Securities and Exchange Commission v. Imran Husain et al

Filing 122

ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT 97 ; AND DENYING DEFENDANT'S MOTION FOR PARTIAL SUMMARYJUDGMENT 105 by Judge Otis D. Wright, II: The SEC's Motion for Summary Judgment is GRANTED as to Claims 1, 3, 4, 6, and 7; The SEC's MSJ is DENIED as to Claims 2, 5, and 8 through 10; The Court GRANTS the SEC's request for an order permanently enjoining Husain from violating the securities laws; The Court GRANTS the SEC's req uest for civil penalties in the amountof $1,757,000.00; The Court GRANTS the SEC's request to bar Husain from serving as an officer or director of a public company and from participating in anoffering of penny stock for a period of seven years from the date ofjudgment in this case; and The Court DENIES the SEC's request for disgorgement.The SEC shall submit a Proposed Judgment no later than seven days after the date of this order. (lc)

O

1
2
3
4
5
6
7

United States District Court
Central District of California

8
9
10
11
12

SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,

13

v.

14
15

Case No. 2:16-cv-03250-ODW (Ex)

IMRAN HUSAIN; GREGG EVAN
JACLIN,

16

ORDER GRANTING IN PART AND
DENYING IN PART PLAINTIFF’S
MOTION FOR SUMMARY
JUDGMENT [97]; AND
DENYING DEFENDANT’S MOTION
FOR PARTIAL SUMMARY
JUDGMENT [105]

Defendants.

17

I.

18

INTRODUCTION

19

Plaintiff Securities and Exchange Commission (“SEC”) initiated this action

20

against Defendants Imran Husain and Gregg Jaclin for perpetrating “a shell factory

21

scheme” in violation of federal securities laws.1 (See FAC ¶ 7, ECF No. 33.) Pending

22

before the Court are the SEC’s Motion for Summary Judgment on all claims, and

23

Husain’s Cross-Motion for Partial Summary Judgment on claims three through eight.

24

(SEC’s Mot. for Summ. J. (“SEC MSJ”), ECF No. 97; Husain’s Opp. & Mot. for

25

Partial Summ. J. (“Husain MPSJ”), ECF No. 105.) The matters are fully briefed. (See

26

SEC Reply ISO MSJ, ECF No. 111; Husain Reply ISO MPSJ, ECF No. 112.) For the

27

1

28

On August 1, 2019, the Court entered judgment as to Jaclin pursuant to the parties’ stipulation.
(Stipulation for J., ECF No. 78; J., ECF No. 79.) Accordingly, Husain is the only remaining
Defendant.

1

reasons discussed below, the Court GRANTS IN PART AND DENIES IN PART

2

the SEC’s Motion for Summary Judgment and DENIES Husain’s Cross-Motion for

3

Partial Summary Judgment.2
II.

4
5

A.

BACKGROUND

Factual Background

6

From 2008 to 2012, Husain created and controlled nine shell companies (the

7

“Shell Companies”).3 (SEC’s Statement of Uncontroverted Facts (“SECUF”) 1–3,

8

ECF No. 97-2.) Husain’s “shell factory scheme,” which centered around penny stock

9

issuers, followed a routine pattern. (See id. 3.)

10

First, Husain created a “business plan” for a new company and then he engaged

11

a friend, friend of a friend, relative, or acquaintance to be the company’s CEO—but in

12

name only. (Id.) In reality, Husain controlled the company and the CEO’s activities.

13

(Id.) The CEO was merely Husain’s “puppet,” as Husain retained full control of the

14

Shell Companies by using nominee shareholders. (Id. 3, 19–20.)

15

Second, Husain assisted in organizing sham private placement offerings of the

16

Shell Companies’ shares. (Id. 19–20.) Husain paid people to recruit shareholders for

17

the Shell Companies and he knew that these “Straw Shareholders” were not using

18

their own money to purchase the shares of the Shell Companies. (Id. 20, 23.) Husain

19

even provided some of the Straw Shareholders cash to buy the stocks. (Id. 21.)

20

Husain also exercised control over the nominee shareholder representatives who

21

approved the eventual mergers on behalf of the Straw Shareholders. (Id. 24–25.)

22

Third, Husain conducted initial public offerings of each of the Shell

23

Companies’ stock so that the shares could trade publicly. (Id. 26–35, 41–42.) He

24

2

25
26
27
28

Having carefully considered the papers filed in connection with the Motions, the Court deemed the
matters appropriate for decision without oral argument. Fed. R. Civ. P. 78; C.D. Cal. L.R. 7-15.
3
Husain created and controlled the following Shell Companies: (1) New Image Concepts, Inc.
(“New Image”); (2) PR Complete Holdings, Inc. (“PR Complete”); (3) Ciglarette Inc. (“Ciglarette”);
(4) Rapid Holdings, Inc. (“Rapid Holdings”); (5) Resume in Minutes, Inc. (“Resume in Minutes”);
(6) Movie Trailer Galaxy (“Movie Trailer”); (7) Health Directory, Inc. (“Health Directory”);
(8) Comp. Services, Inc. (“Comp. Services”); and (9) Counseling International, Inc. (“Counseling
International”).

2

1

directed each Shell Company to file a registration statement on Form S-1 with the

2

SEC. (Id.) Husain knew the Shell Companies’ registration statements on Form S-1

3

and the amendments thereto were “misleading” because they “contained ‘no

4

disclosure of Husain’s role as the controlling person’ of the Shell Companies.”

5

(Id. 45.) Instead, the Shell Companies’ Forms S-1 listed the puppet CEOs as the sole

6

officer, director, and employee of the Shell Companies. (Id. 46–47.) Husain reviewed

7

and approved the registration statements and was the Shell Companies’ “main point of

8

contact” with Jaclin and the companies’ auditors. (Id. 36–40.) Husain kept his name

9

off the registration statements to avoid the suspicion and attention of the SEC.

10

(Id. 51–53.) Husain’s responsibility for over fifty misleading registration statements

11

is uncontested. (See id. 26.)

12

The Shell Companies provided information to market makers and transfer

13

agents that omitted Husain’s role as a control person, including Financial Industry

14

Regulation Authority (“FINRA”) Form 211 applications. (Id. 60, 61, 65.) Following

15

approval of the Form 211s, pre-merger trades occurred in the stock of three Shell

16

Companies. (Id. 66–68.)

17

Between 2008 and 2012, eight Shell Companies filed periodic reports on

18

Forms 10-K and 10-Q. (Id. 70–78.) Husain “directed the preparation” of these SEC

19

filings, reviewed and approved drafts, and coordinated with Jaclin and outside

20

auditors before they were filed. (Id. 81.) These SEC filings contained “material

21

misrepresentations and omissions regarding, among other things, the [Shell

22

Companies’] business purposes, Husain’s identity and role as the control person and

23

promoter of the companies, and the Straw Shareholders’ and puppet CEOs’ true

24

nature, and in two instances, the existence of merger plans.” (Id. 79.) Throughout this

25

process, Husain made sure his name was omitted from all SEC filings. (Id. 82.)

26

Husain was “aware that the shell companies that [he created] were valuable

27

because they allowed the people who acquired them to completely control the shares

28

and corporate actions of the companies that otherwise appeared to be legitimate public

3

1

companies.” (Id. 126.) Husain knew that the Shell Companies were sold to people

2

who would “likely use the [Shell Company] to merge into private corporations that

3

had some ongoing business.” (Id. 127.) “After the sale of each [S]hell [C]ompany,

4

the [company’s] puppet CEO resigned and new management was installed.”

5

(Id. 128.)

6

Husain “directed, reviewed, and approved” SEC filings for Health Directory

7

and Movie Trailer, which falsely claimed that neither company had merger plans,

8

even though “portions of the sales proceeds had already been received into escrow.”

9

(Id. 85–89, 91.) In total, Husain oversaw the filing of over thirty-five materially false

10

and misleading periodic reports with the SEC. (See id. 70, 79.) Husain sold seven of

11

the Shell Companies through reverse mergers. (Id. 92.) Neither Husain’s sales to the

12

Shell Companies’ purchasers, nor their subsequent sales to the public, were “validly

13

registered” with the SEC. (Id. 93, 113.) The sales of Ciglarette, Resume in Minutes,

14

Rapid Holdings, Health Directory, and Movie Trailer grossed $1,787,000. (Id. 130.)

15

Husain and Jaclin made concerted efforts to conceal their scheme, including by

16

communicating through false email accounts and hiring a computer consultant to

17

destroy emails between Husain and Jaclin. (Id. 136.) In August 2012, the puppet

18

CEO of PR Complete informed Husain that the SEC subpoenaed her in investigative

19

proceedings regarding the Shell Company. (Id. 141.) Husain coached the puppet

20

CEO on how to testify and instructed her to “to testify falsely by leaving [his] name

21

out of it.” (Id. 144.) On October 14, 2014, Husain pleaded guilty to conspiracy to

22

obstruct the proceedings of the SEC. (See id. 141–49.)

23

B.

24
25

Procedural Background
On November 22, 2016, the SEC filed its First Amended Complaint against

Husain for federal securities violations, asserting ten claims:

26

 Claims 1 and 2: unregistered offer and sale of securities under Section 5(a)

27

and 5(c) of the Securities Act, and aiding and abetting violations of

28

Sections 5(a) and 5(c);

4

1

 Claims 4 and 7: fraud in the offer or sale of securities in violation of

2

Sections 17(a)(2) of the Securities Act and Rule 10b-5(b) of the Exchange

3

Act;

4

 Claims 3 and 6: scheme to defraud in the offer or sale of securities in

5

violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act and

6

Rules 10b-5(a) and (c) of the Exchange Act;

7
8

 Claims 5 and 8: aiding and abetting fraud in violation of Section 17(a) of the
Securities Act and Rule 10b-5 of the Exchange Act; and

9

 Claims 9 and 10: aiding and abetting registration violations under Section

10

15(d) and Rules 12b-20, 15d-1, and 15d-13 of the Exchange Act, and control

11

person violations pursuant to Section 20(a) of the Exchange Act.

12

(FAC ¶¶ 172–222.) Husain filed a Motion to Dismiss the SEC’s FAC, which Motion

13

the Court denied. (See Order Den. Defs.’ Mots. to Dismiss, ECF No. 46.) The Court

14

stayed this case from May 2017 to August 2019, during the pendency of the related

15

criminal matters.

16

No. 82.) Thereafter, the parties filed the present summary judgment motions.

17

(Order Granting Stay, ECF No. 58; Order Lifting Stay, ECF
III.

LEGAL STANDARD

18

A court “shall grant summary judgment if the movant shows that there is no

19

genuine dispute as to any material fact and the movant is entitled to judgment as a

20

matter of law.” Fed. R. Civ. P. 56(a). Courts must view the facts and draw reasonable

21

inferences in the light most favorable to the nonmoving party.

22

550 U.S. 372, 378 (2007). A disputed fact is “material” where the resolution of that

23

fact might affect the outcome of the suit under the governing law, and the dispute is

24

“genuine” where “the evidence is such that a reasonable jury could return a verdict for

25

the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

26

Conclusory or speculative testimony in affidavits is insufficient to raise genuine issues

27

of fact and defeat summary judgment. Thornhill Publ’g Co. v. GTE Corp., 594 F.2d

28

730, 738 (9th Cir. 1979). Moreover, though the Court may not weigh conflicting

5

Scott v. Harris,

1

evidence or make credibility determinations, there must be more than a mere scintilla

2

of contradictory evidence to survive summary judgment. Addisu v. Fred Meyer, Inc.,

3

198 F.3d 1130, 1134 (9th Cir. 2000).

4

Once the moving party satisfies its burden, the nonmoving party cannot simply

5

rest on the pleadings or argue that any disagreement or “metaphysical doubt” about a

6

material issue of fact precludes summary judgment. See Celotex Corp. v. Catrett,

7

477 U.S. 317, 322–23 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,

8

475 U.S. 574, 586 (1986); Cal. Architectural Bldg. Prods., Inc. v. Franciscan

9

Ceramics, Inc., 818 F.2d 1466, 1468 (9th Cir. 1987).

Nor will uncorroborated

10

allegations and “self-serving testimony” create a genuine issue of material fact.

11

Villiarimo v. Aloha Island Air, Inc., 281 F.3d 1054, 1061 (9th Cir. 2002). The Court

12

should grant summary judgment against a party who fails to demonstrate facts

13

sufficient to establish an element essential to his case when that party will ultimately

14

bear the burden of proof at trial. See Celotex, 477 U.S. at 322.

15

Pursuant to the Local Rules, parties moving for summary judgment must file a

16

proposed “Statement of Uncontroverted Facts and Conclusions of Law” that sets out

17

“the material facts as to which the moving party contends there is no genuine dispute.”

18

C.D. Cal. L.R. 56-1. A party opposing the motion must file a “Statement of Genuine

19

Disputes” setting forth all material facts as to which it contends there exists a genuine

20

dispute. C.D. Cal. L.R. 56-2. “[T]he Court may assume that material facts as claimed

21

and adequately supported by the moving party are admitted to exist without

22

controversy except to the extent that such material facts are (a) included in the

23

‘Statement of Genuine Disputes’ and (b) controverted by declaration or other written

24

evidence filed in opposition to the motion.” C.D. Cal. L.R. 56-3.

25

IV.

DISCUSSION

26

First, the Court addresses the SEC’s claims, which can be categorized three

27

ways. In Claims 1 and 2, the SEC alleges Husain violated Sections 5(a) and 5(c) by

28

offering and selling unregistered securities. In Claims 3 through 8, the SEC asserts a

6

1

theory of fraud—namely, that Husain’s shell factory scheme involved acts of

2

deception, misleading statements, and omissions in the sale of securities using means

3

of interstate commerce. In Claims 9 and 10, the SEC asserts “secondary claims” in

4

the alternative to Husain’s primary liability, alleging that he aided and abetted the

5

Shell Companies’ reporting violations and is liable as their control person. Second,

6

the Court addresses the SEC’s requested remedies. Husain moves for partial summary

7

judgment on only Claims 3 through 8.

8

A.

Offering and Selling Unregistered Securities (Claims 1 & 2)

9

The SEC moves for summary judgment on Claim 1, which alleges that Husain

10

violated the Securities Act’s registration requirements through unregistered offers and

11

sales of securities.

12

summary judgment on Claim 2, which alleges that Husain aided and abetted said

13

registration requirements. (SEC MSJ 2 n.1.) In his opposition, Husain states that he

14

“is prepared to concede liability under Sections 5(a) and (c) . . . in connection with his

15

failure to make disclosures to the SEC.” (Husain MPSJ 3.)

(SEC MSJ 15–18.)

In the alternative, the SEC moves for

16

Sections 5(a) and (c) of the Securities Act prohibit the unregistered offer or sale

17

of securities in interstate commerce or mail unless an exemption from registration

18

applies. See 15 U.S.C. § 77e(a), (c); SEC v. Phan, 500 F.3d 895, 902 (9th Cir. 2007).

19

Husain concedes liability with respect to violating Sections 5(a) and (c), and thus,

20

does not put forth any argument or evidence contesting his liability with respect to the

21

registration violations. (See Husain MPSJ 3, 15 (proposing judgment by consent on

22

these claims).) As there is no genuine dispute concerning Husain’s primary violations

23

of Sections 5(a) and (c), the SEC is entitled to summary judgment on Claim 1 against

24

Husain for offering and selling unregistered securities.

25

Husain liable for primary violations of these provisions, the SEC’s claim for aiding

26

and abetting violations of Sections 5(a) and (c) (Claim 2) is denied.

27
28

7

Because the Court finds

1

B.

Fraud Violations (Claims 3–8)

2

Next, the SEC moves for summary judgment on its claims that Husain violated

3

various antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of

4

the Exchange Act, and Rule 10b-5 by operating the alleged shell factory scheme.

5

(SEC MSJ 8–15.)

6

(1) material misstatements and omissions (Claims 4 and 7), (2) scheme to defraud

7

(Claims 3 and 6), and (3) aiding and abetting fraud (Claims 5 and 8).

8
9

The SEC’s fraud claims can be subcategorized three ways:

Husain opposes the SEC’s motion and cross-moves for partial summary
judgment on Claims 3 through 8. (Husain MPSJ 1.)

10

1.

Claims 4 & 7: Material Misstatements and Omissions

11

In its fourth and seventh claims, the SEC alleges that Husain profited from

12

making material misstatements and omissions in the offer or sale of securities by

13

means of interstate commerce. (FAC ¶¶ 191–94, 204–07.) Specifically, the SEC

14

contends that the Shell Companies’ registration statements—Form S-1, periodic

15

reports on Forms 10-K and 10-Q, and FINRA Forms 211—all contained material

16

misstatements depicting the puppet CEOs as the entities controlling the Shell

17

Companies, while concealing Husain’s ownership and control.

18

Additionally, two SEC filings, for Health Directory and Movie Trailer, falsely stated

19

that neither company had plans to merge. (Id.) Husain, on the other hand, argues that

20

any material misrepresentations or omissions were made only to the SEC, and as such,

21

he cannot be held liable for securities fraud violations. (Husain MPSJ 14–15.)

(SEC MSJ 10.)

22

The antifraud provisions of the Securities Act (Section 17(a)(2)), and the

23

Exchange Act (Section 10(b) and Rule 10b-5(b)), “forbid making a material

24

misstatement or omission in connection with the offer or sale of a security by means

25

of interstate commerce.”

26

(internal quotation marks omitted). Section 17(a)(2) makes it unlawful for any person

27

in the offer or sale of any securities “to obtain money or property by means of any

28

untrue statement of a material fact or any omission.”

SEC v. Hui Feng, 935 F.3d 721, 734 (9th Cir. 2019)

8

15 U.S.C. § 77q(a)(2).

1

Section 17(a)(2) and Rule 10b-5(b) are nearly identical, except the statutes differ with

2

respect to the state of mind requirements. Hui Feng, 935 F.3d at 734; see Aaron v.

3

SEC, 446 U.S. 680, 695–97 (1980) (explaining that Section 10(b) and Rule 10b-5(b)

4

violations require scienter, while Section 17(a)(2) requires only negligence).

5

Husain contest only the materiality of the misstatements and omissions and

6

whether they were made “in connection with” and “in the offer or sale” of a security.

7

(See generally Husain MPSJ.) The first issue is whether Husain’s ownership and

8

control of the Shell Companies was material.

9

substantial likelihood that the disclosure of the omitted fact would have been viewed

10

by the reasonable investor as having significantly altered the ‘total mix’ of

11

information made available.” Phan, 500 F.3d at 908 (quoting Basic Inc. v. Levinson,

12

485 U.S. 224, 231–32 (1988)).

A fact is material if there is “a

13

As this Court has previously expressed, there is little doubt that a reasonable

14

investor would have wanted to know the identity of the Shell Companies’ true leader.

15

(See Order Den. Defs.’ Mots. to Dismiss 14); see also SEC v. Fehn, 97 F.3d 1276,

16

1290 (9th Cir. 1996) (finding that the existence of a control person is a material fact).

17

Moreover, at this juncture, there can be no serious dispute that the omission of

18

Husain’s role as promoter and control person in the Shell Companies’ annual and

19

quarterly reports was material because he has admitted this fact in his Amended

20

Answer.

21

quarterly

22

regarding . . . Husain’s identity and role as the control person and promoter of the

23

companies.”), with Husain’s Am. Answer ¶ 216, ECF No. 92 (“Defendant admits the

24

allegations in paragraph No. 216 [of the FAC].”).) Under federal law “admissions in

25

the pleadings are generally binding on the parties and the Court.” Am. Title Ins. Co. v.

26

Lacelaw Corp., 861 F.2d 224, 226 (9th Cir. 1988). Therefore, the Court finds that

27

Husain’s failure to disclose his role as control person and promoter of the Shell

28

Companies was material. See Phan, 500 F.3d at 908.

(Compare FAC ¶ 216 (“The [S]hell [C]ompanies . . . filed annual and
reports

containing

material

9

misrepresentations

and

omissions

1

The second issue is whether the material misstatements and omissions were

2

made “in the offer or sale of” a security, (see Section 17(a)), and “in connection with

3

the purchase or sale of a security,” (see Rule 10b-5). Section 17(a) is interpreted

4

broadly; the Supreme Court has explained that the terms “in,” “offer,” and “sale,” as

5

used in Section 17(a), “are expansive enough to cover the entire selling process.”

6

United States v. Naftalin, 441 U.S. 768, 772–73 (1979) (“The statutory language does

7

not require that the victim of the fraud be an investor—only that the fraud occur ‘in’

8

an offer or sale.”); see also id. (“This language does not require that the fraud occur in

9

any particular phase of the selling transaction.”). Similarly, under Rule 10b-5, “the ‘in

10

connection with’ requirement is met if the fraud alleged ‘somehow touches upon’ or

11

has ‘some nexus’ with ‘any securities transaction.’” SEC v. Rana, 8 F.3d 1358, 1362

12

(9th Cir. 1993) (quoting SEC v. Clark, 915 F.2d 439, 499 (9th Cir. 1990)). Thus,

13

courts have found “[w]here the fraud alleged involves public dissemination in a

14

document such as a[n] . . . annual report . . . or other such document on which an

15

investor would presumably rely, the ‘in connection with’ requirement is generally met

16

by proof of means of dissemination . . . .” Id.

17

Here, the very purpose of Husain’s “shell factory scheme” was to create fake

18

public companies whose stock could be traded, and the undisputed evidence

19

demonstrates that his deceptive conduct accompanied the offers and sales of securities

20

throughout the Shell Companies’ existence in at least three ways.

21

undisputed evidence demonstrates that Husain made material misstatements and

22

omissions in the offer of the Shell Companies’ securities to the public in the Forms S-

23

1 by failing to disclose his role as the companies’ promoter and control person. (See

24

SECUF 60, 61, 65.)

First, the

25

Second, Husain made material misstatements to market makers, transfer agents,

26

and FINRA to enable public trading of the Shell Companies’ stock. (See id.); see,

27

e.g., SEC v. C. Jones & Co., 312 F. Supp. 2d 1375, 1381 (D. Colo. 2004) (false

28

statements “enabling a stock to be publicly traded are ‘reasonably calculated to

10

1

influence the investing public’ and hence made ‘in connection with’ the purchase or

2

sale of a security.” (citation omitted)); see also SEC v. Zouvas, No. 3:16-cv-0998-

3

CAB (DHBx), 2016 WL 6834028, at *8 (S.D. Cal. Nov. 21, 2016) (“[T]he alleged

4

false information that [the defendant] gave to FINRA, the organization relied on by

5

investors to ensure that the information they receive is truthful and complete,” enabled

6

“the stock to be publicly traded and [was], therefore, sufficiently connected to

7

subsequent securities transactions.”).

8

Third, Husain’s material misstatements occurred during pre-merger and post-

9

merger trades, and sales to the purchasers of the Shell Companies. (See, e.g., SECUF

10

66–68.) For example, Movie Trailer and Health Directory’s Form 10-K and amended

11

Forms S-1 falsely claimed that neither company had merger plans, even though the

12

purchasers already paid partial consideration for the Shell Companies. (See id. 85–89,

13

91.) Thus, based on the undisputed evidence the Court finds that Husain’s material

14

misstatements and omissions occurred “in the offer or sale of” and “in connection

15

with the purchase or sale” of securities.

16

Nevertheless, Husain insists that the SEC’s fraud claims fail because “there

17

were no misstatements or omissions to any [S]traw [S]hareholder or investor,”

18

because they were involved in the scheme, and thus there was no violation of the

19

antifraud statutes. (Husain MPSJ 14–15.) However, as this Court has previously

20

stated, the antifraud provisions are meant to be broad and flexible so as to root out

21

fraud wherever it exists and in whatever form it takes. (See Order Den. Defs.’ Mots.

22

to Dismiss 19–20 (citing United States v. Charnay, 537 F.2d 341, 349 (9th Cir.

23

1976)).) Indeed, Rule 10b-5 is “not intended as a specification of particular acts or

24

practices that constitute manipulative or deceptive devices or contrivances, but [is]

25

instead designed to encompass the infinite variety of devices that are alien to the

26

climate of fair dealing.” Charnay, 537 F.2d at 349 (internal quotation marks omitted).

27

Similarly, investor protection is not the sole purpose of the Securities Act and Section

28

17(a) thereunder. Naftalin, 441 U.S. at 769. “While prevention of fraud against

11

1

investors was a key part of the purpose of the Act, so was the effort ‘to achieve a high

2

standard of business ethics . . . in every facet of the securities industry,’ . . . .” Id.

3

(quoting SEC v. Cap. Gains Bureau, 375 U.S. 180, 186–87 (1963)).

4

Here, Husain intentionally engaged in fraudulent, deceitful, and criminal

5

actions to enable the public trading of the Shell Companies’ stock. His actions were

6

clearly “alien to the climate of fair dealing” and antithetical to the Securities Act’s

7

goal to achieve a high standard of business ethics. See Charnay, 537 F.2d at 349;

8

Naftalin, 441 U.S. at 769. In light of the foregoing authority and in furtherance of the

9

stated purposes of the antifraud provisions, the Court rejects Husain’s absurdly narrow

10

view that there can be no violation of the antifraud statutes simply because the Shell

11

Companies’ investors and purchasers were privy to the scheme. The adoption of such

12

a view would undermine the public’s faith in the public securities markets.

13

Therefore, based on the undisputed evidence, the SEC has demonstrated that

14

Husain made material misstatements and omissions “in the offer or sale of” and “in

15

connection with the purchase or sale of a security” in violation of Section 17(a) and

16

Rule 10b-5. Accordingly, the SEC is entitled to summary judgment as to Claims 4

17

and 7, and Husain’s Motion for Partial Summary Judgment on Claims 4 and 7 is

18

denied.

19

2.

Claims 3 & 6: Scheme to Defraud

20

In its third and sixth claims, the SEC alleges that Husain engaged in a scheme

21

to defraud as the co-mastermind of the shell factory scheme.

(FAC ¶¶ 187–90,

22

201–03.)

23

conceal the shell factory from the public market, regulators, and market makers by,

24

among other things, using puppet CEOs and coaching a witness to lie under oath.

25

(Id.)

26

purchasers, or other investors of securities within the traditional meaning of the

27

[antifraud] statutes.” (Husain MPSJ 1.)

The SEC contends Husain engaged in numerous deceptive actions to

Husain argues that there was no “scheme to deceive or defraud sellers,

28

12

1

“The securities fraud provisions . . . prohibit any person, in the offer or sale of

2

securities, ‘to employ any device, scheme, or artifice to defraud’ or ‘to engage in any

3

transaction, practice, or course of business which operates or would operate as a fraud

4

or deceit upon the purchaser.’” Hui Feng, 935 F.3d at 736 (quoting 15 U.S.C.

5

§ 77q(a)(1), (3)); see also 17 C.F.R. § 240.10b-5(a), (c). “The same elements required

6

to establish a section 10(b) and Rule 10b-5 violation suffice to establish a violation

7

under sections 17(a)(1)–(3).” Zouvas, 2016 WL 6834028, at *11. A scheme typically

8

involves a “manipulative” or “deceptive” act. Id. at *5 (quoting Cooper v. Pickett,

9

137 F.3d 616, 624–25 (9th Cir. 1997)); see also Scheme, Black’s Law Dictionary

10

(11th ed. 2019) (“An artful plot or plan . . . to deceive others.”). “The state of mind

11

requirement varies among these provisions, but a showing of intentional or knowing

12

conduct clears all thresholds.” Hui Feng, 935 F.3d at 736.

13

Here, the undisputed evidence demonstrates that Husain’s deceptive actions

14

exude the very essence of an unlawful scheme. Commencing with his fake “business

15

plans” for the Shell Companies, Husain essentially developed a “how-to” guide for the

16

creation and operation of an illegal shell factory enterprise. The scheme involved,

17

among other things, creating public “shell” companies, which had virtually no assets,

18

operations, or legitimate business purposes, and then selling the companies to buyers

19

who sought to trade the companies’ stock publicly. (See SECUF 126–128.) Husain’s

20

deceitful actions are numerous, including: (1) secretly recruiting puppet CEOs and

21

Straw Shareholders, (2) organizing sham private placements, (3) preparing and filing

22

false documents with the SEC, and (4) conducting initial public offerings for the Shell

23

Companies. (See id. 3, 19–20, 26–35, 41–42, 46–47, 70–78.) His deceitful actions

24

were for the purpose of facilitating the sale of securities to the purchasers of the Shell

25

Companies via reverse merger.

26

necessary to take the Shell Companies public and make their securities valuable to the

27

purchasers. (Id.)

(Id. 126–128.) And his deceptive actions were

28

13

1

Husain’s shell factory scheme is exactly the type of conduct the antifraud

2

provisions were designed to prevent. See Naftalin, 441 U.S. at 769 (explaining that

3

the intention of the Securities Act was ‘to achieve a high standard of business

4

ethics . . . in every facet of the securities industry”); see also A.T. Brod & Co. v.

5

Perlow, 375 F.2d 393 (2d Cir. 1967) (“Rule 10b-5 . . . was designed to protect both

6

investors and the public interest.” (internal quotation marks omitted)). Husain’s shell

7

factory scheme clearly undermined the integrity of the “securities industry” as a whole

8

and the “public interest.” See Naftalin, 441 U.S. at 769; A.T. Brod, 375 F.2d at 396.

9

Based on the undisputed evidence, the SEC has demonstrated that Husain engaged in

10

a scheme to defraud in violation of 17(a) and Rule 10b-5.
Accordingly, the SEC is entitled to summary judgment as to Claims 3 and 6,

11
12

and Husain’s Motion for Partial Summary Judgment as to these claims is denied.

13

3.

Claims 5 & 8: Aiding and Abetting Fraud

14

As an alternative to primary liability under the antifraud statutes, in its fifth and

15

eighth claims the SEC alleges that Husain is liable for aiding and abetting the Shell

16

Companies’ and their purchasers’ fraudulent actions. (FAC ¶¶ 195–200, 208–13; SEC

17

MSJ 18 n.12 (explaining that the Section 17(a) and 10b-5 aiding and abetting claims

18

are asserted “as an alternative basis for Husain’s direct, primary liability”).) However,

19

the Court’s determination that Husain is liable as a primary violator of the antifraud

20

statutes moots these claims. Therefore, both motions are denied as to these claims.

21

C.

Secondary Violations (Claims 9 & 10)

22

In its ninth and tenth claims, the SEC alleges that, in the alternative to Husain’s

23

primary liability, he aided and abetting the Shell Companies’ reporting violations and

24

is liable as their control person. As discussed in Parts A and B above, Husain is liable

25

as a primary violator of the Securities Act and the Exchange Act. Accordingly, the

26

SEC’s claims for secondary violations as an aider and abettor and a control person

27

(Claims 9 and 10) are denied.

28

14

1

D.

Requested Remedies

2

The SEC requests that the Court order the following remedies: (1) a permanent

3

injunction; (2) civil penalties; (3) an officer and director bar and penny stock bar; and

4

(4) disgorgement. (SEC MSJ 19–25.) The Court addresses each requested form of

5

relief in turn.

6

1.

Permanent Injunction

7

First, the SEC seeks an order permanently enjoining Husain from violating the

8

securities laws. (SEC MSJ 19–20.) The SEC may seek a permanent injunction

9

against a person who has violated securities laws pursuant to Section 20(b) of the

10

Securities Act and Section 21(d) of the Exchange Act.

See 15 U.S.C.

11

§§ 77t(b), 78u(d). To obtain an injunction, the SEC must establish that there is “a

12

reasonable likelihood of future violations of the securities laws.” SEC v. Murphy,

13

626 F.2d 633, 655 (9th Cir. 1980). “In predicting the likelihood of future violations, a

14

court must assess the totality of the circumstances surrounding the defendant and his

15

violations.” Id. A court must consider the following factors (“Murphy Factors”):

16

(1) the degree of scienter involved, (2) the isolated or recurrent nature of the

17

misconduct, (3) the defendant’s recognition of the wrongful nature of the conduct,

18

(4) the likelihood that, because of the defendant’s occupation, future violations may

19

occur, and (5) the sincerity of defendant’s assurances (if any) against future violations.

20

See id.

21

Here, the totality of the circumstances warrants injunctive relief. Husain acted

22

with a high degree of scienter, over several years, in a repeated pattern of wrongdoing.

23

He went to great lengths to conceal his shell factory scheme from regulatory

24

oversight. Husain only stopped his scheme because he got caught, which gives rise to

25

an inference of a reasonable expectation of future violations. See SEC v. Manor

26

Nursing Ctrs., 458 F.2d 1082, 1100-01 (2d Cir. 1972) (“[T]he drawing of such an

27

inference [is] particularly appropriate . . . where appellants did not attempt to cease or

28

undo the effects of their unlawful activity until the institution of an investigation.”);

15

1

SEC v. Koracorp Indus., Inc., 575 F.2d 692, 698 (9th Cir. 1978) (same).

And

2

although Husain argues that he has expressed regret for his illegal past conduct,

3

“courts must be particularly skeptical about attaching any significance to contrition

4

under protest.” Koracorp Indus., 575 F.2d at 698; (see Decl. of Imran Husain ISO

5

MPSJ (“Husain Decl.”) ¶ 5, ECF No. 105-3 (“I have repeatedly expressed regret for

6

my conduct here.”).)

7

Importantly, Husain fails to recognize the wrongful nature of his conduct. He

8

has repeatedly failed to acknowledge that there were victims of his fraudulent scheme,

9

and he refuses to take responsibility for the impact of his illegal conduct on the

10

market’s integrity. (See, e.g., Husain Decl. ¶ 4 (“[T]here were no ‘victims’ of any . . .

11

misconduct in this case involving sales of certain [Shell Companies].”).)

12

Husain’s past dealings and his failure to recognize the wrongful nature of his

13

conduct gives the Court every reason to be concerned about future violations.

14

Accordingly, the Court GRANTS the SEC’s request for a permanent injunction.

15

2.

Civil Penalties

16

Second, the SEC requests that the Court impose a second-tier civil penalty of

17

$1,757,000,4 which represents the gross amount of pecuniary gain from Husain’s

18

illegal activities. (SEC MSJ 22–23 (citing 15 U.S.C. §§ 77t(d)(2), 78u(d)(3)(A)).)

19

“Congress enacted civil penalty provisions to achieve the dual goals of punishment of

20

the individual violator and deterrence of future violations.” SEC v. Duncan, No. CV

21

08-1323-VAP (OPx), 2009 WL 10670521, at *15 (C.D. Cal. July 6, 2009) (quoting

22

SEC v. Marker, 427 F. Supp. 2d 583, 592 (M.D. Fla. 2006)). “The deterrence of

23

securities fraud through the imposition of monetary sanctions serves such important

24

goals as encouraging investor confidence, increasing the efficiency of financial

25

markets, and promoting the stability of the securities industry.” Id. (citing SEC v.

26

Palmisano, 135 F.2d 860, 866 (2d Cir. 1998)).

27
28

4

The SEC excludes from this calculation the amount that Jaclin was ordered to disgorge. (SEC
MSJ 21 n.15.)

16

1

Similar to permanent injunctions, civil penalties are imposed to deter the

2

wrongdoer from similar conduct in the future, so courts frequently apply the Murphy

3

Factors for permanent injunctions when assessing civil penalties.

4

626 F.2d at 655; see also SEC v. CMKM Diamonds, Inc., 635 F. Supp. 2d 1185, 1192

5

(D. Nev. 2009). For the same reasons as above, the Murphy Factors favor civil

6

penalties.

See Murphy,

7

The Exchange Act and the Securities Act provide for three tiers of penalties,

8

and the amount of any penalty “shall be determined by the court in light of the facts

9

and circumstances.” 15 U.S.C. §§ 78u(d)(3)(B), 77t(d)(2). Second-tier civil penalties

10

apply to violations that “involved fraud, deceit, manipulation or deliberate or reckless

11

disregard of a regulatory requirement,” and must not exceed the gross amount of the

12

defendant’s pecuniary gain.

13

previously discussed, Husain’s conduct involved fraud and deceit, and his gross

14

pecuniary gain of $1,757,000 is undisputed.

15
16

15 U.S.C. §§ 78u(d)(3)(B)(ii), 77t(d)(2)(B).

As

Accordingly, the Court GRANTS the SEC’s request for civil penalties under
tier two in the amount of $1,757,000.

17

3.

Officer and Director Bar and Penny Stock Bar

18

Third, the SEC seeks to permanently bar Husain from serving as an officer or

19

director of a public company and from participating in offerings of penny stock. (See

20

SEC MSJ 23–25.)

21

Under Section 21(d)(2) of the Exchange Act and Section 20(e) of the Securities

22

Act, a district court may prohibit a person who has engaged in securities fraud from

23

acting as an officer or director of a public company “if the person’s conduct

24

demonstrates unfitness to serve as an officer or director.”

25

78u(d)(2). Courts may also bar an individual from trading in “penny stock,” an equity

26

security with a price of less than $5.00, when it is shown that the person was

27

participating in an offering of penny stock at the time of his alleged misconduct. See

28

15 U.S.C. § 77t(g).

17

15 U.S.C. §§ 77t(e),

1

Courts consider the following factors in determining whether to order an officer

2

and director bar or a penny stock bar: “(1) the ‘egregiousness’ of the underlying

3

securities law violation; (2) the defendant’s ‘repeat offender’ status; (3) the

4

defendant’s ‘role’ or position when he engaged in the fraud; (4) the defendant’s

5

degree of scienter; (5) the defendant’s economic stake in the violation; and (6) the

6

likelihood that misconduct will recur.” SEC v. First Pac. Bancorp, 142 F.3d 1186,

7

1193 (9th Cir. 1998) (quoting SEC v. Patel, 61 F.3d 137, 141 (2d Cir. 1995)); SEC v.

8

Premier Holding Corp., No. SACV 18-00813 CJC (KESx), 2020 WL 8099514, at *10

9

(C.D. Cal. Nov. 30, 2020) (“The court considers essentially the same factors that

10

govern the imposition of an officer or director bar when imposing a penny stock bar.”

11

(internal quotation marks omitted)).

12

As discussed above, the undisputed facts establish that Husain was the

13

co-mastermind of the illegal shell company scheme, which centered around penny

14

stock issuers. His scheme lasted several years, and it resulted in numerous illegitimate

15

public Shell Companies. Additionally, Husain controlled the companies during the

16

scheme, took criminal actions to hide the scheme from detection, and profited

17

substantially from his actions.

18

Upon consideration of the undisputed evidence in this case and relevant

19

authorities, the Court finds that Husain should be barred from acting as an officer or

20

director of a public company and from participating in an offering of penny stock for a

21

period of seven years. The Court finds that a seven-year bar, as opposed to the

22

permanent ban the SEC seeks, is more in line with other courts in this circuit and

23

appropriately reflects the severity of Husain’s scienter, his material misstatements, his

24

economic stake in the scheme, and his lack of remorse for the illegal conduct. Cf.

25

SEC v. F. Nat’l Invs. Ltd., No. ED CV14-02376 JAK (DTBx), 2016 WL 6875953,

26

at *7 (C.D. Cal. Nov. 18, 2016) (imposing a ten-year bar on former CEO who

27

knowingly carried out a scheme to defraud members of the public by, among other

28

things, disseminating false press releases); SEC v. Retail Pro, Inc., No. 08 CV 1620-

18

1

WQH-(RBBx), 2011 WL 13186014, at *6 (S.D. Cal. June 23, 2011) (imposing a

2

seven-year bar on a former CFO who made repeated misrepresentations to the public

3

and auditors); SEC v. Forum Nat’l Invs. Ltd., Premier Holding Corp., 2020 WL No.

4

SACV 18-00813-CJC (KESx), 2020 WL 8099514, at *10 (C.D. Cal. Nov. 30, 2020)

5

(imposing a five-year bar on corporation’s former president, CEO, and CFO, based on

6

his “multiple material misstatements made with a high degree of scienter, his lack of

7

remorse for his mistakes, and the significant likelihood of future violations.”).

8

Accordingly, the Court GRANTS the SEC’s request to bar Husain from serving

9

as an officer or director of a public company and from participating in an offering of

10

penny stock for a period of seven years from the date of judgment in this case.

11

4.

Disgorgement

12

Fourth and finally, the SEC seeks disgorgement in the amount of $1,757,000,

13

which constitutes the undisputed gross proceeds from the sales of the Shell

14

Companies and prejudgment interest. (SEC MSJ 20–22.) “The district court has

15

broad equity powers to order the disgorgement of ill-gotten gains obtained through the

16

violation of the securities laws.” First Pac. Bancorp, 142 F.3d at 1191 (internal

17

quotation marks omitted).

18

Shortly after the SEC filed its Motion for Summary Judgment, the United States

19

Supreme Court in Liu v. SEC, 140 S. Ct. 1936 (2020), clarified to what extent the SEC

20

may seek disgorgement through the court’s power to award equitable relief to victims

21

of securities fraud.

22

disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for

23

victims is equitable relief permissible under § 78u(d)(5).”

Justice Sotomayor, writing for the majority, held that “a

24

Because of the timing of the Supreme Court’s decision, the SEC argues that the

25

Parties did not have the opportunity to conduct discovery or brief the issues presented

26

by Liu. And it contends that the record is lacking with respect to what portion of the

27

$1,757,000 constitutes Husain’s net profits. (See SEC’s Reply ISO MSJ (“The SEC

28

did not address Liu in its motion, and as Husain admits, the record is not complete as

19

1

to the factual findings Liu requires.”). Husain agrees that the record is undeveloped

2

with respect to “net proceeds” as opposed to “gross proceeds.” (Husain MPSJ 18.)

3

Thus, the SEC requests that the Court reopen discovery under Federal Rule of

4

Civil Procedure (“Rule”) 56(d) so that it can provide supplemental briefing on this

5

issue. (SEC Reply ISO MSJ 14–15.) Under Rule 56(d), the Court has discretion to

6

defer resolution of a motion for summary judgment and allow time for additional

7

discovery “[i]f a nonmovant shows by affidavit or declaration that, for specified

8

reasons, it cannot present facts essential to justify its opposition.” Fed. R. Civ.

9

P. 56(d). “An extension is not justified merely because discovery is incomplete or

10

desired facts are unavailable.” Khai v. Cnty. of Los Angeles, No. CV 16-3124 PA

11

(JCx), 2016 WL 11520829, at *3 (C.D. Cal. Sept. 14, 2016). “The burden is on the

12

party seeking additional discovery to proffer sufficient facts to show that the evidence

13

sought exists,” and that it is material to summary judgment. Chance v. Pac-Tel.

14

Teletrac, Inc., 242 F.3d 1151, 1161 n.6 (9th Cir. 2001).

15

The Court finds the SEC’s request to reopen discovery is deficient, and at this

16

stage in the litigation unnecessary. First, instead of filing an “affidavit or declaration”

17

in support of the request, the SEC makes its Rule 56(d) request its Reply brief.

18

Therefore, the SEC “necessarily has not done the minimum required of [it] to . . .

19

delay summary judgment.” See Wilcox v. City of Los Angeles, No. CV 19-622-GW

20

(FFMx), 2020 WL 8096332, at *2 (C.D. Cal. Oct. 2, 2020).

21

Second, the Court finds that evidence concerning Husain’s net profits are not

22

“essential” or necessary for the Court to rule on the Parties’ Motions. Moreover, the

23

Court finds that its imposition of a permanent injunction, seven-year officer and

24

director and penny stock bar, and $1,757,000 civil penalty are sufficient punishment

25

and deterrence to address Husain’s violations of the securities laws. Therefore, in the

26

exercise of its broad discretion, the Court DENIES the SEC’s request for

27

disgorgement.

28

20

V.

1

CONCLUSION

2

For the foregoing reasons, the Court DENIES Husain’s Motion for Partial

3

Summary Judgment. (ECF No. 105.) The Court GRANTS IN PART AND DENIES

4

IN PART the SEC’s Motion for Summary Judgment (ECF No. 97) as follows:

5

 The SEC’s Motion for Summary Judgment is GRANTED as to
Claims 1, 3, 4, 6, and 7;

6
7

 The SEC’s MSJ is DENIED as to Claims 2, 5, and 8 through 10;

8

 The Court GRANTS the SEC’s request for an order permanently
enjoining Husain from violating the securities laws;

9
10

 The Court GRANTS the SEC’s request for civil penalties in the amount
of $1,757,000;

11
12

 The Court GRANTS the SEC’s request to bar Husain from serving as an

13

officer or director of a public company and from participating in an

14

offering of penny stock for a period of seven years from the date of

15

judgment in this case; and

16

 The Court DENIES the SEC’s request for disgorgement.

17

The SEC shall submit a Proposed Judgment no later than seven days after the date of

18

this order.

19
20

IT IS SO ORDERED.

21
22
23
24
25

March 24, 2021
____________________________________
OTIS D. WRIGHT, II
UNITED STATES DISTRICT JUDGE

26
27
28

21