Court Opinion

ID: 5117837
Source: CourtListenerOpinion
Date Created: 2021-10-12 18:00:20.744246+00
Date Added: 2024-06-11T08:22:04.377427
License: Public Domain

Case: 20-30464     Document: 00516050750         Page: 1   Date Filed: 10/12/2021

           United States Court of Appeals
                for the Fifth Circuit                          United States Court of Appeals
                                                                        Fifth Circuit

                                                                      FILED
                                                               October 12, 2021
                                  No. 20-30464
                                                                 Lyle W. Cayce
                                                                      Clerk
   Securities and Exchange Commission,

                                                           Plaintiff—Appellee,

                                      versus

   Ronald L. Blackburn; Bruce A. Gwyn; Michael A.
   Mulshine,

                                                      Defendants—Appellants.

                  Appeal from the United States District Court
                     for the Eastern District of Louisiana
                           USDC No. 2:15-CV-2451

   Before Dennis, Higginson, and Costa, Circuit Judges.
   Gregg Costa, Circuit Judge:
         The Securities and Exchange Commission charged these three
   defendants and others with selling unregistered securities and misleading
   investors during their operation of a penny stock company. On summary
   judgment, the district court found the three defendants liable on several of
   the Commission’s claims. Among other remedies, the district court ordered
   disgorgement of the defendants’ fraud proceeds.
         This appeal presents two questions. First, was summary judgment
   warranted in the SEC’s favor on liability? Second, was the disgorgement
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                                   No. 20-30464

   award “for the benefit of investors” as Liu v. SEC, 140 S. Ct. 1936, 1949
   (2020), requires? This is the first time a court of appeals is being asked to
   decide the “awarded for victims” question since Liu was decided. Because
   the answer to both questions is yes, we AFFIRM.
                                         I.
          Ronald Blackburn founded Treaty Energy Corporation in 2008.
   Treaty was a small oil and gas company whose shares were traded over the
   counter as “penny stocks.” 17 C.F.R. § 240.3a51–1 (defining penny stocks);
   see SEC v. Kahlon, 873 F.3d 500, 502 n.1 (5th Cir. 2017) (explaining that a
   “penny stock” is one sold over the counter for less than $5/share). When
   the company was formed, Blackburn received around 400 million shares,
   giving him an 86.4% interest in Treaty. Though Blackburn was never a board
   member or an officer of Treaty—we will soon discuss the reasons he may not
   have wanted those public affiliations—he maintained significant control over
   the company. To cite some examples, Blackburn communicated with a
   foreign government on behalf of Treaty, paid the company’s bills with his
   stock proceeds, and appointed Treaty’s officers and directors.
          Treaty was not Blackburn’s first involvement with a penny stock
   company. He had previously worked at a gravel pit company that went
   bankrupt. During the bankruptcy, Blackburn paid over $1 million to settle
   the trustee’s claim that he had misappropriated company funds. And before
   that penny stock bankruptcy, Blackburn was convicted of four federal tax
   felonies.
          Blackburn recruited people with cleaner records to serve as officers of
   his new Treaty venture. Blackburn knew Michael Mulshine from before he
   started Treaty and asked him to help form the new company. In exchange
   for his help, Mulshine received over 16 million shares of Treaty. From then
   on, Mulshine served as Treaty’s Assistant Secretary.

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          Bruce Gwyn’s involvement with Treaty began a few years later when
   he joined the Board of Directors. He also served as Treaty’s co-Chief
   Executive Officer for some time before becoming Treaty’s Chief Operating
   Officer.
          In 2014, the SEC asserted several claims against Treaty and
   individuals involved with Treaty, including Blackburn, Mulshine, and
   Gwyn. 1 To give a taste of the allegations, we detail a few here.
          The SEC alleged that the defendants failed to register millions of
   shares they sold, in violation of sections 5(a) and 5(c) of the Securities Act.
   15 U.S.C. § 77e(a), (c).        These sales raised millions of dollars from
   unsophisticated investors.
          The SEC also claimed that Blackburn and Mulshine misrepresented
   the company’s drilling results to investors. See 15 U.S.C. § 77q(a); 17 C.F.R.
   § 240.10b-5. In 2012, Mulshine published a press release stating that Treaty
   had “struck oil” in Belize. The very next day, Belize’s government released
   a statement “categorically refut[ing]” Treaty’s claims of “drilling success”
   and calling the reports “false and misleading.” An unchastened Mulshine,
   with Blackburn’s help, published a second press release entitled, “Treaty
   Energy Provides Confirmation of its Belize Oil Find.”                 Treaty never
   produced any oil in Belize.
          The SEC further alleged that Mulshine deceived investors about
   Blackburn’s role in Treaty. When Mulshine was searching for investors, he
   reached out to a former coworker named Jeffrey Morgan. In their discussions
   about the company, Morgan asked whether Blackburn was involved. If he

          1
            The company and one defendant settled with the SEC. The district court found
   the other two defendants liable and imposed remedies against them in the same order we
   are reviewing, but those two defendants did not appeal.

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   was, Morgan did not want to invest—he had lost over $450,000 investing in
   the gravel pit company after Blackburn had guaranteed it had a “positive
   outlook.” Despite Blackburn’s significant control over Treaty, Mulshine
   assured Morgan that Blackburn was not involved. Morgan subsequently
   invested and lost about $20,000 this time.
           The SEC similarly alleged that Gwyn failed to disclose in public filings
   Blackburn’s involvement with Treaty. Gwyn prepared a Form 10-K on
   behalf of Treaty that listed and described Treaty’s officers, directors, and
   significant employees. But Gwyn failed to name Blackburn. Instead of
   mentioning Blackburn by name throughout the rest of the filing, Gwyn
   referred to him in general, nonspecific terms—as a “major shareholder,” an
   “affiliate,” and a “related party.” The 10-K thus did not reveal that
   Blackburn was controlling Treaty behind the scenes.
           Both the SEC and defendants sought summary judgment. The court
   denied the defense motion and granted the Commission’s motion in part. 2
   The court concluded that defendants violated section 5 of the Securities Act
   by selling unregistered securities. The court also held that defendants
   violated section 10(b) of the Securities Exchange Act, rule 10b-5 thereunder,
   and section 17(a) of the Securities Act by misrepresenting Treaty’s oil
   production and Blackburn’s role in the company. The district court imposed
   several nonmonetary remedies, including prohibiting defendants from acting
   as officers or directors of any publicly held companies. The district court
   then ordered disgorgement of profits and imposed civil monetary penalties.

           2
            The court denied the SEC’s claim that defendants violated federal securities laws
   in connection with an offering for a West Texas project. The court also rejected the
   Commission’s allegation that Blackburn and Mulshine aided and abetted Treaty’s
   reporting violations.

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          Defendants appealed. The SEC requested a limited remand in light
   of the Supreme Court’s decision in Liu, which had been decided after the
   district court’s disgorgement order. We granted the limited remand, after
   which the district court modified its disgorgement procedure. Defendants
   now appeal the district court’s summary judgment ruling and the amended
   disgorgement order.
                                          II.

          We start with liability. In Blackburn’s and Mulshine’s joint briefing,
   they argue summary judgment was improper because “numerous” disputed
   fact issues exist. Yet their brief fails to identify any disputed issues; nor does
   it sufficiently challenge the court’s analysis finding them liable based on
   undisputed facts. Instead their brief attacks the SEC. It blames the agency
   for overreliance on the victim who complained and on “professional internet
   bashers who were destroying Treaty on behalf of unknown naked-short
   sellers.” The brief further chastises the SEC for the number of “venomous”
   press releases it issued about this case—claiming an “irresistible inference”
   that the press releases were not written by the SEC at all, but instead by an
   anonymous internet poster. The experienced district judge labeled these
   accusations “nonsensical.” To the extent we can even understand these
   arguments, they in no way challenge the district court’s thorough evaluation
   of the record, which led to its grant of summary judgment in the SEC’s favor.
   Given the absence of meaningful engagement with that analysis, the district
   court’s ruling must be upheld for these two defendants.
          Gwyn challenges the district court’s ruling that he violated Rule 10b-
   5 by failing to disclose, in required public filings, Blackburn’s role with

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   Treaty. 3 He argues there is a disputed fact issue on whether he had the
   requisite scienter in omitting Blackburn from the Form 10-K. According to
   Gwyn, there is no evidence he was aware of Blackburn’s criminal history
   when he filed the 10-K yet that criminal history is part of why the district
   court concluded the failure to disclose Blackburn’s involvement was
   material.
           But failing to disclose Blackburn’s involvement was not material only
   if Gwyn knew of Blackburn’s criminal history. At a more basic level, it was
   material because Blackburn was running Treaty. Investors make decisions
   about whether to invest their money in a company, in part, based on the
   company’s leadership. Even though Blackburn was not an officer of Treaty,
   there is “little doubt that a reasonable investor would have wanted to know
   the true identity” of who was leading the company. SEC v. Husain, 2017 WL
   810269, at *8 (C.D. Cal. Mar. 1, 2017) (“Other than a corporation’s
   financials, its leadership . . . would seem to be [among] the most important
   pieces of information available to an investor.”); SEC v. Farmer, 2015 WL
   5838867, at *9 (S.D. Tex. Oct. 7, 2015) (finding this information important
   “given the ease and frequency with which microcap companies . . . can and
   are manipulated by undisclosed control persons”); see generally SEC v. Texas
   Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968) (en banc) (explaining that
   material facts include those “which affect the probable future of the company
   and those which may affect the desire of investors to buy, sell, or hold the
   company’s securities”). Disclosure of Blackburn’s key role with Treaty

           3
             To establish liability under Rule 10(b)(5), the SEC must prove that the defendant
   made “an untrue statement of material fact or omit[ted] a material fact” and did so with
   an “‘intent to deceive, manipulate or defraud’” or “‘severe recklessness’” such that the
   “‘danger of misleading buyers or sellers . . . is either known to the defendant or is so
   obvious that the defendant must have been aware of it.’” Southland Sec. Corp. v. INSpire
   Ins. Sols., Inc., 365 F.3d 353, 366 (5th Cir. 2004) (citation omitted).

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   might have mattered to investors for a number of reasons, including but not
   limited to his criminal convictions, the lawsuit he settled for
   misappropriating over a million dollars from another company, or just his
   general reputation—good, bad, or nonexistent—in the oil-and-gas industry.
           Gwyn was fully aware of Blackburn’s wide-ranging management of
   Treaty and of the Form 10-K’s disclosure requirements. He repeatedly
   referred to Blackburn’s role in the 10-K but used “major shareholder,”
   “affiliate,” and “related party” instead of the proper noun. On these
   undisputed facts, Gwyn’s failure to list Blackburn’s name in the disclosure
   was—at the very least—severely reckless, such that the “danger of
   misleading” investors about Treaty’s leadership was “so obvious that
   [Gwyn] must have been aware of it.” See Southland Sec. Corp. v. INSpire
   Ins. Sols., Inc., 365 F.3d 353, 366 (5th Cir. 2004).
           Although Gwyn is correct that summary judgment is uncommon on a
   question of intent, it is appropriate when the undisputed evidence removes
   any doubt on that issue. See SEC v. Sethi, 910 F.3d 198, 206–07 (5th Cir.
   2018). That is the case here. Gwyn undeniably knew about Blackburn’s
   paramount role in Treaty yet failed to disclose his name in the Form 10-K.
   Summary judgment is warranted on this claim.
                                             III.

           Next is the challenge to the disgorgement remedy. The Exchange Act
   authorizes the SEC to seek “equitable relief” that “may be appropriate or
   necessary for the benefit of investors.” 15 U.S.C. § 78u(d)(5). The Supreme
   Court recently addressed whether this statute supports the longstanding
   practice of ordering disgorgement in securities cases. Liu, 140 S. Ct. at 1940. 4

           4
           A few months after the Supreme Court decided Liu, Congress amended the
   Exchange Act to add a statutory subsection specifically authorizing disgorgement without

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   The Court answered yes, noting that “equity practice long authorized courts
   to strip wrongdoers of their ill-gotten gains.” Id. at 1942. Two things keep
   such a remedy aimed at unjust enrichment from becoming punitive:
   Disgorgement cannot exceed the defendants’ “net profits” and must “be
   awarded for victims.” Id.
           The district court’s disgorgement order satisfies those requirements.
   First, the disgorgement amounts are the profits defendants received from
   their securities fraud: $1,512,059.96 for Blackburn, $108,291.05 for
   Mulshine, and $772,434.90 for Gwyn. As those figures show, the district
   court did not impose joint-and-several liability but individually assessed each
   defendant’s gain. See id. at 1945, 1949 (raising concerns about joint-and-
   several disgorgement awards).
           Second, the district court concluded that the SEC has identified the
   victims and created a process for the return of disgorged funds. Under the
   district court’s supervision, any funds recovered will go to the SEC, acting as
   a de facto trustee. The SEC will then disburse those funds to victims but only
   after district court approval.
           The disgorgement thus is being “awarded for victims.” 140 S. Ct. at
   1942. In contrast to a crime like insider trading—which injures the market as

   the “for the benefit of investors” language. See 15 U.S.C. § 78u(d)(7) (“In any action or
   proceeding brought by the Commission under any provision of the securities laws, the
   Commission may seek, and any Federal court may order, disgorgement.”); see also 15
   U.S.C. § 78u(d)(3)(A)(ii). The SEC argues in the alternative that the amended law applies
   to this case that was pending when it was enacted and gives district courts broader authority
   to order disgorgement than the general “equitable relief” provision of section 78u(d)(5)
   that Liu interpreted. But we need not address this argument. As we discuss, the scheme
   set up by the district court is sufficient under the “equitable relief” provision the district
   court applied.

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   a whole rather than individual market participants 5—defendants’ fraud
   harmed identifiable investors. Because the SEC has already identified the
   defrauded Treaty investors, it is certainly feasible—more than that, it is the
   plan—that money the defendants return will go to the harmed investors.
           This case therefore does not involve the issue Liu left open: whether
   disgorgement is “awarded for victims” when the money is put into a
   Treasury fund that helps “pay whistleblowers reporting securities fraud and
   to fund the activities of the Inspector General.” Id. at 1947. 6 That issue
   arises when it is “infeasible to distribute the collected funds to investors.”
   Id. at 1948. Here it is not only feasible to identify the victims to whom the
   funds will be distributed, that work has already been done.
           The district court’s order—requiring disbursements to already-
   identified victims with court supervision to ensure compliance with that
   edict—easily satisfies Liu. 7 We do not hold that this scheme is the only way
   to satisfy Liu as other cases may present greater challenges for ensuring that
   disgorgement benefits victims.            Whatever the floor may be for Liu
   compliance, the remedy here rises well above it.
                                             ***
           The judgment is AFFIRMED.

           5
            In at least one post-Liu insider trading case, the SEC withdrew its request for
   disgorgement. See e.g., SEC v. Govender, 2020 WL 5758997, at *1–2 (S.D.N.Y. Sept. 28,
   2020).
           6
             The district court initially ordered the disgorged funds to go into that Treasury
   fund but changed the plan following the limited remand.
           7
             Defendants also challenge the district court’s award of civil monetary penalties.
   They argue that because the penalty amounts were determined from the disgorgement
   amounts, the penalties should be vacated if the disgorgement award was in error. As we
   find no abuse of discretion on the court’s disgorgement award, the penalties also stand.

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