In SEC v. Quan, No. 11 Civ. 723 ADM/JSM, 2014 WL 4670923 (D. Minn. Sept. 19, 2014), the United States District Court of Minnesota denied motions for judgment as a matter of law and a new trial made by Marlon Quan (“Quan”) and three entities owned and controlled by Quan (collectively the “Defendants”), and partially granted the Securities and Exchange Commission’s (“SEC”), motion for remedies and final judgment on Quan’s liability for securities fraud. The court also granted the SEC’s motion for injunctive relief, disgorgement, and prejudgment interest, but denied the request for civil penalties.

According to the allegations of the SEC, Quan, operated two hedge funds, Stewardship Credit Arbitrage Fund LLC (“SCAF LLC”) and Stewardship Credit Arbitrage Fund, Ltd. (“SCAF Ltd.”) (collectively, the “SCAF Funds”). The marketing materials described risk management techniques designed to protect SCAF funds that the SEC claimed were “never implemented.”  The SCAF Funds’ invested a considerable amount of funds in PAC Funding LLC, which was later revealed to be a Ponzi scheme.

The SEC filed suit against Quan alleging he misled investors, violating Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Exchange Act of 1934. On February 11, 2014, a jury found Defendants liable for securities fraud. Defendants moved for judgment as a matter of law and a new trial.

Defendants first argued that the verdict was inconsistent given the jury found Defendants liable under Section 10(b), but not under Section 17(a)(1), a substantially identical provision. To prove a violation of those sections, Plaintiff must establish Defendants “(1) engaged in prohibited conduct (i.e., employed a fraudulent scheme, made a material misstatement or omission, or engaged in a fraudulent business practice); (2) in connection with the offer, sale, or purchase of a security; (3) by means of interstate commerce.” The court held, however, the verdicts could be harmonized because the jury could have found Defendants did not initiate the fraudulent scheme, but did make material misrepresentations and engage in fraudulent practices. Thus, the jury’s finding that Defendants were liable under Section 10(b) but not 17(a)(1) would not be so inconsistent as to require a new trial.

Second, Defendants argued the instruction to the jury was erroneous because they did not require unanimous agreement on which specific misstatement was in violation. The court, however, determined juror unanimity was not required for material misrepresentations and omissions.  “Courts interpreting federal fraud statutes traditionally do not require a jury to unanimously agree on the particular acts a defendant used to commit the fraud.”

Finally, the court examined Defendants’ argument that the verdict finding Defendants acted with scienter was against the greater weight of evidence. Scienter could be inferred if there was “strong circumstantial evidence of conscious misbehavior or recklessness…” The court found that the standard was met through the testimony of several witnesses’ testimony and in Quan’s approval and distribution of the marketing materials.

The SEC sought injunctive relief, disgorgement, prejudgment interest, and civil penalties against Defendants. The court granted injunctive relief, disgorgement, and prejudgment interest. The court, however, denied the SEC’s request for civil penalties, finding the disgorgement awarded was substantial enough to sufficiently deter future securities laws violations.

In sum, the District Court of Minnesota denied Defendants’ motions for judgment as a matter of law and for a new trial and granted in part the SEC’s motion for remedies.

The primary materials for this case may be found on the DU Corporate Governance website.