Sec. & Exch. Comm'n v. Smart, Civil No. 2:09cv00224 (DAK)
| Decision Date | 06 June 2011 |
| Docket Number | Civil No. 2:09cv00224 (DAK) |
| Parties | SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF, v. BRIAN J. SMART, and SMART ASSETS, LLC, a California limited liability company, DEFENDANTS. |
| Court | U.S. District Court — District of Utah |
Christopher C. Ehrman (pro hac vice)
Jacob D. Krawitz (pro hac vice)
Brian T. Fitzsimons (pro hac vice)
Attorneys for Plaintiff
Thomas M. Melton (4999)
Attorney for Plaintiff
U.S. Securities and Exchange Commission
This matter is before the court on the Securities and Exchange Commission's (the "Commission") Motion for Summary Judgment, Defendants Brian J. Smart and Smart Assets, LLC's Cross-Motion for Summary Judgment. A hearing on the motions was held on April 28, 2011. At the hearing, the Commission was represented by Brian T. Fitzsimons and Thomas M. Melton. Defendants were represented by Steven G. Loosle. Before the hearing, the court carefully considered the memoranda and other materialssubmitted by the parties. Since taking the motions under advisement, the court has further considered the law and facts relating to these motions, along with the proposed orders and proposed findings of fact and conclusions of law submitted by the parties. Now being fully advised, the court renders the following Findings of Fact and Conclusions of Law.
1. This Court has jurisdiction over this action pursuant to Sections 20(d)(1) and 22(a) of the Securities Act of 1933 (15 U.S.C. §§ 77t(d)(1) and 77v(a)) and Sections 21(d), 21(e), and 27 of the Securities Exchange Act of 1934 (15 U.S.C. §§ 78u(d), 78u(e), and 78aa). Defendants, directly or indirectly, have made use of the means in instrumentalities of interstate commerce or of the mails in connection with the acts, transactions, practices and courses of business alleged in this Complaint.
2. Venue in this Court is proper pursuant to Section 22(a) of the Securities Act of 1933 (15 U.S.C. § 77v(a)) and Section 27 of the Exchange Act of 1934 (15 U.S.C. § 78aa), because certain of the conduct alleged in this Complaint took place within the District of Utah.
3. Brian J. Smart: Defendant Smart is a resident of Lehi, Utah. See Declaration of Brian T. Fitzsimons ("Fitzsimons Decl. 1") at ¶ 7.
4. Smart Assets, LLC: Defendant Smart Assets, LLC is a private, limited liability company registered in the State of California. Smart is believed tobe the only member of Smart Assets and manages Smart Assets through various locations within Utah. See Fitzsimons Decl. 1 ¶ 6-7.
5. In March 2001, Smart, acting as an insurance salesman for AIM Association, Inc. ("AIM")—an insurance brokerage located in California—sold an $100,000 annuity to Paul Brown and Katherine Brown. See Fitzsimons Decl. 1 ¶ 12 (August 25, 2009).
6. In April 2003, Smart convinced the Browns to cancel their annuity at a loss by telling them that he would invest their money in investment products that would provide steady income for retirement. See Fitzsimons Decl. 1 ¶ 12.
7. The Browns invested an additional $80,000 with Smart based on his misrepresentations. See Exhibit 34 to Fitzsimons Decl. 1 ¶ 12.
8. In 2005, Paul Brown died, and Smart convinced Katherine Brown ("Brown") to invest the death benefit from his insurance policy of over $145,000 with him by misrepresenting to Brown that the money would be invested in an "S & P" index mutual fund and other securities, and that he would invest the majority of the money in a safe investment. See Exhibit 34 to Fitzsimons Decl. 1 ¶ 12.
9. Brown's money was not used as Smart represented. See e.g. Exhibit 41 to Fitzsimons Decl. 2. 10. Brown's money was pooled with the money of other investors, and the pooled funds were used for (1) Smart's personal expenses; (2) investment in real estate; (3) hard money loans; (4) investment in high risk companies; and (5) to pay other investors. See e.g. Exhibits 6, 12, 18, 19, 22-25, 28-31 to Fitzsimons Decl. 1; Exhibits 34, 36-37 to Fitzsimons Decl. 2 (February 26, 2010); see generally Exhibit 39 to Fitzsimons Decl. 2.
11. At deposition, when asked about whether he invested her money in a low risk mutual fund, used her money for his own personal expenses, used her money to invest in real estate, used her money to make hard money loans, and pooled her money with other investor money, Smart asserted his Fifth Amendment privilege. See e.g. Exhibit 41 to Fitzsimons Decl. 2 at 127:14-16; 135:9-12; 139:7-9; 141:11-13; 139:14-17.
12. In order to further his scheme and deception, Smart gave Brown fabricated account statements that misstated, among other things, the balance of her account and the interest rate earned on her account. See Exhibit 2 to Fitzsimons Decl. 1.
13. Brown made repeated requests for account information that Smart would not honor. See Exhibit 1 to Fitzsimons Decl. 1; Exhibit 34 to Fitzsimons Decl. 2.
14. Smart did not keep adequate books and records, he commingled investor funds, and he recreated company records during discovery. See Exhibit 26 to Fitzsimons Decl. 1.
15. The false account statements gave the appearance that Brown's money was held in a separately managed account and invested in securities offering fixed rates of return. See Fitzsimons Decl. 1 ¶ 13. 16. Brown's money was not used as Smart represented and was not held in a separate account. See Fitzsimons Decl. 1 ¶ 15.
17. Smart repeatedly asserted the Fifth Amendment privilege at deposition when asked about whether the account statements were fabricated and whether he designed the statements to mislead investors. See Exhibit 41 to Fitzsimons Decl. 2 at 134:20-22; 142:5-7; 163:21-23; 180:8-11.
18. Smart also furnished Brown with a fabricated product information sheet, describing the non-existent Smart Assets, LLC product "Safe Guard VI," which stated that "[c]lients can realize above average returns without risking loss of principal" and that it is "[d]esigned for clients primarily interested in a fixed rate strategy." See Exhibit 3 to Fitzsimons Decl. 1; Exhibit 34 to Fitzsimons Decl. 2.
19. In 2004, Smart met with Lisa Maria Padilla ("Padilla") and her mother Virginia, and convinced them to invest the assets of the Padilla Family Trust— approximately $1.1 million dollars—in an annuity. See Fitzsimons Decl. 1 ¶ 17.
20. At this time, Smart still worked as an insurance salesman with AIM. See Fitzsimons Decl. 1 ¶ 17.
21. Shortly thereafter, in or around September 2004, Smart left AIM. See Fitzsimons Decl. 1 ¶ 17.
22. In March 2005, Padilla was appointed sole trustee of the family trust. See Fitzsimons Decl. 1 ¶ 17. 23. Smart, still holding himself out as being affiliated with AIM, convinced Padilla to invest the trust assets with him based on myriad misrepresentations. See Fitzsimons Decl. 1 ¶ 17.
24. Smart memorialized the conversation in an email that he sent to Padilla, stating: (1) that her money would be invested "into Low [sic] risk or fixed funds offering Principal [sic] guaranteed protection with above average returns;" (2) that the fixed rate funds offer 5.5% returns; (3) that her remaining $425,000 would be invested with a "ROI (return on investment) company called Golden Key investments [sic]" offering "principle [sic] guaranteed product;" (4) that the investments were "very solid and safe;" and (5) that the investment could be "turned into a stretch IRA, passing the gains tax free to it's [sic] beneficiaries." See Exhibit 5 to Fitzsimons Decl. 1; Exhibit 37 to Fitzsimons Decl. 2.
25. Padilla's money was not used as Smart represented and was not held in a separate account. See Fitzsimons Decl. 1 ¶ 18. Padilla's money was pooled with other investors' money and was used for highly speculative investments, Smart's personal expenses, and to pay other investors. See Exhibits 6, 12, 18, 19, 22-25, 28 to Fitzsimons Decl. 1; Exhibits 37, 39 to Fitzsimons Decl. 2.
26. Padilla made repeated requests for account information that Smart would not honor. See Exhibit 4 to Fitzsimons Decl. 1; Exhibit 37 to Fitzsimons Decl. 2..
27. At the deposition of Smart Assets, Smart admitted that approximately $870,000 of Padilla's money was used to make a failed "hard money" loan. See Exhibit 21 to Fitzsimons Decl. 1 at 84:6-20.
28. Smart met Dagmar Chaplin-Lee ("Lee") in early 2005, and by November of 2005, had convinced her to invest $200,000 with him by telling her that: (1) he would put the money in safe investments; (2) she would always have access to her money; (3) he was going to make Brown and Lee millionaires; and (4) he was still affiliated with AIM. See Exhibit 7 to Fitzsimons Decl. 1; Exhibit 35 to Fitzsimons Decl. 2; Exhibit 35 to Fitzsimons Decl. 2.
29. To make Lee "comfortable" with the investment, Defendants entered into a promissory note agreement with Lee and gave her a membership certificate purporting to give her 200,000 units of membership in Smart Assets. See Exhibits 8 and 10to Fitzsimons Decl. 1. The note promised a fixed rate of 8.5% per year. See Fitzsimons Decl. 1 ¶ 21.
30. As collateral for the note, Defendants offered a defaulted $870,000 promissory note. See Fitzsimons Decl. 1 ¶ 21. Smart did not disclose to Lee that this note was already in default.
31. In order to further his scheme and deception, Smart gave Lee fabricated account statements containing various misstatements. See Exhibits 7 and 9 to Fitzsimons Decl. 1 ¶ 21.
32. The account statements gave the appearance that Lee's money was held in a separately managed account and invested in securities offering an annual interest rate of 20.65%. See Exhibit 9 to Fitzsimons Decl. 1; Fitzsimons Decl. 1 ¶ 21. 33. Lee made repeated requests for account information that Smart would not honor. See Exhibits 7 to Fitzsimons Decl. 1.
34. In February 2006, based on Smart's prior misrepresentations, Lee...
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