UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
- against -
STEVEN BYERS, JOSEPH SHERESHEVSKY,
WEXTRUST CAPITAL, LLC, WEXTRUST
EQUITY PARTNERS, LLC, WEXTRUST
DEVELOPMENT GROUP, LLC, WEXTRUST
SECURITIES, LLC, and AXELA HOSPITALITY,
LLC,
Defendants,
- and -
ELKA SHERESHEVSKY,
Relief Defendant.
08 Civ. 7104 (DC)
ECF Case
RECEIVER’S OPPOSITION TO INTERNATIONAL AD-HOC COMMITTEE
OF WEXTRUST CREDITORS’ MOTION OBJECTING TO ENTRY AND
SEEKING MODIFICATION OF PRELIMINARY INJUNCTION
TIMOTHY J. COLEMAN
Receiver for Wextrust Entities
DEWEY & LEBOEUF LLP
1301 Avenue of the Americas
New York, NY 10019-6092
Tel. (212) 259-8000
Attorneys for Receiver
November 6, 2008
i
Table of Contents
Page
I. PRELIMINARY STATEMENT .........................................................................................1
II. BACKGROUND .................................................................................................................3
A. Purpose of the Receivership.....................................................................................3
B. Efforts of the Receivership to date...........................................................................6
III. THE RECEIVERSHIP ORDERS PROPERLY PLACED
RESTRICTIONS ON THE PARTIES’ ABILITY TO AFFECT THE
PROPERTY THAT IS SUBJECT TO THE JURISDICTION OF THIS
COURT. ...............................................................................................................................9
A. If Movants are qualified to otherwise initiate a bankruptcy case,
Movants can file a bankruptcy case under the Receivership Order.........................9
B. Movants are not qualified to initiate a bankruptcy case. .......................................11
IV. THE COURT WAS WITHIN ITS AUTHORITY IN AUTHORZING
AND DIRECTING THE RECEIVER TO MANAGE THE ASSETS
THAT ARE SUBJECT TO THE JURISDICTION OF THIS COURT. ...........................13
V. THE RELIEF MOVANTS SEEK WOULD CREATE CHAOS,
INEFFICIENCIES, AND DUPLICATION OF EFFORT AND
PREJUDICE INVESTORS. ..............................................................................................17
A. Movants’ suggested relief would prohibit the Receiver from
carrying out his duties............................................................................................19
B. Movants’ suggested relief would prejudice investors............................................20
C. Movants’ suggested relief is unnecessary..............................................................21
VI. CONCLUSION..................................................................................................................25
ii
Table of Authorities
Cases
Adams v. Marwill (In re Bayou Group, LLC),
363 B.R. 674 (S.D.N.Y. 2007)............................................................................................ 14, 16
Bailey v. Proctor,
160 F.2d 78 (1st Cir. 1947)....................................................................................................... 22
Eberhard v. Marcu,
530 F.3d 122 (2d Cir. 2008) ................................................................................... 5, 7, 9, 18, 23
In re Beyond.com Corp.,
289 B.R. 138 (Bankr. N.D. Cal. 2003) ..................................................................................... 13
J.I. Case Co. v. Borak,
377 U.S. 426 (1964).................................................................................................................. 10
Jackson Dairy, Inc. v. H.P. Hood & Sons,
596 F. 2d 70 (2d Cir. 1979) ...................................................................................................... 11
Lankenau v. Coggeshall & Hicks,
350 F.2d 61 (2d Cir. 1965) ................................................................................................... 9, 23
Manhattan Rubber Mfg. Co. v. Lucey Mfg. Co.,
5 F.2d 39 (2d Cir. 1925) ........................................................................................................... 23
Mills v. Electric Auto-Lite Co.,
396 U.S. 375 (1970).................................................................................................................. 10
Northern Pipeline Co. v. Marathon Pipeline Co.,
458 U.S. 50 (1982).................................................................................................................... 17
Phelan v. Middle States Oil Corp.,
154 F.2d 978 (2d Cir. 1946) ..................................................................................................... 18
Scholes v. Lehmann,
56 F.3d 750 (7th Cir. 1995) ...................................................................................................... 18
SEC v. Am Bd of Trade, Inc.,
830 F. 2d 431 (2d Cir. 1987) .......................................................................................... 9, 17, 23
SEC v. Credit Bancorp, Ltd.,
290 F.3d 80 (2d Cir. 2002) ..................................................................................... 20, 22, 23, 25
SEC v. Lincoln Thrift Ass’n,
577 F.2d 600 (9th Cir. 1978) .................................................................................................... 23
SEC v. Manor Nursing Centers, Inc.,
458 F.2d 1082 (2d Cir. 1973) ..................................................................................................... 9
SEC v. Shiv,
379 F. Supp. 2d 609 (S.D.N.Y. 2005) .......................................................................... 18, 23, 24
iii
SEC v. Tipco, Inc.,
554 F.2d 710 (5th Cir. 1977) .................................................................................................... 22
SEC v. TLC Investments and Trade Co.,
147 F. Supp. 2nd 1031 (C.D. Cal. 2001) ............................................................................ 23, 24
SEC v. Wencke,
622 F.2d 1363 (9th Cir. 1980) .............................................................................................. 9, 10
Tcherepnin v. Franz,
485 F.2d 1251 (7th Cir. 1973) .................................................................................................. 24
Other Authorities
11 U.S.C. § 1101(1) ...................................................................................................................... 15
11 U.S.C. § 1126(c) ...................................................................................................................... 12
11 U.S.C. § 303(b) ........................................................................................................................ 12
11 U.S.C. § 303(i) ......................................................................................................................... 11
11 U.S.C. § 305(a)(1).................................................................................................................... 13
11 U.S.C. § 366............................................................................................................................. 21
11 U.S.C. § 543................................................................................................................... 5, 15, 16
28 U.S.C. § 1334(a) ...................................................................................................................... 17
28 U.S.C. § 1334(e)(1).................................................................................................................. 10
28 U.S.C. § 151....................................................................................................................... 10, 17
28 U.S.C. § 157(d) ........................................................................................................................ 16
28 U.S.C. § 754............................................................................................................................... 9
28 U.S.C. § 959(b) .................................................................................................................... 5, 13
1
Timothy J. Coleman (the “Receiver”), Receiver for the Wextrust Entities1, submits this
opposition to the International Ad-Hoc Committee of Wextrust Creditors’ (“Movant,” and
together with the Consortium, “Movants”2) motion objecting to the entry, and seeking
modification of the Court’s Order Appointing Temporary Receiver entered on August 11, 2008
(Dkt. No. 2) (“Initial Receivership Order”), the Court’s Amended Order Appointing Temporary
Receiver entered on September 11, 2008 (Dkt. No. 36) (“Amended Receivership Order”) and its
October 24, 2008 Order On Consent Imposing Preliminary Injunction and Other Relief Against
the Defendants and Relief Defendant entered on October 24, 2008, (Dkt. No. 65) (“Preliminary
Injunction Order” and together with the Court’s Initial and Amended Receivership Orders, the
“Receivership Order”).
I. PRELIMINARY STATEMENT
On August 11, 2008, the Securities Exchange and Commission (the “SEC”) filed this
civil enforcement action against Byers, Shereshevsky and the Wextrust Entities (as amended, the
“SEC Complaint”).3 The SEC Complaint alleges the discovery of a massive Ponzi-type scheme
perpetrated upon the investors of Wextrust Entities and seeks to halt further dissipation of assets
through a “freeze order” and the appointment of the Receiver. The Receivership Order
empowers and requires that the Receiver undertake certain acts to preserve and marshal assets
1 This Court’s Order Appointing Temporary Receiver dated August 11, 2008, defines “Wextrust Entities” as
Wextrust Capital, LLC, Wextrust Equity Partners, LLC, Wextrust Development Group, LLC, Wextrust Securities,
LLC and Axela Hospitality, LLC. The same Order extends the Receiver’s authority to over 240 additional legal
entities and funds in which any of the Wextrust Entities have ownership interests or which are under the control of
the Wextrust Entities (“Wextrust Affiliates”), some, but not all, of which the Order specifically identifies in Exhibit
A to the Order.
2 The Receiver also directs this Opposition to the Joinder of the so-called International Consortium of Wextrust
Creditors (“Consortium”) in Support of Motion by the International Ad-Hoc Committee of Wextrust Creditors
Objecting to Entry and Seeking Modification of Preliminary Injunction (Dkt. No. 73) (“Consortium Joinder,” and
together with the Movant’s motion, the “Motion”). The Consortium has joined in the Motion, “since the legal
arguments the Consortium would make and the legal authority the Consortium would cite are identical to those of
the Committee.” (Consortium Joinder at 4).
3 Capitalized terms not otherwise defined shall have the same definition as set forth in the SEC Complaint.
2
and recommend a methodology for their distribution. Claiming that the Court has entered orders
that prejudice their rights, Movants seek to amend those orders, thereby removing provisions
which protect the very assets under the control of the Receiver and that are subject to the in rem
jurisdiction of this Court. In effect, Movants seek relief that would enable them to file numerous
bankruptcy cases in several jurisdictions requiring the Receiver to administer his receivership in
a confused, chaotic and very expensive manner, all at the expense of the victims of the fraud.
One would think from the Motion that the SEC commenced an equity receivership to harm the
investors in Wextrust and to circumvent bankruptcy law, and then enlisted the Receiver to assist
in its efforts. As shown below, the facts and law are the opposite of Movants’ contentions.
If granted, the relief Movants seek would disrupt the Receiver’s orderly efforts to “(1)
preserve the status quo; (2) ascertain the true financial condition of the Defendant WexTrust
Entities [and the WexTrust Affiliates] . . . and of the disposition of investor funds; (3) determine
the extent of commingling of funds . . .; and (4) prevent further dissipation of . . . property and
assets . . . .” for the ultimate benefit of all WexTrust investors. (Amended Receivership Order at
3-4.) Most importantly, Movants seek to deprive the Receiver of the authority to determine
whether one or more bankruptcy cases should be filed in the first instance. This Court directed
the Receiver to make that determination. (See Amended Receivership Order at 10.) Movants’
insistence that they be empowered to commence one or more involuntary bankruptcies therefore
is wholly at odds with the language and intent of the Receivership Order and, moreover, is
wholly irresponsible given the short time since the Receiver’s appointment and current economic
conditions.
The Court acted well within its authority in issuing the orders of which Movants
complain. The Receivership Order is necessary to ensure the efficient and cost-effective
3
administration of the receivership estate. The Receivership Order should not be disturbed absent
a specific showing of need (and Movants have made none).
II. BACKGROUND
A. Purpose of the Receivership
The SEC Complaint alleges that the defendants participated in a Ponzi-type scheme to
defraud investors in connection with Wextrust securities offerings. Among other things, the SEC
Complaint alleges that the defendants failed to disclose that the proceeds of various Wextrust
offerings were used for purposes other than those for which the money was raised. The SEC
Complaint also alleges that the defendants failed to disclose Shereshevsky’s prior felony
conviction for bank fraud. The SEC Complaint alleges violations of various provisions of the
Securities Act, including section 17(a)(1), and the Securities Exchange Act, including section
10(b). The SEC Complaint seeks various forms of equitable relief, including injunctions against
future violations of the securities laws, disgorgement, prejudgment interest and civil monetary
penalties.
Simultaneously with the filing of the SEC Complaint, the SEC sought, and the Court
granted, emergency relief, including a temporary restraining order (“TRO”), an order freezing
the assets of the defendants (“Freeze Order”) and the appointment of a receiver. On October 24,
2008, the Court issued its Preliminary Injunction Order granting a preliminary injunction and
continuing the previously-granted provisional remedies on the consent of all parties to the case.
The TRO preliminarily enjoined the defendants from violating certain provisions of the
Securities Act and the Securities Exchange Act; ordered Byers and Shereshevsky to provide
verified accountings for themselves and for the Wextrust Entities; and prohibited the destruction,
alteration or concealment of documents by any of the defendants. The Freeze Order broadly
4
froze all assets of Byers, Shereshevsky and the Wextrust Entities, subject to the Receivership
Order.
The Receivership Order directs the Receiver to:
• preserve the status quo;
• ascertain the true financial condition of the Wextrust Entities and Affiliates, and
the disposition of investor funds;
• determine the extent of commingling of investor funds between the Wextrust
Entities and Affiliates;
• prevent further dissipation of the assets of the Wextrust Entities and Affiliates;
• prevent the encumbrance or disposal of assets of the Wextrust Entities, the
Wextrust Affiliates and investors;
• preserve the books, records and documents of Wextrust Entities and Affiliates;
• be available to respond to investor inquiries; and
• determine if the Wextrust Entities and Affiliates should undertake a bankruptcy
filing.
To fulfill these obligations, the Receivership Order empowers the Receiver, inter alia,
• to take possession and control of all Wextrust assets and properties;
• to pay from available funds necessary business expenses required to preserve the
assets of Wextrust Entities and Affiliates;
• to engage accountants, attorneys and other professionals; and
• to take all necessary steps to gain control over, and repatriate, assets in foreign
jurisdictions.
Of particular significance with respect to the Motion is the Receiver’s succession “to all
rights to manage all properties owned or controlled, directly or indirectly, by the Wextrust
Defendants . . . pursuant to the LLC and operating agreements relating to each entity[.]”
(Amended Receivership Order at 5.)
On September 11, 2008, at the request of the Receiver and on consent of all parties to the
action, the Court amended the Receivership Order to authorize the Receiver, inter alia, to
establish a cash management system and to encumber and sell assets, subject to certain notice
requirements. The amendments also permit the Receiver to commence bankruptcy cases in this
district if he determines it is appropriate to do so, prosecute the bankruptcy petitions “subject to
5
the same parameters and objectives as a chapter 11 trustee” and “remain in possession, custody,
and control of the title 11 estates . . . .” (Amended Receivership Order at 10.) This right of the
Receiver to continue to manage the Wextrust Entities and Affiliates as debtors in possession is
inherent in the power this Court granted to the Receiver to succeed to all management rights
relating to the Wextrust Entities and Affiliates pursuant to the limited liability company
operating agreement applicable to each such Entity or Affiliate.4 The Receivership Order
empowers the Receiver to act as managing member for each such entity and, therefore, pursuant
to relevant state law and as required by federal statute,5 to remain as the sole responsible party
with respect to making the decision to file bankruptcy. Contrary to the Movants’ contentions
(Movants’ Memorandum of Law at 5), once in bankruptcy the Receiver does not become a
trustee. The Receiver remains in possession of the assets as managing member of a debtor in
possession, subject to the rights of any party in interest to challenge such possession pursuant to
section 543 of the Bankruptcy Code or to request a chapter 11 trustee. Initially, the dispute
would be brought in this Court, but this Court can resolve it or refer it to the bankruptcy court.
Quite simply, district courts routinely reserve the option to determine how the bankruptcy
proceeds because the determination may or may not impair other valid goals of the receivership.
If there is a connection, the district court can reconcile any competing interests by making a
determination itself.
4 The former managers of the Wextrust Entities and Affiliates usually structured the Affiliates as limited liability
companies. (See Declaration of John Sordillo in Support of Receiver’s Opposition to Motion, submitted herewith, ¶
3.) In many instances, a Wextrust holding company held a common membership interest in a second tier “investor”
LLC and private placement investors held preferred membership interests with an extremely attractive distribution
preference.
5 28 U.S.C. § 959(b) requires that a receiver shall “manage and operate the property in his possession . . . according
to the requirements of the valid laws of the State in which such property is situated, in the same manner that the
owner or possessor would be bound to do if in possession thereof.” See also Eberhard v. Marcu, 530 F.3d 122, 132
(2d Cir. 2008) (receiver stands in the shoes of corporation within the receivership).
6
In sum, the SEC has discovered the existence of what appears to be a massive Ponzi
scheme and has taken action to remove existing management in favor of a neutral third party
receiver.6 By its actions, the SEC has prevented further loss to the investors in Wextrust’s
multitude of single asset limited liability companies (“LLC Entities”). To accord investors
further protection, the Court tasked the Receiver with marshalling and managing all assets,
investigating the true economic state of affairs at the Wextrust Entities and Affiliates and the
proper disposition of Wextrust assets. As part of his power to manage the Wextrust Entities and
Affiliates, the Receiver may commence bankruptcy cases in a single district (the Southern
District of New York) and continue to remain in possession of their assets and properties, subject
to the rights of claimants and interest holders in those Entities and Affiliates. The decision on
whether bankruptcy is in the best interests of claimants and investors must await the Receiver’s
factual investigation of such issues as the commingling of the cash of some LLC Entities with
those of other Entities, what liabilities and equity interests may be asserted against a given LLC
Entity or its assets and how best, in or out of bankruptcy, to distribute the assets within the
receivership to claimants and investors.
B. Efforts of the Receivership to date
As will be set out in more detail in the First Interim Report of Receiver, the Receiver and
his advisors (Dewey & LeBoeuf LLP, Deloitte Financial Advisory Services LLP (“Deloitte”),
forensic accountant Jerry Klein and the Hilco Organization (“Hilco”)) have engaged in a series
of measures to meet the tasks set forth above The Receiver has taken possession and control of
Wextrust businesses, properties and assets throughout the United States, and is managing them
6 Mr. Coleman has no prior relationship with Wextrust. District Judge Sullivan selected Mr. Coleman as Receiver
from a list of three candidates proposed by the SEC. Prior to joining Dewey & LeBoeuf in 2006, Mr. Coleman
served for eight years as an Assistant United States Attorney in this District. He has substantial prior experience in
SEC enforcement litigation, including cases involving equity receiverships.
7
with the assistance of Wextrust employees and experts engaged pursuant to the Receivership
Order. The Receiver, with the assistance of attorneys and advisors, has conducted asset security
and evidence preservation operations in the United States and Israel, and has taken extensive
steps to gain control of Wextrust interests in properties and assets in South Africa and Namibia.
For example, the Receiver has taken steps to preserve evidence at 10 domestic and international
sites, cut unnecessary expenses, prepare valuations of Wextrust assets, identify and take
exclusive control of bank accounts, prepare financial statements for the Wextrust Entities and
establish effective internal controls.
The Receiver, assisted by his attorneys, accountants and other advisors, is conducting an
investigation of the financial condition of the Wextrust Entities and Affiliates, the extent of
intermingling of funds and the disposition of the proceeds of Wextrust securities offerings, as
required by the Receivership Order. (See generally Amended Receivership Order at 3-5); cf.
Eberhard, 530 F.3d at 131 (authority of receiver appointed at the SEC’s request “necessarily
includes the power to investigate the defendant’s transactions”). The results of that investigation
to date will be discussed in detail in the Receiver’s First Interim Report, which will be submitted
shortly.
The Receiver has made extensive efforts to respond to investor inquiries, as requested by
the Receivership Order, and to provide information to all parties in interest in a prompt and open
manner. For example, in August and September of 2008 the Receiver held “town hall” meetings
in New York, Chicago, Norfolk, Virginia and Tel Aviv to meet personally with investors and
address their many concerns, including the whereabouts of what in many instances was the life
savings they transferred to Byers and Shereshevsky. In early November, the Receiver will hold
another meeting for investors in New York. With respect to South African mining operations in
8
which one or more Wextrust Affiliates made investments, the Receiver traveled to South Africa
to assess the situation and has retained counsel to take steps to repatriate tens of millions of
dollars in investor funds transferred to South Africa, as required by the Receivership Order. (See
Amended Receivership Order at 5 (Receiver empowered to “[t]ake all necessary steps to gain
control of the Defendants’ interests in assets in foreign jurisdictions . . .which may be proceeds
of Defendants’ fraud, including . . . taking steps necessary to repatriate foreign assets”).7
Working with Hilco, the Receiver has begun the process of determining the value of the
receivership estate’s assets, whether sales would result in a positive return to investors and
whether placing any of the LLC Entities in bankruptcy would be in the best interests of investors
and other parties in interest. However, at this point in time, it has not been determined that any
particular LLC Entity needs to be placed in bankruptcy. (See Declaration of Mitchell A. Kahn in
Support Receiver’s Opposition (“Kahn Decl.”) submitted herewith, ¶¶ 6, 8.). The Receiver and
his advisors also have identified a substantial amount of commingling of investor funds between
and among various Wextrust Entities and Affiliates. Based primarily on the reports and
recommendations of his consultants, the Receiver will develop a course of action, including the
potential use of bankruptcy, to facilitate the marshalling of assets and their distribution.
However, the use of a bankruptcy case by the Receiver, or anyone, should only be
implemented after evaluating the benefits and burdens of its use.
7 The Receiver and Dewey & LeBoeuf expect to submit their first interim joint fee application to the Court in early
November. It has been previously submitted to the SEC for review. The Receiver has consulted with the SEC in
connection with all major expenditures. Dewey & LeBoeuf and other receivership advisors have agreed to
substantial fee discounts in connection with their engagements, based on the public service nature of the
receivership.
9
III. THE RECEIVERSHIP ORDERS PROPERLY PLACED RESTRICTIONS ON
THE PARTIES’ ABILITY TO AFFECT THE PROPERTY THAT IS SUBJECT
TO THE JURISDICTION OF THIS COURT.
A. If Movants are qualified to otherwise initiate a bankruptcy case, Movants
can file a bankruptcy case under the Receivership Order.
It is well-settled that a district court has broad authority under the securities laws and the
court’s general equitable powers to appoint a receiver in an SEC enforcement action. Eberhard,
530 F.3d at 131 (“District courts possess broad power to remedy violations of federal securities
laws,” including the power to appoint receivers); SEC v. Manor Nursing Centers, Inc., 458 F.2d
1082, 1100-06 (2d Cir. 1973) (recognizing district court’s authority to appoint receiver “to
effectuate the purposes of the federal securities laws”); see also SEC v. Am. Bd. of Trade, Inc.,
830 F. 2d 431, 436 (2d Cir. 1987).
“A receiver appointed in any civil action or proceeding involving property . . . situated in
different districts shall . . . be vested with complete jurisdiction and control of all such property
with the right to take possession thereof.” 28 U.S.C. § 754. Accordingly, there has developed
the general rule that, to give effect to a district or state court’s in rem or quasi in rem jurisdiction
in a receivership proceeding, the court with jurisdiction must have exclusive control of the
property. See Lankenau v. Coggeshall & Hicks, 350 F.2d 61, 64 (2d Cir. 1965).
Likewise, when a district court takes control over property by appointing a receiver, the
court has the power “to issue a stay, effective against all persons, of all proceedings against the
receivership entities.” SEC v. Wencke, 622 F.2d 1363, 1369 (9th Cir. 1980); see also Lankenau,
350 F. 2d at 62 (staying “all persons . . . from commencing or continuing any suits against the
defendant herein or his property”). As Wencke makes plain, “all persons” includes nonparties.
Wencke, 622 F.2d at 1370-71. Applying a stay to nonparties is consistent with the “broad
equitable powers of the federal courts to shape equitable remedies to the necessities of particular
10
cases, especially where a federal agency seeks enforcement in the public interest.” Id. at 1371
(citing, inter alia, Mills v. Electric Auto-Lite Co., 396 U.S. 375, 386 (1970); J.I. Case Co. v.
Borak, 377 U.S. 426, 433 (1964)).
Movants complain of the Receivership Order’s supposed bar on the filing and
prosecution of involuntary bankruptcy petitions. (Movants’ Memorandum of Law at 11-16.)
The Receivership Order, however, simply requires Movants to come to this Court to establish
sufficient cause for allowing Movants to take action against the property subject to the
jurisdiction of this Court. Such a limitation makes eminent sense in the current situation, where
Movants propose the use of bankruptcy without evaluating necessary information regarding the
Wextrust Entities and Affiliates. Such ill-founded bankruptcy cases, if not dismissed, will only
serve to create mass inefficiencies, increase already substantial costs of administration and
severely prejudice investors hopeful of receiving a distribution from Wextrust properties and
other assets. The Receiver, and this Court, would be forced to coordinate the Receiver’s interests
in potentially multiple bankruptcy and litigation cases in multiple jurisdictions across the country
Conversely, if any bankruptcy were filed in the Southern District of New York, this Court would
continue to have jurisdiction over all assets in the receivership and in the bankruptcy because (1)
28 U.S.C. § 1334(e)(1)8 grants the District Court exclusive jurisdiction over all property in the
bankruptcy case, and (b) the bankruptcy court is a unit of the district court pursuant to 28 U.S.C.
§ 151.
Movants argue that in order to grant this limited restriction, the SEC must show the
traditional elements for a preliminary injunction (i.e., irreparable injury and a balancing of
equities) and that the SEC cannot make such a showing. (See Movants’ Memorandum of Law at
8 “The district court in which a case under title 11 is commenced or is pending shall have exclusive jurisdiction . . .
of all the property, wherever located, of the debtor as of the commencement of such case, and of the property of the
estate . . . .”
11
16.); see also Jackson Dairy, Inc. v. H.P. Hood & Sons, 596 F. 2d 70 (2d Cir. 1979) (stating
preliminary injunction standards). To the contrary, the facts cited above would support a finding
of irreparable injury to the vast number of investors who are not within Movants’ client groups.
Once the receivership estate’s limited resources are consumed by the increased administrative
costs resulting from involuntary bankruptcies, neither the Receiver nor the other investors will
have any way to recoup these expenses barring evidence of bad faith on the part of Movants (a
proceeding that would consume even more of the receivership estate) and a source of funding to
pay the fees and damages resulting from the filing. See 11 U.S.C. § 303(i). Also, a balancing of
the equities would clearly favor requiring Movants or any other group seeking to file involuntary
bankruptcies to make a showing as to what benefits can be achieved at the cost of interfering
with the Receiver’s investigation and increasing the administrative expenses of the receivership
estate. There are obviously serious issues going to the merits of whether particular LLC Entities
should file bankruptcy cases.
Instead of Movants’ invitation to chaos, any required bankruptcy case should be
coordinated in this District and the Receiver should be allowed to recommend the most efficient
use of bankruptcy to minimize costs and confusion and to maximize returns to holders of claims
and interests. As explained above, if circumstances warrant bankruptcy, the Receiver himself
will recommend and file it.9
B. Movants are not qualified to initiate a bankruptcy case.
The law firms representing Movants have disclosed who their clients are and, in some
cases, what interests they may have pursuant to the Court’s direction to disclose that information
9 In an effort to increase transparency in connection with this case, the Receivership Order actually requires the
Receiver to give notice of his intent to file a bankruptcy case. (See Amended Receivership Order at 10).
12
to the Court, the SEC and the Receiver.10 It is not surprising that Movants did not volunteer that
information. Movants are not Wextrust creditors authorized to file involuntary bankruptcy
petitions. Section 303 of the Bankruptcy Code requires that in instances where the debtor has
twelve or more creditors (and most Wextrust Entities and Affiliates fall into that category), an
involuntary bankruptcy case may only be commenced by three or more creditors holding
unsecured claims that are not contingent as to liability or the subject of a bona fide dispute as to
liability or amount. See 11 U.S.C. § 303(b)(1). Although both law firms indicate that their
respective clients are “creditors,” they admit their rights arise out of their assertion of damages
claims arising from securities fraud and those claims are unliquidated at this time.11 The
securities they hold are equity securities similar to the shares of preferred stock issued by a
corporation. The fact that shareholders assert unliquidated fraud claims does not make them
creditors eligible to file involuntary bankruptcy petitions in accordance with section 303(b) of
the Bankruptcy Code.
As alluded to above, Bankruptcy Code section 303 (b)(1) does not allow an unsecured or
under-secured creditor to file an involuntary petition unless the creditor’s claim is “not
10 Movants’ disclosure is inadequate. For example, the Dechert firm’s disclosure in some instances does not
indicate the amount of the investment.
11 The Brown Rudnick firm lists its clients as creditors of one or more Wextrust Affiliates in the chart attached to
their correspondence, but also refers to them in their cover letter as holding interests. The term “interests” in
bankruptcy generally refers to status as the holder of an equity interest. See, e.g., 11 U.S.C. § 1126(c) and (d)
(distinguishing between classes of “claims” and “interests” in connection with voting on acceptance of a chapter 11
plan). The Dechert firm also describes members of the Ad Hoc Committee as holding interests in Wextrust and
admits in the chart disclosing the firm’s clients that they are “investors” in one or more LLC Entities. As noted in
footnote 4, the typical right held by an investor in an LLC Entity would be a preferred membership interest in a
second tier “investor LLC” which owns the property-holding single asset entity. The “claims” of these investors
would arise from violations of federal and state securities laws based on the purchase of equity securities from the
various LLC Entities.
Some of the Dechert clients do hold guaranteed depository receipts (“GDR’s”), which could be debt depending on
whether the GDR arose from the roll-over of a distribution from an initial equity investment or was purchased
separately. Even then, many of the GDR holders appear not to know the amounts of what may be a claim and as
noted above, section 303 of the Bankruptcy Code does not accord standing to file an involuntary if the claim is the
subject of bona fide dispute as to amount. Because, among other things, no one currently knows the extent of loss,
all such claims or interests are subject to dispute as to amount.
13
contingent as to liability or the subject of bona fide dispute as to liability or amount . . . .” Here,
none of the Movants has a claim undisputed as to amount because no one knows the amount of
the damages yet. In short, Movants seek leave to take legal action they have no standing to
take.12
IV. THE COURT WAS WITHIN ITS AUTHORITY IN AUTHORZING AND
DIRECTING THE RECEIVER TO MANAGE THE ASSETS THAT ARE
SUBJECT TO THE JURISDICTION OF THIS COURT.
Movants argue that the provisions of the Receivership Order relating to the Receiver’s
right to commence and prosecute bankruptcy cases exceed the district court’s authority and
improperly nullify various provisions of the Bankruptcy Code and title 28. Movants could only
make their assertions by mischaracterizing the relief this Court granted. This Court did not
exceed its broad authority to allow the Receiver to proceed with his work free from the need to
fight unmerited litigation. Contrary to Movants’ assertions (see Movants’ Memorandum of Law
at 5), the Court did not designate the Receiver as a post-petition trustee contrary to the
Bankruptcy Code. Instead, the Court directed the Receiver to succeed to the role of management
in place of individuals under suspicion of having perpetrated a massive fraud on unsuspecting
individuals, thereby replacing those individuals and ending any further misrepresentations and
dissipation of assets. The Receiver is required to act in accordance with state law, see 28 U.S.C.
§ 959(b), and with the various LLC agreements of the Wextrust Entities and Affiliates. This
Court properly appointed the Receive to act as authorized management of the Wextrust Entities
12 In an analogous situation, bankruptcy courts will often deny a debtor in possession’s request for approval of a
disclosure statement when in fact the plan proposed by the debtor is not confirmable on its face. See, e.g., In re
Beyond.com Corp., 289 B.R. 138, 140 (Bankr. N.D. Cal. 2003) (“Because the underlying plan is patently
unconfirmable, the disclosure statement may not be approved”). It is within this Court’s equitable jurisdiction and
discretion to fashion relief that will prevent victims of the Wextrust scheme from suffering further harm as a result
of the Receiver and other parties having to defend against multiple involuntary bankruptcy cases brought by parties
who are not qualified to file the underlying cases in the first instance, based on a determination that it is in the best
interests of the investors for the Receiver to continue with his efforts. See 11 U.S.C. § 305(a)(1) (bankruptcy court
may dismiss a bankruptcy case or suspend all proceedings in the case if the court determines at any time that the
interests of creditors and the debtor would be better served by such dismissal or suspension).
14
and Affiliates and to act with the authority granted under the governing state law and LLC
agreements.
Movants’ citation to this Court’s decision in Adams v. Marwill (In re Bayou Group,
LLC), 363 B.R. 674 (S.D.N.Y. 2007), only serves to confirm this point. In that case, the United
States Trustee argued that a prior district court order similar in substance to the Receivership
Order properly vested management authority in a federal equity receiver, but that somehow
management authority had ceased upon the filing of a bankruptcy. This Court rejected that
argument, noting that it had the authority, both inherently and pursuant to the federal securities
laws, to remedy securities law violations by appointing a new corporate manager to oversee the
affairs of entities used to perpetrate a Ponzi scheme. Id. at 684. The receiver’s role qua
receivership ended with the filing of a bankruptcy case, but the Bayou “receiver’s” role as
manager of the filing entities continued. Id. at 685.
Movants make much of trivial differences between the Receivership Order and the order
their own counsel advocated in Bayou.13 However, an examination of the language of the
Receivership Order reveals that this Court intended the Receiver to also have full authority to
“succeed to all rights to manage . . . pursuant to the LLC and operating agreement relating
to each entity (emphasis supplied).” (Amended Receivership Order at 5.) The conclusion is
inescapable that the Receiver has replaced the former, discredited management of Wextrust and
has full power not only to determine when and if to commence bankruptcy cases (a proposition
not contested in Bayou) or defend against any involuntary case, but also to continue to manage
these same entities when and if they become debtors in possession. This Court in Bayou
emphasized that allowing the debtor to remain in possession of the estate remained the preferred
13 Indeed, on information and belief, the Dechert firm, counsel for the Movants, continues to maintain the propriety
of the Bayou order on appeal to the Second Circuit.
15
method of conducting a chapter 11 case and that a debtor entity automatically becomes the
debtor in possession upon filing, citing 11 U.S.C. § 1101(1). This is of course does not license
the Receiver to ignore the dictates of the Bankruptcy Code once a filing occurs. As noted in
Bayou, once the Receiver commences a chapter 11 case for any Wextrust Entity or Affiliate,
such Entity or Affiliate will become subject to all the obligations of a debtor in possession under
title 11 and challenges by appropriate parties. Significantly, when the Receiver held town hall
meetings across the country and around the world, the investors supported his efforts and
management of Wextrust. It is only a minority here that seeks relief that will hurt investors.
Contrary to Movants’ assertions, the Receivership Order does no violence to section 543
of the Bankruptcy Code, which obligates a custodian to turn over the assets of the filing entity
upon learning of the commencement of a bankruptcy. First, the Receivership Order provides that
any party in interest may litigate its rights under section 543 in this Court. This Court may
decide the dispute or refer it to the bankruptcy court. This makes a lot more sense than Movants’
assertion that the Receiver should turn over the property to an unspecified newcomer and then
litigate to get the property back. Movants conveniently neglect to point out that there is no one
to whom the Receiver could turn over the property. This reckless approach exposes Movants’
motives. The motives are not to maximize returns to investors. The motives are to create a
creditors’ committee that Movants’ attorneys want to represent. The Receiver has nothing
against attorneys wanting to represent creditors’ committees. But, the Receiver absolutely
opposes the creation of chaos to make that happen. Second, because the Court provided Mr.
Coleman with authority to manage each Wextrust Entity and Affiliate pursuant to the applicable
LLC and operating agreements (and under the state law that applies to such agreements), upon
16
the filing of a bankruptcy Mr. Coleman will cease being a custodian subject to section 543 and
continue in his role as managing member. See Bayou, 363 B.R. at 687.14
Assuming, arguendo, that Mr. Coleman remained a custodian post-petition, the
bankruptcy court may excuse compliance with subsection 543 (a), (b) and (c) if the interests of
creditors would be better served by continuance of a receiver’s possession. See Bankruptcy
Code § 543(d)(1). Movants have never suggested the Receiver has failed in his duties as
receiver or court-appointed managing member of the Wextrust Entities and Affiliates. Indeed,
the evidence suggests that, since his appointment by this Court, Mr. Coleman has worked
constantly on the wide range of difficult issues facing Wextrust and its investors and has literally
traveled around the world to meet with investors personally at town hall meetings to address
their concerns over the status of their savings. In any event, inasmuch as Movants have never
established that they represent creditors of any Wextrust Entity or Affiliate, they can hardly be
viewed as spokespersons for creditor interests.
Movants further maintain that the Receivership Order violates 28 U.S.C. § 157(d)
because it provides for “extraordinary relief” in the form of “a preemptive withdrawal of the
reference.” (Movants’ Memorandum of Law at 7.) The Receivership Order is devoid of any
language seeking to provide for a future withdrawal of the reference in the event a bankruptcy
case is commenced. What the Receivership Order does provide for is protection for the
receivership (of particular importance in the nascent stages of the Receiver’s investigation) and
for the in rem jurisdiction of this Court over assets subject to dissipation by Wextrust’s former
14 A typical LLC Entity operating agreement grants the company manager substantial authority to operate the
company and conduct its business affairs. Attached as Exhibit A to the Declaration of Mark S. Radke, submitted
herewith, is a true and correct copy of the Operating Agreement of GSH Development, LLC, one of the LLC
Entities and owner of the Hamptons of Hinsdale condominium/town home development in Hinsdale, Illinois. Under
section 6.1 of the Operating Agreement, the manager “has the exclusive right to manage the Company’s business.”
The manager “shall take all actions which shall be necessary or appropriate to accomplish the Company’s purposes
in accordance with the terms of this Agreement.”
17
principals. The entire argument seems premised on the notion that this Court has improperly
meddled in bankruptcy issues. This line of reasoning ignores the fact that Congress vested
original and exclusive jurisdiction over bankruptcy cases in the federal district courts. 28 U.S.C.
§ 1334(a). Further, on its motion, the district court may remove the reference. 28 U.S.C. 157
(d). Since the 1984 amendments to title 28 effected in the wake of the Supreme Court’s decision
in Northern Pipeline Co. v. Marathon Pipeline Co., 458 U.S. 50 (1982), the bankruptcy court
constitutes “a unit of the district court,” not some special court divorced from the authority of the
district court and superior federal courts. 28 U.S.C. § 151. This Court has not exceeded its
jurisdictional authority by issuing an order insuring continuity of management in the event a
bankruptcy case is filed only until such time as this Court (or at this Court’s election, the
bankruptcy court) determines who should manage the estate. As aforsesaid, Movants would
have the Receiver relinquish all property immediately on the filing of a bankruptcy, but Movants
nowhere mention who would then be in charge. That is simply irresponsible and worse.
The issue at bar is not what Movants contend it is, namely whether their ability to file
involuntary bankruptcy cases can be limited if Movants are otherwise qualified to undertake such
filings (see Section III above). Rather, the issue is whether bankruptcy should be used to create
order or chaos. The Receivership Orders as entered create order. Movants request license for
chaos.
V. THE RELIEF MOVANTS SEEK WOULD CREATE CHAOS, INEFFICIENCIES,
AND DUPLICATION OF EFFORT AND PREJUDICE INVESTORS.
A primary purpose of appointing a receiver is “promptly to install a responsible officer of
the court who [can] bring the companies into compliance with the law, ascertain the true state of
affairs . . . and report thereon to the court and the public shareholders and preserve the corporate
assets.” Am. Bd. of Trade, 830 F.2d at 436 (internal citations and quotations omitted.); see also
18
Phelan v. Middle States Oil Corp., 154 F.2d 978, 991 (2d Cir. 1946); Eberhard, 530 F.3d at 131
(same). Courts also appoint receivers “to carry out the SEC’s authority to enjoin violations of
the Act and, insofar as possible, to restore to a defrauded entity or to defrauded persons that
which was fraudulently diverted from its or their custody and control.” SEC v. Shiv, 379 F.
Supp. 2d 609, 618 (S.D.N.Y. 2005). A federal equity receivership is well-recognized as an
efficient manner of administering a series of entities involved in a massive fraudulent scheme
like the one that appears to have been perpetrated here. See Scholes v. Lehmann, 56 F.3d 750,
755 (7th Cir. 1995) (observing efficiency of federal equity receivership and noting that
“[c]orporate bankruptcy proceedings are not famous for expedition”).
Movants never state what legitimate purpose will be served by allowing involuntary
filings so as to effect a change in the management already provided for in the Receivership
Orders. That is because none exists. By seeking leave to file a series of involuntary bankruptcy
cases involving some, but not all, of the Wextrust Entities and Affiliates, Movants request
license for chaos. First of all, the separate entities appear to be more fiction than fact given all
the commingling that occurred. Second, the Receiver would continue to be responsible for some
unknown group of Wextrust Entities and Affiliates, but obviously cannot pursue his mandate to
take control of all assets and property of the Wextrust Entities and Affiliates and to ascertain the
use and disposition of funds obtained by the defendants through the sale of securities. The
reason: some of those assets and properties will be under the in rem jurisdiction of different
courts and potentially subject to differing management arrangements. Also, the filing of multiple
involuntary bankruptcy cases will greatly increase the cost of administering the over 240
separate legal entities that make up the Wextrust conglomerate, a cost that many of the entities
cannot withstand. (See Sordillo Decl., ¶¶ 3, 8-12.)
19
A. Movants’ suggested relief would prohibit
the Receiver from carrying out his duties.
The Receivership Order tasks the Receiver with a number of duties, as discussed in
Section II.A above, including determining whether any of the Wextrust Entities or Affiliates
should undertake bankruptcy filings. To assist him in complying with the Receivership Order,
the Receiver has retained Dewey & LeBoeuf, Mr. Klein, Hilco and Deloitte. These advisors are
in the process of advising the Receiver on a number of issues, including the bankruptcy option
and how to structure the bankruptcy so as to achieve the maximum return to investors. The
Receiver currently is considering all manner of appraisals and other valuations; evaluating such
issues as the feasibility of tracing investments so as to determine their ultimate disposition and
how to best marshal the assets of the receivership estate; investigating the nature of the investors’
stake in Wextrust (i.e., whether investors hold claims or equity interests); and holding
discussions with secured creditors. Meanwhile, without even waiting for the Receiver’s initial
report or otherwise ascertaining the facts, Movants seek carte blanche to implement the
bankruptcy option. The Receiver submits that to suggest the filing of bankruptcy cases without
the requisite knowledge, given the complexity of Wextrust and current economic conditions, is
irresponsible. The Movants, even if qualified petitioners, should not be permitted to file
bankruptcy cases at this point. This Court should permit the Receiver to conclude his analysis
and form his recommendations regarding bankruptcy.
Moreover, allowing the filing of involuntary bankruptcy cases would leave some of the
Wextrust Entities and Affiliates subject to the receivership and some of the entities in separate
bankruptcies in different jurisdictions. Such a division of the various Wextrust Entities and
Affiliates will deprive the Receiver of the ability to fulfill the duties this Court created by its
entry of the Receivership Order. For instance, the Receiver and his advisors have commenced an
20
investigation regarding the intermingling of investor funds. Completion of this type of
investigation would require access to all Wextrust financial data, not just the information
applicable to the particular Wextrust Entities and Affiliates remaining in the receivership.
In short, the specter of multiple bankruptcy cases for some LLC entities but not others
and an active receivership will likely make it impossible for the Receiver to complete a full
investigation. The whole concept underlying the Receivership Order—maximizing returns to
investors—will be negated. Indeed, Movants do not even know which entities have the
resources to finance bankruptcy cases, and which entities would simply lead to abandonment of
assets to the investors’ detriment.
B. Movants’ suggested relief would prejudice investors.
Separating the assets of the Wextrust Entities and Affiliates for the purpose of
determining which assets should be part of which estate obviously presents a major issue which
is avoided by proceeding with a single insolvency estate. See SEC v. Credit Bancorp, Ltd., 290
F.3d 80, 90 (2d Cir. 2002) (receivership are “insolvency proceedings” within the meaning of
UCC § 1-201(22) and “the law of federal equity receiverships applies”). Such a separation will
create inefficiencies, duplicative efforts and cause the receivership to incur substantial costs
otherwise available for distributions. (See generally Sordillo Decl., ¶¶ 8-12.)
The administration of separate insolvency estates will greatly increase the cost of
administering the Wextrust estate. Many of the LLC Entities do not appear to generate sufficient
cash flow to pay the administrative expenses and other costs common to a bankruptcy
proceeding. (Id., ¶ 7.) The assets within the receivership are limited but appear to be sufficient
to satisfy the cost of operating the individual businesses during the time necessary for the
Receiver to generate a strategic plan. However, additional costs and expenses not within the
budgets of the Wextrust Entities and Affiliates may severely impact the Receiver’s ability to
21
maintain operations, conduct his analysis and make distributions to creditors. (Id., ¶ 6.) The
costs associated with bankruptcy include so-called first-day motions and the preparation of
Schedules and Statements of Financial Affairs for each filing entity, increased utility deposits
under section 366 of the Bankruptcy Code, increases in working capital arising from reductions
in vendor payment terms and the added costs associated with statutory committees and their
professionals. (Id., ¶¶ 8, 9.) Bankruptcy may force some of the Wextrust Affiliates to sell assets
immediately in what are rather obviously less than optimal conditions. (Id., ¶ 11.) Investors will
suffer obvious prejudice to the extent the expenses of prosecuting multiple insolvency
proceeding consumes assets otherwise available for distribution.
C. Movants’ suggested relief is unnecessary
Finally, at no point do Movants maintain that the filing of multiple involuntary
bankruptcy cases will provide some particular benefit to claimants or investors. They cannot
point to any particular situation. The Receiver’s experts have determined that, at this point, there
is no need to commece bankruptcy cases for any of the Wextrust properties. (See Kahn Decl., ¶
6.) If the Receiver determines at a later time that one or more bankruptcies are needed, the
Receiver will not hesitate to commence the cases in the bankruptcy court for this federal district.
In the meantime, and contrary to Movants' assertions (Movants’ Memorandum of Law at 11), the
Receivership Order provides many safeguards to creditors and investors that parallel applicable
provisions of the Bankruptcy Code. (See Amended Receivership Order at 7-8 (requiring written
notice to the SEC, the individual defendants and investors requesting notice of new
encumbrances on assets in excess of $750,000 and of the lease or sale of property having an
appraised value or cost basis in excess of $750,000).) If Movants later determine that changed
circumstances mandate bankruptcy filings and none have occurred, the Receivership Order
permits Movants to seek modification of the Receivership Order.
22
Movants also generally argue that bankruptcy cases provide a more appropriate
framework for the liquidation of insolvent companies than a SEC receivership. (See Movants’
Memorandum of Law at 9) It may prove beneficial to commence chapter 11 or 7 cases for a
substantial number of the Wextrust Entities and Affiliates at some later point in time, particularly
in connection with distributing assets through the mechanism of a chapter 11 plan. However, at
this juncture, the Receiver (who the Court empowered to conduct an analysis of whether
bankruptcies should be filed) and his consultants have not identified any situation that warrants a
bankruptcy and cannot at this point make an informed recommendation on the subject. (See
Kahn Decl., ¶ 6.)
Furthermore, in their comparison of the relative merits of bankruptcy and SEC
receivership, Movants in some instances are simply incorrect. For example, the bankruptcy
courts do not necessarily constitute a superior forum for the actual sale or other liquidation of the
assets within a receivership estate. The Second Circuit and numerous other courts have
recognized the need for liquidation by a receiver in appropriate circumstances. Most recently, in
Credit Bancorp, 290 F.3d at 88, the Second Circuit approved the partial liquidation of the assets
of a corporate defendant in a securities fraud Ponzi scheme. A district court’s authority to order
liquidation by a federal equity receiver has been affirmed by numerous appellate courts. See,
e.g., Bailey v. Proctor, 160 F.2d 78, 81 (1st Cir. 1947) (“[W]e now hold that a court of equity has
inherent power to appoint a receiver to liquidate a corporation or investment trust where fraud,
mismanagement or abuse of trust is present whether or not insolvency is likewise present.”); SEC
v. Tipco, Inc., 554 F.2d 710, 711 (5th Cir. 1977) (upholding the district court’s decision to deny
an intervenor the opportunity to challenge a receiver’s plan to liquidate corporate assets and
distribute them on a pro rata basis); SEC v. Lincoln Thrift Ass’n, 577 F.2d 600, 609 (9th Cir.
23
1978) (affirming district court’s order refusing to transfer receivership liquidation proceedings to
bankruptcy court). Indeed, in the Second Circuit, a receiver appears to have the right to choose
the forum in which he or she proceeds with liquidation, as the court does not have authority to
force the receiver into declaring bankruptcy. Manhattan Rubber Mfg. Co. v. Lucey Mfg. Co., 5
F.2d 39, 42 (2d Cir. 1925) (“We think the command of the order below reaches out into limits
that a court of equity may not go in administering the property of the corporation in possession
of its receiver.”). The Second Circuit has never reversed a district court order authorizing
liquidation by an SEC receiver. See Am. Bd. of Trade, 830 F.2d at 437 (acknowledging that it
had “never vacated or modified a receivership order on the ground that a district court had
improperly attempted to effect liquidation.”).15
In other jurisdictions, courts have permitted liquidation by SEC receivers on similar
grounds. For example, in SEC v. TLC Investments and Trade Co., 147 F. Supp 2nd 1031 (C.D.
Cal. 2001), the Central District of California ordered pre-judgment liquidation of receivership
assets. Its reasons for doing so are instructive for a number of reasons. First, it held that
“liquidation at this time, prior to entry of judgment, is appropriate because the evidence
presented to the Court demonstrated that the TLC entities’ liabilities were greater than their
15 In several cases, the Second Circuit has expressed in dicta the concern that it may be more appropriate to conduct
the liquidation of an insolvent company in a bankruptcy case rather than in a district court receivership. See, e.g.,
Eberhard, 530 F.3d at 132; Am. Bd. of Trade, 830 F.2d at 436; Lankenau, 350 F.2d at 63 (“[R]eceiverships ancillary
to SEC actions against brokers or broker-dealers should not be continued, in a case involving insolvency, beyond the
point necessary to get the estate into the proper forum for liquidation – the bankruptcy court.”). In each of those
cases, despite the Second Circuit’s misgivings, it nonetheless affirmed the district court’s order authorizing
liquidation by the receiver.
Whatever persuasive force the dicta in those cases may have, it has been called into question by the Second Circuit’s
subsequent opinion in the Credit Bancorp case, a case which squarely addressed the issue of whether the receiver
should liquidate the estate’s assets and which Movants fail to cite in their Memorandum of Law. The Second
Circuit in Credit Bancorp, 290 F.3d at 90, held – as part of its ratio deciendi – that an SEC receivership was an
insolvency proceeding. Courts in this district have followed that decision in authorizing liquidations by SEC
receivers. See SEC v. Shiv, 379 F. Supp. 2d 609 (S.D.N.Y. 2005).
24
assets and because ongoing management alone will drain money out of the estate, money that
otherwise could be returned to investors.” Id. at 1036.
Second, the court in TLC held that “in the unique circumstances of this case, there is such
a close connection between the actions necessary for ongoing oversight of the Receivership’s
assets and for liquidation of those assets that it is appropriate for the Receiver, rather than a
bankruptcy court, to carry out the liquidation.” Id. In other words, liquidation was appropriate
given that the purpose of a receivership was not to engage in an on-going business, but rather to
collect and preserve assets for ultimate distribution to adversely affected investors and creditors.
As the TLC court noted, “[u]nfortunately, the investors in this situation have been victimized by
the actions of the Defendants. The Court can stop this from happening again, and it can return as
much money as possible to the investors, but it cannot turn the TLC entities into an ongoing,
profitable investment. It would not be appropriate for the Court, or the Receiver on behalf of the
Court, to become a real estate developer.” TLC, 147 F. Supp. 2d at 1043 n.8.
Following such precedent, district courts—even in this District—continue to exercise
their equitable powers to liquidate and resolve claims among various types of creditors. This
Court has held that “[t]he Second Circuit, like the Seventh Circuit, therefore extended the
Receiver’s equity jurisdiction to trace and repatriate funds from many discrete accounts, through
an entity from which the funds had been diverted, back to the rightful owners, ratably in
proportion to their losses.” SEC v. Shiv, 379 F. Supp. 2d at 617; see also Tcherepnin v. Franz,
485 F.2d 1251 (7th Cir. 1973) (court had ancillary jurisdiction over actions brought by receiver
to trace and restore funds and assets that defendants had diverted, to create a fund from which
fraud victims could be compensated.). As the Shiv court noted, the Second Circuit has held this
action “was a proper exercise of discretion to implement the SEC’s authority to obtain an order
25
from a District Court to enjoin fraud, freeze accounts that are the instrumentalities of fraud, and
repatriate funds on a ratable basis to defrauded claimants.” Id. (citing Credit Bancorp, 290 F.3d
at 88-89, 90).
Movants have reviewed many of the same authorities and come to the conclusion that the
liquidation of legal entities used in perpetrating a complex Ponzi scheme, as a matter of public
policy, requires the immediate commencement of bankruptcies. Movants are wrong. The
authorities discussed above do not come to any such overall conclusion. Liquidation of assets by
a receiver under the guidance of a federal district court may be entirely appropriate depending on
the circumstances. At this juncture of the case, the investigation of which prospective debtors
have rights against specific assets and which investors may properly assert claims against
specific assets, regardless of which LLC Entity formally owns the assets, has not progressed to
the point where placing particular LLC Entities in bankruptcy will provide any demonstrable
benefit to investors. Indeed the Receiver has already shown that splitting the insolvency estates
to be administered by bankruptcy courts and this Court will needlessly interfere with the
Receiver’s investigation and greatly increase the costs of administration. (See Section V.B
above.)
The Receivership Order properly charges the Receiver with certain duties. He should be
permitted to complete them. Meanwhile, that same Order contains provisions that meet the
concerns expressed by Movants and allow all parties to seek relief from the Court, if justified.
VI. CONCLUSION
For all of the foregoing reasons, the Receiver respectfully requests that this Court deny
the Motion and grant such other and further relief as the Court deems appropriate.
26
Dated: November 6, 2008 Respectfully Submitted,
s/ Leo V. Gagion
Leo V. Gagion
Martin F. Bienenstock
Mark S. Radke, pro hac vice
DEWEY & LEBOEUF LLP
1301 Avenue of the Americas
New York, New York, 10019-6092
(212) 259-8000 (t)
(202) 259-6333 (f)
Attorneys for Timothy J. Coleman, Receiver
for the Wextrust Entities and Affiliates
27
CERTIFICATE OF SERVICE
The undersigned, an attorney, states that I am one of the attorneys for Timothy J. Coleman,
Receiver, in this matter and do hereby certify that on November 6, 2008, I caused a true and
correct copy of the foregoing RECEIVER’S OPPOSITION TO INTERNATIONAL AD-
HOC COMMITTEE OF WEXTRUST CREDITORS’ MOTION OBJECTING TO
ENTRY AND SEEKING MODIFICATION OF PRELIMINARY INJUNCTION to be
served upon the following:
Via Electronic Mail
Alexander M. Vasilescu
Securities and Exchange Commission
(212) 336-1322 (f)
vasilescua@sec.gov
Andrew M. Calamari
Securities and Exchange Commission
(212) 336-0178 (f)
calamaria@sec.gov
Steven G. Rawlings
Securities and Exchange Commission
(212) 336-1324 (f)
rawlingss@sec.gov
Edward F. Malone
Attorney for Barrington, Bank & Trust Co.
and Hinsdale Bank & Trust Co. Company
(312) 984-3100 (f)
edward.malone@bfkn.com
George R. Mesires
Attorney for Barrington, Bank & Trust Co.
and Hinsdale Bank & Trust Co. Company
(312) 984-3150 (f)
george.mesires@bfkn.com
Barry S. Pollack
Attorney for G&H Partners AG
(617) 338-2880
bpollack@sandw.com
Shalom Jacob, Esq.
Attorney for INTERNATIONAL AD-HOC
COMMITTEE OF WEXTRUST CREDITORS
shalom.jacob@dechert.com
Via Electronic Mail
Barry S. Zone
Attorney for Defendant STEVEN BYERS
(212) 752-3868 (f)
bzone@gskny.com
Jason Canales
Attorney for Defendant STEVEN BYERS
(212) 980-5192 (f)
jcanales@gskny.com
Stephen Richard Popofsky
Attorney for Defendant STEVEN BYERS
(212) 980-5192 (f)
spopofsky@gskny.com
John C. Meringolo
Attorney for Defendant JOSEPH
SHERESHEVSKY
(212) 202-4936 (f)
jmeringolo@aol.com
Michael Fred Bachner
Attorney for Defendant ELKA
SHERESHEVSKY
(212) 344-7774 (f)
mb@bhlawfirm.com
Martin Siegel, Esq.
Attorney for INTERNATIONAL
CONSORTIUM OF WEXTRUST
CREDITORS
msiegel@brownrudnick.com
___ s/ Leo V. Gagion _____________________
