Ninth Circuit Lifts $1.8 Million Civil Penalty in SEC Case
Majority Says Judge Wright, in Ruling on Summary Judgment Motion, Improperly Assessed Amount of Penalty
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals yesterday, in a 2-1 decision, lifted a civil penalty of nearly $1.8 million imposed on a Santa Monica businessman who violated securities laws, with the majority finding that a District Court judge improperly assessed that amount in a summary judgment although triable issues of fact exist.
Defendant Imran Husain contended in his opening brief that the $1,757,000 penalty was the highest “ever imposed on an individual in this Circuit in a Securities and Exchange Commission (SEC) enforcement action,” arguing:
“Nothing about this case suggests that this record-breaking penalty was warranted.”
Husain and New Jersey attorney Gregg Jaclin had engaged, from 2006-13, in an illegal scheme under which they created shell companies, made materially false statements concerning the companies’ financing in periodic filings, and sold the companies for a profit through public offerings. In criminal proceedings before District Court Judge Richard Seeborg of the Northern District of California, Husain was placed on probation, but in civil proceedings before District Court Judge Otis D. Wright II of the Central District of California, the monetary penalty was imposed.
Wright acted pursuant to a provision of the Securities Exchange Act of 1934.
Husain set forth in his opening brief in the Ninth Circuit:
“[T]he district court here sought to impose the maximum civil money penalty available. The tiered penalty statute at issue theoretically allows for a penalty up to the ‘gross amount of pecuniary gain to [the] defendant’ from any violative conduct, regardless of severity. The five shell companies for which the statute of limitations had not completely expired yielded sale proceeds of $1,787,000. The SEC asserted that virtually all of this amount represented Husain’s gross pecuniary gain. But those proceeds were paid over to third party entities, and there was no evidence that Husain owned or controlled those entities, let alone received anything remotely close to that amount of money. The district court nevertheless signed off on the SEC’s request that Husain pay the agency a penalty of $1,757,000.
“The statute did not permit the court to penalize Husain based on a vague theory that he had somehow vicariously ‘gained’ amounts that accrued to others. And. even making the incorrect assumption that Husain’s gross pecuniary gain somehow was $1,757,000. the district court gave no explanation for why the ostensible maximum penalty was required. Instead it simply incorporated by reference its analysis as to why an injunction was warranted.”
Yesterday’s majority opinion expresses agreement with Husain. It was authored by District Court Judge Kathryn H. Vratil of the District of Kansas, sitting by designation.
Ninth Circuit Judge Sandra S. Ikuta joined in Vratil’s opinion and Ninth Circuit Judge Kim McLane Wardlaw dissented.
“The district court did not explain its conclusion that the gross pecuniary gain of $1,757,000 to Husain was ‘undisputed.’ It apparently relied solely on Husain’s concession that the sales prices of five shell companies totaled $1,787,000. The district court did not explain how Husain’s concession about total ‘sales’ established the exact same amount in ‘gross pecuniary gain’ to him.” The visiting jurist said that admissions by Husain to which Wright alluded “establish only that he and Jaclin received total sales proceeds of $1,787,000” and the fact that he “had final authority over the shells and appointed shareholder representatives does not establish that he controlled or constructively received the proceeds.”
She spotted at least two factors cited by Wright—scienter and lack of contrition—which entail a credibility determination, not properly made on summary judgment. The case was remanded for further proceedings.
Wardlaw protested in her dissent:
“[T]he disputed facts that the majority identities are relevant only if we read the statutes to require that courts trace the final disposition of ill-gotten gains to each individual defendant. That is a misreading of the statutory text and our precedent, which holds that defendants are liable for the funds they receive as well as the fluids they distribute. Contrary to the holding of the majority, this is a question of law. not fact, and a question which the majority answers incorrectly.”
“[T]he plain text of the statutes, and our precedent, allows the “gross amount of pecuniary gain” to be calculated based on the gross proceeds from the shell companies that Husain controlled, absent business deductions, which was undisputedly $1,787,000.”
The case is U.S. Securities & Exchange Commission v. Husain, 21-55859. Wardlaw scoffed:
“The heart of the majority’s argument rests on the proposition that any assessment of the defendant’s ‘credibility’—including his degree of scienter or contrition—is almost always inappropriate on a summary judgment record. The majority’s logic could effectively preclude any court from awarding injunctive relief or maximum civil penalties without an evidentiary hearing, even for confessed violations of the securities laws….
“It has been held, she said, that in assessing the relevant factors, “an evidentiary hearing is not required to determine a remedy for violations of the securities laws.”
Vratil responded in a footnote:
“Our ruling does not reach so broadly. Indeed, in this case, Husain does not dispute that the district court properly entered summary judgment on liability and properly entered a permanent injunction. On the amount of a civil penalty, however, because the district court did not view the record evidence in the light most favorable to the non-moving party, it necessarily abused its discretion in imposing a civil penalty of $1,757,000. Even so, provided that a district court properly views the evidence…, we do not suggest that it would abuse its discretion by imposing the maximum civil penalty on summary judgment.”
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