Securities and Exchange Commission v. Sayid

Background

The Securities and Exchange Commission (SEC) brought this enforcement action against Mustafa David Sayid and Norman T. Reynolds. The SEC alleged that the defendants violated Section 5 of the Securities Act of 1933 by offering and selling restricted shares of Nouveau Holdings, Ltd. stock without an applicable registration exemption. The SEC also alleged that they violated Section 10(b) of the Securities Exchange Act of 1934 and Section 17(a) of the Securities Act by making false statements about the date on which a debt settlement agreement had been executed.

The agreement contemplated a three-way transaction. Sayid’s law firm would assign $50,000 of debt owed by Nouveau to three Belizean entities; those entities would pay Sayid $50,000; and Nouveau would issue 50 million shares of its stock to those entities to satisfy the assigned debt. The agreement was not finalized by the Belizean entities until at least September 25, 2012. Nouveau’s president, Dale Henry, did not receive the agreement for signature until August 2, 2013, and the court stated that the three-way agreement could not be executed without the signatures of all three parties.

Nouveau did not have an effective registration statement during the relevant period. Transfer Online therefore issued Nouveau stock with a restrictive legend unless it received an attorney opinion letter stating that the issuance complied with Rule 144. For the transactions at issue, Rule 144 required the Belizean entities to have owned and paid for the shares for at least one year.

The Rule 144 letters and stock issuances

Sayid asked Reynolds to prepare Rule 144 opinion letters. Initially, Sayid provided Reynolds with an unsigned agreement dated September 25, 2012. Reynolds told Sayid that this date did not satisfy the one-year holding requirement. Sayid then told Reynolds that earlier agreements had been executed and provided several unsigned agreements. Reynolds nevertheless issued a letter stating that the agreement had been executed on July 17, 2012, more than one year before the stock issuance.

After Reynolds issued the first letter, Sayid obtained signature pages from Nouveau and the Belizean entities that were dated July 17, 2012, even though the signatures were obtained in August 2013. Sayid sent the letter to Nouveau’s president, who forwarded it to Transfer Online. Transfer Online issued three million unrestricted shares on August 27, 2013. Reynolds later issued a second substantially identical letter, and Transfer Online issued approximately five million more unrestricted shares on September 12, 2013.

The Belizean entities later sold approximately four million of those unrestricted shares to penny-stock investors, generating approximately $275,000 in proceeds. Sayid obtained affiliate and conversion letters needed for the resale and gave them to the Belizean entities. Reynolds received two payments of $350 from Sayid for preparing the opinion letters.

Summary-judgment standard

The court applied Federal Rule of Civil Procedure 56. It could grant summary judgment if the evidence showed no genuine dispute about any important fact and the moving party was entitled to judgment as a matter of law. The court was required to view the facts favorably to the defendants, but a dispute had to be supported by evidence that could allow a reasonable factfinder to rule for them.

Section 5 liability

Section 5 generally prohibits the public offer or sale of unregistered securities unless an exemption applies. The court held that the Rule 144 exemption did not apply because the debt settlement agreement was not executed before September 25, 2012. The Belizean entities therefore had not held the shares for the required one year when Transfer Online issued the unrestricted stock in August and September 2013.

The court held that Sayid was a necessary and substantial participant in the unlawful sale. He negotiated and completed the transaction, supplied Reynolds with the information used in the opinion letters, paid Reynolds’s fees, and obtained documents needed for the later resale.

The court also held that Reynolds was a necessary and substantial participant. His opinion letters caused Transfer Online to issue the shares without restrictions. The court rejected Reynolds’s argument that a factual issue existed about the transfer agent’s reliance, explaining that the shares were issued in unrestricted form because of his letters. The court also found that Reynolds acted recklessly by issuing the first letter without seeing a signed July 17, 2012 agreement.

The court therefore granted summary judgment on the defendants’ Section 5 liability.

Securities fraud liability

For Section 10(b) and Section 17(a), the SEC had to show materially false statements or deceptive conduct, the required level of knowledge or recklessness, and a connection to the purchase or sale of securities. The court found that Sayid’s statements about earlier agreements and the falsely dated July 17, 2012 agreement were false and material because they formed the basis for Reynolds’s conclusion that the one-year holding period was satisfied. The court found that Sayid knew, or at least recklessly disregarded, that the statements were false.

The court also held Reynolds liable. An attorney’s opinion includes an implied representation that it was given in good faith and had a reasonable factual and legal basis. The court found that Reynolds had a heightened duty to investigate the facts supporting his opinion. Instead, he did not meaningfully investigate the execution date, did not obtain the necessary signatures before issuing the first letter, did not verify the promised $50,000 payment, and told Sayid to check the facts himself. The court concluded that Reynolds recklessly disregarded the truth and that his letters contained material misstatements.

The court held Sayid liable under Section 10(b) and Section 17(a)(1), which prohibits using a device or scheme to defraud. It held Reynolds liable under Section 10(b) and Section 17(a)(2), which prohibits obtaining money or property through material misstatements or omissions.

Disposition

The court granted the SEC’s motion for summary judgment in its entirety against Sayid and Reynolds for violating Section 5 and Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934.