Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_13-cv-00319/USCOURTS-casd-3_13-cv-00319-3/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

SECURITIES AND EXCHANGE

COMMISSION,

Plaintiff,

CASE NO. 13cv319-GPC(BGS)

ORDER DENYING PLAINTIFF’S

MOTION FOR SUMMARY

JUDGMENT; GRANTING

DEFENDANTS’ MOTION FOR

PARTIAL SUMMARY

JUDGMENT; AND GRANTING

DEFENDANTS’ MOTION TO SET

ASIDE DEFAULT

[Dkt. Nos. 61, 64, 66, 72.]

vs.

ABS MANAGER, LLC and GEORGE

CHARLES CODY PRICE,

Defendants,

ABS FUND, LLC [ARIZONA]; ABS

FUND, LLC [CALIFORNIA];

CAPITAL ACCESS, LLC; CAVAN

PRIVATE EQUITY HOLDINGS,

LLC; and LUCKY STAR EVENTS,

LLC,

 Relief Defendants.

Before the Court are Plaintiff Securities and Exchange Commission’s motion for 

summary judgment; and Defendants ABS Manager, LLC and George Charles Cody

Price’s motion for summary judgment and motion to set aside default. (Dkt. Nos. 61,

64, 66.) Oppositions and replies were filed. (Dkt. Nos. 70, 71, 73, 74, 75, 77.) After

a review of the briefs, supporting documents, and the applicable law, the Court

DENIES Plaintiff’s motion for summary judgment; GRANTS Defendants’ motion for

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partial summary judgment; and GRANTS Defendants’ motion to set aside default. 

Background

On February 8, 2013, Plaintiff Securities and Exchange Commission (“SEC”)

filed a complaint along with an ex parte application, without notice, for a temporary

restraining order (“TRO”) and order freezing assets; appointing a receiver over

defendant ABS Manager, LLC and the entitiesit controls and manages; prohibiting the

destruction of documents; granting expedited discovery; and requiring an accounting. 

(Dkt. Nos. 1, 2.) The SEC also filed an ex parte application, without notice, for an

order temporarily sealing the entire file until the asset freeze is served. (Dkt. No. 2.) 

On February 11, 2013, the Court denied Plaintiff's ex parte application for TRO and

denied Plaintiffs’ ex parte application to temporarily file entire case under seal. (Dkt.

No. 3.) On February 19, 2013, Plaintiff filed a motion for preliminary injunction along

with an ex parte motion to shorten time for hearing on the motion for preliminary

injunction. (Dkt. No. 5.) After briefing by both parties, on February 27, 2013, the

Court granted Plaintiffs’ ex parte motion and set the matter for hearing on March 15,

2013, which was continued to March 19, 2013 after granting the parties’ joint motion

to continue the hearing date. (Dkt. Nos. 22. 24, 30.) On March 20, 2013, the Court

granted Plaintiff’s motion for preliminary injunction and for an order partially freezing

assets of ABS Manager and the Funds, preserving documents, and requiring an

accounting and denying Plaintiff’s motion for an order freezing all funds’ asset and

personal assets and order appointing a receiver. (Dkt. No. 31.) A preliminary

injunction order was filed on April 4, 2013. (Dkt. No. 35.) 

The complaint alleges violations ofsections 206(1) and 206(2) ofthe Investment

Advisers Act of 1940; violations of section 206(4) of the Investment Advisers Act of

1940 and Rule 206(4)-8; violations of section 17(a) of the Securities Act of 1933

(“Securities Act”); violations of section 10(b) of the Securities Exchange Act of 1934

(“Exchange Act”) and Rule 10b-5; and violations of section 20(a) of the Securities

Exchange Act of 1934. (Dkt. No. 1.) 

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Plaintiff movesfor summary judgment asto all causes of action in the complaint. 

Defendants move for summary judgment as to the first two causes of action based on

violations of the Investment Advisers Act of 1940 as they contend they fall under an

exception to the definition of investment adviser. Defendants also move to set aside

default entered against Relief Defendants Cavan Private Equity Holdings, LLC and

Lucky Star Events, LLC. (Dkt. No. 59.) 

Factual Background

ABS Manager, LLC was formed by George Charles Cody Price (“Price”) in

March 2009. Price is ABS Manager’s sole member, and serves as its President and

Chief Executive Officer. From 2009 to the present, 35 individuals invested about $20

million to three Funds, ABS Fund, LLC (Arizona) (“ABS Fund Arizona”), ABS Fund,

LLC (California) (“ABS FundCalifornia”) and Capital Access, LLC Fund (collectively

known as the “Funds”) managed by Defendants. Investors received membership units

or interests in the Funds in which they invested and a brokerage held the securities. 

The ABS Fund Arizona was first offered in March 2009 and sold units to about

13 or 14 investors for around $2.4 million. (Dkt. No. 64-3, Dean Decl., Ex. 1 at 1.) 

ABS Fund Arizona’s Private Placement Memorandum (“PPM”) stated that investors

were entitled to a rate of 18% on their unreturned capital contribution. (Id. at 6.) 

The ABS Fund California, also known as the Nationwide Platinum Fund, was

first offered in June 2010 and sold units to 35 investors for about $14.1 million. (Dkt.

No. 64-3, Dean Decl., Ex. 2 at 1-2.) The ABS Fund California’s PPM stated that

investors were entitled to a 12.5% variable return with a minimum of 7.48% on their

unreturned capital contribution. (Id.) 

The Capital Access Fund was first offered in August 2012 and sold units to 35

investors for about $18.8 million. (Dkt. No. 64-3, Dean Decl., Ex. 3 at 1.) This Fund

provided that investors were entitled to a 12.5% variable return with a minimum of

7.48% on their unreturned capital contribution. (Id. at 8-9.) 

The Funds used investor funds to obtain U.S. government issued agency interest

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only (“IO”) collaterized mortgage obligations (“CMO”) and reverse IO CMOs which

were purchased through brokerage accounts maintained by the Funds with licensed

broker dealers, such as Morgan Stanley Smith Barney (“Morgan Stanley”). The

investors receive monthly interest payments that accumulate in the accounts. These

calculations are conducted by a third-party accounting professionals. The Fund,

through ABS Manager, distributed the accumulated monthly interest to the investors

according to the accountant’s spreadsheets. The accounting firms send monthly

account statements to each investors, which reflect distributions and the investor’s

monthly membership interest account statements. The third party accounting firms also

calculate the compensation that ABS manager isto receive after distributions are made

to the Fund’s investors. SEC disputes theses facts to the extent that the accounting

firms did not base calculations or did not take into consideration the net asset value of

the Funds. 

Mortgage-backed securities (‘MBS”) are bonds whose payments are secured by

the principal and interest payments made by borrowers in a collection, or pool, of

mortgages. (Dkt. No. 64-28, Weiner Expert Report at 6.) Mortgage backed securities

can be either “Agency” or “Non-Agency.” (Id. at 9.) A government-backed instrument

is known as Agency. 

An Agency carries the names of one of the mortgage Government

Sponsored Entities (“GSE”): Fannie Mae, Freddie Mac or Ginnie Mae. 

In return for a fee taken as a slice of interest from the mortgage

payments in the pool, the GSEs guarantee the timely payment of

principal and interest of each of the mortgages in the pool. (Id.) This

‘Agency’ guarantee effectively removes default risk from the

investment because if a mortgagor defaults, the Agency purchases the

loan from the pool at full face value, along with any interest accrued

and owed, and that repurchase is passed along to investors in the pool. 

(Id.) 

Ginnie Mae is not a government agency, but is a ‘wholly-owned government

corporation located within the U.S. Department of Housing and Urban Development

(HUD)’” (Id. at 10.) Fannie Mae and Freddie Mac are “government-chartered, but

publicly-owned, corporations, with common and preferred stock that trade on public

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stock exchanges.” (Id.) This Agency “guarantee” applies to timely payment of interest

and principal but not on a decline in the market value of any security or a guarantee

that an investor will necessarily earn a positive return on the holding of a security. (Id.) 

An Agency Collateralized Mortgage Obligation (“Agency CMO”) was created

from MBS and “redirects the principal and interest cash flows from a pool of similar

mortgage pass-throughs into a different and newly-created set of bond classes or

‘tranches.’” (Id. at 12.) CMO tranches can be tailored to meet a particular investment

need or investor class. (Id.) While there is an Agency guarantee as to the required

payments to investors, it does not guarantee a liquid market or a positive return on an

investment, especially one that is sold prior to its maturity date. (Id. at 13.) A type of

Agency CMO is an interest only (“IO”) where investors receive only the interest

payments. (Id.) Because it receives no principal, it has no underlying principal balance

but instead has a “notional” balance which tracks the balance of the underlying bond

from which it was structured. (Id. at 14.) Since there is no principal payment, the

investor does not receive a final return of principal as a single payment on the final

maturity date or as a stream distributed throughout the life of the investment. (Id.) The

investor is only entitled to interest flows during the time the security is outstanding. 

(Id.) Should mortgage refinancings increase, then the flow is reduced and ultimately

extinguished. (Id.) Owning an IO security “constitutes a sort of race to recoup the

initial investment plus enough additional interest to produce a desired level of return

before the security disappears.” (Id.)

An Inverse IO is a CMO tranche that pays only interest and with a coupon that

resets monthly according to an inverse-type formula. (Id. at 18.) These are the “among

the most complex, difficult to understand, value and manage mortgage derivative

securities . . . and are considered to be among the riskiest forms of CMO securities.” 

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(Id.) 

1

According to Plaintiff, the Inverse IOs contain two risks. First, the risk of a rise

in LIBOR reducing the coupon as a result of the coupon formula, and second, the risk

of an increase in mortgage prepayments, which will cause the notional balance of the

security to pay down and eventually evaporate. The Agency guarantee provides no

protection as to these risks. According to Price, the “government backing” of Agency

IOs and Inverse IOs eliminates IO credit risk and several other risks. (Dkt. No. 73-2,

Price Decl. ¶ 34.) 

All three of the Funds’ PPMs state the Fund would invest in various types of

collateralized mortgage obligations (“CMO”) but do not mention the specific type. 

(Dkt. No. 64-3, Dean Decl., Ex. 1 at 1; Ex. 2 at 11; Ex. 3 at 7.) Ultimately, the ABS

Funds were invested in two particular types of Agency CMOs: IO and Inverse IO

tranches. (Dkt. No. 68-4, Suppl. Dean Decl., Ex. 37, Price Depo. at 118:20-23; 119:19-

120:7; 121:10-18; 122:3-8; 123:34-124:1; 249:5-12.) 

Agency IO and Inverse IO tranches of CMOs are high risk, volatile securities. 

(Dkt. No. 64-3, Dean Decl., Ex. 7 at 16-17; see also Dkt. No. 64-28 Weiner Report. at

15.) While the parties dispute the degree of risk, it is clear that these investments were

not for the ordinary investor but required a sophisticated investor. (See Dkt. No. 64-3,

Dean Decl., Ex. 1 at 5 (only certain sophisticated accredited investors who are able to

bear a substantial loss of their capital contribution may invest); Ex. 2 at 7 (investor

required to represent that they are sophisticated in busines and financialmatters or have

been advised by someone who is); Ex. 3 at 5 (“this offering involved substantial risks

. . . investors in the company must have such knowledge and experience in business

and financial matters as will enable them to evaluate the merits of the proposed

Defendants’ expert testified that Inverse IOs are not considered to be among the

1

riskiest forms of CMO securities. (Dkt. No. 73-3, Beirne Depo. at 96:12-15.) Then,

Plaintiff cites to the deposition of Defendants’ expert, Beirne, where he states “this is

a high-risk fund”; however, Plaintiffs do provide sufficient portions of the transcript

for the Court to determine which fund he is talking about. (Dkt. No. 84-3, Dean Decl.,

Ex. 43, Beirne, Depo. at 112:7.) There is an implication that the CMO IO securities are

high risk. (Id. at 116:3-15.) 

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investment . . . and be able to bear the economic risks of this investment.”) In their

opposition, Defendants concede and state that the investors understood the high risk

of investing in these types of securities and that they could lose their total investment

and they also understood that the preferred return was not guaranteed nor were there

any guarantees regarding the backing for the securities purchased by the fund. (Dkt.

No. 73-3, Price Decl., Ex. F, Flagg Decl.¶ 9; Dkt. No. 73-3, Price Decl., Ex. G, Murch

Decl. ¶ 16.)

According to Price, Agency CMOs are “fairly sophisticated and not easily

understood by the average financial advisor. This is primarily due to the simple fact

these securities are traded in a specialized market and are considered ‘odd lot’

purchases. Where as most banks look to lend against what are called “round lot’

CMOs which are larger in average size than ‘odd lot’ smaller in size CMOs. While

there is always a market in which these securities can be sold, it requires doing a lot of

homework and making sure that the bid and ask prices are commensurate with the

value of the income generated by the interest-onlyCMOsin order to obtain a fair price.

Not every firm has a person who is an expert in this area, and there are only a few

qualified individuals at the films that do have the ability and desire to evaluate and

trade these securities.” (Dkt. No. 73-2, Price Decl., Ex. A, Price Decl. in Opp. to Pl’s

Ex Parte Appl. ¶ 11.) 

From 2010 to 2012, the Funds made interest payments to investors of 12% to

18%. However, the value of certain portfolios held by ABS Arizona and Capital

Access had decreased significantly in value. 

Discussion

A. Legal Standard for Federal Rule of Civil Procedure 56

Federal Rule of Civil Procedure 56 empowers the Court to enter summary

judgment on factually unsupported claims or defenses, and thereby “secure the just,

speedy and inexpensive determination of every action. ” Celotex Corp. v. Catrett, 477

U.S. 317, 325, 327 (1986). Summary judgment is appropriate if the “pleadings,

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depositions, answers to interrogatories, and admissions on file, together with the

affidavits, if any, show that there is no genuine issue asto any material fact and that the

moving party is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). A fact

is material when it affects the outcome of the case. Anderson v. Liberty Lobby, Inc.,

477 U.S. 242, 248 (1986). 

The moving party bears the initial burden of demonstrating the absence of any

genuine issues of material fact. Celotex Corp., 477 U.S. at 323. The moving party can

satisfy this burden by demonstrating that the nonmoving party failed to make a

showing sufficient to establish an element of his or her claim on which that party will

bear the burden of proof at trial. Id. at 322-23. If the moving party fails to bear the

initial burden, summary judgment must be denied and the court need not consider the

nonmoving party’s evidence. Adickes v. S.H. Kress & Co., 398 U.S. 144, 159-60

(1970). 

Once the moving party has satisfied this burden, the nonmoving party cannot rest

on the mere allegations or denials of his pleading, but must “go beyond the pleadings

and by her own affidavits, or by the ‘depositions, answers to interrogatories, and

admissions on file’ designate ‘specific facts showing that there is a genuine issue for

trial.’” Celotex, 477 U.S. at 324. If the non-moving party fails to make a sufficient

showing of an element of its case, the moving party is entitled to judgment as a matter

of law. Id. at 325. “Where the record taken as a whole could not lead a rational trier

of fact to find for the nonmoving party, there is no ‘genuine issue for trial.’” 

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). In

making this determination, the court must “view[] the evidence in the light most

favorable to the nonmoving party.” Fontana v. Haskin, 262 F.3d 871, 876 (9th Cir.

2001). TheCourt does not engage in credibility determinations, weighing of evidence,

or drawing of legitimate inferences from the facts; these functions are for the trier of

fact. Anderson, 477 U.S. at 255. 

/ / / /

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B. Anti-Fraud Provisions: Sections 17(a)(1)-(3) of the Securities Act; Section

10(b) of the Exchange Act and Rule 10b-5 

Plaintiff moves for summary judgment on the anti-fraud provisions of the

Securities Act and the Exchange Act. The third cause of action alleges violations of

sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act, 15 U.S.C. §§ 77q(a)(1),

77q(a)(2), & 77q(a)(3). Section 17(a) prohibits fraud in the offer or sale of securities

and provides:

It shall be unlawful for any person in the offer or sale of any securities

. . .by the use of any means or instruments of transportation or

communication in interstate commerce or by use of the mails, directly

or indirectly

(1) to employ any device, scheme, or artifice to defraud, or

(2) to obtain money or property by means of any untrue statement of a

material fact or any omission to state a material fact necessary in order

to make the statements made, in light ofthe circumstances under which

they were made, not misleading; or

(3) to engage in any transaction, practice, or course of business which

operates or would operate as a fraud or deceit upon the purchaser.

15 U.S.C. §§ 77q(a)(1) -(3). 

The fourth cause of action isfor violations ofsection 10(b) of the Exchange Act,

15 U.S.C. § 78j(b); and Rules 10b–5(a-c), 17 C.F.R. § 240.10b–5. Section 10(b)

prohibits fraud in connection with the purchase or sale of any security:

It shall be unlawful for any person, directly or indirectly, by the use of

any means or instrumentality of interstate commerce or of the mails, or

of any facility of any national securities exchange - - . . .

(b) To use or employ, in connection with the purchase or sale of any

security registered on a nationalsecurities exchange or any security not

so registered, or any securities-based swap agreement anymanipulative

or deceptive device or contrivance in contravention of such rules and

regulations as the Commission may prescribe as necessary or

appropriate in the public interest or for the protection of investors.

15 U.S.C. § 78j(b). Rule 10b–5 seeks to enforce these statutes by making the following

acts in connection with the purchase or sale of any security unlawful:

It shall be unlawful for any person, directly or indirectly, by the use of

any means or instrumentality of interstate commerce, or of the mails or

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of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state

a material fact necessary in order to make the statements made, in the

light of the circumstances under which they were made, not

misleading, or

(c) To engage in any act, practice, or course of business which operates

or would operate as a fraud or deceit upon any person, in connection

with the purchase or sale of any security.

17 C.F.R. § 240.10b–5.

Section 17(a) of the Securities Act, section 10(b) of the Exchange Act, and Rule

10b-5 consist of the same elements. See SEC v. Rauscher, Inc., 254 F.3d 852, 855-56

(9th Cir. 2001). They all “forbid making [1] a material misstatement or omission [2]

in connection with the offer or sale of a security [3] by means of interstate commerce.” 

SEC v. Phan, 500 F.3d 895, 907-08 (9th Cir. 2007) (citing Rauscher, 254 F.3d at 855-

56). Section 17(a)(1), section 10(b) and Rule 10b-5 also require scienter while

violations ofsections 17(a)(2) and (3) require a showing of negligence. Phan, 500 F.3d

at 908. In a securities fraud action, ‘[m]ateriality and scienter are both fact-specific

issues which should ordinarily be left to the trier of fact,’ although ‘summary judgment

may be granted in appropriate cases.’” Kaplan v. Rose, 49 F.3d 1363, 1375 (9th Cir.

1994) (citation omitted). 

In this case, the parties dispute whether Defendants made a material

misstatement or omission, and whether Defendants acted with scienter. 

1. Material Misrepresentation or Omission of Fact

The SEC alleges affirmative materialmisrepresentations and omissions made by

Defendants to the Fund investors in the Funds’ account statements, newsletters, on the

Funds’ websites, on the radio and in the PPMs provided to the investors. The SEC

asserts that Defendants misrepresented how the Funds were performing, failed to

disclose risks of the Funds, misrepresented Price’s experience, and misrepresented

assets under management. 

Defendants argue that the SEC misunderstands the nature ofthese agencyCMOs

as they are sophisticated and not easily understood by the average financial advisor. 

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They also contend that ABS Manager provided written and verbal disclosures

regarding the nature of IO and inverse IO investments. Price further denies he

misrepresented his prior work experience. Lastly, he alleges that the SEC’s use of the

term “assets under management” is incorrrect. 

Violations of the securities antifraud provisions prohibit the making of material

misstatements or omissions. SEC v. Dain Rauscher, Inc., 254 F.3d 852, 856 (9th Cir.

2001); see also Basic, Inc. v. Levinson, 485 U.S. 224, 231–32 (1988); TSC Indus., Inc.

v. Northway, Inc., 426 U.S. 438, 449 (1976). “An omitted fact is material ‘if there is

a substantial likelihood that the disclosure of the omitted fact would have been viewed

by the reasonable investor as having significantly altered the total mix of information

made available.’” SEC v. Platforms WirelessInt’l Corp., 617 F.3d 1072, 1092 (9thCir.

2010) (quoting Phan, 500 F.3d at 908). In other words, a misrepresentation,

misstatement, or omission is material if there is a substantial likelihood that a

reasonable investor would consider the true or complete information important in

making an investment decision. See id. As such, the antifraud provisions of the

securities statutes and regulations impose a “‘duty to disclose material facts that are

necessary to make disclosed statements, whether mandatory or volunteered, not

misleading.’” SEC v. Fehn, 97 F.3d 1276, 1290 n.12 (9th Cir. 1996) (quoting Hanon

v. Dataproducts Corp., 976 F.2d 497, 504 (9th Cir. 1992)). 

Determining materiality in securities fraud cases “should ordinarily be left to the

trier of fact.” Phan, 500 F.3d at 908 (citing In re Apple Computer Secs. Litig., 886

F.2d 1109, 1113 (9th Cir. 1989)). “Materiality typically cannot be determined as a

matter of summary judgment because it depends on determining a hypothetical

investor’s reaction to the alleged misstatement.” Id. “The determination requires

delicate assessments of the inferences a ‘reasonable shareholder’ would draw from a

given set of facts and the significance ofthose inferencesto him, and these assessments

are peculiarly ones for the trier of fact. Only if the established omissions are ‘so

obviously important to an investor, that reasonable minds cannot differ on the question

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of materiality’ is the ultimate issue of materiality appropriately resolved ‘as a matter

of law’ by summary judgment.” TSC Indus., 426 U.S. at 450. 

a. Defendants Misrepresented and/or Failed to Disclose the

Funds’ Performance

TheSEC alleges Defendants made affirmative misrepresentations and omissions

by claiming thatsince 2010, ABS Arizona earned annual returns of 18% and ABS Fund

California and Capital Access earned annual returns of 12.5%; however, these

statements as to returns do not take into consideration the value of the underlying

securities. Specifically, the monthly account statements represented that each CMO

held in the Funds was individually performing at 18% or better for the ABS Fund

Arizona or 12% or better for ABS Fund California and Capital Access Fund. In

addition, in an October 2010 newsletter by email, Price wrote that “[a]ll of the bonds

are making well over 18% and will continue to do so for quite some time.” (Dkt. No.

63-4, Dean Decl., Ex. 35.) Further, as of January 2013, the Capital Access website

included a “Historic Reference” table showing monthly returns of 1.04% (12.5%

annualized) from January 2010 through June 2012. (Id., Ex. 12 at 10.) Lastly, in a

radio show, Price stated that the Funds have a variable return that “starts in the single

digits and goes all the way up into the double digits” and the Funds had seen some

extraordinary returns. (Id., Ex. 6 at 23, 32.) It is undisputed that these reports did not

take into account the value of the assets held by the Funds. In fact, the underlying

value of many of these securities held by the Funds decreased during this time and the

SEC alleges that Defendants did not incorporate that fact into their calculation of

“returns.” For example, at least three CMOs held by the Funds were stated as

performing when, in fact, they had expired and were no longer generating any returns

at all. 

Defendants allege that the SEC failsto understand the difficulties in valuing the

securities at issue and disputes the SEC’s method for valuation. According to

Defendants, the SEC’s use of the Interactive Data Corporation (“IDC”), a third party

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aggregator used in the industry to price securities, reports are inaccurate as they only

value “round lot” CMOs, not the “odd lot” CMOs at issue, which are bought at a

deeper discount than “round lot” CMOs. Defendants argue that the only way to

accurately value these securities is to sell them. They also contend that there is no rule

or regulation that requires Defendants to report the value of the bonds to investors. 

Underlying these arguments is a dispute on how the “rate of return” is defined. 

The parties use the term “return” loosely without a precise definition or reference to

an expert. The SEC seeks to define “rate of return” to include not just the interest rate

payments but also how the underlying values of the bonds are performing which

Defendants admittedly failed to include. Contrarily, Defendants argue that the “rate

2

of return” on these Agency IO and Inverse IO CMO’s has nothing to do with the value

of the underlying assets; in fact, Price stated he had no idea about their values. Price

uses interest payments to calculate returns and not the underlying asset values. (Dkt.

No. 68-4, Suppl. Dean Decl., Ex. 37, Price Depo. at 175:13-24; 226:18-25; 228:12-19.) 

First, the Court concludes that there is a material issue of disputed fact as to

whether it is even possible to value the underlying asset without selling the underlying

property. Second, while the parties do not dispute that there is no requirement that the

account statements, newsletter comments,the Funds’ websites, the radio comments and

the PPMs regarding rate of return had to include the underlying value of the assets,

there is an issue of material fact in dispute as to whether there is a substantial

likelihood that a reasonable investor would have acted differently if the alleged

misrepresentation had not been made and the value of the underlying asset been

disclosed. See Phan, 500 F.3d at 908. 

/ / / /

SEC writes in its moving papers, “Although Defendants used the terms ‘rate of 2

return,’ and ‘performing’ in communicating with investors regarding the Funds and

their securities, they were really referring to ‘current yield.’” (Dkt. No. 68-1 at 10.) 

The Court notes that the SEC fails to define each of the terms of art to assist the Court

in understanding its argument. 

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b. Defendants Failed to Disclose the Risks of the Funds

Investment

The SEC argues that Defendants failed to disclose the true nature of the

investment in the CMOs, particularly that the Funds would invest in the high-risk,

volatile Agency IOs and Inverse IO tranches of CMOs. In response, Defendants argue

that the investors were informed, in writing and orally, about the nature of the

investment in Agency IO and Inverse IO CMOs. 

In support, the SEC presents two investors who state they never spoke to Price

before investing demonstrating that they did not know the Funds would be investing

in IOs and Inverse IO tranches. (Dkt. No. 64-3, Dean Decl., Ex. 39, Nittoli Depo. at

29:22-30:2; Ex. 18, Musumeci email dated 1/28/13.) According to Michael Nittoli, he

did not talk to anyone connected with ABS Fund before investing in the Fund except

Glenn Howard. (Dkt. No. 64-3, Dean Decl., Ex. 39, Nittoli Depo. at at 29:22-30:2.) 3

He explained that he does not recall what Howard told him about the ABS Fund except

that it was a good Fund. (Id. at 30:4-31:14.) He did not remember or care what the

Fund invested in or whether the principal would be protected because Howard was his

friend and he relied on Howard’s advice. (Id. at 31:12-18.) 

SEC also presents an email froman investor named Ronni Musumeci explaining

his understanding of his investment in the ABS Manager Funds. According to his

email, which is not sworn under penalty of perjury, Musumecistatesthat his accountant

introduced him to ABS Fund, LLC in January/February 2012. (Id., Ex. 18.) 

Subsequently, he spoke with Jay Cowan, who worked for the Fund. (Id.) In a

telephone conversation, Cowan informed him that ABS Funds primarily invested in

It is not clear whether Mr. Howard works with ABS Manager or not. Since the

3

SEC provides only portions of the deposition transcript that does not describe who Mr.

Howard is and does not explain who Nittoli is talking about, the Court is unable to

determine whether his conversations with Howard prior to investing in the Funds was

sufficient disclosure. In Dewan’s deposition transcript, it appears that Price invested

in Glenn John Capital LLC, a private equity firm raising capital to make certain

investments selected by Glenn Howard. (Dkt. No. 64-3, Ex. 40, Dewan Depo. at

24:12-26:6.) 

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government agency bonds and mortgage backed securities and said that the Fund

provided a return of 7.48% plus a 5% bonus that was subject to change. (Id.) While

he does not recall if Cowan explained that the ABS Fund invested in CMOs; however,

upon his review, the PPM stated that the Fund would invest in CMOs. (Id.) Based on

Cowan’s representations, he believed the investment was safe since they were

government agency bonds. (Id.) Cowan also told him that ABS Fund managers had

previous experience investing in government agency bonds and that Price “previously

interacted with contacts at Goldman Sachs who had experience with investing in

government agency bonds.” (Id.) In addition, at least one investor understood that the

principal and interest payments were “guaranteed” by Ginnie Mae and that he expected

that he would receive 100% of his principal back in addition to monthly “returns” paid

by Defendants. (Id., Ex. 40, Dewan Depo. at 42:16-44:17; 44:20-47:15; 52:17-53:19;

58:20-59:2.) He believed the investment wassafe because they were backed by Ginnie

Mae. (Id.)

However, Dewan also stated that he was told by Price, prior to the date he made

his investments, that the Fund was investing in an IO strip of a CMO. (Dkt. No. 73-3,

Dewan Depo. at 49:6-23.) Price also explained the risk as to the interest and that the

rate of return was probably going to be LIBOR inversed. (Id. at 59:3-11.) He

understood that it was possible that the interest rate might fluctuate. (Id. at 59:13-16.) 

He also testified that he knew that the rate of return that was calculated in the offering

documents was always based on his capital contribution and not on the value of the

underlying bond. (Id. at 191:17-25.)

Defendants also present the declarations of two investors who state they fully

understood the type of investment and the risks of IOs as they were disclosed by Price. 

(Dkt. No. 73-3, Price Decl., Ex. F, Flagg Decl.; Dkt. No. 73-3, Price Decl., Ex. G,

Murch Decl.) 

Dan Flagg was a financial advisor to Peter Kern, an investor. (Dkt. No. 73-3,

Price Del., Ex. F., Flagg Decl. ¶ 2.) Prior to investing, Kern and Flagg talked with

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Price about the Capital Access Fund. (Id. ¶ 3.) Price sent written materials including,

investor suitability forms, the PPM, an investor’s guide to CMOs and other related

materials. (Id.) Kern decided to invest $2 million in May 2012, over $4 million in July

2012 and $2.5 million in September 2012 into the Fund. (Id. ¶ 4.) At the time, they

understood that Kern was purchasing interestsin a limited liability company that would

be purchasing CMOs of varying risks in odd lot transactions. (Id.) They understood

that the Fund was investing in IO versions of agency CMO bonds and understood that

factors, such as a change in the one month LIBOR that could cause fluctuations in

value. (Id. ¶ 5.) They expected to receive a preferred return on a monthly basis

between 7.48 and 12.5% ofthe capital contributionsmade by Kern and they understood

that the rates did not take into account the actual value of the securities owned by the

Fund at any given time. (Id. ¶ 8) They understood the higher risk but opted due to the

potential higher yield. (Id. ¶ 5.) They also understood that the preferred return was not

guaranteed and that Kern could lose his total investment. (Id. ¶9.) Price explained that

the Fund made odd lot purchases and it was difficult to value these types of CMOs

once purchased. (Id.) Price’s employment history was not a factor in Kern’s decision

to invest. (Id. ¶ 6.) 

Another investor, Jack Murch met Price at the Online Trading Academy where

Price made an educational presentation about different types of bonds. (Dkt. No. 73-3,

Price Decl., Ex. F, Murch Decl. ¶ 6.) Subsequently, Murch attended three to four more

presentations regarding bonds and stocks and established a relationship with Price. (Id.

¶ 7.) He inquired whether Price was involved with these types of assets. (Id.) Price

provided him with market data and educational materials about agency bonds and

CMOs. (Id. ¶ 8.) Murch decided to invest $100,000 into ABS Fund Arizona in

November 2009. (Id.) Later, he invested another $100,000. (Id.) Price’s employment

history was not a factor in his decision whether to invest in ABS Fund Arizona. (Id.

¶ 10.) He was informed the Fund was a high risk start-up type of offering. (Id.) He

understood that he was purchasing limited liability company units and that the Fund

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would be purchasing high risk securities such as different types of CMOs including

various IOs. (Id. ¶11.) He understood that the values of the units may not change even

though the values of the underlying securities owned by the Fund would. (Id. ¶ 12.) 

Murch understood that he expected to receive a preferred return of 18% per year on his

unreturned capital contributions and that the rates did not take into account the

underlying value of the assets owned by the Fund. (Id. ¶¶13, 14.) He recognized the

risk because he wanted a greater return that would not have been earned from a lower

risk type of CMO. (Id. ¶ 15.) He understood that the account statement was a snapshot

of the various securities but no values were listed for those securities as they were

provided for illustrative purposes only. (Id. ¶ 17.) He had conversations with Price

over the years and wastold thatsome bonds had gone up drastically and some had gone

down but overall the portfolio was able to meet its obligations to pay him the 18%

interest. (Id. ¶ 18.) Price also testified that he verbally disclosed to investors in ABS

Fund California that its investments would consist of IO tranches of CMOs. (Dkt. No.

73-3, Ex. B, Price Depo. at 247:16-20; 248:18-21; 249:13-18.) 

Defendants also state that they also provided written disclosures such as the

Investor’s Guide to Collateralized Mortgage Obligations, which was provided to

investors in person and this information was also on the Fund’s website. (Dkt. No. 73-

2, Price Decl. ¶ 9; Dkt. No. 64-3, Dean Decl., Ex. 7.) 

These declarations, testimony and email raise issues of disputed material facts

as to whether Defendants disclosed that the Funds would invest in IOs and Inverse IOs

and the risks associated with those types of investments. 

Plaintiff also alleges that Defendants falsely claimed that the IOs and Inverse IOs

Funds were “guaranteed”, “safe & reliable bonds” and that Funds’ “number one goal

[was] preserving Capital” in the radio program, Wealth Weekend Hour and a power

point presentation. (Dkt. No. 64-3, Dean Decl., Ex. 6 at 12, 24; Ex. 17 at 2; Ex. 37,

Price Depo. at 154-55.) Defendant argues that such statements are forward looking

statements and are protected by the “bespeaks caution” doctrine. Plaintiff argues that

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the doctrine does not apply as it applies to forward looking statements, not current

statements. 

The bespeaks caution doctrine “provides a mechanism by which a court can rule

as a matter of law that defendants’ forward-looking representations contained enough

cautionary language or risk disclosure to protect the defendant against claims of

securities fraud.” Livid Holdings, Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940,

947 (9th Cir. 2005) (quoting In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1408 (9th Cir.

1996)). We have applied the bespeaks caution doctrine in situations where “optimistic

projections coupled with cautionary language . . . affect[ ] the reasonableness of

reliance on and the materiality of those projections.” In re Worlds of Wonder Sec.

Litig., 35 F.3d 1407, 1414 (9th Cir. 1994). Plaintiff alleges misrepresentations as to

past and present statements, and not the future. Therefore, the bespeaks caution

doctrine does not apply in this case. However, there is a disputed issue of fact as to

whether the investors heard these statements and whether they were material. 

c. Defendants Misrepresented Price’s Experience

The SEC alleges that Defendants affirmatively misrepresented Price’s working

experience falsely claiming that he had worked at Goldman Sachs and was a trader at

Wells Fargo and specialized in mortgage-backed bonds. In opposition, Price statesthat

he was an independent contractor at Goldman Sachs and that he was a branch manager

at Wells Fargo; he states he did not allege that he specialized in mortgage- backed

bonds while at Wells Fargo. 

The Capital Access Fund website described Price as “structuring the buying and

selling of mortgage pools on the secondary market for Wells Fargo and locat[ing] hard

to find assets with small institution banks as a consultant for Goldman Sachs.” (Dkt.

No. 64-3, Dean Decl., Ex. 12 at 8.) On the Wealth Weekend Hour radio program, Price

stated:

I started at Wells Fargo Bank as a branch manager several, several

years ago, and went from there to working with Goldman as [sic]

independent contractor dealing with REOs and foreclosed homes

portfolios, getting them sold, things of that nature. . . . 

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(Dkt. No. 64-3, Dean Decl., Ex. 6 at 7-8.) The Funds’ PPMs state the Price held the

position of Branch Manager at Well Fargo and then progressed to the position of

Manager of Mortgage Resources for 23 retail branches where he became familiar with

high-yield return investments on the secondary market. (Id., Ex. 1 at 22; Ex. 2 at 20;

Ex. 3 at 9-10.) The PPMs also similarly state that he was hired as a consultant for

Goldman Sachs and became an independent contractor for Goldman Sach’s asset

management department where he was responsible for the buying and selling of

mortgage pools worth hundreds of millions of dollars. (Id.) 

Plaintiff presents a declaration fromthe Vice President within the HumanCapital

Management Division of Goldman Sachs where he states that there is no record of

Price’s employment as an employee, consultant or independent contractor. (Dkt. No.

64-3, Dean Decl., Ex. 31.) Moreover, at Wells Fargo he was a Subprime Branch Sales

Manager and worked in mortgage origination. (Id., Ex. 30.) He was not involved in 4

trading mortgage backed securities or in the securitization of mortgages. (Id.)

In opposition, Price states that he worked for Goldman Sachs as an independent

contractor and/or consultant and other large institutions interested in purchasing

securities and various other types of CMOs prior to forming ABS Fund, LLC. (Dkt.

No.73-2, Price Decl. ¶ 20.) At Wells Fargo, he states he was a Branch Manager in their

Mortgage Resources division. (Id. ¶ 21.) 

The description on the Capital Access Fund website as to Price’s work at Wells

Fargo was false since he did not “structure the buying and selling of mortgage pools

Defendants object and move to strike the Declaration of Peter DeLanoit arguing 4

that he does not have any personal knowledge of Price or of his job responsibilities at

Wells Fargo Bank and that DeLanoit does not have any personal knowledge of the

contents and documents submitted in support of his declaration. (Dkt. No. 72.) 

Plaintiff opposes. (Dkt. No. 77-17.) DaLanoit states the he has personal knowledge

of the matters set forth and he is Senior VP in Human Resources with 16 years

experience at Wells Fargo. (Dkt. No. 64-3, Dean Decl., Ex. 30.) The Court concludes

that the declaration establishes a basis for his knowledge about the human resources

files he reviewed. Accordingly, the Court overrules Defendants’ objection and

DENIES their motion to strike the Declaration of Peter DaLanoit. 

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on the secondary market for Wells Fargo.” It is not clear whether the other descriptions

of Price’s past work experience was misleading; however, Plaintiff must show that

these misleading statements were material. 

Plaintiff has presented one investor, Bradford Dewan who stated that Price’s

work experience at Wells Fargo and Goldman Sachs would have affected his decision

to invest. (Dkt. No. 64-3, Dean Decl., Ex. 40, Dewan Depo. at 56:13-58:6.) In

opposition, Defendants present the declarations of Flagg and Murch who state that

Price’s employment history was not a factor in their decision to invest. (Dkt. No. 73-3,

Price Decl., Ex. F., Flagg Dec. ¶ 6; Dkt. No. 73-3, Price Decl., Ex. F, Murch Decl. ¶

10.) Accordingly, there is a disputed issue of material fact as to whether Price’s past

work experience was material to investors. 

d. Defendants Misrepresented Assets under Management

The SEC alleges that Defendants overstated the assets under management as

much as three times and this would have affected one investor’s decision to invest. 

Dewan testified that the amount of assets under management reported in the PPM gave

him a little comfort in the sense that “there happened to be other investors besides

myself. So it would give a little more credibility.” (Dkt. No. 64-3, Dean Decl., Ex. 40,

Dewan Depo. at 54:11-55:2.) Defendants dispute the term“assets under management”

as that term does not appear in the 2012 spreadsheet referenced by Plaintiff. 

Defendants state that this spreadsheet does not provide any information about current

values of assets under management but only provides the amount of each investor’s

capital contribution. (Dkt. No. 73-2, Price Decl.¶ 22.) 

The ABS California Fund’s PPM stated that the Fund had “company owned

assets” of $62.4 million as of June 1, 2010. (Dkt. No. 64-3, Dean Decl., Ex. 2 at 11.) 

In addition, ABS Manager’s website stated that “ABS Fund has grown to having $72

million assets under management as of May 2011.” (Id., Ex. 27 ¶ 5.) However, the

November 2012 spreadsheet reflects total assets under management of $17,435,462. 

(Id., Ex. 5.) In 2013, Price stated in an email that ABS Manager had $18 million assets

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under management. (Dkt. No. 64-3, Dean Decl., Ex. 48.) 

Again, there is a disputed issue as to the definition the parties use of “assets

under management” Neither party properly defines total assets under management. 

Accordingly, there is a disputed issue of material fact as to whether Defendants

misrepresented assets under management. 

5

2. Scienter

“A plaintiff cannot recover without proving that a defendant made a material

misstatement with an intent to deceive –not merely innocently or negligently.” Merck

& Co., Inc. v. Reynolds, 559 U.S.633, 649 (2010). In the Ninth Circuit, the meaning

of scienter is similar in section 10(b), Rule 10b-5, and section 17(a)(1). Vernazza v.

SEC, 327 F.3d 851, 860 (9th Cir. 2003). Scienter may be supported by “knowing or

Plaintiff also raises facts surrounding the liquidation of the Funds’ CMOs that 5

were held by Morgan Stanley. In June 2012, Capital Access began to allow investors

to obtain a line of credit from ABS Manager for up to 70% of the value of their

investment in Capital Access. ABS Manager obtained a “non-purpose loan” from

Morgan Stanley, its broker-dealer and clearing firm. Plaintiff alleges and Defendants

dispute that Defendants falsified the loan application for the line of credit claiming

Price intended to use the proceeds to purchase commercial and residential real estate. 

The facility was collateralized by the IOs and Inverse IOs held by the Funds. Plaintiff

alleges that the addition of the line of credit to the Fund’s brokerage account

heightened the risk to investors because it made the account susceptible to a “margin

call” which wasrealized at the end of 2012. At the end of 2012, Morgan Stanley Smith

Barney requested that the Fund movesits account and requested a transfer to a different

firm by the end of January 2013. Defendants were unable to locate another broker so

in February 2013, all the assets of Capital Access were liquidated by Morgan Stanley.

According to Plaintiff, investors did not seem to understand Morgan Stanley’s ability

to call the loan and liquidate the underlying collateral and Defendants have not been

honest with them about the events related to this liquidation. As a result, all the

investors in Capital Access suffered a total loss. 

In opposition, Defendants assert that the line of credit did not heighten the

investors’ risk but lowered the risk of investment losses for the investors who used the

line of credit as it was not allowable to be clawed back and the investor held no

liability for any shortfalls. This was stated in the PPMs and margin disclosure

documents provided to investors. The line of credit was considered as a payment of

principal back to the investors, thus lowering the exposure of outstanding investments

to only 30%. They also dispute representations made to Morgan Stanley as to the

purpose of the line of credit. Price states that he opened the line of credit to acquire

real estate and bonds. (Dkt. No. 73-2, Price Decl. ¶¶ 25-29.) Defendants have

presented evidence to create a genuine issue of material disputed fact as to whether

there were misrepresentation as to the liquidation of the Funds’ CMOs with Morgan

Stanley. 

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reckless conduct” without a showing of “willful intent to defraud.” Id. (citing Nelson

v. Serwold, 576 F.2d 1332, 1337 (9th Cir.1978); see also Howard v. Everex Sys., Inc.,

228 F.3d 1057, 1063 (9th Cir. 2000). Scienter is satisfied by recklessness. Hollinger

v. Titan Capital Corp., 914 F.2d 1564, 1568–69 (9th Cir. 1990). Reckless conduct is

conduct that consists of a highly unreasonable act, or omission, that is an “extreme

departure from the standards of ordinary care, and which presents a danger of

misleading buyers or sellers that is either known to the defendant or is so obvious that

the actor must have been aware of it.” Id. at 1569. 

Plaintiff assertsthat Price, asthe sole manager and CEO of ABS Manager, knew

or was reckless in not knowing that the misrepresentations and omissions made by the

Defendants were false. Price managed the Funds’ investments and he knew they were

only reporting the interest rate and not the underlying value of the assets. Defendants

argue that based on the advice and reliance on outside third-party professionals, they

reasonably believed that information was being accurately transmitted to the investors;

and there are disputed issues of fact regarding the value of the bonds.

Here, as discussed above, there is a genuine disputed issue of material fact as to

whether these representations and omissions were violations of the securities laws. 

While Plaintiff believed that his method of valuating the returns was correct, there is

a genuine issue of fact as to whether it was reckless conduct. 

Based on the above, the Court DENIESPlaintiff’s motion for summary judgment

on the anti-fraud causes of action pursuant to the Securities Act and the Exchange Act.

B. Section 17(a)(2) and 17(a)(3) of the Securities Act

The SEC also moves for summary judgment asto sections 17(a)(2) and 17(a)(3)

of the Securities Act. Defendants oppose. 

Sections 17(a)(2) and 17(a)(3) does not require a finding ofscienter but requires

a showing of negligence. Rauscher, Inc., 254 F.3d at 856; see also Aaron v. SEC, 446

U.S. 680, 696–702 (1980). 

Here, as there are material issues of disputed fact as to whether the elements of

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the antifraud provisions ofthe securities law, the Court also DENIES Plaintiff’s motion

for summary judgment on sections 17(a)(2) and 17(a)(3) of the Securities Act. 

C. Section 20(a) of the Exchange Act - Control Person Liability

The SEC moves for summary judgment under the control person liability

contending that Price controlled and exercised power over Defendant ABS Manager. 

Defendants oppose arguing that since there is a genuine issues of material fact as to

whether they violated the Exchange Act, Plaintiff’s motion for summary judgment

should be denied. 

Section 20(a) of the Exchange Act provides, 

Every person who, directly or indirectly, controls any person liable

under any provision of this chapter or of any rule or regulation

thereunder shall also be liable jointly and severally with and to the

same extent as such controlled person to any person to whom such

controlled person is liable . . . .” 

15 U.S.C. § 78t(a). A defendant may be liable for securities violation if (1) there is a

violation of the Exchange Act and (2) the defendant directly or indirectly controls any

person liable for the violation. SEC v. Todd, 642 F.3d 1207, 1223 (9th Cir. 2011). The

SEC defines “control” as “the possession, direct or indirect, of the power to direct or

cause the direction of the management and policies of a person, whether through

ownership of voting securities, by contract, or otherwise.” 17 C.F.R. § 230.405; Todd,

642 F.3d at 1223 n.4. The definition of “person” under the Act encompasses a

“company.” Todd, 642 F.3d at 1223 (citing 15 U.S.C. § 78c(a)(9)). 

As there is a genuine issue of material fact as to whether there was a violation

of the Exchange Act, the Court DENIES the SEC’s Motion for Summary Judgment

with regard to this cause of action. 

D. Sections 206(1) and 206(2) of the Advisors Act, 15 U.S.C. 80b-6(1) and (2) 

(fraud by an investment advisor); Section 206(4) of the Advisers Act, 15

U.S.C. 80b-6(4) and Rule 206(4)-8, 17 C.F.R. § 275.206(4)-8

The SEC movesfor summary judgment that Defendants violated sections 206(1),

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206(2), and 206(4) of the Investment Advisers Act, and accompanying Rule 206(4)-8. 

Defendants also move for summary judgment that they are exempt under the

Investment Advisers Act. 

Sections 206(1) and 206(2) provide:

[i]t shall be unlawful for any investment adviser . . . (1) to employ any

device, scheme, or artifice to defraud any client or prospective client;

[or] (2) to engage in any transaction, practice, or course of business

which operates as a fraud or deceit upon any client or prospective

client.

15 U.S.C. § 80b-6(1); 15 U.S.C.§ 80b-6(2). Section 206(4) and Rule 275.206(4)-8

prohibit the same conduct but as it relates to pooled investment vehicles. 15 U.S.C. §

80b-6(4); 17 C.F.R. § 275.206(4)-8. The definition of investment adviser is asfollows:

“Investment adviser” means 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; but does not

include . . . (E) any person whose advice, analyses, or reports relate

to no securities other than securities which are direct obligations

of or obligations guaranteed as to principal or interest by the

United States, or securities issued or guaranteed by corporations in

which the United States has a direct or indirect interest which shall

have been designated by the Secretary of the Treasury, pursuant to

section 3(a)(12) of the Securities Exchange Act of 1934 [15 U.S.C.A.

§ 78c(a)(12)], as exempted securities for the purposes of that Act [15

U.S.C.A. § 78a et seq.] . . . .”

15 U.S.C. § 80b-2(a)(11)(E) (emphasis added). 

Plaintiff argues that Defendants were investment advisers subject to the

Investment Advisers Act. Defendants engaged in the business of advising others as to

the value of securities or as to the advisability of investing in, purchasing or selling

securities. Moreover, ABS Manger even applied to be registered as an investment

adviser in California, and ABS Manager and Price, its sole manager, managed the

Funds and their investments and were compensated for it in the form of a management

fee. The SEC also alleges Defendants violated section 206(4) and Rule 275.206(4)-8

which prohibit the same conduct as sections 206(1) and 206(2) but in connection with

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“pooled investment vehicles.” 

In their motion for partial summary judgment, Defendants argue that they

provided management services to the Funds as to the Funds’ securities which solely

consisted of Agency CMOs and IOs which fall within the exclusion of the definition

of Investment Adviser. Moreover, they contend that they were managers, not advisers.

In opposition, Plaintiff asserts that contrary to Defendants’ allegations that the

Funds’ securities consisted solely of Agency CMOs and IOs, at least one was a nonAgency CMO. Defendants purchased 1 private CMO bond, issued by Countrywide. 

The bond, CWALT 2005-J10 Class 1A14 has CUSIP No. 12668ABL8 and was an

inverse IO bond. (Dkt. No. 71-9, Weiner Decl. ¶¶ 2-5; Exs. 1-2.) It appeared for the

first time in the May 2009 Andrew Garrett account statement for ABS Arizona and sold

on April 11, 2011. (Id.) 

Moreover, Defendants offered investment advisory services to investors about

two different types of securities, the Agency CMOs and private bonds. For example,

the 2009 PPM for the ABS Arizona Fund states:

The Fund expects to invest only in certificates tied to residential

mortgages with the following characteristics: Government National

Mortgage Association backedBonds with Guaranteed payments by the

Treasury Department, OR borrowers with a minimum of 720 credit

scores, loans with at least 18% equity, a history of limited defaults, and

AAA rating. 

(Dtk. No. 64-14, Ex. 68 at SEC-MAJ-0000399.) The SEC argues that Defendants held

themselves out as trading in government and private mortgage backed securities.

In reply, Defendants state that the Countrywide bond was purchased by Relief

Defendant Cavan Private Equity Holding, LLC in November 2008, prior to the

existence of the ABS Arizona Fund’s 2009 startup date, and it wasfor personal use and

not intended to be purchased for the Fund. (Dkt. No. 76, CSAMF, Ex. A, Price Decl.

¶¶ 2, 3;see also, Ex. 1.) All monies contributed by investors for all new securities were

used to purchase Agency CMOs. (Id. ¶ 4.) Price testified that 100% of the assets

purchased by ABS Fund California and Capital Access Fund were IO tranches of

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CMOs. (Dkt. No. 73-3, Ex. B, Price Depo at 249:5-12.) Investors understood that the

Fund intended to invest in Agency CMOs. (Dkt. No. 76, CSAMF, Ex. B, Dewan Tr.

at 53:23-54:18.) 

Defendants also allege they were managers of the Funds, not investment

advisers. At least two investors stated that no one from Defendant ABS Manager

represented themselves asinvestment advisers, (Dkt. No. 76, Ex. B, Chester Decl., Ex.

3, Nittoli Depo., 120:5-7; Ex. 2, Dewan Depo. at 137:10-12), while another investor

acknowledged his understanding that the Capital Access, LLC Fund was not a

registered investment advisory company and that its officer, directors and manager

have no ability to offer any sort of investment advice and they never represented to be

an investment adviser. (Id., Chester Decl., Ex.4; Necomb Decl. ¶7). 

While the PPMs state that the Funds would invest in either agency bonds and

private bonds, there is no additional evidence provided by Plaintiff that Defendants

informed investors that they would invest in “private mortgage backed securities.” 

While the definition of investment advise can be in the form of “writings”, such as the

PPMs, itshould also involve “advising others” “asto the value ofsecurities or asto the

advisability of investing in, purchasing, or selling securities.” See 15 U.S.C. § 80b2(a)(11)(E). Besides one documents, Plaintiff has presented no contrary evidence that

Defendants informed investors that they would invest in private mortgage backed

securities. The evidence reveals verbal and written communications by Defendants 

that solely addressed Agency CMOs and all statements concerning the Funds such

“guaranteed”, “safe and reliable” were referencing Agency bonds. Accordingly, the

Court concludes that Defendants are exempt from the Investment Advisers Act under

the exception as provided in the definition of investment adviser. See 15 U.S.C. § 80b2(a)(11)(E). 

Accordingly, the Court DENIES Plaintiff’s motion for summary judgment and

GRANTS Defendants’ motion for partial summary judgment as to the first two causes

of action under sections 206(1), 206(2) and 206(4) of the Investment Advisers Act and

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Rule 206(4)-8. .

E. Evidentiary Objections

Plaintiff filed evidentiary objections. (Dkt. No. 77-18.) The Court notes its

objections. To the extent that the evidence is proper under the Federal Rules of

Evidence, the Court considered the evidence. To the extent that the evidence is not

proper, the Court did not consider it. 

F. Defendants’ Motion to Set Aside Default

Defendants move to set aside the default entered against Relief Defendants

Cavan Private Equity Holdings, LLC (“Cavan”) and Lucky Star Events, LLC (“Lucky

Star”). While Cavan and Lucky Star have not answered the complaint, they have been

“otherwise defending” the lawsuit. Plaintiff opposes arguing that ABS Manager and

Price improperly have moved to set aside default instead of Cavan and Lucky Star. 

Second, SEC argues that they have never appeared in this matter and it istheir culpable

conduct that led to the entry of default. 

6

On January 15, 2014, Plaintiff moved for default as to Cavan and Lucky Star. 

(Dkt. No. 58.) Default was entered on January 16, 2014 for failure to “plead or

otherwise defend.” (Dkt. No. 59.) Defendants note that while there are five Relief

Defendants, Plaintiff only sought default as to two of them. Cavan is owned by

Defendant Price and Lucky Star is owned by Price’s wife. According to the Complaint,

the SEC alleges that the Funds improperly paid management fees to Lucky Star and

Cavan. In this case, the personal and legal interests of Defendants are closely tied and

aligned with the Relief Defendants. Therefore, while Defendants filed the motion

instead of Lucky Star and Cavan, the Court will allow the motion considering the close

knit relationship between all defendants. 

SEC also argues that the motion is not even timely, as it was filed on April 1, 6

2014, past the March 28, 2014 motion cut-off date. Defendants maintain that clerical

errors caused the delay. As noted on the docket, Defendants attempted to file their

motion to set aside default on March 28, 2014; however it was stricken due to failure

to obtain a hearing date. (Dkt. Nos. 63, 65.) Due to the clerical error, the Court

concludes that Defendants’ motion is timely. 

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According to Federal Rule of Civil Procedure 55(c), “[t]he court may set aside

an entry of default for good cause . . . .” Fed. R. Civ. P. 55(c). The good cause

standard under Rule 55(c) is identical to the standard governing vacating a default

judgment under Rule 60(b). Franchise Holding II, LLC v. Huntington Rests. Group,

Inc., 375 F.3d 922, 925 (9th Cir. 2004); TCI Group Life Ins. Plan v. Knoebber, 244

F.3d 691, 696 (9th Cir. 2001). The decision to set aside an entry of default is at the

discretion of the trial court judge. Brandt v. American BankersInc. Co. of Florida, 653

F.3d 1108, 1110 (9th Cir. 2011). The moving party bears the burden of showing the

following factors: (1) whether the defendant engaged in culpable conduct that led to

the default; (2) whether the defendant has a meritorious defense; and (3) whether lifting

the default would prejudice the plaintiff. Franchise Holding II, 375 F.3d at 926. 

“Default is not to be freely granted, however, as “a case should, whenever possible, be

decided on the merits.” TCI Group, 244 F.3d at 697. 

Defendants argue they did not engage in culpable conduct as they have been

defending the case. Both entities are subject to and complying with the preliminary

injunction order issued by this Court which included a wide array of equitable orders

to maintain the status quo, and to provide accountings to the SEC. (Dkt. No. 35.) Price

has also appeared and defended the claims in this case including those involving the

Relief Defendants. Plaintiffs maintain that Cavan and Lucky Star engaged in culpable

conduct by not answering the complaint once they had notice of the lawsuit when Mr.

Chester, counsel for Defendants, accepted service of the complaint on their behalf. 

Based on the proceedings in this case, the Court concludes the Defendants did not

engage in culpable conduct as they have been involved in defending this case. 

Defendants contend there is a genuine issue offact whether the funds transferred

to Cavan and Lucky Star were wrongfully received based on ill gotten gains and

whether they were entitled to pay themselves. SEC argues that Cavan and Lucky Star

failed to produce competent evidence that they have a meritorious defense to the claim

that they are in possession of investor money that was wrongfully transferred to them

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by Defendants. As discussed above on Plaintiff’s motion for summary judgment, there

is a genuine issue of disputed material fact whether Defendants violated the securities

laws. As such, this factor weighs in favor of Defendants. 

Defendants further contend that the SEC will not be prejudiced because the SEC

has been conducting discovery as to these Relief Defendants. In opposition, SEC

argues it will be prejudiced because it will be hindered in its ability to conduct

discovery asto these relief defendants. When the SEC attempted to take the deposition

of Lucky Star, Chester indicated he was not counsel for Lucky Star, so it spent weeks

attempting to effect service of a deposition notice. When it became clear that Lucky

Star was evading service, the SEC decided that it would simply take defaults of Cavan

and Lucky Star. Plaintiff contends that Defendants waited several months until April

1, 2014 to move to set aside the defaults. 

In reply, Defendants assert that Plaintiff has conducted discovery as the Relief

Defendants. While the deposition of Mrs. Price was not yet conducted, it was not due

to Defendants. Defense counsel, Mr. Chester, informed the SEC that a representative

from Lucky Star and its counsel were available for deposition on November 5th or 6th;

but SEC never responded and did not take further action to obtain a deposition. As for

Cavan, the SEC did not issue a deposition subpoena specifically for Cavan because it

deposed Cowan and Price, who are also representatives of Cavan. Moreover,

Defendants produced documents to the SEC related to Cavan. The Court concludes

that the SEC will not be prejudiced as it has conducted discovery as to Cavan and

appears to only need to depose Lucky Star’s representative. 

Both parties have been litigating the case even though the Relief Defendants

never filed an answer. The Complaint was served on February 22, 2013. It was not

until January 15, 2014, almost a year later, that the SEC moved for entry of default. 

Then it was not until April 1, 2014 that Defendants moved to set aside the default. 

When it became difficult to schedule the deposition of Mrs. Price, the SEC sought entry

of default. 

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Based on the fact that Relief Defendants Cavan and Lucky Star were otherwise

defending the lawsuit, the Court finds good cause and grants Defendants’ motion to set

aside the defaults entered against Cavan and Lucky Star. While Defendants argue that

the claims against Relief Defendants are not ripe until the Court determines that

Defendants misappropriated funds and transferred those ill gotten gains to Cavan and

Lucky Star, or that they have been “otherwise defending the case” by participating in

discovery, that does not preclude them from filing an answer. According to the Federal

Rule of Civil Procedure 12(a), Relief Defendants must file an answer to the complaint. 

Conclusion

Based on the above, the Court DENIES Plaintiff’s motion for summary judgment

on all causes of action; GRANTS Defendants’ motion for partial summary judgment

as to the first two causes of action; and GRANTS Defendants’ motion to set aside

default against Relief Defendants Cavan Private Equity Holdings, LLC and Lucky Star

Events, LLC. Relief DefendantCavan and Lucky Star shall file an answer within seven

(7) days from the date this order is “filed.” While the other Relief Defendants are not

before the Court on motion, the Court recommends that the other Relief Defendants

also file an answer. The hearing set for June 13, 2014 shall be vacated. 

IT IS SO ORDERED. 

DATED: June 11, 2014

HON. GONZALO P. CURIEL

United States District Judge

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