Sec. & Exch. Comm'n v. Koester
| Decision Date | 02 April 2014 |
| Docket Number | Case No. 1:12–cv–01364–TWP–TAB. |
| Citation | 13 F.Supp.3d 928 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Ryan W. KOESTER, and Rykoworks Capital Group, LLC, Defendants. |
| Court | U.S. District Court — Southern District of Indiana |
Brian Fitzsimons, Devon Anthony Brown, U.S. Securities and Exchange Commission, Washington, DC, for Plaintiff.
ENTRY ON CROSS–MOTIONS FOR SUMMARY JUDGMENT
This matter is before the Court on the parties' cross-motions for summary judgment. Defendant Ryan W. Koester (“Mr. Koester”) filed his Motion for Summary Judgment (Dkt. 30) seeking judgment in his favor on the claims brought against him by the Securities and Exchange Commission (“SEC”). The SEC filed its Motion for Summary Judgment (Dkt. 35) seeking judgment against both Mr. Koester and Rykoworks Capital Group, LLC (“Rykoworks”). For the reasons set forth below, SEC's Motion as to Mr. Koester is GRANTED and Mr. Koester's Motion is DENIED.
Federal Rule of Civil Procedure 56 provides that summary judgment is appropriate if “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Hemsworth v. Quotesmith.Com, Inc.,
476 F.3d 487, 489–90 (7th Cir.2007). In ruling on a motion for summary judgment, the court reviews “the record in the light most favorable to the nonmoving party and draw[s] all reasonable inferences in that party's favor.” Zerante v. DeLuca, 555 F.3d 582, 584 (7th Cir.2009) (citation omitted). However, “[a] party who bears the burden of proof on a particular issue may not rest on its pleadings, but must affirmatively demonstrate, by specific factual allegations, that there is a genuine issue of material fact that requires trial.” Hemsworth, 476 F.3d at 490 (citation omitted). “In much the same way that a court is not required to scour the record in search of evidence to defeat a motion for summary judgment, nor is it permitted to conduct a paper trial on the merits of a claim.” Ritchie v. Glidden Co., 242 F.3d 713, 723 (7th Cir.2001) (citation and internal quotations omitted). Finally, “neither the mere existence of some alleged factual dispute between the parties nor the existence of some metaphysical doubt as to the material facts is sufficient to defeat a motion for summary judgment.” Chiaramonte v. Fashion Bed Grp., Inc., 129 F.3d 391, 395 (7th Cir.1997) (citations and internal quotations omitted).
An adverse inference from a party's assertion of the Fifth Amendment is permissible in a civil case, but is not required. Thompson v. City of Chi., 722 F.3d 963, 976 (7th Cir.2013). However, an adverse inference alone is not sufficient to make a finding as a matter of law and additional evidence is needed to corroborate an adverse inference. Id.
As an initial matter, the Court must address deficiencies in Mr. Koester's Response, and Cross–Motion for Summary Judgment. As mentioned above, summary judgment is governed by Federal Rule of Civil Procedure 56. A movant seeking summary judgment must show “that there is no genuine dispute as to any of the material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A party must support its factual positions by citing to “particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits, or declarations, stipulations ... admissions, interrogatory answers, or other materials.” Fed.R.Civ.P. 56(c)(1)(A). A party may also show that cited materials “do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce evidence to support the fact.” Fed.R.Civ.P. 56(c)(1)(B). An affidavit submitted with a motion “must be made on personal knowledge, set out facts that would be admissible in evidence, and show that the affiant or declarant is competent to testify on the matters stated.” Fed.R.Civ.P. 56(c)(4).
Local Rule 56–1 governs summary judgment procedure in this District. A movant is obligated to include in his or her brief a “Statement of Material Facts Not in Dispute” containing the facts “that are potentially determinative of the motion” and “as to which the movant contends there is no genuine issue.” S.D. Ind. L.R. 56–1(a). A non-movant may, within 28 days after the motion, file and serve a response brief that must include a section entitled “Statement of Material Facts in Dispute” that identifies determinative facts and controverts those facts. L.R. 56–1(b). The Court will deem facts admitted without controversy to the extent they are supported by admissible evidence and not specifically controverted. L.R. 56–1(f). The Court has no duty to search the record not specifically cited by the parties. L.R. 56–1(h). Further, the Seventh Circuit and Local Rule 56–1 require that “[a] party seeking summary judgment against an unrepresented party must serve that party with the notice contained in Appendix A.” Local Rule 56–1(k); see Timms v. Frank, 953 F.2d 281 (7th Cir.1992).
Mr. Koester's Motion for Summary Judgment does not contain the required “Statement of Material Facts Not in Dispute,” or any statement of fact. Courts liberally construe the pleadings of individuals that proceed pro se, but the Court is not required to search the record to support Mr. Koester's position. Greer v. Bd. of Educ. of City of Chi., Ill., 267 F.3d 723, 727 (7th Cir.2001). Additionally, although Mr. Koester was served by SEC with a Notice to Pro Se Defendant of Filing of Summary Judgment Motion (Dkt. 33), he has not responded to SEC's motion. Thus, faced with only SEC's statement of material facts not in dispute and finding them supported by admissible evidence, the Court accepts SEC's statement of material facts not in dispute for purposes of this motion. However, the Court's standard for considering those facts remains in the light most favorable to Mr. Koester, as explained more fully below.
The Court adopts “The Undisputed Material Facts” as set forth by SEC in docket entry 32, contained on pages 2 through 16 in paragraphs 1 through 51. A brief summary of those facts is as follows: Mr. Koester is a resident of Brownsburg, Indiana. He is the sole owner and operator of Rykoworks, an inactive Indiana limited liability company that operates in Brownsburg, Indiana. Mr. Koester has never held any securities licenses. Indiana authorities have filed pending state criminal charges against Mr. Koester in State of Indiana v. Ryan Koester, Cause No. 41C011205FB00028 (May 16, 2012). Beginning around September 2010, Mr. Koester is alleged to have participated in a fraudulent investment scheme in which he, Rykoworks, and others misappropriated nearly $1.7 million of investor money. Mr. Koester purported to be an expert foreign currency trader and represented to investors that his unique trading strategy offered investors a principal guaranteed investment opportunity. The investor funds were transferred to Mr. Koester through Rykoworks, an entity he controlled, where the funds were pooled and then depleted through trading losses and Mr. Koester's misappropriation of funds for his personal expenses.
In connection with the scheme, Mr. Koester and the other defendants knowingly made materially false representations to investors regarding both the nature of the investment and the intended and actual use of investors' funds. Mr. Koester also provided investors with materially false account information and statements in an attempt to conceal his fraudulent misuse of investors' funds. In so doing, the SEC alleges that Mr. Koester, Rykoworks and the other defendants violated Section 10(b) of the Securities Exchange Act of 1934 [15 U.S.C. § 78j(b) ] (the “Securities Act”).
In its Complaint, the SEC alleges that Mr. Koester violated Section 10(b) of the Securities Act. To prevail, the SEC must establish that (1) in connection with the offer or sale of securities; (2) Mr. Koester made material untrue statements or material omissions, or employed or engaged in a scheme to defraud (scheme liability); and (3) he acted with the requisite scienter, in that he intended to deceive, manipulate or defraud investors, or acted recklessly. See SEC v. Zandford, 535 U.S. 813, 820–21, 122 S.Ct. 1899, 153 L.Ed.2d 1 (2002). The Court agrees with SEC that the undisputed facts establish each element, and SEC is entitled to judgment as a matter of law.
The definition of security is broad, and includes an “investment contract.” See 15 U.S.C. § 77b(a)(1) ; Lincoln Nat'l Life Ins. Co. v. Bezich, 610 F.3d 448, 449 (7th Cir.2010). To determine whether a particular scheme is an investment contract, courts ask “whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.” SEC v. Edwards, 540 U.S. 389, 393, 124 S.Ct. 892, 157 L.Ed.2d 813 (2004) (quoting SEC v. W.J. Howey Co., 328 U.S. 293, 301, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946) ). The term “profits must come solely from the efforts of others” refers to the “profits that investors seek on their investment, not the profits of the scheme in which they invest.” Id. In the Seventh Circuit “common enterprise” is analyzed under the “horizontal commonality” test, which is satisfied where “multiple investors pool their investments and receive pro rata profits.” Goldberg v. 401 N. Wabash Venture LLC, 904 F.Supp.2d 820, 848 (N.D.Ill.2012) (quoting Stenger v. R.H. Love Galleries, Inc., 741 F.2d 144, 146 (7th Cir.1984) ).
Here, Mr. Koester's scheme was an investment contract. Clients invested their money with Mr. Koester upon his representation that funds would be used for foreign currency trading. Investor money was pooled in a Rykoworks trading account. The promissory notes produced...
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