A Bad Poker Hand
A recent complaint filed by the Illinois Administrator
In 2003, Respondent co-founded an investment advisory firm named The Nutmeg Group, LLC (“Nutmeg”), to make investments and to provide investment advice to unregistered investment pools. Prior to June 7, 2007, when it registered as an investment advisor with the federal Securities and Exchange Commission (“SEC”), Nutmeg operated without being registered due to its small size. As of 2007, though, Nutmeg had fifteen advisory clients, all of which were limited partnerships organized in either Illinois or Minnesota. Each advisory client was organized as a fund (“the Funds”), and collectively included 328 individuals or entities who participated in the Funds as limited partners. The investors invested their money with the Funds, which then purchased securities issued by companies with market capitalization less than $50 million. As of 2007, Nutmeg claimed that the total amount of assets it had under management in the various Funds was approximately $32 million.
Respondent allegedly became sole owner and managing member
Beginning in at least 2008, Respondent caused Nutmeg to make false statements about the value of various Funds to the SEC and to investors in those Funds. During an examination by SEC staff in relating to the first quarter of 2008, Respondent was asked to substantiate claims regarding the value of Nutmeg’s four largest Funds (known as Michael, Fortuna, Mercury and Stealth). The information Respondent provided overstated the value of the Mercury Fund by $485,479, overstated the value of the Stealth Fund by $578,000, and misstated the values of the Michael and Fortuna Funds because Nutmeg, at Respondent’s direction, had commingled those Funds’ assets with other Funds, or paid out distributions due to the Michael or Fortuna Funds and rolled some of those distributions to a separate Fund held in Nutmeg’s name, rather than in the name of Michael or Fortuna.
Respondent also caused Nutmeg to send false investor account statements to its investors about the performance of various Funds and the investors’ cash position, due to Respondent’s failure to properly allocate up to $1 million in rolled-over assets to certain Funds and his decision to describe as “cash” investments in unallocated and illiquid securities.
The statements Respondent caused Nutmeg to make to the SEC and to Nutmeg’s investors, described in paragraphs five and six, above, were false, because they were based on incomplete, inaccurate or deliberately misstated stock prices, overstated sales prices, inflated share holdings, and commingled or misallocated assets.
Alleged misuse of assets
Respondent’s initial capital contribution to Nutmeg was $70,000. Despite that, between at least 2003 and 2009, Respondent withdrew more than $1.2 million from Nutmeg’s commingled investment accounts that he used to pay his personal expenses, without regard to whether the money was his to take or belonged to the Funds or the Funds’ investors. Those personal expenses included more than $660,000 on Respondent’s home equity line of credit, $67,000 for the acquisition of an Acura automobile that was titled in Nutmeg’s name but used by Respondent, more than $400 in tickets for Chicago White Sox baseball games, a $10,000 entry fee for the World Series of Poker, and more than $160,000 in payments on Respondent’s personal credit cards or on Nutmeg’s cards for purchases made on Respondent’s behalf. As of 2008, Nutmeg owed the Funds $974,054, but the balances in its two bank accounts were both negative as of March 31, 2008.
SEC action
On October 25, 2019, Magistrate Judge Jeffrey T. Gilbert entered a 61-page document entitled “Findings of Fact and Conclusions of Law” in case number 1:09-cv-01775, in which he concluded that Respondent violated the Investment Advisers Act of 1940 by misappropriating and misrepresenting the value of Nutmeg investors’ assets, that Respondent’s violations had been material, and that Respondent was reasonably likely to violate the law in the future and therefore should be permanently enjoined from violating the Investment Advisers Act. Magistrate Judge Gilbert also ordered Respondent to disgorge $642,422 of the proceeds of his illegal activities, plus prejudgment interest, plus an additional $642,422 as a civil penalty.
On July 7, 2022, the United States Court of Appeals for the Seventh Circuit issued an opinion resolving Respondent’s appeal of Magistrate Judge Gilbert’s decision. Securities and Exchange Commission v. Goulding, number 20-1689. The Court affirmed all of Magistrate Judge Gilbert’s findings and conclusions but remanded the case for Magistrate Judge Gilbert to include more specific language in his injunction.
The United States Court of Appeals for the Seventh Circuit affirmed a conviction in 1994
Randall S. Goulding and Michael M. Ushijima, both Illinois lawyers, were charged in an 18-count indictment with conspiracy to defraud the United States, mail fraud and illegal transportation of currency and monetary instruments in violation of 18 U.S.C. §§ 371 and 1341 and 31 U.S.C. §§ 5316(a) and 5322(a). A jury found them guilty on all counts. They were each sentenced to six months’ incarceration on Count 1 and five years’ probation on Counts 2 through 18. Both defendants were ordered to make restitution of $8,000 to the United States and to perform 500 hours of community service.
In late 1984 or early 1985, Goulding told government informant James Evegelatos that he knew how to move money around the world to hide it from the government in order to avoid paying taxes. Goulding claimed to have bankers in Hong Kong, Switzerland and the Cayman Islands, all of whom were acquainted with his system. Evegelatos reported the conversation to the government in September 1986 and an undercover investigation was commenced. From December 1986 until August 1987, Internal Revenue Service Special Agent Gregory Myre using the name T.J. Ryder posed as a businessman who had, over the four previous years, acquired $400,000 in illegal income from bookmaking activity in Florida. Ryder was introduced to Goulding by Evegelatos in December 1986.
At their initial meeting Ryder informed Goulding that he wished to have use of his income without reporting it to the Internal Revenue Service. Goulding told Ryder that if Ryder declared his unreported income, the taxes, penalties and interest might eat up the entire unreported amount. Goulding explained, however, that for $10,000 he could arrange for Ryder’s money to be moved through a corporate account in the Cayman Islands and brought back to the United States as a non-taxable corporate loan. Goulding drew a flow chart to depict the system. He acknowledged that Ryder would be in a lot of trouble if anyone found out about the system, but reassured Ryder that the system could be set up so that the Internal Revenue Service would not detect it. Goulding claimed his system “cleaned the money.”
In February 1987, Ryder met with Goulding again. Ryder again explained that his unreported cash income came from illegal bookmaking activities. In response, Goulding described Cayman Islands’ secrecy laws and explained how, given such laws, corporations and trusts could be established that could hide Ryder’s transactions. Goulding again used a chart to explain his system, noting that the trusts could be controlled by Ryder through “wish letters” of instruction from Ryder to a trustee in the Cayman Islands. Goulding offered to travel there with Ryder to introduce him to lawyers, bankers and trust officers.
He moved to dismiss on grounds of selective prosecution
In support of his motion to dismiss, Goulding claimed that the government prosecuted him because he had sued Internal Revenue Service agents Thomas Dietz and Irving Feinglass, who had audited various partnerships that Goulding formed for clients in the late 1970s and early 1980s. See Goulding v. Feinglass, 811 F.2d 1099 (7th Cir. 1987), certiorari denied, 482 U.S. 929, 107 S. Ct. 3215, 96 L. Ed. 2d 701. He attached affidavits alleging that those revenue agents made disparaging remarks about him during their civil audits.
The Hearing Board majority recommended disbarment for the conviction with a dissent that would impose a three-year suspension.
I was unable to locate a final order in that matter, although it appears that a suspension was imposed rather than disbarment. (Mike Frisch)