Carney v. Illarramendi

          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” ...