Securities and Exchange Commission v. Chen

Background

The Securities and Exchange Commission (SEC) alleged that Jean Danhong Chen, Tony Ye, and others violated federal securities laws in connection with investments made through the EB-5 Immigrant Investor Program. According to the complaint, Jean Chen and Ye allegedly helped clients invest in EB-5 projects, brokered transactions without required registration, received undisclosed commissions, and attempted to conceal the arrangement. The SEC alleged that Kuansheng Chen, who lives in Hong Kong, helped conceal the scheme by allowing his accounts to receive and transfer funds.

The SEC asserted eight claims in the case. Claims against Kuansheng Chen included aiding and abetting alleged securities fraud, aiding and abetting failure to register as a broker-dealer, and alternative liability for disgorgement. Kuansheng Chen moved to dismiss the complaint for lack of personal jurisdiction and inadequate service of process.

Personal Jurisdiction

Personal jurisdiction is a court’s authority to require a particular defendant to defend a case in that court. Because the SEC’s motion was based on written materials rather than an evidentiary hearing, the SEC needed to make a prima facie showing—a preliminary showing supported by evidence—that jurisdictional facts existed. The court could consider evidence outside the complaint and had to resolve conflicts in the evidence in the SEC’s favor at this stage.

The federal securities laws provide nationwide service of process. Therefore, the relevant due-process question was whether Kuansheng Chen had sufficient contacts with the United States, rather than with California specifically.

The court applied the test for specific personal jurisdiction, which asks whether: (1) the defendant purposefully directed activities toward the forum or purposefully conducted business there; (2) the claims arose from or related to those activities; and (3) exercising jurisdiction would be reasonable and consistent with fair play.

The court held that the SEC met its preliminary burden. The SEC presented evidence that U.S.-based regional centers paid at least $8,781,500 into accounts held in Kuansheng Chen’s name from April 2012 through August 2016; that he signed marketing or referral agreements; that he allowed Jean Chen and her employees access to one of his accounts; that he gave Jean Chen power of attorney over a U.S. Charles Schwab account; and that funds moved through that account in connection with the alleged transactions. The court also considered his alleged involvement with Tree Lined Properties and the overlap between New Horizons and Jean Chen’s law offices.

Kuansheng Chen argued that he had not referred investors, that others may have impersonated him or forged his signature, and that his role was more limited than the SEC alleged. The court said those arguments might affect whether he was liable on the merits, but they did not defeat the SEC’s preliminary showing of jurisdictional facts.

The court also found that exercising jurisdiction was reasonable. The case involved enforcement of U.S. securities laws, and the court determined that most of the relevant acts, including payment of transaction fees, occurred in the United States. Although defending the case would impose substantial burdens on a foreign defendant, the court found no circumstances that prevented enforcement of U.S. securities laws in the United States.

Service of Process

Service of process is the formal delivery of the summons and complaint that gives a defendant notice of the lawsuit. The court had previously authorized the SEC to serve Kuansheng Chen by email and overnight delivery to his U.S. counsel. The SEC filed proof of service. The court rejected Chen’s objections and reaffirmed that service was proper.

Disposition

The court denied Kuansheng Chen’s motion to dismiss for lack of personal jurisdiction. It also rejected his challenge to service of process, and the order disposed of ECF No. 61. The court did not reach the issue concerning Kuansheng Chen’s deposition, stating that any dispute about it should be raised separately. The order did not decide whether Kuansheng Chen ultimately violated the securities laws or was liable for the alleged conduct.