SEC v. CurshenSEC v. Curshen
Defendant-Appellant Jonathan Curshen appeals from the district court‘s judgment in favor of Plaintiff-Appellee Securities and Exchange Commission (“the SEC“). In 1999, Mr. Curshen made approximately thirty-five anonymous Internet postings about a company called Freedom Golf. As a result of these postings, the SEC brought this civil action against him alleging that he committed securities fraud by: (1) failing to disclose that he had been compensated for promoting Freedom Golf, and (2) hyperlinking to an Investor Report on Freedom
Background
In November 1999, Timothy Miles and Gaylen Johnson merged two companies. The resulting company, Freedom Golf, became publicly traded in December 1999. Jones, 2009 WL 539615, at *2. In February 2000, Miles contacted Mr. Curshen and Carter Allen Jones about becoming stock promoters for Freedom Golf. Id. Jones agreed to promote the company and was paid with warrants for the purchase of Freedom Golf stock. Id. Based on numbers provided by Johnson, Jones prepared an “Investor Report” for Freedom Golf that projected rapidly increasing revenues with profits of $1.6 million in 2000, $4.5 million in 2001, and $13.5 million in 2002. Id. at *3. Johnson testified that these numbers were realistic but only if an infomercial was produced and marketed. Id. Without
Mr. Curshen also agreed to promote Freedom Golf. Id. at *3. He told Jones that “he had buyers who would follow his recommendation to purchase Freedom Golf stock and drive up the price.” Id. at *3. He admitted to posting Internet messages under various screen names about Freedom Golf stock, expressly or implicitly urging people to buy it. Id. at *4. Approximately thirty-five messages about Freedom Golf were posted under Mr. Curshen‘s screen names. See, e.g., 4 Aplt. App. 675, 680, 686, 689, 700, 701, 707, 710, 711, 713, 727, 729, 735, 741, 742, 749, 762, 763, 764, 765, 767, 769, 770, 774, 777, 782, 783, 784, 785, 786, 787, 788). In one of the postings, Mr. Curshen provided a hyperlink to Jones‘s Investor Report and stated, “For research on [Freedom Golf], look at the Raging Links section or go here [hyperlink to Investor Report].” 4 Aplt. App. 762.
In April 2003, the SEC brought a civil action alleging that Mr. Curshen‘s conduct violated
Mr. Curshen disputed, inter alia, that he had been compensated for posting the messages, that the messages were false (let alone material), and that he had acted with intent. Furthermore, he argued that the messages were not actionable because they were mere puffery—statements of corporate optimism for the future. The district court found Mr. Curshen‘s testimony to be “not fully credible” because it was often in direct conflict with other witnesses who had no self-interest in the particular issue. Jones, 2009 WL 539615, at *1.
Relying on a transcript from Miles‘s deposition, the district court concluded that Mr. Curshen had been compensated for promoting Freedom Golf. Id. at *3. Specifically, Miles testified during his deposition that he had arranged for Mr. Curshen to be compensated with stock. 2 Aplt. App. 421. Miles transferred 125,000 shares of Freedom Golf stock in February and March 2000 to an account in the name of Triparoo, S.A., a Costa Rican entity. 4 Aplt. App. 658, 664; 5 Aplt. App. 1016-1017. The stated beneficiary on the account was Barry
The district court noted that the full extent of Mr. Curshen‘s benefit from the sale of the Freedom Golf stock was not clear. Id. The funds from the Triparoo account were regularly wired to Surety Bank in the Bahamas. Aplee. Supp. App. 1-4. The listed name on the Surety Bank account was Kahn Noonien Singh Management, LC, but the account had Mr. Curshen‘s facsimile number on it. 5 Aplt. App. 1025; Aplee. Supp. App. 1-4. After receipt of the funds from the Triparoo account, Surety Bank wired amounts to either Mr. Curshen individually or to Southern Assurance, a privately held company owned and operated by Mr.
The district court found that Mr. Curshen‘s promotional efforts were contemporaneous with his compensation and that his actions and omissions were knowingly made. Jones, 2009 WL 539615, at *4. The court found that his omissions and misrepresentations were material because a reasonable investor would consider it important that an individual promoting a stock was being compensated for his activities and was selling the same stock for his own benefit. Id. at *5. The court also concluded that posting the hyperlink to the Investor Report was a material misstatement because “financial projections are matters a reasonable investor would consider,” and Mr. Curshen “knew the dire financial position of Freedom Golf and either knew, or recklessly didn‘t know, that the published investor report was essentially baseless because there was a ‘gross disparity’ between Freedom Golf‘s financial reality and the unrealistic financial
For relief, the district court granted a permanent injunction and a penny stock bar, and ordered disgorgement in the amount of $66,235. Id. at *7-8. The court retained jurisdiction to determine prejudgment interest and to consider a motion for civil penalty. Id. at *8.
As framed by Mr. Curshen, the merits appeal presents the following issues: (1) whether the district court erred in finding that Mr. Curshen made misrepresentations or omissions for purposes of §§ 10(b) and/or 17(a); (2) whether, even if Mr. Curshen did make misrepresentations or omissions, they were material; (3) whether Mr. Curshen could have possessed the requisite scienter if he made no material misrepresentations or omissions in the first instance; (4) whether Mr. Curshen can be liable under § 17(b) where there was no competent evidence that he received compensation for promoting Freedom Golf‘s stock; and (5) whether the district court erred in ordering Mr. Curshen to disgorge funds and pay damages. Aplt. Br. 1-2.
A. Standard of Review
“In an appeal from a bench trial, we review the district court‘s factual findings for clear error and its legal conclusions de novo.” Keys Youth Servs., Inc. v. City of Olathe, 248 F.3d 1267, 1274 (10th Cir. 2001); see also SEC v. Maxxon, Inc., 465 F.3d 1174, 1180 (10th Cir. 2006). “If the district court‘s account of the evidence is plausible in light of the record viewed in its entirety, the court of appeals may not reverse it even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently.” Anderson v. City of Bessemer, 470 U.S. 564, 573-74 (1985) (citations omitted). The same standard “applies equally regardless of whether the district court‘s factual findings are based on credibility determinations or on documentary evidence.” La Resolana Architects, PA v. Reno, Inc., 555 F.3d 1171, 1177 (10th Cir. 2009). “When findings are based on determinations regarding the credibility of witnesses, [Fed. R. Civ. P.] Rule 52(a) demands even greater deference to the trial court‘s findings; for only the trial judge can be aware of the variations in demeanor and tone of voice that bear so heavily on the listener‘s understanding of and belief in what is said.” Anderson, 470 U.S. at 575 (citation omitted). Whether Mr. Curshen made material misrepresentations and whether he did so with the requisite scienter are both “‘fact-specific issues.‘” SEC v. Solv-Ex Corp., 101 F. App‘x 271, 272-73 (10th Cir. 2004) (citing Schneider v. Vennard, 886 F.2d 1109, 1113 (9th Cir. 1989)). With respect to evidentiary rulings, a “district court violates the Rules of Evidence only if it abuses its broad discretion—i.e., only if its ruling is based on a clearly erroneous finding of fact or an erroneous conclusion of law or the ruling manifests a clear error in judgment.” United States v. Oldbear, 568 F.3d 814, 820 (10th Cir. 2009) (internal quotation marks and citations omitted). As for the district court‘s grant of a permanent injunction and order of disgorgement, we review both for abuse of discretion. Prairie Band Potawatomi Nation v. Wagnon, 402 F.3d 1015, 1019 (10th Cir. 2005) (citing SEC v. Pros Int‘l, Inc., 994 F.2d 767, 769 (10th Cir. 1993)) (permanent injunction); Maxxon, 465 F.3d at 1179 (disgorgement).
B. Liability under §§ 17(a)(1)-(3), § 10(b), and Rule 10b-5
To establish a § 10(b) or Rule 10b-5 violation,1 the SEC must prove that Mr. Curshen made: (1) “a misrepresentation or omission (2) of material fact, (3) with scienter, (4) in connection with the purchase or sale of securities, and (5) by virtue of the requisite jurisdictional means.” SEC v. Wolfson, 539 F.3d 1249, 1256 (10th Cir. 2008) (citation omitted). Section 17(a)(1)-(3) requires substantially similar proof with respect to the offer or sale of securities. Id. The
The focus of the parties’ legal debate concerning these elements is whether there was a misrepresentation and, if so, whether it was material and whether there was scienter. The district court noted that there was apparently no dispute that the SEC has proved connectivity and use of jurisdictional means, Jones, 2009 WL 539615, at *4, and these elements are not at issue on appeal.
1. Compensation
Mr. Curshen asserts that the record does not support the district court‘s finding that he received compensation for promoting Freedom Golf. Co-defendant Miles was out of the country and thus unavailable to testify at Mr. Curshen‘s bench trial. During an earlier deposition, Miles testified that he arranged to transfer stock and warrants to Mr. Curshen for promoting Freedom Golf. 2 Aplt. App. 421. Neither Mr. Curshen nor his counsel attended the deposition because it took place before Mr. Curshen was joined in the case. 3 Aplt. App. 620. Mr. Curshen argues that the deposition was the only testimony regarding his alleged involvement with Freedom Golf and that the court abused its discretion by admitting the transcript. Aplt. Br. 27. Over Mr. Curshen‘s objection, the district court ruled that Miles‘s deposition was admissible under
A statement “not specifically covered by [Federal] Rules [of Evidence] 803 or 804 but having equivalent circumstantial guarantees of trustworthiness” is admissible under Rule 807 if the court determines “(A) the statement is offered as evidence of a material fact; (B) the statement is more probative on the point for which it is offered than any other evidence which the proponent can procure through reasonable efforts; [] (C) . . . the interests of justice will best be served by admission of the statement into evidence,” and (D) the proponent provided notice to the adverse party of its intent to offer such evidence.
Mr. Curshen argues that the SEC did not satisfy its burden of demonstrating that Miles‘s prior testimony was the most probative evidence reasonably available because the district court did not force the SEC to establish that the testimony was unavailable from any other witness or source. Aplt. Br. 27 (citing United States v. Balfany, 965 F.2d 575, 582 (8th Cir. 1992) (noting that the probative value of the hearsay testimony was “very questionable” and that the “district court could have (and probably should have) required the prosecution to establish that such information was unavailable from any other witness before” admitting the hearsay). While we do not interpret the “more probative” requirement with “cast iron rigidity,” United States v. Harrison, 296 F.3d 994, 1007 (10th Cir. 2002) (internal citation and quotation marks omitted), we have previously upheld the inadmissability of evidence under the residual exception where “no showing as to the probative value of the statement or as to efforts made by defendant to obtain the information from other sources,” United States v. Zamora, 784 F.2d 1025, 1031 (10th Cir. 1986). Here, the district court could properly rule that Miles‘s deposition was the most probative available evidence with respect to Miles‘s agreement with Mr. Curshen to promote Freedom Golf for compensation. The district court found that the SEC tried to elicit testimony directly from Mr. Curshen regarding this topic, but he apparently could not recall his conversations with Miles. 3 Aplt. App. 623; see 5 Aplt. App. 980-83, 986, 991-94.
2. Puffery
To satisfy the first element of a 10b-5 claim, the SEC must allege facts showing Mr. Curshen made an untrue statement of material fact, or failed to state a material fact necessary to make the statements that were made not misleading.
As noted by the SEC during oral argument, puffing statements are typically made by the corporation or someone investors would know is associated with the corporation. Mr. Curshen agrees that “‘[p]rofessional investors, and most amateur investors as well, know how to devalue the optimism of corporate executives, who have a personal stake in the future success of the company.‘” Aplt. Br. 40 (quoting In re Verifone Sec. Litig., 784 F. Supp. 1471, 1481 (N.D. Cal. 1992)) (emphasis added). Circuit courts “‘have demonstrated a willingness to find immaterial as a matter of law a certain kind of rosy affirmation commonly heard from corporate managers and numbingly familiar to the marketplace—loosely optimistic statements that are so vague, so lacking in specificity, or so clearly constituting the opinions of the speaker, that no reasonable investor could find them important to the total mix of information available.‘” In re Ford Motor Co. Sec. Litig., 381 F.3d 563, 570-71 (6th Cir. 2004) (quoting Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1217 (1st Cir. 1996)); see id. at 571 (“corporation‘s self-praise about its business strategy is ‘not considered seriously by the marketplace and investors in assessing a potential investment‘“) (internal citation and quotation marks omitted).
Even though a reasonable investor would not have known that Mr. Curshen was associated with Freedom Golf when he made the Internet postings, Mr. Curshen argues that all of the postings are unactionable puffery. Aplt. Br. 39-40; Aplt. Reply Br. 11-16. While the district court referred to Mr. Curshen‘s postings as “puffing type messages,” Jones, 2009 WL 539615, at *4, the court did not specifically address the materiality of Mr. Curshen‘s statements.
The messages on the Internet bulletin boards concern whether the stock had value or was just part of a pump and dump scheme. We agree that many of Mr. Curshen‘s postings are vague, optimistic, unverifiable statements on which no reasonable investor would rely. Statements like “Pump up the volume!!,” “Get in now before the fireworks,” and “The next big mover. . .,” 4 Aplt. App. 680, 707, 788, certainly fall into this category. However, other postings suggest that Mr. Curshen has personal knowledge about the company and its plans. For example, some postings represent that Mr. Curshen has spoken with the CEO who is functioning in accordance with some sort of strategic plan: “I have enjoyed speaking with [the CEO]. He appears to have a good short, medium and long term plan for the company.” 4 Aplt. App. 735. “According to management there
3. Materiality
There is no liability under § 10(b) for failure to disclose information absent a duty to do so. See Cent. Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 174 (1994) (§ 10(b)); SEC v. Cochran, 214 F.3d 1261, 1264 (10th Cir. 2000) (§ 10(b)); Arst v. Stifel, Nicolaus & Co., Inc., 86 F.3d 973, 981 (10th Cir. 1996) (Rule 10b-5). The duty to disclose arises when “‘one party has information that the other party is entitled to know because of a fiduciary or other similar relation of trust and confidence between them.‘” Cochran, 214 F.3d at 1264 (quoting Chiarella v. United States, 445 U.S. 222, 228 (1980)). However, where a party without a duty elects to disclose material facts, he must speak fully and truthfully, and provide complete and non-misleading information with respect to the subjects on which he undertakes to speak. In re K-Tel Int‘l Inc. Sec. Litig., 300 F.3d 881, 898 (8th Cir. 2002) (internal citations omitted). Thus, a voluntary
Mr. Curshen argues that making anonymous Internet postings does not create a fiduciary or otherwise heightened duty to the public requiring him to disclose that he is being compensated for promoting Freedom Golf. Aplt. Br. 29-30. He further argues that “no reasonable investor under the circumstances present here would consider it important in deciding whether to buy or sell Freedom Golf stock that someone anonymously touting that stock on an Internet bulletin board was paid to do so.” Aplt. Br. 43. The SEC counters that failing to disclose the fact that he was being compensated for promoting Freedom Golf stock makes all of his statements per se misleading because a reasonable investor would consider his compensation as bearing on Mr. Curshen‘s objectivity. Aplee. Br. 33. The district court agreed that a reasonable investor would find important that an individual promoting the sale of a stock was being compensated for his actions and was selling the same stock for his own benefit. Jones, 2009 WL 539615, at *5.
4. Scienter
To establish scienter, the SEC must demonstrate: (1) Mr. Curshen knew of the potentially material fact, and (2) Mr. Curshen knew that failure to reveal the potentially material fact would likely mislead investors. City of Philadelphia v. Fleming Cos., 264 F.3d 1245, 1261 (10th Cir. 2001). “The requirement of knowledge in this context may be satisfied under a recklessness standard by the defendant‘s knowledge of a fact that was so obviously material that the defendant must have been aware both of its materiality and that its non-disclosure would likely mislead investors.” Id.
The SEC argues that Mr. Curshen acted with scienter because he knew he
We see nothing clearly erroneous about the district court‘s finding that Mr. Curshen‘s material omissions were made with the requisite scienter. Once the district court found that Mr. Curshen had been compensated for his promotional activities, there is nothing controversial about drawing the logical conclusion—he knew he was being compensated, and he knew failing to disclose this compensation would mislead those reading his postings by making his opinions seem objective. The district court‘s conclusion that Mr. Curshen‘s acts were negligent in violation of § 17(a)(2) & (3) is likewise not clearly erroneous.
To conclude our discussion of §§ 17(a)(1)-(3), § 10(b), and Rule 10b-5, we
C. Liability under § 17(b)
Section 17(b) makes it unlawful “to publish, give publicity to, or circulate any . . . communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer . . . without fully disclosing the receipt . . . of such consideration and the amount thereof.”
On appeal, Mr. Curshen only challenges the district court‘s finding that he received compensation, reiterating the evidentiary objections discussed above. Aplt. Br. 54-55; Aplt. Reply Br. 31. Because the district court‘s finding that Mr. Curshen was compensated is not clearly erroneous, and it is undisputed that he
D. Sanctions
An injunction based on the violation of securities laws is appropriate if the SEC demonstrates a reasonable and substantial likelihood that Mr. Curshen, if not enjoined, will violate securities laws in the future. See SEC v. Pros Int‘l, Inc., 994 F.2d 767, 769 (10th Cir. 1993). Determination of the likelihood of future violations requires analysis of several factors, such as (1) the seriousness of the violation; (2) the degree of scienter; (3) whether his occupation will present opportunities for future violations; and (4) whether he has recognized his wrongful conduct and given sincere assurances against future violations. Id. “Although no single factor is determinative, we have previously held that the degree of scienter ‘bears heavily’ on the decision.” Id. (quoting SEC v. Haswell, 654 F.2d 698, 699 (10th Cir. 1981)). “A knowing violation of §§ 10(b) or 17(a)(1) will justify an injunction more readily than a negligent violation of § 17(a)(2) or (3). However, if there is a sufficient showing that the violation is likely to recur, an injunction may be justified even for a negligent violation of 17(a)(2) or (3).” Id. (citing Aaron v. SEC, 446 U.S. 680, 700-01 (1980)).
Mr. Curshen argues that there is no evidence that he engaged in the sort of recurrent conduct that would support an injunction and that any wrongdoing
As for the disgorgement order, “[t]he SEC is entitled to disgorgement upon producing a reasonable approximation of Mr. Curshen‘s ill-gotten gains.” SEC v. Calvo, 378 F.3d 1211, 1217 (11th Cir. 2004). Mr. Curshen notes that once the SEC has produced such an estimate, “[t]he burden then shifts to [Mr. Curshen] to demonstrate that the Commission‘s estimate is not a reasonable approximation.” Aplt. Br. 58 (citing First City Fin. Corp., 890 F.2d 1215, 1232 (D.C. Cir. 1989)). However, he does not contest the amount of the disgorgement order. Rather, Mr. Curshen argues that disgorgement is not appropriate because he has not violated
AFFIRMED.
Entered for the Court
Paul J. Kelly, Jr.
Circuit Judge