memosuppsj.pdf

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MARC J. FAGEL (Admitted to Cal. bar)MICHAEL S. DICKE (Admitted to Cal. bar)

[email protected] F. LAMARCA (Admitted to Cal. bar)

[email protected]

ROBERT L. TASHJIAN (Admitted to Cal. bar)[email protected] A. BERMAN (Admitted to N.Y. bar)

[email protected]

Attorneys for PlaintiffSECURITIES AND EXCHANGE COMMISSION44 Montgomery Street, Suite 2800San Francisco, California 94104Telephone: (415) 705-2500Facsimile: (415) 705-2501

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF IDAHO

SOUTHERN DIVISION

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,v.

ALTERNATE ENERGY HOLDINGS, INC.,DONALD L. GILLISPIE, and JENNIFERRANSOM,

Defendants,

and

BOSCO FINANCIAL, LLC, and ENERGYEXECUTIVE CONSULTING, LLC,

Relief Defendants.

Case No. 1:10-cv-621-EJL-REB

PLAINTIFF SECURITIES AND

EXCHANGE COMMISSIONS

MEMORANDUM IN SUPPORT OF

MOTION FOR SUMMARY

JUDGMENT AGAINST

DEFENDANTS ALTERNATE

ENERGY HOLDINGS, INC. AND

DONALD L. GILLISPIE

Case 1:10-cv-00621-EJL-REB Document 167 Filed 06/01/12 Page 1 of 25


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SEC SUMMARY JUDGMENT MEM. i

Table of Contents

I. INTRODUCTION ................................................................................................................... 1

II. SUMMARY OF UNDISPUTED MATERIAL FACTS ......................................................... 2

A. AEHI and Gillispie Raised Millions fromInvestors Through an Unregistered Offering .............................................................. 2

B. AEHI and Gillispie REPEATEDLY MADE FALSESTATEMENTs About the Status of AEHIs Funding ............................................ 5

III. ARGUMENT ....................................................................................................................... 7

A. Summary Judgment Should be Granted onclaims Where, As Here, There is No Genuine

Issue For Trial ............................................................................................................. 7

B. AEHI and Gillispie Violated securities act section 5 .................................................. 8

1. The Commission Has Met Its Prima Facie Burden ........................................ 9

2. AEHI and Gillispie Cannot Show That the Offeringof AEHI Stock to the Public Was Exempt Fromthe Registration Requirement ........................................................................ 10

C. AEHI and Gillispie Violated SECURITIES ACTSECTION 17(a), Exchange Act section 10(b),and rule 10b-5 thereunder .......................................................................................... 15

1. Gillispie Made Material Misrepresentations Knowinglyand Recklessly ............................................................................................... 16

2. AEHI Made Material Misrepresentations and OmissionsThrough Gillispie .......................................................................................... 19

IV. CONCLUSION .................................................................................................................. 20



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SEC SUMMARY JUDGMENT MEM. ii

Table of Authorities

Cases

Aaron v. SEC, 446 U.S. 680 (1980) ........................................................................................ 16, 18

Basic, Inc. v. Levinson, 485 U.S. 224 (1988)................................................................................ 17

Baxter v. Palmigiano, 425 U.S. 308 (1976) .................................................................................. 19

Ernst & Ernst v.Hochfelder, 425 U.S. 185 (1976)....................................................................... 16

Franklin Supply Co. v. Tolman, 454 F.2d 1059 (9th Cir. 1972) ................................................... 20

Gebhart v. SEC, 595 F.3d 1034 (9th Cir. 2010) ..................................................................... 16, 18

Hill York Corp. v. Am. Int'l Franchises, Inc.,448 F.2d 680 (5th Cir. 1971) .................................................................................................... 13

Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990) ................................................ 16

Makor Issues & Rights, Ltd. v. Tellabs, Inc., 513 F.3d 702 (7th Cir. 2008) ................................. 19

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 495U.S. 574 (1985)...................................... 7

Nationwide Life Ins. Co. v. Richards, 541 F.3d 903 (9th Cir. 2008) ............................................ 19

Premium Plus Partners L.P. v. Goldman, Sachs & Co.,

648 F.3d 533 (7th Cir. 2011) ................................................................................................... 20

Rolf v. Blyth, Eastman Dillon & Co., Inc., 570 F.2d 38 (2d Cir. 1978)........................................ 18

SEC v. Banner Fund Intl, 211 F.3d 602 (D.C. Cir. 2000) ............................................................. 8

SEC v. Benson, 657 F. Supp. 1122 (S.D.N.Y. 1987) .................................................................... 19

SEC v. Bonastia, 614 F.2d 908 (3rd Cir. 1980) .............................................................................. 8

SEC v. Calvo, 378 F.3d 1211 (11th Cir. 2004) ........................................................................... 8, 9

SEC v. Cavanaugh, 445 F.3d 105 (2nd Cir. 2006) ......................................................................... 8

SEC v. Colello, 139 F.3d 674 (9th Cir. 1998) ............................................................................... 19

SEC v. Credit First Fund, L.P., No. CV 05-8741 DSF,2006 WL 4729240 (C.D. Cal. Feb. 13, 2006) .......................................................................... 13



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SEC SUMMARY JUDGMENT MEM. iii

SEC v. Current Fin. Servs., Inc., 100 F. Supp. 2d. 1 (D.D.C. 2000) .............................................. 9

SEC v. Hughes Capital Corp., 124 F.3d 449 (3d Cir. 1997) ........................................................ 16

SEC v. Murphy, 626 F.2d 633 (9th Cir. 1980) ....................................................................... Passim

SEC v. Phan, 500 F.3d 895 (9th Cir. 2007) .................................................................................... 9

SECv. Platforms Wireless Int'l. Corp.,617 F.3d 1072 (9th Cir. 2010) .......................................... 8

SEC v. Ralston Purina Co., 346 U.S. 119 (1953) .................................................................. Passim

SEC v. Rana Research, Inc., 8 F.3d 1358 (9th Cir. 1993) ............................................................ 16

SEC v. Recile, 10 F.3d 1093 (5th Cir. 1993)............................................................................. 8, 17

TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976) ....................................................... 17

W.R. Grace & Co., Inc. v. Western U.S. Indus. Inc.,608 F.2d 1214 (9th Cir. 1979) .................................................................................................. 19

Western Fed. Corp. v. Erickson, 739 F.2d 1439 (9th Cir. 1984) .................................................. 12

World Hospitality LTD. v. Wohl, 983 F.2d 650 (5th Cir. 1993) ................................................... 19

Statutes

15 U.S.C. 77c ............................................................................................................................. 15

15 U.S.C. 77d ....................................................................................................................... 10, 15

15 U.S.C. 77q ................................................................................................................... 7, 16, 19

15 U.S.C. 77e ......................................................................................................................... 7, 8

15 U.S.C. 78j .................................................................................................................... 7, 15, 19

Rules

FED.R.CIV.P. 56 ............................................................................................................................ 7

Regulations

17 C.F.R. 230.501 ................................................................................................................ 10, 12

17 C.F.R. 230.502 .......................................................................................................... 11, 13, 14



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SEC SUMMARY JUDGMENT MEM. iv

17 C.F.R. 230.504 ...................................................................................................................... 11

17 C.F.R. 230.505 ...................................................................................................................... 12

17 C.F.R. 240.106-5 ............................................................................................................... 7, 15



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SEC SUMMARY JUDGMENT MEM. 2

fundinga critical issue for a development stage company, as AEHI has acknowledged. And

beyond the offering documents, AEHI also made a number of specific claims in press releases

and shareholder letters about financing deals that it had purportedly struck to fund its nuclear

power plant project. These statements were also false and misleading and, thus, illegal. As

Gillispie knew, AEHI never obtained one cent in funding, nor any commitment to provide it,

outside of its illegal stock sales to investors. The facts showing the fraud are not in dispute.

Gillispies claims about funding are announced boldly in press releases and open letters and

emails, and their falsity is clear from AEHIs own financial statements and admissions in this

litigation and elsewhere.

While the evidence supporting this Motion is more limited than what the Commission

would introduce at trial, summary judgment on these undisputed material facts would resolve the

central claims alleged by the Commission in this action. Because AEHI and Gillispie violated

the registration and antifraud provisions of the securities laws, and because those violations are

evident based on undisputed facts and the limited evidence propounded herein, summary

judgment should be granted on the claims that they violated Section 5 and Section 17(a)(2) of the

Securities Act of 1933 (Securities Act), and Section 10(b) of the Securities Exchange Act of

1934 (Exchange Act), and Rule 10b-5 thereunder.

II. SUMMARY OF UNDISPUTED MATERIAL FACTS

The Commission also files its Statement of Undisputed Material Facts (SUMF)

pursuant to Local Rule 7.1(b)(1), as summarized below.

A. AEHI AND GILLISPIE RAISED MILLIONS FROMINVESTORS THROUGH AN UNREGISTERED OFFERING

Gillispie formed AEHI and took it public in 2006 through a reverse merger involving two

predecessor companies. SUMF 1. AEHI has, since its creation, been a publicly-traded



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company whose stock is quoted on the Pink Sheets. Id. During this period, Gillispie has been

Chief Executive Officer and Chairman of AEHIs board of directors (SUMF 4), and the only

full time senior executive of the company. SUMF 5. One director testified that the AEHI

board served as an advisory committee to Gillispie, who ran the company. SUMF 5.

AEHIs stated mission is to develop nuclear power plants in the United States. SUMF 3. It

describes itself as a development stage company which, from inception through the end of

2010 has never earned any revenue. Id.

AEHI has paid for its expensesincluding Gillispies compensationby issuing and

selling common stock to the investing public. SUMF 21-23, 42. AEHI acknowledges that it

has never registered any offer or sale of securities with the Commission. SUMF 29.

Nevertheless, company filings show that AEHI has raised more than $14.55 million in

unregistered stock sales, which it made continuously from October 2006 through the end of

2010, when this action was filed. SUMF 23.

AEHI sold stock through the use of documents called private placement memoranda or

PPMs. SUMF 7. These offering documents set the sale price of the stock, contained some

basic information about the company, and attached a two-page investor questionnaire for

purchasers to complete and return. SUMF 9-10. Gillispie updated the PPMs periodically to

change the sale price or to edit the text. SUMF 8. The PPMs did not, however, contain key

information like AEHIs current financial statements or its most recent filings with the

Commission. SUMF 15. As described further below, the PPMs also contained false statements

about the companys financing. See Part II(B), infra.

AEHI solicited investors for its offering in a number of ways. First, Gillispie sent e-mail

messages to large groups of associates and supporters in which he attached the latest PPM.

SUMF 16. In these e-mails Gillispie highlighted that the offering price was lower than the



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current market price. SUMF 16. Second, Gillispie encouraged recipients to forward the stock

offering to friends of friends and other prospective investors, and he offered finders fees as

a reward for doing so. SUMF 17-18. Third, Gillispie engaged paid helpers to solicit

strangers to purchase AEHI stock in exchange for sales-based commissions. SUMF 18.

Finally, AEHI advertised at least one investment orientation seminar on television, radio, and

in the newspaper. SUMF 19. At the seminar, held near San Francisco in 2009, Gillispie

personally touted AEHI stock, and encouraged attendees to invest. SUMF 20.

AEHIs offering was not limited to individuals who met any kind of sophistication or

accreditation criteria. In some instances, investors told AEHI that they had limited investing

experience and resources, but AEHI and Gillispie nevertheless allowed them to invest. SUMF

27. For example, AEHI sold restricted stock to a mail carrier who said in her PPM

questionnaire that she made $30,000 a year, had no idea of her net worth, and invested

occasionally, and to a school teacher who said that she made $62,000 a year and had a net

worth of $170,000, most of which was in a 401(k). SUMF 27. Beginning in at least 2010,

investors were told that they were not required to provide any information about their

background or financial condition. SUMF 28. AEHI regularly sold stock to investors who

returned PPM questionnaires blank, containing nothing but a name, address, and a signed check.

SUMF 26.

By AEHIs own account, it sent PPMs to approximately 850 people. SUMF 21. As

noted above, AEHI also offered stock through associates, paid helpers, and public seminar

advertisements. AEHI has acknowledged that it engaged in approximately 1,500 transactions in

its own stock. SUMF 24. As of March 31, 2011, there were at least 850 shareholders of record

of AEHI stock, plus those who owned shares in street name. Id. Many of these investors are

in Idaho, but they also live throughout the United States and across the globe. Id.



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B. AEHI AND GILLISPIE REPEATEDLY MADE FALSESTATEMENTS ABOUT THE STATUS OF AEHIS FUNDING

AEHI has repeatedly acknowledged that funding is critical to its plans to build a nuclear

power plant in Idaho. In public filings, AEHI estimated that it would cost approximately $100

million just to obtain regulatory approval for the project. SUMF 10. Thus, Gillispie has touted

new prospects for funding in his solicitations of investors. SUMF 12. AEHI has also conceded

that the project would not be possible if it is not able to raise the requisite funds. SUMF 13.

AEHI has never obtained funding for the nuclear project. From inception through the

end of 2010, AEHIs financial statements reflected no financing other than from the proceeds of

its unregistered offering. SUMF 13-14. And yet, at various points during this period, AEHI

announced to investors and the market that it had secured funding for its project. As described

below, these statements were false.

AEHI made numerous false statements about funding in its PPMs. Several PPMs

claimed that AEHIs project is funded. SUMF 12. Others claimed that AEHI had funding

commitments or funding arrangements. Id. One PPM claimed that AEHI had obtained $3.5

billion in funding. Id. Gillispie personally disseminated PPMs making this false claim to

investors as part of the illegal offering of securities. SUMF 16.

AEHI also issued numerous press releases in which it claimed to have struck specific

deals to bring in large financing packages. In reality, the claimed deals did not exist. Rather, the

only events to which Gillispie could refer were engagements that he signed with brokers who

promised to help AEHI hunt for funds. For example, on June 26, 2007, AEHI announced to the

public that it had Secure[d] $3.5 Billion in Funding for Proposed Idaho Energy Complex.

SUMF 33. In fact, AEHI had merely signed an engagement letter with Cobblestone Financial

Group, a real estate brokerage firm which AEHI hired to help it find a funding source. SUMF



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34. In that letter, which Gillispie signed, AEHI acknowledges and agrees that Cobblestone

does not guarantee that a commitment can be obtained. Id. Asked about AEHIs June 26,

2007, press release, Cobblestones president testified that, not only was the statement false, but

he told Gillispie so at the time. Id. Similarly, just six months later, on December 6, 2007, AEHI

announced to the public that it had Receive[d] $150 Million Private Placement Commitment

Letter for Idaho Nuclear Reactor Project. SUMF 35. Gillispie stated in the press release that

the commitment provides the initial funding to launch an important project for Idaho. . . . Id.

In fact, AEHI had only signed a best efforts letter agreement, this time with a firm called with

Silverleaf Capital Partners. SUMF 36.

Despite these earlier claims that financing was already in place, on June 5, 2009 AEHI

announced to the public that it had a Signe[d] agreement with Source Capital Group to fund

Idaho nuclear site. SUMF 37. Shortly after, in a September 9, 2009, letter to shareholders

(posted on the companys Web site), Gillispie reiterated this claim, stating that we have a

funding commitment from Source Capital for the site. SUMF 38. However, upon receiving

the September 9, 2009 letter, a Source Capital official wrote to Gillispie:

It was inappropriate and misleading for the company to notify its shareholders that thecompany has a funding commitment from Source Capital. What the company has fromour firm is a commitment to raise capital for the company on a Best Efforts basis.

SUMF 40. Gillispie also represented in his September 9, 2009 letter that AEHI had a large

energy trust that is willing to loan us up to $5 billion for the plant construction phase. SUMF

38. Gillispie has claimed that he could not recall the name of the energy trust, but he

conceded that, in any case, the loan offer was dependent on the companys first obtaining

regulatory approval from the NRC, an uncertain condition that he acknowledged would take

several years and many tens of millions of dollars to obtain. SUMF 39. One of AEHIs own

board members was not aware of the basis for this extraordinary claim. SUMF 39. Gillispie



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has never withdrawn, corrected, or clarified any of these false and misleading statements about

AEHIs funding. SUMF 41. Moreover, Gillispie has refused to answer questions about them in

this litigation, instead invoking his Fifth Amendment privilege at his deposition and in his

response to written discovery. SUMF 6.

III. ARGUMENT

Summary judgment should be granted as to the Commissions claims against AEHI and

Gillispie for violating the registration requirements in Section 5 of the Securities Act [15 U.S.C.

77e]. Summary judgment should also be granted as the Commissions claims against AEHI

and Gillispie for violating the antifraud prohibitions in Section 17(a) of the Securities Act

[15 U.S.C. 77q(a)], and 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(b)], as argued herein.

A. SUMMARY JUDGMENT SHOULD BE GRANTED ON CLAIMSWHERE, AS HERE, THERE IS NO GENUINE ISSUE FOR TRIAL

Summary judgment should be granted 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.P. 56(c). Once the

moving party has identified portions of the record that show the absence of a genuine issue of

material fact, the opposing party has the burden to controvert that showing. Matsushita Elec.

Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986). The opposing party cannot rely

merely on allegations or denials, but must, by affidavit or otherwise, set out specific facts

showing a genuine issue for trial. If the opposing party does not so respond, summary judgment

should, if appropriate, be entered against that party. FED.R.CIV.P. 56(e). If the record taken

as a whole could not lead a rational trier of fact to find for the non-moving party, there is no

genuine issue for trial. Matsushita, 475 U.S. at 587.



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There can be no reasonable dispute about the facts at issue here. AEHI admits that it

offered and sold company stock to investors without registration, and AEHI and Gillispie have

repeatedly told the public in offering documents and press releases that their project had

funding when, in fact, they have now conceded that AEHI has never been successful in

reaching this milestone. Summary judgment is thus appropriate on the Commissions claims

against AEHI and Gillispie for violating the registration requirements of the Securities Act, and

for violating the antifraud provisions of the Securities Act and the Exchange Act by misleading

the investing public about the status of AEHIs funding. See, e.g., SECv. Platforms Wireless

Intl Corp., 617 F.3d 1072 (9th Cir. 2010) (affirming summary judgment for the Commission on

fraud charge and registration violation); SEC v. Cavanaugh, 445 F.3d 105 (2d Cir. 2006) (same);

SEC v. Banner Fund Intl, 211 F.3d 602 (D.C. Cir. 2000) (same); SEC v. Recile, 10 F.3d 1093,

1097 (5th Cir. 1993) (same); SEC v. Bonastia, 614 F.2d 908 (3d Cir. 1980) (same).

B. AEHI AND GILLISPIE VIOLATED SECURITIES ACT SECTION 5Sections 5(a) and (c) of the Securities Act prohibit any person from offering or selling a

security in interstate commerce unless a registration statement is in effect or there is an

applicable exemption. See 15 U.S.C. 77e(a) and (c). The purpose of the registration

requirements of Section 5 is to protect investors by promoting full disclosure of information

thought necessary to informed investment decisions. SEC v. Ralston Purina Co., 346 U.S. 119,

124 (1953). To establish aprima facie violation of Section 5 of the Securities Act, the

Commission must show that: (1) a person, directly or indirectly, sold or offered to sell securities;

(2) no registration statement was filed or in effect; and (3) interstate means were used in

connection with the offer or sale. SeeSEC v. Calvo, 378 F.3d 1211, 1214 (11th Cir. 2004);

accord SEC v. Murphy, 626 F.2d 633, 640 (9th Cir. 1980).



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As to the first element against an individual, such as Gillispie, theprima facie case is met

where it is shown that a person engaged in steps necessary to and was a substantial factor in

an unregistered distribution. Murphy, 626 F.2d at 649-50 & 652; see alsoSEC v. Phan, 500 F.3d

895, 906 (9th Cir. 2007) (affirming liability of defendant who directed company attorneys to

draft contract for stock sale). Section 5 does not require proof that the defendant acted

intentionally or with any other mental state. Calvo, 378 F.3d at 1215; SEC v. Current Fin.

Servs., Inc., 100 F. Supp. 2d. 1, 6 (D.D.C. 2000) (Scienter is not required under Section 5 of the

Securities Act). Once the Commission establishes theprima facie elements of a Section 5

violation, the burden shifts to the party claiming the exemption or safe harbor from registration

to show the applicability of the exemption or safe-harbor. See Ralston Purina, 346 U.S. at 126

(1953).

1. The Commission Has Met ItsPrima Facie BurdenAEHI and Gillispie violated Sections 5(a) and (c) of the Securities Act by offering and

selling AEHI securities in unregistered transactions. First, there is no dispute that AEHI offered

and sold its common stock to hundreds of investors.1 There can also be no reasonable dispute

that Gillispie was a substantial factor in the offering. He was the Chief Executive Officer of

AEHI, and he personally distributed PPMs and other solicitations to potential investors.

Gillispie even appeared at the investor seminar to personally offer stock. Second, it is also

undisputed that AEHI has never filed a registration statement with the Commission concerning

the issuance of any AEHI securities. AEHI has admitted this fact in its discovery responses, and

it is also readily apparent from the Commissions public files. Finally, AEHI and Gillispie sold

1 AEHI also issued and granted stock as payment for services. SUMF 22. Thosetransactions, too, were not registered with the Commission. SUMF 29. The Commission islimiting the instant Motion, however, to AEHIs public offering of stock for cash.



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securities to investors across the country and the globe, satisfying the interstate commerce

element.

2. AEHI and Gillispie Cannot Show That the Offering of AEHIStock to the Public Was Exempt From the Registration Requirement

Although it is not the Commissions burden to disprove the existence of any exemption,

the record in this case makes plain that no exemption was available to AEHI. This is especially

true given that, in light of the Securities Acts broad remedial purpose, exemptions from the

registration provisions must be narrowly construed against the claimant. Murphy, 626 F.2d at

645. Consequently, as demonstrated below, the facts make clear that AEHI fell far short of

satisfying the exemptions upon which it claimed to rely.

Section 4(2) of the Securities Act excludes from the Acts registration requirements

transactions by an issuer not involving any public offering. 15 U.S.C. 77d(2). In other

words, this provisionwhich AEHI has cited the source for its purported exemptionapplies to

so-calledprivate sales of securities that do not involve a public distribution. Key to this

exemption must be the consideration of the need of the offerees for the protections afforded by

registration, particularly access to the information that would be available in a registration

statement. Ralston Purina, 346 U.S. at 125-27.

Based on the overarching considerations in favor of disclosure, courts have developed

four factors to decide whether an offering qualifies for the exemption under Section 4(2): (1)

the number of offerees; (2) the sophistication of the offerees; (3) the size and manner of the

offering; and (4) the relationship of the offerees to the issuer. Murphy, 626 F.2d at 644-45

(internal citations omitted). The Commission has also promulgated rules establishing a

registration exemption for qualifying private placements, which track the factors set out in

Murphy; see 17 C.F.R. 230.501-508 (Regulation D). The undisputed facts show that AEHI



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and Gillispies offering failed to qualify for an exemption under Section 4(2) of the Securities

Act, Regulation D, or any other provision.2

Number of Offerees: [T]he more offerees, the more likelihood that the offering is

public. Murphy, 626 F.2d at 645 (internal citations omitted). Similarly, under Regulation D,

exemptions are generally only available for offerings limited to 35 or fewer purchasers, unless

those purchasers meet certain accreditation requirements. 17 C.F.R. 230.505-506;3see infra

(discussing accreditation). Regulation D also excludes any offering that is effected through a

general solicitation or general advertising. 17 C.F.R. 230.502(c); see infra (discussing general

solicitation).

AEHI has acknowledged in its sworn discovery responses that it sent its offer to at least

850individuals. AEHIs internal records show that, in reality, AEHI made offers to many more,

as they engaged helpers to solicit additional investors in return for commissions. On the

numbers alone, AEHIs offering failed to qualify as a private transaction that might be exempt

2 Although AEHI solicited investors on numerous occasions, it engaged in one singleoffering as defined by the securities laws. Courts use a multi-factor test to determine whether anissuer has engaged in several offerings or one, integrated offering. The factors are: (a) whetherthe offerings are part of a single plan of financing; (b) whether the offerings involve issuance ofthe same class of securities; (c) whether the offerings are made at or about the same time; (d)whether the same kind of consideration is to be received; and (e) whether the offerings are madefor the same general purposes. Murphy, 626 F.2d at 645. Factors (a), (b), (d) and (e) arestraightforwardAEHIs PPMs were constant over four years as to the key aspects of itsoffering, i.e. that it was selling common stock, in return for cash, that it purportedly sought tofinance the initial stages of its nuclear project. SUMF 9. As to (c), timing, it is also clear thatthis was one offering, as AEHI sold stock in virtually every month from 2006 to the end of 2010.

SUMF 22.

3 Rule 504 of Regulation D provides an exemption for offerings without a limit onpurchasers. 17 C.F.R. 230.504(a)(1). Rule 504 is only available, however, to offerings of lessthan $1 million and for issuers who are not subject to Exchange Act reporting requirements.Id.AEHIs offer exceeded $1 million. SUMF 9. In addition, AEHI became an Exchange Actreporting company in October 2008. SUMF 2. Accordingly, the Rule 504 exemption isunavailable to AEHI.



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from registration. See, e.g.,Murphy, 626 F.2d at 645 (400 purchasers clearly suggests a public

offering rather than a private placement.) And because AEHIs offering was conducted through

a general solicitation, AEHI cannot meet its burden of showing otherwise. SeeWestern Fed.

Corp. v. Erickson, 739 F.2d 1439, 1442 (9th Cir. 1984) (To claim the private offering

exemption, evidence of the exact number and identity of all offerees must be produced.)

Sophistication of the Offerees: The private placement exemption in Section 4(2) is

intended for [a]n offering to those who are shown to be able to fend for themselves. Ralston

Purina, 346 U.S. at 644. As with the other factors, the burden lies with the issuer to show that

each potential purchaser had the sort of business acumen necessary to qualify as sophisticated

investors. Murphy, 626 F.2d at 646. Regulation D uses an accreditation standard. Investors

are only accredited under the rule if they have a net worth of $1 million or they earn more than

$200,000 per year (or $300,000 jointly with a spouse). 17 C.F.R. 230.501(a). Regulation D

requires that all but 35 purchasers meet this accreditation requirement in order for an offering to

qualify for exemption. 17 C.F.R. 230.505(b)(ii), 506(b)(ii). With large offerings like AEHIs

that exceed $5 million, all purchaserseven those 35 who need not meet the technical

accreditation requirementmust be reasonably believed to have such knowledge and

experience in financial and business matters that [they are] capable of evaluating the merits and

risks of the prospective investment. 17 C.F.R. 230.506(b)(ii). In other words, each and every

investor must be sufficiently sophisticated that they are deemed not to need the extra protections

that registration provides.

AEHIs own records indicate that it offered and sold stock to unaccredited and

unsophisticated investors. Moreover, AEHIs investor questionnaire told purchasers they need

not provide information about their financial condition and investing experience. Indeed, AEHI

and Gillispie showed utter indifference to investors income, net worth, and sophistication, as



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they sold shares regardless of whether investors provided this information. AEHI and Gillispie

thus cannot have reasonably believed that the targets of their offer were sophisticated and/or

accredited, as required by Section 4(2) and Regulation D. In any case, because AEHI and

Gillispie did not control the scope of their offering, which was conducted in part through third

party helpers and general solicitations, they cannot meet their burden of showing that all offerees

were appropriate targets for solicitation under either analysis. See, e.g., SEC v. Credit First

Fund, L.P., No. CV 05-8741 DSF, 2006 WL 4729240, at *12 (C.D. Cal. Feb. 13, 2006)

(Without knowing the identity of the offerees, it is impossible to make individual assessments

as to the offerees levels of sophistication and the manner in which they were contacted.)

Size and Manner of the Offering: The smaller the size of the offering, the more

probability it is private. Hill York Corp. v. Am. Intl Franchises, Inc., 448 F.2d 680, 689 (5th

Cir. 1971). Consistent with this principal, under Regulation D the requirements for exemption

are increasingly strict for offerings of less than $1 million (Rule 504), up to $5 million

(Rule 505), and more than $5 million (Rule 506). Moreover, Regulation D provides that if an

offering is made in the manner of a general solicitation or general advertising, no exemption is

available, regardless of all the other factors, and even if every investor is accredited. 17 C.F.R.

230.502(c). General solicitations and advertisements under Regulation D include, but are not

limited to, (1) [a]ny advertisement, article, notice or other communication published in any

newspaper, magazine or similar media or broadcast over television or radio; and (2) [a]ny

seminar or meeting whose attendees have been invited by general solicitation or general

advertising. Id.

AEHIs public filings show that it raised more than $14 million from investors between

2006 and the end of 2010, all of which came from the sale of common stock in AEHIs

unregistered offering. The volume of sales alone suggests a public offering. See, e.g.,Murphy,



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626 F.2d at 646 (sale of $7.5 million in securities was without question a sizeable offering

suggesting that it was public). AEHI also conducted its offering in the manner of a general

solicitation and with general advertising, over television, radio and in person. Aside from its

own solicitation of many hundreds of investors, AEHI hired helpers and promoters to solicit

additional investors, and it paid them commissions based on their sales of AEHI stock. AEHI

even held an investor seminars, which was the subject of its media advertisements, where

Gillispie personally touted AEHI stock. Offerings conducted through these forms of general

solicitation are precisely those for which the Section 4(2) exemption are notavailable, see

Ralston Purina, 346 U.S. at 123-24 (discussing meaning of public offer), and which are

specifically excluded from exemption under Regulation D. 17 C.F.R. 230.502(c).

The Relationship of the Offerees to AEHI: A court may only conclude that the

investors do not need the protection of the Act if all the offerees have relationships with the

issuer affording them access to or disclosure of the sort of information about the issuer that

registration reveals. Murphy, 626 F.2d at 647. Under Regulation D, issuers must provide

investors (other than those who meet the accreditation requirements) with specified written

disclosures within a reasonable time prior to sale. 17 C.F.R. 230.502(b). For companies that

do not report to the Commission under the Exchange Act, which included AEHI until October

2008, this includes, at a minimum, financial statements with a recent, audited balance sheet.

17 C.F.R. 230.502(b)(2)(B) (requiring disclosure of information required by Article 8 of

Regulation S-X). For Exchange Act reporting companies, this includes recent public filings. Id.

AEHI had no preexisting relationship with many of its offerees, because it engaged in a general

solicitation of the public and used promoters to solicit strangers.

Even had AEHI limited its offering to known associates or existing shareholders (which

it did not), the offering would still fail to qualify for the Section 4(2) exemption. Offerees must



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have access to the extensive information that would be required in a registration statement.

Ralston Purina, 346 U.S. at 125;Murphy, 626 F.2d at 647. InRalston Purina, for example, it

was not sufficient for the issuer to limit its unregistered offering to its current employees because

even they, unlike company executives, did not have access to the kind of information that would

be available in a registration statement. Ralston Purina, 346 U.S. at 125. AEHIs offerees were

far less close to key information than the employees inRalston Purina. AEHI failed to provide

offerees with financial statements or other financial information describing how the proceeds

would be used. Moreover, as described below, the materials that AEHI and Gillispie did provide

were frequently false, misleading and inaccurate.

For these reasons, AEHI and Gillispies offering was not exempt from the registration

requirements of the Securities Act under Section 4(2), Regulation D, or any other provision.4

C. AEHI AND GILLISPIE VIOLATED SECURITIES ACT SECTION 17(a),EXCHANGE ACT SECTION 10(b), AND RULE 10b-5 THEREUNDER

Section 10(b) of the Exchange Act and Rule 10b-5 make it unlawful for any person,

directly or indirectly . . . [t]o 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 . . . in connection with the purchase or sale of a

security. 15 U.S.C. 78j(b) and 17 C.F.R. 240.10b-5(b). Where the fraud alleged involves

public dissemination in a document such as a press release, annual report, investment prospectus

or other such document on which an investor would presumably rely, the in connection with

4 AEHI has also claimed that its offering is exempt from registration under Section 4(6) ofthe Securities Act. That provision provides an exemption for transactions involving offers orsales by an issuer solely to one or more accredited investors if certain other conditions are met.15 U.S.C. 77d(6). By its terms, Section 4(6) is never available for offerings in which there isadvertising or public solicitation. Id. Section 4(6) is also never available for offerings exceeding$5 million. 15 U.S.C. 77c(b). For the same reasons that AEHIs offering did not qualify for anexemption under Section 4(2), described above, Section 4(6) is also unavailable.



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requirement is generally met by proof of the means of dissemination and the materiality of the

misrepresentation or omission. SEC v. Rana Research, Inc., 8 F.3d 1358, 1362 (9th Cir. 1993).

Section 17(a)(2) of the Securities Act applies to false statements made in connection with offers

and sales. That provision prohibits any person, directly or indirectly, in the offer or sale of

securities, from obtaining money or property by means of untrue statements of a material fact or

by omitting to state a material fact necessary in order to make the statements made, in light of the

circumstances under which they were made, not misleading. 15 U.S.C. 77q(a)(2).

Violations of Exchange Act Section 10(b) and Rule 10b-5(b) require proof of scienter,

meaning knowing or intentional misconduct. Ernst & Ernst v.Hochfelder, 425 U.S. 185, 193,

197-99 (1976). Proof of scientermay be satisfied by evidence of recklessness, which is

misconduct that is so obvious that the actor must have been aware of it. Hollinger v. Titan

Capital Corp., 914 F.2d 1564, 1569 (9th Cir. 1990) (citations and internal quotations omitted).

Scienter may be established, therefore, by showing that the defendants knew their statements

were false, or by showing that defendants were reckless as to the truth or falsity of their

statements. Gebhart v. SEC, 595 F.3d 1034, 1041 (9th Cir. 2010). However, scienter need notbe proven to establish violations of Securities Act Section 17(a)(2); rather, proof of negligence

will suffice. Aaron v. SEC, 446 U.S. 680, 701-02 (1980). Negligence in this context consists of

the failure to exercise reasonable care or competence in communicating business information.

SEC v. Hughes Capital Corp., 124 F.3d 449, 453 (3d Cir. 1997).

The undisputed facts demonstrate that AEHI and Gillispie knowingly or recklessly made

misrepresentations of, or omitted to state, material facts in the offer and sale, and in connection

with the purchase and sale, of AEHI securities.

1. Gillispie Made Material Misrepresentations Knowingly and RecklesslyGillispie violated the antifraud provisions of the securities laws. First, he personally



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made and disseminated false statements about the status of AEHIs funding. These statements

came in the form of a signed letter to shareholders, press releases bearing his quotations, and

PPMs which Gillispie edited and personally distributed. When confronted with an example of a

PPM claiming that AEHIs project is funded, Gillispie did not deny its falsity, but instead

claimed in a sworn statement to this Court that the document was a forgery. SUMF 14. That

claim, too, was at least misleading, as Gillispie personally used PPMs with the very same false

statements to solicit investors. SUMF 16.

Second, Gillispies statements were material. False and misleading statements or

omissions are material where there is a substantial likelihood that a reasonable investor would

consider such statement or omission important in making an investment decision or if a

reasonable investor would consider the statement or omission as having significantly altered the

total mix of information available. Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988).

Misrepresentations and omissions are material as a matter of law if they involve facts that are so

obviously important to a [reasonable] investor, that reasonable minds cannot differ on the

question of materiality. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 450 (1976). The

Ninth Circuit has observed that [s]urely the materiality of information [in offering documents]

relating to financial condition, solvency and profitability is not subject to serious challenge.

Murphy, 626 F.2d 653 (citations omitted). This includes, among other things, false statements to

investors about financing arrangements. See, e.g.,SEC v. Recile, 10 F.3d at 1097 (false

statements that issuer had obtained long-term financing amply satisfy the materiality element of

a securities fraud claim.)

Gillispie has acknowledged that funding is critical to AEHIs existence. He has also

acknowledged that AEHIs project will cost billions of dollars. There can be no reasonable

dispute about whether funding was a material factor to be considered by investors. In fact, for a



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company with no revenue, operations, or regulatory approvals, funding was very likely the

primary factor to be considered by investors. Nor can there be a reasonable dispute about the

materiality of these statements in context. For participants in AEHIs unregistered offering, the

three-page PPM was the only current information they were provided. There, on the first page,

AEHI told them: The project has funding. And in the press releases, AEHIs funding claims

were in big, bold headlines. Indeed there was no purpose of the press releases except to tout the

purported funding deals. This is the essence of materiality.

Third, Gillispie knew his claims were false. As the founder, CEO and Chairman of

AEHI, a company purportedly planning to finance a multi-billion dollar nuclear power plant,

Gillispie had to know the status of his companys funding. Gillispie personally negotiated the

agreements with Cobblestone, Silverleaf and Source Capital, and so knew that they did not

secure or commit anything. Astonishingly, Gillispies contacts at Cobblestone and Source

Capital both told him that his press releases were false and misleading, and he still did not

correct them. At a minimum, Gillispie acted recklessly and with utter disregard for the truth of

his claims, which is itself sufficient to ground liability under the Exchange Act. See Gebhart,

595 F.3d at 1041;Rolf v. Blyth, Eastman Dillon & Co., Inc., 570 F.2d 38, 47-48 (2d Cir. 1978)

(recklessness where statements made without investigation and with utter disregard for whether

there was a basis for the assertions.) And it can hardly be disputed that Gillispie was at least

negligent, the standard of scienter under Section 17(a)(2) for untrue statements about material

facts that were made, like Gillispies, in connection with an offering of securities. See Aaron

446 U.S. at 701-02.

Finally, if more were needed (which it is not), Gillispies refusal to answer questions

about his knowledge, by instead invoking his Fifth Amendment privilege, removes any chance

that any other explanation can be offered. Parties are free to invoke the Fifth Amendment in



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civil cases, but the court is equally free to draw adverse inferences from their failure of proof.

SEC v. Colello, 139 F.3d 674, 677 (9th Cir. 1998) (affirming summary judgment against silent

party); accord Baxter v. Palmigiano, 425 U.S. 308, 318 (1976). Where, as here, there is a

substantial need for the information, there is not another less burdensome way of obtaining it,

and there is independent evidence of the fact about which the party refuses to testify, adverse

inference may be appropriately drawn. See Nationwide Life Ins. Co. v. Richards, 541 F.3d 903,

911-12 (9th Cir. 2008). In any event, Gillispie is now precluded from presenting evidence in

opposition as to matters on which he has invoked the Fifth Amendment privilege, including his

knowledge. See Nationwide Life, 541 F.3d 910 (Trial courts generally will not permit a party to

invoke the privilege against self incrimination with respect to deposition questions and then later

testify about the same subject matter at trial); SEC v. Benson, 657 F. Supp. 1122, 1129

(S.D.N.Y. 1987), cited in Colello, 139 F.3d at 678 (barring silent party from introducing

evidence in opposition to summary judgment).5

2. AEHI Made Material Misrepresentations and Omissions Through GillispieGillispies false and misleading statements in PPMs, press releases, and open letters are

all attributable to AEHI, and AEHI is thus also liable under the securities laws for fraud. A

corporation can act only through its officers and directors. See, e.g., World Hospitality LTD. v.

Wohl, 983 F.2d 650, 652 (5th Cir. 1993). [T]he doctrines of respondeat superior and apparent

authority remain applicable to suits for securities fraud. Makor Issues & Rights, Ltd. v. Tellabs,

Inc., 513 F.3d 702, 708 (7th Cir. 2008). A CEOs knowledge in making a false statement is

imputed to the company. See, e.g.,W.R. Grace & Co., Inc. v. Western U.S. Indus. Inc., 608 F.2d

5 As described above, see Part II(A) & (B), supra, there is no dispute that Gillispie usedmeans of interstate commerce or the mails to disseminate his false statements about AEHIsfunding. Thus the jurisdictional requirements of the antifraud provisions of the securities lawsare satisfied as a matter of law. See 15 U.S.C. 78j(b), 17 C.F.R. 240.10b-5(b) and 15 U.S.C. 77q(a)(2).



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1214, 1218-19 (9th Cir. 1979) (finding, as a matter of law, corporation was required to

answer for intentional or reckless misrepresentation of its agent); Franklin Supply Co. v.

Tolman, 454 F.2d 1059, 1070 (9th Cir. 1972) (the law is clear that the knowledge of an agent is

imputed to his principal particularly when he is in the executive echelon); Premium Plus

Partners L.P. v. Goldman, Sachs & Co., 648 F.3d 533, 537 (7th Cir. 2011) (whether a particular

employees knowledge is imputed to the employer is a question of law, not of fact).

Here, there is no dispute that Gillispie spoke for AEHI. Gillispie was AEHIs founder,

CEO and Chairman, and his statements were made in his capacity as such. His statements were

made in AEHI offering documents, AEHI press releases, and on AEHI letterhead. If it were not

Gillispie who spoke for AEHI, it would be hard to say who could, as Gillispie was the only full-

time senior executive of the company. Even an AEHI director testified that he had no

knowledge about the bases of Gillispies public claims, and that he viewed the board as a mere

advisory committee to Gillispie. Accordingly, Gillispies false and misleading statements are

attributable to AEHI, and AEHI is liable to the same extent as Gillispie under the antifraud

provisions of the Exchange Act and the Securities Act.

IV. CONCLUSION

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

Commissions motion for summary judgment against AEHI and Gillispie, as argued above.

Dated: June 1, 2012 Respectfully submitted,

/s/ David BermanSusan F. LaMarcaRobert L. TashjianDavid A. BermanAttorney for PlaintiffSECURITIES AND EXCHANGE COMMISSION


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