Securities and Exchange Commission v. Blackburn et al

Filing 121

ORDER & REASONS denying 105 Motion to Dismiss for Failure to State a Claim. Signed by Judge Carl Barbier on 12/28/2015. (mmm)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA

SECURITIES AND EXCHANGE
COMMISSION

CIVIL ACTION

VERSUS

NO: 15-2451

RONALD L. BLACKBURN, ET AL

SECTION: “J”(1)

ORDER & REASONS
Before the Court is Defendant Lee C. Schlesinger’s Motion to
Dismiss (Rec. Doc. 105); an opposition thereto (Rec. Doc. 115)
filed by Plaintiff, the Securities and Exchange Commission; and
Schlesinger’s reply (Rec. Doc. 120). Having considered the motion
and legal memoranda, the record, and the applicable law, the Court
finds that the motion should be DENIED.
FACTS AND PROCEDURAL BACKGROUND
This is a civil enforcement action brought by the United
States Securities and Exchange Commission (“SEC”) against the
Defendants for various claims under the Securities Act of 1933
(“Securities

Act”)

and

the

Securities

Exchange

Act

of

1934

(“Exchange Act”). The SEC alleges a widespread scheme by the
individual

Defendants

to

defraud

investors

and

violate

the

antifraud, registration, and reporting provisions of the federal
securities

laws

with

respect

to

Defendant

Treaty

Energy

Corporation (“Treaty”), a publicly traded oil and gas company.
According to the SEC, Defendants Ronald Blackburn, Andrew Reid,
Bruce Gwyn, Michael Mulshine, Lee Schlesinger, and Samuel Whitley
carried out this scheme between 2009 and 2013 by (1) concealing
that Blackburn, a convicted felon, controlled Treaty as de facto
officer and director; (2) engaging in a false promotional campaign
intended to artificially inflate Treaty’s stock price, including
issuing a January 2012 press release falsely claiming a major oil
strike in Belize; (3) perpetuating a fraudulent trading scheme
involving the issuance and transfer of restricted and unrestricted
Treaty stock through which Defendants raised millions of dollars
selling virtually worthless stock to unwitting investors; and (4)
conducting an illegal and unregistered offering of oil and gas
working interests. The SEC alleges that as a result of their
misconduct,

Defendants

reaped

illicit

profits

of

over

$4.9

million.
On February 2, 2015, Schlesinger filed a Partial Motion to
Dismiss (Rec. Doc. 18). During the pendency of Schlesinger’s
motion, on June, 20, 2015, this case was transferred to this Court
from the United States District Court for the Eastern District of
Texas. (Rec. Doc. 66.) Subsequently, on September 10, 2015, this
Court granted Schlesinger’s motion but gave the SEC an opportunity
to amend its complaint in order to conform to the requirements for
pleading under the Federal Rules of Civil Procedure. (Rec. Doc.
2

91, at 23.) The SEC filed its First Amended Complaint (Rec. Doc.
97) on October 1, 2015.
According to the Amended Complaint, Schlesinger began working
with Treaty in May 2011. Id. at 5. Initially, Schlesinger served
as a consultant, selling shares on Treaty’s behalf. Id. In November
2011, Schlesinger became Treaty’s Chief Investment Officer (“CIO”)
and remained in that position until his resignation in September
2013. Id. Schlesinger also served as Treaty’s “investor relations
point of contact” between October 2012 and January 2013. Id. In
addition, Schlesinger was a member of Treaty’s Board of Directors
during his entire tenure with the company. Id. While working for
Treaty, Schlesinger signed Treaty’s annual reports on SEC Form 10K filed in 2011 and 2012 and Treaty’s registration statements on
SEC Form S-8 filed in 2012 and 2013. Id.
In its Amended Complaint, the SEC alleges that Schlesinger
knowingly

or

recklessly

participated

in

and

furthered

the

Defendants’ scheme by failing to disclose the fact that Blackburn
controlled Treaty, by engaging in unregistered public offerings of
restricted stock, by providing substantial assistance to Treaty in
its violations of the reporting provisions, and by failing to make
required

filings

with

the

SEC

regarding

stock

ownership

and

disposition. Id. at 8-11, 18-19, 24-26, 29.
The SEC asserts four types of claims against Schlesinger.
First, the SEC asserts claims against Schlesinger for securities
3

fraud in violation of Section 17(a) of the Securities Act, 15
U.S.C. § 77q(a); Section 10(b) of the Exchange Act, 15 U.S.C. §
78j(b); and Rule 10b-5 thereunder. Id. at 27-28. Second, the SEC
asserts

a

claim

against

Schlesinger

for

aiding

and

abetting

Treaty’s reporting violations under Section 13(a) of the Exchange
Act, 15 U.S.C. § 78m(a), and Rules 12b-20, 13a-1, 13a-11, and 13a13 thereunder. Id. at 29. Third, the SEC asserts a claim against
Schlesinger for reporting violations under Section 16(a) of the
Exchange Act, 15 U.S.C. § 78p(a), and Rule 16a-3 thereunder. Id.
at 31. Fourth, the SEC asserts a claim against Schlesinger for
offering

or

selling

unregistered

securities

in

violation

of

Section 5 of the Securities Act, 15 U.S.C. § 77e(a), (c). Id. at
26.
The SEC seeks to enjoin Schlesinger from violating, directly
or indirectly, the above-mentioned sections of the Securities Act
and Exchange Act and the related rules, from aiding and abetting
any violation of Section 13(a) of the Exchange Act and the related
rules, and from acting as an officer or director of any issuer
that has a class of securities registered under Section 12 of the
Exchange Act or that is required to file reports under Section
15(d) of the Exchange Act. Id. at 31-32. In addition, the SEC also
seeks disgorgement and the imposition of a civil monetary penalty.
Id. at 33.

4

Schlesinger filed the instant Motion to Dismiss (Rec. Doc.
105) on October 22, 2015, seeking to dismiss all claims against
him set forth in the Amended Complaint. 1 The SEC filed its response
on December 8, 2015. On December 16, 2015, Schlesinger filed a
reply. The Court now considers the motion on the briefs, without
oral argument.
PARTIES’ ARGUMENTS
First, Schlesinger moves to dismiss the SEC’s claims that he
violated Section 17(a) of the Securities Act, Section 10(b) of the
Exchange Act, and Rule 10b-5. In support of his motion, Schlesinger
contends that the SEC has failed to plead with particularity the
circumstances constituting the alleged fraud as required by Rule
9(b) of the Federal Rules of Civil Procedure. (Rec. Doc. 105-2, at
9, 12-13.) Further, Schlesinger argues that the SEC fails to allege
the requisite scienter, because the allegations in the Amended
Complaint “do nothing to establish Schlesinger’s alleged motive to
defraud with any plausibility.” Id. at 9. According to Schlesinger,
the Amended Complaint alleges that his primary motive was to profit
from his Treaty transactions, which is insufficient to establish
an inference of fraud. Id. at 15. Moreover, Schlesinger claims
that the allegation that he asked for an advance to pay a loan “is
indicative of a lack of motive on [his] part, because doing so

1

In his partial motion to dismiss, Schlesinger did not seek dismissal of the
SEC’s claims against him under Section 5 of the Securities Act or Section 16(a)
of the Exchange Act. (Rec. Doc. 91, at 3 n.1.)

5

would be seeking a legitimate, not fraudulent, means to pay for
his expenses.” Id. at 16. In addition, Schlesinger claims that the
SEC fails to identify circumstances indicating conscious behavior
by him. Id. at 17. Schlesinger maintains that he did not certify
the accuracy and completeness of Treaty’s SEC filings and argues
that the SEC fails to allege facts establishing that he knew or
should have known that any of Treaty’s SEC filings were materially
misleading. Id. at 17-20. With regard to the SEC’s claims under
Section 17(a)(2) and (3), Schlesinger contends that the Amended
Complaint fails to demonstrate that he was negligent. Id. at 2021.
Next, Schlesinger contends that the SEC fails to allege
sufficient facts to support its claim for aiding and abetting under
Section 13(a) of the Exchange Act and related rules thereunder.
Id, at 21. Schlesinger argues that the SEC must allege specific
facts

that

support

an

inference

of

his

conscious

intent

or,

alternatively, that he had a special duty to disclose or that his
assistance was unusual in character and degree, and that he acted
recklessly. Id. at 22. According to Schlesinger, there is no
showing of his conscious intent because he merely electronically
signed the SEC filings; he did not certify their accuracy. Id. at
23. Similarly, Schlesinger maintains that the SEC fails to allege
facts sufficient to illustrate an extreme departure from the

6

standard

of

ordinary

care

that

would

warrant

a

finding

of

recklessness. Id.
Further,

Schlesinger

contends

that

the

SEC’s

claim

for

reporting violations under Section 16(a) of the Exchange Act fails
because the Amended Complaint does not adequately allege that
Schlesinger was an officer or director at the time he owned Treaty
shares. Id. at 9, 24. Schlesinger argues that “it is reasonable to
conclude that Schlesinger might have acquired these shares while
he was not an officer or director,” and therefore had no obligation
to report under Section 16(a). Id. at 26. For example, Schlesinger
claims that there is a period of approximately five months where
one of the alleged transactions could have occurred while he was
no longer an officer or director of Treaty. Id. at 26.
Lastly, with respect to the SEC’s Section 5 claim, Schlesinger
contends that the Amended Complaint has not sufficiently alleged
that he did in fact sell securities that were required to be
registered. Id. at 9, 26. Schlesinger points out that the Amended
Complaint alleges that he transferred purportedly unrestricted
shares to two companies controlled by Gwyn, who then sold the
shares. Id. at 26-27. Moreover, Schlesinger argues that he was not
a substantial factor and necessary participant in these sales
because there was no reason for him to be involved. Id. at 27.
“[A]s alleged by the Commission, there was no reason to issue
shares to Schlesinger because they were illegally registered from
7

the onset. . . . Because the Registration Statement, as alleged by
the Commission, was illegal, there was no reason for Schlesinger
to be involved.” Id. Schlesinger claims his role was not necessary
because the shares could have been directly issued to the entities
controlled by Gwyn. Id.
In

response,

the

SEC

opposes

Schlesinger’s

motion

and

maintains that the Amended Complaint sets forth nonconclusory
facts that detail the time, place, and nature of Defendants’
manipulative

stock

trading

scheme,

and

details

Schlesinger’s

relationship to and role in that scheme as an officer and director
of the company. (Rec. Doc. 115, at 12.) First, with regard to its
claims for securities fraud, the SEC contends that the Amended
Complaint amply alleges that Schlesinger acted with scienter. Id.
at 13. The SEC claims that it need only plead scienter through
facts that permit an inference that Schlesinger engaged in severely
reckless conduct. Id. at 13-15. Further, the SEC point out that
Schlesinger relies on cases governed by the Private Securities
Litigation Reform Act of 1995 (“PSLRA”), which requires plaintiffs
in private securities fraud litigation to plead facts giving rise
to a “strong inference” of scienter. Id. at 14. According to the
SEC, this Court applied the PSLRA’s “strong inference” standard in
its previous Order on Schlesinger’s Partial Motion to Dismiss,
requiring the SEC to allege facts that would show a defendant’s
motive to commit securities fraud or identify circumstances that
8

would indicate the defendant’s conscious behavior. Id. at 15.
Nevertheless, the SEC argues that the Amended Complaint adequately
alleges Schlesinger’s motive and conscious behavior. Id. at 1520. Moreover, the SEC maintains that Schlesinger was at least
negligent

in

signing

public

filings

that

failed

to

disclose

Blackburn’s criminal history and true role in the company. Id. at
21.
Second, the SEC contends that it adequately alleged that
Schlesinger aided and abetted Treaty’s violations of the reporting
provisions of Section 13(a) of the Exchange Act and the rules
thereunder. Id. The SEC states that the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 modified the scienter
requirement for such claims in SEC enforcement actions by expressly
expanding it from “knowingly” providing substantial assistance to
also include doing so “recklessly.” Id. at 22. The SEC maintains
that the Amended Complaint properly alleges that Treaty violated
the reporting provisions by filing reports on Forms 10-K, 10-Q,
and 8-K that failed to disclose Blackburn’s control of the company
and contained materially false and misleading statements about the
purported Belize oil strike. Id. Further, the SEC argues that the
Amended Complaint alleges that Schlesinger knew, or was reckless
in

not

knowing,

that

the

filings

failed

to

disclose

this

information and were therefore incomplete, false, and misleading
at the time he signed them. Id. at 22-23. Moreover, the SEC claims
9

that Schlesinger owed fiduciary duties to the company and the
shareholders to ensure that the filings he signed were complete
and accurate. Id. at 23.
Third, regarding its claim for reporting violations under
Section 16(a) of the Exchange Act, the SEC contends that the
allegations in the Amended Complaint, which must be taken as true,
state that “Schlesinger, an officer and director of Treaty during
his entire tenure (November 2011 through September 2013), and a
consultant from May-November 2011 who sold Treaty securities and
received treaty stock awards and shares, failed to file required
reports of ownership and . . . changes of ownership of common stock
and other equity securities” with the SEC. Id. at 24. For example,
the

SEC

shares

alleges
and

later

that
sold

Schlesinger
those

purchased

shares,

but

20,000,000

never

Treaty

reported

his

ownership or change of ownership as required. Id. at 24 n.9.
Therefore, the SEC maintains that the Amended Complaint states a
plausible claim that Schlesinger violated Section 16(a) and Rule
16a-3 of the Exchange Act. Id. at 24. The SEC argues that the
evidentiary defenses raised by Schlesinger are inappropriate at
this stage and should not be considered on a motion to dismiss.
Id.
Lastly, the SEC contends that it has adequately alleged that
Schlesinger violated Section 5 of the Securities Act. The SEC
claims that the Amended Complaint clearly alleges that Schlesinger
10

directly sold or offered to sell unregistered Treaty securities.
Id. at 25. According to the SEC, Schlesinger’s argument that he
was not a substantial factor and necessary participant only go to
whether he was an indirect seller and ignore the allegations that
he is liable under Section 5 as a direct seller. Id.
LEGAL STANDARD
Typically, a plaintiff’s complaint must contain “a short and
plain statement of the claim showing that the pleader is entitled
to relief.” Fed. R. Civ. P. 8(a)(2). The complaint must “give the
defendant fair notice of what the claim is and the grounds upon
which it rests.” Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 346
(2005). The allegations “must be simple, concise, and direct.”
Fed. R. Civ. P. 8(d)(1).
However, allegations of fraud must meet a higher standard
than the basic notice pleading required by Rule 8. “In alleging
fraud

or

mistake,

a

party

must

state

with

particularity

the

circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b).
Importantly, though, the second sentence of Rule 9(b) relaxes the
particularity requirement for conditions of the mind, such as
scienter. Tuchman v. DSC Commc'ns Corp., 14 F.3d 1061, 1068 (5th
Cir. 1994). “Malice, intent, knowledge, and other conditions of a
person's mind may be alleged generally.” Fed. R. Civ. P. 9(b). The
particularity

requirement

of

Rule

9(b)

does

not

render

the

principles of simplicity established by Rule 8 inapplicable; the
11

two rules must be read in harmony. Williams v. WMX Techs., Inc.,
112 F.3d 175, 178 (5th Cir. 1997).
“Under

Rule

12(b)(6),

a

claim

may

be

dismissed

when

a

plaintiff fails to allege any set of facts in support of his claim
which would entitle him to relief.” Taylor v. Books A Million,
Inc., 296 F.3d 376, 378 (5th Cir. 2002) (citing McConathy v. Dr.
Pepper/Seven Up Corp., 131 F.3d 558, 561 (5th Cir. 1998)). To
survive a Rule 12(b)(6) motion to dismiss, the plaintiff must plead
enough facts to “state a claim to relief that is plausible on its
face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is
facially plausible when the plaintiff pleads facts that allow the
court to “draw the reasonable inference that the defendant is
liable for the misconduct alleged.” Id. A court must accept all
well-pleaded facts as true and must draw all reasonable inferences
in favor of the plaintiff. Lormand v. U.S. Unwired, Inc., 565 F.3d
228, 232-33 (5th Cir. 2009); Baker v. Putnal, 75 F.3d 190, 196
(5th Cir. 1996). The court is not, however, bound to accept as
true legal conclusions couched as factual allegations. Iqbal, 556
U.S.

at

678.

“[C]onclusory

allegations

or

legal

conclusions

masquerading as factual conclusions will not suffice to prevent a
motion to dismiss.” Taylor, 296 F.3d at 378.

12

DISCUSSION
As an initial matter, both parties ask the Court to take
judicial notice of certain documents filed by Treaty with the SEC.
Schlesinger asks the Court to take judicial notice of Treaty’s SEC
filings on Form 10-K for the years 2011 and 2012 and Form S-8 for
the years 2012 and 2013. (Rec. Doc. 105-2, at 19 n.1.) Similarly,
the SEC asks the Court to take judicial notice of Treaty’s SEC
filings on Form 10-K for the years 2011 and 2012. (Rec. Doc. 115,
at 9 n.1.) Generally, in deciding a motion to dismiss for failure
to state a claim, a court may rely on only the complaint and its
proper attachments. Fin. Acquisition Partners LP v. Blackwell, 440
F.3d 278, 286 (5th Cir. 2006). However, a court may also consider
“documents

incorporated

into

the

complaint

by

reference,

and

matters of which a court may take judicial notice.” Tellabs, Inc.
v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). When
deciding a motion to dismiss in securities actions, “a court may
consider the contents of relevant public disclosure documents
which (1) are required to be filed with the SEC, and (2) are
actually filed with the SEC.” Lovelace v. Software Spectrum Inc.,
78 F.3d 1015, 1018 (5th Cir. 1996). Accordingly, the Court takes
judicial notice of Treaty’s SEC filings on Form 10-K for the years
2011 and 2012 and Form S-8 for the years 2012 and 2013.

13

A.

Securities Fraud Under Securities Act Section 17(a), Exchange
Act Section 10(b), and Rule 10b-5
To state a claim for securities fraud under Section 10(b) or

Rule 10b-5 of the Exchange Act, the SEC must allege facts that, if
true, establish (1) a misstatement or omission (2) of material
fact (3) in connection with the purchase or sale of a security (4)
made with scienter. SEC v. Gann, 565 F.3d 932, 936 (5th Cir. 2009)
(citing Aaron v. SEC, 446 U.S. 680, 691 (1980)). The elements
constituting a prima facie showing of a violation of Section
17(a)(1) of the Securities Act are essentially the same. SEC v.
Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999). A fact is
considered material if there is “a substantial likelihood that the
disclosure of the omitted fact would have been viewed by the
reasonable investor as having significantly altered the ‘total
mix’ of information made available.” Basic Inc. v. Levinson, 485
U.S. 224, 231-32 (1988). 2 For the purposes of securities fraud,
scienter is defined as “a mental state embracing intent to deceive,
manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S.
185, 193 n.12 (1976).
Rule 9(b) imposes a heightened level of pleading for all fraud
claims, including claims for securities fraud. Dorsey v. Portfolio

2

A court can determine statements to be immaterial as a matter of law on a
motion to dismiss. ABC Arbitrage Plaintiffs Grp. v. Tchuruk, 291 F.3d 336, 359
(5th Cir. 2002). However, it is well established that, “[b]ecause materiality
is a mixed question of law and fact, it is usually left for the jury.” Id.
(alteration in original) (quoting United States v. Peterson, 101 F.3d 375, 380
(5th Cir. 1996)).

14

Equities,

Inc.,

540

F.3d

333,

338-39

(5th

Cir.

2008).

The

heightened pleading standard of Rule 9(b) “provides defendants
with fair notice of the plaintiffs' claims, protects defendants
from harm to their reputation and goodwill, reduces the number of
strike suits, and prevents plaintiffs from filing baseless claims
and then attempting to discover unknown wrongs.” Tuchman, 14 F.3d
at

1067.

The

Fifth

Circuit

interprets

Rule

9(b)

strictly,

“requiring a plaintiff pleading fraud to specify the statements
contended to be fraudulent, identify the speaker, state when and
where the statements were made, and explain why the statements
were fraudulent.” Dorsey, 540 F.3d at 339. In cases alleging a
fraudulent omission of facts, Rule 9(b) requires the plaintiff to
plead “the type of facts omitted, the place in which the omissions
should have appeared, and the way in which the omitted facts made
the representations misleading.” Carroll v. Fort James Corp., 470
F.3d 1171, 1174 (5th Cir. 2006). Put simply, Rule 9(b) requires
the complaint to set forth “the who, what, when, where, and how”
of the events at issue, similar to “the first paragraph of any
newspaper story.” DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th
Cir. 1990); accord Dorsey, 540 F.3d at 339.
In the Court’s previous Order on Schlesinger’s Partial Motion
to Dismiss, the Court determined that the SEC’s original complaint
adequately set forth “the who, what, when, where, and how” of the
alleged fraud. (Rec. Doc. 91, at 13-4, 13 n.5.) However, the Court
15

concluded that the original complaint failed to plead scienter
adequately. Id. at 15-18. Therefore, the Court will first consider
whether the Amended Complaint adequately alleges scienter.
The scienter element may be satisfied by proof that the
defendants acted with severe recklessness. Abrams v. Baker Hughes
Inc., 292 F.3d 424, 430 (5th Cir. 2002). Although scienter may be
“alleged generally,” the Fifth Circuit has made clear that “simple
allegations that defendants possess fraudulent intent will not
satisfy Rule 9(b).” Dorsey, 540 F.3d at 339 (quoting Melder v.
Morris, 27 F.3d 1097, 1102 (5th Cir. 1994)); accord Tuchman, 14
F.3d

at

1068.

“Scienter

must

be

shown

because

not

every

misstatement or omission in a corporation’s disclosures gives rise
to a Rule 10b-5 claim.” Tuchman, 14 F.3d at 1067. “To plead
scienter adequately, a plaintiff must set forth specific facts
that support an inference of fraud.” Dorsey, 540 F.3d at 339;
accord Tuchman, 14 F.3d at 1068. “Alleged facts are sufficient to
support such an inference if they either (1) show a defendant's
motive to commit securities fraud or (2) identify circumstances
that indicate conscious behavior on the part of the defendant.”
Dorsey, 540 F.3d at 339; accord Tuchman, 14 F.3d at 1068.
In its opposition, the SEC quotes the above-cited language
from Dorsey v. Portfolio Equities, Inc. and claims that this Court
“applied the PSLRA’s ‘strong inference’ standard” in its Order on
Schlesinger’s Partial Motion to Dismiss. (Rec. Doc. 115, at 15.)
16

As the Court will explain, however, it properly applied the Fifth
Circuit’s Rule 9(b) standard as it existed before passage of the
PSLRA. Before the passage of the PSLRA, the circuit courts of
appeals had not reached a consensus regarding the nature and
content of the allegations of scienter that a plaintiff must plead
in order to survive a motion to dismiss. For example, since the
1970s, the Second Circuit has required a plaintiff to allege facts
giving rise to a “strong inference” of fraudulent intent in order
to adequately plead scienter under Rule 9(b). See Ross v. A.H.
Robins Co., 607 F.2d 545, 558 (2d Cir. 1979). Similarly, the Fifth
Circuit also required plaintiffs to plead specific facts, but
unlike the Second Circuit, only mandated that the specific facts
alleged “support an inference of fraud.” Nathenson v. Zonagen Inc.,
267 F.3d 400, 407 (5th Cir. 2001) (quoting Tuchman, 14 F.3d at
1068). However, not all courts of appeals endorsed a stringent
interpretation of Rule 9(b). For example, the Ninth Circuit allowed
plaintiffs to plead scienter generally, “simply by saying that
scienter existed.” In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541,
1547 (9th Cir. 1994).
Unsatisfied with the disagreement among the circuits, as well
as

the

perceived

inability

of

Rule

9(b)

to

prevent

abusive,

frivolous strike suits, 3 Congress enacted the PSLRA in 1995, see

3

The legislative history of the PSLRA explains the reasoning behind the
heightened pleading standard: “[Rule 9(b)] has not prevented abuse of the
securities laws by private litigants. Moreover, the courts of appeals have

17

Pub. L. No. 104-67, 109 Stat. 737 (Dec. 22, 1995) (codified in
part at 15 U.S.C. § 78u), which heightened the requirement for
pleading scienter to the level adopted by the Second Circuit. See
15 U.S.C. § 78u-4(b)(2). However, the PSLRA’s “strong inference”
standard is more stringent than any circuit’s interpretation of
Rule 9(b); a complaint will survive only if the inference of
scienter is “at least as compelling as any opposing inference one
could draw from the facts alleged.” Tellabs, 551 U.S. at 324. In
sum, the PSLRA created a distinct, heightened pleading standard
for private securities actions, separate and apart from the general
requirements of Rule 9(b). Id. at 321-22.
The plain language of the statute makes clear that the Fifth
Circuit’s previous rule, which required that a plaintiff plead
facts that support an “inference of fraud,” has been supplanted in
private securities fraud actions by the PSLRA’s “strong inference”
requirement. Zonagen, 267 F.3d at 407. The SEC correctly states
that the PSLRA does not apply to SEC enforcement actions. However,
enforcement actions are still governed by the requirements of Rule
9(b). In cases governed by Rule 9(b) but not governed by the PSLRA,
courts in this circuit apply the pre-PSLRA Rule 9(b) standard.
See, e.g., SEC v. Shapiro, No. 405CV364, 2007 WL 788335, at *2

interpreted Rule 9(b)'s requirement in conflicting ways, creating distinctly
different standards among the circuits.” H.R. Rep. No. 104-369, at 41 (1995)
(Conf. Rep.) (footnotes omitted). Thus, in enacting the PSLRA, Congress
recognized “the need to establish uniform and more stringent pleading
requirements to curtail the filing of meritless lawsuits.” Id.

18

(E.D. Tex. Mar. 14, 2007) (“Rule 9(b) requires a plaintiff to set
forth specific facts that support an inference of fraud.” (citing
Tuchman, 14 F.3d at 1068)); SEC v. Gann, No. 305CV0063L, 2006 WL
616005, at *3 (N.D. Tex. Mar. 13, 2006) (“To plead scienter
adequately, a plaintiff must set forth specific facts that support
an inference of fraud.” (quoting Tuchman, 14 F.3d at 1068)); SEC
v. Kornman, 391 F. Supp. 2d 477, 493 (N.D. Tex. 2005) (same).
In its previous Order, the Court applied the Fifth Circuit’s
Rule 9(b) standard, not the more stringent PSLRA standard. (Rec.
Doc. 91, at 15.) As amply demonstrated by Fifth Circuit precedent,
Rule 9(b) requires the SEC to set forth specific facts in the
complaint that support an inference of fraud. See, e.g., Tuchman,
14 F.3d at 1068. Before Congress passed the PSLRA, the Fifth
Circuit announced two means by which a plaintiff could satisfy the
scienter requirement at the pleading state: the plaintiff could
either (1) allege “facts that that show a defendant’s motive to
commit securities fraud,” or (2) “allege facts that constitute
strong

circumstantial

evidence

of

conscious

misbehavior

or

recklessness.” 4 Zonagen, 267 F.3d at 409 (citing Tuchman, 14 F.3d
at 1068). The appropriate analysis is to consider whether all facts

4

The Fifth Circuit apparently adopted these two formulations from the Second
Circuit, although for the former, the Second Circuit requires a plaintiff to
allege facts showing that a defendant had both a motive and opportunity to
commit fraud. Zonagen, 267 F.3d at 409 (citing Shields v. Citytrust Bancorp,
Inc., 25 F.3d 1124, 1128 (2d Cir. 1994)).

19

and circumstances “taken together” are sufficient to support the
necessary inference of scienter. See id. at 425.
The Fifth Circuit has held, both before the passage of the
PSLRA and after, that “certain motives alleged, especially those
universal to corporations and their officers, do not suffice to
establish an inference of fraud under Rule 9(b).” Flaherty &
Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200,
213 (5th Cir. 2009) (citing Melder, 27 F.3d at 1102; Tuchman, 14
F.3d at 1068). For example, allegations that officers and directors
were motivated by incentive compensation, standing alone, are
insufficient to allow for an inference of scienter.

Melder, 27

F.3d at 1102; Tuchman, 14 F.3d at 1068; see also Novak v. Kasaks,
216 F.3d 300, 307 (2d Cir. 2000) (“Plaintiffs could not proceed
based on motives possessed by virtually all corporate insiders,
including . . . the desire to maintain a high stock price in order
to increase executive compensation.”). However, in the Second
Circuit, adequate motive typically arose from the desire to profit
from extensive insider sales, such as “when corporate insiders
were alleged to have misrepresented to the public material facts
about the corporation's performance or prospects in order to keep
the stock price artificially high while they sold their own shares
at a profit.” Novak, 216 F.3d at 307; see also Tellabs, 551 U.S.
at 325 (“[P]ersonal financial gain may weigh heavily in favor of
a scienter inference . . . .”).
20

In

the

instant

case,

the

SEC

alleges

that

“Schlesinger

realized a direct and concrete personal financial benefit as a
result of the fraudulent stock manipulation scheme—money—and that
he

was

subject

to

the

same

motivation

common

to

all

market

manipulators: the desire for personal profit.” (Rec. Doc. 115, at
16.) In particular, the Amended Complaint alleges that Schlesinger
was “motivated to conceal Blackburn’s control of the company and
maintain the Belize Announcement charade because [he] depended on
the Treaty scheme for [his] livelihood.” (Rec. Doc. 97, at 13.)
Further, the Amended Complaint states that Schlesinger knew that
Treaty’s oil and gas operations were highly unprofitable and that
the only way for him to make money was to sell Treaty stock. Id.
Finally, the Amended Complaint alleges that “Schlesinger purchased
20,000,000 shares from Treaty at a 50% discount with money he
borrowed from his mother” and later “sold the shares for a net
profit of $188,668.” Id. at 25. The Amended Complaint also alleges
that Schlesinger received $322,498 in direct payments from Treaty
in misappropriated funds. Id.
The SEC’s allegations of motive are distinguishable from the
rote conclusory allegations universal to all corporate officers in
Melder v. Morris and Tuchman v. DSC Communications Corp. For
example, in Melder, the plaintiffs attempted to establish scienter
by

alleging

that

the

corporation's

officers,

directors,

accountants, and underwriters entered into a conspiracy to inflate
21

the price of the corporation's stock. 27 F.3d at 1102. Notably,
the Fifth Circuit determined that the defendants’ motive to commit
securities fraud was not readily apparent because “there [was] no
allegation

that

any

of

the

corporate

defendants

actually

personally profited from the allegedly inflated stock values or
the money raised from the two offerings.” Id.; see also Tuchman,
14 F.3d at 1068 (“[P]laintiffs do not allege that the defendants
purchased or sold any stock during the class period.”). Here, by
contrast, the SEC alleges that Schlesinger personally profited
from the allegedly inflated stock values and the money raised.
Even if the SEC’s allegations of motive, standing alone, would be
insufficient to support an inference of fraud, the allegations of
motive enhance the other allegations of scienter.
Absent allegations of improper motive, the SEC may still meet
the pleading standard by alleging facts that constitute strong
circumstantial

evidence

of

conscious

behavior

or

severe

recklessness on the part of Schlesinger. See, e.g., Tuchman, 14
F.3d at 1068. Severe recklessness is “limited to those highly
unreasonable

omissions

or

misrepresentations

that

involve

not

merely simple or even inexcusable negligence, but an extreme
departure from the standards of ordinary care, and that present a
danger of misleading buyers or sellers which is either known to
the defendant or is so obvious that the defendant must have been

22

aware of it.” 5 Zonagen, 267 F.3d at 408. “Where the complaint
alleges that defendants knew facts or had access to non-public
information contradicting their public statements, recklessness is
adequately pled for defendants who knew or should have known they
were misrepresenting material facts with respect to the corporate
business.” SEC v. Egan, 994 F. Supp. 2d 558, 565 (S.D.N.Y. 2014)
(quoting In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 76 (2d
Cir.

2001)).

Alternatively,

a

complaint

adequately

pleads

a

reckless omission if it alleges that defendants “failed to review
or check information that they had a duty to monitor, or ignored
obvious signs of fraud.” Id. (quoting Novak, 216 F.3d at 308).
Here,

the

intentionally

SEC

alleges

participated

that

in

a

Schlesinger

fraudulent

knowingly

scheme

by

and

making

material misrepresentations and omissions in Treaty’s Forms 10-K
filed in 2011 and 2012, relating to Blackburn’s control over the
company.

The

Amended

Complaint

alleges

that

Schlesinger

was

Treaty’s Chief Investment Officer and served as a member of the
Board of Directors. (Rec. Doc. 97, at 5.) Further, the Amended
Complaint alleges that Schlesinger signed Treaty’s SEC filings in
his capacity as director. Id. By signing the filings as a director
of Treaty, Schlesinger “is stating to the world that he, with other

5

Although the Fifth Circuit often uses the modifier “severe,” its definition
of severe recklessness is the same as the definition of recklessness applied by
other circuits. Akin v. Q-L Investments, Inc., 959 F.2d 521, 526 n.2 (5th Cir.
1992) (citing Woods v. Barnett Bank of Ft. Lauderdale, 765 F.2d 1004, 1010 n.9
(11th Cir. 1985)).

23

signers, is jointly making the statements within the document.” N.
Port Firefighters' Pension—Local Option Plan v. Temple-Inland,
Inc.,

936

F.

Supp.

2d

722,

745

(N.D.

Tex.

2013);

see

also

Blackwell, 440 F.3d at 287 (“Corporate statements can be tied to
officers if plaintiffs allege they signed the documents on which
the statements were made . . . .”). 6
In addition, the SEC claims that Schlesinger was aware of
Blackburn’s control of Treaty when Schlesinger signed Treaty’s SEC
filings.

For

example,

the

Amended

Complaint

alleges

that

Schlesinger knew that Blackburn held a substantial percentage of
Treaty stock, was paid nearly twice as much as any Treaty officer,
worked in the same office as Schlesinger and other Treaty officers,
frequently

communicated

with

Schlesinger

about

day-to-day

operations of the company, directed Schlesinger’s work, oversaw an
oil and gas drilling program in Belize for which he served as
Treaty’s

point

of

contact

program,

participated

in

with

the

selecting

company’s
and

working

partner
with

in

the

Treaty’s

vendors and professional service providers, orchestrated sales and

6 Schlesinger argues that the SEC’s allegations are insufficient to demonstrate
conscious behavior on his part because he merely signed Treaty’s public filings
and did not certify their accuracy. (Rec. Doc. 105-2, at 17-20.) However, the
SEC explains that is has not charged Schlesinger with making a false
certification under the Sarbanes-Oxley Act of 2002, which gives rise to a
separate cause of action and remedies. (Rec. Doc. 115, at 20 n.7.) Rather, the
SEC maintains that by signing Treaty’s filings in his capacity as director,
Schlesinger is making a statement and attesting to its accuracy. Id. (citing
Howard v. Everex Sys., Inc., 228 F.3d 1057, 1061 (9th Cir. 2000) (“[W]hen a
corporate officer signs a document on behalf of the corporation, that signature
will be rendered meaningless unless the officer believes that the statements in
the document are true.”)).

24

transfers of Treaty stock by soliciting investors and either
arranging for Treaty to issue them stock directly or selling them
his own shares, used proceeds from sales of his own Treaty stock
to pay company expenses, managed Treaty’s funds and dictated how
company

money

would

be

spent,

routinely

negotiated

loans

on

Treaty’s behalf, and directed and approved the timing and content
of key press releases published by Treaty. (Rec. Doc. 97, at 89.) Further, the SEC claims that Blackburn hired Schlesinger and
appointed Schlesinger to act as Treaty’s CIO. Id. at 8. The Amended
Complaint

alleges

that,

despite

Schlesinger’s

knowledge

of

Blackburn’s extensive involvement in nearly all facets of the
company, Schlesinger signed the 2011 and 2012 Forms 10-K, which
failed

to

disclose

Blackburn’s

role

at

the

company

and

intentionally misrepresented his role by generically referring to
him as a “major shareholder,” “affiliate,” or “related party.” Id.
at 9.
The

Amended

Complaint

adequately

alleges

facts

that

constitute strong circumstantial evidence of severe recklessness
on the part of Schlesinger. The Amended Complaint identifies
circumstances indicating that Schlesinger was aware of Blackburn’s
extensive involvement in Treaty’s operations. For example, in SEC
v. Enter. Sols., Inc., the Southern District of New York held that
a

corporate

officer

acted

with

scienter

by

knowingly

and

intentionally concealing a consultant’s management role and equity
25

interest in the company, where the consultant had a history of
criminal and regulatory violations. 142 F. Supp. 2d 561, 574
(S.D.N.Y. 2001). The court found that the corporate officer knew
that the consultant was soliciting private investors, arranging
loans, negotiating with a takeover target, and participating in
the preparation of a registration statement. Id. The corporate
officer also knew that the consultant had interviewed him and
negotiated his contract on behalf of the company. Id. Here, the
SEC alleges similar facts. The allegations in the Amended Complaint
are

distinguishable

plaintiffs

alleged

from
that

those

in

corporate

Tuchman.
officers

In

made

Tuchman,

the

contradictory

statements regarding the corporation's commitment to quality, the
adequacy of the testing of corporate software, the reasons for
corporate telephone network outages, and the reasons for the
corporation's economic downturn. 14 F.3d at 1069. The Fifth Circuit
found

these

allegations

insufficient

to

indicate

conscious

behavior, noting that the plaintiffs failed to allege any facts
that show the corporate officers’ statements were belied by their
actual knowledge of contradictory facts. Id. Here, however, the
Amended Complaint alleges facts that make it reasonable to believe
that Schlesinger knew that Treaty’s Forms 10-K in 2011 and 2012
were materially misleading when he signed them.
Accepting all factual allegations in the Amended Complaint as
true,

the

Court

concludes

that
26

the

facts

alleged,

taken

collectively,

support

an

inference

of

scienter.

Because

this

action is not governed by the PSLRA, the inference of scienter is
not

required

to

be

“at

least

as

compelling

as

any

opposing

inference one could draw from the facts alleged.” Tellabs, 551
U.S. at 324. For this reason, the Court need not consider plausible
nonculpable explanations for Schlesinger’s conduct. The Amended
Complaint
constitute

alleges
strong

recklessness.

facts

that

show

circumstantial

Accordingly,

the

Schlesinger’s
evidence

Amended

of

Complaint

motive
his

and

severe

sufficiently

pleads scienter to survive a Rule 9(b) motion.
Likewise, the Amended Complaint properly states a claim under
Section 17(a)(2) and (3) of the Securities Act. Unlike Section
17(a)(1), scienter is not an element of a claim under Section
17(a)(2) or (3). Meadows v. SEC, 119 F.3d 1219, 1226 n.15 (5th
Cir. 1997) (citing Aaron, 446 U.S. at 697). To plead violations of
these subsections, the plaintiff need only show that the defendant
acted with negligence. Id.; Aaron, 446 U.S. at 702. Here, the
Amended Complaint alleges that Schlesinger obtained money by means
of an omission of material fact, which deceived the investing
public. Further, the Amended Complaint alleges that Schlesinger
owed a fiduciary duty to the company and the shareholders to ensure
that

Treaty’s

SEC

filings

that

he

signed

were

complete

and

accurate. (Rec. Doc. 97, at 11.) These allegations are sufficient
to show that Schlesinger was at least negligent in signing Treaty’s
27

public filings that failed to disclose Blackburn’s role in the
company.
B.

Aiding and Abetting Reporting Violations Under Exchange Act
Section 16(a) and Rules 12b-20, 13a-1, 13a-11, and 13a-13
The SEC claims that Schlesinger aided and abetted Treaty’s

violations of Section 13(a) and Rules 12b-20, 13a-1, 13a-11, and
13a-13 of the Exchange Act. Section 13(a) and Rules 13a-1, 13a11, and 13a-13 require issuers of registered securities to file
with the SEC annual reports on Form 10-K, current reports on Form
8-K, and quarterly reports on Form 10-Q. See 15 U.S.C. § 78m(a);
17 C.F.R. §§ 240.13a-1, 240.13a-11, 240.13a-13. In addition, Rule
12b-20 requires the issuer to disclose any material information as
may be necessary to ensure that the reports are not misleading. 17
C.F.R. § 240.12b-20. The reporting provisions of the Exchange Act
are “clear and unequivocal,” and satisfied only by the filing of
complete, accurate, and timely reports. SEC v. IMC Int'l, Inc.,
384 F. Supp. 889, 893 (N.D. Tex. 1974).
Section 20(e) of the Exchange Act authorizes the SEC to bring
claims for aiding and abetting primary violations of the federal
securities laws. See 15 U.S.C. § 78t(e). Section 20(e) was adopted
as part of the PSLRA in 1995; however, it codified the approach
taken by most federal courts, which had long recognized the ability
to sue aiders and abettors for violations of securities laws. For
example, in Abbott v. Equity Group, Inc., the Fifth Circuit applied

28

a

three-part

required

the

test

for

plaintiff

aiding-and-abetting
to

show

“(1)

that

liability,
the

which

primary

party

committed a securities violation; (2) that the aider and abettor
had ‘general awareness’ of its role in the violation; and (3) that
the aider and abettor knowingly rendered ‘substantial assistance’
in furtherance of it.” 2 F.3d 613, 621 (5th Cir. 1993). The Fifth
Circuit in Abbott explained that underlying the second and third
elements “is a single scienter requirement that varies on a sliding
scale from ‘recklessness’ to ‘conscious intent.’” Id. Generally,
the plaintiff must show conscious intent. Id. However, if there is
a “special duty of disclosure” or “evidence that the assistance to
the

violator

was

unusual

in

character

and

degree,”

then

a

recklessness standard applies. Id.
When Congress first passed the PSLRA, Section 20(e) provided
that “any person that knowingly provides substantial assistance to
another person in violation of a provision of this chapter, or of
any rule or regulation issued under this chapter, shall be deemed
to be in violation of such provision to the same extent as the
person to whom such assistance is provided.” 15 U.S.C. § 78t(e)
(2000) (emphasis added). However, in 2010, Congress passed the
Dodd-Frank Wall Street Reform and Consumer Protection Act, which
amended Section 20(e) and added the phrase “or recklessly” to
satisfy the scienter requirement in aiding-and-abetting cases.

29

Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L.
No. 111-203, 124 Stat 1376 (2010).
The amendment to Section 20(e) was intended to correct the
holding of a growing number of courts “that knowingly means actual
knowledge, rather than recklessness.” SEC v. Big Apple Consulting
USA, Inc., 783 F.3d 786, 801 (11th Cir. 2015) (quoting H.R. Rep.
No.

111-687(I),

at

80

(2010)).

The

amendment

clarifies

that

“recklessness is sufficient for bringing an aiding and abetting
action.” Id. Therefore, the amendment to Section 20(e) modifies
the three-part test for aiding-and-abetting liability: the SEC
must

show

(1)

that

the

primary

party

committed

a

securities

violation; (2) that the aider and abettor had “general awareness”
of its role in the violation; and (3) that the aider and abettor
knowingly

or

recklessly

rendered

“substantial

assistance”

in

furtherance of it. Cf. Abbott, 2 F.3d at 621. Although the SEC may
satisfy the second and third elements by showing conscious intent;
the SEC is only required to show recklessness. See 15 U.S.C. §
78t(e).
In the instant case, the SEC has adequately alleged that
Schlesinger aided and abetted Treaty’s violations of Section 13(a)
of the Exchange Act and the rules thereunder. The Amended Complaint
alleges that Treaty violated the reporting provisions by filing
reports on Forms 10-K, 10-Q, and 8-K that failed to disclose
Blackburn’s control of the company and which contained materially
30

misleading statements about the purported Belize oil strike. (Rec.
Doc. 97, at 10-11.) As discussed above, the allegations in the
Amended

Complaint,

taken

as

true,

adequately

allege

that

Schlesinger acted recklessly by signing Treaty’s Forms 10-K in
2011 and 2012, which failed to disclose Blackburn’s significant
role. Accordingly, the Amended Complaint sufficiently alleges that
by signing Treaty’s misleading Forms 10-K, Schlesinger aided and
abetted Treaty’s violations.
C.

Reporting Violations Under Exchange Act Section 16(a) and
Rule 16a-3
The SEC claims that Schlesinger violated Section 16(a) and

Rule 16a-3 of the Exchange Act. Section 16(a) of the Exchange Act
demands that “[e]very person who is directly or indirectly the
beneficial owner of more than 10 percent of any class of any equity
security (other than an exempted security) which is registered
pursuant to section 78l of this title, or who is a director or an
officer of the issuer of such security,” must file ownership
statements with the SEC. 15 U.S.C. § 78p(a)(1). These include
initial ownership statements on Form 3, statements disclosing
changes in beneficial ownership on Form 4, and annual statements
on Form 5. Rule 16a–3 contains the requirements for such ownership
statements. See id. § 78p(a)(2); 17 C.F.R. § 240.16a-3.
To establish a violation of Section 16(a), the SEC must show
that Schlesinger was an officer, director, or 10% beneficial owner

31

and that he did not file the required statements disclosing his
ownership of or transactions in the equity securities of the
company. See SEC v. e-Smart Techs., Inc., 82 F. Supp. 3d 97, 104
(D.D.C. 2015). While it appears that the Fifth Circuit has not
determined whether scienter is an element that the SEC must prove
to establish a violation of Section 16(a), numerous district courts
have consistently held that Section 16(a) does not require a
showing of scienter and have treated it as a strict-liability
provision. See, e.g., id. (collecting cases). 7
In the instant case, the SEC claims that, at various points
in time, Schlesinger failed to make required filings with the SEC
regarding his ownership of Treaty stock. (Rec. Doc. 97, at 24.) In
support

of

this

claim,

the

Amended

Complaint

alleges

that

Schlesinger was an officer and director of Treaty from November
2011 through September 2013. 8 Id. at 5. Further, the Amended
Complaint alleges that Schlesinger sold Treaty securities and
received Treaty stock awards and shares. Id. at 24-25. Lastly, the
SEC claims that Schlesinger failed to file the required reports of
ownership and changes of ownership of common stock and other equity
securities

of

Treaty.

Id.

For

7

example,

the

SEC

claims

that

Although Schlesinger argues that the SEC fails to allege that he possessed
the requisite scienter for a Section 16(a) violation, he fails to cite a single
case in which a court held that Section 16(a) requires a showing of scienter.
8 The Amended Complaint also alleges that Schlesinger served as a consultant
from May 2011 through November 2011, during which time he sold Treaty securities
and received Treaty shares as commission for stock sales. (Rec. Doc. 97, at 5,
20.) However, it is unclear whether the SEC is alleging that Schlesinger was
subject to the disclosure requirements of Section 16(a) during this time.

32

Schlesinger purchased 20,000,000 Treaty shares and later sold
these

shares,

ownership

as

yet

never

required

reported
by

his

Section

ownership

16(a).

Id.

or

change

Taking

of

these

allegations as true, the Court concludes that the SEC states a
plausible claim that Schlesinger violated Section 16(a) and Rule
16a-3 of the Exchange Act.
Schlesinger’s arguments in opposition are misplaced. First,
Schlesinger argues that the SEC fails to adequately allege that
the was an officer or director at the time he allegedly received
2,000,000 Treaty shares on August 8, 2011. Schlesinger claims that
he was not an “officer” as defined by Rule 16a-1 during the time
he served as a consultant, and he argues that the Amended Complaint
“clearly insinuates that shortly after his acquisition of the
shares,

he

transferred

them.”

(Rec.

Doc.

105-2,

at

25.)

Accordingly, Schlesinger argues that he was no longer in possession
of this stock by the time he became an officer and director of
Treaty.

Id.

Schlesinger

also

argues

that

the

SEC

fails

to

adequately plead that he violated Section 16(a) when he later
received and sold 20,000,000 Treaty shares. Schlesinger points out
that the Amended Complaint alleges that this transaction took place
between July 2011 and February 2014, which leaves an “approximately
5 month gap (between September 2013 – February 2014) where this
second transaction could have occurred and Schlesinger was not an
officer or director.” Id, at 25-26. However, these arguments are
33

inappropriate at this stage of the litigation on a motion to
dismiss, where the Court must accept all well-pleaded facts as
true and draw all reasonable inferences in favor of the SEC.
D.

Offering or Selling Unregistered Securities in Violation of
Securities Act Section 5
The SEC claims that Schlesinger violated Section 5 of the

Securities Act, which prohibits the interstate offer or sale of
securities without an effective registration statement. See 15
U.S.C. § 77e(a). To establish a violation of Section 5, the SEC
must show that (1) no registration statement was in effect as to
the securities; (2) the defendant directly or indirectly sold or
offered to sell securities; and (3) the sale or offer was made
through interstate commerce. SEC v. Cont'l Tobacco Co. of S.C.,
463 F.2d 137, 155 (5th Cir. 1972). Section 5 is a strict liability
statute; there is no need to prove scienter. Swenson v. Engelstad,
626 F.2d 421, 424 (5th Cir. 1980). Once the SEC introduces evidence
that a defendant has violated the registration provisions, the
defendant then has the burden of proof in showing entitlement to
an exemption. 9 See Doran v. Petroleum Mgmt. Corp., 545 F.2d 893,

9

In his reply, Schlesinger argues that the SEC fails to state a claim against
him under Section 5 because the Amended Complaint fails to allege that he is an
underwriter, issuer, or dealer. (Rec. Doc. 120, at 8.) Schlesinger points out
that Section 4 of the Securities Act exempts from the registration requirements
transactions by any person other than an issuer, underwriter, or dealer. Id
(citing 15 U.S.C. § 77d(1)). However, the burden is on Schlesinger to show his
entitlement to this exemption; the SEC need not allege facts showing that no
exemption applies.

34

899 (5th Cir. 1977) (citing SEC v. Ralston Purina Co., 346 U.S.
119, 126 (1953)).
Although Section 5 provides that it is unlawful for any person
to sell or offer to sell an unregistered security, liability under
Section 5 is not limited to the person or entity that ultimately
passes title to the security. SEC v. Murphy, 626 F.2d 633, 649
(9th Cir. 1980). “Instead, courts have established the concept of
‘participant’ liability to bring within the confines of § 5 persons
other than sellers who are responsible for the distribution of
unregistered securities.” Id. A defendant may be liable as a
participant in a Section 5 violation if the defendant’s role in
the transaction is significant. Id. at 648. A defendant plays a
significant role when he is both a “necessary participant” and
“substantial factor” in the sales transaction. Id. at 652.
Here, the SEC claims that Schlesinger directly sold or offered
to sell unregistered Treaty securities and that the offer or sale
was made through the use of interstate commerce or the mails. (Rec.
Doc. 97, at 17, 20.) In particular, the Amended Complaint alleges
that Schlesinger “engaged in the illegal offer and sale of Treaty
securities

[through]

Form

S-8

offerings

of

registered,

unrestricted stock to ineligible recipients.” Id. at 17. For
example, the SEC claims that Schlesinger transferred 2,000,000
Form S-8 shares he illegally received in August 2011 as commission

35

for

stock

sales

to

two

companies

controlled

by

Gwyn

without

ensuring that the shares were received as restricted. Id. at 20.
Schlesinger argues that the Amended Complaint fails to allege
that he was a necessary participant and substantial factor in the
sale of unregistered securities. (Rec. Doc. 105-2, at 27.) For
example, Schlesinger points out that the SEC alleges that Treaty
illegally

issued

commissions.

2,000,000

Schlesinger

shares

claims

to

that

him
if

as

these

payment

for

shares

were

illegally registered from the onset then there was no reason to
issue the shares to him rather than issue them directly to Gwyn.
Id. Therefore, Schlesinger argues that his role was not necessary.
Id. However, the SEC argues that the “necessary participant” and
“substantial

factor”

test

is

irrelevant

because

the

Amended

Complaint alleges that Schlesinger is liable as a direct seller.
The Court agrees. The SEC has alleged sufficient facts to state a
plausible claim against Schlesinger for violation of Section 5.
In conclusion, the Court finds that the SEC has sufficiently
pleaded its claims against Schlesinger so as to avoid dismissal at
this juncture.
CONCLUSION
Accordingly,
IT IS HEREBY ORDERED that Defendant’s Motion to Dismiss (Rec.
Doc. 105) is DENIED.
New Orleans, Louisiana, this 28th day of December, 2015.
36

CARL J. BARBIER
UNITED STATES DISTRICT JUDGE

37