United States District Court, D. South Dakota, Southern Division
THE WATER WORKS BOARD OF THE CITY OF BIRMINGHAM; WASHINGTON SUBURBAN SANITARY COMMISSION EMPLOYEES' RETIREMENT PLAN; ATLANTIC GLOBAL YIELD OPPORTUNITY MASTER FUND, L.P; AND ATLANTIC GLOBAL YIELD OPPORTUNITY FUND, L.P, Plaintiffs,
U.S. BANK NATIONAL ASSOCIATION, Defendant.
MEMORANDUM OPINION AND ORDER ON DEFENDANT'S
MOTION TO DISMISS
LAWRENCE L. PIERSOL UNITED STATES DISTRICT JUDGE
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.
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.
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.
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.
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
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.
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
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
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. 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.
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
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.
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] ...