Securities and Exchange Commission v. Mantria Corporation et al
Filing
704
ORDER Granting In Part Receiver's Motion to Approve Distribution Plan. The Receiver's Motion to Approve Receiver's Report, Proposed Distribution Plan,and Proposed Allocation Percentages and Distribution Procedures (Doc. # 669 ) is GRA NTED IN PART and MODIFIED IN PART as reflected in this Order; on or before August 7, 2020, the Receiver shall submit a revised proposed orderthat reflects the modifications the Court has detailed; and the hearing that is currently set for July 8, 2020, is VACATED. By Judge Christine M. Arguello on 07/06/2020. (rvill, )
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge Christine M. Arguello
Civil Action No. 09-cv-02676-CMA-MJW
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
v.
MANTRIA CORPORATION,
TROY B. WRAGG,
AMANDA E. KNORR,
SPEED OF WEALTH, LLC,
WAYDE M. MCKELVY, and
DONNA M. MCKELVY,
Defendants.
_____________________________________________________________________
ORDER GRANTING IN PART RECEIVER’S MOTION
TO APPROVE DISTRIBUTION PLAN
_____________________________________________________________________
This matter is before the Court on the Receiver John Paul Anderson’s (“the
Receiver”) Motion to Approve Receiver’s Report, Proposed Distribution Plan, and
Proposed Allocation Percentages and Distribution Procedures. (Doc. # 669.) The
Securities and Exchange Commission (“SEC”) and Carbon Diversion Solutions LLC,
Douglas Guyer, and James Holt (“CDS Creditors”) filed Responses to the Receiver’s
Proposed Distribution Plan on December 17, 2019, and January 3, 2020, respectively.
(Doc. ## 667, 679.) The Receiver filed a Reply addressing the SEC’s Response on
December 31, 2019. (Doc. # 678.)
For the following reasons, the Court grants the Receiver’s Motion in part and
modifies the Distribution Plan in part.
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I.
BACKGROUND
This case arises from a Ponzi scheme Defendants perpetrated from September
2007 through November 2009. On November 16, 2009, the SEC filed a Complaint
against Defendants alleging several violations of the federal securities laws that were
related to the scheme. The Court entered Final Judgment against Defendant Mantria
Corporation on September 12, 2011.
Specifically, the Court ordered that the entity was “liable for disgorgement of
$37,031,035.36, representing profits gained as a result of the [fraudulent] conduct
alleged in the Complaint,” in addition to prejudgment interest, and a civil penalty in the
amount of $500,000. (Id. at 4.) The Court entered Final Judgements against the
remaining Defendants on September 12, 2012. (Doc. ## 311–15).
After freezing Defendants’ assets pursuant to a preliminary injunction in 2009,
the Court granted the SEC’s Motion to Appoint a Receiver over Defendant Mantria
Corporation and its subsidiaries and affiliates, including Speed of Wealth and its
subsidiaries and affiliates on April 30, 2010. The Receiver was authorized to, inter alia:
use reasonable efforts to determine the nature, location and value of all
property interests of the Receivership Defendants . . . manage, control,
operate and maintain the Receivership Estates and hold in his possession,
custody and control all Receivership Property . . . employ persons in his
discretion to assist him in carrying out his duties and responsibilities . . .,
including, but not limited to, accountants [and] attorneys . . . [and to] bring
such legal actions based on law or equity in any state, federal, or foreign
court as the Receiver deems necessary or appropriate in discharging his
duties as Receiver . . . .
(Doc. # 82 at 4–6.) The Receiver has faithfully discharged his duties for the last ten
years.
Based on the Receiver’s efforts, “the Receivership had available for payment of
administrative expenses and distribution to creditors approximately $1.285 million in
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cash” as of June 30, 2019.1 Of the funds that are currently in the Receivership Estate,
$800,000 are proceeds from a $6.850 million settlement that the Receiver and a class
of Defendants’ former investors secured in two lawsuits against individuals and entities
that were associated with Defendants (“the Gatekeeper litigation”). The remaining funds
in the Receivership Estate are proceeds that the Receiver secured by, e.g., selling real
and personal property that formerly belonged to Defendants.
On November 26, 2019, the Receiver filed his Report, Proposed Distribution Plan
and Proposed Allocation Percentages and Distribution Procedures (“the Plan”) for the
Receivership Estate’s assets. (Doc. # 669-1.) In its Response, the SEC accurately
summarized the Plan as follows:
$167,021 Additional fees and expenses to the Receiver and other professionals;
$707,363 Fees for the Receiver’s counsel’s work on the Gatekeeper litigation;
$235,730 Payments to former Mantria Employees;
$107,033 Payments to Unsecured Creditors (which also includes additional
payments to former Mantria Employees);
$50,000 IRS Settlement; and
$16,289 Payment to Mantria Investors.
[Total: $1,283,436.]
(Doc. # 667 at 5) (footnote omitted).
The SEC objects to the Plan because “former Mantria employees and other
Unsecured Creditors should not take precedence over investors and should not receive
1
In the Receiver’s most recent application for approval of fees and expenses, the Receiver
noted that, as of March 31, 2020, the Receivership Estate’s balance of cash was $1.257 million.
(Doc. # 696 at 3.)
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any recovery,” and the “fees sought by the Receiver’s counsel in connection with the
Gatekeeper litigation should be rejected in whole or in part, and those funds should be
distributed to harmed investors.” (Id. at 2–3.) The CDS Creditors, on the other hand,
assert that the Plan should be approved without further amendment. (Doc. # 679 at 6.)
II.
LEGAL STANDARD
“It is generally recognized ‘that the district court has broad powers and wide
discretion to determine . . . relief in an equity receivership.’” SEC v. DeYoung, 850 F.3d
1172, 1182 (10th Cir. 2017) (quoting SEC v. Vescor Capital Corp., 599 F.3d 1189, 1194
(10th Cir. 2010)). “This discretion derives from the inherent powers of an equity court to
fashion relief.” Id. (quoting Vescor Capital, 599 F.3d at 1194). Additionally, the district
court’s “broad authority to craft remedies for violations of the federal securities laws,”
includes “the power to approve a plan of distribution proposed by a federal receiver.”
SEC v. McGinn, Smith & Co., No. 1:10-cv-457 (GLS/CFH), 2016 WL 6459795, at *2
(N.D.N.Y. Oct. 31, 2016) (quoting SEC v. Byers, 637 F. Supp. 2d 166, 174 (S.D.N.Y.
2009)).
Thus, courts have the discretion to approve a receiver’s plan that is “fair and
reasonable.” Id. (quoting SEC v. Wang, 944 F.2d 80, 81, 85 (2d Cir. 1991) (distribution
plan should be “reviewed under [the district] court’s general equitable powers to ensure
it is fair and reasonable”)). In exercising their discretion, courts “may defer to the
receiver’s choices for the plan’s details and should give substantial weight to the
SEC’s views regarding a plan’s merits.” SEC v. Amerindo Inv. Advisors Inc., No. 05 Civ.
5231, 2014 WL 2112032, at *14 (S.D.N.Y. May 6, 2014) (emphasis added) (citing
Byers, 637 F. Supp. 2d at 175)).
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III.
DISCUSSION
The SEC asserts that the Court should reject the Plan in two ways: employees
and unsecured creditors should not take precedence over investors; and the Receiver’s
counsel should not receive the full amount of attorney fees it has requested in
connection with the Gatekeeper litigation. The Court will address each argument in turn.
A.
DISTRIBUTION PRIORITIES
In the Plan, the Receiver “identified the following claim categories and priority:
(1) Administrative Claims, (2) Employee Claims, (3) Unsecured Creditor Claims,
(4) Investor Claims, and (5) IRS Claims.” (Doc. # 669 at 3) (citation omitted). The SEC,
by contrast, asserts that “the investor victims should receive what has been recovered
over the former employees . . . and other unsecured creditors.” (Doc. # 667 at 10.) The
Court agrees with the Receiver’s claim priority structure.
The SEC indicates that it “brought this case to enforce the federal securities
laws, and to obtain all appropriate relief against the Defendants for their egregious
conduct, including providing the maximum monetary recovery to the defrauded
investors,” as opposed to Defendants’ employees and other creditors. (Doc. # 677 at 8.)
The Court is similarly focused on ameliorating the pecuniary harm that the investors
sustained. However, the Court is cognizant of the fact that Defendants’ conduct harmed
others as well. As the Receiver points out in his Reply brief, “[l]ike investors, employees
and contractors were victims of the fraud because they provided services to Defendants
with the expectation of being paid for those services and without knowledge that
Defendants were operating a Ponzi scheme.” (Doc. # 678 at 2.)
Notably, the funds that investors will receive from the Receivership Estate are not
the only compensation that investors will recover for their losses. In the Gatekeeper
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litigation, the investor class members received over $3.9 million. (Doc. # 669-1 at 14.)
The funds that the Plan reserves for employees and creditors total $342,763, which is
less than 10% of what the investors received from the Gatekeeper litigation.
If the funds that have been reserved for employees and creditors were distributed
among the investors, each investor would receive a relatively small amount. However,
although the funds constitute a mere a faction of what the investors lost, the funds
would completely redress the former employees’ approved claims, and they would
provide a significant measure of relief to Defendants’ creditors. Accordingly, the
Receiver’s Plan equitably balances the competing interests of the investors, the
employees, and the creditors.
Although it may not have been the SEC’s intention to initiate this case for the
benefit of Defendants’ employees and creditors, the SEC has created a situation in
which it is possible to address an injustice that those individuals have suffered. The
Court could not satisfy its duty to ensure that the Receiver’s Plan is “fair and
reasonable” if the Plan ignored the harm to Defendants’ employees and creditors.
Therefore, the Court approves the priority structure that the Receiver established in the
Plan with respect to those individuals.
B.
ATTORNEY FEES RELATED TO THE GATEKEEPER LITIGATION
The Receiver indicates that its counsel “incurred $707,363.52 in fees and
expenses related to the litigation against the Gatekeepers,” and the Receiver asserts
that its counsel should be reimbursed for those fees and expenses as part of the Plan.
(Doc. # 669-1 at 16.) The SEC, on the other hand, argues that the Receiver’s counsel
should be entitled to no more than $200,000 for fees and expenses related to the
Gatekeeper litigation. (Doc. # 667 at 12–13.) The Court agrees with the SEC.
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In considering applications for compensation by receivers and their attorneys,
“courts have long applied a rule of moderation, recognizing that ‘receivers and attorneys
engaged in the administration of estates in the courts of the United States . . . should be
awarded only moderate compensation.’” Byers, 590 F. Supp. 2d at 645 (quoting In re
New York Investors, Inc., 79 F.2d 182, 185 (2d Cir. 1935)). “The Receiver and any
professionals assisting the Receiver should charge a reduced rate to reflect the public
interest involved in preserving funds held in the receivership estate.” SEC v. Small Bus.
Capital Corp., No. 5:12-CV-03237 EJD, 2013 WL 6701928, at *1 (N.D. Cal. Dec. 19,
2013) (citing Byers, 590 F. Supp. 2d at 646–47). “The Receiver and his counsel should
be moderately compensated for their services because investors who were promised
large returns on investments by the defendant may stand to recover ‘only a fraction of
their losses.’” Id. (quoting Byers, 590 F. Supp. 2d at 645).
In the instant case, the Receiver filed an Unopposed Motion for Order Setting
Procedure and Deadlines for Filing of Claims on October 15, 2015. (Doc. # 478.) In that
motion, the Receiver referenced the Gatekeeper litigation and indicated that its counsel
“agreed to prosecute the claims . . . on an alternative fee basis.” (Id. at 20.) Further, the
Receiver “recommend[ed] a payment to Bryan Cave of 25% of the $800,000
[i.e., $200,000] received into the Receivership Estate as a result of the settlement
agreements with the Gatekeepers as fair compensation for those services.” 2 (Id.)
2
The Court notes that the Receiver is seeking compensation for two law firms for work related
to the Gatekeeper litigation: Brownstein Hyatt Farber Schreck, LLP (“BHFS”) and Bryan Cave
Leighton Paisner, LLP (“BCLP”). See (Doc. # 669-1 at 17). However, the Receiver’s October
2015 motion specifically recommended that only BCLP should be paid from the proceeds of the
Gatekeeper litigation. (Doc. # 478 at 20.) The October 2015 motion was silent as to BHFS.
Additionally, based on the materials in the record, it appears that BHFS has already been
compensated for work it has done in connection with the Gatekeeper litigation. See, e.g., (Doc.
# 243 at 2) (reporting that BHFS billed $21,364.65 for, inter alia, “communication with investors
regarding their asserted claims against the ‘Gatekeepers,’ and preparation of a litigation risk
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Importantly, the Court approved the Receiver’s motion, and consequently, approved the
recommendation regarding his counsel’s “fair compensation.” (Doc. # 519.)
As a preliminary matter, the Court agrees with the SEC’s observation that “it is
unclear why the Receiver’s counsel did not seek their fees in connection with and at the
time the final judgment was entered in [the Gatekeeper] litigation.” (Doc. # 677 at 13.)
The Receiver does not address this point in his Reply brief. Additionally, the SEC
accurately points out that the Receiver does not “explain why counsel should not be
held to their [alternative fee] ‘agree[ment]’ . . . or why he thought $200,000 was ‘fair
compensation’ in 2015 – after the litigation and settlement was complete – but now
believes that an additional $500,000 is appropriate.” (Id.) (emphasis added). The
Receiver does not squarely address this issue in his Reply brief either. Rather, the
Receiver merely indicates that the fees should be approved because they are
reasonable. However, the Receiver’s silence regarding the irregularities cited by the
SEC speaks volumes.
The Court approved the Receiver’s recommendation that $200,000 was fair
compensation for his counsel’s efforts in connection with the Gatekeeper litigation, and
the Receiver never sought to amend that recommendation in the last five years. That
fact alone is sufficient to reject an increase in compensation. However, the Court’s
conclusion is further supported by the fact that granting the Receiver’s request would
mean that the Receiver’s counsel would recover $700,000 of the $800,000 proceeds
memorandum for the Receiver to evaluate the types of claims that the Receiver may bring and
their attendant risks.”); (Doc. # 250) (Order approving payment to BHFS). Accordingly, the Court
does not approve any additional compensation for BHFS for any other fees it clams based on its
work related to the Gatekeeper litigation. To be clear, the Court is referring specifically to the
BHFS’s fees that are reflected in Table 6 of the Receiver’s Plan. See (Doc. # 669-1 at 17). This
limitation does not apply to any funds to which BHFS may be entitled that have been the subject
of the 20% holdbacks on amounts that have been previously distributed to BHFS.
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that were allocated to the Receivership Estate from the Gatekeeper litigation. Thus, the
Receiver’s counsel would be paid 87.5% of the proceeds from the Gatekeeper litigation
when the Court approved a 20% payment from those proceeds. That position is
inapposite with the principle that “receivers and attorneys engaged in the administration
of estates in the courts of the United States . . . should be awarded only moderate
compensation.” Byers, 590 F. Supp. 2d at 645 (citation omitted); SEC v. Goren, 272 F.
Supp. 2d 202, 206 (E.D.N.Y. 2003) (“courts must exercise discretion to avoid even the
appearance of a windfall.”).
Therefore, the Court holds the Receiver’s counsel to the Receiver’s 2015 fee
recommendation. As a result, the Receiver’s counsel shall not recover more than
$200,000 for work related to the Gatekeeper litigation. The remaining $507,363.52 that
the Receiver reserved for his counsel in the Plan shall be distributed to the investors.
IV.
CONCLUSION
Based on the foregoing, the Court ORDERS as follows:
the Receiver’s Motion to Approve Receiver’s Report, Proposed Distribution Plan,
and Proposed Allocation Percentages and Distribution Procedures (Doc. # 669) is
GRANTED IN PART and MODIFIED IN PART as reflected in this Order;
on or before August 7, 2020, the Receiver shall submit a revised proposed order
that reflects the modifications the Court has detailed; and
the hearing that is currently set for July 8, 2020, is VACATED.
DATED: July 6, 2020
BY THE COURT:
______________________________
CHRISTINE M. ARGUELLO
United States District Judge
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