Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_01-cv-03376/USCOURTS-cand-3_01-cv-03376-3/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:77 Securities Fraud

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SECURITIES & EXCHANGE COMMISSION,

Plaintiff,

v

M & A WEST, INC et al,

Defendants. /

No C-01-3376 VRW

ORDER

Plaintiff Securities & Exchange Commission (the

“Commission”) moves for summary judgment against defendant Stanley

Medley (“Medley”) on its claims against him for:

(1) offering and selling securities when no registration

statement had been filed and no exemption from registration was

available, in violation of sections 5(a) and (c) of the Securities

Act of 1933 (the “Securities Act”), 15 USC §§ 77e(a) and (c); and

(2) acting as a broker without being registered with the

Commission in accordance with section 15(b) of the Securities

Exchange Act of 1934 (the “Exchange Act”), in violation of section

15(a) of the Exchange Act, 15 USC § 78o(a). Doc #109. 

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For the reasons that follow, the court GRANTS IN PART the

Commission’s motion relative to claim (1) and sua sponte GRANTS

summary judgment in favor of Medley on the Commission’s claim (2).

I

A brief background on the applicable securities law will

lay the foundation for the somewhat intricate facts of this case. 

Section 5 of the Securities Act prohibits the unregistered sale of

securities. Registration is required on a transaction-bytransaction basis; securities themselves are not “registered” once

and for all. Registration is an often expensive and time-consuming

process of making certain reports to and obtaining authorization

from the Commission to sell a security. As such, section 4 of the

Securities Act provides exemptions from the registration

requirement under circumstances where registration -- which is

intended to provide full disclosure to the investing public --

would serve little purpose. The most obvious example of such a

circumstance is a securities transaction between two members of the

investing public who are unaffiliated with the issuer of the

securities. Such investors possess no special knowledge about the

issuer and are thus on equal footing in making their trade.

Such trades are exempted from the section 5 registration

requirement by section 4(1), which exempts “transactions by any

person other than an issuer, underwriter, or dealer” -- the belief

being, presumably, that issuers, underwriters and dealers (but no

one else) have information superior to that possessed by the public

at large. This case is about whether Medley was an “underwriter”;

that term has a particular statutory definition under section 2(11)

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of the Securities Act. An underwriter is someone who has purchased

securities from an issuer (or an affiliate of an issuer) with a

view to the (public) distribution of those securities. As the

court will discuss in greater detail below, Medley’s status as an

underwriter turns on whether he took shares from an affiliate (a

person or group of persons controlling or controlled by an issuer),

or escaped the statute by clever sequencing of his transactions.

As for the Commission’s unregistered broker claim, the

operative statutory language is the definition of “broker” in

section 3(a)(4)(A) of the Exchange Act: “any person engaged in the

business of effecting transactions in securities for the account of

others.” Although this language is somewhat opaque, the court has

not been supplied with further interpretive guidance.

II

This case arises out of the activities of M & A West, Inc

(“M & A West”) and its affiliates; M & A West can fairly be

described as a sham incubator for startup companies. Although

other defendants (M & A West, Scott Kelly, Salvatore Censoprano,

Zahra Gilak and Frank Thomas Eck, III) are charged in the complaint

(Doc #3) with stock manipulation and accounting fraud, the claims

against Medley are limited to selling securities when no

registration statement had been filed and acting as an unregistered

broker. Moreover, the claims against Medley arise only from his

facilitation of and participation in so-called reverse merger

transactions, while the claims against other defendants arise not

only from these reverse mergers but also from M & A West’s

operations and those other defendants’ allegedly fraudulent

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transactions in the securities of M & A West and related companies.

As this is a summary judgment motion, the court must

determine whether genuine issues of material fact exist, resolving

any doubt in favor of the party opposing the motion -- here,

Medley. “[S]ummary judgment will not lie if the dispute about a

material fact is ‘genuine,’ that is, if the evidence is such that a

reasonable jury could return a verdict for the nonmoving party.” 

Anderson v Liberty Lobby, 477 US 242, 248 (1986). “Only disputes

over facts that might affect the outcome of the suit under the

governing law will properly preclude the entry of summary

judgment.” Id.

That said, the court works here from a record without

genuine disputes of material fact, as suggested by the absence in

Medley’s papers of any detailed discussion of the merger

transactions at issue. See Medley Opp (Doc #120) at 2-7; Medley

Decl (Doc #121). Indeed, at oral argument, Medley’s counsel

volunteered that she did not contend there were issues of material

fact with respect to the structure of the transactions at issue. 

To be sure, Medley discusses at great length his contentions about

his role in the transactions and the disposition of his proceeds

from the transactions. These contentions may be relevant to the

scope of relief to which the Commission is entitled (a question for

another day), but as will become apparent, Medley’s factual

contentions are immaterial to the instant motion, which is only

directed to Medley’s liability. Accordingly, what follows are the

undisputed facts about the reverse mergers that Medley facilitated.

A “reverse merger,” as used herein and in the parties’

papers, is a transaction in which a private operating corporation

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“Ex” citations refer to the exhibits to the Declaration of 

Elena Ro (Doc #110).

5

(a “private” company) merges into a corporation whose stock has

previously been offered to the public (a “public” company). 

Typically, the public company will at the time of the reverse

merger be a “shell” company with minimal assets and liabilities and

no actual operations. To complete the securities aspect of the

reverse merger, the public shell company will exchange its treasury

stock (along with, perhaps, shares from its stockholders) for all

outstanding shares of the private company, and in consideration,

the shareholders who control the public shell company will transfer

most of their shares in the shell company to the owners of the

private company. Often the public shell company will take on the

name formerly used by the private company, and operations will

carry on as before, except the formerly private company is now an

issuer of publicly traded securities. The overall transaction thus

provides a way for the private company effectively to offer its

stock to the public.

Medley would work with the shareholders of private

companies to execute such reverse mergers by identifying suitable

public shell companies and by, at a minimum, preparing the

documents for the reverse mergers and coordinating among the

various parties to the reverse mergers. See, e g, Medley Testimony

(Ex 21

) [hereinafter “Test”] at 50; Medley Deposition (Ex 1)

[hereinafter “Depo”] at 24, 31-32.

Because the reverse mergers -- four are at issue -- are

central to the claims against Medley, the court will discuss them

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in some detail. 

(1) The first of the four reverse mergers was between

VirtualLender.com, Inc (“Virtual Lender”) and Golden Chain

Marketing, Inc (“Golden Chain”). Virtual Lender was a subsidiary

of M & A West engaged in the business of selling mortgages over the

Internet; Golden Chain was a public shell company with no business

operations. Medley “work[ed] on” this reverse merger by, at a

minimum, “communicating” between Virtual Lender’s owners and Golden

Chain’s owners. Test at 49-51. The reverse merger was contracted

for in a “reorganization and stock purchase agreement,” Ex 5, in

which Medley’s nominee (Robert Bryan) was to receive 100,000 shares

of Golden Chain stock, id §1. Ultimately, it was Fordee Management

Company (“Fordee”), which Medley owned, that received the shares. 

See Ex 7 (Fordee account statements). The Virtual Lender reverse

merger agreement was made by Golden Chain by shareholders owning

not less than approximately 75% of Golden Chain’s outstanding

stock. Ex 5 § 1.

(2) The next reverse merger was between M & A West and

Buffalo Capital IV, Ltd (“Buffalo IV”). Again, Medley was

involved, at a minimum, in facilitating the transaction. See Exs

11, 12 (correspondence from Medley related to drafting of stock

purchase agreements). Unlike the Virtual Lender transaction, the M

& A West transaction was to proceed in two steps on successive

days: First, Buffalo IV would issue new shares and transfer those

shares (along with some of its stockholders’ shares) to M & A West

in exchange for all of M & A West’s outstanding shares, upon which

Buffalo IV’s officers (also its stockholders) would resign. The

issuance of the new shares would also dilute the existing Buffalo

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IV shareholders’ holdings considerably, and the exchange of all of

M & A West’s shares would cause M & A West to become a subsidiary

of Buffalo IV. On the next day, Buffalo IV’s shareholders would

deliver most of their shares to the former shareholders of M & A

West for fairly nominal cash consideration, also delivering 110,000

shares to Medley’s nominee (again, Robert Bryan). See Ex 10

(various agreements executed to this end). As with the Virtual

Lender transaction, it was Fordee that actually received the

shares. Exs 13, 14 (directions from Medley that shares be

transferred to Fordee); Ex 7 (Fordee account statements). The

agreement embodying the first stage of the M & A West transaction

was made by Buffalo IV shareholders owning not less than

approximately 75% of Buffalo IV’s outstanding stock. Ex 10 § 1. 

These same shareholders separately executed stock purchase

agreements embodying the second stage of the transaction. Ex 10.

(3) The next reverse merger also appears to have

employed a two-step structure like the M & A West transaction. 

Medley was involved in the reverse merger of Workfire.com

(“Workfire”) into Buffalo Capital VII, Ltd (“Buffalo VII”). See

Exs 16, 17 (correspondence from Medley related to Workfire). The

agreement embodying the first stage of the Workfire transaction is

similar to the shareholder agreement embodying the first stage of

the M & A West transaction. Ex 19. The Commission has

supplemented the record to provide the court the complementary

stock purchase agreement for the second stage. LaMarca (Doc #131)

Ex 19B. Moreover, the shareholder agreement provided that Medley’s

nominee (again, Robert Bryan) was to receive shares in the

transaction, see, e g, Ex 19 at §§ 3, 5. There were also draft

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agreements to embody the second stage of the transaction, Ex 18,

and Medley testified that he received stock in the Workfire

transaction, Test at 197-98 (discussing Workfire shares Medley

held). As in the previous transactions, Fordee ultimately held

Medley’s Workfire shares, see Ex 7 (Fordee account statements), and

the stockholder agreement embodying the first stage of the Workfire

transaction was made by Buffalo VII shareholders owning not less

than approximately 75% of Buffalo VII’s outstanding stock. Ex 19 §

1.

(4) The final reverse merger was completed using the

same two-stage structure. Again with Medley’s assistance, Digital

Bridge merged into Black Stallion Management, Inc (“Black

Stallion”), a public shell company. See Test 48-49, 154-55. The

structure of the transaction was apparently the same as the M & A

West transaction, with one agreement embodying the dilution and

stock swap, Ex 22, and other agreements (again, not before the

court as of this order) for the subsequent purchase of the Black

Stallion shareholders’ stock, see id § 17 (describing the stock

purchase agreements as conditions subsequent). Again, the

Commission has supplemented the record to provide drafts of the

stock purchase agreements embodying the second stage of the

transaction. LaMarca Decl (Doc #131) Ex 22C. Fordee and Robert

Bryan were to receive shares of the merged entity in the

transaction, id, and indeed, shares of the merged entity were held

in a Fordee brokerage account, see Ex 25 (Fordee account

statements), or the account of Byzantine Investments, Inc

(“Byzantine”), another entity controlled by Medley, see Ex 26

(Byzantine account statements). Finally, as with the other

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transactions, the stockholder agreement embodying the first stage

of the Digital Bridge transaction was made by Black Stallion

shareholders owning not less than approximately 75% of Black

Stallion’s outstanding stock. Ex 12 preamble.

In the months following these transactions, Fordee and

Byzantine sold to the public in market transactions many of the

shares acquired in the four reverse mergers. See Ex 7 (detailing

sales of Virtual Lender and M & A West stock); Ex 25 (detailing

sales of Black Stallion / Digital Bridge); Ex 26 (detailing sales

of Black Stallion / Digital Bridge). From the materials before the

court, it does not appear that Medley sold any Workfire stock, and

Medley himself states in his testimony that he “never sold a share

of Workfire” and still “ha[s] all the shares of Workfire, mainly

because I thought it had a lot of potential and I didn’t think it

was worth selling any shares.” Test at 197-98. Medley was unaware

of any registration statement filed with respect to his

transactions in the securities of any of the four companies, Depo

at 61, and there is no evidence that any such registration

statements were in effect.

III

The Commission moves for summary judgment on both its

claims: (1) violations of sections 5(a) and (c) of the of the

Securities Act, 15 USC §§ 77e(a) and (c), which concern

unregistered purchases and sales of securities, and (2) violations

of section 15(a) of the Exchange Act, 15 USC § 78o(a), which

prohibits the unregistered operations of brokers. The court takes

them in turn.

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A

Section 5 of the Securities Act provides in relevant

part:

(a) Unless a registration statement is in effect as to a

security, it shall be unlawful for any person,

directly or indirectly --

(1) to make use of any means or instruments of

transportation or communication in interstate

commerce or of the mails to sell such security

through the use or medium of any prospectus or

otherwise; or

(2) to carry or cause to be carried through the

mails or in interstate commerce, by any means

or instruments of transportation, any such

security for the purpose of sale or for

delivery after sale.

* * *

(c) It shall be unlawful for any person, directly or

indirectly, to make use of any means or instruments

of transportation or communication in interstate

commerce or of the mails to offer to sell or offer

to buy through the use or medium of any prospectus

or otherwise any security, unless a registration

statement has been filed as to such security * * *.

As noted above, there are exemptions to these rules. Of relevance

here is the exemption in section 4 that “[t]he provisions of

section 5 shall not apply to -- (1) transactions by any person

other than an issuer, underwriter, or dealer.”

Medley asserts that his transactions were within the

section 4(1) exemption (or Rule 144 promulgated under the

Securities Act); the Commission contends that Medley was an

“underwriter” as the term is defined section 2(11) of the

Securities Act (a “statutory underwriter”), and therefore not

entitled to the section 4(1) exemption. The dispute thus turns on

whether, in the transactions described above, Medley was a

statutory underwriter as defined in section 2(11) and interpreted

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in Rule 144 (“Persons Deemed Not to Be Engaged in a Distribution

and Therefore Not Underwriters”).

To be clear, the court does not understand the Commission

to base its section 5 claim solely on the transfer of securities to

Medley from the shareholders of the public shell companies. 

Standing alone, those transactions would arguably fall within the

section 4(2) exemption for “transactions by an issuer not involving

any public offering” or the so-called “4(1-1/2)” exemption, see,

e g, United States v Lindo, 18 F3d 353, 358 (6th Cir 1994). Those

transactions were apparently among sophisticated parties who had

substantial access to information regarding the issuer’s business

condition, a situation with which the securities laws are not

typically concerned. See SEC v Ralston Purina Co, 346 US 119, 125

(1953) (noting that “[a]n offering to those who are shown to be

able to fend for themselves is a transaction ‘not involving any

public offering’”). Rather, what the Commission challenges here is

the complete distribution of securities to the public, for which a

necessary ingredient was Medley’s subsequent sale of the securities

he acquired to the public at large through ordinary transactions in

the market.

With the transactions in mind, the court turns to the

definition of “underwriter” in section 2(11):

The term “"underwriter” means any person who

has purchased from an issuer with a view to, or

offers or sells for an issuer in connection

with, the distribution of any security, or

participates or has a direct or indirect

participation in any such undertaking, or

participates or has a participation in the

direct or indirect underwriting of any such

undertaking * * *. As used in this paragraph

the term “issuer” shall include, in addition to

an issuer, any person directly or indirectly

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controlling or controlled by the issuer, or any

person under direct or indirect common control

with the issuer.

This definition must be construed broadly so that the corresponding

exemption in section 4(1) will be construed narrowly. See SEC v

Blazon Corp, 609 F2d 960, 968 (9th Cir 1979).

If Medley was a statutory underwriter, it was because he

purchased securities from an issuer with a view to the distribution

of those securities. Given Medley’s sales in the months after

receiving the securities, there is no doubt that Medley purchased

the securities with a view to distribution in the Virtual Lender, M

& A West and Digital Bridge transactions. In the Workfire

transaction, there is at least a dispute of fact whether Medley

purchased with a view to distribution; he has apparently held the

securities for his own account since receiving them. As such, the

Commission is not entitled to summary judgment on a violation of

Section 5 with respect to securities involved in the Workfire

transaction.

Accordingly, the key remaining question with respect to

the other three transactions -- and the focus of the parties’

dispute -- is whether Medley “purchased from an issuer.” Medley

contends, at least with respect to the two-step transactions

(involving M & A West and Digital Bridge), that the Buffalo IV and

Black Stallion stockholders were not “issuers” within the meaning

of section 2(11) because they were not control persons of the

issuers. See, e g, Louis Loss & Joel Seligman, Fundamentals of

Securities Regulation 467-69 (Aspen, 5th ed 2004) [hereinafter

“Loss & Seligman”] (discussing control in the context of section

2(11)). In particular, Medley points out, the Buffalo IV and Black

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Stallion stockholders were neither officers or directors of their

companies (having resigned following the first stage of the

transaction) nor did they control a significant amount of stock

(their holdings having been diluted as part of the stock swap in

the first stage of the transaction).

The Commission urges the court to look behind the formal

two-step structure of the transactions to the underlying substance. 

In this connection, the Commission relies heavily on SEC v

Cavanaugh, 1 F Supp 2d 337, 363-66 (S D NY) (Cote, J), aff’d 155

F3d 129 (2d Cir 1998), which advanced (arguably in dictum) the

concept that two-step transactions such as those here should be

regarded as an integrated whole for purposes of applying a section

4 exemption.

The court agrees with Judge Cote’s thoughtful analysis,

but also finds it unnecessary to apply the rubric of integration to

the transactions here to reach the result the Commission urges. 

Neither the Commission nor Medley is attentive to the question of

what constitutes a “purchase” under section 2(11). To the extent

Medley and his compatriots believed they were complying with the

law, they acted as if “purchase” occurs only upon transfer of title

-- on the second day, in the second stage of the merger

transaction, at a moment when the shell company stockholders were

not control persons of the shell companies. The Commission does

not directly dispute this interpretation of “purchase,” although

the integration analysis the Commission offers is effectively an

argument about what components of a multi-stage transaction are

part of the same “purchase” transaction.

Rather than rely on the superstructure of an integration

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analysis, it is far more direct to interpret “purchase.” 

“Purchase” is not defined in section 2 (or elsewhere), but its

obverse, “sell” is defined in section 2(3): “The term ‘sale’ or

‘sell’ shall include every contract of sale or disposition of a

security or interest in a security, for value.” By extension, a

“purchase” includes every contract for purchase, irrespective of

when title may be transferred. Indeed, in this context, there

seems to be no relevant distinction between a purchase and a sale;

the lone use in section 2(11) of the undefined term “purchased”

rather than the defined term “sale” seems to be the product of

syntactical convenience alone.

The broad interpretation of “purchase” has ready

application to this case: Irrespective of when Medley obtained

title to the securities, there is no question that the contracts

for purchase were formed at a time when the Buffalo IV and Black

Stallion shareholder groups were undoubtedly control persons by

virtue of their substantial holdings (at least about 75%) and their

ability to direct the corporate reorganization. See also Loss &

Seligman at 467 (“[C]ontrol may rest with a group of persons * *

*.” (citing Arthur Children’s Trust v Keim, 994 F2d 1390, 1397 (9th

Cir 1993) (emphasis in original)). Indeed, even the documents

embodying the first stages of the transactions contemplate the

delivery of securities to Medley’s nominee. See, e g, Ex 10 § 6 (M

& A West transaction); Ex 22 § 17 (Digital Bridge transaction,

specifying performance of the second stage contract as a condition

subsequent to the first stage contract). The same analysis applies

to the Virtual Lender transaction; that transaction consists of a

single contract, making the analysis simpler still.

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It is of no moment that the parties may not have executed

the written contracts (in particular, the stage two stock purchase

contracts) until after the public shell company’s shareholders were

no longer control persons. A contract may be formed without

reduction to writing. In these transactions, the two instruments

were negotiated in tandem. See, e g, Ex 11 (transmission of both

draft agreements under one cover). Moreover, business sense

dictates that the two transactions could not be freestanding: The

first stage, standing alone, was overwhelmingly favorable to the

public shell company stockholders (who exchanged some nearworthless shares for the shell company taking over an operating

company). The second stage, standing alone, was overwhelmingly

favorable to the private company stockholders (who were allowed to

purchase the public shell company stockholders’ now-valuable shares

for a pittance). The two stages were complementary and necessarily

were entered into as part of a single implied or oral contract.

Medley’s response to the Commission’s arguments (which,

again, frames the issue largely as one of integration) is that he

acted in reliance on Rule 144. Rule 144, 17 CFR § 230.144, is a

“safe harbor” rule that specifies concrete conditions under which a

person will not be engaged in a distribution and therefore deemed

not to be a statutory underwriter. Rule 144 is somewhat intricate,

and the court need not discuss it in detail -- although a summary

of its operation may be found in Loss & Seligman at 430-34. The

issue here turns on whether the securities Medley received in the

reverse mergers were “restricted securities” within the meaning of

Rule 144(a)(3): If the securities were not restricted, Medley’s

subsequent sales were exempt from registration, pursuant to Rule

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144(k). If the securities were restricted, Medley was required to

hold the securities for one year under Rule 144(d)(1) -- something

he did not do (except, again, for his Workfire Shares).

Rule 144(a)(3) designates several categories of

securities as “restricted securities,” but only one category, Rule

144(a)(3)(i), applies here: “Securities that are acquired directly

or indirectly from the issuer, or from an affiliate of the issuer,

in a transaction or chain of transactions not involving any public

offering.” “Affiliate” is in turn defined by Rule 144(a)(1) in the

same way that the second sentence of section 2(11) expands the

definition of “issuer”; in short, affiliates are control persons,

which the Buffalo IV and Black Stallion stockholders were at the

time the transaction documents were executed. (And, again, for the

one-stage Virtual Lender transaction, it is undisputed that Medley

took his securities from an affiliate, making his securities

restricted under Rule 144(a)(3)(i).)

Accordingly, the question once again turns on the meaning

of a past participle -- section (2)(11) uses “purchased from an

issuer”; Rule 144(a)(3)(i) substitutes “acquired * * * from an

affiliate of the issuer.” The court has already construed

“purchased” to include contracts to purchase, and there is no

indication that the Commission intended “acquired” to be less

expansive than “purchased”; if anything, “acquired” encompasses

more than the simple cash-for-stock transactions suggested by

“purchased.” Furthermore, the court doubts that the Commission has

the authority to give a safe harbor in Rule 144 to conduct that

Congress itself has forbidden through sections 2(11), 4(1) and 5.

Finally, Medley makes a variety of arguments about

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positions the Commission has taken in the past, about whether his

conduct was clearly a violation at the time of the transactions,

about his reliance on counsel and so forth. These may all be

relevant to the remedies the Commission seeks -- injunctive relief

and civil monetary penalties must be based on a concern that the

defendant will continue to violate the securities laws and

therefore must be restrained or deterred from doing so. See Loss &

Seligman at 1057-60 (discussing civil monetary penalties); id at

1411-17 (discussing injunctions). But these arguments are

irrelevant to Medley’s liability for the offenses, because scienter

is not an element of the violation of the registration provisions

of the Securities Act. Aaron v SEC, 446 US 680, 714 n5 (1980)

(Blackmun, J, concurring in part and dissenting in part) (“The

prohibition in § 5 of the 1933 Act, 15 USC § 77e, against selling

securities without an effective registration statement has been

interpreted to require no showing of scienter.” (citing cases)).

Accordingly, the court concludes that Medley has violated

sections 5(a) and (c) of the Securities Act, 15 USC §§ 77e(a) and

(c). The Commission’s motion for summary judgment against Medley

on claim 1 of the complaint is therefore GRANTED, although only

with respect to Medley’s transactions in the securities of Virtual

Lender, M & A West and Digital Bridge.

B

The SEC’s second claim against Medley is that by bringing

together the public shell companies and the private operating

companies, Medley acted as an unregistered broker in violation of

section 15(b) of the Exchange Act. Section 15(b) provides in

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relevant part:

It shall be unlawful for any broker * * * to

make use of the mails or any means or

instrumentality of interstate commerce to

effect any transactions in, or to induce or

attempt to induce the purchase or sale of, any

security * * * unless such broker * * * is

registered in accordance with subsection (b) of

this section.

It is undisputed that Medley was not registered as a broker. 

Likewise, his conduct may fairly be described as inducing the

purchase or sale of securities. The only question is whether he

was in fact a broker. Section 3(a)(4)(A) of the Exchange Act

defines a “broker” as “any person engaged in the business of

effecting transactions in securities for the account of others.”

The Commission’s entire opening argument on this issue

(aside from a boilerplate introduction) is a one-paragraph string

of factual assertions and legal conclusions, unconnected by any

interpretive or precedential authority:

Medley actively brokered the sale of stock

between the shell owners and the M & A West

affiliates and their shareholders in each of

the four reverse mergers. Medley thus acted as

the middle-man in the transactions, inserting

himself as the person through whom the parties

on the two sides of the transaction would

exchange their respective shares. In fact,

Medley ensured that the transactions could not

be completed without him, by requiring the

shell company’s shareholders to enter into

“Non-circumvention Agreements.” Medley further

facilitated the purchase and sale of the

securities exchanged in the reverse mergers by

drafting the agreements, obtaining concurrence

on the terms, and obtaining the necessary

signatures and other information. And, Medley

was paid handsomely for his services, receiving

between $50,000 and $75,000 in cash upon

completion of each transaction, and blocks of

stock in the four companies. Medley was thus

acting as an unregistered broker with respect

to each of the four mergers, in violation of

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the Exchange Act.

Mot Summ Judg (Doc #109) at 21:19-22:2.

This factual recitation capped with an ipse dixit sheds

no light on why Medley’s activities -- commonly associated with

paralegals (who draft documents), lawyers (who draft documents and

orchestrate transactions), businessmen (who identify potential

merger partners) and opportunists (who like to take a small cut of

a big transaction), none of whom is commonly regarded as a broker -

- add up to Medley being a broker. In particular, no assets were

entrusted to Medley, and the Commission identifies no evidence that

he was authorized to transact “for the account of others” (aside

from his fiduciary authority over Fordee’s and Byzantine’s

accounts). Although Medley was in the business of facilitating

securities transactions among other persons, the Commission cites

no authority for the proposition that this equates to “effecting

transactions in securities for the account of others.” When asked

at oral argument for some authority -- in the form of a case or a

no-action letter -- that held conduct like Medley’s to be that of a

“broker,” the Commission responded simply that it relied on the

statute. A bare statutory definition without interpretive

authority (or even reasoned argument from the statutory language)

is too slender a reed on which to condemn Medley’s conduct. 

Accordingly, the Commission’s motion for summary judgment on this

claim is DENIED. If authority in this area is as lacking as

counsel maintains, the Commission may wish to consider promulgating

rules beyond Rules 3a4-1 to -6 to give further guidance.

Further, with the well-developed record before the court,

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the absence of any issues of fact and the parties’ complete (if

modest) briefing on this issue, the court finds it appropriate to

GRANT sua sponte summary judgment in favor of Medley on the

Commission’s claim against him for violation of section 15(a) of

the Exchange Act. See, e g, Gospel Missions of America v City of

Los Angeles, 328 F3d 548, 553 (9th Cir 2003) (“Even when there has

been no cross-motion for summary judgment, a district court may

enter summary judgment sua sponte against a moving party if the

losing party has had a ‘full and fair opportunity to ventilate the

issues involved in the matter.’” (citing Cool Fuel, Inc v Connett,

685 F2d 309, 312 (9th Cir 1982)).

IV

In sum, the Commission’s motion for leave to supplement

the record (Doc #130) is GRANTED. The court GRANTS IN PART the

Commission’s motion for summary judgment (Doc #109) and sua sponte

GRANTS summary judgment in favor of Medley on the Commission’s

claim for violation of section 15(a) of the Exchange Act.

As the court has indicated above, the matter of remedies

remains subject to debate. The court would benefit substantially

from briefing focused on the issue of remedies. Accordingly, the

Commission shall file a memorandum on appropriate remedies on or

before July 7, 2005, stating with particularity the remedies it

seeks. Medley shall file a response on or before July 21, 2005. 

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The court will hear oral argument on remedies on August 4, 2005, at

2:00 pm.

IT IS SO ORDERED.

 

VAUGHN R WALKER

United States District Chief Judge

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