United States Commodity Futures Trading Commission, Plaintiff - Appellee
Michael Burdic Kratville, Defendant - Appellant; Michael J. Welke; Fred Honea; John Rizzli; Ron Bassett; FXIG; Sonador; Neal LaBelle; Michael Stewart, Defendants
Jonathan W. Arrington; Elite Management Holdings Corp.; MJM Enterprises LLC, Defendants
Submitted May 13, 2015
Appeal from United States District Court for the District of Nebraska - Omaha.
For United States Commodity Futures Trading Commission, Plaintiff - Appellee: Margaret P. Aisenbrey, Charles D. Marvine, Christopher A. Reed, U.S. Commodity Futures Trading Commission, Kansas City, MO; Mary T. Connelly, Jonathan L. Marcus, Robert A. Schwartz, Commodity Futures Trading Commission, Office of General Counsel, Washington, DC.
Michael Burdic Kratville, Defendant - Appellant, Pro se, Omaha, NE.
For Michael Burdic Kratville, Defendant - Appellant: John Paul Weis, Wolfe & Snowden, Lincoln, NE.
Before WOLLMAN, SMITH, and BENTON, Circuit Judges.
SMITH, Circuit Judge.
The United States Commodity Futures Trading Commission (CFTC) brought suit against Jonathan Arrington, Michael B. Kratville, Michael J. Welke, Elite Management Holdings Corp. (EMHC), and MJM Enterprises LLC (MJM) (collectively, " defendants'). The CFTC alleged that the defendants fraudulently induced more than 130 individuals to invest $4.7 million in commodity pools operated by the defendants, in violation of the Commodity Exchange Act (CEA), 7 U.S.C. § § 1 et seq., and its implementing regulations, 17 C.F.R. § § 1.1 et seq. The district court granted summary judgment in favor of the CFTC against Kratville. On appeal, Kratville argues that the district court erred in (1) denying his request for more time to review purportedly new evidence; (2) considering affidavits from investors who signed releases, affidavits from investors who lacked credibility, and emails that could have been altered; (3) declining to consider the affidavit of an expert opining on the authenticity of the emails; (4) granting summary judgment on the CFTC's claim that Kratville committed fraud and related violations of the CEA and CFTC regulations in soliciting persons to invest and maintain funds in commodity investment pools; and (5) determining that the litigation strategy of Kratville's attorney was not excusable neglect warranting relief under Federal Rule of Civil Procedure 60(b)(1). We affirm.
In the summer of 2005, Arrington, Kratville, and Welke formed EMHC to pursue investment opportunities. They all agreed to invest with FX Investment Group (FXIG), a trading group run by Fred Honea in Spain. FXIG traded in the spot (cash) and future markets for commodities, precious metals, and foreign exchange (" forex" ). It operated as an investment pool so that every account's return would be the same. It reported monthly trading returns ranging from 8.6 percent to 34.6 percent per month from May 2002 through May 2005. FXIG promised investors high returns with limited risks because no more than ten percent of an individual's funds would be invested at any one time. At no time did Arrington, Kratville, or Welke ever see any FXIG trading statements to confirm FXIG's representations because Honea refused to provide them.
EMHC became the parent company or " commodity pool operator"  for two " commodity pools"  called Elite Index Investment Group (EIIG) and Elite Aggressive Growth Group (EAGG), which had been incorporated the year prior and run by Arrington. Kratville had invested in EIIG from early 2004 to mid-2005 and lost money. EMHC also became the parent company for a third pool that Arrington, Kratville, and Welke opened in January 2006 called Elite Management Investment Fund (EMIF). The Elite Pools had a target return structure that capped the returns to which an individual pool participant was entitled in a given month. Arrington, Kratville, and Welke were to keep all returns above the monthly caps, and they were to bear all business expenses. The returns were to be made by investing in FXIG.
Arrington, Kratville, and Welke all owned EMHC and were officers of EMHC, with Kratville holding the position of secretary. Arrington, Welke, and Kratville did not register EMHC with the CFTC as a commodity pool operator or register individually as associated persons of a commodity pool operator. See 7 U.S.C. § § 6m(1) and 6k(2) (2006). EMHC never registered or filed an exemption of registration with the CFTC. See 17 C.F.R. § 4.13.
In addition to being an owner and officer of EMHC, Kratville had several other roles. First, when a prospective pool participant expressed interest in investing, Kratville referred that person to Arrington. Arrington, Kratville, and Welke shared potential investment contacts with the Elite Pools. Second, Kratville was originally a signatory on at least two bank accounts for EMHC, although Arrington later removed Kratville as a signor for the accounts on December 27, 2006. Third, Kratville acted as the attorney for EMHC and the Elite Pools and appeared before the Nebraska Department of Banking and Finance (NDBF) in that capacity. Fourth, Kratville reviewed and contributed to the Elite Pools website, brochure, prospectus, and monthly newsletter called " eWires."
In August 2005, Kratville began providing information about the Elite Pools to prospective pool participants. That month, Kratville emailed at least two prospective pool participants and told them that he had " formed an investment company so that we can pay people 4-6% PER MONTH because of the ability of our trader to generate consistent profits of at least 6% every month since [M]ay 2002." Kratville represented that he had " been a part of this fund since 2002" and " expect[ed] [it] to hit the 6% mark again by the end of [August 2005] . . . . for the 40th month in a row." (Ellipsis in original.) Neither Kratville's email nor the EMHC website referenced FXIG. In reality, FXIG--not the Elite Pools--reported the returns.
Kratville followed up with one of his clients, Ed Voges, several months after making representations to prospective investors. In one email to Voges, Kratville stated, " We have hit at least 6% every month since 5/02 . . . . and we don['t] get paid unless we hit your goal level first, and we charge no fees." (Ellipsis in original.) In another email to Voges, Kratville stated, " We are an investment club that is exempt from the SEC rules . . . so no filings." (Ellipsis in original.) And Kratville wrote in another email that " our main clients are people in our age group with IRAs and 401(k)s that can be rolled over into our fund and where people are looking to let it grow for a minimum of 3 years. We accept cash, of course, but we feel we do the most good for people that roll over tax-deferred vehicles."
Kratville also referred prospective pool participants to additional information on the EMHC website, brochure, and other marketing materials. The website made the following representation about its trading strategy, stating, in relevant part:
Our Executive Trader and trading group designed our Special Growth Strategy over a 10 year period of testing and trading. The principal investment markets that this strategy utilizes are equities, commodities, precious metals and currencies.
This strategy has had many multi-million offers to buy the system, but the desire has been, and still is to help the small guy build a nest egg and to remain entirely proprietary.
Special Growth Strategy has been designed to satisfy the demands for a product such as this from various private investors and groups. It is based on sound investment and money management principals; and uses sophisticated procedures developed to prevent losses. No more than 10% of principal is invested at one time, yet the results are unparalleled.
In reality, neither EMHC nor any of the Elite Pools had a proprietary trading system, and the defendants never received any offers to purchase such a system.
The monthly newsletter, eWires, that Kratville forwarded to potential pool participants included representations about trading returns and stated that EMHC hit the maximum target goal for several months in a row. The eWires newsletters did not mention FXIG.
The brochure and prospectus also made several representations about EMHC's trading strategy, such as that (1) the pool's special growth strategy was designed over a 12-year period of testing and trading; (2) the strategy had attracted multi-million dollar offers to buy the system; (3) even though there was no guarantee monthly target goals could be met, such goals had been met every month since 2002; and (4) a successful local attorney--Kratville--was an active, longterm investor in EMHC.
The prospectus listed EMHC's primary broker as TradeStation Securities in Florida and its clearing house broker as R.J. O'Brien in Chicago, Illinois. It also stated that the investments were equities, commodities, precious metals, and currency, both in the futures and spot markets. In truth, EMHC never had trading accounts at TradeStation Securities or R.J. O'Brien. While EAGG did at one time hold accounts there, those accounts had ceased trading by the end of April 2005--before the defendants began soliciting pool participants and before the formation of EMHC.
None of EMHC's marketing materials state that any money would be sent out of the country, and Kratville did not tell potential pool participants that investments would be sent out of the country. Kratville told his friend Pat Shannon in October 2005 that if he told people about FXIG, no one would invest with the Elite Pools. In an email dated August 30, 2006, Welke stated " [W]e both agreed . . . that it would be best if they didn[']t know who ou[r] people are . . . . [I] just think we should try to hold on as long as we can without giving out any names or info since that is our 'secret ingredient' which is our recipe for success . . . ." As to sales agents, Kratville told Shannon that EMHC could not hire anyone who had a license because " there are reporting rules for people with licenses if they are working with funds that are not licensed like ours." Kratville explained to Shannon that the sales agents that they were hiring " have connections with lots of rich people" and that they raised $1.5 million in 2005 " all in less than 4 months . . . hoping to hit $10 million in principal in 2006 . . . then we can all retire for real." (Second ellipsis in original.)
Between July 7, 2005, and April 30, 2006, EMHC received almost $2.3 million in funds from pool participants. The Elite Pools paid approximately $100,000 back to pool participants and sent $1.7 million to be traded on the Elite Pools' behalf. All of the Elite Pools' funds were commingled, and the Elite Pools were set up so that pool participants would share losses equally, based on the amount invested.
On May 15, 2006, Arrington received a letter from the NDBF regarding the investments that EMHC sold through its website, which he forwarded to Kratville. The letter referenced the EMHC website, asked for detailed business descriptions and copies of all promotional materials used, and inquired as to the identity of EMHC's traders. The letter stated that no offers or sales could continue until EMHC's legal status was determined.
Kratville contacted an attorney the following day about the NDBF's letter. In follow-up emails to that attorney, Kratville asked, " [I]f we open up another LP in another state, refund the money to Nebraska residents, and then have people give us back the money we just gave them to put into the new LP located outside [of] Nebraska . . . do you think that would suffice?" The attorney explained the jurisdictional reach of the NDBF was broader than that. In a subsequent email from Kratville to Arrington, Kratville said:
Despite [the attorney's] advice, I think the better course of action is to not refund the monies at this time and try and stretch out the discussion process as long as possible (I have some ideas on that) until the point where [they] likely [will] tell us to shut down.
* * *
I am curious whether we need to consider LPs in just another state or whether we need to even move it offshore. Just an idea.
On May 25, 2006, Arrington, Kratville, and Welke created NIC, LLC (NIC) and MJM in Wyoming. MJM was to manage NIC as its commodity pool operator. Shortly thereafter, Kratville, Arrington, and Welke agreed that MJM, EMHC, and at least one of the Elite Pools would be permitted to open bank accounts in Iowa. Arrington, Kratville, and Welke jointly decided on bank accounts, traders, allocation of NIC funds, and how to report returns to participants. As with the Elite Pools, they did not register MJM as a commodity pool operator nor individually register as associated persons of MJM. MJM never registered or filed an exemption of registration with the CFTC. Kratville was the self-described vice president/managing partner of MJM, and he solicited on behalf of MJM and NIC.
During the last week in May 2006, Arrington, Kratville, and Welke held a meeting for the Elite Pool participants attended by 20 to 40 persons. At the meeting, Kratville stated that while the NDBF had issues with how the Elite Pools were set up, there was nothing wrong.
On June 16, 2006, Kratville and Welke met with the NDBF. At that meeting, Kratville and Welke represented that Arrington, Kratville, and Welke were the sole officers of EMHC. Kratville represented that EMHC invested in commodities and currencies, but he did not mention FXIG. He told the NDBF that there were no pool participants from any other states; that no more than ten percent of a participant's principal was at risk at any one time; and that the EAGG had made at least five percent every month for 48 months.
The NDBF concluded that EMHC failed to disclose to investors the risks of investing in commodities; the details about the multi-million dollar offers to buy EMHC's trading system; information supporting the 48-month five-percent earnings claim, and Arrington's, Kratville's, and Welke's trading qualifications. The NDBF asked that the Elite Pools return the pool participants' money, both principal and gain. The NDBF explained that because EMHC was selling securities and that its structure, numbers, and representations were flawed, full rescission was the only adequate cure for the flaws. The NDBF warned that if EMHC did not agree to shut down and return all investor funds, then the NDBF would sue. Kratville and Welke agreed to follow the NDBF's directives and to notify Arrington.
The defendants, however, did not comply with the NDBF's directive. Instead, Kratville, Arrington, and Welke sent out two letters dated July 5, 2006, to every pool participant. The first letter, which the defendants provided to the NDBF as proof that the pools were complying with the NDBF's directive, stated that pursuant to cooperation with the NDBF, the Elite Pools would be closed and account balances returned to pool participants. The letter asked each pool participant to have the letter notarized, indicating that the pool participant had received his or her funds. The second letter, which was not provided to the NDBF, stated " [w]ith the dissolving of the current [Elite Pools], and you now joining NIC, LLC, we wanted to provide you with an accurate rollover balance. This is an internal document for you only. Do not provide this information to anyone." The letter listed the pool participant's balance and instructed the pool participant to contact Arrington, Kratville, and Welke with any questions.
Kratville made various comments about the letters to pool participants. Kratville emailed the letters to Voges, and, in conversations with Voges, Kratville explained that the NDBF did not like limited partnerships like the Elite Pools. Kratville explained to pool participant Gary McConnell that the opening of the new entity was necessitated by issues with the legal organization of the Elite Pools or a tax problem. Kratville told other pool participants that the rollover was a formality. When telling pool participants about the rollover, Kratville represented that everything would remain the same, including the traders and the risk limitation; the only thing that would change was the name. After the rollover, several of the pool participants of the Elite Pools became pool participants of NIC, which MJM managed.
On August 18, 2006, Kratville emailed Arrington and Welke about a follow-up letter that he had drafted to the NDBF. In that email, Kratville wrote, in relevant part:
Morever, as I stated last night, we don[']t know if the state has gotten ahold of our bank records or not. I do assume not because if they had, I don[']t think their only response would be to call me with these questions. [I]t is quite clear to me that if the State ever finds out that we have the Wyoming entity and that we moved everyone over, that they will go after our nuts.
Lastly, in an abundance of caution, I deleted anything on my computer that refers to FXIG or Elite. If the state would ever come grab our computers, the less on them the better. I would advise us to store any such documents on little zip drives, portable drives, on Hotmail or Yahoo accounts, etc. I don[']t have any of our emails in my Outlook or Outlook Express either. Better safe than sorry.
For several months preceding the fall of 2006, Arrington, Kratville, and Welke had been hearing that FXIG was in trouble. Kratville knew that FXIG had been refusing to honor withdrawals. In June 2006, the FXIG traders took the month off, and the website was unavailable for much of the summer. By late August or early September 2006, FXIG posted that 41 percent of its funds were in open negative trades. In an email dated November 6, 2006, Kratville wrote to Arrington:
On Red's point about results for October, I think we need better info from Fred and Ron before we post anything.
Personally, I am conflicted on saying " we hit 5.07" (or whatever the real number was for October, I'm just using the Sept number) versus just saying " we met our goals" and then find ...