No Relief for|Hedge Fund Manager

     MINNEAPOLIS (CN) – A hedge fund manager and his companies will not get a retrial in a securities fraud case springing from Thomas Petters’ $3.7 billion Ponzi scheme, a federal judge ruled. But they will not suffer civil penalties, and the manager’s wife was dismissed as a relief defendant.
     Marlon Quan and his companies Acorn Capital Group LLC, Stewardship Investment Advisors LLC and ACG II LLC were found liable in February for securities fraud for their participation in Petters’ Ponzi scheme. Petters is serving 50 years for the scam in which he claimed to be selling electronics to big-box retailers.
     Quan and his companies invested hedge fund money in Petters’ scheme, but were not charged with knowingly investing in fraudulent notes, U.S. District Judge Ann Montgomery wrote in her Sept. 19 ruling.
     Quan’s offense was telling investors about “risk management techniques” that were not taken with the money defendants put into Petters’ notes. When the notes began to fail, Quan et al. restructured them to disguise their default while assuring investors that “few defaults have occurred,” Judge Montgomery found.
     The defendants were found liable for securities fraud in February.
     The SEC sought disgorgement of ill-gotten gains and civil penalties.
     Quan sought a new trial, claiming that the verdict was “inconsistent, non-unanimous, against the greater weight of the evidence, and based on inadmissible testimony by the SEC’s expert witness.”
     Relief defendant Florene Quan, Quan’s wife, sought dismissal because she has an ownership interest in two properties, together worth $3 million, that were transferred to her from Marlon Quan’s assets. The SEC sought to include the properties in the assets available for disgorgement.
     The Quans argued that the jury’s finding of liability contradicted itself, and should have required unanimous agreement about which particular action contradicted a particular statute.
     But because the jurors agreed that fraud had been committed, unanimity of verdict is not necessary, Judge Montgomery wrote.
     Defendants also argued for a judgment as a matter of law based on the SEC’s lack of evidence that Quan knowingly covered up defaults.
     But Montgomery ruled: “In deciding a motion for judgment as a matter of law, the court must view the evidence in the light most favorable to the party who prevailed before the jury, making all reasonable inferences in that party’s favor. The court must not substitute its own judgment for that of the trier of fact.”
     After examining the evidence through that lens, Montgomery wrote, it is clear that defendants acted deliberately in misrepresenting the status of the hedge funds.
     Montgomery also dismissed defendant’s claims that the SEC’s expert witness was unqualified to testify, because a retrial based on this would be unlikely to yield different results.
     The court ordered the defendants to pay more than $80 million in disgorgement plus pre-judgment interest. Payments toward class-action settlements brought by investors will count toward that balance.
     Defendants are enjoined from violating the Securities Act but will not be required to pay a civil penalty. The $80 million disgorgement satisfies the goal of civil penalties, which is “to punish the wrongdoer and discourage future violations of the securities laws.”
     The court also determined Florene Quan was more than just an agent of defendants, having invested her own honestly obtained money and time in improving the properties she was transferred. Because she has an ownership interest in the properties, she is not a proper relief defendant and thus her portion of the properties is not subject to the disgorgement. But the SEC may foreclose on Marlon Quan’s interest in the properties.

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