13-3191-c v

SEC v. Frohling 1 UNI TED STATES COURT OF A PPEAL S 2 FOR THESECOND CI RCUI T 3 - - - - - - 4 August Term, 2016 5 (Arg

ued: Octobe r 19, 2016 Dec ided: Dec ember 6, 2016) 6 Docke t No. 13-3191-c v 7

_________________________________________________________________ 8 SECURI TI ES AND EXCHAN GE COMMI SSI ON, 9 Plaintif f-Appellee , 10 - v. - 11 J OHN B . FROHL I NG, 12 D e f e n d a n t

- C r o s s - C l a i m a n t

- C r o s s - D e f e n d a n t

13 Appellant , 14 HI SAO SAL

MI WA, 15 Defendant- Cross-Clai mant-Cross-Defendant , 16 VIRGI

NIA K. SOURL I S, 17 Defendant- Cross-Clai mant , 18 DANIEL D. STARCZEW S KI, J OE V. OVERCASH, J R., FRANK J

. MOREL L I , I I I , 19 THOMAS F. PIERSON, 20 Defendants-Cross-De fendants , 21 ACTIVE STEAL TH, L L C, BA F CONSUL TI NG, I NC., BL UEWATER EXECUTIVE 22 CAPI TAL , L L C, EMERGI NG MARKETS CONS ULTI NG, L L C, KCS REFERAL 23 SERVI CES, L L C , M BA I NVESTORS, L TD., NEW AGE SPOR TS, I NC., POWER 24 NETWORK, I

NC., PROJ ECT DEVEL OPMENT, I NC., SEVI L L E CONSUL TI NG, I NC., 25 STARR C ONSUL TI NG, I NC., TUSCANY CONSUL TI NG, I NC., YT2K, I

NC., 26 Relief-De fendants-Cross-Defendants ,1 GREENSTONE HO L DI NGS, I NC., J AMES S. P AI

NTER, I I I , 2 Defendants

. * 3

_________________________________________________________________ 4 Be fore : KEARSE, POOL ER, and DRONEY, Circuit Judges

. 5 Appea l by defe ndant attorney from a November 25, 2015 final judgme nt of the United 6 States District Court for the Southern District of New York, Miriam G. Cedarba um, Judge , g ranting 7 plaintiff Securities and Exchang e Commissi on' s motion for summary judgme nt in this enfor ceme nt 8 action, holding defe ndant liable for securities laws violations (§§ 5 and 17(a) of the Securities Act of 9 1933, 15 U.S.C. §§ 77e, 77q(a) ; § 10(b) of the Securities Ex chang e Act of 1934, 15 U.S.C. § 78j(b), 10 and Rule 10b-5 there under, 17 C.F.R. § 240.10b-5) in connec tion with false opinion letters he wrote 11 or approve d to enable impermissible public offe ring s of unreg i s t er ed share s of stock of defe ndant 12 Gre enstone Holdings, Inc.; ordering him to pay a total of $204,161.86 as a civil penalty , disgorg ement, 13 and prejudgment interest; and perma nently barring him from participating in cer tain stock offe ring s. 14 Def

endant contends principally that the district court e rre d in ruling that there was no g enuine issue 15 to be tried a s to his knowledge of the fa lsity of the letter s. 16 Affir med. ** 17 AL LAN A. CAPUTE, Special Counsel to the Solicitor, 18 Washington, D.C. (Anne K. Small, Gene ral Counsel, 19 Michae l A. Conley , Deputy Gene ral Counsel, J acob H. 20 S t i l l m a n , S o l i c i t o r , S e c u r i t i e s a n d E x c h a n g e 21 Commi ssion, Washington, D.C., o n the brief) , for 22 Plaintif f-Appellee

.

* The Clerk of

Court is directed to ame nd the offic ial caption in this appea l to confor m with the above.

** Orig inally

filed as a summary order on November

8, 2016, this decision is now being published as an opinion on motion of the Securities a nd Ex chang e Commissi on dated November

14, 2016, g rante d on Dec ember 1, 2016. 21 J OHN B . FROHLI NG, pro se , J erse y

City , New Jersey , 2 D e f e n d a n t

- C r o s s - C l a i m a n t

- C r o s s - D e f e n d a n t

3 Appellant

.

4 KEARSE, Circuit Judge : 5 In this appea l, which was reinstated following a rema nd for final resolution of pending 6 claims, see SEC v. Frohling , 614 F. App' x 14 (2d Cir. 2 0 1 5 ), d ef endant- cross-c laimant-cr oss7 defe ndant-a

ppellant J ohn B. Frohling pro se appe als from a November 25, 2015 Superseding Final 8 Judg ment of the United States Dist ri ct Court for the Southern District of New York, Miriam G. 9 Cedarba

um, Judge , in this enfor ceme nt action brought by the Securities and Ex chang e Commi ssion 10 (" SEC") in connec tion with public offe ring s of unreg istered share s of stock of defe ndant Gre enstone 11 Holdings, Inc. (" Gre enstone" ). The district court grante d a motion by the SEC for summary judgme nt 12 on issues of liability , holding Fr ohling- -who as Gre enstone' s securities counsel in 2006- 2008 wrote, 13 approve d, or concur red in 11 opinion letters relating to all of the rele vant offe ring s--liable for violating 14 § 17(a) of the Securities Act of 1933 (" Securities Act" ), 15 U.S.C. § 77q(a) ; § 5 of the Securities Act, 15 15 U.S .C. § 77e; and § 10(b) of the Securities Ex chang e Act of 1934 (" Ex chang e Act" ), 15 U.S.C. 16 § 78j(b), and Rule 10b-5 there under, 17 C.F.R. § 240.10b-5. The Superseding Final J udg ment order s 17 Frohling to pay a total of $204,161.86 as a civil penalty , disgorg ement, and prejudgment interest, and 18 perma

nently bars him from participating in so- called "pe nny stock" offe ring s, i.e. , offe ring s of " any 19 equity security that has a price of less than five dollars, except as provided in Rule 3a51-1 under the 20 Ex chang e Ac t," Super sedingFinal Judgment at 4. 21 On appeal, Frohling c o n t en d s p rincipally that he had no knowledg e that the opi nion 22 letters he issued, approve d, or concurre d in wer e false, nor any knowledg e of fac ts to aler t him that

31 the opinion letters wer e false, and that the district court err ed in ruling that there was no g enuine issue 2 to be tried as to his knowledg e. For the rea sons that follow, we find no basis for reve rsal. We assume 3 the par

ties' familiarity

with the underly

ing f acts a nd proce dural history

of the c ase.

4 A. Liabil ity 5 Section 5 of the Securities Act makes it unlawful, direc tly or indirectly , t o publicly 6 offe r or sell unreg istered stock, see 15 U.S.C. § 77e, unless the offe ring is cover ed by an exemption. 7 T h e s to c k c e r

ti f ic a te for unreg istered share s not cover ed by an exemption--"r estricted " s to c k

- - n o r mally 8 bear s a leg end stating that the share s have not been reg istered and cannot lawfully be sold until they 9 are reg istered. The pertinent exemption in this case , as it exis ted at the rele vant time, a llowed stock 10 to be issued without the restric ted-stock l ege n d if the rec ipients wer e persons unaff iliated with the 11 stock' s issuer at the time of the sale or during the prec eding three months, and if at least two year s had 12 elapse d since the share s wer e owned by the issuer or a person aff iliated with the issuer, see SEC Rule 13 144(k), 17 C.F.R. § 230.144(k) (2005) (" Rule 144(k) ex em p tion"). The two-year require ment was 14 satisfied if unaf filiated per sons acquire d the share s in exchang e for "c onsideration consisting solely 15 of other se curities of the same issuer " that had bee n rec eived at least two year s earlier, as the sha res 16 wer e deeme d to have been acquir ed from the i s s u er at the time the surre ndere d securities had been 17 acquir ed. Id

. § 230.144(d)( 3)(ii) (2005) (empha sis added)

. "T o state a cause of action under Section 18 5, o n e must show ' (1) lack of a [required] reg istration statement as to the subject securities; (2) the 19 offe r or sale of the s ecurities; and (3) the us e of interstate transportation or communi ca t i o n an d t h e 20 mails in connec tion with the offe r or sale.' " SEC v. Cavanagh , 445 F.3d 105, 111 n.13 (2d Cir. 2006) 21 (quoting Europe & Ove rseas Commodity Traders, S.A. v. Banque Paribas London , 147 F.3d 118, 124 22 n.4 (2d Cir. 1998)). A person not direc tly eng ag ed in transfe rring title of the security can be held

41 liable under § 5 if he or she "e ng ag ed in steps nece ssary to the distribution of [unreg istered] security 2 issues." SEC v. Chinese Consolidated Benev olent Ass'n , 120 F.2d 738, 741 ( 2d Cir. 1941). 3 Section 10(b) of the Ex chang e Act and Rule 10b-5, which prohibit fra ud i n t h e 4 purcha se or sale of a security , are violated if a person has "' (1) made a materia l misre prese ntation or 5 a materia l omission as to which he had a duty to speak, or used a fra udulent device ; (2) with scienter ; 6 (3 ) in connec tion with the purcha se or sale of securities.'" SEC v. Pentagon Capital Manage me n t 7 PLC , 725 F.3d 279, 285 (2d Cir. 2013) (quoting SEC v. Monarch Funding Corp. , 192 F.3d 295, 308 8 (2d Cir. 1999)), cert. denied, 134 S. Ct. 2896 (2014). A false statement was made with the requisite 9 scienter

if it was made w ith the "intent to dece ive, manipulate, or defr aud." SEC v. Obus , 693 F.3d 10 276, 286 (2d Cir. 2012) (inter nal quotation marks omitted). "[S] cienter may be established through 11 a showing of rec kless disreg ard for the truth, that is, conduct which is highly unrea sonable and which 12 repr esents an e x treme departur e from the s tandar ds of ordinar y car e." Id . (interna l quotation marks 13 omitted). 14 The elements of a claim under § 17(a) of the Securities Act, which prohibits f raud in 15 the "of

fer or sale" of a securi t y , 1 5 U. S

. C

. § 77q(a) , are "[e]ssentially the same" as the elements of 16 claims under § 10(b) and Rule 10b- 5. SEC v. Monarch F unding Corp. , 192 F.3d at 308. 17 Summary judgme nt may be grante d "if the movant shows that there i s no g enuine 18 dispute as to any materia l fac t and the movant is entitled to judgme nt as a matter of law." Fe d. R. Civ. 19 P. 56(a)

. A g enuine dispute exis ts when the evidenc e is such that, if the party ag ainst whom summary 20 judgme nt is sought is g iven the bene fit of all per missibl e infe renc es and a ll credibility assessments, 21 a rational fac tfinder could resolve all materia l fac tual issues in favor of that party

. See , e.g. , Anderson 22 v. Liberty Lobby, Inc. , 477 U.S. 242, 248 (1986). Summary judgme nt is appropriate when "the re can 23 be but one rea sonable conclusion as to the verdic t," id

. at 250, i.e. , "it is quite clea r what the truth is,"

51 Poller v. Columbia Broadcasting System, Inc. , 368 U.S. 464, 467 (1 9 6 2 ) (i nterna l quotation marks 2 omitted), and no rational fac tfinder could find in favor of the nonmovant. We re view the district 3 court' s grant of summary judgme nt de novo , applying the same standards t hat g overn the district 4 court' s considera tion of the motion. See , e.g. , Aulicino v. New Y ork City Depart me n t o

f Homele ss 5 Servic es , 580 F.3d 73, 79 ( 2d Cir. 2009). 6 It is undisputed that the Gre enstone share s in question wer e not reg ist er ed

. It is 7 undisputed that Fr ohling wrote, approve d, or concur red in 11 opinion letters rely in g ex plicitly or 8 implicitl y

on the Rule 144(k) exemption, stating that the s hare s could lawf ully be tra nsfer red to the 9 reci p i en ts as unrestricted shares on the ground that they wer e acquired by persons unaffiliated with 10 Gre enstone solely in exchang e for other Gre enstone securities they had rec eived more than two year s 11 earlier. The rec ord shows that Frohling himself wrote eight of these letters; six of the eight expressly 12 cited the Rule 144(k) ex emption; and F rohlingsubsequently wrote a letter re vising the othe r two to 13 invoke the Rule 144(k) exemption expressly

. It is undisputed that those statements wer e untrue. For 14 example, ce rt ain owner s--the "Mor elli Group" --whic h purported to be rec eiving the to-be-of fer ed 15 share s from Gre enstone in exchang e for old conver tible promissory notes agree d that at least half of 16 the proce eds from the sale of the share s would be paid to Gre enstone, thus making it false to repr esent 17 that the Morelli Group was acquir ing the to-be-of fer ed share s "sole ly " in exchang e for the promissory 18 notes. Fr ohling nonetheless wrote or approve d opinion letters stating, inter alia , that the unreg istered 19 Gre enstone share s "ma y be issue d without restric tion" (F rohling letter dated August 31, 2006) and 20 without a leg end identifying them as restric ted share s. Public offe ring s of the share s ensued, and the 21 district court conclude d that Frohling' s participation i n t h o s e unlawful offe ring s was substantial 22 beca

use without those opinion let t er s , Gr ee nstone' s transfe r ag ent "w ould not have issued any 23 unreg istered share s." SEC v. Gree nstone Holdings, Inc. , No. 10 Civ. 1302, 2012 WL 1038570, at *11

61 (S .D.N.Y. Mar. 28, 2012) (" Gree nstone I ")

. Fr ohling has provided no basis for disturbi n g t h at 2 conclusion. We aff irm the ruling that Fr ohling violated § 5 substantially for the rea sons stated by the 3 district court in Gree nstone I

. 4 Wit h respe ct t o the SEC's fra ud claims ag ainst Fr ohling under § 17(a) , § 10(b), and 5 Rule 10b-5, Frohling challeng es t he propriety of sum mary judgme nt, arguing, as he did below, that 6 h e d i d not know the 11 opinion letters' repr esentations--that Gre enstone share s to be offe red t o t h e 7 public wer e exempt under Rule 144(k) from the reg istration requirement--w ere false and that his 8 knowledg e could not be deter mined as a matter of law. The district court conclude d that no rational 9 fac tfinder could fail to find that Fr ohling knew of, inter alia , the Morelli Group' s agree ment to share 10 the proc eeds of

the offe ring s with Gree nstone: 11 [A] s to the l etters Frohling wrote, the rec ord contains numerous e-m ails sent 12 by Miwa [defendant Hisao Sal Miwa, Gre enstone' s founder and chief office r] 13 to Frohling in which Miwa discusses the Morelli Group's plan to sell shares 14 to the public and remit the procee ds to Gree nstone

. Miwa expli citly states that 15 portions of the share s wer e to be used for "f unding the company ," that is, in 16 exchange for new consideration. Fur thermore , Frohling admitted at his 17 deposition that he knew of the Morelli Group's commitme nt t o tr a n s f er to 18 Gree nstone at least half of the procee ds of the public sale of the unregistered 19 shares

. T h u s , h e knew that the share s wer e being improperly sold for new 20 consideration. 21 Gree nstone I

, 2012 WL1038570, at *6 (e mphases adde d). 22 In addition, F r o h lin g wr o te two of his false opinion letters to rec eive unrestric ted share s 23 himself, in exchang e for a promissory note. Fr ohling opined that the Rule 144(k) exemption applied, 24 despite knowing that it did not beca use, inter alia , he had rec eived the note less than the require d two 25 year s earlier. See id

. at *4. As to one such letter, "[t]he undisputed fac ts show that Fr ohling rec eived 26 10 milli on Gre enstone share s as a result of th[ e] opinion letter and shortly there afte r sold at least 2.9 27 milli on of those shar es." Id . at *7.

71 The court a ls o found that Fr ohling fra udulently approve d of a J anuar y 11, 2006 opinion 2 letter by defe ndant Virg inia K. Sourlis (" Sourlis L etter" ) leading to the issuance of more than 6 milli on 3 Gre enstone share s as unrestric ted stock. See id

. at *3. Sourlis opined that the share s could lawfully 4 be issued as unrestric ted share s beca use the rec ipients wer e acquiring them in exchang e for cer tain 5 conver

tible notes. See id

. In her letter, Sourlis stated that she was rely ing o n "i n fo rm ation and 6 repr esentations furnished by

. . . the Orig inal Note Holders to me," and that "I have been informed by 7 the Orig inal Note Holders" that none of them wer e aff iliated with the issuer and that the Orig inal Note 8 Holders had owned the notes for at least two year s. (Sourlis L etter at 2

. ) T h e rec ord established, 9 howeve r, that "the conver tible notes described by Sourlis did not even exis t." SEC v. Gree nston e 10 Holdings, Inc. , 954 F.Supp.2d 211, 213 (S.D.N.Y. 2013) (" Gree nstone II ")

. Frohling concur

red in the 11 Sourlis L etter, and 6,150,000 share s wer e issued as unrestric ted share s under the cl ai m o f a Rule 12 144(k) exemption for conver tible promissory notes that in fac t did not exis t, allowing the share s to be 13 sold to the public although unreg istered. Be causethe notes did not exi st, many of the stateme nts in 14 the Sourlis L etter wer e nece ssarily false. See id

. The district court found that "Fr o h l i n g ad o p ted 15 Sourlis's statement[s] in full[,]

. . . even though he knew the t ru e fa ct s." Gree nstone I , 2012 WL 16 1038570, at *3. 17 Although Fr ohling argues that there was a fac t issue to be tried beca use he testified in 18 deposition that he did not know the opinion letters he wrote, approve d, or concur red in wer e false in 19 their statements that the Rule 144(k) exemption applied, it is indisputable that he also admitted in that 20 deposition that he knew that the Morelli Group had agree d to share the proce eds of the offe ring s with 21 Gre enstone. Given that admission, toge ther with the documentar y evidenc e consisting of emails sent 22 to him stating that Gre enstone was to rec eive part of the proce eds of the offe ring s, we see no err or in 23 the district court' s conclusion that Fr ohling' s later testimony that he did not kno w t h at fac t did not 81 cre ate a n issue that was g enuine. 2 We conclude that the rec ord was ample to su p p ort the district court' s deter mination that 3 there was no g enuine issue to be tried as to Fr ohling' s knowledg e that the repr esentati o n s as to the 4 applicability of the Rule 144(k) exemption wer e false, and to s up p o rt i ts conclusion that Fr ohling 5 violated § 17(a) of the Securities Act, § 10(b) of the Ex chang e Act, an d Ru l e 1 0 b -5 beca use the 6 opinion letters he wrote, approve d, or concur red in "a ll falsely claimed reg istration exemptions under 7 Rule 144(k)," Gree nstone I , 2012 WL1038570, at *6.

8 B. Relief 9 Finally , we reje ct Fr ohling' s challeng es to the relief order ed by the district c ourt, i.e. , 10 disgorg ement, prejudgment interest, civil penalties, and injunctive relief

. "O nce the district court has 11 found fede ral securities law violations, it has broad equitable power to fashion appropriate reme dies 12

. . . ." SEC v. First Jerse y Securities, Inc. , 101 F.3d 1450, 1474 (2d Cir. 1996) (" First Jerse y ") , cert. 13 denied, 522 U.S. 812 (1997). 14 "T he primary purpose of disgorg ement as a reme dy for violation of the securities laws 15 is to deprive violators of their ill-gotten g ains, there by eff ectuating the deter

renc e objectives of those 16 laws." Id

. Prejudg ment i n t ere st may be awa rded on sums order ed disgorg ed in order to fully 17 compensa

te the wrong ed party for ac tu al d amag es suffe red. See , e.g. , id

. at 1476. Civil monetary 18 penalties a

re a uthorized by the S ecurities Act and the Ex chang e Ac t for both deter rent a nd punitive 19 purposes. See , e.g. , SEC v. Razmilovic , 738 F.3d 14, 38- 39 (2d Cir. 2013). And injunctive r elief is 20 particula rl y wi thin the court' s discretion wher e a violation was founded on 21 sy stematic wrong doing, rathe r than an isolated occur renc e, . . . and wher e the 22 court view s the defe ndant' s degree of culpability and continued protestations 23 of innocenc e as indications that injunctive relief is war rante d, since "

persistent 24 refusals to admit any wrongdoing ma[k] e it rather dubious that [th e o ffe nders]

91 a r e l ikely to avoid such violations of the securities laws in the future in th e 2 absenceof an injunction ." 3 First Jerse

y , 101 F.3d at 1477 (quoting SEC v. Lorin , 76 F.3d 458, 461 (2d Cir. 1996) (other internal 4 quotation marks omitted) (empha ses ours)). The court' s choice of reme dies is revie wed for abuse of 5 discretion. See , e.g. , First Jerse y , 101 F.3d at 1474-77; SEC v. Contorinis , 743 F.3d 296, 301 (2d Cir. 6 2014), cert. dismissed, 136 S. Ct . 531 (2015). 7 We see no abuse of discretion here , g iven the rec ord in this case as to the money s 8 rec eived by Fr ohling either through fee s rec eived by him or his firm for his fra udulent opinion letters 9 or re ceive d by

Fr ohling pe rsonally

from an unla

wful st ock offering , and given Frohling ' s continued 10 manifestation of a lack of conce rn for his responsibilities under the fede ral securities laws. ( See , e.g. , 11 Hea

ring Transc ript, Marc h 21, 2013, at 6-8, 9-10 ( Fr ohling' s acknow ledg ement that he did not "sa y 12 any

wher e in [hi s 11 written or endorse d] opinion [l etters] that" hi s opinion "w as not based on any 13 persona l know ledg e of [hi s own]" and that he was "simply rely ing on the opinions of other people" ; 14 and his continued insistence that he was entitled to g ive, approve , and concur in the opinions he g ave 15 without knowing, a nd without investigatingto find out, whether the y wer e true or fa lse).)

16 CONCLUSI ON

17 We have considere d all of Fr ohling' s arguments on this appea l and have found in them 18 no basis for r ever sal. The district cour t's Super sedingFinal Judgment a g ainst Frohlingis affirme d.

10