United States District Court, D. Massachusetts
CRAIG R. JALBERT, in his capacity as Trustee of the F2 Liquidating Trust, on behalf of himself and all others similarly situated, Plaintiff,
SECURITIES AND EXCHANGE COMMISSION, Defendant.
MEMORANDUM AND ORDER ON DEFENDANT'S MOTION TO
DENNIS SAYLOR IV, UNITED STATES DISTRICT JUDGE.
a suit by a bankruptcy trustee challenging the authority of
the Securities and Exchange Commission to order disgorgement
as part of a settlement of an administrative proceeding. The
settlement in question occurred in 2014. The trustee filed
suit three years later, seeking to invalidate that
settlement, on the ground that the disgorgement was unlawful.
Investments, Inc., a Massachusetts-based registered
investment adviser, was charged in an SEC administrative
proceeding with using materially false marketing materials.
In December 2014, it entered into a settlement with the SEC.
As part of that settlement, it agreed to pay disgorgement of
$30 million and a civil money penalty of $5 million. In
addition, it expressly agreed to waive “judicial
review” of that settlement by “any court.”
2015, F-Squared filed for bankruptcy, and Craig Jalbert was
appointed as trustee of plaintiff F2 Liquidating Trust, the
successor-in-interest to F-Squared.
trustee now challenges that settlement, contending that the
disgorgement portion of the order was unlawful in light of
the Supreme Court's opinion in Kokesh v. SEC,
137 S.Ct. 1635 (2017). The SEC has moved to dismiss the
complaint for lack of subject-matter jurisdiction and failure
to state a claim. For the following reasons, the motion to
dismiss will be granted.
facts are set forth as described in the complaint, attached
exhibits, and public record.
F-Squared's Securities Violations
Investments, Inc. was a Wellesley-based investment adviser.
(Compl. Ex. A ¶ 5). It was founded by Howard Present in
2006. (Id. ¶ 6). It launched its first
“AlphaSector” index in October 2008. (Id.
¶ 5). The “AlphaSector” investment
strategy was an exchange-traded fund (“ETF”)
sector rotation strategy. (Id. ¶
F-Squared would apply ETF trend data to determine whether a
particular ETF was in or out of the AlphaSector portfolio.
(Id. ¶ 2).
October 2008 and September 2013, F-Squared marketed the
AlphaSector strategy. (Id. ¶ 7).
F-Squared's marketing materials included inaccurate
statements portraying AlphaSector indices as actual
performance in the period from April 2001 to September 2008.
(Id. ¶ 29). Specifically, F-Squared claimed the
strategy was “not back[-]tested, ” when in fact
it was. (Id. ¶¶ 1, 7 n.3). In addition,
F-Squared incorrectly applied ETF trend data such that the
AlphaSector strategy implemented buy and sell signals one
week before the price shifts creating the signals actually
occurred. (Id. ¶¶ 2-3).
30, 2014, approximately $28.5 billion had been invested
pursuant to 75 AlphaSector indices. (Id. ¶ 7
n.3). $13 billion of that amount was in mutual-fund assets
sub-advised by F-Squared. (Id. ¶
Most of the assets invested pursuant to AlphaSector indices
were invested through registered mutual funds, other funds,
or separately managed accounts managed by advisers or brokers
who received information from F-Squared. (Id. ¶
Settlement with the SEC
point, the SEC began investigating whether F-Squared had
violated federal securities laws. In December 2014, F-Squared
and the SEC entered into a settlement in order to resolve the
matter. The settlement involved an administrative proceeding,
not a civil enforcement action.
settlement took the form of an “Offer of Settlement of
F-Squared Investments, Inc.” that was accepted by the
SEC, although presumably the terms were negotiated in
advance. The settlement agreement indicated that F-Squared
“submits this Offer of Settlement . . . in anticipation
of public administrative and cease-and-desist proceedings to
be instituted against it by the [SEC]” pursuant to the
Investment Advisers Act of 1940 and the Investment Company
Act of 1940. (Def. Ex. 1 § I).
other things, F-Squared admitted to certain facts;
acknowledged that its conduct violated the federal securities
laws; and admitted that the SEC had jurisdiction over it and
over the matters at issue. (Id. § VII).
F-Squared also “consent[ed] to the entry of the
attached Order by Commission, in which the Commission”
(1) found that F-Squared willfully violated §§ 204,
206, and 207 of the Investment Advisers Act and various rules
promulgated under that act, and aided and abetted a violation
of § 34(b) of the Investment Company Act; (2) ordered
that F-Squared cease and desist from committing any future
violations; (3) ordered that F-Squared “pay
disgorgement of [$30 million] to the United States
Treasury”; (4) ordered that it pay a “civil money
penalty” of $5 million to the Treasury; and (5) ordered
that it comply with certain undertakings, largely relating to
“Offer of Settlement” also included the following
By submitting this Offer, Respondent hereby acknowledges its
waiver of those rights specified in Rules 240(c)(4) and (5)
[17 C.F.R. 201.240(c)(4) and (5)] of the Commission's
Rules of Practice.
(Id. § V). Rule 240(c)(4) provides as follows:
(4) By submitting an offer of settlement, the person making
the offer waives, subject to acceptance of the offer:
(i) All hearings pursuant to the statutory provisions under
which the proceeding is to be or has been instituted;
(ii) The filing of proposed findings of fact and conclusions
(iii) Proceedings before, and an initial decision by, a
(iv) All post-hearing procedures; and
(v) Judicial review by any court.
17 C.F.R. 201.240(c)(4) (emphasis added).
then transferred $35 million to the Treasury Department.
(Compl. ¶ 59). No. portion of that money was paid to the
present or former clients of F-Squared. (Id.).
8, 2015, F-Squared filed for bankruptcy. (Id. ¶
60). Craig Jalbert was appointed by the bankruptcy court as
trustee of the F2 Liquidating Trust, F-Squared's
successor-in-interest. (Id. ¶ 11).
5, 2017, the Supreme Court issued its opinion in
Kokesh, described in greater detail below.