Court Slams North American Clearing SIPC Trustee

October 13, 2014

It is the zombie that will not die. North American Clearing and Richard Goble continue to seek revenge. After having taken a bite out of the Securities and Exchange Commission, the creature now leaves the Securities Investor Protection Corporation ("SIPC") a bloody mess. 

In The Beginning

In 2005, Richard Goble (as Trustee of the Goble Family Trust) started North American Clearing, Inc. ("NACl"). Wholly owned by the family trust, NACl was a registered broker-dealer and clearing firm, which handled the business of 40 small brokerage firms and cleared in excess of 10,000 customer accounts. For years, NACl directly paid various personal and business expenses of Goble, including his monthly credit card invoices.

The First Shot

On May 27, 2008, the SEC filed an enforcement action against NACl asserting inaccurate daily settlement practices. Securities and Exchange Commission, Plaintiff, v. North American Clearing, Inc.; Richard L. Goble; George B. Blatman; and Timothy B. Ward, Defendants (MDFL, Complaint for Injunctive Relief, May 27, 2008). 

Seeking to shut down NACl, the SEC Complaint alleged that, in part, Goble had directed the falsification of NACl's books (apparently on a one-time occasion) in order to permit the firm to withdraw money from an account that was essentially set aside for the benefit of the firm's customers. Although NACl immediately repaid the contested dollars withdrawn, regulators and certain NACl officers opted to wind down the business, prompting the initiation of liquidation proceedings by the Securities Investor Protection Corporation ("SIPC").

SIDE BAR: The title is as much of a Spoiler Alert as there is: "Federal Appeals Court's Dramatic Antifraud Interpretation Eviscerates SEC's Goble Victory" (BrokeAndBroker.com, May 30, 2012). In that May 2012 analysis, we explained that:

Following a five-day bench trial, Defendant Goble was found liable for committing fraud and aiding and abetting his clearing firm's violations of the Customer Protection Rule and books and records provisions of the Securities Exchange Act of 1934 . The District Court found that Goble and North American's executives made a substantial effort to conceal the firm's financial profits by, among other acts, Goble's direction of a so-called sham transaction by which North American falsely recorded a $5 million money market purchase, which artificially lowered the firm's reserve requirement under the Customer Protection Rule and allowed North American to improperly withdraw more than $3 million from its EBOC Account.

The District Court permanently enjoined Goble from violating Sections 10(b), 15(c)(3), and 17(a) of the Exchange Act and Rules 10b-5, 15c3-3, and 17a-3 thereunder. On its own initiative, the District Court enjoined Goble from attempting to secure any securities licenses or otherwise attempting to engage in the securities business. Goble was ordered to pay a reduced civil penalty amount of $7,500 based, in part, upon consideration that North American had been liquidated in a Securities Investor Protection Corporation bankruptcy proceeding.
. . .

In the Matter of the Securities and Exchange Commission v. Richard L. Goble (US Ct App 11th Cir, No. 11-12059, May 29, 2012), on appeal from the District Court for the Middle District of Florida, the 11th Circuit Court:
    • affirmed the District Court's judgment that Goble aided and abetted North American's violations of the Customer Protection Rule and books and records requirements of the Exchange Act;
    • reversed the District Court's conclusion that Goble committed securities fraud in violation of § 10(b);
    • vacated portions of the District Court's court's injunction that:
    • bar Goble from procuring a securities license, engaging in the securities business, or violating § 10(b) or Rule 10b-5, and
    • address compliance with §§ 15(c)(3) and 17(a) of the Exchange Act because these paragraphs simply cross-reference the statutes and regulations; and
    • remanded to the District Court for consideration in the first instance whether Goble's violations of the Customer Protection Rule and books and records requirements warrant the lifetime bar from the securities business. (The lower court was instructed to afford Goble an opportunity to be heard on the propriety of this relief; and the court should draft an injunction addressing compliance with §§ 15(c)(3) and 17(a) that allows Goble to understand his obligations under the injunction
Let The Games Begin Anew

Pursuant to the Securities Investor Protection Act of 1970, at SIPC's request, on July 28, 2008, Richard N. Gilbert was appointed Trustee over NACl and he attempted to recover $527,979.19 in payments made between June 1, 2006 and May 15, 2008 - the Trustee asserted that said payments were "avoidable fraudulent transfers." On May 26, 2010, Trustee Gilvert filed procedings against Goble seeking to void 103 transfers in the amount of $527,979.19, that had occurred between June 1, 2006, and May 15, 2008. As set forth in the final Amended Complaint brought by the Trustee, there were seven counts alleging Constructive Fraud; Actual Fraud; Avoidance of the Transfers; Breach of Fiduciary Duty; and Liability for Unlawful Distributions.  A six-day trial ensued.

"Goble Worked Tirelessly To Help NACI Succeed"

As noted in the Memorandum Opinion of the U.S. Bankruptcy Court:

NACI was consistently profitable. The company earned $4,477,513 in revenue in 2006, although advance expenses accrued early for tax reasons resulted in a slight, artificial loss of $339,274.8 By 2007, NACI's revenue had increased to $5,340,493, and its net income improved to a positive $399,951.9In 2008, NACI only operated from January through May but appeared poised for its most profitable year. The firm earned $1,858,782.55 in total income and $382,095.39 in net income for the five-month operating period in 2008.10 Based on these figures, NACI hardly appears to have been on its last legs. The firm's profitability was increasing year-to-year.

Goble was the person in charge of NACI, although he had no official title other than as a member of NACI's board of directors.11 He made all important hiring decisions. Bruce Blatman, NACI's last president, reported directly to Goble.12

Goble worked tirelessly to help NACI succeed focusing on marketing, technology, and generating business for the firm. He routinely attended conferences around the country to promote NACI's services. Goble was the salesman for the company and relied on others to insure that NACI complied with securities regulations and properly accounted for customer funds.13  According to Blatman, Goble "ran" NACI.14

Memorandum Opinion Pages 3 to 4

"Trustee Put Forth Absolutely NO Proof"

In a stunning rebuke - one that may be deemed historical over the years to come - US Bankruptcy Judge Jennemann concluded that Trustee Gilbert did not prove any legal basis to avoid the cited transfers.

Fairly early into the Court's presentation of its rationale for dismissing the case against Goble, a reader is alerted to the fact that Judge Jennemann was trying, but not necessarily succeeding, at concealing a judicial anger (if not outrage) with the Trustee's position.

Consider the Court's analysis here, for example:

Here, the Two Year Transfers fall into two categories-business expenses ($255,282.06) and personal expenses ($245,777.72). The business expenses include charges for these types of expenditures:

Travel expenses for Goble and other employees to attend business meetings and trade
conferences;
Real estate taxes and property related expenses on NACI's offices;
Advertising expenses;
Business cell phone costs;
Stockbroker test preparation materials;
Employee search firm services;
Computer equipment;
Business lunches for NACI employees and others;
Office supplies;
Company gatherings and other outings for employees;
FINRA charges;
Corporate filing expenses;
Software licensing expenses; and
Conference call services.38

After trial, the Court reviewed these expenses at some length and honestly is shocked that the Trustee would challenge these expenses. Trustee put forth absolutely NO proof to show that NACI failed to receive reasonably equivalent value from these charges. Many of the credit card  charges are clearly business related, such as amounts paid to FINRA, employee search firm services, corporate filing expenses, and conference call services. To argue that NACI received no value from these obviously business-related Transfers defies logic. . .

Memorandum Opinion Page 10.

Distressed Over Lack Of Distress

Having found not credible or persuasive the Trustee's argument as to the existence of a constructively fraudulent transfer, the Court then considered whether the Trustee had proven that NACl was in serious financial distress when allegedly avoidable transfers were made.  In rejecting the Trustee's position, the Court said:

Here, the Trustee tried to establish this element by showing that the Debtor "was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital."53 This prong is known as "unreasonably small capital" or "under capitalization,"54 is rarely argued, and is difficult to establish. Indeed, the vast majority of the six days of trial time was devoted to this portion of the Trustee's complicated factual argument. . .

Memorandum Opinion Page 15

For a sense of the dismissive nature of the Court's Opinion, consider this relatively terse language:

The Trustee here provided no meaningful analysis of the Debtor's financial condition in conjunction with the Transfers. The Trustee's case hinged instead on questionable legal presuppositions and untested hypotheses involving NACI's use of customer funds in its operations. In simple terms, the Trustee argues that NACI improperly used customer cash to fund daily operating expenses and, therefore, must have been operating with unreasonably small capital when the Transfers occurred. . .

Memorandum Opinion Page 17

Actual Fraudulent Transfers

As to the Trustee's allegations of actual fraudulent transfers, the Court referenced a two-pronged test for actual fraud:
1. The Debtor transferred an interest in property; and
2. The transfer was made with the actual intent to hinder, delay or defraud creditors.
In language that leaves very little room for debate, the Memorandum Opinion states that:

The Court rejects the Trustee's argument of actual fraud. Although Goble, as sole indirect owner of NACI and member of its board of directors is an insider of NACI, the company was paying its bills on time, was not undercapitalized, received reasonably equivalent value for the Transfers, and did not improperly use, conceal, or remove assets, including customer monies. The Court specifically finds that the Transfers largely pre-dated FINRA's complaint against NACI lodged in Fall 2007. The Transfers were an established pattern of payment by NACI to Goble and were not in response or even remotely connected to the FINRA complaint. No other badges of fraud exist. 93  The Trustee did not prove actual fraud. . .

Memorandum Opinion Pages 23 - 24.

Fiduciary Duty

As to the Trustee's allegations that Goble had breached his fiduciary duty of loyalty and care at a time when NACl was purportedly undercapitalized, the Court found that "the Trustee proved no deficiency in NACI's capitalization" and, accordingly, "the Court can find no breach of any duty Goble owed NACI. See Page 24 of the Memorandum Opinion.

Victory

On September 30, 2014, judgment was entered on all counts in favor of Defendant Richard Goble against Plaintiff Trustee Richard N. Gilbert. In Re North American Clearing, Inc., Debtor.  / Robert N. Gilbert, Trustee, Plaintiff, vs. Richard Goble, Defendant. (MDFL, US Bankruptcy Court, FINAL JUDGMENT, Case No. 6:08-ap-00145-KSJ, Adversary No. 6:10-ap-00151-KSJ).

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