Court: District Court, N.D. Georgia; June 27, 2018; Federal District Court
Plaintiff's Motion for Partial Summary Judgment seeks to determine whether Defendants Donald V. Watkins, Sr. and Masada Resource Group committed securities fraud concerning three specific promissory notes. Defendants have filed a Motion for Leave to File a Sur-Reply, which the Court denies. The Court notes that the Federal Rules and Local Rules do not authorize sur-replies unless a valid reason is presented, such as new arguments or evidence, which the Defendants failed to provide. Instead, their sur-reply merely reiterates previous arguments.
Furthermore, Defendants attempted to exceed the page limits for their brief by incorporating extensive factual statements, which the Court finds unmanageable and unnecessary. The Court emphasizes that it will review only those facts that are properly cited and discussed within the parties' briefs.
Background information reveals that since 2009, Defendant Watkins has owned Watkins Pencor LLC and controlled Masada Resource Group, both of which hold patents for waste-to-ethanol technology. Watkins is also a major shareholder in Alamerica Bank and previously took out significant loans for stock purchases. Additionally, he was the majority owner of Watkins Aviation, LLC, involved in litigation related to an airplane-cargo venture. Watkins owns Nabirm, a company with rights to explore natural resources in Namibia.
In 2010 and 2011, Defendant Watkins was in a relationship with Marion Snell in Atlanta while owing his ex-wife, Deandra Watkins, $10,000 monthly in alimony. His son, Donald V. Watkins, Jr., managed business operations and fund disbursements under Watkins' direction. During this period, Watkins exclusively utilized the bank account of his son’s business, Donald V. Watkins, PC (DVWPC), for transactions related to Masada.
Charles Barkley, a former NBA player and owner of Charles Barkley Enterprises, invested or loaned at least $4,000,000 to Watkins between 2007 and 2012. In January 2007, Barkley acquired 5% of Watkins' interests in several entities, including Masada, with the purchase agreement referencing assignment provisions, investment risk factors, and buy-sell provisions.
On May 8, 2010, Watkins solicited Barkley for $1,000,000 to secure long-term waste management contracts in Morocco and partnerships in Mexico, Senegal, South Africa, and South Korea, claiming that existing stakeholders should capitalize on these projects. After negotiations, Barkley agreed and executed a promissory note on May 14, 2010. This note, signed by Watkins on behalf of DVWPC, was strictly for Masada-related business and did not reference prior agreements. Barkley wired $1,000,000 to DVWPC, which had less than $5,000 prior to this transaction. Watkins subsequently refunded over $750,000 to an earlier investor, paid $10,015 for housing utilities for his girlfriend, allocated $10,000 for his alimony, and used over $40,000 for his personal plane mortgage.
In May 2011, Watkins requested another $1,000,000 from Barkley for a special purpose loan, representing that it would be utilized for legal and banking services related to a potential acquisition of Masada by Waste Management.
Mr. Barkley provided a loan to Defendant Watkins, who executed a promissory note stating the funds were for business use by DVWPC on behalf of Masada. Prior to receiving a second $1,000,000 loan, DVWPC's bank account showed a negative balance of $786.67. Upon receipt of the funds, Watkins used them for various personal expenses, including a $7,000 gift to his son, over $40,000 to his girlfriend, and $50,000 in partial alimony. Additionally, he paid off personal debts, including over $250,000 in tax liabilities and more than $20,000 for loans related to Alamerica bank stock. The attorneys Watkins compensated with Barkley’s funds were involved in the Tradewinds Litigation, not the purported WM transaction.
In a subsequent request for a $150,000 loan on May 24, 2013, Watkins claimed the funds were needed to cover $600,000 in expenditures for business projects, including significant legal fees for a $10 million investment transaction. However, his total expenditures for April and May did not exceed $300,000, and no payments for these legal fees were found in bank records. An email indicated the funds were primarily intended for credit card bills, as Watkins faced a financial shortfall of about $200,000. Though Watkins signed a note for the $150,000 loan for Masada, he later referred to it as being for Nabirm.
The legal standard for summary judgment requires the court to grant judgment if there are no genuine disputes regarding material facts, which could affect the case's outcome. The moving party must demonstrate the absence of evidence supporting the nonmoving party's claims and must be viewed in the light most favorable to the nonmoving party.
The moving party must substantiate its motion for summary judgment, after which the non-movant must demonstrate that genuine disputes exist by providing specific facts. A rational trier of fact cannot find for the nonmoving party if the overall record does not support such a conclusion. Merely presenting a minimal amount of evidence, or evidence that is not significantly probative, is insufficient to prevent summary judgment. However, all reasonable doubts must be resolved in favor of the nonmoving party.
Sections 10(b) and 17(a) of the Securities Exchange Act and Securities Act prohibit material misrepresentations or omissions in securities transactions, with Section 10(b) and Section 17(a)(1) requiring a showing of scienter, while Sections 17(a)(2) and (3) only require negligence. A corporate officer may be liable if they are deemed the 'maker' of the statement in question.
The plaintiff argues that the Barkley Notes qualify as 'securities,' a point unchallenged by the defendants. Additionally, it is undisputed that emails from Defendant Watkins to Barkley used means of interstate commerce. The court must determine if the emails contained material misrepresentations or omissions and whether these were made with scienter or negligence. In their response, defendants minimally address the emails, claiming Barkley did not read or rely on them, which the plaintiff disputes; however, reliance is not necessary to establish liability. Defendants contend the emails are 'cherry-picked' and that Watkins provided the 'proper context,' but fail to clarify these assertions, leaving the court to assess the emails' content for material misrepresentations.
Defendant Watkins claimed in an initial email that he had an immediate opportunity to secure long-term waste management contracts in several countries, seeking to leverage existing Masada stakeholders to avoid dilution of investor returns. In a follow-up, he proposed to split an initial $1 million for projects in Morocco and Mexico but later acknowledged potential adjustments to allocations. However, Watkins did not utilize Mr. Barkley’s investment as promised; instead, he refunded approximately $750,000 to a previous investor, spent over $10,000 on personal housing and utilities for his girlfriend, made $10,000 alimony payments to his ex-wife, and allocated over $40,000 towards his personal plane's mortgage. Watkins attempted to justify these expenditures as for "Masada purposes," but he had specifically pledged that the funds would support international waste management projects, rendering his claims false.
The court must assess the materiality of these misrepresentations, defined as whether a reasonable investor would consider the omitted facts significant in their investment decision-making. The established standard aims to eliminate trivial information from consideration. The defendants did not address Watkins's misrepresentations or contest their materiality. A reasonable investor, believing their funds would support lucrative international contracts, would find it critical to know if those funds were instead being used for personal obligations or to refund another investor. Watkins’s assertions about the intended use of funds were material misrepresentations, further evidenced by his specific claim in a May 13, 2011, email that the funds would cover costs for investment bankers and lawyers, which he also did not honor.
Defendant Watkins made significant financial transactions using Mr. Barkley's funds, including a $7,000 gift to his son, over $40,000 to his then-girlfriend for a 'House Account,' and $50,000 in partial alimony to his ex-wife. He also paid personal debts, such as a tax liability exceeding $250,000 and over $20,000 for loans related to Alamerica bank stock. The attorneys paid with Mr. Barkley's funds represented Watkins in the Tradewinds Litigation, not in the WM transaction. Watkins sought a $150,000 temporary loan, claiming it was needed to cover $600,000 in expenditures for various international projects, including substantial legal fees related to a $10 million investment handled by a London firm. However, his total expenditures for April and May were under $300,000, with no bank records supporting the claimed legal fees. The defendants did not address this discrepancy in their response to the Motion for Partial Summary Judgment, raising concerns about the materiality of Watkins’ misrepresentations. A reasonable investor would find it crucial to know that Watkins’ expenses were misrepresented and were actually related to credit card bills and mortgage arrears. The court must determine whether these misrepresentations were made with scienter or mere negligence, with scienter requiring a showing of knowing misconduct or severe recklessness. Defendants did not argue that Watkins had a good-faith belief in the truth of his statements, instead claiming that his use of funds was authorized by the Masada Operating Agreement. During his deposition, Watkins was questioned about the necessity of accuracy in presenting how investment funds would be used.
Defendant Watkins claimed he was only required to have a business purpose for using funds, asserting he could utilize the money as needed to grow his business. However, this assertion is challenged by the legal requirement that prohibits making untrue statements of material fact in securities transactions, as outlined in 17 C.F.R. 240.10b-5(b). The law emphasizes that an investor is entitled to accurate information, and misrepresenting the intended use of funds is prohibited. Specifically, Watkins misled Mr. Barkley regarding the allocation of the $150,000 loan, representing it would support specific projects while, in reality, he diverted funds for personal expenses, including over $200,000 for tax liabilities and over $20,000 for personal loans. Watkins’ conduct, marked by gross exaggeration and misappropriation of investor funds, indicates a high level of scienter, suggesting he was aware that his statements could mislead investors. His initial communications to Barkley further misrepresented the investment's potential benefits and risks, reinforcing the misleading nature of his representations. Overall, Watkins’ actions demonstrate a clear violation of securities fraud standards, undermining the integrity of the investment process.
Defendant Watkins attempted to justify his misrepresentation to Mr. Barkley by emphasizing that he sought investment specifically from him rather than new equity partners. This suggests that Watkins knowingly misled Barkley, as he was aware that Barkley would not have invested had he known the actual use of the funds. Scienter, or intent to deceive, can be established through circumstantial evidence, but direct evidence from Watkins' own testimony also supports this. He indicated he believed he had the discretion to use the investment money as he deemed necessary for business growth, regardless of his representations in communications with Barkley. During his deposition, Watkins did not acknowledge any obligation to be truthful regarding the use of investor funds, as long as they were applied to what he considered a business purpose.
This behavior demonstrates an extreme disregard for ordinary care, indicating that he must have recognized the risk of misleading investors. Watkins' belief that he could make false representations, provided the funds were used for business purposes, underscores his intent to mislead. He argued that Barkley's investment was based on their friendship and that Barkley would have allowed him discretion over fund usage. However, if Watkins intended to raise funds for general business purposes, he was still required to be honest about his intentions. His misrepresentations deprived Barkley of the accurate information necessary for informed investment decisions, violating Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act, which are designed to protect against such material misrepresentations.
Even if scienter were not established, Watkins' actions would still qualify as negligent, confirming violations of Sections 17(a)(2) and (3) of the Securities Act. Finally, Watkins is deemed the "maker" of the misrepresentations in the emails, holding full liability for the false statements due to his ultimate authority over their content and communication.
Defendant Watkins' actions regarding the first two loans are attributed to Masada, allowing for the imputation of his scienter to the company, as established in SEC v. Manor Nursing Ctrs. Inc. However, for the $150,000 loan solicitation, liability for Masada regarding misrepresentations is not conclusively established due to ambiguity about Watkins' role. The email associated with this loan references Masada projects but also mentions expenses for Nabirm, and Watkins characterized the loan as being for Nabirm in a subsequent email. Therefore, it remains unclear if Watkins acted as a representative of Masada when making those misrepresentations.
The Plaintiff seeks to have DVWPC declared a constructive trustee of the funds loaned to Watkins. Defendants argue that this claim is barred by the statute of limitations. The Court finds that determining specific remedies like disgorgement is premature and cannot currently impose a constructive trust because the Plaintiff has not identified a specific identifiable res. While ill-gotten funds were deposited into DVWPC’s account, their usage complicates tracing, as the funds were not left idle, and the Court lacks an accounting of any unjust enrichment.
The Court partially grants the Plaintiff's Motion for Partial Summary Judgment: it affirms liability under Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act for Watkins concerning all three promissory notes, and for Masada regarding the 2010 and 2011 notes. However, it denies liability for Masada concerning the May 2013 note and the request to impose a constructive trust on DVWPC. Additionally, the Defendants' Motion for Leave to File a Sur-Reply is denied. The Court clarifies that there is no evidence Mr. Barkley agreed to the terms of the Masada Operating Agreement, and Defendants' objections regarding the Plaintiff's statements of material fact are deemed invalid as they do not substantively dispute the facts or provide sufficient evidence to challenge them. The email in question did not explicitly discuss the $150,000 loan but sought a larger capital infusion and proposed converting existing loans into equity, potentially relieving Defendants of repayment obligations.
