Sec. & Exch. Comm'n v. Art Intellect, Inc.
| Decision Date | 06 March 2013 |
| Docket Number | Case No. 2:11-CV-357 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. ART INTELLECT, INC. d/b/a MASON HILL and VIRTUAL MG; PATRICK MERRILL BRODY; LAURA A. ROSER; GREGORY D. WOOD, Defendants. |
| Court | U.S. District Court — District of Utah |
On April 18, 2011, Plaintiff Securities and Exchange Commission (SEC) brought this civil enforcement action against Art Intellect (d/b/a Mason Hill and VirtualMG) ("Mason Hill"), Patrick Brody, and Laura Roser.1 With Mason Hill now in receivership, SEC contends that Mr. Brody and Ms. Roser (Defendants), through their involvement with Mason Hill, have violated the federal securities laws by acting as unregistered brokers or dealers while fraudulently selling unregistered "investment contract" securities beginning as early as April 2009.
In October 2011, the SEC obtained a preliminary injunction. Now the SEC moves for summary judgment on all of its claims against the Defendants, seeking a permanent injunction, disgorgement of ill-gotten gains, and imposition of civil monetary penalties. The Defendantshave filed a cross-motion for summary judgment, contending that they were not offering or selling "securities," a jurisdictional pre-requisite for SEC's suit against the Defendants. In support of their cross-motion, the Defendants submitted three affidavits, all of which the SEC has moved to strike.2
For the reasons set forth below, the court GRANTS SEC's motions to strike the three affidavits, GRANTS SEC's Motion for Summary Judgment, and DENIES the Defendants' Cross-Motion for Summary Judgment.
Before going into the background of this case, the court notes that in 2002 the SEC pursued a similar civil enforcement action against Mr. Brody for his business dealings through a group of entities collectively referred to as Merrill Scott. Ultimately, the court found that Mr. Brody violated the anti-fraud provisions and broker registration requirements of the federal securities laws, so it permanently enjoined Mr. Brody in May 2007,3 ordered him to disgorge more than $16,000,000 in ill-gotten gains,4 and imposed a civil monetary penalty of $110,000.5
The court also notes that in 2009, Mr. Brody was convicted of one misdemeanor count of failure to file a tax return reporting income received from Merrill Scott.6 He was sentenced toserve ten months in custody and twelve months supervised release. This all occurred before the action now before the court was filed.
When the SEC filed its complaint in the current case, it sought and received a temporary restraining order7 (TRO) against the Defendants. At the same time, the court issued an order freezing assets of Mason Hill and the individual defendants (the "Asset Freeze Order"),8 and appointed a receiver, R. Wayne Klein (the "Receiver"), to marshal and preserve the assets.9 The court then scheduled a hearing to determine whether a preliminary injunction should be issued.
After the court issued the TRO and Asset Freeze Order, the SEC attempted to serve the documents on Mr. Brody and Ms. Roser, both of whom wilfully attempted to avoid service of thecomplaint, TRO, and Asset Freeze Order.10 About the same time, the SEC learned that Mr. Brody and Ms. Roser had violated the Asset Freeze Order, and so it initiated contempt proceedings by filing a motion for an order to show cause.
On June 23, 2011, the SEC, in preparation for the contempt and preliminary injunction hearing, deposed Mr. Brody and Ms. Roser. During the depositions, Mr. Brody and Ms. Roser asserted their Fifth Amendment privilege against self-incrimination to every question concerning the frozen assets and their involvement with Mason Hill and its affiliated entities.11
On June 29, 2011, and July 12, 2011, the court held two evidentiary hearings on the motion for preliminary injunction and contempt issues raised by the SEC. (See June 29, 2011 Hr'g Tr. (Docket No. 75) ("June Tr."); July 12, 2011 Hr'g Tr. (Docket No. 88) ("July Tr.").) At the hearings, the witnesses included Gregory Wood (a former president of Mason Hill), Thomas Larkin (former CEO of Mason Hill), Tom Love (an investor with Mason Hill), and David Young (an investor with Mason Hill).
During the preliminary injunction proceedings, the Defendants mainly contended that they were not selling "securities" as defined by the federal securities laws so the court has no jurisdiction. That argument failed, and in October 2011, the court issued its Preliminary Injunction Order against the Defendants. The court preliminarily found that the Defendants were selling securities called "investment contracts," that they misrepresented (and omitted) materialfacts to potential and actual investors, and that they engaged in a Ponzi scheme.12
Soon after that, on November 15, 2011, the court found that the SEC had proven, by clear and convincing evidence, that Mr. Brody and Ms. Roser, despite having notice of the action and orders, were in contempt of court for violating the Asset Freeze Order.13 Eventually, in May 2012, Mr. Brody and Ms. Roser purged themselves of contempt,14 but getting to that point proved to be a difficult and drawn-out process.15
During the December 14, 2011 hearing regarding whether Ms. Roser had purged herself of contempt, Ms. Roser again asserted her Fifth Amendment privilege.16 After the court found the Defendants in contempt of court, they agreed to give deposition testimony in April and May 2012 in an attempt to purge themselves of contempt. Although they did not assert their Fifth Amendment privilege at the subsequent depositions, the subject matter of those depositions, and consequently the extent of the waiver of the privilege, was very narrow, as described later in this order.
During that time, the SEC filed the motion for summary judgment currently before the court. The Defendants filed a cross motion for summary judgment, primarily arguing that theywere not selling "securities" as defined by the federal securities laws. To support their cross motion, the Defendants submitted the affidavits of Laura Roser, Patrick Brody, and David Helm. The SEC then filed motions to strike those affidavits, which motions are now before the court.
Patrick Brody and his wife Laura Roser created Mason Hill, a company that solicited investments in real estate.
Ms. Roser was the founder and president of Art Intellect, the CEO of Mason Hill, the founder of VirtualMG, and the CEO of Mason Hill. Ms. Roser wrote and managed all of the marketing material of Mason Hill, including the website, brochures, webinars, and press releases. She also interviewed and hired staff and had a position of control at Mason Hill. But her activities were overshadowed by Mr. Brody's behind-the-scenes management.
Mr. Brody in fact controlled the operations of Mason Hill. For example, he solicited investors, recruited employees, made hiring decisions, was involved in the day-to-day operations of Mason Hill, called himself a financial director for the company, directed how funds of the company would be spent, and essentially acted as a de facto CEO. Nevertheless, Mr. Brodylargely kept his name off of any entity or property owned or controlled by Mason Hill.
Because Mr. Brody and Ms. Roser controlled Art Intellect, Inc., Mason Hill, and VirtualMG accounts, they moved and controlled investor money at will. Representatives and employees of Mason Hill solicited investors and acted on behalf of Mason Hill at the direction of Laura Roser and Patrick Brody. In this Order, when the court refers to "Mason Hill," the term includes Ms. Roser and Mr. Brody, whose representatives made the sales pitch at their direction.
Neither Mr. Brody nor Ms. Roser has ever been registered in any capacity with the SEC or any other securities regulatory agency. And Mason Hill did not register its offer and sales with the SEC.
Mason Hill offered "The Mason Hill Real Estate Investment Model" to prospective investors, who entered into a "Reservation Agreement" and "Real Estate Purchase Agreement" with Mason Hill. Mason Hill attracted approximately 75 investors and raised at least $2.5 million. Mason Hill solicited investors through its website, through "webinar" presentations, and through other communications with investors. Mason Hill also engaged a network of "strategic partners" to solicit investors nationwide in exchange for a "referral fee."
The Mason Hill model offered a "turnkey" approach to real estate investing. Specifically, Mason Hill claimed that it purchased distressed real estate at a low price, rehabilitated the properties and secured tenants, all for the investors. In addition, Mason Hill told investors that it would collect the rents and maintain the properties.18 In short, it promised investors a "hasslefree" option for real-estate investing.
For example, on its website, Mason Hill published a brochure entitled "What Everyone Should Know About the Mason Hill Real Estate Investment Model."19 It started out with the following: "How a new kind of real estate investment can produce a 14% to 26% cash-on-cash return, year after year . . . even if you never lift a finger to manage the properties, fix the properties or find a tenant. . . ."20 On the same website, under the heading "Turnkey Cash Flow," Mason Hill advertised a "LIVE webinar" called "The Hassle Free Investment: Generate Passive Income Through Real Estate."21
Mason Hill told investors that it maintained an inventory of properties in desirable areas in Florida, Ohio, and Kansas, with increasing property values that it would sell to investors at a substantial discount. Mason Hill represented that it acquired properties in bulk from banks, allowing it to obtain the properties at lower prices than could an individual investor. Mason Hill further represented that the properties were "newer" (built in 2004 to 2007 or...
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