Securities and Exchange Commission v. Chen

• Court: District Court, W.D. Washington
• Decided: March 11, 2020
• Docket: 2:17-cv-00405
• Status: Unknown

Opinion

1 2

3 4 5 6 7 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON 8 AT SEATTLE

9 10 SECURITIES AND EXCHANGE CASE NO. C17-0405JLR COMMISSION, 11 ORDER SCHEDULING Plaintiff, EVIDENTIARY HEARING 12 v.

13 ANDY SHIN FONG CHEN, et al. 14 Defendants, and 15 NORTH AMERICAN FOREIGN 16 TRADE ZONE INDUSTRIES, LLC, et al., 17 Relief Defendants. 18

I. INTRODUCTION 19 Before the court is Plaintiff Securities and Exchange Commission’s (“the SEC”) 20 motion for final judgment. (Mot. (Dkt. # 74); see also Reply (Dkt. # 83).) Defendants 21 Andy Chin Fong Chen and Aero Space Port International Group, Inc. (“ASPI”) 22 1 (collectively, “Defendants”) and North American Foreign Trade Zone Industries, LLC 2 (“NAFTZI”), Washington Economic Development Capital, LLC (“EDC I”), Washington

3 Economic Development Capital II, LLC (“EDC II”), EVF, Inc. (“EVF”), Moses Lake 4 96000 Building, LLC (“Moses Lake 96000”), Sun Basin Orchards, LLC (“Sun Basin 5 Orchards”), John Chen, Tom Chen, Bobby Chen, and Heidi Chen’s (collectively, “Relief 6 Defendants”1) oppose the motion. (Resp. (Dkt. # 78).) For the reasons set forth below, 7 the court concludes that an evidentiary hearing is necessary to resolve factual disputes 8 regarding the SEC’s disgorgement calculation.

9 II. BACKGROUND 10 On February 15, 2019, the court granted summary judgment in favor of the SEC 11 on the SEC’s claims for misrepresentation liability under Section 10(b) of the Securities 12 Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b-5 13 thereunder, 17 C.F.R. § 240.10b-5; and on the SEC’s claims under Section 17(a)(2) of the

14 Securities Act of 1933 (the “Securities Act”), 15 U.S.C. § 77q(a)(2). (See 2/15/19 Order 15 (Dkt. # 53) at 23-42.) The court, however, denied the SEC’s motion for summary 16 judgment on its claims under Rule 10b-5(a) and (c) and Section 17(a)(1) and (3) of the 17 Securities Act. (See id. at 42-44.) The court also granted Relief Defendants’ motion for 18 summary judgment with respect to PIA on the grounds that “the SEC has failed to allege

19 facts supporting the court’s exercise of jurisdiction over PIA.” (See id. at 45-46.) The 20

1 Although PIA, LLC (“PIA”) was named as a Relief Defendant in the SEC’s initial 21 complaint (see Compl. (Dkt. # 1) ¶ 19), SEC amended its complaint on March 11, 2019, and removed PIA, LLC from this case (see generally Am. Compl. (Dkt. # 61)). 22 1 court otherwise denied Defendants’ and Relief Defendants’ motion for summary 2 judgment. (See id. at 44-48.)

3 After the court issued its summary judgment order, the parties stipulated to allow 4 the SEC to amend its complaint. (See 3/6/19 Stip. (Dkt. # 58) 1-2.) The SEC’s amended 5 complaint withdrew the claims the court denied summary judgment on—the SEC’s 6 claims under Rule 10b-5(a) and (c) and Section 17(a)(1) and (3) of the Securities Act— 7 and removed PIA as a Relief Defendant. (See id.; see also Am. Compl.) Accordingly, all 8 that remains for adjudication in this case is determination of the appropriate remedies to

9 award the SEC on its claims under Rule 10b-5(b) and Section 17(a)(2) of the Securities 10 Act against the Defendants and Relief Defendants. (See Mot. at 1-2.) The SEC requests 11 disgorgement, prejudgment interest, civil penalties, and permanent injunctive relief 12 against Defendants.2 (See id.) 13 III. ANALYSIS

14 The court recognizes that it “has broad equity powers to order the disgorgement of 15 ‘ill-gotten gains’ obtained through the violation of federal securities laws.”3 SEC v. JT 16

17 2 The SEC does not seek judgment against Relief Defendants but reserves the right to do so if Defendants fail to satisfy the judgment. (See Mot. at 1.) 18 3 The court acknowledges that the United States Supreme Court granted certiorari during 19 the pendency of the SEC’s motion on the issue of the SEC’s authority to obtain disgorgement in civil enforcement proceedings. See Liu v. SEC, --- U.S. ---, 140 S. Ct. 451, 2019 WL 5659111 20 (U.S. Nov. 1, 2019) (No. 18-1501). However, it is axiomatic that “[b]inding authority must be followed unless and until overruled by a body competent to do so.” Hart v. Massanari, 266 F.3d 1155, 1170 (9th Cir. 2001). Thus, the court will apply established Ninth Circuit and Supreme 21 Court law on disgorgement and will not stay this case pending the Supreme Court’s resolution of Liu. See, e.g., SEC v. Team Res. Inc., 942 F.3d 272, 274 (5th Cir. 2019) (affirming disgorgement 22 award despite pending Supreme Court review in Liu). 1 Wallenbrock & Assocs., 440 F.3d 1109, 1113 (9th Cir. 2006) (quoting SEC v. First Pac. 2 Bancorp, 142 F.3d 1186, 1190 (9th Cir. 1998)). “Disgorgement is designed to deprive a

3 wrongdoer of unjust enrichment, and to deter others from violating securities laws by 4 making violations unprofitable.” First Pac. Bancorp, 142 F.3d at 1191 (citing Hateley v. 5 SEC, 8 F.3d 653, 655 (9th Cir.1993)). The court also retains broad discretion in 6 calculating disgorgement amounts. See, e.g., JT Wallenbrock & Assocs., 440 F.3d at 7 1113-14. “A disgorgement calculation requires only a reasonable approximation of 8 profits causally connected to the violation, and the amount of disgorgement should

9 include all gains flowing from the illegal activities.” See id. (citations and internal 10 quotations omitted). The SEC “bears the ultimate burden of persuasion that its 11 disgorgement figure reasonably approximates the amount of unjust enrichment.” SEC v. 12 Platforms Wireless Int’l Corp., 617 F.3d 1072, 1096 (9th Cir. 2010) (citations omitted). 13 If the SEC carries its burden to establish a reasonable approximation of Defendants’

14 actual profits, “the burden shifts to the defendants to demonstrate that the disgorgement 15 figure was not a reasonable approximation.” See id. (citations and internal quotations 16 omitted). 17 The court concludes that an evidentiary hearing is necessary to calculate the 18 appropriate amount of disgorgement to award the SEC in this matter. The briefing and

19 evidence submitted by the parties in support of and in opposition to the SEC’s motion for 20 final judgment identifies factual disputes on the SEC’s disgorgement analysis. (See, e.g., 21 Resp. at 11-17; Reply at 2-3, 5-6.) As just one example, Defendants claim that one 22 investor, Di Jiang, has requested and received a refund of his investment from 1 Defendants. (See Resp. at 14 (citing Angela Chen Decl. (Dkt. # 80) ¶ 2, Ex. 1).) The 2 SEC includes Di Jiang’s full investment amount in its disgorgement calculation (see

3 Worland Decl. (Dkt. # 76) ¶ 2, Ex. 1), and claims that it is “not possible to assess” the 4 impact of Di Jiang’s alleged repayment amount on the SEC’s disgorgement calculation 5 because Defendants did not submit appropriate documentation in support of their claim 6 that he was repaid (see Reply at 1). Yet, Angela Chen included Di Jiang on the “roster of 7 investors” who received refunds from Defendants and submitted Di Jiang’s withdrawal 8 letter in her sworn declaration. (See Angela Chen Decl. ¶ 2, Ex. 1.) An evidentiary

9 hearing will allow the court to resolve this factual dispute and any others related to the 10 SEC’s proposed disgorgement calculation. 11 IV. CONCLUSION 12 The court schedules an evidentiary hearing in this matter on Monday, March 23, 13 2020, beginning at 1:30 PM Seattle time. Both parties will have 60 minutes each—

14 including cross-examination time—to present testimony, evidence, and oral argument 15 regarding the appropriate amount of disgorgement to award in this case under the legal 16 framework identified above. The court further ORDERS the parties to exchange and file 17 their respective witness and exhibit lists no later than Thursday, March 19, 2020. 18 Dated this 11th day of March, 2020.

19 A 20 21 JAMES L. ROBART United States District Judge 22