in the united states district court for the ... sur...circuit found in knauer that the "key...

QB\13342503.2

IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF WISCONSIN

FAYE B. FEINSTEIN, NOT INDIVIDUALLY, BUT AS RECEIVER FOR WML GRYPHON FUND LLC,

Plaintiff,

v.

Case No. 11-CV-00058

BRIAN W. BENDER, individually and in his capacity as trustee of the Brian W. Bender Personal Revocable Trust and the Brian W. and Marianne P. Bender Joint Revocable Trust, and MARIANNE P. BENDER, individually and in her capacity as trustee of the Brian W. and Marianne P. Bender Joint Revocable Trust,

Defendants.

RECEIVER'S CIVIL L.R. 7(h) AND 7(i) EXPEDITED NON-DISPOSITIVE MOTION

FOR LEAVE TO FILE SUR-REPLY TO DEFENDANTS' REPLY MEMORANDUM OF LAW IN SUPPORT OF THEIR MOTION TO DISMISS

Plaintiff, Faye B. Feinstein (the "Receiver"), not individually, but as receiver for WML

Gryphon Fund LLC, a Wisconsin limited liability company ("Gryphon"), by her attorneys,

hereby requests leave to file the attached Sur-Reply of Receiver to Defendants' Reply

Memorandum of Law in Support of Their Motion to Dismiss Plaintiff's Complaint. Defendants'

reply (Docket No. 17) (the "Reply") raises arguments and incorporates or references secondary

source material outside the scope of Defendants' memorandum of law in support of their original

Motion to Dismiss and outside the issues raised and addressed by the Receiver's brief in

opposition thereto. The Reply also mischaracterizes the Receiver's filings and positions. The

Receiver therefore respectfully requests leave to file the Sur-Reply submitted as Exhibit 1 to this

Motion, which concisely describes and responds to those aspects of the Defendants' Reply.

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WHEREFORE, the Receiver asks that the Court enter an order (A) granting the Receiver

leave to file the Sur-Reply submitted herewith as Exhibit 1; (B) directing the Clerk of the Court

to file the Sur-Reply; and (c) granting the Receiver such other or further relief as the Court

deems appropriate.

Respectfully submitted this 17th day of May, 2011.

/s/ Christopher Combest

One of the Receiver's Attorneys Christopher Combest QUARLES & BRADY LLP 300 North LaSalle Street, Suite 4000 Chicago, IL 60654 Phone: (312) 715-5000 [email protected] Counsel to Faye B. Feinstein, Receiver

EXHIBIT 1

Proposed Sur-Reply of Receiver to Defendants' Reply Memorandum of Law in Support of

Their Motion to Dismiss Plaintiff's Complaint

QB\13342507.2

IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF WISCONSIN

FAYE B. FEINSTEIN, NOT INDIVIDUALLY, BUT AS RECEIVER FOR WML GRYPHON FUND LLC,

Plaintiff,

v.

Case No. 11-CV-00058

BRIAN W. BENDER, individually and in his capacity as trustee of the Brian W. Bender Personal Revocable Trust and the Brian W. and Marianne P. Bender Joint Revocable Trust, and MARIANNE P. BENDER, individually and in her capacity as trustee of the Brian W. and Marianne P. Bender Joint Revocable Trust,

Defendants.

SUR-REPLY OF RECEIVER TO DEFENDANTS' REPLY MEMORANDUM OF LAW

IN SUPPORT OF THEIR MOTION TO DISMISS PLAINTIFF'S COMPLAINT

Plaintiff, Faye B. Feinstein (the "Receiver"), not individually, but as receiver for WML

Gryphon Fund LLC, a Wisconsin limited liability company ("Gryphon"), by her attorneys,

hereby makes this sur-reply to Defendants' Reply Memorandum of Law in Support of Their

Motion to Dismiss Plaintiff's Complaint (Docket No. 17) (the "Reply"). This Sur-Reply

addresses arguments and authorities raised by Defendants for the first time in the Reply and

corrects Defendants' misleading statements.1

(1) Defendants' New Mischaracterization of Janvey V. Adams: In their Reply,

Defendants challenge the Receiver's analysis of Janvey v. Adams, 588 F.3d 831 (5th Cir. 2009),

not by argument from the appellate opinion itself, but, for the first time, by reference to, and by

1 Capitalized terms not defined herein are intended to have the respective meanings ascribed to them in the Complaint or in the Receiver's Opposition to the Motion to Dismiss (Docket No. 11) (the "Opposition").

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purporting to describe, the underlying district court lawsuits that led to the Fifth Circuit's opinion

on what it means to be a "relief defendant." Since Defendants invite it, an examination of the

two lawsuits that led to the consolidated appeal in Janvey is appropriate here and shows that the

Receiver's description in her Opposition is correct: the Fifth Circuit ruled against a receiver who

had attempted to use the concept of "relief defendant" to avoid doing what the Receiver here has

done – allege specific statutory and/or common-law causes of action entitling her to relief from

the Defendants.

In Janvey, the Fifth Circuit had consolidated appeals of two lawsuits filed by receiver

Ralph S. Janvey in the United States District Court for the Northern District of Texas: Janvey v.

Alguire, Case No. 09-cv-00724 (as amended (before the appeal) on July 28, 2009, the "724

Complaint") (appealed as No. 09-10761), and Janvey v. Letsos, Case No. 09-cv-01329 (the

"1329 Complaint") (appealed as No. 09-10765).2 Exactly as the Receiver described (Opposition

at 6-7), Mr. Janvey filed those lawsuits to recover assets – not by asserting specific causes of

action against the scores of entities he had targeted – but, rather, by trying to shoehorn his targets

into the category of "relief defendant" and, then, obtaining a declaration that their assets were

subject to redistribution among all injured investors. In fact, the 1329 Complaint specifically

states that "[Janvey] files this Complaint to name as Relief Defendants the following investors

[naming them]" whom he "added in a nominal capacity solely to facilitate relief" (1329

Complaint, ¶¶2, 4). The 724 Complaint is actually entitled "Receiver's Complaint Naming Relief

Defendants" and contains a 17-page appendix listing the investors Mr. Janvey sought to name as

"relief defendants." It was not until after the Fifth Circuit's decision that Mr. Janvey further

amended the 724 Complaint to assert fraudulent-transfer and unjust-enrichment claims against

2 The 724 Complaint and the 1329 Complaint are attached as Group Exhibit A hereto; the 1329 Complaint has two "first" pages, because the page containing the case caption was filed separately as an amendment.

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certain of those parties (Docket No. 128 in Case No. 09-cv-00724). Both the 724 Complaint and

the 1329 Complaint remain pending in the federal district court.

Moreover, while Defendants insist that Janvey is indistinguishable from the Receiver's

Complaint for disgorgement, the Seventh Circuit has already distinguished it. In its decision in

the underlying receivership case, SEC v. Wealth Management LLC, 628 F.3d 323, 335 (7th Cir.

2010) (in which the appellants were represented by the same counsel representing Defendants in

this action), the Court observed that the "issue in Janvey was whether the district court had the

authority to freeze assets the receiver sought to 'claw back' when the holders of the assets were

not relief defendants . . . . it did not consider the equities of clawing back those assets." Id. at

335 n.8.

Finally, Defendants try to enlist the Securities and Exchange Commission ("SEC") into

their effort to make Janvey stand for something it does not, by selectively citing to, and including

in their appendix, an amicus brief submitted in the Janvey case by the SEC, by which Defendants

attempt to imply SEC disapproval of the captioned action. (Reply at 3.) Defendants encourage

confusion by using the non-statutory term "claw back" to refer to both the Janvey lawsuits and

the Receiver's Complaint. The term "claw back" is used as shorthand to refer to any of a variety

of actions that seek recovery of money previously paid, including fraudulent transfer, unjust

enrichment, and preference actions. The SEC also used the term to refer to receiver Janvey's

actions to acquire control of assets by deeming their owners to be "relief defendants." That the

SEC may have disagreed with that approach does not mean that it opposes any suit that can be

characterized, in common parlance, as a "claw back" action.

On May 10, 2011, the SEC filed a motion for leave to file a response to this aspect of the

Reply, attaching the response to its motion as an exhibit (Docket Nos. 19 and 19-1) (the "SEC

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Submission"). While the Receiver respectfully suggests that an SEC "policy" or position does

not bear on whether the Receiver has raised claims that, as a matter of law, can withstand

Defendants' Motion to Dismiss, if this Court were to consider the SEC's position, as Defendants

urge it to do, the Court should allow the SEC Submission to be filed, because the SEC is in the

best position to articulate its view.3

(2) Defendants Misrepresent the Receiver's References to the SEC's Complaint:

Defendants repeatedly assert that the Receiver has "incorporated by reference the SEC's

complaint," filed in the SEC's underlying enforcement action, into her Complaint against the

Bender Defendants, implying that the Receiver is somehow bound by all statements and

positions taken by the SEC in the underlying enforcement action. (Reply at 10, 12, 13.) The

Receiver's Complaint refers to the SEC action as part of her jurisdictional statement (Receiver's

Complaint, ¶8) and also refers to several exhibits to the SEC's complaint, all of which are part of

the public record. Nowhere in her Complaint or in her Opposition does the Receiver purport to

adopt any of the SEC's allegations or inferences as her own for the purposes of the captioned

lawsuit.

(3) Defendants' Misstatement of the Seventh Circuit's Holdings in Scholes v.

Lehmann and Knauer v. Jonathan Roberts Financial Group: Defendants paraphrase – and

thereby misstate – the Seventh Circuit's holding in Scholes v. Lehmann, 56 F.3d 750 (7th Cir.

1995), regarding standing: contrary to Defendants' gloss, the Seventh Circuit did not hold that a

receiver's standing depends upon whether or not a Ponzi scheme is involved; rather, the Scholes

court recognized that a receiver has standing to sue when seeking to "redress injuries to the entity

3 Defendants' object (Docket No. 21) to the SEC's request to be heard with regard to the relevance to this proceeding of the SEC's brief, filed in a different case, to address different facts and legal issues. Defendants would like to use statements made by the SEC in its Janvey brief for Defendants' own purposes, while denying the author of those statements, the SEC itself, leave to address the relevance of those same statements.

- 5 - QB\13342507.2

in receivership". Id. at 753. Furthermore, the Scholes court does not state that it refused to apply

the in pari delicto doctrine to the receiver because "the case involved a Ponzi scheme". (Reply at

16.)

Similarly, Defendants create a rule from Knauer v. Jonathan Roberts Fin. Group, 348

F.3d 230 (7th Cir. 2003), that is not to be found in their citation to that case (Reply at 3). In

Knauer, the Seventh Circuit agreed with its prior holding in Scholes and found that the receiver

for the receivership entities in Knauer had standing to pursue claims on their behalf, because

those receivership entities had "suffered a legal injury" – what the court characterized there as

"embezzlement." Here, the Receiver also alleges that Gryphon, a receivership entity, suffered

injury as a result of the transfers that WM caused Gryphon to make to Defendants. The Seventh

Circuit found in Knauer that the "key difference" between "fraudulent conveyance cases such as

Scholes" and Knauer was that the Scholes receiver sought to "recover the diverted funds from the

beneficiaries of the diversions". Id. at 236. So, too, does the Receiver in the captioned action.

Defendants are asking this Court to create a new rule of law: that a receiver may never

establish that any investor received a fraudulent transfer under relevant state law, unless there is

some prior finding that the investment vehicles were operated as Ponzi schemes and the damages

sought are characterized as "embezzlement step" funds. Driving that request is Defendants'

refrain that they are "innocent" (see, e.g., Reply at 1, 2 (twice), 3, 6). Whether Defendants can

establish any defenses to the Receiver's claims is not appropriately addressed on a motion to

dismiss. There is no basis to deny a receiver the opportunity to seek redress for the benefit of the

receivership estate. In fact, courts have found otherwise, even where the case does not involve a

Ponzi scheme, see, e.g., Lancer Mgmt. Group LLC v. Alpha Fifth Group, Case No. 04-60899,

2010 WL 1332844, at *3 n.2 (S.D. Fla. Mar. 30, 2010) (attached hereto as Exhibit B) (under

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Scholes, "a Receiver has standing to bring fraudulent transfer claims because . . . the Receiver is

in fact suing to redress injuries that the entities suffered when its members caused the entities to

commit waste and fraud. [Citations omitted.] At the pleading stage, the Court will permit the

Receiver to pursue this legal theory. A determination [of the merits] should await the

development of a complete factual record.").

WHEREFORE, for the reasons stated herein and in the Receiver's Opposition to

Defendants' Motion to Dismiss, the Receiver asks that the Motion be denied.

Respectfully submitted this 17th day of May, 2011.

/s/ Christopher Combest One of the Receiver's Attorneys Christopher Combest QUARLES & BRADY LLP 300 North LaSalle Street, Suite 4000 Chicago, IL 60654 Phone: (312) 715-5000 [email protected] Counsel to Faye B. Feinstein, Receiver

GROUP EXHIBIT A

Janvey v. Alguire, Case No. 09-cv-00724 (the "724 Complaint") and Janvey v. Letsos, Case No. 09-cv-01329 (the "1329 Complaint")

AMENDED COMPLAINT NAMING RELIEF DEFENDANTS 1

IN THE UNITED STATES DISTRICT COURTFOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

RALPH S. JANVEY, IN HIS CAPACITY AS COURT-APPOINTED RECEIVER FOR THE STANFORD INTERNATIONAL BANK, LTD., ET AL.

Plaintiff,

v.

JAMES R. ALGUIRE, ET AL.

Relief Defendants.

§§§§§§§§§§§§

Case No. 03:09-CV-0724-N

________________________________________________________________________

RECEIVER’S AMENDED COMPLAINT NAMING RELIEF DEFENDANTS

________________________________________________________________________

SUMMARY

1. The ultimate purpose of this Receivership is to make the “maximum disbursement

to claimants.” This requires the Receiver to maximize the pool of assets that will be available for

distribution. To accomplish this, the Receiver must take control of all assets of the Estate and

traceable to the Estate, “wherever located,” including money stolen from investors through fraud.

2. The Receiver’s investigation to date reveals that CD sales generated substantially

all of the income for the Stanford Defendants and the many related Stanford entities. Revenue,

let alone any profit, from all other activities and investments was miniscule in comparison.

Money that new investors were deceived into paying to purchase CDs funded the Stanford

network; lavish offices and appointments; extravagant lifestyles for the individual defendants

and their families; employees’ salaries; loans, commissions, and bonuses to financial advisors;

and purported CD Proceeds in the form of interest and redemptions to unwitting investors. This

fraud endured, in part, by incentivizing a sales force with big commissions and paying CD

Case 3:09-cv-00724-N Document 14 Filed 07/28/09 Page 1 of 20 PageID 178


Proceeds to a minority of investors in order to maintain the façade of a legitimate financial

business.

3. However, money stolen from CD purchasers through trickery and deceit retains its

character as ill-gotten gain regardless of where, when, how, and why the Stanford Defendants

spent it. When Stanford paid commissions to his brokers, or CD Proceeds to a few investors, he

did no more than take money out of one investor’s pocket and put it into the hand of another

investor or a broker selling the fraudulent CDs. For the more than 20,000 investors who have

thus far received little or nothing from their investment in Stanford CDs, money recovered from

wherever it resides today is likely the only money they will ever receive in restitution. CD

Proceeds – loans, commissions, bonuses or other compensation paid to financial advisors for

selling CDs, and interest or redemptions to investors – are little more than stolen money and do

not belong to persons who received such funds but belong instead to the Receivership Estate.

4. The recipients of new CD purchase money fall into four categories: (1) those who

were complicit in, or at least knowledgeable about, the Stanford Defendants’ scheme; (2)

financial advisors who received compensation to sell fraudulent CDs; (3) a minority of investors

who received both a supposed return of their initial investment in the form of a purported

redemption, and a false profit in the form of purported interest payments; and (4) investors who

received CD Proceeds in an amount less than their initial investment.

5. The Receiver’s investigation to identify those who were actively or passively

complicit in the fraud is on-going. When such persons are identified, the Receiver will fulfill his

duty to pursue claims against any such persons who received money taken from those who

purchased CDs. At this stage of the Receivership, the Receiver has identified substantial sums of

money paid to brokers and to a minority of investors, and through this Complaint seeks the



return of those funds to the Receivership Estate in order to make an equitable distribution to

claimants.

6. The monies paid by Stanford Defendants to financial advisors for the sale of CDs

were not in payment for legitimate services rendered by the financial advisors. The Stanford

Defendants kept their fraudulent scheme going by using the financial advisors to lure new

investors and then diverting the investors’ funds for the Stanford Defendants’ own illicit

purposes. The commissions, loans, and other compensation paid to financial advisors came not

from revenue generated by legitimate business activities, but from monies contributed by

defrauded investors. The financial advisors are in possession of assets traceable to the Stanford

Defendants’ fraudulent scheme. They have no legitimate ownership interest in these assets; they

necessarily hold the assets in trust for the Receivership Estate for the benefit of defrauded

investors.

7. Stanford investors received money that they may have believed was a return on an

investment placed with what they thought was a legitimate bank, Stanford International Bank

Ltd. (“SIB”). In reality, the money the investors received was not their money, was not a return

on their investment, and was not generated by any of SIB’s other business ventures. The funds

used to pay purported CD interest and redemptions was simply money that came from the more

than 20,000 CD holders who were deceived into purchasing CDs and who by chance, or as the

result of sales tactics by brokers, had not withdrawn funds from SIB as of the date the

Receivership was put in place. CD Proceeds must be returned to the Receiver to compensate

victims of the Stanford fraud according to principles of law and equity, rather than according to

the vagaries of luck or chance. The Receiver cannot fulfill his duty to compensate victims

according to long-standing principles of law and equity if some who received stolen money,



through luck, chance or complicity, are allowed to keep stolen money. Such preferential

treatment of a few would only come at the expense of thousands of others who currently hold –

not funds withdrawn from the fraud scheme – but only the worthless CDs which were the engine

of this massive fraud.

8. The fraudulent proceeds received by the financial advisors and investors

(collectively, the “Relief Defendants”) totaled over $800 million, and was delivered, either to

brokerage and trust accounts, or to depository banks, or directly to the investors and brokers. A

substantial portion of the fraudulent proceeds were received into accounts in the name of or

controlled by the Relief Defendants in the custody of (a) Pershing LLC (“Pershing”), the primary

clearing broker used by Defendant Stanford Group Company (“SGC”) in the conduct of its

brokerage business or (b) SEI Private Trust Company (“SEI”), which holds Stanford Trust

Company customer accounts.1 The investor and financial advisor Relief Defendants named

herein include: (1) Stanford customers or financial advisors who have a frozen account(s) at

Pershing, SEI or JP Morgan; (2) Stanford customers who, pursuant to stipulation, have

transferred assets to the Receiver’s escrow account; and (3) Stanford customers and financial

advisors who do not presently have any frozen accounts or funds in escrow. Pershing and SEI

(“Custodian Relief Defendants”) are also named herein as relief defendants solely to facilitate

final relief upon an adjudication that the money in the frozen accounts should be disgorged and

delivered to the Receiver’s exclusive control.

9. The Receiver does not allege at this time that any of the Relief Defendants

participated in the fraudulent scheme at issue in the SEC’s case or otherwise committed any

wrongdoing. Rather, the Relief Defendants are added in a nominal capacity solely to facilitate

1 In some instances, the fraudulent proceeds were received into accounts in the name of or controlled by the Relief Defendants in the custody of JP Morgan.



return of assets to the Receivership Estate. See SEC v. Colello, 139 F.3d 674, 676-77 (9th Cir.

1998).

10. In fraud cases such as this where investors’ funds are commingled, all defrauded

persons are similarly situated with respect to those who perpetrated the scheme and are to be

treated equally with respect to the ultimate distribution plan that the Receiver implements using

funds and assets recovered. See e.g., SEC v. Credit Bancorp, Ltd. 290 F.3d 80, 88-89 (2d Cir.

2002). All Stanford claimants, including the investors named herein, will have the opportunity

to assert a claim for recovery during the Receiver’s distribution process.

11. “As the Supreme Court explained in the litigation that gave the Ponzi scheme its

name, ‘equality is equity’ as between ‘equally innocent victims.’” SEC v. George, 426 F.3d 786,

799 (6th Cir. 2005) (quoting Cunningham v. Brown, 265 U.S. 1, 13 (1924)). Allowing some

innocent investors, such as the Relief Defendants, to keep proceeds from the fraudulent scheme

when other investors received none, would violate this principle. See United States v. Durham,

86 F.3d 70, 73 (5th Cir. 1996) (district court did not abuse its discretion by rejecting plaintiff’s

request to trace and recover investment funds and holding that “all the fraud victims were in

equal positions and should be treated as such”). “The mere coincidence that the defendants

chose the relief defendants (instead of others) to receive funds contributed by other investors in

order to delay the discovery of this scheme does not entitle the relief defendants to preferential

treatment.” George, 426 F.3d at 799; see SEC v. Forex Asset Mgmt. LLC, 242 F.3d 325, 331

(5th Cir. 2001) (“noting that ‘the facts did not support a remedy that would elevate the [relief

defendants’] claim above the other victims’ even though the relief defendants could trace the

funds they received to a segregated account containing only their investment”); SEC v. Infinity

Group Co., 226 Fed. Appx. 217, 219 (3rd Cir. 2007) (upholding a pro rata distribution plan and



refusing to let an investor keep 100% of his principal even though his money was directly

traceable because “there is no equitable basis to distinguish between early investors and those,

like Roberts, who invested shortly before TIGC’s account was frozen, and that all investors

should thus be treated the same”).

12. The Receiver therefore seeks an order that (a) proceeds or funds received directly

or indirectly by the Relief Defendants from fraudulent CDs are property of the Receivership

Estate held pursuant to a constructive trust for the benefit of the Receivership Estate; (b) each of

the Relief Defendants is liable to the Receivership Estate for an amount equaling the amount of

proceeds he or she received from fraudulent CDs; (c) the Receiver may withdraw the assets

contained in Pershing, SEI and JP Morgan accounts in the names of or controlled by the Relief

Defendants and add those assets, up to the amounts of fraudulent CD Proceeds received by the

Relief Defendants, to the assets of the Receivership Estate; (d) the escrow account at JP Morgan

holding CD Proceeds pursuant to stipulations with investors is property of the Receivership

Estate available for distribution to claimants; and (e) Relief Defendants (excluding the Custodian

Relief Defendants) must pay to the Receiver the difference, if any, between the amounts

contained in their Pershing, SEI and JP Morgan accounts, if any, and the total amount of

fraudulent CD Proceeds received.

13. If the Receiver does not pursue these claims against Relief Defendants, then an

investor who redeemed millions of dollars in CDs just before the Receivership began could

recover 100%, or more, of his initial investment – despite the absolute certainty that what he

received was money stolen from other investors. For example, on or about January 23, 2009

Relief Defendant Gregory Alan Maddux received $3,669,735.10 in SIB CD Proceeds, consisting

of $3,500,000 in principal and $169,735.10 in purported interest. On December 19, 2008, Relief



Defendant Regions Bank received over $13 million in CD Proceeds. Had Mr. Maddux or

Regions Bank waited only a few more weeks and tried cash out after the Receivership began,

they would have received nothing. Through no fault of their own, more than 20,000 other

investors who did not cash out before the Receivership are waiting, and will continue to wait for

some time, to receive pennies on the dollar. There is no legal authority to support such inequity.

JURISDICTION & VENUE

14. This Court has jurisdiction over this action, and venue is proper, under Section

22(a) of the Securities Act (15 U.S.C. § 77v(a)), Section 27 of the Exchange Act (15 U.S.C.

§ 78aa), and under Chapter 49 of Title 28, Judiciary and Judicial Procedure (28 U.S.C. § 754).

15. Further, as the Court that appointed the Receiver, this Court has jurisdiction over

any claim brought by the Receiver to execute his Receivership duties.

16. Further, within 10 days of his appointment, the Receiver filed the original

Complaint and Order Appointing the Receiver in 26 United States district courts pursuant to 28

U.S.C. § 754, giving this Court in rem and in personam jurisdiction in each district where the

Complaint and Order have been filed.

17. Further, each account holder who submitted an Application for Review and

Potential Release of Stanford Group Company Brokerage Accounts made the following

declaration: “By filing this application, I submit to the exclusive jurisdiction of the United States

District Court for the Northern District of Texas, Dallas Division and irrevocably waive any right

I or any entity I control may otherwise have to object to any action being brought in the Court or

to claim that the Court does not have jurisdiction over the matters relating to my account.”

18. Further, a number of the Relief Defendants have filed motions to intervene in SEC

v. Stanford International Bank, Ltd., et al., Case No. 3:09-cv-298-N. By filing a motion to



intervene they have consented as a matter of law to the Court’s personal jurisdiction. See In re

Bayshore Ford Truck Sales, Inc., 471 F.3d 1233, 1246 (11th Cir. 2006); County Sec. Agency v.

Ohio Dep’t of Commerce, 296 F.3d 477, 483 (6th Cir. 2002); Pharm. Research & Mfrs. v.

Thompson, 259 F. Supp. 2d 39, 59 (D.D.C. 2003); City of Santa Clara v. Kleppe, 428 F. Supp.

315, 317 (N.D. Ca. 1976).

RELIEF DEFENDANTS

19. Each of the Relief Defendants named herein will be served pursuant to the Federal

Rules of Civil Procedure, through their attorney of record, or by other means approved by this

Court’s order.

A. THE FINANCIAL ADVISORS

20. The Receiver names the Stanford Financial Group financial advisors listed on

App. 1-11 as Relief Defendants. Over just a two-year period, these financial advisors received

commissions ranging in amounts from $2.6 million to $200,000, along with other incentive

compensation, to promote the sales of CDs. Collectively, these financial advisors received more

than $40 million in such compensation during that period.

B. THE INVESTORS WITH FROZEN ACCOUNTS

21. The Receiver names the people and entities listed on App. 12-25 as Relief

Defendants. These people and entities received CD Proceeds in the amounts reflected on App.

12-25 and have one or more accounts currently frozen at Pershing, JP Morgan or SEI.

Collectively, these people and entities received approximately $373 million in CD Proceeds, of

which approximately $300 million is recoverable to the Receivership Estate from the frozen

accounts.



C. THE INVESTORS WITH FUNDS IN THE RECEIVER’S ESCROW ACCOUNT

22. The Receiver names the people and entities listed on App. 26 as Relief

Defendants. These people and entities received CD Proceeds in the amounts reflected on App.

26 and wired funds into the Receiver’s escrow account, following the execution of a Stipulation

Regarding Release of Accounts. Collectively, these people and entities received approximately

$18.5 million in CD Proceeds.

D. THE INVESTORS WITHOUT FROZEN ACCOUNTS OR FUNDS IN ESCROW

23. The Receiver names the people and entities listed on App. 27-28 as Relief

Defendants. These people and entities received CD proceeds in the amounts reflected on App.

27-28 but do not have an account currently frozen and have not wired funds into the Receiver’s

escrow account. Collectively, these people and entities received almost $494 million in CD

Proceeds.

E. THE CUSTODIAN RELIEF DEFENDANTS

24. Pershing LLC is a limited liability company formed under the laws of the state of

Delaware. Pershing is headquartered at One Pershing Plaza, Jersey City, New Jersey 07399.

25. SEI Private Trust Company is a nationally chartered thrift institution regulated by

the Office of Thrift Supervisions. SEI is incorporated in Pennsylvania and is headquartered at

One Freedom Valley Drive, Oaks, PA 19456.

STATEMENT OF FACTS

26. On February 16, 2009, the Securities and Exchange Commission commenced a

lawsuit in this Court against R. Allen Stanford, two associates, James M. Davis and Laura

Pendergest-Holt, and three of Mr. Stanford’s companies, Stanford International Bank, Ltd.,

Stanford Group Company, and Stanford Capital Management, LLC (collectively “Stanford

Defendants”). On the same date, the Court entered an Order appointing a Receiver, Ralph S.



Janvey (“Receiver”), over all property, assets, and records of the Stanford Defendants, and all

entities they own or control.

27. The factual allegations set forth in the SEC’s First Amended Complaint are

incorporated herein. See First Amended Complaint, Doc. 48.2

Stanford Defendants Operated a Fraudulent Scheme

28. As alleged by the SEC, the Stanford Defendants marketed a fraudulent CD to

investors exclusively through SGC financial advisors pursuant to a Regulation D private

placement. Id. ¶ 23. The CDs were sold by Stanford International Bank, Ltd. (“SIB” or “the

Bank”). Id.

29. In marketing, selling, and issuing the CD to investors, the Stanford Defendants

repeatedly touted the CD’s safety and security and SIB’s consistent, double-digit returns on its

investment portfolio. Id. ¶ 31.

30. In its brochure, SIB told investors, under the heading “Depositor Security,” that

its investment philosophy is “anchored in time-proven conservative criteria, promoting stability

in [the Bank’s] certificate of deposit.” SIB also emphasized that its “prudent approach and

methodology translate into deposit security for our customers.” Id. ¶ 32. Further, SIB stressed

the importance of investing in “marketable” securities, saying that “maintaining the highest

degree of liquidity” was a “protective factor for our depositors.” Id. ¶ 45.

31. In its 2006 and 2007 Annual Reports, SIB told investors that the Bank’s assets

were invested in a “well-balanced global portfolio of marketable financial instruments, namely

U.S. and international securities and fiduciary placements.” Id. ¶ 44. More specifically, SIB

2 Unless otherwise stated, citations to Court records herein are from the case styled SEC v. Stanford Int’l Bank, Ltd., et al., Civil Action No. 3-09-CV-0298-N.



represented that its 2007 portfolio allocation was 58.6% equity, 18.6% fixed income, 7.2%

precious metals and 15.6% alternative investments. Id.

32. Consistent with its Annual Reports and brochures, SIB trained SGC financial

advisors, in February 2008, that “liquidity/marketability of SIB’s invested assets” was the “most

important factor to provide security to SIB clients.” Id. ¶ 46. In training materials, the Stanford

Defendants also claimed that SIB had earned consistently high returns on its investment of

deposits (ranging from 11.5% in 2005 to 16.5% in 1993). Id. ¶ 24.

33. Contrary to the Stanford Defendants’ representations regarding the liquidity of its

portfolio, SIB did not invest in a “well-diversified portfolio of highly marketable securities.”

Instead, significant portions of the Bank’s portfolio were misappropriated by Defendant Allen

Stanford and were either placed in speculative investments (many of them illiquid, such as

private equity deals), diverted to other Stanford Entities “on behalf of shareholder” - i.e., for the

benefit of Allen Stanford, or used to finance Allen Stanford’s lavish lifestyle (e.g., jet planes, a

yacht, other pleasure craft, luxury cars, homes, travel, company credit card, etc.). In fact, at

year-end 2008, the largest segments of the Bank’s portfolio were: (i) at least $1.6 billion in

undocumented “loans” to Defendant Allen Stanford; (ii) private equity; and (iii) over-valued real

estate. Id. ¶¶ 24, 48.

34. In an effort to conceal their fraud and ensure that investors continued to purchase

the CD, the Stanford Defendants fabricated the performance of SIB’s investment portfolio. Id.

¶ 5.

35. SIB’s financial statements, including its investment income, were fictional. Id.

¶ 37. In calculating SIB’s investment income, Defendants Stanford and James Davis provided to

SIB’s internal accountants a pre-determined return on investment for the Bank’s portfolio. Id.



Using this pre-determined number, SIB’s accountants reverse-engineered the Bank’s financial

statements to reflect investment income that SIB did not actually earn. Id.

36. For a time, the Stanford Defendants were able to keep the fraud going by using

funds from current sales of SIB CDs to make interest and redemption payments on pre-existing

CDs. See id. ¶ 1. However, in late 2008 and early 2009, CD redemptions increased to the point

that new CD sales were inadequate to cover redemptions and normal operating expenses. As the

depletion of liquid assets accelerated, this fraudulent scheme collapsed.

The Stanford Defendants Transferred Proceeds from the Fraudulent Scheme to the Relief Defendants

37. SGC is a registered broker dealer and investment advisor headquartered in

Houston, Texas. Id. ¶ 13. SGC used Pershing LLC as its clearing broker, and in that capacity,

Pershing holds in its custody certain customer accounts introduced by SGC. Pershing did not

have custody of SIB-issued CDs, nor did it reflect such CDs on any Pershing brokerage account

statement. SEI Private Trust Company holds in its custody Stanford Trust Company customer

accounts.

38. The Stanford Defendants used an elaborate and sophisticated incentive program to

keep SGC financial advisors highly motivated to sell SIB CDs to brokerage customers. Id.

¶¶ 27-28. The program included high commission rates, bonuses, and forgivable loans, all

closely tied to maintaining the Stanford Defendants’ portfolio of CDs. In 2007, SIB paid SGC

and its affiliates more than $291 million in management fees for CD sales, up from $211 million

in 2006. Id. ¶ 29.

39. As a result of SGC’s aggressive sales tactics, a significant percentage of SGC

customers, including the investor Relief Defendants, bought CDs from SIB. Id. ¶ 22. Some of

them received interest payments or were able to cash out CDs directly or in the form of loans



prior to the date of the Order Appointing Receiver and the TRO. As the SEC alleges, these

customers were paid, not from actual returns on any underlying investments, but from money

contributed by new victims of the fraud. See id. ¶ 1.

40. Based on information available to the Receiver to date, the proceeds from

fraudulent SIB CDs received directly or indirectly by the Relief Defendants are set forth in the

appendix hereto.

41. At the time the SEC’s lawsuit was commenced, a substantial portion of the above-

referenced CD Proceeds received by the Relief Defendants were located in their Pershing, SEI

and JP Morgan accounts. They remain there today.

42. Proceeds from the fraudulent scheme described above – including the purported

interest and principal redemptions received by the investor Relief Defendants – were transferred

by the Stanford Defendants to the Relief Defendants solely for the purpose of concealing and

perpetuating the fraudulent scheme. Such proceeds were not legitimate investment returns or

returns of principal but were paid from funds supplied by other investors who bought new CDs

after the investor Relief Defendants purchased their CDs. The Relief Defendants did not

perform services (or performed only services that were in furtherance of the fraudulent scheme)

in exchange for these payments. Therefore, the Relief Defendants do not have any rightful

ownership interest that could justify their retaining possession of these funds, which are properly

considered assets of the Receivership Estate. See George, 426 F.3d at 799-800 (Assets held by a

third party can be considered property of the receivership estate if (1) the assets are traceable to

the fraudulent activity and (2) the non-party has no legitimate claim to ownership of the assets.);

see also Commodity Futures Trading Comm’n v. Kimberlynn Creek Ranch, Inc., 276 F.3d 187,

191-92 (4th Cir. 2002) (recipient of proceeds of fraud had no ownership interest in the funds);



SEC v. Cavanagh, 155 F.3d 129, 136-37 (2d Cir. 1998) (recipient of “gift” that constituted

proceeds of fraud had no legitimate claim of ownership); SEC v. Elfindepan, S.A., No.

1:00cv00742, 2002 WL 31165146, at *4 (M.D.N.C. Aug, 30, 2002) (money deposited in third

party’s checking account as proceeds of “Note Transaction” with defendant was recoverable as

asset of receivership estate).

43. The fact that the Relief Defendants are innocent and committed no wrongdoing

does not entitle them to retain proceeds received from the fraudulent SIB CDs. See Quilling v.

3D Mktg., LLC, No. 3-06-CV-0296-L, 2007 WL 1058217, at *3-4 (N.D. Tex. Feb. 8, 2007)

(investor who invested $100,000 in Ponzi scheme ordered to give up 100% of proceeds received,

for a total of $150,000); Wing v. Harrison, No. 2:03 CV 26DAK, 2004 WL 966298, at *5 (D.

Utah April 29, 2004) (investors had to pay back 100% of proceeds – including their initial

investment).

Receiver Entitled to Disgorgement of Assets from the Relief Defendants

44. One of the Receiver’s key duties is to maximize distributions to defrauded

investors and other claimants.3 See Amended Order Appointing Receiver at ¶ 5(g), (j) (Doc.

157) (ordering the Receiver to “[p]reserve the Receivership Estate and minimize expenses in

furtherance of maximum and timely disbursement thereof to claimants”); Scholes v. Lehmann, 56

F.3d 750, 755 (7th Cir. 1995) (receiver’s “only object is to maximize the value of the [estate

assets] for the benefit of their investors and any creditors”); SEC v. TLC Invs. & Trade Co., 147

F. Supp. 2d 1031, 1042 (C.D. Cal. 2001); SEC v. Kings Real Estate Inv. Trust, 222 F.R.D. 660,

669 (D. Kan. 2004). But before the Receiver can attempt to make victims whole, he must locate

3 This is, of course, very similar to the trustee’s role in bankruptcy. See, e.g., In re Drexel Burnham Lambert Group, Inc., 123 B.R. 702, 708 (S.D.N.Y. 1991) (“A trustee in bankruptcy, under the Act and the Code, is under a duty to maximize the realization of estate liquidation. To that end a trustee must marshal the estate's assets and, if necessary to achieve that end, institute all necessary litigation.”).



and take exclusive control and possession of assets of the Estate or assets traceable to the Estate.

Doc. 157 ¶ 5(b).

45. Paragraph 4 of the Order Appointing Receiver, entered by the Court on February

16, 2009, authorizes the Receiver “to immediately take and have complete and exclusive control,

possession, and custody of the Receivership Estate and to any assets traceable to assets owned by

the Receivership Estate.” Order Appointing Receiver, Doc. 10, ¶ 4; Amended Order Appointing

Receiver, Doc. 157, ¶ 4. Paragraph 5(c) of the Order specifically authorizes the Receiver to

“[i]nstitute such actions or proceedings [in this Court] to impose a constructive trust, obtain

possession, and/or recover judgment with respect to persons or entities who received assets or

records traceable to the Receivership Estate.” Doc. 10, ¶ 5(c); Doc. 157, ¶ 5(c).

46. As alleged above, the CD Proceeds received by the Relief Defendants are assets

of the Receivership Estate, and it is necessary to name the Relief Defendants as nominal

defendants to effect full relief in the marshaling of assets that are the fruit of the underlying

fraud. Colello, 139 F.3d at 676-77.

47. Claw-back claims, even against innocent investors, are one of the most important

ways the Receiver fulfills his duty to maximize Estate assets for ultimate distribution.4 By

eliminating the sources of inequity, claw-back claims play a vital role in the Receiver’s efforts to

mitigate the damage caused by the Defendants’ fraud.

48. Case law amply supports the power of a receiver to seek disgorgement of tainted

funds from relief defendants who receive proceeds from a Ponzi scheme.5 When the relief

4 See Quilling v. 3D Mktg., LLC, No. 3-06-CV-0296-L, 2007 WL 1058217, at *3 (N.D. Tex. Feb. 8, 2007) (investor who invested $100,000 in Ponzi scheme ordered to give up 100% of proceeds received, for a total of $150,000); Wing v. Harrison, No. 2:03 CV 26DAK, 2004 WL 966298, at *5 (D. Utah April 29, 2004) (investors had to pay back 100% of proceeds – including their initial investment).5 SEC v. George, 426 F.3d 786, 798-99 (6th Cir. 2005); SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109, 1116 (9th Cir. 2006); SEC v. Infinity Group Co., 212 F.3d 180, 193 (3rd Cir. 2000); Quilling,



defendant is an investor, proceeds of the fraud can include both the “profit” and the principal

amount of the third party’s original investment in the fraudulent scheme. See George, 426 F.3d

at 799.

49. In order to carry out the duties delegated to him by this Court, the Receiver seeks

complete and exclusive control, possession and custody of the SIB CD Proceeds received by the

Relief Defendants.

RELIEF SOUGHT

50. As alleged above, Pershing and SEI are custodians of proceeds from a massive

fraudulent scheme, and Pershing and SEI neither have nor assert any legitimate ownership claim

to such funds. Pursuant to the equity powers of this Court, Pershing and SEI should be ordered

to transfer to the Receiver all such proceeds of the fraudulent scheme alleged to have occurred in

this case.

51. The Relief Defendants cannot establish any legitimate ownership claim to the

proceeds from fraudulent SIB CDs. Pursuant to the equity powers of this Court, the Receiver

therefore seeks an order (a) establishing that proceeds received directly or indirectly by the

Relief Defendants from fraudulent CDs are property of the Receivership Estate held pursuant to

a constructive trust for the benefit of the Receivership Estate; (b) ordering that each of the Relief

Defendants is liable to the Receivership Estate for an amount equaling the amount of proceeds he

2007 WL 1058217, at *4; SEC v. Alanar, Inc., No. 1:05-cv-1102, 2008 WL 1994854, at *5-6 (S.D. Ind. May 6, 2008); SEC v. Cross Fin. Servs., Inc., 908 F. Supp. 718, 730 (C.D. Cal. 1995); Commodity Futures Trading Comm’n v. Bolze, No. 3:09-CV-88, 2009 WL 1313249, at *2 (M.D. Tenn. April 1, 2009); SEC v. AmeriFirst Funding, Inc., Civil Action No. 3:07-CV-1188-D, 2008 WL 1959843, at *2 (N.D. Tex. May 5, 2008); Commodity Futures Trading Comm’n v. Foreign Fund, 549 F. Supp. 2d 1005, 1008 (M.D. Tenn. 2008); Commodity Futures Trading Comm’n v. Foreign Fund, No. 3:04-0898, 2007 WL 1850007, at *5 (M.D. Tenn. June 25, 2007); SEC v. Dowdell, No. Civ. A. 3:01CV00116, 2002 WL 31357059, at *4-5 (W.D. Va. Oct. 11, 2002); SEC v. Chem. Trust, No. 00-8015-CIV, 2000 WL 33231600, at *11-12 (S.D. Fla. Dec. 19, 2000); SEC v. Better Life Club of Am., Inc., 995 F. Supp. 167, 184 (D.D.C. 1998); SEC v. Infinity Group Co., 993 F. Supp. 324, 331 (E.D. Pa. 1998).



or she received from fraudulent CDs; (c) allowing the Receiver to withdraw the assets contained

in Pershing, SEI and JP Morgan accounts in the names of or controlled by the Relief Defendants

and add those assets, up to the amounts of fraudulent CD Proceeds received by the investor

Relief Defendants, to the assets of the Receivership Estate; and (d) ordering the investor Relief

Defendants to pay to the Receiver the difference, if any, between the amounts contained in their

Pershing, SEI and JP Morgan accounts and the total amount of fraudulent CD Proceeds received

by the Relief Defendants.

PRAYER

52. The Receiver respectfully requests the following

(a) A summary adjudication that payments made directly or indirectly to SGC,

SGC financial advisors and investors in connection with the sale of

fraudulent SIB CDs are subject to a constructive trust for the benefit of the

Receivership Estate;

(b) A summary adjudication of the amount of ill-gotten proceeds transferred by

Defendants to each Relief Defendant (excluding the Custodian Relief

Defendants) in connection with the sale of fraudulent SIB CDs;

(c) An order providing that each of the Relief Defendants (excluding the

Custodian Relief Defendants) is liable to the Receivership Estate for an

amount equaling the amount of proceeds he or she received from fraudulent

CDs;

(d) An Order allowing the Receiver to withdraw the assets contained in the

Pershing, SEI and JP Morgan accounts in the names of or controlled by the

Relief Defendants and add those assets, up to the amounts of fraudulent CD



Proceeds received by the Relief Defendants, to the assets of the Receivership

Estate;

(e) An order that the escrow account at JP Morgan holding CD Proceeds pursuant

to stipulations with investors is property of the Receivership Estate available

for distribution to claimants;

(f) An Order requiring the Relief Defendants (excluding the Custodian Relief

Defendants) to pay to the Receiver the difference between the amounts

contained in their Pershing, SEI and JP Morgan accounts and the total

amount of fraudulent CD Proceeds received by the Relief Defendants

(excluding the Custodian Relief Defendants); and

(g) Such other and further relief as the Court deems proper under the

circumstances.



Dated: July 28, 2009 Respectfully submitted,

BAKER BOTTS L.L.P.

By: /s/ Kevin M. SadlerKevin M. SadlerTexas Bar No. [email protected] I. HowellTexas Bar No. [email protected] T. ArlingtonTexas Bar No. [email protected] San Jacinto Center98 San Jacinto Blvd.Austin, Texas 78701-4039(512) 322-2500(512) 322-2501 (Facsimile)

Timothy S. DurstTexas Bar No. [email protected] Ross AvenueDallas, Texas 75201(214) 953-6500(214) 953-6503 (Facsimile)

ATTORNEYS FOR RECEIVER RALPH S. JANVEY



CERTIFICATE OF SERVICE

On July 28, 2009, I electronically submitted the foregoing document with the clerk of the court of the U.S. District Court, Northern District of Texas, using the electronic case filing system of the Court. I hereby certify that I will serve the Relief Defendants individually or through their counsel of record, electronically, or by other means authorized by the Court or the Federal Rules of Civil Procedure.

/s/ Kevin M. SadlerKevin M. Sadler



DALLAS DIVISION

RALPH S. JANVEY, IN HIS CAPACITY AS COURT-APPOINTED RECEIVER,

Plaintiff,

v.

and JIM LETSOS, FELIPE GONZALEZ, CHARLOTTE HUNTON, RICHARD O. HUNTON AND CHARLES HUNTON,

Relief Defendants.

§§§§§§§§§§§§§

Case No. ___________

________________________________________________________________________

COMPLAINT________________________________________________________________________

SUMMARY








2. The Receiver files this Complaint to name as Relief Defendants the following

investors who received proceeds from fraudulent certificates of deposit issued by Stanford

International Bank, Ltd. (“SIB”): Jim Letsos, Felipe Gonzalez, Charlotte Hunton, Richard O.

Hunton and Charles Hunton.


Complaint 1


DALLAS DIVISION

________________________________________________________________________

COMPLAINT________________________________________________________________________

SUMMARY








2. The Receiver files this Complaint to name as Relief Defendants the following

investors who received proceeds from fraudulent certificates of deposit issued by Stanford

International Bank, Ltd. (“SIB”): Jim Letsos, Felipe Gonzalez, Charlotte Hunton, Richard O.

Hunton and Charles Hunton.

3. The fraudulent proceeds received by the Relief Defendants totaled over $3

million. A substantial portion of those fraudulent proceeds were received into accounts in the

name of or controlled by Relief Defendants in the custody of Pershing LLC, the primary clearing

broker used by Defendant Stanford Group Company (“SGC”) in the conduct of its brokerage

business. Those accounts are currently frozen by Orders issued by this Court.

4. The Receiver does not allege that the Relief Defendants participated in the

fraudulent schemes at issue in the SEC’s case or otherwise committed any wrongdoing. Rather,


Complaint 2

the Relief Defendants are added in a nominal capacity solely to facilitate relief. See SEC v.

Colello, 139 F.3d 674 (9th Cir. 1998).

5. The Receiver must assemble assets of the Stanford Defendants into a pool from

which distributions ultimately will be made to victims of the Stanford Defendants’ fraudulent

scheme, and such assets include monies paid out pursuant to the fraudulent scheme. In fraud

cases such as this where investors’ funds are commingled, all defrauded persons are similarly

situated with respect to those who perpetrated the scheme and are to be treated equally with

respect to the ultimate distribution plan that the Receiver implements using funds and assets

recovered. See e.g., S.E.C. v. Credit Bancorp, 290 F.3d 80, 88-89 (2d Cir. 2001).

6. “As the Supreme Court explained in the litigation that gave the Ponzi scheme its

name, ‘equality is equity’ as between ‘equally innocent victims.’” SEC v. George, 426 F.3d 786,

799 (6th Cir. 2005) (quoting Cunningham v. Brown, 265 U.S. 1, 13, 44 S. Ct. 424 (1924)).

Allowing some innocent investors, such as the Relief Defendants, to keep proceeds from the

fraudulent scheme when other investors received none, would violate this principle. See United

States v. Durham, 86 F.3d 70, 73 (5th Cir. 1996)(district court did not abuse its discretion by

rejecting plaintiff’s request to trace and recover investment funds and holding that “all the fraud

victims were in equal positions and should be treated as such”). “The mere coincidence that the

defendants chose the relief defendants (instead of others) to receive funds contributed by other

investors in order to delay the discovery of this scheme does not entitle the relief defendants to

preferential treatment.” George, 426 F.3d at 799; see SEC v. Forex Asset Mgmt. LLC, 242 F.3d

325, 331 (5th Cir. 2001) (noting that “the facts did not support a remedy that would elevate the

[relief defendants’] claim above the other victims” even though the relief defendants could trace

the funds they received to a segregated account containing only their investment); SEC v. Infinity


Complaint 3

Group Co., 226 Fed. Appx. 217, 219 (3rd Cir. 2007) (upholding a pro rata distribution plan and

refusing to let an investor keep 100% of his principal even though his money was directly

traceable because “there is no equitable basis to distinguish between early investors and those,

like Roberts, who invested shortly before TIGC’s account was frozen, and that all investors

should thus be treated the same”).

7. The Receiver therefore seeks an order (a) establishing that proceeds received

directly or indirectly by the Relief Defendants from fraudulent CDs are property of the

Receivership Estate held pursuant to a constructive trust for the benefit of the Receivership

Estate; (b) ordering that each of the Relief Defendants is liable to the Receivership Estate for an

amount equaling the amount of proceeds he or she received from fraudulent CDs; (c) allowing

the Receiver to withdraw the assets contained in Pershing accounts in the names of or controlled

by the Relief Defendants and add those assets, up to the amounts of fraudulent CD proceeds

received by the Relief Defendants, to the assets of the Receivership Estate; and (d) ordering the

Relief Defendants to pay to the Receiver the difference, if any, between the amounts contained in

their Pershing accounts and the total amount of fraudulent CD proceeds received by the Relief

Defendants.

JURISDICTION & VENUE

8. This Court has jurisdiction over this action, and venue is proper, under Section

22(a) of the Securities Act (15 U.S.C. § 77v(a)), Section 27 of the Exchange Act (15 U.S.C.

§ 78aa), and under Chapter 49 of Title 28, Judiciary and Judicial Procedure (28 U.S.C. § 754).

9. Further, as the Court that appointed the Receiver, this Court has jurisdiction over

any claim brought by the Receiver to execute his Receivership duties. Reneker v. Offill, Civil

Action No. 3:08-CV-1394-D, 2009 WL 804134, at *4 (N.D. Tex. 2009).


Complaint 4

RELIEF DEFENDANTS

10. Jim Letsos can be served by and through his counsel of record, Eugene B.

Wilshire, Wilshire & Scott P.C., 3000 One Houston Center, 1221 McKinney, Houston, Texas

77010.

11. Felipe Gonzalez can be served by and through his counsel of record, Eugene B.


77010.

12. Charlotte Hunton can be served by and through her counsel of record, Eugene B.


77010.

13. Richard O. Hunton can be served by and through his counsel of record, Eugene B.


77010.

14. Charles Hunton can be served by and through his counsel of record, Eugene B.


77010.

STATEMENT OF FACTS

Stanford Defendants Operated a Fraudulent Scheme

15. The factual allegations set forth in the SEC’s First Amended Complaint are

incorporated herein. See First Amended Complaint, Doc. 48.

16. As alleged by the SEC, the Stanford Defendants marketed a fraudulent CD to

investors exclusively through SGC financial advisors pursuant to a Regulation D private


Complaint 5

placement. Id. ¶ 23. The CDs were sold by Stanford International Bank, Ltd. (“SIB” or “the

Bank”). Id.

17. In selling the CD to investors, the Stanford Defendants repeatedly touted the CD’s

safety and security and SIB’s consistent, double-digit returns on its investment portfolio. Id. ¶

31.

18. In its brochure, SIB told investors, under the heading “Depositor Security,” that

its investment philosophy is “anchored in time-proven conservative criteria, promoting stability

in [the Bank’s] certificate of deposit.” SIB also emphasized that its “prudent approach and

methodology translate into deposit security for our customers.” Id. ¶ 32. Further, SIB stressed

the importance of investing in “marketable” securities, saying that “maintaining the highest

degree of liquidity” was a “protective factor for our depositors.” Id.

19. In its 2006 and 2007 Annual Reports, SIB told investors that the Bank’s assets

were invested in a “well-balanced global portfolio of marketable financial instruments, namely

U.S. and international securities and fiduciary placements.” Id. ¶ 44. More specifically, SIB

represented that its 2007 portfolio allocation was 58.6% equity, 18.6% fixed income, 7.2%

precious metals and 15.6% alternative investments. Id.

20. Consistent with its Annual Reports and brochures, SIB trained SGC financial

advisors, in February 2008, that “liquidity/marketability of SIB’s invested assets” was the “most

important factor to provide security to SIB clients.” Id. ¶ 46. In training materials, the Stanford

Defendants also claimed that SIB had earned consistently high returns on its investment of

deposits (ranging from 11.5% in 2005 to 16.5% in 1993). Id. ¶ 24.

21. Contrary to the Stanford Defendants’ representations regarding the liquidity of its

portfolio, SIB did not invest in a “well-diversified portfolio of highly marketable securities.”


Complaint 6

Instead, significant portions of the Bank’s portfolio were misappropriated by Defendant Allen

Stanford and used by him to acquire private equity and real estate. In fact, at year-end 2008, the

largest segments of the Bank’s portfolio were: (i) at least $1.6 billion in undocumented “loans”

to Defendant Allen Stanford; (ii) private equity; and (iii) over-valued real estate. Id. ¶¶ 24, 48.

22. In an effort to conceal their fraud and ensure that investors continued to purchase

the CD, the Stanford Defendants fabricated the performance of SIB’s investment portfolio. Id.

¶ 5.

23. SIB’s financial statements, including its investment income, are fictional. Id.

¶ 37. In calculating SIB’s investment income, Defendants Stanford and James Davis provided to

SIB’s internal accountants a pre-determined return on investment for the Bank’s portfolio. Id.

Using this pre-determined number, SIB’s accountants reverse-engineered the Bank’s financial

statements to reflect investment income that SIB did not actually earn. Id.

24. For a time, the Stanford Defendants were able to keep the fraud going by using

funds from current sales of SIB CDs to make interest and redemption payments on pre-existing

CDs. See id. ¶ 1. However, in late 2008 and early 2009, CD redemptions increased to the point

that new CD sales were inadequate to cover redemptions and normal operating expenses. As the

depletion of liquid assets accelerated, this fraudulent scheme collapsed.

The Stanford Defendants Transferred Proceeds from the Fraudulent Scheme to the Relief Defendants

25. SGC is a registered broker dealer and investment advisor headquartered in

Houston, Texas. Id. ¶ 13. SGC used Pershing LLC as its clearing broker, and in that capacity,

Pershing holds in its custody the customer accounts introduced by SGC.

26. The Stanford Defendants used an elaborate and sophisticated incentive program to

keep SGC financial advisors highly motivated to sell SIB CDs to brokerage customers. Id.


Complaint 7

¶¶ 27-28. The program included high commission rates, bonuses, and forgivable loans, all

closely tied to maintaining the Stanford Defendants’ portfolio of CDs. In 2007, SIB paid SGC

and its affiliates more than $291 million in management fees and CD sales, up from $211 million

in 2006. Id. ¶ 29.

27. As a result of SGC’s aggressive sales tactics, a significant percentage of SGC

customers, including the Relief Defendants, bought CDs from SIB. Id. ¶ 22. Many such

customers, including the Relief Defendants, received interest payments or were able to cash out

CDs directly or in the form of loans prior to the date of the Order Appointing Receiver and the

TRO. As the SEC alleges, these customers were paid, not from actual returns on any underlying

investments, but from money contributed by new victims of the fraud. See id. ¶ 1.

28. Based on information available to the Receiver to date, the proceeds from

fraudulent SIB CDs received directly or indirectly by the Relief Defendants are as follows:

Jim Letsos received approximately $86,753.44 in SIB CD proceeds;

Felipe Gonzalez received approximately $1,024,545.20 in SIB CD proceeds;

Charlotte Hunton received approximately $67,730.46 in SIB CD proceeds;

Richard O. Hunton received approximately $1,810,253.84 in SIB CD proceeds; and

Charles Hunton received approximately $74,680.13 in SIB CD proceeds.

29. At the time the SEC’s lawsuit was commenced, all or a substantial portion of the

above-referenced proceeds received by the Relief Defendants were located in their Pershing

accounts. They remain there today.

30. Proceeds from the fraudulent scheme described above – including the interest and

principal redemptions received by the Relief Defendants – were transferred by the Stanford


Complaint 8

Defendants to the Relief Defendants solely for the purpose of concealing and perpetuating the

fraudulent scheme. Such proceeds were not legitimate investment returns or returns of principal

but were paid from funds supplied by new investors who bought CDs after the Relief Defendants

purchased their CDs. The Relief Defendants did not perform services in exchange for these

payments. Therefore, the Relief Defendants do not have any rightful ownership interest that

could justify their retaining possession of these funds, which are properly considered assets of

the Receivership Estate. See George, 426 F.3d 786, 799 (6th Cir. 2005) (Assets held by a third

party can be considered property of the receivership estate if (1) the assets are traceable to the

fraudulent activity and (2) the non-party has no legitimate claim to ownership of the assets.); see

also CFTC v. Kimberlynn Creek Ranch, 276 F.3d 187, 191-92 (4th Cir. 2002) (recipient of

proceeds of fraud had no ownership interest in the funds); SEC v. Cavanagh, 155 F.3d 129, 136-

37 (2nd Cir. 1998) (recipient of “gift” that constituted proceeds of fraud had no legitimate claim

of ownership); SEC v. Elfindepan, 2002 WL 31165146, at *4 (M.D.N.C. Aug, 30, 2002) (money

deposited in third party’s checking account as proceeds of “Note Transaction” with defendant

was recoverable as asset of receivership estate).

31. The fact that the Relief Defendants are innocent investors and committed no

wrongdoing does not entitle them to retain proceeds received from the fraudulent SIB CDs. See

Warfield v. Byron, 436 F.3d 551, 559-60 (5th Cir. 2006) (two investors ordered to give back

proceeds of Ponzi scheme under fraudulent transfer statute); Quilling v. 3D Marketing, LLC,

2007 WL 1058217, at *3 (N.D. Tex. 2007) (investor who invested $100,000 in Ponzi scheme

ordered to give up 100% of proceeds received, for a total of $150,000); Mays v. Lombard, 1998

WL 386159, at *3 (N.D. Tex. 1998) (investor had to pay back money received in excess of

original investment as fraudulent transfer); see also Donell v. Kowell, 533 F.3d 762, 779-80 (9th


Complaint 9

Cir. 2008) (receiver won summary judgment on fraudulent transfer theory against investor to

recover false profits); Scholes v. Lehmann, 56 F.3d 750, 757, 759 (7th Cir. 1995) (receiver

recovered from investor amounts received in excess of his principal investment as fraudulent

transfers; receiver recovered from charity 100% of amounts received as fraudulent transfers);

Wing v. Harrison, 2004 WL 966298, at *5 (D. Utah 2004) (investors had to pay back 100% of

proceeds – including their initial investment – as fraudulent transfer).

Receiver Entitled to Disgorgement of Assets from the Relief Defendants

32. Paragraph 4 of the Order Appointing Receiver, entered by the Court on February

16, 2009, authorizes Receiver Janvey “to immediately take and have complete and exclusive

control, possession, and custody of the Receivership Estate and to any assets traceable to assets

owned by the Receivership Estate.” Order Appointing Receiver, Doc. 10, ¶ 4; Amended Order

Appointing Receiver, Doc. 157, ¶ 4. Paragraph 5(c) of the Order specifically authorizes

Receiver Janvey to “[i]nstitute such actions or proceedings [in this Court] to impose a

constructive trust, obtain possession, and/or recover judgment with respect to persons or entities

who received assets or records traceable to the Receivership Estate.” Doc. 10, ¶ 5(c); Doc. 157,

¶ 5(c).

33. As alleged above, the proceeds received by the Relief Defendants are assets of the

Receivership Estate, and it is necessary to name the Relief Defendants as nominal defendants to

effect full relief in the marshaling of assets that are the fruit of the underlying fraud. SEC v.

Colello, 139 F.3d 674 (9th Cir. 1998).

34. In order to carry out the duties delegated to him by this Court, the Receiver seeks

complete and exclusive control, possession and custody of the SIB CD proceeds received by the

Relief Defendants.


Complaint 10

RELIEF SOUGHT

35. The Relief Defendants neither have nor assert any legitimate ownership claim to

the proceeds from fraudulent SIB CDs. Pursuant to the equity powers of this Court, the Receiver

therefore seeks an order (a) establishing that proceeds received directly or indirectly by the

Relief Defendants from fraudulent CDs are property of the Receivership Estate held pursuant to

a constructive trust for the benefit of the Receivership Estate; (b) ordering that each of the Relief

Defendants is liable to the Receivership Estate for an amount equaling the amount of proceeds he

or she received from fraudulent CDs; (c) allowing the Receiver to withdraw the assets contained

in Pershing accounts in the names of or controlled by the Relief Defendants and add those assets,

up to the amounts of fraudulent CD proceeds received by the Relief Defendants, to the assets of

the Receivership Estate; and (d) ordering the Relief Defendants to pay to the Receiver the

difference, if any, between the amounts contained in their Pershing accounts and the total amount

of fraudulent CD proceeds received by the Relief Defendants.

PRAYER

Receiver Janvey respectfully requests the following:

(a) A summary adjudication that payments made directly or indirectly to the Relief Defendants in connection with fraudulent SIB CDs are property of the Receivership Estate held pursuant to a constructive trust for the benefit of the Receivership Estate;

(b) An order providing that each of the Relief Defendants is liable to the Receivership Estate for an amount equaling the amount of proceeds he or she received from fraudulent CDs;

(c) An Order allowing the Receiver to withdraw the assets contained in the Pershing accounts in the names of or controlled by the Relief Defendants and add those assets, up to the amounts of fraudulent CD proceeds received by the Relief Defendants, to the assets of the Receivership Estate;

(d) An Order requiring the Relief Defendants to pay to the Receiver the difference between the amounts contained in their Pershing accounts and the total amount of fraudulent CD proceeds received by the Relief Defendants; and


Complaint 11

(e) Such other and further relief as the Court deems proper under the circumstances.


Complaint 12

Dated: July 15, 2009 Respectfully submitted,

BAKER BOTTS L.L.P.

By: /s/ Kevin M. SadlerKevin M. SadlerTexas Bar No. [email protected] I. HowellTexas Bar No. [email protected] T. ArlingtonTexas Bar No. [email protected] San Jacinto Center98 San Jacinto Blvd.Austin, Texas 78701-4039(512) 322-2500(512) 322-2501 (Facsimile)

Timothy S. DurstTexas Bar No. [email protected] Ross AvenueDallas, Texas 75201(214) 953-6500(214) 953-6503 (Facsimile)

ATTORNEYS FOR RECEIVER RALPH S. JANVEY


Complaint 13

CERTIFICATE OF SERVICE

On July 15, 2009, I electronically submitted the foregoing document with the

clerk of the court of the U.S. District Court, Northern District of Texas, using the electronic case

filing system of the court. I hereby certify that I have served the Relief Defendants through their

counsel of record electronically or by another manner authorized by Federal Rule of Civil

Procedure 5(b)(2).

/s/ Kevin M. SadlerKevin M. Sadler


EXHIBIT B

Lancer Management Group LLC v. Alpha Fifth Group, Case No. 04-60899, 2010 WL 1332844 (S.D. Fla. Mar. 30, 2010)

Slip Copy, 2010 WL 1332844 (S.D.Fla.) (Cite as: 2010 WL 1332844 (S.D.Fla.))

Only the Westlaw citation is currently available.

United States District Court, S.D. Florida.

Marty STEINBERG as Court-Appointed Receiver for LANCER MANAGEMENT GROUP LLC, et

al., Plaintiffs v.

ALPHA FIFTH GROUP, et al., Defendants.

No. 04-60899-CIV. March 30, 2010.

Andrew David Zaron, Craig Vincent Rasile, KevinMichael Eckhardt, David Eugene Bane, Hunton &Williams, Miami, FL, for Plaintiffs. Allan Michael Lerner, Fort Lauderdale, FL, BrianE. O'Connor, Jeffrey Scott Siegel, Willkie Farr &Gallagher, Russell Shanks, Cyruli Shanks & Ziz-mor LLP, New York, NY, David Charles Pollack,Stearns Weaver Miller Weissler Alhadeff & Sitter-son, Daniel Frederick Blonsky, Robert Kent Burl-ington, Coffey Burlington, Ricardo Jesus Cata,Benjamin Joseph Biard, Wilson Elser MoskowitzEdelman & Dicker, Scott M. Grossman, GreenbergTraurig et al., Miami, FL, Stephen A. Mendelsohn,Greenberg Traurig et al., Boca Raton, FL, GregoryEric Schwartz, Schwartz Zweben & Associates,Hollywood, FL, Andrew L. Jiranek, Baltimore,MD, Barry Adam Postman, Cole Scott & Kissane,Gregor J. Schwinghammer, Jr., Gunster Yoakley &Stewart, West Palm Beach, FL, Jonathan Seth Rob-bins, Akerman Senterfitt & Eidson, Fort Lauder-dale, FL, for Defendants. Martin H. Garvey, Essex Falls, NJ, pro se.

ORDER AND OPINION DENYING UNITED NEIGHBORHOOD HOUSES' MOTION TO DIS-

MISS KENNETH A. MARRA, District Judge.

*1 THIS CAUSE is before the Court upon De-

fendant United Neighborhood Houses' Motion toDismiss Plaintiff's Sixth Amended Complaint [DE 665]. The Court has carefully considered the motion and response, and is otherwise fully advised in the premises. No reply was submitted. IntroductionFN1

FN1. The following background information is taken from the Affidavit of Nancy Wackstein, submitted by UNH in support of its Motion to Dismiss. The Receiver provides very little information about UNH, and the Court finds this information helpful in putting the arguments in context. The Court may consider this affidavit as extrinsic evidence since UNH makes a factual challenge to subject matter jurisdiction. Morrison v. Amway Corp., 323 F.3d 920, 925 n. 5 (11th Cir.2003). In any case, the Receiver does not take issue with any of these background facts.

United Neighborhood Houses' (“UNH”) is a

501(c)(3) charitable not-for-profit organization and is a federation of 34 independent settlement houses and community centers throughout New York City. UNH was founded in 1919 and its membership comprises one of the largest human service systems in New York City, working to provide social, edu- cational and recreational services and activities to more than one-half million New Yorkers annually. Wackstein Aff. ¶ 3.

Between the years of 1998 and 2003, among others, UNH, through a project called Hedge Funds Care, participated in organizing and running an annual dinner and dance benefit to assist abused children called the Open Your Heart to Children Bene- fit. Wackstein Aff. ¶¶ 7, 9. Between the years 1998 and 2003, Lancer Management Group LLC (“LMG”) and Lancer Management Group II LLC (“LMG II”) collectively donated the total sum of $76,000 to the Open Your Heart to Children Benefit

© 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.

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5/15/2011http://web2.westlaw.com/print/printstream.aspx?destination=atp&prid=ia744a4970000012...


as follows:

(a) December 15, 1998-$12,000 by LMG II to purchase a table for 10 at the 1999 benefit;

(b) November 20, 1999-$12,000 by LMG to purchase a table for 10 at the 2000 benefit;

(c) December 10, 2000-$25,000 by LMG II to purchase two tables of 10 at the 2001 benefit;

(d) December 11, 2001-$15,000 by LMG II to purchase a table for 10 at the 2002 benefit; and

(e) January 6, 2003-$12,000 by LMG II to purchase a table of 10 at the 2003 benefit.

The Receiver brings this action against UNH to

recover the $76,000 in charitable donations which are allegedly fraudulent transfers from LMG and LMG II, two of the Receivership Entities. Standard of Review

In deciding a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), a court must accept all factual allegations in a complaint as true and take them in the light most favorable to the plaintiff. See Erickson v. Pardus, 551 U.S. 89, 127 S.Ct. 2197, 2200, 167 L.Ed.2d 1081 (2007). When a defendant challenges the plaintiff's standing through a motion to dismiss, the court must con- strue all disputed facts in the light most favorable to the plaintiff in an effort to discern whether relief could be granted under any set of facts that could be proven consistent with the allegations. See Chepstow Ltd. v. Hunt, 381 F.3d 1077, 1080 (11th Cir.2004).

To satisfy the pleading requirements of Federal Rule of Civil Procedure 8, a complaint must contain a short and plain statement showing an entitlement to relief, and the statement must “give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests.” Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002) (citing Fed.R.Civ.P. 8); see also Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127

S.Ct. 1955, 167 L.Ed.2d 929 (2007); Dura Pharm.,Inc. v. Broudo, 544 U.S. 336, 346, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005). “While a complaint at- tacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, [ ] a plaintiff's obligation to provide the ‘grounds' of his ‘entitlement to relief’ requires more than labels and conclusions, and a formulaic recitation of the ele- ments of a cause of action will not do ... Factual allegations must be enough to raise a right to relief above the speculative level on the assumption that all of the complaint's allegations are true” Twombly, 550 U.S. at 555 (citations omitted). Plaintiff must plead enough facts to state a plausible basis for the claim. Id. “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, --- U.S. ----, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (citing Twombly, 550 U.S. at 570). Discussion

*2 In its Motion to Dismiss, UNH argues that the complaint should be dismissed because: (1) this Court lacks personal jurisdiction over UNH; (2) several of the transfers are barred by the applicable statute of limitations; (3) the Receiver's unjust enrichment claim is barred due to the existence of an adequate legal remedy; (4) the Receiver's unjust enrichment claim is barred because UNH was a conduit for the transfers; (5) the Receiver lacks standing under the Florida Uniform Fraudulent Transfer Act (“FUFTA”), Fla. Stat. § 726.101, et seq.; and (6) the Receiver's claims are barred by the doctrine of in pari delicto.

Many of these arguments have been addressed and rejected in prior orders of this Court. See e.g., Order and Opinion on Defendant Nantucket Capital Management's Motion to Dismiss, Marty Steinberg, et al., v. Alpha Fifth Group, et al., Case No. 04-60899-CIV-MARRA, DE 307. Regarding UNH's first argument, since UNH is subject to personal jurisdiction in the Southern District of New


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York where the Receiver filed the Receivership Or-der and the Order of Reappointment, this Court has personal jurisdiction over UNH by virtue of 28 U.S.C. §§ 754 and 1692 and the Court's powers of nationwide service of process under Rule 4(k)(1)(D). Id. As to UNH's second argument, that the Receiver's claims are time barred, the Court has already determined that because the Receiver has not limited his recovery to causes of action solely under Florida law, the pleadings leave open the possibility that the laws of another jurisdiction such as New York, which has a six year statute of limitations for the recovery of fraudulent transfers, may apply. See Order and Opinion on Taubman's Mo- tion to Dismiss, Court-Appointed Receiver v. Alfred A. Taubman as Trustee for the Taubman Ret. Rev. Trust, et al., Case No. 05-60199-CIV-MARRA, DE 96. At this stage of the litigation, it is premature to undertake a choice of law analysis.

As to UNH's third argument, the Court has also previously rejected the argument that the Receiver's claim for unjust enrichment fails because an adequate remedy at law exists. Id; see also Order and Opinion on Motions to Dismiss, Court-Appointed Receiver v. Michael Lauer, et al., Case No. 05-60584-CIV-MARRA, DE 353. The Receiver may maintain an equitable unjust enrichment claim in the alternative to his legal claims against UNH. Mere Conduit

UNH's fourth argument asserts that it served as a “conduit” for the transfers for the eventual recipients and as a matter of law the Receiver cannot recover the transfers from UNH. The parties agree that the test to determine whether an entity qualifies as a “conduit” for transfers is whether that entity had legal control over the transfers and the right to use those transfers for its own purposes. This issue presents a question of fact that cannot be considered on a motion to dismiss. The Receiver has alleged in the Complaint that UNH received the transfers. Even if UNH has a valid argument that it was a mere “conduit” for the transfers, that argument is an affirmative defense to be proven at trial,

not on a motion to dismiss. See Dept. of Ins. v.Blackburn, 633 So.2d 521, 524 (Fla.Dist.Ct.App.1994) (“commercial conduit” defense for intermediary transferees constitutes an affirmative defense and thus cannot justify dismissal of complaint with prejudice). Receiver's Creditor Status

*3 UNH's fifth argument asserts that the Re- ceiver, as a matter of law, cannot bring claims under FUFTA because the Receiver represents the Re- ceivership Entities that are the debtor/transferors that made the transfers. According to UNH, the right to sue for fraudulent transfer in this case be- longs to the creditors of the Receivership Entities, not to the Receiver, who stands in the shoes of the Receivership Entities that made the allegedly fraudulent transfer. “[T]he Receivership Entities cannot simultaneously qualify as both “debtors” and “creditors” under FUFTA is sound as a matter of policy.” DE 665 at 15. UNH contends that neither the Receiver, nor the Receivership Entities, are “creditors” within the meaning of the Act.

Previously, the Receiver's claims under FUFTA were dismissed because of the lack of specific factual allegations establishing the debtor creditor relationship. See e.g., Order and Opinion on Motion to Dismiss Fifth Amended Complaint, DE 586. In another ancillary case, the Court con- cluded that the Receiver failed to sufficiently allege standing to bring claims under FUFTA because, among other things, he “neither identified on which specific entity's behalf he is suing as a creditor, nor has he clearly articulated the basis upon which the transferor would be a debtor.” See Order and Opin- ion on Motions for Reconsideration, Court-Ap- pointed Receiver et al. v. the Citco Group, LLC, et al., Case No. 05-60055-CIV-MARRA, DE 92 at 5, DE 93 at 6. After reconsideration, the Court stated that in order to bring claims under FUFTA, the Re- ceiver must show that “he has a claim which qualifies him as a creditor of the entity or individual who has either transferred or received assets which thwarts the creditor's attachment.” Id. The Court


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also noted that if the Receiver wishes to assert aclaim as a creditor, he must plead factual allegations establishing the creditor/debtor relationship.

The Sixth Amended Complaint now contains many paragraphs addressing this concern. See Compl. ¶¶ 26-80. The Receiver alleges that he is the receiver of each of the Receivership Entities, as well as receiver of the post-receivership entities, and as such he is a creditor of the pre-receivership “zombie” FN2 entities managed by Lauer. See, e.g., Compl. ¶¶ 31-32. These so called pre-receivership “zombies” managed by Lauer made the transfers that are directly or indirectly traceable from investors in the Receivership Entities. See, e.g., Com- pl. ¶ 33. The Receiver further alleges that he is a creditor of the entity transferees on the basis that the transferees received monies dissipated by the Receivership Entities. See, e.g., Compl. ¶ 34.

FN2. In Scholes v. Lehmann, 56 F.3d 750, 755 (7th Cir.1995), the Seventh Circuit held that, during the operation of a ponzi scheme, the corporations created by the scheme operator were “robotic” “evil zombie” tools of the operator, but nonetheless separate legal entities in the eyes of the law that were forced (by the operator) to pay out funds to early investors instead of using the corporation's funds for legitimate investments. Id. at 754. Once the scheme collapsed, “[t]he appointment of the receiver removed the wrongdoer from the scene.” Freed from his spell these former “zombie” entities became entitled to the return of the moneys-for the benefit not of the operator but of innocent investors-that the operator had made the corporations di- vert to unauthorized purposes. Id. Other courts have agree with the Seventh Cir- cuit's “colorful analysis” and found a Re- ceiver has standing to bring fraudulent transfer claims because, although the los- ing investors will ultimately benefit from the asset recovery, the Receiver is in fact

suing to redress injuries that the entitiessuffered when its managers caused the entities to commit waste and fraud. See, e.g., Donell v. Kowell, 533 F.3d 762, 767 (9th Cir.2008); Knauer v. Jonathon Roberts Financial Group, Inc., 348 F.3d 230, 235 (7th Cir.2003) (“As long as an entity is legally distinct from the person who diverted funds from the entity, a receiver for the entity has standing to recover the removed funds”). At the pleading stage, the Court will permit the Receiver to pursue this legal theory. A determination of whether this theory is legally viable and whether the Receiver can prevail on this theory should await the development of a complete factual record.

The Receiver makes the assertion in his re-

sponse that each of the Receivership Entities holds claims against the Management Companies that fraudulently dissipated funds. The Receiver main- tains that he can stand as a creditor of the Manage- ment Companies with standing to pursue the fraudulent transfers because, as receiver of the newly “cleansed” Management Companies, he may assert claims against the “evil zombie” Management Companies which wrongfully dissipated funds to entities such as UNH.

*4 Accepting all factual allegations in the complaint as true and taking them in the light most favorable to the Receiver, as the Court must at this stage, the Court finds that the Receiver has made sufficient factual allegations regarding his standing as a creditor under FUFTA. Whether he truly qualifies as a creditor is a question of fact which cannot be resolved now, but must be reserved for summary judgment or trial. In Pari Delicto

UNH's last argument is that the Receiver's unjust enrichment claim is barred by the equitable doctrine of in pari delicto. The Receiver responds that the doctrine of in pari delicto does not apply to bar claims by an equity receiver because the wrong-


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doing of a receivership entity or its principals is notimputed to such a receiver.

This issue has been raised by other defendants in ancillary cases and the Court has ruled that in pari delicto is an affirmative defense that is not appropriately considered at this point. See Order and Opinion on Motions to Dismiss, Court-Appointed Receiver v. Michael Lauer, et al., Case No. 05-60584-CIV-MARRA, DE 353. Conclusion

According to the conclusions made herein, it is hereby

ORDERED AND ADJUDGED that Defendant United Neighborhood Houses' Motion to Dismiss Plaintiff's Sixth Amended Complaint [DE 665] is DENIED.

DONE AND ORDERED in Chambers at West Palm Beach, Palm Beach County, Florida, this 29th day of March, 2010. S.D.Fla.,2010. Steinberg ex rel. Lancer Management Group LLC v. Alpha Fifth Group Slip Copy, 2010 WL 1332844 (S.D.Fla.) END OF DOCUMENT


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