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Saunwin International Equities Fund LLC v. Donville Kent Asset Management Inc.

United States District Court, D. Massachusetts

July 20, 2018

SAUNWIN INTERNATIONAL EQUITIES FUND LLC, Plaintiff,
v.
DONVILLE KENT ASSET MANAGEMENT INC., JASON DONVILLE, and JORDAN ZINBERG, Defendants. TARA HOLBROOK, et al.,, Plaintiffs,
v.
DONVILLE KENT ASSET MANAGEMENT INC., JASON DONVILLE, and JORDAN ZINBERG,, Defendants.

          MEMORANDUM AND ORDER ON DEFENDANTS' MOTIONS TO DISMISS

          F. Dennis Saylor, IV United States District Judge.

         This is 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.

         The 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.

         Defendants 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.

         I. Background

         The following facts are as set forth in the amended complaints.[1]

         A. Factual Background

         Saunwin 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).

         1. Murakami and Chiat's Fund Formation History

         a. The MC2 Capital Partners Fund

         Murakami 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).

         Murakami 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).

         In 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.).

         b. The MC2 Value Fund

         In 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).

         2. Donville and Zinberg

         Donville 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).

         At the 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).

         3. Donville and Zinberg Seek U.S. Investors

         In 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. ¶¶ 71-73).

         According 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. ¶ 77).

         4. The Formation of MC2 Capital Canadian Opportunities Fund and MC2 Canada Management, LLC

         The MC2 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).

         The 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. ¶ 79).

         The 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).

         The 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).

         The 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. ¶ 85).

         According 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).

         5. Defendants' Marketing and Trading Activities

         The 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).[2]

         Using 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).

         The 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. ¶ 136).

         The 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 you.
. . . .
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).

         The 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).

         During 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).

         Defendants 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).

         6. Suspicious Activity in the Fund

         The 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, 185, 189).

         In 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).

         The 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).

         7. Defendants Allegedly Walk Away

         On 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).

         By May 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. ¶ 206).

         Investors 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. ΒΆ 211). State and federal agencies brought civil suits against Murakami, Chiat, MC2 ...


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