used SFPEF II's assets to obtain loans for ADSA.
Although Silver attributes much of his self-dealing as payment for the making or selling of investments, the evidence is undisputed that, at the end of December 1985, SFPEF II had $ 2.5 million in receivables from SFPEF I, more than one million of which remains outstanding. The evidence at trial showed that SFPEF II transferred $ 2.3 million to ADSP and $ 284,000 to ADSA, in direct violation of the LPA's limitations on Silver's investments in his own partnerships and on SFPEF II's investing more than $ 500,000 in venture capital funds.
Finally, the evidence showed that Silver kept investing in Pathfinder to protect his own interests and not those of his investors. While the Court may not substitute its business judgment for that of Silver, the evidence at trial showed that no reasonably prudent investor would have continued to fund Pathfinder at the levels Silver did. Silver was under a fiduciary duty to make reasonably prudent investments. See Kolentus v. Avco Corp., 798 F.2d 949, 966 (7th Cir. 1986), cert. denied, 479 U.S. 1032, 93 L. Ed. 2d 832, 107 S. Ct. 878 (1987). Silver's continued investment in Pathfinder was a clear breach of this duty, particularly since his investors had directed him not to do so.
Under N.M. Stat. Ann. 54-1-21, SFPEF II is entitled to any benefit or profit had by Silver at its expense. Although Lincoln has not detailed these damages, or explained what part of its loss is attributable to Silver's fiduciary breach, the Court need not inquire further into the matter at this time, because damages under Counts VI and VII are merely alternative theories of relief. Because Lincoln had already been awarded its actual damages, trebled, further inquiry into actual damages here is not necessary. If necessary at a later date, Lincoln may submit supplemental materials explaining its, and SFPEF II's, actual damages under Counts VI and VII.
Nevertheless, the Court's inquiry here is not over. Under New Mexico law, punitive damages may be awarded for a breach of fiduciary duty. Levy v. Disharoon, 106 N.M. 699, 749 P.2d 84, 90 (N.M. 1988). Such an award is justified where a partner who breached his fiduciary duties engaged in malicious, intentional, fraudulent, oppressive or reckless disregard of his partner's rights. Bassett v. Bassett, 110 N.M. 559, 798 P.2d 160, 165 (N.M. 1990) (upholding punitive damage award, citing Levy); see also Romero v. Mervyn's, 109 N.M. 249, 784 P.2d 992, 998 (N.M. 1989) (stating requisite showing for punitive damages).
In the opinion of the Court, an award of punitive damages is appropriate in this case. Silver exhibited an intentional and fraudulent disregard for his partner's rights. The Court therefore awards SFPEF II $ 1,000,000 in punitive damages, in order to punish Silver for his extraordinary misconduct, and to serve as an example or warning to others not to engage in such conduct.
Accordingly, the Court finds for the Plaintiff and against the Defendants on Counts VI and VII, and awards actual and punitive damages. Based on the facts and law, as set forth in this opinion, the Court enters judgment, for actual damages suffered, in the amount of $ 7,134,596, and punitive damages in the amount of $ 1,000,000.
C. Lincoln's Rule 10b-5 Claim
As an alternative theory of relief, in Count III, Lincoln, in its individual capacity only, claims that Silver and ADSP violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated under section 10(b). For the reasons stated in the Court's discussion of Lincoln's RICO claims, the Court finds for the Plaintiff and against the Defendants on Count III. As indicated, Lincoln's actual damages proximately caused were $ 500,000, representing the amount contributed by Lincoln to SFPEF II in response to the Fund's first capital call.
Lincoln claims that it is entitled to prejudgment interest. This is a matter within the Court's sound discretion. Michaels v. Michaels, 767 F.2d 1185, 1204 (7th Cir. 1985) (affirming an award of prejudgment interest in a Rule 10b-5 case), cert. denied, 474 U.S. 1057, 88 L. Ed. 2d 774, 106 S. Ct. 797 (1986); see also Commercial Union Assurance Co. v. Milken, 17 F.3d 608, 613 (2d Cir.) (discussing prejudgment interest in a Rule 10b-5 cases involving limited partnerships), cert. denied, 513 U.S. 873, 115 S. Ct. 198, 130 L. Ed. 2d 130 (1994). Such awards are for compensation, not punishment. See Anixter v. Home-Stake Prod. Co., 977 F.2d 1549, 1554 (10th Cir. 1992), cert. denied, 507 U.S. 1029, 113 S. Ct. 1841, 123 L. Ed. 2d 467 (1993). The decision to award prejudgment interest requires balancing the equities of the parties. Michaels, 767 F.2d 1185 at 1204. Here, the equities clearly favor the Plaintiff. The Court, however, is unable to calculate the appropriate amount of prejudgment interest at this time. Thus, the Court requests a memorandum from each party which calculates the appropriate level of prejudgment interest to be awarded.
Accordingly, judgment for the Plaintiff on Count III.
D. Lincoln's Section 12(2) Claim
In an additional alternate theory of recovery, in Count I, Lincoln, individually, claims that Silver and ADSP violated section 12(2) of the Securities Act of 1933, 15 U.S.C. § 771(2). That section imposes liability on any person who "offers or sells a security . . . by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary to make the statements . . . not misleading." 15 U.S.C. § 771(2).
The Court finds that Silver violated this section by making untrue statements in the Confidential Offering Memorandum, a prospectus. Cf. Ambrosino v. Rodman & Renshaw, Inc., 972 F.2d 776, 784-85 (7th Cir. 1992) (applying section 12(2) to a private offering of limited partnership interests); Spatz v. Borenstein, 513 F. Supp. 571, 577 & n.2 (N.D. Ill. 1981) (noting that antifraud provisions of the securities laws apply to unregistered securities).
Under Section 12(2), Plaintiff's damages are its $ 500,000 contribution to SFPEF II plus interest. The Court will rule on the question of the appropriate award of interest as soon as possible after receiving the supplemental submissions of the parties.
Accordingly, judgment for the Plaintiff on Count I.
E. Lincoln's Claim under the Illinois Securities Law of 1953
In Count IV, an alternate theory of recovery, Lincoln, individually, claims that Silver and ADSP violated section 5/12 of the Illinois Securities Law of 1953, S.H.A. 815 ILCS 5/12 (1993). The elements of this claim are satisfied by either the elements of a Rule 10b-5 violation, see Branch-Hess Vending Servs. Employees' Pension Trust v. Guebert, 751 F. Supp. 1333, 1342 (C.D. Ill. 1992), or by the elements of a section 12(2) violation, see Spatz, 513 F. Supp. 571 at 577 n.7 (N.D. Ill. 1981). Either way, the statute is here satisfied.
Under S.H.A. 815 ILCS 5/13 (1993), Plaintiff's damages are $ 500,000 plus interest and attorneys' fees. Again, the amount of prejudgment interest will be determined with the assistance of the memoranda submitted by the parties. The amount of attorneys' fees to be awarded will also be determined by the Court with the assistance of the supplemental material to be submitted, including supporting affidavits.
Accordingly, judgment for Plaintiff on Count IV.
F. Lincoln's Fraud Claim
In Count XXI, Lincoln alleges a claim against Silver for fraud. This analysis is governed by the Court's Rule 10b-5 analysis. The Court finds for the Plaintiff. Plaintiff's damages are the identical $ 500,000 awarded with respect to Counts I, III and IV, plus prejudgment interest.
By proving common law fraud, a plaintiff may be entitled to punitive damages. See Golden Cone Concepts, Inc. v. Villa Linda Mall, Ltd., 113 N.M. 9, 820 P.2d 1323, 1328-29 (N.M. 1991). In the opinion of the Court, an additional award of punitive damages for Silver's fraud is warranted. The Court awards an additional $ 500,000 in punitive damages in order to punish Silver for his extraordinary misconduct, and to serve as an example or warning to others not to engage in such conduct.
The Court finds for the Plaintiff and against the Defendants on all Counts. The Plaintiff is hereby awarded $ 22,903,788 in damages, representing actual damages of $ 7,134,596, trebled, plus $ 1.5 million in punitive damages. Since Plaintiff is entitled to only one recovery of actual damages, even though Plaintiff has proved that it is entitled to recover under multiple causes of action, the actual damages calculated by the Court represent a single recovery of actual damages. The Plaintiff is also entitled to its reasonable costs and attorneys fees, pursuant to 18 U.S.C. § 1964(c) and 815 ILCS 5/13, for which Plaintiff shall submit a detailed and documented request.
The Court finds for the Plaintiff and against the Defendants on all Counts. The Plaintiff is hereby awarded $ 22,903,788 plus reasonable attorneys' fees. Plaintiff shall submit its request for interest and fees, supported by sworn affidavits, and a draft judgment order within three weeks of the date of this order. Defendants may respond, if they wish, within two weeks thereafter. The Court will promptly rule by mail, entering final judgment in this case.
JOHN A. NORDBERG
United States District Judge
DATED: September 29, 1995