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