come exclusively from the funds profits your feathers made no such misstatements you certainly cannot be said to have made statements so obviously misleading this issue can be resolved at summary judgment against him as a matter of law but this did not say that the funds he was the company so what is your best factual evidence that he did not receive it judy on to the phones weren't made to the ocean we don't we don't deny the existence of the so i believe your honor that's relevant most directly relevant to the discouragement issue which is whether he himself that the loans from his funds to see the managing company whether that can be deemed to be his ill gotten profits from his alleged fraud well let me put it another way the agreement said no none of those lines or go to any member the company and he himself personally benefited from those funds so i think the key here is that he never in your what is your answer then answer that is that statement is read in context it's plain that it doesn't apply to the standard you know to me to the portion of the investors prime fund offering document to which you are so it's at your one thirty seven i believe your honor that the funds will be engaged in the business of investing in mortgage loans that's how the funds were intended to make money and it set forth nine specific provisions that govern the funds investments in mortgage loans and so this no loans to manager pr was one of the six provisions so you're saying that the representation was only that we the fund would make no loans mortgage loans to the manager but it could make unsecured loans well yes and there may have been and other circumstances there might have been other loans that could contravene other aspects of the offering was rather odd that the there's a prohibition against making secured loans to the manager but no probation against making unsecured loans no your honor the manager or s p c c so that's not entirely sure you are just stepping back to the legal requirements here that would be you know missions claim assuming feather's didn't disclose the existence of the advances to cover the management expenses there would be no missions claim that c c would have to identify some duty to disclose the fact that these loans existed and the only possible due to the f c c cited here is one that arises from the need to clarify and other otherwise misleading statement so yes he has to tie  this particular omission to a misleading statement hasn't done that yet the causes it comes as no loans to manager provision president's claim that no loans to manage bridges doesn't say no loans whatsoever may be made to the manager that apply specifically to the mortgage loans  which the funds would invest and from which they make money and so given that and certainly at the very least it can't be said that as a matter of law feathers understood who do you think the reasonable investor would see the offering document action to correct and clarify the statements so in the initial documents that are issue here before the notes received or ever created all it said was no loans to manage or that was the only provision here that might even possibly bear on this issue after the notes receivable were created there's an issue action to secure approval from the investors and he sent them a letter requesting approval of an amendment to the operating agreement and operating agreement that you have offered documents was amended and feathers made a material misleading statement and he knew at the time he made that misstatement that it was with mislead jurors so every time feathers a surprise there might be some risk that investors were misled he took  steps to clarify it and so when he next made statements he didn't say anything that could have misled jurors and as he hasn't hasn't suggested that the offering documents once amended didn't actually authorize the notes receivable and so feather's couldn't have had scien the one kind of loan which is allowed to maybe a to the manager mortgage no what is right is is with respect to foreclosures these loans were not made with respect to foreclosures again you because all these provisions including that particular provision are citing apply only to the mortgage loans in which the funds were invested that's clear again in context the heading is general standard cyclical to mortgage loans and all of the provisions make sense only in the context of mortgage loan didn't the document tell investors that the purpose of the funds was to invest in mortgage loans it said that the funds that with their money there were there wasn't going to be the no representations of investors that the funds would be  the funds so the way it's actually occurred was that he paid certain marketing and syndication expenses they're called in order to this was for these religion expenses they were for the funds and what happened was the auditor marketing expenses already existing investors and his future investors and so that was the purpose of these expenses and once those were incurred the auditor changed his accounting treatment midstream and said those can't be treated as catalyze expenses they have to be treated as operating expenses which means they they have to be subtracted immediately from the balance sheet that was sort of the accounting creation that caused the notes receivable to be created so i think and i think this timeline is critical once that occurred once fathers recognize that the receivable would be created and there was this as you call that a loan reflected on the firm's balance sheet he reached out to investors and he sought approval for an amendment to the offering documents that would allow for the creation of this note receivable and so that's it that two ninety nine there's also other versions that letter and your three thirty four s you are one forty six but there's reached out to the investors and you sought approval and then before he made any other statements again this is a scary prosecutor for he made any other statements those amendments were contained in the offering documents so at no time he made any statements respecting the possibility of any loans s p c c the managing company could be said as a matter of law to know that those were twelve e mail says oh see clearly outlines the manners note approval the dollar amounts etc so feathers believe that this was permitted at the very least that evidence is enough to create a materialist view the fact is the science or you want to address  honor we'd also the second set of misstatements that the s e c is attacked is purported representation that all distributions would be would be paid out of the funds profits but if again if you look carefully the offering documents fathers never made any such misrepresentation he simply said that member returns as a defined term member returns would be paid that members were entitled to a certain percentage of on profits roughly speaking seven point five percent and that was the member return fund investors would get that if there were sufficient profits but nowhere did feather say that that would be the only source of member distributions and to the contrary at year one forty nine this is again the i p f offering document that is represented to the extent cash distributions exceed the current accumulated earnings and profits of the fund they will constitute a return of capital so it was expressly recognized in the offering documents that the cash distributions could exceed the funds profit and so if it feathers made that representation you cannot have made the mistake messy claims you made and certainly again at the at the summary judgment stage where scienter is a required element of the case he cannot be said to have knowingly made a misstatement as a broker again and i think the plain text of the relevant statues supports this the broker is a third party intermediary between the buyer in the seller that's what the definition is getting at and says it has to be someone who's engaged in the business of selling securities for the account of others those wasn't doing that he wasn't acting as a third party intermediary he was selling the securities of the funds that he himself managed and controlled and there's no precedent nothing suggesting that that sort of individual acts as a broker and regardless even setting that aside this is perhaps an even more simple basis for reversal that there is did not engage in any interstate transactions there's an express exception in the registration requirement for intrastate business and feathers didn't sell these securities outside of california there's nothing in the record assessed suggests otherwise as you say it's only to a straight e mail which by there's mention that some want to talk to someone in taiwan there's no evidence of any sale whatsoever not alone is enough to defeat  wasn't loaning it to himself it was a business expense to help the mortgage business yes that's right i mean so that is not a response on the merits he never made in any misrepresentations regarding the loan but as a matter of fact it's true he was not taking these were not his personal profits he was spending these monies for the funds it was it was largely based on it was marketing costs to raise more capital in order to invest in more mortgage loans and also licensing costs associated with getting a preferred status may please the court benjamin better for the securities and exchange commission i think i'd like to start with a quick clarification we actually have two separate funds here and two different sets of offering documents we have offering circulars from one of the funds and private placement memorandums from the other fund now there's been some discussion of attempts to obtain approvals for changes to these offering documents there never was any changes to one set of offering documents the documents for the s p f fund were never amended were never changed they have the same representation of the loans to manager throughout the period at issue here and the documents for the i p f fund were in fact amended we don't dispute that we disagree that these this attempt to obtain an amendment and the amendment itself discloses the existence of these loans discloses the amount of the loans or even adequately disclosed to investors what these loans were supposed to be about and what they were doing so there is i think like a disagreement there about what the facts of the record indicate the facts are undisputed with respect to the amendment and i think that's an important thing to remember is that there is a second set of documents that was never meant it so the approvals itself even if you were to give mr feathers the benefit of the argument don't get him off the hook on the misleading statements as to the s p f as to the s p f funk yes and i don't want to be clear we don't agree at all that the amendments to the i p f document adequately disclose these things and you know or just close to investors that the loans existed in the amount of them which would be the necessary disclosures to get approval and his accountant pointed this out to him in an e mail when he said i don't think getting approval after the fact is actually good enough and the text of the letters themselves which are in the record are very clear that they don't disclose that the loans already existed or the amount of the already existing loans and having said that i think i'm going to start probably in reverse order where mr siegel left off on the broker charge you mr feathers is not an issue or the statute defines issue as one who issue securities and i think it's undisputed here that the only issue here is that to the extent that there is in fact an exemption for issuers that issuers aren't brokers i shouldn't say exemption apologize for the use of that word the issuers aren't brokers he is not an issue or as we pointed out o the funds he controls i mean i suppose i don't know that we made that argument below your honor and i guess what i'm what i'm not ready to concede is that the relationship he has with s p c c would somehow make him an employee of the funds for the purposes of the broker analysis what is how do you correct characterize his relationship with the two funds i mentioned what he controlled the funds as a sort of factual matter and he  control the sale of a factual matter does it well an issue or like an issue where would as a factual matter if they're acting as an issue and handing out their own shares what i suppose you could say control the sales so in the sense that if apple decides to give away ten free shares of stock to each one of its employers in that sense it's acting as an issue and not a broker that's not what happened here at all mr feathers used s b c c and as species employees to go out and sell these investments to investors that's classic broker activity and from what i can tell he doesn't actually dispute that part of the district court's analysis what he's disputing or what he's claiming is that he's not a broker as the statute defines it because he's an issue work something else the statute define but he's not and if you look at the statutory definition of issuer he's clearly not issue as one who issues now his secondary argument is that he didn't violate section fifteen's broker registration requirements because his business was exclusively interstate well that's effectively an exemption from the registration requirement and it's longstanding law that if you're claiming an exemption from a registration requirement it's your burden to plead and prove it at that point now he's pointed to this issue of a lack of interstate transactions as the failure of evidence on the commission's part that's not really the what's going on here that's not actually the right way to read the statute when you read section fifteen it says that basically every broker except for those who fall in this thing who uses instrumentality of instrument interstate commerce to attempt to induce so the statute doesn't require completed sales to attempt to induce transactions has broaden the reach of the registration provision so even if he's right that there was some sort of pleading to the fact we've identified evidence in the record that gets us past that hurdle of i then becomes his burden to pleading prove the exception which he hasn't done here he did not plead it billowed by the way your honor this was forfeited simply pointing to exemptions from the thirty three x registration requirement isn't the same thing as claiming an exemption from the brokerage astra it was baiting to get a question your honor on the question of discords meant since that did come up very briefly as i understand his argument he did not personally receive the money it did not go into his own pocket so therefore he should not be ordered to discourse it that's not consistent with longstanding law here it's undisputed that he controlled s p c is also undisputed that he caused the funds to convey the money or to send the money to s b c these are undisputed facts now the reason there is a one one explanation as to why there is no joint and several order of discourse from it here is that the funds were in receivership so to order join several disgorgement wouldn't have made a lot of sense in the factual context of what judge the below was dealing with there the funds already were in receivership their finances were under control and being carefully examined so you know how would you jointly and severally order the defendant mr feathers to discords with funds that he no longer has control over that's an explanation but i think the principle articulated in those cases that one is presumed to have obtained the benefit of the funds when they go to an organization or entities that are essentially him still applies here and it again it is undisputed that he controlled s b c see that he and his wife were the only signatories on these accounts so the money essentially went to him and the discourse in order as proper as to his factual suggestion that this seven million dollars somehow included money that was paid back to investors i just don't think the record supports that at all for the reasons we explained in our brief  tied together in a way his argument on both counts depends on his conclusion that the offering documents on their face don't prohibit loans to the fund manager and i'd like to point out that he has no evidence he doesn't cite any evidence in the record that anyone be anybody but him reads these documents this way his accountant didn't read the no laws to manage a provision that way his lawyer didn't read the loans to manage your provision in the whole in context and understood as a reasonable investor would read them and for the reasons explained in our brief i think that the reasonable reading of those documents is that there would be no loans to the fund manager now  opposed position there would be no mortgage loans for the fund manager but there was no representation there wouldn't be any unsecured loans to the fund well that's also true that's that's the second aspect of the misstatements that we're getting at it's actually no loans and then no unsecured loans so there's representation a subtle way that you're learning from read the offering document he says the only representation is no mortgage you want to know and i understand that i understand that's his proposed reading and i understand where he gets that he's looking at the headings of the document but if you look at the text of the documents as a whole it talks about standards applicable to all fund loans it talks about certain lending guidelines and a reasonable investor reading these as a whole knowing what they were investing in wouldn't think when they handed over their hard earned money this money will be used for anything but making well secured mortgage loans that's clearly the impression and the intention of these documents and saying now that oh well because there's the word mortgage in a heading here investors wouldn't necessarily think that i can't make unsecured loans to myself i just think is not plausible and the fact that this really isn't a plausible reading of the offering documents undermines much of his scienter argument we don't dispute that the case law on this circuit has some discussion of a subjectivity element to recklessness as a basis for however your belief has to be objectively rim has to be reasonable it can't be just an assertion that this is what this means there has to be some reasonable basis to think that that is subjectively reasonable to believe if i may  to be some basis for it though other than your own say so in other words to walk in and say i believe that this is how the documents should be read ok well what evidence is there that that is how the documents should be read and what evidence is there to support that that was the reasonable belief you howled and here his auditor already told him that that wasn't how the documents should be read again he's the only person reading the documents these ways this way so i just you know as far as his scienter argument goes that the issue of subjective belief really is addressed mostly to the no loans to manager and the security lack of security for the loans he has the separate issue of the profits making distributions in excess of the profits and there he really has no basis for concluding that he didn't have slant or because his own people were telling him he was making distributions in excess of the profits and i apologize your honor i'm now eating into the receiver's time i would like for the court to be able asking the questions from go both of the receiver ok thank you  five appeals that are still active each of these appeals arises out of an order concerning the administration of the receivership the state in each case the appeals were preceded by a motion before judge dalla and extensive briefing in each of those cases judged throughout this case bend over backwards to attempt to provide mr feathers arguments he would bring in investors and throughout this period i think he was provided every opportunity to present all of the evidence he had i mention this because in reviewing these appeals the standard we're looking at here whether or not judged abused his discretion and entering the orders concerning the administration of the estate in doing so we're talking about orders concerning the sale of the loan portfolios the claims that were submitted by mr feathers and mrs feathers and other claimants in this case along with the receivers plan for distribution and i would submit that in each of these cases judge data certainly did not abuse discretion to the contrary he challenge the receiver every step to go back and attempt to respond to arguments even where there was not any evidence to support the allegations that were being submitted questions thank you very much thanks siegel you want to use three minutes for your rebuttal your honor i'm so i'd like to turn just to the science or issue because i think that's really the key here so this court in platform allow for this but again the f c c is burden was to show that it is scienter it could be resolved as a matter of law and that couldn't be done when there is no contemporaneous evidence that feather's was told that his they miss were misleading before he made them when feather some self said in emails that he didn't understand the documents to be read that way when as the f c c has acknowledged eight they understand even if they deem our reading of the documents unreasonable i would submit that it's fully reasonable they understand where it comes from because of the headings in these offering documents it's a general standard to put all the mortgage loans as he said that that we have nothing to show that there's no signs or in profits it's because the f c c is not properly applying the science or standard here it's not just that he knew the the funds were were issuing distributions in excess of profits they have to prove as a matter of law that he knew the his statements in offering documents regarding the distribution of of member returns were misleading there's absolutely no evidence the record to suggest that fathers understood himself to be representing the distributions could come only from fund profits in fact he told investors in the offering documents that they would not necessarily come from profits and that they could in some circumstances exceed those fun profits and the return capital exactly  n he when he distributed in excess of profits and he was distributed in return of capital did he advise the investors of that fact so that they would not have to pay taxes on return panel hearings from now on she will be taking part in motions and other matters of the court and i'd like to mark the fact that there's no one has been a wise and warm member of court but as a leader in the western justice center which forwards her goals of mediation and arbitration in the building next to our courthouse in pasadena and she came to the and then she went from being a fervent broom to a fervent trojan and she was the first woman who was ever the dean of a major law school in the united states for which she was it's been my honor to serve the court and as a former professor i look out and see students there listening to this case today i wonder if i would decided to become a lawyer are in the audience will say to talk to you while we could for but be sure to ask them any questions about why they're setting laws and what they intend