U.S. S.E.C. v. Sierra Brokerage Services Inc.

• Decision Date: 31 March 2009
• Docket Number: Case No. C2-03-CV-326.
• Citation: 608 F.Supp.2d 923
• Parties: UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. SIERRA BROKERAGE SERVICES INC., et al., Defendants.
• Court: U.S. District Court — Southern District of Ohio

608 F.Supp.2d 923

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. SIERRA BROKERAGE SERVICES INC., et al., Defendants.

Case No. C2-03-CV-326.

United States District Court, S.D. Ohio, Eastern Division.

March 31, 2009.

COPYRIGHT MATERIAL OMITTED

Adolph J. Dean, Jr., Amy S. Cotter, Tracy W. Lo, Kathryn A. Pyszka, U.S. Securities and Exchange Commission, Chicago,

IL, Dale Edward Williams, Mark Thomas D'Alessandro, United States Attorney's Office-2 Columbus, OH, for Plaintiff.

Sierra Brokerage Services, Inc., Columbus, OH, pro se.

Peter B. Shaeffer, Chicago, IL, Paula Milsom Brown, Kravitz, Brown & Dortch, LLC, Frederick Morris Luper, Luper Neidenthal & Logan, Kimberly Cocroft, Buckingham Doolittle & Burroughs LLP, Carter M. Stewart, Vorys Sater Seymour & Pease LLP, Columbus, OH, Ronald E. DePetris, DePetris & Bachrach LLP, New York, NY, Aamer Ravji, Godwin Gruber, LLP, Phillip W. Offill, Jr., Dallas, TX, Irving M. Einhorn, Law Offices of Irving M., Manhattan Beach, CA, Benjamin Brian Segel, Dublin, OH, for Defendants.

Jeffrey A. Richardson, Columbus, OH, pro se.

Michael M. Markow, Westlake Village, CA, pro se.

OPINION & ORDER

ALGENON L. MARBLEY, District Judge.

I. INTRODUCTION

The Securities and Exchange Commission ("SEC") filed this civil enforcement action against twelve defendants alleging that they violated registration, disclosure, and anti-fraud provisions of federal securities law in connection with the public sale of Bluepoint Linux Software Corporation's ("Bluepoint") shares. In Count I, the SEC claims that Defendants Aaron Tsai ("Tsai"), Michael Markow ("Markow"), Global Guarantee Corporation ("Global Guarantee"), Francois Goelo ("Goelo"), Yongzhi Yang ("Yang"), K & J Consulting Ltd. ("K & J Consulting"), Ke Lou ("Lou"), M & M Management Ltd. ("M & M"), Sierra Brokerage Services, Inc. ("Sierra"), and Jeffrey Richardson ("Richardson") violated Sections 5(a) and 5(c) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77e(a) and 77e(c), by trading securities in interstate commerce without filing registration statements. Counts II, III, IV, and VI of the Complaint allege that Defendants Markow, Global Guarantee, Goelo, Yang, K & J Consulting, Lou, M & M, Sierra, Richard Geiger ("Geiger"), and Richardson engaged in a "pump and dump" scheme that manipulated the market price for Bluepoint shares on March 6, 2000, in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act, 15 U.S.C. §§ 77q(a)(1) and 77q(a)(3); Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5; and Section 15(c)(1) of the Exchange Act, 15 U.S.C. § 78o(c)(1). Counts VIII and IX allege that Defendants Tsai (acting individually), and Goelo (individually and as part of a group), Yang (individually and as part of a group), K & J Consulting, Markow, Global Guarantee, Lou, and M & M (acting collectively) failed to report their beneficial ownership of securities in violation of Section 13(d) of the Exchange Act, 15 U.S.C. §§ 78m(d)(1) and (2), Rules 13d-1(a) and 13d-2(a) thereunder, 17 C.F.R. §§ 240.13d-1, 240.13d-2; and Section 16(a) of the Exchange Act, 15 U.S.C. § 78p(a) and Rule 16a-3 thereunder, 17 C.F.R. §§ 240.16a-3.

Now before the Court is the SEC's motion for summary judgment (doc. no. 124) against Defendants Tsai, Markow, Global Guarantee, Yang, K & J Consulting, Lou, M & M, Goelo, Sierra, and Richardson on the Section 5 registration claim (Count I) and on the Section 13(d) and 16(a) disclosure claims (Counts VIII and IX). Defendants Tsai, Markow, Global Guarantee, Goelo, Yang, K & J Consulting, Lou, M & M, and Geiger (collectively "Defendants") have cross motioned for summary judgment on the registration and disclosure counts (Counts I, VIII, and IX) and also seek summary judgment on the market manipulation scheme counts (Counts II, III, IV, and VI). (Doc. no. 112). For the reasons explained below, the SEC's motion is GRANTED in PART and DENIED in PART and the Defendants' motion is DENIED.

II. BACKGROUND

A. Facts

This case centers on Defendant Tsai's creation of MAS Acquisition XI Corporation ("MAS XI"), a "shell" company that ultimately merged with Bluepoint and sold shares to the public on the Over-the-Counter Bulletin Board in March of 2000. The SEC maintains that the Defendants' conduct relating to that process repeatedly violated the federal securities laws.

"Shell companies," like MAS XI, are also referred to as "blank check" companies. Shell companies or blank check companies are formed with the purpose of qualifying for public trading on the Over-the-Counter Bulletin Board and later being sold to a privately-held company. The private company is then merged into the shell. To accomplish the reverse merger, the public shell company exchanges its stock with the outstanding shares of the private company. The shareholders in control of the shell company transfer most of their shares to the owners of the private company.

The public shell company often changes its name to the name previously used by the private company and continues the business activity of the formerly private company except that the company is now an issuer of publicly traded securities. See SEC v. M & A West, Inc., No. C01-3376, 2005 WL 1514101, at *2 (N.D.Cal. June 20, 2005) (explaining reverse mergers). This process allows the private company to go public cheaply, i.e., without the expense of an initial public offering. See SEC v. Kern, 425 F.3d 143, 146 (2d Cir.2005). Shell companies have no assets or revenue; instead, they exist merely to serve as a vehicle for the businesses activities of the company which merges into them. See Black's Law Dictionary 149 (2d Pocket Ed. 2001).

1. Defendants

Tsai is a resident of Taiwan. Tsai controls MAS Capital Securities, Inc., a U.S. incorporated securities broker-dealer that is registered with the SEC. From 1996 to 2000, he formed 101 public shell corporations. The shell companies were created so that they could be merged with private companies that want to go public. One of those shell companies was MAS XI, which ultimately was merged with Bluepoint.

Tsai is experienced in the securities industry. Between 1998 and 2000, Tsai was a registered representative of five brokerage firms. He is also educated in the securities industry. Between 1998 and 1999, he took and passed several exams related to the securities industry including: (1) the Series 7 exam, a New York Stock Exchange exam for stock brokers which Tsai passed with high marks in 1998; (2) the Series 24 exam, which is a securities principal license exam for managers of brokerage firms; (3) the Series 28 exam; (4) the Series 55 exam for stock traders; and (5) the Series 63 exam, which covers state regulations regarding securities.

Tsai also has experience with securities violation litigation. On April 4, 2005, final judgment was entered against him by the District Court for the Middle District of Florida enjoining him from future violations of the registration provisions of the federal securities laws and ordering disgorgement and civil penalties. SEC v. Surgilight Inc., SEC Litig. Release No. 19169, 2005 WL 770873 (Apr. 6, 2005) (M.D. Fla. Case No. 6:02-CV-413). Tsai consented to the final judgment without admitting or denying the allegations against him. Id.

a. Promoter Defendants

Defendants Yang, Markow, Goelo, Lou, K & J Consulting (Yang's company), Global Guarantee (Markow's company), and M & M (Lou's company) are collectively referred to throughout this Opinion as the "Promoter Defendants." Yang is a California resident. He currently works as a business consultant and owns his own building materials importer business. Yang holds a Ph.D. in mathematics and has a computer science background.

In 1999, Yang worked as a consultant for Shenzhen Sinx Software Technology Corporation, which was later renamed Bluepoint. In that role, Yang was responsible for finding an American public shell corporation into which Bluepoint could merge. He was ultimately involved in negotiating and consummating the reverse merger between Max XI and Bluepoint. Yang controls K & J Consulting, Ltd, a British Virgin Islands company, through which he held and traded Bluepoint stock in 2000.

Like Tsai, Yang is no stranger to securities litigation. On February 28, 2005 the District Court for the Central District of California entered a final judgment against Yang in SEC v. Hartcourt Companies. SEC Litig. Release No. 19133, 2005 WL 597024 (Mar. 15, 2005) (C.D. Cal. Case no. CV 03-3698). The Court enjoined him from future violations of the registration and anti-fraud provisions of federal securities law, ordered $186,619 in disgorgement, and imposed $20,000 in civil penalties.

Markow is a California resident. He is a financial consultant with substantial experience conducting reverse mergers. He formed and controls Global Guarantee, which consults with other companies regarding their business plans and financing. In 2000, Markow acquired and sold Blue Point stock through Global Guarantee. He facilitated the reverse merger between MAS XI and Bluepoint.

Markow is a repeated securities law violator. In 1994, 1995, and 1999, the National Association of Securities Dealers ("NASD") held Markow liable for monetary awards in arbitration proceedings based on his securities-related misconduct. (NASD Arbitration Awards; 12/3/2004 Markow Dep. 220-221, 223.) In 1998, California issued two "desist and refrain" orders against him for operating as a broker-dealer without a license and for selling securities that had not been qualified. (5/15/1998 Cal. Desist and Refrain Orders). In 2000, Alabama issued a "cease and desist" order against him for operating as an unregistered broker dealer. (3/3/2000 Ala. Cease and Desist Order.)

Goelo is a resident of the Cayman Islands. Goelo knew Yang through internet investor message boards. He also knew Markow from his reputation as a...