district of minnesota u.s. commodity futures...

UNITED STATES DISTRICT COURTDISTRICT OF MINNESOTA

U.S. COMMODITY FUTURES TRADING COMMISSION,

Plaintiff(s) Case No: 09-cv-3332 MJD/FLN

v.

TREVOR COOK d/b/a CROWN FOREX, LLC, PATRICK KILEY d/b/aCROWN FOREX, LLC, UNIVERSALBROKERAGE FX and UNIVERSAL BROKERAGE FX DIVERSIFIED, OXFORDGLOBAL PARTNERS, LLC, OXFORDGLOBAL ADVISORS, LLC, UNIVERAL BROKERAGE FX ADVISORS, LLC f/k/a UBS DIVERSIFIED FX ADVISORS, LLC, UNIVERSAL BROKERAGE FX GROWTH, L.P. f/k/a UBS DIVERSIFIED FXGROWTH L.P., UNIVERSAL BROKERAGEFX MANAGEMENT, LLC f/k/a UBS DIVERSIFIED FX MANAGEMENT, LLCand UBS DIVERSIFIED GROWTH, LLC,

Defendant(s)

R.J. ZAYED,

Receiver.

Case 0:09-cv-03332-MJD-FLN Document 494 Filed 10/18/10 of 21

UNITED STATES DISTRICT COURTDISTRICT OF MINNESOTA

UNITED STATES SECURITIESAND EXCHANGE COMMISSION, Case No: 09-cv-3333 MJD/FLN

Plaintiff(s)

v.

TREVOR G. COOK, PATRICK J. KILEY, UBS DIVERSIFIED GROWTH, LLC, UNIVERSAL BROKERAGE FXMANAGEMENT, LLC,OXFORD GLOBAL ADVISORS, LLC, and OXFORD GLOBAL PARTNERS, LLC,

Defendants

and

BASEL GROUP, LLC, CROWN FOREX, LLC, MARKET SHOT, LLC, PFG COIN AND BULLION, OXFORD DEVELOPERS, S.A., OXFORD FX GROWTH, L.P., OXFORD GLOBAL MANAGED FUTURES FUND, L.P., UBS DIVERSIFIED FX ADVISORS, LLC, UBS DIVERSIFIED FX GROWTH, L.P., UBS DIVERSIFIED FX MANAGEMENT, LLC, CLIFFORD BERG, and ELLEN BERG,

Relief Defendants.

R.J. ZAYED,

Receiver.


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MEMORANDUM IN SUPPORT OF THE RECEIVER’S MOTION FOR AN ORDER APPROVING INTERIM DISTRIBUTION PLAN

AND CLAIM FINALIZATION PROCEDURES

The Court-appointed Receiver, R.J. Zayed, respectfully moves for entry of an

Order approving the Receiver’s plan to make an interim distribution in these civil cases

of $2,250,000.00 to investors who lost money to Trevor Cook’s Ponzi scheme. An

additional $363,700.00 in Receivership funds, which currently are held in the Court

Registry of the United States District Court, will be used for criminal restitution in United

States of America v. Trevor Cook, 10-cr-00075 (D. Minn. 2010). The Receiver further

moves for an Order approving his plan to finalize all claims for civil restitution and

claims for payment by other creditors of the Receiver Estates.

I. BACKGROUND

This case concerns one of the biggest Ponzi schemes in Minnesota history,

involving hundreds of investors who lost over $150 million to a fraud perpetrated by

Trevor Cook and others. This Court has appointed the Receiver to recover assets and

return funds to the victims of Cook’s fraud.

A. The Receivership Was Established To Collect And Liquidate Assets Of The Fraud.

On November 23, 2009, the Securities and Exchange Commission (“SEC”) and

the Commodity Futures Trading Commission (“CFTC”) filed lawsuits against Trevor

Cook, Patrick Kiley, and various entities controlled by them (collectively referred to as

the “Receiver Estates”). Complaint, No. 09-cv-3333 (“SEC case”), Docket No. 1 (Nov.

23, 2009); Complaint for Injunctive and Other Equitable Relief and For Penalties under


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the Commodity Exchange Act, No. 09-cv-3332 (“CFTC case”), Docket No. 1 (Nov. 23,

2009).

On November 23, 2009, the Court established the Receivership in the related SEC

and CFTC cases. See Order Appointing Receiver, SEC Docket No. 13 (Nov. 23, 2009);

see also Amended Order Appointing Receiver, SEC Docket No. 18 (Nov. 24, 2009);

Second Amended Order Appointing Receiver, SEC Docket No. 68 (Dec. 11, 2009); Order

Imposing Asset Freeze and Other Ancillary Relief, SEC Docket No. 14 (Nov. 23, 2009);

Order Identifying Frozen Accounts, SEC Docket No. 15 (Nov. 23, 2009); Ex Parte

Statutory Restraining Order, CFTC Docket No. 21 (Nov. 23, 2009); Order Continuing

Appointment of Temporary Receiver, CFTC Docket No. 96 (Dec. 11, 2009).

The purpose of the Receivership is to marshal, preserve, account for and liquidate

the assets of the Receivership for the benefit of the investors who were defrauded by

Cook’s scheme. Order Continuing Appointment of Temporary Receiver, CFTC Docket

No. 96, at 3.

B. The Receivership Has Collected, Liquidated, And Frozen Approximately $7,708,784.00.

As of September 13, 2010, the Receiver had collected, liquidated, and frozen

approximately $7,708,784.00 in cash. Fifth Status Report of Receiver R.J. Zayed, SEC

Docket No. 492 & CFTC Docket No. 449, at 6 (Sept. 13, 2010). Of that total,

$2,281,519.00 has been used to pay expenses and fees incurred by the Receiver in

fulfilling the Court’s Receivership Orders. See id.


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C. The Court Registry Holds An Additional $363,700.00 In Receivership Funds.

On April 12, 2010, Cook caused $363,700.00 in Receivership funds to be turned

over to the FBI. Third Status Report of Receiver R.J. Zayed, SEC Docket No. 308 &

CFTC Docket No. 294, at 8 (May 5, 2010). These funds were deposited into the Court

Registry for the United States District Court and now will be used for criminal restitution

in United States of America v. Trevor Cook, 10-cr-00075 (D. Minn. 2010). Id.

D. The Receiver Has Expended Considerable Effort To Identify Cook’s Victims And Their Losses.

From the onset of his appointment, the Receiver has continuously endeavored to

identify the victims of Cook’s fraud and the amount of their losses for the purpose of

returning recovered funds at the appropriate time. The Receiver has used various means

to compile a comprehensive database of investors and an accurate accounting of their

losses.

1. The Receiver Has Communicated Directly With Investors.

Since December 2009, the Receiver has maintained a website

(www.cookkileyreceiver.com), email account ([email protected]), and toll-

free (877-316-6129) and local (612-436-9664) telephone numbers to communicate with

investors about their losses and the process for submitting claims to the Receiver.

(Declaration of Tara Norgard (“Norgard Decl.”) ¶¶ 3-5). The Receiver’s web site allows

investors to submit their claims and supporting documentation to the Receiver online,

print a hard copy claim form for submission by mail, or request a claim form be sent to

them. (Id. ¶ 5, Id. ¶ 6, Ex. 1; Id. ¶ 7, Ex. 2.) Investors may also request claim forms by


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phone or email and talk to the Receiver’s staff about the claim submission process. (Id.

¶¶ 3-4.)

The Receiver requires all claims for civil restitution to be supported by

independent proof from a reliable entity unrelated to the fraud. (Id. ¶ 18.) Examples of

acceptable forms of proof include documents from third-party financial institutions such

as canceled checks, wire transfer receipts, and bank statements. (Id.) For claims

involving gold, silver, and other precious metals, the Receiver requires proof of

ownership of the metals, a detailed listing of the coins or other items transferred, and

invoices, purchase orders, or other documentation showing the valuation of the items on

the date of transfer, as well as documentation showing that the value was in fact

transferred to a Receiver Estate. (Id.)

Many claims submitted by investors to-date have been incomplete. For example,

some investors did not provide records to verify their investments with the fraudulent

entities and others failed to subtract withdrawals they made. (Id. ¶ 18.) Other investors

included claims for “interest” that fraudulent account statements had shown. (Id.) The

Receiver’s staff worked with each investor, where appropriate, to ensure that the claims

were properly documented and calculated. (Id. ¶¶ 19-20.)

2. The Receiver Has Reviewed Seized Hard Copy Records.

In accordance with this Court’s Orders, the Receiver took custody and control of

properties of the Receiver Estates and seized, among other things, all books and records

found therein. Among these books and records were hard copy files for many investors

in the fraud. First Status Report of Receiver R.J. Zayed, CFTC Docket No. 134 & SEC


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Docket No. 100, at 6-7 (Dec. 30, 2009). The Receiver engaged volunteer students from

Century College to review these files for investor data. (Norgard Decl. ¶ 8.) These

students, working free of charge, compiled a list of names and contact information for all

investors found in the hard copy files seized by the Receiver. (Id.)

3. The Receiver Has Analyzed Seized Electronic Data.

In addition to the hard copy files, the Receiver took possession and made forensic

images of forty-one computer drives recovered at the Van Dusen mansion and twenty-

one computer drives recovered at the Tiffany Court property. First Status Report of

Receiver R.J. Zayed, CFTC Docket No. 134 & SEC Docket No. 100, at 6-7. The

Receiver also imaged the computer drive from Cook’s personal residence in Apple

Valley. (Norgard Decl. ¶ 9.)

With this Court’s permission, the Receiver engaged a computer forensic specialist

to help recover data from the seized drives, identify the useable data, and put that data

into a searchable format. (Id. ¶ 10); see also Declaration of Receiver R.J. Zayed in

Support of Motion to Approve the Payment of Fees Incurred by the Receiver that were

Necessary to Assist the Receiver in his Duties, SEC Docket No. 147 and CFTC Docket

No. 167, at 3-4 (Jan. 19, 2010); Declaration of Receiver R.J. Zayed in Support of Motion

to Approve the Payment of Fees Incurred by the Receiver that were Necessary to Assist

the Receiver in his Duties, SEC Docket No. 204 and CFTC Docket No. 209, at 4-5 (Feb.

16, 2010). The Receiver has analyzed this recovered data to, among other things, identify

investors and verify losses. (Norgard Decl. ¶¶ 19-20.)


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4. The Receiver Has Reviewed Financial Records From Third Parties.

The Receiver also has obtained and analyzed comprehensive financial records

from third parties concerning the fraud. Using the subpoena power granted in the Court’s

Receivership Orders, the Receiver has issued nearly 300 subpoenas to banks, brokerage

firms, and other individuals and entities. Order Continuing Appointment of Temporary

Receiver, CFTC Docket No. 96 at I(H); Second Amended Order Appointing Receiver,

SEC Docket No. 68 at I(H); (Norgard Decl. ¶ 11.) The Receiver has used these financial

records to identify victims and verify losses. (Norgard Decl. ¶ 20.)

The Receiver engaged volunteer MBA students from the University of St. Thomas

to analyze key financial records for investor information. (Id. ¶ 12.) These students, also

working free of charge, created a list of individuals and entities appearing in bank records

and cash flow statements tracing all funds coming into and going out of key bank

accounts controlled by the Receiver Estates. (Id.) For the UBS Diversified account at

Wells Fargo alone, the students reviewed almost 2,500 wire transfers and canceled

checks. (Id.)

5. The Receiver Has Worked With The SEC.

In addition to analyzing information obtained through his independent

investigation, the Receiver has worked with the SEC to identify and verify investor

claims. Prior to filing suit, the SEC conducted an investigation of Cook and his various

entities. As part of this work, the SEC compiled several tables of financial transactions,

including a table of probable investors. See Declaration of Scott J. Hlavacek, SEC


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Docket No. 4, Ex. 2, at 3-27 (Nov. 23, 2009). The SEC tables also offer a consolidated

and categorized analysis of the several financial accounts held in the name of, or under

the control of, the Receiver Estates. Id. The Receiver compared all claims submitted by

investors against the data compiled by the SEC to ensure that all relevant data was

captured in the Receiver’s database of investors. (Norgard Decl. ¶ 20.)

The Receiver also has obtained data about investors from their submissions to the

SEC. As part of its investigation into the fraud at the heart of these cases, the SEC

provided known investors with a questionnaire about their investments with Cook and his

entities. (Id. ¶ 13, Ex. 3.) This questionnaire requested, among other things, each

investor’s name, address, and estimated loss. (Id.) The Receiver obtained copies of

completed questionnaires from the SEC and in some cases, directly from investors. (Id.

¶¶ 7, 13.) The Receiver’s staff then followed up with each investor who completed an

SEC questionnaire but did not submit a claim to the Receiver. (Id. ¶ 13.).

6. The Receiver Has Worked With The United States Probation Office.

The Receiver also has worked closely with the United States Probation Office

(“Probation Office”), which is handling the criminal restitution in United States of

America v. Trevor Cook, 10-cr-00075 (D. Minn. 2010), to identify victims of the fraud,

verify their losses, and help them understand the claim procedures for restitution in the

civil and criminal cases.

On April 28, 2010, the Probation Office mailed a letter to each investor who had

been identified by the Receiver and the SEC. (Norgard Decl. ¶ 14, Ex. 4.) The letter


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explained the process for submitting claims to the Probation Office for purposes of

restitution in the criminal case. (Id.) The Receiver followed up with a similar letter to all

investors who had made a claim to the Receiver as of June 1, 2010, explaining the

separate process for restitution in the related criminal case. (Id. ¶ 15, Ex. 5.) The

Receiver and the Probation Office shared the information they obtained through their

respective efforts to ensure that the Probation Office had all of the documentation that

had been submitted to the Receiver and that the Receiver had all of the documentation

that had been submitted to the Probation Office. (Id. ¶ 16.)

On August 25, 2010, Judge Rosenbaum sentenced Cook to a criminal sentence of

twenty-five years in prison and ordered Cook to make restitution in the amount of

$158,211,092.34 to 923 victims. Judgment in a Criminal Case, 10-cr-00075, Doc. No.

18, at 5 (Aug. 25, 2010). Since then, the Receiver and the Probation Office have

continued to work together to eliminate duplicate claims and verify amounts of losses.

(Norgard Decl. ¶ 16.) As a result, the Probation Office has revised its criminal restitution

list to 798 victims with losses totaling $155,359,411.77. Amended Judgment in a

Criminal Case, 10-cr-00075, Doc. No. 21, at 5 (Oct. 7, 2010).

The Receiver’s proposed interim distribution list for civil restitution closely

parallels the Probation Office’s list for criminal restitution, with two exceptions. First,

the criminal restitution list includes claims submitted by employee investors.1 See

Amended Judgment in a Criminal Case, 10-cr-00075, Doc. No. 21, at 5 (Oct. 7, 2010). 1 Employee investors include anyone who received compensation of any type from the fraudulent entities, including salaried employees, independent contractors, brokers, and partners, as well as spouses of these individuals.


9

The Receiver is still investigating claims made by employee investors and as such, they

are not included in the proposed interim distribution. See infra Part III(A). Second, the

criminal restitution list includes those possible investors who are identified in the SEC

tables, but who have not submitted a claim to the Receiver, the Probation Office, or the

government agencies. See Amended Judgment in a Criminal Case, 10-cr-00075, Doc.

No. 21, at 5 (Oct. 7, 2010); Declaration of Scott J. Hlavacek, SEC Docket No. 4, Ex. 2, at

3-27. The Receiver will advise these possible investors of their right to submit a claim

for civil restitution to the Receiver and the process and deadline for doing so. See infra

Part III(B). Claims from investors in either of these groups that are later verified will be

made part of the Receiver’s final distribution. The Receiver will make a final accounting

to ensure that every verified claim is paid out on an equal pro rata basis, whether the

claim was included in the interim distribution or not. In other words, the final accounting

will take into account whether a particular claimant did or did not receive an interim

distribution in these civil cases.

7. The Receiver Has Worked With Counsel For The Victims.

A number of investors have retained private counsel to represent their interests in

their case against Cook and his colleagues. The Receiver has worked with the law firm

of Messerli and Kramer to obtain claim data for the 105 investors represented by that

firm. (Norgard Decl. ¶ 17.)

E. The Receiver Has Undertaken A Claim Reconciliation Process To Ensure That All Investor Claims Are Legitimate, Accurately Calculated, And Properly Substantiated.

The Receiver has diligently worked with Cook’s victims to ensure that there is


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proper documentation for and verification of their claims. (Id. ¶¶ 2-7, 17-20.) Wherever

possible, the Receiver used the seized and subpoenaed hard copy and electronic files to

help investors who did not have third party proof to calculate and substantiate their

claims. (Id. ¶ 19.) The Receiver has also verified claims against the information

obtained through his independent investigation. (Id. ¶ 20.)

To date, the Receiver has verified claims for 668 investors with losses totaling

$142,327,921.81. (Norgard Decl. ¶ 21.) As explained above, this total does not include

losses claimed by employee investors or by investors who have yet to submit claims to

the Receiver, Probation Office, or government agencies. The Receiver has calculated a

recognized claim amount for each of the 668 claimants by adding all verified deposits

and subtracting all receipts. Receipts are payments or benefits of any kind from the

Receiver Estates, such as withdrawals of principal, “interest” payments, employee

compensation, commissions, medical or other insurance benefits, mortgage payments,

vehicles, personal property, and gifts. The Receiver also has subtracted any claims for

profits shown on fraudulent account statements; these profits were never in fact made. In

the final claim reconciliation process the Receiver also will deduct any recovery an

investor makes in another forum for losses related to Cook’s scheme. For example, the

Receiver will deduct from each victim’s claim any criminal restitution paid from United

States v. Cook, 10-cr-00075 (D. Minn. 2010). To the extent an investor recovers from

any third parties, such as Associated Bank or Entrust, that recovery will be subtracted

from the final claim amount recognized by the Receiver, as well.


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II. THE RECEIVER’S PROPOSED INTERIM DISTRIBUTION PLAN

The Receiver proposes to make an interim civil distribution of $2,250,000.00 to

668 investors with verified losses totaling $142,327,921.81. (Norgard Decl. ¶¶ 21-22.)

This translates to a rate of 1.581 cents paid out in the interim distribution for every dollar

lost to Cook’s fraud. (Id. ¶ 22) The proposed interim distribution will be made on a pro

rata basis, such that every investor’s interim payout in these civil cases will be

proportionate to his or her verified loss in Cook’s scheme. On an individual basis, these

proposed interim payouts range from $67.98 to $110,820.95, with an average payout of

$3,368.26. (Id.) Although only a fraction of what was lost, the Receiver submits that the

interim civil distribution proposed herein will provide some measure of relief to as many

investors as possible in the short-term.

The Receiver proposes to effectuate the interim distribution through the Clerk of

Court for the United States District Court for the District of Minnesota (“Clerk”). The

Clerk will issue a check to each of the 668 victims identified on the Receiver’s interim

distribution list in the pro rata amount calculated by the Receiver. (Id. ¶¶ 21-22.) Each

check will be accompanied by a letter from the Receiver informing the investor of the

amount of his or her recognized claim amount. (Id. ¶ 23, Ex. 6.) This letter also will

explain the process for accepting or challenging the Receiver’s recognized claim amount.

(Id.; Id. ¶ 26, Ex. 9); see also infra Part III(E).

The number and in some cases the amount of the claims recognized by the

Receiver for purposes of the interim distribution likely will be adjusted in the final

accounting and distribution. For example, investors who are part of the interim


12

distribution may challenge the claim amount recognized by the Receiver. See infra Part

III(E). Claims by employee investors and by those who have not yet submitted claims to

the Receiver will not be part of the interim distribution, but may later be recognized and

confirmed by the Court. See infra Parts III(A), III(B). The Receiver will make a final

accounting and distribution to ensure that all verified claims ultimately are paid out on an

equal pro rata basis.

III. THE RECEIVER’S PROPOSED CLAIM FINALIZATION PROCEDURES

A. The Receiver Will Provide Employee Investors With A Recognized Claim Amount.

Upon completion of his investigation of claims by employee investors, the

Receiver will attempt to contact these individuals by U.S. Mail with a calculation of their

deposits, less any payments or other benefits received from the Receiver Estates, which

will equal the claim the Receiver will recognize for civil restitution. (Id. ¶ 24, Ex. 7.)

This mailing also will explain the process and deadline for challenging the recognized

claim amount. (Id.; Id. ¶ 26, Ex. 9); see also infra Part III(E).

B. The Receiver Will Notify Investors Who Have Not Yet Made A Claim Of The Process And Deadline For Doing So.

Through his investigative efforts, the Receiver has identified a number of

individuals and entities that may have been investors but that have not submitted claims

for losses to the Receiver, the Probation Office, or the government agencies. The

Receiver will attempt to contact these known individuals and entities by U.S. Mail with a

packet explaining the case, the appointment of the Receiver, how to submit and

substantiate a claim, and the date by which all claims must be received. (Id. ¶ 25, Ex. 8;


13

Id. ¶ 7, Ex. 2; Id. ¶ 28, Ex. 11.) Any investors who have not yet been identified by the

Receiver will be notified by publication. See infra Part III(D). The Receiver will review

any new claim and respond in writing with an explanation of the amount of the claim the

Receiver recognizes and the process for accepting or challenging that figure. See infra

Part III(E).

C. Claims By Non-Investor Creditors Will Be Processed And Finalized In The Same Manner As Investor Claims.

Other creditors of the Receiver Estates, such as trade creditors, who claim they are

owned remuneration for goods sold or services provided to the Receiver Estates prior to

November 23, 2009, also will be given the opportunity to submit a claim to the Receiver.

These creditors will be advised by public notice of the process and deadline for

submitting a claim. See infra Part III(D). The Receiver will then review any such

creditor claim and respond in writing with an explanation of the amount of the claim the

Receiver recognizes and the process for accepting or challenging that figure. See infra

Part III(E). All such claims that are recognized by the Receiver and confirmed by the

Court will be paid out on the same pro rata basis as investor claims.

D. The Receiver Proposes January 14, 2011, As The Bar Date By Which Date All Claims Must Be Submitted To The Receiver.

The Receiver requests that the Court set Friday, January 14, 2011, as the final date

by which all claims for civil restitution and payments to creditors must be submitted to

the Receiver (“Claim Bar Date”). Any claim that is not submitted to the Receiver by

January 14, 2011, will be barred. The exception to the Claim Bar Date will be any claims

for civil restitution arising from clawback litigation initiated by the Receiver that have


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not been resolved by the Claim Bar Date. Upon confirmation of this date by the Court,

the Receiver will publish the Notice of Claim Bar Date to inform all possible claimants.

(Norgard Decl. ¶ 28, Ex. 11.)

First, the Receiver will post the Notice of Claim Bar Date on the Receiver’s

website. The Receiver also will request that the United States District Court, the SEC,

the CFTC, the FBI, and the U.S. Attorney publish the Notice of Claim Bar Date on their

respective websites, as well.

Second, the Receiver will publish the Notice of Claim Bar Date in the Minneapolis

Star Tribune, the St. Paul Pioneer Press, and Investor’s Business Daily. (Id. ¶¶ 29-30.)

With investors scattered across at least forty-three states and several foreign countries,

the Receiver believes publication of the Claim Bar Notice in a national publication, as

well as the two regional papers, is necessary. (See id. ¶ 27, Ex. 10.) The Receiver

anticipates the total cost for publication in these papers will be at least $5,634.00. (Id. ¶¶

29-30.)

Third, the Receiver will send the Notice of Claim Bar Date by U.S. Mail to the

individuals and entities who the Receiver has identified as possible victims but who have

not yet filed a claim for civil restitution. (Id. ¶ 28, Ex. 11; see Id. ¶ 25, Ex. 8.)

E. Claimants May Challenge The Receiver’s Recognized Claim Amount.

Any claimant who receives a letter from the Receiver detailing his or her

recognized claim amount will have thirty (30) days from the date of the Receiver’s letter

to challenge that amount. (Id. ¶ 26, Ex. 9; see id. ¶ 23, Ex. 6; Id. ¶ 24, Ex. 7.) This

process will apply equally to all claimants, whether they are a part of the interim


15

distribution or later recognized as having a verified claim. Any challenging claimant

must submit to the Receiver a sworn statement detailing the basis for the challenge and a

complete listing of the dates and amounts of his or her deposits to and receipts from the

Receiver Estates, along with documentation to support the sworn statement. (See id.)

Challenges that are not timely submitted within the thirty (30) day period will be denied.

(See id.)

Upon receipt of a timely challenge, the Receiver will review any new information

and inform the claimant in writing of his decision. Any claimant who wishes to appeal

the Receiver’s decision on a challenge will have the opportunity to bring that issue to the

Court. See infra Part III(G).

F. Unchallenged Claim Amounts Will Be Recognized As Final.

Any claimant who receives a letter from the Receiver detailing his or her

recognized claim amount and does not challenge it within the thirty (30) day period will

be deemed to have accepted the recognized claim amount. The Receiver will move to

have all such unchallenged claim amounts entered as final claim amounts for civil

restitution in these cases.

G. On Or Before March 15, 2011, The Receiver Will Move The Court To Accept The Final Recognized Claim Amounts For All Resolved Claims And Update The Court On Any Claims That Remain Unresolved.

On or before March 15, 2011, the Receiver will file a motion with the Court

seeking acceptance of the Receiver’s recognized claim amounts for all settled and

undisputed claims and seek entry of the amounts as the final civil restitution amount for

those claimants. At the same time, the Receiver will file a complete list of all unresolved


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claims and the current status of any settlement negotiations relating to those claims. The

Receiver also will ask the Court to establish a process for judicial resolution of any

challenges to the Receiver’s recognized claim amount.

IV. LEGAL STANDARD

It is well established that the Court has broad discretion in determining relief in an

equity receivership. SEC v. Lincoln Thrift Ass’n, 577 F.2d 600, 606 (9th Cir. 1978)

(“The district court has broad powers and wide discretion to determine the appropriate

relief in an equity receivership.”) As noted by the Ninth Circuit, “reasonable

administrative procedures, crafted to deal with the complex circumstances of each case,

will be upheld. A district judge simply cannot effectively and successfully supervise a

receivership and protect the interests of its beneficiaries absent broad discretionary

power.” SEC v. Hardy, 803 F.2d 1034, 1038 (9th Cir. 1986). The district court’s choice

of distribution plan is reviewed for abuse of discretion. SEC v. Fischbach Corp., 133

F.3d 170, 175 (2d Cir. 1997) (holding that “the district court's distribution plan will not

be disturbed on appeal unless that discretion has been abused”).

Courts have consistently held that the most any victim of a Ponzi scheme can

recover is the invested principal. See Terry v. June, 432 F. Supp. 2d 635, 642 (W.D. Va.

2006) (“[W]here the existence of a Ponzi scheme is established, the transferee's proof that

it made a 'capital' investment in the scheme does not constitute reasonably equivalent

value for the receipt of fictitious profits.”); Donell v. Kowell, 533 F.3d 762, 776 (9th Cir.

2008) (“[C]ourts have long held that is more equitable to attempt to distribute all

recoverable assets among the defrauded investors who did not recover their initial


17

investments rather than to allow the losses to rest where they fell.”); Scholes v. Lehmann,

56 F.3d 750, 757-58 (7th Cir. 1995) (“[One investor] should not be permitted to benefit

from a fraud at [a later investors’] expense merely because [the investor] was not himself

to blame for the fraud.”)

Courts have also consistently found pro rata distributions to be appropriate,

especially for fraud victims of Ponzi schemes, where “earlier investors' returns are

generated by the influx of fresh capital from unwitting newcomers rather than through

legitimate investment activity”. SEC v. Credit Bancorp, Ltd., 290 F.3d 80, 88-9 (2d Cir.

2002) (explaining the preference of courts for pro rata distribution of assets where funds

have been comingled and victims are similarly situated relative to the defrauders); see

also SEC v. George, 426 F.3d 786, 799 (6th Cir. 2005); Cunningham v. Brown, 265 U.S.

1, 13 (1924) (rejecting tracing “fiction” where receivership fund consisted of money

acquired by fraud perpetuated against many victims); SEC v. Forex Asset Management

LLC, 242 F.3d 325, 331-2 (5th Cir. 2001) (affirming district court's approval of pro rata

distribution plan where party's assets were held by defrauder in segregated accounts);

CFTC v. Topworth International, Ltd., 205 F.3d 1107, 1115-16 (9th Cir. 1999) (affirming

district court's approval of pro rata distribution plan where assets were commingled);

United States v. Durham, 86 F.3d 70, 72-3 (5th Cir.1996) (affirming district court's

approval of pro rata distribution plan even though the majority of funds were traceable to

specific claimants; whether at any given moment a particular customer's assets are

traceable is “a result of the merely fortuitous fact that the defrauders spent the money of

the other victims first”); SEC v. Elliott, 953 F.2d 1560, 1569-70 (11th Cir. 1992)


18

(affirming district court's approval of pro rata distribution plan even though securities

were traceable to claimants).

This Court has broad discretion to determine the procedures to be used in

reconciling and resolving claims. See Liberte Capital Group, LLC v. Capwill, 462 F.3d

543, 551 (6th Cir. 2006) (“To the extent that a party has a colorable claim against a

receiver or the entities in receivership, due process demands that the claimant be heard,

but the district court exercises significant control over the time and manner of such

proceedings.”) The Court’s broad discretionary power in receivership cases allows for

the use of summary proceedings, provided claimants are afforded due process. See SEC

v. Basic Energy & Affiliated Res., 273 F.3d 657, 667 (6th Cir. 2001) (“[t]his discretion,

which ‘derives from the inherent powers of an equity court to fashion relief,’ makes the

use of abbreviated, summary processes possible.”) See also SEC v. Elliott, 953 F.2d

1560, 1567 (11th Cir. 1992) (“[A] district court does not generally abuse its discretion if

its summary procedures permit parties to present evidence when the facts are in dispute

and to make arguments regarding those facts.”).

CONCLUSION

The Receiver respectfully requests that the Court issue an Order approving the

interim distribution plan and claim finalization procedures set forth in this memorandum.

A Proposed Order is submitted herewith.


19

Respectfully submitted,

Dated: October 18, 2010 s/ R. J. ZayedR.J. Zayed (MN Bar No. 309,849)Carlson, Caspers, Vandenburgh & Lindquist, P.A.225 South Sixth Street, Suite 3200Minneapolis, MN 55402Telephone: (612) 436-9600Facsimile: (612) 436-9605Email: [email protected]


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