Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_12-cv-02164/USCOURTS-casd-3_12-cv-02164-20/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:0077 Securities Fraud

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

SECURITIES AND EXCHANGE

COMMISSION,

Plaintiff,

CASE NO. 3:12-cv-2164-GPC-JMA

ORDER DENYING THE SEC’S

MOTION FOR PARTIAL

SUMMARY JUDGMENT ON ITS

FOURTH CLAIM FOR RELIEF

[ECF No. 685]

v.

LOUIS V. SCHOOLER and FIRST

FINANCIAL PLANNING

CORPORATION, dba Western

Financial Planning Corporation,

Defendants.

I. INTRODUCTION

Before the Court is Plaintiff Securities and Exchange Commission’s (the “SEC”)

Motion for Partial Summary Judgment on its Fourth Claim for Relief. (ECF No. 685.)

Defendants Louis V. Schooler (“Schooler”) and First Financial Planning Corporation

d/b/aWesternFinancial Planning Corporation (“Western”) (collectively, “Defendants”)

oppose. (ECF No. 980.)

The parties have fully briefed the motion. (ECF Nos. 685, 980, 1019.) The Court

findsthe motion suitable for disposition without oral argument pursuant to Civil Local

Rule 7.1(d)(1). Upon review ofthe moving papers, admissible evidence, and applicable

law, the Court DENIES the SEC’s motion for partial summary judgment.

/ /

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II. BACKGROUND

This is an enforcement action brought by the SEC. (See ECF No. 1.) The SEC

alleges that Defendants defrauded investors in the sale of general partnership (“GP”)

units which were, as a matter of law, unregistered securities. (Id.) On September 4,

2012, the SEC filed its complaint. (Id.) On October 22, 2012, this case was transferred

to the Honorable Gonzalo P. Curiel. (ECF No. 52.) On July 15, 2013, Defendants filed

an answer to the SEC’s complaint. (ECF No. 255.) On March 28, 2014, the SEC filed

a motion for partial summary judgment with regards to whether the GP units were

securities. (ECF No. 563.) On April 25, 2014, the Court granted the SEC’s motion for

partial summary judgment and found that the GP units at issue in this case were, as a

matter of law, securities (the “Securities Order”). (ECF No. 583.) The facts of this case

are set forth in detail in the Securities Order. (Id. at 1–11.)

On September 9, 2014, the SEC filed the present motion for partial summary

judgment on its fourth claim for relief. (ECF No. 685.) On February 13, 2015,

Defendants filed an opposition to the SEC’s motion. (ECF No. 980.) On March 6,

2015, the SEC filed a response to Defendants’ opposition. (ECF Nos. 1011, 1019.) The

SEC moves for summary judgment on its fourth claim for relief: that Defendants

violated Sections 5(a) and 5(c) of the Securities Act of 1933, 15 U.S.C. §§ 77e(a),

77e(c). (ECF No. 1 ¶¶ 79–82; ECF No. 685.) The SEC further movesfor disgorgement

pursuant to its Section 5 cause of action. (ECF No. 685-1, at 1.)

IV. LEGAL STANDARD

A. Summary Judgment

Federal Rule of Civil Procedure 56 empowers the Court to enter summary

judgment on factually unsupported claims or defenses, and thereby “secure the just,

speedy and inexpensive determination of every action.” Celotex Corp. v. Catrett, 477

U.S. 317, 325, 327 (1986); FED.R.CIV. P. 56. Summary judgment is appropriate if the

“pleadings, depositions, answers to interrogatories, and admissions on file, together

with the affidavits, if any, show that there is no genuine issue as to any material fact

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and that the moving party is entitled to judgment as a matter of law.” FED. R. CIV. P.

56(c). A fact is material when it affects the outcome of the case. Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 248 (1986).

The moving party bears the initial burden of demonstrating the absence of any

genuine issues of material fact. Celotex, 477 U.S. at 323. The moving party can satisfy

this burden by demonstrating that the nonmoving party failed to make a showing

sufficient to establish an element of his or her claim on which that party will bear the

burden of proof at trial. Id. at 322–23. If the moving party fails to bear the initial

burden, summary judgment must be denied and the Court need not consider the

nonmoving party’s evidence. Adickes v. S.H. Kress & Co., 398 U.S. 144, 159–60

(1970).

Once the moving party has satisfied this burden, the nonmoving party cannot rest

on the mere allegations or denials of his pleading, but must “go beyond the pleadings

and by her own affidavits, or by the ‘depositions, answers to interrogatories, and

admissions on file’ designate ‘specific facts showing that there is a genuine issue for

trial.’” Celotex, 477 U.S. at 324 (citing FED. R. CIV. P. 56 (1963)). If the non-moving

party fails to make a sufficient showing of an element of its case, the moving party is

entitled to judgment as a matter of law. Id. at 325. “Where the record taken as a whole

could not lead a rational trier of fact to find for the nonmoving party, there is no

‘genuine issue for trial.’” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S.

574, 587 (1986) (citing FED. R. CIV. P. 56 (1963)). In making this determination, the

Court must “view [] the evidence in the light most favorable to the nonmoving party.”

Fontana v. Haskin, 262 F.3d 871, 876 (9th Cir. 2001). The Court does not engage in

credibility determinations, weighing of evidence, or drawing of legitimate inferences

from the facts; these functions are for the trier of fact. Anderson, 477 U.S. at 255.

In an SEC enforcement action, once the SEC has made out a prima facie case of

the sale of unregistered securities, it is the defendant’s burden to raise an exemption as

a defense. See Sec. and Exch. Comm’n v. Murphy, 626 F.2d 633, 641 (9th Cir. 1980)

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(citations omitted). Though it would be the defendant’s burden at trial to prove that it

satisfied the requirements of the exemption, when the SEC is moving for summary

judgment, the SEC carries the burden of proving that the exemption does not apply. Id.

1

B. Disgorgement

When moving for disgorgement, the SEC bears “the ultimate burden of

persuasion that its disgorgement figure” is “a reasonable approximation of profits

causally connected to the violation.” Sec. and Exch. Comm’n v. First Pac. Bancorp,

142 F.3d 1186, 1192 n.6 (9th Cir. 1998) (quoting Sec. and Exch. Comm’n v. First

Jersey Sec., Inc., 101 F.3d 1450, 1475 (2d Cir. 1996)); Sec. and Exch. Comm’n v. First

City Fin. Corp., Ltd., 890 F.2d 1215, 1232 (D.C.C. 1989). Once the SEC has met this

burden, the burden shifts to the defendant to “demonstrate that the disgorgement figure

was not a reasonable approximation.” First City, 890 F.2d at 1232.

V. DISCUSSION

A. Sale of Unregistered Securities

There are three elements to a prima facie case of a Section 5 violation: (1) the

offer orsale, (2) of an unregistered security, (3) through interstate commerce. 15 U.S.C.

§§ 77e(a), 77e(c). Regulation D providesfour exemptionsto Section 5: Rule 504, Rule

505, Rule 506(b), and Rule 506(c). 17 C.F.R. §§ 230.504, 230.505, 203.506(b),

203.506(c). This Court, in the Securities Order, has already determined that the GP

units at issue in this case were securities in the form of investment contracts. (ECF No.

583.)

Defendants do not appear to dispute that the SEC has made out a prima facie

case of the sale of unregistered securities under Section 5, instead they argue that there

The Court notes that some post-Murphy Ninth Circuit cases have implied that 1

on an SEC motion for summary judgment, the defendant bears the burden on any

registration exemption defenses. See, e.g., Sec. and Exch. Comm’n v. Platforms

Wireless Intern. Corp., 617 F.3d 1072, 1083, 1086 (9th Cir. 2010) (stating that “the

defendant . . . has the burden of proof in showing entitlement to an exemption” in

ruling on an appeal from an SEC motion for summary judgment on a Section 5 cause

of action) (quoting Murphy, 626 F.2d at 641). However, there is no indication that

Murphy has been overruled and thus the Court will apply Murphy’s standard in this

case.

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is a dispute of material fact as to whether those sales qualify for the private offering

exemption under Rule 506(b). (See ECF No. 980, at 6.) Defendants have admitted that

the GP units were not registered with the SEC. (ECF No. 255 ¶ 81.) Defendants also

do not dispute the SEC’s evidence that the GP units were offered or sold through

interstate commerce, including mail and email. (See, e.g., ECF No. 8 ¶ 11; ECF No. 4-

25.) Accordingly, the Court finds that the SEC has made out a prima facie Section 5

violation. The Court now addresses whether an exemption applies.

B. Rule 506(b)

Though the SEC argues that Defendants cannot meet the requirements of any of

the exemptions, (ECF No. 685-1, at 11–12), Defendants only contend that there is a

dispute of material fact asto whether their sales of GP units qualifies for an exemption

under Rule 506(b), (ECF No. 980, at 6), and do not raise any of the other exemptions

in either their answer or opposition. (See ECF Nos. 255, 980.) To qualify for an

exemption under Rule 506(b), an offering must meet the general conditions set forth

in 17 C.F.R. §§ 230.501–.502, including providing information to purchasers and

refraining from general solicitation or advertising, see 17 C.F.R. §§ 230.502(b)–(c),

230.506(b)(1), and two specific conditions: (1) there must be, or the issuer must

reasonably believe there are, fewerthan 35 non-accredited investors ofsecurities in the

offering, and (2) each non-accredited investor must have, or the issuer reasonably

believes he or she has, “such knowledge and experience in financial and business

matters that he [or she] is capable of evaluating the merits and risks of the prospective

investment,” 17 C.F.R. § 230.506(b)(2); see also 17 C.F.R. § 230.501(e)(1)(iv)

(excluding “accredited investor[s]” when calculating the number of “purchaser[s]”).

1. Integration

The first issue under Rule 506(b) is to determine the number of offerings.

Defendants argue that each GP was a separate offering. (ECF No. 980, at 7.) The SEC

argues that either there was one continuous offering or there were approximately 23

offerings, one for each property. (ECF No. 1019, at 6.) 17 C.F.R. § 230.502(a) sets

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forth the five factors that apply to whether sales are integrated:

(a) Whether the sales are part of a single plan of financing;

(b) Whether the sales involve issuance of the same class of securities;

(c) Whether the sales have been made at or about the same time;

(d) Whether the same type of consideration is being received; and

(e) Whether the sales are made for the same general purpose.

17 C.F.R. § 230.502(a) Note; Securities Act Release No. 4552 (Nov. 6, 1962), 27 Fed.

Reg. 11316; see Murphy, 626 F.2d at 645 (“These factors guide our evaluation.”)

(citations omitted).

Murphy provides a useful analogue to this case. In Murphy, the defendant

company, Intertie, created approximately 30 limited partnerships over the course of

several years. 626 F.2d at 637. “Intertie would buy a cable television system, making

a cash down payment and financing the remainder, and then sell it to a partnership for

a cash down payment and non-recourse promissory notes in favor of Intertie and lease

it back from the partnership.” Id. Intertie raised approximately “$7.5 million from 400

investors.” Id. The Ninth Circuit found that “[a]ll but the third factor militate in favor

of finding integration” because, though “[t]he separation in time from one system

offering to the next suggests that the offerings were not integrated, . . . that factor is

heavily outweighed by the remaining considerations.” Id. at 646. First, “the offerings

were all made for the same general purpose” and part of a single financing plan to

finance Intertie’s operations. Id. Second, the securities were all of the same class

because they were all limited partnership interests. Id. Third, “the consideration for all

partnership shares wasthe same, cash and notes secured by the particular cable systems

purchased.” Id. Based on this, the Ninth Circuit concluded that “the trial court on

summary judgment was bound to conclude that the offerings were integrated.” Id.

Like Intertie in Murphy, Western would buy undeveloped real estate through a

combination of cash and selling financing. (ECF No. 182, at 5.) Western would

similarly go on to form one or more GPs, sell GP units to investors, and then sell the

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undeveloped real estate to the GP or GPs. (Id. at 2–5) Through thisinvestment scheme,

Western raised approximately $153 million fromapproximately 3,400 investors. (ECF

No. 27, at 6; ECF No. 203, at 8.)

Just asin Murphy, all but the third factor strongly support finding that there was

a single offering in this case. The sales of GP units were part of a single plan to finance

Western’s operations. (See ECF No. 182, at 7 (“Approximately 93% of the actual cash

collect by the GPs was transferred to Western.”).) The sales of GP units were of the

same class because they were all general partnership interests for GPs that owned the

same type of property, undeveloped real estate. (ECF No. 980-2 ¶ 8 (“the GPs were

established for the sole purpose of owning raw land in fractional interests for eventual

resale to developers.”); ECF No. 14-1, Ex. 1 (sample partnership agreement).) All

investors bought GP units using the same type of consideration: cash and notes. (ECF

No. 182, at 6.) The sales of GP units were all made for the same purpose: financing

Western’s operations through creating GPs to buy and hold undeveloped real estate.

(ECF No. 980-2 ¶ 8); cf. Donohoe v. Consolidated Operating & Prod. Corp., 982 F.2d

1130, 1140 (7th Cir. 1992) (“The term ‘same general purpose’ suggests a level of

generality to the integration analysis that may be satisfied by the observation that the

purpose of each partnership was to drill for oil.”) (citation omitted).

With regards to the third factor, the operative time period is the “separation in

time from one [GP] offering to the next.” Murphy, 626 F.2d at 646. Although the GPs

were formed over the course of 31 years, a GP wasformed in 26 of the 31 years and the

longest gap between GP formations was between 1982 and 1987; no other gap was

larger than approximately two years. (ECF No. 203, at 3–8. ) Courts have found that 2

separate sales made over the course of a number of years can be integrated. See, e.g.,

Murphy, 626 F.2d at 645–46, Sec. and Exch. Comm’n v. Alt. Energy Holdings, Inc., No.

1:10-cv-0621-EJL-REB, 2014 WL 2515710, at *7 (D. Id. May 13, 2014), Moreover,

At least one GP was formed in each of the following years: 1981, 1982, 1987,

2

1988, 1989, 1990, 1991, 1992, 1993, 1994, 1996, 1997, 1998, 1999, 2000, 2001, 2003,

2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011, and 2012. (ECF No. 203, at 3–8.)

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the sale of GP units for a given GP would often last a year or more, (see, e.g., ECF No.

1 ¶ 51; ECF No. 255 ¶ 50), meaning that, in many instances, the time between sales

was smaller than the GP formation date indicates. In Murphy, 30 limited partnerships

were formed to purchase 30 different cable television systems yet this was considered

a single offering. 626 F.2d at 637, 646. Similarly, though Western sold 23 different

properties, and created approximately 86 GPs, the Court finds that the “time factor is

heavily outweighed by the remaining factors” and thus the 17 C.F.R. § 230.502(a)

factors, as a whole, warrant considering Western’s sales of GP units for all the GPs to

be a single, integrated offering. Currie v. Cayman Res. Corp., 595 F. Supp. 1364, 1377

(N.D. Ga. 1984).

2. Conditions

The SEC argues that Western’s sales of GP units do not satisfy Rule 506(b)’s

conditionsfor three reasons:(1) Western failed to provide required information to nonaccredited investors, (2) Western engaged in general solicitation, and (3) Western

exceeded the limit on purchasers. (ECF No. 1019, at 7–16.)

a. Purchaser Limit

Rule 506(b) requires that there be no more than 35 purchasers, excluding

accredited investors, in the offering. 17 C.F.R. §§ 230.501(e)(1)(iv), 230.506(b)(2).

Included within the definition of “accredited investor” is “[a]ny natural person whose

individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000.”

Id. § 230.501(a)(5). The SEC argues that, because there were “3,400 investors in the

defendants’ single, integrated offering of GP securities,” “the registration exemption

cannot be invoked.” (ECF No. 1019, at 16.) However, the SEC has failed to carry its

burden to show that more than 35 of the 3,400 investors count against Rule 506(b)’s

purchaser limit. The SEC provides no evidence relating to the net worth of any of the

investors. Accordingly, the Court finds that there is a dispute of material fact as to

whether there were more than 35 purchasers in the single integrated offering of GP

units.

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b. Information Requirement

Rule 506(b) further requires that an issuer must provide certain kinds of

information to any non-accredited investor purchaser. 17 C.F.R. § 230.502(b). The

SEC argues that, because Schooler stated that “Western did not provide any financial

statements to prospective investors,” “it is undisputed that the [information

requirement] has not been met.” (ECF No. 1019, at 8 (quoting ECF No. 980-2 ¶ 8).)

Again, the SEC has failed to carry its burden because the information requirement does

not apply to accredited investors and the SEC has not provided any evidence relating

to the net worth of any of the investors. Accordingly, the Court finds that there is a

dispute of material fact as to whether Defendants complied with the information

requirement.

c. General Solicitation

Rule 506(b) also prohibits an issuer or “any person acting on its behalf” from

selling or offering to sell securities “by any form of general solicitation or general

advertising.” 17 C.F.R. § 230.502(c). The SEC cites eleven sources of evidence to

support its contention that Western engaged in generalsolicitation or advertising of GP

units, primarily relying upon Schooler’s statements with regards to cold calls. (ECF No.

685-2, at 1; ECF No. 1019, at 9–15.)

Contrary to the SEC’s arguments, the evidence it cites does not necessarily

indicate that GP units were generally solicited or advertised by Western. First, Rule

506(b) prohibits offering or selling securities through general solicitation or

advertising, but does not prohibit obtaining clients through such methods. See 17

C.F.R. § 230.502(c). Indeed, the SEC has issued a no action letter recognizing that

offers to clients obtained through general solicitation do not constitute general

solicitation so long as “sufficient time” passes “between establishment of the

relationship and [the] offer.” Sec. and Exch. Comm’n v. Credit First Fund LP, No. 05-

cv-8741-DSF-PJWx, 2006 WL 4729240, at *12 (C.D. Cal. Feb. 13, 2006) (quoting E.F.

Hutton & Co., No-Action Letter, 1985 SEC No-Act. LEXIS 2917 (Dec. 3, 1985)).

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Second, the SEC has failed to cite any case which interprets the phrase “any person

acting on its behalf.” 17 C.F.R. § 230.502(c). Instead the SEC merely argues that the

sales agents being compensated by Western for the sale of GP units qualifies, without

providing any reason why such compensation satisfies the “acting on its behalf”

standard. Third, an unknown number of cold calls or mailings to a geographic area of

unknown size may not necessarily qualify as generalsolicitation or advertising.Cf. Sec.

and Exch. Comm’n v. Tecumseh Holdings Corp., No. 03-cv-5490-SAS, 2009 WL

4975263, at *4 (S.D.N.Y. Dec. 22, 2009) (noting that a “nationwide cold-calling

campaign has many of the same characteristics as the examples listed in 502(c)”

because of three factors: “(1) it has the potential to reach a large number of people; (2)

it has the potential to reach people throughout a large geographic area; and, perhaps

most importantly, (3) it generally targets people with whom the issuer does not have

a prior relationship and who are unlikely to have any special knowledge about the

offered security”) (emphasis added). With these three issues in mind, the Court now

turns to the evidence proffered by the SEC.

i. Cold Calls

First, the SEC relies heavily on several pieces of evidence that reference cold

calls and call lists, including: (1) statements from Schooler’s May 3, 2012, deposition,

(ECF No. 4-1, Ex. 1, at 159:9–15); (2) statements from Schooler’s February 27, 2015,

deposition. (ECF No. 1013, Ex. 3, at 72–73); and (3) Schooler’s statements in

requesting advice fromhis counsel prior to thislitigation, (ECF No. 980-3, Ex. 1, at 48,

58). Yet, in the referenced statements, Schooler does not say that Western offered or

sold GP units through cold calls or lead lists, rather he says that Western obtained

clientsthrough such methods. As the SEC’s E.F. Hutton & Co. No-Action Letter makes

clear, obtaining clients through general solicitation or advertising and then offering

those clients securities does not necessarily violate Rule 506(b)’s general solicitation

and advertising prohibition. 1985 SEC No-Act. LEXIS 2917. Schooler’s comments,

without more, are insufficient to carry the SEC’s burden on summary judgment as it is

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possible that Western did not generally solicit or advertise the GP units even though

Western obtained clients in that way.

Additionally, Defendants contend that these cold calls should not be considered

general solicitations for two reasons: (1) Western, through its agents, instructed sales

personnel not to cold call, and (2) any cold calls were “done by persons in their

capacity as agents of WFP Securities, Inc., which is an entity legally separate from

Western.” (ECF No. 980, at 7–10.) The SEC argues that these sales personnel were

“acting on [Western’s] behalf.” (ECF No. 1019, at 13.) As the Court has noted above,

the SEC has failed to carry its burden to show that the people making cold calls were 

acting on behalf of Western. That said, Defendants’ argument regarding Western’s

instructions is unavailing for two reasons. One, merely because Western instructed its

sales personnel not to cold call does not necessarily mean that they were not acting on

Western’s behalf. And two, even if that were sufficient, instructions given after

previous cold calling, (see, e.g., ECF No. 980-15, Ex. 5, at 62–66), would not remedy

those prior cold calls when all of the GPs are considered a single, integrated offering.

ii. Counsel Admissions

Second, the SEC relies on Defendants’ response to the SEC’s statement of facts

in support of the SEC’s March 28, 2014, Motion for Partial Summary Judgment, (ECF

No. 563). (ECF No. 571-1, at 4.) The SEC’s statement of facts stated that “Schooler

then conducted an offering of GP interests to the general public.” (ECF No. 563-2, at

2.) At the time, Defendants’ responded that this was “[u]ndisputed, but immaterial and

irrelevant.” (ECF No. 571-1, at 4.) However, Defendants dispute this fact now. (See

980-1, at 1. ) It is within a district court’s discretion whether to treat representations by

counsel as judicial admissions. Am. Title Ins. Co. v. Lacelaw Corp., 862 F.2d 224,

226–27 (9th Cir. 1988) (“We . . . hold that statements of fact contained in a brief may

be considered admissions of the party in the discretion of the district court.”).

As an initial matter, the language from the SEC’s statement of facts relies on the

same statements from Schooler’s May 3, 2012, deposition, (ECF No. 4-1, Ex. 1, at

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159:9–15), that the Court has already noted do not necessarily show a violation of the

prohibition on generalsolicitation. Regulation D exemptionsto Section 5 were also not

at issue in the SEC’s March 28, 2014, Motion for Partial Summary Judgment, (ECF

No. 563). Most importantly, Defendants now dispute this fact. Thus, the Court

exercises its discretion and declines to consider Defendants’ response to the SEC’s

statement of facts as a judicial admission. See Am. Title Ins., 862 F.2d at 227.

The SEC relatedly relies on statementsfrom this Court’s Securities Order. (ECF

No. 583, at 3.) Though the Securities Order states that “Defendants solicited investors

throughout the country” “[w]hen offering to sell GP units,” (id.), that language appears

to have been borrowed from the SEC’s statement of facts. (See ECF No. 571-1, at 4.)

As the Court has already noted, the language from the SEC’s statement of facts

misinterprets the statements from Schooler’s May 3, 2012, deposition, (ECF No. 4-1,

Ex. 1, at 159:9–15). In any event, the Court’s language in the Securities Order with

regard to a fact that was immaterial at the time is not evidence.

iii. Preliminary Injunction Order

Third, the SEC points to statements from Judge Burns’s October 5, 2012,

Preliminary Injunction Order. (ECF No. 44, at 10–11.) This evidence does not support

the SEC’s argument for numerous reasons. First, the standard for a preliminary

injunction differs fromthe standard for summary judgment.CompareWinter v. Natural

Res. Def. Council, Inc., 555 U.S. 7, 20 (2008) with FED.R.CIV.P. 56(c). Second, Judge

Burns merely stated that Western had “purchased lead lists and made cold calls,” not

that Western had offered or sold securities through such methods. (ECF No. 44, at 10.)

Third, Judge Burns relied on the on the same statementsfrom Schooler’s May 3, 2012,

deposition, (ECF No. 4-1, Ex. 1, at 159:9–15), that the Court has already noted do not

necessarily show a violation of the prohibition on general solicitation.

iv. Mailings

Fourth, the SEC cites several pieces of evidence referencing mailings and

subsequentfollowup meetings between Western and potential investors, including:(1)

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statements from the April 24, 2012, deposition of Roger de Bock, (ECF No. 4-4, at

102:8–105:25), (2) the Declaration of Robert Centanni where Mr. Centanni states that

he met with Western, (ECF No. 552-1 ¶ 3), and (3) the Declaration of Roy Honig

where Mr. Honig states that he received a flyer from Western, met with a Western

representative Courtland Young, and then was advised to invest in GP units, (ECF No.

552-3 ¶¶ 3–4). Mr. de Bock stated that Western would send out fliers to “target ZIP

codes” advertising a “workshop to discuss Western Financial Planning and real estate

investments.” (ECF No. 4-4, at 103:16–24.) However, Mr. de Bock’s statements are

ambiguous as to whether “real estate investments” means the GP units at issue in this

case, as well as ambiguous as to the scope of the geographic area, and thus are

insufficient to carry the SEC’s burden on summary judgment. See Tecumseh, 2009 WL

4975263, at *4.

Mr. Honig’s statements are similarly insufficient. (See ECF No. 552-3 ¶¶ 3–4.)

While it does appear that an insufficient amount of time may have passed between the

receipt of the flyer and the offer to sell GP units, see 1985 SEC No-Act. LEXIS 2917,

there is no indication as to the geographic or numerical reach of the flyer that Mr.

Honig received. See Tecumseh, 2009 WL 4975263, at *4. Mr. Centanni’s declaration

is also insufficient as he states that he learned about Western from his brother and that

Mr. Centanni himself reached out to Western. (ECF No. 552-1 ¶ 3.) This is clearly not

solicitation or advertising by Western since Western is being contacted by the investor

rather than the other way around.

v. Networking Groups

Fifth, the SEC cites to evidence of networking groupsincluded within statements

from the June 27, 2012, deposition of Rhea Olson. (ECF No. 498, Ex. 8, at

25:14–27:24; ECF No. 980-15, Ex. 3, at 13:2–20:24.) Ms. Olson stated thatshe learned

about Western through a “business networking group” known as “BNI” and that one

of Western’s agents, John Naviaux, discussed with her the possibility of investing in

GP units. (ECF No. 498, Ex. 8, at 25:14–27:24) However, Ms. Olson’s statements are

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ambiguous as to how many people Mr. Naviaux actually discussed the GP units with

and what prior relationship, if any, they had with Western. (See id. (stating that “it was

a good investment for us”) (emphasis added).) Without more, this is insufficient to

carry the SEC’s burden and show that Western engaged in general advertising or

solicitation when it appears that one of Western’s agents may have merely discussed

the GP units with a few people that he appears to have had a preexisting relationship

with.

Additionally, Ms. Olson’s statements do not necessarily indicate that Western,

through Mr. Naviaux, sold or offered to sell GP units through general solicitation.

Rather, Ms. Olson states that Mr. Naviaux used his presentation “as a way to really

advocate for the company,” not to sell or offer to sell GP units. (ECF No. 980-15, Ex.

3, at 13:2–20:24 at 20:21.) Even if Mr. Naviaux did offer to sell Ms. Olson GP units,

it has not been shown that it was a general solicitation. (See id. at 13:22–23 (“the only

one he told me about was this Nevada piece of land”) (emphasis added).)

vi. Benefits Fairs

Sixth, the SEC cites evidence relating to benefits fairs included in the

Declaration of Eleonore Gorwin. (ECF No. 552-2.) Ms. Gorwin declares that she

learned about Western at “an annual benefits fair” and then engaged Western for

financial planning services which included Western’s representative, Simon Chung,

advising her to invest in GP units. (Id. ¶¶ 3–4.) However, there is no indication as to

the timing of the offer or sale of GP units to Ms. Gorwin and thus may not count as

generalsolicitation or advertising if sufficient time had passed. See 1985 SEC No-Act.

LEXIS 2917. Accordingly, Ms. Gorwin’s declaration does not carry the SEC’s burden

to show that Western engaged in general advertising or solicitation.

As none of the evidence cited by the SEC undisputedly shows that Western did

not meet the requirements of Rule 506(b), the SEC has failed to carry its burden on

summary judgment. Accordingly, the Court findsthat, on the evidence currently before

it, there is a dispute of material fact as to whether Defendants complied with Rule

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506(b)’s conditions and DENIES the SEC’s motion for partialsummary judgment with

regards to its Section 5 cause of action.

B. Prejudice

The Court is cognizant that Defendants did not raise Rule 506(b) as a defense

to the SEC’s Section 5 cause of action until Defendants’ opposition to the SEC’s

present motion. (See ECF No. 980.) Nowhere in their answer do Defendants raise any

Regulation D exemption as an affirmative defense. (See ECF No. 255.) Defendants’

Rule 506(b) argument is an affirmative defense as it does not allege that the SEC has

failed to meet any of the elements of a prima facie Section 5 violation. A defendant

may raise an affirmative defense in response to a motion for summary judgment “only

if the delay does not prejudice the plaintiff.” Magana v. Commonwealth of the N. Mar.

I., 107 F.3d 1436, 1446 (9th Cir. 1997) (citation omitted). Defendants first raised their

Rule 506(b) affirmative defense approximately five months after the SEC filed the

present motion and approximately nineteenmonths after Defendants filed their answer.

(See ECF Nos. 255, 685, 980.) The SEC filed its reply addressing Defendants’ Rule

506(b) affirmative defense less than a month after Defendants first raised the issue.

(See ECF Nos. 980, 1011.) While the Court findsit appropriate to consider Defendants

Rule 506(b) affirmative defense asthe SEC had predicted it in the SEC’s initial moving

papers, (see ECF No. 685-1, at 11–12), the Court acknowledges that the short amount

of time in which the SEC has had the opportunity to respond to Defendants’ arguments

may have led to the deficiencies in the SEC’s supporting evidence. Accordingly, the

Court finds it appropriate to deny the SEC’s motion without prejudice so that it may

have the opportunity to have sufficient time to gather evidence. The SEC may file an

amended version of the present motion, addressing the deficiencies noted by the Court,

on or before April 24, 2015.

3

/ /

This constitutes a minor amendment to the scheduling order. (See ECF No. 3

850.)

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C. Disgorgement

As the SEC’s claim for disgorgement hinges on it obtaining summary judgment

on its Section 5 cause of action, which the Court has denied, the Court also DENIES

the SEC’s motion for partial summary judgment with regards to disgorgement.

VI. CONCLUSION AND ORDER

For the reasons stated above, IT IS HEREBY ORDERED that:

1. The SEC’s Motion for Partial Summary Judgment on its Fourth Claim for

Relief, (ECF No. 685), is DENIED without prejudice; and

2. The SEC may refile its motion, addressing the deficiencies noted by the

Court, on or before April 24, 2015.

DATED: April 3, 2015

HON. GONZALO P. CURIEL

United States District Judge

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