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Securities and Exchange Commission v. Stein

United States Court of Appeals, Ninth Circuit

October 11, 2018

Securities and Exchange Commission, Plaintiff-Appellee,
v.
Mitchell Jay Stein, Defendant-Appellant. and Heart Tronics, Inc., Willie James Gault, Defendant-Appellee,

          Argued and Submitted March 13, 2018 San Francisco, California

          Appeal from the United States District Court for the Central District of California, No. 8:11-cv-01962-JVS-AN James V. Selna, District Judge, Presiding

          Robert O. Saunooke (argued), Saunooke Law Firm PA, Miramar, Florida, for Defendant-Appellant.

          Allan A. Capute (argued), Special Counsel to the Solicitor; John B. Capehart, Attorney; Jacob H. Stillman, Senior Advisor to the Solicitor; John W. Avery, Deputy Solicitor; Robert B. Stebbins, General Counsel; Securities and Exchange Commission, Washington, D.C.; for Plaintiff-Appellee.

          Before: J. Clifford Wallace, Marsha S. Berzon, and Consuelo M. Callahan, Circuit Judges.

          SUMMARY[*]

         Securities Law

         The panel affirmed the district court's summary judgment in favor of the Securities and Exchange Commission ("SEC") on the SEC's claims that Mitchell Stein violated various federal securities laws.

         The SEC brought a civil enforcement action against Stein, alleging that while he acted as purported outside counsel to co-defendant Heart Tronics, he engaged in a series of frauds designed to inflate the company's stock price so that he could profit from selling its securities to investors. Concurrently with the SEC's case, the Department of Justice brought a criminal case, charging Stein with fourteen counts for the same fraudulent conduct; and Stein was convicted on all counts.

         The panel held that Stein's criminal conviction conclusively established all of the facts the SEC was required to prove with respect to the specified securities fraud claims. First, both the criminal and civil case involved the same fraudulent scheme carried out by Stein. Second, the SEC's securities fraud claims involved "the application of the same rule of law" as that involved in the criminal case. Finally, pretrial preparation and discovery related to the criminal proceeding could "reasonably be expected" to have embraced the issues sought to be presented in the SEC's civil case. The panel concluded that the district court did not err in entering summary judgment based on the preclusive effect of Stein's conviction.

         The panel rejected Stein's arguments against the application of issue preclusion. The panel held that the district court did not abuse its discretion in denying Stein's request for a continuance pending further discovery. Finally, the panel held that the district court did not err in denying Stein's motion for summary adjudication.

          OPINION

          WALLACE, CIRCUIT JUDGE:

         Mitchell Stein, an attorney, appeals from the district court's summary judgment in favor of the Securities and Exchange Commission (SEC) on the SEC's claims that Stein violated various federal securities laws. The district court entered summary judgment on six of the SEC's claims on the ground that Stein's prior criminal conviction precluded him from contesting the allegations at issue in the civil case. We have jurisdiction under 28 U.S.C. § 1291, and we affirm.

         I.

         In December 2011, the SEC brought a civil enforcement action against Stein alleging that Stein, while acting as purported outside counsel to co-defendant Heart Tronics, engaged in a series of frauds designed to inflate the company's stock price so that he could profit from selling its securities to investors. The alleged scheme was wide ranging, but centered on allegations that Stein concocted three false purchase orders with fictitious companies, and used these orders as the basis for SEC filings and press releases touting bogus sales of Heart Tronics' "Fidelity 100" heart-monitoring system.

         The purchase orders at issue ostensibly were agreed to during September and October 2007. The first purchase order reflected a sale of 180 units of the Fidelity 100 for $1.98 million. The SEC alleges that an individual later identified as Thomas Tribou signed the purchase order and sent Heart Tronics $50, 000 as a deposit. However, the copy of the order that was counter-signed by the then-CEO of Heart Tronics and returned to Tribou identified the customer as "Cardiac Hospital Management" (CHM). The SEC maintained that CHM was a fictitious entity not known to Tribou. The second and third purchase orders reflected sales to a fictional Israeli company called "IT Healthcare" for $3.3 million and $564, 000, respectively.

         Stein went to great lengths to make the purchase orders appear legitimate. Specifically, the SEC alleges that Stein and his personal assistant, co-defendant Martin Carter, created letters and documents purportedly originating from CHM and IT Healthcare to create the appearance of communication between Heart Tronics and its "customers." One such letter was from a purported CHM purchasing agent named "Toni Nonoy" asking for products to be sent to a "new address" in Japan. Other documents were from fictitious people supposedly affiliated with IT Healthcare confirming sales orders and providing updated shipping instructions. The SEC alleges that all these documents were fraudulent and that Stein simply made up the names.

         During the same period in which Stein drew up the alleged fraudulent purchase orders, he also orchestrated the dissemination of press releases reporting the sales. The SEC alleges that based on information provided by Stein, John Woodbury, Heart Tronics' securities lawyer, published three press releases touting the more than $5 million in purported sales to CHM and IT Healthcare. The SEC also alleged that Stein caused the fraudulent sales orders to be incorporated into Heart Tronics' SEC filings from approximately September 2007 through August 2008.

         Based on these and other allegations, the SEC asserted various claims against Stein, including securities fraud in violation of Section 10(b) of the Securities Exchange Act (Exchange Act), Exchange Act Rule 10b-5, and Section 17(a) of the Securities Act; aiding and abetting violations of Section 10(b) and Rule 10b-5; selling or offering for sale unregistered securities in violation of Section 5(a) and 5(c) of the Securities Act; falsifying books and records in violation of Exchange Act Rule 13b2-1; knowingly falsifying books and records in violation of Section 13(b)(5) of the Exchange Act; and aiding and abetting Heart Tronics' violations of the reporting, record-keeping, and internal controls provisions of the Exchange Act (Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B)) and Exchange Act Rules (Rules 13a-1, 13a-11, 13a-13, and 12b-20).

         Concurrent with the SEC's case against Stein, the Department of Justice (DOJ) filed a criminal case against him in the Southern District of Florida arising out of the same fraudulent conduct alleged in the civil case. The fourteen-count indictment charged Stein with three counts of securities fraud (18 U.S.C. § 1348), three counts of wire fraud (18 U.S.C. § 1343), three counts of mail fraud (18 U.S.C. § 1341), one count of conspiracy to commit mail and wire fraud (18 U.S.C. § 1349), three counts of money laundering (18 U.S.C. § 1957), and one count of conspiracy to obstruct justice (18 U.S.C. § 371). The DOJ eventually moved to ...


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