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Securities and Exchange Commission v. Louis

United States District Court, S.D. California

April 25, 2014

SCHOOLER and FIRST FINANCIAL PLANNING CORPORATION, dba Western Financial Planning Corporation, Defendants.


GONZALO P. CURIEL, District Judge.


This is a civil enforcement action initiated by the Securities and Exchange Commission ("SEC"), in which the SEC alleges defendants Louis V. Schooler ("Schooler") and First Financial Planning Corporation d/b/a Western Financial Planning Corporation ("Western") defrauded investors through the sale of unregistered securities tied to interests in real property.

The Court has entered a preliminary injunction and appointed Thomas C. Hebrank ("Receiver") as permanent receiver to operate and manage the affairs of Western, its subsidiaries, and the several general partnerships that Western formed in connection with the sale of the aforementioned interests in real property.

On August 16, 2013, the Court entered an order to remove the GPs from the receivership once certain conditions were satisfied. (ECF No. 470.) Among those conditions, Defendants disagreed with the condition that Western's interests in the GPs be liquidated so that Western would have no further ties to the GPs. (ECF No. 474.) The Court rejected Defendants' argument that this was an inappropriate condition, (ECF No. 494), and Defendants appealed to the Ninth Circuit, (ECF No. 499). Thereafter, Defendants asked the Court to release the GPs from the receivership, but to put a hold on the condition that Western's interests in the GPs be liquidated. (ECF No. 495.) On November 14, 2013, the Court decided to put a hold on releasing the GPs from the receivership until the Ninth Circuit has a chance to decide whether this Court's conditions for releasing the GPs from the receivership are appropriate. (ECF No. 513.)

On November 15, 2013, the SEC filed its own appeal of this Court's order that the GPs should be released upon satisfaction of certain conditions. (ECF No. 514.)

Now before the Court are the following three motions: (1) Defendants' Motion for Partial Summary Judgment ("Defendants' MSJ"), (ECF No. 542), which has been fully briefed, (ECF Nos. 552, 556[1]); (2) the SEC's Motion to Defer Consideration of Defendant's MSJ ("SEC's Motion to Defer"), (ECF No. 553), which has been fully briefed, (ECF Nos. 557, 564); and (3) the SEC's cross Motion for Partial Summary Judgment ("SEC's MSJ"), (ECF No. 563), which has been fully briefed, (ECF Nos. 571, 575). The Court finds the foregoing motions suitable for disposition without oral argument. See CivLR 7.1.d.1.

Having considered the parties' submissions, the record in this matter, and the applicable law, and for the reasons that follow, the Court will DENY the SEC's Motion to Defer, [2] DENY Defendants' MSJ, and GRANT IN PART and DENY IN PART the SEC's MSJ.


I. Solicitation

When offering to sell GP units, Defendants solicited investors throughout the country without regard to the investors' level of sophistication in business affairs or real estate investments. Defendants, for example, engaged in cold-calling programs to market the GP units to investors. Defendants also hosted real estate investing workshops, which they advertised through mass mailings sent to targeted zip codes, and they participated in benefits fairs to solicit new investors. Defendants also met prospective investors through networking groups and other contacts. Many Western salespeople also acted as financial advisors, in which role they encouraged their clients to not only invest in GP units, but to also invest in real estate investment trusts ("REITs"), which interests are generally categorized as securities. When acting as financial advisors, these salespeople were technically working for non-party WFP Securities, Inc.-a company in which Schooler owns an interest, but in which Schooler asserts he is otherwise uninvolved.

These broad solicitation efforts attracted investors throughout the United States. And, given the scope of these solicitation efforts, many investors did not meet with or even know other investors in their GPs. Their only contact, at least initially, was with Defendants and their representatives.

Western and its salespeople gave investors and prospective investors marketing materials that highlighted Western's and Schooler's expertise in real estate investment. One slide show prepared by a Western salesperson explained that Western's role in the GPs was to "Find the Right Investments, " "Bring Investors Together, " "Take Care of All Paperwork Details, " and "Make Sure You Get the Best Value for Your Investment" and that Western performed "Rigorous Due Diligence Process" and delivered "Impressive, Consistent Returns." While Defendants do not dispute that a Western salesperson prepared and presented this information to investors, Schooler asserts he neither saw nor approved the information for dissemination to investors. Further, Western salespeople were trained to tell investors Schooler "had great expertise in... making decisions about the best times to buy and sell land, " and "Western would decide when to sell the land, find a buyer, and negotiate a sales price" before sending ballots to investors." At least one individual invested his IRA account with Western based on representations by Western salespeople "that when Western believed the time was right to sell the land, it would approach potential buyers and negotiate a sales price, then come back to its investors for final approval."[4]

II. GP Formation

Upon investing-i.e., at the time investors gave Western cash or a promissory note for their GP units-investors were generally required to sign, among others, two key documents. Defendants created both documents. Investors did not negotiate the terms of the documents.

The first document is entitled, "Statement and Agreement of Partnership" ("Partnership Agreement"). Once effective, the document provides that: (1) investors have the right to access, inspect, and copy GP records; (2) investors have the right to select and remove signatory partners and partnership administrators;[5] (3) investors "shall participate in the control, management, and direction of the business"; (4) investors shall make decisions affecting the GP in accordance with a vote of the partners holding a majority of the capital contributed to the GP who are entitled to vote; (5) Schooler, Western, and others are non-voting members; and (6) any investor, whether voting or non-voting, may initiate a matter for a vote by submitting a written request to the partnership administrator, who "will" prepare and distribute ballots to other investors.

The second document is entitled, "Partner Representations." Among other representations, it includes a statement that investors "have sufficient experience, knowledge, and understanding of real estate and financial matters such that [they are] capable of evaluating the merits and risks of [their] investment."

At least two, but typically four, GPs would end up owning the undeveloped real estate that Defendants selected and bought. In one instance, eleven GPs owned various parcels of one large stretch of real estate.[6] Generally, each GP held an undivided fractional interest in a parcel. Schooler determined the number of GPs that would co-own a parcel, the price each GP would pay for its interest, and the price of GP units offered to the public.

Once Schooler decided the structure and terms of the offerings, Western conducted the GP offerings serially-i.e., one at a time-at prices that increased from one GP offering to the next, so investors had an incentive to invest early. Many GPs had 100 or more investors each, and some had as many as 275 investors. Once a GP was, in essence, filled with investors, the offering for that GP would be "closed, " the GP would be formally organized, and Western would transfer an interest in land to the GP. It was only at that time that investors were provided with a list of names and contact information for the other investors in their GP. And while investors bore some responsibility for keeping their partnership administrators updated with their current contact information, these lists were sometimes incomplete and outdated.

Returning to the Partnership Agreement that investors signed at the time they invested, the SEC notes each agreement states in the first paragraph that, "The General Partnership Agreement is effective as of ______, " and each signature page stated that the agreement was "executed as of the day and year first above written." The effective date was only filled in once a GP offering closed. For example, the Night Hawk Partners offering began in May 2008, and Western continued to receive investor money through August 2009 for that GP. The final Partnership Agreement for this GP provides an effective date of September 9, 2009. Thus, more than a year and three months passed between the initial offering and the date that this Partnership Agreement, by its terms, became effective. This is one to two-year period between initial offering and GP closing was typical.

Further, because of the above scheme, at the time most investors paid for their interests, the GPs in which they were investing did not formally exist. This is because a GP offering would be closed before required formation paperwork was filed with the State of California. Nonetheless, bank accounts were opened in the names of prospective GPs upon an initial investment. Investors did not control these bank accounts until the Partnership Agreements, which provided for the appointment of signatory partners, became effective. Generally, 93% of investor funds were transferred from the GPs to Western during this period. 7% of investor funds would remain in the GP accounts to cover operational expenses.

III. Investor Dependance

One of Western's selling points was that it would take care of everything, and many investors purchased GP units, in part, because they expected Western to manage all partnership business ...

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