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Securities & Exchange Commission v. Capital Solutions Monthly Income Fund, LP

United States Court of Appeals, Eighth Circuit

March 15, 2016

Securities and Exchange Commission, Plaintiff - Appellee
v.
Capital Solutions Monthly Income Fund, LP, formerly known as Hennessey Financial Monthly Income Fund, LP; Transactional Finance Fund Management, LLC, Defendants; Todd A. Duckson, Defendant - Appellant

         Submitted October 21, 2015

Page 347

          Appeal from United States District Court for the District of Minnesota - Minneapolis.

         For Securities and Exchange Commission, Plaintiff - Appellee: Benjamin J. Hanauer, Daniel J. Hayes, Marlene B. Key, Eric M. Phillips, SECURITIES & EXCHANGE COMMISSION, Midwest Regional Office, Chicago, IL; Daniel Staroselsky, U.S. SECURITIES & EXCHANGE COMMISSION, Office of General Counsel, Washington, DC.

         For Todd A. Duckson, Defendant - Appellant: Scott Richard Carlson, DC LAW CHARTERED, Minneapolis, MN.

         Before RILEY, Chief Judge, SMITH and SHEPHERD, Circuit Judges.

          OPINION

Page 348

          SMITH, Circuit Judge.

         This appeal arises from a civil law enforcement action that the Securities and Exchange Commission (SEC) brought against Todd Duckson, the Capital Solutions Monthly Income Fund, LP (" the Fund" ), and related individuals and entities. A jury found Duckson liable for violating the antifraud provisions of the federal securities laws and for aiding and abetting the Fund's violations. On appeal, Duckson argues that the district court[1] abused its discretion in declining to admit certain evidence offered to support Duckson's defense and in crafting the verdict form. We affirm.

         I. Background

         The SEC commenced this civil law enforcement action against Duckson, the Fund, and related individuals and entities, asserting a number of claims relating to alleged fraud in the offer and sale of certain investments: Count I asserted direct violations of Section 10(b) of the Securities Exchange Act of 1934 (" Exchange Act" ) and Rule 10b-5 promulgated thereunder (" Section 10(b) and Rule 10b-5" ); Count II charged aiding and abetting the Fund's violations of Section 10(b) and Rule 10b-5; and Count III asserted direct violations of Section 17(a) of the Securities Act of 1933 (" Securities Act" ). At the time of trial, the defendants included the Fund; the Fund's investment manager, Transactional Finance Fund Management, LLC (TFFM); and attorney Duckson, who formed, owned, and controlled TFFM (collectively, " defendants" ).

         A. Appraisals

         Prior to trial, the SEC filed a motion in limine to preclude evidence and argument regarding supposed property values. The motion related to Duckson's defense

that he believed that all of these properties that the Fund had acquired through the foreclosure on Hennessey Financial were so valuable that when the real estate crisis abated, he would be able to sell those properties, pay all of the investors

Page 349

back the principal and interest that they were owed, and he would have money left over to take for himself, or the Fund would be able to use it as collateral and everything would be fine.

         At the final pretrial conference relating to the SEC's motion, the SEC explained that it did not object to Duckson telling his " story" ; however, it did object to Duckson " offer[ing] evidence from other witnesses . . . about what these other witnesses thought that the value of these properties were, other people who were involved in the Fund, and what their belief was based on." The court granted the SEC's motion as follows:

a. Evidence of asserted property values shall be presumptively inadmissible, unless and until there is an additional offer of proof pursuant to [Federal] Rule [of Evidence] 104[2] establishing sufficient foundation for who made the appraisals, at whose direction, the timing of the appraisals, when they were received, and how they were used. If and when the Court receives an additional offer of proof and any exhibits related to that offer of proof, the Court reserves the right to revisit the issue, whether prior to opening statements or later in the trial, if necessary.
b. Absent further ruling by the Court, there shall be no reference to property values in the opening statements of either Plaintiff or Defendants.

         At trial, Duckson first sought to introduce appraisals during his cross-examination of Brian Aylieff who worked as a due-diligence analyst at National Financial Partners Securities (NFP) from 2004 to 2011 and was the broker-dealer that was the primary seller of the Fund's securities. Duckson's counsel questioned Aylieff about a July 20, 2009 letter from Duckson to the Fund's limited partners. The first paragraph of this letter stated, " We have completed our analysis of the Fund's consolidated assets and liquidity. Although appraising the value of real estate is not an exact science, we are pleased to report a 2009 consolidated appraised net asset value of approximately $78 million." Aylieff confirmed that he had the opportunity to review certain of the appraisals supporting that net value figure. Duckson's counsel then asked Aylieff if he had the " opportunity to review a two-page summary [Exhibit 1251] that listed, asset by asset, what the values were, what the debt on the property was, and what the net asset value of each of those parcels was." Aylieff confirmed that he had a chance to look at the two-page summary for identification and recalled seeing that document at some point in 2009. When Duckson's counsel asked Aylieff if the document supported the $78 million net figure from the July 20 letter, the SEC objected and requested a sidebar. The SEC argued that Aylieff could not " provide the foundation for these appraisals" because he " didn't draft the appraisals [and] has no independent knowledge of how they were conducted since he's from NFP and the appraisals were presumably conducted by representatives of the Fund, or at least at their direction by outside appraisers." The court sustained the SEC's objection " primarily on [Federal Rule of Evidence] 403[3] foundation grounds . . . because . . . [the

Page 350

testimony] should come from Mr. Duckson, himself."

         Duckson next attempted to offer the appraisals through Dean Engstrom who previously worked for the Fund and was the one who ordered the appraisals. Engstrom testified that, to his knowledge, the appraisals were conducted competently and " each appraised value that was ultimately determined represented a professional third party's best and reasoned judgment as to the actual value of the real estate as of the date of the appraisal." When Duckson's counsel then directed Engstrom to " take a look at some of the appraisals," the SEC objected. The SEC moved to exclude the appraisals because Engstrom did not prepare them and was unable to " say anything about how they went about being prepared." According to the SEC, Engstrom " simply received the appraisal, didn't know what went into them, [or] how they were done," which meant that " those appraisals are nothing more than hearsay, and [Engstrom] doesn't have the foundation to talk about them." In response, Duckson's counsel argued that the appraisals " are classic business records," which do not have to be created by the business; instead, Duckson had to show only that they were maintained and that the third party relied on those documents.

         The court sustained the objection based on lack of foundation; the court explained that it needed " more information on how [the appraisals] were . . . selected and processed." The court advised Duckson's counsel that " whether they come in through Mr. Duckson or others, whether you need the appraisers, if you want more guidance from the Courts, separate from Mr. Engstrom here, I'll be glad to do that at the appropriate time. Sooner rather than later if you want."

         In the proceedings that followed, the court voiced its concerns about the appraisals' length, stating that it had read " the very lengthy ones because that issue will be coming up if not during the Plaintiff's case, the Defendant's case for sure." Thereafter, when the court asked Duckson's counsel whether there was any further offer of proof that he wanted to make as to the appraisals, Duckson's counsel responded:

As to the appraisals, I don't think so. What I'm going to do, we will have Mr. Engstrom back--I don't know if we need the jury here for this, but what we have done is we have prepared what are basically five or six pages from the beginning of each appraisal. So it is not the whole report anymore; it is essentially just a letter. And put that in a single ...

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