Sec. & Exch. Comm'n v. True N. Fin. Corp.

• Decision Date: 09 November 2012
• Docket Number: Civil No. 10–3995 (DWF/JJK).
• Citation: 909 F.Supp.2d 1073
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. TRUE NORTH FINANCE CORPORATION, formerly known as CS Financing Corporation; Capital Solutions Monthly Income Fund, LP, formerly known as Hennessey Financial Monthly Income Fund, LP; Capital Solutions Distributors, LLC; Capital Solutions Management, LP; Transactional Finance Fund Management, LLC; Todd A. Duckson; Michael W. Bozora; Timothy R. Redpath; and Owen Mark Williams, Defendants.
• Court: U.S. District Court — District of Minnesota

909 F.Supp.2d 1073

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.TRUE NORTH FINANCE CORPORATION, formerly known as CS Financing Corporation; Capital Solutions Monthly Income Fund, LP, formerly known as Hennessey Financial Monthly Income Fund, LP; Capital Solutions Distributors, LLC; Capital Solutions Management, LP; Transactional Finance Fund Management, LLC; Todd A. Duckson; Michael W. Bozora; Timothy R. Redpath; and Owen Mark Williams, Defendants.

Civil No. 10–3995 (DWF/JJK).

United States District Court,

D. Minnesota.

Nov. 9, 2012.

Eric M. Phillips, Esq., Marlene B. Key, Esq., and Daniel J. Hayes, Esq., U.S. Securities and Exchange Commission, counsel for Plaintiff.

Philip T. Colton, Esq., and William A. McNab, Esq., Winthrop & Weinstine, PA, counsel for Defendant True North Finance Corporation, formerly known as CS Financing Corporation.

Scott R. Carlson, Esq., DC Law Chartered, counsel for Defendants Capital Solutions Monthly Income Fund, LP, formerly known as Hennessey Financial Monthly Income Fund, LP, and Transactional Finance Fund Management, LLC.

Andrea D. Kiehl, Esq., and Cynthia A. Bremer, Esq., Ogletree, Deakins, Nash, Smoak & Stewart, P.C.; Michael Z. Gurland, Esq., Michael Moshe Zmora, Esq., and Phillip L. Stern, Esq., Neal, Gerber & Eisenberg LLP, counsel for Defendants Capital Solutions Distributors, LLC, Capital Solutions Management, LP, Michael W. Bozora, and Timothy R. Redpath.

Lawrence J. Field, Esq., and Bryant D. Tchida, Esq., Leonard Street and Deinard, PA, counsel for Defendant Todd A. Duckson.

Andrew M. Luger, Esq., and Jenny Gassman–Pines, Esq., Greene Espel PLLP; and Brent R. Baker, Esq., Parsons Behle & Latimer, counsel for Defendant Owen Mark Williams.

MEMORANDUM OPINION AND ORDER

DONOVAN W. FRANK, District Judge.

INTRODUCTION

This matter is before the Court on a Joint Motion for Summary Judgment brought by Defendants Capital Solutions Monthly Income Fund, LP and Transactional Finance Fund Management, LLC (“TFFM”) (Doc. No. 113) and a Motion for Summary Judgment brought by Defendant Todd A. Duckson (“Duckson”) (Doc. No. 117). For the reasons set forth below, Defendants' motions are granted in part and denied in part.

BACKGROUND

This matter involves the Securities and Exchange Commission's (“SEC”) allegations of fraud in the offer and sale of interests in the Capital Solutions Monthly Income Fund, LP, f/k/a Hennessey Financial Monthly Income Fund, LP (the “Fund”), an unregistered investment pool. (Doc. No. 97 (First Am. Compl. (“FAC”)) ¶¶ 1–3, 26.) The SEC alleges that Defendants engaged in written and oral misrepresentations to investors and brokers from March 2008 to December 2009. (FAC ¶¶ 2–19.) In the First Amended Complaint, the SEC asserts three counts of securities fraud against the Fund, TFFM, and Duckson: primary violations of Section 10(b) of the Exchange Act 15 U.S.C. § 78j(b) and Rule 10b–5 (17 C.F.R. § 240.10b–5); aiding and abetting liability for violations of Section 10(b) of the Exchange Act 15 U.S.C. § 78j(b) and Rule 10b–5 (17 C.F.R. § 240.10b–5); and violations of Section 17(a)(1)-(3) of the Securities Act 15 U.S.C. § 77q(a)(1)-(3). The SEC seeks permanent injunctive relief enjoining Defendants from future violations of securities laws, an officer-director bar against Duckson, declaratory judgment as to Defendants' securities violations, disgorgement of ill-gotten gains, civil penalties, and other relief the Court may deem appropriate. (FAC ¶¶ 19, Relief Requested.)

In April 2011, the Court denied Defendants True North Finance Corporation (“True North”) and Owen Mark Williams' (“Williams”) motions to dismiss, finding that the SEC's Corrected Complaint (Doc. No. 4) satisfied the pleading requirements of Federal Rule of Civil Procedure 9(b) and that the factual allegations in the Corrected Complaint sufficiently plead scienter. (Doc. No. 62 at 12–13.) In May 2012, the SEC was given leave to file its First Amended Complaint, which the Fund, TFFM, and Duckson answered several weeks later. (Doc. Nos. 95–99.)

A. The Parties

The Fund was a Delaware limited partnership and TFFM was a Minnesota limited liability company; both were based in Minneapolis, Minnesota. (FAC ¶¶ 26–27.) In 2004, Timothy R. Redpath (“Redpath”) and Michael W. Bozora (“Bozora”) launched the Fund to provide financing to Hennessey Financial, LLC and/or Hennessey Financial Note Holdings, LLC (collectively, “Hennessey”). ( Id. ¶¶ 32, 33, 36.) Hennessey, which was owned by Jeffrey Gardner (“Gardner”) generated income for the Fund by making mezzanine ¹ loans at annual rates of 18% or greater to real estate developers including Heritage Development (“Heritage”), Argus Homes (“Argus”), Omni Investment Properties (“Omni”), and Assured Financial, LLC (“Assured”) (collectively, “affiliated borrowers”), which were also owned and operated by Gardner. (Doc. No. 141, Phillips Aff. ¶ 2, Ex. 2 (Redpath Dep. I) at 209–11.) Heritage was the largest of Hennessey's affiliated borrowers, receiving approximately two-thirds of Hennessey's loans; Omni and Argus received nearly all of Hennessey's remaining loans. (Phillips Aff. ¶ 9, Ex. 9 (Essen Dep.) at 84–85.)

NFP Securities, Inc. (“NFP”) is a brokerage firm that brought in a majority of the Fund's investors. (Phillips Aff. ¶ 14, Ex. 14 (Woodward Dep.) at 11.) Prior to November 2008, Duckson did not speak with NFP or any of the Fund's actual or potential brokers or investors. (Doc. No. 121, Duckson Decl. ¶ 3.)

The Fund offered its limited partners (“investors”) a 12% fixed annual return and required them to lock-up their investment in the Fund for four years. (FAC ¶ 36.) The Fund paid its investors 1% per month, which was paid primarily from the interest it received from Hennessey and its affiliated borrowers. ( Id.; Phillips Aff. ¶ 1, Ex. 1 (Duckson Dep. I) at 40.) Pursuant to the Fund's partnership agreement, any profits were maintained within the Fund as capital until the Fund's dissolution. (Duckson Dep. I at 41.)

Until the end of 2008, Duckson was a capital partner at the Minneapolis office of Hinshaw and Culbertson, LLP (“Hinshaw”). (Duckson Decl. ¶ 2.) In 2008, over two-thirds of Duckson's billable attorney fees were incurred on behalf of Gardner and his affiliates. (Phillips Aff. ¶ 19, Ex. 19 (Hinshaw 30(b)(6) Dep.) at 23–29.) On October 26, 2008, Duckson formed TFFM, which became the Fund's investment manager. (Duckson Decl. ¶ 11.) Duckson resigned from Hinshaw on December 31, 2008 to manage the Fund through TFFM “because he believed that the value of the Fund's real estate assets obtained through foreclosure on Hennessey Financial so far exceeded the Fund's liabilities” that he was sure to make a great deal of money. ( Id.) Duckson served as CEO of True North from June 2009 to the end of 2010 when Duckson resigned and Steven Howard Levenson (“Levenson”) took over as CEO. (FAC at ¶ 94; Phillips Aff. ¶ 84, Ex. 84 (Levenson Dep.) at 9–10.)

TFFM, which was owned and controlled by Duckson, served as the investment manager to the Fund beginning in November 2008. (FAC ¶ 27.) As the Fund's investment manager, TFFM received a 2% annual management fee. (Duckson Dep. I at 41.) Through TFFM, Duckson oversaw the Fund's operating real estate assets, monitored cash flows, interacted with third parties doing business with the Fund, and evaluated investment opportunities, strategy, and asset management. (Duckson Decl. ¶ 14.) Duckson also served as the “Chief Manager and Governor” of the Fund's general partner, CS Fund General Partner, LLC. (Field Aff. ¶ 3, Ex. 2 (November 2008 COM) at CAP 0227774.) ² The Fund's investment manager, TFFM, was responsible for overseeing “most decisions regarding the acquisition and sale of major investments by the Fund” and the “day-to-day management and operation of the Fund.” ( Id.)

Duckson also formed Transactional Finance, LLC (“Transactional Finance”) to provide additional investment opportunities for the Fund in the form of third-party promissory notes, which were issued in 2009.³ (Duckson Decl. ¶ 29.) Transactional Finance was a part owner and holding company for TFFM. (Phillips Aff. ¶ 8, Ex. 8 (Duckson Dep. II) ⁴ at 16–17.) Though Duckson owned 100% of Transactional Finance as of May 2012, he had other ownership partners until approximately 2007 or 2008. ( Id. at 17.) Duckson also created CS Midwest Holdings (“CS Midwest”) and CS Southeast Holdings (“CS Southeast”) as special purpose vehicles (“SPVs”) to which the Fund could sell assets in furtherance of the Fund's strategic objectives. (November 2008 COM at CAP 0227776.)

B. Relevant Facts Prior to Period of Alleged Fraud

Prior to July 2007, Jon Essen (“Essen”), Hennessey's CFO and COO, was aware that Heritage was experiencing financial difficulties as a result of the credit crisis and the downturn in the real estate market. (Essen Dep. at 17–18, 50.) By January 2008, Hennessey lacked the ability to repay its creditors. (Phillips Aff. ¶ 20, Ex. 20 (Dixon Dep.) at 114.) Due to deteriorating real estate market conditions, Argus and Assured also struggled to meet their financial obligations to Hennessey. (Dixon Dep. at 54; Phillips Aff. ¶ 18, Ex. 18 (RichardsonDep.) at 44.) By September 2007, Gardner had determined that the Fund would need to foreclose on Hennessey's assets. (Phillips Aff. ¶ 5, Ex. 5 (Gardner Dep.) at 207–08.)

In November 2007, Duckson, Redpath, Bozora and several others held due diligence meetings with Gardner in Minneapolis, where they discussed Heritage, Hennessey, and the affiliated borrowers' financial struggles. (Phillips Aff. ¶ 86, Ex. 86 (Regalia Dep.) at 19–23; Essen Dep. at 139.) In a November 21, 2007 e-mail summarizing one of the due diligence meetings, Andy Regalia (“Regalia”) outlined the group's three options for dealing with the associated borrowers' defaults: immediately salvage them, attempt to take-on and manage them, or raise new funds while limiting liability and waiting for the market to rebound. (Phillips Aff. ¶ 87, Ex. 87 at 2, CAP...