Securities and Exchange Commission v. End of the Rainbow Partners, L.L.C., The, et al
OPINION AND ORDER granting in part and denying in part 2 Motion for a Temporary Restraining Order by Chief Judge Marcia S. Krieger on 11/14/17. A non-evidentiary hearing is set for 11/21/2017 at 09:00 AM before Chief Judge Marcia S. Krieger. (dkals, )
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Chief Judge Marcia S. Krieger
Civil Action No. 17-cv-02670-MSK
SECURITIES AND EXCHANGE COMMISSION,
THE END OF THE RAINBOW PARTNERS, LLC, and
THE ESTATE OF MICHAEL F. ANDERSON,
CAROLYN M. ANDERSON, individually, as the Personal Representative of the Estate of
Michael F. Anderson, and as trustee for the Michael Anderson Trust and a trust for the
benefit of her minor children,
THE END OF THE RAINBOW FOUNDATION, INC.,
SEAOMA CONSULTING COMPANY, and
BIGHORN WEALTH FUND, L.P.,
OPINION AND ORDER
THIS MATTER comes before the Court pursuant to the Plaintiff’s (“SEC”) Emergency
Ex Parte Motion for An Order Granting an Asset Freeze and Other Emergency Relief (# 2).
Jurisdiction and Material Facts
The pertinent facts alleged in the SEC’s Complaint (# 1) can be readily summarized.
From 2014 to February 2017, Michael Anderson operated the Defendant entity The End of the
Rainbow Partners, LLC (“Rainbow”). Rainbow was ostensibly a stock-trading investment
scheme, with the slight twist that a portion of its trading profits were to be donated (with the
investors’ upfront consent) to a charitable organization also founded by Mr. Anderson, The End
of the Rainbow Foundation, Inc. (“Foundation”). The remaining profits would be paid to
investors, to whom Mr. Anderson promised annual rates of return between 12% and 48%. Mr.
Anderson ultimately collected more than $5 million in investments in Rainbow.
In reality, Rainbow was a classic Ponzi scheme. Mr. Anderson mostly lost money on
trades, distributed false monthly statements to investors showing fictitious gains, and used the
capital from later investors to pay off redemption requests by earlier investors. In addition, the
SEC alleges that Mr. Anderson diverted more than $2 million of Rainbow’s funds to 1) pay his
own personal expenses; 2) the bank accounts of his (ex-)wife,1 Carolyn Anderson, and her
personal creditors; 3) Seaoma Consulting Company, an entity consisting solely of Ms. Anderson
and which provided only trivial services to Rainbow, such as running errands and proofreading
documents; and 4) to Bighorn Wealthfund, a hedge fund that Mr. Anderson also managed. The
SEC contends that although Rainbow made few trading profits, it diverted significant sums to the
Foundation, despite the fact that the Foundation had no offices or employees, never engaged in
any operations, and was nothing more than yet another mechanism for Mr. Anderson to divert
investor funds to the personal benefit of himself and Ms. Anderson.2 Mr. Anderson died in
February 2017, shortly after signing a confessional affidavit that admitted some of the facts set
During most of the relevant time period herein, Mr. Anderson and Ms. Anderson were
divorced, but Mr. Anderson continued to reside in the home owned by Ms. Anderson. They
reconciled and were re-married shortly before Mr. Anderson’s death in February 2017.
The SEC’s Complaint also devotes significant attention to a life insurance policy insuring
Mr. Anderson’s life, the premiums for which were paid in whole or part with Rainbow investor
funds. The policy named Mr. and Ms. Anderson’s children as beneficiaries. After Mr.
Anderson’s death, the policy paid $2 million in benefits, some of which were used by Ms.
Anderson to acquire a residence in Florida, and the remainder of which were placed in an
unidentified trust for the benefit of the children, for which Ms. Anderson serves as trustee.
The SEC asserts two claims against Rainbow and Mr. Anderson’s estate: (i) securities
fraud in violation of the Securities Act, 15 U.S.C. § 77q(a); and (ii) securities fraud in violation
of the Exchange Act, 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5. In addition, the SEC asserts
a claim for “equitable disgorgement” against the “Relief Defendants” – Ms. Anderson in various
capacities, Seaoma, and Bighorn -- seeking to recover the investor funds they obtained and for
which they have no legitimate claim. Separately, the SEC has moved for an ex parte temporary
restraining order and preliminary injunction (# 2), to freeze the assets of all Defendants,
including the Relief Defendants.
The Court exercises jurisdiction pursuant to 18 U.S.C. §1331.
To obtain an ex parte temporary restraining order under Rule 65(b), the SEC must: (i)
demonstrate, by affidavit or verified complaint, that it will suffer immediate and irreparable
injury before the Defendants could be heard in opposition to the motion; and (ii) provide a
certification from its counsel identifying any efforts that the SEC has made to give notice of the
motion to the Defendants and the reasons why such notice should not be required. Fed. R. Civ.
P. 65(b)(1)(A), (B). In addition, the SEC must make a showing that it is likely to succeed on the
merits of its claims against the Defendants. Smith v. S.E.C., 653 F.3d 121, 127-28 (2d Cir.
2011). For the claims against Mr. Anderson’s estate and Rainbow, this is satisfied by a showing
that an inference can be drawn that the party has violated securities laws. Id. at 128. For the
claims against the Relief Defendants, the SEC must show that the defendant has received illgotten funds and does not have a legitimate claim to them. Id.
The Court has some doubt that the SEC has satisfied its obligations under Rule 65(b). It
relies upon a conclusory affidavit from its counsel, Leslie Hughes, but that affidavit does not
address either of the Rule 65(b) elements. It makes a perfunctory assertion that “providing [all
Defendants] with advance notice of the Commission’s emergency motion seeking an asset freeze
would allow them to dissipate or conceal assets,” but offers no factual basis for that conclusion.
Indeed, the assertion is troubling insofar as the record indicates that the SEC deposed Ms.
Anderson on October 4, 2017, asking her numerous questions about Mr. Anderson’s operations
and the grounds on which she asserted claims to various funds and property derived from Mr.
Anderson’s fraud. The Hughes affidavit offers no explanation why notifying Ms. Anderson of
this Motion would be more likely to prompt her to begin dissipating or concealing assets, than
the taking of her deposition would have done.
Nevertheless, the Court is mindful that the SEC’s purpose in seeking an asset freeze is to
advance the public interest in ensuring that ill-gotten funds can be secured to satisfy a potential
future judgment. Smith, 653 F.3d at 127. As such, the Court is inclined to overlook small
procedural defects if the motion is otherwise well-taken. Here, the Court is satisfied that the SEC
has made an adequate showing – based on Mr. Anderson’s confessional affidavit – that it is
likely to succeed in its claims of securities fraud against Mr. Anderson’s estate and Rainbow.
Thus, an ex parte freeze of all assets held by the named Defendants, End of the Rainbow and the
Estate of Michael F. Anderson, is appropriate.
The Court is less sanguine as to the SEC’s blanket request to freeze all assets of the
various Relief Defendants. The SEC does not allege that these defendants have any direct
culpability for Mr. Anderson’s fraudulent acts; the only question is whether and to what extent
these defendants received funds that Mr. Anderson improperly diverted from Rainbow and
whether those defendants have any legitimate claim to the funds they received. In this regard,
the Court notes that, in addition to Mr. Anderson’s confessional affidavit, the SEC’s motion is
supported by two additional affidavits. One, executed by Jeffrey Lyons, the SEC’s counsel, is
more argument than affidavit. Mr. Lyons relies on various exhibits, rather than his own personal
knowledge of the facts, to support his averments. The other affidavit is from Kerry Matticks, an
SEC staff accountant, and is based upon a review of Rainbow’s books and records and various
other financial information relating to the various Defendants. Based upon these affidavits and
the corresponding exhibits, the Court makes the following findings:
• The Foundation: The Matticks affidavit is somewhat unclear on precisely what funds
were diverted from Rainbow to the foundation. At one point, that affidavit states that Rainbow
diverted a total of approximately $218,000 to the Foundation. Docket # 2-4, ¶ 32. It is unclear
whether the SEC is contending that all of these funds were paid improperly. The Matticks
affidavit specifically singles out four specific months between June 2014 and February 2015
when Rainbow transferred approximately $66,000 in funds to the Foundation. These transfers
occurred in months where Rainbow did not generate any trading profits. By singling out these
four months and this $66,000 in payments, the implication appears to be that the remaining
$150,000 or so that Rainbow paid the Foundation may have been proper. Certainly, there is
evidence that although Rainbow lost large amounts of investor capital through its largest trading
accounts, some of its smaller accounts showed modest net trading profits over the time period at
issue. Docket # 2-14. Thus, on the limited record before it, the Court finds that the SEC has
shown only that the Foundation received $66,000 in payments to which it was not entitled. In
such circumstances, the Court will authorize an ex parte asset freeze on the Foundation’s assets
in that amount.
• Ms. Anderson, individually: The Matticks affidavit asserts that Ms. Anderson
personally received roughly $465,000 from Rainbow, plus approximately $186,000 in payments
that Rainbow made directly to Ms. Anderson’s personal creditors on her behalf. However, both
Mr. Anderson’s confessional affidavit and Ms. Anderson’s carefully-worded testimony at her
October 4 deposition state that Mr. Anderson owed bona fide debts to Ms. Anderson, including
back child support payments and rent for living in her house. Generally, a relief defendant in
possession of purloined funds is not subject to a disgorgement order if there is evidence that the
defendant has a “legitimate claim” to some portion of the funds. A legitimate claim can arise
when the defendant has provided meaningful services to the payor, such that the monies
identified could be said to be consideration for such services. F.T.C. v. Direct Marketing
Concepts, Inc., 569 F.Supp.2d 285, 312 (D.Ma. 2008). Ms. Anderson may have a legitimate
claim to funds for child support and rent paid by Mr. Anderson from his own accounts, but
nothing in the instant record suggests that Ms. Anderson contends that she provided services to
Rainbow for which she was entitled to compensation. Thus, the Court finds that the SEC has
shown that Ms. Anderson allegedly received $465,000 from Rainbow for which she has no
legitimate claim. The Court declines to supplement that amount with the $186,000 paid by
Rainbow to third parties for Ms. Anderson’s benefit, as the record does not suggest that Ms.
Anderson ever had possession of those funds. Accordingly, the Court will authorize a ex parte
freeze on Ms. Anderson’s individual assets in the amount of $465,000.
• Ms. Anderson, as trustee: The caption of this case and fleeting reference in the
Complaint describe Ms. Anderson acting as trustee for two trusts, the Michael Anderson Trust
and an unidentified “trust for the benefit of her minor children.” Both trusts appear to have been
settled with the proceeds of the life insurance policy on Mr. Anderson’s life. There is some
scattered evidence that Mr. Anderson may have improperly caused Rainbow to pay some of the
premiums on that policy – approximately $4,160 in premiums were paid by the Foundation and
an additional $1,500 were paid by Seaoma (discussed below). The SEC appears to assume that,
by showing that the premiums for the life insurance policy can be traced back to Rainbow
investor funds, the SEC is entitled to freeze and eventually obtain the proceeds of that policy. It
cites to no authority for that proposition, and in the absence of such authority, the Court declines
to adopt that position on an ex parte basis. In any event, as noted both above and below, the
record appears to reflect that both the Foundation and Seaoma had legitimate entitlements to
some amount of money from Rainbow, and it is plausible that the relatively small amounts of
insurance premiums paid by the two entities fit within the sums that Rainbow legitimately owed
to them. Thus, the Court denies the SEC’s ex parte request to freeze any assets of the two trusts
over which Ms. Anderson acts as trustee.
• Seaoma: The Matticks affidavit indicates that, during the time period at issue, Rainbow
paid approximately $360,000 to Seaoma. According to Ms. Anderson’s deposition testimony,
Mr. Anderson devised Seaoma as a vehicle for Ms. Anderson to accumulate more tax deductions
for herself. She testified that, on behalf of Seaoma, she rendered services for “a few hours a
week” to Rainbow, such as running errands to Costco or to a print shop, and proofreading and
giving her opinion as to graphic design of various documents that Rainbow was going to
distribute. Seaoma did not invoice Rainbow for these services and at her deposition, Ms.
Anderson was unable or unwilling to attempt to quantify the value of the services. Clearly, Ms.
Anderson –as Seaoma – has a legitimate claim to payment from Rainbow for the value of the
minimal services she provided; the more difficult question is fixing that value. But the burden to
quantifying ill-gotten gains as compared to a legitimate claim for payment falls to the SEC in its
ex parte motion. Absent a showing that distinguishes what was an ill-gotten gain, none of
Seoma’s funds are subject to a freeze at this time.
• Bighorn: The record is also vague as to Bighorn. The SEC describes it only as a “hedge
fund” of which Mr. Anderson was a manager, and which received funds that Mr. Anderson
transferred from Rainbow. The Matticks’ affidavit calculates that Bighorn received $1.15
million of Rainbow investor funds. Mr. Anderson’s confessional affidavit sheds some additional
light on the issue, explaining that Bighorn “opened a brokerage account” for Rainbow and that
one of Bighorn’s partners “handled all trades with these . . . accounts.” Thus, it appears that
Bighorn rendered services to Rainbow in the form of handling any trading of securities owned by
Rainbow. This would constitute a legitimate entitlement for Bighorn to receive some
compensation from Rainbow, but once again, it is difficult for the Court to fix a reasonable value
for such services. The burden of establishing which funds were paid for legitimate claims and
which were ill-gotten gains again is on the SEC, and the insufficiency of the showing in this
record prevents imposition of any freeze on Bighorn’s funds.
Accordingly, the Court GRANTS IN PART and DENIES IN PART the SEC’s Motion
for a Temporary Restraining Order (# 2). Specifically, the Court orders that:
1. All assets of any kind held in the name of The End of the Rainbow Partners, LLC or
the Estate of Michael F. Anderson, wherever located or by whomever held, are frozen;
2. Assets of The End of the Rainbow Foundation, up to a maximum value of $66,000
and assets of Carolyn M. Anderson, individually, up to a maximum value of $465,000, wherever
located or by whomever held, are frozen.
3. Any party in this matter or person acting at their control or direction, and any person
having custody or control over the assets listed above who receives actual notice of this Order,
shall retain and preserve such assets in their control, preventing their dissipation, withdrawal, or
transfer, as set forth herein.
The provisions of paragraphs 1-3 above shall remain in effect until 11:59 p.m. MST
on November 21, 2017, and shall thereafter be lifted unless otherwise directed by the Court in a
5. The Court will hold a non-evidentiary hearing on the SEC’s Motion for Preliminary
Injunction at 9:00 a.m. on November 21, 2017. The purpose of the hearing is to determine: (i)
whether and to what extent the parties can agree to continue, expand, or abandon some or all of
the current asset freeze; (ii) whether and to what extent there are pertinent facts in dispute such
that an evidentiary preliminary injunction hearing is necessary on the SEC’s remaining requests;
and (iii) to schedule an evidentiary hearing. To ensure that the parties are prepared to proceed as
scheduled, the Court directs that the SEC effectuate service, pursuant to Fed. R. Civ. P. 4, of the
Summons, Complaint, Motion for Preliminary Injunction, and this Order, on all of the
Defendants on or before November 16, 2017. The Defendants shall file a response to the Motion
for Preliminary Injunction at or before 1:00 p.m. MST on November 20, 2017.
Dated this 14th day of November, 2017 at 9:36 a.m.
BY THE COURT:
Marcia S. Krieger
Chief United States District Judge
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