## Facts

- First Pacific Bancorp (Bancorp), a bank holding company whose main asset was its wholly owned bank subsidiary, was in severe financial distress and sought capital through an all-or-nothing public offering.
- The offering materials represented that if a stated minimum amount was not raised by a deadline, the offering would be cancelled and investor funds returned.
- Bancorp raised about $188,000 from outside investors.
- PacVen, Inc., a shell corporation controlled by Leonard S. Sands, conducted a separate public offering that raised about $500,000.
- Sands caused PacVen’s offering proceeds to be diverted into Bancorp’s offering in an attempt to satisfy the minimum required by Bancorp’s all-or-nothing terms, without proper disclosure or separation of proceeds.
- Even with the diverted funds, the Bancorp offering failed to meet the minimum by the deadline; a $1,000,000 investor check counted toward the minimum was returned unpaid, and Sands knew the minimum had not been met.
- Bancorp did not cancel the offering or return funds as promised; Sands later contributed his own money after the deadline to create the appearance that the minimum had been achieved.
- During the relevant period, Sands received substantial salary and benefits from Bancorp.
- The SEC brought a civil enforcement action alleging antifraud and related federal securities-law violations; the district court granted partial summary judgment for the SEC, found remaining liability after a bench trial, permanently enjoined future violations, ordered disgorgement of $688,000 plus prejudgment interest jointly and severally against Sands, Bancorp, and PacVen, and permanently barred Sands from serving as an officer or director of a public company.

## Issues

1. Whether the evidence supported findings of scienter and liability under federal antifraud provisions based on diversion and commingling of offering proceeds and failure to comply with all-or-nothing offering conditions.
2. Whether the district court properly ordered joint and several disgorgement of $688,000 plus prejudgment interest against Sands, Bancorp, and PacVen.
3. Whether a permanent officer-and-director bar against Sands was authorized and appropriate.
4. Whether the district court properly exercised equitable discretion in imposing injunctions and monetary and status-based remedies after finding securities-law violations.

## Decision

- The Ninth Circuit affirmed the district court’s partial summary judgment rulings, post-trial liability findings, and final judgment.
- The court upheld findings that Sands and the entities committed securities fraud, including deceptive diversion and undisclosed commingling of proceeds and failure to cancel the all-or-nothing offering and return funds when the minimum was not met.
- The court affirmed joint and several disgorgement of $688,000 plus prejudgment interest as a reasonable approximation of ill-gotten gains not returned to investors.
- The court affirmed the permanent officer-and-director bar and the permanent injunctions, finding no abuse of discretion in the equitable relief ordered.

## Legal Principles

- Scienter in securities fraud may be shown by knowledge of one’s conduct and its consequences; intentional diversion of offering proceeds and knowing failure to follow stated all-or-nothing conditions can establish fraudulent intent.
- Misrepresentations or omissions are material when investors are told funds will be returned if conditions are not satisfied; retaining funds after failure of the stated minimum may be deceptive.
- Disgorgement is an equitable remedy aimed at depriving wrongdoers of unjust enrichment and deterring violations; a reasonable approximation of ill-gotten gains is sufficient.
- Joint and several disgorgement may be imposed when defendants act in concert or have a close relationship in the unlawful scheme, making precise tracing of proceeds impracticable.
- District courts have broad equitable authority in SEC enforcement actions to impose injunctions, disgorgement, and officer-and-director bars; remedial determinations are reviewed for abuse of discretion with deference once violations are established.

## Conclusion

The Ninth Circuit sustained broad equitable relief in an SEC enforcement action where a corporate officer controlled related entities, diverted and commingled offering proceeds, and knowingly failed to honor all-or-nothing offering commitments, affirming fraud liability, joint and several disgorgement with interest, permanent injunctions, and a permanent officer-and-director bar.


S.E.C. v. First Pac. Bancorp, 142 F.3d 1186 (9th Cir. 1998)