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United States Securities and Exchange Commission v. Ackman

United States District Court, E.D. Michigan, Southern Division

May 12, 2015

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
BLAIR D. ACKMAN, ET AL., Defendants.

OPINION AND ORDER DENYING DEFENDANT DIAZ'S MOTION TO DISMISS [61]

NANCY G. EDMUNDS, District Judge.

This civil matter comes before the Court on Defendant Alicia M. Diaz's motion to dismiss the Securities and Exchange Commission ("SEC")'s Complaint, arguing alternatively that the Complaint fails to state a claim against her, her ethical duties as an attorney prohibited her from disclosing attorney-client information and any viable claim is time-barred under the relevant five-year statute of limitations. The SEC's two-count Complaint alleges that (1) Defendants Mayfieldgentry Realty Advisors, LLC ("MGRA") and Chauncy Mayfield violated section 206(1) and (2) of the Investment Advisers Act of 1940 (the "Advisers Act"), 15 U.S.C. § 80b-6(1) and (2); and (2) Defendants Blair Ackman, Marsha Bass, W. Emery Matthews, and Alicia M. Diaz aided and abetted Defendants MGRA's and Mayfield's violations of section 206(1) and (2) and thus violated section 209(f) of the Advisers Act, 15 U.S.C. § 80b-9(f). The Court held a hearing on this matter on April 29, 2015. For the reasons stated below, Defendant's motion is DENIED.

I. Background

Until May 2012, MGRA was an investment adviser to the Police and Fire Retirement System of the City of Detroit (the "PFRS") - a pension fund that manages billions of dollars for the benefit of over 8, 300 retirees and over 3, 800 active duty members of Detroit's Police and Fire Departments. (Compl. ¶¶ 2, 7, 13, 21, 23.) The PFRS was MGRA's largest client, and the vast majority of the compensation earned by MGRA's principals, including Defendant Diaz, was directly attributable to fees MGRA charged PFRS. ( Id. ¶¶ 3, 70.)

Defendant Mayfield is the founder, President, and CEO of MGRA, a registered investment adviser. ( Id. ¶ 14.) Mayfield owns 71% of MGRA's stock. ( Id. ) Mayfield was also the defendant in a separate SEC enforcement action, SEC v. Kilpatrick, et al., Case No. 12-cv-12109 (E.D. Mich.), which was pending at the time this case was filed. Based on the alleged misconduct in the SEC action, Defendant Mayfield pled guilty to one count of conspiracy to influence or reward local public officials in violation of 18 U.S.C. §§ 371, 666(a), in United States v. Beasley, et al., No. 12-cr-20030, a pending criminal matter. ( Id. )

Defendant Diaz is a licensed attorney. From January 2004 through May 2012, Diaz was the General Counsel, Executive Vice President and Chief Compliance Officer of MGRA, and she owns 8% of MGRA's stock. ( Id. ¶ 18.)

In January and February 2008, at the direction of its Chief Executive Officer, Defendant Mayfield, MGRA, without authorization from PFRS or disclosure to PFRS, secretly took $3.1 million out of the PFRS's "Master Account" and used it to buy two shopping centers (the "California Properties") for MGRA. ( Id. ¶¶ 43-58.) A reasonable investment advisory client in PFRS's position would have wanted to know that its investment adviser had misappropriated its assets without permission. ( Id. ¶ 57.)

In late March 2008, Defendant Ackman reviewed the closing documents from MGRA's purchase of the California Properties and noticed that they did not indicate that PFRS owned the California Properties; MGRA was still listed as the owner. In response to Ackman's inquiries, Mayfield replied that he was looking for high net investors to "take PFRS out of the deal." ( Id. ¶¶ 59-61.) Within the next few months, however, the real estate market collapsed and the California Properties lost a significant amount of their value. ( Id. ¶ 64.) On a regular basis from 2008 through 2011, Defendant Ackman discussed the California Properties with Mayfield. Rather than taking steps to disclose the theft, Defendants Mayfield and Ackman discussed ways of replacing the stolen funds so that the theft would not be disclosed. ( Id. ¶¶ 65-67.)

On a quarterly basis from 2008 through 2011, Defendant Ackman provided detailed financial reports to the PFRS regarding properties owned by the PFRS. The financial reports included, among other things, the names of properties MGRA managed on behalf of PFRS; the assets, liabilities, and equity associated with the properties; and the income and expenses associated with the properties. Ackman also regularly gave written notice to PFRS of all funds transferred to and from the PFRS's bank accounts. None of these financial reports or written notices ever included the California Properties or disclosed that MGRA had used $3.1 million of PFRS's money to purchase the California Properties. ( Id. ¶ 68.)

In May 2011, Defendants Ackman, Bass, Matthews, and Diaz met to discuss budgeting and cost cutting. Mayfield was not in attendance. At that meeting, the MGRA principals who were present discussed that the $3.1 million used to purchase the California Properties was taken without permission from the PFRS Master Account. They discussed different scenarios for paying back the PFRS, including selling the California Properties and implementing cost-cutting measures. They did not discuss disclosing the theft to PFRS. Rather, they discussed ways to put the $3.1 million back into PFRS's Master Account without PFRS ever discovering the money was missing in the first place. This decision was based on their fear that their client - PFRS - would fire MGRA upon learning of the theft. ( Id. ¶¶ 70-71.) Rather than informing PFRS of the theft, MGRA's principals, Defendants Ackman, Bass, Matthews, Diaz, and Mayfield, engaged in affirmative efforts to conceal the theft from PFRS, including hiring a broker and taking steps to sell the California Properties. The efforts to sell the California Properties were unsuccessful. None of this was disclosed to PFRS. ( Id. ¶¶ 72-74.) The MGRA principals continued to discuss cost-cutting measures, including reductions in their substantial salaries. ( Id. ¶¶ 75-76.)

On July 14, 2011, Defendants Matthews and Diaz attended a PFRS board meeting and discussed portfolio performance, along with a proposal for a new investment opportunity; and on July 21, 2011, Defendants Matthews and Diaz again appeared at a PFRS board meeting where they discussed performance measurement reporting. They did not discuss the theft or the California Properties at either meeting. ( Id. ¶ 78.)

As a major investment adviser to PFRS, MGRA made annual budget presentations to the PFRS board. These were critical meetings where MGRA's principals discussed the full scope of MGRA's advisory activities for PFRS and requested continued funding of the assets that MGRA managed on PFRS's behalf. ( Id. ¶ 79.)

On December 15, 2011, MGRA made its 2012 budget presentation to the PFRS board. All of MGRA's principals, Defendants Mayfield, Ackman, Bass, Matthews, and Diaz, attended and participated in the meeting. ( Id. ¶ 80.) Defendants Diaz and Matthews took part in the presentation at this December 15, 2011 board meeting. ( Id. ¶¶ 82-86.) At no point during her presentation did Defendant Diaz discuss the California Properties nor did she mention the difficulties MGRA had been having in selling the California Properties, which had dramatically declined in value since being acquired in 2008. ( Id. ¶ 85.) Likewise, when Defendant Matthews solicited and answered questions from PFRS board members, he was asked whether MGRA calculated a "return on investment" for each property or for the entire PFRS portfolio. Matthews explained that MGRA calculated an "internal rate of return" for the PFRS portfolio, stated that it was currently at 6.8%, that it had "exceeded relevant benchmarks, " but did not explain that the 6.8% would be materially impacted if it took into account the $3.1 million theft. ( Id. ¶¶ 86-88.)

Prior to the meeting, MGRA had provided PFRS with an extremely detailed and voluminous document titled "Police & Fire Retirement System of the City of Detroit - 2012 Annual Operating Budget" (the "Budget Document"). This document exhaustively reviewed MGRA's advisory activities on PFRS's behalf, including an asset-by-asset analysis of the portfolio that MGRA managed for it. The Budget Document did not include any mention of the California Properties purchased with the funds stolen from PFRS's bank account. Each of MGRA's principals had a hand in preparing the Budget Document. ( Id. ¶ 81.)

In March 2012, MGRA sold one of the California Properties at a loss to a third party, and the proceeds from the sale were used to pay down the mortgage on the California Properties. None of the proceeds were returned to PFRS, and PFRS was not informed about the sale. ( Id. ¶ 89.)

In late April 2012, MGRA faxed an undated letter to PFRS disclosing, for the first time, that MGRA used PFRS funds to purchase the California Properties, and that the Properties were never titled to PFRS. ( Id. ¶¶ 90-91.)

On May 3, 2012, PFRS voted to terminate its business relationship with MGRA. That same day, PFRS delivered a letter to MGRA terminating the PFRS MGRA Advisory Agreement for cause, stating that MGRA's failure to disclose the theft constituted fraud, bad faith, negligence, and a breach of that Agreement. Shortly thereafter, all of MGRA's other clients terminated their business relationships with MGRA, and MGRA has since transitioned the real estate assets it was managing to other entities and is in the process of winding down its operations. ( Id. ¶¶ 92-93.)

On May 23, 2012, PFRS filed a complaint in state court against MGRA, its principals, and the MGRA limited liability company involved in the purchase of the California Properties. The state court granted PFRS's motion for a temporary restraining order, and the state-court action is still pending. ( Id. ¶ 94.)

On December 31, 2012, MGRA sold the other California Property to a third party for $1.55 million. Part of the proceeds of the sale were used to satisfy the outstanding balance on the loan used to finance the original purchase of the California Properties. Some of the proceeds went to commissions and fees, and the balance - approximately $1.1 million - was remitted to PFRS in connection with the state-court action. ( Id. ¶ 95.)

On June 10, 2013, the SEC filed this civil enforcement action alleging that Defendants MGRA and Mayfield violated section 206(1) and (2) of the Advisers Act and that Defendants Ackman, Matthews, Diaz, and Bass violated section 209(f) of the Advisers Act ...


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