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Securities and Exchange Commission v. Falor

August 19, 2010

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
ROBERT D. FALOR, DEFENDANT, AND JENNIFER L. FALOR, RELIEF DEFENDANT.



The opinion of the court was delivered by: Joan B. Gottschall United States District Judge

Judge Joan B. Gottschall

MEMORANDUM OPINION AND ORDER

Plaintiff, the Securities and Exchange Commission (the "SEC"), brought this action against Defendant Robert Falor, seeking injunctive relief, civil penalties, disgorgement, and prejudgment interest for alleged violations of the Securities Act and the Securities Exchange Act. (Compl., Doc. No. 1.) This matter comes before the court on Falor's motion to dismiss.*fn1 (Doc. No. 23.)

I. BACKGROUND

Between July 2004 and April 2005, Falor allegedly sold $9 million worth of "membership interests" in three LLCs: Printers Row Investors, LLC; South Beach Investors, LLC; and Tides Hotel Investors, LLC. (Compl. ¶ 2.) Falor represented to investors that their funds "would be used to buy old hotels, convert them to hotel-condominium units and to sell the hotel-condominium units at a profit, and to then pay promised returns ranging from 50% to 120% over a two-year period." (Id. ¶ 3.) According to the SEC, however, "Falor used investor funds to make payments to himself and [his wife], to buy expensive cars, to lease private airplanes, to finance other unrelated real estate projects, and to pay unrelated business debts." (Id. ¶ 4.) In an attempt to conceal his fraud, the SEC claims that "Falor provided investors with false information concerning the progress of the hotel-condominium conversion projects." (Id. ¶ 5.) After "several years of mismanagement," the hotels were sold at a loss, and Falor allegedly pocketed the proceeds from those sales. (Id. ¶¶ 30, 47, 63.) The SEC subsequently filed a three-count complaint against Falor, alleging violations of Sections 17(a)(1), (2), and (3) of the Securities Act and Section 10(b) of the Exchange Act. (Id. ¶¶ 64-74.) See 15 U.S.C.A. §§ 77q(a)(1-3), 78j(b).

II. LEGAL STANDARD

Rule 12(b)(6) allows a defendant to seek dismissal of a complaint that fails to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). In deciding a Rule 12(b)(6) motion, the court must "construe the complaint in the light most favorable to the plaintiff, accepting as true all well-pleaded facts alleged, and drawing all possible inferences in [the plaintiff's] favor." Tamayo v. Blagojevich, 526 F.3d 1074, 1081 (7th Cir. 2008). Legal conclusions, however, are not entitled to any assumption of truth. Ashcroft v. Iqbal, 556 U.S. ---, 129 S.Ct. 1937, 1949 (2009).

III. ANALYSIS

A. Misstatements

Falor argues that "Plaintiff's complaint fails to provide the requisite specificity that any representations were false or misleading." (Mot. at 3-4.) The SEC asserts that "the Complaint provides, on a transaction-by-transaction basis, a detailed account of Defendant['s] scheme to divert investor funds from the conversion projects . . . for his illicit personal use." (Resp. at 9.) The court agrees with the SEC.

Under Federal Rule of Civil Procedure 9(b), litigants (including the SEC) are required to plead allegations of fraud "with particularity." See S.E.C. v. Kelly, 545 F. Supp. 2d 808, 811 (N.D. Ill. 2008) (citing Fed. R. Civ. P. 9(b)). This means that the complaint must allege the "'who, what, when, where, and how' of the fraud." Id. (quoting DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990)). In practical effect, Rule 9(b) requires the plaintiff to "'state the time, place and content of the alleged communications perpetrating the fraud,'" such that the court can "evaluate the claim in a meaningful way." Arazie v. Mullane, 2 F.3d 1456, 1465 (7th Cir. 1993) (quoting Graue Mill Dev. Corp. v. Colonial Bank & Trust Co., 927 F.2d 988, 992 (7th Cir. 1991)).

The SEC has clearly met its burden of pleading the circumstances of Falor's alleged fraud with particularity. (See Compl.) For each of the three LLCs that Falor controlled, the SEC describes the timing and content of Falor's misrepresentations to investors, as well as a transaction-by-transaction account of Falor's misappropriation of investor funds. (See id. ¶¶13-63.) The SEC's detailed description of how Falor allegedly bilked investors in the Tides Hotel out of $2.8 million provides an example of the level of specificity employed throughout the complaint. (See id. ¶¶ 13-30.) First, the SEC alleges that Falor solicited the investors "[i]n the fall of 2004," using "various offering materials" stating that "the investors' funds would be used to purchase the Tides Hotel and convert it to a hotel condominium." (Id. ¶ 15.) "Between . . . November 9, 2004 and December 6, 2004, Falor raised approximately $2.8 million from approximately twenty-six investors through the sale of membership interests in Tides Hotel Investors . . . ." (Id. ¶ 16.) According to the SEC, the investors' funds were not used to purchase the Tides Hotel, but rather to "make payments to [Falor] and [his wife], to buy expensive cards, to lease private airplanes, to finance other unrelated real estate projects, and to pay unrelated business debts." (Id. ¶ 4.) The complaint then sets forth in detail the timing and circumstances of Falor's misappropriations:

 On November 12 and 17, 2004, Falor directed wire transfers of $560,000 and $300,000 of investor funds to his wife, Jennifer Falor; in June 8, 2008, Ms. Falor "used the . . . investor money to make a down payment for the purchase of a multimillion dollar home located in Winnetka, Illinois." (Id. ¶¶ 20, 22-23.)  On December 14, 2004, "Falor directed the wire transfer of $50,000 [of investor funds] to pay a Falor business associate for a business expense unrelated to the Tides Hotel conversion project." (Id. ¶ 27.)  On December 21, 2004, "Falor directed the wire transfer of $192,663.10 [of investor funds] to pay for the lease of private airplanes." (Id. ¶ 28.)

The complaint also details the timing and content of misrepresentations that Falor made "to lull [investors] into believing their investments were being used to complete the Tides Hotel conversion project." (Id. ΒΆ 29.) "Between approximately July 15, 2005 and September 26, 2005," alleges the SEC, "Falor, through conference calls and written documents, provided investors with false information ...


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