Mitchell et al v. Total Wealth Management Inc. et al

Filing 57

ORDER Following Order to Show Cause: The Court stays this case as to Defendants TWM, Altus Capital, Altus Fund, and Cooper; Grants Plaintiffs' request to proceed with their case against the McNamee/Shoemaker Defendants; Denies Plaintiffs' request to conduct discovery against TWM, Altus Fund, Altus Capital, and Cooper; and, Orders the Receiver to provide this Court with an update regarding the status of Securities and Exchange Commission v. Total Wealth Management, Case No. 15-cv-226-BAS (DHB) on or before August 14, 2015. Signed by Judge Gonzalo P. Curiel on 5/12/15.(All non-registered users served via U.S. Mail Service)(dlg)

1
2
3
4
5
6
7
8

UNITED STATES DISTRICT COURT

9

SOUTHERN DISTRICT OF CALIFORNIA

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24

W. BYRON MITCHELL, JR. and
NANCY L. MITCHELL, individuals,
v.

Plaintiffs,

CASE NO. 14cv1552-GPC-JLB
ORDER FOLLOWING ORDER TO
SHOW CAUSE

TOTAL WEALTH MANAGEMENT
INC., a California corporation;
ALTUS CAPITAL MANAGEMENT,
LLC, a Delaware limited partnership;
ALTUS CAPITAL OPPORTUNITY
FUND LP, a Delaware limited
partnership; CAPITA ADVISORS,
INC., a California corporation;
FINANCIAL COUNCIL, INC., a
California corporation; PINNACLE
WEALTH GROUP, INC., a California
corporation; JACOB K. COOPER;
NATHAN P. MCNAMEE;
DOUGLAS D. SHOEMAKER; and
DOES 1 through 100, inclusive,
Defendants.
On February 6, 2015, Receiver Kristen A. Janulewicz (“Receiver”) filed a Notice

25 of Pending Receivership regarding her appointment as a temporary Receiver for Total
26 Wealth Management Inc., and its subsidiaries and affiliates, including, but not limited
27 to Atlus Capital Management, LLC, in Securities and Exchange Commission v. Total
28 Wealth Management, Case No. 15-cv-226-BAS (DHB) (the “Receivership Action”).
-1-

14cv1552-GPC-JLB

1 (ECF No. 49.)
2

On February 12, 2015, District Judge Cynthia Bashant (hereinafter “the

3 Receivership Court”) issued a preliminary injunction order, wherein she appointed the
4 Receiver as a permanent receiver. (Case No. 15-cv-226-BAS (DHB), ECF No. 8.) The
5 order appointing a permanent receiver provides that:
6
7
8
9
10
11

[E]xcept by leave of this Court, during the pendency of this receivership,
all clients, investors, trust beneficiaries, note holders, creditors, claimants,
lessors and all other persons or entities seeking relief of any kind, in law
or in equity, from Defendant Total Wealth Management, Inc., or its
subsidiaries or affiliates . . . are hereby restrained and enjoined from,
directly or indirectly, with respect to these persons and entities . . .
commencing, prosecuting, continuing or enforcing any suit or proceeding
(other than the present action by the SEC or any other action by the
government) against any of them . . . .

12 (Id. at 11.)
13

On February 17, 2015, this Court issued an Order to Show Cause (“OSC”) why

14 this action should not be stayed during the pendency of the receivership in Securities
15 and Exchange Commission v. Total Wealth Management, Case No. 15-cv-226-BAS
16 (DHB). (ECF No. 51.) Plaintiffs and the Receiver both filed responses to the OSC on
17 March 6, 2015 (ECF Nos. 52 & 53.) None of the other Defendants filed responses. On
18 March 13, 2015, Plaintiffs filed a reply brief. (ECF No. 54.)
19

BACKGROUND

20 A.

The SEC Action

21

On April 15, 2014, the Securities and Exchange Commission (“SEC”) issued an

22 Order Instituting Administrative and Cease-and-Desist Proceedings in its investigation
23 of Total Wealth Management, Inc. (“TWM”), Jacob Keith Cooper (“Cooper”), Nathan
24 McNamee (“McNamee”), and Douglas David Shoemaker (“Shoemaker”). (ECF No.
25 53, Ex. D.) According to the SEC’s order, McNamee is the current president and chief
26 compliance officer of TWM, an investment adviser representative for TWM, and the
27 sole founder and operator of Capita Advisors, Inc. (“Capita”). (Id., Ex. D ¶¶ 1, 3, 11.)
28 Shoemaker is a co-founder and former chief compliance officer of TWM, an
-2-

14cv1552-GPC-JLB

1 investment adviser representative for TWM, and the sole founder and operator of
2 Financial Council, Inc. (“Financial Council”). (Id., Ex. D ¶¶ 1, 3, 12.) The SEC
3 alleges that TWM entered into revenue sharing arrangements with several investment
4 funds (including Altus funds), such that when TWM placed its clients’ investments in
5 those funds, TWM received sharing fees. (Id., Ex. D ¶¶ 25, 53.) TWM, in turn, paid
6 Cooper, McNamee, and Shoemaker a portion of the revenue sharing fees it received.
7 (Id., Ex. D ¶ 26.)
8

The SEC further alleges that “[a]bout the same time that the Altus Capital Fund

9 was established [by Cooper], Cooper formed Pinnacle, and he advised Shoemaker and
10 McNamee to form Financial Council and Capita, respectively.” (Id., Ex. D ¶ 27.) After
11 forming their respective “consulting” companies, McNamee and Shoemaker would
12 routinely invoice TWM for “consulting fees,” even though McNamee and Shoemaker
13 did not do any consulting work. (Id., Ex. D ¶ 28.) The money TWM paid in response
14 to these invoices instead represented McNamee and Shoemaker’s shares of the revenue
15 sharing fees. (Id.)
16

In addition, McNamee and Shoemaker are alleged to have known of, and aided

17 and abetted, TWM and Cooper’s failure to adequately disclose material information
18 about the revenue sharing fee arrangement because they (1) reviewed brochures,
19 offering memoranda, statements, Forms ADV, and other materials that Total Wealth
20 provided to its clients, (2) signed off on these materials, (3) met with prospective
21 clients and investors, (4) prepared investment recommendations for those clients, and
22 (5) sold the Altus investments to clients, all the while failing to disclose to the investors
23 the truth about the revenue sharing agreements. (Id., Ex. D ¶¶ 41-42.)
24

The SEC action seeks to determine, among other things, what remedial action

25 should be taken against McNamee and Shoemaker, including “civil penalties and
26 disgorgement.” (Id., Ex. D ¶¶ C, E, H, I.)
27 ///
28 ///
-3-

14cv1552-GPC-JLB

1 B.

Plaintiffs in this Case

2

Plaintiffs W. Byron Mitchell, Jr. and Nancy L. Mitchell (the “Mitchell

3 Plaintiffs”) are healthcare professionals of retirement age who invested over one
4 million dollars with Defendants in June of 2010. (Complaint, ECF No. 1 ¶¶ 14-16, 38.)
5 After becoming concerned about the returns they were receiving on their accounts, the
6 lack of communication from Defendants, and the poor handling of their accounts,
7 Plaintiffs requested that Defendants liquidate all of their assets. (Id. ¶¶ 62.) Plaintiffs
8 allege that some liquidations did take place, but in some cases, TWM retained the cash
9 in “cash holdings” and still charged Plaintiffs management fees. (Id.)
10

Plaintiffs because aware of the SEC action instituted on April 15, 2014, and filed

11 this action soon after on June 26, 2014. (Id. 63.) In their Complaint, Plaintiffs allege
12 fifteen claims for relief, including violations of federal and California securities laws,
13 unfair competition, constructive fraud, breach of fiduciary duty, accounting, and
14 common counts. (Id. ¶¶ 97-208.)
15
16

DISCUSSION
The parties dispute whether the injunction issued by the Receivership Court

17 should be extended to stay this action. The Receiver acknowledges that the preliminary
18 injunction does not bar prosecution of litigation against the individual defendants in
19 this case or entities not deemed to be Receivership Entities1. (ECF No. 52 at 1.)
20 However, for practical reasons, the Receiver recognizes that the injunction “has
21 significant implications” in connection with discovery, summary judgment, and
22 potential judgment enforcement actions that may be undertaken against the individual
23 and non-receivership defendants. (Id. at 4.) Additionally, the Receiver believes “that
24 those defendants in this matter to whom the litigation stay does not apply will almost
25 certainly become subjects of the Receiver’s investigation effort, and may themselves
26
27
28

1

The Receiver defines the “Receivership Entities” as “Total Wealth Management, Inc. and
its subsidiaries and affiliates, including but not limited to Altus Capital Management, LLC.” (ECF
No. 52 at 1.)

-4-

14cv1552-GPC-JLB

1 become defendants or relief defendants in the Receivership Case or in Receivership
2 Asset recovery litigation brought by the Receiver.” (Id. at 5.) For this reason, failing
3 to impose a blanket stay in this case could result in a “race to the courthouse,” wherein
4 some claimants may obtain relief first, to the detriment of other claimants. (Id.) The
5 Receiver also argues that judicial economy militates against evaluating claims in a
6 piecemeal fashion. (Id.) Accordingly, the Receiver does not object to the Court
7 staying the action in its entirety pending resolution of the Receivership Case. (Id.)
8

The Mitchell Plaintiffs concede that the injunction stays this action against

9 defendants TWM, Altus Capital Opportunity Fund LP (“Altus Fund”), Altus Capital
10 Management, LLC (“Altus Capital”), and Cooper. (ECF No. 53 at 5-6.) However, they
11 ask this Court to allow them to proceed in litigating their claims against McNamee,
12 Shoemaker, Capital, and Financial Council (collectively, the “McNamee/Shoemaker
13 Defendants”), because the Mitchell Plaintiffs seek only the personal assets2 of these
14 defendants, which they contend are not part of the Receivership res. (Id. at 2, 5-6.)
15 The Mitchell Defendants also ask that the Court allow them to proceed with discovery
16 against the defendants subject to the Receivership action because it will be directly
17 relevant to proving up liability and damages against the McNamee/Shoemaker
18 Defendants. (Id. at 2-3.) The crux of the Mitchell Plaintiffs’ argument is that they will
19 suffer substantial injury if they are not allowed to proceed because they both are of
20 advanced age and cannot retire until they recover their “nest egg” from Defendants.
21 (Id.)
22

“The power of a district court to impose a receivership or grant other forms of

23 ancillary relief . . . derives from the inherent power of a court of equity to fashion
24 effective relief.” SEC v. Wencke, 622 F.2d 1363, 1369 (9th Cir. 1980). The “primary
25 purpose of equity receiverships is to promote orderly and efficient administration of the
26
27

2

The Mitchell Plaintiffs repeatedly use this term even though Capita and Financial Council

28 are corporations.

-5-

14cv1552-GPC-JLB

1 estate by the district court for the benefit of creditors.” SEC v. Hardy, 803. F.2d 1034,
2 1038 (9th Cir. 1986). In order to effectuate this goal, the receivership court has
3 authority to enjoin individuals from proceeding in another court in order to prevent
4 interference with a receivership action. Wencke, 622 F.2d at 1371-72 (upholding
5 district court’s order staying state action by nonparties against receivership entities
6 because “[t]here is a strong federal interest in insuring effective relief in SEC actions
7 brought to enforce the securities laws”).
8

This case is somewhat unique procedurally in that the parties are asking this

9 Court, as opposed to the Receivership Court, for permission to proceed. Given that
10 Plaintiffs and the Receiver agree that the McNamee/Shoemaker Defendants are not
11 currently part of the Receivership Action, the default position would be to allow
12 Plaintiffs to proceed forward in prosecuting their case against these defendants. What
13 gives the Court pause is the Receiver’s statement that these defendants “will almost
14 certainly become subjects of the Receiver’s investigation effort, and may themselves
15 become defendants or relief defendants in the Receivership Case or in Receivership
16 Asset recovery litigation brought by the Receiver.” (ECF No. 52 at 5.) This suggests
17 that assets of the McNamee/Shoemaker Defendants may at some future date become
18 part of the receivership res. Thus, allowing Plaintiffs to proceed forward against these
19 defendants could put them ahead of other claimants in recovering receivership assets.
20

At this point, however, that eventuality is entirely speculative and this Court has

21 insufficient facts before it to support a total stay of the proceedings in this Court. As
22 Plaintiffs point out, they are of advanced age and want to retire. (ECF No. 53 at 9.)
23 Until they are able recover their “nest egg,” retirement is out of reach. (Id.) The Court
24 finds that, at this stage, Plaintiffs’ interest in proceeding outweighs the Receiver’s
25 interest in preventing any future, theoretical impact on the receivership res. See S.E.C.
26 v. Universal Fin., 760 F.2d 1034, 1037-38 (9th Cir. 1985) (considering, among other
27 things, “whether the moving party will suffer substantial injury if not permitted to
28 proceed” in deciding whether to except applicants from a blanket receivership stay)
-6-

14cv1552-GPC-JLB

1 quoting SEC v. Wencke, 742 F.2d 1230, 1231 (9th Cir. 1984)). For this reason,
2 Plaintiffs’ request to proceed with their case against the McNamee/Shoemaker
3 Defendants is GRANTED.
4

The Court turns now to Plaintiffs’ request for permission to conduct discovery

5 against TWM, Altus Fund, Altus Capital, and Cooper for purposes of pursuing their
6 claims against the McNamee/Shoemaker Defendants. (ECF No. 53 at 10.) Plaintiffs
7 contend that the preliminary injunction issued by the Receivership Court does not
8 address discovery. (Id.) This Court disagrees. The Court finds that discovery falls
9 squarely within the Receivership Court’s order prohibiting investors from “prosecuting
10 [or] continuing . . . any suit or proceeding” against the defendants in the Receivership
11 Action. (See Case No. 15-cv-226-BAS (DHB), ECF No. 8 at 11.) Moreover, if this
12 Court were to allow Plaintiffs to propound discovery against TWM, Altus Fund, Altus
13 Capital, and Cooper, the Receiver would be required to expend time and funds from
14 the receivership res in order to respond. The purpose of the receivership and the
15 litigation stay issued by the Receivership Court is to protect receivership assets and to
16 allow the Receiver time to focus on identifying and recovery receivership assets. (Id.
17 at 2, 9-10) (finding that “[g]ood cause exists to believe that, unless restrained and
18 enjoined by order of this Court, Defendants will dissipate, conceal, or transfer assets”
19 and that a permanent receiver was necessary “to conduct such investigation and
20 discovery as may be necessary to locate and account for all of the assets” and “take
21 such action as is necessary and appropriate to preserve and take control of and to
22 prevent the dissipation, concealment, or disposition of any assets”). Thus, to allow
23 discovery against TWM, Altus Fund, Altus Capital, and Cooper would be contrary to
24 the spirit and intent, in addition to the express language, of the Receivership Court’s
25 injunction order. Plaintiffs’ request to conduct discovery against TWM, Altus Fund,
26 Altus Capital, and Cooper is, therefore, DENIED.
27 ///
28 ///
-7-

14cv1552-GPC-JLB

1

In so ruling, the Court is cognizant of the fact that the Receivership Court is

2 more knowledgeable about the status of the SEC’s administrative action and the
3 Receivership Action. Absent an intervening ruling from the Receivership Court that
4 affects this case, the Court orders the Receiver to provide this Court with an update
5 regarding the status of Securities and Exchange Commission v. Total Wealth
6 Management, Case No. 15-cv-226-BAS (DHB) on or before August 14, 2015.
7

CONCLUSION

8

For the foregoing reasons, the Court:

9

1.

STAYS this case as to Defendants TWM, Altus Capital, Altus Fund, and

10 Cooper3;
11

2.

GRANTS Plaintiffs’ request to proceed with their case against the

12 McNamee/Shoemaker Defendants;
13

3.

DENIES Plaintiffs’ request to conduct discovery against TWM, Altus

14 Fund, Altus Capital, and Cooper; and,
15

4.

ORDERS the Receiver to provide this Court with an update regarding the

16 status of Securities and Exchange Commission v. Total Wealth Management, Case No.
17 15-cv-226-BAS (DHB) on or before August 14, 2015.
18

IT IS SO ORDERED.

19 DATED: May 12, 2015
20
HON. GONZALO P. CURIEL
United States District Judge

21
22
23
24
25
26
27

3

The Clerk of Court entered a default against Pinnacle Wealth Group, Inc. on September 15,

28 2014 (ECF No. 24), so the Court need not include that defendant in the instant stay.
-8-

14cv1552-GPC-JLB