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

September 17, 2008

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

The Commodity Futures Trading Commission ("CFTC") has filed a motion seeking entry of a default judgment as to defendant Phillip J. Baker. For the following reasons, the CFTC's motion is granted and the court enters a permanent injunction against Mr. Baker as specified below.

I. Background

The court assumes familiarity with its prior orders and thus provides a brief summary of the procedural posture of this action. On June 26, 2007, the CFTC filed a one-count complaint directed at Lake Shore Asset Management Limited ("Lake Shore Limited"). The CFTC alleged that Lake Shore Limited was a registered commodity trading advisor ("CTA") and commodity pool operator ("CPO") and had improperly refused to make its books and records available for inspection or to provide information about its commodity pool participants and trading activity as required by the Commodity Exchange Act, as amended (the "Act").

The CFTC subsequently amended its complaint to add Lake Shore Group of Companies Inc., Ltd. and Philip Baker, who controlled a wide variety of entities associated with Lake Shore Limited, as defendants. The amended complaint repeated the allegations about the Lake Shore entities' failure to comply with the Act's recordkeeping requirements. It also alleged that Lake Shore Limited was part of a common enterprise, which included a long list of Lake Shore entities associated with Mr. Baker, and that Lake Shore Limited, Lake Shore Group, and Mr. Baker had violated the Act by defrauding pool participants in at least four commodity pools (Lake Shore Alternative Financial Asset Funds I, II, III, and IV).

Shortly after it filed its amended complaint, the CFTC filed a motion for a preliminary injunction. On August 28, 2007, after conducting a three-day hearing, this court entered an 86-page order granting the motion in part and denying it in part. The court found that Lake Shore Limited, the Lake Shore Group and Lake Shore Asset Management Inc. (Lake Shore Limited's predecessor company), and the other Lake Shore entities controlled by Philip Baker operated as a common enterprise and were essentially all the same, explaining that "this case is the poster child for the transaction of business through a maze of interrelated companies" because "all of the evidence presented to the court indicates that all of the Lake Shore companies . . . were under common control and did not operate at arms-length." Docket No. 118, at 46.

Next, the court made extensive findings regarding Lake Shore Limited's control of pool assets (held in the name of Lake Shore Alternative Financial Asset Ltd., Lake Shore Alternative Financial Asset Account I Ltd., Lake Shore Alternative Financial Asset Account II Ltd., Lake Shore Alternative Financial Asset Account III Ltd., and Lake Shore Alternative Financial Asset Fund IV Limited, currently known as Geneva Corporation Funds World Limited and/or Genevacorp Funds World Ltd.). In addition, the court found that the CFTC had established a likelihood of success on its claim that Lake Shore Limited fraudulently solicited pool participants, provided false information to existing participants, and otherwise defrauded pool participants. The court also held that Lake Shore Limited was bound by the Act and was required to comply with, among other things, the Act's requirements regarding recordkeeping and production. Based on the entire record, the court then found that an asset freeze was necessary to protect customer funds.

Lake Shore Limited moved to stay the preliminary injunction order pending the disposition of its appeal from that order. On September 7, 2007, the Seventh Circuit denied Lake Shore Limited's motion for a stay pending appeal. On September 21, 2007, four of the Lake Shore pools and Hanford Investments (another Baker-controlled entity) filed a claim in the High Court in London seeking to compel the British futures commission merchants ("FCMs") to release the customer funds to them, despite the asset freeze in effect and the Seventh Circuit's denial of Lake Shore Limited's stay motion.

On October 4, 2007, this court entered a 42-page order that, among other things, detailed Lake Shore Limited's efforts to avoid complying with the Act, its discovery obligations, and the preliminary injunction order. See Docket No. 191. The court then appointed Robb Evans & Associates as receiver and entered an order outlining the duties and powers of the receiver. Since its appointment, the receiver has made numerous unsuccessful demands on various Lake Shore entities and the London FCMs requesting turnover of the frozen Lake Shore funds held by the London FCMs, and is presently pursing litigation in London to attempt to secure the funds so they can be distributed to the investors, who are the rightful owners of these monies. Entities controlled by Mr. Baker are opposing these efforts, despite the fact that the investors' money indisputably belongs to the investors.

The receiver has also participated in bankruptcy proceedings relating to Sentinel (an Illinois FCM that was the cash manager and the sub-custodian for the Lake Shore funds), as Lake Shore is one of Sentinel's largest creditors. See In re Sentinel Management Group, No. 07-14987 (Bankr. N.D. Ill.). Both the receiver and Baker-controlled entities filed competing proofs of claim in the Sentinel bankruptcy, and on July 21, 2008, the bankruptcy court disallowed and expunged the proofs of claims filed by the Baker-controlled entities.*fn1

From October of 2007 to January of 2008, the court also entered numerous orders relating to Lake Shore Limited's failure to comply with the court's orders, found that Lake Shore Limited was in civil contempt of court, and referred this case to the United States Attorney for investigation and possible prosecution of criminal contempt charges against Lake Shore Limited and Mr. Baker personally. See Docket Nos. 191, 299, 322, 347, 363 & 402.

On December 28, 2007, the Seventh Circuit issued an opinion affirming the preliminary injunction as to Lake Shore Limited. Lake Shore Asset Management Limited v. Commodity Futures Trading Com'n , 511 F.3d 762 (7th Cir. 2007). The Seventh Circuit left the asset freeze in place and rejected Lake Shore Limited's claim that the CFTC was improperly trying to regulate acts outside the United States and control assets held in foreign countries that had been invested by individuals and entities outside the United States. The Seventh Circuit then found that the preliminary injunction bound all other members of the corporate group under Rule 65(d) to the extent that they were acting in concert with Lake Shore Limited.

It also held, however, that this court could not directly enjoin the entities that make up the Lake Shore common enterprise unless they were first named as defendants, served with process and given an opportunity to defend. Id. at 766-67 (entities comprising the Lake Shore common enterprise must be served with process and allowed to present evidence before they may be enjoined). In other words, according to the Seventh Circuit, the Lake Shore entities who had not been named as defendants had to have a chance to challenge the court's factual findings before the court could directly enjoin them despite this court's finding that they were all interrelated sham entities created to defraud investors.

Once the mandate issued, on January 16, 2008, this court amended the preliminary injunction order to only directly bind Lake Shore Limited. See Docket No. 390. The CFTC then amended its complaint to allege the existence of a common enterprise controlled by Mr. Baker which included Lake Shore Limited and the Lake Shore Group of Companies, Inc. Ltd. ("Lake Shore Group"). The First Amended Complaint alleged that Mr. Baker, Lake Shore Limited and the Lake Shore Group violated the anti-fraud provisions of the Act when they defrauded commodity pool participants in at least four commodity pools by misrepresenting the performance of the pools and issuing false account statements.

The CFTC subsequently amended its complaint again to add numerous other Lake Shore entities. In the second amended complaint, the CFTC asserted that the newly added Lake Shore defendants were controlled by Mr. Baker and operated in concert with Lake Shore Limited, Lake Shore Inc., and Lake Shore Group as a common enterprise. The allegations in the second amended complaint were consistent with the extensive evidence about the Lake Shore pools that was presented at the previous preliminary injunction hearing.

On April 24, 2008, the court granted the CFTC's motion for entry of a default judgment and entered a permanent injunction order against the newly added defendants.*fn2 See Docket No. 552. It also entered an amended receivership order to address developments in this action. See Docket No. 554. On June 10, 2008, the court granted the CFTC's request to sanction Lake Shore Limited based on Lake Shore Limited's long history of failure of flouting the court's orders and its disregard of its obligations under the Federal Rules of Civil Procedure, and entered a partial default judgment and permanent injunction order as to Lake Shore Limited. See Docket No. 578.

At this point, the receiver's efforts on behalf of the investors are continuing. In addition, the CFTC still has pending claims for additional relief against all of the Lake Shore defendants, including claims for restitution for defrauded pool participants. The CFTC's claims against Mr. Baker also remain pending. This order addresses certain of the CFTC's claims against Mr. Baker, who has failed to answer or otherwise plead.

II. Service of Process

As detailed in prior orders, Mr. Baker has had actual notice of all of the proceedings in this case. See Docket No. 403 (criminal contempt referral for Lake Shore Limited and Mr. Baker personally). Nevertheless, after his dead-of-night flight from London immediately following the court's entry of a preliminary injunction and asset freeze, Mr. Baker successfully managed to thwart the CFTC's efforts to locate and serve him with process. His present whereabouts remain unknown, but he remains involved in the London legal proceedings. He also is the Managing Director, Principal and President of Lake Shore Limited, which is represented by counsel in this action, and thus has received notice of the orders entered in this action in this capacity.

The CFTC attempted to serve Mr. Baker via means approved by the Hague Convention at an address in Germany provided by one of Lake Shore Limited's lawyers, to no avail. Because the German address proved to be incorrect and the CFTC could not find Mr. Baker, the Hague Convention -- assuming that Mr. Baker is living in a country that is a signatory -- does not govern the CFTC's efforts to serve Mr. Baker. See BP Products North America, Inc. v. Dagra, 232 F.R.D. 263, 264 (E.D. Va. 2005), quoting 20 U.S.T. 361 (U.S.T.1969) ("the Hague Convention contains an explicit exemption where the address of the foreign party to be served is unknown: 'This Convention shall not apply where the address of the person to be served with the document is not known'").

The CFTC thus moved for leave to serve Mr. Baker via publication pursuant to Fed. R. Civ. P. 4(f)(3). This rule allows service to be made on an individual in a foreign country by any means "not prohibited by international agreement, as the court orders," Fed. R. Civ. P. 4(f)(3), as long as the chosen method of service "comport[s] with constitutional notions of due process," In re LDK Solar Securities Litigation, No. C 07-05182 WHA, 2008 WL 2415186 *4 (N.D. Cal. Jun. 12, 2008). Magistrate Judge Mason approved service of process via publication in the International Herald Tribune newspaper once a week for four consecutive weeks (specifically, on April 17, 24, 30 and May 8, 2008). See Docket No. 566.

Since Mr. Baker has concealed his whereabouts, the court cannot definitively ascertain if any international agreement applicable to the location where Mr. Baker is hiding prohibits service via publication. Clearly, however, service by publication coupled with actual notice of this action is "reasonably calculated, under all the circumstances, to apprise [Mr. Baker] of the pendency of the action and afford [him] an opportunity" to defend. Rio Properties, Inc. v. Rio Intern. Interlink, 284 F.3d 1007, 1016 (9th Cir. 2002); see also BP Products North America, Inc.

v. Dagra, 236 F.R.D. 270, 272-1 (E.D. Va. 2006) ("service by publication to a defendant in a foreign country is an acceptable alternative means under 4(f)(3), so long as diligent attempts have been made to locate the defendant and serve process by traditional means, and the publication is one that likely would reach the defendant" especially when "the defendant possess[es] some knowledge that he might be subject to a suit"). Thus, the court finds that Magistrate Judge Mason properly authorized service via publication and that the CFTC properly served Mr. Baker via publication.

III. Personal Jurisdiction

The CFTC failed to address personal jurisdiction, despite the fact that the court's opinion addressing the CFTC's motion for a default judgment against the other Lake Shore defendants specifically addressed this critical issue. Specific jurisdiction applies when the court is asserting jurisdiction over a defendant in a suit "arising out of or related to the defendant's contacts with the forum." RAR, Inc. v. Turner Diesel, Ltd., 107 F.3d at 1277, citing Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. at 416. On the other hand, general jurisdiction is applicable when the lawsuit neither arose nor was related to the defendant's contacts with the forum state. Id. Such jurisdiction is permitted only where the defendant has "continuous and systematic general business contacts" with the state. Id.

Specific jurisdiction fits well with the facts of this case, as Lake Shore Limited was controlled by Mr. Baker, who was its Managing Director, Principal and President. Lake Shore Limited targeted Chicago and touted its status as a CFTC-registrant and NFA member, as discussed at length in the court's prior orders, to cloak Lake Shore Limited and the Lake Shore funds in a mantle of apparent propriety. The court may exercise specific jurisdiction over Mr. Baker if he "purposefully established minimum contacts within the forum state" and those contacts "make personal jurisdiction fair and reasonable under the circumstances." RAR, Inc. v. Turner Diesel, Ltd., 107 F.3d 1272, 1277 (7th Cir. 1997), quoting Burger King v. Rudzewicz, 471 U.S. 462, 476-77 (1985). Clearly, both Mr. Baker and Lake Shore Limited purposefully took numerous actions directed at Chicago in connection with Lake Shore Limited's actions as a trading advisor and pool operator for the Lake Shore Funds. See Docket No. 118, rev'd in part on other grounds by Lake Shore Asset Management Ltd. v. Commodity Futures Trading Com'n, 511 F.3d 762 (7th Cir. 2007).

The court anticipates that Mr. Baker would take the position that he nevertheless cannot be liable personally based on the actions of Lake Shore entities. Under Illinois law, however, an individual may be liable for the acts of a corporation if: "(1) there exists such unity of interest and ownership that the separate personalities of the individual and the corporation no longer exist; and (2) . . . there exist circumstances such that an adherence to the fiction of separate corporate existence would likely produce an unjust or inequitable result." APS Sports Collectibles, Inc. v. Sports Time, Inc., 299 F.3d 624, 631 (7th Cir. 2002). This standard is easily met in this case, for the reasons discussed at length in the court's preliminary injunction order. See Docket No. 118 ("this case is the poster child for the transaction of business through a maze of interrelated companies, and all of the evidence presented to the court indicates that all of the Lake Shore companies . . . were under common control and did not operate at arms-length"); see also In re Teknek, L.L.C., 354 B.R. 181, 196 n.5 (Bankr. N.D.Ill. 2006) ("The exception permits the individual corporate defendant to be roped in with personal jurisdiction if the plaintiff makes a prima facie showing . . . that the corporate form is a shell or sham rather than a real, separate entity").

Mr. Baker might also contend that the fiduciary shield doctrine prevents this court from exercising personal jurisdiction over him. Under the fiduciary shield doctrine, a court may not exercise jurisdiction over a non-resident corporate official when the only contacts that individual has with Illinois were made in his or her corporate capacity. Rollins v. Ellwood, 141 Ill.2d 244, 279 (Ill. 1990) (where an individual defendant's conduct in Illinois "was a product of, and was motivated by, his employment situation and not his personal interests, . . . it would be unfair to use this conduct to assert personal jurisdiction over him as an individual"); see also Rice v. Nova Biomedical Corp., 38 F.3d 909, 912 (7th Cir.1994) (Illinois recognizes the fiduciary shield doctrine, which "denies personal jurisdiction over an individual whose presence and activity in the state in which the suit is brought were solely on behalf of his employer or other principal").

However, it is well-established that the fiduciary shield doctrine is inapplicable if a defendant's actions were taken to further his or her personal interests. See, e.g., Vasilj v. Duzich, No. 07 C 5462, 2008 WL 2062371, at *3-4 (N.D. Ill. May 13, 2008). In determining whether the personal interest exception applies, courts focus on whether the individual at issue "has a direct financial stake in the company's health." United Financial Mortg. Corp. v. Bayshores Funding Corp., 245 F.Supp.2d 884, 885 (N.D. Ill. 2002). Accordingly, "in reviewing the personal interest exception, the critical factor is the individual's status as a corporate shareholder, not merely whether he is an officer or director." Plastic Film Corp., Inc. v. Unipac, Inc., 128 F.Supp.2d 1143, 1147 (N.D. Ill. 2001).

Thus, the fiduciary shield doctrine does not protect high-ranking company officers or shareholders with "a direct financial stake in the company's health." Vasilj v. Duzich, 2008 WL 2062371, at *4 (collecting cases). Mr. Baker indisputably had a direct financial stake in the health of Lake Shore Limited and all of the other Lake Shore entities he controlled. Indeed, he admitted that the asset freeze imposed by this court and the National Futures Association led to his precipitous flight from Lake Shore's now-shuttered London offices. See Docket No. 192 at 2 n.2 (discussing declaration submitted by Mr. Baker in this case). The court thus finds that the fiduciary shield doctrine is inapplicable and that Mr. Baker's decision to base Lake Shore Limited, and thus the heart of his fraudulent scheme, in Chicago means that the court can exercise personal jurisdiction over him.

IV. Findings of Fact and Conclusions of Law

Having satisfied itself that the CFTC properly served Mr. Baker and that the exercise of personal jurisdiction over him is proper, the court turns to the merits of the CFTC's motion for a default judgment against Mr. Baker. Mr. Baker has failed to timely answer or otherwise defend this action. As Mr. Baker declined to respond within the time specified by the court, the court will proceed without the benefit of his views.

A. Findings of Fact

1. This court has jurisdiction over this action pursuant to Section 6c of the Act, 7 U.S.C. § 13a-1, which authorizes the CFTC to seek injunctive relief against any person whenever it shall appear to the CFTC that such person has engaged, is engaging, or is about to engage in any act or practice constituting a violation of any provision of the Act or any rule, regulation or order thereunder.

2. Venue is proper pursuant to Section 6c of the Act, 7 U.S.C. § 13a-1(e), because Mr. Baker, individually and as a controlling person of the Lake Shore Common Enterprise ("LS Common Enterprise"), transacted business in this district, and the acts and practices in violation of the Act have occurred, are occurring, or are about to occur within this district.

3. Service was properly effected upon Mr. Baker pursuant to Fed. R. Civ. P. 4(f)(3), by publication of the summons in the International Herald Tribune newspaper along with directions to the computer link posted on the Commission's website once a week for four consecutive weeks i.e., on April 17, 24, 30 and May 8, 2008.

4. Mr. Baker has failed to timely answer or otherwise defend the CFTC's second amended complaint within the time permitted by Fed. R. Civ. P. 12.

5. The allegations of the second amended complaint are well-pleaded and hereby taken as true. This order is ...


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