F OR P UBLICATION



### UNIT E D ST AT E S CO URT O F APPE AL S FO R T H E NINT H CIRCUIT

S E C U R I T I E S A N D E X C H A

N G E C O M M I S S I O N , Plaintiff-Appellee
,

v

.

CMKM D I A M O N D S , I N C ., Defendant
,

and

1 S T G L O B A L S T O C K T R A N S F E R L L C; H E L E N B A G L E Y ; B R

I A N D V O R A K , Defendants-Appellants

. Nos. 11-17021 11-17025

D.C. No. 2:08-cv-00437- L RH-RJ J

OPI NI ON

Appeals from the United States District Court

for the District of Nevada L arry R. Hicks, District J udg e, Presiding

Arg ued and Submitted April 15, 2013—San F rancisco, California

F iled September 10, 2013SEC V

. CMKM D I A M O N D S , I N C

. 2

B efore: Susan P. Graber and Morg an Christen, Circuit J udg es, and J ohn R. Tunheim, * District J u d g e

.

O pinion by

J udg e Tunheim

SUMMARY * *

Securities Law

The pa n e l affirmed in part, and reversed in part, the district court’s orders in a civil e nforcement action broug ht b y the Securities a

nd Ex chang e Comm i ssion ag ainst numerous defendants a lleg edly involved in a scheme to sell unreg istered securities of CMKM Diamonds, I nc. in violation of Section 5 of the Securities Act of 1933.

The panel reversed the district court’s g rant of summa ry j u dg ment ag ainst CMKM’s transfer ag ent, 1st Global Stock Transfer, L L C and its owner Helen B ag ley
, because there was

a material issue of fact reg arding whether Global a nd B ag ley

were necessary participants and substantial factor s i n the distribution of CMKM’s stock sufficient to i m p o se liability

un d e r Section 5 of the Securities Act of 1933. T h e panel affirmed the mag istrate judg e ’ s denial of the motion of B rian Dvorak, CMKM’s a ttorney at the time of scheme, to stay the proceeding s, and the dist r i c t court’s disg org ement order

* T h e Ho n o rab le J oh n R

. T u n h eim
, Un ited States District J u d g e f o r th e District o f

Min n eso ta, sittin g b y

d esig n atio n

.

** T h is su m m ary co n stitu

t es n o p ar t o f t h e o p in io n o f th e co u rt. It h as b een p rep ared b y

co u rt staf

f f o r th e co n v en i en ce o f

th e read er.SEC V

. CMKM D I A M O N D S , I N C

. 3

(ordering d efendants to disg org e proceeds from the illeg al securities’ sales, plus prejudg ment interest) as to Dvorak.

COUNSEL

Mark S. Dz arnos k i ( arg ued), Gordon & Silver L td., L a s Veg as, Nevada, for Defendants-Appellants 1st Global Stock Transfer L L C and Helen B ag ley

.

J ohn W esley

Hall, J r. (arg

ued), L aw O ffices of J ohn W esley Hall, J r., L ittle Rock, Arkansas, for D e f e n dant-Appellant B rian Dvorak.

Allan Armistead Capute (arg ued), Secu rities and Ex chang e Commission, W a shing ton, D.C., for Plaintiff-Appellee.

OP INION

TUNHEI M, District J udg e:

These consolidated appe a l s a rise o u t of a civil

en forcement action broug h t by the Securities and Ex chang e Commission (“SEC”) ag ainst numerous defendants alleg edly involved in a scheme to sell unreg istered securities of CMKM Diamonds, I nc. (“CMKM ” )

. The district c ourt g ranted
summary judg ment in favor of the SEC, r uling that 1 st Global St o ck Transfer, L L C (“Global”), Helen B ag ley
, and B rian Dvorak (collectively
, “ Defendants”) pa r ticipated in an unreg istered distribution of securities in violation o f Section 5 of the Securities Act of 1933 (“Securities Act”), 15 U .S.C. § 77e. T he d i s trict court o rdered Defendants to disg org eSEC V

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proceeds from the illeg al sales, plus p r e j udg ment interest. Prior to the district court’s r uling on summary judg ment, Dvorak broug ht a motion to stay the civil proceeding s until the conclusion of his criminal proceeding s involving the same conduct, which a mag istrate judg e denied.

Global and B ag ley ap p e al the district c ourt’s entry o f
summary judg ment and the disg org e m e nt order; Dvorak appeals the mag istrate judg e’s order deny ing his motion to stay and the district court’s disg org e ment order. W e conclude that the district court erred in g ranting summa r y j u dg ment ag ainst Global and B ag ley because a material issue of fact remains r eg arding w hether G lobal a nd B ag ley were necessary p articipants a

nd substantial factors in the distribution o f CMKM’s stock sufficient to impose liability under Section 5. W e therefore r e v e r s e the judg ment o f the district court as to Global a nd B ag ley

and remand for further proceeding s. W e affirm the mag istrate judg e’s denial of D v o r ak’s motion to stay the proceeding s and the district c o u rt’s disg org ement order as to Dvorak.

I. BACK G R OUND

A. The Schem e

CMKM is a publicly held Nevada corporation. D uring the relevant time period, CMKM’s common stock w a s not reg istered with t h e S EC under the Securities Act, 15 U .S.C. § 77a et seq. CMKM’s stock was r eg istered, however, under Section 12(g ) of the Securit i es Ex chang e Act of 1934 (“Ex c hang e Act”), 15 U.S.C. § 78 l (g ), and was traded on the Pink Sheets, now known as OTC P ink, an electronic
q uotation and trading marketplace for both reg istere d a n d
unreg istered securities.SEC V

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B e tween J anuary 2003 a nd March 2005, at least eleven i n dividuals and three entities alleg edly participated in a scheme to issue b i l l i o n s of shares of unrestricted CMKM stock and then sell the stock to the public without f iling a reg istration statement. CMKM, holding itself out as a gold and diamond mining company , increased its number of shares
to 800 billion. Urban Casavant and J ohn Edwa rds, respectively CMKM’s CEO a nd director of “post-merg er matters,” then beg an issuing a nd selling shares o f unrestricted stock. CMKM in fact had no leg itimate operations. The
company issued false press releases, operated a promotional racing team that traveled around the country , a n d p rovided investors with fake maps and videos of mineral operations in North a nd South America. The pro c eeds of the stock sales

were used p rimarily to finance the p e r s o nal lifesty les o f Ca s a v a n t and Edwards. As a result of the scheme,
approx imately

40,000 investors lost at least $64.2 million.

I n a n a t t empt to a

ppear to comply with securities

r eg ulations, E dwards received false opinion letters su p p o r t i n g the iss u a n ce of u nrestricted CMKM stock f rom Defendant Dvorak. B ased upon these letters, CMKM’s transfer ag ent, Defendant Global and its owner B ag l ey , issued unrestricted

s h a res of CMKM stock. Using these certificates, Edwar d s

s o l d 260 billion shares of stock throug h Dary l Anderson, Kathleen Tomasso, and Anthony Tomass o

. Anderson was Edwards ’ r eg istered representative at NevW est Securities Corporation (“NevW est”) and sold over 200 billion shares. Edwards a lso issued 77.3 billion shares of stock to companies owned by the T omassos, which in turn sold the shares to the public.SEC V

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B. Dvorak’s Role

Dvorak a cted as CMKM’s attorney d uring the co u rse o f the scheme. Casavant told Dvorak that numerous inv e s t ors had already paid for shares of sto c k in CMKM when the
company was in its init i a l s t a g es, but stock certificates h ad

nev e r b e e n issued to those investors. Casavant also told Dvorak that new c e rt i ficates needed to be issued to c ertain investors whose shares were the subject of an earlier 1 00-forone stock sp l i t

. Casavant then beg an issuing those certificates. After receiving the newly issued CMKM stock certificates, Dvorak would write an opinion letter stating that the stocks referred to in the certificates should be iss u e d without a restrictive leg e nd. 1

Dvorak’s opinion letters indicated t hat the stocks issued by CMKM met the safe harbor of Rule 144(k), and therefore

were e x empt from reg istration under the Securities Act. See 15 U.S.C. § 7 7d(a)(1); 1 7 C.F .R. § 230.144 ( k )

. 2 D v orak’s

1 A restrictiv e leg en d p l a c e d u p o n a secu rity alerts b u y ers t h at th e

secu rity h as n o t b een reg istered u n d er th e Secu rities A ct an d m ay b e

o f f ered an d so ld on ly if th e secu rity is reg istered , o r its sale q u alif ies f or

a n e xe m p tio n f ro m reg istratio n

. S

ee Use o f L eg en d s an d Sto p

- T ran sf e r In stru ct io n s as Ev id en ce o f No n p u b lic Of f erin g , SEC Release No

. 33

- 5 1 2 1
, 19 7 1 W L 1 2 0 4 7 0 (Feb

. 1
, 1 9 7 1). Wh en th e req u irem en ts o f an

ex em p tio n f ro m reg istratio n h av e b een m et, h ow ev er, an issu er w i ll o f ten seek to h av e th e restrictiv e leg en d rem ov ed to av o id d elay s in th e tran sf er

a n d to m ak e th e secu rities m o re saleab le. S ee R o b ert A

. B arro n , S o m e Co mmen ts o n th e Remo va l o f Restrictive Leg en d

s a n d S t o

p s fro m Restricted S

ecu rities Prio r to th e S

a l e o f S uch S ecu rities
, 3 4 S ec. Reg

. L .J

. 3 0 8 (2 00 6 ).

2 In relev an t p art, Ru le 1 4 4(k ) p ro v id ed th at th e u n reg istered sale of

secu rities d id n o t v io late th e Secu rities A ct if th e secu rities w ere h eld f or

a t least tw o y ears b y a n o n af f iliate of th e issu er. S

ee 1 7 C .F.R.SEC V

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letters concluded that the stocks satisfi e d t he two-y e ar holding period of Rule 144(k) because, perhaps implausibly
, the investors had paid for the stock or performed services for CMKM more than two y ea r s prior to issuance of the stock certificates or because a 1 00-for-one stock split had occurred

m o r e than two y ears earlier. Therefore Dvorak’s letters concluded that the shares should be i s sued without a restrictive leg e nd.

During t h e c o u rse o f the scheme, Dvorak drafted 450 opinion letters reg arding a t least 233.7 billion shares o f stock, issued t o 2 58 individuals, that CMKM claimed could have been issued more than two y e a rs e arlier. Dvorak received $318,843 from other participants in the scheme, including
approx imately

$350 per opinion letter.

C. G lobal and Bagley’s Role

Defendant Global is a Nevada corporat i o n owned a nd operated by B ag ley

. I n October 2 001, Global reg istered with the SEC as a transfer ag ent 3 p ursuant to 15 U.S.C. § 78q-1(c) and in 2002 beg a

n serving as CMKM’s transfer ag ent. During the course o f t h e scheme, CMKM a pproved several increases in its number o f authoriz ed shares, until the number

§ 23 0 .1 4 4 (k ) (2 0 0 8 ). Ru le 14 4 (k ) h as sin ce b een rep laced b y Ru le 1 44 (b )

w h ich ch an g ed t

h e tw o

- y ear h o ld in g p erio d o f Ru le 1 4 4 (k ) to a o n e- y ear h o l d i ng perio d. S

ee 1 7 C.F.R. § 2 3 0 .1 4 4 (b ); S EC v. M&

A W

. In c. 5 3 8 F.3 d 1 0 43
, 1 0 4 6 n .1 ( 9 t h Ci r

. 2 0 08 ) (citin g Rev isio n s to Ru les 1 4 4

an d 1 5 5
, Ex ch an g e A ct Release No

. 3 3

- 8 8 6 9
, 2 0 0 7 W L 4 2 7 0 7 0 0 (Dec. 6
, 2 0 0 7 )).

3 Issu ers o f s ecu rities u s e tran sf er ag en ts to , am o n g o th er th in g s, m o n ito r th e issu an ce o f secu rities, reg ister tran sf ers o f secu rities, an d m ain tain th e issu er’ s secu rity

h o ld er reco rd s. S

ee 1 5 U.S.C. § 7 8 c(a)(2 5 ).SEC V

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of auth o r i z ed shares approached 800 billion. Global a nd B ag ley were n otified o f these authoriz ations, and b etween 2002 and 2004 Glo b al issued up to 622 billion shares o f unrestricted CMKM stock based on attorney opinion letters.

During mos t of 2003 and the first half of 2004, B ag ley relied upon opinion letters written by Dvorak. B ag ley testified that, rely ing on Dvorak’s letters she understood that the stock was to be issued without a restrictiv e l e g e n d because p a

y ment for the stock h a d been made, or the stock split h a d occurred, at least two y ears earlier. B ag ley also testified that she may have wondered whether all of the shares claimed by CMKM should actually have been issued t wo y ears earlier, that it seemed strang e to h er that CMKM had so many shares, and that n o t hing CMKM did as a company “m a de sense” to her. B ag ley further testified that Global is “only the transfer ag ency

. That’s all we do. I f we g et proper paperwork, we do what needs to be done.”

I n J une 2004, B a g ley requested that Dvorak’s o p inions be confirmed by Edwards & Ang ell L L P (“Ang ell”), another law firm representing CMKM, because she was not c omfortable with Dvorak’s letters. 4 I n their opinion letters, the A ng ell attorney s stated that “ w e h ave relied upon opinions

. . . o f Dvorak & A ssociates, L td. for e ach o f the Shareholders to the effect that t h e a l r eady

- issued shares as to which the Shares

are being issued as dividen d s w e re issued more than two
y ears ag o and that the issuance of the Shares as dividends has

4 In h er d ep o sitio n , B ag ley d id n o t testif y to an y p articu lar e v e n t s t h a t

m ad e h er f

eel u n co m f

o rtab le w i th

Dv o rak ’ s o p in io n s, n o r d id sh e testif y t h a t s h e h a d an y reaso n to d o u b t t h e accu racy o f Mr. Dv o rak ’ s w o rk

. B ag ley d id state w i t h r e sp ect to Dv o rak t h at sh e “ d id n o t lik e h im ” an d

“ did n ’ t lik e h i s attitu d e.”SEC V

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been duly authori z e d

. ” The Ang ell opinion letter a lso stated that “[ w] e have ex amined such certificates, certified copies o f
org aniz ational and g overnance documents, certif i c a tes o f
g ood standing
, certific a t i o ns of factual matters, company

res o lutions and other records, pertinent documents a nd instruments, and have investig ated such other matters of law and fa ct, as we have d eemed necessary for the purpose o f rendering t h e o pinions set forth herein.” F inally
, the A ng ell opinion letter concluded that “the Shares may be issued to the Shareholde r s

. . . and that the certificates evidencing the Shares need bear no restrictive leg end.” An Ang ell attorney testified that he felt it was r e asonable to rely u pon the opinions ex pressed b y D v o rak in writing Ang ell’s opinion letters. The attorney testified t h a t h e believed Dvorak’s opinion letters to be v a l i d
, and had n o reason to believe the is s u a n ce o f shares in reliance on the Dvorak opinion letters
was wrong ful.

D. P rocedural History

O n A pril 7, 2008, the SEC filed a complaint a g ain s t Dvorak, Global, B ag ley
, and e leven o t h er defendants in the United States D istrict Court for the District of Nevada. The complaint alleg ed violation s o f Section 5 of the Securities A c t , 1 5 U.S.C. § 77e(a), which creates liability for the distribution of unreg istered securities.

On March 25, 2009, an i n d ictment was issued in the United States D istrict Court for the District of Nevada based

on the same set of facts that g ave rise to the civil proceeding s. The indictment n amed Dvorak, as well as five other defendants who are not parties to this appeal.SEC V

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On D ecember 23, 2 0 1 0
, the SEC filed a motion for
summary judg ment ag ainst Dvorak, G l obal, and B a g ley

. Global a nd B ag ley
, but n ot D vorak, opposed t h e S EC’s motion. On J uly 25, 2011, the district court g ranted summary judg ment ag a inst all three Defendants, holding that there was

no g enuine issue of material fact that e ach Defendant was both a n ecessary participant and a substantial f a c tor in the
unreg istered distribution of CMKM stock, and was therefore liable for violating Section 5 of the Securities Act. As to Global and B ag ley
, the district court concluded that they h ad play ed more than a de minimis role in the schem e , and that but for their p a

rticipation in removing the restrictive leg ends

on the CMKM stock certificates there would not have been a sale of unreg istered securities. The district court rejected Global and B ag ley ’s contention that summary judg ment was inappropriate because a mat erial issue of fact remained
reg arding whether they

knew or had reason to know that the distribution of stock was illeg al, concluding that Section 5 is a strict liability

statute.

The district court entered final judg ment on Aug ust 1, 2011. The c ourt permanently enjoined Defenda n t s from violati n g Section 5 and ordered disg o rg ement of p rofits
g ained a s a result of viola t i o n s o f the Securities Act plus prejudg ment interest. Specifically , the court ordered Dvorak
to disg o r g e $409,638.11 and B ag l e y a n d Global, jointly a nd severally , to disg org e $448,047.87

On J anuary 18, 2011
, wh i le the SEC’s motion for
summary judg ment was pending
, Dvorak filed a motion to stay the civil proceeding s until the criminal proc ee d i ng s

con c luded, a

rg uing that a stay w as necessary to protect his F ifth Amendment rig hts. I n the alternative, Dvorak requested that the court g rant him additional time to respond to theSEC V

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SEC’s m otion for summary judg ment. Specifically
, Dvorak referen c e d the SEC’s e v idence r e lated to the criminal proceeding s, stating that “[ w] ith 200 box es of discovery waiting to be scanned and delivered to defense counsel in the criminal case, there may be more Dvorak will b e able to present to defeat summary judg ment.”

United States Mag istrate J udg e Robert J

. J ohnston denied Dvorak’s motion for a stay on April 7, 2011, rejecting D v orak’s arg ument that a stay was required by the F i f t h Am e ndment. The mag istrate judg e also stated that Dvorak had not soug ht any

particular discovery and had not referred in his moving papers to F ederal Rule of Civil Procedure 56(d), sug g esting that Dvorak’s a b i l i t y to respond to the SEC’s motion for summary judg ment w ould not be altered if the court did not stay

the case.

Global and B ag ley appeal the district co u r t ’s g rant o f
summary judg ment and disg org ement order. Dvorak appeals the denial of his motion to stay the proceeding s as well as the district court’s disg org e ment order.

II. DISCUSSION

A. Liability Under Section 5

Global a nd B ag ley arg ue that the district court erred in
g ranting summary judg ment because g enu i n e issues o f material f

a c t r emain as to whether Global and B a g ley ’s actions as a transfer ag ent satisfied the standard for liability under Section 5 of the Securities Act.

W e review the district court’s g rant of summary judg ment de novo, SEC v. Platforms W i r e l e s s Int’l Corp.
, 617 F .3dSEC V

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1072, 1085 (9th Cir. 2010), and view the evidence in the lig ht
most favorable to the nonmoving party to “determine whether there are g enuine issu e s o f material fact and whether the district court c orrectly applied the relevant substantive law,” Oak H a r b or F reight Lines, Inc. v

. Sears Roebuck & Co.
, 513 F .3d 949, 954 (9th Cir. 2008).

“Sections 5(a) and (c) of the Securities Act, 15 U .S.C. § 77e(a), (c), make it unlawf u l t o o f fer or sell a security in interstate commerce if a reg istr a t i on statement has not been filed as to that security
, unless the transaction qualifies for an

ex e mption f

rom reg istration.” Platforms W ireless
, 617 F .3d
at 1085. Section 5(a)(1) “broadly prohibits sales of securities irrespective of the c haracter o f t h e p e rson making them.” SEC v. Chinese Consol. Benevolent Ass’n
, 120 F .2d 7 3 8, 741 (2d Cir. 1941). To establish a prima facie case for violation of Section 5, the SEC must show that ( 1) no reg istration
statement w as in effect as to the securities; (2) the defendant directly or indirectly sold or offered to sell securities; and (3) the sale or offer was made throug h interstate commerce. See SEC v

. Phan
, 500 F .3d 895, 902 (9th Cir. 2007); see also SEC

v. Calvo
, 378 F .3d 1 211, 1214 (11th Cir. 2004) (per curiam). “Once the SEC introdu c e s e vidence that a d efendant has violated the reg istrat i o n provisions, the defendant then h a s the b u r d e n of proof in showing entitlement to an ex e mption.” SEC v. Murphy
, 626 F .2d 633, 641 (9th Cir. 1980) (citing SEC v. Ralston Purin a Co.
, 346 U.S. 119, 126 (1953)). Global and B ag ley challeng e only the first elem e n t of the SEC’s prima facie case, arg uing that they did not sell or offer to sell securities within the meaning o f Section 5.

A l t houg h Section 5 p rovides that it is unlawful for a n y person to sell or offer to sell an unreg istered secu r i t y , 15 U.S.C. § 77e(a), (c), liability under Section 5 is not limitedSEC V

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to the person or entity who ultimately passes title to the security

. See Murphy
, 6 26 F

. 2d at 6 49. “I nstead, courts have established the concept of ‘par ticipant’ liability to bring within the confines of § 5 persons other than sellers who a re responsible for the distributi o n of unreg istered securities.” I d

. W ith respect to Section 5, a defendant’s “role i n t h e transaction must be a sig nificant one before liability will attach.” Id. at 648. Defendants play a sig nificant r ole when they are “both a ‘necessary p a r t icipant’ and ‘substantial factor’ in the sales transact i o n

. ” Phan
, 500 F .3d at 906 (quoting Murphy
, 626 F .2d at 648, 652). W e have previously
st ressed that the substantial factor test requires more than a finding of “but for” causation, ex plaining :

Prior to the issuance of a security
, numerous perso n s perform mechanical acts without which there could be no sale. F or ex ample, a printer may prepare key

documents or a b a

nk

m ay a dvance cash to a customer upon th e customer’s presentation of an instrument and then pass the instrument to anoth e r person. B o th would satisfy a “but for” causation test, b u t these acts nonetheless do not render th e defendants sellers. B efore a person’s acts can be consid ered the prox imate cause of a sale, his a cts must also be a substantial factor in bring ing about the transaction.

Murphy
, 626 F .2d at 650 (citations omitted); see also S E C v

. Seaboard Corp.
, 677 F .2d 1289, 1294 (9th Cir. 1982). “The
prox imate cause analy sis required by Murphy

. . . u s u a l ly i n v o l v es a question o f fact for the jury .” Anderson v. Aurotek
, 774 F .2d 927, 93 0 (9th Cir. 1985) (per curiam),SEC V

. CMKM D I A M O N D S , I N C

. 14

o v erruled in part on other grounds by Pinter v. Dah l
, 486 U.S. 622 (1988). 5

Global and B ag ley first arg ue that the district court erred when it determined that Section 5 is a s t r i c t liability statute

a nd failed to consider whether Global and B ag ley knew or should h ave known that their c onduct violated the Securities Act. G lobal and B ag ley arg ue that, as tra n s f e r ag ents, they
occupy a u nique role in a securities transaction in w hich they perform la r g ely ministerial tasks in reliance upon attorney opinion letters. Therefore, Global and B ag ley arg ue, they can be liable u nder Sectio n 5 only if they acted unreasonably in issuing the CMKM shares without a restrictive leg end.

W e have previously s u g g ested that scienter is not an element of Section 5 liability

. S ee P h an , 500 F .3d at 905–06. This is in accord with the majority of circuit courts that have

5 In Pin ter , th e Su

p rem e C o u r t o v e rru led th e u se o f th e “ su b stan tial f acto r” test f

o r p u rp o s es o f im

po s in g liab ility u n d e r Se ctio n 1 2 o f th e Secu rities A ct. 4 8 6 U.S. at 6 5 4

. S ectio n 1 2 p ro v id es th at “ [a]n y

p erso n

w h o —(1 ) o f

f ers o r sells a secu rity in v io latio n o f [Sectio n 5 ]

. . . sh all b e liab le

. . . to th e p erso n p u rch asin g su ch secu rity f ro m h im .” 15 U.S.C. § 7 7 l ( a )

. T h e Pin ter co u rt ex p lain ed t h at “ [t]h e ‘ p u rch ase f

ro m ’

r e q u irem en t o f § 1 2 f

o cu ses on th e d ef

en d an t ’ s relatio n sh ip w i t h t h e p lain tif f

- p u rch aser. T h e su

b stan tial- f

acto r t est, o n th e oth er h an d
, f o cu ses

o n th e def en d an t’ s d eg ree o f in v o lv em en t in th e s ecu rities tran sactio n an d its su rro u n d in g circu m stan ces.” Pin ter , 4 8 6 U.S. at 6 5 1

.

Sectio n 5 d o es n o t co n tain a sim ilar “ p u rch ase f ro m ” req u irem en t, an d th eref o re w e h av e h eld th at Pin t er d i d n o t o v erru le u se o f th e su b stan tial f acto r test f

or pu rp o ses o f im

p o sin g Sectio n 5 li a b i l i t y

. S ee Ph a n , 5 0 0 F.3 d at 9 0 6 n .1 3 ; see also Geig er v. S EC
, 3 6 3 F.3 d 4 8 1
, 4 8 7

– 8 8 (D.C. Cir. 2 0 0 4 ). Cases th at preced ed Pin t e r a n d describ ed o r ap p lied th e

n ecessary p articip an t an d su

b stan tial f

acto r test in th e co n tex t

o f Sectio n 1 2 co n tin u e t o b e relev an t f

o r p u rp o s es o f d ef

in in g th e sco p e o f t

h at test

w ith resp ect to Sectio n

5

. See, e.g ., Ph a n , 5 0 0 F.3 d at 9 0 6

.SEC V

. CMKM D I A M O N D S , I N C

. 15

c onsidered the question. S ee Calvo
, 378 F .3d at 1 215; SE C

v. Holschuh
, 694 F .2d 130, 1 37 n.10 (7th Cir. 1982); Swenson

v. Engelstad
, 626 F .2d 4 2 1
, 424 (5th Cir. 1980). But see Kane v. S EC
, 842 F .2d 1 94, 199 (8th Cir. 1988) ( holding that Section 5 liability “ex tends to those p ersons who are uniquely positioned to ask relevant questions, acquire material information, or disclose their finding s”). W e conclude that a transfer a g ent’s r ole in a s ecurities distribution is not inherently un i q u e and therefore does not justify subjecting transfer ag ents to a different standard for Sec t i on 5 liability than any o t h er participant in the distribution of unreg istered

secu r i t i es. Transfer ag ents are not, for ex a mple, the only potential participants in a securities distribution that may rely

on the o pinions of a ttorney s. Nor are transfer ag ents the only participants in a securities distr ibution that may play a

m inisterial or de minimis role. A transfer ag e nt, l i k e a n y other p articipant in a securitie s scheme, does not play precisely the same role in every transaction. There f o r e , w e decline to create an ex ception to strict liability for transfer
ag ents, and we r eaffirm that scienter i s n o t a n element o f Section 5 liability

. 6 As ex p laine d m o r e fully below, the

6 B ecau se Sectio n 5 is a strict liab ility statu te, it ap p ears t h at th e d istrict

c o u rt erred in determ in in g th at g o od f aith relian ce o n co u n se l c o u l d
p reclu d e l iab ility u n der th e statu te. T h e cases cited b y th e d istrict co u rt in

su p p o rt of th at p ro p o sitio n in v o lv ed o th er p ro v isio n s o f th e secu rities law s th at d o req u ire scien ter b ef o re im p o sin g liab ility

. S

ee S EC v

. G o l d

f i e ld Deep M i n es Co

. o f Nev.
, 7 5 8 F.2 d 4 5 9
, 4 6 7 (9 th Cir. 19 8 5) (ex am in in g a g o o d f aith d ef en se in th e co n tex t o f en try o f a p erm an en t in j u n c t i o n b ecau se an in

j u n ctio n m ay b e en tered o n l y u p o n a f in d in g o f s cien ter to

v io late th e secu rities law s); S EC v. Sa vo

y In d u s., In c. , 6 65 F.2 d 1 3 1 0
, 1 3 1 4 n .2 8 (D.C. Cir. 1 9 8 1 ) (d iscu ssin g a g o o d f aith relian ce d ef

en se in th e

co n tex t o f liab i l ity u n d er th e an ti-fr a u d p ro v isio n s o f th e secu rities
reg u latio n s th at req u ire a f in d in g o f s cien ter). In co n trast “ n eith er a g o o d f aith b elief th at th e o f

f ers o r sales in q u estio n w ere leg al, n o r relian ce on th e ad v ice o f co u n sel, p ro v id es a co m plete d ef en se to a ch arg e o f v io latin gSEC V

. CMKM D I A M O N D S , I N C

. 16

“necessary

participant” and “substantial factor” test is better suited to determine participant liab i l i t y

. The my riad securities schemes and participant r oles within those schemes
must be considered by courts rat h e r than a scienter requirement based upon the title of a participant.

I n support of their position that transfer ag ents should face liabilit y under Section 5 only when they act

unreasona

b l y , Global and B ag ley rely primarily on Nevada
state law. Under the Ex chang e Ac t, states are authoriz ed to enact leg islati o n g overning transfer ag ents that is “ not inconsistent” w ith f

ederal securities reg u l a t i o n s. 15 U .S.C. § 78q-1(d)(4). Transfer a g ents h ave a duty to reg ister a transfer o f stock under Nevada state law pro v ided that the transfer is, a mong other thing s, rig htful. 7 Global and B ag ley
arg ue that a reasonable bel i ef that a transfer would be
wrong ful under federal securities la w p rovides a transfer
ag ent w ith a defense to the state la w d u t y t o reg ister a transfer. Therefore, Global and B ag ley a rgu e that it is inconsistent for f

ederal law to impose strict liabilit y u p on a transfer ag ent’s wrong ful transfer stock when compliance

Sectio n 5 o f th e S ecu rities A ct.” S EC v. Frien d ly Po wer Co

. , 4 9 F. Su p p

. 2 d 1 3 63 , 1 3 6 8 (S.D. Fla. 1 9 9 9 ) (citin g Ho lsch u h , 6 9 4 F.2 d at 1 3 7 ).

7 Co u rts h av e h eld th at a req u est t o rem o v e a restrictiv e leg en d is

su b s t an tially eq u iv alen t to a req u est to reg ister a tran s f er u n d er th e Un i f o rm C o m m ercial Co d e. S

ee, e.g

. , Am. S

ec. Tra n sfer, In c. v. Pa n t

h eo n In d u s ., In c. , 8 7 1 F. Su

pp

. 4 0 0
, 4 0 4

– 0 5 (D. Co lo

. 19 9 4 ); Ben d er v. Memo r

y Meta ls, In c. , 5 14 A .2 d 1 1 0 9
, 1 1 1 5 (Del. Ch

. 1 9 8 6 ). W e assu m e, w ith o u t d ecid in g , f

o r p u rp o ses o f Glo b al an d B ag ley ’ s arg u m en t th at th e req u ests in th is case to rem o v e th e restrictiv e leg en ds f ro m CMKM sh ares w ou ld b e su bj ect to Nev ad a law g o v ern i n g a tran s f er ag en t’ s du ty to reg ister a tran sf er.SEC V

. CMKM D I A M O N D S , I N C

. 17

with the state law duty to reg ister a t ra n s f er is subject to a reasonableness inquiry

.

The e x istence of state law shielding a transfer ag ent from liability f or failing to remove a r estrictive leg end based upon

a reasonable belief that s uch a removal would be wrong f ul does not conflic t wi th our holding that Section 5 is a strict liability statute. L iability under state and federal law is mutually ex clusive in this c ontex t. I f a transfer ag ent is f ound liable under Section 5 of the Securities Act for issuing shares without a restrictive leg e nd, it is impossible for the transfer
ag ent to b e found liable under state law for refusing to issue that same share. A n d a t ransfer ag ent will not face federal liability for not removing a r e s t r ictive leg end, but may face
state liability if it d i d not h ave a reasonable basis for its refusal. Althoug h the knowledg e requirement for violations of state and federal law differs, that di f f e r e n ce does not persuade us to incorporate an element of scienter into Section 5.

B e cause Section 5 imposes strict liability for violations o f its r eg istration requirement
, we recog niz e that it is particularly important that the n ecessary p a rticipant a nd substantial factor test be carefully applied to each case so a s not to subject d e f

endants with a de minimis or insubstantial

r o l e i n a securities scheme to strict liability

. W ith that in mind, w e turn n ow to application of the n ecessary participant and substantial factor test to the facts of this case.

The district court found tha t G l o bal and B ag ley were necessary participants b ecause, “ but for their participation in

rem o v i n g the r estrictive leg e nds, there would not have been

a sale of unreg istered se c u r ities because the CMKM stock would stil l h a ve the restrictive leg end o n each certificate.”SEC V

. CMKM D I A M O N D S , I N C

. 18

The c ourt w ent on to conclude that Global and B ag ley were substantial f

a c t o r s in the scheme as a matter of law because they “issued billions o f shares of CMKM stock w ithout the restrictive leg end and then transferred those unrestri cted

c e r t ificates to defendant NevW est for the purpose o f sale t o the g eneral public.” Global and B ag ley arg ue that, e v e n if Section 5 does not require scienter, their conduct as CMKM’s transfer a ge n t w as insufficient to establish that they were a substantial factor in the scheme to distribute CMKM stock. The SEC arg u es, however, that Global and B ag ley by v irtue of their status as CMKM’s transfer ag ent are necessarily liable under Section 5 because a t r a nsfer ag ent’s role is “central to the distribution” of securities.

W e reject the SEC’ s c o n tention that Global and B ag ley

are n ecessarily liable under Sectio n 5 by virtue of their position as CMKM’s transfer ag e nt. A par t i c i pant’s title, standing alone, cannot determine liability under Se c t i o n 5, because the mere fact that a defendant is labeled as a n issuer,

a broker, a transfer ag ent, a CEO, a purchaser, or an attorney , does not adequately ex plain what role the defendant actually play ed in the scheme at issue. I nstead, whether a defendant is a substantial factor in the distribution of unreg istered securities is a question o f fact requiring a case-by -case analy sis o f the n at ure of the securities scheme and the defendant’s participa t i o n i n it. See Anderson
, 774 F .2d at 930. This does not mean that summary judg ment will never be appropriate, however. F or ex ample, i n M u rphy we affirmed the district court’s g r ant of summary judg ment in the SEC’s favor reg arding defendant’s Section 5 liability because

Murphy participated he avily in the offering s.

. . . He devised the corporate financing scheme for [ the issuer ]

. . . . HeSEC V

. CMKM D I A M O N D S , I N C

. 19

prepared and reviewed offering memoranda; he met personally with broker-dealer s, investors and their represe n t a tives; and he spoke at broker-dealer sales seminars. There

can be no g a insay

ing the importance of these
acts: Murphy ’s ex tensi v e role in facilitating the transactions clearl y w as a substantial factor in the sales of unreg istered securities.

Murphy
, 626 F

. 2d a t 6 3 8, 652. Similarly
, in Phan we affirmed summary judg ment holding the defenda n t l iable under Section 5 w here the defendant chose the date to call in the investor’s $1.25 million oblig ation to the issuer, directed the investor to sell the shares in order to r epay her oblig ation, provided the investor w ith a buy er , d i r ected the issuer’s lawy er to draft a contract for the stock sale, and instructed the investor where to send the procee d s

. 500 F .3d at 906. B ecause of those facts we concluded that Phan “was both a ‘necessary participant’ and a ‘substant i a l f actor in’ W u’s resale.” I

d. ; see also Calvo
, 378 F .3d at 1215 ( “[ T] he undisputed material f

acts amply suppo r t t he district court’s determination that, as a matter of law, Calvo illeg ally sold
unreg istered securities” where “Calvo neg otiated and sig n ed the contract with [ the issuer] SOE pursuant t o which [ the brokerag e] r eceived the unreg istered shares as c ompensation; he ex tended that contract on behalf of [ the brokerag e ] ; he sig ned the documents that opened the .

. . brokerag e account into which all of the unreg istered SOE shares were d eposited; he sig ned st o c k transfer authoriz ation and stock p owers for sales or transfers of stock o u t of [ the] brokerag e account; a nd he received proceeds–albeit throug h [ the broker a g e ]– f r o m the sale o f SOE shares. Clearly
, Calvo was a necessary p a r t i c ipant and a substantial f actor in the illeg a l sale of
unreg istered SOE stock.”).SEC V

. CMKM D I A M O N D S , I N C

. 20

Here, the undisputed facts do not establish that Global a nd B ag ley were substantial participants in the CMKM distribution as a matter of law. Global and B a gl e y r e a d opinion letters from D vorak, instructing them to remove the restrictive leg ends from CMKM stock, and then issued larg e quantities of those shares without the restrictive l eg end. Global and B ag ley then requested a second opinion letter from Ang ell. After reading the Ang ell opinion letters, Global and B ag le y continued to issue larg e q uantities of shares without the restrictive leg end. 8 T his conduct is in stark
contrast to the actions taken by the defendants in Murphy
, Phan
, and Calvo

. The defendants in those cases were i nteg rally involved in the securities-distribution schemes, from devising the scheme to finding investors and buy ers to structuring the sales. That G lobal a nd B ag ley issued l a r ge quantities of shares without a restrictive leg end a fter receiving two attorney opinion letters is insufficient, in and o f itself, to e stablish that Global and B ag ley w ere sub s tantial factors as a matter of law. B ased upon this evidence, a reasonable jury could conclude that Global and B ag ley were not substantial par t i ci p a nts in the CMKM scheme. See Geiger v. SEC
, 363 F .3d 481, 487 ( D .C. Ci r. 2 004) ( “[ N] ot

8 T h e d istrict co u rt reaso n ed th at Glo b al an d B ag ley “ tran sf erred th ose

u n restricted certif

icates to d ef

en d an t Nev W est f

o r th e p u rp o se o f sale to th e g en eral pu

b lic” in co ncluding t

h at Glo b al an d B ag ley w ere su b stan tial f acto rs in th e sch em e. B u t th is f act w as n o t u n d isp u ted in th e reco rd

. T h e

reco rd in dicates o n ly th at “ Ed w ard s h an d d eliv ered sev eral recen tly issu ed
sto ck certif

i cates in CMKM sto ck to Nev W est,” an d th at “ Ed w ard s w as d eliv erin g to Nev W est n ew ly issu ed sto ck certif

icates in CMKM s to ck .” T h e SEC d o es n o t id en tif

y an y p o rtio n o f th e reco rd in dicatin g th at G lo b a l

a nd B a g ley tran sf

erred sh ares to Nev W est. T h eref o re, th e d istrict co u rt

e r r e d i n r ely i n g o n th e f

act th at Glo b al an d Bag ley tran sf erred s to ck s to Nev W est to su

p p ort its co n clu sio n th at t

h ey w ere su

b stan tial f acto rs in th e CMKM d i strib u tio n

.SEC V

. CMKM D I A M O N D S , I N C

. 21

every one in the chain of intermediari e s b etween a seller o f securities and the ultimate buy er is sufficiently i n volved in the process to make h i m responsible for an unlawful distribution.” (internal quotation marks omitted)). T his case does not present e v idence o f sig nificant and continuing involvement in the development and ex ecution of a scheme
to distribute securities in v iolation of the Securi t i e s Act like that which h as supported th e e n try of summary judg ment in other cases on the question of whether defendants were a substantial factor in a securities distribution

. T herefore, we

reverse the district c o urt’ s gr a n t of summary judg ment as to Global and B ag ley and r emand f or proceeding s consistent with this opinion. 9

B. Motion to Stay

Dvorak appeals from the mag istrate judg e’s denial o f his motion to stay

. D vorak challeng es b oth t h e mag istrate judg e’s authority to decide the motion, as well a s t h e substantive reasons for the denial.

1. Authority of

the Magistrate Judge

“[ A] d istrict judg e may desig n ate a mag istrate judg e to hear any nondispositive pretrial matter pending before the

cour t

. ” E

state of Connors ex rel. Meredith v. O’Connor
, 6 F .3d 656, 658 (9th Cir. 1 9 9 3 ); see also 28 U .S.C. § 636(b)(1)(A). U n der 2 8 U.S.C. § 636(b)(1)(B ), a district judg e may also authoriz e a mag istrate j u d ge to “conduct hearing s, including evidentiary hearing s, and to sub m i t to a

9 B ecau s e w e rem an d o n t h e issu e o f

Glo bal an d B ag ley ’ s liab ility , w e d o n o t reach th eir arg u m en ts ab ou t th e reaso n ab len ess o f th e d istrict

co u rt’ s d isg o rg em en t o rd er ag ain st th em

.SEC V

. CMKM D I A M O N D S , I N C

. 22

judg e of the cour t p roposed finding s of fact a nd recommendations f

or the disposition” of moti o n s that the
mag istrate judg e lacks the authority to dec i d e under § 636(b)(1)(a). As we have noted:

T h e p r i m a r y d i f

f e r e n c e b e t w e e n subsections (1)(A) a

n d (1)(B ) is that the former allows the mag istrate judg e to “determine” the matter (subject to the review of the distric t c o urt for clear or leg al error)

w h i le the latter allows the mag istrate only t o

s u b m i t “ p r o p o s e d f i n d i n g s a n d recommendations” for the district cou r t ’ s de

novo review.

Reynaga v. Cammisa
, 971 F .2 d 4 1 4
, 416 (9th Cir. 1 992) (quoting 28 U.S.C. § 636(b)(1)).

W e h ave previously held that where th e d enial of a motion to stay is e ffectively a d enial of the u l t i m a t e relief
soug h t, s u ch a motion is considered dispositive, and a mag istrate judg e lacks the authority to “determine” the
matter. Id. at 4 16–17. W e have not, however, squarely addressed the question o f whether a m o t ion to stay a civil proceeding
, where the effect is not the denial of relief, is a nondispositive motion tha t m ay be determined by a mag istrate judg e under § 636(b)(1)(A). The F irst Circuit has held that a motion to stay litig ation that “is not dispositive o f either th e case or any claim or defense within it” may properly be determined by

a mag istrate judg e. PowerShare, Inc. v. Syntel, Inc.
, 597 F

. 3d 10, 13–14 (1st Cir. 2010). Here, D v o r ak simply speculated that he mig ht have stronge r evidence to support his position in the civil proceeding s if he

w a s a ble to g o throug h the criminal p roceeding s first. T h eSEC V

. CMKM D I A M O N D S , I N C

. 23

mag istrate judg e’s denial of Dvorak’s motion to stay the civil proceeding s did not dispose o f any claims or defenses and did
not effectively deny him any u ltimate relief soug ht. Therefore Dvorak’s moti o n t o stay was nondispositive, a nd

we c o n clude that the mag istrate judg e had authority to determine Dvorak’s motion to stay under § 636(b)(1)(A).

2. Denial of

Motion to Stay

I n addition to challeng ing the mag istrate judg e’s authority
to rule on his motion, Dvorak raises numerous challeng es to the substance o f the m a gi s t rate judg e’s denial of his motion
t o s t ay t he proceeding s. However, D vorak did not object to the mag istrate judg e’s order in the district court, a nd he therefo r e h as forfeited his rig ht to appellate review of the order. See Simpson v

. Lear Astronics Corp

. , 77 F .3d 1170, 1174 (9th Cir. 1 996) ( “[ A] party who f a i l s to file timely objections to a mag istrate judg e’s nondispositive or d er with the district judg e to whom the case is assig ned f o r feits its rig ht to appellate review of that order.”); see also Glenbrook Homeowners As s ’ n v

. Tahoe Reg’l Planning Agency
, 425 F .3d 611, 619–20 (9th Cir. 2005).

C. Disgorgem ent

On appeal, Dvorak arg ues that the district co u r t erred in ordering him to disg org e $409,638.11 because material issues of f a ct remain as to the appropriateness of that amount. 1 0 Specifically
, Dvorak arg ues t h a t b ank records a nd ex h ibits that he produced at his deposition contain evidence indicating

10 Dv o rak d isp u

t es o n ly th e d istrict co u rt’ s d isg o rg em en t o rd er an d d oes

n o t arg u e th at th e d istrict co u rt erred in en terin g su m m ary j u d g m en t as to h is liab ility

u n d er Sectio n

5

.SEC V

. CMKM D I A M O N D S , I N C

. 24

that $409,638.11 is n ot a reasonable approx imation of the amount by

which Dvorak was unjustly enriched.

“The district court has broad equity powers to ord e r the disg org e ment of ‘ill-g otten g ains’ obtained throug h the violation of the securities laws.” SEC v. First P ac. B a ncorp , 142 F .3d 1186, 1191 (9th C i r

. 1 9 9 8) (citing SEC v. Clark
, 915 F .2d 439, 453 (9th Cir. 1990)). “The district court also has b r oad d iscretion in calculating the amount to be disg org e d.” SEC v. JT W allenbrock & A s s o c s

. , 4 40 F .3d 1109, 1 1 1 3 ( 9 th Cir. 2006). I n calculating disg org ement, a district c ourt n eed only make a “reasonable approx imation o f profits causally conn e c t ed to the violation” and is “ not required to trace e very dollar of the offering proceeds fraudulently retained b y ” the defendants. First Pac. B a ncorp , 142 F .3d at 1192 n.6. (internal quotation marks omitted).

“The SEC bears the ultimate burden of persuasion that its disg org e ment fig ure reasonably approx imates the a mount o f unjust enrichment.” P latforms W ireless
, 617 F .3d at 1096 (internal q

uotation marks omitted). I f the SEC establishes that the amount of disg org ement requested i s a reasonable
approx imation of defendants’ actual profits from the scheme, “the burden shifts to the defendants to demonstrate that the d i s go rg ement fig ure was n ot a reasonable approx imation.” Id. (interna l q u otation marks omitted). Defendants bear the burden o f showing unreasonableness because they “are more likely than the S E C t o have access to e vidence establishing what they pa i d f

or the securities, if a

ny thing
, to whom the proceeds from th e s ales were distributed, and for what purposes the proceeds were used.” I d.

Dvorak a dmits that the bank records and ex hibits he n ow references were not part of the record before the district court,SEC V

. CMKM D I A M O N D S , I N C

. 25

because he failed to produce them or otherwise respond to the SEC’s m o t i o n f

or summary judg ment and request for a disg org e ment order. Therefore, Dvorak has forfeited his rig ht
to a p pellate review of the district court’s disg org ement order. See Peterson v. H

ighland M

u s i c , Inc.
, 140 F .3d 1313, 1321 (9th Cir. 1998) (“W e apply a g eneral rule ag ainst entertaining
argu m en t s on appeal that were not presented or developed before the district court.” (internal quotation marks o mitted)). Dvorak arg ues o n appeal, h owever, that arg ument s in his motion to stay constituted a response to the SEC’s request for disg org e ment. Specif

i c al ly
, Dvorak arg ues that his d e p o s i t i o n a nd ex hibits thereto “c o n t r o v e r t e d ” t h e

r e a sonableness of the SEC’s request for disg org e ment. B ecause h e co u l d not a fford a copy of his deposition transcript, Dvorak ar gu e s that the district court should have ordered the SEC to produce the e n ti rety of Dvorak’s deposition.

F irst, the district court did not err in failin g t o c o nsider Dvorak’s r e f

e rences to the disg org ement order made in connection with h is motion to stay , because district c ourts a re not required to r eview all papers f i l ed in a case in order to determine if a p arty has raised arg uments in other filing s that could b e construed as r esponsive t o a p ending motion. See Simpson
, 77 F .3d at 1175–76 ( ruli n g that a complaint about the amount of a sanct i o ns order that was raised in a filing other t h a n the motion for review of the sanctions order “ did not put the district judg e on notice that [ the plaintiff] soug ht to contest the amount of sanctions.”

Second, even if Dvorak is correct that his comments about discovery in his motion t o s t a y c onstituted a response to the SEC’s request for disg org ement, these arg u ments a re insuffi cient to show that the district court abused itsSEC V

. CMKM D I A M O N D S , I N C

. 26

discretion in ordering Dvorak to disg o rg e $409,638.11. I n his briefing in support of the motion to stay litig a tion, Dvorak stated that portions of his dep o s i t ion and ex hibits thereto “clearly controverted” the amount o f the SEC’s disg org ement request. He requested that the SEC “fulfill its duty of c andor
t o t h e c o urt and file the entire deposition and all its ex hibits

as an ex hibit to i t s Motion for Summary J udg ment.” B ut Dvorak d id not indicate how the f acts contained in his bank
account records and d eposition transcript would demonstrate the unreasonableness o f the SEC’s d isg org ement request. Nor did Dvorak provide a ny ex planat i on for why he was unable to produce h is own bank account records and ex h ibits he produced at his deposition to oppose the SEC’s request for disg org e ment. Therefore, Dvorak failed to meet his burden of showing that the disg org ement fig u re was not a reasonable
approx imation of his illeg al profits. See Platforms W ireless
, 617 F .3d a t 1096. According ly
, we affirm the district court’s disg org e ment order as to Dvorak.

CONCLUSION

A material issue of f

act remains reg arding whether Global and B a g ley were neces s a r y participants a

nd substantial factors in the distrib u t ion of CMKM securities sufficient to impose liability under Section 5 of the Securities Act. Therefore, we reverse the g r a n t of summary ju d gment as to Global and B ag ley
, and remand f or further proceeding s. W e af firm the mag istrate judg e’s denial of Dvorak’s motion to stay and the district court’s disg org ement order as to Dvorak.

AF F IRMED in part, REVERSED in p a r t a nd REMANDED. The parties shall bear their own costs on appeal.