Sec. & Exch. Comm'n v. Armijo

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SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. ROBERT JOSEPH ARMIJO, and JOSEPH FINANCIAL, INC., Defendants.

No. 21-CV-1107 TWR (RBB)

United States District Court, S.D. California

March 8, 2023

ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANTS' CROSS-MOTION FOR SUMMARY JUDGMENT (ECF NOS. 24, 26)

Honorable Todd W. Robinson, United States District Judge

Presently before the Court are the cross-motions for summary judgment (the “Motions”) filed by Plaintiff the Securities and Exchange Commission (“SEC”) (“Pl.'s MSJ,” ECF No. 24) and Defendants Robert Joseph Armijo and Joseph Financial, Inc. (“JFI”) (“Defs.' MSJ,” ECF No. 26). The Motions are fully briefed, (see ECF Nos. 34-35, 38-40), and the Court held a hearing on February 23, 2023. (See ECF No. 44.) Having carefully considered the Parties' arguments, the record, and the applicable law, the Court GRANTS Plaintiff's Motion and DENIES Defendants' Motion, as follows.

BACKGROUND

I. Undisputed Material Facts

The Parties have agreed to the following undisputed material facts:

A. The Underlying Securities

“In 2011, Brian Davison . . . formed EquiAlt, LLC (“EquiAlt”), in Nevada, to be used as a manager of real estate investment funds (“Fund Manager”).” (See ECF No. 39 (“Jt Stmt.”) ¶ 3.) “EquiAlt retained securities counsel, Paul Wassgren . . ., and his firms, Fox Rothschild LLP and then DLA Piper LLP, to form legal entities to be used as real estate investment funds and to raise capital for the funds through offerings of securities.” (Id. ¶ 4; see also id. ¶ 26.) “Wassgren remained counsel to EquiAlt and the Funds through 2020, and was counsel at all times that Defendants acted as agents for the Fund Manager and Funds.” (Id. ¶ 5.)

“From 2011 to 2019, EquiAlt formed at least four real estate investment funds (collectively, “Funds”): (1) EquiAlt Fund, LLC (“Fund I”); (2) EquiAlt Fund II, LLC (“Fund II”); (3) EquiAlt Fund III (“Fund III”); and (4) EA SIP, LLC (“EA SIP Fund”)[.]”^[1](Id. ¶ 6; see also id. ¶ 10.) “Each Fund issued its own securities,” (id. ¶ 7), in the form of “debentures . . . providing a fixed annual return of 8% to 12%.” (See id. ¶ 9.) “None of the Funds' securities were ever listed or traded on any exchange facility, such as a national securities exchange or an over-the-counter market.” (Id. ¶ 8.) Further, “[t]he EquiAlt Funds were not registered with the SEC at any time during the period from February 1 2016[,] to February 22, 2020.” (Id. ¶ 16.)

EquiAlt hired Wassgren and members of his various law firms, to draft, among other documents, a Private Placement Memorandum (“PPM”) and Prospective Purchaser Questionnaire (“PPQ”) for each Fund's offering (individually, “Fund Offering;” collectively “Fund Offerings”).” (Id. ¶ 11.) “The PPQ defined ‘accredited investor' and instructed potential investors to identify whether they were ‘accredited' under such definition and sign and date the document.” (Id. ¶ 12.) “Each PPM contained information about the particular Fund Offering[] but did not include financial statements for the Fund.” (Id. ¶ 13.) “Each PPM for each Fund stated in capital letters ‘THE SECURITIES HAVE NOT BEEN REGISTERED WITH NOR APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION.... THIS OFFERING HAS NOT BEEN APPROVED OR DISAPPROVED UNDER APPLICABLE STATE SECURITIES LAWS.'” (Id. ¶ 14.) “The fact that the Funds' securities had not been registered with the SEC was reiterated in the Prospective Purchaser Questionnaire which stated that ‘the offering of the Securities has not been and will not be registered under the Securities Act of 1933, as amended, or state securities laws[] ....'” (Id. ¶ 15.)

“EquiAlt, with Wassgren's assistance, filed Forms D, entitled ‘Notice of Exempt Offering of Securities,' with the SEC for each Fund.” (Id. ¶ 17.) “The Form Ds certified that, ‘if the issuer is claiming a Regulation D exemption for the offering, the issuer is not disqualified from relying on Rule 504 or Rule 506 for one of the reasons stated in Rule 504(b)(3) or Rule 506(d).'” (Id.)

“Fund I filed a Form D on July 19, 2011, signed by Davison as Fund I's CEO, claiming an exemption from registration under Rule 506 for a $50 million offering of debt and tenant-in-common type securities.” (Id. ¶ 19; see also id. ¶ 18.) “This Form D[] listed 0 non-accredited investors at the time of filing.” (Id. ¶ 19.) “Fund I filed an amended Form D on June 28, 2013, which modified the type of securities offered to reflect only debt-type securities[;] stated that the first sale of securities had occurred on January 11, 2011[;] and indicated that the offering had been sold to 31 non-accredited investors out of a total of 60 investors at the time of filing.” (Id.) “Fund I filed an amended Form D on August 13, 2019, which specified Rule 506(b) as the relevant exemption from registration . . . and indicated that the offering had been sold to 31 non-accredited investors out of a total of 1,089 investors at the time of filing.” (Id.)

“Fund II filed a Form D on April 4, 2016, signed by Davison as Fund II's CEO, claiming an exemption from registration under Rule 506(b) for a $20 million offering of debt-type securities.” (Id. ¶ 20; see also id. ¶ 18.) “This Form D stated that the first sale of securities had taken place on May 2, 2013, and indicated that the offering had been sold to 10 non-accredited investors out of a total of 88 investors at the time of filing.” (Id. ¶ 20.) “The Form D indicated that solicitations pursuant to the offering and sales compensation would occur in Arizona, California, Colorado, Massachusetts, Nevada[,] and Utah.” (Id.) “Fund II filed an amended Form D on April 28, 2016, which de-selected any specific states for sales compensation.” (Id.) “Fund II filed an amended Form D on September 1, 2017, which indicated that the offering had been sold to 10 non-accredited investors out of a total of 209 investors at the time of filing.” (Id.)

“EA SIP Fund filed a Form D with the SEC on August 8, 2016,^[2] signed by Davison as EA SIP Fund's CEO, claiming an exemption from registration under Rule 506(b) for a $25 million offering of debt-type securities.” (Id. ¶ 22; see also id. ¶ 18.) “This Form D listed 0 non-accredited investors at the time of filing.” (Id. ¶ 22.) “EA SIP Fund did not file additional Forms D.” (Id.)

B. Recruitment of Defendants

Defendant JFI is a California corporation located in San Diego, California, that is owned and controlled by Defendant Robert Joseph Armijo. (See Jt. Stmt. ¶ 2.) At all relevant times, neither Defendant was associated with a registered broker-dealer or registered as broker-dealer with the SEC, the Financial Industry Regulatory Authority (“FINRA”), or any state securities regulatory authority. (See id. ¶ 1.)

“Barry Rybicki . . . was EquiAlt's Managing Director and supervised the agents who marketed the Funds to prospective purchasers.” (Id. ¶ 23.) “Rybicki operated a company called BR Support Services, LLC (“BR Support”).” (Id.)

“On or about January 19, 2016, Rybicki recruited Defendants to solicit investors to make offers to buy Fund debentures.” (Id. ¶ 24.) “Armijo spoke to Rybicki during a lengthy telephone conversation, lasting more than an hour.” (Id.) “During that conversation, Armijo specifically asked Rybicki what licenses he would need to participate as an offering agent for the Funds.” (Id.)

“Rybicki . . . represented to Defendants that, for compensation, Defendants would do the following, which they did do:” (1) “[c]ommunicate with, solicit, and encourage potential investors to prepare, sign, and submit offers to purchase a Funds' debenture or security[;]” (2) “[d]iscuss the backgrounds of the principal(s) associated with the Fund Managers with potential investors[;]” (3) “[i]nform investors about the possible merits and economic, market, and business risks related to the Funds' stated operations and operational model[;]” (4) “[l]isten to potential investors' representations about their investment objectives, net worth, portfolio, income needs, risk tolerance, and time horizon[;]” (5) “[p]rovide potential investors with the Funds' prepared marketing materials and offering materials, including the PPM and PPQ[;]” and (6) “[a]ssist potential investors complete and submit the Offer-to-Buy materials, including the PPQ, in order to purchase a Fund's securities.” (See id. ¶ 27.) “Rybicki also represented to Defendants that compensation for agent services:” (1) “[w]ould be paid if the Fund accepted the solicited, potential investor's offer to buy the Funds' securities and the investor paid for such securities;” (2) “[c]ompensation would be paid from a Fund Manager marketing account and not from an investor's securities purchase money;” (3) “[a]ny compensation paid to Defendants would be paid through Rybicki's company, BR Support[;]” and” (4) “[i]n an amount equal to 10% of the purchase amounts attributable to the investors whose offers Defendants had solicited.” (Id. ¶ 41.)

Rybicki made several additional representations to Defendants including (1) “EquiAlt, as Fund Manager, had retained Wassgren as legal counsel for the Funds;” (2) “Wassgren had prepared materials, including the PPMs and PPQs, to be presented to potential investors; and” (3) “EquiAlt would pay Wassgren for legal advice Defendants solicited relative to the Fund Offerings, including the propriety of offering Fund Securities with the licenses held by Armijo-a Series 65 investment adviser license, but not a Series 7 broker license.” (Id. ¶ 25.) As a result, “Defendants did not obtain independent advice on whether it was legal for them to be involved in the sale of EquiAlt debentures without any additional license.” (See id. ¶ 26.) “Rybicki confirmed that Wassgren was ‘our...