FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

SECURITIES AND EXCHANGE 

COMMISSION,

Plaintiff-Appellee,

v. No. 06-15165

M&A WEST INC.; SCOTT L. KELLY;

D.C. No. SALVATORE CENSOPRANO; ZAHRA R.  CV-01-03376-VRW GILAK; FRANK THOMAS ECK, III,

Defendants, OPINION

and

STANLEY R. MEDLEY,

Defendant-Appellant. 

Appeal from the United States District Court

for the Northern District of California

Vaughn R. Walker, District Judge, Presiding

Argued and Submitted

November 6, 2007—San Francisco, California

Filed August 12, 2008

Before: Sidney R. Thomas, Richard C. Tallman, and

Sandra S. Ikuta, Circuit Judges.

Opinion by Judge Thomas;

Partial Concurrence and Partial Dissent by Judge Ikuta

10437
COUNSEL

Irving M. Einhorn and Patricia G. Bell, Law Offices of Irving

M. Einhorn, for the appellant. 

Brian G. Cartwright, General Counsel, Jacob H. Stillman,

Solicitor, Hope Hall Augustini, Senior Litigation Counsel,

Tracey A. Hardin, Senior Counsel, Securities and Exchange

Commission, for the appellee. 

OPINION

THOMAS, Circuit Judge: 

This case arose from the activities of M&A West, Inc.

(“M&A West”), which, as the district court aptly stated, “can

fairly be described as a sham incubator for startup companies.” The Securities and Exchange Commission (“SEC”)

brought a civil law enforcement action against defendant/

appellant Stanley Medley and five co-defendants. This appeal

concerns the charges against Medley only. Medley was

charged with violating Section 5 of the Securities Act of 1933

(“the Act”), 15 U.S.C. § 77e, for selling unregistered securities. On summary judgment, the district court held that Stanley was an underwriter under Section 2(11) of the Act, 15

U.S.C. § 77b(11), and therefore not exempt from Section 5’s

registration requirements under Section 4(1), 15 U.S.C.

§ 77(d)(1). The court also imposed remedies in the form of a

SEC v. MEDLEY 10441
five-year injunction, civil penalties, disgorgement and prejudgment interest. On appeal Medley argues, as he did before

the district court, that he acted in reliance on Rule 144(k), 17

C.F.R. § 230.144(k),1 a safe harbor under which persons are

deemed not to be underwriters as the term is used in Section

2(11). 

We conclude that the district court properly held that Medley was an underwriter, and therefore not exempt from the

registration requirements. We also conclude that the district

court did not err in ordering that Medley disgorge all profits,

with interest, he obtained from these transactions. However,

we conclude that genuine issues of material fact precluded the

entry of summary judgment as to the imposition of the civil

sanctions—specifically, the second-tier penalties and the fiveyear injunction. We therefore vacate the summary judgment

on civil sanctions and remand for an evidentiary hearing.

I

The claims against Medley arise from a series of “reverse

merger” transactions. A reverse merger is a transaction in

which a privately-held corporation acquires a publicly-traded

corporation, thereby allowing the private corporation to transform into a publicly-traded corporation without the necessity

of making an initial stock offering. Often, and in the three

reverse mergers at issue here, the public corporation is a shell

company with minimal assets and liabilities and no actual

operations. To effect the reverse merger, the shell public corporation will exchange its treasury stock for all outstanding

shares of the privately-held corporation. In consideration, the

controlling shareholders of the shell public corporation transfer a majority of their shares to the owners of the private cor1Rule 144(k) has since been repealed and replaced by Rule 144(b),

which replaced the two-year holding period of Rule 144(k) with a oneyear holding period. See Revisions to Rules 144 and 145, Exchange Act

Release No. 33-8869 (December 6, 2007). 

10442 SEC v. MEDLEY
poration. After the transaction, the newly merged public

corporation will assume the identity and name of the former

private company. Thus, the private corporation is transformed

into a publicly traded company, without going through the

complicated process of an initial stock offering. 

Since 1992, Medley has been in the business of assisting

private corporations to become publicly-traded corporations

through reverse merger transactions. Medley would identify a

suitable public shell company into which the private company

would merge, advise the private company, coordinate the

transaction with both parties, and assist with the paperwork

involved in such a transaction. 

In the transactions at issue here, Medley assisted his codefendants in arranging reverse mergers for three privatelyheld companies: M&A West and two of its subsidiaries. Medley helped to seek out public shell companies that were willing to enter into a reverse merger. Medley then prepared the

documentation for the merger and acted as a conduit for the

negotiations. 

The owners of the shell companies used in these transactions were compensated largely through the retention, and

eventual sale, of a small portion of the stock in the newlymerged entities. Medley was compensated for his work

through both a cash fee and a block of shares in the newlymerged company. Medley and the former shell owners all

entered into “lock-up” agreements allowing the immediate

sale of a small portion of their shares, with the remaining

shares becoming eligible for sale in blocks every month for

the following six months.

A

The VirtualLender Transaction

The first reverse merger involved M&A West Financial,

Inc., a wholly-owned subsidiary of M&A West. During the

SEC v. MEDLEY 10443
merger process, M&A West Financial, Inc. was known as

Virtuallender.com, Inc. (“VirtualLender”). Medley was hired

in late 1998 or early 1999 to assist with arranging a reverse

merger for VirtualLender. Medley identified Golden Chain

Marketing, Inc. (“Golden Chain”), as a suitable public shell

company for a reverse merger and prepared the documentation for the reverse merger. 

The transaction was accomplished in a “Reorganization and

Stock Purchase Agreement” on February 4, 1999. Under this

agreement, Golden Chain and/or its shareholders transferred

95% of the outstanding Golden Chain shares to VirtualLender

or its assigns, in exchange for all of the outstanding shares of

VirtualLender. Golden Chain then changed its name to VirtualLender. 

As part of Medley’s compensation, he received 100,000

shares in VirtualLender.2 Medley and the former Golden

Chain shareholders signed lock-up agreements for the shares

they retained. Medley was also paid $50,000 in cash. Within

seven months of the merger, Medley sold a portion of his VirtualLender stock to the public for a profit of approximately

$208,000. Within the next nine months, Medley sold additional shares to the public for a profit of approximately

$10,800. No registration statement was filed for these sales.

2Medley generally arranged to have such shares transferred in the names

of various entities and trusts he controlled or to Robert Bryan, whom he

identified as a friend. However, the district court found that Medley did

not know where Bryan lived, and had not seen Bryan in years. Because

Medley does not dispute that all relevant shares were transferred as compensation for his services, and for simplicity of reference, we state merely

that any such shares were transferred to Medley. 

10444 SEC v. MEDLEY
B

The M & A West Transaction

The second reverse merger involved M&A West itself and

Buffalo Capital IV, Ltd. (“Buffalo Capital”), a public shell

company. In April 1999, Medley prepared documents and

helped facilitate a reverse merger between M&A West and

Buffalo Capital. This transaction was accomplished through a

two-step structure in which two separate agreements were set

to close on the same day. 

Under the “Reorganization and Stock Purchase Agreement,” dated April 19, 1999, all of the shares of M&A West

were transferred to Buffalo Capital. In exchange, M&A West

and/or its assignees received 69% of the outstanding Buffalo

Capital stock, including both existing shares and new shares

issued from Buffalo Capital’s treasury. The agreement specified that Medley was to receive 110,000 of the existing common shares from Buffalo Capital’s shareholders “[a]t the

closing.” The agreement also provided that, on the closing

date, Buffalo Capital’s officers and directors would be

replaced by Scott L. Kelly, an officer of M&A West. Buffalo

Capital then changed its name to M&A West, Inc. 

Under the separate “Stock Purchase Agreement,” dated

April 20, 1999, Medley and the M&A West shareholders

agreed to purchase the existing shares specified in the “Reorganization and Stock Purchase Agreement” from the Buffalo

Capital shareholders for $2,983. The sale was expressly contingent on the closing of the Reorganization Agreement

between Buffalo Capital and M&A West. Both Agreements

were scheduled to close on April 26, 1999. 

Medley received 110,000 shares of stock from the officers,

directors, and shareholders of Buffalo Capital. As before,

Medley and the former Buffalo Capital shareholders signed

lock-up agreements. Medley was also paid $75,000 in cash.

SEC v. MEDLEY 10445
Within eleven months of the merger, Medley had sold shares

of this stock to the public for a profit of $547,139. No registration statement was filed.

C

The Digital Bridge Transaction

The third transaction involved the reverse merger of Digital

Bridge, Inc. (“Digital Bridge”), a privately-owned M&A West

subsidiary, into Black Stallion Management, Inc. (“Black

Stallion”), another public shell company. This merger also

utilized a two-step structure. The “Reorganization and Stock

Purchase Agreement” was dated January 21, 2000 and set to

close on January 31, 2000. This agreement provided for the

issuance of 20,000,000 new shares from Black Stallion’s corporate treasury to the Digital Bridge shareholders in exchange

for the outstanding Digital Bridge stock. The agreement also

provided for the replacement of the current Black Stallion

officers and directors with Digital Bridge shareholders by the

closing date. After the closing, Black Stallion changed its

name to Digital Bridge. 

The Reorganization Agreement contained a “condition subsequent” clause which assumed the future closing of Stock

Purchase Agreements between M&A West shareholders,

including Medley, and Black Stallion shareholders, in order to

effectuate the purchase of Black Stallion stock.3 Under the

clause, if the selling shareholders “fail[ed] to satisfy their

3The Reorganization agreement included the following language: 

CONDITION SUBSEQUENT. This closing assumes the later

closing of a STOCK PURCHASE AGREEMENT between

[Black Stallion] certain shareholders of [Black Stallion] and certain buyers of [Black Stallion’s] EXISTING SHARES. All Parties hereto agree that if the selling shareholders’s [sic] fail to

satisfy their obligations thereunder, [Digital Bridge] and [Black

Stallion] shall have the right to unwind this entire transaction

without imposition of any fee, charge or payment. 

10446 SEC v. MEDLEY
obligations” of the stock purchase agreements, Digital Bridge

and Black Stallion retained the right to unwind the Reorganization Agreement without penalty. 

The Stock Purchase Agreements, referenced in the condition subsequent clause, were dated January 31, 2000 and

scheduled to close that same day, which was also the scheduled closing date for the Reorganization Agreement. In one

agreement, Medley agreed to pay $20,000 for 160,000 previously existing shares (200,000 post-split) of Black Stallion

from Ken Kurtz.4 In an identical agreement dated the same

day, “Robert Bryan and/or assigns” agreed to purchase

another 160,000 shares (200,000 post-split) of previously

issued stock from Kurtz. Medley again entered into lock-up

agreements. Medley was also paid $50,000 in cash. 

Between February 22, 2000, and October 3, 2000, Medley

sold shares of the stock to the public for a profit of approximately $1,049,875. As with the other sales in this case, no

registration statement was filed. 

D

The SEC Complaint

On September 6, 2001, the SEC filed a complaint in the

United States District Court for the Northern District of California alleging that Medley violated Sections 5(a) and 5(c) of

the Securities Act (selling unregistered securities), and Section 15(a) of the Exchange Act (acting as a broker without

registering as a broker). On May 12, 2005, the SEC filed a

Motion for Partial Summary Judgment regarding Medley’s

liability for these violations. On June 20, 2005, the district

court granted the motion in part, finding that Medley violated

4Kurtz had been the majority shareholder of Black Stallion prior to the

issuance of new shares under the Reorganization and Stock Purchase

Agreement. 

SEC v. MEDLEY 10447
Section 5 when he sold unregistered shares of VirtualLender,

M&A West, and Digital Bridge to the public. The district

court found that Medley was an “underwriter” under Section

2(11) because he purchased stock from persons who were

controlling persons—affiliates—of the shell companies as of

the dates the transactions were agreed to. The court rejected

Medley’s argument that he qualified for the Rule 144(k) safe

harbor because the selling shareholders were no longer affiliates on the dates they delivered securities to Medley.

On October 31, 2005, the district court entered a remedies

order. The district court ordered disgorgement of

$1,990,750.445 and prejudgment interest of $657,213.85,

reflecting Medley’s proceeds from the sales of stock and cash

payments for his work on the mergers. The district court

rejected Medley’s assertion that he acted in good faith and

imposed second tier civil penalties of $55,000 for each merger

transaction. The district court found that the permanent

injunction sought by the SEC was inappropriate, but considering Medley’s scienter against the sincerity of his assurance

against future violations and recognition of the wrongful

nature of his conduct, imposed a five-year injunction. This

timely appeal followed.

II

Section 5 Charges

[1] Medley was charged with violating Section 5(a) and (c)

of the Securities Act for his role in the VirtualLender, M&A

West, and Digital Bridge mergers. Section 5(a) of the Securities Act provides that: 

Unless a registration statement is in effect as to

5The itemized profits listed earlier in this opinion are approximate figures and roughly add up to the total profit, as found by the district court.

Medley has not challenged any of these calculations. 

10448 SEC v. MEDLEY
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 interstate commerce, by any means or

instruments of transportation, any such security for

the purpose of sale or for delivery after sale. 

15 U.S.C. § 77e(a). Section 5(c) similarly prohibits unregistered offers to sell and buy unregistered securities. 15 U.S.C.

§ 77e(c). 

[2] Section 4(1) of the Act exempts “transactions by any

person other than an issuer, underwriter, or dealer” from Section 5’s registration requirement. 15 U.S.C. § 77d(1). The district court held that Medley was an “underwriter” and was

thus not entitled to the Section 4(1) exemption. Medley argues

that he is not an underwriter and accordingly his sales of

unregistered securities should fall within the Section 4(1)

exemption. 

[3] The term “underwriter” is defined in Section 2 of the

Act: 

The term “underwriter” means any person who has

purchased from an issuer with a view to, or offers or

sells for an issuer in connection with, the distribution

of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect

underwriting of any such undertaking . . . . As used

in this paragraph the term “issuer” shall include, in

SEC v. MEDLEY 10449
addition to an issuer, any person directly or indirectly controlling or controlled by the issuer, or any

person under direct or indirect common control with

the issuer. 

15 U.S.C. § 77b(11). 

To aid in the interpretation of the term “underwriter,” the

SEC promulgated Rule 144, which creates a “safe harbor” by

identifying certain conditions under which a person will be

deemed to not be a statutory “underwriter.” 17 C.F.R.

§ 230.144(b); see also SEC v. Kern, 425 F.3d 143, 148 (2d

Cir. 2005).6

In part, Rule 144(k) provides a safe harbor for the unregistered sale of restricted securities: 

sold for the account of a person who is not an affiliate of the issuer at the time of the sale and has not

been an affiliate during the preceding three months,

provided a period of at least two years has elapsed

since the later of the date the securities were

acquired from the issuer or from an affiliate of the

issuer. The two-year period shall be calculated as

described in paragraph (d) of this section. 

17 C.F.R. § 230.144(k). 

[4] In other words, Rule 144(k) permits a person who is not

an affiliate of the issuer, and has not been an affiliate during

the past three months, to sell restricted securities without

6The Rule 144 safe harbor is not the exclusive manner in which a seller

of unregistered securities can establish that he or she is eligible for the section 4(1) exemption. See 17 C.F.R. § 230.144(j) (“[Rule 144(k)] does not

eliminate or otherwise affect the availability of any exemption for resales

under the Securities Act that a person or entity may be able to rely

upon.”). Medley, however, argues only that he is entitled to the Rule 144

safe harbor. 

10450 SEC v. MEDLEY
complying with certain requirements7

 after they have held the

securities for a period of two years. An affiliate of an issuer

is defined as “a person that directly, or indirectly through one

or more intermediaries, controls, or is controlled by, or is

under common control with, such issuer.” 17 C.F.R.

§ 230.144(a)(1). 

Rule 144(k) further permits purchasers of restricted securities who acquire from non-affiliates in private transactions to

comply with the two-year holding period by adding—

“tacking”—the holding period of the prior non-affiliate holder

to their own holding period. Tacking is not permitted, however, if the purchaser acquires the securities directly from an

affiliate in a private transaction. 17 C.F.R. § 230.144(d)(1). 

Medley was not an affiliate of the issuer in any of the transactions in this case, either at the time of sale or in the three

months prior to the sales. He did not, however, hold the securities for at least two years. Thus, to be eligible for the safe

harbor of Rule 144(k), Medley must be able to tack the holding period of the prior holder. Medley can only take advantage of tacking if the persons he acquired the securities from

were not themselves affiliates of the issuer.8

[5] It is undisputed that the persons from whom Medley

purchased his shares were affiliates of the public shell corporation prior to the reverse mergers.9

 Thus, to determine

7

See 17 C.F.R. § 230.144(c) (current public information); § 230.144(e)

(limitation on amount of securities sold); § 230.144(f) (manner of sale);

§ 230.144(h) (notice of proposed sale). Medley did not comply with these

requirements and thus must satisfy Rule 144(k) to obtain Section 4(1)

exemption. 

8

It is not contested that at least two years had elapsed, in each transaction, since the persons from whom Medley acquired his stock originally

acquired the stock from the issuer or affiliate of the issuer. 

9These individuals represented in their respective reorganization agreements that they controlled no less than 75% of the shares of the shell companies. The authority to transfer ownership of the company, coupled with

their significant ownership stake, is more than sufficient to establish affiliate status. See Kern, 425 F.3d at 150. 

SEC v. MEDLEY 10451
whether Medley qualified for Section 4(1) exemption, we

must determine whether or not these persons were still affiliates at the time that Medley acquired the shares. Because in

each of the three transactions at issue in this case Medley

acquired the securities from persons who were affiliates at the

time of the transfer, we affirm the district court’s grant of

summary judgment with respect to the Section 5 violations.

A

The VirtualLender Transaction

[6] In the VirtualLender transaction involving VirtualLender’s reverse merger into the public shell Golden Chain,

Medley was compensated with shares of Golden Chain stock.10

Medley’s compensation was specified under a “Reorganization and Stock Purchase Agreement.” Unlike the other two

transactions in this case, the VirtualLender transaction

involved a single agreement, the Reorganization and Stock

Purchase Agreement. Under that agreement, dated February 4,

1999 and set to close on February 11, Medley received

100,000 shares of Golden Chain stock “at the closing.” The

Golden Chain shareholders were to have this stock ready for

delivery “on or before” the closing date. The officers and

directors of Golden Chain were also replaced “[u]pon the

closing date.” In other words, on the closing date two events

occurred effectively simultaneously: affiliates of Golden

Chain were transformed into non-affiliates, and Medley

acquired Golden Chain shares from these individuals. 

[7] We are not persuaded by Medley’s argument that we

should construe these simultaneous events as occurring consecutively, with the acquisition of stock following the status

change of the affiliates such that Medley effectively acquired

10As with the other reverse mergers, the stock would later bear the name

of the private company that was merged into the public shell. When Medley sold this stock it was labeled VirtualLender stock. 

10452 SEC v. MEDLEY
the stock from non-affiliates. Where a single transaction

accomplishes both a change in status from an affiliate to a

non-affiliate and a transfer of stock from that person or entity,

the transfer must be viewed as a transfer from an affiliate. 

[8] Medley began selling shares of Golden Chain as early

as March 12, 1999, and the latest sales took place on June 6,

2000. Because he acquired his shares from affiliates of the

issuer, he was not permitted to tack on the holding periods of

the selling shareholders. See 17 C.F.R. § 230.144(d)(1). Medley would have had to wait until February 11, 2001—two

years from the closing date—to sell his shares before he could

qualify for the Rule 144(k) safe harbor. Thus, Medley did not

qualify for the Rule 144(k) safe harbor, and does meet the

statutory definition of an “underwriter.” As an underwriter,

Medley violated Section 5 by selling unregistered securities.

B

The M & A West and Digital Bridge Transactions

[9] Both the M & A West and Digital Bridge transactions

involved more complex two-step structures. However, the

result of the transactions was substantively identical. In all

three transactions, Medley was compensated with shares of

the relevant corporations, and in all three transactions Medley

received the stock from persons who were indisputably affiliates at the time that the agreements were formed. The difference lies merely in the structure of the agreements. In the

VirtualLender transaction the act which transformed the relevant affiliates into non-affiliates and the transfer of stock from

those persons to Medley were both accomplished in one

agreement, whereas in the M & A West and Digital Bridge

transactions the two acts were accomplished in separate

agreements. The mere strategic change from one document to

two does not excuse Medley from liability. In both the M &

A West and Digital Bridge transactions, the relevant agreements were contingent on each other. In the M & A West

SEC v. MEDLEY 10453
Transaction, the stock transfer specified in the Stock Purchase

Agreement was expressly contingent on the closing of the

Reorganization Agreement. In the Digital Bridge transaction,

the Reorganization Agreement contained a “condition subsequent” clause which assumed the future closing of Stock Purchase Agreements. The referenced Stock Purchase

Agreements then provided for the transfer of stock to Medley.

In other words, in each transaction the Reorganization Agreement and the Stock Purchase Agreements could not contractually operate independently. The failure to comply with the

terms of one agreement would necessarily void the other. 

[10] Under such circumstances, the multiple agreements

actually constituted “a single actual transaction with multiple

stages.” SEC v. Cavanagh, 445 F.3d 105, 114 (2d Cir. 2006).

We agree with our sister circuit that: 

In these circumstances, a person who is an “affiliate”

during the negotiation of, and agreement to, the deal

may not enjoy a Section 4(1) exemption by simply

abdicating his affiliate status (e.g., by selling his

controlling shares or resigning as an officer or director) shortly before the parties complete the transaction. 

Id. at 114-15. 

[11] In so holding, we are informed by the purpose of registration, which is “to protect investors by promoting full disclosure of information thought necessary to informed

investment decisions.” SEC v. Ralston Purina Co., 346 U.S.

119, 124 (1953). The express purpose of the reverse mergers

at issue in this case was to transform a private corporation

into a corporation selling stock shares to the public, without

making the extensive public disclosures required in an initial

offering. Thus, the investing public had relatively little information about the former private corporation. In such transactions, the investor protections provided by registration

10454 SEC v. MEDLEY
requirements are especially important. Medley’s actions violated the spirit of Section 4(1) exemption, which is to allow

certain persons to sell unregistered securities because those

persons do not have potential access to non-public information relevant to the securities, either through their own affiliation with the relevant corporation or through the affiliation of

the person from whom they obtained the securities. Here,

Medley arranged to obtain the securities from persons whose

status at the time of the negotiations would place Medley outside the protection of Rule 144(k), but attempted to create a

loophole by creating a separate agreement which would alter

that status immediately prior to what Medley would have us

identify as the actual moment of the stock transfer.11

The Supreme Court has long instructed that securities law

places emphasis on economic reality and disregards form for

substance. See SEC v. W. J. Howey Co., 328 U.S. 293, 298-

300 (1946); see also Danner v. Himmelfarb, 858 F.2d 515,

518 (9th Cir. 1988); SEC v. Glenn W. Turner Enters., Inc.,

474 F.2d 476, 481-82 (9th Cir. 1973). Where a single transaction accomplishes both a change in status from an affiliate to

a non-affiliate and a transfer of stock from that person or

entity, the transfer must be viewed as a transfer from an affiliate for the purposes of determining Rule 144(k) eligibility.

The existence of multiple agreements bears little effect when

11The dissent suggests there is nothing in the record to establish that

Medley or his nominee signed the initial stock purchase and sale agreements for the M&A West and Digital Bridge transactions. However, this

concern is misplaced. First, Medley has never denied that he assisted in

arranging the reverse mergers and was compensated for his services partially with stock of the newly merged companies. More specifically, the

supplemental excerpts of record provided by the SEC to this Court contain

the following documents: a Lock-up Agreement for stock obtained in the

M&A West transaction, signed by Medley; a Stock Purchase Agreement

for the Digital Bridge transaction, signed by Medley; a Lock-up Agreement for the Digital Bridge transaction, signed by Medley; a Stock Purchase Agreement for the Digital Bridge transaction signed by Medley’s

nominee Robert Bryan; and a Lock-up Agreement for the Digital Bridge

transaction signed by Bryan. 

SEC v. MEDLEY 10455
the agreements collectively constitute a single transaction.

Thus, the district court properly held that Medley violated

Section 5 when he sold unregistered shares of VirtualLender,

M&A West, and Digital Bridge to the public. 

III

Remedies

Upon finding that Medley committed Section 5 violations

in the three reverse merger transactions discussed here, the

district court imposed three forms of penalties. First, the district court ordered Medley to disgorge, with pre-judgment

interest, the salary and profits from stock sales for the three

reverse merger transactions. Second, the court ordered a total

civil penalty of $165,000, based on three “second-tier” civil

penalties of $55,000 each. Finally, the court granted a fiveyear injunction against any future violations of Sections 5(a)

and 5(c) of the Securities Act. We affirm the district court’s

disgorgement order, but remand for further proceedings

before any second-tier penalties or injunction may be

imposed.

A

Disgorgement

[12] The district court ordered disgorgement, with interest,

to ensure that Medley is not allowed to benefit from his

unlawful conduct. “The district court has broad equity powers

to order the disgorgement of ‘ill-gotten gains’ obtained

through the violation of the securities laws.” SEC v. First Pac.

Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998). Through his

involvement in the three reverse mergers, Medley violated

Section 5 of the Securities Act and was compensated for his

efforts. The district court properly calculated Medley’s profits

from these mergers, including the cash payments he obtained

and his profits from his stock sales. We affirm the district

10456 SEC v. MEDLEY
court’s order that Medley disgorge $2,647,964.29 in profits

and pre-judgment interest.

B

Second Tier Penalties

The district court also imposed civil penalties for three

“second-tier” Securities Act violations. A second-tier penalty

is an intermediate level sanction that can be imposed only if

the violation “involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement.” 15

U.S.C. § 77t(d)(2)(B). Thus, unlike disgorgement, the imposition of second-tier penalties requires an assessment of

scienter. 

On summary judgment, a district court must determine

whether genuine issues of material fact exist, and must

resolve any uncertainty in favor of the non-moving party.

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

While the district court properly determined that no genuine

issue of material fact existed with respect to whether Medley

violated Section 5 of the Securities Act, the district court’s

imposition of second-tier penalties was improper at the summary judgment stage. Medley presented evidence to the district court that he believed his sales of securities were exempt

from registration requirements through the Rule 144 safe harbor. In addition to his own testimony, Medley submitted legal

opinions, upon which he claims he relied, to support his argument that he acted in good faith. Even though the district

court did not find Medley’s evidence persuasive, this evidence does create a material issue of fact as to Medley’s state

of mind during the transactions and thus creates a question as

to whether Medley’s actions “involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory

requirement,” 15 U.S.C. § 77t(d)(2)(B). 

[13] In rejecting the evidence Medley produced to demonstrate his good faith, the district court made a credibility

SEC v. MEDLEY 10457
determination. This Court, and others, “have long recognized

that summary judgment is singularly inappropriate where

credibility is at issue. Only after an evidentiary hearing or a

full trial can these credibility issues be appropriately

resolved.” SEC v. Koracorp Indus., Inc., 575 F.2d 692, 699

(9th Cir. 1978). The district court’s assessment of Medley’s

credibility may ultimately be correct, but such an assessment

may only be made after a full evidentiary hearing, and is inappropriate at the summary judgment stage.

C

Injunction

Likewise, the district court’s decision to impose an injunction also requires an assessment of scienter. To justify an

injunction, there must be “a reasonable likelihood of future

violations of the securities laws.” SEC v. Murphy, 626 F.3d

633, 655 (9th Cir. 1980). In predicting this likelihood a court

should consider the totality of the circumstances, including:

“(1) the degree of scienter involved; (2) the isolated or recurrent nature of the infraction; (3) the defendant’s recognition

of the wrongful nature of his conduct; (4) the likelihood,

because of defendant’s professional occupation, that future

violations might occur; (5) and the sincerity of his assurances

against future violations.” SEC v. Fehn, 97 F.3d 1276, 1295

(9th Cir. 1996). For the same reasons that the district court

found second-tier penalties appropriate, the court found that

the first factor, the degree of scienter involved “strongly

favors the SEC.” 

[14] Once again, the district court’s decision was premature. Medley has presented evidence that he acted in good

faith and was unaware that he was violating securities laws.

An assessment of his credibility must await a full evidentiary

hearing. 

10458 SEC v. MEDLEY
IV

In summary, we affirm the district court’s finding that

Medley violated Sections 5(a) and 5(c) of the Securities Act

through his involvement in the three reverse mergers discussed previously. Additionally, we affirm the district court’s

order that Medley disgorge all profits, with interest, he

obtained from these transactions. However, we reverse the

district court’s imposition of civil sanctions—in the form of

second-tier penalties and a 5-year injunction—and remand for

a full evidentiary hearing before any penalty requiring an

assessment of scienter may be imposed. 

AFFIRMED in part, REVERSED and REMANDED in

part. Each party shall bear his or its own costs. 

IKUTA, Circuit Judge, concurring in part, dissenting in part:

I agree with the majority that the district court did not err

in determining that Medley’s sale of stocks acquired in the

Golden Chain transaction violated the Securities Act. I dissent

from part II.B of the majority, however, because Medley’s

activities in the M&A West/Buffalo Capital and Digital

Bridge/Black Stallion transactions were protected by the safe

harbor in 17 C.F.R. § 230.144(k). The majority’s interpretation of Rule 144(k) sacrifices the plain language of the regulation to general policy goals that the SEC failed to express in

its own regulations. Such an approach is manifestly unfair to

the regulated community, which is entitled to structure its

affairs in reliance on the plain language of a safe harbor regulation. The SEC is free to amend and clarify its regulations to

ensure that the safe harbor is used in a manner consistent with

its goals.1

1

Indeed, the SEC has done just that. Shortly after this appeal was

argued, the SEC substantially revised Rule 144, 17 C.F.R. § 230.144. See

SEC v. MEDLEY 10459
The majority correctly lays out the applicable law. Rule

144(k) provides a safe harbor from the general prohibition on

the sale of unregistered, restricted securities. A seller qualifies

for the safe harbor if (i) the seller is not an affiliate of the

issuer at the time of the sale and was not an affiliate of the

issuer during the three months prior to the sale, and (ii) a

period of at least two years has elapsed since the securities

were last acquired from the issuer or an affiliate of the issuer.

17 C.F.R. § 230.144(k). The word “affiliate” is defined by

Rule 144(a)(1) as follows: “[a]n affiliate of an issuer is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common

control with, such issuer.” The time period during which any

previous owner held the securities counts towards the twoyear requirement, allowing the seller to tack his holding

period to the prior owner’s period. However the two-year

clock resets every time the securities are acquired from an

issuer or an affiliate of the issuer. § 230.144(k). 

Medley did not wait two years before selling his shares, so

he qualifies for the Rule 144(k) safe harbor only if he can validly tack his holding period onto the previous owners’ holding

periods. He cannot use tacking to meet the two-year requirement if the previous owners were affiliates of the issuer at the

time Medley acquired his shares. § 230.144(k). Therefore, the

key question in this case is whether the persons who transferred their shares to Medley were “affiliates” as defined by

Rule 144(a)(1) at the time Medley acquired those shares. 

Revisions to Rules 144 and 145, Exchange Act Release No. 33-8869

(December 6, 2007). New Rule 144(i)(1) makes Rule 144 unavailable,

with limited exceptions not at issue in this case, to issuers that have at any

time had “(A) No or nominal operations; and (B) Either: (1) No or nominal assets; (2) Assets consisting solely of cash and cash equivalents; or (3)

Assets consisting of any amount of cash and cash equivalents and nominal

other assets.” While the parties have not briefed the subject, this revised

regulation appears to target the precise sort of reverse merger transactions

at issue here. 

10460 SEC v. MEDLEY
With respect to the M&A West and Digital Bridge transactions, the parties do not dispute that the persons who transferred their shares to Medley did not meet the definition of

“affiliate” during the stage of the transaction in which Medley

acquired those shares. After the Reorganization and Stock

Purchase Agreement was implemented, the transferors

resigned and were no longer officers or directors of the corporations, and their shares had been diluted so they no longer

had control of the corporations. In light of the interlocking

nature of these agreements in the reverse merger transaction,

and in light of the SEC’s policy goals, the majority simply

asserts that because the prior owners of the securities were

affiliates when the original Reorganization and Stock Purchase Agreement was signed, they are deemed to be affiliates

during a subsequent stage in the transaction when a third party

acquires those shares. Under this interpretation, it may be

irrelevant whether the person who ultimately acquires the

securities was even a party to the transaction. For example, in

this case, nothing in the record establishes that Medley or his

nominee even signed the initial Reorganization and Stock

Purchase Agreements.2

The plain language of Rule 144(k) provides no support to

the majority’s interpretation. Rule 144(k) provides a safe harbor when “a period of at least two years has elapsed since the

later of the date the securities were acquired from the issuer

or from an affiliate of the issuer.” The majority does not assert

that Medley “acquired” the securities at the time the owners

entered into the Reorganization and Stock Purchase Agreement. Nor could it: Using words in their natural sense,3

 Med2While the majority is correct that the record contains subsequent agreements related to Medley’s acquisition of the shares, maj. op. at 10455

n.11, the majority does not dispute that nothing in the record establishes

that Medley or his nominee signed the initial Reorganization and Stock

Purchase Agreements. 

3

“Acquired” is not defined in Rule 144, or in any related rules or statutes. Therefore, we look to the common sense meaning of the word,

including dictionary definitions. See United States v. Pearson, 274 F.3d

1225, 1231 n.6 (9th Cir. 2001). Dictionary definitions of “acquire” include

“[t]o gain possession or control of; to get or obtain,” Black’s Law Dictionary 25 (8th ed. 2004), and “to come to have as one’s own; get possession

of,” Webster’s New World College Dictionary 12 (4th ed. 2005). 

SEC v. MEDLEY 10461
ley did not acquire the shares at issue until he had actual

possession or control of them, which took place after the

transferors in the M&A West and Digital Bridge transactions

ceased to be affiliates. As mentioned above, the parties do not

dispute that the transferors in the two transactions did not

meet the definition of “affiliate” in Rule 144(a) during the

stage of the transaction in which Medley acquired the securities. In fact, the majority’s interpretation is untethered to any

language in the applicable regulations or statutes; and is not

based on any authoritative interpretation by the SEC to which

we must defer. In my view, this interpretive approach is not

reasonable. 

SEC v. Cavanagh, 445 F.3d 105 (2d Cir. 2006), does not

support the majority’s interpretation of Rule 144(k).

Cavanagh interpreted Section 4(1), 15 U.S.C. § 77d(1), not

Rule 144(k). Section 4(1) provides that Section 5’s registration provisions do not apply to “transactions by any person

other than an issuer, underwriter, or dealer.” In interpreting

this language, Cavanagh held that a multi-stage transaction

counted as a single “transaction” for purposes of qualifying

for an exemption to sell unregistered securities. Cavanagh’s

interpretation of the word “transaction” in Section 4(1) may

be reasonable, but its analysis cannot help us construe the

word “acquired” in Rule 144(k). The majority has borrowed

the holding in Cavanagh while jettisoning the reasoning that

led up to it. 

Because Medley established that he qualified for the safe

harbor in Rule 144(k) for the M&A West and Digital Bridge

transactions, I would reverse the district court’s grant of summary judgment and disgorgement with respect to those transactions. I otherwise concur in the majority opinion. 

10462 SEC v. MEDLEY