The opinion of the court was delivered by: Gerard E. Lynch, District Judge
The Securities and Exchange Commission ("SEC") has accused Universal Express, Inc., Richard A. Altomare, and Chris G. Gunderson (collectively, "Organizational Defendants") and Mark S. Neuhaus, George J. Sandhu, and Tarun Mendiratta (collectively, "Consultant Defendants") of violating certain provisions of the federal securities laws. It now seeks summary judgment against all the defendants on claims that they offered or sold unregistered securities in violation of Section 5 of the Securities Act of 1933 and against all defendants except Mendiratta on claims that they engaged in fraud relating to the purchase, offer, or sale of securities in violation of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Organizational Defendants cross-move for summary judgment with respect to Section 5 liability, and Neuhaus and Sandhu cross-move for summary judgment as to all allegations. For the following reasons, the SEC's request for partial summary judgment against the Organizational Defendants is granted on all claims, and the Organizational Defendants' cross-motion is denied; its motion for summary against Neuhaus judgment is granted as to liability under Section 5 but denied in all other respects; and all the remaining requests for summary judgment are denied.
Universal Express is a publicly traded Nevada corporation purportedly involved in shipping and transportation, and it maintains its principal place of business in Florida and an office in New York City.*fn1 Richard A. Altomare has been its chief executive officer and director since 1992, and he currently is the company's sole officer and director. Chris G. Gunderson is a lawyer and has worked for Universal Express as its in-house counsel since 1995.
Mark S. Neuhaus trades securities and apparently was once a professional race car driver. He formed and manages the company Coldwater Capital, LLC, and also helped form the partnership, H&N LLC, the brokerage accounts of which were involved in selling Universal Express shares. He also formed and controlled an entity called Perfect Line Investments, which also traded Universal Express shares.
George J. Sandhu is an investment advisor. During times relevant to this case, he held some degree of trading authority over certain brokerage accounts belonging to Spiga, Ltd., a company that sold Universal Express shares and to which Sandhu provided investment advice. Sandhu also advised a mutual fund called Target Growth Fund Ltd.
Tarun Mendiratta apparently is the nephew of two individuals, Sabita Dhingra and Veena Kaila. During relevant times he was authorized to buy and sell securities in brokerage accounts belonging to Dhingra and Kaila, which received and sold Universal Express shares. Mendiratta is also the president of Jensen Pacific, a Nevada corporation that received funds during this time from the accounts of Dhingra and Kaila.
Between April 2001 and January 2004, Universal Express issued more than 500 million of its shares to Neuhaus, Spiga, Dhingra, and Kaila. The shares were issued pursuant to written agreements, drafted by Gunderson and signed by Altomare, exchanging stock purportedly for consulting services. (See P. Exs. 7a-d.) No securities-registration statement was filed by Universal Express between January 1, 2001, and March 31, 2004, except for two S-8 forms registering a total of 50 million shares -- one on May 7, 2001, for 30 million shares, and another on January 22, 2002, for 20 million shares.*fn2 There is no evidence that any shares were issued under the S-8 forms.
Of the more than 500 million shares, 270,698,345 were issued to Neuhaus pursuant to letters, drafted by Gunderson and reviewed and signed by Altomare, informing the company's transfer agent that the shares were "to be free trading under an S-8 registration." (P. Exs. 257aii.) Pursuant to similar letters containing the "S-8 registration" phrase, Universal Express issued 152,389,115 shares to Spiga, 40,954,000 to Kaila, and 37,903,000 to Dhingra. (See P. Exs. 260, 261, 290.) During this time, Universal Express also issued 26,233,248 restricted shares to Neuhaus and 6,310,625 to Spiga.*fn3
On approximately April 12, 2004, several months after the last issuance based on a letter mentioning "S-8 registration," the SEC advised Universal Express's transfer agent that she might be charged with participating in the issuance of unregistered securities. The transfer agent informed Gunderson of the SEC's communication and asked him about the legality of the issuance of the shares. On April 23, 2004, Gunderson wrote to the transfer agent stating that "the shares in question were properly issued pursuant to and in compliance with the 1994 Stock Option Plan of Packaging Plus Services, Inc." (P. Ex. "Drayer Wells Letter.")
The 1994 Stock Option Plan ("Option Plan") had been attached to the bankruptcy reorganization plan, judicially approved in February 1994, of Universal Express's previous incarnation, Packaging Plus Services, Inc. The Option Plan authorized the company to issue shares upon the exercise of an option to purchase by "officers, directors, employees, consultants, franchisees and professional advisors of the Company." (P. Ex. 248.) The maximum number of shares to be issued under the Option Plan was 1,250,000 in total, although that limit could be changed "by reason of any recapitalization, stock split or stock dividend," at the discretion of the plan's administrators. (Id.) The number of authorized options was reduced to 104,167 after a reverse stock split in June 1997, and there is no indication of any other change of that number during the relevant time. Under the Option Plan, all options issued were to be evidenced by an option agreement and written notice by individuals intending to exercise an option stating, among other information, their investment intent; the record contains no such agreements or notices. The consulting agreements between Universal Express and Neuhaus, Spiga, Dhingra, and Kaila, do not mention the Option Plan or any possibility of exercising options. Universal Express stated in its annual reports to the SEC from 2001 through 2003, during the period of the subject transactions, that "[t]he [Option Plan] provides for the issuance of up to 104,167 shares of common stock . . . No options have been granted under the plan as of [this date]." (P. Exs. 240, 237, 180.)
Between April 2001 and March 2004, Universal Express issued 270,698,345 "S-8 registration" shares to Neuhaus, and he deposited nearly 235 million of them into brokerage accounts he opened in the names of Coldwater Capital, LLC, H&N LLC, and Perfect Line Investments. He also deposited over 5.5 million restricted shares into these accounts during the same period. In this time, Neuhaus sold 259,649,167 shares of Universal Express for proceeds of $9,786,589. From April 2002 to November 2003, $5,861,488 was transferred from bank accounts controlled by Neuhaus to Universal Express. At one point a brokerage firm where Coldwater Capital maintained accounts wrote Neuhaus to ask about the proper trading status of the Universal Express stock being sold; that firm subsequently closed the accounts. Neuhaus never checked with the SEC whether a registration statement had been filed as to the shares issued to him.
Spiga, the company associated with defendant Sandhu, sold 134,490,539 of the Universal Express shares transferred to it during this time for proceeds of $3,970,280. It transferred 9,644,333 of the shares it received to an account of Target Growth Fund, from which over 8 million of the shares were sold for $93,778. Sandhu advised Spiga about the amount, timing, and price of certain Universal Express stock sales. During the period covering these sales, Spiga made payments to Universal Express totaling $2,604,880.
All of the "S-8 registration" shares issued to Mendiratta's aunt Dhingra were deposited into accounts at brokerage firms including NevWest Securities Corporation. Between September 1, 2002, and September 30, 2003, these accounts sold 35,703,000 shares of Universal Express for proceeds of $1,230,234. The "S-8 registration" shares issued to Mendiratta's aunt Kaila were deposited in a NevWest brokerage account; they were sold for proceeds of $2,940,009. Dhingra's and Kaila's accounts also purchased shares of Universal Express -- 905,000 shares by Dhingra and 172,000 by Kaila.
Mendiratta was authorized to buy and sell securities in Dhingra and Kaila's brokerage accounts. The relevant representative of NevWest has testified that he received sales instructions for Dhingra's and Kaila's accounts only from Mendiratta; he never spoke with either account-owner about sales of Universal Express stock. From October 2002 to December 2003, NevWest was instructed to transfer money from Dhingra's accounts to third parties -- over $1 million together to Jensen Pacific, an Annette Hunter, and a Joseph Powers, and $75,000 to Mendiratta himself. Mendiratta signed at least one letter, dated January 7, 2003, authorizing a transfer of funds from Dhingra's account to Jensen Pacific, a company of which he is president (P. Ex. 135); Jensen Pacific received at least $500,000 from Dhingra. Transfers were similarly ordered from Kaila's NevWest account: from October 2003 to March 2004, $805,800 to Jensen Pacific, and $160,000 together to Hunter and a Gerald Kay.
Within the relevant period Jensen Pacific transferred $1,008,460 to Universal Express. Mendiratta signed checks and wire transfer orders directing payment of over $1 million from Jensen Pacific to Universal Express. For instance, a check he signed on December 30, 2003, for $260,000 drawn on Jensen Pacific's Bank West account and made payable to Universal Express, was deposited into Universal Express's account at First Union National Bank. The other transferees from Dhingra and Kaila -- Hunter, Powers, and Kay -- transferred some $475,000 total to Universal Express, also near the time of their receipt of the funds from Dhingra and Kaila.
III. Statutory Fraud Claims
The SEC accuses all defendants but Mendiratta of committing federal securities fraud in connection with certain press releases issued by Universal Express about its financing, expansion, or other business operations. Gunderson and Altomare each drafted or edited the press releases and then reviewed and approved them before their release. Each release was immediately followed by an increase in Universal Express's share price and a significant jump -- by 377 percent at the lowest and 4,770 percent at the highest -- in its trading volume.
Universal Express's May 23, 2002, press release announced that it had "receive[d] over $100,000,000 in funding commitments" from "two International Hedge Funds" to finance acquisitions. (P. Ex. 21.) According to a quote of Altomare in the release, these hedge funds had "already invested over $5,000,000" with the company in the preceding five years. (Id.) Prior to issuance of this press release, Altomare had asked Neuhaus and Sandhu to provide letters pledging funding to Universal Express. According to the undisputed testimony of Neuhaus and Sandhu, Altomare essentially created the contents of these letters. None of the releases actually mentions the names of any of the Consultant Defendants or of any individuals or entities allegedly associated with them. Altomare has testified that, at the time, he neither possessed nor had sought to obtain any financial information about the entities purporting to commit funding in the letters essentially created by him.
Neuhaus provided a letter -- dated March 22, 2002, and addressed to Altomare -- as the "Managing Member" of Coldwater Capital, stating that Coldwater Capital had "been very happy with its investments in Universal Express, investing over $2,000,000 in the company over the past 10 years" and stating that Coldwater's "Board of Directors has authorized $5,000,000 in additional seed capital for any acquisitions Universal Express may wish to undertake." (P. Ex. 22.) The letter states that Coldwater "will also provide up to $40,000,000 in long-term financing, if necessary." (Id.) However, Coldwater had not been investing in Universal Express for 10 years and had actually invested some $500,000 less than stated, it did not have $40 million on hand at the time, and it did not have a board of directors.
In a second letter, dated May 22, 2002, and also addressed to Altomare, Neuhaus on behalf of Coldwater Capital stated that his "hedge fund and partners enthusiastically commit to the funding of Universal Express's strategic acquisition of Trailway's Bus Systems and will do whatever we can to help . . . close the transaction." (P. Ex. 26.) Altomare told Neuhaus that his letters would be provided to Trailways for merger discussions. Neuhaus reiterated the statements in his letters to a representative of Trailways who called to discuss a potential merger with Universal Express. He later told the SEC that he had only a "preliminary interest" in, rather than enthusiasm for, the Trailways acquisition, but that he drafted stronger language at Altomare's behest. (Neuhaus SEC Tr. 2 at 69-70.) The day the May 23, 2002, press release issued, Neuhaus, who had previously been selling approximately 500,000 shares of Universal Express per day, sold more than 3 million shares, for proceeds totaling over $80,000.
Also at Altomare's request, Sandhu provided him a letter, dated March 25, 2002, stating, "As investment advisor to Target Growth Fund Ltd., . . . we have . . . invested over $3,000,000 . . . . [and] are happy to continue investing in Universal Express." The letter continued, "[W]e have authorized up to $7,500,000 in addition capital from the Fund for future approved acquisitions [of] Universal Express . . . [and] are also prepared based upon due diligence and proper collateral to arrange an additional $50,000,000 in long term financing for such an acquisition." (P. Ex. 23.)
In May 2002, as he had with Neuhaus, Altomare solicited a letter from Sandhu expressing funding support for a potential acquisition of Trailways, for which acquisition he told Sandhu a letter of intent had been signed. Altomare drafted the May 21, 2002, funding letter, which Sandhu signed, stating: "based upon the initial proposed letter of intent, we would be committed to the funding of the combined company. Please let us know when the final terms have been negotiated so we can move our discussions to the next level." (P. Ex. 24.) Sandu permitted Altomare to name him as a reference to Trailways, and in a conversation with a Trailways representative Sandu confirmed the statements in his March and May 2002 letters. On the day of the May 23, 2002, press release and the day after, Spiga sold a total of approximately 2 million Universal Express shares for proceeds of about $64,000.
On July 10, 2002, Universal Express issued a press release announcing that it had "received a letter of intent from a funding institution for $460,000,000." (P. Ex. 28.) In a June 27, 2002, letter address to Altomare, a loan broker had written, "please accept this document as our letter of intent to grant you Financing in the amount of, not to exceed, Four Hundred Sixty Million Dollars ($460,000,000) USD upon mutually acceptable terms and conditions." (P. Ex. 29, emphasis in original.) That broker wrote the letter based on his understanding, after speaking with Altomare, that Universal Express had an agreement to purchase $950 million's worth of assets of another corporation at half price. There is no evidence in the record that such an agreement actually existed.
On November 21, 2002, Universal Express issued a press release announcing that it had received "additional funding of $25,000,000 from Transamerica and New Millennium Financial" and stating that "[t]his $25,000,000 brings our total financial commitments to $585,000,000."
(P. Ex. 30.) Yet Transamerica had explicitly stated conditions precedent in its November 19, 2002, letter to Altomare proposing $20 million in financing, and had stressed that the letter "is only a letter of proposal and it is not intended nor should it be construed as a commitment." (Id.) After learning of the November 21 press release, Transamerica wrote Altomare that the release "incorrectly states the facts" and that it "expects that the misstated facts . . . will be promptly corrected." (P. Ex. 33.) Altomare received Transamerica's letter and forwarded it to Gunderson, but no correction issued. The New Millennium letter of November 20, 2002, similarly stated various conditions for extending $5 million in funding. (P. Ex. 32.) There is no evidence that any of the conditions for receiving funds from Transamerica or New Millennium was ever met, or that any basis existed outside the proposal letters for representing these entities' intentions.
Universal Express made another funding announcement on April 9, 2003, claiming that it had received "$300 million in committed and approved funds . . . to acquire a soon to be announced nationally established transportation company." (P. Ex. 34.) It stated that a letter of intent had been signed with the company to be acquired. The release quotes Altomare as representing that the receipt of funds was "far more definite" than if contingent on "due diligence requirements," and that "our legal counsel" had deemed it "appropriate for the benefit of the general public, our shareholders and all others involved" to make the announcement despite the possibility of "unexpected setbacks." (Id.) Yet there is no evidence that Universal Express ever fulfilled the condition stated in the letter of intent -- payment of $300 million of the purchase price no later than March 31, 2003, more than a week before the press release issued -- to sustain the deal, and there is no evidence that such payment would have been possible.
Universal Express issued another press release on October 12, 2003, announcing that it had signed a contract to purchase North American Airlines, which "will add over $160,000,000 in revenues." (P. Ex. 41.) The release, quoting Altomare, stated that "[w]e have paid a $1,000,000 deposit . . . and the 45 day due diligence process has begun." (Id.) Neuhaus had emailed the president of the airline several days earlier, claiming that Universal Express would "have to make some sort of public filing and or announcement" to validate the funding of the deposit and telling him that Altomare would contact him about any release. (P. Ex. 40.) Neuhaus reviewed a draft of the press release announcing payment of the deposit. He had financed the deposit through a series of transfers and loans involving his shares of Universal Express. The first trading day after the statement was publicly released, Neuhaus sold 1 million shares of Universal Express stock, continuing to sell that amount on average every day for several weeks for proceeds of $1 million.
In addition to announcing purported expansions and funding commitments, Universal Express also publicly projected sizeable revenues from businesses with which it actually had no connection. In a May 22, 2003, press release, for instance, Universal Express anticipated receiving $9 million of revenue annually from "over 9,000 independently owned and operated private postal stores" in its "WorldPost Network." (P. Ex. 54.) But there is no evidence that Universal Express actually had a relationship with any such store, and, indeed, Altomare has explained that its "network" consisted of every postal store existing in the United States that had not somehow known to opt out of it. (See Altomare Dep. 1 at 249-50.)
In 2001, the beginning of the time period relevant to this case, Universal Express operated at a net loss and had liabilities that outweighed its assets by $1,799,526. From 2001 to 2004, it generated a total of $2,868,519 in revenues from business operations and received a total of $15,072,656 from actors connected with the stock sales at issue in this case.