Case 2:09-cv JP Document Filed 11/29/10 Page 1 of 5 UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

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1 Case 2:09-cv JP Document Filed 11/29/10 Page 1 of 5 UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA : SECURITIES AND EXCHANGE COMMISSION, : : Plaintiff, : : v. : Civil Action No. : 09-CV (JP) DONALD ANTHONY WALKER YOUNG, : a/k/a D. A. WALKER YOUNG, : ACORN CAPITAL MANAGEMENT, LLC and : ACORN II, L.P., : : Defendants, : : and : : OAK GROVE PARTNERS, L.P., : NEELY YOUNG and : W. B. DIXON STROUD, JR., : : Relief Defendants. : : JUDGMENT AS TO DEFENDANTS DONALD ANTHONY WALKER YOUNG, ACORN CAPITAL MANAGEMENT, LLC, AND ACORN II, L.P. The Securities and Exchange Commission having filed a Complaint and Defendants Donald Anthony Walker Young, a/k/a D.A. Walker Young ( Young ), Acorn Capital Management, LLC ( Acorn Capital ), and Acorn II, L.P. ( Acorn II, and collectively with Young and Acorn Capital, Defendants ) having entered a general appearance; consented to the Court s jurisdiction over Defendant and the subject matter of this action; consented to entry of this Final Judgment without admitting or denying the allegations of the Complaint (except as to jurisdiction); waived findings of fact and conclusions of law; and waived any right to appeal from this Judgment:

2 Case 2:09-cv JP Document Filed 11/29/10 Page 2 of 5 I. IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that Defendants and Defendants agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of this Final Judgment by personal service or otherwise are permanently restrained and enjoined from violating, directly or indirectly, Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. 78j(b)] and Rule 10b-5 promulgated thereunder [17 C.F.R b-5], by using any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of any security, to: (a) (b) employ any device, scheme, or artifice to defraud; make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or to (c) engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person. II. IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that Defendants and Defendants agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of this Final Judgment by personal service or otherwise are permanently restrained and enjoined from violating Section 17(a) of the Securities Act of 1933 (the Securities Act ) [15 U.S.C. 77q(a)] in the offer or sale of any security by the use of any means or instruments of transportation or communication in interstate 2

3 Case 2:09-cv JP Document Filed 11/29/10 Page 3 of 5 commerce or by use of the mails, directly or indirectly, to: (a) (b) employ any device, scheme, or artifice to defraud; obtain money or property by means of any untrue statement of a material fact or any omission of a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or to (c) engage in any transaction, practice, or course of business which operates or to would operate as a fraud or deceit upon the purchaser. III. IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that Defendants Young and Acorn Capital, their agents, officers, servants, employees, and attorneys, and those persons in active concert or participation with them who receive actual notice of this Final Judgment by personal service or otherwise are permanently restrained and enjoined from violating Section 204 of the Advisers Act [15 U.S.C. 80b-4] and Rule thereunder. [17 C.F.R ]. IV. IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that Defendants Young and Acorn Capital, their agents, officers, servants, employees, and attorneys, and those persons in active concert or participation with them who receive actual notice of this Final Judgment by personal service or otherwise are permanently restrained and enjoined from violating Sections 206(1) and 206(2) of the Advisers Act, 15 U.S.C.'' 80b-6(1) and 80b-6(2) while acting as investment advisers, by the use of the mails or any instrumentality of interstate commerce, directly or indirectly, to: (a) employ any device, scheme, or artifice to defraud any client or prospective client; or 3

4 Case 2:09-cv JP Document Filed 11/29/10 Page 4 of 5 (b) engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client. V. IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that Defendants Young and Acorn Capital, their agents, officers, servants, employees, and attorneys, and those persons in active concert or participation with them who receive actual notice of this Final Judgment by personal service or otherwise are permanently restrained and enjoined from violating Section 206(4) of the Advisers Act [15 U.S.C. 80b-6(4)] and Rule 206(4)-8 thereunder [17 C.F.R (4)-8] by, while acting as an investment adviser to a pooled investment vehicle, by the use of the means and instrumentalities of interstate commerce and of the mails, making untrue statements of material fact or omitting to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading, to any investor or prospective investor in the pooled investment vehicle or otherwise engage in acts, practices, or courses of business that are fraudulent, deceptive or manipulative with respect to any investor or prospective investor in the pooled investment vehicle. VI.. Upon motion of the Commission, the Court shall determine whether it is appropriate to order disgorgement of ill-gotten gains and prejudgment interest thereon, and/or a civil penalty pursuant to Section 20(d) of the Securities Act [15 U.S.C. 77t(d)], Section 21(d)(3) of the Exchange Act [15 U.S.C. 78u(d)(3)], and Section 209(e) of the Advisers Act [15 U.S.C. ' 80b- 9(e)], and, if so, the amount(s) of the disgorgement, prejudgment interest, and/or civil penalty. In connection with the Commission s motion for disgorgement, prejudgment interest, and/or 4

5 Case 2:09-cv JP Document Filed 11/29/10 Page 5 of 5 civil penalties, and at any hearing held on such a motion: (a) Defendants will each be precluded from arguing that they, individually or collectively, did not violate the federal securities laws as established by the Commission s Motion for Partial Summary Judgment Pursuant to Fed. R. Civ. P. 56(d) Establishing Liability and Granting Injunctive Relief against all Defendants, which underlies this Judgment; and (b) Defendants may not challenge the validity of this Judgment. VII.. IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that this Court shall retain jurisdiction of this matter for the purposes of enforcing the terms of this Judgment. VIII. There being no just reason for delay, pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, the Clerk is ordered to enter this Judgment forthwith and without further notice. Dated:, 20 The Honorable John R. Padova, U.S. D.J. 5

6 Case 2:09-cv JP Document 192 Filed 11/29/10 Page 1 of 4 UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA : SECURITIES AND EXCHANGE COMMISSION, : : Plaintiff, : : v. : Civil Action No. : 09-CV (JP) DONALD ANTHONY WALKER YOUNG, : a/k/a D. A. WALKER YOUNG, : ACORN CAPITAL MANAGEMENT, LLC and : ACORN II, L.P., : : Defendants, : : and : : OAK GROVE PARTNERS, L.P., : NEELY YOUNG and : W. B. DIXON STROUD, JR., : : Relief Defendants. : : PLAINTIFF SECURITIES AND EXCHANGE COMMISSION S MOTION FOR PARTIAL SUMMARY JUDGMENT PURSUANT TO FED. R. CIV. P. 56(d), ESTABLISHING LIABILITY AND GRANTING INJUNCTIVE RELIEF 1 For the reasons set forth in the accompanying Memorandum, Plaintiff Securities and Exchange Commission ( Commission ) respectfully moves this Court the entry of summary judgment pursuant to Fed. R. Civ. P. 56(d), establishing the liability of Defendants Donald Anthony Walker Young ( Young ), Acorn Capital Management, LLC ( Acorn Capital ) and Acorn II, L.P. ( Acorn II ) (collectively, the Defendants ) on all charges in the Complaint; and 1 The Commission is not, at this time, requesting an order directing the payment of disgorgement, prejudgment interest, and/or a penalty. Rather, as stated in the accompanying Memorandum, the Commission defers requesting this relief until such time as it has more information about, among other things, the results of the Receivership established in this action.

7 Case 2:09-cv JP Document 192 Filed 11/29/10 Page 2 of 4 (ii) permanently enjoining the Defendants from violating Section 17(a) of the Securities Act, 15 U.S.C. 77q(a), Section 10(b) of the Exchange Act, 15 U.S.C. 78j(b), and Exchange Act Rule 10b-5, 17 C.F.R b-5; and (iii) permanently enjoining defendants Acorn Capital and Young from violating Sections 204, 206(1), 206(2), and 206(4) of the Advisers Act [15 U.S.C. 80b-4, 80b-6(1), 80b-6(2), and 80b-6(4)], and Rules and 206(4)-8 thereunder [17 C.F.R and (4)-8]. Date: November 29, 2010 Respectfully submitted, /s/ Catherine E. Pappas G. Jeffrey Boujoukos (PA #67215) Catherine E. Pappas (PA #56544) Attorneys for Plaintiff: SECURITIES AND EXCHANGE COMMISSION 701 Market Street, Suite 2000 Philadelphia, PA Telephone: (215) Facsimile: (215)

8 Case 2:09-cv JP Document 192 Filed 11/29/10 Page 3 of 4 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. DONALD ANTHONY WALKER YOUNG, ET AL., Defendants, OAK GROVE PARTNERS, L.P., NEELY YOUNG, AND W.B. DIXON STROUD JR., Relief Defendants. : : : : : : : : : : Civil Action No.: 2:09-cv JP CERTIFICATE OF SERVICE I hereby certify that on this date I caused to be served a true and correct copy of the plaintiff s Motion for Partial Summary Judgment and accompanying documents electronically on the following: Kevin Dooley Kent Conrad O Brien PC 1515 Market Street, 16th Floor Philadelphia, PA William J. Winning Jennifer M. McHugh Cozen & O Connor Suite Four Falls Corporate Ctr. West Conshohocken, PA Robert E. Welsh, Jr. Catherine M. Recker Welsh & Recker, P.C Market Street, Suite 2903 Philadelphia, PA Mark E. Cedrone Law Offices of Mark Cedrone, P.C. 123 S. Broad Street Suite 810 Philadelphia, PA 19109

9 Case 2:09-cv JP Document 192 Filed 11/29/10 Page 4 of 4 Gregory P. Miller Stephen G. Stroup Drinker Biddle & Reath LLP One Logan Square 18th & Cherry Streets Philadelphia, PA Michael R. Shanahan Forensic Accounting & Litigation Consulting Kroll Two Logan Square Philadelphia, PA Dated: November 29, 2010 /s/ Catherine E. Pappas Catherine E. Pappas

10 Case 2:09-cv JP Document Filed 11/29/10 Page 1 of 12 UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA : SECURITIES AND EXCHANGE COMMISSION, : : Plaintiff, : : v. : Civil Action No. : 09-CV (JP) DONALD ANTHONY WALKER YOUNG, : a/k/a D. A. WALKER YOUNG, : ACORN CAPITAL MANAGEMENT, LLC and : ACORN II, L.P., : : Defendants, : : and : : OAK GROVE PARTNERS, L.P., : NEELY YOUNG and : W. B. DIXON STROUD, JR., : : Relief Defendants. : : STATEMENT OF UNCONTESTED MATERIAL FACTS Plaintiff Securities and Exchange Commission ( Commission ) respectfully submits this Statement of Uncontested Material Facts pursuant to the Policies and Procedures of the Honorable John R. Padova: 1. On April 1, 2010, Defendant Donald Anthony Walker Young ( Young ) was indicted on charges of mail fraud and money laundering (the Criminal Charges ). See Exhibit B (Indictment). 2. On July 20, 2010, Defendant Young pled guilty to the Criminal Charges. See Exhibit G (Plea Trans.) at pp

11 Case 2:09-cv JP Document Filed 11/29/10 Page 2 of At times relevant to this matter, Defendant Young, his wife, Neely Young, and their children, resided in Coatesville, Pennsylvania, with additional residences in Palm Beach, Florida and in Mt. Desert, Maine. Exhibit C (Admissions), , , At least since year end, 1999, through April 17, 2010, Young was the sole source of income for his family, and substantially all of Young s income was derived, directly or indirectly, from one or more of Acorn Capital Management II, L.P. ( ACM II ), Acorn Capital Management, LLC ( Acorn Capital ) and Acorn II, L.P. ( Acorn II ). Exhibit C (Admissions), At least since year end, 1999, through April 17, 2010, substantially all of Young s income was derived, directly or indirectly, from one or more of ACM II, Acorn Capital, and Acorn II. Exhibit C (Admissions), Acorn Capital is a Pennsylvania limited liability company, and, since 2001, has been registered with the Commission as an investment adviser. Exhibit C (Admissions), 9, Exhibit E (Thomas Dec.), Young and a colleague formed Acorn Capital in 1999 and Young has been its managing member since its inception. Exhibit C (Admissions), Up through the filing of the Complaint, Young controlled Acorn Capital and Acorn Capital acted by and through Young. Exhibit C (Admissions), At all times relevant to this matter, in addition to advising separately managed accounts, Acorn Capital was the general partner of ACM II, and the general partner of, and investment adviser to, Acorn II. Exhibit C (Admissions), 12,

12 Case 2:09-cv JP Document Filed 11/29/10 Page 3 of Acorn Capital records indicate that Acorn Capital received over $5 million from Acorn II in compensation for investment advisory services that it purportedly provided to Acorn II. Exhibit A (Kroll Aff.), Young directed the formation of ACM II in late Exhibit C (Admissions), 10, Exhibit F (Plea Memo), p. 4; Exhibit G (Plea Trans.) at pp A purpose of ACM II was to invest in securities and other financial instruments of the United States and foreign entities. Exhibit C (Admissions), In 2001, Young directed the formation of Acorn II. Exhibit C (Admissions), A purpose of Acorn II was to invest in securities and other financial instruments of the United States and foreign entities. Exhibit C (Admissions), Limited partners in ACM II and Acorn II, in their capacity as limited partners, did not have any role in the management or operation of the partnerships or the investment of partnership funds although, according to Young, one limited partner participated in fund raising for ACM II. Exhibit C (Admissions), 18-20, Through Acorn Capital and otherwise, Young controlled ACM II and Acorn II, and both partnerships acted by and through Young. Exhibit C (Admissions), 12-17, 21-23, 65-69, Young controlled ACM II and Acorn II investment decisions and financial transactions. Exhibit C (Admissions), 12-17, 65-69, Young controlled the information that the partnerships provided to limited partners and to other third parties. Exhibit C (Admissions), 28,

13 Case 2:09-cv JP Document Filed 11/29/10 Page 4 of Beginning in 1999 and continuing thereafter, ACM II, through Young and Acorn Capital, accepted investments from investors in the form of limited partnership interests. Exhibit C (Admissions), Young and Acorn Capital did not maintain ACM II investor accounts separately; rather all investments in ACM II were pooled in financial account(s) of ACM II. Exhibit C (Admissions), By, at least, November 1999, Young and Acorn Capital began using investor funds in the ACM II financial accounts for purposes other than those authorized by the ACM II investors. Exhibit A (Kroll Aff.), 4; Exhibit F (Plea Memo), p. 4; Exhibit G (Plea Trans.) at pp See also Exhibit C (Admissions), (admitting conduct; unsure of date). 22. Young and Acorn Capital, without disclosure to investors, and without the permission or authorization of, ACM II investors, transferred investor funds directly or indirectly into one or more personal accounts held by Young in both his own name, and jointly with his wife, Neely Young, and/or or to pay Young s personal expenses. Exhibit C (Admissions), 29-43; Exhibit A (Kroll Aff.), In or around January 2001, Young purchased a residence in Mt. Desert, Maine for $715,000. Exhibit C (Admissions), Young had no ownership interest in the funds that he used to purchase the Maine residence referenced immediately above; rather, substantially all of the funds used to purchase the Maine residence derived, directly or indirectly, without disclosure or permission, from investments made by investors in ACM II. Exhibit C (Admissions),

14 Case 2:09-cv JP Document Filed 11/29/10 Page 5 of Young and Acorn Capital provided false information to ACM II investors about ACM II investment accounts. Exhibit C (Admissions), Young and Acorn Capital provided false information to ACM II investors about ACM II investment accounts in order to hide their conversion of investor funds. See Exhibit C (Admissions), Young and Acorn Capital, acting through Young, created and provided to some or all ACM II investors by U.S. mail, electronic mail, and otherwise, account statements ( ACM II Account Statements ) which reflected false profits and inflated account balances. Exhibit C (Admissions), By way of example, the ACM II Account Statements reflected the balances that the ACM II investors expected to see in their accounts based on their capital contributions and expected returns, without offset for the substantial amounts converted by Young and Acorn Capital for unauthorized purposes. Exhibit C (Admissions), Acorn Capital, acting through Young, created and provided to ACM II investors by U.S. mail, tax documents that did not accurately reflect the investors income from their investments in ACM II. Exhibit C (Admissions), From the inception of ACM II through the institution of the Civil Action, Young and Acorn Capital diverted $10,256,594 from investor funds in ACM II financial accounts to the direct or indirect benefit of Young and his family. Exhibit A (Kroll Aff.), 4. See also Exhibit C (Admissions), (at least $8.7 million). 5

15 Case 2:09-cv JP Document Filed 11/29/10 Page 6 of Beginning in 2001 and continuing thereafter, Acorn II, through Young and Acorn Capital, accepted investments in the form of limited partnership interests. Exhibit C (Admissions), In some instances, Young directed investors in Acorn II to send their investments in Acorn II to ACM II financial accounts. Exhibit C (Admissions), Young, Acorn Capital, and Acorn II (collectively, the Defendants ) did not maintain each limited partner s investment in Acorn II in segregated financial accounts; rather, they pooled all investments in Acorn II in either Acorn II or ACM II financial accounts. Exhibit C (Admissions), The Defendants created and provided to Acorn II investors, by U.S. mail, electronic mail, and otherwise, account statements that reflected their respective principal contributions and purported balances in Acorn II (the Acorn II Account Statements ). Exhibit C (Admissions), 89-90, The Defendants retained an accounting firm to performing bookkeeping services for, and annual audits of, Acorn II (the Accountants ). Exhibit C (Admissions), Acorn II succeeded ACM II as the vehicle through which Young and Acorn Capital perpetrated the fraud. Exhibit C (Admissions), 93; see also Exhibit F (Plea Memo), p. 4; Exhibit F (Plea Memo), p. 4; Exhibit G (Plea Trans.) at pp Soon after the creation of Acorn II, the Defendants substantially discontinued the operations of ACM II. Exhibit C (Admissions), Soon after the creation of Acorn II, the Defendants no longer provided, to all but one ACM II investor, ACM II Account Statements. Exhibit C (Admissions),

16 Case 2:09-cv JP Document Filed 11/29/10 Page 7 of Soon after the creation of Acorn II, Young, and Acorn Capital and Acorn II acting through Young, began creating for all except one ACM II investor, Acorn II Account Statements indicating that ACM II investments were investments in Acorn II and reflecting, dollar for dollar, each ACM II investor s principal contribution and purported balance in ACM II. Exhibit C (Admissions), The books and records maintained by Young, which were the basis for the Acorn II Account Statements, reflected ACM II investors as Acorn II investors. Exhibit C (Admissions), Without the knowledge of Acorn II and ACM II investors, Young, and Acorn II and Acorn Capital acting through Young, transferred only the records of existing ACM II investments to Acorn II he did not transfer the funds underlying the investments from ACM II financial accounts to Acorn II financial accounts. Exhibit C (Admissions), Over time, beginning prior to the formation of Acorn II, Young and Acorn Capital diverted substantially all of the investor funds in ACM II financial accounts to Young s personal use. Exhibit C (Admissions), ; Exhibit A (Kroll Aff.), From the inception of the Acorn II, the aggregate of investments reflected on the books and records of Acorn II, which included investments in ACM II, exceeded the combined assets of the two partnerships. Exhibit C (Admissions), The Acorn II Account Statements, provided by the Defendants to both the Acorn II investors and investors in ACM II, generally reflected all contributions, plus false profits, without disclosure of the Defendants diversion of investor funds. Exhibit C (Admissions), 98, 104,

17 Case 2:09-cv JP Document Filed 11/29/10 Page 8 of Over time, the Defendants used new money provided by Acorn II investors to repay investors in ACM II. Exhibit F (Plea Memo), p. 4; Exhibit F (Plea Memo), p. 4; Exhibit G (Plea Trans.) at pp From the inception of Acorn II through April 17, 2009, Young and Acorn Capital, through Acorn II, misappropriated approximately $14,108,000 of investor funds from Acorn II to accounts held by Young in his own name and jointly with his wife, and/or to pay personal expenses. Exhibit A (Kroll Aff.), 6; see also Exhibit C (Admissions), 120 (at least $13 million), Exhibit F (Plea Memo), pp. 4-5; Exhibit F (Plea Memo), p. 4; Exhibit G (Plea Trans.) at pp In or around April 2006, Young used investor funds to purchase his residence in Florida for approximately $2.1 million. Exhibit C (Admissions), Young, and Acorn Capital and Acorn II acting through Young, diverted investor contributions in Acorn II to Young s benefit by instructing the Accountants to credit, in the Accountant s records, investor checks intended for investment in the respective investor s Acorn II account to an Acorn II account in Young s name. Exhibit C (Admissions), 111. See also Exhibit F (Plea Memo), p. 5; Exhibit F (Plea Memo), p. 4; Exhibit G (Plea Trans.) at pp The Defendants had no ownership interest in the diverted funds, and no permission to take these funds. Exhibit C (Admissions), Substantially all of the assets recorded by the Accountants in Young s Acorn II account should have been recorded in the accounts of other Acorn II investors. Exhibit C (Admissions),

18 Case 2:09-cv JP Document Filed 11/29/10 Page 9 of Young, and Acorn Capital and Acorn II acting through Young, further diverted investor funds by directing the transfer of funds from Acorn II financial accounts directly or indirectly into personal financial accounts in Young s name, accounts that Young held jointly with his wife, Neely Young, or otherwise used for Young s benefit, while directing the Accountants to record the transactions as (authorized) distributions to Acorn II investors. Exhibit C (Admissions), 114,117. See also Exhibit F (Plea Memo), p. 5; Exhibit F (Plea Memo), p. 4; Exhibit G (Plea Trans.) at pp In connection the transfers referenced immediately above, the Acorn II investors in whose Acorn II account the Accountants recorded the distributions did not know about, or authorize, the distributions, and did not receive the distributions. Exhibit C (Admissions), From the inception of Acorn II through April 17, 2009, Acorn Capital financial accounts were primarily funded by Acorn II investments. Exhibit A (Kroll Aff.), Over time, the Defendants directed a net amount of $2,589,762 in Acorn II investor funds, originating from Acorn Capital financial accounts, to the benefit of Young and his family. Exhibit A (Kroll Aff.), 7; see also Exhibit C (Admissions), 139 (at least $2.5 million). 55. From the inception of Acorn II through April 17, 2009, Young, and Acorn Capital and Acorn II, acting through Young, directed the disbursement of $9,182,356 from Acorn II financial accounts to Acorn II and ACM II investors as distributions and/or withdrawals, and directed the Accountants to record those distributions as originating from investors who had not requested or authorized, and did not receive, the distributions. Exhibit A (Kroll Aff.), 8; see 9

19 Case 2:09-cv JP Document Filed 11/29/10 Page 10 of 12 also Exhibit C (Admissions), (at least $9.0 million), Exhibit F (Plea Memo), pp. 4-5; Exhibit F (Plea Memo), p. 4; Exhibit G (Plea Trans.) at pp Young, Acorn Capital, and Acorn II provided false information to Acorn II and ACM II investors about their investment accounts. Exhibit C (Admissions), Young, and Acorn Capital and Acorn II through Young, provided false information to Acorn II and ACM II investors about their investment accounts in order to hide their conversion of investor funds. Exhibit C (Admissions), 133, The Defendants distributed Acorn II Account Statements to investors by U.S. mail, electronic mail, and otherwise. Exhibit C (Admissions), The Acorn II Account Statements reflected false profits and inflated account balances. See Exhibit C (Admissions), , Exhibit F (Plea Memo), p. 5; Exhibit F (Plea Memo), p. 4; Exhibit G (Plea Trans.) at pp The Acorn II Account Statements reflected the balances that the Acorn II and ACM II investors expected to see in their accounts based on their capital contributions and expected returns, without offset for the substantial amounts converted by the Defendants for unauthorized purposes. Exhibit C (Admissions), 131, Exhibit F (Plea Memo), p. 5; Exhibit F (Plea Memo), p. 4; Exhibit G (Plea Trans.) at pp Young also verbally provided false profit and account balance information to ACM II and Acorn II investors. Exhibit C (Admissions), 130, Young, and Acorn Capital and Acorn II acting through Young, provided to Acorn II investors by U.S. mail, tax documents that did not accurately reflect the investors income from their investments in Acorn II. Exhibit C (Admissions),

20 Case 2:09-cv JP Document Filed 11/29/10 Page 11 of In September 2008, Young informed the representative of the Broker that Acorn II held assets of $27 million, spread among multiple clearing firms. Exhibit C (Admissions), , At the beginning and end of September 2008, Acorn II held assets with an aggregate value of only (approximately) $6 million and $5.5 million, respectively. Exhibit C (Admissions), 241. See also Exhibit A (Kroll Aff.), In early 2009, Young provided to the representative of the Broker documents purporting to be January 31, 2009 account statements for Acorn II financial accounts at a bank and a brokerage firm, reflecting approximately $24 million in assets. Exhibit C (Admissions), See also Exhibit F (Plea Memo), p. 6; Exhibit F (Plea Memo), p. 4; Exhibit G (Plea Trans.) at pp In early 2009, neither the bank nor the brokerage firm held any Acorn II assets. Exhibit C (Admissions), See also Exhibit F (Plea Memo), p. 6; Exhibit F (Plea Memo), p. 4; Exhibit G (Plea Trans.) at pp Young created and/or altered the bank and brokerage statements referenced in paragraph 65, above, and provided them to the representative of the Broker, to hide the Defendants conversion of investor funds. Exhibit C (Admissions), In anticipation of a January 2009 Commission examination of Acorn Capital, in late 2008 the staff of the Commission directed to Young and Acorn Capital written requests for documents and information for the period January 1, 2006 through December 31, Exhibit C (Admissions), ; Exhibit E (Thomas Dec.),

21 Case 2:09-cv JP Document Filed 11/29/10 Page 12 of As of April 17, 2009, Young had not, directly or indirectly through counsel, produced to the Commission staff the names of all investors in Acorn II or files for 2006 and Exhibit C (Admissions), 258, Young and Acorn Capital failed to provide complete and accurate information to the Commission in order to hide from the Commission staff the Defendants conversion of investor funds. Exhibit C (Admissions), From the inception of ACM II through April 17, 2010, the Defendants directed $26,954,356 in ACM II and Acorn II investor funds to the direct or indirect benefit of Young and his family. See Exhibit A (Kroll Aff.), The diversion of investor funds described above resulted in losses of (approximately) $30.9 million to (approximately) 44 investors. See Exhibit A (Kroll Aff.), 12. Date: November 29, 2010 Respectfully submitted, /s/ Catherine E. Pappas G. Jeffrey Boujoukos (PA #67215) Catherine E. Pappas (PA #56544) Attorneys for Plaintiff: SECURITIES AND EXCHANGE COMMISSION 701 Market Street, Suite 2000 Philadelphia, PA Telephone: (215) Facsimile: (215)

22 Case 2:09-cv JP Document Filed 11/29/10 Page 1 of 27 UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA : SECURITIES AND EXCHANGE COMMISSION, : : Plaintiff, : : v. : Civil Action No. : 09-CV (JP) DONALD ANTHONY WALKER YOUNG, : a/k/a D. A. WALKER YOUNG, : ACORN CAPITAL MANAGEMENT, LLC and : ACORN II, L.P., : : Defendants, : : and : : OAK GROVE PARTNERS, L.P., : NEELY YOUNG and : W. B. DIXON STROUD, JR., : : Relief Defendants. : : PLAINTIFF SECURITIES AND EXCHANGE COMMISSION S MEMORANDUM IN SUPPORT OF ITS MOTION FOR PARTIAL SUMMARY JUDGMENT PURSUANT TO 56(d) I. PRELIMINARY STATEMENT Plaintiff Securities and Exchange Commission ( Commission ) respectfully submits this Memorandum of Law in support of its Motion for Partial Summary Judgment Pursuant to Fed. R. Civ. P. 56(d), Establishing Liability and Granting Injunctive Relief with respect to Defendants Donald Anthony Walker Young ( Young ), Acorn Capital Management, LLC ( Acorn Capital ) and Acorn II, L.P. ( Acorn II ) (collectively, the Defendants ). The Commission defers until a later date seeking from this Court the imposition of an order to pay disgorgement, prejudgment interest, and a civil penalty, because facts that may be relevant to quantification of such relief are

23 Case 2:09-cv JP Document Filed 11/29/10 Page 2 of 27 not yet known. 1 In sum, the Commission is entitled to the requested judgment at this time because the evidence of record, comprised in large part of admissions by Young in this action and in related criminal proceedings, leaves no material issues of fact in dispute. II. SUMMARY From at least late 1999 through April 2009, Young misappropriated investor funds through three entities that he controlled: Acorn Capital, a registered investment adviser, and two limited partnerships -- Acorn II and its predecessor, Acorn Capital Management II, L.P. ( ACM II ). Current calculations indicate that his conduct resulted in losses of (approximately) $30.9 million to 44 investors. 2 On April 17, 2009, the Commission filed the complaint in this matter (the Complaint ), alleging that, from at least 2005, the Defendants conduct violated the antifraud provisions of the Securities Act of 1933 ( Securities Act ), the Securities Exchange Act of 1934 ( Exchange Act ), and/or the Investment Advisers Act of 1940 ( Advisers Act ), and that defendant Acorn Capital violated, and defendant Young aided and abetted Acorn Capital s violation of, certain recordkeeping provisions of the Advisers Act (the Civil Action ). As evident from the facts set forth below, the Defendants, through Young, have admitted the facts underlying the violations charged in the Complaint, and further have admitted related fraudulent conduct dating back to Among other things, assets collected and/or liquidated during the Receivership may be relevant to the calculation of monetary relief. The Commission is seeking partial relief now because the adjudication of the issues presented herein may assist in efficiently resolving certain ancillary proceedings of the Receiver, as well as administrative claims concerning continued participation of Young and Acorn Capital in the securities industry. 2 See Affidavit of Michael R. Shanahan at 12 (attached as Exhibit A). Mr. Shanahan is a Senior Manager at Kroll, which has been retained, with Court approval, by the Receiver appointed in the Civil Action. 2

24 Case 2:09-cv JP Document Filed 11/29/10 Page 3 of 27 Young was indicted on April 1, 2010, in a parallel criminal proceeding (the Criminal Proceeding ), charged with one count of mail fraud (18 U.S.C. 1341) and one count of money laundering (18 U.S.C. 1957) (the Indictment ). U.S. v. Young, Crim. No (E.D. Pa.) As alleged in the Indictment, from in or about November 1999, through in or about April 2009, Young devised and intended to devise a scheme to defraud, diverting more than $25 million of investor funds to his own use. 3 On July 20, 2010, Young pled guilty to both counts of the Indictment. Because the allegations that form the basis for the Civil Action and the Criminal Proceeding overlap, Young s admissions in connection with the Criminal Proceeding provide additional proof of the allegations in the Civil Action. The Commission now seeks entry of summary judgment against the Defendants pursuant to Fed. R. Civ. P. 56(d): (i) establishing the Defendants liability on all counts of the Complaint; (ii) permanently enjoining the Defendants from violating Section 17(a) of the Securities Act, 15 U.S.C. 77q(a), Section 10(b) of the Exchange Act, 15 U.S.C. 78j(b), and Exchange Act Rule 10b-5, 17 C.F.R b-5; and (iii) permanently enjoining defendants Acorn Capital and Young from violating Sections 204, 206(1), 206(2), and 206(4) of the Advisers Act [15 U.S.C. 80b-4, 80b-6(1), 80b-6(2), and 80b-6(4)], and Rules and 206(4)-8 thereunder [17 C.F.R and (4)-8]. For the reasons set forth below, the Commission s Motion should be granted in full. 3 See Exhibit B (Indictment, U.S. v. Young, 10-cr-199, (April 1, 2010)). 3

25 Case 2:09-cv JP Document Filed 11/29/10 Page 4 of 27 III. THE DEFENDANTS A. Young and Acorn Capital At times relevant to this matter, Defendant Young, his wife, Neely Young, and their children, resided in Coatesville, Pennsylvania, with additional residences in Palm Beach, Florida and in Mt. Desert, Maine. Exhibit C (Admissions), , , At least since year end, 1999, through the filing of the Complaint, Young was the sole source of income for his family, and substantially all of Young s income was derived, directly or indirectly, from one or more of ACM II, Acorn Capital, and Acorn II. Exhibit C (Admissions), Acorn Capital is a Pennsylvania limited liability company, and, since 2001, has been registered with the Commission as an investment adviser. Exhibit C (Admissions), 9, Exhibit E (Thomas Dec.), 4. 5 Young and a colleague formed Acorn Capital in 1999 and Young has been its managing member since its inception. Exhibit C (Admissions), 1-3. Up through the filing of the Complaint, Young controlled Acorn Capital and Acorn Capital acted by and through Young. Exhibit C (Admissions), 6-8. At all times relevant to this matter, in addition to advising separately managed accounts, Acorn Capital was the general partner of ACM II, and the general partner of, and investment adviser to, Acorn II. Exhibit C (Admissions), 12, Acorn Capital records indicate that Acorn Capital received over $5 million from Acorn II in 4 This reference is to Young s Answer to the SEC s First Request for Admissions dated May 27, A copy of this document, as well as supplemental admissions in the form of Young s Answer to the SEC s Interrogatories and Requests for Production, dated June 11, 2010, are attached as Exhibits C and D. 5 This reference is to the Declaration of Frank Thomas, part of Docket # 2, filed with this Court on April 17, 2009 in conjunction with the Commission s initial motion for emergency relief. A copy of that Declaration is attached hereto, as Exhibit E, without exhibits (which were filed under seal). The exhibits are incorporated herein by reference and additional copies will be provided to the Court upon request. 4

26 Case 2:09-cv JP Document Filed 11/29/10 Page 5 of 27 compensation for investment advisory services that it purportedly provided to Acorn II. Exhibit A (Kroll Aff.), 11. B. The Limited Partnerships: ACM II and Acorn II Young directed the formation of ACM II in late Exhibit C (Admissions), See also Exhibit F (Plea Memo), p A purpose of ACM II was to invest in securities and other financial instruments of the United States and foreign entities. Exhibit C (Admissions), 11. In 2001, Young directed the formation of Acorn II. Exhibit C (Admissions), 61. Like ACM II, a purpose of Acorn II was to invest in securities and other financial instruments of the United States and foreign entities. Exhibit C (Admissions), 64. As further described below, Acorn II replaced ACM II as the vehicle through which Young conducted the fraud described in the Civil Action and the Criminal Proceeding, and funds from investors in Acorn II were used to repay investors in ACM II. See, e.g., Exhibit C (Admissions), Limited partners in ACM II and Acorn II, in their capacity as limited partners, did not have any role in the management or operation of the partnerships or the investment of partnership funds. 8 Exhibit C (Admissions), 18-20, Through Acorn Capital and otherwise, Young controlled ACM II and Acorn II, and both partnerships acted by and through Young. Exhibit C (Admissions), 12-17, 21-23, 65-69, Among other things, Young 6 In the Admissions, Young states this date to be approximate. Exhibit C (Admissions), This reference is to the Change of Plea Memorandum in the Criminal Proceeding, dated July 18, 2010 ( Plea Memo ), attached hereto as Exhibit F. With exceptions not relevant to this point or the other points for which it is cited herein, Young adopted the facts as stated in the Plea Memo at his plea hearing on July 20, See Exhibit G ( Plea Trans. ) at pp According to Young, one limited partner participated in fund raising for ACM II. Exhibit C (Admissions),

27 Case 2:09-cv JP Document Filed 11/29/10 Page 6 of 27 controlled the partnerships investment decisions and financial transactions. Exhibit C (Admissions), 12-17, 65-69, He further controlled the information that the partnerships provided to limited partners and to other third parties. Exhibit C (Admissions), 28, IV. THE FRAUD At the time the Commission brought the Civil Action and accompanying motion for emergency relief, the Commission staff had reviewed documentation generally spanning the period 2005 to the present. Thus, the Commission alleged in the Civil Action a fraud beginning by 2005, continuing to the present. In fact, subsequent discovery and analysis by the Commission and the Receiver has since revealed that the Defendants began fraudulent activities long before 2005, and, indeed, that Acorn Capital and Young first began misappropriating funds through ACM II, an entity which, for all practical purposes, became Acorn II in or around A. Diversion of Investments in ACM II Beginning in 1999 and continuing thereafter, ACM II, through Young and Acorn Capital, accepted investments from investors in the form of limited partnership interests. Exhibit C (Admissions), Young and Acorn Capital did not maintain ACM II investor accounts separately; rather all investments in ACM II were pooled in financial account(s) of ACM II. Exhibit C (Admissions), By, at least, November 1999, Young and Acorn Capital began using investor funds in the ACM II financial accounts for purposes other than those authorized by the ACM II investors. See Exhibit A (Kroll Aff.), 4; Exhibit F (Plea Memo), p Among other things, Young and 9 In July 2010, in connection with the Criminal Proceeding, Young admits that his scheme to defraud began in See Exhibit F (Plea Memo), p. 4; Exhibit G (Plea Trans.), pp Previously, 6

28 Case 2:09-cv JP Document Filed 11/29/10 Page 7 of 27 Acorn Capital, without disclosure to investors, and without the permission or authorization of ACM II investors, transferred investor funds directly or indirectly into one or more personal accounts held in Young s name and jointly with his wife, and/or to pay Young s personal expenses. 10 Exhibit C (Admissions), 29-43; Exhibit A (Kroll Aff.), 4. For instance, in or around January 2001, Young purchased a residence in Mt. Desert, Maine for $715,000. He had no ownership interest in the funds that he used to purchase the Maine residence -- substantially all of the funds used to purchase the Maine residence derived, directly or indirectly, without disclosure or permission, from investments made by investors in ACM II. Exhibit C (Admissions), Young and Acorn Capital acted deliberately to preserve investor ignorance of the fraud, providing false information to ACM II investors about ACM II investment accounts. Exhibit C (Admissions), Young and Acorn Capital, acting through Young, created and provided to some or all ACM II investors by U.S. mail, electronic mail, and otherwise, account statements ( ACM II Account Statements ) which reflected false profits and inflated account balances. Exhibit C (Admissions), So, for instance, the ACM II Account Statements reflected the balances that the ACM II investors expected to see in their accounts based on their capital contributions and expected returns, without offset for the substantial amounts converted by Young and Acorn Capital for unauthorized purposes. Exhibit C (Admissions), 50. Moreover, Acorn Capital, acting through Young, deliberately created and provided to ACM II investors by in connection with his May 2010 responses to Admissions sought in the Civil Action, Young admitted the conduct but stated that he could not recall the date that the conduct began. See Exhibit C (Admissions), See, e.g., SEC v. The Infinity Group, 993 F. Supp. 324 (E.D. Pa. 1997), at 325 ( In the timedishonored tradition of Charles Ponzi, [the defendants] substituted new investors money for real investment return on old investors funds. ). 7

29 Case 2:09-cv JP Document Filed 11/29/10 Page 8 of 27 U.S. mail, tax documents that did not accurately reflect the investors income from their investments in ACM II. Exhibit C (Admissions), As a direct result of this conduct, from the inception of ACM II through the institution of the Civil Action, Young and Acorn Capital illegally diverted $10,256,594 from investor funds in ACM II financial accounts to the direct or indirect benefit of Young and his family. Exhibit A (Kroll Aff.), 4. See also Exhibit C (Admissions), (at least $8.7 million). B. The Continued Scheme to Defraud the Transition from ACM II to Acorn II. Beginning in 2001 and continuing thereafter, Acorn II, through Young and Acorn Capital, accepted investments in the form of limited partnership interests. Exhibit C (Admissions), In some instances, Young directed investors in Acorn II to send their investments in Acorn II to ACM II financial accounts. Exhibit C (Admissions), 72. The Defendants did not maintain each limited partner s investment in Acorn II in segregated financial accounts; rather, they pooled all investments in Acorn II in either Acorn II or ACM II financial accounts. Exhibit C (Admissions), As with ACM II, the Defendants created and provided to Acorn II investors, by U.S. mail, electronic mail, and otherwise, account statements that reflected their respective principal contributions and purported balances in Acorn II (the Acorn II Account Statements ). Exhibit C (Admissions), 89-90, However, in connection with Acorn II, the Defendants retained an accounting firm for the purpose of performing bookkeeping services and annual audits (the Accountants ). Exhibit C (Admissions), Acorn II succeeded ACM II as the vehicle through which Young and Acorn Capital perpetrated the fraud. Exhibit C (Admissions), 93. See also Exhibit F (Plea Memo), p. 4 (classifying ACM II as a predecessor company to Acorn II). Soon after the creation of Acorn 8

30 Case 2:09-cv JP Document Filed 11/29/10 Page 9 of 27 II, the Defendants substantially discontinued the operations of ACM II and no longer provided ACM II Account Statements to all but one ACM II investor. Exhibit C (Admissions), Rather, Young admits that, at that time, he began creating for all except one ACM II investor, Acorn II Account Statements indicating that ACM II investments were investments in Acorn II, reflecting, dollar for dollar, each ACM II investor s principal contribution and purported balance in ACM II. Exhibit C (Admissions), Moreover, the books and records maintained by Young, which were the basis for the Acorn II Account Statements, reflected ACM II investors as Acorn II investors. Exhibit C (Admissions), 99. Significantly, however, and unbeknownst to Acorn II and ACM II investors, Young transferred only the records of existing ACM II investments to Acorn II he did not transfer the funds underlying the investments from ACM II financial accounts to Acorn II financial accounts. Exhibit C (Admissions), Therefore, although Acorn II books and records reflected the investments of ACM II investors, Acorn II financial accounts never received those investments or any associated income. Moreover, over time prior to the formation of Acorn II, Young diverted substantially all of the investor funds in ACM II financial accounts to personal use. Exhibit C (Admissions), ; Exhibit A (Kroll Aff.), 5. In sum, from the inception of the Acorn II, the aggregate of investments reflected on the books and records of Acorn II, which included investments in ACM II, exceeded the combined assets of the two partnerships. Exhibit C (Admissions), Nevertheless, the Acorn II Account Statements, provided by the Defendants to both the Acorn II investors and investors in ACM II, generally reflected all contributions, plus false profits, thereby leading investors to believe their investments were both intact and growing. Exhibit C (Admissions), 98, 104, Ultimately, the Defendants used new money provided by Acorn II investors to repay investors in 9

31 Case 2:09-cv JP Document Filed 11/29/10 Page 10 of 27 ACM II -- in connection with the Criminal Proceeding, Young has claimed that he made up shortfalls on ACM II investors, at least in part, if not fully, by using money from investors in Acorn II. Exhibit F (Plea Memo), p. 4. C. The Misappropriation of Assets from Acorn II As with ACM II, Young and Acorn Capital misappropriated funds from Acorn II investors and Acorn II financial accounts. Over time, the Defendants collectively misappropriated almost $26 million from Acorn II over $16.6 million for Young s personal benefit, diverted from both Acorn II and Acorn Capital financial accounts; and another (approximately) $9.1 million to pay investor distributions and withdrawals. 1. The Defendants Diverted Approximately $14.1 Million from Acorn II Financial Accounts for Young s Personal Use. From the inception of Acorn II through April 17, 2009, Young and Acorn Capital, through Acorn II, misappropriated approximately $14,108,000 of investor funds from Acorn II for Young s personal use, including to pay Young s personal expenses and to finance his family s lavish lifestyle. Exhibit A (Kroll Aff.), 6; see also Exhibit C (Admissions), 120 (at least $13 million), Exhibit F (Plea Memo), pp Among other things, in or around April 2006, Young used investor funds to purchase his residence in Florida for approximately $2.1 million. Exhibit C (Admissions), The Defendants diverted investor contributions in Acorn II to Young s benefit by instructing the Accountants to credit, in their records, investor checks intended for investment in the respective investor s Acorn II account to an Acorn II account in Young s name. Exhibit C (Admissions), 111. See also Exhibit F (Plea Memo), p. 5. The Defendants had no ownership interest in these funds, no permission to take these funds, and substantially all of the assets 10

32 Case 2:09-cv JP Document Filed 11/29/10 Page 11 of 27 recorded by the Accountants in Young s Acorn II account should have been recorded in the accounts of Acorn II investors. Exhibit C (Admissions), The Defendants further diverted investor funds by directing the transfer of funds from Acorn II financial accounts directly or indirectly into personal financial accounts in Young s name, accounts that Young held jointly with his wife, Neely Young, or otherwise used for Young s benefit, while directing the Accountants to record the transactions as (authorized) distributions to Acorn II investors. Exhibit C (Admissions), 114,117. See also Exhibit F (Plea Memo), p. 5. In connection with such transfers, the Acorn II investors in whose Acorn II account the Accountants recorded the distributions did not know about, or authorize, the distributions, and did not receive the distributions. Exhibit C (Admissions), The Defendants Diverted Over $2.5 Million in Acorn II Investor Funds to Young s Benefit through Acorn Capital. From the inception of Acorn II through April 17, 2009, Acorn Capital financial accounts were primarily funded by Acorn II investments. Exhibit A (Kroll Aff.), 7. Over time, the Defendants directed a net amount of $2,589,762 in Acorn II investor funds, originating from Acorn Capital financial accounts, to the benefit of Young and his family. Exhibit A (Kroll Aff.), 7; see also Exhibit C (Admissions), 139 (at least $2.5 million). 11

33 Case 2:09-cv JP Document Filed 11/29/10 Page 12 of The Defendants Diverted Approximately $9.1 Million from Acorn II Financial Accounts to Pay Other Investors. Finally, in true ponzi fashion, from the inception of Acorn II through April 17, 2009, Young and Acorn Capital, through Acorn II, also directed the disbursement of, approximately, $9,182,356 from Acorn II financial accounts to Acorn II and ACM II investors as distributions and/or withdrawals, and directed the Accountants to record those distributions as originating from investors who had not requested or authorized, and did not receive, the distributions. Exhibit A (Kroll Aff.), 8; see also Exhibit C (Admissions), (at least $9.0 million), Exhibit F (Plea Memo), pp The Defendants Continuous Efforts to Conceal the Theft of Acorn II Investor Funds Young, Acorn Capital, and Acorn II acted deliberately to preserve investor ignorance of the fraud, providing false information to Acorn II and ACM II investors about their investment accounts. Exhibit C (Admissions), They distributed Acorn II Account Statements to investors by U.S. mail, electronic mail, and otherwise. Exhibit C (Admissions), These statements reflected false profits and inflated account balances. See Exhibit C (Admissions), , Exhibit F (Plea Memo), p. 5. So, for instance, the Acorn II Account Statements reflected the balances that the Acorn II and ACM II investors expected to see in their accounts based on their capital contributions and expected returns, without offset for the substantial amounts converted by the Defendants for unauthorized purposes. Exhibit C (Admissions), 131, Exhibit F (Plea Memo), p. 5. Young made similar misrepresentations to investors verbally. Exhibit C (Admissions), 130, 132. Moreover, the Defendants provided to Acorn II investors by U.S. mail, tax 12

34 Case 2:09-cv JP Document Filed 11/29/10 Page 13 of 27 documents that did not accurately reflect the investors income from their investments in Acorn II. Exhibit C (Admissions), In addition, in September 2008, after investors had made several large withdrawals, a representative of the introducing broker-dealer (the Broker ) through whom Young had solicited several investors, began questioning Young about the low balance in the Acorn II financial account. 11 In order to quell the representative s unease and avoid the detection of his fraud, Young falsely assured the representative that Acorn II held assets of $27 million, spread among multiple clearing firms. Exhibit C (Admissions), , 242. In fact, at the beginning and end of September 2008, Acorn II held assets with an aggregate value of only (approximately) $6 million and $5.5 million, respectively. Exhibit C (Admissions), 241. See also Exhibit A (Kroll Aff.), 10. To further support his false assurances to the Broker s representative, in early 2009, Young provided to the representative documents purporting to be January 31, 2009 account statements for Acorn II financial accounts at a bank and a brokerage firm, reflecting approximately $24 million in assets. Exhibit C (Admissions), See also Exhibit F (Plea Memo), p. 6. In fact, neither the bank nor the brokerage firm held any Acorn II assets. Exhibit C (Admissions), See also Exhibit F (Plea Memo), p. 6. Young created these purported account statements for the specific purpose of allaying the concerns of the representative of the Broker, and thereby forestall any continued questioning of his operations that might result in exposure of his fraud. Exhibit C (Admissions), See also Exhibit F (Plea Memo), p The Broker had access to Acorn II s investment account balance directly through the custodian of the funds. 13

35 Case 2:09-cv JP Document Filed 11/29/10 Page 14 of 27 Meanwhile, in anticipation of a January 2009 Commission examination of Acorn Capital, in late 2008 the staff of the Commission directed to Young and Acorn Capital written requests for documents and information for the period January 1, 2006 through December 31, Exhibit C (Admissions), ; Exhibit E (Thomas Dec.), Young never provided many of the items requested by the Commission staff. Exhibit E (Thomas Dec.), While Young disputes that he failed to produce certain items to the staff, he admits that he and Acorn Capital deliberately provided, and caused to be provided to the Commission staff false and inaccurate information, 12 because providing to the Commission staff accurate responses to its inquiries would have revealed his fraud. Exhibit C (Admissions), D. The Scheme to Defraud Resulted in a Net Benefit to Young Exceeding $26 Million. As a result of the conduct described above, Young received the direct or indirect benefit of $26,954,356 in ill-gotten gains -- the aggregate of investor funds that he directed to his benefit and/or the benefit of his family through the entity Defendants and ACM II. See Exhibit A (Kroll Aff.), Exhibit C (Admissions), Young admits, however, that as of the filing of the Civil Action (April 17, 2009), Young had not, directly or indirectly through counsel, produced to the Commission staff the names of all investors in Acorn II or files for 2006 and Exhibit C (Admissions), 258,

36 Case 2:09-cv JP Document Filed 11/29/10 Page 15 of 27 V. LAW AND ARGUMENT As evidenced above and discussed below, there is no genuine issue as to any material fact in the Civil Action and, accordingly, the Commission is entitled to summary judgment on all claims in its Complaint. A. Summary Judgment Pursuant to Fed. R. Civ. P. 56(a), the Court should enter summary judgment when the movant demonstrates that there is no genuine issue of material fact and it is entitled to a judgment as a matter of law. See Anderson v. Liberty Lobby Inc., 477 U.S. 242, (1986). If summary judgment is not rendered on the whole action, the court should to the extent practicable, determine what material facts are not genuinely at issue. [The court] should then issue an order specifying what facts including items of damages or other relief are not genuinely at issue. The facts so specified must then be treated as established in the action. Fed. R. Civ. P. 56(d)(1). 13 Granting summary judgment avoids unnecessary and protracted litigation by permitting prompt resolution of controversies on their merits, without a trial, where there are no genuine issues of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986). As stated by the United States Supreme Court: [s]ummary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed 'to secure the just, speedy and inexpensive determination of every action.'" Celotex, 477 U.S. at 327. Upon a showing of the absence of a genuine issue of material fact, the burden shifts to the defendant to dispute that showing with specific evidentiary facts. Fed. R. Civ. P. 56(e); see also 13 See also Fed. R. Civ. P. 56(d)(2) (An interlocutory summary judgment may be rendered on liability alone, even if there is a genuine issue on the amount of damages). 15

37 Case 2:09-cv JP Document Filed 11/29/10 Page 16 of 27 Celotex, 477 U.S. at 322 (1986). Only disputes over facts that might affect the outcome of the suit under governing law will properly preclude the entry of summary judgment -- factual disputes that are irrelevant or unnecessary will not be counted. 14 Anderson, 477 U.S. at 248. See also SEC v. Hughes Capital Corp., 124 F.3d 449, 452 (3d Cir. 1997); Schoonejongen v. Curtiss- Wright Corp., 143 F.3d 120, 129 (3d Cir. 1998). As discussed below, there is no genuine issue as to any material fact as to liability or the need for injunctive relief remaining for adjudication in this case. Accordingly, and for the reasons set forth below, the Commission is entitled to the relief requested in the accompanying Motion. B. The Commission is Entitled to Summary Judgment on its Claims of Fraud Under Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act. The Commission has charged the Defendants with violations of Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5. Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder prohibit the employment of fraudulent devices in connection with the offer, purchase, or sale of securities. 15 To prevail in a civil enforcement action alleging violations of these antifraud statutes, the Commission must show that a defendant: (i) by the use of the mails or an instrumentality of interstate commerce; (ii) made false and misleading statements or omissions of material fact or otherwise employed any device, scheme, or artifice to defraud or engaged in any transaction, 14 Evidentiary showings that are merely colorable, conclusory, speculative, or not significantly probative cannot defeat the motion. See Anderson, 477 U.S. at The Supreme Court has recognized that the antifraud provisions of the Securities Act and the Exchange Act prohibit essentially the same conduct. See U.S. v. Naftalin, 441 U.S. 768, 778 (1979). 16

38 Case 2:09-cv JP Document Filed 11/29/10 Page 17 of 27 practice or course of business which operates as a fraud or deceit; (iii) in connection with the offer, purchase or sale of securities; and (iv) acted with the requisite intent or scienter The Defendants Used Means and Instrumentalities of Interstate Commerce in Connection with their Conduct. As set forth above, the Defendants used the U.S. mail and the internet in connection with the conduct discussed herein. 17 Among other things, the Defendants sent to investors by mail and false account statements and tax documents. 2. The Fraud was in Connection with Securities. The Defendants fraud was in connection with the offer and sale of securities and, in particular, the sale of the ACM II and the Acorn II limited partnerships. 18 Courts have consistently held that interests in limited partnerships such as those at issue here, are securities. See SEC v. Holschuh, 694 F.2d 130, 137 (7th Cir. 1982); See also, Abrahamson v. Fleschner, 568 F.2d 862, 868 (2d Cir. 1977), cert. denied sub nom., Harry Goodkin & Co. v. Abrahamson, 436 U.S. 905 (1978). They are investment contracts under the analysis set forth in SEC v. W. J. Howey, Co., 328 U.S. 293, (1946), i.e. (1) an investment of money (2) in a common enterprise (3) with the expectation of profits to be derived solely from the efforts of others. Howey, 328 U.S. at See also SEC v. the Infinity 16 Aaron v. SEC, 446 U.S. 680, 697 (1980); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 860 (2d Cir. 1968), cert. denied sub nom., Coates v. SEC, 394 U.S. 976 (1969); SEC v. Kimmes, 799 F. Supp. 852, 858 (N.D. Ill. 1992), aff'd, 997 F.2d 287 (7th Cir. 1993). There is no scienter requirement for violations of Sections 17(a)(2) or 17(a)(3). See Aaron, 446 U.S. at See, e.g., U.S. v. Tykarsky, 2004 U.S. Dist. LEXIS 15392, *7 (E.D. Pa. July 20, 2004), aff d 446 F.3d 458 (3d Cir. 2006) (Court finds connection to the Internet equates to the use of a facility or means of interstate commerce in the context of criminal statute, 18 U.S.C. 2423). 18 Although ACM II is not a defendant to the Civil Action and, indeed, appears to no longer exist or hold any assets, it is clear from Young s admissions that it was part of this fraud. In sum, as described above, ACM II evolved into Acorn II, and if, as Young claims, ACM II investors were made whole, this was done only through the use of Acorn II investor funds, which were paid to ACM II investors. 17

39 Case 2:09-cv JP Document Filed 11/29/10 Page 18 of 27 Group, 212 F.3d 180, 187 (3d Cir. 2000), cert. denied Springer v. SEC, 532 US 905 (2001). The Acorn II and ACM II limited partnership interests were sold as investments to passive investors who had no significant role in the management and operation of the partnership. Through Acorn Capital and otherwise, Young controlled ACM II and Acorn II, and both partnerships acted by and through Young. He controlled investment decisions and all financial transactions, and the investors relied on Young, who pooled their investments in ACM II and Acorn II, to trade in securities and earn a profit. Accordingly, these limited partnership interests were investment contracts, thereby falling squarely within the definition of security under the federal securities laws. See Securities Act Section 2(a)(1) ( The term security means any note, stock, investment contract,. ), 15 U.S.C. 77b(a)(1). The in connection with element requires only that the scheme to defraud and the security coincide. See SEC v. Zandford, 535 U.S. 813, (2002). See also Fox International Relations v. Fiserv Securities, Inc., 490 F. Supp. 2d 590, (E.D. Pa. 2007). The Defendants sold securities in the form of limited partnership interests, and misappropriated the proceeds from the sales of these interests. The scheme to defraud thus coincides with the securities. 3. The Defendants Engaged in Transactions, Practices, and Courses of Business that Operated as a Fraud or Deceit. The evidence demonstrates that the Defendants defrauded investors out of millions of dollars through material misstatements and omissions of material information concerning the use of investor funds. These material misstatements and omissions perpetuated the scheme for a decade. The Supreme Court enunciated the general standard for assessing materiality in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976), in which the Court held: 18

40 Case 2:09-cv JP Document Filed 11/29/10 Page 19 of 27 An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important... Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available. See also Basic, Inc. v. Levinson, 485 U.S. 224, 231 (1988). Without doubt, the use of investment proceeds, and in particular, the conversion of proceeds for personal use and to pay other investors, is information that a reasonable investor would find important. See Superintendent of Ins. State of New York v. Bankers Life and Casualty Co., 404 U.S. 6, 92 S. Ct. 165, (1971) (misappropriation or diversion of funds for uses other than those disclosed constitutes a scheme or artifice to defraud prohibited by the antifraud provisions). In each instance that Young and Acorn Capital misused ACM II investor funds, they failed to disclose material information to those investors about this misuse; similarly, in each instance that Young, Acorn II and Acorn Capital misused Acorn II and/or ACM II investor funds, they failed to disclose material information to those investors about this misuse. Moreover, in each instance in which the Defendants provided to investors account statements that did not reflect the various misappropriations, they made affirmative, material misstatements. Indeed, each withdrawal from existing investors to fund other investors distributions materially misrepresented the nature of the Defendants operations, creating the illusion that the Defendants were operating a legitimate, profitable enterprise rather than an illegal scheme which would ultimately collapse when the well of new investors ran dry. See, e.g. SEC v. The Infinity Group, 993 F. Supp. 324, 326 (E.D. Pa. 1998) (describing, in detail, the demise of a Ponzi scheme). The Defendants actions were deliberate, thereby satisfying the requirement that they acted with scienter. Scienter is defined as a "mental state embracing intent to deceive, manipulate or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Scienter 19

41 Case 2:09-cv JP Document Filed 11/29/10 Page 20 of 27 includes conduct evidencing an intent to mislead, as well as conduct demonstrating a reckless disregard for misleading statements. Id. at ; see also Sharp v. Coopers & Lybrand, 649 F.2d 175, 193 (3d Cir. 1981), cert. denied, 455 U.S. 938 (1982). Young s scienter is imputed to Acorn Capital and Acorn II as vehicles through which he operated the fraud and over which he had control. See SEC v. Management Dynamics, Inc., 515 F.2d 801, 812 (2d. Cir. 1975); SEC v. Haligiannis, 470 F. Supp. 2d 373, 382 (S.D.N.Y. 2007) (scienter of an individual who controls a business entity may be imputed to that entity). In this case, Young, and the entity Defendants acting through Young, deliberately diverted investor funds to undisclosed purposes, including to benefit Young and to keep the enterprise afloat by providing distributions to requesting investors. They further created and disseminated false statements and tax documents to investors reflecting non-existent income and account balances in order to hide the conversion of funds. Indeed, Young admits to the deliberate deception. For instance: 53. Admit that you provided false information to ACM II investors about their ACM II Capital Accounts in order to hide your conversion of their funds. Response: Admitted Admit that you provided false information to Acorn II and ACM II investors about their investments in Acorn II and ACM II in order to hide your conversion of their funds. Response: Admitted. See Exhibit C (Admissions), 53,133. Up through the end of this fraudulent scheme, the Defendants attempted to keep the scheme alive by deliberately fabricating custodial statements to lull the representative of the Broker into a false sense of security regarding its clients investments. As Young admits, for instance: 20

42 Case 2:09-cv JP Document Filed 11/29/10 Page 21 of Admit that you created and/or altered [bank and brokerage account statements provided to the Broker] to hide your conversion of investor funds. Response: Admitted Admit that you provided to [the Broker] the false bank and brokerage account statements to hide your conversion of investor funds. Response: Admitted. See Exhibit C (Admissions), 249, 250. Finally, when the Commission examination staff prepared for, and conducted, the 2009 examination, Young provided limited and inaccurate information with the intent of hiding the conversion and perpetuating the fraud. See Exhibit C (Admissions), In sum, all aspects of this fraud were (admittedly) deliberate and thoughtfully orchestrated by Young individually and through the entity Defendants. Accordingly, the Defendants violated Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. C. The Commission is Similarly Entitled to Summary Judgment on its Claims of Fraud Under Sections 206(1) and (2) of the Advisers Act. Section 206(1) of the Advisers Act [15 U.S.C. 80b-6(1)] prohibits investment advisers from employing any device, scheme, or artifice to defraud any client or prospective client. Similarly, Section 206(2) of the Advisers Act [15 U.S.C. 80b-6(2)] makes it unlawful for an investment adviser to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client, but, unlike Section 206(1), scienter is not a required showing. Steadman v. SEC, 603 F.2d 1126, 1134 (5 th Cir. 1979); SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195 (1963). Conduct that violates the antifraud provisions of the Securities Act and/or Exchange Act, when done by an investment adviser to his 21

43 Case 2:09-cv JP Document Filed 11/29/10 Page 22 of 27 or her clients, also violates Sections 206(1) and 206(2) of the Advisers Act. See SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1985); Haligiannis, 470 F. Supp. 2d at As set forth above, Acorn Capital and Young violated the antifraud provisions of the Securities Act and the Exchange Act. As discussed immediately below, they both did so while acting as investment advisers to Acorn II. Accordingly, they also violated Sections 206(1) and (2) of the Advisers Act. See Blavin, 760 F.2d at 711. Under Section 202(a)(11), 15 U.S.C. 80b-2(a)(11), of the Advisers Act, an investment adviser is any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities. As set forth above, Acorn Capital, an investment adviser registered with the Commission since 2001, was the investment adviser to Acorn II, and received fees in connection with that function. Young, as the President, Chief Investment Officer, Chief Compliance Officer, and Managing Member of Acorn Capital, made the investment decisions for its clients. He received compensation both through the remuneration due to Acorn Capital and from his diversion of investor funds. See In the Matter of Ira William Scott, 1998 SEC LEXIS 1957, *11; 53 SEC 862 (Sept. 15,1998) (the compensation element of the definition of investment adviser is satisfied by the diversion of investor funds for personal use), citing Alexander v. Stein, 1995 SEC LEXIS 3628, *8; 52 SEC 296, 300 (June 8, 1995). Accordingly, Young, in addition to Acorn Capital, was acting as an investment adviser to Acorn II in connection with the activity described herein. 19 The standard of materiality under the Advisers Act is the same as that applied in the context of Section 10(b) of the Exchange Act. Id. at (applying TSC v. Northway standard of materiality to Investment Advisers Act claims); SEC v. Steadman, 967 F.2d 636, 643 (D.C. Cir. 1992). 22

44 Case 2:09-cv JP Document Filed 11/29/10 Page 23 of 27 See SEC v. Berger, 244 F. Supp. 2d 180, 193 (S.D.N.Y. 2001), aff d, 322 F.3d 187 (2d Cir. 2003) (Because the individual effectively controlled the investment adviser and its decision making, the individual is also properly labeled an investment adviser). D. Defendants Acorn Capital and Young Also Have Violated Section 206(4) of the Advisers Act and Rule 206(4)-8 Thereunder. Section 206(4) of the Advisers Act prohibits an investment adviser from, directly or indirectly, engaging in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. Under Rule 206(4)-8, a person violates Section 206(4) if that person makes any untrue statement of a material fact or omits to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading, to any investor or prospective investor in the pooled investment vehicle; or otherwise engages in any act, practice, or course of business that is fraudulent, deceptive, or manipulative with respect to any investor or prospective investor in the pooled investment vehicle. Here, for all of the reasons discussed above and in connection with the investments pooled in the Acorn II financial accounts, Young and Acorn Capital violated Section 206(4) and Rule 206(4)-8 thereunder. E. Defendant Acorn Capital Has Violated, and Defendant Young has Aided and Abetted Acorn Capital s Violation of, Section 204 of the Advisers Act and Rule Thereunder. Section 204 of the Advisers Act requires registered investment advisers to make and keep certain records, and to furnish such copies thereof and make and disseminate such reports as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors. 15 U.S.C. 80b-4. Section 204 specifies that such records are subject to examination by Commission staff. Rule elaborates on the requirements of Section 204, requiring registered investment advisers to make and keep true, accurate and current various specific categories of books and records relating to its investment advisory 23

45 Case 2:09-cv JP Document Filed 11/29/10 Page 24 of 27 business. This includes books and records that are necessary to form the basis of performance calculations; specific information relating to assets, income and expenses, and cash receipts and disbursements; as well as all written communications relating to recommendations, advice given, receipt or delivery or disbursement of funds or securities; and a list or other record of all accounts in which the investment adviser is vested with any discretionary authority with respect to the funds, securities, or transactions of any client. See 17 C.F.R The documents requested by the Commission examination staff of Acorn Capital in early 2009, including documents reflecting investments in Acorn II, and current investor account balances, fall within the regulated records. As admitted by Young, upon request of the Commission staff, Acorn Capital failed to produce s (written correspondence) or the names of all investors in Acorn II. Upon Young s failure to produce to the staff certain additional records, the Commission staff obtained the same, including quarterly performance reports, cash receipts, disbursement journals, and account balances, from third parties. Assuming, as Young contends, that Young and Acorn Capital indirectly produced these records to the Commission staff through third parties, they produced or caused to be produced to the Commission examination staff information that they knew to be false and inaccurate. See Exhibit C (Admissions), (Young provided false and inaccurate information to the Commission staff through third parties). Such production was in violation of Acorn Capital s obligation to maintain and produce for examination, true, accurate, and current, records and to produce the same for examination upon request. By failing to produce certain required records, and by maintaining, furnishing, or causing to be furnished, false and inaccurate records to the 24

46 Case 2:09-cv JP Document Filed 11/29/10 Page 25 of 27 Commission staff, Acorn Capital violated Section 204 of the Advisers Act and Rule thereunder. Young, through whom Acorn Capital acted, aided and abetted that violation. 20 F. The Commission is Entitled to Injunctive Relief. The Commission respectfully requests that this Court permanently enjoin the Defendants from further violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and that Acorn Capital and Young be enjoined from violating Sections 204, 206(1), (2) and (4) of the Advisers Act and Rules and 206(4)-8 thereunder. The Securities Act, the Exchange Act, and the Advisers Act, each provide for the issuance of a permanent injunction following a violation of any of their provisions. See 15 U.S.C. 77t(b); 15 U.S.C. 78u(d)(e), 78u-1; 15 U.S.C. 80b-9(d). A permanent injunction may be granted at summary judgment. See SEC v. Research Automation Corp., 585 F.2d 31, 36 (2d Cir. 1978) (affirming, and noting propriety of, injunctive relief on summary judgment). To obtain an injunction, the Commission must show that there is a reasonable likelihood that the defendant, if not enjoined, will again engage in the illegal conduct. SEC v. Bonastia, 614 F.2d 908, 912 (3d Cir. 1980); SEC v. Chester Holdings, Ltd., 41 F. Supp. 2d 505, 527 (D.N.J. 1999). Considerations to this end are: (1) the degree of defendant s scienter; (2) whether the infraction was of an isolated or recurrent nature; (3) defendant s recognition of his or her wrongful conduct; (4) the sincerity of assurances against future violations; and (5) the likelihood, 20 Aiding and abetting requires (1) the commission of a wrongful act; (2) knowledge of the act by the aider and abettor; and (3) the aider-abettor knowingly and substantially participated in the wrongdoing. Morganroth & Morganroth v. Norris, McLaughlin & Marcus, P.C., 331 F.3d 406, 415 (3d Cir. 2003). Here, Acorn Capital violated the statute, and acted and failed to act through Young. All requests for documents were made to Acorn Capital through Young and, accordingly, Young was aware of the failure to comply with the requests of the regulator and/or the provision of false and inaccurate information the wrongful acts. As the control person and officer of a regulated entity, he was also aware of the recordkeeping requirements and thus, understood the wrongful nature of these acts. Accordingly, Young aided and abetted this violation by Acorn Capital. 25

47 Case 2:09-cv JP Document Filed 11/29/10 Page 26 of 27 due to defendant s professional occupation, that future violations may occur. Bonastia, 614 F.2d at 912; Chester Holdings, 41 F. Supp. 2d at 527. Injunctions are appropriate even where there is no finding that the defendant was a repeat offender, if the other factors weigh in the Commission s favor. See, e.g., SEC v. Tome, 833 F.2d 1086, 1095 (2d Cir. 1987), cert. denied, 486 U.S (1988). The conduct described herein establishes that there is a substantial likelihood that the Defendants will again engage in the illegal conduct unless enjoined. The deliberation and active deception over a ten year period is striking Young, through his entities, orchestrated the fraudulent scheme on several fronts through misstatements and omissions, including the creation of false documents and the alteration of existing documents, realizing almost $27 million in illgotten gains. They acted affirmatively to avoid detection, both in the ordinary course of the fraudulent scheme through the maintenance of (at least) 2 sets of books and records; and upon the more focused and directed inquiries of the representative of the Broker. Up through the filing of the Complaint, Young admitted no wrongdoing and actively sought to deceive regulators during an examination conceding liability only after he had been caught in the fraud. Clearly Young, and by Young, his entities, acted with a high degree of scienter over a prolonged period of time. Young is thirty-nine years old, was employed and held himself out -- as an investment adviser throughout the conduct described herein, and is accustom to a lavish lifestyle. Under these circumstances, and even assuming, arguendo, a period of incarceration, there is a reasonable likelihood that, unless enjoined, Young will again violate federal securities laws, through his existing companies and co-defendants, or otherwise. 26

48 Case 2:09-cv JP Document Filed 11/29/10 Page 27 of 27 VI. CONCLUSION For the reasons set forth above, the Commission respectfully requests that the Court grant the Commission s Motion and enter the proposed Judgment submitted with this Memorandum. Date: November 29, 2010 Respectfully submitted, /s/ Catherine E. Pappas G. Jeffrey Boujoukos (PA #67215) Catherine E. Pappas (PA #56544) Attorneys for Plaintiff: SECURITIES AND EXCHANGE COMMISSION 701 Market Street, Suite 2000 Philadelphia, PA Telephone: (215) Facsimile: (215)

49 Case 2:09-cv JP Document Filed 11/29/10 Page 1 of 2 UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA : SECURITIES AND EXCHANGE COMMISSION, : : Plaintiff, : : v. : Civil Action No. : 09-CV (JP) DONALD ANTHONY WALKER YOUNG, : a/k/a D. A. WALKER YOUNG, : ACORN CAPITAL MANAGEMENT, LLC and : ACORN II, L.P., : : Defendants, : : and : : OAK GROVE PARTNERS, L.P., : NEELY YOUNG and : W. B. DIXON STROUD, JR., : : Relief Defendants. : : Declaration of Catherine E. Pappas I, Catherine E. Pappas, hereby declare as follows: 1. I am employed by the Securities and Exchange Commission (ACommission@), the plaintiff in this action, as a Senior Trial Counsel in its Philadelphia Regional Office. I am the lead counsel on the captioned matter. 2. A true and correct copy of the Affidavit of Michael R. Shanahan, dated November 29, 2010, is attached as Exhibit A. 3. A true and correct copy of the April 1, 2010 Indictment in USA v. Young, Criminal No. 10-CR-199 (E.D. Pa.) is attached as Exhibit B.

50 Case 2:09-cv JP Document Filed 11/29/10 Page 2 of 2 4. A true and correct copy of Defendant Donald Anthony Walker Young s Answer to the SEC s First Request for Admissions in the captioned action, dated May 27, 2010, is attached as Exhibit C. 5. A true and correct copy of Defendant Donald Anthony Walker Young s Answer to the SEC s Interrogatories and Requests for Production in the captioned action, dated June 11, 2010, redacted, is attached as Exhibit D. 6. A true and correct copy of the Declaration of Frank A. Thomas, which is part of Docket # 2 in the captioned action, is attached as Exhibit E. 7. A true and correct copy of the July 18, 2010 Government s Change of Plea Memorandum in USA v. Young, Criminal No. 10-CR-199 (E.D. Pa.) is attached as Exhibit F A true and correct copy of the (redacted) transcript of the July 20, 2010 Plea Hearing in USA v. Young, Criminal No. 10-CR-199 (E.D. Pa.) is attached as Exhibit G. I declare, based on my knowledge, information, and belief, that the foregoing is true and correct. Dated: November 29, 2010 /s/ Catherine E. Pappas Catherine E. Pappas 1 This document incorrectly reflects docket number in its caption. 2

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