Securities and Exchange Commission v. Harden et al

Filing 155

OPINION AND ORDER granting 138 motion for summary judgment; signed by Chief Judge Paul L. Maloney (Chief Judge Paul L. Maloney, aeb) Modified text on 7/16/2009 (bd).

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION ________________________________________________ | | UNITED STATES SECURITIES AND EXCHANGE | Case No. 1:05-cv-354 COMMISSION, | | Plaintiff, | | HONORABLE PAUL L. MALONEY v. | | Magistrate Judge Ellen S. Carmody PHILIP E. LOWERY, | | Defendant. | | ________________________________________________ OPINION and ORDER
Granting the Plaintiff's Motion for Summary Judgment; Entering the Permanent Injunction Requested by the Plaintiff; Directing Lowery to Provide an Accounting and Disgorge All Ill-Gotten Gains Referring the Case to the Magistrate Judge for Determination of: Amount of Unlawful Gains to be Disgorged by Lowery, and Prejudgment Interest Thereon; Civil Monetary Penalties, if any, Under 15 U.S.C. §§ 77t(d) and 78u(d)(3)

This is an action under the Securities Act, 15 U.S.C. § 77c and 77q, and the Exchange Act, 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5, so the court has unquestioned federal-question jurisdiction under 28 U.S.C. § 1331. Plaintiff, the United States Securities and Exchange Commission ("SEC"), moves for summary judgment against the lone remaining defendant, Philip Eugene Lowery ("Lowery"). For the reasons that follow, the court will grant summary judgment to the SEC and issue the injunctive and other relief which it requests.

BACKGROUND Defendant Philip Lowery, who is 77 years old, is a retired lawyer living in Colorado, while the late former defendant Gary L. Harden Senior was a Michigan resident. See Complaint filed May 19, 2005 ("Comp") ¶¶ 4-5. The SEC claims that between January 1999 and March 2001, Lowery and Harden violated the anti-fraud and registration provisions of the federal securities laws in connection with the sale of $5.8 million in interests in purported Colorado Registered Limited Liability Partnership ("RLLPs"). See Comp ¶ 2; Deposition of Philip E. Lowery dated September 25, 2008 ("Lowery Dep") (Ex N1) at 21-22; Philip E. Lowery's SEC Investigative Testimony dated Oct. 3, 2001 ("Lowery 10/2001 SEC Test'y") (Ex Z) at pp. 109-118 and 146-47 and 167 and Philip E. Lowery's SEC Investigative Testimony dated November 4, 2002 ("Lowery 11/2002 SEC Test'y") (Ex AA) at pp. 53-54; Gary L. Harden Senior's SEC Investigative Testimony dated May 23, 2002 ("Harden SEC Test'y") (Ex V) at pp. 387-88. Lowery, an attorney, drew up an agreement which he and Harden executed, whereby Harden would serve as managing general partner ("MGP") of each of the RLLPs and would obtain on behalf of the RLLPs a 33% interest in the profits of each online casino; Harden was to give each RLLP a 27% share of the corresponding online casino's profits. For his part, Lowery would develop and manage the online casinos in exchange for about $510,000 in investor funds from the RLLP for each casino. Harden would manage the RLLPs through his company, Cyberspace, while Lowery would develop and manage the online casinos through his companies, Palancar LLC and Princeton Holdings LLC. See Lowery Dep (Ex N) at pp. 16, 21-24; see also Lowery 10/2001 SEC Test'y (Ex

Unless otherwise indicated, an "Ex" refers to an exhibit attached to the plaintiff SEC's opening brief in support of its summary-judgment motion. -2-

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Z) at pp. 56-57, 87, 127-34, and Ex 12; see also Harden 11/13/2002 SEC Test'y (Ex W) at pp. 72 and Harden 11/14/2002 SEC Test'y (Ex X) at pp. 4-7. Lowery and Harden raised about $5.8 million from more than 80 individual and corporate/partnership investors. Harden used some of this money to fund the ten RLLPs (each with three to twenty-eight investors) and forwarded $4.5 million to Lowery. See Lowery 10/03/2001 SEC Test'y (Ex Z) at pp. 133-37; see also Harden 11/15/2002 SEC Test'y (Ex Y) at pp. 120-158 and its Exs. 35 through 44; see also Declaration of Carolyn E. Kurr dated February 13, 2009 ("Kurr Dec") ¶ 2(a). It is undisputed that Lowery and Harden failed to register any of the offers for, or sales of, those RLLP units with the SEC as required by Securities Act section 5. See Comp ¶ 2; see also Ex CC (Attestation of Non-Registration issued by SEC Records Officer Larry Mills on February 11, 2009); see also Harden 11/13/2002 SEC Test'y (Ex W) at p. 73 and its Ex 30. Harden formed and served as managing partner for all ten RLLPs and sold the RLLP units to investors, ostensibly to give them an opportunity to share in the profits of planned Internet casinos offering blackjack, slots, roulette, and video poker. Lowery solicited investors to buy the online-casino RLLP units, and he was to form and operate the online casinos. Harden and Lowery solicited more than eighty investors to purchase partnership units in ten RLLPs. See Comp ¶¶¶ 2, 4-5 and 11. Harden raised $550,000 to $750,000 for each of the ten RLLPs. See Comp ¶ 11. According to the SEC, Lowery and Harden targeted uneducated and financially unsophisticated, elderly investors using highpressure sales tactics. In connection with their selling efforts, Harden and Lowery made false and misleading statements to investors. Specifically, some investors were provided with unrealistic profit projections . . . . [O]thers were falsely told that their investments were guaranteed. -3-

Investors were also led to believe that their money would be used for partnership and casino business expenses, but most of it was actually used to pay for personal expenses and to support Lowery's extravagant lifestyle. Many of the investors liquidated retirement accounts and other conservative investments to invest in the RLLPs. Eventually, investors lost all of their money after the casinos were shut down due to operational problems. *** All of the RLLP units were sold using the same techniques. Harden obtained the initial sales leads by sending mass mailings [which] advertis[ed] seminars on how to make money from the Internet, soliciting investors on Cyberspace's website and contacting his former insurance clients. Harden and Lowery then personally solicited investors in the RLLPs by speaking at these seminars and in follow-up meetings and telephone conversations with potential investors. Harden also made many door-to-door sales calls, soliciting investors at their homes. Harden provided potential investors with an information packet that included an offering memorandum, a sample registration form, a partnership agreement, and a ballot to elect Harden as managing partner. Many investors were also provided with a sales brochure. Harden closed the transactions by obtaining investors' signatures on the RLLP documents and collecting their money. Although Harden was primarily responsible for procuring sales leads, conducting door-to-door sales calls and obtaining investors' complete paperwork, Lowery also actively solicited investors by appearing as the featured speaker during certain seminars, including ones in Michigan and Iowa. At these seminars, Lowery gave presentations to potential investors describing the online casinos' business prospects and proposed operations. Numerous individuals invested after hearing his presentations. Lowery also met with potential investors, spoke on the telephone to prospective investors who had questions about the online casinos (referred to him by Harden), and personally solicited one of his doctors to invest. (The doctor invested a total of $150,000 in three different RLLPs.) Lowery spoke particularly frequently to the managing partner of several partnerships that, with Lowery's encouragement, invested $2.74 million in the casino RLLPs over a thirteen[-]month period. In addition, Lowery contributed to the content of the casino RLLPs' offering documents and the Cyberspace website, and reviewed and edited all of the offering documents' and website's content. Comp ¶¶ 1 and 12-13 (some paragraph breaks added, italics added). Specifically, Harden confirmed that RLLP sales materials drafted and approved by Lowery projected that each online casino would -4-

earn a profit of about $2 million in the first year, $7 million in the second year, and $6.5 million in each of years three and four, for a total four-year profit of $22 million per RLLP. See Harden 11/13/2002 SEC Test'y (Ex W) at 73 and its Ex 30, as well as Harden 11/15/2002 SEC Test'y (Ex Y) at 59-71. The SEC estimates that 60% of the investors were at least 60 years old, and 43% were at least 70 years old. See Comp ¶ 14. The SEC presents ample uncontradicted testimony that many of the investors had little formal education and little or no experience in investing or in operating a business, and many of them used their retirement funds to purchase the RLLP interests. See Declaration of Albert C. Emery dated April 15, 2002 ("Emery Dec") (Ex E); Deposition of Faye Dexter taken November 27, 2006 ("Dexter Dep") (Ex I) at pp. 6-7 and 10-11; Deposition of Helen Hutchins taken December 12, 2006 ("Hutchins Dep") (Ex K) at pp. 6-9 and 21; see also Deposition of Dorothy K. Kremer taken November 3, 2006 ("Kremer Dep") (Ex M) at pp. 1-3 and 35; Deposition of Dorothy C. O'Neill taken November 17, 2006 ("O'Neill Dep") (Ex O) at pp. 7-13; Deposition of June E. Rice taken November 13, 2007 ("Rice Dep") (Ex P) at pp. 7-9 and 16. Some of the investors were not even aware that they were investing in gambling websites. See Emery Dec (Ex E); Hoskins Dec (Ex G); Johnson Dec (Ex H); Hutchins Dep (Ex K) at 21; O'Neill Dep (Ex O) at 94. Lowery traveled to Michigan and gave presentations to prospective Michigan investors, see Lowery Dep (Ex N) at pp. 41-42 and Lowery 11/04/2002 SEC Test'y (Ex AA) at pp. 55-57. In a criminal proceeding arising out of this same RLLP scheme, Lowery pled guilty to misdemeanor federal blackmail for demanding (after he learned that the SEC was investigating) that Harden destroy a videotape of one such sales presentation, in exchange for which Lowery would not inform

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against Harden. See Exs A, B and D (Judgment of Conviction and Sentence, Minutes of Guilty-Plea Hearing, and Superseding Information in US v. Philip Lowery (W.D. Mich.)). Lowery met several times with a major Florida investor, William Wimble ("Wimble") and spoke with him at least ten times over the telephone regarding the RLLP interests. Lowery told Wimble that the RLLPs' new online casino websites would ultimately earn $500,000 to $1 million per month, garnering fully half of the online casino market. Wimble ultimately invested about $2.7 million in the RLLPs on his behalf and on behalf of others, nearly half of the total $5.8 million raised by Lowery and Harden. See Lowery 10/03/2001 SEC Test'y (Ex Z) at pp. 154-159; see also Deposition of Wm. Wimble dated February 8, 2007 ("Wimble Dep 1") (Ex Q) at pp. 121-124 and its Exs 18 and 113-118; Deposition of Wm. Wimble dated February 9, 2007 ("Wimble Dep 2") (Ex R) at pp. 53-53 (recalling Lowery's oral projections of monthly profit and market-share) and its Ex 3 (Wimble's contemporaneous notes of those oral projections); and Deposition of Wm. Wimble dated March 30, 2007 ("Wimble Dep 3") (Ex S) at pp. 11-17 and 31-62 and its Exs 12, 13, 17-22, 25 and 26. Essentially, the SEC alleges that Lowery and Harden's offering documents were internally contradictory, did not reflect the true state of affairs as to control of the RLLPs and the conduct of their business, and were part of an attempt to structure the RLLP transactions to avoid application of federal securities laws. On the one hand, each RLLP's partnership agreement required each investor to represent that he had "sufficient experience and knowledge of business affairs to allow him/her to intelligently exercise his/her powers as a partner"; stated that each investor was expected to actively participate in the partnership's business; and stated that each partner would be asked to serve on one or more committees to help oversee and conduct partnership

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business. See Comp ¶ 15. More explicitly, each RLLP agreement required the investor to attest, when he signed, I specifically acknowledge and understand that I am a limited liability partner of this partnership and therefore any interest herein is not considered to be a security. This interest has not been registered with the Securities and Exchange Commission nor any state securities department and I am afforded no protection under the Securities Act of 1933, or any similar state act relating to the offer and sale of securities. Comp ¶ 15. Despite the investor ("partner") declarations in the RLLP agreements, and the language encouraging or "expecting" the investors to actually exercise some day-to-day duties of partners and actively guide the partnership, the offering memorandum marketed the RLLPs as passive investments ­ more nearly the antithesis of the partnership suggested by the agreements themselves. The offering memorandum assured investors, "This is a completely turnkey business." Comp ¶ 16. The SEC alleges that not only did Lowery and Harden market the RLLP "unit" purchases as passive arrangements involving the purchase of a security rather than a real partnership, they also operated the RLLPs that way. When soliciting new investors, Lowery and Harden touted Lowery's business acumen and explained that he would run the online casinos. See Comp ¶ 16. On the tactical and day-to-day operational side, the investors universally affied that they were depending (and led to depend) not on their own participation in and guidance of the RLLPs or the underlying casinos, but on Lowery's touted business experience and his ability to develop and operate the online casinos at a profit, in order to receive any return on investment. See Dexter Dep (Ex I) at pp. 29-30; see also Emery Dec (Ex E)and Declaration of Aaron F. Faltin dated March 1, 2002 ("Faltin Dec") (Ex F), Declaration of Russell R. Hoskins dated February 8, 2002 ("Hoskins Dec") (Ex G), and Declaration of Mary A. Johnson dated February 4, 2002 ("Johnson Dec") (Ex H); Deposition of Robert T. Haarala taken November 14, 2006 ("Haarala Dep") (Ex J) at pp. 67-71;

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Deposition of Helen Hutchins taken December 12, 2006 ("Hutchins Dep") (Ex K) at pp. 24-27; Deposition of Linda Irwin taken October 23, 2006 ("Irwin Dep") (Ex L) at pp.64-66; O'Neill Dep (Ex O) at pp. 42-43 and 51-52; Rice Dep (Ex P) at pp. 26-27; Wimble 2/8/2007 Dep (Ex Q) at pp. 61-63 and 106; Wimble 2/9/2007 Dep (Ex R) at pp. 70-71; and Youse Dep (Ex T) at p. 24. The SEC explains in further detail, without specific contradiction from Lowery, how the two men actually treated the RLLP purchases as just that ­ purchases of a security ­ rather than the partnership they portrayed in the RLLP agreements: Lowery and his entities (Palancar and Princeton Holdings) were also prominently mentioned in the sales brochure that was distributed to investors, further indicating that the success or failure of the ventures depended on Lowery's efforts. The offering materials also state that Harden, as managing partner, would perform all significant duties for the RLLPs. In practice, investors were not kept informed about the progress of the casinos or otherwise involved in the underlying business. The only partnership business conducted by the investors was their "vote" on two perfunctory matters (to elect Harden as managing partner of the RLLP and to close the partnership to additional investors). Harden never held any partnership meetings for the RLLPs or established any committees. In fact, investors typically were not even given the names of the other partners. Moreover, due to their lack of [financial] sophistication, the majority of the investors in the casino RLLPS could not intelligently exercise any partnership powers they theoretically might have had. Finally, Lowery (rather than Harden or the partnerships) controlled the casinos. The agreements between the RLLPs and Lowery [for Lowery to operate the online casinos]. did not bestow any power to control the casinos on individual partners, or on the partners acting collectively. Thus, even before Lowery stopped operating the casinos, there was no business for the investors to manage. Comp ¶¶ 16-17 (italic emphasis added, paragraph breaks added, underline emphasis in original). See also testimony that investors typically did not know who their co-partners were and how to contact them: Harden 11/14/2002 SEC Test'y (Ex X) at pp. 91-92; Decs of Emery,. Faltin, Hoskins, and Johnson (Exs E-H); Haarala Dep (Ex J) at pp. 69-70; Irwin Dep (Ex L) at p. 64; Rice Dep (Ex -8-

P) at p. 27; and Youse Dep (Ex T) at p. 16. At least four investors state that when they tried to contact Harden, in his role as general managing partner of their RLLPs, to check on the status of their investments, they were unable to reach him. See Dexter Dep (Ex I) at p. 24; see also Haarala Dep (Ex J) at 68-71; Hutchins Dep (Ex K) at p. 20; O'Neill Dep (Ex O) at p. 90; and Youse Dep (Ex T) at pp. 23-24. Lowery admitted that the RLLPs and the supposed "partners" therein were not intended to manage or operate the online casinos in any way. See Lowery 10/03/2001 SEC Test'y (Ex Z) at pp. 55-57 and 134. Lowery further admitted that the investors did not have any ownership interest in the casinos themselves, nor in his development and management companies; rather their putative "ownership" interests consisted only of a right to a minority percentage of the casinos' profits. See Lowery 10/03/2001 SEC Test'y (Ex Z) at pp. 233-234. In addition, the RLLP partnership documents gave Harden, as managing general partner, the exclusive right to exercise managerial control and exclusive authority to bind each RLLP to agreements, see Harden 11/13/2002 SEC Test'y (Ex W) at p. 73 and its Ex 30 (offering memorandum) at 8 and 10. The RLLP documents also provided that "only the Partners acting in fact for an RLLP [only Harden, as managing general partner of all the RLLPs] are liable for actions taken on behalf of that RLLP . . . ." Harden 11/13/2002 SEC Test'y (Ex W) Ex 30 (offering memorandum) at 8. Moreover, according to the uncontradicted testimony of former codefendant Harden and major investor Wimble and others, the RLLPs never held partnership meetings, never formed the committees referred to in the offering memoranda, and never made books and records available for "partner"-investor review, and the investors never interacted with each other. See Harden 11/14/2002 SEC Test'y (Ex J) at pp. 79-80; see also Dexter Dep (Ex I) at pp. 29-30; see also

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Haarala Dep (Ex J) at pp. 67-70; see also Hutchins Dep (Ex K) at pp. 24-26; see also O'Neill Dep (Ex O) at pp. 51-52; see also Rice Dep (Ex P) at pp. 26-27 and 33; see also Emery Dec, Faltin Dec, Hoskins Dec, and Johnson Dec (Exs E-H). Lowery himself opined that the investors had no right to know how he spent $1.9 million-plus of their capital, namely on matters wholly unrelated to operating or developing the business of the RLLPS' online casinos ($1.5 million to develop casinos for his own account, and over $400,000 for the couple's residence, lifestyle, travel, and other personal expenses). See Lowery 11/04/2002 Sec Test'y (Ex AA) at pp. 80-83. According to Harden, the investor-"partners" voted on, at most, three issues: the "selection" of the managing general partner of the RLLP (which the initial paperwork pre-designated as Harden, with no other choices listed), whether to close the partnership to additional investors after raising the desired funds, and whether to sell the online casinos after several years of unprofitable and sporadic operation. See Harden 11/13/2002 SEC Test'y (Ex W) at pp. 73-74 and Harden 11/14/2002 SEC Test'y (Ex X) at pp. 83-87 and its Ex 32. Even that limited number of partner/investor votes is suspect based on this record. The SEC points out that no ballots are in the record to show that the investors ever actually voted on whether to close any of the RLLPS to additional investors, see MSJ at 7, and it logically emphasizes that the investor/partner vote on whether to sell the failed casinos2 occurred only after Lowery and Harden knew the SEC was investigating and so cannot be evidence of their normal business practices during the relevant period, id. (citing Harden 05/22/2002 SEC

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After the RLLPs' online casinos shut down, Lowery sold the rights to the casinos to a third party in exchange for a 15% share in any future profits. The third party never re-started the casinos and they never generated any income. See Lowery Dep (Ex N) at 35 and Lowery 11/04/2002 SEC Test'y (Ex AA) at 38-47 and 50-52 and its Ex 100. The record contains no evidence that Lowery conveyed any of his right to the future profits to the RLLP investors, who, after all, had a right to a share of the casinos' profits under the terms of the RLLPs. -10-

Test'y (Ex U) Ex 1 and Harden 11/14/2002 SEC Test'y (Ex X) Ex 32. In other words, the undisputed evidence shows that despite the language of the subscription agreements, the Retrieval RLLP structure was essentially that of a limited partnership with a general partner charged with conducting all the partnership affairs and multiple limited partners whose role is limited to contributing funds for the investment and receiving a share of the profits. In the Retrieval RLLP scheme, Harden was the general partner and the investors were the limited partners. MSJ at 6-7.

The SEC also proffers a series of statements by Lowery and Harden which it characterizes as misrepresentations and misleading omissions: · · During initial sales seminars, Lowery and Harden said they expected each RLLP to generate about $300,000 to $600,000 within six months. The offering memoranda provided to prospective investors in connection with some of the RLLPs included a table entitled "Internet Casino License Projections", which indicated that a new online casino would generate about $22 million in revenue and $11 million "owner's share" over four years, even though Lowery and Harden had no gambling/gaming experience and no historical revenue and profit figures on which to base their projections. While Lowery and Harden were selling the later RLLPs, they knew (or were reckless in not knowing) that their online casinos already had significant operational problems which made their revenue and profit forecasts very untenable. Software problems delayed the start of online operations until 2000, two years after Lowery and Harden began soliciting investors. The websites operated for only one year and even then were not operational for 7-8 of the 12 months due to technical problems. Even when operating, the casinos generated no profits, yet Lowery & Harden continued to tell prospective investors the RLLPs would generate monthly profits. The sales brochure provided to investors represented that "The potential returns of an RLLP casino are enormous" and "The partners will share a percent of the monthly casino net drop [p]aid monthly."

·

· ·

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·

The sales brochure promised that "at the end of thirty-six (36) monthly payments, monthly payment will terminate and the net revenue interest will be bought-out per a contractual agreement for the original purchase price of five hundred ten thousand dollars." Lowery and Harden did not revise the sales brochure even after it became evident that the casinos had ongoing major difficulties and were not profitable. When convincing the managing partner of several partnerships to invest $2.74 million in the RLLPs over a 13-month period, Lowery made materially false and misleading statements, such as: (1) (2) (3) (4) Lowery was already operating profitable casinos; Lowery was buying up to three casinos per month with his own money and had set aside $16 million to buy more; Lowery was contributing at least $600,000 advertising per casino; Lowery expected to lose money on the casinos due to personal expenditures, but he planned to buy back the casinos from the investors after 3 years and either sell them or "take them public" at a large profit; The "President of Budweiser" offered to buy his casino business for $1 billion but he was not ready to sell.

·

(5) ·

The sales brochure stated that "[f]unds are being sought to create and lease internet casino sites, customized graphics and advertising," suggesting that the investors' money would be used to provide capital for the online casinos. In fact, none of the $5.8 million collected from investors was used to provide capital for the casinos: $4.5 million was deposited in Lowery's "Palancar LLC" accounts and then transferred to his "Princeton Holdings LLC" account, and $1.3 million was paid to Harden-controlled companies.

About $1.5 million was transferred into an account jointly owned by Lowery and his wife, then used to pay their personal expenses, including (1) $500,000 in back taxes; (2) a downpayment on a condominium in Colorado; (3) appointments with a masseuse and personalfitness trainers; (4) maintenance of a horse, llama, fish, and lakes and waterfalls at the Lowerys' three-acre home property; (5) new BMW and Mercedes automobiles; and (6) international travel and hotels in London, Vietnam, the Philippines, Belize, Curacao, Costa Rica, the Bahamas, the Isle of Jersey in the U.K., San Francisco CA, and Las Vegas NV. See Comp ¶¶ 18-20 and 24-25.3

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Paragraphs 21-23 of the complaint pertain only to defendant Gary Harden, who has died. -12-

The SEC complaint's allegations regarding Lowery's material misrepresentations and omissions are supported by the uncontradicted testimony of Lowery and Harden themselves. See Harden 05/23/2002 SEC Test'y (Ex V) at pp. 393-400 and 432-433 (agreeing that the sales brochure and website promised prospective investors that their RLLP interest would be "bought out" after 3 years, at the original purchase price, and that Lowery drafted and approved these materials) and Lowery 11/04/2002 SEC Test'y (Ex AA) at p. 79 (admitting that he had no gaming experience on which to base profit projections). See also Lowery 11/04/2002 SEC Test'y (Ex AA) at 59 (contrary to Lowery's alleged claim to Wimble that he was developing three casinos per month just for himself, Lowery testified that in his life he had tried to develop only 16 casinos, including the ten for the then RLLPs and just six for himself); Lowery 11/04/02 SEC Test'y (Ex AA) at pp. 59-60, 80-83, 170-174, and 195-197 and Lowery 11/05/02 SEC Test'y (Ex B) at pp. 5-8, 56-57, 70 and 74 (confirming Lowery's diversion of $430,000 for personal expenses or investments unrelated to the RLLPs and corresponding casinos, and his transfer to his wife of $1.5 million which he then spent to develop six online casinos in his own name rather than that of the "partnerships").4
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In testimony before the SEC, Lowery expressed his position that, notwithstanding this written promise in the sales brochure and website, he was not obligated to buy back the RLLPs at their purchase price. Lowery reasoned that because the casinos were never profitable (and went out of business after far less than three years of operation) therefore never made the requisite 36 months of payments. See Lowery 11/04/2002 SEC Test'y (Ex AA) at pp. 97-102. Lowery's opposition brief says nothing about this issue except to note, with unclear relevance, "Lowery's `buy-back' guarantee was clearly set forth in his contract with Cyberspace [Harden's company]." Def's Opp at unnumbered page 3, first full unnumbered paragraph. Both Lowery and Harden admitted, however, that they never disclosed this interpretation of the contingent nature of the buy-back promise to investors. See Lowery 10/03/2001 SEC Test'y (Ex Z) at pp. 127-134 and Harden 05/23/2002 SEC Test'y (Ex V) at pp. 393-400 and 432. The court finds that this was an omission of information which Lowery knew was material. That is, Lowery had to know that the true nature and extent of the buy-back guarantee was likely to influence the investors' decisions about whether to buy an interest in the RLLPs, how much of an interest to buy, -13-

And Wimble further testified that Lowery claimed he had a large "pot" of money to spend advertising the online casinos, had reserved $16 million to finish this casino project, and had paid $2 million to acquire a list of almost 4 million e-mail addresses, presumably to generate new customers for the online casinos, see Wimble Dep 3 (Ex S) at pp. 11-17 and 31-62, and its Exs 12-13, 17-22 and 25-26 (Wimble's contemporaneous notes of Lowery's oral statements). Those representations are starkly contradicted by the Lowerys' sworn personal financial statements of April 2004, see Exs FF and GG. Neither statement lists any interest or drawing rights in any trust fund, or income from trust funds, or assets, anywhere remotely approaching $1 billion. Rather, the SEC's reviewer of these records swears, without contradiction by Lowery, These records show that at most, the couple's assets totaled approximately $4 million (apart from any inflows of funds from the Retrieval RLLP investors). [T]he great majority of the couple's assets were highly illiquid, consisting of a primary residence valued at $1.1 million and the income from a promissory note with a face value of $2.3 million, with interest and payable on a monthly basis over a fourteen year period. Kurr Dec ¶ 2c. Likewise, the SEC's reviewer of the financial records of the RLLPs, the Lowerys, and associated entities states, without specific contradiction by Lowery, that the records show Lowery deposited at most $250,000 into accounts related to the online casinos, with nothing to suggest he paid $2 million for an e-mail list or set aside or had access to $16 million to develop, advertise, or operate the casinos. See Kurr Dec ¶¶ 2d and 2e. In any event, due to software and other problems, the online casinos underlying the RLLPs were shut down shortly after the began operating; none of them ever generated any profits, and none of the RLLPs made any payments to the 80-plus investors, see Comp ¶ 11, and none of the investors

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received any proceeds from the sale of the failed casinos, see Lowery Dep (Ex N) at p. 35. An essential premise of the SEC's case is that the RLLP units which Lowery and Harden sold to investors were "securities" as the term is defined by section 2(1) of the Securities Act, 15 U.S.C. § 77b(1). See Comp ¶ 27. Count one asserts a claim under sections 5(a) and 5(c) of the Securities Act. Specifically, the SEC claims that Lowery violated 15 U.S.C. §§ 77e(a) and 77e(c) by doing the following things without filing a registration statement for the RLLP units: (1) used mail and other means of transport and communication to sell the securities, or caused those securities to be carried in the mail or in interstate commerce for the purpose of sale or delivery after sale, and (2) used the means of transport or communication in interstate commerce or in the mails to sell or offer to sell the securities. See Comp ¶ 28. Count two asserts a claim under section 17(a) of the Exchange Act, 15 U.S.C. § 77q(a) ("Fraudulent Interstate Transactions" - "Use of Interstate Commerce for Purpose of Fraud or Deceit"). Count three asserts a claim under section 10(b) of the Exchange Act and Rule 10b-5 thereunder, i.e., 15 U.S.C. § 78j(b) ("Information Required in Prospectus" - "Summarizations and Omissions Allowed by Regulations") and 17 C.F.R. § 240.10b-5 ("Employment of Manipulative and Deceptive Devices"), respectively. In both counts, the SEC claims that Lowery, when offering or selling securities through the mail or other means of interstate commerce, employed schemes to defraud, obtained money by misrepresentations or omissions of material fact, or engaged in transactions or business practices which operated as a fraud or deceit on the purchasers of the securities. See Comp ¶¶ 30 and 32.

PROCEDURAL HISTORY

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In May 2005 the SEC filed the complaint against seven defendants: Lowery and his wife Erma J. Lowery, two entities owned by Lowery (Palancar LLC and Princeton Holdings LLC), Gary L. Harden Senior and his company Cyberspace Ltd., and Development Investments and Associates Inc. See Doc. No. 1. In October 2005, the Honorable Richard Alan Enslen, Senior United States District Judge, dismissed three defendants without prejudice for lack of personal jurisdiction: Erma J. Lowery, Princeton Holdings LLC, and Palancar LLC. See Doc. Nos. 32 (opinion) and 33 (order). In July 2006, Judge Enslen granted the SEC's application for default judgment against two defendants, Cyberspace Ltd. and Development Investments and Associates Inc. See Doc. Nos. 82 (motion) and 86 (judgment). That left only Lowery and Harden as defendants. In December 2006, the Honorable Ellen S. Carmody, United States Magistrate Judge, stayed the case pending the conclusion of US v. Philip Lowery and Gary Harden, Criminal Case No. 1:2006-104 (W.D. Mich.) ("the criminal case"). See Doc. No. 105. In March 2008, Magistrate Judge Carmody permitted Lowery's counsel to withdraw from the case. See Doc. No. 114. The case was reassigned from Judge Enslen to this judge, who directed the SEC to file a status report upon completion of the criminal case. Lowery went to trial on an indictment, but after the jury had been empaneled and started to hear testimony, he pled guilty to a superseding indictment charging him with one misdemeanor count of blackmail in violation of 18 U.S.C. § 873, defined as "knowingly and willfully demand[ing] a valuable thing as consideration for not informing on a violation of law of the United States." Specifically, in exchange for not telling law enforcement that Harden had committed federal mail fraud and wire fraud, Lowery demanded that Harden destroy a videotape of Lowery making a presentation to potential investors regarding an Internet gambling venture. See Ex D (Superseding

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Information dated Dec. 5, 2007). Although Lowery was subject to a potential prison term of one year and a fine of $100,000, the government did not seek prison time and the Honorable Janet T. Neff, United States District Judge, did not impose any. Rather, at the May 2008 sentencing, Judge Neff required Lowery to pay $500,000 in restitution and a $2,500 fine, with interest waived on both. Lowery's restitution payments are to be distributed on a pro rata basis to investors in Registered Limited Liability Partnerships ("RLLPs") described in the indictment who invested in or after May 2000. See Exs. A and B and C (Criminal Case No. 1:06-104, Doc. No. 102 (Dec. 5, 2007 Criminal Minute Sheet from Plea Hearing) and Doc. No. 115, Ex A (May 8, 2008 Judgment of Conviction) and Doc. No. 101 (Lowery's Plea Agreement) ¶¶ 1, 2, 5a, and 6. Also in May 2008, the court granted the SEC's motion to voluntarily dismiss the claims against Harden, who had died. See Doc. Nos. 115 and 120. That left only Lowery as a defendant. Magistrate Judge Carmody held a case management conference and issued a scheduling order in June 2008. In August, October and November 2008, the court granted the SEC's motions for extensions of time in which to conduct discovery and file dispositive motions, and in February 2009 the court granted the SEC a further extension of time in which to file a dispositive motion. See Doc. Nos. 126, 130, 133 and 136. The SEC filed the instant motion for summary judgment in February 2009, Lowery filed an opposition brief in March 2009, and the SEC filed a reply brief in See Doc. Nos. 138 (SEC's motion), 140 (Lowery's opposition), 143 (extension of time order), and 144 (SEC's Reply). Magistrate Judge Carmody held a settlement conference on June 25, 2009 but the case did not settle. See Doc. No. 147. Lastly, with an extension of time, on Friday, July 10, 2009 the SEC filed a proposed pretrial

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order. The pretrial conference was scheduled for Monday, July 13, 2009, with a bench trial to commence on Tuesday, July 28, 2009, but today's order cancels those proceedings.

DISCUSSION Preliminarily, the court notes that in ruling on summary judgment, it is entitled to consider sworn testimony given by Lowery and others in the course of the SEC's investigation on the same basis as other competent deposition or affidavit evidence. See SEC v. Research Automation Corp., 585 F.2d 31, 34 n.5 (2d Cir. 1978) ("Sworn testimony taken in an SEC investigation may be used pursuant to Rule 56(c) on a motion for summary judgment"); SEC v. Am. Commodity Exchange, Inc., 546 F.2d 1361, 1369 (10th Cir. 1976) (SEC investigative testimony is the same as affidavit evidence on a motion for summary judgment). See, e.g., SEC v. K.W. Brown & Co., 555 F. Supp.2d 1275, 1296-98 (S.D. Fla. 2007) (considering sworn testimony that civil defendant gave during SEC investigation, and noting how it contradicted his later trial testimony), order supplemented (S.D. Fla. Jan. 4, 2008) (not available in F. Supp.2d or on WestLaw); SEC v. Bolla, 401 F .Supp.2d 43, 51-52 (D.D.C. 2005) (considering sworn testimony that civil defendant gave during SEC investigation, and noting that it contradicted his earlier statement to the SEC), aff'd in part and rev'd in part o.g., 475 F.3d 392 (D.C. Cir. 2007); SEC v. General Refractories Co., 400 F. Supp. 1248 (D.D.C. 1975) (John Pratt, J.) (sworn affidavits and investigatory transcripts were properly admitted as probative evidence at preliminary-injunction hearing; "The factual findings resulting from the SEC's review of such records are presented in the form of affidavits and transcripts. Under Rule [of Evidence] 803(8), such findings are presumptively valid and reliable unless it is determined that the circumstances indicate a lack of trustworthiness as to the information contained therein. There is

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no evidence to indicate such a lack of trustworthiness."). On count one, Lowery fails to create a genuine issue of material fact as to any of the elements of the SEC's claim under sections 5(a) and 5(c) of the Securities Act. Specifically, Lowery does not present evidence which would enable a reasonable factfinder to find that he did not violate 15 U.S.C. §§ 77e(a) and 77e(c) by doing the following things without filing a registration statement for the RLLP units: (1) using mail and other means of transport and communication to sell the securities, or causing those securities to be carried in the mail or in interstate commerce for the purpose of sale or delivery after sale, and (2) using the means of transport or communication in interstate commerce or in the mails to sell or offer to sell the securities. See Comp ¶ 28. Securities Act section 5(a), which is codified as title 15 U.S.C. § 77e(a), is entitled Sale or Delivery After Sale of Unregistered Securities, provides: Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly ­ (1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale.

(2)

Securities Act section 5(c), which is codified as title 15 U.S.C. § 77e(c) and entitled Necessity of Filing Registration Statement, provides as follows: It shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security, or while the registration statement is the subject of a refusal order or stop order or (prior to the effective date of the registration statement) any public proceeding or examination under section 77h of this title [15 U.S.C. § 77h]. -19-

The court first finds that the RLLP interests sold by Lowery and Harden qualify as "securities" for purposes of the statutes in count one, as well the statutes in counts two and three. As our Circuit has explained, The courts have found that many investment schemes fall within the definition of security as defined by the Securities Act and the Securities Exchange Act. As the Supreme Court stated in Tcherepnin v. Knight, 389 U.S. 322 . . . (1967), "In searching for the meaning and scope of the word `security' in the Act, form should be disregarded for substance and the emphasis should be on economic reality." Id. at 386 . . . . Court have relied on this directive to look beyond the terms of the parties' agreement to determine whether a security was involved. SEC v. Prof. Assocs., 731 F.2d 349, 354 (6th Cir. 1984) (Engel, Kennedy, Sr. Cir. J. Bailey Brown). Accordingly, in determining whether Lowery and Harden's Colorado RLLP interests constituted securities, the court is entitled to consider not only the terms of the RLLP purchase documents or partnership agreements, but also the sales brochures, websites, and other promotional materials used to inform purchasers about the nature of the interest. See SEC v. Prof. Assocs., 731 F.2d at 354 ("In United Housing Foundation, Inc. v. Forman, 421 U.S. 837 (1975), the Supreme Court was called upon to decide whether shares of a cooperative housing project, sold to residents of the project, were securities. The Court, in making its decision . . . , relied not only on the agreements between the parties involved but also on an information bulletin published to attract investors. In light of the specific holding of . . . Forman . . . and the Court's general directive in . . . Tcherepnin . . . , we hold that the district court acted properly in considering the promotional brochure in making its determination that securities were offered and sold."). By the same token, the court will also consider the testimony of Lowery, Harden, investor Wimble, and the other investors recalling oral statements by Lowery and Harden which shed light on the true nature of the RLLP interests. See SEC v. Prof. Assocs., 731 F.2d at 355 ("We conclude

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that the district court did not err in allowing the oral testimony as to the actual operation of the trusts to show that there was a common enterprise [the second of the three elements of a `security' under these Acts].") (citing Curran v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 622 F.2d 216 (6th Cir. 1980) (Lively, Engel, Sr. Cir. J. Phillips) (in reaching conclusion that a discretionary commodity account was not an "investment" contract [the first of the three elements of a `security' under these Acts] because there was no actual pooling of investors' funds, the court relied not only on the terms of the parties' agreements, but also on the testimony of two of defendants' employees that plaintiffs' money had not actually been commingled with that of other investors)). Even if the Supreme Court had not remarked that a "security" is "a flexible concept which may encompass a wide variety of schemes", Prof. Assocs., 731 F.2d at 355 (citing Tcherepnin v. Knight, 389 U.S. 322 (1967)), this court would not hesitate to find that the Colorado RLLP interests offered and sold by Lowery were securities for purposes of the statutes underlying all the SEC's claims. Securities Act § 2(a)(1) and Exchange Act § 3(a)(10) provide essentially identical definitions of "security." See SEC v. Great Lakes Equities Co., 1990 WL 260587, *21 (E.D. Mich. Sept. 4, 1990) ("The definition of `security' in Section 3(a)(10) of the Exchange Act is virtually identical to the definitional sections of the Securities Act and for present purposes the two acts may be considered the same.") (citing Reves v. Ernst & Young, 494 U.S. 56 (1990)), app. dismissed, Nos. 91-1354, 91-1405 and 91-1525, 933 F.2d 1009, 1991 WL 88417 (6th Cir. May 28, 1991) (table entry), aff'd, Nos. 92-1433 and 92-1565, 12 F.3d 1214, 1993 WL 465161 (6th Cir. Nov. 10, 1993). Both Acts define a security to include investment contracts, which in turn are defined as any contract which constitutes (1) an investment (2) in a common venture (3) with the expectation of profits from the efforts of others. See Stone v. Kirk, 8 F.3d 1079, 1085 (6th Cir. 1983) ("the test for determining

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whether a particular financial arrangement constitutes an investment contract is whether it entails: `an investment in a common venture premises on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.'") (quoting Forman, 421 U.S. at 852). On the first element of a "security", it is undisputed that Wimble et al.'s purchases of the Colorado RLLP interests were an "investment", as each interest afforded the purchaser the potential to earn a return and subjected him to the risk of loss ­ and indeed Wimble and the other investors lost everything they invested. See generally SEC v. Edwards, 540 U.S. 389, 393 (2004) (the term "investment contract" is "`a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits'") (quoting SEC v. W.J. Howey & Co., 328 U.S. 293, 299 (1946)); see, e.g., Stone v. Kirk, 8 G.3d 1079, 1085 (6th Cir. 1993) (interests in joint ventures were investments where the funds used to purchase the interests were pooled and enabled the defendant-seller to engage in the venture's business (leasing the right to license "master recordings" and manufacture them on physical media, at the time record albums and cassette tapes) on their behalf); SEC v. Friendly Power co., LLC, 49 F. Supp.2d 1363, 1368-69 (S.D. Fla. 1999) (the term "investment" refers to any arrangement "whereby an investor commits assets to an enterprise or venture in such a manner as to subject himself to financial losses."). On the second element of a "security," it is undisputed that Wimble and the other investors pooled their purchase funds in a common venture, i.e., the particular RLLP in which they bought interests. The investors expected and intended that the aggregation of the funds would enable Lowery and Harden to create and profitably operate an online casino whose profits were contractually designated to flow partially to their RLLP. Indeed, Lowery and Harden led the

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purchasers to believe that the invested funds would be used for precisely that purpose. On the third element of a "security", it is undisputed that Wimble and the other investors purchased the RLLP interests with the reasonable expectation of profits to be derived from the "entrepreneurial or managerial skills of others", namely Lowery's alleged business and casino experience and his skills in creating, operating, publicizing and expanding the corresponding online casino (which would owe 33% of its profits to their RLLP). Moreover, the SEC presents a recent published appellate decision which squarely held that interests in a Colorado RLLP constitute investment contracts, and hence securities under the circumstances, whenever even one of these criteria are met: (1) the RLLP was similar in structure to a limited partnership, meaning that the partners had to vote for a particular managing partner and had no practical ability to conduct the RLLP's business, partly because they were geographically dispersed and had no pre-existing relationship with each other, or (2) the partners had little or no experience in the business affairs of the RLLP, or (3) the partners were so dependent on the unique entrepreneurial or managerial skill of the seller or promoter that they could realistically replace him or exercise meaningful partnership powers. See SEC v. Merchant Capital, 483 F.3d 747, 755 (11th Cir. 2007). For the same reasons that the 11th Circuit found all three of these criteria to be satisfied in Merchant Capital, 483 F.3d at 765, this court finds all three criteria to be satisfied here. As in Merchant Capital, the supposed partners in the RLLPs were given no choice but to "elect" a preselected person as the general managing partner of their RLLPs (here, Harden); and they had little or no voice in the management of the RLLPs or the underlying business (i.e., no way to meaningfully direct or even influence Harden's management of the RLLPs or Lowery's operation of the underlying online casinos), and no practicable, legally enforceable way to replace either

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Harden or Lowery. Finally, the SEC presents expert testimony that the "Retrieval" Colorado RLLPs sold by Lowery and Harden qualify as investment contracts and thus as securities under these Acts. Lowery has not challenged the relevant expertise and experience of Mark J. Lowenstein, Esq. ­ a University of Colorado securities and corporate law professor who has taught these subjects for about thirty years, gave trial or deposition testimony in at least seven federal and state cases in this field since 2004, and served by Governor's appointment on the Colorado Securities Board from 1995 to 2000. See Expert Report of Professor Lowenstein dated November 10, 2008 ("Lowenstein Repot") (Ex DD, Sealed) ¶ 1 and Ex A (cases where he testified) and Ex B (curriculum vitae). Before preparing his opinion on whether the RLLP interests were securities, Lowenstein reviewed the following documents, many of which are in the record: 1. Investor Packets, consisting of cover sheet, copy of cancelled check, "Partner Information Sheet," subscription agreement, ballot (electing Gary Harden as Managing Partner), representations and warranties, and appoint of attorneys and certificate of resolution (for partners with accounts at Retirement Accounts & Co.). Partnership distribution summaries for the various RLLPs. IRA transfer/rollover form (for partners with accounts at Retirement Accounts & Co.) and similar forms for partners with retirement accounts at other vendors. The Complaint in this matter. Excerpts from deposition testimony of [investors] Linda Irwin, Lawrence Youse, Helen Hutchins, June Rice, Faye Dexter, William Wimble, Dorothy O'Neill, Gary Harden. Declarations of [investors] Robert Haarala, Helen Hutchins, Mary Johnson, June Rice, Russell Hoskin[s], Faye Dexter, Aaron Fatlin, Albert Emery. Certificates of General Partnership issued to the investors. -24-

2. 3.

4. 5.

6. 7.

8. 9. 10. 11. 12. 13. 14.

Cyberspace, Inc.[owned by Harden] ­ Palancar, LLC [owned by Lowery] agreement of April 22, 1999. Various account statements. Information statement about the RLLPs. Powerpoint or slide presentation or brochure about the investment and internet gambling. Information sheet on Pacific Internet LLC. Explanation of the "four step process." Memoranda of FBI (or FBI/IRS) interviews with Donald Wilson, Linda Irwin, Robert Haarala, Russell Hutchins, Russell Hoskins, Stanley Draper, Edward Hillock, Rene Hillock[.] Form partnership agreements. Various correspondence [sic] from investors. Information and documentation related to Redstone Resources and Funding Corp. and various Redstone "entities." Organizational documentation related to Princeton Holdings, LLC and Palancar, LLC [both owned by Lowery]. Complaint forms filed with the Michigan Office of Financial & Insurance Services, Division of Securities, and related information, by [investors] Walter Hinderer, Arlene Youse, Ruth Conley, June Rice, Tom Johnson[.] Various documentation [sic] related to debt collection business and investment partnerships related thereto. Documentation related to complaint of Robert MacGregor against Gary Harden. Agreements between Cyberspace, Inc. [owned by Harden] and Gary Harden and the partners of the various RLLPs regarding distribution of revenues. Miscellaneous correspondence and documentation.

15. 16. 17. 18. 19.

20. 21. 22. 23.

Lowenstein Report (Ex DD) Ex C. -25-

The court finds that Lowenstein reviewed documents of sufficient quantity, substance, and relevance to render him able to render an intelligent opinion, grounded in the specific facts of this case, as to whether the RLLP interests were securities. After carefully enumerating the sound factual assumptions on which he based his opinion, see Ex DD ¶ 4, Professor Lowenstein filed a report stating in pertinent part as follows: Based upon the foregoing, I anticipate offering the following opinions at the trial of this matter: (a) Limited liability organizations are a relatively new addition to the forms of business organizations available to promoters and entrepreneurs. Essentially, a limited liability partnership is a general partnership in which the individual partners are not liable for the debts or obligations of the partnership except to the extent that a partner expressly assumed a liability or caused an injury to a third party. Because it is a general partnership, in theory each partner of a limited liability partnership has equal rights to manage the business and affairs of the partnership. However, in practice this may not be the case. Partners may lack the experience, interest or ability to participate in the management of the partnership's business, or they may contract away that right by designating one or more persons to manage the partnership. These qualifications describe the RLLPs; the investor/partners lacked the experience, interest or ability to manage the partnership and, in any event, they designated Harden as the manager. The investors thus by choice and necessity became passive investors in the RLLPs. Moreover, because the partners in a limited liability partnership are not liable for the debts and obligations of the partnership, they have less of an incentive to be active in the business and affairs of the partnership than do partners in a traditional general partnership. Thus, while some courts have presumed that an investment in a general partnership is not a security [citing Colorado state court], because the partners have both the right to manage and the incentive to do so, that presumption is not appropriate when the investment is in a limited liability partnership. (b) An investment in which the investor is passive, that is, invests money in a common enterprise with the expectation that profits will be realize through the efforts of others, is a "security," commonly known as an "investment contract." [footnote 6 citing SEC v. W.J. Howey & Co., 328 U.S. 293, 298-99 (1946)] The investments made by the investors in the RLLPs are investment contracts because: -26-

I.

There can be no doubt that the investors made monetary investments in the RLLPs and that their expectation was that their investments would be pooled to acquire an interest in the profits of internet gambling sites.

ii. There also can be doubt that despite what the documents signed by the investors may have stated, the investors and the defendants knew that the investors would remain passive, as they did, and would look to Harden, Lowery and their affiliates to realize a profit for them. iii. What is important in determining whether an investment is a security for purposes of the federal securities laws is the economic realities of the investment. The reality of this investment is that it was a passive one. At the time of the investment, the expectations of the parties were that the investors would be passive and, in fact, that turned out to be the case. [n. 7 citing Hutchins Dep at pp. 24-27, Rice Dep at p. 27, Dexter Dep at pp. 29-30, unspecified Wimble Dep at pp. 70-71, and date-unspecified interviews of Irwin, Draper, Edward Hillock, and Rene Hillock] It is appropriate to look to the representations of the promoter when marketing the RLLP interests, not just the documentation. [n. 8 citing Merchant Capital, 483 F.3d at 756] Numerous investors testified that Harden told them that "he would take care of everything" (or words to that effect) and that they (the investors) would not have to do anything. [n.9 citing Irwin Dep at pp. 64-66 and date-unspecified FBI interview of Donald Wilson] (c) Even if, counter-factually, the investors did not cede control to Harden, their investment would still clearly be a security, because the RLLPs themselves were passive. The internet gambling sites ­ the ultimate source of any return the investors cold hope to realize ­ were owned and operated by Lowery and entities controlled by, or affiliated with, him [Princeton Holdings, LLC, and Palancar, LLC]. Each RLLP, therefore, looked to Lowery and his affiliates to realize a profit for the RLLP. Lowenstein Report (Ex DD) ¶ 5. The court finds that Lowenstein had the requisite training, education and experience to testify as an expert on this issue, that he reviewed sufficient documents to intelligently apply general principles to the facts of this case, and that his reasoning is sound and persuasive. Accordingly, based on Lowenstein's opinion and the factors mentioned above, the court finds that the RLLP interests were securities as defined by the Securities Act and Exchange Act, -27-

satisfying the threshold requirement for application of the statutory and regulatory provisions in question. The court finds that Lowery has not shown any genuine issue of material fact bearing on the other elements of the section 5(a) and 5(c) claims, either. Based on the evidence catalogued in detail in the Background section above, it is undisputed that Lowery used interstate means of communication and transportation to offer and sell the RLLP securities, e.g., calling from Colorado to Florida to convince Wimble to invest, faxing documents from Colorado to Harden in Michigan, and traveling from Colorado to Michigan to give sales presentations, which presentations actually resulted in purchases of RLLP interests. It is also undisputed, as stated in the RLLP documents and SEC records alike, see Ex CC (Attestation of Non-Registration), that nobody ever filed a registration with the SEC regarding the Retrieval RLLP interests. Consequently, the SEC has proven its entitlement to summary judgment on count one. Lowery fails to show a genuine issue of material fact as to count two, which asserts a claim under the Exchange Act, 15 U.S.C. § 77q(a), or count three, which asserts a claim under the Exchange Act and Rule 10b-5, i.e., 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5. In both counts, the SEC claims that Lowery, when offering or selling securities through the mail or other means of interstate commerce, employed schemes to defraud, or obtained money by misrepresentations or omissions of material fact, or engaged in transactions or business practices which operated as a fraud or deceit on the purchasers of the securities. The detailed testimonial and documentary evidence provided by the SEC without effective, specific contest from Lowery (i.e., a contest grounded in specific, cited testimony or evidence of record) leaves no doubt that Lowery obtained money for the RLLPs, hundreds of thousands to

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millions of which he diverted for the personal benefit of himself and his wife rather than any arguable tangible benefit to the online casinos or the RLLPs; by making knowingly unrealistic or ungrounded profit projections; by making a buy-back promise that he admits he intended to keep only in certain circumstances (a crucial limitation which he admits he conveniently neglected to convey to Wimble or the other eighty-plus investors); by misrepresenting the amount of money which he had spent, planned to spend, and had the ability to spend advertising and developing the online casinos corresponding to the RLLPs; and by overstating his online-casino experience and implying that he had greater financial resources than he had relative to such projects (e.g., by falsely stating that he was developing three new online casinos per month for himself when he actually only developed six such casinos for himself during the relevant period), inter alia. Although the record would definitely permit a finding that Lowery committed these acts with the intent of defrauding and deceiving the investors, the SEC need not prove intent. In our circuit, it is sufficient that the SEC has presented ample evidence from which a factfinder not only may but must infer that Lowery was at least reckless with regard to the truth, accuracy, and completeness of his presentations and other statements to investors about the casinos, his experience, his resources, his plans, and what those factors implied about the likely risk and rewards of buying an interest in an RLLP. The record compels the conclusion, undispelled by Lowery, that in making the representations and omissions discussed above, in failing to find arguably-sound statistics or other bases for his profit and marketshare projections, and in diverting investor-"partner" capital from the RLLPs and casinos to his personal use without consulting or even informing them, he engaged in "highly unreasonable conduct which is an extreme departure from the standards of ordinary care." SEC v. George, 426 F.3d 786, 792-93 (6th Cir. 2005).

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Consequently, the SEC is entitled to summary judgment on counts two and three. Lowery's Opposition Brief. Defendant Lowery, a 77-year-old retired lawyer, is proceeding pro se and states that he "is legally blind and has congestive heart failure." Lowery's Opposition Brief filed March 24, 2009 ("Def's Opp") at 1 (citing Letter of Dr. Mark W. Keller, M.D., F.A.C.C., dated September 24, 2008, and Letter of James A. Patterson, M.D., dated November 11, 2008). Notwithstanding sympathy for Mr. Lowery's health problems, the fact remains that his brief does not show a genuine issue of material fact for trial. The brief fails to even address most elements of the SEC's claims against him. For example, Lowery fails to specifically controvert the material factual allegations which establish that the RLLP interests were "securities" for purposes of both the Securities Act and the Exchange Act and that they were not registered. Once over that threshold, on count one Lowery fails to effectively controvert count one, with the required specific citation to the record, and its ample testimonial and documentary evidence establishing that he used means of interstate transportation and/or communication to sell the unregistered securities, a violation of Securities Act section 5(a), codified as15 U.S.C. § 77e(a)(1) ("Sale or Delivery After Sale of Unregistered Securities"). This failure is fatal to Lowery's attempt to reach trial on count one, because it is incumbent on the non-movant to "direct the court's attention to those specific portions of the record upon which it seeks to rely to create a genuine issue of material fact." In re Morris, 250 F.3d 654, 655 (6th Cir. 2001); see also Guarino v. Brookfield Twp. Trustees, 980 F.2d 399, 405 (6th Cir. 1992) ("the designated portions of the record must be designated with enough specificity that the district court can readily identify the facts upon which the non-moving party relies'") (quoting Inter-Royal Corp. v. Sponseller, 889 F.2d 108, 111 (6th Cir.

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1989)). See, e.g., US v. Davis, 2008 WL 1735167, *4 (E.D. Ky. Apr. 11, 2008) (Edward Atkinson, M.J.) ("Defendant has not provided any specific information regarding who may have been responsible for submission of the CMNs; rather, she simply states that there are `disputes' regarding who actually submitted the forms. A conclusory statement that a dispute exists, absent specific citation to the record, is insufficient to raise a genuine issue of material fact.") (emphasis added) (citing Morris); accord Porter v. Potter, 2006 WL 1006882, *3 (D. Kan. Apr. 13, 2006) ("Plaintiff has failed to specifically controvert defendant's statement of fact and to support his own factual assertions with proper citation to the record. * * * Because plaintiff's response is, for the most part, unsupported by citation to the record, it is insufficient to controvert defendant's motion.") (emphasis added); US v. Worden, 2004 WL 2030286, *2 (D. Kan. Aug. 12, 2004) (Sam Crow, Sr. J.) (defendant's opposition brief was insufficient to controvert plaintiff's SJ motion where defendant failed to comply with local civil rule requiring non-movant to "refer with particularity to those portions of the record upon which [he] relies") (emphasis added).5 Moreover, it is not enough for a non-movant simply to make multiple factual allegations, or challenges to the adversary's factual allegations, and then throw cumulative citations at the end, without specifying the pages where the supporting evidence may be found or tying each citation to a specific allegation or challenge. See Walton v. Sizemore Sec. Int'l, Inc., 2007 WL 1545845, *2
5

Contrast Myszka v. Asbury, 2008 WL 4525415, *4-5 (M.D. Tenn. Oct. 2, 2008) (Aleta Trauger, J.) ("Plaintiff filed a Response to Defendants' Statement of Facts. Though his submission does not conform to the common structure of a memorandum response, it does include the required substantive information [meeting the requirement of] Rule 56 of the Local Rules . . . that `[e]ach disputed fact must be supported by specific citation to the record.' * * * Additionally, the nonmoving party must go beyond the pleadings and come forward with specific facts to demonstrate that there is a genuine issue for trial. The undersigned concludes that Plaintiff's filing constitutes an appropriate summary judgment response, particularly in light of the liberal construction his pro se status affords.") (citations and in