Sec. & Exch. Comm'n v. Morgan
| Decision Date | 05 June 2019 |
| Docket Number | 1:19-CV-00661 EAW |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. ROBERT C. MORGAN, MORGAN MEZZANINE FUND MANAGER LLC, and MORGAN ACQUISITIONS LLC, Defendants. |
| Court | U.S. District Court — Western District of New York |
The Securities and Exchange Commission (the "SEC" or "Plaintiff") commenced the instant action on May 22, 2019, alleging that defendants Robert C. Morgan ("Morgan"), Morgan Fund Manager LLC (the "Fund Manager"), and Morgan Acquisitions LLC ("Morgan Acquisitions") (collectively "Defendants") have violated § 17(a) of the Securities Act of 1933 (the "Securities Act") and § 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder. (Dkt. 1). Currently before the Court is the SEC's emergency application for a temporary restraining order, preliminary injunction, asset freeze, appointment of a receiver, and other relief. (Dkt. 4). For the reasons set forth below, the Court grants the SEC's motion in part and denies it in part.
The following facts are taken from the Declaration of Lee A. Greenwood (Dkt. 5) and the Declaration of Kerri L. Palen (Dkt. 6), with all attached exhibits, submitted in support of the emergency application, and the Declaration of Joel M. Cohen (Dkt. 17), with all attached exhibits, submitted in opposition to the emergency application.
For more than 30 years, Morgan has developed commercial and residential real estate, including multifamily properties, through his companies. (Dkt. 5 at ¶ 4). From 1998 until 2018, Morgan managed his portfolio of multifamily properties through the company Morgan Management, LLC ("Morgan Management"), before selling Morgan Management to Grand Atlas in 2018. (Id.; Dkt. 17 at ¶ 4).1 To finance his projects, Morgan used, among other sources of capital, the proceeds from sales of securities to investors and loans made by investors. (Dkt. 4-1 at 5). Between October 2013 and September 2018, Morgan raised approximately $80 million from investors in connection with three separate notes funds ("Notes Funds") and a separate investment company, Morgan Acquisitions. (Dkt. 5 at ¶ 7).
Morgan manages three Notes Funds—Notes Fund I, Notes Fund II, and Notes Fund III—through a limited liability company formed in 2013 called the Fund Manager. (Id. at ¶¶ 5, 8).2 Each of these Notes Funds are divided into investments made by either purportedly accredited investors ("AI Fund") or qualified purchasers ("QP Fund"). (Id. at ¶ 8). Morgan formed, and was the managing member of, two Delaware limited liability companies for each of these three Notes Funds, one for each AI Fund and one for each QP Fund. (Id. at ¶ 9). Investors would purchase membership interests in either an AI Fund or a QP Fund pursuant to a subscription agreement with the Fund Manager that was signed by Morgan. (Id.).
David Rumsey ("Rumsey") worked at Morgan Management, and later at Grand Atlas, in an investor relations role and as general counsel. (Id. at ¶ 10). He was also an officer of the Fund Manager. (Id.). Rumsey would email subscription packages to potential investors. (Id. at ¶ 11). These packages contained an offering memorandum, the operating agreement for the limited liability company in which the investor wished to purchase a membership interest, a subscription agreement with the Fund Manager, a copy of Morgan's personal guaranty agreement, and the redemption policy. (Id.).
The investments involving Morgan Acquisitions ("Morgan Acquisitions Investments") were managed differently. Morgan, as the managing member and sole owner of Morgan Acquisitions, entered into a loan agreement with each investor and issued a promissory note to the investor in the amount of the loan. (Id. at ¶¶ 6, 13). Each loan agreement advised that the corresponding promissory note was not registered with Plaintiff under the Securities Act and required the investor to represent that she or he was an accredited investor for purposes of Securities Act Rule 501. (Id. at ¶ 14).
Morgan and Rumsey would both meet, speak with, and email potential investors in the Notes Funds. (Id. at ¶ 22). Rumsey interfaced directly with current and potential investors, relaying questions and other developments to Morgan. (Id.). Rumsey would also set up meetings and dinners with potential investors, which Rumsey and Morgan both attended, to discuss the Notes Funds and Morgan Acquisitions investment opportunities. (Id.). Morgan urged Ramsey to raise as much money as possible from these investors. (Id.). More than 200 individuals and entities invested in the Notes Funds and Morgan Acquisitions Investments over time. (Id. at ¶ 20).
For Notes Funds I, Notes Fund II, and Notes Fund III, Defendants told investors through the offering memoranda and various emails that their investments would be used to make unsecured subordinated loans ("Portfolio Loans") to affiliated Morgan-controlled entities ("Affiliate Borrowers"). (Dkt. 4-1 at 2). Investors were told the loans would allow Affiliate Borrowers to more efficiently acquire, manage, operate, hold, or sell multifamily properties or to acquire real estate development projects. (Dkt. 5 at ¶ 23). Defendants also told these investors that they would use their investments to make Portfolio Loans at rates sufficient to meet 11% target return rates, and that the Notes Funds would make interest payments to them using the interest income generated by the Portfolio Loans. (Id.). The Portfolio Loans were interest-only loans until their maturity. (Id.).
The offering memoranda for Notes Fund II and Notes Fund III stated that Portfolio Loans made by prior Notes Funds had always generated sufficient interest to fund the 11% interest payment to investors. (Id. at ¶ 25). For example, the offering memorandum for Notes Fund II states that "[a]ll of the Fund I Portfolio Loans are paying the 11% target return on schedule," and that "[s]ince its inception Fund I has paid, and is paying, its investors the 11% target return as projected therein totaling more than $1.7 million in distributions to date." (Dkt. 5-4 at 11, 23). Similarly, the offering memorandum for Notes Fund III states that "[a]ll of the Fund I Portfolio Loans are paying the 11% target return on schedule," "[a]ll of the Fund II Portfolio Loans are paying the 11% target return on schedule," and "[s]ince its inception Fund I and Fund II have paid, and are paying, investors the 11% target return as projected therein totaling more than $5.0 million in distributions to date." (Dkt. 5-6 at 11-12, 24). Morgan personally guaranteed the repayment of each Portfolio Loan, including all principal and interest due, back to the various Notes Funds. (Dkt. 5-2 at 121-22; Dkt. 5-4 at 126-27; Dkt. 5-6 at 133-34).
For the Morgan Acquisitions Investments, the loan agreements generally required Morgan Acquisitions to make monthly 11% interest payments, with Morgan personally guaranteeing both the interest and the principal return. (Dkt. 5-9 at 10, 17). They also specified the property, owned by a Morgan-controlled entity, for which the investor's funds would be used. (Id. at 1).
The overall investment strategy was to make Portfolio Loans to Affiliate Borrowers, and to then use the proceeds of the Portfolio Loans to make 11% interest payments back to investors and ultimately return their principal. (Dkt. 5 at ¶ 32). Morgan or a senior employee would request funds from the Notes Funds or Morgan Acquisitions Investments on behalf of an Affiliate Borrower, then accounting personnel at Morgan Management or Grand Atlas would review the account balances to determine if the Notes Funds or Morgan Acquisitions Investments had available cash to lend, and then Morgan would approve the transfer on behalf of the Affiliate Borrower. (Id. at ¶¶ 34-36). After the funds were transferred, Rumsey would typically prepare a form promissory note for the Portfolio Loan, sometimes several months after the loans were funded, and then present the promissory note to the managing member of the Affiliate Borrower for his or her signature. (Id. at ¶ 38).
The SEC contends Defendants engaged in three different types of fraudulent conduct. First, it asserts that some or all of the Defendants improperly transferred at least $15.6 million from later Notes Funds to facilitate redemptions of earlier investors and repay maturing loans made by earlier formed Notes Funds. (Dkt. 4-1 at 8). Next, it contends that Defendants used the Notes Funds and the Morgan Acquisitions Investments to make the 11% interest payments back to investors because Defendants lacked sufficient funds from the Affiliate Borrowers and because Morgan did not want to make good on his personal guaranty. (Id.). Finally, Plaintiff asserts Morgan directed the use of more than $11 million from the Notes Funds and/or the Morgan Acquisitions Investments to help pay off a loan and more than $2.6 million in prepayment penalties for The Eden Square Apartments in Cranberry Township, Pennsylvania ("Eden Square") to conceal that the loan was fraudulently obtained. (Id.). Criminal charges are currently pending against Morgan regarding, among other things, his involvement with Eden Square.
Investors have more than $63 million in principal remaining in the Notes Funds and the Morgan Acquisitions Investments. (Dkt. 5 at ¶ 91). As of February 15, 2019, investors had submitted more than $20 million of redemption requests. (Id.).
On May 22, 2018, a 62-count indictment was returned by a federal grand jury as to Frank Giacobbe, Patrick Ogiony, Kevin Morgan, and Todd Morgan, charging them with wire fraud, bank fraud, and conspiracy to commit wire fraud and bank fraud, for allegedly defrauding financial institutions to obtain loans for various multifamily properties. United States v. Giacobbe, No....
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