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United States Securities and Exchange Commission v. Quan

United States Court of Appeals, Eighth Circuit

March 22, 2016

United States Securities and Exchange Commission, Plaintiff - Appellee
v.
Marlon Quan; Acorn Capital Group, LLC; Stewardship Investment Advisors, LLC, Defendants - Appellants, Stewardship Credit Arbitrage Fund, LLC; Putnam Green, LLC; Livingston Acres, LLC, Defendants, ACG II, LLC, Defendant - Appellant, Florence Quan, Defendant, Nigel Chatterjee; DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main; Sovereign Bank; Topwater Exclusive Fund III, LLC; Freestone Low Volatility Partners, LP; Freestone Low Volatility Qualified Partners, LP Intervenors, Gary Hansen, Receiver

         Submitted October 20, 2015

Page 584

[Copyrighted Material Omitted]

Page 585

          Appeal from United States District Court for the District of Minnesota - Minneapolis.

         For United States Securities and Exchange Commission, Plaintiff - Appellee: James Sanderson Alexander, U.S. ATTORNEY'S OFFICE, District of Minnesota, Minneapolis, MN; John E. Birkenheier, Charles J. Kerstetter, SECURITIES & EXCHANGE COMMISSION, Midwest Regional Office, Chicago, IL; Jacob Loshin, Benjamin Lawrence Schiffrin, William Kenneth Shirey, U.S. SECURITIES & EXCHANGE COMMISSION, Office of General Counsel, Washington, DC.

         For Marlon Quan, Acorn Capital Group, LLC, Stewardship Investment Advisors, LLC, ACG II, LLC, Defendants - Appellants: Christopher Thomas Casamassima, WILMER & HALE, Los Angeles, CA; Bruce E. Coolidge, Laura Schwalbe, WILMER & CUTLER, Washington, DC.

         Before RILEY, Chief Judge, SMITH and SHEPHERD, Circuit Judges.

          OPINION

Page 586

          RILEY, Chief Judge.

         Marlon Quan, along with entities he controls, (collectively, Quan, unless context dictates otherwise) appeals a judgment entered on jury verdicts finding securities fraud. Quan challenges the coherence of the verdicts, the accuracy of the jury instructions, and the authority of the district court[1] to order disgorgement. We affirm.

         I. BACKGROUND

         Marlon Quan managed a hedge fund, Stewardship Credit Arbitrage Fund, LLC (SCAF) and its offshore twin, Stewardship Credit Arbitrage Fund, Ltd., through his company Stewardship Investment Advisors, LLC (SIA). The funds invested

Page 587

heavily in loans to PAC Funding, a company controlled by Thomas Petters. The loans were meant to finance Petters's business of buying consumer electronics wholesale and reselling them to retail stores for a profit. The loans were supposedly secured by the goods, accounts receivable, or the stores' promises to pay. Unfortunately, Petters's business was actually a massive Ponzi scheme. Petters used the funds' money to pay off other investors and maintain appearances, while pocketing whatever was left for himself and his family. See generally United States v. Petters, 663 F.3d 375, 379 (8th Cir. 2011). When the scheme collapsed in the fall of 2008, investors in Quan's funds (as well as Quan himself) lost a lot of money.

         The U.S. Securities and Exchange Commission (SEC) sued Quan for securities fraud on two basic theories: (1) he made false statements about what he did to protect the funds against fraud and other risks; and (2) he concealed problems with the funds' investments as Petters's scheme began to unravel. The SEC alleged Quan and his companies violated Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a); Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5; and Section 206(4) of the Investment Advisers Act, 15 U.S.C. § 80b-6(4), and Rule 206(4)-8 thereunder, 17 C.F.R. § 275.206(4)-8. The SEC also alleged Quan personally violated Section 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t(a), and aided and abetted SCAF's violations of Section 10(b) and Rule 10b-5 and SIA's violations of Section 206(4) and Rule 206(4)-8. See also 15 U.S.C. § 78t(e) (aiding-and-abetting liability). The case went to trial and a jury found liability on every count except the alleged violations of Section 17(a)(1) and the allegation Quan personally aided and abetted SCAF's violations of Section 10(b) and Rule 10b-5.

         Quan moved for judgment as a matter of law and a new trial. The SEC moved for remedies and a final judgment. The district court denied Quan's motions, entered injunctions against him, and ordered him to disgorge almost $81 million in profits, plus prejudgment interest. We have jurisdiction of Quan's appeal. See 28 U.S.C. § 1291 (appellate jurisdiction); Fed.R.Civ.P. 54(b) (partial final judgments).

         II. DISCUSSION

         A. Verdict Internal Consistency

         Quan first argues he is entitled to a new trial because the jury contradicted itself by finding he violated Rule 10b-5 under the Securities Exchange Act, but did not violate Section 17(a)(1) of the Securities Act or aid and abet SCAF in violating Rule 10b-5. Before reaching Quan's argument, we first address a threshold matter.

         The district court held Quan could not seek a new trial based on alleged inconsistencies in the verdicts because he did not ask to have the verdicts sent back to the jury before it was discharged. The district court relied on our statement, " If a party feels that a jury verdict is inconsistent, it must object to the asserted inconsistency and move for resubmission of the inconsistent verdict before the jury is discharged or ...


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