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Securities and Exchange Commission v. Bernath

United States District Court, W.D. North Carolina, Charlotte Division

February 8, 2017

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
LONNY S. BERNATH, Defendant.

          ORDER

          Graham C. Mullen United States District Judge

         This matter is before the Court upon the Securities and Exchange Commission's Motion to Set Disgorgement and a Civil Penalty. A hearing was held in this matter on October 20, 2016. At the conclusion of the hearing, the Court directed the parties to file supplemental briefs. The parties have filed their supplemental briefs and this matter is now ripe for disposition. Based upon the evidence and oral argument the Court must decide the amount of disgorgement, prejudgment interest, and civil penalties to be imposed.

         FACTUAL BACKGROUND

         The Complaint alleges that Defendant Bernath, a 44 year old resident of Charlotte, North Carolina, owned and operated the investment advisers that managed three relevant funds, Headline Group, LP (“Headline Fund”), Headline Partners, LP (“Partners Fund”) and Dynasty Capital Partners, LP (“Dynasty Fund”) (collectively, the “Funds”).[1] (Compl. ¶¶ 1, 2.) At the same time as he was managing the Funds, Bernath also held a financial interest in and managed three real estate limited partnerships: Bayside, Novus Partners, and Saxony (the “Real Estate Partnerships”), that were formed by Bernath for the purpose of investing in real estate.[2] (Compl. ¶¶ 5, 6). Bernath also held a financial interest in a chrome plating business known as ChromeEast (Compl. ¶ 7) and an internet retailer known as A2Z Companies (“A2Z”).

         Bernath told investors in the Funds that they would use proprietary trading methodologies to make money by trading stocks, exchange traded funds, and futures. (Compl. ¶¶14-16, 33, 36.) From 2008 to 2011, unbeknownst to investors, Bernath caused the Funds to invest in the Real Estate Partnerships and ChromeEast, even though some of the Funds' investors had expressly declined to invest in the Real Estate Partnerships. (Compl. ¶¶ 19-31, 41.) The vast majority of the money that the Funds transferred to those entities was not repaid. Bernath also caused the Headline Fund to borrow from Carolina Premier Bank and transfer the proceeds to A2Z. Although A2Z made a few interest payments on the loan, A2Z never repaid the principal of the loan. Bernath did not disclose the Funds' “loans” to the Real Estate Partnerships, ChromeEast, or A2Z to his investors. (Compl. ¶ 32.) Bernath shifted money and obligations among the Funds in order to meet liquidity needs. (Compl. ¶¶ 23, 28.) He also wrote down the value of the Funds' interests in the Real Estate Partnerships and ChromeEast from time to time between 2008 and 2011, without disclosing that fact to investors. (Compl. ¶ 32.)

         Bernath's ill-gotten gains from his securities violations fall into two major categories- (1) management and performance fees earned by his advisory firm and (2) transfers to entities in which he owned a financial interest. Based upon an accounting created by Bernath in compliance with the Court's October 30, 2015 Order, from the fourth quarter of 2008 until 2012, Bernath's advisory firm collected $442, 025 in management and performance fees from the Dynasty Fund, $230, 256 in management fees from the Headline Fund, and $77, 314 in management fees from the Partners Fund. Consequently, the total amount of fees collected by Bernath's advisory firm during the fraudulent scheme is $749, 595.

         Over the years, Bernath caused the Dynasty Fund to transfer, at a minimum, the following amounts to entities in which he had a financial interest:

• $811, 250 to Bayside for development;
• $136, 000 to Bayside for a construction loan;
• $232, 442.21 to Bayside for the Waterford property;
• $330, 975.53 to Novus;
• $1, 325, 000 to ChromeEast; and • $136, 000 to Saxony.

         Bernath caused the Headline Fund to transfer, at a minimum, the following additional amounts to entities in ...


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