Hollerich v. Acri, 14 CV 10411

259 F.Supp.3d 806

Michael HOLLERICH and Laura Hollerich, Plaintiffs,

v.Robert C. ACRI, Kenilworth Asset Management, LLC, Quentin Woods Corporation, Praedium Development Corp., KAM Private Fund, LLC, and Woodmar Hammond, LLC, Defendants.

No. 14 CV 10411

United States District Court, N.D. Illinois, Eastern Division.

Signed April 10, 2017

Eric J. Malnar, Megan Mae Mathias, Jeremy Paul Kreger, Stahl Cowen Crowley Addis LLC, Justin Lee Heather, Lopp Mathias Law Group, Chicago, IL, for Plaintiffs.

David T. Wallach, Wallach Michalec Fridman, P.C., Chicago, IL, Darren K. Miller, Law Offices of Darren K. Miller, Highland Park, IL, for Defendants.

MEMORANDUM OPINION AND ORDER

Manish S. Shah, United States District Judge

Plaintiffs Michael and Laura Hollerich followed advice from their registered investment advisers, defendants Robert Acri and Kenilworth Asset Management, to invest in two real estate development projects. After investigations by FINRA, the SEC, and the Illinois Secretary of State, Acri was banned from the securities industry. The Hollerichs brought this action against Acri and Kenilworth for violating the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, the Illinois Securities Act, and common law fiduciary duties. The Hollerichs move for summary judgment on those claims with respect to Kenilworth. For the following reasons, the motion for summary judgment is granted.

I. Background

A. Procedural Posture

Defendants in this case have been largely unresponsive. The Hollerichs have filed several motions for default judgment against both Acri and Kenilworth. See [23]; [32]; [54]; [68]; [70].¹ One such motion was successful; I granted a motion for default judgment against Acri and I entered an order of judgment against him. [72]. As for Kenilworth, I denied the Hollerichs' motion for default judgment and I did not enter an order of judgment against Kenilworth. [62]. I also vacated the technical defaults against Kenilworth and I ordered Kenilworth to pay the Hollerichs' reasonable fees and costs.² [62].

Despite being given a chance to defend the case, and even after being sanctioned, Kenilworth failed to file a response to the Hollerichs' motion for summary judgment or a response to the Hollerichs' Local Rule 56.1 statement of facts.³ The Hollerichs' "reply" brief requests that their statement of facts be deemed admitted and that their motion be granted. See [114] at 1–2. That request is denied in part. The absence of Kenilworth's responses does not relieve the Hollerichs of their burden of persuasion; the Hollerichs still must show that they are entitled to judgment as a matter of law. Raymond v. Ameritech Corp. , 442 F.3d 600, 608 (7th Cir. 2006). It appears that very little effort went into drafting the Hollerichs' complaint and statement of facts. Both documents largely consist of copied and pasted portions of the SEC's cease and desist order. See [1], [107–1] at 17–24. Those same portions of copied text also appear in Mr. Hollerich's declaration, see [107–1] at 1–13, which the Hollerichs repeatedly cite in their statement of facts. Although Kenilworth's failure to respond means that the material facts set forth in the Hollerichs' statement of facts will be deemed admitted, that is only true to the extent that the facts are supported by evidence in the record. N.D. Ill. L.R. 56.1(b)(3)(C) ; see also Raymond , 442 F.3d at 608. Furthermore, Kenilworth's failure to respond operates as a waiver of any objections to the admissibility of the Hollerichs' supporting evidence.

Summary judgment is appropriate if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). A genuine dispute over a material fact exists if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party."

Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Facts are construed and all reasonable inferences are drawn in favor of the nonmoving party. Bell v. Taylor , 827 F.3d 699, 704 (7th Cir. 2016).

B. Acri's and Kenilworth's Investment History

Acri was a broker-dealer registered with the SEC. [107–1] at 19; [119] ¶ 10. In 2002, Acri founded the firm Kenilworth, an investment adviser registered with the SEC. Id. For ten years, Acri controlled Kenilworth: he maintained its bank accounts, hired its employees, determined its policies and practices, and he made decisions about what investments should be offered to its clients. Id. ¶ 11. In February 2012, Clayton Lawrie⁴ took control over Kenilworth's accounts. Id. ¶ 72. Six months later, Acri resigned as a principal and terminated his ownership of Kenilworth. [107–1] at 19. Lawrie continued to manage the firm until 2014. Id. ¶ 66.

Before he resigned, Acri convinced the Hollerichs to transfer a large portion of their assets to Kenilworth in 2009, so that he could advise them in their investments. Id. ¶ 19. Lawrie also helped bring the Hollerichs in as clients of Kenilworth. Id. ¶ 74. Approximately two years later, Acri recommended that they invest in the Woodmar Project, a plan to develop a parcel for retail near Hammond, Indiana. Id. ¶¶ 20, 22. Acri did not tell the Hollerichs whether Praedium, Woodmar Hammond, or Prairie⁵ issued the promissory note, id. ¶ 21, but he stated that the note had more than a fifty percent loan-to-value ratio, that it would be secured by certain real estate, and that it bore a fifteen percent annual interest rate. Id. ¶¶ 20–21. As a result, the Hollerichs followed Acri's advice and they invested $25,000 in the Woodmar Project. Id. ¶ 22. Despite the Hollerichs' repeated demands, Acri never provided them with a copy of the promissory note. Id. ¶ 23.

Acri also recommended that the Hollerichs invest in the Quentin Woods Corporation project, a plan to develop a parcel for an assisted living facility in the Village of Palatine, Illinois. Id. ¶¶ 6, 30. Acri showed the Hollerichs QWC's building plans and he explained that the only obstacle to the project was the zoning permit, but Acri assured the Hollerichs that the permit would be granted soon. Id. ¶ 32. Once the building was complete, Acri told the Hollerichs that they would have the option of receiving payment in full on their promissory notes or to convert their investment into an ownership stake in the facility, which meant the Hollerichs would be equity owners in the business. Id. Again, the Hollerichs took Acri's advice and invested $150,000 with QWC. Id. ¶¶ 33–34; [107–1] at 10; [107–2] at 5. Acri prepared and executed the agreements between QWC and the Hollerichs, [119] ¶ 35, because Acri was the president and a shareholder of QWC. Id. ¶ 6.

When the QWC project did not progress as planned, Acri told the Hollerichs that he gave Joan DeSouza, who Acri referred to as a developer and a consultant, approximately $120,000 of their investment as a "down-payment" for her services in advancing the project. Id. ¶ 51. Later on, Acri informed the Hollerichs that the zoning permit had not been approved and that he was working with DeSouza to get the Hollerichs' money refunded.⁶ Id. ¶ 52. The Hollerichs believe that QWC never submitted a zoning permit or pursued its approval with the Village of Palatine. Id. The Hollerichs requested proof of Acri's communications with DeSouza, but he never supplied any such documentation. Id. ¶ 53. Instead, Acri suggested that Mr. Hollerich sue DeSouza because DeSouza no longer had the Hollerichs' funds. Id. ¶ 57. Acri also recommended that Mr. Hollerich take control of QWC and invest more money into the project.⁷ Id. ¶ 54.

The Hollerichs requested records relating to their investments in the Woodmar Project and the QWC project, but Acri and Kenilworth never complied. Id. ¶ 50. The Hollerichs sent letters to Acri to notify him of the outstanding loan amounts and interest for the promissory notes, id. ¶ 61, and of the breaches to the QWC agreements, id. ¶ 58. Eventually, the Hollerichs began moving their money, approximately $500,000, out of Acri and Kenilworth's control. Id. ¶ 55. The Hollerichs say they never received any payment on their contracts or other promised consideration for their $175,000 worth of investments through Kenilworth in the Woodmar Project and the QWC project. Id. ¶ 63.

In 2013, FINRA began investigating Acri's involvement in the sale of alternative investments and defaulted promissory notes. Id. ¶ 37. This investigation led to FINRA permanently barring Acri from associating with any FINRA member in any capacity. Id. ¶ 38. The following year, the SEC examined potential misconduct by Acri involving Kenilworth's clients, id. ¶ 39, and it published a press release titled "Chicago–Area Attorney Charged After SEC Exam Spots Fraud in Real Estate Investment Offering." Id. ¶ 41. The SEC also issued a cease and desist order that imposed a remedial sanction on Acri: $55,000 for disgorgement, $4,478.96 for prejudgment interest, and $55,000 for a civil money penalty. Id. ; [107–1] at 23. This order is the basis for the Hollerichs' complaints against Kenilworth with respect to their investments in the Woodmar Project. A summary of the SEC's findings is as follows:

Between April and September 2011, Acri, as the controlling managing member of Commission-registered investment adviser Kenilworth Asset Management LLC ("Kenilworth"), defrauded Kenilworth's investment advisory clients in the offer and sale of $240,000 in promissory note securities of Prairie Common Holdings LLC ("Prairie"). Acri told clients that their funds would be used in the development of a retail parcel located near Hammond, Indiana, and that their investments would be secured by real estate. Acri, however, misappropriated $41,250 of the total proceeds, and the investments were never secured. Acri also failed to disclose material information to advisory clients concerning: (1) a conflict of interest arising from his motivation to engage in the

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