2:13-cv-02578
W.D. Tenn.Feb 29, 2016Background
- Plaintiffs (Mary Phillipa Sledge, Mary Jane Pidgeon Sledge Trust, Pidgeon Sledge Family LP) invested $5,293,500 between Nov 2011–Oct 2012 after defendant Cleal Watts III (acting for Indico) solicited funds to purchase unrefined gold dust purportedly from Ghana.
- Watts represented Defendants were “ready and able” to supply >$5M of ~91% pure gold, that he was an experienced gold importer, and promised ~30% ROI; no gold was ever delivered.
- Plaintiffs relied on Watts’s representations, emails ("Soft Corporate Offers"), schedules, news articles and an insurance policy Watts provided; later many of those documents (news articles, insurance policy) were shown to be fabricated.
- Bank records show Watts diverted substantial investor funds to Indico’s brokerage accounts, a correspondent account in a Nigerian bank, and to personal/third-party payees instead of purchasing gold.
- Watts had no prior successful deliveries; his testimony contained multiple inconsistencies. DOJ notified Watts of a parallel criminal investigation and called the scheme fraudulent.
- Court converted a preliminary injunction to a permanent injunction, granted summary judgment for Plaintiffs on all claims except negligent misrepresentation, and awarded $22,232,700 (principal, prejudgment interest, and treble TCPA damages).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Fraudulent misrepresentation (state law) | Watts knowingly/recklessly lied about ability, experience, and existence/purity of gold; Plaintiffs relied and lost >$5M | Watts disputes facts generally; offered excuses for delivery failures | Court: summary judgment for Plaintiffs — all fraud elements met; damages awarded |
| Conversion / trover / misappropriation | Funds were entrusted for a specific purpose (gold) but were diverted to Indico accounts, personal expenses, and others | Watts denied or offered alternative explanations but cited no record evidence | Court: summary judgment for Plaintiffs — intentional dominion and unauthorized use established |
| Tennessee Consumer Protection Act (TCPA) & damages | Defendants’ deceptive acts caused ascertainable loss; conduct was willful so treble damages and attorney fees appropriate | Contest as to facts and willfulness (not supported) | Court: summary judgment for Plaintiffs; willful violation found; trebled damages awarded and attorney fees permitted |
| Federal securities claims (§10(b)/Rule 10b-5, §20(a), §12(1)) | Investment contracts were securities (Howey); misstatements/omissions in connection with sale; scienter, reliance, loss, and unregistered offering present | Watts contested facts but failed to present record evidence creating a genuine dispute | Court: summary judgment for Plaintiffs on §10(b)/10b‑5, §20(a) (Watts controlled Indico), and §12(1) (unregistered securities) |
Key Cases Cited
- Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (U.S. 1986) (summary judgment standard—view evidence in nonmovant’s favor when deciding genuine issues)
- Celotex Corp. v. Catrett, 477 U.S. 317 (U.S. 1986) (nonmoving party must present specific facts to show genuine dispute)
- Anderson v. Liberty Lobby, 477 U.S. 242 (U.S. 1986) (standard for judging whether evidence presents a genuine issue for trial)
- SEC v. W.J. Howey Co., 328 U.S. 293 (U.S. 1946) (investment contract test for determining a security)
- Gizzi v. Marinov, 79 F.3d 1148 (6th Cir. 1996) (fraud finding where defendant misrepresented ability to deliver investment product)
- Zaluski v. United Am. Healthcare Corp., 527 F.3d 564 (6th Cir. 2008) (elements of §10(b)/Rule 10b‑5 claims)
- Doherty v. American Motors Corp., 728 F.2d 334 (6th Cir. 1984) (corporations must be represented by counsel in federal court)
- SEC v. Blavin, 760 F.2d 706 (6th Cir. 1985) (duty of disclosure and good faith in broker–client contexts)