Court Opinion

ID: 7803336
Source: CourtListenerOpinion
Date Created: 2022-08-24 20:00:31.995265+00
Date Added: 2024-06-11T16:29:37.322223
License: Public Domain

NOT FOR PUBLICATION                           FILED
                    UNITED STATES COURT OF APPEALS                       AUG 24 2022
                                                                      MOLLY C. DWYER, CLERK
                                                                       U.S. COURT OF APPEALS
                           FOR THE NINTH CIRCUIT

U.S. SECURITIES AND EXCHANGE                    No.    21-56090
COMMISSION,

                Plaintiff-Appellee,             D.C. No.
                                                SACV 16-00974-CJC (AGRx)
 v.

CHARLES C. LIU; XIN WANG a/k/a LISA             MEMORANDUM*
WANG,

                Defendant-Appellant.

                   Appeal from the United States District Court
                      for the Central District of California
                   Cormac J. Carney, District Judge, Presiding

                           Submitted August 22, 2022**
                              Pasadena, California

Before: WATFORD and OWENS, Circuit Judges, and PRESNELL,*** District
Judge.

      *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
      **
             The Panel unanimously concludes that this case is suitable for
decision without oral argument. See Fed. R. App. P. 34(a)(2).
      ***
            The Honorable Gregory A. Presnell, United States District Judge for
the Middle District of Florida, sitting by designation.
      Charles Liu and Xin Wang (husband and wife) appeal the district court’s

judgment of disgorgement. Xin Wang also appeals the district court’s denial of her

motion to dismiss for lack of jurisdiction due to extraterritorial conduct. We have

jurisdiction under 28 U.S.C. § 1291 and we affirm.

      This appeal arises from the SEC’s civil action against Appellants Charles

Liu (“Liu”) and Xin Wang (“Wang”) for violating Section 17(a)(2) of the

Securities Act of 1933. Appellants solicited nearly $27 million from foreign

investors to develop a cancer treatment center under the EB-5 immigration

program. Each investor was required to put up at least a $500,000 “Capital

Contribution” and a $45,000 “Administrative Fee.” The Private Offering

Memorandum (“POM”) given to investors stated that the Capital Contribution

would be used for construction costs, equipment purchases, and other items needed

to build and operate the cancer treatment center. The POM also stated that

“Offering Expenses, including legal, accounting and administration expenses, and

commissions and fees related to this Offering,” would be paid from the

Administrative Fee, not the Capital Contribution.

      Despite these commitments and disclaimers, Liu diverted most of the Capital

Contributions to marketing companies, salaries for himself and Wang, and

personal bank accounts and withdrawals. The district court granted summary

judgment for the SEC and ordered Appellants to disgorge the entirety of the

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investors’ contributions, SEC v. Liu, 262 F. Supp. 3d 957 (C.D. Cal. 2017), and

this Court affirmed, SEC v. Liu, 754 F. App’x 505 (9th Cir. 2018).

      The Supreme Court granted Appellants’ petition for certiorari and took up

the issue of whether disgorgement is a permissible remedy in securities fraud

cases. While the Supreme Court answered that question in the affirmative, it

overturned the disgorgement award and remanded with instructions to recalculate

disgorgement after deducting legitimate expenses. See Liu v. SEC, 140 S. Ct. 1936

(2020). On remand, the district court ordered Appellants to disgorge

$20,871,758.81, jointly and severally, and Appellants now appeal that judgment.

      This Court reviews de novo whether a district court has complied with a

mandate on remand. Cassett v. Stewart, 406 F.3d 614, 620 (9th Cir. 2005). This

Court reviews a district court’s imposition of a disgorgement award for abuse of

discretion. SEC v. Feng, 935 F.3d 721, 737 (9th Cir. 2019). And this Court reviews

the district court’s findings of fact for clear error, viewing the evidence in the light

most favorable to the prevailing party. SEC v. Rubera, 350 F.3d 1084, 1093–94

(9th Cir. 2003).

      The Supreme Court held that “courts must deduct legitimate expenses before

ordering disgorgement under [15 U.S.C.] § 78u(d)(5).” Liu, 140 S. Ct. at 1950. A

district court must therefore ascertain “whether expenses are legitimate or whether

they are merely wrongful gains under another name.” Id. (citation and quotation

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marks omitted). Although the Supreme Court declined to offer specific guidance, it

noted that some of Appellants’ expenses “arguably have value independent of

fueling a fraudulent scheme,” such as expenses directed towards “lease payments

and cancer-treatment equipment.” Id.

      “The SEC ‘bears the ultimate burden of persuasion that its disgorgement

figure reasonably approximates the amount of unjust enrichment.’” SEC v.

Platforms Wireless Int’l Corp., 617 F.3d 1072, 1096 (9th Cir. 2010) (quoting SEC

v. First City Fin. Corp., 890 F.2d 1215, 1232 (D.C. Cir. 1989)). Once the SEC

meets its burden and provides a reasonable approximation of a defendant’s ill-

gotten gains, the burden shifts to the defendant to “demonstrate that the

disgorgement figure was not a reasonable approximation.” Id. (quoting First City

Fin., 890 F.2d at 1232). In the context of the Supreme Court’s mandate, this

standard necessarily required the SEC to provide a reasonable approximation of the

legitimate expenses, if any, that should be deducted from the $27,000,000 paid by

the investors.

      In making its calculation, the district court deducted $2,210,701 in

administrative expenses,1 $3,105,809 in construction, design, equipment, and other

related payments, and $234,899.19 which was left in Appellants’ corporate bank

1
  This figure represents the total amount of administrative fees collected from the
investors.

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accounts. After deducting those costs, the district court ordered Appellants to

disgorge the remaining $20,871,758.81 of investor contributions. The district court

declined to deduct any other claimed expenses because those represented

Appellants’ pecuniary gains or were used to further the fraudulent scheme.

      To sum things up, this iteration of the case requires us to decide the proper

method of calculating disgorgement as an equitable remedy in an SEC enforcement

action.

      In framing the issue, the Supreme Court used the term “net profits” to cabin

the wrongful gains obtained by Appellants. From an accounting standpoint, this

term is a misnomer in the context of this case.2 Net profits connote the result of

deducting expenses from the revenues of an ongoing business enterprise. See Jae

K. Shim & Joel G. Siegel, Dictionary of Accounting Terms, 312–13 (Barron’s, 5th

ed. 2010). Of course, the net profits of a business can be the subject of

disgorgement in the appropriate case. But here, there were no revenues and no

profit, because Appellants stole the investment capital necessary to build the

cancer treatment facility. Indeed, Appellants make this very argument: No net

profit, thus no disgorgement. Clearly, this outcome would not produce an equitable

remedy for Appellants’ fraud.

2
  The Supreme Court noted in its opinion that disgorgement, as an equitable
remedy, has “gone by different names,” but “whatever the name, has been a
mainstay of equity courts.” Liu, 140 S. Ct. at 1942–43.

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      In its opinion, the Supreme Court noted the foundational principle that it

would be inequitable for a wrongdoer to gain from his own wrong. The Court also

noted that “when the entire profit of a business or undertaking results from the

wrongful activity . . . the defendant will not be allowed to diminish the show of

profits by putting in unconscionable claims for personal services or other

inequitable deductions.”3 Liu, 140 S. Ct. at 1945 (citation and quotation marks

omitted). While the district court ultimately opted to deduct certain expenses in

deference to the Supreme Court’s concerns, it expressed doubt as to whether

Appellants were entitled to any deductions. But no party appeals those deductions,

so we decline to address them further.

      With this framework in mind, we find no error with the district court’s

factual findings as to the illegitimate expenses or with the district court’s

disgorgement award. Appellants spent nearly $11 million on payments to

marketing companies4 and professional service providers. Those payments far

exceeded the total amount of administrative fees collected and violated the terms

of the POM.5 Appellants also paid themselves $6,858,092 as salaries and withdrew

3
  When used in the context of this case, the term “profit” necessarily refers to the
investors’ payments.
4
  Evidence also shows that Wang was a high-level official at one of the marketing
companies that was paid several million dollars from investor funds. See Liu, 262
F. Supp. 3d at 964.
5
  These payments fell within the definition of “Offering Expenses” which,
according to the POM, could only be paid from the administrative fees.

                                           6                                    21-56090
an additional $2,367,167 from the project’s corporate accounts for personal

expenses like car and school tuition payments and other recreational activities.6

These payments represent Appellants’ ill-gotten gains and are in no way legitimate

business expenses.

      Appellants also made a $3 million payment to Mevion Medical Systems,

Inc., for a proton therapy machine, even though they had already paid Optivus

Proton Beam Therapy, Inc., $368,100 for the same type of equipment. The district

court determined that this was done to cut out Liu’s business partner, Dr. John

Thropay, in order to prevent the exposure of Liu’s fraudulent activities. This

finding is supported by the factual record, and we agree that Liu should not be able

to deduct this payment. Accordingly, we affirm the district court’s final

disgorgement award.

      Next, Appellants argue that the district court erred in holding them jointly

and severally liable for the disgorgement award because Wang was minimally

involved in the EB-5 scheme. Generally, courts may not impose disgorgement on

defendants for profits “which have accrued to another, and in which they have no

participation.” Liu, 140 S. Ct. at 1949 (quoting Belknap v. Schild, 161 U.S. 10, 25–

26 (1896)). But the common law does “permit liability for partners engaged in

6
  For example, bank transaction records reveal that an ATM withdrawal was made
in the amount of $56,173 from the Pacific Proton Therapy Regional Center bank
account at “Caesar Palace Las Vegas.”

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concerted wrongdoing.” Id. Wang played an integral role in the EB-5 scheme by

promoting the proton therapy project and soliciting investors. The evidence also

shows that Wang was the “Vice President of Marketing” for Beverly Proton

Center, that she signed a salary agreement for her work in that position, and that

she was an officer of one of the marketing companies to which Liu diverted

substantial investor funds, Liu, 262 F. Supp. 3d at 963–64. We see no error with

these factual findings, nor with the district court’s decision to hold Liu and Wang

jointly and severally liable.7

      Last, we address the district court’s denial of Wang’s motion to dismiss. The

district court determined that Wang’s conduct was sufficient to subject her to the

SEC’s jurisdiction. We affirm the denial, albeit on a different ground from that

relied upon by the district court. This panel considered Wang’s extraterritoriality

argument on her initial appeal. We rejected that argument as waived and affirmed

her liability. See Liu, 754 F. App’x at 508. Wang did not appeal this ruling and the

Supreme Court did not disturb her liability when it remanded this case.8

      The SEC contends that under the rule of mandate, the district court could not

7
  The Supreme Court acknowledged that these facts could very well support the
imposition of joint-and-several liability. See Liu, 140 S. Ct. at 1949. The Court also
noted that that Appellants did not “suggest that their finances were not comingled,
or that one spouse did not enjoy the fruits of the scheme, or that other
circumstances would render a joint-and-several disgorgement order unjust.” Id.
8
  Indeed, we recently held that Appellants’ “liability had already been established
as law of the case.” SEC v. Liu, 851 F. App’x 665, 668 (9th Cir. 2021).

                                          8                                    21-56090
disturb Wang’s liability and was therefore required to deny her motion to dismiss. 9

We agree. “[I]n both civil and criminal cases, . . . a district court is limited by this

court’s remand in situations where the scope of the remand is clear.” United States

v. Thrasher, 483 F.3d 977, 982 (9th Cir. 2007) (quoting Mendez-Gutierrez v.

Gonzales, 444 F.3d 1168, 1172 (9th Cir. 2006)). Because the scope of the remand

in this case was restricted to the recalculation of the disgorgement award, the

district court could not venture beyond that issue to address Wang’s liability.

Therefore, we affirm the denial of Wang’s motion to dismiss.

      AFFIRMED.

9
 Wang contends that the SEC waived this argument by failing to raise it before the
district court below. In this Circuit, the rule of mandate “limit[s] the district court’s
authority on remand,” and is therefore “jurisdictional” in nature. See Thrasher, 483
F.3d at 982 (quotation marks omitted). This argument may therefore be considered
for the first time on appeal.

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