Securities And Exchange Commission v. Hui Feng et al

NOTICE OF MOTION AND MOTION for Summary Judgment as to Complaint

C.D. Cal.January 31, 2017

Case 2:15-cv-09420-CBM-SS DEFENDANTS’ NOTICE OF MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 HOLMES, TAYLOR & JONES LLP Andrew B. Holmes (SBN 185401) abholmes@htjlaw.com Matthew D. Taylor (SBN 220032) matthew.taylor@htjlaw.com 617 South Olive Street, Suite 1200 Los Ángeles, California 90014 Tel: (213) 985-2200 Fax: (213) 973-6282 Attorneys for Defendants Hui Feng and Law Offices of Feng & Associates P.C. UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION SECURITIES AND EXCHANGE COMMISSION, Plaintiff, vs. HUI FENG and LAW OFFICES OF FENG & ASSOCIATES P.C., Defendants. Case No. 2:15-cv-09420-CBM-SS [Hon. Consuelo B. Marshall] DEFENDANTS’ NOTICE OF MOTION AND MOTION FOR SUMMARY JUDGMENT [Declarations of Hui Feng and Andrew B. Holmes and Statement of Uncontroverted Facts Filed Concurrently] Date: February 28, 2017 Time: 10:00 a.m. Crtrm.: 8B Case 2:15-cv-09420-CBM-SS Document 66 Filed 01/31/17 Page 1 of 2 Page ID #:8024 Case 2:15-cv-09420-CBM-SS -1- DEFENDANTS’ NOTICE OF MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 TO ALL INTERESTED PARTIES AND THEIR ATTORNEYS OF RECORD: PLEASE TAKE NOTICE that on February 28, 2017 at 10:00 a.m., or as soon thereafter as the parties may be heard in Courtroom 8B of the United States Courthouse, located at 350 West 1st Street, Los Angeles, California 90012, Defendants Hui Feng and Law Office of Feng & Associates P.C. (collectively, “Defendants”) will and hereby do move the Court for an order of summary judgment against plaintiff Securities and Exchange Commission. This motion is based upon the present Notice of Motion and Motion for Summary Judgment, the concurrently filed Declarations of Hui Feng and Andrew B. Holmes and all exhibits thereto, the concurrently filed Statement of Uncontroverted Facts, the pleadings on file herein, and any other oral and documentary evidence presented at the time of the hearing on this matter. This motion is made following the conference of counsel pursuant to L.R. 7-3, which took place in person on January 19, 2017. Dated: January 31, 2017 HOLMES, TAYLOR & JONES LLP _____/s/ Andrew B. Holmes________________ Andrew B. Holmes Attorneys for Defendants Hui Feng and Law Offices of Feng & Associates P.C. Case 2:15-cv-09420-CBM-SS Document 66 Filed 01/31/17 Page 2 of 2 Page ID #:8025 Case No. 15-cv-03101-CRB DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 HOLMES, TAYLOR & JONES LLP Andrew B. Holmes (SBN 185401) abholmes@htjlaw.com Matthew D. Taylor (SBN 220032) matthew.taylor@htjlaw.com 617 South Olive Street, Suite 1200 Los Ángeles, California 90014 Tel: (213) 985-2200 Fax: (213) 973-6282 Attorneys for Defendants Hui Feng and Law Offices of Feng & Associates P.C. UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION SECURITIES AND EXCHANGE COMMISSION, Plaintiff, vs. HUI FENG and LAW OFFICES OF FENG & ASSOCIATES P.C., Defendants. Case No. 2:15-cv-09420-CBM-SS [Hon. Consuelo B. Marshall] DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT [Declarations of Hui Feng and Andrew B. Holmes and Statement of Genuine Facts Filed Concurrently] Date: February 28, 2017 Time: 10:00 a.m. Crtrm.: 8B Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 1 of 31 Page ID #:8026 Case No. 15-cv-03101-CRB -i- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 TABLE OF CONTENTS Page(s) I. INTRODUCTION .................................................................................................... 1 II. FACTUAL BACKGROUND .................................................................................. 2 A. OVERVIEW OF THE FEDERAL EB-5 IMMIGRATION PROGRAM. ... 2 B. THE SEC’S SUDDEN AND UNANNOUNCED ATTEMPT TO CLASSIFY EB-5 ATTORNEYS AS BROKERS. ....................................... 4 C. MR. FENG AND HIS EB-5 RELATED ACTIVITIES. .............................. 5 III. LEGAL ARGUMENT ............................................................................................. 7 A. LEGAL STANDARD ON MOTION FOR SUMMARY JUDGMENT. ..... 7 B. THE SEC’S ALLEGATIONS AGAINST DEFENDANTS. ....................... 8 C. ALL OF THE SEC’S CLAIMS FAIL BECAUSE THE EB-5 INVESTMENTS AT ISSUE ARE NOT SECURITIES. .............................. 8 1. Since These Investments Were Not Motivated By Investment Profits, But Rather By The Desire To Obtain Permanent Resident Status In The United States, They Are Not Securities. .......................................................................... 9 2. Whether Applying Subjective or Objective Factors, Mr. Feng’s EB-5 Clients Had No Expectation of Profit from Their Investments. ......................................................................... 10 D. MR. FENG DID NOT VIOLATE § 15(A) OF THE EXCHANGE ACT SINCE THIS PROVISION IS NOT APPLICABLE TO THE EB-5 TRANSACTIONS AT ISSUE AND SINCE MR. FENG’S ACTIONS DID NOT OTHERWISE QUALIFY HIM AS A “BROKER.” ................. 13 1. The Purpose of the Exchange Act and Broker Regulation Thereunder. ................................................................................... 13 2. The Exchange Act Does Not Require Registration of “Brokers” Unless They Are Effecting Transactions on Domestic “Exchanges.” ................................................................. 14 3. Mr. Feng’s Activities Do Not Give Rise to “Broker” Liability. ........................................................................................ 15 a) Mr. Feng’s Receipt of Transaction Based Compensation Should Not Be Considered Dispositive Given the Fact It Did Not Give Rise to A Conflict of Interest. ...................................... 18 4. As a Matter of Public Policy, Subjecting Attorneys to Broker Registration Requirements Makes Little Sense Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 2 of 31 Page ID #:8027 Case No. 15-cv-03101-CRB -ii- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Given the Heightened Fiduciary Duties Attorneys Already Owe Their Clients. .......................................................... 19 E. DEFENDANTS DID NOT COMMIT SECURITIES FRAUD. ................ 20 1. The Contingent Finder’s Fee is Not “In Connection With” the Purchase or Sale of Security ......................................... 21 2. Mr. Feng’s Failure to Disclose the Fact He Was Being Compensated by The Regional Centers Was Not Material to His Clients. ................................................................. 22 3. The SEC’s Claim of Fraud Against the Regional Centers Fails Since The Record Does Not Support the Notion The Regional Centers Actually or Reasonable Relief on The Alleged Misrepresentations. .................................................. 24 F. THE DISGORGEMENT AMOUNT SOUGHT BY THE SEC IS INAPPROPRIATE GIVEN THE FACTS OF THE CASE. ....................... 24 IV. CONCLUSION ...................................................................................................... 25 Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 3 of 31 Page ID #:8028 Case No. 15-cv-03101-CRB -iii- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 TABLE OF AUTHORITIES Page(s) Cases Apex Global Partners, Inc. v. Kaye/Bassman Intern. Corp., 2009 WL 2777869, *3 (N.D.Tex.2009) ............................................................................................ 16 Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609 (7th Cir. 2012) .......................... 14 Benzon v. Morgan Stanley Distributors, Inc., 420 F.3d 598 (6th Cir. 2005) ......................... 24 Carlsson v. U.S. Citizenship & Immigration Servs., No. CV 12-7893-CAS, 2012 WL 4758118, at *2 (C.D. Cal. Oct. 3, 2012) ............................................................. 4 Chang v. United States, 327 F.3d 911, 916 n.2 (9th Cir. 2003) ............................................... 3 Cornhusker Energy Lexington, LLC v. Prospect Street Ventures, 2006 WL 2620985 at *6 (D. Neb. 2006) .................................................................................... 16, 18 Durning v. First Boston Corp., 815 F.2d 1265 (9th.Cir. 1987) ............................................. 21 Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) ................................................................ 13 Falkowski v. Imation Corp., 309 F.3d 1123 (9th Circuit 2002) ............................................. 21 Fecht v. Price Co., 70 F.3d 1078 (9th Cir. 1995) .................................................................... 21 Freeman Investments, LP v. Pacific Life Ins. Co., 704 F.3d 1110 (9th Cir. 2013) ................................................................................................................................. 22 In re Daou Sys., Inc., 411 F.3d 1006 (9th Cir. 2005) ............................................................. 20 In re Hayes, 183 F.3d 162 (2nd.Cir. 1999) ............................................................................ 19 Kaplan v. Rose, 49 F.3d 1363 (9th Cir.1994)......................................................................... 21 Marine Bank v. Weaver, 455 U.S. 551 (1982) ......................................................................... 8 Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986) ............................... 7 Regional Properties, Inc. v. Financial and Real Estate Consulting Co., 678 F.2d 552 (5th Cir. 1982) ................................................................................................... 13 Reves v. Ernst & Young, 494 U.S. 56 (1990) ......................................................................... 19 S.E.C. v. Bravata, 2009 WL 2245649, *2 (E.D.Mich.2009) ................................................. 15 S.E.C. v. Kenton Capital, Ltd., 69 F.Supp.2d 1 (D.D.C.1998) ............................................... 15 S.E.C. v. Martino, 255 F.Supp.2d 268 (S.D.N.Y. 2003) ........................................................ 15 SEC v. Benger, 934 F. Supp. 2d 1008 (N.D.Ill 2013) ................................................ 13, 15, 19 SEC v. Collyard, 174 F. Supp. 3d 781 (D. Minn. 2015) ........................................................ 18 Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 4 of 31 Page ID #:8029 Case No. 15-cv-03101-CRB -iv- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 SEC v. Edwards, 540 U.S. 389 (2004) ................................................................................... 10 SEC v. Hansen, No. 83 Civ. 3692 (LPG), 1984 U.S. Dist. Lexis 17835, * 25 (S.D.N.Y. Apr. 6, 1984) .................................................................................................... 15 SEC v. Kramer, 778 F.Supp.2d 1320 (M.D. Fla. 2011) ................................................... 16, 18 SEC v. Liu, 2016 U.S. Dist. LEXIS 181536 ........................................................................... 11 SEC v. M&A West, 2005 U.S. Dist. LEXIS 22452 (N.D.Cal. 2010) .......................... 16, 17, 19 SEC v. Platforms Wireless Int’l Corp., 617 F.3d 1072 (9th Cir. 2010) .................................. 25 SEC v. R.G. Reynolds Enters., Inc., 952 F.2d 1125 (9th Cir. 1991) ........................................ 9 SEC v. W.J. Howey Co., 328 U.S. 293 (1946) ......................................................................... 8 Tcherepnin v. Knight, 389 U.S. 332 (1967) ............................................................................. 8 United Hous. Found., Inc. v. Forman, 421 U.S. 837 (1975) .............................................. 8, 10 United States v. Berger, 473 F.3d 1080 (9th Cir.2007) ......................................................... 21 US v. Laurienti, 611 F.3d. 530 (9th Cir. 2010) ................................................................ 23, 24 Warfield v. Alaniz, 569 F.3d 1015 (9th Cir. 2009) ................................................................... 9 Statutes 11 U.S.C. §80b-2(a)(11) ......................................................................................................... 20 11 U.S.C. §80b-2(a)(11)(B) ................................................................................................... 20 15 U.S.C. § 77q(a) .............................................................................................................. 8, 20 15 U.S.C. § 78c(a)(1) ............................................................................................................. 14 15 U.S.C. § 78c(a)(4)(A) .................................................................................................... 9, 15 15 U.S.C. § 78j(b) ............................................................................................................... 8, 20 15 U.S.C. § 78o(a)(1) ........................................................................................................ 13, 14 15 U.S.C. §78o(a)(2) .............................................................................................................. 14 15 U.S.C. §78o(b) ................................................................................................................... 13 8 C.F.R. § 204.6(a) ................................................................................................................... 3 8 C.F.R. § 204.6(e) ................................................................................................................... 3 8 C.F.R. § 204.6(j)(2) ............................................................................................................... 9 8 C.F.R. § 204.6(j)(4)(iii), (m)(7) ............................................................................................. 3 8 C.F.R. § 204.6(j)(5)(iii) ......................................................................................................... 9 Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 5 of 31 Page ID #:8030 Case No. 15-cv-03101-CRB -v- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 8 C.F.R. § 216.6(a)(4) .............................................................................................................. 3 8 U.S.C. § 1103 ........................................................................................................................ 3 8 U.S.C. § 1153 ........................................................................................................................ 3 8 U.S.C. § 1153(b)(5) ............................................................................................................... 3 8 U.S.C. § 1186b ...................................................................................................................... 3 Other Authorities Immigration Act of 1990. 21 Pub. L. No. 101-649, tit. I, subtit. B, pt. 2, § 121, 104 Stat. 4978 ..................................................................................................................... 2 Rules Fed.R.Civ.P. 56(c) .................................................................................................................... 7 Fed.R.Civ.P. 56(e) .................................................................................................................... 7 Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 6 of 31 Page ID #:8031 Case No. 15-cv-03101-CRB -1- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 MEMORANDUM OF POINTS AND AUTHORITIES I. INTRODUCTION The SEC’s lawsuit against Defendants Hui Feng and the Law Offices of Feng & Associates P.C. (collectively, “Defendants”) represents a “solution” in search of a problem. For more than 10 years, Mr. Feng, a Columbia law school educated attorney licensed in the State of New York, has provided legal assistance to clients, primarily Chinese nationals, in obtaining EB-5 visas. In doing so, Mr. Feng has achieved extraordinary results for his clients. Despite the fact that, nationwide, only approximately 77% of investors applying for EB-5 visas ultimately obtain them, Mr. Feng’s success rate to date is 100%. In other words of the approximately 150 of Mr. Feng’s EB-5 clients who have applied for visas through the EB-5 visa, none of them has had their application denied. Nevertheless, the SEC has filed the present lawsuit in an attempt to put an abrupt end to Mr. Feng’s representation of EB-5 clients while seeking the disgorgement of $4,718,000, the total amount Mr. Feng has been paid in “commissions” as well as the amount the SEC contends he is entitled to be paid in the future. The Commission’s case against Defendants is deficient in several key respects. First and foremost, the underlying EB-5 investments at issue in this case should not be deemed to be “securities” under federal law because Mr. Feng’s clients did not have a reasonable “expectation of profit” from these investments. Although the SEC would like to focus on the fact that the documents signed by investors repeatedly referred to the investments as “securities,” such labels are hardly dispositive. Rather, the simple fact remains that, after accounting for the mandatory “administrate” or “marketing” fees paid by the investors, fees that were themselves part and parcel of the EB-5 investments, Mr. Feng’s clients stood no chance of receiving more money back from their investment than they put in, the very definition of a “profit.” This simple fact made any “expectation of profit” impossible, meaning the investments did not qualify as securities under Howey. Even assuming the Court disagrees and finds the investments qualify as “securities,” Mr. Feng, himself, is not a “broker” under federal securities laws. This is because, among Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 7 of 31 Page ID #:8032 Case No. 15-cv-03101-CRB -2- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 other things, § 15(a) of the Exchange Act, the broker registration provision Mr. Feng is alleged to have violated, is applicable only to transactions effectuated “utilizing exchange facilities.” The simple fact that the EB-5 investments at issue here were not made via “exchanges” but were rather private, arms-length transactions between the EB-5 investors and the “regional centers” responsible for administering the EB-5 projects means § 15(a), by its own terms, is simply inapplicable to this case. However, even assuming the Court disagrees with this argument, too, Mr. Feng’s activities in connection with these investments, which were of the sort lawyers routinely perform for their clients, were otherwise insufficient to qualify him as a “broker” under federal securities laws. Moreover, as a matter of public policy, it makes little sense to subject lawyers, whose relationship with their clients are already subject to the highest of fiduciary standards, to broker registration requirements under the Exchange Act. Not only would such a holding be entirely inconsistent with the Exchange Act’s stated purpose of “protect[ing] investors … through regulation of transactions upon national securities exchanges and in over-the- counter markets against manipulation of share prices,” SEC v. Kramer (M.D.Fla. 2011) 778 F.Supp.2d 1320, 1334 (citations omitted), but it is unlikely to do anything to modify the behavior of unscrupulous attorneys. Attorneys are already subject, on a state by state basis, to stringent requirements regarding avoiding conflicts of interest with their clients. And, it is the role of these states, rather than the SEC, to oversee attorney ethical violations. Finally, the SEC’s fraud claims against Defendants are deficient in that non- disclosure of contingent finder’s fees is not: (1) “in connection with” the purchase or sale of securities; (2) material as a matter of law; (3) an actionable fraudulent scheme or manipulation under Rule 10b-5(a) and (c) and 17(a)(1) and (3) of the federal securities laws; (4) an actionable omission under Rule 10b-5(b) and 17(a)(2). II. FACTUAL BACKGROUND A. Overview of the Federal EB-5 Immigration Program. In 1990, Congress created the EB-5 visa category as part of the Immigration Act of 1990. 21 Pub. L. No. 101-649, tit. I, subtit. B, pt. 2, § 121, 104 Stat. 4978, 4989-94 (codified Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 8 of 31 Page ID #:8033 Case No. 15-cv-03101-CRB -3- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 as amended at 8 U.S.C. §§ 1153(b)(5), 1186b). The new category, the Senate Judiciary Committee explained, was “intended to create new employment for U.S. workers and to infuse new capital into the country.” S. Rep. 101-55, 101st Cong., 1st Sess. (June 19, 1989). The statute is administered by the United States Citizenship and Immigration Services, commonly referred to as “USCIS.” 8 U.S.C. § 1103 (delegating authority to the Secretary of Homeland Security). Each year the United States offers 10,000 green cards to immigrants who successfully apply for the employment-based fifth preference (“EB-5”) visa. 8 U.S.C. § 1153(b)(5). To qualify, a foreign applicant must complete a series of steps. First, the applicant must invest $1 million1 in a new commercial enterprise in the United States. See Chang v. United States, 327 F.3d 911, 916 n.2 (9th Cir.2003) (citing 8 U.S.C. § 1153(b)(5)(A)(i)-(iii), (C)). Next the applicant must file an “I-526 Petition by Alien Entrepreneur” “seeking approval of their submitted investment and business plans.” Chang, 327 F.3d at 916. If approved, the applicant receives conditional permanent resident status in the United States for two years. 8 C.F.R. § 204.6(a). If the enterprise creates or sustains at least 10 full-time jobs during that time, the applicant may file an I-829 Petition to request removal of the conditions and obtain permanent legal status (i.e., a green card). 8 U.S.C. § 1186b(c); 8 C.F.R. § 216.6(a)(4); Chang, 327 F.3d at 916. Congress has since amended the EB-5 program to permit foreign applicants to pool their capital in “regional centers.” 8 C.F.R. § 204.6(e)2. Foreign applicants who work with regional centers can fulfill the job creation requirement by showing the direct or indirect creation of 10 or more jobs per applicant. 8 C.F.R. § 204.6(j)(4)(iii), (m)(7); see generally Carlsson v. U.S. Citizenship & Immigration Servs., No. CV 12-7893-CAS, 2012 WL 1 The amount of the investment is reduced to $500,000 in “targeted employment areas,” which are defined as “a rural area or an area which has experienced high unemployment (of at least 150 percent of the national average rate).” 8 U.S.C. § 1153. 2 A “regional center” is “any economic unit, public or private, which is involved with the promotion of economic growth, including increased export sales, improved regional productivity, job creation, and increased domestic capital investment.” 8 C.F.R. § 204.6(e). Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 9 of 31 Page ID #:8034 Case No. 15-cv-03101-CRB -4- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 4758118, at *2 (C.D. Cal. Oct. 3, 2012). Recent government data show the overwhelming majority of EB-5 visas are obtained through the regional center program. In 2014, for instance, 97 percent of conditional visas issued (10,376) were granted to foreign applicants through the regional centers, and only 3 percent (316) were granted through the original program.3 B. The SEC’s Sudden and Unannounced Attempt to Classify EB-5 Attorneys as Brokers. For over 25 years, immigration attorneys in this country – and on the west coast in particular – have helped foreign applicants navigate the complex EB-5 program and secure permanent legal status in the United States. As far as defendants are aware, none of those lawyers registered as brokers because there was no suggestion by anyone – not the SEC, the USCIS, any other government agency, or any court – that they were in fact acting as brokers. In fact, for the vast majority of that time – more than 23 years – the SEC did not concern itself with the EB-5 program at all. This is likely because everyone knew the EB-5 visa program is an immigration program and not a securities program4. The reality is that most if not all of the foreign “investors” are perfectly willing to lose their capital contributions if it means getting a visa and green card. As one immigration attorney told a Washington state legislative committee in 2013, “[m]ost of my clients want the green card above all else.” The applicants’ attitude was “if I lose my money, I lose my money, but I don’t want to lose the green card.”5 Then, less than a two years ago, again without notice or rulemaking, the SEC launched a nationwide charge to pursue purported “brokers” in the EB-5 program. In June 3 See RJN, Ex. A (U.S. State Department Report of the Visa Office, Table V (Part 3)). 4 See, e.g., RJN, Ex. C (Eric Posner, “Citizenship for Sale,” Slate (May 13, 2015)); Ex. D (Editorial Board, “For sale: U.S. citizenship, $500,000 to $1 million,” Los Angeles Times (Nov. 29, 2015)); Ex. E (Alana Samuels, “Should Congress Let Wealthy Foreigners Buy Green Cards?” The Atlantic (Sept. 21, 2015)). 5 See RJN, Ex. F (Sanjay Bhatt, “Money from investor visas floods U.S., but doesn’t reach targeted poor areas,” The Seattle Times (March 7, 2015)); see also RJN, Ex. G (Lornet Turnbull, “Wealthy immigrants can invest way to visas,” The Seattle Times (December 10, 2011)). Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 10 of 31 Page ID #:8035 Case No. 15-cv-03101-CRB -5- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 2015, the SEC announced it had brought its first unregistered broker-dealer claim against two business entities (not law firms) that allegedly introduced EB-5 projects to more than 150 immigrants. A few months later, the SEC turned its attention for the first time to attorneys, instituting settled administrative proceedings against seven immigration attorneys arising from their legal services to EB-5 clients. When Mr. Feng declined to accept the SEC’s sudden and unjustified attempt to categorize immigration attorneys as brokers, the SEC filed this action against Mr. Feng alleging failure to register as a “broker” and securities fraud in connection with the provision of EB-5 legal services. Dkt. No. 1 (“Compl.”) at ¶ 4. C. Mr. Feng and His EB-5 Related Activities. Defendant Hui Feng (“Mr. Feng”) was born in China and immigrated to the United States at the age of 19 to attend college. (UF 1.6) Mr. Feng earned his law degree from Columbia Law School in 1997. (UF 2.) Beginning in approximately 2010, Mr. Feng began receiving inquiries from both existing and new clients in China about the United States’ EB- 5 program. In nearly all cases, Mr. Feng’s clients initiated the contact through referrals by Mr. Feng’s existing clients or after reading his online blog articles about the EB-5 program, or through advertisements concerning his legal services Mr. Feng placed in Chinese publications. (UF 19.) Since all his clients are in China, Mr. Feng set up three offices in China in April 2013 to provide more convenient immigration services to them. Then in April 2014, he incorporated a consulting company in Hong Kong as a separate entity for the overseas immigration service operations. (UF 61.) To date, Mr. Feng has represented approximately 150 clients regarding the EB-5 visa process who chose to go forward with it. (UF 11.) Of those clients, approximately 30 have obtained permanent or provisional two-year green cards, approximately 80 have obtained I- 526 application approvals, while the rest of the clients’ applications are pending adjudication. (UF 12.) In short, Mr. Feng has a 100% success rate, as compared to an overall average of approximately 77%. (UF 13–14.) Mr. Feng attributes his unusually high success 6 “UF” refers to the undisputed facts offered by Defendants in support of this MSJ. Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 11 of 31 Page ID #:8036 Case No. 15-cv-03101-CRB -6- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 rate to the fact he has spent a great deal of time researching the hundreds of regional centers operating in the marketplace in order to determine which of them has the best “track record” in getting their projects both fully funded and in meeting the USCIS job creation requirements, a necessary prerequisite for investors ultimately obtaining permanent residency. (UF 15.) Using this criteria, Mr. Feng has identified approximately 10 to 20 regional centers to which he has referred his EB-5 clients. (UF 16.) Mr. Feng’s clients have invested in a total of 30 separate investment projects, all of which have been real estate developments of one sort of another. (UF 17.) These projects have been conducted through about 10 separate “regional centers.” (UF 18.) All of the EB-5 projects in which Mr. Feng’s clients have invested have been structured as limited partnerships, with the investor becoming a “limited partner” in the partnership and the regional center serving as the general partner. (UF 17.) Although the terms of each of the investments is slightly different, each of them were effectively structured as loans rather than equity investments, meaning that rather than sharing in the profits and losses of the project, an investor is offered a fixed rate of return, or interest rate, on the money invested. (UF 21.) In addition to the minimum investment amount of $500,000 required to make an EB- 5 investment, all investors are required to pay a “marketing” fee directly to the regional center. (UF 25.) These fees, which range from $25,000 to $50,000, were set by the regional centers without Mr. Feng’s input. (UF 26.) All EB-5 investors were required to pay these fees to the regional centers, regardless of whether any portion of this fee was subsequently paid to Mr. Feng as a referral fee. (UF 27.) The effect of these mandatory marketing fees, set unilaterally by the regional centers, was to make investment in each of the EB-5 projects in which Mr. Feng was involved “unprofitable,” at least in a monetary sense. (UF 29.) This is because any “profit” reflected in the project’s stated rate of return was outweighed by the amount of the mandatory marketing fee paid by the investor. (UF 30.) The result of this was simple and straightforward- even if a project were “successful,” Mr. Feng’s clients received less money back from the regional centers than they paid the regional center to make the investment, meaning no “profit” was earned. (UF 31.) However, this fact was of little Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 12 of 31 Page ID #:8037 Case No. 15-cv-03101-CRB -7- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 concern to Mr. Feng’s clients whose overriding concern was obtaining permanent residency rather than earning a financial return. (UF 32.) As for Mr. Feng, his role in the process was simply that of a lawyer advising his clients regarding the best way to obtain their legal objective- permanent residency. (UF 36.) Since the financial terms of various EB-5 investments which Mr. Feng recommended to his clients were fixed by the regional centers in advance and non-negotiable, offered paltry returns and were effectively offered to investors on a “take it or leave it” basis, there was no room for Mr. Feng to operate as a typical broker or investment advisor and advise clients regarding the relative merits of the investments they were making. (UF 21, 26, 37, 53.) Instead, Mr. Feng advised his clients as to those projects he considered most likely to comply with the USCIS’ requirements for job creation and therefore to fulfill his clients’ objective of resulting in permanent residency. (UF 10, 16, 34.) III. LEGAL ARGUMENT A. Legal Standard on Motion for Summary Judgment. Summary judgment is appropriate where the moving party establishes “there is no genuine issue as to any material fact and that [it] is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c). A factual dispute between the parties will not defeat a motion for summary judgment unless it is both genuine and material. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247–48 (1986). A factual dispute is genuine if a reasonable jury could return a verdict for the non-moving party, and it is material if, under the substantive law, it would affect the outcome of the suit. Id. at 248. Once the moving party has carried its burden under Rule 56, “its opponent must do more than simply show that there is some metaphysical doubt as to the material facts in question.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). The non-moving party must go beyond the pleadings and, by affidavits or other evidence, designate specific facts showing there is a genuine issue for trial. Fed.R.Civ.P. 56(e); Celotex, 477 U.S. at 324. Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 13 of 31 Page ID #:8038 Case No. 15-cv-03101-CRB -8- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 B. The SEC’s Allegations Against Defendants. The SEC’s claims against Mr. Feng can be divided into two broad categories. The first of these is that Mr. Feng acted as an unregistered “broker” in violation of § 15(a) of the Exchange Act, which makes it unlawful for a “broker” or “dealer” “to make use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security” unless the broker or dealer is registered with the SEC. The SEC asserts, and Defendants do not dispute, that § 15(a) is a strict liability statute The SEC further alleges Mr. Feng committed securities “fraud” of two distinct types. First, at paragraphs 65, the SEC alleges Mr. Feng defrauded his own EB-5 legal clients by, inter alia, “fail[ing] to disclose to [his] clients that [he was] receiving commissions from the EB-5 Promoters, and fail[ing] to disclose [his] conflicts of interest…” Secondly, at paragraphs 78 and 80, the SEC alleges Mr. Feng defrauded certain “promoters” (i.e. “regional centers”) by misrepresenting the nature of his relationship with certain “partners” and “agents” in China and by falsely representing these individuals “were the ones soliciting and referring investors to the Promoters, when, in fact, it was Mr. Feng or his employees.” The SEC asserts its fraud claims under 15 U.S.C. § 77q(a), and 15 U.S.C. § 78j(b) and Rule 10b-5. C. All of The SEC’s Claims Fail Because The EB-5 Investments at Issue Are Not Securities. While Congress enacted a definition of “security” sufficiently broad to encompass virtually any instrument that might be sold as an investment, Congress did not “intend to provide a broad federal remedy for all fraud.” Marine Bank v. Weaver, 455 U.S. 551, 556 (1982). Indeed, in interpreting the term “security,” “form should be disregarded for substance and the emphasis should be on economic reality.” Tcherepnin v. Knight, 389 U.S. 332, 336 (1967); see also SEC v. W.J. Howey Co., 328 U.S. 293, 298 (1946). No clearer statement of this approach exists than in United Hous. Found., Inc. v. Forman, 421 U.S. 837 (1975), which stated: We reject at the outset any suggestion that the present transaction, evidenced by the sale of shares called “stock,” must be considered a security transaction simply because the statutory definition of a security includes the words “any ... Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 14 of 31 Page ID #:8039 Case No. 15-cv-03101-CRB -9- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 stock.” Id., 848. So not everything that looks like a security, and not everything that even calls itself a security, is actually a security. Courts have defined an “investment contract” as “(1) an investment of money (2) in a common enterprise (3) with an expectation of profits produced by the efforts of others.” SEC v. R.G. Reynolds Enters., Inc., 952 F.2d 1125, 1130 (9th Cir. 1991)(italics added); see also SEC v. W.J. Howey Co., 328 U.S. 293 (1946). The third prong of this test, requiring “an expectation of profits produced by the efforts of others,” involves two distinct concepts: whether a transaction involves any expectation of profit and whether expected profits are the product of the efforts of a person other than the investor. Warfield v. Alaniz, 569 F.3d 1015, 1020 (9th Cir. 2009).7 The EB-5 investments at issue are not “securities” since Mr. Feng’s clients did not have an “expectation of profits,” as required under federal law.8 1. Since These Investments Were Not Motivated By Investment Profits, But Rather By The Desire To Obtain Permanent Resident Status In The United States, They Are Not Securities. In determining whether a particular transaction involved an “expectation of profit,” Courts have looked to both subjective factors, such as the “subjective intent of the 7 While the SEC focuses on 8 C.F.R. § 204.6(j)(2) (“the petition must be accompanied by evidence that the petitioner has placed the required amount of capital at risk for the purpose of the generating a return on the capital placed at risk”) to argue there was an “expectation of profit,” the same goes on to state: If the new enterprise is a partnership, either limited or general, evidence that the petitioner is engaged in either direct management or policy making activities. For purposes of this section, if the petitioner is a limited partner and the limited partnership agreement provides the petitioner with certain rights, powers, and duties normally granted to limited partners under the Uniform Limited Partnership Act, the petitioner will be considered sufficiently engaged in the management of the new commercial enterprise. 8 C.F.R. § 204.6(j)(5)(iii). Based on this later section, all EB-5 clients who meet the requirement of the EB-5 program statue as adjudicated by USCIS will be “considered sufficiently engaged in the management of the new commercial enterprises.” This means valid EB-5 offerings will not necessarily meet the “expectation of profits” test, and the SEC’s blanket assertion that these are all securities isn’t true. 8 Also, a “broker” is defined as “any person engaged in the business of effecting transactions in securities for the account of others” (15 U.S.C. § 78c(a)(4)(A)(italics added). So even if the Court concludes that Feng might have been a “broker,” if the investments themselves do not qualify as “securities,” summary judgment is appropriate. Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 15 of 31 Page ID #:8040 Case No. 15-cv-03101-CRB -10- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 purchasers” in opting to enter into the transaction at issue, as well as objective factors, such as the “character of the instrument or transaction offered based on what the purchasers were led to expect.” Id. at 221. As for objective factors, courts have frequently examined the promotional materials associated with an instrument or transaction in determining whether a particular transaction qualifies as a security. See, e.g., SEC v. Edwards, 540 U.S. 389, 392 (2004) (observing that a payphone sale and buyback scheme involved investment contracts where promotional materials noted “potential for ongoing revenue generation”); United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 854 (1975) (noting, in the course of finding investment contract test not met, that the promotional materials “[n]owhere...seek to attract investors by the prospect of profits” and rather “repeatedly emphasize the ‘nonprofit’ nature of the endeavor”). In this case, whether looking to subjective or objective factors, the relevant EB-5 investments clearly did not involve an “expectation of profit” by investors. 2. Whether Applying Subjective or Objective Factors, Mr. Feng’s EB-5 Clients Had No Expectation of Profit from Their Investments. Subjectively, overwhelming evidence points to the fact that Mr. Feng’s EB-5 investors simply did not care about whether or not they earned a financial “profit” from their EB-5 investment (UF 32–33.) Instead, they were exclusively concerned with whether or not their investment would result in their securing permanent residency in the U.S. (UF 32.) This fact is also borne out by the testimony of various third parties. (UF 33–34.) And, objectively, the very terms of the EB-5 investments themselves reveal that, in every case, Mr. Feng’s clients could expect to receive less money back from their investments than they put into them, the very definition of a lack of “profit.”9 See, e.g. SEC v. Edwards, 540 U.S. 389, 395-96 (2004) (noting “profits” under Howey is determined simply by looking at “financial returns on investments.”) Although Mr. Feng’s clients invested in about 30 separate projects, all of which contained slightly different financial terms (UF 17), after factoring in the mandatory “marketing” or “administrative” fees 9 A simple analysis of the various PPMs, as summarized in Ex. 1 to Hui Feng’s declaration, shows that the total interest payable to each client is less than the management fee (with the sole exception of Mr. Bao.). (UF 29–31, 33, 68, 72–73.) Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 16 of 31 Page ID #:8041 Case No. 15-cv-03101-CRB -11- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 investors were required to pay, which ranged from $30,000 to $50,000, it was literally impossible for investors to earn a profit. (UF 26, 29–31, 33.) Thus, it simply defies logic to argue these investors could reasonably have had the “expectation of profit” Howey requires.10 The SEC will undoubtedly attempt to sidestep this analysis entirely by pointing to the recent decision in SEC v. Liu, 2016 U.S. Dist. LEXIS 181536. In that case, which also looked at whether certain mandatory fees incurred as part of an EB-5 investment should be taken into account in determining whether an “investment contract” created an “expectation of profit,” the court disregarded such fees, reasoning “[t]he question is not whether some combination of EB-5 shares and fees are profitable securities, but whether the shares themselves…qualify as investment contracts.” Id at *12. However, Liu’s reasoning is unpersuasive and should be disregarded by the Court. It defies both common sense and applicable federal law to reason that a mandatory investment fee, which is part and parcel of the underlying investment, should not be factored into the “expectation of profit analysis.11 Indeed if – as in Liu - the administrative fee is not part of the “security” that makes up the investment, then there is an additional wrinkle: The contingent fee comes out of the administrative fee, not out of the “security,” and it is only paid if a green card is issued. So how is that payment – which, under the Liu logic is not part of the security and does not depend on an investment, but rather on the issuance of a green card – “in connection with” the purchase or sale of the underlying “security”? 10 This lack of profit potential is most obvious in the case of the “Genesis" project sponsored by the Western Regional Center, Inc. (“WRCI”), a project in which approximately 27 of Feng’s client’s invested. (UF 24.) The Genesis project was structured in such a way so as to make it impossible for investors to obtain a financial return of any kind. Instead, they could only hope to obtain a return of their “principal.” (See UF 24.) 11 Moreover, Liu’s claim that defendants in that case provided “no legal authority for the proposition that the size of an investment fee can alter the nature of an investment contract,” ignores the fact that the Supreme Court in Forman expressly accounted for associated fees when considering whether there was an expectation of profit. 421 U.S. at 860. (“Moreover, nothing in the record suggests that the facilities in fact returned a profit in the sense that the leasing fees are greater than the actual cost to Co-op City of the space rented.”). Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 17 of 31 Page ID #:8042 Case No. 15-cv-03101-CRB -12- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 The SEC has historically conceded that an EB-5 investment without an expectation of profit is not a security. On January 18, 2002, the SEC issued a No Action Letter (RJN Ex. B) to CanAccord Capital Corporation for the Canadian Immigrant Investor Program stating that: Based on the facts presented, the Division will not recommend enforcement action to the Commission if, in reliance on your opinion of counsel that the Canadian Immigrant Investor Program and the notes issued thereunder are not securities within the meaning of the Securities Act of 1933 or the Securities Exchange Act or 1934, CanAccord administers the Immigrant Investor Program as described in the incoming letter without registration under either statute. And that’s exactly what we have here: an “investment” with no expectation of profit. The same result should accrue: These are not securities.12 Columbia Law Professor John C. Coffee, Jr., has suggested that this analysis applies broadly to many, if not all EB-5 projects. In analyzing the obligations undertaken by foreigners “investing” in EB-5 projects, he has explained: But are the obligations so purchased truly “securities”? Here it should depend on whether the visa seeker thought he was making a long-term investment for profit or whether he was simply buying a visa. Under United Housing Foundation, Inc. v. Forman [421 U.S. 837 (1975)], an investor who buys shares in a housing cooperative does not buy a security if the investors’ primary motivation is to obtain housing. The typical EB-5 structure involves a capital contribution by the investor to a special purpose limited partnership or limited liability company that makes a construction loan to the developer (typically at an interest rate below what a bank would charge, which is why developers avidly seeks such investments.)13 EB-5 participants seek visas, not profit. Even where some profit motive may exist, courts should focus on the primary motive. See Rice v. Braniger Organization, Inc. 922 F. 2d 788 (11th Cir. 1991); Grenader v. Spitz, 537 F. 2d 612 (2d Cir. 1976). Although some profit may accrue, it is not the primary motivation. 12 “It is generally understood that in enacting the EB-5 provisions contained within the Immigration Act of 1990, Congress intended to establish an immigration investment program to rival those enacted by other countries, specifically Canada and Australia.” See Employment Creation Immigrant Visa (EB-5) Program Recommendations, page 6, “Foreign Competition and Response”, USCIS, March 18, 2009. (RJN Ex. K). 13 See RJN, Ex. H: Coffee, John “News From California: The 9th Circuit and the SEC Challenge New York,” The CLS Blue Sky Blog (July 20, 2015). Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 18 of 31 Page ID #:8043 Case No. 15-cv-03101-CRB -13- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 These are not securities, and the motion should be granted. D. Mr. Feng Did Not Violate § 15(a) of the Exchange Act Since This Provision Is Not Applicable to The EB-5 Transactions At Issue And Since Mr. Feng’s Actions Did Not Otherwise Qualify Him as a “Broker.” The SEC’s third cause of action alleges Defendants violated § 15(a) of the Exchange Act, which makes it unlawful for a “broker” or “dealer” “to make use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security” unless the broker or dealer is registered with the SEC in accordance with § 15(b). 15 U.S.C. § 78o(a)(1). This claim fails since § 15(a) is not applicable to the sorts of transactions at issue here and since Defendants’ activities in connection with his EB-5 clients were not sufficient to make him a “broker” under federal law, particularly in light of the underling policy purpose for regulation of brokers. 1. The Purpose of the Exchange Act and Broker Regulation Thereunder. Federal regulation of transactions in securities emerged as part of the aftermath of the market crash in 1929. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 (1976). The 1934 “Exchange Act,” of which § 15(a) is part, “was intended principally to protect investors against manipulation of stock prices through regulation of transactions upon securities exchanges and in over-the-counter markets, and to impose regular reporting requirements on companies whose stock is listed on national securities exchanges.” Ernst & Ernst at 195; S. Rep. No. 792, 73d Cong., 2d Sess., 1-5 (1934)(italics added). As courts have noted, the “requirement of [broker] registration is not an end in itself, standing in splendid isolation. Rather, registration is merely a subordinate component of the Exchange Act’s broader statutory scheme and exists to achieve the overarching purpose of the Act.” SEC v. Benger, 934 F. Supp. 2d 1008, 1012 (N.D.Ill 2013); see also Regional Properties, Inc. v. Financial and Real Estate Consulting Co., 678 F.2d 552, 561-62 (5th Cir. 1982)(§ 15(a)’s registration requirement is “of the utmost importance in effecting the purposes of the Act.”); 15 U.S.C. §78o(b)(Empowering the Commission to require such information and documents concerning the broker or dealer as “necessary or appropriate in Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 19 of 31 Page ID #:8044 Case No. 15-cv-03101-CRB -14- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 the public interest or for the protection of investors.”)14 2. The Exchange Act Does Not Require Registration of “Brokers” Unless They Are Effecting Transactions on Domestic “Exchanges.” As a threshold issue, Defendants contend the broker registration requirements embodied in § 15(a) simply do not apply to the EB-5 investments at issue in this case since these investments were not made “utilizing exchange facilities” as the Exchange Act expressly requires. Section 15(a) of the Exchange Act is captioned: “Registration of all persons utilizing exchange15 facilities to effect transactions; exemptions.” 15 U.S.C. § 78o(a)(1)(bold in original)16. Congress’ focus on exchanges in § 15(a) is also apparent from the text of the statute, itself, which provides: It shall be unlawful for any broker or dealer... (other than such a broker or dealer whose business is exclusively intrastate and who does not make use of any facility of a national securities exchange) to make use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security other than an exempted security or commercial paper, bankers’ acceptances, or commercial bills) unless such broker or dealer is registered in accordance with subsection (b) of this section. 15 U.S.C. § 78o(a)(1) (parenthesis in original)(emphasis added). The primacy of the exchanges is further suggested by the very prologue of the Exchange Act, which sets forth as its object the regulation of “transactions in securities as commonly conducted upon securities exchanges and over-the-counter markets…” 15 U.S.C. §78b. In this case, there can be little disagreement regarding the fact the EB-5 investments 14 That registration is not an end in itself but merely a means to achieve the goal of protecting those involved in securities transactions is further illustrated by § 15(a)’s empowerment of the Commission to exempt from the registration requirement any broker or dealer so long as it is “consistent with the public interest and the protection of investors....” 15 U.S.C. §78o(a)(2). 15 15 U.S.C. § 78c(a)(1) defines an “exchange” as “any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange.” 16 It has long been held that while express provisions in the body of an act cannot be controlled or restrained by the title or preamble, the latter are relevant to the court’s construction of the statute. Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609, 619 (7th Cir. 2012). In this case, the title of § 15(a) clearly evidences Congress’ concern with the registration of brokers and dealers utilizing “exchange facilities.” Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 20 of 31 Page ID #:8045 Case No. 15-cv-03101-CRB -15- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 made by Mr. Feng’s clients were not made utilizing securities “exchanges” of any kind. Rather, these were private, arms-length transactions entered into directly between the investors and the regional centers. (UF 47.) Accordingly, § 15(a)’s broker registration requirements are simply not applicable here. 3. Mr. Feng’s Activities Do Not Give Rise to “Broker” Liability. However, even assuming the Court finds § 15(a) of the Exchange Act does apply to the transactions at issue in this case, Mr. Feng’s activities were insufficient to qualify him as a “broker” under federal securities laws. Section 3(a)(4)(A) of the Exchange Act defines a “broker” as “any person engaged in the business of effecting transactions in securities for the account of others.” 15 U.S.C. § 78c(a)(4)(A)(italics added). While the statute does not elaborate on what it means to “effect transactions” or to be “engaged in the business,” courts have identified a number of factors for determining whether a person qualifies as a broker for purposes of § 15(a)(1), including whether that individual: 1) was an employee of the issuer; 2) received commissions as opposed to a salary; 3) was selling, or had previously sold, the securities of other issuers; 4) was involved in negotiations between the issuer and the investor; 5) made valuations as to the merits of the investment or gave advice; and 6) was an active rather than passive finder of investors. SEC v. Hansen, No. 83 Civ. 3692 (LPG), 1984 U.S. Dist. Lexis 17835, * 25 (S.D.N.Y. Apr. 6, 1984). However, “[t]he factors articulated in Hansen ... [a]re not designed to be exclusive.” S.E.C. v. Benger, 697 F.Supp.2d 932, 945 (N.D.Ill.2010). For example, S.E.C. v. Bravata, 2009 WL 2245649, *2 (E.D.Mich.2009) describes “[t]he most important factor in determining whether an individual or entity is a broker” as the “regularity of participation in securities transactions at key points in the chain of distribution.” (citing S.E.C. v. Martino, 255 F.Supp.2d 268, 283 (S.D.N.Y. 2003)); see also S.E.C. v. Kenton Capital, Ltd., 69 F.Supp.2d 1, 12–13 (D.D.C.1998) (describing “regularity of participation” as one of the primary indicia of “engag[ing] in the business”). Absent further involvement, “[m]erely bringing together the parties to transactions, even those involving the purchase and sale of securities, is not enough” to warrant broker Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 21 of 31 Page ID #:8046 Case No. 15-cv-03101-CRB -16- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 registration under § 15(a). Apex Global Partners, Inc. v. Kaye/Bassman Intern. Corp., 2009 WL 2777869, *3 (N.D.Tex.2009). Rather, the evidence must demonstrate involvement by the individual in question at “key points in the chain of distribution,” such as participating in the negotiation, analyzing the issuer’s financial needs, discussing the details of the transaction, and recommending an investment. Cornhusker Energy Lexington, LLC v. Prospect Street Ventures, 2006 WL 2620985 at *6 (D. Neb. 2006). In SEC v. Kramer, the Commission alleged that the defendant acted as an unregistered broker in violation of § 15(a) where he received transaction-based commissions for actively soliciting “intimate friends and family” over a period of two years. SEC v. Kramer, 778 F.Supp.2d 1320 (M.D. Fla. 2011). The court determined the defendant had acted as a facilitator rather than a broker because his conduct “consisted of nothing more than bringing together the parties to a transaction” and the Commission presented no evidence of the defendant possessing "authority over the accounts of others." Id. at 1339. Although, generally speaking, there is a dearth of Ninth Circuit law illuminating the definition of a “broker” under the Exchange Act, the case of SEC v. M&A West, 2005 U.S. Dist. LEXIS 22452 (N.D.Cal. 2010) is instructive. In M&A West, the court examined whether an individual engaged in facilitating so-called reverse mergers qualified as a “broker” under the Exchange Act. Specifically, the defendant worked with the shareholders of a private company (1) to identify “suitable public shell companies,” (2) to prepare documents for the reverse merger, and (3) to co-ordinate the parties to the reverse merger. And, upon successful completion of a reverse merger, the defendant received compensation in cash and securities. Rejecting the SEC’s argument the defendant’s conduct amounted to broker activity, M & A West held that: Th[e] [Commission’s] factual recitation capped with an ipse dixit sheds no light on why [the defendant]’s activities —commonly associated with paralegals (who draft documents), lawyers (who draft documents and orchestrate transactions), businessmen (who identify potential merger partners) and opportunists (who like to take a small cut of a big transaction), none of whom is commonly regarded as a broker—add up to [the defendant’s] being a broker. In particular, no assets were entrusted to [the defendant], and the Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 22 of 31 Page ID #:8047 Case No. 15-cv-03101-CRB -17- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Commission identifies no evidence that he was authorized to transact “for the account of others” (aside from his fiduciary authority over [the] accounts [of entities controlled by him]). Although [the defendant] was in the business of facilitating securities transactions among other persons, the Commission cites no authority for the proposition that this equates to “effecting transactions in securities for the account of others.” Id. at * 26-27 In other words, M&A West held that simply facilitating securities transactions among other persons did not amount to “effecting transactions in securities for the account of others,” where, no assets were actually entrusted to the individual in question and there was no other evidence existed that the defendant was authorized to transact “for the account of others.” Id. at *27. Similar to the facts of M&A West, Mr. Feng’s activities in connection with the EB-5 transactions were of the type commonly engaged in by attorneys. For example, unlike a typical broker, Mr. Feng was not engaged in giving investment advice to his clients. (UF 37.) Instead, he was primarily engaged in advising his clients regarding which of the EB-5 investments on offer was most likely to lead to their obtaining an EB-5 visa, assisting them in understanding the terms of the investments at issue. (UF 36, 39–40.) All of these actions are better thought of as “lawyering” activities than “brokering” activities. Mr. Feng is not a broker because: 1) He has not previously sold any other securities (UF 35); 2) He does not negotiate the terms of the EB-5 program for clients other than facilitating the communication between his clients and the regional centers due to the language barriers (UF 46)17; 3) He only conducts legal (and not investment) due diligence to qualify EB-5 programs for his clients for the purpose of green card applications (UF 15, 36– 37, 39–40); 4) In nearly all cases, Mr. Feng’s clients come to him for immigration advice either by finding him first online or through clients’ referral (UF 19, 41); and 5) He has not organized any seminars or sent any unsolicited emails or made any unsolicited phone calls to 17 The SEC’s summary motion (ECF No. 65) claims (at 13:16-19) on one hand that the administrative fees/contingent finder’s fees are not part of the investment contract for calculating the investment return for the EB-5 investment … but at the same time claim Mr. Feng’s “negotiation” of the administrative fees for his clients (or his contingent finder’s fee) is the type of negotiation that can lead to a broker registration requirement. This appears to be a double standard, where the administrative/contingent finder’s fees is not part of the investment for the “profit” aspect of the “securities” issue, but is nonetheless treated as part of the “transaction-based compensation” for the “broker” issue. Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 23 of 31 Page ID #:8048 Case No. 15-cv-03101-CRB -18- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 anyone about EB-5 programs. (UF 38.) On the contrary, Mr. Feng explicitly advised his clients about immigration, not investments, Mr. Feng is not a registered financial advisor or a broker, and his clients are not concerned about profits when choosing an EB-5 investment. (UF 32, 36–37.) Mr. Feng provides immigration services, and engages in legal due diligence to screen EB-5 programs and select the most reliable ones for his clients as part of his essential immigration services. (UF 15–16, 36, 39.) a) Mr. Feng’s Receipt of Transaction Based Compensation Should Not Be Considered Dispositive Given the Fact It Did Not Give Rise to A Conflict of Interest. Another consideration is whether Mr. Feng truly received the sort of “transaction- based compensation” this Court should be concerned with. See SEC v. Kramer, 778 F.Supp.2d 1320, 1334 (M.D. Fla. 2011) (noting transaction-based compensation is “one of the hallmarks of being a broker-dealer”). As the SEC points out, courts have noted that, in certain cases, such compensation “represents a potential incentive for abusive sales practices that registration is intended to regulate and prevent.” SEC v. Collyard, 174 F. Supp. 3d 781, 789 (D. Minn. 2015); accord Cornhusker Energy Lexington, LLC v. Prospect St. Ventures, No. 8:04CV586, 2006 U.S. Dist. LEXIS 68959, *20 (D. Neb. Sept. 12, 2006). However, this is simply not one of those cases. In fact, in this case, the various payments Mr. Feng received from the regional centers through which his clients invested were structured so as to specifically avoid the sort of conflict of interests and/or abusive sales practices with which courts have been concerned. This is because Mr. Feng was only paid such commissions in the event his clients actually obtained their goal: receipt of I-526 approval notices issued by USCIS, the first step towards obtaining a green card. (UF 42–43.) In other words, Mr. Feng’s incentives, as a lawyer, were completely aligned with those of his clients, and there was no reason for Mr. Feng to engage in “abusive sales practices” that might benefit himself to the detriment of his clients. The payment was entirely dependent on his legal clients actually obtaining their green card, and was not dependent on the “investment.” (See discussion at § III.A.1 below.) Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 24 of 31 Page ID #:8049 Case No. 15-cv-03101-CRB -19- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 4. As a Matter of Public Policy, Subjecting Attorneys to Broker Registration Requirements Makes Little Sense Given the Heightened Fiduciary Duties Attorneys Already Owe Their Clients. Finally, given the heightened fiduciary duties attorneys already owe their clients, it makes little sense, as a matter of public policy, to also superimpose “broker” regulations on the attorney-client relationship.18 The attorney-client relationship entails one of the highest fiduciary duties imposed by law. In re Hayes, 183 F.3d 162 (2nd.Cir. 1999) (citing In re Cooperman, 83 N.Y.2d 465, 472 (1994) (noting that under New York law, “[t]his unique fiduciary reliance ... is imbued with ultimate trust and confidence” and “[t]he duty to deal fairly, honestly and with undivided loyalty superimposes onto the attorney-client relationship a set of special and unique duties, including maintaining confidentiality, avoiding conflicts of interest, operating competently, safeguarding client property and honoring the clients’ interests over the lawyer’s.”) As seen in the SEC’s own summary judgment motion, they matter-of-factly claim “[t]he law is clear that attorneys who act as brokers are subject to the registration requirements,” citing the case of SEC v. Benger, 934 F.Supp.2d (N.D. Ill. 2013),19 Defendants strongly dispute this legal conclusion. In fact, in M&A West, the court recognized that the routine activities of lawyers, who are not “commonly regarded as broker[s]” such as “draft[ing] documents and orchestrat[ing] transactions” is insufficient, on 18 In Reves v. Ernst & Young, 494 U.S. 56 (1990), this issue was addressed as part four of the “family resemblance” test: The presence of an alternative regulatory regime which “significantly reduces the risk of the instrument, thereby rendering the application of the Securities Act unnecessary.” Id. In the context of attorneys and their clients, the various state bars fill this role. 19 In Benger, although one of the defendants, Powers, happened to be an attorney, the court’s finding that he qualified as a broker was unrelated to any legal work performed on behalf of investors. Rather, the court found Powers qualified as a broker because, in pertinent part, he acted as the “escrow agent”—selected by the agents and dealers (not the investors)—and received compensation triggered by the performance of his duties as an escrow agent. Benger, 697 F.Supp.2d at 937 (“As compensation for his duties as escrow agent, Powers received the greater of one percent of the gross proceeds from the sale of all shares or $5,000.”). Benger is therefore distinguishable from this case. Most importantly, unlike the defendant there, Feng was: (a) retained by clients seeking immigration assistance, not selected by the regional centers or any other party; (b) not the escrow agent; (c) compensated only upon the achievement of his client’s goals (a green card), not the sale of securities. Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 25 of 31 Page ID #:8050 Case No. 15-cv-03101-CRB -20- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 its own, to give rise to broker liability. The SEC’s attempts to transform such routine “lawyering” activity into “brokering” activity is unpersuasive.20 In fact, attorneys are already expressly exempt from other financial regulations applicable to Investment Advisors. Although 11 U.S.C. §80b-2(a)(11) defines an “Investment Advisor” as “any person who… engages in the business of advising others… as to the value of securities or as to the advisability of investing in, purchasing, or selling securities…,” lawyers are expressly excluded from this definition so long as their “performance of such services [are] solely incidental to the practice of [their] profession.” 11 U.S.C. §80b-2(a)(11)(B). Although this same exemption is not expressly stated in the Exchange Act, the underlying rationale is the same. Since lawyers are often called on by their clients to provide advice on a variety of financial matters and since they are already held to heightened fiduciary duties in their dealings with their clients, subjecting them to regulation as “brokers” or “investment advisors” would serve little purpose. E. Defendants Did Not Commit Securities Fraud. The SEC’s first claim is brought under § 17(a) of the Securities Act, which prohibits fraud in the offer or sale of securities. 15 U.S.C. § 77q(a). The SEC’s second claim is brought under § 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibits fraud in connection with the purchase or sale of any security. 15 U.S.C. § 78j(b) (hereafter, “§ 10(b)(5)”). This section makes it unlawful for any person to use “manipulative or deceptive devices” in connection with the purchase or sale of securities. Among other things, when the SEC brings a § 10(b)(5) claim, it must establish the following: (1) a material misrepresentation or omission of fact, (2) scienter, and (3) a connection with the purchase or sale of a security. See, e.g., In re Daou Sys., Inc., 411 F.3d 1006, 1014 (9th Cir. 2005). 20 Finally, the SEC’s Persons Deemed Not to Be Brokers, Exchange Act Release No. 22172, 33 SEC Docket 686, 50 FR 27940 (June 27, 1985) does not apply because Feng was never “retained by an issuer,” let alone “for the purpose of selling securities to the public.” To the contrary, he was retained by clients seeking immigration counsel, for the purpose of helping them obtain green cards. Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 26 of 31 Page ID #:8051 Case No. 15-cv-03101-CRB -21- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Materiality, in the context of securities fraud, is measured by a reasonable investor standard. United States v. Berger, 473 F.3d 1080, 1100 (9th Cir.2007). Moreover, the determination of whether an omission is “material” is a determination that “requires delicate assessments of the inferences a reasonable [investor] would draw from a given set of facts and the significance of those inferences to him, and these assessments are peculiarly ones for the trier of fact.” Fecht v. Price Co., 70 F.3d 1078, 1080 (9th Cir. 1995)(quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450 (1976); accord United States v. Gaudin, 515 U.S. 506, 511-512 (1995) (materiality is an “application-of-legal-standard-to-fact sort of question ... [that] has typically been resolved by juries”); Kaplan v. Rose, 49 F.3d 1363, 1375 (9th Cir.1994) (“materiality” is a “fact-specific issue which should ordinarily be left to the trier of fact”), cert. denied, 516 U.S. 810 (1995). Therefore, only if the adequacy of the disclosure or the materiality of the statement is “so obvious that reasonable minds [could] not differ” are these issues “appropriately resolved as a matter of law.” Durning v. First Boston Corp., 815 F.2d 1265 (9th.Cir. 1987); accord TSC Indus., 426 U.S. at 450. 1. The Contingent Finder’s Fee is Not “In Connection With” the Purchase or Sale of Security Unlike typical “transaction-based compensation,” the finder’s fee here is based on an immigration event, not on the purchase or sale of any alleged securities. (UF 42–43.) It has nothing to do with the value or nature of the alleged securities themselves or with the risks associated with them, nor does payment of the fee coincide with the purchase or sale of any securities. In Falkowski v. Imation Corp., 309 F.3d 1123 (9th Circuit 2002), the court held: the fraud in question must relate to the nature of the securities, the risks associated with their purchase or sale, or some other factor with similar connection to the securities themselves. While the fraud in question need not relate to the investment value of the securities themselves, it must have more than some tangential relation to the securities transaction. Id., 1131. “Misrepresentation occurs “in connection with” the purchase or sale of a covered security if “the fraud and the stock sale coincide or are more than tangentially related.” Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 27 of 31 Page ID #:8052 Case No. 15-cv-03101-CRB -22- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Freeman Investments, LP v. Pacific Life Ins. Co., 704 F.3d 1110 (9th Cir. 2013), citing Madden v. Cowen & Co., 576 F.3d 957, 966 (9th Cir. 2009). Since the contingent fee payment is related solely to the approval of an immigrant’s visa, it is not “in connection with” the purchase or sale of securities, Mr. Feng cannot be held liable for any securities fraud violations, and he is entitled to summary judgment. 2. Mr. Feng’s Failure to Disclose the Fact He Was Being Compensated by The Regional Centers Was Not Material to His Clients. As it relates to the alleged fraud by Mr. Feng against the individual EB-5 Investors, the SEC’s theory of liability is based on the notion that Mr. Feng’s failure to disclose to his clients that he was entitled to a commission payment from the Regional Centers in the event the client actually obtained a visa somehow created a conflict of interest … and that this fact alone would have been material to a reasonable investor.21 However, this argument ignores the fact that the particular investor was charged an additional “administrative” or “marketing” fee regardless of whether or not Mr. Feng or his firm received a commission payment from the regional center. (UF 27, 49.) In other words, any commission fee paid to Mr. Feng or his firm had absolutely no effect on the final cost to Mr. Feng’s clients of making the underlying investment. Given that fact, there is absolutely no reason to believe that this fact should have been material to a reasonable investor. And Mr. Feng’s clients, themselves, confirm this was not material. (UF 50, 52, 75.) In Ettinger v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 835 F. 2d 1031 (3rd Cir. 1987), the court addressed the materiality of the undisclosed markups in a securities transaction and held that “[t]he SEC has established through its enforcement actions the principle that charging undisclosed excessive commissions constitutes fraud.” This fraud is avoided only by charging a price which bears a reasonable relation to the prevailing price or disclosing such information as will permit the customer to make an informed judgment upon whether or not he will complete the transaction.” In re Duker & Duker, 8 S.E.C. 386, 388-89 21 The legal standard for materiality is discussed in section III.E above, and is expressly incorporated herein by this reference. Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 28 of 31 Page ID #:8053 Case No. 15-cv-03101-CRB -23- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 (1939). The SEC has continually adhered to this position, see, e.g., In re Associated Secs. Corp., 40 S.E.C. 10, 14 (1960), which has also received judicial approval. Charles Hughes & Co. v. Securities & Exch. Comm'n, 139 F.2d 434, 437 (1943), cert. denied, 321 U.S. 786, 64 S.Ct. 781, 88 L.Ed. 1077 (1944). In SEC v. Rauscher Pierce Refsnes, Inc., 17 F.Supp.2d 985 (D.Ariz. 1998), the district reasoned that “Plaintiff must first establish that Defendants had an affirmative duty to disclose the markup. There can be no question that broker-dealers have an obligation under federal securities laws to disclose markups that may be deemed excessive. See SEC v. Feminella, 947 F.Supp. 722, 729 (S.D.N.Y.1996). This duty arises because there is an implied representation by broker-dealers when they hang out their shingle to do business that they are charging their customers securities prices that are reasonably related to the prices charged in an open and competitive market. See Charles Hughes & Co. v. SEC, 139 F.2d 434, 437 (2d Cir. 1943). Broker-dealers that do not disclose that they are charging excessive markups are committing fraud. See SEC v. First Jersey, 101 F.3d 1450, 1469 (2d Cir. 1996). Thus, Defendants had a duty to disclose their markup only if it was excessive. Defendants contend that Plaintiff cannot establish a duty to disclose because the markup they charged was not excessive as a matter of law”. In light of these authorities, where the fees charged are not excessive, nondisclosure of such fees is not material. Here, it is undisputed that the finder’s fee in question is a standard industry practice. Regional centers regularly pay out such fees to immigration agents for referring clients to the regional centers. There is nothing excessive or unreasonable here. Mr. Feng did not charge his clients this fee. Regional centers paid this fee out of the administrative/management fees collected from the immigrant clients for getting into the EB-5 programs. Moreover, the amount of the administrative/management fees and how they may be used are all disclosed in the various PPMs, and even such minimal disclosure of the fact there were such fees may be sufficient to defeat a nondisclosure claim. (UF 20.) See US v. Laurienti, 611 F.3d. 530 (9th Cir. 2010) (even minimal disclosures can meet the broker’s obligation to disclose); Benzon v. Morgan Stanley Distributors, Inc., 420 F.3d 598 (6th Cir. Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 29 of 31 Page ID #:8054 Case No. 15-cv-03101-CRB -24- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 2005) (brokers met their disclosure obligations because of a prospectus disclosure that brokers “may receive different compensation for selling each Class of share”). And even if a disclosure might be required under certain circumstances, that disclosure is limited to material facts. US v. Laurienti, 611 F.3d. at 541. 3. The SEC’s Claim of Fraud Against the Regional Centers Fails Since The Record Does Not Support the Notion The Regional Centers Actually or Reasonable Relief on The Alleged Misrepresentations. The SEC’s fraud claims also fail as they relate to alleged fraud against the Regional Centers (referred to by the SEC as the “Promoters”), since the Regional Centers were fully aware of, or otherwise did not care about, the fact Mr. Feng was using various overseas “nominees” to receive commission payments to which Mr. Feng, himself, was entitled. (UF 57, 67.) As the SEC’s complaint readily concedes, the decision to begin using overseas “nominees” was driven not by Mr. Feng but by the Regional Centers, themselves, “in an apparent effort to avoid running afoul of broker-dealer registration requirements contained in federal securities laws.” (UF 58.) As a result, Mr. Feng began nominating certain family members and overseas companies to accept receipt of any commission payments earned. (UF 62.) All the regional centers the SEC deposed admitted they either didn’t care about this issue, or else didn’t inquire of Mr. Feng and failed to conduct any due diligence on their own on this issue. (UF 57, 62.) As such, it was logical for Mr. Feng to conclude the regional centers did not care about the identities or the job functions of Mr. Feng’s overseas agents or representatives during that time.22 F. The Disgorgement Amount Sought by The SEC is Inappropriate Given the Facts of the Case. In addition to seeking a permanent injunction, the SEC seeks a disgorgement of allegedly “ill-gotten gains” in the amount of $4,718,000 (according to the SEC’s summary 22 Defendants also incorporate by this reference the “in connection with” and “materiality” arguments discussed in section III.A.1, above. Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 30 of 31 Page ID #:8055 Case No. 15-cv-03101-CRB -25- DEFENDANTS’ MSJ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 motion). This number is derived from adding the $1,268,000 Defendants have allegedly already received in marketing fees to the $3,450,000 the SEC contends Defendants are entitled to receive upon approval of his clients I-526 petitions. The SEC bears the ultimate burden of persuasion that its disgorgement figure reasonably approximates the amount of unjust enrichment. SEC v. Platforms Wireless Int’l Corp., 617 F.3d 1072, 1096 (9th Cir. 2010). And, in this case, the SEC’s calculation wildly misses the mark. There is simply no legal basis for the SEC’s attempt to obtain disgorgement of moneys Defendants have not even yet received. The SEC cites no legal authority for the proposition, and this Court should not allow such “prospective” disgorgement. IV. CONCLUSION For all of the foregoing reasons, Defendants request their motion for summary judgment be granted in its entirety. Dated: January 31, 2017 By: HOLMES, TAYLOR & JONES LLP _____/s/ Andrew B. Holmes _________________ Andrew B. Holmes Attorneys for Defendants Hui Feng and Law Offices of Feng & Associates P.C Case 2:15-cv-09420-CBM-SS Document 66-1 Filed 01/31/17 Page 31 of 31 Page ID #:8056 -1- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 HOLMES, TAYLOR & JONES LLP Andrew B. Holmes (SBN: 185401) abholmes@htjlaw.com Matthew D. Taylor (SBN: 220032) matthew.taylor@htjlaw.com 617 South Olive Street, Suite 1200 Los Angeles, California 90014 Tel: (213) 985-2200 Fax: (213) 973-6282 Attorneys for Defendants Hui Feng and Law Offices of Feng & Associates P.C. UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION SECURITIES AND EXCHANGE COMMISSION, Plaintiff, vs. HUI FENG and LAW OFFICES OF FENG & ASSOCIATES P.C., Defendants. Case No. 2:15-cv-09420-CBM-SS [Hon. Consuelo B. Marshall] DEFENDANTS STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW IN SUPPORT OF MOTION FOR SUMMARY JUDGMENT Date: February 28, 2017 Time: 10:00 a.m. Ctrm: 8B, 8th Floor Judge: Hon. Consuelo B. Marshall [Motion for Summary Judgment and Declarations of Hui Feng and Andrew B. Holmes Filed Concurrently] Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 1 of 28 Page ID #:8057 -2- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence Background Information Regarding Defendants 1. In 1991, Hui Feng (“Feng”) came to the United States from China to study at Hamilton College on a full scholarship. Declaration of Hui Feng (“Feng Decl.”) ¶ 2. 2. In 1997, Feng graduated, and obtained a law degree, from Columbia University Law School in New York. Feng Decl. ¶ 2. 3. Since graduating from law school, Feng began advising certain clients regarding immigration matters. Feng Decl. ¶ 3. 4. In 2011, Feng incorporated his law office as defendant Law Offices of Feng & Associates P.C. (“LOFA”). Feng Decl. ¶ 3. 5. Beginning in 2010, Feng received inquiries from prospective clients in China concerning the EB-5 Immigrant Investor Program (“EB-5 Program”). Feng Decl. ¶ 4. 6. Since all of Feng’s clients originate from China, Feng set Feng Decl. ¶ 4. Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 2 of 28 Page ID #:8058 -3- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence up three offices in China in April 2013 to provide more convenient immigration services to them. 7. EB-5 clients currently represent approximately 5% of Feng’s legal clients and EB-5 related services generate roughly 15% of the revenue generated by LOFA. Feng Decl. ¶ 4. Background Information Regarding the the EB-5 Program 8. In 1990, Congress created the EB-5 visa category as part of the Immigration Act of 1990. 21 Pub. L. No. 101-649, tit. I, subtit. B, pt. 2, § 121, 104 Stat. 4978, 4989-94 (codified as amended at 8 U.S.C. §§ 1153(b)(5), 1186b). The new category, the Senate Judiciary Committee explained, was “intended to create new employment for U.S. workers and to infuse new capital into the country.” The statute is administered by the United S. Rep. 101-55, 101st Cong., 1st Sess. (June 19, 1989). Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 3 of 28 Page ID #:8059 -4- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence States Citizenship and Immigration Services, commonly referred to as “USCIS.” 9. The USCIS pre-approves many entities called “regional centers” to pool investors’ funds together to invest in job-creating projects. Feng Decl. ¶ 5. 10. Prior to becoming personally involved in the EB-5 industry, Feng conducted extensive research on the hundreds of regional centers located throughout the United States in an attempt to determine which of them had the best track record in obtaining green cards for their investors. As a result of this research, Feng identified approximately 10 to 20 different regional centers in whose projects Feng feel comfortable advising his clients to invest. Feng Decl. ¶ 6. 11. To date, Feng has advised approximately 150 of his clients Feng Decl. ¶ 17; Feng Decl., Ex. 1 (client spreadsheet). Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 4 of 28 Page ID #:8060 -5- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence regarding the EB-5 visa process and who ultimately chose to go forward with an EB-5 investment. 12. Of those clients, approximately 30 have already green cards or two-year provisional visas as a result of their investment, approximately 80 are on track to receive their green cards (i.e., they have received their I-526 approvals and are currently on the waiting list to obtain provisional two-year visas), and approximately 40 clients are waiting for their applications to be adjudicated by USCIS. Feng Decl. ¶ 17. 13. In short, Feng has a 100% success rate. Feng Decl. ¶ 17. 14. The average rate for obtaining I- 829 approvals for EB-5 investors, for years 2008 through 2016, is 77%. Feng Decl. ¶ 17; RJN Ex. I; Ex. J. 15. Feng attributes his high success rate to his extensive due diligence on the regional centers Feng Decl. ¶ 18. Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 5 of 28 Page ID #:8061 -6- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence before advising his clients to invest in EB-5 projects. Feng also only advises clients to invest in projects that he think have a high probability of success. 16. Using this criteria, Feng has identified approximately 10 to 20 regional centers with which he feels have the best track record in obtaining green cards for EB-5 project participants. Feng Decl. ¶ 6. 17. Feng’s clients have invested in a total of 30 separate investment projects, all of which have been structured as limited partnerships, with the EB-5 investor becoming a “limited partner” in the partnership and the regional center, or a related entity, serving as the general partner. Feng Decl. ¶ 13. 18. These projects have been conducted through 10 separate regional centers. Feng Decl. ¶ 13. Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 6 of 28 Page ID #:8062 -7- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence 19. In nearly all cases, Feng’s clients initiated the contact through referrals by Feng’s existing clients or after reading his online blog articles about the EB-5 Program, or legal services advertisements in Chinese publications. Feng Decl. ¶ 21; Holmes Decl. Ex. 15 (Peng Inv. Test.) at 13:4–14:2 (found Feng through an advertisement placed in the Chinese-language newspaper, World Daily, advertising Feng’s immigration services); Ex 13 (Guo Inv. Test) at 12:21–13:4 (found Feng through an online Chinese advertisement and articles written by Feng). 20. Investors received Private Placement Memorandums (“PPMs”) prior to participating in any EB-5 project offering. Feng Decl. ¶ 12; Holmes Decl. Ex. 12 (Ekins depo. at 25:24-26:2), Ex. 14 (Ostar depo. at 29:2-5; 26:3-5). 21. Although the terms of each of the investments is slightly different, each of them were effectively structured as loans rather than equity investments, meaning that rather than sharing in the profits and losses of the project, an investor is offered a fixed rate of return, or interest rate, on the money invested. Feng Decl. ¶ 13–16. 22. EB-5 project investors expected an annual return on their capital Holmes Decl. Ex. 12 (Ekins Depo.) at 27:12-15 (annual return of 0.5%)); Ex. Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 7 of 28 Page ID #:8063 -8- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence contributions that ranged from 0.5% to 2%—and, in one, apparently special, case 5%— for a specified period of time. 10 (Bao Inv. Test. at 18:20-25 (5% return on investment); 34:20-35:12 (last year’s return was 6%))1; Ex. 14 (Ostar depo. at 37:17-38:20 (return on EB-5 Capital securities ranged from 0.5% to 1% annually); 20:4-14 (some regional centers provide higher returns that that)); Declaration of David M. Morris ¶¶ 3, 18 (ECF No. 63) (return on DCRC-Skyland and DCRC-SWW’s offerings was 0.5%)). 23. The typical rate is 1% or less. Feng Decl. ¶ 13. 24. In the case of the Western Regional Center (“WRC”) Genesis EB-5 Project, which approximately 27 of Feng’s clients chose, the project was structed in such a way that there was no possibility that investors (i.e., limited partners) would receive more than their $500,000 investment. Feng Decl. ¶ 13; Holmes Decl., Ex. 11 (Hee-Sung Yun Inv. Test.) at 17:25– 19:19. 1 However, according to the terms of the PPM for Bao’s project, anything in excess of 5% was paid to the general partner. Additionally, the general partner (the regional center) was entitled to the first 1.25% of interest generated by the project’s loans. Feng Decl., Ex. 83 (CMB 12 PPM) at p.6 (under heading “Distributions,” funds to limited partners are “not to exceed 5%” and the general partner is guaranteed a payment of “not less than 1.25%.”). Accordingly, for Bao to receive the maximum 5%, the project must return an annual profit of at least 6.25%. Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 8 of 28 Page ID #:8064 -9- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence 25. In addition to the minimum investment amount of $500,000 required to make an EB-5 investment, all investors are required to pay a “marketing” fee directly to the regional center. Feng Decl. ¶ 14; Holmes Decl. Ex. 12 (Ekins Depo.) at 88:3–89:6 (the only time Ekins recalls when investors did not pay an administrative fee was when they accepted investors from another EB-5 project “that were left stranded” and had already paid an administrative fee to another regional center); id.at 92:6–14. 26. These fees, which range from $25,000 to $50,000, were set by the regional centers without Feng’s input. Feng Decl. ¶ 14. 27. All EB-5 investors were required to pay these fees to the regional centers, regardless of whether any portion of this fee was subsequently paid to Feng as a referral fee. Feng Decl. ¶ 22 (fees are “mandatory”); Holmes Decl. Ex. 12 (Ekins Depo.) at 88:3–89:6 (the only time Ekins recalls when investors did not pay an administrative fee was when they accepted investors from another EB-5 project “that were left stranded” and had already paid an administrative fee to another regional center). EB-5 Project Offerings Are Not “Securities” 28. Most if not all of the foreign investors are perfectly willing to lose their capital contributions if Feng Decl. ¶¶ 9, 20; Declaration of Qimeng Zhang, (ECF No. 18-1) ¶ 2; Declaration of Qinglan Lu, (ECF No. Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 9 of 28 Page ID #:8065 -10- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence it means getting a visa and green card. 18-2) ¶ 2; Declaration of Xuanrui Chen, (ECF No. 18-3) ¶ 2; Declaration of Yunling Zhang, (ECF No. 18-4) ¶ 2; Declaration of Boning Li, (ECF No. 18- 5) ¶ 2; Declaration of Jianjun Peng, (ECF No. 18-6) ¶ 2; Declaration of Xiangyang Guo, (ECF No. 18-7) ¶ 2; Declaration of Bin Cheng, (ECF No. 18-8) ¶ 2; Declaration of Cankun Cai, (ECF No. 18-9) ¶ 2; Declaration of Feng Xue, (ECF No. 18-10) ¶ 2; Declaration of Genling Liang, (ECF No. 18-11) ¶ 2; Declaration of Hui Liao, (ECF No. 18-12) ¶ 2; Declaration of Jin Wang, (ECF No. 18-13) ¶ 2; Declaration of Jun Hu, (ECF No. 18- 14) ¶ 2; Declaration of Li Li, (ECF No. 18-15) ¶ 2; Declaration of Min Zhou, (ECF No. 18-16) ¶ 2; Declaration of Qiang Zhou, (ECF No. 18-17) ¶ 2; Declaration of Qing Zhao, (ECF No. 18-18) ¶ 2; Declaration of Shasha Zeng, (ECF No. 18-19) ¶ 2; Declaration of Shujuan Li, (ECF No. 18-20) ¶ 2; Declaration of Weifeng Li, (ECF No. 18-21) ¶ 2; Declaration of Xiaoyu Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 10 of 28 Page ID #:8066 -11- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence Zhang, (ECF No. 18-22) ¶ 2; Declaration of Xinxing Zhang, (ECF No. 18-23) ¶ 2; Declaration of Yong Zhang, (ECF No. 18-24) ¶ 2; Declaration of Yue Chen, (ECF No. 18- 25) ¶ 2; Declaration of Zhihui Sun, (ECF No. 18-26) ¶ 2; Declaration of Zhitong Chen, (ECF No. 18-27) ¶ 2; Declaration of Zhong Wu, (ECF No. 18-28) ¶ 2; [Client Testimony]; RJN, Ex. [] (Sanjay Bhatt, “Money from investor visas floods U.S., but doesn’t reach targeted poor areas,” The Seattle Times (March 7, 2015)); see also RJN, Ex. W (Lornet Turnbull, “Wealthy immigrants can invest way to visas,” The Seattle Times (December 10, 2011)). 29. With the possible exception of Fenglei Bao, the effect of these mandatory marketing fees, set unilaterally by the regional centers, was to make investment in each of the EB-5 projects in which Feng was involved Feng Decl. ¶¶ 10, 13–16. Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 11 of 28 Page ID #:8067 -12- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence “unprofitable,” at least in a monetary sense. 30. This is because any “profit” reflected in the project’s stated rate of return was outweighed by the amount of the mandatory marketing fee paid by the investor. The only (possible) exception to this is Fenglei Bao, who chose a project that required a $1 million capital investment. Feng Decl. ¶¶ 15, 16. 31. Accordingly, even if a project were “successful,” Feng’ clients received less money back from the regional centers than they paid the regional center to make the investment, meaning that no “profit” was earned. Feng Decl. ¶¶ 11, 15. 32. With the possible exception of Fenglei Bao, Feng’s clients did not care about obtaining a profit—and understood that the minimal income they received would not cover the costs of participating in the EB-5 Feng Decl. ¶¶ 9, 20; Holmes Decl. Ex. 12 (Ekins Depo.) at 98:2–15(based on his “discussions with many investors,” Ekins says “this is an investment that they’re making in order to earn a green card. It’s not a for-profit investment.”); id. at 98:17–23 (in “[a]ll EB-5 cases, Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 12 of 28 Page ID #:8068 -13- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence Program. Their overriding concern was obtaining permanent residency rather than earning a financial return. the profit earned is outweighed by the administrative fee that is paid by the investor); Ex. 16 (Zhang Depo.) at 50:12–21 (client’s “expectation was I hoped they could return the principal to me and also getting the green card”); Ex. 17 (Jin Depo.) at 51:24–52:20 (even after prodding by SEC, asking whether client was upset by Feng’s receipt of a fee, client responds: “[M]y main goal is to get the green card. So what happened between him, Mr. Feng, and CMB [the regional center], I did not want to learn more. It doesn’t really matter to me….”); Ex. 15 (Peng Inv. Test.) at 17:25–18:7 (“All I cared about was whether this program could allow me to appy for EB-5, so my child nad I could come to the states and my child could study here. That’s all I cared about.”); Declaration of Qimeng Zhang, (ECF No. 18-1) ¶ 2; Declaration of Qinglan Lu, (ECF No. 18-2) ¶ 2; Declaration of Xuanrui Chen, (ECF No. 18-3) ¶ 2; Declaration of Yunling Zhang, (ECF No. 18-4) ¶ 2; Declaration of Boning Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 13 of 28 Page ID #:8069 -14- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence Li, (ECF No. 18-5) ¶ 2; Declaration of Jianjun Peng, (ECF No. 18-6) ¶ 2; Declaration of Xiangyang Guo, (ECF No. 18-7) ¶ 2; Declaration of Bin Cheng, (ECF No. 18-8) ¶ 2; Declaration of Cankun Cai, (ECF No. 18-9) ¶ 2; Declaration of Feng Xue, (ECF No. 18- 10) ¶ 2; Declaration of Genling Liang, (ECF No. 18-11) ¶ 2; Declaration of Hui Liao, (ECF No. 18-12) ¶ 2; Declaration of Jin Wang, (ECF No. 18- 13) ¶ 2; Declaration of Jun Hu, (ECF No. 18-14) ¶ 2; Declaration of Li Li, (ECF No. 18-15) ¶ 2; Declaration of Min Zhou, (ECF No. 18-16) ¶ 2; Declaration of Qiang Zhou, (ECF No. 18-17) ¶ 2; Declaration of Qing Zhao, (ECF No. 18-18) ¶ 2; Declaration of Shasha Zeng, (ECF No. 18-19) ¶ 2; Declaration of Shujuan Li, (ECF No. 18-20) ¶ 2; Declaration of Weifeng Li, (ECF No. 18-21) ¶ 2; Declaration of Xiaoyu Zhang, (ECF No. 18-22) ¶ 2; Declaration of Xinxing Zhang, (ECF No. 18-23) ¶ 2; Declaration of Yong Zhang, (ECF No. 18-24) ¶ 2; Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 14 of 28 Page ID #:8070 -15- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence Declaration of Yue Chen, (ECF No. 18- 25) ¶ 2; Declaration of Zhihui Sun, (ECF No. 18-26) ¶ 2; Declaration of Zhitong Chen, (ECF No. 18-27) ¶ 2; Declaration of Zhong Wu, (ECF No. 18-28) ¶ 2. 33. George Ekins, who has been involved in approximately 10 EB-5 projects, each with a number of investors ranging from 15 to 800, testified that in no case has an EB-5 investor actually earned more in profit than he or she paid out in the administrative fee. Holmes Decl. Ex. 12 (Ekins Depo.) at 99:4–18. 34. Representatives of regional centers also acknowledge that EB-5 Program participants would not invest if they could not get a green card. Holmes Decl., Ex. 14 (Ostar Depo.) at 166:3–20 (acknowledging that the possibility of obtaining a green card “is a necessary part or important part of an investor deciding to invest in one of these projects”); Ex. 12 (Ekins Depo.) at 98:2–15 (based on his “discussions with many investors,” Ekins says “this is an investment that they’re making in order to earn a green card. It’s not a for- profit investment.”); Holmes Decl. Ex. Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 15 of 28 Page ID #:8071 -16- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence 18 (Schwigen Inv. Test.) at 30:5–22 (noting that, “to be successful,” an EB- 5 project is “not a true financial transaction. It’s somebody that’s focused upon immigration and green card.”); 31:14–32:3 (“the primary focus of every EB-5 investor, is obtaining permanent residency”) Feng was not required to register as a “broker” 35. Feng has never sold securities and is not a registered financial advisor or broker. Feng Decl. ¶¶ 19, 25. 36. Feng’s role in the EB-5 process is simply that of a lawyer advising his clients regarding the best way to obtain their legal objective- permanent residency. Feng Decl. ¶¶ 4, 19–21. 37. Feng did not provide investment advice to clients. Feng Decl. ¶¶ 19–20. 38. Feng never organized any seminars or sent any unsolicited emails or made any unsolicited phone calls to anyone about EB- 5 programs. Feng Decl. ¶ 21. Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 16 of 28 Page ID #:8072 -17- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence 39. Feng advised his clients as to those projects he considered most likely to comply with the USCIS’ requirements for job creation and therefore to fulfill his clients’ objective of resulting in permanent residency (e.g., whether they have done projects before and how successful those projects were in terms of returning green cards to EB-5 project participants). Feng Decl. ¶¶ 6, 20. 40. When Feng, or his employees, presented lists of EB-5 projects to clients, those projects were chosen based on the likelihood of obtaining a green card, not prioritized based on whether, and how much, of a fee Feng would receive. Feng Decl. ¶ 20; Holmes Decl. Ex. 15 (Peng Inv. Test.) at 18:8–11 (Feng’s employee didn’t recommend any of the five or six EB-5 projects more highly than any others) 41. Some of Feng’s clients who became EB-5 project participants came to him seeking general legal advice, Feng Decl. ¶ 20. Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 17 of 28 Page ID #:8073 -18- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence with the goal of obtaining a green card. 42. The fees Feng received from regional centers were not contingent upon the client’s agreeing to invest money with a regional center’s EB-5 project. Feng Decl. ¶ 29. 43. Feng’s interest in receiving fees from regional centers was aligned with his clients’ interest in obtaining green cards, as in every case, Feng’s receipt of the fee was contingent upon the approval of the clients’ application by USCIS. Feng Decl. ¶ 29; Holmes Decl. Ex. 12 (Ekins Depo.) at 95:21–23, 96:8–12, 97:5–12 (finder’s fee isn’t earned until the investor is approved by USCIS). 44. In three isolated incidents, a client would wire funds to Feng, who would then transfer the funds to the escrow agent specified by the regional center. Feng Decl. ¶ 23. 45. In all other cases, however, the client would transfer funds directly to the escrow agent specified by the regional center. This was standard practice for Feng’s EB-5 Program clients. Feng Decl. ¶ 23; Holmes Decl. Ex. 12 (Ekins Depo.) at 93:16–22 (Feng did not handle investors funds in any of the projects or offerings in which Ekins was involved); id. At 94:6–10 (Ekins understanding was that it was the Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 18 of 28 Page ID #:8074 -19- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence general practice for investors to wire the funds directly to ADF’s accounts when they were making an investment). 46. Feng was not involved in negotiating the financial terms of his EB-5 Project clients’ investments with regional centers. Feng Decl. ¶ 22. 47. EB-5 investments made by Feng’s clients were not made utilizing securities “exchanges” of any kind. Rather, these investments were all made via communications and documents transmitted directly from the regional centers to Feng, acting on behalf of his clients. Feng Decl. ¶ 33. 48. Feng was not an employee of the issuer(s) of EB-5 Project offerings. Feng Decl. ¶ 7. Feng Did Not Defraud his Clients 49. Each of Feng’s clients was contractually obligated to pay the regional center an additional “administrative” or “marketing” fee regardless of whether or not Feng Decl. ¶¶ 14, 22. Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 19 of 28 Page ID #:8075 -20- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence Feng or his firm received a commission payment from the regional center. 50. None of Feng’s clients think they were defrauded and do not believe the payment of referral fees was material. Feng Decl. ¶¶ 31–32; Declaration of Qimeng Zhang, (ECF No. 18-1) ¶ 1; Declaration of Qinglan Lu, (ECF No. 18-2) ¶ 1; Declaration of Xuanrui Chen, (ECF No. 18-3) ¶ 1; Declaration of Yunling Zhang, (ECF No. 18-4) ¶ 1; Declaration of Boning Li, (ECF No. 18- 5) ¶ 1; Declaration of Jianjun Peng, (ECF No. 18-6) ¶ 1; Declaration of Xiangyang Guo, (ECF No. 18-7) ¶ 1; Declaration of Bin Cheng, (ECF No. 18-8) ¶ 1; Declaration of Cankun Cai, (ECF No. 18-9) ¶ 1; Declaration of Feng Xue, (ECF No. 18-10) ¶ 1; Declaration of Genling Liang, (ECF No. 18-11) ¶ 1; Declaration of Hui Liao, (ECF No. 18-12) ¶ 1; Declaration of Jin Wang, (ECF No. 18-13) ¶ 1; Declaration of Jun Hu, (ECF No. 18- 14) ¶ 1; Declaration of Li Li, (ECF No. 18-15) ¶ 1; Declaration of Min Zhou, (ECF No. 18-16) ¶ 1; Declaration of Qiang Zhou, (ECF No. 18-17) ¶ 1; Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 20 of 28 Page ID #:8076 -21- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence Declaration of Qing Zhao, (ECF No. 18-18) ¶ 1; Declaration of Shasha Zeng, (ECF No. 18-19) ¶ 1; Declaration of Shujuan Li, (ECF No. 18-20) ¶ 1; Declaration of Weifeng Li, (ECF No. 18-21) ¶ 1; Declaration of Xiaoyu Zhang, (ECF No. 18-22) ¶ 1; Declaration of Xinxing Zhang, (ECF No. 18-23) ¶ 1; Declaration of Yong Zhang, (ECF No. 18-24) ¶ 1; Declaration of Yue Chen, (ECF No. 18- 25) ¶ 1; Declaration of Zhihui Sun, (ECF No. 18-26) ¶ 1; Declaration of Zhitong Chen, (ECF No. 18-27) ¶ 1; Declaration of Zhong Wu, (ECF No. 18-28) ¶ 1; Holmes Decl. Ex. 10 (Bao. Inv. Tr.) at 32:12–22. 51. As of February 2015, Feng began fully disclosing his receipt of a referral fee in his engagement agreements with clients. Feng Decl. ¶ 48. 52. Since beginning to include this disclosure in his engagement agreements, Feng has not noticed any significant change Feng Decl. ¶ 31. Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 21 of 28 Page ID #:8077 -22- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence in his clients requesting that a portion of the referral fee be rebated to them. 53. The administrative fees, like all other financial terms of the EB- 5 project offerings, as they relate to the EB-5 project investors, were set by the regional centers. Feng Decl. ¶ 22; Holmes Decl. Ex. 12 (Ekins Depo.) at 92:6–14. 54. Feng did not set the administrative fees. Feng Decl. ¶ 22; Holmes Decl. Ex. 12 (Ekins Depo.) at 92:6–14. 55. Feng did not voluntarily disclose that he would, in most cases, receive a portion of the administrative fee. Feng Decl. ¶ 30. 56. However, if a client asked if Feng received a referral fee, he would tell them the truth. Feng Decl. ¶ 30. Feng Did Not Defraud the Regional Centers 57. The regional centers, themselves, were either fully aware of, or did not care about, the fact that Feng was using various overseas “nominees” to receive commission payments Feng Decl. ¶ 27; Holmes Decl. Ex. 12 (Ekins Depo.) at 101:18–102:2 (Ekins did not feel deceived in any way in connection with the payments ADF made to Feng) Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 22 of 28 Page ID #:8078 -23- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence to which Feng, himself, was entitled. 58. The decision to begin using overseas “nominees” was driven not by Feng but by the regional centers, themselves. Complaint ¶ 76; Feng Decl. ¶ 27. 59. Some of the at-issue EB-5 project offerings involve, or implicate, fees from, and agreements between, regional centers and Atlantic Business Consulting, Limited (“ABCL”). Feng Decl. ¶¶ 24–25. 60. ABCL is a Hong Kong entity that Feng formed in April 2014. Feng Decl. ¶ 25. 61. Feng formed ABCL to formalize the separation between the legal services he provided to his EB-5 Program clients and other services (though it is Defendants’ belief such a separation was and remains unnecessary). Feng Decl. ¶ 25. 62. Prior to the creation of ABCL, if a regional center asked for an overseas payee, Feng would Feng Decl. ¶ 27. Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 23 of 28 Page ID #:8079 -24- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence identify family members and overseas companies. 63. At the time it was established, Feng was the sole owner of ABCL and opened ABCL’s bank account. Now, Feng owns 50% of ABCL. Feng Decl. ¶ 26. 64. Feng has not personally benefitted from any funds paid to ABCL. Those funds are used to pay ABCL’s operating expenses, including the salaries of ABCL employees. Feng Decl. ¶¶ 26, 28. 65. A portion of the funds held and owned by ABCL have been by Feng and used to pay Defendants’ litigation costs, due to the fact that the SEC’s complaint puts ABCL’s property at risk. Feng Decl. ¶¶ 28, 35. 66. ABCL has 4 employees in China. Feng Decl. ¶ 25. 67. The regional centers, themselves, were either fully aware of, or did not care about, Feng Decl. ¶ 27; Holmes Decl., Ex. 14] (Ostar Depo.) at 150:9–151:6. Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 24 of 28 Page ID #:8080 -25- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence the fact that Feng was the primary owner of ABCL. The Exceptional Case of Fenglei Bao 68. Unlike all of Feng’s other EB-5 Program clients, Fenglei Bao (“Bao”) chose a program that required a capital contribution of $1 million—double what other clients were required to provide. Feng Decl. ¶ 16; Holmes Decl. Ex. 10 (Bao. Inv. Tr.) at 16:25–17:3; Feng Decl., Ex. 83 (CMB 12 PPM) at p.2 (next to heading “The Offering:”). 69. Bao understood that the typical EB-5 project offering offered a low rate of return. Holmes Decl. Ex. 10 (Bao. Inv. Tr.) at 15:25–16:3. 70. Unlike all of Feng’s other EB-5 Program clients, Bao wanted an EB-5 project offering that was an actual investment that would return a significant profit. Holmes Decl. Ex. 10 (Bao. Inv. Tr.) at 15:21–16:3. 71. Notably, Bao never informed Feng of these criteria. Holmes Decl. Ex. 10 (Bao. Inv. Tr.) at 16:4–8. 72. Based on his criteria (undisclosed to Feng), Bao chose a project that would provide a maximum rate of return of 5% annually, but required a $1 million capital Feng Decl. ¶ 16, Ex. 83 (CMB 12 PPM) at p.1 (next to the heading “The Offering”), id. at p.6 (under heading “Distributions,” funds to limited partners are “not to exceed 5%” and the Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 25 of 28 Page ID #:8081 -26- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 Defendants’ Undisputed Facts Defendants’ Supporting Evidence contribution plus a $45,000 “Syndication Fee” (the administrative fee). general partner is guaranteed a payment of “not less than 1.25%.”). 73. According to the terms of the PPM for Bao’s project, anything in excess of 5% was paid to the general partner. Additionally, the general partner (the regional center) was entitled to the first 1.25% of interest generated by the project’s loans. Thus, for Bao to receive the maximum 5%, the project must return an annual profit of at least 6.25%. Feng Decl., Ex. 83 (CMB 12 PPM) at p.6 (under heading “Distributions,” funds to limited partners are “not to exceed 5%” and the general partner is guaranteed a payment of “not less than 1.25%.”). 74. Unlike Feng’s other clients, Bao might have been concerned about Feng’s receipt of a fee from the regional center (CMB). Holmes Decl. Ex. 10 (Bao. Inv. Tr.) at 32:3–6. 75. However, Bao also told the SEC that, had he known of Feng’s receipt of the fee, it would not have affected his choice of the EB-5 project because that fee did not affect the safety of the investment or the potential interest rate. Holmes Decl. Ex. 10 (Bao. Inv. Tr.) at 32:12–22. Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 26 of 28 Page ID #:8082 -27- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 CONCLUSIONS OF LAW A. The EB-5 Investments Are Not Securities 1. All of Plaintiff’s claims are contingent upon the EB-5 Investments that Feng’s clients participated in being securities. 2. The EB-5 investments are not securities under federal securities law. 3. Since these investments were not motivated by a desire to obtain profits, but rather by the desire to obtain permanent residence status in the United States, they are not securities. 4. Whether applying subjective or objective factors, Defendants’ EB-5 clients had no expectation of profit. B. Feng Was Not Required to Register as a Broker 5. The Exchange Act does not require a person to register as a “broker” unless the person is effecting transactions on domestic “exchanges.” Because the EB- 5 project offerings are not traded on exchanges, and because Feng has never traded in securities, he was not required to register as a broker. 6. Additionally, Feng’s activities—primarily legal advice concerning immigration-related issues—do not give rise to broker liability. 7. As a matter of public policy, subjecting attorneys to broker registration makes little sense, given the already heightened fiduciary duties attorneys already owe to their clients. C. Defendants Did Not Commit Securities Fraud 8. Defendants did not commit securities fraud because the contingent finders fees that Feng received were not “in connection with” the purchase or sale of a security. 9. Feng’s failure to disclose the fact that he was being compensated by the regional centers was not material to his clients. 10. The SEC’s claims, based on fraud against the regional centers, fails since Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 27 of 28 Page ID #:8083 -28- STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 H ol m es , T ay lo r & Jo n es L LP 61 7 So ut h O liv e St re et , S ui te 12 00 Lo s A ng el es , C al ifo rn ia 9 00 14 the record does not support the notion that the regional centers actually or reasonably relied on the alleged misrepresentations. D. The Disgorgement Amount Sought by the SEC Is Inappropriate Given the Facts of the Case 11. There is no legal basis for the SEC’s attempt to obtain disgorgement of funds that Defendants have not even yet received. Dated: January 31, 2017 HOLMES, TAYLOR & JONES LLP ____/s/ Andrew B. Holmes ______________ Andrew B. Holmes Attorneys for Defendants Hui Feng and Law Offices of Feng & Associates P.C. Case 2:15-cv-09420-CBM-SS Document 66-2 Filed 01/31/17 Page 28 of 28 Page ID #:8084