USFIA a Ponzi scheme, SEC granted summary judgement
In an effort to save time, last month the SEC filed for summary judgement against Steve Chen.
Chen opposed the filing and argued, among other things, that summary judgement would deprive him of a jury trial.
A hearing on the matter was scheduled for November 28th, however taken off the calendar on November 22nd.
Looking at the case docket, it appears the November 28th hearing was canceled in favor of a December 8th Settlement Conference.
On December 1st both parties made a flurry of Motions in Limine:
- Motion in Limine (SEC) – seeking preclusion of evidence
- Motion in Limine (SEC) – seeking to restrict admission of Steve Chen’s prior statements
- Motion in Limine (SEC) – seeking to admit statements
- Motion in Limine (Chen) – seeking to exclude expert testimony of Charles Carmona
- Motion in Limine (Chen) – seeking to exclude certain testimony from USFIA Receiver, Thomas Seaman
- Motion in Limine (Chen) – seeking to exclude reference to Chen’s silence
- Motion in Limine (Chen) – seeking to exclude references to “Ponzi scheme” and “pyramid scheme”
- Motion in Limine (Chen) – seeking to exclude references to Chen’s “alleged bad acts and character evidence”
- Motion in Limine (Chen) – seeking to exclude “evidence of and references to parallel criminal proceedings and investigations”
- Motion in Limine (Chen) – seeking to exclude “evidence of Mr. Chen’s personal finances and lifestyle”
- Motion in Limine (Chen) – seeking to exclude “unauthenticated videos”
From number 6 in the above list, Chen’s motions get pretty amusing.
I thought the reference to parallel criminal proceedings might have evidence of such proceedings in the motion.
Unfortunately Chen only references Arcadia police interviews in the motion as evidence of a suspected criminal investigation.
In any event, a scheduled Settlement Conference took place on December 8th.
The minutes for the conference state:
Case settles contingent on acceptance by the Commission. Material terms of settlement placed on the record.
While it appears a settlement between Chen and the SEC was on the card, that same day Judge Klausner granted the SEC’s motion for Summary Judgement.
In granting summary judgement, the court observed
To prevail on a summary judgment motion, the movant must show that there are no genuine issues of material fact as to matters upon which it has the burden of proof at trial.
To defeat a summary judgment motion, the nonmovant may not merely rely on its pleadings or on conclusory statements. Nor may the nonmovant merely attack or discredit the movant’s evidence.
The nonmovant must affirmatively present specific admissible evidence sufficient to create a genuine issue of material fact for trial.
For those of you unfamiliar with legal jargon, the “movant” in this motion is the SEC (the party asking for judgement). Steve Chen is the “nonmovant” (the party opposing judgement).
The crux of Chen’s argument in opposing the Motion is that Defendant sold amber, not securities.
Chen supported the above assertion with declarations ‘from undeposed declarants‘.
the Court finds that these declarations have the potential to create a genuine issue of material fact only in a limited way.
The first declarant is Coco Ke Xu, USFIA’s customer service manager.
From her interactions, she has personal knowledge regarding the “many” customers with whom she interacted and business operations to the extent of her involvement.
However, Chen did not lay a foundation establishing Xu’s personal knowledge over every customer interaction or every aspect of the business in SEC’s evidence.
Characterizing Xu as a “core person in this case” “who interacted most commonly and closely with USFIA customers” is insufficient.
Accordingly, certain parts of her declaration are admissible only to the
extent of her involvement certain parts of her declaration are conclusory, speculative, and inadmissible.
The other two declarants, Li Cong and Xin Yu, were both USFIA affiliates.
The Cong and Yu declarations have similarly limited effect. Both are declarations made by USFIA customers based on their own experience.
Their declarations are admissible only to the extent of their personal involvement.
Accordingly, the Motion can be granted only based on evidence not contradicted by the three declarants’ statements based on their personal involvement.
In a nutshell, the declarations alone can’t be used to defeat the SEC’s Summary Judgement motion.
Where applicable, they can only be used with respect to the personal experiences of the declarants themselves.
As noted by the court, this experience is of limited relevance to the SEC’s proceedings against Chen.
Based on the evidence submitted by the SEC, here’s a breakdown of the rest of Judge Klausner’s order:
- USFIA involved securities, ‘whether characterized as investment contracts or pyramid scheme transactions‘
- USFIA involved “investment contracts”, as defined in the Securities and Exchange Act
- representations that USFIA sold amber are ‘not inconsistent with units, Gem Coins, or recruiting bonuses being part of‘ USFIA affiliate packages
- USFIA was a pyramid scheme, through with affiliates ‘receive(d) various financial rewards for recruiting additional investors‘
- Steve Chen’s assertions that USFIA wasn’t a pyramid scheme have ‘no merit in light of (the) SEC’s evidence‘
- through USFIA, Steve Chen offered and sold unregistered securities
- Steve Chen committed securities fraud by ‘sell(ing) securities of an inherently fraudulent pyramid scheme‘ and failing to disclose to USFIA affiliates that ‘the scheme is bound to collapse‘ (Omnitrition)
- Steve Chen lied about the $50 billion value of his entities
- Steve Chen lied about his involvement in the China Unicom IPO
- Steve Chen lied about USFIA becoming a public company
- Steve Chen misused USFIA affiliate funds to ‘fund a lifestyle that included multiple million-dollar mansions and luxury automobiles for him and his family‘
- amber on display in the USFIA showroom was ‘tagged with prices much than their true worth‘
- Steve Chen’s operation of the USFIA Ponzi scheme and “misuse of investor funds” is sufficient to find he acted with scienter (required to be proven for summary judgement)
Accordingly, the Court finds Steve Chen committed fraud in the offer or sale of securities and in connection with sale of securities.
(A) permanent injunction against Chen is appropriate.
Chen has shown no sign of recognition of wrongdoing and has offered
no assurances against future violations.
The Court finds that a reasonable likelihood of future violations exists without a permanent injunction.
For the foregoing reasons, the Court GRANTS SEC’s Motion for Summary Judgment.
And there it is, all on the public record.
The granted summary judgement order sees Chen
- prohibited from committing further violating of the Securities and Exchange Act and
- ordered to pay a civil penalty, including disgorgement of ill-gotten gains and prejudgement interest
I think it’s pretty obvious we’re going to see criminal charges filed against Chen at some point too. There’s also a possibility former Arcadia mayor John Wuo might be pursued, depending on how deep his connections with Chen and USFIA went.
At this point all we know is Wuo was on the books and profiting handsomely. He also didn’t want anyone to know as much and failed to adequately disclose his dealings with Chen and USFIA.
In the meantime, it’s great to see the SEC win a case against a scammer that didn’t drag on for years.
Here’s hoping we see more “summary judgement” SEC cases in the future.