Securities And Exchange Commission v. Murray

MOTION for Summary Judgment Against Defendant James Michael Murray

N.D. Cal.September 8, 2016

MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 JASON M. HABERMEYER (Cal. Bar No. 226607) HabermeyerJ@sec.gov KAREN KREUZKAMP (Cal. Bar No. 246151) KreuzkampK@sec.gov Attorneys for Plaintiff SECURITIES AND EXCHANGE COMMISSION 44 Montgomery Street, Suite 2800 San Francisco, California 94104 Telephone: (415) 705-2500 Facsimile: (415) 705-2501 SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. JAMES MICHAEL MURRAY, Defendant, and EVENT TRADING GP, LLC, Relief Defendant. Case No. CV-12-1288-EMC NOTICE OF MOTION AND MOTION FOR SUMMARY JUDGMENT AGAINST DEFENDANT JAMES MICHAEL MURRAY Date: October 27, 2016 Time: 1:30 p.m. Honorable Edward M. Chen Courtroom 5, 17th Floor UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 1 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 i NOTICE OF MOTION TO DEFENDANT JAMES MICHAEL MURRAY, RELIEF DEFENDANT EVENT TRADING GP, LLC, AND COUNSEL, IF ANY, PLEASE TAKE NOTICE THAT Plaintiff Securities and Exchange Commission (the “Commission” or “SEC”) hereby moves pursuant to Federal Rule of Civil Procedure 56 and Civil Local Rule 7-2 for summary judgment against Defendant James Michael Murray. The Commission’s motion is noticed for hearing on October 27, 2016, at 1:30 p.m. before the Honorable Edward M. Chen, Judge of the District Court for the Northern District of California. Separate notice has been provided to Defendant, who is in custody and not represented by legal counsel in this matter. See Special Notice of Motion to Pro Se Defendant, filed concurrently. The Commission’s motion is based on the principles of collateral estoppel and is supported by facts necessarily decided in a related criminal case against Defendant Murray. The Commission seeks summary judgment against Defendant on all of its Claims for Relief: violations of Section 17(a) of the Securities Act of 1933 [15 U.S.C. § 77q(a)]; 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]; and Section 206(4) of the Investment Advisers Act of 1940 [15 U.S.C. § 80b-6] and Rule 206(4)-8 thereunder [17 C.F.R. § 275.206(4)-8]. Supp. First. Am. Compl. ¶¶ 39-47 (Dkt. No. 63). As detailed in the accompanying proposed order, the Commission seeks injunctive relief against Defendant, disgorgement of Defendant’s ill-gotten gains, and the imposition of civil monetary penalties, as authorized by the federal securities laws. This motion is supported by the accompanying Memorandum of Points and Authorities, the contemporaneously filed Declaration of Jason M. Habermeyer, the proposed order, pleadings and papers filed on the Court’s docket in this action and the related criminal action captioned United States v. Murray, No. 3:12-cr-00278-EMC (N.D. Cal.), and such other oral or written evidence as may be presented at the hearing. Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 2 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 ii TABLE OF CONTENTS MEMORANDUM OF POINTS AND AUTHORITIES ................................................................ 1 I. INTRODUCTION ............................................................................................................ 1 II. STATEMENT OF FACTS AND PROCEDURAL HISTORY ....................................... 1 A. The Civil Claims and Criminal Indictment Against Murray ................................ 1 B. The Evidence Admitted at Murray’s Criminal Trial ............................................ 3 1. Murray’s Role as the Investment Adviser to Market Neutral Trading ......................................................................................... 3 2. Murray Created False Statements to Hide Near-Total Losses in 2009 .......................................................................................... 4 3. Murray Perpetrated an Elaborate Investment Fraud In 2011 and 2012 ........................................................................................... 4 i. Murray Provided False Performance Reports to Investors ........................................................................................ 4 ii. Murray Defrauded Investors Through Fake Audit Reports ................................................................................ 5 iii. Murray Lied About MNT’s Service Providers and His Background ..................................................................... 6 4. The Aftermath of Defendant’s Investment Fraud ..................................... 7 C. The Jury Instructions, Verdict, and Final Judgment ............................................. 8 III. STANDARD FOR GRANTING SUMMARY JUDGMENT .......................................... 9 IV. ARGUMENT .................................................................................................................... 9 A. Summary Judgment Should Be Granted Under Principles of Collateral Estoppel ................................................................................................ 9 1. Elements of the Collateral Estoppel Doctrine .......................................... 9 2. The Commission’s Securities Act and Exchange Act Claims Are Based on the Same Facts Decided in the Government’s Favor at the Criminal Trial ............................................. 12 3. The Factual Basis for the Commission’s Advisers Act Claim Was Also Adjudicated in the Government’s Favor at the Criminal Trial ..................................................................... 15 Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 3 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 iii B. The Court Should Enter the Requested Relief Against Defendant ............................................................................................................ 17 1. Murray Should Be Permanently Enjoined from Committing Future Violations ................................................................ 17 2. Murray Should Disgorge His Ill-Gotten Gains ....................................... 18 3. Murray Should Pay a Civil Money Penalty for His Fraud ....................................................................................................... 20 V. CONCLUSION............................................................................................................... 21 Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 4 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 iv TABLE OF AUTHORITIES CASES Basic Inc. v. Levinson, 485 U.S. 224 (1988) ........................................................................................ 13 Burnett v. Rowzee, 2007 U.S. Dist. LEXIS 74275 (C.D. Cal. Sept. 26, 2007) .................................... 14 Celotex Corp. v. Catrett, 477 U.S. 317 (1986) ...................................................................................... 9 Emich Motors Corp. v. Gen. Motors Corp., 340 U.S. 558 (1951) ....................................................... 10 FTC v. Stefanchik, 559 F.3d 924 (9th Cir. 2009) ................................................................................... 9 Galen v. Cnty. of Los Angeles, 477 F.3d 652 (9th Cir. 2007) ................................................................ 9 Hinkle Nw., Inc. v. SEC, 641 F.2d 1304 (9th Cir. 1981) ...................................................................... 10 In re Media Vision Tech. Sec. Litig., 2003 WL 22227875 (N.D. Cal. Sept. 23, 2003) ....................... 11 Ivers v. United States, 581 F.2d 1362 (9th Cir. 1978) ......................................................................... 10 Koch v. Hankins, 928 F.2d 1471 (9th Cir. 1991) ................................................................................. 13 Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574 (1986) .................................... 9 Montana v. United States, 440 U.S. 147 (1979) .................................................................................... 9 Parklane Hosiery Co. v. Shore, 439 U.S. 322 (1979) ........................................................................... 9 Robi v. Five Platters, Inc., 838 F.2d 318 (9th Cir. 1988) .................................................................... 10 SEC v. ABS Manager, LLC, 2014 WL 2605476 (S.D. Cal. June 11, 2014), granting reconsideration in part, 2014 WL 7272385 (S.D. Cal. Dec. 18, 2014) ............................... 16 SEC v. Bilzerian, 29 F.3d 689 (D.C. Cir. 1994) ................................................................................... 10 SEC v. Bravata, 3 F. Supp. 3d 638 (E.D. Mich. 2014) .................................................................. 10, 11 SEC v. Colello, 139 F.3d 674 (9th Cir. 1998) ...................................................................................... 19 SEC v. Cross Fin. Servs., Inc., 908 F. Supp. 718 (C.D. Cal. 1995) ..................................................... 19 SEC v. Dimensional Entm’t Corp., 493 F. Supp. 1270 (S.D.N.Y. 1980) ............................................ 11 SEC v. Fehn, 97 F.3d 1276 (9th Cir. 1996).......................................................................................... 17 SEC v. First Jersey Secs., Inc., 101 F.3d 1450 (2d Cir. 1996) ............................................................. 19 SEC v. First Pac. Bancorp, 142 F.3d 1186 (9th Cir. 1998) ................................................................. 19 Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 5 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 v SEC v. Gruenberg, 989 F.2d 977 (8th Cir. 1993) ................................................................................ 10 SEC v. Henke, 275 F. Supp. 2d 1075 (N.D. Cal. 2003) ....................................................................... 20 SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109 (9th Cir. 2006) ..................................................... 18 SEC v. Kenton Capital, Ltd., 69 F. Supp. 2d 1 (D.D.C. 1998) ........................................................... 20 SEC v. M&A West, Inc., 2005 WL 2988963 (N.D. Cal. Oct. 31, 2005), aff’d in part and rev’d in part, 538 F.3d 1043 (9th Cir. 2008) ........................................................... 19 SEC v. Mattera, 2013 WL 6485949 (S.D.N.Y. Dec. 9, 2013) ............................................................. 11 SEC v. McGinn, Smith & Co., 2015 WL 667848 (N.D.N.Y. Feb. 17, 2015) ................................ 10, 15 SEC v. Monarch Funding Corp., 192 F.3d 295 (2d Cir. 2008) .......................................................... 12 SEC v. Murphy, 626 F.2d 633 (9th Cir. 1980) ............................................................................... 13, 17 SEC v. Nutmeg Grp., LLC, 2016 WL 690930 (N.D. Ill. Feb. 18, 2016) .............................................. 16 SEC v. Pace, 173 F. Supp. 2d 30 (D.D.C. 2001) ................................................................................. 11 SEC v. Phan, 500 F.3d 895 (9th Cir. 2007) ......................................................................................... 12 SEC v. Randolph, 736 F.2d 525 (9th Cir. 1984) .................................................................................. 17 SEC v. Rind, 991 F.2d 1486 (9th Cir. 1993) ........................................................................................ 18 SEC v. Steadman, 967 F.2d 636 (D.C. Cir. 1992)................................................................................ 16 SEC v. Tzolov, 2011 U.S. Dist. LEXIS 8562 (S.D.N.Y. Jan. 26, 2011) .............................................. 10 SEC v. W.J. Howey Co., 328 U.S. 293 (1946) ..................................................................................... 13 SEC v. Zandford, 535 U.S. 813 (2002) ................................................................................................ 14 Smith v. SEC, 129 F.3d 356 (6th Cir. 1997) ......................................................................................... 10 Taylor v. Sturgell, 553 U.S. 880 (2008) ............................................................................................... 10 United States v. Real Prop. Located at Section 18, 976 F.2d 515 (9th Cir. 1992) .............................. 11 Vernazza v. SEC, 327 F.3d 851 (9th Cir. 2003) ....................................................................... 12, 14, 15 W. Pac. Fisheries, Inc. v. SS President Grant, 730 F.2d 1280 (9th Cir. 1984) ................................... 19 STATUTES 15 U.S.C. § 77 b(1) .............................................................................................................................. 13 15 U.S.C. § 77q(a) .................................................................................................................. i, 2, 12, 18 Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 6 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 vi 15 U.S.C. § 77q(a)(2) ........................................................................................................................... 12 15 U.S.C. § 77t(b) ................................................................................................................................ 17 15 U.S.C. § 77t(d)(2) ........................................................................................................................... 20 15 U.S.C. § 78c(a)(1) ........................................................................................................................... 13 15 U.S.C. § 78j(b) ................................................................................................................... i, 2, 12, 18 15 U.S.C. § 78u(d) ............................................................................................................................... 20 15 U.S.C. § 78u(d)(1) ........................................................................................................................... 17 15 U.S.C. § 80b-2(18) .......................................................................................................................... 13 15 U.S.C. § 80b-2(a)(11)...................................................................................................................... 16 15 U.S.C. § 80b-6 .......................................................................................................................... i, 2, 18 15 U.S.C. § 80b-6(4) ............................................................................................................................ 15 15 U.S.C. § 80b-9(d) ............................................................................................................................ 17 15 U.S.C. § 80b-9(e) ............................................................................................................................ 20 18 U.S.C. § 1028A(a)(1) ........................................................................................................................ 2 18 U.S.C. § 1343 .................................................................................................................................... 2 18 U.S.C. § 1957 .................................................................................................................................... 2 18 U.S.C. § 401(3) ................................................................................................................................. 2 28 U.S.C. § 1961 ................................................................................................................................. 19 OTHER AUTHORITIES 18B Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice & Procedure § 4474 (2d ed.) ................................................................................................................................. 11 Prohibition of Fraud by Advisers to Certain Pooled Investment Vehicles, Advisers Act Rel. No. 2628, 91 SEC Docket 938, 2007 WL 2239114 (Aug. 3, 2007) .......................................... 15, 16 RULES Fed. R. Civ. P. 56(a) ............................................................................................................................... 9 Fed. R. Civ. P. 56(e) ............................................................................................................................... 9 Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 7 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 vii REGULATIONS 17 C.F.R. § 201.1003 ........................................................................................................................... 20 17 C.F.R. § 240.10b-5 ............................................................................................................. i, 2, 12, 18 17 C.F.R. § 275.206(4)-8 ........................................................................................................ i, 2, 15, 18 Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 8 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1 MEMORANDUM OF POINTS AND AUTHORITIES I. INTRODUCTION Defendant James Michael Murray defrauded investors out of over $2.5 million as the adviser to a hedge fund he alone controlled. Last year, following his indictment in connection with this and other financial schemes, a jury convicted Defendant on all 23 counts of wire fraud, money laundering, identity theft, and criminal contempt. Defendant is now serving a 15-year prison term. The SEC is entitled to summary judgment on its claims against Murray based upon the doctrine of collateral estoppel. The facts elicited at Defendant’s criminal trial are virtually identical to the conduct that gives rise to the violations alleged by the Commission in this case. Because the doctrine of collateral estoppel precludes Murray from contesting or re- litigating factual and legal issues decided against him in the criminal case, there is no genuine issue of material fact, and the Commission is entitled to judgment as a matter of law against Murray on all of its Claims for Relief. This motion also addresses the remedies that should be imposed against Defendant. The facts established by the criminal conviction or otherwise shown by the record in this case demonstrate that Murray should be permanently enjoined from violating the federal securities laws, ordered to disgorge his ill-gotten gains from his fraud, and pay a civil monetary penalty due to the damage incurred by the victims in his path of destruction. II. STATEMENT OF FACTS AND PROCEDURAL HISTORY A. The Civil Claims and Criminal Indictment Against Murray The Commission initiated this action on March 15, 2012 by filing its Complaint against Murray (see Dkt. No. 1), and subsequently filed the operative Supplemental First Amended Complaint on January 9, 2013. See Ex. A (Compl.).1 The Commission alleged that Murray violated the antifraud provisions of the Securities Act of 1933 (“Securities Act”), the 1 Referenced exhibits are attached to the accompanying Declaration of Jason M. Habermeyer submitted in support of this motion and are cited as “Ex. __.” Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 9 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2 Securities Exchange Act of 1934 (“Exchange Act”), and the Investment Advisers Act of 1940 (“Advisers Act”). See id. at 9-10 (alleging violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder). Specifically, the SEC alleged that Murray defrauded investors in Market Neutral Trading, LLC (“MNT”), an investment fund he controlled, by providing them inflated representations of the fund’s historical performance and phony audit reports issued by a fictitious audit firm. Id. at ¶¶ 1, 16-31. The purported audit reports and the other documents Murray disseminated to investors failed to disclose the near-total losses MNT had incurred and instead represented that MNT had as much as a 25 percent return on investment. Id. at ¶¶ 27-31.2 On April 19, 2012, the Grand Jury returned an indictment against Murray. See Ex. C (Indictment). A Fourth Superseding Indictment was filed on March 17, 2015, charging Murray with 16 counts of wire fraud, in violation of 18 U.S.C. § 1343, four counts of money laundering, in violation of 18 U.S.C. § 1957, two counts of aggravated identity theft, in violation of 18 U.S.C. § 1028A(a)(1), and a single count of criminal contempt, in violation of 18 U.S.C. § 401(3). See Ex. D (Fourth Superseding Indictment). Specifically, the indictment alleged in part that Murray defrauded MNT investors by soliciting them with audit reports issued by a fictitious audit firm that falsely reported MNT’s historical performance. Id. at ¶¶ 11, 12(d)-(i), 13. Because Murray’s scheme to defraud investors was included and based on the same set of allegations in both cases, the Court related the criminal charges with the Commission’s civil action. See Ex. E (Order). 2 In addition, the SEC alleged that Murray, on behalf of MNT, generated stock trading proceeds at an account at Oppenheimer & Co. and rather than crediting MNT with the gain, diverted $261,000 to another Murray-controlled account. Ex. A at ¶¶ 32-38. These proceeds, along with subsequent trading proceeds, totaling approximately $363,000 and frozen by this Court at the request of the Commission (see Dkt. 58), are not subject to this motion. The question of whether those proceeds are subject to disgorgement will be adjudicated following the resolution of the Commission’s claims against Murray. See Ex. B (6-23-2016 Minute Order). Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 10 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 Murray was represented by legal counsel in the criminal action, and his trial commenced on September 21, 2015. See Ex. F (Minute Entry). B. The Evidence Admitted at Murray’s Criminal Trial The evidence at Defendant’s criminal trial established that Murray engaged in a multifaceted fraud designed to deceive investors and others beginning in at least 2009 and continuing even after his arrest in 2012. The Government elicited testimony from 35 witnesses and introduced hundreds of exhibits detailing the fraud. Some specifics of the scheme applicable to this action follow. 1. Murray’s Role as the Investment Adviser to Market Neutral Trading From 2006 through at least 2011, Murray was the sole owner and investment manager of MNT. Ex. G at 20-21, 23; Ex. 159 at 6, 45; Ex. 160 at 5.3 As described in its private placement memorandum (“PPM”) given to investors, MNT was an investment fund designed “to seek substantial capital appreciation while attempting to eliminate and or minimize stock market risk by investing in risk arbitrage merger and acquisition’s [sic] and employing market neutral strategies.” Ex. 159 at 35. Investors purchased non-managing LLC interests in MNT and shared in MNT’s profits and losses through capital accounts in the fund. Id. at 18-22, 35. To generate investment returns, the fund purported to employ various proprietary models and utilize “a broad cross-section of investment styles.” Id. at 41. As investment manager, Murray had 100 percent control over MNT and made all trading decisions on the fund’s behalf. Id. at 45; Reporter’s Transcript, United States v. Murray, No. 12-CR-278 EMC (N.D. Cal.) (“R.T.”) at 597-98 (Eckel).4 Murray also provided investment advice to MNT, for which he received a two percent management fee and a 20 percent incentive fee. See, e.g., Ex. 159 at 45-46; Ex. 160 at 4; Ex. 141 at 4-5, 9. 3 Relevant exhibits admitted into evidence at Murray’s criminal trial are referenced herein by their trial exhibit numbers (e.g., Ex. 159) and are attached to the Habermeyer Declaration as Exhibits I-R. 4 Cited excerpts of the Reporter’s Transcript of the proceedings at Murray’s criminal trial are attached to the accompanying declaration. See Habermeyer Decl. ¶ 10 & Ex. H. The testifying witness follows the citation in parentheses. Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 11 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 4 2. Murray Created False Statements to Hide Near-Total Losses in 2009 By 2009, Murray was managing over $2 million in the MNT fund. R.T. at 431, 434- 35 (Moran); Ex. 140 at 1. However, by year end 2009, the fund had only $172,460 (a 95 percent loss in value) due to staggering losses from Murray’s trading in the final four months and client withdrawals in excess of $2.4 million. Ex. 140 at 1; R.T. at 431, 434-40 (Moran). Defendant did not disclose this fact, but instead created false account statements that hid the massive losses incurred by the fund. For example, in 2009, Murray persuaded his friend, Corinna Seibt, to invest by telling her, among other things, that MNT’s net return since inception in 2006 was 36.75 percent. R.T. at 192 (Seibt). Seibt ultimately invested $162,000, comprised of money from her IRA accounts and her entire life savings. Id. at 240-44. Between 2009 and early 2012, Murray sent Seibt false statements showing a positive balance in her IRA accounts. Id. at 250-66. Seibt later discovered that her actual balance in the account was zero. Id. at 266. Seibt lost all the money she invested with Murray. Id. at 278- 79. 3. Murray Perpetrated an Elaborate Investment Fraud In 2011 and 2012 Undeterred by the fund losing nearly its entire value, Defendant set out in 2010 to solicit new investments in MNT. Murray retained a consultant, Paul Eckel, to assist with raising additional capital. In total, between 2011 and 2012, Murray raised an additional $2.3 million from various investors in the fund. R.T. at 1261, 1273-76 (Villanueva). In so doing, Murray defrauded investors in several ways, as described below. i. Murray Provided False Performance Reports to Investors Murray provided Eckel with false monthly reports that failed to disclose MNT’s historical losses. Upon contacting Eckel, Murray provided him with various documents purporting to represent the fund’s historical performance. Id. at 493-94, 498-99 (Eckel). One of the documents included a monthly performance update that represented that since inception in 2006, MNT’s net annual return was nearly 30 percent and that its net returns over the previous 24 months and 12 months were 41 percent and 28 percent, respectively. Id. at 499- 501, 503-06 (Eckel); Ex. 158 at 5. The update also claimed that MNT had a positive rate of Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 12 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 5 return of 13.44 percent in 2009 and purported to show that the fund had a significantly higher rate of return than other comparable indices and benchmarks. Id. Murray incorporated these falsehoods into marketing materials that the consultant used to solicit new investors in the fund. R.T. at 564, 568-69 (Eckel). Multiple investors testified that they relied on MNT’s positive rate of return during the economic downturn in deciding to invest in the fund. See, e.g., id. at 770-73 (Russell), 850 (Gorin). Yet Murray failed to disclose MNT’s previously- sustained losses to any of the investors. Id. at 1284-1291 (Villanueva). ii. Murray Defrauded Investors Through Fake Audit Reports Murray also defrauded the fund and its investors through the use of fake audit reports through a phony audit firm he created. In December 2008, Defendant established a virtual office for the purported auditing firm, JMA, forging his then-wife’s signature and using her identity to set up the office. R.T. at 49-52 (Boyce), 357-365 (Brigulio); see also 1607 (Murray) (admitting that he “set up” JMA’s virtual office and reserved its domain name). At Murray’s instruction, JMA’s mail was forwarded to Murray’s home address. R.T. at 63 (Boyce), 76-78, 81, 83-85 (Phung), 343-44 (Brigulio). During a search of Murray’s residence by the United States Secret Service, agents found, inter alia, mail addressed to JMA, JMA’s checkbook, and a credit card terminal in JMA’s name. R.T. at 890-91, 906-07 (Kramer); Ex. 102 at 1-2, 8, 15, 17, 19, 21-22, 46. Murray admitted at trial that he provided Eckel with MNT audit reports supposedly prepared by JMA, which he knew Eckel was using to solicit investment in MNT. R.T. at 1685 (Murray), 530 (Eckel). At trial, Murray testified that he did not create the reports, despite the fact that the forensic evidence showed that the reports were not prepared by JMA but by Murray himself. Id. at 1592 (Murray), 1712, 1714-29 (Sims). Murray further claimed, under oath, that in 2009 JMA had prepared a 2006 audit for MNT and that he had provided JMA with materials for audits for 2006 through 2008. Id. at 1608-09 (Murray).5 5 Murray backdated audit reports that predated JMA’s existence, to create the illusion that the fund had been continually audited since inception. See R.T. at 573-75, 581-82 (Eckel). Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 13 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 6 The Murray-prepared reports purported to show positive performance for the fund and did not disclose the fact that MNT had suffered a near-total loss in 2009. Id. at 550-52 (Eckel). Thus, unwitting investors received the audit reports – which confirmed the fictitious returns reflected in MNT’s marketing materials – and relied on JMA’s ostensibly independent verification of such returns in deciding to invest in the fund. Id. at 747-53 (Pernell), 775-76 (Russell), 831-32 (Gibson), see also id. at 193-195 (Seibt). iii. Murray Lied About MNT’s Service Providers and His Background Murray made additional false statements in fund offering documents. In materials provided to Eckel, Murray set forth MNT’s purported service providers, naming JMA as the fund auditor, a firm named H.F. Administrators as the fund’s administrator, and Hornstein Law Offices as its legal advisor. Ex. 160 at 7; R.T. at 505-06 (Eckel). In doing so, Murray claimed that these “service providers are well-established organizations with 10 or more reputable years of experience in their field.” Ex. 160 at 19. Murray also touted H.F. Administrators in various materials provided to investors as a company that was independently calculating the monthly net asset value of the fund based on information provided directly from MNT’s prime broker to the administrator. R.T. at 513-14, 521-25 (Eckel), 826-30 (Gibson); Ex. 160 at 17, 20. In fact, however, H.F. Administrators was just another Murray-created sham company. Murray admitted at trial to setting up the virtual office and reserving the domain name for the company, and the United States Secret Service seized evidence from Murray’s home that included a H.F. Administrators checkbook. R.T. at 1607 (Murray), 877-879, 891 (Kramer); Ex. 102 at 9-10. Defendant failed to disclose his relationship with H.F. as a conflict of interest. Ex. 160 at 7. Defendant also admitted at trial that the purported legal counsel to the fund did not actually represent the fund, but was an attorney Murray used for a prior and unrelated litigation. R.T. at 803-13 (Hornstein), 1593-94 (Murray).6 6 Murray also lied by representing that JMA was a “well-established organization with 10 or more reputable years of experience,” that Murray did not have a conflict of interest with JMA, and that MNT’s performance was audited by JMA. Ex. 160 at 7, 17, 19-20. Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 14 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 7 Murray also lied to investors about his background. Murray included a copy of his resume in a July 2010 email to Eckel, which reflected that he graduated cum laude from the University of Arizona with a degree in economics and finance and that he also received a master’s degree in economics from Arizona. Id. at 508-09. One month later, Murray sent Eckel a copy of a Disclosure Document Questionnaire, or DDQ. Id. at 513; Ex. 160 at 1. In the DDQ, which Defendant prepared (Ex. 160 at 24), Murray again claimed to have graduated cum laude from Arizona with a degree in economics and finance, with a master’s degree in economics. Ex. 160 at 10. He also denied ever having been disciplined by any state or federal governmental regulatory authority. R.T. at 515-16 (Eckel); Ex. 160 at 6. Murray repeated many of these same assertions about his education and his lack of disciplinary history (and MNT’s service providers) in the fund’s PPM and in direct communications with potential investors. See, e.g., R.T. at 535-37, 596, 599-600 (Eckel); Ex. 159 at 45; Ex. 169 at 10. Murray admitted at trial that the representations regarding his educational history were lies, as in fact he did not graduate cum laude, did not obtain a Bachelor of Science degree, and did not receive any Master’s degree. R.T. at 1634-35, 1656 (Murray). Multiple investors testified that Murray’s educational profile was material to their decision to invest in MNT. R.T. at 322 (Seibt), 728-30 (Pernell), 828 (Gibson), 851-52 (Gorin). Murray also failed to disclose in fund offering documents and required disclosures the fact that his securities license was previously suspended by the New York Stock Exchange for six months. R.T. at 1457-58 (Murray), 515-16, 532, 536-37 (Eckel), 735-39 (Pernell); Ex. 160 at 6; Ex. 159 at 45. 4. The Aftermath of Defendant’s Investment Fraud All told, Defendant’s lies left a devastating wake of destruction, as multiple investors testified they lost all, or significant amounts of, their investments in the fund. These included: • The entire life savings ($162,000) of one of his own friends (R.T. at 173-78, 240-41, 244, 278-79 (Seibt)); • The entire $189,000 investment from an 82-year-old military veteran (Id. at 767, 779-784 (Russell)); Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 15 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 8 • The entire $250,000 from a 78-year-old investor, who in turn got his brother to invest an additional $325,000 (Id. at 822, 834, 839-42 (Gibson)); • Another $250,000 from a pooled pension fund (Id. at 724-26, 756-62 (Pernell)); and • $20,000 from Murray’s then-wife (Id. at 355-56 (Brigulio)). C. The Jury Instructions, Verdict, and Final Judgment At the conclusion of the trial, the Court instructed the jury on 16 counts of wire fraud. Specifically, the Court instructed the jury that the Government must prove each of the following elements beyond a reasonable doubt: First, the Defendant knowingly participated in, devised or intended to devise a scheme or plan to defraud, or a scheme or plan for obtaining money or property by means of false or fraudulent pretenses, representations, or promises; Second, the statement made or facts omitted as part of the scheme were material, that is they had a natural tendency to influence or were capable of influencing a person to part with money or property; Third, the Defendant acted with intent to defraud, that is, intent to deceive or cheat; And fourth, the Defendant used or caused to be used a wire communication to carry out an essential part of the scheme.7 Id. at 1778-79 (emphasis added). Seven of the wire fraud counts – Counts 5 through 11 – were predicated on Murray’s fraud relating to MNT investors. See id. at 1836-37, 1930; Ex. T at 2. The other counts included wire fraud related to Murray’s credit card scheme and the Oppenheimer transaction, money laundering charges associated with the Oppenheimer transaction, aggravated identity theft, and criminal contempt for violating the terms of his pretrial release. Ex. T. On October 13, 2015, the jury reached a unanimous verdict finding Defendant guilty on all 23 counts. Ex. U. On April 6, 2016, the Court sentenced Murray to a term of 180 months in custody and ordered Murray to pay restitution in the amount of $3,480,479.90. Ex. V. The Court entered judgment on April 8, 2016. Ex. W. 7 Murray stipulated in advance of trial that the use of wires in interstate commerce for each of the wire fraud counts were used. Ex. S. Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 16 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9 III. STANDARD FOR GRANTING SUMMARY JUDGMENT Summary judgment should be granted “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); accord Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); FTC v. Stefanchik, 559 F.3d 924, 927 (9th Cir. 2009). The Court should enter summary judgment for the moving party where “the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party.” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). While the Court must view the facts in the light most favorable to the non-moving party, that party must come forward with “‘specific facts showing there is a genuine issue for trial.’” Matsushita, 475 U.S. at 587 (quoting Fed. R. Civ. P. 56(e)) (emphasis added). In so doing, the defendant may not rely upon bald assertions or conclusory arguments to establish a genuine issue of material fact. Stefanchick, 559 F.3d at 929; Galen v. Cnty. of Los Angeles, 477 F.3d 652, 658 (9th Cir. 2007). Here, because the doctrine of collateral estoppel precludes Murray from contesting the facts found at the criminal trial that led to his conviction, which are also the factual basis of the SEC’s Complaint, there can be no genuine issue of material fact for trial. The Court should therefore grant summary judgment for the Commission. IV. ARGUMENT A. Summary Judgment Should Be Granted Under Principles of Collateral Estoppel 1. Elements of the Collateral Estoppel Doctrine The doctrine of collateral estoppel prevents a party who received a full and fair opportunity to litigate claims and related issues of fact and law in one action decided against him from re-litigating the same claims and issues of fact and law in a second action. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 332-33 (1979). Thus, once a court has decided an issue of fact necessary to its judgment, that fact is conclusive against the party in subsequent litigation. Montana v. United States, 440 U.S. 147, 153 (1979). Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 17 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10 It is well settled that a criminal conviction may be conclusive, and thus may work as an estoppel, in a subsequent civil litigation against a defendant involving issues that were determined in the criminal prosecution. Emich Motors Corp. v. Gen. Motors Corp., 340 U.S. 558, 568-69 (1951) (citations omitted); Hinkle Nw., Inc. v. SEC, 641 F.2d 1304, 1308-09 (9th Cir. 1981). Thus, courts frequently enter summary judgment in favor of the SEC based upon the collateral estoppel effect of the defendant’s conviction in a parallel criminal case. See, e.g., SEC v. Bravata, 3 F. Supp. 3d 638, 655 (E.D. Mich. 2014) (“federal courts in this circuit and others routinely grant summary judgment in civil securities fraud actions where the defendant has been convicted on criminal fraud or conspiracy charges based on the same factual circumstances”) (citing cases); Smith v. SEC, 129 F.3d 356, 362 (6th Cir. 1997) (noting that “in order to prevail in the civil action, the SEC now needs only to move for summary judgment on the basis of the collateral estoppel effect of [the criminal] conviction”); SEC v. Bilzerian, 29 F.3d 689, 694 (D.C. Cir. 1994); SEC v. Gruenberg, 989 F.2d 977 (8th Cir. 1993); SEC v. McGinn, Smith & Co., 2015 WL 667848, at *10 (N.D.N.Y. Feb. 17, 2015); SEC v. Tzolov, 2011 U.S. Dist. LEXIS 8562, at *3 (S.D.N.Y. Jan. 26, 2011).8 Courts may enter summary judgment based on the collateral estoppel effect of a criminal conviction even if the charges are not identical, provided the factual determinations underlying the conviction are sufficient to establish the violations at issue in the subsequent action. Ivers v. United States, 581 F.2d 1362, 1367 (9th Cir. 1978). Collateral estoppel bars “successive litigation of an issue of fact or law actually litigated and resolved in a valid court determination essential to the prior judgment, even if the issue recurs in the context of a different claim.” Taylor v. Sturgell, 553 U.S. 880, 892 (2008) (citation omitted) (emphasis added). 8 The collateral estoppel effect of the criminal judgment against Murray applies here even though Murray is seeking to overturn his conviction on appeal. See Robi v. Five Platters, Inc., 838 F.2d 318, 327 (9th Cir. 1988) (stating that a prior judgment that is “sufficiently firm” is to be accorded conclusive effect, and that “the preclusive effects of a lower court judgment cannot be suspended simply by taking an appeal that remains undecided”) (citations omitted). Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 18 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 11 As such, numerous courts across the country have held that the conviction of criminal wire fraud is sufficient to establish liability for civil securities fraud where both cases are based on the same underlying facts or conduct that led to the conviction. See, e.g., In re Media Vision Tech. Sec. Litig., 2003 WL 22227875, at *2 (N.D. Cal. Sept. 23, 2003) (holding that defendants’ guilty plea and conviction on wire fraud entitled plaintiffs to summary judgment on their civil claim that defendants violated Section 10(b) and Rule 10b-5); SEC v. Pace, 173 F. Supp. 2d 30, 33 (D.D.C. 2001) (finding that conviction for two counts of wire fraud collaterally estopped defendant from contesting liability for violating federal securities laws); SEC v. Dimensional Entm’t Corp., 493 F. Supp. 1270, 1275-77 (S.D.N.Y. 1980) (finding that wire fraud conviction collaterally estopped re-litigation of Section 10(b) claims under the Exchange Act, even though jury in criminal case acquitted defendant on the very same 10(b) charges); Bravata, 3 F. Supp. 3d at 657 (“[c]onvictions for mail fraud, wire fraud, securities fraud, and conspiracy to commit securities fraud suffice to establish claims for securities fraud based on the same facts in a related civil action”) (citing cases); SEC v. Mattera, 2013 WL 6485949, *7 (S.D.N.Y. Dec. 9, 2013) (“‘[p]erhaps the most attractive cases that have extended issue preclusion from criminal convictions to civil actions involve claims by the government for civil remedies based on the same transaction that gave rise to the conviction’”) (quoting 18B Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice & Procedure § 4474 (2d ed.)). In the Ninth Circuit, collateral estoppel based on a criminal conviction applies where: (1) the prior conviction was for a serious offense so that the defendant was motivated to fully litigate the charges; (2) there was a full and fair trial; (3) the issue on which the prior conviction is offered was of necessity decided at the criminal trial; and (4) the party against whom the collateral estoppel is asserted was a party at the prior trial. United States v. Real Prop. Located at Section 18, 976 F.2d 515, 518 (9th Cir. 1992). Here, there can be no dispute that Murray’s conviction was for a serious offense such that he was motivated to fully litigate the charges, that there was a full and fair trial, and that Murray was a party at the prior trial. The question, therefore, is whether the factual and legal Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 19 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 12 issues for which collateral estoppel is sought here were decided at the criminal trial. As discussed below, the answer is, “yes.” 2. The Commission’s Securities Act and Exchange Act Claims Are Based on the Same Facts Decided in the Government’s Favor at the Criminal Trial The Commission alleges that Murray violated the antifraud provisions of the Securities Act and the Exchange Act. See Ex. A (Compl.) ¶¶ 39-44 (first and second claims). The elements of these claims are similar, and generally require that a defendant: (1) engage in fraudulent conduct, either through a fraudulent scheme and/or material misrepresentations or omissions, (2) in connection with the offer, purchase, or sale of securities,9 (3) by means of interstate commerce, and (4) with scienter.10 See SEC v. Phan, 500 F.3d 895, 907-08 (9th Cir. 2007); SEC v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 2008) (holding that “essentially the same elements are required” under Section 17(a) as under Section 10(b) and Rule 10b-5 except that “no showing of scienter is required for the SEC to obtain an injunction under [17(a)] subsections (a)(2) or (a)(3)”). Section 17(a)(2) of the Securities Act requires additional proof that the defendant obtained “money or property” through the alleged misrepresentations. 15 U.S.C. § 77q(a)(2); see Vernazza v. SEC, 327 F.3d 851, 858 (9th Cir. 2003). As described above, both the criminal action and this SEC action are predicated upon the same conduct, and Murray’s criminal conviction and the evidence admitted by the Court establishes that each of these elements are met here. First, the jury necessarily found that Murray engaged in a “scheme or plan to defraud” MNT investors through the use of “false or fraudulent pretenses [or] representations.” R.T. at 1778-79; Ex. T. Murray’s fraudulent scheme, as both alleged in the SEC action and elicited in the criminal trial, included the use of fake account statements and a phony accounting firm 9 Section 17(a) of the Securities Act prohibits fraud in the “offer or sale” of securities (15 U.S.C. § 77q(a), while Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit fraud “in connection with the purchase or sale” of securities (15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5). 10 Violations of Section 10(b) and Rule 10-5 under the Exchange Act, as well as Section 17(a)(1) under the Securities Act, require scienter, while violations of Sections 17(a)(2) and (3) under the Securities Act only require negligence. SEC v. Phan, 500 F.3d 895, 908 (9th Cir. 2007). Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 20 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 13 with fake audit reports, designed to deceive investors into believing that MNT was profitable and a safe investment. The jury’s verdict also found that Murray’s fraud was material to investors. See R.T. at 1778-79 (instructing jury that statements made were “material”). Information is material if there is a substantial likelihood that disclosure of the misstated or omitted fact would have significantly altered the “total mix” of information available to a reasonable investor. Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (citation omitted). “Surely the materiality of information relating to financial condition, solvency and profitability is not subject to serious challenge.” SEC v. Murphy, 626 F.2d 633, 653 (9th Cir. 1980). Here, Murray misled investors about the performance of the fund, its trustworthiness in the form of third-party providers who were ostensibly monitoring the fund, and his educational and disciplinary history that gave investors additional comfort that Murray was an honest investment manager. Second, the evidence established that Murray defrauded investors in the offer and sale of securities by selling ownership interests in MNT, a limited liability company. See Ex. 159 at 37 (“Subscribers whose subscriptions are accepted will become Owner Members of the Company”), 18 (describing terms and conditions of subscription agreement to allow investors to become members in the LLC). These subscription agreements in MNT are securities under the federal securities laws because they are investment contracts. See 15 U.S.C. § 77 b(1) (defining “security” under the Securities Act to include “investment contracts”); 15 U.S.C. § 78c(a)(1) (including “investment contract” in Exchange Act definition); 15 U.S.C. § 80b- 2(18) (Advisers Act). An “investment contract” is any “contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” SEC v. W.J. Howey Co., 328 U.S. 293, 298- 99 (1946); see also Koch v. Hankins, 928 F.2d 1471, 1476-77 (9th Cir. 1991) (stating that “this circuit looks to whether ‘the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise’”) (citation omitted). Because the MNT investors’ expectations of returns came solely from Murray’s efforts, their investments in limited liability company Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 21 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 14 interests in the MNT fund amounted to “investment contracts,” and thus securities. See Ex. 159 at 45 (indicating that Murray would “make all the investment decisions for” and possessed “unlimited authority to administer investments on behalf of” MNT), 58 (stating that purchasers of LLC interests “will not be entitled to participate in the management of the Company limited to Mr. Murray’s discretion”); see Burnett v. Rowzee, 2007 U.S. Dist. LEXIS 74275, at *14-17 (C.D. Cal. Sept. 26, 2007) (finding that LLC interests were securities where operating agreement installed defendant as sole manager and gave him full authority and discretion to manage the LLC, recommend investments, and solicit investors). Third, the jury necessarily found that Murray’s misrepresentations and omissions – concerning the funds’ investment returns, audited financial statements, third-party service providers, and his educational and disciplinary background, among others – occurred in the offer and sale of securities, from which Murray received money or property in the form of a management fee and incentive fee. See Vernazza, 327 F.3d at 858; R.T. at 1778-79 (instruction that the scheme be conducted “by means of” false pretenses or representations). These misrepresentations and omissions also occurred in furtherance of, and “coincided with,” his investment scheme and thus satisfy the required nexus with the purchase and sale of securities. See SEC v. Zandford, 535 U.S. 813, 820-22 (2002) (required “in connection with” element satisfied if scheme to defraud “coincide[s]” with purchase or sale of securities). Finally, the jury necessarily found that Murray intentionally deceived investors. R.T. at 1778-79 (instruction that defendant acted with “intent to defraud,” defined as “an intent to deceive or cheat”). The evidence at trial demonstrated that Murray not only failed to inform investors that the MNT fund had lost nearly its entire value in 2009, but that he solicited new investors by actively concealing these losses and distributing false reports that led investors to believe that his fund was actually profitable. He lied about his background which misled investors into believing that he was someone he was not. Even more egregiously, Murray created a sham audit firm that he controlled and created phony audit reports that purported to show that the MNT fund was being audited. He also duped investors into believing the fund Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 22 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 15 was safe by representing that the fund had a third-party administrator and counsel, which he knew was not true. In sum, in returning its guilty verdict on the seven counts of wire fraud relating to the MNT fraud, the jury necessarily determined facts in the Government’s favor that support each element of the Commission’s antifraud claims.11 The Court should enter summary judgment, finding that the criminal judgment establishes, and collaterally estops Murray from contesting, his liability for violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. 3. The Factual Basis for the Commission’s Advisers Act Claim Was Also Adjudicated in the Government’s Favor at the Criminal Trial In addition, the jury determined facts that establish Murray’s liability for violations of the Commission’s Advisers Act claim. See Ex. A (Compl.) ¶¶ 45-47 (third claim). Section 206 of the Advisers Act makes it unlawful for any “investment adviser,” directly or indirectly, to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. 15 U.S.C. § 80b-6(4). Rule 206(4)-8 under the Act prohibits any investment adviser to a “pooled investment vehicle” to make materially false misrepresentations or omissions, or to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. 17 C.F.R. § 275.206(4)-8; see McGinn, Smith & Co., 2015 WL 667848, at *8 n.26 (pooled investment vehicles include those entities which “holds itself out as being engaged primarily . . . in the business of investing, reinvesting, or trading in securities”); Prohibition of Fraud by Advisers to Certain Pooled Investment Vehicles, Advisers Act Rel. No. 2628, 91 SEC Docket 938, 2007 WL 2239114, at *3 n.21-22 (Aug. 3, 2007) (explaining that pooled investment vehicles include “hedge funds . . . and other types of privately offered pools that invest in securities”). The elements of the Advisers Act claim thus are similar to the antifraud claims in the Securities Act and Exchange Act discussed above. See Vernazza, 327 F.3d at 858 (comparing 11 Murray stipulated to the interstate commerce requirement in advance of trial. Ex. S. Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 23 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 16 Section 17(a), Section 10(b), and Section 206 and finding that “the element of a materially false statement is satisfied by essentially the same conduct for all of the statutes in question”); SEC v. ABS Manager, LLC, 2014 WL 2605476, at *14-15 (S.D. Cal. June 11, 2014), granting reconsideration in part, 2014 WL 7272385 (S.D. Cal. Dec. 18, 2014) (finding that Section 206(4) and Rule 206(4)-8 prohibit same antifraud conduct as it relates to pooled investment vehicles).12 An “investment adviser,” the necessary element to establish liability under the Advisers Act, is defined to include “any person, who for compensation, engages in the business of advising others . . . as to the value of securities or as to the advisability of investing in, purchasing, or selling securities” or who “issues or promulgates analyses or reports concerning securities.” 15 U.S.C. § 80b-2(a)(11). In this case, the evidence adduced at trial demonstrated that Murray obtained compensation from MNT in the form of a two percent management fee and a 20 percent incentive fee. Ex. 160 at 4; Ex. 141 at 4-5, 9. In this capacity, Murray provided advice to the fund in making all investment decisions on behalf of MNT. Ex. 159 at 45-46; Ex. 160 at 4; Ex. 141 at 4-5, 9. Accordingly, Murray meets the definition of an “investment adviser” under the Advisers Act. In addition, as discussed above, the jury found that Murray intentionally engaged in a scheme to defraud MNT’s investors by making false statements about the fund’s performance, providing fake audit reports from a phony auditing firm, misrepresenting the nature and independence of the fund’s service providers, and lying about his educational background and disciplinary history. These findings more than amply satisfy the requisite standard of liability here. See SEC v. Nutmeg Grp., LLC, 2016 WL 690930, at *12-13 (N.D. Ill. Feb. 18, 2016) (granting summary judgment on Section 206(4) and Rule 206(4)-8 claim where defendant’s 12 Claims under 206(4) do not require scienter and are instead analogous to claims under Section 17(a)(2) and 17(a)(3) of the Securities Act. SEC v. Steadman, 967 F.2d 636, 647 (D.C. Cir. 1992); see also Advisers Act Rel. No. 2628, 2007 WL 2239114, at *4 (stating that intent of Rule 206(4)-8 was to encompass negligent conduct). Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 24 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 17 conduct “clearly satisfies the low bar of negligence”). For these reasons, the Court should enter summary judgment against Defendant, finding him liable for violations of Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. B. The Court Should Enter the Requested Relief Against Defendant The Commission’s Complaint seeks three forms of relief: an injunction against future violations of the applicable securities laws by Murray, an order directing Murray to disgorge his ill-gotten gains, with prejudgment interest, and an order that Murray pay a civil monetary penalty for his fraud. 1. Murray Should Be Permanently Enjoined from Committing Future Violations The federal securities laws authorize the Commission to seek, and the Court to grant, an injunction against acts or practices that violate the securities laws. See 15 U.S.C. § 77t(b) (Securities Act); 15 U.S.C. § 78u(d)(1) (Exchange Act); 15 U.S.C. § 80b-9(d) (Advisers Act). A permanent injunction is the Commission’s primary weapon against future violations of the securities laws. See SEC v. Randolph, 736 F.2d 525, 529 (9th Cir. 1984). Whenever there is “a reasonable likelihood of future violations of the securities laws,” a permanent injunction is appropriate. SEC v. Fehn, 97 F.3d 1276, 1295 (9th Cir. 1996) (citation omitted). “The existence of past violations may give rise to an inference that there will be future violations; and the fact that the defendant is currently complying with the securities laws does not preclude an injunction.” Murphy, 626 F.2d at 655. To assess the likelihood of future violations, courts consider the totality of circumstances surrounding the past violations, including: (1) the degree of scienter involved; (2) the isolated or recurrent nature of the violations; (3) the defendant’s recognition of the wrongfulness of his conduct; (4) the likelihood, because of the defendant’s line of work, of future violations; and (5) the sincerity of assurances against future violations. Fehn, 97 F.3d at 1295. Each of these factors applies with force here. As described above, Murray exhibited a high degree of scienter with which he executed his scheme, and the jury found that his actions Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 25 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18 demonstrated an intent to defraud. Murray’s bad acts are not isolated. His crimes recurred multiple times, across multiple investors, between 2008 and 2013. He was previously suspended by the New York Stock Exchange for six months for improper conduct. Murray has also not recognized the wrongfulness of his conduct. He appears intent to challenge the validity of his conviction on appeal, and he continues to contest this case despite the fact that it arises out of the exact same operative conduct as his criminal case. There is a strong likelihood of future violations. Murray stated that he has been involved with the securities industry for 22 years. R.T. at 1457. Accordingly, if given the opportunity, the record of his repeated violations suggests that Murray would engage in similar conduct. For instance, the evidence described Murray’s long and checkered history of fraud of lying to investors and failing to return money entrusted to him by those investors, his propensity for dishonesty leading to the New York Stock Exchange’s suspension of his securities license and illustrated by his stealing of hundreds of thousands of dollars in a credit card scam. Indeed, even after he was arrested, Murray set up new accounts in the names of others to conceal his identity. He then flaunted a court order and was found guilty of contempt of court for violating the terms of his pretrial release. Finally, Murray has provided no assurances against future violations. This Court should thus permanently enjoin Murray against future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. 2. Murray Should Disgorge His Ill-Gotten Gains Disgorgement is an equitable remedy that deprives a defendant of the benefits of his wrongful conduct. SEC v. Rind, 991 F.2d 1486, 1493 (9th Cir. 1993). The Ninth Circuit has observed that disgorgement plays a central role in securities law enforcement. Id. at 1491. To obtain disgorgement, the Commission need not provide a detailed accounting; rather, disgorgement need be only a reasonable approximation of a defendant’s unjust enrichment. SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109, 1113-14 (9th Cir. 2006) (stating that district court has “broad discretion” in calculating disgorgement, which “requires only a Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 26 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 19 ‘reasonable approximation of profits causally connected to the violation’”) (citation omitted); see also SEC v. First Jersey Secs., Inc., 101 F.3d 1450, 1474-75 (2d Cir. 1996) (stating that “any risk of uncertainty [in calculating disgorgement] should fall on the wrongdoer whose illegal conduct created that uncertainty”) (citation omitted). Here, the criminal case established that Murray fraudulently raised over $2.5 million from various investors in the fund between 2009 and 2012. R.T. at 1261, 1273-76 (Villanueva) and Ex. 392 (reflecting amounts obtained from various MNT investors in amount of $2,358,000); R.T. at 183-84, 192-93, 240-41 and Exs. 223, 231 at 5 (reflecting amounts obtained from Seibt in amount of $161,114.47); compare Ex. W (ordering restitution for same victims in MNT fund). These funds are all subject to disgorgement as funds that should be returned to investors. See SEC v. First Pac. Bancorp, 142 F.3d 1186, 1192 (9th Cir. 1998) (affirming district court grant of disgorgement for proceeds of the offering despite defendant’s argument that he received no personal financial benefit as a result of the offering). In addition, prejudgment interest should be assessed on the disgorgement to ensure that Defendant does not benefit from the lapse of time between when he received the individual investor monies and the resolution of this action against him. SEC v. Cross Fin. Servs., Inc., 908 F. Supp. 718, 734 (C.D. Cal. 1995), aff’d sub nom. SEC v. Colello, 139 F.3d 674 (9th Cir. 1998). In the Ninth Circuit, prejudgment interest may be calculated using the interest rate specified for postjudgment interest – the one-year constant maturity Treasury yield. See 28 U.S.C. § 1961; W. Pac. Fisheries, Inc. v. SS President Grant, 730 F.2d 1280, 1289 (9th Cir. 1984); SEC v. M&A West, Inc., 2005 WL 2988963, at *2 (N.D. Cal. Oct. 31, 2005) (including formula for computation), aff’d in part and rev’d in part, 538 F.3d 1043, 1054 (9th Cir. 2008). Here, the amount of prejudgment interest accruing from the time that each investor from 2009 forward (as established in the criminal trial) transferred funds to Murray through August 2016 equals at least $31,162.87. See Habermeyer Decl. ¶ 27 & Ex. X (including Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 27 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 20 interest rates and computation).13 Thus, the full amount of disgorgement and prejudgment interest requested by the Commission totals $2,550,277.34. Id.14 3. Murray Should Pay a Civil Money Penalty for His Fraud The securities laws also provide for civil money penalties to deter future violations. See 15 U.S.C. § 77t(d)(2) (Securities Act); 15 U.S.C. § 78u(d) (Exchange Act); 15 U.S.C. § 80b-9(e) (Advisers Act). The statutes establish three penalty tiers, to be determined in light of the facts and circumstances of each case: 1. For any violation of the securities laws, the Court may impose penalties against individuals and entities in the maximum amounts of $7,500 and $75,000, respectively. 2. For each violation involving fraud or deceit, the Court may impose penalties against individuals and entities in the maximum amounts of $75,000 and $375,000, respectively, or the gross amount of the defendant’s pecuniary gain. 3. For each violation involving fraud or deceit which resulted in substantial loss or a significant risk of substantial loss, the Court may impose penalties against individuals and entities in the maximum amounts of $150,000 and $725,000, respectively, or the gross amount of the defendant’s pecuniary gain. See, e.g., 15 U.S.C. § 77t(d)(2) (Securities Act); 17 C.F.R. § 201.1003 & Table III (adjusting for inflation amounts of statutory penalties for violations occurring after March 3, 2009). Penalties may be assessed for each violation of the securities laws. See, e.g., SEC v. Henke, 275 F. Supp. 2d 1075, 1084 (N.D. Cal. 2003); SEC v. Kenton Capital, Ltd., 69 F. 13 The Commission’s claim for disgorgement does not include former investors Patricia and Robert Windsor, who recently filed a motion in the criminal action seeking to be included as victims of Murray’s fraud. See Crim. Dkt. No. 395. As set forth in the Commission’s response to that motion, also filed today, the Commission does not yet have evidence as to whether or how the Windsors were defrauded. If such evidence is found, the Commission will amend this request to include these investors. 14 To the extent that Murray actually pays restitution, which the Court has already ordered Murray to do in the amount of $3,480,479.90, the amount paid may offset amounts owed as disgorgement. Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 28 of 29 MOTION FOR SUMMARY JUDGMENT SEC V. MURRAY CASE NO. 12-CV-1288-EMC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 21 Supp. 2d 1, 17 (D.D.C. 1998) (multiplying third-tier penalty by number of investors defrauded as proxy for number of violations). In the criminal case, the Court has already found that Murray caused substantial losses to at least nine MNT investors. See Ex. W. The Court should therefore impose third tier penalties. Here, it is important that the Court impose a substantial and meaningful civil penalty to reinforce the seriousness of Murray’s violations and to deter illegal conduct by others. CONCLUSION For the reasons stated above, the Commission respectfully requests that the Court grant summary judgment against Murray and order the requested relief. DATED: September 8, 2016 Respectfully submitted, /s/ Jason M. Habermeyer JASON M. HABERMEYER KAREN KREUZKAMP Attorney for Plaintiff SECURITIES AND EXCHANGE COMMISSION Case 3:12-cv-01288-EMC Document 122 Filed 09/08/16 Page 29 of 29