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SEC v. GenAudio Inc.

SEC v. GenAudio Inc.

United States Court of Appeals for the Tenth Circuit

April 26, 2022, Filed

No. 19-1454, No. 19-1455

Opinion

 [*910]  HOLMES, Circuit Judge.

Taj Jerry Mahabub, founder and Chief Executive Officer ("CEO") of GenAudio, Inc. ("GenAudio")—whom we collectively refer to as "Appellants"—attempted to secure a software licensing deal with a well-known technology company, Apple, Inc. ("Apple"). It was Mr. Mahabub's goal to integrate GenAudio's three-dimensional audio software—AstoundSound—into Apple's products. While Appellants were pursuing that collaboration, the Securities and Exchange Commission ("SEC") commenced [**2]  an investigation into Mr. Mahabub's conduct. Mr. Mahabub was suspected of defrauding investors by fabricating  [*911]  statements about Apple's interest in GenAudio's software and violating registration provisions of the securities laws in connection with sales of GenAudio securities.

Granting summary judgment for the SEC, the district court found that Mr. Mahabub defrauded investors and violated the securities laws. The court determined that Appellants were liable for knowingly or recklessly making six fraudulent misstatements in connection with two offerings of GenAudio's securities in violation of the antifraud provisions of the securities laws—that is, SEC Rule 10b-5 and § 10(b) of the Exchange Act.1 As to one of those statements, the court also determined that Appellants violated § 17(a)(2) of the Securities Act, which also proscribes the making of certain misstatements. In addition, the district court granted summary judgment in favor of the SEC on its claims that GenAudio and Mr. Mahabub violated §§ 5(a) and 5(c) of the Securities Act, which prohibit the offer or sale of unregistered securities. As a remedy for these violations, the court ordered disgorgement of Appellants' proceeds and imposed civil penalties.

Appellants now appeal from the [**3]  district court's decision, raising three overarching issues before us. First, Appellants assert that the district court erred in finding them liable for the six fraudulent misstatements under the securities laws. Generally, Appellants explain that Mr. Mahabub's statements to actual and potential shareholders were informed by a reasonable belief regarding Apple's interest in acquiring GenAudio's proprietary technology. Second, Appellants contend that the district court erred in concluding GenAudio did not qualify for two exemptions allowing its sale of unregistered securities—specifically, the private-offering exemption under § 4(a)(2) of the Securities Act, and the Rule 506 safe-harbor exemption of the SEC's Regulation D. Third, Appellants challenge the district court's legal authority to impose a disgorgement order and the court's computation of the disgorgement amounts, as well as the civil penalties that the court imposed on them. Exercising jurisdiction under 28 U.S.C. § 1291, we reject all of Appellants' arguments and affirm the district court's judgment.

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32 F.4th 902 *; 2022 U.S. App. LEXIS 11199 **

SECURITIES AND EXCHANGE COMMISSION, Plaintiff - Appellee, v. GENAUDIO INC., Defendant - Appellant, and TAJ JERRY MAHABUB, Defendant.SECURITIES AND EXCHANGE COMMISSION, Plaintiff - Appellee, v. TAJ JERRY MAHABUB, Defendant - Appellant, and GENAUDIO INC., Defendant.

Prior History:  [**1] Appeals from the United States District Court for the District of Colorado. (D.C. No. 1:15-CV-02118-WJM-SKC).

SEC v. Mahabub, 2017 U.S. Dist. LEXIS 210959, 2017 WL 6555039 (D. Colo., Dec. 22, 2017)

CORE TERMS

email, district court, investors, disgorgement, Offering, exemption, technology, Opening, alteration, buy-in, rollout, shareholders, securities law, summary judgment, accredited, violations, purported, business-expenses, negotiations, integrated, scienter, courts, material fact, briefing, expenses, reasonable belief, misrepresentations, representations, communications, bridge

Civil Procedure, Appeals, Standards of Review, De Novo Review, Summary Judgment, Summary Judgment Review, Standards of Review, Judgments, Entitlement as Matter of Law, Entitlement as Matter of Law, Genuine Disputes, Legal Entitlement, Burdens of Proof, Absence of Essential Element, Burdens of Proof, Nonmovant Persuasion & Proof, Securities Law, Securities Exchange Act of 1934 Actions, Implied Private Rights of Action, Civil Liability, Fraudulent Interstate Transactions, Scienter, Elements of Proof, Elements of Proof, Connection Requirement, Scienter, Recklessness, Express Liabilities, Misleading Statements, Materiality, Statements of Opinion, Civil Liability Considerations, Disclosures, Forward Looking Statements, Puffery, Predictions of Future Performance, Bespeaks Caution Doctrine, Abuse of Discretion, Evidence, Admissibility, Procedural Matters, Rulings on Evidence, Trials, Judgment as Matter of Law, Conditional Rulings, Initial Offerings of Securities, Securities Act Actions, Definitions, Preservation of Remedies & Rights, Exempt Classes of Securities, Control & Restricted Securities, Safe Harbor, Insider Trading, Disgorgement of Profits, Contracts Law, Remedies, Restitution, Equitable Relief, Governments, Courts, Judicial Precedent, Reviewability of Lower Court Decisions, Preservation for Review, Reliance, Justifiable & Reasonable Reliance, Regulators, US Securities & Exchange Commission, Penalties & Unlawful Representations, Penalties for Knowing & Willful Violations