United States District Court, D. Massachusetts
MEMORANDUM AND ORDER ON DEFENDANTS' MOTIONS TO
Dennis Saylor, IV United States District Judge.
an action arising out of the allegedly fraudulent operation
of an investment fund. Plaintiffs were investors in MC2
Capital Canadian Opportunities Fund, LLC (“MC2 Canadian
Fund”), a hedge fund based in Cambridge, Massachusetts,
that ostensibly specialized in Canadian securities
investments. MC2 Canadian Fund was managed by two
individuals, Yasuna Murakami and Avi Chiat.
complaints allege that defendants Donville Kent Asset
Management (“DKAM”), Jason Donville, and Jordan
Zinberg set up MC2 Canadian Fund in partnership with Murakami
and Chiat as a scheme to allow defendants to offer securities
in the United States without being properly registered or
licensed. The fund failed, partly due to risky trading and
partly due to outright theft by Murakami. Murakami has since
pleaded guilty in federal court to one count of wire fraud,
and both men have been sued by the Securities and Exchange
Commission for securities fraud.
have moved to dismiss the complaint, contending that they
were merely consultants to Murakami and Chiat and that they
cannot be held responsible for their actions. At this stage,
of course, the issue is not what actually happened; it is
whether the allegations of the complaints are sufficient to
survive dismissal. The core of the present dispute is whether
the complaints have adequately pleaded the existence of a
partnership between defendants and Murakami and Chiat. For
the foregoing reasons, the Court finds that they have.
However, the complaints fail to allege the existence of an
actionable breach of fiduciary duty, and the claims arising
out of such a claimed breach will be granted. The motions to
dismiss will be otherwise denied.
following facts are as set forth in the amended
International Equities Fund LLC, Tara Holbrook, and other
named plaintiffs were investors in MC2 Canadian Fund. The
fund was co-founded in 2011 by Yasuna Murakami and Avi Chiat,
who were residents of Cambridge and Wellesley, Massachusetts,
respectively. (Am. Compl. ¶¶ 37, 42). Murakami has
never had a securities license and has never been registered
with the federal or Massachusetts securities regulators.
(Id. ¶ 37). Chiat was registered with the
Financial Industry Regulatory Authority, Inc. and the
Commonwealth of Massachusetts as a representative of a
brokerage firm, but those registrations terminated on July
18, 2007. (Id. ¶ 43).
Murakami and Chiat's Fund Formation
The MC2 Capital Partners Fund
and Chiat had previously founded a separate hedge fund called
MC2 Capital Partners Fund, LLC (“MC2 Partners
Fund”) in August 2007. (Id. ¶ 46). MC2
Partners Fund was based in Cambridge, Massachusetts.
(Id.). Murakami and Chiat were investment advisers
to MC2 Partners Fund and were responsible for day-to-day
management of the fund. (Id. ¶ 47).
and Chiat raised more than $2 million from investors in 2007,
ostensibly for investment in MC2 Partners Fund. (Id.
¶ 49). To raise that money, Murakami and Chiat claimed
that their investment strategy entailed “value
investing.” (Id. ¶ 50). However, they
proceeded to engage in risky trades, such as margin trades
and trades in high-volatility industries. (Id.
¶ 52). By the end of 2007, Murakami and Chiat had lost
more than $600, 000 of their investors' money.
(Id. ¶ 53). The following year, they raised
another $1.6 million. (Id. ¶ 49). However,
again through risky trades, they lost another $2 million in
investor money by the end of 2008. (Id. ¶ 56).
addition to trading losses, Murakami also stole money from
MC2 Partners Fund. Between 2008 and 2010, he spent
approximately $1 million in investor money on personal
expenses and travel. (Id. ¶¶ 57-58). By
the end of 2010, MC2 Partners Fund had only $45, 372 in
assets, or 1.2% of the total funds raised from investors.
(Id. ¶ 59). That amount had dwindled even
further to less than $3, 000 when regulators began
investigating Murakami in 2016. (Id.).
The MC2 Value Fund
August 2008, approximately one year after the MC2 Partners
Fund was created, Murakami and Chiat created a second fund,
called the MC2 Value Fund. (Id. ¶¶ 60-61).
Like MC2 Partners Fund, MC2 Value Fund was based in
Cambridge. (Id. ¶ 62). MC2 Value Fund was also
advertised as a “value investing” hedge fund.
(Id. ¶ 64). Murakami and Chiat served as
investment advisers to the fund and raised $535, 000 in
investments. (Id. ¶¶ 66, 68). However,
that money again was lost through risky trades and outright
theft by Murakami. (Id. ¶¶ 64-65). A
portion of the fund's assets was also diverted to prop up
MC2 Partners Fund. (Id. ¶ 69).
Donville and Zinberg
Kent Asset Management, Inc. (“DKAM”) is an
investment-management firm based in Toronto, Ontario.
(Id. ¶ 30). DKAM advertises itself to the
public as an experienced asset-management firm that invests
in Canadian securities. (Id.). Jason Donville, a
resident of Oakville, Ontario, was its founder and principal.
(Id. ¶ 32). Jordan Zinberg, who also resides in
Ontario, was a senior employee and principal of DKAM.
(Id. ¶ 34). Zinberg recruited new investors and
advertised himself to prospective MC2 Canadian Fund investors
as a “portfolio manager” based in the United
States. (Id. ¶¶ 34, 36).
relevant times, DKAM was not licensed, either as a
broker-dealer or as an investment advisory firm, by federal
or state securities regulators in the United States.
(Id. ¶ 31). Similarly, neither Donville nor
Zinberg was licensed, either as a broker-dealer registered
representative or investment adviser, by federal or state
securities regulators, although Donville had been licensed
with FINRA in 2005 and was familiar with U.S. securities
rules and regulations. (Id. ¶¶ 33, 35).
Donville and Zinberg Seek U.S. Investors
2009, Donville and Zinberg started to explore the American
investment management market. (Id. ¶ 70). They
advertised their expertise in Canadian equity markets to
attract American investors interested in diversifying their
investments by purchasing Canadian securities.
(Id.). However, because they were not licensed in
the United States, they initially declined to accept
investments from American nationals. (Id.
to the complaints, to get around that problem, Donville and
Zinberg sought American-based partners who could legally
recruit American investors. (Id. ¶ 74). In May
2011, they agreed with Murakami and Chiat to offer investment
management services to American investors. (Id.
The Formation of MC2 Capital Canadian Opportunities Fund
and MC2 Canada Management, LLC
Canadian Fund was a hedge fund created in May 2011.
(Id. ¶¶ 2, 94). Like Murakami and
Chiat's other two funds, it was Delaware limited
liability company based in Cambridge. (Id.
¶¶ 80, 94-95; Dormitzer Aff. Ex. A). It was an
investment vehicle with no employees. (Am. Compl. ¶ 95).
managing member and administrator of MC2 Canadian Fund was a
limited liability company called MC2 Canada Capital
Management, LLC (“MC2 Canada Management”). MC2
Canada Management was organized in Massachusetts on May 18,
2011. (Id. ¶ 78). The listed principal place of
business was Cambridge, Massachusetts. (Id. ¶
complaints allege that “[t]he purpose of MC2 Canada
Management was primarily to act as the ostensible
administrative manager of the MC2 Canadian Fund and the
vehicle through which Defendants and their partners charged
the Fund investors asset management fees, and to conceal from
U.S. federal and state securities regulators that Defendants
were engaging in securities and investment management
business in the United States and Massachusetts without
required licenses and/or registrations.” (Id.
¶ 80). MC2 Canada Management provided various support
services for MC2 Canadian Fund, such as maintaining and
preserving fund records, reviewing subscription agreements,
and providing office space. (Id. ¶ 81).
complaints further allege that the relationship between
Donville and Zinberg, on the one hand, and Murakami and
Chiat, on the other, was a partnership, in which they agreed
to divide their roles and responsibilities. (Id.
¶¶ 77, 85). They allege that defendants used
Murakami and Chiat as “‘front men'” to
avoid American securities regulators, and therefore did not
disclose their names as part of the leadership of MC2 Canada
Management or list their names as managers or control persons
in documents filed with Massachusetts authorities.
(Id. ¶¶ 90-91). They further allege that a
consulting agreement, under which defendants were to be mere
consultants to MC2 Canada Management and not investment
managers, was a sham to further circumvent securities laws.
(Id. ¶¶ 92-93).
complaints also allege that Donville and Zinberg had greater
ownership, control, and responsibilities as to MC2 Canada
Management than Murakami and Chiat. They allege that Donville
and Zinberg (acting through DKAM) were charged with
“soliciting and recruiting” American investors,
managing investment funds, and evaluating new Canadian
investment opportunities. (Id. ¶ 85). Both
Donville and Zinberg had decision-making authority for MC2
Canadian Fund investment decisions and authority for all
trading. (Id. ¶ 87). Zinberg also had business
cards made advertising himself as a portfolio manager for the
“MC2 Capital Canadian Opportunities Fund” and
listing a Cambridge address and Boston telephone and fax
numbers (and an Ontario telephone number denominated
“Direct”). (Id. ¶ 86). Murakami and
Chiat similarly solicited and recruited American investors;
however, they were charged with running the back office for
MC2 Canadian Fund and providing administrative and marketing
assistance for Donville and Zinberg. (Id. ¶
to the complaints, Donville, Zinberg, and DKAM owned 70% of
MC2 Canada Management and received 70% of the investment
management fees paid by MC2 Canadian Fund investors.
(Id. ¶ 88). Murakami and Chiat owned only 30%
of MC2 Canada Management and received 30% of the fees.
(Id. ¶ 89).
Defendants' Marketing and Trading
complaints allege that Donville, Zinberg, and DKAM, assisted
by Murakami and Chiat, prepared securities offering materials
and distributed them to prospective investors in the United
States. (Id. ¶¶ 101, 125-127). Those
materials represented that DKAM would be managing the money
and would be “responsible for the day-to-day
operation” of the fund, and they repeatedly touted
defendants' expertise as well-known, award-winning, and
reputable Canadian investment managers. (Id.
¶¶ 128, 144, 146).
those materials, defendants alone and together with Murakami
and Chiat offered and sold securities issued by MC2 Canadian
Fund to American-based investors, including plaintiffs.
(Id. ¶¶ 103, 114). Donville and Zinberg
frequently traveled to the United States (to Boston, New
York, and Santa Barbara) to meet potential investors, and
appeared on American television stations. (Id.
¶¶ 115, 116, 118). During those presentations, they
emphasized their expertise and proven track record of
identifying profitable investment opportunities in Canadian
financial markets. (Id. ¶¶ 116, 119).
complaints allege that the offering materials included
several material omissions, including the facts (1) that
Murakami and Chiat had stolen funds from previous investors;
(2) that Donville, Zinberg, and DKAM were not licensed to
engage in the securities business in the United States; (3)
that defendants had structured their participation in MC2
Canadian Fund to circumvent state and federal securities
laws; (4) that MC2 Canadian Fund lacked financial and
reporting controls; and (5) that Donville, Zinberg, and DKAM
were being paid 70% of the fees charged to MC2 Canadian Fund
investors. (Id. ¶ 135). They further allege
that the offering materials also contained several material
misrepresentations, including mischaracterizing Murakami and
Chiat as highly skilled investment managers and
mischaracterizing Murakami and Chiat as managers of the fund
when in fact they were just administrators. (Id.
complaints allege that all sales of MC2 Canadian Fund
securities were treated as having been made by the
partnership and all partners. (Id. ¶ 105). They
allege that defendants referred to Murakami and Chiat as
their “partners, ” and vice versa. (Id.
¶¶ 106-109, 122).
In emails to a potential investor, Zinberg stated:
Eligibility for our funds is based on residency as opposed to
citizenship, and currently only Canadian residents can invest
in our funds. That being said, we run the exact same strategy
for a firm called MC2 Capital based in Boston and that fund
is open to both U.S. and non-US investors. If you would like
me to connect you with our partners from MC2 in Boston please
let me know and they would be happy to discuss the fund with
. . . .
MC2 is simply our distributor and back office for U.S.
clients, Donville Kent runs the money. So yes, in essence
investing in the MC2 Canadian fund would be the same as
investing in the DKAM Capital Ideas Fund LP with the only
differences being that MC2 reports in USD and uses all U.S.
based service providers (legal, fund accounting, etc.).
(Id. ¶ 109; see also Pl. Opp. to Mot.
to Dismiss Ex. 2 at FAQ (explaining that “[u]nless you
are a Canadian resident, you cannot invest directly into the
award-winning Donville Kent Capital Ideas Fund” but the
“MC2 Canadian Fund is the exclusive investment vehicle
that allows seamless access to the same strategy and
active management, ” and the “U.S. back office
and onshore fund is based in Boston”). Donville and
Zinberg also described MC2 Canadian Fund as a fund that they
managed, and referred to it as “their” fund.
(Id. ¶ 120). The complaints also allege that
defendants encouraged Murakami and Chiat to refer to them as
partners, and to represent to potential investors that
defendants would be managing investors' money, in order
to lend their prestige and reputation to the fund and induce
investment. (Id. ¶¶ 123, 129, 130).
complaints allege that plaintiffs relied on those
representations, and defendants' affiliation with the
fund was a key factor in their decision to invest.
(Id. ¶ 124, 130, 143). The complaints further
allege that plaintiffs relied on defendants' advertised
skill and reputation when deciding whether to invest in the
fund. (Id. ¶¶ 144-149).
the time the MC2 Canadian Fund was under defendants'
management, at least 38 individuals invested at least $10
million, of which only $8, 289, 000 was actually transferred
to the fund's trading account. (Id. ¶¶
141-42). The rest was stolen by Murakami from the fund's
bank account. (Id. ¶ 142).
managed the fund from its inception until May 2015.
(Id. ¶ 152). They controlled and oversaw the
fund's brokerage account and directed the trading for the
fund. (Id. ¶ 153). They had discretion as to
how to invest the money. (Id. ¶ 154). The
complaints allege that defendants “received fees likely
exceeding $1 million, from the MC2 Canadian Fund
investors' money” and that “[i]n the last
seven months of their management of the Fund alone,
Defendants received in excess of $242, 000 in fees.”
(Id. ¶ 158).
Suspicious Activity in the Fund
complaints further allege that Donville, Zinberg, and DKAM
became aware of highly suspicious conduct that was strongly
indicative of misconduct. (Id. ¶ 173). As an
example, they cite Murakami's two initial deposits to the
fund, totaling $250, 000, which did not come from investors
but from his previous, failed MC2 Value Fund. (Id.
¶¶ 174-175). They further allege that it was a
“major red flag” that Donville, Zinberg, and DKAM
did not have access to MC2 Canadian Fund's bank account,
where money from investors was initially deposited, and that
Murakami was actively seeking to exclude defendants from
knowing the amount, timing, and destination of new
investors' deposits. (Id. ¶ 165-166, 176,
December 2014, an investor requested a complete withdrawal
from MC2 Value Fund and MC2 Canadian Fund. Murakami withdrew
the entire amount ($963, 753) from the MC2 Canadian Fund
alone. (Id. ¶ 178). The complaints allege that
Murakami falsely told Donville, Zinberg, and DKAM that the
money had gone to several MC2 Canadian Fund investors, and
defendants failed to verify that claim despite the
suspiciously large withdrawal. (Id. ¶ 179). In
another instance, in May 2014, Murakami wired $475, 000, or
5% of the total value of MC2 Canadian Fund, from the
brokerage account to an account he controlled in the name of
MC2 Canada Management, and wired $20, 750 directly to Chiat.
(Id. ¶ 192). Murakami told Donville, Zinberg,
and DKAM that the money was going to an investor, but
defendants never confirmed that claim despite the large
withdrawal. (Id. ¶ 193).
complaints allege that between 2011 and 2016, MC2 Canada
Management defrauded investors by sending them false tax
documents, inflated individual account statements, false and
misleading Schedule K-1s, and fictitious reports of the
fund's performance. (Id. ¶¶ 160-162).
Donville, Zinberg, and DKAM never inquired into MC2 Canadian
Fund's accounting or took steps to implement adequate
controls, despite the fact that they were partners of
Murakami and Chiat and managers of the MC2 Canadian Fund.
(Id. ¶¶ 171, 187).
Defendants Allegedly Walk Away
February 27, 2015, defendants gave notice that they were
terminating their relationship with MC2 Canada Management and
MC2 Canadian Fund, which became effective 90 days later.
(Id. ¶¶ 195, 200). According to the
complaints, despite having represented to investors that they
would be managing the money in the fund, they never told
investors that they were leaving. (Id. ¶¶
197-198). At that time, according to the complaints, there
was enough money in the fund for the investors to withdraw
their investments in full. (Id. ¶ 201). Indeed,
Chiat himself did so as soon as he learned that DKAM would
cease managing the money, also warning family and friends to
withdraw their investments. (Id. ¶ 202).
2015, Murakami was the only one left in charge. (Id.
¶ 204). By the end of 2016, the fund was empty, the
money having gone into Murakami's own pocket or been lost
in bad trades. (Id. ¶¶ 205-207). Between
2011 and 2016, he stole more than $6 million from the fund,
most of it after defendants had departed. (Id.
did not learn that defendants were not, in fact, managing the
fund until long after defendants' departure, and in many
cases not until actions against Murakami and the fund by
Massachusetts regulators were reported in the media.
(Id.¶ 208). Eventually, federal criminal
charges were brought against Murakami. (Id. ¶
211). State and federal agencies brought civil suits against
Murakami, Chiat, MC2 ...