The defendant, the former CEO of Northwest Communications Solutions (NCS) moved to dismiss, among other things, the claim of the Securities and Exchange Commission that he violated sections 17(a)(1), (2), and (3) of the Securities Act of 1933. NCS was a division of a wholly owned subsidiary of Northwestern Corporation, which was a publicly traded company. The SEC alleged that the defendant directed the accountants at NCS to record unearned revenue and fictitious profits and engage in other actions that caused NCS to make misstatements on its financial statements. The SEC further alleged that these misstatements caused Northwestern to misstate its revenue and net income in its public filings.
The defendant moved to dismiss the complaint, arguing, among other things, that he could not be held liable as a primary violator of section 17(a)(1), (2), or (3) of the Securities Act, which requires that a material misstatement or omission be made in connection with the offer or sale of a security by means of interstate commerce, because he did not have a meaningful connection to Northwestern’s public offering of securities. The court rejected this argument, ruling that a person can be charged with making a material misstatement in connection with the offer or sale of a security if the person, acting with the requisite scienter, either makes or causes to be made such a statement which is then used in connection with the offer or sale. After noting that the defendant had not contested a prior ruling that his scienter had been adequately pleaded, the court held that the SEC’s allegations that the defendant supplied Northwestern with fraudulent financial information that he knew would be incorporated into Northwestern’s publicly filed financial statements sufficiently alleged his connection to Northwestern’s sale and offer to sell securities for purposes of its section 17(a) claims. (S.E.C. v. Thielbar, 2008 WL 4360964 (D.S.D. Sept. 24, 2008))