U.S. Sec. & Exch. Comm'n v. Quan

Decision Date22 March 2016
Docket NumberNo. 14–3707.,14–3707.
Citation817 F.3d 583
Parties UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff–Appellee v. Marlon QUAN; Acorn Capital Group, LLC; Stewardship Investment Advisors, LLC, Defendants–Appellants Stewardship Credit Arbitrage Fund, LLC ; Putnam Green, LLC; Livingston Acres, LLC, Defendants ACG II, LLC, Defendant–Appellant Florence Quan, Defendant Nigel Chatterjee; DZ Bank AG Deutsche Zentral–Genossenschaftsbank, Frankfurt am Main ; Sovereign Bank; Topwater Exclusive Fund III, LLC ; Freestone Low Volatility Partners, LP ; Freestone Low Volatility Qualified Partners, LP, Intervenors Gary Hansen, Receiver.
CourtU.S. Court of Appeals — Eighth Circuit

Jacob Loshin, argued, Benjamin Lawrence Schiffrin, on the brief, Washington, DC, for PlaintiffAppellee.

Thomas Casamassima, argued, Los Angeles, CA (Laura Schwalbe, Bruce E. Coolidge, Washington, DC, on the brief), for DefendantAppellant.

Before RILEY, Chief Judge, SMITH and SHEPHERD, Circuit Judges.

RILEY

, Chief Judge.

Marlon Quan, along with entities he controls, (collectively, Quan, unless context dictates otherwise) appeals a judgment entered on jury verdicts finding securities fraud. Quan challenges the coherence of the verdicts, the accuracy of the jury instructions, and the authority of the district court1 to order disgorgement. We affirm.

I. BACKGROUND

Marlon Quan managed a hedge fund, Stewardship Credit Arbitrage Fund, LLC (SCAF) and its offshore twin, Stewardship Credit Arbitrage Fund, Ltd., through his company Stewardship Investment Advisors, LLC (SIA). The funds invested heavily in loans to PAC Funding, a company controlled by Thomas Petters. The loans were meant to finance Petters's business of buying consumer electronics wholesale and reselling them to retail stores for a profit. The loans were supposedly secured by the goods, accounts receivable, or the stores' promises to pay. Unfortunately, Petters's business was actually a massive Ponzi scheme. Petters used the funds' money to pay off other investors and maintain appearances, while pocketing whatever was left for himself and his family. See generally United States v. Petters, 663 F.3d 375, 379 (8th Cir.2011)

. When the scheme collapsed in the fall of 2008, investors in Quan's funds (as well as Quan himself) lost a lot of money.

The U.S. Securities and Exchange Commission (SEC) sued Quan for securities fraud on two basic theories: (1) he made false statements about what he did to protect the funds against fraud and other risks; and (2) he concealed problems with the funds' investments as Petters's scheme began to unravel. The SEC alleged Quan and his companies violated Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a)

; Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b–5 thereunder, 17 C.F.R. § 240.10b–5 ; and Section 206(4) of the Investment Advisers Act, 15 U.S.C. § 80b–6(4), and Rule 206(4)–8 thereunder, 17 C.F.R. § 275.206(4)–8. The SEC also alleged Quan personally violated Section 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t(a), and aided and abetted SCAF's violations of Section 10(b) and Rule 10b–5 and SIA's violations of Section 206(4) and Rule 206(4)–8. See also 15 U.S.C. § 78t(e) (aiding-and-abetting liability). The case went to trial and a jury found liability on every count except the alleged violations of Section 17(a)(1) and the allegation Quan personally aided and abetted SCAF's violations of Section 10(b) and Rule 10b–5.

Quan moved for judgment as a matter of law and a new trial. The SEC moved for remedies and a final judgment. The district court denied Quan's motions, entered injunctions against him, and ordered him to disgorge almost $81 million in profits, plus prejudgment interest. We have jurisdiction of Quan's appeal. See 28 U.S.C. § 1291

(appellate jurisdiction); Fed.R.Civ.P. 54(b) (partial final judgments).

II. DISCUSSION
A. Verdict Internal Consistency

Quan first argues he is entitled to a new trial because the jury contradicted itself by finding he violated Rule 10b–5 under the Securities Exchange Act, but did not violate Section 17(a)(1) of the Securities Act or aid and abet SCAF in violating Rule 10b–5. Before reaching Quan's argument, we first address a threshold matter.

The district court held Quan could not seek a new trial based on alleged inconsistencies in the verdicts because he did not ask to have the verdicts sent back to the jury before it was discharged. The district court relied on our statement, "If a party feels that a jury verdict is inconsistent, it must object to the asserted inconsistency and move for resubmission of the inconsistent verdict before the jury is discharged or the party's right to seek a new trial is waived."2

Parrish v. Luckie, 963 F.2d 201, 207 (8th Cir.1992)

(emphasis added); accord, e.g., Brode, 966 F.2d at 1239. Quan arguably objected by saying "I will just state for the record that the verdict is internally contradictory" after the district court read the verdicts, cf. Fed.R.Civ.P. 46 ("[A] party need only state the action that it ... objects to, along with the grounds for the ... objection."); Smith v. Riceland Foods, Inc., 151 F.3d 813, 821 n. 6 (8th Cir.1998), but indisputably did not move for resubmission.

We first observe that we have not previously imposed forfeiture in such a situation—where a party pointed out an alleged inconsistency, but did not formally request relief. To the contrary, we appear to have arrived at the formulation requiring both forms of preservation by successively restating general propositions from past cases that did not themselves contain such a requirement. See, e.g., Parrish, 963 F.2d at 207

(citing Lockard v. Mo. Pac. R.R., 894 F.2d 299, 304 (8th Cir.1990) ("[I]f trial counsel fails to object to any asserted inconsistencies and does not move for resubmission of the inconsistent verdict before the jury is discharged, the party's right to seek a new trial is waived.")). On the other hand, we also recognize that the purpose of the forfeiture rule in this context "is to allow the original jury to eliminate any inconsistencies without the need to present the evidence to a new jury," thereby "prevent[ing] a dissatisfied party from misusing procedural rules and obtaining a new trial for an asserted inconsistent verdict." Lockard, 894 F.2d at 304. Though that policy would be partially served by an objection standing alone—which might at least flag a potential issue for the district court—it would be further advanced by requiring the objecting party to specify in a motion how it proposes to solve the problem.

We need not definitively weigh these competing rationales here, because the verdicts in this case are not actually inconsistent. We therefore assume without deciding Quan preserved his argument and proceed to the merits.

Quan could be entitled to a new trial "only if there was ‘no principled basis upon which to reconcile the jury's inconsistent findings.’ "3

Top of Iowa Coop., 324 F.3d at 633

(quoting Bird v. John Chezik Homerun, Inc., 152 F.3d 1014, 1017 (8th Cir.1998) ). The district court has discretion over whether to grant a motion for a new trial, but here the decision turns on a question of law, so we address Quan's two proffered irreconcilable inconsistencies de novo. See, e.g., Behlmann v. Century Sur. Co., 794 F.3d 960, 963 (8th Cir.2015).

1. Liability Under Rule 10b–5, but Not Section 17(a)(1)

The jury found Quan did not violate Section 17(a)(1), but did violate Rule 10–b5. Section 17(a)(1) makes it illegal "to employ any device, scheme, or artifice to defraud." 15 U.S.C. § 77q(a)(1)

. Rule 10b–5 prohibits the same thing in subsection (a), but also prohibits, in subsections (b) and (c), respectively, "mak[ing] any untrue statement of a material fact or ... omit[ting] to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading" and "engag[ing] in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person."4 17 C.F.R. § 240.10b–5. Quan argues the verdict is inconsistent because the two provisions cover the same things and if he violated one he necessarily violated the other.

But that is not what the district court told the jury. According to the jury instructions, "A device, scheme or artifice to defraud"—the basis for liability under Section 17(a)(1)"must involve conduct beyond just misrepresentations or omissions"—the basis for liability under Rule 10b–5(b). In other words, the bar for finding liability was higher under Section 17(a)(1) than under Rule 10b–5(b). In light of those instructions, the straightforward inference from the verdicts is that the jury concluded Quan made a false statement or misleading omission, but did not do enough beyond that (at least with scienter) to rise to the level of employing a device, scheme, or artifice to defraud. Cf. Anheuser–Busch, Inc. v. John Labatt Ltd., 89 F.3d 1339, 1347 (8th Cir.1996)

("As the unchallenged instructions of the District Court make clear, the two claims have different elements. In these circumstances, the jury could have found that [the plaintiff] proved all of the elements of [one claim] while failing to prove one of the separate elements of the [other claim]."). This understanding fits aptly with the approach taken at trial, where the parties and the district court treated the different provisions as separate theories of liability based on different facts: (1) false-statement or misleading-omission liability for lying about the funds' safeguards; and (2) fraudulent-scheme liability for hiding problems with the Petters investments.

We are not persuaded by any of Quan's challenges to reconciling the verdicts in this way. His assertion that Section 17(a)(1) "plainly does impose liability for false statements, not solely for nonspeech conduct" is beside the point. We evaluate whether verdicts are consistent in light of how the...

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