July 19, 2018

Colorado Court of Appeals: Plaintiff Need Only Demonstrate Prima Facie Showing of Personal Jurisdiction to Defeat Rule 12(b) Motion to Dismiss

The Colorado Court of Appeals issued its opinion in Rome v. Reyes on Thursday, June 15, 2017.

Ponzi Scheme—Investments—Insurance—Fraud—Personal Jurisdiction—Long Arm Statute—Colorado Securities Act—C.R.C.P. 12(b)(2)—C.R.C.P. 9(b).

This case arises out of a Ponzi scheme that defrauded at least 255 investors out of $15.25 million dollars. To implement the scheme, Schnorenberg formed KJS Marketing, Inc. in Colorado to obtain funds for investment in insurance and financial products sales companies. Schnorenberg hired Reyes, a California resident, and Kahler, a Wyoming resident, to solicit investor funds on behalf of KJS and its successor company, James Marketing. Rome, the Securities Commissioner for the State of Colorado, brought claims against Schnorenberg, Reyes, and Kahler for securities fraud, offer and sale of unregistered securities, and unlicensed sales representative activity. The Commissioner also sought a constructive trust or equitable lien against Schnorenberg’s mother (among others), who resides in Wyoming, as a “relief defendant,” based on allegations that she received some of the improperly invested funds. Reyes, Kahler, and Schnorenberg’s mother moved to dismiss all claims against them under C.R.C.P. 12(b)(2) for lack of jurisdiction. Reyes and Kahler also sought dismissal of the securities fraud claim on the ground that it failed to meet the C.R.C.P. 9(b) particularity requirements. (Neither Schnorenberg nor KJS is a party to this appeal.) The district court granted all of these motions without conducting an evidentiary hearing. In written orders, the court concluded that it lacked personal jurisdiction over each of the nonresident defendants, and that the Commissioner’s securities fraud claim failed to “link any particular factual allegations to actual false representations” made by Reyes or Kahler.

On appeal, the Commissioner contended that the district court erred in dismissing the claims against Reyes, Kahler, and Schnorenberg’s mother for lack of personal jurisdiction. Here, the Commissioner sufficiently alleged that Reyes and Kahler violated the Colorado Securities Act (CSA) because the transactions at issue pertained to securities that originated in Colorado. Taking the allegations together, the activities of Reyes and Kahler made it reasonably foreseeable that they could be haled into a Colorado court to answer the allegations. Further, the exercise of jurisdiction over them does not offend due process principles. Schnorenberg’s mother received funds from her son that had been transferred from Colorado accounts, and she knew or should have known that the money came from investors in her son’s “Colorado-based investment scheme.” The Commissioner’s action against Schnorenberg’s mother arises from her activities’ consequences in Colorado, and it is reasonable to exercise jurisdiction over her, despite the somewhat limited nature of her direct contacts with Colorado.

The Commissioner also argued that the district court erred in dismissing the claims against Reyes and Kahler under the CSA on the ground that the Commissioner failed to meet his pleading burden under Rule 9(b). The Commissioner’s complaint provided sufficient particularity to give Reyes and Kahler fair notice of the claim for securities fraud and the main facts or incidents upon which it is based.

The judgment was reversed and the case was remanded.

Summary provided courtesy of The Colorado Lawyer.

Colorado Court of Appeals: Innocent Investor May Keep Some Funds Exceeding Principal Investment in Ponzi Scheme

The Colorado Court of Appeals issued its opinion in Lewis v. Taylor on Thursday, February 9, 2017.

Steve Taylor invested $3 million in a hedge fund run by Sean Mueller, a licensed securities broker, and after about a year of investing, he withdrew all his money and received a profit of over $487,000. In 2010, the Colorado Securities Commissioner determined the hedge fund was a Ponzi scheme, and Mueller was convicted of several criminal offenses. C. Randel Lewis was appointed as receiver and tasked with collecting and distributing Mueller’s assets to the creditors and investors he defrauded through the Ponzi scheme. Lewis filed a claim under CUFTA seeking to void the transfer of the over $487,000 in net profits that Taylor received from Mueller’s fund.

In the district court, both Lewis and Taylor moved for summary judgment. Taylor argued that (1) the CUFTA claim was filed outside the statutory time period, and (2) even if the claim was timely, his net profits were not recoverable under CUFTA because he was an innocent investor. Lewis argued that the claim was timely filed and that CUFTA required Taylor to return his net profits. The district court agreed with Lewis on both issues and granted him summary judgment. On appeal, a division of the Colorado Court of Appeals held the district court erred in finding the claim was timely and reversed. The court of appeals did not reach the innocent investor issue. The Colorado Supreme Court ruled that the claim was timely and remanded to the court of appeals for determination of the innocent investor issue.

On remand from the supreme court, Taylor argued that the district court erred by ruling that even though he was an innocent investor in Mueller’s fund, CUFTA nevertheless required him to return all of the payments from the fund in excess of his principal investment. The court noted that CUFTA provides that “[a] transfer . . . is not voidable under section 38-8-105(1)(a) against a person who took in good faith and for a reasonably equivalent value.” The parties agreed that Taylor was an innocent investor who withdrew his profits in good faith, but disagreed about whether he gave reasonably equivalent value for his $487,000 profits.

The court of appeals evaluated the term “reasonably equivalent value,” noting that two lines of opinions had developed among courts in jurisdictions with versions of the Uniform Fraudulent Transfers Act. The court of appeals evaluated the line of cases promoted by Lewis, particularly the leading Ninth Circuit case. The court of appeals found the Ninth Circuit’s reasoning illogical because all transfers “deplete the assets of the scheme operator for the purpose of creating the appearance of a profitable business venture.” The court similarly disagreed with other cases cited by Lewis. The Colorado Court of Appeals instead held that the value an investor gives by investing is not limited to the precise dollar amount of the principal investment, but includes the use of that money for however long it was available for investment or any other use.

The court of appeals evaluated the plain statutory language to determine whether the transfers to Taylor were voidable. The court noted that the General Assembly may wish to revisit the issue and craft a better remedy to more fairly address the circumstances while considering equitable principles embodied in doctrines such as the clean hands doctrine. The court of appeals applied the plain language to determine the district court erred in failing to account for the time value of Taylor’s principal investment in determining whether he gave reasonably equivalent value.

The court of appeals remanded for determination of the fact question of whether Taylor gave “reasonably equivalent value.” The court further directed the district court to determine based on its “reasonably equivalent value” finding whether Lewis’s and Taylor’s summary judgment motions had merit.

Colorado Supreme Court: CUFTA Limitations Period May Be Tolled by Express Agreement

The Colorado Supreme Court issued its opinion in Lewis v. Taylor on Monday, June 20, 2016.

Uniform Fraudulent Transfer Act—Limitation of Actions—Agreements Tolling Limitation.

Under the Colorado Uniform Fraudulent Transfer Act (CUFTA), CRS §§ 38-8-101 to -112, any action to avoid an intentionally fraudulent transfer is extinguished if not brought within four years after the transfer was made or, if later, within one year after the transfer was or could reasonably have been discovered. Here, the Supreme Court held that these time limitations may be tolled by express agreement. Because the parties to this case signed a tolling agreement, and petitioner’s CUFTA claims were properly brought within the tolling period, the Court concluded that his claims were timely filed and were not barred by CUFTA’s limitations period. Therefore, the Court reversed the judgment of the Court of Appeals.

Summary provided courtesy of The Colorado Lawyer.

Tenth Circuit: CEA Allows Nationwide Service of Process for Receivers Pursuing Receivership Property

The Tenth Circuit Court of Appeals issued its opinion in Klein v. Cornelius on Wednesday, May 27, 2015.

R. Wayne Klein was appointed receiver of Winsome Investment Trust, a business entity whose founder, Robert J. Andres, caused it to illegally distribute funds as part of a Ponzi scheme. William Cornelius and his Houston law firm, Cornelius & Salhab, received some of the illegally obtained funds as payment for a New Hampshire criminal defense representation of one of Andres’ friends. Klein, as receiver, brought suit against Cornelius in Utah federal court to void the fraudulent transfer to Cornelius for approximately $90,000 in legal fees. The Utah court granted summary judgment to Klein, and Cornelius appealed, raising several points of error.

The Tenth Circuit first addressed Cornelius’ three jurisdictional challenges. Cornelius first argued the Commodity Exchange Act (CEA) does not authorize a receiver to bring state fraudulent transfer claims in federal court against a third-party recipient of Ponzi scheme funds. The Tenth Circuit found that the CEA authorizes the Commodities Futures Trading Commission (CFTC) to bring civil actions in federal court to enjoin violations of the CEA, and does not prohibit a receiver from pursuing state law claims in federal court. The Tenth Circuit concluded the district court had subject matter jurisdiction to resolve Klein’s Uniform Fraudulent Transfer Act (UFTA) claims on Winsome’s behalf.

Cornelius next challenged standing, arguing Klein lacked standing to bring a UFTA claim because Winsome itself could not bring such a claim. Cornelius reasoned that because Winsome was unincorporated and under Andres’ control, it was an alter ego for Andres and therefore had no authority to sue in its own right. Although he conceded Klein could sue as a receiver for Andres, the Tenth Circuit disagreed with Cornelius’ contention that Winsome could not sue in its own right. The Tenth Circuit found that as a business entity abused as part of a Ponzi scheme, Winsome became a defrauded creditor. The Tenth Circuit found that Winsome was its own entity under Utah law and therefore Klein had standing to pursue the UFTA claim.

Cornelius also argued the district court lacked personal jurisdiction because he did not have sufficient contacts with Utah and because he was not properly served with a complaint. The Tenth Circuit first found the CEA allowed nationwide service of process for receivers pursuing receivership property. The Tenth Circuit next looked at Cornelius’ argument that he had minimum contacts with Utah, and found that in federal question cases where nationwide service of process invokes jurisdiction, the defendant must establish that the chosen forum burdens the defendant with “constitutionally significant inconvenience.” Because Cornelius made no jurisdiction arguments other than the minimum contact argument, the Tenth Circuit found no error in the district court’s determination that it had jurisdiction. Cornelius also argued that in personam jurisdiction was inappropriate and only in rem jurisdiction would apply, but the Tenth Circuit disagreed, finding personal jurisdiction applied under the particular statutory scheme.

Next, Cornelius argued three points of error regarding the district court’s application of UFTA: (1) Texas law applies, (2) the transfer was not fraudulent, and (3) regardless, Klein’s claim is barred by the statute of limitations. The Tenth Circuit addressed each argument in turn. Because the relevant provisions of Texas law use the same language as Utah, the Tenth Circuit found Cornelius’ first argument of no practical significance. Next, the Tenth Circuit found that because Ponzi schemes are inherently insolvent, there is a presumption that transfers from such entities involve an intent to defraud. Cornelius argued that neither he nor the criminal defendant he represented knew of the Ponzi scheme, but the Tenth Circuit noted that nothing in the UFTA requires a transferee to have knowledge of the fraud. The Tenth Circuit also declined to adopt Cornelius’ assertion that he provided “reasonably equivalent value” for his payment, noting that his legal services conferred no benefit on Winsome and the payments to Cornelius only served to diminish its net worth.

Finally, the Tenth Circuit addressed the statute of limitations argument. Claims alleging actual intent to defraud under the UFTA must be brought within four years of when the transfer was made or one year after the transfer could reasonably have been discovered. Klein brought suit against Cornelius in December 2011. The payments to Cornelius for his legal services were made between September 2006 and July 2007, and Cornelius argued the suit was untimely because it was brought well after the four year statute of limitations had expired. However, Klein was appointed as receiver in January 2011, and he could not have reasonably discovered the fraud until his appointment. The Tenth Circuit found the claim was timely since it was brought within one year of Klein’s appointment as receiver.

The district court’s grant of summary judgment to Klein was affirmed.

Colorado Court of Appeals: Statutory Time Period for Filing CUFTA Claim Cannot be Extended by Agreement

The Colorado Court of Appeals issued its opinion in Lewis v. Taylor on Thursday, March 13, 2014.

Colorado Uniform Fraudulent Transfer Act—Tolling of Statute of Limitations.

In 2006, defendant Steve Taylor invested $3 million with Sean Mueller, a licensed securities broker. Taylor withdrew his money in 2007, realizing a profit of more than $487,000. In 2010, the Colorado Securities Commissioner discovered that Mueller’s investment company was a Ponzi scheme. Mueller was convicted of securities fraud, theft, and violation of the Colorado Organized Crime Control Act. The district court appointed Randel Lewis as receiver to collect and distribute Mueller’s assets to creditors, including his defrauded investors.

Lewis sought to recover the profit Taylor made from investing with Mueller pursuant to the Colorado Uniform Fraudulent Transfer Act (CUFTA). Within the statutory time period for asserting a CUFTA claim, Taylor and Lewis entered into a written tolling agreement that purportedly allowed Lewis to bring a CUFTA claim outside the statutory time period. Lewis eventually filed such a claim against Taylor outside the statutory time period but within the time period defined in the tolling agreement.

Both parties moved for summary judgment. Taylor argued that Lewis’s CUFTA claim was untimely because the statutory time period cannot be extended by agreement of the parties. The district court disagreed and granted Lewis summary judgment. The Court of Appeals reversed, holding that the statutory time period for bringing a CUFTA claim cannot be extended by agreement.

CRS § 38-8-110(1) provides that a CUFTA action is “extinguished” unless brought within the applicable time period. The Court noted that parties cannot waive a jurisdictional time limitation, but may agree to toll a non-jurisdictional one. Thus, the question was whether the time limitation imposed here is jurisdictional. A jurisdictional time limitation is one that, if not met, destroys the right of action underlying the suit. A non-jurisdictional time limitation has no effect on the underlying right, and merely defines the period during which an action based on that right may be brought.

CRS § 38-8-110(1) provides that the cause of action is “extinguished” if filed outside the applicable time period. Once the period has run, the right underlying the CUFTA claim is destroyed and there is complete immunity from CUFTA liability. The time limit is jurisdictional and therefore cannot be tolled by agreement of the parties. Accordingly, the judgment was reversed, the order was vacated, and the case was remanded for entry of a grant of Taylor’s motion for summary judgment.

Summary and full case available here.

Tenth Circuit: Defendant’s Instruments in Ponzi Scheme Met Definition of “Securities” Under Family Resemblence Test

The Tenth Circuit Court of Appeals published its opinion in Sec. Exch. Comm’n v. Thompson on Friday, October 4, 2013.

This appeal arose out of a civil-enforcement action brought by the Securities and Exchange Commission (“SEC”) against Defendant-Appellant Ralph W. Thompson, Jr., in connection with an alleged Ponzi scheme Thompson ran through his company, Novus Technologies, L.L.C. (“Novus”). Novus made a total of 138 of its “loans” to around sixty holders.

The district court granted summary judgment in the SEC’s favor on several issues, including the issue of whether the instruments Novus sold investors were “securities,” as that term is defined under the Securities Act of 1933 and the Securities Exchange Act of 1934.

Thompson’s sole claim on appeal was that the district court ignored genuine disputes of material fact on the issue of whether the Novus instruments were securities, and that he was entitled to have a jury make that determination. The Tenth Circuit concluded, under the test articulated by the Supreme Court in Reves v. Ernst & Young, 494 U.S. 56 (1990), that the district court correctly found that the instruments Thompson sold were securities as a matter of law.

In Reves, the United States Court adopted a version of the Second Circuit’s “family resemblance” test, under which a note is presumed to be a “security,” and that presumption may be rebutted only by a showing that the note bears a strong resemblance to one of the categories of instrument identified by the Second Circuit in Exchange Nat’l Bank of Chicago v. Touche Ross & Co., 544 F.2d 1126, 1137 (2d Cir. 1976).

To provide guidance to courts considering whether an instrument “bears a strong resemblance” to the instruments on the list, the Court prescribed application of the following four factors: (1) the motivations that would prompt a reasonable seller and buyer to enter into the transaction; (2) the ‘plan of distribution’ of the instrument, with an eye on whether it is an instrument in which there is common trading for speculation or investment; (3) the reasonable expectations of the investing public; and (4) whether some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument, thereby rendering application of the Securities Acts unnecessary. The factors are to be considered as a whole. The court held that, in the context of a civil case where the “security” status of a “note” is disputed, the ultimate determination of whether the note is a security is one of law.

After applying the four factors, the court held that the instruments Thompson sold were securities.  Thompson could not rebut the presumption that the Novus Instruments were securities.


Tenth Circuit: Money from Ponzi Scheme Must Be Returned to Victims before Discovery by Victim or Government in order to Earn Sentencing Credits

The Tenth Circuit Court of Appeals issued its opinion in United States v. Merriman on Wednesday, July 27, 2011.

The Tenth Circuit affirmed the district court’s sentence. Petitioner, in early 2009, “approached an otherwise unsuspecting U.S. Attorney’s Office and disclosed he had engaged in a longrunning Ponzi scheme that defrauded investors of over twenty-million dollars. At the time of his disclosure, [Petitioner] offered several million dollars of assets to the government so that it could liquidate the assets and eventually remit the proceeds to [his] victims. He cooperated with authorities throughout the proceedings and ultimately pled guilty to one count each of mail fraud and forfeiture.” Petitioner appeals two of the district court’s sentencing decisions: first, he argues the court should have counted the assets he initially turned over to the government as a credit against his victims’ measured aggregate loss, resulting in a two-point decrease, and second, he argues the court erred by finding he occupied a “position of trust” for a two-point enhancement.

The Application Notes of the Sentencing Guidelines “unambiguously require two conditions to be met before any credits are earned: the money must be returned to the victim, and this return must occur before the offense was detected or discovered by a victim or the government. . . . Here, the money was not returned by [Petitioner]; rather, it was returned by the government after a later liquidation of [Petitioner]’s forfeited assets. Even if [the Court] assume[d] the government ‘acted jointly’ with[Petitioner] to return his victims’ money, no money could have been returned until after [he] turned himself in and disclosed his crimes to the U.S. Attorney.” The Guidelines do not provide an exception “for crimes that are detected because the defendant confesses his crime to the government. Although the Guidelines permit a reduction for restoring victims’ losses prior to the onset of any government involvement, they do not contemplate similar treatment when payments are not returned to the victims until after the crime has been discovered by the government and the defendant has, for example, additional motivation to use his ill-gotten gains as leverage in a plea negotiation or other self-serving purpose.”

As to whether Petitioner occupied a position of trust, the Court found that “the parties do not dispute that [Petitioner] retained and exercised authority to make investments on behalf of his investors with complete discretion to invest however he desired. Investors did not scrutinize his financial accounting or investing decisions, nor was he obligated to disclose such matters. [The Court saw] no clear error in the district court’s conclusion that [Petitioner]’s authorized and exercised discretion and the resultant lack of transparency between [him] and his investors significantly contributed to his ability to avoid detection.” As such, even if his fraud was perpetuated in part by circumstances other than his position of trust, Petitioner’s complete control over his investors’ money significantly contributed to his fraud by “making the detection of the offense . . . more difficult.”