By Rodney F. Tonkovic, J.D.
A Second Circuit panel has affirmed by summary order a district court judgment finding an attorney liable for issuing false opinion letters. There was no dispute that the shares at issue were not registered and that the statements in the letters were false (SEC v. Frohling, November 8, 2016, per curiam).
The Commission brought the underlying enforcement action in connection with public offerings of unregistered shares of Greenstone Holdings, Inc. The district court found that attorney John Frohling, Greenstone's securities counsel in 2006-2008, wrote, approved, or concurred in 11 opinion letters stating that the shares could lawfully be transferred as unrestricted shares. The letters cited the Rule 144(k) exemption as it existed at the time and said that the shares were acquired by persons unaffiliated with Greenstone solely in exchange for other Greenstone securities they had received more than two years earlier.
Opinion letters were false. On appeal, Frohling maintained that he had no knowledge that the opinion letters that he issued, approved, or concurred in were false, or any knowledge that would alert him to that falsity. The court stated, however, that there was no dispute that the Greenstone shares at issue were not registered and that that the statements in the letters were false. Frohling wrote or approved opinion letters stating that the unregistered shares may be issued without restriction and without a legend identifying them as restricted. Without these opinion letters, the court said in agreement with the district court, Greenstone's transfer agent would not have issued any of the unregistered shares. The panel found no reason to disturb the district court's conclusion that Frohling violated the registration provisions of the Securities Act.
The panel agreed further with the district court's finding that a jury could not find that Frohling did not know that the letters' representations that the Greenstone shares were exempt were false. To illustrate, Frohling admitted at his deposition that he knew that at least some of the shares were being improperly sold for new consideration. Frohling also wrote two opinion letters to receive shares himself, opining that the exemption applied, despite knowing that he received the promissory note in exchange less than the required two years earlier. The panel concluded that the record amply showed that there was no genuine issue to be tried as to Frohling's knowledge that his representations as to the applicability of the Rule 144(k) exemption were false.
Relief. The panel went on to affirm the district court's order of injunctive relief, plus disgorgement, prejudgment interest and civil penalties totaling $204,161.86. The panel saw no abuse of discretion, given the fees received by Frohling for the fraudulent opinion letters and his lack of concern for his responsibilities under the federal securities laws.
The case is No. 13-3191-cv.