[00:00:14] Speaker 03:
Your Honor, and may it please the Court, I would like to reserve five minutes for rebuttal.

[00:00:20] Speaker 03:
The district court's decision below should be reversed for two main reasons.

[00:00:25] Speaker 03:
First, the Court erred in finding that the life-setment arrangements at issue were securities under Howey, even though the investment success depended primarily on forces outside of the promoter's control rather than the promoter's own entrepreneurial efforts.

[00:00:43] Speaker 03:
the equitable remedy of disgorgement without finding that defendant's conduct caused pecuniary harm to investors.

[00:00:50] Speaker 03:
So as to the first issue, life settlement policies here are not securities.

[00:00:55] Speaker 03:
Here the expected profit from the investment depended primarily on the lifespan of the insured, not on any managerial effort by the Pacific West.

[00:01:04] Speaker 03:
Pacific West contractual activities of paying policy premiums, monitoring the insured, and delivering the eventual policy payment to investors were ministerial, not managerial.

[00:01:15] Speaker 03:
Pacific West purchasers picked their own policies to invest and were free to seek outside valuation of those policies.

[00:01:22] Speaker 01:
Well, they chose policies amongst an array offered to them by your clients.

[00:01:28] Speaker ?:
That is absolutely correct, Ivana.

[00:01:32] Speaker 01:
recalls me and offers different mutual funds.

[00:01:34] Speaker 01:
I get to choose amongst them, but they're still mutual funds.

[00:01:37] Speaker 01:
They're still for equities.

[00:01:39] Speaker 01:
I mean, we shares, that doesn't change their status as securities.

[00:01:45] Speaker 01:
So the fact that you're offered some alternatives doesn't take away from the fact that it's the selection of the alternatives to offer and the promoter's representation that they've carefully selected what to offer.

[00:02:05] Speaker 01:
will make them lucrative for the investor in the future?

[00:02:09] Speaker 03:
That is right, but I think the more precise analogy he will respect would be not one of a broker offering mutual funds.

[00:02:16] Speaker 03:
It would be something like an art consultant or an art gallery who is going to offer to someone who wants to invest in artwork a selection of paintings.

[00:02:25] Speaker 03:
And then that individual would decide which painting to purchase.

[00:02:28] Speaker 03:
Those paintings would be selected based on their, based on who the artist is.

[00:02:35] Speaker 03:
and value, but nevertheless courts have not viewed those types of arrangements to be

[00:02:45] Speaker 03:
of land for purchase.

[00:02:47] Speaker 03:
And the company may represent that that particular parcel of land will appreciate the value because of some adjoining development or because of its particular location, but courts have not viewed that to be securities.

[00:02:59] Speaker 03:
In fact, Judge Boudin's opinion in the First Circuit in Rodriguez expressly said a real estate company can offer land for investment

[00:03:28] Speaker 04:
and how it might appreciate.

[00:03:30] Speaker 04:
But here you're dealing with medical records and a specialized expertise as the company portrayed in being able to choose certain appropriate policies under parameters of four to seven years and whatnot.

[00:03:48] Speaker 04:
Why does that push

[00:03:58] Speaker 03:
is that here what Pacific West did is they did not hire medical examiners.

[00:04:04] Speaker 03:
They did not use any property or software to evaluate lifespan.

[00:04:07] Speaker 03:
So this is different from the situation before the 5th and 11th Circuits.

[00:04:11] Speaker 03:
They looked at what was on the face of a policy.

[00:04:15] Speaker 03:
They looked at basic, basic data about the insurance age, medical history, family history, and then also before the investors committed the money.

[00:04:25] Speaker 03:
Pacific West provided that information

[00:04:32] Speaker 03:
on the basis of that date available in the policies.

[00:04:36] Speaker 03:
And they could consult the policies themselves.

[00:04:38] Speaker 03:
And at that point, the investors could make the decisions.

[00:04:41] Speaker 03:
So they were not locked into the investment, unlike the situation in the other cases, where once the investor committed the money, he had to accept one of the policies, profit to profit to them.

[00:05:15] Speaker 03:
I don't think that actually changes the analysis in this case.

[00:05:18] Speaker 03:
I mean, some courts have observed that there may be some difference in analysis depending on fractional interest versus whether there is investment in the whole life insurance policy.

[00:05:27] Speaker 03:
But I don't think that changes the analysis here because the selection of a policy was done based on these

[00:05:47] Speaker 03:
which is whether or not the investment and the expectation of profit is going to depend primarily on the efforts of others.

[00:05:54] Speaker 04:
The other point that gets raised in these circuit opinions is about part of the value that's added potentially is the purchasing of these policies at a certain price.

[00:06:08] Speaker 04:
Why investors aren't doing that, they're not negotiating for

[00:06:28] Speaker 03:
pre-purchase activities such as the selection of policies has a very minimal indication as to whether or not that will be a security because it doesn't tell whether the expectation of profit derives from the efforts of others.

[00:06:41] Speaker 03:
That part, that negotiation of the purchase price is already baked into the purchase contract between Pacific Western investors.

[00:06:50] Speaker 03:
So in essence, it is divorced from the firm expectation of profit.

[00:06:54] Speaker 03:
It is very similar in a way

[00:06:59] Speaker 03:
particular company offered silver bars, offered gold or gold for investors, and it offered them at a specific price, which the investors themselves did not control.

[00:07:11] Speaker 03:
But with this court set, those did not constitute securities because once the purchase was made,

[00:07:17] Speaker 03:
of that investment depended on market forces, it did not depend on the promoter's own managerial efforts.

[00:07:26] Speaker 03:
So this is just the case like that.

[00:07:29] Speaker 03:
And then also, I think it is important to look not just at the selection of policies, but also at the post-purchase efforts by Pacific West.

[00:07:39] Speaker 03:
And all of those, as I mentioned, ministerial, not managerial.

[00:07:43] Speaker 03:
So Pacific West

[00:08:03] Speaker 03:
You want to because that system, the sole purpose of that system was to make sure that the premiums would be paid.

[00:08:10] Speaker 03:
So even though the three-year system was simply designed to ensure that the premiums would be paid across the time.

[00:08:27] Speaker 01:
Pacific West took that upon itself in a way that sought to assure the investor that we're not going to call upon you to do anything, we got this taken care of, trust us.

[00:08:38] Speaker 03:
You know, actually, actually Pacific West did not fully, did not make, make that full representation to investors.

[00:08:43] Speaker 03:
It did tell them that it had that premium system which, by pooling some of the resources, sought to ensure that the premiums would be paid.

[00:08:50] Speaker 01:
Yes, the possibility that the investor would be called upon.

[00:08:59] Speaker 03:
important that the Pacific West said yes, we have developed a

[00:09:08] Speaker 03:
would be paid, even if the first year would be insufficient.

[00:09:11] Speaker 03:
But they did expressly tell investors, there is a possibility where we will call upon you to pay the premiums.

[00:09:17] Speaker 03:
And again, the discourse had to know that just because a company has devised a system to perform its contractual duties, which is all that is here, that does not actually make that particular effort managerial.

[00:09:31] Speaker 03:
In fact, the 5th and the 11th circuits, when they looked at the

[00:09:34] Speaker 03:
payment of premiums, they did agree that that is a ministerial function.

[00:09:39] Speaker 03:
That is not an entrepreneurial function that would characterize the particular investment as a security.

[00:09:47] Speaker 04:
But doesn't the structure of it allow for spreading of risks even if certain policies, even if the bet made on certain policies was incorrect and there had to be additional payments made, it didn't fall just

[00:10:24] Speaker 03:
which we do not challenge, but I don't think that that system of ensuring that the premiums will be paid and that the policies remain enforced for as long as possible, I don't think that actually changes those

[00:10:50] Speaker 03:
to the investors.

[00:10:52] Speaker 03:
It told investors that its estimate of a life expectancy of the insured between four and seven years was just an estimate.

[00:10:59] Speaker 03:
It was not a guarantee.

[00:11:01] Speaker 03:
The investors acknowledged that they understood that.

[00:11:04] Speaker 03:
And Pacific West really had no control over how long the insured will live over that life expectancy.

[00:11:11] Speaker 03:
So it is very similar to the market forces that this court said do not actually make the promoters' efforts entrepreneurial.

[00:11:43] Speaker 01:
is marked low enough so that in the end there will be a profit.

[00:11:49] Speaker 01:
I mean, even a two-year-old may have a long life expectancy, but if you bought a policy cheap enough, it could be profitable.

[00:11:59] Speaker 01:
You just have to wait for a good, long time.

[00:12:01] Speaker 01:
And so I'm not sure.

[00:12:07] Speaker 01:
that it's not something that the promoter was responsible for because what really matters here is what price the promoter decided to pay.

[00:12:43] Speaker 03:
to bronze or copper and other metal.

[00:12:46] Speaker 03:
So certainly the company does make a decision and does make a selection and recommendation to investors based on certain data and based on estimation what is going to make a good investment.

[00:12:56] Speaker 03:
But then once that purchase is made, the investment does not depend on the efforts of the promoter.

[00:13:01] Speaker 03:
And I think the thesis architecture is the thing and the thesis architecture is destructive because these pre-purchase efforts which go to the selection and recommendation of investment, the press for them is already baked

[00:13:24] Speaker 03:
passed and which requires significant efforts by the promoter.

[00:13:28] Speaker 01:
Well, how it itself didn't seem to distinguish.

[00:13:30] Speaker 01:
Now granted, the law has come a long way since then, but that's still the root for this.

[00:13:35] Speaker 01:
It's even older than we are.

[00:13:38] Speaker 01:
It didn't seem to distinguish between the pre and post.

[00:13:41] Speaker 01:
It talked about the substantial efforts made to develop the citrus, excuse me, citrus grows.

[00:13:48] Speaker 01:
There were going to be efforts that continue

[00:13:57] Speaker 03:
I think the DC circuit's line actually does stem from Howie because Howie speaks about the investor's expectation of profits and whether that expectation and those profits depend on the significant efforts of ours.

[00:14:14] Speaker 03:
In the quintessential cases is where those efforts are efforts to develop the assets or efforts to monitor, to administer the assets, to do something else, something with that asset that the investor has bought.

[00:14:32] Speaker 03:
expressly made it they made that point express but it this the pre-purchase efforts do have a reduced in reduced information reduced indication whether or not an investment is a security and so in that sense it is it is really it correctly now view implements the test of how we and it doesn't form it and here I think if the court looks at the at the efforts

[00:15:03] Speaker 03:
software did not involve the use of medical examiners who would conduct independent evaluation of these policies.

[00:15:11] Speaker 03:
And then if it looks at the post-purchase activities which were ministerial in nature, the right answer here, even if the court does not adopt the pre-purchase, post-purchase divide of the DC circuit, the right answer here is that these were not securities because the involvement

[00:15:32] Speaker 03:
any other cases in the Fifth Circuit and the Eleventh Circuit cases.

[00:15:35] Speaker 03:
If I can turn also to the second question, which relates to disgorgement.

[00:15:40] Speaker 03:
And with respect to disgorgement, the Supreme Court in lieu made clear that the equitable remedy of disgorgement must be, I quote, awarded for victims.

[00:15:49] Speaker 03:
Therefore, before the court can order disgorgement, there must be victims of the defendant's conduct.

[00:15:59] Speaker 03:
that has suffered pecuniary harm is a necessary prerequisite that the investors are victims of.

[00:16:16] Speaker 03:
I think it means it's out of pocket.

[00:16:22] Speaker 03:
money from the original amount of money that they have committed to the investment.

[00:16:33] Speaker 03:
I think this gorgement has never meant, and the restitution with respect to unjust enrichment has never meant to return the investor or the person who was defrauded to a position where he would have been, where he would receive both principal and also profit.

[00:16:52] Speaker 03:
And this court has made it clear in the

[00:17:14] Speaker 01:
two forms and that's one of the reasons I'm having trouble picking up this ice cube as it slides across the counter because it's hard for me to understand why at least the opportunity cost, the time value of money, isn't given consideration for good discouragement.

[00:17:34] Speaker 03:
We don't think that, particularly after Lee, we don't think that discouragement

[00:17:42] Speaker 03:
beyond the principle that the investor contributed, because the focus is on putting the investor in the status quo.

[00:17:49] Speaker 03:
And I think, and these are the cases that we cited earlier.

[00:17:51] Speaker 03:
That as well would have been having the money years ago and being able to do something else with it.

[00:17:56] Speaker 03:
In a way, but I think that analysis will then necessarily assume that this gorgement will also be able to return to also provide some profits to the investor, because then, because the only way to put the investor back in a position in which it would have been headed investor

[00:18:12] Speaker 03:
is to give him something on top of the original investment.

[00:18:16] Speaker 03:
And that has never been, never been understood to be within, to be something that is the restitution that returns the investor of the person to be, that is the fraud into the status quo.

[00:18:25] Speaker 03:
And I think that, I mean, this court can look to Govel where that analysis is made.

[00:18:30] Speaker 03:
This also stems from

[00:18:35] Speaker 03:
uh, 1948, will you discuss this and criticize the treatises and in fact the SEC's position, which try to say this gorgement can return more money to the victims than just is necessary to return them to the status quo.

[00:18:48] Speaker 03:
What about that?

[00:18:49] Speaker 03:
What about the statutory change?

[00:18:50] Speaker 04:
Does that, did that supersede the Supreme Court?

[00:18:54] Speaker 03:
No, Your Honor, the statutory

[00:19:02] Speaker 03:
the statutory change really meant to clarify the uncertainty that resulted after the Supreme Court's caucasian decision whether or not disgorgement was in fact a permissible remedy.

[00:19:11] Speaker 03:
It did not mean to legislate or overrule the Supreme Court's decision.

[00:19:15] Speaker 04:
Why would that be needed if the Supreme Court already said disgorgement is an available remedy?

[00:19:22] Speaker 04:
Is it a better reading of the statute than it was an intent by Congress

[00:19:39] Speaker 03:
move in parallel.

[00:19:40] Speaker 03:
That happened in the heaviest context where the Supreme Court's adoption of particular heaviest rules were then paralleled with what Congress did in changing and amending the heaviest statute.

[00:19:50] Speaker 03:
And I think here also there is no indication in the SEC

[00:19:57] Speaker 03:
or from any kind of floor statements indicating that what Congress wanted to do was to statutorily override Supreme Court.

[00:20:04] Speaker 03:
I mean, it's a pretty momentous decision.

[00:20:05] Speaker 03:
For instance, in the Ledbetter case, it was very clear when Congress reacted to the Supreme Court's decision and overrode it statutorily.

[00:20:13] Speaker 03:
Here, the amendment and the enactment of Section D7 happened about

[00:20:24] Speaker 03:
really was trying to clarify the discourse which was a proper remedy, it got there roughly at the same time, Mr. Supreme Court, than to you.

[00:20:35] Speaker 02:
I want to clarify two points in my mind.

[00:20:53] Speaker 03:
Supreme Court certainly will discouragement must be actually must be done for the victims the force a matter of equity it must it there is there is a need to show that there are in fact victims and so however the measure whatever even the measure of discouragement how much

[00:21:18] Speaker 03:
The record actually shows there is no debate, and the district court itself even admitted that the investors may get a return of a couple of percent more than their principal investment.

[00:21:29] Speaker 03:
And this is in our brief on page 37.

[00:21:33] Speaker 03:
This is a situation where these investors will get the full money that they have contributed to the investment.

[00:21:40] Speaker 03:
So they have suffered no pecuniary harm and they cannot be considered victims.

[00:21:44] Speaker 03:
Now, it is true that they would only recoup that investment in the course of a number of years, but that is a function of the nature of the investment.

[00:21:52] Speaker 03:
They invest in the life insurance policies where the profitability depended on the lifespan of the insurance.

[00:21:59] Speaker 03:
So, and just one last point on discouragement.

[00:22:01] Speaker 03:
To the extent that the court is concerned that limiting discouragement to really its equitable nature and requiring a show pecuniary harm may actually hamstring the SEC's authority and somehow allow an entity, an individual, a company that defrauded the people who got engaged.

[00:22:23] Speaker 03:
The SEC actually has expressed statutory authority

[00:22:43] Speaker 03:
or victims.

[00:22:44] Speaker 03:
Let me see if my colleagues have any final questions for now.

[00:22:48] Speaker 04:
Great, thank you.

[00:22:48] Speaker 04:
We'll give you a little time for rebuttal.

[00:22:50] Speaker 05:
Thank you, Your Honor.

[00:22:59] Speaker 00:
Good morning, Your Honor.

[00:22:59] Speaker 00:
May it please the Court?

[00:23:00] Speaker 00:
I'm Carrie Dingell on behalf of the Securities and Exchange Commission.

[00:23:03] Speaker 00:
I'd like to begin by addressing some of Your Honor's questions on why the fractionalized life settlements in this case are securities, and that I'm happy to take questions about disgorgement.

[00:23:23] Speaker 00:
your honors pointed out was by using analysis and expertise to select policies that would pay out in four to seven years while avoiding loopholes that could prevent payout.

[00:23:32] Speaker 00:
And the second was by managing the ongoing premium payments to protect investors' returns on their investment from the risk of total loss.

[00:23:41] Speaker 00:
So appellants make the point that for the purposes of the Howey test, you're looking at the expectation of profit, but I think they're conflating the ultimate

[00:23:54] Speaker 00:
Profits here were dependent on the accuracy of Pacific West estimation of the death date and on the payment of the premiums.

[00:24:02] Speaker 00:
And investors could lose profit in two ways.

[00:24:05] Speaker 00:
One would be by being subject to premium calls because the policy went on for longer than Pacific West had estimated and the reserves ran out.

[00:24:15] Speaker 00:
And they would then be subject to premium calls which would increase their cost basis in the investment.

[00:24:20] Speaker 00:
and result in a lower profit.

[00:24:23] Speaker 00:
The second is that if the premiums weren't paid, they could risk losing their investment altogether.

[00:24:28] Speaker 00:
And this brings me to Judge Sanchez's point about, does it matter that these are fractional interests?

[00:24:34] Speaker 00:
I think for that second factor,

[00:24:42] Speaker 00:
did was it fractionalized these policies and sold them to different investors and then the risk the investors risk that the premiums wouldn't be paid were then shared with all of the other investors who had purchased fractions of the same policy.

[00:24:58] Speaker 00:
So Pacific Quest not only said you know well these are you're going to just buy a portion of the policy and so therefore there's a common interest for the second prong of the Howey test

[00:25:10] Speaker 00:
It went further than that and said, we are going to manage that risk for you.

[00:25:13] Speaker 00:
And that's really what I think the essential point that makes this a security is that Pacific West is managing the risk through the pooled premium reserve structure.

[00:25:23] Speaker 00:
And in fact, it went even— Which I guess has its limits, right?

[00:25:26] Speaker 04:
Because if the wrong bet is made about how long people would live,

[00:25:42] Speaker 00:
I don't know which way that cuts.

[00:25:57] Speaker 00:
policies enforced.

[00:25:59] Speaker 00:
And there's testimony in the record where the investors said that that was, you know, important to them.

[00:26:06] Speaker 00:
In the deposition of Michael Wachs at $27.90, he said, it's my understanding that if another investor doesn't make their premium call, the Pacific West is going to take care of it.

[00:26:18] Speaker 00:
How critical is this second part?

[00:26:20] Speaker 01:
I mean, as to the first part, if the investor knows age,

[00:26:26] Speaker 01:
out of the policy because gender can figure out

[00:26:49] Speaker 00:
I think that this court doesn't need to determine whether pre-purchase activities on their own can qualify something as a security because there were these significant post-purchase activities, but Calhoun, the CEO of Pacific West, held himself out as having

[00:27:24] Speaker 01:
premium tier system and so forth, but I'm not sure the first part gets you there.

[00:27:32] Speaker 00:
The first part may not get us there if there's just the pre-purchase policies.

[00:27:36] Speaker 00:
This court in Berbera said that you can't divide up the securities into discrete transactions and then sort of look at each one.

[00:27:45] Speaker 00:
You have to look at the economic reality of the whole thing.

[00:27:49] Speaker 00:
And here I think there's an interplay between that first part

[00:27:52] Speaker 00:
where Calhoun is saying, I expect this person to live for four to seven years.

[00:27:56] Speaker 00:
And the second part where he's saying, we're going to manage this premium reserve structure to make sure that the policy stays in force.

[00:28:04] Speaker 04:
Is there a councilmate was emphasizing the fact that unlike other deals of this kind, there was no medical input into the selection of these policies?

[00:28:16] Speaker 04:
seem important in your mind?

[00:28:19] Speaker 00:
I don't think so, Your Honor, because Calhoun was representing that he had other ways of estimating that.

[00:28:25] Speaker 00:
I mean, he was sort of holding himself out as having expertise.

[00:28:28] Speaker 00:
So if anything, it sort of cuts in favor of these being found to be securities, because it wasn't just sort of algorithmic formula that was applied.

[00:28:36] Speaker 00:
It was really his own personal judgment that the investors were depending on.

[00:29:04] Speaker 04:
years and those sorts of policies.

[00:29:07] Speaker 04:
The structured system is just different pools of money and when it gets access to it.

[00:29:12] Speaker 04:
That strikes me as a little bit more ministerial to me.

[00:29:16] Speaker 00:
Well, Your Honor, I think they're both important.

[00:29:18] Speaker 00:
I do think that it's different from the sort of sales

[00:29:21] Speaker 00:
Goods contracts cases like Noah and Belmont Reed because gold is gold and silver is silver and once you've delivered it to an investor, they're just depending on market fluctuations and themselves deciding when to sell to maximize their own profit.

[00:29:36] Speaker 00:
And so there is sort of more expertise that goes into this in the beginning and the investors are depending on, you know,

[00:29:54] Speaker 00:
sort of has some external value, it's that linkage between the actuarial estimates and the pulls of the premium reserves.

[00:30:03] Speaker 00:
But on that point, I just want to make a point that it's not just, in Life Partners, I think, in the DC Circuit case, the company was making premium payments, but it really was a more ministerial action than what was happening here.

[00:30:20] Speaker 00:
Because they just escrowed the premium payments, and then they were paying them out every month.

[00:30:34] Speaker 00:
many of the premiums himself when policy started to run out so that he wouldn't need to tap into those polls.

[00:30:44] Speaker 00:
the summary judgment hearing below, the appellants council agreed the Pacific West would have had the ability to either do capital calls from investors or take from the reserves or some combo of the two.

[00:30:57] Speaker 00:
So there was discretion in managing that premium structure.

[00:31:01] Speaker 00:
It was not the case that the premium reserve structure just sort of was put into place and then played out automatically.

[00:31:08] Speaker 00:
So there were significant post-purchase managerial efforts.

[00:31:14] Speaker 04:
So what about the disgorgement side of things?

[00:31:16] Speaker 04:
Sure.

[00:31:17] Speaker 00:
So moving on to disgorgement, the disgorgement award in this case requires the appellants to disgorge a fraction of the unjust enrichment that they obtained from violating the securities laws by selling securities in unregistered transactions.

[00:31:33] Speaker 00:
That award aligns with decades of this court's precedent with platforms wireless, with Louis V. SEC, and with the statutes authorizing disgorgement of unjust enrichment.

[00:31:52] Speaker 01:
Well, Your Honor, that's an interesting question.

[00:31:56] Speaker 00:
Because the pecuniary harm requirement was created in the Second Circuit's opinion in Goevel, we don't have a lot of guidance from courts about when there has been pecuniary loss, because disgorgement has never been understood to be a compensatory remedy.

[00:32:16] Speaker 00:
It is measured by the defendants on just enrichment.

[00:32:21] Speaker 00:
It's not measured by the victim's loss.

[00:32:23] Speaker 00:
And so there's not really a lot of case law around that.

[00:32:26] Speaker 00:
Here though, we have a receiver who was appointed who said the investors are out of pocket $107 million when the case started.

[00:32:37] Speaker 00:
The receivers managed that down to $69 million.

[00:32:39] Speaker 00:
But there's still $69 million in outstanding

[00:32:56] Speaker 00:
I just looked at the receiver's report from November.

[00:32:59] Speaker 00:
So as of last month, it was still the $69 million figure.

[00:33:05] Speaker 00:
People aren't dying on demand, I guess.

[00:33:09] Speaker 00:
I think the receiver has a lot of discretion in terms of how to manage the funds that come in.

[00:33:15] Speaker 00:
And so I'm not exactly sure where that stands in terms of if I think

[00:33:23] Speaker 00:
made is to pool all of the funds and then try to get money out to investors on a sort of pro-rata basis as opposed to paying out the particular investors when they're insured on their particular policy passes away.

[00:33:40] Speaker 04:
So what, to go back to Judge Clifton's earlier question, what makes a victim here?

[00:33:46] Speaker 00:
So they were victims because they invested in fractional

[00:33:55] Speaker 00:
The appellants who are left in the case don't have fraud charges against them, but there were fraud charges against Pacific West and Calhoun.

[00:34:05] Speaker 00:
But these defendants don't.

[00:34:07] Speaker 01:
That's one of the things that makes this hard.

[00:34:38] Speaker 00:
But just to make a few points, first is that the Supreme Court made it clear in lieu that disgorgement remains a profits-based measure of unjust enrichment.

[00:34:47] Speaker 00:
So it is measured by the defendant's unjust enrichment, and it aims to deprive the wrongdoer of their ill-gotten gains.

[00:34:53] Speaker 00:
That's the purpose of disgorgement.

[00:34:55] Speaker 00:
It is not to compensate victims.

[00:34:58] Speaker 00:
The court used the awarded-for-victim thing, which when it was talking about how to distribute

[00:35:16] Speaker 00:
money to the Treasury, exactly, instead of sending it to known victims.

[00:35:20] Speaker 00:
And so the court... How do we know that's not going to be the case here?

[00:35:25] Speaker 00:
Well, because the SEC intends to turn the money over to the receiver to use that to compensate the victims.

[00:35:32] Speaker 00:
And the Discoursemen here, you know, is a few hundred thousand dollars.

[00:35:36] Speaker 00:
They're 69 million dollars of outstanding loss.

[00:35:39] Speaker 00:
And, you know, I know there were arguments

[00:35:43] Speaker 00:
saying that they could recover that money at some point in the future by 2032 but because it's in a receivership the district court will retain jurisdiction over what happens to the money and can decide what to do in the event that

[00:36:10] Speaker 00:
but if there was an SEC fair fund, the court would retain jurisdiction in that event as well.

[00:36:16] Speaker 00:
And so this is really a distribution issue.

[00:36:19] Speaker 00:
And Lew didn't intend to, there's no suggestion in Lew that intended to change disgorgement from an unjust enrichment remedy to a compensatory damages remedy.

[00:36:34] Speaker 00:
Those are two very different things.

[00:37:04] Speaker 04:
by virtue of depriving a wrongdoer of ill-gotten gains to hold otherwise would render meaningless a latter part of the statute.

[00:37:13] Speaker 04:
So why doesn't that push back a little bit on your argument that it's still a profit-based focus?

[00:37:22] Speaker 00:
So two things, Your Honor.

[00:37:23] Speaker 00:
First, the Court was responding specifically to the

[00:37:28] Speaker 00:
Section 21D5 of the Exchange Act that says that disgorgement must be appropriate or necessary for the benefit of investors.

[00:37:36] Speaker 00:
And it said that that was an additional limitation on equity.

[00:37:40] Speaker 00:
And so as Your Honor pointed out earlier, there was an amendment to the Exchange Act post-LU in which the Congress expressly authorized the remedy of disgorgement and did not include that

[00:38:01] Speaker 00:
restriction that required money to go back to investors, we would say that's no longer operative.

[00:38:10] Speaker 04:
I take counsel's point that if Congress really did intend to overrule or supersede a part of Lou, I would imagine it would have said something at some point rather than just for us to

[00:38:27] Speaker 00:
tended to overrule Lou.

[00:38:29] Speaker 00:
It's that Lou pointed to two bases for this idea that money should go back to investors.

[00:38:36] Speaker 00:
One was it said equity generally requires it.

[00:38:39] Speaker 00:
And the second was that the statute has this further restriction that says it needs to be necessary or appropriate for investors.

[00:38:46] Speaker 01:
It's hard for me to interpret Congress's later action as say, okay, this could be a profit center for the government.

[00:38:53] Speaker 01:
You don't have to worry about restoring

[00:38:56] Speaker 01:
the investors' losses.

[00:39:00] Speaker 01:
Am I wrong about that?

[00:39:02] Speaker 00:
No, Your Honor, but I hear that's not an issue because I think what Lew was getting at was about whether money could go to Treasury or not.

[00:39:09] Speaker 00:
Although it ultimately withheld judgment on that question and said the lower court

[00:39:28] Speaker 00:
address them.

[00:39:29] Speaker 00:
Exactly, Your Honor.

[00:39:29] Speaker 00:
There's no judgment in this case directing money to Treasury.

[00:39:33] Speaker 00:
The disgorgement will be used in a compensatory manner and so there's no, you know, issue from a loop perspective and the court doesn't need to wade into the Treasury argument or really wade into this distinction in the statute.

[00:39:47] Speaker 01:
Well, the District Court with regard to the current parties didn't say

[00:40:01] Speaker 01:
The district court also acknowledged that they had a pretty good reason, perhaps, for believing what they were doing didn't require registration, didn't find c-enter or knowledge of wrongdoing on their part, so decided to cut back some.

[00:40:18] Speaker 01:
I'd like you to address both of that in the context of the one-third measure and also whether the civil penalty of any kind

[00:40:36] Speaker 00:
So Your Honor, the disgorgement is a discretionary remedy.

[00:40:40] Speaker 00:
And so while the court could award up to the full profits that the appellants obtained as a result of their violation, the court was well within its discretion in weighing the equities and the factors and looking at how much other defendants in the case had been ordered to disgorge or had

[00:41:20] Speaker 00:
gives courts authority to award penalties even for any violation of the securities laws.

[00:41:28] Speaker 00:
Well, say the court can, doesn't mean that it should.

[00:41:30] Speaker 00:
Well here, the penalty was $15,000 per appellant.

[00:41:36] Speaker 00:
The statutory award could be $7,500 per violation.

[00:41:42] Speaker 00:
The courts have discretion in how to

[00:41:59] Speaker 00:
made could have been, you know, one violation per month that the scheme went on.

[00:42:05] Speaker 00:
But it is a penalty.

[00:42:06] Speaker 01:
And if you don't have c-enter or knowledge of wrongdoing by the party, why a penalty?

[00:42:14] Speaker 00:
To deter others from making the same mistake.

[00:42:23] Speaker 00:
Well, here I think it goes beyond a mistake and I think the district court made it clear that he thought that it was questionable that the appellants were selling these things.

[00:42:57] Speaker 01:
knows we've spent a lot of time and read a lot of pages trying to figure out whether this is an investment contract.

[00:43:03] Speaker 01:
I'm not sure I want to say that these individual appellees or appellants should have figured that out.

[00:43:10] Speaker 00:
So the court pointed to the fact that they were making specific representations to investors about the premium reserves without having you know any knowledge except that there were premium reserves.

[00:43:27] Speaker 00:
insurance policies in force except for Calhoun's own say so and so the court seemed to think that that was not reasonable even after Calhoun had told the appellants that there was you know that some of the second tier of the reserve structure had been tapped into that they continued to sort of make representations to investors about this and so I think the court

[00:43:56] Speaker 00:
you know, looked at that and decided that a relatively small penalty was appropriate based on the facts and circumstances here, which is consistent with what the court was permitted to do under the statutory scheme.

[00:44:10] Speaker 00:
So I see that I'm over time.

[00:44:12] Speaker 00:
Unless the court has any further questions, we would ask you to affirm the judgment of the district court.

[00:44:16] Speaker 00:
Thank you.

[00:44:32] Speaker 03:
Thank you, Judge Sanchez.

[00:44:34] Speaker 03:
To address the premium system first, I don't think the premium reserve system by itself transforms us into managerial efforts.

[00:44:42] Speaker 03:
The entire design of premium systems to ensure premiums would be paid, it is not qualitatively different than setting up some kind of an escrow.

[00:44:50] Speaker 03:
If I could make an analogy,

[00:44:56] Speaker 03:
investors to purchase civil bars then said look we will set up and it offered to store them for a year for free offered some kind of a system saying we're not just going to put these bars in the warehouse we're going to put them in a secure safe we're going to hire guards we're going to implement the state of our security measure we will really make

[00:45:14] Speaker 03:
safe for that year that we store it.

[00:45:16] Speaker 03:
I don't think that the court would say that kind of contractual duty to ensure the gold would be safely stored and not just put somewhere where it can be pilfered easily would constitute the entrepreneurial efforts.

[00:45:29] Speaker 03:
I think with respect to the fact that Pacific West did not perform any kind, did not engage independent medical examiners, did not conduct an in-depth medical assessment of a type that was done in life partners is important because it shows that the investors

[00:45:44] Speaker 03:
have essentially the same knowledge as Pacific West.

[00:45:47] Speaker 03:
So when they decided to invest, they were not investing without actually access to the life insurance policy, without access to the analysis that the promoter has made.

[00:45:58] Speaker 03:
So that takes this case out of the cases like the Fifth Circuit, the Eleventh Circuit.

[00:46:03] Speaker 03:
And it actually is similar to even the case before the DC Circuit, where there was a detailed examination of significant

[00:46:11] Speaker 03:
and medical history and medical indicia.

[00:46:14] Speaker 03:
With respect to discouragement, I think what is important is that my friend on the other side focused on what is the measure of discouragement.

[00:46:22] Speaker 03:
But that is a different question from whether or not

[00:46:27] Speaker 03:
for the imposition of disgorgement itself.

[00:46:29] Speaker 03:
How disgorgement is measured and whether it should look to the ill-gotten profits or whether it should adopt some kind of measure is a secondary question.

[00:46:38] Speaker 03:
The first one, as the court, the Supreme Court in Rio said, disgorgement must not only deprive the wrongdoer of ill-gotten profits, but it also must be looking to compensate the victims and return them to the status quo.

[00:46:50] Speaker 03:
And if there are no

[00:46:53] Speaker 03:
harm, then that requirement is not met and discouragement may not be offered.

[00:47:03] Speaker 03:
Well, I think that is at this moment in time.

[00:47:08] Speaker 03:
I think if you look at the record citations, you now brief on pages 36, 37, particularly volume 2, the experts of records, page 118.

[00:47:17] Speaker 03:
If you look at what the district court said, this is volume 16, experts of records, page 4189, they did acknowledge that

[00:47:24] Speaker 03:
in the in in the fullness of time these investors will recoup the entire principle and in fact there may be extra money left so I think this is this is a somewhat unusual case what the record does indicate that the entire principle will be made available to the investors again not that this perhaps not at this moment in time and I'm not aware how exactly the I think

[00:48:00] Speaker 01:
Why should we disregard that?

[00:48:02] Speaker 03:
Because I think that goes to the question of the profit.

[00:48:06] Speaker 03:
And I think as this court said in DCD programs versus Leighton, the unjust enrichment, disgorgement, do look to placing the individual in the position of a status quo.

[00:48:19] Speaker 03:
They don't try to actually realize the profit, which will be compensating the investors for the time value of money.

[00:48:29] Speaker 03:
admitted the language for the benefits of the victims is not really indicative that Congress intended to prescribe to vest the SEC with a larger disgorgement authority because when Congress legislated, it legislated against the background of what the Supreme Court said in lieu and the Supreme Court in lieu said approved of a disgorgement because it found the disgorgement was an act of remedy present in equity

[00:48:54] Speaker 03:
And the requirement of a remedy be available of equity is that it were available to the Court of Chancery in 1789.

[00:49:02] Speaker 03:
So when Congress uses the term disgorgement, it really brings all the equitable old soil with it.

[00:49:08] Speaker 03:
And so the limitation of disgorgement, namely that it must not only deprive the wrongdoer of profits, but also be for the victims, also accompanies the use of disgorgement in section D7.

[00:49:19] Speaker 03:
And I haven't answered the question with respect to the points that Judge Clifton raised on the civil penalties, but we do think, as we said in our brief,