                  FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

SECURITIES AND EXCHANGE                
COMMISSION,
                 Plaintiff-Appellee,
                v.
                                             No. 06-15165
M&A WEST INC.; SCOTT L. KELLY;
SALVATORE CENSOPRANO; ZAHRA R.                D.C. No.
                                           CV-01-03376-VRW
GILAK; FRANK THOMAS ECK, III,
                       Defendants,             OPINION
               and
STANLEY R. MEDLEY,
              Defendant-Appellant.
                                       
        Appeal from the United States District Court
          for the Northern District of California
        Vaughn R. Walker, District Judge, Presiding

                 Argued and Submitted
       November 6, 2007—San Francisco, California

                   Filed August 12, 2008

    Before: Sidney R. Thomas, Richard C. Tallman, and
              Sandra S. Ikuta, Circuit Judges.

                Opinion by Judge Thomas;
   Partial Concurrence and Partial Dissent by Judge Ikuta




                            10437
                       SEC v. MEDLEY                    10441


                         COUNSEL

Irving M. Einhorn and Patricia G. Bell, Law Offices of Irving
M. Einhorn, for the appellant.

Brian G. Cartwright, General Counsel, Jacob H. Stillman,
Solicitor, Hope Hall Augustini, Senior Litigation Counsel,
Tracey A. Hardin, Senior Counsel, Securities and Exchange
Commission, for the appellee.


                         OPINION

THOMAS, Circuit Judge:

   This case arose from the activities of M&A West, Inc.
(“M&A West”), which, as the district court aptly stated, “can
fairly be described as a sham incubator for startup compa-
nies.” The Securities and Exchange Commission (“SEC”)
brought a civil law enforcement action against defendant/
appellant Stanley Medley and five co-defendants. This appeal
concerns the charges against Medley only. Medley was
charged with violating Section 5 of the Securities Act of 1933
(“the Act”), 15 U.S.C. § 77e, for selling unregistered securi-
ties. On summary judgment, the district court held that Stan-
ley was an underwriter under Section 2(11) of the Act, 15
U.S.C. § 77b(11), and therefore not exempt from Section 5’s
registration requirements under Section 4(1), 15 U.S.C.
§ 77(d)(1). The court also imposed remedies in the form of a
10442                     SEC v. MEDLEY
five-year injunction, civil penalties, disgorgement and pre-
judgment interest. On appeal Medley argues, as he did before
the district court, that he acted in reliance on Rule 144(k), 17
C.F.R. § 230.144(k),1 a safe harbor under which persons are
deemed not to be underwriters as the term is used in Section
2(11).

   We conclude that the district court properly held that Med-
ley was an underwriter, and therefore not exempt from the
registration requirements. We also conclude that the district
court did not err in ordering that Medley disgorge all profits,
with interest, he obtained from these transactions. However,
we conclude that genuine issues of material fact precluded the
entry of summary judgment as to the imposition of the civil
sanctions—specifically, the second-tier penalties and the five-
year injunction. We therefore vacate the summary judgment
on civil sanctions and remand for an evidentiary hearing.

                                  I

   The claims against Medley arise from a series of “reverse
merger” transactions. A reverse merger is a transaction in
which a privately-held corporation acquires a publicly-traded
corporation, thereby allowing the private corporation to trans-
form into a publicly-traded corporation without the necessity
of making an initial stock offering. Often, and in the three
reverse mergers at issue here, the public corporation is a shell
company with minimal assets and liabilities and no actual
operations. To effect the reverse merger, the shell public cor-
poration will exchange its treasury stock for all outstanding
shares of the privately-held corporation. In consideration, the
controlling shareholders of the shell public corporation trans-
fer a majority of their shares to the owners of the private cor-
  1
   Rule 144(k) has since been repealed and replaced by Rule 144(b),
which replaced the two-year holding period of Rule 144(k) with a one-
year holding period. See Revisions to Rules 144 and 145, Exchange Act
Release No. 33-8869 (December 6, 2007).
                       SEC v. MEDLEY                   10443
poration. After the transaction, the newly merged public
corporation will assume the identity and name of the former
private company. Thus, the private corporation is transformed
into a publicly traded company, without going through the
complicated process of an initial stock offering.

   Since 1992, Medley has been in the business of assisting
private corporations to become publicly-traded corporations
through reverse merger transactions. Medley would identify a
suitable public shell company into which the private company
would merge, advise the private company, coordinate the
transaction with both parties, and assist with the paperwork
involved in such a transaction.

   In the transactions at issue here, Medley assisted his co-
defendants in arranging reverse mergers for three privately-
held companies: M&A West and two of its subsidiaries. Med-
ley helped to seek out public shell companies that were will-
ing to enter into a reverse merger. Medley then prepared the
documentation for the merger and acted as a conduit for the
negotiations.

   The owners of the shell companies used in these transac-
tions were compensated largely through the retention, and
eventual sale, of a small portion of the stock in the newly-
merged entities. Medley was compensated for his work
through both a cash fee and a block of shares in the newly-
merged company. Medley and the former shell owners all
entered into “lock-up” agreements allowing the immediate
sale of a small portion of their shares, with the remaining
shares becoming eligible for sale in blocks every month for
the following six months.

                             A

               The VirtualLender Transaction

  The first reverse merger involved M&A West Financial,
Inc., a wholly-owned subsidiary of M&A West. During the
10444                       SEC v. MEDLEY
merger process, M&A West Financial, Inc. was known as
Virtuallender.com, Inc. (“VirtualLender”). Medley was hired
in late 1998 or early 1999 to assist with arranging a reverse
merger for VirtualLender. Medley identified Golden Chain
Marketing, Inc. (“Golden Chain”), as a suitable public shell
company for a reverse merger and prepared the documenta-
tion for the reverse merger.

   The transaction was accomplished in a “Reorganization and
Stock Purchase Agreement” on February 4, 1999. Under this
agreement, Golden Chain and/or its shareholders transferred
95% of the outstanding Golden Chain shares to VirtualLender
or its assigns, in exchange for all of the outstanding shares of
VirtualLender. Golden Chain then changed its name to Virtu-
alLender.

   As part of Medley’s compensation, he received 100,000
shares in VirtualLender.2 Medley and the former Golden
Chain shareholders signed lock-up agreements for the shares
they retained. Medley was also paid $50,000 in cash. Within
seven months of the merger, Medley sold a portion of his Vir-
tualLender stock to the public for a profit of approximately
$208,000. Within the next nine months, Medley sold addi-
tional shares to the public for a profit of approximately
$10,800. No registration statement was filed for these sales.
  2
   Medley generally arranged to have such shares transferred in the names
of various entities and trusts he controlled or to Robert Bryan, whom he
identified as a friend. However, the district court found that Medley did
not know where Bryan lived, and had not seen Bryan in years. Because
Medley does not dispute that all relevant shares were transferred as com-
pensation for his services, and for simplicity of reference, we state merely
that any such shares were transferred to Medley.
                       SEC v. MEDLEY                    10445
                              B

               The M & A West Transaction

   The second reverse merger involved M&A West itself and
Buffalo Capital IV, Ltd. (“Buffalo Capital”), a public shell
company. In April 1999, Medley prepared documents and
helped facilitate a reverse merger between M&A West and
Buffalo Capital. This transaction was accomplished through a
two-step structure in which two separate agreements were set
to close on the same day.

   Under the “Reorganization and Stock Purchase Agree-
ment,” dated April 19, 1999, all of the shares of M&A West
were transferred to Buffalo Capital. In exchange, M&A West
and/or its assignees received 69% of the outstanding Buffalo
Capital stock, including both existing shares and new shares
issued from Buffalo Capital’s treasury. The agreement speci-
fied that Medley was to receive 110,000 of the existing com-
mon shares from Buffalo Capital’s shareholders “[a]t the
closing.” The agreement also provided that, on the closing
date, Buffalo Capital’s officers and directors would be
replaced by Scott L. Kelly, an officer of M&A West. Buffalo
Capital then changed its name to M&A West, Inc.

   Under the separate “Stock Purchase Agreement,” dated
April 20, 1999, Medley and the M&A West shareholders
agreed to purchase the existing shares specified in the “Reor-
ganization and Stock Purchase Agreement” from the Buffalo
Capital shareholders for $2,983. The sale was expressly con-
tingent on the closing of the Reorganization Agreement
between Buffalo Capital and M&A West. Both Agreements
were scheduled to close on April 26, 1999.

   Medley received 110,000 shares of stock from the officers,
directors, and shareholders of Buffalo Capital. As before,
Medley and the former Buffalo Capital shareholders signed
lock-up agreements. Medley was also paid $75,000 in cash.
10446                         SEC v. MEDLEY
Within eleven months of the merger, Medley had sold shares
of this stock to the public for a profit of $547,139. No regis-
tration statement was filed.

                                      C

                   The Digital Bridge Transaction

   The third transaction involved the reverse merger of Digital
Bridge, Inc. (“Digital Bridge”), a privately-owned M&A West
subsidiary, into Black Stallion Management, Inc. (“Black
Stallion”), another public shell company. This merger also
utilized a two-step structure. The “Reorganization and Stock
Purchase Agreement” was dated January 21, 2000 and set to
close on January 31, 2000. This agreement provided for the
issuance of 20,000,000 new shares from Black Stallion’s cor-
porate treasury to the Digital Bridge shareholders in exchange
for the outstanding Digital Bridge stock. The agreement also
provided for the replacement of the current Black Stallion
officers and directors with Digital Bridge shareholders by the
closing date. After the closing, Black Stallion changed its
name to Digital Bridge.

   The Reorganization Agreement contained a “condition sub-
sequent” clause which assumed the future closing of Stock
Purchase Agreements between M&A West shareholders,
including Medley, and Black Stallion shareholders, in order to
effectuate the purchase of Black Stallion stock.3 Under the
clause, if the selling shareholders “fail[ed] to satisfy their
  3
   The Reorganization agreement included the following language:
      CONDITION SUBSEQUENT. This closing assumes the later
      closing of a STOCK PURCHASE AGREEMENT between
      [Black Stallion] certain shareholders of [Black Stallion] and cer-
      tain buyers of [Black Stallion’s] EXISTING SHARES. All Par-
      ties hereto agree that if the selling shareholders’s [sic] fail to
      satisfy their obligations thereunder, [Digital Bridge] and [Black
      Stallion] shall have the right to unwind this entire transaction
      without imposition of any fee, charge or payment.
                            SEC v. MEDLEY                          10447
obligations” of the stock purchase agreements, Digital Bridge
and Black Stallion retained the right to unwind the Reorgani-
zation Agreement without penalty.

   The Stock Purchase Agreements, referenced in the condi-
tion subsequent clause, were dated January 31, 2000 and
scheduled to close that same day, which was also the sched-
uled closing date for the Reorganization Agreement. In one
agreement, Medley agreed to pay $20,000 for 160,000 previ-
ously existing shares (200,000 post-split) of Black Stallion
from Ken Kurtz.4 In an identical agreement dated the same
day, “Robert Bryan and/or assigns” agreed to purchase
another 160,000 shares (200,000 post-split) of previously
issued stock from Kurtz. Medley again entered into lock-up
agreements. Medley was also paid $50,000 in cash.

  Between February 22, 2000, and October 3, 2000, Medley
sold shares of the stock to the public for a profit of approxi-
mately $1,049,875. As with the other sales in this case, no
registration statement was filed.

                                   D

                        The SEC Complaint

   On September 6, 2001, the SEC filed a complaint in the
United States District Court for the Northern District of Cali-
fornia alleging that Medley violated Sections 5(a) and 5(c) of
the Securities Act (selling unregistered securities), and Sec-
tion 15(a) of the Exchange Act (acting as a broker without
registering as a broker). On May 12, 2005, the SEC filed a
Motion for Partial Summary Judgment regarding Medley’s
liability for these violations. On June 20, 2005, the district
court granted the motion in part, finding that Medley violated
  4
    Kurtz had been the majority shareholder of Black Stallion prior to the
issuance of new shares under the Reorganization and Stock Purchase
Agreement.
10448                       SEC v. MEDLEY
Section 5 when he sold unregistered shares of VirtualLender,
M&A West, and Digital Bridge to the public. The district
court found that Medley was an “underwriter” under Section
2(11) because he purchased stock from persons who were
controlling persons—affiliates—of the shell companies as of
the dates the transactions were agreed to. The court rejected
Medley’s argument that he qualified for the Rule 144(k) safe
harbor because the selling shareholders were no longer affili-
ates on the dates they delivered securities to Medley.

   On October 31, 2005, the district court entered a remedies
order. The district court ordered disgorgement of
$1,990,750.445 and prejudgment interest of $657,213.85,
reflecting Medley’s proceeds from the sales of stock and cash
payments for his work on the mergers. The district court
rejected Medley’s assertion that he acted in good faith and
imposed second tier civil penalties of $55,000 for each merger
transaction. The district court found that the permanent
injunction sought by the SEC was inappropriate, but consider-
ing Medley’s scienter against the sincerity of his assurance
against future violations and recognition of the wrongful
nature of his conduct, imposed a five-year injunction. This
timely appeal followed.

                                    II

                          Section 5 Charges

   [1] Medley was charged with violating Section 5(a) and (c)
of the Securities Act for his role in the VirtualLender, M&A
West, and Digital Bridge mergers. Section 5(a) of the Securi-
ties Act provides that:

           Unless a registration statement is in effect as to
  5
   The itemized profits listed earlier in this opinion are approximate fig-
ures and roughly add up to the total profit, as found by the district court.
Medley has not challenged any of these calculations.
                        SEC v. MEDLEY                      10449
    a security, it shall be unlawful for any person,
    directly or indirectly—

       (1) to make use of any means or instruments of
    transportation or communication in interstate com-
    merce or of the mails to sell such security through
    the use or medium of any prospectus or otherwise;
    or

       (2) to carry or cause to be carried through the
    mails or in interstate commerce, by any means or
    instruments of transportation, any such security for
    the purpose of sale or for delivery after sale.

15 U.S.C. § 77e(a). Section 5(c) similarly prohibits unregis-
tered offers to sell and buy unregistered securities. 15 U.S.C.
§ 77e(c).

   [2] Section 4(1) of the Act exempts “transactions by any
person other than an issuer, underwriter, or dealer” from Sec-
tion 5’s registration requirement. 15 U.S.C. § 77d(1). The dis-
trict court held that Medley was an “underwriter” and was
thus not entitled to the Section 4(1) exemption. Medley argues
that he is not an underwriter and accordingly his sales of
unregistered securities should fall within the Section 4(1)
exemption.

  [3] The term “underwriter” is defined in Section 2 of the
Act:

    The term “underwriter” means any person who has
    purchased from an issuer with a view to, or offers or
    sells for an issuer in connection with, the distribution
    of any security, or participates or has a direct or indi-
    rect participation in any such undertaking, or partici-
    pates or has a participation in the direct or indirect
    underwriting of any such undertaking . . . . As used
    in this paragraph the term “issuer” shall include, in
10450                         SEC v. MEDLEY
      addition to an issuer, any person directly or indi-
      rectly controlling or controlled by the issuer, or any
      person under direct or indirect common control with
      the issuer.

15 U.S.C. § 77b(11).

   To aid in the interpretation of the term “underwriter,” the
SEC promulgated Rule 144, which creates a “safe harbor” by
identifying certain conditions under which a person will be
deemed to not be a statutory “underwriter.” 17 C.F.R.
§ 230.144(b); see also SEC v. Kern, 425 F.3d 143, 148 (2d
Cir. 2005).6

   In part, Rule 144(k) provides a safe harbor for the unregis-
tered sale of restricted securities:

      sold for the account of a person who is not an affili-
      ate of the issuer at the time of the sale and has not
      been an affiliate during the preceding three months,
      provided a period of at least two years has elapsed
      since the later of the date the securities were
      acquired from the issuer or from an affiliate of the
      issuer. The two-year period shall be calculated as
      described in paragraph (d) of this section.

17 C.F.R. § 230.144(k).

   [4] In other words, Rule 144(k) permits a person who is not
an affiliate of the issuer, and has not been an affiliate during
the past three months, to sell restricted securities without
  6
    The Rule 144 safe harbor is not the exclusive manner in which a seller
of unregistered securities can establish that he or she is eligible for the sec-
tion 4(1) exemption. See 17 C.F.R. § 230.144(j) (“[Rule 144(k)] does not
eliminate or otherwise affect the availability of any exemption for resales
under the Securities Act that a person or entity may be able to rely
upon.”). Medley, however, argues only that he is entitled to the Rule 144
safe harbor.
                              SEC v. MEDLEY                            10451
complying with certain requirements7 after they have held the
securities for a period of two years. An affiliate of an issuer
is defined as “a person that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is
under common control with, such issuer.” 17 C.F.R.
§ 230.144(a)(1).

   Rule 144(k) further permits purchasers of restricted securi-
ties who acquire from non-affiliates in private transactions to
comply with the two-year holding period by adding—
“tacking”—the holding period of the prior non-affiliate holder
to their own holding period. Tacking is not permitted, how-
ever, if the purchaser acquires the securities directly from an
affiliate in a private transaction. 17 C.F.R. § 230.144(d)(1).

   Medley was not an affiliate of the issuer in any of the trans-
actions in this case, either at the time of sale or in the three
months prior to the sales. He did not, however, hold the secur-
ities for at least two years. Thus, to be eligible for the safe
harbor of Rule 144(k), Medley must be able to tack the hold-
ing period of the prior holder. Medley can only take advan-
tage of tacking if the persons he acquired the securities from
were not themselves affiliates of the issuer.8

   [5] It is undisputed that the persons from whom Medley
purchased his shares were affiliates of the public shell corpo-
ration prior to the reverse mergers.9 Thus, to determine
  7
     See 17 C.F.R. § 230.144(c) (current public information); § 230.144(e)
(limitation on amount of securities sold); § 230.144(f) (manner of sale);
§ 230.144(h) (notice of proposed sale). Medley did not comply with these
requirements and thus must satisfy Rule 144(k) to obtain Section 4(1)
exemption.
   8
     It is not contested that at least two years had elapsed, in each transac-
tion, since the persons from whom Medley acquired his stock originally
acquired the stock from the issuer or affiliate of the issuer.
   9
     These individuals represented in their respective reorganization agree-
ments that they controlled no less than 75% of the shares of the shell com-
panies. The authority to transfer ownership of the company, coupled with
their significant ownership stake, is more than sufficient to establish affili-
ate status. See Kern, 425 F.3d at 150.
10452                       SEC v. MEDLEY
whether Medley qualified for Section 4(1) exemption, we
must determine whether or not these persons were still affili-
ates at the time that Medley acquired the shares. Because in
each of the three transactions at issue in this case Medley
acquired the securities from persons who were affiliates at the
time of the transfer, we affirm the district court’s grant of
summary judgment with respect to the Section 5 violations.

                                    A

                  The VirtualLender Transaction

   [6] In the VirtualLender transaction involving Virtual-
Lender’s reverse merger into the public shell Golden Chain,
Medley was compensated with shares of Golden Chain stock.10
Medley’s compensation was specified under a “Reorganiza-
tion and Stock Purchase Agreement.” Unlike the other two
transactions in this case, the VirtualLender transaction
involved a single agreement, the Reorganization and Stock
Purchase Agreement. Under that agreement, dated February 4,
1999 and set to close on February 11, Medley received
100,000 shares of Golden Chain stock “at the closing.” The
Golden Chain shareholders were to have this stock ready for
delivery “on or before” the closing date. The officers and
directors of Golden Chain were also replaced “[u]pon the
closing date.” In other words, on the closing date two events
occurred effectively simultaneously: affiliates of Golden
Chain were transformed into non-affiliates, and Medley
acquired Golden Chain shares from these individuals.

  [7] We are not persuaded by Medley’s argument that we
should construe these simultaneous events as occurring con-
secutively, with the acquisition of stock following the status
change of the affiliates such that Medley effectively acquired
  10
     As with the other reverse mergers, the stock would later bear the name
of the private company that was merged into the public shell. When Med-
ley sold this stock it was labeled VirtualLender stock.
                         SEC v. MEDLEY                     10453
the stock from non-affiliates. Where a single transaction
accomplishes both a change in status from an affiliate to a
non-affiliate and a transfer of stock from that person or entity,
the transfer must be viewed as a transfer from an affiliate.

   [8] Medley began selling shares of Golden Chain as early
as March 12, 1999, and the latest sales took place on June 6,
2000. Because he acquired his shares from affiliates of the
issuer, he was not permitted to tack on the holding periods of
the selling shareholders. See 17 C.F.R. § 230.144(d)(1). Med-
ley would have had to wait until February 11, 2001—two
years from the closing date—to sell his shares before he could
qualify for the Rule 144(k) safe harbor. Thus, Medley did not
qualify for the Rule 144(k) safe harbor, and does meet the
statutory definition of an “underwriter.” As an underwriter,
Medley violated Section 5 by selling unregistered securities.

                                B

     The M & A West and Digital Bridge Transactions

   [9] Both the M & A West and Digital Bridge transactions
involved more complex two-step structures. However, the
result of the transactions was substantively identical. In all
three transactions, Medley was compensated with shares of
the relevant corporations, and in all three transactions Medley
received the stock from persons who were indisputably affili-
ates at the time that the agreements were formed. The differ-
ence lies merely in the structure of the agreements. In the
VirtualLender transaction the act which transformed the rele-
vant affiliates into non-affiliates and the transfer of stock from
those persons to Medley were both accomplished in one
agreement, whereas in the M & A West and Digital Bridge
transactions the two acts were accomplished in separate
agreements. The mere strategic change from one document to
two does not excuse Medley from liability. In both the M &
A West and Digital Bridge transactions, the relevant agree-
ments were contingent on each other. In the M & A West
10454                   SEC v. MEDLEY
Transaction, the stock transfer specified in the Stock Purchase
Agreement was expressly contingent on the closing of the
Reorganization Agreement. In the Digital Bridge transaction,
the Reorganization Agreement contained a “condition subse-
quent” clause which assumed the future closing of Stock Pur-
chase Agreements. The referenced Stock Purchase
Agreements then provided for the transfer of stock to Medley.
In other words, in each transaction the Reorganization Agree-
ment and the Stock Purchase Agreements could not contractu-
ally operate independently. The failure to comply with the
terms of one agreement would necessarily void the other.

   [10] Under such circumstances, the multiple agreements
actually constituted “a single actual transaction with multiple
stages.” SEC v. Cavanagh, 445 F.3d 105, 114 (2d Cir. 2006).
We agree with our sister circuit that:

    In these circumstances, a person who is an “affiliate”
    during the negotiation of, and agreement to, the deal
    may not enjoy a Section 4(1) exemption by simply
    abdicating his affiliate status (e.g., by selling his
    controlling shares or resigning as an officer or direc-
    tor) shortly before the parties complete the transac-
    tion.

Id. at 114-15.

   [11] In so holding, we are informed by the purpose of regis-
tration, which is “to protect investors by promoting full dis-
closure of information thought necessary to informed
investment decisions.” SEC v. Ralston Purina Co., 346 U.S.
119, 124 (1953). The express purpose of the reverse mergers
at issue in this case was to transform a private corporation
into a corporation selling stock shares to the public, without
making the extensive public disclosures required in an initial
offering. Thus, the investing public had relatively little infor-
mation about the former private corporation. In such transac-
tions, the investor protections provided by registration
                            SEC v. MEDLEY                           10455
requirements are especially important. Medley’s actions vio-
lated the spirit of Section 4(1) exemption, which is to allow
certain persons to sell unregistered securities because those
persons do not have potential access to non-public informa-
tion relevant to the securities, either through their own affilia-
tion with the relevant corporation or through the affiliation of
the person from whom they obtained the securities. Here,
Medley arranged to obtain the securities from persons whose
status at the time of the negotiations would place Medley out-
side the protection of Rule 144(k), but attempted to create a
loophole by creating a separate agreement which would alter
that status immediately prior to what Medley would have us
identify as the actual moment of the stock transfer.11

   The Supreme Court has long instructed that securities law
places emphasis on economic reality and disregards form for
substance. See SEC v. W. J. Howey Co., 328 U.S. 293, 298-
300 (1946); see also Danner v. Himmelfarb, 858 F.2d 515,
518 (9th Cir. 1988); SEC v. Glenn W. Turner Enters., Inc.,
474 F.2d 476, 481-82 (9th Cir. 1973). Where a single transac-
tion accomplishes both a change in status from an affiliate to
a non-affiliate and a transfer of stock from that person or
entity, the transfer must be viewed as a transfer from an affili-
ate for the purposes of determining Rule 144(k) eligibility.
The existence of multiple agreements bears little effect when
   11
      The dissent suggests there is nothing in the record to establish that
Medley or his nominee signed the initial stock purchase and sale agree-
ments for the M&A West and Digital Bridge transactions. However, this
concern is misplaced. First, Medley has never denied that he assisted in
arranging the reverse mergers and was compensated for his services par-
tially with stock of the newly merged companies. More specifically, the
supplemental excerpts of record provided by the SEC to this Court contain
the following documents: a Lock-up Agreement for stock obtained in the
M&A West transaction, signed by Medley; a Stock Purchase Agreement
for the Digital Bridge transaction, signed by Medley; a Lock-up Agree-
ment for the Digital Bridge transaction, signed by Medley; a Stock Pur-
chase Agreement for the Digital Bridge transaction signed by Medley’s
nominee Robert Bryan; and a Lock-up Agreement for the Digital Bridge
transaction signed by Bryan.
10456                   SEC v. MEDLEY
the agreements collectively constitute a single transaction.
Thus, the district court properly held that Medley violated
Section 5 when he sold unregistered shares of VirtualLender,
M&A West, and Digital Bridge to the public.

                              III

                          Remedies

   Upon finding that Medley committed Section 5 violations
in the three reverse merger transactions discussed here, the
district court imposed three forms of penalties. First, the dis-
trict court ordered Medley to disgorge, with pre-judgment
interest, the salary and profits from stock sales for the three
reverse merger transactions. Second, the court ordered a total
civil penalty of $165,000, based on three “second-tier” civil
penalties of $55,000 each. Finally, the court granted a five-
year injunction against any future violations of Sections 5(a)
and 5(c) of the Securities Act. We affirm the district court’s
disgorgement order, but remand for further proceedings
before any second-tier penalties or injunction may be
imposed.

                               A

                        Disgorgement

   [12] The district court ordered disgorgement, with interest,
to ensure that Medley is not allowed to benefit from his
unlawful conduct. “The district court has broad equity powers
to order the disgorgement of ‘ill-gotten gains’ obtained
through the violation of the securities laws.” SEC v. First Pac.
Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998). Through his
involvement in the three reverse mergers, Medley violated
Section 5 of the Securities Act and was compensated for his
efforts. The district court properly calculated Medley’s profits
from these mergers, including the cash payments he obtained
and his profits from his stock sales. We affirm the district
                        SEC v. MEDLEY                     10457
court’s order that Medley disgorge $2,647,964.29 in profits
and pre-judgment interest.

                               B

                    Second Tier Penalties

   The district court also imposed civil penalties for three
“second-tier” Securities Act violations. A second-tier penalty
is an intermediate level sanction that can be imposed only if
the violation “involved fraud, deceit, manipulation, or deliber-
ate or reckless disregard of a regulatory requirement.” 15
U.S.C. § 77t(d)(2)(B). Thus, unlike disgorgement, the imposi-
tion of second-tier penalties requires an assessment of
scienter.

   On summary judgment, a district court must determine
whether genuine issues of material fact exist, and must
resolve any uncertainty in favor of the non-moving party.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
While the district court properly determined that no genuine
issue of material fact existed with respect to whether Medley
violated Section 5 of the Securities Act, the district court’s
imposition of second-tier penalties was improper at the sum-
mary judgment stage. Medley presented evidence to the dis-
trict court that he believed his sales of securities were exempt
from registration requirements through the Rule 144 safe har-
bor. In addition to his own testimony, Medley submitted legal
opinions, upon which he claims he relied, to support his argu-
ment that he acted in good faith. Even though the district
court did not find Medley’s evidence persuasive, this evi-
dence does create a material issue of fact as to Medley’s state
of mind during the transactions and thus creates a question as
to whether Medley’s actions “involved fraud, deceit, manipu-
lation, or deliberate or reckless disregard of a regulatory
requirement,” 15 U.S.C. § 77t(d)(2)(B).

   [13] In rejecting the evidence Medley produced to demon-
strate his good faith, the district court made a credibility
10458                   SEC v. MEDLEY
determination. This Court, and others, “have long recognized
that summary judgment is singularly inappropriate where
credibility is at issue. Only after an evidentiary hearing or a
full trial can these credibility issues be appropriately
resolved.” SEC v. Koracorp Indus., Inc., 575 F.2d 692, 699
(9th Cir. 1978). The district court’s assessment of Medley’s
credibility may ultimately be correct, but such an assessment
may only be made after a full evidentiary hearing, and is inap-
propriate at the summary judgment stage.

                               C

                          Injunction

   Likewise, the district court’s decision to impose an injunc-
tion also requires an assessment of scienter. To justify an
injunction, there must be “a reasonable likelihood of future
violations of the securities laws.” SEC v. Murphy, 626 F.3d
633, 655 (9th Cir. 1980). In predicting this likelihood a court
should consider the totality of the circumstances, including:
“(1) the degree of scienter involved; (2) the isolated or recur-
rent nature of the infraction; (3) the defendant’s recognition
of the wrongful nature of his conduct; (4) the likelihood,
because of defendant’s professional occupation, that future
violations might occur; (5) and the sincerity of his assurances
against future violations.” SEC v. Fehn, 97 F.3d 1276, 1295
(9th Cir. 1996). For the same reasons that the district court
found second-tier penalties appropriate, the court found that
the first factor, the degree of scienter involved “strongly
favors the SEC.”

   [14] Once again, the district court’s decision was prema-
ture. Medley has presented evidence that he acted in good
faith and was unaware that he was violating securities laws.
An assessment of his credibility must await a full evidentiary
hearing.
                           SEC v. MEDLEY                         10459
                                  IV

   In summary, we affirm the district court’s finding that
Medley violated Sections 5(a) and 5(c) of the Securities Act
through his involvement in the three reverse mergers dis-
cussed previously. Additionally, we affirm the district court’s
order that Medley disgorge all profits, with interest, he
obtained from these transactions. However, we reverse the
district court’s imposition of civil sanctions—in the form of
second-tier penalties and a 5-year injunction—and remand for
a full evidentiary hearing before any penalty requiring an
assessment of scienter may be imposed.

  AFFIRMED in part, REVERSED and REMANDED in
part. Each party shall bear his or its own costs.



IKUTA, Circuit Judge, concurring in part, dissenting in part:

   I agree with the majority that the district court did not err
in determining that Medley’s sale of stocks acquired in the
Golden Chain transaction violated the Securities Act. I dissent
from part II.B of the majority, however, because Medley’s
activities in the M&A West/Buffalo Capital and Digital
Bridge/Black Stallion transactions were protected by the safe
harbor in 17 C.F.R. § 230.144(k). The majority’s interpreta-
tion of Rule 144(k) sacrifices the plain language of the regula-
tion to general policy goals that the SEC failed to express in
its own regulations. Such an approach is manifestly unfair to
the regulated community, which is entitled to structure its
affairs in reliance on the plain language of a safe harbor regu-
lation. The SEC is free to amend and clarify its regulations to
ensure that the safe harbor is used in a manner consistent with
its goals.1
  1
   Indeed, the SEC has done just that. Shortly after this appeal was
argued, the SEC substantially revised Rule 144, 17 C.F.R. § 230.144. See
10460                        SEC v. MEDLEY
   The majority correctly lays out the applicable law. Rule
144(k) provides a safe harbor from the general prohibition on
the sale of unregistered, restricted securities. A seller qualifies
for the safe harbor if (i) the seller is not an affiliate of the
issuer at the time of the sale and was not an affiliate of the
issuer during the three months prior to the sale, and (ii) a
period of at least two years has elapsed since the securities
were last acquired from the issuer or an affiliate of the issuer.
17 C.F.R. § 230.144(k). The word “affiliate” is defined by
Rule 144(a)(1) as follows: “[a]n affiliate of an issuer is a per-
son that directly, or indirectly through one or more intermedi-
aries, controls, or is controlled by, or is under common
control with, such issuer.” The time period during which any
previous owner held the securities counts towards the two-
year requirement, allowing the seller to tack his holding
period to the prior owner’s period. However the two-year
clock resets every time the securities are acquired from an
issuer or an affiliate of the issuer. § 230.144(k).

   Medley did not wait two years before selling his shares, so
he qualifies for the Rule 144(k) safe harbor only if he can val-
idly tack his holding period onto the previous owners’ holding
periods. He cannot use tacking to meet the two-year require-
ment if the previous owners were affiliates of the issuer at the
time Medley acquired his shares. § 230.144(k). Therefore, the
key question in this case is whether the persons who trans-
ferred their shares to Medley were “affiliates” as defined by
Rule 144(a)(1) at the time Medley acquired those shares.

Revisions to Rules 144 and 145, Exchange Act Release No. 33-8869
(December 6, 2007). New Rule 144(i)(1) makes Rule 144 unavailable,
with limited exceptions not at issue in this case, to issuers that have at any
time had “(A) No or nominal operations; and (B) Either: (1) No or nomi-
nal assets; (2) Assets consisting solely of cash and cash equivalents; or (3)
Assets consisting of any amount of cash and cash equivalents and nominal
other assets.” While the parties have not briefed the subject, this revised
regulation appears to target the precise sort of reverse merger transactions
at issue here.
                             SEC v. MEDLEY                           10461
   With respect to the M&A West and Digital Bridge transac-
tions, the parties do not dispute that the persons who trans-
ferred their shares to Medley did not meet the definition of
“affiliate” during the stage of the transaction in which Medley
acquired those shares. After the Reorganization and Stock
Purchase Agreement was implemented, the transferors
resigned and were no longer officers or directors of the corpo-
rations, and their shares had been diluted so they no longer
had control of the corporations. In light of the interlocking
nature of these agreements in the reverse merger transaction,
and in light of the SEC’s policy goals, the majority simply
asserts that because the prior owners of the securities were
affiliates when the original Reorganization and Stock Pur-
chase Agreement was signed, they are deemed to be affiliates
during a subsequent stage in the transaction when a third party
acquires those shares. Under this interpretation, it may be
irrelevant whether the person who ultimately acquires the
securities was even a party to the transaction. For example, in
this case, nothing in the record establishes that Medley or his
nominee even signed the initial Reorganization and Stock
Purchase Agreements.2
   The plain language of Rule 144(k) provides no support to
the majority’s interpretation. Rule 144(k) provides a safe har-
bor when “a period of at least two years has elapsed since the
later of the date the securities were acquired from the issuer
or from an affiliate of the issuer.” The majority does not assert
that Medley “acquired” the securities at the time the owners
entered into the Reorganization and Stock Purchase Agree-
ment. Nor could it: Using words in their natural sense,3 Med-
  2
     While the majority is correct that the record contains subsequent agree-
ments related to Medley’s acquisition of the shares, maj. op. at 10455
n.11, the majority does not dispute that nothing in the record establishes
that Medley or his nominee signed the initial Reorganization and Stock
Purchase Agreements.
   3
     “Acquired” is not defined in Rule 144, or in any related rules or stat-
utes. Therefore, we look to the common sense meaning of the word,
including dictionary definitions. See United States v. Pearson, 274 F.3d
1225, 1231 n.6 (9th Cir. 2001). Dictionary definitions of “acquire” include
“[t]o gain possession or control of; to get or obtain,” Black’s Law Dictio-
nary 25 (8th ed. 2004), and “to come to have as one’s own; get possession
of,” Webster’s New World College Dictionary 12 (4th ed. 2005).
10462                   SEC v. MEDLEY
ley did not acquire the shares at issue until he had actual
possession or control of them, which took place after the
transferors in the M&A West and Digital Bridge transactions
ceased to be affiliates. As mentioned above, the parties do not
dispute that the transferors in the two transactions did not
meet the definition of “affiliate” in Rule 144(a) during the
stage of the transaction in which Medley acquired the securi-
ties. In fact, the majority’s interpretation is untethered to any
language in the applicable regulations or statutes; and is not
based on any authoritative interpretation by the SEC to which
we must defer. In my view, this interpretive approach is not
reasonable.

   SEC v. Cavanagh, 445 F.3d 105 (2d Cir. 2006), does not
support the majority’s interpretation of Rule 144(k).
Cavanagh interpreted Section 4(1), 15 U.S.C. § 77d(1), not
Rule 144(k). Section 4(1) provides that Section 5’s registra-
tion provisions do not apply to “transactions by any person
other than an issuer, underwriter, or dealer.” In interpreting
this language, Cavanagh held that a multi-stage transaction
counted as a single “transaction” for purposes of qualifying
for an exemption to sell unregistered securities. Cavanagh’s
interpretation of the word “transaction” in Section 4(1) may
be reasonable, but its analysis cannot help us construe the
word “acquired” in Rule 144(k). The majority has borrowed
the holding in Cavanagh while jettisoning the reasoning that
led up to it.

   Because Medley established that he qualified for the safe
harbor in Rule 144(k) for the M&A West and Digital Bridge
transactions, I would reverse the district court’s grant of sum-
mary judgment and disgorgement with respect to those trans-
actions. I otherwise concur in the majority opinion.
