Opinion ID: 1984482
Heading Depth: 2
Heading Rank: 2

Heading: What is the appropriate monetary remedy?

Text: Having determined that Diacide I established the State's right to pursue a joint and several theory of liability against McHose, we must now decide whether the district court's award of monetary relief against McHose in favor of the State is in accordance with our decision in Diacide I, the applicable statutes and the record. We noted in Diacide I that the State's aiding and abetting contention against McHose raised a question concerning the knowledge element of aiding and abetting under section 502.503(1)(b). 561 N.W.2d at 376. Pursuant to section 502.503(1)(b), an alleged aider and abetter can escape liability for aiding and abetting securities fraud by proving he or she did not know, and was not grossly negligent in failing to know, of the existence of facts by reason of which the liability is alleged to exist. The district court in its ruling before the first appeal, however, did not apply the provisions of section 503.503(1)(b), but rather relied on Foley v. Allard, 427 N.W.2d 647 (Minn.1988), which in turn adopted a three-prong test to establish aiding and abetting liability set forth in Metge v. Baehler, 762 F.2d 621 (8th Cir.1985). The State and McHose did not object when the district court applied the Metge test, which imposes the burden of proof on the State regarding the issue of knowledge, and did not raise the issue on appeal in Diacide I. We therefore left the further application of section 502.503(1) for future securities fraud cases and analyzed the district court's use of the Metge test to determine whether the evidence was sufficient to show that McHose aided and abetted the commission of securities fraud. Diacide I, 561 N.W.2d at 377. Section 502.503(1)(b) therefore has no application to this case due to the above record. We stated in Diacide I that knowledge of a securities law violation on the part of an aider or abettor is established by proof that the alleged aider and abettor knew of the illegal scheme and was aware of his or her assistance in furthering the scheme. Id. at 378. We also proceeded to outline the events and transactions showing McHose's participation in the fraudulent note program and ultimately concluded that the district court wrongly decided there was insufficient evidence that McHose aided and abetted the commission of securities fraud. In doing so, we did not specify a particular date as the point at which McHose had knowledge of the illegal scheme. Rather, we pointed to specific events and transactions showing McHose's knowledge of the scheme. In particular, we noted that: (1) as early as 1990, Diacide and ESPMcHose's family-owned corporationentered into a financing agreement and that McHose made loans to Diacide during the course of the scheme; (2) the notes sold by Diacide to defrauded investors were very similar in terms to many of the financing agreements between Diacide and McHose entered into between September 1990 and December 1991; and (3) between September 25, 1992 and February 25, 1993, nine deposits were made into ESP's bank account, three of which were from checks made by investors to Diacide under the bogus note scheme. Id. at 380. We also noted that McHose's testimony itself provided evidence about his awareness of the fraudulent scheme; portions of this testimony related to events that occurred between 1992 and 1993. [5] Id. Based on these events, in addition to those discussed more thoroughly in Diacide I, we found that McHose was aware of the fraudulent Ponzi scheme and of his role in it, id. at 382, and further found that McHose aided and abetted the violation of the Iowa Code section 502.401 antifraud provisions. Id. at 384. Our findings and conclusions in this equity action therefore became the law of the case, which were binding upon the district court during the course of the proceedings on remand. On remand, the district court apparently believed that it had to establish a certain date as to when McHose acquired knowledge of the fraudulent nature of Diacide's scheme and the approximate date that he acquired knowledge that he was assisting therein. The district court picked May 5, 1993, (when McHose had a luncheon meeting with the other defendants involved in the fraudulent scheme) as the date that McHose acquired the requisite knowledge and reasoned that McHose should not be held liable for monies the other defendants fraudulently obtained from investors before May 5, 1993. Based on this finding, the district court concluded it would not be equitable to enter a judgment against McHose requiring him to repay amounts taken from investors prior to his involvement with Defendants Diacide and Starnes. Thus, the only judgment entered by the court was for disgorgement of $102,283 that McHose repaid himself from investors' money in the ESP bank account. Upon our review, we believe the district court misinterpreted our statements in Diacide I to mean that McHose's involvement and knowledge of the fraudulent note program was somehow limited to a certain time period, which in turn limited the extent of his liability. We believe our opinion in Diacide I showed a summary of events and transactions outlining McHose's involvement in the fraudulent scheme, including events that occurred long before the May 5, 1993 meeting. As indicated above, the findings outlining McHose's involvement in, and knowledge of, the fraudulent scheme and our conclusion that he aided and abetted securities fraud became the law of the case. The district court was bound by these findings and therefore should have entered an appropriate judgment in the same amount as had been entered against the other defendants. The district court therefore erred and should have entered restitution judgment in the amount of $1,457,135 plus applicable interest in favor of the State and against McHose as an aider and abettor pursuant to Iowa Code sections 502.604(2) and 502.503(1). Accordingly, we reverse the district court's judgment on this issue.