U.S. Sec. & Exch. Comm'n v. Big Apple Consulting USA, Inc.

• Citation: 783 F.3d 786
• Decision Date: 09 April 2015
• Docket Number: No. 13–11976.,13–11976.
• Parties: U.S. SECURITIES AND EXCHANGE COMMISSION, Plaintiff–Appellee, v. BIG APPLE CONSULTING USA, INC., MJMM Investments, LLC, Marc Jablon, Mark C. Kaley, Defendants–Appellants, Matthew Maguire, et al., Defendants.
• Court: U.S. Court of Appeals — Eleventh Circuit

783 F.3d 786

U.S. SECURITIES AND EXCHANGE COMMISSION, Plaintiff–Appellee

v.BIG APPLE CONSULTING USA, INC., MJMM Investments, LLC, Marc Jablon, Mark C. Kaley, Defendants–Appellants

Matthew Maguire, et al., Defendants.

No. 13–11976.

United States Court of Appeals, Eleventh Circuit.

April 9, 2015.

Theodore Weiman, Dominick V. Freda, Jeffery T. Infelise, Cheryl J. Scarboro, Thomas A. Sporkin, Duane Kenneth Thompson, U.S. Securities & Exchange Commission Office of the General Counsel, Washington, DC, for Plaintiff–Appellee.

Mark C. Kaley, Orlando, FL, pro se.

Carl Francis Schoeppl, Jr., Brenda Marie Nelson, Schoeppl & Burke, PA, Boca Raton, FL, for Defendants–Appellants.

Keith Jablon, Winter Garden, FL, pro se.

Matthew Maguire, Sanford, FL, pro se.

Appeals from the United States District Court for the Middle District of Florida. D.C. Docket No. 6:09–cv–01963–JA–GJK.

Before CARNES, Chief Judge, TJOFLAT and SILER,^* Circuit Judges.

Opinion

SILER, Circuit Judge:

The Securities and Exchange Commission (SEC) brought this civil enforcement action against defendants Big Apple Consulting USA, Inc. (Big Apple), MJMM Investments, LLC (MJMM), Marc Jablon (Jablon), and Mark C. Kaley (Kaley) (collectively, the defendants) for violations of the Securities Act of 1933 (Securities Act), 15 U.S.C. § 77a et seq., and the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78a et seq. The SEC also brought the action against Matthew Maguire (Maguire) and Keith Jablon (Keith), but those defendants are not involved in this appeal. The district court granted summary judgment in favor of the SEC as to some of the claims, and the remainder of the claims proceeded to trial. A jury found in favor of the SEC as to the remaining claims against all defendants.

On appeal, the defendants assert six claims of error involving both the district court's partial grant of summary judgment in favor of the SEC and the district court's rulings in the jury trial. For the reasons explained below, we affirm.

FACTUAL BACKGROUND

a. The Players

Big Apple and its wholly owned subsidiary, MJMM, provided investor relations and public relations services to microcap companies. Management Solutions International, Inc. (MSI), another wholly owned subsidiary of Big Apple, offered a variety of services, including marketing, business planning, and e-commerce website development and maintenance. Jablon was president and CEO of Big Apple, as well as CEO of MSI. Jablon and Maguire cofounded MJMM; Maguire also served as the vice president of Big Apple. Kaley was president of MJMM and an officer of Big Apple. Kaley was also an attorney. Keith is Jablon's brother and was vice president of MSI.

The SEC's allegations stem from the defendants' relationship with CyberKey Solutions, Inc. (CyberKey), previously known as CyberKey Corp., and its CEO James Plant (Plant). CyberKey sold customizable USB drives that could be loaded with encryption software to secure content stored on the drives. Beginning on July 5, 2005, CyberKey's stock traded on a website called Pink Sheets, which displays the bid and ask prices for over-the-counter securities (i.e., securities that are not listed on a U.S. exchange). On June 15, 2005, Kaley executed a consulting agreement with CyberKey on behalf of MJMM, in which MJMM agreed to provide services intended to promote CyberKey's business. According to the agreement, MJMM would “diligently market and promote [CyberKey] to brokers ... and [ ] introduce [CyberKey] and its principals to [MJMM's] current and future network of brokerage firms and market makers.” Although CyberKey signed the agreement with MJMM, the parties understood that Big Apple and its subsidiaries would provide all the services detailed in the consulting agreement.

Under the terms of the original consulting agreement, CyberKey paid MJMM $50,000 per month either in cash or in “free-trading shares”¹ of CyberKey, which was calculated based on the previous ten-day average closing bid price. This sort of exchange was typical for Big Apple; at least ninety-five percent of Big Apple's clients paid in stock. The consulting agreement between MJMM and CyberKey was extended twice—once on November 14, 2005 and again on October 9, 2006. Kaley signed both agreements. The October 2006 extension required CyberKey to pay $80,000 per month or a number of CyberKey shares calculated based on a fifty percent discount of the ten-day average closing bid price of CyberKey stock. Thus, assuming a constant closing bid price in CyberKey stock over the previous ten-day period, MJMM received CyberKey stock that had a market value of $160,000 in exchange for $80,000 worth of services. During the entire period that CyberKey contracted with MJMM, CyberKey paid exclusively in stock for services provided. MJMM also negotiated the option to purchase additional CyberKey stock at a significant discount, initially forty percent in July 2006 and increasing to fifty percent shortly thereafter. Ultimately, MJMM received approximately 77 million CyberKey shares for services rendered, and at the direction of Jablon and Kaley, MJMM purchased a total of approximately 648 million more shares by exercising options on a regular basis.

As part of its public relations services to CyberKey and other clients, Big Apple operated a telephone call room that contacted registered securities brokers and dealers to disseminate public information in order to create interest in client companies and their stock. Maguire supervised the call room on a day-to-day basis, but Jablon bore ultimate oversight and was both aware of and authorized all the policies and procedures used in the call room. Big Apple staffed the call room with as many as fifty employees, who used internally-drafted press releases and “bullet sheets” to draw attention among the broker-dealer community to its clients.

b. The Department of Homeland Security Contract

At first, there was no demand for CyberKey stock, but that changed when Plant began reporting fabricated contracts. First, Plant falsely informed Big Apple— on three separate occasions—that CyberKey had been awarded a valuable contract with a fictitious part of the government called the “Military Post Exchange” (MPX). The purported contract allegedly was valued at $15 million, then increased to $19 million, and then to $23.9 million. Both Jablon and Kaley were aware of this claimed purchase order. On each occasion that Plant raised the MPX contract price, the MSI staff drafted a press release that covered details such as the dollar figure of the order and the number of units requested, and each time MSI held the release pending its distribution by CyberKey. On November 11, 2005, approximately four hours after MSI drafted the latest press release announcing a $23.9 million MPX order for 185,000 units and while awaiting Plant's approval to publish the release, MSI abruptly revised the press release to reflect a $24.49 million order from the Department of Homeland Security (DHS) for 150,000 units (the DHS contract). Any announcement of the MPX contract was abandoned without explanation.

The newly-announced, fictitious DHS contract was a game changer. Jablon characterized it as “[o]ne in a million,” and both he and Kaley thought the contract would significantly increase demand for CyberKey stock.

Plant showed Jablon and Kaley a document he purported was the DHS contract, and it contained several obvious inconsistencies. Neither Jablon nor Kaley looked closely at the contract. Although the contract was supposedly with DHS, a federal entity, the eight-page document contained multiple references to the State of Connecticut, including a mailing address in the state, a state e-mail address for the purchasing contact, and several contract terms that expressly identified the “State of Connecticut” or “the State” as the counter-party. In fact, only the cover page and the header of each page of the document referred to the DHS. Further, the contract's stated value—$24,494,412.15—differed from the amounts Plant had previously reported to the defendants relating to the original MPX deal. The contract award date was also internally inconsistent. On the first and second pages of the contract, the award date was listed as October 31, 2005, but two pages later it was listed as August 12, 2005.

CyberKey publicized the DHS contract in a December 8, 2005 press release that announced “the Company [had received] a multi-million [d]ollar purchase order from the Department of Homeland Security ... [for over] 150,000 units.” MSI drafted the press release and Big Apple was listed as the primary contact, along with the telephone number 1–866–THE–APPL(E). Incoming brokers' calls were routed to Big Apple's sales floor, and investors' calls were routed to MSI's investor relations team. Over the next fifteen months, the defendants conceived, drafted, edited, or reviewed numerous press releases emphasizing the $25 million DHS contract or aspects related to it. The defendants also drafted press releases announcing the first two shipments of USB devices to DHS and CyberKey's receipt of two $4.2 million payments from DHS.

During this time, Big Apple used its call room to aggressively promote CyberKey to broker-dealers; Big Apple routinely designated CyberKey the “on focus” client, making it a priority in salespeople's calls. For example, out of a given sixty day period, CyberKey was “on focus” for thirty to forty-five of those days. The defendants prepared or approved the preparation of “bullet sheets” detailing talking points about CyberKey and circulated them to its salespeople in the call room. Generally, Big Apple and MJMM did not disclose to brokers or investors that compensation for representing CyberKey came in the form of stock.

c. The Scheme Unravels

Additional signs of Plant's dishonesty surfaced in the coming months. In January 2006, Plant sent CyberKey's first financial statement for public release, and, according to Jablon, the financial statements looked like the...