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Securities and Exchange Commission v. Bronson

United States District Court, S.D. New York

March 27, 2017

FAIRHILLS CAPITAL, INC., Relief Defendant.

          Kevin P. McGrath, Esq. Haimavathi V. Marlier, Esq. Christopher J. Dunnigan, Esq. Securities and Exchange Commission New York, NY Attorneys for Plaintiff

          William A. Rome, Esq. Michael A. Eisenberg, Esq. Robinson Brog Leinwand Greene Genovese & Gluck P.C. New York, NY Attorneys for Defendants Edward Bronson, E-Lionheart Associates, LLC, and Fairhills Capital, Inc. [1]

          OPINION & ORDER

          KENNETH M. KARAS, District Judge:

         Plaintiff, the United States Securities and Exchange Commission (“SEC” or “Plaintiff”) filed a Complaint against Edward Bronson (“Bronson”) and E-Lionheart Associates, LLC (“E- Lionheart” and, with Bronson, “Defendants”) alleging violations of securities registration requirements under §§ 5(a) and 5(c) of the Securities Act of 1933 (“the Act”), 15 U.S.C. §§ 77e(a) and 77e(c). The SEC also asserts a claim for unjust enrichment against Relief Defendant Fairhills Capital, Inc. (“FCI” or “Relief Defendant”). Before the Court is the SEC's Motion for Summary Judgment (the “Motion”). (Dkt. No. 146.) For the reasons to follow, the Motion is granted.

         I. Background

         A. Factual Background

         1. The Parties

         Defendant Bronson, a resident of Ossining, New York, is the sole managing member of E-Lionheart, a Delaware limited liability company formed in 2005 for the purpose of engaging in financing activities and reverse mergers. (See Pl. SEC's Local Rule 56.1 Statement of Undisputed Material Facts (“SEC's 56.1”) ¶¶ 1-2, 4, 16 (Dkt. No. 148); Defs.' Resp. to Pl. SEC's Local Rule 56.1 Statement and Statement of Additional Undisputed Material Facts (“Defs.' 56.1”) ¶¶ 1-2, 4, 16 (Dkt. No. 154).)[2] In April 2005, Bronson registered E-Lionheart as a foreign limited liability company with the State of New York. (See SEC's 56.1 ¶ 5; Defs.' 56.1 ¶ 5.) The listed address was Bronson's apartment at the time, located in Manhattan. (See SEC's 56.1 ¶ 21; Defs.' 56.1 ¶ 21.) From 2005 to 2007, E-Lionheart's office was located in Manhattan, at various locations, (see SEC's 56.1 ¶ 22; Defs.' 56.1 ¶ 22), and beginning in September 2007, E-Lionheart operated solely out of Bronson's residence in Ossining, New York, (see SEC's 56.1 ¶ 23; Defs.' 56.1 ¶ 23). From May 2009 to January 2010, E-Lionheart maintained an office at 151 East Post Road, White Plains, New York, (see SEC's 56.1 ¶ 24; Defs.' 56.1 ¶ 24), and beginning in January 2010, E-Lionheart maintained an office at 245 Main Street, White Plains, New York, (see SEC's 56.1 ¶ 25; Defs.' 56.1 ¶ 25).

         Beginning in 2008 or 2009, E-Lionheart began doing business as “Fairhills Capital.” (See SEC's 56.1 ¶¶ 17, 20; Defs.' 56.1 ¶¶ 17, 20.) In 2009, Bronson hired Mark Grober as an employee of E-Lionheart. (See SEC's 56.1 ¶ 19; Defs.' 56.1 ¶ 19.) Up until that point, Bronson had been E-Lionheart's sole employee. (See SEC's 56.1 ¶ 19; Defs.' 56.1 ¶ 19.)

         For the years 2005 to 2011, E-Lionheart filed federal and New York State tax returns. (See SEC's 56.1 ¶¶ 26-27; Defs.' 56.1 ¶¶ 26-27.) For the years 2009, 2010, and 2011, E-Lionheart did not file tax returns in Delaware. (See SEC's 56.1 ¶ 28; Defs.' 56.1 ¶ 28.) Starting in September 2007, E-Lionheart maintained a checking and savings account at JPMorgan Chase Bank, NA (“Chase”) in Millwood, New York, and on July 2, 2009, E-Lionheart opened a savings account at a Chase branch in White Plains, New York. (See SEC's 56.1 ¶¶ 29-30; Defs.' 56.1 ¶¶ 29-30.)

         In 2002, Bronson founded Fairhills Capital Management (“FCM”), a limited liability corporation incorporated in Delaware. (See SEC's 56.1 ¶¶ 11-12; Defs.' 56.1 ¶¶ 11-12.) Bronson was the sole owner of FCM. (See SEC's 56.1 ¶ 11; Defs.' 56.1 ¶ 11.) FCM specialized in the small and micro-cap sectors, performing advisory assignments and financing thousands of transactions. (See SEC's 56.1 ¶ 13; Defs.' 56.1 ¶ 13.)[3] FCM purchased and sold securities that were not registered, including those that were issued in reliance on exemptions from registration under Regulation D and Rule 144 of the Securities Act. (See SEC's 56.1 ¶ 15; Defs.' 56.1 ¶ 15.) Bronson is also the President and owner of Relief Defendant FCI, a Delaware corporation formed in September 2010, with a business address in Ossining, New York. (See SEC's 56.1 ¶¶ 6, 31; Defs.' 56.1 ¶¶ 6, 31.)

         2. E-Lionheart's Transactions

         E-Lionheart's typical purchase pattern was as follows: employees operating from E-Lionheart's White Plains offices called a company to inquire whether it was interested in obtaining capital. (See SEC's 56.1 ¶ 56; Defs.' 56.1 ¶ 56.) If the company was interested, E-Lionheart employees offered options, including offering to buy the company's securities at a price that was discounted from the then-prevailing market price. (See SEC's 56.1 ¶¶ 56-57; Defs.' 56.1 ¶¶ 56-57.)[4] Bronson instructed E-Lionheart employees to seek a purchase price for securities that was typically 50 percent of the trading price over the prior 10 to 20 days, though the discount ranged from 10 to 90 percent. (See SEC's 56.1 ¶¶ 58-59; Defs.' 56.1 ¶¶ 58-59.) Bronson ultimately determined the amount E-Lionheart would spend on an issuer's stock. (See SEC's 56.1 ¶ 61; Defs.' 56.1 ¶ 61.)

         After an issuer expressed interest in selling securities to E-Lionheart, E-Lionheart employees Mark Grober and Richard Stilitino would send the issuer a set of documents, including an Entity Subscription Agreement (the “Agreement”) and an Opinion Letter advising that the transaction was exempt from registration. (See SEC's 56.1 ¶¶ 63, 65; Defs.' 56.1 ¶¶ 63, 65.) The Agreement typically listed E-Lionheart's address as 1000 N. West Street, Suite 1200, Wilmington, Delaware 19801 and stated that the stock certificates should be issued in the name of E-Lionheart and listed the mailing address as either “Fairhills Capital, 151 East Post Road, Suite 114, White Plains, New York 10601” or “Fairhills Capital, 245 Main Street, Suite 390, White Plains, New York 10601.” (SEC's 56.1 ¶¶ 68-69; Defs.' 56.1 ¶¶ 68-69.)[5]

         Section 2 of the Agreement provided

Notwithstanding anything in this Subscription Agreement (the “Agreement”) to the contrary, THE COMPANY shall have no obligation to issue Shares to any person who is a resident of a jurisdiction in which the issuance of the Shares to it would constitute a violation of the securities, “blue sky” or other similar laws of such jurisdiction . . . . It is intended that the Shares will only be issued to entities formed pursuant to the laws of the State of Delaware that maintain its principal place of business within the State of Delaware.

(SEC's 56.1 ¶ 91; Defs.' 56.1 ¶ 91; Decl. of Kevin P. McGrath, Esq. (“McGrath Decl.”) Ex. 3, at DEFS-191909 (Dkt. No. 151).) Section 5.1(b) of the Agreement stated

The undersigned is an entity formed pursuant to the laws of the State of Delaware and maintains its principal place of business within the State of Delaware and/or the undersigned is an “accredited investor” as defined under Rule 501 of Regulation D and/or the Subscriber is an “institutional investor” as defined under [§] 7309(b)(8) of the Delaware Securities Act and [§] 501(a)(1) of Part E under the Rules and Regulations Pursuant to the Delaware Securities Act.

(SEC's 56.1 ¶ 93; Defs.' 56.1 ¶ 93; McGrath Decl. Ex. 3, at DEFS-191909.) Bronson represented that “[e]ach owner or member of the undersigned is an ‘accredited investor' as such term is defined in the rules of the Securities Act of 1933, ” (SEC's 56.1 ¶ 95; Defs.' 56.1 ¶ 95 (some internal quotation marks omitted)), and that “[t]he undersigned is an ‘accredited investor, ' as such term is defined in . . . the rules to the Securities Act of 1933, ” (SEC's 56.1 ¶ 96; Defs.' 56.1 ¶ 96 (some internal quotation marks omitted)). Bronson also represented that “[t]he undersigned has not offered or sold any portion of the Shares to others or with a view to reselling or otherwise disposing of any portion of the Shares.” (SEC's 56.1 ¶ 98; Defs.' 56.1 ¶ 98 (internal quotation marks omitted).)

         Once an issuer indicated interest in selling shares to E-Lionheart, E-Lionheart then introduced the issuer to an attorney who would issue an Opinion Letter stating that the securities being sold to E-Lionheart qualified for an exemption from registration under Rule 504(b)(1)(iii) and Delaware law. (See SEC's 56.1 ¶ 119; Defs.' 56.1 ¶ 119.) Virginia Sourlis (“Sourlis”) issued the majority of the Opinion Letters at issue in this Action. (See SEC's 56.1 ¶¶ 64, 119, 124; Defs.' 56.1 ¶¶ 64, 119, 124.) Sourlis, who was only admitted to practice law in New Jersey at the time she issued the Opinion Letters, had a retainer agreement with E-Lionheart. (See SEC's 56.1 ¶¶ 120-21; Defs.' 56.1 ¶¶ 120-21.)[6]

         Most Sourlis Opinion Letters provided

The Purchaser [E-Lionheart] . . . qualifies for the exemption from registration set forth in the Securities Act pursuant to Rule 504 of Regulation D, [§] 7309(b)(8) of the Delaware Securities Act [now § 73-207(b)(8)] and [§] 510(a)(1) of Part E under the Rules and Regulations Pursuant to the Delaware Securities Act.

         (See SEC's 56.1 ¶ 125; Defs.' 56.1 ¶ 125; McGrath Decl. Ex. 3, at TAR 0004583.)[7]Additionally, most of the Opinion Letters drafted by Sourlis stated that “[§] 7309(b)(8) of the Delaware Securities Act [now § 73-207(b)(8)] satisfied the requirements of [§] 504(b)(1)(iii).” (SEC's 56.1 ¶ 126; Defs.' 56.1 ¶ 126; McGrath Decl. Ex. 3, at TAR 0004583.) Additional attorneys provided Opinion Letters to issuers, none of which was admitted to practice in Delaware at the time each Opinion Letter was issued. (See SEC's 56.1 ¶¶ 156-69; Defs.' 56.1 ¶¶ 156-69.)

         The issuer would then sign the Agreement and return it to E-Lionheart's offices in New York, where Bronson signed it. (See SEC's 56.1 ¶ 71; Defs.' 56.1 ¶ 71.) After receiving Bronson's signature, E-Lionheart employees would wire the purchase funds to an escrow account, where they were held until the transfer agent issued stock certificates or E-Lionheart received confirmation that the shares had been electronically transferred to E-Lionheart's account. (See SEC's 56.1 ¶ 74; Defs.' 56.1 ¶ 74.) Transfer agents were generally instructed to send the physical stock certificates to E-Lionheart's offices in White Plains, New York or to brokerage firms where E-Lionheart maintained an account. (See SEC's 56.1 ¶ 79; Defs.' 56.1 ¶ 79.)[8] None of the addresses provided by the transfer agents was a Delaware address. (See SEC's 56.1 ¶ 80; Defs.' 56.1 ¶ 80.) E-Lionheart would then instruct the escrow agent to release the funds to the issuer. (See SEC's 56.1 ¶ 75; Defs.' 56.1 ¶ 75.)

         After purchasing securities from an issuer, E-Lionheart typically would immediately resell the stock after it was cleared for trading. (See SEC's 56.1 ¶ 62; Defs.' 56.1 ¶ 62.) Bronson made the decision when to sell the shares until 2011, when Bronson hired Greg Regan and Joseph Sansobrino to make trading decisions on behalf of E-Lionheart. (See SEC's 56.1 ¶ 89; Defs.' 56.1 ¶ 89.)

         3. Location of the Transactions

         E-Lionheart employees who took actions in connection with the Rule 504(b)(1)(iii) transactions were located in New York, with the exception of Naton Wells, who worked for E-Lionheart remotely from Florida. (See SEC's 56.1 ¶ 101; Defs.' 56.1 ¶ 101.) On July 16, 2009, FCI entered into a contract with the Regus Group for a one-year lease on virtual office space in Wilmington, Delaware, running from August 1, 2009 to July 31, 2010. (See SEC's 56.1 ¶ 111; Defs.' 56.1 ¶ 111.) The lease provided FCI with a Delaware mailing address, telephone number, voicemail and answering service, mail forwarding, and the right to use the Regus Group's Delaware office space two days per month. (See SEC's 56.1 ¶ 112; Defs.' 56.1 ¶ 112.) The Regus Group forwarded mail addressed to E-Lionheart to a White Plains, New York address and forwarded faxes to a New York fax number on a daily basis. (See SEC's 56.1 ¶ 114; Defs.' 56.1 ¶ 114.) Prior to August 1, 2009, neither E-Lionheart nor FCI owned or leased office space in Delaware. (See SEC's 56.1 ¶ 110; Defs.' 56.1 ¶ 110.) The lease with the Regus Group was renewed automatically 90 days before its expiration. (See SEC's 56.1 ¶ 115; Defs.' 56.1 ¶ 115.)

         On May 3, 2011, E-Lionheart and Fairhills Capital Offshore, Ltd. entered into contracts with the Regus Group to lease full-time office spaces in Wilmington, Delaware. (See SEC's 56.1 ¶¶ 116-17; Defs.' 56.1 ¶¶ 116-17.)[9] No E-Lionheart employee worked from or visited the rented office space in Delaware, (see SEC's 56.1 ¶ 118; Defs.' 56.1 ¶ 118), and neither E-Lionheart, nor any FCI entity had any employees in an office in Delaware in 2009, 2010, or 2011, (see SEC's 56.1 ¶ 185; Defs.' 56.1 ¶ 185).

         4. Plaintiff's Claims

         The SEC alleges that Defendants violated §§ 5(a) and 5(c) of the Securities Act of 1933 and that Relief Defendant FCI has been unjustly enriched by Defendants' unlawful conduct. (See Compl. ¶¶ 37-41 (Dkt. No. 1).)

         B. Procedural History

         The SEC filed the Complaint on August 22, 2012. (Dkt. No. 1.) On February 1, 2013, Defendants filed a Motion To Dismiss, (Dkt. No. 17), which was denied in an Order & Opinion (“Opinion”) on March 31, 2014, (Dkt. No. 21).

         On May 1, 2014, Defendants' then-counsel, Nixon Peabody LLP, made a motion to withdraw as counsel, (Dkt. Nos. 27-28), which the Court granted on May 6, 2014, (Dkt. No. 30). Morvillo Abramowitz Grand Iason & Anello P.C. (“Morvillo”) appeared as new counsel for Defendants on June 13, 2014. (Dkt. Nos. 33-34, 39.)

         Defendants filed an Answer to the Complaint on September 5, 2014, (Dkt. No. 41), and filed an Amended Answer on October 5, 2015, (Dkt. No. 116).

         On April 11, 2016, Morvillo filed a motion to withdraw as counsel, (Dkt. Nos. 140-41), which the Court granted, (Dkt. No. 142). In a subsequent Order, the Court instructed Defendants E-Lionheart and FCI to appear with new counsel and ordered that an attorney for Bronson appear or that Bronson inform the Court that he wished to proceed pro se. (Dkt. No. 143.) Robinson Brog Leinwand Greene Genovese & Gluck P.C. (“Robinson Brog”) appeared on behalf of Defendants on May 15, 2016. (Dkt. Nos. 144-45.)

         On June 10, 2016, the SEC filed the instant Motion for Summary Judgment and accompanying papers, (Dkt. Nos. 146-51), and Defendants filed their opposition and accompanying papers on July 22, 2016, (Dkt. Nos. 154-56). On August 19, 2016, the SEC filed its papers in reply. (Dkt. Nos. 159-61.)

         On October 20, 2016, Robinson Brog filed a motion to withdraw as counsel for Defendants and requested a stay of the proceedings pursuant to the motion. (Dkt. Nos. 169-70.) On October 24, 2016, the SEC filed an opposition, agreeing to the withdrawal of Defendants' counsel, but opposing the proposed stay of ...

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