694 F. App'x 853
2d Cir.2017Background
- Anthony M. Knight co‑founded iShopnomarkup.com and participated in unregistered stock offerings in 1999–2000 that raised about $2.3 million.
- The SEC sued Knight, iShop, and others in 2004 for violations of Sections 17(a), 10(b)/Rule 10b‑5, and Sections 5(a)/(c) of the Securities Act; only claims against Knight went to a 14‑day jury trial.
- The jury returned a verdict for the SEC; the district court denied Knight’s motions for directed verdict or new trial and imposed remedies including disgorgement, prejudgment interest, civil penalties, and officer/director bar.
- Knight appealed pro se, challenging liability findings (materiality, scienter, who “made” statements under Janus, Rule 506 exemption) and evidentiary rulings and remedies.
- The Second Circuit reviewed sufficiency of the evidence de novo, evidentiary rulings for abuse of discretion, and remedies for abuse of discretion, and affirmed the district court judgment.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Statute of limitations under 28 U.S.C. § 2462 | SEC: claims timely because fraudulent acts occurred Sept. 21, 1999 or later and complaint filed Sept. 20, 2004 | Knight: enforcement action time‑barred | Held: SEC timely; limitations accrue when fraudulent action occurs (Gabelli) |
| Materiality of offering memoranda disclosures | SEC: memoranda contained materially inaccurate descriptions despite general risk disclosures | Knight: general startup risk warnings meant disclosures were not materially misleading | Held: general risk warnings do not cure materially inaccurate descriptions; sufficient evidence of materiality |
| Scienter / reliance on counsel defense | SEC: evidence supported a finding of scienter (reckless conduct); Knight failed to fully disclose to counsel | Knight: reasonably relied on counsel when drafting memoranda | Held: jury could reject reliance defense because Knight withheld information from counsel; scienter supportable |
| "Maker" and Janus / scheme liability | SEC: even if Knight wasn’t maker of memoranda, he made other fraudulent statements and could be liable under Rule 10b‑5(a)/(c) scheme liability | Knight: under Janus, only entity (iShop) was maker of memoranda so Knight cannot be liable for those misstatements; also raised alter‑ego defense | Held: sufficient evidence that Knight made other fraudulent statements; Janus limited to subsection (b) and does not preclude scheme liability under (a)/(c); jury could find liability on that basis |
| Admission of video deposition (Ian Noakes) | SEC: deposition proper and Noakes testimony cumulative of live testimony | Knight: no notice given to his attorneys; admission was error | Held: district court’s finding that defense counsel knew deposition was set; even if error, testimony was cumulative and harmless |
| Section 5 / Rule 506 exemption | SEC: offerings were public and not eligible for Rule 506 private offering exemption; Knight failed to carry exemption burden | Knight: offerings exempt under Rule 506 and involved accredited investors | Held: jury reasonably could find offerings were public (general solicitation) and Knight failed to show exemption; Section 5 liability sustained |
| Remedies (disgorgement, penalties, bar) | SEC: remedies appropriate for violations | Knight: challenges to remedies | Held: district court’s remedies not an abuse of discretion; affirming relief imposed |
Key Cases Cited
- Gabelli v. SEC, 568 U.S. 442 (statute of limitations for SEC enforcement actions accrues when the fraudulent act occurs)
- Janus Capital Grp. v. First Derivative Traders, 564 U.S. 135 (who is the operative “maker” of a statement under Rule 10b‑5(b))
- SEC v. Frohling, 851 F.3d 132 (elements of Rule 10b‑5 and Section 17(a) claims)
- Bucalo v. Shelter Island Union Free Sch. Dist., 691 F.3d 119 (standard for Rule 50 review and directed verdicts)
- SEC v. Pentagon Capital Mgmt. PLC, 725 F.3d 279 (scheme liability under Rule 10b‑5(a) and (c))
- Markowski v. SEC, 34 F.3d 99 (reasonable‑reliance defense and duty to disclose to counsel)
- Warren v. Pataki, 823 F.3d 125 (harmless‑error standard for evidentiary rulings)
- SEC v. Cavanagh, 445 F.3d 105 (burden to establish registration exemption)
- SEC v. Razmilovic, 738 F.3d 14 (appellate review standard for civil penalties)
- SEC v. Bankosky, 716 F.3d 45 (officer and director bar review)
- First Jersey Sec. Inc. v. Bergen, 101 F.3d 1450 (standards for disgorgement and prejudgment interest)