Sec. & Exch. Comm'n v. Conrad
| Decision Date | 17 January 2019 |
| Docket Number | CIVIL ACTION NO. 1:16-CV-2572-LMM |
| Citation | 354 F.Supp.3d 1330 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Thomas CONRAD, Financial Management Corporation, and Financial Management Corporation, S.R.L., Defendants. |
| Court | U.S. District Court — Northern District of Georgia |
Madison Graham Loomis, Pat Huddleston, II, Securities & Exchange Commission, Kristin Wilhelm Murnahan, U.S. Securities and Exchange Commission—ATL Atlanta Regional Office, William P. Hicks, U.S. Securities & Exchange Commission, Atlanta, GA, for Plaintiff.
James E. Connelly, Robert Riles Ambler, Jr., Womble Bond Dickinson (US) LLP, Atlanta, GA, for Defendants.
This case is before the Court on Plaintiff's Partial Motion for Summary Judgment [64] and Defendants' Motion for Summary Judgment [68]. After due consideration, the Court enters the following Order.
The Court provided a detailed general background on the facts of this case in its Order on Defendants' Motions to Dismiss, which is incorporated by reference as though fully set forth herein. Dkt. No. [22] at 2-4. Pertinent to this Order, this matter arises from the allegedly fraudulent operation of a $10.7 million "fund of funds" operated by Defendant Thomas Conrad ("Conrad" or "Dr. Conrad"). Dkt. No. [1] ¶ 1. Conrad is the owner and controlling officer of Defendants Financial Management Corporation ("FMC") and Financial Management Corporation, S.R.L. ("SRL"). Id. ¶ 9.
Plaintiff Securities and Exchange Commission ("the SEC") brought this action on July 15, 2016, charging six separate counts of fraud against Defendants and four counts of aiding and abetting fraud against former Defendant Stuart Conrad pursuant to various provisions of the Securities Act, the Securities Exchange Act, and the Investment Advisers Act. Id. The Complaint alleges that Defendant Conrad controls Defendant entities FMC and SRL, and together these Defendants fraudulently sold and redeemed interests in hedge funds they operate, including World Opportunity Fund, L.P. ("WOF")1 , World Opportunity Master Fund, L.P. ("WOF Master"), World Fund II, L.P. ("World Fund II") and World Opportunity Fund (BVI) Ltd. ("BVI") (collectively, "the funds"). Id. ¶ 1. WOF, World Fund II, and BVI are the feeder funds into WOF Master, although only WOF and World Fund II are currently active feeder funds since all BVI investors were moved into WOF. Dkt. No. [67] ¶ 21. In a master-feeder structure, investors buy limited partnership interests in a feeder fund, and the feeder funds in turn invest their assets in the master fund. Dkt. Nos. [64-2] ¶ 11; [67] ¶ 11. The SEC seeks civil penalties in addition to permanent injunctive relief. Dkt. No. [1] at 33-34.
The Court dismissed all counts against Stuart Conrad on February 22, 2017, leaving only fraud Counts I, II, IV, VI, VII, and IX against Defendants Conrad, FMC, and SRL. Dkt. Nos. [1, 22]. Further, the Court partially dismissed certain counts insofar as they relied on allegedly fraudulent activities that either could not meet the elements of those counts or could not be attributed to Defendant SRL because they predated SRL's existence. Dkt. No. [22] at 17-18, 23-25.
As to all Defendants, Count I alleges violations of Section 17(a)(1) of the Securities Act, 15 U.S.C. § 77q(a)(1) ; Count II alleges violations of Sections 17(a)(2) and (3) of the Securities Act, 15 U.S.C. § 77q(a)(2), (3) ; Count IV alleges violations of Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(2)(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5 ; Count VI alleges violations of Section 206(1) of the Investment Advisers Act, 15 U.S.C. § 80b-6(1) ; Count VII alleges violations of Section 206(2) of the Investment Advisers Act, 15 U.S.C. § 80b-6(2) ; and Count IX alleges violations of Sections 206(4) and 206(4)-8 of the Investment Advisers Act, 17 C.F.R. § 275.206(4)-8.
All remaining counts are based on five categories of allegedly fraudulent activities underlying the counts in different configurations, and they are extant against all Defendants except where otherwise noted below. Dkt. No. [1]. These categories include: (1) failure to disclose a potential conflict of interest and related compensation (Counts I, II, IV, VI, VII, and IX)2 ; (2) failure to disclose disciplinary history (Counts I, II, IV, and IX); (3) failure to disclose loans to family members (Counts VI, VII, and IX)3 (4) fraudulent purchases (Counts VI, VII, and IX)4 ; and (5) fraudulent redemption practices (Counts I, II, IV, and IX).
Each of these five categories, in turn, encompasses multiple separate acts. First, the "failure to disclose conflicts and compensation" category includes allegations of Conrad's nondisclosure of his appointment as sub-manager of WOF Master in January 2013, nondisclosure of his compensation arrangement in that role, and nondisclosure of the fact that he had unilateral authority to appoint himself to the position. See Dkt. No. [1] ¶¶ 41-48. Plaintiff contends these are material conflicts of interest requiring disclosure. Id.
Second, the "failure to disclose disciplinary history" category encompasses allegations regarding World Fund II offering memoranda from January 2011 and January 2013, a World Fund II disclosure brochure from January 2012, WOF Master marketing materials from 2014, World Fund II investor fact sheets distributed between December 2011 and January 2014, and various face-to-face and telephonic pitches to prospective investors. Id. ¶¶ 49-58. Plaintiff alleges it was fraudulent for Defendants to tout Conrad's wealth management experience and career accomplishments going back to 1965 in these documents and conversations, while omitting a 1971 SEC opinion against Defendant Conrad barring him from associating with any securities broker or dealer.5 This category also encompasses allegations that Defendants included certain false and misleading information in investor fact sheets regarding the historical performance of fund investments and whether the funds were audited. Id. ¶¶ 59-62.
Third, the "failure to disclose loans to family members" category includes an alleged February 2010 loan to Conrad's daughter-in-law and a July 2013 loan to Conrad's son from WOF Master fund assets. Id. ¶¶ 63-66.
Fourth, the "fraudulent purchases" category includes Defendant Conrad's alleged purchases in his own name, using fund assets, of two soybean farms in Uruguay and $88,000 worth of precious metals, neither of which was disclosed to investors. Id. ¶¶ 67-70.
Fifth, the "fraudulent redemption practices" category encompasses several acts between 2008 and 2013 forming part of an alleged scheme to allow redemptions and withdrawals of asset funds by friends, family members, and favored investors, while denying the redemption requests of at least 29 other investors and justifying the denials by misrepresenting that all redemptions had been suspended. Id. ¶¶ 71-97.
Plaintiff has moved for summary judgment on the following claims against the following Defendants, based on the specified underlying categories:
Dkt. No. [64]. The "fraudulent purchases" category is the only category of allegations not subject to Plaintiff's summary judgment motion. See id. 12 In the event the Court concludes that summary judgment is not warranted on any given count, Plaintiff asks the Court to grant partial summary judgment on specific elements of that count if the Court concludes the record supports such a finding. Id. at 20 n.8 (citing SEC v. Norstra Energy, Inc., 202 F.Supp.3d 391, 398-99 (S.D.N.Y. 2016) ).
Defendants filed a cross-motion for summary judgment on all counts. Dkt. No. [68].
Federal Rule of Civil Procedure 56 provides "[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a).
A factual dispute is genuine if the evidence would allow a reasonable jury to find for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A fact is "material" if it is "a legal element of the claim under the applicable substantive law which might affect the outcome of the case." Allen v. Tyson Foods, Inc., 121 F.3d 642, 646 (11th Cir. 1997).
The moving party bears the initial burden of showing the Court, by reference to materials in the record, that there is no genuine dispute as to any material fact that should be decided at trial. Hickson Corp. v. N. Crossarm Co., 357 F.3d 1256, 1260 (11th Cir. 2004) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ). The moving party's burden is discharged merely by " ‘showing’—that is, pointing out to the district court—that there is an absence of evidence to support [an essential element of] the nonmoving party's case." Celotex Corp., 477 U.S. at 325, 106 S.Ct. 2548. In determining whether the moving party has met this burden, the district court must view the evidence and all factual inferences in the light most favorable to the party opposing the motion. Johnson v. Clifton, 74 F.3d 1087, 1090 (11th Cir. 1996).
Once the moving party has adequately supported its motion, the non-movant then has the burden of showing that summary judgment is improper by coming forward with specific facts showing a genuine dispute. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). There is...
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...omission of critical facts were material and that no reasonable jury could conclude that they were not. See, e.g., SEC v. Conrad, 354 F. Supp. 3d 1330, 1343 (N.D. Ga. 2019) ("materiality requirement does not set an especially high bar, as its role in the analysis is to filter out essentiall......
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