Securities and Exchange Comm. v. Infinity Group Co. ( 2000 )

Opinions of the United
2000 Decisions States Court of Appeals
for the Third Circuit
5-4-2000
Securities and Exchange Comm. v. Infinity Group
Co.
Precedential or Non-Precedential:
Docket 98-1215, 98-1216, 98-1217
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Filed May 4, 2000
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 98-1215, 98-1216, 98-1217
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION,
v.
THE INFINITY GROUP COMPANY; GEOFFREY P.
BENSON; GEOFFREY J. O'CONNOR; FUTURES HOLDING
COMPANY; SLB CHARITABLE TRUST; SUSAN L.
BENSON; JGS TRUST; LINDSEY SPRINGER;
BONDAGE BREAKER MINISTRIES
LINDSEY SPRINGER; BONDAGE BREAKER MINISTRIES,
THIRD-PARTY PLAINTIFFS
v.
THE UNION STATES OF THE CONSTITUTION, i.e.;
ALASKA; ALABAMA; ARKANSAS; ARIZONA; CALIFORNIA;
COLORADO; CONNECTICUT; DELAWARE; FLORIDA;
GEORGIA; HAWAII; IOWA; ILLINOIS; INDIANA; KANSAS;
KENTUCKY; LOUISIANA; MASSACHUSETTS; MARYLAND;
MAINE; MICHIGAN; MINNESOTA; MISSOURI;
MISSISSIPPI; MONTANA; NORTH CAROLINA; NORTH
DAKOTA; NEBRASKA; NEW HAMPSHIRE; NEW JERSEY;
NEW MEXICO; NEVADA; NEW YORK; OHIO; OKLAHOMA;
OREGON; PENNSYLVANIA; RHODE ISLAND; SOUTH
CAROLINA; SOUTH DAKOTA; TENNESSEE; TEXAS;
UTAH; VIRGINIA; VERMONT; WISCONSIN; WEST
VIRGINIA; WYOMING; WASHINGTON; FEDERAL DISTRICT
OF COLUMBIA,
THIRD-PARTY DEFENDANTS
Geoffrey J. O'Connor (98-1215), Geoffrey P. Benson
(98-1216), Susan L. Benson, Pro Se on behalf of
herself in her representative capacity on behalf of
SLB Charitable Trust, Futures Holding Company
and JGS Trust (98-1217),
Appellants
ON APPEAL FROM THE
UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
Civil No.: 97-CV-05458
District Court Judge: Honorable Stewart Dalzell
Argued: March 2, 1999
Before: ALITO and MCKEE, Circuit Judges, and
SCHWARTZ, District Judge*
(Filed: May 4, 2000)
Richard L. Scheff, Esq. (Argued)
Montgomery, McCraken, Walker &
Rhoads, LLP
123 South Broad Street
Philadelphia, PA 19109
Attorney for Appellants
Harvey J. Goldschmid, Esq.
Richard M. Humes, Esq.
Samuel M. Forstein, Esq.
Timothy N. McGarey, Esq. (Argued)
Securities and Exchange
Commission
450 Fifth Street, N.W., Stop 2-7
Washington, DC 20549
Attorney for Appellee
United States Securities and
Exchange Commission
_________________________________________________________________
* The Honorable Murray M. Schwartz, Senior District Judge of the United
States District Court for the District of Delaware, sitting by
designation.
2
J. Bradford McIlvain, Esq.
Dilworth, Paxson, Kalish &
Kauffman
1735 Market Street
3200 The Mellon Bank Center
Philadelphia, PA 19103
Attorney for Appellee
Robert F. Sanville
Mr. Lindsey K. Springer, Pro Se
(Argued)
5147 South Harvard
Suite 116
Tulsa, OK 74135
OPINION OF THE COURT
McKEE, Circuit Judge.
Defendants appeal the grant of a permanent injunction in
this civil action for securities fraud. The defendants argue
that the instruments that they offered to investors were not
"securities" under federal law, and that the district court
therefore lacked subject matter jurisdiction. The defendants
also challenge certain evidentiary and procedural rulings
that the district court made during the hearing on the
motion for a permanent injunction. For the reasons that
follow, we will affirm.
I.
In November 1995, defendants Geoffrey Benson and
Geoffrey O'Connor formed the Infinity Group Company
Trust (the "Trust" or "TIGC").1 Thereafter, the Trust unveiled
an "Asset Enhancement Program" that offered investors an
opportunity to invest with the expectation of exceedingly
high return and minimal risk. Investors in TIGC were asked
_________________________________________________________________
1. Benson was the Executive Trustee Director of TIGC. O'Connor was
also a trustee of TIGC. As Trustees of TIGC, Benson and O'Connor
exercised sole discretion of the Trust's investment programs.
3
to execute "property transfer contracts" pursuant to which
the investors contributed substantial sums of money to the
Trust for the Trust to invest. TIGC guaranteed investors
that they would receive an annual rate of return ranging
from 138% to 181% depending on the amount of the
participant's principal investment.2 The guarantees were
based upon the Trust's purported performance experience,
financial connections, and the ability to pool large amounts
of money. Participants were promised that their principal
would be repaid upon demand. Once the property transfer
contracts were executed, the transferred funds became
assets of the Trust and were subject to investment at the
sole discretion of the Board of TIGC.
TIGC's solicitation was successful. It raised
approximately $26.6 million from over 10,000 investors
nationwide. However, TIGC only invested $12 million of the
funds it received pursuant to the property transfer
contracts, and it never earned a profit on the funds it did
invest.3 Rather, the Trust sustained mounting loses that it
failed to disclose to investors. The district court described
what happened as follows:
TIGC also used over $2 million in so-called downline
commissions to keep the engine of this enterprise
humming like a new Mercedes on the autobahn. In the
time-dishonored tradition of Charles Ponzi, TIGC
substituted new investors' money for real investment
return on old investors' funds.
The rest of TIGC's expenditures were even less
investment-related. More than $816,000 was spent on
real estate, a significant portion of which went to the
purchase and development of a personal residence for
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2. For property transfers of $1,200 to $50,000, the guaranteed rate of
return was 138%. For amounts greater than $50,000, the return rate
was 181%.
3. Defendants contend that the money that was not invested was used
for "operating expenses" and charitable contributions or that it
constituted "excess profits." Appellant's Br. at 11. The evidence at trial
established that the money not invested was used to pay "dividends" to
earlier investors and personal expenses of the Benson family. Appellee's
Br. at 12-13.
4
Geoffrey and Susan Benson . . . the purchase or lease
of cars for their garage, . . . a $6,133.46 spending
spree at Circuit City; more than $2,000 spent at
television retailers; over $50,000 in ``household
expenses'; $5,000 to pay off a home mortgage; $10,000
to pay off personal credit card bills; $10,000 for school
tuition for the Bensons' son; as well as hundreds for
jewelry, bowling equipment and membership fees, [sic]
groceries. In short, the Bensons used TIGC as their
personal checking account.
In addition, Geoffrey Benson made an undisclosed
donation of $1.265 million of investor funds to Lindsey
K. Springer, d/b/a Bondage Breaker Ministries.
In addition to all this, defendants Geoffrey Benson and
Geoffrey O'Connor paid themselves nearly $300,000 in
cash from TIGC's funds, none of it reported to the
Internal Revenue Service or even documented on
TIGC's books-- which did not exist. Lastly, more than
$1.9 million remains unaccounted for, . . . .4
SEC v. Infinity Group Co., 993 F. Supp. 324, 325-26 (E.D.Pa.
1998) (original footnote omitted).
On August 27, 1997, the SEC filed the instant complaint
in the United States District Court for the Eastern District
of Pennsylvania charging "an ongoing scheme, directed by
Benson and O'Connor, to defraud public investors through
the offer and sale of TIGC securities, in the form of
investment contracts," App. 41a, in violation of Section 22
of the Securities Act of 1933, 15 U.S.C. 77v, and Sections
21 and 27 of the Securities Exchange Act of 1934, 15
U.S.C. 78u & 78aa. The Commission sought a permanent
injunction, a freeze of the assets of TIGC, appointment of a
Trustee to manage the affairs of TIGC, and an order
requiring defendants, and certain third parties (the"relief
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4. The district court agreed with the SEC's claim that the operation of
the Trust was "the classic modus operandi of Ponzi schemes." Appellee's
Br. at 21. For a brief explanation of the origin of"Ponzi schemes" and
Charles Ponzi see Bald Eagle Area School District v. Keystone Financial,
Inc., 189 F.3d 321, 324 n.1(3rd Cir. 1999), and Mark A. McDermott,
Ponzi Schemes and the Law of Fraudulent and Preferential Transfers, 72
Am. Bankr. L. J. 157, 158 (1998).
5
defendants") to disgorge assets of TIGC that had been
improperly transferred.5
On September 5, 1997, after a hearing, the district court
issued an Order for Preliminary Injunction, Appointment of
Trustee, and Freeze of Assets and Other Relief. Although
the Trust's funds and assets were frozen, the September 5
Order provided for the release of funds to pay legal
expenses and fees, as well as defendants' living expenses.
On February 6, 1998, the district court entered afinal
judgment against the defendants enjoining them from
further violations of the securities laws and ordering
disgorgement of all amounts contributed to the Trust by the
Trust participants. This appeal followed.
II.
Defendants raise four issues on appeal. First, they argue
that the property transfer contracts that were used as an
"investment" vehicle here were not "securities" under
federal securities laws, and therefore that the district court
lacked subject matter jurisdiction. Second, they argue that
inasmuch as they sincerely believed in the investments that
TIGC made, there can be no liability for securities fraud.
Third, they allege that the district court erred in denying
their concededly untimely demand for a jury trial. Lastly,
they contend that several allegedly erroneous procedural
and evidentiary rulings constitute reversible cumulative
error even though the rulings were harmless when
considered separately. We will discuss each argument in
turn.
III.
We must first address the defendants' claim that the
_________________________________________________________________
5. The SEC sought disgorgement from the following relief defendants:
Futures Holding Company (controlled, in part, by Benson); SLB
Charitable Trust (a charitable trust established in the name of Susan
Benson, Benson's wife); Susan L. Benson (trustee of SLB and TIGC); JGS
Trust (a "family trust" controlled by Benson); Lindsey Springer (manager
and "legal representative" of TIGC and controller of Bondage Breaker
Ministries); and Bondage Breaker Ministries.
6
district court lacked subject matter jurisdiction because the
"property transfer contracts" were not "securities" under
federal securities laws. Inasmuch as this is an appeal from
a final judgment, we have jurisdiction to review the district
court's decision under 28 U.S.C. S 1291. We exercise
plenary review over a district's ruling on a motion to
dismiss for lack of subject matter jurisdiction. Delaware
Valley Citizens Council v. Davis, 932 F.2d 256, 264 (3d Cir.
1991).6
It is well established that federal securities laws only
apply to the purchase or sale of "securities" as defined
therein. Steinhardt Group Inc. v. Citicorp, 126 F.3d 144, 150
(3d Cir. 1997).
``[S]ecurity' means any note, stock, treasury stock,
bond, debenture, evidence of indebtedness, certificate
of interest or participation in any profit-sharing
agreement, collateral-trust certificate, . . . investment
contract, voting-trust certificate, . . . any interest or
instrument commonly known as a ``security', or any
certificate of interest or participation in, . . . or right to
subscribe to or purchase, any of the foregoing.
15 U.S.C. S 77b(a)(1) (emphasis added). The property
transfer agreements that TIGC's investors executed
certainly appear to be "investment contract[s]," however
"[t]he term investment contract has not been defined by
Congress, nor does the legislative history to the 1933 and
1934 Acts illuminate what Congress intended by the term
investment contract." Steinhardt, 126 F.3d at 150-51. In
SEC v. W.J. Howey Co., 328 U.S. 293 (1946), the Supreme
Court provided a framework for determining when such
agreements are subject to federal law. The Court stated:
[A]n investment contract for purposes of the Securities
Act means a contract, transaction or scheme whereby
_________________________________________________________________
6. Although the district court treated defendants' motion to dismiss for
lack of subject matter jurisdiction as a Rule 12(h)(3) motion, the parties
here have treated it as a 12(b)(1) motion. We exercise plenary review
under either. See Nationwide Insurance Co. v. Patterson, 953 F.2d 44, 45
(3d Cir. 1991) (Rule 12(h)(3) motion to dismiss is subject to plenary
review).
7
a person invests his money in a common enterprise
and is led to expect profits solely from the efforts of the
promoter or a third party, it being immaterial whether
the shares in the enterprise are evidenced by formal
certificates or by nominal interests in the physical
assets employed in the enterprise.
Howey, 328 U.S. at 298-99. Thus, the property transfer
contracts between TIGC and its investors are securities if
they were (1) "an investment of money," (2)"in a common
enterprise," (3) "with profits to come solely from the efforts
of others." Id. at 301, Steinhardt , 126 F.3d at 151.
Defendants agree that the property transfer contracts
satisfy the first and third prongs of the Howey test. Indeed,
they can hardly deny it. There clearly was an investment of
money because the contracts required and evidenced the
monetary transfer solely for the purposes of receiving the
"guaranteed" return of between 138% and 181%. See
Steinhardt, 126 F.3d at 151 (finding prong one met where
an investment was made with the expectation of an 18%
return on investment). Similarly, the third prong is clearly
satisfied here because the expected return was to be "with
profits to come solely from the efforts of others." Id.
(quoting Howey, 328 U.S. at 301).
Our focus under the third prong is whether "the
purchaser [is] attracted to the investment by the prospect of
a profit on the investment rather than a desire to use or
consume the item purchased." Id. at 152. TIGC's investors
did not intend to consume anything in return for the money
they gave to TIGC. Whether the investor has "meaningfully
participated in the management of the partnership in which
it has invested such that it has more than minimal control
over the investment's performance" is also relevant under
the third prong. Id. TIGC concedes that"the TIGC Board
retained exclusive control over the investment decision."
Appellant's Br. at 18. Thus, the participants were passive
investors who exercised no control over the funds they gave
to TIGC. Those investors depended upon the managerial
decisions of others. Therefore, we agree that thefirst and
the third prongs have been satisfied,7 and we will focus our
_________________________________________________________________
7. Even though the parties agree that the first and third prong are
satisfied, we must independently satisfy ourselves that those prongs are
8
analysis upon the "common enterprise," or second prong, of
the Howey test.
We have held that the common enterprise requirement is
satisfied by "horizontal commonality."8 Horizontal
commonality is characterized by "a pooling of investors'
contributions and distribution of profits and losses on a
pro-rata basis among investors." Steinhardt , 126 F.3d at
151 (quoting Maura K. Monaghan, An Uncommon State of
Confusion: The Common Enterprise Element of Investment
Contract Analysis, 63 Fordham L.Rev. 2135, 2152-53
(1995) (footnotes omitted)). See also Salver v. Merrill Lynch,
Pierce, Fenner & Smith, 682 F.2d 459, 460 (3d Cir. 1982)
(holding that a commodity account is not a "security"
because it is not part of a pooled group of funds). Here, it
is undisputed that TIGC's solicitation and membership
materials stated that TIGC would pool participant
_________________________________________________________________
established because the inquiry is jurisdictional, and we have an
independent responsibility to insure that subject matter jurisdiction
exists. See Steel Company v. Citizens for a Better Environment, 523 U.S.
83, 94 (1998) (federal courts must decide jurisdictional issues "even
when not otherwise suggested, and without respect to the relation of the
parties to it.").
8. Circuit courts of appeals utilize two distinct approaches in analyzing
commonality; "vertical commonality," and "horizontal commonality."
"Vertical commonality" focuses on the community of interest between the
individual investor and the manager of the enterprise. See e.g., Long v.
Acultz Cattle Co., 881 F.2d 129 (5th Cir. 1989) ("A common enterprise is
one in which the fortunes of the investor are interwoven with and
dependent upon the efforts and success of those seeking the investment
or of third parties" (quoting Glenn W. Turner Enterprises, Inc., 474 F.2d
476, 482 n.7 (9th Cir. 1973)). "Horizontal commonality" examines the
relationship among investors in a given transaction, requiring a pooling
of investors' contributions and distribution of profits and losses on a
pro-rata basis. See e.g., Salcer v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 682 F.2d 459 (3d Cir. 1982); Cooper v. King, 114 F.3d 1186 (6th
Cir. 1997); SEC v. Lauer, 52 F.3d 667 (7th Cir. 1995).
In Steinhardt, we declined to decide if we should adopt a vertical
commonality analysis when conducting an inquiry under the
commonality prong of Howey. Steinhardt , 126 F.3d at 151. Inasmuch as
we conclude that horizontal commonality exists here, we need not now
decide if we should also adopt a vertical commonality analysis.
9
contributions to create highly-leveraged investment power
that would yield high rates of return while protecting the
investors' principal contributions. For example, the Trust's
Private Member Material and Manual represents:
The Infinity Group Company invests for profit by
accepting amounts as low as [$1200] from thousands
of people like you, and creating large blocks of funds
that are in the millions of dollars. This gives the Trust
a leverage position whereby we can command large
profits, and have the security of never putting the
principal at risk. This is very sophisticated investing
that cannot be accomplished unless you have millions
of dollars to deposit in a top world US bank.
App. 261a. However, TIGC argues that commonality is
nevertheless lacking because the investors did not"share
proportionately in the profits or losses of TIGC or the
various investment programs," Appellant's Br. at 19
(emphasis omitted). Rather, TIGC asserts that "each
participant would execute an individual contract with TIGC
providing for a fixed return, payable on demand (principal
only) or on a specific date. . . ." Id. According to TIGC:
[T]he property transfers were obligations of TIGC to
repay the other party to the contract at a specific time,
and did not represent a direct interest in TIGC, any
other entity or a specific security or investment vehicle.
. . . The property transfers were not earmarked for any
particular purpose, or even any particular type of
investment. . . . Under these contracts, the TIGC Board
retained exclusive control over the investment decision
and participants were not promised that their funds
would be invested in any particular investment
program.
Id. at 18 (internal citations omitted).
However, TIGC's denial of horizontal commonality is
contrary to the record. By the plan's very terms, the return
on investment was to be apportioned according to the
amounts committed by the investor. Each investor's
apportionment of profits was represented by certain "capital
units" obtained in exchange for executing a "property
transfer agreement." The number of units an investor
10
purchased was, of course, dependent upon the size of his
or her investment and the investor's return was directly
proportional to the amount of that investment. TIGC's
solicitation materials stated:
[W]ith the Private Trust, what you will be doing is
making a Property Transfer into the Trust in exchange
for 1 Capital Unit for every $100 deposit. In turn the
Trust guarantees that you will make a certain annual
dividend. These dividends are a minimum of 20% up to
181% depending on the amount of Capital Units you
hold.
Supp. App. 77. The materials also stated that "[d]ividends
are dispersed . . . as the assets of the Trust increase and
as the Board of Trustees elects to pay guaranteed
dividends," App. 261a.
TIGC seeks to negate the obvious import of its structure
by arguing that there are technical characteristics that
distinguish the instruments involved here from those that
are "securities." We are not persuaded. The defendants'
claim that the property transfer contracts do not constitute
"investment contracts" because the investors were to
receive a fixed rate of return rather than a rate dependent
on the success of the investments. The defendants argue:
[I]f the aggregate value of the investments increased,
each contract holder would not share in the
appreciation. Rather, they would receive only their
fixed, contractually agreed-upon return. . . . Similarly,
if the value of TIGC investments decreased, the
contract holder would still be entitled to the agreed-
upon, fixed return on his or her property transfer
contract. . . . In the event that the value of the
investments dropped below the ability of TIGC to honor
its commitment to a specific individual, the
participants would not share proportionately (``pro rata')
in the shortfall.
Appellant's Br. at 19 (internal citations omitted). However,
the definition of security does not turn on whether the
investor receives a variable or fixed rate of return. See El
Khaden v. Equity Securities Corp., 494 F.2d 1224, 1229
(9th Cir. 1974) (that expected profits remain constant while
11
risk of loss varies does not remove a plan from the
definition of a security); National Bank of Yugoslavia v.
Drexel Burnham Lambert, Inc., 768 F.Supp 1010, 1016
(S.D.N.Y. 1991) (holding that time deposits made for
investment purposes in return for a fixed rate of interest
were investment instruments rather than consumer or
commercial bank loans).
Profits can be either "capital appreciation resulting from
the development of the initial investment" or earnings
contingent on profits gained from the use of investors'
funds. United Housing Foundation, Inc. v. Forman , 421 U.S.
837, 852 (1975). The mere fact that the expected rate of
return is not speculative does not, by itself, establish that
the property transfer contracts here are not "investment
contracts" within the meaning of federal securities laws.
See Howey, 328 U.S. at 301 (explicitly rejecting the theory
that a non-speculative enterprise cannot be considered an
investment contract; "it is immaterial whether the
enterprise is speculative or non-speculative").
Moreover, the transactions here are easily distinguished
from those in Marine Bank v. Weaver, 455 U.S. 551 (1982),
where the Supreme Court held that FDIC-protected
certificates of deposit offering a fixed rate of return were not
securities. There, the Supreme Court stated that Congress
"did not intend to provide a broad federal remedy for all
fraud." Id. at 557. The Court reasoned that certificates of
deposit issued by federally-regulated banking institutions
differed from other long-term debt obligations in part
because "[i]t is unnecessary to subject issuers of bank
certificates of deposit to liability under the antifraud
provisions of the federal securities laws since the holders of
bank certificates of deposit are abundantly protected under
federal banking laws," Id. at 559. The Court noted that a
"purchaser of a certificate of deposit is virtually guaranteed
payment in full," Id. at 551. Here, TIGC's investors were
offered no such protection.9"The crux of the Marine Bank
decision is that federal banking regulations and federal
_________________________________________________________________
9. TIGC's investors are therefore like "the holder[s] of an ordinary long-
term debt obligation (who) assume[ ] the risk of the borrower's
insolvency." Id. at 551-52.
12
deposit insurance eliminate the risk of loss to the investor,
therefore obviating the need for protection of the federal
securities laws," Gary Plastic Packing Corp. v. Merrill Lynch,
756 F.2d 230, 240 (2d Cir. 1985).10 As will become more
evident in our discussion of TIGC's "investment" in certain
railroad bonds, the investors here were guaranteed nothing
despite TIGC's purported guarantee of principal."The
fundamental purpose undergirding the Securities Acts is ``to
eliminate serious abuses in a largely unregulated securities
market,' " Reves v. Ernst & Young, 494 U.S. 56, 60 (1990)
(quoting United Housing, 421 U.S. at 849 (distinguishing
Marine Bank where no risk-reducing factor was present)).
The aim is to prevent further exploitation of the public
by the sale of unsound, fraudulent, and worthless
securities through misrepresentation; to place
adequate and true information before the investor; to
protect honest enterprise, seeking capital by honest
presentation, against the competition afforded by
dishonest securities offered to the public through
crooked promotion. . . .
S.Rep. No. 47, 73d Cong., 1st Sess., at 1 (1933).
We take a flexible and realistic approach in determining
when a particular scheme requires the protection of federal
securities laws.
For example, in Howey, the defendant owned large tracts
of citrus acreage that it sold to the public. Purchasers of
the tracts received land sales and service contracts and,
upon full payment of the purchase price, the land was
conveyed by warranty deed. However, under the
arrangement between Howey and the purchasers, a
servicing corporation was given "full and complete"
possession of the acreage, and full discretion to grow,
_________________________________________________________________
10. Defendants contend that "just because the property transfers at
issue in this case do not constitute securities does not mean they were
exempt from any form of regulation whatsoever. Perhaps there are other
branches of government, state or federal, with jurisdiction over TIGC, or
other regulations or statutes which TIGC's conduct violated." Appellant's
Br. at 20. However, they do not identify any applicable regulation or
statute. This is consistent with our conclusion that this enterprise
required the protections of federal securities laws.
13
harvest, and market crops grown on the tracts with very
little accountability to the purchaser. The SEC instituted an
action against Howey because the corporation had not
complied with the registration requirements of federal
securities laws. Howey defended by arguing that
registration was not required because it was not selling
"securities" under federal law. The "lower courts . . . treated
the contracts and deeds as separate transactions involving
no more than an ordinary real estate sale and an
agreement by the seller to manage the property for the
buyer," Howey, 328 U.S. at 297-98, and concluded that
they did not constitute "securities" under federal law.
However, the Supreme Court disagreed because Howey was
not merely offering fee simple interests in land coupled with
a contract for management services. Rather, the Court
concluded that Howey was offering "an opportunity to
contribute money and to share in the profits" of the
enterprise. Id. at 299. "[The purchasers were] attracted
solely by the prospects of a return on their investment,"
and the land sales contracts and warranty deeds were
merely a "convenient method" by which to apportion profits.
Id. at 300. Thus, the Court concluded that the agreements
were securities. The Court reasoned:
The investors provide the capital and share in the
earnings and profits; the promoters manage, control
and operate the enterprise. It follows that the
arrangements whereby the investors' interests are
made manifest involve investment contracts, regardless
of the legal terminology in which such contracts are
clothed.
Id. (emphasis added). See also SEC v. C.M. Joiner Leasing
Corp., 320 U.S. 344 (1943) (finding that a defendant selling
assignment of oil leases was "not as a practical matter
offering naked leasehold rights," instead "the (oil)
exploration enterprise was woven into these leaseholds, in
both an economic and a legal sense; the undertaking to
drill a well runs through the whole transaction as the
thread on which everybody's beads were strung.")
Here, the investors' beads were strung upon the
gossamer guarantee of seemingly impossibly high returns
at no risk. The fact that TIGC promised a "fixed rate of
14
return" based upon the amount invested is irrelevant. We
will not embroider a loophole into the fabric of the
securities laws by limiting the definition of"securities" in a
manner that unduly circumscribes the protection Congress
intended to extend to investors. Rather, we must scrutinize
these "property transfer contracts" in a manner that
"permits the fulfillment of the statutory purpose of
compelling full and fair disclosure relative to the issuance
of the many types of instruments that in our commercial
world fall within the ordinary concept of a security."
Howey, 328 U.S. at 299 (internal quotation marks and
citation omitted). Our inquiry:
embodies a flexible rather than a static principle, one
that is capable of adaptation to meet the countless and
variable schemes devised by those who seek the use of
the money of others on the promise of profits.
Id.
We must consider that Congress "enacted a definition of
``security' sufficiently broad to encompass virtually any
instrument that might be sold as an investment," Reves,
494 U.S. at 61. The securities laws were intended to
provide investors with accurate information and to protect
the investing public from the sale of worthless securities
through misrepresentations. H.R.Rep. No. 85, 73d Cong.,
1st Sess., at 1-5 (1933). As noted above, TIGC accepted
nearly $26.6 million from approximately 10,000 investors.
TIGC persuaded those investors to part with their cash by
guaranteeing the proverbial "blue sky;" fantastic profit at no
risk. Of the $26.6 million raised, more than half of the
money was used to satisfy the material "needs" of the
individual defendants. The balance was poured down empty
wells that could hardly be confused with prudent
investments. TIGC realized no return whatsoever on those
"investments." Given the totality of the circumstances here,
the property transfer contracts clearly constitute securities,
and the district court therefore had subject matter
jurisdiction.
15
IV.
Defendants argue that the SEC failed to establish the
scienter required for liability under Section 17(a) of the
Securities Act,11 Section 10(b) of the Exchange Act12 or Rule
10b-5.13 They argue that they cannot therefore be liable
even if the property transfer contracts were securities.
The SEC must establish the requisite scienter to
establish securities fraud. Ernst & Ernst v. Hochfelder, 425
U.S. 185, 193 (1976); Newton v. Merrill, Lynch, Pierce,
Fenner & Smith, Inc., 135 F.3d 266, 272-73 (1998); McLean
v. Alexander, 599 F.2d 1190, 1196-97 (3d Cir. 1979).
Scienter is "a mental state embracing intent to deceive,
manipulate or defraud," Hochfelder, 425 U.S. at 193 n.12;
McLean, 599 F.2d at 1197. We have previously held that
the scienter required for securities fraud includes
recklessness, and we have adopted the definition of
recklessness set forth in Sundstrand Corp. v. Sun Chemical
Corp., 553 F.2d 1033 (7th Cir. 1977). See also Sharp v.
Coopers & Lybrand, 649 F.2d 175, 1993 (3d Cir. 1981).14
Accordingly, recklessness includes:
[H]ighly unreasonable (conduct), involving not merely
simple, or even inexcusable negligence, but an extreme
departure from the standards of ordinary care, . . .
_________________________________________________________________
11. Section 17(a) makes it unlawful for any person in the offer or sale of
any security to: (1) "employ any device, scheme or artifice to defraud;"
(2)
"obtain money or property by means of any untrue statement [or
omission] of material fact;" or (3) to "engage in any transaction,
practice
or course of business which operates . . . as a fraud or deceit upon the
purchaser." 15 U.S.C. S 77q(a).
12. Section 10(b) of the Exchange Act prohibits"manipulative" or
"deceptive" conduct "in connection with the purchase or sale of a
security." 15 U.S.C. S 78j(b).
13. Rule10b-5 proscribes (1) the employment of any "device, scheme or
artifice to defraud;" (2) the making of "any untrue statement [or
omission] of material fact;" and (3) the engagement "in any act, practice,
or course of business which operates . . . as a fraud or deceit upon any
person, in connection with the purchase or sale of any security." 17
C.F.R. S 240.10b-5.
14. The recklessness standard applies to both omissions and
misstatements. McLean, 599 F.2d at 1197.
16
which presents a danger of misleading buyers or sellers
that is either known to the defendant or is so obvious
that the actor must have been aware of it.
McLean, 599 F.2d at 1197 (citing Sundstrand Corp., 553
F.2d at 1045).
The SEC argues that scienter is evidenced by TIGC's
guarantees of high rates of return that were unsupported
by any honest due diligence. The defendants, on the other
hand, contend that their actions "were entirely consistent
with the fact that they believed their representations (in the
Trust literature and elsewhere) [to be] true." Appellant's Br.
at 23. However, good faith, without more, does not
necessarily preclude a finding of recklessness. Therefore,
even if the defendants believed TIGC's investments were
sound, they may still be liable for securities fraud if their
belief was based upon nothing more than a reckless
disregard of the truth. Moreover, we reiterate that TIGC
invested less than half of the money obtained under the
property transfer contracts. In addition, a minimum of
$3,649,000 of the funds was spent on such things as the
Bensons' home, a new Mercedes Benz, etc. Nevertheless,
the defendants claim that they "attempted to obtain
documentation and contractual guarantees from the
investment providers" and "were [themselves] the victims of
fraud on the part of the investment providers." Id. at 29-30.
We are not persuaded.
The defendants concede that no profits were ever realized
from the funds that were actually invested. Appellant's Br.
at 11. One need look no further than one example of an
investment that TIGC made to understand why no profit
was ever realized and to appreciate the specious nature of
the denials of recklessness. In October 1996, TIGC
purchased a bond of the Marietta and Northern Georgia
Railway that had been issued in 1889. TIGC paid $302,000
for that bond, apparently based upon "unsubstantiated
boasts of value ranging from $35 million to $107 million,
and without performing any meaningful type of due
diligence inquiry to clarify the $72 million discrepancy."
Appellee's Br. at 28. TIGC paid $302,000 even though the
bond had a face value of only $1000. Despite the unique
investment acuity proclaimed in the Trusts' materials, the
17
defendants missed a little glitch in this investment
bonanza. The railroad that issued the bond had gone
bankrupt in 1895, and it had ceased to exist in 1896.
Supp. App. 1-4. The bond was therefore "worthless except
for its modest value as a collectible (which [was] estimated
at $80-100.)." Appellee's Br. at 29. Thus, TIGC used a
portion of those funds that it did not divert to personal use
to pay $302,000 for a bond with a face value of $1,000 that
had been issued by a railroad that had gone out of
business 100 years ago.15 In referring to this investment the
district court stated:
[W]e suspect that even a complete neophyte infinance,
accounting, or economics would suspect, when
confronted with such an investment, that defendants'
business was on the wrong track. Instead, TIGC chose
in its materials to value the ancient bond at $107
million!
993 F. Supp. at 330. It is a small wonder that the district
court referred to TIGC as a "financial train wreck." Id. at
326. Yet, TIGC's offering materials proclaimed that the
unique skill it provided would enable the Trust to
guarantee very high rates of return with no risk to
principal. The solicitation materials boasted that
participants would have "an opportunity that has a 100%
success rate, for 100% of the people who become associated
with my business." Supp. App. 74. Investors were told that
their investments were "guaranteed by a top 100 World
Bank" and "the returns (Profits) that (TIGC based) the
[return rate of] 138% and 181% on (were) guaranteed by
the Trust, making this one of the safest programs
available." App. 271a (emphasis omitted).
Even if we indulge the defendants and assume arguendo
that they believed in these guarantees, we nevertheless
must examine the foundation such a belief would have
rested upon. A good faith belief is not a "get out of jail free
card." It will not insulate the defendants from liability if it
is the result of reckless conduct. See McLean .16 However,
_________________________________________________________________
15. This investment was therefore the ultimate"turn around play."
16. We will assume that a defendant can genuinely have a subjective
belief that demonstrates good faith even though it is the result of
reckless conduct. However, it clearly can be argued that a subjective
belief based only upon an inquiry that is reckless can never properly be
considered a "good faith" belief.
18
under our standard of review, we must view the evidence in
the light most favorable to the SEC as verdict winner.
Eisenberg v. Gagnon, 766 F.2d 770, 778 (3d Cir. 1985). In
doing so, we readily conclude that the district court did not
err in finding that the SEC had established the necessary
scienter for securities fraud. The district court stated:
[W]e reject Geoffrey Benson's proffered defense that he
was ignorant of the falsity of TIGC's statements, and in
all events he acted in good faith in soliciting investor
funds and pursuing investments on behalf of TIGC.
Even assuming that those statements are true--and we
do not, given the mountain of evidence of invidious
motive here--ignorance provides no defense to
recklessness where a reasonable investigation would
have revealed the truth to the defendant. . . . Similarly,
good faith is no shield to liability under the antifraud
provisions of the Securities Acts. . . .
But we need not rely on either the ignorance defense,
or the existence of recklessness, in Geoffrey Benson's
case. His actual intent to defraud may be inferred from
his wholly successful, and carefully-crafted, offering
materials. . . . [T]he materials at length depict a
mysterious cabal into which only the initiated, like
TIGC's trustees, could enter. Benson's texts weave
visions of risk-free, high-return investing in a clever
tapestry of anti-government, individualist fervor.
Although the offering materials often speak of
mysteries and the need to maintain secrecy, in fact
Geoffrey Benson and his colleagues well knew that the
reason these secrets were not mentioned is because
there were none. As Geoffrey Benson and O'Connor
allowed their offering materials to be disseminated
around the country--by fax on demand, through a
legion of downline representatives, and via the mails--
they had to know that they were funding payments to
early investors with new investors' money rather than
with investment return. In short, Geoffrey Benson and
Geoffrey O'Connor knew precisely what they were doing
in these materials, and that was engaging in a hugely
successful interstate fraud.
19
At best, defendants' investment enterprise began as
a reckless financial enterprise, and evolved into an
intentional scheme to defraud investors of their money
when that money became necessary to prevent TIGC's
collapse. At worst, TIGC's Asset Enhancement Program
was from its inception a Ponzi scheme, calculated to
bilk investors of funds by preying on their excessive
greed, their feelings of exclusion from America's
current prosperity, and their fears of jackbooted
government intrusion.
993 F. Supp. at 330-31.17 The district court's analysis is
consistent with the record. Indeed, the record mandates the
court's conclusion.
In McLean, we stressed that plaintiff:
[c]ircumstantial evidence may often be the principal, if
not the only, means of proving bad faith. A showing of
shoddy accounting practices amounted at best to a
``pretended audit,' or of grounds supporting a
representation ``so flimsy as to lead to the conclusion
that there was no genuine belief back of it' have
traditionally supported a finding of liability in the face
of repeated assertions of good faith. . . . In such cases,
the factfinder may justifiably conclude that despite
those assertions the ``danger of misleading . . . (was) so
obvious that the actor must have been aware of it.
_________________________________________________________________
17. TIGC's materials also offered not so subtle hints that TIGC could
assist in "sheltering" assets where others with less expertise had failed.
TIGC's materials proclaimed:
If you are thinking about establishing an off-shore Trust or Bank
Account please beware! Belize, the Cayman's and may [sic] others
that used to be off-shore havens are about as safe as throwing your
money in the fireplace. The U.S. government has twisted most of
these off-shore government's arms to the point where they will give
out information and let the U.S. do whatever they want to.
We have access to off-shore facilities that are totally safe when
up properly. If you are serious, and do not mind spending some
time and money, you will want to contact us to get some of the
preliminary details.
Supp. App. 88-89.
20
Mclean, 599 F.2d at 1198 (citing Sundstrand, 553 F.2d at
1045)(footnotes omitted)). Although defendants assert a
good faith belief that their representations were true, "an
opinion that has been issued without a genuine belief or
reasonable basis is an ``untrue' statement which, if made
knowingly or recklessly, is culpable conduct actionable
under [the securities laws]." Eisenberg , 766 F.2d at 776
(emphasis added).
When the opinion or forecast is based on underlying
materials which on their face or under the
circumstances suggest that they cannot be relied on
without further inquiry, then the failure to investigate
further may ``support [ ]an inference that when [the
defendant] expressed the opinion it had no genuine
belief that it had the information on which it could
predicate that opinion.'
Id. (citing McLean, 599 F.2d at 1198). Here, the evidence
supporting TIGC's purported belief in its representations is
"so flimsy as to lead to the conclusion that there was no
genuine belief " in the validity of TIGC's guarantee or the
soundness of its investments. McLean, 599 F.2d at 1198
(citing Ultramares Corp. v. Touche, 174 N.E. 441 (N.Y.
1931)). The guarantees were "so recklessly made that the
culpability attaching to such reckless conduct closely
approaches that which attaches to conscious deception," Id.
at 1197 (citing Coleco Industries, Inc. v. Bernamn, 567 F.2d
569, 574 (3d Cir. 1977)). Indeed, here, the recklessness can
be equated to conscious deception, especially when we
consider how the defendants' primary focus was upon
improving their own (apparently lavish) lifestyle rather than
attempting to get a decent (let alone extraordinary) rate of
return on the investments of the participants in the Trust.
The Trust failed: (1) to obtain certified financial
statements from the programs in which it invested, (2) to
inquire into whether programs were insured or guaranteed
by a banking institution, (3) to obtain legal opinions about
the legitimacy of the investment programs and (4) to obtain
certificates of good standing.18
_________________________________________________________________
18. We also note that TIGC's "warning of risk" was less than
forthcoming. For example, the solicitation materials stated:
21
We are equally unpersuaded by the defendants' attempts
to shift the responsibility to the purported "dishonest and
fraudulent activities" of the investment providers.
Appellant's Br. at 28. Although several of the investment
companies that TIGC did business with are now either
defunct or under investigation, the evidence is inconsistent
with TIGC as a mere "victim." Rather, it appears that
several scoundrels were sleeping in the same bed, and
these defendants were amongst them. We doubt that it was
a mere oversight that TIGC continued to guarantee high
rates of return even after defaults in $7.5 million worth of
their investments. Thus, even if the initial guarantees were
not recklessly made, the record would still support a
finding that TIGC was reckless in failing to modify its
guarantees after such massive defaults. Accordingly, we
hold that the SEC presented abundant evidence of the
scienter requirement of securities fraud. See McLean, 599
F.2d at 1197.
V.
Defendants next contend that the district court erred in
denying their concededly untimely demand for a jury trial.
The SEC filed its Complaint on August 27, 1997. The
defendants filed an Answer on September 26, 1997; and
relief defendants filed an Answer on October 28, 1997. The
defendants did not file their Demand for Jury Trial until
January 13, 1998; two and one half months after thefinal
pleading in this case.
Fed. R. Civ. P. 38 states, in pertinent part, "Any party
may demand a trial by jury of any issue triable of right by
a jury by . . . serving upon the other parties a demand
_________________________________________________________________
Yes we do guarantee the returns you will make on your exempt
security transfer. . . . (P)lease do not interpret guarantee as
meaning
absolutely no risk. There is no such thing. There's a risk in
getting
out of bed in the morning. Or . . . a big rock could fall on Ohio
and
wipe out TIGC and everything else in the state. Remember, things
can happen that are beyond anyone's control.
App. 230a.
22
thereof in writing at any time after the commencement of
the action and not later than 10 days after the service of
the last pleading directed to such issue . . . ," Fed.R.Civ.P.
38(b). Fed R. Civ. P. 39(b) provides, "[N]otwithstanding the
failure of a party to demand a jury in an action in which
such a demand might have been made of right, the court in
its discretion upon motion may order a trial by jury of any
or all issues." Fed.R.Civ.P. 39(b). Therefore, a district court
may still grant a jury trial, even where the demand was
untimely made.
We review the district court's denial of the request for a
jury trial for abuse of discretion. William Goldman Theatres,
Inc. v. Kirkpatrick, 154 F.2d 66, 68 (3d Cir. 1946). "An
abuse of discretion is a ``clear error of judgment,' and not
simply a different result which can arguably be obtained
when applying the law to the facts of the case." In re Tutu
Wells Contamination Litigation, 120 F.3d 368, 387 (3d Cir.
1997) (quoting United Telegraph Workers, AFL-CIO v.
Western Union Corp., 771 F.2d 699, 703 (3d Cir. 1985)).
Although we understand that the delay here may have been
partly attributable to a change in counsel, it is nevertheless
uncontested that the only justification for the delay was
attorney inadvertence. Courts in this Circuit generally deny
relief when "the only basis for such relief advanced by the
requesting party is the inadvertence or oversight of
counsel." See Plummer v. General Elec. Co. , 93 F.R.D. 311,
313 (E.D. Pa. 1981); and cases cited therein. However, this
is not a mechanical rule.
Courts consider several factors in determining whether to
grant an untimely jury demand. They are:
1) whether the issues are suitable for a jury; 2)
whether granting the motion would disrupt the
schedule of the Court or the adverse party; 3) whether
any prejudice would result to the adverse party; 4) how
long the party delayed in bringing the motion; and 5)
the reasons for the failure to file a timely demand.
Fort Washington Resources, Inc. v. Tannen, 852 F. Supp.
341, 342 (E.D. Pa. 1994). Here, in denying the untimely
request, the district court noted that (i) "Defendants offer
nothing to excuse their untimeliness except the fact that
23
they switched counsel in mid-November" -- a full two
months prior to making the demand, and (ii) "the fact that
the demand was made only two weeks before trial-- and
not fully briefed until one week before trial -- means that
the Commission's case would be greatly prejudiced by our
granting the motion." App. 118a. The district court did not
abuse its discretion in denying the belated request for a
jury trial under these circumstances.
We agree that the defendants did not make an adequate
showing that the issues involved in this case were
particularly suitable for a jury. Contrary to the defendants'
assertion, we have rejected an argument for entitlement to
a jury trial based upon the quantum of damages. William
Goldman Theatres, 154 F.2d at 69 ("evidentiary facts are
intricate and will require auditing, if not an accounting[,]
[w]e can perceive substantial difficulties, though not
insuperable obstacles, to the framing of a charge which
properly would submit the issue of damages to a jury").
The defendants also argue that the scheduling of the
initial preliminary injunction hearing created time
pressures resulting in counsel's failure to timelyfile a jury
demand. Specifically, they argue that after new counsel
entered their appearance in mid-November, "they faced the
time consuming task of absorbing and assessing the facts,
the procedural posture of the case, and potential trial
strategies," as well as conducting discovery. Appellant's Br.
at 32-33. The district court concluded that defendants'
explanations "(fell) short" of excusing their untimely
demand. App. 118a-19a. We agree.
We disagree, however, with the district court's conclusion
that granting the belated jury request would have
materially prejudiced the SEC under the circumstances
here. Nevertheless, based upon all of the factors we have
enumerated, we hold that the district court did not abuse
its discretion in denying defendants' untimely demand for a
jury trial.
VI.
The defendants contend that the cumulative effect of four
alleged evidentiary and procedural errors impaired their
24
right to present and prepare an adequate defense. This
aggregation of errors is known as the "cumulative error
doctrine." Under that doctrine appellate courts may
determine that, although certain errors do not require relief
when considered individually, the cumulative impact of
such errors may warrant a new trial. In other words, under
this theory, the whole is greater than the sum of its parts.
However, unlike some of our sister courts of appeals,19 we
have rejected the cumulative error doctrine, at least in the
context of a civil trial. See Lockhart v. Westinghouse Credit
Corporation, 879 F.2d 43, 57 (3d Cir. 1989), overruled on
other grounds by Starceski v. Westinghouse Elec. Corp., 54
F.3d 1089 (3d Cir. 1995). Moreover, even if we were to
apply the doctrine of cumulative error, we would conclude
that defendants are entitled to no relief because the
individual rulings that they challenge under that doctrine
were not erroneous.
A.
Defendants claim that the district court erred in"cutting
. . . fees for defense counsel" two days before the final
injunction hearing and thereby "unfairly (hampering) the
defense efforts to complete discovery and to mount an
effective defense at trial." Appellant's Br. at 35. In
November 1997, the district court issued a preliminary
injunction authorizing a court-appointed trustee to
disburse $125,000 for legal fees and expenses on behalf of
the defendants from the previously frozen assets. As a
result of receiving information that the defendants were
independently attempting to raise $175,000 to defray legal
expenses, the SEC successfully moved to modify the district
court's original provision of legal fees and expenses. Two
days before the final injunction hearing began, the district
court granted the SEC's motion in part, and issued an
_________________________________________________________________
19. See e.g., United States v. Rivera , 900 F.2d 1462, 1469 (10th Cir.
1990) ("The cumulative effect of two or more individually harmless errors
has the potential to prejudice a defendant to the same extent as a single
reversible error"); Malek v. Federal Ins. Co. , 994 F.2d 49, 55 (2d Cir.
1993); Frymire-Brinati v. KPMG Peat Marwick, 2 F.3d 183, 188 (7th Cir.
1993); Hendler v. United States, 952 F.2d 1364, 1383 (Fed. Cir. 1991).
25
order prohibiting defense counsel from disposing of further
trust assets to raise funds for fees or expenses.
The authority to freeze assets in receivership, in whole or
in part, is committed to the district court's sound
discretion. Commodity Futures Trading Commission v.
American Metals Exchange Corp., 991 F.2d 71, 79 (1993). A
freeze of assets is designed to preserve the status quo by
preventing the dissipation and diversion of assets. Id.
(quoting SEC v. Capital Counselors, Inc., 512 F.2d 654 (2d
Cir. 1975)). Here, the district court's order modifying the
initial release of legal expenses and fees was prudent
inasmuch as the defendants were attempting to raise funds
to pay for legal services.20 In American Metals, we found no
abuse of discretion where the district court denied a
request to pay attorney's fees from frozen assets where it
was shown that the defendant had access to other funds
not in receivership. Accordingly, we do not find abuse of
discretion here.
B.
Defendants argue that the district court erred in
"arbitrarily advancing the date for the (final injunction
_________________________________________________________________
20. The record indicates that Infinity investors received the following
correspondence from the "Freedom For America Ministry and Friends of
Infinity":
The SEC, government, the Judge, or Trustee (It's hard to tell any
of
them apart) has approved an ``allowance' out of YOUR ``MONEY' to be
paid to us to live on. . . . Each and everyone of you can help with
your gift to FAM, along with the completed form provided. Your gift
at this time is important because the government has frozen [NOT
SEIZED] all assets of TIGC and related entities which makes it
impossible at this time for them to fund a Member Law Suit against
the government, or to adequately finance their own offense. Your
gift
will be used for the following: Administrative and operating . . .
expenses . . . 15%, Private Member Law Suit . . . 25%, legal
offense
fund for TIGC . . . 25%, and investments . . . 35%. If the average
gift
is $100.00, FAM would have about $175,000 to fund a TIGC
Member Suit, $175,000 to help TIGC with their legal costs, and
$245,000 for investment purposes over a period of time.
Supp. App. 145-46.
26
hearing) by two days" because defense was operating under
an expedited discovery schedule and "could not afford to
lose the two full days in which to prepare" for the final
injunction hearing. Appellant's Br. at 35. This claim is
wholly without merit.
Matters of docket control and scheduling are within the
sound discretion of the district court. State of Alaska v.
Boise Cascade Corp., 685 F.2d 810, 817 (3d Cir. 1982).
Here, the district court notified both parties, over three
weeks before the originally scheduled date, that the hearing
date would have to be changed due to changes in the
district court's criminal docket. We find neither"actual" nor
"substantial" prejudice in the rescheduling. The change was
only two days, and it impacted both sides.
C.
Defendants allege error in the court's refusal to admit lay
opinion testimony from John F. Jackman, an insurance
specialist whom defendants called to testimony about
"legitimate bank instruments and other investment
programs which produce extremely high returns with
minimal risk." Appellant's Br. at 36. The defendants
contend that Mr. Jackman's testimony "was probative of
the issue of whether [TIGC was] reckless or acted with an
intent to defraud" and would contradict the finding that the
promised rates of return were unlikely. Id. at 37. We review
the exclusion of lay opinion testimony for abuse of
discretion. Government of the Virgin Islands v. Knight, 989
F.2d 619, 629 (3d Cir. 1993). Rule 701 of the Federal Rules
of Evidence provides:
If the witness is not testifying as an expert, the witness'
testimony in the form of opinion or inferences is limited
to those opinions or inferences which are (a) rationally
based on the perception of the witness and (b) helpful
to a clear understanding if the witness' testimony or
the determination of a fact in issue.
Fed. R. Evid. 701. A lay opinion is rationally based on the
witness' perception and "firsthand knowledge of the factual
predicates that form the basis for the opinion." Knight, 989
F.2d at 629 (citing Fed. R. Evid. 701(a) advisory committee's
27
note). Here, it is uncontested that Jackman had no
personal knowledge of the investments in question.
Therefore, the court properly barred his testimony.
Moreover, even though defendants now seize upon
Jackman's precluded testimony to support their cries of
"foul," it is obvious that excluding his testimony did them
far more good than admitting his questionably relevant
opinion would have. In his deposition, Jackman testified
that it was not possible to guarantee the high rates of
return promised by TIGC. Supp. App. 153-154. When he
was asked how he would respond to someone who offered
the sky-high returns and guarantee of principal promised
by TIGC he responded: "I'd say you were nuts, and your
[you're] inexperienced, and you don't know what you're
talking about, and you're a fool." Id. at 156. It is hard to see
how the defendants were prejudiced by excluding such
testimony.
D.
Finally, the defendants contend that the district court
erred in excluding certain "key exhibits" that they failed to
list in the pretrial statement. Defendants assert that the
admission of the documents would have "demonstrated that
the Defendants acted in good faith, with no intent to
defraud and had exercised some care in making
investments." Appellant's Br. at 35.
We review a district court's decision to refuse to admit
exhibits not previously identified for abuse of discretion.
Greate Bay Hotel & Casino v. Tose, 34 F.3d 1227, 1236 (3d
Cir. 1994). In determining whether there has been an abuse
of discretion, we consider four factors: (1) the prejudice or
surprise in fact to the opposing party, (2) the ability of the
party to cure the prejudice, (3) the extent of disruption of
the orderly and efficient trial of the case, and (4) the bad
faith or willfulness of the non-compliance. Id. (quoting
Beissel v. Pittsburgh and Lake Erie R. Co., 801 F.2d 143,
150 (3d Cir. 1986)). Here, the district court only excluded
those documents that the defendants failed to produce,
App. 144a-45a, and the district court properly considered
the effect that admitting the evidence would have on the
SEC. The court stated, "The Commission is entitled not to
28
be surprised. That's why we have all these procedures in
Federal Court." Supp. App. 59. We find no abuse of
discretion in that.
VII.
Accordingly, for the reasons set forth above, we will
affirm the district court's Order for Final Injunction.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
29