Hirsch v. Arizona Corp. Commission
237 Ariz. 456
| Ariz. Ct. App. | 2015Background
- Radical Bunny, LLC pooled investor funds from 1999–2008 to invest in Mortgages, Ltd. (ML) via two programs: a Pass-Through program (investor fractional interests in ML loans) and the RB-ML Loan Program (Radical Bunny lent directly to ML and sold fractional interests to participants).
- Radical Bunny and its managers (Appellants Hirsch, B. Walder, H. Walder, Shah) never registered the membership interests or the loans as securities, nor were they registered dealers/salespersons.
- Attorneys repeatedly advised Appellants (2006–2007) that the RB-ML program likely violated securities laws and that collateral documents were defective; Appellants continued soliciting investors.
- ML filed bankruptcy in June 2008; Radical Bunny had about $197 million outstanding involving ~900 participants; Radical Bunny later filed bankruptcy.
- The Arizona Corporation Commission found 900 anti-fraud violations (A.R.S. § 44-1991(A)(2)), multiple registration violations (A.R.S. §§ 44-1841, -1842), ordered ~$189.8 million restitution to participants, and assessed administrative penalties totaling $4.65 million against Appellants.
- The superior court affirmed the Commission; this appeal challenged sufficiency of evidence, application of loss-causation, calculation of restitution, and penalty amounts.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether loss causation is required in an ASA enforcement action | Appellants: Commission must prove loss causation for each participant and violation | Commission: A.R.S. § 44-2082(E) limits loss-causation requirement to private actions; enforcement actions need not prove it | Court: Loss causation under § 44-2082(E) applies only to private suits; Commission need not prove loss causation in enforcement actions |
| Sufficiency of evidence for 900 violations of A.R.S. § 44-1991(A)(2) (fraud by omission/misstatement) | Appellants: Only five investors testified; materiality and causation not shown for the rest | Commission: Materiality is objective; misstatements/omissions about collateral, ML’s finances, and legality were material to a reasonable investor | Court: Substantial evidence supports 900 violations; materiality satisfied objectively and misrepresentations persisted after legal advice |
| Validity and measure of restitution ordered ($189,800,867) | Appellants: "Restitution" should be limited to wrongdoers’ profits or follow federal disgorgement principles | Commission: Statute and rule authorize restitution to correct conditions and compensate investors using a formula restoring investor losses | Court: A.R.S. § 44-2032(1) and A.A.C. R14-4-308 authorize investor-loss restitution; restitution aims to restore victims, not merely disgorge violators |
| Legality and size of administrative penalties | Appellants: Only five proven transactions justify small penalties; penalties excessive | Commission: Statute allows up to $5,000 per violation; Commission found many violations and assessed lower-than-maximum penalties | Court: Penalties are within statutory authority and not an abuse of discretion; record supports penalties given unregistered sales to 900 participants |
Key Cases Cited
- Grand v. Nacchio, 214 Ariz. 9 (App. 2006) (discusses loss causation under ASA and limits of § 44-2082(E))
- TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976) (objective materiality standard for securities disclosures)
- SEC v. Pirate Investor L.L.C., 580 F.3d 233 (4th Cir. 2009) (enforcement actions by SEC need not prove loss causation)
- In re Naarden Trust, 195 Ariz. 526 (App. 1999) (distinction between beneficial interests in property and personal claims)
- Hughey v. United States, 495 U.S. 411 (1990) (ordinary meaning of "restitution" is restoring a victim to prior position)