Sec. & Exch. Comm'n v. Gruss
| Decision Date | 28 March 2017 |
| Docket Number | 11 Civ. 2420 |
| Citation | 245 F.Supp.3d 527 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Perry A. GRUSS, Defendant. |
| Court | U.S. District Court — Southern District of New York |
Attorneys for Plaintiff, SECURITIES AND EXCHANGE COMMISSION, New York Regional Office, Brookfield Place, 200 Vesey Street, New York, NY 10281–1022, By: Todd D. Brody, Esq., Peter Altenbach III, Esq.
Attorneys for Defendant, DORSEY & WHITNEY LLP, 51 West 52nd Street, New York, NY 10019, By: Nathaniel H. Ackerman, Esq., Thomas O. Gorman, Esq.
Prior Proceedings...533
The Facts...533
The Defendant and the Funds Involved...533
The U.S. Tax Exemption for the Offshore Fund...540
The Offshore Fund Loans to the Onshore Fund...544
Gruss acted with a Negligent Intent When He Authorized the Offshore Fund Transfers to Fund Onshore Investments and the Revolver...599
to Purchase an Airplane is Denied as Presenting a Contested Issue of Fact...601
The plaintiff the Securities and Exchange Commission ("SEC" or the "Plaintiff") has moved pursuant to Rule 56(a) F. R. Civ. P. for summary judgment enjoining the defendant Perry A. Gruss ("Gruss" or the "Defendant") from violating Sections 206(1) and (2) of the Investment Advisers Act of 1940 (the "Advisers Act") and for disgorgement and civil penalties. Gruss has also moved for summary judgment pursuant to Rule 56(a) to dismiss the SEC complaint against him. Upon the facts and conclusions set forth below, both motions are granted in part and denied in part.
The principal dispute between the parties arises from the interpretation of the documents controlling the operations of the funds involved relative to the actions taken by Gruss. Central to this controversy is the bar against engaging in a U.S. trade or business under which the Offshore Fund was exempted from U.S. taxes and whether or not that bar was breached.
The SEC has advanced four grounds on which it urges the issuance of an injunction based on violations of Sections 206(1) and (2) of the Advisers Act by D.B. Zwirn & Co. ("DBZCO"), aided and abetted by Gruss. The first is based upon the sixty-six interfund transfers from the Offshore Fund to the Onshore Fund to fund Onshore investment between May 2004 and July 2006, fourteen of which were real estate investments. The second ground relates to the four payments of the Onshore revolver credit between June 2005 and May 2006, and the third and fourth grounds arise out of the payment by the Offshore Fund of DBZCO management fees and to purchase an airplane for DBZCO's managing partner. Because the payments for funding the Onshore Fund investment and repaying the Onshore revolving credit facility violate the Advisers Act, the SEC motion for injunctive relief and penalties will be granted, and the Gruss motion for summary judgment denied. Because the intercompany payment of management fees does not violate the Advisers Act, that portion of the SEC motion is denied and that portion of Gruss' summary judgment is granted. Because there is a factual issue as to Gruss' knowledge with respect to the payments to purchase the airplane, the SEC summary judgment motion on that basis is denied.
The SEC filed this action on April 8, 2011 alleging that Gruss, the Chief Financial Officer of DBZCO, a hedge fund aided and abetted violations of the Advisers Act by using funds of the Offshore Fund to fund investments by the Onshore Fund and to pay Onshore Fund loan commitments as well as a revolving 75–day credit facility and management fees and payments to purchase an airplane.
Discovery proceeded, the motion of Gruss to dismiss the complaint was denied on May 9, 2012 ( 859 F.Supp.2d 653 (S.D.N.Y. 2012), and the instant motions were heard and marked fully submitted on October 6, 2016.
The facts in these fact-rich motions are set forth in the parties' respective Rule 56.1 Statements of Material Fact and are not in dispute except as noted below.
York, London, Hong Kong, Houston, Milan, Frankfurt, Tokyo, Seoul, Beijing, Singapore, Melbourne, and Luxembourg. DBZCO also had offices in Connecticut, Mexico, New Delhi, Warsaw, Tel Aviv, and Taipei.
5. The Chief Financial Officer ("CFO") and Chief Administrative Officer for DBZCO was Gruss. In January 2006, Gruss became a partner of DBZCO and at various times held the title of Senior Vice President Managing Director. Prior to becoming the CFO of DBZCO, Gruss had never served as a CFO, although he did work in the finance departments at Nomura Holdings America, where he prepared profit and loss statements, and at American International Group.
6. In 2004, Gruss' compensation at DBZCO was either $800,000 or $1.2 million. In 2005, his compensation at DBZCO was $1.8 million. In 2006, his compensation at DBZCO was $1,657,718.00.
7. Gruss' bonus comprised the vast majority of his compensation. In 2005, his base salary from DBZCO was $160,000. In 2006, in connection with his promotion to partner, Gruss' base salary was increased to $225,000.
8. In 2007, Gruss was hired as a "marketer" for Babcock & Brown, LP, a global merchant/investment bank. As of the date of his deposition in this case, Gruss was still employed by Babcock & Brown.
Gruss admitted the statement in part and denied it in part, noting Babcock & Brown ("B & B") did hire Gruss in 2007 as a marketer, but he has never worked in that role at B & B, that B & B has been in liquidation after being delisted on the Australian Stock Exchange in June 2009, that since that time his responsibility at B & B has been to assist in the company's liquidation, and that he has not worked for an investment advisor since he left DBZCO in September–October 2006 and at the present time has no plans to work for an investment advisor.
9. During the time period of 2002 through 2009, DBZCO managed several "hedge funds," including the D.B. Zwirn Special Opportunities Fund, L.P. ("the Onshore Fund") and the D.B. Zwirn Special Opportunities Fund, Ltd. (the "Offshore Fund"), and added a third fund in March 2003 and a fourth fund in May 2005, in addition to several separately managed private accounts.
PriceWaterhouseCoopers ("PWC") audited each of these funds annually.
10. The Onshore Fund was a Delaware limited partnership founded in April 2002 to operate as a private investment fund. The Onshore Fund commenced investment operations in May 2002.
The Offshore Fund was a Cayman Island exempted company incorporated on April 12, 2002 to operate as a private investment fund. The Offshore Fund commenced investment operations in May 2002.
11. While there was some overlap in the investors in the Onshore and Offshore Funds, the majority of investors in the two funds were different. Gruss knew that the investors in the Onshore Fund were separate and distinct from the investors in the Offshore Fund. The Offshore Fund was open to both non-U.S. investors and permitted U.S. investors, and both groups of investors were required to be accredited investors and qualified purchasers. A significant proportion of the investors in both funds were themselves registered investment advisors. The SEC has noted that Gruss' only citation for this statement is the report of Dr. Richard Bergin ("Dr. Bergin"), his expert, and that Dr. Bergin cannot testify about purely factual information where the expert has no first-hand knowledge and because Gruss has not provided an admissible source for this assertion, the SEC has not responded.
The SEC has cited listings of investors for the Onshore Fund and the Offshore Fund for the period of January 1, 2006 to March 4, 2008. The relevant period of the inter-fund transfers alleged in the complaint and claimed on the SEC's summary judgment motion is March 2004 through July 2006. The evidence as to the relative proportion of the same investors in both funds has not been established.
12. The Offshore Fund was an exempted company under Cayman Islands law; as such, it had received an undertaking as to tax concessions that provided that, for a period of 20 years from the date of issue of the undertaking, no law thereafter enacted in the Cayman Islands imposing any taxes or duty to be levied on income or capital assets, gains or...
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