October 17, 2017

Tenth Circuit: Discretionary Function Exemption Applies to All Activities of Prosecutors

The Tenth Circuit Court of Appeals issued its opinion in Estate of James D. Redd, M.D. v. United States on Tuesday, February 14, 2017.

The facts of the case stemmed from the case of Estate of James D. Redd, M.D. v. Love, in which the estate of Dr. Redd alleged that Mr. Love, a special agent with the Bureau of Land Management, violated Dr. Redd’s Fourth, Fifth, Sixth, Eighth, and Fourteenth Amendment rights when officers searched the Redds’ home as a part of an investigation that targeted persons in possession and trafficking in Native American artifacts that had been taken illegally from the Four Corners region of the United States. The day after agents searched the Redds’ property and arrested him, Dr. Redd committed suicide.

At the beginning of the trial of the lawsuit against Agent Love, the court dismissed all claims against Agent Love except one alleging excessive force. The court later dismissed the excessive force claim as well. In this appeal, the Tenth Circuit was evaluating one of the early claims under the Federal Tort Claims Act (FTCA) that had been dismissed by the district court in the first case: that the value of a “bird effigy pendant” was, as alleged by the estate, overstated in order to support a felony charge against Dr. Redd.

At the request of the parties to the case, the court decided the case on the briefs without oral argument. The court reviewed the claim de novo that the value of the pendant was inflated, and that prosecutors were aware of the inflation. The court stated, “determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” The court agreed with the district court’s finding that the allegation that a cooperating witness intentionally over-valued the pendant is implausible and not well pleaded. The court then noted that the district court was correct in stating that, “absent the implausible allegation of fraudulent valuation of the pendant, the discretionary function exception applies to all identified activities of the prosecutors barring the Estate’s FTCA claim.”

The Tenth Circuit affirmed the district court’s dismissal of all the Estate’s FTCA claims based on the discretionary-function exemption.

Colorado Court of Appeals: Securities Company Not Liable for Outside Bad Acts of Its Broker

The Colorado Court of Appeals issued its opinion in Houston v. Southeast Investments, N.C., Inc. on Thursday, May 18, 2017.

InvestmentsColorado Securities ActControl Person Liability.

Sorenson created and owned 1st Consumer Financial Services, Inc. (CFS). Around early 2011 Sorenson hired Hornick to work for CFS. Southeast Investments N.C., Inc. (Southeast) was an authorized and registered broker-dealer of securities at all relevant times. In February 2013 Sorenson signed an independent contractor agreement and registered representative agreement with Southeast that prohibited him from engaging in business activities not involving Southeast without disclosing such activities to Southeast and obtaining written approval. In spring 2013 Houston, a retired, unmarried woman, agreed to Hornick’s requests and liquidated her entire retirement savings and transferred the money into a self-directed IRA account to be managed by Hornick. Ultimately these funds were invested in CFS and Houston was unable to obtain a return of the money. Houston sued a number of parties under various theories of liability, including a control person liability claim against Southeast. The district court concluded that, as a matter of law, Southeast was not a control person with regard to Sorenson’s conduct underlying Houston’s securities fraud claim, and Southeast was entitled to summary judgment.

The sole issue on appeal was whether the district court erred in granting summary judgment for Southeast, based on its conclusion that, as a matter of law, Southeast was not liable as a control person under C.R.S. § 11-51-604(5)(b) of the Colorado Securities Act (the Act). A plaintiff establishes a prima facie case of control person liability where the plaintiff demonstrates that (1) a primary violation of securities fraud occurred and (2) the defendant was a controlling person. As a general rule, a broker-dealer is statutorily in control of its registered representatives as a matter of law. However, a broker-dealer is not in statutory control of its registered representative’s underlying conduct when all of the following factors are undisputed: (1) the plaintiff did not reasonably rely on the registered representative’s relationship with the broker-dealer in making plaintiff’s investment; (2) the plaintiff invested in markets other than those promoted by the broker-dealer; (3) the registered representative did not rely on its relationship with the broker-dealer to access the securities market to sell the subject securities to the plaintiff; and (4) the broker-dealer did not know of, or have a financial interest in, the investor’s business with the registered representative.

Here, Sorenson hid his conduct from Southeast by failing to notify Southeast of his outside securities sales on behalf of CFS and by using undisclosed, private email accounts to engage in the subject transactions. No one from Southeast knew about Sorenson’s involvement with Houston. Sorenson did not use Southeast’s access to the securities markets to promote or conduct his deals with Houston (through Hornick), because CFS was a private venture created and owned by Sorenson. Southeast never held any of Houston’s money because Sorenson never opened a Southeast account for Houston. Southeast accordingly had no financial interest in Houston’s investments with Sorenson. Houston did not rely on Sorenson’s relationship with Southeast in deciding to invest with Sorenson. Thus, Southeast was not in control of Sorenson with respect to his conduct underlying this case, and Southeast was entitled to judgment as a matter of law on the issue of control.

The judgment was affirmed.

Summary provided courtesy of The Colorado Lawyer.

Tenth Circuit: Overly Optimistic Reporting Not Enough to Prove Scienter

The Tenth Circuit Court of Appeals issued its opinion in Anderson v. Spirit AeroSystems Holdings, Inc. on Tuesday, July 5, 2016.

Spirit AeroSystems Holdings, Inc., agreed to manufacture parts for two Gulfstream aircraft and a Boeing 787. Spirit managed the production of the parts through three projects, each of which encountered production delays and cost overruns. Nevertheless, Spirit executives expressed optimism to investors about the company’s ability to break even. However, in October 2012, Spirit announced the projected loss of hundreds of millions of dollars on the three projects. The investors brought a class action against Spirit and four of its executives—CEO and president Jeffrey Turner, CFO Philip Anderson, Oklahoma Senior Vice President Alexander Kummant, and Vice President Terry George, who was overseeing the Boeing 787 project—for violating § 10(b) of the Securities Exchange Act and SEC Rule 10b-5. Plaintiffs alleged that Spirit and the executives misrepresented and failed to disclose cost overruns and project delays. Defendants moved to dismiss, arguing that the plaintiffs failed to allege facts showing misrepresentations or omissions that were false or misleading and material, and failed to show scienter. The district court granted defendants’ motion, in part agreeing that plaintiffs had failed to show scienter. Plaintiffs appealed.

The Tenth Circuit compared the evidence set forth by plaintiffs to show scienter with the defendants’ explanations, noting that the inference of scienter would only suffice if it were at least as cogent and compelling as any other inference that could be drawn from the facts. Plaintiffs alleged that defendants knew throughout the class period that the projects were experiencing setbacks and generating so much in additional costs that a loss would be inevitable, yet they failed to warn investors of the forward loss until October 2012. Defendants argued that despite the setbacks, they were optimistic that the projects would meet the original cost forecasts, and expected revenues to exceed total costs. When Spirit realized that a loss was likely, it promptly announced a forward loss on the three projects. The Tenth Circuit found Spirit’s explanation that it was overly optimistic more compelling than an inference that the executives intentionally misrepresented or recklessly ignored economic realities. The Tenth Circuit noted that the plaintiffs presented little evidence to presume malevolence over benign optimism.

The Tenth Circuit approved of the district court’s consideration of a lack of a motive to commit securities fraud as a mitigating factor against scienter. Although the plaintiffs did not need to show a motive, the absence of one was relevant. The plaintiffs also proposed testimony by corroborating witnesses, but the Tenth Circuit determined the witnesses were too far removed from the executives to have been able to testify as to the executives’ state of mind. Plaintiffs also alleged that the defendants had a duty to disclose project overruns and delays, but the Tenth Circuit refused to infer scienter from the defendants’ failure to disclose, finding instead that there was no evidence that the defendants knew they needed to disclose more or were reckless in their failure to disclose. The Tenth Circuit disposed of plaintiffs’ remaining claims, characterizing them as “fraud by hindsight” but not securities fraud. Plaintiffs argued that Spirit’s recovery plan for the 787 project supported an inference of scienter, but the Tenth Circuit again accepted the defendants’ explanations of innocent optimism. The plaintiffs also argued that the sheer magnitude of the loss supported an inference of scienter, but the Tenth Circuit noted that the plaintiffs failed to show that the executives knew that their public reports were too encouraging or had recklessly failed to heed red flags from problem reports.

The Tenth Circuit affirmed the district court’s dismissal. Judge McHugh concurred in part and dissented in part; she would have found that Anderson and Turner made materially false statements, therefore satisfying the scienter element.

Colorado Supreme Court: Holder-in-Due-Course Status Does Not Preclude Forgery Defense

The Colorado Supreme Court issued its opinion in Liberty Mortgage Corp. v. Fiscus on Monday, May 16, 2016.

Negotiable Instruments—Holders in Due Course—Forgery—Ratification—Negligent Contribution.

Respondent Fiscus’s wife forged his name on three powers of attorney and used them to procure a promissory note that was ultimately assigned to petitioner Branch Banking and Trust Company. The note was secured by a deed of trust purporting to encumber property held in Fiscus’s name alone. Branch Banking and Trust claimed holder-in-due-course status under Article 3 of Colorado’s Uniform Commercial Code, and Fiscus raised a forgery defense. The Court of Appeals held that Article 3 does not apply to deeds of trust because they are not “negotiable instruments” as defined in the Code. The Supreme Court held that, even assuming Article 3 applies to such deeds of trust, holder-in-due-course status does not preclude a purported maker from asserting a forgery defense. Thus, because Fiscus had a valid forgery defense, not barred by any negligence or ratification on his part, the Court affirmed the judgment of the Court of Appeals but on different grounds. The Court did not address the negotiability of deeds of trust that secure promissory notes under Article 3.

Summary provided courtesy of The Colorado Lawyer.

Colorado Court of Appeals: Use of Strawman Purchasers Not Fraudulent

The Colorado Court of Appeals issued its opinion in Rocky Mountain Exploration, Inc. v. Davis Graham & Stubbs, LLP on Thursday, March 10, 2016.

Rocky Mountain Exploration (RMEI) owned oil and gas interests in leaseholds in North Dakota. In 2006, it sold 80% of its leasehold interest to Tracker. In 2009, Tracker attempted to purchase RMEI’s remaining 20% interest, but it was unsuccessful and relations between Tracker and RMEI became strained. Tracker then agreed to purchase the interest together with Lario, with Lario acting as Tracker’s agent in the purchase so that RMEI would not refuse to deal with Tracker.

Davis Graham & Stubbs (DGS) represented Tracker in the deal but refused to represent Lario due to a conflict of interest. However, DGS handled the negotiations for Lario and Tracker because of its representation of Tracker. Lario variously referred to DGS as its attorney, and DGS made no attempt to correct Lario’s mistake.

After the sale closed and RMEI discovered Tracker’s interest, RMEI sued Lario and Tracker, their officers individually, and DGS. All parties except DGS settled. RMEI asserted fraud and civil conspiracy claims against DGS based on the use of Lario as a “strawman” purchaser in the transaction. DGS moved for summary judgment, contending that RMEI could not establish a duty owed by DGS to support the fraud claims, and that RMEI had failed to establish that Tracker owed RMEI fiduciary duties. The district court agreed with DGS and granted its motion, also ruling that the use of a strawman purchaser is not fraudulent.

The Colorado Court of Appeals affirmed, noting that agents are frequently used in business transactions and there is nothing fraudulent about using a strawman purchaser. The court of appeals noted that RMEI’s situation did not fit the narrow circumstances allowing a third party to avoid a contract, and that RMEI could have insisted on a contractual prohibition on assignment of interests.

The court of appeals affirmed the district court’s grant of summary judgment to DGS.

Colorado Court of Appeals: Domestic Relations Court Lost Jurisdiction Five Years After Case Ended

The Colorado Court of Appeals issued its opinion in Fritsche v. Fritsche Thoreson on Thursday, November 5, 2015.

Divorce—Modification of Decree—Statute of Limitations—Fraud, Theft and Conversion.

Husband and wife divorced in April 2007. In January 2013, wife allegedly disclosed, for the first time, income of $69,399 that she had earned in 2011 from an employment-related lawsuit. In July 3013, wife filed sworn financial statements that allegedly disclosed, for the first time, a pension from IBM in the amount of $111,575.94. In November 2013, husband filed a motion to modify the final decree. The court did not rule on the motion within the 63-day period, as required by CRCP 59(j), and therefore it was deemed denied in January 2014. In June 2014, husband filed a motion for relief from judgment under CRCP 60(a) and (b), which was denied as untimely. Husband then filed an equitable action in district court, asserting fraud, theft, and conversion claims against wife. Wife moved to dismiss, and the district court granted the motion.

The Court of Appeals first held that a party to the original domestic relations proceedings may file an independent equitable action in district court related to the domestic relations court proceedings aft the expiration of that five-year period. The Court then affirmed the district court’s conclusion that husband failed to state a claim upon which relief could be granted. Relief pursuant to an independent equitable action is available in cases of unusual and exceptional circumstances, including fraud. However, a party challenging a judgment previously entered in a domestic relations case by “seeking relief through an independent equitable action based on fraud must establish extrinsic fraud as opposed to mere intrinsic fraud.” Husband’s claims of perjury and failure to disclose are forms of intrinsic fraud, and therefore do not warrant relief through an independent action, and his claims of theft and conversion do not present unusual or exceptional circumstances. The Court denied wife’s request for attorney fees, holding that husband’s claims were not frivolous or lacking substantial justification.

Summary and full case available here, courtesy of The Colorado Lawyer.

Tenth Circuit: Incidental Mailings Triggered by Fraud Qualify as Mail Fraud Acts

The Tenth Circuit Court of Appeals issued its opinion in United States v. Zander on Friday, July 24, 2015.

Jeffrey Zander began working for the Paiute Indian Tribe in Utah in 1998 as a tribal planner, and he later became the Tribe’s trust resource and economic development director. In 2004 or 2005, he recommended to the Tribe that it seek federal grant money to fund development of an Integrated Resource Management Plan (IRMP) for each of the Tribe’s bands. Between 2005 and 2007, Zander prepared grant proposals to request funding from the Bureau of Indian Affairs (BIA) for the Tribe to develop IRMPs for each of its bands. Each proposal represented most of the grant funds would be used to hire and pay an outside facilitator to assist the Tribe. Each proposal was approved by that band’s council and the Tribal Council, then submitted to the BIA, which approved and awarded five IRMP development grants for a total of $165,000. Instead of hiring an outside consultant, Zander transferred the funds to four fictitious companies he created, then represented to the Tribe that these companies had provided consulting services for the IRMP development. The Tribe then issued checks to the companies, which were either mailed or hand-delivered to Zander. The Tribe then requested reimbursement from the BIA, which it approved, sometimes via fax.

Zander deposited the checks made out to the fictitious companies into his personal checking account and spent all of the $165,000. The Tribe learned of Zander’s scheme when a bank employee contacted it in March 2008 to ask about check made out to one of the fictitious businesses that Zander had tried to deposit in his personal checking account. The Tribe conducted a short investigation and fired Zander. The Tribe thereafter received a notice of collection from the BIA seeking repayment of the grant funds based on the Tribe’s failure to product the IRMPs the grants were intended to fund.

In February 2012, Zander was indicted on several charges, including mail fraud, wire fraud, money laundering, and failure to file tax returns. He was tried before a jury and convicted on all of the counts in the indictment. He was sentenced to 68 months’ imprisonment and ordered to pay $202,543.92 in restitution to the Tribe based on the actual grant funds, attorney fees, unemployment benefits, and Tribal employees’ time and travel costs associated with the case. He appealed, arguing five points of error: (1) insufficient evidence to support his mail fraud convictions; (2) insufficient evidence to support his wire fraud convictions; (3) a conditional challenge to his money laundering conviction; (4) a challenge to the procedural reasonableness of his sentence; and (5) a challenge to the restitution award. The Tenth Circuit addressed each in turn.

The Tenth Circuit meticulously examined Zander’s mail fraud challenge. Zander argued that although the BIA had mailed checks for the proposed IRMP development, those checks would have been mailed regardless of fraudulent intent had the Tribe submitted grant proposals. The Tenth Circuit rejected this argument, finding that although the mailings were an innocent side effect of Zander’s fraud, he set in motion the mechanism that caused the checks to be mailed. The Tenth Circuit compared Zander’s fraud to that of the defendant in Schmuck v. United States, where defendant altered the odometers of used cars and sold them to dealers at inflated prices. There, as in Zander’s case, although the mailings themselves were an innocent by-product of fraud, they would not have occurred but for the defendants’ fraudulent acts. The Tenth Circuit similarly rejected Zander’s wire fraud arguments, concluding that although the faxed themselves were innocuous, they occurred solely because of Zander’s fraudulent acts. Because Zander’s challenge to the money laundering conviction was conditional based on the Tenth Circuit’s findings on the mail and wire fraud counts, the Tenth Circuit affirmed the money laundering conviction.

Next, the Tenth Circuit addressed Zander’s challenges to the procedural reasonableness of his sentence and his restitution award. The Circuit found that the district court incorrectly included costs in the restitution award without requisite findings affirmatively showing that the costs were directly and proximately caused by Defendant’s conduct. These costs raised the base offense level for the conviction, resulting in a higher sentence. The Tenth Circuit reversed and remanded for resenting and recalculation of the restitution award based on the new offense level and based on evidence tying costs directly to Zander’s conduct.

The district court’s conviction was affirmed. The sentence and restitution award were reversed and remanded for recalculation.

Colorado Court of Appeals: Jury Improperly Instructed that “Any Note” is a Security; Reversal Required

The Colorado Court of Appeals issued its opinion in People v. Mendenhall on Thursday, August 13, 2015.

Promissory Note—Securities Fraud—Colorado Securities Act—Jury Instructions—Testimony—Prosecutorial Misconduct.

Defendant was employed as a salesperson by an insurance company that specializes in low-risk insurance products for retirement-age persons. Defendant also was licensed to sell securities through an affiliated broker–dealer. Defendant obtained loans from clients or customers whom he had met through his employment to fund his personal real estate investments, giving each of them a promissory note. He was convicted by a jury of multiple counts of securities fraud and theft.

On appeal, defendant argued that the trial court erred in instructing the jury that any note is a security. One of the elements of securities fraud under the Colorado Securities Act (CSA) is that the defendant engaged in fraud in connection with a security. If there is no security, there cannot be securities fraud. The CSA defines “security” to include “any note.” Because sometimes notes are not securities, however, the court’s instruction constituted error. Because this instructional error was not harmless beyond a reasonable doubt, defendant’s securities fraud convictions were reversed.

Defendant also argued that the trial court erred in admitting the testimony of the district attorney’s investigator regarding his process for investigating someone suspected of criminal activity; under what circumstances he recommended pursuing criminal charges; and the specific investigation of, and decision to pursue charges against, defendant. Because probable cause to charge defendant was not at issue here, the investigator’s statements regarding how many potential cases he received each year and in how many of those cases charges were brought constituted inadmissible evidence. However, because there was overwhelming evidence that defendant was guilty of theft and the investigator’s comments were minimal, any error was harmless.

Defendant further contended that the prosecutor committed misconduct in closing argument when he likened defendant to Bernie Madoff and referred to the victims as members of the “greatest generation.” The Court concluded that the prosecution’s mention of Madoff was referencing a victim’s testimony, and referring to the victims as the “greatest generation” did not rise to the level of plain error.

Summary and full case available here, courtesy of The Colorado Lawyer.

Tenth Circuit: District Court Lacked Authority to Consider Defendant’s Fraud on the Court Motion

The Tenth Circuit Court of Appeals issued its opinion in United States v. Williams on Tuesday, June 23, 2015.

Jeffrey Dan Williams was convicted on federal drug and firearm charges in the late 1990s. He unsuccessfully challenged his convictions multiple times in state and federal court. In November 2010, he filed his fifth request for postconviction relief, in which he claimed at least five Tulsa police officers who were involved in the investigation in his case were investigated for corruption, including planting evidence and perjury in criminal cases. The Tenth Circuit denied Williams’ motion to file a second or subsequent habeas petition due to lack of supporting evidence but allowed him to refile a motion for authorization containing complete descriptions of all relevant facts, with supporting evidence. Williams attempted to comply but the Tenth Circuit found the evidence insufficient and denied the motion.

Williams next filed a pro se “Motion to Withdraw and Nullify Guilty Plea” in district court in January 2012, arguing that the officers involved in the corruption investigation had “engaged in the same type of illegal conduct” in Williams’ case. Williams attached evidence undermining the testimony of the DEA agent used to support the quantity findings at Williams’ sentencing. The district court construed the motion as an F.R.C.P. 60(d)(3) request, appointed counsel for Williams, ordered the parties to conduct discovery, and held an evidentiary hearing. At the hearing the district court heard testimony from multiple witnesses that supported Williams’ fraud claims. The district court issued an opinion and order vacating Williams’ judgment and sentence and dismissing the third superseding indictment. The court found that the Tulsa Police officers committed a fraud on the court that required Williams’ convictions to be set aside. Alternatively, the district court granted Williams’ motion to withdraw his guilty plea based on the court’s common law authority to prevent a miscarriage of justice. The district court distinguished an intervening Tenth Circuit decision, United States v. Baker, which held that motions alleging fraud on the court should be treated as second or successive petitions, noting that the court sua sponte invoked its authority to construe Williams’ motion as a fraud on the court. The government appealed.

The Tenth Circuit agreed with the government that AEDPA divested the district court of authority to rule on the motion, characterizing it as a second or successive petition for habeas relief. The Tenth Circuit found the district court did not properly invoke its inherent authority to correct fraud on the court and therefore lacked subject matter jurisdiction. Explaining that for AEDPA purposes it looks at the substance of a motion and not the title, the Tenth Circuit found that Williams’ motion challenged his underlying conviction, falling squarely in the definition of a second or successive habeas petition for AEDPA purposes. Although an exception existed for newly discovered factual bases for relief, that exception did not apply in Williams’ case because his claims of corruption existed from its inception. The Tenth Circuit clarified that newly discovered proof is not the same as a newly discovered factual basis, so although the evidence supporting Williams’ corruption claims had not yet been uncovered at the time of his first appeal, the basis of the claims existed. Because Williams failed to obtain certification from the Tenth Circuit before filing his motion, he was prohibited from filing a second or successive habeas motion.

The Tenth Circuit next rejected the district court’s characterization that it was acting sua sponte to correct the fraud on the court. The Tenth Circuit explained that in the years following AEDPA’s enactment, the court’s authority to remedy fraud on the court was narrowed, and in Baker, the Tenth Circuit further limited a court’s authority in cases where the defendant has already had fair habeas review. The Tenth Circuit dismissed the district court’s statement that it was acting sua sponte, finding instead that it acted on the successive application for habeas relief because it considered the new claims and evidence contained in Williams’ motion. The Tenth Circuit reversed the district court’s decision to vacate Williams’ convictions based on fraud on the conviction court.

The Tenth Circuit also found the district court was not free to exercise its common law authority to prevent a miscarriage of justice, noting it must be constrained by the limits set by Congress. Because Williams did not first obtain certification from the Tenth Circuit to appeal, the district court lacked jurisdiction to consider the miscarriage of justice claims.

Finally, the Tenth Circuit evaluated Williams’ motion as a request to file a second or successive petition, which it granted in part. The Tenth Circuit evaluated Williams’ new evidence and the testimony of the witnesses supporting his fraud claims, and found that only his firearm conviction would be affected by the new evidence since Williams did not contest every search or all evidence gained by the police as obtained by corruption. In fact, the Tenth Circuit found that the evidence tended to support Williams’ possession charges.

The Tenth Circuit reversed the district court’s judgment and remanded with instructions to dismiss the case for lack of jurisdiction. The Tenth Circuit granted Williams’ motion to file a second or successive habeas petition as related to the firearm charge. Judge Bacharach dissented, arguing the Circuit should have respected the district court’s assertion that it acted sua sponte.

Tenth Circuit: District Court Empowered to Consider All Relevant Conduct When Calculating Loss for Sentencing Purposes

The Tenth Circuit Court of Appeals issued its opinion in United States v. Alisuretove on Monday, June 8, 2015.

Elvin Alisuretove pleaded guilty to one count of conspiracy to commit wire fraud after authorities discovered his connection in a scheme to “skim” bank information off debit cards and make cash withdrawals from ATM machines. Alisuretove was sentenced to 63 months’ imprisonment followed by 36 months’ supervised release and was ordered to pay $240,682.27 in restitution. Alisuretove appealed both his sentence and restitution amount, arguing the district court erred in determining his total offense level, in calculating the amount of loss associated with his conduct, and in determining the amount of restitution owed under the Mandatory Victims Restitution Act (MVRA).

The Tenth Circuit first examined the total amount of loss attributed to Alisuretove. Under the Sentencing Guidelines, a loss between $200,000 and $400,000 would result in a 12-level increase to Alisuretove’s base offense level of 1. Alisuretove contends the district court’s calculation of $360,856.80 total loss was “clearly erroneous” because no evidence showed he placed or used the skimming devices. Alisuretove asserted that the only loss that should be attributed to him was the $140,000 he told officers about after arrest. The Tenth Circuit noted that the district court was empowered to consider not just the conduct proffered by defendant but also all of defendant’s relevant conduct. In this case, Alisuretove’s guilty plea, statements to law enforcement, and other evidence supported the district court’s calculation of $360,856.80 total loss. The Tenth Circuit found no error in this calculation.

The Tenth Circuit next evaluated the restitution amount under the MVRA. Alisuretove contended the district court erroneously took into account losses suffered by twelve financial institutions even though only five were named in the indictment. The Tenth Circuit found the word “victim” in the MVRA is not limited to only those victims named in the indictment but rather encompasses any person harmed in the course of defendant’s criminal conduct. However, because neither the PSR nor the district court made any factual findings regarding the specific losses suffered by the financial institutions, the Tenth Circuit remanded for recalculation of restitution.

The district court’s judgment was affirmed in part, reversed in part, and remanded for further findings.

Tenth Circuit: CEA Allows Nationwide Service of Process for Receivers Pursuing Receivership Property

The Tenth Circuit Court of Appeals issued its opinion in Klein v. Cornelius on Wednesday, May 27, 2015.

R. Wayne Klein was appointed receiver of Winsome Investment Trust, a business entity whose founder, Robert J. Andres, caused it to illegally distribute funds as part of a Ponzi scheme. William Cornelius and his Houston law firm, Cornelius & Salhab, received some of the illegally obtained funds as payment for a New Hampshire criminal defense representation of one of Andres’ friends. Klein, as receiver, brought suit against Cornelius in Utah federal court to void the fraudulent transfer to Cornelius for approximately $90,000 in legal fees. The Utah court granted summary judgment to Klein, and Cornelius appealed, raising several points of error.

The Tenth Circuit first addressed Cornelius’ three jurisdictional challenges. Cornelius first argued the Commodity Exchange Act (CEA) does not authorize a receiver to bring state fraudulent transfer claims in federal court against a third-party recipient of Ponzi scheme funds. The Tenth Circuit found that the CEA authorizes the Commodities Futures Trading Commission (CFTC) to bring civil actions in federal court to enjoin violations of the CEA, and does not prohibit a receiver from pursuing state law claims in federal court. The Tenth Circuit concluded the district court had subject matter jurisdiction to resolve Klein’s Uniform Fraudulent Transfer Act (UFTA) claims on Winsome’s behalf.

Cornelius next challenged standing, arguing Klein lacked standing to bring a UFTA claim because Winsome itself could not bring such a claim. Cornelius reasoned that because Winsome was unincorporated and under Andres’ control, it was an alter ego for Andres and therefore had no authority to sue in its own right. Although he conceded Klein could sue as a receiver for Andres, the Tenth Circuit disagreed with Cornelius’ contention that Winsome could not sue in its own right. The Tenth Circuit found that as a business entity abused as part of a Ponzi scheme, Winsome became a defrauded creditor. The Tenth Circuit found that Winsome was its own entity under Utah law and therefore Klein had standing to pursue the UFTA claim.

Cornelius also argued the district court lacked personal jurisdiction because he did not have sufficient contacts with Utah and because he was not properly served with a complaint. The Tenth Circuit first found the CEA allowed nationwide service of process for receivers pursuing receivership property. The Tenth Circuit next looked at Cornelius’ argument that he had minimum contacts with Utah, and found that in federal question cases where nationwide service of process invokes jurisdiction, the defendant must establish that the chosen forum burdens the defendant with “constitutionally significant inconvenience.” Because Cornelius made no jurisdiction arguments other than the minimum contact argument, the Tenth Circuit found no error in the district court’s determination that it had jurisdiction. Cornelius also argued that in personam jurisdiction was inappropriate and only in rem jurisdiction would apply, but the Tenth Circuit disagreed, finding personal jurisdiction applied under the particular statutory scheme.

Next, Cornelius argued three points of error regarding the district court’s application of UFTA: (1) Texas law applies, (2) the transfer was not fraudulent, and (3) regardless, Klein’s claim is barred by the statute of limitations. The Tenth Circuit addressed each argument in turn. Because the relevant provisions of Texas law use the same language as Utah, the Tenth Circuit found Cornelius’ first argument of no practical significance. Next, the Tenth Circuit found that because Ponzi schemes are inherently insolvent, there is a presumption that transfers from such entities involve an intent to defraud. Cornelius argued that neither he nor the criminal defendant he represented knew of the Ponzi scheme, but the Tenth Circuit noted that nothing in the UFTA requires a transferee to have knowledge of the fraud. The Tenth Circuit also declined to adopt Cornelius’ assertion that he provided “reasonably equivalent value” for his payment, noting that his legal services conferred no benefit on Winsome and the payments to Cornelius only served to diminish its net worth.

Finally, the Tenth Circuit addressed the statute of limitations argument. Claims alleging actual intent to defraud under the UFTA must be brought within four years of when the transfer was made or one year after the transfer could reasonably have been discovered. Klein brought suit against Cornelius in December 2011. The payments to Cornelius for his legal services were made between September 2006 and July 2007, and Cornelius argued the suit was untimely because it was brought well after the four year statute of limitations had expired. However, Klein was appointed as receiver in January 2011, and he could not have reasonably discovered the fraud until his appointment. The Tenth Circuit found the claim was timely since it was brought within one year of Klein’s appointment as receiver.

The district court’s grant of summary judgment to Klein was affirmed.

Tenth Circuit: PSLRA Requires Showing of Intent to Deceive, Defraud, or Manipulate In Order to Prove Scienter

The Tenth Circuit Court of Appeals issued its opinion in In re Gold Resource Corp. Securities Litigation: Banker v. Gold Resource Corp. on Friday, January 16, 2015.

Gold Resource Corporation (GRC) is a publicly traded Colorado corporation engaged in mining for gold, silver, and other minerals in Mexico. At one of its mines, the El Aguila property, GRC began stockpiling ore and developed an aggressive business plan calling for increased mining activities. GRC had a single buyer for its mining products from the El Aguila property. GRC issued a press release in January 2012, announcing “record” production at the El Aguila facility and predicting continued growth and success. GRC issued several other press releases and filings with the SEC documenting “record” production and growth.

GRC first announced production problems at the El Aguila facility on July 19, 2012, admitting its second quarter production was lower than expected due to several factors. It lowered its production outlook by 15 percent, causing stock values to plummet. GRC announced its third quarter results in an October 2012 press release, notifying investors that production was lower still than expected. In November 2012, GRC issued a press release announcing that settlement of its billing dispute with its single buyer required restatement of the already-reported financial results. It submitted a Form 8-K to the SEC explaining that executive management became aware of significant variances between GRC’s assays and those of the buyer in the third quarter of 2012, but that GRC believed those discrepancies were remedied as of September 30, 2012.

Nitesh Banker and others, investors, brought suit against GRC, alleging violation of § 10(b) of the Securities Exchange Act. Investors asserted that by September 30 at the latest, GRC was aware of serious problems with its accounting control, and therefore misled investors with its first and second quarter financial reportings. Investors also alleged that two statements in the January 30, 2012, press release were materially misleading, because GRC was aware of significant production problems but failed to report them, and because the statement about continuing on the trajectory of projected growth did not prove to be accurate. The district court dismissed the complaint with prejudice, finding plaintiff investors failed to meet the heightened scienter requirement required by the Private Securities Litigation Reform Act (PSLRA). Plaintiffs appealed.

The Tenth Circuit first examined the requirements for properly stating a claim for securities fraud, and the heightened pleading requirements for the untrue statement and scienter requirements under the PSLRA. The PSLRA requires that plaintiffs must show with particularity a mental state involving intent to deceive, manipulate, or defraud, in order to prove the scienter requirement.

First addressing plaintiffs’ allegations of scienter because of the misstatement of first and second quarter profits, the Tenth Circuit found no wrongdoing by GRC. The Tenth Circuit found other plausible inferences in GRC’s accounting misstatements and SOX miscertifications, including that employees in Oaxaca did not immediately tell executive management in Denver about the variances because they thought buyer’s figures were wrong, and it was prudent of the management to investigate the variances before confirming the discrepancy publicly. Addressing the accounting practices, the Tenth Circuit found no recklessness where GRC recognized as income the amount buyer agreed to pay, rather than the amount buyer eventually did pay, since that was the contractual agreement between GRC and the buyer. The Tenth Circuit similarly dismissed plaintiffs’ remaining assertions of scienter, finding instead that at most the conduct constituted negligence, and defendants’ explanation offered a plausible alternative. The defendants had every right not to disclose the variances before the matter was investigated and resolved.

As for the production problems, the Tenth Circuit accepted defendants’ explanations for encountering difficulties as a plausible reason to produce less ore than originally expected. The risks of the mining business were set forth in the cautionary statements issued to investors, and encountering the risks did not rise to the level of scienter.

The Tenth Circuit affirmed the district court’s dismissal of plaintiffs’ claims with prejudice. The Tenth Circuit also concluded the district court did not abuse its discretion by failing to allow plaintiff to amend its complaint and in denying its motion to strike.