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Securities and Exchange Commission v. Wealth Management LLC

United States District Court, E.D. Wisconsin

July 8, 2019

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
WEALTH MANAGEMENT, LLC, JAMES PUTMAN, and SIMONE FEVOLA, Defendants, and WML GRYPHON FUND, LLC, WML WATCH STONE PARTNERS, L.P.; WML PANTERA PARTNERS, L.P., WML PALISADE PARTNERS, L.P., WML L3, LLC, WML QUETZAL PARTNERS, L.P., and EMPLOYEE SERVICES OF APPLETON, INC., Relief Defendants.

          DECISION AND ORDER

          WILLIAM C. GRIESBACH, CHIEF JUDGE

         The Securities and Exchange Commission brought this enforcement action against Wealth Management LLC, Wealth Management's founder James Putman, and Wealth Management's former president and chief investment officer Simone Fevola, alleging that the defendants violated the Securities Act of 1933, 15 U.S.C. § 77a, et seq.; the Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq.; Rule 10b-5, 17 C.F.R. § 240.10b-5; and the Investment Advisor Act of 1940, 15 U.S.C. § 80b-1, et seq. Presently before the court is Lincoln National Life Insurance Company's motion to intervene pursuant to Rule 24(a)(2) of the Federal Rules of Civil Procedure. For the reasons stated below, the motion will be denied.

         BACKGROUND

         The original action in this case commenced over ten years ago, on May 20, 2009, when the SEC filed this action against Wealth Management, James Putnam, Simone Fevola, and six “relief defendant” funds. On that same date, this court appointed Ms. Faye Feinstein as the Receiver of Wealth Management, the various Wealth Management funds, and Employee Services of Appleton, Inc. See Order Appointing Receiver, Dkt. No. 8. Ms. Feinstein, in the course of her Receivership, has retained Quarles & Brady LLP as her counsel in this action, and both regularly apply to the court for approval of compensation for their services.

         In carrying out her duties as Receiver, Ms. Feinstein engaged in negotiations with the law firm of Melnick & Melnick, SC to act as special litigation counsel in the action and to “(a) investigate the potential liability of numerous entities, including, insurance companies . . . for the losses sustained by investors in the Brown and Baetis funds; and (b) consider the pursuit of such claims.” Receiver's Br. in Opp., Dkt. No. 477, at 7. Following negotiations, the court authorized the Receiver to execute an engagement letter and retain Melnick & Melnick, SC See Order, Dkt. No. 352. Following investigation by Melnick, the firm informed Ms. Feinstein that it was prepared to pursue litigation in Wisconsin state court, and in December 2012, Ms. Feinstein authorized four of the Wealth Management funds to file suit against various defendants in Outagamie County. One of those defendants was Lincoln. Lincoln's Br., Dkt. No. 471, at 4.

         Prior to and during the course of the Outagamie County litigation, both Ms. Feinstein and Quarles had represented Lincoln in various matters. Lincoln, through its affiants, asserts that Quarles represented Lincoln in thirteen matters from 2001 until 2009, and that Ms. Feinstein was specifically retained in actions relating to bankruptcy, foreclosures, and building code violations in 2010, 2011, 2013, 2014, and 2015. Lincoln maintains that Ms. Feinstein should have identified the potential conflict of interest with her Receivership as early as 2010, but failed to recognize it then, and further failed to disclose the conflict in 2014 when she was retained in litigation with the City of Chicago that was unrelated to the litigation in this action. Id. Quarles, on the other hand, maintains that Lincoln should have known of a potential conflict as early as 2013, when Ms. Feinstein informed Mary Jo Potter, associate general counsel for Lincoln, that Ms. Feinstein was acting as a Receiver, although Ms. Potter says she is certain that Ms. Feinstein did not indicate that the Receivership was involved in litigation directly adverse to Lincoln. Potter Aff., Dkt. No. 474-2, ¶¶ 9-11.

         Regardless, it was not until July 2018 that Lincoln acted, when the City of Chicago filed another complaint against Lincoln. The attorney handling that complaint, Jeffrey Davis, is also representing Lincoln in the Outagamie County litigation. Upon investigation, Mr. Davis discovered that Ms. Feinstein, who was Lincoln's counsel in the City of Chicago litigation, was also directing the lawsuit against Lincoln in the Outagamie County litigation in her capacity as a Receiver. Lincoln's Br., Dkt. No. 471, at 4. Upon discovery of this potential conflict, Lincoln notified Ms. Feinstein, who denied any conflict and referred Lincoln to Don Schott, Quarles' general counsel. Id. In October 2018, Mr. Davis sent Mr. Schott a letter, demanding that Ms. Feinstein resign as receiver, that Quarles disgorge all fees paid by Lincoln to Quarles since 2009, and that Quarles waive all pending invoices. During a November 2018 phone call, Mr. Schott informed Lincoln that he had refused Lincoln's demands and denied that a conflict existed. Id. Following the refusal, Lincoln attempted to work directly with the SEC to resolve the conflict, but ultimately filed this motion to intervene for the purpose of disqualifying Ms. Feinstein as Receiver of Wealth Management, and to disqualify Quarles as counsel to the Receiver.

         ANALYSIS

         Under Federal Rule of Civil Procedure 24(a)(2), a party must be allowed to intervene in an action if it “claims an interest relating to the property or transaction that is the subject of the motion, and is so situated that disposing of the action may as a practical matter impair or impede the movant's ability to protect its interest, unless existing parties adequately represent that interest.” A party has a right to intervene when (1) the motion to intervene is timely filed; (2) the proposed intervenors possess an interest related to the subject matter of the action; (3) disposition of the action threatens to impair that interest; and (4) the named parties inadequately represent that interest. Wis. Educ. Ass'n Council v. Walker, 705 F.3d 640, 657-59 (7th Cir. 2013). The party seeking to intervene has the burden to show that all four criteria are met. Reid L. v. Ill. State Bd. of Educ., 289 F.3d 1009, 1017 (7th Cir. 2002). Failure to satisfy any one factor mandates denial of the petition. United States v. City of Chicago, 908 F.2d 197, 199 (7th Cir. 1990). “In evaluating the motion to intervene, the district court must accept as true the non-conclusory allegations of the motion.” Lake Investors Dev. Grp., Inc. v. Egidi Dev. Grp., 715 F.2d 1256, 1258 (7th Cir. 1983).

         Taking the issue of timeliness first, the court concludes that Lincoln's motion to intervene was not timely. The Supreme Court mandates that “the court where the action is pending must first be satisfied as to timeliness.” N.A.A.C.P. v. New York, 413 U.S. 345, 365 (1973). Timeliness is not “limited to chronological considerations but is to be determined from all the circumstances.” Lopez-Aguilar v. Marion Cty. Sheriff's Dep't, 924 F.3d 375, 388 (7th Cir. 2019) (quoting City of Bloomington v. Westinghouse Elec. Corp., 824 F.3d 531, 534 (7th Cir. 1987)). When considering whether a motion to intervene is timely, the court considers four factors: “(1) the length of time the intervenor knew or should have known of his interest in the case; (2) the prejudice caused to the original parties by the delay; (3) the prejudice to the intervenor if the motion is denied; and (4) any other unusual circumstances.” Id. (quoting Sokaogon Chippewa Cmty.v. Babitt, 214 F.3d 941, 949 (7th Cir. 2000)). The test for timeliness is “essentially one of reasonableness” and potential intervenors need to be “reasonably diligent in learning of a suit that might affect their rights, and upon so learning they need to act reasonably promptly.” Reich v. ABC/York-Estes Corp., 64 F.3d 316, 321 (7th Cir. 1995) (citations omitted). Whether a motion to intervene is timely is “committed to the sound discretion of the district court.” Shea v. Angulo, 19 F.3d 343, 349 (7th Cir. 1994) (quoting City of Chicago, 908 F.2d at 199).

         The policy behind the timeliness requirement is to “prevent a tardy intervenor from derailing a lawsuit within sight of the terminal.” United States v. South Bend Cmty. Sch. Corp., 710 F.2d 394, 396 (7th Cir. 1983). Furthermore, “[t]he timeliness requirement forces interested non-parties to seek to intervene promptly so as not to upset the progress made toward resolving a dispute.” Grochocinski v. Mayer Brown Rowe & Maw, LLP, 719 F.3d 785, 797 (7th Cir. 2013). Other circuits have recognized that the timeliness requirement is a “guard against prejudicing the original parties by failure to apply sooner.” Adam Joseph Res. v. CNA Metals Ltd., 919 F.3d 856, 865 (5th Cir. 2019) (citations omitted). Here, while Lincoln may not be derailing a lawsuit within sight of the terminal, Lincoln's tardiness in filing this motion is greatly upsetting the progress that was made in settling the original dispute, and is also upsetting the progress being made in the Outagamie County litigation. Lincoln's “failure to apply sooner” is prejudicing the original parties, and thus, as noted by the Fifth Circuit, the timeliness requirement must act as a guard against such prejudice.

         Beginning with the length of time Lincoln knew or should have known of its interest in the case, the court notes that it “determine[s] timeliness from the time the potential intervenors learn that their interest might be impaired.” Reich, 64 F.3d at 321. Lincoln was first sued in Outagamie County in 2012, but argues that it was unaware that Ms. Feinstein and Quarles would not adequately protect Lincoln's interest in its privileged information until November 2018, when Quarles denied that a conflict existed and refused Lincoln's demands. Lincoln's Br., Dkt. No. 471, at 6. Despite Lincoln's contention, the record reveals that Lincoln should have known of Ms. Feinstein's potential conflict as early as 2013. In 2013, the defendant insurance companies in the Outagamie County litigation filed a motion to dismiss, to which Stephanie L. Melnick filed an affidavit in opposition. In the third paragraph of that affidavit, Ms. Melnick indicates that she attached to the affidavit, as Exhibit 1, the order from this court appointing Ms. Feinstein as Receiver for Wealth Management and its relevant funds. See Melnick Decl. Ex. C, ¶ 3 & Ex. 1, Dkt. No. 478-3. While Lincoln characterizes this exhibit as “buried, ” the court does not do the same. Had Lincoln been “reasonably diligent, ” an act as simple as reading a document that had been filed in a case to which Lincoln was a party, Lincoln would have realized then and there, that Ms. Feinstein may have a potential conflict, and it could have taken steps to alleviate the problem starting nearly six years ago. A six-year delay in filing a motion to intervene is categorically untimely.

         But even if the court were to conclude that the exhibit was “buried” and that Lincoln did not know and could not have known that it had an interest in the case, then the court can look to Lincoln's own in-house attorneys, who recall Ms. Feinstein raising her position as a Receiver with them. In either 2013 or 2015, Ms. Feinstein raised her position as a Receiver with Mary Jo Potter, Associate General Counsel for Lincoln. Ms. Potter recalled Ms. Feinstein mentioning the Receivership and she also recalled Ms. Feinstein assuring her that the Receivership would not pose a conflict to Lincoln. Potter Aff., Dkt. No. 474-2, ¶¶ 9-10. Ms. Potter further noted that she did not understand why Ms. Feinstein had raised the issue of the Receivership, and that she was never provided with a case number or a notice of conflict in writing. But Ms. Potter wasn't the only one who was told of the Receivership. Eric Deskins, an attorney for Lincoln, had a discussion with Ms. Feinstein in 2014 in which Ms. Feinstein mentioned her Receivership. Again, Mr. Deskins says he was not given a case number, and that he had not understood why Ms. Feinstein raised the issue. Deskins Aff., Dkt. No. 474, ¶¶ 6-7. Lincoln indicates that even after these conversations took place, Lincoln did not know and could not have known of its interest in the case. It seems clear that Ms. Feinstein's statements regarding the Receivership and her belief that it would not pose a conflict with Lincoln would be worth questioning and investigating, and it would not seem reasonably diligent to let such a comment pass without further inquiry. Based on these conversations, it is possible that Lincoln should have known of the potential conflict as early as 2013 or 2015, depending on the year in which Ms. Feinstein discussed the matter with Ms. Potter. Yet again, we face a lengthy delay either way, and whether it is a six year delay or a four year delay, neither would be considered timely.

         But even if the court assumes that Lincoln did not know or could not have known as early as 2015 that its interests were implicated, then Lincoln certainly knew or should have known in July 2018, when Mr. Davis, allegedly for the first time, discovered the potential conflict. If we start the “timeliness clock” in July of 2018, then Lincoln still waited eight months to file its motion to intervene. In this circuit, a time frame of eight months, and sometimes even shorter, has been deemed untimely. See South Bend Cmty. Sch. Corp., 710 F.2d at 396 (stating that filing the motion four and a half months from the point of knowledge was untimely); Atl. Mut. Ins. Co. v. Nw. Airlines, Inc., 24 F.3d 958, 961 (7th Cir. 1994) (noting that filing more than three months after the decision was not “timely by any standard”); In re Testosterone Replacement Therapy Prods. Liab. Litig., No. 14-C-1748, 2018 WL 5884519 (N.D. Ill. 2018) (stating that filing the motion at a minimum of three months after having known or should have known was untimely). Lincoln's defense of this time frame is that it spent the time between July and November working with Quarles, Ms. Feinstein, and the SEC to attempt to resolve the problem directly. However, even if the court accepts this as true and accepts that the negotiations broke down in November ...


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