A federal court determined that a New York-based firm and its principal that transacted in unregistered securities were not exempt from the SEC’s registration requirements, despite claiming an exemption due to a “virtual office” located in Delaware. The court granted summary judgment to the SEC, imposing a penny stock bar and permanently enjoining the defendants from further violations. However, the court requested additional documentation from the SEC regarding the issue of disgorgement, and imposed the minimum third-tier penalty on the firm’s principal (SEC v. Bronson, March 27, 2017, Karas, K.).
Unregistered securities. E-Lionheart Associates was formed as a Delaware LLC in 2005 by Edward Bronson, the firm’s sole managing member. E-Lionheart would contact issuers expressing interest in buying their securities, which, if purchased, were resold almost immediately after the stock was cleared for trading. The securities at issue in a complaint filed by the SEC were not registered with the Commission. The transactions took place almost exclusively in New York.
E-Lionheart began renting a “virtual office space” in Wilmington, Delaware, beginning in 2009. However, according to the SEC, transfer agents were instructed to send stock certificates to E-Lionheart’s New York offices or brokerage firms, and no E-Lionheart employee ever worked from or visited the company’s virtual office in Delaware. Nor did the defendants send proceeds of sales to addresses in Delaware.
The SEC’s complaint charged Bronson and E-Lionheart with violating the registration provisions of the Securities Act. The defendants moved to dismiss, claiming an exemption from registration requirements under Delaware law. The court rejected this argument, finding that there was not a sufficient nexus between the defendants and Delaware to take advantage of the provision. The SEC then moved for summary judgment.
Delaware nexus. As a preliminary matter, the court disagreed with the defendants’ argument that because not all the 63 issuers cited in the complaint were named, the defendants were unfairly prejudiced. The court found that the transactions at issue were specifically identified as illustrative by the SEC. It also advised that the defendants were put on notice about the transactions during the discovery process.
The court stood by its earlier analysis that the transactions did not qualify for a registration exemption. Rule 504 provides an exemption for offers and sales of securities that are conducted according to state law exemptions from registration that permit general solicitation and advertising, so long as sales are only made to accredited investors. The Delaware state law provision cited by the defendants applies only where “there is a sufficient nexus between Delaware and the transaction at issue.”
The court held that the defendants had not cited any case law that the maintenance of a “virtual office,” the payment of franchise taxes, and a choice-of-law provision amounted to “collectively” sufficient contact with Delaware to render the Delaware law, and thus the SEC exemption, applicable. “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,” the court proclaimed, and granted the SEC’s motion for summary judgment.
Sanctions. The court also granted the SEC’s request for a penny stock bar and permanent injunction, finding that the violations were not isolated, but continuous and systematic, as well as a lack of acknowledgement of wrongdoing by the defendants. For similar reasons, the court also imposed a third-tier penalty on Bronson; however, acknowledging his recent bankruptcy in addition to the other sanctions imposed, the court set it at the minimum of $875,000.
Sanctions. The court also granted the SEC’s request for a penny stock bar and permanent injunction, finding that the violations were not isolated, but continuous and systematic, as well as a lack of acknowledgement of wrongdoing by the defendants. For similar reasons, the court also imposed a third-tier penalty on Bronson; however, acknowledging his recent bankruptcy in addition to the other sanctions imposed, the court set it at the minimum of $875,000.
In addition, the court sided with the SEC in ordering the defendants to pay disgorgement and prejudgment interest. However, the court agreed with the defendants that they are entitled to an offset for expenses to be deducted from the disgorgement figure, and ordered the SEC to submit a revised disgorgement figure reflecting this matter.
The case is No. 12-cv-6421.