motion for summary judgment on the …...2018/11/06 · case no. 3:18-cv-00679 arising out of case...

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF MISSISSIPPI

NORTHERN DIVISION

ALYSSON MILLS, IN HER CAPACITY AS RECEIVER FOR ARTHUR LAMAR ADAMS AND MADISON TIMBER PROPERTIES, LLC,

Plaintiff, v. MICHAEL D. BILLINGS and MDB GROUP, LLC; TERRY WAYNE KELLY, JR. and KELLY MANAGEMENT, LLC; and WILLIAM B. MCHENRY, JR. and FIRST SOUTH INVESTMENTS, LLC,

Defendants.

Case No. 3:18-cv-00679 Arising out of Case No. 3:18-cv-252, Securities and Exchange Commission v. Arthur Lamar Adams and Madison Timber Properties, LLC Hon. Carlton W. Reeves, District Judge

MOTION FOR SUMMARY JUDGMENT ON THE RECEIVER’S FRAUDULENT TRANSFER CLAIMS

Plaintiff Alysson Mills, in her capacity as the court-appointed receiver (the “Receiver”) for

Arthur Lamar Adams (“Adams”) and Madison Timber Properties, LLC (“Madison Timber”),

through undersigned counsel, respectfully files this Motion for Summary Judgment against

Michael D. Billings and MDB Group, LLC (sometimes collectively, “Billings”) and William B.

McHenry and First South Investments, LLC (sometimes collectively, “McHenry”) and states as

follows:

1.

In this motion, the Receiver asks for summary judgment on her fraudulent transfer claims,

Counts I and II of her complaint, only.

Case 3:18-cv-00679-CWR-FKB Document 31 Filed 11/06/18 of 6

2.

The Receiver shows that the commissions that Adams and Madison Timber paid to Billings

and McHenry were fraudulent and subject to avoidance under Mississippi’s version of the Uniform

Fraudulent Transfer Act because the commissions were proceeds of a Ponzi scheme. The only

facts that matter are as follows:

Madison Timber was a Ponzi scheme.

• The bill of information filed by the U.S. Attorney’s Office for the Southern District of Mississippi alleges Madison Timber was a Ponzi scheme.1

• Adams “admit[ted] to all of the conduct of the entire scheme and artifice to defraud” as set forth in the bill of information.2

• Adams testified at his sentencing hearing that Madison Timber’s income came solely from defrauded investors.3

• The Receiver reviewed records for the bank accounts of Madison Timber and independently confirmed that Madison Timber’s income came from defrauded investors.4

• The Receiver’s review of the books and records of Madison Timber confirms that, as Adams acknowledged under oath, funds paid to investors by Madison Timber were taken from funds invested in Madison Timber by investors. Madison Timber had neither legitimate operations nor income, save and except sums invested by duped investors.5

Billings recruited new investors to the Madison Timber Ponzi scheme, and Madison

Timber in turn paid Billings $3,513,780 from the proceeds.

• The Receiver and J. Lester Alexander, III, a forensic accountant and Certified Fraud Examiner, reviewed the records for the bank accounts of Madison Timber and MDB Group and confirmed that MDB Group received $3,513,780 in proceeds from the Madison Timber Ponzi scheme.6

1 Docket No. 1, United States v. Adams, No. 3:18-cr-00088 (S.D. Miss). 2 Docket No. 11, United States v. Adams, No. 3:18-cr-00088 (S.D. Miss). 3 Transcript of Adams’s sentencing on October 29 and 30, 2018, forthcoming. 4 Exhibit 1, Declaration of Alysson Mills. 5 See Exhibit 1, Declaration of Alysson Mills. 6 Exhibit 1, Declaration of Alysson Mills; Exhibit 2, Declaration of J. Lester Alexander, III.


McHenry recruited new investors to the Madison Timber Ponzi scheme, and Madison

Timber in turn paid McHenry $3,473,320 from the proceeds.

• The Receiver and J. Lester Alexander, III, a forensic accountant and Certified Fraud Examiner, reviewed the records for the bank accounts of Madison Timber and First South and confirmed that First South received $3,473,320 in proceeds from the Madison Timber Ponzi scheme.7

3.

The law entitles the Receiver to recover those proceeds from Billings and McHenry, for

the benefit of the Receivership Estate. Under Mississippi’s Uniform Fraudulent Transfer Act

(“MUFTA”), the Receiver is entitled to avoid any transfers made with “actual intent to hinder,

delay or defraud any creditor.” MISS. CODE ANN. § 15-3-107(1).8 In the Fifth Circuit, “proving that

[a transferor] operated as a Ponzi scheme establishes the fraudulent intent behind the transfers it

made.” Janvey v. Alguire, 647 F.3d 585, 598 (5th Cir. 2011) (quoting SEC v. Res. Dev. Int’l, LLC,

487 F.3d 295, 201 (5th Cir. 2007) (alteration in original)) (analyzing Texas’s Uniform Fraudulent

Transfer Act); see also Quilling v. Schonsky, 247 Fed. App’x 583, 586 (5th Cir. 2007) (“[T]ransfers

made from a Ponzi scheme are presumptively made with intent to defraud, because a Ponzi scheme

is, as a matter of law, insolvent from inception.”).

4.

For purposes of this motion, the Receiver does not have to prove that Billings or McHenry

knew or should have known the commissions were proceeds of a Ponzi scheme. A defendant may

keep money transferred to him if he proves he “took in good faith and for reasonably equivalent

7 Exhibit 1, Declaration of Alysson Mills; Exhibit 2, Declaration of J. Lester Alexander, III. 8 It is the Receiver’s understanding that all transfers to Billings and MDB Group were made or deemed to have been made in Mississippi, and therefore those transfers are subject to Mississippi’s version of the Uniform Fraudulent Transfer Act. If, however, the Court determines that the transfers to Billings and MDP Group were made or deemed to have been made in Texas, the analysis as to whether the transfers may be avoided is the same, because Texas’s Uniform Fraudulent Transfer Act, Texas Business and Commerce Code § 24.0001, et seq., is substantively identical to Mississippi’s.


value.” MISS. CODE ANN. § 15-3-113(1) (emphasis added). But that defense is not available to

Billings and McHenry, because even if they could prove they took in good faith, they cannot prove

it was for reasonably equivalent value. As a matter of law, a recruiter who induces new investors

to invest in a Ponzi scheme does not provide reasonably equivalent value in exchange for his

commissions. Warfield v. Byron, 436 F.3d 551 (5th Cir. 2006).

5.

Because Billings’s and McHenry’s good or bad faith is irrelevant to whether the

commissions must be returned, the Receiver does not offer new evidence that might establish

Billings’s and McHenry’s knowledge at this time.9 This motion instead focuses solely on the fact

of the Ponzi scheme itself.

6.

The few facts that matter cannot be disputed, and the law is clear. The Receiver is entitled

to summary judgment voiding the $3,513,780 and $3,473,320, respectively, that Madison Timber

paid Billings and McHenry.

___________________

WHEREFORE, the Receiver respectfully asks that after due proceedings the Court grant

her motion and enter summary judgment voiding the $3,513,780 and $3,473,320, respectively, that

Madison Timber paid Billings and McHenry.

9 The Receiver reserves the right to do so as future circumstances may require.


November 6, 2018

Respectfully submitted,

/s/ Lilli Evans Bass

BROWN BASS & JETER, PLLC

Lilli Evans Bass, Miss. Bar No. 102896

LaToya T. Jeter, Miss. Bar No. 102213

1755 Lelia Drive, Suite 400

Jackson, Mississippi 39216

Tel: 601-487-8448

Fax: 601-510-9934

[email protected]

Receiver’s counsel

/s/ Rebekka C. Veith

FISHMAN HAYGOOD, LLP

Admitted pro hac vice

Brent B. Barriere, Primary Counsel

Jason W. Burge

Kristen D. Amond

Rebekka C. Veith

201 St. Charles Avenue, Suite 4600

New Orleans, Louisiana 70170

Tel: 504-586-5253

Fax: 504-586-5250

[email protected]

[email protected]

[email protected]

[email protected]



CERTIFICATE OF SERVICE

I certify that I electronically filed the foregoing with the Clerk of Court using the ECF

system which sent notification of filing to all counsel of record.

In addition, I have separately emailed a copy of the foregoing to:

Andy Taggart Taggart, Rimes & Graham, PLLC

[email protected]

Counsel for Michael D. Billings and MDB Group, LLC

Joseph “Whit” Cooper Farese, Farese & Farese PA [email protected]

Counsel for Terry Wayne Kelly, Jr. and Kelly Management, LLC

Frank W. Trapp Phelps Dunbar LLP

[email protected]

Counsel for William B. McHenry, Jr. and First South Investments, LLC

Date: November 6, 2018 /s/ Rebekka C. Veith



Exhibit 1

Case 3:18-cv-00679-CWR-FKB Document 31-1 Filed 11/06/18 Page 1 of 3

1371973v.2

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF MISSISSIPPI

NORTHERN DIVISION


Plaintiff,

v.

MICHAEL D. BILLINGS and

MDB GROUP, LLC;

TERRY WAYNE KELLY, JR. and

KELLY MANAGEMENT, LLC;

and WILLIAM B. MCHENRY, JR. and

FIRST SOUTH INVESTMENTS, LLC,

Defendants.

Case No. 3:18-cv-00679

Arising out of Case No. 3:18-cv-252, Securities and Exchange Commission v. Arthur Lamar Adams and Madison Timber Properties, LLC

Hon. Carlton W. Reeves, District Judge

DECLARATION OF J. LESTER ALEXANDER, III IN SUPPORT OF PLAINTIFF’S MOTION FOR TEMPORARY RESTRAINING ORDER AND

PRELIMINARY INJUNCTION AGAINST MICHAEL D. BILLINGS, MDB GROUP, LLC, WILLIAM B. MCHENRY JR., and FIRST SOUTH

INVESTMENTS, LLC

I, J. Lester Alexander, III, do hereby declare under penalty of perjury and in accordance

with 28 U.S.C. § 1746 that this declaration is made of my own personal knowledge, that I am

competent to testify as to the matters stated herein, and that the following statements are all true

and correct.

1. I am the Chief Executive Officer and founder of AEA Group, LLC, formerly known

as Accounting, Economics & Appraisal Group, LLC (“AEA Group”), a forensic accounting and

valuation firm located in Houston and Birmingham. I am a Certified Public Accountant and

Exhibit 2


1371973v.2

Certified Fraud Examiner. In addition, I am Certified in Financial Forensics and Accredited in

Business Valuation by the American Institute of Certified Public Accountants (“AICPA”). I also

am a Chartered Global Management Accountant. I have more than three decades of professional

experience performing audit, tax and consulting services. I have been admitted as an expert

forensic accountant on the subject of the existence, payment history, original amount, disposition

of collateral and the outstanding balance of a company’s debts in Federal and various state courts.

I have been admitted as an expert forensic accountant on a variety of financial topics including

making solvency determinations, tracing the source and use of cash and other assets, evaluating

the timing and value of consideration received in exchange for payments made to creditors and the

course of conduct between a debtor and its creditors and other matters in various Federal courts,

including the U.S. District Court for the Middle District of Alabama. I am a former partner of

PricewaterhouseCoopers LLP and its legacy firm, Coopers & Lybrand, LLP, where I served as the

leader of its Southeastern regional forensic accounting practice with offices in Dallas, Houston,

Atlanta, Louisville, Birmingham, Tampa and Miami.

2. I was engaged by the Receiver, Alysson L. Mills, in Securities and Exchange

Commission v. Arthur Lamar Adams and Madison Timber Properties, LLC, Cause No. 3:18-CV-

252 (the “Receivership Proceeding”), pending in the United States District Court for the Southern

District of Mississippi, to serve as a forensic accountant. I submit this Declaration in support of

the Plaintiff’s Motion for Temporary Restraining Order and Preliminary Injunction in the above-

captioned proceeding.

INFORMATION UTILIZED

3. I have received and analyzed Madison Timber Properties, LLC’s business records,

including without limitation, the Madison Timber Account Statements and the Madison Timber


1371973v.2

Electronic Accounting Files, as described in the Declaration of Alysson L. Mills. I have also

reviewed the MDB Group Account Statements and First South Electronic Accounting Files, as

described in the Declaration of Alysson L. Mills.

FINDINGS

4. Based on my review of Madison Timber Properties, LLC’s business records, the

MDB Group Account Statements, and the First South Electronic Accounting Files, I have

concluded that Defendant MDB Group, LLC received $3,513,780 in transfers from Madison

Timber and Defendant First South Investments, LLC received $3,473,320 in transfers from

Madison Timber. Attached as Exhibit A to this affidavit is a spreadsheet summarizing all of those

transfers.

I declare under penalty of perjury and in accordance with 28 U.S.C. § 1746 that the

foregoing is true and correct.

EXECUTED this 17th day of October, 2018.

__________________________________________ J. Lester Alexander, III


Exhibit A

First South Commissions MDB Group, LLC Commissions

Date Amount Date Amount

02/09/2010 15,000.00$ 12/16/2013 30,000.00$ 02/16/2010 7,500.00 12/27/2013 3,000.00 03/26/2010 3,125.00 01/02/2014 10,000.00 05/21/2010 1,620.00 01/27/2014 6,750.00 06/29/2010 6,500.00 02/03/2014 10,000.00 06/29/2010 250.00 02/14/2014 9,000.00 07/09/2010 7,000.00 03/03/2014 10,000.00 08/03/2010 3,500.00 03/13/2014 22,500.00 09/08/2010 9,000.00 03/21/2014 4,500.00 09/13/2010 8,000.00 03/26/2014 3,000.00 10/18/2010 8,500.00 04/01/2014 10,000.00 10/26/2010 4,000.00 04/24/2014 22,500.00 11/05/2010 10,000.00 05/01/2014 10,000.00 11/29/2010 4,225.00 05/12/2014 3,000.00 12/03/2010 10,000.00 05/23/2014 22,500.00 12/07/2010 10,250.00 06/02/2014 10,000.00 04/01/2011 15,000.00 06/30/2014 6,750.00 05/27/2011 10,000.00 07/01/2014 10,000.00 06/06/2011 15,000.00 07/01/2014 10,000.00 06/20/2011 10,000.00 07/17/2014 6,375.00 07/05/2011 5,000.00 07/30/2014 3,000.00 07/12/2011 10,000.00 08/01/2014 10,000.00 07/14/2011 10,000.00 08/04/2014 6,000.00 09/16/2011 10,000.00 08/29/2014 11,250.00 09/30/2011 15,100.00 09/02/2014 10,000.00 10/25/2011 10,000.00 09/16/2014 6,000.00 11/22/2011 10,000.00 10/01/2014 10,000.00 12/08/2011 15,000.00 10/22/2014 3,000.00 12/15/2011 5,000.00 10/30/2014 3,750.00 01/10/2012 10,000.00 11/03/2014 10,000.00 01/25/2012 15,000.00 11/14/2014 7,500.00 02/14/2012 10,000.00 11/26/2014 5,250.00 02/23/2012 10,000.00 12/01/2014 10,000.00 03/14/2012 10,000.00 12/12/2014 6,000.00 03/16/2012 10,000.00 01/02/2015 22,500.00 03/22/2012 10,000.00 01/02/2015 10,000.00 06/08/2012 5,000.00 02/02/2015 10,000.00 07/05/2012 15,000.00 02/02/2015 4,500.00 07/11/2012 10,000.00 02/05/2015 3,000.00 07/13/2012 10,000.00 02/12/2015 7,500.00 07/24/2012 10,000.00 02/27/2015 6,000.00 08/08/2012 10,000.00 03/02/2015 10,000.00 08/17/2012 10,000.00 03/06/2015 3,000.00 08/27/2012 10,000.00 03/17/2015 3,750.00 09/04/2012 10,000.00 04/01/2015 33,750.00 09/19/2012 10,000.00 04/01/2015 10,000.00 10/03/2012 10,000.00 04/06/2015 3,750.00 10/09/2012 10,000.00 05/01/2015 10,000.00

1 of 6


Exhibit A



10/18/2012 10,000.00 05/04/2015 6,000.00 10/28/2012 5,000.00 05/08/2015 2,500.00 11/20/2012 10,000.00 05/15/2015 7,500.00 11/23/2012 10,000.00 05/29/2015 11,250.00 12/11/2012 20,000.00 06/01/2015 12,500.00 12/13/2012 15,000.00 06/26/2015 22,500.00 01/09/2013 15,000.00 07/01/2015 12,500.00 01/31/2013 10,000.00 07/01/2015 8,250.00 02/15/2013 20,000.00 07/17/2015 11,250.00 03/05/2013 10,000.00 07/31/2015 14,250.00 03/28/2013 10,000.00 08/03/2015 12,500.00 04/09/2013 10,000.00 08/07/2015 9,000.00 04/30/2013 10,000.00 08/12/2015 13,500.00 05/08/2013 5,000.00 08/13/2015 3,000.00 05/15/2013 10,000.00 09/01/2015 12,500.00 05/17/2013 10,000.00 09/16/2015 6,000.00 05/31/2013 20,000.00 10/01/2015 30,750.00 06/03/2013 5,000.00 10/01/2015 12,500.00 06/21/2013 10,000.00 10/29/2015 9,750.00 06/26/2013 15,000.00 11/02/2015 12,500.00 07/02/2013 10,000.00 11/05/2015 6,000.00 07/17/2013 10,000.00 11/13/2015 9,750.00 08/01/2013 10,000.00 11/18/2015 4,500.00 08/05/2013 10,000.00 12/01/2015 12,500.00 08/14/2013 10,000.00 12/03/2015 24,375.00 08/28/2013 10,000.00 01/04/2016 12,500.00 09/04/2013 10,000.00 01/04/2016 30,750.00 09/10/2013 15,000.00 01/13/2016 9,000.00 09/26/2013 10,000.00 01/29/2016 18,750.00 10/16/2013 15,000.00 02/01/2016 12,500.00 10/22/2013 5,000.00 02/16/2016 9,750.00 10/31/2013 10,000.00 03/01/2016 12,500.00 11/04/2013 10,000.00 03/03/2016 16,350.00 11/25/2013 10,000.00 03/04/2016 7,500.00 12/05/2013 10,000.00 03/30/2016 34,500.00 12/18/2013 10,000.00 04/01/2016 12,500.00 12/30/2013 10,000.00 05/02/2016 12,500.00 01/08/2014 10,000.00 05/03/2016 12,750.00 01/21/2014 30,000.00 05/16/2016 14,250.00 01/23/2014 10,000.00 05/25/2016 75,000.00 02/03/2014 1,400.00 06/01/2016 12,500.00 02/05/2014 3,150.00 06/02/2016 26,250.00 02/12/2014 15,000.00 06/09/2016 8,000.00 02/13/2014 30,000.00 06/10/2016 6,000.00 02/13/2014 15,000.00 06/30/2016 58,000.00 02/27/2014 10,000.00 07/01/2016 12,500.00 03/12/2014 10,000.00 07/15/2016 3,000.00

2 of 6


Exhibit A



03/28/2014 10,000.00 07/25/2016 12,000.00 04/10/2014 15,000.00 08/01/2016 12,500.00 04/18/2014 10,000.00 08/02/2016 4,000.00 04/18/2014 7,500.00 08/15/2016 13,000.00 05/06/2014 10,000.00 09/01/2016 12,500.00 05/22/2014 10,000.00 09/02/2016 36,000.00 06/03/2014 20,000.00 09/14/2016 4,000.00 06/05/2014 25,000.00 09/16/2016 4,000.00 07/01/2014 10,000.00 09/30/2016 44,000.00 07/04/2014 10,000.00 10/03/2016 12,500.00 07/16/2014 10,000.00 11/01/2016 12,500.00 07/25/2014 15,000.00 12/19/2016 5,000.00 07/29/2014 10,000.00 01/03/2017 12,500.00 08/07/2014 20,000.00 01/04/2017 38,000.00 08/29/2014 10,000.00 02/01/2017 12,500.00 09/03/2014 10,000.00 02/02/2017 73,500.00 09/04/2014 10,000.00 02/16/2017 84,530.00 09/22/2014 5,000.00 03/01/2017 12,500.00 09/29/2014 10,000.00 03/09/2017 35,000.00 10/10/2014 20,000.00 04/01/2017 12,500.00 10/14/2014 10,000.00 04/03/2017 5,000.00 10/15/2014 10,000.00 04/04/2017 117,000.00 10/30/2014 15,000.00 05/01/2017 12,500.00 11/04/2014 6,000.00 05/02/2017 18,000.00 11/26/2014 10,000.00 05/18/2017 53,000.00 12/01/2014 15,000.00 06/01/2017 12,500.00 12/05/2014 10,000.00 06/02/2017 110,000.00 12/08/2014 10,000.00 06/07/2017 60,000.00 12/10/2014 30,000.00 06/16/2017 19,800.00 01/05/2015 10,000.00 06/26/2017 50,000.00 01/09/2015 15,000.00 06/30/2017 56,900.00 01/21/2015 15,000.00 07/01/2017 12,500.00 01/30/2015 30,000.00 08/01/2017 12,500.00 01/30/2015 12,500.00 08/03/2017 32,000.00 02/11/2015 10,000.00 08/10/2017 90,000.00 02/18/2015 7,500.00 08/18/2017 20,000.00 02/25/2015 20,000.00 08/29/2017 21,000.00 03/04/2015 10,000.00 09/01/2017 10,000.00 03/25/2015 20,000.00 09/01/2017 12,500.00 03/26/2015 15,000.00 09/12/2017 120,000.00 04/15/2015 7,500.00 10/01/2017 12,500.00 04/17/2015 10,000.00 10/04/2017 24,800.00 04/24/2015 10,000.00 10/13/2017 24,000.00 05/05/2015 10,000.00 10/18/2017 100,000.00 05/07/2015 10,000.00 10/27/2017 20,000.00 05/13/2015 10,000.00 11/01/2017 12,500.00 05/27/2015 10,000.00 11/03/2017 10,000.00

3 of 6


Exhibit A



06/03/2015 20,000.00 11/10/2017 96,000.00 06/08/2015 5,000.00 11/27/2017 120,000.00 06/10/2015 5,000.00 12/01/2017 12,500.00 06/17/2015 15,000.00 12/04/2017 79,200.00 06/18/2015 15,000.00 12/27/2017 30,000.00 07/10/2015 10,000.00 01/15/2018 12,500.00 07/28/2015 10,000.00 01/17/2018 20,000.00 08/04/2015 15,000.00 01/26/2018 62,000.00 08/11/2015 10,000.00 02/01/2018 12,500.00 08/21/2015 10,000.00 02/02/2018 16,000.00 08/21/2015 15,000.00 02/14/2018 13,000.00 08/27/2015 10,000.00 03/01/2018 12,500.00 09/08/2015 10,000.00 03/02/2018 121,000.00 09/10/2015 10,000.00 03/09/2018 34,000.00 09/15/2015 15,000.00 03/19/2018 34,000.00 09/25/2015 11,000.00 04/02/2018 12,500.00 09/25/2015 10,000.00 04/02/2018 71,000.00 10/08/2015 20,000.00 04/17/2018 88,700.00 10/28/2015 15,000.00 10/30/2015 10,000.00 Total 3,513,780.00$

11/12/2015 17,500.00 11/13/2015 10,000.00 11/27/2015 10,000.00 11/27/2015 15,000.00 11/30/2015 10,000.00 12/07/2015 20,000.00 01/06/2016 20,000.00 01/13/2016 10,000.00 01/21/2016 8,000.00 02/03/2016 15,000.00 02/08/2016 25,000.00 02/24/2016 10,000.00 02/29/2016 10,000.00 02/29/2016 5,000.00 03/02/2016 7,500.00 03/09/2016 6,000.00 03/10/2016 15,000.00 03/11/2016 15,000.00 04/01/2016 10,000.00 04/05/2016 30,000.00 04/12/2016 25,000.00 04/28/2016 20,000.00 05/10/2016 10,000.00 05/12/2016 20,000.00 05/17/2016 10,000.00 05/31/2016 10,000.00 06/14/2016 10,000.00

4 of 6


Exhibit A



06/21/2016 5,000.00 06/29/2016 10,000.00 07/07/2016 8,000.00 07/14/2016 15,000.00 07/14/2016 20,000.00 07/21/2016 20,000.00 08/02/2016 10,000.00 08/02/2016 6,500.00 08/10/2016 10,000.00 08/15/2016 5,000.00 08/22/2016 15,000.00 08/30/2016 10,000.00 09/13/2016 10,000.00 09/28/2016 10,000.00 10/04/2016 20,000.00 10/07/2016 15,000.00 10/19/2016 10,000.00 10/25/2016 15,000.00 10/31/2016 10,000.00 11/02/2016 20,000.00 11/10/2016 10,000.00 11/22/2016 15,000.00 12/01/2016 10,000.00 12/06/2016 10,000.00 12/13/2016 7,500.00 01/04/2017 10,000.00 01/10/2017 10,000.00 01/13/2017 15,000.00 01/19/2017 15,000.00 01/25/2017 25,000.00 01/26/2017 20,000.00 02/07/2017 20,000.00 02/14/2017 10,000.00 02/28/2017 20,000.00 03/09/2017 10,000.00 03/16/2017 31,500.00 03/25/2017 10,000.00 03/29/2017 15,000.00 04/13/2017 15,000.00 04/27/2017 30,000.00 05/01/2017 15,000.00 05/09/2017 20,000.00 05/18/2017 10,000.00 05/25/2017 10,000.00 06/07/2017 10,000.00 06/19/2017 15,000.00 06/29/2017 20,000.00

5 of 6


Exhibit A



07/10/2017 30,000.00 07/14/2017 20,000.00 07/14/2017 15,000.00

07/19/2017 10,000.00 07/19/2017 25,000.00 08/02/2017 17,500.00 08/03/2017 15,000.00 08/07/2017 10,000.00 08/17/2017 10,000.00 08/30/2017 25,000.00 09/01/2017 10,000.00 09/01/2017 10,000.00 09/08/2017 10,000.00 09/21/2017 10,000.00 10/03/2017 20,000.00 10/10/2017 1,200.00 10/12/2017 20,000.00 10/18/2017 10,000.00 11/01/2017 45,000.00 11/28/2017 10,000.00 11/29/2017 10,000.00 11/29/2017 10,000.00 12/05/2017 20,000.00 12/28/2017 10,000.00 01/08/2018 15,000.00 01/10/2018 10,000.00 01/18/2018 20,000.00 01/29/2018 15,000.00 01/30/2018 15,000.00 01/31/2018 35,000.00 02/01/2018 10,000.00 02/05/2018 7,000.00

2/9/2018 10,000.00 2/21/2018 10,000.00 2/27/2018 20,000.00 3/2/2018 10,000.00 3/7/2018 5,000.00

3/16/2018 5,000.00 3/30/2018 5,000.00 3/30/2018 20,000.00 4/4/2018 10,000.00 4/5/2018 10,000.00

4/13/2018 10,000.00 4/18/2018 10,000.00

Total 3,473,320.00$

6 of 6


UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF MISSISSIPPI NORTHERN DIVISION


Plaintiff, v. MICHAEL D. BILLINGS and MDB GROUP, LLC; TERRY WAYNE KELLY, JR. and KELLY MANAGEMENT, LLC; and WILLIAM B. MCHENRY, JR. and FIRST SOUTH INVESTMENTS, LLC,

Defendants.

Case No. 3:18-cv-00679 Arising out of Case No. 3:18-cv-252, Securities and Exchange Commission v. Arthur Lamar Adams and Madison Timber Properties, LLC Hon. Carlton W. Reeves, District Judge

MEMORANDUM IN SUPPORT OF MOTION FOR SUMMARY JUDGMENT ON THE RECEIVER’S

FRAUDULENT TRANSFER CLAIMS

Plaintiff Alysson Mills, in her capacity as the court-appointed receiver (the “Receiver”) for

Arthur Lamar Adams (“Adams”) and Madison Timber Properties, LLC (“Madison Timber”),

through undersigned counsel, respectfully files this memorandum in support of her Motion for

Summary Judgment against Michael D. Billings and MDB Group, LLC (sometimes collectively,

“Billings”) and William B. McHenry, Jr. and First South Investments, LLC (sometimes

collectively, “McHenry”).

Case 3:18-cv-00679-CWR-FKB Document 32 Filed 11/06/18 Page 1 of 15

INTRODUCTION

In this motion, the Receiver asks for summary judgment on her fraudulent transfer claims,

Counts I and II of her complaint, only. The Receiver shows that the commissions that Adams and

Madison Timber paid to Billings and McHenry were fraudulent transfers because they were

proceeds of a Ponzi scheme. The law entitles the Receiver to recover those proceeds from Billings

and McHenry, for the benefit of the Receivership Estate.

For purposes of this motion, the Receiver does not have to prove that Billings or McHenry

knew or should have known the commissions were proceeds of a Ponzi scheme. Billings’s and

McHenry’s good or bad faith is irrelevant to whether the commissions must be returned; it is

enough under the law that Madison Timber was a Ponzi scheme. The Receiver does not offer new

evidence that might establish Billings’s and McHenry’s knowledge at this time.1 This motion

instead focuses solely on the fact of the Ponzi scheme itself.

BACKGROUND

Madison Timber

Adams, through Madison Timber, operated a Ponzi scheme that defrauded hundreds of

investors. Investors in Madison Timber believed that Madison Timber used investors’ money to

purchase timber from Mississippi landowners; that Madison Timber sold the timber to Mississippi

lumber mills at a higher price; and that Madison Timber repaid investors their principal and

promised interest with the proceeds of those sales. Investors received timber deeds and cutting

agreements that purported to secure their investments—but the documents were fake.2 The money

1 The Receiver reserves the right to do so as future circumstances may require. 2 Docket No. 1, United States v. Adams, No. 3:18-cr-00088 (S.D. Miss), at ¶ 9. See also transcript of Adams’s sentencing on October 29 and 30, 2018, forthcoming.


used to repay existing investors came from new investors.3 Like any Ponzi scheme, Madison

Timber required more and more new investors to continue.

Adams’s recruiters, or “bird dogs,” identified new investors and sold to them Madison

Timber investments. For each investment made by an investor he personally recruited, each

recruiter received a cut of the investor’s payment to Madison Timber.

In April 2018, on the heels of investigations of him by the F.B.I. and the U.S. Attorney’s

Office for the Southern District of Mississippi, Adams turned himself in. The U.S. Attorney’s

Office for the Southern District of Mississippi charged Adams with two counts of wire fraud and

one count of bank fraud in connection with a broader scheme to defraud. Among other things, the

bill of information states that as “part of the scheme and artifice to defraud” Adams “paid

commissions to recruiters who referred investors to [him]”:

The commissions were paid from investors’ money. For example, ADAMS paid one recruiter approximately two million four hundred forty-five thousand four hundred and forty-nine dollars ($2,445,449) in commissions in 2017 alone. ADAMS paid another recruiter approximately one million six hundred twenty-eight thousand one hundred dollars ($1,628,100) in commissions in 2017 . . . .4

Separately, the S.E.C. charged Adams with violations of the Securities Act of 1933 and

Securities & Exchange Act of 1934, alleging in its complaint that “[b]eginning in approximately

2004,” Adams, through Madison Timber, “committed securities fraud by operating a Ponzi

scheme.”5

On May 9, 2018, Adams pleaded guilty to the federal crime of wire fraud and admitted “all

of the conduct of the entire scheme and artifice to defraud as set forth” in the bill of information.6

3 Docket No. 1, United States v. Adams, No. 3:18-cr-00088 (S.D. Miss), at ¶ 10. 4 Docket No. 1, United States v. Adams, No. 3:18-cr-00088 (S.D. Miss), at ¶ 11. 5 Docket No. 3, Securities & Exchange Commission vs. Adams, et al., No. 3:18-cv-00252 (S.D. Miss), at ¶ 1. 6 Docket No. 11, United States v. Adams, No. 3:18-cr-00088 (S.D. Miss).


Most recently, during his sentencing hearing, Adams testified that Madison Timber operated as a

classic Ponzi scheme. Since no later than 2005, there were no legitimate revenues and investors

were paid from funds obtained from other investors.7 The fact that Madison Timber was a Ponzi

scheme cannot credibly be disputed.

Billings

The Receiver’s complaint alleges that Billings became a recruiter for Madison Timber by

no later than 2012, while he was employed by Butler Snow Business Advisory Services, LLC

(“Butler Snow”); that Madison Timber paid Butler Snow a monthly retainer for “strategic business

development, strategic financing/capital strategies and overall management advisory” services;

that Butler Snow and Billings introduced Madison Timber to potential investors; and that Madison

Timber paid Butler Snow and Billings a “success fee” when an investor invested.

The Receiver’s complaint alleges that in December 2013, Billings left Butler Snow for the

prospect of recruiting new investors to Madison Timber fulltime; that Adams agreed to pay

Billings 2%, and later 2.5%, of each dollar of each investment made by an investor that Billings

personally recruited; that, in addition, Madison Timber paid Billings a fee of $10,000, and later

$12,500, a month; and that these agreements were honored until the collapse of the Ponzi scheme

in April 2018.

The Receiver’s complaint alleges that among Adams’s “bird dogs,” Billings was a

standout; that when Adams met Billings in 2012, Madison Timber received annual investments of

approximately $15,000,000; that with Billings’s help, the Ponzi scheme ballooned; that Billings

targeted large investors in Texas and California, often dropping certain investors’ names to attract

7 The Receiver is awaiting the transcript of the sentencing hearing. She reserves the right to supplement this memorandum and accompanying exhibits following receipt of that transcript.


new investors;8 that Billings personally “booked” more than $80,000,000 in investments in 2017

alone; and that Billings was always hunting for “more, and more and more!!”9

Between 2013 and April 2018, Billings induced dozens of persons to invest in Madison

Timber. In exchange, he and MDB Group received Madison Timber “commissions” of not less

than $3,513,780.10

McHenry

The Receiver’s complaint alleges that McHenry became a recruiter for Madison Timber by

no later than 2010; that McHenry demanded, and Adams agreed to pay to McHenry, 10% of each

dollar of each investment made by an investor that McHenry personally recruited; and that the

agreement was not committed to writing but was honored until the collapse of the Ponzi scheme

in April 2018.

The Receiver’s complaint alleges that many of McHenry’s investors were elderly retirees;

that he met some of them in older adult Sunday school classes; that he cultivated relationships with

these individuals by visiting them, praying with them, bestowing gifts on them—even taking them

hunting when they could no longer go by themselves; and that although these individuals could

not afford to risk their life savings on purported timber investments, McHenry gained their trust

and took their money. The Receiver’s complaint alleges that, in one instance, McHenry, after

learning at church that one couple was suffering financial difficulties, presented himself as an

answer to their prayers and told the couple that God had led him to contact them.

8 Docket Nos. 16-3 and 16-4, Mills v. Billings, et al., No. 3:18-cv-00679 (S.D. Miss). 9 Docket No. 16-5, Mills v. Billings, et al., No. 3:18-cv-00679 (S.D. Miss). 10 Exhibit 1, Declaration of Alysson Mills; Exhibit 2, Declaration of J. Lester Alexander, III.


Between 2010 and April 2018, McHenry induced approximately twenty people to invest

in Madison Timber. In exchange, he and First South received Madison Timber “commissions” of

not less than $3,473,320.11

MATERIAL UNDISPUTED FACTS

For the purposes of this motion, only the following facts, each of which is supported by

evidence, matter:

1. Madison Timber was a Ponzi scheme.

• The bill of information filed by the U.S. Attorney’s Office for the Southern District of Mississippi alleges Madison Timber was a Ponzi scheme.12

• Adams “admit[ted] to all of the conduct of the entire scheme and artifice to defraud” as set forth in the bill of information.13

• Adams testified at his sentencing hearing that Madison Timber’s income came solely from defrauded investors.14

• The Receiver reviewed records for the bank accounts of Madison Timber and independently confirmed that Madison Timber’s income came from defrauded investors.15

• The Receiver’s review of the books and records of Madison Timber confirms that, as Adams acknowledged under oath, funds paid to investors by Madison Timber were taken from funds invested in Madison Timber by investors. Madison Timber had neither legitimate operations nor income, save and except sums invested by duped investors.16

2. Billings recruited new investors to the Madison Timber Ponzi scheme, and Madison

Timber in turn paid Billings $3,513,780 from the proceeds.

• The Receiver and J. Lester Alexander, III, a forensic accountant and Certified Fraud Examiner, reviewed the records for the bank accounts of Madison

11 Exhibit 1, Declaration of Alysson Mills; Exhibit 2, Declaration of J. Lester Alexander, III. 12 Docket No. 1, United States v. Adams, No. 3:18-cr-00088 (S.D. Miss), at ¶¶ 8-11, 17. 13 Docket No. 11, United States v. Adams, No. 3:18-cr-00088 (S.D. Miss), at ¶ 1. 14 Transcript of Adams’s sentencing on October 29 and 30, 2018, forthcoming. 15 Exhibit 1, Declaration of Alysson Mills. 16 See Exhibit 1, Declaration of Alysson Mills.


Timber and MDB Group and confirmed that MDB Group received $3,513,780 in proceeds from the Madison Timber Ponzi scheme.17

3. McHenry recruited new investors to the Madison Timber Ponzi scheme, and Madison

Timber in turn paid McHenry $3,473,320 from the proceeds.

• The Receiver and J. Lester Alexander, III, a forensic accountant and Certified Fraud Examiner, reviewed the records for the bank accounts of Madison Timber and First South and confirmed that First South received $3,473,320 in proceeds from the Madison Timber Ponzi scheme.18

ARGUMENT

Summary judgment must be granted “if the movant shows that there is no genuine dispute

as to any material fact and the movant is entitled to a judgment as a matter of law.” Fed. R. Civ.

P. 56; see Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The movant “bears the initial

responsibility of informing the district court of the basis for its motion.” Celotex, 477 U.S. at 423.

Once the movant makes this showing, the nonmoving party must “establish that there is a genuine

issue of material fact such that a reasonable jury might return a verdict in its favor.” Janvey v.

Democratic Senatorial Campaign Comm., 793 F. Supp. 2d 825, 829 (N.D. Tex. 2011) (citing

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586–87 (1986)). This requires

the nonmovant to “do more than simply show that there is some metaphysical doubt as to the

material facts.” Matsushita Elec., 475 U.S. at 586. “[A]ctual controversies are resolved in favor

of the nonmoving party ‘only when an actual controversy exists, that is, when both parties have

submitted evidence of contradictory facts.’” Janvey v. DSCC, 793 F. Supp. 2d at 829 (quoting

Olabisiomotosho v. City of Hous., 185 F.3d 521, 525) (5th Cir. 2010) (internal quotation marks

omitted)).

17 Exhibit 1, Declaration of Alysson Mills; Exhibit 2, Declaration of J. Lester Alexander, III. 18 Exhibit 1, Declaration of Alysson Mills; Exhibit 2, Declaration of J. Lester Alexander, III.


There is no actual controversy here. Madison Timber was a Ponzi scheme. As a matter of

law, the commissions Madison Timber paid to Billings and McHenry were fraudulent transfers,

and Billings and McHenry did not provide reasonably equivalent value for them. The Receiver is

entitled to judgment as a matter of law on her fraudulent transfer claims.

I. Madison Timber was a Ponzi scheme.

In a “classic Ponzi scheme,” the fraudster “us[es] payments from new investors to cover

the gains paid to older investors.” Janvey v. Alguire, 847 F.3d 231, 237 (5th Cir. 2017) (Alguire

II); see also Quilling v. Schonsky, 247 Fed. App’x 583, 586 (5th Cir. 2007) (quoting BLACK’S LAW

DICTIONARY 1180 (8th ed. 2004)) (A Ponzi scheme is “[a] fraudulent investment scheme in which

money contributed by later investors generates artificially high dividends for the original

investors.”). Madison Timber was a classic Ponzi scheme; it used new money from new

investments to pay amounts due on preexisting notes.

Adams was the founder and president of Madison Timber and is the person best positioned

to testify to its operations. Adams admitted in his guilty plea that Madison Timber was a Ponzi

scheme and that he used new money from new investments to pay amounts due on preexisting

notes. Adams’s plea agreement is sufficient evidence to establish the existence of a Ponzi scheme.

Janvey v. Alguire, 647 F.3d 585, 598 (5th Cir. 2011) (Alguire I) (holding that the plea agreement

of James Davis, the Chief Financial Officer of Stanford Investment Bank, “when read as a whole,

provides sufficient evidence for the district court to assume that the Stanford enterprise constituted

a Ponzi scheme ab initio”).

In connection with his guilty plea, Adams “admit[ted] to all of the conduct of the entire

scheme and artifice to defraud” as set forth in the bill of information filed by the U.S. Attorney’s


Office for the Southern District of Mississippi.19 Adams thus admitted that he devised a “scheme

and artifice to defraud investors by soliciting millions of dollars of funds under false pretenses,

failing to use the investors’ funds as promised, and misappropriating and converting investors’

funds to [his] own benefit and the benefit of others without the knowledge or authorization of the

investors.”20 Adams admitted that Madison Timber was “a sophisticated Ponzi scheme”; that “[i]n

furtherance of the Ponzi scheme,” he created fake timber deeds and cutting agreements for the

purpose of defrauding investors; that he used the proceeds from new investors to “mak[e]

payments due and owing to other investors”; that he “paid commissions to recruiters who referred

investors to [him]”; and that “[t]he commissions were paid from investors’ money.”21

Separately, the Receiver reviewed records for the bank accounts of Madison Timber and

independently confirmed that Madison Timber’s income came from defrauded investors. For the

time period in question, Madison Timber did not generate any material income from timber sales.

Records show that Madison Timber used new money it received from new investments to pay

amounts due on preexisting notes and to pay commissions to his recruiters. As custodian of

Adams’s and Madison Timber’s records, the Receiver is qualified to attest to their contents. See

Warfield v. Byron, 436 F.3d 551, 559 (5th Cir. 2006); see also Schonsky, 247 Fed App’x at 586

(“[The Receiver’s] affidavit, attached to the summary judgment motion, firmly establishes that

[the Ponzi scheme’s] bank account at JP Morgan Chase was in receipt of investor funds and was

the source of Stark’s gifts to [the defendant]. That is enough to shift the burden to [the

defendant].”).

19 Docket No. 11, United States v. Adams, No. 3:18-cr-00088 (S.D. Miss), at ¶ 1. 20 Docket No. 1, United States v. Adams, No. 3:18-cr-00088 (S.D. Miss), at ¶ 5. 21 Docket No. 1, United States v. Adams, No. 3:18-cr-00088 (S.D. Miss), at ¶ 11.


Finally, the Receiver and J. Lester Alexander, III, a forensic accountant and Certified Fraud

Examiner, reviewed the records for the bank accounts of MDB Group and First South and

confirmed that those entities received proceeds from the Madison Timber Ponzi scheme; indeed,

Madison Timber commissions were those entities’ primary or sole source of income.22 Billings

and McHenry controlled MDB Group and First South, respectively, and directed disbursements

from those entities’ bank accounts to themselves.

II. The commissions were fraudulent.

Under Mississippi’s Uniform Fraudulent Transfer Act (“MUFTA”), the Receiver is

entitled to avoid any transfers made with “actual intent to hinder, delay or defraud any creditor.”

MISS. CODE ANN. § 15-3-107(1).23 As set forth above, Madison Timber was a classic Ponzi

scheme. In the Fifth Circuit, “proving that [a transferor] operated as a Ponzi scheme establishes

the fraudulent intent behind the transfers it made.” Alguire I, 647 F.3d at 598 (quoting SEC v. Res.

Dev. Int’l, LLC, 487 F.3d 295, 301 (5th Cir. 2007) (alteration in original)) (analyzing Texas’s

Uniform Fraudulent Transfer Act); see also Schonsky, 247 Fed. App’x at 586 (“[T]ransfers made

from a Ponzi scheme are presumptively made with intent to defraud, because a Ponzi scheme is,

as a matter of law, insolvent from inception.”).

In a Ponzi scheme case, a “transferees’ knowing participation is irrelevant” to whether a

transfer was fraudulent. Alguire I, 647 F.3d at 598. A receiver’s proof of the existence of a Ponzi

scheme “obviat[es] the need to prove fraudulent intent of the transferees,” here Billings and

22 Exhibit 1, Declaration of Alysson Mills; Exhibit 2, Declaration of J. Lester Alexander, III. 23 It is the Receiver’s understanding that all transfers to Billings and MDB Group were made or deemed to have been made in Mississippi, and therefore those transfers are subject to Mississippi’s version of the Uniform Fraudulent Transfer Act. If, however, the Court determines that the transfers to Billings and MDP Group were made or deemed to have been made in Texas, the analysis as to whether the transfers may be avoided is the same, because Texas’s Uniform Fraudulent Transfer Act, Texas Business and Commerce Code § 24.0001, et seq., is substantively identical to Mississippi’s.


McHenry; a receiver need only prove “that each individual received transfers of money from the

Ponzi scheme.” Id. at 599 (emphasis in original). Because the Receiver has established that

Madison Timber operated as a Ponzi scheme, she has established that Madison Timber’s transfers

of money to Billings and McHenry were “presumptively made with the intent to defraud.”

Schonsky, 247 Fed. App’x at 586. The Receiver is entitled to summary judgment voiding the

$3,513,780 and $3,473,320, respectively, that Madison Timber paid to Billings and McHenry.

III. Billings’s and McHenry’s good or bad faith is irrelevant.

A defendant may keep money transferred to him if he proves he “took in good faith and

for reasonably equivalent value.” MISS. CODE ANN. § 15-3-113(1) (emphasis added). But that

defense is not available to Billings and McHenry, because even if they could prove they took in

good faith, they cannot prove they gave reasonably equivalent value for the commissions paid to

them.

As a matter of law, a recruiter who induces new investors to invest in a Ponzi scheme does

not provide reasonably equivalent value in exchange for his commissions. In Warfield v. Byron,

436 F.3d 551 (5th Cir. 2006), the Fifth Circuit affirmed summary judgment for a receiver on his

claims under Washington’s Uniform Fraudulent Transfer Act to recover commissions paid to an

investor who also recruited new investors to a Ponzi scheme.24 The investor-recruiter argued that

he received his commissions in good faith and for fair value. Id. at 559. The Fifth Circuit disagreed,

explaining that the “primary consideration in analyzing the exchange of value for any transfer is

the degree to which the transferor’s net worth is preserved.” Id. at 560. “It takes cheek,” the court

wrote, “to contend that in exchange for the payments [the defendant] received, the RDI Ponzi

24 The relevant provisions of Washington’s Uniform Fraudulent Transfer Act are identical to Mississippi’s.


scheme benefitted from [the defendant’s] efforts to extend the fraud by securing new investments.”

Id.

The Fifth Circuit did not even reach the question of the investor-recruiter’s good faith,

because he could not establish reasonably equivalent value. “We need not draw a conclusion on

good faith,” the court wrote, “as his defense would still fail because he did not receive the transfers

from RDI in exchange for reasonably equivalent value.” Id. See also Janvey v. Democratic

Senatorial Campaign Comm., 793 F. Supp. 2d 825, 858 (N.D. Tex. 2011) (granting summary

judgment where defendants failed to produce evidence “establishing the exchange of consideration

of a reasonably equivalent value”).

Case law from outside the Fifth Circuit is also instructive. The defendant in Hoffman v.

Markowitz, No. 16-01972, 2017 WL 6940501 (C.D. Cal. July 26, 2017), “acted as a third-party

referring agent, whose only admitted task was to directly recruit new investors” to a corporation

offering investments in Automated Teller Machines. Id. at *5. There was no genuine dispute that

the corporation “operated as a Ponzi scheme, which by its very nature is doomed to failure.” Id.

Therefore, the United States District Court for the Central District of California “conclude[d] that

the Referral Fees received by Defendant d[id] not constitute ‘reasonably equivalent value’” and

were subject to disgorgement under California’s Uniform Voidable Transactions Act. Id.

Likewise, in Wing v. Dockstader, No. 2:08 cv 776, 2010 WL 5020959, (D. Utah Dec. 3,

2010), aff’d, 482 Fed. App’x 361 (10th Cir. 2012), a defendant argued that he provided reasonably

equivalent value “by referring investors to [a Ponzi scheme].” Id. at *6. The United States District

Court for the District of Utah “disagree[d] with the notion that a person paid to refer investors to

a Ponzi scheme is more akin to the venture’s utility provider than the investors.” Id. Instead, “a

person who refers investors to a Ponzi scheme, whether knowingly or not, is just as involved, and


even more involved, in furthering the scheme as a passive investor.” Id. The court held that the

“fictitious profits to the defendants in this case did not benefit [the Ponzi scheme] and instead

simply depleted the scheme’s resources faster. Accordingly, the payments were not for reasonably

equivalent value and, therefore, were fraudulent transfers.” Id. at *5.25

Given this clear precedent, Billings and McHenry cannot establish reasonably equivalent

value, therefore their good or bad faith is irrelevant.26 The Receiver is entitled to summary

judgment in her favor on her fraudulent transfer claims.

25 Other courts have disgorged commissions paid to Ponzi scheme recruiters on the premise that “[j]ust as the law would require innocent investors to disgorge profits obtained from investing in an unlawful Ponzi scheme, it dictates that the court cannot permit the sales agent defendants to unjustly benefit from their unlawful sales of securities in furtherance of a Ponzi scheme.” Hays v. Adam, 512 F. Supp. 2d 1330 (N.D. Ga. 2007); see also Cobalt Multifamily Investors I, LLC v. Arden, No. 06 Civ. 6172, 2010 WL 3191040, at *3 (S.D.N.Y. Sept. 9, 2010) (disgorging commissions because defendants “were paid corporate funds for assisting in a fraudulent scheme to extract money from potential investors—funds that were then steered through the corporation into the pockets of the ringleaders of the fraud”; “The salespeople are plainly not entitled to retain such commission payments, and the receiver appears to be a proper person to pursue those funds on behalf of the estate, which in turn will presumably be held responsible for the ultimate reimbursement of the shareholders.”). 26 If she had to, the Receiver would show that Billings and McHenry did not take in good faith because at a minimum they knew enough facts to have had a duty to inquire. A receiver need not establish that a defendant had actual knowledge of a Ponzi scheme; constructive knowledge, or “inquiry notice,” is sufficient. See Janvey v. GMAG LLC, No. 3:15-CV-00401-N, 2017 WL 8780882, at *2 (N.D. Tex. Sept. 14, 2017), order amended, 2017 WL 8780883 (N.D. Tex. Dec. 14, 2017) (a court “examines (1) ‘whether the transferee had information that put it on inquiry notice that the transferor was insolvent or that the transfer might be made with a fraudulent purpose’ and (2) whether, having been put on inquiry notice, the transferee ‘satisf[ied] a ‘diligent investigation’ requirement’”) (quoting In re Am. Hous. Found., 785 F.3d 143, 164 (5th Cir. 2015)) (alteration in original). While the Fifth Circuit did not reach the question of good faith in Warfield, it emphasized that the defendant’s “failure to inquire about [the Ponzi scheme] more closely, in light of the abundant suspicious information he possessed,” raised “serious questions.” 436 F.3d at 560. The Tenth Circuit in In re M&L Bus. Mach. Co., 84 F.3d 1330 (10th Cir. 1996), summarized facts establishing the defendant’s constructive knowledge, and lack of good faith, in that case:

[Defendant’s] experience as an investor; promised rates of return greatly exceeding the market rate . . . ; an implausible explanation by [the Ponzi scheme’s] officials as to how the company could pay these extremely high rates; [the Ponzi scheme’s] use of postdated checks to pay investors; [another party’s] disclosure that he received a commission for finding investors for [the Ponzi scheme]; and the fact that the company's first check to [defendant] was returned.

Id. at 1338–39. The Tenth Circuit examined good faith under Section 548(c) of the Bankruptcy Code in In re M&L, rather than under an UFTA statute. Because “UFTA is modeled on § 548(a)(1) of the Bankruptcy Code,” cases interpreting Section 548 “may be used to interpret UFTA or its [state-law] equivalent.” Janvey v. Democratic Senatorial Campaign Comm., 712 F.3d 185, 194 (5th Cir. 2013).


CONCLUSION

The few facts that matter cannot be disputed, and the law is clear. The Receiver is entitled

to summary judgment voiding the $3,513,780 and $3,473,320, respectively, that Madison Timber

paid Billings and McHenry.

November 6, 2018

Respectfully submitted,

/s/ Lilli Evans Bass

BROWN BASS & JETER, PLLC

Lilli Evans Bass, Miss. Bar No. 102896

LaToya T. Jeter, Miss. Bar No. 102213

1755 Lelia Drive, Suite 400

Jackson, Mississippi 39216

Tel: 601-487-8448

Fax: 601-510-9934

[email protected]


/s/ Rebekka C. Veith

FISHMAN HAYGOOD, LLP


Brent B. Barriere, Primary Counsel

Jason W. Burge

Kristen D. Amond

Rebekka C. Veith

201 St. Charles Avenue, Suite 4600

New Orleans, Louisiana 70170

Tel: 504-586-5253

Fax: 504-586-5250

[email protected]

[email protected]

[email protected]

[email protected]



CERTIFICATE OF SERVICE

I certify that I electronically filed the foregoing with the Clerk of Court using the ECF

system which sent notification of filing to all counsel of record.

In addition, I have separately emailed a copy of the foregoing to:

Andy Taggart Taggart, Rimes & Graham, PLLC

[email protected]

Counsel for Michael D. Billings and MDB Group, LLC

Joseph “Whit” Cooper Farese, Farese & Farese PA [email protected]

Counsel for Terry Wayne Kelly, Jr. and Kelly Management, LLC

Frank W. Trapp Phelps Dunbar LLP

[email protected]

Counsel for William B. McHenry, Jr. and First South Investments, LLC

Date: November 6, 2018 /s/ Rebekka C. Veith



motion for summary judgment on the …...2018/11/06 · case no. 3:18-cv-00679 arising out of case...

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