A federal district court adopted a U.S. magistrate judge’s recommendation to grant the Securities and Exchange Commission’s motion for summary judgment and to enter an order for a permanent injunction and disgorgement with prejudgment interest against a registered investment adviser as well as its president and 50% owner.
The court found that summary judgment for the plaintiff was appropriate—a rare decision in a securities fraud case. The court noted that the SEC had put forth overwhelming evidence of defendants’ severe recklessness which the defendants failed to rebut. As shown by the SEC, the investment adviser’s president organized a purported private investment firm and marketed its shares directly to the investment adviser’s clients. He received more than $1.62 million for investment purposes. The money, however, was used for other purposes and was transferred to the defendant investment adviser, the individual defendant (or used to pay his personal debts), and otherwise withdrawn by checks for unknown purposes. Significantly, defendants brought forward no evidence demonstrating that the transfers in question were for legitimate investment purposes. In addition, the individual defendant attemptedto conceal many of the fraudulent transfers by, among other things, converting funds to cash by writing checks directly to banks and by falsely characterizing contributions from the private investment firm to the corporate defendant as capital contributions. Moreover, the individual defendant did not dispute that he overstated the value of the private investment firm’s shares to its investors after the shares dropped significantly in value.
In adopting the magistrate judge’s recommendation to enter a permanent injunction against the defendants, the court noted that defendants engaged in a series of unlawful transfers over a long period of time and further noted that the individual defendant was held in contempt for violating a preliminary injunction and asset freeze that the magistrate judge had previously instituted against him. In addition, the court adopted the magistrate judge’s recommendation that the defendants be disgorged of over $800,000 that they had misappropriated from the private investment firm. (SEC v. Brown, 2008 WL 4425593 (D. Minn. Sept. 30, 2008))