Sec. & Exch. Comm'n v. Johnson, 09-5399
| Decision Date | 28 June 2011 |
| Docket Number | No. 1:05-cv-00036,No. 09-5399,09-5399,1:05-cv-00036 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, APPELLEE v. CHARLES JOHNSON, JR., APPELLEE CHRIS BENYO, APPELLANT MICHAEL KENNEDY, ET AL., APPELLEES |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Appeal from the United States District Court
for the District of Columbia
Terrance G. Reed argued the cause for appellant. With him on the briefs was Vernon T. Lankford.
Luis de la Torre, Senior Litigation Counsel, Securities and Exchange Commission, argued the cause for appellee Securities and Exchange Commission. With him on the brief were David M. Becker, General Counsel, Jacob H. Stillman,Solicitor, and Rada Lynn Potts, Attorney. John D. Worland Jr., Counsel, entered an appearance.
Before: SENTELLE, Chief Judge, Ginsburg and KAVANAUGH, Circuit Judges.
Opinion for the Court filed by Circuit Judge GINSBURG.
GINSBURG, Circuit Judge: In this civil enforcement action, a jury found Christopher Benyo aided and abetted a securities fraud by his former employer purchasePro.com, Inc., in violation of 15 U.S.C. § 78t(e). The district court fined Benyo $35,000 and barred him from serving as an officer or director of a publicly held company for five years. on appeal, Benyo argues the district court erred in allowing his trial to proceed in the District of Columbia pursuant to the "co-conspirator theory of venue." We reverse the judgment of the district court on the basis of improper venue and do not reach Benyo's claims relating to the merits of the case against him.
From 2000 to 2001, Benyo served as Senior Vice president for Marketing and Network Development for purchasePro, which made software for online "business-to-business" sales. PurchasePro sold licenses that granted the holders access to its online "marketplace" where they couldbuy and sell goods and build a company-specific site using PurchasePro's technology.
Early in 2000, America Online, Inc. (AOL) engaged PurchasePro to help it build NetBusiness, an online sales platform for small businesses, and in March of that year, PurchasePro agreed to pay AOL for advertising and for referring new customers to PurchasePro. The companies entered into additional agreements later that year that made AOL a sales agent for PurchasePro. By the end of 2000, PurchasePro's business depended heavily upon the payments and referrals it received from AOL.
In September 2000, PurchasePro began to document sham transactions in order to inflate its reported revenue. Certain customers referred by AOL agreed to buy licenses to PurchasePro's software in exchange for a side agreement for AOL or PurchasePro to subsidize the purchase. Because PurchasePro would disclose the sale but not the side agreement, each transaction appeared on paper to generate a substantial amount of revenue for PurchasePro.
PurchasePro also backdated or entirely falsified new agreements with AOL. The company later attributed $3.65 million in revenue to one of those contracts — an agreement to integrate an auction platform into AOL's NetBusiness, styled as a subcontract under a pre-existing agreement between AOL and a third company, AuctioNet, Inc. In the first quarter of 2001, two-thirds of PurchasePro's announced revenues of $29.8 million in some way came from the company's dealings with AOL, whether through the sham referrals or the new fraudulent contracts.
PurchasePro's auditors and attorneys learned the AuctioNet deal was phony on May 14, 2001, when AOL sent PurchasePro's chief accounting officer a letter stating it hadno documentation of the deal. Until then the company's auditors and attorneys had relied upon a "Statement of Work" dated February 5, 2001 and apparently executed by AOL and PurchasePro, but which they had suspected was a forgery. After AOL confirmed that suspicion, PurchasePro excluded from its report to the SEC the revenue associated with the AuctioNet deal and the other fraudulent agreements it had discovered. On the Form 10-Q it filed on May 29, 2001, PurchasePro reported only $16 million of the nearly $30 million in revenue it had publicly announced the month before. PurchasePro declared bankruptcy in 2002.
In January 2005, the Government filed in the Eastern District of Virginia a 31-count indictment against Benyo, three other PurchasePro employees, and two executives of AOL. By that time, six former executives of PurchasePro had agreed to plead guilty to charges relating to the fraud and cover-up and, as part of a deferred-prosecution agreement, AOL had admitted having aided and abetted a securities fraud. See Dep't of Justice, America Online Charged with Aiding and Abetting Securities Fraud, http://www.justice.gov/opa/pr/2004/December/04_crm_790.h tm (Dec. 15, 2004).
On the same day, the SEC filed this civil enforcement action against the same defendants in the District of Columbia. The SEC alleged Benyo had "worked on drafting or caused others to draft" the Statement of Work for the phony AuctioNet deal. The complaint further alleged that, in order "to create the false appearance ... the [integration] services described in the Statement of Work had actually been performed" during the first quarter of 2001, Benyo had devised a plan to place on the NetBusiness site a hyperlink to AuctioNet.com. From the alleged facts, the SEC inferred Benyo "knew or was reckless in not knowing" PurchaseProintended to recognize and report revenue associated with the fraudulent Statement of Work; therefore he had aided and abetted the company's fraud, in violation of 15 U.S.C. § 78t(e);** aided and abetted the company's failure to maintain internal accounting controls, in violation of § 78m(b)(5); falsified books and records, also in violation of § 78m(b)(5) and of 17 C.F.R. § 240.13b2-1 (Rule 13b2-1); and misled an accountant or auditor, in violation of 17 C.F.R. § 240.13b2-2 (Rule 13b2-2).
The SEC's civil case against Benyo went to trial only after the jury in Virginia had acquitted Benyo of all criminal charges. The civil jury here then found Benyo liable on the one count of aiding and abetting PurchasePro's securities fraud and absolved him of the other charges. The district court fined Benyo $35,000 and barred him from serving as an officer or director of a publicly traded company for five years, as authorized by § 78u(d).
In his answer to the SEC's complaint, Benyo had argued venue was improper in the District of Columbia. He renewed that objection in a motion for summary judgment, and again after trial in a motion for judgment as a matter of law. In each filing, Benyo argued the allegations showed he had acted only in Nevada, and, more important, no "act or transaction constituting the violation[s]" with which he was charged had occurred in the District of Columbia, as required for venue under § 78aa. The SEC countered that the District was a permissible forum under the "co-conspirator venue theory" because Benyo had been "in league with a defendant who ...act[ed] within the [D]istrict." Johnson, 565 F. Supp. 2d at 92.***
The district court adopted the Commission's "co-conspirator theory of venue," which it said courts "routinely apply" when a complaint alleges a securities fraud "involving multiple defendants acting in multiple districts." Id. at 92. Here, the defendant had allegedly "aided and abetted a scheme, a material part of which occurred in the District of Columbia," to wit, PurchasePro's filing a misleading Form 10-K for 2000 and Form 10-Q for the first quarter of 2001. Id. at 93; see SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1154 & n.12 (D.C. Cir. 1978) (). The district court rejected, however, the SEC's assertion the scheme had also reached the District of Columbia by way of a press release PurchasePro had sent out nationwide and a nationally broadcast conference call with securities analysts in which PurchasePro had made misleading or incorrect statements about the company's revenue. Johnson, 565 F. Supp. 2d at 91, n.11.
The parties' dispute over the proper interpretation of § 78aa, the special venue section of the Securities Exchange Act of 1934, clearly raises a question of law. Therefore we address it de novo. See 5B CHARLES ALAN WRIGHT, ARTHUR R. MILLER, MARY K. KANE, & RICHARD L. MARCUS, FEDERAL PRACTICE & PROCEDURE § § 1352 (3d ed.); see also Armstrong v. Geithner, 608 F.3d 854, 857 (D.C. Cir. 2010).
Venue for a civil action under the securities laws lies "in the district wherein the defendant is found or is an inhabitant or transacts business," or "in the district wherein any act or transaction constituting the violation occurred." § 78aa. By the reference to "any act," the statute permits a plaintiff to bring suit in any district where any person has committed any act that "constitute[s]" the offense with which the defendant is charged.
The co-conspirator theory of venue is but a gloss upon and an extension of § 78aa. The question presented in this case is whether that extension is consistent with the terms of § 78aa. Benyo contends it is not, relying in particular upon Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994), in which the Supreme Court held there was no private right of action for aiding and abetting securities fraud and strongly implied there could be no cause of action for any form of "secondary liability" for fraud that does not require proof of each of the elements of the primary violation, see id. at 180, 184. After Central Bank of Denver was decided, the Congress enacted § 78t(e) to give the SEC express authority to pursue a person who has aided and abetted a securities fraud. See Private Securities Litigation Reform Act of 1995, § 104, Pub. L. 104-67, 109 Stat. 737, 757 (1995); Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 158 (2008). Because § 78t(e) did not similarly authorize the SEC to sue for conspiracy to commit...
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