United States District Court, D. Colorado
ORDER ON MOTON FOR SUMMARY JUDGMENT
JOHN L. KANE, Senior District Judge.
This is a civil enforcement action by the Securities and Exchange Commission ("SEC") against Jilapuhn, Inc. ("Jilapuhn"), doing business as Her Majesty's Credit Union ("HMCU") and its principal, Stanley McDuffie ("McDuffie")(collectively, "Defendants"). The SEC moves under Fed.R.Civ.P.56 for summary judgment on all claims alleged against HMCU and McDuffie in this matter's Complaint, the gist of which alleges that the Defendants misled investors, sold unregistered certificates of deposit (CDs) and misappropriated over $500, 000 worth of investors' funds, Doc.26. As explained below, because no genuine issue exists as to any material fact, summary judgment in favor of the SEC is appropriate as a matter of law in all respects.
II. SUMMARY JUDGMENT STANDARD
Summary judgment is appropriate if the moving party can show "that there is no genuine dispute as to any material fact and the [SEC] is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). A fact is material when it would affect the outcome of the case. Adamson v. Multi Cmty. Diversified Servs., 514 F.3d 1136, 1145 (10th Cir. Kan. 2008) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). A dispute is genuine "if a rational jury could find in favor of the nonmoving party on the evidence presented." Id.
To survive summary judgment, Mr. McDuffie must demonstrate the existence of a genuine issue of fact by citing to the record or by showing that the materials cited by the SEC are disputed. Fed.R.Civ.P. 56(c)(1); Anderson, 477 U.S. at 248. His assertions "must be based on more than mere speculation, conjecture, or surmise." Bones v. Honeywell Int'l, Inc., 366 F.3d 869, 875 (10th Cir. 2004). All of the evidence will be viewed in the light most favorable to Mr. McDuffie. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
In 1997, Mr. McDuffie obtained a corporate charter for Jilapuhn, Inc., in Georgia, and later incorporated in Colorado in 2004 and the U.S. Virgin Islands in 2005. Gegenheimer Decl. ¶ 2, Ex. 1, McDuffie p. 23 ll. 1-15, p. 24, ll. 9-12. Acting as CEO, Answer ¶ 11 (Doc. #12), Mr. McDuffie operated Jilapuhn as two separate credit unions in Georgia and the U.S. Virgin Islands between 2005 and 2011. Gegenheimer Decl. ¶ 3, Ex. 2, Undisputed Facts c-f, q, r.
A. Jilapuhn Employees Federal Credit Union
On January 25, 2005, Mr. McDuffie opened Jilapuhn Employees Federal Credit Union ("JEFCU") in Atlanta, Georgia, after receiving a charter from the National Credit Union Administration ("NCUA"). Gegenheimer Decl. ¶¶2, 3 Ex. 1, McDuffie, p. 30 ll. 14-23, Ex. 77; Undisputed Facts q, r. The NCUA charter included a Letter of Understanding and Agreement ("LUA") that set out the requirements for JEFCU's operations. Id. (¶2(c)(4) p. NCUA 001385-1389 with signed copy attached). Mr. McDuffie sold shares in JEFCU as CDs to investors, Gegenheimer Decl. ¶ 3, Ex. 2, Undisputed Facts j, which were insured by the National Credit Union Share Insurance Fund ("NCUSIF"), Gegenheimer Decl. ¶¶2, 3, Ex. 2, Stipulated Facts r., Ex. 1, McDuffie pp. 30 ll. 18-21, 66 ll. 9-17.
On March 31, 2005, the NCUA completed an onsite review of JEFCU and found "substantial noncompliance" with the terms of the LUA. Ex. 4 (¶2(c) pp. NCUA XXXXXX-XX). The report cited problems with negative share account handling, compliance, recordkeeping, operating exceptions, law violations, and unsound policies, practices, or procedures. Id. NCUA's findings of unsound practices at JEFCU included:
(1) Impermissible Loans: The LUA mandated that no loans could be made to any member in excess of ten percent of unimpaired capital and surplus. After its formation, however, JEFCU immediately made loans to members in excess of the requirements of the LUA. These loans mainly were made to Mr. McDuffie or Jilapuhn.
(2) Unsafe and Unsound Lending Practices: The credit union had a total net worth on March 31, 2005, of $3, 176, yet had two unsecured loans to a single borrower totaling $14, 534. That borrower was Jilapuhn. JEFCU had unsecured lines of credit but there was no analysis of the Jilapuhn's ability to repay the loans.
(3) Compliance Risks: The credit union had no policies to comply with the Bank Secrecy Act, the Patriot Act, or the Office of Foreign Assets Control.
(4) Transaction Risks: There were inaccurate account balances and a lack of reconciliation of accounts.
Pl.'s Mot. Summ. J. ¶ 14 (citing the Ex. 4, NCUA letter) (numbers added).
Further examinations by the NCUA in May 2005 also found that JEFCU's website misled investors by advertising high certificate rates based only on speculative fee income. Ex.4 (¶2(c)(7) pp. NCUA XXXXXX-XX. The NCUA also found that Mr. McDuffie had hired his brother as manager of JEFCU and placed his father on the Board of Directors, despite neither of them having the formal training required by the LUA. Pl's Mot. Summ. J. ¶ 13; Gegenheimer Decl. ¶5, Ex. 4 (¶2(c)(1) p. NCUA0001387) (requiring that "the directors, supervisory committee, and president will receive formal training in all areas applicable to their respective positions"). The NCUA also found that Jilapuhn, JEFCU's sponsor company, was inappropriately involved in the daily operations of the credit union: Jilapuhn was paying sponsor bills and wiring money to Jilapuhn employees with the JEFCU account. Ex. 4 (¶2(c)(9) pp. NCUA 001453-1461). The NCUA concluded: "Mr. Roberson's [McDuffie] motives for organizing the credit union are questionable." Id. (p. NCUA 0001453); Pl.'s Mot. Summ. J. ¶ 19. The NCUA warned Mr. McDuffie about JEFCU's violations, and the parties agreed to a Document of Resolution ("DOR") that set a schedule for identifying and fixing JEFCU's problems. Gegenheimer Decl. ¶5 Ex. 4 (¶2(c)(8) p. NCUA 000717-719).
The problems persisted, however, and after JEFCU failed to make progress toward compliance by the end of the DOR's deadlines for action, the NCUA issued a Notice of Involuntary Liquidation and Revocation of Charter in August 2005. NCUA 001460; Gegenheimer Decl. ¶2, 5, Ex. 1, McDuffie p. 74, Ex. 78.; Ex. 4 (¶2(c)(10) pp. NCUA 000221-227). JEFCU did not cooperate in this liquidation and instead filed a lawsuit against the NCUA on September 2, 2005, which sought to enjoin the NCUA's liquidation. Jilapuhn Employees Federal Credit Union v. National Credit Union Administration, No. 05-2306 (U.S.D.C.N.D.G. September 2, 2005). The court rejected the motion for an injunction and ordered JEFCU to comply with the NCUA's liquidation procedures. Gegenheimer Decl. ¶1, 3, Ex. 2, Undisputed Fact s, t; Ex. 1, McDuffie pp. 75-76, Ex. 79, 80.
B. Her Majesty's Credit Union
On August 25, 2007, Mr. McDuffie applied for a territory credit union charter from the U.S. Virgin Islands (USVI) Division of Banking and Insurance. Also in 2007, he obtained a license from the USVI Department of Licensing and Consumer Affairs ("DLCA") to operate Jilapuhn as HMCU. Gegenheimer Decl. ¶ 1, 3, Undisputed Facts g; McDuffie p. 52 ll. 17-21. Although the Virgin Islands Code authorizes the charter and regulation of credit unions, 13 V.I.C. 588, HMCU was registered under a "territory charter" and not subject to the type of oversight and auditing procedures that regulate federally- and state-chartered credit unions. Pl.'s Mot. Summ. J. ¶ 9; Comp. ¶ 18. In fact, HMCU was never examined nor audited by any agency of the USVI. Gegenheimer Decl. ¶3, Ex. 2, Undisputed Fact g; Answer (Doc. #12) ¶32.
HMCU offered CDs to investors at interest rates as high as 7.75%. Gegenheimer Decl. ¶3, Ex. 2, Undisputed Facts j, k; Ex. 1, McDuffie p. 65 ll. 10-13, p. 136-139, p. 145 ll. 23-25, p. 146 ll. 1-5. The CDs were advertised on the HMCU website. Undisputed Facts j, k, Gegenheimer Decl. ¶6, Ex. 5, Jung Deposition p. 16, Ex. 1. The Defendants told investors that the CDs were insured by Lloyds of London on the HMCU website, on investor application forms, and in oral statements made by Mr. McDuffie. Gegenheimer Decl. ¶2, Ex. 1, McDuffie pp. 132 ll. 1-25, 133 ll.1-14, 137 ll.1-25, 138 ll. 1-3.
In fact, the CDs were not insured. Mr. McDuffie asserts, however, that he was under the mistaken belief that, at least for a time, the CDs were insured. Defendants support this assertion by attaching Exhibit D to McDuffie's Affidavit. But Exhibit D is only two pages of a seven page insurance policy. The complete policy is attached as Exhibit B to the Declaration of Nancy Gegenheimer. It is clear on the face of the policy that the policy is liability insurance, not share insurance. Liability insurance covers HMCU the institution against losses such as robbery, burglary, and theft. See Ex. B to Gegenheimer Declaration, policy page VIAG0000011. There is no share insurance covering the deposits of CD purchasers; the liability insurance only protects for losses of property on the premises. According to Mr. McDuffie none of the CD deposits were kept on the premises, but instead were deposited into Jilapuhn's bank account. McDuffie ¶ 23. Even if I were to credit Mr. McDuffie's ignorance theory regarding share versus liability coverage, he later admits that he knew HMCU carried no insurance after November 2008 because it was cancelled retroactive to September 2008 due to nonpayment by HMCU. McDuffie ¶¶ 8, 9, 10, 17, 18, 26, 27, Response ¶ 6. Mr. McDuffie admits that he did not tell investors that their CDs were uninsured even after knowing that they were uninsured because he "thought the situation could still be rectified" by legislative means. The bill Mr. McDuffie references, however, was not even considered until 2011, after HMCU stopped selling CDs. In total, investors purchased $532, 591.97 worth of uninsured CDs from HMCU. Gegenheimer Decl. ¶¶3, 7, Ex. 2, Undisputed Facts o; Ex. 6, CD investor list; Answer ¶60. The CDs were never registered with the SEC.
In the Defendants' Response to the present motion and in Mr. McDuffie's deposition, the Defendants admit that "McDuffie and HMCU repeatedly made the material misrepresentation that CD investor funds were insured. Id., McDuffie pp. 65 ll. 10-13, 133 ll. 4-14, 136-139." Pl.'s Mot. Summ. J. ¶ 45. Furthermore, they admit that "McDuffie and HMCU misappropriated all investor funds, the CD investors suffered a total loss of their investments when HMCU ceased operations." Id. ¶ 44. The Defendants also admit to making the following additional misrepresentations on the HMCU website about the nature of the credit union's business: "We have no stockholders-no outside third parties to exert influence. Each member has one vote in annual elections regardless of the amount of money they have deposited in the credit union." Gegenheimer Decl. ¶3, Undisputed Facts j, k, m, n.
C. Examples of investor reliance on misleading ...