U.S. Securities and Exchange Commission v. Christopher J. Hall

Case: 17-13897 Date Filed: 01/04/2019 Page: 1 of 16

[DO NOT PUBLISH] IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT ________________________ No. 17-13897 ________________________ D.C. Docket No. 1:15-cv-23489-CMA

U.S. SECURITIES AND EXCHANGE COMMISSION,

Plaintiff - Appellee, versus CHRISTOPHER J. HALL,

Defendant - Appellant.

________________________

Appeal from the United States District Court for the Southern District of Florida ________________________ (January 4, 2019)

Before JILL PRYOR, BRANCH, and BOGGS, * Circuit Judges.

PER CURIAM:

This appeal stems from an enforcement action that the Securities and Exchange Commission (“SEC”) brought against Christopher Hall for violating Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j(b),1 and Section 17(a) of the Securities Act of 1933, 15 U.S.C. §77q(a)2 (hereinafter “the antifraud provisions of federal securities law”). After a seven-day trial in February 2017, a unanimous jury determined that Hall committed multiple violations of the antifraud provisions of federal securities law. The district court then entered an order and final judgment against Hall, granting the SEC’s requests for an injunction and imposing an officer-and-director bar against Hall. The district court also ordered Hall to disgorge ill-gotten gains in the amount of approximately $3.7 million and also pay approximately $1 million in prejudgment interest.

Because the district court did not abuse its discretion in imposing the remedies requested by the SEC, we AFFIRM the district court’s order.

I. BACKGROUND

The timeline of events in this case dates back to the nationwide financial crisis in 2008. The full factual background is extensive and “involve[s] multiple parties and transactions.” SEC v. Hall, No. 1:15-cv-23489-CMA, slip op. at 1 (S.D. Fla. April 13, 2017) (hereinafter “First Order”). We provide only the relevant facts here; they are fairly straightforward. Because this case involves a jury verdict, we must view the evidence in the light most favorable to the prevailing party, drawing all reasonable inferences and credibility determinations in favor of the jury’s verdict. See Combs v. Plantation Patterns, 106 F.3d 1519, 1526 (11th Cir. 1997).

Throughout 2009 and 2010, Hall obtained millions of dollars in loans from his brokerage firm, Penson Financial Services, Inc. (“PFSI”). Hall was the chairman and controlling shareholder of Call Now, Inc., which also had a brokerage account with PFSI. Prior to the financial crisis in 2008, Hall and Call Now borrowed millions of dollars in margin loans through these brokerage accounts to purchase bonds and to fund operating expenses at Retama Park, a financially struggling Texas horse racetrack operated by Call Now.

By 2009, both Hall and Call Now’s brokerage accounts had substantially diminished in value, so PFSI required Hall and Call Now to deposit additional collateral. In response to PFSI’s call for collateral, Hall pledged Call Now stock, but told PFSI he needed loans to unencumber the shares because they were pledged to other lenders. PFSI agreed to loan him approximately $3.68 million. In fact, Hall’s shares were unencumbered; Hall had lied so that PFSI would loan him more money.

In 2010, Hall and Call Now again had shortfalls in their margin accounts with Penson. To avoid liquidation, Hall agreed to a restructuring that required him to sell some of his Call Now shares back to Call Now, which would then pledge the shares as additional collateral to PFSI. Hall claimed that the shares were encumbered and that he could not sell the shares back to Call Now until he paid off a $1.8 million lien. PFSI loaned him $1.8 million, and the shares were pledged. Unlike before, these shares were actually subject to a lien, but Hall had reached a deal with the lienholder to satisfy the lien for only $850,000. After Hall satisfied the lien, he kept the rest of the money that PFSI had loaned him. All told, as a result of these lies about the liens, Hall obtained millions in loans (about $5.5 million) from PSFI, but paid only $850,000 to a single lender who had a valid lien on Hall’s Call Now Stock.3 Hall also pledged his interest in a real-estate limited partnership as additional collateral for his margin loans. As he had with the Call Now stock, Hall claimed that his interest in the limited partnership was subject to an existing lien, and failed to disclose that he was the holder of that lien, through an entity created for his benefit to hide his assets.

In September 2015, the SEC brought an enforcement action against Hall for violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934. In February 2017, a seven-day trial was held. During the trial, Hall admitted he lied to PFSI numerous times to receive millions of dollars in loans. 4

At the close of evidence, Hall moved for judgment as a matter of law under Federal Rule of Civil Procedure 50(a), arguing that the SEC failed to show that his lies were material or made in connection with a securities transaction. The district court denied the motion. A unanimous jury found that Hall committed multiple violations of the antifraud provisions of the federal securities laws. Hall never filed a renewed motion for judgment as a matter of law or moved for a new trial.

In March 2017, after the trial concluded, the SEC filed a Motion for Final Judgment seeking: (1) entry of a final judgment; (2) a permanent injunction barring Hall from violating the securities laws in the future; (3) disgorgement of $3,747,717.12; (4) prejudgment interest of $955,583.39; (5) a civil penalty of $3,747,717.12; and (6) a permanent officer-and-director bar. Hall opposed the requested remedies, calling them “highly excessive and not supported by record evidence or the prevailing law.”

On April 13, 2017, after considering the parties’ briefs, the district court issued the First Order and final judgment. The district court granted the SEC’s request for a permanent injunction and imposed a ten-year officer-and-director bar. In addressing the SEC’s disgorgement request, the district court accepted that the SEC had proven that Hall improperly obtained $3,747,717.12 through his fraud.5 But the district court ordered no disgorgement because it found that the SEC was required to offset this amount by the value of the collateral Hall had deposited into his margin account. The district court explained that “[b]ecause Hall pledged the collateral as security for repayment of these loans, presumably [PFSI] retained the full value of the collateral.” First Order at 15 n.2. Without evidence about the value of the collateral, the court concluded that it would be inappropriate to order disgorgement. The district court instead imposed a $225,000 civil money penalty against Hall.

The following month, on May 11, 2017, the SEC filed a motion asking the district court to reconsider its ruling on disgorgement. The SEC argued that Hall was entitled to no offset based on the value of the Call Now shares that he pledged as collateral to PFSI. The SEC asserted that once Hall’s account had insufficient collateral, he was obligated either to pledge additional collateral to PFSI or risk that the existing collateral pledged in his margin account would be liquidated. So even if Hall had not lied to PFSI, he still would have been required to post the collateral. When Hall provided the collateral, PFSI posted the full value of the collateral as a credit to his margin debt. The SEC argued that giving Hall an offset now for the value of the collateral would give him credit twice for the same collateral.

In the alternative, the SEC argued that if the value of the pledged collateral was relevant, Hall failed to carry his burden to prove its value. The SEC explained that Hall had the burden of proving the value of the offset. And given his failure to show the value of his Call Now stock, he could not show that he was entitled to any offset.

The district court agreed with the SEC and, on June 29, 2017, issued an order granting the motion (the “Second Order”) and an amended judgment. SEC v. Hall, No. 15-23489-CIV, 2017 WL 3635108 (S.D. Fla. June 29, 2017). The Second Order noted that, “as demonstrated by the SEC and not rebutted by Hall, had Hall not lied about liens encumbering the collateral, [PFSI] and Hall still would have agreed to Hall posting the collateral, but [PFSI] would not have loaned him the $3.68 million in cash.” Id. at *3. The district court determined that the SEC reasonably calculated Hall’s profits and reasonably declined to offset those profits with the value of Hall’s posted collateral. The district court imposed the disgorgement and prejudgment interest amounts identified and requested by the SEC, and ordered Hall to disgorge $3,747,717.12 and prejudgment interest of $955,583.39 (totaling $4,703,300.51).

Hall timely appealed. On appeal, Hall argues that the district court abused its discretion in assessing disgorgement and in requiring him to pay prejudgment interest. Hall also takes issue with the imposition of the injunction and officer-and- director bar, and disputes evidence supporting the jury’s verdict at trial. 6

II. DISCUSSION

A. Disgorgement and Prejudgment Interest

1. Standard of Review When reviewing the amount of ill-gotten gains to be disgorged by a defendant, we review the district court’s findings for abuse of discretion. SEC v. Calvo, 378 F.3d 1211, 1217–18 (11th Cir. 2004)). “[W]hen reviewing a district court’s disposition of a motion for reconsideration after final judgment, we have consistently stated that the decision to grant such relief is committed to the sound discretion of the district judge and will not be overturned on appeal absent an abuse of discretion.” Region 8 Forest Serv. Timber Purchasers Council v. Alcock, 993 F.2d 800, 806 (11th Cir. 1993) (footnote omitted).

2. Discussion “Generally, disgorgement is a form of ‘[r]estitution measured by the defendant’s wrongful gain.’ Disgorgement requires that the defendant give up ‘those gains . . . properly attributable to the defendant’s interference with the claimant’s legally protected rights.’” Kokesh v. SEC, 137 S. Ct. 1635, 1640 (2017) (alteration in original) (quoting Restatement (Third) of Restitution and Unjust motion, we have “no authority” to consider its challenge to the sufficiency of the evidence. Hi Ltd. P’Ship v. Winghouse of Fla., Inc., 451 F.3d 1300, 1302 (11th Cir. 2006).

Here, Hall made a Rule 50(a) motion, arguing that the SEC failed to show that his lies were material or made in connection with a securities transaction. But he failed to file a post- verdict motion, which means that we have no authority to review Hall’s challenges to the sufficiency of the SEC’s evidence at trial.

Enrichment § 51, cmt. a, p. 204 (2010)). “The SEC is entitled to disgorgement upon producing a reasonable approximation of a defendant’s ill-gotten gains. . . . Exactitude is not a requirement; so long as the measure of disgorgement is reasonable, any risk of uncertainty should fall on the wrongdoer whose illegal conduct created that uncertainty.” Calvo, 378 F.3d at 1217 (internal quotation marks and citations omitted). After the SEC produces its approximation of ill- gotten gains, “[t]he burden then shifts to the defendant to demonstrate that the SEC’s estimate is not a reasonable approximation.” Id.

It is clear that the district court carefully considered the disgorgement issue and the evidence provided by the parties on both occasions. The district court’s Second Order (the order at issue in this appeal) amended the First Order in response to the SEC’s Motion for Reconsideration of the district court’s First Order. In the Second Order, the district court revisited the disgorgement issue and determined that the SEC “reasonably” set forth the calculation for determining Hall’s profits.

After the SEC provided a reasonable approximation of Hall’s ill-gotten profits, the burden then shifted to Hall “to demonstrate that the SEC’s estimate [was] not a reasonable approximation.” Id. But the district court found that Hall failed meet this burden because he did not provide “any evidence he would not have pledged the same collateral in the first transaction even without the fraudulently obtained up-front cash payment, nor has he shown he incurred any losses as a result of his fraudulent misrepresentations in the second and third transactions.” Hall, 2017 WL 3635108, at *4. Because Hall failed to rebut the SEC’s reasonable approximation, the district court’s decision to impose the reasonable disgorgement amount proposed by the SEC was not an abuse of the court’s discretion. Accordingly, we affirm the district court’s order requiring Hall to disgorge $3,747,717.12.

Relatedly, the decision to grant prejudgment interest—and the rate at which interest is awarded—falls squarely within the discretion of the district court. SEC v. Carrillo, 325 F.3d 1268, 1273 (11th Cir. 2003). On appeal, Hall fails to prove that the district court was acting outside of its discretion in imposing the prejudgment interest amount. He continues to rely on the same overvaluation of the collateral he provided to PFSI that the district court correctly disregarded. This overvaluation was resisted by the SEC in its approximation, and the district court found that it was “reasonable not to offset those profits by the value of the Call Now stock Hall sold, as the fraud was not in the sale of stock to Call Now; rather the fraud occurred when Hall fraudulently induced [PFSI] to loan more cash to Call Now than was needed to pay off the liens on that stock.” Hall, 2017 WL 3635108, at *3. Accordingly, we affirm the district court’s order requiring Hall to pay prejudgment interest in the amount of $955,583.39.

B. Permanent Injunction and Officer-and-Director Bar

1. Permanent Injunction “[T]he decision whether to grant or deny injunctive relief is addressed to the sound discretion of the district court and will not be disturbed on appeal except for clear abuse.” SEC v. Caterinicchia, 613 F.2d 102, 105 (5th Cir. 1980). 15 U.S.C. § 78u (d)(1) 7 and 15 U.S.C. § 77t(b)8 grant the SEC the authority to obtain a permanent injunction, which it sought and the district court granted here.

In determining whether to grant the SEC’s request for a permanent injunction, a court applies a two-part test, which requires the SEC to establish: “(1) a prima facie case of previous violations of federal securities laws, and (2) a reasonable likelihood that the wrong will be repeated.” Calvo, 378 F.3d at 1216. Because the jury found Hall liable for violations of securities laws, we consider the prima facie case required by part one as easily met. Likewise, Hall “do[es] not dispute that the SEC has established a prima facie case for its . . . claims.” S.E.C. v. Big Apple Consulting USA, Inc., 783 F.3d 786, 807 (11th Cir. 2015).

Thus, only part two is at issue here. Under part two, the district court should consider the following “[i]ndicia that a wrong will be repeated[:] . . . [the] ‘egregiousness of the defendant’s actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant’s assurances against future violations, the defendant’s recognition of the wrongful nature of the conduct, and the likelihood that the defendant’s occupation will present opportunities for future violations.’” Calvo, 378 F.3d at 1216 (quoting SEC v. Carriba Air, Inc., 681 F.2d 1318, 1322 (11th Cir. 1982)). Hall argues that the permanent injunction imposed by the district court is inappropriate because the SEC failed to properly show that Hall’s conduct was “egregious.” 9 The district court, however, engaged in a lengthy, thoughtful, and well-reasoned analysis of the part-two factors and determined that “Hall is a repeat violator . . . [who] acted egregiously, with a high degree of scienter, and is very likely to encounter opportunities for future violations.” See First Order at 9. We agree, and find that the district court did not abuse its discretion.

2. Officer-and-Director Bar District courts are afforded substantial discretion in deciding whether to impose an injunction that bars an individual from serving as an officer or director. SEC v. Patel, 61 F.3d 137, 141 (2d Cir. 1995).

Similar to its authority to issue an injunction as discussed above, the court’s ability to impose an officer-and-director bar is also statutory. See 15 U.S.C. § 78u(d)(2) (“[T]he court may prohibit, conditionally or unconditionally, and permanently or for such period of time as it shall determine, any person who violated section 78j(b) of this title or the rules or regulations thereunder from acting as an officer or director . . . if the person’s conduct demonstrates unfitness to serve as an officer or director of any such issuer.”); see also 15 U.S.C. § 77t(e) (“[T]he court may prohibit, conditionally or unconditionally, and permanently or for such period of time as it shall determine, any person who violated section 77q(a)(1) of this title from acting as an officer or director . . . if the person’s conduct demonstrates unfitness to serve as an officer or director of any such issuer.”).

When deciding whether to impose a bar—and, relatedly, how long the bar should be—the district court considered the following factors: “(1) the egregiousness of the underlying securities law violation; (2) the defendant’s repeat offender status; (3) the defendant’s role or position when he engaged in the fraud; (4) the defendant’s degree of scienter; (5) the defendant’s economic stake in the violation; and (6) the likelihood that misconduct will recur.” Patel, 61 F.3d at 141. See also SEC v. Huff, 758 F. Supp. 2d 1288, 1356 (S.D. Fla. 2010) (citing SEC v. First Pac. Bancorp, 142 F.3d 1186, 1193 (9th Cir. 1998)), aff’d, 455 F. App’x 882 (11th Cir. 2012). 10 Again, the district court engaged in a careful analysis of these factors. The district court’s officer-and-director analysis echoed its injunction analysis, noting that Hall’s multiple, repeated violations were egregious and conducted with a high degree of scienter—all while Hall was the Chairman of Call Now. At trial, Hall also admitted that he lied to PFSI in order to obtain numerous loans. Notably, although the district court found that there was a “high likelihood [Hall’s] conduct may recur,” the district court declined to impose the SEC’s requested permanent bar. First Order at 11. Instead, the district court found a ten- year bar appropriate after “factor[ing] in the egregiousness and recurrence of Hall’s actions, as well as his apparent recognition that he knowingly lied to receive large sums of money, while holding fast to the position he did not commit any securities violations.” Id. We find that the district court did not abuse its discretion.

We also note that Hall’s arguments in this appeal continue to showcase his insistence that he did not commit any securities violations—in spite of his own trial testimony, in which he admitted the existence of the liens was a lie aimed at inducing PFSI to advance him more money. Likewise, Hall had not even paid the initial $225,000 penalty amount imposed by the First Order by the time the Second Order was issued, and the district court noted that Hall failed to pay “in defiance of the Court’s [First] Order and as further evidence of his lack of remorse.” Hall, 2017 WL 3635108, at *1. If anything, Hall’s continued proclamation of his innocence and resistance to paying any amount of restitution evidences his continued failure to recognize “the wrongful nature of [his] conduct.” See Calvo, 378 F.3d at 1216 (internal quotation marks omitted). These facts create further support for the district court’s initial determination that a ten-year injunction and an officer-and-director bar were appropriate.

Because we have not identified any abuse of discretion by the district court, we AFFIRM.