U.S. Commodity Futures Trading Comm'n v. Kratville

• Decision Date: 03 August 2015
• Docket Number: No. 14–2181.,14–2181.
• Citation: 796 F.3d 873
• Parties: UNITED STATES COMMODITY FUTURES TRADING COMMISSION, Plaintiff–Appellee v. Michael Burdic KRATVILLE, Defendant–Appellant Michael J. Welke; Fred Honea; John Rizzli; Ron Bassett; FXIG; Sonador ; Neal LaBelle; Michael Stewart, Defendants v. Jonathan W. Arrington; Elite Management Holdings Corp.; MJM Enterprises LLC, Defendants.
• Court: U.S. Court of Appeals — Eighth Circuit

796 F.3d 873

UNITED STATES COMMODITY FUTURES TRADING COMMISSION, Plaintiff–Appellee

v.Michael Burdic KRATVILLE, Defendant–Appellant

Michael J. Welke;

Fred Honea;

John Rizzli;

Ron Bassett;

FXIG;

Sonador ;

Neal LaBelle;

Michael Stewart, Defendantsv.Jonathan W. Arrington;

Elite Management Holdings Corp.;

MJM Enterprises LLC, Defendants.

No. 14–2181.

United States Court of Appeals, Eighth Circuit.

Submitted: May 13, 2015.

Filed: Aug. 3, 2015.

John Paul Weis, argued, Lincoln, Michael Burdic Kratville, on the brief, Omaha, NE, for Appellant.

Mary T. Connelly, argued, Jonathan L. Marcus, Robert A. Schwartz, on the brief, Washington, DC, for Appellee.

Before WOLLMAN, SMITH, and BENTON, Circuit Judges.

Opinion

SMITH, Circuit Judge.

The United States Commodity Futures Trading Commission (CFTC) brought suit against Jonathan Arrington, Michael B. Kratville, Michael J. Welke, Elite Management Holdings Corp. (EMHC), and MJM Enterprises LLC (MJM) (collectively, “defendants”). The CFTC alleged that the defendants fraudulently induced more than 130 individuals to invest $4.7 million in commodity pools operated by the defendants, in violation of the Commodity Exchange Act (CEA), 7 U.S.C. §§ 1 et seq., and its implementing regulations, 17 C.F.R. §§ 1.1 et seq. The district court¹ granted summary judgment in favor of the CFTC against Kratville.² On appeal, Kratville argues that the district court erred in (1) denying his request for more time to review purportedly new evidence; (2) considering affidavits from investors who signed releases, affidavits from investors who lacked credibility, and emails that could have been altered; (3) declining to consider the affidavit of an expert opining on the authenticity of the emails; (4) granting summary judgment on the CFTC's claim that Kratville committed fraud and related violations of the CEA and CFTC regulations in soliciting persons to invest and maintain funds in commodity investment pools; and (5) determining that the litigation strategy of Kratville's attorney was not excusable neglect warranting relief under Federal Rule of Civil Procedure 60(b)(1). We affirm.

I. Background

In the summer of 2005, Arrington, Kratville, and Welke formed EMHC to pursue investment opportunities. They all agreed to invest with FX Investment Group (FXIG), a trading group run by Fred Honea in Spain. FXIG traded in the spot (cash) and future markets for commodities, precious metals, and foreign exchange (“forex”). It operated as an investment pool so that every account's return would be the same. It reported monthly trading returns ranging from 8.6 percent to 34.6 percent per month from May 2002 through May 2005. FXIG promised investors high returns with limited risks because no more than ten percent of an individual's funds would be invested at any one time. At no time did Arrington, Kratville, or Welke ever see any FXIG trading statements to confirm FXIG's representations because Honea refused to provide them.

EMHC became the parent company or “commodity pool operator”³ for two “commodity pools”⁴ called Elite Index Investment Group (EIIG) and Elite Aggressive Growth Group (EAGG), which had been incorporated the year prior and run by Arrington. Kratville had invested in EIIG from early 2004 to mid–2005 and lost money.⁵ EMHC also became the parent company for a third pool that Arrington, Kratville, and Welke opened in January 2006 called Elite Management Investment Fund (EMIF).⁶ The Elite Pools had a target return structure that capped the returns to which an individual pool participant was entitled in a given month. Arrington, Kratville, and Welke were to keep all returns above the monthly caps, and they were to bear all business expenses. The returns were to be made by investing in FXIG.

Arrington, Kratville, and Welke all owned EMHC and were officers of EMHC, with Kratville holding the position of secretary. Arrington, Welke, and Kratville did not register EMHC with the CFTC as a commodity pool operator or register individually as associated persons of a commodity pool operator. See 7 U.S.C. §§ 6m(1) and 6k(2) (2006). EMHC never registered or filed an exemption of registration with the CFTC. See 17 C.F.R. § 4.13.

In addition to being an owner and officer of EMHC, Kratville had several other roles. First, when a prospective pool participant expressed interest in investing, Kratville referred that person to Arrington. Arrington, Kratville, and Welke shared potential investment contacts with the Elite Pools. Second, Kratville was originally a signatory on at least two bank accounts for EMHC, although Arrington later removed Kratville as a signor for the accounts on December 27, 2006. Third, Kratville acted as the attorney for EMHC and the Elite Pools and appeared before the Nebraska Department of Banking and Finance (NDBF) in that capacity. Fourth, Kratville reviewed and contributed to the Elite Pools website, brochure, prospectus, and monthly newsletter called “eWires.”

In August 2005, Kratville began providing information about the Elite Pools to prospective pool participants. That month, Kratville emailed at least two prospective pool participants and told them that he had “formed an investment company so that we can pay people 4–6% PER MONTH because of the ability of our trader to generate consistent profits of at least 6% every month since [M]ay 2002.” Kratville represented that he had “been a part of this fund since 2002” and “expect[ed] [it] to hit the 6% mark again by the end of [August 2005].... for the 40th month in a row.” (Ellipsis in original.) Neither Kratville's email nor the EMHC website referenced FXIG. In reality, FXIG—not the Elite Pools—reported the returns.

Kratville followed up with one of his clients, Ed Voges, several months after making representations to prospective investors. In one email to Voges, Kratville stated, “We have hit at least 6% every month since 5/02.... and we don['t] get paid unless we hit your goal level first, and we charge no fees.” (Ellipsis in original.) In another email to Voges, Kratville stated, “We are an investment club that is exempt from the SEC rules ... so no filings.” (Ellipsis in original.) And Kratville wrote in another email that “our main clients are people in our age group with IRAs and 401(k)s that can be rolled over into our fund and where people are looking to let it grow for a minimum of 3 years. We accept cash, of course, but we feel we do the most good for people that roll[ ] over tax-deferred vehicles.”

Kratville also referred prospective pool participants to additional information on the EMHC website, brochure, and other marketing materials. The website made the following representation about its trading strategy, stating, in relevant part:

Our Executive Trader and trading group designed our Special Growth Strategy over a 10+ year period of testing and trading. The principal investment markets that this strategy utilizes are equities, commodities, precious metals and currencies.

This strategy has had many multi-million offers to buy the system, but the desire has been, and still is to help the small guy build a nest egg and to remain entirely proprietary.

Special Growth Strategy has been designed to satisfy the demands for a product such as this from various private investors and groups. It is based on sound investment and money management principals; and uses sophisticated procedures developed to prevent losses. No more than 10% of principal is invested at one time, yet the results are unparalleled.

In reality, neither EMHC nor any of the Elite Pools had a proprietary trading system, and the defendants never received any offers to purchase such a system.

The monthly newsletter, eWires, that Kratville forwarded to potential pool participants included representations about trading returns and stated that EMHC hit the maximum target goal for several months in a row. The eWires newsletters did not mention FXIG.

The brochure and prospectus also made several representations about EMHC's trading strategy, such as that (1) the pool's special growth strategy was designed over a 12–year period of testing and trading; (2) the strategy had attracted multi-million dollar offers to buy the system; (3) even though there was no guarantee monthly target goals could be met, such goals had been met every month since 2002; and (4) a successful local attorney—Kratville—was an active, longterm investor in EMHC.

The prospectus listed EMHC's primary broker as TradeStation Securities in Florida and its clearing house broker as R.J. O'Brien in Chicago, Illinois. It also stated that the investments were equities, commodities, precious metals, and currency, both in the futures and spot markets. In truth, EMHC never had trading accounts at TradeStation Securities or R.J. O'Brien. While EAGG did at one time hold accounts there, those accounts had ceased trading by the end of April 2005—before the defendants began soliciting pool participants and before the formation of EMHC.

None of EMHC's marketing materials state that any money would be sent out of the country, and Kratville did not tell potential pool participants that investments would be sent out of the country. Kratville told his friend Pat Shannon in October 2005 that if he told people about FXIG, no one would invest with the Elite Pools. In an email dated August 30, 2006, Welke stated “[W]e both agreed ... that it would be best if they didn[']t know who ou[r] people are.... [I] just think we should try to hold on as long as we can without giving out any names or info since that is our ‘secret ingredient’ which is our recipe for success....” As to sales agents, Kratville told Shannon that EMHC could not hire anyone who had a license because “there are reporting rules for people with licenses if they are working with funds that are not licensed like ours.” Kratville explained to Shannon that the sales agents that they were hiring “have connections with lots of rich people” and that they raised $1.5 million in 2005 “all in less...