Securities and Exchange Commission v. Harold Bailey Gallison

Background

The Securities and Exchange Commission (SEC) sued various defendants under Sections 5(a) and 5(c) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 17(a)(2) of the Securities Act. The decision concerns the SEC’s claims against Robert S. Oppenheimer and Core Business One, Inc. (CBO). Oppenheimer was CBO’s chief executive officer and sole employee and acted as a business consultant through CBO.

The SEC alleged that Oppenheimer and CBO helped Nature’s Peak, Inc. become publicly traded through a reverse merger with Everock, Inc., a public shell company. The SEC alleged that they helped remove trading restrictions from 300 million Everock shares issued to Charles Moeller, helped transfer the shares to brokerage accounts controlled by Frank Zangara or his associates, and assisted efforts to sell the shares to the public. The SEC also alleged that Oppenheimer and CBO helped prepare promotional materials and disclosure statements and received proceeds connected to the stock sales.

Two statements were central to the fraud claims. An October 3, 2009 disclosure statement said that Moeller had effectively returned 270 million of his 300 million shares to Everock. The court found that the shares had not been returned but had instead been transferred to brokerage accounts controlled by Zangara. A December 14, 2009 press release said that CBO had provided more than $200,000 toward Everock’s financing and quoted Oppenheimer describing that financing. The court found that statement was untrue: the funding came from Digital Edge through CBO, and only $102,500 had been transferred to Everock as of the date of the release.

Motions and timeliness

The SEC moved for summary judgment on Oppenheimer and CBO’s liability and sought a permanent injunction, disgorgement, civil monetary penalties, a penny-stock bar, and an officer-and-director bar. Oppenheimer and CBO cross-moved for summary judgment dismissing the SEC’s claims. The SEC also moved to strike portions of Oppenheimer and CBO’s statement of undisputed facts.

The court rejected Oppenheimer and CBO’s argument that the National Defense Authorization Act for Fiscal Year 2021 improperly revived expired claims in violation of the Constitution’s ban on ex post facto criminal punishments. The court held that disgorgement under the relevant securities statute was a civil remedy designed to prevent unjust enrichment, not a criminal punishment. It also held that the SEC’s claims for injunctions, officer-and-director bars, and penny-stock bars were timely under the ten-year limitations period established by the amended statute. The SEC acknowledged that the five-year limitations period still applied to civil penalties and was not seeking penalties for conduct outside that period.

Section 5 liability

Section 5 generally requires registration before securities may be offered or sold, unless an exemption applies. The SEC had to show that no required registration statement existed, that the securities were offered or sold, and that interstate communications or the mails were used. The court found those elements established and held that Oppenheimer and CBO were “necessary participants.” That term refers to people whose participation was a substantial factor in the securities sales even if they did not directly transfer ownership of the securities.

The court found that Oppenheimer and CBO played a substantial role in the reverse merger, obtaining Everock’s ticker symbol and quotation on OTC Link, reviewing and sending merger documents, helping remove restrictions from Everock stock, assisting with acceptance of the shares by a broker-dealer, and drafting, reviewing, or authorizing promotional releases and disclosure statements. The court rejected Oppenheimer’s claim that he was an unwitting participant and granted the SEC summary judgment on liability under Sections 5(a) and 5(c).

Sections 10(b) and 17(a)(2) liability

For the Section 10(b) and Rule 10b-5 claim, the SEC had to establish a material misrepresentation or omission, a duty to speak, scienter, and a connection to the purchase or sale of securities. Scienter means an intent to deceive or defraud, or sufficiently reckless conduct. Section 17(a)(2) requires proof of negligence rather than scienter.

For the October 3, 2009 disclosure statement, the court found no genuine dispute that Oppenheimer and CBO made a material misrepresentation. Oppenheimer had edited, signed, and filed the statement and knew that the shares had not been returned. The court also relied on evidence that he had helped remove trading restrictions and transfer the shares to Zangara-controlled brokerage accounts. It therefore granted the SEC summary judgment on the Section 10(b) and Section 17(a)(2) claims concerning that statement.

For the December 14, 2009 press release, the court found that Oppenheimer worked on the release and knew its financing statement was false. The court concluded that Oppenheimer and CBO knew the funds came from Digital Edge rather than being CBO’s own new financing and knew that the amount transferred by the release date was less than the amount stated. The court granted the SEC summary judgment on the Section 10(b) and Section 17(a)(2) claims concerning that release.

Disposition

The court granted the SEC’s motion for summary judgment as to Oppenheimer and CBO’s liability in its entirety. It denied Oppenheimer and CBO’s cross-motion for summary judgment. It denied the SEC’s motion to strike as moot. The opinion does not state that the court entered a specific disgorgement amount, civil penalty, injunction, penny-stock bar, or officer-and-director bar in this order.