504 F.3d 1130 (9th Cir. 2007), 05-35541, Securities and Exch. Commn. v. Ross

Docket Nº:05-35541, 05-35542, 05-35544, 05-35545, 05-35546, 05-35547, 05-35552, 05-35554, 05-35555, 05-35559, 05-35577, 05-35578, 05-35580, 05-35663.
Citation:504 F.3d 1130
Party Name:SECURITIES and EXCHANGE COMMISSION, Plaintiff-Appellee, and Thomas F. Lennon, as appointed receiver for Alpha Telcom, Inc.; an Oregon Corporation; American Telecommunication Company, Inc., a Nevada Corporation; Strategic Partnership Alliance, LLC.; a Nevada Limited Liability Company; SPA Marketing, LLC, a Nevada Limited Liability Company, Receiver-
Case Date:October 15, 2007
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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Page 1130

504 F.3d 1130 (9th Cir. 2007)

SECURITIES and EXCHANGE COMMISSION, Plaintiff-Appellee,

and

Thomas F. Lennon, as appointed receiver for Alpha Telcom, Inc.; an Oregon Corporation; American Telecommunication Company, Inc., a Nevada Corporation; Strategic Partnership Alliance, LLC.; a Nevada Limited Liability Company; SPA Marketing, LLC, a Nevada Limited Liability Company, Receiver-Appellee,

v.

Priscilla ROSS; Kevin M. Rimple; Bruce F. Ruark; Dennis L. Baugher; Michael E. Girouard; Lance Lipoufski; Samir K. Ghosh; Robert Tripode; Richard Wilson; Harold C. Norris; Thomas O. Park; Joe Brandenburg; Ernest Bustos; Thell G. Pruitt, Intervenors-Appellants.

Nos. 05-35541, 05-35542, 05-35544, 05-35545, 05-35546, 05-35547, 05-35552, 05-35554, 05-35555, 05-35559, 05-35577, 05-35578, 05-35580, 05-35663.

United States Court of Appeals, Ninth Circuit

Oct. 15, 2007

Argued and Submitted Feb. 6, 2007.

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[Copyrighted Material Omitted]

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Ernest Bustos, San Antonio, TX, pro se, as the intervenor-appellant.

David R. Zaro, Allen Matkins Leck Gamble & Mallory LLP, Los Angeles, CA, for the receiver-appellee.

Christopher Paik, Esq., Securities & Exchange Commission, Washington, DC, for the plaintiff-appellee.

Appeal from the United States District Court for the District of Oregon; Owen M. Panner, Senior Judge, Presiding. D.C. No. CV-01-01283-OMP.

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Before: D.W. NELSON, ANDREW J. KLEINFELD, and JAY S. BYBEE, Circuit Judges.

BYBEE, Circuit Judge.

Ernest Bustos and sixteen other Intervenor-Defendants (collectively, "Bustos") appeal the district court's order requiring them to disgorge commissions they received through the sale of interests in pay phones being offered by Alpha Telcom, Inc. and related companies (collectively, "Alpha Telcom"). This disgorgement order issued in a summary proceeding ancillary to an enforcement action brought by the Securities and Exchange Commission ("SEC") against Alpha Telcom and its owner, Paul S. Rubera, alleging various securities law violations arising from the sale of these interests. See SEC v. Rubera, 350 F.3d 1084 (9th Cir. 2003). Bustos challenges the disgorgement order on several grounds, including lack of personal jurisdiction, improper venue, insufficiency of service of process, and due process violations arising from the district court's use of summary proceedings. He also appeals the district court's calculation of the amount of disgorgement. We hold that the district court lacked in personam jurisdiction over Bustos and, therefore, erred when it entered the order of disgorgement against him.

Because the theories advanced in the disgorgement action are novel, and the proceedings are complicated, we will recount the facts and proceedings in some detail.

I. FACTS AND PROCEEDINGS

Bustos worked as a sales agent for Alpha Telcom, selling investments styled as purchases of pay telephones and management services from Alpha Telcom and its affiliates. In fact, as detailed in our Rubera opinion, while Alpha Telcom's business plan was curiously anachronistic--selling service contracts on pay phones--its business model was timeless: the Ponzi scheme. See Rubera, 350 F.3d at 1087-89. As in all Ponzi schemes, expenses far exceeded revenues, and "returns" to investors were funded by monies obtained from more recent investors. On August 24, 2001, Alpha Telcom filed voluntary petitions for bankruptcy.

A. The SEC Enforcement Action

On August 27, 2001, the SEC commenced a civil enforcement action against Alpha Telcom for violations of the federal securities laws. On the same day, the district court appointed a receiver ("Receiver") to manage the corporation and preserve its assets for eventual distribution to the injured investors. The Receiver's appointment was confirmed on September 6, 2001.

In the underlying enforcement action, the district court held that the "investment opportunity" offered by Alpha Telcom was actually a security for purposes of the Securities Act of 19331 ("the Act") and that Alpha Telcom had violated § 5 of the Act by failing to register the securities with the SEC prior to selling them in interstate commerce. SEC v. Alpha Telcom, Inc., 187 F.Supp.2d 1250, 1258 (D. Or. 2002). The district court granted equitable relief against Rubera, the sole owner of

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Alpha Telcom, in the form of a permanent injunction against future violations of the securities laws and disgorgement in the amount of $3,750,707.66, representing "gross wages, shareholder compensation, shareholder loans, and other payments to Rubera and his family." Id. at 1262-63. However, the court declined to impose civil penalties under § 20 of the Act, concluding that they were "not warranted" given that this offense was Rubera's first violation and "his conduct did not amount to fraud, deceit, manipulation, or the like." Id. at 1263. We affirmed the district court in all respects. See SEC v. Rubera, 350 F.3d 1084 (9th Cir. 2003).

B. The Disgorgement Motion and Subsequent Proceedings

On December 23, 2003, approximately two weeks after we decided Rubera, the Receiver filed a motion to disgorge $21 million in commissions on the sales of these unregistered securities from Alpha Telcom's sales agents.2 In its motion, which the SEC joined, the Receiver styled its requested relief as "[r]equiring all Agents to disgorge Commissions received for their unlawful sale of unregistered securities in violation of Sections 5(a) and 5(c) of the Securities Act of 1933...." Citing our decisions in SEC v. Wencke, 783 F.2d 829 (9th Cir.1986), and SEC v. Hardy, 803 F.2d 1034 (9th Cir. 1986), the Receiver further requested the court to allow it to proceed "through summary proceedings," an approach he argued was permissible "in equity receivership cases such as this." The Receiver asserted that the district court had broad powers to order disgorgement of "ill-gotten gains" and that the commissions, which were paid "to compensate and reward the Agents for their illegal sale of unregistered securities to investors," were "in fact the ill-gotten gains received from these investors ...." According to the Receiver, "the Agents provided no benefit to Alpha other than to facilitate the process of luring in additional new investors." The Receiver asserted that it was beyond dispute that "the money used to pay the Commissions to the Agents were ill-gotten gains from the sales of unregistered securities to unsuspecting investors." Because "the Commissions were paid to [the Agents] specifically for their role in these illegal sales of the unregistered securities," the agents had "no legitimate claim to the Commissions."3

Joining the Receiver's motion, the SEC argued that "it is well-established that District Courts may order disgorgement by nonparties in Commission enforcement actions." According to the SEC, Disgorgement was proper here because (1) the court had already held that the investments were unregistered securities and thus were sold in violation of § 5 of the Act, rendering any proceeds "ill-gotten gains"; (2) the Agents had "no legitimate claim to these funds, as there is no evidence that they provided services to [Alpha Telcom]

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in exchange for the commissions ...."; and (3) even if the Agents did "expend[] effort," they have no legitimate claim "because they offered and sold the securities in violation of the federal securities laws."

In support of its motion, the Receiver submitted detailed information about the financial condition of the Receivership Entities and of commissions paid out to each of the sales agents. On either December 24 or 31, 2003, 4 it sent a Notice of Hearing on the motion for disgorgement to "the interested parties in this action" by first-class mail. The notice stated that the hearing would be held in Portland, Oregon on February 18, 2004, and that any response to the motion had to be filed and served within eleven days of service of the notice. The district court entered an order permitting the agents to file responses to the motion by February 2, 2004.

On February 2, several of the agents, including Bustos and 10 other Appellants, preserving their jurisdictional objections, moved to intervene as of right as defendants in the action under FED.R. CIV.P. 24(a)(2), noting that, because the Receiver was attempting to have the district court "summarily adjudicate the Intervenors' personal liability," the agents had "a direct financial interest in this case" that could be adequately represented only by each named agent; they also requested an extension of time to respond. The Receiver objected to the agents' motion, arguing that there was "no legal basis" for their request to intervene in the underlying enforcement action. Moreover, because the agents had allegedly known of the Receiver's intent to disgorge commissions for over 18 months, 5 the Receiver argued that the motion was "nothing more than a delay tactic designed to hinder the Receiver's efforts to recover the ill-gotten gains received by these Agents."

On February 11, the district court granted the motion to intervene, stating that no formal answer was required and that the intervenors could "assert any defenses by motion or in their memoranda opposing the Receiver's motion ...." However, "[d]ue to the advanced stage of [the] case," the district court conditioned intervention "on Intervenor's agreement not to revisit issues already adjudicated." These issues presumably included the district court's prior findings that the investments sold by the agents were unregistered securities.6

Despite the district court's statement that no answer was required, the now Intervenor-Defendants filed a brief answer on February 18, 2004 and asserted several defenses, including lack of personal...

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