SEC v. CMKM Diamonds, Inc.

A participant’s title, standing alone, cannot determine liability under Section 5 of the Securities Act; there is a material issue of fact as to whether a transfer agent is a necessary participant and substantial factor to satisfy the standard for liability under Section 5.

The Securities Exchange Commission ("SEC") brought an action against several defendants alleged to have participated in a scheme to sell unregistered securities of CMKM Diamonds, Inc. ("CMKM") The district court granted summary judgment in favor of the SEC holding that defendants participated in an unregistered distribution of securities in violation of Section 5 of the Securities Act of 1933. Defendants were ordered to disgorge proceeds from the illegal sales along with any prejudgment interest. Two defendants appeal the decision. Defendant Dvorak, attorney for CMKM at the time of the scheme, appealed the denial of his motion to stay the proceedings as well as the district court’s disgorgement order. Defendant 1^st Global Stock Transfer, LLC ("Global") owned by Defendant Helen Bagley appeals claiming the district court erred in granting summary judgment because there are genuine issues of material fact remaining as to whether Global and Bagley’s actions as a transfer agent satisfied the standard for liability under Section 5 of the Securities Act. The Ninth Circuit held that the judgment should be reversed with regard to Global and Bagley as their involvement as a transfer agent does not indicate an actual role in the scheme. The panel used the substantial factor test requiring more than a finding of “but for” causation to determine that a reasonable jury could conclude that Global and Bagley were not substantial participants. As to Dvorak, the panel noted that he forfeited his right to appeal as a timely objection was not filed. Additionally, the panel found that Dvorak failed to meet his burden of showing that the disgorgement figure was not a reasonable approximation of his illegal profits. AFFIRMED in part, REVERSED in part and REMANDED.