U.S. Sec. & Exch. Comm'n v. Markusen

• Decision Date: 10 November 2015
• Docket Number: Civil File No. 14-3395 (MJD/TNL)
• Citation: 143 F.Supp.3d 877
• Parties: United States Securities and Exchange Commission, Plaintiff, v. Steven R. Markusen, Jay C. Cope, and Archer Advisors LLC, Defendants.
• Court: U.S. District Court — District of Minnesota

143 F.Supp.3d 877

United States Securities and Exchange Commission, Plaintiff,

v.Steven R. Markusen, Jay C. Cope, and Archer Advisors LLC, Defendants.

Civil File No. 14-3395 (MJD/TNL)

United States District Court, D. Minnesota.

Signed November 10, 2015

John E. Birkenheier and Nicholas J. Eichenseer, U.S. Securities and Exchange Commission, Counsel for Plaintiff.

No appearance by Defendants Steven R. Markusen or Archer Advisors LLC.

MEMORANDUM OF LAW & ORDER

Michael J. Davis

United States District Court

I. INTRODUCTION

This matter is before the Court on Plaintiff's Application for Entry of Default Judgment Against Defendants Steven R. Markusen and Archer Advisors LLC. [Docket No 21] The Court heard oral argument on August 21, 2015. For the reasons that follow, the Court grants Plaintiff's motion; however, the Court withholds entering the Judgment until Plaintiff's claims against Defendant Jay Cope are resolved.

Based on the facts in the record, Markusen completely controlled Archer and, together, they engaged in long-term fraudulent schemes to bilk investors for bogus "research expenses" and for fees based on artificially inflated earnings created by marking the close. The facts demonstrate clear scienter by Markusen and, thus, Archer, and meet the standards for liability under the Securities Act, Exchange Act, and Advisers Act.

II. FINDINGS OF FACT

The Court makes the following findings of fact:

A. Factual Background

1. The Parties and Relevant Entities

Defendant Steven R. Markusen lives in Minneapolis and is the sole owner and CEO of Defendant Archer Advisors LLC ("Archer"). (Compl. ¶ 20.) Markusen has 29 years of experience in the investment industry and is not registered with Defendant the United States Securities and Exchange Commission ("SEC"). (Id. )

Defendant Jay Cope resides in Shorewood, Minnesota. (Compl. ¶ 21.) From 2003 through 2013, Cope worked for Archer. (Id. ¶¶ 21, 52.) He worked on marketing the Funds, investor relations, and placing trades. (Id. ¶ 54.) Archer held Cope out as its Chief Operating Officer ("COO") and a managing member of Archer. (Id. ¶¶ 56-58.) Cope held himself out to investors and others as an employee and agent of Archer. (Id. ¶¶ 60-62.) Archer paid Cope a monthly salary for his work at Archer; from 2011 to 2013, this was typically $10,000 per month. (Id. ¶ 63.) This salary was for finding new investors, dealing with existing investors, placing trades, and other operational and administrative tasks related to being COO, but not for conducting research. (Id. ¶ 65.) Cope is not registered with the SEC. (Id. ¶ 21.)

Archer is a Delaware limited liability company with its principal place of business in Wayzata, Minnesota. (Compl. ¶ 22.) Archer is not registered with the SEC. (Id. ) Its only business purpose was to serve as the investment manager for two private funds, the Archer Equity Fund ("Equity Fund") and the Archer Focus Fund ("Focus Fund") (collectively, "Funds"), both of which closed in October 2013. (Id. )

The Focus Fund was a Delaware limited liability company based in Wayzata. (Compl. ¶ 24.) It was a private fund managed by Archer for the benefit of Fund investors. (Id. ) It had more than 20 investors and, at its peak in 2011, had more than $8 million in net assets. (Id. ) The Focus Fund was governed by a 2008 LLC agreement and a 2008 offering memorandum ("OM"). (Id. )

The Equity Fund was also a Delaware limited liability company based in Wayzata. (Compl. ¶ 23.) It was a private fund managed by Archer for the benefit of Fund investors. (Id. ) It had more than 40 investors and, at its peak in 2007, had approximately $28 million in net assets. (Id. ) It was never registered with the SEC. (Id. ) The Equity Fund was governed by a 2002 LLC agreement and two private OMs dated 2003 and 2008. (Id. )

Together, the Funds had more than 50 individual investors. (Compl. ¶ 32.)

CyberOptics Corp. is a NASDAQ-listed company with the ticker symbol CYBE. (Compl ¶ 171.) CYBE's shares were thinly traded and they comprised more than 75% of the Funds' combined portfolio. (Id. ¶¶ 175, 184-85.)

2. Formation of Archer

Markusen formed Archer in 2002 and has been its only owner and CEO since 2003. (Compl. ¶ 25.) Archer has no board of directors or trustees; Markusen, alone, controls it. (Id. ¶ 27.) Markusen used Archer to manage the Equity Fund and the Focus Fund on behalf of the Fund investors. (Id. ¶ 26.) In exchange for their investments, the investors received membership interests in the Fund LLCs. (Id. ¶ 29.) Archer was the managing member of each LLC. (Id. ) Through Archer, Markusen made all investment decisions for the Funds and had exclusive and complete control of the Funds' management and operations. (Id. ¶ 30.)

Markusen invested most of the Funds' assets in publicly traded U.S. stocks. (Compl. ¶ 31.) He claimed that his investment strategy was to seek long-term capital appreciation by buying stock in under-followed and out-of-favor companies that he believed would double in share price in 2 or 3 years. (Id. ) Archer claimed to use a "detailed, fundamental investment research approach" to identify investment opportunities. (Id. )

Markusen and Archer were investment advisers to the Funds and received compensation in the form of fees. (Compl. ¶ 34.) They were in the business of advising the Funds about the value of securities or the advisability of investing, in purchasing, or selling particular securities. (Id. ) The Funds paid Archer a monthly management fee of 0.125% of the monthly balance of each investor's capital account in the Funds and an annual performance fee of 20% of the Funds' investment gains. (Id. ¶ 35.) The Funds also reimbursed Archer for out-of-pocket expenses that Archer incurred in managing the Funds. (Id. ¶ 36.) Markusen submitted Archer's claimed expenses on a monthly basis. (Id. ) Archer's only sources of income were the management fees, performance fees, and expense reimbursements from the Funds. (Id. ¶ 37.)

3. Research Expenses

In 2008, the Equity Fund lost more than half of its value, so Archer was not entitled to a performance fee at the end of the year and its management fees decreased. (Compl. ¶¶ 87-90.) Overall, Archer's 2008 fees were approximately $140,000 less than its 2007 fees. (Id. ¶ 91.) Although Archer claimed no research expenses in 2007, it billed $140,494 in research expenses to the Fund in 2008. (Id. ) The Funds' performance improved in 2010, and, in January 2011, Markusen sent an email to the Funds' administrator stating that he would no longer charge for Cope's research. (Id. ¶¶ 106, 108.) He did stop billing, but then the Funds fell almost 10% and, in June 2011, Markusen again began to bill for Cope's research. (Id. ¶ 109.)

From 2008 to 2013, the Funds reimbursed Archer more than $680,000 for payments that Markusen claimed Archer had made to Cope, Bloomberg Finance LP, and Tom Duxbury (an Archer insider). (Compl. ¶ 38.) The Funds wired the money to Archer's bank account, which was under Markusen's sole control. (Id. ¶ 48.) Markusen asserted that the payments were reimbursable, out-of-pocket expenses incurred by Archer. (Id. ¶ 38, 44, 46-47.) In reality, Archer paid Cope, Duxbury, and Bloomberg Finance less than $200,000 during that time period. (Id. ¶ 39.) The remainder of the money went to Archer and, in turn, to Markusen. (Id. )

Markusen knew that most of the claimed expenses were fake. (Id. ¶ 97.) Overall, from 2009 to 2013, the Funds reimbursed Archer almost $500,000 for out-of-pocket "research" expenses that Archer did not actually pay. (Id. ¶103.) Markusen personally spent these reimbursements on items such as country club dues, a Lexus, and tuition for a boarding school. (Id. ¶ 105.)

Markusen claimed that Archer paid $415,000 of the $680,000 to Cope as monthly fees for "research" performed by Cope for the Funds. (Compl. ¶ 41.) Cope did little research, creating no written analysis, studies, or recommendations for Archer, and was only paid $100,000. (Id. ¶¶ 41, 64.) Thus, $315,000 was paid to Archer for research expenses by Cope, yet not paid over to Cope. (Id. ¶ 41.)

Starting, at the latest, in February 2008, Cope began creating monthly invoices for "research provided for" Archer, in the amount of his salary, billed to Archer and Markusen, and directing that checks should be payable to Cope. (Compl. ¶¶ 66-67.) These invoices were for Cope's salary as Archer's COO, and he created the invoices to disguise his salary as a permissible Fund expense. (Id. ¶ 69.) However, these payments were not permissible because the Funds' governing documents limited Archer's compensation to a monthly management fee, an annual performance fee, and reimbursement for legitimate expenses. (Id. ¶ 70.) Cope's Archer salary should have come from the monthly management fee Archer charged to the Funds or from other Archer assets, not from the Funds. (Id. ¶ 72.)

Based on the Funds' governing documents, investors believed that Archer-related compensation paid to Cope should have come from the management fee. (Compl. ¶ 73.) The "research" fees paid to Cope were the Funds' largest expense after management fees, amounting to approximately 1/3 of the reimbursed expenses Archer received from the Funds from 2008 to 2012. (Id. ¶ 75.)

Markusen drafted or controlled the content of all written communications sent to Fund investors. (Compl. ¶ 78.) In those documents, he did not disclose that the Funds were reimbursing Archer for payments to Cope. (Id. ¶ 77.) In late 2008, Markusen reassured investors that the Funds were designed to prevent fraud and that the Funds' independent auditor made sure that all fees and expenses were appropriate. (Id. ¶ 92.)

In July 2013, after Markusen learned that the SEC was investigating Archer, he stopped billing the Funds for Cope's and Duxbury's "research" fees. (Compl. ¶ 110.)

4. Soft Dollars for Research Fees

Markusen also charged the Funds a second time for the amounts that he claimed that Archer had paid to Cope, Duxbury, and Bloomberg Finance.

From 2009 to 2013, Markusen...