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Securities and Exchange Commission v. Wealth Strategy Partners, LLP

United States District Court, M.D. Florida, Tampa Division

May 17, 2019

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
WEALTH STRATEGIES PARTNERS, LLP, HARVEY ALTHOLTZ, STEVENS RESOURCE GROUP, LLC, and GEORGE Q. STEVENS, Defendants.

          REPORT AND RECOMMENDATION

          THOMAS G. WILSON, UNITED STATES MAGISTRATE JUDGE

         The Securities and Exchange Commission (SEC) has filed a second amended complaint against the defendants for defrauding investors in violation of the securities laws (Doc. 54). Defendants, Harvey Altholtz ("Altholtz") and Wealth Strategies Partners, LLP (" WSP"), are the subject of the SEC's recent motion for disgorgement, interest, and civil penalties (Doc. 108). The defendants had previously consented to the entry of judgments that permanently enjoin them from violating federal securities laws.

         The judgments provided for the court-ordered determination of disgorgement, prejudgment interest, and civil penalties (Doc. 106, pp. 5-6; Doc. 107, p. 6). Significantly, the consent judgments stated that the allegations in the second, amended complaint are taken as true for purposes of a.motion on those matters (Doc. 106, p. 6; Doc. 107, p. 6). Based upon the conceded allegations, I recommend that the defendants, jointly and severally, disgorge ill-gotten gains of $228, 505.97, with prejudgment interest of $52, 015.31, and that a civil penalty be assessed against WSP in the amount of $725, 000.00 and against Altholtz in the amount of $150, 000.00.

         I.

         The second amended complaint essentially alleges that the defendants engaged in a scheme to defraud over 100 investors through misstatements and omissions concerning the financial strength of companies invested in by two funds, the Adamas Fund, LLLP ("Adamas Fund"), and the Stealth Fund, LLLP ("Stealth Fund") (see Doc. 54).[1] Altholtz was WSP's . principal with WSP being the partner to the Adamas and Stealth Funds (id., pp. 1, 4).[2] Altholtz formed both the Adamas Fund and Stealth Fund in order to engage in investment activities (id., p. 6). Altholtz and WSP were unregistered financial advisors to both funds (id., p. 4). Altholtz also managed the day-to-day businesses of both funds for WSP and solicited investments for the funds (Doc. 100, p. 2).

         According to the second amended complaint, the defendants "raised approximately $30.8 million from investors through private sales of limited partnership interests in the Funds" (Doc. 54, p. 1). Thus, from April 2007 through February 2008, the defendants "raised about $ 18.1 million from 86 investors through private placement sales of limited partnership interests in the Adamas Fund" (id., p. 7). Also, from December 2007 through November 2009, the defendants "raised [] 12.7 million from about 57 investors through private sales of limited partnership interests in the Stealth Fund" (id.). The defendants, being in charge of the funds, also received management and incentive fees (id-, p. 10). For example, between November 14, 2008 and February 1, 2010, "WSP received $ 147, 500 in management fees from the Stealth Fund" (Doc. 100, p. 3). With respect to the Adamas Fund, between November 13, 2008, and September 30, 2009, "WSP received $67, 500.00 in management fees" (id.).

         The second amended complaint alleged a fraudulent scheme in which the defendants by misstatements and omissions through newsletters and offering statements to investors, failed to disclose to the investors the true financial state of the companies (Doc. 54, pp. 2, 10, 15-18). Thus, the companies that had been invested in by the funds were doing poorly, while investors believed otherwise. Despite the companies failing, the defendants kept investing money into the companies.

         Further, in violation of the operating agreements, in order to keep the failing funds afloat, the defendants from Altholtz family trusts provided loans to the funds without disclosing the conflict of interest to investors (id., pp. 2, 10-14). The loans were short term with high interest rates and the trusts received preferential treatment with respect to redemption over other investors (id., pp. 2, 3). In particular, in January 2009, WSP . loaned the Adamas Fund $250, 000 at an interest rate of 18% with a maturity date of March 31, 2009, and a default interest rate that was 50.7% based on Standards Poor's 500 stock index (id., pp. 13-14).[3] WSP, however, then assigned the loan to an Altholtz family trust (id., p. 14). The SEC in its memorandum explains that the loan was assigned to trusts that were in Altholtz's daughters' names (see Doc. 109, p.7). The loan was first assigned to the Melanie S. Altholtz Irrevocable Trust and then later to the Karyn M. Blaise Irrevocable Trust (id.). For both trusts, defendant Altholtz is the beneficiary and his son is the trustee (id.).

         The second amended complaint indicates that in April 2010, despite the "Adamas Fund ha[ving] virtually no cash in its bank accounts, Altholtz sold more than $325, 000 worth of money market securities out of the fund's brokerage account" (Doc. 54, p. 14). On behalf of the Adamas Fund, Altholtz then issued a check to the family's trust for $391, 005 as a repayment on the loan.[4] The payment constituted $25 0, 000 in principal and $ 141, 005.97 in interest (id.). Moreover, the defendant's family trusts received preferential redemption, whereas other investors' requests for redemption were denied (id., pp. 18-19). In other words, the loan was paid back to the family trust - at a high interest rate - instead of providing redemption to requesting investors.

         The SEC has filed a motion seeking disgorgement with prejudgment interest and the imposition of civil penalties against the defendants (Doc. 109). The SEC requests that the defendants be held jointly and severally liable for disgorgement in the amount of $228, 505.97, plus prejudgment interest of $52, 015.31 (id.). In addition, it seeks civil penalties of $150, 000.00 against Altholtz and $725, 000.00 against WSP (id.).

         Altholtz filed a response opposing the imposition of . disgorgement and civil penalties, essentially arguing that he is not to be blamed for the losses because the loans were "all done with the good will of attempting to save the investors from a formidable loss" (Doc. 113, p. 10). Altholtz also places the blame on other people and factors, including his son and the recession (see Doc. 113).

         Defendant WSP did not file any response to the motion. Notably, an attorney (Michael C. Addison) has filed an appearance on behalf of WSP (Docs. 77, 79). Moreover, he approved the form of the consent document that not only authorized the entry of a permanent injunction, but set out provisions regarding disgorgement and civil penalties (Doc. 104-1, p. 7). Under these circumstances, WSP would seem to be entitled to challenge through counsel the SEC's claims of disgorgement, prejudgment interest and civil penalties. However, it did not do so.

         The SEC's motion has been referred to me (Dkt. Entry 114). A hearing was subsequently held on the motion (Doc. 116). Altholtz, appearing pro se, expressed his position at the hearing. WSP did not appear.

         II.

         The consent judgments set out criteria under which disgorgement and civil penalties are to be assessed. Thus, the judgments provide (Doc. 106, p. 6; Doc. 107, p. 6):

In connection with the Commission's motion for disgorgement and/or civil penalties, and at any hearing held on such a motion: (a) Defendant will be precluded from arguing that it did not violate the federal securities laws as alleged in the Complaint; (b) Defendant may not challenge the validity of the Consent or this Judgment of Permanent Injunction; (c) solely for the purposes of such motion, the allegations of the Complaint shall be accepted as and deemed true by the Court; and (d) the Court may determine the issues raised in the motion on the basis of affidavits, declarations, excerpts of sworn deposition or investigative testimony, and documentary evidence, without regard to the standards for summary judgment contained in Rule 56(c) of the Federal Rules of Civil Procedure.

         Altholtz's response does not acknowledge these stipulations. Moreover, what he does not do is challenge, or even mention, the amounts sought by the SEC.

         In support of his position, Altholtz states that he "neither admitted nor denied the allegations made by the Commission in the Second Amended Complaint" (Doc. 113, p. 6). Further, Altholtz explains that, due to "extremely limited amounts of cash available for payment of defense by legal counsel," he had to "finally agree to sign a document presented to him by the SEC as a means to end his forced pro se representation" (id., p. 14). However, the consent judgments have established the facts as admitted as true with respect to the matter of determining disgorgement and civil penalties (see Doc. 106, pp. 1, 5-6; Doc. 107, pp. 1, 6). Thus, the defendants, having foregone the opportunity to go to trial, are bound by the stipulations they made in settling this case.

         The Supreme Court has confirmed the principle that parties are not permitted to deny the truth of stipulated facts. Christian Legal Soc. Chapter of the University of California. Hastings College of the Lawv. Martinez. 561 U.S. 661, 677-78 (2010) ("factual stipulations are formal concessions ... that have the effect of withdrawing a fact from issue and dispensing wholly with the need for proof of the fact"). Accordingly, the issues of disgorgement and civil penalties are to be decided based upon ...


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