S.E.C. v. First Pacific Bancorp
| Decision Date | 28 April 1998 |
| Docket Number | 96-56690,Nos. 96-56687,s. 96-56687 |
| Citation | 142 F.3d 1186 |
| Parties | Fed. Sec. L. Rep. P 90,197, 98 Cal. Daily Op. Serv. 3143, 98 Daily Journal D.A.R. 4343 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. FIRST PACIFIC BANCORP; PacVen, Inc., Defendants-Appellants, Leonard S. Sands; Charles W. Knapp; Berrien Moore; Daniel S. Geiger; Mulk Raj Dass; Apex Investment Securities, Ltd., Defendants, SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Leonard S. SANDS, Defendant-Appellant, First Pacific Bancorp; PacVen, Inc.; Charles W. Knapp; Berrien Moore; Daniel S. Geiger; Mulk Raj Dass; Apex Investment Securities, Ltd., Defendants. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Scott W. Wellman, Wellman & Warren LLP, Irvine, California, for defendants-appellants.
Mark Pennington, Sr. Litigation Counsel, S.E.C., Washington, DC, for plaintiffs-appellees.
Appeal from the United States District Court for the Central District of California, John G. Davies, District Judge, Presiding. D.C. No. CV-93-07510-JGD.
Before: FARRIS, O'SCANNLAIN, and FERNANDEZ, Circuit Judges.
The Securities and Exchange Commission brought a civil enforcement action against Leonard S. Sands, First Pacific Bancorp (Bancorp), and PacVen Inc. for violations of the antifraud, filing and disclosure provisions of the federal securities laws. The district court granted partial summary judgment in favor of the SEC on three of its claims. 1 After a bench trial, the court ruled in favor of the SEC on all of its remaining claims. Sands, Bancorp and PacVen appeal the district
court's grant of partial summary judgment. They also appeal the court's final judgment, which permanently enjoins them from future violations of the securities laws, orders them to disgorge $688,000 plus pre-judgment interest, and permanently bars Sands from acting as an officer or director of a public company. We affirm.
Sands was the chairman of the board, chief executive officer and corporate counsel of Bancorp, a Delaware corporation organized as a bank holding company, and owned 54% of its common stock. Sands was also the chairman of the board and corporate counsel of First Pacific Bank, Inc. (Bank), the wholly owned subsidiary of Bancorp and its major asset. In addition, Sands was the president and the CEO of PacVen, a Nevada "blank check", also known as "shell", corporation formed for the purpose of merging with or acquiring other companies.
Beginning in the early 1980s, state and federal regulators repeatedly rated the Bank "unsatisfactory" because of its inadequate capital, earnings and liquidity, and because of its increasing amounts of classified assets and past due loans. In the late 1980s, Bancorp and Sands engaged in several financial transactions designed to raise additional capital for the failing Bank. They committed various securities law violations in the process. 2
The transaction which underlies most of the issues in this appeal was the Bancorp's 1987 public offering of securities. In April of 1987, it commenced a "mini-max" public offering with the intention of downstreaming its proceeds to the financially troubled Bank. Under the terms of the offering, Bancorp was required to sell a minimum of 750 "units," at $2,000 each, on an all-or-nothing basis by August 12, 1987. The underwriter later extended the deadline to October 10, 1987. If all 750 units were not sold by the deadline, the offering was to be cancelled and the funds were to be returned to the investors. If the minimum were reached, Bancorp had a right to sell up to 1,275 units on a best-efforts basis.
On October 9, 1987, $1,688,000 was forwarded to the escrow agent for investment in the Bancorp offering, but of those funds, $1,000,000 was in the form of a check written by Paul Kutik, chairman of Savoy Reinsurance Company, and drawn on the Bank of Montreal, Bahamas Ltd. That check was later returned unpaid. Also, $500,000 had been raised in a public offering by PacVen in July of 1987, and was fraudulently diverted by Sands into the Bancorp offering. 3 Thus, Bancorp only succeeded in raising $688,000 by the deadline, and only $188,000 of the funds came from bona fide investors. However, Sands and Bancorp did not return the funds to the investors as they had promised in the Prospectus, but instead continued with the offering. On December 30, 1987, the date the offering was scheduled to close, Sands purchased 500 of the Bancorp units, paying $1,000,000 of his own funds. That purchase brought the total amount to $1,688,000. The offering was then closed and the proceeds were delivered to the Bank.
Among other things, the SEC sought to have Sands, Bancorp and PacVen disgorge the $688,000 raised in the Bancorp offering from outside investors, and to have Sands barred from serving as an officer or director of publicly held companies in the future. The district court granted both forms of relief and this appeal ensued. 4
The district court had jurisdiction pursuant to 28 U.S.C. § 1331. We have jurisdiction pursuant to 28 U.S.C. § 1292(a)(1).
We review the grant of summary judgment de novo. See Goldblatt v. FDIC, 105 F.3d 1325, 1327 (9th Cir.1997). We review the district court's order of disgorgement for abuse of discretion. See SEC v. Clark, 915 F.2d 439, 453 (9th Cir.1990). Similarly, we review the district court's decision to bar Sands from serving as an officer or director of a publicly held company for abuse of discretion. See SEC v. Posner, 16 F.3d 520, 522 (2d Cir.1994).
Sands and Bancorp object to the district court's grant of summary judgment against them on the SEC's claim that their handling of the Bancorp offering constituted securities fraud. See Sands I, 902 F.Supp. at 1162-63. Sands also claims that even if the summary judgment were proper, he should not have been ordered to disgorge $688,000. For convenience, we will only refer to Sands in the ensuing discussion, though, of course, if he were correct about the summary judgment grant, that would inure to Bancorp's benefit also.
(1) The summary judgment
We recognize that in reviewing the district court's grant of summary judgment in favor of the SEC, we must view the evidence in the light most favorable to Sands, and determine "whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law." Goldblatt, 105 F.3d at 1327. That does not help Sands at all.
Sands cannot dispute that the $1,000,000 check written by Paul Kutik and drawn on the Bank of Montreal, Bahamas Ltd. was returned unpaid. Rather, he contends that the minimum requirement of the offering was satisfied because a sufficient amount was received in the form of checks by the deadline. We reject that argument. Rule 10b-9 expressly provides that funds invested in the mini-max offering must be promptly refunded to the investors unless "(i) a specified number of units of the security are sold at a specified price within a specified time, and (ii) the total amount due to the seller is received by him by a specified date." 17 C.F.R. § 240.10b-9 (a)(2) (emphasis added). 5 Thus, Bancorp had to receive "the total amount due" to it, i.e. $1,500,000, by the October 10 deadline. A check is merely a "promise to pay." See Black's Law Dictionary 237 (6th ed.1990). As this case vividly demonstrates, the receipt of a "promise to pay" $1,000,000 is not equivalent to the receipt of the actual "amount due" because the check may fail to clear. Had the check cleared in the regular course of business but after the deadline, it could be argued that the result should be different, but we need not decide that issue. On the facts of this case, Bancorp did not raise the $1,500,000 amount by the October 10 deadline as was required by the terms of the offering.
Sands attempts to put his own spin on the actual course of events by arguing that he acquired Paul Kutik's position in the offering and Kutik invested before the deadline. His attempt fails. Because Kutik's check never cleared, his "position" in the offering amounted to zero. Sands' purchase of the 500 units, which Kutik had merely wished to purchase, occurred after the deadline and, therefore, after the Bancorp offering Sands' main contention, however, is that he had "bona fide" intentions at the time of his investment in the offering, and he did not, therefore, act with the requisite scienter. This argument goes very wide of the mark. The fact that Sands made a real investment is not determinative because that investment occurred after the Bancorp offering had already failed to satisfy the minimum requirement. If he wanted to invest, fine. But the other investors' funds should have been returned to them.
had already failed for inability to raise the $1,500,000 minimum.
In a mini-max offering, scienter is shown by a defendant's knowledge of the minimum requirement, and that the funds were retained even though the minimum amount was not raised. As the court said in C.E. Carlson, Inc. v. SEC, 859 F.2d 1429 (10th Cir.1988):
The SEC thus determined that both petitioners acted with scienter.... Scienter "refers to a mental state embracing intent to deceive, manipulate, or defraud." Proof of scienter may be satisfied by a showing of recklessness, or conduct which falls far short of the standard of ordinary care and which carries a danger of misleading purchasers such that petitioners knew or must have known of its propensity to mislead. The SEC found that petitioners were aware of the part-or-none provision, the requirement that two million shares be sold in a manner not inconsistent with a public distribution. Rather [than] wait for additional public sales or return the funds of subscribers, petitioners arranged for non-public sales to close the offering and then retained the funds.
Id. at 1435-36 (internal...
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