SEC v. Battoo: Violations of the Exchange Act and the Advisers Act
In SEC v. Battoo, 1:12-CV-07125, 2016 BL 19839 (N.D. Ill. Jan. 25, 2016), the United States District Court for the Northern District of Illinois, Eastern Division, granted the Securities and Exchange Commission’s (“SEC”) motion for summary judgment against Tracy Sunderlage. The court found the SEC successfully demonstrated Sunderlage’s violation of Section 15 of the Securities Exchange Act (“Exchange Act”) and Section 203 of the Investment Advisers Act (“Advisers Act”).
As the SEC alleged, Sunderlage was barred in 1986 from associating with any broker, dealer, investment adviser, investment company, or municipal securities dealer, after discovering he sold unregistered securities and made material misstatements to clients. In 1989, Sunderlage created a “Multi-Employer Plan,” replaced in 2003 by a “Single-Employer Plan” (collectively, the “Employment Plans”), through which employers made tax-deductible contributions to a welfare benefit trust. PBT, Ltd. (“PBT”), owned and operated by Sunderlage, served as the trustee of the Employment Plans. PBT pooled contributions and invested them in insurance products, including a company Sunderlage founded and directed, Maven Assurance Limited (“Maven”). Participating employees paid premiums, and were required to become Maven shareholders by purchasing variable annuities issued to Maven Life International Limited (“Maven Life”), promoted and administered by Sunderlage. Sunderlage also owned Sunderlage Resource Group, Inc. (“SRG”), which managed SRG International and allegedly promoted the Employer Plans and Maven Life variable annuity at conferences in the United States.
The SEC brought this federal securities law action against Sunderlage, the one remaining defendant, after the other individual and corporate-entity defendants defaulted.
As a threshold requirement to impose liability under the Exchange Act and Advisor’s Act, it must be proven that the case involved a "security." Under 28 U.S.C. § 2462, there is a five-year statute of limitations for any "action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise." Section 15 of the Exchange Act bars unregistered brokers from using interstate commerce to conduct securities transactions, and requires any person who has been barred from associating with a broker to obtain SEC approval to willfully "associate with a broker.” 15 USC §78o. In addition, the Advisers Act prohibits any person who has been barred from associating with an investment adviser to willfully "associate with an investment adviser" without SEC approval.
The court first addressed whether the Employer Plans and Maven Life annuity were securities under the Exchange Act and the Advisers Act, concluding no reasonable trier of fact could find they were anything but securities. The Exchange Act and the Advisers Act both define a security to include an investment contract. The court held the Employment Plans were investment contracts because, under the well-established Howey test, they were: (1) an investment of money, since employers “invested” money by “giving up some tangible and definable consideration in return for interests with substantially the same characteristics of a security;” (2) in a common enterprise, because PBT pooled employer contributions to purchase securities as well as the Employer Plans tying SRG International’s interests to the investments; and (3) with an expectation of profits flowing solely from the efforts of others, because the Employer Plans were portrayed as “having a dominant investment intent.” The court also held the Maven Life annuity was a security, as Sunderlage admitted such in his answer to the complaint.
Turning to the statute of limitations, the court quickly concluded that, unlike a claim for penalties, the claims seeking injunctive relief and disgorgement were not subject to a five-year statute of limitations. According to the court, Sunderlage forfeited any other statute-of limitations argument because he did not offer an alternative limitations period for equitable relief.
Next, the court determined that Sunderlage acted as or associated with a broker in violation of Section 15 of the Exchange Act’s bar on willful association with brokers, absent SEC approval. The court found it significant that Sunderlage and SRG International not only solicited investors and provided investment advice, but they also processed documents and handled funds to effectuate securities transactions, receiving transaction-based compensation for investments in the Employer Plans and the Maven Life annuity.
Finally, the court held Sunderlage and SRG International routinely provided investment advice by relaying information about the Maven securities and managing clients’ funds in exchange for compensation, thus acting as an investment adviser under the Adviser’s Act in violation of Section 203(f).
Accordingly, the court granted the SEC’s motion for summary judgment.
The primary material for this case can be found on the DU Corporate Governance Website.