United States District Court, N.D. New York
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For Securities and Exchange Commission, Plaintiff: Herbert M. Semler, Richard Hong, U.S. Securities and Exchange Commission - DC Office, Washington, DC.
For Stratocomm Corporation, Defendant: Scott M. Peterson, LEAD ATTORNEY, Giovanna A. D'Orazio, D'Orazio, Peterson Law Firm, Saratoga Springs, NY.
For Roger D. Shearer, Defendant: E. Stewart Jones, Jr., LEAD ATTORNEY, James C. Knox, E. Stewart Jones Law Firm, PLLC, Troy, NY.
Craig Danzig, Defendant, Pro se, Boca Raton, FL.
Thomas J. McAvoy, Senior United States District Judge.
DECISION & ORDER
This is a civil enforcement action brought by the Securities and Exchange Commission (" the SEC" or " the Commission" ) against StratoComm Corporation (" StratoComm" ), Roger D. Shearer (" Shearer" ) and Craig Danzig (" Danzig" ).
The Commission asserts that the defendants committed securities fraud and registration violations in the offer and sale of StratoComm penny stock. In this regard, the Commission contends that StratoComm, under the control of Shearer and with the assistance of Danzig, disseminated fraudulent public statements designed to portray StratoComm as a successful company that had developed, manufactured and sold sophisticated telecommunications equipment for tens of millions of dollars. However, the Commission asserts that the undisputed facts reveal that StratoComm had no products, no paying customers, and no revenues; and that its very existence depended on its ability to sell its securities to investors. The Commissioner further asserts that StratoComm disseminated fraudulent statements to the public in three press releases and a marketing document posted on the internet and distributed to potential investors. During this same time period, the defendants sold millions of shares of StratoComm's stock to over 100 investors. Yet, StratoComm's stock offering was not registered as required by law. In addition, Danzig, who was in the forefront of selling StratoComm's stock, was not registered as a broker.
The Commission moves for partial summary judgment on the issue of liability for each of its claims. StratoComm and Shearer have opposed the motion, but Danzig, who is proceeding pro se, has failed to submit any opposition. The Commission has also submitted reply papers. The Court has considered all of the submitted papers in reaching its decision on the pending motion.
a. StratoComm Corporation
StratoComm Corporation (" StratoComm" ) is a Delaware corporation that was incorporated in 1997. It describes itself as being in the business of designing, manufacturing, and selling telecommunications equipment. StratoComm's stock is a penny stock that is publicly traded and quoted on the electronic quotation system formerly known as the Pink Sheets. From late 2007 until April 2010, StratoComm received approximately $4 million from selling its stock to more than 100 investors. StratoComm has never filed a registration statement with the U.S. Securities and Exchange Commission, (" Commission" ), never prepared audited financial statements or provided an offering memorandum to investors.
b. Roger D. Shearer
Roger D. Shearer, who founded StratoComm in 1997, is the sole Officer and Director of StratoComm and has held those positions since the inception of the company. Shearer is also the Chief Executive Officer (" CEO" ) of StratoComm and has held that position since the inception of the company except for a one-month period in the fall of 2010. As CEO, Shearer controlled the conduct of StratoComm during all periods in which he was CEO. As sole Director of StratoComm, Shearer authorized himself, as CEO of StratoComm, to issue StratoComm stock between January 2007 and January 2011. From November 2007 until April 2010, Shearer was StratoComm's largest beneficial stockholder.
c. Craig Danzig
Craig Danzig was employed by StratoComm from at least 2007 until November 2010, initially as Director of Investor and Institutional Relations and subsequently as Executive Director of Institutional Relations. Prior to joining StratoComm, Danzig was a registered representative (commonly known as a " stockbroker" ) associated with several broker-dealers. Danzig held a license to sell securities from 1991 until 2000, when it lapsed. From November 2007 through April 2010, Danzig was not licensed to sell securities.
d. StratoComm Portrayal as a Successful Telecommunications Company
The SEC asserts that during the period November 2007 through April 2010, StratoComm stated that it was designing, manufacturing and selling telecommunications equipment called the Transitional Telecommunications System (" TTS" ) to countries in the developing world. Plt. Statement of Facts (" PSOF" ) ¶ 19. Defendants StratoComm and Shearer asserts that StratoComm did not state that it manufactured anything " other than its proprietary payload" and that, to the extent their Answer can be read as admitting that it manufactured telecommunications systems generally, it " was an unintentional oversight." Shearer SOF ¶ 19; see also StratoComm SOF ¶ 19.
According to the SEC, StratoComm described its TTS as consisting primarily of an antenna system suspended from a blimp (" aerostat" ) tethered to the ground. PSOF ¶ 20. Defendants StratoComm and Shearer deny this statement and contend that " the transitional telecommunications system consists primarily of three components, including the users segment, the flight segment and the ground segment, each of which are composed of separate and distinct components. . . . The flight segment consists of the aerostat, tether, and mooring system." Shearer SOF ¶ 20.
It is undisputed that StratoComm stated that its TTS could provide 500,000 subscribers with broadband internet, wireless voice, or broadcast services. StratoComm also stated that it was developing a Stratospheric Telecommunications System (" STS" ), including solar-powered equipment to be stationed in the stratosphere 65,000 feet above ground. StratoComm explained that the STS would be able to provide telecommunications services to three million customers in a 1,000 kilometer area, and that it was operating on two parallel tracks: (i) current production and sales of the TTS, and (ii) development of the stratospheric system. It is also undisputed, however, that StratoComm has never actually built a TTS; has never tested an operational prototype of a TTS; has never had all of the parts to construct a TTS; has never possessed an aerostat; has never had the funds to acquire an aerostat; has never exchanged a TTS for money; and has never received a deposit on a TTS.
The Commission further maintains that as of late 2007, StratoComm had not yet resolved basic design issues relating to the TTS and had only estimated the cost of the system at a rough level. PSOF ¶ 33. Defendants contend that at the referenced time, " the design was complete and the TTS was marketable for sale and deliverable, but for the finding of a moneyed purchaser." Shearer SOF ¶ 33; see also StratoComm SOF ¶ 33. It is undisputed, however, that StratoComm has never acquired any customers who transmitted payment to StratoComm for products or services; has never had any revenue; and its sole source of support, aside from loans from friends and family, has been the
money that it received from selling its securities to investors.
e. StratoComm's Alleged False And Misleading Statements
1. November 20, 2007 Press Release
During the November 2007 through May 2009 time period, Shearer, acting within the scope of his authority and in his capacity as CEO of StratoComm, was authorized to write, publish and distribute press releases on behalf of StratoComm. On November 20, 2007, StratoComm issued a press release entitled " StratoComm Announces $45 Million System Sale." The press release identifies StratoComm as its source. Shearer, acting within the scope of his authority, and in his capacity as CEO of StratoComm, wrote the November 20, 2007 press release and authorized its release and publication. The press release was posted on StratoComm's website and was distributed to the public via PR Newswire on November 20, 2007. This press release states that Evergreen ISP Platform, PLC " has contracted with StratoComm for the purchase of $45,000,000 of StratoComm Transitional System telecommunications equipment and services." The press release described StratoComm as a " provider" of " telecommunications infrastructure technologies" and stated that a " $45 million contract" was " awarded" to StratoComm by an entity in Cameroon for three TTS units and related services. However, as of November 20, 2007, StratoComm had never built or tested an operational TTS and StratoComm did not have the money to do so.
The SEC asserts that " on November 20, 2007, Shearer knew that StratoComm did not have an operational TTS prototype and had no TTS units to supply." PSOF ¶ 47. Defendants " object to the characterization that StartoComm 'had no TTS units to supply'" because " [i]t was a logistical impracticality and financial impossibility to maintain a TTS unit 'in stock' before a purchaser was acquired and paid a significant downpayment. Moreover, StratoComm was able to supply a TTS at any time, given its possession of the proprietary payload and the ready availability of the additional required off-the-shelf components to be supplied through third-party vendors." Shearer SOF ¶ 47; StratoComm SOF ¶ 47.
However, it is undisputed that on November, 20, 2007, StratoComm had not provided telecommunications infrastructure technologies to any person or entity, and Shearer knew StratoComm did not have the funding in place to build a TTS. Thus, defendants concede that when Shearer drafted the November 20, 2007 press release, he knew that StratoComm had not provided telecommunications infrastructure technologies to any person or entity. Moreover, StratoComm never received a monetary deposit or payment from Evergreen ISP Platform based upon the sale announced in the November 20, 2007 press release and StratoComm never received any revenue based upon the sale referenced in the November 20, 2007 press release.
2. January 29, 2008 Press Release
On January 29, 2008, StratoComm issued a press release announcing the sale, valued at $15 million, of a TTS and related services to StratoComm's joint venture partner in Madagascar. The press release identifies StratoComm as its source. Shearer, acting within the scope of his authority and in his capacity as CEO of StratoComm, wrote the January 29, 2008 press release, and acting within the scope of his authority and in his capacity as CEO of StratoComm, authorized the release and publication of the January 29, 2008 press release. StratoComm's January 29, 2008 press release was distributed to the public
via PR Newswire on the same date, and posted on StratoComm's website on February 26, 2008. The January 29, 2008 press release referred to the Madagascar transaction as " StratoComm's most recent system sale," and described StratoComm as a " provider" of telecommunications infrastructure technologies. However, as of January 29, 2008, StratoComm had never built or tested an operational TTS and StratoComm did not have the money to do so. The Commission contends that, as of January 29, 2008, Shearer knew that StratoComm did not have an operational TTS prototype or TTS unit to supply to Madagascar. PSOF ¶ 61. Shearer " objects" to this assertion, contending again that " [i]t was a logistical impracticality and financial impossibility to maintain a TTS unit 'in stock' before a purchaser was acquired and paid a significant downpayment," and that " StratoComm was able to supply a TTS at any time, given its possession of the proprietary payload and the ready availability of the additional required off-the-shelf components to be supplied through third-party vendors." Shearer SOF § 61; see also StratoComm SOF § 61 (same).
However, there is no dispute that as of January 29, 2008, StratoComm had not provided telecommunications infrastructure technologies to any person or entity, and Shearer knew that StratoComm did not have the funding in place to build a TTS. It is also undisputed that StratoComm never received a monetary deposit or payment from StratoComm Madagascar SA based upon the sale announced in the January 29, 2008 press release, and StratoComm never received any revenue based upon the agreement referenced in the January 29, 2008 press release.
3. September 2, 2008 " Executive Informational Overview"
On September 2, 2008, StratoComm published its Executive Informational Overview. It was prepared at the direction of Shearer acting within the scope of his authority and in his capacity as CEO of StratoComm. The Executive Informational Overview was prepared by StratoComm with the assistance of Crystal Research Associates, LLC. StratoComm paid Crystal Research Associates $40,000 and provided 300,000 StratoComm stock warrants to assist in the preparation of the Executive Informational Overview. The Executive Informational Overview was based upon information provided by StratoComm. Shearer reviewed, approved and authorized the release of the Executive Informational Overview. ...