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Securities and Exchange Commission v. Schooler

United States District Court, S.D. California

May 14, 2015

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
LOUIS V. SCHOOLER and FIRST FINANCIAL PLANNING CORPORATION, dba Western Financial Planning Corporation, Defendants.

NOTICE OF TENTATIVE AMENDMENT TO THE COURT'S ORDER ON THE SEC'S INITIAL MOTION FOR SUMMARY JUDGMENT [ECF No. 1029]

GONZALO P. CURIEL, District Judge.

I. INTRODUCTION

Pursuant to Federal Rule of Civil Procedure 54(b), the Court finds it appropriate to amend its April 3, 2015, Order Denying the SEC's Motion for Partial Summary Judgment on its Fourth Claim for Relief. (ECF No. 1029.) The Court's prior order incorrectly set forth the law regarding which party bears the burden of proving an affirmative defense on summary judgment under Federal Rule of Civil Procedure 56. ( See ECF No. 1029, at 3-4.) With a correct interpretation of the law, the Court finds that SEC's initial motion, (ECF No. 685), must be granted in part and denied in part, reversing the Court's initial determination in the April 3, 2015, Order. Citing Sec. and Exch. Comm'n v. Murphy, 626 F.2d 633, 641 (9th Cir. 1980), Defendants had argued that, on summary judgment, the evidentiary burden is on the SEC to disprove an affirmative defense to a registration violation. (ECF No. 980, at 4.) However, this aspect of Murphy was overturned by Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986) (Rule 56 does not require the moving party to "negate[] the opponent's claim.") (emphasis omitted). Thus the Court finds it appropriate to amend the April 3, 2015, order's sections regarding Rule 506(b) and disgorgement. The Court now provides notice of its tentative ruling on these issues.

II. DISCUSSION

A. Rule 506(b)

The SEC argue that Western's sales of GP units do not satisfy Rule 506(b)'s conditions for three reasons: (1) Western failed to provide required information to non-accredited investors, (2) Western engaged in general solicitation, and (3) Western exceeded the limit on purchasers. (ECF No. 1019, at 7-16.)

1. Purchaser Limit

Rule 506(b) requires that there be no more than 35 purchasers, excluding accredited investors, in the offering. 17 C.F.R. §§ 230.501(e)(1)(iv), 230.506(b)(2). Included within the definition of "accredited investor" is "[a]ny natural person whose individual net worth, or joint net worth with that person's spouse, exceeds $1, 000, 000." Id. § 230.501(a)(5). The SEC argues that, because there were "3, 400 investors in the defendants' single, integrated offering of GP securities, " "the registration exemption cannot be invoked." (ECF No. 1019, at 16.) Defendants attempt to rebut this argument by pointing to the fact that two GPs have less than 35 investors. (ECF No. 980, at 7.) However, the Court has already concluded that all the GPs constitute a single, integrated offering and thus the fact that two GPs have less than 35 investors does not show that the entire offering has less than 35 non-accredited investors. Accordingly, the Court finds that Defendants have failed to carry their burden on Western's Rule 506(b) affirmative defense. The Court will, however, address the remaining disputes concerning Rule 506(b).

2. Information Requirement

Rule 506(b) further requires that an issuer must provide certain kinds of information to any non-accredited investor purchaser. 17 C.F.R. § 230.502(b). The SEC argues that, because Schooler stated that "Western did not provide any financial statements to prospective investors, " "it is undisputed that the [information requirement] has not been met." (ECF No. 1019, at 8 (quoting ECF No. 980-2 ¶ 8).) Defendants argue that "Western reasonably believed that non-accredited investors, either alone or with a purchaser representative, possessed the knowledge and experience in financial and business matters' to fairly evaluate the merits and risks of the prospective investment.'" (ECF No. 980, at 10 (citations omitted).) But Rule 506(b) does not exempt non-accredited investors from the information requirement based on Western's beliefs about the investors' financial expertise; only accredited investors are exempted from the information requirement. 17 C.F.R. § 230.502(b)(1). Accordingly, the Court finds that Defendants have failed to carry their burden to show that the required information was provided to non-accredited investors.

3. General Solicitation

Rule 506(b) also prohibits an issuer or "any person acting on its behalf" from selling or offering to sell securities "by any form of general solicitation or general advertising." 17 C.F.R. § 230.502(c). The SEC cites eleven sources of evidence to support its contention that Western engaged in general solicitation or advertising of GP units, primarily relying upon Schooler's statements with regards to cold calls. (ECF No. 685-2, at 1; ECF No. 1019, at 9-15.)

Contrary to the SEC's arguments, the Court finds that the evidence cited by the parties indicates a dispute of material fact as to whether the GP units were generally solicited or advertised by Western. First, Rule 506(b) prohibits offering or selling securities through general solicitation or advertising, but does not prohibit obtaining clients through such methods. See 17 C.F.R. § 230.502(c). Indeed, the SEC has issued a no action letter recognizing that offers to clients obtained through general solicitation may not constitute general solicitation if "sufficient time" passes "between establishment of the relationship and [the] offer." Sec. and Exch. Comm'n v. Credit First Fund LP, No. 05-cv-8741-DSF-PJWx, 2006 WL 4729240, at *12 (C.D. Cal. Feb. 13, 2006) (quoting E.F. Hutton & Co., No-Action Letter, 1985 SEC No-Act. LEXIS 2917 (Dec. 3, 1985)). Second, Western argues that its sales agents were selling the GP units on behalf of a third party, not Western. (ECF No. 980, at 7-10.) Third, an unknown number of cold calls or mailings to a geographic area of unknown size may not necessarily qualify as general solicitation or advertising. Cf. Sec. and Exch. Comm'n v. Tecumseh Holdings Corp., No. 03-cv-5490-SAS, 2009 WL 4975263, at *4 (S.D.N.Y. Dec. 22, 2009) (noting that a " nationwide cold-calling campaign has many of the same characteristics as the examples listed in 502(c)" because of three ...


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