Court Opinion

ID: 9930296
Source: CourtListenerOpinion
Date Created: 2024-02-06 17:00:47.608088+00
Date Added: 2024-06-11T11:11:21.728435
License: Public Domain

FILED
                           NOT FOR PUBLICATION
                                                                             FEB 6 2024
                    UNITED STATES COURT OF APPEALS                       MOLLY C. DWYER, CLERK
                                                                          U.S. COURT OF APPEALS

                            FOR THE NINTH CIRCUIT

U.S. SECURITIES & EXCHANGE                       No.   17-56196
COMMISSION,
                                                 D.C. No.
              Plaintiff-Appellee,                2:12-cv-08024-AB-JEM

 v.
                                                 MEMORANDUM*
BRUCE A. COLE; NANETTE H. COLE,

              Defendants-Appellants.

                    Appeal from the United States District Court
                       for the Central District of California
                    Andre Birotte, Jr., District Judge, Presiding

                           Submitted February 6, 2024 **

Before: FERNANDEZ, SILVERMAN, and N.R. SMITH, Circuit Judges.

      *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
      **
             The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).
      The Securities and Exchange Commission (SEC) brought a civil

enforcement action against Bruce and Nanette Cole1 for committing securities

fraud. The Coles appeal the district court’s judgment ordering them to disgorge

the $904,1672 they wrongfully received as a result of Bruce Cole’s fraudulent

actions. We have jurisdiction under 28 U.S.C. § 1291 and review a “district

court’s formulation of remedies under the Securities Act and the Exchange Act”

for abuse of discretion. SEC v. Husain, 70 F.4th 1173, 1180 (9th Cir. 2023). We

affirm in part, and vacate and remand in part.

      1.     The district court did not err in granting summary judgment on the

basis that Cole was collaterally estopped from relitigating the SEC charges for the

first wire transfer of $700,000. In Missouri, Cole pleaded guilty to securities fraud,

Mo. Rev. Stat. § 409.05-501, which encompassed the same fraudulent scheme as

those charged in this case. Thus, the evidence and the claims are closely related.

See Sec. & Exch. Comm’n v. Stein, 906 F.3d 823, 830 (9th Cir. 2018). The state

and federal charges have the same elements of (1) a material misrepresentation (2)

in connection with a sale of securities. The Missouri statute has an additional mens

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        Nanette Cole was included as a relief defendant for receiving ill-gotten
gains from her husband, Bruce Cole.
      2
       This amount was obtained through two separate wire transfers of $700,000
and $204,167. The district court also granted prejudgment interest in the amount
of $119,885, making the final judgment $1,024.052.
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rea of willfullness, see Mo. Rev. Stat. § 409.5-508(a), which is higher than Section

17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 of

the Exchange Act, see Howard v. Everex Sys., Inc., 228 F.3d 1057, 1063 (9th Cir.

2000) (outlining recklessness as the scienter required for Section 10(b) or

17(a)(1)); SEC v. Dain Rauscher, Inc., 254 F.3d 852, 856 (9th Cir. 2001) (outlining

the scienter for Section 17(a)(2) and (3) is negligence). Although scienter is not an

element of the Missouri securities fraud statute, see State v. Dumke, 901 S.W.2d

100, 104 (Mo. Ct. App. 1995), Missouri law requires that the defendant act with “a

culpable mental state” as defined by Missouri statute section 562.016, see id. at

104–05. With respect to securities law, willful means “an act which is intentional

with respect to the conduct.” Id. at 104. “Therefore, [the state of Missouri] proved

beyond a reasonable doubt the same issues the SEC needed to prove only by a

preponderance of the evidence. There is no difference in the applicable legal

standards that would affect the outcome of the civil case.” See Stein, 906 F.3d at

830. Accordingly, Cole is estopped from challenging the facts established in the

Missouri criminal case relating to the first wire transfer.

      2.     The district court did not err in concluding that Cole’s scheme to

defraud violated Section 17(a), Section 10(b), and Rule 10b-5. “Liability under

Section 10(b) and Rule 10b–5 . . . requires evidence of (1) a material

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misrepresentation, (2) in connection with the purchase or sale of a security, (3)

with scienter, (4) by means of interstate commerce.” See SEC v. Todd, 642 F.3d

1207, 1215 (9th Cir. 2011). Section 17(a), Section 10(b), and Rule 10b-5 “forbid

making a material misstatement or omission in connection with the offer or sale of

a security by means of interstate commerce.” SEC v. Dain Rauscher, Inc., 254

F.3d 852, 856 (9th Cir. 2001). Here, the record supports the district court’s

conclusion that Cole perpetrated a fraudulent scheme. First, Cole materially

misrepresented the creation of Ramwell Industrial to Memtek, which Cole never

incorporated. Cole instructed a Mamtek employee to prepare invoices for the

fictional company and submitted the invoices to the City of Moberly. When

Mamtek received the requested payments from the City, he directed the funds be

sent to his wife’s account on behalf of Ramwell, despite his knowledge that his

wife was not an agent of Ramwell, Ramwell did not exist, and the payments were

not for any services performed. Second, Cole’s use of the City’s bonds to obtain

the wire transfers “touche[d] upon or ha[d] some nexus with [a] securities

transaction.” SEC v. Rana Rsch., Inc., 8 F.3d 1358, 1362 (9th Cir. 1993) (internal

quotation marks and citation omitted). Third, Cole knew that his statements were

false. Cole falsified a contract between Mamtek and Ramwell, and Cole knew that

his wife was not an agent of Ramwell. Finally, the wire transfer took place by

                                          4
means of interstate commerce through different banks and financial institutions in

different states. Although “[m]ateriality and scienter are both fact-specific issues

which should ordinarily be left to the trier of fact,” In re Apple Computer Sec.

Litig., 886 F.2d 1109, 1113 (9th Cir. 1989) (citations omitted), here, the

“materiality is so obvious that reasonable minds could not differ,” Provenz v.

Miller, 102 F.3d 1478, 1489 (9th Cir. 1996) (cleaned up). Accordingly, the all of

the elements of security fraud under Section 17(a), Section 10(b), and Rule 10b-5

have been met.

      The Coles argue that the disgorgement of $204,167 was improper because it

was for compensation for Bruce Cole’s services. Although Brice Cole represented

to Mamtek that the money was for services he personally performed, the record

establishes that the money paid by the City were for services allegedly performed

by Ramwell, not Bruce Cole, as outlined in the Ramwell invoice. The Coles do not

provide any evidence, beyond speculation and Coles’s self-serving statements, that

payment for Bruce Cole’s services were included in the Ramwell invoice. Thus,

district court properly included the $204,167 in the disgorgement order.

      3.     After the district court entered judgment in this case, the Supreme

Court decided Liu v. Sec. & Exch. Comm’n, 140 S. Ct. 1936 (2020). Liu makes it

clear that “a disgorgement award [cannot] exceed a wrongdoer’s net profits and is

                                           5
awarded for victims is equitable relief permissible under § 78u(d)(5).” Id. at 1940.

Although the district court ultimately did not award disgorgement in excess of the

amounts obtained by the Coles’ underlying fraud, it is unclear whether the

recovered money was properly directed to the victims rather than the SEC. See id.

at 1948–49 (noting that “[i]t is an open question whether, and to what extent, [the

SEC’s practice of depositing disgorgement funds with the Treasury when it is

infeasible to distribute the funds to the investors] nevertheless satisfies the SEC’s

obligation to award relief ‘for the benefit of investors’ and is consistent with the

limitations of § 78u(d)(5)”). Thus, to the extent that the district court’s

disgorgement order was not in accordance with Liu, we vacate and remand for the

district court to ensure that the amount awarded and its distribution is in

accordance with Liu.

      4.     The district court did not abuse its discretion in rejecting the Coles’s

claims concerning discovery issues. See Tatum v. City & Cnty. of San Francisco,

441 F.3d 1090, 1100 (9th Cir. 2006). The Coles never filed a motion under

Federal Rule of Civil Procedure 56(d), and it appears from the record that they did

obtain the discovery requested, after which the district court granted additional

time to respond to the SEC’s motion. The Coles do not explain on appeal “what

other specific evidence it hope[ed] to discover [or] the relevance of that evidence

                                           6
to its claims.” Stevens v. Corelogic, Inc., 899 F.3d 666, 678 (9th Cir. 2018). Nor

do they suggest what facts exist that would have precluded summary judgment.

See id. Accordingly, the Coles have failed to establish that the district court abused

its discretion.

       The parties shall bear their own costs on appeal.

       AFFIRMED in part, VACATED and REMANDED in part.

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