U.S. Securities and Exchange Commission v. Big Apple Consulting USA, Inc.
2015 U.S. App. LEXIS 5712
| 11th Cir. | 2015Background
- Big Apple Consulting, its subsidiaries (MJMM, MSI), and executives (Marc Jablon, Mark Kaley) provided investor/public relations services and were paid largely in client stock; they promoted microcap CyberKey Solutions and received/ traded massive CyberKey shareholdings.
- CyberKey’s CEO James Plant fabricated a large Department of Homeland Security (DHS) contract; defendants drafted and circulated press releases, ran a call room to promote CyberKey, and sold hundreds of millions of shares while allegedly failing to disclose or investigate red flags.
- The SEC sued for violations of the Securities Act (§17(a), §5) and the Exchange Act (§15(a), aiding and abetting under §20(e)); district court granted partial summary judgment for SEC on registration-related claims and submitted the §17(a)/§20(e) claims to a jury.
- At trial, the jury found defendants violated §17(a) subsections (1)–(3) and §20(e), finding both actual knowledge and severe recklessness; defendants appealed raising six issues.
- The Eleventh Circuit affirmed, rejecting defendants’ arguments about Janus’s reach, §20(e) scienter, jury instructions (deliberate ignorance), summary judgment on §5 claims (underwriter/dealer), and evidentiary rulings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Janus limits §17(a) liability by restricting who “made” misstatements | Janus addresses Rule 10b‑5(b) only; SEC contends §17(a) (especially subsections (1) and (3) and the phrase “by means of” in (2)) imposes broader liability that can cover actors who used others’ statements | Janus’ definition of who “makes” a statement under Rule 10b‑5(b) should apply to §17(a), so defendants who lacked ultimate control over press releases cannot be primary violators | Rejected: Janus applies to Rule 10b‑5(b) only; §17(a)(1) and (3) unaffected and §17(a)(2)’s “by means of” language covers use of others’ statements—defendants remain potentially liable as primary violators |
| Required scienter under §20(e) (SEC aiding/abetting authority) | SEC: §20(e) need not demand actual knowledge; pre‑Central Bank jurisprudence and legislative history support scienter satisfied by severe recklessness | Defendants: §20(e) requires proof of actual knowledge; Dodd‑Frank’s later addition of “or recklessly” shows Congress originally meant actual knowledge | Held: Severe recklessness sufficed under §20(e) as applied; legislative history and pre‑Central Bank standards support that interpretation; even if actual knowledge required, jury found both actual knowledge and severe recklessness (harmless) |
| Validity and formulation of the deliberate ignorance (willful blindness) jury instruction | SEC: deliberate ignorance instruction appropriate where evidence shows defendants consciously avoided confirming red flags | Defendants: instruction is a criminal standard, omitted necessary subjective-language and risked equating negligence with knowledge | Held: Instruction appropriate in civil aiding/abetting context, contained subjective elements (high probability + deliberate actions to avoid learning) and not plain error; linked properly to scienter and severe recklessness instructions |
| Whether Big Apple/MJMM/Jablon were exempt from §5 registration under §4(1) (i.e., not underwriters/dealers) | SEC: defendants obtained shares with a view to distribution and were in the business of buying/selling (dealers/underwriters) — no §4(1) exemption | Defendants: received stock primarily as payment for services and held some shares months before selling; not underwriters/dealers | Held: Summary judgment for SEC affirmed — evidence showed acquisition “with a view to” distribution (rapid sales, profit motive) and that Big Apple/MJMM were dealers in securities; defendants failed to show a genuine issue of material fact |
Key Cases Cited
- Janus Capital Grp., Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011) (interpreting who “makes” a misstatement under Rule 10b‑5(b))
- Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994) (private aiding and abetting under §10(b) foreclosed)
- Stoneridge Inv. Partners, LLC v. Scientific‑Atlanta, Inc., 552 U.S. 148 (2008) (secondary actors can commit primary violations under certain theories)
- Woods v. Barnett Bank of Ft. Lauderdale, 765 F.2d 1004 (11th Cir. 1985) (aiding and abetting test; severe recklessness can satisfy scienter)
- Global‑Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060 (2011) (willful blindness/deliberate ignorance can supply knowledge in civil cases)
- SEC v. Tambone, 597 F.3d 436 (1st Cir. 2010) (interpreting §17(a)(2) and the reach of liability for using others’ statements)
- Berckeley Inv. Grp., Ltd. v. Colkitt, 455 F.3d 195 (3d Cir. 2006) (holding on “with a view to distribution” and consideration of holding period in underwriter analysis)