Securities and Exchange Comm'n v. Charles Liu ( 2018 )

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS OCT 25 2018
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
SECURITIES AND EXCHANGE No. 17-55849
COMMISSION,
D.C. No.
Plaintiff-Appellee, 8:16-cv-00974-CJC-AGR
v.
MEMORANDUM*
CHARLES C. LIU, XIN WANG a/k/a LISA
WANG,
Defendants-Appellants,
and
PACIFIC PROTON THERAPY
REGIONAL CENTER LLC; et al.,
Defendants.
Appeal from the United States District Court
for the Central District of California
Cormac J. Carney, District Judge, Presiding
Argued and Submitted October 11, 2018
Pasadena, California
Before: WATFORD and OWENS, Circuit Judges, and PRESNELL,** District
Judge.
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
**
The Honorable Gregory A. Presnell, United States District Judge for
the Middle District of Florida, sitting by designation.
Charles Liu (“Liu”) and his wife, Xin Wang (“Wang”), appeal the district
court’s entry of summary judgment in favor of the SEC, finding that the couple
violated Section 17(a)(2) of the Securities Act of 1933. Liu and Wang raised
approximately $27 million from Chinese investors under the EB-5 Immigrant
Investor Program (the “EB-5 Program”), which is administered by United States
Citizenship and Immigration Services and which allows foreign citizens to obtain
visas in exchange for investments in job-creating projects in the United States.
The Appellants’ project involved selling membership interests in an LLC,
which would then lend the proceeds of those sales to a second LLC; the second
LLC was supposed to use the lent funds to construct and operate a cancer treatment
center in California. Each investor was required to put up a $500,000 “Capital
Contribution” and a $45,000 “Administrative Fee.” According to the Private
Offering Memorandum (henceforth, the “POM”) provided to investors, the Capital
Contribution would be used for construction costs, equipment purchases, and other
items needed to build and operate the cancer treatment center, while the
Administrative Fee would be used to pay “legal, accounting and administration
expenses” related to the offering. Moreover, “[o]ffering expenses, commissions,
and fees incurred in connection with [the] [o]ffering” would be paid only from the
Administrative Fee, not from the Capital Contribution. The district court found
that the Appellants misappropriated most of the money raised, paying $12.9
2
million to marketing firms to solicit new investors, and paying themselves
approximately $8.2 million in salaries, although there was no mention of such
exorbitant salaries in the POM.1 Despite these expenditures, the Appellants never
even obtained the required permits to break ground for the cancer center.
In granting summary judgment, the district court ordered disgorgement of
the entire amount that had been raised from investors, imposed civil penalties equal
to the $8.2 million the Appellants had personally received from the project, and
permanently enjoined the Appellants from future solicitation of EB-5 Program
investors.
We have jurisdiction under 28 U.S.C. § 1291. A grant of summary
judgment is reviewed de novo. Padfield v. AIG Life Ins. Co., 290 F.3d 1121, 1124
(9th Cir. 2002). We affirm.
The Appellants seek reversal of the summary judgment order on numerous
grounds. They first contend that the limited-partnership interests they sold were
not “securities” within the meaning of Section 17(a)(2) 2 because the investors
1
As set forth in the POM, the manager of the first LLC was entitled to a
management fee of 3 percent of the funds raised, or approximately $800,000 in
total.
2
Section 17(a)(2) of the Securities Act of 1933, 15 U.S.C. § 77q(a)(2), makes
it unlawful for any person in the offer or sale of any “securities” to obtain “money
or property by means of any untrue statement of a material fact or any omission 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.”
3
were primarily interested in obtaining visas, not profits. Section 2(a)(1) of the
Securities Act of 1933, 15 U.S.C. § 77b(a)(1), defines the term “security” to
include, inter alia, “investment contracts.” The basic test for distinguishing
transactions involving investment contracts from other commercial dealings is
“whether the scheme involves an investment of money in a common enterprise
with profits to come solely from the efforts of others.” United Housing
Foundation, Inc. v. Forman, 421 U.S. 837, 852 (1975) (quoting SEC v. W.J.
Howey Co., 328 U.S. 293, 301 (1946)).
Even if it was not their primary motivation, the investors here were promised
a chance to earn a profit. The POM provided that if the cancer center project
succeeded, after five years the second LLC would repay its loan with interest “at
the rate of 0.25% per annum,” and these funds would be distributed to investors.
This promise is enough to establish that investors had some expectation of
receiving profits, as required under Forman.3 In addition, Liu hired American
securities lawyers to draft the POM under his supervision, and that document
repeatedly refers to the investments at issue as “securities.” For example, the first
page of the POM refers to them by that term five times. See Forman, 421 U.S. at
3
Counsel for the Appellants also argued that the investments were not
securities because the potential rate of return was lower than the expected rate of
inflation. The Appellants do not cite any authority requiring that an investment’s
potential return exceed projected inflation rates. Such a standard would be
unworkable and is not required by Forman.
4
850-51 (“There may be occasions when the use of a traditional name such as
‘stocks’ or ‘bonds’ will lead a purchaser justifiably to assume that the federal
securities laws apply.”).
The Appellants’ second complaint is that the district court improperly drew
adverse inferences based on the assertion of their Fifth Amendment rights during
their depositions. A district court’s decision to draw an adverse inference from a
party’s invocation in a civil case of the Fifth Amendment privilege against self-
incrimination is reviewed for abuse of discretion. Nationwide Life Ins. Co. v.
Richards, 541 F.3d 903, 909 (9th Cir. 2008).
Appellants complain of two such inferences: an inference that they
controlled a marketing firm that was paid $3.8 million and only brought in 10
investors, and an inference that the Appellants acted with a high degree of scienter,
justifying a permanent injunction against future solicitation of EB-5 Program
investors. See Aaron v. Securities and Exchange Commission, 446 U.S. 680, 701
(1980) (holding that degree of intentional wrongdoing evident in a defendant’s past
conduct is an “important factor” to consider when SEC seeks permanent
injunction). Courts have discretion to draw adverse inferences based on the
assertion of a Fifth Amendment privilege in a civil case, so long as there is a
substantial need for the information, there is not another less burdensome way of
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obtaining that information, and there is corroborating evidence to support the fact
under inquiry. Richards, 541 F.3d at 912.
The district court did not rely on the inference regarding control of the
marketing firm to support any conclusion in its summary judgment order. Thus,
even assuming arguendo that the district court erred in drawing that inference, the
error was harmless. As for the inference regarding scienter, the district court
needed that information to determine whether an injunction was warranted, and the
Appellants do not point to any other source from which the district court could
have obtained it. The inference was corroborated by several items of evidence
tending to show that, among other things, the Appellants organized and controlled
the project and that, at its outset, they entered contracts with marketers that would
require payments in excess of the sums raised by way of the Administrative Fee,
thereby violating the promises of the POM. In addition, the district court noted
that the $8.2 million the Appellants paid themselves was far in excess of the $2.2
million raised in Administration Fees, thereby necessarily putting in their own
pockets money that should only have been spent to construct and operate the
cancer center. The district court did not abuse its discretion in drawing the
inference that the Appellants acted with scienter.
The Appellants also argue that American securities laws do not apply to
their actions because there is no evidence that they made sales or offers to sell
6
within the United States. However, the Appellants did not raise this
extraterritoriality argument before the district court, and it has therefore been
waived. See, e.g., In re Mercury Interactive Corp. Sec. Litig, 618 F.3d 988, 992
(9th Cir. 2010) (“Although no bright line rule exists to determine whether a matter
has been properly raised below, an issue will generally be deemed waived on
appeal if the argument was not raised sufficiently for the trial court to rule on it.”)
(internal quotations omitted).
Finally, the Appellants contend that the district court’s order that they
disgorge $26,733,018.81 – the total amount they raised from their investors
($26,967,918) less the amount left over and available to be returned ($234,899.19)
– was erroneous. The court reviews a district court’s imposition of equitable
remedies, including injunctive relief, disgorgement, and penalties, for abuse of
discretion. SEC v. Goldfield Deep Mines Co., 758 F.2d 459, 465 (9th Cir. 1985);
SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109, 1113 (9th Cir. 2006).
Relying on Kokesh v. SEC, 137 S.Ct. 1635 (2017), the Appellants argue that
the district court lacked the power to order disgorgement in this amount. But
Kokesh expressly refused to reach this issue, id. at 1642 n.3, so that case is not
“clearly irreconcilable” with our longstanding precedent on this subject. Miller v.
Gammie, 335 F.3d 889, 900 (9th Cir. 2003) (en banc). They also contend that, in
setting the amount to be disgorged, the district court did not give them credit for
7
amounts they characterize as legitimate business expenses, such as rent payments
and deposits paid to equipment manufacturers. But the proper amount of
disgorgement in a scheme such as this one is the entire amount raised less the
money paid back to the investors. JT Wallenbrock & Assocs., 440 F.3d at 1114(stating that it would be “unjust to permit the defendants to offset against the
investor dollars they received the expenses of running the very business they
created to defraud those investors into giving the defendants the money in the first
place”).4
The district court also imposed civil penalties equal to the undisputed
amounts each of the Appellants directly received from the project – $6,714,580 for
Liu and $1,538,000 for Wang. As with the disgorgement order, the Appellants
argue that their “legitimate business expenses” should have been deducted from
these amounts. The Securities Act provides that violations involving “fraud,
deceit, manipulation, or deliberate or reckless disregard of a regulatory
requirement” and that “directly or indirectly resulted in substantial losses or
created a significant risk of substantial losses to other persons” may be punished by
4
To justify setting this disgorgement amount, the district court noted that the
contracts with the overseas marketers and a significant portion of Liu’s
compensation – both of which would necessarily require tapping into the funds set
aside for construction and operation of the cancer center – were set at the inception
of the project; the district court described this as “extensive evidence of a
thorough, long-standing scheme to defraud investors.”
8
imposition of penalties up to “the gross amount of pecuniary gain” to each
defendant. 15 U.S.C. § 77t(d)(2)(C). The Appellants do not challenge the district
court’s characterization of their violations as meeting both of these requirements,
and we find no abuse of discretion by the district court in imposing civil penalties
equal to the undisputed amount of each defendant’s gross pecuniary gain.
AFFIRMED.
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