Estate of Bogue v. Adams

          MEMORANDUM OPINION AND ORDER ON DEFENDANTS' MOTION TO DISMISS AMENDED COMPLAINT (ECF 53) AND PLAINTIFFS' MOTION FOR ORDER DETERMINING NECESSITY OF CERTIFICATE OF REVIEW [ETC.] (ECF 29)

          JOHN L. KANE SENIOR U.S. DISTRICT JUDGE.

         Plaintiffs allege that Defendants violated Colorado statutory and common law, committing securities fraud, racketeering, conspiracy, breach of fiduciary duty in selling investments to Jon L. Bogue (Bogue) and managing them on his behalf. Bogue is now deceased, and the claims are brought by his estate and executrix. The case is now before the Court on Defendants' motion to dismiss Plaintiffs' Amended Complaint. For the reasons discussed below, the Court grants the motion in part and denies it in part.

         PROCEDURAL HISTORY

         All Defendants filed a motion to dismiss Plaintiffs' original Complaint, arguing among other things that Plaintiffs had failed to allege their claims with sufficient particularity, that their claims under the Colorado Securities Act (CSA) were barred by the CSA's statute of repose, and that Plaintiffs had not filed a certificate of review pursuant to C.R.S. § 13-20-602 to support their claims that the individual Defendants failed to comply with their duties as licensed professionals. Plaintiffs opposed the motion to dismiss and filed a motion asking the Court to determine whether a certificate of review is necessary, and, if so, for leave to file a belated certificate.

         On March 11, 2019, the late Hon. Richard P. Matsch granted Defendants' motion to dismiss but granted leave to amend to provide more specific allegations concerning Defendants' respective roles in the alleged wrongdoing. That ruling did not address Defendants' arguments raising the statute of repose and the necessity of a certificate of review.

         Plaintiffs filed an Amended Complaint on April 10, 2019. ECF 47. Defendants again moved to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b), once more arguing, inter alia, that the allegations lack sufficient specificity, that the securities fraud claims are barred by the statute of repose, and that Plaintiffs' failure to file a certificate of review is fatal to their claims.

         ALLEGATIONS OF THE AMENDED COMPLAINT

         In summary, and viewed in a light most favorable to Plaintiffs, the Amended Complaint alleges the following:

         Bogue, who was born in 1939, worked during his lifetime as a flight instructor, airline pilot, and commercial truck driver. He retired in 2009, after which his income came from Social Security and his retirement savings. He did not have substantial investment expertise, experience, or sophistication. He died on November 3, 2016. Am. Compl. ¶¶ 23, 35-45; 272.

         The individual Defendants except Sharon Adams (who is married to Patrick Adams) are or were registered and/or licensed professionals in the investment industry, variously Certified Financial Advisers (CFAs) (Mr. Adams; Pecoraro); Certified Financial Planner (Favre); Investment Adviser Representatives (IARs) for one or more of the entity Defendants (Mr. Adams; Favre; Ly; Prati); and/or securities brokers (Favre; Ly). Id. ¶¶ 48-80.

         The individual Defendants held various positions as the organizers, administrators, officers, “direct or indirect” owners, and/or operators of the entity Defendants. See Id. The entity Defendants were, respectively, a licensed Investment Adviser in the State of Colorado (IA) (Choice Investment Management, LLC); an investment or hedge fund manager (Choice Capital Management, LLC); a broker-dealer that provides investment advice and facilitates the purchase and sale of securities (CIM Securities, LLC); and an asset manager that provides investment advice to customers (PVG Asset Management Corp.). The entity Defendants were affiliated through common ownership, operation, and management by the individual Defendants in their respective roles. Id. ¶¶ 80-117.

         In addition to their positions and roles in the entity Defendants, Mr. and Mrs. Adams, Favre, Ly, and Prati were also directors, officers, and/or owners of two other non-Defendant entities, Maroon Bells of Colorado, Inc., and Centennial Brands, Inc. Id. ¶¶ 53-54; 57-58; 65; 72-73; 77-78.

         Defendants (collectively) “are the organizers, administrators, managers and/or officers of a series of limited liability ventures, referred to as Pooled Investment Vehicles” (PIVs). Id. ¶ 19. The PIVs were generally limited partnerships in which one of the entity Defendants (Choice Capital) acted as general partner. Id. ¶ 94. Defendants, in their respective roles, offered and sold interests in the PIVs, advised customers concerning their PIV investments, and advised and managed the PIVs.

         Summarizing Defendants' alleged wrongdoing, the Amended Complaint alleges that they knowingly and with an intent to defraud their investor clients, perpetrated a complicated scheme whereby they offered and sold securities and provided investment advisory and broker-dealer services to clients, while at the same time systematically manipulating the investments they were selling for their own benefit and for their own enrichment, to the detriment of their unsuspecting and often elderly investors, who lacked investment expertise and experience. Id. ¶ 18.

         Regarding Bogue specifically, the Amended Complaint alleges on information and belief that Bogue met Favre in the mid-1990s and began investing his savings with Favre shortly thereafter. Id. ¶ 38. The Amended Complaint does not allege, in detail or even generally, the nature of Bogue's investments with Favre in the years before Favre's later affiliation with the other Defendants.

         In early 2005, Defendant Favre established a relationship with Mr. and Mrs. Adams and Ly and their respective affiliated companies, at which time they entered into an agreement for Favre to promote and sell units in Defendants' PIVs for compensation based on the amounts invested. Id. ¶¶ 135-36. In that same timeframe, acting “in conjunction with” Mr. Adams, Mrs. Adams, and Ly, Favre began soliciting Bogue, gained his trust, and sought to have him invest his individual retirement account (IRA) and non-qualified retirement savings in Defendants' PIVs, which were high-risk investments. Exploiting Bogue's lack of financial sophistication and using their respective qualifications and licensure to provide legitimacy, those Defendants established discretionary accounts for Bogue's IRA and non-qualified retirement savings and placed hundreds of thousands of dollars of Bogue's money in Defendants' PIVs. Id. ¶¶ 22-23; 137-142.

         In the course of obtaining and using Bogue's investments in discretionary accounts, and exercising their discretionary authority over the accounts, Favre, Mr. Adams, Mrs. Adams, and Ly allegedly completed subscription instructions without seeking or obtaining Bogue's actual signature and without disclosing the risks of the investment or providing all required investment documents to Bogue, and fraudulently obtained and used one or more Medallion Guarantees of Bogue's signature to complete other investment documents, all without Bogue's presence or knowledge. Id. ¶¶ 144-151. They knew that the amounts being placed in high-risk private partnerships represented more than 70% of Bogue's investable assets and over 50% of his net worth. Id. ¶ 26. In recommending and placing Bogue's money in these investments, the foregoing Defendants failed to conduct any reasonable or good faith inquiry into Bogue's investment objectives, financial situation, and actual needs. Id. ¶¶ 143, 229.

         Pursuant to this scheme, the “foregoing Defendants” put Bogue in the following specific investments:

• October 5, 2005: $50, 000 in non-qualified retirement funds in Cynergy CP, LLC;

• June 26, 2006: $50, 000 in IRA funds in Cynergy CP, LLC;

• April 9, 2007: $75, 000 in IRA funds in Cynergy All Seasons;

• April 9, 2007: $75, 000 in non-qualified retirement funds in Cynergy All Seasons;

• February 29, 2008: $30, 000 in IRA funds in Cynergy All Seasons;

• February 29, 2008: $75, 000 in non-qualified funds in Cynergy All Seasons;

• April 16, 2008: $25, 000 in non-qualified funds in Cynergy Healthcare Investors, LLC.

Id. ¶¶ 146-58.

         On June 5, 2008, Mr. Favre met with Mr. Bogue and, in doing so, made a drawing and notes about Mr. Bogue's investments, allegedly representing the value of Bogue's IRA, non-IRA, and other sources of income at that time. Id. ¶ 159 and Ex. 6. The Amended Complaint does not allege that any information in this document was false, misleading, or otherwise actionable.

         Later statements sent to Bogue show that as of September 30, 2008, Defendants had placed nearly $250, 000.00 of Bogue's money in Cynergy CP, LLC; over $45, 000.00 of non-IRA assets in the Adams Market Neutral Fund, LLLP; and more than $45, 000.00 of Bogue's IRA assets in the Adams Market Neutral Fund, LLLP. Id. ¶¶ 160-62.

         A February 6, 2017, letter from Defendants Prati and Choice Capital Management responding to an inquiry from the Bogue Estate reflected a total of $520, 199.34 of Bogue's IRA and non-qualified retirement savings invested in Defendants' PIVs. This letter also advised that the funds in which Bogue's money was invested owned certain non-liquid assets that required certain “liquidity events” to occur before the funds could be liquidated. Id. ¶ 184; Ex. 11.

         In recommending and operating the PIVs, Defendants “Mr. Adams, Mr. Favre, Mr. Ly, Mr. Prati, Mr. Pecoraro and, upon information and belief, Mrs. Adams, along with Choice Investment, Choice Capital, CIM Securities and PVG Asset Management” (that is, all of the Defendants) failed to disclose conflicts of interest, their compensation arrangements and the excessive amounts they were paying themselves. Id. ¶¶ 165-69.

         Specifically, Defendants (collectively) failed to disclose affiliations with related companies and other material facts concerning companies in which Defendants' PIVs were investing or making payments. For example, these included:

• Failing to disclose approximately $388, 023.00 in brokerage commissions and other fees paid in 2005 by three of Defendants' PIVs to CIM Securities (id. ¶¶ 168);

• Encouraging selected investors, including two PIVs, to participate in a “sell-back” of units of Cynergy CP LLC in 2009, but failing to inform other investors, such as Bogue, that the sell-back was occurring (id. ¶ 170);

• Failing to disclose that between March 2011 and October 2012 Cynergy Emerging Growth LLC and Cynergy Healthcare Investors Fund, LLC 2009 invested $1, 425, 000.00 in Maroon Bells, a company in which Mr. and Mrs. Adams and Ly were owners and officers (id. ¶¶ 171-73);

• Failing to disclose that between August 2012 and August 2013 Cynergy All Seasons invested $570, 000 in Centennial Brands, a company in which Mr. and Mrs. Adams, Prati, and Ly were officers or affiliates or held ownership interests (id. ¶¶ 174-75);

• Failing to disclose that interests held by Defendants' PIVs in Life Care Medical Devices (Life Care) were so substantial that they over-weighted the PIVs' total interest in an extremely risky company such that investors' interests could not be liquidated (id. ¶¶ 176-78);

• Failing to disclose that 7, 597, 062 shares of Life Care were held by Echo Resources LLC, a company owned by Mrs. Adams and over which Mr. Adams exercised sole voting and investment control; and that 1, 452, 500 shares of Life Care were held by New Generation Resources, LLC, which was owned by Ly and his wife along with Mr. and Mrs. Adams, and over which Mr. Adams exercised sole voting and investment control (id. ¶ 179-83);

• In the February 6, 2017 letter described above, advising the Estate that certain events had to occur before Bogue's interests could be sold, and representing that they expected favorable market prospects for a Life Care medical device, while failing to disclose that Prati had filed a Form 8-K in 2015 stating that Life Care expected its common stock to be deregistered in the near future for failure to file timely reports and that the SEC had, in October 2015, revoked the ...