U.S. Sec. & Exch. Comm'n v. John T. Place, Paul G. Kirk, John P. Kirk, Global Transition Solutions, Inc., CIVIL ACTION NO. 16-4291

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, v. JOHN T. PLACE, PAUL G. KIRK,JOHN P. KIRK, GLOBAL TRANSITION SOLUTIONS, Inc.,and GLOBAL TRANSITION SOLUTIONS, LLC

CIVIL ACTION NO. 16-4291

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

December 21, 2018

MEMORANDUM RE: MOTION FOR SUMMARY JUDGMENT

Baylson, J.

I. Introduction

In this case, the Securities and Exchange Commission ("SEC") alleges that the brokerage firms Global Transition Solutions, Inc. and Global Transition Solutions, LLC (together, "GTS"); John Kirk, GTS, LLC's President; Paul Kirk, GTS's General Counsel and Chief Operating Officer; and John Place, GTS, LLC's Chief Executive Officer committed securities fraud by misleading current and prospective clients about the true nature of their costs in connection with transitioning their portfolios. The Complaint alleges four causes of action under federal securities laws.

1. Count I: Violations of Section 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 against Defendants John Kirk; Paul Kirk; John Place; GTS, Inc.; and GTS, LLC.

2. Count II: Violations of Section 15(c)(1) of the Exchange Act against Defendant GTS, Inc.

3. Count III: Control personal liability under Section 20(a) of the Exchange Act for violations of Exchange Act §§ 15(c)(1) and 10(b) and Rule 10b-5 thereunder against Defendants John Kirk, Paul Kirk, and John Place.

4. Count IV: Liability under Section 20(e) of the Exchange Act for aiding and abetting violations of Exchange Act Section 15(c)(1) against Defendants John Kirk, Paul Kirk, and John Place.

The SEC seeks permanent injunctions against Defendants to enjoin them from engaging in acts, practices, and courses of business alleged in the Complaint; disgorgement of all profits realized from Defendants' unlawful conduct; and civil penalties pursuant to Section 21(d)(3) of the Exchange Act. (ECF 1, Compl. ¶ 8.)

John and Paul Kirk (together, "the Kirks" or "Defendants") have moved for summary judgment on all claims against them-Counts I, III, and IV of the Complaint-arguing that the claims are time-barred. The SEC has also moved for summary judgment on liability on its claims under Sections 10(b) and 20(a) of the Exchange Act against Defendants-Counts I and III of the Complaint. The Court is not ruling on the SEC's Motion for Summary Judgment at this time. For the reasons discussed below, the Kirks' Motion for Summary Judgment is denied.

II. Undisputed Facts

The following is a fair account of the factual assertions at issue in this case, as taken from the parties' Statements of Facts and briefing, are not genuinely disputed. Due to the volume of facts in the record, the factual background is limited to the facts material to both Motions for Summary Judgment presently before this Court.

GTS, LLC and GTS, Inc. operated as a single transition management brokerage consulting business from October 2006 to February 2014. (ECF 44, Ex. 2, "SEC SOF" ¶ 4.) GTS¹, a broker-dealer registered with the SEC, provided transition management services mainly to public pension funds, which needed to execute large securities transactions in a coherent and timely fashion. (Compl. ¶¶ 15, 21; Defs.' MSJ, at 2; SEC MSJ, at 4; SEC SOF ¶ 4.)

GTS, like other transition managers, would generally be hired to reduce the costs of transitioning clients' investment strategies or investment managers. (SEC MSJ, at 6.) In selectinga transition manager, clients would typically consider their questionnaire responses, as well as meetings with transition managers about explicit costs. (Id.; SEC SOF ¶¶ 18-19.)

GTS client contracts, marketing materials, presentations, and questionnaire responses conveyed that it was GTS's "mission," and "exclusive" or "sole" purpose, to reduce costs. (SEC SOF ¶¶ 67, 96.) GTS marketing literature and client contracts also stated that GTS would act as a fiduciary to its clients, that it had no conflict of interest with its clients, and that GTS would inform clients, with "total transparency," how much a portfolio change cost them after the transaction was completed. (Id. ¶¶ 63, 69, 77-78.)

Once hired, GTS would administer and manage the process of transitioning clients' portfolios. (Id. ¶ 20.) In this process, GTS typically prepared for, and provided oversight of, trading; provided updates to clients; and generated pre- and post-trade reports. (Id.) GTS did not execute these trades, take possession of assets, or serve as a custodian. (Id. ¶ 21.) Rather, GTS would send trades to a broker of record ("BOR"), which would typically route trades through executing brokers. (Id.)

Defendant John Kirk joined GTS in the summer of 2004 (Id. ¶ 1; Defs.' MSJ, at 3.) Later, John Kirk became the President and 48.5% owner of GTS, LLC and a registered representative of GTS, Inc. (Defs.' MSJ, at 3; id. Ex. 1, "John Kirk Decl." ¶ 3; SEC SOF ¶ 1; ECF 62 "Defs.' Am. SOF" ¶ 1.) In 2007, John Kirk's ownership interest in GTS, LLC was reduced "following the infusion of capital into GTS by others." (Defs.' Am. SOF ¶ 1.) Along with Defendant John Place, GTS, LLC's Chief Executive Officer, and GTS's compliance personnel, John Kirk authorized and often scripted the content of GTS's communications with current and prospective clients and consultants. (SEC SOF ¶¶ 46-48; Defs.' SOF ¶ 46.) He also reviewed pre- and post-trade reportsalong with Stephen Malinowski, John Place, and Peter Romanelli before they were given to clients or consultants. (SEC SOF ¶ 46; Defs.' SOF ¶ 58.)

Defendant Paul Kirk, John Kirk's brother, joined GTS in August 2006 as General Counsel. (SEC SOF ¶ 3.) He was also the Chief Operating Officer of GTS, LLC and a registered principal of GTS, Inc. (SEC SOF ¶ 3; SEC MSJ, at 5.) In April 2009, he became a compliance principal of GTS and first obtained "supervisory responsibilities at GTS." (Defs.' MSJ, at 3; Defs.' Am. SOF ¶ 3.) At GTS, LLC, he reported to John Place. (ECF 48, "Defs.' Opp'n," at 16.) At GTS, Inc., he reported to its owner, James Zogby. (Id.; SEC SOF ¶ 7.) In these positions, he reviewed and approved GTS's promotional literature and client communications, reviewed pre- and post-trade reports before they were provided to clients or consultants, and, beginning in 2009, signed contracts on behalf of GTS. (SEC SOF ¶¶ 3, 49.) However, he did not negotiate client contracts. (SEC SOF ¶¶ 9, 49; Defs.' Opp'n, at 16.)

GTS engaged in revenue sharing with BORs, including Convergex and INTL, in connection with the transition of securities. (SEC SOF ¶ 23.) Between October 2006 and October 2011, Convergex shared approximately $8.8 million of revenue with GTS. (Id. ¶ 111; Defs.' Am. SOF ¶ 111.) Between November 2011 and February 2013, INTL shared $1,468,700 with GTS in connection with transitions. (SEC SOF ¶ 114; Defs.' Am. SOF ¶ 114.)

Both John and Paul Kirk knew that GTS and BORs shared in revenues in connection with transitions, and the Kirks had access to GTS's financial records, which they reviewed regularly. (SEC SOF ¶ 42; Defs.' Am. SOF ¶ 42.) John Place typically communicated with Convergex and INTL and handled trade oversight, but John Kirk handled communications with BORs when Place was sick or unavailable. (SEC SOF ¶ 118; Defs.' Am. SOF ¶ 118.)

GTS client contracts stated that the BOR would charge stated commissions, and typically stated that the broker of record "will remit a portion of the commissions/fees to GTS and disclose this arrangement on each confirmation it generates for Client's account." (Id. ¶ 98; Defs.' Am. SOF ¶¶ 86, 89, 90, 98.) GTS also provided brokers and clients with "transaction cost analysis," or "TCA," a service in which GTS would review past transactions so that brokers and clients could evaluate broker performance based on execution cost and other factors. (SEC SOF ¶ 40; Defs.' Am. SOF ¶ 40.) When Paul Kirk invoiced Convergex and INTL in connection with transitions, the invoices often listed "TCA" as the basis for payment. (SEC SOF ¶ 121; Defs.' Am. SOF ¶ 121.)² GTS maintained a separate bank account to receive revenues separate from stated commission fees. (SEC SOF ¶ 8.)

Both John and Paul Kirk were subordinate to John Place. (Defs.' Opp'n, at 15-16.) As General Counsel, Paul Kirk's duties were delegated by Place. (Id. at 16.) In October 2012, Place removed both Paul and John Kirk from their positions as General Counsel and President, respectively. (Id.; SEC SOF ¶ 56.) GTS ceased operations in June 2014. (Defs.' MSJ, at 3.) Since 2014, neither John nor Paul Kirk has been involved in the securities industry, and they do not maintain securities licenses. (Id.)

III. Procedural History

On August 8, 2016, Plaintiff SEC filed the Complaint in this Court against Defendants GTS, Inc., GTS, LLC, the Kirks, and Place, alleging that Defendants engaged in a scheme to defraud customers between October 2006 and February 2014 by failing to adequately disclose allsources of compensation. (ECF 1, Compl. ¶¶ 2-7.) The Kirks filed an Answer to the Complaint along with Affirmative Defenses on April 7, 2017 (ECF 25).

On June 15, 2018, the SEC filed a Consent Motion for Entry of Judgment on Liability against Defendant Place (ECF 42), along with the Consent of Place (ECF 43, Ex. 1). That same day, the SEC also filed a Motion for Summary Judgment on liability on its Sections 10(b) and 20(a) claims-Counts I and III of the Complaint-against the Kirks (ECF 44). The Kirks filed an Opposition on August 10, 2018 (ECF 48), and the SEC filed a Reply on September 7, 2018 (ECF 50).

Also on June 15, 2018, the Kirks filed a Motion for Summary Judgment, contending that the SEC's claims against them-Counts I, III, and IV of the Complaint-should be dismissed as time-barred (ECF 45). The SEC filed an Opposition in response on August 10, 2018 (ECF 49, "SEC Opp'n"), and the Kirks filed a Reply on September 7, 2018 (ECF 51, "Defs.' Rep.").

On October 18, 2018, the Court ordered Defendants to file a Response to the SEC's Statement of Facts, specifically indicating its...