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United States Commodity Futures Trading Commission v. Lake Shore Asset Management Limited

August 30, 2007

UNITED STATES COMMODITY FUTURES TRADING COMMISSION, PLAINTIFF,
v.
LAKE SHORE ASSET MANAGEMENT LIMITED, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Blanche M. Manning United States District Judge

MEMORANDUM AND ORDER

Lake Shore Limited's emergency motion for a stay pending appeal of the court's August 28, 2007, preliminary injunction order is before the court. The court has also had the benefit of reviewing the CFTC's response and the accompanying declaration of Mary Spear, who received information on August 28, 2007, indicating that earlier that month, Philip Baker began to dismantle Lake Shore and Hanford's shared London offices and equipment in a sudden manner which caused the landlord to believe that theft had occurred. For the following reasons and as set forth more specifically below, Lake Shore Limited's request for a stay pending appeal is granted in part and denied in part.

Applicable Standard

"A party seeking a stay pending appeal . . . must show that it has a significant probability of success on the merits; that it will face irreparable harm absent a stay; and that a stay will not injure the opposing party and will be in the public interest. Hinrichs v. Bosma, 440 F.3d 393, 396 (7th Cir. 2006).

Likelihood of Success on the Merits

The court assumes familiarity with its 86-page opinion addressing the CFTC's motion for a preliminary injunction and thus turns to Lake Shore Limited's arguments as to the likelihood of success on the merits of its appeal. First, Lake Shore Limited claims that the injunction enjoins entities that are not parties to the proceeding. This argument is at odds with the court's findings that Lake Shore Limited is the mere continuation of Lake Shore Inc. and that the Lake Shore entities operated as a common enterprise. See Commodity Futures Trading Com'n v. Lake Shore Asset Management Limited, 07 C 3598, docket #118 at 41-48 (N.D. Ill. Aug. 28, 2007). In other words, the injunction binds Lake Shore Limited wearing a variety of hats, as opposed to binding legally distinct entities.

Critically, Lake Shore Limited does not set forth any arguments regarding any factual or legal basis for its assertion that the injunction enjoins non-parties. Indeed, it fails to even acknowledge the basis for the court's ruling. Instead, it merely claims that the injunction is overly broad. As noted above, this is incorrect given the court's specific findings about the existence of the Lake Shore common enterprise and Lake Shore Limited's status as a mere continuation of Lake Shore Inc. It also means that Lake Shore has failed to identify any reason why it has a likelihood of success on the merits of this particular argument.

Second, Lake Shore Limited contends that the evidence fails to show that it engaged in fraud because the evidence was "admittedly incomplete and subject to non-fraudulent interpretations." Stay Motion at 3. As discussed at length in the court's order and as graphically depicted on the court's summary chart, which is Exhibit 1 to the August 28th order, the Lake Shore Alternative Financial Asset Funds are the relevant funds. The lack of records for the segregated managed accounts ("SMAs") does not affect the CFTC and NFA's ability to audit Lake Shore Alternative Financial Asset Funds I, II, III, and IV (as opposed to Lake Shore Funds I, II, III, and IV, some of which include SMAs).

All four of the registered futures commission merchants ("FCMs") with accounts for the Lake Shore Alternative Financial Asset Funds produced their records. Mr. Brodersen testified that reviewing Lake Shore Limited's documents would provide a fuller picture of its activities, but that he had the trading records necessary to audit the Lake Shore Alternative Financial Asset Funds. Thus, as the court noted in its order, Lake Shore Limited's refusal to produce its records and the absence of information about the SMAs did not somehow render the FCMs' records suspect or prevent the CFTC or NFA from accurately auditing the Lake Shore Alternative Financial Asset Funds. See Commodity Futures Trading Com'n v. Lake Shore Asset Management Limited, docket #118at 69, 75-77.

In its stay motion, Lake Shore Limited also repeats its familiar refrain that the CFTC's evidence was subject to non-fraudulent interpretations. This is a highly charitable view of the record that is not supported by the evidence presented during the preliminary injunction hearing. The CFTC's witnesses testified that their auditing of the Lake Shore Alternative Financial Asset Funds using the FCM records and other Lake Shore documents they received from trustworthy sources showed numerous irregularities. If Lake Shore Limited believed that any evidence existed which explained these irregularities or cast doubt on the CFTC's witnesses' testimony or the documentary evidence regarding the irregularities, it was incumbent upon Lake Shore Limited to introduce that alleged evidence. Id. at 76-77 ("[p]ositing theories unsupported by any evidence is not enough to controvert the CFTC's positions where those positions are amply supported by credible evidence").

Third, Lake Shore Limited argues that the CFTC failed to establish that the allegedly fraudulent information was shown to specific investors. Again, this argument has no basis in the evidence before the court. That evidence amply showed, among other things, that Lake Shore Limited knowingly made material misrepresentations about profitability when it solicited customers and during its interactions with existing investors in the Lake Shore Alternative Financial Asset Funds. See id. at 62-77.

Fourth, Lake Shore Limited contends that it cannot access customer funds directly and thus could not have engaged in fraud. This argument borders on the frivolous. See id. at 71.

Fifth, Lake Shore Limited repeats its argument that it did not act as a CTA or CPO for the Lake Shore Alternative Financial Asset Funds and contends that this issue "remains to be litigated in a plenary trial." Stay Motion at 4. The court, however, determined that the CFTC had a strong likelihood of success on the merits of this issue. See Commodity Futures Trading Com'n v. Lake Shore Asset Management Limited, 07 C 3598, docket #118 at 52-58. Indeed, even Lake Shore Limited's counsel admitted that his client acted as a CTA for the Lake Shore Alternative Financial Asset Funds. Id. at 56 (quoting Lake Shore Limited's counsel's statement that "[t]o the extent Lake Shore Limited had a role in the activity that will be discussed in this hearing, it was a ...


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