-LRL Securities and Exchange Commission v. Graham, II et al, No. 2:2009cv00250 - Document 65 (D. Nev. 2011)
Court Description: ORDER Denying 51 Motion for Summary Judgment. Signed by Judge James C. Mahan on 5/13/11. (Copies have been distributed pursuant to the NEF - MMM)
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-LRL Securities and Exchange Commission v. Graham, II et al Doc. 65 1 2 3 4 UNITED STATES DISTRICT COURT 5 DISTRICT OF NEVADA 6 7 SECURITIES AND EXCHANGE COMMISSION, 2:09-CV-250 JCM (LRL) 8 Plaintiff, 9 10 v. 11 LEWIS E. GRAHAM II and FLOWORKS, INC., 12 13 Defendants. 14 15 ORDER 16 Presently before the court is defendant Lewis E. Graham II’s pro se motion for summary 17 judgment (doc. #51). Plaintiff the Securities and Exchange Commission (hereinafter “the 18 commission”) filed an opposition. (Doc. #52). Defendant filed a reply. (Doc. #57). 19 The commission filed its complaint against defendants Graham and Floworks, Inc. and relief 20 defendant Linworth LLC, on February 6, 2009, asserting claims for (1) violations of section 10(b) 21 and Rule 10b-5 of the Securities Exchange Act of 1934 (“Exchange Act”) against Graham and 22 Floworks, and (2) equitable disgorgement against Linworth. The commission alleges that Graham, 23 through his entity Floworks, materially misrepresented facts to investors that impacted their 24 decisions relating to the buying and selling of securities. 25 Motion for Summary Judgment 26 In the motion for summary judgment (doc. #51), Graham argues several points, including, 27 but not limited to, (1) lack of jurisdiction, (2) that no securities transactions occurred, (3) that there 28 James C. Mahan U.S. District Judge Dockets.Justia.com 1 was no California operating agreement, (4) his statements were made in reliance on reports from 2 counsel, advisors, consultants, business associates, and others, (5) his actions were legitimate based 3 on his due diligence, (6) the complaint misrepresents facts, (7) his motivations were “stewardship 4 rather than self-interest,” (8) all necessary disclosures were made, and (9) that no tax advice was 5 provided. Graham concludes based on the foregoing, that no genuine issues of material fact exist 6 regarding the claim against him, and that the court should enter summary judgment in his favor. 7 A. 8 Pursuant to Rule 56 of the Federal Rules of Civil Procedure, summary judgment may 9 Legal Standard be granted if the pleadings demonstrate that there are no genuine issues of material fact 10 and the moving party is entitled to judgment as a matter of law. Anderson v. Liberty Lobby, Inc., 477 11 U.S. 242, 247 (1986); Diaz v. Eagle Produce Ltd. Partnership, 521 F.3d 1201, 1207 (9th Cir. 2008). 12 The party seeking summary judgment bears the initial burden of informing the court of the basis of 13 its motion, and identifying the portions of the pleadings or otherwise which demonstrate the absence 14 of genuine issues of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). 15 At the summary judgment stage, the facts and inferences must be viewed in the light most 16 favorable to the nonmoving party. Anderson, 477 U.S. at 248, 256; Diaz, 521 F.3d at 1207. Once the 17 movant has met its burden, the non-moving party must set forth facts to show a genuine issue for 18 trial. Celotex, 477 U.S. at 324. 19 B. 20 During 2002, Graham, through Floworks, became the manager of a real estate investment 21 partnership by the name of Stanford Square Investors, LLC (hereinafter “Stanford”), which had 22 approximately 100 investors. (Doc. #52). The primary asset of Stanford was a building located in 23 Palo Alto, California (hereinafter “the Palo Alto property”), that was initially purchased in 1985 for 24 approximately $15 million. Id. Prior to Graham becoming manager, in July of 2002, a trustee for the 25 Securities Investors Protection Corporation named Stephen Snyder announced to investors that he 26 intended to become the manager of the Palo Alto property. Id. 27 Relevant Facts After he was informed of Snyder’s intention to manage, Graham began to campaign to be 28 James C. Mahan U.S. District Judge -2- 1 appointed manager instead. At that time, Graham owned approximately 2.5% interest in Stanford, 2 and allegedly represented to investors in an August 9, 2002, newsletter that he had “multiple 3 advanced degrees, founded and ran an international management consulting company for more than 4 20 years,...served as a [d]irector of several corporations, and [was] a member of several California 5 business advisory boards.” (Doc. #52-24 Exhibit 163). Ultimately, investors voted Graham as 6 manager. (Doc. #52). 7 Shortly after being elected manager, in 2004, Graham began actively trying to sell the Palo 8 Alto property, and sent newsletters to the investors announcing this intention and introducing the 9 option of “deferring the tax affect of any sale through a tax-free transaction known as a like-kind 10 exchange under Section 1031 of the Internal Revenue Code.” (Doc. #52-26 Exhibit 165 and Doc 11 #52-6 Exhibit 45). Basically, he was informing the investors in the newsletters that the Palo Alto 12 property could be sold, the proceeds could be used to purchase another investment property, and 13 there would be no tax consequences to them. (Doc. #52). 14 In March of 2005, Graham sent another newsletter (doc. #52-26 Exhibit 165) to the investors 15 explaining that he had secured a non-binding letter of intent to purchase the Palo Alto property which 16 indicated a gross sale price of $33.2 million with a net sales price of $28.5 million. He estimated that 17 each investor’s interest would receive nearly $20,000 for each 1% interest in Stanford, and that the 18 investors would realize a “paper profit” from the sale. Id. Once again, he assured them that they 19 could avoid paying taxes by entering into a tax-free, like-kind exchange under the Internal Revenue 20 Code. Id. He attached a ballot to this newsletter, which asked the investors whether or not they 21 supported the proposed sale. Id. 22 In addition to the information regarding the intent to purchase letter, Graham stated in the 23 newsletter that the purchase of the replacement property would “require a separate, additional ballot 24 after the sale and the approval of a [m]ajority-[i]n-[i]nterest of [its] [m]embers.” Id. In April of that 25 year, Graham sent another newsletter (doc. #52-6 Exhibit 45) informing the investors that he had 26 located a possible replacement property, that he had to commit to millions of dollars in order to keep 27 the deal available, and that he transferred his financial interests “for the benefit of [m]embers and 28 James C. Mahan U.S. District Judge -3- 1 in order to secure an investment opportunity for a [tax-free] exchange.” Id. The commission argues 2 that these “millions” were actually part of an agreement where Graham agreed to assign essentially 3 all of his financial interests as manager of the Palo Alto property to the seller Langenburg Research, 4 Inc., owned by Albercht zu Hohenlohe Langenburg (hereinafter “Langenburg”), and that he was 5 receiving substantial financial interests in what amounted to a joint venture with the Langenburg and 6 Langenburg Research. (Doc. #52). 7 After 68% of the Stanford investors approved the sale, the Palo Alto property sold for $33.2 8 million ($28.5 million in net proceeds). (Doc. #52-8 Exhibit 48). Subsequently, and without the 9 approval of the investors, Graham purchased the “like-kind, commercial property,” that he described 10 in a newsletter as “several parcels and two (2) buildings in an industrial park in Eugene, Oregon” 11 (hereinafter “the Eugene property”). Id. He assured the investors that the Eugene property was the 12 “best exchange opportunity that met all [the] Internal Revenue Code requirements while offering 13 significant, potential financial upside.” Id. 14 Following this, Graham made several representations to the investors, including that the 15 property was comprised of “superb high-technology manufacturing space,” had been appraised at 16 “$75+ million,” that the Eugene market had been “moving upward,” and that the parties had 17 “mutually agreed” upon a value of $75 million including “existing land, buildings, improvements 18 and generic equipment plus all specialized production equipment installed by seller.” Id. (Emphasis 19 supplied). Graham informed the investors that the Eugene property would have a “single, high- 20 technology tenant” by the name of H20 Bottling LLC. Id. He assured the investors that he had carried 21 out “extensive due diligence” and that H20's business prospects were “enormous.” Id. Investors were 22 told that H20's lease on the Eugene property would translate to a distribution of $10,000 per year for 23 every 1% interest over the first 3 years of the lease. Id. 24 Finally, the newsletter stated that the purchase of the Eugene property met the requirements 25 for tax-free treatment, and that those who elect to remain in the LLC “will have no current tax 26 liabilities” from the decision to sell Palo Alto property. Id. For any investor who did not wish to 27 participate in the purported tax-free transaction, Graham informed them that Langenburg Research 28 James C. Mahan U.S. District Judge -4- 1 would purchase their interest “for every pre-tax penny [they] would have received from the building 2 sale if there had been no LLC 1031 transaction plus [their] pro rata share of the additional property 3 purchase down payment that the LLC was required to make for a total cash investment of 4 $3,000,000.00.” Id. (Emphasis supplied). Approximately 40 investors elected to sell their Stanford 5 interests. (Doc. #52). 6 C. 7 In the complaint (doc. #1) and the opposition to the motion (doc. #52), the commission 8 asserts that Graham made “numerous misleading statements and omissions regarding the transactions 9 at issue, including, among other things, the nature of the Eugene property transaction, the identity 10 of the seller of the Eugene property, the value of the Eugene property, [the] tax-free status of the Palo 11 Alto and Eugene property transactions, Grahams financial interest in H20 Bottling, and existing and 12 potential liabilities incurred by [Stanford].” The commission contends that these misrepresentations 13 amount to violations of Section 10(b) of the Exchange Act, and Rule 5b-1 thereunder. (Doc. #1 and 14 #52). Conclusion 15 To be successful in his motion for summary judgment (doc. #51), Graham must demonstrate 16 that no genuine issues of material fact exist in the claim against him for violations of the Exchange 17 Act. Celotex, 477 U.S. at 317, 323. The commission must prove four elements to establish violations 18 of section 10(b) and 10b-5 of the Exchange Act, including (1) a fraudulent device, material 19 misrepresentation or omission, or an act that operated as a fraud or deceit, (2) in connection with the 20 purchase or sale of a security, (3) scienter, and (4) use of the jurisdictional means. SEC v. Rana 21 Research, Inc., 8 F.3d 1358, 1363-64 (9th Cir. 1996) (discussing the elements of 10b-5); SEC v. 22 Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999). 23 In Graham’s motion for summary judgment (doc. #51), he argues that summary judgment 24 is appropriate, but fails to provide the court with conclusive evidence to negate the allegations 25 against him and to support the contention that no genuine issues of material fact exist. Graham 26 asserts that “there are no material facts in dispute and none that indicate [he] ever detected fraud 27 by others or committed fraud of any kind himself.” (Doc. #57) (Emphasis supplied). However, the 28 James C. Mahan U.S. District Judge -5- 1 commission points to several facts that indicate fraud occurred, or at the least, that support a finding 2 that a dispute as to the fraudulent and misleading nature of certain activities and representations 3 exists. (Doc. #52). 4 Specifically, the commission argues that Graham made certain misrepresentations, and 5 provides the court with evidence supporting their assertion that (1) the Eugene sale was not a 6 purchase of Stanford from Langenburg Research, but rather a purchase from Western Mechanical 7 by Stanford and Langenburg together for $5.4 million, (2) the value of the property was grossly 8 inflated, as it was actually purchased for $5.4 million, instead of the $17 million that Graham 9 purported to purchase it for, (3) Graham failed to disclose to investors that he had no basis to support 10 the promise that the transaction met the requirements of the tax-free status and had never consulted 11 with an attorney regarding this (doc. #52-29 Exhibit 168, doc #52-30 Exhibit 169, doc. #52-31 12 Exhibit 170, and doc. #52-32 Exhibit 171), (4) he failed to disclose his current and future financial 13 interest in H20 to investors, and (5) he failed to disclose to investors that he caused Stanford to be 14 liable for loans to Western Mechanical for $1.9 million and to Grand Pacific for $4 million and $1.5 15 million. (Docs. #52-16, 52-12, 52-13, and 52-14). 16 Despite the evidence presented, Graham denies that these misrepresentations occurred and 17 provides his own evidence to dispute the allegations against him. Therefore, there are genuine issues 18 as to whether the material misrepresentations and/or omissions occurred. As Graham has failed to 19 meet his burden of proving that no genuine issues of material fact exist as to the violations of the 20 Exchange Act, the court is not inclined to grant summary judgment. 21 Accordingly, 22 IT IS HEREBY ORDERED ADJUDGED AND DECREED that defendant Lewis E. Graham 23 24 II’s pro se motion for summary judgment (doc. #51) be, and the same hereby is, DENIED. DATED this 13th day of May, 2011. 25 26 UNITED STATES DISTRICT JUDGE 27 28 James C. Mahan U.S. District Judge -6-
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