The opinion of the court was delivered by: Robert B. Kugler United States District Judge
HONORABLE ROBERT B. KUGLER
Plaintiff Commodity Futures Trading Commission ("CFTC" or "Plaintiff") alleges that Defendants Vincent Firth, Robert W. Shimer, and Equity Financial Group LLC ("Equity") committed multiple violations of the Commodity Exchange Act and CFTC regulations. The allegations in the complaint include claims that Defendants violated 7 U.S.C. § 4b(a)(2) by committing fraud by misrepresentation. CFTC also alleges violations of 7 U.S.C. § 6o(1), commodity pool fraud, and alleges that Equity was responsible for Shimer and Firth's commodity pool fraud and vice versa. CFTC alleges failure to register as a commodity pool operator or commodity trading advisor and that Shimer and Firth aided and abetted Equity's violation on this count. CFTC claims that Shimer and Firth failed to register as associated persons ("APs") of the commodity pool operator. Finally, CFTC alleges that Shimer impermissibly accepted and traded third party funds in the name of Tech Traders, the commodity trading advisor, in violation of 17 C.F.R. § 4.30.
The Court has previously ruled that defendant Shasta was a commodity pool, initially in the opinion at Commodity Futures Trading Comm'n v. Equity Fin. Group, No. 04-1512, 2005 WL 2864784 (D.N.J. Oct. 4, 2005) and on reconsideration, Commodity Futures Trading Comm'n v. Equity Fin. Group, No. 04-1512, 2006 WL 3359418 (D.N.J. Nov. 16, 2006). The Court ruled that Shasta satisfied the four-factor test for a commodity pool, as articulated in Lopez v. Dean Witter Reynolds, Inc., 805 F.2d 880, 883 (9th Cir. 1986), because (1) the funds of individual investors were pooled in defendant Shimer's equity account; (2) these commingled funds were then transferred en masse to Tech Traders to be invested in commodity futures, without distinguishing between the funds of individual investors; (3) investors believed that gains from the Tech Traders operation would be allocated pro rata, depending on the relative amount of their investment; and (4) trades were made on behalf of the pool rather than in the name of individual investors.
The Court previously granted summary judgment on a number of other counts of Plaintiff's complaint in the opinion at Commodity Futures Trading Comm'n v. Equity Fin. Group, No. 04-1512, 2006 WL 3751911 (D.N.J. Dec. 18, 2006). The Court ruled that Equity violated 7 U.S.C. § 6m(1) because Equity, acting as an unregistered CPO, used instrumentalities of interstate commerce, i.e., the telephone, in connection with its business. Because the Court concluded that Shasta was a commodity pool and Equity a commodity pool operator, and because Plaintiff presented evidence that defendants Firth and Shimer acted as salespeople for Equity, the Court ruled that Defendants Firth and Shimer violated 7 U.S.C. § 6k(2) by failing to register with the CFTC as associated persons ("APs"). Regarding Plaintiff's allegations under 7 U.S.C. § 6 o(1)(b), the Court concluded that, given the nature of the fiduciary relationship Firth had with Shasta investors, the uncontroverted evidence that he intended to make misleading representations to potential Shasta investors when he signed and distributed the PPM via e-mail and posted the "verified" performance numbers on the Shasta website, and the finding that the PPM had the effect of defrauding or deceiving potential investors, Firth violated 7 U.S.C. § 6o(1)(B). The court also concluded that Shimer violated this provision because he had a fiduciary relationship with Shasta's investors, intentionally ignored the numerous and varied warning signs regarding Tech Traders and Murray, used the internet to post the PPM as well as unverified performance numbers on the Shasta website, and communicated with the CPAs, potential investors, and Murray via e-mail. The Court ruled that because these violations were all committed while defendants Firth and Shimer acted as agents of Equity, Equity is liable for the foregoing charges against Firth and Shimer under 7 U.S.C. § 2(a)(1)(B).
The Court has also ruled that Tech Traders was a commodity trading advisor ("CTA"), that it violated 17 C.F.R. § 4.30 by accepting money from third parties and trading those funds in Tech Trader's name, and that Shimer aided and abetted this violation of section 4.30. Commodity Futures Trading Comm'n v. Equity Fin. Group, No. 04-1512, 2007 WL 1038754, (D.N.J. March 30, 2007).
There are three remaining issues. The first is whether defendants Firth, Shimer and Equity committed fraud by misrepresentation under 7 U.S.C. § 6b(a)(2) in misrepresenting and failing to disclose material information about their expertise, qualifications, background, compensation, and their experiences in dealing with Coyt Murray and Tech Traders; recklessly misrepresenting the performance of the Shasta commodity pool and the role of the independent CPA; and accepting disbursements to which they were not entitled. The second issue is whether defendants Firth and Shimer are liable for Equity's violations of the Act, pursuant to 7 U.S.C. § 13c(b), because Firth and Shimer "directly or indirectly controlled Equity and did not act in good faith or knowingly induced, directly or indirectly, the acts constituting Equity's violations" of the Commodity Exchange Act. In connection with the failure to register as a commodity pool operator count, the remaining issue is whether defendant Shimer aided and abetted Equity's previously-determined failure to register as a CPO under 7 U.S.C § 6m(1).
The Court, without a jury, held a trial on these issues on August 27, 28, 29, 30, and 31 and September 4, 5, and 6, 2007. On November 6, 2007, Plaintiff filed Proposed Findings of Fact and Conclusions of Law, together with a Supplemental Post Trial Brief. Shimer submitted "Proposed Findings of Fact and Conclusions of Law and Post Trial Brief."*fn1 Firth submitted "Proposed Findings of Fact and Conclusions of Law."*fn2 Though Equity was represented, the Court excused its obligation to file anything further.
The following, pursuant to Federal Rule of Civil Procedure 52, represents the Court's Findings and Conclusions. As will be demonstrated, plaintiff clearly sustained its burden of proof and is entitled to the judgments it seeks against all defendants.
1. Defendant Equity Financial Group, LLC, ("Equity") is a New Jersey limited liability company formed on September 1, 1998, with an address of 3 Aster Court, Medford, New Jersey 08055. (Answer ¶1; Stip. Fact 4). Equity was the manager of Shasta Capital Associates, a Delaware limited liability company. (Stip. Fact 4.)
2. Defendant Vincent J. Firth ("Firth") resides in Medford, New Jersey and is the President and sole shareholder of Equity. (Answer ¶1; Stip. Fact 2.)
3. Defendant Robert W. Shimer ("Shimer") resides or resided in Leesport, Pennsylvania and was legal counsel for Shasta and Equity at all relevant times. (Answer ¶¶ 1, 31; Stip. Fact 3.)
4. The Court has already ruled that Shasta was a commodity pool.
5. Shasta's funds, except for 1% of initial deposits, all went into Tech Traders' master pool. (Trial Tr., Shimer, 8/28/07, 93-4 to 9.)
6. The Court previously ruled that Equity was the commodity pool operator ("CPO") for Shasta.
7. New Century Trading LLC ("New Century"), is a Nevis, West Indies limited liability company whose manager was Allied International Management, Ltd. (Stip. Fact 5.)
8. New Century was formed by an attorney by the name of Liburd on the Island of Nevis, West Indies, in April of 2001, at the direction of Shimer. Shimer suggested the formation of this entity to permit accredited foreign investors to invest in Tech Traders. New Century had two investors, International Investment Alliance and Metalchem. Later, Shimer formed Shasta as a Delaware Limited Liability Company. (Stip. Fact 34.)
9. Edgar Holding Group, Inc. ("Edgar") was a Delaware corporation formed in December, 2000, of which Firth was president and Shimer was the chief financial officer. Edgar collected at least $180,000, in funds from four outside investors to invest with Coyt E. Murray. (Stip. Fact 6.)
10. Tech Traders, Inc. ("TTI") was a Delaware corporation located in Gastonia, North Carolina. (Stip. Fact 7.)
11. Tech Traders, Ltd. ("TTL") was a foreign corporation organized under the laws of the Bahamas. It was a sister company to Tech Traders, Inc. and was party to a "Service Agreement" dated June 1, 2001, providing that Tech Traders, Ltd., would place investment funds with Tech Traders, Inc., for trading. (Stip. Fact 8.)
12. TTI and TTL generally shared common ownership, office space and employees. Most investor funds were held in bank or future commission merchant ("FCM") accounts carried in the name of TTI. As there was no meaningful distinction between them, they are hereafter referred to generally as "Tech Traders." (Stip. Fact 9.)
13. Magnum Investments, Ltd. ("Magnum") was incorporated as a South Carolina corporation in 1991 but is not in good standing. Magnum was a party to a "Service Agreement" dated June 1, 2001, purportedly providing that Magnum would place investment funds with Tech Traders, Inc. for trading. (Stip. Fact 10.)
14. Magnum Capital Investments, Ltd. ("MCI") was a foreign corporation organized under the laws of the Bahamas. It is a sister company to Magnum Investments, Ltd., and was party to a "Service Agreement" dated June 1, 1999, purportedly providing that MCI would send investment funds for placement with Magnum for trading. (Stip. Fact 10.)
15. Coyt Murray ("Murray") was the president and chief executive officer of Tech Traders and was Tech Traders' primary contact person in dealing with potential participants. Murray also controlled Magnum and MCI. Murray and Tech Traders operated out of an office in Gastonia, North Carolina. Murray represented to Firth and Shimer that Tech Traders used a "portfolio" system for successful trading of selected exchange-traded financial futures contracts, including the NASDAQ 100 and S&P 500. He told Firth and Shimer that the success of the portfolio system derived from the fact that it utilized many different, allegedly non-correlated, separate systems traded concurrently on different time frames using proprietary algorithms, which not only helped filter out market noise for the purpose of more correctly determining the real direction of market trends, but also would balance and smooth the performance of the system. (Stip. Fact 12.)
16. The Court previously found that:
a. Firth and Shimer acted as salespeople for Shasta. They were associated persons ("APs") of Equity;
b. Neither Firth nor Shimer were registered as APs for Equity;
c. Equity is not registered with the CFTC in any capacity.
17. From June 2001 through April 1, 2004, Defendants Firth and Shimer, acting individually and through Equity, solicited $15,113,498.11 in outside investor funds through Shasta and $295,143.81 in outside investor funds through New Century for trading by Tech Traders in commodity futures contracts. Equity, acting through Firth and Shimer, and Firth and Shimer individually, touted the "astonishing" performance of the Shasta commodity pool, claiming that the pool had earned trading profits of approximately 100% per annum since inception. (Stip. Fact 13.)
18. Defendants Tech Traders and Murray solicited and accepted net deposits of $13,883,381.20 from Shimer's escrow account and $296,143.81 directly from New Century to trade commodity futures contracts. In total, Tech Traders received a total of $43,132,522.01 from Shasta and other investors. At the time Tech Traders' assets were frozen by the court, Tech Traders, Inc. had returned a total of $11,984,471 of principal to investors, paid $617,942.19 in fictitious profits to investors, and from 2001 to April 1, 2004, lost $7,605,407 trading commodity futures contracts and other financial instruments in the accounts that held Shasta, and other third-party funds. Tech Traders also transferred over $2.4 million to Equity and to bank accounts controlled by Shimer or Firth. In order to make its investors whole, the receivership estate of Tech Traders, Inc., would need more than $15 million. (See Stip. Fact 14.)
19. Murray often stated to Shimer and Firth that other individuals and/or entities had loaned money to his companies or had placed funds with his various companies for trading solely in the name of Murray's various companies. (Stip. Fact 15.) Firth and Shimer knew that Tech Traders and Murray pooled these funds with Shasta's funds. (Trial Tr., Firth, 8/27/07, 77-8 to 10; Shimer, 8/28/07, 101-12 to 13.) The Investment Agreement between Shasta and Tech Traders also provided that Shasta's funds would be intermingled with the funds of Tech Traders' other investors and that all investors' funds would be treated equally in the superfund. (Stip. Fact 27.) Shimer drafted and Firth signed this Investment Agreement. (Pl.'s Ex. 91; Trial Tr., Shimer, 8/28/07, 101-5 to 7.)
20. Firth was the sole signatory on Equity's bank account and made decisions on disbursements out of that account. Firth also issued the monthly account statements to Shasta and New Century investors. (Stip. Fact 16). He reviewed, approved, and distributed Shasta's Private Placement Memorandum. (Answer ¶¶ 29, 30, 48.) Therefore, Firth is a controlling person of Equity.
21. Firth was registered in the securities industry as a registered representative of several broker-dealers between 1981 and 1990. (Answer ¶ 30.) The Shasta PPM states that Firth holds an NASD Series 7 license, creating the impression that the license was current, though it was not. (Trial Tr., Firth, 9/4/07, 10-17 to 11-1.) Firth had no experience with commodity pool accounting, no training in pool statement preparation and no experience with back office operations of a commodity pool. CFTC, 2006 WL 3751911, *6 (granting partial summary judgment to Plaintiff CFTC). The Shasta PPM does not disclose this lack of experience. (Answer ¶ 49; Pl.'s Exs. 1093, 1070, 461.)
22. Firth and his wife filed for bankruptcy, which was not disclosed in the Shasta PPM. (Pl.'s Ex. 4; Trial Tr., Firth, 8/27/07, 116-1 to 117-4.) Investors testified this information would have been important to their decision to invest in Shasta. (Trial Tr., Dent, 8/29/07, 87-19 to 88-1; Tate, 8/30/07,44-2 to 15; Evans, 8/29/07, 72-13 to 25; Northridge, 8/31/07, 56-17 to 57-4.)
23. Shimer did not inquire as to whether Firth had been in bankruptcy. (Trial Tr., Shimer, 8/28/07, 97-7 to 9.)
24. Shimer was legal counsel for Shasta and Equity. He is an attorney admitted to the bar in Massachusetts in 1973. (Stip. Fact 18.)
25. From June to December 1986, Shimer was registered as an AP of Churchill Commodities, a former CPO that had been registered with the Commission. From December 1988 to April 1989, he was registered as an AP of Capital Management Partners, a former introducing broker. (Trial Tr., Shimer, 8/27/07, 175-3 to 5; Answer ¶ 21.) He took and passed the Series 3 examination required for APs in the futures industry in 1986. (Trial Tr., Shimer, 8/27/07, 174-15 to 175-4.)
26. Shimer's only experience trading commodity futures contracts before forming Shasta was an account his wife had opened for six to eight months in the late 90's. He does not have an accounting degree. Before Shasta, he had never managed a commodity pool, never prepared commodity pool statements, and had no experience with commodity pool accounting procedures. In 2001, when he formed Shasta, he did not remember much about commodity trading. (Trial Tr., Shimer, 8/27/07, 180-15 to 181.23.)
PRIOR BUSINESS FAILURES OF SHIMER AND FIRTH
27. Shimer formed a Nevada corporation called Kaivalya Holding Group in 1999. (Trial Tr., Shimer, 8/27/07, 181-24 to 182-1.) He was a director and shareholder. (Id. 82-1 to 10.) He and others collected investor money for three different investments. (Id. 182-10 to 20.)
28. All Kaivalya investments failed. The first involved $669,000 of investor money (of which $345,000 was collected by Shimer). (Trial Tr., Shimer, 8/27/07, 182-21 to 183-16.) Investors got some payments for about a year, but did not recover all their principal. They only recovered 50-54%. (Trial Tr., Shimer, 8/27/07, 184-13 to 22.) The FBI investigated. (Id. 184-24 to 185-3.*fn3
29. Shimer admits the second Kaivalya investment was a "total disaster" also. (Trial Tr., Shimer, 8/27/07, 185-14 to 186-3.) Investors lost $325,000. (Id. 186-7 to 11.) This also was "an international scam." (Id. 186-6.)
30. The third Kaivalya investment was made through intermediaries Jerry La Tulippe ("La Tulippe") and Tom Leonard ("Leonard"). Shimer became involved in this new investment to pay back the Kaivalya investors who invested in the earlier failed deals. (Perkins Dep. 13.4 to 14.3.) La Tulippe told Shimer that he had an exclusive relationship with a trader who was obtaining phenomenal trading results. (Trial Tr., Shimer, 8/27/07, 186-13 to 187-13.) That Trader was Coyt Murray. Shimer went to the Bahamas and met Coyt Murray. Murray told Shimer that he had licensed his trading system to Hubert Pinder, who had a trading platform in the Bahamas. (Id. 187-14 to 189-24.) Leonard or La Tulippe told Shimer that Murray's system was averaging 10% returns per day. (Id. 190-9 to 20.) After this meeting in the Bahamas, Shimer collected over $1,300,000 from investors to invest in Murray's trading system and wired the money to an account in the name of Good Works, which he was told was a company controlled by La Tulippe. (Id. 190-21 to 191-2.)
31. This third investment failed when according to Shimer, La Tulippe absconded with the money. (Trial Tr., Shimer, 8/27/07, 198-14.) This was to become known to Shimer as the "Tom and Jerry fiasco." (Trial Tr., Shimer, 8/28/07, 40-11.)
32. Shimer was pressured by some Kaivalya investors to pay them back. There were threats of lawsuits and complaints to government authorities. Shimer gave promissory notes to some investors from the third deal. (Trial Tr., Shimer, 8/27/07, 192-6 to 197-20.)
33. Shimer did not disclose the failed Kaivalya investment history to potential Shasta investors. The Shasta PPM did not disclose these facts either. (Answer ¶ 51; Pl.'s Exs. 1093, 1070, 461, 404 at .) Investors testified this failed investment history would have been important to their decision to invest in Shasta. (Trial Tr., Dent, 8/29/07, 88-6 to 9, 102-16 to 103-1; Evans, 8/29/07, 73-17 to 74-3; Northridge, 8/31/07, 57-23 to 58-4.)
34. Beginning in the fall of 1999, Firth introduced several parties to Badishe Trust to secure financing. Badische absconded with the parties' commitment fees. At least two parties that Firth introduced to Badishe brought legal action against Firth and secured judgments or other relief against Firth. (Answer ¶ 18; Pl.'s Exs. 1000, 1121, 1139; Trial Tr., Firth, 8/27/07, 117-4 tp 121.18; 122.20 to 124.9.) The Shasta PPM does not disclose this failed investment deal or the fact that Firth was sued by people he solicited for financing deals. (Pl.'s Exs. 1093, 1070, 461; Trial Tr., Firth, 8/27/07, 124-17 to 22.) Investors testified it would have been important to know of Firth's failed investments and that he had been sued when making a decision to invest in Shasta. (Trial Tr., Dent, 8/29/07, 88-10 to 16, 102-16 to 103-1; Evans, 8/29/07, 73-1 to 16; Tate, 8/30/07, 44-16 to 45-17; Northridge, 8/31/07, 57-5 to 22.)
SHIMER AND FIRTH MEET AND BEGIN OPERATIONS; SHASTA FORMED
35. Firth and Shimer met in the fall of 1999, through La Tulippe. Shimer was introduced as La Tulippe's lawyer. Firth learned before organizing Shasta that La Tulippe had taken investor money from Shimer for an investment with Murray and never paid it back. (Trial Tr., Firth, 8/27/07, 69-10 to 71-15.) This was the only business experience Firth had with Shimer prior to forming Shasta. Id. Firth failed to do any investigation of Shimer's background or experience before managing Equity. (Id. 71-15 to 76-5.)
36. In the fall of 2000, Shimer tracked down Murray to find out what had happened to the $1.3 million of investor money he had collected for Murray's trading system. Murray told Shimer that he had never received the money from La Tulippe that was supposed to be invested in his trading system. (Trial Tr., Shimer, 8/27/07, 198-8 to 24.) Shimer showed Murray some documentation that implicated Murray in Leonard's and La Tulippe's fraud and told Murray that he was considering reporting Leonard and La Tulippe to Florida criminal authorities. Because of this threat, and even though he claimed never to have received the Kaivalya funds, Murray agreed to help Shimer repay the Kaivalya investors if Shimer placed funds for trading with him. (Id. 198-25 to 201-16; Shimer, 9/05/07, 35-13 to 39-9.)
37. Murray told Shimer he was just beginning to trade and that he had been back-testing his trading system for a year, although he had told Shimer in 1999 that he licensed it to Pinder the year before. (Trial Tr., Shimer, 8/28/07, 17-8 to 12.) Although Shimer had been told by La Tulippe and Leonard that Murray was successfully trading the system in 1999 through Pinder, Shimer did not ask Murray a lot of questions about his relationship with Pinder. Murray told Shimer that he had returned money to Pinder after being advised by his attorneys to do so because Pinder was misusing investor funds. Murray also told Shimer that he returned money given to him for trading to Pinder after suffering a trading loss. (Id. 17-18 to 20-1.)
38. Shimer and Murray agreed to solve Shimer's Kaivalya's problems (the three failed investments and those investors' demands to be repaid) by Murray sharing Tech "profits" with Shimer. To do this, Murray would send a share of the "profits" to a Nevis Trust initiated by Shimer, called Shadetree. (Trial Tr., Shimer, 8/27/07, 198-25 to 202-13.)
39. Shadetree had no bank account. (Trial Tr., Shimer, 8/27/07, 203-15.) Murray made payments pursuant to this Shadetree agreement to bank accounts that Shimer controlled. (Id. 204-12 to 20.) Money allocated to Shadetree went to Shimer and Firth. (Id. 204-23 to 206-8.)
40. Sometime before June 30, 2001, Shimer drafted Shasta's Private Placement Memorandum ("PPM"), Operating Agreement, Subscription Agreement, the Agreement for Independent Verification of Shasta Capital Profits and Losses and Investor Questionnaire. He was also responsible for all of Shasta's filings with the Securities and Exchange Commission and for all required notice filings in every state. Shimer also tried to review every document Firth sent out for Equity. In addition to preparing legal documents for Equity, Shimer also approved all subscription documents submitted to Shasta, accepted participant funds and deposited them into his attorney escrow account for further transmittal to Tech Traders ...