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United States Court of Appeals for the Ninth Circuit
October 21, 2021, Argued and Submitted, San Francisco, California; January 5, 2022, Filed
Berkeley Healthcare Dynamics, Inc. ("BHD") was named as a relief defendant in this securities fraud action by the Securities and Exchange Commission against Thomas Henderson. After a consent judgment was entered against Henderson, the SEC sought disgorgement from BHD of funds traceable to the fraud. The district court entered a summary judgment ordering disgorgement, [*2] and BHD did not appeal.
A year after the judgment was entered, the Supreme Court decided Liu v. SEC, 140 S. Ct. 1936, 207 L. Ed. 2d 401 (2020). BHD then moved for relief from judgment under Federal Rule of Civil Procedure 60(b)(6), arguing that Liu required deduction of BHD's legitimate expenses from the disgorgement order. The district court denied the motion, and this time BHD appealed.
The sole issue for decision is whether Liu changed the law governing the disgorgement order and therefore was an extraordinary circumstance requiring reopening of a final judgment. See Phelps v. Alameida, 569 F.3d 1120, 1135 (9th Cir. 2009). Like the district court, we conclude that Liu did not change the governing law and affirm the denial of the Rule 60(b)(6) motion.
1. We have long distinguished between "primary wrongdoers" and "relief defendants" in addressing disgorgement under the securities laws. A primary wrongdoer is one who obtained ill-gotten gains through violation of the securities laws. See SEC v. Platforms Wireless Int'l Corp., 617 F.3d 1072, 1096 (9th Cir. 2010). Prior to Liu, we permitted disgorgement by a wrongdoer of the entire amount obtained through conduct forbidden by the securities statutes, reduced only by amounts already paid back to investors. See SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109, 1114 (9th Cir. 2006). Liu expressly rejected that standard, requiring that a disgorgement award under 15 U.S.C. § 78u(d)(5) "not exceed a wrongdoer's net profits," 140 S. Ct. at 1940, and that therefore "courts must deduct legitimate [*3] expenses before ordering disgorgement," id. at 1950. Liu plainly changed our existing caselaw governing disgorgement by primary wrongdoers. See, e.g., SEC v. Yang, 824 F. App'x 445, 447 (9th Cir. 2020) (remanding disgorgement order against primary wrongdoers for further consideration in light of Liu).
2. In contrast to a primary wrongdoer, a relief or nominal defendant "holds the subject matter of the litigation in a subordinate or possessory capacity as to which there is no dispute." SEC v. Colello, 139 F.3d 674, 676 (9th Cir. 1998) (cleaned up). Under Ninth Circuit precedent, to obtain disgorgement against a relief defendant, a "plaintiff must show that the nominal defendant has received ill gotten funds and that he does not have a legitimate claim to those funds." Id. at 677. A "lack of a legitimate claim to the funds is the defining element of a nominal defendant." Id. Thus, disgorgement cannot be ordered if the relief defendant received the funds as "compensation in return for services rendered." SEC v. Ross, 504 F.3d 1130, 1142 (9th Cir. 2007).3
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2022 U.S. App. LEXIS 245 *; 2022 WL 42807
U.S. SECURITIES & EXCHANGE COMMISSION, Plaintiff-Appellee, v. BERKELEY HEALTHCARE DYNAMICS, LLC, Defendant-Appellant, SUSAN L. UECKER, Receiver-Appellee.
Notice: PLEASE REFER TO FEDERAL RULES OF APPELLATE PROCEDURE RULE 32.1 GOVERNING THE CITATION TO UNPUBLISHED OPINIONS.
Prior History: [*1] Appeal from the United States District Court for the Northern District of California. D.C. No. 3:17-cv-00223-RS. Richard Seeborg, Chief District Judge, Presiding.
SEC v. S.F. Reg'l Ctr. LLC, 2020 U.S. Dist. LEXIS 141747, 2020 WL 4569844 (N.D. Cal., Aug. 7, 2020)
disgorgement, funds, wrongdoers, legitimate claim, district court, expenses, legitimate business, legitimate expense, nominal defendant, purposes, profits, extraordinary circumstances, securities law, ill-gotten, foreclose, ordering, squarely, caselaw