320 F. Supp. 3d 910
E.D. Mich.2018Background
- Gregory McKnight ran a $72M Ponzi scheme (Legisi) and, through Legisi Marketing/Legisi Holdings, invested ~$9.44M (all Ponzi-derived) in Royal Palm Real Estate Investment Fund, LLLP (the Fund) in 2007.
- SEC sued McKnight/Legisi in 2008; Robert Gordon was appointed receiver for their estates and brought this suit against Royal Palm entities and individuals alleging securities fraud, state-law fraud, partnership breaches, and fraudulent-transfer claims.
- Key alleged facts: Royal Palm principals (the Rosettos and others) formed interrelated entities, marketed the Fund (Sierra later became selling agent), and allegedly made misrepresentations/changed offering terms and engaged in self-dealing after Legisi’s investments.
- Procedural posture: Defendants moved to dismiss the Second Amended Complaint under Fed. R. Civ. P. 12(b)(1) and 12(b)(6); the Court heard argument and issued a mixed ruling granting dismissal of some counts and denying others.
- Disposition overview: Court dismissed receiver’s maker-liability §10(b)/Rule 10b-5(b) claims (because alleged misstatements were made by a non-defendant salesman), many Michigan-law claims under Michigan’s wrongful-conduct/in pari delicto doctrine, and certain counts as to some individual defendants; it allowed scheme-based Rule 10b-5(a)/(c) claims, certain Florida partnership and fiduciary-duty claims against the Management Company and Bruce Rosetto, and Michigan statutory fraudulent-transfer claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Applicability of in pari delicto to federal securities claims | Receiver may proceed despite Ponzi origin because recovery will go to innocent investors and enforcement favors allowing suit | Receiver (standing in Ponzi-schemer's shoes) is barred if plaintiff is equally culpable under Bateman Eichler | In pari delicto established on culpability prong but denied as defense under second prong (public enforcement/policy): receiver may pursue federal securities claims (scheme-based) |
| Applicability of Michigan wrongful-conduct/in pari delicto to state claims | Receiver seeks relief for victims; Orzel rule should not bar claims because recovery benefits innocent investors | Michigan wrongful-conduct rule bars claims where plaintiff's criminal conduct caused injury | Court applied Michigan law: dismissed Michigan statutory and common-law claims under Orzel (policy concerns do not alter rule) |
| Maker liability under §10(b)/Rule 10b-5(b) | Defendants controlled communications and are responsible for misrepresentations made to McKnight | Alleged misstatements were made and controlled by a non-party salesperson (Lichtenstein/Sierra); Janus limits private-party liability to makers | Dismissed maker-liability claims: Plaintiff failed to plead that named defendants were the ‘makers’ of the alleged statements |
| Scheme liability under Rule 10b-5(a)/(c) | Defendants participated in deceptive scheme (entity formation, altered offering terms, self-dealing) 'in connection with' sale | Defendants argued lack of direct misstatements and other defenses | Court found plausible scheme allegations and allowed 10b-5(a)/(c) claims to proceed |
Key Cases Cited
- Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (U.S. 1985) (in pari delicto bars private securities actions where plaintiff is substantially at fault unless preclusion would impair enforcement/public policy)
- Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135 (U.S. 2011) (private §10(b) liability limited to the ‘maker’ who has ultimate authority over statements)
- Pinter v. Dahl, 486 U.S. 622 (U.S. 1988) (plaintiff must be active, voluntary participant in wrongdoing for in pari delicto to apply)
- Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (U.S. 2008) (scheme liability under Rule 10b-5 may reach participants who do not 'make' statements but engage in deceptive acts connected to securities transactions)
- Wuliger v. Manufacturers Life Ins. Co., 567 F.3d 787 (6th Cir. 2009) (receiver stands in debtor’s shoes and is subject to debtor’s claims and defenses)