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U.S. Commodity Futures Trading Commission v. Arrington

United States District Court, D. Nebraska

January 28, 2014

U.S. COMMODITY FUTURES TRADING COMMISSION, Plaintiff,
v.
JONATHAN W. ARRINGTON, ELITE MANAGEMENT HOLDINGS CORP., MJM ENTERPRISES LLC, MICHAEL B. KRATVILLE, and MICHAEL J. WELKE, Defendants.

MEMORANDUM AND ORDER ON DEFAULT JUDGMENT

LAURIE SMITH CAMP, Chief District Judge.

This matter is before the Court on the Motion for Default Judgment against Jonathan Arrington ("Arrington"), Elite Management Holdings Corp. ("EMHC"), and MJM Enterprises LLC ("MJM") (Filing No. 109), filed by the Plaintiff, U.S. Commodity Futures Trading Commission ("CFTC"). For the reasons stated below, the CFTC's Motion for Default Judgment will be granted.

FACTUAL BACKGROUND AND FINDINGS

For the purposes of CFTC's Motion for Default Judgment, the Court incorporates by reference the well-pled facts alleged in the Complaint, which Arrington, EMHC, and MJM have never contested by answer or other responsive pleading. These facts are taken as true. Fed.R.Civ.P. 8(d).

I. Parties

CFTC is an independent federal regulatory agency that is charged by Congress with the administration and enforcement of the Commodity Exchange Act, 7 U.S.C. §§ 1 et seq. (the "Act") and the Regulations promulgated thereunder, 17 C.F.R. §§ 1.1 et seq. EMHC was a Nebraska corporation formed on August 16, 2005, with its principal place of business in Omaha, Nebraska. Arrington, and Defendants Michael B. Kratville ("Kratville") and Michael J. Welke ("Welke") owned and controlled EMHC, purportedly "established to provide conservative investors with an opportunity to invest a small portion of their investment portfolios in an aggressively managed investment account with the potential for higher overall yields." (Filing No. 1.) EMHC engaged in a business that was of the nature of an investment trust, syndicate, or similar form of enterprise, and, in connection therewith, solicited, accepted, or received from others, funds, securities, or property for the purpose of trading in commodities for future delivery or commodity options. EMHC acted as the controlling and general partner for, at a minimum, the following investment pools: Elite Aggressive Growth Group LP ("EAGG"); Elite Management Investment Fund LP ("EMIF"), and Elite Index Investment Group LP ("EIIG"). EMHC was never registered with the CFTC.

MJM was a Wyoming limited liability company formed on May 25, 2006, with a principal place of business in Omaha, Nebraska. Arrington, Kratville, and Welke owned and controlled MJM, which engaged in a business in the nature of an investment trust, syndicate, or similar form of enterprise, and, in connection therewith, solicited, accepted, or received from others, funds, securities, or property for the purpose of trading in commodities for future delivery or commodity options. MJM acted as the controlling and general partner for the NIC LLC ("NIC") investment pool. MJM was never registered with the CFTC.

Arrington, a resident of Omaha, Nebraska, was an equal owner and president of EMHC and president/managing partner of MJM. He jointly operated or controlled (directly or indirectly) EMHC and MJM, with Welke and Kratville. Arrington also was a self-identified trader for the various pools used by the Defendants. In association with both EMHC and MJM, Arrington served as a partner, officer, employee, consultant, or agent in a capacity that involved the solicitation of funds for participation in pools operated by EMHC and MJM. Arrington never registered with the CFTC.

II. Origin of Investment Pools

As detailed in the CFTC's Complaint, in or around the late summer of 2005, Arrington, Kratville, and Welke met at Kratville's house and decided to form multiple investment pools that they would use to solicit money from others and invest with FX Investment Group (FXIG), that purportedly traded in futures and spot markets for commodities, precious metals, and foreign currency. To carry out their scheme, EMHC, an unregistered commodity pool operator (CPO), and Arrington, Kratville, and Welke, unregistered associated persons (APs) of EMHC, initially used three pools-EAGG, EIIG, and EMIF (collectively, Elite Pools), which were portrayed as investment clubs, formed as limited partnerships, in which pool participants supposedly would become partners.

EMHC was the general partner of the Elite Pools. Through their ownership of EMHC, Arrington, Kratville, and Welke exerted total control over the Elite Pools. For example:

a. all three agreed that the Elite Pools' funds would be traded by FXIG;
b. all three were signatories on the bank accounts for the Elite Pools; and
c. all three actively solicited individuals to become pool participants of the Elite Pools.

Arrington, Kratville, and Welke also represented to pool participants and prospective pool participants that the three of them controlled the Elite Pools.

III. Solicitations for the Elite Pools

In or around late summer of 2005, Arrington, Kratville, and Welke began soliciting prospective pool participants to trade in futures and foreign exchange markets ("forex") through the Elite Pools. When soliciting prospective pool participants, EMHC-by and through Arrington, Kratville, and Welke-touted, among other things, their own extensive and successful experience trading futures and forex, the superior methodology of their program, the long and successful track record of their program, and their ability to limit risk while delivering above average returns. Pool participants received a brochure that described the pools' trading strategy, represented that there had been several multimillion offers for purchase of the investment system, and stated that the purpose was to help small investors earn money.

The Defendants' solicitations included discussions of the Elite Pools' return structure. Pool participant returns purportedly were to be capped based on the amount of funds a participant invested with the Elite Pools. For example, one prospective pool participant was told that if she invested between $10, 000 and $25, 000, her returns would be capped at 4% monthly, if she invested between $25, 000 and $50, 000, her returns would be capped at 5% monthly, and if she invested more than $50, 000, her returns would be capped at 6% monthly. The percentage caps also were referred to as the "return goals" or the "target returns." Though representations about the required investment and rates of return varied, the Defendants' solicitations included a representation that the Elite Pools met target returns every month for several years.

EMHC, Arrington, Kratville, and Welke did not have extensive, successful experience trading futures or forex; they did not own a program with a long successful track record or one that could greatly limit trading risks; and they had received no offers to buy their proprietary trading program. The Elite Pools had not made their target return goals each and every month for several years, as claimed by the Defendants; instead (1) trading had occurred by or on behalf of the Elite Pools for only a few months; (2) the earliest Elite Pool was not formed until February of 2004; and (3) the earliest Elite Pool participant was solicited in or around the late summer of 2005. EMHC, Arrington, Kratville, and Welke knew their representations were false.

EMHC-by and through Arrington, Kratville, and Welke-told pool participants and prospective pool participants that EMHC (and Arrington, Kratville, and Welke via their ownership of EMHC) would not be compensated unless pool participants received their target returns. The Defendants' compensation purportedly was to be composed of the returns in excess of target returns ( i.e., if the purported monthly return was 10%, then Defendants' compensation would be the difference between 10% and the stated target return).

EMHC-by and through Arrington, Kratville, and Welke-also told pool participants and prospective pool participants that any expenses incurred by or for the Elite Pools would be paid by EMHC, rather than out of the pooled funds or the pool participants' share of the returns. Despite these promises, Arrington, Kratville, and Welke used pooled participant funds to operate the pool and to pay for personal expenses, such as trips to Europe for Arrington and Welke. EMHC-by and through Arrington, Kratville, and Welke-told pool participants and prospective pool participants there was little risk in investing with the Elite Pools because only 5-10% of their funds would be invested at any one time. Each of these statements was false.

In addition to the above, EMHC-by and through Arrington, Kratville, and Welke- made other misrepresentations to pool participants and prospective pool participants:

• Arrington told prospective pool participants and pool participants that the Elite Pools met the maximum target return of 6% for at least 42 consecutive months as of the fall 2005. He claimed the year-to-date returns, with compounding, in 2005 were 53.9% for customers at the 4% per month target-return level, 71.0% at the 5% per month target-return level, and 89.8% at the 6% per month target-return level. These statements were false.
• Some prospective pool participants and pool participants were referred to Welke by Arrington and Kratville. On those occasions, Welke acted as a reference for the Elite Pools, but did not disclose his interest and role with EMHC and the Elite Pools. Rather, he posed as a like-minded pool participant with money invested in the Elite Pools. He falsely purported to provide an impartial reference vouching for Arrington's character.
• Kratville told at least one prospective pool participant that he spent ten years developing and testing the trading program that the Elite Pools used and that the program had been making the target returns between 4% and 5% per month and 60% annually for the past forty months as of April 2006. Kratville also said that several companies offered to buy the program, but Kratville refused to sell it because the program was making so much money that there was no need to sell it. Kratville also told the prospective pool participant that Kratville was a friend of Warren Buffett and that Buffett's children invested with Elite Pools. These statements were false. After the then-prospective pool participant decided to invest, Kratville referred him to Arrington to open the account.

EMHC-by and through Arrington, Kratville, and Welke-provided prospective pool participants and pool participants with written marketing materials describing the Elite Pools. These materials made several of the same misrepresentations described above, about the purported performance of the Elite Pools, target-return tiers, and purported excellent risk-versus-return.

IV. Elite Pools Participant Statements

EMHC-by and through Arrington, Kratville, and Welke-emailed pool participants a monthly newsletter that discussed the Elite Pools' previous month's trading results, and year-to-date returns, and represented that the target returns had been achieved for a certain number of consecutive months. For example, on November 7, 2005, Welke emailed an October 2005 newsletter to a pool participant, stating that the Elite Pools hit the "maximum target goal of 6% for the 42nd consecutive month" and that the year-to-date returns at the three target return levels were 53.9% at the 4% target, 62.9% at the 5% target, and 79.1% at the 6% target. Each of these statements was inaccurate.

Pool participants logged onto their individual accounts on the Elite Pools' website (www.emholdings.com) to view their account statements, and at least one pool participant received his account statements by mail. The account statements purported to show pool participants' investments growing by the percentage return goal, compounded every month. The online and mailed statements viewed by several of the pool participants showed purported gains every month from October 2005 through May 2006, ranging from 2% to 6%. Each of these statements was false.

V. EMHC and the Elite Pools Become MJM and NIC

On May 12, 2006, the State of Nebraska Department of Banking and Finance ("NDBF") sent EMHC a letter notifying EMHC that the sale of limited partnership investments implicated state law. NDBF sought information from EMHC, including, among other things, the names and addresses of all officers of EMHC, including EMHC's executive trader and trading group. In the letter, NDBF also stated that EMHC was prohibited from selling interests in the investment pool until the matter was resolved.

In a May 26, 2006, response letter to NDBF, Kratville, as the attorney for and an owner of EMHC, made several representations, including that: (1) Arrington, Kratville, and Welke were the trading group; (2) Arrington was the senior or executive trader because of his past experience with investment clubs; and (3) Kratville and Welke "have extensive trading experience...." Kratville also represented that he, Arrington, and Welke were the sole officers of EMHC. In the letter, EMHC agreed not to make any further offers or sales of investments in the Elite Pools. Kratville and Welke, acting on behalf of EMHC and the Elite Pools, also met with NDBF and reiterated those representations. NDBF demanded that the Elite Pools shut down because the Elite Pools were not operated in accordance with state law.

At about the same time that Arrington, Kratville, and Welke purported to shut down EMHC and the Elite Pools, they started a new group of entities-NIC LLC (NIC) and MJM-to continue their fraudulent scheme. Like the Elite Pools and EMHC, NIC was an investment pool, in which pool participants invested, and MJM was the controlling member that managed NIC. Arrington, Kratville, and Welke equally owned MJM. Through their ownership of MJM, Arrington, Kratville, and Welke exerted control over NIC.

Arrington, Kratville, and Welke did not tell NDBF about NIC and MJM, and led NDBF to believe they were following its directive. While setting up NIC and MJM, and to demonstrate that the Elite Pools were shutting down, Arrington, Kratville, and Welke asked each pool participant for a notarized signature acknowledging that the Elite Pools had returned that pool participant's funds. Arrington, Welke, and Kratville persuaded the Elite Pools' participants to sign the documents, but did not disclose why NDBF sought to shut down the Elite Pools. On the same day that Arrington, Kratville, and Welke sent the letter seeking a notarized signature from each Elite Pools participants, the three sent a second letter to the participants, providing a purportedly accurate rollover balance and cautioning the investors not to provide the information to anyone else.

In August and September 2006, EMHC-by and through Kratville-forwarded to NDBF the notarized documents with the Elite Pools participants' acknowledgment that their funds had been returned. EMHC-by and through Kratville-also informed NDBF that Arrington, Kratville, and Welke decided to dissolve EMHC and the Elite Pools. Arrington, Kratville, and Welke did not disclose to NDBF that they had started MJM, an unregistered CPO (for which they were unregistered APs), and NIC, nor did they disclose that the Elite Pools members' accounts had been rolled over to NIC.

VI. NIC and MJM Solicitation of Customers

From July 2006 until at least September 2007, MJM-by and through Arrington, Kratville, and Welke-made substantially similar representations to prospective pool participants and pool participants of NIC (as they had done to prospective pool participants and pool participants of the Elite Pools), including representations that pool participants' funds would be traded in futures and forex; that investment pools they controlled had been extremely profitable and had met or exceeded target returns for several years; and that no more than 10% of a pool participant's money would be at risk at any one time. MJM, Arrington, Kratville, and Welke each knew that these representations were false. Further, MJM-by and through Arrington-represented the following to certain pool participants regarding NIC's trading:

• that Arrington was NIC's trader and that he developed the trading program that NIC used;
• that he tested the program for over a year using his father's money to trade;
• that he was offered several million dollars to sell the program, but he refused because he could make more money using it himself; and
• that the program had never lost money.

Each of these representations was false.

MJM-by and through Arrington-also represented the following to certain pool participants:

• that Arrington used to do all the trading himself, but became too busy handling other aspects of the business;
• that NIC employed traders, who traded 24 hours a day, seven days a week;
• that, in the beginning, NIC employed six of the top ten traders in the world, and, as of March 2007, NIC ...

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