Judge Shira Scheindlin
The SEC alleged defendants bought unregistered penny stock shares, which they resold without complying with registration requirements by falsely claiming their purchase exempt under Rule 144 of the Securities Act. To evade Rule 144 defendants made it appear they met the "holding period." They did not satisfy Rule 144 because the original debt was not a security. Rather it was "akin to an ‘IOU’ for services rendered or compensation owed to a current or former affiliate of the issuer." District court denied dismissal. In finding scienter adequately alleged the court found the SEC’s claims created a strong inference that defendants possessed the needed fraudulent intent in carrying out their "Convertible Debt Scheme." Further, the fact that alleged misstatements were made by attorneysin the form of an "opinion letter"did not bar the SEC’s fraud claims. Defendants solicited the advisory opinion and had ultimate authority over whether and how to communicate that opinion. Its issuance at defendants’ behest did not further the convertible debt scheme. It was only when defendants presented the information within the advisory opinion in support of their ability to sell the penny stocks without registration that it had its intended effect.
