SEC Granted Reversal, Remand and Jury Trial from the Ninth Circuit

court decision

On August 31, 2016, the SEC caught a break when a Ninth Circuit panel reversed Judge Manuel L. Real’s bench trial verdict for defendants, former corporate officers of the now-defunct Basin Water, Inc., finding that the SEC was wrongfully denied its shot at a jury trial in a securities fraud action involving alleged false reporting of millions of dollars in unrealized revenue.  The panel vacated the judgment and remanded for a jury trial, noting that the SEC had not consented to the defendants’ withdrawal of their jury demand, and in fact, consistently demonstrated its objection to a bench trial, preserving its objection all the way to the appellate court.

When the SEC originally filed its complaint in 2011 against former Basin CEO and CFO Peter Jensen and Thomas Tekulve, it did not demand a jury trial.  However, defendant Tekulve later requested trial by jury in its answer to the SEC’s complaint for “all issues which are triable by jury.” As a result, in December of 2011, the district court entered an order setting the case for a jury trial.  Over a year later, on March 29, 2013, both defendants filed a notice withdrawing their earlier jury demand and waiving their right to a jury trial. In response, the SEC objected, but its objection was overruled by Judge Real, who granted the request, reasoning that it was “only the defendants” who had timely requested a jury trial; therefore, it was only the defendants who needed to provide consent to waiving a jury trial.

The SEC did not take no for an answer.  In the parties’ jointly proposed Amended Final Pretrial Conference Order, dated September 5, 2013, the SEC again requested a jury trial.  A few days later at the pretrial conference, Judge Real ordered a bench trial instead, emphasizing again that his decision was based on the SEC not having asked for a jury trial in the first place.

The Ninth Circuit rejected this reasoning.  Citing to Federal Rule of Civil Procedure 38, the panel found that Judge Real committed an error because subsection (d) clearly describes situations in which jury demands may be withdrawn:  “only if the parties consent.”  As the panel explained further, “other parties are ‘entitled to rely’ on the original demand, ‘and need not file their own demands.’”  The Ninth Circuit noted that the SEC stated its objection to a bench trial as early as the day defendants purported to withdraw their jury demand, and consistently objected to it, preserving its objection for trial.

Although defendants tried to frame any such error by Judge Real as a harmless error, the Ninth Circuit ruled otherwise.  The court instead found that the denial of a jury trial was not harmless, because Judge Real made credibility determinations about multiple witnesses, a role traditionally reserved for jurors, which resulted in the SEC’s witnesses being discredited.

The panel declined a request by the SEC to reassign the case to a district court judge other than Judge Real. 

On remand, it will be interesting to see how the jury evaluates the credibility of the SEC’s and defendants’ witnesses, and ultimately how the jury decides the case compared to Judge Real’s verdict and reasoning.