Narrative Opinion Summary
The Ninth Circuit Court of Appeals reviewed a case involving the Securities and Exchange Commission's (SEC) enforcement action against defendants linked to the unregistered sale of securities by CMKM Diamonds, Inc., in violation of Section 5 of the Securities Act of 1933. The case involved several parties, including CMKM's transfer agent, Global, and its owner, Helen Bagley, as well as Brian Dvorak, an attorney who provided false opinion letters to facilitate the stock sales. The court affirmed some of the district court's rulings but reversed the summary judgment against Global and Bagley due to unresolved factual questions about their roles in the distribution of unregistered shares. The court upheld the denial of Dvorak's motion to stay the proceedings and affirmed the disgorgement order against him. The case was remanded for further proceedings concerning Global and Bagley's liability, while other rulings were upheld. The court emphasized that liability under Section 5 does not require scienter and that transfer agents are subject to strict liability if they are necessary participants and substantial factors in the securities distribution. The decision highlighted the distinction between federal and state law standards for transfer agents, emphasizing the federal requirement for strict liability. The appellate decision was partially affirmed, partially reversed, and remanded, with parties bearing their own appeal costs.
Legal Issues Addressed
Denial of Motion to Stay Proceedingssubscribe to see similar legal issues
Application: The appellate court upheld the denial of Dvorak's motion to stay civil proceedings pending criminal charges.
Reasoning: United States Magistrate Judge Robert J. Johnston denied the stay on April 7, 2011, ruling that Dvorak had not demonstrated a specific need for discovery nor referenced Federal Rule of Civil Procedure 56(d).
Disgorgement of Proceedssubscribe to see similar legal issues
Application: The court affirmed the disgorgement order against Dvorak, requiring him to return profits from illegal securities sales.
Reasoning: The district court possesses broad equity powers to order disgorgement of ill-gotten gains from securities law violations and has discretion in determining the disgorgement amount.
Securities Act of 1933, Section 5 Violationssubscribe to see similar legal issues
Application: The court examined whether defendants were necessary participants and substantial factors in the unregistered sale of CMKM Diamonds, Inc. securities.
Reasoning: Liability attaches only when a defendant plays a significant role in the transaction, characterized as both a 'necessary participant' and a 'substantial factor' in the sale.
Strict Liability under Section 5subscribe to see similar legal issues
Application: The court addressed whether Section 5 imposes strict liability on transfer agents performing ministerial tasks based on attorney opinions.
Reasoning: Precedent suggests that scienter is not a necessary element of Section 5 liability, a view supported by multiple circuit courts.
Transfer Agent Liabilitysubscribe to see similar legal issues
Application: The court evaluated the liability of CMKM's transfer agent, Global, and its owner, Bagley, under Section 5, considering their role in issuing unrestricted shares.
Reasoning: The district court concluded that Global and Bagley were necessary participants because their actions directly enabled the sale of unregistered securities by removing restrictive legends.