225 F. Supp. 3d 225
S.D.N.Y.2016Background
- From 2007–2014 Penn managed Camelot Acquisitions Secondary Opportunities LP and diverted approximately $9.3 million from the Fund through payments routed to Ssecurion and then to Penn-controlled entities (CASO Management and CGI).
- Penn was criminally charged in New York and pled guilty to grand larceny and falsifying business records, admitting he stole over $1 million and falsified invoice schedules "with intent to defraud."
- In his amended civil-answer Penn admitted diverting $9.3 million to his entities, that Fund records mischaracterized those transfers, and expressly admitted liability under Section 204 of the Investment Advisers Act and Rule 204-2.
- SEC moved for judgment on the pleadings (and alternatively for partial summary judgment) on Exchange Act §10(b)/Rule 10b-5 and several Advisers Act claims; also moved to dismiss Penn’s counterclaims.
- Court converted the Rule 12(c) motion to summary judgment after giving Penn proper notice, applied collateral estoppel to Penn’s plea admissions and treated admissions in his answer as judicial admissions.
- Court granted summary judgment for the SEC on Exchange Act §10(b)/Rule 10b-5 and Advisers Act §§204, 206(1), 206(2) and Rule 204-2; dismissed Penn’s counterclaims without prejudice; §207 claim remains for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Should SEC's Rule 12(c) motion be converted to summary judgment? | SEC: offered materials outside pleadings and gave Local Rule notice; conversion appropriate. | Penn: (pro se) contested some facts but provided no admissible opposing evidence. | Court converted to summary judgment after providing adequate notice. |
| Do Penn’s guilty plea allocution and amended answer preclude relitigation (collateral estoppel/judicial admissions)? | SEC: plea and answer admissions are binding and establish core facts. | Penn: appealed conviction and disputed certain factual characterizations. | Court: New York preclusion law binds Penn; plea allocution and answer admissions preclude relitigation. |
| Liability under Exchange Act §10(b) and Rule 10b-5(a)/(c) for scheme liability | SEC: routing payments via Ssecurion and falsifying records were inherently deceptive acts done with scienter. | Penn: argued payments were consistent with investor expectations and challenged materiality/scienter. | Court: Penn’s admissions established deceptive scheme and intent; summary judgment for SEC. |
| Liability under Advisers Act §§206(1) & 206(2) and §204/Rule 204-2 | SEC: adviser duties breached by diversion, non-disclosure and falsified records; admitted violations of §204/Rule 204-2. | Penn: did not present admissible evidence to counter; asserted fee expectations defense. | Court: admissions and facts satisfy elements (fiduciary duty, scheme/non-disclosure, scienter/negligence); summary judgment for SEC. |
| Are Penn’s counterclaims permissible as compulsory/cross-claims in SEC enforcement action? | Penn: asserted common-law torts and §1983 counterclaims. | SEC: Congress requires SEC consent to assert counterclaims in enforcement actions; none given. | Court: dismissed Penn’s counterclaims without prejudice (SEC has not consented). |
Key Cases Cited
- Celotex Corp. v. Catrett, 477 U.S. 317 (summary judgment standard)
- Scott v. Harris, 550 U.S. 372 (no genuine issue where record could not lead a rational trier of fact to find for nonmovant)
- Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (court must find no rational trier could rule for nonmovant)
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (scienter standard for securities fraud)
- Transamerica Mortg. Advisors, Inc. v. Lewis, 444 U.S. 11 (Advisers Act imposes fiduciary standards)
- Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373 (full faith and credit: state preclusion law governs collateral estoppel)
- Steadman v. SEC, 603 F.2d 1126 (applying scienter standard under Advisers Act akin to Section 17(a) analysis)