United States District Court, D. Connecticut
JOHN J. CARNEY, in his capacity as court-appointed receiver, Plaintiff,
v.
FRANCISCO ILLARRAMENDI, Defendant.
RULING ON MOTION FOR SUMMARY JUDGMENT
Stefan
R. Underhill United States District Judge
John J.
Carney, in his capacity as court-appointed receiver for the
Michael Kenwood Group and certain affiliated entities
(collectively, the “Receivership Entities”),
[1]
filed an eleven-count complaint against Francisco
Illarramendi in an effort to recover assets stolen in the
course of Illarramendi's Ponzi scheme.[2] The receiver now
has moved for summary judgment on five counts of the Amended
Complaint. For the following reasons, I grant the
receiver's motion with respect to Counts Six, Seven, and
Eleven of the Amended Complaint, as well as with respect to
either Count One or Count Ten, but not both. I allow the
receiver ten days to file a notice on the docket stating
whether he intends to pursue Count One or Count Ten of the
Amended Complaint. The Clerk shall then enter judgment for
the receiver on the appropriate counts.
I.
Standard of Review
Summary
judgment is appropriate when the record demonstrates that
“there is no genuine dispute as to any material fact
and the movant is entitled to judgment as a matter of
law.” Fed.R.Civ.P. 56(a). When ruling on a summary
judgment motion, the court must “view the evidence in
the light most favorable to the non-moving party and draw all
reasonable inferences in its favor.” Sologub v.
City of New York, 202 F.3d 175, 178 (2d Cir. 2000);
Aldrich v. Randolph Ctrl. Sch. Dist., 963 F.2d 520,
523 (2d Cir. 1992) (court is required to “resolve all
ambiguities and draw all inferences in favor of the nonmoving
party”). “The burden of showing that no genuine
factual dispute exists rests upon the moving party.”
Carlton v. Mystic Transp., 202 F.3d 129, 133 (2d
Cir. 2000). When a motion for summary judgment is properly
supported by documentary and testimonial evidence, however,
the nonmoving party may not rest upon the mere allegations or
denials of the pleadings, but must present sufficient
evidence supporting its position “to require a jury or
judge to resolve the parties' differing versions of the
truth at trial.” Anderson v. Liberty Lobby,
477 U.S. 242, 249 (1986); Colon v. Coughlin, 58 F.3d
865, 872 (2d Cir. 1995).
“The
trial court's function at this stage is to identify
issues to be tried, not decide them, ” Graham v.
Long Island R.R. Co., 230 F.3d 34, 38 (2d Cir. 2000),
and so “[o]nly when no reasonable trier of fact could
find in favor of the non-moving party should summary judgment
be granted.” White v. ABCO Eng'g Corp.,
221 F.3d 293, 300 (2d Cir. 2000). Summary judgment therefore
is improper “[w]hen reasonable persons, applying the
proper legal standards, could differ . . . on the basis of
the evidence presented.” Sologub, 202 F.3d at
178. Nevertheless,
the mere existence of some alleged factual dispute between
the parties will not defeat an otherwise properly supported
motion for summary judgment; the requirement is that there be
no genuine issue of material fact. . . . Only
disputes over facts that might affect the outcome of the suit
under the governing law will properly preclude the entry of
summary judgment.
Anderson, 477 U.S. at 247-48.
“[A]
complete failure of proof concerning an essential element of
the nonmoving party's case necessarily renders all other
facts immaterial, ” and in such circumstances, there is
“no genuine issue as to any material fact.”
Celotex Corp. v. Catrett, 477 U.S. 317, 322-23
(1986); accord Goenaga v. March of Dimes Birth Defects
Found., 51 F.3d 14, 18 (2d Cir. 1995) (movant's
burden satisfied if it can point to an absence of evidence to
support an essential element of nonmoving party's claim).
To present a “genuine” issue of material fact and
avoid summary judgment, the record must contain contradictory
evidence “such that a reasonable jury could return a
verdict for the non-moving party.” Anderson,
477 U.S. at 248.
II.
Background
Francisco
Illarramendi worked as an investment adviser to certain hedge
funds. Between approximately 2006 and February 8, 2011,
Illarramendi defrauded investors by operating a large-scale
Ponzi scheme. Plea Agreement, Ex. E to Fokas Decl., Doc. No.
98-5, at 13; see United States v. Illarramendi, 2015
WL 8664174, at *2 (D. Conn. Dec. 11, 2015),
aff'd, 677 F. App'x 30 (2d Cir. 2017)
(summary order). Essentially, Illarramendi solicited new
investments in the funds to pay earlier promised returns, all
while concealing-through use of fraudulent documents and
false representations-that the funds' liabilities greatly
exceeded the true value of their assets. Plea Agreement, Doc.
No. 98-5, at 13. Illarramendi also lied to SEC investigators
in an attempt to conceal his misconduct. Id. at
13-14.
On
January 14, 2011, the SEC initiated a civil action against
Illarramendi and various businesses he controlled (the
Receivership Entities) for violations of sections 206(1),
206(2), and 206(4) of the Investment Advisers Act of 1940, 15
U.S.C. § 80b-6(1), (2), & (4); violation of the
SEC's Rule 206(4)-8, 17 C.F.R. 275.206(4)-8; and unjust
enrichment. Compl., Doc. No. 1, SEC v.
Illarramendi, 3:11-cv-00078 (JBA). The SEC
simultaneously filed a motion for a temporary restraining
order freezing Illarramendi's assets. Doc. No. 2,
id. After a hearing, United States District Judge
Janet B. Arterton issued an order freezing assets and
appointed John J. Carney as receiver for the Receivership
Entities on February 3, 2011. See Docs. Nos. 36, 66,
& 67, id.
On
March 7, 2011, Illarramendi was charged in a five-count
criminal information with wire fraud in violation of 18
U.S.C. § 1343 (Counts One and Two); securities fraud in
violation of 15 U.S.C. §§ 78j(b) & 78ff and 17
C.F.R. § 240.10b-5 (Count Three); investment adviser
fraud in violation of 15 U.S.C. §§ 80b-6 &
80b-17 (Count Four); and conspiracy to obstruct justice in
violation of 18 U.S.C. § 371 (Count Five). See
Information, Ex. D to Fokas Decl., Doc. No. 98-4.
Illarramendi pleaded guilty to all five counts on the same
day.[3]
Plea Agreement, Doc. No. 98-5. In an attached stipulation of
offense conduct-signed by Illarramendi and his
attorney-Illarramendi acknowledged that he “engaged in
a scheme to defraud his investors, creditors and the [SEC] .
. . by means of materially false and fraudulent pretenses,
representations and promises.” Id. at 13.
Illarramendi stipulated that he:
(a) used money provided by new investors to the Funds to pay
out the returns he promised to earlier investors;
(b) created fraudulent documents to mislead and deceive his
investors, creditors and the SEC about the existence of the
Funds' assets;
(c) made false representations to his investors and creditors
in an effort to obtain new investments from them and to
prevent them from seeking to liquidate their investments;
(d) commingled the investments in each individual hedge fund
with investments in the other hedge funds without regard to
their structure, stated purpose or investment limitations and
thus, treated all investments in the Funds as a single source
to provide returns to investors; and
(e) engaged in transactions that were not in the best
interests of the Funds and agreed to pay kickbacks to persons
connected with those transactions.
Id. As a result of Illarramendi's misconduct,
the hedge funds he managed and advised “ha[d]
outstanding liabilities that greatly exceed[ed] the true
value of their assets, exposing the investors and creditors
to the risk of suffering losses of hundreds of millions of
dollars.” Id.
On May
10, 2011, the SEC filed a Second Amended Complaint and a
second motion for a temporary restraining order. Judge
Arterton held a five-hour hearing on the SEC's motion on
May 25, 2011.[4] Illarramendi testified at length during
that hearing and admitted that, after incurring a $30 million
trading loss in late 2005, he decided to “conceal the
loss . . . and try to ‘raise as much money as possible
to be able to make it so that the gains from . . . the
additional money would eventually cover the
loss.'”[5] SEC v. Illarramendi, 260
F.Supp.3d 166, 172 (D. Conn. 2017) (quoting May 25, 2011 TRO
Hr'g Tr., Doc. No. 260, at 364 (hereinafter “TRO
Hr'g Tr.”)). He stated that he “tried to
solve the problem” by running “a unified treasury
function, ” through which “the money, no matter
where it came from, was used either to invest in transactions
or to pay . . . investors that were lending to the
pot.” Id. (quoting TRO Hr'g Tr., Doc. No.
260, at 365). Illarramendi's “comingling
account” was used “for paying off other investors
that the pot owed money to.” Id. (quoting TRO
Hr'g Tr., Doc. No. 260, at 398). In other words,
“earlier investors [were] paid from the investments of
more recent investors”-the hallmark of a Ponzi scheme.
Eberhard v. Marcu, 530 F.3d 122, 132 n.7 (2d Cir.
2008).
At the
hearing, Illarramendi also “admitted that he received
more in management fees than he was entitled to and that the
management fees paid . . . were ‘inflated.'”
Illarramendi, 260 F.Supp.3d at 173 (quoting TRO
Hr'g Tr., Doc. No. 260, at 385). Illarramendi's fees
“were calculated on the Net Asset Value
(‘NAV') of each of the funds” that he
advised, and “the NAVs as calculated . . . included
profits from transactions . . . [that] were
fictitious.” Id. (quoting TRO Hr'g Tr.,
Doc. No. 260, at 384). Illarramendi “modif[ied] the
numbers” at the end of each year “so that [he]
would receive more compensation than [he] w[as] really
entitled to if you looked at it under strict terms.”
Id. (quoting TRO Hr'g Tr., Doc. No. 260, at
387-88).
On
January 29, 2015, I sentenced Illarramendi to 156 months'
imprisonment, three years' supervised release, and a $500
special assessment. Because I determined that the true loss
could “not be calculated with sufficient [specificity],
clarity, and confidence, ” I used the estimated amount
of Illarramendi's gain-approximately $20 million-in
calculating his advisory range under the Sentencing
Guidelines. Sentencing Hr'g Tr., Ex. J to Fokas Decl.,
Doc. No. 98-10, at 72-73. I later held a separate hearing on
restitution after supplemental briefing from both parties. On
December 11, 2015, I issued a written ruling that ordered
Illarramendi to pay restitution in the amount of $370, 482,
716.54, based on the “fair and reasonable”
estimate of losses provided by the receiver.
Illarramendi, 2015 WL 8664174, at *3.
During
the pendency of the criminal and SEC actions, a number of
civil cases have proceeded concomitantly as the receiver has
attempted to recover stolen assets for the benefit of the
Receivership Entities and the investors. See, e.g.,
Carney v. Beracha, No. 3:12-cv-00180 (SRU);
Carney v. Marin, No. 3:12-cv-00181 (SRU); Carney
v. Lopez, No. 3:12-cv-00182 (SRU); Carney v.
Montes, No. 3:12-cv-00183 (SRU); Carney v. Horizon
Invs., No. 3:13-cv-00660 (SRU). In the present case, the
receiver seeks to recover money stolen by Illarramendi
himself. The Amended Complaint alleges actual fraud in
violation of Conn. Gen. Stat. § 52-552e(a)(1) (Count
One); constructive fraud in violation of Conn. Gen. Stat.
§ 52-552e(a)(2) (Count Two) and Conn. Gen. Stat. §
52-552f(a) (Count Three); common law fraudulent transfer
(Count Four); unfair trade practices in violation of Conn.
Gen. Stat. § 42-110a et seq. (Count Five); breach of
fiduciary duty (Count Six); unjust enrichment (Count Seven);
conversion (Count Ten); and the common law writ of
indebitatus assumpsit (money had and received) (Count
Eleven). See Doc. No. 51. The Amended Complaint also
seeks the imposition of a constructive trust (Count Eight)
and an equitable accounting (Count Nine).[6] The receiver
requests relief in the form of damages, disgorgement, and
avoidance of fraudulent transfers.
On June
20, 2017, the receiver moved for partial summary judgment on
five counts of the Amended Complaint. Doc. No. 96. On October
10, 2017, Illarramendi opposed the motion. Doc. No. 113. The
receiver filed a reply on October 27, 2017, Doc. No. 116, and
Illarramendi filed a surreply on December 15, 2017. Doc. No.
117 I elected to rule on the papers without argument.
III.
Discussion
The
receiver has moved for summary judgment on Counts One
(Connecticut Uniform Fraudulent Transfer Act
(“CUFTA”)), Six (Breach of Fiduciary Duty), Seven
(Unjust Enrichment), Ten (Conversion), and Eleven (Money Had
and Received) of the Amended Complaint. The receiver argues
that “the same essential facts [are] at issue in this
case” as were “found . . . when adjudicating
Illarramendi guilty in the Criminal Action.” Mem. Supp.
Mot. Summ. J., Doc. No. 99, at 12. Through the doctrine of
collateral estoppel, the receiver contends, Illarramendi
should be “prevent[ed] . . . from re-litigating issues
already decided in the Criminal Action.” Id.
Because the facts “necessary to establish the criminal
convictions . . . are also sufficient to impose civil
liability on Illarramendi, ” the receiver requests that
judgment be entered in his favor as a matter of law.
Id.
Illarramendi's
response is somewhat incoherent, but he appears to argue that
collateral estoppel does not apply because he has a section
2255 petition for writ of habeas corpus presently pending
before this court. See Mem. Opp'n Mot. Summ. J.,
Doc. No. 113, at 31. He also argues that he did not have a
“full and fair opportunity” to litigate in the
SEC and criminal actions because he was “rendered
indigent at the beginning of the judicial process by an
unconstitutional, court-ordered TRO, ” id. at
32; “[k]ey decisions . . . [were] ordered by the
District Court after hearings at which the Pro Se defendant
was not able to participate, ” id. at 33; and
one of Illarramendi's investors-Venezuela's
state-owned oil company, Petróleos de Venezuela, S.A.
(“PDVSA”)-was “allowed to present a
fraudulent and overvalued claim” that was
“approved by the Court at the behest of the Receiver
without any evidentiary scrutiny.” Id. In
addition, Illarramendi asserts that his prior statements and
affirmations are “unavailing” because “they
were factually erroneous, . . . based on a layman's
misunderstanding of the legal parameters, ” and
“recanted . . . early in the process.”
Id. at 34. Finally, even if collateral estoppel does
apply and Illarramendi is bound by his previous statements,
Illarramendi argues that his affirmative defenses of
extortion and duress “exonerate [him] from any
guilt.” Id. at 44.
A.
Does collateral estoppel apply?
“Under
the doctrine of offensive collateral estoppel (more recently
called offensive issue preclusion), a plaintiff may foreclose
a defendant from relitigating an issue the defendant has
previously litigated but lost against another
plaintiff.” SEC v. Monarch Funding Corp., 192
F.3d 295, 303-04 (2d Cir. 1999). “The Government bears
a higher burden of proof in the criminal than in the civil
context, ” and so either the United States or another
party “may rely on the collateral estoppel effect of a
criminal conviction in a subsequent civil case.”
Gelb v. Royal Globe Ins. Co., 798 F.2d 38, 43 (2d
Cir. 1986) (Newman, J.). “[F]ederal law governs the
collateral estoppel effect of a federal criminal conviction
in a subsequent diversity action.” Id. In the
present case, if collateral estoppel applies, then
Illarramendi “is barred from relitigating any issue
determined adversely to him in the criminal
proceeding.” See id.
Because
the doctrine of collateral estoppel “elevates
uniformity and repose above correctness, ” id.
at 44, “courts have imposed a number of prerequisites
to assure that the precluded issue, whether or not correctly
resolved, was at least carefully considered in the first
proceeding.” Monarch Funding Corp., 192 F.3d
at 304. In order for collateral estoppel to apply:
(1) the issues in both proceedings must be identical,
(2) the issue in the prior proceeding must have been actually
litigated and actually decided,
(3) there must have been a full and fair opportunity for
litigation in the prior proceeding, and
(4) the issue previously litigated must have been necessary
to support a valid and final judgment on the merits.
Gelb, 798 F.2d at 44. “The party asserting
collateral estoppel”-here, the receiver-“bears
the burden of demonstrating that it is entitled to th[at]
relief.” Bear, Stearns & Co. v. 1109580
Ontario, 409 F.3d 87, 93 (2d Cir. 2005).
Judge
Arterton recently gave estoppel effect in the SEC action to
Illarramendi's admissions in the criminal
action.[7] See Illarramendi, 260 F.Supp.3d
at 176. As explained below, I agree with Judge Arterton's
reasoning and also hold that collateral estoppel applies.
1.
Are the issues in both proceedings
“identical”?
The
same underlying conduct-Illarramendi's operation of the
Ponzi scheme-gave rise to the criminal action, the SEC
action, and the present case. Although the causes of action
differ, “[t]he allegations . . . described in the
[receiver]'s complaint in this action parallel the events
and charged determined . . . in [Illarramendi's] guilty
plea[].” See Mishkin v. Ageloff, 299 F.Supp.2d
249, 253 (S.D.N.Y. 2004). For example, the receiver's
claim for breach of fiduciary duty requires him to show that
“a fiduciary relationship existed.” Rendahl
v. Peluso, 173 Conn.App. 66, 100 (2017). That issue
effectively is decided by Illarramendi's admission in the
criminal action that he “acted as an investment adviser
to certain hedge funds, ” Plea Agreement, Doc. No.
98-5, at 13, because investment advisers are considered
fiduciaries under both Connecticut and federal law. See
SEC v. Capital Gains Research Bureau, 375 U.S. 180, 194
(1963) (“Congress recognized the investment adviser to
be . . . a fiduciary . . . .”); Iacurci v.
Sax, 313 Conn. 786, 804 (2014) (“[C]ourts have
concluded that [a] relationship . . . is fiduciary in nature
when a heightened risk of abuse of trust or confidence
exists, such as when the [defendant] acts as an investment
advisor . . . .”); Lehn v. Dailey, 2002 WL
449842, at *2-*3 (Conn. Super. Ct. Feb. 27, 2002)
(“defendant . . . owed a duty to the plaintiffs as a
fiduciary” because he “f[ell] within the
definition of an investment adviser” under Conn. Gen.
Stat. § 36b-3(10)). Thus, at least some of the issues
are “identical” such that estoppel of those
issues would be appropriate.
2.
Were the issues “actually litigated and actually
decided” in the prior proceeding?
“For
a finding to merit estoppel effect it must . . . have been
actually litigated and actually decided in the initial
action.” Monarch Funding Corp., 192 F.3d at
309. “[T]he actual litigation and actual decision
prerequisites help ensure that a finding was carefully
considered in the first action, and that it therefore may
serve as a fair basis for estoppel.” Id. Thus,
when an issue “received little attention from either
the parties or the court” in the prior action,
“applying collateral estoppel . . . would be
improper.” Id.
Here,
it can hardly be said that the issues underlying the
receiver's claims received “little attention”
in the criminal case. Id. To the contrary, the
issues not only were the subject of a binding stipulation to
Illarramendi's plea agreement-which may of its own force
render those issues “actually litigated” for
purposes of collateral estoppel, see Cent. Hudson Gas
& Elec. Corp. v. Empresa Naviera Santa, S.A., 56
F.3d 359, 369 & n.4 (2d Cir. 1995)-but also many of them
(e.g., the amount of loss) were hotly contested at
Illarramendi's sentencing and restitution hearings.
See United States v. U.S. Currency in Amount of $119,
984.00, More or Less, 304 F.3d 165, 179 (2d Cir. 2002)
(“That the issues . . . were raised by the [presentence
report], addressed by one party, and made the subject of
inquiry by the District Court strongly suggests that those
issues were ‘actually litigated' for purposes of
collateral estoppel . . . .”). The multiple written
decisions in Illarramendi's criminal case also show that
the issues have been “actually” (indeed,
exhaustively) “litigated.” See
Illarramendi, 2015 WL 8664174, at *3;
Illarramendi, 677 F. App'x 30; United States
v. Illarramendi, 642 F. App'x 64 (2d Cir. 2016)
(summary order). Therefore, I conclude that the issues that
were “actually decided” in the previous
actions-as reflected by the hearing transcripts and written
opinions-were also “actually litigated.”
3.
Was there a “full and fair opportunity for
litigation” in the prior proceeding?
Illarramendi
concentrates his opposition on the third prerequisite for
collateral estoppel, asserting that he lacked a “full
and fair opportunity for litigation” in the criminal
action. As he also has claimed in his habeas petition,
Illarramendi argues that he was deprived of a “full and
fair opportunity” to litigate because the asset freeze
imposed by Judge Arterton “forced [him] into
representation by counsel that [was] not of his choice”
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