Citations
- 966 F. Supp. 587
Full opinion text
MEMORANDUM OPINION AND ORDER
NORDBERG, District Judge.
I. INTRODUCTION
This dispute regarding Defendant A. David Silver’s alleged mismanagement of two venture capital funds came before the Court for bench trial on August 16-20, 23-27, and September 30, 1993. The Court heard closing arguments on October 22,1993. The parties have each submitted a memorandum of proposed findings of fact and conclusions of law. In addition, the parties have briefed to the Court the Defendants’ Motion for a Directed Verdict. After first summarizing the ease and then deciding several outstanding motions, the Court makes its findings of fact and conclusions of law pursuant to Fed. R.Civ.P. 52(a).
A. Jurisdiction
The Court has jurisdiction over this action under Section 1331 of the Judicial Code, 28 U.S.C. § 1331, Section 22 of the Securities Act of 1933, 15 U.S.C. § 77v, Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, Section 1965 of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1965, and supplemental jurisdiction over Plaintiffs state law claims under 28 U.S.C. § 1367.
B. Case Summary
This case arises out of Defendant Silver’s improper management of two venture capital funds, the Santa Fe Private Equity Fund (“SFPEF I”) and the Sante Fe Private Equity Fund II (“SFPEF II”), each of which were limited partnerships run by a venture capital fund controlled by Silver, ADS Associates, Ltd. (“ADSA”), which controlled SFPEF I, and ADS Partners, Ltd. (“ADSP”), which controlled SFPEF II. SFPEF I was predominantly a computer industry fund. Its portfolio companies included Pathfinder Computer Centers (“Pathfinder”), Avant-Garde, which later merged with Family Achievement Software Company (“FASCO”), and Cipherlink Corporation (“Ci-pherlink”). Each of these three companies experienced severe cash problems and were on the verge of failing when Silver organized SFPEF II, which he touted as a health care fund. Plaintiff, the Lincoln National Life Insurance Company (“Lincoln”), was among SFPEF II’s limited partners.
Although SFPEF II was supposed to be a health care fund, and despite the fact that several of that fund’s limited partners had declined to invest in SFPEF I, Silver invested more than seventy percent of the SFPEF II’s first capital call in computer companies that were part of SFPEF I’s portfolio, including the failing Pathfinder, Avan1>-Garde/FASCO, and Cipherlink. When the SFPEF II limited partners learned of the nature of the fund’s investments, they requested Silver to refrain from continuing to invest in SFPEF I portfolio companies. He nevertheless persisted. The limited partners of the two funds removed Silver’s management companies as their general partners on February 10, 1987 and had a receiver appointed for the Funds. In April 1988, the receiver for SFPEF II assigned to Lincoln all of SFPEF II’s claims in this case.
Lincoln’s Second Amended Complaint, the pleading on which this action is now based, contains twenty-three counts which make claims against several individuals and entities, all of which save Silver and ADS Partners, Ltd. (“ADSP”), the managing general partner of SFPEF II, have been dismissed from this case. The following Counts were tried to the Court.
In Counts VIII, IX and X, Lincoln, in its individual capacity, claims that Silver violated sections 1962(a), 1962(b), and 1962(c) of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), Pub.L. 91-452, Title IX, § 901(a), 84 Stat. 941 (1970) (codified as amended at 18 U.S.C. §§ 1961-1968 (1988)),
In Counts XI, XII, and XIII, Lincoln repeats its RICO claims as assignee of SFPEF II, claiming that Silver violated 18 U.S.C. §§ 1962(a), 1962(b), 1962(e).
In Counts VI and VII respectively, Lincoln individually and as SFPEF II’s assignee claims that Silver and ADSP breached fiduciary duties owed under N.M. Stat. Ann. §§ 54-2-9 and 54-l-21(A) (1978).
In Count III, Lincoln, individually, claims that Silver and ADSP violated section 10(b) of the Securities Exchange Act of 1934, ch. 404, 48 Stat. 881 (1934) (codified as amended in scattered sections of 15 U.S.C. (1988)).
In Count I, Lincoln, individually, claims that Silver and ADSP violated section 12(2) of the Securities Act of 1933, eh. 38, 48 Stat. 74 (1993) (codified as amended in scattered sections of 15 U.S.C. (1988)).
In Count IV, Lincoln, individually, claims that Silver and ADSP violated section 5/12 of the Illinois Securities Law of 1953 (codified ' as amended at S.H.A. 815 ILCS 5/1-19 (1993)).
• In Count XXI, Lincoln, individually, claims that Silver engaged in common law fraud.
C.Defendants’ Motion for a Directed Verdict
• At the close of the Plaintiffs case, the Defendants moved for a directed verdict. The motion is denied, for the reasons indicated in the Court’s findings of fact and conclusions of law.
D.Silver’s Motion to Reopen the Evidence
Silver moves, pursuant to Rules 59 and 60 of the Federal Rules of Civil Procedure, to reopen the evidence in this case so that the Court may consider a Pledge Agreement which is already, in fact, in evidence. The motion is denied. The proffered evidence is already part of the record. In addition, Silver’s arguments accusing witness William Enloe and Plaintiffs counsel of wrongdoing are hereby ordered stricken.
E.The Parties’ Motions for Sanctions
The parties have each requested sanctions against the other. These requests are denied.
F.Summary of the Court’s Findings
Both parties were well represented at trial. Lincoln had the services of very capable counsel who represented their client in a thorough and professional way. . Silver, a non-lawyer, represented himself pro se. He demonstrated remarkable skill in capably representing himself, with the assistance of his wife, despite the fact that, as the Court’s findings of fact show, he had a weak case.
At trial, the Court heard testimony from A. David Silver, Ivan Berk, Steven Rork, Verne Spangenberg, Kyle Lefkoff, Richard Azimov, Eric Lesin, Thomas Measday, William Byrne, and Richard Dumler. In addition, the parties submitted portions of the deposition testimony of Silver, Jesse Acker (taken on two different occasions), James Ray, W. Hardee Mills, Gary Stoefen, Phillip DeWald, and William Enloe. The Court has reviewed the memoranda and arguments of counsel, the testimony of the witnesses, the depositions of absent witnesses, the exhibits and stipulations received into evidence, the trial transcript, and detailed notes taken by the Court at trial. In listening to the testimony at trial, the Court took care to appraise each witness’s credibility and to determine the weight to be accorded the witness’s testimony. In so doing, the Court considered the witnesses’ intelligence, ability, and opportunity to observe; their age, memory and manner while testifying; any interest, bias, or prejudice they may have had; and the reasonableness of their testimony in light of all the evidence presented in the ease. The Court recorded its impressions of the witnesses in its notes.
In reaching its conclusion in this case, the Court has sought to draw reasonable inferences from the evidence, and has considered the parties’ legal arguments. In the opinion of the Court, the evidence submitted at trial requires judgment for Plaintiff. The Court now makes its findings of fact and conclusions of law pursuant to Fed.R.CivJP. 52(a).
II. FINDINGS OF FACT
A. The Parties
The Lincoln National Corporation is the parent company of the Plaintiff in this ease, The Lincoln National Life Insurance Company (“Lincoln”), and of Lincoln National Investment Management Company (“LNIMC”), which acted as Lincoln’s agent through its then Vice President, Ivan Berk. Lincoln is an Indiana Corporation having its principal place of business in Fort Wayne, Indiana.
Defendant A. David Silver (“Silver”) is a venture capitalist who managed SFPEF I and SFPEF II through two limited partnerships formed under New Mexico law, ADS Associates, L.P. (“ADSA”), which was the managing general partner of SFPEF I, and ADS Partners, L.P. (“ADSP”), which was the managing general partner of SFPEF II. Silver resides in New Mexico. At all relevant times, the principal place of business for Silver, ADSA, ADSP, SFPEF I, and SFPEF II was 524 Camino del Monte Sol, Santa Fe, New Mexico.
SFPEF I, or “Fund I”, was organized as a limited partnership pursuant to the laws of the State of New Mexico in August of 1983. ADSA was SFPEF I’s sole general partner until February 10, 1987, when it was removed by the limited partners. SFPEF II, or “Fund II”, was organized as a limited partnership pursuant to the laws of the State of New Mexico in August of 1985. ADSP was the sole general partner of SFPEF II until February 10, 1987, when it was removed by the limited partners.
In February 1987, after ADSA and ADSP were removed as general partners, the First Judicial District Court for the County of Santa Fe, New Mexico appointed John Clark (“Clark”) to serve as the receiver for both funds.
Lincoln filed this suit in September 1986 against Silver, ADSP, and other Defendants who have since been dismissed. Thereafter, several of the Silver-related entities went into bankruptcy.
In May 1987, Clark filed for SFPEF I a bankruptcy petition pursuant to Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court for the District of New Mexico. In February 1988, ADSA and ADSP filed bankruptcy petitions pursuant to Chapter 7 of the Bankruptcy Code for SFPEF I in the United States Bankruptcy Court for the District of New Mexico. Silver has himself filed for bankruptcy protection as well.
In April 1988, Clark, for SFPEF II, assigned to Lincoln all of SFPEF II’s claims against Silver and ADSP as part of a settlement of claims against SFPEF II. (Stipulation of Facts ¶ 11; Tr. at 821-22.) On April 21,1988, the First Judicial District Court for the County of Santa Fe, New Mexico entered an order approving the assignment.
B. SFPEF I
In August, 1983, Silver, as managing partner of ADSA, formed SFPEF I for the purpose of investing in and providing venture capital to computer and other high-technology companies.
As of December 31, 1984, Silver had invested approximately $10.5 million of SFPEF I’s capital in eleven portfolio companies. The portfolio consisted of: Pathfinder Computer Centers (“Pathfinder”), Avant-Garde Publishing Corp. (“Avant-Garde”), which later merged with Family Achievement Software Company (“FASCO”), Cipherlink Corporation (“Cipherlink”), Gateway Computer (“Gateway”), Personal Diagnostics, Inc., Cri-tichem, Mesa Diagnostics, Inc., Sonostics, NMR Imaging, Inc. (“NMR”), and Central Data Corporation. Of the $10.5 million invested, more than $4.7 million was invested in Pathfinder, Fund I’s largest investment, and Avant-Garde. (Stipulation of Facts ¶ 15.) Silver’s investments in Cipherlink and Gateway are also particularly relevant to this lawsuit.
Pathfinder, a chain of retad stores which sold computer hardware and software to small and medium sized businesses, had been founded as a limited partnership in 1982 and was incorporated as a privately held Delaware Corporation on July 28, 1983. Silver was one of the company’s founders, was the Chairman of its Board of Directors, and its Chief Executive Officer. (See Tr. at 56; Silver Dep. at 337-38; Pl.’s Ex. 20 at 20.) The company hired Steven A. Rork (“Rork”) as President. He worked in that capacity from 1982 until April 1985, when he was demoted and later dismissed by Silver. (Tr. at 53-56, 74-75; Pl.’s Ex. 19 at 24.) Rork, Silver, and SFPEF I were Pathfinder’s principal stockholders when it was incorporated. (Tr. at 54r-55.)
The Court finds that SFPEF I invested extensively in Pathfinder. As of December 31,1984, SFPEF I had invested $3,003,396 in Pathfinder. (Pl.’s Ex. 2 at 2.) In the following year, between January 1, 1985 and July 31, 1985, SFPEF I invested another $1.6 million, making SFPEF I Pathfinder’s single largest investor. (Stipulation of Facts ¶ 22.)
Avant-Garde was an Oregon corporation, incorporated in 1983, that designed and marketed software for the home personal computer market. (Stipulation of Facts ¶25.) In January 1985, SFPEF I established Family Achievement Software Corporation (“FAS-CO”), which acquired 80 percent of Avante Garde’s stock. (Stipulation of Facts ¶27.) Silver was FASCO’s Chairman of the Board. (Tr. at 815-16; Silver Dep. at 338; Pl.’s Ex. 297 at 9.) The two companies merged in November of 1985. (Stipulation of Facts ¶ 28.)
Silver offered Verne Spangenberg (“Span-genberg”) a position with FASCO in early 1985. (Tr. at 354-56.) Spangenberg was President and Chief Operating Officer of FASCO and Vice-President and Treasurer of Avant-Garde. (Tr. at 355; Pl.’s Exs. 259, 260.) Spangenberg planned to sell the viable Avant-Garde products, develop a new line of software products based on celebrity endorsements called “Aehieveware”, acquire other products and companies, and then take FASCO public. (Tr. at 356.)
The Court finds that Silver, for SFPEF I, invested extensively in Avant-Garde/FASCO. As of December 31, 1984, SFPEF I had invested $1,745,177 in FASCO. (Pl.’s Ex. 2 at 2.)
Cipherlink was incorporated in October 1983. (PL’s Ex. 34.) It listed a Los Angeles, California business address. (Id.) Silver was one of Cipherlink’s directors. (Tr. at 1041.) Erie Lesin was the company’s president from its inception until 1986, when it ceased operations. (Tr. at 1038.) The company developed a software program to perform data communications between different types of computers. (Tr. at 1033-34.)
The Court finds that SFPEF I invested extensively in Cipherlink. As of December 31,1984, SFPEF I had invested $1,250,000 in Cipherlink. (Pl.’s Ex. 2 at 2.) One year later, as of December 31,1985, that investment had risen to $1,747,000. (Pl.’s Exs. 3, 4, 5 at 3.)
Gateway operated a chain of computer systems houses through which it sold, serviced, and installed personal computer systems. (Pl.’s Ex. 6 at 16.) As of December 31,1984, SFPEF I had invested $1,000,000 in Gateway. (Pl.’s Ex. 2 at 2.) Lincoln invested directly in Gateway as a co-investor with SFPEF I. (Pl.’s Ex. 6 at 16.)
The Court finds that, by the Spring of 1985, when Silver started attempting to form SFPEF II, Pathfinder was operating at a loss and needed cash. (Silver Dep. at 260-63.) So did Avant-Garde, Cipherlink, Gateway, and NMR. (Silver Dep. at 267-68.) However, by June 30, 1985, all of SFPEF I’s capital contributions had been paid in. (Stipulation of Facts ¶ 32.) At that time, SFPEF I had only $460,000 in cash in its accounts, (id.), and could not meet the cash needs of its portfolio companies.
The Court finds that after June 1985, SFPEF I’s ability to invest in and support its portfolio companies had weakened so much that from August 1985 through December 1985, SFPEF I distributed only $452,525, which involved the investment of $396,500 in six portfolio companies, $6900 of which was invested in Pathfinder. (Pl.’s Ex. 299.) Similarly, SFPEF I’s disbursements for all of 1986 totaled $25,830 in new investments, with $22,089 for Pathfinder. (PL’s Ex. 299.)
C. The Financial Condition of the SFPEF I Portfolio Companies pri- or to the formation of SFPEF II
The Court finds that from the last quarter of 1984 until, and through, August of 1985, Pathfinder experienced severe financial problems. Thus, at the time SFPEF II was formed, Pathfinder was on the verge of failing. As of August 1985, Pathfinder was in dire need of cash. The evidence in support of these conclusions was overwhelming. Some of the evidence may be summarized as follows:
1. At the time of its initial public offering (“IPO”), ^ November 1984, Pathfinder was not generating sufficient revenues to meet its operating expenses, including payroll, payroll taxes, and obligations to key suppliers. (Tr. at 56-57; PL’s Ex. 19.) It admitted and disclosed these facts in an S-l form filed on November 21, 1984 with the Securities and Exchange Commission. (PL’s Ex. 19.)
2. IBM and Apple were the two largest lines of computers in 1984 and 1985. Pathfinder was unable to sell either line because of its poor financial condition. (PL’s Ex. 19 at 8; Tr. at 108.)
3. The net proceeds from Pathfinder’s IPO amounted to $589,000. (PL’s Ex. 20 at 16; Tr. at 61.) These funds, when received, relieved Pathfinder’s cash-flow problems for two weeks, after which the company returned to its “standard financial crisis.” (Tr. at 61.)
4. As of December 31, 1984, as disclosed in Pathfinder’s Form 10-K filed with the SEC in March of 1985, Pathfinder’s accumulated deficit had grown from $589,-000 to $2,365,000 in one year. Its gross profit decreased from 27.8 percent of sales to 17.6 percent in two years. (See PL’s Ex. 20 at 3,14.)
5. Pathfinder’s net loss for 1984 was approximately $1,684,000. The previous year’s net loss was approximately $382,-000. (Tr. at 61; PL’s Ex. 20 at 13.)
6. The accounting firm of Peat, Marwick, Mitchell & Co. (“Peat Marwick”) prepared Pathfinder’s audited financial statements, which were included in Pathfinder’s 1984 10-K. In its Accountant’s Report, Peat Marwick stated:
The magnitude of [certain of Pathfinder’s] losses in relation to working capital and stockholders’ equity, among other factors, indicate that the Company may be unable to continue in existence.
(PL’s Ex. 20 at F.2; Tr. at 67.)
7. Peat Marwick’s report issued a “going concern” qualification. (Tr. at 766-67.) A “going concern warning” indicates that the auditors believe that “there is considerable risk that the company could not continue its operations.” (Tr. at 654.) Such warnings are not lightly given by auditors because they further jeopardize the company’s credit worthiness. (Tr. at 654.)
8. Through March 31, 1985, Pathfinder continued to experience severe cash-flow problems and sustained a net loss of $665,502 over the first three months of 1985. (Pl.’s Ex. 23; Tr. at 68.)
9. Silver was acutely aware of Pathfinder’s difficulties. He had received a copy of the firm’s 10-K and had been told by Rork that the company’s financial future was dismal. (Tr. at 67, 70-71.)
10. Silver told Rork to obtain a $500,000 to $750,000 bridge loan for Pathfinder. (Tr. at 77.) Rork failed to accomplish that mission, even though he contacted approximately 20 financial institutions. (Tr. at 77, 80-82.) Silver also attempted to get bridge financing for Pathfinder. (Tr. at 82; Pl.’s Exs. 110, 224.) Silver represented to Lloyds Bank that he was establishing a second fund from the same investors in SFPEF I and that the fund would be able to guarantee credit to Pathfinder. (Pl.’s Ex. 224.) Despite these representations, Lloyds denied Pathfinder’s request for financing, telling Rork that Pathfinder fell “into every risk category there is, and the regulatory authorities such as the FDIC, state examiners, and national bank examiners would be flagged immediately” if Lloyds granted the requested loan. (Tr. at 86; Pl.’s Ex. 228.)
11. For the six months ended June 30, 1985, Pathfinder incurred a net loss of $1,584,199 and saw its accumulated deficit increase to $3,949,581. (Pl.’s Ex. 26.)
12. In a 10-Q Report filed with the SEC, Pathfinder’s management indicated that if the company did not secure funding from SFPEF I, it would be unable to get funding from any other source, presenting “considerable risk as to whether the Company would be able to continue in existence.” (Pl.’s Ex. 26.)
13.Silver terminated Rork at the end of August 1985. (Tr. at 86-87.) At the time Pathfinder still had cash-flow problems and had a financial condition described by Rork as “bleak”. (Tr. at 87.) Rork believed that his Pathfinder stock was “worthless” (Tr. at 91), but tried to sell it back to Pathfinder as provided by a provision in his contract (Tr. at 87). Silver told Rork that Pathfinder would not repurchase the stock because Pathfinder lacked the funds to do so. (Tr. at 88.)
The Court finds that Avant-Garde/FAS-CO, like Pathfinder, experienced severe cash-flow and financial problems over the course of its existence and was in dire need of cash as of August 1985. (Pl.’s Exs. 30, 31; Tr. at 372-73, 398-99, 432-33.) Some of the evidence in support of these conclusions is summarized as follows:
1. For the fiscal year ended January 31, 1985, Avant-Garde’s current liabilities exceeded its current assets by $464,591.
2. The company’s auditors stated that:
In light of the current year loss and the Company’s working capital position at January 31, 1985, if the Company is not successful in acquiring a substantial infusion of either debt or equity, it may not be able to continue in existence. (Pl.’s Ex. 31 at Bates 0013997.)
3. Before coming to work at FASCO, Spangenberg evaluated Avant-Garde for Silver. He told Silver that the company’s products were poor and that it was not being managed well. (Tr. at 351-52.) Spangenberg testified that Avant-Garde was “essentially moribund in late 1984, if not earlier, and dependent on cash.” (Tr. at 372.)
4. In April 1985, FASCO submitted to Silver a business plan requiring an infusion of $1,195,000 in May; Silver approved the plan. (Tr. at 360-64; Pl.’s Ex. 261.) SFPEF I was unable to provide the funds, however. On April 19, 1985, Silver wrote Spangenberg to state that the fund could only provide $100,-000 of FASCO’s needed cash by June 30, 1985. (PL’s Ex. 262.) At that time, it was apparent that FASCO’s business plan would not be met. (Tr. at 365.)
5. FASCO’s failure to receive the required infusion of cash threatened its existence as a viable company. (See Tr. at 365.)
6. Silver urged Spangenberg to obtain bridge financing for FASCO until funds from SFPEF II were available. (Tr. at 1407.) Spangenberg tried to do so but failed. (Tr. at 373.)
7. Nevertheless, on July 19, 1985, at a FASCO board meeting held at Silver’s New York residence, Silver committed SFPEF I to provide FASCO with $1,130,000 in “bridge financing” over a four month period beginning in August of that year. (Tr. at 374; PL’s Ex. 273.) Silver did not deliver on this promise, however. (Tr. at 374.)
The Court finds that Cipherlink was also experiencing crippling financial difficulties and that as of August 1,1985, Cipherlink was in dire need of cash, needing approximately $3 million to meet its business plan. (Tr. at 1059.) Some of the evidence in support of these conclusions is recited as follows.
1. As of August 31, 1984, Cipherlink had an accumulated deficit of $621,529. (PL’s Ex. 34.)
2. Five months later, as of January 31, 1985, the deficit had more than doubled to $1,302,806.33 (PL’s Ex. 35), and the company’s current liabilities exceeded its current assets by $22,655.38 (Id. (showing current assets of $150,-950.55 and current liabilities of $173,-605.93)).
3. Two months later, by March 31, 1985, Cipherlink had incurred another $260,-275 in losses; its accumulated deficit had grown to $1,563,081.48. (PL’s Ex. 36.)
4. As of July 31, 1985, Cipherlink’s accumulated deficit had grown to $2,083,249.89 and its current liabilities exceeded its current assets by $282,-047.19 ($43,305.01-$325,352.20). (PL’s Ex. 41.)
The Court finds that several other Fund I companies were performing poorly by the end of December 1984. One Point, Sonosties, Personal Diagnostics, Critiehem, and Mesa Diagnostics all showed signs of various degrees of poor performance. (See PL’s Exs. 44, 45, 54, 57, 61, 63, 64, 65, & 66.) Several of these companies operated at large net losses for the last fiscal year and had accumulated large deficits.
D. Silver’s Interests in the SFPEF I Portfolio Companies
The Court finds that Silver had a critical personal interest in the success of SFPEF I and its portfolio companies. He had significant ownership interests in Pathfinder and Avant-Garde/FASCO, had guaranteed the obligations of several of the Fund I portfolio companies, and sought to preserve a perception of value in the Fund I companies in order to raise money for the second fund. The Court summarizes some of Silver’s interests as follows.
In addition to being Chairman of Pathfinder’s Board of Directors, and its CEO, Silver had extensive personal interests in the success of Pathfinder. As of December 31, 1984, Silver owned 3.5 percent of Pathfinder’s stock. ADSA owned 7.8 percent of the stock. SFPEF I owned 61.9 percent. (PL’s Ex. 20 at 22.)
In addition to his ownership interests in Pathfinder, Silver had personally guaranteed a large amount of Pathfinder’s debt. On July 20, 1984, Silver personally guaranteed certain of Pathfinder’s obligations to ITT Commercial Finance Corporation (“ITT”) under a credit agreement. (PL’s Ex. 220.) In addition, prior to Pathfinder’s November 1984 IPO, Silver had personally guaranteed certain of Pathfinder’s leases and accounts payable to vendors. These guarantees amounted to approximately $391,000 by September 30, 1984. (PL’s Ex. 19 at 27.) Five months later, in March 1985, Pathfinder agreed to pay Silver a fee of $4,617 per month in exchange for his guaranteeing various of Pathfinder’s obligations. (Tr. at 89-91; PL’s Ex. 221.) After that agreement, Silver incurred further obligations on Pathfinder’s behalf. In December 1985, Silver personally guaranteed $175,000 in obligations Pathfinder owed to Hewlett-Packard Co. (Pl.’s Ex. 239.) At that time, Silver’s personal guarantees on behalf of Pathfinder were greater than $1 million. (Stipulation of Facts ¶23.) In addition to the one million dollars that he personally guaranteed, Silver had caused SFPEF I to guarantee more than $1 million of Pathfinder’s obligations before December 1985. (Stipulation of Facts ¶ 24.)
Similarly, Silver had extensive personal interests in Avant-Garde/FASCO. He was the controlling shareholder and Chairman of the Board of Directors of Avant-Garde (Stipulation of Facts ¶ 25; Pl.’s Ex. 297), and he was also a shareholder and Chairman of the Board of Directors of FASCO. (Pl.’s Ex. 297 at 9.) During various times, Silver personally guaranteed or caused SFPEF I to guarantee the’ obligations of FASCO. By December of 1985, these guarantees exceeded $250,000. (Stipulation of Facts ¶ 29.)
Silver was on the board of directors of both Cipherlink and Gateway.
E. Silver’s Plans for a Second Fund
Before March 1985, Silver discussed forming a venture capital fund that would invest primarily in health care entities with Jesse Acker (“Acker”), who was to become a general partner in SFPEF II. (Acker Dep. of 9/10/90 at 23-24.) They both believed that the computer industry was softening and that health care would become a “very, very strong, dynamically growing market.” (Acker Dep. of 9/10/90 at 24.) On that basis, and based on his belief that the proposed fund would be one of the first of its kind to be investing primarily in health care, Acker agreed to become Silver’s co-general partner in the second fund. (Acker Dep. of 9/10/90 at 24.)
The Court finds that, despite his professed intentions of investing primarily in health care companies, Silver planned to use funds from the second fund, SFPEF II, to help solve the problems of several SFPEF I portfolio companies, including Pathfinder, FAS-CO, and Cipherlink. Silver’s intent, in this regard, is demonstrated by his representations to Rork at Pathfinder, Spangenberg at FASCO, and Eric Lesin at Cipherlink.
Before he formed SFPEF II, Silver told Rork that SFPEF I was “tapped out” and would be unable to satisfy the company’s cash needs. (Tr. at 73.) Silver told Rork to find bridge financing until Silver could obtain funds from SFPEF II to bail Pathfinder out of its cash shortage. (Tr. at 72, 1406.) According to Rork, Silver represented that the second fund “would be more or less the second coming.” (Tr. at 72.) Silver told Rork not to discuss the fact that the second fund would be used to “bail out” Pathfinder. (Tr. at 72-73.)
Similarly, Silver told Spangenberg that SFPEF I did not have any funds for the company, but that SFPEF II would be able to provide funds to FASCO. (Tr. at 1407.) Silver told Spangenberg to find interim financing until the SFPEF II funds were available. (Tr. at 1407.)
Silver made the same type of representations to Eric Lesin (Tr. at 1407), and to R & B Commercial Management (“R & B”), an investor in Cipherlink (Pl.’s Ex. 105; Tr. at-1069-70,1407-08).
F. The SFPEF II Confidential Offering Memorandum
In April 1985, Silver, with Acker’s input, prepared a Confidential Offering Memorandum for SFPEF II. (PL’s Ex. 104; Tr. at 1258-59; Acker 9/10/90 Dep. at 63-64.) The investment program articulated in that Memorandum stressed that SFPEF II sought a “diversified portfolio composed primarily of emerging health sciences companies and secondarily of computer-related and other high technology companies.” (PL’s Ex. 104 at 12.) The “Investment Program” outlined discussed a variety of available investments in the health care industry and noted that “there are considerably fewer investment opportunities in the computer industry than in the health sciences industry.” (Id. at 19.) In addition, the memorandum made several representations that are particularly relevant here:
1. The Memorandum stated that SFPEF II would not borrow greater than twenty percent of the Fund’s net asset value. (Id. at 26.)
2. The Memorandum discussed SFPEF I’s investment in 11 portfolio companies, stating that the fund had invested $10.5 million in companies which ADSA valued at approximately $19.4 million. (Id. at 7.)
3. Based on ADSA’s valuations, the Memorandum claimed a “pre-tax cumulative internal rate of return to SFPEF I’s limited partners” of 45.03 percent per annum. (Id. at 7.) That discussion referred the prospective investor to the Memorandum’s Exhibit II, which summarized the means used by ADSA to value the SFPEF I companies. (Id. at Bates 0011700.)
4. The Memorandum represented that Silver would conduct five different exhaustive audits prior to investing.
The Court finds that Silver provided, or caused to be provided, a copy of the Confidential Offering Memorandum to each limited partner in SFPEF II. (Stipulation of Facts ¶ 43.) Lincoln received its copy before August 1,1985. (Id. ¶ 47.)
G. Silver’s Solicitation of SFPEF II Investors
The Court finds that Silver convinced Lincoln, and other investors, to invest in SFPEF II based on its purported status as a health care fund and based on SFPEF I’s represented track record.
Silver convinced Lincoln, through Berk, to invest $2 million in SFPEF II. Lincoln had previously declined to invest in Silver’s computer fund, SFPEF I. (Silver Dep. 274-77.) However, Silver solicited Lincoln’s participation in SFPEF II, in April 1985, through communications with Patrick E. Falconio, senior vice president of LNIMC, stating that the fund would “specialize in health sciences investments” and that SFPEF I had returns in 1984 of “45% pre-tax.” (Stipulation of Facts ¶¶ 33, 34; Pl.’s Ex. 107.) In May 1985, Silver represented to Falconio that SFPEF I “had done pretty well.” (Silver Dep. at 299.)
In the Spring of 1985, Falconio sent Berk a letter dated April 23, 1985 from Silver to Falconio and the SFPEF II Confidential Offering Memorandum. (Pl.’s Exs. 104, 107; Tr. at 126.) Falconio told Berk that he wanted Lincoln to invest in a venture capital fund that was “specifically tied into the health care industry.” (Tr. at 126.)
On June 24, 1985, Silver and Acker met with Berk and Falconio at Berk’s office in Northfield, Illinois. During the meeting, Silver represented that SFPEF II would be a health care fund, that at least 75 percent of its capital would be invested in health care ventures, and that SFPEF II would set up an advisory committee to “make sure that Fund II would not invest in Fund I companies.” (Tr. at 127-29; Pl.’s Ex. 114.) Silver said that the function of the advisory committee was to consult with ADSP with respect to the valuations of companies making up the fund and conflicts arising out of investments in SFPEF I. (Tr. at 131.) Later, Silver sent to Berk additional correspondence regarding SFPEF II. (Tr. at 268.) Based on Silver’s oral and written representations, Berk recommended that Lincoln invest in SFPEF II.
Lincoln followed Berk’s recommendation. In August 1985, Lincoln agreed to invest $2 million in SFPEF II. (Tr. at 135-37, 1223; Def.’s Ex. 136; Pl.’s Ex. 120.) Berk signed the SFPEF II Limited Partnership Agreement (“LPA”) for Lincoln. (Tr. at 136.)
Silver also convinced James Ray, who managed Raybank, to invest some of that company’s assets in SFPEF II. Raybank, formed by Ray, is a partnership which makes venture capital investments and investments in the stock and bond markets (Ray Dep. at 6, 10); it had previously invested in SFPEF I. (Ray. Dep. at 21.)
When Silver first approached him about investing in SFPEF II, Ray was not interested. He felt that SFPEF I was a “disaster” and that Pathfinder and Avant-Garde were overvalued investments. (Ray Dep. at 22.) However, Silver managed to convince Ray to meet with Silver to discuss Raybank’s possible investment in SFPEF II. (Ray. Dep. at 31-32.) At a meeting between Ray, Silver, Acker and others at the Seattle Yacht Club, on July 15, 1985, Ray expressed his belief that Pathfinder was a “dog”. (Ray Dep. at 31-32, 41.) Silver told Ray that he did not plan to invest further in Pathfinder and other Fund I companies and that SFPEF II would invest “eighty percent or better” of its capital in health care companies. (Ray Dep. at 51; Acker 9/10/90 Dep. at 32-38; Acker 9/28/93 Dep. at 63.)
The Court finds that Raybank invested in SFPEF II based on Silver’s representations.
The Court finds that Silver also convinced the Jefferson-Pilot Insurance Company to invest in SFPEF II. On December 17, 1985, Silver met with several officials of the Jefferson-Pilot Insurance Company (“Jefferson-Pilot”) to discuss the company’s possible investment in SFPEF II. Silver represented, in a memorandum, that SFPEF II would be a health care fund and that he expected SFPEF II to achieve “an internal rate of return by December 31, 1985 of 58% ... for its first five months of operation.” (Mills Dep. Ex. 2 at 1.) Several weeks later, Silver spoke by telephone with W. Hardee Mills (“Mills”), a senior securities analyst with Jefferson-Pilot, concerning Jefferson-Pilot’s possible investment in SFPEF II. (Mills Dep. at 24-26.) Thereafter, in February of 1986, when Mills visited Silver in Santa Fe, New Mexico, and on March 3,1986, when the two spoke by phone, the two discussed SFPEF II’s past and potential investments. (Mills Dep. at 29-34.) When discussing SFPEF II’s past investments, Silver understated the fund’s investment in Pathfinder and overstated its investment in NMR Imaging, a health-care investment. (Mills Dep. at 33-34, 55-57; Mills Dep. Ex. 8.)
The Court finds that Jefferson-Pilot invested in SFPEF II based on Silver’s representations to Mills and others, particularly his representations that the SFPEF II was going to be a health-care fund. (Mills Dep. at 30,42.)
The Court also finds that Silver similarly convinced Modern Woodmen of America to invest in SFPEF II. From February 1985 to some time before July 1986, Silver, on occasion, solicited the investment of Modern Woodmen of America (“Woodmen”) through its Treasurer and Investment Manager Gary E. Stoefen (“Stoefen”); Silver made several references to his intentions to invest in the “health sciences” through a second venture capital fund. (Stoefen Dep. at 14-18.) At first, Woodmen decided not to invest in SFPEF II, but Silver persisted. (See Tr. at 16, 20-23.)
Sometime before July 1986, Silver and Acker met with Stoefen and others from Woodmen to discuss an investment by Woodmen in SFPEF II. (Stoefen Dep. at 21-23.) During the meeting, Silver told Stoefen that at least eighty percent of SFPEF II’s funds would be invested in health-care delivery companies. (Stoefen Dep. at 23.) Silver followed the meeting with a telephone call and at least two letters, one dated July 29, 1986 and one dated August 18, 1986. (Pl.’s Exs. 196, 201.) In the July 29 letter, Silver stated that: (1) SFPEF II was a health care delivery venture capital fund, and (2) that he, and unnamed others, were “particularly pleased with the quality of the investments and deal. flow for SFPEF II.” (Pl.’s Ex. 196.) Silver made this statement despite the fact that, prior to the letter, Pathfinder had stopped selling computers and FASCO was on the verge of collapse. In the August 18 letter, to Kevin Kubik in Woodmen’s investment department, Silver stated: “Please be assured that Santa Fe Private Equity Fund II is a health care delivery-oriented venture capital fund and that it intends to invest 80% of its committed capital in health care delivery companies.” (Pl.’s Ex. 201.) Stoefen considered it so important that SFPEF II invest no more than 20 percent of its investments in non-health care related ventures that he demanded, as a condition to Woodmen’s investing in SFPEF II, a written warranty that SFPEF II’s “investments will substantially comprise (approximately 80%) of its committed capital to health-care delivery companies.” (Pl.’s Ex. 202.) Silver provided the requested warranty by signing and returning Stoefen’s request. (Pl.’s Ex. 202; Stoefen Dep. at 30-32.)
The Court finds that, based on Silver’s representations, Woodmen invested in SFPEF II in August of 1986. When, in October 1986, Woodmen learned that Silver had not invested 80 percent of its capital in health-care investments, it decided, like Lincoln, to delay paying its second capital call. (Stoefen Dep. at 37.)
The Court finds that Silver solicited many-other potential investors through the U.S. mails, sending a variety of different types of memoranda. (see PL’s Exs. 102,106,109,130, 132,137,139,141,142,150,154,160,174,180, 185, 188, 189, 192.) Silver also solicited investors and sent memoranda by Federal Express. (See Pl.’s Ex. 129, 153, 193.) These communications generally emphasized that SFPEF II would specialize in the health care industry or emphasized that SFPEF I had been successful, or failed to mention the failures of and investments in Pathfinder, FAS-CO, and Cipherlink. Between August 1985 and February 1987, Silver regularly sent materials via the United States mail in conducting the business of SFPEF II and ADSP. (Stipulation of Facts ¶ 40.) During that time period, Silver used the interstate mails and telephone lines numerous times. (Stipulation of Facts ¶¶ 36-41.)
The Court finds that between August 1985 and October 1986, Silver regularly used the United' States mail and wires to cause the SFPEF II limited partners to wire their capital, contributions to SFPEF II.
H. SFPEF II
SFPEF II was formed in August of 1985. Under the terms of the Limited Partnership Agreement (the “LPA”), the limited partners were to contribute capital through installment payments called by Silver. (PL’s Ex. 120.) The LPA stipulated that Silver could not call more than fifty percent of a particular partner’s contribution before December 1, 1986 and that Silver could not call more than seventy-five percent of such a contribution before August 1,1987. (Id.)
Silver made SFPEF IPs first capital call in August of 1985. The limited partners paid in $2,537,500. (PL’s Ex. 301.) From August until October 1985, Silver invested heavily in, or made payments to, Pathfinder, FASCO, Cipherlink, ADSA, ADSP, and SFPEF I. (See PL’s Exs. 301, 313, 314A, 315A) By the end of October 1985, SFPEF II was out of cash and had overdrawn its account at the Los Aamos National Bank by more than $650,000. (See Tr. at 466; PL’s Ex. 144; PL’s Ex. 301.)
In November of 1985, Silver obtained two lines of credit for SFPEF II, pledging the same collateral for both. First, on November 6, 1985, Silver obtained a $2.5 million revolving line of credit from the First Interstate Bank of Denver, N.A. (“First Interstate”). (PL’s Exs. 70 (AY03790 — AY03794), 78.) Silver pledged all of SFPEF II’s capital calls as collateral for the line of credit and promised not to “pledge, mortgage, or otherwise encumber” or create a security interest in that collateral. (PL’s Exs. 70 (AY03790, AY03791), 78; Tr. at 1402.) SFPEF II borrowed $1.4 million under that line of credit, just under the maximum it could borrow based on the agreement’s permitted borrowing base. (See PL’s Ex. 155 (stating that the most that could be borrowed was $1.45 million); PL’s Ex. 169.)
Second, on November 20, 1985, Silver, for SFPEF II, obtained a second line of credit, for $950,000, from the First National Bank of Boston (“Bank of Boston”). (PL’s Ex. 79; Tr. at 1402.) In return for the line of credit, Silver pledged the same collateral pledged to First Interstate and promised that the total liabilities of SFPEF II would not exceed $1,050,000, despite the fact that SFPEF II already owed $1.4 million to First Interstate.
The Court finds that from August 1985 through December 1985, Silver was investing predominantly in Fund I computer companies, primarily Pathfinder and Avant-Garde/FASCO, using Fund II monies. When it became apparent that Fund I would be unable to repay Fund II, Silver reclassified the receivables as investments.
Before the end of 1985, Acker became concerned with Silver’s investments in Fund I computer companies and not in health care companies. (Acker 9/10/90 Dep. at 42-44.) He expressed his concerns on numerous occasions. (Id. at 43.) Silver indicated that solving the Pathfinder situation was his first priority. (Id. at 44; Acker 9/10/90 Dep. Ex. 7 at 180.) Acker eventually resigned.
The Court finds, that by the end of the 1985, SFPEF II, like SFPEF I, Pathfinder, Avant-Garde/FASCO, and Cipherlink, was in a financial crisis. And, the fund was nowhere close to fulfilling its mission of becoming a health care fund. As of December 31, 1985, SFPEF II’s investments were as follows:
Cipherlink $ 260,000
Critichem 92,000
Avant-Garde/FASCO 1,145,480
NMR 193,500
Pathfinder 1,753,567
Preventaeare 999,999
Total $4,444,546
(PL’s Exs. 11, 345 (listing similar figures).) Of the $4,444,546 invested by Silver for SFPEF II, $1,192,999, or 26.8 percent, had been invested in health-eare related companies, Preventaeare and NMR. The remaining investments had been invested in Fund I computer-related companies. Before being audited by Arthur Young & Company, SFPEF IPs ledger listed $2,503,801.13 in payments to SFPEF I portfolio companies on behalf of SFPEF I. (Pl.’s Ex. 315(a).) This $2.5 million was listed as a receivable from SFPEF I (Tr. at 696-97), which was given a going concern warning for the year ended December 31,1985 (Pl.’s Ex. 5.) After the Arthur Young audit, the receivables were reclassified as investments. (Tr. at 696-97.) However, there was no documentation, existing prior to December 31, 1985, supporting the view that the $2.5 million was considered to reflect investments in Fund I companies, rather than as receivables from that Fund. (Tr. at 698.) Nevertheless, in February of 1986, Silver represented the payments to Fund I companies as investments to the limited partners. (See Pl.’s Ex. 345.)
Silver had assigned associate Kyle Lefkoff to the oversight of Pathfinder, including due diligence reviews. In the fall of 1985, Lef-koff suggested to Silver that Pathfinder be closed or placed into bankruptcy. Silver responded that doing so would prevent him from attracting investors in SFPEF II. (Tr. at 478.)
In January of 1986, Lefkoff thoroughly reviewed Pathfinder’s financial status and twice recommended to Silver that Pathfinder be closed immediately and placed in bankruptcy. (See Tr. at 480-82.) Silver responded that he could not follow Lefkoffs recommendation because his personal guarantees would be called. (Tr. at 482.)
From February 20 to 22,1986, the SFPEF II advisory committee met at Innisbrook in Tarpon Springs, Florida. (See Pl.’s Ex. 345.) Berk, for Lincoln, did not attend, but participated by phone. A memorandum dispensed by Silver revealed Silver’s favoritism for “follow-on” investments in SFPEF I computer companies. (Pl.’s Ex. 345.) The members of the advisory committee were upset at Silver’s failure to invest the limited partners funds as promised. They admonished him not to invest any more in Fund I companies.
On May 5, 1986, the SFPEF II Advisory Committee met for the second time. (Tr. at 150-53; Pl.’s Ex. 191.) In a memorandum prepared for the committee for that meeting, Silver represented that “It appears that SFPEF II has put a lid on its follow-on investments in non-health care companies at $3,500,000.” (PL’s Ex. 191 at Bates 000084.) The memorandum also revealed, however, that Silver had invested an additional $741,-000 ($3,532,000 as of 4/30/86 compared with $2,791,000 as of 12/31/85) in Pathfinder, FAS-CO and Cipherlink since December 31, 1985. (Tr. at 150-52; PL’s Ex. 191 at Bates 000084.)
Based on Silver’s revelations, Berk and Falconio decided to have Lincoln’s internal auditor, David Martin, review SFPEF II’s books and records. (Tr. at 153.) Martin conducted the review and found what he believed to be several “irregular” elements to the SFPEF II books, including a transfer of $330,000 of SFPEF II’s funds to Silver’s personal account. (Tr. at 153-54.)
Martin’s findings and Silver’s inadequate responses thereto, prompted Lincoln to hire, in July 1986, the accounting firm of Ernst & Whinney to look at SFPEF II’s books. (Tr. at 154.) Ernst & Whinney provided Lincoln with a report dated August 8, 1986 summarizing its findings. (PL’s Ex. 198.) The report revealed that SFPEF II had conducted various transactions without “clear authority” under the LPA. (Id.) Among the potential violations was the fact that SFPEF II had outstanding borrowings in the amount of $2,735,705, or $235,705 more than the $2,500,-000 borrowing permitted by a waiver of SFPEF IPs 20 percent of net assets value requirement. (PL’s Ex. 198.) The Ernst & Whinney report also showed that SFPEF II had made a $1,088,406 transfer, interest free, to ADSP. (Pl.’s Ex. 198 at Bates 0002090.) The records also show that $333,202 and $23,700 had beén lent to Silver interest free. (Id.) Of that, Silver paid back $316,000. (Id.)
Based on the Ernst & Whinney report, Lincoln decided to delay payment on its second capital call. (Tr. at 161-62.) Silver responded by attempting to answer questions posed by Lincoln and by demanding payment of Lincoln’s second capital call. (Pl.’s Ex. 207.)
The Court finds that, despite the warnings of his investors, Silver failed to dedicate SFPEF II’s funds to health care companies, as promised. During 1986, SFPEF II made small investments in health care funds in May ($25,000), July ($20,000), August ($30,-000), and September ($40,000), representing 4 percent, 61 percent, 2 percent, and 2 percent of the funds invested in the corresponding month. In March, April, June, October, November, and December, no SFPEF II funds were invested in health care companies, despite the fact that the Fund dispersed $188,057, $289,701, $127,289, $130,581, $84,-020, and $90,000 in those respective months. (See PL’s Ex. 301.)
The Court finds that, as of December 31, 1986, SFPEF II’s had made the following investments:
Cipherlink $ 455,000
Critichem 41,688
Avant-Garde/FASCO 1,003,289
NMR 353,500
Pathfinder 2,493,791
Preventacare 999,999
PDT Systems Corp. 20,000
Total $5,367,267
(See Stipulation of Facts ¶ 50.) Thus, from 1985 to 1986, Silver decreased SFPEF IPs investments in FASCO and Critichem by a total of almost $192,413, increased investments in Pathfinder by $740,224, increased investments in Cipherlink by $195,000, increased investments in NMR by $160,000, held investments in Preventacare constant, and added a $20,000 investment in PDT Systems Corporation. (Compare Stipulation of Facts ¶ 49 with Stipulation of Facts ¶ 50.)
In September 1986, the SFPEF II limited partners met with the SFPEF I limited partners and with Silver at Hilton Head, South Carolina. After meeting with Silver, the limited partners from both funds decided to form an ad hoc committee consisting of a limited partner from each fund and a limited partner of both funds. The ad hoc committee was responsible for deciding what to do about the two funds and their general partners, ADSA and ADSP. Silver fought his removal, representing that he was pursuing leveraged buy outs, or LBOs, for Pathfinder and FASCO. (Def.’s Ex. 100.)
In February 1987, the limited partners of both SFPEF I and SFPEF II voted unanimously to remove ADSA and ADSP, respectively, as the general partners of SFPEF I and SFPEF II and to place those Funds into receivership. That same month, Judge Bruce Kaufman of the First Judicial District Court for the County of Santa Fe, New Mexico, appointed John Clark (“Clark”) as receiver for SFPEF I and for SFPEF II.
Clark conducted a broad investigation of SFPEF I and SFPEF II, with the help of two law firms and an accounting firm. Based on his investigation, Clark recommended to Judge Kaufman that SFPEF I be placed into bankruptcy. In May 1987, Clark filed for SFPEF I a Chapter 7 petition for bankruptcy protection in the United States District Court for the District of New Mexico. At or near that time SFPEF II was, or became, responsible on a loan from Los Ala-mos National Bank (“LANB”) to SFPEF I in the amount of $826,000, and on a note signed by SFPEF II in the amount of $350,000 from SunWest Bank. SFPEF II was also responsible for its $375,000 guarantee of Pathfinder’s obligations to ITT. LANB, SunWest, and ITT all sued SFPEF II. Clark, for SFPEF II, settled each of those claims for less than the amount owed.
Clark’s investigation of SFPEF II revealed, in his opinion, the worst example of mismanagement, fraudulent use of funds, and self-dealing he had seen in thirty years in the business world. (Tr. at 812.) At trial, he testified:
Well, generally speaking, I can tell you that I found that Fund II was the subject of gross mismanagement, fraud, deception, self-dealing. I have been in the business world for 30 years, roughly, and president of three different companies. I have never seen such gross mismanagement and fraudulent use of funds and self-dealing. I have never seen such activity.
(Tr. at 812.) The Court credits this testimony.
The Court finds that SFPEF II collected a total of $9,134,596, constituting $7,134,596 in paid-in capital before the appointment of the receiver, and an additional $2 million collected by the receiver to cover the claims of SFPEF II’s creditors and to wind down the Fund’s affairs. The Court finds that of the more than $9 million ultimately collected by SFPEF II, Lincoln contributed $900,000, consisting of $500,000 in response to the Fund’s first capital call and an additional $400,000 to resolve the Fund’s affairs. SFPEF II claims that Silver and ADSP caused its loss of $9,134,596. Lincoln claims that Silver and ADSP caused its loss of $900,000.
The Court finds that Silver’s, and ADSP’s, gross mismanagement, fraud, deception, and self-dealing caused SFPEF II a loss of $7,134,596, the paid-in capital before the appointment of the receiver. SFPEF II, by Lincoln, has failed to prove its entitlement to recovery of the additional $2 million collected by the receiver. In the opinion of the Court, Plaintiff has failed to prove that these damages were caused by Silver or ADSP. While SFPEF II may be entitled to various legal or accounting fees collected after the receiver was appointed, it has failed to distinguish those fees from funds collected to pay SFPEF II’s creditors. The limited partners were not required to pay off SFPEF II’s creditors; they had limited liability. The loss of such payments cannot, therefore, be attributed to Silver.
Similarly, the Court finds that Silver caused Lincoln a loss of $500,000, its first capital call contribution. While Silver may also have caused a loss of some part of the additional $400,000 paid-in by Lincoln, Lincoln has failed to prove such damages by distinguishing monies paid to creditors from monies paid for professional services.
I.SFPEF II’s Investments in, Payments to, and Guarantees for Silver, SFPEF I and its Portfolio Companies, ADSP and ADSA
The-Court finds that Silver caused SFPEF II to make vast investments in Pathfinder from August 1985 through February of 1987, despite admitting that, as of late 1985, computer retailing was “a dumb place to be” (Tr. at 1275). Among the evidence in support of this proposition is the following.
1. SFPEF II invested $1,753,567 in Pathfinder between August 1985 and December 31,1985. (Stipulation of Facts ¶ 49.)
2. SFPEF II invested $740,224 in Pathfinder between December 31,1985 and December 31, 1986, for a total investment of $2,493,791. (Stipulation of Facts ¶ 49.)
3. SFPEF II paid out $264,934 for Pathfinder during February ($70,000), March ($25,000) and April ($169,934) 1986. (Pl.’s Ex. 301.) The payments included legal fees, inventory payments, accounting fees, and payroll expenses. (Id.)
4. SFPEF II paid out $145,705.50 for Pathfinder in May and June and received $30,000 back, a net increase of the Fund’s investment of $115,705.50. (Id.)
5. SFPEF II apparently made no investments in Pathfinder in July 1986, when the company had ceased operations, but in August through October of that year, after Pathfinder had stopped selling computers, SFPEF II disbursed another $65,145.09 to pay a variety of fees for the company. (Id.)
The Court finds that Silver caused SFPEF II to invest more than a million dollars in FASCO. The Court bases this finding on the following.
1. On August 28,1985, Silver wrote Span-genberg a letter enclosing a $50,000 check for FASCO payroll and other “urgent accounts payable.” (PL’s Ex. 275.)
2. SFPEF II eventually invested a total of $1,003,389 in FASCO. (Stipulation of Facts ¶ 50.)
The Court finds that Silver caused SFPEF II to invest $455,000 in Cipherlink by December 31, 1986. (Stipulation of Facts ¶ 50.) This finding is supported by the following.
1. On August 20, 1985, Silver sent Eric Lesin a letter advising that SFPEF II was committing $400,000 to Cipherlink. (PL’s Ex. 215.)
2. As of December 31, 1985, SFPEF II had invested $260,000 in Cipherlink. (Stipulation of Facts ¶ 49.)
3. SFPEF II’s investment grew to $455,-000 by the end of the year.
During the period of August 1985, when SFPEF II commenced investing, through December 31, 1986, SFPEF II disbursed greater than five and a half million dollars to, or on behalf of, Silver individually, ADSP, ADSA, or SFPEF I. (Tr. at 670-71.) These payments included $2,318,351.23 to ADSP, $2,503,801.12 to SFPEF I, and $284,322.13 to ADSA. (Tr. at 671-700.) Portions of that amount of money were repaid, and ADSP was entitled to a portion of that money as expenses for “Making/Selling Investment.” (See PL’s Exs. 120, 301.) However, the Court finds that the Plaintiff proved by a preponderance of the evidence, that Silver engaged in a pattern of unlawful self-dealing that endangered the SFPEF II’s limited partners’ investments and eventually resulted in the partnership’s loss of capital.
The evidence shows, that at minimum, Silver disbursed $2,318,351.23 to or on behalf of ADSP. (Tr. at 680; PL’s Ex. 314(a).) Interest was never charged on those funds. And, as of December 31, 1986, $1,263,407.32 was recorded in SFPEF II’s books as a receivable from ADSP, and was not recorded as a payment for the making or selling of an investment. (PL’s Ex. 301.) That amount was never repaid to SFPEF II. (Tr. at 680.)
Of the $2,318,351.23 disbursed on behalf of ADSP, some were made directly to Silver, ADSA and SFPEF I. At minimum, the payments on behalf of ADSP included a $333,-202.03 payment to Silver’s individual account at LANB. The Court finds that this payment was part of a $1,140,00 wire transfer to SFPEF II’s account at LANB in New Mexico from First Interstate in Colorado. Although Silver claims that the payment to his account was an error, it is the opinion of the Court that the evidence proved otherwise.
On November 4, 1985, Silver sent a letter to Bill Enloe, President of LANB. (PL’s Ex. 367.) The letter indicated that SFPEF II would acquire a $2.5 million line of credit from First Interstate, that SFPEF II could then borrow up to $1.44 million, and that SFPEF II would repay LANB $750,000 of the Fund’s debt to that bank. Silver told Enloe to determine how he wished to apply the $750,000. On November 5, 1985, $1,140 million was wired from First Interstate to LANB. The funds were deposited into the following accounts:
Silver’s account $ 333,202.23
ADSP account 54,575.97
Avant-Garde account 18,753.00
ADSA Payroll account 25,247.05
ADSA account 2,286.38
Pathfinder account 15,094.00
SFPEF II account 6,085.62
SFPEF II account 654,140.75
SFPEF I account 30,025.00
Total $1,140,000.00
(PL’s Ex. 360.)
On December 26,1985, Silver repaid $316,-000 of the $333,202.23 that had been transferred out of SFPEF II’s account. (PL’s Exs. 301, 362; Enloe Dep. at 18-19.) Silver funded the repayment by taking out a personal loan in the amount of $316,000 at LANB. (PL’s Ex. 362; Enloe Dep. at 18-19.)
The Court finds that Enloe must have made the account transfers based on Silver’s specifications and not by mistake. Based on Enloe’s testimony as to his bank’s practices and the uneven amounts transferred, the Court concludes that Enloe must have been directed to make the various transfers.
The $2,318,351.23 in payments on behalf of ADSP also included several large transfers to ADSA for payroll and other expenses. (Tr. at 682-85.) These transfers were made despite the fact that ADSA had been issued a going concern warning for the year ended December 31, 1985. (Pl.’s Ex. 17; Tr. at 687.)
Similarly, the $2,318,351.23 included payments on behalf of ADSP to SFPEF I for interest payments, attorneys’ fees, and other expenses. These transfers were made despite the fact that SFPEF I warranted, and received, a going concern warning for the year ended December 31,1985. (Pl.’s Ex. 5.)
The Court finds that Silver dispersed an additional $2,503,801.12 to or on the behalf of SFPEF I. (Tr. at 693.) These payments, but for a $4,432.18 payment in June of 1986, were investments in portfolio companies or cash transfers. They were originally recorded as receivables from SFPEF I, but were reclassified as investments prior to Arthur Young & Company’s audit for the year ended December 31,1985. (Tr. at 695-97.)
The Court finds that Silver dispersed an additional $284,322.13 to ADSA from SFPEF II. (Tr. at 699-700.)
In addition, through December 1985, Silver used SFPEF II accounts to cover the overdrafts of SFPEF I, ADSP, and ADSA at LANB.
Finally, the Court finds that Silver caused SFPEF II to guarantee, on September 5, 1986, an $826,705.89 loan to.SFPEF I from LANB, for which Silver pledged the capital calls of some of the SFPEF II limited partners, that Silver had SFPEF II sign a note in the amount of $350,000 due to the Sun-West Bank, and that Silver had SFPEF II assist ADSP in obtaining a $150,000 loan, on July 22, 1986, from the Western Bank of Santa Fe, for which Silver assigned certain capital calls of SFPEF II limited partners, as collateral.
J. The Financial Condition of several SFPEF I Portfolio Companies after the formation of SFPEF II
The Court finds that, despite large infusions of cash from SFPEF II, Pathfinder’s computer-related business failed. Steve Rhodes and then Jeffrey Boetticher succeeded Rork as President of Pathfinder. (Tr. at 1275.) In the fall of 1985, Pathfinder was unable to obtain IBM or Apple computers for sale. (Tr. at 108-112; Pl.’s Exs. 19, 20, 23, 26.) However, Pathfinder acquired two small computer retail chains, Computerama and Rainbow Computing, both of which sold IBM computers. (Tr. at 107-09; Pl.’s Exs. 23, 26, 236.) Pathfinder was therefore able to sell IBM computers through these stores. Soon thereafter, IBM terminated Computer-ama’s and Rainbow Computing’s Retail Dealer Agreements when Pathfinder failed to pay those companies’ combined obligations of $580,023.53, which Pathfinder assumed. (Tr. at 108-09; Pl.’s Ex. 236.)
On January 10,1986, Pathfinder’s Bo