U.S. Sec. & Exch. Comm'n v. Husain
| Docket Number | 21-55859 |
| Decision Date | 13 June 2023 |
| Parties | U.S. SECURITIES & EXCHANGE COMMISSION, Plaintiff-Appellee, v. Imran HUSAIN, Defendant-Appellant, and Gregg Evan Jaclin, Defendant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Appeal from the United States District Court for the Central District of California, Otis D. Wright II, District Judge, Presiding, D.C. No. 2:16-cv-03250-ODW-E
Daniel R. Walfish (argued) and Rachel Penski Fissell, Walfish & Fissel PLLC, New York, New York; George B. Newhouse Jr., Richards Carrington LLC, Los Angeles, California; for Defendant-Appellant.
Jeffrey A. Berger (argued) and Roberto A. Tercero, Senior Litigation Counsels; Michael A. Conley, Solicitor; Dan Berkovitz, General Counsel; Securities and Exchange Commission; Washington, D.C.; Amy J. Longo, Ropes & Gray LLP, San Francisco, California; for Plaintiff-Appellee
Before: Kim McLane Wardlaw and Sandra S. Ikuta, Circuit Judges, and Kathryn H. Vratil,* District Judge.
Opinion by Judge Vratil;
OPINION
Imran Husain and his attorney, Gregg Evan Jaclin, created publicly-traded shell corporations and sold them to privately-held companies. The Securities and Exchange Commission (SEC) filed suit against Husain and Jaclin for violations of the Securities Act of 1933 (Securities Act), 15 U.S.C. § 77a et seq., the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78a et seq., and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. On cross motions for summary judgment, the district court held that Husain had violated the securities laws and imposed equitable statutory remedies, including a civil penalty of $1,757,000. The district court found that as a matter of undisputed fact, Husain had received $1,757,000 in gross pecuniary gain from his violations and used that amount for the civil penalty. On appeal, Husain challenges the amount of that penalty. We have jurisdiction under 28 U.S.C. § 1291 and reverse.
From 2008 to 2012, Husain and Jaclin created and controlled nine shell companies. For each company, Husain acted as an undisclosed control person and recruited other individuals to serve as nominal CEOs. Husain controlled each company and the activities of each CEO, and he had final authority over all matters involving the shells. Husain also helped organize private placement offerings for the shares of the shells and paid people to recruit "straw shareholders."
Husain conducted initial public offerings for the stock of each shell, so that the shares could trade publicly. At his direction, each shell filed one or more registration statements on SEC Form S-1. Some 50 registration statements were misleading because they did not disclose Husain's role as the controlling person. On Jaclin's advice, Husain kept his name off the registration statements to avoid suspicion and attention from the SEC.
Between 2008 and 2012, in coordination with Jaclin and outside auditors, Husain directed the preparation of various SEC filings related to eight of the shells. These SEC filings contained material misrepresentations and omissions regarding the business purposes of the shells, Husain's role as the control person and promoter, the nature of the straw shareholders and puppet CEOs and, in two instances, the existence of merger plans.1 In total, Husain oversaw the SEC filings of more than 35 materially false and misleading periodic reports.
Husain understood that the shells were valuable because they allowed their buyers—which often were privately-held corporations with ongoing businesses—to control the shares and corporate actions of the companies. After the sale of each shell, the puppet CEO resigned and the new owner installed new management. Husain sold seven of the shells through reverse mergers.2
Once the shell companies were sold, the sales proceeds flowed to an escrow account, pursuant to an escrow agreement signed by nominee-representatives that Husain appointed. The escrow agent then paid Jaclin's firm's legal fees. After paying the legal fees, the escrow agent wired the proceeds to the nominee-representative's bank account. Alternatively, some proceeds were paid to the offshore accounts of two entities, Liric and Ucino, that the SEC claimed were owned or controlled by Husain. The sales of five shell companies (Ciglarette, Inc., Rapid Holdings, Inc., Resume in Minutes, Inc., Movie Trailer Galaxy, Inc., and Health Directory, Inc.) within the five-year statute of limitations period generated gross proceeds of $1,787,000.3
Together, Husain and Jaclin tried to conceal their scheme. They communicated with each other through email accounts in the names of the puppet CEOs and hired a computer consultant to destroy emails between them. In 2012, Husain coached the puppet CEO of PR Complete Holdings, Inc. on how to testify before the SEC and instructed her to testify falsely by leaving his name out of it.
In May of 2014, a grand jury returned an indictment which charged Husain with obstruction of SEC proceedings in violation of 18 U.S.C. § 1505 and conspiracy to obstruct such proceedings in violation of 18 U.S.C. § 371. On October 14, 2014, Husain pleaded guilty to the conspiracy charge. As part of the factual basis for the guilty plea, Husain admitted that from 2008 to at least 2012, SEC filings for several shells which he controlled did not disclose his role. Husain also admitted that he recruited nominal CEOs who did not actually control the companies.
In May of 2017, based on Husain's ongoing cooperation in the criminal case, a grand jury indicted Jaclin for securities crimes.4 Meanwhile, in 2016, the SEC filed this civil enforcement action against Husain and Jaclin.5 From May of 2017 through August of 2019, while the criminal case was proceeding against Jaclin and Husain was awaiting sentencing, the district court stayed the civil enforcement action. Shortly after the district court lifted the stay, Jaclin consented to the entry of judgment. The district court imposed an injunction on Jaclin and ordered disgorgement in the amount of $32,700.00 and interest in the amount of $7,773.80, for a total of $40,473.80. The district court did not impose a civil penalty on Jaclin.
In Husain's criminal case, on November 12, 2019, the district court sentenced him to three years of probation. Jaclin pleaded guilty to obstructing SEC proceedings and conspiracy to obstruct such proceedings, and on June 22, 2020, the district court sentenced him to three years of probation with three months of partial home confinement.
In the civil enforcement action, on cross motions for summary judgment, the district court held that Husain had violated the Securities Act, the Exchange Act and SEC Rule 10b-5, as asserted in Claims 1, 3, 4, 6 and 7. In addition, it granted summary judgment on the issue of equitable remedies: it permanently enjoined Husain from violating securities laws, banned him from serving as an officer or director of a public company for seven years, barred him from participating in penny stock offerings for seven years and imposed a civil penalty of $1,757,000.6
The district court found that based on the "totality of the circumstances" and the factors set forth in SEC v. Murphy, 626 F.2d 633, 655 (9th Cir. 1980), a permanent injunction was necessary to prevent Husain from violating the securities laws. It determined that Husain had (1) "acted with a high degree of scienter, over several years, in a repeated pattern of wrongdoing;" (2) had gone "to great lengths to conceal his shell factory scheme from regulatory oversight;" (3) "only stopped his scheme because he got caught, which gives rise to an inference of a reasonable expectation of future violations;" and (4) failed to recognize the wrongful nature of his conduct.
The district court noted that the Murphy factors also favored a civil penalty. Because Husain's conduct involved fraud and deceit, the district court imposed a second-tier penalty under the Securities Act and the Exchange Act.7 It found that $1,757,000 was the undisputed amount of Husain's gross pecuniary gain and granted the SEC's request for a civil penalty in that amount.8
Husain filed a motion to reconsider the amount of the civil penalty, arguing that his "pecuniary gain" should take into account expenses which Jaclin paid from gross proceeds over which Husain had no control. Husain argued that he "did not realize (or ever receive) the gross payments." The district court denied the motion to reconsider, finding that it merely reiterated arguments raised in Husain's summary judgment opposition and stating that in determining the appropriate civil penalty, it had "thoroughly reviewed the record and relevant legal authority." The district court did not directly address Husain's argument that the gross proceeds went to Jaclin and that Husain did not receive any proceeds until Jaclin had paid other individuals and expenses.
As noted, Husain argues that the district court erred in granting summary judgment on the amount of the civil penalty.
We review de novo a district court decision to grant summary judgment. Evanston Ins. Co. v. OEA, Inc., 566 F.3d 915, 918 (9th Cir. 2009). Viewing the evidence in the light most favorable to the non-moving party, we determine whether genuine issues of material fact exist and whether the district court correctly applied the substantive law. Id. at 918-19. As to the district court's formulation of remedies under the Securities Act and the Exchange Act, we review for abuse of discretion. See SEC v. Murphy (Murphy II), 50 F.4th 832, 842 (9th Cir. 2022).
The parties disagree what standard of review applies to the factual findings which underlie the district court's determination of the amount of the civil penalty in this case. The SEC seeks review for abuse of discretion, and argues that the district court did not apply the incorrect legal standard and its...
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