SEC v. PhanSEC v. Phan
The SEC alleged that Alan Phan used stock registered only for employee compensation purposes to raise capital from the public for the cash-strapped publicly traded company he led in 1999, thereby violating federal securities law. The district court granted summary judgment in favor of the SEC, holding that Phan both engaged in an unregistered securities sale and committed securities fraud. In this appeal, Phan contends that the admissible evidence, viewed in the light most favorable to him, supports his position rather than the SEC‘s.
We affirm the district court‘s summary judgment rulings concerning the registration issue. Whether or not the stock was initially issued to compensate bona fide consulting services, Phan was involved in its subsequent resale to raise capital for the company and thereby violated the registration provision of federal securities law. We agree with Phan, however, that the summary judgment record does not demonstrate that he made misstatements material as a matter of law. We therefore reverse the grant of summary judgment in favor of the SEC with respect to the antifraud claims and vacate much of the relief the district court awarded against Phan.
I.
During the relevant time period, Phan was chairman, CEO, and president of the Hartcourt Companies Inc. (“Hartcourt“), a publicly traded business development and investment holding company based in Long Beach, California. Believing, as did many others during the heady dot-com bubble of the late 1990s, that fortunes could be made by investing in the technology sector, Hartcourt decided to enter the Chinese technology market. To this end, Hartcourt entered into a pair of investment agreements with companies based in China and Hong Kong that obligated Hartcourt to pay those companies several million dollars in cash during the later half of 1999. As was true of many other companies venturing into the technology sector in the late 1990s, Hartcourt‘s ambition outstripped its financial resources, and the company found itself in the fall of 1999 having difficulty making the promised payments to its investment partners.
Hartcourt entered into a written Fee and Option Agreement (the “Fee Agreement“) with Wu on August 23, 1999. The Fee Agreement specified that Wu “will use [her] best efforts to search for, identify and make known to [Hartcourt], Internet-related businesses and Assets (“Opportunities“) which qualify as potential acquisitions by [Hartcourt].” The Fee Agreement explained that Wu‘s “talents and services are of a special, unique, unusual and extraordinary character and are of particular and peculiar benefit and importance to [Hartcourt].”
The Fee Agreement stated that Hartcourt would provide Wu with an option to purchase one million Hartcourt shares at a price of $1.25 per share, approximately Hartcourt‘s then-current share price. The Fee Agreement represented that this payment was “to satisfy [Wu‘s] time and expense incurred, up to and including the first acquisition by [Hartcourt] of an Opportunity introduced or arranged by [Wu],” and that Wu “has not been engaged to perform, nor will [she] agree to perform any services in connection with capital raising transactions.”1 The Fee Agreement specified that Wu would serve as a consultant through December 30, 1999, but that either party could terminate her service on thirty-days notice. The Fee Agreement contained no provision requiring Wu to forfeit the option if the Fee Agreement was terminated early, although it did state that Hartcourt “shall only be liable for payment of fees earned by [Wu] as a result of work prior to the effective date of the termination.”
Under the terms of a separate Option Agreement (the “Option Agreement“), also signed on August 23, 1999, Hartcourt granted Wu an option to purchase one million shares to fulfill the promise made in the Fee Agreement. Wu had until December 1, 2001 to exercise the option and was required to pay the $1.25 per share at the time of exercise to receive the stock (the “prepayment” requirement). In other words, Wu immediately became the owner of the options, but would not receive the one million shares of Hartcourt until she paid $1.25 million.
Both agreements were filed with the SEC on September 7, 1999, as attachments to a Form S-8, which registered the issuance of those one million shares.2 This form and its attachments were publicly available upon filing. The Securities Act of 1933 (“the 1933 Act“),
Right after it filed the S-8 form, Hartcourt issued one million shares of common stock to Wu. Contrary to the Option Agreement, however, Wu (and Yang) paid nothing to Hartcourt at that time. In a declaration submitted in the district court Yang explained that he pressed for the elimination of the prepayment requirement because “I wanted some guarantee that my wife and I would receive our option shares, since we did not have the money to pay the option price, and it made no sense for us to bring companies to Hartcourt if there was no guarantee that we would receive the shares.”
Phan stated in his declaration that to satisfy Yang‘s request he orally modified the agreement on behalf of the company, by waiving the prepayment requirement and instead allowing Wu to receive the shares in exchange for a promissory note to pay Hartcourt $1.25 million.3 Hartcourt did not note this modification in its S-8 form, so the supposedly superseded terms were the only publicly disclosed information about the arrangement between Hartcourt and Wu.
Within months, Wu resold most of the one million shares. The bulk of the shares were sold to Rubin Investment Group (“Rubin“) in a November 1, 1999 transaction involving 500,000 shares and a November 4, 1999 transaction involving 300,000 shares. The sales were at prices well below the $1.25 per share that Wu supposedly was obligated to repay Hartcourt. Phan stated in his declaration that he suggested Yang contact Rubin and that he directed Hartcourt‘s lawyer to draft a contract for one of these stock sales. Phan also acknowledged that Hartcourt‘s demand in October 1999 that Wu repay the $1.25 million promissory note generated Wu‘s decision to sell the shares.4 Yang likewise stated in his declaration that he informed Phan that Wu would be forced to sell the shares if Hartcourt demanded repayment of the loan, and “Phan insisted that if that was the only way we could pay Hartcourt, then we should sell the shares and get Hartcourt paid.”
At Phan‘s direction, Wu wired the approximately $680,000 in proceeds of these two sales to Hartcourt‘s investment partners in China and Hong Kong, to pay Hartcourt‘s outstanding debts. On December 8, 1999, she also wired one of these
Yang made a number of smaller purchases and sales of Hartcourt‘s stock during the fall of 1999, primarily for his own benefit. During the same period, Hartcourt promised Yang that he would receive 100,000 shares in exchange for helping Hartcourt enter into a joint venture with Chinese technology company Innostar. The defendants explain that this promise caused Hartcourt to forgive Wu‘s debt for the purchase price of 100,000 of the original one million shares in lieu of issuing additional shares.
After conducting an investigation, the SEC filed a civil complaint against Phan, Yang, and Hartcourt, exercising its power to seek injunctions and fines against those who violate the 1933 Act and the Securities Exchange Act of 1934 (“the 1934 Act“). See
After both parties moved for summary judgment, the district court granted the SEC‘s motion and denied the defendants’ motion. The district court permanently enjoined the defendants from violating securities laws, fined the defendants — imposing a $55,000 fine against Phan, a $20,000 fine against Yang, and a $275,000 fine against Hartcourt — ordered Hartcourt and Yang to disgorge ill-gotten gains — $819,363 and $186,604, respectively — and barred Phan from serving as an officer or director of a publicly traded company. Phan appealed the judgment; Yang and Hartcourt did not.
We review de novo the district court‘s decisions on the summary judgment motions. SEC v. First Pac. Bancorp, 142 F.3d 1186, 1190 (9th Cir.1998). In our review, we must “determine, viewing the evidence in the light most favorable to the nonmoving party, whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law.” Johnson v. Columbia Props. Anchorage, LP, 437 F.3d 894, 898 (9th Cir.2006).
II.
It is unlawful to participate in an interstate or mail sale of unregistered securities. See 1933 Act § 5(a), (c),
The district court held that Phan violated Section 5 because a large portion of the stock was resold by Wu to raise capital for Hartcourt without filing an additional registration statement.8 The registration dispute in this case thus centers on whether, at the time of Wu‘s resales of Hartcourt‘s stock, the September 7, 1999 S-8 “registration statement[was] in effect as to [the] security.”
The SEC interprets these regulations flatly to prohibit the use of an S-8 form to register shares that are sold to the public to raise capital. As the SEC‘s published explanation of amendments to the regulations promulgated in 1999 specifies:
[S]ome issuers and promoters have misused Form S-8 as a means to distribute securities to the public without the protections of registration under Section 5 of the Securities Act. For example, the issuer registers on Form S-8 securities nominally offered and sold to employees or, more commonly, to so-called “consultants.” These persons then resell the securities in the public markets, at the direction of the issuer or a promoter. In some cases, the consultants or employees perform limited or no additional services for the issuer. The consultants or employees then either remit to the issuer the proceeds from these resales, or apply those proceeds to pay expenses of the issuer that are not related to any service provided by the consultants or employees.
Registration of the shares on Form S-8 does not accomplish Section 5 registration of these public sales. The transaction that takes place (a capital-raising transaction with the public) is a different transaction from the transaction registered on Form S-8 (a compensatory transaction with employees, including consultants). Although the issuer purports to sell securities to employees, the securities instead are sold to the public. The “employees” act as conduits by selling the securities to the public and distributing the proceeds (or their economic benefit) to the issuer. This public sale of securities by the issuer has not been registered, although the Securities Act requires registration. The failure to register this sale of securities deprives public investors of the protections afforded by the Securities Act.
S-8 Release, 64 Fed.Reg. at 11,103-04 (emphasis added) (footnote omitted).
At the same time, the SEC explained the circumstances in which it would view a transaction as seeking to raise capital from the public:
Form S-8 is not available to register offers and sales of securities to . . . consultants and advisors where:
• By prearrangement or otherwise, the issuer or a promoter controls or directs the resale of the securities in the public market; or
• The issuer or its affiliates directly or indirectly receive a percentage of the proceeds from such resales.
We owe substantial deference to an agency‘s published interpretation of its own regulations and will treat it as controlling if it is not “plainly erroneous or inconsistent with the regulation.” Auer v. Robbins, 519 U.S. 452, 461, 117 S.Ct. 905, 137 L.Ed.2d 79 (1997) (internal quotation marks omitted); see also Epstein v. MCA, Inc., 50 F.3d 644, 654 n. 17 (9th Cir.1995) (applying such substantial deference to an interpretation published in a SEC Release), rev‘d on other grounds sub. nom Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 116 S.Ct. 873, 134 L.Ed.2d 6 (1996). Such deference is particularly sensible here in light of the SEC‘s broad statutory authority to design the schema for registering securities. See
Applying this holding, we conclude that Wu‘s resale of Hartcourt‘s publicly traded stock could not be covered by an S-8 registration. That resale had the effect of supplying the company with capital from the public at the company‘s behest.
The summary judgment record, viewed in the light most favorable to Phan, establishes both that Wu transferred to Hartcourt‘s creditors the proceeds of the stock sales she made through Rubin and her brokerage account to satisfy the company‘s outstanding debts and that Hartcourt was the impetus behind these resales. Phan‘s declaration states:
Hartcourt made demand [sic] for payment from Yang and Yan Wu in October 1999. Yang agreed to sell the Hartcourt shares which he and his wife received from Hartcourt. He asked me if I knew anyone who could sell shares in large lots, and I directed him to call Rubin Investments, whose business card was on my desk at the time and whom had recently made a presentation to Hartcourt where they had described themselves as institutional investors which had an interest in investing in Hartcourt. In an effort to assist Yang and Yan Wu, I later asked my attorney to prepare a simple share purchase agreement which Yan Wu could use in selling the shares, since Yang told me that he and his wife were unfamiliar with the process. . . .
. . .
From the payments which Hartcourt demanded that Yang and Yan Wu make pursuant to their exercise of the option shares, I instructed Yang to send those sums to third parties designated by Hartcourt instead of sending the money directly to Hartcourt.
Likewise, a declaration submitted by Yang stated:
I advised Alan Phan that [Wu and I] did not have the money to pay off what was owed, and that the only way we could come up with a major portion of what was owed would be to sell the shares we received. Phan insisted that if that was the only way we could pay Hartcourt,
then we should sell the shares and get Hartcourt paid.
This undisputed evidence demonstrates that it was the company‘s directives to Wu that resulted in the sale of the stock and therefore in raising capital for the company. Given these circumstances, the resale of Wu‘s stock could not validly be registered on Form S-8. Hartcourt — the issuer of publicly traded stock — “control[led] or direct[ed] [Yang‘s] resale of the securities in the public market” through its demand for repayment of the loans, because the demand “ma[d]e a resale happen.” See S-8 Release, 64 Fed.Reg. at 11,106 & n. 30. Further, Hartcourt “indirectly receive[d] a percentage of the proceeds from such resale” when the proceeds of the resale were paid to its creditors. Id. at 11,106 & n. 31.
Phan asserts that the foregoing analysis is not here pertinent, as long as the defendants intended at an earlier time — when Hartcourt initially granted Wu the one million shares — to provide compensation for bona fide consulting. But, as we have noted above, liability need not turn on whether Hartcourt‘s initial grant of the shares to Wu was properly registered. Even if the S-8 form was effective as of the date of the initial grant because Hartcourt intended to compensate Wu for bona fide consulting services — as we must accept, construing the summary judgment record in the light most favorable to the defendants — the S-8 registration ceased to be effective once Hartcourt sought to use the shares for a capital-raising purpose. See 1 THOMAS LEE HAZEN, TREATISE ON THE LAW OF SECURITIES REGULATION § 3.4[4][E], at 252 (5th ed. 2005) (“Unlike most other registered offerings, securities offered in a Form S-8 registration may be subject to resale restrictions.“).
At the point at which a company seeks to redistribute into the public market the securities it issued to consultants, then, “Form S-8 is not available to register offers and sales of securities to . . . consultants.” S-8 Release, 64 Fed.Reg. at 11,106; see also
Phan also argues, in a cursory fashion without citing any authority, that “[h]e did not participate in any sale of S-8 shares . . . nor did he benefit from any such sales.” Although we have “recognize[d] that [a defendant‘s] role in the transaction must be a significant one before [Section 5] liability will attach,” we have defined a “significant” role to include one who is both a “necessary participant” and “substantial factor” in the sales transaction. Murphy, 626 F.2d at 648, 652.13
Applying this standard, Phan‘s role in assisting Wu‘s resale satisfied the “sold or offered to sell” element of Section 5. As detailed in the defendants’ own declarations, quoted above, Phan chose the date to call in Wu‘s $1.25 million obligation to Hartcourt, directed Wu to sell the shares in order to repay her obligation, provided Yang with a buyer, directed Hartcourt‘s lawyer to draft a stock sale contract, and instructed Wu where to send the proceeds. Phan therefore was both a “necessary participant” and a “substantial factor in” Wu‘s resale. See id. at 652; see also Geiger, 363 F.3d at 487-88 (“[S]omeone who played a role as crucial as [the defendant‘s] — finding the buyer, negotiating the terms, facilitating the resale — cannot escape liability [under Section 5] by avoiding direct involvement in the final [sales] act.“)
III.
The district court also granted summary judgment in favor of the SEC on its claim that Phan committed securities fraud through his involvement in filing Hartcourt‘s S-8 registration form. The fraud claim is certainly supported by some of the evidence, indeed much of it. But viewing all of the evidence in the light most favorable to Phan, as we must on summary judgment, we conclude that there are disputes of material fact that preclude summary judgment. We therefore reverse the district court‘s grant of summary judgment in favor of the SEC but affirm the denial of Phan‘s motion for summary judgment.
Section 17(a) of the 1933 Act,15 Section 10(b) of the 1934 Act,16 and Rule 10b-517 “forbid making [1] a material misstatement
Phan primarily challenges the district court‘s holding that the evidence viewed in the light most favorable to him demonstrated the materiality of his misstatements.18 The antifraud provisions’ materiality element is satisfied only if there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix’ of information made available.” Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976)) (internal quotation mark omitted) (applying test to claims under Section 10(b) and Rule 10b-5); see also SEC v. Rogers, 790 F.2d 1450, 1458 (9th Cir.1986) (applying a “reasonable investor” test to Section 17), overruled on other grounds by Pinter v. Dahl, 486 U.S. 622, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988).
Determining materiality in securities fraud cases “should ordinarily be left to the trier of fact.” In re Apple Computer Secs. Litig., 886 F.2d 1109, 1113 (9th Cir.1989). Materiality typically cannot be determined as a matter of summary judgment because it depends on determining a hypothetical investor‘s reaction to the alleged misstatement. As the Supreme Court has explained:
The determination [of materiality] requires delicate assessments of the inferences a “reasonable shareholder” would draw from a given set of facts and the significance of those inferences to him, and these assessments are peculiarly ones for the trier of fact. Only if the established omissions are “so obviously important to an investor, that reasonable minds cannot differ on the question of materiality” is the ultimate issue of materiality appropriately resolved “as a matter of law by summary judgment.”
TSC Indus., 426 U.S. at 450, 96 S.Ct. 2126 (quoting Johns Hopkins Univ. v. Hutton, 422 F.2d 1124, 1129 (4th Cir.1970)) (footnote omitted);19 see also 10A CHARLES ALAN WRIGHT, ARTHUR R. MILLER & MARY KAY KANE, FEDERAL PRACTICE AND PROCEDURE: CIVIL § 2729, at 556 (3d ed. 1998) (“[E]ven when there is no dispute as to the facts, it usually is for the jury to decide whether the conduct in question meets the reasonable-person standard.” (emphasis added)), cited in TSC Indus., 426 U.S. at 450 n. 12, 96 S.Ct. 2126. Thus, for example, the Supreme Court has refused to
Applying this strict standard and evaluating the securities fraud claim in light of the record viewed most favorably to Phan, we cannot find that the misstatements made in Hartcourt‘s S-8 registration form rise to the level of obviousness necessary to award summary judgment.
A.
The SEC argues that the many misrepresentations and omissions in the S-8 form as of the moment it was filed on September 7, 1999 made materiality so obvious so as to warrant summary judgment. The evidence in the record is in conflict, however, as to many important facts that could support this conclusion. For example: whether Wu had a bona fide obligation fully to repay Hartcourt for the stock after the transaction was restructured; whether Hartcourt did initially intend the shares to compensate Yang and Wu for consulting work; and whether Hartcourt issued the shares to Wu expecting that they would be resold to raise capital from the public to satisfy the company‘s pressing debts. The S-8 registration would certainly have contained material misstatements if those disputed facts were resolved in the SEC‘s favor. Obviously, an average Hartcourt investor would want to know if the company was giving away a million shares of stock for free or needed to sell stock quickly in order to stave off a liquidity crisis. But we cannot uphold summary judgment in favor of the SEC on that basis, as the underlying facts have not been conclusively established.
The district court determined otherwise after it refused to credit critical statements in Phan‘s and Yang‘s declarations. Those statements attested to a restructuring of the transaction that created a bona fide obligation for Wu fully to repay Hartcourt for the stock.20 The district court viewed the declarations as “uncorroborated and self-serving” and as contradicted by earlier testimony in the record, and so disregarded the statements regarding restructuring. The district court‘s characterizations of the statements cannot justify disregarding them.
As we have previously noted, declarations oftentimes will be “self-serving” — “[a]nd properly so, because otherwise there would be no point in [a party] submitting [them].” United States v. Shumway, 199 F.3d 1093, 1104 (9th Cir. 1999). In most cases, consequently, “[t]hat an affidavit is selfserving bears on its credibility, not on its cognizability for purposes of establishing a genuine issue of material fact.” Id. Only in certain instances — such as when a declaration “state[s] only conclusions, and not `such facts as would be admissible in evidence,‘” — can a court disregard a selfserving declaration for purposes of summary judgment. Id. (quoting
Villiarimo v. Aloha Island Air, Inc., 281 F.3d 1054 (9th Cir.2002), relied upon by
Moreover, it is unremarkable that the defendants could not otherwise corroborate their personal conversations. That is likely to be the case regarding most conversations between two people, and does not disqualify either participant from testifying about the interchange — subject, of course, to a credibility determination by the finder of fact. The district court was thus wrong to disregard the declarations as “uncorroborated and self-serving.”
Nor was it proper to disregard Phan‘s and Yang‘s declarations based on our case law that treats declarations “flatly contradict[ed]” by the declarant‘s prior testimony as “sham[s].” Kennedy v. Allied Mut. Ins. Co., 952 F.2d 262, 267 (9th Cir.1991). Phan‘s deposition testimony that he directed his staff to send Wu a promissory note with a six-month term does not “flatly contradict” the declaration‘s assertion that Hartcourt could demand repayment in October 1999. The deposition provided only cursory testimony about the terms, and Phan stated in his deposition that he was unsure whether such a promissory note was even actually sent. Moreover, Yang‘s testimony during the SEC‘s investigative proceedings — that Phan “sa[id] do this deal, sell that many shares and whatever money you get send to [Hartcourt‘s creditor]” — is entirely consistent with the statements in Yang‘s later declaration that Phan demanded repayment with the understanding that Wu would have to sell the stock.
The upshot is that for present purposes, we must take the description of the option transaction contained in Yang‘s and Phan‘s declarations as true. In other words, we must accept that Phan modified the Option Agreement at Wu‘s request to replace the prepayment requirement with a $1.25 million loan obligation and that Wu initially received the stock for compensatory purposes, and cannot in evaluating the grant of summary judgment on the fraud issue rely on any misstatement concerning those representations.
At the same time, it is quite clear that, by the time the form was filed, Yang and Wu, by their own account, had arranged to obtain the shares without paying up front, yet the form stated otherwise. That means that in evaluating the SEC‘s summary judgment motion, we can rely on the one undisputed misstatement in the S-8 registration form: the assertion that Wu would be required to pay $1.25 million in cash upon exercising her option to receive the one million Hartcourt shares.
B.
Given that understanding of the underlying facts, we cannot conclude on the present summary judgment record that, by failing to disclose the payment term change, the S-8 registration form contained a misstatement “obviously important to an investor.” See TSC Indus., 426 U.S. at 450, 96 S.Ct. 2126. The SEC, which both bears the burden of proof and is the party moving for summary judgment, submitted no evidence to the district court demonstrating the materiality of the misstatement about the payment terms.21
We do agree with the SEC‘s observation in its brief that “[a]ny reasonable investor would consider it important that the company was giving away one million shares and getting . . . nothing close to full payment for the shares,” (emphasis added); see also Murphy, 626 F.2d at 653 (“Surely the materiality of information relating to financial condition . . . is not subject to serious challenge.“). But we must accept for present purposes that Hartcourt received a $1.25 million promissory note in exchange for the shares. Although financial logic dictates that a $1.25 million promissory note is less valuable than $1.25 million in cash, given the risks inherent in a loan and the time value of money, the record contains no evidence about the value of this $1.25 million note at the time the transaction was restructured. Therefore, we have no way to know if Hartcourt‘s decision to accept a loan as payment was the equivalent of agreeing to get ”nothing close to full payment for the shares,” or represented only a minor decrease in payment that might well be an inconsequential change in the risk that investors already realized they faced by investing in the unproven company. Accordingly, we cannot say as a matter of law, unaided by any evidence in the record, that an investor would view the “total mix” of information about Hartcourt as “significantly altered” by this misstatement, standing alone. See Basic, 485 U.S. at 231-32, 108 S.Ct. 978; United States v. Bingham, 992 F.2d 975, 976 (9th Cir.1993) (per curiam) (reversing a criminal conviction for violating Rule 10b-5 when the government‘s expert testimony about materiality was “far too abstract to satisfy the materiality requirement in a particular case,” because “[m]ateriality must be judged in the context of the `total mix’ of information available to investors“).
Indeed, the case for materiality is, if anything, weaker here than it was in TSC Indus. In TSC Indus., the Supreme Court refused to hold as a matter of law that the difference in value of a payment in warrants worth $3.50 and warrants worth $5.25 was material. Here, we do not even know the value of the promissory note. Given that gap in the record — which would turn on Wu‘s financial circumstances, her credit record, and the likely repayment schedule, among other things — we cannot gauge the extent of the misrepresentation and so cannot determine whether the difference in value between the promissory note and $1.25 million in cash was greater, absolutely or as a percentage of the represented value, than the difference in value in TSC Indus., the significance of which was held to be a question for the trier of fact.
The SEC, indeed, does not really argue that the materiality of the one misstatement about payment terms — the only misstatement
In sum, whether Phan made a material misstatement of fact in the original filing is a question for resolution at trial. Although it may well be that, in fact, the transaction was a capital-raising conduit from the outset and the contrary representations on the S-8 form were material misstatements, or that the admitted misstatements regarding the form of the original transaction was indeed material, neither matter can appropriately be decided on the present summary judgment record.
IV.
Up to this point our analysis has assumed that we can consider all the evidence the district court used in ruling on the summary judgment motions. Phan also appeals, however, the district court‘s rejection of several evidentiary objections.
In asking us to reverse the district court‘s evidentiary rulings Phan faces a heavy burden. A district court‘s refusal to exclude evidence in its consideration of summary judgment is reviewed for an abuse of discretion and warrants reversal only when the “evidentiary ruling was manifestly erroneous and prejudicial.” Orr v. Bank of Am., 285 F.3d 764, 773 (9th Cir.2002). Phan falls far short of meeting such a burden. His arguments are meritless, and some border on frivolous.
Phan‘s broadest challenge concerns a declaration submitted by SEC lawyer Nicholas Chung, which incorporated dozens of interview transcripts, depositions, and documentary exhibits. Phan argues the declaration and its attachments must
Phan correctly notes that Rule 56(e) of the Federal Rules of Civil Procedure requires that declarations used to support or oppose summary judgment motions “shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the [declarant] is competent to testify to the matters stated therein.”
Phan does argue that the SEC failed to establish a sufficient foundation for the transcript of Yang‘s August 2001 interview, conducted as part of a SEC investigation into a prior case. That transcript lacked a court reporter‘s certification when originally submitted to the district court, but the SEC later provided the certification by filing a declaration from the court reporter. The later declaration was adequate. See
Phan also objects to the admission of the transcript of Yang‘s 2001 interview because neither Phan nor his lawyer was given an opportunity to attend it. Accordingly, Phan argues, the transcript‘s use violated the requirement in the Federal Rules of Civil Procedure that depositions may be used only “against any party who was present or represented at the taking of the deposition.”
V.
Fully accepting Phan‘s position that Wu received one million shares of Hartcourt in exchange for a $1.25 million loan to compensate Yang‘s service as a consultant and resold most of those shares to repay the loan, Phan is nonetheless liable under Section 5 for the unregistered resale of Hartcourt‘s stock. The district court therefore correctly granted summary judgment in favor of the SEC on the Section 5 cause of action. But the fact that this transaction differed from the arrangement Hartcourt detailed in registering those one million shares with the SEC does not establish as
AFFIRMED in part; REVERSED in part; VACATED in part. REMANDED for further proceedings consistent with this opinion. Each party shall bear its own cost on appeal.
Notes
(a) Sale or delivery after sale of unregistered securities
Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly—
(1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or
(2) to carry or cause to be carried through the mails or in inter-state commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale.
. . .
(c) Necessity of filing registration statement It shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security. . . .
Section 5 contains no language similar to the “from him” language of Section 12. So Pinter did not overturn our holding in Murphy, that the SEC establishes an actionable violation of Section 5 when it shows a defendant is both a “necessary participant” and “substantial factor” in the sales transaction. Cf. Calvo, 378 F.3d at 1215 (observing, in a 2004 decision, that “the SEC must prove that the defendant was a `necessary participant’ or `substantial factor’ in the illicit sale” to establish Section 5 liability and citing Murphy); Geiger v. SEC, 363 F.3d 481, 488 (D.C.Cir. 2004) (observing in a challenge to a SEC enforcement action that “[w]e do not believe Pinter is on point” as to the scope of Section 5 liability).
It shall be unlawful for any person in the offer or sale of any securities . . . by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly
(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange —
. . .
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
This argument, however, cannot be reconciled with our holding in the opinion‘s previous section that Phan violated Section 5 of the 1933 Act by failing to file a new registration form at the time of Wu‘s resales, because the S-8 form was no longer effective. We do not understand how the securities laws could simultaneously deem the S-8 form ineffective and require Phan to update the form, and we have found no case law applying a duty to update to a stock registration form when the registrant is not still issuing stock pursuant to that form.