Saunwin Int'l Equities Fund LLC v. Donville Kent Asset Mgmt. Inc.
| Decision Date | 20 July 2018 |
| Docket Number | Civil Action No. 17-11585-FDS,Civil Action No. 17-11631-FDS |
| Parties | SAUNWIN INTERNATIONAL EQUITIES FUND LLC, Plaintiff, v. DONVILLE KENT ASSET MANAGEMENT INC., JASON DONVILLE, and JORDAN ZINBERG, Defendants. TARA HOLBROOK, et al., Plaintiffs, v. DONVILLE KENT ASSET MANAGEMENT INC., JASON DONVILLE, and JORDAN ZINBERG, Defendants. |
| Court | U.S. District Court — District of Massachusetts |
MEMORANDUM AND ORDER ON DEFENDANTS' MOTIONS TO DISMISS
This is an action arising out of the allegedly fraudulent operation of an investment fund. Plaintiffs were investors in MC2 Capital Canadian Opportunities Fund, LLC ("MC2 Canadian Fund"), a hedge fund based in Cambridge, Massachusetts, that ostensibly specialized in Canadian securities investments. MC2 Canadian Fund was managed by two individuals, Yasuna Murakami and Avi Chiat.
The complaints allege that defendants Donville Kent Asset Management ("DKAM"), Jason Donville, and Jordan Zinberg set up MC2 Canadian Fund in partnership with Murakami and Chiat as a scheme to allow defendants to offer securities in the United States without being properly registered or licensed. The fund failed, partly due to risky trading and partly due to outright theft by Murakami. Murakami has since pleaded guilty in federal court to one count of wire fraud, and both men have been sued by the Securities and Exchange Commission for securities fraud.
Defendants have moved to dismiss the complaint, contending that they were merely consultants to Murakami and Chiat and that they cannot be held responsible for their actions. At this stage, of course, the issue is not what actually happened; it is whether the allegations of the complaints are sufficient to survive dismissal. The core of the present dispute is whether the complaints have adequately pleaded the existence of a partnership between defendants and Murakami and Chiat. For the foregoing reasons, the Court finds that they have. However, the complaints fail to allege the existence of an actionable breach of fiduciary duty, and the claims arising out of such a claimed breach will be granted. The motions to dismiss will be otherwise denied.
The following facts are as set forth in the amended complaints.1
Saunwin International Equities Fund LLC, Tara Holbrook, and other named plaintiffs were investors in MC2 Canadian Fund. The fund was co-founded in 2011 by Yasuna Murakami and Avi Chiat, who were residents of Cambridge and Wellesley, Massachusetts, respectively. (Am. Compl. ¶¶ 37, 42). Murakami has never had a securities license and has never been registered with the federal or Massachusetts securities regulators. (Id. ¶ 37). Chiat was registered with the Financial Industry Regulatory Authority, Inc. and the Commonwealth of Massachusetts as a representative of a brokerage firm, but those registrations terminated on July 18, 2007. (Id. ¶ 43).
Murakami and Chiat had previously founded a separate hedge fund called MC2 Capital Partners Fund, LLC ("MC2 Partners Fund") in August 2007. (Id. ¶ 46). MC2 Partners Fund was based in Cambridge, Massachusetts. (Id.). Murakami and Chiat were investment advisers to MC2 Partners Fund and were responsible for day-to-day management of the fund. (Id. ¶ 47).
Murakami and Chiat raised more than $2 million from investors in 2007, ostensibly for investment in MC2 Partners Fund. (Id. ¶ 49). To raise that money, Murakami and Chiat claimed that their investment strategy entailed "value investing." (Id. ¶ 50). However, they proceeded to engage in risky trades, such as margin trades and trades in high-volatility industries. (Id. ¶ 52). By the end of 2007, Murakami and Chiat had lost more than $600,000 of their investors' money. (Id. ¶ 53). The following year, they raised another $1.6 million. (Id. ¶ 49). However, again through risky trades, they lost another $2 million in investor money by the end of 2008. (Id. ¶ 56).
In addition to trading losses, Murakami also stole money from MC2 Partners Fund. Between 2008 and 2010, he spent approximately $1 million in investor money on personal expenses and travel. (Id. ¶¶ 57-58). By the end of 2010, MC2 Partners Fund had only $45,372 in assets, or 1.2% of the total funds raised from investors. (Id. ¶ 59). That amount had dwindled even further to less than $3,000 when regulators began investigating Murakami in 2016. (Id.).
In August 2008, approximately one year after the MC2 Partners Fund was created, Murakami and Chiat created a second fund, called the MC2 Value Fund. (Id. ¶¶ 60-61). Like MC2 Partners Fund, MC2 Value Fund was based in Cambridge. (Id. ¶ 62). MC2 Value Fund was also advertised as a "value investing" hedge fund. (Id. ¶ 64). Murakami and Chiat served as investment advisers to the fund and raised $535,000 in investments. (Id. ¶¶ 66, 68). However, that money again was lost through risky trades and outright theft by Murakami. (Id. ¶¶ 64-65). A portion of the fund's assets was also diverted to prop up MC2 Partners Fund. (Id. ¶ 69).
Donville Kent Asset Management, Inc. ("DKAM") is an investment-management firm based in Toronto, Ontario. (Id. ¶ 30). DKAM advertises itself to the public as an experienced asset-management firm that invests in Canadian securities. (Id.). Jason Donville, a resident of Oakville, Ontario, was its founder and principal. (Id. ¶ 32). Jordan Zinberg, who also resides in Ontario, was a senior employee and principal of DKAM. (Id. ¶ 34). Zinberg recruited new investors and advertised himself to prospective MC2 Canadian Fund investors as a "portfolio manager" based in the United States. (Id. ¶¶ 34, 36).
At the relevant times, DKAM was not licensed, either as a broker-dealer or as an investment advisory firm, by federal or state securities regulators in the United States. (Id. ¶ 31). Similarly, neither Donville nor Zinberg was licensed, either as a broker-dealer registered representative or investment adviser, by federal or state securities regulators, although Donville had been licensed with FINRA in 2005 and was familiar with U.S. securities rules and regulations. (Id. ¶¶ 33, 35).
In 2009, Donville and Zinberg started to explore the American investment management market. (Id. ¶ 70). They advertised their expertise in Canadian equity markets to attract American investors interested in diversifying their investments by purchasing Canadian securities. (Id.). However, because they were not licensed in the United States, they initially declined to accept investments from American nationals. (Id. ¶¶ 71-73).
According to the complaints, to get around that problem, Donville and Zinberg sought American-based partners who could legally recruit American investors. (Id. ¶ 74). In May 2011, they agreed with Murakami and Chiat to offer investment management services to American investors. (Id. ¶ 77).
The MC2 Canadian Fund was a hedge fund created in May 2011. (Id. ¶¶ 2, 94). Like Murakami and Chiat's other two funds, it was Delaware limited liability company based in Cambridge. . It was an investment vehicle with no employees. (Am. Compl. ¶ 95).
The managing member and administrator of MC2 Canadian Fund was a limited liability company called MC2 Canada Capital Management, LLC ("MC2 Canada Management"). MC2 Canada Management was organized in Massachusetts on May 18, 2011. (Id. ¶ 78). The listed principal place of business was Cambridge, Massachusetts. (Id. ¶ 79).
The complaints allege that "[t]he purpose of MC2 Canada Management was primarily to act as the ostensible administrative manager of the MC2 Canadian Fund and the vehicle through which Defendants and their partners charged the Fund investors asset management fees, and to conceal from U.S. federal and state securities regulators that Defendants were engaging in securities and investment management business in the United States and Massachusetts without required licenses and/or registrations." (Id. ¶ 80). MC2 Canada Management provided various support services for MC2 Canadian Fund, such as maintaining and preserving fund records, reviewing subscription agreements, and providing office space. (Id. ¶ 81).
The complaints further allege that the relationship between Donville and Zinberg, on the one hand, and Murakami and Chiat, on the other, was a partnership, in which they agreed to divide their roles and responsibilities. (Id. ¶¶ 77, 85). They allege that defendants used Murakami and Chiat as "'front men'" to avoid American securities regulators, and therefore did not disclose their names as part of the leadership of MC2 Canada Management or list their names as managers or control persons in documents filed with Massachusetts authorities. (Id. ¶¶ 90-91). They further allege that a consulting agreement, under which defendants were to be mere consultants to MC2 Canada Management and not investment managers, was a sham to further circumvent securities laws. (Id. ¶¶ 92-93).
The complaints also allege that Donville and Zinberg had greater ownership, control, and responsibilities as to MC2 Canada Management than Murakami and Chiat. They allege that Donville and Zinberg (acting through DKAM) were charged with "soliciting and recruiting" American investors, managing investment funds, and evaluating new Canadian investment opportunities. (Id. ¶ 85). Both Donville and Zinberg had decision-making authority for MC2 Canadian Fund investment decisions and authority for all trading. (Id. ¶ 87). Zinberg also had business cards made advertising himself as a portfolio manager for the "MC2 Capital Canadian Opportunities Fund" and listing a Cambridge address and Boston telephone and fax numbers (and an Ontario telephone number denominated "Direct"). (Id. ¶ 86). Murakami and Chiat similarly...
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