Opinion
No. 3-98-CV-2689-M
January 31, 2002
FINDINGS AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
Michael J. Quilling, as Receiver for Funding Resource Group and related entities, has filed a motion to establish procedures for the resolution of objections and payment of claims. The motion has been referred to United States Magistrate Judge Jeff Kaplan for recommendation pursuant to 28 U.S.C. § 636 (b) and a standing order of reference dated June 16, 2000.
I.
This is a civil action brought by the SEC against 16 defendants and 13 equity relief defendants arising out of the sale of non-existent "prime bank" securities. The SEC alleges that defendants raised more than $14 million from unwitting investors by making false representations about the use and safety of investor proceeds and the expected rate of return on their investments. This conduct, if proved, constitutes a violation of the federal securities laws.
The SEC alleges violations of Sections 5(a), (c) 17(a) of the Securities Act of 1933, 15 U.S.C. § 77e (a), (c) 77q(a), Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5. (Plf. Third Am. Compl. ¶ 3).
Funding Resource Group a/k/a FRG Trust ("FRG") and its managing partner, Steven C. Roberts, are named defendants in this case. On November 13, 1998, Michael J. Quilling was appointed as Receiver for FRG and Roberts. The order of appointment provides, in relevant part:
The Temporary Receiver shall take custody, possession and control of any and all assets, monies, securities and properties, real and personal, tangible and intangible, of whatever kinds and description, and wherever situated, belonging to FRG . . . [and] Roberts . . . (hereinafter referred to as "Receivership Assets"), as well as any documents relating to the Receivership Assets.
ORDER App. TEMP. RECEIVER, 11/13/98 at 2-3. To date, the Receiver has recovered more than $1.3 million in assets traceable to FRG and Roberts. He now seeks an order establishing procedures for the resolution of objections and payment of claims to defrauded investors.
The Receiver was previously ordered to send court-approved claim forms to all known and possible claimants of the Funding Resource Group Estate. These forms were to be completed and returned to the Receiver by March 31, 2001. See ORDER, 1/12/01. A total of 485 claims were filed. The Receiver allowed 462 claims and objected to 23 others. (Rec. Obj. to Claims ¶¶ 8 9). He also identified 96 potential claimants who did not return claim forms, could not be located, or agreed that they had no claim against the Estate. ( Id. ¶ 7 Exhs. 1-3). A hearing on the objections was held on January 25, 2002. The Receiver notified all interested parties of this hearing by posting notice on his website. Aggrieved claimants were notified that a written response to the Receiver's objections must be filed by January 15, 2002. See ORDER, 12/10/01. Thomas C. Jackson timely filed a response protesting the Receiver's decision to reject his $90,000.00 claim against the Estate. Only Jackson and Bill Priakos appeared at the hearing to urge their claims. After considering the evidence and the written submissions of the parties, the magistrate judge recommends as follows:
By order dated March 12, 2001, the Court authorized the Receiver to designate four receivership estates for purposes of handling claims and making distributions to defrauded investors. The four estates are: (1) Cord/Winterhawk; (2) Howe Financial Trust; (3) Funding Resource Group; and (4) Hammersmith Trust. See ORDER, 3/12/01. The Court has already established procedures, ruled on objections, and approved the payment of claims relating to the Cord/Winterhawk Estate and Howe Financial Trust Estate. See FINDINGS REC. OF MAG. JUDGE, 519101, adopted as modified by ORDER, 6/14/01 (Cord/Winterhawk Estate); FINDINGS REC. OF MAG. JUDGE, 7/13/01, adopted by ORDER, 7/25/01 (Howe Financial Trust Estate).
Prior to the hearing, the Receiver agreed to allow the following claims after initially filing objections: (1) Annastina Marek — $12,300.00; (2) Robert L. Mills — $5,585.00; and (3) Kenneth Gloria Mondin — $5,830.00.
II.
The claims identified in Exhibit 1 attached hereto have been allowed by the Receiver and should be approved.
III.
The Receiver has objected to the claims identified in Exhibit 2 attached hereto. These objections should be sustained and the claims should be rejected.
IV.
The Receiver also objects to claims filed by various investors in the Arrow Resources Investment Trust program ("Arrow Resources"). These claimants and the amount of their investments are: (1) Michael Arnold — $12,000.00; (2) Gary Bennett — $32,000.00; (3) William Hutton — $16,000.00; (4) Thomas Jackson — $90,000.00; (5) Rick Lien — $100,000.00; (6) Tim Long — $16,000.00; (7) Steven Morris — $156,000.00; and (8) Bill Priakos — $235,000.00. Despite the fact that all these claimants had contracts with FRG, the Receiver objects to their claims because none of the funds can be traced to that entity. Instead, Roberts instructed these claimants to send their payments to Arrow Resources, which is not part of the Receivership Estate.
The Court initially questions the Receiver's legal premise. The order of appointment authorizes the Receiver to "take custody, possession and control of any and all assets, monies, securities and properties, real and personal, tangible and intangible, of whatever kind and description, and wherever situated, belonging to FRG . . . [and] Roberts . . ." ORDER APP. TEMP. RECEIVER, 11/13/98 at 2-3 (emphasis added). It is undisputed that all these claimants had contracts with FRG. The only reason they sent their money to Arrow Resources instead of FRG is because Roberts instructed them to do so. Arguably, these funds "belong" to FRG and, therefore, are receivership assets.
Even if the funds sent to Arrow Resources are not technically part of the Funding Resource Group Estate, the claims of these defrauded investors still should be allowed. A district court has broad powers and wide discretion to determine appropriate relief in an equity receivership. See SEC v. Forex Asset Management LLC, 242 F.3d 325, 330 (5th Cir. 2001); see also U.S. v. Durham, 86 F.3d 70, 73 (5th Cir. 1996) ("Sitting in equity, the district court is a court of conscience."). In deciding how receivership assets should be distributed to defrauded investors, "[t]he fundamental principal which emerges from the case law is that any distribution should be done equitably and fairly, with similarly-situated investors or customers treated alike." SEC v. Credit Bancorp, Ltd., 2000 WL 1752979 at *13 (S.D.N.Y. Nov. 29, 2000). There is no just reason why claimants who had contracts with FRG, but paid their money to Arrow Resources, should be treated differently than other FRG investors. As the Receiver acknowledges, the Arrow Resources program was the last of several places where commingled investor funds were sent by Roberts on behalf of ERG. It was Roberts who told these claimants to send their money to Arrow Resources. "But for the fortuitousness of the Arrow Resources investors being told in the waning days of the scam to send their money directly to Arrow Resources, their funds, in all likelihood, would have been commingled with other FRG trust investor funds." (Rec. Ltr., 1/28/02 at 2). The Court therefore determines that these claims should be allowed.
At least $393,000.00 was funneled to Arrow Resources by FRG. In addition, some FRG investors who sent money to Arrow Resources received partial payments from Roberts out of FRG funds.
The Court reached the same conclusion with respect to a claim filed by Merril Maunder against the Cord/Winterhawk Estate. In that case, Maunder entered into a contact with AmeriCorp., Ltd., an entity affiliated with Robert Cord, and invested a total of $367,000.00 in the venture. One payment of $200,000.00 was sent to AmeriCorp Holdings, Ltd. in St. Johns, Antigua. Another payment of $167,000.00 was sent to Swiss Bank Corporation for Banco Inversion Madrid. The Receiver objected to this claim because there was no evidence that Maunder invested her money with Cord or Winterhawk. The Court disagreed, noting that the relationship between Cord and AmeriCorp was sufficient to establish that Maunder had invested in the Winterhawk program. See FINDINGS REC. OF MAG. JUDGE, 5/9/01 at 5-6, adopted as modified by ORDER, 6/14/01.
At the hearing, the Receiver pointed out that some of the claimants who invested in Arrow Resources have received partial payments from FRG. These claimants and the amount of the return on their investment are: (1) Steven Morris — $39,000.00; (2) Michael Arnold — $3,000.00; (3) Tim Long — $4,000.00; and (4) William Hutton — $4,000.00. Accordingly, the following claims should be approved:
Claimant Amount Claim
Michael Arnold $9,000.00
Gary Bennett $32,000.00
William Hutton $12,000.00
Thomas Jackson $90,000.00
Rick Lien $100,000.00
Tim Long $12,000.00
Steven Morris $117,000.00
The Priakos claim should be apportioned as follows: (1) Andy Bateman — $24,000.00; (2) Bill Purdy — $30,000.00; (3) Jim Pruitt — $25,000.00; (4) Bill Priakos — $42,500.00; and (5) J.C. Sanford — $113,500.00
Total: $607,000.00
RECOMMENDATION
The Court should approve the claims identified in Paragraphs II and IV of this recommendation and reject the claims identified in Paragraph III.The Receiver is ordered to post a copy of this report and recommendation on his website, www.secreceiver.com. Any claimant or interested party may file written objections to this recommendation by February 14, 2002 . The failure to file written objections shall bar the aggrieved party from appealing the factual findings and legal conclusions of the magistrate judge that are accepted or adopted by the district court, except upon grounds of plain error or manifest injustice. See Douglass v. United Services Automobile Ass'n, 79 F.3d 1415, 1417 (5th Cir. 1996).