Meyer v. Ward

          MEMORANDUM OPINION AND ORDER

          MARY M. ROWLAND, United States Magistrate Judge

         In 2007, Plaintiff David Meyer (“Plaintiff” or “Meyer”) invested in the Calhoun Market Neutral Fund. Krista Ward (“Ward”) was the owner of Calhoun Asset Management LLC (“Calhoun”), which was the investment adviser to the Calhoun Market Neutral Fund. Plaintiff brought this lawsuit against Defendants Calhoun and Ward alleging among other things that they violated federal and Illinois securities laws. At a one-day bench trial, the remaining claims were Counts I (Violation of Section 12 of the Securities Act of 1933), III (Violation of the Illinois Securities Law of 1953), VII (Rescission), and VIII (Unjust Enrichment). After considering the testimony, exhibits admitted at trial, and the parties' pre-trial and post-trial submissions, the Court concludes that Plaintiff failed to prove that he is entitled to any recovery from Defendants. The Court enters findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52(a)^[1] and enters judgment in favor of Defendants.

         I. JURISDICTION AND APPLICABLE LAW

         The parties consented to the jurisdiction of the United States Magistrate Judge, pursuant to 28 U.S.C. § 636(c). (Dkt. 75). This Court has jurisdiction pursuant to the Securities Exchange Act of 1934, 15 U.S.C. § 78aa; 28 U.S.C. § 1331. This Court has supplemental jurisdiction over Meyer's state and common law claims pursuant to 28 U.S.C. § 1367.

         II. PRIOR PROCEEDINGS

         On February 14, 2014, Meyer filed an eight-count amended complaint. (Dkt. 24) (“Amended Complaint”). On June 18, 2014, the Court dismissed Meyer's claims of breach of fiduciary duty and breach of contract. (Dkt. 38). On September 27, 2016, this Court granted in part and denied in part Defendants' motion for summary judgment (Dkt. 110), leaving for trial Plaintiff's claims in Counts I, III, VII, and VIII. The case against Ward was stayed as she was in a bankruptcy proceeding. (see Dkts. 114, 118). However, on April 5, 2017, Ward's bankruptcy case closed. (Bankr. N.D.Ill. Case No. 16-33669, Dkt. 24). Therefore, the stay in this case against Ward ended April 5, 2017. See DeliverMed Holdings, LLC v. Schaltenbrand, 734 F.3d 616, 621 n.1 (7th Cir. 2013) (“[T]he automatic stay of actions against the debtor ends at the close of its bankruptcy case.”) (citing 11 U.S.C. § 362(c)(2)(A)).

         III. THE TRIAL

         The main issues for trial were whether: (1) Defendants violated federal law by selling unregistered securities or, as Defendants argue, sale of the Calhoun Market Neutral Fund was exempt from registration; (2) Plaintiff relied on material misrepresentations and/or omissions made by Defendants in violation of the Illinois Securities Law; and (3) Defendants were unjustly enriched as a result of Plaintiff's investment. Before trial, the parties submitted a joint proposed pretrial order and joint proposed findings of fact as well as separate proposed findings of fact and conclusions of law. (Dkts. 125, 127). The Court held a pre-trial conference on April 19, 2017. During trial, defense counsel moved orally to exclude the December 29, 2011 and July 9, 2012 Orders of the U.S. Securities and Exchange Commission (SEC) involving Calhoun and Ward, and maintained a standing objection to any reference to the SEC action.^[2] In a written opinion after trial, this Court ruled that the 2012 Order Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order (“SEC Consent Decree”) was not admissible. (Dkt. 133). However the 2011 Order Instituting Administrative and Cease-and-Desist Proceedings against Calhoun and Ward (“SEC OIP” (PX 11)) was admissible. (Id.). After trial, the parties filed simultaneous post-trial briefs. Only Defendants filed a response brief. (Dkts. 136-38).

         IV. FINDINGS OF FACT

         A. The Parties

         Defendant Calhoun was an Illinois limited liability company and SEC-registered investment adviser that was the investment adviser to several offshore funds including the Calhoun Market Neutral Fund (“Calhoun Fund”), a Cayman Islands company. (Stip.^[3] at ¶¶ 1-2). Defendant Ward was the sole member, owner, and only full time employee of Calhoun. (Id. at ¶ 3).^[4] Plaintiff Meyer was an investment advisory representative employed by Orizon Investment Counsel (“Orizon”), a registered investment adviser. (Id. at ¶ 7, Tr. at 41, 67, PX 11 at 3).

         Meyer was a sophisticated investor: he was an investment advisory representative with a FINRA (Financial Industry Regulatory Authority) license and had been in the financial services industry for more than 30 years (20 years at the time of the events in this case). (Tr. at 4, 41). As part of his job, he was consistently presented with investment opportunities and “could do nothing but just look at investment opportunities as an advisor if I wanted.” He took pride in making his individual investment decisions “based on due diligence.” (Id. at 59).

         B. The Calhoun Fund

         In late 2006, Meyer's employer, Orizon, recommended that he and other Orizon accredited investors consider investing in the Calhoun Fund. (Tr. at 5, 43- 45). Orizon had initiated a relationship with Ward around the time it decided to replace the Diligent Asset Diversification Fund (“DAD”), the fund of funds^[5] that Orizon had been offering investors. (Id. at 5, 44-45).^[6] Orizon asked Ward for information about the Calhoun Fund. (Id. at 87-88). The Calhoun Fund was offered only to Orizon's accredited investors. (Id. at 45, 52, 87, 124). It was not offered to the public. (Id. at 125). Meyer and other investors initially learned about the investment opportunity from Orizon, not Defendants. (Id. at 5, 44-46, 88). The Calhoun Fund had only eight investors including Meyer; all eight were accredited investors. (Id. at 87, 124-125).

         Each investor signed a Subscription Agreement in which the investor agreed that interests in the fund would be held only by “Eligible Investors” and that they had read and understood pertinent investment documents and had the financial background to assess the risk of investing in the Calhoun Fund. (Tr. at 124-25; DX 4H). Specifically the Subscriber (a) acknowledged receipt and familiarity with the Offering Memorandum and the Subscription Agreement and (b) warranted that he “possesse[d] requisite knowledge and experience in financial matters such that [he] is capable of evaluating the merits and risks of an investment in the Fund (including without limitation, the ability to suffer a complete loss of the investment. . .). (DX 4H).

         C. Meyer's Decision to Invest in the Calhoun Fund

         Before investing, Meyer believed due diligence had been performed on both Ward and the Calhoun Fund by Orizon. (Tr. at 47-48, 67-68). Before “it could get to Orizon to talk to its investors, [broker-dealer] ¶ 3 would have had to [have] been supportive” and the Calhoun Fund would have undergone Qa3's review protocols. (Id. at 67-69). When he made the decision to invest his own money, Meyer relied on the due diligence he assumed was performed by Orizon on both Ward and the Calhoun Fund and the review protocols that he knew Qa3 would have required prior to approving the investment. (Id. at 47-48, 67-70). In addition, DAD was being dissolved which resulted in a payout to Meyer. (Id. at 45-46). Replacing his investment in DAD was a “contributing factor” in Meyer's decision to invest in the Calhoun Fund. (Id. at 45-46, 48).

         In addition to company-level due diligence, Meyer testified that after receiving Orizon's recommendation, he did his own due diligence and then made his decision individually to invest. (Id. at 5, 23-25, 46, 59). In late 2006 and early 2007, Meyer had phone conversations with Ward. (Id. at 5, 24-25).^[7] He also reviewed three documents: (1) the Taipan Wealth Advisors, LLC Alternative Investment Management Association (AIMA) Due Diligence Questionnaire (PX4) (“DDQ”); (2) Taipan Wealth Advisors marketing overview (PX 6) (“Taipan Marketing Overview”); and (3) the Calhoun Fund one-page marketing document (“Calhoun Fund Marketing Document”) (PX 9). (Tr. at 25-26). These documents were also shared with the other Calhoun Fund investors. (Id. at 47).

         On February 22, 2007, Meyer signed a Calhoun Fund Subscription Agreement (“Subscription Agreement”) (DX 4H) to invest in the Calhoun Fund, an offshore fund, through his personal Individual Retirement Account. (Stip. at ¶¶ 2, 4-7; Tr. at 6, 41, 80). The Calhoun Fund was described as a Cayman Island exempt company created for international investors and U.S. tax-exempt investors. (PX 9).^[8]Meyer invested $209, 825.06 in the Calhoun Fund and later received back $144, 324.43. (Stip. at ¶¶ 6, 10; Tr. at 31). The parties stipulated that the S&P 500 index lost approximately 40% from the high point in 2008 to the low point in 2009. (Stip. at ¶11).

         D. Credibility

         Only two witnesses testified at trial. The Court weighed their credibility as follows: the Court found Ward to be credible. Her demeanor was confident, her answers direct, and her testimony consistent. By contrast, Meyer's testimony, particularly when it addressed his claims about Defendants' alleged misrepresentations and omissions, was internally inconsistent or contradictory. His answers were often vague and equivocating, and his testimony was peppered with statements about what he “assumed” and “inferred.” In addition, he frequently used the present tense, making it sometimes difficult to tell whether he was testifying to what he knew before investing or what he later learned.

         V. CONCLUSIONS OF LAW

         A. Section 12 of the Securities Act

         Plaintiff claims that Defendants sold unregistered securities in violation Section 12(a)(1) of the Securities Act of 1933. Defendants counter that the Calhoun Fund was exempt from registration because it was a private offering. Under Section 5(a) of the Securities Act, it is unlawful to sell unregistered securities in interstate commerce. 15 USCS § 77e. Section 12(a)(1) provides a remedy to a person purchasing a security that violates § 77e. 15 U.S.C.S. § 77l(a)(1). However, transactions “not involving any public offering” are exempt from registration. 15 USCS § 77d(a)(2); 17 CFR §230.506 (“Regulation D”).

         Defendants established by a preponderance of the evidence that the Calhoun Fund was exempt from registration as a private placement. See SEC v. Ralston Purina Co., 346 U.S. 119, 126 (burden of proof on party claiming private offering exemption); Springfield Oil Drilling Corp. v. Weiss, No. 02 C 249, 2003 U.S. Dist. LEXIS 14936, at *28 (N.D. Ill. Aug. 26, 2003) (preponderance of the evidence standard applied to private offering exemption). Preponderance of the evidence means that “trier of fact must believe that it is more likely than not that the evidence establishes the proposition in question.” Am. Grain Trimmers, Inc. v. Office of Workers' Comp. Programs, 181 F.3d 810, 817 (7th Cir. 1999).

         Courts have identified four factors to guide the determination of whether an offering is exempt as a private placement: “(1) the number of offerees and their relationship to the issuer; (2) the number of units offered; (3) the size of the offering; and (4) the manner of the offering.” ABN AMRO, Inc. v. Capital Int'l, Ltd., 595 F.Supp.2d 805, 833 (N.D. Ill. 2008); see also Cogniplex, Inc. v. Hubbard Ross, L.L.C., 00 C 7463, 00 C 7933, 2001 U.S. Dist. LEXIS 11113, at *33 (N.D. Ill. Apr. 26, 2001) (“[Defendant] may well be able to show that Arns and Hubbard were sophisticated investors who did not need the protections of the securities laws, by pointing to specific facts relevant to Arns and Ross' investment experience, the nature of the relationship between Hubbard, Arns and Ross, and how Hubbard extended the offer to Arns and Ross.”).^[9] The purpose of the exemption statute is to “protect investors by promoting full disclosure of information thought necessary to informed investment decisions.” Ralston Purina Co., 346 U.S. at 124. Therefore the focus of the inquiry is “on the need of the offerees for the protections afforded by registration.” Id. at 127.

         The Court concludes that Defendants met their burden to show the Calhoun Fund was a private offering. The evidence at trial showed that: (1) the Calhoun Fund was offered only to Orizon's accredited investors^[10] and was not offered to the public; (2) there were only eight investors, including Meyer, in the fund, and all eight were accredited investors; (3) Orizon initiated the relationship with Defendants and then recommended the Calhoun Fund to Meyer and other Orizon accredited investors; (4) Meyer was a sophisticated investor with access to information about the fund and the opportunity to ask questions of Ward; and (5) each investor in the Calhoun Fund signed a Subscription Agreement representing that he/she had financial knowledge and experience, was capable of evaluating the merits and risks of investing in the Fund and had read pertinent investment documentation including the Subscription Agreement and Offering Memorandum.^[11]With regard to the manner of the offering, Meyer's and Ward's testimony was consistent that Orizon approached Ward, asked for information about her funds, and then recommended the Calhoun Fund to its accredited investors. There was no testimony that Ward initiated these communications or reached out to any other potential investors. There was no evidence of any cold calls, mass mailing, or general solicitation by Defendants. See 17 CFR § 230.502(c) (exemption not available if offering is sold by means of general solicitation or general advertising); Cf. Johnston, 764 F.Supp. 1263 (finding private offering not proven where evidence showed, among other things, that there were 275 investors in four partnerships, mass mailings, and cold calls).

         Meyer and the seven other investors were not persons in need of the protections of registration. All eight investors were accredited investors, received the same information Meyer did, and signed a Subscription Agreement for the Calhoun Fund. (Tr. at 45, 47, 87, 124-125). That Subscriber Agreement specifically confirmed that investors received and understood the August 1, 2006 Offering Memorandum for the Calhoun Fund (“Offering Memorandum” or “OM”), and Ward testified credibly that the Offering Memorandum disclosed to investors “all the risks and disclosures of private placement.” (Tr. at 122).^[12] Other documentation investors reviewed prior to investing also shows they were on notice that the Calhoun Fund was intended to be exempt: that documentation stated that the Calhoun Fund was “exempt” (PX 9); “registered with and regulated by the Cayman Island Monetary Authority” and in response to a question about the legal ...