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United States Securities and Exchange Commission v. Brown

United States District Court, N.D. Illinois, Eastern Division

March 4, 2015



THOMAS M. DURKIN, District Judge.

The United States Securities and Exchange Commission ("SEC") has sued defendants Julian R. Brown and Alliance Investment Management Limited ("AIM") for violating federal securities laws. The defendants have moved to dismiss the SEC's complaint for lack of personal jurisdiction and failure to state a claim for relief. They argue that their contacts with the United States are too sporadic to support personal jurisdiction. They also argue that the SEC has failed to allege a domestic securities transaction, which they argue is a necessary element of a claim under the federal securities laws. For the following reasons, the Court denies the defendants' motion.


AIM is a Bahamian broker-dealer registered with the Securities Commission of the Bahamas. R. 1 ¶ 15. Brown, a resident of the Bahamas, is AIM's president and director. Id. at ¶ 16. The SEC alleges the defendants participated in a "massive international fraud scheme orchestrated primarily by asset manager Nikolai S. Battoo and entities under his control." Id. at ¶ 1.[1] AIM held itself out as the custodian of assets related to Battoo's "asset management program, " which operated under the trade name "Private International Wealth Management" ("PIWM"). Id. at ¶ 15. Investors participated in the PIWM program by investing in individual "mandates" managed by Battoo. Id. at ¶ 24. Of the 61 such mandates, three are relevant to the defendants' motion: The Planning Group ("TPG"), Sovereign International Asset Management, Inc. ("SIAM"), and Maven Assurance Limited and Maven Life International Limited (collectively, "Maven"). Id. at ¶ 25. Clients of TPG, an Arizona-based investment adviser, invested more than $5 million in the PIWM program. Id. at ¶ 26. The SEC contends that TPG's clients invested in PIWM in the United States, citing the following allegations:

At the time [TPG]'s clients made their investments, they were physically in the United States. All investment decisions and directions were made from within the United States by [TPG]'s founder or its clients, all of whom were residents of the United States. [TPG]'s principal or its clients signed all documents relating to their investments while physically in the United States. [TPG]'s clients also wired their PIWM investment proceeds from bank accounts in the United States directly to AIM's Bahamian bank account

Id. at ¶ 27. The SEC makes similar allegations with respect to SIAM (a Florida-based investment adviser) and Maven (Anguilla-incorporated entities with principal places of business in Illinois). Id. at ¶¶ 28, 30. SIAM's clients invested more than $45 million in the PIWM program. Id. at ¶ 28. Those clients signed all documents related to their investments in the United States, and wired investment proceeds from their bank accounts in the United States to SIAM's bank account in Florida. Id. at ¶ 29. SIAM then pooled the funds before wiring them to AIM's bank account or to a bank account under Battoo's control in Bailiwick of Guernsey, Channel Islands. Id. Unlike TPG and SIAM, Maven's investors "often signed their original investment paperwork outside the United States...." Id. at ¶ 31. Those investments "typically" had one-year terms. Id. In order to renew their investments for additional terms, Maven's investors executed renewal paperwork - "often" in the United States - and sent new investment money to Illinois-based Randall Administration (Maven's "administrator"). Id. at ¶¶ 30, 32. The act of transmitting their new investment funds to Randall Administration automatically renewed their investment for another one-year term. Id. at ¶ 32.

Battoo's PIWM program suffered "devastating" losses in connection with the 2008 financial crisis and the collapse of Bernie Madoff's Ponzi scheme. Id. at ¶¶ 33, 36. To cover up those losses, Battoo began reporting bogus investment returns misrepresenting the value of investors' holdings. Id. at ¶ 44. Brown and AIM participated in Battoo's fraud by holding AIM out to investors as an "independent custodian" for their PIWM investments. Id. at ¶ 49. The SEC alleges that, on the contrary, since at least 2009 AIM did not possess or control most of the assets listed in AIM's account statements. Id. at ¶ 50. The statements overstated the value of some holdings, and fabricated others. Id. at ¶ 53. AIM also transferred some assets to Battoo, which he used to support his lavish lifestyle. Id. at ¶ 51. The defendants relied on Battoo to supply the information that AIM was supposed to be independently verifying. Id. at ¶ 54. They helped Battoo perpetrate this fraud by sending blank AIM letterhead to Battoo at his Fort Lauderdale, Florida address. Id. at ¶¶ 55-56. Battoo used the letterhead to prepare sham account statements, which he then sent to Brown. Id. at ¶¶ 56-57. Brown, in turn, sent cover letters bearing his signature to PIWM investors' accountants enclosing the false statements. Id. at ¶ 57. The SEC highlights in particular AIM's interactions with Maven's U.S.-based accounting firm in connection with that firm's audit of Maven's 2010 financials. Id. at ¶¶ 59-60. In response to the auditor's requests concerning Maven's PIWM investments, Battoo told AIM to send account statements to the auditor's offices in Arlington, Heights, Illinois. Id. at ¶ 60; see also R. 16 at 25 ¶ 15 (Brown states in his declaration that AIM sent the account statements to the auditors pursuant to Battoo's instructions.).[2] Those statements were false. Id. at ¶¶ 61-62. In one statement, the defendants list 20 "mutual funds" in which Maven purportedly held almost $40 million. Id. The SEC alleges that Maven's investors held no interests in at least 18 of the 20 funds. Id. at ¶ 62. It lists six AIM accounts holding approximately $10 million. Id. at ¶ 61. AIM has no record of any such accounts. Id. at ¶ 62.

The SEC has filed a five-count complaint against Brown and AIM for violating the Securities Act of 1933 (the "33 Act") (Counts I-III), the Exchange Act of 1934 (the "34 Act") (Count IV), and for aiding and abetting Battoo's violations of the 33 Act, the 34 Act, and § 206(4) of the Investment Advisers Act (Count V). Brown and AIM have moved to dismiss the SEC's complaint pursuant to Fed.R.Civ.P. 12(b)(2) and 12(b)(6).

Legal Standard

It is the SEC's burden to establish that the defendants are subject to this Court's personal jurisdiction. Northern Grain Marketing, LLC v. Greving, 743 F.3d 487, 491 (7th Cir. 2014). To determine whether the SEC has satisfied its burden, the Court may "receive and weigh" affidavits and other evidence outside the pleadings. Purdue Research Foundation v. Sanofi-Synthelabo, S.A., 338 F.3d 773, 782 (7th Cir. 2003) (citation and internal quotation marks omitted). The SEC "need only make out a prima facie case of personal jurisdiction" because the Court has not held an evidentiary hearing to resolve factual disputes. Id. (citation and internal quotation marks omitted). The Court construes the SEC's complaint "liberally with every inference drawn" in its favor. GCIU-Employer Retirement Fund v. Goldfarb Corp., 565 F.3d 1018, 1020 n.1 (7th Cir. 2009). The Court, however, accepts as true the facts as stated in Brown's unrefuted declaration. See Purdue Research Foundation, 338 F.3d at 782-83 ("[O]nce the defendant has submitted affidavits or other evidence in opposition to the exercise of jurisdiction, the plaintiff must go beyond the pleadings and submit affirmative evidence supporting the exercise of jurisdiction."); see also GCIU-Employer Retirement Fund, 565 F.3d at 1020 n.1 ("[W]e accept as true any facts contained in the defendant's affidavits that remain unrefuted by the plaintiff.").

"To survive a motion to dismiss under Rule 12(b)(6), a complaint must provide enough factual information to state a claim to relief that is plausible on its face' and raise a right to relief above the speculative level.'" Thulin v. Shopko Stores Operating Co., LLC, 771 F.3d 994, 997 (7th Cir. 2014) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 570 (2007)). "Whether a complaint states a claim upon which relief may be granted depends upon the context of the case and requires the reviewing court to draw on its judicial experience and common sense.'" Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009)). The Court accepts the complaint's well-pleaded allegations as true and construes them in the light most favorable to the SEC. Id


I. Whether the Court Has Personal Jurisdiction Over the Defendants

In federal question cases, see R. 1 ¶ 12, "a federal court has personal jurisdiction over the defendant if either federal law or the law of the state in which the court sits authorizes service of process to that defendant." Mobile Anesthesiologists Chicago, LLC v. Anesthesia Associates of Houston Metroplex, P.A., 623 F.3d 440, 443 (7th Cir. 2010). In this case, the 33 Act and the 34 Act authorize worldwide service of process. See 15 U.S.C. § 77v(a) (process may be served "wherever the defendant may be found"); 15 U.S.C. § 78aa (same); Robinson Engineering Co. Pension Plan and Trust v. George, 223 F.3d 445, 449 (7th Cir. 2000) (construing the 33 Act and the 34 Act to authorize worldwide service). As it would in a diversity case, the Court will apply the familiar "minimum contacts" test to determine whether exercising jurisdiction over the defendants comports with due process. See Mobile Anesthesiologists Chicago, 623 F.3d at 443-44; see also Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) (The court may exercise personal jurisdiction over a non-resident defendant if the defendant has "certain minimum contacts with [the forum] such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.'") ( quoting Milliken v. Meyer, 311 U.S. 457, 463 (1940)). The relevant contacts, however, are with the United States as a whole, rather than a particular state. See Waeltz v. Delta Pilots Retirement Plan, 301 F.3d 804, 807 n.3 (7th Cir. ...

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