Opinion ID: 757739
Heading Depth: 3
Heading Rank: 2

Heading: Unavailability of Exemption from Registration

Text: 14 Section 4(1) provides an exemption from the registration requirement of Section 5 for those who are not underwriters, issuers or dealers. A control person, such as an officer, director, or controlling shareholder, is an affiliate of an issuer and is treated as an issuer when there is a distribution of securities. 19 Thus, an affiliate ordinarily 20 may not rely upon the Section 4(1) exemption--he must either re-register his shares or qualify for a different exemption 21 before undertaking to sell them. Where shares are originally issued pursuant to a Form S-8 registration statement, the registration requirement may be met under certain conditions by distribution of a reoffer prospectus. 22 It is undisputed that no subsequent registration or reoffer prospectus was filed for the December 1997 offer and sale of Curbstone/EOSC stock. 15 The district court found that Levy participated in an offer to sell the Curbstone shares that violated Section 5(c) because he was an active participant in an offer to sell the shares while Chachas was still in control of Curbstone. 23 On December 1, 1997, Levy and Chachas started to exchange documents outlining both the acquisition and the sale of the shares to third parties, three Spanish clients of Milestone. Levy admitted at the preliminary injunction hearing that he and Chachas were discussing the terms of the sale of the stock at that stage. By December 7, 1997, Chachas had drafted and sent to Levy the purchase agreements for the management shares. On December 12, Levy sent Chachas a wire transfer payment of $550,000, which included $100,000 for the majority of the management shares and $450,000 for the option to purchase 150,000 additional management shares at $3 per share, which funds Levy contends were to be held in escrow until the closing of the WTS-Curbstone acquisition. 16 During the first twelve days of December, while Levy and Chachas negotiated and finalized the terms for the sale of the management shares, Chachas, even under Levy's version of the facts, remained an affiliate and in control of Curbstone. Chachas and Brooksbank, acting on behalf of Curbstone, did not accept their own resignations until December 18, 1997. 17 Levy argues that these discussions and agreements did not constitute an offer because they were unenforceable, as the closing of the Acquisition Agreement was a condition precedent of the sale. However, the Act defines an offer to include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value. 24 This definition extends beyond the common law contract concept of an offer and clearly covers Levy's and Chachas's negotiations. 25 18 Levy also argues that if the actual sale of the management shares was legal, then any offer to sell them must also be legal. He cites no legal authority for this proposition. More importantly, an offer in violation of Section 5(c) constitutes an independent offense under the securities laws. 26 Section 5(c) requires the filing of a registration statement prior to any offer, regardless of whether a sale occurs or the conditions of that sale. 19 Levy also argues that the district court improperly conflated Section 5 and Rule 144 27 in its analysis. Rule 144 expounds on the exemption provided under Section 4 for sale of unregistered securities by non-control persons, as well as providing for sales of limited amounts of securities by control persons without registering. The rule is a safe harbor provision that cannot be violated. The district court did not find that Levy had violated Rule 144; the court held that Levy had violated Section 5 and had not met the requirements to be protected by Rule 144. Levy's Rule 144 argument is simply irrelevant. 20 Levy also argues that he comes within the exemption for preliminary negotiations contained in Section 2(3) of the Securities Act. 28 However, the district court could reasonably find that the SEC made a sufficient showing that these negotiations had gone beyond a preliminary stage and the parties had no intention to file a registration statement. 29 21 Having found that the SEC made a sufficient showing that Levy violated Section 5(c), we do not reach the issue of whether a sufficient showing was made that he participated in a sale of securities in violation of Section 5(a). 22 Injunctive relief is expressly authorized by Congress to proscribe future violations of federal securities laws. 30 The SEC must demonstrate that there is a substantial likelihood of future violations of illegal securities conduct. 31 The court looks at the following factors: 23 the fact that the defendant has been found liable for illegal conduct; the degree of scienter involved; whether the infraction is an isolated occurrence; whether defendant continues to maintain that his past conduct was blameless; and whether, because of his professional occupation, the defendant might be in a position where future violations could be anticipated. 32 24 The SEC made a sufficient showing that Levy was a direct participant in the offer to sell the Management Shares without re-registering them. The district court reasonably found that Levy's potential for future involvement in this type of scheme is great because he is a lawyer specializing in securities transactions. The district court also found that Levy displayed a general lack of concern for the seriousness of the charges. Lastly, Levy has a history of securities law violations. In SEC v. Management Dynamics, Inc., 33 this court upheld the district court's entry of an injunction against Levy prohibiting him from future violations of the registration and antifraud provisions of the federal securities laws. The district court judge noted that Levy's participation in the scheme at issue in Management Dynamics bear[s] remarkable similarities to the instant endeavor. 34 The district court was well within its discretion in entering a preliminary injunction against Levy to prevent him from committing future violations of Section 5.