Sec. & Exch. Comm'n v. Kingdom Legacy Gen. Partner, LLC
| Decision Date | 31 January 2017 |
| Docket Number | Case No: 2:16-cv-441-FtM-38MRM |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. KINGDOM LEGACY GENERAL PARTNER, LLC and MARK C. NORTHROP, Defendants. |
| Court | U.S. District Court — Middle District of Florida |
This matter comes before the Court on review of Defendants, Kingdom Legacy General Partners, LLC ("KLGP") and Mark C. Northrup's Motion to Dismiss (Doc. #16) filed on August 5, 2016. Plaintiff, Securities and Exchange Commission ("SEC") responded in opposition on August 29, 2016. The matter is ripe for review.
This case involves allegations of widespread securities fraud. The SEC is the federal agency responsible for enforcing federal securities laws. The SEC alleges that Northrup is a licensed CPA, the owner and CEO of Kingdom Legacy Fund, LLC ("KLF"), and the controlling alter-ego of KLGP. (Doc. #1 at 3-4). KLGP is a fund management entity that controls the selection and overall allocation of KLF's assets. (Doc. #1 at 3).KLF is a hedge fund with a portfolio of different investment funds. (Doc. #1 at 1-5). According to the Complaint, from December 2010 to September 2015, the Defendants raised at least $10,000,000.00 from at least 40 investors for the KLF fund. (Doc. #1 at 1). Through KLF, Defendants allegedly siphoned at least $3,000,000.00 in undisclosed fees from investors. (Doc. #1 at 1).
Specifically, the Complaint alleges that through various avenues including the internet, through the mail, and in person at church gatherings, Defendants employed a number of misstatements and omissions to entice individuals into investing in KLF. (Doc. #1 at 5-9). Through its website, KLF made false representations regarding the profitability of the fund and the extent of involvement by Northrup's family. It stated that (Doc. #1 at 5). It further stated that (Doc. #1 at 7). Finally, the website stated that "[Northrup's] family is the largest investor in the fund, which means nobody is going to watch your money any closer than we do." (Doc. #1 at 9) (capitalization omitted). The Complaint alleges these representations are false, that Defendants profited when the fund lost money, and that the Northrup family was never the largest investor in KLF. (Doc. #1 at 7, 9).
Moreover, a brochure that KLF distributed stated that each of KLF's principles and employees had personal investments in the fund, and that they "only ma[d]e money when [the investors] ma[d]e money." (Doc. #1 at 7). The Complaint alleges this statement isfalse, as there were occasions where investors lost money and Defendants still managed to profit for themselves. (Doc. #1 at 7).
Usually at the time of investment, either in person or by mail, the investors were also provided with a Private Placement Memorandum ("PPM"). (Doc. #1 at 5). The PPM detailed the investment the individuals had undertaken, and the types of KLF share classes, including KLF Conservative Series A ("KLF Conservative") and KLF Aggressive Series B ("KLF Aggressive").2 (Doc. #1 at 5). The PPM also claimed that investors in KLF shares received advantages over others, such as diversification, experienced management, investor limited liability and administrative convenience. (Doc. #1 at 6). The PPM continued by claiming that the trade size and volume of trading "may enable [KLF] to obtain lower commission rates than would otherwise be available to smaller portfolios invested independently in the strategies applied by [KLF]." (Doc. #1 at 6). Importantly, the Complaint alleges that the PPM also contained misrepresentations and omissions on administrative fees. (Doc. #1 at 6). The PPM explicitly stated that investments in KLF funds were only subject to a 2% annual asset management fee on any profits made. (Doc. #1 at 6). The Complaint alleges this representation was false, and in actuality, Defendants charged investors 40% or 50% in administrative fees on monthly trading profits. (Doc. #1 at 6-7).
Finally, the Complaint alleges that a letter was received by at least one investor claiming that Northrup was a "mathematical guru" and that he had "increased each investor's account by double digit returns every year since he started managing hedge funds in 2000." (Doc. #1 at 8). These promotions failed, however, to mention Northropwas forced to dissolve a previous hedge fund in 2008 because of tremendous losses, and that in 2009, Northrop and his previous hedge fund management company were sued under the Kansas Uniform Securities Act and a default judgment was entered against them. (Doc. #1 at 8).
Because of all of the above and with knowledge of an ongoing SEC investigation, the Complaint alleges that Northrop sent letters to all KLF investors in September 2015. (Doc. #1 at 9). These letters urged all KLF investors to sign an enclosed addendum "to try and eliminate any confusion any of our investors may have" concerning KLF's fee structure, and that he "should have made clear these returns to you, the investor, are after all fees." (Doc. #1 at 9) (capitalization omitted). With that, the addendum also disclosed the 50% fees for KLF Conservative and 40% fees for KLF Aggressive. (Doc. #1 at 9-10).
Under Federal Rule of Civil Procedure 12(b)(6), a court may dismiss a Complaint for failure to state a claim upon which relief can be granted. In deciding a Rule 12(b)(6) motion to dismiss, the Court limits its consideration to well-pleaded factual allegations, documents central to, or referenced in, the complaint, and matters judicially noticed. La Grasta v. First Union Sec., Inc., 358 F.3d 840, 845 (11th Cir. 2004). The Court must accept all factual allegations in a plaintiff's complaint as true and take them in the light most favorable to the plaintiff. Pielage v. McConnell, 516 F.3d 1282, 1284 (11th Cir. 2008). Conclusory allegations, however, are not entitled to a presumption of truth.Ashcroft v. Iqbal, 556 U.S. 662 (2009); Marsh v. Butler County, Ala., 268 F.3d 1014, 1036 n. 16 (11th Cir. 2001).
The Court employs the Twombly-Iqbal plausibility standard when reviewing a complaint subject to a motion to dismiss. Randall v. Scott, 610 F.3d 701, 708 n.2 (11th Cir. 2010). A claim is plausible if the plaintiff alleges facts that "allow[ ] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678. The plausibility standard requires that a plaintiff allege sufficient facts "to raise a reasonable expectation that discovery will reveal evidence" that supports the plaintiff's claim. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007); Marsh, 268 F.3d at 1036 n.16. Thus, "the-defendant-unlawfully harmed me accusation" is insufficient. Iqbal, 556 U.S. at 677. "Nor does a complaint suffice if it tenders naked assertions devoid of further factual enhancement." Id. (internal modifications omitted). Further, courts are not "bound to accept as true a legal conclusion couched as a factual allegation." Papasan v. Allain, 478 U.S. 265, 286 (1986).
Under Federal Rule of Civil Procedure 12(b)(1), a district court may dismiss a case if subject matter jurisdiction is not present. Fed. R. Civ. P. 12(b)(1). Motions to dismiss for lack of subject matter jurisdiction attack jurisdiction facially and/or factually. See Carmichael v. Kellogg, Brown & Root Servs., Inc., 572 F.3d 1271, 1279 (11th Cir.2009); Morrison v. Amway Corp., 323 F.3d 920, 925 n. 5 (11th Cir.2003). Where, as here, a defendant raises a factual attack on subject matter jurisdiction, irrespective of the sufficiency of the pleadings, the district court may look outside the four corners of the complaint to determine if jurisdiction exists. See Eaton v. Dorchester Dev., Inc., 692 F.2d727, 732 (11th Cir.1982); Garcia v. Copenhaver, Bell & Assocs., M.D.'s, P.A., 104 F.3d 1256, 1261 (11th Cir. 1997). In factual attacks, the presumption of truthfulness afforded to a plaintiff under Rule 12(b)(6) does not attach. See Scarfo v. Ginsberg, 175 F.3d 957, 960 (11th Cir.1999) (citing Lawrence v. Dunbar, 919 F.2d 1525, 1529 (11th Cir.1990)). Since the Court's power to hear the case is at issue in a Rule 12(b)(1) motion, courts are free to weigh evidence outside the complaint (e.g., affidavits, declarations, and deposition testimony). See Carmichael, 572 F.3d at 1279; Eaton, 692 F.2d at 732.
Defendants' Motion to Dismiss is multifaceted. First, they argue that the Complaint should be dismissed because it does not meet the particularity threshold of Rule 9(b). Second, Defendants present evidence and an alternative theory they claim undermines the Complaint's securities fraud allegations. Third, Defendants argue that the Complaint fails to sufficiently support the statutory elements of securities fraud in Counts II, III, IV, V, VI, VII, VIII, IX, X and XI. Fourth, Defendants argue the relief sought in the Complaint is prohibited. Fifth, they argue that the Court lacks subject matter jurisdiction over the claims in the Complaint because they do not involve interstate commerce. Last, Defendants argue that some of the actions contemplated by the Complaint are time-barred. The Court will address each argument below.
Defendants first aver the Complaint should be dismissed because it does not meet the pleading threshold imposed on fraud claims by the Federal Rules of Civil Procedure. Securities fraud allegations are subject to the heightened pleading standards of Federal Rule of Civil Procedure 9(b), which requires that a party "state with particularity thecircumstances constituting fraud." Normally, ...
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