FERNANDEZ, Circuit Judge:
The Securities and Exchange Commission brought a civil enforcement action against Leonard S. Sands, First Pacific Bancorp (Bancorp), and PacVen Inc. for violations of the antifraud, filing and disclosure provisions of the federal securities laws. The district court granted partial summary judgment in favor of the SEC on three of its claims.
Sands was the chairman of the board, chief executive officer and corporate counsel of Bancorp, a Delaware corporation organized as a bank holding company, and owned 54% of its common stock. Sands was also the chairman of the board and corporate counsel of First Pacific Bank, Inc. (Bank), the wholly owned subsidiary of Bancorp and its major asset. In addition, Sands was the president and the CEO of PacVen, a Nevada "blank check", also known as "shell", corporation formed for the purpose of merging with or acquiring other companies.
Beginning in the early 1980s, state and federal regulators repeatedly rated the Bank "unsatisfactory" because of its inadequate capital, earnings and liquidity, and because of its increasing amounts of classified assets and past due loans. In the late 1980s, Bancorp and Sands engaged in several financial transactions designed to raise additional capital for the failing Bank. They committed various securities law violations in the process.
The transaction which underlies most of the issues in this appeal was the Bancorp's 1987 public offering of securities. In April of 1987, it commenced a "mini-max" public offering with the intention of downstreaming its proceeds to the financially troubled Bank. Under the terms of the offering, Bancorp was required to sell a minimum of 750 "units," at $2,000 each, on an all-or-nothing basis by August 12, 1987. The underwriter later extended the deadline to October 10, 1987. If all 750 units were not sold by the deadline, the offering was to be cancelled and the funds were to be returned to the investors. If the minimum were reached, Bancorp had a right to sell up to 1,275 units on a best-efforts basis.
On October 9, 1987, $1,688,000 was forwarded to the escrow agent for investment in the Bancorp offering, but of those funds, $1,000,000 was in the form of a check written by Paul Kutik, chairman of Savoy Reinsurance Company, and drawn on the Bank of Montreal, Bahamas Ltd. That check was later returned unpaid. Also, $500,000 had been raised in a public offering by PacVen in July of 1987, and was fraudulently diverted by Sands into the Bancorp offering.
Among other things, the SEC sought to have Sands, Bancorp and PacVen disgorge the $688,000 raised in the Bancorp offering from outside investors, and to have Sands barred from serving as an officer or director of publicly held companies in the future. The district court granted both forms of relief and this appeal ensued.
JURISDICTION AND STANDARDS OF REVIEW
The district court had jurisdiction pursuant to 28 U.S.C. § 1331. We have jurisdiction pursuant to 28 U.S.C. § 1292(a)(1).
We review the grant of summary judgment de novo. See Goldblatt v. FDIC, 105 F.3d 1325, 1327 (9th Cir.1997). We review the district court's order of disgorgement for abuse of discretion. See SEC v. Clark, 915 F.2d 439, 453 (9th Cir.1990). Similarly, we review the district court's decision to bar Sands from serving as an officer or director of a publicly held company for abuse of discretion. See SEC v. Posner, 16 F.3d 520, 522 (2d Cir.1994).
Sands and Bancorp object to the district court's grant of summary judgment against them on the SEC's claim that their handling of the Bancorp offering constituted securities fraud. See Sands I, 902 F.Supp. at 1162-63. Sands also claims that even if the summary judgment were proper, he should not have been ordered to disgorge $688,000. For convenience, we will only refer to Sands in the ensuing discussion, though, of course, if he were correct about the summary judgment grant, that would inure to Bancorp's benefit also.
(1) The summary judgment
We recognize that in reviewing the district court's grant of summary judgment in favor of the SEC, we must view the evidence in the light most favorable to Sands, and determine "whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law." Goldblatt, 105 F.3d at 1327. That does not help Sands at all.
Sands cannot dispute that the $1,000,000 check written by Paul Kutik and drawn on the Bank of Montreal, Bahamas Ltd. was returned unpaid. Rather, he contends that the minimum requirement of the offering was satisfied because a sufficient amount was received in the form of checks by the dead-line. We reject that argument. Rule 10b-9 expressly provides that funds invested in the mini-max offering must be promptly refunded to the investors unless "(i) a specified number of units of the security are sold at a specified price within a specified time, and (ii) the total amount due to the seller is received by him by a specified date." 17 C.F.R. § 240.10b-9 (a)(2) (emphasis added).
Sands attempts to put his own spin on the actual course of events by arguing that he acquired Paul Kutik's position in the offering and Kutik invested before the deadline. His attempt fails. Because Kutik's check never cleared, his "position" in the offering amounted to zero. Sands' purchase of the 500 units, which Kutik had merely wished to purchase, occurred after the deadline and, therefore, after the Bancorp offering
Sands' main contention, however, is that he had "bona fide" intentions at the time of his investment in the offering, and he did not, therefore, act with the requisite scienter. This argument goes very wide of the mark. The fact that Sands made a real investment is not determinative because that investment occurred after the Bancorp offering had already failed to satisfy the minimum requirement. If he wanted to invest, fine. But the other investors' funds should have been returned to them.
In a mini-max offering, scienter is shown by a defendant's knowledge of the minimum requirement, and that the funds were retained even though the minimum amount was not raised. As the court said in C.E. Carlson, Inc. v. SEC, 859 F.2d 1429 (10th Cir.1988):
Id. at 1435-36 (internal citations omitted); see also Svalberg v. SEC, 876 F.2d 181, 184 (D.C.Cir.1989) (scienter is shown by "knowledge of what one is doing and the consequences of those actions"). When the $1,000,000 check from Paul Kutik was returned unpaid, Sands knew that Bancorp had failed to raise $1,500,000 as was required by the terms of the offering. But instead of refunding $688,000 to the investors, Sands retained those funds and proceeded to close the offering by investing $1,000,000 of his own money. That itself was fraudulent.
As the court pointed out in Svalberg, 876 F.2d at 183:
See also Banc One Capital Partners Corp. v. Kneipper, 67 F.3d 1187, 1193 (5th Cir.1995) ("The sellers cannot avoid the requirements of [an all-or-none] provision by fraudulently creating the impression that the minimum has been met."); C.E. Carlson, Inc., 859 F.2d at 1434; A.J. White & Co. v. SEC, 556 F.2d 619, 622-23 (1st Cir.1977). Thus, regardless of his long term intentions at the time of the investment, the knowing retention of the monies that others invested into Bancorp's failed offering satisfied the scienter requirement, and the district court did not err in granting summary judgment on that issue.
(2) The disgorgement order against Sands
The district court has broad equity powers to order the disgorgement of "illgotten gains" obtained through the violation of the securities laws. See Clark, 915 F.2d at 453; see also SEC v. Fischbach Corp., 133 F.3d 170, 175 (2d Cir.1997); SEC v. First Jersey Sec. Inc., 101 F.3d 1450, 1474 (2d Cir.1996), cert. denied, ___ U.S. ___, 118 S.Ct. 57, 139 L.Ed.2d 21 (1997). Disgorgement is designed to deprive a wrongdoer of unjust enrichment, and to deter others from violating securities laws by making violations unprofitable. See Hateley v. SEC, 8 F.3d 653, 655 (9th Cir.1993); SEC v. Rind, 991 F.2d 1486, 1491 (9th Cir.1993). Further, where two or more individuals or entities collaborate or have a close relationship in engaging in the violations of the securities laws, they have been held jointly and severally liable for the disgorgement of illegally obtained proceeds. See Hateley, 8 F.3d at 656; see also SEC v. Hughes Capital Corp., 124 F.3d 449, 455 (3d Cir.1997); First Jersey,
Sands argues that he should not have been ordered to disgorge the proceeds of the offering because he received no personal financial benefit as a result of that offering. We reject the argument. The infusion of capital from the Bancorp offering put off a bank failure and enabled the Bank to remain in operation for two and a half more years. During that time, Sands engaged in what the district court's findings characterized as "milking the asset," by paying himself hundreds of thousands of dollars in salaries, commissions, and consulting, management and legal fees. The California state bank examiners determined that although Sands was not then an officer of the Bank, he retained control over the Bank and continued to extract sufficient income to service his heavy personal debt and to cover his living expenses. The FDIC inspector found that Sands was paying himself excessive compensation, which amounted to two or three times what a CEO of a comparable, well-managed institution would receive. The FDIC inspector also noted in his report that Sands "apparently could not afford to reduce his salary, pay on his loans, and maintain his standard of living." Thus, Sands received substantial personal benefit from the infusion of the illegally obtained proceeds from the Bancorp offering into the failing Bank, which justified the district court's order directing Sands to disgorge those proceeds.
Sands also claims that the district court ordered restitution instead of disgorgement, and that he was unfairly surprised and had no opportunity to raise defenses to that form of remedy. Sands' claim of unfair surprise is not supported by the record. Several pretrial pleadings filed by the SEC specifically requested that the court order Sands to disgorge the fraudulently retained proceeds of the Bancorp offering, and that those proceeds be returned to the investors as restitution. Further, it is quite clear from the district court's conclusions of law that the remedy it granted was disgorgement rather than restitution. The fact that the district court directed that the disgorged funds be returned to the defrauded investors does not change the nature of the remedy. Once the primary purpose of disgorgement has been served by depriving the wrongdoer of ill-gotten gains, the district court has broad discretion in determining the disposition of the disgorged funds. See Fischbach, 133 F.3d at 175 ("Once the profits have been disgorged, it remains within the court's discretion to determine how and to whom the money will be distributed...."); SEC v. Huffman, 996 F.2d 800, 803 (5th Cir.1993) ("The district court has broad discretion in fashioning the equitable remedy of a disgorgement order."); see also SEC v. Drexel Burnham Lambert, Inc., 956 F.Supp. 503, 507 (S.D.N.Y.), aff'd, 133 F.3d 170 (1997).
We need not engage in a rather scholastic argument about whether restitution and disgorgement are really just about the same
B. OFFICER AND DIRECTOR BAR
Sands earnestly argues that he should not have been "permanently and unconditionally prohibited from acting as an officer or director of any issuer required to file reports pursuant to Sections 12(b), 12(g) or 15(d) of the Securities Exchange Act of 1934 [15 U.S.C. §§ 781(b), (g) or 780(d)]." We have listened carefully to his monody, but we agree with the district court that protection of the public justifies the bar. In addition to the conduct we have detailed in the Background portion of this Opinion, Sands helped to orchestrate transactions involving Residual Interest Wrap Notes and Liberian Certificates of Deposit, which greatly and artificially inflated the value of the Bank.
The district court has broad equitable powers to fashion appropriate relief for violations of the federal securities laws, which include the power to order an officer and director bar. See Posner, 16 F.3d at 521; see also SEC v. Patel, 61 F.3d 137, 141 (2d Cir.1995) (a district court has "substantial discretion" in deciding whether to impose an officer and director bar). In addition to the court's inherent equitable powers, the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (Remedies Act) authorizes the court to order an officer and director bar "if the person's conduct demonstrates substantial unfitness to serve as an officer or director." 15 U.S.C. § 78u(d)(2).
The district court considered those factors, and found that Sands' "securities violations are egregious; he caused the collapse of a federally insured bank; he attempted to stymie banking regulators from doing their jobs; he is a recidivist; and the fraudulent conduct he committed occurred while serving in a corporate or fiduciary capacity." The district court also found that Sands had a high level of scienter, that he engaged in ongoing and recurrent violations, that he had failed to assume any responsibility for his violations of law, that he utterly failed to
Sands, a sophisticated businessman and a lawyer, has engaged in numerous activities in violation of the securities laws and basic notions of right and wrong. He perpetuated a number of frauds upon investors and regulators. We need not sort out whether his principles are just plain wrong, or whether he is afflicted with akrasia, or whether there is some other explanation for his actions. What is clear is that he, along with Bancorp and PacVen, must disgorge the amounts that the unwitting investors were relieved of. Equally clear, the district court properly barred him from assuming a position from which he could inflict similar wrongs in the future.