Cobalt Multifamily Investors I, LLC v. Arden
857 F. Supp. 2d 349
S.D.N.Y.2011Background
- Receiver moved for summary judgment on 2/24/2011 against Landsman, Eisemann, Kagan, Dundon, and Comvest for alleged unregistered securities sales and related disgorgement.
- Receiver seeks (1) violation of Section 12(a)(1) for sale of unregistered securities and (2) disgorgement of commissions and unjust enrichment from defendants.
- R&R recommended: grant as to individual defendants on first action; deny against Comvest; grant as to individual defendants on third action; deny unjust enrichment; and require disgorgement amounts for each individual defendant.
- Court adopted the R&R, granting summary judgment against the individual defendants on the first action and ordering disgorgement; denied additional unjust enrichment disgorgement; denied relief against Comvest for the first action.
- Comvest lacked established Section 5 jurisdiction for the alleged sale of unregistered securities; the case discusses Regulation D exemptions (Rules 505/506) and whether exemptions apply.
- The Receiver was ordered to submit a status letter by 10/12/2011 and the Clerk was to terminate docket entry 139.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does Comvest meet Section 5 jurisdiction for selling unregistered securities? | Paduano asserts Comvest conducted interstate solicitations via Dundon on Comvest’s behalf. | Comvest contends no sufficient proof that Dundon acted as its representative in a manner triggering Section 5 jurisdiction. | No Section 5 jurisdiction established for Comvest. |
| Are the Cobalt securities exempt under Regulation D (Rules 505/506)? | Securities claimed exempt under Regulation D (505/506). | Regulatory limits and integration issues may prevent exemption; need sufficient purchaser count and investment totals. | Receiver failed to prove exemptions; exemptions did not apply on this record. |
| Did the defendants sell unregistered securities in violation of Section 5? | Defendants solicited investors for unregistered securities via calls; securities were unregistered. | Defendants contend lack of regulatory knowledge or intent is relevant; some defenses argued (later disregarded). | Yes; prima facie Section 5 violation established for individual defendants. |
| Is disgorgement an appropriate remedy against the individual defendants? | Disgorgement is proper to deprive wrongdoers of ill-gotten gains and deter future violations. | No direct challenge; court evaluates whether disgorgement is proper given the posture. | Disgorgement proper for individual defendants; specified amounts ordered. |
| Is the unjust enrichment claim viable against the defendants? | Defendants were unjustly enriched by commissions from unregistered securities sales. | Receivership standing and equities may preclude restitution; in pari delicto and Bateman/Pinter considerations apply. | Unjust enrichment claim against Comvest denied; against individuals, court declined restitution, finding other equities and agency principles weigh against recovery. |
Key Cases Cited
- Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (U.S. Supreme Court 1985) (two-prong test for in pari delicto defense in securities cases)
- Pinter v. Dahl, 486 U.S. 622 (U.S. Supreme Court 1988) (investor/promoter consideration in in pari delicto analysis)
- Ross v. Bolton, 904 F.2d 819 (2d Cir. 1990) (in pari delicto defense and equities in restitution analyses)
- Universal Exp., Inc. v. Sec. & Exch. Comm., 475 F.Supp.2d 412 (S.D.N.Y. 2007) (elements of Section 5 violation and exemptions framework)
- Zwick, 317 Fed.Appx. 34 (2d Cir. 2008) (disgorgement and calculation of profits as remedial not punitive)
- Cavanagh, 445 F.3d 105 (2d Cir. 2006) (addressing disgorgement and exemptions context)