by T. GormanPosted on Posted in SECActions

In recent rulings the SEC obtained mixed results on the question of what constitutes an investment contract. In one case the agency obtained a summary judgment ruling in its favor. In a second the Commission lost a motion to dismiss centered on the same question.

The win. In SEC v. Radical Bunny LLC, No. 11-16275 (9th Cir. Opinion issued July 10, 2013) the Commission prevailed, securing an order affirming summary judgment granted in its favor by the district court. Here the complaint claimed that beginning in late 2005, and continuing through June 2008, the company and four individual defendants raised over $189 million from at least 900 investors through a nationwide offer of unregistered securities in the form of promissory notes or investment contracts. The notes were sold using a series of misrepresentation, according to the SEC.

Each defendant settled, consenting to the entry of permanent injunctions prohibiting future violations of the antifraud and registration provisions. The individuals also agreed to pay disgorgement, prejudgment interest and a penalty. The individuals, however, reserved the right to appeal the summary judgment ruling.

On appeal defendants argued that there was a triable issue of fact as to whether the investments were a security under the test set forth in the Supreme Court’s seminal decision in SEC v. W.J. Howey Co., 328 U.S. 293 1946). The Court concluded that the facts proffered by the Commission met the test.

The undisputed facts demonstrated that Appellants sent each investor a document entitled “Direction to Purchase.” Investments made following the Direction were in a “common enterprise. All the profits were to come from the efforts of the Appellants who promised an 11% return annually. That profit was paid by Radical Bunny. Investors did not have or exercise any control over the underlying loans to be acquired by Radical Bunny with investor funds. Under these circumstances the Court had little difficulty affirming the district court’s conclusion that the Howey test had been met.

The loss. The Howey test was also the critical question in SEC v. Graham, Case No. 13-10011 (S.D. Fla. Ruling issued July 10, 2013). In this case the court concluded that the Commission’s amended complaint failed to adequately plead facts demonstrating that the key elements of the test were met. The case was dismissed without prejudice, leaving the SEC to perhaps try again.

Graham is an action against five individuals who are alleged to have raised about $300 million from 1,400 investors over a four year period beginning in 2004. The defendants “directly and through Cay Club Resorts and Marinas . . . [raised the money] through the offer and sale of units in purported five-star luxury resorts at 17 locations nationwide.” Cays Clubs, according to the complaint, were formed by two of the individual defendants in 2004 as a purported real estate development company. It was composed of about 100 entities controlled by three of the individual defendants. The organization, which was not incorporated in any state, collapsed in July 2008.

The critical issue on the motion to dismiss was the nature of the investment solicited by defendants. In this regard the complaint states that the defendants “offered investors the opportunity to purchase undervalued condominium units and obtain an immediate 15 percent return through a two-year leaseback agreement with Cay Clubs.” Investors were also told that their units would appreciate after being renovated by Cay Clubs.

The “leaseback was the key feature of the Cay Clubs investment,” the SEC stated. While some of the marketing materials described it as voluntary, the complaint states that it was a “critical selling point and a critical factor for investors” because the 15% was to be paid at the closing table which provided investors with an immediate return. To facilitate the process the defendants furnished investors with a list of preferred lenders who “provided 100 percent financing and typically issued 30-year fixed term mortgages to those who executed leaseback agreements.”

Judge James King turned to the Howey test as interpreted by the Eleventh Circuit to assess the adequacy of the Commission’s allegations. Under the Circuit’s precedent the court held that “Plaintiff must show that there was an investment, that it was a common enterprise, and that the buyer lacked control over the profitability of the investment,” citing Alunni v. Development Resources Group, LLC, 445 Fed. Appx. 288 (11th Cir. 2011). At the core of this test is an analysis of the purchase agreement. Here, however, “Plaintiff has neither filed a copy of the purchase agreement on the record, nor included adequate factual allegations in the Amended Complaint concerning the contents of the purchase agreement. Therefore, the Court finds that the Amended Complaint presents insufficient facts to support Plaintiff’s claims.” The motion to dismiss was granted, without prejudice to file a Second Amended Complaint.

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by T. GormanPosted on Posted in SECActions

In the FCPA case against film makers Gerald and Patricia Green, the Ninth Circuit Court of Appeals handed down a ruling last week which is virtually guaranteed not to end anything. In its decision the Court rejected a claim regarding the manner in which the restitution order was entered while all but invited a petition for rehearing en banc. U.S. v. Green, No. 10-50519 (9th Cir. Opinion Filed July 11, 2013).

The case centered on the work of Mr. and Mrs. Green in connection with the Bangkock International Film Festival. The couple had a number of contracts from the Tourism Authority of Thailand to run the Festival and related promotions. Under their direction the enterprise was hugely successful, generating profits of as much as $140 million. Over 1,600 journalists attended the events in 2006. Some thought the event would become the next Cannes Film Festival.

The difficulty was the manner in which Mr. and Mrs. Green secured the contacts. About $1.8 million was paid to the governor of Thailand’s Tourism Authority. The amount paid equaled about 13% of the value of the contracts.

An FCPA action was filed. A jury trial followed in which the couple was convicted. They were sentenced to serve six months imprisonment and three years supervised release. The court also ordered the payment of $250,000 in restitution. To enter this part of the sentencing order the court had to find under the applicable statute that there was an identifiable victim who either suffered a physical injury or pecuniary loss. The court concluded that these statutory requirements were met, finding there was a victim and a loss in terms of the “bribery figure amount.”

On appeal the Greens challenged the Court’s findings which are the predicate for the restitution order. Specifically, they argued that the jury, and not the court, should have made the requisite findings. The Ninth Circuit rejected this claim, for now.

The issue is an outgrowth of the Supreme Court’s decision in Apprendi v. New Jersey, 120 S. Ct. 2348 (2000) and its recent application of that case in Southern Union Co. v. U.S., 132 S. Ct. 2344 (2012). Apprendi held that “[o]ther than the fact of a prior conviction, any fact that increases the penalty for a crime beyond the prescribed statutory maximum must be submitted to a jury, and proved beyond a reasonable doubt.” The ruling has been applied to the fact-finding needed to trigger capital punishment and, in Southern Union, to criminal fines. It does not apply to fact-finding regarding whether sentences are consecutive or concurrent.

Following the Supreme Court’s ruling in Apprendi the Ninth Circuit rejected the contention that the ruling applied to restitution as Mr. and Mrs. Green now argue. Those decisions were handed down before Southern Union however. Thus Judge Kozinski stated that “Our precedents are clear that Apprendi doesn’t apply to restitution, but that doesn’t mean our case law’s well-harmonized with Southern Union. Had Southern Union come down before our cases, those cases might have come out differently.” Presently, those cases control the Court held. The panel could not overrule the circuit decisions since they were not clearly in conflict with Southern Union. The next step for Mr. and Mrs. Green seems quite clear.

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