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Rome v. Mandel

Court of Appeals of Colorado, Third Division

December 29, 2016

Gerald Rome, Securities Commissioner for the State of Colorado, Plaintiff-Appellee,
Mark Mandel and Wall Street Radio, Inc., d/b/a Winning on Wall Street, Defendants-Appellants.

         City and County of Denver District Court No. 14CV34131 Honorable Shelley I. Gilman, Judge.


          Cynthia H. Coffman, Attorney General, Russell B. Klein, Deputy Attorney General, Sueanna P. Johnson, Assistant Attorney General, Denver, Colorado, for Plaintiff-Appellee

          Jones & Keller, P.C., David Zisser, Denver, Colorado, for Defendants-Appellants

          Vorndran Shilliday, P.C., Paul Vorndran, Denver, Colorado; Zachary Knepper, Washington, D.C., for Amicus Curiae North American Securities Administrators Association, Inc.

          Webb and Hawthorne, JJ., concur.


          NAVARRO JUDGE.

         ¶ 1 The Securities Commissioner of Colorado, Gerald Rome, brought this civil enforcement action under the Colorado Securities Act (CSA), §§ 11-51-101 to -908, C.R.S. 2016, against defendants, Marc Mandel and Wall Street Radio, Inc. d/b/a Winning on Wall Street (WSR). The Commissioner alleged that defendants had transacted business as investment advisers or investment adviser representatives without a license or exemption from licensure. According to the Commissioner, they did so by: (1) responding to direct investment questions from clients through a service called "crystal ball readings"; and (2) effectively executing securities trades on behalf of their clients through a practice known as "auto-trading."

         ¶ 2 The trial court entered summary judgment in favor of the Commissioner, holding that defendants could not engage in those activities without a license. As a result, the court imposed a permanent injunction and entered a restitution order against defendants.

         ¶ 3 On appeal, defendants raise three novel questions. First, by acting as a so-called "lead trader" for an auto-trading platform, does one act as an investment adviser required to be licensed under the CSA? Second, if so, is this licensing requirement consistent with the actor's First Amendment rights? Third, may the Commissioner seek as restitution the fees paid by the unlicensed investment advisor's clients? The answer to all three questions is "yes." Therefore, we affirm the summary judgment and the restitution order. But we vacate the injunction in part and reverse it in part. And we remand with directions.

         I. Factual and Procedural History

         A. Undisputed Facts

         ¶ 4 The trial court recognized, and the record confirms, the following undisputed facts. Defendants, based in Boulder, Colorado, hosted a radio show devoted to securities and investments. They also maintained a website offering a variety of investment-related services under two membership plans: the Master Membership Plan and the Lead Trader Membership Plan.

         ¶ 5 Subscribers to the Master Membership Plan paid $500 annually to receive defendants' electronic newsletter, daily trading ideas, seminars, online access to defendant's trading system and portfolio, and - as relevant to this case - the opportunity to call or e-mail Mandel twice a week with questions about specific stocks (called "crystal ball readings"). Subscribers to the Lead Trader Membership Plan paid between $1000 and $2000 annually to receive the Master Membership Plan services and the opportunity to mimic Mandel's own security trades through an investment vehicle known as auto-trading.

         ¶ 6 Auto-trading is a system whereby investors (the followers) mimic the trades of a single investor (the lead trader). See Sec. & Exch. Comm'n v. Terry's Tips, Inc., 409 F.Supp.2d 526, 529-30 (D. Vt. 2006). All investors - lead trader and followers alike - open separate accounts with a broker-dealer that provides an auto-trading platform. The lead trader then grants followers permission to mimic his or her trades. Finally, followers authorize the broker-dealer to execute the same transactions in their accounts as those of the lead trader. Consequently, when the lead trader initiates a transaction for his or her account, the broker-dealer automatically executes the same transaction in the followers' accounts, without need for further instruction or approval. Followers are often not aware of the trades until after they have occurred. Id. at 530.

         ¶ 7 Mandel and his Lead Trader Membership subscribers employed as the broker-dealer a company called Ditto Trade, which provides an online auto-trading platform through its website.[1]Under the Ditto Trade model, a follower may choose certain controls limiting the extent to which the follower's account mimics the lead trader's transactions (e.g., the follower can exclude identified securities from being traded or limit the investment amount that will follow the lead trader's transactions). Alternatively, the follower can select the "ditto all" or "full throttle" option, wherein the follower's entire investment account may be used to buy and sell securities in the same proportion as that of the lead trader.[2]

         ¶ 8 Ditto Trade requires lead traders to attest that they are either registered investment advisers or are exempt from registration. Mandel attested to operating within an exemption.

         B. The Prior Administrative Action

         ¶ 9 Neither Mandel nor WSR has ever been licensed in Colorado as an investment adviser or investment adviser representative. Mandel's earlier attempt to gain such a license resulted in an administrative action before the Commissioner in 2008. Mandel allegedly failed to make complete and accurate disclosures in his application materials; he did not disclose: (1) a nondischarged bankruptcy; (2) a number of judgments, arbitration matters brought by former clients, and a California regulatory action brought against his insurance license; and (3) his discipline by the National Association of Securities Dealers.

         ¶ 10 The administrative action ended in a stipulated consent order. Therein, the Commissioner denied Mandel's application, precluded him from reapplying for ten years, and barred him from acting as a solicitor or otherwise associating with any Colorado licensed investment adviser or "federal covered" adviser.[3]

         C. The Present Action

         ¶ 11 The Commissioner initiated the present district court action against Mandel and WSR in October 2014. The Commissioner alleged that defendants had acted as unlicensed investment advisers or investment adviser representatives, contrary to CSA section 11-51-401(1.5), C.R.S. 2016. Specifically, defendants managed clients' securities transactions through the auto-trading platform, and defendants provided "direct-to-client" advice through bi-weekly crystal ball readings. Defendants responded that they were exempt from licensure under the "newsletter exclusion" set forth in section 11-51-201(9.5)(b)(III), C.R.S. 2016.

         ¶ 12 Discerning no genuine issue of material fact, the trial court granted summary judgment against defendants. The court noted that, although defendants "may have engaged in some exempt publishing activities, they provided personalized money management for which a license is required." Specifically, defendants used the lead trader service to provide information to followers "as to the advisability of purchasing and selling securities through the trades in [their] own accounts, " and defendants used the crystal ball service to provide "individual advice regarding the advisability of buying and selling securities to clients." The court concluded that this conduct "squarely met the definition of investment adviser and investment adviser representative, " as provided under section 11-51-201(9.5)(a)(I) and (9.6)(a), and that defendants did not qualify for any exemption from the licensure requirement.

         ¶ 13 The court entered a permanent injunction under section 11-51-602(1), C.R.S. 2016 - effectively barring defendants from any involvement in the securities industry in Colorado - and directed them to pay $80, 000 in restitution, reflecting $1000 for each auto-trading subscriber.

         II. Summary Judgment

         ¶ 14 Defendants contend that the trial court erroneously entered summary judgment against them for two reasons. First, defendants argue that a genuine issue of material fact exists as to whether they acted as investment advisers or investment adviser representatives. Second, they assert that summary judgment was inappropriate because the Commissioner failed to controvert defendants' affirmative defense that the First Amendment of the Federal Constitution and article II, section 10 of the Colorado Constitution barred this enforcement action.

         A. Standard of Review and Summary Judgment Principles

         ¶ 15 We review de novo an order granting summary judgment. People v. Wunder, 2016 COA 46, ¶ 13. In de novo review, we do not defer to the trial court's view of the written filings or any other documentary evidence, but instead we consider them anew. See Ringquist v. Wall Custom Homes, LLC, 176 P.3d 846, 849 (Colo.App. 2007).

         ¶ 16 A court may not grant summary judgment except on a clear showing that no genuine issue exists as to any material fact and that the moving party is entitled to judgment as a matter of law. C.R.C.P. 56(c); Churchey v. Adolph Coors Co., 759 P.2d 1336, 1339-40 (Colo. 1988). A material fact is one that "will affect the outcome of the case." People in Interest of S.N., 2014 COA 116, ¶ 23 (quoting Dominguez Reservoir Corp. v. Feil, 854 P.2d 791, 795 (Colo. 1993)).

         ¶ 17 The moving party bears the initial burden of production to show that no genuine issue of material fact exists, and a court must resolve all doubts as to the existence of such an issue against the moving party. Churchey, 759 P.2d at 1340. If the moving party would not bear the burden of persuasion at trial, the moving party must show an absence of evidence in the record to support the nonmoving party's case. Cont'l Air Lines, Inc. v. Keenan, 731 P.2d 708, 712 (Colo. 1987).

         ¶ 18 If the moving party meets its burden, the burden shifts to the nonmoving party to establish that a genuine dispute of material fact exists. Id. at 713; S.N., ¶ 27. In that event, "an adverse party may not rest upon the mere allegations or denials of the opposing party's pleadings, but the opposing party's response by affidavits or otherwise . . ., must set forth specific facts showing that there is a genuine issue for trial." C.R.C.P. 56(e).

         B. Burden of Production

         ¶ 19 With his motion for summary judgment, the Commissioner submitted an array of evidence supporting his claims: e-mail communications between Mandel and clients that constituted crystal ball readings; a spreadsheet listing defendants' auto-trading followers on Ditto Trade; communications and paperwork between Mandel and Ditto Trade personnel (e.g., auto-trading platform descriptions, Mandel's attestation, consulting agreements); the 2008 consent order between Mandel and the Commissioner; a letter to the Colorado Attorney General from Ditto Trade's general counsel describing the services afforded by the auto-trading platform; defendants' responses to discovery requests; and defendants' advertisements for their services. In response, defendants submitted three exhibits: their first set of discovery requests, an affidavit by their attorney regarding the Commissioner's failure to confer in advance of filing his motion for summary judgment, and the letter from Ditto Trade's general counsel describing its auto-trading platform.

         ¶ 20 Defendants identify only one disputed fact: whether they based their services on their subscribers' individual portfolios or specific investment needs. As we shall explain, however, that fact does not affect the outcome of this case.

         ¶ 21 Defendants' other contentions raise matters of law (e.g., whether this enforcement action violates the First Amendment). But those contentions do not suggest that additional material evidence exists which contradicts the Commissioner's evidence. The record and the briefs reveal, therefore, that the Commissioner presented undisputed facts sufficient to resolve this case, including defendants' affirmative defense. Accordingly, we turn to whether the Commissioner is entitled to judgment as a matter of law.

         C. Relevant Law

         ¶ 22 Section 11-51-401(1.5) provides that "[a] person with a place of business in this state shall not transact business in this state as an investment adviser or investment adviser representative unless such person is licensed as such or exempt from licensing under section 11-51-402." (No one suggests that section 11-51-402, C.R.S. 2016, applies here.) An "investment adviser" includes, as relevant here,

any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.

§ 11-51-201(9.5)(a)(I). An "investment adviser representative" means, as relevant here, one who is a partner, officer, or director of an investment adviser; or who is employed or otherwise associated with an investment adviser; and who makes recommendations or otherwise renders advice to clients regarding securities, manages securities accounts or portfolios for clients, or determines which recommendation or advice regarding securities should be given to clients. § 11-51-201(9.6)(a).

         ¶ 23 But an "investment advisor" does not include:

(II)A publisher of a bona fide newspaper, magazine, or business or financial publication with a regular paid circulation; [or]
(III)A publisher of a securities advisory newsletter with a regular and paid circulation who does not provide advice to subscribers on their specific investment situations[.]

ยง 11-51-201(9.5)(b). These provisions form the so-called "publishers exclusion" or "newsletter exclusion" from the basic definition of an investment adviser. This case turns on whether this exclusion ...

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