Court Opinion

ID: 2721445
Source: CourtListenerOpinion
Date Created: 2014-08-27 21:01:29.305165+00
Date Added: 2024-06-11T10:02:45.918592
License: Public Domain

FILED
                           NOT FOR PUBLICATION                                AUG 27 2014

                                                                          MOLLY C. DWYER, CLERK
                    UNITED STATES COURT OF APPEALS                          U.S. COURT OF APPEALS

                            FOR THE NINTH CIRCUIT

U.S. SECURITIES & EXCHANGE                       No. 12-56404
COMMISSION,
                                                 D.C. No. 8:09-cv-01431-DOC-AN
              Plaintiff - Appellee,

  v.                                             MEMORANDUM*

BROOKSTREET SECURITIES
CORPORATION and STANLEY C.
BROOKS,

              Defendants - Appellants.

                   Appeal from the United States District Court
                      for the Central District of California
                    David O. Carter, District Judge, Presiding

                       Argued and Submitted August 7, 2014
                               Pasadena, California

Before: WARDLAW, CALLAHAN, and M. SMITH, Circuit Judges.

       Stanley Brooks appeals from the district court’s grant of summary judgment

to the SEC and imposition of injunctive and monetary relief. Brooks contends that

disputes of material fact remain as to whether Brookstreet’s employees committed

        *
             This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
certain primary violations of federal securities laws, and as to whether Brooks was

a control person of those employees. Brooks also challenges the district court’s

injunction as overbroad, and both Brooks and the SEC ask us to remand this case

to the district court in order to recalculate the monetary relief imposed against

Brooks. Because the parties are familiar with the facts and procedural history of

these cases, we repeat only those facts necessary to resolve the issues raised on

appeal. We affirm, except as to the remedies portion of the district court’s

judgment.

                                      Discussion

A. Evidentiary Matters

      With the exception of citations to his own affidavit, the testimony of

Professor Finnerty in a related Florida trial, and several citations to the Affidavit of

Troy Gagliardi, Brooks failed to specifically identify any facts that would

controvert the SEC’s Statement of Undisputed Facts. Accordingly, we must accept

as true the SEC’s Statement of Undisputed Facts, except to the extent they are

contradicted by the few sources to which Brooks directed the district court.

Carmen v. S.F. Unified Sch. Dist., 237 F.3d 1026, 1028–29 (9th Cir. 2001).

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B. Primary Violations

      The undisputed record shows that each of the three Brookstreet

representatives identified by the SEC committed violations of Section 10(b) and

Rule 10b-5. SEC v. Rana Research, Inc., 8 F.3d 1358, 1364 (9th Cir. 1993). The

disclaimers identified by Brooks either do not specifically refute the

misrepresentations made by the Brookstreet representatives, or were not

“transmitted to the public with a degree of intensity and credibility sufficient to

effectively counter-balance any misleading impression created by the insiders’

one-sided representations.” In re Apple Computer Sec. Litig., 886 F.2d 1109, 1116

(9th Cir. 1989).

C. Control Person Liability

      Brooks was the CEO, President, Chairman of the Board, and owner of

Brookstreet through his family trust. Moreover, before his FINRA suspension

Brooks was “involved in the nuts and bolts of how things worked,” and “was

involved in the minutiae” of the firm’s practices. Brooks was also specifically

involved in the CMO Program. Brooks’ position as an officer, his involvement in

the day-to-day affairs of Brookstreet, and his involvement in the CMO Program

establish that he controlled the primary violators. See Wool v. Tandem Computers,

Inc., 818 F.2d 1433, 1440–42 (9th Cir. 1987). Further, at oral argument Brooks’

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counsel conceded that there is no genuine dispute of fact as to whether Brooks’

suspension by FINRA diminished Brooks’ power to direct the management and

policies under which the primary violators continued to act.

      Brooks is not entitled to the good faith defense. We do not agree that

Brooks “made every effort to ensure that Brookstreet’s customers received honest

and fair advice from Brookstreet’s . . . representatives,” as he contends. Brooks

knew that Brookstreet representatives were recommending and selling CMOs to

retail customers beginning in 2004, and yet Brookstreet did not establish suitability

standards for CMO clients until 2007, three years later. This failure is particularly

egregious in light of Brooks’ receipt of NASD Notice 95-73 in mid-2005, which

detailed a broker’s responsibility to educate clients about the risks of CMOs and

made clear that certain CMOs were suitable only for sophisticated investors with a

high risk profile. Brooks thus cannot show that Brookstreet’s “supervisory system

was adequate and that it reasonably discharged its responsibilities under the

system.” Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1576 (9th Cir. 1990).

D. Injunctive Relief

      In light of Brooks’ knowledge of, and failure to address, problems in the

CMO program, we find that the district court properly granted injunctive relief

against Brooks, U.S. SEC v. Fehn, 97 F.3d 1276, 1295–96 (9th Cir. 1996), and the

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injunction will remain in effect pending any change therein made by the district

court.

E. Monetary Remedies

         The SEC concedes that both the disgorgement remedy and the civil penalties

ordered by the district court must be altered to meet the proof tendered to the court.

Accordingly, we vacate that portion of the district court’s judgment and remand for

further proceedings.

         The parties shall bear their own costs on appeal.

         AFFIRMED in substantial part, VACATED in part, and REMANDED

for further proceedings.

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