I. What was Connolly
Obligated to Do By Company Bylaws? Was
He Permitted to Loan Funds Between Companies and Commingle Assets?
David Connolly was president of Connolly Properties, and his
wife Donna was vice president. Connolly
Properties solicited investment in about 30 different apartment owning
companies in PA and NJ. A prospectus was
issued for each company, describing the method of operation. Connolly was the Managing Member of the
Limited Liability Company (LLC) set up for each investment. Connolly pled guilty to Securities Fraud and
Money Laundering in February 2013 in connection with ownership and management
of these companies by Connolly Properties.
Per the Operating Agreement for each LLC, Connolly assumed
the responsibility of Managing Member. Article
2.2 of the Operating Agreement contains Separateness Covenants, which dictate
that the Company will be independent from any other entity. Specifically, it states that the Company
will:
i)
maintain a separate identity
ii)
maintain its accounts, books and records separate from
any other entity
iii)
maintain its accounts, books, records as official
records
iv)
not commingle its funds with those of any other entity
v)
hold its assets in its own name
vi)
conduct business in its name
vii)
maintain its financial statements and accounting
records separate from any other entity
viii)
pay its own liabilities out of its own funds and assets
ix)
through xvi) - other articles
xvii)
maintain adequate capital in light of contemplated
business operations
Additionally, Article 6.1 specifies the powers of the
Managing Member, David Connolly.
Specifically, it states that the Managing Member will:
a)
be David Connolly
b)
have the following powers:
i.
borrow money for the purposes of the Company
ii.
deposit or invest funds that may not be available for
current distribution
iii.
settle any actions that are in the interest in and
protection of the company
iv.
establish reserve funds our of revenues received by the
Company
What the evidence shows Connolly did as Manager:
1.
commingled the funds of all 30 companies in the
Connolly Properties master account, in violation of 2.2.iv, 2.2.v, 2.2.viii and
2.2.xvii
2.
did not maintain independent accounting of each
property, as required by 2.2.ii (during a 2011 legal action, Connolly claimed it
would cost in excess of $100,000 to do a formal accounting of just two of
thirty entities, because he had not maintained the accounts independently)
3.
refinanced the mortgages of 20 companies and withdrew
over $35 million in equity, without informing beneficiaries (investors), and
used the funds to pay non-company expenses, distributions, and to finance his
own personal development projects, in violation of 2.2.iv, 2.2.v, 2.2.xvii and
6.1.b.iv
Conclusion: Connolly was required to not commingle the
assets of companies, but he commingled them all together, which is why they all
failed within a short window of time.
Connolly was permitted to loan
money from each company – however, only
if that company maintained a cash reserve and was fiscally healthy and could
afford the loan. Connolly registered
only one loan from one company to another – out of approximately 30 refinancing
transactions (20 companies refinanced, 10 refinanced twice). Therefore, he knowingly violated numerous
requirements of the Operating Agreement for each company, including making
undocumented “loans” by dumping all the cash from refinancing into one massive
account. These were not in fact loans,
but disallowed uses of company assets on a grand scale.
II. What is a
Security?
According to the Federal Code, a security is “any . . .
transferable share, investment contract, . .or, in general, any interest or
instrument commonly known as a ‘security.’”
In order for a “security” to be deemed an “investment
contract” within the meaning of the Securities Act of 1933, § 77a et seq.,
there must be an investment of money in a common enterprise with profits to
come from the entrepreneurial and management efforts of others. According to this definition, Connolly sold
securities to his investors.
III. What is
Securities Fraud?
The essential elements of securities fraud are:
1) the
defendant engaged in a scheme to defraud,
2) the
defendant did so in connection with the purchase of sale of securities,
3) in
connection with the purchase or sale of securities the defendant made use of
any means or instrumentality of interstate commerce, or of the mails, or of any
facility of any national securities exchange,
4) the
defendant acted with the intent to defraud.
IV. Connecting the
Dots to Security Fraud
Since for several years, Connolly knowingly used funds
raised to purchase securities in one company, or earned by one company, to pay
the expenses of others, distributions to investors in other companies, and to
purchase development properties for his own use, this establishes elements of
1), 2) and 4). These transactions were
interstate, since the properties were located in NJ and PA, and investors were
located in NJ, PA and FL, as well as other states, establishing element 3). Hence all of the elements are present.
V. Connolly’s New
Defenses in Appeal
Connolly is taking a shotgun approach in attempting to
appeal his conviction and sentence. In
addition to claiming ineffective assistance of counsel, Connolly has claimed:
1) He
was not charged with dealing Securities (he was)
2) He
didn’t know anything about Securities laws (the evidence shows he did)
3) He
didn’t believe he was dealing in Securities (the evidence shows he did)
The superseding indictment states Connolly dealt
securities. Proof that Connolly was
aware he was dealing in securities is located here.. This defense will fail. Furthermore, to win his appeal, Connolly will
have to show he was innocent – which papers filed thus far do not demonstrate.
