Sec. & Exch. Comm'n v. Stein

• Decision Date: 11 October 2018
• Docket Number: No. 15-55506,15-55506
• Citation: 906 F.3d 823
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, and Heart Tronics, Inc., Willie James Gault, Defendant-Appellee, v. Mitchell Jay STEIN, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

906 F.3d 823

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee,andHeart Tronics, Inc., Willie James Gault, Defendant-Appellee,

v.Mitchell Jay STEIN, Defendant-Appellant.

No. 15-55506

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 13, 2018 San Francisco, California

Filed October 11, 2018

Robert O. Saunooke (argued), Saunooke Law Firm PA, Miramar, Florida, for Defendant-Appellant.

Allan A. Capute (argued), Special Counsel to the Solicitor; John B. Capehart, Attorney; Jacob H. Stillman, Senior Advisor to the Solicitor; John W. Avery, Deputy Solicitor; Robert B. Stebbins, General Counsel; Securities and Exchange Commission, Washington, D.C.; for Plaintiff-Appellee.

Before: J. Clifford Wallace, Marsha S. Berzon, and Consuelo M. Callahan, Circuit Judges.

WALLACE, Circuit Judge:

Mitchell Stein, an attorney, appeals from the district court's summary judgment in favor of the Securities and Exchange Commission (SEC) on the SEC's claims that Stein violated various federal securities laws. The district court entered summary judgment on six of the SEC's claims on the ground that Stein's prior criminal conviction precluded him from contesting the allegations at issue in the civil case. We have jurisdiction under 28 U.S.C. § 1291, and we affirm.

I.

In December 2011, the SEC brought a civil enforcement action against Stein alleging that Stein, while acting as purported outside counsel to co-defendant Heart Tronics, engaged in a series of frauds designed to inflate the company's stock price so that he could profit from selling its securities to investors. The alleged scheme was wide ranging, but centered on allegations that Stein concocted three false purchase orders with fictitious companies, and used these orders as the basis for SEC filings and press releases touting bogus sales of Heart Tronics' "Fidelity 100" heart-monitoring system.

The purchase orders at issue ostensibly were agreed to during September and October 2007. The first purchase order reflected a sale of 180 units of the Fidelity 100 for $1.98 million. The SEC alleges that an individual later identified as Thomas Tribou signed the purchase order and sent Heart Tronics $50,000 as a deposit. However, the copy of the order that was counter-signed by the then-CEO of Heart Tronics and returned to Tribou identified the customer as "Cardiac Hospital Management" (CHM). The SEC maintained that CHM was a fictitious entity not known to Tribou. The second and third purchase orders reflected sales to a fictional Israeli company called "IT Healthcare" for $3.3 million and $564,000, respectively.

Stein went to great lengths to make the purchase orders appear legitimate. Specifically, the SEC alleges that Stein and his personal assistant, co-defendant Martin Carter, created letters and documents purportedly originating from CHM and IT Healthcare to create the appearance of communication between Heart Tronics and its "customers." One such letter was from a purported CHM purchasing agent named "Toni Nonoy" asking for products to be sent to a "new address" in Japan. Other documents were from fictitious people supposedly affiliated with IT Healthcare confirming sales orders and providing updated shipping instructions. The SEC alleges that all these documents were fraudulent and that Stein simply made up the names.

During the same period in which Stein drew up the alleged fraudulent purchase orders, he also orchestrated the dissemination of press releases reporting the sales. The SEC alleges that based on information provided by Stein, John Woodbury, Heart Tronics' securities lawyer, published three press releases touting the more than $5 million in purported sales to CHM and IT Healthcare. The SEC also alleged that Stein caused the fraudulent sales orders to be incorporated into Heart Tronics' SEC filings from approximately September 2007 through August 2008.

Based on these and other allegations, the SEC asserted various claims against Stein, including securities fraud in violation of Section 10(b) of the Securities Exchange Act (Exchange Act), Exchange Act Rule 10b-5, and Section 17(a) of the Securities Act; aiding and abetting violations of Section 10(b) and Rule 10b-5; selling or offering for sale unregistered securities in violation of Section 5(a) and 5(c) of the Securities Act; falsifying books and records in violation of Exchange Act Rule 13b2-1; knowingly falsifying books and records in violation of Section 13(b)(5) of the Exchange Act; and aiding and abetting Heart Tronics' violations of the reporting, record-keeping, and internal controls provisions of the Exchange Act (Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B)) and Exchange Act Rules (Rules 13a-1, 13a-11, 13a-13, and 12b-20).

Concurrent with the SEC's case against Stein, the Department of Justice (DOJ) filed a criminal case against him in the Southern District of Florida arising out of the same fraudulent conduct alleged in the civil case. The fourteen-count indictment charged Stein with three counts of securities fraud ( 18 U.S.C. § 1348 ), three counts of wire fraud ( 18 U.S.C. § 1343 ), three counts of mail fraud ( 18 U.S.C. § 1341 ), one count of conspiracy to commit mail and wire fraud ( 18 U.S.C. § 1349 ), three counts of money laundering ( 18 U.S.C. § 1957 ), and one count of conspiracy to obstruct justice ( 18 U.S.C. § 371 ). The DOJ eventually moved to intervene and stay discovery in the SEC action pending the outcome of the criminal proceeding. The district court granted the unopposed motion and stayed the civil case in April 2012.

The DOJ's case against Stein tracked the main allegations asserted in the SEC's complaint. During a two-week trial, the DOJ presented evidence that Stein created three fraudulent purchase orders for CHM and IT Healthcare; that he orchestrated the publication of press releases touting the fraudulent purchase orders; that he made up documents purported to be from employees of CHM and IT Healthcare to create the impression the purchase orders were legitimate; and that he caused the false information to be incorporated into Heart Tronics' SEC filings. During closing arguments, the prosecution focused the jury's attention on the "false purchase orders," "false press releases," and "false SEC filings" that underpinned Stein's scheme. At the end of trial, the jury returned guilty verdicts against Stein on all counts. The district court sentenced Stein to 17 years' imprisonment, and ordered him to forfeit over $5 million and pay over $13 million in restitution.

Stein appealed from his judgment of conviction and sentence, arguing, among other things, that the DOJ failed to produce material, exculpatory evidence in violation of Brady v. Maryland , 373 U.S. 83, 83 S.Ct. 1194, 10 L.Ed.2d 215 (1963), and that the DOJ knowingly relied on false testimony in violation of Giglio v. United States , 405 U.S. 150, 92 S.Ct. 763, 31 L.Ed.2d 104 (1972). The Eleventh Circuit rejected the Brady and Giglio claims, affirmed Stein's conviction, but vacated and remanded Stein's sentence for a recalculation of actual losses attributable to his fraud. See United States v. Stein , 846 F.3d 1135 (11th Cir. 2017).

Following Stein's conviction, the SEC moved for summary judgment, arguing that Stein's conviction precluded him from contesting the SEC's allegations in the civil proceeding. The district court concluded that Stein's criminal conviction "necessarily decided" the facts needed to establish his liability in the civil case, and entered summary judgment in favor of the SEC on the following claims: securities fraud in violation of Section 10(b) of the Exchange Act, Exchange Act Rule 10b-5, and Section 17(a) of the Securities Act; aiding and abetting violations of Section 10(b) and Rule 10b-5; falsifying books and records in violation of Exchange Act Rule 13b2-1; knowingly falsifying books and records in violation of Section 13(b)(5) of the Exchange Act; and aiding and abetting Heart Tronics' violations of the reporting and internal controls requirements of the Exchange Act and Exchange Act Rules. This appeal followed.

II.

We review a district court's summary judgment de novo. Branch Banking & Trust Co. v. D.M.S.I., LLC , 871 F.3d 751, 759 (9th Cir. 2017). We also review de novo whether issue preclusion is available. Dias v. Elique , 436 F.3d 1125, 1128 (9th Cir. 2006). If issue preclusion is available, the district court's decision to apply the doctrine is reviewed for abuse of discretion. Id.

III.

Issue preclusion bars parties from relitigating an issue if the same issue was adjudicated in prior litigation. Resolution Tr. Corp. v. Keating , 186 F.3d 1110, 1114 (9th Cir. 1999). The form of the doctrine at issue here is "offensive nonmutual issue preclusion," which prevents "a defendant from relitigating the issues which a defendant previously litigated and lost against another plaintiff." Syverson v. IBM Corp. , 472 F.3d 1072, 1078 (9th Cir. 2007) (quoting Parklane Hosiery Co. v. Shore , 439 U.S. 322, 329, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979) ). A party invoking a defendant's prior criminal conviction as the basis for offensive preclusion must demonstrate: (1) the prior conviction was for a serious offense; (2) the issue at stake in the civil proceeding is identical to the issue raised in the prior criminal proceeding; (3) there was a full and fair opportunity to litigate the issue at the prior trial; and (4) the issue on which the prior conviction is offered was actually litigated and necessarily decided at trial. Ayers v. City of Richmond , 895 F.2d 1267, 1271 (9th Cir. 1990) ; see also Syverson , 472 F.3d at 1078.

We typically look to four factors (sometimes referred to as the Restatement factors) to determine whether two issues are "identical" for purposes of issue preclusion:

(1) Is there a substantial overlap between the evidence or argument to be advanced in the second proceeding and that advanced in the first?

(2) Does the new evidence or argument involve the application of the same

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