The Securities and Exchange Commission sought to have defendants held in civil contempt for repeatedly violating a court order (the Order) that enjoined defendants from, among other things, selling unregistered securities and violating Rule 10b-5 of the Exchange Act. After noting that the SEC was required to show that (i) the Order was clear and unambiguous;(ii) the proof of defendants’ noncompliance was clear and convincing; and (iii) the defendants had not attempted to comply in a reasonable manner, the Court ruled that the SEC had satisfied its burden.
Among other things, the SEC provided evidence that the defendants had issued billions of unregistered shares of stock in exchange for services after the Order was entered. Defendants admitted issuing the shares, but argued that they did not constitute “sales” because they were exchanged for services rather than cash. The court rejected the argument, finding that the Securities Act of 1933 defines “sale” broadly and clearly includes exchanges of unregistered securities for services. The SEC also provided evidence that defendants continued to make false statements in filings made with the SEC after the Order was entered. In a novel, yet unsurprisingly unavailing argument, defendants asserted that it was a matter of “widespread public knowledge” that these statements were false. However, far from “neutralizing” the impact of their false representations, the Court viewed defendants’ admission as “demonstrat[ing] the brazenness of [their] mendacity.” (Securities Exchange Commission v. Universal Express, Inc., 2007 WL 2469452 (Aug. 31, 2007 S.D.N.Y.))