Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_14-cv-01552/USCOURTS-casd-3_14-cv-01552-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

W. BYRON MITCHELL, JR. and

NANCY L. MITCHELL, individuals,

Plaintiffs,

CASE NO. 14cv1552-GPC-JLB

ORDER FOLLOWING ORDER TO

SHOW CAUSE 

v.

TOTAL WEALTH MANAGEMENT

INC., a California corporation;

ALTUS CAPITAL MANAGEMENT,

LLC, a Delaware limited partnership;

ALTUS CAPITAL OPPORTUNITY

FUND LP, a Delaware limited

partnership; CAPITA ADVISORS,

INC., a California corporation;

FINANCIAL COUNCIL, INC., a

California corporation; PINNACLE

WEALTH GROUP, INC., a California

corporation; JACOB K. COOPER;

NATHAN P. MCNAMEE;

DOUGLAS D. SHOEMAKER; and

DOES 1 through 100, inclusive,

Defendants.

On February 6, 2015, Receiver Kristen A. Janulewicz (“Receiver”) filed a Notice

of Pending Receivership regarding her appointment as a temporary Receiver for Total

Wealth Management Inc., and its subsidiaries and affiliates, including, but not limited

to Atlus Capital Management, LLC, in Securities and Exchange Commission v. Total

Wealth Management, Case No. 15-cv-226-BAS (DHB) (the “Receivership Action”). 

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(ECF No. 49.)

On February 12, 2015, District Judge Cynthia Bashant (hereinafter “the

Receivership Court”) issued a preliminary injunction order, wherein she appointed the

Receiver as a permanent receiver. (Case No. 15-cv-226-BAS (DHB), ECF No. 8.) The

order appointing a permanent receiver provides that: 

[E]xcept by leave of this Court, during the pendency of this receivership,

all clients, investors,trust beneficiaries, note holders, creditors, claimants,

lessors and all other persons or entities seeking relief of any kind, in law

or in equity, from Defendant Total Wealth Management, Inc., or its

subsidiaries or affiliates . . . are hereby restrained and enjoined from,

directly or indirectly, with respect to these persons and entities . . .

commencing, prosecuting, continuing or enforcing any suit or proceeding

(other than the present action by the SEC or any other action by the

government) against any of them . . . .

(Id. at 11.) 

On February 17, 2015, this Court issued an Order to Show Cause (“OSC”) why

this action should not be stayed during the pendency of the receivership in Securities

and Exchange Commission v. Total Wealth Management, Case No. 15-cv-226-BAS

(DHB). (ECF No. 51.) Plaintiffs and the Receiver both filed responses to the OSC on

March 6, 2015 (ECF Nos. 52 & 53.) None of the other Defendants filed responses. On

March 13, 2015, Plaintiffs filed a reply brief. (ECF No. 54.) 

BACKGROUND

A. The SEC Action

On April 15, 2014, the Securities and Exchange Commission (“SEC”) issued an

Order Instituting Administrative and Cease-and-Desist Proceedingsin its investigation

of Total Wealth Management, Inc. (“TWM”), Jacob Keith Cooper (“Cooper”), Nathan

McNamee (“McNamee”), and Douglas David Shoemaker (“Shoemaker”). (ECF No.

53, Ex. D.) According to the SEC’s order, McNamee is the current president and chief

compliance officer of TWM, an investment adviser representative for TWM, and the

sole founder and operator of Capita Advisors, Inc. (“Capita”). (Id., Ex. D ¶¶ 1, 3, 11.) 

Shoemaker is a co-founder and former chief compliance officer of TWM, an

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investment adviser representative for TWM, and the sole founder and operator of

Financial Council, Inc. (“Financial Council”). (Id., Ex. D ¶¶ 1, 3, 12.) The SEC

alleges that TWM entered into revenue sharing arrangements with several investment

funds (including Altus funds), such that when TWM placed its clients’ investments in

those funds, TWM received sharing fees. (Id., Ex. D ¶¶ 25, 53.) TWM, in turn, paid

Cooper, McNamee, and Shoemaker a portion of the revenue sharing fees it received. 

(Id., Ex. D ¶ 26.)

The SEC further alleges that “[a]bout the same time that the Altus Capital Fund

was established [by Cooper], Cooper formed Pinnacle, and he advised Shoemaker and

McNamee to formFinancial Council and Capita, respectively.” (Id., Ex. D ¶ 27.) After

forming their respective “consulting” companies, McNamee and Shoemaker would

routinely invoice TWM for “consulting fees,” even though McNamee and Shoemaker

did not do any consulting work. (Id., Ex. D ¶ 28.) The money TWM paid in response

to these invoicesinstead represented McNamee and Shoemaker’s shares ofthe revenue

sharing fees. (Id.)

In addition, McNamee and Shoemaker are alleged to have known of, and aided

and abetted, TWM and Cooper’s failure to adequately disclose material information

about the revenue sharing fee arrangement because they (1) reviewed brochures,

offering memoranda, statements, Forms ADV, and other materials that Total Wealth

provided to its clients, (2) signed off on these materials, (3) met with prospective

clients and investors, (4) prepared investment recommendations for those clients, and

(5) sold the Altusinvestmentsto clients, all the while failing to disclose to the investors

the truth about the revenue sharing agreements. (Id., Ex. D ¶¶ 41-42.) 

The SEC action seeks to determine, among other things, what remedial action

should be taken against McNamee and Shoemaker, including “civil penalties and

disgorgement.” (Id., Ex. D ¶¶ C, E, H, I.)

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B. Plaintiffs in this Case

Plaintiffs W. Byron Mitchell, Jr. and Nancy L. Mitchell (the “Mitchell

Plaintiffs”) are healthcare professionals of retirement age who invested over one

million dollars with Defendants in June of 2010. (Complaint, ECF No. 1 ¶¶ 14-16, 38.) 

After becoming concerned about the returns they were receiving on their accounts, the

lack of communication from Defendants, and the poor handling of their accounts,

Plaintiffs requested that Defendants liquidate all of their assets. (Id. ¶¶ 62.) Plaintiffs

allege that some liquidations did take place, but in some cases, TWM retained the cash

in “cash holdings” and still charged Plaintiffs management fees. (Id.) 

Plaintiffs because aware of the SEC action instituted on April 15, 2014, and filed

this action soon after on June 26, 2014. (Id. 63.) In their Complaint, Plaintiffs allege

fifteen claims for relief, including violations of federal and California securities laws,

unfair competition, constructive fraud, breach of fiduciary duty, accounting, and

common counts. (Id. ¶¶ 97-208.) 

DISCUSSION

The parties dispute whether the injunction issued by the Receivership Court

should be extended to stay this action. TheReceiver acknowledges that the preliminary

injunction does not bar prosecution of litigation against the individual defendants in

this case or entities not deemed to be Receivership Entities . (ECF No. 52 at 1.) 1

However, for practical reasons, the Receiver recognizes that the injunction “has

significant implications” in connection with discovery, summary judgment, and

potential judgment enforcement actions that may be undertaken against the individual

and non-receivership defendants. (Id. at 4.) Additionally, the Receiver believes “that

those defendants in this matter to whom the litigation stay does not apply will almost

certainly become subjects of the Receiver’s investigation effort, and may themselves

The Receiver defines the “Receivership Entities” as “Total Wealth Management, Inc. and 1

its subsidiaries and affiliates, including but not limited to Altus Capital Management, LLC.” (ECF

No. 52 at 1.)

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become defendants or relief defendants in the Receivership Case or in Receivership

Asset recovery litigation brought by the Receiver.” (Id. at 5.) For this reason, failing

to impose a blanket stay in this case could result in a “race to the courthouse,” wherein

some claimants may obtain relief first, to the detriment of other claimants. (Id.) The

Receiver also argues that judicial economy militates against evaluating claims in a

piecemeal fashion. (Id.) Accordingly, the Receiver does not object to the Court

staying the action in its entirety pending resolution of the Receivership Case. (Id.)

The Mitchell Plaintiffs concede that the injunction stays this action against

defendants TWM, Altus Capital Opportunity Fund LP (“Altus Fund”), Altus Capital

Management, LLC (“Altus Capital”), and Cooper. (ECF No. 53 at 5-6.) However, they

ask this Court to allow them to proceed in litigating their claims against McNamee,

Shoemaker, Capital, and Financial Council (collectively, the “McNamee/Shoemaker

Defendants”), because the Mitchell Plaintiffs seek only the personal assets of these

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defendants, which they contend are not part of the Receivership res. (Id. at 2, 5-6.) 

The Mitchell Defendants also ask that the Court allow them to proceed with discovery

against the defendants subject to the Receivership action because it will be directly

relevant to proving up liability and damages against the McNamee/Shoemaker

Defendants. (Id. at 2-3.) The crux of the Mitchell Plaintiffs’ argument is that they will

suffer substantial injury if they are not allowed to proceed because they both are of

advanced age and cannot retire until they recover their “nest egg” from Defendants. 

(Id.)

“The power of a district court to impose a receivership or grant other forms of

ancillary relief . . . derives from the inherent power of a court of equity to fashion

effective relief.” SEC v. Wencke, 622 F.2d 1363, 1369 (9th Cir. 1980). The “primary

purpose of equity receivershipsisto promote orderly and efficient administration ofthe

 The Mitchell Plaintiffs repeatedly use this term even though Capita and Financial Council 2

are corporations.

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estate by the district court for the benefit of creditors.” SEC v. Hardy, 803. F.2d 1034,

1038 (9th Cir. 1986). In order to effectuate this goal, the receivership court has

authority to enjoin individuals from proceeding in another court in order to prevent

interference with a receivership action. Wencke, 622 F.2d at 1371-72 (upholding

district court’s order staying state action by nonparties against receivership entities

because “[t]here is a strong federal interest in insuring effective relief in SEC actions

brought to enforce the securities laws”). 

This case is somewhat unique procedurally in that the parties are asking this

Court, as opposed to the Receivership Court, for permission to proceed. Given that

Plaintiffs and the Receiver agree that the McNamee/Shoemaker Defendants are not

currently part of the Receivership Action, the default position would be to allow

Plaintiffs to proceed forward in prosecuting their case against these defendants. What

gives the Court pause is the Receiver’s statement that these defendants “will almost

certainly become subjects of the Receiver’s investigation effort, and may themselves

become defendants or relief defendants in the Receivership Case or in Receivership

Asset recovery litigation brought by the Receiver.” (ECF No. 52 at 5.) This suggests

that assets of the McNamee/Shoemaker Defendants may at some future date become

part of the receivership res. Thus, allowing Plaintiffs to proceed forward against these

defendants could put them ahead of other claimants in recovering receivership assets.

At this point, however, that eventuality is entirely speculative and this Court has

insufficient facts before it to support a total stay of the proceedings in this Court. As

Plaintiffs point out, they are of advanced age and want to retire. (ECF No. 53 at 9.) 

Until they are able recover their “nest egg,” retirement is out of reach. (Id.) The Court

finds that, at this stage, Plaintiffs’ interest in proceeding outweighs the Receiver’s

interest in preventing any future, theoretical impact on the receivership res. See S.E.C.

v. Universal Fin., 760 F.2d 1034, 1037-38 (9th Cir. 1985) (considering, among other

things, “whether the moving party will suffer substantial injury if not permitted to

proceed” in deciding whether to except applicants from a blanket receivership stay)

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quoting SEC v. Wencke, 742 F.2d 1230, 1231 (9th Cir. 1984)). For this reason,

Plaintiffs’ request to proceed with their case against the McNamee/Shoemaker

Defendants is GRANTED.

The Court turns now to Plaintiffs’ request for permission to conduct discovery

against TWM, Altus Fund, Altus Capital, and Cooper for purposes of pursuing their

claims against the McNamee/Shoemaker Defendants. (ECF No. 53 at 10.) Plaintiffs

contend that the preliminary injunction issued by the Receivership Court does not

address discovery. (Id.) This Court disagrees. The Court finds that discovery falls

squarelywithin the Receivership Court’s order prohibiting investors from“prosecuting

[or] continuing . . . any suit or proceeding” against the defendants in the Receivership

Action. (See Case No. 15-cv-226-BAS (DHB), ECF No. 8 at 11.) Moreover, if this

Court were to allow Plaintiffs to propound discovery against TWM, Altus Fund, Altus

Capital, and Cooper, the Receiver would be required to expend time and funds from

the receivership res in order to respond. The purpose of the receivership and the

litigation stay issued by the Receivership Court is to protect receivership assets and to

allow the Receiver time to focus on identifying and recovery receivership assets. (Id.

at 2, 9-10) (finding that “[g]ood cause exists to believe that, unless restrained and

enjoined by order of this Court, Defendants will dissipate, conceal, or transfer assets”

and that a permanent receiver was necessary “to conduct such investigation and

discovery as may be necessary to locate and account for all of the assets” and “take

such action as is necessary and appropriate to preserve and take control of and to

prevent the dissipation, concealment, or disposition of any assets”). Thus, to allow

discovery against TWM, Altus Fund, Altus Capital, and Cooper would be contrary to

the spirit and intent, in addition to the express language, of the Receivership Court’s

injunction order. Plaintiffs’ request to conduct discovery against TWM, Altus Fund,

Altus Capital, and Cooper is, therefore, DENIED.

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In so ruling, the Court is cognizant of the fact that the Receivership Court is

more knowledgeable about the status of the SEC’s administrative action and the

Receivership Action. Absent an intervening ruling from the Receivership Court that

affects this case, the Court orders the Receiver to provide this Court with an update

regarding the status of Securities and Exchange Commission v. Total Wealth

Management, Case No. 15-cv-226-BAS (DHB) on or before August 14, 2015. 

CONCLUSION

For the foregoing reasons, the Court:

1. STAYS this case as to Defendants TWM, Altus Capital, Altus Fund, and

Cooper ;

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2. GRANTS Plaintiffs’ request to proceed with their case against the

McNamee/Shoemaker Defendants;

3. DENIES Plaintiffs’ request to conduct discovery against TWM, Altus

Fund, Altus Capital, and Cooper; and,

4. ORDERS the Receiver to provide thisCourt with an update regarding the

status of Securities and Exchange Commission v. Total Wealth Management, Case No.

15-cv-226-BAS (DHB) on or before August 14, 2015. 

IT IS SO ORDERED. 

DATED: May 12, 2015

HON. GONZALO P. CURIEL

United States District Judge

The Clerk of Court entered a default against Pinnacle Wealth Group, Inc. on September 15, 3

2014 (ECF No. 24), so the Court need not include that defendant in the instant stay. 

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