Opinion
Case No. 06-4107-RDR.
November 30, 2006
ORDER
This is a civil securities fraud enforcement action brought by the Securities and Exchange Commission (SEC). The SEC brings this action against defendants Seaforth Meridian, Ltd.; Seaforth Meridian Advisors, LLC; Seaforth Meridian Management, LLC; Alain A. Assemi; Timothy J. Clyman; John D. Friedrich; Scott F. Klion a/k/a James S. Tucker and David Tanner; and relief defendants Henri B. Gonthier and Frederick L. Winkler. The SEC alleges violations of section 17(a) of the Securities Act, 15 U.S.C. § 77q(a) [First Claim], and section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5[Second Claim]. The complaint alleges that the defendant individuals created a hedge fund, defendant Seaforth Meridian Ltd., to defraud at least 70 investors of approximately $18 million through the fraudulent offer and sale of securities called "limited partnership interests." This matter is presently before the court upon thepro se motions to dismiss for failure to state a claim upon which relief can be granted pursuant to Fed.R.Civ.P. 12(b)(6) of defendants Assemi, Clyman and Friedrich.
In their motions, the defendants essentially contend that the facts, as demonstrated by approximately 1500 pages of exhibits, show that plaintiff's claims lack merit. The defendants state in each motion: "The complaint is inadequately plead, wholly without merit, and fails to state a cause of action as to [each defendant's] underlying fraud." The defendants suggest that the "misleading." In a recently filed reply, defendant Assemi raises a variety of matters, including charges of fraud and misconduct by Seaforth Meridian's former attorney, the receiver, and attorneys for the SEC and the receiver.
In considering a motion under Rule 12(b)(6), the court cannot consider materials outside the complaint unless the motion is converted into a motion for summary judgment. Fed.R.Civ.P. 12(b);Miller v. Glanz, 948 F.2d 1562, 1565 (10th Cir. 1991). The court does not intend to convert the instant motions to ones for summary judgment. See Lybrook v. Members of Farmington Mun. Schools Bd. of Educ., 232 F.3d 1334, 1341-42 (10th Cir. 2000) (court has broad discretion in determining whether to accept or reject documents attached to motion to dismiss). Accordingly, the court shall not consider the documents filed by the defendants in support of their motions to dismiss.
The court will dismiss a cause of action for failure to state a claim only when it appears beyond a doubt that the plaintiff can prove no set of facts in support of the theory of recovery that would entitle him or her to relief, Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Maher v. Durango Metal, Inc., 144 F.3d 1302, 1344 (10th Cir. 1998), or when an issue of law is dispositive.Neitzke v. Williams, 490 U.S. 319, 326 (1989). On a Rule 12(b)(6) motion, the court judges the sufficiency of the complaint accepting as true the well-pleaded factual allegations and drawing all inference in favor of the plaintiff. Shaw v. Valdez, 819 F.2d 965, 968 (10th Cir. 1987). The issue in resolving a motion such as this is not whether the plaintiff will ultimately prevail, but whether he or she is entitled to offer evidence to support the claims. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974),overruled on other grounds, Davis v. Scherer, 468 U.S. 183 (1984). Dismissal is a harsh remedy to be used cautiously so as to promote the liberal rules of pleading while protecting the interest of justice. Mounkes v. Conklin, 922 F.Supp. 1501, 1506 (D.Kan. 1996).
Section 10(b) of the Exchange Act ( 15 U.S.C. § 78j(b)) and § 17(a) of the Securities Act ( 15 U.S.C. § 77q(a)) are general fraud provisions. Together with Rule 10b-5 ( 17 C.F.R. § 240.10b-5), they make it unlawful for a person or entity, in connection with the purchase or sale of a security, to employ any device, scheme, or artifice to defraud, to make an untrue statement of material fact, or to omit a material fact that is necessary to make the statement made, in the light of the circumstances under which it was made, not misleading. Thus, to state a claim under section 10(b) and Rule 10b-5, the SEC must allege that defendants: (1) used a fraudulent device, made a material misrepresentation or omission, or committed an act that operated as a fraud or deceit; (2) in connection with the purchase or sale of securities; and (3) acting with scienter. See SEC v. Monarch Funding Corp., 192 F.3d 295, 308 (2nd Cir. 1999). With respect to section 17(a), essentially the same elements must be established as for section 10(b) and Rule 10b-5 liability. SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1467 (2nd Cir. 1996).
In the complaint, the SEC alleges that in or about May 2004, the individual defendants retained an attorney to assist them in the formation of the three defendant Seaforth entities and in the preparation of a Private Placement Memorandum (PPM), the primary offering document of Seaforth Meridian. The PPM contemplated that Seaforth Meridian would utilize the investment experience and expertise of the individual defendants to invest funds contributed by investors. The SEC alleges that, while raising investor funds, the individual defendants made repeated misrepresentations and omissions and acted contrary to their own representations in the PPM including: (1) investing in two suspect offshore funds with no verifiable history of paying monthly returns or generating growth of capital or production of income while the PPM states that Seaforth Meridian employs a strategy intended to create a monthly cash revenue stream and that the primary investment objective is "growth of capital and production of income;" (2) the offshore funds had no record of purchasing fixed income bonds or legitimate recognized security even though the PPM claimed that Seaforth Meridian's business was "buying and selling `A' rated or better fixed-income bonds as well as trading securities of medium to large capitalized companies, including stocks, warrants, rights and options of U.S. and non-U.S. entities;" (3) the offshore funds never demonstrated actual income or revenue from their unspecified investment activity so payments were not made as set forth in the PPM with 55% to Seaforth Management and 45% to the investors; (4) no meaningful due diligence was conducted on the offshore funds contrary to representations in the PPM that the individual defendants would undertake due diligence regarding the prospective investments; and (5) claims of the experience and expertise of the individual defendant omitted important information. The SEC further alleges that (1) throughout late 2005, the individual defendant sent investors false and misleading monthly account statements and newsletters showing profits and emphasizing the safety of the investors' principal, and some investors received nominal payments represented as profits but the individual defendants had no financial basis for determining the assets or profits of Seaforth Meridian or the individual investors; and (2) Seaforth Meridian, Assemi, Clyman and Friedrich presented contradictory, false and misleading information concerning monies invested in the offshore funds to the SEC in response to a turnover motion filed by the receiverSEC v. Tanner d/b/a Capital Enhancement Club, No. 05-4057-RDR. Finally, the SEC alleges that (1) the individual defendants cannot or have refused to explain the disappearance of $13.5 million sent to the offshore funds; and (2) the individual defendants have received at least $600,000.00 in undisclosed kickbacks.
A review of the complaint here clearly reveals that plaintiff has adequately set forth sufficient claims and facts to overcome a motion to dismiss. The defendants have not specifically addressed any shortcomings in the complaint. Rather, the defendants have suggested that certain facts indicate that they did not engage in a fraudulent scheme. These arguments will have to be asserted at a later time, such as at trial, or as part of a summary judgment motion. For the present, the court is confident that plaintiff's complaint properly alleges violations of the anti-fraud provisions of the federal securities laws. Accordingly, defendants' motions to dismiss must be denied.
IT IS THEREFORE ORDERED that defendant Friedrich's motion to dismiss (Doc. # 30) be hereby denied.
IT IS FURTHER ORDERED that defendant Clyman's motion to dismiss (Doc. # 36) be hereby denied.
IT IS FURTHER ORDERED that defendant Assemi's motion to dismiss (Doc. # 39) be hereby denied.
IT IS FURTHER ORDERED that defendant Friedrich's motion to dismiss (Doc. # 43) be hereby denied.