SEC v. Sargent
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Opinion
United States Court of Appeals For the First Circuit
Nos. 23-1669, 23-1812
U.S. SECURITIES AND EXCHANGE COMMISSION,
Plaintiff, Appellee/Cross-Appellant,
v.
HENRY B. SARGENT,
Defendant, Appellant/Cross-Appellee,
FREDERICK M. MINTZ; ALAN P. FRAADE; JOSEPH J. TOMASEK; PATRICK GIORDANO,
Defendants.
APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Barron, Chief Judge, Lynch and Kayatta, Circuit Judges.
Peter R. Ginsberg, with whom Christopher Neff and Moskowitz Colson Ginsberg & Schulman LLP were on brief, for appellant/cross- appellee.
Paul G. Álvarez, Senior Appellate Counsel, Securities and Exchange Commission, with whom Megan Barbero, General Counsel, Michael A. Conley, Solicitor, and Daniel Staroselsky, Assistant General Counsel, were on brief, for appellee/cross-appellant. February 13, 2025 KAYATTA, Circuit Judge. This appeal arises from a civil
enforcement action brought by the Securities and Exchange
Commission (SEC) against Henry B. Sargent, who allegedly violated
registration and antifraud provisions of the federal securities
laws. The district court awarded partial summary judgment to the
SEC on its claim that Sargent violated section 5 of the Securities
Act of 1933 (the "Act") by directing a series of transactions as
part of an unregistered public offering of penny stocks. The
district court also ordered various equitable remedies, including
disgorgement and a ten-year ban on Sargent's ability to trade penny
stocks. Finally, the district court dismissed the SEC's fraud
claims and rejected its request for an additional civil penalty.
Both Sargent and the SEC appealed. Sargent first
challenges the district court's partial grant of summary judgment,
arguing that his transactions were exempt from registration (or at
least that a jury could so find). Sargent further challenges the
district court's remedial order, arguing that the district court
abused its discretion in imposing the ten-year penny-stock ban and
in calculating the disgorgement amount. Meanwhile, the SEC argues
that the district court erred in refusing to order a civil penalty
while dismissing its fraud claims.
We now affirm the district court's grant of partial
summary judgment, the amount it ordered in disgorgement, and its
dismissal of the SEC's fraud claims. We also hold that the
- 3 - district court erred both in imposing equitable remedies and in
concluding that it lacked the power to issue a civil penalty. Our
reasoning follows.
I.
"'On review of an order granting summary judgment, we
recite the facts in the light most favorable to the nonmoving
party' to the extent that they are supported by competent
evidence." Ellis v. Fidelity Mgmt. Tr. Co., 883 F.3d 1, 3 (1st
Cir. 2018) (quoting Walsh v. TelTech Sys., Inc., 821 F.3d 155,
157–58 (1st Cir. 2016)); see also Burns v. State Police Ass'n of
Mass., 230 F.3d 8, 9 (1st Cir. 2000) (noting that competent
evidence is necessary to defeat summary judgment). We therefore
refer to the undisputed material facts set out in the district
court's summary judgment decision, see SEC v. Sargent, 589 F. Supp.
3d 173, 181–83 (D. Mass. 2022), and take additional undisputed
facts "from the record at large where appropriate," Ellis, 883
F.3d at 3.
A.
In August 2014, Sargent incorporated BMP Holdings, LLC
("BMP"), the business of which thereafter included operating a
yoga studio. Sargent served as BMP's chief executive officer,
chief financial officer, majority shareholder, and sole director.1
1 Sargent also worked at Southridge Capital Investment ("Southridge"), a financial services firm.
- 4 - Between September and December 2014, Sargent caused BMP
to issue 168,000 shares to thirty-two individuals (the "S-1
shareholders") for $0.01 per share, or $1,680 in total. The S-1
shareholders ranged from Sargent's family, friends, and business
associates, to family members of those business associates, to
additional individuals those associates brought in whom Sargent
did not personally know. Sargent's purpose in recruiting the S-1
shareholders was not to fund BMP's operations but to "get a
shareholder base" so he could take BMP public. Some S-1
shareholders were not aware of anything about BMP's operations
other than that it was a "shell company."
In January 2015, Sargent caused BMP to issue 5,000,000
shares to himself, in exchange for his interest in a small yoga
studio (which he had operated at a loss). In May 2015, Sargent
caused BMP to file a Form S-1 registration statement with the SEC,
which became effective in August of that year. The Form S-1
registration provided a mechanism by which the S-1 shareholders
could publicly sell or otherwise dispose of their shares. In
September 2015, Sargent caused a brokerage firm to file a
Form 15c2-11 application with the Financial Industry Regulatory
Authority (FINRA) on BMP's behalf. This application, which FINRA
approved in January 2016, cleared BMP's stock to be quoted publicly
on the over-the-counter (OTC) market. In May 2016, Sargent caused
BMP to issue him another 245,000,000 shares, which reduced BMP's
- 5 - state tax liability. Notwithstanding taking these steps, Sargent
did not inform any S-1 shareholders at the time that he had filed
the Form S-1, nor that as of January 2016, they could sell their
BMP shares on the OTC market.
In May 2016, BMP's lawyer and various consultants began
negotiating over the potential acquisition of BMP by PixarBio, a
biotech company located in Massachusetts. As those negotiations
continued, in July 2016, Sargent sent stock powers -- legal
documents that transfer stock ownership -- to the S-1 shareholders.
The shareholders signed the stock powers, leaving the buyer blank,
and sent them back to Sargent.
On August 19, 2016, Sargent and PixarBio executed a
stock-purchase agreement as part of what the SEC alleged was a
reverse merger.2 Under the agreement, Sargent transferred
5,000,000 shares of his restricted BMP stock to PixarBio for
$108,500; the agreement also provided that PixarBio would
contribute $191,500 to satisfy an outstanding loan from Sargent to
2 "A reverse merger is a transaction in which a privately- held corporation acquires a publicly-traded corporation, thereby allowing the private corporation to transform into a publicly- traded corporation without the necessity of making an initial stock offering." United States v. Weed, 873 F.3d 68, 70 n.2 (1st Cir. 2017) (quoting SEC v. M & A W. Inc., 538 F.3d 1043, 1046–47 (9th Cir. 2008)). "To effect the reverse merger, the shell public corporation will exchange its treasury stock for all outstanding shares of the privately-held corporation. In consideration, the controlling shareholders of the shell public corporation transfer a majority of their shares to the owners of the private corporation." Id. (quoting M & A W. Inc., 538 F.3d at 1046–47).
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United States Court of Appeals For the First Circuit
Nos. 23-1669, 23-1812
U.S. SECURITIES AND EXCHANGE COMMISSION,
Plaintiff, Appellee/Cross-Appellant,
v.
HENRY B. SARGENT,
Defendant, Appellant/Cross-Appellee,
FREDERICK M. MINTZ; ALAN P. FRAADE; JOSEPH J. TOMASEK; PATRICK GIORDANO,
Defendants.
APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Barron, Chief Judge, Lynch and Kayatta, Circuit Judges.
Peter R. Ginsberg, with whom Christopher Neff and Moskowitz Colson Ginsberg & Schulman LLP were on brief, for appellant/cross- appellee.
Paul G. Álvarez, Senior Appellate Counsel, Securities and Exchange Commission, with whom Megan Barbero, General Counsel, Michael A. Conley, Solicitor, and Daniel Staroselsky, Assistant General Counsel, were on brief, for appellee/cross-appellant. February 13, 2025 KAYATTA, Circuit Judge. This appeal arises from a civil
enforcement action brought by the Securities and Exchange
Commission (SEC) against Henry B. Sargent, who allegedly violated
registration and antifraud provisions of the federal securities
laws. The district court awarded partial summary judgment to the
SEC on its claim that Sargent violated section 5 of the Securities
Act of 1933 (the "Act") by directing a series of transactions as
part of an unregistered public offering of penny stocks. The
district court also ordered various equitable remedies, including
disgorgement and a ten-year ban on Sargent's ability to trade penny
stocks. Finally, the district court dismissed the SEC's fraud
claims and rejected its request for an additional civil penalty.
Both Sargent and the SEC appealed. Sargent first
challenges the district court's partial grant of summary judgment,
arguing that his transactions were exempt from registration (or at
least that a jury could so find). Sargent further challenges the
district court's remedial order, arguing that the district court
abused its discretion in imposing the ten-year penny-stock ban and
in calculating the disgorgement amount. Meanwhile, the SEC argues
that the district court erred in refusing to order a civil penalty
while dismissing its fraud claims.
We now affirm the district court's grant of partial
summary judgment, the amount it ordered in disgorgement, and its
dismissal of the SEC's fraud claims. We also hold that the
- 3 - district court erred both in imposing equitable remedies and in
concluding that it lacked the power to issue a civil penalty. Our
reasoning follows.
I.
"'On review of an order granting summary judgment, we
recite the facts in the light most favorable to the nonmoving
party' to the extent that they are supported by competent
evidence." Ellis v. Fidelity Mgmt. Tr. Co., 883 F.3d 1, 3 (1st
Cir. 2018) (quoting Walsh v. TelTech Sys., Inc., 821 F.3d 155,
157–58 (1st Cir. 2016)); see also Burns v. State Police Ass'n of
Mass., 230 F.3d 8, 9 (1st Cir. 2000) (noting that competent
evidence is necessary to defeat summary judgment). We therefore
refer to the undisputed material facts set out in the district
court's summary judgment decision, see SEC v. Sargent, 589 F. Supp.
3d 173, 181–83 (D. Mass. 2022), and take additional undisputed
facts "from the record at large where appropriate," Ellis, 883
F.3d at 3.
A.
In August 2014, Sargent incorporated BMP Holdings, LLC
("BMP"), the business of which thereafter included operating a
yoga studio. Sargent served as BMP's chief executive officer,
chief financial officer, majority shareholder, and sole director.1
1 Sargent also worked at Southridge Capital Investment ("Southridge"), a financial services firm.
- 4 - Between September and December 2014, Sargent caused BMP
to issue 168,000 shares to thirty-two individuals (the "S-1
shareholders") for $0.01 per share, or $1,680 in total. The S-1
shareholders ranged from Sargent's family, friends, and business
associates, to family members of those business associates, to
additional individuals those associates brought in whom Sargent
did not personally know. Sargent's purpose in recruiting the S-1
shareholders was not to fund BMP's operations but to "get a
shareholder base" so he could take BMP public. Some S-1
shareholders were not aware of anything about BMP's operations
other than that it was a "shell company."
In January 2015, Sargent caused BMP to issue 5,000,000
shares to himself, in exchange for his interest in a small yoga
studio (which he had operated at a loss). In May 2015, Sargent
caused BMP to file a Form S-1 registration statement with the SEC,
which became effective in August of that year. The Form S-1
registration provided a mechanism by which the S-1 shareholders
could publicly sell or otherwise dispose of their shares. In
September 2015, Sargent caused a brokerage firm to file a
Form 15c2-11 application with the Financial Industry Regulatory
Authority (FINRA) on BMP's behalf. This application, which FINRA
approved in January 2016, cleared BMP's stock to be quoted publicly
on the over-the-counter (OTC) market. In May 2016, Sargent caused
BMP to issue him another 245,000,000 shares, which reduced BMP's
- 5 - state tax liability. Notwithstanding taking these steps, Sargent
did not inform any S-1 shareholders at the time that he had filed
the Form S-1, nor that as of January 2016, they could sell their
BMP shares on the OTC market.
In May 2016, BMP's lawyer and various consultants began
negotiating over the potential acquisition of BMP by PixarBio, a
biotech company located in Massachusetts. As those negotiations
continued, in July 2016, Sargent sent stock powers -- legal
documents that transfer stock ownership -- to the S-1 shareholders.
The shareholders signed the stock powers, leaving the buyer blank,
and sent them back to Sargent.
On August 19, 2016, Sargent and PixarBio executed a
stock-purchase agreement as part of what the SEC alleged was a
reverse merger.2 Under the agreement, Sargent transferred
5,000,000 shares of his restricted BMP stock to PixarBio for
$108,500; the agreement also provided that PixarBio would
contribute $191,500 to satisfy an outstanding loan from Sargent to
2 "A reverse merger is a transaction in which a privately- held corporation acquires a publicly-traded corporation, thereby allowing the private corporation to transform into a publicly- traded corporation without the necessity of making an initial stock offering." United States v. Weed, 873 F.3d 68, 70 n.2 (1st Cir. 2017) (quoting SEC v. M & A W. Inc., 538 F.3d 1043, 1046–47 (9th Cir. 2008)). "To effect the reverse merger, the shell public corporation will exchange its treasury stock for all outstanding shares of the privately-held corporation. In consideration, the controlling shareholders of the shell public corporation transfer a majority of their shares to the owners of the private corporation." Id. (quoting M & A W. Inc., 538 F.3d at 1046–47).
- 6 - BMP, and $25,000 to pay certain BMP operating expenses, for a total
sum from PixarBio of $325,000. Sargent also promised to deliver
agreements for six-month "lockups" with certain S-1 shareholders
owning 25,000 shares of BMP S-1 stock. As part of the transaction,
PixarBio also cancelled the other 245,000,000 shares in Sargent's
name, and a few months later cancelled the remaining shares it had
acquired from Sargent. Sargent resigned as BMP's president and
director the same day as the stock-purchase agreement, August 19,
although his director resignation did not become effective until
September 15.
Meanwhile, around the same time that Sargent signed the
stock-purchase agreement with PixarBio, the S-1 shareholders'
shares were transferred using the signed blank stock powers, some
to Sargent and the rest to Jay Herod and Patrick Giordano, both of
whom were associated with PixarBio. Specifically, on August 15,
Giordano executed a stock-purchase agreement purporting to buy
10,000 shares from two S-1 shareholders for $0.02 per share. On
August 23, Herod executed a stock-purchase agreement buying
130,000 shares from twenty-five of the twenty-nine S-1
shareholders for the same price.3 And Sargent executed an
agreement, also dated August 15, buying 10,000 shares from his
3 There were only twenty-nine S-1 shareholders at this point because three investors had assigned their shares to another S-1 shareholder, Bodhnarine Persaud, in the interim.
- 7 - sister for $0.10 per share. Sargent then acquired another 18,000
shares from Bodhnarine Persaud, one of the S-1 shareholders and a
colleague at Southridge, and paid him $2,000 (around $0.11 per
share) by check dated September 20, 2016.
On October 11, 2016, BMP (now under the control of
PixarBio affiliates) declared a nine-for-one stock dividend. On
October 30, PixarBio merged with BMP. Thus, the BMP shares owned
by Herod, Giordano, and Sargent -- i.e., the only shares of BMP
available for sale on the public market -- became shares of
PixarBio and multiplied by ten. As a result, the 28,000 shares
that Sargent purchased from Persaud and his sister became 280,000
PixarBio shares. However, Sargent's shares were still subject to
the contractual lockups that Sargent had delivered to PixarBio, as
promised in the August 19 stock-purchase agreement.
On October 31, 2016, public trading of PixarBio stock
opened at $3.00 per share on the OTC market. In the meantime,
PixarBio and its officers had allegedly orchestrated a "pump-and-
dump" scheme -- including by making false representations in the
company's Form 8-K filed with the SEC -- that caused the market
value of PixarBio stock to quickly surge.4 PixarBio's stock closed
at $4.77 on October 31, $11 on November 1, and $30 on November 2.
4 The SEC instituted an enforcement action against PixarBio and its officers in a different case. See Complaint, SEC v. PixarBio Corp., No. 1-18-cv-10797, 2017 WL 8942305 (D. Mass. Apr. 24, 2017).
- 8 - On November 2, PixarBio released Sargent from the
contractual lockup on his 280,000 shares. Sargent began trading
the next day. Over the following two-and-a-half months, Sargent
sold around 40% of his shares, earning $627,979 in profits. Herod
and Giordano respectively earned around $900,000 and $115,000 in
profits during the same general time period.
On January 23, 2017, the SEC suspended public trading in
PixarBio stock.
B.
In June 2019, the SEC brought this civil enforcement
action against Sargent and a group of co-defendants, alleging
violations of the registration and antifraud provisions of the
federal securities laws.
After discovery, the SEC moved for partial summary
judgment on its section 5 registration claim, which the district
court granted. Sargent, 589 F. Supp. 3d at 180. The district
court first concluded that the SEC had established a prima facie
case that Sargent had violated section 5 by failing to register
the sales to the public of BMP (PixarBio) stock he had acquired
from the S-1 shareholders. Id. at 187–91. The court then held
that the undisputed facts established that Sargent was an
"underwriter" and that Sargent thus failed to carry his burden to
show that those sales were exempt from registration under
section 4(a)(1) of the Act. Id. at 191–206.
- 9 - In April 2022, the SEC tried its fraud claims before a
jury, which resulted in a unanimous verdict against Sargent. See
SEC v. Sargent, 66 F.4th 11, 13 (1st Cir. 2023). However, after
the verdict was announced, the district court denied Sargent's
request to individually poll the jurors, as required by Federal
Rule of Civil Procedure 48(c). On interlocutory review, this court
held that the district court's failure to poll the jurors
constituted reversible error, such that Sargent was entitled to a
new trial. Id. at 12.
Back in the district court, the SEC sought various
remedies for its section 5 claim on which the court had granted
partial summary judgment. Those remedies included a permanent
injunction, a permanent prohibition on Sargent's participation in
penny stock offerings, disgorgement of Sargent's ill-gotten gains
from his section 5 violation, and a single first-tier civil penalty
of $630,979. After an evidentiary hearing and remedies
briefing -- including as to whether the district court could order
a civil penalty for Sargent's section 5 violation even though the
SEC's fraud claims were scheduled for retrial before a jury -- the
district court issued a nonfinal partial judgment awarding
equitable remedies for Sargent's section 5 violation.
That nonfinal order, dated July 12, 2023, laid out
several equitable remedies: (1) a permanent injunction barring
Sargent from committing future section 5 violations, (2) a ten-
- 10 - year ban prohibiting Sargent from participating in any offerings
of penny stocks (those tradeable for less than $5.00 per share),
and (3) a disgorgement of $562,786 in net profits from Sargent's
section 5 violations and $142,132 in prejudgment interest.
However, with the SEC's fraud claims scheduled for retrial, the
court explained that it lacked the constitutional power to impose
a monetary penalty for Sargent's section 5 violation "absent a
jury verdict or a ruling that obviates the need for a jury." The
district court thus refrained from imposing a nonfinal monetary
penalty. Citing the fraud retrial, the district court also stayed
entry of its partial judgment "until appropriate."
The SEC then submitted a notice contesting -- as it had
previously -- the notion that the district court lacked the
authority to issue a civil penalty for the section 5 violation.
The SEC stipulated that to the extent the court saw the outstanding
retrial of the fraud claims as a legal impediment thereto, the SEC
would seek authorization to file a motion to dismiss its fraud
claims "upon entry of a final order granting all equitable relief
set forth in the [district court's] July 12, 2023 Order and any
civil penalty the [c]ourt deems appropriate."
Shortly thereafter, on August 11, 2023, the SEC filed a
"Motion for Entry of Order Concurrently Granting Certain Relief
and Dismissing Fraud Claims." The SEC asked that the district
court enter "an order or orders that concurrently: (1) provide all
- 11 - of the relief set forth . . . in the Court's July 12, 2023 Order;
(2) impose a civil penalty of $630,979 or, if needed, set a hearing
regarding imposition of a civil penalty as soon as is practicable;
and (3) dismiss the [SEC's fraud claims] as to Sargent . . . ."
On September 6, 2023, the district court issued a minute
order dismissing the SEC's fraud claims with prejudice, without
imposing any civil penalty for Sargent's section 5 violation. The
district court noted that it "ha[d] no power to award a penalty
herein where a jury trial has been asserted and not waived." The
court declared its July 12 nonfinal order a final judgment.
This appeal and cross-appeal followed.
II.
We start with Sargent's appeal of the district court's
order summarily entering judgment against Sargent on the section 5
claim. Summary judgment is appropriate when "there is no genuine
dispute as to any material fact and the movant is entitled to
judgment as a matter of law." Fed. R. Civ. P. 56(a). We review
the district court's order granting summary judgment de novo,
drawing all reasonable inferences in favor of the party against
whom summary judgment was entered. See Gibson Found., Inc. v.
Norris, 88 F.4th 1, 5 (1st Cir. 2023).
- 12 - B.
The district court found, and Sargent does not contest
on appeal, that the SEC's undisputed evidence established a prima
facie showing that Sargent violated section 5 by failing to
register the sales of PixarBio stock he acquired from Persaud.5
Sargent, 589 F. Supp. 3d at 182, 187–91; see also 15 U.S.C. § 77e
(requiring that securities be registered with the SEC before they
are sold). So the SEC's claim that Sargent violated section 5
turns on whether he qualified for an exemption to section 5 -- in
this case, section 4(a)(1), which exempts from liability
"transactions by any person other than an issuer, underwriter, or
dealer." 15 U.S.C. § 77d(a)(1). An "underwriter" is "any person
who has purchased from an issuer with a view to . . . the
distribution of any security, or participates or has a direct or
indirect participation in any such undertaking, or participates or
5Sargent also purchased S-1 shares from his sister but asserts that he "continues to hold th[ose] shares." The SEC does not challenge this assertion. Nor does Sargent contest the district court's disgorgement award on the basis that it inappropriately considered profits from his sale of S-1 shares acquired from his sister. Thus, we need only focus on Sargent's sale of the shares he acquired from Persaud. Nor need we address Sargent's possible liability for facilitating the transfer of S-1 shares to Herold and Giordano, since the district court did not reach that issue. See Sargent, 589 F. Supp. 3d at 191 (noting that Herod's and Giordano's sales were unregistered); id. at 198 & n.18 (clarifying that the court "only ruled as matter of law that Sargent violated section 5 based on his sales to the public, not those of Herod and Giordano").
- 13 - has a participation in the direct or indirect underwriting of any
such undertaking." Id. § 77b(a)(11); see also SEC v. Big Apple
Consulting USA, Inc., 783 F.3d 786, 807 (11th Cir. 2015) ("The
definition of 'underwriter' in the [Act] 'is expansive.'" (quoting
SEC v. Platforms Wireless Int'l Corp., 617 F.3d 1072, 1086 (9th
Cir. 2010))). And as relevant to the definition of an
"underwriter," an "issuer" is anyone who issues or proposes to
issue a security, including "any person directly or indirectly
controlling or controlled by the issuer, or any person under direct
or indirect common control with the issuer." 15 U.S.C.
§ 77b(a)(11).
Because judgment against Sargent was entered without a
trial under Federal Rule of Civil Procedure 56, the precise issue
before this court is whether he has come forward with facts that
would support a jury finding that the section 4(a)(1) exemption
applied. See SEC v. GenAudio Inc., 32 F.4th 902, 941 (10th Cir.
2022) (explaining that, once the SEC established a prima facie
case, it became defendant's burden to demonstrate a genuine dispute
of material fact that an exemption applied). To carry his burden,
Sargent "must point to evidence affirmatively tending to prove the
fact in [his] favor." FDIC v. Elder Care Servs., Inc., 82 F.3d
524, 526 (1st Cir. 1996).
Sargent devotes much of his brief to criticizing the
district court's reliance on a so-called "presumption of the middle
- 14 - ground" in finding that Sargent controlled the S-1 shareholders,
and its reliance on the price at which Sargent sold his S-1 shares
due to PixarBio's pump-and-dump scheme. See Sargent, 589 F. Supp.
3d at 187. As the SEC points out, however, given that our review
is de novo, the question is whether the district court ended up in
the correct place, not whether it took the correct analytical route
to get there.6 In other words, "[b]ecause appellate review is
plenary," Perez v. Volvo Car Corp., 247 F.3d 303, 310 (1st Cir.
2001), we may "reject the rationale employed by the lower court
and still uphold its order for summary judgment," Houlton Citizens'
Coal. v. Town of Houlton, 175 F.3d 178, 184 (1st Cir. 1999). In
this respect, the law is clear that we may affirm a judgment on
"any independently sufficient ground." Mesnick v. Gen. Elec. Co.,
950 F.2d 816, 822 (1st Cir. 1991). And for the following reasons,
6 To be sure, we reject the district court's application of its so-called "presumption of the middle ground" insofar as it is anything other than a metaphor for strong evidence in support of a particular conclusion. That is, because Sargent had the burden to show that a jury could find him not to be an underwriter, it was not error for the court to consider facts regarding the share-price disparity and the timing of Sargent's sale of shares to be strong evidence suggestive of Sargent's underwriter status. In that regard, the district court's use of its so-called "presumption" to redescribe the strength of that evidence was harmless. See Sargent, 589 F. Supp. 3d at 196–206. However, because the issue of "control" requires a totality-of-the- circumstances inquiry, see id. at 185, we reject the notion that a court "may grant summary judgment [as to a defendant's underwriter status] if the price disparity is established (and not rebutted)," irrespective of other evidence to the contrary, id. at 201.
- 15 - we conclude that any properly instructed jury would have to agree
with the SEC that Sargent committed a section 5 violation through
his sale of shares.
Although the law under section 4(a)(1) is certainly
reticulated, the key point for our purposes is that Sargent did
not qualify for the exemption if he (1) acquired any of the S-1
shares with a view to distribution, (2) controlled any of the S-1
shareholders from whom he acquired the shares, and (3) controlled
BMP. See 15 U.S.C. §§ 77b(a)(11), 77d(a)(1). We address each
issue in turn, training our attention on Sargent's dealings with
Persaud.
1.
Sargent argues that because the S-1 shares he purchased
from Persaud were subject to Sargent's contractual lockup, he did
not purchase the shares with a view to distribution. Sargent did
not make this argument below, so it is forfeited -- allowing, at
most, plain-error review. See Universitas Educ., LLC v.
Granderson, 98 F.4th 357, 373 (1st Cir. 2024). And on the merits,
there is no plain error. The lockup agreement term lasted a mere
six months; thus, even if PixarBio did not release Sargent from
the lockup several months early, he still would have been able to
sell his PixarBio shares within a short seven-month period. See
17 C.F.R. § 230.144(b)(1)(i) (2024) (using a one-year ownership
benchmark as a proxy for insider status); see also Berckeley Inv.
- 16 - Grp., Ltd. v. Colkitt, 455 F.3d 195, 213 (3d Cir. 2006) (noting
that courts have otherwise "developed the general presumption that
a two-year holding period is sufficient to negate the inference
that the security holder did not take the securities with a view
to distribute" (quotation marks and citation omitted)). This short
holding period would preclude any reasonable jury from finding
that Sargent did not purchase Persaud's shares with a view to
distribution.
2.
Sargent next argues that he did not control Persaud at
the time he purchased Persaud's shares. "Control" means "the
possession, direct or indirect, of the power to direct or cause
the direction of the management and policies of a person, whether
through the ownership of voting securities, by contract, or
otherwise." 17 C.F.R. § 230.405 (2024); see also SEC v. Kern, 425
F.3d 143, 149 (2d Cir. 2005) (acknowledging that section 4(a)(1)
and its corresponding regulations do not define control but using
§ 230.405's definition of "control" because § 230.405 contains a
definition of "affiliate identical to that of [section 4(a)(1)'s
corresponding regulations]"). "Control" is typically "a question
of fact" that turns on "the realities of the situation," SEC v.
Int'l Chem. Dev. Corp., 469 F.2d 20, 28 (10th Cir. 1972), and
"depends on the totality of the circumstances, including an
appraisal of the influence the individual has on the management
- 17 - and policies of a company [or person]," SEC v. Cavanagh, 1 F. Supp.
2d 337, 366 (S.D.N.Y. 1998), aff'd, 155 F.3d 129 (2d Cir. 1998).
Notwithstanding the fact-intensive nature of this inquiry, at
least two courts of appeals have held that courts can properly
resolve this issue at the summary-judgment stage. See Kern, 425
F.3d at 147, 150; SEC v. Sierra Brokerage Servs., Inc., 712 F.3d
321, 323, 329–30 (6th Cir. 2013).
In arguing that a jury could find that he did not control
Persaud, Sargent claims that Persaud purchased his BMP shares as
an investment; knew he could sell his shares on the public market
and instead decided to sell them to Sargent; and negotiated with
Sargent of his own free will, devoid of Sargent's influence. But
Persaud's testimony, viewed as a whole and construed in Sargent's
favor, falls well short of supporting Sargent's account of
Persaud's knowledge about his "investment." Persaud testified
that he did not know whether BMP sold products or provided
services, and never had any conversation with Sargent about BMP's
business or Sargent's plans for the future. Persaud paid $50 for
his shares, a price that Sargent suggested, simply because Sargent
"wanted to form an entity, and he needed a certain number of
investors, and he [asked] me to be a participant." In other words,
Persaud wanted "[t]o help a colleague" reach his goal.
Persaud's testimony also contradicts Sargent's claim
that Persaud knew he could sell his shares on the public market.
- 18 - Persaud of course anticipated selling the shares "at some point."
But even accepting Sargent's view that Persaud expected to one day
sell them on the public market, Persaud admitted that he never
knew whether he could actually do so. He also testified that he
did not know how to sell the shares; indeed, he never tried to do
so until Sargent told him it was time to sell the shares back to
Sargent. We therefore find Sargent's claim that Persaud knew he
could sell his BMP shares on the OTC market unsupported by the
record.
Finally, as to his sale of shares back to Sargent,
Persaud stated that he had never heard of PixarBio and never
discussed with Sargent anything about a potential merger or what
his BMP shares might be worth. Rather, Sargent presented him with
a check for $1,500 for Persaud's 18,000 shares,7 and Persaud
responded that "this is just a[] guess, [but] I think [the shares
are] worth more than that." While testifying, Persaud explained
that he had "[n]o reason" to think the shares were actually worth
more but negotiated as "[j]ust a ploy to get a few dollars more."
Accordingly, Sargent agreed on the spot to pay him $2,000 for the
shares.
7 By this point, Persaud owned not only the shares he purchased from Sargent but also the shares of three other S-1 shareholders.
- 19 - Sargent and the dissent both make much of the fact that
Persaud "negotiated" the sale price, and in that manner
demonstrated that his sale to Sargent was an arms-length
transaction. We disagree. As the SEC highlights, the context is
key here. See Cavanagh, 1 F. Supp. 2d at 366 (stating that control
"depends on the totality of the circumstances"). After Persaud's
initial purchase, and unbeknownst to Persaud, Sargent used his
control of BMP to take two steps that bore directly on the value
of the S-1 shares. First, he made the shares marketable to the
public at large; and second, he negotiated a deal that made sense
only if he could ensure that the bulk of the S-1 shares would be
conveyed back to him or his designee for payments that would be
less than the value the shares would have in effecting the deal he
had in mind. By keeping the S-1 shareholders in the dark
concerning these machinations, Sargent ensured they had no choice
but to trust him when called upon to return their shares. Cf.
Kern, 425 F.3d at 150 (finding control "where, as here, the
controlling persons so dominated those controlled as to be able to
gain upwards of 90% of the stock from Owners who were in a
relationship of trust with Sellers"). As the SEC argues, this
overarching scheme demonstrates that Sargent overwhelmingly
possessed "the power to direct or cause the direction of the [S-1
shareholders'] management and policies of" their shares. See 17
C.F.R. § 230.405 (2024).
- 20 - Indeed, Sargent's plans for a deal with PixarBio were,
as a practical matter, contingent on the S-1 shareholders not
inquiring as to his plans for the shares that had been effectively
parked with them. And, thanks to Persaud's testimony in this case,
we know that Sargent was right to expect Persaud's willingness to
go along with the deal. That Persaud may have thought he was
engaged in any material negotiation by getting an extra $500 simply
highlights the disparity in knowledge that allowed Sargent to call
the shots. And though Persaud did make an offhand effort to
haggle, he had no choice but to trust that Sargent was treating
him fairly in dictating the timing of the sale and the ballpark of
the price. Thus, viewed as a whole, we think that any reasonable
jury would understand Persaud's testimony to provide an
insufficient basis for concluding that Sargent lacked "the power
to direct" Persaud's handling of the S-1 shares. See id.
To support a finding of control, the SEC also urges
reliance on a price disparity, measured by the difference between
what Sargent paid Persaud for the shares and the consideration
Sargent received from PixarBio in the August 19 stock-purchase
agreement, which the SEC claims was payment for Sargent's
facilitation of the transfer of S-1 shares to Herod and Giordano.
Sargent, in turn, contests the SEC's reliance on the stock-purchase
agreement, arguing that "he earned nothing at all" for his
facilitation of the transfer of those shares. We need not take a
- 21 - position on this dispute, however, where our holding rests on a
finding of control independent from any price disparity.
To be sure, we recognize that Kern and Sierra relied on
substantial price disparities in reaching their affirmances. See
Kern, 425 F.3d at 150 ("The proof of control over Owners here rests
in the ability of Sellers to garner overwhelming proportions of
Citron and Polus' stock at a fraction of the price at which it was
sold to Lybrand for distribution."); Sierra, 712 F.3d at 329
("[T]he $250,000 Tsai received motivated his transfer of the
thirty-three shareholders' stock . . . [, but] $250,000 is
significantly higher than the low price of $3,300 that the thirty-
three shareholders received when Tsai transferred [those same]
shares. That differential demonstrates Tsai's control."). But we
view these price disparities as one means among others of showing
that one side was in the dark with regards to the essence of the
transaction and therefore dependent on the other party. In other
words, we understand our sister circuits in Kern and Sierra to
have recognized the utility of a price disparity as an objective
stand-in for actual evidence of control. Here, we have such
evidence. And, as such, we need not opine on the presence or lack
of a price disparity. Cf. Kern, 425 F.3d at 150 n.3 ("We do not
intimate that such overwhelming proof of control exercised here is
necessary to satisfy the broad definition of 'control[.]'").
- 22 - None of this is to say that superior knowledge of any
type concerning a transaction equates with control, or that a trust
relationship by itself suffices. Here, though, Sargent ensured
that his trusting colleague did not know the shares were even
marketable, or that Sargent was orchestrating a pending
transaction that he clearly thought would render the shares more
valuable, but that would work only if he could acquire the S-1
shares. On this record, no properly instructed jury could find
that Sargent did not effectively "possess[], direct[ly] or
indirect[ly] . . . the power to direct or cause the direction of
the management" of Persaud's S-1 shares. 17 C.F.R. § 230.405
(2024).8
3.
Sargent next argues that he no longer controlled BMP
when he purchased Persaud's shares. Specifically, Sargent claims
that because he had already resigned from all his controlling
positions at BMP, he no longer controlled BMP, so Persaud and BMP
8For similar reasons, a case could also be made for affirming on the alternative ground that even if Sargent did not control Persaud, he undoubtedly controlled S-1 shareholder Thomas Saunders, who frankly admitted to being a "friendly investor[]" and to "waiting for" Sargent to tell him "what the plan was" regarding selling his shares. But because the district court limited its finding of a section 5 violation and its disgorgement remedy to Sargent's personal sales of PixarBio shares, see supra n.5, and Saunders's shares were purchased by Herod and Giordano, Sargent's purchase of shares from Persaud provides a cleaner path to affirmance.
- 23 - were no longer under Sargent's "common control." See 15 U.S.C.
§ 77b(11); see also 17 C.F.R. § 230.144(a)(1) (2024) (setting out
criteria for a safe harbor under which certain "affiliates," or
"person[s] that . . . control[], or . . . [are] under common
control with . . . [the] issuer," qualify for a section 4(a)(1)
exemption9). However, Sargent never raised this argument below,
so he forfeited it, and he makes no plain-error showing on appeal.
See Universitas Educ., LLC, 98 F.4th at 373.
Even had he preserved the argument, it would likely have
failed. "[A] person who [controls the issuer] during the
negotiation of, and agreement to, the deal may not enjoy a
[s]ection [4(a)(1)] exemption by simply abdicating [such control]
(e.g., by selling his controlling shares or resigning as an officer
or director) shortly before the parties complete the transaction."
SEC v. Cavanagh, 445 F.3d 105, 114–15 (2d Cir. 2006) (italicization
omitted). And here, there can be little serious doubt that Sargent
"controlled" BMP at least until August 19, 2016, when PixarBio
purchased Sargent's control block of BMP shares. And he remained
on BMP's board of directors until September 15, only fifteen days
before he retrieved the S-1 shares from Persaud. As the Second
Circuit noted in Kern, "attempting to garner large quantities of
[a] closely held compan[y's] stock in anticipation of public
9 Sargent does not otherwise meet the requirements for the Rule 144 safe harbor. See 17 C.F.R. § 230.144 (2024).
- 24 - distribution . . . is exactly the type of transaction for which
the Act was intended to require disclosure." 425 F.3d at 150; see
also 17 C.F.R. § 230.144 preliminary note (2024) (stating that its
"safe harbor is not available to any person with respect to any
transaction or series of transactions that, although in technical
compliance with [section 4(a)(1)'s corresponding regulations], is
part of a plan or scheme to evade the registration requirements of
the Act").
In sum, in purchasing the S-1 shares from Persaud that
Sargent went on to resell to the public, Sargent clearly acquired
the shares with a view to distribution, under the Act's definition
of underwriter, and from an "issuer" (i.e., someone who, along
with BMP, was under Sargent's common control). Sargent thus cannot
enjoy section 4(a)(1)'s protection for certain unregistered sales
of securities. In so finding, we note that section 4(a)(1) is "an
exemption for ordinary transactions by ordinary, nonprofessional
investors." Thomas Lee Hazen, Treatise on the Law of Securities
Regulation, § 4:94 (May 2024 Update). We think Sargent's sale of
S-1 shares, acquired from Persaud, was no ordinary
transaction -- and that, even construing the record in Sargent's
favor, it was exactly the type of transaction that the Act's
registration requirements are designed to reach. See SEC v.
Ralston Purina Co., 346 U.S. 119, 124 (1953) ("The design of the
- 25 - [Act] is to protect investors by promoting full disclosure of
information thought necessary to informed investment decisions.").
Accordingly, we affirm the district court's grant of
partial summary judgment to the SEC on its section 5 claim against
Sargent.
III.
We turn next to the appeal and cross-appeal arising from
the district court's judgment ordering certain remedies for
Sargent's section 5 violation. As relevant here, the district
court imposed two equitable remedies that Sargent now argues were
abuse of discretion. First, the court issued a two-part
injunction, permanently enjoining Sargent from violating
section 5, and enjoining him for ten years from participating in
penny-stock offerings. Second, the court ordered that Sargent be
held liable for disgorgement in the amount of $562,786 plus
$142,132 in prejudgment interest. Meanwhile, the district court
declared itself barred from imposing, in addition to equitable
remedies, a civil penalty for Sargent's section 5 violation -- a
finding that the SEC, for its part, argues was abuse of discretion.
We address these three issues seriatim.
In order to prevent future violations of the securities
laws, the Act permits the SEC to seek an injunction against a
person "[w]henever it shall appear to the [SEC] that [the] person
- 26 - is engaged or about to engage in any acts or practices which
constitute or will constitute a violation of" the Act. 15 U.S.C.
§ 77t(b). The Act also provides that in any proceeding "against
any person participating in, or, at the time of the alleged
misconduct, who was participating in, an offering of penny stock,
the court may prohibit that person from participating in an
offering of penny stock, conditionally or unconditionally, and
permanently or [temporarily]." Id. § 77t(g)(1).
"The legal standard for issuance of [an] injunction is
a 'reasonable likelihood of recidivism,' which is assessed by
looking at 'several factors, none of which is determinative.'"
SEC v. Lemelson, 57 F.4th 17, 30 (1st Cir. 2023) (quoting SEC v.
Sargent, 329 F.3d 34, 39 (1st Cir. 2003)). These factors include
"(1) the nature of the violation, including its egregiousness and
its isolated or repeated nature, (2) whether the defendants will,
owing to their occupation, be in a position to violate again, and
(3) whether the defendants have recognized the wrongfulness of
their conduct." Id. (quotation marks omitted) (quoting Sargent,
329 F.3d at 39). In deciding whether to impose a penny-stock bar,
courts typically also consider the defendant's repeat-offender
status, the defendant's role in the offense, the defendant's degree
of scienter, and the defendant's economic stake in the violation.
See SEC v. Weed, 315 F. Supp. 3d 667, 677 (D. Mass 2018) (citing
SEC v. Patel, 61 F.3d 137, 141 (2d Cir. 1995)).
- 27 - "In an SEC enforcement action, we review the district
court's decision to enter an injunction for abuse of discretion."
Lemelson, 57 F.4th at 30. Abuse of discretion "occurs when a
material factor deserving significant weight is ignored, when an
improper factor is relied upon, or when all proper and no improper
factors are assessed, but the [district] court makes a serious
mistake in weighing them." Sargent, 329 F.3d at 38 (quoting Indep.
Oil & Chem. Workers of Quincy, Inc. v. Procter & Gamble Mfg. Co.,
864 F.2d 927, 929 (1st Cir. 1988)). It also occurs when the
district court "incorrectly applies the law to particular facts."
Id. (quoting Am. Bd. of Psychiatry & Neurology, Inc. v. Johnson-
Powell, 129 F.3d 1, 3 (1st Cir. 1997)).
Here, we simply cannot glean from the district court's
cryptic remedial order any consideration of the factors relevant
to issuing an injunction. It is true that "[t]here are no magic
words that a district court must pronounce in order to convince
[us] that it has considered an issue" and "[a] simple reference
normally will do." In re Grand Jury Investigation, 545 F.3d 21,
26 (1st Cir. 2008). And we have previously found that a district
court acts within its discretion even when it does not make
detailed findings as to the application of the legal standard, if
it at least "properly articulate[s] the legal standard." See
Sargent, 329 F.3d at 39. But here, the district court's order did
not recite any legal standard at all. Nor did it offer any
- 28 - explanation from which one could confidently infer application of
the correct standard.
In briefing the issue below, the parties both cited the
relevant factors, while disagreeing as to their relative weight
and application. But the district court never made any finding as
to Sargent's likelihood of recidivism (or any subsidiary factor)
to which we can point to sustain the injunction.10 Nor is the
proper application of the factors obvious from the record: Sargent
has not been convicted of a crime or been found to have committed
a civil violation that has scienter as an element. Nor is he a
repeat offender. So it is difficult to infer from the merits
judgment the district court's rationale for the injunction. Rather
than guessing, we vacate the injunction on Sargent -- both the
penny-stock bar and the ban on future section 5 violations -- and
remand to give the district court an opportunity to consider afresh
the injunction and explain its rationale.
Sargent next takes issue with the district court's
disgorgement order. The district court found Sargent liable for
disgorgement of $562,786, "representing a portion of net profits
10 The SEC does not argue that distinct standards apply to the validity of the court's imposition of a penny-stock bar as opposed to its permanent injunction on Sargent from future section 5 violations. As a result, we assume the general "reasonable likelihood of recidivism" standard applies to both forms of injunctive relief.
- 29 - gained as a result of" Sargent's conduct in violation of section 5,
plus $142,132 in prejudgment interest. In calculating the
disgorgement amount, the district court declined to discount the
taxes Sargent paid on the income to be disgorged. On appeal,
Sargent argues that the district court's refusal to do so was abuse
of discretion. We disagree.
In Liu v. SEC, the Supreme Court held that "[c]ourts may
not enter disgorgement awards that exceed the gains made upon any
business or investment, when both the receipts and payments are
taken into the account." 591 U.S. 71, 91 (2020) (quotation marks
and citation omitted). "Accordingly, courts must deduct
legitimate expenses before ordering disgorgement . . . ." Id. at
91–92. In so holding, the Court reiterated "the general rule that
a defendant is entitled to a deduction for all marginal costs
incurred in producing the revenues that are subject to
disgorgement." Id. at 91 (citing Restatement (Third) of
Restitution and Unjust Enrichment § 51 cmt. h (Am. L. Inst. 2010)).
Here, Sargent argues that the taxes he paid on the income
to be disgorged, i.e., the capital gains taxes on Sargent's
unregistered sales of PixarBio stock, were a legitimate expense
that did not figure into his net profits to be disgorged. He
argues that net profits, as distinct from gross profits, encompass
"[t]otal sales revenue less the cost of the goods sold and all
- 30 - additional expenses," including taxes. Profit, Black's Law
Dictionary (11th ed. 2019).
However, the capital gains tax Sargent paid on his
unregistered sale of PixarBio shares was not a "legitimate
expense[]" because it was not a cost "incurred in producing the
revenues that are subject to disgorgement." Liu, 591 U.S. at 91.
Rather, the tax was a post hoc consequence of his sale of the
shares at a particular price, one that would have occurred
regardless of whether those sales were properly registered under
section 5.
Moreover, the Restatement also explains -- in the same
comment that Liu cited -- that a "defendant is normally denied a
credit for income taxes paid . . . to avoid a distortion resulting
from the effect of the judgment on the defendant's future tax
liability." Restatement (Third) of Restitution and Unjust
Enrichment § 51 cmt. h (Am. L. Inst. 2010). That is exactly what
happened here: The district court explained that it declined to
subtract the taxes because Sargent might subsequently request that
the Internal Revenue Service (and/or the Connecticut tax
authorities) recalculate his taxes to reflect that his income had
been disgorged. In any event, Sargent does not dispute this
finding on appeal, so he has waived any challenge to this portion
of the district court's rationale. United States v. Zannino, 895
F.2d 1, 17 (1st Cir. 1990).
- 31 - Consequently, we find that the district court did not
abuse its discretion in calculating the disgorgement award.
C.
The district court declined to impose a civil penalty on
Sargent for his section 5 violation. It reasoned that, because
the SEC's separate fraud claims were set for a jury retrial, the
court was prohibited from imposing a penalty. Specifically, it
explained that the "[i]mposition of a penalty is a quintessentially
legal remedy," and that "[i]n a jury case, absent a jury verdict
or a ruling that obviates the need for a jury, it is beyond the
constitutional power of this [c]ourt to impose a penalty."
Moreover, even after the district court later dismissed the SEC's
fraud claims (as discussed further at infra Part IV), it still
determined that it lacked "power to award a penalty" where
Sargent's right to a jury trial "ha[d] been asserted and not
waived." The SEC now cross-appeals, arguing that the district
court erred as a matter of law in holding itself barred from
awarding a civil penalty, rendering its failure to do so abuse of
discretion. We agree.
Put simply, the district court's grant of partial
summary judgment to the SEC on its section 5 claim was precisely
the "ruling that obviate[d] the need for a jury" on that claim.
It is well established that "summary judgment does not violate the
Seventh Amendment." Parklane Hosiery Co. v. Shore, 439 U.S. 322,
- 32 - 336 (1979). Courts thus regularly impose civil penalties in cases
resolved at summary judgment, including for section 5 violations.
See, e.g., Kern, 425 F.3d at 145.
To be sure, "where equitable and legal claims are joined
in the same action, there is a right to jury trial on the legal
claims which must not be infringed . . . by a court trial of a
common issue existing between the claims." Ross v. Bernhard, 396
U.S. 531, 537–38 (1970). "Thus, where there are issues common to
both the equitable and legal claims, the legal claims involved in
the action must be determined prior to any final court
determination of [the] equitable claims." Danjaq LLC v. Sony
Corp., 263 F.3d 942, 962 (9th Cir. 2001) (quotation marks and
citation omitted).
However, if "the legal and equitable claims do not
involve common issues," then no constitutional problem arises.
Granite State Ins. Co. v. Smart Modular Techs., Inc., 76 F.3d 1023,
1027 (9th Cir. 1996). And here, the district court held that there
was no triable issue of fact as to Sargent's section 5 liability.
See Sargent, 589 F. Supp. 3d at 206. The court could thus grant
the SEC's request to impose a civil penalty based only on a finding
of (1) Sargent's section 5 liability and (2) his gross pecuniary
gain. See 15 U.S.C. § 77t(d)(1)–(2). Neither the existence of a
section 5 violation nor Sargent's resulting gain were elements of
the SEC's fraud claims against Sargent. See id. §§ 77q(a), 78j(b).
- 33 - And in seeking a civil penalty, the SEC relied only on the
section 5 claim. Accordingly, the district court could have deemed
a first-tier civil penalty appropriate without conflicting with
any subsequent findings a jury would be required to make in its
determination of Sargent's liability for those fraud claims.
Thus, we conclude that the district court erred in
holding itself prohibited from awarding a civil penalty and
therefore abused its discretion in refusing to do so on that basis.
In so ruling, we express no view on whether Sargent's conduct
warrants a penalty.
IV.
We last turn to the SEC's cross-appeal of the district
court's dismissal of its fraud claims against Sargent.
Recall that on July 12, 2023, when the district court
ordered equitable remedies for Sargent's section 5 violation, the
court ordered that its judgment not enter until
"appropriate" -- that is, until the resolution of the SEC's
separate fraud claims that were set for retrial that September.
And as discussed, in that order, the district court erroneously
concluded that it lacked authority to issue a civil penalty on the
section 5 claim "absent a jury verdict or a ruling that obviates
the need for a jury."
- 34 - A few weeks prior to issuing that order, the district
court convened a status conference to explain its tentative
disposition. First, the court indicated that it would likely not
grant any civil penalty so long as there remained an outstanding
jury trial on the fraud claims. In response, the SEC stressed
that "the relief that would be granted on the [s]ection 5 claim
[was] material to the [SEC's] decision whether to try to prove for
a second time to a jury that Henry Sargent committed securities
fraud." In other words, the SEC explained, it was "very difficult
to make an informed decision" about whether to retry its fraud
claims "without knowing whether or not the relief that [the SEC
sought] on the [s]ection 5 claim would be implemented." In turn,
the district court noted that it was "not going to tell [the SEC]
flat out" that it would not "give a penalty," but it indicated
that it was "inclined not to do [so]."
After the court went on to issue its July 12 nonfinal
remedial order, the SEC filed a notice stating that the order
granted "substantially all of the equitable relief sought by the
[SEC] following the jury verdict against Sargent." The SEC
argued -- as it had previously -- that the court was wrong to hold
itself barred from issuing a civil penalty based on the pending
retrial of the separate fraud claims. However, the SEC explained,
in light of the comprehensive nature of the relief outlined in the
nonfinal order, the SEC would seek internal authorization to "file
- 35 - a motion to dismiss the remaining [fraud] claims upon entry of a
final order granting all equitable relief set forth in the July 12,
2023 [o]rder and any civil penalty the [c]ourt deems appropriate."
In the SEC's view, "[u]pon the granting of such motion, no jury
claims would remain, obviating the need for a retrial." And "[i]f
no jury claims remained, the [c]ourt could consider the entirety
of the record to fashion an appropriate penalty."
The SEC then filed a "Motion for Entry of Order
Concurrently Granting Certain Relief and Dismissing Fraud Claims."
In that motion, the SEC requested that the district court
enter an order or orders that concurrently: (1) provide all of the relief set forth above and in the [c]ourt's July 12, 2023 [o]rder; (2) impose a civil penalty of $630,979 or, if needed, set a hearing regarding imposition of a civil penalty as soon as is practicable; and (3) dismiss the [SEC's fraud claims against Sargent].
Sargent filed a response to the SEC's motion. He did
not oppose the SEC's request to dismiss its fraud claims but argued
that dismissal should be granted with prejudice. Sargent also
opposed the entry of any civil penalty.
Around two weeks later, in response to the SEC's motion
and Sargent's response, the district court issued a minute order
(1) entering its July 12 nonfinal order outlining equitable
remedies on the section 5 claim as the final judgment in the case,
(2) dismissing the SEC's remaining fraud claims with prejudice,
- 36 - and (3) declining to order any civil penalty on the ground that
the court "has no power to award a penalty . . . where a jury claim
has been asserted and not waived."
The SEC now appeals, arguing that the district court
abused its discretion in "sua sponte" dismissing its fraud claims
"without assessing whether civil penalties were appropriate." But
given our conclusion that the district court erred in holding
itself prohibited from issuing a civil penalty, on remand
"assessing whether civil penalties [are] appropriate" is precisely
what the district court must do. As the SEC shall now have an
opportunity to argue for a civil penalty, to also reinstate its
fraud claims would let the SEC have its cake and eat it too. In
other words, on remand, the court will proceed unrestrained by any
suggestion that it lacks the ability to assess on the merits
whether civil penalties for the section 5 violation are
appropriate. And with the court so empowered, we lack a basis for
revisiting the district court's acceptance of the SEC's invitation
to dismiss the fraud claims.
For the foregoing reasons, we affirm the district
court's grant of partial summary judgment to the SEC on its
section 5 claim. We also affirm the district court's calculation
of disgorgement, as well as its dismissal of the SEC's fraud
- 37 - claims. However, we otherwise vacate the district court's remedial
order, including its injunction against Sargent, and remand for
proceedings consistent with this opinion. On remand, the district
court shall, among other things, assess the appropriateness of
injunctive relief and civil penalties for Sargent's section 5
violation. Nothing in this opinion shall be read as favoring or
disfavoring such relief or penalties. No costs are awarded.
- Concurring and Dissenting Opinion Follows -
- 38 - BARRON, Chief Judge, concurring in part and dissenting
in part. The majority affirms the grant of summary judgment to
the Securities Exchange Commission ("SEC") on its claim that Henry
Sargent violated Section 5 of the Securities Act of 1933 ("Act").
The SEC alleges in the claim that Sargent committed the violation
by selling shares of already issued stock as an "underwriter"
without an accompanying registration statement, which would have
disclosed important information about the shares to the investing
public. 15 U.S.C. §§ 77d(a)(1), 77b(a)(11).
Ordinarily, the Act exempts a sale, like Sargent's, of
already issued securities from Section 5, even though the Act does
not exempt the issuance itself. See 15 U.S.C. §§ 77e, 77d(a)(1).
However, the Act treats a post-issuance sale as a covered
intermediate step in the issuing company's own process of
distributing its securities when the sale is made by an
"underwriter," because of an underwriter's relationship to both
the issuing company and the securities involved in the sale. See
SEC v. Murphy, 626 F.2d 633, 648 (9th Cir. 1980); SEC v. M&A West,
Inc., 538 F.3d 1043, 1053 (9th Cir. 2008).
The summary judgment ruling here must stand, therefore,
if the record establishes beyond reasonable dispute that Sargent
was acting as an underwriter when he sold the securities in
question, as Sargent concedes that no registration statement
accompanied their sale. In my view, however, the record is not
- 39 - clear enough to establish that Sargent was acting as an underwriter
at the time of the sale of the shares in question. I thus join
only in the portions of the majority's opinion that do not concern
the SEC's Section 5 claim against Sargent.
The following uncontradicted facts bear on Sargent's
underwriter status in making the sale alleged to have violated
Section 5. From November 2016 to January 2017, he sold nearly
110,000 publicly tradable shares of stock in a putative
biotechnology company, PixarBio Corp ("PixarBio"). The shares had
been issued and registered as S-1 shares by a fledgling
company -- a yoga business known as BMP Holdings, LLC
("BMP") -- that Sargent himself had created and operated as a side
venture to his regular job.
The shares became PixarBio shares only after that
company consummated a reverse merger with BMP, which occurred not
long after Sargent founded the company. The reverse merger
followed a stock-purchase agreement between Sargent and PixarBio,
which at the time was looking for a shell company with which to
merge.
The agreement's formal terms required Sargent, in return
for a very substantial sum, to take the following actions: (1)
transfer his five million restricted shares in BMP to PixarBio;
(2) resign as BMP's sole director and appoint a designee of
- 40 - PixarBio as director; (3) cause the resignation of all of BMP's
officers; and (4) secure lock-up agreements with other outstanding
BMP shareholders holding 25,000 S-1 shares in BMP.11 The
stock-purchase agreement mentioned no other BMP shares. At the
time that Sargent fulfilled his duties under this agreement,
however, he also transferred 140,000 S-1 BMP shares, over which he
had blank stock powers, to two PixarBio associates.
After carrying out the terms of the stock-purchase
agreement, Sargent still retained some S-1 shares in BMP. In
particular, he retained 18,000 such shares that, after having sold
them for a trifle two years earlier to one of his colleagues,
Bhodnarine Persaud, he had bought back from that colleague not
long after he had fulfilled the promises that he had made to
PixarBio in the stock-purchase agreement.
Sargent bought back those shares before the reverse
merger between PixarBio and BMP took effect. Persaud did not know,
at the time of that transaction, about Sargent's stock-purchase
agreement with PixarBio, the expected reverse merger between that
company and BMP, or even, arguably, whether the shares that he was
selling to Sargent were publicly tradable. Nonetheless, Persaud
rejected Sargent's initial offer to buy the shares for $1,500 and
The contract also required Sargent to deliver certain codes 11
for SEC filings as well as BMP's books and records.
- 41 - only agreed to sell them to Sargent after Sargent agreed to
Persaud's counteroffer of $2,000.
Following the reverse merger between PixarBio and BMP,
Sargent then sold on the open market as PixarBio shares a portion
of the 18,000 S-1 shares in BMP that he had acquired from Persaud.12
By that time, however, members of PixarBio's management
team -- unbeknownst to Sargent, as far as the record shows -- had
executed a pump-and-dump scheme to inflate the newly merged
company's stock price. As a result, Sargent netted $627,979 when
he ultimately sold the PixarBio shares to the public -- reaping a
per-share value 500 times greater than Persaud got per share in
his deal with Sargent.
If all this wheeling and dealing raises questions about
whether Sargent was acting as an underwriter when he sold the
PixarBio shares on the open market for more than $600,000, I can
see why. But, remember, we are considering an appeal from a grant
12 Sargent sold approximately 110,000 PixarBio shares on the public market from November 2, 2016 to January 23, 2017. At the time public trading of PixarBio shares began, Sargent owned 280,000 PixarBio shares. Of the 280,000, 180,000 were the 18,000 S-1 shares in BMP Sargent had acquired from Persaud, which multiplied by 10 after PixarBio caused BMP to declare a 9 for 1 stock dividend and later became PixarBio shares as a result of the reverse merger. The remaining 100,000 were the 10,000 S-1 shares in BMP he had acquired from his sister a month prior to his transaction with Persaud, which also multiplied by 10 and became PixarBio shares for the same reasons as above.
- 42 - of summary judgment to the SEC that is based on Sargent having
been an "underwriter" in making the sale of just a portion of those
shares. The question for us is therefore a narrow one: Is it
beyond reasonable dispute that Sargent was acting as an underwriter
with respect to his sale of any of the specific S-1 shares in BMP
that he had bought back from Persaud?13
In fact, though, the question that we must decide is
even narrower still. For example, although a seller of securities
who purchases them with a view to their distribution from someone
who directly controls or is directly controlled by the company
that issued them qualifies as an underwriter, see 15 U.S.C.
§ 77b(a)(11), there is no contention that Sargent was acting as a
seller like that in selling the securities that are of concern.
Rather, the majority, like the SEC, is of the view that it is
beyond reasonable dispute that Sargent qualified as an underwriter
at the relevant time, because, in selling the securities in
13The SEC urges an alternative ground for affirming the grant of summary judgment: it contends that the record clearly shows that Sargent violated Section 5 by facilitating the PixarBio associates' resale of the non-Persaud S-1 shares on the open market -- which was itself not registered -- by helping transfer those shares to them using blank stock powers. See SEC v. Sierra Brokerage Servs., Inc., 712 F.3d 321, 328 (6th Cir. 2013) ("A party can violate the registration requirements . . . through even indirect involvement in the public sale of unregistered securities."). But we cannot affirm the grant of summary judgment to the SEC on the Section 5 claim on that basis because the only shares that ground the claim that yielded the ultimate disgorgement award here are the Persaud shares that Sargent himself sold on the open market.
- 43 - question, he exercised "common control" over both the company that
issued them (BMP) and the party from whom he acquired them
(Persaud) with a view to their distribution. Id.
Moreover, the majority concludes that, by putting forth
evidence that supportably shows that Sargent sold unregistered
securities when he sold the PixarBio shares in question on the
open market, the SEC has established a prima facie case that
Sargent violated Section 5 in selling the Persaud shares. The
majority thus concludes -- and I agree -- that the SEC thereby has
shifted the burden back to Sargent to identify a triable issue of
fact about his underwriter status. See SEC v. GenAudio Inc., 32
F.4th 902, 941 (10th Cir. 2022). And, further, the majority
concludes, and I agree, Sargent has not identified a genuine issue
of material fact as to either whether he exercised the requisite
control over BMP itself at the time of the deal with Persaud or
whether he acquired the S-1 shares in BMP in that deal with a view
to their distribution.
Thus, I agree with the majority that the question on
which Sargent's challenge hinges concerns only whether he has shown
that there is a supportable basis for finding that he did not
exercise control over Persaud when he bought the 18,000 S-1 shares
in BMP from him. For, given the ways the burdens of proof are
allocated, only if Sargent has made that showing would there then
be a genuine issue of material fact for a jury to decide as to
- 44 - whether he was exercising the kind of "common control" over the
shares in question that would have made him an underwriter in
subsequently selling any of them to the public.
So, has Sargent shown what he must with respect to
whether he controlled Persaud in buying back the 18,000 S-1 shares
in BMP? Sargent contends that he has through the testimony that
he put forward from Persaud, as Persaud states in that testimony
that he negotiated the price that Sargent paid him for those shares
and ultimately received more for them than Sargent had initially
offered.
All else being equal, I agree with Sargent that it would
be reasonable for a juror to find that he has made the requisite
showing about his lack of control over Persaud based on this
testimony. Standing on its own, the testimony does supportably
show that the seller here (Persaud) exercised independent judgment
in successfully bargaining for an advantageous price from the buyer
(Sargent), as it is reasonable to find, absent any other evidence,
that a person who sells something for more than the purchaser first
offered is not under the purchaser's thumb.
In fact, the majority does not appear to disagree. It
contends, however, that there is other evidence in the record that,
when taken together, precludes a reasonable juror from relying on
Persaud's testimony to find that Sargent has shown that he did not
- 45 - control Persaud at the critical time. For reasons that I will
next explain, I am not persuaded.
The majority concludes that, as a matter of law, a
purchaser of securities controls the seller if nothing in the
record suffices to put in reasonable dispute evidence that
otherwise shows that the purchaser "possess[ed], direct[ly] or
indirect[ly], . . . the power to direct or cause the direction of
[the seller's] management" of those securities. This conclusion
rests on the SEC regulation that defines "control" as "the
possession, direct or indirect, of the power to direct or cause
the direction of the management and policies of a person, whether
otherwise." 17 C.F.R. § 230.405 (2024).
The majority then holds that, notwithstanding the
testimony from Persaud about his successful counteroffer to
Sargent, the SEC has conclusively shown that Sargent "possess[ed],
direct[ly] or indirect[ly], . . . the power to direct or cause the
direction of [Persaud]'s management" of his S-1 shares. To support
this holding as an evidentiary matter, the majority points to the
undisputed evidence conclusively showing that Persaud and Sargent
were colleagues, that Persaud purchased the shares in question
upon Sargent's request for a price that Sargent specified, that
Sargent subsequently entered into a deal with PixarBio that would
- 46 - make sense only if Sargent could reacquire a large bulk of S-1
shares, that Sargent possessed vastly more knowledge than Persaud
about BMP and the value of its shares, and that Persaud then sold
the shares back to Sargent. The majority also reads the record to
establish -- beyond reasonable dispute -- that Persaud never knew
that he could sell the shares on the public market.
I assume that the majority is right that the record does
establish conclusively that, notwithstanding Sargent's assertion
to the contrary, Persaud did not understand himself to be acquiring
the shares from Sargent as an investment. What matters, though,
is whether Sargent controlled Persaud in their later transaction
in which Persaud sold those shares back to Sargent, not whether
Sargent controlled Persaud when he first handed those shares over
to Persaud.
Similarly, the majority may be right that the
stock-purchase agreement between Sargent and PixarBio shows beyond
reasonable dispute that Sargent was betting on being able to buy
back Persaud's S-1 shares when he entered into the stock-purchase
agreement with PixarBio. But what matters is whether Sargent in
fact possessed control over Persaud in re-acquiring those shares,
not whether Sargent wished to exercise such control in theory when
he entered into that agreement.
Thus, notwithstanding the majority's reasons for
discounting Persaud's testimony, it would appear to me to be of
- 47 - some import to the question of Sargent's power over Persaud with
respect to the shares in question that Persaud testified that, in
fact, he got Sargent to pay more for those shares than Sargent
first offered for them. After all, the question for us on appeal
is not whether it would be reasonable to find on this record that
Sargent possessed "the power to direct" Persaud's management of
his S-1 shares but whether it would be unreasonable to find
otherwise. And while it is always tempting to conclude that one's
reading of the record is the only reasonable reading available, it
is a temptation to be resisted.
In fact, there is an especially strong reason to resist
that temptation here, because the District Court did not rely on
the evidence that the majority invokes to support its ruling, nor
did the SEC in making its case for summary judgment to the District
Court.
Thus, the majority breaks new ground in concluding that
the features of the record that it concludes make all the
difference make that difference. As a result, that conclusion
must be "made manifest by the record" for it to provide a
permissible basis for our affirming the ruling below. Perez v.
Volvo Car Corp., 247 F.3d 303, 310 (1st Cir. 2001).
In other words, it must be manifest in the record that,
because of all the evidence the majority foregrounds about the
relationship between Sargent and Persaud and what each knew, no
- 48 - reasonable juror could find that Persaud was acting independently
of Sargent in successfully wringing an extra $500 out of him in
their dealings. I agree that the features of the record to which
the majority gives such weight might suffice if the record also
made manifest that Persaud, despite his push-back on price,
indisputably managed only to get less than -- or even, potentially,
just -- fair market value for the shares in question in selling
them back to Sargent. In that event, the evidence of Persaud's
push-back, at least arguably, would do nothing to put in question
the other evidence in the record of Sargent's "power to direct"
Persaud's management of his shares. But the majority does not
suggest -- let alone identify conclusive evidence showing -- that,
despite getting Sargent to pay a third-more for the shares than he
first offered for them, Persaud still ended up getting either less
than or no more than he could have gotten by selling the shares on
the open market or to anyone else.
As a result, I fail to see how the record manifestly
shows that no reasonable juror could find that Sargent lacked the
"power to direct" Persaud's management of his shares. Indeed, if
anything, Sargent's willingness to accede to Persaud's push-back
would appear to provide a supportable basis for finding that
Persaud had leverage over Sargent rather than that Persaud was
dependent on him.
- 49 - Notably, the only circuit precedent on which the
majority relies for its control ruling -- SEC v. Kern, 425 F.3d
143 (2d Cir. 2005) -- does not suggest otherwise. Kern did state
that a "relationship of trust" is indicative of control. Id. at
150. But it ultimately held only that a purchaser's ability to
acquire shares in bulk suffices to demonstrate control as a matter
of law when the purchaser obtained the shares at "a fraction of
the price at which" the purchaser ultimately sold them. Id.
(emphasis added) ("The proof of control over [the shell company's
shareholders] here rests in the ability of [the defendants] to
garner overwhelming proportions of [the shell company's stock] at
a fraction of the price at which it was sold.").
In fact, Kern did not even hold that the
price-disparity-based ground for finding control would carry the
day in a case that also had evidence of "haggl[ing]," Maj. Op. at
22, of the sort that the majority acknowledges Persaud's testimony
provides here. Nor did Kern have any reason to do so. There was
no evidence in that case that the allegedly controlled parties had
managed, despite their claimed dependency, to get more for the
shares than the allegedly controlling party had offered. Yet Kern
still relied on a substantial price disparity to find control as
a matter of law, 425 F.3d at 150, and quite understandably so,
given that people involved in arms-length securities transactions
- 50 - do not usually part with shares for a song that they could sell
for a killing.
So, while the majority tries to justify our affirming
the District Court's summary judgment ruling on a ground
independent of there being any price disparity, I see no basis for
our doing so on this record. I thus turn to the Kern-derived
ground for finding conclusive evidence of control on which both
the District Court and the SEC relied, which rests on the
determination that the record indisputably establishes that
Persaud sold his 18,000 S-1 shares in BMP to Sargent at a fraction
of their price.
The District Court did find that there was a price
disparity here comparable to the one in Kern. The District Court
did so based on the evidence that Sargent paid Persaud only $2,000
for shares that Sargent ultimately sold a portion of in a sale
that netted him $627,979.
Not even the SEC suggests on appeal, however, that under
Kern -- and the follow-on Sixth Circuit precedent that drew upon
it, SEC v. Sierra Brokerage Services, Inc., 712 F.3d 321 (6th Cir.
2013) -- this evidence of price disparity, massive as the disparity
is, conclusively shows that Sargent controlled Persaud. The reason
for the SEC's circumspection is easy enough to understand. The
District Court itself found that -- unlike in either Kern or
- 51 - Sierra -- this disparity resulted from an event that intervened
between the purchase and the sale: the execution of the
post-reverse-merger pump-and-dump scheme by members of PixarBio's
management. As a result, the ultimate sale price for the Persaud
shares that Sargent garnered on the open market provides no basis
for finding that those shares were worth more than $2,000 when
Persaud sold them to Sargent.
The SEC therefore directs our attention to a different
deal to make the case that the record contains conclusive evidence
of a control-cinching price disparity: the stock purchase
agreement between Sargent and PixarBio that was consummated just
prior to Sargent reacquiring the S-1 BMP shares from Persaud. The
SEC reasons that this deal must be treated as showing that Sargent
received $325,000 from PixarBio for his promise to transfer 140,000
S-1 shares in BMP to two PixarBio associates. The SEC thus
reasons, albeit implicitly, that this deal conclusively shows that
Sargent obtained $2.50 per S-1 share of BMP in his deal with
PixarBio ($325,000 divided by 140,000 S-1 shares), which is an
amount more than twenty times greater than the $0.11 Persaud
obtained for each S-1 share of BMP in his deal with Sargent shortly
thereafter ($2,000 divided by 18,000 S-1 shares). Hence, according
to the SEC, the PixarBio deal conclusively establishes a price
disparity that, under Kern and Sierra, dispositively shows that
- 52 - Sargent controlled Persaud, notwithstanding Persaud's testimony
regarding their negotiation over his S-1 shares in BMP.
Precisely because the District Court did not rely on
this price disparity for its summary judgment ruling, however, we
can affirm based on this alternative ground only if the claimed
disparity in price is "made manifest by the record." Perez, 247
F.3d at 310. I agree with Sargent that it is not.
The stock-purchase agreement neither mentioned the S-1
BMP shares that Sargent transferred to PixarBio associates, nor
clearly stated that PixarBio would pay Sargent $325,000. The
agreement instead required PixarBio to pay $108,500 to Sargent and
$216,500 to BMP, which would use $191,500 of that sum to satisfy
its outstanding loan obligations to Sargent and the rest for
certain company expenses. Further, the agreement expressly
required Sargent to hand over his five million restricted BMP
shares (which represented 97 percent of BMP's outstanding stock
and which the SEC itself referred to in its complaint as the
"controlling interest in BMP"), cause all BMP officers to resign
(including himself), appoint a PixarBio designee to replace him as
sole director of BMP, and secure lock-up agreements as to 25,000
outstanding S-1 BMP shares.
As a result, the SEC acknowledges, as it must, that if
there is a genuine issue of material disputed fact about how much
PixarBio was paying for any of the expressly enumerated parts of
- 53 - the deal, then there is necessarily a genuine issue of material
disputed fact about whether PixarBio was valuing each S-1 BMP share
at $2.50 or something close to that amount. However, the SEC
contends counterintuitively that there is no such issue because
PixarBio clearly was paying the $325,000 only for the unmentioned
S-1 shares that Sargent gave to two of its associates.
To support this surprising contention, the SEC asserts
that the five million restricted shares "lacked any value to
PixarBio." That is so, the SEC explains, because the record
establishes without contradiction that they were not publicly
tradable and that PixarBio eventually cancelled them.
I cannot agree that it is manifest in the record,
however, that a reasonable juror would be compelled to find that
PixarBio deemed the restricted shares worthless at the time of the
stock-purchase deal itself, even accounting for PixarBio's
post-merger cancellation of them. As Sargent points out, the value
of a controlling block of restricted shares at that time does not
speak to their value to a company seeking to make a merger happen.
See 19 Am. Jur. 2d Corporations § 2234 (2024). Indeed, the record
shows that PixarBio cancelled the shares a month after the reverse
merger had been completed.
Moreover, the ability to effectuate a reverse merger is
itself valuable. It enables shareholders of privately held
companies not only to trade their shares in those companies on the
- 54 - public market "without [the company's] undertaking the expensive
process of an initial public offering," Sierra, 712 F.3d at 324,
but also to do so without being subject to the registration
requirements of Section 5 that would ordinarily apply to such a
public offering, see 15 U.S.C. § 77d(a)(1).
As for the other parts of the stock-purchase agreement,
the SEC inexplicably ignores them. Yet, it is reasonable to infer
that Sargent's promise to install a PixarBio designee as the sole
director of BMP in his stead was helpful to PixarBio's effectuation
of the merger, because the board of directors enters into merger
agreements on behalf of the corporation. See 19 Am. Jur. 2d
Corporations § 1273 (2024). Similarly, it is hardly manifest in
the record that PixarBio deemed worthless Sargent's promise to
secure lock-up agreements on 25,000 S-1 shares, because such
agreements protect the value of the stock from being diluted by a
significant number of shares flooding the marketplace when public
trading begins. See 24 William M. Prifti, Securities: Public and
Private Offerings § 4:7 (2d ed. 2024).
In other words, even if a reasonable juror were to agree
with the SEC that PixarBio was paying Sargent $325,000 for carrying
out his end of the stock-purchase agreement and that the deal
included Sargent's promise to transfer the 140,000 S-1 shares in
BMP, I do not see why such a juror would have to find evidence of
a price disparity that showed that Sargent controlled Persaud.
- 55 - Such a juror still easily could find on this record that Sargent's
willingness to offer up the other aspects of the exchange
substantially contributed to PixarBio's willingness to pay that
large sum. I thus cannot see how it is manifest in this record
that such a juror would have to find that PixarBio paid Sargent
around $2.50 for each S-1 share in BMP rather than some far lower
price.14
But let's assume, favorably to the SEC, that the record
does make manifest that PixarBio indisputably was valuing the
140,000 S-1 shares in BMP at $2.50 a share at the time of the
stock-purchase agreement. The record even then would not make
14 Kern, like Sierra, did not address whether the allegedly controlling party who is buying shares, the allegedly controlled party who is selling them, or both such parties must know in engaging in the exchange that the shares are in fact being sold for far less than they are worth at that time in order for the disparity between that sale price and the later price for which they are sold to provide a dispositive basis for concluding that the buyer controlled the seller. See Kern, 425 F.3d at 150; Sierra, 712 F.3d at 329-30. In fact, Kern and Sierra leave open the possibility that the knowledge of the parties to the exchange that the shares are worth more than they are being sold for may be irrelevant to whether the disparity in price shows that the seller controlled the party, as it may be that under Kern and Sierra the control question is to be determined wholly by an objective assessment of what a reasonable party to the exchange would have understood about the value of the shares. I need not resolve that open question about the kind of knowledge that is required, however, because, for the reasons I have explained, the PixarBio deal fails to show that either Sargent or Persaud, let alone both, in fact knew or reasonably could have known that Persaud could get $2.50 a share for his S-1 shares in BMP as of the time of the subsequent exchange for those shares between Persaud and Sargent.
- 56 - clear that any market participant would similarly value a
standalone S-1 share in BMP.
At most, the record then would show that there was a
single company that was willing to pay a $2.50 per share price to
a holder of such shares who also had a controlling block in a shell
company with which it wished to effect a reverse merger. Persaud,
however, only had standalone S-1 BMP shares to give, not a
controlling block in that company. Therefore, the PixarBio deal
would not show that Persaud could have gotten more for his S-1
shares in BMP than he testified that he convinced Sargent to pay
for them.
Indeed, the PixarBio associates who received the 140,000
S-1 shares in BMP from Sargent paid $0.02 per share for them. And
although the record does show that the associates then sold the
shares for a lot after the pump-and-dump scheme had been executed,
our concern is with what Persaud could have gotten for them at the
time that he sold them to Sargent.
I should also add that the deals that Kern and Sierra
looked to as benchmarks for the control-determining price
disparities that they found were not like the assertedly
benchmarking deal here. Kern involved a sale of shares in the
open market, Kern, 425 F.3d at 146, which was plainly a market
equally available to the supposedly controlled seller there. So,
- 57 - the price of the sale there did show what someone with those shares
could get for them.
True, Sierra is somewhat more on point, as it anchored
the dispositive price disparity in a private deal involving a shell
company. 712 F.3d at 329. But the disparity there at least was
traced to a sale that was solely of the shares in question, id. at
326, thereby arguably making it reasonable to infer that there was
a party -- the buyer in that transaction -- who would have paid
that purchase price to anyone then holding those shares. All we
know for sure here, by contrast, is that the buyer, PixarBio, was
in the market for a reverse merger, and was willing to pay Sargent
in part for something that Persaud could not offer -- a controlling
block of shares in a shell company. We thus cannot know with
confidence on this record that there was any party that was willing
to pay $2.50 a share to Persaud.
In sum, if we are trying to determine whether the record
makes manifest that it is beyond reasonable dispute that Persaud
sold shares to Sargent for a pittance that he could have sold for
a ton, then Sargent's complicated deal with PixarBio shows no such
thing. In fact, as best I can tell, the last person to have put
a value on standalone S-1 shares in BMP before the pump-and-dump
scheme had been put into effect was Sargent himself. Yet the
uncontradicted record shows that Sargent wanted to pay 25 percent
less for those shares than the 11 cents-a-share that Persaud
- 58 - ultimately got him to pay for them -- a fact that hardly shows
that Persaud was selling those shares on the cheap.
I understand that the SEC needs a practical means of
proving assertedly arms-length transactions to be nothing of the
sort when they are shams. I also understand the SEC's interest in
an expansive notion of underwriter status, given the difficulty of
proving involvement in fraud. But that need and interest cannot
justify our finding control as a matter of law in a case in which
evidence of an extreme, unexplained price disparity is most
uncertain and direct evidence in the form of the putatively
controlled party's successful counteroffer is present.
Doing so would undermine the jury's important role in
SEC enforcement actions. It also would permit the SEC to regulate
transactions that a reasonable factfinder could find Section 5
exempts and thereby risk subjecting the securities market to
regulation that Congress did not intend.
I thus respectfully dissent from the majority's holding
that the SEC was entitled to summary judgment on its Section 5
claim in this case and so do not reach the issues concerning
remedies for the alleged violations of that provision. I otherwise
join, however, in the majority's opinion.
- 59 -
Related
Cite This Page — Counsel Stack
SEC v. Sargent, Counsel Stack Legal Research, https://law.counselstack.com/opinion/sec-v-sargent-ca1-2025.