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SEC v. JT Wallenbrock & Assocs.

United States Court of Appeals for the Ninth Circuit

October 17, 2005, Argued and Submitted, Pasadena, California ; March 10, 2006, Filed

No. 04-55100


 [*1111]  FISHER, Circuit Judge:

At issue is an order entered against parties to a securities pyramid or Ponzi scheme, requiring the principal and his two companies, jointly and severally, to disgorge millions of dollars that the district court found to be ill-gotten gains from their having defrauded numerous investors. The defendants are J.T. Wallenbrock & Associates ("Wallenbrock") and Citadel Capital Management Group, Inc. ("Citadel"), business entities that were organized and controlled by appellant-defendant Larry Osaki, the managing general partner of Wallenbrock and a 99.5 percent owner of Citadel (collectively "the defendants"). 1 Another appellant-defendant [**2]  is Van Ichinotsubo, an employee of both companies who solicited investors on their behalf and invested $ 1.2 million in Wallenbrock. 2 We affirm the district court's disgorgement order.

I. Factual and Procedural Background

 [**3]  From at least 1997 to October 2003, the defendants raised nearly $ 253.2 million from thousands of investors through the fraudulent sale of unregistered promissory notes. 4 [**4]  The defendants misrepresented to investors that they were using the proceeds of the notes, matched by Wallenbrock, to purchase accounts receivable of Malaysian latex glove manufacturing companies and that the investments would yield returns of 15-20 percent every 90 days. The defendants told investors that there was little or no risk in the Wallenbrock investments and emphasized the safety of profits. In fact, the defendants did not purchase such receivables but instead used the investors' funds to engage in a high-stakes Ponzi scheme and invest in speculative business ventures. 5

 [*1112]  Wallenbrock first deposited the investors' $ 253.2 million in Osaki's Wallenbrock checking account. The defendants then used $ 113.8 million of these funds to pay investors their "re-turns," maintaining the illusion that the defendants were actually making the investments as represented. Of the remaining $ 139.4 million, the defendants spent $ 11.1 million to cover operating expenses for both Citadel and Wallenbrock, including expenses such as office space and payroll for over 60 employees of both companies, and $ 25.5 million to pay for various Wallenbrock [**5]  operating expenses and Osaki's personal expenses. 6 Wallenbrock also spent $ 99.8 million to fund over 175 start-up companies on Citadel's behalf, of which Citadel was obligated to repay Wallenbrock $ 71.2 million plus 10 percent annual interest. 7 The remaining $ 3.0 million was still in Osaki's Wallenbrock checking account as of December 2001.

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440 F.3d 1109 *; 2006 U.S. App. LEXIS 5949 **; Fed. Sec. L. Rep. (CCH) P93,711


Prior History:  [**1]  Appeal from the United States District Court for the Central District of California. D.C. No. CV-02-00808-ER. Edward Rafeedie, District Judge, Presiding.


disgorgement, investors, district court, expenses, funds, defendants', ill-gotten, unjust enrichment, violations, fraudulently, jointly, invest, operating expenses, proceeds, start-up, gains, third party, calculation, receivable, wrongdoer, deduct, spend

Civil Procedure, Appeals, Standards of Review, Abuse of Discretion, Securities Law, Securities Exchange Act of 1934 Actions, Insider Trading, Disgorgement of Profits