up the briefing in this case is fairly extensive i wanted to begin at the end of it and then move back to a couple broader points and that point at the end i wanted to began my remarks with this morning is this question of mr callinan's status as an accredited investor such as the briefing goes on the s c c's side of the issue they say well if anything else there's issues of proof there and it is worth taking a moment just to center  it's real five on a par five you have a natural person with that worth over a million dollars you have some part six natural person with income over two hundred thousand for two years and some part eight to entity in which its owners it is late i don't but let me let me jump to the end of it and talk about why it's still relevant even if everything that the court is concerned about is correct remedy in this case is defined by a number of different factors and a relevant factor of remedy comply with the regulation and with requirements of being a credit investor the fact is it's very good evidence and it removes any doubt about the point that he isn't a credit investor it's not really a clash of those points if it would be relevant i missed a year or got a year or got a year here to show that there was good faith that was in the malefactor it person abusing that river of vision it's certainly relevant to show his full compliance so at the very least of the issue of remedy the fact that there's evidence of compliance investor well we we or you at the beginning of the state of the facts he's an accredited investor it's part of the reasons but that's part of the diligence that he did in building up his business to begin using this exemption and we talk about remedy it's in that discussion the other judges say is not in correct i just think of them are just barrels of there's more answer to this going back to the liability stage i suggest we look at the full record because it's all here but let's go back to what's there that record shows it's not the complaint says nothing about this this is not a claim the f c c was pursuing mr caleb for he's given all this information in the f c c in our briefing on our motion we say here's what the regulations require he complied with that the standard of course secondly is not simply that he be it he can also the issuer can have a reasonable belief that the person is a credit bester let's not get into that i really don't think a credit investor is i last point on this and i'll move to that is i want to just close off this question because there were other questions the original submissions about mr kalam status talked about the multi million dollar property he had in taxes that he had wired well before he began doing any of these transactions and that multi million dollar assets is sufficient to at least raise some fact issue of the argument judge jones was just making about his status but let's let's talk about the other elements of this of this exemption and the other doctrines about it that have been cited by the f c c and let's begin with what is most recently stated by the f c c i've tried to find a word to describe what has happened with this rule in the last few months of the beginning of this year and the word i came to was the when this regulation was first of act there were statements made by the commission and by various spokesman of the commission about how it was going to enhance the ability of small businesses to get seed capital the reinforcement actions on number of facts fact pattern since then we come to this year and we have a new right we have an reiteration of that regulation with these relevant aspects they recognize the exemptions they are doesn't go away they recognize that following the exemption produces free trading shares so that ends the connection to the registration rules you have a you have nothing in the restated reiterated regulation about this geographic nexus issue and you have the repeal of a related regulation that did not result in free trading shares rule five zero five it had a five million dollars cap that rule goes away the five million dollars moves over to rule five you know that's sort appealing but if but if you go on forty five in a thirty mile an hour zone you have to pay the fine even if they change the change the speed limit to fifty a few weeks later so i'm not sure that it's certainly is the connection that makes these unregistered securities my for validly my understanding was that these five o four allows the seed capital company in a particular state like texas to take advantage of an absence of of the of an exemption and then they can sell to you do in texas a third texas religious issue or to begin with but i don't see how the person who is purchasing the securities can buy them from china or from or new york and have  you lived in texas i don't see how as the purchaser of securities from somewhere else can claim the benefit of the simpsons but the the of the sub parts of b cite the whole reg but that it as i interpret it if you issued the securities in a state where there is no regulation or there's an exemption then you can sell them requires registration they can be sold to callan and callan can resell but i think the the what they are challenging is you're buying securities that are from all over the world and just because you're in texas and my misunderstanding that well the texas exemption itself to start that work my way back to texas exemption self has no limit to taxes it says if the registration requirements otherwise control in this state do not apply if the sales are made to a credit investors as defined by the federal reps and that now there are other exemptions texts but the relevant one just says that some texas which knows how to put limitations on things did not do so in that limitation then you go back to the broader question of how did these markets work how do we get the capital where did your client get an opinion from the texas police office about that there is extensive back and briefing i mean other than all this you know stuff about due diligence if if the what the sites run back to his declaration is a series of he discovers it investigates it further and then there's a tick tick tick set of e mails and and other items he just gets from the government including a publication that was available at the time from a lady named proffering was the head of that office that was circulated around this time explaining exactly what i just set the limitation in the rule the only one and the only one discussed in the paper about that particular exemption has to do with the intent of the person using the exemption which is that they cannot be the language and it is investment is not defined term i'd suggest that by reference to the underwriter provisions and other rules it simply means you're not a member right or you're buying it you're assuming risk you're trying to make a profit which is exactly what my client did it to the point about the structure of the market you can you at some point there has to be a reality check on how the market works the stock market is every stock is sold here they're all around the world to the limit to see capital exemption to have a very specific set of sales a very specific place centrally moots it it writes in a limitation that is very carefully left out of this texas in this federal exemption because it's just not practical you just can't can't do anything with it that way it becomes a small ideas of every other state except for one that has any extra territorial effect it didn't do that it left that issue to the state but it's a twist of law should the parties agree to it and my man owns millions of dollars of real estate in texas he is a texas businessman he spent millions of dollars getting  plane restore he's got a business they are getting gauges in stock in the state but the question is is there some connection by t j management mr kale into texas which is the foremost question that we are having a stranger to the state absolutely is not he was a texas businessman before you ever heard of this and for a texas businessman to then expand that business and use the law of the state where he is is not a great reach it is not an expansion of texas sovereign power it is a choice of law issues being engaged in by a texas resident of one of the federal government could but chose not to and recently reiterated again that if the free trading shares resulted from qualifying state exemptions that do exactly what the tax exemption was when it made that statement to the markets not two months ago can't be yes and no at the same time and we can't read words into these regulations in the securities act aren't there but what's the worst of it missing from the three in other words beat b three says i have to question well you have time i still have two questions but one of them is the way you interpret b three it seems to me would swallow up be one and be to number one  because every everybody who trades in penny stocks would relocate to wherever they could get the benefit of the regulation sort of like southwick was saying and second is what is the know where does it say limit it says x according to what is the substance of the state law exemption and then what limitations are placed on that do they permit general solicitation advertising yes so long as they're made only to accredited record itself did not in fact have this evidence that they point to now to prove they had it investors status you can't really but he's a rich guy you wouldn't go after him if ask you see at least correct from your viewpoint that it affects the penalty doesn't it show that he was acting under even stronger evidence he was acting consistently with his understanding of the law say there are a number of other bases to bind on that this wasn't an inadvertent violation on his part but in addition to that the court looks to any number of factors in deciding whether to impose an injunction petty start bar including the recurrent nature of the violations we're talking about millions of shares a penny stocks over several years and so there are other bases but who are right that if this was the only basis on which a violation was found that would be relevant to the remedies determination but to move to what i think is the more substantive or one of several more substantive said that transactions have to occur exclusively according to the terms of state law exemptions exemptions bar and given that state law exemptions can only apply within their borders the supreme court has told that the extension of lies and there is no evidence showing where they strands actually occurred the only evidence we have in fact points to the possibility that they occurred elsewhere let me well let me ask you let me probe a little bit because if you in your motion in the different court you have a list of the companies that you don't and you have a footnote where they were incorporated and you are not contending that any of the underlying stocks had to have had a registration statement correct in other words my vintage baby was in texas and it was under the texas exemption from registration you said the none of the stocks had registration statement so i in turn for that to mean that he that he was at least buying stocks that were validly not subject to registration statement well if i think that he points to have complied with the  not asking that i'm saying he was because if it was a number if it was a good if the stock was exempt and then and so i understand your and maybe i have a fundamental misunderstanding but if the stock was exempt and my understanding is that the issuer of the stock could sell it to person a b c and that person could and roll five hundred specifically says that the exemptions there on your are only available to issue as they are not available to any person for resale and that applies here of the whole point in making the market i was trying to conceptualize that in my mind because i thought the whole point of making them clearly there was a preexisting market for these shares where did the market exist i mean he's not selling in the market he's not making the market the he is selling into a market that is pretty exhausting for good life china for viper industries for atlanta us where is the market is that the chicago as opposed to the city market is to new york where is the market that that the distinction here i think your honor is between the characteristics of the securities themselves and sort of whether they're respected her own restricted and then whether a transaction is exempt ordinarily war right your average investor can resell securities in the secondary market without any registration requirements the reason they can do that is not because section five of the registration requirement here is they were acting as an underwriter in these transactions why didn't you just charge him with being an underwriter because to me the grab a minute of your charge was that he was purchasing  securities and he couldn't resell them and so now what you in other words fired for the bronson case that was b one and b two and the theory there was essentially but he was selling not to an underwriter because there was a requirement that you sell to an institutional investor and he said his right hand was his and to tional investment company  well to be clear your honor we did raise the underwriter issue below and that's in our summary judgment papers where we talk about the fact that there isn't an ability to resell these securities without a separate exemption but it is when i get these securities from the issuers pursuant to five a four b one three they are quote freely tradeable and i can go trade them without worrying about the registration current that's simply not true well why  exempt securities what the appellant's are pointing to is the distinction between restricted securities and unrestricted securities or so called freely tradeable are freely transferable securities and that has to come directly from the issue are in a chain of transactions don't tell us the whole lot just tell us what the facts are here these are unrestricted security they were unrestricted securities unrestricted securities nonetheless can only be sold in transactions that are registered are except ordinarily unrestricted securities are very easily resold and this isn't a problem because a for a one because resales not by an issue or underwriting or dealer ar exempt so what so the only difference between a proper sale and an improper sale was the volume is that what you're saying now what i'm saying is the  a defined term under two eleven of the act and it is somebody who takes securities directly from the issuer with a view to distribution so this turns on whether he had a distribution often that's a difficult question was because if you look at intent to solve a lot courts have looked at objective factors like how long the suffered because you basically filed a fifteen page motion for summary judgment in the district court twenty page excuse me there was  very what is to me at least a very complex area of the law i take your point your honor i will say that part of the problem may have arisen from the fact of the way its section five bronson so maybe there were a c c enforcement actions there and there are some administrative cases commission opinions but i think you know the a plug ability of b one three itself you're right there are not a lot of recorded cases on there and sort of the fact that you need to show that the offers are sales at issue take place in the jurisdiction in which the state exemption applies was has his defense that he relied on statements of counsel opinions of counsel through and he was and he was dealing with a whole bunch of institutional type purchasers on the other side so do you think i mean if that what i mean what what what were their rights beats a v v securities if he's liable why isn't goldman sachs well a couple of points your honor first is very clear and well established in the law that this is a strict liability violation so good faith reliance on subscription agreement he signed which are what traveled with these transactions through the attorneys issuing opinion letters and through the brokerage houses did not document the reality of the transactions he specifically represented and that he took these with investment intent and not with a view to distribution of you to distribution is a well established concept under the securities laws the distribution is the chain of transactions that gets secured is in the first instance to the public well and in this context and i don't want the whole background i mean this context suppose this was my vintage baby in texas he buys five percent of the stock he then and he keeps two percent and then he so three percent what is wrong with that a couple of is it doesn't depend on volume of sales what it depends upon and it doesn't depend upon the location of the sale but in other contexts known there holding period so i mean the f c c is at least told people that you can hold the stock like after an initial offering i know very little but i you know you can hold the stock for an x amount of time and then you can resell it without having to be called an underwriter that's correct you know that there's nothing like that to clarify the law here well but the content of the distribution is precisely the same throughout the securities law as i think what you're referring to is rule one forty four which is a safe harbor for something not to be considered a distribution and therefore you're not an underwriter if you look at that rule of one forty four at the at the very beginning of the preliminary note it explains this quite explicitly and what the preliminary note of one forty four tells you is that distribution depends upon the intent of the purchaser when they buy that is a difficult thing to prove quite often so what are the factors courts looks to and the commission has looked to or the length of time in which you hold it or whether there is for example a change in circumstances between the purchase and sale so i bought these i provided suitable seed capital and an angel investor i want to invest in the small business i'm going to provide seed capital and wait and see how they do the next day my kid gets into stanford and i have to pay tuition and i mean to liquidate assets that's the kind of thing that might show you didn't purchase with an intent to distribute but here what you have from m them is their express intent to sell these securities as soon as practical as soon as market conditions were favorable and in fact what they did is sell them within days or we public in the first instance the primary market once the one securities have come to the public market then ordinary sales are in fact covered by for a while and hemp you've sold without any e and i realize you're here you know on short notice but maybe you can cite of a couple more cases about this well and i want to be clear on what the court is looking for which are cited in the briefing below and in our brief that have involved the one three but they don't really delve into this issue but if what the court is looking for is authority for the proposition that the sales of unrestricted securities assume he took them correctly under view one three need to be exempt or registered there's there's no shortage but already on the act we can start out as but that is not because of five o four b one is it was argued below it is an independent grounds to affirm the summary judgment here in the sense that it is a well established and uncontested on the undisputed facts i would also point the court to the beginning of the c p apple release that's the one nine hundred ninety nine release that actually adopted the one three where this is a very explicitly laid out what the commission said there is five o four exemptions are only available to shores they're not available for resales that any resale needs to be registered or accent and that anybody who takes five zero for securities with an intent to distribute distribute or with a view to distribution is an underwriter and risk section five liability that is precisely what happened in this case i'm sorry but i'm going to ask you a couple more questions first one is if i focus quite a bit on the  the amended rule that came into effect did it materially change what the legal status of what occurred here not at all your honor and for several reasons first i do want to make a procedural point that that release was actually issued in november two thousand and sixteen so any arguments flowing from it were available prior to the opening brief in this case which was filed in december and argue it  here you did in his reply brief your honor and the january did he focuses on his reply brief is women about putting a person out of with anyway i'll take i'll take that you say it's not material so i'll accept that but we can look it up if we think you're made it doesn't change any of the material terms of the rule all it did was increase the offering limit from one million to five million and that i do have two questions about the proposed remedy and one of them is one of them has to do with your idea about what you call gross profits which is clearly gross revenue right gross revenue not gross profits being the measure here and the second one being the lifetime ban on trading in penny stocks because penny stocks are anything valued at four ninety nine or less and you can trade in a stock that's trading today at six dollars and tomorrow it can be down to four that that part you look at the final judgment and this case it's not a lifetime ban on any trading this is pacifically delineated in section twenty of the securities act which gives the authority for a penalty any stock bar and it is a bar participating in the firing of penny stocks offering a penny stocks is then defined in the act and that language is reflected in the final judgment here which is engaging with a broker dealer or issue this part just doesn't appear to be covered by that language and certainly the idea that he would be taken to court and found in contempt on that basis is far from action to to say the least  then with respect to offset that was argued for in this case for business expenses and fees i want to remind the court that we are talking about a discretionary remedy and the question for the court is whether this was an abuse of the lead or the guy down the street you would think that the judge would at least let him appear and make some argument i can't speak to the court's decision as to whether to hold argument i will plea not that the amount of discouragement here the calculation seven point seven million dollars in ill gotten gains is not in dispute and the only arguments were the entitlement to the offset right and have the judge heard oral argument he could have heard that there was no other case some bronson have dealt with the b one three exemption he might have gotten as confused as i have been about exactly what transactions you were saying were the illegal ones and he might have said you know let's give this guy the benefit of the doubt one hundred thousand acres or one hundred acres of land in dallas is not a small amount maybe you know maybe we ought to deduct something for the his claimed attorneys fees or whatever he the overwhelming weight of cases looking at this question have found that it's within the court's discretion to deny it and it's not unfair here in iran or when what we're talking about is the entirety of his business involved running these illegal  of in chicago you're of publishing establishment it's not there's no allegation of frog at all you're right there is not how you should have product i want to push back a little bit on the idea that this is a well established well organized market we are talking about penny stocks here penny stocks are typically traded over the counter without the ordinary keepers of an exchange with artistic requirements and information and we're by definition talking looked too easy the way the judge handled this and maybe my colleagues will disagree with me so i don't want to waste your time and i will i see my time is up and i will just conclude with the idea that the penny stock market is in fact a market where the information provided to investors by registration is particularly important you're talking about as i said transactions over the counter and issuers that are either  exemptions apply offering and so it could i don't know what types of offerings that were used for the other you know the preexisting securities what we're talking about is the back of securities that he took from the issuers in each of these hundred five fifty five transactions and so each offering has to be registered or exempt they can be registered or exempt in different ways so we don't know that they were all be one to be three speak to questions raised in the earlier argument and then turn to this issue underwriter status of judge jones the answer to your question about the role of b three compared to one in two in looking at the regulation again b three contains the limitation to accredited cave investors which does not appear in one and two so they have different baskets of sticks and that's a pretty significant stick distinguishing those second dispersions as to the market is a good place to look for the definition we cited the s our reply brief and get in turn cites this october report it's the work up to the regulatory agency must do in the course of promulgating new regulations beginning at page eighty six and going on for a while is the economic analysis of the new economic analysis of the regulation as read over and expand that talks about limitation to taxes or to any state it talks about aggregate dollar amounts of all of the transactions done under five before it gets rid of five o five which require which did not result in free trade and shares and it says we need more of those there's no word of the economic analysis on the geographic section we're not saying or some get out of free card jail free card we've got as a result of the new regulation what we are saying is the facts of this case cannot be reconciled to what the f c c says about their new regulation and the support for it in terms of the economic impact they hope it has with respect underwriter status with that regulations talk about those rules we're talking about is the big investment banking house someone so goes public the underwriter gets it it sells it to the public it assumes no risk because there's a pre sales it's going to get the stock it's going to turn around it's going to sell it you see the ads  the time but it's that's we've said there's some sweeping about this in the district court but it's it's because it didn't become a big issue on appeal but that's just the definition that's the fact pattern and if you look at the regulations of already is about it that's what it deals with let me illustrate the flipside of that which is the language in the state regulation it says investment intent that just means you're trying to make money you have to be able to sell things to make money the commissions argument that intends to resell necessarily makes you an underwriter makes anybody who plans to sell securities an underwriter but you also say that is the standard measure of what the intent was and whether you're lying for your distribution is the fact pattern how quickly you do that it seems to be are you disputing that that is the standard measure of determining whether you are an underwriter or no it's it's absurd i'm just suggesting that there's different risk factors do you look at but practically what those are talking about is the difference between the underwriter basis he took that risk no guarantee he could get it back that's not underwriting the fact he may have taken a greater risk to exempt him from the rules it seems to me that the whole purpose of this is that the initial purchaser from the issue and both of them sell stock that's what the commission says both make sales a good stock and you need a registration but that's the hope the whole point of this is we got free trading shares she says they must be registered unless otherwise exempt and that's her point yes and it applies home it applies and if it does it's free trading shares and we can sell it and the reason we're trading fast is the market moves been bing bing bing bing pinball machine it's not the new york stock exchange you have to move quickly when you see opportunity fast could be a week we hold a little bit here a little bit there a little bit the other way admittedly it's a fast moving market but there's no timing required the other way there are timing requirements for how long an underwriter must hold stock there is no such requirement here anywhere in any of these exemptions how long does it have to be it's a fast moving stock and highly volatile securities with a man who assumes all the rest that is not with an underwriter is intended to be any observation  given general principles of restitution just by my client had significant expenses lawyers dealing with thousands of operating and he may profit it's not for years just dropped a footnote about disgorgement and there are of the other day over time that i would have as to remedy your honor is the court as an observer and they were in the circuit because there is a texas connection i've managed babies where this got started in the plane of division so there are transactions sort of that involve taxes if the court approaches even made it at least the texas stock it should be pooled out or has it already pulled out you have not made that argument but it's one of things and we're here to try to figure out which room getting these new arguments here getting the reply brief is not t there we operate on just as i'm sorry i'm rambling on it was asked him did you make the argument before that there's anything wrong with look at how this calculation was made you either win or you lose it's not that it should be six