Securities and Exchange Commission v. North Star Finance, LLC

          MEMORANDUM OPINION

          GEORGE J. HAZEL UNITED STATES DISTRICT JUDGE

         The Securities and Exchange Commission (“SEC”) moves for summary judgment against the remaining Defendants in this civil enforcement action: Michael K. Martin, his company Capital Source Lending, LLC (“CSL”), Thomas Vetter, and Relief Defendants Charel Winston and Goodwill Funding, Inc. (“Goodwill”).^[1] Martin, who is currently incarcerated, was not served the Motion for Summary Judgment at the location of his incarceration until January 15, 2019. ECF No. 385. On February 13, the Court granted Martin's first Motion for Extension of Time to file a response. ECF No. 388. On March 12, he filed a second Motion for Extension of Time and also sought to Compel Production of Documents. ECF No. 389. On March 29, the Motion was granted in part and denied in part, and Martin was given thirty days to file a response. ECF No. 391. To date, neither Martin nor CSL has filed a response.

         Defendant Vetter, proceeding pro se, filed an Opposition and Cross-motion for Summary Judgment. ECF No. 374. Defendant Winston, also proceeding pro se, filed an Opposition to the SEC's Motion for Summary Judgment, purportedly on behalf of herself and Goodwill Funding, Inc. ECF No. 376. However, that Opposition will only be considered as to Winston, as corporations may only file motions when represented by counsel. See Loc. R. 101.1(a) (D. Md. 2016) (“Individuals who are parties in civil cases may only represent themselves.”). The SEC has also filed an unopposed Motion for Judgment as to Defendants North Star Finance, LLC (“North Star”), Thomas Ellis, and Yasuo Oda. ECF No. 365. No. hearing is necessary. Loc. R. 105.6. For the following reasons, Plaintiff's Motion for Summary Judgment, ECF No. 361, is granted in part and denied in part. Defendant Vetter's Motion for Summary Judgment, ECF No. 374, is granted in part and denied in part. Plaintiff's Motion for Judgment, ECF No. 365, is granted.

         I. BACKGROUND ^[2]

         Defendant Martin is the registered agent of CSL, a limited liability company based in Virginia Beach, VA, with its principal office at Martin's home address. ECF No. 363 ¶¶ 18, 19. Martin has controlled CSL, which promoted transactions involving bank instruments and “monetizing” services since at least 2013. Id. ¶¶ 19, 36. From January 2013 to May 2015, Martin, CSL, and two other companies controlled by Martin obtained approximately $4, 163, 910.28 in deposits from at least 34 investors in connection with bank instrument transactions. Id. ¶ 45. In these transactions, Martin and CSL told investors that they could obtain and monetize bank guarantees, standby letters of credit, and other bank instruments. Id. ¶ 49.

         Martin pled guilty and was convicted of conspiracy to commit wire fraud in March 2018. Id. ¶ 38. As part of this guilty plea, Martin admitted to at least three fraudulent investment schemes from mid-2013 through 2015. Id. ¶¶ 38-44. In the first scheme, he admitted to knowingly and willfully conspiring with a third party on a scheme to falsely and fraudulently solicit payments from individuals in exchange for access to blocked bank accounts that would return 1000% on their investments within approximately thirty days. ECF No. 364-10 at 38-39.^[3]Martin admitted to knowingly falsifying letters on bank letterhead that purported to confirm the existence of these accounts, and to having obtained funds from the victims of this scheme. Id. at 38.

         In the second scheme, Martin admitted that he falsely represented to a member of the board of a charter school that, upon the transfer of $400, 000, he would obtain and monetize a bank instrument which would result in a payout of no less than €105, 000, 000. Id. at 45-46. Martin admitted that he did not use the $400, 000 to monetize a bank instrument and did not pay out any funds to the board member; instead, he used $182, 000 of the transferred funds to pay personal living expenses. Id. at 46-47.

         Martin also admitted to the accuracy of the plea agreement as to the third fraudulent scheme, in which he worked with North Star, Ellis, and Oda after they failed to obtain financing for construction projects for members of the National Association of Home Builders (“NAHB”). ECF No. 364-9 at 6. Martin admitted that he promised the members that in exchange for a “participation fee, ” he would obtain and monetize a bank guarantee to generate funds that North Star would loan to members for their construction projects. Id. For example, one member of NAHB declared that he was told to send $75, 000 to an escrow account that Martin would use to acquire a bank instrument that would generate $4.8 million in funds. ECF No. 5-43 ¶¶ 15-16. These funds would then be loaned to the NAHB member on favorable terms to be used for a real estate project. Id. ¶ 16. Six months later, after myriad inquiries by the NAHB member and just as many false reassurances by Martin and Ellis that the money was forthcoming, Martin agreed to refund $60, 000 of the $75, 000. Id. ¶ 29. Martin explained that he was keeping the other $15, 000 because he was ready to fund the transaction and accused the NAHB member of backing out of the agreement. Id.

         The SEC, through expert testimony, has asserted that investments of this kind do not exist, and no defendant has offered any evidence to the contrary. See ECF No. 363 ¶¶ 26-29. Indeed, despite his continued promises to the victims of his scheme that he could acquire and monetize bank guarantees, Martin repeatedly admitted at his deposition that he does not fully understand what a bank guarantee is or how it would or could be monetized. See ECF No. 364-2 at 15, 16, 25, 26, 27.

         Defendant Vetter was a member of NAHB's Board of Directors. ECF No. 363 ¶ 15. He began acting as a consultant for North Star in November 2013. ECF Nos. 374 ¶¶ 6-8, 363 ¶ 83. The consulting agreement stated that Vetter was to be paid “$5, 000 per project upon signing of Term sheet with Company and Builder Client.” ECF No. 364-15 at 10. On at least a few occasions, he was paid one-third of the fees each builder paid to North Star. See ECF No. 364-1 at 82-83. Vetter introduced Ellis and North Star to the NAHB builders at its annual meeting in Las Vegas, Nevada in February 2014. ECF No. 87 ¶¶ 28-30. At this meeting, Ellis pitched NAHB members on a “100% debt financing” opportunity requiring a “$30, 000 refundable Earnest Money and processing fee deposit.” ECF No. 374-9 at 3, 7. Though a disclaimer was read following the presentation stating that the presentation was “for the builders (sic) information only, ” in the two months following the presentation, at least 12 NAHB members applied for the program. ECF No. 87 ¶ 30-31. Vetter helped facilitate these applications, having followed up with attendees who expressed interest with additional details and acting as the “front person” for Ellis with NAHB members. ECF No. 363 ¶¶ 91-92.

         Vetter admitted that he was initially “extremely skeptical of this 100 percent financing, ” and attempted to research Ellis but found little except for a red flag on a website called “Ripoff Report” that he claims he later discovered was an “extortion website.” ECF No. 364-1 at 18-19. Vetter claims he was reassured by the fact that North Star was working with Citywide Lending Group, an entity that claimed to be a broker registered with the SEC. See ECF No. 374-10 at 6-9. Ellis had also provided him with a newspaper article describing a project that Ellis claimed to have funded. ECF No. 364-1 at 37. Vetter unsuccessfully attempted to follow up with anyone associated with the project to verify Ellis' involvement. Id. In February 2014, a builder expressed concern about Ellis' refusal to provide references, and Vetter wrote to Ellis telling him to “[s]ay you are hamstrung because of the attorney's recommendation, and that it is out of your hands.” ECF No. 364-1 at 151. At his deposition, Vetter did not recall sending this email and was unable to explain to what attorney recommendation he was referring. Id. at 43-44.

         Vetter contends that, after funding failed to materialize for any of his builders, he resigned from his consulting agreement with North Star on June 1, 2014. ECF No. 374-10 at 3. But in his deposition he explained, in reference to a June 19, 2014 email that he received naming him as responsible for “educat[ing] the borrower, ” that he had been “front person” as part of his consulting role. ECF No. 364-1 at 53. Vetter consistently emphasized that his role was not to explain the loan structure, but rather to pass along information on the loan structure created by Ellis. Id. Despite his supposed resignation, Vetter continued to send and receive program-related emails. On July 9, 2014, he proposed to Ellis that “[o]nce we get the first funding . . . lets go over all builders in the closing pipeline and pick the ones we want to continue to do business with and offer them the first slots for new project funding to them.” Id. at 169. On September 24, 2014, Ellis sent an email to Vetter, Oda, and another North Star employee announcing a new loan program in which the applicants “do not pay back the loan.” Id. at 176. In this email, Ellis asked Vetter to put the descriptions onto the North Star website, and Vetter did so. Id; id. at 67-68. Vetter testified that no one attempted to apply for this new program. Id. at 176.

         Vetter also continued to communicate with NAHB members, passing along updates on the status of their applications. On October 24, 2014, he informed one member that the bank guarantee purchases had been completed, and only a final signature was required to conclude the transactions. ECF No. 364-1 at 194. By November 25, 2014, when the project still had not closed, Vetter emailed the member to say that “It is not as if they are deliberately delaying the process. Mike [Martin] has $3.5 million of his own money in this and I am sure he wants it Reimbursed (sic).” Id. at 197. Vetter further explained that he did not get paid until the projects close-a claim he was later unable to explain. Id. He sent similar emails to other NAHB members inquiring about the status of their projects. Id. at 200-05.

         For his part, Vetter also challenges the SEC investigation as based on the suborned testimony of Andy Hutchison, one of the builders who applied for a loan from North Star. See ECF No. 374 ¶¶ 9-21. Vetter's allegation of suborned testimony is based on edits made to Hutchison's declaration by an SEC attorney. See ECF No. 374-6.

         II. STANDARD OF REVIEW

         Under Fed.R.Civ.P. 56, summary judgment is appropriate only when the Court, viewing the record as a whole and in the light most favorable to the nonmoving party, determines that there exists no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-24 (1986). The burden is on the moving party to demonstrate that there exists no genuine dispute of material fact. See Pulliam Inv. Co. v. Cameo Props., 810 F.2d 1282, 1286 (4th Cir. 1987). To defeat the motion, the nonmoving party must submit evidence showing facts sufficient for a fair-minded jury to reasonably return a verdict for that party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986). Additionally, a party must be set forth admissible facts in order for them to be considered in support of or opposition to a motion for summary judgment. See Williams v. Silver Spring Volunteer Fire Dep't, 86 F.Supp. 398, 407 (D. Md. 2015).

         Cross-motions for summary judgment require that the Court consider “each motion separately on its own merits to determine whether either of the parties deserves judgment as a matter of law.” Rossignol v. Voorhaar, 316 F.3d 516, 523 (4th Cir. 2003). “The Court must deny both motions if it finds a genuine issue of material fact, ‘but if there is no genuine issue and one or the other party is entitled to prevail as a matter of law, the court will render judgment.'” Wallace v. Paulos, No. DKC 2008-0251, 2009 WL 3216622, at *4 (D. Md. 2009) (citation omitted).

         A district court is obligated to thoroughly analyze an unopposed motion for summary judgment to determine whether the moving party is entitled to summary judgment as a matter of law. See Maryland v. Universal Elections, Inc., 729 F.3d 370, 380 (4th Cir. 2013). “Although the failure of a party to respond to a summary judgment motion may leave uncontroverted those facts established by the motion, the district court must still proceed with the facts it has before it.” Robinson v. Wix Filtration Corp., 599 F.3d 403, 409 n.8 (4th Cir. 2010) (internal quotations omitted).

         III. DISCUSSION

         Plaintiff contends that Defendants Martin and CSL violated Section 17(a) of the Securities Act, 15 U.S.C.A. § 77q(a); Section 10(b) of the Exchange Act, 15 U.S.C.A. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5; Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e(a), (c); and Section 15(a) of the Exchange Act, 15 U.S.C. § 78o(a)(1).

         Plaintiff alleges that Defendant Vetter violated Section 20(e) of the Exchange Act, 15 U.S.C. § 78t(e). Plaintiff also argues that Defendant Vetter violated Section 15(a) of the Exchange Act, 15 U.S.C. § 78o(a)(1).

         Due to these violations, Plaintiff asks the Court both to enjoin Defendants from future violations of the Securities Laws and to disgorge all benefits Defendants have derived from their misconduct. Finally, Plaintiff seeks civil monetary penalties from all Defendants. Plaintiff also asserts that Relief Defendants Winston and Goodwill ...