Sec. & Exch. Comm'n v. Loomis

• Decision Date: 03 September 2013
• Docket Number: No. 2:10–cv–00458–KJM–KJN.,2:10–cv–00458–KJM–KJN.
• Citation: 969 F.Supp.2d 1226
• Parties: SECURITIES and EXCHANGE COMMISSION, Plaintiff, v. Lawrence “Lee” LOOMIS, et al., Defendants.
• Court: U.S. District Court — Eastern District of California

969 F.Supp.2d 1226

SECURITIES and EXCHANGE COMMISSION, Plaintiff,

v.Lawrence “Lee” LOOMIS, et al., Defendants.

No. 2:10–cv–00458–KJM–KJN.

United States District Court,

E.D. California.

Sept. 3, 2013.

Jeremy E. Pendrey, John Scott Yun, Susan Frances Lamarca, U.S. Securities and Exchange Commission, San Francisco, CA, for Plaintiff.

Douglas J. Beevers, Federal Defender, Sacramento, CA, Klaus J. Kolb, Auburn, CA, for Defendants.

ORDER

KIMBERLY J. MUELLER, District Judge.

This case was on the court's June 28, 2013 calendar for the motion for summary judgment brought by plaintiff Securities and Exchange Commission (the “SEC”) on its claims against defendant Lawrence “Lee” Loomis. Jeremy Pendrey and John Yun appeared for the SEC, and Douglas Beevers appeared for Loomis. For the reasons stated below, the court GRANTS the SEC's motion.

I. PROCEDURAL HISTORY AND UNDISPUTED FACTS

From 2007 to 2008, Loomis controlled Loomis Wealth Solutions (“LWS”), an entity that provided financial planning services to individuals. (Compl. ¶¶ 9, 11, ECF 1; Loomis Ans. ¶¶ 9, 11, ECF 9.) Loomis's father-in-law, John Hagener, controlled Lismar Financial Services, LLC, which Hagener created to manage Naras Secured Fund, LLC and Naras Secured Fund # 2, LLC (“Naras Fund 1” and “Naras Fund 2” or collectively, “Naras Funds”). (Compl. ¶¶ 10–12; Loomis Ans. ¶ 10; Hagener Ans. ¶ 10.)

In February 2007, the Naras Funds began offering equity securities to investors known as “membership interest units.” (Compl. ¶¶ 14–15; see Loomis Ans. ¶¶ 14–15.) The Private Placement Memoranda (“PPM”) describe the Naras Funds and identify Lismar as the manager of the Naras Funds. (Naras Fund 1 PPM at 19, Ex. 1 to Decl. of Jeremy E. Pendrey (Pendrey Decl.), ECF 64–11; Naras Fund 2 PPM at 19, Ex. 2 to Pendrey Decl., ECF 64–13.) The PPM specify that the membership units were not registered with the SEC for offer or sale. (Naras Fund 1 PPM at 1, Naras Fund 2 PPM at 2.) Additionally, the SEC has attested that neither fund was registered. (Pendrey Decl., Ex. 9, ECF 64–15 at 72; Pendrey Decl., Ex. 10, ECF 64–15 at 74.)

Loomis and LWS recruited investors for the Naras Funds by advertising two-hour seminars and weekend-long seminars through newspaper advertisements and direct mailing of pamphlets. (Decl. of Melissa Wikstrom (Wikstrom Decl.) ¶ 3, ECF 64–20.) At one seminar in March 2008, Loomis advised potential investors that Naras Fund 2 was like a savings account and had a twelve percent guaranteed rate of investment. (Decl. of David Ronald Bailey (Bailey Decl.) ¶ 2, ECF 64–3.)

LWS issued a newsletter called “True Wealth” that it sent to LWS members and posted on the LWS website. (Wikstrom Decl. ¶ 6.) The October 2007 edition of True Wealth included a one-page article about the Naras Funds entitled “What is Naras?” ( Id.) Loomis's employee, Melissa Wikstrom (known as Melissa Bowman at the time), wrote the article but the contents were dictated by Loomis and Hagener. ( Id. ¶¶ 6–7.) The “What is Naras?” article stated that Naras Funds “are allocated as a second position on mortgages....” (Ex. A to Wikstrom Decl., ECF 64–20.) The article also explained that Naras Funds “offer[ ] a flat, guaranteed 12% per annum, so a $100,000 account would yield $12,000 for the year, or $1,000 per month.” ( Id.) It continued that Naras Funds “allow [ ] the liquidity of withdrawing funds for real estate transactions, but unlike a traditional savings account, you continue to receive interest on that money for up to ten days after withdrawal.” ( Id.) The article advised that Naras was not FDIC insured and that interested investors should read the PPM for a full description of risks. ( Id.) The article states that “NARAS I is currently at its maximum amount for total dollars contributed, however, we are working on opening another account for our members whom [sic] are still interested in this savings option.” ( Id.)

Loomis would also schedule one-on-one meetings with potential investors. (Wikstrom Decl. ¶ 4; Testimony of James R. Stryker (Stryker Test) at 86:15–18, Ex. 4 to Pendrey Decl., ECF 64–15.) At these meetings, Loomis encouraged potential investors to invest in the Naras Funds, advised that they were safe investments similar to a savings account, and that they paid a twelve percent interest rate. (Wikstrom Decl. ¶ 5; Stryker Test. at 96:6–8.) In March 2007, Loomis told one investor that Naras Fund 2 was secured with a guaranty and provided a twelve percent annual rate of return. (Decl. of Paul W. Thompson (Thompson Decl.) ¶ 2, ECF 64–17.) He told other investors in Naras Fund 2 that they would be able to retrieve their investments on short notice. (Decl. of George J. Yao (Yao Decl.) ¶ 5, ECF 64–21; Decl. of Frank Zorrilla (Zorrilla Decl.) ¶ 3, ECF 64–22; Decl. of Rodney Julianus (Julianus Decl.) ¶ 3.) Loomis would tell the investors to review the PPM, but some investors never received a copy. (Stryker Test. at 86:17–87:20.)

Loomis also told potential investors that the funds were secured by second mortgages on real estate. ( Id. at 96:13–97:12; Yao Decl. ¶ 3, ECF 64–21.) Stryker testified:

There was [sic] ... unrecorded second mortgages.... [M]y understanding is, they had a vault of all these notes and deeds of trust, and it was all ready to be recorded, but didn't record. It was just there in good faith because, after all, the members were working with [LWS] in a contract, so everyone understood their roles.

(Stryker Test. at 97:7–13.) Stryker, an investor in the Naras Funds who also opened a LWS branch in Seattle, testified that he further understood that Naras had a twenty percent mortgage in property owned by its members. ( Id. at 98:5–10.)

Loomis and Hagener executed a master loan agreement (the “Promissory Note”) to Advantage Financial Group Holdings, LLC (“AFG”) in favor of Naras Fund 2. (Pendrey Decl. ¶ 4; Promissory Note, Ex. 3 to Pendrey Decl., ECF 64–15.) The agreement represented that AFG would pay fourteen percent in annual interest for each loan made to AFG. It stated that “[f]or each loan on the Master Loan Schedule, [AFG] pledges its Home Equity Line of Credit (HELOC) interest in member investor real estate properties as collateral and any other real estate interest as collateral.” (Promissory Note.) Loomis signed on behalf of AFG and Hagener signed on behalf of Naras Fund 2. ( Id.)

Between March 2007 and August 2008, Naras Fund 1 raised money from over thirty investors. Although the Naras Fund 1 PPM states throughout that the total offering is limited to $975,000.00, (Naras Fund 1 PPM at 1, 9, 11, 18), a forensic accountant retained by the SEC determined that the total aggregated sales amounted to $1,303,083.97. (Decl. of Carolyn Van Alst (Van Alst Decl.) ¶ ¶ 9–10; Ex. A, ECF 64–18 at 4, 9.) The value of the investments exceeded $1 million by October 2007. ( Id. ¶ 10.) During the same time period, Naras Fund 2 raised over $10 million from eighty-one investors. ( Id. ¶¶ 9–10.)

In August 2007, Loomis asked the Certified Public Accounting firm of Francis, Scinto & Graziano, LLP (“FS & G”) to provide cash reporting and accounting work for LWS, AFG, Advantage Financial Group, Inc., Advantage Financial Partners of California, LLC and Lismar (collectively, the “Loomis Entities”), as well as Naras Fund 1 and Naras Fund 2. (Decl. of David P. Scinto (Scinto Decl.) ¶ 2, ECF 64–16.) Loomis and Hagener did not provide documents that the FS & G accountants requested, including contracts or documentation showing that the HELOCs existed, or proof that the Naras Funds had a security interest. ( Id. ¶ 5.) Loomis asked FS & G to create a statement showing that Naras Funds investors were earning twelve percent in interest on their investments but FS & G refused, on the grounds that such a statement would be misleading. ( Id.) FS & G told Loomis that the companies were undercapitalized. ( Id. ¶ 6.) The companies fell behind on their payments to FS & G and FS & G terminated their services in December 2007. ( Id. ¶¶ 7–8.)

The former controller of AFG predecessor Advantage Financial Partners of California, Karen White, stated in her declaration that the company was often short on cash when she worked there from 2006 until February 2008. (Decl. of Karen L. White (White Decl.) ¶¶ 2, 4, ECF 64–19.) If the Loomis Entities had insufficient funds to make mortgage, insurance or payroll payments, Loomis would instruct White or her coworker to use funds from the Naras Funds accounts. ( Id. ¶¶ 4–5.) SEC's forensic accountant determined that only one interest payment was made by AFG to the Naras Funds under the Promissory Note. (Van Alst Decl. ¶ 11.) White explained that the interest payments were made to the Naras Funds with the understanding that the payment would be transferred back to the other entities. (White Decl. ¶ 7.)

In June 2008, LWS had a conference call with its members. (Wikstrom Decl. ¶ 8.) Loomis addressed the unsigned HELOCs during this call and said that he was meeting with his attorneys about this issue but there was no specific date for the HELOCs to be signed. (Ex. B to Wikstrom Decl., ECF 20.) During discovery, the SEC's real estate and accounting expert witness, Paul Habibi, reviewed the list of 120 HELOC properties. (Decl. of Paul Habibi (Habibi Decl.) ¶ 6.) Habibi located escrow statements and appraisals for 55 of the properties and ordered title profile reports for each of those properties. ( Id. ¶ 7.) None of these properties had a deed of trust recorded in favor of Naras Funds or any of the Loomis entities. ( Id. ¶ 8.) Habibi was only able to obtain partial escrow files for the other properties, none of which contained deeds of trust in favor of the Naras Funds or Loomis Entities. ( Id.) Habibi was also unable to locate unrecorded deeds of trust in favor of any of the properties. ( Id.)

The review by the SEC's forensic accountant showed that the amount owed by Naras Fund 1 to its members exceeded the amount in Naras Fund 1's account by the end of August 2007,...