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U.S. Securities & Exchange Commission v. Schooler

United States Court of Appeals, Ninth Circuit

September 26, 2018

U.S. Securities & Exchange Commission, Plaintiff-Appellee,
v.
E. Andrew Schooler, Defendant-Appellant, and First Financial Planning Corporation, DBA Western Financial Planning Corporation, Defendant.

          Submitted July 13, 2018 [*] Pasadena, California

          Appeal from the United States District Court for the Southern District of California D.C. No. 3:12-cv-02164-GPC-JMA Gonzalo P. Curiel, District Judge, Presiding

          Bryan C. Vess, Bryan C. Vess APC, San Diego, California; Philip H. Dyson, Law Office of Philip H. Dyson, Las Mesa, California, for Defendants-Appellants.

          Stephen G. Yoder, Senior Litigation Counsel; John W. Avery, Deputy Solicitor; Robert B. Stebbins, General Counsel; Securities and Exchange Commission, Washington, D.C.; for Plaintiff-Appellee.

          Before: Sandra S. Ikuta and N. Randy Smith, Circuit Judges, and Stephen M. McNamee, [**] District Judge.

         SUMMARY[***]

         Securities Law

         The panel affirmed in part, and vacated in part, the district court's judgment in favor of the U.S Securities & Exchange Commission ("SEC") in a civil enforcement action alleging federal securities law violations brought against Louis Schooler and his company Western Financial Planning Corporation.

         The panel affirmed the district court's core holding that the general partnership interests at issue were investment contracts and qualified as securities under federal law, and that Louis Schooler violated federal securities law by selling unregistered securities and defrauding his investors.

         Louis Schooler died during the pendency of the appeal, and E. Andrew Schooler (as executor of the estate) replaced him as the named party on appeal. The panel vacated the civil penalty ordered by the district court in light of Louis Schooler's death. The panel also vacated and remanded the disgorgement order for reconsideration in light of the Supreme Court's decision in Kokesh v. SEC, 137 S.Ct. 1635 (2017), which altered the analysis for determining the limitations period applicable to disgorgement.

         The panel affirmed the district court's judgment in all other aspects. The panel affirmed entry of summary judgment for the SEC on its claims under Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities and Exchange Act of 1934, and Rule 10b-5 thereunder.

          OPINION

          N.R. SMITH, Circuit Judge

         Dressing an investment contract in the trappings of a general partnership interest does not immunize that interest from the federal securities laws. Our standard for identifying an "investment contract" under federal securities law has long been "flexible rather than . . . static"; it "is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits." See SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946). The undisputed facts establish that the general partnership interests at issue were stripped of the hallmarks of a general partnership and marketed as passive investments. Accordingly, we affirm the district court's core holding that the general partnership interests at issue qualify as securities under federal law and that Louis Schooler violated federal securities law by selling unregistered securities and defrauding his investors.

         Louis Schooler died during the pendency of the appeal, but E. Andrew Schooler (as executor of his estate) replaced him as the named party on appeal. In light of Louis Schooler's death and intervening Supreme Court precedent, the Securities and Exchange Commission (SEC) acknowledges that several components of the district court's judgment require vacatur or remand. Specifically, we vacate the civil penalty ordered by the district court in light of Louis Schooler's death.[1] We also vacate and remand the disgorgement order for reconsideration in light of the Supreme Court's decision in Kokesh v. SEC, 137 S.Ct. 1635 (2017), which alters the analysis for determining the limitations period applicable to disgorgement. As noted above, we affirm the district court's judgment in all other respects.

         I.

         Between 1978 and 2012 (when the SEC filed suit), Louis Schooler individually and through his wholly owned company, First Financial Planning Corporation d/b/a Western Financial Planning Corporation (Western), [2] engaged in the business of identifying tracts of land to purchase and sell to investors by means of general partnership interests. Through these alleged general partnership interests, each investor/partner would own a fractional interest in the parcels to hold as a speculative investment-in the hopes that the areas where the land was located would become developed and the value of the land would increase. Specifically, Schooler would identify a tract of land, purchase it in the name of his company, and then turn around and mark up the price (often by several multiples of the price originally paid) to sell the land to investors. Schooler sold interests in a general partnership to the investors that would collectively hold the land (typically with several other general partnerships). Schooler marketed these general partnership interests to individuals across the United States and ultimately sold 3, 400 such interests over the lifetime of the operation.

         In 2012, the SEC brought suit asserting a host of federal securities law violations. The SEC sought a temporary restraining order (TRO) and the appointment of a receiver. The district court granted a TRO and eventually converted the order to a preliminary injunction. The parties litigated the case through summary judgment, where the district ...


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