SEC v. Morrone ( 2021 )

United States Court of Appeals
For the First Circuit
No. 19-2006
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff, Appellee,
v.
JONATHAN MORRONE, individually and d/b/a JM International, Inc.,
Defendant, Appellant,
Z. PAUL JURBERG, individually and d/b/a Brookline Capital
Partners, Inc.; ANTHONY ORTH, individually and d/b/a Grand
Traverse Equities, Inc.; MAY'S INTERNATIONAL CORPORATION,
Defendants,
BRETT HAMBURGER, d/b/a JCBH Consulting, LLC,
Defendant/Third-Party Plaintiff,
BIO DEFENSE CORPORATION; MICHAEL LU, individually and d/b/a
May's International Corporation,
Defendants/Third-Party Defendants,
DAVID SMITH; ONEIGHTY C TECHNOLOGIES,
Third-Party Defendants.
No. 19-2007
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff, Appellee,
v.
Z. PAUL JURBERG, individually and d/b/a Brookline Capital
Partners, Inc.,
Defendant, Appellant,
JONATHAN MORRONE, individually and d/b/a JM International, Inc.;
ANTHONY ORTH, individually and d/b/a Grand Traverse Equities,
Inc.; MAY'S INTERNATIONAL CORPORATION,
Defendants,
BRETT HAMBURGER, d/b/a JCBH Consulting, LLC,
Defendant/Third-Party Plaintiff,
BIO DEFENSE CORPORATION; MICHAEL LU, individually and d/b/a
May's International Corporation,
Defendants/Third-Party Defendants,
DAVID SMITH; ONEIGHTY C TECHNOLOGIES,
Third-Party Defendants.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Douglas P. Woodlock, U.S. District Judge]
Before
Lynch, Lipez, and Thompson,
Circuit Judges.
Steven M. Kaplan, with whom Rosenfeld & Kaplan, L.L.P. was on
brief, for appellants.
Theodore Weiman, Senior Litigation Counsel, Securities and
Exchange Commission, with whom Michael A. Conley, Acting General
Counsel, Securities and Exchange Commission, and Tracey A. Hardin,
Assistant General Counsel, Securities and Exchange Commission,
were on brief, for appellee.
May 10, 2021
LYNCH, Circuit Judge. Appellants Jonathan Morrone and
Z. Paul Jurberg were senior officers at Bio Defense Corporation,
a United States company whose stated purpose was to develop and
sell a machine to clean and decontaminate mail. The United States
Securities and Exchange Commission ("SEC") alleged that Morrone
and Jurberg solicited investments in Bio Defense from investors in
violation of the federal securities laws. The district court
granted in part summary judgment in the SEC's favor. SEC v. Bio
Def. Corp., No. CV 12-11669-DPW, 2019 WL 7578525, at *35 (D. Mass.
Sept. 6, 2019). On appeal, Morrone and Jurberg argue that the
district court erred in applying the U.S. federal securities laws
to their solicitation of foreign investors in light of the Supreme
Court's decision in Morrison v. National Australia Bank Ltd., 561
U.S. 247 (2010). Alternatively, they argue that genuine issues of
fact precluded entry of summary judgment in favor of the SEC on
some of its claims. We find no error and affirm.
I. Facts
A. Bio Defense
Bio Defense is a Delaware corporation with its principal
place of business in Massachusetts. It was founded in 2001 by
Michael Lu in response to the widely publicized mailing of letters
containing anthrax after the September 11, 2001 terrorist attacks.
Lu said that he wanted Bio Defense to manufacture a machine, the
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MailDefender, capable of decontaminating letters of biological
pathogens.
Morrone joined Bio Defense1 in 2002 as its Senior
Executive Vice President and as a member of the company's board of
directors. He had previously worked as a licensed registered
representative at various broker-dealers. Bio Defense paid
Morrone through JM International, Inc., a corporation Morrone
controlled.
Jurberg joined Bio Defense around 2003 as a senior
officer. Like Morrone, he had previously worked as a registered
representative at various broker-dealers. Jurberg was also the
president of Brookline Capital Partners, Inc., the entity through
which Bio Defense paid him.
In addition to Morrone and Jurberg, Bio Defense made two
other hires relevant to this appeal. First, it hired Brett
Hamburger in 2002 or 2003 as a consultant to help generate leads
for prospective investors. Bio Def. Corp., 2019 WL 7578525, at
*1. Hamburger had previously worked as a registered representative
for various brokerage firms. Id. at *2-3. However, in 2000, he
was barred by the National Association of Securities Dealers for
acting as an unregistered broker, and in 2003, he was convicted of
conspiracy to commit securities fraud for activities unrelated to
1 Bio Defense was previously called Life Max. Life Max
became Bio Defense at some point in the early 2000s.
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Bio Defense. Both Morrone and Jurberg knew of Hamburger's
conviction.2 Id. at *31. Bio Defense paid Hamburger through JCBH
Consulting, LLC, which he controlled. Second, Bio Defense hired
Anthony Orth in 2005 or 2006 to assist with sales and marketing.
Id. at *1. He eventually became a Vice President. Id. Orth was
paid through Grand Traverse Equities, Inc., a company he
controlled. Id. at *2 & n.2.
Bio Defense never earned a profit and lost at least $2
million each year. Id. at *2. In total, it sold around ten
MailDefender machines and brought in only $430,000 from these sales
over a six-year period. Id. In contrast, it raised almost $25
million from stock sales to private investors over the same period.
B. Domestic Fundraising (2004-2008)
After joining Bio Defense, Morrone, Jurberg, and Orth
solicited individual domestic investors to purchase Bio Defense
stock and collected "consulting fees" for doing so. Id. Bio
Defense stock was not registered with the SEC from 2004 to 2010.
Id. at *2, *13. We limit our discussion to events that occurred
after September 10, 2007.3
2 Jurberg disputed before the district court that there
was evidence he knew of Hamburger's conviction. The district court
found that he did, see Bio Def. Corp., 2019 WL 7578525, at *31,
and Jurberg does not dispute this finding on appeal.
3 Citing the Supreme Court's decision in Kokesh v. SEC,
137 S. Ct. 1635, 1642-45 (2017), the district court held that the
SEC "may not seek monetary penalties, disgorgement, injunction, or
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On October 3, 2007, Morrone, Jurberg, and Orth
participated in a conference call for prospective investors and
touted Bio Defense stock. Orth told investors that governmental
interest in the MailDefender was growing exponentially and that
Bio Defense had already sold units to the United Nations,
Department of Defense, Reuters, and other organizations. Morrone
told investors that various federal agencies had already committed
to purchasing 300 units of the MailDefender and that the military
wanted Bio Defense to be able to produce 250 units a month. Jurberg
talked about the company's prospects abroad and said that Bio
Defense was authorized to sell units in Italy. All three also
said that Bio Defense would be an attractive acquisition target.
Morrone and Jurberg specifically mentioned a well-known mailing
equipment and technology company as a potential acquirer.
Additionally, from December 2007 to February 2008, by
phone, fax, and mail, Jurberg helped various investors transfer
money from their existing Individual Retirement Accounts ("IRAs")
an officer/director bar for any fraudulent conduct that occurred
prior to September 10, 2007" because the SEC filed its complaint
on September 10, 2012. Bio Def. Corp., 2019 WL 7578525, at *11.
When the district court ruled, a five-year limitation period
applied to the SEC's claims. On January 1, 2021, Congress extended
the statute-of-limitations period to ten years. See National
Defense Authorization Act for Fiscal Year 2021, Pub. L. No. 116-
283, § 6501, 134 Stat. 3388, 4625-26 (Jan. 1, 2021). The changed
statute of limitations does not impact this case.
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into new accounts so that they could purchase Bio Defense stock.
Id. at *14 n.22.
An enforcement attorney at the Texas State Securities
Board participated in the October 2007 conference call as part of
an investigation into Bio Defense's offering and sale of securities
in Texas. The Texas State Securities Board contacted Bio Defense.
Lu, Morrone, and Jurberg agreed to the entry of a cease and desist
order against them and Bio Defense for offering unregistered shares
through unregistered agents. Morrone and Jurberg admitted to the
findings of fact and conclusions of law in the cease and desist
order.
In 2008, Massachusetts also opened an investigation into
Bio Defense's offering of unregistered securities in
Massachusetts. Partially as a result of this investigation, and
on the advice of legal counsel, Bio Defense decided to stop selling
its securities to U.S.-based investors.
C. International Fundraising (2008-2010)
In 2008, Hamburger introduced Bio Defense to Agile
Consulting ("Agile"). Agile ran call centers targeting investors
in Europe, and Hamburger told Lu, Morrone, and Jurberg that Agile
could help them raise money from foreign investors. He said it
would be "very expensive" and that Agile charged a 75% fee for any
investor funds that it raised. Hamburger acted as an intermediary
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between Agile and Bio Defense. Bio Defense entered into an
agreement with Agile on August 1, 2008.
Shortly thereafter, Lu, Morrone, and Jurberg met with
Bio Defense's outside counsel, Barbara Jones. Jones says that Lu,
Morrone, and Jurberg explained the agreement to her without telling
her that Bio Defense had already entered into it and without
showing the agreement to her. Based on this conversation, she
said she advised the company not to enter the agreement. She said
she told Lu, Morrone, and Jurberg that the fact that Bio Defense
would receive such a small portion of any investment was an
"absolutely critical disclosure that would need to be made to any
potential investor."
On August 6, 2008, after reviewing the agreement, Jones
sent an email to Lu, Morrone, and Jurberg saying that "the cost of
[Agile's] funding is exorbitantly high" and that "no legitimate,
professional consulting group would charge" such a high fee.4 She
called Agile's fee "usurious" and said that "[f]uture investors
would reasonably question the judgment of management and the Board
in permitting the Company to undertake such an obligation."
Meanwhile, Morrone, Jurberg, Orth, and Hamburger
prepared to work with Agile. In July 2008, Orth emailed Morrone
4 The agreement itself does not mention the 75% fee. Jones
says she learned the amount of the fee at her meeting with Lu,
Morrone, and Jurberg.
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and Jurberg a call script for soliciting investors, which Morrone
and Jurberg both forwarded to Hamburger. Hamburger said that the
script "was given to [him] by Paul Jurberg at the company to give
to [Agile]" and that the script was "also sent to me from Jonathan
Morrone as well." Hamburger sent Agile the script, which did not
mention the 75% fee Bio Defense agreed to pay to Agile.
In August 2008, Morrone sent a bullet-point list of "Key
Corporate Updates" and a stock subscription agreement to
Hamburger, who at the time was meeting with Agile in Spain. The
stock subscription agreement did not mention Agile's fee. It also
said that "[t]he Company shall have no obligation hereunder until
the Company shall execute and deliver to the Purchaser an executed
copy of this Subscription Agreement and until the closing
conditions . . . have been satisfied."
Additionally, Morrone sent Hamburger a cover letter,
signed by Morrone, to accompany any subscription agreement. He
discussed edits to the letter with Hamburger and sent him
instructions on how investors could send payments to Bio Defense.
In what became known as the "EU Project," Agile began
soliciting investors through its call centers using the documents
Morrone and Jurberg provided from the U.S. to Hamburger. Once
Agile found investors interested in Bio Defense, it would send
their names and contact information to an email account Hamburger
could access. The information was then sent to both Morrone and
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Jurberg, who would send subscription agreements from the U.S. to
the potential investors. When the investors signed the
subscription agreements and sent them to either Morrone or Jurberg
in Boston, they processed the documents, brought the agreements to
Lu, who was also in Boston, so that he could counter-sign them,
then mailed Bio Defense stock certificates from Boston to the
investors. Bio Def. Corp., 2019 WL 7578525, at *4. After paying
Agile a 75% commission, Bio Defense paid Hamburger an additional
12.5% commission from the remaining funds (about 3% of the total
amount received from investors) and made commission payments to
Morrone, Jurberg, and Lu. Id. Bio Defense was left with less
than 25% of the funds invested. Bio Defense would pay Agile and
Hamburger weekly, and its financial controller would send a weekly
report detailing these payments to Hamburger, Lu, Morrone, and
Jurberg. The EU Project ran from August 2008 to February 2009.
Bio Defense raised around $3.3 million and paid around $2.5 million
to Agile.
Bio Defense also engaged in three other similar schemes,
including the payment of fees of either 70% or 75%, with companies
other than Agile. In addition to the EU Project, Hamburger managed
the "PT Project," which ran from December 2008 to October 2010 and
raised approximately $3.3 million. Id. at *5. Orth managed the
"CA Project" and the "GH project," which operated from March 2009
to July 2010 and April 2010 to September 2010, respectively. Id.
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The CA Project raised about $5 million, while the GH project raised
about $118,000. Like for the EU Project, Lu, Orth, Morrone, and
Jurberg all received weekly updates on the subscription agreements
entered into as part of these projects.
An SEC forensic accountant submitted a declaration
saying that Bio Defense paid $607,928 in commissions to Morrone
and $576,798 in commissions to Jurberg within the statute-of-
limitations period. Based on the timing of these payments, some
of the commissions were related to their domestic fundraising
activities and some were related to their international
fundraising activities.
While these projects were ongoing, Morrone, Jurberg,
Orth, and Hamburger received numerous complaints from investors
about Bio Defense's solicitation practices. The chairman of Bio
Defense's advisory board also alerted Morrone to numerous
complaints he had received about Bio Defense's "boiler room
tactics" related to the call centers.
II. Procedural History
The SEC filed a complaint against Bio Defense, Lu,
Morrone, Jurberg, Hamburger, and Orth alleging violations of the
Securities Act of 1933 ("Securities Act"), the Securities Exchange
Act of 1934 ("Exchange Act"), and SEC Rule 10b-5. Relevant to
this appeal, it alleged that Morrone and Jurberg (1) violated
§§ 5(a) and 5(c) of the Securities Act by offering and selling
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unregistered securities through interstate commerce and the mails,
see 15 U.S.C. § 77e(a), (c); (2) violated § 15(a) of the Exchange
Act by offering and selling securities without registering as
brokers, see 15 U.S.C. § 78o(a)(1); (3) violated § 17(a)(1) of the
Securities Act, § 10(b) of the Exchange Act, and Rule 10b-5 by
substantially participating in a scheme to defraud investors, see
15 U.S.C. § 77q(a)(1); 15 U.S.C. § 77j(b); 17 C.F.R. § 240.10b-
5(b); (4) violated § 17(a)(2) of the Securities Act, § 10(b) of
the Exchange Act, and Rule 10b-5 by making materially false and
misleading statements in the offer or sale of securities; and (5)
violated § 17(a)(3) of the Securities Act by "engag[ing] in any
transaction, practice, or course of business which operates . . .
as a fraud or deceit upon the purchaser," 15 U.S.C. § 77q(a)(3).
Additionally, the SEC alleged that Morrone had control over Bio
Defense and was liable under § 20(a) of the Exchange Act for Bio
Defense's § 10(b) violation. It moved for summary judgment against
Morrone, Jurberg, Hamburger, and Orth.5 Bio Def. Corp., 2019 WL
7578525, at *1. The district court issued an order ruling on these
motions on September 6, 2019. Id.Before turning to the summary judgment motion, the
court's order decided two preliminary issues. First, it held that
5 Default judgment was entered against Bio Defense, Lu,
and May's International Corporation. Bio Def. Corp., 2019 WL
7578525, at *35.
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it would draw adverse inferences requested by the SEC against
Jurberg and Orth, who had asserted their Fifth Amendment rights
against self-incrimination during discovery, "to the extent there
is other evidence to support [them]." Id. at *8. Next, it held
that the federal securities laws applied to the defendants' conduct
targeting international investors because "Bio Defense received
the proposed subscription agreements from overseas investors,
. . . Lu counter-signed them in Bio Defense's Boston office before
mailing the stock certificates to the investors[,] . . . [and] Bio
Defense . . . incurred irrevocable liability within the United
States." Id. at *12.
The court then granted partial summary judgment to the
SEC. It held the SEC was entitled to summary judgment on its
registration claims under § 5 and § 15 and its fraudulent or
deceptive practices claim under § 17(a)(3) against Morrone and
Jurberg. Id. at *17-20, *25.
On the SEC's fraudulent or deceptive scheme claim under
§ 17(a)(1), § 10(b), and Rule 10b-5, the court ruled in the SEC's
favor with respect to Morrone. Id. at *22. As to Jurberg, it
found that there was "a genuine issue whether Jurberg's involvement
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was so substantial that it exposes him to liability under § 10(b)
and § 17(a)(1)."6 Id.
The court denied summary judgment in the SEC's favor on
its materially false and misleading statement claims against
Morrone and Jurberg under § 17(a)(2), § 10(b), and Rule 10b-5.
Id. at *25-29. It also held that the SEC was not entitled to
summary judgment against Morrone on its § 20(a) control liability
claim. Id. at *29-30.
The court permanently enjoined Morrone and Jurberg from
violating the federal securities laws in the future, ordered
disgorgement of their commission payments, imposed civil monetary
penalties, and barred them from serving as officers or directors
of public companies. Id. at *31-34.
Morrone and Jurberg timely appealed the entry of summary
judgment against them on some of the SEC's claims.
III. Analysis
Summary judgment is appropriate if the movant shows
"there is no genuine dispute as to any material fact" and is
"entitled to judgment as a matter of law." Mitchell v. Miller,
790 F.3d 73, 76-77 (1st Cir. 2015) (quoting Bos. Prop. Exch.
Transfer Co. v. Iantosca, 720 F.3d 1, 10 (1st Cir. 2013)). We
6 The district court stated that, unlike for the
§ 17(a)(1) claim, "[Jurberg's] participation need not have been
substantial" to expose him to § 17(a)(3) liability. Id. at *25.
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review an order granting summary judgment de novo, "drawing all
reasonable inferences in the light most favorable to the nonmoving
party." Id. at 76.
A. The District Court Did Not Err in Applying the Federal
Securities Laws to Morrone and Jurberg
Appellants argue that the district court erred when it
applied United States law to "foreign transactions involving
foreign investors solicited by foreign brokerage firms." They
argue that Morrison, 561 U.S. at 273, prevented it from doing so.
We disagree.
Morrison held that § 10(b) of the Exchange Act does not
apply extraterritorially and articulated a transactional test to
determine "which transnational frauds it applie[s] to." Id. at
267 & n.9. Under this test, the federal securities laws apply to
only two types of transnational transactions: (1) "transactions in
securities listed on domestic exchanges," and (2) "domestic
transactions in other securities." Id. at 267. Because Bio
Defense was not listed on a domestic exchange, the federal
securities laws apply to the transactions at issue here if they
are "domestic transactions in other securities."
The First Circuit has not previously applied Morrison to
determine whether a transaction is domestic. Other circuits have
held that a transaction is domestic under Morrison if "irrevocable
liability" occurs in the United States. See Absolute Activist
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Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 67 (2d Cir. 2012)
("[W]e hold that transactions . . . are domestic if irrevocable
liability is incurred or title passes within the United States.");
United States v. Georgiou, 777 F.3d 125, 137 (3d Cir. 2015) (same);
Stoyas v. Toshiba Corp., 896 F.3d 933, 949 (9th Cir. 2018) (same).
Under this standard, parties to a transaction incur "irrevocable
liability" if the "purchaser incurred irrevocable liability within
the United States to take and pay for a security, or . . . the
seller incurred irrevocable liability within the United States to
deliver a security." Absolute Activist, 677 F.3d at 68. The
circuits adopting the "irrevocable liability" test in this context
have reasoned that, because "the point at which the parties become
irrevocably bound is used to determine the timing of a purchase
and sale," it "can [also] be used to determine the locus of a
securities purchase or sale." Id. (emphasis added); see Georgiou,
777 F.3d at 136; Stoyas, 896 F.3d at 948; see also Riseman v. Orion
Rsch., Inc., 749 F.2d 915, 918-19 (1st Cir. 1984) (applying the
irrevocable liability test to determine the timing of a
transaction).
We agree with the reasoning of the Second, Third, and
Ninth Circuits and hold that a transaction is domestic under
Morrison if irrevocable liability occurs in the United States.7
7 We note that Morrison's transactional test only governs
conduct occurring before July 22, 2010. Shortly after Morrison
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Applying that test here, it is clear that Bio Defense "incurred
irrevocable liability within the United States to deliver a
security." Absolute Activist, 677 F.3d at 68. The subscription
agreements for Bio Defense stock said that the company had "no
obligation" under them until Bio Defense "execute[s] and
deliver[s] to the Purchaser an executed copy" of the agreement.
It is undisputed that these subscription agreements were executed
on behalf of Bio Defense by Lu in Boston, and that either Morrone
or Jurberg then issued shares from Boston to the investors. Bio
Def. Corp., 2019 WL 7578525, at *4. Because Bio Defense became
irrevocably liable to deliver the shares in Boston, the federal
securities laws apply.
Appellants argue that the analysis does not end here.
They say that even if a transaction is domestic because irrevocable
liability occurred in the United States, we should adopt the Second
Circuit's holding in Parkcentral Global Hub Ltd. v. Porsche
Automobile Holdings SE, 763 F.3d 198, 215 (2d Cir. 2014), that "a
domestic securities transaction" under Morrison is "not alone
sufficient to state a properly domestic claim under the statute."
They argue that, under Parkcentral, the federal securities laws do
was decided, Congress amended the federal securities laws to "apply
extraterritorially when the [newly-added] statutory conduct-and-
effects test is satisfied." SEC v. Scoville, 913 F.3d 1204, 1218
(10th Cir. 2019); see 15 U.S.C. § 77v(c); 15 U.S.C. § 78aa(b). At
oral argument, the SEC represented to us that there are "very few"
cases left that will be governed by Morrison.
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not apply to claims where the transactions meet the irrevocable
liability test but "the claims . . . are so predominantly foreign
as to be impermissibly extraterritorial." Id. at 216; see also
Cavello Bay Reinsurance Ltd. v. Shubin Stein, 986 F.3d 161, 165-
68 (2d Cir. 2021) (applying Parkcentral).
Like the Ninth Circuit, we reject Parkcentral as
inconsistent with Morrison. See Stoyas, 896 F.3d at 950 ("[T]he
principal reason that we should not follow the Parkcentral decision
is because it is contrary to . . . Morrison itself."). Morrison
says that § 10(b)'s focus is on transactions. 561 U.S. at 266("[T]he focus of the Exchange Act is not upon the place where the
deception originated, but upon purchases and sales of securities
in the United States."). Section 10(b) "seeks to 'regulate'"
transactions and protect "parties or prospective parties to those
transactions." Id. at 267 (quoting Superintendent of Ins. of N.Y.
v. Bankers Life & Cas. Co., 404 U.S. 6, 12 (1971)). The Court
explicitly said that, if a transaction is domestic, § 10(b)
applies. Id. at 267 ("[I]t is in our view only transactions in
securities listed on domestic exchanges, and domestic transactions
in other securities, to which § 10(b) applies."). The existence
of a domestic transaction suffices to apply the federal securities
laws under Morrison. No further inquiry is required.
Regardless, even if we were to apply Parkcentral, the
claims here are not "so predominantly foreign as to be
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impermissibly extraterritorial." 763 F.3d at 216. Parkcentral
itself cautioned that it "cannot . . . be perfunctorily applied to
other cases based on the perceived similarity of a few facts."
Id. at 217. Here, Bio Defense incurred irrevocable liability in
the United States, but there were also significantly more U.S.
connections rendering the fraud domestic. Morrone and Jurberg
were both based in the United States. They conducted nearly all
of their activities in furtherance of the fraud from the U.S.
Further, Bio Defense was a U.S.-based company and was not traded
on a foreign exchange. In contrast, Parkcentral involved
significantly more foreign conduct, including transactions in a
foreign company's securities traded on a foreign exchange. Id. at
215-16.
There was no error in applying the federal securities
laws to Morrone and Jurberg.
B. The District Court Did Not Err in Granting Partial Summary
Judgment in the SEC's Favor
The appellants next argue that alleged issues of fact
precluded entry of summary judgment in the SEC's favor with respect
to its § 15 unregistered brokers claim and its § 17(a)(3) anti-
fraud claim under the Securities Act. Morrone also argues that
the district court erred as to the SEC's § 5 claim against him and
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its § 17(a)(1), § 10(b), and Rule 10b-5 claims against him. We
find no error.
On the § 15 claim, the appellants argue that they had
merely an administrative role in Bio Defense's unregistered
offering of securities to overseas investors and did not act as
brokers.8 Section 15 makes it unlawful "for any broker or dealer
. . . to make use of the mails or any means or instrumentality of
interstate commerce to effect any transactions in, or to induce or
attempt to induce the purchase or sale of, any security . . .
unless such broker or dealer is registered . . . ." 15 U.S.C.
§ 78o(a)(1). A broker is "any person engaged in the business of
effecting transactions in securities for the account of others."
Id. § 78c(a)(4). According to SEC rules, "a person may 'effect
transactions,' among other ways, by assisting an issuer to
structure prospective securities transactions, by helping an
issuer to identify potential purchasers of securities, or by
soliciting securities transactions." Strengthening the
Commission's Requirements Regarding Auditor Independence, Exchange
Act Release No. 34-47265, 79 SEC Docket Nos. 1284, 1571, at *18
8 Appellants also say that "[t]he flaw in the District
Court's analysis is that it used the conduct engaged in by Jurberg
and Morrone prior to September 10, 2007 to find that they acted as
brokers." This argument ignores the solicitation of domestic
investors both Morrone and Jurberg were actively engaged in after
September 10, 2007 on which the district court relied. We have
already detailed that involvement and do not repeat it here.
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n.82 (Jan. 28, 2003). A person can be "engaged in the business"
of doing so "by receiving transaction-related compensation or by
holding itself out as a broker-dealer." Id.
Morrone and Jurberg's involvement in the offering and
scheme to defraud investors was far from minimal. They were
instrumental in the scheme's planning and execution and there is
no genuine dispute that they were engaged in the business of
effecting transactions in Bio Defense stock. They were in the
room when Hamburger first presented the scheme with Agile to Bio
Defense. They were there when Bio Defense's counsel advised
against the arrangement and said that if the company did proceed
it would be crucial to disclose Agile's exorbitant commission.
They helped Hamburger provide call scripts to Agile. They received
weekly reports on the scheme's progress. They mailed subscription
agreements to investors found by the call centers. Whenever an
investor signed a subscription agreement, that investor mailed the
agreement back to either Morrone or Jurberg. They handled the
funds, gave the subscription agreement to Lu for his
countersignature, and mailed the stock certificates to investors.
Bio Def. Corp., 2019 WL 7578525, at *4. They also received
commissions based on the value of investments made by these
investors. The district court was correct to conclude that they
acted as brokers for the purposes of § 15 liability. See id. at
*18.
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Based on these same undisputed facts, there is also no
genuine dispute as to whether Morrone and Jurberg "engage[d] in
[a] transaction, practice, or course of business which operates .
. . as a fraud or deceit upon the purchaser" of a security in
violation of § 17(a)(3). See 15 U.S.C. § 77q(a)(3). Appellants
do not dispute that Bio Defense's solicitation of investors was
fraudulent. Entry of summary judgment on this claim in favor of
the SEC was proper.9
Finally, Morrone argues that the district court erred
because there were issues of fact as to whether he was a "necessary
participant" or "substantial factor" in the scheme to sell
unregistered securities overseas in violation of § 5 of the
Securities Act. He makes similar arguments against the SEC's
§ 17(a)(1), § 10(b), and Rule 10b-5 claims and argues that there
is an issue of fact as to whether he acted with the requisite
scienter.
9 Jurberg argues that it was inconsistent for the district
court to find that (1) there was a genuine issue of fact as to
whether he "employed" a fraudulent scheme or deceptive device under
§ 17(a)(1) and Rule 10b-5 but (2) there was no genuine issue of
fact as to whether he "engaged in a practice or course of business"
operating as a fraud under § 17(a)(3). We see no inconsistency,
as "employing" a fraud and "engaging" in one are not necessarily
the same. Cf. Lorenzo v. SEC, 139 S. Ct. 1094, 1102 (2019) (noting,
when discussing Rule 10b-5, that "at least some conduct . . .
amounts to 'employ[ing]' a 'device, scheme, or artifice to
defraud'" as well as "'engag[ing] in a[n] act . . . which operates
. . . as a fraud'" (alterations in original)).
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Morrone's main argument is that the court erred in
holding that there was no genuine dispute that he had substantially
participated in the fraud while also holding that there was a
genuine dispute as to whether Jurberg substantially participated.
There is ample evidence specific to Morrone showing that he was
integral to the fraud and acted with scienter. Morrone recognized
that he had a responsibility to ensure that people soliciting
investors made proper disclosures. He knew about the exorbitant
fee the call centers were charging and was warned by counsel that
it should have been disclosed. Nevertheless, he helped prepare
and disseminate the information received by investors and took no
steps to disclose this fee. He sent bullet points to Hamburger
for the call centers to use. He sent the script used by the call
centers to Hamburger. With Hamburger, he helped edit the
subscription agreements that were ultimately sent to investors.
He helped draft, and signed, the introductory letter sent to every
investor caught up in the scheme. He took no steps to disclose
the fees after being warned about the call centers and their
"boiler-room tactics." There was no error.
IV. Conclusion
Affirmed.
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