Securities and Exchange Commission v. Stratocomm Corporation et al

Filing 61

DECISION AND ORDER granting 25 Motion for Summary Judgment. The SEC's motion for partial summary judgment imposing liability on defendants on each claim in which the defendants are named is GRANTED. The parties may now present evidence to the Court, by way of separate motion and/or proceeding, regarding appropriate relief to be awarded. Signed by Senior Judge Thomas J. McAvoy on 2/19/2014. [Mailed copy of decision and order to pro se defendant] (dpk)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF NEW YORK
__________________________________________
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
v.

1:11-CV-1188

STRATOCOMM CORPORATION,
ROGER D. SHEARER, and
CRAIG DANZIG,
Defendants.
__________________________________________
THOMAS J. McAVOY,
Senior United States District Judge

DECISION & ORDER
I.

INTRODUCTION
This is a civil enforcement action brought by the Securities and Exchange

Commission (“the SEC” or “the Commission”) against StratoComm Corporation
(“StratoComm”), Roger D. Shearer (“Shearer”) and Craig Danzig (“Danzig”). The
Commission asserts that the defendants committed securities fraud and registration
violations in the offer and sale of StratoComm penny stock. In this regard, the
Commission contends that StratoComm, under the control of Shearer and with the
assistance of Danzig, disseminated fraudulent public statements designed to portray
StratoComm as a successful company that had developed, manufactured and
sold sophisticated telecommunications equipment for tens of millions of dollars. However,
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the Commission asserts that the undisputed facts reveal that StratoComm had no
products, no paying customers, and no revenues; and that its very existence depended on
its ability to sell its securities to investors. The Commissioner further asserts that
StratoComm disseminated fraudulent statements to the public in three press releases and
a marketing document posted on the internet and distributed to potential investors. During
this same time period, the defendants sold millions of shares of StratoComm’s stock to
over 100 investors. Yet, StratoComm’s stock offering was not registered as required by
law. In addition, Danzig, who was in the forefront of selling StratoComm’s stock, was not
registered as a broker.
The Commission moves for partial summary judgment on the issue of liability for
each of its claims. StratoComm and Shearer have opposed the motion, but Danzig, who
is proceeding pro se, has failed to submit any opposition. The Commission has also
submitted reply papers. The Court has considered all of the submitted papers in reaching
its decision on the pending motion.
II.

BACKGROUND1
a. StratoComm Corporation
StratoComm Corporation (“StratoComm”) is a Delaware corporation that was

incorporated in 1997. It describes itself as being in the business of designing,
manufacturing, and selling telecommunications equipment. StratoComm’s stock is a
penny stock that is publicly traded and quoted on the electronic quotation system formerly

1

Unless indicated otherwise, the facts set forth above are admitted by the opposing party, properly
supported by the record, or deemed admitted (Danzig, who is proceeding pro se, failed to respond to the
motion so the properly support facts pertinent to him are deemed admitted, see Local Rule 7.1(a)(3)).

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known as the Pink Sheets. From late 2007 until April 2010, StratoComm received
approximately $4 million from selling its stock to more than 100 investors. StratoComm
has never filed a registration statement with the U.S. Securities and Exchange
Commission, (“Commission”), never prepared audited financial statements or provided an
offering memorandum to investors.
b. Roger D. Shearer
Roger D. Shearer, who founded StratoComm in 1997, is the sole Officer and
Director of StratoComm and has held those positions since the inception of the company.
Shearer is also the Chief Executive Officer (“CEO”) of StratoComm and has held that
position since the inception of the company except for a one-month period in the fall of
2010. As CEO, Shearer controlled the conduct of StratoComm during all periods in which
he was CEO. As sole Director of StratoComm, Shearer authorized himself, as CEO of
StratoComm, to issue StratoComm stock between January 2007 and January 2011. From
November 2007 until April 2010, Shearer was StratoComm’s largest beneficial
stockholder.
c. Craig Danzig
Craig Danzig was employed by StratoComm from at least 2007 until November
2010, initially as Director of Investor and Institutional Relations and subsequently as
Executive Director of Institutional Relations. Prior to joining StratoComm, Danzig was a
registered representative (commonly known as a “stockbroker”) associated with several
broker-dealers. Danzig held a license to sell securities from 1991 until 2000, when it
lapsed. From November 2007 through April 2010, Danzig was not licensed to sell

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securities.
d. StratoComm Portrayal as a Successful Telecommunications Company
The SEC asserts that during the period November 2007 through April 2010,
StratoComm stated that it was designing, manufacturing and selling telecommunications
equipment called the Transitional Telecommunications System (“TTS”) to countries in the
developing world. Plt. Statement of Facts (“PSOF”) ¶ 19. Defendants StratoComm and
Shearer asserts that StratoComm did not state that it manufactured anything “other than
its proprietary payload” and that, to the extent their Answer can be read as admitting that it
manufactured telecommunications systems generally, it “was an unintentional oversight.”
Shearer SOF ¶ 19; see also StratoComm SOF ¶ 19.
According to the SEC, StratoComm described its TTS as consisting primarily of an
antenna system suspended from a blimp (“aerostat”) tethered to the ground. PSOF ¶ 20.
Defendants StratoComm and Shearer deny this statement and contend that “the
transitional telecommunications system consists primarily of three components, including
the users segment, the flight segment and the ground segment, each of which are
composed of separate and distinct components. . . . The flight segment consists of the
aerostat, tether, and mooring system.” Shearer SOF ¶ 20.
It is undisputed that StratoComm stated that its TTS could provide 500,000
subscribers with broadband internet, wireless voice, or broadcast services. StratoComm
also stated that it was developing a Stratospheric Telecommunications System (“STS”),
including solar-powered equipment to be stationed in the stratosphere 65,000 feet above
ground. StratoComm explained that the STS would be able to provide telecommunications
services to three million customers in a 1,000 kilometer area, and that it was operating on
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two parallel tracks: (i) current production and sales of the TTS, and (ii) development of the
stratospheric system. It is also undisputed, however, that StratoComm has never actually
built a TTS; has never tested an operational prototype of a TTS; has never had all of the
parts to construct a TTS; has never possessed an aerostat; has never had the funds to
acquire an aerostat; has never exchanged a TTS for money; and has never received a
deposit on a TTS.
The Commission further maintains that as of late 2007, StratoComm had not yet
resolved basic design issues relating to the TTS and had only estimated the cost of the
system at a rough level. PSOF ¶ 33. Defendants contend that at the referenced time, “the
design was complete and the TTS was marketable for sale and deliverable, but for the
finding of a moneyed purchaser.” Shearer SOF ¶ 33; see also StratoComm SOF ¶ 33. It is
undisputed, however, that StratoComm has never acquired any customers who
transmitted payment to StratoComm for products or services; has never had any revenue;
and its sole source of support, aside from loans from friends and family, has been the
money that it received from selling its securities to investors.
e. StratoComm’s Alleged False And Misleading Statements
1. November 20, 2007 Press Release
During the November 2007 through May 2009 time period, Shearer, acting within
the scope of his authority and in his capacity as CEO of StratoComm, was authorized to
write, publish and distribute press releases on behalf of StratoComm. On November 20,
2007, StratoComm issued a press release entitled “StratoComm Announces $45 Million
System Sale.” The press release identifies StratoComm as its source. Shearer, acting

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within the scope of his authority, and in his capacity as CEO of StratoComm, wrote the
November 20, 2007 press release and authorized its release and publication. The press
release was posted on StratoComm’s website and was distributed to the public via PR
Newswire on November 20, 2007. This press release states that Evergreen ISP Platform,
PLC “has contracted with StratoComm for the purchase of $45,000,000 of StratoComm
Transitional System telecommunications equipment and services.” The press release
described StratoComm as a “provider” of “telecommunications infrastructure technologies”
and stated that a “$45 million contract” was “awarded” to StratoComm by an entity in
Cameroon for three TTS units and related services. However, as of November 20, 2007,
StratoComm had never built or tested an operational TTS and StratoComm did not have
the money to do so.
The SEC asserts that “on November 20, 2007, Shearer knew that StratoComm did
not have an operational TTS prototype and had no TTS units to supply.” PSOF ¶ 47.
Defendants “object[] to the characterization that StartoComm ‘had no TTS units to supply’”
because “[i]t was a logistical impracticality and financial impossibility to maintain a TTS
unit ‘in stock’ before a purchaser was acquired and paid a significant downpayment.
Moreover, StratoComm was able to supply a TTS at any time, given its possession of the
proprietary payload and the ready availability of the additional required off-the-shelf
components to be supplied through third-party vendors.” Shearer SOF ¶ 47; StratoComm
SOF ¶ 47.
However, it is undisputed that on November, 20, 2007, StratoComm had not
provided telecommunications infrastructure technologies to any person or entity, and
Shearer knew StratoComm did not have the funding in place to build a TTS. Thus,
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defendants concede that when Shearer drafted the November 20, 2007 press release, he
knew that StratoComm had not provided telecommunications infrastructure technologies
to any person or entity. Moreover, StratoComm never received a monetary deposit or
payment from Evergreen ISP Platform based upon the sale announced in the November
20, 2007 press release and StratoComm never received any revenue based upon the sale
referenced in the November 20, 2007 press release.
2. January 29, 2008 Press Release
On January 29, 2008, StratoComm issued a press release announcing the sale,
valued at $15 million, of a TTS and related services to StratoComm’s joint venture partner
in Madagascar. The press release identifies StratoComm as its source. Shearer, acting
within the scope of his authority and in his capacity as CEO of StratoComm, wrote the
January 29, 2008 press release, and acting within the scope of his authority and in his
capacity as CEO of StratoComm, authorized the release and publication of the January
29, 2008 press release. StratoComm’s January 29, 2008 press release was distributed to
the public via PR Newswire on the same date, and posted on StratoComm’s website on
February 26, 2008. The January 29, 2008 press release referred to the Madagascar
transaction as “StratoComm’s most recent system sale,” and described StratoComm as a
“provider” of telecommunications infrastructure technologies. However, as of January 29,
2008, StratoComm had never built or tested an operational TTS and StratoComm did not
have the money to do so. The Commission contends that, as of January 29, 2008,
Shearer knew that StratoComm did not have an operational TTS prototype or TTS unit to
supply to Madagascar. PSOF ¶ 61. Shearer “objects” to this assertion, contending again
that “[i]t was a logistical impracticality and financial impossibility to maintain a TTS unit ‘in
7

stock’ before a purchaser was acquired and paid a significant downpayment,” and that
“StratoComm was able to supply a TTS at any time, given its possession of the proprietary
payload and the ready availability of the additional required off-the-shelf components to be
supplied through third-party vendors.” Shearer SOF § 61; see also StratoComm SOF § 61
(same).
However, there is no dispute that as of January 29, 2008, StratoComm had not
provided telecommunications infrastructure technologies to any person or entity, and
Shearer knew that StratoComm did not have the funding in place to build a TTS. It is also
undisputed that StratoComm never received a monetary deposit or payment from
StratoComm Madagascar SA based upon the sale announced in the January 29, 2008
press release, and StratoComm never received any revenue based upon the agreement
referenced in the January 29, 2008 press release.
3. September 2, 2008 “Executive Informational Overview”
On September 2, 2008, StratoComm published its Executive Informational
Overview. It was prepared at the direction of Shearer acting within the scope of his
authority and in his capacity as CEO of StratoComm. The Executive Informational
Overview was prepared by StratoComm with the assistance of Crystal Research
Associates, LLC. StratoComm paid Crystal Research Associates $40,000 and provided
300,000 StratoComm stock warrants to assist in the preparation of the Executive
Informational Overview. The Executive Informational Overview was based upon
information provided by StratoComm. Shearer reviewed, approved and authorized the
release of the Executive Informational Overview. StratoComm’s logo and contact
information appeared at the top of the first page of the Executive Informational Overview
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and StratoComm’s logo appears on every page of the document.
StratoComm’s Executive Informational Overview stated that “StratoComm’s
aerostat is nearly 37 meters in length and 12 meters at its widest portion. It meets all U.S.
Federal Aviation Administration (FAA) requirements, including the presence of an
emergency flight termination system and proper lighting, and can carry a payload of up to
225 kilograms.” The Executive Informational Overview made the following assertions
regarding the dimensions and performance of the TTS:
The TTS is a tethered aerostat 37 meters in length positioned 1,500 meters
above the region for which it provides telecommunications. Due to its
proprietary payload designed in-house by StratoComm’s Development
Team, the TTS can support broadband Internet, wireless voice, or broadcast
services (up to 100 video channels) for roughly 500,000 customers in an
80-kilometer diameter area.
StratoComm’s Executive Informational Overview at 37.
StratoComm’s Executive Informational Overview described the TTS as “presently
available,” and stated that much of the company’s resources were devoted to support of
its “installed TTSs.” StratoComm’s Executive Informational Overview at 6. StratoComm’s
Executive Informational Overview also stated that, “[a]t present, the
Company has sold three TTS aerostats to Cameroon [and] one to Madagascar…” The
Executive Informational Overview contained pictures and artist’s renderings that, the SEC
contends, were “presented in a manner suggesting that they represented existing
StratoComm systems, such as tethered airships.” PSOF ¶ 78; but see Shearer SOF § 78;2

2

(“Defendant Shearer denies the assertions contained in [PSOF] paragraph 78. The assertion that
the pictures and artist’s renderings in the Executive Informational Overview were presented in a manner
suggesting they represented existing systems is an opinion of the author of the assertion in paragraph 78 and
cannot be said to be a fact. What is a fact is that the Executive Informational Overview refers to pictures and
drawings produced in the Overview as depicted renderings, not actual photographs of existing items.”)

9

StratoComm SOF ¶ 78.3
The Executive Informational Overview also stated that StratoComm was
“presently selling” the TTS, that TTS units “have been sold…for $60 million to date,” and
that its goal was to obtain “up to an additional $75 million in sales” by the end of 2008,
which was less than four months after the Executive Informational Overview was issued.
Executive Informational Overview at 13, 36. StratoComm admits this statement, but adds
that “the Overview goes on to state that ‘the Company expects to begin receiving funds
under these sales contracts during the fourth quarter 2008.’” StratoComm SOF ¶ 80.
Shearer “admits in part” the SEC’s statement, but “notes that while the Overview states
that TTS units have been sold for $60 million, it also clearly states in the same sentence
that ‘the Company expects to begin receiving funds under these sales contracts during the
fourth quarter 2008,’ which clearly by implication means that the company had received no
funds under the sales contracts.” Shearer SOF ¶ 80. Nevertheless, defendants concede
that StratoComm’s Executive Informational Overview stated that “the TTS now supports
wireless telephony,” and that, “StratoComm anticipates that the first TTS unit will likely be
in service by the first quarter 2009.”
The Commission asserts that the “Executive Informational Overview described a
product that does not exist and sales that never occurred.” PSOF ¶ 83. Shearer contends
that: (1) “the Overview describes more than one product; namely, that TTS and the STS, a
transitional telecommunications system and a stratospheric telecommunications system,

3

(“Denies the assertions in [PSOF] Paragraph 78 as the self-serving characterizations of a party, and
affirmatively states that the pictures and drawings in the Overview are referred to as depicted renderings and
not actual photographs of existing items.”)

10

respectively;” (2) “the reality is that all of the components of the described products
existed, but not as a single unit. . . . Instead, the Overview claimed only that the company
manufactured – and hence maintained physically – the proprietary payload;” (3) “the
Overview made clear that a ‘turnkey aerostat’ would be shipped to a buyer only when it
had been developed;” (4) “it is undisputed that StratoComm entered into several contracts
for sale. In fact, the Overview reflects that “StratoComm has entered into contracts that
are expected to result in TTS sales of $60 million dollars.” (emphasis in SOF); and (5)
“[c]ontracts for sale were executed between StratoComm and system purchasers on two
occasions.” Shearer SOF ¶ 83. StratoComm asserts that
each of the components of the described products existed, but not as a
single unit. . . . The Overview claimed only that the company manufactured
– and hence maintained physically – the proprietary payload. . . . It is
undisputed that StratoComm entered into contracts for the sale of the TTS.
StratoComm did not represent that it had already been paid on such
contracts. The Overview reflects that "StratoComm has entered into
contracts that are expected to result in TTS sales of $60 million dollars." The
Overview also detailed extensive risks with respect to potential barriers to the
fruition of the contracts.
StratoComm SOF ¶ 83 (citations omitted).
However, is undisputed that when Shearer approved the Executive Informational
Overview for public distribution, he knew that (1) StratoComm had never owned an
aerostat; (2) StratoComm never had the funding to purchase an aerostat or build an
operational TTS; (3) StratoComm has never delivered an operational TTS to any entity; (4)
StratoComm had not installed a TTS; and (5) StratoComm had not received payment in
connection with the sales agreements referenced in the November 20, 2007 and January
29, 2008 press releases. Danzig reviewed the Executive Informational Overview before it
was finalized, and it was placed on StratoComm’s website on December 3, 2008 and
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posted on Crystal Research Associates’ website on September 2, 2008.
4. May 5, 2009 Press Release
On May 5, 2009, StratoComm issued a press release entitled, “StratoComm
Corporation Schedules Initial System Turn On.” Shearer, acting within the scope of his
authority and in his capacity as CEO of StratoComm, wrote the May 5, 2009 press release
and, acting within the scope of his authority and in his capacity as CEO of StratoComm,
authorized the release and publication of the May 5, 2009 press release. StratoComm’s
May 5, 2009 press release was distributed via PR Newswire on May 5, 2009. This press
release identifies “StratoComm Corporation” as its “source” and noted that “a team of
engineers” was departing for Cameroon, “the location for installation of StratoComm’s first
commercial wireless telecommunications system.” The May 5, 2009 press release
described testing of the system at the company’s facilities in New Jersey and the
scheduled departure of the “installation and training team.” It also emphasized that testing
would ensure “efficient installation and reliable operation with system turn on.”
It is conceded that the reference in the May 5, 2009 press release to
“StratoComm’s first commercial wireless telecommunications system” was not to a TTS.
Rather, the system to be installed in Cameroon involved placement of telecommunications
equipment on a radio tower. The press release did not disclose that the system installed in
Cameroon was not a TTS. Further, the press release did not disclose that the system
installed in Cameroon was anchored to a tower. It is conceded that if StratoComm had
progressed to a stage where it had constructed and installed a TTS, that would have been
a very significant event for the company.

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f. Danzig’s Marketing and Sales of StratoComm Stock
In his role as Director of Investor and Institutional Relations and subsequently as
Executive Director of Institutional Relations, Danzig’s primary responsibility was to market
StratoComm’s stock to investors. Danzig served as the designated contact within
StratoComm for investors, relayed the terms of stock sales, handled paperwork relating to
stock sales, and facilitated the issuance of shares. He marketed StratoComm’s stock
throughout the country by telephone, through e-mail and in face-to-face meetings. Danzig
used the Executive Informational Overview as a “selling tool” to market StratoComm’s
stock and to convince investors of StratoComm’s “legitimacy;” routinely directed potential
investors to the Executive Informational Overview on the Crystal Research website;
arranged for a copy of the Executive Informational Overview to be sent to potential
investors; instructed a stock broker to use the Executive Informational Overview in dealing
with a client considering an investment in StratoComm; directed potential providers of
public relations services to the Executive Informational Overview; and directed potential
providers of investment banking services to the Executive Informational Overview.
It is undisputed that when Danzig distributed the Executive Informational Overview
to potential investors, Danzig knew that StratoComm did not have a TTS. In an email on
October 30, 2009, more than a year after the Executive Informational
Overview was issued, Danzig complained to Shearer that StratoComm had “no money,
and no product.” StratoComm paid Danzig a salary plus a “discretionary bonus” that was
based on his performance in raising money by selling the company’s securities. While
marketing and selling StratoComm stock to investors, Danzig was not registered as a
broker and was not associated with a registered broker.
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III.

DISCUSSION
a. Antifraud Provisions of the Federal Securities Laws
The antifraud provisions of the federal securities laws include Section 10(b) of the

Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 promulgated
thereunder, and Section 17(a) of the Securities Act of 1933 (the “Securities Act”). 15
U.S.C. § 78j(b); 17 C.F.R. § 240.10b–5 and 15 U.S.C. § 77q(a). To establish a violation of
Section 17(a)(1) of the Securities Act or Section 10(b) of the Exchange Act and Rule
10b-5 thereunder, the Commission must demonstrate: (1) a misrepresentation or
omission, (2) that was material, (3) that was made in the offer and sale of a security
(Section 17(a)(1)) or in connection with the purchase or sale of securities (Section 10(b)
and Rule 10b-5), (4) scienter, and (5) the involvement of interstate commerce, the mails,
or a national securities exchange. SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1467 (2d
Cir. 1996); see 15 U.S.C. § 78j(b).4 Scienter is not an element of a violation of Section
17(a)(2) or (3). First Jersey Sec., 101 F.3d at 1467.
1. Misrepresentation or Omission
Statements that create a false impression that a company has a developed, tested
and presently available product when, in fact, it has not, are false, misleading, and

4

In pertinent part, Section 10(b) declares it unlawful for any person, directly or indirectly, by the use of
any means of interstate commerce, the mails, or a national securities exchange,
[t]o use or employ, in connection with the purchase or sale of any security registered on a national
securities exchange or any security not so registered, ... any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as the [Securities and Exchange]
Commission may prescribe as necessary or appropriate in the public interest or for the protection of
investors.
15 U.S.C. § 78j(b).

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constitute misrepresentations under the antifraud provisions of the federal securities laws.
SEC v. Platforms Wireless Int’l., Corp., 617 F.3d 1072 (9th Cir. 2010);5 see also SEC v.
North American Research & Dev. Corp., 424 F.2d 63, 77 (2d Cir. 1970)(“the deliberate
use of ambiguities and half-truths” rendered statements “materially false and misleading”);
SEC v. Schiffer, No 91 Civ. 5835, 1998 WL 307375 at *2 (S.D.N.Y June 11, 1998)
(“half-truths are as violative of [sic] as outright falsehoods”).
A. November 2007 and January 2008 Press Releases
The November 20, 2007 press release described StratoComm as a “provider” of
“telecommunications infrastructure technologies” and announced that StratoComm
was “awarded” a “$45 Million contract for the sale” of three TTS units in Cameroon.
The press release represented that StratoComm’s Cameroonian joint venture had
contracted with StratoComm for the purchase of $45 million worth of “StratoComm
Transitional System telecommunications equipment and services.” Although defendants
assert that “the design was complete and the TTS was marketable for sale and
deliverable, but for the finding of a moneyed purchaser,” that qualification does change the
fact that the November 20, 2007 press release represented that StratoComm had
contracted for the sale of the TTS technology. Moreover, it is undisputed that on

5
In Platforms Wireless, the company issued a press release describing a telecommunications system
remarkably similar to StratoComm’s purported systems. Platforms’ “ARC” telecommunications system
consisted of a portable antenna payload and either airplanes or aerostats to carry the antenna aloft. Platforms
Wireless, 617 F.3d at 1981. The press release described technical details and performance characteristics of
the various components of the ARC system and spoke in the present tense when describing the components
(i.e., “the Zero-Gravity Aerostructure is a large, manned, helium-filled aerodynamically-shaped airship
structure.”) Id. at 1082. In contrast to the press release, Platforms Wireless did not have an operational
prototype of the ARC system or the money to build a prototype. The court concluded that the press release
was materially misleading because “[c]onsidered as a whole, it leaves the unmistakable impression that the
ARC system exists.” Id. at 1095.

15

November, 20, 2007, StratoComm had not provided telecommunications infrastructure
technologies to any person or entity, and Shearer knew StratoComm did not have the
funding in place to build a TTS. Still further, it is undisputed that StratoComm never
received a monetary deposit or payment based upon the sale announced in the November
20, 2007 press release, and StratoComm never received any revenue based upon the
sale referenced in the November 20, 2007 press release.
On January 29, 2008, StratoComm issued another press release announcing the
“sale” of a TTS unit in Madagascar for $15 million. This release, entitled “StratoComm
Corporation Signs $15 Million System Sale Agreement,” again described StratoComm as
a “provider” of “telecommunications infrastructure technologies.” The press release
referred to the Madagascar “sale” as “StratoComm’s most recent system sale.” While
Shearer contends that it was a logistical impracticality and financial impossibility to
maintain a TTS unit “in stock” before a purchaser was acquired and paid a significant
down payment for it, that does not change the misleading nature of the January 29, 2008
press release that indicated that a $15 million sale had occurred in Madagascar. Further,
his current assertion that StratoComm “at all times possessed its proprietary
telecommunications payload” or “it manufactured the proprietary telecommunications
payload” is contradicted by his own prior sworn testimony to the SEC in May 2008. In this
regard, Shearer testified that “[t]he payload is completely designed, yeah. We have not
manufactured the first one yet.” 5/22/2008 Shearer Investigative Test. at 90:5-6 (emphasis
added). It is well settled that a party may not create a question of fact sufficient to defeat
summary judgment by submitting an affidavit that contradicts prior sworn testimony. See
Raskin v. Wyatt Co., 125 F.3d 55, 63 (2d Cir. 1997).
16

Defendants’ contention that the press releases are not false and misleading
because they contained Shearer’s contact information for potential investors to obtain any
additional information is insufficient speculation upon which to defeat summary judgment.
Further, “investors are not generally required to look beyond a given document to discover
what is true and what is not.” Miller v. Thane Int’l, Inc., 519 F.3d 879, 887 (9th Cir. 2008)
(citing Dale v. Rosenfeld, 229 F.2d 855, 858 (2d Cir. 1956) (“Availability elsewhere of
truthful information cannot excuse untruths or misleading omissions in the prospectus.
Readiness and willingness to disclose are not equivalent to disclosure.”)).
There can be no legitimate dispute that these press releases are false and
misleading because they give the impression that the TTS actually existed in operational,
readily deployable form, when the TTS did not even exist. It is undisputed at the time that
StratoComm issued these press releases, StratoComm had not built or tested an
operational prototype of the TTS and did not have the money to do so. Indeed, around the
time that StratoComm disseminated these press releases, it had not resolved even basic
design issues related to the TTS.
By announcing two “sales” of StratoComm “Transitional System
telecommunications equipment” and services worth a total of $60 million, StratoComm’s
press releases leave the unmistakable—and false—impression that the TTS exists when it
did not. In light of these purported sales announced by these press releases, it was “highly
unreasonable” for StratoComm not to disclose that the TTS did not actually exist and that
StratoComm had never actually built or tested such a system. See Platforms Wireless,
617 F.3d at 1095.
The press releases are also false and misleading because they refer to
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StratoComm as a “provider” of “telecommunications infrastructure technologies.” There is
no dispute that as of November 2007 and January 2008, StratoComm had not “provided”
telecommunications infrastructure technologies to any person or entity.
B. September 2, 2008 “Executive Informational Overview”
StratoComm made additional false and materially misleading statements regarding
the existence of the TTS through the preparation and dissemination of the Executive
Overview, which included present-tense descriptions of the physical traits, dimensions,
performance and service capabilities of the TTS.6 These present-tense statements are
false and misleading because they leave “the unmistakable impression that [StratoComm
possessed an operational aerostat and the TTS] system exists.” Platforms Wireless, 617
F.3d at 1095. It is undisputed that StratoComm did not possess an aerostat and never
had the funding to purchase one. Yet, the Executive Overview represented the TTS as
“presently available” and stated that much of the company’s resources were devoted to
supporting its “installed TTSs.” This was false and misleading because there were no
“installed TTSs” at the time the Executive Overview was written and disseminated.

6

For example, the Executive Overview stated:

StratoComm’s aerostat is nearly 37 meters in length and 12 meters at its widest portion. It meets all
U.S. Federal Aviation Administration (FAA) requirements, including the presence of an emergency
flight termination system and proper lighting, and can carry a payload of up to 225 kilograms.
The Executive Overview also made the following assertions regarding the dimensions and
performance of the TTS:
The TTS is a tethered aerostat 37 meters in length positioned 1,500 meters above the region for
which it provides telecommunications. Due to its proprietary payload designed in-house by
StratoComm’s Development Team, the TTS can support broadband Internet, wireless voice, or
broadcast services (up to 100 video channels) for roughly 500,000 customers in an 80-kilometer
diameter area.

18

The Executive Overview also included visual images suggesting that StratoComm
products, including tethered airships, actually existed. These statements and impressions,
however, are false and misleading because StratoComm had never possessed an
aerostat or built an operational TTS.
The Executive Overview also repeatedly referred to “sales” of TTS units and stated
that TTS units “have been sold…for $60 million to date.” Further, the Executive Overview
stated that StratoComm’s goal was to obtain “up to an additional $75 million in sales” by
the end of 2008, which was less than four months after the Executive Overview was
issued. Yet, when the Executive Overview was issued, StratoComm had no TTSs to sell
and no resources to build one. No reasonable fact finder could conclude that, as Shearer
contends, the Overview describes TTS and STS systems; “the Overview claimed only that
the company manufactured – and hence maintained physically – the proprietary payload;”
the Overview merely indicated that “a ‘turnkey aerostat’ would be shipped to a buyer only
when it had been developed;” the Overview reflects that “StratoComm has entered into
contracts that are expected to result in TTS sales of $60 million dollars;” and, the
Overview divulged that “[c]ontracts for sale were executed between StratoComm and
system purchasers on two occasions.”
Taken together, the representations made in StratoComm’s Executive Overview
paint a clear picture that the TTS existed and multiple units had been sold for millions.
This was not true. The use of cautionary language in the Overview does not shield
defendants from liability. See SEC v. Meltzer, 440 F. Supp. 2d 179, 191 (E.D.N.Y.
2006)(generalized disclosures of amorphous risks do not shield defendants’ from liability).
Moreover, any insulation from liability through the use of cautionary language does not
19

apply to “historical or present fact-knowledge” -- statements that a defendant knew was
false when made, as was the case here. Id. at 191-92. In addition, a showing of investor
reliance is not required to establish fraud. SEC v. Credit Bancorp, Ltd., 195 F. Supp. 2d
475, 490-91 (S.D.N.Y. 2002). Thus, the fact that a select few investors have attested that
they were not mislead by the Overview is of no moment. See United States v. Elliot, 62
F.3d 1304, 1308 (11th Cir. 1995). Accordingly, were the case to proceed to trial, there
could be no conclusions other than that StratoComm’s Executive Overview, like the press
release in Platforms Wireless, is “deceptive, an absolute and unequivocal falsehood.”
Platforms Wireless, 617 F.3d at 1095.
C. May 5, 2009 Press Release
On May 5, 2009, StratoComm issued a press release announcing that it would
“turn on” of its first system. In the months leading up to this press release, StratoComm
had stated publicly that it anticipated that “the first TTS unit will likely be in service by the
first quarter 2009.” The May 5, 2009 press release stated that StratoComm was preparing
to send engineers to Cameroon “for installation of StratoComm’s first commercial wireless
telecommunications system.” The press release described testing of the system at the
company’s facilities in New Jersey and the scheduled departure of the “installation and
training team.” It emphasized that testing would ensure “efficient installation and reliable
operation with system turn on.”
In light of the surrounding circumstances, and in particular, StratoComm’s public
statement that it anticipated that the first TTS would be in service at the beginning of 2009,
this press release implied that StratoComm was installing its TTS in Cameroon. It was not.

20

The system to be installed in Cameroon was not the TTS, but a much more rudimentary
system involving the placement of an antenna on a radio tower. There is no merit to
defendants’ contention with respect to the May 5, 2009 press release that a “reasonable
investor familiar with StratoComm’s prior disclosures would read” it in a certain way and
would figure out the truth. StratoComm Memo at 10. As indicated above, investors are
not generally required to look beyond a given document to discover what is true and what
is not.
Based on the undisputed evidence, a reasonable fact finder could only conclude
that StratoComm’s failure to disclose the material facts regarding the nature of the system
installed in Cameroon was misleading.
2. Materiality
Information is material if there is a “substantial likelihood that a reasonable person
would consider it important in deciding whether to buy or sell shares.” Azrielli v. Cohen
Law Offices, 21 F.3d 512, 518 (2d Cir. 1994); SEC v. Universal Express, Inc., 475 F.
Supp. 2d 412, 423 (S.D.N.Y 2007). An omitted fact is 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.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132
(1976). Statements related to whether a company has a product to sell are material as a
matter of law. SEC v. Enter. Solutions, Inc., 142 F. Supp. 2d 561, 577 (S.D.N.Y. 2001)
(“[w]hether the company actually had products to sell is clearly relevant information to a
potential investor.”). This is particularly true for development-stage companies. “A

21

finished, tested product is almost certainly the single most important piece of information
for an investor deciding whether to invest in a start-up company.” Platforms Wireless, 617
F.3d at 1095.
The false and misleading statements in StratoComm’s press releases and the
Executive Overview were material. StratoComm’s statements falsely portrayed it as a
development-stage company that had progressed to the operational stage with a finished
product and sales, when it had not. These misstatements are material bause they relate to
whether the company has a product to sell and a viable business model. See Enter.
Solutions, 142 F. Supp. 2d at 577.
A. Maker of the Statement
StratoComm made the false and misleading statements in the press releases and
the Executive Overview. See Janus Capital Group, Inc. v. First Derivative Traders, 131 S.
Ct. 2296, 2302 (2011)(with respect to material misstatements under Exchange Act Rule
10b-5(b), “the maker of a statement is the person or entity with ultimate authority over the
statement, including its content and whether and how to communicate it.”); SEC v. Stoker,
865 F. Supp. 2d 457, 463 (S.D.N.Y. 2012).7 Each of the press releases identify
StratoComm as its “source.” Acting within the scope of his authority as StratoComm’s

7

(“To begin with, [Section 17(a)], on its face, does not state that a defendant must obtain the funds
personally or directly. On the contrary, all three prongs of liability under Section 17(a) are preceded by the
common modifier “directly or indirectly.” It would be contrary to this language, and to the very purpose of
Section 17(a), to allow a corporate employee who facilitated a fraud that netted his company millions of
dollars to escape liability for the fraud by reading into the statute a narrowing requirement not found in the
statutory language itself. As the Supreme Court has repeatedly stated, “Congress intended securities
legislation enacted for the purpose of avoiding frauds to be construed ‘not technically and restrictively, but
flexibly to effectuate its remedial purpose.’ ” Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128,
151, 92 S. Ct. 1456, 31 L.Ed.2d 741 (1972) (quoting SEC v. Capital Gains Research Bureau, 375 U.S. 180,
195, 84 S.Ct. 275, 11 L. Ed.2d 237 (1963)).”)

22

CEO, Shearer drafted, authorized and disseminated each release. Thus, StratoComm is
the entity with ultimate control over the statements in the press releases, including their
“content and whether and how to communicate it.” Janus Capital Group, 131 S. Ct. at
2302.
StratoComm also made the false and misleading statements in the Executive
Overview. The Executive Overview itself states that StratoComm prepared it with the
assistance of Crystal Research Associates. StratoComm’s logo appears on every page
and the company’s contact information appears at the top of the first page.
StratoComm had ultimate control over the Executive Overview’s content and whether and
how to communicate it. StratoComm paid for the Executive Overview, and Shearer, as
StratoComm’s CEO, approved the final version. Thus, StratoComm made the false and
misleading statements in the press releases and the Executive Overview.
3. Statements Made in Connection with the Offer, Purchase or Sale of
Securities
Courts construe broadly the “in connection with” element of Section 10(b), Rule
10b-5, and Section 17(a). SEC v. Credit Bancorp, Ltd., 195 F. Supp. 2d 475, 491
(S.D.N.Y. 2002); SEC v. Hasho, 784 F. Supp. 1059, 1106 (S.D.N.Y.1992). To establish
that fraudulent conduct satisfies the “in connection with” requirement, “[i]t is enough that
the scheme to defraud and the sale of securities coincide.” SEC v. Zandford, 535 U.S.
813, 822, 122 S. Ct. 1899, 1904 (2002). The “in connection with” requirement is satisfied
whenever “assertions are made . . . in a manner reasonably calculated to influence the
investing public, e.g., by means of the financial media . . . .” SEC v. Texas Gulf Sulfur
Co., 401 F.2d 833, 862 (2d Cir. 1968). Applying this standard, courts
23

have concluded that publicly-disseminated press releases, research reports, and website
representations that contain materially false and misleading statements regarding an
issuer of securities satisfies the “in connection with” requirement. See, e.g., SEC v. Rana
Research, Inc., 8 F.3d 1358, 1362 (9th Cir. 1993); see also Rowinski v. Salomon Smith
Barney Inc., 398 F.3d 294 (3d Cir. 2005) (statements made in a research report satisfied
the “in connection with” requirement under Section 10(b)); SEC v. DCI Telecomm., Inc.,
122 F. Supp. 2d 495, 499-500 (S.D.N.Y. 2000) (statements in press releases and website
content satisfy the “in connection with” requirement).
The November 20, 2007 and January 29, 2008 press releases and the Executive
Overview were posted on StratoComm’s website. The Executive Overview also was
posted on the Crystal Research Associates website. During the same time that
StratoComm disseminated the press releases and Executive Overview, it sold
approximately 62 million shares of stock. In addition, during this time StratoComm’s
shares were quoted on the over-the-counter market and were purchased and sold by
investors. Thus, a reasonable fact finder could only conclude that StratoComm made the
false and misleading statements in a manner reasonably calculated to influence investors,
and the statements coincided with the offer and sale of the company’s stock. Accordingly,
the statements were made “in connection with” the offer, purchase or sale of securities.
4. False and Misleading Statements Made With Scienter
Scienter under Section 10(b) “refers to a mental state embracing intent to deceive,
manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12, 96 S. Ct.
1375, 1381 (1976). Scienter may be established by knowing misconduct or reckless

24

disregard for the truth. SEC v. McNulty, 137 F.3d 732, 741 (2d Cir. 1998). Recklessness
is “an extreme departure from the standards of ordinary care . . . to the extent that the
danger was either known to the defendant or so obvious that the defendant must have
been aware of it.” Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 47 (2d Cir. 1978).
Furthermore, “[r]epresenting information as true while knowing it is not, recklessly
misstating information, or asserting an opinion on grounds so flimsy as to belie any
genuine belief in its truth, are all circumstances sufficient to support a conclusion of
scienter.” SEC v. Universal Express, Inc., 475 F. Supp. 2d 412, 424 (S.D.N.Y. 2007). The
scienter of a company’s officer may be attributed to the company where he was acting
within the scope of his apparent authority. Adams v. Kinder-Morgan, Inc., 340 F.3d 1083,
1106-07 (10th Cir. 2003); Universal Express, Inc., 475 F. Supp. 2d 412, 424 n.4 (S.D.N.Y.
2007).
The incontrovertible record shows that StratoComm and Shearer made materially
false and misleading statements with scienter. For example, as a development stage
company, StratoComm (through its Chief Executive Officer Shearer, who prepared and/or
wrote the statements at issue), stated in its November 7, 2007 and January 29, 2008
press releases that it was a “provider” of “telecommunication infrastructure technologies.”
In its Executive Overview, StratoComm also stated that its TTS units [part of its alleged
telecommunication infrastructure technologies] are “presently available”; expansively
described, in the present tense, the dimension and performance of TTS; and stated that
much of the company’s resources were devoted to supporting its “installed TTSs.” These
statements made by StratoComm (through Shearer) are indisputably false and misleading

25

in that StratoComm and Shearer have conceded through their admissions to the
Commission’s Statement of Material Facts that StratoComm had not provided
telecommunication infrastructure technologies to anyone and TTS was neither “presently
available” nor “installed” anywhere at the time these press releases and the Executive
Overview were issued. See PSOF ¶¶ 25-30, 49, 63, 84-87; StratoComm’s Response to
PSOF at 3-7 (admitting PSOF ¶¶ 25-30, 45, 49, 59, 63, 75-77, 84-87); Shearer Response
to PSOF at 4-7, 9 (same). These undisputed statements, together with the November 20,
2007 and January 29, 2008 press releases announcing two “sales” worth $60 million
(which were, at best, signing of some contracts where no money ever exchanged hands),
leave an indelibly false and misleading impression that the company had a developed,
tested, and presently available product when, in fact, it did not. See SEC v. Gabelli, 653
F.3d 49, 57 (2d Cir. 2011) (explaining that “‘half-truths’ – literally true statements that
create a materially misleading impression – will support claims for securities fraud”)
(emphasis supplied), rev’d on other grounds sub nom., Gabelli v. SEC, 133 S. Ct. 1216
(2013).
Furthermore, in its Executive Overview, StratoComm stated that its TTS
units [part of its alleged telecommunication infrastructure technologies] are “presently
available”; expansively described, in the present tense, the dimension and performance of
TTS; and stated that much of the company’s resources were devoted to supporting its
“installed TTSs.” These statements made by StratoComm (through Shearer) are
indisputably false and misleading.
A reasonable fact finder could only conclude that in preparing and disseminating
the press releases and Executive Overview which contained the referenced false and
26

misleading statements regarding the existence of the TTS, Shearer engaged in knowing
misconduct. As the founder, CEO and sole director of StratoComm, Shearer was aware
that StratoComm had no operational TTS units. Specifically, at all times relevant to this
action, Shearer knew that StratoComm: (1) had never built a TTS; (2) had never had the
parts to build a TTS; (3) had never had the money needed to acquire the parts to build a
TTS; (4) never tested an operational prototype; and (5) had never exchanged a TTS for
money. In addition, at the time that he drafted the November 2007 and January 2008
press releases, Shearer knew that StratoComm had not provided “telecommunications
infrastructure technologies” to any person or entity. Thus, a reasonable fact finder could
only conclude that Shearer engaged in knowing misconduct when he drafted and
disseminated the press releases and Executive Overview, portraying StratoComm as a
company that had a finished, tested product and multi-million-dollar TTS sales.
Likewise, a reasonable fact finder could only conclude that Shearer engaged in
knowing misconduct in that the November 2007 and January 2008 press releases falsely
described StratoComm as a “provider” of “telecommunications infrastructure
technologies.” As StratoComm’s CEO and sole director who acted within the scope of his
authority, Shearer’s scienter is imputed to StratoComm. Adams, 340 F.3d at 1106-07.
5. Involvement of Interstate Commerce, the Mails, or a National
Securities Exchange
Finally, there can be no dispute that the press releases and Executive Overview
were used in connection with the interstate sale of securities by telephone, over the

27

internet,8 and publicly traded and quoted on the electronic quotation system formerly
known as the Pink Sheets.
Thus, the Commission has established all five elements of its claims brought under
of Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act, and Rule
10b-5 thereunder.
C. Liability Under Section 10(b) and Rule 10b-5 as a Controlling Person
Exchange Act Section 20(a) provides that:
[e]very person who, directly or indirectly, controls any person liable under any
provision of this title or of any rule or regulation thereunder shall also be liable
jointly and severally with and to the same extent as such controlled person to any
person to whom such controlled person is liable, unless the controlling person
acted in good faith and did not directly or indirectly induce the act or acts
constituting the violation or cause of action.
15 U.S.C. § 78t.
The SEC makes a prima facie case of liability under Section 20(a) by proving: “(1) a
primary violation by a controlled person; (2) control of the primary violator by the
defendant; and (3) that the controlling person was in some meaningful sense a culpable
participant in the primary violation.” Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d Cir.
1998) (interior quotation marks and citation omitted). Control may be established by
showing that the defendant possessed the “power to direct or cause the direction of the
management and policies” of the controlled entity, “whether through the ownership of
voting securities, by contract, or otherwise.” 17 C.F.R. § 240.12b-2 (defining control); see
also In re Take-Two Interactive Sec. Litig., 551 F. Supp. 2d 247, 306 (S.D.N.Y. 2008).

8
While employed by StratoComm, Danzig used his e-mail addresses
[e-mail] and [e-mail] to conduct StratoComm business.

28

Once the Commission establishes a prima facie case of Section 20(a) liability, the burden
shifts to the defendant to prove that he acted in good faith or “did not directly or indirectly
induce the act or acts constituting the violation” First Jersey Secs., Inc., 101 F.3d at 1473
(quoting 15 U.S.C. § 78t).
The Commission has established a prima facie case against Shearer under
Exchange Act Section 20(a) because it is undisputed that he controlled StratoComm. He
founded the company and was the Chief Executive Officer and sole member of the Board
of Directors. Shearer also was StratoComm’s largest beneficial shareholder.
StratoComm’s primary violations of the securities laws are demonstrated above.
Furthermore, Shearer was a culpable participant in the company’s issuance of the
misleading press releases because he wrote them and he knew that StratoComm had
never constructed a TTS and did not have the means to do so. Shearer was a culpable
participant in the company’s misstatements in the Executive Overview because he
arranged for it to be produced, reviewed it, and approved it. Shearer has not rebutted the
Commission’s prima facie case and, and thus is liable under Section 20(a) as a
“controlling person” of StratoComm.
D. Aiding and Abetting Violations of Exchange Act Section 10(b) and Rule
10b-5
Exchange Act Section 20(e) permits the SEC to bring a civil enforcement action for
aiding and abetting securities fraud against “any person that knowingly provides
substantial assistance” to a primary violator of the securities laws. 15 U.S.C. § 78t(e);
SEC v. Apuzzo, 689 F.3d 204, 211 (2d Cir. 2012). Aiding and abetting liability under the
federal securities laws has three elements: (1) the existence of a securities law violation by
29

the primary violator; (2) knowledge of the violation on the part of the aider and abettor; and
(3) “substantial assistance” by the aider and abettor in achieving the primary violation.
Apuzzo, 689 F.3d 204 at 211.
In light of the uncontested facts in this matter, a reasonable fact finder could only
conclude that Shearer aided and abetted StratoComm’s violations of Section 10(b). He
knew that the press releases and the Executive Overview were materially misleading.
Specifically, he knew that StratoComm: (1) had never built a TTS; (2) had never had the
parts to build a TTS; (3) had never had the money needed to acquire the parts to build a
TTS; (4) had never tested an operational prototype; and (5) had never exchanged a TTS
for money. In addition, when he drafted the November 2007 and January 2008 press
releases, Shearer knew that StratoComm had not provided “telecommunications
infrastructure technologies” to any person or entity. Shearer substantially assisted
StratoComm’s violations because he wrote the press releases and authorized their public
distribution. In addition, Shearer arranged for the production of the Executive Overview,
reviewed it, approved it, and authorized its dissemination.
A reasonable fact finder could also only conclude that Danzig aided and abetted
StratoComm’s violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder
in connection with the Executive Overview. He knew that the Executive Overview
contained materially misleading statements. Specifically, Danzig knew that, contrary to
the representations in the Executive Overview, StratoComm did not have a TTS. Danzig
substantially assisted the company’s conduct because he referred potential investors to
the Executive Overview posted on the internet and “used it as a selling tool.” In this
regard, Danzig referred investors to the Executive Overview on numerous occasions and
30

instructed a stock broker to use the Executive Overview in dealing with potential investors.
Danzig also directed potential providers of public relations and investment banking
services to the Executive Overview. Accordingly, Shearer and Danzig aided and abetted
StratoComm’s violations of Section 10(b) and Rule 10b-5.
E. Exchange Act Section 15(a) and Securities Act Section 17(a)
1. Acting as an Unregistered Broker
Section 15(a) of the Exchange Act makes it unlawful for a broker to effect any
transaction in, or to induce or attempt to induce the purchase or sale of any security,
unless such broker: (1) is registered with the Commission; (2) in the case of a natural
person, is an associated person of a registered broker; or (3) satisfies the conditions for an
exemption or safe harbor. Section 3(a)(4) the Exchange Act defines “broker” as any
person “engaged in the business of effecting transactions in securities for the account of
others.” The SEC is not required to prove scienter to establish a violation of Section 15(a).
SEC v. Martino, 255 F. Supp. 2d 268, 283 (S.D.N.Y. 2003).
To demonstrate that someone is acting as a broker, the SEC is required to show a
regularity of participation in securities transactions “at key points in the chain of
distribution.” Mass. Fin. Servs, Inc. v. Sec. Investor Prot. Corp., 411 F. Supp. 411, 415 (D.
Mass. 1976) aff’d, 545 F.2d 754 (1st Cir. 1976). Among the activities that indicate that a
person may be acting as a “broker” are: (1) solicitation of investors to purchase securities;
(2) involvement in negotiations between the issuer and the investor; and (3) receipt of
transaction based compensation. SEC v. Gagnon, No. 10-cv-11891, 2012 WL 994892, at
*11 (E.D. Mich. March 22, 2012); SEC v. Hansen, No. 83 Civ. 3692, 1984 WL 2413, at *10

31

(S.D.N.Y. Apr. 6, 1984).
Danzig acted as an unregistered broker in violation of Section 15(a) of the
Exchange Act by regularly engaging in the business of effecting transactions in securities
for the accounts of others in exchange for transaction-based compensation. As Director of
Investor and Institutional Relations and Executive Director of Institutional Relations,
Danzig’s primary responsibility was to solicit investors to purchase StratoComm’s
securities. He contacted investors about buying StratoComm securities, relayed terms of
the transactions and handled related paperwork. Danzig also received transaction-based
compensation in the form of a discretionary bonus that depended on how much money he
raised for StratoComm by selling its securities to investors. Accordingly, the undisputed
facts in this case establish that Danzig acted as an unregistered broker.
2. Section 17(a) of the Securities Act
Pursuant to Section 17(a) of the Securities Act, it is unlawful in the offer or sale of
any securities to use any means of interstate commerce or the mails to: (1) employ any
device, scheme, or artifice to defraud, or (2) obtain money or property by means of any
untrue statement of a material fact or any omission to state a material fact necessary in
order to make the statements made, in light of the circumstances under which they were
made, not misleading; or (3) engage in any transaction, practice, or course of business
which operates or would operate as a fraud or deceit upon the purchaser. 15 U.S.C. §
77q(a). Scienter is not an element of a violation of Section 17(a)(2) or (3). Aaron v. SEC,
446 U.S. 680, 701–02, 100 S. Ct. 1945, 1958 (1980).
Based on the undisputed evidence, Danzig violated Section 17(a)(1) of the

32

Securities Act by employing a fraudulent device (the Executive Overview) as “a selling
tool” to market StratoComm’s stock to investors and to convince investors of the
“legitimacy” of the company. He either gave them a copy of the Executive Overview or
referred them to Crystal Research Associates’ website, where it was posted. Danzig
made such referrals on numerous occasions. It is undisputed that Danzig knew the
statements contained in the Executive Overview were false because he knew that the
company did not have a TTS. PSOF ¶¶ 113, 114. He violated Section 17(a)(2) by
obtaining money or property by means of the untrue statements in the Executive
Overview. His discretionary bonus was tied to the stock he sold, and he used the
Executive Overview, which he knew contained untrue statements, as a “tool” to achieve
those sales. Furthermore, he used the Executive Overview to solicit sales that generated
funds for his employer, StratoComm. See Stoker, 865 F. Supp. 2d at 463 (concluding that
Section 17(a)(2) is violated where the defendant obtained money or property for his
employer while acting as its agent, or, alternatively, where the defendant personally
obtained money indirectly from the fraud). Danzig violated Section 17(a)(3) by engaging in
securities transactions and courses of business that operated as a fraud on StratoComm
investors.
F. Offering and Selling Securities in Unregistered Transactions
Sections 5(a) and 5(c) of the Securities Act make it unlawful for any person to offer
or sell any security through interstate commerce when no registration statement has been
filed. 15 U.S.C. § 77e(a) and (c); SEC v. Kern, 425 F.3d 143 (2d Cir. 2005). The purpose
of the registration requirement “is to protect investors by promoting full disclosure of

33

information thought necessary to informed investment decisions.” SEC v. Ralston Purina
Co., 346 U.S. 119, 124 (1953).
Section 5 “imposes strict liability on offerors and sellers of unregistered securities”
regardless of any degree of fault, negligence or intent on the seller’s part. SEC v. Calvo,
378 F.3d 1211, 1215 (11th Cir. 2004) (citation omitted); accord Aaron v. SEC, 446 U.S.
680, 714 n. 5, 100 S. Ct. 1945, 64 L. Ed.2d 611 (1980)(a plaintiff need not also show
scienter to prove a Section 5 violation). A defendant violates Section 5 if it is shown that
he was a necessary participant or a substantial factor in the offering or selling of the
unregistered securities. SEC v. Cavanagh, 445 F.3d 105 (2d Cir. 2006); Calvo, 378 F.3d
at 1215; see also SEC v. Chinese Consol. Benev. Ass'n, Inc., 120 F.2d 738, 741 (2d
Cir.1941)( Liability for violations of Section 5 extends to those who have “engaged in steps
necessary to the distribution of [unregistered] security issues.”).
To prove a violation of Section 5, the Commission must establishing three prima
facie elements demonstrating that: (1) the defendant directly or indirectly sold or offered to
sell securities; (2) through the use of interstate transportation or communication and the
mails; and (3) when no registration statement was in effect. Cavanagh, 445 F.3d at 111 n.
13; Cobalt Multifamily Investors I, LLC v. Arden, 857 F. Supp. 2d 349, 357-58 (S.D.N.Y.
2011). A defendant may rebut this prima facie case by showing that the securities
involved were not required to be registered. Ralston Purina Co., 346 U.S. at 126.
It is undisputed that: (1) StratoComm offered and sold more than 62 million shares
of stock to investors between late 2007 and April 2010; (2) StratoComm has never
registered a securities offering with the Commission; (3) as StratoComm’s CEO and sole

34

director, Shearer authorized StratoComm’s stock sales and directed the transfer agent to
issue stock certificates; and (4) Danzig marketed StratoComm’s stock throughout the
country by telephone, through e-mail, and in face-to-face meetings. In addition, Danzig
served as the designated contact within StratoComm for investors, relayed the terms of
stock sales, handled paperwork relating to stock sales, and facilitated the issuance of
shares. Thus, StratoComm offered and sold stock in unregistered transactions and
Shearer and Danzig were necessary participants in those offerings. Accordingly, the
Commission has established the prima facie elements of Section 5 liability with respect to
StratoComm, Shearer and Danzig.
Defendants assert that they did not comply with the federal securities registration
requirements because StratoComm was engaged in an exempted “private offering” only,
and as a result, the SEC’s unregistered claims (under Section 5 of the Securities Act)
against them fail. See StratoComm Memo at 15-17; Shearer Memo at 21-24.
Registration exemptions are construed strictly to promote full disclosure of
information for the protection of the investing public. Cavanagh, 445 F.3d at 115. The test
for whether an offering is an exempt “private offering” under Section 4(2) is whether the
offerees could “fend” for themselves, and whether the offerees had access to the same
information that registration would provide. Ralston Purina Co., 346 U.S. at 125-27. A
number of factors are considered, including, the number of offerees, the relationship of the
offerees to each other and the issuer, the manner of the offering (that is, solicitation),
information disclosure or access, and the sophistication of the offerees. SEC v. Life
Partners, Inc., 912 F. Supp. 4, 10 (D.D.C. 1996). The party claiming the exemption must

35

show that it is met not only with respect to each purchaser, but also with respect to each
offeree. Life Partner, 912 F. Supp. at 10.
Given the record in this case, defendants fail to establish entitlement to this
exemption. First, there is no merit to defendants’ argument that the exemption applies
simply because StratoComm’s securities were offered only to its existing shareholders.
See SEC v. Sunbeam Gold Mines Co., 95 F.2d 699, 702 (9th Cir. 1938) (“We therefore
hold that an offering of securities under the Securities Act of 1933 may be a public offering
though confined to stockholders of an offering company, a fortiori where the offerees
include the stockholders of another company, though seeking to become stockholders of
the offeror.”). Second, defendants have failed to produce evidence of the required exact
number and identity of all offerees. Life Partners, Inc., 912 F. Supp. at 10 (citing Western
Fed. Corp. v. Erickson, 739 F.2d 1439, 1442 (9th Cir. 1984)) (“To claim the private offering
exemption, evidence of the exact number and identity of all offerees must be produced”).
Third, defendants admitted to all of the Commission’s Statement of Material Facts relating
to StratoComm’s unregistered stock sales, including the SMFs showing that StratoComm
offered and sold stock to investors who were not accredited, that many of StratoComm’s
shareholders were inexperienced with investing, and that StratoComm never prepared
audited financial statements or provided an offering memorandum to investors. See PSOF
¶¶ 5-6, 118-122; StratoComm’s Response to PSOF at 2, 9 (admitting PSOF ¶¶ 5-6, 118122); Shearer Response to PSOF at 2, 11 (same). Consequently, the Court finds there
exists no material issue of fact whether defendants have rebutted the Commission’s prima
facie demonstration Sections 5(a) and 5(c) violations.

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IV.

CONCLUSION
For the reasons set forth above, the SEC’s motion for partial summary judgment

imposing liability on defendants on each claim in which the defendants are named [dkt. #
25] is GRANTED.
The parties may now present evidence to the Court, by way of separate motion
and/or proceeding, regarding appropriate relief to be awarded.
IT IS SO ORDERED.
Dated:February 19, 2014

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