Securities and Exchange Commission v. Bliss et al
Filing
241
MEMORANDUM DECISION AND ORDER granting 208 Motion to Amend/Correct 39 Order on Motion to Appoint Receiver. Signed by Judge Robert J. Shelby on 11/27/18 (alt)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
MEMORANDUM DECISION AND
ORDER GRANTING THE RECEIVER’S
MOTION
v.
2:15-cv-98
ROGER S. BLISS, et al.,
Chief District Judge Robert J. Shelby
Defendants.
This case stems from Roger Bliss’s Ponzi scheme. To protect Bliss’s assets and the
assets of the entities abused by him, the court appointed a receiver. Now before the court is the
Receiver’s Motion for an Order Amending the Order Appointing the Receiver. 1 In her Motion,
the Receiver seeks an amendment, adding a finding that she has standing to pursue net-winner
lawsuits under Utah’s Uniform Voidable Transactions Act. Defendants in separate suits oppose
her Motion. For the reasons below, the court GRANTS the Receiver’s Motion.
BACKGROUND
Roger Bliss sustained his Ponzi scheme by creating the illusion he profitably traded
Apple stock. Over the course of about six years, he raised approximately $26.3 million.2 He lost
$3.8 million investing, spent $6 million on himself, and transferred $16.3 million to investors. 3
These transfers, which Bliss mischaracterized as returns on investment, attracted new investors
1
Dkt. 208.
2
Dkt. 209, Ex. 1 at 3.
3
Id.
and gulled them into investing in Bliss’s scheme. 4 Bliss, of course, did not generate returns by
investing; he generated returns by transferring money from new investors to established
investors. 5 His scheme thus depended on an ever-increasing supply of capital, and when that
supply dried up, Bliss’s scheme was unveiled. 6 He subsequently pleaded guilty to securities
fraud and a pattern of unlawful activity. 7
To protect Bliss’s assets and the assets of entities abused by him, the court appointed a
receiver. 8 In multiple civil suits, the Receiver seeks to recoup money she alleges Bliss caused
abused entities to distribute to established investors, i.e., net-winners. For example, the Receiver
sued Steve Devereux to recover funds Bliss transferred to him. 9 Devereaux responded with a
Motion challenging the Receiver’s standing. 10 After the benefit of briefing and a hearing on
Devereaux’s Motion, the court took two actions. First, the court granted the Receiver’s request
for discovery on the standing issue. 11 Second, the court denied Devereaux’s Motion without
prejudice. 12
The Receiver served written discovery on Devereaux and subpoenaed Matthew Bliss
(Roger Bliss’s son) and David Hill (a defendant in an ancillary net-winner lawsuit). 13 She
4
Id.
5
Id.
6
See dkt. 1.
7
Dkt. 6, Ex. 4.
8
Dkt. 39.
9
See 2:16-cv-508, dkt. 2.
10
See 2:16-cv-508, dkt. 10.
11
See 2:16-cv-508, dkt. 35.
12
Id.
13
Dkt. 209, ¶ 2.
2
deposed Devereaux and his accountant, Kent Chambers. 14 She interviewed and re-interviewed
several victims. 15 She consulted financial advisors. 16
Following discovery and a meet-and-confer, Devereaux did not renew his motion
challenging the Receiver’s standing. Devereaux instead filed his Answer, reserving the defense
the Receiver lacks standing. 17 In response to consistent and sustained attacks on her standing in
this case and ancillary cases, 18 the Receiver filed the current Motion for an Order Amending the
Order Appointing Receiver. 19
LEGAL STANDARD
The parties do not specify what legal standard governs the current Motion. The court has
the benefit of evidence obtained during discovery on the standing issue, so it will apply the
standard for summary judgment. To withstand a motion for summary judgment, the Receiver
must set forth, by affidavit or other evidence, specific facts establishing standing. 20 For the
purposes of this Motion, the court accepts the Receiver’s evidence as true. 21 Because standing is
an indispensable part of any case, 22 Defendants may later challenge the Receiver’s standing so
long as they have a non-frivolous basis to do so.
14
Id.
15
Id.
16
Id.
17
See 2:16-cv-508, dkt. 41.
18
See 2:16-cv-508, dkt 10; 2:16-cv-558, dkt. 13; 2:16-cv-556, dkt 21.
19
Dkt. 208.
20
Lujan v. Defs. Of Wildlife, 504 U.S. 555, 561 (1992) (citing Fed. R. Civ. P. 56(e)).
21
Id.
22
Id.
3
ANALYSIS
Defendants attack the Receiver’s assertion of standing under Utah’s Uniform Voidable
Transactions Act. Although the precise basis for Defendants’ attack is difficult to discern, they
appear to base their attack on three arguments. 23 First, Defendants argue the Receiver lacks
standing because there was no unincorporated association, only Roger Bliss acting
individually. 24 Second, Defendants maintain the Receiver “has no standing to act for a
creditor.” 25 Third, Defendants argue the Uniform Voidable Transaction Act does not apply in
this case because the relevant conduct predates the Act’s effective date. 26 Each of these
arguments fail.
I.
Trading Club is an unincorporated association.
Federal Rule of Civil Procedure 17(b)(3) instructs courts to apply the law of the state in
which it is located to determine whether an entity exists, i.e., has the capacity to sue or be sued.
The court is located in Utah, so Utah Rule of Civil Procedure 17(d) applies. That Rule provides
in relevant part, “When two or more persons associated in any business either as a joint-stock
company, a partnership or other association, not a corporation, transact such business under a
23
Defendants purported to incorporate by reference an indeterminate number of additional arguments, located
somewhere within at least 7 filings that consisted of 488 pages. At oral argument, Defendants clarified they
intended only for their incorporation to highlight disputed material facts. Yet the court disallows the attempted
incorporation for even that limited purpose. Defendants deprived the Receiver of a meaningful opportunity to
respond to whatever arguments they hoped the court would consider. Defendants also deprived the court of the
benefit of the adversarial process on those arguments. More simply, Defendants’ attempted incorporation runs afoul
of District of Utah Local Rules of Civil Procedure 7-1(b)(2) and 7-1(c). The court thus considers only those
arguments made within the text of Defendants’ motions. See dkts. 216, 224.
24
Dkt. 216 at 17; see also id. at 11-14 (using bullet points to list assorted evidence and arguments); Oral Argument
at 40:27 (Oct. 23, 2018 hearing).
25
Dkt. 216 at 3, 16.
26
Dkt. 216 at 3, 6, 14-15.
4
common name, whether it comprises the names of such associates or not, they may sue or be
sued by such common name.” Two cases guide the interpretation and application of Rule 17(d).
The first case is Ogden Trece v. Weber County, in which the Utah Supreme Court
confronted the issue of whether a criminal street gang was a Rule 17(d) unincorporated
association. 27 The gang argued it did not exist for a lawful purpose and thus could not transact
“business.” 28 The unspoken presumption bolstering the gang’s argument was that Rule 17(d)
text referred only to lawful business. The Court rejected that presumption, explaining the
definition of a business did not require legality. 29 Because the gang generated profits and
divided those profits amongst themselves, the Court concluded the gang transacted business. 30
The gang also argued that, even if it transacted business, it did not do so under a common
name. 31 Without articulating a test for determining whether an entity transacts business under a
common name, the Court rejected the gang’s argument because the gang had, as a group,
distinguishing clothing, tattoos, hand signs, and gestures. 32
In the second case, Klein v. Cornelius, the defendants argued the receiver did not have
standing to bring a Utah Uniform Fraudulent Transaction Act claim because the entity in
receivership (Winsome) could not bring such a claim. 33 The defendants elaborated that because
Winsome was under the fraudster’s control it was “a mere alter-ego” of the fraudster and thus
27
2013 UT 62, ¶30, 321 P.3d 1067.
28
Id. at 1075.
29
Id.
30
Id. at 1075-76.
31
Id. at 1076.
32
Id.
33
786 F.3d 1310, 1316 (10th Cir. 2015).
5
without capacity to sue in its own right. 34 The Tenth Circuit rejected the defendants’ “mere
alter-ego argument” because a fraudster harms an entity by causing it to unlawfully transfer its
assets to net-winners. 35 The entity, or the receiver standing in the entity’s shoes, thus has
standing to redress that harm under applicable fraudulent transfer acts. 36 Of course, to sue, the
law must recognize the juridical existence of an entity. The Tenth Circuit therefore applied Utah
Rule of Civil Procedure 17(d), explaining,
Under Utah law, Winsome is an association of investors who pooled
resources together and transacted business under the common name of
Winsome Investment Trust. It had joint venture contracts with the investors
on behalf of the Trust, including bank accounts and other indicia of
independence and separateness. Over the course of its existence, it made
payments to some investors and even had its own website.
We thus agree with the district court that Winsome is an independent entity
under Utah law and see no impediment for Klein to assert standing on behalf
of Winsome to pursue a UFTA [Utah Fraudulent Transfer Act] claim. 37
Defendants here insist the Tenth Circuit in Cornelius added an extra-textual requirement
for satisfaction of Rule 17(d). This supposed requirement would require a receiver show
sufficient indicia of independence and separateness of a stand-alone business entity, similar to a
bona fide trust, signed trust document, or trust bank accounts, to satisfy Rule 17(d). 38 The words
“indicia of independence and separateness” do appear in Cornelius; however, the court does not
understand those words, or the passage from which they appear, to add an extra-textual
34
Id.
35
Id. (citing Scholes v. Lehmann, 56 F.3d 750, 754 (7th Cir. 2015)).
36
Id. (citing Scholes v. Lehmann, 56 F.3d 750, 754 (7th Cir. 2015)).
37
Id. at 1317.
38
Oral Argument at 41:02 (Oct. 23, 2018 hearing).
6
requirement. Rather the court understands the Tenth Circuit to hold the facts in Cornelius were
sufficient, but not necessary, to satisfy Rule 17(d).
Ogden Trece and Cornelius, although highly persuasive, do not dictate the resolution of
this case because the facts in those cases differ significantly from the facts in the current case. In
the absence of controlling authority, both parties invite the court to substitute legal reasoning
with policy justifications. 39 The court declines these invitations because a district court does not
choose what in its view is a desirable policy and then work backwards, supplying legal reasoning
to effectuate that policy. On the contrary, where no state authority is controlling, a district court
must endeavor to predict how the highest state court would rule. 40 Consistent with how the Utah
Supreme Court interpreted Rule 17(d) in Ogden Trece, the court will give effect to the plain
meaning of Rule 17(d)’s clear and unambiguous language. 41
A. Trading Club transacted business.
Rule 17(d) contemplates two factors: “(i) parties transacting business, and (ii) transacting
such business under a common name.” 42 Defendants dispute whether the Receiver satisfied the
first factor. 43 They argue Trading Club was a “pure fiction” and thus could not have transacted
39
Similarly, the court declines to consider the Receiver’s policy argument, including those policy arguments
borrowed from Johnson v. Chilcott, 599 F. Supp. 224, 227-233 (D. Colo. 1984). The court does not necessarily
disagree with the reasoning of that case; however, the court does not have the same leeway to consider policy
arguments because the court presently interprets statutory text. In contrast, the Chilcott court updated a common
law test. See id.
40
Stickley v. State Farm Mut. Auto. Ins. Co., 505 F.3d 1070, 1077 (10th Cir. 2007); see also id. (“If there be no
decision by [the state’s highest] court then federal authorities must apply what they find to be the state law after
giving proper regard to relevant rulings of other courts of the State.”) (internal quotation marks omitted).
41
See Ogden Trece, 2013 UT at ¶ 35, 321 P.3d at 1075.
42
Hebertson v. Willowcreek Plaza, 923 P.2d 1389, 1392 (Utah 1996) (emphasis removed) (interpreting Utah R. Civ.
P. 17(d)). After careful review of the statutory text, the court believes the Rule contemplates a third factor, namely
an association. Because this third factor is not at issue here, the court does not stake out a conclusive view on this
issue.
43
Dkt. 216 at 17.
7
business. 44 “Business” is defined as “[a] commercial enterprise carried on for profit; a particular
occupation or employment habitually engaged in for livelihood or gain.” 45 The court thus asks
whether two or more associates, i.e., Trading Club, conducted a for-profit enterprise.
Here, the court answers that question in the affirmative. Trading Club pooled money for
the purpose of obtaining a profit. 46 Trading Club traded Apple stock and paid purported returns
to certain investors. 47 Trading Club recruited and entered into agreements with new members;
then Trading Club transferred the new members’ investments to established members, creating
the illusion of profitability. 48 And then, while under Bliss’s control, Trading Club repeated the
cannibalistic cycle. 49
Not a single instance of the aforementioned business conduct is fictitious. Perhaps any
purported lawful profits were imaginary. But the transfer of purported returns to established
investors was real. Evidence, including an expert forensics analysis, shows the real-world
transfer of funds to investors. 50 All Defendants’ “pure fiction” argument might suggest is the
transfer of fraudulent returns to certain investors. But that suggestion does no damage to the
Receiver’s standing because when a criminal entity—be it a street gang or Ponzi entity—
conducts a for-profit enterprise, Rule 17(d)’s business transaction requirement is satisfied. 51
Accordingly, the court finds Trading Club transacted business.
44
Id.
45
Business, BLACK’S LAW DICTIONARY (10th ed. 2014).
46
Dkt. 209, Ex. 1 at 3; Dkt. 209, Ex. 7 at 70:9-10.
47
See Dkt. 209, Ex. 1 at 3-5.
48
Id.
49
Id.
50
Id.
51
See Ogden Trece, 2013 UT at ¶ 35-38, 321 P.3d at 1075-76.
8
B. Trading Club transacted business under a common name.
The second factor contemplated by Rule 17(d) is the transaction of business under a
common name. 52 “Common” is defined as “occurring or appearing frequently: familiar.” 53 The
court thus asks whether two or more associates transacted business under a frequently used
name. Because common does not mean exact or even consistent, the Utah Supreme Court gave
no weight to Ogden Trece’s (aka Centro City Locos’) use of an alias when determining whether
two or more associates transacted business under a frequently used name. 54 Likewise, the court
here gives no weight to Trading Club’s possible transaction of business under aliases.
Defendants urge a different conclusion. They draw attention to the legion of falsehoods
Roger Bliss told investors, arguing Trading Club did not conduct business under a common
name because Bliss used too many different names while defrauding investors. 55 While making
these arguments, Defendants do not engage with Rule 17(d)’s text nor the holding in Ogden
Trece, both of which cut against their arguments. 56 The court, however, cannot ignore those
authorities.
Abiding by those authorities here, the court finds two or more associates transacted
business under the frequently used name “Trading Club.” When transferring money to Bliss for
52
Willowcreek Plaza, 923 P.2d. at 1392.
53
Common, MERRIAM-WEBSTER ONLINE, available at https://www.merriam-webster.com/dictionary/common
(2018).
54
See Ogden Trece, 2013 UT at ¶ 39-42, 321 P.3d at 1076-77.
55
Dkt. 216 at 11.
56
Defendants reliance on Herbertson v. Willowcreek Plaza is misplaced. 923 P.2d 1389 (Utah 1996). That case
involved a plaintiff who slipped and fell in Willowcreek Plaza and then attempted to sue Willowcreek Plaza as a
Rule 17(d) unincorporated association, rather than the incorporated owners of the Willowcreek Plaza. The Court
stated, “We do not here articulate a test for determining when parties are transacting business under a common
name. We simply hold that the name of a building owned by parties transacting business together, even if such
business relates solely to that building, is not enough, without more, to establish that the parties were transacting
business under the name of the building for purposes of rule 17(d).” Id. (emphasis added).
9
the purpose of making a profit, Devereaux testified he believed he was investing in “a trading
club” 57 Consistent with this belief, Devereaux identified “A TRADING CLUB” as a source of
income when paying federal income taxes. 58 When other members funded their investment
accounts via personal check, they referenced “Trading Club” in their check’s memorandum
line. 59 Members in no fewer than 28 separate checks referenced “Trading Club.” 60 In view of
the foregoing evidence, the parties transacted business under a “common name.”
This finding agrees with Cornelius and Ogden Trece. Just as in Cornelius, associates
pooled resources together and transacted business under a common name. 61 Although Trading
Club did not have distinguishing clothing, tattoos, or hand signs, Trading Club did document its
business transactions. Extensive written evidence in this case demonstrates two or more
associates transacting business under the Trading Club name. Because the Receiver has satisfied
both Rule 17(d) factors, Trading Club is an unincorporated association that may sue or be sued
under its common name.
II.
The Receiver may sue on behalf of defrauded creditors.
Bliss argues the Receiver “has no standing to act for a creditor.” 62 This argument is
imprecise. Ponzi fraudsters often fraudulently transfer an entity’s wealth. Such transfer injures
the entity, transforming it into a defrauded creditor that can pursue its rights and remedies under
57
Dkt. 209, Ex. 7 at 18:25-19:8, 69:9-10, 69:18-19.
58
Dkt. 209, Ex. 11. In November 2016, Devereaux amended his 2014 and 2015 tax returns to show a $73,545 return
on investment from “a trading club.” Id. Just before responding to the Receiver’s written discovery requests related
to standing, Devereaux again amended his tax returns, now stating the income previous reported as a return on
investment was actually “additional income for construction services.” Id.
59
60
Dkt. 209, Ex. 8.
Id.
61
786 F.3d at 1317.
62
Dkt. 216 at 16.
10
applicable statutes. 63 Consequently, the receiver has standing to sue on behalf of a defrauded
creditor, that is also an entity in receivership, under applicable statutes. 64
III.
The Receiver has standing to sue under Utah’s Uniform Voidable Transactions Act
and/or Uniform Fraudulent Transfer Act.
The Uniform Voidable Transactions Act (UVTA) amended the Uniform Fraudulent
Transactions Act (UFTA). 65 The UVTA only “applies when any transfer occurs after the
effective date [May 9, 2017] of this act.” 66 Because transfers in this case took place before May
9, 2017, Defendants argue the Receiver cannot sue under the UVTA or UFTA. This suggestion is
wrong. Defendants fail to articulate, and the court’s independent research did not unearth, any
substantive difference between the two Acts. To avoid getting bogged down in trivial
technicalities, the court will amend the Order Appointing Receiver to permit the Receiver to sue
under the UVTA and/or UFTA.
CONCLUSION
The court finds Trading Club is an unincorporated association under Rule 17(d). 67 The
court therefore GRANTS the Receiver’s Motion. 68 Consistent with this opinion, the court will
amend the Order Appointing the Receiver in a separate order.
63
Cornelius, 786 F.3d at 1316.
64
See Utah Code Ann. §§ 25-6-202, 25-6-303.
65
Utah Code Ann. § 25-6-1, et seq.
66
Utah Code Ann. § 25-6-406(1).
67
The court does not understand the Receiver to request additional findings regarding the existence of additional
unincorporated associations, such as “Roger Bliss and Associates Club LLC.” Nor does the court understand the
Receiver to request a finding that “Roger Bliss and Associates Club LLC” were aliases of “Trading Club.”
Therefore, the court does not reach these issues.
68
Dkt. 208.
11
SO ORDERED this 27th day of November, 2018.
BY THE COURT:
________________________________________
ROBERT J. SHELBY
United States Chief District Judge
12
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