United States Commodity Futures Trading Commission v. Kratville , 796 F.3d 873 ( 2015 )

United States Court of Appeals
For the Eighth Circuit
___________________________
No. 14-2181
___________________________
United States Commodity Futures Trading Commission
lllllllllllllllllllll Plaintiff - Appellee
v.
Michael Burdic Kratville
lllllllllllllllllllll Defendant - Appellant
Michael J. Welke; Fred Honea; John Rizzli; Ron Bassett; FXIG; Sonador; Neal
LaBelle; Michael Stewart
lllllllllllllllllllll Defendants
v.
Jonathan W. Arrington; Elite Management Holdings Corp.; MJM Enterprises LLC
lllllllllllllllllllll Defendants
____________
Appeal from United States District Court
for the District of Nebraska - Omaha
____________
Submitted: May 13, 2015
Filed: August 3, 2015
____________
Before WOLLMAN, SMITH, and BENTON, Circuit Judges.
____________
SMITH, Circuit Judge.
The United States Commodity Futures Trading Commission (CFTC) brought
suit against Jonathan Arrington, Michael B. Kratville, Michael J. Welke, Elite
Management Holdings Corp. (EMHC), and MJM Enterprises LLC (MJM)
(collectively, "defendants'). The CFTC alleged that the defendants fraudulently
induced more than 130 individuals to invest $4.7 million in commodity pools
operated by the defendants, in violation of the Commodity Exchange Act (CEA), 7
U.S.C. §§ 1 et seq., and its implementing regulations, 17 C.F.R. §§ 1.1 et seq. The
district court1 granted summary judgment in favor of the CFTC against Kratville.2 On
appeal, Kratville argues that the district court erred in (1) denying his request for
more time to review purportedly new evidence; (2) considering affidavits from
investors who signed releases, affidavits from investors who lacked credibility, and
emails that could have been altered; (3) declining to consider the affidavit of an
expert opining on the authenticity of the emails; (4) granting summary judgment on
the CFTC's claim that Kratville committed fraud and related violations of the CEA
and CFTC regulations in soliciting persons to invest and maintain funds in
commodity investment pools; and (5) determining that the litigation strategy of
Kratville's attorney was not excusable neglect warranting relief under Federal Rule
of Civil Procedure 60(b)(1). We affirm.
I. Background
In the summer of 2005, Arrington, Kratville, and Welke formed EMHC to
pursue investment opportunities. They all agreed to invest with FX Investment Group
1
The Honorable Laurie Smith Camp, Chief Judge, United States District Court
for the District of Nebraska.
2
The court issued default judgments against Arrington, EMHC, and MJM and
approved a consent order for Welke.
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(FXIG), a trading group run by Fred Honea in Spain. FXIG traded in the spot (cash)
and future markets for commodities, precious metals, and foreign exchange ("forex").
It operated as an investment pool so that every account's return would be the same.
It reported monthly trading returns ranging from 8.6 percent to 34.6 percent per
month from May 2002 through May 2005. FXIG promised investors high returns with
limited risks because no more than ten percent of an individual's funds would be
invested at any one time. At no time did Arrington, Kratville, or Welke ever see any
FXIG trading statements to confirm FXIG's representations because Honea refused
to provide them.
EMHC became the parent company or "commodity pool operator"3 for two
"commodity pools"4 called Elite Index Investment Group (EIIG) and Elite Aggressive
Growth Group (EAGG), which had been incorporated the year prior and run by
Arrington. Kratville had invested in EIIG from early 2004 to mid-2005 and lost
money.5 EMHC also became the parent company for a third pool that Arrington,
Kratville, and Welke opened in January 2006 called Elite Management Investment
3
A "commodity pool operator" includes anyone who is "engaged in a business
that is of the nature of a commodity pool . . . , and who, in connection therewith,
solicits, accepts, or receives from others, funds . . . for the purpose of trading in
commodity interests." 7 U.S.C. § 1a(11)(A)(i).
4
A "commodity pool" is "any investment trust, syndicate, or similar form of
enterprise operated for the purpose of trading in commodity interests." 7 U.S.C.
§ 1a(10)(A).
5
In approximately 2004, Kratville and Welke were members of EIIG, which
was run by Arrington and Neil Labelle. Kratville made a $25,000 investment to join
EIIG, which was incorporated in February 2004, and began trading as early as
September 2003. Elite Capital Management Group, LLC operated EIIG and EAGG.
During the summer of 2005, Labelle assigned EIIG and EAGG to Arrington. At that
time, some or all members received their funds back. In May 2005, Kratville received
slightly less of his money back than he had invested because his EIIG investment
resulted in a loss. Neither EAGG nor EIIG showed consistent profitability.
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Fund (EMIF).6 The Elite Pools had a target return structure that capped the returns to
which an individual pool participant was entitled in a given month. Arrington,
Kratville, and Welke were to keep all returns above the monthly caps, and they were
to bear all business expenses. The returns were to be made by investing in FXIG.
Arrington, Kratville, and Welke all owned EMHC and were officers of EMHC,
with Kratville holding the position of secretary. Arrington, Welke, and Kratville did
not register EMHC with the CFTC as a commodity pool operator or register
individually as associated persons of a commodity pool operator. See 7 U.S.C.
§§ 6m(1) and 6k(2) (2006). EMHC never registered or filed an exemption of
registration with the CFTC. See 17 C.F.R. § 4.13.
In addition to being an owner and officer of EMHC, Kratville had several other
roles. First, when a prospective pool participant expressed interest in investing,
Kratville referred that person to Arrington. Arrington, Kratville, and Welke shared
potential investment contacts with the Elite Pools. Second, Kratville was originally
a signatory on at least two bank accounts for EMHC, although Arrington later
removed Kratville as a signor for the accounts on December 27, 2006. Third,
Kratville acted as the attorney for EMHC and the Elite Pools and appeared before the
Nebraska Department of Banking and Finance (NDBF) in that capacity. Fourth,
Kratville reviewed and contributed to the Elite Pools website, brochure, prospectus,
and monthly newsletter called "eWires."
In August 2005, Kratville began providing information about the Elite Pools
to prospective pool participants. That month, Kratville emailed at least two
prospective pool participants and told them that he had "formed an investment
company so that we can pay people 4–6% PER MONTH because of the ability of our
trader to generate consistent profits of at least 6% every month since [M]ay 2002."
6
EIIG, EAGG, and EMIF will be referred to collectively as "the Elite Pools."
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Kratville represented that he had "been a part of this fund since 2002" and
"expect[ed] [it] to hit the 6% mark again by the end of [August 2005] . . . . for the
40th month in a row." (Ellipsis in original.) Neither Kratville's email nor the EMHC
website referenced FXIG. In reality, FXIG—not the Elite Pools—reported the returns.
Kratville followed up with one of his clients, Ed Voges, several months after
making representations to prospective investors. In one email to Voges, Kratville
stated, "We have hit at least 6% every month since 5/02 . . . . and we don['t] get paid
unless we hit your goal level first, and we charge no fees." (Ellipsis in original.) In
another email to Voges, Kratville stated, "We are an investment club that is exempt
from the SEC rules . . . so no filings." (Ellipsis in original.) And Kratville wrote in
another email that "our main clients are people in our age group with IRAs and
401(k)s that can be rolled over into our fund and where people are looking to let it
grow for a minimum of 3 years. We accept cash, of course, but we feel we do the
most good for people that roll[] over tax-deferred vehicles."
Kratville also referred prospective pool participants to additional information
on the EMHC website, brochure, and other marketing materials. The website made
the following representation about its trading strategy, stating, in relevant part:
Our Executive Trader and trading group designed our Special Growth
Strategy over a 10+ year period of testing and trading. The principal
investment markets that this strategy utilizes are equities, commodities,
precious metals and currencies.
This strategy has had many multi-million offers to buy the system, but
the desire has been, and still is to help the small guy build a nest egg and
to remain entirely proprietary.
Special Growth Strategy has been designed to satisfy the demands for
a product such as this from various private investors and groups. It is
based on sound investment and money management principals; and uses
-5-
sophisticated procedures developed to prevent losses. No more than
10% of principal is invested at one time, yet the results are unparalleled.
In reality, neither EMHC nor any of the Elite Pools had a proprietary trading system,
and the defendants never received any offers to purchase such a system.
The monthly newsletter, eWires, that Kratville forwarded to potential pool
participants included representations about trading returns and stated that EMHC hit
the maximum target goal for several months in a row. The eWires newsletters did not
mention FXIG.
The brochure and prospectus also made several representations about EMHC's
trading strategy, such as that (1) the pool's special growth strategy was designed over
a 12-year period of testing and trading; (2) the strategy had attracted multi-million
dollar offers to buy the system; (3) even though there was no guarantee monthly
target goals could be met, such goals had been met every month since 2002; and (4)
a successful local attorney—Kratville—was an active, longterm investor in EMHC.
The prospectus listed EMHC's primary broker as TradeStation Securities in
Florida and its clearing house broker as R.J. O'Brien in Chicago, Illinois. It also stated
that the investments were equities, commodities, precious metals, and currency, both
in the futures and spot markets. In truth, EMHC never had trading accounts at
TradeStation Securities or R.J. O'Brien. While EAGG did at one time hold accounts
there, those accounts had ceased trading by the end of April 2005—before the
defendants began soliciting pool participants and before the formation of EMHC.
None of EMHC's marketing materials state that any money would be sent out
of the country, and Kratville did not tell potential pool participants that investments
would be sent out of the country. Kratville told his friend Pat Shannon in October
2005 that if he told people about FXIG, no one would invest with the Elite Pools. In
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an email dated August 30, 2006, Welke stated "[W]e both agreed . . . that it would be
best if they didn[']t know who ou[r] people are . . . . [I] just think we should try to
hold on as long as we can without giving out any names or info since that is our
'secret ingredient' which is our recipe for success . . . ." As to sales agents, Kratville
told Shannon that EMHC could not hire anyone who had a license because "there are
reporting rules for people with licenses if they are working with funds that are not
licensed like ours." Kratville explained to Shannon that the sales agents that they
were hiring "have connections with lots of rich people" and that they raised $1.5
million in 2005 "all in less than 4 months . . . hoping to hit $10 million in principal
in 2006 . . . then we can all retire for real." (Second ellipsis in original.)
Between July 7, 2005, and April 30, 2006, EMHC received almost $2.3 million
in funds from pool participants. The Elite Pools paid approximately $100,000 back
to pool participants and sent $1.7 million to be traded on the Elite Pools' behalf. All
of the Elite Pools' funds were commingled, and the Elite Pools were set up so that
pool participants would share losses equally, based on the amount invested.
On May 15, 2006, Arrington received a letter from the NDBF regarding the
investments that EMHC sold through its website, which he forwarded to Kratville.
The letter referenced the EMHC website, asked for detailed business descriptions and
copies of all promotional materials used, and inquired as to the identity of EMHC's
traders. The letter stated that no offers or sales could continue until EMHC's legal
status was determined.
Kratville contacted an attorney the following day about the NDBF's letter. In
follow-up emails to that attorney, Kratville asked, "[I]f we open up another LP in
another state, refund the money to Nebraska residents, and then have people give us
back the money we just gave them to put into the new LP located outside [of]
Nebraska . . . do you think that would suffice?" The attorney explained the
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jurisdictional reach of the NDBF was broader than that. In a subsequent email from
Kratville to Arrington, Kratville said:
Despite [the attorney's] advice, I think the better course of action is to
not refund the monies at this time and try and stretch out the discussion
process as long as possible (I have some ideas on that) until the point
where [they] likely [will] tell us to shut down.
***
I am curious whether we need to consider LPs in just another state or
whether we need to even move it offshore. Just an idea.
On May 25, 2006, Arrington, Kratville, and Welke created NIC, LLC (NIC)
and MJM in Wyoming. MJM was to manage NIC as its commodity pool operator.
Shortly thereafter, Kratville, Arrington, and Welke agreed that MJM, EMHC, and at
least one of the Elite Pools would be permitted to open bank accounts in Iowa.
Arrington, Kratville, and Welke jointly decided on bank accounts, traders, allocation
of NIC funds, and how to report returns to participants. As with the Elite Pools, they
did not register MJM as a commodity pool operator nor individually register as
associated persons of MJM. MJM never registered or filed an exemption of
registration with the CFTC. Kratville was the self-described vice president/managing
partner of MJM, and he solicited on behalf of MJM and NIC.
During the last week in May 2006, Arrington, Kratville, and Welke held a
meeting for the Elite Pool participants attended by 20 to 40 persons. At the meeting,
Kratville stated that while the NDBF had issues with how the Elite Pools were set up,
there was nothing wrong.
On June 16, 2006, Kratville and Welke met with the NDBF. At that meeting,
Kratville and Welke represented that Arrington, Kratville, and Welke were the sole
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officers of EMHC. Kratville represented that EMHC invested in commodities and
currencies, but he did not mention FXIG. He told the NDBF that there were no pool
participants from any other states; that no more than ten percent of a participant's
principal was at risk at any one time; and that the EAGG had made at least five
percent every month for 48 months.
The NDBF concluded that EMHC failed to disclose to investors the risks of
investing in commodities; the details about the multi-million dollar offers to buy
EMHC's trading system; information supporting the 48-month five-percent earnings
claim, and Arrington's, Kratville's, and Welke's trading qualifications. The NDBF
asked that the Elite Pools return the pool participants' money, both principal and gain.
The NDBF explained that because EMHC was selling securities and that its structure,
numbers, and representations were flawed, full rescission was the only adequate cure
for the flaws. The NDBF warned that if EMHC did not agree to shut down and return
all investor funds, then the NDBF would sue. Kratville and Welke agreed to follow
the NDBF's directives and to notify Arrington.
The defendants, however, did not comply with the NDBF's directive. Instead,
Kratville, Arrington, and Welke sent out two letters dated July 5, 2006, to every pool
participant. The first letter, which the defendants provided to the NDBF as proof that
the pools were complying with the NDBF's directive, stated that pursuant to
cooperation with the NDBF, the Elite Pools would be closed and account balances
returned to pool participants. The letter asked each pool participant to have the letter
notarized, indicating that the pool participant had received his or her funds. The
second letter, which was not provided to the NDBF, stated "[w]ith the dissolving of
the current [Elite Pools], and you now joining NIC, LLC, we wanted to provide you
with an accurate rollover balance. This is an internal document for you only. Do not
provide this information to anyone." The letter listed the pool participant's balance
and instructed the pool participant to contact Arrington, Kratville, and Welke with
any questions.
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Kratville made various comments about the letters to pool participants.
Kratville emailed the letters to Voges, and, in conversations with Voges, Kratville
explained that the NDBF did not like limited partnerships like the Elite Pools.
Kratville explained to pool participant Gary McConnell that the opening of the new
entity was necessitated by issues with the legal organization of the Elite Pools or a tax
problem. Kratville told other pool participants that the rollover was a formality. When
telling pool participants about the rollover, Kratville represented that everything
would remain the same, including the traders and the risk limitation; the only thing
that would change was the name. After the rollover, several of the pool participants
of the Elite Pools became pool participants of NIC, which MJM managed.
On August 18, 2006, Kratville emailed Arrington and Welke about a follow-up
letter that he had drafted to the NDBF. In that email, Kratville wrote, in relevant part:
Morever, as I stated last night, we don[']t know if the state has gotten
ahold of our bank records or not. I do assume not because if they had,
I don[']t think their only response would be to call me with these
questions. [I]t is quite clear to me that if the State ever finds out that we
have the Wyoming entity and that we moved everyone over, that they
will go after our nuts.
Lastly, in an abundance of caution, I deleted anything on my computer
that refers to FXIG or Elite. If the state would ever come grab our
computers, the less on them the better. I would advise us to store any
such documents on little zip drives, portable drives, on Hotmail or
Yahoo accounts, etc. I don[']t have any of our emails in my Outlook or
Outlook Express either. Better safe than sorry.
For several months preceding the fall of 2006, Arrington, Kratville, and Welke
had been hearing that FXIG was in trouble. Kratville knew that FXIG had been
refusing to honor withdrawals. In June 2006, the FXIG traders took the month off,
and the website was unavailable for much of the summer. By late August or early
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September 2006, FXIG posted that 41 percent of its funds were in open negative
trades. In an email dated November 6, 2006, Kratville wrote to Arrington:
On Red's point about results for October, I think we need better info
from Fred and Ron before we post anything.
Personally, I am conflicted on saying "we hit 5.07" (or whatever the real
number was for October, I'm just using the Sept number) versus just
saying "we met our goals" and then find out the real number was 2%.
I think we all agree that we don[']t want to subsidize any more . . . .
unless it is a very small %.
The money with Dustin not being traded in October still bugs me a bit
to . . . .
(Ellipses in original.)
By November 2006, FXIG reported the negative trade figure was 37 percent
of the fund. In December 2006, FXIG announced that it would transfer all remaining
funds to Sharndor Logistics and that dollars would be converted to units—each dollar
of principal would be a class A unit and each dollar of growth would be a class B
unit.
NIC participants received no notification of any problems with FXIG. They
received statements showing returns of 6 percent for July 2006, 3 percent for August
2006, 6 percent for September 2006, 3.02 percent for October 2006, 3.5 percent for
November 2006, and 3.07 for December 2006. But, in actuality, the true percentages
were 3.89 percent for July 2006, 3.52 percent for August 2006, 0.28 percent for
September 2006, 0 for October 2006, 0.17 percent for November 2006, and -7.76
percent for December 2006.
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By February 2007, Sharndor Logistics posted that the funds received for FXIG
investors were worth less than a penny on the dollar. Upon learning this information,
Kratville emailed Arrington and Welke on February 11, 2007, that he was
really frustrated because we are handling ot[he]r peoples' money and
basically have had to hide these problems from our investors. The idea
of doing an April 1st report scares the hell out of me because t[he] idea
of lying has to be worse than anything right now. We can[']t keep
digging a hole and hope to get out eventually.
The next day, Kratville emailed Arrington and Welke that he felt "like April 1st is a
ticking time bomb because we can[']t go on saying nothing to our people but it is too
early to tell them anything too." Arrington, Kratville, and Welke began discussing a
variety of ways to try to recover the money. On February 13, 2007, Kratville emailed
Arrington and Welke "a few ideas," which were in relevant part as follows:
2. I don['t] know that hard ball gets us anywhere at all. It makes us
feel bet[ter] but I really fear if t[he] authorities get involved that will
d[i]minish our eventual net return. More than that, I fear that someone
will find out that we have been acting illegally too.
3. If this thing blows up, I will lose my bar license. So I am trying to
be careful here. I can[']t afford to have this blow up. My other fear is
that if th[is] blows up that I will lose all of my assets paying our
members. Playing hardball cou[ld] r[e]sult in t[he] state and feds
finding out what we were doing because they will look into all of the
members to begin with if we turn Fred [Honea] in or if anybody turns
him in.
(Emphases added.)
In an email dated February 25, 2007, Welke wrote to Arrington regarding
Kratville's concerns, stating that
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[Kratville] is most worried about what we are going to tell people in
[A]pril. [H]e kept bringing up we need to be honest with our people, [I]
don[']t know if that means we tell them where the money is or what, but
. . . my opinion is we definit[ely] need to keep that to us at least till we
figure what the hell is going on with the funds and how much we are
going to get back . . . .
(Second ellipsis in original.)
In response, Arrington replied, in part, "I talked with kratty tonite. We talked
about what you mentioned and my opinion as well (which is on trac w/you). . . . My
personal opinion is Kratty will be ok. . . . [K]ratty doe[sn']t want to f**k anything up
. . . as we don't so as much as he's freaked we can work with most of that."
Kratville grew increasingly concerned about what to report in the NIC's April
2007 report. On February 28, 2007, Kratville emailed Arrington and Welke that "it
seem[s] like it is almost all gone. Which creates a hell of an issue for us come April
1st; the issue we hoped we wouldn[']t have to face but apparently will have to face
after all." In another email that same day, Kratville acknowledged that the
investments were almost gone and that they would be lucky to recover ten percent of
their funds.
In March 2007, Honea posted that he tried to recoup losses but further
withdrawals crashed the system and that he could not estimate how long that it would
take to make the customers whole. During this time, Kratville met with NIC
participant and longtime friend, BJ Tobin. Tobin was one of the two pool participants
who knew about Honea and FXIG. Tobin expressed concern about whether NIC was
in trouble "because of Fred Honea and FXIG's problems." Kratville replied that they
"were using several traders, not just one and that as far as [Kratville] knew things
with the other two were fine and that [he] had no information about how FXIG had
done for a few months." Even though Kratville told Tobin that he had no information
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about FXIG's problems, on March 18, 2007, Kratville emailed Arrington and Welke
that "[m]aybe we should just file bankruptcy now." In another email that same day,
Kratville stated, "Bankruptcy is the only option right now legally. But I am open to
options."
Despite NIC's worsening problems as evidenced in the email exchanges, NIC
participants received statements for the first three months of 2007 showing positive
returns and no loss of principal. The statements showed a 3.20 percent return for
January 2007, a 3.30 percent return for February 2007, and a 4.50 percent return for
March 2007. The NIC's actual results were, taking into account the loss at FXIG in
February 2007, 6 percent in January 2007,-79.27 percent in February 2007, and 6
percent in March 2007.
On April 18, 2007, Kratville emailed Arrington and Welke about the necessity
of coming up with a timeline to show "when F[red Honea] locked the accounts from
taking money out . . . what we did to deal with Fred, to obtain more info, to press him
for more info, etc." The next day, Kratville emailed Arrington and Welke concerning
the posting of results for the first quarter. Kratville suggested that, based on concerns
as to whether they could ever withdraw money from FXIG, they should post
something on the website "that won['t] arouse a lot of suspicion but gives us t[he]
chance to deal with Fred [Honea] one last time." The suggested statement was,
"In auditing all 3 of our traders' information for the first quarter, we have
a few questions that we want to go over with one of the traders and after
we do so, we may post a different number for the quarter. We will
update you as soon as possible."
That same day, Welke emailed Arrington about Kratville, stating, "U boy is going to
go postal soon . . . . lock down." (Ellipsis in original.)
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NIC participants received statements falsely reporting 3.01 percent growth for
April 2007, 3.04 percent growth for May 2007, and 3.03 percent growth for June
2007, when the pool actually suffered substantial losses in each of those months. The
percentages reported should have been -5.95 percent, -10.61 percent, and -26.11
percent for April, May, and June 2007, respectively.
Beginning as early as October 2007 and through as late as January 2008, NIC
participants learned of the loss of the value of their accounts.7 By the end of 2007,
Arrington, Kratville, and Welke had collected $4.6 million in pool participants' funds,
paid out $850,000 in "returns" to existing pool participants, and had sent out a net of
approximately $3 million to trading entities. As NIC participants learned of the loss
or suspected something was wrong, many contacted Kratville, who told them that he
never joined MJM or NIC. Kratville provided the CFTC with documents purportedly
showing his resignation from MJM and NIC on June 23, 2006. Kratville drafted the
resignation documents, which included stipulations that he continue to be informed
about any traders that MJM or NIC used; that any information that he learned about
MJM, NIC, or their traders would be kept confidential; that he would not disclose his
resignation to any one; that he would not compete with EMHC, NIC, or MJM; and
that EMHC, NIC, or MJM would pay for his golf club membership dues through July
2007.
The CFTC filed suit on May 11, 2011, alleging that Arrington, Kratville, and
Welke "us[ed] numerous investment pools operated" by EMHC and
MJM—unregistered commodity pool operators—to "orchestrate[] a fraudulent
7
In total, there were 112 pool participants, counting couples as one pool
participant.
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scheme that induced more than 130 pool participants . . . to invest at least $4.7
million in the pools," in violation of the CEA.8
Discovery in this case commenced in August 2011 and closed on April 29,
2013. On April 16, 2013, a grand jury indited Kratville, charging him with 14 counts
of fraud and related crimes based on substantially the same facts as this civil case.9
On May 23, 2013, the CFTC moved for summary judgment on all counts, which the
district court granted on the merits after rejecting several of Kratville's evidentiary
challenges. Kratville moved to alter or obtain relief from the judgment under Federal
Rules of Civil Procedure 59(e) and 60(b)(1) and (6), renewing points raised in his
opposition to the motion for summary judgment and seeking relief on the ground that
his former attorney committed excusable neglect by advising him to invoke the Fifth
Amendment at his deposition following his criminal fraud indictment and by not more
aggressively pursuing discovery. The court denied the motion.
8
Specifically, the CFTC alleged that the defendants committed fraud in
connection with futures, in violation of 7 U.S.C. § 6b(a)(2)(i)–(iii) (2006) and 7
U.S.C. §§ 6b(a)(1)(A)–(C) and 6b(a)(2)(A)–(C); committed commodity-pool fraud,
in violation of 7 U.S.C. § 6o(1) (2006) and 17 C.F.R. § 4.41 (2010); committed fraud
in connection with options, in violation of 7 U.S.C. § 6c(b) (2006) and 17 C.F.R.
§ 33.10 (repealed June 26, 2012); failed to register as a commodity pool operator, in
violation of 7 U.S.C. § 6m(1)(2006); and failed to register as an associated person of
a commodity pool operator, in violation of 7 U.S.C. § 6k(2) (2006). The CFTC also
alleged that the individual defendants were liable as controlling persons for the
violations of EMHC and MJM under 7 U.S.C. § 13c(b).
9
On December 4, 2014, Kratville pleaded guilty to Count 9 of the indictment,
which charged wire fraud and aiding and abetting, in violation of 18 U.S.C. §§ 13 and
2. See United States v. Arrington, Kratville, and Welke, No. 13-cr-00146 (D. Neb.).
On June 18, 2015, the district court sentenced Kratville to 48 months' imprisonment.
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II. Discussion
On appeal, Kratville argues that the district court erred in (1) denying his
request for more time to review purportedly new evidence; (2) considering affidavits
from investors who signed releases, affidavits from investors who lacked credibility,
and emails that could have been altered; (3) declining to consider the affidavit of an
expert opining on the authenticity of the emails; (4) granting summary judgment on
the CFTC's claim that Kratville committed fraud and related violations of the CEA
and CFTC regulations in soliciting persons to invest and maintain funds in
commodity investment pools; and (5) determining that the litigation strategy of
Kratville's attorney was not excusable neglect warranting relief under Federal Rule
of Civil Procedure 60(b)(1).
A. Time To Review Evidence
Kratville argues that the district court abused its discretion in refusing to permit
him sufficient time to review over 78,000 pages of evidence that the "government"
provided to him two months after discovery closed.
Discovery in this case closed on April 29, 2013. In the meantime, on April 16,
2013, Kratville was criminally indicted. On May 23, 2013, the CFTC moved for
summary judgment on all counts. In June 2013, two months after Kratville's criminal
indictment, the United States Attorney's Office in the criminal case produced a CD
ROM of Arrington's hard drive containing emails and other documents and provided
it to Kratville's counsel.10 Several months prior, the CFTC had produced hard copies
10
Kratville averred that
about June 17, 2013, the United States Attorneys office delivered to
Affiant's attorneys' office a CD ROM purportedly containing a copy of
the files on Defendant Jon Arrington's hard drive (and containing other
files as well) but not a copy of the actual hard drive itself. This CD
ROM contained 18,636 separate PDF files totaling 78,680 pages of
documents in PDF format.
-17-
of those emails that it had received from Arrington. Kratville's response to the CFTC's
motion for summary judgment was due on July 11, 2013. On that date, Kratville
moved for an extension of time to respond to the CFTC's motion for summary
judgment based on the evidence that the United States Attorney's Office produced in
the criminal case. Kratville asserted that he had retained an expert to examine the hard
drive to see if Arrington's emails were fake or had been altered. Kratville also
submitted a brief in opposition to the CFTC's motion for summary judgment based
on the existing evidence.
On July 12, 2013, the CFTC opposed Kratville's motion for extension of time.
It argued that although Kratville had 51 days to respond to its motion for summary
judgment, Kratville waited until the day his response was due to request additional
time. It also asserted that Kratville failed to explain why he "need[ed] an expert now,
after the close of discovery, instead of when he first saw the Arrington emails that he
now claims are fake." The CFTC pointed out that Kratville had received the
Arrington emails in its possession on February 28, 2013, and that the CFTC had used
these emails as exhibits in Kratville's deposition on March 29, 2013. As a result, the
CFTC maintained that "[i]f Kratville believed these emails were fake, he should have
designated an expert at that time, or at the very least mentioned to the CFTC he was
considering getting an expert." The CFTC asserted that "because the emails are from
Kratville, he was in a unique position to know whether" he had written them. That
same day, the district court denied as moot Kratville's motion for an extension of time
given that "Kratville went ahead and filed a brief responding to the summary
judgment motion."
On August 15, 2013, Kratville moved to defer consideration of the CFTC's
motion for summary judgment. In that motion, Kratville argued that "David Burgess,
a computer forensic expert, was provided copies of co-Defendant Jonathan
Arrington's computer hard drives by the United States Attorney's Office for the
District of Nebraska–Omaha Division" and that Burgess was "in the process of
-18-
conducting an analysis and examination of co-Defendant Jonathan Arrington's
computer hard drive, in order to determine the authenticity of certain email
correspondence, which was relied upon by [the CFTC] in its Motion for Summary
Judgment." Kratville asserted that he could not "present facts essential to justify his
opposition" to the CFTC's motion for summary judgment "without further knowledge
regarding the authenticity of said email correspondence which was utilized against
him in [the CFTC's] Motion for Summary Judgment." Kratville asked the court to
defer considering the motion for summary judgment—which was filed on May 23,
2013—until November 15, 2013.
The district court denied Kratville's motion to defer consideration of the
CFTC's motion for summary judgment, stating,
As Kratville acknowledges, he has been in possession of hard copies of
the subject emails since at least March of 2013. Yet, he waited until
June, 2013, to locate Arrington's computer in an effort to complete the
forensic analysis. Discovery in this case closed on April 29, 2013.
Kratville has not acted diligently in pursuing the requested discovery,
and the Court will not provide him additional time to gather evidence
which could have been obtained much earlier.
Kratville first argues that the CFTC violated Federal Rule of Civil Procedure
26(e)(1)(A) by not supplementing disclosure when information "has not otherwise
been made known to the other parties during the discovery process." According to
Kratville, "[t]here is no indication that the existence of Arrington's hard drive was
disclosed to Appellant prior to late June 2013. Appellee had a duty to disclose it and
never did so until it was produced by the government in June 2013[,] almost 2 months
after discovery had been completed."
But Kratville is conflating his criminal case with his civil case and the United
States Attorney's Office with the CFTC. The United States Attorney's Office—not the
CFTC—produced the CD ROM in June 2013. The CFTC represents that it was
-19-
unaware of Arrington's hard drive, and Kratville has offered no evidence that the
CFTC was aware of its existence.
Kratville next argues that he was entitled to a continuance for additional
discovery pursuant to Federal Rule of Civil Procedure 56(d). "Under Rule 56([d]),11
a party may seek 'an extension of time in which to respond to the motion[ ] [for
summary judgment] in order to complete further discovery.'" Hargis v. Access Capital
Funding, LLC, 674 F.3d 783, 792 (8th Cir. 2012) (second and third alterations in
original) (quoting Marksmeier v. Davie, 622 F.3d 896, 903 (8th Cir. 2010)). This
court reviews a denial of a continuance motion under Rule 56(d) for an abuse of
discretion. Id.
Kratville sought continuance under Rule 56(d) to enable his expert to review
the hard drive that the United States Attorney's Office had produced in the criminal
case. In denying the motion, the district court stated, "As Kratville acknowledges, he
has been in possession of hard copies of the subject emails since at least March of
2013." Kratville does not contest that the CFTC produced all of the hard copies of
Arrington's emails that it had in its possession. Having the hard copies of these
emails, Kratville could have sought the source of these emails and would have known
upon reading them whether he authored the ones showing him as the sender. As the
CFTC notes, Kratville waited until three weeks before the close of discovery to
request documents from Arrington and never deposed him. More importantly,
Kratville has not shown how the documents are material to summary judgment in the
present case; that is, Kratville has not "affirmatively demonstrat[ed] . . . how
postponement of a ruling on the motion will enable him, by discovery or other means,
11
"Rule 56(f)—recodified 'without substantial change' as Rule 56(d) effective
December 1, 2010—authorizes a district court to defer considering a motion for
summary judgment if a party opposing the motion 'shows by affidavit or declaration
that, for specified reasons, it cannot present facts essential to justify its opposition.'"
Chambers v. Travelers Cos., Inc., 668 F.3d 559, 568 (8th Cir. 2012).
-20-
to rebut the movant's showing of the absence of a genuine issue of fact." Ray v. Am.
Airlines, Inc., 609 F.3d 917, 923 (8th Cir. 2010) (quotation and citation omitted)
(second alteration in original). Accordingly, we hold that the district court did not
abuse its discretion in denying Kratville more time to review the documents contained
on the CD ROM that the United States Attorneys' Office produced in his criminal
case for purposes of the CFTC's summary-judgment motion.
B. Consideration of Affidavits and Emails
Kratville next challenges the district court's consideration of several affidavits
in deciding the CFTC's motion for summary judgment. We review for an abuse of
discretion the district court's consideration of affidavits when ruling on a motion for
summary judgment. Malone v. Ameren UE, 646 F.3d 512, 515 (8th Cir. 2011).
1. Affidavits from Pool Participants Who Settled Lawsuits with Defendants
Kratville asserts that the district court improperly granted summary judgment
to the CFTC because some investors who provided affidavits in support of the
CFTC's motion for summary judgment had brought private lawsuits against him,
settled their cases for compensation, and signed releases. According to Kratville, the
district court disregarded Nebraska law by refusing to enforce these releases and
considering those investors' affidavits.
Rarely will privity be found "between a private party in one action and a party
in a later action when the party in the later action is a governmental agency." EEOC
v. Pemco Aeroplex, Inc., 383 F.3d 1280, 1290–91 (11th Cir. 2004). Furthermore, "It
is a well-established general principle that the government is not bound by private
litigation when the government's action seeks to enforce a federal statute that
implicates both public and private interests." Id. at 1291 (quotation and citation
omitted). The doctrine of res judicata does not bar the government "'from maintaining
independent actions asking courts to enforce federal statutes implicating both public
and private interests merely because independent private litigation has also been
-21-
commenced or concluded.'" Id. (quoting Sec'y of Labor v. Fitzsimmons, 805 F.2d 682,
692 (7th Cir.1986) (en banc)). "[G]overnmental agencies have statutory duties,
responsibilities, and interests that are far broader than the discrete interests of a
private party." Id.
Applying these principles, we agree with the district court that it was not barred
from considering the investors' affidavits in support of the CFTC's motion for
summary judgment because the CFTC was not a party to the settlement agreement
between the investors and Kratville. Instead, the present case involves the CFTC
seek[ing] to protect a public interest that far exceeds the interests of
individual citizens. That is, the [CFTC] seeks to protect the integrity of
a public market. The continued integrity and hence vitality of that public
market has huge implications for the national economy.
Therefore, even though a private litigant "understandably" may
believe it wise "to compromise claims to gain prompt and definitive
relief," such a settlement "does not further the broader national public
interests represented by the [CFTC] and reflected in Congress's
delegation of [the Act's] enforcement powers to the [CFTC.]" [Herman
v. S.C. Nat'l Bank, 140 F.3d 1413,] 1426 [(11th Cir. 1998)]. Indeed, and
quite apart from whether the individual victims are satisfied with their
private settlements, full and ample restitution, and other equitable
remedies such as disgorgement of profits, serve distinct deterrence
functions that are vital to the "national public interest." Id. Therefore,
when private parties settle their disputes without the approval or consent
of the [CFTC], those settlements cannot preclude the [CFTC] from later
seeking additional or more full restitution or any other remedy.
CFTC v. Comm'l Hedge Servs., Inc., 422 F. Supp. 2d 1057, 1060–61 (D. Neb. 2006)
(fourth alteration in original).
2. Affidavits from Pool Participants Who Kratville Claims Lack Credibility
-22-
Kratville also argues that the district court abused its discretion in admitting the
affidavits of pool participants Tony Leach and Pat Shannon because, he believes,
their credibility is questionable.
Leach averred that in August 2007, he went on vacation with Kratville's sister,
Catherine Kratville ("Catherine"), who told him that "Kratville had indicated to her
that NIC was in serious trouble, and that [Leach] should get [his] money out." Leach
also averred that Catherine "told [him] that if [he] repeated this, she would have [him]
killed." Kratville argues that Catherine's affidavit calls into question Leach's
credibility because Catherine denied "ever tell[ing] Anthony Leach that if he told
anything to anyone that I would kill him or have him killed" and "ever hav[ing] any
conversations with Anthony Leach about Elite or NIC or MJM or Leach's investment
in one or more of those entities."
As to Shannon's affidavit, Kratville submitted an affidavit from Burgess in
which Burgess averred that he had examined Shannon's affidavit and emails attached
to Shannon's affidavit, as well as electronic versions of emails directly from
Kratville's computer. "After such examination, [Burgess] concluded that Shannon was
not telling the truth about the subject of the emails of that date Shannon sent to
Kratville which contain the email of that date attached to Shannon's affidavit."
Kratville also offered the affidavit of Joseph Boeggeman, who knew both Kratville
and Shannon. Boeggeman averred that he had informally mediated a legal fee dispute
between Shannon and Kratville, gave a different interpretation of some emails that
Shannon discussed in Shannon's affidavit, and expressed his general view that
Shannon was not honest.
In the present case, the CFTC, "the party with the burden of proof," is the
movant, and Kratville is "the opposing party present[ing] evidence contesting the
veracity of the movant's evidence." United States v. Real Prop. Located at 3234
Washington Ave. N., Minneapolis, Minn., 480 F.3d 841, 845 (8th Cir. 2007). "In this
-23-
situation, if the testimony of a witness . . . is necessary to carry the movant's burden
of proof, we look carefully at whether the witness is unbiased and competent, and
whether his testimony is positive, internally consistent, unequivocal, and in full
accord with the documentary exhibits." Id. (quotation and citation omitted). Summary
judgment is not proper "where specific facts are alleged that if proven would call the
credibility of the moving party's witness into doubt." Id. (quotation and citation
omitted).
Like the district court, we reject Kratville's credibility challenge to the CFTC's
use of Leach's and Shannon's affidavits. As the district court noted, the CFTC did not
allege any fact, and the district court did not rely on any fact, "based solely on Leach's
affidavit." As to Shannon's affidavit, we agree with the district court that Kratville
"failed to allege specific facts calling into question Shannon's credibility." General
allegations that "Shannon has a history of failing to fully disclose the truth with
respect to business dealings" and Kratville's argument that "Boeggeman's affidavit
calls into question the veracity of Shannon's affidavit and his credibility in general"
lack specificity. Furthermore, as the district court observed, "Kratville admitted or did
not contest the CFTC's statement of material facts with respect to many of the issues
touched upon in Shannon's affidavit. Matters Kratville did contest are not material to
CFTC's burden of proof, and relate only to differing interpretations of documents."
3. Arrington's Emails and the Expert's Affidavit
Kratville next claims that the district court erred in considering emails
exchanged between him, Arrington, and Welke that were attached to Arrington's
affidavit that was submitted in support of the CFTC's motion for summary judgment.
He also claims that the court erred in refusing to consider the affidavit of Burgess, his
expert on the authenticity of the emails. Kratville argues that these emails may have
been altered based on Burgess's averment that he had conducted a "cursory" review
of hard copies of Arrington's emails and concluded that "portions of some" have been
deleted.
-24-
The district court refused to consider the Burgess affidavit based on Kratville's
failure to timely disclose Burgess as an expert, explaining:
Kratville disclosed Burgess as an expert the day before he filed his
response to the CFTC's Motion for Summary Judgment. He has not
provided any justification for this untimely disclosure. Kratville received
the hard copy emails during discovery, and the emails were used as
exhibits during Kratville's deposition on March 29, 2013. Kratville had
more than sufficient notice of the emails, many of which were written
by him, and adequate time to question their authenticity. Kratville has
not demonstrated that his failure to disclose his forensics expert was
substantially justified or harmless. Accordingly, Kratville has failed to
provide specific facts challenging Arrington's credibility, and the Court
has considered the Arrington affidavit and emails in its analysis of the
CFTC's Motion.
Reviewing the district court's exclusion of the Burgess affidavit for an abuse
of discretion, Trost v. Trek Bicycle Corp., 162 F.3d 1004, 1008 (8th Cir. 1998), we
conclude that the district court did not err in disregarding Burgess's affidavit and thus
rejecting Kratville's challenge to the authenticity of the emails that Arrington attached
to his affidavit. As the district court explained, Kratville failed to timely disclose
Burgess as an expert pursuant to Federal Rule of Civil Procedure 26(a). "'A party that
. . . fails to disclose information required by Rule 26(a) . . . shall not be permitted to
use [the nondisclosed information] as evidence at a trial, at a hearing, or on a motion'
'unless such failure is harmless' or there was 'substantial justification' for the failure."
Trost, 162 F.3d at 1008 (quoting Fed. R. Civ. P. 37(c)(1)). Kratville has not shown
that the failure to disclose Burgess was harmless or that he had a substantial
justification for the failure. As explained supra, the CFTC had shown Kratville the
emails appended to Arrington's affidavit months before in a deposition; therefore, he
could have retained an expert at that time to review the authenticity of the emails.
C. Violation of the CEA
-25-
Kratville argues that the district court erroneously granted summary judgment
to the CFTC on its claim that Kratville committed fraud in violation of the CEA and
its implementing regulations. "We review a district court's grant of summary
judgment de novo, viewing the facts and all reasonable inferences in the light most
favorable to the nonmoving party." Reed v. City of St. Charles, Mo., 561 F.3d 788,
790 (8th Cir. 2009) (citation omitted).
"In order to establish liability for fraud, CFTC had the burden of proving three
elements: (1) the making of a misrepresentation, misleading statement, or a deceptive
omission; (2) scienter; and (3) materiality." CFTC v. R.J. Fitzgerald & Co., Inc., 310
F.3d 1321, 1328 (11th Cir. 2002) (citations omitted).12 "In applying these various
elements to the present case, we are guided by the principle that the CEA is a
remedial statute that serves the crucial purpose of protecting the innocent individual
investor—who may know little about the intricacies and complexities of the
commodities market—from being misled or deceived." Id. at 1329 (citing R&W
Technical Servs., Ltd. v. CFTC, 205 F.3d 165, 173 (5th Cir. 2000)). The question is
whether the "undisputed facts demonstrate fraud and deception as a matter of law."
Id.
1. Misrepresentation, Misleading Statement, or Deceptive Omission
"Whether a misrepresentation has been made depends on the 'overall message'
and the 'common understanding of the information conveyed.'" Id. at 1328 (quoting
Hammond v. Smith Barney Harris Upham & Co., [1987-1990 Transfer Binder]
Comm. Fut. L. Rep. (CCH) 24,617, 36,657 & n.12 (CFTC Mar. 1, 1990)). Thus, we
read the information "for its overall message, and how that message would be
interpreted by an objectively reasonable" receiver of that information. Id. at 1329.
12
As the district court correctly observed, "[t]here are few elemental differences
between the CFTC's various fraud claims." Therefore, we will analyze the same
elements for the fraud claims brought against Kratville under the CEA and its
implementing regulations. See R.J. Fitzgerald, 310 F.3d at 1328.
-26-
Here, the district court cited the following "uncontroverted evidence" as
satisfying the CFTC's burden of proving that Kratville made misrepresentations. First,
the district court found that "[t]he overall message of representing FXIG's purported
track record as that of EMHC or the Elite Pools was misleading." The following
undisputed facts support this finding. Kratville told prospective pool participants in
the fall of 2005 that the Elite Pools had returned at least four to six percent per month
since 2002 when the EIIG did not begin trading until 2003 at the earliest and the
EAGG was not established until 2004. Additionally, it was FXIG, not the Elite Pools,
that reported the four-to-six percent returns. EMHC's website and brochures also
represented that EMHC received multiple million-dollar offers to purchase its system
when, in reality, neither EMHC nor any of the Elite Pools had a proprietary trading
system, and the defendants never received any offers to purchase such a system.
Kratville is liable for these representations, as he was an equal officer and owner of
EMHC and MJM.
On appeal, Kratville argues that it was not misleading for EMHC to list the
reported achievements of its traders at FXIG because all club members knew that
outside traders were being used. But, as the district court noted, "[t]he issue is not
whether the representations accurately described FXIG's track record, but whether it
was misleading to represent FXIG's track record as that of EMHC, without
mentioning FXIG." First, it is undisputed that neither EMHC nor any of the Elite
Pools earned the reported returns through their own trading, which is what the
marketing materials represented. Second, Kratville told a friend that if he told people
about FXIG, no one would invest with the Elite Pools.
Third, the district court also found that Kratville and the defendants made
explicitly false representations apart from misrepresenting FXIG's purported record
as its own. The following undisputed facts support this finding. The prospectus
provided that EMHC's primary broker was TradeStation Securities and its clearing
-27-
house broker was R.J. O'Brien when EMHC never had trading accounts with those
entities.
Finally, the district court found that Kratville made personal representations
that were either false or misleading to investors. The following undisputed facts
support this finding. Kratville represented to investors that he was an active, longterm
investor in EMHC. In reality, Kratville was an investor in EAGG under Neil Labelle,
but he received his money back at a loss in May 2005. Once EMHC began operating
the Elite Pools, Kratville deposited, at most, $500 of his money in August 2005.
Additionally, Kratville did not disclose to the pool participants the NDBF's directive
to shut down EMHC and return all investor money; instead, Kratville and the other
defendants falsely told pool participants that the NDBF merely had some technical
concerns about the pools' structure that had been rectified by reconstituting the pools
and rolling over the investors' money to a new pool.
In summary, we agree with the district court that "[t]he undisputed evidence
demonstrates that the 'overall message' and the 'common understanding of the
information conveyed' to investors while recruiting and managing the Elite and MJM
pools was deceitful." (Quoting R.J. Fitzgerald, 310 F.3d at 1328.)
2. Scienter
"For purposes of fraud or deceit in an enforcement action, scienter is
established if Defendant intended to defraud, manipulate, or deceive, or if Defendant's
conduct represents an extreme departure from the standards of ordinary care." R.J.
Fitzgerald, 310 F.3d at 1328 (citation omitted). The CFTC proves scienter by
showing that the "Defendant's conduct involves 'highly unreasonable omissions or
misrepresentations . . . that present a danger of misleading [customers] which is either
known to the Defendant or so obvious that Defendant must have been aware of it.'"
Id. (alterations in original) (quoting Ziemba v. Cascade Int'l, Inc., 256 F.3d 1194,
1202 (11th Cir. 2001)).
-28-
We agree with the district court that "[t]he CFTC has presented uncontroverted
evidence of scienter." First, in 2005, Kratville admitted to a friend that if he told
people about FXIG, then no one would invest with the Elite Pools. Second, in 2006,
Kratville's correspondence with Arrington and Welke regarding the NDBF
investigation undisputably demonstrates scienter; the district court accurately
recounted this correspondence as follows:
After receiving the NDBF inquiry, Kratville recommended that an
attorney's advice be disregarded, stating "I think the better course of
action is to not refund the monies at this time and try and stretch out the
discussion process as long as possible (I have some ideas on that) until
the point where [they] likely [will] tell us to shut down . . . . I am curious
whether we need to consider LPs in just another state or whether we
need to even move it offshore. Just an idea." (Filing No. 102-6 at ECF
41.) Kratville, Welke, and Arrington followed through with this scheme
and created MJM and the NIC Pools. On August 18, 2006, Kratville
emailed Arrington and Welke, stating "it is quite clear to me that if the
State ever finds out we have the Wyoming entity and we have moved
everyone over, that they will go after our nuts." (Filing No. 102-6 at
ECF 44.) Kratville advised that, "in an abundance of caution, I deleted
everything on my computer that refers to FXIG or Elite. If the state
would ever come grab our computers, the less on them the better. I
would advise us to store any such documents on little zip drives,
portable drives, on Hotmail or Yahoo accounts, etc." (Id.) He further
stated he did not "have any of our emails in" his Outlook, and "[b]etter
safe than sorry." (Id.) These statements evidence an intent to keep the
scheme in place as long as possible and avoid detection as long as
possible.
(Alterations in original.)
Third, after Kratville learned in February 2007 that FXIG would return less
than a penny on the dollar, Kratville emailed Arrington and Welke that he was "really
frustrated because we are handling ot[he]r peoples' money and basically have had to
-29-
hide these problems from our investors." Also, in his email to Arrington and Welke
regarding ways to recover the money, Kratville stated that he feared that "someone
will find out that we have been acting illegally too . . . If this thing blows up, I will
lose my bar license. . . . My other fear is that if th[is] blows up that I will lose all of
my assets paying our members. Playing hardball cou[ld] r[e]sult in t[he] state and feds
finding out what we were doing . . . ."
Fourth, Kratville collaborated with Arrington and Welke on whether to report
the losses during the first half of 2007 and recommended that they report something
that "won[']t arouse a lot of suspicion."
On appeal, Kratville contends that a genuine issue of material fact exists as to
his scienter based on the emails between Arrington and Welke about Kratville and at
least one email from Kratville to Arrington purportedly showing Kratville expressing
concern about the funds' performance and a desire to be truthful. For purposes of
summary judgment, we assume the veracity of these emails. But we must examine
"the record as a whole" to determine whether "a rational trier of fact [could] find for
the nonmoving party"; if not, then "there is no genuine issue for trial." Kiemele v. Soo
Line R. Co., 93 F.3d 472, 474 (8th Cir. 1996) (quotation omitted). Here, the record
as a whole, as best evidenced by Kratville's own words in his email exchanges with
Arrington and Welke, demonstrate his scienter. There is no genuine issue of material
fact for a jury to decide.
Kratville also claims that material issues of fact exist as to whether he was a
controlling person of EMHC and MJM. He contends that he presented evidence that
he either did not know about the misrepresentations, objected to them, or was barred
by ethics rules from correcting any misrepresentations that his codefendants, as his
clients, made.
-30-
An individual "who, directly or indirectly, controls [a corporation that] has
violated [the CEA] may be held liable for such violation in any action brought by the
Commission to the same extent as such controlled [corporation]." 7 U.S.C. § 13c(b).
For liability to attach, the Commission must prove: (1) that a corporation
violated the Act; (2) that the defendant "directly or indirectly" controlled
that corporation; and (3) that the controlling person "did not act in good
faith or knowingly induced, directly or indirectly, the act or acts
constituting the violation." 7 U.S.C.A. § 13c(b).
CFTC v. Baragosh, 278 F.3d 319, 330 (4th Cir. 2002).
The Commission establishes that a defendant controlled a corporation under
§ 13c(b) by showing "that the defendant actually exercised general control over the
operation of the entity principally liable and possessed the power or ability to control
the specific transaction or activity upon which the primary violation was predicated,
even if such power was not exercised." Id. (quotation and citations omitted). The facts
and circumstances dictate whether a defendant possessed such "control." Id. (citations
omitted). "Because control may be exercised jointly by a group, several persons may
simultaneously be controlling persons of the same corporation." Id. (citation omitted).
However, "in every case, the controlling person must have actually exercised general
control over the operation of the entity principally liable." Id. (quotation and citation
omitted). One who "actually direct[s] a corporation or cause[s] it to act" may be liable
as a controlling person and cannot "otherwise hide behind formalities of ownership
or title." Id. (citation omitted). It is the person's "power that matters, not whether he
exercised it by actually participating in or benefitting from the illegal acts." Monieson
v. CFTC, 996 F.2d 852, 860 (7th Cir. 1993) (citation omitted). A controlling person
"knowingly induced" the conduct if he "had actual or constructive knowledge of the
core activities that make up the violation at issue and allowed them to continue." R.J.
Fitzgerald, 310 F.3d at 1334 (citation omitted).
-31-
The undisputed facts show that Kratville is liable as a controlling person. First,
EMHC's and MJM's default judgment serves as the predicate source of entity liability
for violations of the CEA and its regulations.
Second, Kratville controlled EMHC and MJM. Kratville admitted that he was
an owner and officer of EMHC and MJM. He jointly operated these entities with
Arrington and Welke and jointly selected with them the traders and financial
institutions that EMHC and MJM used. He solicited pool participants with Arrington
and Welke to invest in the companies' pools and jointly prepared marketing materials
and trading statements with them for EMHC and MJM. He served as legal counsel
for EMHC and the Elite Pools and represented them in dealings with the NDBF.
Finally, the undisputed facts show that Kratville knowingly induced the
entities' fraud, as shown by the evidence set forth supra establishing his scienter.
Therefore, we hold that the district court correctly determined that Kratville is liable
as a controlling person.
3. Materiality
"A representation or omission is 'material' if a reasonable investor would
consider it important in deciding whether to make an investment." R.J. Fitzgerald,
310 F.3d at 1328–29 (citations omitted). "It is too obvious for debate that a
reasonable listener's choice-making process would be substantially affected by
emphatic statements on profit potential . . . ." Id. at 1330. "When the language of a
solicitation obscures the important distinction between the possibility of substantial
profit and the probability that it will be earned, it is likely to be materially misleading
to customers." Id. (quotation and citation omitted). As a result, "representations about
profit potential and risk 'go to the heart of a customer's investment decision and are
therefore material as a matter of law.'" Id. (quoting CFTC v. Noble Wealth Data, 90
F. Supp. 2d 676, 686 (D. Md. 2000)).
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The district court found that Kratville's misrepresentations and omissions were
material, and the undisputed facts support this finding. Kratville's misrepresentations
related to profit potential and risk. Kratville misrepresented the Elite Pools's returns
and profitability as late as 2006 and 2007, misrepresented the identity of the Elite
Pools's brokers, and misrepresented that the Elite Pools owned a proprietary trading
system. He hid from investors that pool funds were being sent out of the country and
failed to disclose that the NDBF had ordered the Elite Pools to be closed and pool
participants funds to be returned.
Because the CFTC satisfied its burden of proving that Kratville violated the
CEA, we affirm the district court's grant of summary judgment to the CFTC.
D. Excusable Neglect
Kratville argues that the district court erroneously denied his Rule 60(b) motion
for relief from judgment based on his former attorney's "excusable neglect." He
identifies the following areas in which his trial attorney was purportedly neglectful:
(1) failing to file motions on some issues; (2) not filing motions on a timely basis on
some issues; (3) not resetting Kratville's deposition so that evidence could be offered;
(4) telling Kratville that taking the Fifth Amendment would not be a problem in
defending against summary judgment when such was clearly wrong; and (5) not
having Kratville file an affidavit in July 2013 that would have controverted many
facts in this case.
"The denial of a Rule 60(b) motion is reviewed for an abuse of discretion." In
re Guidant Corp. Implantable Defibrillators Prods. Liab. Litig., 496 F.3d 863, 866
(8th Cir. 2007) (citing Noah v. Bond Cold Storage, 408 F.3d 1043, 1045 (8th Cir.
2005)). "[B]ecause Rule 60(b) authorizes relief in only the most exceptional cases,"
we will rarely reverse a district court's denial of a Rule 60(b) motion. Id. (quotation
and citation omitted).
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"Rule 60(b)(1) permits, inter alia, a district court to grant relief from a
judgment entered because of a party's excusable neglect." Id. (citing Noah, 408 F.3d
at 1045). We have identified two components of excusable neglect: "(1) neglect or
noncompliance . . . (2) that is excusable." Id. (citing Noah, 408 F.3d at 1045). We
consider several factors in analyzing whether conduct is "excusable":
(1) the danger of prejudice to the non-moving party; (2) the length of the
delay and its potential impact on judicial proceedings; (3) whether the
movant acted in good faith; and (4) the reason for the delay, including
whether it was within the reasonable control of the movant. Pioneer Inv.
Serv. Co. v. Brunswick Assoc. Ltd. P'ship, 507 U.S. 380, 395, 113 S. Ct.
1489, 123 L. Ed. 2d 74 (1993). These four Pioneer factors do not carry
equal weight; the reason for delay is a key factor in the analysis. Lowry
v. McDonnell Douglas Corp., 211 F.3d 457, 463 (8th Cir. 2000).
Id. (internal footnote omitted).
Rule 60(b)(1) "does not permit litigants and their counsel to evade the
consequences of their legal positions and litigation strategies, even though these
might prove unsuccessful, ill-advised, or even flatly erroneous." McCurry ex rel.
Turner v. Adventist Health Sys./Sunbelt, Inc., 298 F.3d 586, 595 (6th Cir. 2002).
Additionally, "'Rule 60(b) has never been a vehicle for relief because of an attorney's
incompetence or carelessness.'" Inman v. Am. Home Furniture Placement, Inc., 120
F.3d 117, 119 (8th Cir. 1997) (emphasis added) (quoting Sutherland v. ITT Cont'l
Baking Co., 710 F.2d 473, 476–77 (8th Cir. 1983)).
Here, the district court denied Kratville's Rule 60(b)(1) motion, finding that
significant delay would result from granting the motion and that counsel's
professional carelessness did not warrant relief. The district court did not err in
denying Kratville's Rule 60(b) motion. Even assuming that Kratville showed
counsel's neglect or noncompliance, as opposed to showing that counsel was simply
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executing a litigation strategy, the district court adequately explained why the
conduct is not "excusable." Had the court granted Kratville's motion, extreme
prejudice to the CFTC and significant delay would have resulted from the CFTC
having to depose Kratville again to obtain responses to the questions that Kratville
previously refused to answer, and the CFTC would likely have had to conduct
additional discovery to evaluate Kratville's answers or relitigate previously resolved
issues. Kratville has failed to provide any justification for this delay beyond the
negligence, carelessness, or incompetence of his attorney.13
III. Conclusion
Accordingly, we affirm the judgment of the district court.
______________________________
13
Kratville argues that his "former attorney's actions were negligent because
they misled [Kratville] into asserting the 5th Amendment when there was no way to
otherwise counter [the CFTC's] evidence." (Internal footnote omitted.)
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