By Dean Seal

Law360 (May 11, 2020, 8:45 PM EDT) -- The U.S. Securities and Exchange Commission told a Connecticut federal judge on Monday the jury that found against Westport Capital at a trial in March was not unduly influenced by the specter of the COVID-19 pandemic, as the investment adviser now insinuates.

The SEC is opposing a bid by Connecticut-based Westport Capital Markets LLC to either get a new judgment or a new trial on claims its owner Christopher McClure defrauded investors and generated roughly $780,000 in undisclosed markups and fees.

Westport claims the evidence presented at trial should not have reasonably led the jury to find in the SEC's favor and cites an issue with the verdict form, bias revealed in a post-trial letter from one of the jurors to the SEC's counsel, and the looming coronavirus pandemic as having all contributed to a "miscarriage of justice."

The SEC responded Monday that Westport's "improper, speculative and substantively insufficient" arguments should not be allowed to disturb the verdict.

"This jury was exceptionally dedicated, and its well-supported verdict should not now be disturbed by defendants' coronavirus argument or any of the other arguments advanced in their motion," the agency said.

The SEC sued Westport and McClure in December 2017 for allegedly sticking clients with risky securities from the firm's proprietary brokerage account and costlier share classes of mutual funds.

According to the SEC's complaint, Westport Capital had established relationships with investment banks in which the firm would buy discounted shares in securities offerings that were being underwritten by those banks. Westport Capital would then sell those shares to client accounts at full price and keep the difference — the markup — for itself, the agency said.

The firm would often make 2% to 3% off each share sold to a client and, from fiscal years 2012 through 2015, collected roughly $650,000 in these markups, the agency alleged. These syndicate offering shares were risky and resulted in about $1.2 million in losses for affected clients, including one client who allegedly had "told McClure that he wanted his accounts to be invested conservatively," according to the complaint.

The agency additionally alleged Westport Capital and McClure didn't disclose they were getting thousands of dollars from annual marketing and distribution fees, dubbed 12b-1 fees, that were charged to clients with Class A mutual fund shares in their portfolios. From 2012 to 2017, the firm collected roughly $130,000 in these fees, according to the SEC.

In October 2019, U.S. District Judge Jeffrey A. Meyer granted the SEC partial summary judgment in a ruling that Westport and McClure had violated the Investment Advisers Act by engaging in "unauthorized principal transactions" and failing to disclose conflicts of interest. The question left for trial was whether the actions were intentional and "whether defendants acted willfully under the anti-fraud provisions of the Advisers Act Section 207."

After a five-day trial that spanned the week of March 9, a jury returned a verdict on March 16 that found against Westport and McClure based on two separate theories of liability for counts related to both their markup practices and 12b-1 fee practices.

Westport and McClure filed a motion on April 27 for a new judgment in their favor, arguing there was insufficient evidence upon which a reasonable jury could find that the defendants had willfully made false statements, and that the design of the jury verdict form suggested the case had already been largely decided.

On top of that, Westport and McClure said, a letter written to the SEC after the trial by "juror number five" displayed a clear bias against the investment adviser that must have affected deliberations. And the outbreak of COVID-19 revved up during the trial, a unique factor that only amplifies the questionability of the verdict, Westport and McClure argued.

The SEC responded Monday that there was ample evidence produced at trial to support the jury's "common-sense conclusion" that McClure took unfair advantage of his clients' accounts and doubled his compensation with practices he never disclosed.

As to their other points, Westport and McClure did not object to the jury verdict form during trial and cannot now do so, the SEC said, adding the verdict was errorless nonetheless. The defendants argued the verdict form should not have been "pre-marked" to show the summary judgment finding that Westport and McClure had failed to adequately disclose their conflicts of interest, but disclosing an established element of the case is not an error, the SEC said.

Westport and McClure had also taken issue with a juror's letter to the SEC after the trial, in which the juror thanked the SEC for its public service, congratulated it on its trial win, and stated that the defendants "didn't have a chance." The letter also noted McClure's wife wore expensive shoes at the trial, which was apparently noticed by members of the jury.

But the letter's observations do not mean the juror or the jury as a whole had not been fair and impartial during the trial, the SEC responded.

"The letter could have been written by someone who had no opinion, or even a negative opinion, of government enforcement, found himself pleasantly surprised by the presentation during the trial, and felt moved enough to contact counsel," the agency suggested. "The juror could be grateful for commission counsel's public service because the juror had found, like his fellow jurors, that the defendants intentionally defrauded people whom the juror heard testify."

And the defendants' speculation about the effect of the growing specter of the coronavirus pandemic cannot be taken seriously, the SEC said. All participants in the trial were aware of the coronavirus situation throughout, it led the defendants' counsel to agree to do closing arguments a day early, and the jury still elected to continue deliberations past the week of the trial and into the following Monday, rather than rush to have them finished by the end of day five, the agency said.

"As far as counsel is aware, the jurors each returned without complaint or an expression of any concern or dismay at returning to the courthouse during the growing health criticism," the SEC said. "The only thing this series of events makes clear is that this jury was particularly conscientious and devoted to its oath."

The SEC and counsel for Westport Capital and McClure did not immediately respond to requests for comment Monday.

The SEC is represented in-house by Michael C. Moran and Kathleen Burdette Shields.

Westport Capital and McClure are represented by Richard Levan and Jon-Jorge Aras of Levan Legal LLC and Brian E. Spears of Spears Manning & Martini LLC.

The case is SEC v. Westport Capital Markets LLC et al., case number 3:17-cv-02064, in the U.S. District Court for the District of Connecticut.

--Additional reporting by Jon Hill and Philip Rosenstein. Editing by Janice Carter Brown.

For a reprint of this article, please contact reprints@law360.com.