Federal District Court Opinions
U.S. v. MELTZER, (E.D.N.Y. 2006) UNITED STATES SECURITIES
AND EXCHANGE COMMISSION, Plaintiff, v. SAMUEL AARON
MELTZER, Defendant. No. 03 Civ. 0770 (DRH) (ETB). United
States District Court, E.D. New York. July 10, 2006
Valerie A. Szczepanik, Esq., UNITED STATES SECURITIES AND
EXCHANGE COMMISSION, Mark K. Schonfeld, Regional Director,
Northeast Regional Office, New York, New York.
Robert Heim, Esq., MEYERS & HEIM LLP, New York, New York,
Attorneys for Defendant.
MEMORANDUM & ORDER
DENIS HURLEY, District Judge
INTRODUCTION
The United States Securities and Exchange Commission
(“SEC”) filed the present securities fraud claim against
Samuel Aaron Meltzer (“Defendant” or “Meltzer”), alleging
that he sent “spam” e-mails that “touted” or “recommended”
certain stocks on the basis of false or misleading
information in violation of Section 17(a) of the Securities
Act (“Securities Act”), 15 U.S.C. § 77q(a), Section
10(b) of the Securities Exchange Act of 1934 (“Exchange
Act”), 15 U.S.C. § 78j(b), and Rule 10b-5
promulgated thereunder, 17 C.F.R. § 240.10b-5. Both
sides Page 2 have moved for summary judgment. Because
issues of material fact remain undetermined, the Court
DENIES both motions.
BACKGROUND
The following recitation of the facts is undisputed unless
otherwise indicated and has been culled from the SEC’s Rule
56.1 Statement and Meltzer’s response thereto.
Meltzer, a Minnesota resident, was the sole owner and
operator of two private corporations that engaged in web
design, web hosting, and “unsolicited bulk email
advertising services,” i.e., “spamming.” From 1998 or
earlier until February 2001 or later, Meltzer was hired by
stock promoters to send bulk e-mails (typically five
million e-mails, but sometimes 10-20 million) speaking in
highly favorable terms about at least twelve publicly
traded companies, which shall be referred to as the
“subject issuers”. Most of these subject issuers were
publicly traded in the over-the-counter (“OTC”) market,
were quoted on the OTC bulletin board, and were “penny
stocks” within the meaning of Section 3(a)(51) of the
Securities Exchange Act of 1934 and Rule 3a51-1 promulgated
thereunder.
In conjunction with the e-mails, Meltzer established
multiple websites, each with a distinct domain name,
internet address, and business name, such as “Growth Stocks
2000,” “Wisestocks 2000,” or “Stock-Vest.” According to the
complaint, the use of multiple distinct internet identities
allowed Meltzer to “flood the Internet with promotional
materials” while “avoid[ing] detection by web hosts who
seek to prevent Internet spam.” (Compl. ¶ 12.)
Below is the content (including grammatical and
typographical errors) of the first bulk e-mail sent by
Meltzer, though attributed to Stock-Vest: Page 3
SPECTACULAR RECOVERY IN ENERGY MARKET IN 1999. CITY VIEW
SECURES SUBSTANTIAL OIL AND GAS RIGHTS COVERING AN AREA
ALMOST TWICE THE SIZE OF THE STATE OF RHODE ISLAND.
THE COMPANY
We have come across a company we feel is establishing a
stronghold in an area that has historically been extremely
profitable, and even more so, in developing countries
where good bargains are available. This Company has its
eyes and ears open. The Company has strategically
positioned itself alongside some of the largest players in
the oil industry. Its exclusive concession rights border
oilfields run by the World’s Major oil Companies. After
speaking to management, we believe that down the road it
could be a potential takeover target. Also, according to
Company management, a future acquisition is possible. We
believe all of this may cause the Company’s undervalued
stock price to recognize its true asset value. Based on
its proven oil and gas reserves the share price should be
valued at over ten times its Current share price. It is
approximately one-tenth its potential value.
I’m sure you will agree that the Oil and Gas Industry is
one of the most profitable arenas to be involved in these
days. Return on Capital is at a high with excessively
generous cash flows. This is all derived from the
production of hydrocarbons into usable products in our
society including: motor oil, gasoline, kerosene, airplane
fuel, cigarette lighters, barbecues, cosmetics, plastics,
and on and on . . . This production will keep a company
liquid and strong. It also gives the company flexibility,
resourcefulness, and product development in an
ever-changing world, which is most appealing of all.
CityView Energy Corporation Ltd., symbol CVCL, on the
NASDAQ Small Cap, as well as, the Australian Stock
Exchange, symbol CVI, is an aggressive oil and gas
development and production company. It was incorporated in
1987 and has been in the energy resource industry for the
past several years. The Oil and Gas Industry is an
exciting, dynamic industry in which companies are
transforming the worldwide production of oil and natural
gas into more efficient uses.
CityView Energy Corporation Ltd., is an innovator in the
booming oil and gas business. Its combination of
experienced entrepreneurial-minded management with highly
skilled natural resources development personnel take care
of the essentials for success in this rapidly growing
industry. Add on strong financial backing and the latest
technology for finding oil and natural gas reserves and
oil drilling methodologies, you spell PROFIT, PROFIT,
PROFIT! The company has achieved a stake of the dwindling
worldwide oil and gas reserves (as well as aiming for new
stakes), thereby maintaining an assurance of future
profits. Page 4
LARGE OIL AND GAS RESERVES
When it comes to profitability in both real estate and
the oil industry, the key is LOCATION, LOCATION, LOCATION!
CityView has that location, with proven reserves in one of
the richest hydrocarbon areas in the world. We believe
that with oil reserves dwindling worldwide, CityView is a
prime take-over candidate from major oil companies
sometime down the road as it owns the oil and natural gas
concession rights to a land mass almost twice the size of
the State of Rhode Island, USA.
There are proven reserves, which at an in-situ price of
$2 per barrel of oil and $0.27 per MFC of natural gas,
would value Citiview’s Hydrocarbon Reserves at $54,400,000
in Assets!
THE FUTURE IS HERE
The Company is planning to surge forward into the year
2000 utilizing the most technologically advanced, the most
current and the most cost-efficient equipment, resources
and processing known to the industry and to add to its
reserves. The company has access to industry leading
experts in the areas of — development,
communications, applications, security, finance, banking,
engineering, accounting, seismology, plate tectonic
mathematics and natural oil and gas refinement.
Additionally CityView’s subsidiary Citra Management Pte
Ltd. has recently obtained the rights to have their
company trade oil and natural gas products and
bi-products. The company expects to achieve a high
percentage stake of the dwindling worldwide reserves so
that future profits will be assured for generations to
come. Virtually all worldwide oil and natural gas
reserves will come to a halt one day; the company is
developing new methodologies and energy-generating
techniques to both improve efficiency on a current basis
and to possibly utilize other energy sources in the future
(i.e., solar).
Once again, please visit [internet address] for full
details.
Disclaimer
This material is being provided by Stock-Vest, an
electronic newsletter paid by the issuer for publishing
the information contained in this report. Vestcom
Holdings, Inc. has paid a consideration of 15,000 free
trading shares of common stock of CityView Energy
Corporation Limited to Stock-Vest as payment for the
publication of the information contained in this report.
Stock-Vest and its affiliates have agreed not to sell the
common stock received as payment for its services until
January 6, 2000, which date is 15 days from the initial
dissemination of this report. After such date, Stock-Vest
may sell such shares. Page 5 Because Stock-Vest is paid
for its services, there is an inherent conflict of
interest in Stock-Vest’s statements and opinions and such
statements and opinions cannot be considered independent.
The information contained in this publication is for
informational purposes only, and not to be construed as an
offer to sell or solicitation of an offer to buy any
security. Stock-Vest makes no representation or warrant
relating to the validity of the facts presented nor does
Stock-Vest represent or warrant that all material facts
necessary to make an investment decision are presented
above. All statements of opinions are those of
Stock-Vest. Stock-Vest relies exclusively on information
gathered from public filings on featured companies, as
well as, in certain circumstances, interviews conducted
by Stock-Vest management of featured companies.
Investors should not rely solely on the information
contained in this publication. Rather, investors should
use the information contained in this publication as a
starting point for conducting additional research on the
featured companies in order to allow the investors to form
his or her own opinion regarding the featured companies.
Factual statements contained in this publication are made
as of the date stated and they are subject to change
without notice. Stock-Vest is not a registered investment
advisor, broker or a dealer. Investment in the companies
reviewed is speculative and extremely high-risk and may
result in the loss of some or all of any investment made
in CityView Energy Corporation Limited. This publication
contains forward-looking statements that are subject to
risk and uncertainties that could cause results to differ
materially from those set forth in the forward-looking
statements. These forward looking statements represent
the judgment of CityView Energy Corporation Limited as of
the date of this publication. The Company disclaims any
intent or obligation to update these forward-looking
statements.
(Decl. of Valerie Ann Szczepanik, dated July 28, 2004, Ex. 7
at 1-6.)
Some later e-mails distributed by Meltzer under various
other names were lengthier and included more specifics
about the subject issuer’s structure, location, business
plans and strategies, officers, financial information, etc.
Although some of the subject issuers discussed in later
e-mails were in different industries (including “global
thermoplastics,” internet gambling, breast cancer
detection, artificial flowers and house plants, clothing,
prepackaged school cafeteria food, and online banking), all
of the e-mails invariably spoke in similarly glowing terms
about the subject issuers’ situations and prospects. Many
contained company press releases. Nearly all contained
“disclaimers” similar to the one above, but in many of the
later e-mails sent by Meltzer Page 6 the disclaimer
appeared in the margins, written in smaller typeface. Some
of the e-mails’ subject lines began with the label “ADV,”
indicating that it was an advertisement, rather than an
independent report.
Meltzer did not enter into any contracts with the subject
issuers discussed in his e-mails and websites, and the
information contained in his e-mails and websites came
largely from promotional materials provided by two stock
promoters, Steven M. Cohen and Howard I. Weinstein (“Cohen
and Weinstein”). In fact, Meltzer testified at deposition
that he “never changed anything on [his] own.” (Dep. of
Samuel Aaron Meltzer, dated March 25, 2004 (“Meltzer Dep.”)
at 22.) From time to time, he would indicate that he had a
problem with the content, saying, “If they came out with
something saying, you know, this was a strong buy or if the
stock would soon be at this price or target price or
anything of that nature, I would say, `You can’t — I
will not put that in there. . . . [b]ecause my lawyer told
me I should not. . . .” (Id.) These suggestions, however,
were not based upon any expertise, as Meltzer had none.
(See id. at 87 (Q: “[D]o you have any background in finance
or accounting?” Meltzer: “No.”).) Meltzer also added press
releases to the e-mails and websites, which he had culled
from Yahoo.com and FreeEDGAR.com. Ultimately, the e-mails
and websites involved no original information from Meltzer;
his contribution was collecting and formatting, but
involved no actual knowledge of securities. (See id. at 40
(“I would take the information number by number. I would
not change anything.”).)
Turning to the disclaimers, which were created by Meltzer,
they misrepresent a number of facts. For example, the
above-quoted disclaimer states that “[a]ll statements of
opinions are those of Stock-Vest,” when, as Meltzer now
insists, the statements of opinions were entirely Page 7
those of Cohen and Weinstein. (See id. at 65 (Q: “[W]hose
opinions are represented in the e-mail?” Meltzer: “Howard
Weinstein and Steve Cohen’s, because they had sent me the
material. . . .”).) Meltzer’s disclaimer also indicated that
he “relie[d] exclusively on information gathered from
public filings on featured companies, as well as, in
certain circumstances, interviews [with] management.” This
too was misleading: Meltzer may have attached or linked the
press releases or public filings of the companies he
discussed, and he may have spoken with management on a
limited number of occasions (see id. at 49-50 (Q: “So was
[your conversations with management concerned] more the
format of the web site as opposed to the content?” Meltzer:
“Yes.”)), but the opinions expressed in the e-mails were
written entirely by Cohen and Weinstein, and not Meltzer
nor the invented corporation Stock-Vest (see id. at 73 (Q:
“[B]ut what you’re telling me today is that the opinion was
actually those of your client.” Meltzer: “Yes.”)). It was
not established whether Cohen and Weinstein had conducted
interviews with “management.”
Cohen and Weinstein compensated Meltzer primarily by
transferring thousands of shares of stock in the subject
issuers into Meltzer’s personal brokerage accounts. Meltzer
admits that he understood that Cohen and Weinstein, for
their promotional services, were paid considerably more
shares of the subject issuers’ stock than he was paid, but
deliberately removed this information from those materials
before publishing and disseminating them in his websites
and spam emails. Thus, the amounts of shares listed in the
disclaimer reflected the amount received by Meltzer, rather
than the number of shares received by Cohen and Weinstein,
who were the actual composers of the substantive portions
of the e-mails and websites.
The SEC alleges that Meltzer “received at least $159,619.62
in stock and cash as ill-gotten gains as a result of his
fraudulent conduct” described above. (Compl. ¶ 13.)
Meltzer Page 8 admits that subsequent to the above
activities, he has continued to provide bulk email, web
hosting and web designing services to clients, achieving
gross profits of $175,000 per year in 2002 and 2003. (See
Meltzer Dep. at 92.) In July 2002, the Attorney General of
Washington, Consumer Protection Division, sued Meltzer for
alleged violations of Washington’s Unfair Business
Practices — Consumer Protection Act and Unsolicited
Electronic Mail Act. Meltzer’s settlement of the case bars
him (within Washington) from using false or misleading
information in the subject line of an e-mail, or
misrepresenting the identity of the sender or origin of a
commercial e-mail.
The SEC filed the present suit on February 18, 2003. The
complaint alleges that Meltzer violated, and “may again
violate” Section 17(a) of the Securities Act of 1933, 15
U.S.C. § 77q(a), Section 10 of the Securities
Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule
10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.
The complaint seeks a permanent injunction barring Meltzer
from further violations of the above provisions, an order
requiring Meltzer to account for and disgorge all monies
obtained through the activities described, an order
requiring Meltzer to pay civil penalties, and an order
permanently prohibiting Meltzer from participating in any
offering of penny stock. Both parties filed their present
summary judgment motions on October 12, 2004.
DISCUSSION
I. Summary Judgment: Legal Standards
Summary judgment is generally appropriate where the
“pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any,
show that there is no genuine issue as to any material fact
and that the moving party is entitled to judgment as a
matter Page 9 of law.” Viola v. Philips Med. Sys. of N.
Am., 42 F.3d 712, 716 (2d Cir. 1994) (quoting Fed.R.Civ.P.
56(c)). A district court considering a summary judgment
motion only determines whether triable factual issues
exist; it does not resolve those issues. See Eastman Mach.
Co., Inc. v. U.S., 841 F.2d 469, 473 (2d Cir. 1988)
(internal citations omitted). No genuinely triable issue
exists when the moving party demonstrates, on the basis of
the pleadings and submitted evidence, and after drawing
all inferences and resolving all ambiguities in favor of
the non-movant, that no rational jury could find in the
non-movant’s favor. Chertkova v. Conn. Gen’l Life Ins. Co.,
92 F.3d 81, 86 (2d Cir. 1996) (citing Fed.R.Civ.P. 56(c)).
To defeat a summary judgment motion properly supported by
affidavits, depositions, or other documentation, the
non-movant must offer similar materials setting forth
specific facts that show that there is a genuine issue of
material fact to be tried. The opponent cannot rely on the
allegations in his or her pleadings, conclusory statements,
or “mere assertions that affidavits supporting the motion
are not credible.” Gottlieb v. County of Orange, 84 F.3d
511, 518 (2d Cir. 1996) (internal citations omitted).
The district court considering a summary judgment motion
thus must also be “mindful of the underlying standards and
burdens of proof,” Pickett v. RTS Helicopter, 128 F.3d 925,
928 (5th Cir. 1997) (citing Anderson v. Liberty Lobby, 477
U.S. 242, 252 (1986)), because the evidentiary burdens that
the respective parties will bear at trial guide district
courts in their determination of summary judgment motions.
Brady v. Town of Colchester, 863 F.2d 205, 211 (2d Cir.
1988). Where the non-moving party would bear the ultimate
burden of proof on an issue at trial, the burden on the
moving party is satisfied if he can point to an absence of
evidence to support an essential element of the
non-movant’s claim. Id. at 210-11. By contrast, where
plaintiff moving for summary judgment bears a much greater
initial burden; it must show that the Page 10 evidence
supporting its claims is so compelling that no reasonable
jury could return a verdict for the defendant. See Select
Creations, Inc. v. Paliafito America, Inc., 911 F. Supp.
1130, 1149 (E.D. Wis. 1995).
The fact that both sides have moved for summary judgment
does not guarantee the absence of triable material issues
of fact. Id. Rather, where both plaintiff and defendant
move for summary judgment, “the court must evaluate each
party’s motion on its own merits, taking care in each
instance to draw all reasonable inferences against the
party whose motion is under consideration.” Schwabenbauer
v. Bd. of Educ., 667 F.2d 305, 314 (2d Cir. 1981). When
considering cross-motions for summary judgment, a court
“need not enter a judgment for either party, but must
examine each motion separately and, in each case, draw all
reasonable inferences against the moving party.” Padberg v.
McGrath-McKechnie, 203 F. Supp. 2d 261, 274 (E.D.N.Y. 2002)
(citing Morales v. Quintel Entm’t, Inc., 249 F.3d 115, 121
(2d Cir. 2001), and Heublein, Inc. v. United States, 996
F.2d 1455, 1461 (2d Cir. 1993)).
“Summary judgment is likely to be inappropriate,” but is
certainly not unobtainable, where the material issues
concern intent, or are otherwise `complex and convoluted.'”
Sec. and Exch. Comm’n v. Research Automation Corp., 585
F.2d 31, 33 (2d Cir. 1978). This is so even where the SEC
is both the plaintiff and the moving party. See id.
II. The Securities Act, the Exchange Act, and Relevant
Legal Principles
As discussed, the SEC alleges that Meltzer’s actions
violated the Securities Act and the Exchange Act. Section
17(a) of the Securities Act, 15 U.S.C. § 77q(a),
states in relevant part:
It shall be unlawful for any person in the offer or sale
of any securities . . . by the use of any means or
instruments of transportation or Page 11 communication in
interstate commerce or by use of the mails, directly or
indirectly
(1) to employ any device, scheme, or artifice to defraud,
or
(2) to obtain money or property by means of any untrue
statement of a material fact or any omission to state a
material fact necessary in order to make the statements
made, in light of the circumstances under which they were
made, not misleading; or
(3) to engage in any transaction, practice, or course of
business which operates or would operate as a fraud or
deceit upon the purchaser.
Section 10 of the Securities Exchange Act of 1934, 15
U.S.C. § 78j states in relevant part:
It shall be unlawful for any person, directly or
indirectly, by the use of any means or instrumentality of
interstate commerce or of the mails, or of any facility of
any national securities exchange
. . . .
(b) To use or employ, in connection with the purchase or
sale of any security registered on a national securities
exchange or any security not so registered . . . any
manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the
Commission may prescribe as necessary or appropriate in
the public interest or for the protection of investors.
And, finally Rule 10b-5, 17 C.F.R. § 240.10b-5,
promulgated under the Exchange Act, states in full:
It shall be unlawful for any person, directly or
indirectly, by the use of any means or instrumentality of
interstate commerce, or of the mails or of any facility of
any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make
the statements made, in the light of the circumstances
under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon
any person, in connection with the purchase or sale of any
security.
In order to establish liability under the Exchange Act and
Rule 10b-5, a plaintiff must prove “that [1] in connection
with the purchase or sale of a security the defendant, [2]
acting with scienter, [3] made a material misrepresentation
(or a material omission if the defendant had a Page 12
duty to speak) or used a fraudulent device.” S.E.C. v.
First Jersey Secs., Inc., 101 F.3d 1450, 1467 (2d Cir.
1996). The Securities Act applies “essentially the same
elements,” except that scienter need not be established to
obtain an injunction under Section 17(a)(2) or (3). First
Jersey Secs., 101 F.3d at 1467 (citing Aaron v. SEC, 446
U.S. 680, 701-02 (1980)). Despite the fact that Meltzer
claims that he was merely an internet technician,
“liability rests with any person who meets the required
elements, regardless of his role in the activity (i.e.
lawyer, accountant, banker, etc.).” Anixter v. Home-Stake
Production Co., 77 F.3d 1215, 1224 (10th Cir. 1996).
The parties do not dispute that Meltzer’s actions occurred
“in connection with the purchase or sale of securities,”
nor do they dispute that the e-mails and websites,
particularly the disclaimers, contain misrepresentations.
Thus, the only disputed issues are whether Meltzer acted
with the requisite “scienter,” pursuant to the Exchange Act
and Rule 10b-5, and whether his alleged misrepresentations
or omissions were “material.”
III. Scienter
“Scienter, as used in connection with the securities fraud
statutes, means intent to deceive, manipulate, or defraud,
or at least knowing misconduct.” First Jersey Secs., 101
F.3d at 1467. Some aspect of the projection must be actually
false, and known to be false to the defendant making the
promise at the time it was made, for the projection to be
fraudulent. See In re Integrated Resources Real Estate Ltd.
Partnerships Securities Litigation, 850 F. Supp. 1105, 1141
(S.D.N.Y. 1993).
Additionally, if the conduct was highly reckless, it may
rise to the level of scienter without an actual showing.
Under such circumstances, the decision must have been
“highly unreasonable,” representing “an extreme departure
from the standards of ordinary care . . . to the Page 13
extent that the danger was either known to the defendant or
so obvious that the defendant must have been aware of it.”
Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 47 (2d
Cir. 1978); see also Rothman v. Gregor, 220 F.3d 81, 90 (2d
Cir. 2000); SEC v. McNulty, 137 F.3d 732, 741 (2d Cir.
1998). Furthermore, “[a]n egregious refusal to see the
obvious, or to investigate the doubtful, may in some cases
give rise to an inference of recklessness.” Chill v.
General Elec. Co., 101 F.3d 263, 269 (2d Cir. 1996)
(citations and quotation marks omitted).
Meltzer’s scienter is virtually indisputable. He admitted
that the disclaimers were in his sole control, adding that
in the instances where Cohen and Weinstein provided their
own disclaimer, he removed theirs and inserted his own.
(See, e.g., Meltzer Dep. at 33 (Meltzer: “When it had their
disclaimer, I put my own disclaimer on it.” Q: “And you
removed their disclaimer?” Meltzer: “Yes.”).) He admitted
that despite the fact that the disclaimers attributed the
composition of the substantive content of the e-mails and
websites to various nonexistent entities rather than to the
actual composers, i.e., Cohen and Weinstein. (See, e.g.,
id. at 73 (Q: “And you knew their name, but you wouldn’t
put their name there?” Meltzer: “No.” Q: “And that was a
choice you made?” Meltzer: “Yes.” Q: “Even though you knew
it was their opinion and not yours?” Meltzer: “Yes.”).) He
admitted that he invented the nonexistent entities as the
authors with the intention that recipients of the e-mails
would not know who the actual authors were. (See Meltzer
Dep. at 72 (Meltzer: “[S]ince bulk e-mail is so hated . . .
I didn’t want their name to — I didn’t want them to
be affiliated with the bulk mail. . . .”).) Thus, it is
abundantly clear that Meltzer intended to deceive the
recipients of these e-mails and visitors to the website
regarding the origin of information that they were reading
regarding the subject issuers. Page 14
Meltzer raises one, potentially viable defense. He asserts
that he “relied on the advice of counsel in appending that
disclosure language, which was drafted by counsel, to the
distributions.” (Id. at 21.) In support of his position,
Meltzer quotes the following proposition: “Good faith
reliance on the advice of an accountant or an attorney has
been recognized as a viable defense to scienter in
securities fraud cases,” S.E.C. v. Caserta, 75 F. Supp. 2d
79, 94 (E.D.N.Y. 1999) (citations omitted). In such cases,
“good faith reliance” is “not a complete defense, but only
one factor for consideration.” Markowski v. S.E.C., 34 F.3d
99, 105 (2d Cir. 1994). “To establish the defense, the
defendant should show that he/she/it made a complete
disclosure, sought the advice as to the appropriateness of
the challenged conduct, received advice that the conduct
was appropriate, and relied on that advice in good faith.”
Id.
In the present case, Meltzer did seek the advice of
counsel, but there is nothing in the record to demonstrate
that he made a complete disclosure, nor is there any
indication that counsel advised Meltzer that the conduct
was appropriate. (See Meltzer Dep. at 110-115 (indicating
that Meltzer did not discuss the actual content of the
e-mails or websites with counsel).) In fact, Meltzer’s
testimony demonstrates that he did not make a full
disclosure. (See id. at 112 (Q: “Did [your attorney] review
each profile you sent out?” Meltzer: “No, he did not.”).)
Finally, Meltzer cannot reasonably argue that he relied
upon the advice of his attorney in good faith when Meltzer
knew that the disclaimers were misleading. The mere fact
that his attorney willingly approved the disclaimers cannot
establish a defense of good faith reliance when the knowing
misrepresentations clearly establish bad faith. Cf. S.E.C.
v. DCI Telecomm., Inc., 122 F. Supp. 2d 495, 500n. 2
(S.D.N.Y. 2000) (citing United States v. Erickson, 601 F.2d
296, 305 (7th Cir. 1979) (“If a company officer knows that
the financial statements are false or Page 15 misleading
and yet proceeds to file them, the willingness of an
accountant to give an unqualified opinion with respect to
them does not negate the existence of the requisite intent
or establish good faith reliance.”)). Accordingly, no
reasonable fact finder could conclude that Meltzer did not
act with scienter.
IV. Materiality
Because Meltzer acted with scienter, the only remaining
question is whether the misrepresentations were material. A
factual statement, misrepresentation, or omission is
material if there is a substantial likelihood that the
misrepresentation “would have been viewed by the reasonable
investor as having significantly altered the `total mix’ of
information made available.” Basic, Inc. v. Levinson, 485
U.S. 224, 231-32 (1988) (quoting TSC Industries, Inc. v.
Northway, Inc., 426 U.S. 438, 449 (1976)). Phrased
differently, “materiality depends on the significance the
reasonable investor would place on the withheld or
misrepresented information.” Id. at 241. Nevertheless, to
be material, a fact need not be outcome-determinative
— that is, it need not be important enough that it
would necessarily cause a reasonable investor to change his
investment decision. See Folger Adam Co. v. PMI Industries,
Inc., 938 F.2d 1529, 1533 (2d Cir. 1991). There is no need
to show that investor reasonably did rely on misstatements;
a showing that a reasonable investor likely would rely on
the misstatements is sufficient. See S.E.C. v. Berger, 322
F.3d 187 (2d Cir. 2003).
Materiality is a “fact-specific inquiry,” Basic, 485 U.S.
at 241, and a “relative concept, so that a court must
appraise a misrepresentation or omission in the complete
context in which the author conveys it.” In re Donald J.
Trump Casino Sec. Litig. — Taj Mahal Litig., 7 F.3d
357, 364 (3d Cir. 1993) (citing I. Meyer Pincus & Assocs.
v. Oppenheimer & Co., 936 F.2d 759, 763 Page 16 (2d Cir.
1991)). As a result, “[t]he determination of materiality is
a mixed question of law and fact that generally should be
presented to a jury.” Press v. Chemical Investment Services
Corp., 166 F.3d 529, 538 (2d Cir. 1999) (citations
omitted). “Only if no reasonable juror could determine that
the undisclosed delay in receipt of proceeds at maturity
would have assumed actual significance in the deliberations
of the reasonable investor should materiality be determined
as a matter of law.” Id. at 538. Following Basic, the
Second Circuit has “consistently rejected a formulaic
approach to assessing the materiality of an alleged
misrepresentation.” Ganino v. Citizens Utilities Co., 228
F.3d 154, 162 (2d Cir. 2000). Finally, the burden of proof
regarding materiality rests squarely on the shoulders of
the SEC. See In re Livent, Inc. Noteholders Securities
Litigation, 355 F. Supp. 2d 722, 729 (S.D.N.Y. 2005) (“In
order to prevail on their motion, Plaintiffs must come
forward with evidence demonstrating that `there is no
genuine issue as to any material fact’ related to the
[misstatements].”); cf. In re Initial Public Offering
Securities Litigation, 227 F.R.D. 65, 105 (S.D.N.Y. 2004)
(“[O]nce the plaintiff establishes the materiality of the
omission . . .”).
A. Meltzer’s Immateriality Arguments
The Court will first consider Meltzer’s arguments. Meltzer
moves for summary judgment and opposes the SEC’s motion for
summary judgment on the grounds that his misstatements and
misrepresentations were immaterial as a matter of law. To
that end, he raises a number of arguments that will be
addressed in turn.
1. The “Bespeaks Caution” Doctrine
Meltzer’s submissions stress above all else the fact that
all of his e-mails were “replete with qualifiers and
disclaimers” (quoted in full in the Background section,
supra) clearly warning Page 17 recipients that the he was
“not a registered investment advisor, broker, or dealer,”
and that “investment in the companies reviewed is
speculative and extremely high-risk and may result in the
loss of some or all of any investment.” According to
Meltzer, his e-mails thus “plainly `bespeak caution.'”
because they “`virtually bristle with warnings as to the
extremely speculative nature of the investment described
therein.'” (Def.’s Opp’n Mem. at 12 (quoting Haggerty vl.
Comstock Gold Co., 765 F. Supp. 111, 115 (S.D.N.Y. 1991).)
One obvious flaw with this line of reasoning is that the
relevant misstatements were in the disclaimer itself, thus
rendering the cautionary language deceptive. Furthermore,
although Meltzer suggests that the disclaimers inserted in
his e-mails must immunize him from the SEC’s claims, the
issue is not nearly so simple.
Under the “bespeaks caution” doctrine, misrepresentations
or omissions in conjunction with the purchase or sale of
securities are considered immaterial where contained in
communications or documents including “cautionary language
sufficiently specific to render reliance on the false or
omitted statement unreasonable,” In re Initial Pub.
Offering Sec. Litig., 358 F. Supp. 2d 189, 211 (S.D.N.Y.
2004) (citations omitted), and thus nonactionable. In re
Donald J. Trump Casino Sec. Litig. — Taj Mahal
Litig., 7 F.3d 357, 364 (3d Cir. 1993).
As the Second Circuit has noted, “[c]autionary language in
securities offerings is just about universal.” Halperin v.
eBanker USA.com, Inc., 295 F.3d 352, 359 (2d Cir. 2002).
But “[g]eneralized disclosures of amorphous risks will not
shield defendants from liability”; instead, the cautionary
language must be “specific and factual” and “expressly warn
of” or “directly relate to” the forward-looking statements
in question. In re Initial Public Offering, 358 F. Supp. 2d
at 211-12 (citations omitted) (holding insufficient
cautionary language in defendant’s Registration Page 18
Statement, which mentioned in general fashion potential loss
of advertising contracts and problems with e-mail system,
but failed to note that seventy-five percent of advertising
contracts were due to expire in one month, and that e-mail
system had “peculiar problem” of deletion of e-mail
addresses when overwhelmed with “junk mail”). It must be
remembered that the “cautionary language associated with
the `bespeaks caution’ doctrine is aimed at warning
investors that bad things may come to pass in dealing with
the contingent or unforeseen future.” P. Stolz Family
Partnership L.P. v. Daum, 355 F.3d 92, 97 (2d Cir. 2004).
Thus, the doctrine does not apply to “historical or
present fact-knowledge within the grasp of the offeror.”
Id. “Such facts exist and are known; they are not
unforeseen or contingent. It would be perverse indeed if an
offeror could knowingly misrepresent historical facts but
at the same time disclaim those misrepresented facts with
cautionary language.” Id. In sum, the “bespeaks caution”
doctrine does not apply “where a defendant knew that its
statement was false when made.” Gabriel Capital, L.P. v.
NatWest Fin., Inc., 122 F. Supp. 2d 407, 419 (S.D.N.Y.
2000).
In the present case, the statements in Meltzer’s e-mails
— in fact, the statements within the disclaimers
themselves — clearly misrepresent present or
historical facts. In particular, Meltzer’s disclaimers
stated that “[a]ll statements of opinions are those of
Stock-Vest” (for example) — when in fact, as Meltzer
now insists himself, the “statements of opinions” were
entirely those of his Cohen and Weinstein. Meltzer’s
disclaimer also indicated that he “relies exclusively on
information gathered from public filings on featured
companies, as well as, in certain circumstances, interviews
[with] management.” This too was misleading: Meltzer may
have attached or linked the press releases or public
filings of the companies he discussed, but his opinions in
fact exclusively relied on (and indeed were written by)
Cohen and Weinstein. In Page 19 sum, Meltzer’s e-mails
contain statements contain more than mere forward looking
projections; they contain inaccurate statements of past and
current fact that are not shielded by his cautionary
language. For this reason as well, the “bespeaks caution”
doctrine provides no defense for Meltzer as a matter of law.
2. Meltzer’s Other Arguments
In addition to the “bespeaks caution” doctrine, Meltzer
makes or appears to make several other arguments against
the materiality of his misstatements. First, Meltzer
asserts that when considering the “total mix” of
information, no reasonable investor could consider the
misrepresentations material because some of the e-mails
“were specifically labeled advertisements.” Not only does
Meltzer fail to provide any citations to support this
proposition, but the case law indicates that
misrepresentations contained in advertisements can be
material. Cf. Commodity Futures Trading Comm’n v. R.J.
Fitzgerald & Co., Inc., 310 F.3d 1321, 1329-30 (11th Cir.
2002) (“As we have indicated in various prior commodities
cases, the fact that the Commercial had a general risk
disclosure statement does not automatically preclude
liability . . . where the overall message is clearly and
objectively misleading or deceptive.”); and S.E.C. v.
Banner Fund Int’l, 211 F.3d 602, 606-07, 615-16 (D.C. Cir.
2000) (holding that defendant’s assistance in preparing
“advertising brochure” containing false and misleading
statements and mailing brochure to potential investors
constituted securities fraud). Thus, the fact that some of
the e-mails were labeled “ADV” does not render those
misstatements immaterial as a matter of law. What’s more,
many of the e-mails were not labeled “ADV,” and Meltzer’s
argument is entirely unavailing as to those misstatements.
Page 20
Meltzer also argues that the disclaimers did not misstate
the extent of Meltzer’s involvement in the composition of
the materials because “he did do a substantial amount of
work.” (Def.’s Opp’n Mem. at 17.) This argument stands at
odds, however, with Meltzer’s deposition testimony (see,
e.g., Meltzer Dep. at 73 (Q: “[Y]ou knew it was their
opinion and not yours?” Meltzer: “Yes.”)), and other
arguments in his own memoranda (see, e.g., Def.’s Opp’n
Mem. at 15 (“[Meltzer] only played a ministerial role in
connection with the newsletter.”). Besides being entirely
inconsistent with his own testimony, this argument also
fails because it essentially an argument that the
statements were in fact “true” — which they were not
— rather than the issue at hand, which is whether
they were material. Accordingly, the argument provides no
support for Meltzer’s motion for summary judgment.
In sum, as there is no merit to any of Meltzer’s arguments
that the misstatements were immaterial as a matter of law,
the Court denies Meltzer’s motion for summary judgment.
B. The SEC’s Arguments In Favor of Materiality
Though the Court has dispensed with Meltzer’s arguments
against materiality, the Court must still determine whether
the misstatements were material as a matter of law, thereby
entitling the SEC to summary judgment. The SEC argues that
Meltzer’s statements and omissions were material because,
while he “knowingly misrepresented to potential investors
that the newsletters he published contained his opinions,
based . . . on a review of public filings,” he “at no time
performed any analysis or research concerning the stocks he
was touting,” and instead simply regurgitated the
statements of the stocks’ promoters, without disclosing
“the actual source of the content of his touts, or the far
larger financial interest they had in the companies.” (SEC
Summ. J. Mem. at 9-10.) Further, says the SEC, “Meltzer’s
spam and websites, purportedly Page 21 disseminated and
operated by numerous, distinct business entities, gave
potential investors the misimpression that there was more
than one person recommending the purchase of the issuer’s
stock or who conducted research concerning the issuer’s
stock.” (Id. at 10.) In sum, the SEC argues that “a
reasonable investor would assume Meltzer’s opinions came
exclusively from public filings and management interviews,”
but “would certainly discount a recommendation to purchase
securities if that investor knew that the promotional
information was merely a reprint of information from a
stock promoter whose financial interests would be served by
successfully inducing others to invest.” (Id.)
In support of its position, the SEC cites to Hoxworth v.
Blinder, Robinson, & Co., 903 F.2d 186 (3d Cir. 1990), and
SEC v. Gorsek, 222 F. Supp. 2d 1099 (C.D. Ill. 2001). Both
of those cases are distinguishable, however, and do not
support a conclusion of materiality as a matter of law in
this case.
In Hoxworth, the Court held that “whether or not a `buy’
recommendation (an implicitly a subsequent `sell’
recommendation) is based on the study of a research
department is a material fact.” Hoxworth, 903 F.2d at 201
(citation omitted). A securities dealer represented that
its “research department” had researched the stocks that
were being recommended. It failed to mention that the
“research department” consisted of a single individual “who
performed no independent research and who only recommended
stocks underwritten by” the dealer. Id. at 200 n. 20.
The present case poses a different scenario, however, from
that in Hoxworth. It is undisputed that Meltzer did not do
the research himself, but it remains undetermined whether
the material provided to Meltzer was the product of
independent research by Cohen and Weinstein. Page 22
Thus, the Hoxworth opinion is nondispositive because it
does not answer the present question of whether
misrepresenting who did the research — rather than
whether any research was actually done — is a
material fact.
Gorsek similarly provides little support for the SEC’s
position. In Gorsek, the court found that a disclaimer was
materially misleading because it “did not tell the reader of
the profile that [the stock research firm] stood to gain if
the price of the stock went up. The disclaimer did not tell
the reader of the profile that [the stock research firm]
had done no independent research on the company and that
all of its statements were just rehashed company material.”
Gorsek, 222 F. Supp. 2d at 1109. Again, the present case is
distinct, primarily because Meltzer’s disclaimer did state
that Meltzer was an interested party. Furthermore, though
Meltzer did no independent research on the companies he
touted, it has not been established by the SEC that all of
the statements made via e-mail and through the website were
simply rehashed company material. Those materials may have
been composed independently by Cohen and Weinstein. (See,
e.g., SEC Summ. J. Mem. at 6 (“Meltzer has admitted that he
simply republished, almost verbatim, the recommendations
and representations he received from the various stock
promoters who paid him. . . .” (emphasis added)).) To the
extent that those materials were independently composed by
Cohen and Weinstein, Gorsek is nondispositive.
Upon perusing other relevant caselaw, the Court concludes
that it is not clear whether a reasonable investor would
have found the misstatements material. First, the
materiality of whether the fact that Cohen and Weinstein,
rather than Meltzer, composed the substantive portions of
the e-mails and websites is uncertain. Though the
disclaimer’s indication that Meltzer (or, e.g., Stock-Vest)
was the entity touting the stock is undoubtedly misleading,
it Page 23 remains a question of fact whether the true
identity of the touter is material to the reasonable
investor. To that end, there is nothing in the evidence
submitted to suggest that the names “Cohen” and “Weinstein”
mean anything more or less to a potential investor than the
name “Meltzer” (or, e.g., “Stockvest”).
In addition, though it is certainly inaccurate that
Meltzer (or, e.g., Stock-Vest) conducted interviews with
management, Cohen and Weinstein may have conducted such
interviews. As such, though it is misleading that Meltzer
(or, e.g., Stock-Vest) conducted the interviews, it may
very well be true that the actual substance of the e-mails
and websites was based in part upon such interviews. If
that is the case, the misstatement’s materiality may
dissipate.
Finally, though the disclaimer misstates the amount of
compensation received by the composer, it nevertheless
discloses the fact that a conflict of interest exists.
Though Meltzer testified that Cohen and Weinstein received
“considerably” more compensation that he had (see Meltzer
Dep. at 32), the difference in compensation may or may not
be material to a reasonable investor; it may be that simply
being alerted to the fact that some significant amount was
paid is significant, but that the actual amount is
immaterial. Furthermore, the SEC has failed to establish
the actual amount of compensation that was paid to Cohen
and Weinstein.
In sum, a reasonable fact finder could conclude that the
misstatements, while false and misleading, would not have
altered the total mix of information available to the
potential investor. Keeping in mind that courts have been
“careful not to set too low a standard for materiality,”
Press, 166 F.3d at 539 (quoting Basic, 485 U.S. at 231),
the Court denies the SEC’s motion for summary judgment.
This conclusion is consistent with the Second Circuit’s
general position that “[t]he determination of materiality
is a mixed question of law and fact that generally Page 24
should be presented to a jury,” Press, 166 F.3d at 538; see
also TSC Industries, Inc., 426 U.S. at 450 (“Only if the
established omissions are `so obviously important to an
investor, that reasonable minds cannot differ on the
question of materiality’ is the ultimate issue of
materiality appropriately resolved `as a matter of law’ by
summary judgment.”).
CONCLUSION
In accordance with the foregoing, the Court denies both
the SEC’s and Meltzer’s motions for summary judgment.
SO ORDERED. Page 1