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.
DECISION & ORDER
Thomas J. McAvoy, Senior United States District Judge.
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 Court previously granted the SEC's motion for partial summary judgment as to liability against each Defendant on all claims. See 02/19/14 Dec. & Ord. (" Order" ). The SEC now moves for judgment imposing various forms of relief as requested in the Complaint. Dkt. # 62. StratoComm and Shearer have opposed the relief, dkt. # 65, dkt. # 67, and the SEC has replied. Dkt. # 70. The Court has considered all of the submission and decides the pending motion without the need for oral argument or a hearing.
The SEC alleged in its Complaint that StratoComm, a development stage company whose penny stock traded on the Pink Sheets; its founder and Chief Executive Officer, Shearer; and its Executive Director of Institutional Relations, Danzig, committed securities fraud and registration violations in the offer and sale of StratoComm stock. As to relief for each Defendant, the SEC requested permanent injunctions from future violations of the federal securities laws; disgorgement of ill-gotten gains with prejudgment interest; and civil penalties. In addition, the Commission sought permanent penny stock bars against Shearer and Danzig, and a permanent officer and director bar against Shearer.
After discovery, the SEC moved for partial summary judgment as to liability against each Defendant on all claims, including the fraud claims. The Commission argued that the undisputed facts showed that from November 2007 through April 2010, StratoComm, acting at Shearer's direction and with Danzig's assistance, knowingly issued and distributed several fraudulent public statements (three press releases and a marketing document calle " Executive Informational Overview" or " Executive Overview" ) designed to portray StratoComm as a successful company that had developed, manufactured and sold sophisticated telecommunications equipment called the Transitional Telecommunications System (" TTS" ) to countries in the developing world for tens of millions of
dollars, and that it was developing a Stratospheric Telecommunications System (" STS" ), including solar-powered equipment to be stationed in the stratosphere 65,000 feet above ground. It is also undisputed, however, that StratoComm has never actually built a TTS; had never tested an operational prototype of a TTS; had never had all of the parts to construct a TTS; had never possessed an aerostat; had never had the funds to acquire an aerostat; has never exchanged a TTS for money; had never received a deposit on a TTS; had no paying customers; and had no revenues. Instead, its existence depended upon its ability to sell its securities to investors. The Commission further contended that the undisputed record showed that the Defendants sold approximately 62 million shares of StratoComm's stock to over 100 investors through illegal, unregistered stock offerings and that Danzig, who led the charge in selling StratoComm's stock, was not even registered as a broker.
The Court granted the SEC's motion, imposing liability on the Defendants on each claim in which the Defendants are named. See Order. The Court held that StratoComm, Shearer, and Danzig violated and/or aided and abetted in violating various antifraud provisions of the federal securities laws, including Section 17(a) of the Securities Act and/or Section 10(b) of the Exchange Act. See id. at 14-33. In addition, the Court found that all Defendants violated Sections 5(a) and (c) of the Securities Act (for engaging in illegal, unregistered offerings); and Danzig violated Section 15(a) of the Exchange Act (for acting as an unregistered broker). See id. at 31-36. Finally, the Court found that Shearer was liable under Section 10(b) as a " controlling person" of StratoComm under Section 20(a) of the Exchange Act. Id. at 29. More specifically, the Court found that StratoComm's four public statements at issue (from November 2007 to May 2009) were materially false and misleading. The Court further found that each Defendant acted knowingly in violating and/or aiding and abetting violations of the anti-fraud provisions of the federal securities laws. Order at 25 (" The incontrovertible record shows that StratoComm and Shearer made materially false and misleading statements with scienter" ); 26-27 (" A reasonable fact finder could only conclude that in preparing and disseminating the press releases and Executive Overview which contained the referenced false and misleading statements ..., Shearer engaged in knowing misconduct" ); 30 (finding that Shearer and Danzig aided and abetted StratoComm's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder with scienter; " Shearer knew that the press releases and the Executive Overview were materially misleading" ; " [Danzig] knew that the Executive Overview contained materially misleading statements" ), 32-33 (" based upon the undisputed evidence, Danzig violated Section 17(a)(1) of the Securities Act by employing a fraudulent device (the Executive Overview) as a 'selling tool' to market StratoComm's stock to investors and to convince investors of the 'legitimacy' of the company" ; " he used the Executive Overview, which he knew contained untrue statements, as a 'tool' to achieve those sales" ).
The SEC moves for a judgment imposing the relief it seeks in the Complaint. As indicated, StratoComm and Shearer oppose the motion. The Defendants' opposition, boil to its core, is that all of the relief requested by the SEC is equitable in nature; thus, none is mandated by law but left to the sound discretion of the Court. Defendants argue that an exercise of discretion should weigh all of the relevant facts and circumstances and, when doing so, should yield lenient sanctions. Defendants make two principle arguments. Firs they assert that any violation of the securities law was unintentional; was derived from Shearer's fervent belief that he could and would provide an operational telecommunicatio product making StratoComm successful and yielding a return for its investors; and their actions did not result in any investors being " duped." Second, the result of this litigation has caused StratoComm and Shearer grave financial distress, thereby making any large financial payment an impossibility. The Court will address the sought-after relief, and the parties' positions, seriatim.
a. Injunctions as to All Defendants
The SEC seeks permanent injunctions against all three defendants preventing them from violating the securities laws in the future. Injunctive relief is expressly authorized by Congress to proscribe future violations of the federal securities laws. SEC v. Cavanagh, 155 F.3d 129, 135 (2d Cir. 1998). An injunction should issue if the SEC can show that there is substantial likelihood that the defendant will violate the securities laws in the future. See id To determine such likelihood, courts consider the totality of the circumstances, including th fact that the defendant has been found liable for illegal conduct; the degree of scienter involved; whether the infraction is an isolated occurrence; whether defendant continues to maintain that his past conduct was blameless; and whether, because of his professional occupation, the defendant might be in a position where future violations could be anticipated. See id; SEC v. Bass, 2011 WL 4344001, at *3 (N.D.N.Y. Sept. 14, 2011).
1. Whether defendant has been found liable for illegal conduct.
Defendants were found liable on each claim in which the they are named, including fraud/aiding and abetting fraud claims under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and/or Section 17(a)(1) of the Securities Act. StratoComm and Shearer's attempts to re-litigate their previously rejected protestations of innocence are without merit. Shearer argues that StratoComm did possess a proprietary telecommunications payload in May 2008, and, therefore, the Court improperly rejected this contention in finding that StratoComm's public statements were false. See Order, p. 16; 
Shearer Decl. ¶ ¶ 18-19. However, and assuming, arguendo, that StratoComm possessed a proprietary telecommunications payload in May 2008, that does not negate the falsity of the many statements contained in StratoComm's November 20, 2007 Press Release;  its January 29, 2008 Press Release;  its September 2, 2008 " Executive Informational Overview; "  and
its May 5, 2009 Press Release. Because these false statements were likely to influence investor decisions, that were violative of the securities law even if some investors were not duped by them. This is because the SEC is not required to prove that a victim relied upon the defendants' omission or misrepresentation in making an investment decision in an enforcement action. See SEC v. Apuzzo, 689 F.3d 204, 213 (2d Cir. 2012). Thus, even assuming that there exists no evidence that any of the investors were actually duped into investing, that fact is of no moment on the issue of liability. It should also be noted that Danzig was found to have acted as an unregistered broker in violation of Section 15(a) of the Exchange Act; and all Defendants were found to have violated Sections 5(a) and 5(c) of the Securities Act by offering and selling securities in unregistered transactions.
In addition, the SEC has demonstrated that Shearer and Danzig are recidivist violators of the securities laws. In this regard, it is undisputed that in 2001, Shearer was ordered by the SEC to cease and desist from future violations of Section 5(a) and 5(c) of the Securities Act for selling unregistered securities. See SEC Order Instituting Proceedings, Making Findings, and Imposing a Cease-and-Desist Order, Oct. 3, 2001 (SEC Ex. 1). The SEC has also demonstrated that Danzig was sanctioned by the State of Delaware in connection with unauthorized transactions in a customer account and was barred from obtaining a license to sell securities in New Jersey. See FINRA BrokerCheck Report for Craig Danzig at 6-8 (discussing the Delaware and New Jersey regulatory proceedings against Danzig) (SEC Exhibit 3). All considered, this factor weighs in favor of injunctive relief.
2. The degree of scienter involved.
Scienter is " a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 96 S.Ct. 1375, 47 L.Ed.2d 668 & n. 12 (1976). The Court found that each Defendant knowingly violated, and/or aided and abetted violations of, the anti-fraud provisions of the federal securities laws. Order at 26-27 (" A reasonable fact finder could only conclude that in preparing and disseminating the press releases and Executive [Informational] Overview which contained the referenced false and misleading statements ..., Shearer engaged in knowing misconduct" ); 27 (" As StratoComm's CEO and sole director who acted within the scope of authority, Shearer's scienter is imputed to StratoComm" ); 30 (finding that Shearer aided and abetted StratoComm's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder with scienter; " Shearer knew that the press releases and the Executive Overview were materially misleading" ). Further, and contrary to Shearer's suggestion, there is no requirement that a defendant must act " intentionally" to be permanently enjoined. See, e.g., Bass, 2011 WL 4344001, at *4 (defendants' acting with the requisite level of scienter -- that is, knowingly in that case --under the Securities and Exchange Acts was sufficient for permanent injunctions). This factor weighs in favor of injunctive relief.
3. Whether the infraction is an isolated occurrence.
The Court found that StratoComm and Shearer falsely portrayed StratoComm as a development-stage company that had progressed to the operational stage with a finished product and sales, when it had not. Order at 22. StratoComm had no products, no paying customers, and no revenues; its existence depended on its ability to sell securities to investors. Order at 2, 22. The Court also found that the fictitious portrayal was advanced through a series of materially false and misleading public statements (three press releases and Executive Informational Overview) over the course of almost two and half years, whereby StratoComm received approximately $4 million from selling its penny stock to more than 100 investors. Order at 3, 15-27. Contrary to Defendant's arguments, the instant infractions were not isolated occurrences but rather appeared to be a part of a longstanding and somewhat elaborate scheme to defraud investors. Moreover, Danzig was found to have acted as an unregistered broker, and all Defendants were found to have violated the Securities Act by offering and selling securities in unregistered transactions. This factor weighs in favor of injunctive relief.
4. Whether the defendant continues to maintain that his past conduct was blameless.
Defendants argue, inter alia, (a) that StratoComm and Shearer's false and misleading public statements were immaterial; (b) that Shearer, StratoComm's CEO and sole member of its Board of Directors, " at all times has operated with the success of the company in mind; " and (c) that Shearer did not have the appropriate scienter to commit any wrongdoing. The arguments are contradicted by the Court's decision in this matter. Further, the securities laws that were violated here are intended to protect the unknowing, unsophisticated investor. A party's good faith intentions, no matter how valid, do not allow a party to run afoul of the law without repercussions. Moreover, Defendants' protestation of innocence is a factor that weighs in favor of the sought-after injunctive relief. See SEC v. Lorin, 76 F.3d 458, 461 (2d Cir. 1996) (" [T]he court may properly view a
culpable defendant's continued protestations of innocence as an indication that injunctive relief is advisable." ). This factor weighs ...