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The Water Works Board of City of Birmingham v. U.S. Bank National Association

United States District Court, D. South Dakota, Southern Division

July 17, 2018




         Pending before the Court is Defendant's Motion to Dismiss under Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted. Doc. 25. The Court has considered the relevant pleadings and for the reasons set forth below, Defendant's motion is granted in part and denied in part.


         This case arises out of the purchase by Plaintiffs of approximately $25 million in bonds issued by Wakpamni Lake Community Corporation (Wakpamni Corp.), a South Dakota Native American tribal organization and an affiliate of the Oglala Sioux Tribe of the Pine Ridge Reservation, South Dakota. Those bonds were part of a scheme involving a series of sham Native American tribal bonds sold to unsuspecting investors, with the profits redirected to a group of criminal conspirators, defined by the Complaint as the "Criminal Defendants," including Jason Galanis-the scheme's main architect who has already pleaded guilty to criminal charges in the Southern District of New York-and his associate Hugh Dunkerley.

         Beginning in March 2014, the criminal scheme had several components. First, the Criminal Defendants convinced the Wakpamni Corp. to issue the first series of Tribal Bonds with the promise that the proceeds would be used to fund community development projects. The trust indenture for the August 2014 Offering provided that the net proceeds from the purchase of the bonds would be invested in a variable annuity which would fund interest and principal payments on the bonds. Wakpamni Corp could then draw certain amounts from the annuity to finance development projects for the tribe.

         Next, on the eve of the first bond offering, an entity controlled by one or more of the Criminal Defendants purchased Hughes Capital Management LLC (Hughes), an SEC Registered Investment Advisor. Hughes had been the investment advisor of Plaintiffs Birmingham Water and Washington Suburban for many years and had discretionary authority over these Plaintiffs' accounts pursuant to investment agreements. Then, on or about August 25, 2014, Wakpamni Corp. issued $24, 844, 089 worth of Special Limited Revenue Bonds (Taxable), Series of 2014, and delivered them to U.S. Bank as Trustee under an Indenture Agreement of the same date (2014 Indenture). On August 26, 2014, the Birmingham Water and Washington Suburban accounts controlled by Hughes purchased $8, 462, 720 worth of tribal bonds in the offering.

         An early draft of the 2014 Indenture was circulated to U.S. Bank and other offering participants and provided that, upon final execution of the indenture, Wakpamni Corp. was to execute and deliver to U.S. Bank a number of additional closing documents, including "[a] letter of appointment appointing Wealth Assurance AG as the investment manager with respect to the Annuity Investment." The Offering Distribution List, which identified the parties involved in the August 2014 Offering, and the Closing Agenda similarly listed "Wealth Assurance AG" as the "Annuity Provider." However, the final draft of the indenture omitted the requirement that a letter of appointment of Wealth Assurance AG be presented at closing. Instead, the final 2014 Indenture provided that the letter of appointment was to appoint Private Equity Management, Limited, as the investment manager. Further, at closing, Wakpamni Corp. was to execute and deliver to the Indenture Trustee:

A Closing Statement signed by the President or Vice-President of the [Wakpamni Corp.] setting forth (i) the amount of the proceeds to be received by the [Wakpamni Corp.] from the sale of the 2014 bonds for funding the purchase of the Annuity Investment. ..; (ii) the amounts to be paid or reserved for the costs and expenses of the financing; and (iii) the amounts to be deposited in the funds established under this Indenture.

         At closing, U.S. Bank received a copy of a 25-year term annuity contract in the amount of $25, 250, 000 (Annuity Contract) which was issued by Wealth Assurance Private Client Corporation (Wealth Assurance BVI). The Annuity Contract identified Wealth Assurance BVI as a British Virgin Islands entity authorized to do business only, in the British Virgin Islands. The Annuity Contract also required that the annuity purchase payment be wire transferred to "a bank without any offices and/or branches in the United States." Dunkerly was the signatory for Wealth Assurance BVI on the Annuity Contract, though he was also listed as a primary representative of Burnham, the Placement Agent. He was also the signatory on the Placement Agency Agreement. This rendered Dunkerly the principal of both the Placement Agent and the Annuity Contract Provider, two parties to the same deal. The Closing Statement was also signed by Wakpamni Corp.'s President, Geneva Lone Hill. Also signed by Wakpamni Corps.'s President is a letter dated August 21, 2014 and addressed to U.S. Bank's Vice President "appointing] Private Equity Management, Limited, as investment manager in connection with the purchase of the annuity investment from Wealth Assurance Private Client Corp. and directing] them to take all actions necessary." Pursuant to the Annuity Contract, the bond proceeds were to be deposited into a separate segregated account and managed exclusively by Private Equity Management, LLC as investment manager, with U.S. Bank as the intended custodian of the investment portfolio. The Annuity Contract and the Investment Management Agreement, a copy of which U.S. Bank appears to have received with the August 21, 2014 letter, were also inconsistent as to who had authority to direct investments. The Annuity Contract granted Wakpamni Corp. no authority over the investments while the Investment Management Agreement provided that Wakpamni Corp. would provide investment guidelines to the manager, had the right to modify them, and could instruct the manager to "buy, sell or retain any investment." Ultimately, the net proceeds of the bond were never invested.

         The 2014 Indenture also required that the value of the Investment Securities be determined at the end of each month according to directions established by agreement between Wakpamni Corp. and U.S. Bank. The term "Investment Securities" is defined to include the Annuity Contract itself. No. such agreement was ever put in place and no valuation was conducted.

         On August 26, 2014, U.S. Bank received instructions for transferring proceeds of the bond issuance to the annuity provider. These instructions were forwarded from Galanis to U.S. Bank by counsel for Burnham, Dilworth Paxson LLP (Dilworth). Galanis was listed on the Distribution List as a primary representative of Burnham, the Placement Agent. Wakpamni Corp. was not copied on the email nor did Wakpamni Corp. send U.S. Bank any directions regarding the disbursement of the proceeds. The instructions directed U.S. Bank to transfer the annuity purchase amount to an entity named "Wealth Assurance Private Client Corporation," located in Santa Monica, California, with a JPMorgan Chase N.A. bank account in Beverly Hills, California (Wealth Assurance US). Wealth Assurance U.S. is incorporated in Florida, not the British Virgin Islands, though the payment instructions did not provide this information.

         In October 2014, the Criminal Defendants used $15 million of the proceeds of the August 2014 Offering, which they had stolen, and used them to purchase $15 million worth of newly issued Tribal Bonds (October 2014 Offering). U.S. Bank served as the indenture trustee of the October 2014 Offering as well. Then, in early April 2015, shortly before the April 2014 Offering, the parent company of Hughes, an entity controlled by the Criminal Defendants, acquired Atlantic Asset Management LLC (AAM) and caused it to merge with Hughes. Pursuant to an investment agreement, AAM had full discretion over Plaintiffs Atlantic Global Yield Opportunity Fund, L.P. 's (Feeder Fund) and Atlantic Global Yield Opportunity Master Fund, L.P.'s (Master Fund, together with Feeder Fund "GYOF") investments.[1] AAM caused GYOF to invest $16.2 million in Tribal Bonds as part of the April 2015 Offering. GYOF was the sole investor in the April 2015 Offering.

         Payment instructions from the April 2015 Offering were included within the closing statement itself and signed by both Wakpamni Corp. and Burnham. U.S. Bank was again directed to send the proceeds to Wealth Assurance US, but this time to a different bank account that was not in Santa Monica, California. No. payments were ever sent to Wealth Assurance BVI, the entity to which payment was supposed to be made pursuant to the Annuity Contract. The Annuity Contract associated with the April 2015 Offering also omitted the August 2014 Annuity Contract's requirement that the money be wire transferred to a bank outside of the United States. However, the April 2015 Annuity Contract still contained the warning that the issuer was not authorized to do business outside of the British Virgin Islands and that the purchase payment must be received at the "Home Office" (defined as the British Virgin Islands). The Investment Management Agreement for the April 2015 Offering also listed U.S. Bank as the custodian for the annuity investments. Again, because the net bond proceeds were stolen, no investments were made. Finally, as with the 2014 Indenture, the 2015 Indenture required the Investment Securities to be valued monthly according to a valuation method set forth by agreement between the Wakpamni Corp. and U.S. Bank. Again, no such agreement was put in place and no valuations were conducted.

         To avoid detection of their fraud, in fall 2015, the Criminal Defendants funded the first interest payments due on the August and October 2014 bonds-approximately $2.72 million. U.S. Bank distributed, those funds to the investors. In 2016, however, the Criminal Defendants stopped funding interest payments, their fraud was uncovered, and they were charged with federal crimes.


         A party may move to dismiss a complaint under Rule 12(b)(6) for "failfing] to state a claim upon which relief can be granted." FED. R. ClV. P. 12(b)(6). The purpose of a motion to dismiss is to test "the sufficiency of a complaint." MM. Silta, Inc. v. Cleveland Cliffs, Inc.,616 F.3d 872, 876 (8th Cir. 2010). When ruling on a motion to dismiss, a court "must liberally construe a complaint in favor of the plaintiff," Huggins v. FedEx Ground Package Sys., Inc.,592 F.3d 853, 862 (8th Cir. 2010), and accept as true all of the well-pleaded allegations contained in the complaint. MM. Silta, 616 F.3d at 876. "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal,556 U.S. 662, 678 (2009) (internal quotations omitted). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. "[A] ...

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