In SEC v. Sayid, No. 17 Civ. 2630 (JFK), 2018 BL 9039 (S.D.N.Y. Jan. 10, 2018), the United States District Court for the Southern District of New York denied securities lawyer Norman T. Reynolds’ (“Reynolds”) motion to dismiss a Securities and Exchange Commission (“SEC”) complaint for failure to state a claim. The SEC alleged Reynolds wrote misleading opinion letters for Mustafa David Sayid (“Sayid”), the legal counsel for Nouveau Holdings Ltd. and Striper Energy, Inc. (collectively, the “Shells”), which opinion letters Sayid used to engage in market manipulation. The court found that the SEC adequately alleged facts that constitute strong circumstantial evidence of Reynolds’ conscious misbehavior.

According to the SEC’s complaint Sayid, who provided legal representation to the Shells, used his position to gain control of the Shells by installing employees whom he could control. The complaint alleges Sayid used these employees to unlawfully issue millions of shares of stock to third parties, without required restrictive legends, who could then sell the stock and kick back part of the profits. Sayid allegedly hired Reynolds to write false opinion letters that persuaded Nouveau’s transfer agent to allow free trade of the restricted shares. The letters contained inaccurate dates and falsely concluded that Sayid had held the securities for one year. In his motion to dismiss, Reynolds claimed he wrote the letters based off Sayid’s instructions and was not aware of Sayid’s scheme. The SEC argued Reynolds failed to investigate the truthfulness of the signed statements and ignored evidence that contradicted the opinion letters.

To successfully state a claim under Section 10(b) and Rule 10b-5, the complaint must allege the defendant made a material misrepresentation or omission as to which he had a duty, with scienter, in the connection with the purchase or sale of securities. To state a claim under Section 17(a)(2), 15 USC § 77(q)(a), there must be evidence that the defendant obtained money through the misstatements or omissions about material facts in the offer or sale of securities.

The court determined Reynolds’ opinion letters contained false statements and that Reynolds, as an attorney, could not “escape liability for fraud by closing his eyes to what he saw and could readily understand.” The court held that Reynolds could not escape liability by claiming reliance on Sayid. Further, the court determined that Reynolds’ allegations that he received payment for the opinion letters containing false statements, which he should have known were false, adequately alleged a claim under Section 17(a)(2).

For the reasons above, the court denied Reynolds’ motion to dismiss, concluding that the allegations against him were plausible on their face.

The primary materials for this case may be found on the DU Corporate Governance Website.