both culpable | Defendants argued qualifications, disclosures, and that some components existed; disputed characterizations of images and wording | Court: Shearer exhibited knowing misconduct; scienter imputed to company; Shearer and Danzig liable as culpable participants and as aider/abettors |
| Whether Danzig acted as an unregistered broker in violation of Section 15(a) and violated Securities Act Section 17(a) | Danzig solicited investors, negotiated terms, handled paperwork, facilitated issuances, and received transaction-based bonus—thus functioning as an unregistered broker and violated Sections 17(a)(1)-(3) | Danzig offered no substantive opposition (pro se, failed to respond); generally might argue role was non-brokerial or internal marketing | Court: Danzig acted as an unregistered broker (regular participation, transaction-based compensation) and violated Section 17(a) |
| Whether offerings were unregistered in violation of Securities Act Sections 5(a) and 5(c) or exempt as private offerings | SEC: Public dissemination, broad solicitation, sales to non-accredited and unsophisticated investors, no registration—no private-offering exemption | Defendants: Claimed private offering exemption (existing shareholders, limited recipients, or purchasers could fend for themselves) | Court: No private-offering exemption; strict construction applies; summary judgment for SEC on Section 5 violations against StratoComm, Shearer, and Danzig |
Key Cases Cited
- First Jersey Sec., Inc. v. Bergen, 101 F.3d 1450 (2d Cir. 1996) (elements of claims under Section 10(b)/Rule 10b-5 and Section 17(a))
- Platforms Wireless Int’l, Inc. v. City of Seattle, 617 F.3d 1072 (9th Cir. 2010) (present-tense product descriptions that create impression product exists can be materially misleading)
- Janus Capital Grp., Inc. v. First Derivative Traders, 131 S. Ct. 2296 (U.S. 2011) (maker-of-statement standard: ultimate authority over content is key)
- Zandford, 535 U.S. 813 (U.S. 2002) (broad construction of "in connection with" element; scheme to defraud coinciding with sale suffices)
- TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (U.S. 1976) (materiality standard: substantial likelihood a reasonable investor would consider information important)
- Gabelli v. SEC, 653 F.3d 49 (2d Cir. 2011) (half-truths and literally true statements that create a misleading impression support fraud claims)