O 11
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66 77 United States District Court 88 Central District of California 99 1100 1111 SECURITIES AND EXCHANGE Case No. 2:16-cv-03250-ODW (Ex) COMMISSION, 1122 ORDER GRANTING IN PART AND Plaintiff, DENYING IN PART PLAINTIFF’S 1133 MOTION FOR SUMMARY v. JUDGMENT [97]; AND 1144 DENYING DEFENDANT’S MOTION IMRAN HUSAIN; GREGG EVAN FOR PARTIAL SUMMARY 1155 JACLIN, JUDGMENT [105]
1166 Defendants.
1177 1188 I. INTRODUCTION 1199 Plaintiff Securities and Exchange Commission (“SEC”) initiated this action 2200 against Defendants Imran Husain and Gregg Jaclin for perpetrating “a shell factory 2211 scheme” in violation of federal securities laws.1 (See FAC ¶ 7, ECF No. 33.) Pending 2222 before the Court are the SEC’s Motion for Summary Judgment on all claims, and 2233 Husain’s Cross-Motion for Partial Summary Judgment on claims three through eight. 2244 (SEC’s Mot. for Summ. J. (“SEC MSJ”), ECF No. 97; Husain’s Opp. & Mot. for 2255 Partial Summ. J. (“Husain MPSJ”), ECF No. 105.) The matters are fully briefed. (See 2266 SEC Reply ISO MSJ, ECF No. 111; Husain Reply ISO MPSJ, ECF No. 112.) For the 2277 1 On August 1, 2019, the Court entered judgment as to Jaclin pursuant to the parties’ stipulation. 2288 (Stipulation for J., ECF No. 78; J., ECF No. 79.) Accordingly, Husain is the only remaining Defendant. 1 reasons discussed below, the Court GRANTS IN PART AND DENIES IN PART 2 the SEC’s Motion for Summary Judgment and DENIES Husain’s Cross-Motion for 3 Partial Summary Judgment.2 4 II. BACKGROUND 5 A. Factual Background 6 From 2008 to 2012, Husain created and controlled nine shell companies (the 7 “Shell Companies”).3 (SEC’s Statement of Uncontroverted Facts (“SECUF”) 1–3, 8 ECF No. 97-2.) Husain’s “shell factory scheme,” which centered around penny stock 9 issuers, followed a routine pattern. (See id. 3.) 10 First, Husain created a “business plan” for a new company and then he engaged 11 a friend, friend of a friend, relative, or acquaintance to be the company’s CEO—but in 12 name only. (Id.) In reality, Husain controlled the company and the CEO’s activities. 13 (Id.) The CEO was merely Husain’s “puppet,” as Husain retained full control of the 14 Shell Companies by using nominee shareholders. (Id. 3, 19–20.) 15 Second, Husain assisted in organizing sham private placement offerings of the 16 Shell Companies’ shares. (Id. 19–20.) Husain paid people to recruit shareholders for 17 the Shell Companies and he knew that these “Straw Shareholders” were not using 18 their own money to purchase the shares of the Shell Companies. (Id. 20, 23.) Husain 19 even provided some of the Straw Shareholders cash to buy the stocks. (Id. 21.) 20 Husain also exercised control over the nominee shareholder representatives who 21 approved the eventual mergers on behalf of the Straw Shareholders. (Id. 24–25.) 22 Third, Husain conducted initial public offerings of each of the Shell 23 Companies’ stock so that the shares could trade publicly. (Id. 26–35, 41–42.) He 24 2 Having carefully considered the papers filed in connection with the Motions, the Court deemed the 25 matters appropriate for decision without oral argument. Fed. R. Civ. P. 78; C.D. Cal. L.R. 7-15. 3 Husain created and controlled the following Shell Companies: (1) New Image Concepts, Inc. 26 (“New Image”); (2) PR Complete Holdings, Inc. (“PR Complete”); (3) Ciglarette Inc. (“Ciglarette”); (4) Rapid Holdings, Inc. (“Rapid Holdings”); (5) Resume in Minutes, Inc. (“Resume in Minutes”); 27 (6) Movie Trailer Galaxy (“Movie Trailer”); (7) Health Directory, Inc. (“Health Directory”); 28 (8) Comp. Services, Inc. (“Comp. Services”); and (9) Counseling International, Inc. (“Counseling International”). 1 directed each Shell Company to file a registration statement on Form S-1 with the 2 SEC. (Id.) Husain knew the Shell Companies’ registration statements on Form S-1 3 and the amendments thereto were “misleading” because they “contained ‘no 4 disclosure of Husain’s role as the controlling person’ of the Shell Companies.” 5 (Id. 45.) Instead, the Shell Companies’ Forms S-1 listed the puppet CEOs as the sole 6 officer, director, and employee of the Shell Companies. (Id. 46–47.) Husain reviewed 7 and approved the registration statements and was the Shell Companies’ “main point of 8 contact” with Jaclin and the companies’ auditors. (Id. 36–40.) Husain kept his name 9 off the registration statements to avoid the suspicion and attention of the SEC. 10 (Id. 51–53.) Husain’s responsibility for over fifty misleading registration statements 11 is uncontested. (See id. 26.) 12 The Shell Companies provided information to market makers and transfer 13 agents that omitted Husain’s role as a control person, including Financial Industry 14 Regulation Authority (“FINRA”) Form 211 applications. (Id. 60, 61, 65.) Following 15 approval of the Form 211s, pre-merger trades occurred in the stock of three Shell 16 Companies. (Id. 66–68.) 17 Between 2008 and 2012, eight Shell Companies filed periodic reports on 18 Forms 10-K and 10-Q. (Id. 70–78.) Husain “directed the preparation” of these SEC 19 filings, reviewed and approved drafts, and coordinated with Jaclin and outside 20 auditors before they were filed. (Id. 81.) These SEC filings contained “material 21 misrepresentations and omissions regarding, among other things, the [Shell 22 Companies’] business purposes, Husain’s identity and role as the control person and 23 promoter of the companies, and the Straw Shareholders’ and puppet CEOs’ true 24 nature, and in two instances, the existence of merger plans.” (Id. 79.) Throughout this 25 process, Husain made sure his name was omitted from all SEC filings. (Id. 82.) 26 Husain was “aware that the shell companies that [he created] were valuable 27 because they allowed the people who acquired them to completely control the shares 28 and corporate actions of the companies that otherwise appeared to be legitimate public 1 companies.” (Id. 126.) Husain knew that the Shell Companies were sold to people 2 who would “likely use the [Shell Company] to merge into private corporations that 3 had some ongoing business.” (Id. 127.) “After the sale of each [S]hell [C]ompany, 4 the [company’s] puppet CEO resigned and new management was installed.” 5 (Id. 128.) 6 Husain “directed, reviewed, and approved” SEC filings for Health Directory 7 and Movie Trailer, which falsely claimed that neither company had merger plans, 8 even though “portions of the sales proceeds had already been received into escrow.” 9 (Id. 85–89, 91.) In total, Husain oversaw the filing of over thirty-five materially false 10 and misleading periodic reports with the SEC. (See id. 70, 79.) Husain sold seven of 11 the Shell Companies through reverse mergers. (Id. 92.) Neither Husain’s sales to the 12 Shell Companies’ purchasers, nor their subsequent sales to the public, were “validly 13 registered” with the SEC. (Id. 93, 113.) The sales of Ciglarette, Resume in Minutes, 14 Rapid Holdings, Health Directory, and Movie Trailer grossed $1,787,000. (Id. 130.) 15 Husain and Jaclin made concerted efforts to conceal their scheme, including by 16 communicating through false email accounts and hiring a computer consultant to 17 destroy emails between Husain and Jaclin. (Id. 136.) In August 2012, the puppet 18 CEO of PR Complete informed Husain that the SEC subpoenaed her in investigative 19 proceedings regarding the Shell Company. (Id. 141.) Husain coached the puppet 20 CEO on how to testify and instructed her to “to testify falsely by leaving [his] name 21 out of it.” (Id. 144.) On October 14, 2014, Husain pleaded guilty to conspiracy to 22 obstruct the proceedings of the SEC. (See id. 141–49.) 23 B. Procedural Background 24 On November 22, 2016, the SEC filed its First Amended Complaint against 25 Husain for federal securities violations, asserting ten claims: 26 Claims 1 and 2: unregistered offer and sale of securities under Section 5(a) 27 and 5(c) of the Securities Act, and aiding and abetting violations of 28 Sections 5(a) and 5(c); 1 Claims 4 and 7: fraud in the offer or sale of securities in violation of 2 Sections 17(a)(2) of the Securities Act and Rule 10b-5(b) of the Exchange 3 Act; 4 Claims 3 and 6: scheme to defraud in the offer or sale of securities in 5 violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and 6 Rules 10b-5(a) and (c) of the Exchange Act; 7 Claims 5 and 8: aiding and abetting fraud in violation of Section 17(a) of the 8 Securities Act and Rule 10b-5 of the Exchange Act; and 9 Claims 9 and 10: aiding and abetting registration violations under Section 10 15(d) and Rules 12b-20, 15d-1, and 15d-13 of the Exchange Act, and control 11 person violations pursuant to Section 20(a) of the Exchange Act. 12 (FAC ¶¶ 172–222.) Husain filed a Motion to Dismiss the SEC’s FAC, which Motion 13 the Court denied. (See Order Den. Defs.’ Mots. to Dismiss, ECF No. 46.) The Court 14 stayed this case from May 2017 to August 2019, during the pendency of the related 15 criminal matters. (Order Granting Stay, ECF No. 58; Order Lifting Stay, ECF 16 No. 82.) Thereafter, the parties filed the present summary judgment motions. 17 III. LEGAL STANDARD 18 A court “shall grant summary judgment if the movant shows that there is no 19 genuine dispute as to any material fact and the movant is entitled to judgment as a 20 matter of law.” Fed. R. Civ. P. 56(a). Courts must view the facts and draw reasonable 21 inferences in the light most favorable to the nonmoving party. Scott v. Harris, 22 550 U.S. 372, 378 (2007). A disputed fact is “material” where the resolution of that 23 fact might affect the outcome of the suit under the governing law, and the dispute is 24 “genuine” where “the evidence is such that a reasonable jury could return a verdict for 25 the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). 26 Conclusory or speculative testimony in affidavits is insufficient to raise genuine issues 27 of fact and defeat summary judgment. Thornhill Publ’g Co. v. GTE Corp., 594 F.2d 28 730, 738 (9th Cir. 1979). Moreover, though the Court may not weigh conflicting 1 evidence or make credibility determinations, there must be more than a mere scintilla 2 of contradictory evidence to survive summary judgment. Addisu v. Fred Meyer, Inc., 3 198 F.3d 1130, 1134 (9th Cir. 2000). 4 Once the moving party satisfies its burden, the nonmoving party cannot simply 5 rest on the pleadings or argue that any disagreement or “metaphysical doubt” about a 6 material issue of fact precludes summary judgment. See Celotex Corp. v. Catrett, 7 477 U.S. 317, 322–23 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 8 475 U.S. 574, 586 (1986); Cal. Architectural Bldg. Prods., Inc. v. Franciscan 9 Ceramics, Inc., 818 F.2d 1466, 1468 (9th Cir. 1987). Nor will uncorroborated 10 allegations and “self-serving testimony” create a genuine issue of material fact. 11 Villiarimo v. Aloha Island Air, Inc., 281 F.3d 1054, 1061 (9th Cir. 2002). The Court 12 should grant summary judgment against a party who fails to demonstrate facts 13 sufficient to establish an element essential to his case when that party will ultimately 14 bear the burden of proof at trial. See Celotex, 477 U.S. at 322. 15 Pursuant to the Local Rules, parties moving for summary judgment must file a 16 proposed “Statement of Uncontroverted Facts and Conclusions of Law” that sets out 17 “the material facts as to which the moving party contends there is no genuine dispute.” 18 C.D. Cal. L.R. 56-1. A party opposing the motion must file a “Statement of Genuine 19 Disputes” setting forth all material facts as to which it contends there exists a genuine 20 dispute. C.D. Cal. L.R. 56-2. “[T]he Court may assume that material facts as claimed 21 and adequately supported by the moving party are admitted to exist without 22 controversy except to the extent that such material facts are (a) included in the 23 ‘Statement of Genuine Disputes’ and (b) controverted by declaration or other written 24 evidence filed in opposition to the motion.” C.D. Cal. L.R. 56-3. 25 IV. DISCUSSION 26 First, the Court addresses the SEC’s claims, which can be categorized three 27 ways. In Claims 1 and 2, the SEC alleges Husain violated Sections 5(a) and 5(c) by 28 offering and selling unregistered securities. In Claims 3 through 8, the SEC asserts a 1 theory of fraud—namely, that Husain’s shell factory scheme involved acts of 2 deception, misleading statements, and omissions in the sale of securities using means 3 of interstate commerce. In Claims 9 and 10, the SEC asserts “secondary claims” in 4 the alternative to Husain’s primary liability, alleging that he aided and abetted the 5 Shell Companies’ reporting violations and is liable as their control person. Second, 6 the Court addresses the SEC’s requested remedies. Husain moves for partial summary 7 judgment on only Claims 3 through 8. 8 A. Offering and Selling Unregistered Securities (Claims 1 & 2) 9 The SEC moves for summary judgment on Claim 1, which alleges that Husain 10 violated the Securities Act’s registration requirements through unregistered offers and 11 sales of securities. (SEC MSJ 15–18.) In the alternative, the SEC moves for 12 summary judgment on Claim 2, which alleges that Husain aided and abetted said 13 registration requirements. (SEC MSJ 2 n.1.) In his opposition, Husain states that he 14 “is prepared to concede liability under Sections 5(a) and (c) . . . in connection with his 15 failure to make disclosures to the SEC.” (Husain MPSJ 3.) 16 Sections 5(a) and (c) of the Securities Act prohibit the unregistered offer or sale 17 of securities in interstate commerce or mail unless an exemption from registration 18 applies. See 15 U.S.C. § 77e(a), (c); SEC v. Phan, 500 F.3d 895, 902 (9th Cir. 2007). 19 Husain concedes liability with respect to violating Sections 5(a) and (c), and thus, 20 does not put forth any argument or evidence contesting his liability with respect to the 21 registration violations. (See Husain MPSJ 3, 15 (proposing judgment by consent on 22 these claims).) As there is no genuine dispute concerning Husain’s primary violations 23 of Sections 5(a) and (c), the SEC is entitled to summary judgment on Claim 1 against 24 Husain for offering and selling unregistered securities. Because the Court finds 25 Husain liable for primary violations of these provisions, the SEC’s claim for aiding 26 and abetting violations of Sections 5(a) and (c) (Claim 2) is denied. 27 28 1 B. Fraud Violations (Claims 3–8) 2 Next, the SEC moves for summary judgment on its claims that Husain violated 3 various antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of 4 the Exchange Act, and Rule 10b-5 by operating the alleged shell factory scheme. 5 (SEC MSJ 8–15.) The SEC’s fraud claims can be subcategorized three ways: 6 (1) material misstatements and omissions (Claims 4 and 7), (2) scheme to defraud 7 (Claims 3 and 6), and (3) aiding and abetting fraud (Claims 5 and 8). 8 Husain opposes the SEC’s motion and cross-moves for partial summary 9 judgment on Claims 3 through 8. (Husain MPSJ 1.) 10 1. Claims 4 & 7: Material Misstatements and Omissions 11 In its fourth and seventh claims, the SEC alleges that Husain profited from 12 making material misstatements and omissions in the offer or sale of securities by 13 means of interstate commerce. (FAC ¶¶ 191–94, 204–07.) Specifically, the SEC 14 contends that the Shell Companies’ registration statements—Form S-1, periodic 15 reports on Forms 10-K and 10-Q, and FINRA Forms 211—all contained material 16 misstatements depicting the puppet CEOs as the entities controlling the Shell 17 Companies, while concealing Husain’s ownership and control. (SEC MSJ 10.) 18 Additionally, two SEC filings, for Health Directory and Movie Trailer, falsely stated 19 that neither company had plans to merge. (Id.) Husain, on the other hand, argues that 20 any material misrepresentations or omissions were made only to the SEC, and as such, 21 he cannot be held liable for securities fraud violations. (Husain MPSJ 14–15.) 22 The antifraud provisions of the Securities Act (Section 17(a)(2)), and the 23 Exchange Act (Section 10(b) and Rule 10b-5(b)), “forbid making a material 24 misstatement or omission in connection with the offer or sale of a security by means 25 of interstate commerce.” SEC v. Hui Feng, 935 F.3d 721, 734 (9th Cir. 2019) 26 (internal quotation marks omitted). Section 17(a)(2) makes it unlawful for any person 27 in the offer or sale of any securities “to obtain money or property by means of any 28 untrue statement of a material fact or any omission.” 15 U.S.C. § 77q(a)(2). 1 Section 17(a)(2) and Rule 10b-5(b) are nearly identical, except the statutes differ with 2 respect to the state of mind requirements. Hui Feng, 935 F.3d at 734; see Aaron v. 3 SEC, 446 U.S. 680, 695–97 (1980) (explaining that Section 10(b) and Rule 10b-5(b) 4 violations require scienter, while Section 17(a)(2) requires only negligence). 5 Husain contest only the materiality of the misstatements and omissions and 6 whether they were made “in connection with” and “in the offer or sale” of a security. 7 (See generally Husain MPSJ.) The first issue is whether Husain’s ownership and 8 control of the Shell Companies was material. A fact is material if there is “a 9 substantial likelihood that the disclosure of the omitted fact would have been viewed 10 by the reasonable investor as having significantly altered the ‘total mix’ of 11 information made available.” Phan, 500 F.3d at 908 (quoting Basic Inc. v. Levinson, 12 485 U.S. 224, 231–32 (1988)). 13 As this Court has previously expressed, there is little doubt that a reasonable 14 investor would have wanted to know the identity of the Shell Companies’ true leader. 15 (See Order Den. Defs.’ Mots. to Dismiss 14); see also SEC v. Fehn, 97 F.3d 1276, 16 1290 (9th Cir. 1996) (finding that the existence of a control person is a material fact). 17 Moreover, at this juncture, there can be no serious dispute that the omission of 18 Husain’s role as promoter and control person in the Shell Companies’ annual and 19 quarterly reports was material because he has admitted this fact in his Amended 20 Answer. (Compare FAC ¶ 216 (“The [S]hell [C]ompanies . . . filed annual and 21 quarterly reports containing material misrepresentations and omissions 22 regarding . . . Husain’s identity and role as the control person and promoter of the 23 companies.”), with Husain’s Am. Answer ¶ 216, ECF No. 92 (“Defendant admits the 24 allegations in paragraph No. 216 [of the FAC].”).) Under federal law “admissions in 25 the pleadings are generally binding on the parties and the Court.” Am. Title Ins. Co. v. 26 Lacelaw Corp., 861 F.2d 224, 226 (9th Cir. 1988). Therefore, the Court finds that 27 Husain’s failure to disclose his role as control person and promoter of the Shell 28 Companies was material. See Phan, 500 F.3d at 908. 1 The second issue is whether the material misstatements and omissions were 2 made “in the offer or sale of” a security, (see Section 17(a)), and “in connection with 3 the purchase or sale of a security,” (see Rule 10b-5). Section 17(a) is interpreted 4 broadly; the Supreme Court has explained that the terms “in,” “offer,” and “sale,” as 5 used in Section 17(a), “are expansive enough to cover the entire selling process.” 6 United States v. Naftalin, 441 U.S. 768, 772–73 (1979) (“The statutory language does 7 not require that the victim of the fraud be an investor—only that the fraud occur ‘in’ 8 an offer or sale.”); see also id. (“This language does not require that the fraud occur in 9 any particular phase of the selling transaction.”). Similarly, under Rule 10b-5, “the ‘in 10 connection with’ requirement is met if the fraud alleged ‘somehow touches upon’ or 11 has ‘some nexus’ with ‘any securities transaction.’” SEC v. Rana, 8 F.3d 1358, 1362 12 (9th Cir. 1993) (quoting SEC v. Clark, 915 F.2d 439, 499 (9th Cir. 1990)). Thus, 13 courts have found “[w]here the fraud alleged involves public dissemination in a 14 document such as a[n] . . . annual report . . . or other such document on which an 15 investor would presumably rely, the ‘in connection with’ requirement is generally met 16 by proof of means of dissemination . . . .” Id. 17 Here, the very purpose of Husain’s “shell factory scheme” was to create fake 18 public companies whose stock could be traded, and the undisputed evidence 19 demonstrates that his deceptive conduct accompanied the offers and sales of securities 20 throughout the Shell Companies’ existence in at least three ways. First, the 21 undisputed evidence demonstrates that Husain made material misstatements and 22 omissions in the offer of the Shell Companies’ securities to the public in the Forms S- 23 1 by failing to disclose his role as the companies’ promoter and control person. (See 24 SECUF 60, 61, 65.) 25 Second, Husain made material misstatements to market makers, transfer agents, 26 and FINRA to enable public trading of the Shell Companies’ stock. (See id.); see, 27 e.g., SEC v. C. Jones & Co., 312 F. Supp. 2d 1375, 1381 (D. Colo. 2004) (false 28 statements “enabling a stock to be publicly traded are ‘reasonably calculated to 1 influence the investing public’ and hence made ‘in connection with’ the purchase or 2 sale of a security.” (citation omitted)); see also SEC v. Zouvas, No. 3:16-cv-0998- 3 CAB (DHBx), 2016 WL 6834028, at *8 (S.D. Cal. Nov. 21, 2016) (“[T]he alleged 4 false information that [the defendant] gave to FINRA, the organization relied on by 5 investors to ensure that the information they receive is truthful and complete,” enabled 6 “the stock to be publicly traded and [was], therefore, sufficiently connected to 7 subsequent securities transactions.”). 8 Third, Husain’s material misstatements occurred during pre-merger and post- 9 merger trades, and sales to the purchasers of the Shell Companies. (See, e.g., SECUF 10 66–68.) For example, Movie Trailer and Health Directory’s Form 10-K and amended 11 Forms S-1 falsely claimed that neither company had merger plans, even though the 12 purchasers already paid partial consideration for the Shell Companies. (See id. 85–89, 13 91.) Thus, based on the undisputed evidence the Court finds that Husain’s material 14 misstatements and omissions occurred “in the offer or sale of” and “in connection 15 with the purchase or sale” of securities. 16 Nevertheless, Husain insists that the SEC’s fraud claims fail because “there 17 were no misstatements or omissions to any [S]traw [S]hareholder or investor,” 18 because they were involved in the scheme, and thus there was no violation of the 19 antifraud statutes. (Husain MPSJ 14–15.) However, as this Court has previously 20 stated, the antifraud provisions are meant to be broad and flexible so as to root out 21 fraud wherever it exists and in whatever form it takes. (See Order Den. Defs.’ Mots. 22 to Dismiss 19–20 (citing United States v. Charnay, 537 F.2d 341, 349 (9th Cir. 23 1976)).) Indeed, Rule 10b-5 is “not intended as a specification of particular acts or 24 practices that constitute manipulative or deceptive devices or contrivances, but [is] 25 instead designed to encompass the infinite variety of devices that are alien to the 26 climate of fair dealing.” Charnay, 537 F.2d at 349 (internal quotation marks omitted). 27 Similarly, investor protection is not the sole purpose of the Securities Act and Section 28 17(a) thereunder. Naftalin, 441 U.S. at 769. “While prevention of fraud against 1 investors was a key part of the purpose of the Act, so was the effort ‘to achieve a high 2 standard of business ethics . . . in every facet of the securities industry,’ . . . .” Id. 3 (quoting SEC v. Cap. Gains Bureau, 375 U.S. 180, 186–87 (1963)). 4 Here, Husain intentionally engaged in fraudulent, deceitful, and criminal 5 actions to enable the public trading of the Shell Companies’ stock. His actions were 6 clearly “alien to the climate of fair dealing” and antithetical to the Securities Act’s 7 goal to achieve a high standard of business ethics. See Charnay, 537 F.2d at 349; 8 Naftalin, 441 U.S. at 769. In light of the foregoing authority and in furtherance of the 9 stated purposes of the antifraud provisions, the Court rejects Husain’s absurdly narrow 10 view that there can be no violation of the antifraud statutes simply because the Shell 11 Companies’ investors and purchasers were privy to the scheme. The adoption of such 12 a view would undermine the public’s faith in the public securities markets. 13 Therefore, based on the undisputed evidence, the SEC has demonstrated that 14 Husain made material misstatements and omissions “in the offer or sale of” and “in 15 connection with the purchase or sale of a security” in violation of Section 17(a) and 16 Rule 10b-5. Accordingly, the SEC is entitled to summary judgment as to Claims 4 17 and 7, and Husain’s Motion for Partial Summary Judgment on Claims 4 and 7 is 18 denied. 19 2. Claims 3 & 6: Scheme to Defraud 20 In its third and sixth claims, the SEC alleges that Husain engaged in a scheme 21 to defraud as the co-mastermind of the shell factory scheme. (FAC ¶¶ 187–90, 22 201–03.) The SEC contends Husain engaged in numerous deceptive actions to 23 conceal the shell factory from the public market, regulators, and market makers by, 24 among other things, using puppet CEOs and coaching a witness to lie under oath. 25 (Id.) Husain argues that there was no “scheme to deceive or defraud sellers, 26 purchasers, or other investors of securities within the traditional meaning of the 27 [antifraud] statutes.” (Husain MPSJ 1.) 28 1 “The securities fraud provisions . . . prohibit any person, in the offer or sale of 2 securities, ‘to employ any device, scheme, or artifice to defraud’ or ‘to engage in any 3 transaction, practice, or course of business which operates or would operate as a fraud 4 or deceit upon the purchaser.’” Hui Feng, 935 F.3d at 736 (quoting 15 U.S.C. 5 § 77q(a)(1), (3)); see also 17 C.F.R. § 240.10b-5(a), (c). “The same elements required 6 to establish a section 10(b) and Rule 10b-5 violation suffice to establish a violation 7 under sections 17(a)(1)–(3).” Zouvas, 2016 WL 6834028, at *11. A scheme typically 8 involves a “manipulative” or “deceptive” act. Id. at *5 (quoting Cooper v. Pickett, 9 137 F.3d 616, 624–25 (9th Cir. 1997)); see also Scheme, Black’s Law Dictionary 10 (11th ed. 2019) (“An artful plot or plan . . . to deceive others.”). “The state of mind 11 requirement varies among these provisions, but a showing of intentional or knowing 12 conduct clears all thresholds.” Hui Feng, 935 F.3d at 736. 13 Here, the undisputed evidence demonstrates that Husain’s deceptive actions 14 exude the very essence of an unlawful scheme. Commencing with his fake “business 15 plans” for the Shell Companies, Husain essentially developed a “how-to” guide for the 16 creation and operation of an illegal shell factory enterprise. The scheme involved, 17 among other things, creating public “shell” companies, which had virtually no assets, 18 operations, or legitimate business purposes, and then selling the companies to buyers 19 who sought to trade the companies’ stock publicly. (See SECUF 126–128.) Husain’s 20 deceitful actions are numerous, including: (1) secretly recruiting puppet CEOs and 21 Straw Shareholders, (2) organizing sham private placements, (3) preparing and filing 22 false documents with the SEC, and (4) conducting initial public offerings for the Shell 23 Companies. (See id. 3, 19–20, 26–35, 41–42, 46–47, 70–78.) His deceitful actions 24 were for the purpose of facilitating the sale of securities to the purchasers of the Shell 25 Companies via reverse merger. (Id. 126–128.) And his deceptive actions were 26 necessary to take the Shell Companies public and make their securities valuable to the 27 purchasers. (Id.) 28 1 Husain’s shell factory scheme is exactly the type of conduct the antifraud 2 provisions were designed to prevent. See Naftalin, 441 U.S. at 769 (explaining that 3 the intention of the Securities Act was ‘to achieve a high standard of business 4 ethics . . . in every facet of the securities industry”); see also A.T. Brod & Co. v. 5 Perlow, 375 F.2d 393 (2d Cir. 1967) (“Rule 10b-5 . . . was designed to protect both 6 investors and the public interest.” (internal quotation marks omitted)). Husain’s shell 7 factory scheme clearly undermined the integrity of the “securities industry” as a whole 8 and the “public interest.” See Naftalin, 441 U.S. at 769; A.T. Brod, 375 F.2d at 396. 9 Based on the undisputed evidence, the SEC has demonstrated that Husain engaged in 10 a scheme to defraud in violation of 17(a) and Rule 10b-5. 11 Accordingly, the SEC is entitled to summary judgment as to Claims 3 and 6, 12 and Husain’s Motion for Partial Summary Judgment as to these claims is denied. 13 3. Claims 5 & 8: Aiding and Abetting Fraud 14 As an alternative to primary liability under the antifraud statutes, in its fifth and 15 eighth claims the SEC alleges that Husain is liable for aiding and abetting the Shell 16 Companies’ and their purchasers’ fraudulent actions. (FAC ¶¶ 195–200, 208–13; SEC 17 MSJ 18 n.12 (explaining that the Section 17(a) and 10b-5 aiding and abetting claims 18 are asserted “as an alternative basis for Husain’s direct, primary liability”).) However, 19 the Court’s determination that Husain is liable as a primary violator of the antifraud 20 statutes moots these claims. Therefore, both motions are denied as to these claims. 21 C. Secondary Violations (Claims 9 & 10) 22 In its ninth and tenth claims, the SEC alleges that, in the alternative to Husain’s 23 primary liability, he aided and abetting the Shell Companies’ reporting violations and 24 is liable as their control person. As discussed in Parts A and B above, Husain is liable 25 as a primary violator of the Securities Act and the Exchange Act. Accordingly, the 26 SEC’s claims for secondary violations as an aider and abettor and a control person 27 (Claims 9 and 10) are denied. 28 1 D. Requested Remedies 2 The SEC requests that the Court order the following remedies: (1) a permanent 3 injunction; (2) civil penalties; (3) an officer and director bar and penny stock bar; and 4 (4) disgorgement. (SEC MSJ 19–25.) The Court addresses each requested form of 5 relief in turn. 6 1. Permanent Injunction 7 First, the SEC seeks an order permanently enjoining Husain from violating the 8 securities laws. (SEC MSJ 19–20.) The SEC may seek a permanent injunction 9 against a person who has violated securities laws pursuant to Section 20(b) of the 10 Securities Act and Section 21(d) of the Exchange Act. See 15 U.S.C. 11 §§ 77t(b), 78u(d). To obtain an injunction, the SEC must establish that there is “a 12 reasonable likelihood of future violations of the securities laws.” SEC v. Murphy, 13 626 F.2d 633, 655 (9th Cir. 1980). “In predicting the likelihood of future violations, a 14 court must assess the totality of the circumstances surrounding the defendant and his 15 violations.” Id. A court must consider the following factors (“Murphy Factors”): 16 (1) the degree of scienter involved, (2) the isolated or recurrent nature of the 17 misconduct, (3) the defendant’s recognition of the wrongful nature of the conduct, 18 (4) the likelihood that, because of the defendant’s occupation, future violations may 19 occur, and (5) the sincerity of defendant’s assurances (if any) against future violations. 20 See id. 21 Here, the totality of the circumstances warrants injunctive relief. Husain acted 22 with a high degree of scienter, over several years, in a repeated pattern of wrongdoing. 23 He went to great lengths to conceal his shell factory scheme from regulatory 24 oversight. Husain only stopped his scheme because he got caught, which gives rise to 25 an inference of a reasonable expectation of future violations. See SEC v. Manor 26 Nursing Ctrs., 458 F.2d 1082, 1100-01 (2d Cir. 1972) (“[T]he drawing of such an 27 inference [is] particularly appropriate . . . where appellants did not attempt to cease or 28 undo the effects of their unlawful activity until the institution of an investigation.”); 1 SEC v. Koracorp Indus., Inc., 575 F.2d 692, 698 (9th Cir. 1978) (same). And 2 although Husain argues that he has expressed regret for his illegal past conduct, 3 “courts must be particularly skeptical about attaching any significance to contrition 4 under protest.” Koracorp Indus., 575 F.2d at 698; (see Decl. of Imran Husain ISO 5 MPSJ (“Husain Decl.”) ¶ 5, ECF No. 105-3 (“I have repeatedly expressed regret for 6 my conduct here.”).) 7 Importantly, Husain fails to recognize the wrongful nature of his conduct. He 8 has repeatedly failed to acknowledge that there were victims of his fraudulent scheme, 9 and he refuses to take responsibility for the impact of his illegal conduct on the 10 market’s integrity. (See, e.g., Husain Decl. ¶ 4 (“[T]here were no ‘victims’ of any . . . 11 misconduct in this case involving sales of certain [Shell Companies].”).) 12 Husain’s past dealings and his failure to recognize the wrongful nature of his 13 conduct gives the Court every reason to be concerned about future violations. 14 Accordingly, the Court GRANTS the SEC’s request for a permanent injunction. 15 2. Civil Penalties 16 Second, the SEC requests that the Court impose a second-tier civil penalty of 17 $1,757,000,4 which represents the gross amount of pecuniary gain from Husain’s 18 illegal activities. (SEC MSJ 22–23 (citing 15 U.S.C. §§ 77t(d)(2), 78u(d)(3)(A)).) 19 “Congress enacted civil penalty provisions to achieve the dual goals of punishment of 20 the individual violator and deterrence of future violations.” SEC v. Duncan, No. CV 21 08-1323-VAP (OPx), 2009 WL 10670521, at *15 (C.D. Cal. July 6, 2009) (quoting 22 SEC v. Marker, 427 F. Supp. 2d 583, 592 (M.D. Fla. 2006)). “The deterrence of 23 securities fraud through the imposition of monetary sanctions serves such important 24 goals as encouraging investor confidence, increasing the efficiency of financial 25 markets, and promoting the stability of the securities industry.” Id. (citing SEC v. 26 Palmisano, 135 F.2d 860, 866 (2d Cir. 1998)). 27
28 4 The SEC excludes from this calculation the amount that Jaclin was ordered to disgorge. (SEC MSJ 21 n.15.) 1 Similar to permanent injunctions, civil penalties are imposed to deter the 2 wrongdoer from similar conduct in the future, so courts frequently apply the Murphy 3 Factors for permanent injunctions when assessing civil penalties. See Murphy, 4 626 F.2d at 655; see also SEC v. CMKM Diamonds, Inc., 635 F. Supp. 2d 1185, 1192 5 (D. Nev. 2009). For the same reasons as above, the Murphy Factors favor civil 6 penalties. 7 The Exchange Act and the Securities Act provide for three tiers of penalties, 8 and the amount of any penalty “shall be determined by the court in light of the facts 9 and circumstances.” 15 U.S.C. §§ 78u(d)(3)(B), 77t(d)(2). Second-tier civil penalties 10 apply to violations that “involved fraud, deceit, manipulation or deliberate or reckless 11 disregard of a regulatory requirement,” and must not exceed the gross amount of the 12 defendant’s pecuniary gain. 15 U.S.C. §§ 78u(d)(3)(B)(ii), 77t(d)(2)(B). As 13 previously discussed, Husain’s conduct involved fraud and deceit, and his gross 14 pecuniary gain of $1,757,000 is undisputed. 15 Accordingly, the Court GRANTS the SEC’s request for civil penalties under 16 tier two in the amount of $1,757,000. 17 3. Officer and Director Bar and Penny Stock Bar 18 Third, the SEC seeks to permanently bar Husain from serving as an officer or 19 director of a public company and from participating in offerings of penny stock. (See 20 SEC MSJ 23–25.) 21 Under Section 21(d)(2) of the Exchange Act and Section 20(e) of the Securities 22 Act, a district court may prohibit a person who has engaged in securities fraud from 23 acting as an officer or director of a public company “if the person’s conduct 24 demonstrates unfitness to serve as an officer or director.” 15 U.S.C. §§ 77t(e), 25 78u(d)(2). Courts may also bar an individual from trading in “penny stock,” an equity 26 security with a price of less than $5.00, when it is shown that the person was 27 participating in an offering of penny stock at the time of his alleged misconduct. See 28 15 U.S.C. § 77t(g). 1 Courts consider the following factors in determining whether to order an officer 2 and director bar or a penny stock bar: “(1) the ‘egregiousness’ of the underlying 3 securities law violation; (2) the defendant’s ‘repeat offender’ status; (3) the 4 defendant’s ‘role’ or position when he engaged in the fraud; (4) the defendant’s 5 degree of scienter; (5) the defendant’s economic stake in the violation; and (6) the 6 likelihood that misconduct will recur.” SEC v. First Pac. Bancorp, 142 F.3d 1186, 7 1193 (9th Cir. 1998) (quoting SEC v. Patel, 61 F.3d 137, 141 (2d Cir. 1995)); SEC v. 8 Premier Holding Corp., No. SACV 18-00813 CJC (KESx), 2020 WL 8099514, at *10 9 (C.D. Cal. Nov. 30, 2020) (“The court considers essentially the same factors that 10 govern the imposition of an officer or director bar when imposing a penny stock bar.” 11 (internal quotation marks omitted)). 12 As discussed above, the undisputed facts establish that Husain was the 13 co-mastermind of the illegal shell company scheme, which centered around penny 14 stock issuers. His scheme lasted several years, and it resulted in numerous illegitimate 15 public Shell Companies. Additionally, Husain controlled the companies during the 16 scheme, took criminal actions to hide the scheme from detection, and profited 17 substantially from his actions. 18 Upon consideration of the undisputed evidence in this case and relevant 19 authorities, the Court finds that Husain should be barred from acting as an officer or 20 director of a public company and from participating in an offering of penny stock for a 21 period of seven years. The Court finds that a seven-year bar, as opposed to the 22 permanent ban the SEC seeks, is more in line with other courts in this circuit and 23 appropriately reflects the severity of Husain’s scienter, his material misstatements, his 24 economic stake in the scheme, and his lack of remorse for the illegal conduct. Cf. 25 SEC v. F. Nat’l Invs. Ltd., No. ED CV14-02376 JAK (DTBx), 2016 WL 6875953, 26 at *7 (C.D. Cal. Nov. 18, 2016) (imposing a ten-year bar on former CEO who 27 knowingly carried out a scheme to defraud members of the public by, among other 28 things, disseminating false press releases); SEC v. Retail Pro, Inc., No. 08 CV 1620- 1 WQH-(RBBx), 2011 WL 13186014, at *6 (S.D. Cal. June 23, 2011) (imposing a 2 seven-year bar on a former CFO who made repeated misrepresentations to the public 3 and auditors); SEC v. Forum Nat’l Invs. Ltd., Premier Holding Corp., 2020 WL No. 4 SACV 18-00813-CJC (KESx), 2020 WL 8099514, at *10 (C.D. Cal. Nov. 30, 2020) 5 (imposing a five-year bar on corporation’s former president, CEO, and CFO, based on 6 his “multiple material misstatements made with a high degree of scienter, his lack of 7 remorse for his mistakes, and the significant likelihood of future violations.”). 8 Accordingly, the Court GRANTS the SEC’s request to bar Husain from serving 9 as an officer or director of a public company and from participating in an offering of 10 penny stock for a period of seven years from the date of judgment in this case. 11 4. Disgorgement 12 Fourth and finally, the SEC seeks disgorgement in the amount of $1,757,000, 13 which constitutes the undisputed gross proceeds from the sales of the Shell 14 Companies and prejudgment interest. (SEC MSJ 20–22.) “The district court has 15 broad equity powers to order the disgorgement of ill-gotten gains obtained through the 16 violation of the securities laws.” First Pac. Bancorp, 142 F.3d at 1191 (internal 17 quotation marks omitted). 18 Shortly after the SEC filed its Motion for Summary Judgment, the United States 19 Supreme Court in Liu v. SEC, 140 S. Ct. 1936 (2020), clarified to what extent the SEC 20 may seek disgorgement through the court’s power to award equitable relief to victims 21 of securities fraud. Justice Sotomayor, writing for the majority, held that “a 22 disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for 23 victims is equitable relief permissible under § 78u(d)(5).” 24 Because of the timing of the Supreme Court’s decision, the SEC argues that the 25 Parties did not have the opportunity to conduct discovery or brief the issues presented 26 by Liu. And it contends that the record is lacking with respect to what portion of the 27 $1,757,000 constitutes Husain’s net profits. (See SEC’s Reply ISO MSJ (“The SEC 28 did not address Liu in its motion, and as Husain admits, the record is not complete as 1 to the factual findings Liu requires.”). Husain agrees that the record is undeveloped 2 with respect to “net proceeds” as opposed to “gross proceeds.” (Husain MPSJ 18.) 3 Thus, the SEC requests that the Court reopen discovery under Federal Rule of 4 Civil Procedure (“Rule”) 56(d) so that it can provide supplemental briefing on this 5 issue. (SEC Reply ISO MSJ 14–15.) Under Rule 56(d), the Court has discretion to 6 defer resolution of a motion for summary judgment and allow time for additional 7 discovery “[i]f a nonmovant shows by affidavit or declaration that, for specified 8 reasons, it cannot present facts essential to justify its opposition.” Fed. R. Civ. 9 P. 56(d). “An extension is not justified merely because discovery is incomplete or 10 desired facts are unavailable.” Khai v. Cnty. of Los Angeles, No. CV 16-3124 PA 11 (JCx), 2016 WL 11520829, at *3 (C.D. Cal. Sept. 14, 2016). “The burden is on the 12 party seeking additional discovery to proffer sufficient facts to show that the evidence 13 sought exists,” and that it is material to summary judgment. Chance v. Pac-Tel. 14 Teletrac, Inc., 242 F.3d 1151, 1161 n.6 (9th Cir. 2001). 15 The Court finds the SEC’s request to reopen discovery is deficient, and at this 16 stage in the litigation unnecessary. First, instead of filing an “affidavit or declaration” 17 in support of the request, the SEC makes its Rule 56(d) request its Reply brief. 18 Therefore, the SEC “necessarily has not done the minimum required of [it] to . . . 19 delay summary judgment.” See Wilcox v. City of Los Angeles, No. CV 19-622-GW 20 (FFMx), 2020 WL 8096332, at *2 (C.D. Cal. Oct. 2, 2020). 21 Second, the Court finds that evidence concerning Husain’s net profits are not 22 “essential” or necessary for the Court to rule on the Parties’ Motions. Moreover, the 23 Court finds that its imposition of a permanent injunction, seven-year officer and 24 director and penny stock bar, and $1,757,000 civil penalty are sufficient punishment 25 and deterrence to address Husain’s violations of the securities laws. Therefore, in the 26 exercise of its broad discretion, the Court DENIES the SEC’s request for 27 disgorgement. 28 1 Vv. CONCLUSION 2 For the foregoing reasons, the Court DENIES Husain’s Motion for Partial 3 || Summary Judgment. (ECF No. 105.) The Court GRANTS IN PART AND DENIES IN PART the SEC’s Motion for Summary Judgment (ECF No. 97) as follows: 5 e The SEC’s Motion for Summary Judgment is GRANTED as to 6 Claims 1, 3, 4, 6, and 7; 7 e The SEC’s MSJ is DENIED as to Claims 2, 5, and 8 through 10; 8 e The Court GRANTS the SEC’s request for an order permanently 9 enjoining Husain from violating the securities laws; 10 e The Court GRANTS the SEC’s request for civil penalties in the amount 11 of $1,757,000; 12 e The Court GRANTS the SEC’s request to bar Husain from serving as an 13 officer or director of a public company and from participating in an 14 offering of penny stock for a period of seven years from the date of 15 judgment in this case; and 16 e The Court DENIES the SEC’s request for disgorgement. 17 || The SEC shall submit a Proposed Judgment no later than seven days after the date of 18 | this order. 19 20 IT IS SO ORDERED. 21 □□ 22 March 24, 2021 a 23 Atel 4 OTIS D. HT, II 05 UNITED STATES DISTRICT JUDGE
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