Securities and Exchange Commission v. Bronson et al
OPINION & ORDER re: 146 MOTION for Summary Judgment , filed by Securities and Exchange Commission. The Court grants the SEC's Motion for Summary Judgment. Accordingly, Defendants are hereby enjoined from committing further viola tions of § 5 of the Securities Exchange Act of 1933 and are barred from trading in penny stocks. Defendants are hereby ordered to provide the SEC with a calculation of their transaction expenses for the purpose of calculating the disgorgement figure within seven days of the date of this Opinion & Order. The SEC is to submit a revised prejudgment interest calculation based on the revised disgorgement amount, and a proposed final judgment within seven days thereafter. The Clerk of Court is respectfully directed to terminate the pending Motion. (Dkt. No. 146.) SO ORDERED. (Signed by Judge Kenneth M. Karas on 3/27/17) (yv)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
SECURITIES AND EXCHANGE COMMISSION,
No. 12-CV-6421 (KMK)
-vEDWARD BRONSON and
E-LIONHEART ASSOCIATES, LLC,
d/b/a FAIRHILLS CAPITAL,
OPINION & ORDER
-andFAIRHILLS CAPITAL, INC.,
Kevin P. McGrath, Esq.
Haimavathi V. Marlier, Esq.
Christopher J. Dunnigan, Esq.
Securities and Exchange Commission
New York, NY
Attorneys for Plaintiff
William A. Rome, Esq.
Michael A. Eisenberg, Esq.
Robinson Brog Leinwand Greene Genovese & Gluck P.C.
New York, NY
Attorneys for Defendants
Edward Bronson, E-Lionheart Associates, LLC, and Fairhills Capital, Inc.1
KENNETH M. KARAS, District Judge:
Plaintiff, the United States Securities and Exchange Commission (“SEC” or “Plaintiff”)
filed a Complaint against Edward Bronson (“Bronson”) and E-Lionheart Associates, LLC (“E1
On October 20, 2016, Robinson Brog Leinwand Greene Genovese & Gluck P.C. filed a
motion to withdraw as counsel, after briefing the instant Motion. (Dkt. No. 169.) The Court
granted the motion to withdraw on January 11, 2017. (Dkt. No. 177.)
Lionheart” and, with Bronson, “Defendants”) alleging violations of securities registration
requirements under §§ 5(a) and 5(c) of the Securities Act of 1933 (“the Act”), 15 U.S.C.
§§ 77e(a) and 77e(c). The SEC also asserts a claim for unjust enrichment against Relief
Defendant Fairhills Capital, Inc. (“FCI” or “Relief Defendant”). Before the Court is the SEC’s
Motion for Summary Judgment (the “Motion”). (Dkt. No. 146.) For the reasons to follow, the
Motion is granted.
A. Factual Background
1. The Parties
Defendant Bronson, a resident of Ossining, New York, is the sole managing member of
E-Lionheart, a Delaware limited liability company formed in 2005 for the purpose of engaging in
financing activities and reverse mergers. (See Pl. SEC’s Local Rule 56.1 Statement of
Undisputed Material Facts (“SEC’s 56.1”) ¶¶ 1–2, 4, 16 (Dkt. No. 148); Defs.’ Resp. to Pl.
SEC’s Local Rule 56.1 Statement and Statement of Additional Undisputed Material Facts
(“Defs.’ 56.1”) ¶¶ 1–2, 4, 16 (Dkt. No. 154).)2 In April 2005, Bronson registered E-Lionheart as
a foreign limited liability company with the State of New York. (See SEC’s 56.1 ¶ 5; Defs.’ 56.1
¶ 5.) The listed address was Bronson’s apartment at the time, located in Manhattan. (See SEC’s
56.1 ¶ 21; Defs.’ 56.1 ¶ 21.) From 2005 to 2007, E-Lionheart’s office was located in Manhattan,
at various locations, (see SEC’s 56.1 ¶ 22; Defs.’ 56.1 ¶ 22), and beginning in September 2007,
Bronson received a degree in business administration from The George Washington
University and received a law degree from New York Law School. (See SEC’s 56.1 ¶¶ 7–8;
Defs.’ 56.1 ¶¶ 7–8.) Bronson is admitted to practice law in the State of New York and maintains
an active New York bar membership. (See SEC’s 56.1 ¶ 9; Defs.’ 56.1 ¶ 9.)
E-Lionheart operated solely out of Bronson’s residence in Ossining, New York, (see SEC’s 56.1
¶ 23; Defs.’ 56.1 ¶ 23). From May 2009 to January 2010, E-Lionheart maintained an office at
151 East Post Road, White Plains, New York, (see SEC’s 56.1 ¶ 24; Defs.’ 56.1 ¶ 24), and
beginning in January 2010, E-Lionheart maintained an office at 245 Main Street, White Plains,
New York, (see SEC’s 56.1 ¶ 25; Defs.’ 56.1 ¶ 25).
Beginning in 2008 or 2009, E-Lionheart began doing business as “Fairhills Capital.”
(See SEC’s 56.1 ¶¶ 17, 20; Defs.’ 56.1 ¶¶ 17, 20.) In 2009, Bronson hired Mark Grober as an
employee of E-Lionheart. (See SEC’s 56.1 ¶ 19; Defs.’ 56.1 ¶ 19.) Up until that point, Bronson
had been E-Lionheart’s sole employee. (See SEC’s 56.1 ¶ 19; Defs.’ 56.1 ¶ 19.)
For the years 2005 to 2011, E-Lionheart filed federal and New York State tax returns.
(See SEC’s 56.1 ¶¶ 26–27; Defs.’ 56.1 ¶¶ 26–27.) For the years 2009, 2010, and 2011, ELionheart did not file tax returns in Delaware. (See SEC’s 56.1 ¶ 28; Defs.’ 56.1 ¶ 28.) Starting
in September 2007, E-Lionheart maintained a checking and savings account at JPMorgan Chase
Bank, NA (“Chase”) in Millwood, New York, and on July 2, 2009, E-Lionheart opened a savings
account at a Chase branch in White Plains, New York. (See SEC’s 56.1 ¶¶ 29–30; Defs.’ 56.1
In 2002, Bronson founded Fairhills Capital Management (“FCM”), a limited liability
corporation incorporated in Delaware. (See SEC’s 56.1 ¶¶ 11–12; Defs.’ 56.1 ¶¶ 11–12.)
Bronson was the sole owner of FCM. (See SEC’s 56.1 ¶ 11; Defs.’ 56.1 ¶ 11.) FCM specialized
in the small and micro-cap sectors, performing advisory assignments and financing thousands of
transactions. (See SEC’s 56.1 ¶ 13; Defs.’ 56.1 ¶ 13.)3 FCM purchased and sold securities that
were not registered, including those that were issued in reliance on exemptions from registration
under Regulation D and Rule 144 of the Securities Act. (See SEC’s 56.1 ¶ 15; Defs.’ 56.1 ¶ 15.)
Bronson is also the President and owner of Relief Defendant FCI, a Delaware corporation
formed in September 2010, with a business address in Ossining, New York. (See SEC’s 56.1
¶¶ 6, 31; Defs.’ 56.1 ¶¶ 6, 31.)
2. E-Lionheart’s Transactions
E-Lionheart’s typical purchase pattern was as follows: employees operating from ELionheart’s White Plains offices called a company to inquire whether it was interested in
obtaining capital. (See SEC’s 56.1 ¶ 56; Defs.’ 56.1 ¶ 56.) If the company was interested, ELionheart employees offered options, including offering to buy the company’s securities at a
price that was discounted from the then-prevailing market price. (See SEC’s 56.1 ¶¶ 56–57;
Defs.’ 56.1 ¶¶ 56–57.)4 Bronson instructed E-Lionheart employees to seek a purchase price for
securities that was typically 50 percent of the trading price over the prior 10 to 20 days, though
the discount ranged from 10 to 90 percent. (See SEC’s 56.1 ¶¶ 58–59; Defs.’ 56.1 ¶¶ 58–59.)
Bronson ultimately determined the amount E-Lionheart would spend on an issuer’s stock. (See
SEC’s 56.1 ¶ 61; Defs.’ 56.1 ¶ 61.)
FCM is not a party to this Action.
While Defendants do not dispute the factual assertions in the above statements, they do
dispute “that the scope of the claim at issue in this action involves 63 issuers and 353
transactions and that the requirements of Rule 56(c)(1) and (c)(2) have been satisfied.” (See,
e.g., Defs.’ 56.1 ¶¶ 33–34, 36–41, 48–87, 89–98, 100–80, 183–221, 225–27.)
After an issuer expressed interest in selling securities to E-Lionheart, E-Lionheart
employees Mark Grober and Richard Stilitino would send the issuer a set of documents,
including an Entity Subscription Agreement (the “Agreement”) and an Opinion Letter advising
that the transaction was exempt from registration. (See SEC’s 56.1 ¶¶ 63, 65; Defs.’ 56.1 ¶¶ 63,
65.) The Agreement typically listed E-Lionheart’s address as 1000 N. West Street, Suite 1200,
Wilmington, Delaware 19801 and stated that the stock certificates should be issued in the name
of E-Lionheart and listed the mailing address as either “Fairhills Capital, 151 East Post Road,
Suite 114, White Plains, New York 10601” or “Fairhills Capital, 245 Main Street, Suite 390,
White Plains, New York 10601.” (SEC’s 56.1 ¶¶ 68–69; Defs.’ 56.1 ¶¶ 68–69.)5
Section 2 of the Agreement provided
Notwithstanding anything in this Subscription Agreement (the “Agreement”) to the
contrary, THE COMPANY shall have no obligation to issue Shares to any person
who is a resident of a jurisdiction in which the issuance of the Shares to it would
constitute a violation of the securities, “blue sky” or other similar laws of such
jurisdiction . . . . It is intended that the Shares will only be issued to entities formed
pursuant to the laws of the State of Delaware that maintain its principal place of
business within the State of Delaware.
(SEC’s 56.1 ¶ 91; Defs.’ 56.1 ¶ 91; Decl. of Kevin P. McGrath, Esq. (“McGrath Decl.”) Ex. 3, at
DEFS-191909 (Dkt. No. 151).) Section 5.1(b) of the Agreement stated
The undersigned is an entity formed pursuant to the laws of the State of Delaware
and maintains its principal place of business within the State of Delaware and/or
the undersigned is an “accredited investor” as defined under Rule 501 of Regulation
D and/or the Subscriber is an “institutional investor” as defined under [§]
While Defendants concede that “[t]he factual assertions from the referenced
Subscription Agreement concerning in what name the stock certificates should be issued under is
not in dispute,” Defendants assert that “the SEC has not produced all of the Subscription
Agreements in order for Defendants to concede (or not) what is typically provided in
Subscription Agreements.” (Defs.’ 56.1 ¶ 69.)
7309(b)(8) of the Delaware Securities Act and [§] 501(a)(1) of Part E under the
Rules and Regulations Pursuant to the Delaware Securities Act.
(SEC’s 56.1 ¶ 93; Defs.’ 56.1 ¶ 93; McGrath Decl. Ex. 3, at DEFS-191909.) Bronson
represented that “[e]ach owner or member of the undersigned is an ‘accredited investor’ as such
term is defined in the rules of the Securities Act of 1933,” (SEC’s 56.1 ¶ 95; Defs.’ 56.1 ¶ 95
(some internal quotation marks omitted)), and that “[t]he undersigned is an ‘accredited investor,’
as such term is defined in . . . the rules to the Securities Act of 1933,” (SEC’s 56.1 ¶ 96; Defs.’
56.1 ¶ 96 (some internal quotation marks omitted)). Bronson also represented that “[t]he
undersigned has not offered or sold any portion of the Shares to others or with a view to reselling
or otherwise disposing of any portion of the Shares.” (SEC’s 56.1 ¶ 98; Defs.’ 56.1 ¶ 98
(internal quotation marks omitted).)
Once an issuer indicated interest in selling shares to E-Lionheart, E-Lionheart then
introduced the issuer to an attorney who would issue an Opinion Letter stating that the securities
being sold to E-Lionheart qualified for an exemption from registration under Rule 504(b)(1)(iii)
and Delaware law. (See SEC’s 56.1 ¶ 119; Defs.’ 56.1 ¶ 119.) Virginia Sourlis (“Sourlis”)
issued the majority of the Opinion Letters at issue in this Action. (See SEC’s 56.1 ¶¶ 64, 119,
124; Defs.’ 56.1 ¶¶ 64, 119, 124.) Sourlis, who was only admitted to practice law in New Jersey
at the time she issued the Opinion Letters, had a retainer agreement with E-Lionheart. (See
SEC’s 56.1 ¶¶ 120–21; Defs.’ 56.1 ¶¶ 120–21.)6
In a Summary Order issued July 8, 2016, the Second Circuit affirmed a ruling of the
district court granting a summary judgment motion by the SEC, holding Sourlis “an attorney
who wrote [an opinion letter] relating to one of the offerings [at issue]—liable for violating § 5
of the Securities Act . . . ; violating § 10(b) of the Securities Exchange Act of 1934 . . . , and Rule
10b-5 . . . ; and aiding and abetting violations of § 10(b) and Rule 10b-5, in violation of § 20(e)
of the Exchange Act . . . .” SEC v. Frohling, 654 F. App’x 523, 525 (2d Cir. 2016). Sourlis was
Most Sourlis Opinion Letters provided
The Purchaser [E-Lionheart] . . . qualifies for the exemption from registration set
forth in the Securities Act pursuant to Rule 504 of Regulation D, [§] 7309(b)(8) of
the Delaware Securities Act [now § 73-207(b)(8)] and [§] 510(a)(1) of Part E under
the Rules and Regulations Pursuant to the Delaware Securities Act.
(See SEC’s 56.1 ¶ 125; Defs.’ 56.1 ¶ 125; McGrath Decl. Ex. 3, at TAR 0004583.)7
Additionally, most of the Opinion Letters drafted by Sourlis stated that “[§] 7309(b)(8) of the
Delaware Securities Act [now § 73-207(b)(8)] satisfied the requirements of [§] 504(b)(1)(iii).”
(SEC’s 56.1 ¶ 126; Defs.’ 56.1 ¶ 126; McGrath Decl. Ex. 3, at TAR 0004583.) Additional
attorneys provided Opinion Letters to issuers, none of which was admitted to practice in
Delaware at the time each Opinion Letter was issued. (See SEC’s 56.1 ¶¶ 156–69; Defs.’ 56.1
The issuer would then sign the Agreement and return it to E-Lionheart’s offices in New
York, where Bronson signed it. (See SEC’s 56.1 ¶ 71; Defs.’ 56.1 ¶ 71.) After receiving
Bronson’s signature, E-Lionheart employees would wire the purchase funds to an escrow
account, where they were held until the transfer agent issued stock certificates or E-Lionheart
received confirmation that the shares had been electronically transferred to E-Lionheart’s
account. (See SEC’s 56.1 ¶ 74; Defs.’ 56.1 ¶ 74.) Transfer agents were generally instructed to
send the physical stock certificates to E-Lionheart’s offices in White Plains, New York or to
ordered “to pay a total of $57,284.83 as a civil penalty, disgorgement, and prejudgment interest,
and [was] permanently bar[red] . . . from participating in so-called ‘penny stock’ offerings.” Id.
Defendants object that “the SEC has not produced in its submission the vast majority of
[O]pinion [L]etters issued by Virginia Sourlis in order for Defendants to concede (or not) what
‘most’ of her opinions provide.” (Defs.’ 56.1 ¶ 125.)
brokerage firms where E-Lionheart maintained an account. (See SEC’s 56.1 ¶ 79; Defs.’ 56.1
¶ 79.)8 None of the addresses provided by the transfer agents was a Delaware address. (See
SEC’s 56.1 ¶ 80; Defs.’ 56.1 ¶ 80.) E-Lionheart would then instruct the escrow agent to release
the funds to the issuer. (See SEC’s 56.1 ¶ 75; Defs.’ 56.1 ¶ 75.)
After purchasing securities from an issuer, E-Lionheart typically would immediately
resell the stock after it was cleared for trading. (See SEC’s 56.1 ¶ 62; Defs.’ 56.1 ¶ 62.) Bronson
made the decision when to sell the shares until 2011, when Bronson hired Greg Regan and
Joseph Sansobrino to make trading decisions on behalf of E-Lionheart. (See SEC’s 56.1 ¶ 89;
Defs.’ 56.1 ¶ 89.)
3. Location of the Transactions
E-Lionheart employees who took actions in connection with the Rule 504(b)(1)(iii)
transactions were located in New York, with the exception of Naton Wells, who worked for ELionheart remotely from Florida. (See SEC’s 56.1 ¶ 101; Defs.’ 56.1 ¶ 101.) On July 16, 2009,
FCI entered into a contract with the Regus Group for a one-year lease on virtual office space in
Wilmington, Delaware, running from August 1, 2009 to July 31, 2010. (See SEC’s 56.1 ¶ 111;
Defs.’ 56.1 ¶ 111.) The lease provided FCI with a Delaware mailing address, telephone number,
voicemail and answering service, mail forwarding, and the right to use the Regus Group’s
Delaware office space two days per month. (See SEC’s 56.1 ¶ 112; Defs.’ 56.1 ¶ 112.) The
Regus Group forwarded mail addressed to E-Lionheart to a White Plains, New York address and
forwarded faxes to a New York fax number on a daily basis. (See SEC’s 56.1 ¶ 114; Defs.’ 56.1
While Defendants do not dispute these factual assertions, Defendants object to the scope
of the claim at issue and additionally note that the SEC “has not even located all of the alleged
instruction letters.” (Defs.’ 56.1 ¶ 79.)
¶ 114.) Prior to August 1, 2009, neither E-Lionheart nor FCI owned or leased office space in
Delaware. (See SEC’s 56.1 ¶ 110; Defs.’ 56.1 ¶ 110.) The lease with the Regus Group was
renewed automatically 90 days before its expiration. (See SEC’s 56.1 ¶ 115; Defs.’ 56.1 ¶ 115.)
On May 3, 2011, E-Lionheart and Fairhills Capital Offshore, Ltd. entered into contracts
with the Regus Group to lease full-time office spaces in Wilmington, Delaware. (See SEC’s 56.1
¶¶ 116–17; Defs.’ 56.1 ¶¶ 116–17.)9 No E-Lionheart employee worked from or visited the
rented office space in Delaware, (see SEC’s 56.1 ¶ 118; Defs.’ 56.1 ¶ 118), and neither ELionheart, nor any FCI entity had any employees in an office in Delaware in 2009, 2010, or
2011, (see SEC’s 56.1 ¶ 185; Defs.’ 56.1 ¶ 185).
4. Plaintiff’s Claims
The SEC alleges that Defendants violated §§ 5(a) and 5(c) of the Securities Act of 1933
and that Relief Defendant FCI has been unjustly enriched by Defendants’ unlawful conduct.
(See Compl. ¶¶ 37–41 (Dkt. No. 1).)
B. Procedural History
The SEC filed the Complaint on August 22, 2012. (Dkt. No. 1.) On February 1, 2013,
Defendants filed a Motion To Dismiss, (Dkt. No. 17), which was denied in an Order & Opinion
(“Opinion”) on March 31, 2014, (Dkt. No. 21).
On May 1, 2014, Defendants’ then-counsel, Nixon Peabody LLP, made a motion to
withdraw as counsel, (Dkt. Nos. 27–28), which the Court granted on May 6, 2014, (Dkt. No. 30).
Morvillo Abramowitz Grand Iason & Anello P.C. (“Morvillo”) appeared as new counsel for
Defendants on June 13, 2014. (Dkt. Nos. 33–34, 39.)
Fairhills Capital Offshore, Ltd. is not a party to this Action.
Defendants filed an Answer to the Complaint on September 5, 2014, (Dkt. No. 41), and
filed an Amended Answer on October 5, 2015, (Dkt. No. 116).
On April 11, 2016, Morvillo filed a motion to withdraw as counsel, (Dkt. Nos. 140–41),
which the Court granted, (Dkt. No. 142). In a subsequent Order, the Court instructed Defendants
E-Lionheart and FCI to appear with new counsel and ordered that an attorney for Bronson appear
or that Bronson inform the Court that he wished to proceed pro se. (Dkt. No. 143.) Robinson
Brog Leinwand Greene Genovese & Gluck P.C. (“Robinson Brog”) appeared on behalf of
Defendants on May 15, 2016. (Dkt. Nos. 144–45.)
On June 10, 2016, the SEC filed the instant Motion for Summary Judgment and
accompanying papers, (Dkt. Nos. 146–51), and Defendants filed their opposition and
accompanying papers on July 22, 2016, (Dkt. Nos. 154–56). On August 19, 2016, the SEC filed
its papers in reply. (Dkt. Nos. 159–61.)
On October 20, 2016, Robinson Brog filed a motion to withdraw as counsel for
Defendants and requested a stay of the proceedings pursuant to the motion. (Dkt. Nos. 169–70.)
On October 24, 2016, the SEC filed an opposition, agreeing to the withdrawal of Defendants’
counsel, but opposing the proposed stay of the proceedings. (Dkt. No. 172.) Robinson Brog
replied on November 1, 2016. (Dkt. No. 173.)
On November 1, 2016, Bronson filed a Notice of Bankruptcy Filing and Enforcement of
Automatic Stay, informing the Court that he had filed a voluntary petition for relief under
Chapter 7 of the United States Bankruptcy Code, and that pursuant to § 362 of the Bankruptcy
Code, such filing “automatically operates as a stay preventing the commencement or continuance
of any actions or proceedings against . . . Defendant.” (Dkt. No. 174.) On November 3, 2016,
the SEC filed an opposition to Bronson’s Notice of Bankruptcy Filing and Enforcement of
Automatic Stay. (Dkt. No. 175.) Despite the Court’s instruction to respond to the SEC’s
opposition, Defendants declined to do so. (Dkt. No. 176.) In an Order dated January 11, 2017,
the Court granted Robinson Brog’s motion to withdraw, and denied Defendants’ application for a
stay as neither the withdrawal of counsel nor the bankruptcy filing warranted a delay of the
Action. (Dkt. No. 177.) Defendants were instructed to appear with new counsel within 30 days
of the date of the Order, (id. at 7), but as of the date of this Opinion & Order, have yet to do so,
A. Standard of Review
Summary judgment is appropriate where the movant shows that “there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.
R. Civ. P. 56(a); see also Psihoyos v. John Wiley & Sons, Inc., 748 F.3d 120, 123–24 (2d Cir.
2014) (same). “In determining whether summary judgment is appropriate,” a court must
“construe the facts in the light most favorable to the non-moving party and . . . resolve all
ambiguities and draw all reasonable inferences against the movant.” Brod v. Omya, Inc., 653
F.3d 156, 164 (2d Cir. 2011) (internal quotation marks omitted); see also Borough of Upper
Saddle River v. Rockland Cty. Sewer Dist. No. 1, 16 F. Supp. 3d 294, 314 (S.D.N.Y. 2014)
(same). Additionally, “[i]t is the movant’s burden to show that no genuine factual dispute
exists.” Vt. Teddy Bear Co. v. 1-800 Beargram Co., 373 F.3d 241, 244 (2d Cir. 2004); see also
Aurora Commercial Corp. v. Approved Funding Corp., No. 13-CV-230, 2014 WL 1386633, at
*2 (S.D.N.Y. Apr. 9, 2014) (same). “However, when the burden of proof at trial would fall on
the nonmoving party, it ordinarily is sufficient for the movant to point to a lack of evidence to go
to the trier of fact on an essential element of the nonmovant’s claim,” in which case “the
nonmoving party must come forward with admissible evidence sufficient to raise a genuine issue
of fact for trial in order to avoid summary judgment.” CILP Assocs., L.P. v. Pricewaterhouse
Coopers LLP, 735 F.3d 114, 123 (2d Cir. 2013) (alteration and internal quotation marks
omitted). Further, “[t]o survive a [summary judgment] motion . . . , [a nonmovant] need[s] to
create more than a ‘metaphysical’ possibility that his allegations were correct; he need[s] to
‘come forward with specific facts showing that there is a genuine issue for trial,’” Wrobel v.
County of Erie, 692 F.3d 22, 30 (2d Cir. 2012) (emphasis omitted) (quoting Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586–87 (1986)), and “cannot rely on the mere
allegations or denials contained in the pleadings,” Walker v. City of New York, No. 11-CV-2941,
2014 WL 1244778, at *5 (S.D.N.Y. Mar. 26, 2014) (internal quotation marks omitted) (citing,
inter alia, Wright v. Goord, 554 F.3d 255, 266 (2d Cir. 2009)).
“On a motion for summary judgment, a fact is material if it might affect the outcome of
the suit under the governing law.” Royal Crown Day Care LLC v. Dep’t of Health & Mental
Hygiene, 746 F.3d 538, 544 (2d Cir. 2014) (internal quotation marks omitted). At summary
judgment, “[t]he role of the court is not to resolve disputed issues of fact but to assess whether
there are any factual issues to be tried.” Brod, 653 F.3d at 164 (internal quotation marks
omitted); see also In re Methyl Tertiary Butyl Ether (“MTBE”) Prods. Liab. Litig., MDL No.
1358, No. M21–88, 2014 WL 840955, at *2 (S.D.N.Y. Mar. 3, 2014) (same). Thus, a court’s
goal should be “to isolate and dispose of factually unsupported claims.” Geneva Pharm. Tech.
Corp. v. Barr Labs. Inc., 386 F.3d 485, 495 (2d Cir. 2004) (internal quotation marks omitted)
(quoting Celotex Corp. v. Catrett, 477 U.S. 317, 323–24 (1986)).
As the Court’s prior Opinion provides an overview of the legal landscape and applicable
securities laws, the Court does not reiterate the history and purpose of the registration
requirements or state “blue sky laws” here. (See Op. & Order (“Opinion”) 8–11 (Dkt. No. 21).)
1. Section 5 of the Securities Act
Section 5 of the Securities Act of 1933 requires that securities be registered with the SEC
before any person may offer or sell such securities. See 15 U.S.C. § 77e. This requirement
“protect[s] investors by promoting full disclosure of 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. StratoComm Corp., 2 F. Supp.
3d 240, 263–64 (N.D.N.Y. Feb. 19, 2014) (quoting SEC v. Calvo, 378 F.3d 1211, 1215 (11th Cir.
2004)), aff’d, 652 F. App’x 35 (2d Cir. 2016). Therefore, “[o]nce a prima facie case has been
made, the defendant bears the burden of proving the applicability of an exemption.” SEC v.
Cavanaugh, 445 F.3d 105, 111 n.13 (2d Cir. 2006); see also SEC v. Verdiramo, 890 F. Supp. 2d
257, 268 (S.D.N.Y. 2011) (same).
To state a cause of action under § 5 of the Securities Act, the SEC must show “(1) lack of
registration statement as to the subject securities; (2) the offer or sale of the securities; and (3)
the use of interstate transportation or communication and mails in connection with the offer or
sale.” Cavanagh, 445 F.3d at 111 n.13 (internal quotations and citations omitted).
It is undisputed that no registration statements were filed or in effect with respect to the
securities that E-Lionheart purchased or resold. (See SEC’s 56.1 ¶¶ 36–38; Defs.’ 56.1 ¶¶ 36–
38.) Nor do Defendants dispute the offer or sale of the securities and the use of interstate
transportation or communication and mails in connection with the offer or sale. (See SEC’s 56.1
¶¶ 39–40; Defs.’ 56.1 ¶¶ 39–40.) While Defendants concede that the SEC has established a
prima facie case as to “the  issuers identified in the Complaint,” Defendants contend that the
SEC has failed to do so for the remaining 53 issuers. (Defs.’ Mem. of Law in Opp’n to Pl.’s
Mot. for Summ. J. (“Defs.’ Opp’n”) 1 (Dkt. No. 156).) Defendants assert that “[t]he
identification at summary judgment of dozens of issuers not set forth in the Complaint, or
thereafter, . . . constitutes a new claim necessitating amendment of the pleading.” (Id. at 1–2.)10
Defendants offer no case law in support of their contention that the SEC’s instant Motion for
Summary Judgment offers a new legal claim as to the remaining 53 issuers.
To the extent that Defendants’ assertion that the “identification at summary judgment of
dozens of issuers not set forth in the Complaint” suggests that Defendants were not on notice of
the scope of Plaintiff’s claims, (Defs.’ Opp’n 1), such a statement is belied by the record. First,
the SEC’s Complaint put Defendants on notice of the types of transactions at issue in this Action
and made clear that those transactions specifically identified were illustrative. (See, e.g., Compl.
¶ 10 (Dkt. No. 1) (“The Defendants in this case obtained and illegally resold the stock of
In its reply to Defendants’ opposition, the SEC clarifies that the Complaint actually
identifies 11 “illustrative issuers.” (Pl. SEC’s Reply in Supp. of its Mot. for Summ. J. Against
Defs. and Relief Def. 1, 7–10 (Dkt. No. 158).) The Court notes that in addition to the 10 issuers
listed in the table at ¶ 30 of the Complaint, the SEC details the resales of the stock of ICBS, Ltd.
in ¶¶ 25–29. (See Compl. ¶¶ 25–30.) Accordingly, the Court agrees that the SEC identified 11
issuers by name in the Complaint.
approximately 100 companies.”); id. ¶ 18 (“Bronson and E-Lionheart repeated this pattern with
approximately 100 issuers, often purchasing and unlawfully reselling multiple ‘tranches’ of
securities from any given issuer”); id. ¶ 30 (“Since August 2009, Defendants have engaged in
similar illegal resales of the stock of over  . . . companies.”).)
Second, throughout discovery, the SEC gave Defendants abundant information on the
additional transactions at issue. (See, e.g., Reply Decl. of Kevin P. McGrath (“McGrath Reply
Decl.”) Ex. 2, at 5 (Dkt. No. 161) (noting in its Initial Disclosures that “discovery is likely to
reveal that Defendants have received proceeds from illegal Rule 504 Transactions concerning
additional publicly traded companies beyond the specific examples mentioned in the Complaint”
and “Plaintiff may seek disgorgement . . . resulting from illegal Rule 504 Transactions involving
the stock of the Illustrative Issuers and any other company”); McGrath Reply Decl. Ex. 5, at 28
(noting at a discovery conference that the SEC was seeking discovery in connection with “a
broader category . . . [of] 60 to 70 additional issuers”); id. at 31 (referencing Plaintiff’s document
requests and stating Defendants will “provide documents showing that [Defendants] entered into
the transactions, and how much [Defendants] entered into—the quantity and the amount”);
McGrath Reply Decl. Ex. 6 ¶¶ J, 1 (defining “Previously Specified Issuers” in the SEC’s first
request for documents as “the  issuers specified in the Investigative Subpoenas” and
requesting “[a]ll documents concerning Rule 504 Transactions in the stock of any issuer other
than a Previously Specified Issuer”).) Indeed, shortly before the close of discovery, the SEC
produced a draft disgorgement chart to Defendants. (McGrath Reply Decl. Ex. 9.) These
disclosures are sufficient. See SEC v. Payton, No. 14-CV-4644, 2016 WL 3023151, at *3
(S.D.N.Y. May 15, 2016) (finding “the SEC was not required to identify in its complaint the
precise amount of disgorgement that it sought” and that “[t]he SEC’s pretrial disclosures, exhibit
list, and summary exhibits further signaled to [the defendant] that all of his . . . trading was at
issue”); SEC v. Zwick, No. 03-CV-2742, 2007 WL 831812, at *24 (S.D.N.Y. Mar. 16, 2007)
(“The SEC was not required to list all of the trades in the complaint, and it was clear from the
report of the SEC’s expert, produced in advance of trial, what trades were [at issue].”), aff’d, 317
F. App’x 34 (2d Cir. 2008).
Thus, Defendants’ conclusory assertion that they are “inherently prejudiced by the
[SEC’s] attempt to inject at the last-minute, dozens of issuers absent from the Complaint or
identified in written discovery” is both unsubstantiated and untrue. (Defs.’ Opp’n 3.)
Accordingly, the Court finds that the transactions with all 63 issuers are relevant to the instant
Motion and that Plaintiff has established its prima facie case. The Court therefore turns to
whether Defendants have established a registration exemption.
2. Federal Law Exemptions to Registration
As detailed in the Court’s prior Opinion, “[r]egistered securities offerings can be
expensive, time consuming, and burdensome, especially for smaller companies.” (Opinion 11.)
Thus, “for certain emerging companies, a registered offering is not an option for them. That
leaves . . . offerings conducted in compliance with exemptions from registration.” (Id. (citation
and internal quotation marks omitted).) “The most commonly relied-on exemption for stock
offerings by emerging companies are those provided by Regulation D . . . .” (Id. (citation and
internal quotation marks omitted).) Regulation D was designed “to streamline and coordinate the
limited offering and nonpublic exemptions under [§§] 3(b) and 4(2) of the Securities Act in order
to provide a more coherent pattern of exemptive relief . . . and to achieve uniformity between
state and federal exemptions . . . .” Bryn Vaaler, Financing a Small Business in Mississippi: A
Practitioner’s Guide to Federal and State Securities Exemptions Part I, 63 Miss. L.J. 129, 142
(1993). “Regulation D provides exemptions from Securities Act registration for securities
offerings under three separate rules: Rules 504, 505, and 506.” Revision of Rule 504 of
Regulation D, the “Seed Capital” Exemption, 64 Fed. Reg. 11,090, 11,090 (Mar. 8, 1999) (to be
codified at 17 C.F.R. pt. 230). Only Rule 504 is relevant here.
Rule 504, known as the “seed capital” exemption, is limited to offerings by non-reporting
companies that do not exceed an aggregate annual amount of $1 million, see Revisions of
Limited Offering Exemptions in Regulation D, 72 Fed. Reg. at 45,116, 45,133 (proposed Aug.
10, 2007) (to be codified at 17 C.F.R. pts. 200, 230, 239), and places “substantial reliance upon
state securities laws,” Revision of Rule 504 of Regulation D, 64 Fed. Reg. at 11,090. “Rule 504
sets forth the requirements for four separate exemptions from the registration requirements of the
Securities Act.” Revisions of Limited Offering Exemptions in Regulation D, 75 Fed. Reg. at
45,133. “Among these is Rule 504(b)(1)(iii), which provides an exemption from registration for
offers and sales of securities that are conducted ‘according to state law exemptions from
registration that permit general solicitation and general advertising so long as sales are made only
to “accredited investors” as defined in [Rule 501(a)].’” Id. (alteration in original) (footnote
omitted); see also 17 C.F.R. § 230.504(b)(1)(iii).11 Thus, there are three requirements for
An “accredited investor” is defined as a person or entity that falls within one of several
categories under 17 C.F.R. § 230.501(a). Relevant to the instant case are those exceptions for
“[a]ny natural person whose individual net worth, or joint net worth with that person’s spouse,
exceeds $1,000,000,” id. § 230.501(a)(5), and “[a]ny natural person who had an individual
income in excess of $200,000 in each of the two most recent years or joint income with that
person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of
reaching the same income level in the current year,” id. § 230.501(a)(6). A more fulsome
application of a Rule 504(b)(1)(iii) exemption: (a) a security sale or offer must be made
exclusively according to state-law exemptions from registration; (b) these state-law exemptions
must permit general solicitation and general advertising; and (c) the purchasers of the securities
must be “accredited investors.” “Securities sold without registration in reliance on this provision
are not subject to the limitations on resale established in Rule 502(d) and, as such, are not
‘restricted securities . . . .’” 75 Fed. Reg. 45,133; see also 17 C.F.R. § 230.504(b)(1) (providing
an exemption for transactions that meet the requirements of Rule 504(b)(1)(i)–(iii) from the
resale restrictions imposed by 17 C.F.R. § 230.502(d)).12 However, in considering the scope of
the Rule 504 exemption, it is worth remembering that “[r]egistration exemptions are construed
strictly to promote full disclosure of information for the protection of the investing public.”
Cavanaugh, 445 F.3d at 115.
3. Applicability of Delaware Security Act § 73-207(b)(8)
As noted supra, Rule 504(b)(1)(iii) requires that offers and sales of securities be “made
exclusively according to state law exemptions from registration.” Defendants assert that the
securities at issue satisfy the conditions for exemption under Rule 504(b)(1)(iii) and the relevant
state-law exemption, Delaware Securities Act § 73-207(b)(8).13 (See generally Defs.’ Opp’n 8–
19.) Section 73-207(b)(8) exempts from registration “[a]ny offer or sale to a bank, savings
discussion of “accredited investor” status, is provided in the Court’s prior Opinion. (See Opinion
For a brief history of the addition of Rule 504(b)(1)(iii) as a new exemption introduced
in 1999, see the Court’s prior Opinion. (See Opinion 13–14.)
Section § 73-207(b)(8) was previously codified at § 7309(b)(8) of the Delaware Code.
78 Del. Laws ch. 175 (2011). The Court will refer to the law by its current codification.
institution, trust company, insurance company, investment company . . . , pension or profitsharing trust, or other financial institution or institutional buyer, or to a broker-dealer, whether
the purchaser is acting for itself or in some fiduciary capacity.” Del. Code. Ann. tit. 6, § 73207(b)(8).
While the Parties dispute whether § 73-207(b)(8) satisfies Rule 504(b)(1)(iii) because it
“does not permit general solicitation or general advertising as required by Rule 504(b)(1)(iii),”
(Pl. SEC’s Mem. in Law in Supp. of its Mot. for Summ. J. Against Defs.’ and Relief Def.
(“SEC’s Mem.”) 14 (Dkt. No. 147)), the Court must first determine whether the state-law
exemption Defendants invoke applies to the transactions at issue, 17 C.F.R. § 230.504(b)(1)
(requiring that offers and sales of securities be made “[e]xclusively according to state law
exemptions from registration”). In its prior Opinion, the Court concluded that “the language of
Rule 504(b)(1)(iii) requires compliance with those state-law exemptions where the securities are
offered or sold.” (Opinion 22.) The Delaware Securities Act applies only where “there is a
sufficient nexus between Delaware and the transaction at issue.” Vichi v. Koninklijke Philips
Elecs. N.V., No. 2578-VCP, 2009 WL 4345724, at *19 (Del. Ch. Dec. 1, 2009). As the Court
has previously observed, “the case law is clear that incorporation alone is not a sufficient nexus
to trigger application of Delaware’s Securities Act.” (Opinion 25 (collecting cases).) In their
opposition to Plaintiff’s Motion, Defendants concede that the Court ruled as such, but argue that
“as the Court had decided earlier in the decision to deny the motion to dismiss on other grounds,
that part of the decision discussing nexus was not necessary to the decision, and should not be
considered binding.” (Defs.’ Opp’n 11.) While Defendants are correct that such dicta is not
binding on the Court, contrary to Defendants’ contention, the “law of the case” doctrine is not
applicable only where a party has had an opportunity to appeal the decision. (Id. at 11 n.12.)
“The law-of-the-case doctrine has several branches; one deals with decisions of a lower
court that have been ruled on on appeal, and another deals with decisions that have not been
ruled on on appeal.” United States v. Uccio, 940 F.2d 753, 757 (2d Cir. 1991). “Under the first
branch of the doctrine,” not relevant here, “the trial court is barred from reconsidering or
modifying any of its prior decisions that have been ruled on by the court of appeals.” Id. “The
court’s exercise of its power to reconsider and modify its prior interlocutory rulings is informed
by the second branch of the law-of-the-case doctrine. That principle is that when a court has
ruled on an issue, that decision should generally be adhered to by that court in subsequent stages
in the same case.” Id. at 758 (emphasis added) (citing Arizona v. California, 460 U.S. 605, 618
(1983)). This second branch of the doctrine, applicable here, “counsels a court against revisiting
its prior rulings in subsequent stages of the same case absent ‘cogent’ and ‘compelling’ reasons
such as ‘an intervening change of controlling law, the availability of new evidence, or the need to
correct a clear error or prevent manifest injustice.’” Ali v. Mukasey, 529 F.3d 478, 490 (2d Cir.
2008) (quoting United States v. Tenzer, 213 F.3d 34, 39 (2d Cir. 2000)).
Defendants contend that “fresh evidence,” along with additional case law warrants
reconsideration of the Court’s conclusions regarding the nexus requirement. (Defs.’ Opp’n 11.)
Defendants highlight the opinion of then-Delaware Securities Commissioner Peter O. Jamison,
III (the “Jamison Opinion”) concurring with the conclusions in Sourlis’ Opinion Letter as
evidence that a sufficient nexus was present where E-Lionheart purchased securities from GoIP
Global, Inc., a Nevada corporation, based in New York. (See id. at 11–12.)14
Defendants do not offer any authority—and the Court is aware of none—holding that the
opinion of, let alone a three sentence email from, a Securities Commissioner is binding.15 The
same is true for the SEC’s proffered evidence of the Opinion from the Investor Protection Unit of
the Delaware Department of Justice (the “Strong Opinion”), and the SEC admits as such. (See
Pl. SEC’s Reply in Supp. of its Mot. for Summ. J. Against Defs. and Relief Def. 6 (Dkt. No. 159)
(noting the email from then-Commissioner Jamison is not binding legal authority and “[t]he
Interpretive Opinion of . . . Commissioner Strong is also not binding”).)16 Thus, the Court
The Court notes that although Defendants offer the Jamison Opinion as evidence that
“the Delaware Securities Commissioner agreed that sufficient nexus was present where [ELionheart] purchased securities from GoIP Global, Inc.,” (Defs.’ Opp’n 11), Defendants do not
offer any argument as to the application of the Jamison Opinion to any other Opinion Letters,
even those drafted by Sourlis, issued in connection with other issuers or transactions.
Defendants thus offer the Jamison Opinion as a blanket acceptance of § 73-207(b)(8)’s
application to all transactions. Indeed, Defendants do so despite their contention that “the SEC
has not produced in its submission the vast majority of [O]pinion [L]etters issued by Virginia
Sourlis in order for Defendants to concede (or not) what ‘most’ of her opinions provide.” (Defs.’
56.1 ¶ 125.)
The email from then-Commissioner Jamison states:
I have reviewed Ms. Sourlis’ [Opinion Letter], and it does appear that Ms. Sourlis’
interpretation of 6 Del. C. [§] 7309(b)(8) and [§] 510 of the Rules and Regulations
Pursuant to the Delaware Securities Act is correct. That being said, if the SEC
believes that the use of the Delaware exemption at [§] 7309(b)(8) in this particular
case is contrary to the public interest, please let me know. Delaware does have a
procedure that authorizes the Commissioner to withdraw an exemption on a general
or case-by-case basis.
(Aff’n of William A. Rome Ex. A, at SEC-SEC-0007800 (Dkt. No. 155).)
Despite the fact that neither Opinion is binding authority, the Court notes that the
Strong Opinion is the far more reasoned of the two. The Strong Opinion addresses two specific
declines to consider either Opinion as binding authority and therefore, need not adjudicate the
merits of these conflicting Opinions.
Defendants also contend that “[E-Lionheart]’s incorporation in Delaware is not its sole
contact with the state.” (Defs.’ Opp’n 12.) In particular, Defendants argue that the maintenance
of a virtual office, payment of franchise taxes, and elected choice-of-law in its Agreements are
“collectively sufficient contact with Delaware.” (Id. (emphasis added).)17
Defendants also assert that “it is an open question whether a virtual office in Delaware
constitutes sufficient nexus by itself to invoke Delaware Securities Law” and that the Court “may
so find” it sufficient. (Id.) However, Defendants fail to offer any case law in which a court has
so found a nexus under such circumstances, let alone in combination with the other factors
present. Indeed, one district court has described Regus as “an entity that apparently provides
[state] mailing addresses and phone numbers for numerous out of state businesses that wish to
appear as if they have a place of business in [that state].” Nedgam Prods., LLC v. Bizparentz
questions posed by the SEC, (McGrath Reply Decl. Ex. 11, at 1, 3), analyzes the relevant
provisions of Delaware law, and provides the reasoning underlying the answers given. The
Jamison Opinion does none of this.
Additionally, Defendants’ contention that the SEC improperly withheld the Jamison
Opinion is unfounded. The SEC had no obligation to disclose this informal communication; as
the Court has already explained, it is not binding authority on this Court.
The SEC also timely sought and disclosed the Strong Opinion. As it explains in its reply
brief, the SEC requested the Opinion before the close of discovery for strategic reasons and
immediately produced it to Defendants upon receipt. Defendants did not make an objection to its
timeliness until their opposition to the instant Motion.
Defendants fail to explain the relevance of the payment of a Delaware franchise tax,
(see Defs.’ Opp’n 12), and as the SEC identifies, it appears that as of June 1, 2015, E-Lionheart’s
incorporation status was cancelled for failure to pay that tax, (see Aff’n of William A. Rome Ex.
O (Dkt. No. 155)).
Found., No. 09-CV-500, 2010 WL 3257909, at *6 (D. Conn. Apr. 29, 2010). Here, Defendants
concede that E-Lionheart’s offices were located in White Plains, New York, (see Defs.’ 56.1
¶¶ 22–25), E-Lionheart employees solicited issuers and sent transactional documents from their
New York offices, (see id. ¶¶ 56, 63), transfer agents were typically instructed to send stock
certificates to E-Lionheart’s New York offices or New York brokerage firms, (see id. ¶¶ 79, 84),
Defendants did not send any proceeds of sales to addresses in Delaware, (see id. ¶ 55), and no ELionheart employee worked from or visited the rented office space in Delaware, (see id. ¶ 118).
Accordingly, nothing in the record or Defendants’ briefing supports the contention that the
leasing of virtual office space weighs in favor of finding a nexus sufficient to invoke Delaware
Securities Laws. See Nedgam Prods., 2010 WL 3257909, at *6 (finding that the plaintiff did not
have a “usual place of business” in Connecticut, even though it claimed to have a virtual office
there, because the record showed that its employees operated in a different state).
Rather than identify potentially applicable exemptions in states (aside from Delaware)
where the transactions occurred, Defendants instead contend that “parties may choose the law
governing their transactions, including securities transactions, to the exclusion of other state
securities laws,” (Defs.’ Opp’n 12), and that “[t]he choice of law provisions in the respective
subscription agreements between [E-Lionheart] and issuers directs the application of Delaware
law to these transactions,” (id. at 13). As the Court previously noted, this claim “that the
Delaware Securities Act could be chosen by issuers to govern securities that were not offered or
sold to or from Delaware might raise serious Commerce Clause questions.” (Opinion 25 n.10.)
In any event, the Court agrees with the SEC that the “broad authority” Defendants invoke
to show that choice-of-law provisions in the E-Lionheart subscription agreements can satisfy the
nexus requirement is unavailing. (Defs.’ Opp’n 13.) The provisions at issue in the cited cases
pertain to either private contract or fraud claims and do not support the proposition that “parties
may choose the law governing their . . . securities transactions” in the context of registration
exemptions. (Id. at 12.) See, e.g., Berckeley Inv. Grp., Ltd. v. Colkitt, 455 F.3d 195, 224 n.28
(3d Cir. 2006) (finding that New York law applied to the plaintiff’s common law fraud claim and
the Pennsylvania Securities Act was inapplicable because “the [a]greement, which contain[ed] a
choice of law clause . . . [was] governed solely by New York law” (emphasis added)); Organ v.
Byron, 435 F. Supp. 2d 388, 390, 393 (D. Del. 2006) (finding “Delaware courts will generally
recognize a valid choice of law provision in a contract, as long as the jurisdiction bears some
material relationship to the transaction” and “Delaware Securities Law provisions are
essentially identical to the [other state’s] provisions” (emphasis added) (internal quotation marks
omitted)); Chase Manhattan Mortg. Corp. v. Advanta Corp., No. 01-CV-507, 2005 WL
2234608, at *12 (D. Del. Sept. 8, 2005) (finding in the context of fraud and misrepresentation
claims “the law of the state with the most significant relationship to the transaction applies”);
Mallon Res. Corp. v. Midland Bank PLC, No. 96-CV-7458, 1997 WL 403450, at *2–3 (S.D.N.Y.
July 17, 1997) (finding a provision stating that “loan documents shall be deemed contracts and
instruments made under the laws of the state of New York” and that borrowers and lenders
“acknowledge that it . . . will be neither inconvenient nor unfair to litigate or otherwise resolve
any disputes or claims in a court sitting in such state” was “broad enough to include statutory
fraud claims” (alteration in original) (emphasis added)); Boss v. Am. Express Fin. Advisors, Inc.,
791 N.Y.S.2d 12, 14 (App. Div. 2005) (finding a forum-selection and choice-of-law clause valid
in an employment contract because “[t]he parties here agreed to the jurisdiction of the Minnesota
courts to resolve any controversy and agreed that Minnesota law would apply” (emphasis
added)), aff’d, 844 N.E.2d 1142 (N.Y. 2006). Put differently, Defendants cannot artificially
select a particular state’s security laws for the purpose of evading the registration requirements of
the federal securities laws where the transactions at issue have no connection to that state. And
because Delaware law is the only state law Defendants cite to justify the non-registration of the
securities at issue, Defendants have failed to rebut the SEC’s prima facie case that Defendants
violated § 5. Therefore, the SEC’s Motion for Summary Judgment is granted.18
4. Requested Relief
“Once the district court has found federal securities law violations, it has broad equitable
power to fashion appropriate remedies . . . .” SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1474
(2d Cir. 1996). In the instant Motion, the SEC seeks relief in the form of a permanent injunction
barring Defendants from violating § 5 of the Securities Act, disgorgement of profits with
prejudgment interest, imposition of civil penalties, and a permanent penny stock bar. (See SEC’s
Mem. 19–25.) In response, Defendants contend that the SEC has not properly calculated
damages and has not offered sufficient evidence to substantiate these calculations. (See Defs.’
Opp’n 21–22.) Defendants additionally argue that they are entitled to an offset for their
expenses—such as brokerage commissions, legal costs, and fees paid to transfer agents—and
While it need not address the question of whether § 73-207(b)(8) permits general
solicitation and advertising or whether Bronson or E-Lionheart are “accredited investors” under
Rule 504(b)(1)(iii), the Court notes that the SEC’s arguments on both issues are more persuasive
than those of Bronson. Reading Rule 504(b)(1)(iii) in conjunction with Rule 510(c), and
considering the contributions of E-Lionheart employees and outside investors to the company,
the Court has serious doubts as to E-Lionheart’s status as an accredited investor.
that Defendants’ good faith reliance upon the advice of counsel warrants the imposition of
minimal or zero civil penalties. (Id. at 22–25.)
a. Section 5 Injunction and Penny Stock Bar19
Injunctive relief is expressly authorized by Congress to prohibit future violations of
federal securities laws. See 15 U.S.C. § 78u(d)(1) (“Whenever it shall appear to the Commission
that any person is engaged or is about to engage in acts or practices constituting a violation of
any provision of this chapter, . . . it may in its discretion bring an action . . . to enjoin such acts or
practices . . . .”). “The SEC must demonstrate that there is a substantial likelihood of future
violations of illegal securities conduct.” SEC v. Cavanagh, 155 F.3d 129, 135 (2d Cir. 1998).
The following factors are relevant in determining the propriety of an injunction:
the fact that [the] defendant has been found liable for illegal conduct; the degree of
scienter involved; whether the infraction is an “isolated occurrence;” whether [the]
defendant continues to maintain that his past conduct was blameless; and whether,
because of his professional occupation, the defendant might be in a position where
future violations could be anticipated.
SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90, 100 (2d Cir. 1978) (citation and internal
quotation marks omitted); see also Cavanaugh, 155 F.3d at 135 (same). Additionally, “in
assessing the strength of the showing concerning likelihood of future violations, the [C]ourt
As defined in the Court’s previous Opinion, “penny stocks” are securities issued by
small companies that trade at less than $5 per share. See Penny Stock Rules, U.S. Sec. and Exch.
Comm’n, (May 9, 2013), https://www.sec.gov/fast-answers/answerspennyhtm.html (last visited
Mar. 20, 2017). Penny stocks are not typically sold on securities exchanges, but rather are traded
in an over-the-counter market. See SEC v. China Energy Sav. Tech., Inc., No. 06-CV-6402,
2009 WL 875997, at *4 (E.D.N.Y. Mar. 27, 2009) (noting that penny stocks are “generally sold
in the over-the-counter . . . market and generally not listed on an exchange” (alteration in
original) (internal quotation marks omitted)).
should consider the specific nature of the injunctive relief sought.” SEC v. Lipkin, No. 99-CV7357, 2006 WL 435035, at *1 (E.D.N.Y. Jan. 9, 2006). “[T]he more onerous are the burdens of
the injunction [the SEC] seeks,” the “more persuasive [its] showing of its entitlement to a
preliminary injunction” must be. SEC v. Unifund SAL, 910 F.2d 1028, 1039 (2d Cir. 1990).
Here, the Court finds several factors weigh in favor of a permanent injunction.
Defendants’ violations of § 5 were not isolated, but continuous and systematic over a period of
more than three years. Despite representations that Defendants had “not offered or sold any
portion of the Shares to others or with a view to reselling or otherwise disposing of any portion
of the Shares,” (SEC’s 56.1 ¶ 98; Defs.’ 56.1 ¶ 98 (internal quotation marks omitted)),
Defendants admitted that E-Lionheart’s “typical practice” was to do just that and “immediately
resell the stock after it was cleared for trading,” (SEC’s 56.1 ¶ 62; Defs.’ 56.1 ¶ 62; McGrath
Decl. Ex. 2, at 1B005-1B005 MISC 008-000124). Indeed, Bronson testified that the above
representation “may appear” inconsistent with E-Lionheart’s conduct. (McGrath Decl. Ex. 3, at
154–55.)20 Remarkably, Defendants continued to engage in transactions supposedly pursuant to
Rule 504(b)(1)(iii) through other entities after the SEC filed the instant Action, exhibiting
obvious disregard for the seriousness of the allegations; indeed, “[Defendants] have yet to
acknowledge their culpability.” Lipkin, 2006 WL 435035, at *1.
As the SEC notes in its Motion, Bronson was a knowledgeable investor (and attorney)
with extensive experience in the securities industry and conceded that he was familiar with the
relevant securities law provisions. Bronson’s career in trading has been largely focused on
On at least one occasion, an issuer complained to Defendants that “Fairhill[s] Capital
[was] driving [the stock’s] price down on purpose to get more shares and a lower price.”
(McGrath Decl. Ex. 3, at 1B005-1B005 MISC 008-000124.)
transacting in unregistered securities. This, combined with the fact that Bronson could continue
working for many years, suggests a potential for future violations.
Taking into account all the applicable factors, the Court concludes that the requested
injunction is appropriate. Injunctive relief is “particularly within the [C]ourt’s discretion where a
violation was founded on systematic wrongdoing, rather than an isolated occurrence, . . . and
where the court views the defendant’s degree of culpability and continued protestations of
innocence as indications that injunctive relief is warranted.” First Jersey Sec., Inc., 101 F.3d at
1477 (internal quotation marks omitted). Furthermore, “the injunction that will be imposed [is]
not onerous. [It] simply require[s] that [Defendants] not break the law, an obligation that they
are supposed to observe in any event.” Lipkin, 2006 WL 435035, at *1. In fact, Defendants do
not specifically oppose the SEC’s request for injunctive relief. (See generally Defs.’ Opp’n.)
And “since persistent refusals to admit any wrongdoing ma[k]e it rather dubious that [the
offenders] are likely to avoid such violations of the securities laws in the future in the absence of
an injunction,” First Jersey Sec., Inc., 101 F.3d at 1477 (alterations in original) (internal
quotation marks omitted), the Court finds a permanent injunction is warranted.
The Court similarly finds that imposition of a permanent penny stock bar against
Defendants is appropriate. The Court may order a penny stock bar “conditionally or
unconditionally, and permanently or for such period of time as the court shall determine.” 15
U.S.C. § 77t(g)(1). The repeat nature of Defendants violationS, as well as the lack of
acknowledgment of wrongdoing, weigh in favor of ordering such relief. See, e.g., SEC v.
Becker, No. 09-CV-5707, 2010 WL 2710613, at *2 (S.D.N.Y. July 8, 2010) (granting the SEC’s
motion for a permanent penny stock bar, among other reasons, because the defendants were
“repeat offenders,” were “in their forties and thus [had] the opportunity to engage in similar
penny stock frauds in the future,” and had not “accepted any responsibility for [their] conduct”);
SEC v. Universal Express, Inc., 475 F. Supp. 2d 412, 429 (S.D.N.Y. 2007) (finding imposition of
a penny stock bar appropriate where the “defendant’s professional position and apparent refusal
to acknowledge the types of conduct that violate securities laws raise[d] serious concerns that he
[would] engage in such misconduct in the future”), aff’d, 300 F. App’x 70 (2d Cir. 2008).
Accordingly, Defendants are permanently barred from transacting in penny stocks.
b. Disgorgement of Profits
“The primary purpose of disgorgement as a remedy for violation of the securities laws is
to deprive violators of their ill-gotten gains, thereby effectuating the deterrence objectives of
those laws.” First Jersey Sec., Inc., 101 F.3d at 1474. A court may award prejudgment interest
on disgorged sums in order to fully compensate the wronged party for damages suffered. Id. at
The SEC seeks disgorgement of $9,601,446.93, its calculation of E-Lionheart’s net
profits associated with 353 tranches of securities purchased from 63 issuers. (See SEC’s Mem.
22.) The SEC additionally seeks $610,000 and the value of automobiles from Relief Defendant
FCI because E-Lionheart transferred these assets without consideration. (See id.; see also SEC’s
56.1 ¶¶ 225–27; Defs.’ 56.1 ¶¶ 225–27.) In addition, the SEC contends that an award of
prejudgment interest is appropriate, in the amount of $1,761,541.14. (See SEC’s Mem. 23.)21 In
response, Defendants do not dispute that disgorgement is an appropriate remedy, but rather argue
that “the basis of any damages must be limited only to [the 10] issuers” “identified in the
This amount is measured from the date of June 10, 2016. (See SEC’s Mem. 23.)
Complaint and subsequent written discovery.” (Defs.’ Opp’n 21.) Defendants further argue that
“[s]hould the Court in its discretion look beyond the pleadings and accept and consider the
evidence offered in the SEC’s supporting declarations, then the damages assessed should be
limited only to such evidence actually presented . . . , i.e. the 63 individual tranches.” (Id.)
As noted supra, the proper scope of Plaintiff’s claims are the stock of 63 issuers, and not
merely the 11 identified by name in the Complaint. As previously discussed, the Complaint put
Defendants on notice of the scope of the SEC’s claims and the information exchanged during
discovery further clarified the issuers and transactions at issue. Specifically, the SEC provided
Defendants with a disgorgement chart prior to the close of discovery. (See McGrath Reply Decl.
The Court agrees with the SEC that the summary chart of the shares purchased and sold
and the corresponding purchase price, (see Decl. of Doreen Rodriguez Ex. 1 (Dkt. No. 150)), is
an appropriate “summary to prove content” pursuant to the Federal Rules of Evidence, see Fed.
R. Evid. 1006 (“The proponent may use a summary, chart, or calculation to prove the content of
voluminous writings, recordings, or photographs that cannot be conveniently examined in
court.”). Defendants do not contend that the “underlying documentary evidence,” (Defs.’ Opp’n
21), was not made available to Defendants, as the rule requires, see Fed. R. Evid. 1006 (“The
proponent must make the originals or duplicates available for examination or copying, or both,
by other parties at a reasonable time and place.”), but rather suggest that the failure to submit
such documentation to the Court precludes consideration of the SEC’s calculation. No such
requirement exists, particularly when Defendants do not dispute the accuracy of the SEC’s
calculation based on the 353 tranches.
Additionally, the Court finds that the imposition of prejudgment interest is appropriate.
“[D]isgorgement and prejudgment interest flow from the principle that, as between one who has
broken the law and the authorities charged with enforcing it, the lawbreaker should not be able to
retain the fruits of the violation.” SEC v. Elliott, No. 09-CV-7594, 2011 WL 3586454, at *12
(S.D.N.Y. Aug. 11, 2011). “Requiring payment of interest prevents a defendant from obtaining
the benefit of what amounts to an interest free loan procured as a result of illegal activity.” SEC
v. Moran, 944 F. Supp. 286, 295 (S.D.N.Y. 1996). “The interest rate generally used to calculate
disgorgement interest is the IRS’s underpayment rate,” SEC v. Shehyn, No. 04-CV-2003, 2010
WL 3290977, at *7 (S.D.N.Y. Aug. 9, 2010), as the SEC proposes here, (see SEC’s Mem. 22).
As to Defendants’ contention that they are entitled to an offset for expenses, the Court
agrees that such costs should be deducted from the disgorgement figure. (See Defs.’ Opp’n 22–
23.) The Court “may, in its discretion, deduct from the disgorgement amount any direct
transaction costs, such as brokerage commissions, that plainly reduce the wrongdoer’s actual
profit.” SEC v. McCaskey, No. 98-CV-6153, 2002 WL 850001, at *4 (S.D.N.Y. Mar. 26, 2002)
(report and recommendation) (citing cases where courts have offset broker commissions and fees
from the disgorgement remedy); see also SEC v. Rosenfeld, No. 97-CV-1467, 2001 WL 118612,
at *2 (S.D.N.Y. Jan. 9, 2001) (report and recommendation) (noting that “[a] court may in its
discretion, deduct from the defendant’s gross profits certain expenses incurred while
garnering the illegal profits, including . . . transaction costs such as brokerage commissions”).
“To require disgorgement of all fees and commissions without permitting a reduction for
associate expenses and costs constitutes a penalty assessment and goes beyond the restitutionary
purpose of the disgorgement doctrine.” Litton Indus., Inc. v. Lehman Bros. Kuhn Loeb, Inc., 734
F. Supp. 1071, 1077 (S.D.N.Y. 1990). Thus, Defendants are to provide the SEC with a
calculation of their transaction expenses within seven days of the date of this Opinion & Order.
The SEC is to submit a revised prejudgment interest calculation based on a newly calculated
disgorgement figure within seven days thereafter.
c. Civil Penalties
Upon a proper showing, § 20(d) of the Securities Act permits a court to impose civil
penalties on a defendant who has violated the Act. See 15 U.S.C. § 77t(d); see also SEC v.
Razmilovic, 738 F.3d 14, 36 (2d Cir. 2013) (“[T]he [Securities Act of 1933] give[s] the court
discretion to order a defendant who has violated those statutes to pay civil penalties.”). “Such
penalties are designed to deter future violations of the securities laws and thereby further the
goals of ‘encouraging investor confidence, increasing the efficiency of financial markets, and
promoting the stability of the securities industry.’” SEC v. Universal Express, Inc., 646 F. Supp.
2d 552, 567 (S.D.N.Y. 2009) (quoting SEC v. Palmisano, 135 F.3d 860, 866 (2d Cir. 1998)),
aff’d, 438 F. App’x 23 (2d Cir. 2011). “[W]hereas disgorgement merely restores the defendant
to his original position without extracting a real penalty for his illegal behavior, the imposition of
civil penalties is appropriate to accomplish the goal of punishment.” Id. (alteration, citation, and
internal quotation marks omitted).
Section 20(d) of the Securities Act outlines three “tiers” of civil penalties, each
establishing a maximum penalty per violation. See 17 C.F.R. § 201, Subpt. E, Tbl. I. The first
tier, operates whenever “any person has violated any provision of [the Securities Act].” 15
U.S.C. § 78u(d)(3)(A). The second tier requires “fraud, deceit, manipulation, or deliberate or
reckless disregard of a regulatory requirement,” id. § 78u(d)(3)(B)(ii), and the third tier applies
when “such violation directly or indirectly resulted in substantial losses or created a significant
risk of substantial losses to other persons,” id. § 78u(d)(3)(B)(iii)(bb).22 In the context of this
guidance, the amount of any civil penalty rests squarely in the discretion of the Court. See SEC
v. Lybrand, 281 F. Supp. 2d 726, 729 (S.D.N.Y. 2003) (“District courts have discretion in
determining the appropriate amount of any penalty.”), aff’d sub nom. SEC v. Kern, 425 F.3d 143
(2d Cir. 2005); see also 15 U.S.C. § 77t(d)(2) (“The amount of the penalty shall be determined
by the court in light of the facts and circumstances.”). In assessing the relevant facts and
circumstances, courts typically consider:
(1) the egregiousness of the violations at issue; (2) [the] defendants’ scienter; (3)
the repeated nature of the violations; (4) [the] defendants’ failure to admit their
wrongdoing; (5) whether [the] defendants’ conduct created substantial losses or the
risk of substantial losses to other persons; (6) [the] defendants’ lack of cooperation
and honesty with authorities, if any; and (7) whether the penalty that would
otherwise be appropriate should be reduced due to [the] defendants’ demonstrated
current and future financial condition.
Lybrand, 281 F. Supp. 2d at 730. In light of the foregoing factors, and the Court’s above
analysis, Defendants’ conduct warrants imposition of a third-tier penalty. “[The] repeated sales
of . . . unregistered securities . . . and [Defendants’] failure to take any steps to confirm the
legitimacy of these sales—even after being put on notice that the sales might not be lawful—
demonstrates a reckless disregard for the regulatory requirements governing the sale of
The fine imposed varies per violation in each tier. When Defendants’ violations
occurred, the following maximum penalties applied:
Tier I: $7,500 for individuals; $75,000 for entities
Tier II: $75,000 for individuals; $375,000 for entities
Tier III: $150,000 for individuals; $725,000 for entities
See 17 C.F.R. § 201, Subpt. E, Tbl. I.
securities.” Universal Express, Inc., 646 F. Supp. 2d at 568. Additionally, Defendants’
statement that E-Lionheart had “not offered or sold any portion of the Shares to others or with a
view to reselling or otherwise disposing of any portion of the Shares,” (SEC’s 56.1 ¶ 98; Defs.’
56.1 ¶ 98 (internal quotation marks omitted)), and subsequent contradictory actions of
immediately reselling the stock, (see SEC’s 56.1 ¶ 62; Defs.’ 56.1 ¶ 62), resulted in the
supplying of false information to issuers and created a significant risk of substantial loss to the
investing public. Defendants knew such information was misleading to issuers and “capitalized
on the misinformation [Defendants] helped disseminate, reaping millions in profits over the
course of several years.” Universal Express, Inc., 646 F. Supp. 2d at 568.
Defendants’ argument that their good faith reliance on counsel warrants imposition of
minimal or no civil penalties is unpersuasive. (See Defs.’ Opp’n 23–25.) To rely on the advice
of counsel as a defense to wrongdoing, a defendant must “show that he made complete
disclosure to counsel, sought advice as to the legality of his conduct, received advice that his
conduct was legal, and relied on that advice in good faith.” Markowski v. SEC, 34 F.3d 99, 105
(2d Cir. 1994). Here, Defendants’ argument fails because his disclosure to Sourlis and other
attorneys was not “complete.” Id. In a typical “Opinion Letter,” Sourlis stated that “[i]n
connection with this [O]pinion, [Sourlis] [has] reviewed . . . [the] Subscription Agreement
executed by [E-Lionheart], including various representations of the parties therein.” (McGrath
Decl. Ex. 2, at TAR 0004583–84.) Section 5.1(b) of the Agreement stated that E-Lionheart
“maintain[ed] its principal place of business within the State of Delaware” and § 5.4(a) provided
that E-Lionheart “[had] not offered or sold any portion of the Shares to others or with a view to
reselling or otherwise disposing of any portion of the Shares.” (McGrath Decl. Ex. 3, at DEFS34
191909–10; SEC’s 56.1 ¶ 98; Defs.’ 56.1 ¶ 98 (internal quotation marks omitted).) The Opinion
Letter further stated that “[a]s to matters of fact, [Sourlis] [has] relied on information obtained
from . . . officers of [E-Lionheart]” and has “relied upon [E-Lionheart]’s assurances that it shall
make reasonable inquiry to determine that [E-Lionheart] has a legitimate investment intent in
purchasing the Shares.” (McGrath Decl. Ex. 2, at TAR 0004586.) These statements as to ELionheart’s principal place of business and investment intent were at best “incomplete,” and
more accurately, false.
Also, to the extent Defendants relied on the Jamison Opinion to determine their “actions
were . . . in accord with the securities laws of the State of Delaware,” (Defs.’ Opp’n 23), this
reliance is misplaced. Jamison’s Opinion spoke directly to that of Sourlis’ Opinion Letter,
which, as noted, was based upon Defendants’ proffer of false information.
As to the appropriate amount of civil penalty, the Court also considers “the extent to
which other aspects of the relief and/or judgment issued in this matter will have the desired
punitive effect.” Universal Express, Inc., 646 F. Supp. 2d at 568. Defendants will be required to
pay multiple millions in disgorgement and prejudgment interest and have been permanently
enjoined from engaging in further violations of § 5 of the Securities Act or trading in penny
stocks. These penalties “lessen the responsibility of the fine to provide a retributive and
deterrent effect.” SEC v. Credit Bancorp, Ltd., No. 99-CV-11395, 2002 WL 31422602, at *4
(S.D.N.Y. Oct. 29, 2002). Bronson has also recently declared bankruptcy, suggesting that his
ability to pay will be limited. In light of these considerations, a civil penalty of $875,000—the
minimum sum of a third-tier penalty for an individual and an entity—is appropriate.
For the foregoing reasons, the Court grants the SEC's Motion for Summary Judgment.
Accordingly, Defendants are hereby enjoined from committing further violations of§ 5 of the
Securities Exchange Act of 1933 and are barred from trading in penny stocks.
Defendants are hereby ordered to provide the SEC with a calculation of their transaction
expenses for the purpose of calculating the disgorgement figure within seven days of the date of
this Opinion & Order. The SEC is to submit a revised prejudgment interest calculation based on
the revised disgorgement amount, and a proposed final judgment within seven days thereafter.
The Clerk of Court is respectfully directed to terminate the pending Motion. (Dkt. No.
White Plains, New York
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