sourlis

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

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SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

- against -

GREENSTONE HOLDINGS, INC., et al.,

Defendants,

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: : : : : : : : : x

10 Civ. 1302 (MGC)

MEMORANDUM OF LAW IN SUPPORT OF PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT AGAINST DEFENDANT VIRGINIA K. SOURLIS

Jack Kaufman Alexander J. Janghorbani Securities and Exchange Commission 3 World Financial Center, Room 400 New York, New York 10281-1022 Tel: (212) 336-0106 (Kaufman) Tel: (212) 336-0177 (Janghorbani) Fax: (212) 336-1319 September 5, 2012

Case 1:10-cv-01302-MGC Document 212 Filed 10/15/12 of 33

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TABLE OF CONTENTS

PRELIMINARY STATEMENT ...................................................................................................... 1

STATEMENT OF UNDISPUTED FACTS ..................................................................................... 4

I. Sourlis’ Professional Background ............................................................................................ 4

II. Greenstone’s Origins and Use of the Sourlis Opinion ............................................................. 5

III. The Sourlis Opinion ................................................................................................................. 7

IV. The Sourlis Opinion Contained Material Misrepresentations .................................................. 9

A. False Statements Concerning the “Notes” and “Assignments” ........................................ 9

B. False Statements Concerning Verification of the “Notes” and “Assignments” ............... 10

C. False Legal Opinion.......................................................................................................... 12

V. Sourlis At Least Recklessly Disregarded the Falisty of the Sourlis Opinion ........................ 12

A. The Fictitious “Notes” and “Assignments” ................................................................... 13

B. Sourlis’ Failure to Verify the Fictitious “Notes” and “Assignments” .......................... 15

ARGUMENT .................................................................................................................................... 16

I. Summary Judgment Standard .................................................................................................. 16

II. Elements Of The Anti-Fraud Provisions Of The Federal Securities Laws .............................. 17

III. Sourlis Committed Securities Fraud ........................................................................................ 21

A. Sourlis At Least Recklessly Disregarded the Falsity of the Sourlis Opinion ................... 22

B. The “In Connection With” Requirement .......................................................................... 24

IV. Sourlis Violated Securities Act Section 5 ................................................................................ 27

CONCLUSION ................................................................................................................................. 28


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TABLE OF AUTHORITIES

Cases Pages

Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) ....................................................................................................................... 16

Basic v. Levinson, 485 U.S. 224 (1988) ....................................................................................................................... 18

Chill v. General Elec. Co., 101 F.3d 263 (2d Cir. 1996) ........................................................................................................... 20

Chris-Craft Indus., Inc. v. Piper Aircraft Corp., 480 F.2d 341 (2d Cir. 1973) ........................................................................................................... 20

Dallas Aero, Inc. v. CIS Air Corp., 352 F.3d 775 (2d Cir. 2003) ........................................................................................................... 16

Geiger v. SEC, 363 F.3d 481 (D.C. Cir. 2004) ......................................................................................................... 6

Graham v. SEC, 222 F.3d 994 (D.C. Cir. 2000) ....................................................................................................... 19

In re Ames Dept. Stores, Inc. Stock Litig., 991 F.2d 953 (2d Cir. 1993) ........................................................................................................... 19

In re Smith Barney Transfer Agent Litig., -- F. Supp.2d --, 2012 WL 3339098 (S.D.N.Y. Aug. 15, 2012) ..................................................... 18

In re WorldCom, Inc. Sec.’s Litig., 352 F. Supp. 2d 496 (S.D.N.Y. 2005) ............................................................................................ 21

Janus Capital Group, Inc. v. First Derivative Traders, 131 S.Ct. 2296, 2011 WL 2297762 (2011) .................................................................................... 18

Jeffreys v. City of New York, 426 F.3d 549 (2d Cir. 2005) ..................................................................................................... 17, 23

Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) ........................................................................................................... 20

Picciano v. McLoughlin, 723 F.Supp.2d 491 (N.D.N.Y. 2010) ............................................................................................. 17


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P. Schoenfeld Asset Mgmt., LLC v. Cendant Corp., 161 F. Supp.2d 355 (D.N.J. 2001) .................................................................................................. 19

Reves v. Ernst & Young, 494 U.S. 56 (1990) ......................................................................................................................... 12

Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38 (2d Cir. 1978) ............................................................................................................. 20

SEC v. Czarnik, No. 10 Civ. 745(PKC), 2010 WL 4860678 (S.D.N.Y. Nov. 29, 2010) ......................... 18-19, 27-28

SEC v. First Jersey Sec.’s Litig., 101 F.3d 1450 (2d Cir. 1996) ................................................................................................... 18, 19

SEC v. Greenstone Holdings, Inc., et al., 10 Civ. 1302, 2012 WL 1038570 (S.D.N.Y. March 28, 2012) ............................................... Passim

SEC v. Jakubowski, 150 F.3d 675 (7th Cir. 1998) .......................................................................................................... 21

SEC v. Monarch Funding Corp., 192 F.3d 295 (2d Cir. 1999) ...................................................................................................... 17-18

SEC v. Ramoil Management, Ltd., 01 civ. 9057 (SC), 2007 WL 3146943 (S.D.N.Y. Oct. 25, 2007) .................................................. 28

SEC v. Rana Research, Inc., 8 F.3d 1358 (9th Cir. 1993) ............................................................................................................ 19

SEC v. Stanard, 06 civ. 7736 (GEL), 2009 WL 196023 (S.D.N.Y. Jan. 27, 2009) .................................................. 18

SEC v. Universal Express, Inc., 475 F. Supp. 2d 412 (S.D.N.Y. 2007) ............................................................................................ 20

SEC v. U.S. Environmental, Inc., 155 F.3d 107 (2d Cir. 1998) ........................................................................................................... 19

United States v. Larabee, 240 F.3d 18 (1st Cir. 2001) ............................................................................................................ 19

United States v. Libera, 989 F.2d 596 (2d Cir. 1993) ........................................................................................................... 19

Weiss v. SEC, 468 F.3d 849 (D.C. Cir. 2006) ....................................................................................................... 21


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Statutes

15 U.S.C. § 77(e)(a) ...................................................................................................................... 16

15 U.S.C. § 77(e)(c) ...................................................................................................................... 16

15 U.S.C. § 78j(b) ......................................................................................................................... 16

Rules

17 C.F.R. § 240.10b-5 ................................................................................................................... 16

Fed. R. Civ. Pr. 56(c)(2) ............................................................................................................... 16


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Plaintiff Securities and Exchange Commission (the “Commission” or “SEC”)

respectfully submits this memorandum of law in support of its motion for partial summary

judgment, as to liability, against defendant Virginia K. Sourlis (“Sourlis”).

PRELIMINARY STATEMENT

The Commission seeks findings of both fraud and non-fraud liability against attorney

Virginia Sourlis for making numerous material false statements in a January 11, 2006 legal

opinion that she authored for her co-defendants, who in turn used her false opinion to obtain

illegally millions of unrestricted shares of stock from defendant Greenstone Holdings, Inc.

(“Greenstone”). No genuine dispute exists that the Sourlis opinion contained material false

statements -- indeed, it was false in every material respect. Furthermore, no genuine dispute

exists that Sourlis knew, or at least recklessly disregarded, that her opinion contained false

statements. Thus, the Commission is entitled to summary judgment against Sourlis for securities

fraud.

The Sourlis opinion stated that, under a registration exemption that applied to securities

held for over two years, Greenstone could issue unrestricted (freely-tradable) stock to the holders

of certain alleged Greenstone “convertible promissory notes.” The Sourlis opinion claimed that

Greenstone had issued the “notes” at least two years earlier to “various vendors” of Greenstone

(e.g., Verizon, AT&T, and FedEx), apparently to pay them for services rendered. The opinion

further claimed that those vendors had “assigned” the “notes” -- for no consideration -- to four

entities (the “Entities”), who sought to convert the “notes” into tradable Greenstone stock.

Finally, the opinion repeatedly claimed that Sourlis had verified the above facts (and others) with

both Greenstone and its vendors:


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“With respect to the factual representations regarding the [vendors], I have relied exclusively and solely on the information and representations furnished by [Greenstone] and the [vendors] to me”;

“I have been informed by [Greenstone] that the Original Convertible Notes were issued by [Greenstone] to various vendors on or before January 10, 2004 . . . and the Original Convertible Notes were assigned and endorsed to [the Entities] and/or its designees on January 10, 2006 (“Assignment”). I have been advised that no consideration was received by [Greenstone], the [vendors] or its designees in connection with the Assignment and no commission or other remuneration was paid or given directly or indirectly for soliciting the Assignment”; and

“I have been informed by the [vendors] that, among other things, (i) the Original Convertible Notes have been beneficially held by the [vendors] for at least two (2) years prior to the date of the Assignment and (ii) none of the [vendors] are an ‘affiliate’ of [Greenstone] within the meaning of Rule 144 at the time of Assignment, nor have been an ‘affiliate’ during the three months preceding the date of such Assignment.”

All of the above claims were false. The alleged “convertible notes” and “assignments”

were fictitious (they did not exist), and Sourlis did not even attempt to verify them with either

Greenstone or the vendors. No genuine dispute exists regarding these falsities. In granting the

SEC summary judgment against defendant John Frohling, the Court already has found that the

“notes” and “assignments” were fictitious. (Docket Entry (“DE”) 192.) Sourlis also admitted at

her deposition and in a recent letter to the Court that she did not verify any of above information

with either Greenstone or its vendors.

Furthermore, for a number of reasons, no genuine dispute exists that Sourlis either knew

of or recklessly disregarded the above false statements and, thus, is liable for securities fraud.

First, the transactions she describes -- Greenstone’s supposed issuance of promissory notes to

pay vendors such as AT&T, Verizon, and FedEx (and the vendors’ subsequent assignment of

those notes to third parties for no consideration) -- were nonsensical on their face. Second,

Sourlis never requested or received any document even purporting to be the “note” or


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“assignment” she described in her letter. Third, the documents that Sourlis allegedly relied upon

in drafting her opinion directly contradicted the existence of any such “note” or “assignment.”

Fourth, Sourlis admitted at her deposition that she did not confirm the existence of the “notes” or

“assignments” with Greenstone and, thus, her repeated claims that she did so were knowingly

false. Finally, Sourlis admitted at her deposition, and in a May 3, 2012 letter to the Court, that

she never communicated with the vendors and, thus, her statements that she was “informed” of

critical facts by the vendors, and that she had “relied” on “information and representations

furnished by” the vendors to her, were also knowingly false.

Regarding the last false statements, Sourlis now claims that her opinion letter mistakenly

states (twice) that she had communicated with the vendors, when she meant to say instead that

she had communicated with the four Entities (the supposed assignees of the fictitious notes).

Under Second Circuit precedent, even on summary judgment, the Court should not credit such an

uncorroborated and nonsensical claim. Sourlis’ claim of mistake is nonsensical because the facts

that she claims to have verified with the Entities -- i.e., that the notes had been held by the

vendors for two years prior to assignment to the Entities and that the vendors were not

“affiliates” of Greenstone -- could only have been verified by the vendors themselves, not the

Entities. Furthermore, even if truly a mistake, such a fundamental double-error by Sourlis -- who

admits reviewing and revising drafts of her opinion letter -- constitutes recklessness, particularly

in light of the many additional material false statements described above. Indeed, every single

material statement of fact (and law) in the Sourlis opinion was false. The rendering of such

consistent and blatant falsehoods by an attorney in a formal legal opinion plainly constitutes, at

the least, an “extreme departure from ordinary care,” the definition of recklessness in this

Circuit.


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For the foregoing reasons, no genuine dispute exists that Sourlis committed securities

fraud, and the Court should grant the Commission summary judgment as to her liability under

Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5

thereunder. Likewise, no genuine dispute exists that Sourlis was a necessary participant in the

illegal offering of Greenstone stock at issue and that, therefore, the Court also should hold

Sourlis liable for violating the non-fraud stock registration requirements of Section 5(a) and (c)

of the Securities Act of 1933 (“Securities Act”).

STATEMENT OF UNDISPUTED FACTS

In support of the following undisputed facts, the Commission relies upon: (1) previously-

filed Exhibits 1-93 to the Declarations Jack Kaufman (“Kaufman Decl.”) and Alexander

Janghorbani, which the Commission filed in support of its summary judgment motion against

defendants John Frohling and Hisao Sal Miwa (DE’s 145, 164, and 166); (2) additional Exhibits

94-110 to the Supplemental Declaration of Jack Kaufman, which the Commission is filing

simultaneously with this memorandum of law; and (3) the Court’s March 28, 2012 summary

judgment decision against defendants Frohling and Miwa. (DE 192, SEC v. Greenstone, No. 10

Civ. 1302 (MGC), 2012 WL 1038570 (S.D.N.Y. March 28, 2012) (“Greenstone”).)

I. Sourlis’ Professional Background

Sourlis is an attorney licensed to practice law and has been practicing law in New Jersey

since at least 1993. (Ex. 94, at 13-15). From 1993 until approximately 2002, Sourlis was

general counsel to Network One Financial Securities, Inc., a full service securities brokerage

firm. (Id., at 14-16.) As general counsel, Sourlis worked on “many different things,” including

regulatory compliance and securities underwritings. (Id., at 16.) At the same time, beginning in

1993, Sourlis had her own private legal practice. (Id., at 15-16.) Beginning in approximately


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2002, Sourlis left Network One to work entirely for herself. (Id., at 15.)

From at least 2003 to the present, Sourlis has been the sole partner and sole owner of the

law firm “The Sourlis Law Firm” and, in January 2006, was the sole attorney at the Sourlis Law

Firm. (Id., at 15-16, 216.) Prior to January 2006, Sourlis was familiar with Securities Act Rule

144 (the basis for her opinion at issue in this case), having authored and issued on behalf of

various client companies at least eight legal opinions concerning the tradability of their stock

under that Rule. (Id., at 221-22, 230-31; Ex. 95.) Furthermore, Sourlis was an experienced

securities attorney. In an August 20, 2007 letter to the Commission (drafted by Sourlis and

others at her firm) regarding a separate matter, The Sourlis Law Firm described itself as “a

boutique and prominent securities law firm counseling and advising brokerage firms, high net

worth individuals and private and publicly traded companies located throughout the world.” (Ex.

94, at 223-24; Ex. 107.)1

II. Greenstone’s Origins and Use of the Sourlis Opinion

Defendant Sal Miwa founded Greenstone in 2004 to develop certain environmentally-

safe chemical products for use by construction and railroad companies. In December 2005,

Greenstone was facing a severe liquidity crisis, and Miwa arranged to convert Greenstone into a

publicly-traded company. (Greenstone, 2012 WL 1038570, at *1; Ex. 6, at 9-12; Ex. 7, at 45,

68; Ex. 8.) To do so, Greenstone acquired a public shell company -- Auto Centrix, Inc. -- and

changed the company’s name to Greenstone. (Greenstone, 2012 WL 1038570, at *1; Ex. 6, at 9-

12, 27-29, 50-51, 53; Ex. 9.) In January 2006, Miwa became CEO of the new Greenstone public

corporation. (Greenstone, 2012 WL 1038570, at *1; Ex. 10, at 12.) Greenstone then hired

1 At her deposition in this case, Sourlis apparently claimed that her firm did not become a “prominent securities law firm” until January 2007, a year after she issued the opinion at issue in this case. (Ex. 94, at 225-30.)


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Corporate Stock Transfer, Inc. (“CST”) to serve as its stock transfer agent and issue its stock

certificates. (Greenstone, 2012 WL 1038570, at *1; Ex. 6, at 103-04; Ex. 16, at 12-13.)2 From

August 2006 through June 2008, until the SEC suspended trading of Greenstone stock,

Greenstone distributed millions of shares of unregistered stock to the public through CST.

(Greenstone, 2012 WL 1038570, at *1; Ex. 91, ¶¶ 4-14.)

To obtain publicly tradable (“unrestricted”) Greenstone stock for a group of Greenstone

investors known as the “Morelli Group,” Greenstone, through its outside counsel John Frohling,

repeatedly sent CST false legal opinions stating that the Greenstone stock issuances complied

with the limited registration exemption provided by then-existing Securities Act Rule 144(k).

(Greenstone, 2012 WL 1038570, at *1-4, 6-7.) The Sourlis opinion was one of the false legal

opinions that Frohling sent to CST, and Frohling used the false Sourlis opinion to obtain illegally

over 6 million shares of unrestricted Greenstone stock from CST for four entities owned by

certain Morelli Group members. (Id., at *3, 6-7; Ex. 15, at 74449-52.)3 The four entities were

Power Network, Inc., MBA Investors, Inc., Starr Consulting, Inc., and YT2K, Inc. (the

“Entities”), (Ex. 15, at 74449-52), which were owned and/or controlled by defendants Thomas

Pierson and Dan Starczewski, (Ex. 5, at 32, 36-39, 101-02; Ex. 21, at 14-17, 37-38.)4

2 In the securities industry, a “transfer agent” is a company “responsible for recording changes of ownership of securities, canceling obsolete certificates, and issuing new ones.” Geiger v. SEC, 363 F.3d 481, 486, n. 3 (D.C. Cir. 2004) (quoting The Random House Dictionary of Business Terms 286 (Jay N. Nisberg ed., 1988)). 3 The Court found Frohling liable for securities fraud for providing the false legal opinion letters to CST. (Greenstone, 2012 WL 1038570, at *6-7, 12.) 4 As the cited deposition testimony demonstrates, Starczewski owned Starr Consulting, Inc. and his stepson, Joe Overcash, was the nominal owner of Power Network, Inc. Pierson testified that he owned MBA Investors, Inc. and that his business partner, Richard Muller, owned Yt2K, Inc. (Id.)


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III. The Sourlis Opinion

On January 3, 2006, Frohling and Pierson contacted Sourlis regarding the Auto

Centrix/Greenstone merger, and Pierson asked Sourlis to draft a legal opinion. (Ex. 94, at 20,

49-51; Ex. 35; Ex. 100; Ex. 102.) A week later, Sourlis and Pierson exchanged drafts of the two-

page opinion, culminating in the final signed January 11, 2006 Sourlis opinion letter at issue.

(Ex. 97; Ex. 98; Ex. 99 (final version); Ex. 101; Ex. 104.) Sourlis herself drafted and signed the

opinion letter, without assistance from anyone else at her firm, and she reviewed each draft and

the final version before sending it to Pierson. (Ex. 94, at 40, 81-88, 91-92; Ex. 97; Ex. 99.)

Starczewski subsequently paid Sourlis $5,000 for the opinion. (Ex. 94, at 28, 32, 55-57, 197-98,

201-02; Ex. 96; Ex. 99; Ex. 106.) In drafting the opinion, Sourlis understood her clients to be the

four Entities, and that Pierson -- her principal contact for this purpose -- was speaking to her on

behalf of the Entities. (Ex. 94, at 34, 58-64; Ex. 96; Ex. 99.)

The Sourlis opinion appears on its face to be issued to Greenstone to obtain from its

transfer agent (CST) unrestricted Greenstone stock for the Entities. (Ex. 99.) The opinion is

addressed to “Auto Centrix, Inc.” (i.e., Greenstone). (Id.) The text of the letter begins: “My

opinion has been requested with respect to the issuance of shares . . . of [Greenstone],” upon the

Entities’ “conversion” of their alleged “Convertible Notes.” (Id.) (Emphasis added.)5 The

opinion further states that it “may not be relied on by any other person holding securities . . .

other than the Transfer Agent for [Greenstone].” (Id.) (Emphasis added.) The “shares to which

[the] opinion relates” were listed in its first-page caption:

All underlying shares of common stock . . . 7% Convertible Promissory Notes dated January 10, 2006 originally issued and

5 The second paragraph of the Sourlis opinion likewise begins, “The Shares of [Auto Centrix] to be issued upon the conversion of the Notes are validly authorized . . . “ (Id.; emphasis added.)


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held by various vendors . . . in the aggregate and principal amount of $71,339.65 . . . and assigned to the [Entities].

(Id. (emphasis added).) The crux of the opinion appears in its penultimate paragraph:

[T]he Shares underlying the Note[s] may be issued to [the Entities] and/or its designees without a legend pursuant to the Securities Act of 1933, as amended.

Sourlis herself underscored the phrase “without a legend.” (Id.; Ex. 94, at 93-94, 97-100.)6

As Sourlis admits, and as this Court recently found, the Sourlis opinion bases its

conclusions, at least in part, upon then-existing Securities Act Rule 144(k). (Ex. 94, at 103-04,

151-52.) This Court stated that, according to the Sourlis opinion, “the [Rule 144(k)] exemption

applied because the shares were to be issued in exchange for the surrender of $77,339.65 worth

of convertible promissory notes that had been issued by Greenstone’s predecessor corporation,

Auto Centrix, ‘on or before January 10, 2004.’” (Greenstone, 2012 WL 1038570, at *3; Ex. 99.)

The Court further explained that, according to the Sourlis opinion, the “convertible notes were

issued by Auto Centrix to ‘various vendors’ and the notes were assigned to the [Entities] on

January 10, 2006.” (Greenstone, 2012 WL 1038570, at *3; see Ex. 99.) “Sourlis submitted

along with her opinion a list of Auto Centrix’s ‘aged payables’ -- debts that the company owed to

vendors such as American Express, Verizon, and FedEx. According to Sourlis, ‘the Original

Convertible Notes were issued by the Company to various vendors’ on the list as payment for

Auto Centrix’s debts.” (Id.) The third paragraph of the Sourlis opinion purports to attach those

“aged payables” as “Exhibit A.” (Ex. 99; see also Ex. 33; Ex. 35.) “Sourlis reasoned that the

shares could be issued without a restrictive legend because they were to be exchanged solely for

6 As this Court explained in its recent summary judgment opinion, a “restrictive legend is placed on unregistered stock certificates to indicate that the shares are not to be sold to the public.” (Greenstone, 2012 WL 1038570, at *2 n.2.) Sourlis admits that the word “legend” in her opinion refers to such a “restrictive legend.” (Ex. 94, at 34-36, 94-96, 108-09.)


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outstanding two-year-old Greenstone securities surrendered for conversion. Thus, they need not

be held by the [Entities] for two years under the exemption in Rule 144(d)(3)(ii).” (Greenstone,

2012 WL 1038570, at *3; Ex. 99.)

IV. The Sourlis Opinion Contained Material Misrepresentations

The Sourlis opinion contained numerous material false statements regarding both (1) the

existence of the alleged “notes” and “assignments” (they did not exist); and (2) Sourlis’ alleged

verification of their existence (in fact, Sourlis did nothing to verify them). In fact, every single

material statement of fact in the Sourlis opinion was false and, indeed, was contradicted by

documents that Sourlis received from Pierson. Thus, Sourlis’ ultimate legal conclusion was also

false.

A. False Statements Concerning the “Notes” and “Assignments”

To begin with, as this Court previously stated, the alleged “convertible notes” discussed

in the opinion did not exist and had never been issued to Greenstone’s vendors and, thus, the

Sourlis opinion’s numerous statements regarding them were all false. (Greenstone, 2012 WL

1038570, at *3.) In support of this conclusion, the Court cited the deposition transcript of

Pierson, who testified that any statement that such notes were issued is “erroneous.” (Id.; see

also Ex. 5, at 209-11; Ex. 15; Ex. 33; Ex. 34, at 82.) The Court further cited declarations that the

Commission submitted “from seven of the vendors listed by Sourlis, including American

Express and Verizon, [which] state that they never received notes of any kind.” (Greenstone,

2012 WL 1038570, at *3; see also Exs. 36-42, 93; Kaufman Decl. at ¶¶ 3-6.) Furthermore,

Sourlis herself admitted at her deposition in this case that she never saw -- or even requested to

see -- any such “notes.” (Ex. 94, at 110-11, 118; Ex. 33.)


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The Court further stated that, contrary to the Sourlis opinion, Greenstone’s vendors had

never “assigned” any notes to the Entities. The Court correctly reasoned, “[g]iven that the notes

did not exist, the statement in the Sourlis opinion that ‘the Original Convertible Notes were

assigned and endorsed’ was false as well.” (Greenstone, 2012 WL 1038570, at *3.)

Furthermore, as with the fictional “convertible notes,” Sourlis admitted at her deposition that she

never received any document even purporting to be an “assignment” of anything, much less the

(non-existent) notes. (Ex. 94, at 123-28; Ex. 33 (last page).) And the subpoena responses and

declarations that the Commission obtained from the Exhibit A vendors further confirm that no

such purported “assignments” ever existed. (Exs. 36-42, 93; Kaufman Decl. at ¶¶ 3-6 (DE 145).)

B. False Statements Concerning Verification of the Notes and Assignments

In addition to the above false statements concerning the existence of the notes and

assignments, the Sourlis opinion repeatedly made the highly material false statements that she

had verified the fact information in her opinion with both Greenstone and the vendors. The

Sourlis opinion stated:

“In rendering my opinion, I have examined such documents, and have made such inquiries of fact and law, as I have deemed necessary. With respect to factual representations regarding the [vendors], I have relied exclusively and solely on the information and representations furnished by [Greenstone] and the [vendors] to me and have not independently verified such information.”

“I have been informed by [Greenstone] that the Original Convertible Notes were issued by [Greenstone] to various vendors on or before January 10, 2004 as set forth in the Schedule of Debt attached hereto as Exhibit A . . . and the Original Convertible Notes were assigned and endorsed to [the Entities] and/or its designees on January 10, 2006 (“Assignment”). I have been advised that no consideration was received by [Greenstone], the [vendors] or its designees in connection with the Assignment and no commission or other remuneration was paid or given directly or indirectly for soliciting the Assignment.”

“I have been informed by the [vendors] that, among other things, (i) the Original Convertible Notes have been beneficially held by the [vendors] for at least two (2) years prior to the date of Assignment and (ii) none of


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the [vendors] are an ‘affiliate’ of [Greenstone] within the meaning of Rule 144 at the time of Assignment, nor have been an ‘affiliate’ during the three months preceding the date of such Assignment”

(Ex. 99.) All of the above statements were indisputably false.

Sourlis admitted at her deposition that she never confirmed the “notes” or “assignments”

with any Greenstone employee or representative. (Ex. 94, at 43-51, 63-66, 118-22; Ex. 100.)7

Thus, Sourlis’ representations -- i.e., that she “relied on . . . information and representations

furnished by [Greenstone] . . . to me” and that she had been “informed by Greenstone” of the

existence of the “notes” and “assignments” -- were falsehoods.

Sourlis further concedes that she never communicated with the vendors (also referred to

as the “Original Note Holders” in the Sourlis opinion). By letter to the Court dated May 3, 2012,

referring to the Court’s pre-motion conference held earlier that day, Sourlis’ counsel stated:

I understand that, at the conference, you asked whether Ms. Sourlis had been in contact with the “Original Note Holders,” as suggested

7 According to Sourlis’ testimony, her only arguable conversation with Greenstone was a single, “very brief” (“two to three minutes”) telephone call from Greenstone counsel John Frohling, on January 3, 2006 -- before Sourlis had been retained to write the opinion and before she even understood its subject matter. According to Sourlis, Frohling told her only that she should “expect a phone call from Tom Pierson,” who was “looking to purchase convertible debts or convertible notes” of Auto Centrix, and Frohling “didn’t go into much more detail than that.” (Ex. 94, at 44-51, 63-66, 118-20; Ex. 100). Sourlis testified that that was her only conversation with Frohling. (Ex. 94, at 51, 64-65.) Sourlis further testified that she received information “indirectly” from Auto Centrix attorney Gregory Bartko -- in the form of two faxes that Bartko had sent Pierson and another individual on December 15, 2005 (apparently for a different purpose), and that Pierson emailed to Sourlis on January 3, 2006. (Ex. 35; Ex. 94, at 63-66, 120-21.) Sourlis admitted that the first fax “had nothing to do with [her] legal opinion” (and that she did not rely on it in rendering her opinion), and that she used the second fax solely to help confirm the existence of the Auto Centrix vendor payables listed on “Exhibit A” to her opinion (Ex. 35; Ex. 94, at 173-75). Critically, however, none of the documents that Pierson sent to Sourlis even purported to be the “notes” or “assignments” described in her opinion. (Ex. 35; Ex. 98.) To the contrary, as explained below, those documents directly contradicted the existence of any such “notes” or “assignments.” (Id.)


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on the second page of her January 11, 2006 letter. The answer is no.

(Ex. 109.). Thus, Sourlis’ representations -- that she had “relied on information and

representations furnished by . . . the Original Note Holders [the vendors] to me” and that she had

been “informed by the Original Note Holders [the vendors]” of various pertinent matters -- were

also material falsehoods.

C. False Legal Opinion

Finally, because no actual promissory notes or assignments existed, Sourlis’ ultimate

legal conclusion -- that Greenstone could issue shares “without a restrictive legend” under Rule

144(k) -- was likewise false. Without the two-year-old promissory notes and assignments,

Greenstone would merely be issuing brand new, unregistered securities, without any applicable

registration exemption, plainly unlawful, as this Court previously found.

Moreover, as this Court also previously stated, even if the “Notes” had existed, Sourlis’

legal conclusion still would have been false because any such “notes” would not have constituted

“securities” for the purpose of the federal securities laws and, thus, could not have been a

predicate for application of the Rule 144(k) registration exemption. (Greenstone, 2012 WL

1038570, at *3 n.5, 4 & 6 (citing Reves v. Ernst & Young, 495 U.S. 56, 65-66 (1990), this Court

reasoned, at page *6, “open-account debts cannot be converted to securities simply by issuing

notes”).)

V. Sourlis At Least Recklessly Disregarded the Falsity of the Sourlis Opinion Sourlis at least recklessly disregarded the falsity of each of her false statements described

above.


13

A. The Fictitious “Notes” and “Assignments”

For at least four reasons, no genuine dispute can exist that Sourlis at least recklessly

disregarded that both the “notes” and “assignments” described in her opinion were fictitious:

(1) the supposed “note” and “assignment” transactions that Sourlis described in her opinion were

nonsensical; (2) Sourlis never saw or received any document even purporting to be such a note or

assignment; (3) the documents that Sourlis claims to have relied upon directly contradicted the

existence of any such note or assignment; and (4) Sourlis never even attempted to verify the

existence of the notes or assignments with either Greenstone or the vendors.

According to the Sourlis opinion, prior to January 2004, to pay its ordinary business

expenses, Greenstone issued promissory notes to vendors (such as AT&T, Verizon and FedEx),

and the vendors subsequently assigned the notes to the Entities for no consideration. (Ex. 99.)

Thus, Sourlis described a series of transactions whereby ordinary-course business vendors

(1) agreed to forego cash payment in exchange for notes convertible into stock of a risky, start-

up penny stock company; and (2) subsequently assigned those notes for free to unrelated entities.

Thus, under Sourlis’ transaction, these vendors ultimately agreed to accept no payment for their

services. Any reasonable attorney would have to at least question such dubious (indeed,

nonsensical) transactions. Sourlis admits that she never did. (Ex. 94, at 114-18.)

At the very least, any reasonable attorney would have to insist on seeing documents that

at least purported to be such promissory “notes” and “assignments.” Sourlis admitted at her

deposition that she never saw any such documents. (Ex. 94, at 110-11, 118, 123-28; Ex. 33.) As

further explained at pages 11-12 above, Sourlis did not otherwise attempt to verify the existence

of the “notes” and “assignments” with either Greenstone or the vendors.


14

To the contrary, the documents that Pierson sent Sourlis directly contradicted the

existence of any such “notes” or “assignments.” On January 3 and 10, 2006, Pierson emailed to

Sourlis the documents that she claims to have used in rendering her legal opinion: (1) the

“Exhibit A” list of Auto Centrix aged payables referenced in her opinion; (2) an unsigned

December 2005 “Debt Assumption Agreement,” whereby the Entities potentially purport to

assume those debts; and (3) an unsigned January 2006 “promissory note” (obligating Greenstone

to pay the Entities $71,339.65 in cash or Greenstone stock). (Ex. 33; Ex. 35; Ex. 94, at 202, 204-

08; Ex. 98.) As noted above, and as Sourlis admits, none of those documents purported to be the

“notes” or “assignments” discussed in the Sourlis opinion. (Ex. 94, at 110-11, 118, 123-28.) To

the contrary, those documents contradicted the existence of any such notes or assignments.

“Exhibit A” expressly states that only two of the listed payables is reflected in a “note,” leading a

reasonable person to conclude that the other debts were not held in the form of a “note” (much

less a convertible note). (Ex. 33; Ex. 35.) The (unsigned) “Debt Assumption Agreement”

merely purports to have the Entities assume certain debts of Auto Centrix but says nothing about

a note. (Ex. 33; Ex. 35.) Finally, the unsigned “promissory note” is dated January 2006 and,

thus, could not possibly have satisfied Rule 144(k)’s two-year-holding requirement (even it had

been an actual, executed, note). (Ex. 98.) Moreover, none of the documents that Sourlis

received even purports to be an “assignment” of the (fictional) promissory notes to the Entities

(an essential element of the Sourlis opinion). (Ex. 35; Ex. 98.)8

8 The documents that Pierson sent Sourlis on January 3 also included a “Sale and Assignment” of purported two-year-old promissory notes allegedly issued by Auto Centrix to a “David Highmore” and a “Wendy Northrup.” (Ex. 35.) The Sourlis opinion, however, does not refer to those alleged notes and assignments, and Sourlis admits that those notes “had nothing to do with” the Sourlis opinion. (Ex. 35; Ex. 94, at 173-75; Ex. 99.)


15

Thus, no genuine dispute can exist that Sourlis at least recklessly disregarded the falsity

of the “promissory notes” and “assignments” upon which she predicated her legal opinion.

B. Sourlis’ Failure to Verify the Existence of the “Notes” and “Assignments” Sourlis likewise knew that, contrary to her opinion’s express claims, she did not even

attempt to verify the existence of the “Notes” or “Assignments” with either Greenstone or the

vendors. As explained above, Sourlis admits that she never verified the notes or assignments

with any Greenstone employee or representative (or otherwise indirectly received any

information from Greenstone that supported her opinion). Sourlis has alleged no excuse for her

opinion’s false statements to the contrary.

Regarding the Sourlis opinion’s claim that Sourlis verified the opinion’s facts with the

“vendors,” Sourlis likewise admits that she never contacted the vendors (and she must have been

aware of this fact at the time). She claims, however, that her opinion inadvertently used the

phrase “Original Note Holders” (vendors) when she should have said “Note Holders.” (Ex. 94,

at 88-91; Ex. 99; Ex. 109.) In other words, she now apparently claims that she meant her opinion

letter to say -- in two separate paragraphs on page two of the opinion -- that she had verified its

facts only with the Entities, not the vendors. (Id.)9 Other than her own statement, Sourlis

proffers no evidence to support her claim of “error.” Moreover, Sourlis’ claim is nonsensical

because the particular facts that she claimed in her opinion to have verified -- i.e., that the

vendors had held the (fictitious) notes for more than two years and that they were not “affiliates”

of Greenstone -- could only have been verified by the vendors or Greenstone, not by the Entities.

Sourlis also admits that she reviewed drafts of her opinion, including the final version, before

9 Sourlis testified that she mistakenly used the phrase “Original Note Holders” in the first line of the second full paragraph on page 2 of her opinion letter. (Ex. 94, at 88-91; Ex. 99.) Sourlis likewise used the phrase “Original Note Holders” in the preceding paragraph (last line), and we presume that she would assert the same alleged “error” regarding that paragraph as well.


16

sending it to Pierson. Indeed, some of Pierson’s and Sourlis’ edits were in the very same

paragraph (at clause (ii)) for which Sourlis now claims to have made an “error.” (Compare Exs.

97 & 98 with Ex. 99.) Thus, no reasonable fact finder could conclude that Sourlis made such a

highly material false statement inadvertently. As further explained below, under Second Circuit

precedent, Sourlis’ uncorroborated and nonsensical claim of mistake is too incredible to merit

serious consideration by the Court on summary judgment.

ARGUMENT

For the following reasons, the Court should grant partial summary judgment as to liability

against Sourlis (1) for securities fraud under Section 10(b) of the Exchange Act, 15 U.S.C.

§ 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5; and (2) for violating Sections 5(a)

and (c) of the Securities Act, 15 U.S.C. § 77(e)(a), (c), arising out of her issuance of the false

Sourlis opinion.

I. Summary Judgment Standard

Summary Judgment “should be rendered if the pleadings, the discovery and disclosure

materials on file, and any affidavits show that there is no genuine issue as to any material fact

and that the movant is entitled to judgment as a matter of law.” Fed. R. Civ. Pr. 56(c)(2). No

genuine issue of material fact exists unless a reasonable finder of fact could return a verdict for

the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In deciding

whether a genuine issue exists, the Court must “construe the facts in the light most favorable to

the non-moving party and must resolve all ambiguities and draw all reasonable inferences

against the movant.” Dallas Aero, Inc. v. CIS Air Corp., 352 F.3d 775, 780 (2d Cir. 2003).


17

Moreover, while witness credibility determinations generally are inappropriate on

summary judgment, the Second Circuit recognizes an exception where the witness’s testimony is

uncorroborated and wholly lacking in credibility:

While it is undoubtedly the duty of district courts not to weigh the credibility of the parties at the summary judgment stage, in the rare circumstance where the [non-movant] relies almost exclusively on his own testimony, much of which is contradictory and incomplete, it will be impossible for a district court to determine whether the jury could reasonably find for the [non-movant], and thus whether there are any genuine issues of material fact, without making some assessment of the [non-movant’s] account. Under these circumstances, the moving party still must meet the difficult burden of demonstrating that there is no evidence in the record upon which a reasonable factfinder could base a verdict in the [non-movant’s] favor.

Jeffreys v. City of New York, 426 F.3d 549, 554 (2d Cir. 2005) (internal quotation marks and

citations omitted). The court in Picciano v. McLoughlin, citing Jeffreys, held that a “rare” and

“narrow exception” existed to the rule that witness credibility is not determined on summary

judgment, where:

[T]estimony by a non-movant . . . possesses the following two characteristics: (1) it constitutes almost the exclusive basis for a disputed issue of fact in the case (or, expressed differently, it is largely unsubstantiated by any other direct evidence); and (2) it is so lacking in credibility (because the testimony is incomplete and/or replete with inconsistencies and improbabilities) that, even after drawing all inferences in the light most favorable to the non-movant, no reasonable jury could find for the non-movant.

723 F.Supp.2d 491, 499 (N.D.N.Y. 2010).

II. Elements Of The Anti-Fraud Provisions Of The Federal Securities Laws

To establish Sourlis’ liability under Section 10(b) of the Exchange Act and Rule 10b-5,

the Commission must prove that Sourlis made a material misrepresentation or omission, or used

a fraudulent device, with scienter, in connection with the purchase or sale of a security. SEC v.

Greenstone, No. 10 Civ. 1302 (MGC), 2012 WL 1038570, *5 (S.D.N.Y. March 28, 2012); SEC


18

v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999); SEC v. First Jersey Sec.’s Litig.,

101 F.3d 1450, 1467 (2d Cir. 1996).

“For purposes of Rule 10b–5, the maker of a statement is the person or entity with

ultimate authority over the statement, including its content and whether and how to communicate

it.” Janus Capital Group, Inc. v. First Derivative Traders, 131 S.Ct. 2296, 2302 (2011). Thus,

for example, a person who signs a written statement is deemed to have “made” the statement for

Rule 10b-5 purposes. See id. (“attribution within a statement . . . is strong evidence that a

statement was made by – and only by – the party to whom it was attributed”); In re Smith Barney

Transfer Agent Litig., -- F. Supp. 2d --, 2012 WL 3339098, at *9 (S.D.N.Y. Aug. 15, 2012)

(“courts consistently hold that signatories of misleading documents ‘made’ the statements in

those documents, and so face liability under Rule 10b–5(b)”) (collecting cases).

A false statement or omission is material if there is a substantial likelihood that a

reasonable investor would consider the information important in making an investment decision.

See Basic v. Levinson, 485 U.S. 224, 231 (1988). False attorney opinion letters relied upon by

transfer agents in issuing stock satisfy the materiality requirement. See Greenstone, 2012 WL

1038570, at *5-7; SEC v. Czarnik, No. 10 Civ. 745(PKC), 2010 WL 4860678, at *5 (S.D.N.Y.

Nov. 29, 2010).

The “in connection with” element is satisfied as long as the false statement or omission

merely “somehow touches upon or has some nexus with any securities transaction.” SEC v.

Stanard, 06 civ. 7736 (GEL), 2009 WL 196023, at *27 (S.D.N.Y. Jan. 27, 2009) (quotations

omitted); see Greenstone, 2012 WL 1038570, at *5. Furthermore, the fraud need not “occur in

any particular phases of the selling transaction,” and the issuance of false opinion letters to

transfer agents satisfies the “in connection with” requirement. Czarnik, 2010 WL 4860678, at *4


19

(citing Graham v. SEC, 222 F.3d 994, 1002-03 (D.C. Cir. 2000)); see also Greenstone, 2012 WL

1038570, at *5-7.

Where a defendant’s false statement is fraudulently used by another in connection with a

securities transaction, the defendant’s conduct is “in connection with” merely if such use was

reasonably foreseeable. See P. Schoenfeld Asset Mgmt., LLC v. Cendant Corp., 161 F. Supp. 2d

355, 360-61 (D.N.J. 2001) (audit firm’s provision of false financial statement to client was “in

connection with” client’s later use of statement in tender offer, even though audit firm did not

know of tender offer when it provided false statement); United States v. Larabee, 240 F.3d 18,

20, 24-25 (1st Cir. 2001) (citing United States v. Libera, 989 F.2d 596, 600 (2d Cir. 1993)) (court

upheld conviction of tipper of inside information for securities fraud based on tippee’s

subsequent trading, even though tipper was unaware of tippee’s trading); SEC v. Rana Research,

Inc., 8 F.3d 1358, 1362 (9th Cir. 1993) (citing In re Ames Dep’t. Stores, Inc. Stock Litig., 991

F.2d 953, 963 & 965 (2d Cir. 1993)) (publicly-traded company liable for securities fraud for

issuing materially false public statements, regardless of whether company knows of precise

securities trades at issue).

“In order to show scienter, the SEC must demonstrate either that the defendant had actual

knowledge of material facts that were omitted or distorted or failed or refused to ascertain and

thereafter accurately disclose such facts after having been put on notice as to their possible

existence.” Greenstone, 2012 WL 1038570, at *6; see also First Jersey Sec.’s Litig., 101 F.3d at

1467 (“Scienter, as used in connection with the securities fraud statutes, means intent to deceive,

manipulate, or defraud, or at least knowing misconduct.”); SEC v. U.S. Environmental, Inc., 155

F.3d 107, 111 (2d Cir. 1998) (“It is well-settled that knowledge of the proscribed activity is

sufficient scienter under § 10(b)”); Greenstone, 2012 WL 1038570, at *6.


20

In addition, a defendant’s “reckless disregard” for the consequences of his or her actions

is also sufficient proof of fraud scienter under Exchange Act Section 10(b) and Securities Act

Section 17(a). Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 46 (2d Cir. 1978); Greenstone,

2012 WL 1038570, at *6. “Reckless conduct is, at the least, conduct which is ‘highly

unreasonable’ and which represents ‘an extreme departure from the standards of ordinary care

. . . to the extent that the danger was either known to the defendant or so obvious that the

defendant must have been aware of it.’” Rolf, 570 F.2d at 47; Greenstone, 2012 WL 1038570, at

*6. “An egregious refusal to see the obvious, or to investigate the doubtful, may in some cases

give rise to an inference of . . . recklessness.” Chill v. General Elec. Co., 101 F.3d 263, 269 (2d

Cir. 1996) (emphasis added); see Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000)

(Commission may establish scienter by showing defendant’s “knowledge of facts or access to

information contradicting [his or her] public statements”); Chris-Craft Indus., Inc. v. Piper

Aircraft Corp., 480 F.2d 341, 398 (2d Cir. 1973) (a defendant cannot plead ignorance of the facts

where there are “warning signals” or other information that should put him or her on notice of

either misrepresented or undisclosed material facts). Thus, “[r]epresenting information as true

while knowing it is not, recklessly misstating information, or asserting an opinion on grounds so

flimsy as to belie any genuine belief in its truth, are all circumstances sufficient to support a

conclusion of scienter.” SEC v. Universal Express, Inc., 475 F. Supp. 2d 412, 424 (S.D.N.Y.

2007) (Lynch, J.).

In its recent summary judgment opinion in this case, this Court set forth the requisite duty

of care for an attorney in issuing a legal opinion:

Under the securities laws, a statement of opinion includes an implied representation that the speaker rendered the opinion in good faith and with a reasonable basis. Good faith alone is not enough. An opinion must have a reasonable basis, and there can


21

be no reasonable basis for an opinion without a reasonable investigation into the facts underlying the opinion. [Defendant attorney] thus implicitly represented that he had conducted ‘a reasonably sufficient examination of material legal and factual sources and [had] reasonable certainty as to the subjects addressed therein.’

Greenstone, 2012 WL 1038570, at *7 (quoting Weiss v. SEC, 468 F.3d 849, 855 (D.C. Cir.

2006)) (citations omitted); see also SEC v. Jakubowski, 150 F.3d 675, 681 (7th Cir. 1998)

(upholding securities fraud summary judgment against attorney defendant, Court reasoned that

“for a lawyer to fail to read a document central to a business transaction is reckless indeed,” and

that nonsensical nature of transaction “was enough by itself to put [the attorney] on notice that

something was amiss”); In re WorldCom, Inc. Sec.’s Litig., 352 F. Supp. 2d 472, 496 (S.D.N.Y.

2005) (accountant’s scienter may be established where accountant refuses to “to investigate the

doubtful” or made “judgments [that] . . . were such that no reasonable accountant would have

made the same decisions if confronted with the same facts”).

III. Sourlis Committed Securities Fraud

As noted above, this Court previously found that the Sourlis opinion made numerous

material false statements concerning the existence of fictional “notes” and “assignments”;

Sourlis has admitted that her opinion contained additional material false statements (concerning

her alleged communications with the vendors and Greenstone); and this Court previously found

that Frohling used the opinion “in connection with” the issuance of Greenstone shares.10 Thus,

the only remaining issues on summary judgment are: (1) whether Sourlis at least recklessly

10 Any claim by Sourlis that she is not bound by the Court’s prior summary judgment decision is irrelevant, as she can present no additional evidence that would contradict the Court’s prior findings. As explained in detail above, for the same reasons set forth in the Commission’s prior motion for summary judgment, the record establishes that no genuine dispute exists concerning the material falsity of the Sourlis letter and Frohling’s use of it “in connection with” a securities transaction.


22

disregarded the falsity of her opinion’s numerous false statements at the time she issued it; and

(2) regarding the “in connection with” requirement, whether it was reasonably foreseeable to an

attorney in Sourlis’ position that Greenstone would use her opinion “in connection with” a

securities transaction. The indisputable facts establish that both of these elements are satisfied

and that, therefore, the Court should hold Sourlis liable for securities fraud.

A. Sourlis at least Recklessly Disregarded the Falsity of the Sourlis Opinion

As explained in the fact section above, Sourlis’ conduct in issuing her false opinion letter

easily meets the “recklessness” standard for securities fraud because her conduct was “highly

unreasonable” and constituted “an extreme departure from the standards of ordinary care” of a

securities attorney issuing such opinions. The Sourlis opinion contained numerous highly

material and blatantly false statements that Sourlis must either have known were false or,

alternatively, did so little to check the veracity of that she might as well have known they were

false.

To begin with, Sourlis never saw or received any document even purporting to be the

alleged two-year-old promissory notes -- or their “assignments” -- that she discusses repeatedly

in her opinion. To the contrary, the documents that she received directly contradicted the

existence of such “notes” and “assignments.” Those documents indicated -- contrary to the

nonsensical transaction that Sourlis described -- that Greenstone was simply issuing a current

note to the Entities in exchange for a cash loan. Such a transaction, of course, did not satisfy

Rule 144(k).

Perhaps most egregiously, in a fraudulent effort to assure anyone reading her opinion that

it was authentic, Sourlis falsely claimed to have verified the “notes” and “assignments” with both

Greenstone and the vendors. Sourlis now admits, as she must, that these claimed


23

communications did not occur. Regarding the vendors, Sourlis nonetheless asserts that any such

statements in her opinion were mistakes -- i.e., that she had intended the opinion letter to state

that she communicated not with the “Original Note Holders” (the vendors) but, rather, with the

“Note Holders” (the Entities). This uncorroborated and illogical claim is so incredible that no

reasonable juror could believe it, and it is insufficient to defeat this summary judgment motion.

See Jeffreys, 426 F.3d at 554. To credit Sourlis’ claim of “error,” one would have to believe that

Sourlis made this error not once, but several times (in two separate paragraphs of her opinion

letter), after reviewing and exchanging drafts of the opinion letter with Pierson. Perhaps more

importantly, as explained above, if as Sourlis suggests, the phrase “Note Holder” (the Entities) is

substituted for “Original Note Holder” (the vendors) in the passages that Sourlis authored, they

would be rendered entirely meaningless. Indeed, under Sourlis’ tortured new reading, she would

be stating that she had done nothing to confirm that the notes were more than two-years old or

that the vendors were affiliates of Greenstone (the unrelated Entities could not have confirmed

either of those facts).

Furthermore, the sheer number of material falsehoods in the Sourlis opinion requires a

finding on summary judgment that her conduct was, at the least, reckless. The Sourlis opinion

falsely states that: (1) the “notes” existed; (2) the note “assignments” existed; (3) the notes were

more than two years old; (4) the “notes” constituted “securities” (contrary to Reves); (5) Sourlis

had communicated with the (non-existent) “note holder” assignees (the vendors); (6) Sourlis had

relied upon communications with Greenstone to issue the opinion; and (7) conversion of the

notes to unrestricted stock complied with Rule 144. Thus, despite all of the contrary

documentation Sourlis reviewed, her own knowledge of her non-existent communications, and

the very definition of “securities,” Sourlis issued an opinion that contained glaring falsehoods in


24

virtually every paragraph. Taken either individually or collectively, the sheer quantity and

quality of Sourlis’ falsehoods necessitates the conclusion that her false statements were at least

reckless.

B. The “In Connection With” Requirement

Finally, Sourlis issued her opinion “in connection with” a securities transaction, for the

purpose of her liability under Section 10(b) of the Exchange Act. This Court already has

determined that Greenstone’s use of the Sourlis opinion to obtain unrestricted Greenstone shares

from its transfer agent (CST) was “in connection with” a securities transaction for Section 10(b)

purposes. Greenstone, 2012 WL 1038570, at *7 (“[t]here is no question that [Frohling’s] legal

opinions were material misstatements and were made ‘in connection with’ an offering of

securities”). As explained above, the only remaining issue is whether Greenstone’s use of the

Sourlis opinion for that purpose was reasonably foreseeable by Sourlis at the time she issued it.

It plainly was.

First, the Sourlis opinion’s last paragraph expressly states that the opinion may be “relied

on” by Greenstone’s transfer agent:

This opinion is given only with respect to a specific transaction in the Shares to which this opinion relates as set forth above and may not be relied on by any other person holding securities . . . other than the Transfer Agent for [Greenstone]”

(Ex. 99 (emphasis added).)

Second, Sourlis initially heard about Auto Centrix and its merger with Greenstone from

Greenstone counsel John Frohling (who later used the Sourlis opinion on behalf of Greenstone).

(Ex. 15, at 74449-52; Ex. 94, at 49-51; Ex. 100.)


25

Third, the Sourlis opinion is addressed to “Auto Centrix, Inc.” (Ex. 99), and any

reasonable attorney would conclude that Auto Centrix (subsequently renamed Greenstone)

would rely upon the opinion to issue unrestricted shares, the entire purpose of the opinion.

Fourth, Pierson personally requested the opinion from Sourlis, and Starczewski paid her

$5,000 for it. (See p. 7 supra.) Pierson and Starczewski ultimately received the unrestricted

Greenstone stock at issue, through the Entities listed in the Sourlis opinion (which Pierson and

Starczewski controlled). (See p. 6 supra.)

Fifth, the Sourlis opinion expressly contemplates an actual “issuance” of Greenstone

stock to the Entities: “My opinion has been requested with respect to the issuance of shares . . .

of common stock . . . of Auto Centrix, Inc. . . . upon the conversion of . . . the ‘Notes’ . . . by [the

Entities],” and “The Shares of [Auto Centrix] to be issued upon the conversion of the Notes are

validly authorized . . . “ (Ex. 99 (emphasis added).)

Sixth, the first-page caption of the Sourlis opinion expressly states the number of shares

that may be issued pursuant to it: “No. of shares: All underlying shares of common stock”

under the “Convertible Promissory Notes.” (Id.; Ex. 108, at 32-33.)11

Seventh, the second page of the opinion states the legal basis for the issuance of those

shares: “Accordingly, the Shares underlying the Note may be issued to [the Entities] and/or its

designees without a legend pursuant to the Securities Act of 1933, as amended” -- i.e., as

unrestricted shares, based upon the two-year-holding exemption of “Rule 144.” (Ex. 99

(emphasis in original).)

11 Exhibit 108 contains excerpts of the second deposition of the CEO of Greenstone’s transfer agent, CST. The testimony clarifies that the transfer agent will accept an attorney opinion letter that does not itself state the precise number of shares to be issued, so long as that number is calculable by reference to a separate document identified in the opinion (in this case, the bogus promissory notes). Id.


26

Eighth, CST’s CEO testified at her deposition in this case that the Sourlis opinion

satisfied all of CST’s requirements to issue unrestricted Greenstone shares, save only

Greenstone’s own written authorization (which Frohling supplied, with authorization from

Greenstone’s CEO). (Ex. 16, at 41; Ex. 108, at 32-33.)12

Thus, the sole and express purpose of the Sourlis opinion was for Greenstone to cause its

transfer agent to issue unrestricted stock to the Entities, precisely the purpose for which Pierson

and Starczewski (who controlled the Entities) obtained the opinion, and precisely the purpose for

which Frohling used the opinion. In other words, the Sourlis opinion expressly contemplated

that it would be used by Greenstone to obtain unrestricted Greenstone shares from Greenstone’s

transfer agent (CST) for the Entities, and that is precisely what happened. No genuine dispute

can exist that such use of the opinion by Greenstone (through its counsel, Frohling) was

reasonably foreseeable by the attorney who issued the opinion (Sourlis). Indeed, this Court

previously recognized as much at its July 7, 2011 hearing rejecting Sourlis’ motion to dismiss:

[R]egardless of the transaction for which they were used, it was a transaction to get the registrar of the stock to remove the legend from the stock. That was the intention and the purpose of the letter.

(Ex. 110, at 3 (Hearing Tr., July 7, 2011, DE 150).)13 Thus, any assertion by Sourlis that

12 Sourlis confusingly has claimed in this case that CST would not have issued the unrestricted Greenstone shares had it known that the underlying transaction did not actually involve the promissory notes described in the Sourlis opinion. We agree, and this subterfuge is precisely the crux of the Commission’s claim against Sourlis -- i.e., that Sourlis authored her false opinion to fool the transfer agent into believing that it was issuing unrestricted Greenstone shares in exchange for two-year-old Greenstone convertible promissory notes (which, in reality, as Sourlis knew, did not exist). 13 See also, id., at 4 (“I am satisfied that a lawyer cannot give an opinion that can be used to remove a legend from restricted stock by asserting flat-out factual misrepresentations”).


27

Frohling’s use of the opinion was not reasonably foreseeable would be patently absurd.14

IV. Sourlis Violated Securities Act Section 5

For essentially the same reasons described above, no genuine dispute exists that Sourlis

violated Section 5 of the Securities Act. This Court previously described the elements of a

Section 5 claim:

In order to prove a Section 5 violation, the SEC must show that: (1) the defendant directly or indirectly offered to sell securities; (2) no registration statement was in effect for the offered securities; and (3) interstate means were used in connection with the offer or sale. A person not directly engaged in the transfer of the title of a security can be held liable if he has engaged in steps necessary to the distribution of [unregistered] security issues. The participation must be substantial, not de minimis. Scienter need not be proven.

Greenstone, 2012 WL 1038570, at *11 (citations and internal quotation marks omitted).

No registration statement was in effect for the stock issuances described in this motion,

and interstate means (both regular mail, email, faxes, the internet, and online brokerage

accounts) were used in the offerings. Id.

Finally, no genuine dispute can exist, that, by issuing her false opinion letter, Sourlis was

a necessary participant in the January 2007 Greenstone stock issuance at issue. As noted above,

CST would not have issued the over six million unrestricted Greenstone shares without an

opinion letter from counsel stating the legal basis for the issuance, and Sourlis’ opinion supplied

that legal basis (i.e., Rule 144(k)). Indeed, both this Court and others in this District have held

that attorneys can be liable under Section 5 for authoring false legal opinions in virtually

identical situations. See id., at *11-12; Czarnik, 2010 WL 4860678, at *12 (“[a] reasonable fact

14 Sourlis has asserted in this case that Frohling’s submission of the Sourlis opinion to CST with an attachment different from “Exhibit A” somehow cuts off Sourlis’ liability. (Ex. 15, at 74449-52.) That attachment did not alter in any way the text of the Sourlis opinion or her fraud -- the issuance of a false opinion to assist her co-defendants in illegally obtaining unrestricted Greentsone stock from CST. Thus, Frohling’s attachment does not alter Sourlis’ culpability.


28

finder could infer that the transfer agent[] would not have issued the securities without [the

attorney’s] documents”); SEC v. Ramoil Management, Ltd., 01 civ. 9057 (SC), 2007 WL

3146943, at *10 (S.D.N.Y. Oct. 25, 2007) (Court found an attorney liable under Section 5

because false legal opinion he provided was “necessary” for obtaining the stock at issue).

CONCLUSION

For the foregoing reasons, the Commission respectfully requests that the Court grant it

partial summary judgment as to liability against defendant Sourlis for her violation of Section

10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 5 of the Securities Act.

Dated: New York, New York September 5, 2012

SECURITIES AND EXCHANGE COMMISSION

By: /s/ . Jack Kaufman Alexander J. Janghorbani Securities and Exchange Commission 3 World Financial Center, Room 400 New York, New York 10281-1022 Tel: (212) 336-0106 (Kaufman) Tel: (212) 336-0177 (Janghorbani) Fax: (212) 336-1319


sourlis

Documents

schoenfeld

monarch funding

cis air corp

piper aircraft

genuine dispute

partial summary

federal securities

eastman dillon