DISPOSITION:  [*1]  Plaintiff's Motion for Summary Judgment with respect to Defendants Terry and Dunbar Holdings granted; Plaintiff's Motion for Summary Judgment with respect to Defendant J.S. Holdings, Inc. denied; Defendants' Terry and Dunbar Holdings Motion for Summary Judgment [# 177] denied; Defendant J.S. Holdings' Cross-Motion to Lift Existing Injunctive Relief [# 175] granted; Defendants Shannon Terry and Dunbar Holdings, LTD permanently enjoined and restrained from violating, directly or indirectly, Section 17(a) of the Securities Act (15 U.S.C. § 77q(a)), Section 10(b) of the Exchange Act (15 U.S.C. § 78j(b) and Rule 10b-5 ( 17 C.F.R. § 240.10b-5).

 

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 [*10] 

n6 For purposes of summary judgment, the SEC reduced its disgorgement request from $ 851,322.50 to $ 828,448 in its Reply Memo in response to Defendant Terry's denial that he received stock valued at $ 22,874.50 in exchange for promoting Silent Radio, Inc. (Pl's Reply at 3, n.3; see also Pl's Stmt of Mat. Uncontested Facts, P 34; Terry Response, P 34.)
 
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Terry is the sole owner of Dunbar Holdings, a corporate shell that is located in Grand Turks, Bahamas. Terry maintains and directs a trading account in the name of Dunbar Holdings with a Canadian brokerage firm. Stocks that Terry received for his commentaries in the Whisper Newsletter were placed into the Canadian trading account of Dunbar Holdings.

As the table in footnote 5 demonstrates, Terry's trading of stocks either coincided with the publication of stories about these same stocks in the Whisper Newsletter or took place shortly after publications of the stories. Terry wrote some of the articles and co-authored others with Melcher who always retained final editorial control over articles appearing in the Whisper Newsletter. These stories  [*11]  would recommend that the subscribers buy the stocks in the companies promoted. However, after some of the stories were printed in the Whisper Newsletter, Terry would turn around and sell his personal holdings of that particular stock within a few days. Since the price of a featured stock often increased soon after Whisper Newsletter's aggressive promotion to subscribers, Terry made substantial profits from his sales. This pattern of selling in contravention of the Whisper, recommendations was repeated over a two year period for all stocks Terry received as compensation for promotion of these stocks.

B. J.S. Holdings.

J.S. Holdings is a holding company, owned by Jeffrey Szur, which in turn owns J.S. Securities. J.S. Holdings received a wire transfer in the amount of $ 255,000 from Defendant Huttoe on August 21, 1996. Plaintiff claims that this amount represents proceeds of the sale of unregistered SOE stock from a nominee account in the name of National Trading Services, Inc. ("NTSI"), a Florida Corporation controlled by Huttoe.
 
II. STANDARD OF REVIEW

 
A party against whom a claim . . . is asserted . . . may, at any time, move with or without supporting affidavits  [*12]  for a summary judgment in the party's favor as to all or any part thereof. . . . The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.

 
Fed. R. Civ. P. 56(b)-(c). The party seeking summary judgment bears the initial burden of demonstrating an absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). In determining whether the movant has met this burden, a court must consider all factual inferences in the light most favorable to the non-moving party. McKinney v. Dole, 246 U.S. App. D.C. 376, 765 F.2d 1129, 1135 (D.C. Cir. 1985). Once the moving party makes its initial showing, however, the nonmoving party must demonstrate "specific facts showing that there is a genuine issue for trial." Celotex, 477 U.S. at 324; McKinney, 765 F.2d at 1135. Moreover, "in determining a motion for summary judgment,  [*13]  the court may assume that facts identified by the moving party in its statement of material facts are admitted, unless such a fact is controverted in the statement of genuine issues filed in opposition to the motion." Local Rule 108(h).
 
III. CLAIMS AGAINST SHANNON TERRY & DUNBAR HOLDINGS

The SEC alleges that Terry violated SA § 17(a), SEA § 10(b), and SEC Rule 10b-5 when he (1) touted publicly traded securities to potential investors in articles he wrote for the Whisper Newsletter in return for undisclosed compensation from the issuers of those securities, (2) traded his personal share holdings in stocks even as he was writing articles in the Whisper Newsletter recommending their purchase, and (3) failed to disclose either of these practices when he solicited subscriptions to the Whisper Newsletter. The SEC also alleges that Terry violated SA § 17(b) when he failed to disclose to subscribers that he received consideration in exchange for writing and publishing articles promoting stock.

Terry deposited the proceeds he received for the articles in Dunbar Holdings. The SEC requests that Terry and Dunbar Holdings disgorge payments for promoting stocks, trading profits,  [*14]  and subscription commissions, as well as prejudgment interest on all illegal profits. The SEC also seeks to permanently enjoin Terry and Dunbar Holdings from participating in further violation of the securities laws.

A. Violation of SA § 17(a), n7 SEA § 10(b) n8 and Rule 10b-5. n9
 
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n7 Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), provides:

It shall be unlawful for any person in the offer or sale of any securities by the means or instruments of transportation or communication in interstate commerce of by the use of the mails, directly or indirectly--

(1) to employ a device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(3) to engage in any transaction practice or course of business which operates or would operate as a fraud or deceit upon the purchaser.

n8 Section 10(b) of the Securities Exchange Act, 15 U.S.C. 78j(b), makes it unlawful for "any person, directly or indirectly," to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.  [*15] 

n9 SEC Rule 10b-5, 17 C.F.R. Sec. 240.10b-5, pursuant to its power under section 10(b). It provides:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,

(1) to employ any device, scheme, or artifice to defraud,
(2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

 
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It is a fraud for "any person" to make any statement in connection with a securities transaction that is materially false or misleading. 15 U.S.C. § 77(q)(a); 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. A statement is made "in connection  [*16]  with" the sale of any security "whenever it may reasonably be expected that a publicly disseminated document will cause reasonable investors to buy or sell securities in reliance thereon, regardless of the motive or existence of contemporaneous transactions by or on behalf of the violator." SEC v. Savoy Industries, Inc., 190 U.S. App. D.C. 252, 587 F.2d 1149, 1171 (D.C. Cir. 1978), cert. denied, sub nom. Zimmerman v. SEC, 440 U.S. 913, 59 L. Ed. 2d 462, 99 S. Ct. 1227 (1979). A statement is materially misleading if there is a substantial likelihood that a reasonable investor would consider an omitted fact significant in making his or her investment decision. See Basic. Inc. v. Levinson, 485 U.S. 224, 232, 99 L. Ed. 2d 194, 108 S. Ct. 978 (1988) (adopting standard of materiality in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976), for the SEA § 10(b) and Rule 10b-5 context); SEC v. Steadman, 296 U.S. App. D.C. 269, 967 F.2d 636, 643 (D.C. Cir. 1992) (using Basic and TSC materiality standard in SA § 17(a) context).

A material misstatement violates  [*17]  SA § 17(a)(1), SEA § 10(b), and Rule 10b-5 when made with scienter, and violates SA §§ 17(a)(2) and 17(a)(3) when made negligently. Aaron v. SEC, 446 U.S. 680, 64 L. Ed. 2d 611, 100 S. Ct. 1945 (1980). Scienter is "a mental state embracing intent to deceive, manipulate, or defraud," Ernst & Ernst v. Hochfelder, 425 U.S. 185, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976), as demonstrated by "extreme recklessness". SEC v. Steadman, 967 F.2d at 641. Extreme recklessness is an "extreme departure from the standard of ordinary care, . . . which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it." Id. at 641-42 (citing Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1045 (7th Cir. 1977), cert. denied, sub nom. Meers v. Sundstrand Corp., 434 U.S. 875, 54 L. Ed. 2d 155, 98 S. Ct. 224, 98 S. Ct. 225 (1977)).

1. Nondisclosure of Paid Promotional Nature of Articles.

The SEC maintains that Terry failed to inform Whisper subscribers of the paid promotional nature of the articles appearing in the Whisper  [*18]  Newsletter and that this nondisclosure was material. The record reflects that Terry sold subscriptions to, and wrote the contents of, much of the Whisper Newsletters. Although, Terry did not write all of the commentaries, he did write many about a number of stocks appearing in the Whisper Newsletter. Terry admits that he was compensated with the stock of companies he profiled or otherwise wrote about. n10
 
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n10 In its Motion for Summary J