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

• Decision Date: 25 January 2016
• Docket Number: No. 1:12-CV-07125,1:12-CV-07125
• Citation: 158 F.Supp.3d 676
• Parties: United States Securities and Exchange Commission, Plaintiff, v. Nikolai S. Battoo, BC Capital Group S.A. (Panama), BC Capital Group Limited (Hong Kong), and Tracy Lee Sunderlage Defendants.
• Court: U.S. District Court — Northern District of Illinois

158 F.Supp.3d 676

United States Securities and Exchange Commission, Plaintiff,

v.Nikolai S. Battoo, BC Capital Group S.A. (Panama), BC Capital Group Limited (Hong Kong), and Tracy Lee Sunderlage Defendants.

No. 1:12-CV-07125

United States District Court, N.D. Illinois, Eastern Division.

Signed January 25, 2016

Jonathan Stephen Polish, Brian David Fagel, Daniel J. Hayes, Eric M. Phillips, Kevin A. Wisniewski, U.S. Securities and Exchange Commission, John D. Mitchell, United States Attorney's Office, John J. Sikora, Jr., Latham & Watkins LLP, Chicago, IL, for Plaintiff.

Daniel P. Shapiro, Patrick Malley Smith, Katten Muchin Rosenman, LLP, Chicago, IL, for Defendant.

Memorandum Opinion and Order

Honorable Edmond E. Chang

, United States District Judge

The United States Securities and Exchange Commission brought this federal securities law action against various individual and corporate-entity defendants, asserting that they engaged in a Ponzi scheme to defraud investors.¹ The SEC now moves for summary judgment against the one remaining defendant (the others defaulted), Tracy Sunderlage, for violating Section 15 of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78o(a)(1)

, 78o(b)(6)(B)(i) ] and Section 203(f) of the Investment Advisers Act of 1940 [15 U.S.C. § 80b-3(f) ]. In 1986, the SEC barred Sunderlage from associating with any broker, dealer, investment adviser, investment company or municipal securities dealer after finding that Sunderlage made material misstatements to investors and sold unregistered securities. R.126, PSOF ¶ 4.² Since then, Sunderlage has worked, in various capacities, with companies that promote and administer employee welfare benefit plans and variable annuities. The SEC argues that the welfare benefit plans and variable annuities are, in reality, securities that form the basis of a complex investment scheme that Sunderlage helped to orchestrate. By promoting and facilitating the purchase and sale of these alleged securities, and advising scheme participants about these securities, the SEC contends that Sunderlage has acted as both a broker and an investment adviser in violation of the SEC's bar. For the reasons described below, the SEC's motion is granted.

I. Background

For purposes of this motion, the following facts are viewed in the light most favorable to Sunderlage (because he is the non-movant), and all reasonable inferences are drawn in his favor. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)

. In 1986, the SEC instituted an administrative proceeding against Sunderlage after finding that he sold over $1.5 million worth of unregistered securities and made material misstatements to over 100 clients. PSOF ¶ 4; R. 126-2 at 46 (Exh. 2). The SEC barred Sunderlage from associating with any broker, dealer, investment adviser, investment company, or municipal securities dealer. PSOF ¶ 5; Exh. 2 at 3. Under the SEC's order, Sunderlage could reapply to associate with a broker or investment adviser after twenty-five months. Exh. 2 at 3. Sunderlage never reapplied. PSOF ¶ 6.

Beginning in 1989, Sunderlage began working with various companies to promote and administer welfare benefit plans and variable annuities. Id. ¶ 26. The first of these plans was the “Professional Benefit Trust Multiple Employer Employee Welfare Benefit Plan and Trust” (Multi-Employer Plan). Id. ¶ 29. Under the Multi-Employer Plan, employers would make tax deductible contributions to a welfare benefit trust. Id. PBT, Ltd. (PBT), a Caribbean company owned and operated by Sunderlage, served as the trustee of the Multi-Employer Plan. Id. ¶¶ 9, 10, 30. As trustee, PBT would pool together employer contributions and invest them in, among other things, insurance products and stocks, for the employers' benefit. Id. ¶ 30. Sunderlage, either himself or through companies he controlled, would market and promote the Multi-Employer Plan to U.S. citizens via promotional materials and informational conferences. Id. ¶ 31. Employers received a pro rata share of plan assets when they terminated their participation in the Multi-Employer Plan. Id. ¶ 32; R. 137, Def.'s Resp. PSOF ¶ 32.

In 2003, a single employer plan (Single-Employer Plan) replaced the Multi-Employer Plan. PSOF ¶ 33. PBT transferred assets held in the Multi-Employer Plan, including cash, cash value life insurance policies and other securities into the Single-Employer Plan. PSOF ¶ 47. Under the Single-Employer Plan, employers made tax-deductible contributions to a single employer plan trust. Id. ¶ 34. PBT, as the trustee of the Single-Employer Plan trusts, took employer contributions and invested them in insurance products—such as a Living Benefits Policy³ —sold by Maven Assurance Limited (Maven Assurance), a Caribbean insurance company. Id. ¶¶ 24, 35. Sunderlage was a founder and director of Maven Assurance. Id. ¶ 24; Def.'s Resp. PSOF ¶ 24.

In addition to paying premiums, employers participating in the Single-Employer Plan had to become a Maven Assurance shareholder. PSOF ¶ 36; Def.'s Resp. PSOF ¶ 36. Employers became indirect shareholders of Maven Assurance by purchasing variable annuities issued to Maven Life International Limited (Maven Life) or Acadia Life International Limited (Acadia Life). PSOF ¶ 37. The variable annuity held the employer's Maven Assurance shares. Id.

Per the Maven Assurance stock Subscription Agreement, each employer (via a variable annuity) had a Protected Premium Account (PPA) with Maven Assurance. Id. ¶ 39. Employer contributions funded the PPAs and were invested in securities. Id. ¶¶ 39, 40. The Subscription Agreement also allowed Maven Assurance shareholders to determine where to invest the money inside their PPAs. Id. ¶ 41. Shareholders could choose from three or four investment portfolios, all of which were part of the Private International Wealth Management-Insurance (PIWM-I) program managed by Nikolai Battoo. Id. ¶¶ 41, 42.

Shareholders benefited from gains in the PPAs. Id. ¶ 43. For example, shareholders could receive dividends on the Maven Assurance stock associated with their PPA. Id. ¶ 45. The Maven Assurance Board of Directors determined whether to declare a dividend payable on the shareholder's stock. Id. ; Def.'s Resp. PSOF ¶ 45. Employers could also receive a dividend when they terminated their participation in the Single-Employer Plan. PSOF ¶ 46; Def.'s Resp. PSOF ¶ 46. From 2007 to 2010, Maven Assurance paid out over 150 times more in dividends to employers participating in the Single-Employer Plan than it did in insurance claims. PSOF ¶¶ 49-52. In 2009 and 2010 alone, Maven Assurance traded more than $147 million in securities. Id. ¶ 48.

In addition to the Multi-and Single-Employer Plans, Sunderlage also helped promote and administer the Maven Life single premium deferred annuity. Id. ¶ 53. Investors used their Maven Life annuity to invest in Maven Assurance stock, PIWM-I portfolios, and other securities. Id. ¶ 54. Several of Sunderlage's clients purchased a Maven Life annuity at his recommendation. Id. ¶ 55; Def.'s Resp. PSOF ¶ 55.

Sunderlage also owned and operated Sunderlage Resource Group, Inc. (SRG), which in turn managed SRG International.⁴ PSOF ¶ 57. SRG International was a shell company created to promote the Employer Plans and Maven Life variable annuity. Id. To do this, SRG International contracted with U.S.-based sales agents or “advisers”—including investment advisers—who would solicit investors. Id. ¶ 58. Sunderlage maintained a personal “block of business” through SRG International. Id. ¶ 59; Def.'s Resp. PSOF ¶ 59. This “block of business” included over 100 clients (they were primarily American), all of whom invested in Maven Assurance or Maven Life products. PSOF ¶ 69.

To promote the Multi-Employer Plan, Single-Employer Plan, and Maven Life variable annuity, SRG International and Sunderlage distributed marketing materials to U.S. clients and organized conferences for current and potential clients. PSOF ¶¶ 60, 61; Def.'s Resp. PSOF ¶ 60. Sunderlage presented and marketed himself at these conferences as having experience in “advanced tax planning, international advanced wealth strategies, … sophisticated investment strategies, [and] alternative investments.” PSOF ¶ 62; R. 126-4 at 150 (Exh. 41). The SEC asserts that Sunderlage and SRG International (remember, Sunderlage was SRG International's CEO) gave presentations to groups on investment strategies, the Employer Plans, and the Maven Life annuity at U.S.-based conferences; Sunderlage disputes that he did so in the United States. Compare PSOF ¶ 63, with Def.'s Resp. PSOF ¶ 63. The SEC also contends that Sunderlage and other SRG International representatives also met privately with potential and current clients at the conferences. PSOF ¶ 64.

Once a prospective investor became a client, SRG International had the client sign an agreement designating SRG International (or Sunderlage) as the client's investment adviser or manager. Id. ¶ 59; R. 126-8 at 17 (Exh. 64); R. 126-9 at 18 (Exh. 67); R. 126-9 at 24 (Exh. 69). Those agreements gave SRG International (or Sunderlage) authority to direct, manage, and invest client funds. PSOF ¶ 59; Exh. 64; Exh. 67 ¶ 2; Exh. 69 at Acadia SEC 00270.

U.S. clients also executed Power of Attorney forms giving SRG International full authority to execute documents on a client's behalf. PSOF ¶¶ 65, 66; Def.'s Resp. PSOF ¶ 65; R. 127-5 at 28 (Exh. 36); R. 127-6 at 3 (Exh. 37). SRG International also handled and forwarded clients' monies offshore to Maven Assurance. PSOF ¶ 67.

SRG International received millions of dollars in commissions and asset-based trail fees from Maven Assurance, Maven Life, and another entity, BC Capital, which was owned by Battoo. Id. ¶ 74. For example, under its marketing agreement with Maven Assurance, SRG International received (1) a commission of 10% of the premium paid over a seven-year period (or 50% of the first year premium) for every Living Benefits...