The opinion of the court was delivered by: Hurley, Senior District Judge:
The United States Securities and Exchange Commission (the "SEC" or the "Commission") commenced this action against defendants iShopNoMarkup.com, Inc. ("iShop"), Scott W. Brockop, Anthony M. Knight, and Moussa Yeroushalmi, also known as Mike Yeroush ("Yeroush"), based upon their alleged violations of the registration provisions of the securities laws, specifically Sections 5(a) and 5(c) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. §§ 77e(a), (c), as well as the anti-fraud provisions of the securities laws, which are set forth in Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a); Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b); and Rule 10b-5, 17 C.F.R. § 240.10b-5. (Compl. ¶ 9.)
In November 2010, Yeroush consented to the entry of judgment against him. (See Endorsed Order, dated December 9, 2010, Docket No. 136.)*fn1 Pursuant to the Consent Judgment, Yeroush was permanently enjoined from violating Sections 5 and 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5. Yeroush was also ordered to pay disgorgement, pre-judgment interest, and a civil penalty in a total amount of $101,266.58. The Consent Judgment further provided that the Court would "determine whether it was appropriate to enter an order, pursuant to Section 21(d)(2) of the Exchange Act, prohibiting, conditionally or unconditionally, and permanently or for such a time period as the Court shall determine, Yeroush from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act upon motion of the Commission." (Id. at 5.)
Pursuant to the Consent Judgment, the SEC has filed the present motion seeking an Order barring Yeroush from serving as an officer or director of a public company. For the reasons set forth below, the Commission's motion is denied.
The Consent Judgment sets forth the following terms applicable to the SEC's motion for an officer and director bar: (1) Yeroush will be precluded from arguing that he did not violate the securities laws, as alleged in the Complaint, (2) Yeroush may not challenge the validity of the Consent Judgment, (3) for purposes of this motion, the Court shall deem the allegations in the Complaint to be true, and (4) the Court "may determine the issues raised in the motion" based upon the parties' submissions "without regard to the standards for summary judgment contained in Rule 56(c) of the Federal Rules of Civil Procedure." (Id.)
The following factual allegations are taken from the Complaint, the submissions of the parties in connection with the present motion, and the Court's September 24, 2007 Memorandum & Order ("Sept. 2007 Decision"), which denied plaintiff's motion for summary judgment on its claim that all of the defendants violated Section 5(a) and (c) of the Securities Act. (Docket No. 84.)
In August 1999, Knight conceptualized and formed iShop, an internet shopping mall that offered products directly from manufacturers to consumers with no markup in price. (Sept. 2007 Decision at 2.) Yeroush invested $50,000 in iShop in late 1999 and, at iShop's request, became a member of iShop's board of directors. (Decl. of Shannon A. Keyes, Esq., dated Feb. 1, 2011 ("Keyes Decl.") ¶¶ 19-21.) At the time yeroush joined the board of directors, iShop refunded a portion of Yeroush's investment; iShop used funds from subsequent iShop investors in order to make this refund to Yeroush. (SEC's Mem. at 3.) As of January 2000, Yeroush held the position of Executive Director, and he became the President of iShop in approximately March 2000. (Keyes Decl. ¶¶ 16-18.) From March 2000 to September 2000, iShop paid Yeroush a salary of $42,465.56. (Id. ¶ 24.)
To raise capital, iShop conducted three private placement offerings of stock. (Sept. 2007 Decision at 2-3.) While the first offering commenced in September 1999, which was prior to Yeroush becoming involved with iShop (id. at 2), the second offering took place in January 2000 while he served as Executive Director. (Keyes Decl. ¶ 16.) The third offering commenced in February 2000, while Yeroush was Executive Director, and continued during Yeroush's term as President. (Id. ¶¶ 16-18.) In connection with these private offerings, iShop distributed confidential offering memoranda ("COMs") to its investors. The COMs contained "material misrepresentations, or failed to disclose material information, about, among other things, the status of iShop's website, iShop's revenues, iShop's use of investor proceeds, and iShop's operating capabilities." (SEC's Mem. at 4 (citing Compl. ¶¶ 2, 35-57).)
IShop's board of directors and officers, including Yeroush, created lists of people that iShop representatives could contact to solicit investments. (Keyes Decl. ¶ 5.) Yeroush personally met with and solicited potential investors (id. ¶ 8) and, in doing so, Yeroush made multiple, material misrepresentations to them (Compl. ¶ 58). Specifically, Yeroush represented to these potential investors that: (1) iShop would have an initial public offering ("IPO") on a date certain at a specific price, (2) an iShop investment would dramatically increase in value, (3) an iShop investment "carried no risk and was a 'sure thing,'" (4) Merrill Lynch was "'backing' the company," and (5) iShop had projected revenues of between $50 and $70 million per year. (Id. ¶¶ 60-64.) Contrary to Yeroush's representations, however, iShop had no specific plans to conduct an IPO on any date certain, did not have any investment banks or broker-dealers providing it with their services, and did not have any revenue-generating operations. (Id. ¶ 65.)
Moreover, there was no reasonable basis to predict that iShop's stock price would dramatically increase in value in the near future. (Id.)
Yeroush was also aware that iShop representatives made telephone calls or sent letters to potential investors throughout the country for the purpose of soliciting their investments in iShop. (Keyes Decl. ¶¶ 9, 15.) These iShop representatives made material misrepresentations to potential investors in order to persuade them to purchase iShop stock. (Compl. ¶ 70.)
The SEC requests an Order barring Yeroush from serving as an officer or director of any public company. Section 20(e) of the Securities Act and Section 21(d)(2) of the Exchange Act give the Court authority to "prohibit, conditionally or unconditionally, and permanently or for such period of time as it shall determine, any person who violated" Section 17(a) of the Securities Act or Section 10(b) of the Exchange Act "from acting as an officer or director" of any public company "if the ...