Shannon Terry & Dunbar Holdings
Shannon Terry, age 28, was an independent contractor employed by SGA
Goldstar Research, Inc. ("SGA" from August 1993 until November 1996. His prior
education and training included a degree in Finance and Economics, earned in
June 1992, two months of unspecified work at SGA in June and July 1992, and one
year of employment by a bank as a credit analyst.
SGA published the SGA Goldstar Whisper Stocks newsletter ("Whisper
Newsletter") Theodore Melcher, the sole shareholder of SGA3 was also publisher
and editor of the Whisper Newsletter. did business out of Melcher's home, where
the Newsletter prepared using desktop publishing equipment. Terry -and Melcher
were the only two people working at SGA during most of Terry's tenure.
The Whisper Newsletter was a "high-risk aggressive growth" newsletter
containing profiles of companies and making recommendations regarding the
purchase of stock in those companies.
--------------------
3 SGA Goldstar Research, Inc. and Theodore Melcher are also named
Defendants in the SEC's original complaint against named Defendant Charles
Huttoe.
3
Each edition typically featured promotion of largely unknown and untested penny
stock or small capitalization companies. The Newsletter was available through
direct subscription, as well as indirectly through several news provider
services. SGA subscribers received the Whisper Newsletter by facsimile each
evening or downloaded a copy by logging into SGA's Internet web page. Each
evening's edition was-post-dated to the following day, In 1996 there were
approximately 280 subscribers to the Whisper Newsletter. In addition to its
subscription revenue, SGA received compensation from companies publicized in the
Whisper Newsletter.
Terry performed a range of tasks including bookkeeping, word
processing, and answering phones. One of his main responsibilities was selling
subscriptions to new and existing clients. Terry also assisted in the production
and distribution of the Newsletter, reviewing press release information about
companies profiled by the Whisper Newsletter and writing articles and
commentaries about some of these same companies. During his employment, Terry
wrote an increasing number of articles, and at times wrote as many as half of
all of the articles in the Newsletter
For his work, Terry received a base compensation of $25,000 per year
and 12.5 percent of all new and renewal subscriptions. In addition, companies
paid SGA with stock in exchange for articles promoting their stock in the
Whisper Newsletter, and SGA would in turn give Terry stock for companies he
promoted in the articles he wrote. Thus, although the stock was not directly
given to Terry by the issuing company, it came from the issuing company to SGA
and
4
then directly to Terry for the articles he wrote about those stocks. Terry
admits to being present at some of the meetings where the stock payments were
negotiated, but denies being a decision maker or negotiator in these meetings.4
Between October 1994 and September 1996, Terry received stock in 18 companies
which
---------
4 Terry admits participation in meetings to negotiate stock in exchange
for promoting Central Resources, American Bio Medica, and Systems of Excellence.
(See Pls. Stmt. of Material Uncontested Facts at 5; Defs. Rsponse to Stmt of
Material Uncontested Facts at 5.)
5
were then promoted in the whisper Newsletter.5 The ultimate value
Stock Shares Dates Dates Dates Shares
Issuer Rec'd Rec'd Promoted SOLD SOLD Proceeds
------------------------------------------------------------------------------------------------------------
Affinity Tele 85,000 7/14/95;
7/21/95;
8/8/95 $57,625
Aimrite Holdings 51,750 2/22/96
5/31/96 $20,530.50
American Bio 20,000 7/15/96 7/15/96- 7/17/96 7,500
8/30/96 7/19/96 2,500
7/25/96 2,500
7/26/96 2,500
7/29/96 2,500
9/04/96 2,500 $116,250
Ameriquest 2,500 2/3/95 3/31/95- 4/05/95 2,500 $7,187.50
4/3/95
Century Tech 75,000 1/8/96 1/19/96 1/19/96 12,000
5/10/96 63,000 $31,402.50
Chancellor Group 2,500 6/11/96 6/11/96- 7/11/96- 1,000
2,500 6/26/96 7/25/96 8/5/96 1,500 $20,937.50
Dragon Envir. 37,500 6/13/96 6/13/96 6/17/96 5,000
16,500 10/30/96 6/17/96 6/18/96 10,000
9/18/96 3,000
9/30/96 3,000 $58,031.10
Essential Res. 40,000 7/12/96 7/30/96 8/9/96 2,000
5,000 9/13/96 9/19/96 8/12/96 1,50:
8/15/96 1,500 $49,375
Fidelity Med. 15,000 5/10/95 $6,555
Garcis USA (Buys) 20,000 4/3/95 4/4/95- 4/12/95 2,500
3,000 5/4/95 4/17/95 4/17/95
4/28/95 17,500
(Free) 5/5/95 3,000 $7,717.50
Insulpro Indus. 15,000 3/13/95 3/15/95 4/21/95
(Buys) 5,000 3/13/95 4/3/95 5/3/95 20,000 $10,740
Int'l Std. Group 50,000 3/14/96 $47,509.10
NVID Int'l 225,000 2/15/96 $53,375
Silent Radio 10,000 10/21/94 $22,874.50
6
of all stocks he received from his allegedly illegal activities was $828,448.6
Terry is the sole owner of Dunbar Holdings, a corporate shell that is
located in Grand Turks, Bahamas. Terry maintains and directs a trading account
in the name of Dunbar Holdings with a Canadian brokerage firm. Stocks that Terry
received for his commentaries in the Whisper Newsletter were placed into the
Canadian trading account of Dunbar Holdings.
As the table in footnote 5 demonstrates, Terry's trading of, stocks
either coincided with the publication of stories about these, same stocks in the
Whisper Newsletter or took place shortly after publications of the stories.
Terry wrote some of the articles and co-authored others with Melcher who always
retained final editorial control over articles appearing in the Whisper
Newsletter. These stories would recommend that the subscribers buy the stocks in
companies promoted However, after some of the stories were printed in the
Whisper Newsletter, Terry would turn around and sell his personal holdings of
that particular stock within a few days Since the price of a featured stock
often increased soon after Whisper Newsletter's aggressive promotion to
subscribers, made substantial profits from his sales. This pattern of selling in
contravention of the Whisper recommendations was repeated over
-------------
6 For purposes of summary judgment, the SEC reduced its disgorgement
request from $851,322.50 to $828,448 in its Reply Memo in response to Defendant
Terry's denial that he received stock valued at $22,874.50 in exchange for
promoting Silent Radio, Inc. (p1's Reply at 3, n.3; see also p1's Stmt of Mat.
Uncontested Facts, 34; Terry Response, 34.)
a two year period for all stocks Terry received as compensation for promotion of
these stocks.
B. J.S. Holdings
J. S. Holdings is a holding company, owned by Jeffrey Szur, which in turn
owns J.S. Securities. J.S. Holdings received a wire transfer in the amount of
$255,000 from Defendant Huttoe on August 21, 1996. Plaintiff claims that this
amount represents proceeds of the sale of unregistered SOE stock from a nominee
account in name of National Trading Services, Inc. ("NTSI" a Florida Corporation
controlled by Huttoe.
II. STANDARD OF REVIEW
A party against whom a claim . . . is asserted . . . may, at any time,
move with or without supporting affidavits for a summary judgment in
the party's favor as to all or any part thereof . . . The judgment
sought shall be rendered forthwith if 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 of law.
Fed. R. Civ. P. 56 (b) - (c). The party seeking summary judgment bears the
initial burden of demonstrating an absence of a genuine issue of material fact.
Celotex Corp. v. Catrett, 477 U.S. 317 322 (1986) . In determining whether the
movant has met this burden a court must consider all factual inferences in the
light most favorable to the non-moving party. McKinney v. Dole, 765 F.2d 1129,
1135 (D.C. Cir. 1985). Once the moving party makes initial showing, however, the
nonmoving party must demonstrate specific facts showing that there is a genuine
issue for trial."
8
Celotex, 477 U.S. at 324; McKinney, 765 F.2d at 1135. Moreover, "n
determining a motion for summary judgment the court may assume that facts
identified by the moving party in its statement of material facts are admitted,
unless such a fact is controverted in the statement of genuine issues filed in
opposition to the motion." Local Rule 108(h).
III. CLAIMS AGAINST SHANNON TERRY & DUNBAR HOLDINGS
The SEC alleges that Terry violated SA ss. 17(a), SEA ss. 10(b), and
SEC Rule 10b-5 when he (1 touted publicly traded securities to potential
investors in articles he wrote for the Whisper Newsletter in return for
undisclosed compensation from the issuers of those securities, (2 traded his
personal share holdings in stocks even as he was writing articles in the Whisper
Newsletter recommending their purchase, and (3) failed to disclose either of
these practices when he solicited subscriptions to the Whisper Newsletter. The
SEC also alleges that Terry violated SA ss. 17(b) when he failed to disclose to
subscribers that he received consideration in exchange for writing and
publishing article promoting stock.
Terry deposited the proceeds he received for the articles in Dunbar
Holdings. The SEC requests that Terry and Dunbar Holdings disgorge payments for
promoting stocks, trading profits, and subscription commissions, as well as
prejudgment interest on all illegal profits. The SEC also seeks to permanently
enjoin Terry and Dunbar Holdings from participating in further violation of the
securities laws
9
A. Violation of SAss.17(a),1 SEA 5 10 (b)2 and Rule 10b-5.3
-------------
7 Section 17(a) of the Securities Act, 15 U.S.C.ss.77q(a) provides:
It shall be unlawful for any person in the offer or sale of any
securities by the means or instruments of transportation or communication in
interstate commerce- of by the use of the mails, directly or indirectly (1) to
employ a 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 the
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.
8 Section 10(b) of the Securities Exchange Act, 15 U.S.C. 78j (b) , makes
it unlawful for "any person, directly or indirectly," 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.
9 SEC Rule 10b-5, 17 C.F.R. Sec. 240.10b-5, pursuant to its power under
-a(.Lion 10(b). It provides:
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,
(1) to employ any device, scheme, or artifice to defraud,
(2) to make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make statements made, in the light of the
circumstances under which they were made, not misleading, or
(3) 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.
10
It is a fraud for "any person' to make any statement in connection with a
securities transaction that is materially false or misleading. 15 U. S. C.ss.77
(q) (a) ; 15 U. S. C.ss.78j (b) ; 17 C. F. Rss. 240.10b-5. A statement is made
"in connection with" the sale of any security "whenever it may reasonably be
expected that a publicly disseminated document will cause reasonable investors
to buy or sell securities in reliance thereon, regardless of the motive or
existence of contemporaneous transactions by or on behalf of the violator." SEC
v. Savoy Industries. Inc., 587 F.2d 1149, 1171 (D.C. Cir. 1978), cert. denied,
sub nom. Zimmerman v. SEC, 440 U.S., 913 (1979) A statement is materially
misleading if there is a substantial likelihood that a reasonable investor would
consider an omitted fact significant in making his or her investment decision.
See Basic, Inc, v. Levinson. 485 U.S. 2,24, 2-3.2 (1988) (adopting standard of
materiality in TSC Industries Inc. v. Northway, Inc., 426 U.S 438 (1976 for the
SEAss.10(b and Rule 10b-5 context) ; SEC v. Steadman, 967 F.2d 636, 643 (D.C.
Cir. 1992) (using Basic and TSC materiality standard in SAss.17(a) context)
A material misstatement violates SAss.17 (a (1) , SEAss.10 (b) and Rule
10b-5 when made with scienter, and violates SA ss.ss.17 (a) (2) and 17 (a) 3
when made negligently. Aaron v. SEC, 446 U.S. 680 (1980). Scienter is "a mental
state embracing intent to deceive, manipulate, or defraud," Ernst & Ernst v.
Hochfelder, 425 U.S. 185 (1976), as demonstrated by "extreme recklessness". SEC
v. Steadman, 967 F.2d at 641. Extreme recklessness is an "extreme departure from
the standard of ordinary care,...which presents
11
a danger of misleading buyers or sellers that is either known to the defendant
or is so obvious that the actor must have been aware of it." Id. at 641-42
(citing Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1045 7th Cir.
1977), cert. denied, sub nom. Meers v., Sundstrand Corp.-, 434 U.S 875 (1977)).
1. Nondisclosure of Paid Promotional Nature of Articles
The SEC maintains that Terry failed to inform Whisper subscribers of the paid
promotional nature of the articles appearing in the Whisper Newsletter and that
this nondisclosure was material. The record reflects that Terry sold
subscriptions to, and wrote the contents of, much of the Whisper Newsletters.
Although, Terry did not write all of the commentaries, he did write many about a
number of stocks appearing in the Whisper Newsletter. Terry admits that he was
compensated with the stock of companies he profiled or otherwise wrote about.4
The fact that Terry received stock in exchange for writing articles
appearing in the Whisper Newsletter is "material" so long as there is a
"substantial that a. reasonable investor
------------------
10 In its Motion for Summary Judgment, and Statement of Material
Uncontested Facts, the SEC describes these payments as the "receipt of free
stock" in exchange for promotion of such stock. The Defendant denies that he
received "free stock" in the companies touted by the Whisper Newsletter, but
admits that he received stock as compensation for writing articles appearing in
the Newsletter. (Compare, e.g. Pls. Stmt. of Mat.. Uncontested FactsP.P. 2, 3,
5-9, with Defs. Response to Pls. Stmt of Mat. Uncontested Facts,P.P. 2, 3, 5-9.
See also Pls. Reply Mot. at 8, n.8.)
What is material, and uncontested, is that the Defendant received
stocks in exchange for writing articles that promoted those stocks. It is also
uncontested that Melcher was also paid to promote stock in the Whisper
Newsletter.
12
would consider the motivation of the person recommending the purchase of a stock
a significant factor in making an investment decision. Basic, Inc., 485 U.S at
232. "[S]uppression of information material to an evaluation of the
disinterestedness of investment advice operate[s] as a deceit on purchasers."
Capital Gains Research, 375 U.S. at 198 (citing SEC v. Torr, 15 F. Supp. 315,
317 (S.D.N.Y. 1936), rev'd on other grounds, 87 F.2d 446 (2nd Cir. 1936)).
Consequently, the paid promotional nature of the articles was clearly a
"material', fact for subscribers of the Newsletter who were potential investors
Indeed, Terry does not argue that the compensation he and Melcher received
was not a "material" fact requiring disclosure. He argues, rather, that this
fact was disclosed to whisper Newsletter subscribers. It is uncontested that the
Whisper Newsletter contained a disclaimer which, during most of Terry's tenure
read as follows: "Personnel associated with SGA may own shares in the companies
mentioned herein or may act as consultants thereto." On July 12, 1996, the words
"for compensation" were added to the end of this sentence.5 The question before
the court,
--------------
11 The full text of the disclosure, as amended, reads:
SGA Goldstar Research is not an -investment advisor! Information
contained in SGA Goldstar is obtained from sources believed to be reliable;
however, in certain instances such information involves rumors or other time
sensitive materials which cannot adequately be verified. SGA makes no
representation or warranty as to the accuracy or adequacy of the information and
recommendations provided. This material is not deemed as a solicitation for the
purchase or sale of a security or commodity. Use of the information and
recommendations is at the subscriber's sole risk. Personnel associated with SGA
may own shares in the companies mentioned
13
wrote and, thus, were deprived of information substantially likely to affect
their investment decision. Consequently, Terry committed fraud by making these
misleading statements in the Newsletter.
Moreover, there is no question that Terry acted with requisite scienter
to violate SA ss. 17 (a) (i) , SEA 10 (b) and Rule 10b-5. Scienter is reflected
in the Defendant's pattern of "touting stock" for more than two years. Terry
admits that he and Melcher received stock in return for promoting the issuer of
the stock and that he knew that the "disclaimer" appearing in the Newsletter did
not state that the staff received stock in return for promoting the issuer in
the Newsletter. The ineffectiveness of the Newsletter's disclosure was not
merely negligent. These statements were so likely to mislead subscribers that it
either known to the defendant or [was] so obvious that the actor must have been
aware of it." SEC v. Steadman, 967 F.2d at 641-42. Clearly Terry must have known
that the footnote in the Newsletter could not have adequately alerted
subscribers to the fact that he and Melcher received free stock for promoting
the companies they urged subscribers of the Newsletter to buy.
Terry raises a number of defenses to the SEC's allegations. First, he
responds that the information appearing in the Whisper Newsletter was not "in
connection with" the offer or sale of securities within the meaning of the
securities laws. In support of this argument, Terry directs the Court to
language in the Newsletter's disclaimer which states "This material is not
deemed as a solicitation for the purchase or sale of a security or
commodity." Notwithstanding the disclaimer, it is clear that the stocks promoted
by Terry and the Whisper Newsletter were designed to provide subscribers with
information that would cause "a reasonable investor to buy or sell securities in
reliance thereon", SEC v. Savoy Industries Inc., 587 F.2d at 1171, and were
therefore, "in connection with" the offer or sale of securities. (See P1's
Stmt.P.P. 12-27.)
Second, Terry argues that he did not commit fraud because he wrote only
some of the articles appearing in the Whisper Newsletter and because Melcher
exercised final editorial control over its content.1 Yet, Terry concedes that he
was responsible for selling subscriptions, writing and preparing the Newsletter
for distribution, and distributing the Newsletter to subscribers by facsimile
and the Internet. Terry further concedes that he was paid stock in those
companies for which he was writing promotional articles in the Newsletter The
fact that Melcher committed fraud would not excuse the fraud committed by
Defendant Terry
Terry argues, finally, that the Court cannot find that the articles he
wrote were fraudulent because the SRC failed to prove that the information
contained in the articles was inaccurate. To the extent that articles are
inaccurate, Terry argues that he was permitted as a journalist to rely upon the
press releases and other sources of information that were the basis of his
writing. In particular, Terry argues that any inaccuracies about SOE were the
--------------
12 Melcher reviewed Terry's commentaries when he was in the office but,
when Melcher was traveling, Terry's commentaries were published without editing.
(Pls. Stmt. atP. 4.)
extreme recklessness in failing to disclose the paid promotional nature of
articles appearing in the Whisper Newsletter
2. Terry's Nondisclosure of Sales Contrary to the Newsletter's
Recommendations to Buy.
The SEC maintains that Terry failed to inform Newsletter subscribers
that he intended to sell his personal holdings of stock despite the
recommendations to buy being made in the Whisper Newsletter. The record reflects
that Terry sold stocks after the Whisper Newsletter recommended that its
subscribers purchase those stock There are ample and uncontested facts in the
record that establish that this was not an isolated incident but a pattern of
behavior repeated continuously over a two year period.2 As has been established
above, Terry received stock in exchange for promoting those companies in the
Whisper Newsletter. It is also uncontested in the record that Terry sold stock
in 18 companies shortly after the Whisper Newsletter made strong recommendations
that its subscribers buy those very same stocks, and profited to the tune of
$828,448.3
Terry's practice of selling when the Newsletter was recommending buying
has long been understood to operate as a fraud
--------
13 The SEC has provided, and the Court has reviewed, voluminous records of
Terry's trading activities, Whisper Stock Newsletters corresponding to the time
of Terry's trading, and Defendant's deposition. The significant activities at
issue are reflected in the table located, supra, at footnote 5. |
