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This week as reported in the Colorado Court of Appeals Opinions

 

First Impression—Compelling Arbitration on a Non-signatory—Appellate Attorney Fees—Confirmation of Arbitration Award.

 

DeLollis and Stout founded an information technology company, Venti Solutions, LLC. Meister invested in Venti and became a member of the company. The purchase agreement signed by Venti, Stout, DeLollis, and Meister granted Meister a 20% interest in Venti in exchange for a capital contribution of $500,000.

The agreement incorporated by reference the Venti operating agreement, which was executed by Stout and DeLollis. The operating agreement had a dispute resolution article providing that arbitration was the exclusive mechanism for resolving all disputes.

In 2012, Meister sued DeLollis, Stout, and Venti. DeLollis and Venti moved to compel arbitration, and the court so ordered. The arbitrator dismissed Meister’s claims with prejudice and awarded $375,738.70 against him on Venti’s breach of contract counterclaim. The district court confirmed the award.

Meister appealed on the ground that arbitration should not have been compulsory as to his claims against Venti, a non-signatory to the operating agreement. Under Colorado law, both signatory and non-signatory parties may be bound by an arbitration agreement if so dictated by ordinary principles of contract law. Equitable estoppel may also be used to bind parties to an arbitration agreement.

The Court of Appeals held that Meister’s claims against Venti were subject to arbitration under an estoppel theory. All of his claims referenced or presumed and relied on the existence of the operating agreement. He was therefore equitably estopped from avoiding arbitration of his claims against Venti. As additional support for this conclusion, the Court noted that Meister’s claims alleged interconnected and concerted misconduct among Venti, Stout, and DeLollis, and it was admitted that Stout and DeLollis were subject to the operating agreement and the arbitration provision.

Meister also challenged the district court’s confirmation of the arbitration award. The Venti operating agreement required arbitration to take place not more than sixty days after selection of an arbitrator. Originally scheduled for July 9 and 10, 2013, arbitration was postponed to September 3 and 4, after Meister failed to pay the arbitration deposit. Meister was also under travel restrictions stemming from an unrelated federal indictment in Florida. He did not disclose these criminal proceedings to the arbitrator or to defendants. He filed a motion to appear electronically on the basis of poor health. Defendants discovered his involvement in criminal proceedings and Meister refused the arbitrator’s requests to verify his health status. His request to appear electronically was denied. The Court affirmed the district court’s ruling and remanded the case for determination of the appellees’ attorney fees and costs.

 

For More Information: http://www.cobar.org/opinions/opinion.cfm?opinionid=9766&courtid=1

SEC Shuts Down Another Ponzi Scheme in Colorado

The SEC may now add Troy A. Barnes and Kristine L. Johnson to the ranks of high profile Pyramid Scheme perpetrators, such as Sean Mueller, Shawon McClung (http://www.pippengerhedberg.com/blog/colorado-ponzi-scheme-unraveled-fraud-punishment?rq=ponzi) and even Charles Ponzi himself, in the latest attempt to defraud Colorado investors.  The SEC recently filed suit against Barnes and Johnson exposing alleged pyramid scheme practices that claimed an audacious 700% return to its ‘Achieve Community’ investors. The complaint, alleges that Barnes and Johnson guaranteed their investors a ‘limitless’ income plan explaining that they had the option to increase their returns by making additional payments to the company, ‘Work for Troy Barnes’ through the purchase of multiple positions in the company (http://www.sec.gov/litigation/complaints/2015/comp-pr2015-35.pdf). 

In textbook pyramid scheme fashion, the defendants lured investors in with the promise that the purchase of additional positions would lead to an exorbitant increase in the payout, claiming that the purchase of one position (a $50 investment) would yield $400, the purchase of two positions for an $800 payout and so on, and on and apparently on all within a three to six month turnaround time. Any payouts received were paid for by the purchase of additional positions by new investors of course, and up the pyramid goes. The take-away here is, if it looks too good to be true, it might be a pyramid scheme. 

Pyramid Schemes

In the classic "pyramid" scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same (http://www.sec.gov/answers/pyramid.htm).

According to the SEC release, Mr. Barnes and Ms. Johnson gained a total of $3.8 million defrauding investors through the use of what the defendants referred to as a “triple algorithm” and “3-D Matrix” (http://www.sec.gov/news/pressrelease/2015-35.html#.VPTVnlPF_oF) system.  The idea of cutting edge technologies and never-before discovered ‘methods’ are the foundations perpetrators are using more  and more in order to gain traction and money for these schemes. By the time investors and/or regulators determine that these new methods are bogus, the money is already in the bank. 

In a similar case in July 2013, Shawon McClung laid claim that he too, had what US Attorney John Walsh described as a “super secret method” that would enable investors to amass large sums of money in short periods of time with little to no effort. McClung was sentenced to 51 months in a federal penitentiary and required to make reparations to his victims. 

While temporary restraining orders have been filed and the defendants’ assets frozen, the fate of Kristine L. Johnson and Troy A. Barnes remains undetermined, with several charges of SEC violations laid before them and no legal representation appointed to date.  Presiding Judge Blackburn has the case ‘under advisement’ following cancelled depositions in response to Johnson’s assertion of her fifth amendment rights and statements from Barnes that he intends to do the same  (http://patrickpretty.com/2015/02/23/bulletin-troy-barnes-kristi-johnson-invoke-5th-amendment-in-secs-pyramidponzi-case-barnes-tells-agency-he-is-target-of-criminal-investigation-sec-says-barnes-discussed-moving-victim-f/).