07-07-2022: SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Randall S. GOULDING, Defendant-Appellant.
Michael Andrew Conley, Dina Bernick Mishra, Tracey A. Hardin, Attorneys, Securities and Exchange Commission, Washington, DC, Robert M. Moye, Attorney, Securities and Exchange Commission, Chicago, IL, for Plaintiff-Appellee. Eric W. Berry, Attorney, Berry Law PLLC, New York, NY, Fred R. Harbecke, Attorney, Chicago, IL, John J. Muldoon, III, Attorney, Muldoon & Muldoon, Chicago, IL, for Defendant-Appellant.
Easterbrook, Circuit Judge.
Michael Andrew Conley, Dina Bernick Mishra, Tracey A. Hardin, Attorneys, Securities and Exchange Commission, Washington, DC, Robert M. Moye, Attorney, Securities and Exchange Commission, Chicago, IL, for Plaintiff-Appellee.
Eric W. Berry, Attorney, Berry Law PLLC, New York, NY, Fred R. Harbecke, Attorney, Chicago, IL, John J. Muldoon, III, Attorney, Muldoon & Muldoon, Chicago, IL, for Defendant-Appellant.
Before Easterbrook, Wood, and Brennan, Circuit Judges.
Easterbrook, Circuit Judge. Randall Goulding has served time in prison for mail fraud and tax fraud. See United States v. Goulding , 26 F.3d 656 (7th Cir. 1994). Both state and federal judges have found that he engaged in other shady dealings. See, e.g., Goulding v. United States , 957 F.2d 1420 (7th Cir. 1992). But these convictions and findings did not deter people from continuing to trust him with their money, which he managed under the name Nutmeg Group. The Securities and Exchange Commission charged in this suit under the Investment Advisers Act of 1940, 15 U.S.C. §§ 80b–1 to 80b–21, that Goulding ran Nutmeg through a pattern of fraud—including touting his supposed financial expertise while failing to tell investors about his crimes—in addition to violating many of the Act's technical rules.
We recount a few of the court's findings to give the flavor of what happened. Goulding, an accountant and lawyer, formed Nutmeg to be an investment adviser. He also formed 15 funds that hired Nutmeg's advisory services. Nutmeg (which Goulding controlled) served as general partner of 13 funds. After investors put up money, the funds invested in illiquid securities, such as warrants and convertible bonds that had been issued by small firms that were close to insolvent or had been given going-concern warnings by their accountants. Goulding wrote all of the disclosure documents that the funds used to raise money and made all of the investment decisions. Because the funds' investments were illiquid, they had to be valued by means other than market prices, and a considerable discount should have been applied under normal accounting standards. Goulding told investors that this would be done—but it wasn't. The funds were accordingly overvalued, and Goulding often announced increases in value without market evidence to support his pronouncements.
A complex structure such as Nutmeg, with illiquid investments and advisory fees tied to the value of the assets under management, needed independent legal counsel and independent accounting. But Goulding never hired an accountant for the funds (despite telling investors and the SEC that he had done so), and his own law firm provided Nutmeg and the funds with all of their legal advice. It gave bad advice. When the SEC began an audit in 2008, Goulding told the agency that he had never heard of the Investment Advisers Act, even though Nutmeg had been registered under that statute.
Another bit of advice that either an accountant or an independent lawyer would have provided was to maintain strict separation of accounts. That didn't happen. Having decided which fund should buy what assets, Nutmeg often held the securities in its own name—not on deposit with a broker (less than 10% was held that way) but in drawers at Goulding's law office or in the hands of third parties that lacked experience managing or safeguarding investments. As for cash: well, that was commingled in one account that held Goulding's personal money, the funds' money, and Nutmeg's money. The magistrate judge found that Goulding used this account as his "personal piggy bank" and paid all sorts of expenses from it, without regard to his legal entitlements. By the time the SEC finished its audit in 2009, this account was empty and the relative entitlements of the funds to the illiquid securities was difficult to determine. The magistrate judge found that Goulding had drawn out at least $1.3 million more than his entitlement, though the restitution award was smaller (representing a conservative estimate of the excess in the five years before the SEC filed suit).
Nutmeg was entitled to fees based on the value of each investor's initial stake (a 4% load charge) plus monthly and yearly fees based in part on asset value and in part on any profits. Because Goulding valued the assets as he pleased, without an illiquidity discount, both the asset-based fees and the profit-based fees were overstated.
The conflict of interest was staggering: a single person was investment adviser (through Nutmeg), investment manager, controller of the funds under management, disclosure-writer, lawyer reviewing those disclosure documents, lawyer for all other purposes at both Nutmeg and each fund, accountant (to the extent that there was any accounting), and chief financial officer. The documents furnished to investors did not reveal the extent of this self-dealing, and as we've already mentioned the documents contained both fraudulent statements (such as a promise to discount illiquid assets) and fraudulent material omissions (such as a neglect to mention Goulding's convictions for fraud and the commingling that gave him access to as much of the money as he pleased). By the time a receiver took over in 2009, investors had lost millions of dollars (just how many millions is hard to know) out of the roughly $32 million entrusted to Nutmeg's 15 funds. (More) -------
IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that Defendant Goulding is permanently restrained and enjoined from violating, directly or indirectly, ... while acting as an investment adviser and by the use of the means and instrumentalities of interstate commerce and of the mails, employing devices, schemes, and artifices to defraud his clients and prospective clients, or engaging in transactions, practices, and courses of business which operate as a fraud or deceit upon his clients or prospective clients.
Goulding may not like the upshot of his request for that relief. One common remedy in securities-fraud cases is a fencing-out injunction—for example, telling the offender that he must never again have anything to do with investment management on behalf of persons other than his immediate relatives. See, e.g., SEC v. Cherif , 933 F.2d 403 (7th Cir. 1991) (prohibition on future trading); SEC v. Koenig , 557 F.3d 736 (7th Cir. 2009) (bar on serving as director or top manager of a public company); SEC v. Patel , 61 F.3d 137 (2d Cir. 1995) (same). Given Goulding's history of securities and tax fraud, such an injunction would have distinct benefits. The choice belongs to the magistrate judge. We mention the fencing-out possibility only to make clear to Goulding that he cannot complain if, on remand, things go from bad to worse.
The finding of liability and all of the financial awards are affirmed. The injunction is vacated, and the case is remanded for further proceedings consistent with this opinion.https://casetext.com/case/sec-exch-commn-v-goulding-2
