Sec. & Exch. Comm'n v. GenAudio Inc.
| Citation | 32 F.4th 902 |
| Decision Date | 26 April 2022 |
| Docket Number | 19-1454, No. 19-1455 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff - Appellee, v. GENAUDIO INC., Defendant - Appellant, and Taj Jerry Mahabub, Defendant. Securities and Exchange Commission, Plaintiff - Appellee, v. Taj Jerry Mahabub, Defendant - Appellant, and GenAudio Inc., Defendant. |
| Court | United States Courts of Appeals. United States Court of Appeals (10th Circuit) |
David J. Aveni, Wilson Elser Moskowitz Edelman & Dicker LLP, San Diego, California, for Defendant-Appellant GenAudio, Inc.
Andrew Bryan Holmes, Holmes, Taylor, Cowan & Jones, Los Angeles, California (David J. Aveni, Wilson Elser Moskowitz Edelman & Dicker LLP, San Diego, California, on the briefs), for Defendant-Appellant Taj Jerry Mahabub.
Emily True Parise, Senior Counsel (Robert B. Stebbins, General Counsel and John W. Avery, Deputy Solicitor, with her on the brief), Securities and Exchange Commission, Washington, D.C., for Plaintiff-Appellee.
Before HOLMES, KELLY, and CARSON, Circuit Judges.
Taj Jerry Mahabub, founder and Chief Executive Officer ("CEO") of GenAudio, Inc. ("GenAudio")—whom we collectively refer to as "Appellants"—attempted to secure a software licensing deal with a well-known technology company, Apple, Inc. ("Apple"). It was Mr. Mahabub's goal to integrate GenAudio's three-dimensional audio software—AstoundSound—into Apple's products. While Appellants were pursuing that collaboration, the Securities and Exchange Commission ("SEC") commenced an investigation into Mr. Mahabub's conduct. Mr. Mahabub was suspected of defrauding investors by fabricating statements about Apple's interest in GenAudio's software and violating registration provisions of the securities laws in connection with sales of GenAudio securities.
Granting summary judgment for the SEC, the district court found that Mr. Mahabub defrauded investors and violated the securities laws. The court determined that Appellants were liable for knowingly or recklessly making six fraudulent misstatements in connection with two offerings of GenAudio's securities in violation of the antifraud provisions of the securities laws—that is, SEC Rule 10b-5 and § 10(b) of the Exchange Act.1 As to one of those statements, the court also determined that Appellants violated § 17(a)(2) of the Securities Act, which also proscribes the making of certain misstatements. In addition, the district court granted summary judgment in favor of the SEC on its claims that GenAudio and Mr. Mahabub violated §§ 5(a) and 5(c) of the Securities Act, which prohibit the offer or sale of unregistered securities. As a remedy for these violations, the court ordered disgorgement of Appellants’ proceeds and imposed civil penalties.
Appellants now appeal from the district court's decision, raising three overarching issues before us. First, Appellants assert that the district court erred in finding them liable for the six fraudulent misstatements under the securities laws. Generally, Appellants explain that Mr. Mahabub's statements to actual and potential shareholders were informed by a reasonable belief regarding Apple's interest in acquiring GenAudio's proprietary technology. Second, Appellants contend that the district court erred in concluding GenAudio did not qualify for two exemptions allowing its sale of unregistered securities—specifically, the private-offering exemption under § 4(a)(2) of the Securities Act, and the Rule 506 safe-harbor exemption of the SEC's Regulation D. Third, Appellants challenge the district court's legal authority to impose a disgorgement order and the court's computation of the disgorgement amounts, as well as the civil penalties that the court imposed on them. Exercising jurisdiction under 28 U.S.C. § 1291, we reject all of Appellants’ arguments and affirm the district court's judgment.
Mr. Mahabub founded GenAudio in 2003 and served as its CEO and Chairman of the Board from 2009 to 2012. GenAudio is a Colorado corporation headquartered in Centennial, Colorado, that develops and markets software. GenAudio created a "three-dimensional audio" technology, which it calls AstoundSound. AstoundSound is a software-based system for processing normal stereo audio to give it a "three-dimensional" effect—as if the sound is coming from some other place, such as behind the listener or from far away.
GenAudio primarily financed itself through selling debt and equity securities in private offerings, but it consistently had funding issues. To bolster funding, GenAudio asked Jim Wei-Kung Mattos, a GenAudio employee, to raise money, which he did, devoting much of his time to the task.
In late 2006, GenAudio commenced discussions with Apple regarding AstoundSound. GenAudio's goal throughout "was to reach a licensing agreement or [arrange for the] acquisition of GenAudio's technology" so Apple could integrate AstoundSound into its consumer products. Aplts.’ App., Vol. VI, at 1493, ¶ 126 (). With this end in mind, GenAudio had talks with two separate product divisions within Apple: (1) the handheld-devices division which encompassed iPhones, iPods, and iPads, and (2) the Macintosh or "Mac" division.
On July 1, 2009, Mr. Mahabub signed Apple's standard non-disclosure agreement ("NDA") on behalf of GenAudio. Mr. Mahabub's primary point of contact in Apple's handheld-devices division was Victor Tiscareno, a senior audio and acoustics engineer. Mr. Mahabub also met and communicated with Michael Hailey, a product-market manager for the iPod, iPhone, and iPad product lines, as well as Ronald Issac, a signal-processing engineer and acoustician technologist. Mr. Issac was Mr. Mahabub's point of contact in the Mac division.
As talks between GenAudio and Apple continued between August 2009 and February 2010, Mr. Mahabub periodically would forward to the GenAudio Team—that is, the Board, employees, and contractors—email communications between himself and his Apple contacts. However, Mr. Mahabub would alter the original versions of these emails, so as to falsely indicate, for instance, that (1) he was meeting with upper-level Apple personnel—such as Phil Schiller, Apple's senior vice president of worldwide marketing, and Tim Cook, Apple's chief operating officer ("COO"); (2) Apple's then-CEO Steve Jobs was being appraised of GenAudio's discussions with Apple; (3) Mr. Mahabub was scheduled to meet with Mr. Jobs personally; (4) progress towards a deal with Apple had generally been swift; and (5) Mr. Schiller was targeting a late 2010 rollout of GenAudio-enhanced Apple products. In short, these altered emails did not reflect the reality of GenAudio's dealings with Apple: in particular, Mr. Mahabub had not met with—and would never meet with—Mr. Jobs, Mr. Cook, or Mr. Schiller, and Apple employees never brought GenAudio to Mr. Jobs's attention.
On September 25, 2009, around the same time that Mr. Mahabub had forwarded the first set of altered emails, he told the GenAudio Board that a deal with Apple was highly probable. Mr. Mahabub also hired an intellectual-property ("IP") valuation specialist to value GenAudio's technology under several different scenarios in anticipation of negotiations with Apple over a licensing agreement or the acquisition of GenAudio's technology.
Furthermore, Mr. Mattos, GenAudio's fundraiser, sent an email to GenAudio's investors that Mr. Mahabub authored and signed. That email—sent on November 9, 2009—informed them that "nothing is assured yet, but as shareholders you should be aware that there is a strong possibility that the Company may be acquired within the next 6 months in light of our extensive discussions with a global industry leader in consumer electronics." Id. , Vol. IV, at 951 (Mattos Email, dated Nov. 9, 2009). A few days later one of the recipients of this email replied to Mr. Mattos with a list of investors, and each of the listed investors purchased GenAudio's shares soon afterward.
However, Mr. Mahabub's excitement about the potential partnership was not shared during roughly the same time period by his counterparts in Apple. On September 1, 2009, for instance, Mr. Mahabub emailed Mr. Isaac, his primary contact in Apple's Mac division, writing "I hope we can get this done on the fast track—potentially for inclusion in Apple's X-Mas product rollout strategy?" Id. , Vol. VII, at 1745 (Mahabub Email, dated Sept. 1, 2009). Apparently, Mr. Isaac neither read this portion of Mr. Mahabub's email, nor did he respond to it. And, on November 28, 2009—around a couple of weeks after Mr. Mattos sent out his November 9 email at Mr. Mahabub's behest—Mr. Mahabub sent Mr. Tiscareno and Mr. Hailey a lengthy email extolling the potential for an Apple-GenAudio partnership, suggesting that Apple's IP lawyers begin examining GenAudio's patents, and stating that "we hope that Apple becomes happy with us once the deal is inked and the initial products from Apple incorporating AstoundSound ... are brought to market." Id. , Vol. IV, at 1061 (Mahabub Email, dated Nov. 28, 2009).
Yet, significantly, Mr. Hailey responded on December 16, 2009, clarifying the deal was "not something we can execute overnight." Id. at 1058 (Hailey Email, dated Dec. 16, 2009). Critically, Mr. Hailey explained that "[t]he business side of things would come into play after we have exec buy-in on the product side." Id. (emphasis added). And in a subsequent email sent on January 5, 2010, Mr. Hailey further noted that although Apple was "pretty serious about looking at audio quality across the board," the partnership "will take time—definitely more than a couple of months ." Id. at 1067–68 (Hailey Email, dated Jan. 5, 2010) (emphasis added).
These Apple communications, however, did not temper Mr. Mahabub's actions. On February 12, 2010, Mr. Mahabub forwarded an email to the GenAudio Board that contained actual communications between Mr. Tiscareno and Mr. Mahabub regarding the testing of GenAudio's technology in the newest iPad model. But Mr. Mahabub...
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