Securities and Exchange Com'n v. Merchant Capital
| Decision Date | 10 November 2005 |
| Docket Number | Civil Action No. 1:02-CV-2984-MHS. |
| Citation | 400 F.Supp.2d 1336 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. MERCHANT CAPITAL, LLC, Steven C. Wyer, and Kurt V. Beasley, Defendants. |
| Court | U.S. District Court — Northern District of Georgia |
James Alexander Rue, William P. Hicks, Securities & Exchange Commission, Atlanta, GA, for Plaintiff.
Joseph Harvey Akers, Greenberg Traurig, Atlanta, GA, Mark Gerald Trigg, Robert Horowitz, PHV, Greenberg Traurig, New York, NY, for Defendants.
On November 4, 2002, plaintiff Securities and Exchange Commission ("SEC") filed this action against Merchant Capital, LLC ("Merchant Capital"), and its principals, Steven C. Wyer and Kurt V. Beasley. The complaint alleged that defendants had raised approximately $20 million from more than 350 investors through a fraudulent scheme involving the sale of general partnership interests in Colorado registered limited liability partnerships, which were formed to purchase and collect debt pools consisting of freshly charged off consumer debt.
Specifically, the SEC alleged that Merchant Capital's sales materials misrepresented the fees to be charged in connection with the operation of the partnerships, the independent nature of the partnerships, and the role played by Merchant Capital as the managing general partner. The SEC further alleged that the sales of partnership interests were unlawful because the interests were securities but no registration statement had been filed and no exemption was available.
The complaint asserted violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77e(a), 77e(c) and 77q(a); Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5; and Section 15(a) of the Exchange Act, 15 U.S.C. § 78o(a). The SEC sought a temporary restraining order and preliminary and permanent injunctions prohibiting defendants from further violations of these securities laws and freezing defendants' assets to prevent the misappropriation or dissipation of investor funds. The SEC also sought an order requiring defendants to disgorge all ill-gotten gains or unjust enrichment and imposing civil penalties on defendants.
On November 7, 2002, a consent temporary restraining order was entered under which defendants, although denying any violations of the securities laws, agreed to stop selling interests in registered limited liability partnerships and to limit expenditures and transfers of their assets pending a hearing on the SEC's motion for a preliminary injunction.
On January 13-15, 2003, the Court conducted an evidentiary hearing on the request for a preliminary injunction. By Order entered May 5, 2003, as amended by Order entered June 27, 2003, the Court denied the SEC's request for a preliminary injunction. After numerous extensions of time to complete discovery and to pursue settlement efforts, the case came on for trial before the Court sitting without a jury on January 18 and 20-21, 2005. Now, having considered the evidence presented both at trial and at the preliminary injunction hearing,1 together with the submissions of counsel, the Court directs entry of final judgment in favor of defendants on the basis of the following findings of fact and conclusions of law.
Formed in July 2001, Merchant Capital is a Tennessee limited liability company with its principal office in Brentwood, Tennessee. (PIT. 35:22-23; Pl.Ex. 2, p. 19.)2 Beginning in October 2001, Merchant Capital served as the organizing general partner and the elected managing general partner of twenty-eight Colorado registered limited liability partnerships ("RLLPs").3 (PIT.35:13-17; PIT.43:14-18; Def.Ex.4.) Each of the partnerships is named "Evergreen High Yield RLLP," followed by a numerical designation. (PIT.45:16-18.) The Evergreen High Yield RLLPs were formed for the purpose of purchasing, collecting, and reselling consumer debt charged off by financial institutions. (Pl.Ex.2, pp. 2, 19; PIT.91:4-12.)
Steven C. Wyer is the Chief Manager of Merchant Capital. (PIT.33:22-23.) Kurt V. Beasley is the Secretary. (PIT.34:2.) Wyer owns 75% of Merchant Capital through an LLC, while Beasley owns the remaining 25% through another LLC. (PIT.34:14-23; PIT.164:4-15.)
Wyer has experience in the sales and marketing of financial services products and was a principal in the Chicago, Illinois, securities firm of Elwin, Wilbert and Hague. (PIT.50:22-51:1; Pl.Ex.3b.) Prior to forming Merchant Capital, Wyer was the President and CEO of Wyer Creative Communications, Inc., an integrated direct marketing company focused on the financial services industry. (PIT.51:8-12; Pl. Ex.3b). In 2000, Wyer filed for personal bankruptcy as a result of unpaid debts of Wyer Creative Communications that he had guaranteed. (PIT.51:18-52:7.)
Kurt Beasley has a law degree from Nashville School of Law and is a certified public accountant. Mr. Beasley is the founder of Beasley, Tyson & Altshuler, a law firm located in Brentwood, Tennessee. His law practice concentrates in areas of banking, asset protection, and general corporate representation. (Pl.Ex.3b.)
From the date of formation of Merchant Capital in 2001 through the date of trial, Wyer received total payments from the Merchant Capital business in the approximate amount of $900,000, and Beasley received total payments in the approximate amount of $268,000. (TT.256:22-257:3.)
Wyer and Beasley initially learned about the business of buying charged off consumer credit card debt through Wyer's personal research, which began in early 2001. (PIT.35:6-9.) Prior to that time, neither Wyer nor Beasley had any debt collection experience. (PIT.545:17-24.) Wyer began his research on the Internet. He also read articles and interviewed people who were active in the industry. (PIT.546:8-16.)
In the spring of 2001, Wyer met Fred Howard, the principal owner of former relief defendant New Vision Financial, LLC ("New Vision").4 (PIT.36:10-23.) Beasley later met Howard in the summer of 2001. (PIT.169:7-10.) Howard introduced Wyer to New Vision's business and to the industry generally. He told Wyer about the mechanism of the Colorado RLLP, how New Vision's business worked, and how New Vision's RLLPs were funded. (T.37:2-6.) At the time Wyer initially spoke with Howard, New Vision had already organized and managed more than fifty RLLPs. (PIT.37:21-23.) As of the date of the hearing in this action, New Vision had formed more than ninety RLLPs. (PIT.340:24-25).
Shortly after meeting Wyer, Howard supplied him with audited financial statements of New Vision's RLLPs that reflected their historical financial performance. (PIT.128:1-8; T.227:15-20.) Howard also supplied Wyer with a spreadsheet that showed New Vision's "break even" business model. (PIT.108:5-12; PIT. 324:13-23; PIT.567:16-24.) The model reflected the monthly target performance goals necessary for an RLLP to return 100% of the partners' capital contributions at the conclusion of the thirty-six month anticipated life of the RLLP, along with the projected partnership distributions. (PIT.474:6-18.) Howard told Wyer that the New Vision RLLPs that repurchased debt with proceeds from the sale of existing debt (the same model ultimately chosen by Merchant Capital) were performing consistent with the model. (PIT.567:25-568:3; PIT.228:8-11.)
After Beasley first discussed this new business opportunity with Wyer, he did extensive personal research regarding RLLPs. (PIT.169:18-22.) Beasley learned that both New Vision and another business in the industry, Collect America, used the RLLP structure. (PIT.492:5-12.) Beasley visited the offices of New Vision and met with Fred Howard and New Vision's legal counsel. He requested and received copies of various legal opinions from New Vision's counsel and spoke at length with New Vision's counsel regarding the structure of the RLLP, as well as the actual historical performance of the New Vision RLLPs. (PIT.492:23-493:6.)
Beasley spent the next several months learning as much as he could regarding RLLPs. He retained the Nashville firm of Baker, Donelson, Bearman & Caldwell and requested that firm's independent evaluation of the RLLP entity and the proposed structure of Merchant Capital's business. He specifically requested an analysis and evaluation from the firm regarding whether a Merchant Capital RLLP partnership interest should be considered a security. (PIT.493:9-22; Pl.Ex.17.) Merchant Capital received a formal legal opinion letter from Baker, Donelson stating that the Evergreen High-Yield RLLP partnership interest "should not be viewed as a security." (PIT.497:11-15; Pl.Ex.17.)
Merchant Capital also reviewed and relied upon several other legal opinions that were provided to Merchant Capital by New Vision's counsel. One of those opinion letters had previously been issued at the request of Collect America and similarly opined that RLLPs were not subject to the federal securities laws. (PIT.494:3-16; Def.Ex. 7.) A third opinion letter reviewed by Merchant Capital dated May 25, 2001, from a Florida law firm further confirmed the opinion that an RLLP was not subject to the federal securities laws. (PIT. 494:25-495:21; Def.Ex.8.)
New Vision's counsel also provided Merchant Capital with an opinion letter from the Houston office of the law firm of Chamberlain, Hrdlicka, White, Williams & Martin. (Def.Ex.9). That opinion letter, dated May 31, 2001, opined that RLLP partnership interests "are not securities under the Texas Securities Act." (PIT495:22-496:16; Def.Ex.9.)
Finally, New Vision provided Merchant Capital with a "no-action" letter from the State of Texas, in which the staff of the Texas State Securities Board took a "no-action...
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