FILED: NEW YORK COUNTY CLERK 09/14/2016 09:41 AM INDEX NO. 654856/2016 NYSCEF DOC. NO. 16 RECEIVED NYSCEF: 09/14/2016 JAMS NEW YORK, NEW YORK ---------------------------------------------------------------x : ALTERNATIVE ACCESS CAPITAL, LLC : : : Claimant, : No. : - against : : PRIME GROUP HOLDINGS, LLC and : PRIME STORAGE FUND I, LLC, : : Respondents. : : ---------------------------------------------------------------x DEMAND FOR ARBITRATION Claimant Alternative Access Capital, LLC ( AAC ), by and through its undersigned attorneys, Patterson Belknap Webb & Tyler LLP, for its Demand for Arbitration against respondents Prime Group Holdings, LLC, Prime Storage Fund I, LLC and their affiliated and controlled entities (collectively Prime ), alleges as follows: NATURE OF CLAIM AAC brings this action to recover for Prime s blatant breaches of the parties Placement Agent Agreement (the Agreement ). AAC is a registered broker-dealer that provides capital raising services for investment firms seeking introductions to high-net-worth investors and their advisors, select tax-exempt institutions and their consultants. In late 2014, Prime asked AAC to help Prime find investors for a fund Prime had formed to acquire selfstorage facilities (the Fund ). The parties entered into the Agreement in early January 2015. Prime agreed to pay AAC a placement fee equal to 2.5% of any amount Prime received from each investor AAC referred to Prime (the Placement Fee ), to be paid in four quarterly installments beginning within 30 days of the investment. To allow AAC to timely assess Prime s
compliance with its payment obligations, Prime also agreed to (i) promptly identify any investor who committed to provide capital to Prime, (ii) obtain from each investor, and provide to AAC, a written acknowledgement of AAC s role and placement fee, and (iii) grant AAC access to and copies of documents sufficient to allow AAC to audit Prime s compliance. Prime breached the Agreement by refusing to pay the fees and provide the disclosures it agreed to provide. The adjudication of this matter will be straightforward because Prime has conceded in writing all the elements of AAC s case. Prime has acknowledged that the Agreement is valid. Prime has admitted that AAC performed as promised by referring to Prime the investors who gave Prime funds in connection with three capital raises in 2015 and 2016, totaling over $154.1 million. Prime has conceded that under the plain terms of the Agreement it owes AAC a fee in the amount of 2.5% of the funds received from the investors AAC referred. And Prime has admitted breach: Prime s position is simply that it does not intend to adhere to the terms of the Agreement. In a formal letter dated July 7, 2016, copying its counsel, Prime took the position that it unilaterally had decided to reduce AAC s placement fee from 2.5% to 1.5% for certain investors. Prime also omitted from the list of investors for which it agreed to pay a fee those that AAC had referred and that had committed to provide capital to the Fund. For six months prior to the receipt of Prime s formal position, AAC attempted to persuade Prime to perform its obligations by agreeing to a reasonable compromise to the parties agreed-upon fee. Prime was non-responsive. After receiving Prime s letter, AAC responded in kind with a formal demand that Prime comply with its payment and disclosure obligations, and allow AAC to exercise its contractually-mandated audit rights. Prime again was non-responsive. To this day, Prime has not paid a dollar of the fees due or made its promised disclosures. 2
AAC is entitled to the full recourse available in law, equity, and the rules of this forum for Prime s willful and wanton breaches of its contractual obligations. That relief includes an order that Prime make the full disclosures called for by the Agreement to allow AAC to ascertain the source of all amounts contributed in connection with Prime s capital raise of $154.1 million. AAC further is entitled to judgment in the amount of the Placement Fee, plus interest at the New York statutory pre-judgment rate of 9%, accrued starting 30 days after the contribution of capital to Prime from any referred investor. Finally, as recompense for Prime s egregious conduct, AAC should be awarded punitive damages, its AAC s attorneys fees and cost, and any portion of the fees associated with this arbitration it otherwise would bear. THE PARTIES 1. AAC is a limited liability company with its primary place of business at 700 Larkspur Landing Circle, Suite 245, Larkspur, California 94939. AAC has a targeted and specialized business. It raises monies for unique investment opportunities that generally are not attractive to or appropriate for the general public. AAC connects the sponsors of these alternative investment opportunities with AAC s network of accredited ultra-high-net-worth and tax-exempt institutional investors. In exchange for its services, AAC receives, inter alia, a placement fee that is a fixed percentage of funds provided by the investors it refers (and those referred by the referred investors). AAC is broker-dealer registered with the Securities and Exchange Commission ( SEC ) and a member of the Financial Industry Regulatory Authority ( FINRA ), a self-regulating organization, and the Securities Investor Protection Corporation ( SIPC ), an insurance program for investors. Douglas A. Cramer is the founder and Managing Principal of AAC. 2. Prime Group Holdings, LLC ( Prime Group ) is a limited liability company, initially incorporated in Colorado, with its headquarters and primary place of business 3
at 85 Railroad Place, Saratoga Springs, New York 12866. Prime Group acquires, owns and operates self-storage properties throughout the United States. The principals of Prime Group are Robert ( Bob ) J. Moser and Robert ( Bob ) C. Morgan. Douglas G. Kotelly is the Chief Investment Officer of the Prime Group. 3. Prime Storage Fund I, LLC ( Prime Storage Fund ) is a Delaware limited liability company, with the same headquarters and principal place of business as the Prime Group. Prime Storage Fund is a closed-end private equity real estate fund formed to acquire self-storage properties. Moser and Morgan are the principals of Prime Storage Fund. 4. Before entering the market for self-storage units, Moser and Morgan invested in recreational vehicle communities. In 2011, the Massachusetts Attorney General took Moser and the entities Morgan and Moser controlled to court for strong-arming mobile home residents into paying for memberships of questionable value. As the Attorney General explained in her press release after prevailing in the action: This company took advantage of elderly customers and retirees who invested a significant amount of money in their homes... It is difficult to believe that any business would try to strong arm people who worked and saved their entire lives so they could enjoy their golden years. Moser is seeking to employ the same strong arm tactics here in disregard of the plain terms of Prime s contractual commitments. JURISDICTION AND VENUE 5. JAMS may properly commence an arbitration under Rule 5(a)(ii) of the Comprehensive Arbitration Rules & Procedures (the Rules ), at its New York, New York venue, pursuant to the following written contractual provision in the Agreement: 9. Arbitration. This Agreement is being delivered and is intended to be performed in the State of New York, and shall be governed by, interpreted, and construed in accordance with the laws of the State of New York without regard to conflict of law principles. Any dispute, claim or controversy arising out of or relating to this Agreement or the breach, 4
termination, enforcement, interpretation or validity thereof, including the determination of the scope or applicability of this agreement to arbitrate shall be determined by arbitration in New York City before one arbitrator. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures. Judgment on the Award may be entered in any court having jurisdiction. This clause shall not preclude parties from seeking provisional remedies in aid of arbitration from the Courts of the State of New York. FACTUAL BACKGROUND 6. In October 2014, Prime s principal Bob Moser and chief investment officer Douglas Kotelly contacted the Douglas Cramer, the Managing Partner of AAC, to request AAC s assistance in raising capital to acquire self-storage facilities. The Prime executives represented that Prime needed AAC s help because Prime wanted to raise a relatively large amount of capital, in a short amount of time, and did not have the expertise or relationships to do so itself. After a series of meetings and discussions to define and ensure a full understanding of the nature of their contemplated relationship, the parties negotiated and agreed upon the terms of a contract, termed the Placement Agent Agreement, which they executed on January 7, 2015. A copy of the Agreement is annexed hereto. A. The Agreement 7. The parties deal was straightforward. AAC agreed to identify and refer prospective investors to Prime. In exchange, Prime agreed to pay AAC a fixed fee of 2.5% of all amounts received from the referred investors, or referrals from those investors. And Prime agreed to provide disclosures to AAC to allow it to audit and confirm Prime s compliance with its payment obligations. The plain terms of the Agreement memorialize this bargain. 8. The main operative provision of the Agreement is Section 3, relating to Incentive and Management Compensation. That provision states that: The Advisor or the Advisor Affiliate shall pay to the Placement Agent, within 30 days after final Closing or any Subsequent Closings in four 5
equal quarterly payments, and amount equal to two and one half percent (2.50%) of all directed assets received by the Advisor or the Advisor Affiliate with respect to any Referred Investor who contributes equity capital to a Fund or separately Managed Accounts in which a Referred Investor may contribute equity capital. The capitalized terms were defined broadly to ensure there was and is no ambiguity that AAC (defined as the Placement Agent ) was and is entitled to a fee of 2.5% on all amounts received by Prime or its affiliates (defined as the Advisor or the Advisor Affiliate ) from any investor (termed a Referred Investor ) in Prime Storage Fund I, LLC (defined as the Fund ) or related account (referred to as a Managed Account ). 9. Of particular import to the instant dispute, the term Referred Investors was defined broadly to encompass any investor who learned of the investment opportunity directly from AAC, or indirectly from AAC through an investor it informed of the opportunity. Specifically, the term Referred Investor was defined as those Prospective Investors that make an investment. Agreement, 1(b). The term Prospective Investor, in turn, was defined to include any person or entity who is controlling, controlled by or under common control with such person, and those that make recommendations on behalf of others is a discretionary or non-discretionary means. Id., 1(a). Moreover, the definition expressly encompasses, by way of example, a Registered Investment Advisor and their underlying clients (High net worth investors, Trusts, etc.) or a Plan Sponsor Consultant and their Advisory clients. Id. (emphasis added.) From the outset, therefore, both parties understood and agreed that AAC s referrals would include such entities and the individuals they manage and advise, and that AAC would be entitled to a Placement Fee for any funds raised directly or indirectly from such sources. 10. The parties deliberately included this particularization in the Agreement with the understanding that the investors interested in the opportunities AAC present including the investment in the Prime fund typically are money managers, private equity funds, hedge 6
funds and other plans that themselves represent and are comprised of high-net-worth individuals and entities. The parties expressly understood and agreed that any investor under the umbrella of a referred group would constitute a Referred Investor. This was agreed to in advance to avoid any dispute as to who would constitute a Referred Investor. By asking AAC to act as a placement agent for its capital raises, Prime accepted this broad definition. 11. The term Closing was defined to mean any contribution of commitment of assets to the Fund. For administrative ease, closings typically are done periodically, for a group of prospective investors who have expressed interest in the investment opportunity. As discussed below, in this instance, there were three capital raises or Closings. 12. The Agreement also required Prime to make disclosures relating to identity and nature of the Prospective Investors and Referred Investors. The disclosures were designed to ensure transparency, to avoid the very type of dispute that is now before this tribunal. Also, certain disclosures were required for regulatory reporting purposes. 13. Thus, in Section 5(a)(xi), the Agreement required Prime to promptly notify AAC of the amount any capital committed by any investor to the Fund, and the identity of the investor. Further in Section 5(a)(xiii), Prime agreed to obtain and provide to AAC an executed Disclosure Statement from any Prospective Investor before Prime entered into the written agreement required for all potential investors, termed an termed an Advisory Contract (see Section 1(c)). The form Disclosure Statement, which was annexed as Exhibit A to the Agreement, disclosed to potential investors AAC s role as a placement agent for Prime and the 2.5% fee it was entitled to receive for providing the placement services. As it expressly recites, moreover, the form was required by the Investment Advisors Act of 1940, as amended, Rule 206(4)-3. Agreement, Exhibit A. 7
14. Importantly, these disclosure obligations with which Prime covenanted it would comply pertained to all investors, not just those AAC referred. The rationale was evident. Once AAC raised awareness of an investment opportunity, the advisors, consultants and potential investors that AAC educated often thereafter entered into direct discussions with the sponsors of the investment. AAC required a disclosure of all investors, not just those Prime viewed as referred, so that AAC could evaluate whether the investor originated from a referred source and, therefore, was within the purview of the definition of Referred Investor. 15. After a capital raise was effectuated, Prime was obligated under Section 5(a)(x) of the Agreement to promptly notify AAC of any investment made by a Referred Investor. Moreover, in connection with the payment of a requisite Placement Fee, Prime was required to provide a written statement detailing how the payment was derived. Agreement, 3(c). AAC then had the right to have audited and make copies of any books and records of the Fund or a separately Managed Account, the Advisor or the Advisor Affiliate to confirm compliance by the Advisor or the Advisor Affiliate with the terms of this Section 3. Id. (emphasis added). 16. The Agreement contemplated that AAC would provide services to Prime through December 31, 2015. See Agreement, 6. Under the terms of the Agreement, however, AAC was entitled to a Placement Fee for any funds contributed after 2015 by an investor referred by AAC during 2015 (or any investor referred by a referred investor that did so). See Agreement, 3, 1. Moreover, by email correspondence dated February 10, 2016, Prime principal Bob Moser expressly authorized AAC to continue to pursue additional investors under the Agreement in 2016. 17. Prime breached each of its payment and disclosure obligations. 8
B. AAC s Performance 18. AAC performed as contemplated by the Agreement. Throughout 2015 and to mid-2016, AAC identified and referred to Prime individuals and entities interested in investing in a fund to acquire self-storage properties. Pertinent to framing the instant dispute are the following four investors AAC referred to Prime during 2015. 19. In March 2015, AAC introduced Prime to LGL Partners, LLC ( LGL ) as a source of capital for Prime s self-storage acquisition fund. LGL is a multi-office financial planning and consulting services firm that represents a wide range of high-net-worth individuals and institutions seeking investment alternatives (including investment limited partnerships and companies, pension and profit sharing plans, trusts, estates, charitable organizations, corporations, and other business entities). AAC provides investment opportunities to LGL to convey to its existing and prospective clients, which in turn become investors and prospective investors under AAC s agreements. Specifically, in the vernacular of the Agreement, LGL is a Registered Investment Advisor and all its underlying clients (High net worth investors, Trusts, etc.) are Prospective Investors and, to the extent any made or makes an investment, are Referred Investors. LGL and its clients (the LGL Investors ) became the largest investors in the Fund. 20. Kenneth Langone, the co-founder of the Home Depot, was one such LGL Investor. By email dated December 14, 2015, Prime expressly acknowledged that Mr. Langone was an LGL Investor who had made an investment of $5 million in the Fund. 21. In June 2015, and on multiple occasions thereafter, AAC introduced Prime to representatives and clients of Alternative Investment Management ( AIM ). AIM is a Registered Investment Advisor that is managed and advised by Jonathan Harris (its Chairman and Chief Investment Officer) and his father J. Ira Harris (Chairman of J. Ira Harris & 9
Associates), who is a consultant to AIM and one of its largest investors. 1 AAC has enjoyed a close and decade-long relationship with Jonathan and J. Ira Harris, as well as other AIM partners and senior level investment professionals. As a Registered Investment Adviser, AIM and its agents and clients are Prospective Investors under the Agreement; and are Referred Investors to the extent of any contribution made to the Fund, which includes a $4 million contribution from J. Ira Harris. To credit AAC s efforts and to acknowledge its role in bringing to AIM and J. Ira Harris the opportunity to invest in the Fund, AIM gave AAC an executed Disclosure Statement, which AAC conveyed to Prime (even though it was Prime s duty to obtain the statement and convey it to AAC). 22. In August 2015, AAC founder and Managing Principal Douglas A. Cramer himself made an investment in the Fund, reflecting his commitment to the enterprise. Further, Mr. Cramer referred the investment opportunity to his sister, who also invested. Together the two invested over $450,000. 23. During both 2015 and 2016, Bob Moser and others at Prime repeatedly complimented AAC on its performance under the Agreement. 24. As a result of AAC s efforts, Prime made three capitals raises, in October 2015, December 2015 and July 2016. The total investment from the three raises amounted to over $154.1 million, surpassing Prime s initial stated target for the Fund of $100 million. C. Prime s Willful Breaches 25. Despite acknowledging and reaping the benefits of AAC s performance, Prime has fully and flagrantly breached every obligation it owes under the Agreement. 26. Prime failed to promptly notify AAC of commitments Prime received 1 See https://www.aim13.com/management. 10
from investors when those commitments were made, as required by Section 5(a)(xi) of the Agreement. Similarly, Prime did not promptly notify AAC of any investment made by a Referred Investor, as it was obligated to do under Section 5(a)(x) of the Agreement. Indeed, Prime only made one belated disclosure of investments actually made on December 14, 2015, months after the first capital raise. Prime has never disclosed the identity of all investors who made commitments, as it is obligated to do. 27. Prime also expressly refused to comply with its obligation to provide AAC with executed Disclosure Statements from Prospective Investors, as it committed to do under Section 5(a)(xiii) of the Agreement. By email dated December 14, 2015, Prime said it would not provide the Disclosure Agreements because it was not required by securities regulations to make the disclosures. But Prime contractually agreed to provide the Disclosure Statements to AAC to facilitate AAC s compliance with the regulations, as expressly noted on the forms themselves. Moreover, Prime s provision of the Disclosure Statements was designed not only to facilitate compliance with regulatory requirements, but also to afford transparency with respect to identity of the investors in the Fund to ensure Prime s compliance with its payment obligations. 28. Prime further breached its agreement to pay the Placement Fee due to AAC within 30 days of each of the three Closings. To this day, Prime has not paid AAC any of the fees due, but is holding hostage the fees in an effort to strong-arm a concession from AAC. 29. Beginning in late 2015, and through the first half of 2016, AAC made numerous entreaties to Prime that it comply with its disclosure and payment obligations. Prime did not dispute the plain terms of the Agreement that required it to make the disclosures and the demanded payments. Prime simply refused to perform. 30. Prime took the position that it would not pay AAC the 2.5% fee due for 11
funds contributed by the LGL Investors because LGL had negotiated with Prime a reduction in fees that Prime charged for acting as an investment advisor and manager of the Fund. As Prime readily conceded, the Agreement did not condition AAC s fee on any agreement that Prime separately negotiated with LGL or any other investor. It was Prime s option to accept any investment from an investor referred by AAC. If it did so, it was required to pay the Placement Fee it had agreed to pay. Prime did not dispute that was the parties deal. It just refused to pay the amounts due. 31. Nonetheless, on multiple occasions throughout the first half of 2016, AAC offered to make a reasonable adjustment to its fee if Prime paid the fees due. Prime rejected the proposed compromises, which are now rescinded. 32. Finally, on July 7, 2016, Prime sent AAC a formal letter from Prime s Chief Investment Officer Doug Kotelly, copying its Principal Bob Moser and its outside counsel (the July 17 letter ). In its letter, Prime conceded its breach of the Agreement. Prime expressly refused to pay the full Placement Fee owed for the LGL Investors. Prime did not dispute, because it could not, that the plain and unambiguous terms of the Agreement required it to pay a Placement Fee of 2.5% of the assets it received from the LGL Investors. Prime instead summarily asserted that it would pay only a 1.5% placement fee because it had unilaterally elected, for its own business reasons, to a reduction in asset management fees and incentive fees from those investors. That was not the deal. 33. By its July 17 letter Prime also conceded further breaches of the Agreement by asserting that it would not pay any Placement Fee for any person other than those set forth on Schedule A. The schedule Prime annexed to its letter does not include Referred Investors for which it contends AAC is entitled to a Placement Fee under the Agreement. 12
Although Prime raised over $154.1 million, it wrongly seeks to pay AAC a success fee on only approximately $47 million of that amount. The list of investors for whom Prime agreed to pay a fee has glaring omissions. By way of example, the schedule does reference Kenneth Langone, who as noted, Prime conceded is a LGL Investor that committed no less than $5 million to the Fund. The schedule does not include AIM, its agents and clients (including J. Ira Harris), which were explicitly referenced on the Prospective Investor listings conveyed to Prime and for which AIM executed a Disclosure Statement. Remarkably, the schedule does not even include the investments made by AAC Managing Principal Douglas A. Cramer and his sister. 34. On August 5, 2016, AAC responded to Prime s July 17 letter, enumerating Prime s admitted breaches of the Agreement and demanding that Prime immediately cure those breaches. Further, AAC gave Prime formal notice that it was exercising its audit rights pursuant to Section 3(c) of the Agreement, and demanded that Prime immediately furnish to AAC s counsel copies of documents sufficient to confirm compliance by Prime with its payment obligations. AAC specifically demanded that the documents produced include those called for by Section 5(a)(xi) of the Agreement, identifying each investor who committed to make an investment into the Fund. 35. Prime breached Section 3(c) of the Agreement by failing to comply with its obligations to provide AAC the right to audit to obtain copies of documents sufficient to confirm its compliance with Prime s payment obligations. Indeed, Prime entirely ignored AAC s demand. Having heard no response from Prime, on August 15, 2016, counsel for AAC inquired of the counsel for Prime copied on its July 17 letter when Prime would be making the requisite disclosures. Prime s counsel did not respond at all. 13
through 35, above. CLAIM BREACH OF CONTRACT 36. AAC incorporates by reference the allegations recited in paragraphs 1 37. Prime breached the Agreement by failing to pay AAC the Placement Fee due under the Section 3 of the Agreement. 38. Prime breached the Agreement by failing to comply with its disclosure and audit obligations under Section 3(c) of the Agreement. 39. Prime breached the Agreement by failing promptly notify AAC of commitments Prime received from investors when those commitments were made, as required by Section 5(a)(xi) of the Agreement. 40. Prime breached the Agreement by failing promptly notify AAC of any investment made by a Referred Investor as it was obligated to do under Section 5(a)(x) of the Agreement. 41. Prime s breaches of the Agreement were wanton and malicious, done in deliberate disregard of AAC s rights and with the intent to interfere with those rights. PRAYER FOR RELIEF WHEREFORE, AAC respectfully prays for the following relief: A. An award of compensatory damages and other amounts to be proven at arbitration for Prime s pervasive and material breaches of the Agreement, including but not limited to, the Placement Fees; B. An award of punitive damages for Prime s willful and wanton pervasive and material breaches of the Agreement; C. An order of prejudgment interest at the New York statutory rate of 9% per annum; D. An order awarding AAC reimbursement of its attorneys fees and costs; 14
E. An order that Prime pay all fees associated with this arbitration; F. A declaration that Prime shall provide the disclosures required by the Agreement through judgment and on a going-forward basis; and G. An order awarding AAC such other and further relief as the Arbitrator deems just and proper. Dated: New York, New York August 29, 2016 Respectfully Submitted, Erik Haas PATTERSON BELKNAP WEBB & TYLER LLP 1133 Avenue of the Americas New York, NY 10036-6710 Attorneys for Claimant Alternative Access Capital, LLC 15