935 F.3d 721
9th Cir.2019Background
- Hui Feng, a New York immigration attorney, recruited ~150 primarily Chinese EB-5 investors and reserved investor "spots" with regional centers under marketing agreements that paid commissions.
- Regional centers structured EB-5 offerings as limited partnerships (capital contribution + separate administrative fees) promising modest fixed returns and eventual return of principal; PPMs labeled the offerings "securities."
- Feng received ~$1.268 million in commissions paid through nominees and a Hong Kong entity (ABCL), sometimes routing client funds through his accounts and concealing commissions from clients and regional centers.
- Feng negotiated fee rebates with regional centers for some clients but concealed that rebates reduced his commissions. He also arranged for commissions to be paid to overseas nominees to evade regional centers' refusal to pay U.S. attorneys who were not registered brokers.
- The SEC sued for securities fraud (Sections 17(a) and 10(b)/Rule 10b-5) and for failure to register as a broker under Section 15(a); the district court granted summary judgment for the SEC and ordered disgorgement; the Ninth Circuit affirmed.
Issues
| Issue | Plaintiff's Argument (SEC) | Defendant's Argument (Feng) | Held |
|---|---|---|---|
| Whether EB-5 investments are "securities" (investment contracts) | PPMs and economic realities show investment in a common enterprise with expectation of profit from others' efforts (Howey test) | Investors primarily sought immigration benefits (green cards), not profits; administrative fees negate any profit expectation | Investments are securities: PPMs, limited-partnership form, promised fixed returns, and separation of administrative fees support Howey analysis; motivation for visas does not negate profit expectation |
| Whether Feng was a "broker" required to register under Section 15(a) | Feng functioned as a broker: received transaction-based commissions, solicited investors, negotiated with issuers, provided investment advice, and steered clients to projects | His role was legal representation; Hansen-factor approach is vague and could capture ordinary attorneys; no need to apply broker regime to private OTC deals | Feng was engaged in business effecting securities transactions for others and thus had to register; Hansen-style totality-of-circumstances analysis supports broker finding |
| Whether Feng committed securities fraud (material omissions and schemes to defraud) | Feng failed to disclose material conflicts (commissions) to clients and engaged in deceptive schemes (nominees, ABCL, concealing source of rebates) | Disclosure not required because clients sought visas not profits; arrangements were legitimate business practices/discounts | Summary judgment for SEC: omissions were material, intent to deceive shown, and schemes (misrepresenting payees and concealing rebate sources) violated Sections 17(a) and 10(b)/Rule 10b-5 |
| Whether disgorgement of commissions was appropriate | Commissions paid to Feng or his controlled entities are gains causally connected to violations and should be disgorged | Some overseas fees covered expenses and should be offset; not all funds were Feng's to disgorge | Disgorgement of commissions (including amounts paid to controlled overseas entities) affirmed as a reasonable approximation of ill-gotten gains; defendants cannot offset business expenses tied to the fraud |
Key Cases Cited
- SEC v. W. J. Howey Co., 328 U.S. 293 (established the Howey investment-contract test)
- United Hous. Found., Inc. v. Forman, 421 U.S. 837 (labels and traditional characteristics inform securities analysis)
- SEC v. Edwards, 540 U.S. 389 (profits include fixed returns; securities laws reach variable schemes promising returns)
- Warfield v. Alaniz, 569 F.3d 1015 (9th Cir.) (focus on promotional materials and objective expectation of profit)
- SEC v. Murphy, 626 F.2d 633 (9th Cir.) (limited-partnership interests can be investment contracts)
- TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (materiality standard for omissions)
- Aaron v. SEC, 446 U.S. 680 (scienter requirements for securities fraud provisions)
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (scope of the Exchange Act and antifraud provisions)
- United States v. Laurienti, 611 F.3d 530 (9th Cir.) (fiduciary/trust relationships can give rise to disclosure duties)
- SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109 (9th Cir.) (standard and scope for disgorgement review)