Sec. & Exch. Comm'n v. Cody, Civil Action No. 16-cv-12510
| Decision Date | 05 December 2019 |
| Docket Number | Civil Action No. 16-cv-12510 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. RICHARD G. CODY, individually and doing business as BOSTON INVESTMENT PARTNERS, LLC, and BOSTON INVESTMENT PARTNERS, LLC, Defendants. |
| Court | U.S. District Court — District of Massachusetts |
MEMORANDUM AND ORDER ON MOTION FOR SUMMARY JUDGMENT
This is a civil enforcement action brought by the Securities and Exchange Commission against Richard G. Cody and a limited liability company through which he did business, Boston Investment Partners, LLC. The complaint alleges that Cody, an investment adviser, lied to several clients about their retirement accounts and then undertook a variety of deceptive and fraudulent acts to hide his misconduct. It further alleges that Cody violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); Rule 10b-5, 17 C.F.R. § 340.10b-5; and §§ 206(1)-(2) of the Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-6(1)-(2).
The SEC has moved for summary judgment in its favor. For the following reasons, the motion will be granted.
Richard G. Cody was an investment adviser and/or broker representative at all times relevant to the following events. (Indict. ¶ 1-2). Boston Investment Partners, LLC was a limited liability company through which Cody conducted some of his business. (Id. ¶ 3).
From 1998 through September 2016, Cody worked as an investment adviser at a variety of different firms. (Rule 11 Hearing, 17-cr-10291 Dkt. #102, 13:19-14:1). In that capacity, he managed the retirement accounts for numerous individuals, which included investing, reporting, and disbursing client funds. (Id. 14:2-11).
Maureen and Paul M., Kenneth E., and Carol and Ray B. were clients of Cody from May 2005 to September 2016. (Id. 14:2-8). Each of those sets of clients involved at least one person who, after a long career at Verizon, retired, and elected to receive their pensions as lump sums. (Id.). Those funds were then entrusted to Cody for investment. (Id.).
In his dealings with each of those clients, Cody "willfully engaged in transactions, practices, and courses of business that were fraudulent, deceptive, and manipulative." (Id. 14:12-18). In essence, he falsely assured the victims that any account balances remained high and that their distributions came from interest income. (Id. 14:16-18). In fact, the accounts suffered significant losses, especially in 2008, and the value of the accounts was steadily declining. (Id. at 14:15-21).
Cody hid that fact from his victims. On one occasion, for example, Kenneth E. called Cody after reviewing a brokerage-firm statement indicating that his account had declined in value. (Id. 14:22-25). Rather than tell the truth, Cody falsely told him that he had additional funds invested elsewhere in bonds, and that the statement did not reflect the full value of hisaccounts. (Id.).
Cody also created false documents to conceal his deception from his victims. In April 2016, Maureen M. told him that she needed to borrow $10,000 from her retirement account. (Id. 15:2-5). At that point, her accounts were basically empty. (Id.). Cody nonetheless told her that her money was in an annuity with Sun Life and proceeded to create a falsified Sun Life annuity form with various false details handwritten on the form. (Id. 15:5-10). That same year, he sent both Maureen M. and Kenneth E. falsified IRS Form 1099, reflecting about $30,000 in distributions. (Id. 15:11-18). Both individuals, however, had retirement accounts that were empty, or nearly so, during this time. (Id. 15:11-22).
In January 2013, Cody was suspended from associating with any FINRA member firm a one-year period. (Id. 15:23-25). He also concealed that fact from his victims. He covertly transferred his accounts to his wife, Jill Cody, by submitting documents with forged signatures. (Id. 15:25-16:2). His victims were never told of the suspension.
Beginning in 2014, the retirement savings of Maureen M. and Kenneth E. were fully depleted. Cody nonetheless paid the monthly payments that they expected to receive from his own accounts. Because of that, neither victim was alerted as to the depleted status of their account. (Id. 16:3-8).
Eventually, the deception was discovered. Cody was indicted for, and eventually pleaded guilty to, securities fraud.
The SEC filed this action on December 12, 2016. On October 2, 2017, the United States filed a motion to intervene and to stay discovery pending completion of the criminal case. The Court granted the motion to intervene and stay on October 26, 2017.
The criminal case against Cody charged one count of fraud under the Investment Advisers Act, 15 U.S.C. §§ 80b-6; 80b-17, and two counts of making a false declaration under oath, 8 U.S.C. § 1623(a). On November 9, 2018, he pleaded guilty to all three counts in the indictment. On July 25, 2019, the Court issued an order lifting the stay in this case.
The SEC has moved for summary judgment on its claims for violations of § 206(2) of the Investment Advisers Act, § 10(b) of the Exchange Act of 1934, and Rule 10(b)-5.
The role of summary judgment is to "pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial." Mesnick v. Gen. Elec. Co., 950 F.2d 816, 822 (1st Cir. 1991) (internal quotation marks omitted). Summary judgment is appropriate when the moving party shows that "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). "Essentially, Rule 56[] mandates the entry of summary judgment 'against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial.'" Coll v. PB Diagnostic Sys., 50 F.3d 1115, 1121 (1st Cir. 1995) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)). In making that determination, the court must view "the record in the light most favorable to the nonmovant, drawing reasonable inferences in his favor." Noonan v. Staples, Inc., 556 F.3d 20, 25 (1st Cir. 2009). When "a properly supported motion for summary judgment is made, the adverse party must set forth specific facts showing that there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986) (internal quotations omitted). The non-moving party may not simply "rest upon mere allegation or denials of his pleading," but instead must "present affirmative evidence." Id. at 256-57.
The complaint alleges that Cody violated (1) § 206(1)-(2) of the Investment Advisers Act, 15 U.S.C. §§ 80b-6(1)-(2); and (2) § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. The SEC seeks summary judgment as to both claims.
The SEC's motion is largely predicated on issue preclusion. Issue preclusion, also known as collateral estoppel, "bars parties from re-litigating issues of either fact or law that were adjudicated in an earlier proceeding." Robb Evans & Associates, LLC v. United States, 850 F.3d 24, 31 (1st Cir. 2017). Id. at 32 (quoting Global NAPs, Inc. v. Verizon New Eng. Inc., 603 F.3d 71, 95 (1st Cir. 2010)).
"It is well established that a prior criminal conviction may work an estoppel in favor of the Government in a subsequent civil proceeding." Emich Motors Corp. v. General Motors Corp., 340 U.S. 558, 568 (1951) (citing United States v. Greater New York Live Poultry Chamber of Commerce, 53 F.2d 518 (S.D.N.Y. 1931)). Thus, multiple courts have given preclusive effect to prior criminal convictions in later civil proceedings. See Fontneau v. United States, 654 F.2d 8, 9-10 (1st Cir. 1981); see also Anderson v. C.I.R., 698 F.3d 160, 164-65 (3d Cir. 2012); Kariuki v. Tarango, 709 F.3d 495, 506-08 (5th Cir. 2013); United States v. $448,342.85, 969 F.2d 474, 476 (7th Cir. 1992); United States v. Wight, 839 F.2d 193, 195-97(4th Cir. 1987). But see Charles Alan Wright & Arthur R. Miller, FEDERAL PRACTICE AND PROCEDURE § 4474.1 (2d ed. 2019) (); Id. at n.32 ().
Cody pleaded guilty to a willful violation of § 206(2). In so doing, he explicitly admitted to a crime with the following elements: (1) being an investment adviser; (2) engaging in a transaction practice or course of business, which operated as a fraud and deceit upon investment advisory clients or engaging in an act, practice and course of business that was fraudulent, deceptive, or manipulative; (3) engaging in such transaction knowingly, willfully, and with intent to defraud; (4) engaging in such alleged transaction, practice, or course of business by use of mails or instrumentality of interstate commerce. 15 U.S.C. § 80b-6; 15 U.S.C. § 80b-17; see also United States v. Tagliaferri, 820 F.3d 568, 572 (2d Cir. 2016) ().
The necessary elements for civil liability under § 206(2) are nearly identical. The SEC must establish that Cody (1) while acting as an investment adviser, (2) engaged in an act, transaction, practice or course of business that operated as a fraud or deceit upon any client, (3) with scienter or acting negligently, (4) by use of mails or an instrumentality of interstate commerce. 15 U.S.C. § 80b-6(2). Although the ...
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