N O T FO R PUB L ICAT IO N UNITED STATES C OUR T OF APPEALS FOR THE NINTH C IR C UIT
U.S. SEC UR ITIES & EXC HANGE C OM M ISSION,

Pla i ntiff-Appe lle e , v. R OB ER T W ILLIAM R

USSELL, De fe nda n t-Appe l la

nt,
and GUY SC OTT GR IFFITHE; R ENEW AB L E TEC HNOLOGIES SOLUTION, INC
. ; GRE EN AC R ES PHAR M S, LLC ,

De fe nda n ts. No. 22-55093 D.C . No. 8:20-c v-00124-DOC -JDE
M EM O R ANDUM *

Appe a l from

the Unite d

Sta t e s Distric t C ourt for the C e ntra l Distric t of C a lifornia Da v id O. C arte r, Distric t Judge , Pre siding Argue d a nd Subm itte d

June 27, 2023 Pa sa de n a , C a l ifornia 

# F IL ED
AUG 3 2023 M OLLY C. DW Y ER, CLERK U

. S. CO URT O F APPEALS

* This disposition is not a ppropria te for public a t ion a

nd is not pre c e de nt e xc e pt a s provide d

by Ninth C irc uit R

ule 36-3.B e fore : N.R . SM ITH, LEE, a nd VANDYKE, C irc uit Judge s. Disse n t by

Judge L EE. The Se c uritie s a

nd Exc ha nge C om m ission (SEC ) brought a

c i vil
e nforc e m e nt a c tion a ga inst R obe rt R usse ll a nd Guy Griffithe for de frauding 25 inve stors out of $4.85 m

illion through the

sa le of unre giste re d a

nd fic titious
se c uritie s in R

usse ll’ s c anna

bis c om p any , SM R B , LLC (SM R B ). R usse ll a ppe a ls the d istric t c o urt’ s judgm e nt orde ring him to pa y $275,153.90 in disgorge

m e nt (plus pre judgm e nt inte re st) a

nd a c ivil pe na lty

of $378,888.93. 1 W e have jurisdic tion unde r 28 U.S.C
. § 1291 a nd re vie w a

“ d istric t c ourt’ s form

ulation of
re m e die s unde r the Se c uritie s Ac t a nd the Exc ha

nge Ac t” for a

b use of disc re tion. SEC v . Husain , 70 F.4th 1173, 1180 (9th C ir. 2023). W e a ffirm
. The distric t c ourt’ s disgorge m e nt a w ard wa s not a

n a buse of disc re tion.

“ [A] disgorge m e nt a

ward tha t doe s not e x c e e d

a wrongdoe r’ s ne t profits . . . is
e quita ble re lie f pe rm issible unde r [15 U.S.C .] § 78u(d)(5).” Liu v . SEC , 140 S. C t. 1936, 1940 (2020). Thus, the ge ne ra l rule is tha

t “ c ourts m

ust de duc t le g itim a te
e xpe nse s be fore orde ring disgorge m e nt unde r § 78u(d)(5).” Id . a t 1950. Howe ve r, the Supre m e C ourt ha s “ c arve d out a n e x c e ption” to this rule
. Id . a t 1945. If “ the
e ntire p rofit of a

busine ss or unde rta k ing re sults from the wrongful a c tivity ,” the n a

1 Griffithe did not a

ppe a l. 2de fe nda

n t “ will not be

a llowe d to dim inish theshow of profits by putting in . . . ine q uita b le de duc tions.” Id
. (c l e a ne d up); se e also id . a t 1950 (sta ting tha t a distric t c o urt ne e d not de duc t le gitim a te e x pe nse s if “ t he y we re inc urre d for the purpose s of furthe ring a

n e ntire ly fra udule nt sc h e m e ” ). R usse ll a rgue s tha t the re c ords he subm i tte d in his opposition to the SEC ’ s m o tion for e ntry of fina l judgm e nt showe d tha t wha t he spe nt on SM R

B ($2,403,334.62) e xc e e de d the tota l inve stor proc e e ds he took in ($1,940,459.90) by $462,874.72. Thus, R

usse l l a sse rts tha

t he “ suffe re d
ne t losse s , a

nd disgorge m e nt wa s ina

pplic a ble unde r Liu .” R

usse ll’ s a rgum e nt fa ils, be c a use this c a se fa lls squa

re l y within the“ c arve d out” e xc e p tion tha t Liu
re c o gniz e d. 140 S. C t. at 1945. R usse ll’ s “ e ntire profit . . . re sult[e d] from the wrongful a c tivity ” a t issue he re
— se c uritie s fra ud. Id . R usse ll c o nc e de d a t ora l
argum e nt tha

t SM R B did not ge ne ra te an y re ve nue . Inste a d , a ll of R u sse ll’ s gross proc e e ds from

SM R B we re de rive d from inve stors who we re de c e ive d, ofte n in

3e la

bora te fa shion, into be lie ving tha t the y we re buy ing sha

re s in a fa st-growing
c anna bis busine ss whic h, in re a lity , ne ve r got off the ground. 2 Furthe r, a l l of the se c uritie s tra nsa c tions a

t issue we re unla

wful. R usse ll a nd his wife re ta ine d full owne rship of SM R B , m e aning a ll of the SM R B sha re s sold to inve stors c onve y e d no “ bona fide owne rship or inc o m e -sha ring sta ke ,” and we re thus “ fic titious” an d la c king in a ny “ a c tua l e c onom ic substa

nc e or va lue .” R

usse ll
a lso e nga ge d in the s e “ sha m tra nsa c tions” without re c e iving the re quisite
re gula tory a pprova l from

the W a shington Sta

te Liquor a

nd C a n na bis B oa rd to se l l sha re s in a c anna bis busine s s. Se e SEC

v . Platforms W

ire le ss Int’l C o rp. , 617 F.3d 1072, 1097 (9th C ir. 2010) (“ Allowing the de fe nda nts to re ta in any m one y

from

2 The re is e vide nc e in the re c ord tha t sugge sts SM R

B wa s ne v e r a

le gitim a te busine ss. For e xam

ple , R usse ll a sse rte d to the distric t c ourt tha t he spe n t just $1,058.03 on irriga

t ion in the m ore tha

n two y e ars tha

t SM R B wa s lic e nse d

to produc e and proc e ss c anna bis. B ut “ c anna

b is, whe the r grown indoors or outdoors, is a prodigiously

thirsty pla nt,” with one study

e stim a ting tha

t a single c anna

bis pla n t c onsum e s a

n ave ra ge of six ga llons of wa te r pe r day . C h e ste r Harpe r, All Is for the Be st in the Be st of All Possible W

orlds: The

Unne c e ssary Env ironme ntal C osts of Fe de ral C

a nnabis Prohibition , 21 Vt. J. Envtl. L. 55, 63 (2019); se e also Asha W ie ga nd-Sha ha ni, Ille gal W ate r Use , Marijuana, and C

alifornia’s Env ironme nt , 48 Envtl. L. R e p. Ne w s & Ana l y s is 10625, 10627 (2018) (de sc ribing the a m ount of wa

te r ne e de d to grow c an na

bis a s “ prohibitive ly

e xpe n sive ” ). The fa c t tha t R usse ll spe nt so little

on irriga tion give s rise to a

n infe re nc e that SM R B wa s not a c tua lly

in the busine ss of growing c anna bis a t a l l, a nd wa s a c tua lly

an “ e n tire ly fra udule nt sc h e m e .” Liu , 1940 S. C t. at 1950. 4the unla

wful tra nsa c tions would a

llow the m to unjustly

profit from

e xc ha nging
unre giste re d se c uritie s for c a sh . . . .” ). B e c a use the only

re ve nue s ge ne ra te d by

SM R B we re the funds unla wfully obta ine d from inve stors, SM R B ’ s “ e ntire profit” arose from R usse ll’ s wrongdoing,
and the distric t c ourt wa s not re quire d to de duc t any of R usse l l’ s busine s s e xpe nse s from the inve stor funds he took in be fore orde ring disgorge m e nt, s e e Liu , 1940 S. C t. at 1945, e ve n though the sc h e m e ultim a te l y lost m o ne y , se e SEC v . First Pac

. Banc orp , 142 F.3d 1186, 1192 n.6 (9th C ir. 1998). Thus, the distric t c ourt c ould la wfully have orde re d R

u sse ll to disgorge

a ll of his gross proc e e ds, whic h we re
se ve ra l m ultiple s la rge r tha n the a c tua l disgorge m e n t a ward (whic h wa s lim ite d to the a m ount of a

y a c ht purc ha s e ). The re fore , the distric t c ourt a c te d within its disc re tion in orde ring R

usse ll to disgorge

only $275,153.90, a s a

“ re a sona ble
a pproxim a tion” of his ill-gotte n ga i ns. Platforms W

ire l e ss , 617 F.3d a

t 1096. The distric t c ourt a l so did not a buse its disc re tion in orde ring R usse ll to pa

y
a third-tie r c ivil pe na lty

of $378,888.93. 15 U.S.C . §§ 77t(d)(2)(C ), 78u(d)(3)(B )(iii). R

usse ll doe s not dispute

tha t his se c uritie s viola

tions “ involve d fraud, de c e it, [or] m anipula tion” and “ re sulte d in substa ntia l losse s” to inve stors, nor doe s he argue tha

t the c ivil pe na lty

a m ount e xc e e de d e ithe r the

5fixe d sta

t utory m a x im

um or his gross pe c unia

ry ga in. 15 U.S.C . §§ 77t(d)(2)(C ). Inste a d, R

usse ll a rgue s tha t the distric t c ourt e rre d by fa iling to c ite the fa c tors se t forth in SEC

v . Murphy . 626 F.2d 633, 655 (9th C i r. 1980). W e find no binding pre c e de nt (a

nd R u sse ll c i t e s none to us) tha t re quire s a

distric t c ourt to disc uss a ny pa rtic u la r fa c tors whe n de te rm ining whe the r to im pose c i vil pe na ltie s. R a the r, a distric t c o urt m

ust “ a s se ss the tota lity

of the c irc um sta

nc e s surrounding the de fe nda n t a nd his viola

tions,” id .; se e also Husain , 70 F.4th a t 1184, a nd provide suffic i e nt “ inform a t ion or e xpla na tion c onc e rning the ba sis” for its de c ision, Hay e s
v . He c k le r , 785 F.2d 1455, 1457 (9th C ir. 1986) (pe r c uria m ). He re , the distric t
c ourt obse rve d “ the de gre e of fra ud a nd de c e i t” in R

usse l l’ s c onduc t, de sc ribe d how he “ use d

inve stor m one y

to fina nc e a y a c h t purc ha se an d pa

y othe r ve n dors,”
and sta te d tha t R usse ll’ s “ wrongful” a c t ions “ re sulte d in substa n tia l ha rm to inve stors who truste d his busine ss with the ir m one y ,” but found tha t the SEC ’ s
re que s te d pe na l ty

a m ount wa s “ unduly

la rge for R usse ll’ s le ve l of c ulpa

b ility in the s c he m e ” a s c om

pa re d to Griffithe ’ s, a

nd re duc e d the pe na lty

a c c o rdingly
. Unde r the “ substa

n tia l de fe re n c e ” we grant “ to the tria l c o urt in fa shioning a

6pe na lty , ” the distric t c ourt’ s a na ly sis wa s suffic i e nt. SEC v . Murphy , 50 F.4th 832, 849 (9th C i r. 2022). 3 AFFIRM E D.

3 W e re je c t R u sse l l’ s re m a ining a

rgum e nts. The distric t c ourt did not e rr “ by pre m ising i[t] s c om

puta tion of c ivil pe na ltie s on the e rrone ous disgorge m e nt orde r” be c a

use the disgorge m e n t orde r wa s not e rrone ous. Nor did the distric t c ourt m issta

te the purpose of the c ivil pe na lty re m e dy

— by ba sing the im

position of third-tie r c ivil pe na ltie s on “ the de gre e of fra ud a nd de c e it a

n d substa ntia l inve stor losse s,” the distric t c o urt m a de c le ar that it c onte m p la t e d the c ivil pe na lty a s a punitive sa

nc tion for R

u s se ll’ s c onduc t.

7SEC v. Russell , No. 22
- 55093

LEE, Circuit Judge, dissent ing : Robert Russell and Guy Griffithe sold unregistered and ficti tious securities in Russell’s cannabis company to the tune of $1,940,559.90 in illicit proceeds. R ussel l, however, contends that disgorgement under 15 U.S.C. § 78u(d)(5)

— a profit

- based penalty

— is unwarranted because h is business had $2,403,344.62 in legitimate expenses, eclipsing the proceeds and thus reducing the illicit profit to zero
. Without fully addressing this argument, the district court order ed $275,153.90 in disgorgement. Premised on the disgorgement order, the distri ct court also ordered a civil penalty of $378,888.93

. While I agree with the majority that the district court has latitude when deriving a civil penalty, I believe that the disgorgement was error . Th is flaw in turn under mine s the civil penalty . Thus, I respectfully dissent
. My main issue is with the majority ’s reading of Liu v. SEC , 140 S. Ct. 1936 (2020). As the majority recog nizes , Liu held that a court “ must deduct legitimate expenses before ordering disgorgement under § 78u(d)(5).” Id. at 1950 (emphasis added). But the majority believes that this rule does not apply when the “entire profit of a business ” results from a fraud ; i t reads Liu to hold that “pro fits” may be disgorged from an entirely fraud ulent scheme without any obligation to account for expenses . Maj. Disp. at 2

– 3
. While Liu is not a model of clarity on this point, I believe the majority misreads it , and its interpretation conflicts with the nature of 

# FILED
AUG 3 2023 MOLLY C. DWYER, CLERK U.S. COURT OF APPEALSequitable disgorgement. By removing expenses from the equation, the majority

erroneously equates illicit profits with illicit revenues , commanding Russ ell to disgorge ill

- gotten gains that may not exist. See Liu , 140 S. Ct. at 1946

– 47 (describing the refusal to deduct legitimate expenses as being in “considerable tension with equity practices” and the goal of disgorging net profit s )
. Liu ’s exception appears to r eflect the unremarkable proposition that equitable disgorgement does not require a court to deduct illegitimate expenses to determine the net profit to be disgorged. For example, no one disputes that Russell can not reduce his disg orgement penalty by claiming as an expense his purchase of a personal yacht
. And when d efining the boundaries of the exception , the Liu Court confined its example of “ expenses ” to things like personal yachts
. It explained that
a “defendant ‘will not be allowed to diminish the show of profits by putting in unconscionable claims for personal services or other inequitable deductions.’” Id. at 1945 (quoting Root v. Lake Shore & M.S. Ry. Co. , 105 U.S. 189, 203 (1882))
. Liu goes on to acknowledge that a court should not deduct expenses that “ were brought for the purposes of the [fraud]” or constituted “ extraordinary salaries.” Id. In other words, Liu focus ed on the refusal to deduct things like unconscionable claims for personal services, expenses in furtherance of the fraud, and excessive salaries

— that is, illegitimate expenses ; it does nothing to disrupt the rule that a courtmust deduct legi timate expenses when calculating net profits
. 1 The Court also

recognized that the “ exception requires ascertaining whether expenses are legitimate or whether they are merely wrongful gains ‘under another name .’” Id. at 1950. That suggests that the court drew a distinc tion between legitimate and illegitimate expenses in assessing disgorgement. In sum, I believe that under Liu the district court must deduct legitimate business expenses before ordering disgorgement under § 78u(d)(5)
. Because it is unclear whether the district court did so, I would reverse and remand
.

1 The cases cited in Liu all referenced illegitimate expenses. See Providence Rubber Co. v. Goodyear , 76 U.S. (9 Wall.) 788, 802

- 803 (1870) (refusing to deduct “extraordinary salaries” but deducting debts, rents, interest payments, the cost of purchasing materials, and “the usual salaries of the managing officers”); Callaghan v. Myers , 128 U.S. 617, 663

– 64, 665 (1888) (refusing to deduct expe nses for “family and personal services” but, to the extent possible, deducting the “actual and legitimate manufacturing costs”).