The opinion of the court was delivered by: Padova, J.
Plaintiff Securities and Exchange Commission ("SEC") instituted this action against Defendants Donald Anthony Walker Young, Acorn Capital Management, LLC ("Acorn Capital") and Acorn II, L.P. ("Acorn II"), alleging that Defendants violated the securities laws by running a Ponzi scheme, pursuant to which they misappropriated over $23 million in investor assets. The SEC has now filed an unopposed Motion for Partial Summary Judgment pursuant to Federal Rule of Civil Procedure 56(d), seeking to establish liability and obtain injunctive relief against Defendants.*fn1 For
the following reasons, we grant the SEC's Motion.
The following facts are undisputed. In 1999, Young and a colleague formed Acorn Capital and, that same year, Young directed the formation of Acorn Capital, II, L.P. ("ACM II"). (Young's Answer to SEC's First Request for Admission ("Admissions") ¶¶ 1, 10.) Since 2001, Acorn Capital has been registered with the SEC as an investment adviser. (Id. ¶ 9.) At all relevant times, Young has been Acorn Capital's managing member. (Id. ¶ 3.) In that capacity, Young controlled Acorn Capital, and the company acted by and through him. (Id. ¶¶ 6-7.)
In 2001, Young directed the formation of Acorn II. (Id. ¶ 61.) One purpose of both ACM II and Acorn II was to invest in securities and other financial instruments. (Id. ¶¶ 11, 64.) Acorn Capital was the general partner of ACM II, and was also the general partner of and an investment advisor to Acorn II. (Id. ¶¶ 12, 62-63.) Limited partners in ACM II and Acorn II did not have any role in the management or operation of the partnerships or the investment of partnership funds. (Id. ¶¶ 18-20, 76-78.) Young controlled ACM II and Acorn II, including their financial accounts and investment decisions, and both ACM II and Acorn II acted by and through Young. (Id. ¶¶ 13-17, 21-22, 66-69, 82-83.)
Beginning in 1999, ACM II accepted investments from investors in the form of limited partnership interests. (Id. ¶¶ 24-25.) Rather than maintaining investor accounts separately, Young and Acorn Capital pooled all ACM II investments in ACM II's own financial accounts. (Id. ¶¶ 26-27.) In November 1999, if not earlier, Young and Acorn Capital began using investor funds in the ACM II financial accounts for purposes other than those that ACM II investors had authorized. (Aff. of Michael R. Shanahan, a senior manager at Kroll, ("Kroll Aff.") ¶ 4; Gov't Change of Plea Memorandum at 4 ("Young admitted that his misuse of client funds began . . . in 1999."*fn2 );
Admissions ¶¶ 29-30.) Among other things, without the investors' knowledge, Young and AcornCapital transferred investor funds directly or indirectly into personal accounts held in Young's name or jointly with his wife and/or to pay Young's personal expenses. (Admissions ¶¶ 29-38; 41-43; Kroll Aff. ¶ 4.) For example, in January 2001, Young used investor funds in which he had no ownership interest to purchase a residence in Northeast Harbor, Maine for $715,000. (Admissions ¶¶ 145-49.) He also used investor funds to landscape, maintain, and construct an addition to that residence. (Admissions ¶¶ 165-76.) In addition, Young used certain ACM II investor funds to pay other ACM II investors. (Id. ¶¶ 39-40.)
Young and Acorn Capital preserved investor ignorance of their fraud by providing false information to ACM II investors about their investment accounts. (Id. ¶¶ 44-45, 50-53.) Specifically, they created and provided to ACM II investors account statements that reflected false profits and inflated account balances. (Id. ¶¶ 46, 51-52.) As a result, ACM II account statements showed balances that ACM II investors expect to have in their accounts based on their capital contributions and expected returns, without any offset for the amounts that Young and Acorn Capital converted for unauthorized purposes. (Id. ¶ 50.) The tax documents that Young and Acorn Capital provided to investors by U.S. Mail also inaccurately reflected the investors' income from their investments in ACM II. (Id. ¶¶ 54-57.) In total, from the inception of ACM II in November 1999 through the commencement of the instant action, Young illegally diverted over $10,256,594 million of investor funds in ACM II's financial accounts for his personal benefit. (Kroll Aff. ¶ 4.)
Beginning in 2001, investors began investing in Acorn II as limited partners. (Admissions ¶ 71.) In some instances, Young and Acorn Capital directed investors in Acorn II to send their investments to ACM II financial accounts. (Id. ¶ 72.) Like ACM II, Acorn II did not maintain separate accounts for each investor; instead, it pooled all Acorn II investments into either Acorn II's or ACM II's financial accounts. (Id. ¶¶ 73-75.) Nevertheless, Young and Acorn Capital provided to both ACM II and Acorn II investors individual account statements for Acorn II accounts that reflected false account balances. (Id. ¶¶ 89-90, 123-26, 129.)
Shortly after creating Acorn II, Young substantially discontinued the operations of ACM II. (Id. ¶ 94.) He stopped providing ACM II account statements to all but one ACM II investor, and instead created Acorn II account statements for those ACM II investors, reflecting that their ACM II investments were now investments in Acorn II (Id. ¶¶ 95-98.) Likewise, Young's own books and records reflected ACM II investors as investors in Acorn II. (Id. ¶ 99.) However, the money that had been invested in ACM II was not actually transferred to Acorn II accounts. (Id. ¶ 100.) Rather, Young used substantially all of the funds remaining in ACM II accounts for his own personal use. (Id. ¶¶ 105-09.) Thus, the investments reflected in the books and records of Acorn II and ACM II exceeded the assets of the two partnerships. (Id. ¶¶ 103-04.)
In the end, from the inception of Acorn II on October 22, 2001, through April 17, 2009, Young misappropriated over $13 million of Acorn II's assets for his personal use. (Id. ¶ 120; Kroll Aff. ¶ 6.) Among other things, in 2002, he used investor funds from both ACM II and Acorn II to purchase property and construct a family residence in Coatesville, Pennsylvania at a cost of $2.3 million, and he further used Acorn II investor funds in April 2006 to purchase a personal residence in Palm Beach, Florida for $2.1 million. (Admissions ¶¶ 177-86, 199-205.) He also used investor funds, without the permission of the investors, to maintain, landscape and improve both the Coatesville and the Florida residences. (Id. ¶¶ 187-98, 206-14.)
Young accomplished this misappropriation, in part, by instructing Acorn II's accountants to credit investor checks intended for investment in the investor's Acorn II account to an Acorn II account in Young's name. (Id. ¶ 111.) He further accomplished his misappropriation by directing that funds be transferred from Acorn II financial accounts to one or more personal financial accounts in either in his name or jointly with his wife, and instructing Acorn II's accountants to record the transaction as a distribution from an investor's account to that investor. (Id. ¶¶ 114, 117.) Young, Acorn Capital and Acorn II then sent account statements to Acorn II investors by U.S. Mail and electronic mail, which reflected false profits and false account balances. (Id. ¶¶ 123-28.)
In a similar time period, i.e., from the inception of Acorn Capital in November 1999, through April 17, 2009, Young also diverted over $2.5 million in investor funds from Acorn Capital financial accounts for his personal use. (Kroll Aff. ¶ 7; Admissions ¶ 139.) Additionally, he directed the disbursement of approximately $9 million from Acorn II financial accounts to Acorn II investors as withdrawals, while directing the accountants to record those distributions as originating from the Acorn II capital accounts of different investors, who had neither requested nor authorized the distributions, and who did not receive the distributions. (Id. ¶ 122.)
In late 2008, a representative of Cresap, Inc. ("Cresap"), a broker, expressed concerns regarding the Acorn II accounts. (See id. ¶¶ 243-44, 248.) In order to hide his conversion of investor funds, Young informed Cresap, in September of 2008, that Acorn II held assets of $27 million in multiple clearing firms when, in fact, Acorn II had but one clearing firm and held assets with an aggregate value of just $6 million or less. (Id. ¶¶ 238-42.) In addition, in early 2009, to allay Cresap's concerns and further hide his conversion of investor funds, Young created and provided to Cresap false account statements for Acorn II financial accounts at a bank and a brokerage firm, which reflected approximately $24 million in assets, when, in fact, neither the bank nor the brokerage firm held Acorn II assets. (Id. ¶¶ 243-50.)
Meanwhile, in early 2009, SEC staff conducted an examination of Acorn Capital. (Decl. of Frank Thomas ("Thomas Decl."), at ¶¶ 8, 59.) In connection with the examination, the SEC sent Acorn Capital, Young and his counsel requests for documents and information concerning the period January 1, 2006 though December 31, 2008. (Id. ¶¶ 9, 60; Admissions ¶¶ 251-53.) According to the SEC, Young and Acorn Capital never provided many of the items requested. (Thomas Decl. ¶¶ 9, 60.) Young admits that he failed to provide certain information and otherwise provided false and inaccurate information to the SEC. (Admissions ¶¶ 254-60.) Young further admits that the reason that he did not provide requested documentation to the SEC was to hide his conversion of investor funds and sustain his fraud. (Id. ¶¶ 261-63.) Ultimately, as a result of his conduct, Young received the direct or indirect benefit of $26,954,356 in ACM II and Acorn II investor funds that he directed to his benefit and/or the benefit of his family. (Kroll Aff. ¶ 9.)
On April 17, 2009, the SEC filed a complaint against Young, Acorn Capital and Acorn II, alleging that Defendants' conduct violated the antifraud provisions of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77q(a), the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and the Investment Advisers Act of 1940 ("Advisers Act"), 15 U.S.C. § 80b-6(1), (2), and (4). The Complaint further alleges that Acorn Capital violated, and Young aided and abetted Acorn Capital's violation of, certain recordkeeping provisions of the Advisers Act. 15 U.S.C. § 80b-4. On April 1, 2010, Young was indicted in a parallel criminal proceeding. See U.S. v. Young, Crim. A. No. 09-110 (E.D. Pa.). He was charged with one count of mail fraud in violation of 18 U.S.C. § 1341, and one count of money laundering in violation of 18 U.S.C. § 1957. On July 20, 2010, Young pled guilty to both counts of the Indictment.
Summary judgment, either full or partial, is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). An issue is "genuine" if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 ...