U.S. Sec. & Exch. Comm'n v. Hui Feng

• Decision Date: 23 August 2019
• Docket Number: No. 17-56522,17-56522
• Citation: 935 F.3d 721
• Parties: U.S. SECURITIES & EXCHANGE COMMISSION, Plaintiff-Appellee, v. HUI FENG; Law Offices Of Feng And Associates PC, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

935 F.3d 721

U.S. SECURITIES & EXCHANGE COMMISSION, Plaintiff-Appellee,

v.HUI FENG; Law Offices Of Feng And Associates PC, Defendants-Appellants.

No. 17-56522

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 16, 2019 Pasadena, California

Filed August 23, 2019

Andrew B. Holmes (argued) and Matthew D. Taylor, Holmes Taylor Scott & Jones LLP, Los Angeles, California, for Defendant-Appellant Law Offices of Feng & Associates.

Hui Feng (argued), Law Offices of Feng & Associates, Flushing, New York, for Defendant-Appellant Hui Feng.

Kerry J. Dingle (argued), Senior Counsel; Jeffery A. Berger, Senior Litigation Counsel; Michael A. Conley, Solicitor; Robert B. Stebbins, General Counsel; Securities & Exchange Commission, Washington, D.C.; for Plaintiff-Appellee.

Before: Kermit V. Lipez,^* Kim McLane Wardlaw, and Andrew D. Hurwitz, Circuit Judges.

LIPEZ, Circuit Judge:

This appeal requires us to decide whether certain investments made by participants in the U.S. Immigrant Investor Program are "securities" subject to regulation by the Securities and Exchange Commission ("SEC") and, if so, whether appellant Hui Feng was a securities "broker" required to register with the SEC and whether he committed securities fraud in connection with the transactions.¹ The district court granted summary judgment for the SEC. We affirm.

I.

A. The EB-5 Program

The U.S. Immigrant Investor Program, colloquially referred to as the EB-5 program, provides legal permanent residency in the United States to foreign nationals who invest in U.S.-based projects. See 8 U.S.C. § 1153(b)(5)(A).² Generally, qualified immigrants may gain U.S. visas through direct investment of at least $ 1 million in a new commercial enterprise that creates at least ten full-time jobs for U.S. workers. Id. § 1153(b)(5)(A), (C). Investment in a business in a "targeted employment area" lowers the required capital investment amount to $ 500,000. Id. § 1153(b)(5)(C)(i), (ii).

Multiple foreign investors may pool their money in the same enterprise, provided that each invests the required amount and "each individual investment results in the creation of at least ten full-time positions." 8 C.F.R. § 204.6(g). Pooled investments are made through "regional centers," which are regulated by the U.S. Citizenship and Immigration Services ("USCIS"). The regional centers offer specific projects to investors and manage the pooled investments. See id. § 204.6(e), (m).

A foreign national investing in an enterprise must file an I-526 application with the USCIS to prove that the investment will satisfy EB-5 program requirements. Id. § 204.6(a), (j)(2). Approval results in conditional permanent resident status. Two years later, the investor may remove the conditions on lawful permanent resident status by filing an I-829 petition, demonstrating that the investment satisfied the EB-5 requirements and created, or will create within a reasonable period, ten qualifying jobs. Id. § 216.6.

B. Factual Background

Feng and the SEC largely agree on the facts. To the extent that they have differing views of the record, we draw all justifiable inferences in the light most favorable to Feng. Blankenhorn v. City of Orange , 485 F.3d 463, 470 (9th Cir. 2007).

Feng conducts an immigration law practice in New York City. Between 2010 and 2016, he led approximately 150 clients through the EB-5 process, substantially all of whom were Chinese nationals who did not speak English. Feng estimated that 80 percent of his clients found him through his website, which posted comparisons and recommendations of available EB-5 projects. Feng holds a law degree from Columbia University and an MBA from the Tuck School of Business at Dartmouth, and he touted his skill at investigating and determining the most reliable investment opportunities.

Feng charged his clients a $ 10,000 to $ 15,000 upfront fee. His services included serving as a liaison between clients and regional centers, explaining the English-language offering materials to his clients, negotiating with regional centers regarding administrative fees charged to the clients by the centers, and compiling and submitting his clients' signed offering documents to regional centers. On three occasions, investors wired funds directly to Feng, who transferred the funds to the regional centers.

Feng also entered into marketing agreements with regional centers. Through these agreements, he reserved a number of the limited investor "spots" in certain EB-5 projects, which he then promoted on his website and tried to fill within a set time period. If one of Feng's clients made the required capital contribution to one of these regional centers, and if the USCIS approved the investor's I-526 petition, the regional center agreed to pay Feng commissions of $ 15,000 to $ 70,000. Although hundreds of regional centers participate in the EB-5 program, Feng procured investors only for ten centers, all of which agreed to pay commissions. Feng did not disclose to his clients the commissions he received from the regional centers unless they specifically asked about them.³

Payment of a commission is an EB-5 industry practice, but many regional centers refuse to pay a commission to a U.S.-based attorney who is not registered as a broker, to avoid causing or aiding and abetting a violation of the broker registration requirement in Section 15(a) of the Securities Exchange Act of 1934. See 15 U.S.C. § 78o(a). Several regional centers offer a discount or rebate of a portion of the administrative fee charged to the investor if there is no referral commission for the attorney. Feng chose neither to register as a broker, nor to forego commissions.

When told by some regional centers that they could only pay commissions to overseas recruiters, Feng responded that he had referral partners in China who were finding investors. He entered into marketing agreements in which he promised to relay the commissions to those individuals. He also arranged agreements that were directly between the regional centers and the individuals. The referral partners included Feng's wife, mother, and mother-in-law. Feng described these individuals in his deposition testimony as his "nominees," whose role was to be "just a surrogate to receive the money." They did not do the work of recruiting investors—Feng did that himself. After the regional centers paid commissions to the individuals, they transferred the funds to Feng. Feng asserts that the regional centers only asked for a foreign contact to pay and did not "care" who it was.

In 2014, Feng also created Atlantic Business Consulting Limited ("ABCL"), based in Hong Kong. According to Feng, this decision was "driven in part by regional centers informing me they needed an overseas entity to pay." ABCL entered into marketing agreements with regional centers, and its only source of revenue was EB-5 commissions. Feng did not inform the regional centers that he solicited and referred ABCL's investors himself. All of Feng's employees worked both for his law office and for ABCL. Feng's mother, Xiuyuan Tan, signed agreements between ABCL and regional centers as ABCL's "President," but Feng admitted she played no role in ABCL. Feng also did not inform the regional centers that he was ABCL's beneficial owner, with sole control of ABCL's bank account. Representatives from the regional centers testified that they would have ceased their marketing agreements if they had known about Feng's relationship with the individual referral agents and with ABCL.

In total, regional centers paid Feng and his overseas entities $ 1.268 million in commissions for investments made by Feng's clients. At the time of the district court judgment, these entities were contractually entitled to an additional $ 3.45 million in commissions, pending the approval of his clients' I-526 petitions.

The basis of the agreements between the regional centers and Feng's investors was set forth in the regional centers' offering materials, also known as private placement memoranda ("PPMs"). Many of the PPMs referred to the investments as "securities" and asserted that the investments were compliant with U.S. securities laws. The regional centers structured the investments as limited partnerships, in which the investors became limited partners and the regional center was the general partner. The regional centers promised investors a fixed, annual return on investment, which ranged across projects from 0.5 to 5 percent of the capital contribution, and investors received Schedule K-1 tax forms to report their investment income from the partnership. The partnerships all made construction loans or otherwise financed a specified construction project. At the end of the investment term, typically five to six years, the regional centers promised the investors a return of their capital contribution, subject to market risks.

The PPMs required that investors pay an administrative fee, which ranged across projects from $ 30,000 to $ 50,000, in addition to the capital contribution of $ 1 million or $ 500,000. The PPMs expressly stated that these administrative fees were for operating and marketing costs, were not part of the capital contribution, and did not earn interest.

Approximately 20 percent of Feng's clients asked him to seek a reduced administrative fee from the regional centers. In those instances, Feng negotiated with regional centers and facilitated contracts between those regional centers and his clients for a rebate of a portion of the administrative fee. Feng did not disclose to these clients, however, that the administrative fees helped to fund his commissions, nor that the regional centers offset the clients' administrative fee rebate with a reduction in the commissions to which he was contractually entitled. Indeed, Feng asked the regional centers not to inform the clients about either fact. Feng explained in his deposition that he wanted to create the appearance to his clients that he was advocating on their behalf...