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Jalbert v. Securities & Exchange Commission

United States District Court, D. Massachusetts

August 22, 2018

CRAIG R. JALBERT, in his capacity as Trustee of the F2 Liquidating Trust, on behalf of himself and all others similarly situated, Plaintiff,
v.
SECURITIES AND EXCHANGE COMMISSION, Defendant.

          MEMORANDUM AND ORDER ON DEFENDANT'S MOTION TO DISMISS

          F. DENNIS SAYLOR IV, UNITED STATES DISTRICT JUDGE.

         This is 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.

         F-Squared 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.”

         In 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.

         The 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.

         I. Background

         A. Factual Background

         The facts are set forth as described in the complaint, attached exhibits, and public record.

         1. F-Squared's Securities Violations

         F-Squared 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. ¶ 1).[1] F-Squared would apply ETF trend data to determine whether a particular ETF was in or out of the AlphaSector portfolio. (Id. ¶ 2).

         Between 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).[2] 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).[3]

         By June 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. ¶ 5).[4] 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. ¶ 7).

         2.The Settlement with the SEC

         At some 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.

         The 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).

         Among 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 compliance. (Id.).

         The “Offer of Settlement” also included the following language:

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 of law;
(iii) Proceedings before, and an initial decision by, a hearing officer;
(iv) All post-hearing procedures; and
(v) Judicial review by any court.

17 C.F.R. 201.240(c)(4) (emphasis added).

         F-Squared 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.).

         3.Later Developments

         On July 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).

         On June 5, 2017, the Supreme Court issued its opinion in Kokesh, described in greater detail below.

         B. Procedu ...


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