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Securities and Exchange Commission v. Sayid

United States District Court, S.D. New York

January 10, 2018




          OPINION & ORDER


         Before the Court is Defendant Norman T. Reynolds' (“Reynolds”) motion to dismiss the Securities and Exchange Commission's (“SEC”) complaint, insofar as it alleges claims against him, for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). For the reasons that follow, Reynolds' motion to dismiss is denied.

         I. Background

         Unless otherwise noted, the following facts are drawn from the complaint. Reynolds is an attorney who resides and is licensed to practice law in Texas. (Compl. ¶ 18.) Defendant Mustafa David Sayid (“Sayid”) is an attorney who transacts business in New York City. (Id. ¶ 16.) Beginning in 2010, Sayid provided legal representation to two publicly traded shell companies, Nouveau Holdings Ltd. (“Nouveau”) and Striper Energy, Inc. (“Striper”), during the SEC's investigation into an offshore boiler room scheme involving Nouveau and Striper (together, the “Shells”). (Id. ¶ 4.) Sayid exploited his position as counsel to assume control of the Shells by installing employees whom he could control. (Id. ¶¶ 4-5.) Sayid used his controlling position to cause the Shells to unlawfully issue millions of shares of stock to third parties, without the required restrictive legends, who could then sell that stock and kick back part of the profits to Sayid. (Id. ¶ 5.)

         Beginning in January 2013, Sayid engineered a pump-and-dump scheme in Nouveau's stock. (Id. ¶¶ 52-53.) Sayid instructed “Person 1, ” then-President of Nouveau, to complete a 1 for 800 reverse split of Nouveau's common stock. (Id. ¶ 52.) The reverse split, which was effective on April 20, 2013, reduced the total number of shares of Nouveau issued and outstanding from approximately 240 million to approximately 300, 000 and thereby reduced the number of shares in the hands of public investors that were outside of Sayid's control. (Id.)

         Sayid coordinated the scheme with two potential investors and stock promoters, Mitchell Brown (“Brown”) and Michael Affa (“Affa”). (Id. ¶ 53.) In May 2013, Sayid received at least $18, 100 from Affa and Brown to prepare a three-way agreement (the “Nouveau Debt Settlement Agreement”) whereby Sayid would assign $50, 000 of the purported legal fees that Nouveau owed him to three Belizean entities controlled by Affa. (Id.) Pursuant to the Nouveau Debt Settlement Agreement, Nouveau agreed to pay the assigned legal fees by way of the issuance of fifty million shares of stock to the Belizean nominee entities. (Id.) Sayid participated in structuring the transaction through nominee entities that obscured the collective scheme to dump Nouveau's stock. (Id.) The Nouveau Debt Settlement Agreement contained a number of misrepresentations and omissions, including a representation that it was made and entered into in July 2012 and an omission of the fact that the nominees were under common control. (Id. ¶ 54.)

         As a general rule, the federal securities laws make it unlawful for any person to offer or sell securities unless such offering or sale is registered with the SEC or is exempt from registration under SEC rules. (Id. ¶ 38.) SEC Rule 144 creates an exemption from the registration requirement for persons seeking to resell securities that are not otherwise exempt from the registration requirements of Section 5 of the Securities Act. (Id. ¶ 39; 17 C.F.R. § 230.144.) For affiliates of an issuer, Rule 144 imposes a series of limitations that includes minimum holding periods (i.e., prohibiting the sale of shares unless the seller has held those shares for the requisite time frame), and volume restrictions (i.e., limiting the number of shares that may be sold). (Id.) These restrictions preclude or greatly constrict stock sales by those who control companies, preventing them from dumping large amounts of stock into the market. (Id.) If Rule 144's requirements are met, the seller is not considered an underwriter and may sell the securities pursuant to the Section 4(a)(1) exemption from Section 5 of the Securities Act for “transactions by any person other than an issuer, underwriter, or dealer.” (Id. ¶ 41; 17 C.F.R. § 230.44(2).)

         In July 2013, Sayid hired Reynolds to provide a legal opinion that the Nouveau Debt Settlement Agreement met the requirements of Rule 144 in order to persuade Nouveau's transfer agent to issue eight million shares of Nouveau stock to the Belizean nominee entities without an affiliate restrictive legend. (Id. ¶¶ 56-57.) At Sayid's direction, Reynolds drafted two opinion letters, dated August 9, 2013 and September 6, 2013, that falsely concluded that (1) the Nouveau Debt Settlement Agreement had been executed on July 17, 2012 and Sayid had accordingly held the subject securities for one year, as required under Rule 144, and (2) the Nouveau Debt Settlement Agreement permitted issuance of fifty million shares to the Belizean nominees. (Id. ¶¶ 56-60.)

         At the time Reynolds drafted his August 9, 2013 opinion letter, he had not received any executed agreement with the July 17, 2012 date. (Id. ¶ 60.) Sayid initially asked Reynolds to base his opinion on an unexecuted version of the Nouveau Debt Settlement Agreement, which bore the date September 25, 2012. (Id. ¶ 57.) Reynolds refused and told Sayid that the document failed to establish that Sayid had held the subject securities for one year, as would be required to qualify for the pertinent exemption under Rule 144. (Id. ¶ 58.) In response, Sayid represented to Reynolds that he had five executed versions of the Nouveau Debt Settlement Agreement bearing various dates: June 4, 2012, June 7, 2012, July 17, 2012, September 7, 2012, and September 25, 2012. (Id.) Reynolds did not receive an executed Nouveau Debt Settlement Agreement bearing the date July 17, 2012 until August 12, 2013, three days after he had drafted and sent to Sayid his August 9, 2013 opinion letter. (Id. ¶ 59.) Reynolds also was copied on emails from Sayid indicating that the Nouveau settlement agreement had not in fact been executed until August 2013. (Id. ¶ 60.)

         Reynolds drafted his opinion letters while negotiating with Sayid to receive a share of the anticipated proceeds from the sale of Nouveau stock issued pursuant to Reynolds' letters. (Id. ¶ 64.) On August 1, 2013, before Reynolds issued his first opinion letter, Reynolds asked about the status of Sayid's funding efforts. (Id.) Sayid responded via email “[t]hey are working on issuing the shares. Then we need your Rule 144 (?) legal opinion to convert the debt into equity and free up the shares. Sell the shares, get paid.” (Id.) Although Reynolds requested a $5, 000 fee from Sayid upon his receiving the proceeds from the sale of shares, Reynolds only received a total of $700 to draft the opinion letters. (Id.)

         The SEC alleges that Reynolds knowingly or recklessly, ignored evidence that the Nouveau Debt Settlement Agreement was in fact fictitious in order to draft the false opinion letters that were necessary for Sayid, Brown, and Affa to conduct their pump-and-dump scheme. (Id. ¶¶ 56, 59-62.) Accordingly, Reynolds' opinion letters contained statements that he knew or should have known that he lacked a good faith basis for making. (Id. ¶ 62.) The complaint alleges that Reynolds violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 17(a)(1) and (2) of the Securities Act on the basis of false statements he made in the opinion letters and his participation in Sayid's pump and dump scheme; and Sections 5(a) and 5(c) of the Securities Act by directly or indirectly engaging in the offer or sale of unregistered Nouveau securities through drafting false opinion letters necessary to the distribution of shares, as well as his expectation of payment from Sayid's efforts to offer and sell illegally issued restriction-free shares. (Id. ¶¶ 74-79, 83-86; SEC Mem. of L. in Opp. to Mot. to Dismiss at 5-6.)

         II. ...

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