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John Thomas Capital Management Group LLC, D/B/Apatriot28 LLC HARD COPY RECEIVED UNITED STATES OF AMERICA JAN 2 2 t:018 Beforethe OFFICE OF THE SECRETARY SECURITIES AND EXCHANGE COMMISSION ADMINISTRATIVEPROCEEDING File No. 3-15255 In the Matter of JOHN THOMAS CAPITAL MANAGEMENT GROUP, LLC, d/b/aPATRIOT28, LLC, GEORGE R. JARKESYJR., JOHN THOMAS FINANCIAL, INC., ANASTASIOS "TOMMY' BELESIS, Respondents. THE DIVISION OF ENFORCEMENT'S OPPOSITION TO RESPONDENTS' JANUARY 5, 2018 SUBMISSION OPPOSING RATIFICATION Todd D. Brody Senior Trial Counsel Alix Biel Senior Attorney Division of Enforcement New York Regional Office 200 Vesey Street, 4th Floor New York, NY 10281 TABLE OF CONTENTS Preliminary Statement 1 Argument 3 I. The Commission's RatificationOrder and Remand Order is Valid and has EffectivelyRemedied Respondents' Alleged Injury 3 A. None of Respondents' Challenges to the November 30 Order Have Merit 3 B. The Reconsideration Procedures Provide a Remedy For all Alleged Harm 5 C. Respondents' Prematurity Argument is not Properly Directed to theALJ 6 II. Respondents' Challenges to the Disgorgment Order are Without Merit 6 A. There Is No Monetary Limiton Disgorgement 6 B. The Potential StatutoryPenalty Amount Is Sufficientto Encompass both the Disgorgement and Penalty Amountin theInitial Decision 7 C. Respondents Have Not Met Their Burden to DemonstrateOffset 9 III. Respondents' Purported "Defects"in the ProceedingHave Already been Rejected 11 A. Respondents' Constitutional Rights Were Not Violated 12 1 The Selection of the AP Forum Raised no Equal Protection Violation 12 2. There No Right to a Juryin the AP Forum 13 3. Respondents Were Not Denied Due Process by theDiscovery Provided 13 B. The Commission Did Not Prejudge theMatter by Accepting Other Settlements 14 C. The.Division Complied with the Rule Requiring Production of Exculpatory Material 15 D. There Were No Improper Ex Parte Communications 16 E. The Division Proved Violations of the AntifraudProvisions 17 1. The Division Proved Violations of the Securities Act and Exchange Act 17 2. The Division Proved Violations of the Advisers Act 18 F. The Division Proved Respondents Aiding and Abetting Liability 19 Conclusion 19 TABLE OF AUTHORITIES Federal CourtDecisions Advanced Disposal Servs.E., Inc. v. NLRB, 820 F.3d 592 (3d Cir. 2016) ..................................... 6 Atlas RoofingCo. v. Occupational Safety& Health Review Commission, 430 U.S. 442 (1977) ................................................................................................................................ 13 Brady v. Maryland, 373 U.S. 83 (1963) ..................................................................................15-16 CFPB v. Gordon, 819 F.3d 1179 (9th Cir. 2016) .................................... ; ................. :.................... 5 FEC v. Legi-Tech, 75 F.3d 704 (D.C. Cir. 1996) ........................................................................... 5 Free Enterprise Fund v. PCAOB, 561 U.S. 477 (2010) ................................................................. 3 Intercollegiate Broadcasting Sys., Inc. v. Copyright RoyaltyBd., 796 F.3d 111 (D.C. Cir. 2015) ......................................................................................................................... 5 Kokesh v. SEC, 137 S.Ct. 1635 (2017) ..................................................................................... 6, 11 Marsh v. Fulton County, 77 U.S. (10 Wall.) 676 (1871) ................................................................ 5 SEC v. Coates, 137 F. Supp.2d 413 (S.D.N.Y. 2001)..................................................................... 8 SEC v. Glantz, 94 Civ. 5737, 2009 U.S. Dist. LEXIS95350 (S.D.N.Y. Oct. 13, 2009) ................ 7 SEC v. Kenton Capital Ltd., 69 F. Supp.2d 1 (D.D.C. 1998) ......................................................... 7 SEC v. Milan Capital Group, Inc., 00 Civ. 0108, 2001 U.S. Dist. LEXIS 11804 (S.. D.N.Y. August 14, 2001) ...................................................................................................... 7 SEC v. Pentagon Capital Mgmt., PLC, 725 F.3d 279 (2d Cir. 2013) ............................................. 8 SEC v. Solow, 554 F. Supp.2d 1356 (S.D. Fla. 2008) .................................................................. 10 Sinclair v. SEC, 444 F.2d 399 (2d Cir. 1971) ............................................................................... 15 Strickler v. Greene, 527 U.S. 263 (1999) ..................................................................................... 15 United States v. Heinszen & Co., 206 U.S. 370 (U.S. 1907) .......................................................... 4 United States v. Ohle, 2011 U.S. Dist. LEXIS 12581 (S.D.N.Y. Feb. 7, 2011) ........................... 15 th United States v. Warshak, 631 F.3d 266 (6 Cir. 2010) ............................................................... 15 Villageof Willowbrook v. Olech, 528 U.S. 562 (2000) ................................................................ 13 Wilkes-Barre Hospital Company, LLC v. National Labor Relations Board, 857 F.3d 364 (D.C. Cir. 2017) ................................................................................................... 3 Decisions of the Commission and Initial Decisions Annable Turner& Co., Inc., Initial Decision Rel. No. 216, 2002 SEC LEXIS 3611 (Sept. 30, 2002) ........................................................................................................................................... 9 Atlantic Equities Co., ExchangeAct Rel. No. 8118, 1967 SEC LEXIS 531 (July 11, 1967), Aff'd sub nom, Hansen v. SEC, 396 F.2d 694 (D.C. Cir. 1968) .............................................. 16 C.James Padgett, Exchange Act Rel. No. 38423, 1997 SEC LEXIS 634 (Mar. 20, 1997) ........ 16 Calabro, ExchangeAct Rel. No. 75076, 2015 SEC LEXIS 2175 (May 29, 2015)...................... 10 Citadel Securities LLC, Exchange Act Rel. No. 78340, 2016 SEC LEXIS 2464 (July 15, 2016) ......................................................................................................................... 11 Gerasimowicz, Initial Decision Rel. No. 496, 2013 SEC LEXIS 2019 (July 12, 2013) ................ 7 Gualario & Co., LLC, Initial Decision Rel. No. 453, 2012 SEC LEXIS 497 (Feb. 14, 2012) ...... 8 Jean-Paul Bolduc, Exchange Act Rel. No. 43884, 2001 SEC LEXIS 2765 (Jan. 25, 2001) ....... 16 John Thomas Capital Management Group LLC d/b/aPatriot28LLC, George R. Jarkesy Jr. et al., Initial Decision Rel. No. 693 at 28, 2014 SEC LEXIS 4162 (Oct. 17, 2014) ...................Passim Montford& Co., Inc., Advisers Act Rel. No. 3829, 2014 SEC LEXIS1529 (May 2, 2014) ...... 10 Stuart-James, Exchange Act Rel. 28810, 1991 SEC LEXIS 168 (Jan. 23, 1991) ........................ 16 Timbervest, LLC, Advisers Act Rel. No. 4492, 2016 SEC LEXIS 3153 (Aug. 22, 2016)........... 10 Constiution and Statues U.S. Const. Art. II,§ 2, Cl. 2; 15 U.S.C. § 78d(b)(l) ..................................................................... 3 15 U.S.C. § 78u-2(a) ....................................................................................................................... 7 15 U.S.C. § 78u-2(b) ....................................................................................................................... 7 15 U.S.C. § 78u-2(e) ....................................................................................................................... 6 Other 1 Floyd R. Mechem, Treatise on the Law ofPublic Officesand Officers§ 536 (1890) ................ 4 Restatement (Third) OfAgency, ch. 4, intro.note (2006) ............................................................... 4 The Division of Enforcement ("Division"), through its attorneys,submits thefollowing Opposition to Respondents George R. Jarkesy, Jr. ("Jarkesy") and John Thomas Capital Management Group LLC, d/b/aPatriot28 LLC ("JTCM") (collectively,the "Respondents") Submission in Response to theCommission's November 30, 2017 Order AssertingRatification of a Prior Appointmentof AdministrativeLaw Judges. PRELIMINARYSTATEMENT This administrativeproceeding involves misstatements and omissions of material factby Respondents in the offerand sale of shares of two hedge funds(collectively, the"Funds"). Jarkesy was themanager of the Funds and JTCM was the Funds' adviser. Aftera multi-week hearing,Administrative Law Judge Carol Fox Foelak("the ALJ") foundthat Respondents violated the antifraudprovisions of the federal securities laws by making material misrepresentations and omissions concerningthe Funds. In particular, the ALJ foundthat the Fund's private placement memorandum ("PPM") and marketing materialsfalsely represented that theFund would not invest more than5% of its capital in any one company andthat the Fundswould set aside sufficientcash to pay the premiums on certain lifeinsurance policies that were part of the Fund's portfolio. John Thomas Capital Management GroupLLC d/b/a Patriot28LLC, George R. Jarkesy Jr. et al., Initial Decision Rel. No. 693 at 28, 2014 SEC LEXIS 4162 (Oct. 17, 2014) ("ID"). The ALJ also foundthat the Respondents made material misrepresentations and omissions concerningtheir relationship with John Thomas Financial, Inc. ("JTF"), the Funds' placement agent, and its president, Tommy Belesis, as well as material misrepresentations and omissions concerningthe value of the Funds and theidentity of the Funds' auditor. Id. at 29. Respondents were ordered to cease and desist fromviolations of the antifraudprovisions, to disgorge,jointly and severally,ill-gotten gains of$1,278,597 plus 1 prejudgment interest,
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