SEC v. Blackburn ( 2021 )

Case: 20-30464 Document: 00516050750 Page: 1 Date Filed: 10/12/2021
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
October 12, 2021
No. 20-30464
Lyle W. Cayce
Clerk
Securities and Exchange Commission,
Plaintiff—Appellee,
versus
Ronald L. Blackburn; Bruce A. Gwyn; Michael A.
Mulshine,
Defendants—Appellants.
Appeal from the United States District Court
for the Eastern District of Louisiana
USDC No. 2:15-CV-2451
Before Dennis, Higginson, and Costa, Circuit Judges.
Gregg Costa, Circuit Judge:
The Securities and Exchange Commission charged these three
defendants and others with selling unregistered securities and misleading
investors during their operation of a penny stock company. On summary
judgment, the district court found the three defendants liable on several of
the Commission’s claims. Among other remedies, the district court ordered
disgorgement of the defendants’ fraud proceeds.
This appeal presents two questions. First, was summary judgment
warranted in the SEC’s favor on liability? Second, was the disgorgement
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No. 20-30464
award “for the benefit of investors” as Liu v. SEC, 140 S. Ct. 1936, 1949
(2020), requires? This is the first time a court of appeals is being asked to
decide the “awarded for victims” question since Liu was decided. Because
the answer to both questions is yes, we AFFIRM.
I.
Ronald Blackburn founded Treaty Energy Corporation in 2008.
Treaty was a small oil and gas company whose shares were traded over the
counter as “penny stocks.” 17 C.F.R. § 240.3a51–1 (defining penny stocks);
see SEC v. Kahlon, 873 F.3d 500, 502 n.1 (5th Cir. 2017) (explaining that a
“penny stock” is one sold over the counter for less than $5/share). When
the company was formed, Blackburn received around 400 million shares,
giving him an 86.4% interest in Treaty. Though Blackburn was never a board
member or an officer of Treaty—we will soon discuss the reasons he may not
have wanted those public affiliations—he maintained significant control over
the company. To cite some examples, Blackburn communicated with a
foreign government on behalf of Treaty, paid the company’s bills with his
stock proceeds, and appointed Treaty’s officers and directors.
Treaty was not Blackburn’s first involvement with a penny stock
company. He had previously worked at a gravel pit company that went
bankrupt. During the bankruptcy, Blackburn paid over $1 million to settle
the trustee’s claim that he had misappropriated company funds. And before
that penny stock bankruptcy, Blackburn was convicted of four federal tax
felonies.
Blackburn recruited people with cleaner records to serve as officers of
his new Treaty venture. Blackburn knew Michael Mulshine from before he
started Treaty and asked him to help form the new company. In exchange
for his help, Mulshine received over 16 million shares of Treaty. From then
on, Mulshine served as Treaty’s Assistant Secretary.
2
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Bruce Gwyn’s involvement with Treaty began a few years later when
he joined the Board of Directors. He also served as Treaty’s co-Chief
Executive Officer for some time before becoming Treaty’s Chief Operating
Officer.
In 2014, the SEC asserted several claims against Treaty and
individuals involved with Treaty, including Blackburn, Mulshine, and
Gwyn. 1 To give a taste of the allegations, we detail a few here.
The SEC alleged that the defendants failed to register millions of
shares they sold, in violation of sections 5(a) and 5(c) of the Securities Act.
15 U.S.C. § 77e(a), (c). These sales raised millions of dollars from
unsophisticated investors.
The SEC also claimed that Blackburn and Mulshine misrepresented
the company’s drilling results to investors. See 15 U.S.C. § 77q(a); 17 C.F.R.
§ 240.10b-5. In 2012, Mulshine published a press release stating that Treaty
had “struck oil” in Belize. The very next day, Belize’s government released
a statement “categorically refut[ing]” Treaty’s claims of “drilling success”
and calling the reports “false and misleading.” An unchastened Mulshine,
with Blackburn’s help, published a second press release entitled, “Treaty
Energy Provides Confirmation of its Belize Oil Find.” Treaty never
produced any oil in Belize.
The SEC further alleged that Mulshine deceived investors about
Blackburn’s role in Treaty. When Mulshine was searching for investors, he
reached out to a former coworker named Jeffrey Morgan. In their discussions
about the company, Morgan asked whether Blackburn was involved. If he
1
The company and one defendant settled with the SEC. The district court found
the other two defendants liable and imposed remedies against them in the same order we
are reviewing, but those two defendants did not appeal.
3
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was, Morgan did not want to invest—he had lost over $450,000 investing in
the gravel pit company after Blackburn had guaranteed it had a “positive
outlook.” Despite Blackburn’s significant control over Treaty, Mulshine
assured Morgan that Blackburn was not involved. Morgan subsequently
invested and lost about $20,000 this time.
The SEC similarly alleged that Gwyn failed to disclose in public filings
Blackburn’s involvement with Treaty. Gwyn prepared a Form 10-K on
behalf of Treaty that listed and described Treaty’s officers, directors, and
significant employees. But Gwyn failed to name Blackburn. Instead of
mentioning Blackburn by name throughout the rest of the filing, Gwyn
referred to him in general, nonspecific terms—as a “major shareholder,” an
“affiliate,” and a “related party.” The 10-K thus did not reveal that
Blackburn was controlling Treaty behind the scenes.
Both the SEC and defendants sought summary judgment. The court
denied the defense motion and granted the Commission’s motion in part. 2
The court concluded that defendants violated section 5 of the Securities Act
by selling unregistered securities. The court also held that defendants
violated section 10(b) of the Securities Exchange Act, rule 10b-5 thereunder,
and section 17(a) of the Securities Act by misrepresenting Treaty’s oil
production and Blackburn’s role in the company. The district court imposed
several nonmonetary remedies, including prohibiting defendants from acting
as officers or directors of any publicly held companies. The district court
then ordered disgorgement of profits and imposed civil monetary penalties.
2
The court denied the SEC’s claim that defendants violated federal securities laws
in connection with an offering for a West Texas project. The court also rejected the
Commission’s allegation that Blackburn and Mulshine aided and abetted Treaty’s
reporting violations.
4
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Defendants appealed. The SEC requested a limited remand in light
of the Supreme Court’s decision in Liu, which had been decided after the
district court’s disgorgement order. We granted the limited remand, after
which the district court modified its disgorgement procedure. Defendants
now appeal the district court’s summary judgment ruling and the amended
disgorgement order.
II.
We start with liability. In Blackburn’s and Mulshine’s joint briefing,
they argue summary judgment was improper because “numerous” disputed
fact issues exist. Yet their brief fails to identify any disputed issues; nor does
it sufficiently challenge the court’s analysis finding them liable based on
undisputed facts. Instead their brief attacks the SEC. It blames the agency
for overreliance on the victim who complained and on “professional internet
bashers who were destroying Treaty on behalf of unknown naked-short
sellers.” The brief further chastises the SEC for the number of “venomous”
press releases it issued about this case—claiming an “irresistible inference”
that the press releases were not written by the SEC at all, but instead by an
anonymous internet poster. The experienced district judge labeled these
accusations “nonsensical.” To the extent we can even understand these
arguments, they in no way challenge the district court’s thorough evaluation
of the record, which led to its grant of summary judgment in the SEC’s favor.
Given the absence of meaningful engagement with that analysis, the district
court’s ruling must be upheld for these two defendants.
Gwyn challenges the district court’s ruling that he violated Rule 10b-
5 by failing to disclose, in required public filings, Blackburn’s role with
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Treaty. 3 He argues there is a disputed fact issue on whether he had the
requisite scienter in omitting Blackburn from the Form 10-K. According to
Gwyn, there is no evidence he was aware of Blackburn’s criminal history
when he filed the 10-K yet that criminal history is part of why the district
court concluded the failure to disclose Blackburn’s involvement was
material.
But failing to disclose Blackburn’s involvement was not material only
if Gwyn knew of Blackburn’s criminal history. At a more basic level, it was
material because Blackburn was running Treaty. Investors make decisions
about whether to invest their money in a company, in part, based on the
company’s leadership. Even though Blackburn was not an officer of Treaty,
there is “little doubt that a reasonable investor would have wanted to know
the true identity” of who was leading the company. SEC v. Husain, 2017 WL
810269, at *8 (C.D. Cal. Mar. 1, 2017) (“Other than a corporation’s
financials, its leadership . . . would seem to be [among] the most important
pieces of information available to an investor.”); SEC v. Farmer, 2015 WL
5838867, at *9 (S.D. Tex. Oct. 7, 2015) (finding this information important
“given the ease and frequency with which microcap companies . . . can and
are manipulated by undisclosed control persons”); see generally SEC v. Texas
Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968) (en banc) (explaining that
material facts include those “which affect the probable future of the company
and those which may affect the desire of investors to buy, sell, or hold the
company’s securities”). Disclosure of Blackburn’s key role with Treaty
3
To establish liability under Rule 10(b)(5), the SEC must prove that the defendant
made “an untrue statement of material fact or omit[ted] a material fact” and did so with
an “‘intent to deceive, manipulate or defraud’” or “‘severe recklessness’” such that the
“‘danger of misleading buyers or sellers . . . is either known to the defendant or is so
obvious that the defendant must have been aware of it.’” Southland Sec. Corp. v. INSpire
Ins. Sols., Inc., 365 F.3d 353, 366 (5th Cir. 2004) (citation omitted).
6
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might have mattered to investors for a number of reasons, including but not
limited to his criminal convictions, the lawsuit he settled for
misappropriating over a million dollars from another company, or just his
general reputation—good, bad, or nonexistent—in the oil-and-gas industry.
Gwyn was fully aware of Blackburn’s wide-ranging management of
Treaty and of the Form 10-K’s disclosure requirements. He repeatedly
referred to Blackburn’s role in the 10-K but used “major shareholder,”
“affiliate,” and “related party” instead of the proper noun. On these
undisputed facts, Gwyn’s failure to list Blackburn’s name in the disclosure
was—at the very least—severely reckless, such that the “danger of
misleading” investors about Treaty’s leadership was “so obvious that
[Gwyn] must have been aware of it.” See Southland Sec. Corp. v. INSpire
Ins. Sols., Inc., 365 F.3d 353, 366 (5th Cir. 2004).
Although Gwyn is correct that summary judgment is uncommon on a
question of intent, it is appropriate when the undisputed evidence removes
any doubt on that issue. See SEC v. Sethi, 910 F.3d 198, 206–07 (5th Cir.
2018). That is the case here. Gwyn undeniably knew about Blackburn’s
paramount role in Treaty yet failed to disclose his name in the Form 10-K.
Summary judgment is warranted on this claim.
III.
Next is the challenge to the disgorgement remedy. The Exchange Act
authorizes the SEC to seek “equitable relief” that “may be appropriate or
necessary for the benefit of investors.” 15 U.S.C. § 78u(d)(5). The Supreme
Court recently addressed whether this statute supports the longstanding
practice of ordering disgorgement in securities cases. Liu, 140 S. Ct. at 1940. 4
4
A few months after the Supreme Court decided Liu, Congress amended the
Exchange Act to add a statutory subsection specifically authorizing disgorgement without
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The Court answered yes, noting that “equity practice long authorized courts
to strip wrongdoers of their ill-gotten gains.” Id. at 1942. Two things keep
such a remedy aimed at unjust enrichment from becoming punitive:
Disgorgement cannot exceed the defendants’ “net profits” and must “be
awarded for victims.” Id.
The district court’s disgorgement order satisfies those requirements.
First, the disgorgement amounts are the profits defendants received from
their securities fraud: $1,512,059.96 for Blackburn, $108,291.05 for
Mulshine, and $772,434.90 for Gwyn. As those figures show, the district
court did not impose joint-and-several liability but individually assessed each
defendant’s gain. See id. at 1945, 1949 (raising concerns about joint-and-
several disgorgement awards).
Second, the district court concluded that the SEC has identified the
victims and created a process for the return of disgorged funds. Under the
district court’s supervision, any funds recovered will go to the SEC, acting as
a de facto trustee. The SEC will then disburse those funds to victims but only
after district court approval.
The disgorgement thus is being “awarded for victims.” 140 S. Ct. at
1942. In contrast to a crime like insider trading—which injures the market as
the “for the benefit of investors” language. See 15 U.S.C. § 78u(d)(7) (“In any action or
proceeding brought by the Commission under any provision of the securities laws, the
Commission may seek, and any Federal court may order, disgorgement.”); see also 15
U.S.C. § 78u(d)(3)(A)(ii). The SEC argues in the alternative that the amended law applies
to this case that was pending when it was enacted and gives district courts broader authority
to order disgorgement than the general “equitable relief” provision of section 78u(d)(5)
that Liu interpreted. But we need not address this argument. As we discuss, the scheme
set up by the district court is sufficient under the “equitable relief” provision the district
court applied.
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a whole rather than individual market participants 5—defendants’ fraud
harmed identifiable investors. Because the SEC has already identified the
defrauded Treaty investors, it is certainly feasible—more than that, it is the
plan—that money the defendants return will go to the harmed investors.
This case therefore does not involve the issue Liu left open: whether
disgorgement is “awarded for victims” when the money is put into a
Treasury fund that helps “pay whistleblowers reporting securities fraud and
to fund the activities of the Inspector General.” Id. at 1947. 6 That issue
arises when it is “infeasible to distribute the collected funds to investors.”
Id. at 1948. Here it is not only feasible to identify the victims to whom the
funds will be distributed, that work has already been done.
The district court’s order—requiring disbursements to already-
identified victims with court supervision to ensure compliance with that
edict—easily satisfies Liu. 7 We do not hold that this scheme is the only way
to satisfy Liu as other cases may present greater challenges for ensuring that
disgorgement benefits victims. Whatever the floor may be for Liu
compliance, the remedy here rises well above it.
***
The judgment is AFFIRMED.
5
In at least one post-Liu insider trading case, the SEC withdrew its request for
disgorgement. See e.g., SEC v. Govender, 2020 WL 5758997, at *1–2 (S.D.N.Y. Sept. 28,
2020).
6
The district court initially ordered the disgorged funds to go into that Treasury
fund but changed the plan following the limited remand.
7
Defendants also challenge the district court’s award of civil monetary penalties.
They argue that because the penalty amounts were determined from the disgorgement
amounts, the penalties should be vacated if the disgorgement award was in error. As we
find no abuse of discretion on the court’s disgorgement award, the penalties also stand.
9