Securities And Exchange Commission v. Conrad et al

MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM with Brief In Support

N.D. Ga.September 26, 2016

WCSR 37152281v1 IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA ATLANTA DIVISION SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. THOMAS D. CONRAD, JR., STUART P. CONRAD, FINANCIAL MANAGEMENT CORPORATION, and FINANCIAL MANAGEMENT CORPORATION, S.R.L., Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) Civil Action File No. 1:16-cv-02572-LMM DEFENDANTS THOMAS D. CONRAD, JR., FINANCIAL MANAGEMENT CORPORATION, AND FINANCIAL MANAGEMENT CORPORATION, S.R.L.’S MOTION TO DISMISS COME NOW Defendants Thomas D. Conrad, Jr., Financial Management Corporation, and Financial Management Corporation, S.R.L. (collectively the “Moving Defendants”), and pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, move to dismiss Plaintiff’s Complaint for failure to state a claim. Plaintiff’s poorly drafted shotgun pleading fails to plead sufficient factual allegations to support each element of Plaintiff’s fraud claims. The Moving Case 1:16-cv-02572-LMM Document 8 Filed 09/26/16 Page 1 of 3 - 2 - WCSR 37152281v1 Defendants are contemporaneously filing a memorandum of law in support of this Motion. Respectfully submitted, this 26th day of September, 2016. 271 17th Street, N.W. Suite 2400 Atlanta, GA 30363-1017 (404) 872-7000 Phone (404) 888-7490 Fax jdespriet@wcsr.com jconnelly@wcsr.com jadkins@wcsr.com WOMBLE CARLYLE SANDRIDGE & RICE, LLP By: /s/ John G. Despriet John G. Despriet State Bar No. 219347 James E. Connelly State Bar No. 181808 Julie E. Adkins State Bar No. 871742 Attorneys for Defendants Case 1:16-cv-02572-LMM Document 8 Filed 09/26/16 Page 2 of 3 WCSR 37152281v1 CERTIFICATE OF SERVICE The undersigned hereby certifies a true and correct copy of the within and foregoing DEFENDANTS THOMAS D. CONRAD, JR., FINANCIAL MANAGEMENT CORPORATION, AND FINANCIAL MANAGEMENT CORPORATION, S.R.L.’S MOTION TO DISMISS was electronically filed with the Clerk of Court using the CM/ECF system which will automatically send email notification of such filing to the following attorneys of record: M. Graham Loomis, Esq. Pat Huddleston, Esq. U.S. Securities and Exchange Commission 950 East Paces Ferry Road, NE Suite 900 Atlanta, GA 30326-1234 This 26th day of September, 2016. /s/ John G. Despriet John G. Despriet State Bar No. 219347 WOMBLE CARLYLE SANDRIDGE & RICE, LLP 271 17th Street, N.W. Suite 2400 Atlanta, GA 30363-1017 (404) 872-7000 Phone (404) 888-7490 Fax jdespriet@wcsr.com Case 1:16-cv-02572-LMM Document 8 Filed 09/26/16 Page 3 of 3 WCSR 37152296v3 IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA ATLANTA DIVISION SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. THOMAS D. CONRAD, JR., STUART P. CONRAD, FINANCIAL MANAGEMENT CORPORATION, and FINANCIAL MANAGEMENT CORPORATION, S.R.L., Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) Civil Action File No. 1:16-cv-02572-LMM MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS THOMAS D. CONRAD, JR., FINANCIAL MANAGEMENT CORPORATION, AND FINANCIAL MANAGEMENT CORPORATION, S.R.L.’S MOTION TO DISMISS Plaintiff’s Complaint is a prime example of a shotgun pleading that fails to tie particular factual allegations to each element of the asserted claims. The vast majority of Plaintiff’s Complaint consists of formulaic recitations of elements and imprecise and disjointed allegations that fail to satisfy the pleading standards of a fraud claim. The Complaint’s few detailed allegations either fall outside the five year statute of limitations, have no connection to the offer, purchase, or sale of a security, were not statements or omissions made by the Moving Defendants, or are Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 1 of 20 - 2 - WCSR 37152296v3 not prohibited conduct. Sometimes when a plaintiff throws everything at the wall something sticks. This is not that case. Plaintiff’s Complaint should be dismissed. I. PLAINTIFF’S ALLEGATIONS AND CLAIMS This case concerns a fund of funds and the investment advisers to the those funds. According to the Complaint, from 1994 to the present Financial Management Corporation and its successor Financial Management Corporation, SRL (collectively, “FMC”), have been the general partner and investment adviser to a family of funds, including the master fund, World Opportunity Master Fund, L.P. (“WOMF”), and its feeder funds, World Opportunity Fund, L.P. (“WOF”), World Opportunity Fund (BVI), Ltd. (“WOF BVI”), and World Fund II, L.P. (“WFII”) (collectively, the “Funds”). [Compl. ¶¶ 1, 11-12, 34-35]. Plaintiff alleges that Dr. Thomas D. Conrad, Jr. (“Dr. Conrad”) formed and at all times has controlled and operated FMC, and that Dr. Conrad made all investment decisions for the Funds through FMC. [Id. ¶¶ 1, 9, 11-13, 20-24, 34-36]. Plaintiff’s criticisms are organized into two categories: (1) alleged misstatements and omissions to the Funds’ investors and prospective investors; and (2) alleged preferential redemption practices. The Complaint alleges that Dr. Conrad did not disclose to the Funds’ investors and prospective investors that there was a potential conflict of interest between FMC’s role as general partner of the Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 2 of 20 - 3 - WCSR 37152296v3 Funds and Dr. Conrad’s personal pecuniary interests [id. 44-48], or that Dr. Conrad appointed himself in January 2013 to serve as a sub-manager for a portion of the WOMF assets, which earned him a 1% annual fee [id. 41-43]. Plaintiff also complains that Dr. Conrad did not disclose: his 1970’s disciplinary history [id. 49- 58]; two small loans that Dr. Conrad made to family members using fund assets, both of which were fully repaid and one of which was repaid within two months [id. ¶ 64-66]; or that Dr. Conrad used investor funds to purchase assets that were titled in his own name, which made him custodian of those WOMF assets [id. ¶ 62, 67-70]. In addition, the Complaint alleges that WFII Investor Fact Sheets were misleading because they contained information regarding the historical performance history of certain investments before such investments were actually acquired by WFII and because they misidentified the Funds’ accountant as an auditor, when the accountant had not conducted a full audit (and instead had prepared only an accountant’s compilation report). [Id. ¶¶ 59-60]. The Complaint does not attach any of the fund offering and marketing materials that are purportedly misleading. Plaintiff’s preferential redemption allegations pit a 2008 notification to investors that FMC was temporarily suspending “‘all withdrawals, redemptions and termination of capital accounts in the Fund’” and could not “‘disburse any Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 3 of 20 - 4 - WCSR 37152296v3 funds to partners unless all are treated equally,’”1 against redemptions made between 2010 and 2014 to FMC, Dr. Conrad and his family members, and three other investors. [Id. ¶¶ 71, 74, 76, 78, 80-84, 94-97]. While the Complaint alleges that by mid-2012 approximately 29 investors were seeking to redeem some or all of their investment in the Funds [id. ¶ 73], there are no specific allegations of redemption requests that were made and denied at the same time that the purported preferential redemptions were made. Plaintiff asserts six claims against the Moving Defendants based on the above allegations: Counts I and II – violation of Sections 17(a)(1), (a)(2), and (a)(3) of the Securities Act of 1933; Count IV – violation of Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder; Counts VI, VII, and IX – violation of Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Paragraphs 1-97 of the Complaint set out Plaintiff’s factual allegations. The rest of the Complaint contains the counts, which do not contain separate factual allegations but instead incorporate by reference the entirety of Paragraphs 1-97. 1 The Complaint quotes but does not attach the referenced communications from 2008. Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 4 of 20 - 5 - WCSR 37152296v3 II. RELEVANT PLEADING STANDARDS “[T]o survive a motion to dismiss, a complaint must now contain sufficient factual matter, accepted as true, to ‘state a claim for relief that is plausible on its face.’” Am. Dental Ass’n v. Cigna Corp., 605 F.3d 1283, 1289 (11th Cir. 2010) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “The plausibility standard is met only where the facts alleged enable the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Simpson v. Sanderson Farms, Inc., 744 F.3d 702, 708 (11th Cir. 2014). “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). To the extent allegations of a misleading statement are not based on personal knowledge, Plaintiff must state with particularity all facts on which the belief is formed. See Damian v. Montgomery County Bankshares, Inc., 981 F. Supp. 2d 1368, 1376 (N.D. Ga. 2013). In addition, Fed. R. Civ. P. Rule 9(b) requires that any fraud claims, and any claims based on the same set of facts that underlies the fraud claims, be pled with particularity. See Fed. R. Civ. P. 9(b); Wagner v. First Horizon Pharm. Corp., 464 F.3d 1273, 1277-78 (11th Cir. 2006). To satisfy Rule 9(b), the Complaint must set forth: Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 5 of 20 - 6 - WCSR 37152296v3 (1) precisely what statements were made in what documents or oral representations or what omissions were made, and (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) same, and (3) the content of such statements and the manner in which they misled the plaintiff, and (4) what the defendants obtained as a consequence of the fraud. SEC v. Torchia, 2016 WL 1650779, at *13 (N.D. Ga. Apr. 25, 2016) (quoting Dixon v. Allergan USA, Inc., 2016 WL 946553, at *2 (11th Cir. Mar. 14, 2015)) (internal citations omitted). Plaintiff’s Complaint fails to adequately plead a claim for relief under these well-established pleading standards. III. ARGUMENT AND CITATION OF AUTHORITY Plaintiff’s shotgun pleading pays little attention to the important details of a fraud claim—i.e., names, dates, places, and what was said by whom, to whom and why—and pays zero attention to corporate formalities. Plaintiff’s Complaint should be dismissed in its entirety because: (1) Plaintiff fails to plead fraud with the particularity required by Fed. R. Civ. P. 9(b), and Plaintiff’s formulaic recitation of elements is insufficient under Twombly and Iqbal; (2) Plaintiff fails to plead how the Defendants’ alleged misstatements and omissions were made in connection with the offer, purchase, or sale of a security, a required element for any Section10(b) or Section 17(a) claim; (3) the Moving Defendants were not the “maker” of the alleged misstatements and omissions; (4) many of Plaintiff’s Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 6 of 20 - 7 - WCSR 37152296v3 allegations are barred by the five year statute of limitations; and (5) the Moving Defendants are not investment advisers to the Funds’ investors. A. Plaintiff’s Complaint Fails to State a Claim for Violation of the Securities Act of 1933 and the Securities Exchange Act of 1934 To begin, Plaintiff’s Complaint is the definition of an impermissible “shotgun” pleading. Each count of Plaintiff’s Complaint incorporates all 97 paragraphs of alleged facts, without stating which alleged facts purportedly support which claim. This is particularly problematic when the Complaint is full of alleged statements and omissions that fall outside the five year statute of limitations, that do not relate to the offer, purchase, or sale of a security, and that were not made by the Moving Defendants and were not made to the Moving Defendants’ clients. The shortcomings of Plaintiff’s shotgun pleading are compounded by the Complaint’s repeated failure to specify names of entities and individuals and use of undefined terms such as “fund” or “funds.” To state a viable claim under Section 10(b) of the Securities Exchange Act and Rule 10b–5 thereunder, Plaintiff must allege “(1) material misrepresentations or materially misleading omissions, (2) in connection with the purchase or sale of securities, (3) made with scienter.” SEC v. Merch. Capital, LLC, 483 F.3d 747, 766 (11th Cir. 2007) (citing Aaron v. SEC, 446 U.S. 680, 695 (1980)). Plaintiff’s Section 17(a)(1), (a)(2), and (a)(3) claims require “‘[e]ssentially the same Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 7 of 20 - 8 - WCSR 37152296v3 elements’ in connection with the offer or sale of a security, except that proof of scienter is not required . . . under Section 17(a)(2) or (3).” Torchia, 2016 WL 1650779, at *12. 28 U.S.C. § 2462 requires that “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued.” 1. The Alleged Omissions Were Not Made in Connection with an Offer, Purchase, or Sale of a Security. Plaintiff complains that Dr. Conrad used investor funds to make loans to family members (which loans were repaid) and to purchase assets that were held in his name (as custodian of those WOMF assets). As an initial matter, Plaintiff fails to show how the Funds’ investors were harmed by fully repaid loans or by Dr. Conrad serving as the custodian of WOMF’s investments in metal and land. Moreover, Plaintiff makes no effort to tie these family loans and asset purchase allegations to any specific offer, purchase or sale of a security. This would be difficult to do given that the Complaint fails to even allege the dates the assets were purchased, alleging only that such purchases occurred “during the relevant time period,” which was never defined. Nor does the Complaint allege what offering documents were given to which prospective investors in connection with the offer, purchase, or sale of a security between the making of the loans and Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 8 of 20 - 9 - WCSR 37152296v3 repayment of those loans, which in one case was only two months later. Alleging an omission is not enough by itself to state a § 10(b) or § 17(a) claim, particularly where Plaintiff is characterizing as an omission what really amounts to at most corporate mismanagement. It is well-established that “§ 10(b) does not regulate ‘transactions which constitute no more than internal corporate mismanagement.’” In re: Ebix, Inc. Sec. Litig., 898 F. Supp. 2d 1325, 1340 (11th Cir. 2012) (quoting Santa Fe Indus. v. Green, 430 U.S. 462, 478 (1977)); SEC v. Yun, 327 F.3d 1264, 1278 (11th Cir. 2003) (“‘§ 10(b) is not an all-purpose breach of fiduciary duty ban’”) (quoting United States v. O’Hagan, 521 U.S. 642, 652 (1997)). Instead, the transaction complained of must involve the offer, purchase, or sale of a security. See SEC v. Globe, 682 F.3d 934, 945-46 (11th Cir. 2012) (holding that the clearing broker’s plan to an make improper withdrawal from a reserve account did not violate § 10(b) because it did not involve purchase or sale of a security); SEC v. Mannion, 789 F. Supp. 2d 1321, 1331-32 (N.D. Ga. 2011) (holding allegations that defendants provided inflated valuations to current investors did not state a § 10(b) claim because the misstatements were not provided in connection with the purchase or sale of a security); see also 15 U.S.C. § 77q(a) (requiring fraud to be connected to the offer and sale of securities). Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 9 of 20 - 10 - WCSR 37152296v3 Similarly unavailing are Plaintiff’s allegations that Dr. Conrad appointed himself as sub-manager for a portion of WOMF’s assets and paid himself an undisclosed annual fee of 1% in connection with this position. Plaintiff makes no effort to tie this alleged undisclosed fee to any actual offer, purchase, or sale of a security and fails to plead how this omission was materially misleading. Plaintiff does not attach or even identify any offering document that was distributed to prospective investors subsequent to Dr. Conrad becoming a sub-manager in 2013, the date(s) of such distribution and who the prospective purchasers were, and what that particular offering document said regarding sub-manager fees. Nor does the Complaint plead the fees charged by the sub-managers who handled the other two- thirds of WOMF’s assets, which are typically twice the percentage that Dr. Conrad charged. Alleging generally that “the undisclosed fee made the statements in the funds’ offering memoranda and marketing materials regarding adviser compensation materially false and misleading” is not sufficient under Twombly and Iqbal, and certainly fails under Rule 9(b). Without alleging the who, what, when, and why and the why being “in connection with an offer, purchase, or sale of a security,” Plaintiff’s undisclosed fee allegations fail to state a § 10(b) or § 17(a) claim. Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 10 of 20 - 11 - WCSR 37152296v3 The alleged omission of Dr. Conrad’s disciplinary history likewise fails to state a fraud claim. Plaintiff’s only attempt to articulate the “in connection with” requirement were the allegations that (a) on some unknown day “in 2013” an unidentified prospective investor asked Dr. Conrad whether he had “any skeletons in his closet” and in response Conrad allegedly denied having any skeletons and did not disclose his disciplinary history to the prospective investor; and (b) that the prospective investor eventually invested in two of the funds at some unidentified point in time.2 [Compl. ¶¶ 55-56]. But even these allegations fail to plead the day, or even the month, when this alleged conversation took place, or where it took place and in what context. More importantly, a representation about “skeletons in the closet” is not a statement of “fact” that could support a fraud claim. See Amalgamated Bank v. Coca-Cola Co., 2006 WL 2818973, at *3 (N.D. Ga. Sept. 29, 2006) (“[T]he alleged fraud must be based upon a statement capable of ‘empirical verification’ and not a statement of ‘opinion or expectation.’”) (quoting Next Century Commc’ns Corp. v. Ellis, 318 F.3d 1023, 1028 (11th Cir. 2003)); Botes v. Weintraub, 2010 WL 966864, at *8 (N.D. Ga. Mar. 12, 2010) (“[A]ctions for fraud or misrepresentation must be based on objective statements of fact, not 2 Significantly, none of the Complaint’s other alleged misrepresentations or omissions are connected to this single purchase. Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 11 of 20 - 12 - WCSR 37152296v3 expressions of personal opinion. A statement of fact is one that (1) admits of being adjudged true or false in a way that (2) admits of empirical verification.”) (internal quotations omitted). While an inquiry about skeletons is colorful, it is ambiguous and meaningless, especially when the purported skeleton was laid to rest in 1971. Even a cursory examination of the Complaint exposes the absence of sufficiently detailed factual allegations that, if true, would amount to a material misstatement or omission that was made in connection with the offer, purchase, or sale of a security. Without such factual allegations, Plaintiff’s § 10(b) and § 17(a) claims fail as a matter of law. 2. The Moving Defendants Are Not the Makers of Alleged Misrepresentations in the Funds’ Offering Documents. In addition, neither Dr. Conrad nor FMC are the “makers” of the statements in the Funds’ various offering documents and therefore cannot be liable for alleged misstatements and omissions in those offering documents. “For purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement , including its content and whether and how to communicate it. . . . One who prepares or publishes as statement on behalf of another is not its maker.” Janus Capital Croup, Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011). In Janus, the U.S. Supreme Court held that the investment adviser to a family of Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 12 of 20 - 13 - WCSR 37152296v3 mutual funds did not “make” any of the statements in the funds’ prospectuses. The funds themselves made those statements. Id. 146-47. FMC is alleged to be the Funds’ investment adviser and that through FMC Dr. Conrad controlled the investment decisions of the Funds, but FMC and the Funds are alleged to be separate legal entities. Most of Plaintiff’s alleged omissions point to the Funds’ offering documents.3 [See, e.g., Compl. ¶¶ 43, 49- 52, 70]. Under Janus, the Moving Defendants are not the maker of the statements in those documents, and it is insufficient to allege that “Conrad, FMC, and FMC Uruguay prepared and distributed these marketing materials to investors and prospective investors.” [Id. ¶ 53]. Thus, to the extent Plaintiff alleges that any of the purported omissions made the Funds’ offering documents materially misleading, these allegations do not state a claim against the Moving Defendants and should be dismissed. That leaves the allegation that “FMC and FMC Uruguay disclosed to investors that they charged each fund an annual management fee ranging between 1.15 percent and 2.18 percent of the fund’s total assets” [id. ¶ 39], and “[o]n information and belief, in face-to-face and telephonic pitches to prospective 3 Any claim based on offering documents and marketing materials that are dated June 2011 or earlier is time-barred under the five year statute of limitations. See 28 U.S.C. § 2462. Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 13 of 20 - 14 - WCSR 37152296v3 investors, Conrad, FMC, and FMC Uruguay described Conrad’s experience” without disclosing his disciplinary history [id. ¶ 54]. These allegations, however, fall far short of Rule 9(b). The Complaint does not allege the date of these alleged disclosures or the names of the individuals who received the disclosures. Nor does the Complaint explain how FMC’s alleged fee disclosure was false and misleading at the time it was made, whenever that was. Moreover, an “on information and belief” allegation requires Plaintiff to state with particularity all facts on which the belief is formed, which Plaintiff failed to do. See Damian, 981 F. Supp. 2d at 1376. Any § 10(b) or § 17(a) claim based on these allegations should be dismissed. 3. The Alleged Preferential Redemption Practices Do Not Support a § 10(b) or § 17(a) Claim. Plaintiff complains that the Funds engaged in preferential redemptions by making payments to FMC, Dr. Conrad and his family members, and at least two non-family member investors between 2010 and 2013 despite informing the Funds’ investors in November and December 2008 that FMC was temporarily suspending all withdrawals and redemptions. Plaintiff’s shotgun pleading approach makes it impossible to know whether Plaintiff even alleges these preferential redemption practices in support of its § 10(b) and § 17(a) claims. To the extent it does, these allegations do not state a plausible fraud claim. Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 14 of 20 - 15 - WCSR 37152296v3 First, there is no false statement or omission, unless Plaintiff is alleging (without actually stating this in the Complaint) that the November and December 2008 statements “temporarily suspending ‘all withdrawals, redemptions and termination of capital accounts’” [id. ¶ 71] were false in light of redemption payments that were made later beginning in 2010. Even had the Complaint made this assertion, it is not plausible to infer that the 2008 temporary freeze was still in place in 2010. Nor does Plaintiff make any effort to tie the statements made in 2008 to any offer, purchase, or sale of a security to other investors. Second, there are no allegations of any specific redemption requests that were made and rejected at the same time that Dr. Conrad and his family members received redemption payments. Even the Complaint references non-family members who received redemptions in 2012 and 2013, and there is no allegation that these were the only non-family member redemptions between 2010 and 2014. Without more, the alleged preferential redemption practices do not state a § 10(b) or § 17(a) fraud claim. B. Plaintiff’s Complaint Fails to State a Claim for Violation of the Investment Advisers Act Plaintiff also fails to state a claim against the Moving Defendants for violation of Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940. Sections 206(1) and 206(2) make it unlawful for an investment adviser to Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 15 of 20 - 16 - WCSR 37152296v3 employ any device, scheme, or artifice to defraud, or to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon, “any client or prospective client.” In the context of a hedge fund or fund of funds, the investment adviser’s “client” is the hedge fund itself, not the fund’s investors. See Mannion, 789 F. Supp. at 1321, 1337-38 (citing Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006) (holding client of investment adviser to hedge fund was the hedge fund itself for purposes of Investment Advisers Act)) (“Based on the reasoning of Goldstein, the Court concludes that to support a claim under Section 206(1), the SEC must plausibly allege that Defendants employed a ‘device, scheme, or artifice to defraud’ the Fund itself, rather than the Fund’s investors.”), mot. for reconsid. Denied, SEC v. Mannion, 2013 WL 5999657, at *3-4 (N.D. Ga. Nov. 12, 2013); SEC v. Lauer, 478 Fed. App’x 550 (11th Cir. 2012) (confirming that hedge fund investors are not typically the hedge fund adviser’s clients for purposes of the Investment Advisers Act). Here, the Moving Defendants are alleged to be “unregistered investment adviser[s] for the hedge funds.” [Compl. ¶ 1, 11, 34]. They are not alleged to be investment advisers to the individual investors. Thus, for purposes of §§ 206(1) and 206(2), FMC and Dr. Conrad’s “clients” are the Funds themselves, not the Funds’ underlying investors. Yet the Complaint pleads no allegations of any fraud Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 16 of 20 - 17 - WCSR 37152296v3 schemed or operated on the Funds themselves. Plaintiff alleges only that the Moving Defendants failed to inform non-client investors and prospective investors of various matters [see, e.g., id. ¶¶ 41, 48, 53, 55, 64], and any alleged preferential redemption practices certainly posed no harm to the Funds themselves. In fact, any restrictions on redemptions would most likely have been invoked to maintain either the liquidity or profitability of the Funds. Plaintiff’s claims under §§ 206(1) and 206(2) of the Investment Advisers Act should be dismissed. Moreover, none of the Investment Advisers Act claims are pled with the particularity required under Rule 9(b). Conclusory allegations of fraud are insufficient, particularly where there are no allegations that investors lost any money or were harmed in some other way. For example, according to Count IX, a finding of liability under § 206(4) requires either (1) untrue statements or omissions of materials facts, or (2) a scheme to defraud, i.e., acts, practices and courses of business that were fraudulent, deceptive, and manipulative. There is no reading of the Complaint that supports a scheme. There is no allegation of an overarching plan to defraud anyone. Nor are there alleged affirmative misrepresentations (with the possible exception of Dr. Conrad’s skeleton denial, which is not a misrepresentation of fact). The Complaint instead alleges only omissions. [See Compl. at pp. 10 (failure to disclose commission), 12 (failure to Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 17 of 20 - 18 - WCSR 37152296v3 disclose disciplinary history), 15 (failure to disclose transfers to family members), 16 (failure to disclose titling assets in personal name)]. Yet, in every instance the use and effect of the omission and the parties impacted are absent. In some instances no specifics are provided at all. In sum, Plaintiff fails to plead the who, what, when, where, and why required to state a § 206(4) claim for fraud. The same is true for Plaintiff’s other § 206 claims. Plaintiff labels all three of the § 206 claims as fraud claims, and in any event, because Plaintiff relies on the exact same set of factual allegations to support its § 206 claims as it does to support its Securities Act and Securities Exchange Act claims, all of Plaintiff’s claims are subject to, and fail under, Rule 9(b)’s heightened pleading requirements. See Wagner, 464 F.3d at 1277-78. Because the Fund’s investors are not the Moving Defendant’s clients and because the Complaint does not sufficiently plead fraud, Plaintiff’s Investment Adviser Claims should be dismissed. IV. CONCLUSION For the reasons stated above, the Moving Defendants respectfully request that the Court dismiss Plaintiff’s Complaint for failure to state a claim. Respectfully submitted, this 26th day of September, 2016. WOMBLE CARLYLE SANDRIDGE & RICE, LLP By: /s/ John G. Despriet John G. Despriet Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 18 of 20 - 19 - WCSR 37152296v3 271 17th Street, N.W. Suite 2400 Atlanta, GA 30363-1017 (404) 872-7000 Phone (404) 888-7490 Fax jdespriet@wcsr.com jconnelly@wcsr.com State Bar No. 219347 James E. Connelly State Bar No. 181808 Julie E. Adkins State Bar No. 871742 Attorneys for Defendants jadkins@wcsr.com Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 19 of 20 WCSR 37152296v3 CERTIFICATE OF SERVICE The undersigned hereby certifies that a true and correct copy of the within and foregoing MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS THOMAS D. CONRAD, JR., STUART P. CONRAD, FINANCIAL MANAGEMENT CORPORATION, AND FINANCIAL MANAGEMENT CORPORATION, S.R.L.’S MOTION TO DISMISS was electronically filed with the Clerk of Court using the CM/ECF system which will automatically send email notification of such filing to the following attorneys of record: M. Graham Loomis, Esq. Pat Huddleston, Esq. U.S. Securities and Exchange Commission 950 East Paces Ferry Road, NE Suite 900 Atlanta, GA 30326-1234 This 26th day of September, 2016. /s/ John G. Despriet John G. Despriet State Bar No. 219347 WOMBLE CARLYLE SANDRIDGE & RICE, LLP 271 17th Street, N.W. Suite 2400 Atlanta, GA 30363-1017 (404) 872-7000 Phone (404) 888-7490 Fax jdespriet@wcsr.com Case 1:16-cv-02572-LMM Document 8-1 Filed 09/26/16 Page 20 of 20