Securities Regulation Daily Attorney’s opinion letters were integral to pump-and-dump scheme
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Wednesday, January 10, 2018

Attorney’s opinion letters were integral to pump-and-dump scheme

By Anne Sherry, J.D.

The SEC’s case continues against a Houston-based attorney who allegedly issued false opinion letters to bolster a pump-and-dump scheme. The defendant received $700 for sending two opinion letters to the transfer agent for Nouveau Holdings Ltd. so that restrictive legends would be removed. Denying the defendant’s motion to dismiss, the Southern District of New York held that the SEC alleged misrepresentations for which the defendant was the "maker" under Janus, and adequately pleaded scienter (SEC v. Sayid, January 10, 2018, Keenan, J.).

Last April, the Commission charged the defendant, the orchestrator of the scheme, and a paralegal in connection with manipulating the market for the stock of Nouveau and Striper Energy, Inc. According to the SEC, the defendant’s opinion letters contained three false statements in violation of Exchange Act 10(b) and Securities Act 17(a)(2). Specifically, the letters represented that a debt settlement agreement was executed on a particular date for purposes of establishing that the scheme’s orchestrator had held the securities for one year. The letters also represented that the agreement permitted the issuance of fifty million shares of Nouveau stock to nominee entities. Finally, the defendant implicitly represented that he had a reasonable basis upon which to base his opinion that this transaction, which in fact was fictitious, met the requirements of Rule 144.

Misrepresentations. The court determined that the complaint alleged that the defendant knew or should have known that the two explicit misstatements were false (the alleged implicit representation was not actionable because it was not itself a statement of fact or opinion). Even if the debt settlement agreement had been genuine, it would have permitted the issuance of less than one hundred thousand shares, not the fifty million represented. And the attorney could not escape liability by claiming that he relied on the scheme’s orchestrator given that the complaint alleged not only that he failed to investigate but that he actually ignored evidence that directly contradicted the representations he made in the opinion letters. Finally, by alleging that the defendant drafted and signed the opinion letters, the SEC established under Janus Capital Group, Inc. v. First Derivatives Traders (U.S. 2011) that he "made" the statements at issue.

Scienter. The SEC also adequately alleged facts constituting strong circumstantial evidence of conscious misbehavior or recklessness. The defendant had been copied on emails indicating that the settlement agreement was executed more than a year after the date stated in the opinion. When he initially refused to write the opinion letter based on the failure to meet the one-year holding requirement, the scheme’s orchestrator sent five different unexecuted agreements bearing different dates. The defendant drafted an opinion letter, and three days later received an executed agreement bearing the earlier date. Finally, the complaint alleged that the defendant knew or should have known that Nouveau had undergone a reverse split that meant that the agreement, if legitimate, would have permitted the issuance of far fewer shares than represented.

Remaining elements. The complaint also made the case that the defendant received money or property as part of the Securities Act Section 17(a)(2) claim, even though he received only a small flat fee that did not depend on whether the opinion letters were true or false. In a majority of courts, there is no requirement that the SEC allege that a defendant received a "fraud bonus" for participating in the scheme but, in any event, the complaint alleged that the defendant received his payment for issuing false opinion letters.

The SEC also alleged scheme liability for purposes of the Exchange Act and Securities Act claims. According to the complaint, the opinion letters were an integral part of the pump-and-dump scheme and the defendant drafted them while negotiating to receive a share of the anticipated proceeds of the scheme.

The case is No. 17 Civ. 2630.

Attorneys: Richard Mann Harper for the SEC. Harlan J. Protass (Clayman & Rosenberg LLP) for Mustafa David Sayid.

Companies: Nouveau Holdings Ltd.; Striper Energy, Inc.

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