Securities & Exchange Commission v. Illarramendi et al

Filing 817

ORDER; the Court's Audit Order #798 is MODIFIED as set forth herein.Signed by Judge Janet Bond Arterton on 1/16/2014.(Morril, Gregory)

UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
v.
FRANCISCO ILLARRAMENDI et al,
Defendants.

Civil No. 3:11cv78 (JBA)

January 16, 2014

ORDER MODIFYING THE COURT’S ORDER REQUIRING THE SEC TO
CONDUCT AN AUDIT AND MAKE REPORTS REGARDING THE RECEIVER
On December 5, 2013, the Court issued an order (the “Audit Order”) [Doc. # 798]
directing the SEC to conduct a line-by-line audit of the Fee Applications submitted by the
Receiver in this action to date. The SEC has now submitted [Doc. # 812] a Preliminary
Response, detailing its efforts to comply with the Audit Order and the actions that it had
taken beforehand to fulfill its responsibility to the public to monitor fees in this matter. It
now requests that the Court consider “whether a further line-by-line audit of, and report
on, the Receiver’s submitted fee applications is necessary, given the significant time such
an audit and report would require.” (Preliminary Response at 14.) For the reasons that
follow, the Audit Order is modified, and a further line-by-line audit is not required.
In its Audit Order, the Court noted that it had “repeatedly expressed concern
regarding the sizable fees that have been generated in this matter, which necessarily come
at the expense of compensating victims of the fraud.” (Audit Order at 2.) Although the
Court has an obligation to ensure that such fees are reasonable and not extravagant, it
necessarily has to rely upon the SEC to assist it in discharging this duty and to review the
voluminous Fee Applications. See New York State Ass’n for Retarded Children, Inc. v.
Carey, 711 F.2d 1136, 1146 (2d Cir. 1983) (“[C]ourts have recognized that it is unrealistic

to expect a trial judge to evaluate and rule on every entry in [a fee] application.”). The
Receiver’s Fee Applications did not give any detail of the SEC’s undertaking in fulfilling
this obligation, and the SEC had not submitted any responses to the Fee Applications.
The SEC’s Preliminary Response now clarifies that its “counsel has been
monitoring and reviewing the Receiver’s bills throughout the Receivership, and has
negotiated significant discounts and deductions on each of the fee applications that were
submitted to the Court.”

(Preliminary Response at 2.)

LeeAnn Gaunt, Assistant

Regional Director of the SEC Boston Regional Office, “estimates that she spent between
20 and 30 hours reviewing each of the fee applications.” (Id. at 4.) The SEC represents
that it has both ensured compliance with its Billing Instructions, and also examined the
larger question of whether the Receiver’s fees are justified in light of the “overall value
provided to the Receivership Estate as a result of his work.” (Id.)
As the SEC notes, while the $35.2 million in fees requested to date is substantial,
the Receiver’s skilled efforts have added substantial value to the Receivership Estate with
approximately $357 million in assets recovered. (Id. at 8–9 & n.3.) These fees (including
the pending Fifth Fee Application) represent approximately 12% of the total value of the
cash assets recovered as of November 30, 2013. (Id. at 9.) As the SEC notes, this ratio is
in line with the fees expended in other complex SEC actions requiring receivers and
compares much more favorably with other instances in which courts have expressed
concerns regarding fees. See e.g., S.E.C. v. Northshore Asset Mgmt., No. 05cv2192 (WHP),
2009 WL 3122608, at *1 (S.D.N.Y. Sept. 29, 2009) (SEC audit of fees ordered where the
receiver recovered only $2.4 million in assets but requested over $11 million in fees and
expenses); S.E.C. v. Goren, 272 F. Supp. 2d 202, 203 (E.D.N.Y. 2003) (reducing fees to
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approximately 30% of assets recovered where the receiver had requested $1.8 million in
fees but only recovered $2.1 million for the estate).
Given the SEC’s representations in its Preliminary Response, and the Court’s own
observations of the value that the Receiver has provided to the estate, the Court concludes
that a further line-by-line audit by the SEC is not necessary at this time, given the
substantial time and public expense that such an audit would require. Going forward, the
SEC is directed to submit a response to each fee application submitted outlining whether
the Commission consents or objects to the fees requested and describing the steps it has
taken to ensure that such fees are reasonable.1 In particular, the SEC is to work with the
Receiver to ensure not only that fee applications comply with the SEC’s Billing
Instructions, but also that the fees requested are justified by the net economic benefit that
they will provide to the estate.2

1

The SEC should submit such a response to the pending Fifth Fee Application
[Doc. # 769].
2

As the Receiver acknowledged upon appointment, “all applications for
compensation are interim and are subject to a cost benefit review and final review at the
close of the receivership,” as well as Court approval. SEC Billing Instructions at 1;
(Receiver Order [Doc. # 666] ¶ 63.) Accordingly, at the close of the Receivership, the
Court will consider whether—in light of subsequent fee applications and the SEC’s
accompanying responses—a complete line-by-line audit, as contemplated in the Audit
Order, is necessary.
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Accordingly, the Court’s Audit Order [Doc. # 798] is MODIFIED as set forth
above.

IT IS SO ORDERED.
/s/
Janet Bond Arterton, U.S.D.J.

Dated at New Haven, Connecticut this 16th day of January, 2014.

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