p five program creates a market in which the investors seek to get united states citizenship the fund managers look to raise capital at the lowest cost possible the united states against employment and economic development there is no requirement in the regulations that the instrument that commits the investors to investing be security under the securities laws the requirement is that the funds be at risk for a return or they were rescued or they're not the they were you one they were at your argument as i understand is that the profit anticipated in the offering memorandum was not sufficient to rush the level of the security and my question is how are we supposed to know where to draw that line in determining what profit is necessary to constitute a security i think the line has been drawn by this court's warfield opinion and that opinion the finds his security based on the supreme court's howie opinion and it focuses only th ird factor of how very there must be an expectation of profits and the investors must rely on totally on the efforts of others here the argument is that they could not have been an expectation of profit when the investor was told that the beginning this was an investment with a guaranteed loss if the project succeeded the investor would gain on fafnir million dollars one point five percent over five years that's not a loss it's just not much well it's a nominal gain it's a real loss when some historical benchmark i just don't understand how we can do that well i don't think that it's appropriate if i may for the court to determine the motivation of the investor well thought that's what your argument was that their motivation here was not for profit but for these but the argument is not the investors subjective motivation the argument is based upon the facts and the actions of the investors the reasonable conclusion one can make is that the only reason why an investor would make this investment is for the united states citizenship if capital is needed for investment and the investment is meritorious on its own terms and vestas will make that investment and the free market will allocate it and there will be a determination of the appropriate interest for that capital in this instance these investors were willing to accept quite twenty five percent return on their capital annually at a time when inflation was running at about two percent no rational investor would make that investment all investors factor in the inflationary element and making their investment decision ok i'm just i'm just troubled by that but i think i understand your position thank you so your position is that we're we as a court were supposed to just figure out whatever the inflation rate is as of the moment the investment was made and then if it's a dollar above that and you count that as a security but if the return is a dollar below that we don't that's that's where we end up but i think what the court has to do is apply  standard that announced and warfield and that standard says at the end of the day for an instrument to be security it has to generate net financial gains and maybe in different periods there will be different calculations of net financial gains i think as you want to judge for us not just noted and deflationary period there will be different considerations do we have any a single case that has factored in this inflationary rate of return that you're you're advocating i haven't seen any i am i am not aware every case that has considered the inflationary rate on the other hand this is the first case and which court of appeals is confronted with this issue in the even five unit is an unusual financial instrument it is not a routine type of financial chinese investors solicited and china make investments in china to finance the construction of a proton therapy project and california i submit to the court that on those facts there are not sufficient the mess to transactions to warrant the application of u securities laws so let's hear your response to the government's argument that you forfeited any ability to raise this argument now because you really never did make the argument that you're now trying to make in the district court what's your response on that front precise issue we wanted the district judge at the argument to the not only to the supreme court's latest opinion in the area but the leading case of m below don't you concede that your argument was not made with respect to mr lew but only as to why we do can see that go on and why would you make the argument as to her but not him because they would both get off the hook if you win that those hundred thirty three are you an offer to sell or security would be sufficient there were fines with respect to mr lew regarding his action and the united states that raised different issues for him and says to his wife miss one thing the facts were entirely clear her conduct was entirely and china but your reliance on more so now you did not cite more symbolic my understand why it's such a who cares whether you cited morrison or not it as i read it the case has nothing to do with what we're trying to decide in this well as this court pointed out recently and it's to sheeba opinion there is a language  morrison that talks about the security in domestic exchange but the principle ruling the subset of ruling of morrison was unless congress makes it explicit the supreme court decided morrison has a substantive case it said the scope of the statute does not reach beyond our borders although that opinion was issued prior to the amendment and dodd frank there congress decision but congress had the supreme court opinion before finally and acted the bill in the supreme court made it clear the federal courts already have to a section to determine to rule on a transactions beyond the issue is has congress authorized us to apply this particular statute beyond our borders it hasn't in this case now i do want to get briefly to the summary judgment  held that the law was obligated to tell the investors that he's going to use capital twelve million of capital to paid for mourners in compensation that isn't securities laws so i don't know that he was obligated to say that i think the problem is in that i think it was a footnote that said basically commissions and the like are only going to be paid out of the ministry of you that's the problem what he had said that right that if he was going to do something different from that i think he was obligated wasn't he to tell people only administrative fees to pay these costs but lou was granted absolute only reviewable discretion to reallocate the capital not just the administrative fees to pay anything that he wanted to do that was an appeal in the real stress to read appeal him away so language in the documents it's the language of the document was submitted a rational trial fact couldn't read it that way and this context essentially the investors were saying well you put on money here we're accepting point twenty five percent return a guaranteed loss we are in trusting you charles who is the manager carrying on behalf of the securities and exchange commission and with me today is my colleague jeffrey berger i'd like to jump straight to the is this a security issue that that you raised so i want to make it clear that how he didn't say and none of this court's precedents has ever said that the expected profit must reach a particular level or total a specific amount in order to count on the how you test is that the case that you know of the promise here then we'll pay you a dollar for each per year for each of the five years on your five hundred thousand dollar investment that you would say well that's profit profit as a profit or is there some de minimus level which is just so you know what that doesn't even count your honor there is no to minimize one a so they they can't claim to be surprised now that they're being held liable for securities fraud because they were selling these as securities the second and i think you know just to take a step back the purpose of the test is to determine whether the securities law should apply in the commissions and forstmann efforts here foscari within the purpose of the securities act which is to protect capital formation for us profit making enterprise exist but i don't understand why if the promise rate of return is a dollar per year on a five hundred thousand dollar investment why the why your agency would have any regard for i mean obviously in that scenario we know to a moral certainty that nobody is investing their money in that so called investment to get a financial return they're obviously motivated by some something else that has probably you're an agency has no interest in so why ask what i guess i don't understand well for two reasons your honor so the commission is not only interested in protecting investors ability to get a return we also have an interest in protecting capital formation so investors have all sorts of reasons why they might make investments but the reason that we're concerned with the b five program and that we've court's opinion i thought your goal was to protect investors from getting ripped off by unscrupulous investment managers why i don't that is one of our goals ok so let's if i'm so let's just take it as a given in my hypothetical where this investment is being offered doll a dollar is the rate of return per year ok you we know that every single person who's investing in this is only interested in getting the visa they could care less whether they could probably care less whether they lose the whole five hundred thousand dollars actually but they certainly are not coming they're not looking out at the investment landscape and saying boy that this is you know i'm attractive rate of return let me go with this right so in that scenario why or why would your agency be concerned about whether folks diff they want to pay five hundred thousand and do know basically gambling their money on whether they're going to get this view so why would you be concerned about that because it still protects capital formation so if if we permit people like a to sell things that they label securities and then commit fraud and steal investors money that affects investor foreign investors willingness to invest in the five enterprises and so since that's a source of capital formation for u s businesses that's where the commission's concern comes in i'm looking for something analogous that would support your position and back in the eighty's they had all these tax shelter schemes were basically you were guaranteed to lose money but that loss could be used as a tax benefit in those cases analogous to what we're dealing with here they could potentially be analogous and i think that this court's opinions leave open the possibility that even minimising losses  of the promoter only her risk of loss depended on the promoters efforts and her potential gain did not moving on if you're honest have no further questions on that to the extraterritoriality so i just i'm still trying to figure out the capital formation and your interest your agency's interest in that i guess i'm just still maybe you can take another run through that with me because i don't i thought that the interest was solely in protecting investors and i guess i just don't see why there's the secondary interest that i think the secondary interest is is in the law itself and if you look at the supreme court's opinions that have interprete it you know as you see the ad words i think refers to capital formation and that's the case that held that you know a fixed fixed rate of return could constitute a profit for how we  purposes there's just really nothing in the securities laws that says that we're only concerned about investors profits the point of the securities laws really is that when investors part with their money and allow someone else to manage their money there are certain risks that arise from that and those risks are no different if you're parting with your money and want someone to minimize your losses and return your money in full and then they would be if they offer you a dollar return take it you would say that the securities laws are designed to protect the dumb investors as well the smart ones absolutely on think there's any of these people are dumb i think they're quite mean the chance to get a  you know it's obviously not something you can purchase on the open market so i think even if you were there was a ninety percent of surance that you were going to lose your five hundred thousand dollars and not get any return but you would nonetheless be successful after two years of getting a visa i think that would still be  honor and i i also think that in this case you don't even need to reach that question because they were promised a return they were promised a return of one point two five percent on their five hundred thousand dollars capital contribution and so if you lie in that with the investment contract test it was an investment of money five hundred thousand dollars in a common enterprise the loan made from p p t five fund to beverly proton with the expectation of profits the one point two five percent based on the efforts of others appellants and their partners so every element of the investment contract test under how is met here and there's simply no precedent for taking into account the rate of inflation in determining whether something is a security nor would that be a working workable test because you don't know what the rate of inflation will be ex ante where you may have no place you get a deflation in which about point two five percent would be good exactly around and that also raises another issue where you know in some instances zero return or a negative return might be attractive to investors because keeping their money in cash is actually riskier incent it's like that than making an investment that doesn't provide a return and no one has ever said that you know you don't have  security in that instance because you just one more question before you move on is there like a market for these kinds of investments for folks like mr lew and his wife that they're competing against other folks who are offering the same kinds of the five opportunities yes there is a primary market and there are approximately eight hundred regional centers in the united states they all have you know terms associated with their offerings and so investors can look at those various offerings and decide which one you know they want to go with there's no secondary market because these aren't traded on an exchange but there is a primary market and it's you know a not insignificant market it's approximately two billion dollars a year of capital formation and do does the rate of return vary or is it that everyone just offers the same the rate of return varies so i've seen you know i haven't looked at all of them but i've seen everything up to five or six percent so i think you you look at you know obviously the risks associated with  particular project and you know investors might have lots of reasons for picking one over the other but there is a market and they do have choices great so you want to do so moving on to the extraterritoriality argument so i believe you're correct that they did waive this argument below the low they only argued that miss wang didn't engage in any conduct within the united states gauge to make any misrepresentation correct but even more broadly you know if you look at whether she engaged in any conduct that's irrelevant under either the section nine twenty nine p b standard or morrison ready for some below you raised in an argument i haven't seen  with i believe at the summary judgment hearing but only with respect to this argument that miss lang didn't engage in any conduct here and morrison doesn't require her to have engaged in conduct here because morrison looks at whether well in the section hundred eighty two context the offer or sale of the security occurred in the united states so i think that they did waive that argument below you know but regardless you know we would argue that section nine twenty nine p b should apply but no matter which standard you choose this is just clearly met either standard would be clearly not here they were selling limited partnership interests from a u s company to build real property in the state of california so the conduct and effects test is clearly met and the triggering event there's a lot of evidence in the record but that can satisfy the morrison standard but for simplicity i would just point the court to so in particular it says after filing of a subscriber's i five twenty six petition that subscriber shall have no right to revoke or withdraw his or her subscription so if that's not you know the point of irrevocable liability i don't know what would be and the i five twenty six petition was filed with usa i ask because the us federal agency so regardless of which standard you apply i think the standard is satisfied in this case but it doesn't matter that it was waive because we've been able to find sufficient evidence on the record to satisfy other standard that the commission was not under the impression that this was an issue and so we didn't look to specifically you know develop evidence that the standards would be satisfied and so it's very possible that there's a lot more evidence that could be developed on that point that the court has no further questions we will ask you to affirm the district  still is position or not but you might want to comment on that short so your honor i think that this court recently and i put that argument to rest and how that you know nothing in cocoa has changed this court's prior opinions that least in the context we're joined several liabilities and pose you can be required to basically discords every penny that the fraudulent enterprise took in i was surprised here to see that the individual was basically required to quote unquote question that they obtained approximately twenty seven million dollars from investors so the parties agree on how much they had seen from investors and the district court held that they were required to disgorge that full amount now they claim that they are entitled to certain deductions for business and what they call business expenses but the district court expressly looked at that and how that even those expenses were sort of part and parcel of the fraud and at twelve the district court said that lou burned through millions of dollars he had left after payments himself along in the marketers quote on half hearted attempts to convey the illusion of progress so expenses even the expenses that they claim are legitimate the district court determined that they were simply expenses to convey an illusion of progress they were part and parcel of the fraud and they also must be disgorged ok and that that covers even that wasn't there a large payment made on a down payment for the equipment itself know there was well they have claims that there was a down payment made on equipment but you know if you look at this court's holding in wallan broke there were real operating expenses that the defendants in that case paid and they were operating a ponzi scheme but their operating expenses associated with it they really paid you know attorneys and accountants and paid for the building that they were and and this court refused to permit them to deduct those expenses because entire enterprise was fraudulent and here you know it's obvious that the entire enterprise was fraudulent because they had entered into agreements with the marketers before they even gave offering documents the investors that violated the terms of the offering care simply said that in terms of the five year statute of limitations they would consider discordant in the context i'm talking about as apparently it was related as i understand it the bennion was related only to this court's meant although it could also be an equitable remedial the program was can be a what it as a penalty and it is it's indicated the factors the court should they can't later claim a cost of a car payment to the getaway driver the lookout for business expenses that is not it's entirely wrong for to the bank it's a violation of public  and the entire sum should go bad here we have someone who created a fine he spent five no knowledge in person or in expenses to get the funds started including nearly fifty thousand dollars of his own money this was not a ponzi scheme this was a legitimate business that he was trying to create and make it happen so that his investors would get a us visas and that he would build a proton therapy clinic mean that every limited partnership interest is a security for example castle just conceded to the court in some instances easy we found if you don't have interest rates of forty five percent well that would be an entirely different case for this court to decide i'm asking this court to decide this case on its facts and to apply your well established law to those facts and i submit that the well established law really says in this instance