MOROSS LIMITED PARTNERSHIP, Plaintiff-Appellant/Cross-Appellee, v. FLECKENSTEIN CAPITAL, INC., William Fleckenstein, and RTM Fund, L.P., Defendants-Appellees/Cross-Appellants.
Nos. 05-2280/2312
United States Court of Appeals, Sixth Circuit
Argued: Sept. 20, 2006. Decided and Filed: Oct. 24, 2006.
466 F.3d 508
Before: CLAY and GILMAN, Circuit Judges; STAFFORD, District Judge.*
OPINION
GILMAN, Circuit Judge.
This case arises from the investment of $750,000 by Moross Limited Partnership into the RTM Fund, L.P., a private investment fund. After the RTM Fund lost 90% of its assets due to an unsuccessful strategy of “short-selling” in the securities market, Moross sued the RTM Fund, its general partner, and its investment manager (collectively, the defendants). Moross‘s suit alleged violations of Michigan‘s Uniform Securities Act (MUSA), fraud, and breach of fiduciary duty. Both sides moved for summary judgment after a lengthy period of discovery. In addition, the defendants moved for sanctions under
On appeal, both parties renew their arguments made below. The defendants further move for sanctions under
I. BACKGROUND
A. Factual background
In December of 1996, William Fleckenstein, the sole shareholder of Fleckenstein Capital, Inc., sent a letter to Stanley Dickson, a Michigan attorney, accountant, and investor, soliciting him to invest in the RTM Fund. The RTM Fund, a Delaware limited partnership that invests in publicly traded securities, was managed by Fleckenstein Capital as its General Partner. Fleckenstein Capital is based in the state of Washington. Included with the solicitation letter was a “Confidential Private Offering Memorandum” (Offering Memo), which explained that, because “[t]his is a private offering[,] [t]he limited partnership interests offered hereby have not been registered with or approved by the Securities and Exchange Commission or any state securities agency.”
In April of 1997, Dickson established the Moross Limited Partnership as the vehicle for his investment in the RTM Fund. As Moross‘s sole general partner, Dickson invested $750,000 with Moross, which was later transferred into the RTM Fund.
The primary investment strategy of the RTM Fund was to “sell short,” which meant that the fund would borrow and then immediately sell shares of a stock that it did not own with the intent to buy the shares back at a later time in order to close out the transaction. If the price of the stock dropped between the sale and the later purchase, then the RTM Fund would profit by selling high and buying back low. Only “accredited investors“—defined by
The RTM Fund‘s short-selling strategy proved very unprofitable during the bull market of 1998-2000. In April of 2000, Dickson requested spreadsheets detailing the daily totals of profits and losses from both the RTM Fund and the Fleckenstein Account. Dickson concluded that these spreadsheets demonstrated improprieties on the part of Fleckenstein; namely, that Fleckenstein had been allocating profitable trades made from the RTM Fund‘s assets into the Fleckenstein Account, but assigning losing trades to other investors, including Moross. Dickson confronted Fleckenstein with his suspicions about this so-called “cherry-picking” of trades. Thereafter, Fleckenstein transferred $221,500 from his own personal account to the RTM Fund. Fleckenstein did this, according to his declaration, to equalize the short-selling losses for both accounts during that calendar quarter “so no one could say the Fleckenstein Account had done better trading securities than the RTM Fund” during that time.
Dickson received his pro rata share of this transfer, which was approximately $2,000. Dissatisfied with Fleckenstein‘s response as compared to the total losses that Dickson had incurred, Dickson withdrew Moross from the RTM Fund. Moross then received approximately $75,000, which was all that remained from its original investment of $750,000.
B. The complaint
In November of 2001, Moross brought suit against the defendants. Based on the spreadsheets furnished by Fleckenstein, Moross alleged that when trades earned profits, Fleckenstein assigned these profits to the Fleckenstein Account, while losses were assigned to the RTM Fund investors. The complaint further alleged that when “Dickson telephoned Fleckenstein to inquire about these ‘suspicious’ trades[,] Fleckenstein admitted his wrongdoing and advised Dickson‘s agent that he would refund to Dickson his initial investment.” According to the complaint, Fleckenstein reneged on this promise, but later disgorged $221,500 and applied it to the RTM Fund.
Moross‘s complaint enumerated four grounds for relief. First, Moross alleged that Fleckenstein violated the MUSA by “misrepresenting how profits and losses in the Fund were to be allocated and failing to disclose his plan to keep profitable trades in his own account.” Moross claimed that it invested in the RTM Fund in reliance on the fact that Fleckenstein would “act consistent with his fiduciary duties as managing member of Fleckenstein Capital and General Partner of the Fund.” Next, Moross‘s complaint sought an accounting of all trades made by Fleckenstein with money from his own account and for the accounts of his affiliated entities, in addition to an accounting “as to how all Fund profits and losses were allocated during the period of time that [Moross] was an investor in the Fund.” Moross‘s two remaining claims of fraud and breach of fiduciary duty were similarly based on the alleged false representations made in the Offering Memo regarding how defendants would allocate the profits made with the RTM Fund‘s assets.
In April of 2002, the defendants moved to dismiss the complaint pursuant to
Deadlines for completing discovery and amending the complaint were initially set for November of 2002, but the district court extended this deadline until March of 2003. Moross attempted to demonstrate its cherry-picking claim using a “representative sample” of Fleckenstein‘s trading records. The defendants produced more than 9,000 pages of documents, including the RTM Fund‘s daily records and financial audits conducted by the accounting firm of Ernst & Young.
Moross was asked in several interrogatories to identify the trades that it believed were improperly assigned as part of Fleckenstein‘s alleged cherry-picking scheme, but it never provided answers to these interrogatories. In April of 2003, the defendants moved for summary judgment on the grounds that Moross “has not identified in its answers to interrogatories any securities trades that Mr. Fleckenstein allegedly cherry picked” and that there was no evidence in the record of a cherry-picking scheme. Moross‘s response, filed in May of 2003, included an affidavit by William A. Collison that purported to demonstrate that factual disputes existed as to the cherry-picking claim.
Collison, whom Moross describes as a “security industries expert,” spent approximately eight and a half hours reviewing the files in this case. He averred, in relevant part, that
[a]lthough the RTM Fund Confidential Private Offering Memoranda [sic] permitted Fleckenstein to maintain and invest funds in his own name, it articulated a very specific investment strategy. Despite a purported consistent, unified investment strategy and discipline, Fleckenstein‘s personal account inexplicably out performed the RTM Fund. For example, on February 29, 2002, the RTM Fund lost 8.03% that day, while Fleckenstein‘s personal account gained 1.23%. That same day, the RTM Fund was down 22.72% for the year, while Fleckenstein‘s personal account was up 38.44%. The disparity in performance between the RTM Fund and Fleckenstein‘s personal account exceeded an astonishing 71%. This fact alone constitutes circumstantial evidence that Defendants committed acts of “front running” and “cherry picking.”
Moross‘s response also included a new factual basis for its claims of fraud and breach of fiduciary duty: that “[a]lthough Defendant, William Fleckenstein, was a director of Pan American Silver Corp. and a holder of approximately 60,000 warrants in that company‘s stock (material facts omitted from the Offering Memoranda and Amendments), as the investment manager and primary trader for the RTM Fund, Fleckenstein proceeded to acquire in excess of 500,000 shares of Pan American Silver Corp. in the RTM Fund as of December 31, 1999.” This was the first time that Fleckenstein‘s association with Pan American Silver was mentioned by Moross.
In their reply memorandum, the defendants asserted that Fleckenstein‘s alleged
The defendants also filed a motion for sanctions under
In July of 2003, the district court held a hearing on the defendants’ motion for summary judgment. Although the court found that Moross was “not even close” to isolating transactions that were alleged to have been improperly assigned to or transferred from the RTM fund, Moross was given an additional 75 days to locate cherry-picked trades in the discovery materials.
Two months later, Moross submitted a letter by Paul Moulden, who was identified as a “Senior Consultant” with Economics Analysis Group, Ltd. of Washington, D.C. The letter did not specifically identify any cherry-picked trades, but concluded that, based upon Moulden‘s analysis of a sampling of trades from one calendar quarter, Fleckenstein had engaged in the improper assignments of trades.
Moulden stated in deposition testimony that his report was based on a methodology that did not determine whether trades were being switched out of the RTM Fund once a trade was completed and found to be actually profitable, but instead analyzed “the way in which trades were being allocated on the day they were executed.” Further, “[t]he analysis really was based on the price of the securities at the time the allocations were made [i.e., before the trade was completed], as opposed to the ultimate profitability of the beginning and ending—opening and closing transaction.” In other words, Moulden calculated the theoretical profit of a trade at the time that Fleckenstein chose to allocate the trade to either the RTM Fund or his personal account, but did not calculate whether a trade allocated into either account in fact was profitable when completed. This methodology, according to Moulden, would determine whether Fleckenstein was purposely allocating losing trades to the RTM Fund. On the basis of his analysis, Moulden concluded that “[a]llocation decisions were made that caused losing trades [as defined by Moulden‘s theoretical analysis] to primarily be allocated to the RTM Fund.”
The district court found that Moulden‘s report “carries [Moross] across the threshold of establishing that there may be a genuine issue of a material fact.” For that reason, and “for administrative convenience,” the court denied the defendants’ motion for summary judgment in July of 2004. The court also denied the defendants’ motion for sanctions, stating that “I traditionally do not award sanctions.”
Discovery continued, and the defendants procured a court order requiring Dickson to appear so that they could depose him. Dickson testified in his deposition that he was “not capable” of identifying either profitable trades that were “switched from
In their renewed motion, the defendants argued that (1) documentary discovery had yielded no evidence of cherry-picking or fraud, (2) the methodology used by Moulden in calculating “theoretical profits and losses” was flawed and his small sample of the voluminous trading records was insufficient, (3) any claims regarding self-dealing in Pan American Silver shares were not asserted in the complaint and were time-barred, and (4) Fleckenstein was permitted by the Offering Memo to serve as a director of Pan American Silver and Dickson had been informed of the directorship.
Moross responded to the defendants’ renewed motion for summary judgment by filing a cross-motion for partial summary judgment. For the first time, Moross included the fact that the defendants’ 1996 Form ADV—a document that Fleckenstein Capital, as an investment advisor, was required to file with the SEC—failed to acknowledge that Fleckenstein Capital would be recommending “to clients that they buy and sell securities in which [Fleckenstein Capital] has some financial interest.” The RTM Fund had in fact purchased securities in Pan American Silver, of which Fleckenstein was a director. This alleged misrepresentation by omission formed the basis of Moross‘s motion for partial summary judgment. Moross also maintained its position that there were sufficient factual issues for the district court to deny summary judgment to the defendants on Moross‘s cherry-picking claim.
The district court resolved these conflicting motions by granting summary judgment to the defendants on all aspects of Moross‘s claims. As to the cherry-picking claim, it stated that “[w]hile up to this point the Court had given Moross every indulgence in letting its cherry-picking claim go forward, the time has come for it to end.” The court held that Moulden‘s report was “seriously flawed” because it analyzed only one third of the trades from a single calendar quarter out of the eight trading quarters during which Moross invested in the RTM Fund. It also discredited the report because, according to the district court, Moulden “admitted he guessed” whether trades were profitable or unprofitable, and Moulden‘s concept of “theoretical” profits and losses was too speculative to overcome summary judgment against Moross. The court held that “[i]t is not enough to overcome summary judgment by broadly asserted [sic] that Moulden‘s opinion creates a genuine issue of material fact.”
In dismissing Moross‘s cherry-picking claim, the district court relied in part on a letter written to Moross by the Securities Division of the state of Washington‘s Department of Financial Institutions. Moross had filed a complaint with the agency in February of 2005. In response, the Securities Division reviewed Moulden‘s report and conducted “additional field work on the allocation question.” According to the Securities Division,
in order to make a case that improper allocations have been made, we need to be able to establish that the allocations were made after it was known which trades had made money and which had lost money. The report of your expert [Moulden] does not address timing of the allocation of the trades. Our field examiner also found no evidence that trades were allocated to accounts after it was known which trades had been prof-
itable. We therefore do not have the evidence we would need to bring an action against [the] advisor for improper allocation of trades.
The district court concluded that this letter from the Securities Division further discredited Moulden‘s expert testimony.
In addition, the district court dismissed Moross‘s accounting claim because the defendants had already produced daily reports of the RTM Fund‘s trading activity, and Moross failed “to articulate what additional information it needs for its equitable accounting claim.” The court further granted summary judgment on Moross‘s “eleventh-hour newly-minted claim” that Fleckenstein breached his fiduciary duty by failing to disclose his involvement with Pan American Silver on the 1996 Form ADV. According to the court, Fleckenstein did not become a director of the company until 1997, so the 1996 Form ADV did not contain any material omissions. In addition, Moross did “not identify or explain the source of the [ 1996 Form ADV], nor was the form part of the initial offering materials or ever before referred to in the many prior filings in this case.” Fleckenstein, moreover, had sent Dickson a letter in 1997 specifically disclosing his new status as a director. The court therefore found that Moross had not produced enough evidence to create a genuine issue of material fact as to any of its claims against the defendants.
II. ANALYSIS
A. Standard of review
We review the district court‘s grant of summary judgment de novo. Int‘l Union v. Cummins, Inc., 434 F.3d 478, 483 (6th Cir. 2006). Summary judgment is proper where no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law.
B. Cherry-picking
The MUSA prohibits “any person, in connection with the offer, sale, or purchase of any security, directly or indirectly . . . [t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.”
Common law fraud requires proof of the same basic elements as a claim under the MUSA; namely,
(1) [t]hat defendant made a material representation; (2) that it was false; (3) that when he made it he knew that it was false, or made it recklessly, without any knowledge of its truth and as a positive assertion; (4) that he made it with the intention that it should be acted upon by plaintiff; (5) that plaintiff acted
in reliance upon it; and (6) that he thereby suffered injury.
U.S. Fid. & Guar. Co. v. Black, 412 Mich. 99, 313 N.W.2d 77, 82 (1981) (quotation marks omitted). The common law further imposes an obligation on fiduciaries to act in their clients’ best interests and to not betray their clients’ confidence. See Fassihi v. Sommers, Schwartz, Silver, Schwartz & Tyler, P. C., 107 Mich. App. 509, 309 N.W.2d 645, 648 (1981); see also Rose v. Nat‘l Auction Group, Inc., 466 Mich. 453, 646 N.W.2d 455, 464 (2001) (“A breach of fiduciary duty claim requires that the plaintiff reasonably reposed faith, confidence, and trust in the fiduciary.“) (citation and quotation marks omitted) (emphasis omitted).
Moross alleged in its complaint that the defendants violated the MUSA, committed fraud, and breached their fiduciary duties by “misrepresenting how profits and losses in the Fund were to be allocated and failing to disclose [Fleckenstein‘s] plan to keep profitable trades for his own account.” According to Moross, “[a]t the end of the trading day, Fleckenstein, as manager of both his personal account and RTM, assigned ‘winning’ trades to his own personal account, while ‘losers’ were assigned to RTM.”
On appeal, Moross devotes little attention to its cherry-picking claim. It does argue, however, that “fact issues persist” with respect to the cherry-picking claim based on both Moulden‘s expert report and the defendants’ voluntary transfer of $221,500 to the RTM Fund once Dickson voiced his suspicions of improper trading. The testimony of Collison, Moross‘s other expert, is not mentioned in Moross‘s briefs, and Collison actually was removed from Moross‘s witness list that was filed with the district court.
Despite the allegations in the complaint that Dickson “discovered” cherry-picked trades, Dickson‘s deposition testimony reveals that he was unable to identify any trades that were improperly allocated to either the RTM Fund or Fleckenstein‘s personal account. We are thus left to consider whether the evidence of Fleckenstein‘s voluntary transfer and the expert report by Moulden are enough to create a genuine issue of material fact on this issue.
Moulden‘s evidence of “theoretical profits” does not support a claim that defendants improperly allocated trades after they were completed and profitable. The report, however, could provide circumstantial evidence that Fleckenstein monitored trades made with unassigned funds for a brief period of time and then allocated the trades to either his own account or the RTM Fund once he determined whether they were likely to be profitable. Moulden‘s report is thus supportive of a claim that the defendants engaged in the manipulation of trades in which those that were likely to be profitable (based on an examination of short-term performance after the purchase of the trade) were assigned to Fleckenstein‘s account and those likely to lose money were assigned to the RTM Fund. After years of discovery, however, Moross has never been able to articulate the precise nature of his cherry-picking claim or how Fleckenstein allegedly manipulated trades.
Although “mere weaknesses in the factual basis of an expert witness’ opinion . . . bear on the weight of the evidence rather than on its admissibility,” McLean v. 988011 Ontario, Ltd., 224 F.3d 797, 801 (6th Cir. 2000) (quotation marks omitted), Moulden‘s analysis still does not explain the mechanism through which Fleckenstein allegedly engaged in improper activity. Moross‘s complaint charges that Fleckenstein allocated profitable trades to his own personal account, while losses were assigned to the RTM Fund investors,
In SEC v. Slocum, Gordon, & Co., 334 F. Supp. 2d 144 (D.R.I. 2004), the SEC was permitted to present a “thorough analysis of [the defendant‘s] trades over the relevant period [in order to reveal] certain trends in firm security purchases supporting an inference of cherry picking. . . .” Id. at 172. Moulden‘s circumstantial evidence of cherry-picking, however, is not thorough, nor does it reveal a pattern of behavior or disparities in performance between the RTM Fund and Fleckenstein‘s personal account. In fact, Fleckenstein‘s account performed almost as badly as the RTM Fund for the full calendar year of 1999, and worse than the RTM Fund in 2000. We therefore agree with the district court that Moulden‘s report does not create a genuine issue of material fact.
Evidence that Fleckenstein voluntarily transferred $221,500 to the RTM Fund also fails to provide a sufficient basis for a jury to rule in favor of Moross. This one fact, which can be interpreted either as an admission of wrongdoing or as a means to avoid the appearance of impropriety, is not enough to allow a rational trier of fact to find for the plaintiff by a preponderance of the evidence, especially when compared to all of the evidence that weighs against a conclusion of cherry-picking. See Anderson, 477 U.S. at 252 (holding that the summary judgment “inquiry, therefore, unavoidably asks whether reasonable [factfinders] could find by a preponderance of evidence that the plaintiff is entitled to a [judgment]“); see also Knecht v. Collins, Nos. 96-3682, 96-3735, 96-4114, 1999 WL 427173, at *4 (6th Cir. June 15, 1999) (unpublished) (holding that a plaintiff‘s speculative evidence “is not enough to survive summary judgment or for a rational trier of fact to conclude by a preponderance of the evidence that a due process violation has taken place“).
The district court further held that Moross had not provided any coherent theory or evidence to support the calculation of damages, which Moross must prove in order to succeed on its claims. Finally, Moross‘s argument that the district court improperly relied on the Securities Division‘s letter, which “fails to address in any meaningful way the scope of the Division‘s investigation; the methodology of the investigation; the witnesses interviewed; or the standard of the review,” is without merit. The district court did not even mention the letter until after the court had already determined that Moulden‘s methodology was “seriously flawed” for a variety of reasons. We therefore conclude that the district court did not improperly consider the letter. In sum, Moross had four years to produce reliable evidence of cherry-picking, either direct or circumstantial, and it failed to do so.
C. Misrepresentations relating to the 1996 Form ADV
On appeal, Moross dedicates the majority of its attention to the alleged misrepresentations on the 1996 Form ADV. Moross claims that Fleckenstein‘s 1996 Form ADV contained material omissions regarding his involvement with Pan American Silver and that Fleckenstein failed to disclose his practice of trading in securities for himself “that were also being bought, sold, or recommended for clients.”
The defendants correctly assert that the “complaint contains no reference of any kind either to Mr. Fleckenstein‘s position as director of Pan American Silver Corporation or to Mr. Fleckenstein‘s ability to make investments in his own name along with investments for the RTM Fund.” Moross argues that the district court should have permitted it to amend its complaint to include these claims, but there is no evidence in the record that Moross sought such an amendment. Instead, Moross first mentioned these claims in May of 2003 as part of its response to the defendants’ motion for summary judgment.
Even if Moross had sought to amend its complaint, the claims would have been barred by Michigan‘s three-year statute of limitations for breach of fiduciary duty and six-year statute of limitations for fraud. See
Under
Finally, “[u]ndue delay in filing, lack of notice to the opposing party, bad faith by the moving party, repeated failure to cure deficiencies by previous amendments, undue prejudice to the opposing party, and futility of amendment are all factors which may affect the decision” of
D. Claim for accounting
Moross further requested that the defendants provide an equitable accounting so that it could “determine the basis for the limited credit previously provided by Defendants.” But the defendants have already produced all of the trading records from the RTM Fund and the Fleckenstein Account for the entire period that Moross was an investor in the RTM Fund. In addition, the defendants provided Moross with accounting records prepared by Ernst & Young, the defendants’ accountant. Because the district court properly held that Moross “fails to articulate what additional information it needs for an equitable accounting claim,” we find no error in the district court‘s grant of summary judgment on this claim.
E. Motion for sanctions under Rule 11 and 28 U.S.C. § 1927
In June of 2003, the defendants moved for sanctions under
The defendants also moved for sanctions under
Although the denial of a motion for sanctions is reviewed under the abuse-of-discretion standard, this circuit has remanded close questions regarding a motion for sanctions where a district court denies sanctions without explanation. See Palmer v. Nationwide Mut. Ins. Co., 945 F.2d 1371, 1377 (6th Cir. 1991) (remanding the denial of sanctions because, “particularly in the close or serious sanction cases, . . . the district court should set out its analysis and discrete findings with respect to its decision on the allowance or rejection of sanctions“) (quotation marks omitted). Appellate courts in other circuits have also found an abuse of discretion where the district court denies sanctions in a close case with no explanation. See, e.g., S. Bravo Sys., Inc. v. Containment Techs. Corp., 96 F.3d 1372, 1375 (Fed. Cir. 1996)
In the present case, the district court was remiss in not providing some explanation for denying defendants’ claim that Moross was purposely prolonging this litigation in order to increase the defendants’ legal expenses. The issue of sanctions is not so close, however, that the district court‘s lack of explanation constitutes an abuse of discretion. Sanctions are awarded where an attorney pursues claims that he should know are “frivolous.” Tareco Props., Inc. v. Morriss, 321 F.3d 545, 550 (6th Cir. 2003). In this case, Moross provided the expert testimony of Paul Moulden in order to demonstrate circumstantially that Fleckenstein did not allocate trades to either his own account or the RTM Fund until he had forecasted their likelihood of profitability. The $221,500 voluntary transfer on the part of Fleckenstein, moreover, can be seen as raising at least an inference of consciousness of guilt. We therefore find that the district court did not abuse its discretion in denying the defendants’ motion for sanctions.
F. Sanctions for this appeal
The defendants have also moved for sanctions under
We therefore deny the defendants’ motion for sanctions under
III. CONCLUSION
For all of the reasons set forth above, we AFFIRM the judgment of the district court, but DENY the defendants’ motion for sanctions on appeal.