Securities and Exchange Commission v. Criterion Wealth Management Insurance Services, Inc. et al, No. 2:2020cv01402 - Document 81 (C.D. Cal. 2022)

Court Description: ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR SUMMARYJUDGMENT 41 ; ORDER DENYING DEFENDANTS' MOTIONS FOR SUMMARY JUDGMENT 50 , 51 . NOW THAT THE COURT HAS RULED ON THE MOTIONS THE STIPULATION TO CONTINUE TRIAL AND PRETRIAL DATES IS MOOT AND IS DENIED AS SUCH 80 by Judge Otis D. Wright, II. (lc)

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Securities and Exchange Commission v. Criterion Wealth Management Insurance Services, Inc. et al Doc. 81 O 1 2 3 4 5 6 7 8 United States District Court Central District of California 9 10 11 12 13 14 15 16 17 Case 2:20-cv-01402-ODW (JEMx) SECURITIES AND EXCHANGE COMMISSION, ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF’S MOTION FOR SUMMARY v. JUDGMENT [41]; ORDER CRITERION WEALTH MANAGEMENT DENYING DEFENDANTS’ SERVICES, INC., et al., MOTIONS FOR SUMMARY Defendants. JUDGMENT [50] [51] Plaintiff, 18 I. INTRODUCTION 19 The Securities and Exchange Commission (“SEC”) brought this enforcement 20 action against Defendant Criterion Wealth Services and its co-owners, Defendants 21 Robert A. Gravette and Mark A. MacArthur, for fraud and breach of fiduciary duty in 22 violation of the Investment Advisers Act of 1940 (“Advisers Act”), 15 U.S.C. 23 §§ 80b-1 to 80b-18c. Three summary judgment motions are pending. First, the SEC 24 moves for summary judgment in its favor as to liability on its first, second, and fourth 25 claims. (Notice SEC Mot., ECF No. 41.) Second, Criterion and Gravette move 26 together for summary judgment in their favor on the SEC’s first, second, and fifth 27 claims. 28 judgment in his favor on the SEC’s first, second, and sixth claims. (MacArthur Mot., (Criterion Mot., ECF No. 51.) Finally, MacArthur moves for summary Dockets.Justia.com 1 ECF No. 50.) After carefully considering the papers filed in connection with the 2 Motion, the Court deemed the matter appropriate for decision without oral argument. 3 Fed. R. Civ. P. 78; C.D. Cal. L.R. 7-15. For the reasons that follow, the Court 4 GRANTS IN PART and DENIES IN PART the SEC’s Motion, and the Court 5 DENIES Defendants’ Motions. II. 6 FACTUAL BACKGROUND 7 Criterion is registered as an investment adviser with the SEC, and between 2014 8 and 2018, it managed $58 million to $190 million in investments.1 (Pl.’s Statement of 9 Uncontroverted Facts (“PSUF”) 1, 3, ECF No. 41-2; see also Criterion Resp. PSUF, 10 ECF No. 62-1; MacArthur Resp. PSUF, ECF No. 65-1.) Defendants Gravette and 11 MacArthur are individual investment advisers who co-owned Criterion until 2016, at 12 which time MacArthur converted to working for Criterion as an independent 13 contractor. (PSUF 4–14.) In 2017, MacArthur left Criterion altogether. (PSUF 15.) 14 Throughout most of this period, Gravette and MacArthur were the only investment 15 adviser representatives at Criterion. 16 Uncontroverted Facts (“MacArthur SAUF”) 262, ECF No. 65-1.) (MacArthur Statement of Additional 17 Criterion, as a registered investment adviser, filed annual Form ADVs2 from 18 2014 to 2020, with Gravette signing the Form ADVs for most of this period. (PSUF 19 16–17.) In describing its business, Criterion represented in Part 2 of its Form ADVs3 20 that it provided “advisory services,” including “continuous advice to a client regarding 21 the investment of client funds based on the individual needs of the client” and 22 “portfolio management services . . . using an asset allocation portfolio approach” 23 1 24 25 26 27 28 Facts supported by citations to any party’s Statement of Uncontroverted Facts or other separate statement-type document are undisputed unless otherwise specified. See C.D. Cal. L.R. 56-3 (permitting courts to assume as undisputed facts in a separate statement not controverted by declaration or other written evidence filed in opposition). 2 Financial advisers must annually submit to the SEC a Form ADV containing a description of their business and a disclosure of any conflicts of interest. (Mem. SEC Mot. 1, ECF No. 41-1); Vernazza v. S.E.C., 327 F.3d 851, 856 (9th Cir. 2003). 3 Investment advisers are required to provide their investor clients with disclosure statements comprising the same information found in Part 2 of the Form ADV. Vernazza, 327 F.3d at 856. 2 1 based on “a personalized variation of a model asset allocation portfolio which is 2 designed to meet a particular investment goal.” 3 represented that its “investment recommendations . . . will generally include advice 4 regarding the following securities,” followed by a list of twenty-one types of assets 5 Criterion might recommend. (PSUF 19.) One of these asset types was “Private 6 Placement Offerings.”4 (Id.) (PSUF 18.) Criterion further The majority of Criterion’s clients were individual investors. 7 (PSUF 24.) 8 Criterion formalized its advisory relationships by having new clients sign an 9 Investment Advisory Agreement. (PSUF 25.) This Advisory Agreement provided 10 that Criterion, in its capacity as a registered investment adviser, would provide either 11 or both of the following types of investment services: (1) Discretionary Investment 12 Management Services, which were based on “an evaluation of clients[’] goals, 13 investment objectives, needs, financial and tax status, investment policies, guidelines, 14 reasonable restrictions and risk tolerance among other factors;” and (2) Alternative 15 Investment Consulting, which would “allow access to an alternative investment on a 16 stand alone basis to accredited investors only.” (PSUF 26–28.) 17 fees for its advisory services in the form of a percentage of an investor’s assets under 18 management with Criterion. (PSUF 20.) Until 2016, Criterion had two different fee 19 schedules. 20 encompassing stocks, bonds, and cash. 21 percentage-of-assets fee, the “Alternative Investment Fee,” applied to services 22 encompassing hedge fund investments, private placement investments, and private 23 equity investments.5 (PSUF 22.) Criterion charged The first was a higher percentage-of-assets fee applied to services (PSUF 21.) The second was a lower 24 25 26 27 28 4 “Private Placement Offerings” refer to securities sold through a private offering to a small group of investors. Private placements are offered to a limited pool of accredited investors and are not offered to the public. 5 In either 2016 or 2017, Criterion stopped offering its Alternative Investment Consulting (i.e., lower) fee schedule. (PSUF 35.) 3 1 The Advisory Agreement referred to Criterion’s Form ADV and required 2 clients to sign with their initials to indicate receipt of the Form ADV. (PSUF 36.) 3 Gravette and MacArthur each signed the Advisory Agreements as a “Financial 4 Advisor.” (PSUF 37.) 5 In addition to their positions with Criterion, Gravette and MacArthur were also 6 registered representatives of Ausdal Financial Partners, Inc. (PSUF 48, 51.) Ausdal is 7 a registered broker-dealer. (PSUF 49.) Gravette and MacArthur operated Ausdal in 8 concert with their operation of Criterion; specifically, when investors entered into a 9 relationship with Criterion, those investors opened a brokerage account with Ausdal to 10 invest in private securities. (Criterion’s Statement of Uncontested Facts (“Criterion 11 SUF”) 12, ECF No. 51-1.) Ausdal, acting through Gravette and MacArthur, would 12 then broker the transactions in the private placement investments for Criterion’s 13 clients. (PSUF 56.) This practice began as early as June 2014, with Ausdal brokering 14 the private placement investments for Criterion’s clients. (PSUF 61.) The majority 15 of Ausdal’s broker-dealer clients were also Criterion’s advisory clients. (PSUF 55.) 16 Each investor who was to invest in private placements would complete and sign 17 an Ausdal New Account Form. (Criterion SUF 10.) Moreover, before an investor 18 made a particular investment in a private placement, the investor completed and 19 signed an Ausdal Private Placement Information Form. (Criterion SUF 11.) The 20 investor would also receive copies of the fund’s offering documents, including the 21 private placement memorandum. (Criterion SUF 12.) 22 With respect to these investments, Gravette and MacArthur would conduct due 23 diligence, employ the above-mentioned “asset allocation portfolio approach,” and 24 perform continuing due diligence after the investments were made. (PSUF 41–44.) 25 At regular intervals, Criterion offered its clients broader portfolio reports that 26 integrated information about all of a given client’s assets under management— 27 including stocks, bonds, private placement offerings, and all other holdings—into a 28 single digest. (PSUF 45.) 4 1 Defendants do not dispute this basic business structure; instead, they dispute in 2 which capacity—investment adviser or broker-dealer—Gravette and MacArthur acted 3 when recommending private placements, executing the transactions, and monitoring 4 the investments on behalf of their dual Criterion/Ausdal clients. (See PSUF 61.) 5 A. T2’s Funds: SREI and AOFIV 6 Four private placement offerings are at issue in this case. Two were offered by 7 T2 Holdings, LLC, a company with whose two principals MacArthur had a pre- 8 existing personal and professional relationship. (PSUF 92.) The first T2 fund is the 9 Strategic Real Estate Income Fund (“SREI Fund”). (PSUF 88.) Initially, T2 made 10 investments in the SREI Fund available to investors solely through Class A units. 11 (PSUF 89.) Returns on Class A units came in three phases. First, Class A unitholders 12 in the SREI Fund would receive all returns until profits achieved a 6% annualized 13 return threshold (i.e., a 6% “hurdle”). 14 allocation of 100% of all new investment income until its profit participation had 15 caught up such that 80% of all profits to date had been allocated to Class A investors, 16 and 20% had been allocated to T2. Third and finally, for any investment returns after 17 that, Class A investors and T2 shared in investment income at 80% and 20%, 18 respectively. (PSUF 90; Compl. ¶ 38, ECF No. 1.) In short, this was “an 80/20 profit 19 split in favor of investors with a 6% hurdle.” (Compl. ¶ 39.) Then, T2 was entitled to a performance 20 Ausdal entered into a placement agreement with T2 under which Ausdal would 21 broker investor transactions in the SREI Fund, and in exchange, T2 would pay Ausdal 22 50% of the performance allocation that T2 received for as long as the investors Ausdal 23 referred remained invested in the SREI Fund. (PSUF 95.) As part of this placement 24 agreement, T2 created special Class C units for the SREI Fund, available only to 25 Criterion clients. Class C units were identical to Class A units, except that after the 26 investment cleared the hurdle, Class A investors and T2 would share income at 60% 27 and 40%, respectively (rather than at 80% and 20%). In short, Class C units provided 28 a 60/40 profit split in favor of investors with a 6% hurdle. (PSUF 103; see Compl. 5 1 ¶ 42.) Criterion’s clients who invested in the SREI Fund purchased only Class C 2 units. (PSUF 106.) All other investors in the SREI Fund, who were referred to it by 3 at least twenty other investment advisers, invested in Class A units. (PSUF 105, 107.) 4 T2 had a separate fund called the T2 Opportunity Fund IV (Master), L.P. 5 (“Master Fund”), which it launched in 2014 with a single feeder fund. (PSUF 123.) 6 The shares offered by that feeder provided an 80/20 profit split in favor of investors 7 with an 8% hurdle. (PSUF 127.) To accommodate Criterion and Ausdal, T2 created a 8 second feeder fund called T2 Asset Opportunity Fund IV (“AOFIV”). (PSUF 125– 9 126.) Ausdal entered into a placement agreement with AOFIV under which Ausdal 10 would broker investor transactions with AOFIV, and in exchange, T2 would pay 11 Ausdal 50% of the allocation that T2 received from the Criterion funds in AOFIV for 12 as long as the investors Ausdal referred remained invested in AOFIV. (PSUF 135.) 13 Shares in AOFIV provided a 60/40 profit split in favor of investors with an 8% hurdle. 14 (PSUF 129.) 15 material difference between the first feeder fund and AOFIV was in the third phase of 16 the distribution formula, which provided a less favorable profit split for Criterion 17 investors than for other investors. (PSUF 132.) The effect of this difference, simply 18 stated, is that the worse the SREI Fund or AOFIV performed, the better the returns for 19 Criterion investors in relation to other investors; and conversely, the better the funds 20 performed, the worse the returns for Criterion investors in relation to other investors. 21 (PSUF 133.) Thus, as with the SREI Fund’s Class A and Class C shares, the main 22 AOFIV’s private placement memorandum contained a chart describing the 23 internal rate of return for T2’s vintage real estate funds as between 12% and 15%, well 24 clear of the 8% hurdle. (PSUF 130.) The SREI Fund materials apparently did not 25 contain such data, but both Gravette and MacArthur testified that, at the time they 26 invested client funds in the SREI Fund, they expected the return on the investment to 27 exceed the SREI Fund’s 6% hurdle. (Decl. Michael Sew Hoy (“Sew Hoy Decl.”) Ex. 28 3 (“Gravette Dep.”) 110:4-6, ECF No. 42-3; Sew Hoy Decl. Ex. 4 (“MacArthur 6 1 Test.”) 159:16-20 (“[T]his was . . . going to be a 7 to 9 percent total return product.”).) 2 That the SREI Fund and AOFIV were expected to clear their hurdles corresponds to 3 the T2 Chief Executive Officer’s expectation that investor returns on AOFIV would 4 be approximately 2% lower than returns on the first feeder to the Master Fund. 5 (PSUF 151.) Indeed, the respective financial statements for the two feeder funds 6 show lower reported returns for AOFIV than for the first feeder. (PSUF 152.) 7 As discussed above, each private placement transaction in the SREI Fund and 8 AOFIV brokered by Ausdal generated commission fees paid to Ausdal. The exact 9 fees paid to Ausdal depended upon T2’s performance allocation, which in turn 10 depended on the interplay of the hurdle, catch-up, and profit-sharing provisions 11 associated with each fund. But for the purpose of this analysis, it suffices to observe 12 that the commission fees paid to Ausdal were calculated as some percentage of the 13 Criterion investors’ funds that were invested in placements brokered by Ausdal. In 14 turn, Gravette and MacArthur took 95% of these commissions for themselves by first 15 accounting for the Ausdal commissions as income for Criterion and then taking 16 distributions from Criterion as Criterion’s co-owners. (PSUF 62–72.) 17 Commissions from Ausdal represented about half of Defendants’ income 18 between 2014 and 2017. (PSUF 71.) At the same time Gravette and MacArthur 19 collected these broker commissions from Ausdal, Criterion continued to collect its 20 alternative investment fees from its clients invested in the SREI Fund and AOFIV, as 21 a percentage of the then-current value of the alternative investment under management 22 by Criterion. (PSUF 122, 149.) 23 Gravette and MacArthur, in their capacities as representatives of Criterion, did 24 not disclose to their clients the nature or the amount of the commissions they were 25 taking on the private placement transactions that Ausdal brokered. 26 Furthermore, they did not disclose to their Criterion/Ausdal clients that SREI Class A 27 shares were available to investors through other channels. (PSUF 113–114.) And 28 although they did disclose, in their capacities as representatives of Ausdal, that Ausdal 7 (PSUF 63.) 1 was the selling agent and would therefore be receiving fees from brokering the private 2 placement transactions, they did not disclose that they as individuals would ultimately 3 receive 95% of the fees paid to Ausdal. (PSUF 116, 118, 143, 145.) 4 The parties do not dispute these basic facts regarding the SREI Fund and its two 5 classes of shares, and the AOFIV and its two feeder funds. The SEC asserts that 6 “Defendants’ compensation arrangement with T2 diluted the returns of Criterion 7 clients who invested in SREI by adding an extra layer of fees to the distribution 8 waterfall.” (PSUF 121.) Defendants disagree, pointing out that “the performance 9 allocation would not come into play if the Fund met or fell short of the hurdle; in that 10 case – or even if the Fund exceeded the hurdle slightly – Class A investors would earn 11 lower returns because they invested through [other] investment advisers . . . .” (Id.; 12 see also MacArthur SAUF 295 (asserting this compensation arrangement benefitted 13 investors by (1) “reduc[ing] the Investors’ downside risk by eliminating or reducing 14 either a recurring investment advisory fee or an up-front commission,” and 15 (2) “align[ing] MacArthur’s interests with those of [his clients] by requiring that the 16 Investors receive a certain return before MacArthur received any commissions”). 17 Defendants assert that they properly disclosed all relevant details of their business 18 structure to their Criterion/Ausdal clients, including all relevant conflicts of interest, 19 and that they therefore did not breach any duty of any type to their clients. The SEC 20 disagrees and maintains that Defendants violated the Advisers Act by providing only 21 partial or incomplete disclosures. 22 B. Bird Rock’s Funds: Southland Home Mortgage II Fund and Pacific West 23 Home Mortgage II Fund 24 Two more funds are at issue in this case: the Southland Home Mortgage II Fund 25 and the Pacific West Home Mortgage II Fund, launched by Bird Rock Ventures in 26 2015 and 2016, respectively. (PSUF 172.) Gravette and MacArthur had a pre- 27 existing relationship with Bird Rock’s principals through college- and church-related 28 connections. (PSUF 163). Since 2008, Criterion’s clients, acting under the advice of 8 1 Gravette and MacArthur, began investing in Bird Rock’s legacy funds, and as of 2014, 2 $9.5 million in Criterion client funds were invested in the Bird Rock legacy funds. 3 (PSUF 171.) The Bird Rock legacy funds are not at issue in this case. 4 Ausdal entered into private placement agreements with Bird Rock under which 5 Ausdal would broker private placement transactions with Criterion clients in exchange 6 for an annual commission equal to 2% of the assets referred to the fund for as long as 7 investors remained invested in the fund. (PSUF 176, 180.) As with the SREI Fund 8 and AOFIV, Gravette and MacArthur ultimately received 95% of this 2% 9 commission. (PSUF 177, 181.) At the same time that Gravette and MacArthur 10 collected these commissions through Ausdal, Criterion continued to collect its 11 alternative investment fees from its clients invested in Bird Rock funds as a 12 percentage of the then-current value of the Bird Rock investment under management 13 by Criterion. (PSUF 187.) 14 The private placement memoranda for both the Southland Home Mortgage II 15 Fund and the Pacific West Home Mortgage II Fund disclose that Ausdal received 16 “commissions of 2% annually on the purchase price of the [units] sold by Ausdal . . . . 17 Any commissions will be paid by [Bird Rock] and not from the proceeds of the 18 Offering.” (PSUF 193, 196.) Bird Rock also disclosed some form of this information 19 in its Form ADVs for the two Funds. (PSUF 191.) 20 The parties dispute whether Gravette and MacArthur went one step further in 21 the disclosures and informed investors that Gravette and MacArthur as individuals 22 would ultimately receive the commissions Bird Rock paid Ausdal. The SEC asserts 23 that Defendants did not disclose this information in any document they provided to 24 their clients; Defendants assert that the private placement memoranda combined with 25 the related private placement agreements disclose this information. (PSUF 199.) 26 C. The SEC’s Examination 27 From November 1, 2014 to June 30, 2016, the SEC’s Office of Compliance, 28 Inspections, and Examinations (“OCIE”) conducted an examination of Criterion. 9 1 (PSUF 222.) In an April 20, 2017 letter to Criterion, the OCIE indicates that 2 Criterion’s Form ADVs “failed to provide adequate disclosures concerning 3 compensation and conflicts of interest” arising from Defendants’ receipt of carried 4 interest, finder’s fee payments, and commissions from Ausdal. (PSUF 224.) The 5 OCIE also found that Criterion “failed to cause Form ADV Pt. 2B disclosures for 6 Messrs. Gravette or MacArthur to be delivered to any clients or prospective clients.” 7 (PSUF 225.) 8 Criterion took remedial action, which included sending a letter to its clients 9 disclosing that most of the alternative investments offered to Criterion clients through 10 Ausdal “were sourced and sponsored by Ausdal and typically paid a one-time sales 11 commission between 5-7%.” (PSUF 229.) Criterion further acknowledged that: 12 [G]iven the potentially considerable amounts of non-advisory compensation from [the funds], we should have provided more disclosure around the potential conflicts of interest in offering these funds to our clients. Although disclosures of non-advisory compensation from commissions or finder’s fees were provided in our Investment Management Agreement and Firm Brochure, a straight forward clear description would have been in your best interest. Having known in more detail [about] these arrangements would have left our clients better informed in making a decision to invest. Detailed disclosure always need to be our priority. 13 14 15 16 17 18 19 20 (PSUF 231 (second alteration in original) (citing Sew Hoy Decl. Ex. 26 (“Client 21 Letter”), ECF No. 43-5.) Gravette signed the letter and sent it to his Criterion clients 22 (but not MacArthur’s) two weeks before MacArthur left Criterion. (PSUF 232–233.) 23 Criterion took further remedial action by instituting a practice of providing clients 24 with a one-page sheet summarizing, in “plain speech,” the relevant disclosures 25 regarding compensation agreements and conflicts of interest. (PSUF 234–235.) 26 D. Criterion’s Policies and Procedures Manual 27 Separately, but relatedly, throughout most of the time period relevant to this 28 lawsuit, Criterion had in place a Policies and Procedures Manual that it drafted and 10 1 instituted in 2008. (PSUF 80, 240.) Criterion updated its policies and procedures, 2 including this in the Manual, only on an “as needed” basis. (PSUF 239.) 3 In 2014, Criterion engaged NRS, a compliance consulting firm, to review 4 Criterion’s compliance practices. (PSUF 241.) NRS observed that Criterion lacked 5 basic compliance infrastructure and proper procedures concerning Gravette’s and 6 MacArthur’s affiliation with Ausdal. (PSUF 242–243.) NRS also noted that Criterion 7 had not updated its Manual since 2008, (PSUF 244), and recommended adding seven 8 sections to the 2008 Manual, including two sections addressing private placements, 9 (PSUF 249). Three years later, in 2017, the OCIE observed that Criterion “ha[d] not 10 revised its Policies and Procedures in over seven years despite changes to its business 11 and applicable regulatory requirements.” (PSUF 252.) Shortly thereafter, Criterion 12 updated its Manual. (PSUF 253.) 13 III. PROCEDURAL BACKGROUND 14 On February 12, 2020, the SEC brought suit against Criterion, Gravette, and 15 MacArthur, setting forth claims for (1) violation of section 206(1) of the Advisers Act, 16 against all Defendants; (2) violation of section 206(2) of the Advisers Act, against all 17 Defendants; (3) violation of section 207 of the Advisers Act, against Criterion and 18 Gravette; (4) violation of section 206(4) of the Advisers Act and Rule 206(4)-7 19 thereunder (the “Compliance Rule”), against Criterion; (5) aiding and abetting 20 violations of the Advisers Act, against Gravette; and (6) aiding and abetting violations 21 of the Advisers Act, against MacArthur. (Compl. ¶¶ 122–151.) On November 1, 22 2021, the SEC moved for partial summary judgment, seeking judgment in its favor on 23 its first, second, and fourth claims. 24 opposed together, (Criterion Opp’n SEC Mot., ECF No. 62), and MacArthur opposed 25 separately, (MacArthur Opp’n SEC Mot., ECF No. 65). The SEC filed a consolidated 26 Reply. (SEC Reply, ECF No. 71.) (Notice SEC Mot.) Criterion and Gravette 27 The same day, Criterion and Gravette, together, moved for partial summary 28 judgment, seeking dismissal of claims one, two, and five, as asserted against them. 11 1 (Criterion Mot.) MacArthur also moved for partial summary judgment, seeking 2 dismissal of claims one, two, and six, as asserted against him. (MacArthur Mot.) The 3 SEC filed a combined Opposition. (SEC Opp’n Defs.’ Mots., ECF No. 61.) Criterion 4 and Gravette replied together, (Criterion Reply, ECF No. 70), and MacArthur replied 5 separately, (MacArthur Reply, ECF No. 72). IV. 6 EVIDENTIARY OBJECTIONS 7 Criterion and Gravette submit evidentiary objections to certain aspects of the 8 SEC’s Statement of Uncontroverted Facts. (Criterion Objs. PSUF, ECF No. 62-2.) 9 MacArthur also submits evidentiary objections. (MacArthur Objs. PSUF, ECF No. 10 65-2.) Defendants’ objections all are all asserted on the following four bases: 11 relevance, calls for a legal conclusion, lacks foundation, and hearsay. 12 First, as a general rule, most relevance-based evidentiary objections are moot in 13 the context of summary judgment motions. This is because at summary judgment, the 14 question is whether there are genuine disputes of material fact, and accordingly, the 15 relevance inquiry inheres throughout the determination of summary judgment 16 motions. See Burch v. Regents of Univ. of Cal., 433 F. Supp. 2d 1110, 1119 (E.D. 17 Cal. 2006) (“A court can award summary judgment only when there is no genuine 18 dispute of material fact. It cannot rely on irrelevant facts, and thus relevance 19 objections are redundant. Instead of objecting parties should simply argue that the 20 facts are not material.”). Accordingly, Defendants’ relevance-based objections are all 21 OVERRULED. 22 The same is true of objections that an assertion is or calls for a legal conclusion. 23 Id. These objections are duplicative of the summary judgment standard itself and are 24 accordingly OVERRULED. This includes Criterion’s and Gravette’s objections to 25 the testimony of Nakamura (the NRS agent primarily responsible for auditing 26 Criterion) on the basis that it is improper expert opinion testimony. 27 28 As for Defendants’ “lack of foundation” objections, these are not true evidentiary objections. Defendants argue that certain assertions in the SEC’s 12 1 Statement of Uncontroverted Facts do not follow from the cited evidence; Defendants 2 do not argue that a particular piece of evidence is inadmissible because the declarant 3 or deponent lacks personal knowledge of the subject matter. Objections are to be 4 made to individual items of evidence, not to argumentative assertions. 5 Scheduling & Case Management Order 8–9, ECF No. 28 (providing an example of a 6 properly submitted evidentiary objection).) 7 foundation” objections are all OVERRULED. (See Accordingly, Defendants’ “lack of 8 As for Defendants’ hearsay objections, such objections on a motion for 9 summary judgment are very unlikely to move the needle in a significant way unless 10 the challenged evidence is key and no other admissible evidence on the matter is 11 available. See Burch, 433 F. Supp. 2d at 1120 (“[W]hen evidence is not presented in 12 an admissible form in the context of a motion for summary judgment, but it may be 13 presented in an admissible form at trial, a court may still consider that evidence.”). 14 With this in mind, the Court rules on the hearsay objections as follows. 15 To Testimony Exhibit 36. OVERRULED. Testimony Exhibit 36 is an email 16 chain providing evidence Bird Rock paid additional referral fees to Ausdal or 17 Criterion. 18 Defendants in ways other than with the challenged exhibit, such as with testimony. 19 The SEC will be able to prove that Bird Rock paid referral fees to To Testimony Exhibit 19. OVERRULED. Testimony Exhibit 19 is an 20 examination letter containing the OCIE’s determination that Criterion failed to 21 disclose its conflicts of interest. To the extent the letter is offered for the truth of its 22 factual contents, the SEC will be able to prove those facts in ways other than with the 23 letter, such as with testimony. 24 letter is not offered for its truth and is offered for some other purpose such as 25 demonstrating notice to Criterion or Criterion’s state of mind, the exhibit is not 26 hearsay. Calmat Co. v. U.S. Dep’t of Labor, 364 F.3d 1117, 1124 (9th Cir. 2004) (“If 27 the significance of an out-of-court statement lies in the fact that the statement was 28 made and not in the truth of the matter asserted, then the statement is not hearsay.”) Burch, 433 F. Supp. 2d at 1120. To the extent the 13 1 To Testimony Exhibits 56 and 58. OVERRULED. Testimony Exhibits 56 and 2 58 are documentation from the auditor, NRS, identifying the gaps in Criterion’s 3 compliance program. To the extent the documentation is offered for the truth of its 4 factual contents, the SEC will be able to prove those facts in other ways, such as with 5 testimony. To the extent it is not offered for its truth and is offered for some other 6 purpose such as demonstrating notice to Criterion or Criterion’s state of mind, the 7 exhibit is not hearsay. V. 8 LEGAL STANDARD 9 A court “shall grant summary judgment if the movant shows that there is no 10 genuine dispute as to any material fact and the movant is entitled to judgment as a 11 matter of law.” Fed. R. Civ. P. 56(a). A disputed fact is “material” where the 12 resolution of that fact “might affect the outcome of the suit under the governing law,” 13 and the dispute is “genuine” where “the evidence is such that a reasonable jury could 14 return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 15 242, 248 (1986). The burden of establishing the absence of a genuine issue of 16 material fact lies with the moving party, and the moving party may meet this burden 17 with arguments or evidence or both. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 18 (1986). 19 Once the moving party satisfies its burden, the nonmoving party cannot simply 20 rest on the pleadings or argue that any disagreement or “metaphysical doubt” about a 21 material issue of fact precludes summary judgment. Matsushita Elec. Indus. Co., Ltd. 22 v. Zenith Radio Corp., 475 U.S. 574, 586 (1986); Cal. Architectural Bldg. Prods., Inc. 23 v. Franciscan Ceramics, Inc., 818 F.2d 1466, 1468 (9th Cir. 1987). The non-moving 24 party must show that there are “genuine factual issues that . . . may reasonably be 25 resolved in favor of either party.” Franciscan Ceramics, 818 F.2d at 1468 (quoting 26 Anderson, 477 U.S. at 250) (emphasis omitted). 27 satisfied its burden, the court should grant summary judgment against a party who 28 fails to present evidence establishing an essential element of its claim or defense when 14 Provided the moving party has 1 that party will ultimately bear the burden of proof on that claim or defense at trial. See 2 Celotex, 477 U.S. at 322. 3 In ruling on summary judgment motions, courts draw all reasonable inferences 4 in the light most favorable to the nonmoving party, refraining from making credibility 5 determinations or weighing conflicting evidence. Scott v. Harris, 550 U.S. 372, 378 6 (2007); Hous. Rts. Ctr. v. Sterling, 404 F. Supp. 2d 1179, 1183 (C.D. Cal. 2004). 7 However, “uncorroborated and self-serving” testimony will not create a genuine issue 8 of material fact. Villiarimo v. Aloha Island Air, Inc., 281 F.3d 1054, 1061 (9th Cir. 9 2002) (quoting Kennedy v. Applause, Inc., 90 F.3d 1477, 1481 (9th Cir. 1996)). 10 “Conclusory” or “speculative” testimony is likewise “insufficient to raise genuine 11 issues of fact and defeat summary judgment.” See Sterling, 404 F. Supp. 2d at 1183. 12 The nonmoving party must provide more than a “scintilla” of contradictory evidence 13 to avoid summary judgment. Anderson, 477 U.S. at 251–52; Addisu v. Fred Meyer, 14 Inc., 198 F.3d 1130, 1134 (9th Cir. 2000). VI. 15 DISCUSSION 16 When parties file cross-motions for summary judgment, the court “evaluate[s] 17 each motion separately, giving the nonmoving party in each instance the benefit of all 18 reasonable inferences.” A.C.L.U. of Nev. v. City of Las Vegas, 466 F.3d 784, 790–91 19 (9th Cir. 2006). In evaluating the motions, “the court must consider each party’s 20 evidence, regardless under which motion the evidence is offered.” Las Vegas Sands, 21 LLC v. Nehme, 632 F.3d 526, 532 (9th Cir. 2011); Fair Hous. Council of Riverside 22 Cnty., Inc. v. Riverside Two, 249 F.3d 1132, 1134 (9th Cir. 2001) (“[T]he court must 23 consider the appropriate evidentiary material identified and submitted in support of 24 both motions, and in opposition to both motions, before ruling on each of them.”). To 25 avoid errors such as the application of the wrong presumption or burden to a party’s 26 showing, the Court analyzes the SEC’s Motion first, followed by the Motions of the 27 Defendants. 28 15 1 A. The SEC’s Motion 2 The SEC moves for summary judgment in its favor as to liability on its first 3 claim for violation of section 206(1) of the Advisers Act (asserted against all three 4 Defendants), its second claim for violation of section 206(2) of the Advisers Act 5 (asserted against all three Defendants), and its fourth claim for violation of the 6 Compliance Rule (asserted against Criterion only). 7 The Court finds that the SEC establishes Defendants violated section 206(2) of 8 the Advisers Act and that Defendants fail to place that finding in genuine factual 9 dispute. 10 By contrast, genuine factual disputes remain as to whether Defendants violated section 206(1) and whether Criterion violated the Compliance Rule. 11 1. Advisers Act Sections 206(1) and 206(2) 12 Section 206(1) of the Advisers Act prohibits “any investment adviser” from 13 “directly or indirectly employ[ing] any device, scheme, or artifice to defraud any 14 client or prospective client.” 15 U.S.C. § 80b-6(1). To establish a violation of 15 section 206(1), the SEC must prove that (1) Defendants were investment advisers; 16 (2) they utilized the mails or instrumentalities of interstate commerce to employ a 17 device, scheme or artifice; (3) the device, scheme or artifice violated Defendants’ 18 fiduciary duty to their clients in that they made false and misleading statements or 19 omissions of material fact to their clients; and (4) Defendants acted with scienter. See 20 S.E.C. v. Merrill Scott & Assocs., Ltd., 505 F. Supp. 2d 1193, 1215 (D. Utah 2007). 21 Section 206(2) of the Advisers Act prohibits “any investment adviser” from 22 “directly or indirectly” “engag[ing] in any transaction, practice, or course of business 23 which operates as a fraud or deceit upon any client or prospective client.” 15 U.S.C. 24 § 80b-6(2). While proving a violation of section 206(1) requires proof of scienter, 25 “[p]roof of simple negligence suffices for a violation of Section 206(2).” Robare 26 Grp., Ltd. v. S.E.C., 922 F.3d 468, 472 (D.C. Cir. 2019); Merrill Scott, 505 F. Supp. 27 2d at 1215 (“The same elements apply for Section 206(2), except that no scienter is 28 16 1 required. All that need be shown is that the investment adviser failed to disclose a 2 material fact.”). 3 Because the Advisers Act “was directed not only at dishonor, but also conduct 4 that tempts dishonor,” an investment adviser’s “[f]ailure to disclose material facts 5 must be deemed fraud or deceit” within the meaning of section 206. S.E.C. v. Capital 6 Gains Rsch. Bureau, Inc., 375 U.S. 180, 200 (1963). “[P]roof of intent to injure and 7 actual injury to the client” are not required. Id. at 195. Actual and potential conflicts 8 of interests are material facts that section 206 requires investment advisers to disclose. 9 Robare Grp., 922 F.3d at 472 (“[T]he Securities and Exchange Commission has long 10 held that failure by an investment adviser to disclose potential conflicts of interest to 11 its clients constitutes fraud within the meaning of Sections 206(1) and (2).” (cleaned 12 up)). 13 14 Because the analysis of section 206(2) provides opportunity for extended discussion, the Court begins there. a. 15 SEC’s Second Claim: Violation of Section 206(2) 16 In this case, whether Defendants violated section 206(2), and whether the 17 underlying material facts are in genuine dispute, center on two areas of inquiry. The 18 first is whether Defendants were acting as investment advisers. If they were not, then 19 they did not owe their clients the fiduciary duties the SEC asserts they did. (Compl. 20 ¶¶ 1, 112–113.) If they were, then they owed fiduciary duties, including a duty to 21 disclose conflicts of interest. Vernazza v. S.E.C., 327 F.3d 851, 860 (9th Cir. 2003). 22 The second area of inquiry centers on those conflicts of interest—what they were, 23 whether Defendants needed to disclose them, and whether Defendants did in fact 24 disclose them. 25 The SEC demonstrates it is entitled to judgment as a matter of law in both these 26 areas, and Defendants fail to raise a genuinely disputed issue of fact that might change 27 the result. 28 17 1 i. Defendants acted as investment advisers in recommending 2 the private placement offerings to their Criterion/Ausdal 3 clients. 4 First, the SEC must demonstrate that Defendants were acting in their capacities 5 as investment advisors. 6 compensation, engages in the business of advising others . . . as to the value of 7 securities or as to the advisability of investing in, purchasing, or selling securities.” 8 15 U.S.C. § 80b-2(a)(11). “Investment advisers typically provide ongoing, regular 9 advice and services in the context of broad investment portfolio management, and are 10 compensated based on the value of assets under management” or other fee-based 11 arrangements. Regulation Best Interest: The Broker-Dealer Standard of Conduct, 12 Exchange Act Release No. 34-86031, 2019 WL 2420297, at *3 (June 5, 2019); see 13 also United States v. Elliott, 62 F.3d 1304, 1311 (11th Cir. 1995), amended, 82 F.3d 14 989 (11th Cir. 1996) (holding defendants were investment advisers when they 15 “received compensation for providing investment advice” and “were also in the 16 business of advising others” (cleaned up)); Abrahamson v. Fleschner, 568 F.2d 862, 17 870 (2d Cir. 1977) (“[P]ersons who managed the funds of others for compensation are 18 ‘investment advisers’ within the meaning of the statute.”). 19 investment advisers owe fiduciary duties toward the clients whose investments they 20 manage. See, e.g., Capital Gains, 375 U.S. at 194. 21 An “investment adviser” is “any person who, for Under federal law, A broker-dealer, by contrast, is “any person engaged in the business of effecting 22 transactions in securities for the account of others.” 23 “Broker-dealers typically provide transaction-specific recommendations and receive 24 compensation on a transaction-by-transaction basis (such as commissions) . . . .” 25 Exchange Act Release No. 34-86031, 2019 WL 2420297, at *3; cf. S.E.C. v. Hansen, 26 No. 83 Civ. 3692, 1984 WL 2413, at *10 (S.D.N.Y. Apr. 6, 1984) (identifying six 27 relevant factors for determining whether an individual acted as a broker). In contrast 28 to investment advisers, broker-dealers were subject to the less stringent “suitability” 18 15 U.S.C. § 78c(a)(4)(A). 1 standard at the times relevant to this action.6 FINRA Rule 2111(a). Under this 2 standard, broker-dealers must deal fairly with clients and broker transactions in a way 3 that is suitable to those clients’ individual traits and needs, but this duty does not rise 4 to that of a fiduciary. Id. (“A [broker-dealer] must have a reasonable basis to believe 5 that a recommended transaction or investment strategy involving a security is suitable 6 for the customer . . . .”). 7 No party disputes that at the relevant times, Gravette and MacArthur were each 8 dual registrants, meaning that they were registered and regulated by the SEC as 9 investment advisers and simultaneously registered and regulated by FINRA as broker- 10 dealers. (See, e.g., MacArthur SUF 1.) Dual registration in and of itself is permissible 11 and is relatively common, though the practice presents ample opportunity for conflicts 12 of interest to arise. See, e.g., Malouf v. S.E.C., 933 F.3d 1248 (10th Cir. 2019). 13 Defendants argue that the fact that Gravette and MacArthur were also acting as 14 broker-dealers in their capacities as principals of Ausdal somehow means that they 15 were not acting as investment advisers. (Criterion Opp’n SEC Mot 4–13; MacArthur 16 Opp’n SEC Mot. 5–16.) 17 Defendants cite the SEC’s three-part test for determining the capacity or capacities in 18 which a dual registrant is acting, Exchange Act Release No. 34-86031, 2019 WL 19 2420297, at *44, and argue that, under this test, they are broker-dealers. As part of their respective arguments, both sets of 20 Defendants’ arguments miss the broader point. No one argues that Criterion 21 and Gravette were not broker-dealers when they brokered their clients’ private 22 placement transactions and otherwise acted as agents of Ausdal. Therefore, it is not 23 surprising that Defendants are able to marshal a significant amount of evidence and 24 arguments to support their contentions that they qualify as broker-dealers under the 25 SEC guidance. But the question is not whether Gravette and MacArthur ever acted as 26 broker-dealers. The question is whether, regardless of when and to what extent they 27 6 28 In July 2019, the SEC adopted a “best interest” standard of conduct for broker-dealers when making recommendations related to securities transactions. 17 C.F.R. § 240.15l-1. The parties do not dispute that the prior “suitability” standard is the one that applies to this action. 19 1 acted as broker-dealers, they were also acting as investment advisers when they 2 recommended to a Criterion/Ausdal client that the client invest in a particular private 3 placement offering. 4 Based on the statutory definitions of investment adviser and broker-dealer, the 5 answer to this question, as a matter of law, is “yes.” Under those definitions, when 6 Gravette or MacArthur presented a private placement offering to one of their 7 Criterion/Ausdal clients, explained the upside and downside risks of the offering, and 8 discussed whether the private placement would be a wise addition to the investor’s 9 portfolio, Gravette and MacArthur were acting as investment advisers, because they 10 were providing investment advice in the context of broader portfolio management. 11 Exchange Act Release No. 34-86031, 2019 WL 2420297, at *3. Once the investor 12 decided to invest in a private placement and directed Gravette or MacArthur to 13 execute the transaction, Gravette and MacArthur would then step into their roles as 14 agents of Ausdal and broker the transaction in a suitable way on behalf of their client. 15 See id. (observing that broker-dealers make “transaction-specific recommendations”). 16 Simply put, when Gravette and MacArthur discussed or recommended whether a 17 client should invest in a private placement, they were acting as investment advisers; 18 when they discussed or recommended how to execute a private placement transaction 19 (and actually brokered and executed the transaction), they were acting as broker- 20 dealers. Importantly, even after an investor decided to invest in a private placement 21 and Gravette and MacArthur stepped into their roles as broker-dealers, their roles as 22 investment advisors did not cease, and instead continued in full force with respect to 23 Criterion’s management of the private placement investments. Furthermore, after 24 Ausdal brokered the transactions and established the investors’ positions in the private 25 placements, Criterion continued to manage those investments and collect management 26 fees. Thus, even after Ausdal brokered the private placement transactions, Gravette 27 and MacArthur continued in their roles as investment advisors with respect to 28 Criterion’s management of the private placements. 20 The fact that Gravette and 1 MacArthur at times stepped into their roles as broker-dealers did not invalidate their 2 roles as investment advisers when they rendered services on behalf of Criterion. 3 No amount of written or oral representations can change this conclusion. 4 Defendants may have had their investor clients sign agreements stating that, when 5 recommending private placement offerings, Gravette and MacArthur were acting in 6 their capacities as broker-dealers for Ausdal. (MacArthur SUF 16 (Firm Brochure 7 stated that “associated persons” of Criterion may, in their “capacities” as investment 8 adviser and broker-dealer, “recommend securities”).) Gravette and MacArthur may 9 also have conveyed as much to their clients orally. (See, e.g., MacArthur Decl. ¶ 11, 10 ECF No. 52 (“Acting in my capacity as a registered representative of Ausdal, I 11 recommended that certain Criterion clients . . . invest in one or more of the Funds.”).) 12 But these representations do not render Gravette and MacArthur solely broker-dealers 13 (i.e., non-investment advisers) in recommending private placements, for the simple 14 fact that the Advisers Act governs investment advisers by operation of law, and 15 advisers may not sign contracts with clients waiving the clients’ rights under the 16 Advisers Act by simply calling investment advising activity something else. 17 Commission Interpretation Regarding Standard of Conduct of Investment Advisers, 18 Inv. Adv. Act Rel. No. 5248, at 10–11 (June 5, 2019) (noting as “inconsistent” with 19 Adviser’s Act “[a] contract provision purporting to waive the adviser’s federal 20 fiduciary duty generally, such as (i) a statement that the adviser will not act as a 21 fiduciary, (ii) a blanket waiver of all conflicts of interest, or (iii) a waiver of any 22 specific obligation under the Advisers Act”). 23 In support of their argument that they were not acting as investment advisers, 24 Defendants also quote the SEC’s own guidance issued in connection with the 2019 25 Regulation Best Interest. Assuming for the sake of argument that this guidance 26 applies to this case, the guidance in fact supports the SEC’s position, not Defendants’. 27 The guidance provides: 28 21 1 2 3 4 We are . . . confirming that Regulation Best Interest does not apply to advice provided by a broker-dealer that is dually registered as an investment adviser (“dual-registrant”) when acting in the capacity of an investment adviser, and that a dual-registrant is an investment adviser solely with respect to accounts for which a dual-registrant provides advice and receives compensation that subjects it to the Advisers Act. 5 6 7 8 9 SEC Release No. 34-86031, at 34–35. Where a financial professional who is dually registered . . . is making an account recommendation to a retail customer, whether Regulation Best Interest or the Advisers Act will apply will depend on the capacity in which the financial professional making the recommendation is acting. 10 Id. at 99. This guidance does not say anything remarkable about dual registrants and 11 the law that applies to them. The guidance does not, as Defendants suggest, indicate 12 that a person cannot act as both an investment adviser and a broker-dealer at the same 13 time. It also does not indicate that a person acting as a broker-dealer cannot also act 14 as an investment adviser. The guidance simply iterates that, when a dual registrant is 15 engaged in activities regulated by the Advisers Act, the dual registrant is acting as an 16 investment adviser, and when the dual registrant is engaged in activities regulated by 17 Regulation Best Interest, the dual registrant is acting as a broker-dealer. Nothing 18 about the SEC’s guidance or anything in case law suggests that an individual cannot 19 act in both these capacities at various times within the context of a given client 20 relationship. 21 To summarize the discussion thus far, as a matter of law, when Gravette and 22 MacArthur discussed whether an investor client should invest in a private placement, 23 the advisability of the investment, and the effect of that investment on the client’s 24 overall portfolio, they were acting as investment advisers, and thus owed fiduciary 25 duties to their clients. Vernazza, 327 F.3d at 860. One of those duties is the duty to 26 disclose all actual and potential material conflicts of interest inhering in the private 27 placement offerings, id., discussed next. 28 22 ii. 1 Defendants had conflicts of interest they did not fully disclose. 2 3 Two main types of conflict of interest arose from Defendants’ business 4 structure and compensation arrangement. The first conflict relates specifically to the 5 SREI Fund and AOFIV and the separate classes of shares T2 created for Criterion 6 investors. Criterion created a conflict of interest by offering less favorable shares to 7 Criterion investors and taking a commission while doing so. This created potential or 8 actual conflict between (1) Gravette and MacArthur’s best interest (directing their 9 investors toward the SREI Fund’s and AOFIV’s Criterion-only shares, where the 10 investments would generate broker commissions) and (2) Criterion investors’ best 11 interest (choosing the investment with the compensation structure most favorable to 12 the investor). 13 A second conflict of a slightly different type arose with respect to all four funds. 14 With all four funds, Ausdal continued to receive commissions from the fund managers 15 (according to various formulas) as long as Criterion investors remained invested in the 16 funds. 17 MacArthur, the same individuals who were responsible for making recommendations 18 to Criterion clients and for managing their investments. This created potential or 19 actual conflict between (1) Gravette and MacArthur’s best interest (keeping clients 20 invested in the funds in order to receive commissions) and (2) Criterion investors’ best 21 interest (ensuring they are invested in funds with terms that are most favorable to 22 them, even if it means exiting one of the funds from which Ausdal was receiving 23 commissions).7 But those commissions were funneling directly back to Gravette and 24 25 26 27 28 7 This conflict of interest would have been reduced had, for example, Gravette and MacArthur drawn a steady salary from Ausdal rather than receiving commission revenue contingent on Criterion’s clients remaining invested and the size of those clients’ investments. Had Gravette and MacArthur done so, their interest in keeping those clients invested in the private placements would be significantly reduced, because their salaries would not be dependent on whether Criterion clients remained invested in the private placements, and they would be able to advise their clients to exit the private placements without directly harming their own personal interests. Thus, the specific nature 23 1 With the conflicts clearly delineated, the Court finds that (1) the SEC submits 2 evidence sufficient to substantiate its claim that Defendants failed to fully disclose 3 these conflicts, and (2) Defendants fail to raise a genuine factual dispute about this 4 conclusion, either by submitting evidence showing that they did sufficiently disclose 5 conflicts, or otherwise. 6 The Advisers Act requires “full and fair disclosure of all material facts.” 7 Capital Gains, 375 U.S. at 194. Both actual and potential conflicts of interest are 8 “indisputabl[y] . . . ‘material’ facts with respect to clients and the Commission.” 9 Vernazza, 327 F.3d at 859 (citing Capital Gains, 375 U.S. at 201). Investment 10 advisers owe a fiduciary duty to disclose all potential conflicts of interest “accurately 11 and completely,” id. at 860, “in a manner that would enable their clients to understand 12 the source and nature of the conflicts,” Robare Grp., 922 F.3d at 477. 13 disclosures about how an adviser “might be deriving additional compensation from 14 their trading activities” are inadequate when the adviser is “actually doing so” and 15 fails to apprise clients of the same. S.E.C. v. Westport Capital Markets LLC, 408 F. 16 Supp. 3d 93, 104 (D. Conn. 2019). “[W]hat is required is a picture not simply of the 17 show window, but of the entire store[;] not simply truth in the statements volunteered, 18 but disclosure.” Capital Gains, 375 U.S. at 201. Vague 19 To determine if Gravette and MacArthur sufficiently disclosed the conflicts of 20 interest, the Court looks first to the written disclosures. The existence and content of 21 the written disclosures is not in factual dispute; the parties generally agree on which 22 documents were available to investors and what the documents stated. 23 The Court begins with the first conflict of interest described above, the one that 24 arose when Criterion recommended investors purchase shares in T2 funds with less 25 favorable compensation structures than what was available to non-Criterion investors. 26 This part of the analysis, at least, is relatively simple. Nothing in any of the 27 28 of the compensation agreement structure connecting the fund manager (T2 or Bird Rock), Ausdal, Gravette, and MacArthur is material, because it directly affects the severity of the conflict of interest. 24 1 documents—the Firm Brochure, the Form ADVs, the client agreements, the 2 investment agreements, or the private placement memoranda—discloses specifically 3 that Criterion investors were investing in shares that provided a 60/40 profit split 4 when other non-Criterion investors had access to shares that provided an 80/20 profit 5 split. This is a material fact that is part of the conflict of interest that arose when 6 Criterion and T2 created Criterion-specific shares and offered them to Criterion 7 investors. By failing to disclose this information when it was clearly known to them 8 and clearly material to investors’ decisions, Gravette and MacArthur breached their 9 fiduciary duties to their clients.8 (Client Letter 2–3 (disclosing difference in profit 10 splits); cf. id. at 3 (“Given the potentially considerable amounts of non-advisory 11 compensation from the above-mentioned funds, we should have provided more 12 disclosure around the potential conflicts of interest in offering these funds to our 13 clients.”).) 14 The next conflict of interest is the broader one that arose as a result of Gravette 15 and MacArthur receiving ongoing percentage-based commissions from T2 and Bird 16 Rock for keeping Criterion clients invested in the four funds. Upon careful review of 17 all the written disclosure materials Defendants quoted in their briefs and statements of 18 undisputed facts, the Court makes the following observations. 19 Some written disclosures indicated that Ausdal might, at some point in the 20 future, receive commissions or other fees for brokering transactions on behalf 21 of Criterion clients. 22 Uncontroverted Facts (“Criterion SAUF”) 307, ECF No. 62-1 (“The Fund may (See, e.g., Criterion Statement of Additional 23 24 25 26 27 28 8 Defendants’ argument that the prohibition on selling away prevented them from mentioning the existence of other classes of shares is a red herring. (See, e.g., Criterion Opp’n SEC Mot. 21.) The selling away rule prohibits a financial adviser from selling investment products without the authorization of the firm with which he is licensed. Bourdel v. Wells Fargo Advisors, LLC, No. 2:12-cv-01213-MMD-CWH, 2013 WL 1855745, at *3 n.2 (D. Nev. Apr. 30, 2013). However, Defendants’ breach of fiduciary duty was not in their failure to offer their clients shares with better profit splits; it was in their failure to inform their clients of the existence of those shares. Defendants could have provided their clients with this information without doing any selling away. 25 1 engage selling agents to offer and sell the Units. Such selling agents may be 2 paid a sales commission . . . .”).) 3 Some written disclosures indicated that Gravette and MacArthur might, at some 4 point in the future, receive commissions or other fees for brokering transactions 5 on behalf of Criterion clients. (See, e.g., MacArthur SAUF 276 (Firm Brochure 6 disclosed that “[i]n their separate capacity(ies) [as representatives of Ausdal], 7 [associated persons] are able to implement investment recommendations for 8 advisory 9 commissions . . .).”).) clients for separate and typical compensation (i.e., 10 Some written disclosures indicated that Ausdal would in fact, in connection 11 with a particular investment transaction, receive commissions or other fees for 12 brokering those transactions on behalf of Criterion clients. (See, e.g., Criterion 13 SAUF 311 (“The Fund has engaged Ausdal . . . to offer and sell interests in the 14 Fund. . . . Such selling agents may be paid a sales commission . . . .”).) 15 Conspicuously absent from Defendants’ papers, however, is evidence of the 16 natural fourth bullet point in this progression: any written disclosures indicating that 17 Gravette and MacArthur as individuals, and not merely Ausdal, would in fact receive 18 commissions from the brokering of these private placements, or that the commissions 19 were ultimately calculated as some percentage of the Criterion investors’ brokered 20 investment. 21 That Criterion’s clients understood that Gravette and MacArthur were the 22 principals of Ausdal, or that they were the Ausdal agents through which Ausdal 23 brokered the clients’ private placements, does not complete the puzzle. That Ausdal 24 received commissions, and that Gravette and MacArthur worked for Ausdal, do not 25 together imply that Gravette and MacArthur, as individuals, were in fact receiving 26 commissions on any given transaction (after funneling them through Criterion or 27 otherwise). Similarly, nothing suggests that Gravette and MacArthur told their clients 28 that they were the only principals of Ausdal, or any other specific information from 26 1 which the clients could reasonably infer that commissions for Ausdal meant 2 commissions for Gravette and MacArthur. 3 Ausdal’s receipt of commission fees created a conflict of interest, and 4 Defendants arguably disclosed this particular conflict. However, that Gravette and 5 MacArthur as individuals ultimately received essentially all Ausdal’s commission fees 6 increased the severity of the conflict of interest, because it more directly tied 7 Gravette’s and MacArthur’s personal incomes to whether their investors remained 8 invested. (See n.7, supra.) This extra layer of conflict was undoubtedly material to 9 investors’ decisions because it increased the risk that Gravette and MacArthur would 10 act in their own best interest rather than that of their clients. The written disclosures 11 fail to demonstrate that Defendants disclosed this conflict with sufficient detail to 12 permit their clients to understand its severity. 13 The next consideration is whether there is any evidence that Gravette or 14 MacArthur made these disclosures orally. Having reviewed, to the best of its ability, 15 the extremely voluminous record of this Motion (no less than three Xerox boxes’ 16 worth of courtesy copies delivered to Chambers), the Court finds exactly three pieces 17 of evidence suggesting that Gravette or MacArthur may have made oral disclosures. 18 The first is an assertion in Gravette’s declaration which reads as follows: 19 20 21 22 23 24 25 26 27 28 As part of my initial meeting with new investors, I explained that I was dually registered, meaning that I was both a registered representative for Ausdal, a broker-dealer, and associated with Criterion, an investment adviser. I explained that my association with Ausdal allowed me to offer private placement investments and offerings under Regulation D of the Securities Act of 1933. I explained that I would be acting as a registered representative of Ausdal with respect to any recommendations relating to private placement investments. I explained that I received commissions on private placements. I also explained that broker-dealers are regulated by the SEC and the Financial Industry Regulatory Authority (“FINRA”). I also explained the differences between investment advisers and brokerdealers, generally including that investment advisers typically provide ongoing advice, exercise discretion, receive fee-based compensation, and are regulated by the SEC, while broker-dealers typically provide 27 transaction-specific recommendations, do not exercise discretion, receive commissions, and are regulated by both the SEC and FINRA. 1 2 3 (Mot. Decl. Robert A. Gravette (“Mot. Gravette Decl.”) ¶ 38, ECF No. 53 (emphasis 4 added).) The italicized sentence is key, but it suffers from the same infirmity as the 5 written disclosures. It is a generalized statement that, at some point in the future, there 6 may be a private placement, and that, if there is a private placement, Gravette might 7 receive commissions on it. It does not amount to a clear disclosure that, with respect 8 to some particular private placement transaction, Gravette would receive a broker 9 commission. 10 Given that the manner in which Gravette and MacArthur ultimately benefit 11 from commissions on private placements is key to full disclosure of the conflict, the 12 Court might have expected a more robust description of exactly what Gravette said to 13 his clients regarding commissions on private placements.9 As written, Gravette’s 14 statement could simply mean that Gravette told his clients he received commissions as 15 a Criterion investment adviser when he directed an investor to a private placement. 16 That proposition is unremarkable. Gravette’s declaration does not indicate he clearly 17 disclosed that he would individually receive an ongoing percentage-of-investment 18 commission as a broker of the investment transaction. MacArthur also submitted a declaration in support of his Motion. 19 (Mot. 20 MacArthur Decl., ECF No. 52.) Paragraph 11 of this declaration is functionally 21 similar to paragraph 38 of Gravette’s declaration in that MacArthur states that he 22 explained to new clients (1) his dual capacity, (2) what he might do in each capacity, 23 and (3) the general difference between the two capacities. (Id. ¶ 11.) There is one key 24 25 26 27 28 9 The Court notes that when Criterion and Gravette cited Paragraph 11 of Gravette’s declaration in their Memorandum of Points and Authorities in support of their Motion, they omitted reference to the italicized language altogether. (Criterion Mot. 11.) Several pages later, they again cite Gravette’s Paragraph 11 and state that, “[a]s discussed above, Gravette disclosed to investors that he received commissions from the Fund Managers based on their investments in the Funds.” (Id. at 15.) But Criterion and Gravette never discussed this particular matter before that point in the brief. 28 1 difference, however: MacArthur’s declaration lacks any suggestion that he told his 2 clients that he would individually receive percentage-of-investment commissions as a 3 result of Ausdal’s brokering activity. 4 The only other pieces of evidence that might remotely suggest that Gravette or 5 MacArthur fully disclosed their compensation from Ausdal are the following 6 statements of Gravette and MacArthur, respectively: 7 8 9 10 11 12 13 14 15 16 Before the time of the investment . . . I explained that the investors’ interest in the Four Funds was excluded [from] Criterion’s standard investment management fee because the Fund Manager compensated me through Ausdal contingent upon the investor first receiving a certain return. (Mot. Gravette Decl. ¶ 41.) Prior to the investment, I explained to each Investor that the Investor’s interest in the Fund (“the “Interest”) would be considered a non-billable asset – i.e., it would be excluded from the calculation of Criterion’s standard investment management fee – because the Fund Manager would compensate me through Ausdal – my affiliated broker-dealer – contingent upon the Investor first receiving a certain return. 17 (Mot. MacArthur Decl. ¶ 15.) Neither of these statements passes muster. First, both 18 statements are primarily about Gravette and MacArthur explaining Criterion’s fee 19 structure to their clients and why certain investments were subject to a lower fee. The 20 main point is why the fee structure is the way it is; the fact that Gravette and 21 MacArthur would individually receive broker commissions is relegated to a 22 subordinate clause whose purpose is to provide a reason for the main point. 23 MacArthur’s statement is particularly ambiguous and could be read as MacArthur not 24 having communicated any of the “because” clause to his clients at all. If this is the 25 only context in which Gravette and MacArthur mentioned that they would 26 individually receive compensation from Ausdal, then it is no wonder some of their 27 clients were unaware of this fact. (See PSUF 214–216.) 28 29 1 More fundamentally, though, the plain language of these declarations still fails 2 to establish that Gravette and MacArthur conveyed to their clients the material details 3 of the conflict of interest. As discussed, the material details are that (1) Gravette and 4 MacArthur, as individuals, were ultimately receiving money from Ausdal’s brokering 5 activity; and (2) the money ultimately came to Gravette and MacArthur as some sort 6 of percentage of Criterion client funds invested in the private placements. Nothing in 7 the record—neither Gravette’s Declaration nor MacArthur’s Declaration nor anything 8 else—indicates that Gravette or MacArthur ever conveyed this second detail to their 9 clients. The word “contingent” in the declarations is no talisman; in that context, 10 “contingent” refers to the share structure that makes the fund manager’s performance 11 allocation initially “contingent” on whether the investment cleared the 6% or 8% 12 hurdle, not that Gravette or MacArthur would obtain funds from Ausdal “contingent” 13 on the investors’ continued investment. 14 Moreover, when parties opposing summary judgment motions submit 15 conclusory, self-serving declarations not supported by anything else in the record, 16 courts may, in appropriate instances, find that the self-serving declaration does not 17 place any fact in genuine dispute. F.T.C. v. Publ’g Clearing House, Inc., 104 F.3d 18 1168, 1171 (9th Cir. 1997) (“A conclusory, self-serving affidavit, lacking detailed 19 facts and any supporting evidence, is insufficient to create a genuine issue of material 20 fact.”) That is the case here. Gravette’s and MacArthur’s self-serving declarations 21 regarding what they told clients about their compensation from Ausdal are terse, 22 patchy, and conclusory, and have no support anywhere else in the thousands of pages 23 of record submitted in connection with these Motions. See Potter v. City of Lacey, 24 517 F. Supp. 3d 1152, 1159 (W.D. Wash. 2021) (“Conclusory, non-specific 25 statements in affidavits are not sufficient, and ‘missing facts’ will not be ‘presumed.’” 26 (quoting Lujan v. Nat’l Wildlife Fed’n, 497 U.S. 871, 888–89 (1990)).) Defendants’ 27 declarations amount to no more than a “scintilla” of evidence that Gravette and 28 MacArthur in fact fully disclosed the nature of the conflict of interest to their clients. 30 1 Anderson, 477 U.S. at 251–52. For that reason, they do not indicate a genuine dispute 2 regarding Gravette’s and MacArthur’s failure to disclose the conflict. 3 For these reasons, the SEC makes a complete showing10 that Gravette and 4 MacArthur violated section 206(2) by failing to provide their clients with the material 5 details of the conflicts of interest that arose from the Criterion/Ausdal business model 6 and compensation structure.11 Defendants submit no evidence suggesting that this 7 conclusion is in genuine factual dispute. Accordingly, the Court GRANTS summary 8 judgment in the SEC’s favor as to liability on its second claim for violation of 9 section 206(2) of the Advisers Act. b. 10 SEC’s First Claim: Violation of Section 206(1) 11 The Court turns to the SEC’s first claim, brought under section 206(1) of the 12 Advisers Act. In order for the SEC to obtain summary judgment on its section 206(1) 13 claim, it must submit evidence substantiating each element of the claim, and it must 14 further demonstrate in the face of Defendants’ rebuttals that no genuine factual dispute 15 exists as to any element. Celotex, 477 U.S. at 322. If a genuine factual dispute exists 16 as to any single element, then the SEC is not entitled to summary judgment in its 17 favor, no matter how clearly or convincingly it demonstrates the other elements. 18 19 20 21 22 23 24 25 26 27 28 10 Neither party, in any motion, opposition, or reply, makes anything beyond a passing mention of the interstate commerce requirement for Adviser Act violations. The Court assumes that this is because the parties do not dispute that Defendants used the mail, telephone, email, or other electronic communications in the course of their relationships with their investor clients. Indeed, no other assumption appears reasonable. 11 The Court reads no special meaning into the “negligence” requirement for section 206(2) violations. The cases that articulate this negligence requirement all trace back to Capital Gains Rsch. Bureau, 375 U.S. 180. That opinion is devoid of the word “negligence,” and instead strongly suggests that an adviser’s failure to make “full and frank disclosure” of his or her conflicts of interest is itself the negligent act that violates section 206(2). Capital Gains, 375 U.S. at 196. This appears axiomatic; a fiduciary’s breach of fiduciary duty is equivalent to a negligent act on the part of the fiduciary because a negligent fiduciary is simply one who failed to meet the applicable standard of care, which, for a fiduciary, is the fiduciary standard. See U.S. Telesis, Inc. v. Ende, 64 F. Supp. 3d 65, 68 (D.D.C. 2014) (“[C]laims for negligence and breach of fiduciary duty are evaluated similarly because they are governed by the same standard of care.”). 31 1 As discussed, the main difference between section 206(1) and section 206(2) is 2 that the former requires a showing of scienter. Robare Grp., 922 F.3d at 472. Here, 3 the issue of scienter remains in genuine factual dispute. In the Ninth Circuit, scienter 4 under the Advisers Act refers to “knowing or reckless conduct.” Vernazza, 327 F.3d 5 at 860 (holding that this is the same standard for scienter under both section 10(b) of 6 the Exchange Act of 1934 and section 17(a)(1) of the Securities Act of 1933). Under 7 this standard, “[s]cienter may be established . . . by showing that the defendants knew 8 their statements were false, or by showing that defendants were reckless as to the truth 9 or falsity of their statements.” Gebhart v. S.E.C., 595 F.3d 1034, 1041 (9th Cir. 10 2010); see also Howard v. Everex Sys., Inc., 228 F.3d 1057, 1064 (9th Cir. 2000) 11 (noting scienter may exist when the actor “had reasonable grounds to believe material 12 facts existed that were misstated or omitted, but nonetheless failed to obtain and 13 disclose such facts although [he] could have done so without extraordinary effort”). 14 “Scienter . . . is a subjective inquiry. It turns on the defendant’s actual state of 15 mind.” Gebhart, 595 F.3d at 1042; see Ernst & Ernst v. Hochfelder, 425 U.S. 185, 16 206 (1976) (“There is no indication that Congress intended anyone to be made liable 17 for such practices unless he acted other than in good faith.”). 18 “[g]enerally, scienter should not be resolved by summary judgment.” S.E.C. v. Life 19 Wealth Mgmt., Inc., No. 10-cv-04769-RSWL (MANx), 2012 WL 12919299, at *3–4 20 (C.D. Cal. Nov. 9, 2012) (finding a genuine dispute as to scienter). 21 For this reason, To establish scienter, the SEC points to Gravette’s deposition, in which 22 Gravette indicates he understood that he needed to disclose certain conflicts of 23 interest. 24 deposition suggesting that MacArthur also understood that there were conflicts of 25 interest, and that MacArthur believed he had disclosed all material details of the 26 conflicts to his clients. (Sew Hoy Decl. Ex. 5 (“MacArthur Dep.”) 163:4-8, ECF 27 No. 42-5.) (Gravette Dep. 122:17-123:6.) 28 32 The SEC also points to MacArthur’s 1 Based on this evidence, and citing Vernazza, the SEC argues that Defendants’ 2 failure to disclose their conflicts of interest accurately and completely constitutes 3 evidence of scienter. Even if it does, though, Defendants’ evidence nevertheless 4 places scienter in genuine dispute. Vernazza was, at the trial court level, a review of 5 the SEC’s determination of scienter after an evidentiary hearing. The holding from 6 Vernazza concerns the evidentiary showing required to support scienter, not the 7 showing required to eliminate genuine disputes as to scienter. 327 F.3d at 859–60. 8 Here, Criterion did make some attempt to inform its clients of the potential for 9 conflicts of interest; the Form ADVs and disclosure statements did not altogether 10 avoid the topic. Since 2014, Criterion’s Form ADVs disclosed that “management and 11 associated persons of [the] firm are separately licensed as registered representatives of 12 Ausdal Financial Partners, Inc., a FINRA member broker-dealer.” (Criterion SAUF 13 305.) The Form ADVs further disclosed that dual licensees such as Gravette and 14 MacArthur were “able to implement investment recommendations for advisory clients 15 for separate and typical compensation (i.e., commissions, 12-b1 fees or other 16 sales-related forms of compensation).” (Id.; MacArthur SAUF 276.) The Form 17 ADVs reiterated that “[w]hen appropriate and suitable, our adviser representatives 18 may recommend certain Alternative Asset investments (i.e. private securities) to 19 [Criterion] client[s] in which the associated person may receive separate and typical 20 compensation (i.e. commissions) when acting in their separate capacities as a 21 registered representative of Ausdal.” (Criterion AMF 303.) The Form ADVs further 22 explained in various ways that, when Ausdal acted as the broker-dealer for private 23 placement transactions of Criterion’s clients, the arrangement “create[d] a conflict of 24 interest between [Criterion] and its clients.” (MacArthur SAUF 276; see also id. 25 (citing another part of the Form ADV providing that the arrangement “presents a 26 conflict of interest to the extent that these individuals recommend that a client invest 27 in a security which results in a commission being paid to the individuals”).) 28 33 1 Gravette’s and MacArthur’s declarations further indicate that they made oral 2 disclosures to their investor clients related to the conflicts. (Opp’n Decl. Robert A. 3 Gravette (“Opp’n Gravette Decl.”) ¶ 41, ECF No. 64; Opp’n Decl. Mark A. 4 MacArthur (“Opp’n MacArthur Decl.”) ¶ 11, ECF No. 66.) Thus, Defendants did not 5 altogether fail to disclose conflicts of interest. Instead, they disclosed the conflicts to 6 a certain degree through some combination of oral disclosures, Form ADVs, the 7 Criterion investment adviser contract, and the private placement memoranda, and the 8 record reflects that Defendants believed that their disclosures were legally sufficient. 9 (Opp’n Gravette Decl. ¶ 38 (Gravette’s oral disclosures to clients); Opp’n MacArthur 10 Decl. ¶ 11 (MacArthur’s oral disclosures to clients).) 11 Moreover, the record credibly supports the notion that, as to the SREI Fund and 12 AOFIV, Gravette and MacArthur believed they were giving their clients a better deal 13 by securing for them a preferred return and a 60/40 split while charging reduced 14 investment adviser fees, because their clients would ostensibly receive a better return 15 on their investment if the funds fell short of their hurdles, met their hurdles, or slightly 16 exceeded them. (Opp’n Gravette Decl. ¶¶ 48, 53; Opp’n MacArthur Decl. ¶ 27 (“This 17 contingent commission structure . . . reduced the Investors’ downside risk by 18 eliminating or reducing either a recurring investment advisory fee or an up-front 19 commission, which the Investors would have paid even if the Investments 20 underperformed.”); id. ¶ 30; Client Letter 2 (“[W]e felt this arrangement represented 21 the cheapest way to own this type of asset over the course of time.”).) To determine 22 whether or not Gravette and MacArthur were acting in good faith would require the 23 Court to weigh evidence and make credibility determinations, which it is not 24 permitted to do on summary judgment. See In re Entropin, Inc. Sec. Litig., 487 F. 25 Supp. 2d 1141, 1148 (C.D. Cal. 2007) (noting scienter is a “fact-specific issue[] which 26 should ordinarily be left to the trier of fact” (quoting Kaplan v. Rose, 49 F.3d 1363, 27 1375 (9th Cir. 1994), overruled on other grounds by City of Dearborn Heights Act 28 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605 (9th Cir. 2017))). 34 1 Although the Court can examine these declarations and determine as a matter of 2 law what details were and were not disclosed (and thereby rule as a matter of law on 3 negligence), this does not resolve the question of scienter, because scienter goes to the 4 state of mind of the actor. Gebhart, 595 F.3d at 1042. The Court cannot conclude 5 that Defendants’ failures to disclose were so egregious, extensive, or pervasive that a 6 finding of scienter is required as a matter of law. Defendants thus demonstrate a 7 genuine factual dispute about whether they engaged in “knowing or reckless conduct” 8 in their failures to fully disclose their conflicts of interest. Vernazza, 327 F.3d at 860. 9 Thus, the SEC is not entitled to summary judgment in its favor on its first claim, and 10 the Court DENIES the SEC’s Motion to this extent. 11 2. SEC’s Fourth Claim: Violation of Compliance Rule 12 The SEC asserts its fourth claim against Criterion for violation of the 13 Compliance Rule. Section 206(4) of the Advisers Act renders it unlawful for 14 investment advisers to “engage in any act, practice, or course of business which is 15 fraudulent, deceptive, or manipulative.” 15 U.S.C. § 80b–6(4). To implement Section 16 206(4), the SEC adopted Rule 206(4)-7, the Compliance Rule, which requires 17 investment advisers to “[a]dopt and implement written policies and procedures 18 reasonably designed to prevent violation[s]” of the Advisers Act, 17 C.F.R. 19 § 275.206(4)–7(a), and to review at least annually the adequacy and effectiveness 20 these policies and procedures, 17 C.F.R. § 275.206(4)-7(b). By way of its fourth 21 claim, the SEC asserts Criterion violated the Compliance Rule by failing to keep its 22 policies and procedures current and appropriately tailored to their business. 23 Generic policies that are not tailored to the specific risks of an adviser’s 24 business do not satisfy the Compliance Rule. See In re Sierra Fin. Adv., LLC, 25 99 S.E.C. 1336, 2010 WL 3725370, at *3 (Sept. 23, 2010) (finding violation of the 26 Compliance Rule when compliance manual “recited general legal requirements . . . 27 but did not contain procedures designed to specifically address [its] business 28 operations and investment practices”). Rather, investment advisers should “identify 35 1 conflicts and other compliance factors creating risk exposure for the firm and its 2 clients in light of the firm’s particular operations, and then design policies and 3 procedures that address those risks.” Compliance Programs of Inv. Cos. & Inv. Adv., 4 68 Fed. Reg. 74714, 74716 (Dec. 24, 2003). An adviser’s failure to maintain adequate 5 compliance policies and procedures “constitute[s] a violation of [the Compliance 6 Rule] independent of any other securities law violation.” Id. at 74715. A violation of 7 the Compliance Rule does not require a showing of scienter and may rest on a finding 8 of simple negligence. See, e.g., S.E.C. v. Steadman, 967 F.2d 636, 643 n.5 (D.C. Cir. 9 1992). 10 Although the SEC submits evidence suggesting that Criterion did not update its 11 manual for several years and that the manual was therefore out of date in several 12 respects, this showing does not require the Court to conclude as a matter of law that 13 Criterion was negligent in not updating its manual. Gravette testified that he met 14 yearly with compliance consultants and reviewed the adequacy and effectiveness of 15 Criterion’s written policies and procedures. (Criterion AMF 327–328.) The record 16 does not preclude the possibility that Criterion’s failure to update the manual with 17 material related to private placement offerings was an innocent or otherwise non- 18 culpable omission. Moreover, the fact that other aspects of the manual, such as the 19 organizational chart, were out of date, is not relevant to the analysis, because the 20 Compliance Rule requires written policies and procedures that ensure conflicts and 21 other compliance factors are sufficiently operationalized within a firm; it does not 22 require firms to have handbooks that at all times contain a complete set of up-to-date 23 details about the firm. 24 recommended updating its policies and procedures manual concerning private 25 offerings, and that Criterion did not update the manual until 2017, likewise does not 26 require a finding of negligence as a matter of law. It is possible that letting three years 27 go by was negligent; or, it is possible that Criterion was justified (that is, was non- 28 negligent) in taking three years to fully update its manual given that it was under Finally, the fact that Criterion’s compliance consultant 36 1 investigation by the SEC. These factual determinations remain in genuine dispute and 2 must be tried. Accordingly, the SEC is not entitled to summary judgment in its favor 3 on its second claim, and the Court DENIES the SEC’s Motion to this extent. 4 In summary, the Court GRANTS IN PART and DENIES IN PART the 5 SEC’s Motion. The Court grants judgment in favor of the SEC on its second claim 6 against all three Defendants, and the SEC’s Motion is otherwise denied. 7 B. Defendants’ Motions 8 The Court now turns to Defendants’ Motions, which are directed toward the 9 SEC’s first claim for section 206(1) violations, second claim for 206(2) violations, 10 and fifth and sixth claims for aiding and abetting by Gravette and MacArthur, 11 respectively. As a preliminary matter, the Court DENIES Defendants’ Motions as to 12 the SEC’s second claim. The Court grants judgment as a matter of law in favor of the 13 SEC on that claim, so Defendants cannot possibly demonstrate that it is beyond 14 genuine dispute that they have not violated section 206(2). 15 1. Section 206(1) 16 Defendants all move for summary judgment in their favor on the SEC’s first 17 claim for violations of section 206(1) of the Advisers Act. As with the SEC’s Motion, 18 scienter is the issue that defeats both Motions of Defendants. 19 Defendants bear the initial burden of demonstrating with arguments and evidence that 20 the SEC will not be able to establish scienter. This is a rather high burden; Defendants 21 must establish a lack of a certain subjective state of mind (bad faith) as a matter of 22 law. Gebhart, 595 F.3d at 1042. Even if Defendants do meet this burden on each of 23 their Motions, the SEC successfully demonstrates that the existence of scienter 24 remains in genuine dispute. Gravette and MacArthur were indisputably aware of the 25 details of the compensation structure underpinning their clients’ investment in the four 26 funds. They eventually admitted in their Client Letter that they should have provided 27 their clients with this information. Nothing in the record precludes the possibility that 28 Defendants were aware earlier on that they should have provided this information and 37 In this context, 1 failed to do so anyway. Thus, the Court cannot conclude as a matter of law that 2 Defendants lacked scienter. The Court DENIES Defendants’ Motions as to the first 3 claim. 4 2. 5 Finally, Defendants move for summary judgment on the SEC’s fifth and sixth 6 claims, for aiding and abetting violations of the Advisers Act, asserted against 7 Gravette and MacArthur, respectively. Defendants argue that, because the underlying 8 claims for violation of sections 206(1) and 206(2) of the Advisers Act fail, so too do 9 the aiding and abetting claims. (Criterion Mot. 24–25; MacArthur Mot. 21.) But, as 10 discussed, the SEC demonstrates that, as a matter of law, Defendants each violated 11 section 206(2). That being the case, there is certainly a genuine factual dispute as to 12 whether Gravette or MacArthur aided or abetted the other (or Criterion) in violating 13 section 206(2). Defendants proffer nothing to suggest otherwise. Accordingly, the 14 Court DENIES Defendants’ Motions as to the aiding and abetting claims. 15 16 Aiding and Abetting Claims Thus, Defendants’ Motions are DENIED in their entireties. VII. STIPULATION TO CONTINUE TRIAL 17 On April 8, 2022, while these Motions were under submission, the parties filed 18 a Stipulation to continue the trial and pre-trial dates. (Stip., ECF No. 80.) The good 19 cause supporting the Stipulation was that the Court had not yet ruled on the instant 20 summary judgment Motions. Now that the Court has ruled on the Motions, the 21 Stipulation is moot and is DENIED as such. The Court will consider continuing the 22 trial if the parties submit with their request a concrete, fact-specific proposal to engage 23 in another round of mediation by a specific date. Unless the parties demonstrate good 24 cause in this way or otherwise, trial will remain on calendar as scheduled. 25 VIII. CONCLUSION 26 For these reasons, the Court GRANTS IN PART and DENIES IN PART the 27 SEC’s Motion. (ECF No. 41.) The SEC is entitled to judgment as a matter of law as 28 38 1 to Defendants’ liability on the second claim for violation of section 206(2) of the 2 Advisers Act. The SEC’s Motion is otherwise denied. 3 The Court DENIES both Motions of Defendants in their entireties. (ECF 4 Nos. 50, 51.) The Stipulation to Continue Trial is DENIED AS MOOT. (ECF 5 No. 80.) 6 7 IT IS SO ORDERED. 8 9 April 25, 2022 10 11 12 ____________________________________ OTIS D. WRIGHT, II UNITED STATES DISTRICT JUDGE 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 39

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