United States District Court, S.D. California
ORDER DENYING THE SEC'S MOTION FOR PARTIAL SUMMARY JUDGMENT ON ITS FOURTH CLAIM FOR RELIEF [ECF No. 685]
GONZALO P. CURIEL, District Judge.
Before the Court is Plaintiff Securities and Exchange Commission's (the "SEC") Motion for Partial Summary Judgment on its Fourth Claim for Relief. (ECF No. 685.) Defendants Louis V. Schooler ("Schooler") and First Financial Planning Corporation d/b/a Western Financial Planning Corporation ("Western") (collectively, "Defendants") oppose. (ECF No. 980.)
The parties have fully briefed the motion. (ECF Nos. 685, 980, 1019.) The Court finds the motion suitable for disposition without oral argument pursuant to Civil Local Rule 7.1(d)(1). Upon review of the moving papers, admissible evidence, and applicable law, the Court DENIES the SEC's motion for partial summary judgment.
This is an enforcement action brought by the SEC. ( See ECF No. 1.) The SEC alleges that Defendants defrauded investors in the sale of general partnership ("GP") units which were, as a matter of law, unregistered securities. ( Id. ) On September 4, 2012, the SEC filed its complaint. ( Id. ) On October 22, 2012, this case was transferred to the Honorable Gonzalo P. Curiel. (ECF No. 52.) On July 15, 2013, Defendants filed an answer to the SEC's complaint. (ECF No. 255.) On March 28, 2014, the SEC filed a motion for partial summary judgment with regards to whether the GP units were securities. (ECF No. 563.) On April 25, 2014, the Court granted the SEC's motion for partial summary judgment and found that the GP units at issue in this case were, as a matter of law, securities (the "Securities Order"). (ECF No. 583.) The facts of this case are set forth in detail in the Securities Order. ( Id. at 1-11.)
On September 9, 2014, the SEC filed the present motion for partial summary judgment on its fourth claim for relief. (ECF No. 685.) On February 13, 2015, Defendants filed an opposition to the SEC's motion. (ECF No. 980.) On March 6, 2015, the SEC filed a response to Defendants' opposition. (ECF Nos. 1011, 1019.) The SEC moves for summary judgment on its fourth claim for relief: that Defendants violated Sections 5(a) and 5(c) of the Securities Act of 1933, 15 U.S.C. §§ 77e(a), 77e(c). (ECF No. 1 ¶¶ 79-82; ECF No. 685.) The SEC further moves for disgorgement pursuant to its Section 5 cause of action. (ECF No. 685-1, at 1.)
IV. LEGAL STANDARD
A. Summary Judgment
Federal Rule of Civil Procedure 56 empowers the Court to enter summary judgment on factually unsupported claims or defenses, and thereby "secure the just, speedy and inexpensive determination of every action." Celotex Corp. v. Catrett, 477 U.S. 317, 325, 327 (1986); FED. R. CIV. P. 56. Summary judgment is appropriate if the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." FED. R. CIV. P. 56(c). A fact is material when it affects the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
The moving party bears the initial burden of demonstrating the absence of any genuine issues of material fact. Celotex, 477 U.S. at 323. The moving party can satisfy this burden by demonstrating that the nonmoving party failed to make a showing sufficient to establish an element of his or her claim on which that party will bear the burden of proof at trial. Id. at 322-23. If the moving party fails to bear the initial burden, summary judgment must be denied and the Court need not consider the nonmoving party's evidence. Adickes v. S.H. Kress & Co., 398 U.S. 144, 159-60 (1970).
Once the moving party has satisfied this burden, the nonmoving party cannot rest on the mere allegations or denials of his pleading, but must "go beyond the pleadings and by her own affidavits, or by the depositions, answers to interrogatories, and admissions on file' designate specific facts showing that there is a genuine issue for trial.'" Celotex, 477 U.S. at 324 (citing FED. R. CIV. P. 56 (1963)). If the non-moving party fails to make a sufficient showing of an element of its case, the moving party is entitled to judgment as a matter of law. Id. at 325. "Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citing FED. R. CIV. P. 56 (1963)). In making this determination, the Court must "view  the evidence in the light most favorable to the nonmoving party." Fontana v. Haskin, 262 F.3d 871, 876 (9th Cir. 2001). The Court does not engage in credibility determinations, weighing of evidence, or drawing of legitimate inferences from the facts; these functions are for the trier of fact. Anderson, 477 U.S. at 255.
In an SEC enforcement action, once the SEC has made out a prima facie case of the sale of unregistered securities, it is the defendant's burden to raise an exemption as a defense. See Sec. and Exch. Comm'n v. Murphy, 626 F.2d 633, 641 (9th Cir. 1980) (citations omitted). Though it would be the defendant's burden at trial to prove that it satisfied the requirements of the exemption, when the SEC is moving for summary judgment, the SEC carries the burden of proving that the exemption does not apply. Id. 
When moving for disgorgement, the SEC bears "the ultimate burden of persuasion that its disgorgement figure" is "a reasonable approximation of profits causally connected to the violation." Sec. and Exch. Comm'n v. First P. Bancorp, 142 F.3d 1186, 1192 n.6 (9th Cir. 1998) (quoting Sec. and Exch. Comm'n v. First Jersey Sec., Inc., 101 F.3d 1450, 1475 (2d Cir. 1996)); Sec. and Exch. Comm'n v. First City Fin. Corp., Ltd., 890 F.2d 1215, 1232 (D.C.C. 1989). Once the SEC has met this burden, the burden shifts to the defendant to "demonstrate that the disgorgement figure was not a reasonable approximation." First City, 890 F.2d at 1232.
A. Sale of Unregistered Securities
There are three elements to a prima facie case of a Section 5 violation: (1) the offer or sale, (2) of an unregistered security, (3) through interstate commerce. 15 U.S.C. §§ 77e(a), 77e(c). Regulation D provides four exemptions to Section 5: Rule 504, Rule 505, Rule 506(b), and Rule 506(c). 17 C.F.R. §§ 230.504, 230.505, 203.506(b), 203.506(c). This Court, in the Securities Order, has already determined that the GP units at issue in this case were securities in the form of investment contracts. (ECF No. 583.)
Defendants do not appear to dispute that the SEC has made out a prima facie case of the sale of unregistered securities under Section 5, instead they argue that there is a dispute of material fact as to whether those sales qualify for the private offering exemption under Rule 506(b). ( See ECF No. 980, at 6.) Defendants have admitted that the GP units were not registered with the SEC. (ECF No. 255 ¶ 81.) Defendants also do not dispute the SEC's evidence that the GP units were offered or sold through interstate commerce, including mail and email. ( See, e.g., ECF No. 8 ¶ 11; ECF No. ...