Full opinion text
OPINION & ORDER ALGENON L. MARBLEY, District Judge. I. INTRODUCTION The Securities and Exchange Commission (“SEC”) filed this civil enforcement action against twelve defendants alleging that they violated registration, disclosure, and anti-fraud provisions of federal securities law in connection with the public sale of Bluepoint Linux Software Corporation’s (“Bluepoint”) shares. In Count I, the SEC claims that Defendants Aaron Tsai (“Tsai”), Michael Markow (“Markow”), Global Guarantee Corporation (“Global Guarantee”), Francois Goelo (“Goelo”), Yongzhi Yang (“Yang”), K & J Consulting Ltd. (“K & J Consulting”), Ke Lou (“Lou”), M & M Management Ltd. (“M & M”), Sierra Brokerage Services, Inc. (“Sierra”), and Jeffrey Richardson (“Richardson”) violated Sections 5(a) and 5(c) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. §§ 77e(a) and 77e(c), by trading securities in interstate commerce without filing registration statements. Counts II, III, IV, and VI of the Complaint allege that Defendants Markow, Global Guarantee, Goelo, Yang, K & J Consulting, Lou, M & M, Sierra, Richard Geiger (“Geiger”), and Richardson engaged in a “pump and dump” scheme that manipulated the market price for Bluepoint shares on March 6, 2000, in violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act, 15 U.S.C. §§ 77q(a)(l) and 77q(a)(3); Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5; and Section 15(c)(1) of the Exchange Act, 15 U.S.C. § 78o (c)(1). Counts VIII and IX allege that Defendants Tsai (acting individually), and Goelo (individually and as part of a group), Yang (individually and as part of a group), K & J Consulting, Markow, Global Guarantee, Lou, and M & M (acting collectively) failed to report their beneficial ownership of securities in violation of Section 13(d) of the Exchange Act, 15 U.S.C. §§ 78m(d)(l) and (2), Rules 13d-1(a) and 13d-2(a) thereunder, 17 C.F.R. §§ 240.13d-l, 240.13d-2; and Section 16(a) of the Exchange Act, 15 U.S.C. § 78p(a) and Rule 16a-3 thereunder, 17 C.F.R. §§ 240.16a-3. Now before the Court is the SEC’s motion for summary judgment (doc. no. 124) against Defendants Tsai, Markow, Global Guarantee, Yang, K & J Consulting, Lou, M & M, Goelo, Sierra, and Richardson on the Section 5 registration claim (Count I) and on the Section 13(d) and 16(a) disclosure claims (Counts VIII and IX). Defendants Tsai, Markow, Global Guarantee, Goelo, Yang, K & J Consulting, Lou, M & M, and Geiger (collectively “Defendants”) have cross motioned for summary judgment on the registration and disclosure counts (Counts I, VIII, and IX) and also seek summary judgment on the market manipulation scheme counts (Counts II, III, IV, and VI). (Doc. no. 112). For the reasons explained below, the SEC’s motion is GRANTED in PART and DENIED in PART and the Defendants’ motion is DENIED. II. BACKGROUND A. Facts This case centers on Defendant Tsai’s creation of MAS Acquisition XI Corporation (“MAS XI”), a “shell” company that ultimately merged with Bluepoint and sold shares to the public on the Over-the-Counter Bulletin Board in March of 2000. The SEC maintains that the Defendants’ conduct relating to that process repeatedly violated the federal securities laws. “Shell companies,” like MAS XI, are also referred to as “blank check” companies. Shell companies or blank check companies are formed with the purpose of qualifying for public trading on the Over-the-Counter Bulletin Board and later being sold to a privately-held company. The private company is then merged into the shell. To accomplish the reverse merger, the public shell company exchanges its stock with the outstanding shares of the private company. The shareholders in control of the shell company transfer most of their shares to the owners of the private company. The public shell company often changes its name to the name previously used by the private company and continues the business activity of the formerly private company except that the company is now an issuer of publicly traded securities. See SEC v. M & A West, Inc., No. C01-3376, 2005 WL 1514101, at *2 (N.D.Cal. June 20, 2005) (explaining reverse mergers). This process allows the private company to go public cheaply, i.e., without the expense of an initial public offering. See SEC v. Kern, 425 F.3d 143, 146 (2d Cir.2005). Shell companies have no assets or revenue; instead, they exist merely to serve as a vehicle for the businesses activities of the company which merges into them. See Black’s Law Dictionary 149 (2d Pocket Ed. 2001). 1. Defendants Tsai is a resident of Taiwan. Tsai controls MAS Capital Securities, Inc., a U.S. incorporated securities broker-dealer that is registered with the SEC. From 1996 to 2000, he formed 101 public shell corporations. The shell companies were created so that they could be merged with private companies that want to go public. One of those shell companies was MAS XI, which ultimately was merged with Bluepoint. Tsai is experienced in the securities industry. Between 1998 and 2000, Tsai was a registered representative of five brokerage firms. He is also educated in the securities industry. Between 1998 and 1999, he took and passed several exams related to the securities industry including: (1) the Series 7 exam, a New York Stock Exchange exam for stock brokers which Tsai passed with high marks in 1998; (2) the Series 24 exam, which is a securities principal license exam for managers of brokerage firms; (3) the Series 28 exam; (4) the Series 55 exam for stock traders; and (5) the Series 63 exam, which covers state regulations regarding securities. Tsai also has experience with securities violation litigation. On April 4, 2005, final judgment was entered against him by the District Court for the Middle District of Florida enjoining him from future violations of the registration provisions of the federal securities laws and ordering disgorgement and civil penalties. SEC v. Surgilight Inc., SEC Litig. Release No. 19169, 2005 WL 770873 (Apr. 6, 2005) (M.D. Fla. Case No. 6:02-CV-413). Tsai consented to the final judgment without admitting or denying the allegations against him. Id. a. Promoter Defendants Defendants Yang, Markow, Goelo, Lou, K & J Consulting (Yang’s company), Global Guarantee (Markow’s company), and M & M (Lou’s company) are collectively referred to throughout this Opinion as the “Promoter Defendants.” Yang is a California resident. He currently works as a business consultant and owns his own building materials importer business. Yang holds a Ph.D. in mathematics and has a computer science background. In 1999, Yang worked as a consultant for Shenzhen Sinx Software Technology Corporation, which was later renamed Bluepoint. In that role, Yang was responsible for finding an American public shell corporation into which Bluepoint could merge. He was ultimately involved in negotiating and consummating the reverse merger between Max XI and Bluepoint. Yang controls K & J Consulting, Ltd, a British Virgin Islands company, through which he held and traded Bluepoint stock in 2000. Like Tsai, Yang is no stranger to securities litigation. On February 28, 2005 the District Court for the Central District of California entered a final judgment against Yang in SEC v. Hartcourt Companies. SEC Litig. Release No. 19133, 2005 WL 597024 (Mar. 15, 2005) (C.D. Cal. Case no. CV 03-3698). The Court enjoined him from future violations of the registration and anti-fraud provisions of federal securities law, ordered $186,619 in disgorgement, and imposed $20,000 in civil penalties. Markow is a California resident. He is a financial consultant with substantial experience conducting reverse mergers. He formed and controls Global Guarantee, which consults with other companies regarding their business plans and financing. In 2000, Markow acquired and sold Blue Point stock through Global Guarantee. He facilitated the reverse merger between MAS XI and Bluepoint. Markow is a repeated securities law violator. In 1994,1995, and 1999, the National Association of Securities Dealers (“NASD”) held Markow liable for monetary awards in arbitration proceedings based on his securities-related misconduct. (NASD Arbitration Awards; 12/3/2004 Markow Dep. 220-221, 223.) In 1998, California issued two “desist and refrain” orders against him for operating as a broker-dealer without a license and for selling securities that had not been qualified. (5/15/1998 Cal. Desist and Refrain Orders). In 2000, Alabama issued a “cease and desist” order against him for operating as an unregistered broker dealer. (3/3/2000 Ala. Cease and Desist Order.) Goelo is a resident of the Cayman Islands. Goelo knew Yang through internet investor message boards. He also knew Markow from his reputation as a professional in facilitating reverse mergers. When he learned that Yang was interested in taking Bluepoint public and trading on the American market, Goelo introduced Yang to Markow. Goelo owns and controls Xplorer Ltd. and Unikay Ltd. through which he bought and sold Bluepoint stock in 2000. Luo is a citizen of the People’s Republic of China but is a Georgia resident. He controls M & M, a Virgin Islands company through which he bought and sold Bluepoint stock in 2000. b. Other Defendants Richardson is the president, head trader and part-owner of Sierra a broker-dealer located in Columbus Ohio. Sierra served as a market-maker for Bluepoint when it began trading on the OTCBB. Geiger was a representative and trader at Sierra. He was ultimately fired. Sierra stopped operating in April 2003. NASD has repeatedly fined Sierra, Richardson, and Geiger for improper practices in as follows: • July 2008: Richardson permanently barred by NASD from association with any member of NASD because of his sales of unregistered securities. (Certified NASD Letter of Acceptance, Waiver & Consent, No. CMS030156 (July 2003).) • January 2003: Sierra fined $5,000 for buying and selling securities without maintaining its minimum net capital (Certified NASD Letter of Acceptance, Waiver & Consent, No. C8B030001 (Jan. 2003).) • July 2002: Sierra fined $10,000 jointly and severally with Richardson because Richardson permitted Geiger and other Sierra employees to work as equity traders without being registered. (Certified NASD Letter of Acceptance, Waiver & Consent, No. C8B020014 (July 2002).) Geiger was also fined $10,000 for this incident and suspended from association with any NASD member for 20 days. (Certified Web CDR for Richard Geiger.) • June 2000: Sierra $15,000 and Richardson $5,000 for faffing to accurately record the time and execution of securities sales in violation of NASD’s rules. (Certified NASD Letter of Acceptance, Waiver & Consent, No. C8A000036 (June 2000).) • November 1998: Sierra fined $2,500 for failing to report transactions accurately and timely and for failing to develop or document training procedures. (Certified NASD Letter of Acceptance, Waiver & Consent, No. C8B980040 (Nov. 1998).) • January 1997: While working at a different firm, i.e., not Sierra, Geiger was fined $10,000, suspended ten days, and barred from acting as a securities firm principal for one year because of his behavior at another trading firm. (Certified Web CDR for Richard Geiger.) Based on this censure, the state of Ohio refused to grant Geiger a securities sales license. (Id.) 2. Formation of the Shell Company, MAS XI On October 7, 1996, Tsai incorporated MAS XI in Indiana. MAS XI was a shell company with no business activity or operations of its own. It existed only to issue shares of stock and to be available for a reverse merger. MAS XI was authorized by its articles of incorporation to issue 80 million shares of common stock and 20 million shares of preferred stock. On the date of its incorporation, MAS XI issued 8.5 million shares of common stock to Tsai. He reported his beneficial ownership of 8.25 million shares with the SEC. Tsai was the CEO, president, and treasurer of MAS XI from its inception. As with his other shell corporations, Tsai formed MAS XI as a vehicle to accomplish a reverse merger in the future. To make MAS XI an attractive candidate for a reverse merger, Tsai wanted to register the company as a voluntary reporting company with the SEC and to clear its stock for trading on the Over-the-Counter Bulletin Board (“OTCBB”). Consequently, in April of 1999, Tsai made MAS XI a voluntary reporting company with the SEC by filing a Form 10-SB. In the Form 10-SB and subsequent related SEC filings, Tsai reported his transfer of MAS XI shares to individual shareholders in 1997-1998. S. Initial Transfers to Five “Former Director" Shareholders Tsai and MAS XI transferred shares to five individuals in 1997 and 1998. No registration statements were filed for these transfers. In his SEC filing, Tsai claimed that five people were former MAS XI directors. The five shareholders were: April C., David Carra (“Carra”), Charles Roberson (“Roberson”), Stephen Lee (“Lee”), and Rick Hemmer (“Hemmer”) (collectively “former directors”). April C. is a mentally disabled person who has lived in a group home since 1997. According to April C.’s case manager, April C. would not be able to understand what a corporate director is, what shares of stock are worth, or what legal documents, such as stock powers, mean. (11/9/2004 Hawkins Dep. 34-35.) Carra was a janitor in 1997 but is currently unemployed. Hemmer currently works in auto assembly and previously worked as a shoe salesman. Lee is currently a financial consultant and worked for an import/export company in 1997. (4/30/2004 Lee Dep. 10-12.) At least three of the five former directors were unaware of ever having been MAS XI directors. (4/29/2004 Hemmler Dep. 26, 37; 7/21/2004 Carra Dep. 12, 15; 4/30/2004 Lee Dep. 31.) Similarly, Roberson testified that while he remembers signing something with the word director on it, he did not think he would be required to perform any duties as a director. (8/28/2000 Roberson Dep. 39-40.) All of the shares held by the five former directors were “restricted,” meaning that they could not be traded publicly. MAS XI issued shares to the five former directors on two occasions. First, on January 1, 1997, MAS XI issued 500 shares of common stock to five former directors. Second, on September 30, 1998, MAS XI issued an additional 750 shares to those same five people. Tsai reported to the SEC that MAS XI transferred those shares to the former directors as “compensation for their services” as directors. (6/22/1999 Form 10-SB/A 27.) At his deposition, however, Tsai admitted that three of the purported former directors — April C., Lee, and Hemmer — never performed any services for MAS XI. (10/19/2004 Tsai Dep. 92.) He also testified that he does not remember if the other two, Carra and Roberson, performed any services for MAS XI. (Id.) On January 1, 1997, Tsai gave 50, 000 shares of his shares to each of the five former directors (a total of 250,000 shares). The former director shareholders were not issued stock certificates at the time they became shareholders. Instead, the shares held by the former directors were recorded as book entries. Stock certificates were only issued shortly before and in furtherance of MAS XI’s merger with Bluepoint in 2000. The five former director shareholders did not attend shareholder meetings. Instead, Tsai held annual shareholder meetings by himself. Although MAS XI’s bylaws required that shareholders be sent notice of the time and place of shareholder meetings, Tsai does not remember ever doing so. The five former director shareholders did not vote on MAS XI directors. Instead, Tsai elected directors by himself during shareholder meetings at which he was the only attendee. Tsai does not remember sending out written consent to shareholders regarding actions taken without holding an annual or special shareholder meeting as required by the bylaws. Similarly, Tsai was the only MAS XI director at the time the bylaws went into effect even though three directors were required. 4. Transfer to 28 Additional Shareholders In July of 1999, Tsai hired Kensington Capital Corporation (“Kensington”) to help get MAS XI cleared for public trading on the OTCBB. As part of that process, MAS XI had to file a Form 211 with NASD. On July 26, 1999, NASD sent Kensington a letter stating that MAS XI’s Form 211 application was deficient because MAS XI’s tradable shares were concentrated in the hands of only five shareholders. In response, Tsai arranged a transfer of shares from the five former director shareholders to 28 additional shareholders (“28 additional shareholders”). No registration statement was filed prior to this transfer. These transfers brought the number of MAS XI shareholders up to 33 — the five original shareholders plus the 28 additional shareholders (collectively “MAS XI Shareholders”). The additional shareholders were Tsai’s friends or people he met at bible study. Tsai arbitrarily decided how many shares to transfer away from the five former directors and how many shares each of the 28 additional shareholders would receive. Tsai did not tell the former director shareholders to whom their shares would be transferred. Nor did the 28 additional shareholders know where their shares came from. A number of the new shareholders erroneously thought that their shares came from Tsai. Tsai admitted that he arranged the transfers “to further the purpose of the company ... because the purpose of the company is to become publically traded.” (10/19/2004 Tsai Dep. 110-11.) He also admitted that helping the company in this way benefitted him. Tsai accomplished the transfers by using blank stock powers which were signed by the former directors near the time they received their shares. The blank stock powers were essentially blank forms which did not include information such as the number of shares that could be transferred or the name of the company at the time the former director shareholders signed them. Tsai claims that he discussed the transfer with the former director shareholders before transferring their shares to the 28 additional shareholders. Stephen Lee testified that he signed the stock power because Tsai “was a friend and it was something that he needed, so I signed. I didn’t even — at that time didn’t even know what stock power was.” (7/21/2004 Lee Dep. 30.) Similarly, Carra testified that at the time he signed the blank stock power, he thought he was being given a power, similarly to a power of attorney, over something. (7/21/2004 Carra Dep. 23.) Roberson also testified that he did not understand the stock power when he signed. (8/28/2000 Roberson Dep. 55.) Once Tsai had obtained the signed blank stock powers, he was able to transfer shares out of the names of the former directors without additional documentation. After the shares were distributed into the hands of the 33 MAS XI shareholders, Kensington submitted a new list of shareholders to NASD. On December 13, 1999, “acting in reliance upon the information contained in the [Form 211] filing,” NASD cleared MAS XI for public trading on the OTCBB. Tsai testified that after the Form 211 was completed, the shares held by the MAS XI shareholders became more liquid because they could be traded in a public marketplace, the OTCBB. Tsai admits that generally, liquid shares are more valuable than illiquid shares. To his knowledge, however, most of the MAS XI shareholders were unaware that the Form 211 process had been successfully completed. 5. MAS XI’s Merger with Bluepoint In December of 1999, Bluepoint was looking for a U.S. shell company with which to merge. Bluepoint was a computer software company that had developed a Chinese version of the Linux operating system. Around that time, Bluepoint hired Yang as a consultant. He was tasked with finding an American shell company and facilitating a reverse merger. Goelo knew Yang from an internet chat-room. Goelo introduced Yang to Markow who put Yang in contact with Tsai. Tsai and Bluepoint’s CEO negotiated a reverse merger between Bluepoint and MAS XI. On January 7, 2000, Tsai and Bluepoint’s CEO signed a Plan and Agreement of Reorganization, in which they formally agreed to conduct a reverse merger. Yang, Markow, and Goelo remained involved and in contact during the merger process and in the lead up to public trading. Markow kept a to-do list and schedule of merger-related tasks that he forwarded to Yang and Goelo. He also ferried documents between Tsai and Bluepoint’s CEO. Markow contacted Richardson at Sierra and asked Sierra to become Bluepoint’s market maker. Goelo posted information about Bluepoint on online stock trading message boards. Yang translated Bluepoint’s business plan into English. Tsai reviewed the business plan while deciding whether to agree to the merger. Markow also reviewed Bluepoint’s business plan and discussed it with Goelo. The business plan described Bluepoint’s product, its officers, the risks to the company, and the prospects for financial growth. One risk to Bluepoint’s future productivity mentioned in the business plan was that, based on the terms of a licensing agreement, Bluepoint was required to publish its source code. This meant that competitors could copy the source code and quickly develop similar products. Thus, Bluepoint’s technological advantage could be undermined relatively quickly. The business plan also discussed Bluepoint’s projected market share. Yang knew that Bluepoint’s total net sales as of the end of 1999 (the last quarter before public trading began) were only $23,027. Markow knew that revenues were “either nonexistent or more extremely minimal.” These business risks were never disclosed to the investing public. 6. February 2000 Sale of Shares to the Promoter Defendants To prepare for the merger, Tsai returned roughly 8.2 million of the shares he held to MAS XI. Those shares were can-celled. The day that the merger was formally approved, MAS XI effected a fifteen-for-one stock split. As a result of the stock split the 250,000 shares held by the 33 MAS XI Shareholders were now 3.75 million shares. The reverse merger was consummated on February 17, 2000. MAS XI changed its name to Bluepoint as part of the merger process. Following the merger, Bluepoint had 20 million shares of common stock outstanding. Of those shares, 15.5 million were restricted shares which were transferred to the Chinese officers and directors of Bluepoint pursuant to the terms on the Plan and Agreement of Reorganization. Yang was given 500,000 of those restricted shares. Tsai also owned another 450,000 restricted shares. That left approximately 4.5 million “unrestricted” shares outstanding. 3.75 million of those shares were held by the 33 MAS XI shareholders. According to Tsai, Markow informed Tsai that he had a group of investors that wanted to buy shares from the 33 MAS XI shareholders. (10/19/2004 Tsai Dep. 224.) Tsai arranged to transfer the 3.75 million shares by the MAS XI shareholders to Markow. On January 7, 2000, Goelo emailed Yang informing him that the purchase price for the shares was $250,000. Yang told Lou. A few weeks later Goelo, Yang, and Lou wired Markow the $250,000 as follows: $91,250 from Goelo on January 20, 2000; and $79,365 each from Yang and Lou on February 7, 2000. Goelo, Yang, and Lou all testified that the money they sent to Markow was to pay for the purchase of their shares from MAS XI’s shareholders. Markow testified that they sent him the money to compensate him for his role in the reverse merger. (3/1/2002 Markow Test. 68-69, 82, 83.) Markow has also testified, however, that he chose to take his remuneration for his role in the reverse merger in the form of a share of the outstanding 4.5 million shares. (12/3/2004 Markow Dep. 103.) As soon as Markow received the money, he sent a $250,000 check to Tsai. Markow and Tsai claim that the money was a finder’s fee paid to Tsai for his role in the reverse merger. After receiving the check, Tsai arranged the sale of shares in the name of the 33 MAS XI shareholders to the Promoter Defendants. First, Tsai issued stock certificates for the stocks issued to the 33 MAS XI shareholders. He then mailed the stock certificates and stock powers to Markow. Markow paid the 33 MAS XI shareholders $100 for their stocks. Each shareholder received the same flat fee payment regardless of whether they sold hundreds or thousands of shares. Consequently, the price paid per share varied from $.07 cents per share to $.67 per share. Several of the shareholders testified that they did not know that they had sold their shares or who Markow was. Markow admits that he never contacted the 33 MAS XI shareholders and did not negotiate with them to arrive at the $100 price. MAS XI did not issue a registration statement before the sale of the shares to the Promoter Defendants. Shortly thereafter, Markow re-certified the 3.75 million shares in the names of the Promoter Defendants, companies they controlled, and their relatives and friends. On February 22, 2000, Markow directed MAS XI’s transfer agent to make the following distribution: Yang 220,000 Shares K & J Consulting (Yang Controlled) 450,000 shares Yang’s family members 780,000 shares Lou 220.000 shares M & M (Lou Controlled) 410.000 shares Lou’s family members 370.000 shares Unikay Ltd. (Goelo controlled) 375.000 shares Xplorer Inc. (Goelo controlled) 400.000 shares Goelo’s Girlfriend 200.000 shares Global Guarantee (Markow controlled) 325,000 shares Yang controlled the 120,000 shares assigned to his mother and deposited them in his company’s brokerage account at Sierra. Lou controlled all of the shares assigned to his family members and deposited the 150,000 shares held by his child into his company’s account at Sierra. Goelo’s girlfriend assigned her shares to Goelo and he deposited them in his Sierra account. In total, the Promoter Defendants deposited 2.43 million of the 3.75 million shares into accounts at Sierra that they controlled. 7. The Promoter Defendants’ Percentage Ownership in Bluepoint After the merger, the Promoter Defendants and their family members collectively owned 18.75% of Bluepoint’s 20 million shares. The Promoter Defendants themselves held 14.5% (2.9 million shares) of Bluepoint’s total shares. Yang alone controlled 5.85% (1.17 million) of the total Bluepoint shares. Similarly, Goelo admits that he alone owned over 5% of the outstanding shares after he bought 40,000 additional shares on March 6, 2000. The Promoter Defendants never reported their percentage ownership of Bluepoint shares to the SEC. Goelo mentioned his concerns regarding percentage of ownership in a January 5, 2000 email to Markow in which he proposed a new distribution of stock ownership and stated “[t]here is the issue of controlling more than 5% of the stock of the Company to be considered as well and I may have to split the holding amongst two Companies: Unikay Ltd and Xplorer Inc.” By March 6, 2000, the Promoter Defendants collectively deposited 2.43 million Bluepoint shares in Sierra brokerage accounts they controlled. 8. Public Trading of Bluepoint Shares On March 6, 2000, Bluepoint began publicly trading on the OTCBB. In the lead up to public trading, Yang, Goelo, and Markow all worked on editing Bluepoint press releases. Markow fronted the money to pay for issuing the press releases. Prior to public trading, no registration statements had been filed for any MAS XI/Bluepoint shares. Bluepoint’s Form 8-K and Schedule 14f-1 were publicly available before the first day of trading. Those forms generally described Bluepoint’s business operations and its access to the Chinese Linux market. Yang admits that investors did not have any access to financial information about Bluepoint or information about Bluepoint’s business risks. Once public trading began the Promoter Defendants and Sierra sold Bluepoint shares. Shortly after trading began on March 6, 2000, Sierra bought 100,000 Bluepoint shares from K & J Consulting. Goelo purchased 40,000 of those shares from Sierra. Later that day, Sierra bought additional shares from Yang and Lou. Geiger transacted all of Sierra’s trades. Richardson approved Sierra’s purchases. He also purchased shares from Sierra and later resold those shares at a profit. Markow sold shares of Bluepoint on March 7, 2000 and August 10, 2000. Between March 6, 2000 and April 27, 2001 the Promoter Defendants sold their shares in Bluepoint at a profit. Yang sold his shares for $1,195,278. Lou sold his shares for $1,161,869. Markow sold his shares for $1,233,640. Goelo sold his shares for $216,861. 9. Additional Facts Relating to the Market Manipulation Claims Only the Defendants have moved for summary judgment on the price manipulation claims (Counts II, III, IV, and VI). Therefore, the facts relating to this claim are viewed in the light most favorable to the SEC, the non-movant. In the lead up to public trading of Bluepoint’s shares, Goelo engaged in an internet touting campaign. In December of 1999 and January of 2000, he posted numerous messages on “Silicon Investor,” an online investor message board. In his posts and emails Goelo extolled the virtues of Bluepoint stock, encouraged potential investor to “load up” when trading began, and suggested that they promote the stock to others. Goelo informed Yang and Markow that he was lining up support on the message boards. Yang instructed Goelo not to post information himself because they had “inside information.” After receiving that instruction, Goelo requested that two of his friends post positive information about Bluepoint online. They did so, posting dozens of positive posts on the Silicon Investor and “Raging Bull” sites during March of 2000, while trading was beginning. There is evidence suggesting that Markow and Goelo compensated one of those positive posters, defendant Armstrong, for his activities. OTCBB trading of Bluepoint stock began on March 6, 2000. That morning the price of Bluepoint shares shot up from an initial price of $6.00 per share to a peak of $21.00 per share less than an hour later. Sierra was a market-maker for Bluepoint. Geiger conducted Sierra’s market making activities on the first day of trading under Richardson’s supervision. A review of the trading activity on March 6, 2000 shows that Sierra was heavily involved in trading Bluepoint. From the first Bluepoint trade at 9:42 a.m. until 10:59 a.m., Sierra held the “inside bid” (the highest bid quote) for 69% of the time, while the next most active market maker held the inside bid for only 20% of the time. Similarly, as Bluepoint’s price rose from $6.02 to $19.50, Sierra accounted for 80% of the trading activity. During that time, Sierra raised its bid seven times to become the inside bid. The Promoter Defendants were also involved in trading on March 6, 2000. In fact, within the first eleven minutes of trading Defendants Yang, Goelo, Lou, and Sierra repeatedly traded with one another, twice in pre-arranged sales. Specifically, in the first trade of the day Yang sold Sierra 100,000 shares of Bluepoint for $6.00 per share. Immediately thereafter, Geiger sold 40,000 of those shares back to Goelo for $6.02 per share. Goelo bought the additional shares from Sierra even though he already owned 975,000 Bluepoint shares which he has acquired for $0.09 per share during the reverse merger. Furthermore, Yang, Goelo, and Geiger had prearranged those two sales as well as the price per share before the first day of trading. A few minutes after the Yang-SierraGoelo sales, Sierra bought an additional 100,000 shares from Yang and Lou (50,000 shares each from K & J Consulting, Yang’s company, and M & M, Lou’s company). Sixteen minutes after the first trade, a customer named Kim Giffoni (“Giffoni”) purchased 5,000 shares from Sierra at $7.1875 per share. Giffoni testified that Markow suggested that he make the purchase and arranged the transaction, including the price at which Sierra would sell the shares, before the first day of trading. Markow also asked Giffoni not to sell his shares during the first day of trading and offered him a financial incentive to comply with his request. At the time that the Promoter Defendants engaged in those transactions they controlled over 80% of the tradable Bluepoint shares (the “float”). They had also failed to register Bluepoint’s stock, which meant that very little public information was available about the company. For example, the investing public had not been informed of the business risks contained in Bluepoint’s business plan. Similarly, the Promoter Defendants had not disclosed their beneficial ownership of a substantial percentage of Bluepoint’s stock, so the investing public did not know who owned Bluepoint or that one of the main owners, Markow, was a repeated securities law violator. Sierra’s trading of Bluepoint shares on the morning of March 6, 2000 was irregular in several ways. Sierra’s first purchase of a single block of 100,000 shares from Yang was reported to NASD as four purchases, giving the appearance of more market activity than had actually occurred. Sierra also took an unusual “long” position in Bluepoint shares at the beginning of its first day of trading, meaning that it built up a large inventory of Bluepoint shares. In the first eleven minutes of trading, Sierra bought 200,000 shares of Bluepoint, investing $700,000. Geiger and Richardson also agreed to buy the first 100,000 shares from Yang for $6.00 even though they had not performed any market analysis before agreeing to that price. Instead, Geiger merely accepted the price suggested by Yang. Yang has testified that he, Markow, and Goelo were all concerned with maintaining the price of the Bluepoint shares. He admitted that it was important to everybody that the price be set and remain above four or five dollars a share (the threshold for penny stock status) because many investors will not buy and sell penny stocks. Finally, the evidence shows that Sierra increased its inside bid while it was already long on Bluepoint and immediately after it had purchased 100,000 shares. According to Arthur J. Pacheco (“Pacheco”), the SEC’s expert witness, there is “no legitimate reason for a market maker to increase its own inside bid immediately after the purchase of 100,000 shares unless its purpose was to move the price of the stock up.” (Pacheco Dec. ¶ 7.) B. Procedural History On April 11, 2003 the SEC filed a complaint against Tsai, Markow, Yang, Goelo, Lou, Geiger, Richardson, Sierra, Global Guarantee, K & J Consulting, M & M, and Armstrong for violations of the federal securities law. On September 2, 2004, the SEC moved for a declaration that Tsai’s attorney-client privilege and confidentiality had been waived under the crime-fraud exception. The parties extensively briefed the motion (“crime-fraud briefing”) and on October 4, 2004, the Court heard oral arguments on the motion. Magistrate Judge Abel granted the SEC’s motion in February of 2005. On July 20, 2005 the SEC and the moving defendants filed their motions for summary judgment. The SEC seeks partial summary judgment on Counts I (registration claim), VIII and IX (disclosure of beneficial ownership claims) of the Complaint. It also asks the Court to: (1) Permanently enjoin Tsai, Markow, Global Guarantee, Yang, K & J Consulting, Lou, M & M, Goelo and Richardson from violating Section 5 of the Securities Act; (2) Permanently enjoin Tsai, Markow, Global Guarantee, Yang, K & J Consulting, Lou, M & M, and Goelo from violating Sections 13(d)(1) and 16(a) of the Exchange Act and Rules 13d-1(a) and 16a-3; (3) Permanently enjoin Markow, Global Guarantee, Yang, K & J Consulting, Lou, M & M, and Goelo from violating Section 13(d)(2) of the Exchange Act and Rule 13d-2(a); (4) Order Tsai, Markow, Global Guarantee, Yang, K & J Consulting, Lou, M & M, and Goelo, Sierra, and Richardson to disgorge all of the profits they received from their alleged securities violations as well as prejudgment interest. The SEC seeks trial on all other claims. The moving Defendants cross-motioned for summary judgment on Counts I, VIII, and IX. They also seek summary judgment on the price manipulation claims (Counts II, III, IV, and VI). Defendants Richardson and Sierra did not join the other defendants’ summary judgment motion and did not file their own. Moreover, although Defendant Richardson requested (doc. no. 140) and ultimately received (doc. no. 193) additional time to file an opposition to the SEC’s motion for summary judgment, he never did so. Defendant Sierra also failed to oppose the SEC’s motion for partial summary judgment. During the pendency of the Parties’ motions for summary judgment several things occurred which are relevant to the resolution of the motions. First, final judgment was entered against defendant Jerome Armstrong on July 25, 2007. (Doc. no. 202). Armstrong consented to the entry of final judgment without admitting or denying the allegations of the complaint. Second, Defendant Global Guarantee failed to comply with the Court’s January 7, 2008 and March 17, 2008 Orders and the Court entered a default against it on February 27, 2009. Therefore, Global Guarantee’s liability is no longer in dispute. Third, on March 26, 2009, Defendant Richardson consented to the entry of final judgment against him without admitting or denying the allegations in the Complaint. The Consent was filed with the Court on March 30, 2009. (Doc. no. 216). In the Consent, Richardson agreed to the imposition of a permanent injunction against him. Consequently, Richardson’s liability will not be determined by the Court in its resolution of the parties’ motions for summary judgment. Finally, on March 31, 2009, the Court ordered an entry of default against Sierra pursuant to Federal Rule of Civil Procedure 55(a), with the amount of the default judgment to be determined by a future order. As a result, Sierra’s liability will not be discussed in or determined by this Order. On May 25, 2007 the Court granted the SEC’s motion for leave to file supplemental legal authorities in support of its motion for summary judgment. On May 23, 2008 the SEC again moved for leave to file supplemental legal authority in support of its motion for summary judgment motion. (Doc. no. 208). That motion is GRANTED. III. STANDARD OF REVIEW Summary judgment is proper if “there is no genuine issue as to any material fact [and] the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c). But “summary judgment will not lie if the ... evidence is such that a reasonable jury could return a verdict for the non-moving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In considering a motion for summary judgment, a court must construe the evidence in the light most favorable to the non-moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The movant therefore has the burden of establishing that there is no genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Barnhart v. Pickrel, Schaeffer & Ebeling Co., 12 F.3d 1382, 1388-89 (6th Cir.1993). The central inquiry is “whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.” Anderson, 477 U.S. at 251-52, 106 S.Ct. 2505. When ruling on a motion for summary judgment, a district court is not required to sift through the entire record to drum up facts that might support the nonmoving party’s claim. InterRoyal Corp. v. Sponseller, 889 F.2d 108, 111 (6th Cir.1989). Instead, a court may rely on the evidence called to its attention by the parties. Id. The standard of review for cross-motions of summary judgment does not differ from the standard applied when a motion is filed by only one party to the litigation. Taft Broad. Co. v. U.S., 929 F.2d 240, 248 (6th Cir.1991). Furthermore, [t]he fact that both parties have moved for summary judgment does not mean that the court must grant judgment as a matter of law for one side or the other; summary judgment in favor of either party is not proper if disputes remain as to material facts. Rather, the court must evaluate each party’s motion on its own merits.... Id. (citations omitted). IV. LAW’& ANALYSIS A. Section 5 Registration Provision Claims The SEC and the Defendants have cross-motioned for summary judgment on the SEC’s registration violation claims. Under Sections 5(a) and 5(c) of the Securities Act, securities must be registered with the SEC before any person may sell or offer those securities. 15 U.S.C. § 77e(a) & (c). The purpose of the registration requirement is to “provide adequate disclosure to members of the investing public.” SEC v. Harwyn Indus. Corp., 326 F.Supp. 943, 954 (S.D.N.Y.1971). To establish a prima facie violation of Section 5, the SEC must prove that: (1) no registration statement was in effect for the securities; (2) that the defendant directly or indirectly sold or offered to sell the securities; and (3) that means of interstate transportation or communication were used in connection with the offer or sale. Eur. & Overseas Commodity Traders, S.A. v. Banque Paribas London, 147 F.3d 118, 124 n. 4 (2d Cir.1998). Scienter is not an element of a Section 5 violation because Section 5 imposes strict liability on sellers of securities. SEC v. Calvo, 378 F.3d 1211, 1215 (11th Cir.2004); Swenson v. Engelstad, 626 F.2d 421, 424 (5th Cir.1980) (the Securities Act imposes strict liability on offerors and sellers of unregistered securities); SEC v. Cavanagh, 1 F.Supp.2d 337, 361 (S.D.N.Y.1998) (hereinafter Cavanagh I) (to prove a violation of Section 5, a plaintiff need not establish scienter). A defendant is liable as a seller under Section 5 if he was a “necessary participant” or “substantial factor” in the illicit sale. See, e.g., SEC v. Calvo, 378 F.3d 1211, 1215 (11th Cir.2004); SEC v. Holschuh, 694 F.2d 130, 139-40 (7th Cir.1982). Thus, even if a defendant did not directly sell securities to investors himself or pass title, he is liable for registration violations if he “has conceived of and planned the scheme by which the unregistered securities were offered or sold.” SEC v. Friendly Power Co., 49 F.Supp.2d 1363, 1371 (S.D.Fla.1999); see also Pinter v. Dahl, 486 U.S. 622, 647, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988). If the plaintiff is able to make out a prima facie case, the defendant bears the burden of showing that the challenged securities transactions fall within one of the enumerated exemptions from registration. SEC v. Ralston Purina Co., 346 U.S. 119, 126, 73 S.Ct. 981, 97 L.Ed. 1494 (1953); SEC v. Cavanagh, 155 F.3d 129, 133 (2d Cir.1998) (hereinafter Cavanagh II). The SEC claims that Tsai, the Promoter Defendants, Sierra, and Richardson violated Section 5. The SEC claims that each of the following unregistered transfers violated Section 5: (1) Tsai’s transfer of shares to the five former directors in 1997; (2) the August 1999 transfer of shares to the 28 additional shareholders arranged by Tsai; (3) the sale of 3.75 million MAS XI shares to the Promoter Defendants arranged by Tsai and Markow; (4) the Promoter Defendants’ post-merger sale of shares on the OTCBB; (5) Sierra’s post-merger sales of shares on the OTCBB; and (6) Richardson’s post-merger sale of shares on the OTCBB. The SEC also argues that Markow, Yang, and Goelo violated Section 5(c), by offering to sell unregistered Bluepoint securities by editing and distributing press releases announcing the March 6, 2000 public trading of Bluepoint. They further argue that Goelo offered to sell by posting messages on internet message boards designed to stimulate investor interest. The Parties do not dispute that no registration statements were filed or were in the process of being filed at the time of those stock transfers or press releases. The Defendants counter, however, that: (1) the SEC has not established a prima facie case regarding Tsai’s January 1997 and February 1999 “gift” transfers; (2) the 1997 and 1999 gift transfers and the February 2000 sales were exempt from registration under Rule 144(K); (3) sales of Bluepoint stock by the Promoter Defendants are exempt under Section 4(1); and (4) the SEC cannot rely on a non-fraud theory of liability because the registration violations alleged in the Complaint are based on fraud. 1. Section 5 Prima Facie Case Turning to the SEC’s prima facie case, it is undisputed that none of the securities sold by the Defendants were registered. The Defendants only attack the SEC’s prima facie showing regarding Tsai’s 1997 transfer to the five former director shareholders and his 1999 transfer to the 28 additional shareholders. With regard to the sales prong, the Defendants argue that Tsai’s 1997 and 1999 transfers to the MAS XI shareholders were gifts, not sales. In support, they point out that Tsai received no compensation from the former directors or 28 additional shareholders, but gave the shares away for free. With regard to the interstate means/use of the mails prong they argue that the SEC has not proved this element for the 1997 transfer. Every “disposition of a security or interest in a security, for value” constitutes a sale. 15 U.S.C. § 77b(a)(3). The value flowing from a transfer, however, need not come from the immediate recipient of the stock. Harwyn, 326 F.Supp. at 954 (transfer in the form of a dividend was for value even though stockholders paid nothing for the shares). The analysis of whether value was received must consider the entire transaction. In the Matter of Capital General Corp., Release Nos. 33-7008, 34-32669, 1993 WL 285801, at *11 (July 23, 1993); SEC v. Datronics Engineers, Inc., 490 F.2d 250, 253 (4th Cir.1973). Defendants are correct that a bona fide gift of a security would not constitute a sale. See Shaw v. Dreyfus, 172 F.2d 140, 142 (2d Cir.1949) (transfers were not sales under Section 16(b) of the Exchange Act where the parties conceded they were bona fide gifts). But, where the “donor” of a security derives some real benefit from the purported “gift,” it will be treated as a sale. 2 Thomas Lee Hazen, Law of Securities Regulation, § 5.1 (6th ed. 2009). Thus, where a “gift” disperses corporate ownership and thereby helps to create a public trading market it is treated as a sale. Datronics, 490 F.2d at 253-54; Capital General, 1993 WL 285801, at *10 (Capital General’s distributions of securities in a shell company were a sale in violation of Section 5 because value accrued to the defendants “by virtue of the creation of a public market for the issuers securities, and the fact that, as a public company the issuer could be sold for greater consideration”). In other words, where a gift is “followed by widespread downstream sales of those securities, these would-be gifts may be characterized as a subterfuge to evade registration.” Id.; accord Harwyn, 326 F.Supp. at 954 (payment of a stock dividend without registration violated section 5 because the purpose of the stock spin-off was to create a public market for the securities without registration); 24 William M. Prifti, Securities: Public & Private Offerings, § 9.18 (2008) (if gifted securities “are intended for the creation of a public market, the gifting clearly constitutes a disposition for value and the sale of a security”). In this case, Tsai admits that he created MAS XI, like his other 100 shell companies, for the express purpose of merging them with a private company. To do so, he needed to make MAS XI a public company. He also admits that he gifted shares to the former directors in 1997, “because we need [sic] shareholders so we can try to take the company public later on.” (3/25/2002 Tsai Test. 30.) Similarly, the 1999 gifts to the additional 28 shareholders were arranged by Tsai to further his goal of taking MAS XI public. The gifts were spurred by his attempts to get MAS XI cleared for trading on the OTCBB by completing the required Form 211. The undisputed record evidence shows that Tsai arranged the August 1999 gifts in response to the July 26, 1999 letter he received from NASD, which explained that MAS XI’s Form 211 application was deficient because its shares were concentrated in the hands of only five shareholders. (10/19/2004 Tsai Dep. 105.) To remedy this, Tsai admits that he arranged for the five former directors to transfer shares to the additional 28 shareholders. Those transfers were made without the five former shareholders knowledge of how many shares they would be “gifting” or to whom they were transferring their shares. Likewise, the 28 additional shareholders did not know where the shares were coming from and assumed it was from Tsai. Moreover, Tsai admits that both the 1997 and 1999 transfers were designed to further the MAS XI’s purpose “because the purpose of the company is to become publically traded.” (Id. 110-11.) He also admits that helping the company in this way benefitted him personally. Shortly after receiving notice of the additional shareholders, NASD cleared MAS XI for public trading on the OTCBB. Tsai retained an interest in MAS XI after the transfers. He also admits that he was ultimately paid a $250,000 fee for his role in the reverse merger with Bluepoint. Under these circumstances, Tsai’s purported “gifts” were for value and constituted sales under Section 5. Capital General, dealt with a nearly identical scenario. 1993 WL 285801, at *5, 10-11. In that case, a defendant named Yeaman was sanctioned for, inter alia, Section 5 violations arising from his plan to create public companies without registration and to later transfer control of those companies to promoters or privately held companies for a fee. Id. at *5. Like Tsai, Yeaman and his company created 69 shell companies over the course of several years. Id. He distributed shares of those companies to hundreds of people as “gifts” without filing registration statements. Id. After the gifts, Yeaman, like Tsai, kept a controlling interest in the shell companies. Id. He then advertised that his company had publicly-held issuers available for mergers and successfully transferred control of 36 of the shells to issuers or private companies. Id. For his efforts, he received over $750,000 in fees. Id. After the transfers of control, Yeaman retained stock in the companies and helped them prepare NASD filings so that they could be publicly traded on the OTCBB. Id. The SEC held that the unregistered “gifts” of stock constituted sales and violated Section 5. The SEC explained that “... the fact that the recipients may not have provided direct monetary consideration for the shares does not mean that there was not a sale or offer for sale for the purposes of Section 5.” Id. at *10. The SEC concluded that the shares were not distributed for a charitable purpose but so that Yeaman could sell control of the shell companies for significant value. Id. at *11. The SEC reasoned that the distributions were for value because “after the stocks were gifted, [their value] increased due to the creation of a public trading market for the securities.” Id. That increased value would flow to Yeaman both because he retained a controlling interest in the shells after the transfer and because he was compensated when he ultimately found buyers for the shells. Id. Like the defendant in Capital General, Tsai transferred shares as gifts as part of a plan to take his shell company public and transfer control of the company for a greater value. Defendants themselves argue that the MAS XI shares had little to no value before the Bluepoint merger. The transfers were necessary to clear the company for public trading on NASD, which in turn made the company a more attractive candidate for a reverse merger. Thus, Tsai’s 1997 and 1999 “gift” transfers were for value because they helped to create a public market in the securities. Tsai benefited from this because it increased the value of the shares he held in MAS XI and because it allowed him to collect a $250,000 fee in connection with the merger. Consequently, the “gifts” were sales triggering the Section 5 registration requirement. With respect only to the 1997 gift of shares to the five former directors, Defendants argue that the SEC has not shown that interstate means were used. The use of the mails or interstate means element of a Section 5 claim is “broadly construed to include tangential mailings or intrastate telephone calls.” SEC v. Softpoint, Inc., 958 F.Supp. 846, 861 (S.D.N.Y.1997). With relation to the 1997 sale, the SEC has provided evidence that one of the five former director shareholders, Stephen Lee, was living in New York at the time of the 1997 transfer and that he received his MAS XI stock certificates (including a certificate for the 1997 transfer) by mail while he was living in California. (4/30/2004 Lee Dep. 20-21, 25-26; 8/25/2000 Lee Test. 45-48). Upon receiving the stock certificates, Lee testified that he called Tsai to ask what they were. Lee also testified at his deposition, that while he was living in California he signed his blank stock power and mailed it to Tsai. (4/30/2004 Lee Dep. 29-31.) Although these mailings occurred after the 1997 transfer, they are sufficient to satisfy the interstate means/use of the mails requirement of Section 5. United States v. Wolfson, 405 F.2d 779, 784 (2d Cir.1968) (interpreting Section 5 to prohibit use of the mails to ship securities certificates after sale, to remit the proceeds to the seller, to send stock offers, to send buyers’ confirmation slips and to cover even more tangential uses); see also Aquionics Acceptance Corp. v. Kollar, 503 F.2d 1225, 1228-29 (6th Cir.1974) (use of the mails to transport a stock certificate months after a sale is sufficient to satisfy interstate requirement of Section 10b — 5); Nicewarner v. Bleavins, 244 F.Supp. 261, 265 (D.Colo.1965) (one post-transfer Chicago to Denver telephone call regarding an error in the transfer and one post-transfer letter about the same problem were sufficient to establish use of interstate means or of the mails). Furthermore, the Court notes that it is undisputed that Tsai’s 1999 sale to the additional 28 shareholders and his 2000 sales of Bluepoint shares on the OTCBB involved interstate means. Thus, even if the 1997 sale did not involve interstate means, as the Court believes it did, the SEC has established a prima facie case of a Section 5 claim based on his other transfers. As the SEC has established all the elements of its Section 5 prima facie case, the Defendants must prove that they qualify for an exemption from the registration requirement to avoid liability. 2. Applicability of Exemptions 4(1) and Rule 144(k) Defendants argue that they are entitled to summary judgment because their unregistered sales of securities fit into exemptions 4(1) and Rule 144(k) to the registration requirement. The Securities Act contains several enumerated exceptions to the registration requirement. The Defendants bear the burden of establishing their transfers fall within one of the enumerated exemptions from registration. Ralston Purina Co., 346 U.S. at 126, 73 S.Ct. 981; Cavanagh II, 155 F.3d at 133. “Registration exemptions are construed strictly to promote full disclosure of information for the protection of the investing public.” SEC v. Cavanagh, 445 F.3d 105, 115 (2d Cir.2006) (hereinafter Cavanagh IV). Section 4(1) of the Securities Act exempts “transactions by any person other than an issuer, underwriter, or dealer” from Section 5’s registration requirement. 15 U.S.C. § 77d(1). To clarify the definition of the term “underwriter” the SEC drafted Rule 144. The Rule creates a “safe harbor” by limiting the definition of the term to exclude those who meet the requirements of the Rule. SEC v. M & A West Inc., 538 F.3d 1043, 1050 (9th Cir.2008). Rule 144(k) on which Defendants rely, creates a “safe harbor” for unregister sales of restricted securities if: (1) the seller has not been an affiliate of the issuer for the preceding three months, and (2) at least two years have elapsed since the securities were last acquired from an issuer or affiliate of the issuer. 17 C.F.R. § 230.144(k). A defendant who does not satisfy the requirements of Rule 144 can still avoid liability if he does not meet the statutory definition of an underwriter. SEC v. Kern, 425 F.3d 143, 148 (2d Cir.2005). Conversely, a person who satisfies Rule 144 must still demonstrate that he is neither an issuer nor a dealer to qualify for the 4(1) exemption. Id. Defendants argue that the February 2000 sale of the MAS XI shareholders shares to the Promoter Defendants was exempt under Rule 144(k). They also claim that Tsai’s 1997 and 1999 sales and the Promoter Defendants’ sales of shares to the public are exempt from registration under Section 4(1) of the Securities act. The SEC contends that no exemptions apply to the sales and that it is entitled to summary judgment on the Section 5 violations. a. Rule 144(k) Safe Harbor The Rule 144(K) requires both (1) that a person wait 90 days after ceasing to be an affiliate before selling securities, and (2) that two years have elapsed between the time the securities were acquired from an affiliate or issuer and when they are resold. An affiliate is “a person that directly, or indirectly ... controls, or is controlled by, or is under common control with [the] issuer.” 17 C.F.R. § 230.144(a)(1) (emphasis added). Under that definition, shareholders who are controlled by the same person that controls the issuer are affiliates. SEC v. Kern, 425 F.3d 143, 149 (2d Cir.2005). In early February 2000, the Promoter Defendants bought their shares from the 33 MAS XI Shareholders and resold them less than a month later when public trading of Bluepoint shares began. The shareholders acquired their shares from Tsai in 1997 (for the five former director shareholders) and from the existing shareholders at Tsai’s direction in 1999 (for the additional 28 shareholders). The Defendants concede that Tsai was an affiliate of MAS XI, the issuer. Thus, the Defendants can only rely on Rule 144(k)’s safe harbor if the MAS XI Shareholders were not affiliates and held their shares for two years. The Promoter Defendants argue that the MAS XI shareholders were not affiliates because they did not have the power to cause MAS XI to prepare and file a registration statement. The SEC counters that Tsai exerted sufficient control over the MAS XI shareholders to render them affiliates. In SEC v. Kern, the Second Circuit analyzed whether shareholders were affiliates in a business transaction similar to the case sub judice. 425 F.3d at 149. Three of the Kern defendants were in the business of creating shell companies. Id. at 146. Those defendants purchased or incorporated three shell companies, which were the subject of the suit. Id. They distributed stock in each company as gifts to their friends and family. The shareholders were not involved in any of the shell companies’ decision-making, even though several of the share holders supposedly served as corporate officers. Id. Instead, the defendants controlled the shell companies and made business decisions. After the shares were gifted, the defendants submitted Form 211 filings to get the shell companies registered on the OTCBB. SEC v. Lybrand, 200 F.Supp.2d 384, 387 (S.D.N.Y.2002), aff'd sub nom. SEC v. Kern, 425 F.3d 143, 149 (2d Cir.2005). They then sought buyers for the corporations. Id. After finding a buyer, “defendants would gather the corporation’s shares from their friends and associates, who in most cases had held the shares for more than two years, and transfer ownership of the company in exchange for an agreed purchase price.” Id. The defendants bought the shares fro