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Securities and Exchange Commission v. Greenstone Holdings, Inc.

United States District Court, S.D. New York

July 10, 2013

SECURITIES and EXCHANGE COMMISSION, Plaintiff,
v.
GREENSTONE HOLDINGS, INC., HISAO SAL MIWA, JOHN B. FROHLING, DANIEL D. STARCZEWSKI, JOE V. OVERCASH, JR., FRANK J. MORELLI, III, THOMAS F. PIERSON, JAMES S. PAINTER, III, and VIRGINIA K. SOURLIS, Defendants, ACTIVE STEALTH, LLC, BAF CONSULTING, INC., BLUEWATER EXECUTIVE CAPITAL, LLC, EMERGING MARKETS CONSULTING, LLC, KCS REFERRAL SERVICES, LLC, MBA INVESTORS, LTD., NEW AGE SPORTS, INC., POWER NETWORK, INC., PROJECT DEVELOPMENT, INC., SEVILLE CONSULTING, INC., STARR CONSULTING, INC., TUSCANY CONSULTING, INC., and YT2K, INC., Relief Defendants

Jack Kaufman, Esq., Alexander Janghorbani, Esq., SECURITIES and EXCHANGE COMMISSION, New York, New York.

For Virginia K. Sourlis, Defendant: Eugene Killian, Jr., Esq., THE KILLIAN FIRM, P.C., Iselin, New Jersey.

OPINION

MIRIAM GOLDMAN CEDARBAUM, United States District Judge.

Page 212

MEMORANDUM OPINION AND ORDER

The Securities and Exchange Commission (" SEC" ) brings this enforcement action under Section 5 of the Securities Act of 1933 and Section 10(b) of the Exchange Act of 1934 against attorney Virginia K. Sourlis. Both parties have moved for summary judgment on liability. At oral argument on November 16, 2012, I granted the SEC's motion for summary judgment for aiding and abetting a violation of Section 10(b) and denied both parties' motions for summary judgment for a primary violation of Section 10(b). I reserved decision on the Section 5 claim. The parties dispute whether Sourlis's actions rise to the level of participation necessary for a Section 5 violation. For the reasons that

Page 213

follow, the SEC's motion for summary judgment is granted, and Sourlis's motion is denied.

FACTS

Greenstone was incorporated in 2004 by Hisao Sal Miwa. In December 2005, with Greenstone facing a severe liquidity crisis, Miwa arranged to convert Greenstone into a publicly traded company. Greenstone acquired the shares of a public shell company and hired Corporate Stock Transfer, Inc. (" CST" ) to serve as its stock transfer agent. From September 2006 through June 2008, Greenstone distributed millions of shares of unregistered stock to the public.

Section 5 of the Securities Act of 1933 makes unlawful the public sale of unregistered securities. 15 U.S.C. § 77e. At the time of the sales at issue, Rule 144(k)[1] exempted securities from registration before public sale if the securities were issued privately, solely in exchange for restricted securities of the same company, if the restricted securities were more than two years old. 17 C.F.R. § 230.144(k). To sell Greenstone shares publicly, the company and its counsel sent legal opinion letters to CST stating facts that, if true, would have supported this exemption from registration under Rule 144(k).

Sourlis wrote one such letter dated January 11, 2006, and John Frohling, counsel to Greenstone, sent her letter to the transfer agent. The letter stated that shares could be issued in exchange for $77,339.65 worth of convertible promissory notes that had been issued by Greenstone's predecessor corporation to " various vendors" on or before January 10, 2004. The letter represented that on January 10, 2006, these notes had been assigned and endorsed to four entities, which were Greenstone investors. Sourlis stated that no consideration was received by the company or by the vendors (referred to by Sourlis as " Original Note Holders" ) in connection with the assignment, and that no commissions were paid in connection with the assignment. Sourlis stated that she had been told by the vendors that the original convertible notes had been held for at least two years prior to the assignment and that none of the vendors were " affiliates" of the company under Rule 144. Accordingly, Sourlis concluded that the shares could be issued without a legend, and CST thereafter issued over 6 million shares without a restrictive legend.

However, the convertible notes described by Sourlis did not even exist. Therefore, Sourlis's statement that she was informed by the vendors that they had held the notes for at least two years was necessarily false. Likewise, Sourlis's other statements -- that the company had informed her that the notes were issued to various vendors; that the notes had been assigned to the four entities; and that no ...


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