U.S. COMMODITY FUTURES TRADING COMMISSION v. JAMES DEVLIN CROMBIE
No. 13-17403
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
February 1, 2019
D.C. No. 4:11-cv-04577-CW
Appeal from the United States District Court for the Northern District of California
Claudia Wilken, Senior District Judge, Presiding
Argued and Submitted December 19, 2018
San Francisco, California
Filed February 1, 2019
Before: Ronald M. Gould and Marsha S. Berzon, Circuit Judges, and Frederic Block,* District Judge.
Opinion by Judge Berzon
SUMMARY**
Commodity Exchange Act
The panel affirmed in part and vacated in part the district court‘s judgment in favor of the Commodity Futures Trading Commission (the “Commission“) in a civil enforcement brought against James D. Crombie, concerning false statements made to the National Futures Association (“NFA“) during a March 2011 investigation.
The Commission alleged that by making misstatements to the NFA, Crombie violated
The panel held that the district court erred in applying the civil meaning of “willfully,” not the generally applicable criminal meaning. The panel further held that the meaning of “willfully” as used in
Although the district court did not apply the heightened criminal standard for willful conduct, the panel nonetheless affirmed the grant of summary judgment to the Commission on the
Concerning the remedies imposed by the district court, the panel held that the district court properly awarded restitution. The panel vacated in part the district court‘s order issuing a permanent injunction against Crombie. The panel held that as to §§ 4 and 5(a), (d), (e), (f), and (g) of the permanent injunction, the connection between the violations found and the prohibitions were sufficiently self-evident; and the panel concluded that the district court‘s inclusion of those future restraints on Crombie was not an abuse of discretion. The panel held that as to §§ 5(b) and (c) of the permanent injunction, the path from the violations found to the prohibitions ordered was not clear; and the panel remanded for further explanation as to those parts of the injunction.
COUNSEL
Jared L. Gardner (argued), Perkins Coie LLP, Anchorage, Alaska; Lauren Elizabeth Watts Staniar, Perkins Coie LLP, Seattle, Washington; for Defendant-Appellant.
Martin B. White (argued), Assistant General Counsel; Jonathan P. Robell, Senior Trial Attorney; Robert A. Schwartz, Deputy General Counsel; Jonathan L. Marcus, General Counsel; Daniel J. Davis, General Counsel; Commodity Futures Trading Commission, Washington, D.C.; for Plaintiff-Appellee.
BERZON, Circuit Judge:
We are asked in this case to answer a recurrent question: What is the meaning of “willfully” in a federal statute? This malleable term may in some cases create difficult questions of statutory interpretation. See, e.g., Ratzlaf v. United States, 510 U.S. 135, 141 (1994). Here, it does not. As we shall explain, in
I
This appeal arises from a civil enforcement action brought by the Commodity Futures Trading Commission (“Commission“) against James D. Crombie. In March 2010, Crombie co-founded Paron Capital Management, LLC (“Paron“), an investment firm. Paron used a computer model developed by Crombie to invest in certain futures2 on behalf of clients. The
The Commission also alleged that Crombie made false statements to the National Futures Association (“NFA“) during a March 2011 investigation by that industry group into Paron. The Commission claimed that by making these misstatements to the NFA, Crombie violated
The Commission filed suit in the Northern District of California in September 2011. After discovery, the district court granted summary judgment to the Commission. The court determined that Crombie violated
Because the Commission did not request any relief in its summary judgment motion, the district court ordered the Commission to file a motion for requested relief and a proposed judgment. The Commission filed that motion and a proposed order and judgment two weeks later, in August 2013.
In November 2013, the district court granted the Commission‘s motion in an order that almost entirely adopted the language of the Commission‘s proposed order, without explaining why the particular relief was chosen. The order requires Crombie to pay a $750,000 civil penalty to the Commission and $746,460.28 in restitution, plus pre- and post-judgment interest, to Paron clients. The order also permanently enjoins Crombie from violating various provisions of the Act, as well as from engaging in a broad range of conduct related to the trading of investments regulated by the Act.6 Among other provisions,
II
Crombie now appeals the district court‘s grant of summary judgment to the Commission. We review this challenge de novo. See, e.g., Rocky Mountain Farmers Union v. Corey, 730 F.3d 1070, 1086 (9th Cir. 2013).
A
On summary judgment, the district court determined that Crombie on four separate occasions willfully violated
1
“The word ‘willfully’ is sometimes said to be ‘a word of many meanings.‘” Bryan v. United States, 524 U.S. 184, 191 (1998) (quoting Spies v. United States, 317 U.S. 492, 497 (1943)). But the proper meaning of “willfully” in
Section 13(a)(4) is a criminal statute, with stiff penalties. “It shall be a felony punishable by a fine not more than $1,000,000 or imprisonment for not more than 10 years, or both, together with the costs of prosecution, for . . . . [a]ny person willfully to falsify, conceal, or cover up by any trick, scheme, or artifice a material fact, make any false, fictitious, or fraudulent statements or representations, or make or use any false writing or document knowing the same to contain any false, fictitious, or fraudulent statement or entry to a registered entity, board of trade, or futures association,” such as the NFA.
“As a general matter, when used in the criminal context, a ‘willful’ act is one undertaken with a ‘bad purpose.‘” Bryan, 524 U.S. at 191. There are certain contexts in which a showing of bad purpose requires a showing that the defendant knew his actions were unlawful. See id. at 192; see also Ratzlaf, 510 U.S. at 140–46. But as to statutes that criminalize the making of false or misleading statements and other fraudulent activity—conduct that is obviously wrongful—we have repeatedly held that “‘willfully’ . . . does not require that
In contrast, in civil contexts, a person acts “willfully” if she “intentionally does an act which is prohibited,—irrespective of evil motive or reliance on erroneous advice . . . .” Lawrence v. CFTC, 759 F.2d 767, 773 (9th Cir. 1985) (quoting Flaxman v. CFTC, 697 F.2d 782, 787 (7th Cir. 1983)). When adjudicating the
The term “willfully” appears in
Given this context, the meaning of “willfully” as used in
2
Although the district court did not apply this somewhat heightened criminal standard for willful conduct, we nonetheless affirm the grant of summary judgment to the Commission on the
During the NFA‘s investigation, Crombie provided the NFA with statements purporting to show the value of accounts Crombie had managed between 2006 and 2008 as part of a prior venture called JDC Ventures (“JDC“). The statements provided by Crombie stated that the JDC-managed accounts were worth over $13.8 million in February 2008, and over $24 million in December 2008. In fact, the accounts had a steady balance of only $40 from late 2007 onward; had no trades in 2008; and closed in February 2008. At his deposition, Crombie testified that he was aware of the day-to-day performance of the accounts he had managed.
These facts unequivocally establish that when Crombie provided the NFA the inaccurate account statements, he acted willfully. Crombie either knew the statements he provided to the NFA misrepresented the value of the JDC-managed accounts, or he provided those statements to the NFA “with a reckless disregard for whether they were false.” Tarallo, 380 F.3d at 1188.
Finally, Crombie told the NFA during its investigation that Steven Lamar had paid JDC $300,000 in exchange for certain financial advice JDC provided to Lamar‘s hedge fund. In his statement, Crombie told the NFA that the $300,000 payment was made in two separate transfers, one of which was a $50,000 transfer made on May 4, 2009. Later in the investigation, however, Crombie told the NFA that the $50,000 payment made on May 4, 2009, was an investment in JDC. Eventually, during litigation, he admitted that the $50,000 payment was in fact a loan made to JDC by Lamar‘s hedge fund.
Crombie argues that, because he used the terms “loan” and “investment” interchangeably, he was not acting willfully when he made these false representations. But Crombie did not initially describe the $50,000 payment as either an investment or a loan; he first described the payment as a fee for services rendered. This description was undoubtedly false, and Crombie had to know the description was false. There is thus no genuine issue as to whether Crombie acted willfully when he misrepresented the nature of the $50,000 payment to the NFA.
B
The district court was also correct to grant summary judgment to the Commission on its claims that Crombie misled investors in violation of
The basic facts underlying these claims are as follows: Paron‘s marketing materials stated that Paron managed $35 million, including one account with $20 million. But Paron in fact managed only $15 million. The largest managed account contained only $6 million. The marketing materials also misrepresented certain performance figures for the JDC-managed accounts. For example, Paron represented in the marketing materials that JDC-managed accounts generated returns of 38.6 percent in 2008; but as discussed above, those accounts in fact had a steady balance of $40 starting in late 2007; had no trades in 2008; and closed in February 2008.
Crombie does not dispute these facts. He argues only that there is a genuine dispute of material fact regarding whether Crombie possessed the mental state necessary to violate
Section 6b(a)(1)(A)–(B) makes it unlawful for any person “to cheat or defraud,” or “willfully to make or cause to be made to [another] person any false report or statement” in connection with certain commodity-related transactions. A showing of scienter is necessary to establish a violation
Crombie maintains that he did not know he was cheating, under subsection (A), or making any material false statements, under subsection (B), because he reasonably relied on reports created by third-party accountants that purportedly verified the 38.6 percent figure, as well as the other representations regarding the performance of the JDC-managed accounts. This contention fails.
First, the third-party accountants’ reports did not provide any basis for Crombie to believe that Paron in fact managed $35 million in total assets, or to believe that Paron managed a $20 million account. So Crombie knew that he was making false statements when he misrepresented the amount of assets managed by Paron. See id.
Second, Crombie testified that he was aware of the day-to-day performance of the accounts JDC managed. Crombie was thus aware that the accounts JDC managed consistently had $40 in assets while open in 2008, and closed completely in February of that year. Even though Crombie received third-party reports that purported to verify the 38.6 percent performance figure, he could not have legitimately believed that the accounts JDC managed had generated 38.6 percent returns, given what he knew about those accounts. Thus, he acted with the requisite scienter—he knew the performance figures he was representing were false. See id.
Crombie similarly argues that there is a genuine dispute of material fact regarding whether Crombie possessed the mental state necessary to violate
III
Crombie also challenges the propriety of the remedies imposed by the district court. We review the remedies issued by a district court for an abuse of discretion. See Grosz-Salomon v. Paul Revere Life Ins. Co., 237 F.3d 1154, 1163 (9th Cir. 2001).
A
The pertinent remedy provision,
Crombie does not challenge whether the amount of the restitution order rests on an accurate calculation of losses suffered by Paron‘s investors. Instead, he maintains that the entire methodology was incorrect, because restitution “does not take into consideration the plaintiff‘s losses, but only focuses on the defendant‘s unjust enrichment.” Wilshire, 531 F.3d at 1345.
Crombie‘s view of the limits of a restitutionary remedy is too narrow. Restitution is a remedy designed to prevent a defendant from unjustly enriching himself at another‘s expense. Restatement of Restitution §§ 1, 3, 49. Where a defendant has profited from his wrongful actions, restitution can take the form of an order requiring the defendant to disgorge those wrongfully gotten profits and transfer them to the victims. Id. § 51(4); see also Co Petro Mktg. Grp., 680 F.2d at 583.
But there are instances in which a defendant does not ultimately reap any profits from his wrongful conduct, and others where even though the defendant obtained some profit, the “loss suffered by the victim is greater than the unjust benefit received by the defendant . . . .” FTC v. Figgie Int‘l., Inc., 994 F.2d 595, 606 (9th Cir. 1993) (quotation omitted); see also FTC v. Stefanchick, 559 F.3d 924, 931 (9th Cir. 2009).10 In these circumstances, restitution can be coupled with the equitable remedy of rescission, which undoes a faulty transaction. See Figgie Int‘l., 994 F.2d at 606–07; 1 Dobbs, Law of Remedies § 4.3(6) (2d ed. 1993); Restatement of Restitution § 54; see also Commerce Planet, 815 F.3d at 603.
as the misrepresentations as to the amount of assets under management and the past performance of funds managed by Crombie. See pp. 12–15, supra. Based on these facts, rescission of the contracts entered into as a result of fraud was an appropriate equitable remedy. Concomitantly, an order that Crombie pay back to the investors the money that they invested in Paron as part of the rescinded transaction less the amount already returned by Paron was proper.11 The amount Parons’ clients invested with Paron less the amount returned by Paron is equivalent to the amount Paron‘s clients lost because they invested with Paron.
The district court did not spell out this reasoning. But the Commission submitted a declaration explaining how the restitutionary amount adopted by the district court was arrived upon. As noted, Crombie only challenges the legal propriety of the Commission‘s victim-based theory of restitution, not the calculation of the restitution amount if the approach taken is permissible. As we have concluded that the method of determining restitution used by the district court was legally permissible, to require a further explanation by the district court would be an empty formality. Cf. Traxler v. Multnomah Cty., 596 F.3d 1007, 1016 (9th Cir. 2010) (remand was required where there was no reasoned decision and “[t]he record does not permit us to infer a rationale“).
B
Although we affirm the restitution order, we vacate in part the district court‘s order issuing a permanent injunction against Crombie. To evaluate a district court‘s decision under the abuse of discretion standard, “we must be able to ascertain how the district court exercised its discretion.” Id. at 1015. Where the connection between the terms of an injunction and the violations sought to be remedied is apparent, we are usually able to ascertain the basis for the district court‘s restrictions sufficiently that no further explanation is needed for purpose of appellate review. When that evident link is missing, however, “we must remand to that court to reconsider its decision and to set forth its reasons for whatever decision it reaches, so that we can properly exercise our powers of review.” Id. (quoting Blue Cross & Blue Shield of Ala. v. Unity Outpatient Surgery Ctr., Inc., 490 F.3d 718, 724–25 (9th Cir. 2007)).
Here, the district court adopted the Commission‘s proposed injunction in toto and provided no specific explanation as to why it adopted any of the suggested provisions. Much of the Permanent Injunction restrains Crombie from violating various provisions of the Act. Other provisions forbid him from engaging in trading in covered financial products and registering to do so. As to all such provisions—§§ 4 and 5(a), (d), (e), (f), and (g) of the Permanent Injunction—the connection between the violations found and the prohibitions are sufficiently self-evident that we can—and do—conclude that the district court‘s inclusion of those future restraints on Crombie was not an abuse of discretion.
As to two other sections of the Permanent Injunction, however, the path from the violations found to the prohibitions ordered is not as clear. Sections 5(b), and (c)
AFFIRMED IN PART, VACATED IN PART, AND REMANDED.
Notes
It shall be unlawful— (1) for any person in or in connection with any order to make, or the making of, any contract of sale of any commodity in interstate commerce or for future delivery that is made, or to be made, on or subject to the rules of a designated contract market, for or on behalf of any other person . . . (A) to cheat or defraud or attempt to cheat or defraud the other person; [or] (B) willfully to make or cause to be made to the other person any false report or statement or willfully to enter or cause to be entered for the other person any false record.
Section 6o(1) provides:
It shall be unlawful for a commodity trading advisor, associated person of a commodity trading advisor, commodity pool operator, or associated person of a commodity pool operator, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly—(A) to employ any device, scheme, or artifice to defraud any client or participant or prospective client or participant; or (B) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or participant or prospective client or participant.