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Mitchell v. Total Wealth Management Inc.

United States District Court, S.D. California

May 12, 2015

W. BYRON MITCHELL, JR. and NANCY L. MITCHELL, individuals, Plaintiffs,
v.
TOTAL WEALTH MANAGEMENT INC., a California corporation; ALTUS CAPITAL MANAGEMENT, LLC, a Delaware limited partnership; ALTUS CAPITAL OPPORTUNITY FUND LP, a Delaware limited partnership; CAPITA ADVISORS, INC., a California corporation; FINANCIAL COUNCIL, INC., a California corporation; PINNACLE WEALTH GROUP, INC., a California corporation; JACOB K. COOPER; NATHAN P. McNAMEE; DOUGLAS D. SHOEMAKER; and DOES 1 through 100, inclusive, Defendants.

ORDER FOLLOWING ORDER TO SHOW CAUSE

GONZALO P. CURIEL, District Judge.

On February 6, 2015, Receiver Kristen A. Janulewicz ("Receiver") filed a Notice of Pending Receivership regarding her appointment as a temporary Receiver for Total Wealth Management Inc., and its subsidiaries and affiliates, including, but not limited to Atlus Capital Management, LLC, in Securities and Exchange Commission v. Total Wealth Management, Case No. 15-cv-226-BAS (DHB) (the "Receivership Action"). (ECF No. 49.)

On February 12, 2015, District Judge Cynthia Bashant (hereinafter "the Receivership Court") issued a preliminary injunction order, wherein she appointed the Receiver as a permanent receiver. (Case No. 15-cv-226-BAS (DHB), ECF No. 8.) The order appointing a permanent receiver provides that:

[E]xcept by leave of this Court, during the pendency of this receivership, all clients, investors, trust beneficiaries, note holders, creditors, claimants, lessors and all other persons or entities seeking relief of any kind, in law or in equity, from Defendant Total Wealth Management, Inc., or its subsidiaries or affiliates... are hereby restrained and enjoined from, directly or indirectly, with respect to these persons and entities... commencing, prosecuting, continuing or enforcing any suit or proceeding (other than the present action by the SEC or any other action by the government) against any of them....

( Id. at 11.)

On February 17, 2015, this Court issued an Order to Show Cause ("OSC") why this action should not be stayed during the pendency of the receivership in Securities and Exchange Commission v. Total Wealth Management, Case No. 15-cv-226-BAS (DHB). (ECF No. 51.) Plaintiffs and the Receiver both filed responses to the OSC on March 6, 2015 (ECF Nos. 52 & 53.) None of the other Defendants filed responses. On March 13, 2015, Plaintiffs filed a reply brief. (ECF No. 54.)

BACKGROUND

A. The SEC Action

On April 15, 2014, the Securities and Exchange Commission ("SEC") issued an Order Instituting Administrative and Cease-and-Desist Proceedings in its investigation of Total Wealth Management, Inc. ("TWM"), Jacob Keith Cooper ("Cooper"), Nathan McNamee ("McNamee"), and Douglas David Shoemaker ("Shoemaker"). (ECF No. 53, Ex. D.) According to the SEC's order, McNamee is the current president and chief compliance officer of TWM, an investment adviser representative for TWM, and the sole founder and operator of Capita Advisors, Inc. ("Capita"). ( Id., Ex. D ¶¶ 1, 3, 11.) Shoemaker is a co-founder and former chief compliance officer of TWM, an investment adviser representative for TWM, and the sole founder and operator of Financial Council, Inc. ("Financial Council"). ( Id., Ex. D ¶¶ 1, 3, 12.) The SEC alleges that TWM entered into revenue sharing arrangements with several investment funds (including Altus funds), such that when TWM placed its clients' investments in those funds, TWM received sharing fees. ( Id., Ex. D ¶¶ 25, 53.) TWM, in turn, paid Cooper, McNamee, and Shoemaker a portion of the revenue sharing fees it received. ( Id., Ex. D ¶ 26.)

The SEC further alleges that "[a]bout the same time that the Altus Capital Fund was established [by Cooper], Cooper formed Pinnacle, and he advised Shoemaker and McNamee to form Financial Council and Capita, respectively." ( Id., Ex. D ¶ 27.) After forming their respective "consulting" companies, McNamee and Shoemaker would routinely invoice TWM for "consulting fees, " even though McNamee and Shoemaker did not do any consulting work. ( Id., Ex. D ¶ 28.) The money TWM paid in response to these invoices instead represented McNamee and Shoemaker's shares of the revenue sharing fees. ( Id. )

In addition, McNamee and Shoemaker are alleged to have known of, and aided and abetted, TWM and Cooper's failure to adequately disclose material information about the revenue sharing fee arrangement because they (1) reviewed brochures, offering memoranda, statements, Forms ADV, and other materials that Total Wealth provided to its clients, (2) signed off on these materials, (3) met with prospective clients and investors, (4) prepared investment recommendations for those clients, and (5) sold the Altus investments to clients, all the while failing to disclose to the investors the truth about the revenue sharing agreements. ( Id., Ex. D ¶¶ 41-42.)

The SEC action seeks to determine, among other things, what remedial action should be taken against McNamee and Shoemaker, including "civil penalties and disgorgement." ( Id., Ex. D ¶¶ C, E, H, I.)

B. Plaintiffs in this Case

Plaintiffs W. Byron Mitchell, Jr. and Nancy L. Mitchell (the "Mitchell Plaintiffs") are healthcare professionals of retirement age who invested over one million dollars with Defendants in June of 2010. (Complaint, ECF No. 1 ¶¶ 14-16, 38.) After becoming concerned about the returns they were receiving on their accounts, the lack of communication from Defendants, and the poor handling of their accounts, Plaintiffs requested that Defendants liquidate all of their assets. ( Id. ¶¶ 62.) Plaintiffs allege that some ...


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