U.S. Commodity Futures Trading Commission v. Gramalegui

Filing 40

ORDER Granting in part and Denying in part 12 The Commissions Motion for a Preliminary Injunction and Incorporated Memorandum of Law. That the asset freeze imposed by my Order Granting Ex Parte Motion for a Statutory Restraining Order 8 , file d October 19, 2015, is modified in part; That in all other respects, the Order Granting Ex Parte Motion for a Statutory Restraining Order 8 , filed October 19, 2015, shall remain in full force and effect; That on or before May 17, 2016, the Commission shall file with the court an accounting of all losses alleged to be attributable to Mr. Gramalegui and Emini Trading School, which losses may be subject to disgorgement in this matter, by Judge Robert E. Blackburn on 2/17/2016.(evana, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge Robert E. Blackburn
Civil Action No. 15-cv-02313-REB-GPG
U.S. COMMODITY FUTURES TRADING COMMISSION,
Plaintiff,
v.
GREGORY L. GRAMALEGUI,
Defendant.

ORDER RE: MOTION FOR PRELIMINARY INJUNCTION
Blackburn, J.
The matter before me is The Commission’s Motion for a Preliminary
Injunction and Incorporated Memorandum of Law [#12],1 filed October 26, 2015.
After the matter was fully briefed, the parties filed a Joint Motion for Entry of Consent
Order of Preliminary Injunction Against Defendant Gregory L. Gramalegui [#36],
filed January 19, 2016, whereby Mr. Gramalegui consented to the entry of an order
enjoining him from “directly or indirectly violation 7 U.S.C. § 6o(1), 17 C.F.R. § 4,41, and
the CFTC Order.[2]” (Consent Order of Preliminary Injunction Against Defendant
Gregory L. Gramalegui [#38], filed January 22, 2016.)

1

“[#12]” is an example of the convention I use to identify the docket number assigned to a
specific paper by the court’s case management and electronic case filing system (CM/ECF). I use this
convention throughout this order.
2

A reference to a previously entered administrative order settling prior fraud charges against Mr.
Gramalegui. See In the Matter of Gramalegui [2000-2002 Transfer Binder] Comm. Fut. L. Rep (CCH) ¶
28,590 (July 12, 2011).

Mr. Gramalegui’s consent did not extend, however, to a continuation of the
statutory restraining order pursuant to which the court granted the Commission’s ex
parte motion to freeze Mr. Gramalegui’s assets. (See Order Granting Ex Parte
Motion for a Statutory Restraining Order [#8], filed October 19, 2015.) I therefore
conducted an evidentiary hearing on the viability and scope of the asset freeze on
January 21, 2016. The Commission appeared by counsel and presented argument, but
no evidence in addition to that already submitted in support of the ex parte motion. Mr.
Gramalegui appeared in person and by counsel and testified.
I have considered carefully the evidence and arguments presented in the papers
and at the hearing. I find and conclude that the Commission’s request to continue the
asset freeze as presently constituted is not well-taken and that the statutory restraining
order should be modified on the terms specified herein.
This is an action alleging violations of the Commodity Exchange Act (“CEA”), 7
U.S.C. §§ 1-27f (the “Act”). The CEA provides, in relevant part,
Whenever it shall appear to the Commission that any
registered entity or other person has engaged, is engaging,
or is about to engage in any act or practice constituting a
violation of any provision of this chapter or any rule,
regulation, or order thereunder, . . . the Commission may
bring an action in the proper district court of the United
States . . . to enjoin such act or practice, or to enforce
compliance with this chapter, or any rule, regulation or order
thereunder, and said courts shall have jurisdiction to
entertain such actions.
7 U.S.C. § 13a-1(a). Courts have consistently recognized that the CEA “drapes the
district court with broad equitable power,” authority which is even more expansive and
flexible because of the public interest implicated by the CEA. Commodity Futures
2

Trading Commission v. Levy, 541 F.3d 1102, 1113 (11th Cir. 2008). See also
Commodity Futures Trading Commission v. Muller, 570 F.2d 1296, 1300 (5th Cir.
1978).
Commensurate with the breadth of its equitable powers under the CEA, the court
may freeze a defendant’s assets to ensure an adequate fund for satisfaction of an
ultimate order of disgorgement. See Levy, 541 F.3d at 1114. See also Commodity
Futures Trading Commission v. Kimberlynn Creek Ranch, Inc., 276 F.3d 187, 193
(4th Cir. 2002) (“[I]t is well settled that equitable remedies such as disgorgement are
available to remedy violations of the CEA.”). Pre-judgment asset freezes are
acceptable as “reasonable measure[s] to preserve the status quo in aid of the claims in
the suit” or to “grant[ ] interim relief of the same character as that which may be granted
finally.” Commodity Futures Trading Commission v. Next Financial Services
Unlimited, Inc., 2005 WL 6292467 at *11 (S.D. Fla. June 7, 2005) (quoting United
States ex rel. Rahman v. Oncology Associates, 198 F.3d 489, 498 (4th Cir. 1999))
(internal quotation marks omitted; alterations in original).
The burden of proof to demonstrate the propriety of an asset freeze is “relatively
light.” Federal Trade Commission v. IAB Marketing Associates, LP, 746 F.3d 1228,
1234 (11th Cir. 2014). “Exactitude is not a requirement,” and the Commission need only
present “a reasonable approximation of a defendant's ill-gotten gains.” Securities and
Exchange Commission v. ETS Payphones, Inc., 408 F.3d 727, 735 (11th Cir. 2005)
(citation and internal quotation marks omitted). Moreover, the freeze need not be
limited only to assets directly traceable to the defendant’s allegedly illegal activities.

3

See Securities and Exchange Commission v. Sekhri, 2000 WL 1036295 at *1
(S.D.N.Y. July 26, 2000) (citing cases).
By the same token, because ultimately “the power to order disgorgement extends
only to the amount with interest by which the defendant profited from his wrongdoing”
Securities and Exchange Commission v. Blatt, 583 F.2d 1325, 1335 (5th Cir. 1978),
there must be a “reasonable approximation” between the scope of the asset freeze and
the defendant’s ill-gotten gains, Federal Trade Commission v. Bishop, 425 Fed.
Appx. 796, 798(11th Cir. 2011). Indeed, it would constitute an abuse of the court’s
otherwise broad discretion to fail to require some amount of parity between the scope of
the asset freeze and the amount of potential disgorgement. See Bishop, 425 Fed.
Appx. at 798. Because that determination typically cannot be made in a vacuum, courts
often approve orders temporarily freezing most or all of a defendant’s assets early in the
litigation, providing the government an opportunity to investigate the extent of the
alleged fraud, and requiring the defendant to provide information relevant to that inquiry.
See, e.g., IAB Marketing Associates, LP, 746 F.3d at 1234; SEC v. Forte, 598
F.Supp.2d 689, 692 (E.D. Pa. 2009). The government then is required to make an
accounting to assist the court in determining the appropriate scope of the asset freeze
going forward. See Commodity Futures Trading Commission v. American Metals
Exchange Corp., 991 F.2d 71, 79 (3rd Cir. 1993); Commodity Futures Trading
Commission v. American Metals Exchange Corp., 693 F.Supp. 168, 196-97 (D.N.J.
1988). See also Securities and Exchange Commission v. Dowdell, 175 F.Supp.2d
850, 854 (W.D. Va. 2001) (“If the court has the authority to freeze personal assets

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temporarily, it logically has the ‘corollary authority to release frozen personal assets, or
lower the amount frozen.’”) (quoting SEC v. Duclaud Gonzalez de Castilla, 170
F.Supp.2d 427, 429 (S.D.N.Y. 2001)).
Courts will release previously frozen assets after balancing “[t]he defendant's
interest in having access to funds needed to pay ordinary and necessary living
expenses . . . against the government's interest in preventing the depletion of potentially
forfeitable assets.” United States v. Thier, 801 F.2d 1463, 1474 (5th Cir. 1987),
modified on other grounds on denial of reh’g, 809 F.2d 249 (5th Cir. 1987). See
also Securities and Exchange Commission v. Manor Nursing Centers, Inc., 458
F.2d 1082, 1103, 1105 (2nd Cir. 1972). In making this determination, the court may
consider evidence of the defendant’s overall assets and income, as well as whether the
defendant is requesting funds for luxuries rather than necessities. Forte, 598
F.Supp.2d at 693-94; Dowdell, 175 F.Supp.2d at 854. See also Duclaud Gonzalez de
Castilla, 170 F.Supp.2d at 430; Securities and Exchange Commission v. Coates,
1994 WL 455558 at *2 (S.D.N.Y. Aug. 23, 1994). Courts will not approve the release of
funds for living expenses that are found to be unnecessary or which, though necessary,
are determined to be excessive. See Forte, 598 F.Supp.2d at 694 (citing cases). All
requests to release funds to pay for living expenses must be supported by adequate
documentation. See id.; Securities and Exchange Commission v. Dobbins, 2004
WL 957715 at *3 (N.D. Tex. Apr. 14, 2004).
At the hearing, the Commission elected to stand on the evidence presented in
support of its ex parte motion for a statutory restraining order and presented no

5

additional evidence in its case-in-chief. It represented in argument that only about
$12,000 in assets – the corpus of Mr. Gramalegui’s personal checking and trading
accounts – had been found and frozen. It referred to the affidavit of one investor who
believed he had been defrauded by Mr. Gramalegui’s program and sought return of the
$5,596 he paid for it. (See Motion for Ex Parte Statutory Restraining Order App.,
Exh. 3 [#2], filed October 19, 2015.)
Mr. Gramalegui testified in his own behalf regarding, and presented a signed
statement attesting to, his current sources of income and his living and other expenses.
(See Def. Hrg. Exh. 1.) He also averred, without contradiction, that between 2010 and
20153 he earned revenues from the challenged program of approximately $325,000.
In light of the evidence and testimony, the court finds and concludes that an
ongoing total freeze on Mr. Gramalegui’s assets would be disproportionate to the scope
of the potential disgorgement that presently appears likely. Mr. Gramalegui testified that
he currently earns somewhere between $6,000 and $10,000 per month from the rental
of his house and the licensing of a database of investor names. While that amount is
adequate to cover his monthly mortgage payment and other living expenses,4 it is
inadequate to completely finance his preexisting card debt5 or make needed repairs to
3

That is, within the applicable five-year statute of limitations. See 28 U.S.C. § 2462; Gabelli v.
SEC, – U.S. –, 133 S.Ct. 1216, 1220-21, 185 L.Ed.2d 297 (2013).
4

I do not mean to suggest that all Mr. Gramalegui’s listed expenses are reasonable and
necessary. Indeed, some items he claims plainly appear excessive and/or unnecessary. However, given
the breadth of the court’s discretion in this regard, I am neither required nor inclined to undertake a lineitem analysis of Mr. Gramalegui’s expenses. Inherent within the parameters afforded by my order, Mr.
Gramalegui will have some latitude to prioritize his spending. Further adjustments may be made as
proven necessary.
5

At the hearing, counsel for the Commission expressed concern that Mr. Gramalegui’s
substantial credit card debt evidenced his inability to manage money and potential to deplete yet further
any funds that might be available to potential claimants in this suit. The court is not unsympathetic to this
argument. Nevertheless, it seems apparent to the court that allowing Mr. Gramalegui to default on his

6

his home, which is his primary asset as well as the primary source of his current
income. See Federal Savings & Loan Insurance Corp. v. Dixon, 835 F.2d 554, 565
n.2 (5th Cir. 1987) (district court on remand should consider defendant’s claim that
freeze order could lead to loss of his house: “To allow the house to be repossessed and
disposed of at a forced sale may not be the best way to preserve assets[.]”). Moreover,
it is inadequate to allow Mr. Gramalegui to pay his attorneys. Neither the parties nor the
court would be well served if the effect of maintaining a total asset freeze would require
Mr. Gramalegui to proceed pro se.
For these reasons, I will order the following items exempted from the scope of
the asset freeze imposed by the extant statutory restraining order: (1) the $100,000 line
of credit Mr. Gramalegui has through First Bank; (2) up to $100,000 of equity in the
house on Larkspur Lane in Vail; and (3) Mr. Gramalegui’s Chase United Visa card. I
find the release of these assets sufficient, based on the evidence presently before me,
to meet the standards relevant to modification of asset freezes. All other assets will
remain subject to the freeze, pending further order of court.
Additionally, I will order the Commission to produce an accounting within 90
days. At the hearing, the Commission presented argument, but no evidence, that Mr.
Gramalegui had not complied fully with his obligations under the statutory restraining
order to provide information which would allow the Commission to accurately account
for investor losses. Presently, that assertion is completely unsubstantiated, and the
Commission has made no formal effort to prove up or otherwise force Mr. Gramalegui’s
compliance with his discovery obligations in the four months since the statutory
credit card payments also may diminish the ultimate recovery available to investors, who may have to
stand in line with or behind these other creditors.

7

restraining order was entered. Given the admittedly light burden in showing entitlement
to an asset freeze, it is incumbent on the Commission to act expeditiously to justify the
scope of the freeze, so that Mr. Gramalegui is not left in limbo for an unreasonably
extended or indefinite period.6
Accordingly, the asset freeze will be modified as indicated herein.
THEREFORE, IT IS ORDERED as follows:
1. That The Commission’s Motion for a Preliminary Injunction and
Incorporated Memorandum of Law [#12], filed October 26, 2015, is granted in part
and denied in part as follows:
a. That the motion is granted to the extent specified in the Consent
Order of Preliminary Injunction Against Defendant Gregory L.
Gramalegui [#38], filed January 22, 2016; and
b. That the motion is denied in part insofar as it seeks a continuation of
the extant asset freeze imposed by my Order Granting Ex Parte Motion
for a Statutory Restraining Order [#8], filed October 19, 2015;
2. That the asset freeze imposed by my Order Granting Ex Parte Motion for a
Statutory Restraining Order [#8], filed October 19, 2015, is modified in part, and the
following assets are unfrozen and no longer subject thereto:
a. The $100,000 line of credit Mr. Gramalegui has through First Bank;
b. Up to $100,000 of the equity in the house on Larkspur Lane in Vail; and
c. Mr. Gramalegui’s Chase United Visa card;

6

If it later is shown that Mr. Gramalegui indeed has been recalcitrant in complying with the
discovery aspect of the statutory restraining order, the court of course may reconsider its position. See
Forte, 598 F.Supp.2d at 693.

8

3. That in all other respects, the Order Granting Ex Parte Motion for a
Statutory Restraining Order [#8], filed October 19, 2015, shall remain in full force and
effect; and
4. That on or before May 17, 2016, the Commission shall file with the court an
accounting of all losses alleged to be attributable to Mr. Gramalegui and Emini Trading
School, which losses may be subject to disgorgement in this matter.
Dated February 17, 2016, at Denver, Colorado.
BY THE COURT:

9