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Kingsley Capital Management, LLC v. Sly

United States District Court, Ninth Circuit

January 17, 2014

Kingsley Capital Management, LLC; Bruce Paine Kingsley MD IRA Rollover, Plaintiffs,
Brian Nelson Sly; Brian Sly and Company Incorporated; Brian Sly and Company; Wilbur Anthony Huff; Sherri Huff; Charles J. Antonucci; Thomas J. Bean; Thomas Cunningham; Heather D. Cunningham; Accredited Investor Resources, LLC, Defendants.


NEIL V. WAKE, District Judge.

Before the Court is Plaintiffs' Motion for a New Trial and or Motion to Alter or Amend Judgment (Doc. 500). In two sequential verdicts the jury found liability but no damages. After direct inquiry whether anything more was sought from the jury, Plaintiffs considered it for ten minutes and then declined. The jury was then discharged without further deliberations. Plaintiffs now move for amendment of the judgment to award damages in the amount of $1, 227, 916.00 or in the alternative for new trial on damages, but not liability, with a new jury. Plaintiffs waived any error in the verdict of no damages by not requesting further deliberations. Plaintiffs' Motion will be denied.


A motion for new trial may be granted after a "jury trial, for any reason for which a new trial has heretofore been granted in an action at law in federal court." Fed.R.Civ.P. 59(a). A new trial is properly granted "only if the verdict is contrary to the clear weight of evidence, is based upon false or perjurious evidence, or to prevent a miscarriage of justice." Passantino v. Johnson & Johnson Consumer Prods., 212 F.3d 493, 510 n.15 (9th Cir. 2000). The trial judge must be "left with the definite and firm conviction that a mistake has been committed" by the jury. Landes Const. Co., Inc. v. Royal Bank of Canada, 833 F.2d 1365, 1371-72 (9th Cir. 1987).


1. Dr. Bruce Kingsley's individual retirement account and his company Kingsley Capital Management, LLC, brought this securities fraud action against Brian Sly, Brian Sly & Company, and others. The Sly Defendants were the only defendants at the trial. Dr. Kingsley alleged Sly violated Arizona securities law and common law when Sly promoted to him an investment in Accredited Investor Resources, LLC, without disclosing certain information. Dr. Kingsley, his accountant, and his lawyers diligently investigated the investment on their own for several months, and Dr. Kingsley was warned off by his accountant. He invested $1, 750, 000.00 on an expectation of 30% annual return, 20% nominal return plus 10% for consulting services.

It turned out the manager of the company, Anthony Huff, with whom Dr. Kingsley dealt directly for months after Sly's introduction, misrepresented the affairs of the company and stole large amounts of company monies, including Dr. Kingsley's $1, 750, 000.00 the day after it was paid in. The company is now defunct, and all investors lost essentially everything, including Brian Sly, the largest investor at $3, 000, 000.00, and Sly's mother. A number of people involved are now in prison, and criminal proceedings are pending against Anthony Huff.

It also turned out that Dr. Kingsley did not put his money in the same investment Sly had promoted to him or that any of the other members of the company invested in. He bought a membership in Accredited Investor Resources, LLC, but in economic substance it was an entirely different investment from theirs. For the other investors, the rosy contract rights to repayments were dependent on the fortunes of the company and its ability to repay them. By his own testimony, Dr. Kingsley only invested because he got a special deal from Anthony Huff and the company, kept secret from all other members, which left him with no risk in his investment. Huff gave Dr. Kingsley a right within five years to force resale of his interest to one of Huff's companies for the unrepaid balance of his purchase price. Of far more importance, the put option was backed by a standby letter of credit from Park Avenue Bank in New York, which had to pay upon presentation of Dr. Kingsley's demand to repurchase and Huff's company's failure to pay. To use a colorful phrase from the trial, Huff agreed to be "the equity shock-absorber, " but only for Dr. Kingsley.

So Dr. Kingsley was the only investor who was not dependent on the fortunes of the company for return of any of his investment, and he could wait up to five years to reclaim his money from Huff and the bank. He had no downside risk in common with the other members; his only risk was the tiny one that the bank might fail. He could pretend to be in the boat and row in time with the true investors, but if the boat foundered, he could helicopter himself out and leave the others to their watery fate. The grist of this lawsuit, Sly's description made months before of his own investment in Accredited Investor Resources, LLC, could not have been material to Dr. Kingsley's decision to invest in an essentially unconditional bank obligation independent from the fortunes of the company. Though Dr. Kingsley denies lack of materiality of Sly's statements, he admits it in fact when he says he only invested because of the put option backed by the bank letter of credit.

The rest of the story is that Anthony Huff bribed officers of Park Avenue Bank to issue Dr. Kingsley's standby letter of credit. One bank officer is in prison and another has criminal proceedings pending against him. The bank did fail and could not honor the letter of credit. As Dr. Kingsley told Sly before suing him, Brian Sly is the only person left in the story with real money.

2. With the benefit of full exposition in three weeks of trial, the Court was disposed to grant Sly's motion for judgment as a matter of law against the securities claim. A membership in Accredited Investor Resources, LLC, was not a security because the operating agreement granted managerial powers to all members and "plaintiff was not so inexperienced and unknowledgeable in this business that he was incapable of exercising meaningful power, nor was he so dependent on unique entrepreneurial managerial ability of the manager that the manager cannot be replaced, or the member, the plaintiff, could not exercise his meaningful power as a member." (Doc. 530, Pgs. 159). Nutek Info. Sys., Inc. v. Ariz. Corp. Comm'n, 194 Ariz. 104, 109 ¶ 20, 977 P.2d 826, 831 (Ariz. App. 1998) (stating factors for whether a general partnership interest constitutes an investment contract or a security and citing Williamson v. Tucker, 645 F.2d 404, 424 (5th Cir. 1981)).

However, granting judgment for Sly against the securities claim then would have had little benefit. The trial would continue and the jury would have to deliberate on the non-securities claims anyway. The Advisory Committee Note to Rule 50(b) counsels the wisdom of reserving the motion for post-verdict decision. "[A] preverdict ruling gambles that a reversal may result in a new trial that might have been avoided. For these reasons, the court may often wisely decline to rule on a motion for judgment as a matter of law made at the close of the evidence" and reserve ruling until after the verdict. Fed.R.Civ.P. 50 cmt. subdiv. (b) (1991). If the verdict goes the same way as the court's ruling would, appellate review is under the more deferential standard for jury verdicts than for judgments as a matter of law.

The Court therefore resolved to send the securities claim to verdict with the other claims and get independent fact-finding based largely on Dr. Kingsley's requested instructions and interrogatories, knowing that it would grant judgment as a matter of law on the securities claim after the verdict in any event. If the verdict was then against Dr. Kingsley, it would eliminate further dispute about what instructions and interrogatories should have been given.

3. The case was tried to a jury for nine days in October 2013. Because the parties insisted on instructing the jury on six different measures of damages for six theories of liability, to reduce jury confusion the Court decided late in the trial to bifurcate liability and damage deliberations. The instruction on the Arizona Securities Act claim was taken verbatim from the statutes and the Arizona case of Nutek Info. Sys., Inc., 194 Ariz. 104, 977 P.2d 826 (Ariz. App. 1998). Indeed, the jury asked for clarification of what is a security, but upon Dr. Kingsley's objection, the Court declined to do so. (Doc. 529, Pgs. 61-67). The jury found for Sly on five claims but for Dr. Kingsley on the Arizona Securities Act claim under A.R.S. § 44-1991(A)(2). (Doc. 485). That required finding that Sly made some ...

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