Securities and Exchange Commission v. Sayid et al

Filing 71

OPINION & ORDER re: 45 MOTION to Dismiss filed by Norman T Reynolds. For the reasons stated above, Reynolds' motion to dismiss is DENIED in its entirety. The Clerk of Court is respectfully directed to terminate the motion docketed at ECF No. 45. SO ORDERED. (Signed by Judge John F. Keenan on 1/10/2018) (anc)

Case 1:09-md-02013-PAC Document 57

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------ X
:
SECURITIES AND EXCHANGE
COMMISSION,
:
UNITED STATES DISTRICT COURT
Plaintiff,YORK :
SOUTHERN DISTRICT OF NEW
:
-----------------------------------------------------------x
-against: :
In re FANNIE MAE 2008 SECURITIES
: :
LITIGATION
MUSTAFA DAVID SAYID and NORMAN : :
T. REYNOLDS,
: :
:
-----------------------------------------------------------x
Defendants.
:
------------------------------ X

Filed 09/30/10 Page 1 of 45
USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: 1/10/2018
1/2/
No. 08 Civ. 7831 2630 (JFK)
17 Civ. (PAC)
OPINION &(PAC)
09 MD 2013 ORDER
OPINION & ORDER

APPEARANCES PAUL A. CROTTY, United States District Judge:
HONORABLE
FOR SECURITIES AND EXCHANGE COMMISSION:
Richard M. Harper II
BACKGROUND1
Michael J. Vito
Dahlia Rin
The early years of this decade saw a boom in home financing which was fueled, among
SECURITIES AND EXCHANGE COMMISSION
other things, by low interest rates and lax credit conditions. New lending instruments, such as
FOR DEFENDANT NORMAN T. REYNOLDS:
Brian J. Poronsky
subprime mortgages (high credit risk loans) and Alt-A mortgages (low-documentation loans)
Joseph Curtis Platt
KATTEN MUCHIN ROSENMAN LLP
kept the boom going. Borrowers played a role too; they took on unmanageable risks on the
JOHN F. KEENAN, United States District Judge:
assumption that the market would continue to rise and that refinancing options would always be
Before the Court is Defendant Norman T. Reynolds’
available in the future. Lending discipline was lacking in the system. Mortgage originators did
(“Reynolds”) motion to dismiss the Securities and Exchange
not hold these high-risk mortgage loans. Rather than carry the rising risk on their books, the
Commission’s (“SEC”) complaint, insofar as it alleges claims
originators sold their loans into the secondary mortgage market, often as securitized packages
against him, for failure to state a claim under Federal Rule of
known as mortgage-backed securities (“MBSs”). MBS markets grew almost exponentially.
Civil Procedure 12(b)(6). For the reasons that follow,
But then the housing bubble burst. In 2006, the demand for housing dropped abruptly
Reynolds’ motion to dismiss is denied.
and home prices began to fall. In light of the changing housing market, banks modified their
I.
Background
lending practices and became unwilling to refinance home mortgages without refinancing.
Unless otherwise noted, the following facts are drawn from
the complaint.
1

Reynolds is an attorney who resides and is

Unless otherwise indicated, all references cited as “(¶ _)” or to the “Complaint” are to the Amended Complaint,
dated June 22, 2009. For purposes of this Motion, all allegations in the Amended Complaint are taken as true.

1
1

licensed to practice law in Texas. (Compl. ¶ 18.)

Defendant

Mustafa David Sayid (“Sayid”) is an attorney who transacts
business in New York City. (Id. ¶ 16.)

Beginning in 2010, Sayid

provided legal representation to two publicly traded shell
companies, Nouveau Holdings Ltd. (“Nouveau”) and Striper Energy,
Inc. (“Striper”), during the SEC’s investigation into an
offshore boiler room scheme involving Nouveau and Striper
(together, the “Shells”). (Id. ¶ 4.)

Sayid exploited his

position as counsel to assume control of the Shells by
installing employees whom he could control. (Id. ¶¶ 4-5.)

Sayid

used his controlling position to cause the Shells to unlawfully
issue millions of shares of stock to third parties, without the
required restrictive legends, who could then sell that stock and
kick back part of the profits to Sayid. (Id. ¶ 5.)
Beginning in January 2013, Sayid engineered a pump-and-dump
scheme in Nouveau’s stock. (Id. ¶¶ 52-53.)

Sayid instructed

“Person 1,” then-President of Nouveau, to complete a 1 for 800
reverse split of Nouveau’s common stock. (Id. ¶ 52.)

The

reverse split, which was effective on April 20, 2013, reduced
the total number of shares of Nouveau issued and outstanding
from approximately 240 million to approximately 300,000 and
thereby reduced the number of shares in the hands of public
investors that were outside of Sayid’s control. (Id.)

2

Sayid coordinated the scheme with two potential investors
and stock promoters, Mitchell Brown (“Brown”) and Michael Affa
(“Affa”). (Id. ¶ 53.)

In May 2013, Sayid received at least

$18,100 from Affa and Brown to prepare a three-way agreement
(the “Nouveau Debt Settlement Agreement”) whereby Sayid would
assign $50,000 of the purported legal fees that Nouveau owed him
to three Belizean entities controlled by Affa. (Id.)

Pursuant

to the Nouveau Debt Settlement Agreement, Nouveau agreed to pay
the assigned legal fees by way of the issuance of fifty million
shares of stock to the Belizean nominee entities. (Id.)

Sayid

participated in structuring the transaction through nominee
entities that obscured the collective scheme to dump Nouveau’s
stock. (Id.)

The Nouveau Debt Settlement Agreement contained a

number of misrepresentations and omissions, including a
representation that it was made and entered into in July 2012
and an omission of the fact that the nominees were under common
control. (Id. ¶ 54.)
As a general rule, the federal securities laws make it
unlawful for any person to offer or sell securities unless such
offering or sale is registered with the SEC or is exempt from
registration under SEC rules. (Id. ¶ 38.)

SEC Rule 144 creates

an exemption from the registration requirement for persons
seeking to resell securities that are not otherwise exempt from
the registration requirements of Section 5 of the Securities
3

Act. (Id. ¶ 39; 17 C.F.R. § 230.144.)

For affiliates of an

issuer, Rule 144 imposes a series of limitations that includes
minimum holding periods (i.e., prohibiting the sale of shares
unless the seller has held those shares for the requisite time
frame), and volume restrictions (i.e., limiting the number of
shares that may be sold). (Id.)

These restrictions preclude or

greatly constrict stock sales by those who control companies,
preventing them from dumping large amounts of stock into the
market. (Id.)

If Rule 144’s requirements are met, the seller is

not considered an underwriter and may sell the securities
pursuant to the Section 4(a)(1) exemption from Section 5 of the
Securities Act for “transactions by any person other than an
issuer, underwriter, or dealer.” (Id. ¶ 41; 17 C.F.R. §
230.44(2).)
In July 2013, Sayid hired Reynolds to provide a legal
opinion that the Nouveau Debt Settlement Agreement met the
requirements of Rule 144 in order to persuade Nouveau’s transfer
agent to issue eight million shares of Nouveau stock to the
Belizean nominee entities without an affiliate restrictive
legend. (Id. ¶¶ 56-57.)

At Sayid’s direction, Reynolds drafted

two opinion letters, dated August 9, 2013 and September 6, 2013,
that falsely concluded that (1) the Nouveau Debt Settlement
Agreement had been executed on July 17, 2012 and Sayid had
accordingly held the subject securities for one year, as
4

required under Rule 144, and (2) the Nouveau Debt Settlement
Agreement permitted issuance of fifty million shares to the
Belizean nominees. (Id. ¶¶ 56-60.)
At the time Reynolds drafted his August 9, 2013 opinion
letter, he had not received any executed agreement with the July
17, 2012 date. (Id. ¶ 60.)

Sayid initially asked Reynolds to

base his opinion on an unexecuted version of the Nouveau Debt
Settlement Agreement, which bore the date September 25, 2012.
(Id. ¶ 57.)

Reynolds refused and told Sayid that the document

failed to establish that Sayid had held the subject securities
for one year, as would be required to qualify for the pertinent
exemption under Rule 144. (Id. ¶ 58.)

In response, Sayid

represented to Reynolds that he had five executed versions of
the Nouveau Debt Settlement Agreement bearing various dates:
June 4, 2012, June 7, 2012, July 17, 2012, September 7, 2012,
and September 25, 2012. (Id.)

Reynolds did not receive an

executed Nouveau Debt Settlement Agreement bearing the date July
17, 2012 until August 12, 2013, three days after he had drafted
and sent to Sayid his August 9, 2013 opinion letter. (Id. ¶ 59.)
Reynolds also was copied on emails from Sayid indicating that
the Nouveau settlement agreement had not in fact been executed
until August 2013. (Id. ¶ 60.)
Reynolds drafted his opinion letters while negotiating with
Sayid to receive a share of the anticipated proceeds from the
5

sale of Nouveau stock issued pursuant to Reynolds’ letters. (Id.
¶ 64.)

On August 1, 2013, before Reynolds issued his first

opinion letter, Reynolds asked about the status of Sayid’s
funding efforts. (Id.)

Sayid responded via email “[t]hey are

working on issuing the shares.

Then we need your Rule 144 (?)

legal opinion to convert the debt into equity and free up the
shares.

Sell the shares, get paid.” (Id.)

Although Reynolds

requested a $5,000 fee from Sayid upon his receiving the
proceeds from the sale of shares, Reynolds only received a total
of $700 to draft the opinion letters. (Id.)
The SEC alleges that Reynolds knowingly or recklessly,
ignored evidence that the Nouveau Debt Settlement Agreement was
in fact fictitious in order to draft the false opinion letters
that were necessary for Sayid, Brown, and Affa to conduct their
pump-and-dump scheme. (Id. ¶¶ 56, 59-62.)

Accordingly,

Reynolds’ opinion letters contained statements that he knew or
should have known that he lacked a good faith basis for making.
(Id. ¶ 62.)

The complaint alleges that Reynolds violated

Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and
Sections 17(a)(1) and (2) of the Securities Act on the basis of
false statements he made in the opinion letters and his
participation in Sayid’s pump and dump scheme; and Sections 5(a)
and 5(c) of the Securities Act by directly or indirectly
engaging in the offer or sale of unregistered Nouveau securities
6

through drafting false opinion letters necessary to the
distribution of shares, as well as his expectation of payment
from Sayid’s efforts to offer and sell illegally issued
restriction-free shares. (Id. ¶¶ 74-79, 83-86; SEC Mem. of L. in
Opp. to Mot. to Dismiss at 5-6.)
II.
A.

Discussion

Motion to Dismiss

Reynolds makes five principal arguments in his motion to
dismiss:

(1) failure to allege that Reynolds made false

statements in his opinion letters, (2) failure to plead scienter
as required to support the SEC’s claims under Section 10(b),
Rule 10b-5(b), and Section 17(a)(1), (3) failure to plead that
Reynolds obtained money or property in connection with the offer
or sale of securities as required to support the SEC’s claim
under Section 17(a)(2), (4) failure to allege participation in a
deceptive scheme as required to bring claims under Rule 10b-5(a)
and (c) and Section 17(a)(1), and (5) failure to allege that
Reynolds was a necessary participant in the sale of unregistered
securities, as required to bring a claim under Section 5.
1.

Legal Standard

To state a cognizable claim under Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder, the SEC must allege that
Reynolds (1) made a material misrepresentation or a material
omission as to which he had a duty to speak, or used a
7

fraudulent device; (2) with scienter; (3) in connection with the
purchase or sale of securities. 15 U.S.C. § 78j(b); SEC v.
Pentagon Capital Mgmt. PLC, 725 F.3d 279, 285 (2d Cir. 2013)
(citations and quotations omitted).

To state a claim under

Section 17(a)(1) of the Securities Act, the SEC must allege that
Reynolds directly or indirectly used any device, scheme, or
artifice to defraud in the offer or sale of securities. 15
U.S.C. § 77(q)(a)(1); see also SEC v. Yorkville Advisors, LLC,
No. 12 CIV. 7728 GBD, 2013 WL 3989054, at *2 (S.D.N.Y. Aug. 2,
2013).

To state a claim under Section 17(a)(2) of the

Securities Act, the SEC must allege that Reynolds obtained money
or property through misstatements or omissions about material
facts in the offer or sale of securities. 15 U.S.C. §
77(q)(a)(2); see also Yorkville Advisors, 2013 WL 3989054, at
*2.

The elements of a claim under Section 17(a) of the

Securities Act in the offer or sale of a security are
“essentially the same” as those required to prove fraud under
Section 10(b). SEC v. Monarch Funding Corp., 192 F.3d 295, 308
(2d Cir. 1999).

However, the SEC need only prove negligence,

rather than scienter, to succeed on a claim under Section
17(a)(2). SEC v. Ginder, 752 F.3d 569, 574 (2d Cir. 2014).

To

state a Section 5 claim, the SEC must allege “(1) lack of a
registration statement as to the subject securities; (2) the
offer or sale of the securities; and (3) the use of interstate
8

transportation or communication and the mails in connection with
the offer or sale.” SEC v. Cavanagh, 445 F.3d 105, 111 n.13 (2d
Cir. 2006).

Scienter is not an element of a Section 5 claim.

SEC v. Czarnik, No. 10 CIV. 745 PKC, 2010 WL 4860678, at *11
(S.D.N.Y. Nov. 29, 2010).
To survive a motion to dismiss under Rule 12(b)(6), a
complaint must plead “enough facts to state a claim to relief
that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550
U.S. 544, 570 (2007).

A claim is plausible “when the plaintiff

pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the
misconduct alleged.” Matson v. Bd. of Educ., 631 F.3d 57, 63 (2d
Cir. 2011) (internal quotation marks omitted).

On a motion to

dismiss, a court must accept the factual allegations in the
complaint as true and draw reasonable inferences in the
plaintiff’s favor. Tsirelman v. Daines, 794 F.3d 310, 313 (2d
Cir. 2015).
In securities fraud cases, Rule 9(b) requires
particularized allegations of the “circumstances constituting
fraud.” FED. R. CIV. P. 9(b).

To comply with the requirements of

9(b), a plaintiff must “(1) specify the statements that the
plaintiff contends were fraudulent, (2) identify the speaker,
(3) state where and when the statements were made, and (4)
explain why the statements were fraudulent.” Rombach v. Chang,
9

355 F.3d 164, 170 (2d Cir. 2004) (citations and quotation marks
omitted).

To plead scienter under Rule 9(b), the complaint must

contain “facts that give rise to a strong inference of
fraudulent intent.” Acito v. IMCERA Grp., Inc., 47 F.3d 47, 52
(2d Cir. 1995).

A strong inference of fraudulent intent may be

established by alleging facts sufficient to show (1) motive and
opportunity to commit fraud, or (2) strong circumstantial
evidence of conscious misbehavior or recklessness. Id.
(citations and quotation marks omitted).
2.
a.

Analysis

Reynolds’ False Statements in Opinion Letters

The SEC alleges that Reynolds’ opinion letters contain
three false statements in violation of Section 10(b) of the
Exchange Act and Section 17(a)(2) of the Securities Act:

(1)

the Nouveau Debt Settlement Agreement was executed on July 17,
2012, (2) the Nouveau Debt Settlement Agreement permitted the
issuance of fifty million shares of Nouveau stock to the
Belizean nominees, and (3) Reynolds implicitly represented that
he had conducted a reasonable inquiry and had a reasonable basis
upon which to base his opinion that the fictitious stock
transaction met the requirements of Rule 144. (Compl. ¶ 60; SEC
Mem. of L. in Opp’n to Mot. to Dismiss at 3.)

Reynolds claims

none of these “misrepresentations” are actionable under Section
10(b) or Section 17(a)(2) because (1) the complaint establishes
10

that at least one of these misstatements was actually true, (2)
Reynolds cannot be held liable for statements of opinion where
he explicitly stated that he relied on factual representations
from Sayid in forming his opinions, and (3) Sayid, not Reynolds,
is the “maker” of the statements in the opinion letters. (See
Def.’s Mem. of L. in Supp. of Mot. to Dismiss at 5-8, 14-16.)
The complaint alleges that Reynolds’ opinion letters
“contained various statements that Reynolds knew or should have
known were false,” including that the Nouveau Debt Settlement
Agreement was executed on July 17, 2012, and that the Nouveau
Debt Settlement Agreement permitted issuance of fifty million
shares to the Belizean nominees. (Id. ¶ 60.)

Reynolds argues

that the SEC has failed to plead that the second statement was
false because “the SEC’s own complaint establishes that the
[second misstatement] was true.” (Def.’s Mem. of L. in Supp. of
Mot. to Dismiss at 6.)

Contrary to Reynolds’ argument, the

complaint alleges falsity because the Nouveau Debt Settlement
Agreement, had it been genuinely made, would have permitted the
issuance of only 62,500 shares after a reverse split of Nouveau
stock in April 2013. (See Compl. ¶ 60.)

Accordingly, drawing

all reasonable inferences in Plaintiff’s favor, the SEC has
alleged that Reynolds made two false statements in his opinion
letters.

11

Although the SEC argues in its opposition brief that
Reynolds made a third misstatement, the complaint alleges that
“[b]y signing the letters as an attorney offering a legal
opinion, Reynolds implicitly represented that he had conducted a
reasonable inquiry into the pertinent factual premises upon
which the transfer agent was expected to rely. . . .

[when]

[i]n actuality, Reynolds had failed to conduct any such
inquiry.” (Id.)

Although, as discussed below, Reynolds may be

held liable for false statements because “a statement of opinion
includes an implied representation that the speaker rendered the
opinion in good faith and with a reasonable basis,” an implicit
representation that the speaker conducted a reasonable
investigation is not in itself a statement of fact or opinion.
SEC v. Greenstone Holdings, Inc., No. 10 CIV. 1302 MGC, 2012 WL
1038570, at *7 (S.D.N.Y. Mar. 28, 2012), aff’d in part sub nom.
SEC v. Frohling, 851 F.3d 132 (2d Cir. 2016) (emphasis added).
Thus, the SEC has only alleged two actionable misstatements
under Section 10(b) and Section 17(a)(2).
Reynolds further argues that he is not liable for any
misstatements because the statements were “opinions that
turn[ed] out to be incorrect” and he explicitly stated in his
letters that he had relied on Sayid’s factual representations in
forming his opinion. (Def.’s Mem. of L. in Supp. of Mot. to
Dismiss at 6-7.)

The SEC alleges that Reynolds knew or should
12

have known that these statements were false based on his
knowledge of facts that presented “glaring questions of
truthfulness,” including, among other things, a series of emails
that showed Sayid executed the Nouveau Debt Settlement Agreement
in August 2013, not July 2012. (Compl. ¶¶ 60, 63.)

The Second

Circuit has held that an attorney cannot “escape liability for
fraud by closing his eyes to what he saw and could readily
understand.” SEC v. Frank, 388 F.2d 486 (2d Cir. 1968).

Even if

Reynolds “had no actual knowledge of the opinions’ falsity at
the time he wrote or concurred in them . . . a statement of
opinion includes an implied representation that the speaker
rendered the opinion in good faith and with a reasonable basis.”
Greenstone, 2012 WL 1038570, at *6–7 (S.D.N.Y. Mar. 28, 2012).
Further, there can be “no reasonable basis for an opinion
without a reasonable investigation into the facts underlying the
opinion.” Id. at *7.

Accordingly, Reynolds cannot escape

liability by claiming he relied entirely on Sayid where,
according to the complaint, he not only failed to investigate
the truth of the statements he signed, but also ignored evidence
that directly contradicted the statements in his letters.
Finally, Reynolds argues that Sayid, not Reynolds, was the
maker of any factual statements in the letters and, under Rule
10b-5(b) and Section 10(b), he cannot be held liable for
statements made by another. (Def.’s Mem. of L. in Supp. of Mot.
13

to Dismiss at 14.)

Under Rule 10b-5, a statement is made by

“the person or entity with the ultimate authority over the
statement, including its content and whether and how to
communicate it.” Janus Capital Grp., Inc. et al. v. First
Derivatives Traders, 564 U.S. 135, 142 (2011).

Reynolds

contends that attorneys who draft opinion letters do not
automatically exercise “ultimate authority” over statements and
therefore, are not the “makers” of the statements in those
letters.
The complaint alleges that Reynolds drafted and signed the
opinion letters that contained false statements. (Compl. ¶¶ 56,
60.)

Courts have “consistently h[e]ld that signatories of

misleading documents ‘made’ the statements in those documents,
and so face liability under Rule 10b-5(b).” In re Smith Barney
Transfer Agent Litig., 884 F. Supp. 2d 152, 163–64 (S.D.N.Y.
2012); see also SEC v. Subaye, Inc., No. 13 CIV. 3114 PKC, 2014
WL 448414, at *8 n.2 (S.D.N.Y. Feb. 4, 2014) (denying motion to
dismiss where SEC alleged that CPA “drafted and prepared
statements in [SEC] filings” and “also signed a certification .
. . in which he personally attested to . . . the statements
contained therein”); Orlan v. Spongetech Delivery Sys., Inc.,
Sec. Litig., No. 10-CV-4093 DLI JMA, 2012 WL 1067975, at *10
(E.D.N.Y. Mar. 29, 2012) (granting motion to dismiss and
directing plaintiffs to amend their complaint to “include any
14

statements directly attributable to [the defendant] such as
statements . . . signed by [the defendant]” to meet the Janus
standard).

As the drafter and signatory of the alleged

misstatements of the opinion letters, Reynolds had ultimate
authority over those statements and is the “maker” under Janus.
Thus, the SEC has alleged two misstatements made by Reynolds in
his opinion letters under Section 10(b) and Section 17(a)(2).
b.

Scienter

Reynolds argues that the SEC has not adequately pleaded
scienter, as required to allege claims under Section 17(a)(1),
Section 10(b), and Rule 10b-5. (Def.’s Mem. of L. in Supp. of
Mot. to Dismiss at 10.)

To plead scienter, the SEC must allege

facts that give rise to a strong inference of fraudulent intent.
Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir. 2000).

The SEC may

do so either by alleging facts (a) showing that the defendant
had both motive and opportunity to commit fraud, or (b) that
constitute strong circumstantial evidence of conscious
misbehavior or recklessness. Id. at 307.

An inference of

recklessness may arise where a plaintiff alleges “[a]n egregious
refusal to see the obvious, or to investigate the doubtful.” Id.
(quoting Chill v. Gen. Elec. Co., 101 F.3d 263, 269 (2d Cir.
1996)).

Courts have found allegations of recklessness

sufficient where a defendant had knowledge of facts or access to
information that contradicts its public statements, or “failed
15

to review or check information that [it] had a duty to monitor,
or ignored obvious signs of fraud.” SEC v. Czarnik, No. 10 CIV.
745 PKC, 2010 WL 4860678, at *6 (S.D.N.Y. Nov. 29, 2010).
The SEC has adequately alleged facts that constitute
strong circumstantial evidence of conscious misbehavior or
recklessness.

Reynolds’ opinion letters concluded that Sayid

had held the subject securities for one year, as required to
claim the relevant exemption under Rule 144, based on the
executed Nouveau Debt Settlement Agreement dated July 17, 2012.
(Compl. ¶ 59.)

According to the complaint, at the time Reynolds

signed the opinion letters, he was copied on an exchange of
emails in August 2013 between Sayid and Person 1 indicating that
the initial Nouveau Debt Settlement Agreement was in fact
executed in August 2013, not July 2012. (Id. ¶ 60.)

After

Reynolds initially refused to write an opinion letter because
the Nouveau Debt Settlement Agreement did not meet the one-year
holding requirement of Rule 144, Sayid sent Reynolds five
different unexecuted versions of the Nouveau Debt Settlement
Agreement that contained different dates in June, July, and
September 2012 for the same transaction. (Id. ¶ 58.)

Reynolds

did not receive an executed Nouveau Debt Settlement Agreement
bearing the date July 17, 2012 until August 12, 2013, three days
after he had drafted and sent to Sayid his first opinion letter.
(Id. ¶ 59.)
16

Finally, the complaint alleges that Reynolds knew or should
have known that Nouveau had undergone a reverse split in April
2013, after the July 17, 2012 date on the executed Nouveau Debt
Settlement Agreement, which meant that the Nouveau Debt
Settlement Agreement, had it been legitimately made, would have
permitted the issuance of only 62,500 shares. (Id. ¶ 60.)
Assuming these allegations to be true, the SEC has alleged that
Reynolds had access to information that contradicted the
statements in his opinion letters, including that Nouveau had
undergone a reverse stock split in April 2013, and ignored
“obvious signs of fraud,” including evidence that the Nouveau
Debt Settlement Agreement had not been executed in July of 2012,
which indicated that Sayid had not held the subject securities
for one year.

These allegations are sufficient to plead

reckless conduct and satisfy the scienter requirement. See,
e.g., Greenstone, 2012 WL 1038570, at *7 (granting summary
judgment in favor of SEC for its securities fraud claims where
attorney failed to “investigate[] the truth of the statements he
signed” in opinion letters and his “avoidance of the true facts”
was “reckless at best”); Czarnik, 2010 WL 4860678, at *9
(finding the requisite scienter where SEC alleged that attorney
was aware of information that should have alerted him to the
likelihood that his representations in documents provided to
transfer agent were false).
17

c.

Obtaining Money or Property in Connection with the Offer or
Sale of Securities Under Section 17(a)(2)
To state a claim under Section 17(a)(2), the SEC must

allege that (i) the defendant made a material misrepresentation
or omission, (ii) in the offer or sale of securities, and (iii)
the defendant “obtain[ed] money or property by means of the
offerings” or sale. SEC v. Syron, 934 F. Supp. 2d 609, 637
(S.D.N.Y. 2013).

To survive a motion to dismiss, the SEC must

allege that Reynolds “actually obtained money or property by
means of the untrue statements.” SEC v. Glantz, No. 94 Civ. 5737
(CSH), 1995 WL 562180, at *5 (S.D.N.Y. Sept. 20, 1995).
Reynolds argues that the SEC’s Section 17(a)(2) claim fails
because the complaint alleges that Reynolds was paid a flat fee
for writing two opinion letters, but does not allege that his
“compensation was affected in any non-trivial manner by making a
false statement rather than a true statement.” (Def.’s Mem. of
L. in Supp. of Mot. to Dismiss at 17 (citing SEC v. Wey, 246 F.
Supp. 3d 894, 904 (S.D.N.Y. 2017)).
The majority of courts have held that there is no
requirement that the SEC allege a “fraud bonus”—i.e. that the
defendant received additional compensation for participating in
fraudulent conduct. SEC v. Cole, No. 12-CV-8167 RJS, 2015 WL
5737275, at *7 (S.D.N.Y. Sept. 19, 2015); see also SEC v.
Tourre, No. 10–cv–3229 (KBF), 2014 WL 61864, at *4 (S.D.N.Y.

18

Jan. 7, 2014) (SEC need not allege that the defendant received
any “fraud bonus” in addition to compensation from employer to
establish liability under Section 17(a)(2)).

However, at least

one court has held that “if the person would have earned the
same fees or compensation regardless of whether the statement
was false, a Section 17(a)(2) claim does not lie.” Wey, 246 F.
Supp. 3d at 904.

Under either standard, the SEC has alleged

that Reynolds obtained money by means of his untrue statements
under Section 17(a)(2).

According to the complaint, Sayid hired

Reynolds to draft opinion letters that “falsely concluded that 8
million shares of Nouveau stock could be issued to the three
nominee entities without restrictive legend.” (Compl. ¶ 56.)

In

an August 1, 2013 email to Reynolds, Sayid stated “we need your
Rule 144 (?) legal opinion to convert the debt into equity and
free up the shares.” (Id. ¶ 64.)

Reynolds received a total of

$700 for issuing two opinion letters that contained statements
that he knew or should have known were false. (Id. ¶¶ 60, 64.)
Thus, the SEC has adequately alleged a claim under Section
17(a)(2). See, e.g., Cole, 2015 WL 5737275, at *7 (denying
defendant’s motion for summary judgment on Section 17(a)(2)
claims where it was undisputed that defendant received
compensation for his work connected to false audit reports);
Tourre, 2014 WL 61864, at *4 (denying defendant’s motion for a
new trial on Section 17(a)(2) claim where evidence showed that
19

he was paid for his work during the time period that he made
material misstatements and the work connected to the
misstatements was within his normal job responsibilities); SEC
v. Syron, 934 F. Supp. 2d 609, 638 (S.D.N.Y. 2013) (dismissing
SEC’s Section 17(a)(2) claims where the complaint lacked any
allegation that the defendants’ compensation was in any way
effected by the stock offerings).
d.

Participation in a Scheme Under Rule 10b-5(a) and (c) and
Section 17(a)(1)
To state a claim that a defendant has engaged in a

deceptive or fraudulent scheme in violation of Rule 10b-5(a) and
(c) and Section 17(a)(1), a plaintiff must allege that the
defendant “(1) committed a manipulative or deceptive act, (2) in
furtherance of the alleged scheme to defraud, (3) scienter, and
(4) reliance.” SEC v. Lee, 720 F. Supp. 2d 305, 325 (S.D.N.Y.
2010).

“[I]t is possible for liability to arise under both

subsection (b) and subsections (a) and (c) of Rule 10b–5 out of
the same set of facts, where the plaintiffs allege both that the
defendants made misrepresentations in violations of Rule 10b–
5(b), as well as that the defendants undertook a deceptive
scheme or course of conduct that went beyond the
misrepresentations.” In re Alstom SA, 406 F. Supp. 2d 433, 475
(S.D.N.Y. 2005).

Reynolds argues that the SEC has failed to

allege “scheme liability” under the second prong because it has

20

not shown that Reynolds engaged in a deceptive scheme or course
of conduct that went beyond the alleged misrepresentations in
his opinion letters, and merely alleging generalized claims that
Reynolds provided assistance to Sayid do not meet Rule 9(b)’s
heightened pleading standard. (Def.’s Mem. of L. in Supp. of
Mot. to Dismiss at 17-19.)
The SEC has alleged that Reynolds participated in a scheme
to defraud that “went beyond the misrepresentations themselves.”
In re Alstom SA, 406 F. Supp. 2d at 476.

The SEC alleges that

Reynolds’ opinion letters were an integral part of Sayid’s
overarching pump and dump scheme, and that “Reynolds knew or
should have known that his false representations would be used
to erroneously issue shares of Nouveau stock without restrictive
legends.” (Id. ¶ 61.)

According to the complaint, Reynolds

drafted his opinion letters while negotiating with Sayid to
receive a share of the anticipated proceeds from the sale of
unregistered Nouveau stock issued pursuant to Reynolds’ letters.
(Id. ¶ 64.)

On August 1, 2013, before Reynolds drafted his

first opinion letter, he asked about the status of Sayid’s
funding efforts. (Id.)

Reynolds received an email from Sayid

stating “[t]hey are working on issuing shares.

Then we need

your Rule 144 (?) legal opinion to convert the debt into equity
and free up the shares.

Sell the shares, get paid.” (Id.)

August 13, 2013, after he drafted his first opinion letter,
21

On

Reynolds asked Sayid about “the status of the sale of the
[Nouveau] shares and the payment of my fee for the opinion
letter.” (Id.)

These allegations are sufficient to plead

participation in a deceptive or fraudulent scheme in violation
of Rule 10b-5(a) and (c) and Section 17(a)(1).
e.

Necessary Participant or Substantial Factor in the Sale
Under Section 5
Under Section 5 of the Securities Act, it is unlawful,

directly or indirectly, to publicly offer or sell unregistered
stock unless the offering is covered by an exemption. SEC v.
Sourlis, 851 F.3d 139, 143 (2d Cir. 2016).

A person not

directly engaged in transferring title of the security,
sometimes referred to as a “secondary actor,” can be held liable
if he or she “engaged in steps necessary to the distribution of
[unregistered] security issues.” Id.

Reynolds argues that as a

secondary actor, he cannot be held liable because the SEC has
failed to allege that he was a “necessary participant” and
“substantial factor” in the sale. (Def.’s Mem. of L. in Supp. of
Mot. to Dismiss at 19.)
As discussed above, the SEC alleges that Sayid hired
Reynolds to provide legal opinions “[i]n order to get shares
without restrictive legends into the hands of Affa and Brown”
and Reynolds’ false representations were “used to erroneously
issue shares of Nouveau stock without restrictive legends.”

22

(Compl.

~~

56,

61.)

These allegations are sufficient to plead

that Reynolds was a "necessary participant" in the sale of
unregistered securities under Section 5 because "had [Reynolds]
qot provided [false]

statements, the stock would not have

issued." SEC v. Ramoil Mgmt., Ltd., No. 01 CIV. 9057
WL 3146943, at *7, *10

(SC), 2007

(S.D.N.Y. Oct. 25, 2007); see also

Sourlis, 851 F.3d at 144-45 (attorney liable under Section 5
where attorney's opinion letter that contained "many" false
statements provided the authority to issue unregistered shares
without a restrictive legend).
CONCLUSION

For the reasons stated above, Reynolds' motion to dismiss
is DENIED in its entirety.

The Clerk of Court is respectfully

directed to terminate the motion docketed at ECF No. 45.
SO ORDERED.

Dated:

New York, New York
January /0, 2018
John F. Keenan
United States District Judge

23