Summary
The Ninth Circuit affirmed summary judgment for the Securities and Exchange Commission in an action involving the sale of fractional interests in life settlements. The court held that the interests were investment contracts and therefore securities subject to federal registration requirements, rejecting the defendants’ claimed intrastate-offering exemption. The court also affirmed disgorgement, civil penalties, and an injunction.
Topics
Practice areas
Questions Presented
- Whether fractional interests in life settlements sold by PWCG were investment contracts and therefore securities under the federal securities laws.
- Whether PWCG's offerings qualified for the intrastate offering exemption.
- Whether PWCG's offerings were integrated into a single interstate offering.
- Whether defendants bore the burden of establishing non-integration and the exemption at summary judgment.
- Whether the district court properly excluded defendants' expert report on the legal question of integration.
- Whether disgorgement was proper where investors were projected to recover their principal but lost the time value of their money.
- Whether the injunction against Cannon was proper under the factors governing the likelihood of future securities-law violations.
- Whether the $15,000 civil penalties imposed on each defendant were authorized and properly calculated.
Holdings
- Fractional interests in life settlements are investment contracts, and therefore securities, when investors depend on the promoter's selection of policies, pricing decisions, premium-reserve system, and management of fractionalized interests to obtain profits.
- Pre-purchase entrepreneurial and managerial activities may be considered, together with post-purchase activities, in determining whether profits are expected to come from the efforts of others; courts may not apply a categorical pre-purchase/post-purchase distinction.
- The intrastate offering exemption did not apply because PWCG offered and sold fractional interests to at least one Nevada resident, so the offerings were not made exclusively within California.
- PWCG's offerings were integrated into a single interstate offering because they shared a financing scheme, involved the same class of security, used the same type of consideration, and served the same general purpose; four of the five integration factors supported integration despite the offerings' timing differences.
- The defendants claiming the intrastate exemption bore the burden of establishing a genuine dispute of material fact concerning non-integration; the SEC did not have to affirmatively prove integration as part of its prima facie case.
- The district court properly excluded defendants' expert report because whether a securities offering is integrated is a question of law, and an expert's legal interpretation would not aid the trier of fact.
- The disgorgement award was proper because investors suffered cognizable pecuniary harm through the loss of the time value of their money, even if they were likely to recover their principal investment.
- The injunction against Cannon was proper because the Murphy factors supported a reasonable likelihood of future securities-law violations, including the recurrent nature of his conduct, limited recognition of wrongdoing, and intent to remain in financial services.
- The district court properly imposed civil penalties of $15,000 against each defendant because it had discretion to determine the number of violations using appropriate proxies, and the penalties were within the statutory maximum when measured against the defendants' multiple violations and gains.
Key quotations
“We conclude that the fractional interests in life settlements sold by PWCG were “investment contracts” and thus securities subject to the registration requirements of the Securities Act of 1933.” (at 5)
“We agree with the Eleventh and Fifth Circuits that pre-purchase activities can be relevant for evaluating whether profits can be expected to come from the efforts of others.” (at 19)
“Buyers of PWCG’s fractional interests in life settlements suffered pecuniary harm through the loss of the time value of their money.” (at 34)
“We affirm the district court’s judgment.” (at 42)
Factual background
Pacific West Capital Group sold investors fractional interests in life settlements, with PWCG selecting policies, negotiating purchase prices, and structuring a three-tiered premium-reserve system. Investors depended on PWCG and its trust to select policies, maintain premiums, and administer the fractional interests; the reserve system eventually failed, resulting in premium calls and losses of the time value of investors' money. The SEC alleged that the individual defendants, who acted as PWCG sales agents, offered and sold unregistered securities and acted as unregistered broker-dealers.
Procedural history
The SEC sued PWCG, related entities, and the individual defendants under the Securities Act of 1933 and the Exchange Act. The district court granted the SEC's renewed motion for summary judgment, denied defendants' cross-motion, ordered each current defendant to disgorge one-third of commissions received, imposed civil penalties of $15,000 each, and enjoined Cannon from future securities-law violations. The Ninth Circuit affirmed.