Securities & Exchange Commission v. Radius Capital Corp. ( 2016 )

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[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 15-12004
Non-Argument Calendar
________________________
D.C. Docket No. 2:11-cv-00116-JES-DNF
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff-Appellee,
versus
RADIUS CAPITAL CORP.,
Defendant,
ROBERT A. DIGIORGIO,
Defendant-Appellant,
THOMAS DOTSON,
Material Witness,
GOVERNMENT NATIONAL MORTGAGE ASSOC., et al.,
Third-Party Custodians.
________________________
Appeal from the United States District Court
for the Middle District of Florida
________________________
(June 29, 2016)
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Before TJOFLAT, JORDAN and JILL PRYOR, Circuit Judges.
PER CURIAM:
The Securities and Exchange Commission sued Robert A. DiGiorgio and his
company, Radius Capital Corporation, under § 17(a) of the Securities Act of 1933,
15 U.S.C. § 77q(a), § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §
78j(b), and Exchange Act Rule 10b–5, 17 C.F.R. § 240.10b–5. After a nine-day
trial, the jury found in favor of the SEC on all claims. The district court then
enjoined Mr. DiGiorgio from committing further violations of the antifraud statutes
and regulations, ordered that he disgorge his gains, and imposed a civil penalty of
$1.29 million. Mr. DiGiorgio, proceeding pro se, now appeals.
I
Mr. DiGiorgio is the founder and CEO of Radius, a mortgage lender and
issuer of mortgage-backed securities (MBS). The Government National Mortgage
Association (Ginnie Mae) is a governmental corporation that guarantees the
payment of approved MBS issued by private lenders. A Ginnie Mae guarantee
requires that the loans underlying the MBS be insured by the Federal Housing
Administration or be eligible for FHA insurance. When a Ginnie Mae-guaranteed
MBS is sold to investors, the homeowners’ monthly principal and interest
payments are “passed-through” from the issuer to the purchasers of the MBS. If
one of the underlying loans enters into default, the issuer can either step in and
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continue the pass-through payments or request approval from Ginnie Mae to
prepay the outstanding principal to remove the defaulted loan from the pool. If the
issuer fails to do either, Ginnie Mae—having guaranteed the MBS—makes the
required payment.
Radius and Mr. DiGiorgio sought to obtain Ginnie Mae guarantees for the
MBS it issued. To do so, they completed an “Application for Approval” to become
a Ginnie Mae approved issuer, a “Schedule of Subscribers” and “Ginnie Mae
Guaranty Agreement” (Form 11705), and a Schedule of Pooled Mortgages (Form
11706). They then submitted the completed forms through Ginnie Mae’s
GinnieNET system. Both the Application and Form 11705 require the issuer to
warrant that the underlying loans are eligible for a Ginnie Mae guarantee under §
306(g) of the National Housing Act, 12 U.S.C. § 1721(g). Form 11706 is a fill-in-
the-blank document in which the issuer provides information about each loan,
including, in this case, an FHA loan case number.
The SEC claimed that, from December of 2005 to October of 2006, Radius
issued and sold at least 15 MBS at a value of over $23 million, for a profit of $1
million. Eventually, the loans underlying Radius’ MBS fell into default, and in
October of 2006, Radius defaulted on its pass-through payments to investors.
Ginnie Mae then prepaid the remaining principal on the defaulting loans and
removed them from the respective pools. As a result, investors who had purchased
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the MBS did not receive the expected interest payments, and because the loans
were not FHA-insured, Ginnie Mae did not recover the prepayment amount and
suffered more than $5 million in losses.
The SEC brought a civil enforcement action against Mr. DiGiorgio and
Radius asserting two claims: Count I alleged violations of § 17(a) of the Securities
Act of 1933, 15 U.S.C. § 77q(a); and Count II alleged violations of § 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), through Exchange Act Rule
10b–5, 17 C.F.R. § 240.10b–5. The SEC sought injunctive relief, disgorgement of
profits, and the imposition of civil penalties. Radius did not answer the complaint,
and the district court entered a default judgment against it.
The SEC alleged that misrepresentations were present both in the
GinnieNET forms and in the prospectuses that were made available to the public
by download via Ginnie Mae’s website, or through an investor’s brokerage. With
respect to the GinnieNET forms, the SEC alleged that, despite knowing that the
majority of the loans did not meet FHA insurability standards, Radius and Mr.
DiGiorgio falsely represented the loans were FHA insured (or were eligible for
FHA insurance) on Forms 11705 and 11706. In fact, the SEC claimed, many of the
loans contained or involved invalid social security numbers, inflated appraisals,
falsified employment and income documentation, straw-man purchases, and
violations of anti-flipping prohibitions. All in all, according to the SEC, roughly
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70% of the underlying loans did not meet FHA insurability standards. As for the
prospectuses, based on the information submitted by Mr. DiGiorgio, they indicated
that Radius had certified that the mortgages in the MBS were eligible for FHA
insurance.
Mr. DiGiorgio filed a counseled motion to dismiss the civil enforcement
action pursuant to Fed. R. Civ. P. 12(b)(6). Before the district court ruled on the
motion, Mr. DiGiorgio’s attorneys withdrew as counsel, and Mr. DiGiorgio
continued pro se. The district court denied the motion to dismiss in part and
granted it in part. It held that some of the claims based on the prospectuses did not
meet the particularity requirement of Fed. R. Civ. P. 9(b) for liability under Rule
10b–5(b). Specifically, the district court found that Rule 10b–5(b) required that
Mr. DiGiorgio have “made” the false statements in the prospectuses, and the
complaint failed to sufficiently plead that Radius or Mr. DiGiorgio had ultimate
control over the message in the prospectuses. The district court denied the motion
to dismiss in all other respects.
Before trial, Mr. DiGiorgio filed a motion for summary judgment. The
district court denied that motion. Mr. DiGiorgio also filed various motions in
limine that sought to prohibit the admission at trial of the application, the
GinnieNET forms, and the prospectuses. The district court denied these motions as
well.
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Mr. DiGiorgio then submitted proposed jury instructions that would require
the jury to find that the alleged material misrepresentations had been made to
public investors. Before the trial’s conclusion, Mr. DiGiorgio moved for a special
limiting instruction that would require, once again, the jury to find that the material
misrepresentations had been publicly disseminated. The final jury instructions did
not contain the requested language, the district court did not issue the requested
limiting instruction, and Mr. DiGiorgio did not object to the final jury instructions.
The jury found Mr. DiGiorgio liable on all claims asserted by the SEC. Mr.
DiGiorgio filed a motion for a new trial, which the district court denied.
II
We liberally construe pro se briefs and hold them to a less stringent standard
than those drafted by attorneys, nevertheless, issues not raised below are still
deemed forfeited. See Timson v. Sampson, 518 F.3d 870, 874 (11th Cir. 2008).
Mr. DiGiorgio raises numerous matters of law and fact on appeal. For
clarity, we frame the issues as Mr. DiGiorgio appealing the district court’s (1)
rulings on statutory interpretation, (2) denial of his objection to the admission of
evidence, (3) denial of his proposed jury instructions and jury verdict form, and (4)
denial of his motion for a new trial.
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III
Questions of statutory interpretation are reviewed de novo. See Moore v.
Appliance Direct, Inc., 708 F.3d 1233, 1237 (11th Cir. 2013).
Establishing a violation of Rule 10b–5 requires proof that the defendant
made (1) material misrepresentations or materially misleading omissions, (2) in
connection with the purchase or sale of securities, (3) with scienter. See SEC v.
Merch. Capital, LLC, 483 F.3d 747, 766 (11th Cir. 2007). Proving a violation of §
17(a)(1) requires substantially similar proof: “(1) material misrepresentations or
materially misleading omissions, (2) in the offer or sale of securities, (3) made with
scienter.” Id. To establish a violation of § 17(a)(2) or (3), the SEC need only show
that the first two elements of § 17(a)(1) were committed with negligence. Id.
Finally, the “in connection with the purchase or sale of” and “in the offer or sale
of” elements of Rule 10b–5 and § 17(a) can be interchangeable. See United States
v. Naftalin, 441 U.S. 768, 773 n.4 (1979).
A
We first address Mr. DiGiorgio’s argument that § 17(a) and Rule 10b–5
require that a material misrepresentation “be disseminated into the public arena,
[and that the] exact misrepresentation . . . be an attempted communication directly
at the potential investing public” to be “in connection with the purchase or sale” or
“in the offer or sale” of any security. Mr. DiGiorgio maintains that § 17(a) and
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Rule 10b–5 do not cover misrepresentations made to Ginnie Mae because, as a
non-market participant, it was not involved in any security transaction. Because his
alleged misrepresentations were only disseminated to Ginnie Mae, Mr. DiGiorgio
argues that as a matter of law he cannot be held liable under either § 17(a) or Rule
10b–5.
The Supreme Court has counseled that the “in the offer or sale of”
requirement of § 17(a) is to be read broadly because the 1933 Securities Act was
intended not just to protect investors, but also “to achieve a high standard of
business ethics . . . in every facet of the securities industry.” Naftalin, 441 U.S. at773–75. In Naftalin, the defendant identified stocks that he felt would quickly lose
value, falsely represented to brokers that he owned shares of the stocks, and placed
orders with them to sell those shares. Id. at 768. Assuming that the stocks’ value
would fall quickly enough that he would be able to purchase the same stocks at a
lower value before the securities had to be delivered, he planned to keep the
difference in value as profit. Id. Instead, the stocks’ value rose, and the brokers
were unable to deliver the securities to investors who had purchased them. Id.Rejecting the defendant’s argument that “in the offer or sale of” any security
referred solely to transactions with the investing public, the Supreme Court ruled
that “the statutory terms . . . are expansive enough to encompass the entire selling
process.” Id. at 773. Because “frauds perpetrated upon either business or investors
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can redound to the detriment of the other and to the economy as a whole” the Court
ruled that placing financial intermediaries “outside the aegis of § 17(a) would
create a loophole in the statutes that Congress simply did not intend to create.” Id.
at 776–77.
In the years following Naftalin, the Supreme Court has rejected a narrow
interpretation of the “in connection with” and “in the offer or sale of” requirements
in SEC civil enforcement actions. See S.E.C. v. Zandford, 535 U.S. 813, 819
(2002) (“[W]e have explained that the statute should be construed not technically
and restrictively, but flexibly to effectuate its remedial purposes.”) (internal
citations omitted). See also Superintendent of Ins. of State of N. Y. v. Bankers Life
& Cas. Co., 404 U.S. 6, 9 (1971) (holding that a violation of Rule 10b–5 can occur
even when the deception does not occur alongside the purchase or sale of
securities). And we have held that misrepresentations need not be concomitant
with a transaction involving public investors. See S.E.C. v. Carriba Air, Inc., 681
F.2d 1318, 1324 (11th Cir. 1982) (“The Securities Act of 1933 must be interpreted
broadly by the courts in order to effectuate the Congressional intent to protect
investors.”).
To sell stock, the defendants in Carriba filed a registration statement with
the SEC that contained misrepresentations and omissions. Id. at 1320. As part of an
initial private placement of securities, the defendants reviewed and approved a
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private placement memorandum that contained the misstatements and omissions
they had made in the registration statement. Id. Later, as part of the public offering,
the defendants reviewed and approved a final prospectus that contained the same
misrepresentations and omissions. Id. The district court found that the defendants
had violated § 17(a) and Rule 10b–5 and imposed a preliminary injunction. Id. at
1320. We affirmed, explaining that the defendants blatantly violated the securities
laws when they “knowingly made material misrepresentations and at least
recklessly made material omissions on documents submitted to the SEC.” Id. at
1322.
Since Carriba, we have continued to read the terms “in connection with the
purchase or sale of” and “in the offer or sale of” broadly. We have upheld
summary judgment against defendants who misstated their company's revenue in
periodic reports, SEC filings, and press releases, and then raised over $10 million
from the sale of company stock, finding that they committed “deceptive acts as
part of a scheme to generate fictitious revenue.” S.E.C. v. Monterosso, 756 F.3d
1326, 1334 (11th Cir. 2014). And we have explained that the “in connection with”
requirement is satisfied where the fraud “touch[es]” the transaction in some way,
including situations where “the purchase or sale of a security and the [preceding]
proscribed conduct are part of the same fraudulent scheme.” Rudolph v. Arthur
Andersen & Co., 800 F.2d 1040, 1046 (11th Cir. 1986) (internal citations omitted).
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Mr. DiGiorgio cites the Supreme Court’s decision in Chadbourne & Parke
LLP v. Troice, 134 S.Ct. 1058 (2014), for the proposition that misrepresentations
must be material to a purchasing decision by one or more public investors to meet
the “in connection with” and “in the offer or sale of” requirements. Mr. DiGiorgio
argues that Chadbourne & Parke requires that misrepresentations be publicly
disseminated. That case, however, involved a private action, which requires actual
reliance by the person defrauded. See id. at 1062–63. An SEC civil enforcement
action does not. See id. In Chadbourne & Parke, the Supreme Court specifically
noted that although actual reliance is necessary for a private action under the
Securities Litigation Uniform Standards Act of 1998 (SLUSA), 15 U.S.C.
§78bb(f)(1), its holding did “not limit the Federal Government’s authority to
prosecute” frauds where there was no actual reliance. Id. at 1062. In a case before
Chadbourne & Parke, we too had recognized this “important distinction” between
private actions and SEC enforcement actions. See S.E.C. v. Morgan Keegan & Co.,
678 F.3d 1233, 1244 (11th Cir. 2012).
Given these authorities, we conclude that the misrepresentations themselves
need not be explicitly directed at the investing public or occur during the
transaction to be “in connection with the purchase or sale of” or “in the offer or
sale of” any security. We therefore reject Mr. DiGiorgio’s contrary argument.
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B
Mr. DiGiorgio next asserts that all § 17(a) and Rule 10b–5 subsections
require that he be the person who “made” the misrepresentations in the
prospectuses. The district court ruled that, under Janus Capital Grp., Inc. v. First
Derivative Traders, 131 S. Ct. 2296 (2011), the SEC must allege facts showing
that a defendant had “ultimate authority over the statement, including its content
and whether and how to communicate it.” See id. at 2302. Because the SEC failed
to make such allegations regarding the prospectuses, the district court concluded
that the complaint did not meet the Rule 9(b) particularity requirement and
dismissed the prospectus-based Rule 10b–5(b) claims.
On appeal, Mr. DiGiorgio relies on S.E.C. v. Kelly, 817 F. Supp.2d 340, 345
(S.D.N.Y. 2011), where the district court ruled that all the § 17(a) and Rule 10b–5
subsections required a defendant to be the maker of the misrepresentations.
Because the district court applied the Janus requirement only to Rule 10b–5(b),
Mr. DiGiorgio contends, it erred in failing to dismiss the civil enforcement claims
in their entirety.
The law in this circuit, however, is clear: the requirement that the defendant
be the “maker” of the misrepresentations on a document only applies to Rule 10b–
5(b). See S.E.C. v. Big Apple Consulting USA, Inc., 783 F.3d 786, 795 (11th Cir.
2015). As we said in Big Apple:
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Rule 10b–5 subsections (a) and (c) . . . like § 17(a)
subsections (1) and (3), prohibit schemes to defraud and
fraudulent courses of business, respectively. However,
subsections (1) and (3) in § 17(a) and subsections (a) and
(c) in Rule 10b–5 do not use the word “make” or even
address misstatements. The Court in Janus interpreted
what it means to “make” a misrepresentation under
subsection (b) of Rule 10b–5. Thus, any attempts by the
defendants to import the Court's narrow holding to the
entirety of § 17(a) is untenable on its face.
Big Apple, 783 F.3d at 796.
Based on Big Apple, we conclude that the requirement that a defendant
“make” the misrepresentations is limited to Rule 10b–5(b) claims, and reject Mr.
DiGiorgio’s argument as to § 17(a).
IV
We review a district court's ruling on the admissibility of evidence
deferentially under an abuse of discretion standard. See Goldsmith v. Bagby
Elevator Co. Inc., 513 F.3d 1261, 1276 (11th Cir. 2008). The district court has
wide discretion in admitting or denying the admission of evidence, and we will
overturn an evidentiary ruling only if the movant establishes that (1) the district
court made a clear error of judgment or applied the wrong legal standard and (2)
the ruling caused a “substantial prejudicial effect.” Burchfield v. CSX Transp., Inc.,
636 F.3d 1330, 1333 (11th Cir. 2011) (internal citation omitted).
Mr. DiGiorgio contests the district court’s admission of both the GinnieNet
forms and the prospectuses. Though Mr. DiGiorgio does not explicitly use any rule
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of evidence to frame his claim, we construe his argument as having two bases.
First, because the documents—and accordingly the misrepresentations—were not
publicly disseminated, they could not have been material to any investor’s
decision, so they are not relevant. Second, the admission of the prospectuses was
substantially prejudicial because it then became impossible for the defense to argue
that the prospectuses did not influence the investors.
The materiality of a misrepresentation in the antifraud context is an objective
determination, Merch. Capital, 483 F.3d at 766, so a lack of dissemination is
immaterial. In this case, moreover, the finalized documents were at the core of the
enforcement action because they were the repositories for Mr. DiGiorgio’s
misrepresentations. The GinnieNET forms and prospectuses are relevant because
they tend to make it more likely that Mr. DiGiorgio made or used
misrepresentations to obtain a Ginnie Mae guarantee for his MBS, which he then
sold. See Fed. R. Evid. 401. For the same reason, whatever unfair prejudice Mr.
DiGiorgio alleges to have suffered from the documents' admission does not
substantially outweigh their probative value. See Fed. R. Evid. 403. In short, the
district court did not abuse its discretion in admitting the documents into evidence.
V
We generally require that a party object to jury instructions or a jury verdict
form before the jury begins deliberations. See Farley v. Nationwide Mut. Ins. Co.,
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197 F.3d 1322, 1329 (11th Cir. 1999). When a party, like Mr. DiGiorgio here,
fails to timely object, we review for plain error. Id. To succeed under this
“extremely stringent form of review,” a party must prove four elements: (1) that an
error occurred, (2) that the error was plain, (3) that it affected substantial rights,
and (4) that not correcting the error would seriously affect the fairness of the
proceedings. Id. In short, we only reverse when an error of law is so prejudicial
that it “affected the outcome of the proceedings.” Id. at 1330.
Mr. DiGiorgio alleges that the final jury instructions and verdict form
constituted plain error because the district court denied his motion for a limiting
instruction, and the final jury instructions did not require the jury to find that the
misrepresentations were publicly disseminated. Because dissemination is not a
legal prerequisite to liability under § 17(a) and Rule 10b–5, we find no plain error.
Mr. DiGiorgio also claims that the instructions were vague because they did
not specify that the Rule 10b–5(b) claim regarding the prospectuses had been
dismissed, and the jury therefore improperly deliberated on that charge. We
disagree. The jury found that there was sufficient evidence to find Mr. DiGiorgio
liable on all counts under all the other subsections of § 17(a) and Rule 10b–5.
Assuming the jury considered whether Mr. DiGiorgio “made” the
misrepresentations in the prospectuses, there is no evidence this affected its
decision regarding whether he “made” misrepresentations in the GinnieNET forms.
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Even if the jury had found for Mr. DiGiorgio as to the prospectuses, it could still
have returned a verdict for the SEC on all counts because the evidence that Mr.
DiGiorgio “made” the misrepresentations on the GinnieNET forms was
considerably stronger—not only did he misrepresent the FHA eligibility on the
forms, but he also included invalid social security numbers, falsified income
information, etc. Because there is no evidence that the jury instructions affected the
outcome of the proceedings, we find no plain error.
VI
We review a district court's denial of a motion for new trial for abuse of
discretion. See Lipphardt v. Durango Steakhouse of Brandon, Inc., 267 F.3d 1183,
1186 (11th Cir.2001). A motion for a new trial based on evidentiary sufficiency
should be granted only if the verdict is against the great weight of the evidence. Id.Great deference “is particularly appropriate where a new trial is denied and the
jury’s verdict is left undisturbed.” Rosenfield v. Wellington Leisure Products, Inc.,
827 F.2d 1493, 1498 (11th Cir. 1987).
Mr. DiGiorgio raises various questions of fact with respect to the verdict:
whether the statements he made on the GinnieNET forms were false assertions or
honest opinions; whether the Radius loans were eligible for FHA insurance; and
whether the misrepresentations or omissions were “in connection with the purchase
or sale of” or “in the offer or sale of” the MBS. Mr. DiGiorgio also recharacterizes
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his dissemination argument into one of factual sufficiency by asserting that, on this
record, any misstatements in the GinnieNET forms were not material because they
had not been disseminated to the public. He also claims that he lacked the
necessary scienter and offers as evidence the fact that he did not disseminate the
forms or prospectuses. Both scienter and materiality are mixed questions of law
and fact and are generally within the province of the jury. See Merch. Capital, 483
F.3d at 766.
Mr. DiGiorgio first points to the declaration of James Hodgins, a former
securities broker at Wachovia Securities—one of the entities that purchased the
Radius MBS. In his declaration, Mr. Hodgins stated that, because the Radius MBS
were backed by Ginnie Mae, the quality of the underlying loans was irrelevant to
him. But again, the test for materiality in an SEC civil enforcement action is
objective, and asks “whether a reasonable man would attach importance to the fact
misrepresented” when deciding whether to purchase the security. Merch. Capital,
483 F.3d at 766. If a borrower defaults and the loans are paid back before
maturity, the MBS investor loses the interest payments remaining on the life of the
loan. On this point, there is evidence that Ginnie Mae-guaranteed MBS are
attractive to investors, in part, because the underlying loans’ quality lessens the
risk that the borrowers will default. Consequently, we find that the jury’s verdict
was not against the great weight of the evidence.
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Mr. DiGiorgio next claims that that he lacked the necessary scienter in
making the alleged misrepresentations. As proof, he asserts that he never
disseminated the GinnieNET forms to the public. Moreover, Mr. DiGiorgio claims
that he was unaware of the prospectuses’ existence—and consequently did not
distribute them—because the MBS were exempt from the antifraud and
registration. See 15 U.S.C. §77c(a)(2) and d(a)(2); 17 C.F.R. § 230.500(a). Or, at
least he says he believed they were. For these reasons, he argues that he could not
have had the necessary scienter under § 17(a) or Rule 10b–5.
We note first that though the MBS are exempt from registration
requirements, they are not exempt from the antifraud provisions of § 17(a), §
10(b), and Rule 10b–5. In addition, we do not require actual knowledge to
establish scienter under § 17(a)(1) or Rule 10b–5. See Monterosso, 756 F.3d at
1335 (scienter can “be established by a showing of knowing misconduct or severe
recklessness.”). Lastly, § 17(a)(2) and § 17(a)(3) only require negligence. Id. at
1334.
Here we conclude that the jury’s verdict was not against the great weight of
the evidence. The type of false information on the GinnieNET forms—e.g., invalid
social security numbers, false case numbers, and falsified employment
information—was quite particular. In addition, seventy percent of the underlying
loans did not meet FHA insurability standards. There is also evidence that, as the
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CEO and sole officer of Radius, Mr. DiGiorgio instructed his employees to make
loans that fell below FHA requirements and overruled employees who refused to
do so. In sum, he was in control of Radius’ operations. With respect to the
prospectuses, as we have noted, the district court dismissed the Rule 10b–5(b)
claim that required Mr. DiGiorgio to have “made” the misrepresentations on the
prospectuses themselves. Thus, whether Mr. DiGiorgio created, knew of, or
distributed the prospectuses is inconsequential because the information in the
prospectuses was based on the misrepresentations he had made on GinnieNET
forms.
Having already expounded on the substantial amount of evidence against
Mr. DiGiorgio, we affirm the district court’s denial of his motion for a new trial.
VII
We affirm the district court’s legal interpretation of § 17(a) and Rule 10b–5,
denial of Mr. DiGiorgio’s objection to the admission of evidence, denial of Mr.
DiGiorgio’s proposed jury instructions and jury verdict form, and denial of Mr.
DiGiorgio’s motion for a new trial.
AFFIRMED.
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