Securities and Exchange Commission v. Greenberg

Filing 56

ORDER granting 53 Motion to Intervene. The SEC has shall file a response within twenty days hereof further developing its arguments in opposition to the Trust's Motion to Modify the Freeze by Judge John L. Kane on 09/18/12.(jjhsl, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge John L. Kane
Civil Action No. 11-CV-313
SECURITIES AND EXCHANGE COMMISSION
Plaintiff,
v.
NEAL R. GREENBERG,
Defendant.
______________________________________________________________________________
ORDER GRANTING MOTION TO INTERVENE
______________________________________________________________________________
KANE, J. ORDERS
Before me are Nonparty Danica Chen Irrevocable Trust II (“Trust”)’s Motions to
Intervene (Doc. 53.) and to Modify Stipulated Freeze Order (Doc. 53-2). Plaintiff SEC filed its
response objecting to the motions on September 14, 2012 (Doc. 55).
The Trust seeks intervenor status for the limited purpose of moving to modify the Freeze
Order such that the ability of the Trust to use its assets to pay reasonable attorney fees and costs
associated with representing the Trust in issues relating to this case is clarified and ruled
permissible. The Freeze Order covers “all persons who hold or possess the direct or indirect
funds or assets of Chen, in whatever form such funds or other assets may presently exist, who
receive actual notice of this Order, by personal service or otherwise…”(Doc 46 at 3). Because
Ms. Chen is a beneficiary of the Trust and she funded the Trust with her assets, the SEC
construes the Freeze Order as barring the Trustee from making any disbursement of Trust assets
and has contacted the Trustee with directions not to do so accordingly.
Intervention

The Trust argues that it is permitted to intervene as a matter of right under Fed. R. Civ. P.
24(a)(2), which provides that a movant is entitled to intervene as of right if, upon timely motion,
1) the movant claims an interest relating to the property or transaction that is the subject matter
of the action; 2) the disposition of the litigation may, as a practical matter, impair or impede the
movant’s interest; and 3) the existing parties do not adequately represent the movant’s interest.
Addressing each prong in turn, I find that the Trust satisfies all elements of Fed. R. Civ. P.
24(a)(2) such that it is entitled to intervene as a matter of right.
First, the Trust has an interest relating to the property that is the subject matter of the
action because the action, among other things, involves Defendant Greenberg disgorging funds
that potentially include monies contained within the Trust. Indeed, the SEC even acknowledges
in its brief opposing intervention that “…Trust assets are in dispute...” (Doc. 55 at 4). Thus, the
Trust has more than an interest relating to the property that is the subject matter of the action; it
owns property that is the subject matter of the action. Second, the Trust’s interests may be
impaired absent intervention because the Trustee may not be able to administer the Trust for the
benefit of the beneficiaries (Danica Chen and her two minor children) without violating the
Freeze Order. Third, the existing parties do not adequately represent the Trust’s interests. The
Trust does not name Greenberg as a beneficiary but rather benefits Ms. Chen, who is not a party,
and her children. Moreover, even were Ms. Chen a party, she is not the sole beneficiary nor is
she authorized to make decisions for the Trust. Under the Trust agreement, Ms. Chen has no
power to control and direct payments, remove trust property, or alter, amend, revoke, or
terminate the Trust, either in whole or in part. Additionally, neither Ms. Chen nor Defendant
Greenberg is allowed to become a trustee of the Trust. Groseenburg Aff. ¶ 21. In fact, Ms. Chen

has already acted contrary to the Trust’s interest by stipulating to the Freeze Order without
consulting the Trustee or seeking his consent. Id. at ¶15.1
For the above reasons, I GRANT the Trust’s Motion to Intervene.
Motion for Modification of Stipulated Freeze Order
The question of whether the Trust may use its assets to pay reasonable attorney fees and
costs associated with representing itself in issues relating to this case presents a messier inquiry
than does the matter of intervention. The Trust’s position is that just as the Freeze Order allows
Greenberg and Ms. Chen to use assets to pay reasonable attorney fees and costs, so too should
the Trust be allowed to use its assets to pay reasonable attorney fees and costs. That is, the Trust
appeals to fairness concerns.
The case law with respect to the use of frozen funds to pay attorney fees leaves much
discretion to the district judge with decisions coming down favorably for movants at times and
for non-movants at other times. The leading case appears to be Commodity Futures Trading
Com'n v. Noble Metals, Inc. 67 F.3d 766, 768 (9th Cir.1995). In Noble Metals, the Court of
Appeals for the Ninth Circuit held that a district judge has discretion to limit or forbid attorney
fees payments in asset freeze situations. Id. at 775. This is particularly so where, as in the
present circumstances, the frozen assets will not be sufficient to compensate the defendant's
victims or customers for their alleged loss. Id., citing Federal Trade Com'n v. World Wide
Factors, Ltd., 882 F.2d 344, 347 (9th Cir.1989). The Ninth Circuit added that the district judge’s
discretion ought to be exercised in light of the fact that the alleged wrongdoing has yet to be
proven, and the Noble Metals court placed the burden on the defendant to show that he can only
1

The SEC contends that Ms. Chen’s stipulation was not contrary to the Trust’s interests because the
Stipulation provided for an escrow account that pays reasonable living expenses for Chen and her family.
While that may mean that the Trust’s beneficiaries are presently provided for, it does not obviate the
conflict of interest concern that Greenberg and/or Ms. Chen may wish to use assets of the Trust to
resolve the SEC’s claims against Greenberg to the future detriment of the Trust and its ability to provide
for its beneficiaries down the road.

secure counsel if use of the frozen assets is permitted. See In re Krause, 349 B.R. 272, 274
(Bankr.D.Kan.2006). Applying the law set forth in Noble Metals, in S.E.C. v. Duclaud Gonzalez
de Castilla, the court denied use of the frozen funds for living expenses, but permitted them to be
used for attorney fees on a limited basis because no clear showing of wrongdoing had been
necessary to sustain the preliminary injunction and asset freeze for violating the securities laws.
S.E.C. v. Duclaud Gonzalez de Castilla, 170 F.Supp.2d 427, 430 (S.D.N.Y.2001).
The Trust’s Motion to Intervene (Doc.53) is GRANTED. The SEC has shall file a
response within twenty days hereof further developing its arguments in opposition to the Trust’s
Motion to Modify the Freeze.
DATED at Denver, Colorado this 18th day of September, 2012.
BY THE COURT:

/s/John L. Kane __________
JOHN L. KANE, SENIOR JUDGE
UNITED STATES DISTRICT COURT