Monday, July 11, 2016

Court affirms judgment against attorney who wrote false opinion letter

By Kevin Kulling, J.D.

The Second Circuit Court of Appeals has affirmed a district court’s determination that an attorney violated Section 5 of the Securities Act when she produced an attorney opinion letter supporting an exemption from registration that contained false statements. The court also upheld the lower court’s finding that the attorney was liable for aiding and abetting violations of Section 10 and Rule 10b-5 (SEC v. Sourlis, July 8, 2016.)

Attorney opinion letter. The action arose out of the distribution of unregistered shares of Greenstone Holdings, Inc., which sent to its stock transfer agent legal opinion letters that supported an exemption from registration under Rule 144(k).

The defendant, attorney Virginia Sourlis, wrote one of the opinion letters in which she concluded that Greenstone shares could be issued without a legend. In her letter, Sourlis represented that the shares could be issued in exchange for convertible promissory notes that had been issued by a predecessor before January 2004. Sourlis wrote that the original convertible notes had been held for at least two years prior to the assignment and that none of the vendors were affiliates of the company under Rule 144. The district court granted the SEC’s request for summary judgment after concluding that the convertible notes did not even exist and representations made by Sourlis were false.

Section 5 liability. The appellate court said that it saw no error in the district court’s conclusion to grant summary judgment on the Section 5 violation. It was undisputed that the Greenstone shares were not registered, the court said. It was also established that Sourlis opined that shares could lawfully be issued as unrestricted shares to recipients who were acquiring them in exchange for certain convertible notes, the court said.

Sourlis wrote that she was relying on “information and representations furnished by the Original Note Holders to me,” and that “I have been informed by the Original Note Holders” that none of them were affiliated with the issuer and that the Original Note holders had owned the notes for at least two years.

The Second Circuit said that on the basis of her letter, shares were issued as unrestricted shares allowing them to be sold to the public despite that fact that they were unregistered. The appellate court agreed with the district court’s determination that her role “satisfied the requirement” that she directly or indirectly offered to sell securities. The transfer agent, who required a legal opinion letter providing the authority to issue the unregistered shares without a restrictive legend, would not have issued the shares without Sourlis’ letter. This, the court said, was sufficient to hold an attorney liable under Section 5.

Aiding and abetting. The appellate court also upheld the district court’s finding that Sourlis was liable under Section 20 of the Exchange Act because her letter aided and abetted violations of Section 10 and Rule 10b-5.

On appeal, Sourlis argued that she had no actual knowledge that her letter would be used for the issuance of unrestricted stock a year later. But the appellate court found no error in the district court’s rejection of Sourlis’ arguments. The letter itself made clear that its purpose was to state whether unrestricted stock could be issued in exchange for the supposed notes, the court said. Its misrepresentations underlying its conclusion that such shares could be issued without a restrictive legend plainly enabled the transfer agent to issue, in exchange for nonexistent notes, unrestricted stock that was then sold by the recipients, according to the court.

The court also said that the requirements of Section 20 had been met because Sourlis elected not to insist on seeing the notes discussed in her letter, which was at the very least reckless, and her misrepresentations that she had spoken to the original note holders were misrepresentations as to her knowledge and hence were knowingly false.

Relief affirmed. The appellate court also upheld the district court’s order of relief that included an order that Sourlis pay $57,284 as a civil penalty, disgorgement, and be permanently barred from participating in penny stock offerings. Sourlis was also suspended as an attorney for a time. The appellate court saw no abuse of discretion, given what it called her lack of concern as to whether her representations of fact were true or false and her continued manifestation of a lack of concern for her responsibilities under the securities laws.

The case is No. 13-3191-cv.

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