SEC Prevails on Summary Judgment Against Recidivist
While the partial government shutdown continued the courts were able to remain open, although their websites were not updated. Agencies such as the SEC reduced their staff to a comparative handful. Nevertheless, during the period the Commission was able to prevail in part on a partial motion for summary judgment against a securities law recidivist. Specifically, the Commission secured summary judgement on claims that a hedge fund owner and his fund violated the antifraud provisions of the securities laws by failing to disclose his prior violation of those stattes and permitting selective redemptions. Defendants’ cross-motion for summary judgment was denied as to all counts. SEC v. Conrad, Civil Action No. 1:16-cv-02572 (N.D. Ga. Order entered Jan. 19, 2019).
Thomas Conrad and his son Stuart were named as defendants along with Financial Management Corporation and Financial Management Corporation, S.R.L. Thomas had been barred from association with any broker or dealer and the registration of his then broker-dealer firm revoked in a 1971 administrative proceeding which concluded that he was unfit for “engaging in the securities business in any capacity.”
Subsequently, Financial Management Corporation acted as the general partner and unregistered investment adviser for the hedge funds operated by Mr. Conrad under the World Opportunity Fund name, including its successor, World Fund II. A master-feeder arrangement was used. Financial Management Corp. assumed the role of general partner and adviser to the World Opportunity feeder funds. Mr. Conrad appointed himself a sub-adviser to the master. Neither his fees nor his prior violation of the law was disclosed.
In November 2008 Mr. Conrad notified investors that FMC was temporarily suspending all withdrawals, redemptions and terminations of capital accounts in view of the market crisis. Requests to redeem all or part of their investments by 29 investors in 2012 were denied. Nevertheless, Mr. Conrad redeemed about $2 million in one transaction and received other payments. Son Stuart received payments in a number of transactions and redeemed $25,000 from an account. The complaint alleged violations of Securities Act Section 17(a), Exchange Act Section (b) and Advisers Act Sections 206(1), 206(2) and 206(4).
The Court granted the Commission’s request for summary judgment on the counts regarding Mr. Conrad’s prior violations of the law and selective redemptions. Defendants admitted the disciplinary history and that it had not been disclosed. They claimed it was not material because it was followed by a number of other positive accomplishments.
To resolve a question of materiality posited by Defendants — typically a mixed question of fact and law — as a matter of law on summary judgment the court “must find the established omissions . . . so obviously important to an investor, that reasonable minds cannot differ on the question of materiality.” Indeed, mixed questions of law and fact are peculiarly within the province of the trier of fact.
In this case, despite Defendants’ claims regarding Mr. Conrad’s background, the “undisputed facts remain that the SEC prohibited Defendant Conrad from ever again associating with a registered broker-dealer and revoked the registration of Conrad & Company, a registered broker-dealer Defendant Conrad controlled.” Also undisputed is the basis for those conclusions: Mr. Conrad willfully aided and abetted violations of the Securities Exchange Act. Those findings cast “aspersions” on Mr. Conrad’s character.
While Mr. Conrad presented evidence of other more recent matters with which he has been involved, the Commission introduced “depositions and affidavit evidence from investors in the funds who stated they would not have invested in the funds had the disciplinary action been disclosed . . .” Stated differently, the undisclosed regulatory history was material and should have been disclosed as a matter of law.
Equally clear is the fact that Defendants preferential redemptions are tied directly to the misrepresentations. Defendants claim that Mr. Conrad had broad discretion to limit redemptions is correct. Their claim that this fact was disclosed to investors is also correct. Neither point changes the fact that Mr. Conrad represented to investors that redemptions were not being permitted and then authorized selective redemptions by others. The undisputed evidence in this case has “established as a matter of law that, over the course of many years, Defendants repeatedly made material misrepresentations regarding the redemption practices of the funds to actual and potential investors in email communications, investor fact sheets, and other offering memoranda. That conduct is prohibited” by Securities Act section 17(a), Exchange Act section 10(b) and Advisers Act section 206(4). Accordingly, summary judgment was granted in favor of the Commission on Counts I, II and IV. See Lit. Rel. No. 24390 (Feb. 4, 2019).
Program: Save the Date of March 19, 2019 for: “Women in Compliance” held at Dorsey & Whitney LLP, 51 West 52nd St. New York, New York, 10019-6119. The program begins at 6:00 p.m. and is followed by cocktails. The announcement is here.