Ussec v. Mark Feathers ( 2019 )

FILED
NOT FOR PUBLICATION MAY 14 2019
MOLLY C. DWYER, CLERK
UNITED STATES COURT OF APPEALS U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
U.S. SECURITIES & EXCHANGE ) No. 13-17304
COMMISSION, )
) D.C. No. 5:12-cv-03237-EJD
Plaintiff-Appellee, )
) MEMORANDUM*
v. )
)
MARK FEATHERS, )
)
Defendant-Appellant. )
)
U.S. SECURITIES & EXCHANGE ) Nos. 14-15466
COMMISSION, ) 14-15894
) 15-16018
Plaintiff-Appellee, ) 15-17200
) 17-15923
v. )
) D.C. No. 5:12-cv-03237-EJD
MARK FEATHERS, )
)
Defendant-Appellant, )
)
)
THOMAS A. SEAMAN, )
)
Receiver-Appellee. )
)
U.S. SECURITIES & EXCHANGE ) No. 14-15831
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
COMMISSION, )
) D.C. No. 5:12-cv-03237-EJD
Plaintiff-Appellee, )
)
v. )
)
NATALIE FEATHERS, )
)
Real-party-in-interest- )
Appellant, )
)
)
THOMAS A. SEAMAN, )
)
Receiver-Appellee. )
)
Appeal from the United States District Court
for the Northern District of California
Edward J. Davila, District Judge, Presiding
Argued and Submitted April 16, 2019
San Francisco, California
MARK FEATHERS, ) No. 15-70102
)
Petitioner, )
)
v. )
)
U.S. SECURITIES & EXCHANGE )
COMMISSION, )
)
Respondent, )
)
On Petition for Review of an Order of the
Securities & Exchange Commission
2
Argued and Submitted April 16, 2019
San Francisco, California
Before: D.W. NELSON, FERNANDEZ and BEA, Circuit Judges.
Mark Feathers (“Feathers”) appeals the district court’s judgment (No. 13-
17304) and the sanctions order entered against him by the United States Securities
and Exchange Commission (“SEC”) (No. 15-70102). Natalie Feathers appeals the
district court’s order regarding the disposal of receivership property and denying
her claim thereto (No. 14-15831).1 We affirm as to No. 13-17304, 14-15466, 14-
15894, 15-16018, 15-17200, 17-15923, and 14-15831. We vacate and remand
with directions as to No. 15-70102.
A. No. 13-17304
(1) Feathers asserts that the district court erred when it granted the SEC
summary judgment on its claim that Feathers committed securities fraud. We
disagree.
In particular, the parties’ arguments revolve around the SEC’s claim that
Feathers violated the prohibitions against the making of “any untrue statement of a
1
We deem waived and will not consider any issues not argued in the
replacement briefing filed on behalf of Feathers and Natalie Feathers, even if the
issues were raised in their previous briefing. That includes any issues raised in
Nos. 14-15466, 14-15894, 15-16018, 15-17200, and 17-15923; the replacement
briefing does not argue any of those issues.
3
material fact or any omission to state a material fact necessary in order to make the
statements made . . . not misleading.” 15 U.S.C. § 77q(a)(2); see also 15 U.S.C.
§ 78j(b); 17 C.F.R. § 240.10b-5(b). The SEC proceeded on the basis that it had to
show that Feathers had scienter when making the alleged misrepresentations or
omissions. Of course, the SEC did not have to show that a statement was literally
untrue because it was sufficient for the SEC to show that Feathers omitted to state
a material fact as a result of which the statements made were misleading. See SEC
v. Fehn, 97 F.3d 1276, 1289 (9th Cir. 1996); see also Matrixx Initiatives, Inc. v.
Siracusano, 563 U.S. 27, 38, 131 S. Ct. 1309, 1318, 179 L. Ed. 2d 398 (2011); TSC
Indus., Inc. v. Northway, Inc., 426 U.S. 438, 445, 449, 96 S. Ct. 2126, 2130, 2132,
48 L. Ed. 2d 757 (1976). As to scienter in this area, we have held that it “is the
mental state embracing intent to deceive, manipulate, or defraud. Reckless conduct
may also constitute scienter.” SEC v. Todd, 642 F.3d 1207, 1215 (9th Cir. 2011)
(citation and internal quotation marks omitted); see also SEC v. Platforms Wireless
Int’l Corp., 617 F.3d 1072, 1092–94 (9th Cir. 2010); SEC v. Dain Rauscher, Inc.,
254 F.3d 852, 856 (9th Cir. 2001); Hollinger v. Titan Capital Corp., 914 F.2d
1564, 1569 (9th Cir. 1990) (en banc).
With those standards in mind, we agree with the district court that there were
a number of material misstatements or omissions in the offering documents for the
4
Funds2 and that the evidence showed that Feathers either intended or recklessly
disregarded the untruth or misleading nature of those statements, and that “no
reasonable jury could conclude otherwise.”3 That is, statements to prospective
investors regarding loans made by the Funds and restrictions on loans to the
Manager4 were misleading to say the least. So, too, were statements that the source
of distributions to investors would be the Funds’ profits, rather than return of
capital. Moreover, accounting manipulations tended to hide the true profitability
facts from the investors and others. All of that indicated to past and future
investors that the Funds were more profitable than they were. “Surely the
materiality of information relating to financial condition, solvency and profitability
is not subject to serious challenge.” SEC v. Murphy, 626 F.2d 633, 653 (9th Cir.
1980).
(2) The district court did not err when it determined that Feathers, and
2
The “Funds” consisted of Investors Prime Fund, LLC (“IPF”) and SBC
Portfolio Fund, LLC.
3
Platforms Wireless, 617 F.3d at 1094; see also id. at 1085; San Diego
Police Officers’ Ass’n v. San Diego City Emps. Ret. Sys., 568 F.3d 725, 733 (9th
Cir. 2009).
4
The Manager was Small Business Capital Corp. (“SBCC”), which was
controlled by Feathers.
5
SBCC, violated the requirement that a broker,5 must, in general, register with the
SEC.6 To the extent that Feathers suggests he is not a broker because he sold
shares of the Funds for his own account, no evidence supports that assertion.
Because he failed to raise the issue in the district court, we decline to consider
Feathers’ argument that he and SBCC were engaged only in intrastate business and
were, therefore, exempt from regulation.7
(3) In light of parts A(1) and (2), supra, Feathers’ claim that he is not
subject to control person liability8 because there were no other relevant violations
fails.
(4) Feathers also asserts that the district court erred when it denied him
access to the frozen assets of the Funds and SBCC for his defense. We review the
district court’s decision for abuse of discretion,9 and find no abuse here. The
5
15 U.S.C. § 78c(a)(4)(A).
6
Id. § 78o(a)(1).
7
See Smith v. Marsh, 194 F.3d 1045, 1052 (9th Cir. 1999); Crawford v.
Lungren, 96 F.3d 380, 389 n.6 (9th Cir. 1996).
8
See 15 U.S.C. § 78t(a).
9
See SEC v. Capital Consultants, LLC, 397 F.3d 733, 738 (9th Cir. 2005);
Commodity Futures Trading Comm’n v. Noble Metals Int’l, Inc., 67 F.3d 766, 775
(9th Cir. 1995); see also United States v. Hinkson, 585 F.3d 1247, 1261–62 (9th
Cir. 2009) (en banc).
6
information before the district court showed a need to preserve the remaining
assets of the Funds and SBCC for the investors in the Funds, who were in danger
of suffering serious losses, and there is much reason to believe that the depleted
nature of the amount available from the Funds and SBCC was due to Feathers’
wrongdoing. Thus, the district court could, in its discretion, preserve those funds
for the investors.10
(5) The district court did not abuse its discretion when it ordered Feathers
to disgorge his “ill-gotten gains.” SEC v. JT Wallenbrock & Assocs., 440 F.3d
1109, 1113 (9th Cir. 2006); see also Platforms Wireless, 617 F.3d at 1096. Nor
did the district court abuse its discretion in determining the amount,11 which had
only to be a reasonable approximation of the amount Feathers gained by his
actions.12 The fact that Feathers used part of the money obtained from the Funds to
pay SBCC’s operating expenses is beside the point; it did not obviate the harm to
the Funds themselves.
B. No. 14-15831
10
Nothing in the indemnity clauses in the agreements between the Funds and
SBCC requires a different conclusion.
11
JT Wallenbrock, 440 F.3d at 1113–14.
12
See Platforms Wireless, 617 F.3d at 1096.
7
Natalie Feathers’ appeal from the district court’s order sustaining the
objections of the receiver to her claim against the receivership estate fails. She
asserts that the district court’s order should be reversed if the district court’s
judgment is set aside as to Feathers’ liability. Because we affirm that judgment,
we also affirm the district court’s order denying her claim against the receivership.
C. No. 15-70102
Feathers argues that the SEC’s order imposing remedial sanctions against
him must be set aside because the administrative law judge who made the initial
sanctions decision was unconstitutionally appointed. See Lucia v. SEC, __ U.S. __,
__, 138 S. Ct. 2044, 2055, 201 L. Ed. 2d 464 (2018). The SEC consents to a
voluntary remand of the sanctions order. We agree. See Cal. Cmtys. Against
Toxics v. EPA, 688 F.3d 989, 992 (9th Cir. 2012) (per curiam). We, therefore,
vacate the SEC’s sanction order and remand to the SEC with the direction that if it
chooses to proceed, it must order a new hearing before a different and properly
appointed administrative law judge. See Lucia, __ U.S. at __, 138 S. Ct. at
2055–56; Humane Soc’y of the U.S. v. Locke, 626 F.3d 1040, 1053 n.7 (9th Cir.
2010).
As to Feathers, AFFIRMED in Nos. 13-17304, 14-15466, 14-15894, 15-
16018, 15-17200, 17-15923, VACATED and REMANDED with directions set
8
forth above in No. 15-70102; as to Natalie Feathers, AFFIRMED in No. 14-15831.
Costs are to be taxed against Appellant Mark Feathers in Nos. 13-17304, 14-
15466, 14-15894, 15-16018, 15-17200, 17-15923; costs are to be taxed against
Appellant Natalie Feathers in No. 14-15831; costs are to be taxed against
Respondent SEC in No. 15-70102.
9