15 F.4th 676
5th Cir.2021Background
- Ronald Blackburn founded Treaty Energy (a penny-stock oil-and-gas issuer) in 2008, retained ~86% of shares, and exercised de facto control while avoiding formal officer/director titles.
- Blackburn had prior convictions for tax felonies and a prior bankruptcy settlement for alleged misappropriation; he placed cleaner-record individuals (Mulshine, Gwyn) in public roles.
- Mulshine (Assistant Secretary) issued press releases falsely claiming an oil discovery in Belize; Gwyn (director/COO at times) prepared a Form 10-K that referred to Blackburn only as a “major shareholder/affiliate/related party,” omitting his name.
- The SEC sued Treaty and individuals for selling unregistered securities and for fraud (Section 5, Rule 10b-5/Section 10(b), and Section 17(a)); the district court granted partial summary judgment for the SEC, barred defendants from officer/director roles, ordered disgorgement and civil penalties.
- After the Supreme Court’s Liu decision, the case was remanded for the district court to revisit disgorgement procedures; the district court modified the plan to direct recovered funds to identified victims under court supervision.
- Defendants appealed liability and the amended disgorgement/penalty orders; the Fifth Circuit affirmed both liability and the disgorgement scheme.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Liability on unregistered sales and fraud (Blackburn, Mulshine) | Undisputed record shows sales of unregistered securities and misrepresentations; summary judgment appropriate. | Numerous factual disputes exist; SEC relied on questionable sources. | Affirmed; defendants failed to identify genuine disputes—summary judgment warranted. |
| Material omission and scienter (Gwyn omitted Blackburn from 10‑K) | Omission of controlling person’s identity is material; Gwyn knew Blackburn ran Treaty and disclosure requirements. | Gwyn lacked requisite scienter; he did not know Blackburn’s criminal history. | Affirmed; omission was at least severely reckless and material regardless of knowledge of criminal history. |
| Disgorgement post-Liu: whether award is "for the benefit of investors" | Disgorgement equals defendants’ net profits and will be distributed to identified Treaty investors under court/SEC supervision. | Disgorgement is improper under Liu unless funds are awarded to victims; prior plan to send funds to Treasury fund was problematic. | Affirmed; awards are net-profits-based, individually allocated, and will be remitted to identified victims—satisfies Liu. |
| Civil monetary penalties tied to disgorgement | Penalties appropriate and discretionary; unaffected if disgorgement stands. | Penalties should be vacated if disgorgement is vacated. | Affirmed; because disgorgement was affirmed, penalties remain. |
Key Cases Cited
- Liu v. SEC, 140 S. Ct. 1936 (2020) (disgorgement may be equitable relief but must be net profits and awarded for victims)
- SEC v. Kahlon, 873 F.3d 500 (5th Cir. 2017) (definition/context of penny stocks)
- Southland Sec. Corp. v. INSpire Ins. Sols., Inc., 365 F.3d 353 (5th Cir. 2004) (scienter standard: intent or severe recklessness for Rule 10b-5)
- SEC v. Sethi, 910 F.3d 198 (5th Cir. 2018) (summary judgment on scienter appropriate when undisputed evidence removes doubt)
- Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968) (materiality includes information affecting investors’ decisions)