Plaintiff SEC brings this action against defendants Juno Mother Earth Asset Management, LLC ("Juno"), Eugenio Verzili ("Verzili"), and Arturo Allan Rodriguez Lopez ("Rodriguez") for alleged violations of securities laws stemming from misrepresentations to investors and the SEC and the improper withdrawal of $1.8 million from a hedge fund advised by Juno and its principals Verzili and Rodriguez (collectively referred to as the "individual defendants"). Defendants move to dismiss several of the counts in the complaint pursuant to Fed. R. Civ. P. 12(b)(6) on the ground that the allegations do not state a proper claim for relief, and they move to dismiss the counts against Rodriguez pursuant to Fed. R. Civ. P. 12(b)(5) for insufficient service of process.
Juno is a Delaware limited liability company that since 2007 has been registered as an investment adviser with the SEC. During 2007 and 2008, Rodriguez served as the Portfolio Manager for Juno, and Verzili served as its Chief Executive Officer and Chief Compliance Officer. Each individual defendant owned at least 25% of Juno during this time and, along with non-party Roland Jansen, controlled its daily operations.
Juno managed the investments of three hedge funds, only one of which- the Juno Mother Earth Resources Fund, Ltd. (the "Fund")-is relevant to this case. The Fund was incorporated in the Cayman Islands, and Rodriguez served on its board of directors along with two independent directors. Fortis Prime Fund Solutions (the "administrators") provided administrative services for the Fund. In 2006, Juno offered investors the opportunity to purchase shares in the Fund, and by 2007, Juno had raised approximately $16 million for the Fund.
The complaint alleges that through 41 transactions in 2007 and 2008, Verzili and Rodriguez withdrew around $1.8 million from Fund accounts to pay Juno's expenses and those of the individual defendants. Defendants first withdrew $642,000. When questioned about these withdrawals by fund administrators, defendants characterized the withdrawals as payments for Fund organizational expenses, as authorized by the private placement memorandum ("PPM") issued by Juno to prospective investors. Yet while these withdrawals were taking place, Verzili stated in an email sent to an investor and copied to Rodriguez that Juno would only claim $100,000 of said organizational expenses. Furthermore, the PPMs subsequently issued by Juno continued to state that it would pay its own expenses with its own money.
After the Fund's independent directors learned from its administrators of the $642,000 of withdrawals, Verzili and Rodriguez withdrew $1.17 million from Fund accounts in exchange for promissory notes issued by Juno. The complaint claims that throughout this process defendants concealed their actions from the Fund's administrators, its independent directors, and its investors, despite having a fiduciary duty to disclose self-dealing transactions.
In addition, the complaint alleges that the individual defendants made affirmative misrepresentations about these transactions. First, in August 2008 board meeting, the individual defendants allegedly discussed the Fund's investments without mentioning its substantial stake in Juno's promissory notes. Second, Rodriguez allegedly told a suspicious investor that a bank account receiving Resource Fund money did not belong to Juno when it did.
When the Fund's independent directors learned of the promissory notes in October 2008, they demanded repayment of the withdrawn sums and removed Rodriguez from the board of directors. None of the $1.17 million has been repaid to date.
The complaint further alleges that defendants made misrepresentations to both investors and the SEC concerning the amount of assets under Juno's management and the amount of capital that the individual defendants had invested in the Fund. The complaint alleges that throughout Juno's existence, its assets under management ("AUM") never exceeded $17 million dollars, and that Verzili and Rodriguez knew or recklessly disregarded that fact. Yet Verzili sent an email in March 2008 to an investor and Rodriguez that contained a doctored document falsely indicating that Juno managed an additional $40 million in assets managed by a separate investment advisor. Furthermore, Verzili sent another email to an investor and Rodriguez stating that Juno's partners-including the individual defendants-had $3 million of their own assets invested in the Fund. Verzili then sent an email in July 2008 to another investor and Rodriguez in which he claimed that the partners currently had $1 million invested in the Fund. Individual defendants, however, invested nothing in the Fund.
Lastly, the complaint alleges that Verzili and Rodriguez, in an effort to maintain Juno's registration as an investment advisor despite its failure to meet the statutory $25 million AUM threshold for registration, caused Juno's attorney to file an amended Form ADV*fn1 with the SEC which falsely claimed that Juno had entered into an agreement with Mother Earth Investments AG to sub-manage $40 million of that company's assets. Using the information supplied by Verzili with the approval of Rodriguez, the attorney falsely represented to the SEC that Juno had $56 million in AUM. The Form ADV also claimed that Juno neither sold securities that it owned to advisory clients nor recommended the purchase of securities to advisory client in which it had an interest, despite the Fund's purchase of Juno's promissory notes. Furthermore, the Form claimed that Juno did not have custody of advisory clients' cash, despite the repeated withdrawals by the individual defendants of such cash.
Based upon these facts, plaintiff alleges seven different legal
violations. Count One alleges that all defendants violated federal
securities laws banning fraudulent statements to investors in
connection with the sale or purchase of securities.*fn2
This count is predicated on the allegedly false statements
contained in the Fund's PPM and the false statements personally made
by the individual defendants to prospective investors.
Count Two alleges that all defendants violated Sections 206(1) and
206(2) of the Investment Advisers Act ("Advisers Act")*fn3
by defrauding the Fund's investors while acting as investment
advisers. This count is predicated on substantially the same factual
allegations as Count One.
Count Three alleges that all defendants violated Section 206(4) of the Advisers Act*fn4 and associated Rule 206(4)-8*fn5 by making material misrepresentations to the Fund's investors while acting as investment advisers. This count is predicated on substantially the same factual allegations as the prior two counts.
Count Four alleges that Juno violated Section 206(4) of the Advisers Act*fn6 and associated Rule 206(4)-2*fn7 by failing, as a registered investment adviser with custody of client funds, to either submit to an unannounced annual examination of its accounts by an independent accountant or release its audited financial statements to investors. Count Four also ...