Securities and Exchange Commission v. Thibeault et al

Filing 30

Judge Nathaniel M. Gorton: ORDER entered. MEMORANDUM AND ORDER: "For the foregoing reasons, the Court concludes that the plaintiff is entitled to injunctive relief as more fully described in the preliminary injunction attached hereto and plaintiffs motion (Docket No. 2) is therefore ALLOWED. So ordered." (Patch, Christine)

United States District Court
District of Massachusetts
)
)
)
)
Plaintiff,
)
)
v.
)
)
DANIEL THIBEAULT,
)
GL CAPITAL PARTNERS, LLC,
)
GL INVESTMENT SERVICES, LLC,
)
GRADUATE LEVERAGE, LLC (d/b/a GL )
ADVISOR AND GL HOLDINGS CORP.)
)
and
)
TAFT FINANCIAL SERVICES, LLC,
)
)
Defendants,
)
)
and
)
)
SHAWNET THIBEAULT and GL ADVISOR )
SOLUTIONS, INC.
)
)
Relief Defendants.
)
)
SECURITIES AND EXCHANGE
COMMISSION,

Civil Action No.
15-10050-NMG

MEMORANDUM & ORDER
GORTON, J.
This case arises from an alleged ongoing dissipation of at
least $16 million in misappropriated investor funds by
defendants Daniel Thibeault (“Thibeault”), GL Capital Partners,
LLC (“GL Capital”), GL Investment Services, LLC (“GLIS”),
Graduate Leverage, LLC (“GL”) and Taft Financial Services, LLC
(“Taft”) (collectively “defendants”).

Thibeault is the

President and CEO of GL, the parent entity of GL Capital and
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GLIS.

He was the founder and portfolio manager of the

investment fund GL Beyond Income Fund (the “Fund”) until
December, 2014.
Plaintiff Securities and Exchange Commission (“the SEC” or
“the Commission”) contends that defendants have and still are
engaged in 1) fraudulent or deceptive conduct in connection with
the purchase or sale of securities in violation of Rule 10b-5 of
the Exchange Act of 1934 (“the Exchange Act”) and 2) fraud in
the offer or sale of securities in violation of Section 17(a) of
the Securities Act of 1933 (“the Securities Act”).

Moreover,

plaintiff claims that Thibeault, GLIS and GL Capital have
engaged in fraudulent or deceptive conduct while acting as
investment advisers, in violation of Sections 206(1) and 206(2)
of the Investment Advisers Act of 1940 (“the Advisers Act”).
Pending before the Court is the plaintiff’s emergency
motion for entry of a temporary restraining order (“TRO”), which
this Court construes as a motion for preliminary injunction 1)
to prohibit the defendants from continuing to violate federal
securities laws, 2) to freeze the assets of defendants and
relief defendants, 3) to require the defendants and relief
defendants to repatriate all proceeds of the fraud that are now
located abroad, 4) to require the defendants and relief
defendants to submit an accounting of investor funds and other
assets in their possession, 5) to prevent the defendants and
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relief defendants from destroying relevant documents and 6) to
authorize the SEC to undertake expedited discovery.

For the

reasons that follow, plaintiff’s motion will be allowed.
I.

Background
Defendant Thibeault is the principal of all the GL entity

defendants: GL, GL Capital, GLIS and GL Advisor Solutions, Inc.
(“GL Advisor”), all of which are investment and financial
advisory businesses.

GL Capital is an investment adviser.

GLIS

is also an investment adviser and purports to have approximately
700 clients and more than $130 million in assets under
management.

GL Advisor is a Philippine corporation that engages

in the origination and servicing of loans owned or controlled by
GL and its affiliates.

Plaintiff contends that Thibeault and/or

GL also founded and control Taft, a purported loan origination
company whose operation appears to be controlled by Thibeault
and GL.
Thibeault created the Fund in March, 2012 and was its
President and sole or co-portfolio manager for most of its
existence until he was terminated by the Fund in December, 2014.
GL Capital characterizes the Fund as providing investors with
direct access to a portfolio of high credit quality consumer
debt predominantly from young professionals.

From January, 2012

to December, 2014, GL Capital was the sole investment adviser of
the Fund.
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The SEC alleges that at least as early as February, 2013,
defendants engaged in a fraudulent scheme to create fictitious
loans to divert investors’ money from the Fund.

Defendants’

scheme allegedly involved the fabrication of paperwork
purporting to reflect numerous six-figure consumer loans using
the names and personal information of individuals who were
unaware that loans were being originated in their names.

For

example, Thibeault had taken out a loan of just under $300,000
in the name of his former college roommate without his
knowledge.

When contacted about a loan statement that was

inadvertently sent out, Thibeault allegedly told his former
roommate’s accountant “not to worry about it.”
Fund money disbursed for those fictitious loans were first
transferred to Taft, which served as an intermediary, and then
into bank accounts of the defendants and the relief defendants
rather than to the purported borrowers.

The disbursements were

used for the defendants’ personal and business expenses and for
making interest payments on outstanding fictitious loans.

The

fictitious loans allegedly bear a program code of “TA” in the
Fund’s records.

As of December, 2014, there were 40 loans

bearing the program code “TA,” with an aggregate value of
approximately $16 million.
The documentation maintained by GL Capital for the “TA”
loans is missing in part and contains material inaccuracies.
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The purported “borrowers” birth dates are incorrect in at least
20 of the 26 loans for which promissory notes and other
supporting documentation was produced by GL Capital.

Such

inaccuracies would make it virtually impossible to obtain
accurate commercial credit scores for a purported borrower.
Between December, 2012 and November, 2014, approximately
$8.5 million was transferred from GL’s operating account at TD
Bank to bank accounts in the name of relief defendant GL Advisor
in the Philippines.

The funds in GL’s operating account in part

paid for the monthly bills of an American Express card that was
used by defendant Thibeault.

The nature of the expenses on the

American Express card, such as hundreds of dollars per month for
videos on demand and e-reader purchases, thousands of dollars
per month at the iTunes Music Store and purchases at home goods
stores suggest that the card was sometimes used for personal
expenses that also benefitted relief defendant Shawnet
Thibeault, the wife of defendant Thibeault.
The whereabouts and disposition of much of money
misappropriated from the Fund is currently unknown.
C.

Procedural History

Plaintiff filed the instant lawsuit and emergency motion
for a temporary restraining order on January 9, 2015.

The Court

held a hearing on the pending motion the following week.

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II.

Plaintiff’s Motion for a Preliminary Injunction
A.

Legal Standard

Generally, in order to obtain a preliminary injunction, the
moving party must establish
(1) a substantial likelihood of success on the merits,
(2) a significant risk of irreparable harm if the
injunction is withheld, (3) a favorable balance of
hardships and (4) a fit (or lack of friction) between
the injunction and the public interest.
Nieves-Marquez v. Puerto Rico, 353 F.3d 108, 120 (1st Cir. 2003)
(citation omitted).

In the context of SEC enforcement

proceedings, injunctive relief is warranted “upon a proper
showing” of federal securities law violations. See Securities
Act § 20(b), 15 U.S.C. § 77t(b); Exchange Act § 21(d)(1), 15
U.S.C. § 78u(d)(1).
The requisite elements of a proper showing include at
a minimum, proof that a person is engaged in or is
about to engage in a substantive violation of [federal
securities laws].
S.E.C. v. Fife, 311 F.3d 1, 8 (1st Cir. 2002) (quoting Aaron v.
S.E.C., 446 U.S. 680, 700-01 (1980) (internal quotations
omitted).

Such proof should be based on “reasonable inquiry and

other credible information.” S.E.C. v. Int’l Loan Network, Inc.,
770 F. Supp. 678, 688 (D.D.C. 1991) aff’d, 968 F.2d 1304 (D.C.
Cir. 1992).
Moreover, SEC requests for injunctive relief
need not involve proof of irreparable injury or the
inadequacy of other remedies as in the usual suit for
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injunction....Rather, the critical question in issuing
an injunction is whether there is a reasonable
likelihood that the wrong will be repeated.
S.E.C. v. Pinez, 989 F. Supp. 325, 333 (D. Mass. 1997) (internal
citations and quotations omitted).
B.

Application
1.

Likelihood of Success

Plaintiff contends that it will likely prevail in proving
that 1) the defendants violated Section 17(a) of the Securities
Act and Section 10(b) of the Exchange Act and 2) Thibeault, GL
Capital and GLIS violated Sections 206(1) and (2) of the
Advisers Act.
The Exchange Act prohibits any person, in connection with
the purchase or sale of any security, from, directly or
indirectly 1) employing any scheme to defraud, 2) making an
untrue statement of material fact or omitting to state a
material fact necessary in order to make the statements made not
misleading or 3) engaging in any act, practice or course of
business that operates as fraud or deceit upon any person, in
connection with the purchase or sale of a security. See 15
U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5.

The Securities Act

contains similar prohibitions for conduct in the offer or sale
of any security. See 15 U.S.C. § 77q(a).
Plaintiff contends that the making of fictitious loans,
creation of false documents to support those loans, the use of
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the loan proceeds to fund business and personal expenses and the
false representations by Thibeault on behalf of himself and the
GL entities constitute material misrepresentations and a scheme
to defraud investors.

The SEC avers that each of the defendants

substantially participated in the scheme, to wit: 1) GL received
funds and pretended to service the fictitious loans and
publicized the Fund despite its CEO’s knowledge that Fund assets
did not exist, 2) GLIS put client money into the Fund to keep
the scheme running and to fund the fictitious loans, 3) GL
Capital marketed and managed the Fund to obtain new money from
investors and actively to conceal the fraudulent nature of the
“TA” loans in the Fund and 4) Taft knowingly served as a straw
entity to create an appearance of legitimacy for the “TA” loans
and hid their true nature from investors and auditors by serving
as a conduit for receiving the Fund’s money and transferring it
back to GL.
With respect to materiality of the fraudulent scheme,
plaintiff contends that any investor would consider the
fraudulent “TA” loans, which consisted of 40% of the Fund’s
purported assets, to be material.

The SEC also avers that the

defendants acted with scienter, a mental state embracing the
intent to deceive or defraud. Ernst & Ernst v. Hochfelder, 425
U.S. 185, 194 n.12 (1976).

It contends that defendants knew the

loans were fraudulent but repeatedly represented that the Fund
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was a legitimate investment company that used investor funds
properly.
Defendant Thibeault disputes various assertions made by the
SEC in support of its motion.

For example, he contends that the

evidence relied upon by the SEC is insufficient to conclude that
1) Thibeault “founded and controls” Taft, 2) defendants directed
that period interest payments be made on some fraudulent loans
to give the appearance that the borrowers were current on the
loans, 3) Thibeault was personally responsible for the creation
of the Taft loans and at best, the evidence suggests that he may
have originated the loans, 4) Thibeault had directed payments
out of the GL bank accounts for his personal expenses, or 5)
GLIS’s disclosure of assets is grossly inflated.
The Court concludes that the Thibeault has not adequately
contested plaintiff’s claim that defendants violated various
federal securities laws and that plaintiff is likely to show
that the fraudulent scheme is material and that Thibeault acted
with scienter.

Here, Thibeault’s scienter is imputed to the

other defendants because he controlled each of those entities.
The same conduct that violates the antifraud provisions of
the Exchange Act may also violate Sections 206(1) and (2) of the
Advisers Act, which prohibit fraudulent conduct by investment
advisers. See S.E.C. v. Rana Research, Inc., 8 F.3d 1358, 1363
n.4 (9th Cir. 1993) (“Section 206 parallels section 10(b) of the
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Exchange Act”).

GLIS and GL Capital are registered with the SEC

as investment advisers and Thibeault was an investment adviser
because he provided investment advice for compensation and
because he controlled both GLIS and GL Capital.

In light of the

Court’s determination that plaintiff is likely to succeed in
proving that defendants have violated the Exchange Act, it also
concludes that the SEC is likely to prove that GLIS, GL Capital
and Thibeault violated the Advisers Act.
2.

Likelihood of future violations and the remaining
factors

Thibeault contends that the SEC has not shown any
likelihood that he would commit further alleged violations
because he was terminated as the Fund manager in December, 2014
and no longer has access to any investor funds to originate new
loans or to make any decisions about Fund assets.
The Commission responds that defendants are likely to
continue to violate the securities laws because their constant
dissipation of assets and failure to replenish the Fund
constitutes an ongoing misappropriation of investor funds.

The

SEC further argues that any action taken with respect to GLIS
client accounts without full disclosure of prior fraudulent
activity constitutes a further violation of their fiduciary
duties under the Advisers Act.

Moreover, plaintiff offers

evidence that contradicts Thibeault’s assertion that he no

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longer has access to any investor funds.

Specifically, it notes

that roughly $15 million was transferred to GL’s operating
account at TD Bank and that $100,000 of that Fund was
transferred to Thibeault’s attorneys as recently as midDecember, 2014, indicating that Thibeault still has access to
misappropriated funds.
The Court concludes that the SEC has made a sufficient
showing that Thibeault and the related defendants are likely to
continue to violate federal securities laws absent a preliminary
injunction entered against them.

The Court is also persuaded by

plaintiff’s arguments that the balance of harms and the public
interest favor the imposition of injunctive relief to prevent
further dissipation of the allegedly misappropriated investor
funds and to protect potential future investors.

Accordingly,

the SEC is entitled to injunctive relief to prohibit the
defendants from continuing to violate federal securities laws.
III. Plaintiff’s request for other equitable relief
Section 22(a) of the Securities Act and Section 27 of the
Exchange Act
confer general equity powers upon the district courts
[so that] [o]nce the equity jurisdiction of the
district court has been properly invoked by a showing
of a securities law violation, the court possesses the
necessary power to fashion an appropriate remedy.
S.E.C. v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1103 (2d
Cir. 1972).

The SEC may therefore “seek other than injunctive
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relief to effectuate the purposes of the federal securities
laws. Id. at 1104.
A.

Asset freeze

Courts in the First Circuit apply the same four-part test
for issuing a preliminary injunction when deciding whether to
enter an asset freeze. Charlesbank Equity Fund II v. Blinds To
Go, Inc., 370 F.3d 151, 161 (1st Cir. 2004).

Irreparable harm

may be shown “where there is a strong indication that the
defendant may dissipate or conceal assets.” Micro Signal
Research, Inc. v. Otus, 417 F.3d 28, 31 (1st Cir. 2005).
Moreover,
the disadvantages and possible deleterious effect of a
freeze must be weighed against the consideration indicating
the need for such relief.
Pinez, 989 F. Supp. at 336 (D. Mass. 1997).
The SEC contends that an asset freeze is necessary to
prevent defendants from dissipating or concealing any remaining
investor funds and to ensure that their assets are available to
satisfy an eventual judgment for disgorgement and/or a penalty.
Plaintiff asserts that it has evidence that millions of dollars
have been transferred from Fund accounts to accounts controlled
by defendants and relief defendant GL Advisor in the
Philippines.

Plaintiff contends that even after Thibeault was

interviewed by the SEC and arrested by the Federal Bureau of
Investigation in December, 2014, he continued to direct the
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dissipation of assets from accounts that he controls.

For

example, records from TD Bank show wire transfers from the main
GL operating account of $65,000 to a recipient in the
Philippines and $100,000 for personal legal expenses after
Thibeault was arrested.
Thibeault responds that the scope of the proposed asset
freeze is overly broad because the SEC has not shown that most
of the implicated accounts are connected to the alleged illegal
activity.

Thibeault asserts that the SEC even acknowledges that

the fraudulent loans constituted 40% of the Fund’s purported
assets.

Moreover, Thibeault contends that the asset freeze

sought by the SEC would render him unable to pay attorneys’ fees
to defend against this civil case and the related criminal
proceeding, which would jeopardize his Sixth Amendment right to
retain counsel of his choosing.
While plaintiff has agreed to a so-called “carve-out” for
living expenses, it argues that defendant is not entitled to
similar consideration for attorneys’ fees because he has no
right either to spend investors’ funds to retain defense counsel
or to dissipate assets that should be preserved to pay an
eventual judgment.

Plaintiff alleges that the investors’ losses

of at least $16 million are far greater than Thibeault’s assets.
In civil cases, an asset freeze is justified in equity when
the likelihood of a significant violation has been shown and it
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is unlikely there will be sufficient funds to pay a disgorgement
remedy or a civil penalty in the event a violation is
established at trial.

See S.E.C. v. Stein, 2009 WL 1181061 at

*1-2 (S.D.N.Y. Apr. 30, 2009); see also, S.E.C. v. Current Fin.
Servs, 62 F. Supp. 2d 66, 67 (D.D.C. 1999) (refusing to allow a
carve-out for defendant’s attorneys’ fees because “the potential
disgorgement [the SEC] could receive in this case far exceeds
the amount that is frozen in the account”).
Although carve-outs to reimburse attorneys’ fees are not
granted as a matter of right in this District even for
defendants facing criminal charges for violations of federal
securities laws, courts have recognized a distinction between
civil and criminal cases because the Sixth Amendment right to
counsel protects an individual’s right to a lawyer of her
choice. See, e.g., S.E.C. v. FTC Capital Markets, Inc., 2010 WL
2652405, at *7 (S.D.N.Y. June 30, 2010) (“Were [defendant]
seeking to use frozen funds to pay her defense costs in a civil
action, the fact that potential disgorgement in this case
exceeds the amount of money that has been frozen might be
sufficient to prevent this Court from releasing the funds.
However, [defendant] seeks advancement of fees and expenses only
in the criminal action against her.” (internal citation
omitted)).

The United States Supreme Court has noted, however,

that
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[a] defendant has no Sixth Amendment right to spend
another person's money for services rendered by an
attorney even if those funds are the only way that
that defendant will be able to retain the attorney of
his choice.
Caplin & Drysdale, Chartered v. United States, 491 U.S. 617, 626
(1989).
The Court will therefore freeze the assets of all
defendants but allow carve-outs for limited living expenses and
attorneys’ fees for Thibeault’s defense in his parallel criminal
proceeding.

To negate the carve-out for attorneys’ fees for

Thibeault’s criminal defense, the Commission has the burden of
demonstrating that such funds are traceable to fraud. See, FTC
Capital Markets, 2010 WL 2652405, at *7.
B.

Accounting

Plaintiff requests that the Court issue an order for an
accounting to determine the exact amount of investors’ assets in
the Fund and elsewhere, the present location of those assets and
defendants’ ability to recoup them.

The SEC asserts that the

limited bank records reviewed by its staff demonstrate that
defendants have withdrawn millions of dollars from the Fund’s
accounts and it is unclear where those funds are currently
located.
The Court concludes that an accounting is appropriate and
therefore plaintiff’s request will be allowed.

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C.

Repatriation

The SEC asserts that a repatriation order is necessary to
require the defendants to return $8.5 million of the Fund’s
money that has been transferred to accounts in the Philippines.
Thibeault responds that the SEC has not met its burden to
warrant such a repatriation order because it has not alleged
that the transfers were improper.

He notes that the SEC has

provided no information about the balance of the accounts or
about the net fund transfers between the American and Philippine
entities.

Defendant instead asserts that on a net basis, GL

Advisor has transferred more funds to the American entities than
vice versa, which negates the SEC’s theory that defendants have
attempted to divert such proceeds by removing them from the
United States.
Thibeault further claims that he does not have the ability
to return the funds at issue in any event because GL Advisor is
a separate entity controlled by an independent, five-member
board of directors and although he is a member of that board, a
return of the fund requires approval of at least three members.
The SEC disputes the claim that defendant is unable to
initiate a transfer from GL Advisor’s accounts by pointing out
that 1) GL is a 99% owner of GL Advisor and 2) on at least one
occasion, Thibeault has independently directed and signed for
the wire transfer of funds from GL Advisor’s bank account in
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Manila, The Philippines.

Plaintiff also contends that

Thibeault’s unsubstantiated argument regarding net transfers is
a red herring because none of the money transferred from the
Fund to Taft should have then been forwarded to GL Advisor in
the Philippines.
The Court is persuaded that defendant has considerable
control over GL Advisor and will issue a repatriation order with
respect to the funds transferred from the Fund to that entity.
D.

Remaining requests

Plaintiff also requests an order expediting discovery and
preventing the destruction of documents.

Thibeault opposes the

SEC’s requests because the SEC has provided no justification for
such an order.

Recognizing the urgency of this matter, the

Court will allow both requests.
ORDER
For the foregoing reasons, the Court concludes that the
plaintiff is entitled to injunctive relief as more fully
described in the preliminary injunction attached hereto and
plaintiff’s motion (Docket No. 2) is therefore ALLOWED.
So ordered.
/s/ Nathaniel M. Gorton
Nathaniel M. Gorton
United States District Judge
Dated January 21, 2015

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