SEC Wins Summary Judgment Ruling In Ponzi Scheme Case

The Commission prevailed in an investment fund scheme action, obtaining a favorable summary judgment ruling. In reaching its conclusion the Court rejected claims that the action was time barred and that the cause of action was outside the scope of Exchange Act Section 10(b). SEC v. Funinaga, Civil Action No. 2:13-CV-1658 (D. Nev. Order entered Oct. 3, 2014).

The SEC named as defendants Edwin Yoshihiro Funinaga and MRI International, Inc. The complaint alleged an investment fund fraud which began in 1998, and continued through 2013, in which over $800 million of investor funds were raised. Those investors were largely in Japan.

Investors were told that the firm purchased medical accounts receivables at a discount. Full value would be realized from the insurance companies. Investors were assured that their funds were safe because of the “role of state governments” which provided guarantees through the deposit system. Investor funds were supposedly kept in “special lock box accounts” managed by an escrow agent.

In fact the defendants were operating a Ponzi scheme, according to the complaint. Investors were repaid with funds raised from other investors. The supposed escrow agent claimed the funds were transferred to Mr. Funinaga. In a statement to the Japanese Financial Services Agency, Mr. Funinaga admitted that investor funds were used to repay other investors. Other portions of the investor funds were diverted to the personal use of Mr. Funinaga who invoked his Fifth Amendment rights in the action.

In considering a series of motions the Court initially rejected defendants’ claim that it lacked subject matter jurisdiction based on the application of 28 U.S.C. Section 2462, the five year statute of limitations. The SEC opposed this motion, claiming that the cause of action continued until 2013 and, in any event, the statute does not apply to equitable remedies. Following SEC v. Ring, 991 F. 2d 1486 (9th Cir. 1993) the Court concluded that the statute of limitations does not apply to disgorgement claims. While other jurisdictions have applied Section 2462 to all forms of relief, Ring is controlling here.

Second, the Court rejected a claim that the action should be dismissed under Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010) which held that a cause of action under Exchange Act Section 10(b) does not have any extraterritorial application. While the SEC claimed that Morrison had been overruled for government enforcement actions by Dodd-Frank, the Court did not reach that issue. The Court noted that other jurisdictions have found a “lack of clarity” on this point, citing. SEC v. Chi. Convention Ctr., LLC, 961 F. Supp. 2d 905, 916-17 (N.D. Ill. 2013). Rather, the Court concluded that the securities transactions involved here closed and title was transferred in Nevada. That is sufficient under Morrison the Court found.

Finally, the Court concluded that there was sufficient evidence to grand summary judgment in favor of the SEC. Here the evidence demonstrates that the defendants made material misrepresentations regarding the investments. Mr. Funinaga had sole control over the investment fund and used the cash for his personal benefit. His control over the scheme, use of the funds, misrepresentations regarding the safety of the funds, when coupled with his assertion of the Fifth Amendment are sufficient to establish the key elements of a claim. Defendants’ attempt to refute the evidence of the SEC by claiming that the Court does not have jurisdiction is not sufficient. Accordingly, summary judgment was entered in favor of the Commission. See Lit. Rel. No. 23111 (October 10, 2014).

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