305 F. Supp. 3d 486
S.D. Ill.2018Background
- The SEC sued Yorkville Advisors, LLC (YA), and two executives, Mark Angelo and Edward Schinik, alleging securities and investment-adviser fraud centered on alleged overvaluation of 15 hard-to-value portfolio positions (2008–2009) and other misrepresentations to investors and auditors.
- YA managed a fund with feeder funds; Angelo was co‑founder, President, majority owner and portfolio manager; Schinik was CFO, COO, and chairman of YA’s Valuation Committee (VC).
- YA used internal valuation processes and retained third‑party valuation consultants (Pluris, later VRC); auditors McGladrey issued clean 2008–2009 audit opinions and later reviewed their workpapers after SEC inquiries.
- The SEC’s valuation expert (Berenblut) opined the 15 positions were materially overstated; defendants moved to preclude parts of his testimony and for summary judgment.
- Court excluded the portions of the expert report that constituted opinions of value (for failure to follow USPAP / reliable methodology) but allowed opinions of quality; denied summary judgment as to Schinik only on claims tied to the Pluris engagement representation; granted summary judgment for Angelo on fraud/ scienter claims but allowed negligence‑based claims (and only for the December 2 cash statement and Pluris representation); YA’s liability limited to the bases that survive against Angelo and Schinik.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Admissibility of SEC expert's valuation opinions | Expert shows 15 positions were overvalued and quantifies overstatements | Expert failed to apply recognized valuation methods and did not comply with USPAP; opinions of value unreliable | Excluded expert opinions of value for failing USPAP/methodology; opinions of quality admissible (gatekeeping under Rule 702 / Daubert) |
| Liability of Schinik for valuation‑based fraud | Schinik concealed documents, endorsed inflated valuations, and misled auditors/investors | VC met regularly; third‑party valuations and clean audits undercut scienter; alleged withheld docs lack record support | Summary judgment denied as to Schinik generally, but SEC may proceed against Schinik only on the Pluris engagement misrepresentation (other valuation fraud claims fail for lack of scienter/evidence) |
| Liability of Angelo for valuation‑based fraud | Angelo had motive (fees, redemptions) and access to contrary information; made affirmative misstatements | Motive allegations too generalized; no specific contrary information shown to be known by Angelo; many contested facts public or investigated; no scienter | Summary judgment granted on all scienter‑based claims against Angelo; negligence‑based claims (Sections 17(a)(2),(3), 206(4), Rule 206(4)‑8) survive only for the December 2 cash statement and Pluris engagement representation |
| Pluris engagement representation (whether YA misled investors about Pluris’ role) | YA represented Pluris was valuing convertibles after YA had decided not to use Pluris for that purpose | Defendants say Pluris continued to provide inputs (illiquidity discounts) and factual disputes over scope; Angelo lacked specific knowledge | Material factual dispute exists as to investor statements and scienter for Schinik; Pluris representation survives against Schinik; Angelo may be liable only for negligence on this point |
Key Cases Cited
- Daubert v. Merrell Dow Pharm., 509 U.S. 579 (expert admissibility gatekeeping under Rule 702)
- Kumho Tire Co. v. Carmichael, 526 U.S. 137 (trial court gatekeeping extends to non‑scientific expert testimony)
- Amorgianos v. Nat'l R.R. Passenger Corp., 303 F.3d 256 (2d Cir. 2002) (framework for assessing expert reliability under Rule 702)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (motive and opportunity and pleading scienter standards)
- Kalnit v. Eichler, 264 F.3d 131 (2d Cir. 2001) (recklessness/conscious misbehavior standard for scienter)
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (scienter defined as intent to deceive, manipulate, or defraud)
- SEC v. Monarch Funding Corp., 192 F.3d 295 (2d Cir. 1999) (elements of Rule 10b‑5/Section 17(a) claims)
- SEC v. DiBella, 587 F.3d 553 (2d Cir. 2009) (aiding and abetting securities liability elements)
- ATSI Commc'ns, Inc. v. Shaar Fund Ltd., 493 F.3d 87 (2d Cir. 2007) (control‑person liability elements)
- Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004) (materiality is typically jury question)