United States Securities and Exchange Commission v. Ahmed et al

Filing 2361

ORDER denying 1652 Motion to Lift the Litigation Stay; denying 1784 Motion for Contempt; denying 1785 Motion for Contempt; granting in part and denying in part 1920 Motion for Joinder and to Lift the Litigation Stay; granting 1968 Motion to Preclude as Moot. Signed by Judge Janet Bond Arterton on 10/13/2022. (Anderson, Colleen)

UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT

UNITED STATES SECURITIES AND EXCHANGE
COMMISSION,
Civil No. 3:15cv675 (JBA)
Plaintiff,
v.
IFTIKAR AHMED,
October 13, 2022
Defendant, and
IFTIKAR ALI AHMED SOLE PROP; I-CUBED
DOMAINS, LLC; SHALINI AHMED; SHALINI AHMED
2014 GRANTOR RETAINED ANNUITY TRUST;
DIYA HOLDINGS LLC; DIYA REAL HOLDINGS, LLC;
I.I. 1, a minor child, by and through his next friends
IFTIKAR and SHALINI AHMED, his parents; I.I. 2, a
minor child, by and through his next friends
IFTIKAR and SHALINI AHMED, his parents; and I.I.
3, a minor child, by and through his next friends
IFTIKAR and SHALINI AHMED, his parents,
Relief Defendants.

ORDER DENYING MOTIONS TO LIFT STAY (1652) AND FOR CONTEMPT (1784 AND
1785), AND GRANTING IN PART AND DENYING IN PART OAK’S MOTION TO JOIN AND
LIFT THE STAY (1920)
Non-party Tracy Klestadt moved on September 21, 2020, for an order lifting the

litigation stay issued by this Court in order to continue an action against defendant Iftikar

Ahmed pending in bankruptcy court. (See [Doc. # 1652].) On April 26, 2021, Oak

Management Corporation (“Oak”) moved to adopt and join in the Plan Administrator’s

motion to lift the stay. (See [Doc. # 1920].) Defendant Iftikar Ahmed filed a cross motion to

preclude the initial motion to lift the stay as moot [Doc. # 1968]. Mr. Ahmed also moved for

the court to find both the Plan Administrator and Oak in contempt of court order in
connection with a private settlement agreement and Oak’s motion to substitute for the PA in

the separate litigation that is the basis of its motion to lift the litigation stay. (See Motion to
Find Plan Administrator in Violation of This Court’s Orders (“PA Contempt Mot.”) [Doc. #

1784]; Motion to Find Oak in Violation of This Court’s Orders (“Oak Contempt Mot.”) [Doc. #
1785].)
I.

Procedural History
At the heart of the parties’ motions is the Appointment Order issued by this Court to

establish the receivership, which stayed “[a]ll civil legal proceedings of any nature, including,

but not limited to, bankruptcy proceedings . . . (c) against any of the Defendants, including

any wholly-owned subsidiaries and partnerships in which a Defendant is a general partner;
or (d) against any of the Defendants’ past or present officers, directors, managers, members,
agents, or general or limited partners sued for, or in connection with, any action taken by

them while acting in such capacity of any nature, whether as plaintiff, defendant, third-party

plaintiff, third-party defendant, or otherwise . . .” (Appointment Order [Doc. # 1070].) The
order further enjoined “[t]he parties to any and all Ancillary Proceedings” from

“commencing or continuing any legal proceedings, or from taking any action, in connection
with any such proceeding, unless leave of this Court is obtained. . .”

Non-party Tracy Klestadt seeks the Court’s leave to lift the stay. Klestadt is the Plan

Administrator (“PA”) for Choxi.com, which has filed for bankruptcy in S.D.N.Y (hereinafter
the “Bankruptcy Court.”) (See Mem. of Law in Support of Mot. To Lift Lit. Stay (“Plan
Administrator Mem.”) [Doc. #1652].) The PA commenced an action as part of the bankruptcy

proceedings against former officers and directors of Choxi.com, including Iftikar Ahmed,

seeking damages for “fiduciary duties and receipt of fraudulent and preferential transfers,
among other claims, that caused substantial monetary losses to the Debtor and other

damages.” (Id. at 2.) The PA asks that the stay be lifted in order to allow the action in
Bankruptcy Court to proceed against Ahmed, and asserts that its objective is to “obtain[ ] a
judgment that it may execute at some later date and in accordance with the priority of other
creditors.” (Id. at 3.)

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Then-Receiver Jed Horwitt took no position as to the motion, and the SEC did not

object. (See Receiver’s Position Regarding Non-Party Tracy Klestadt’s Motion to Lift
Litigation Stay [Doc. # 1663]; SEC’s Response to Non-Party Tracy Klestadt’s Motion to Lift

Litigation Stay [Doc. # 1664].) Defendant Iftikar Ahmed and the Relief Defendants opposed

the motion. (See Relief Defendants’ Opposition to Non-Party Tracy Klestadt’s Motion to Lift

Litigation Stay [Doc. #1665]; Memorandum in Opposition re Motion for Order Lifting the

Litigation Stay [Doc. # 1666].)

Subsequently, the Plan Administrator assigned all claims against Mr. Ahmed in the

bankruptcy proceeding to Oak, which filed a motion to be substituted as a party in the
proceeding. (See Mot. to Adopt and Join in the Mot. to Lift Lit. Stay [Doc. # 1920] at 2.) The

Bankruptcy Court declined to rule on the motion to substitute until the stay is lifted, or this
Court clarifies that the motion is not covered by the stay. (Id.) Oak asserts that it is “simply
stepping in the shoes” of the Plan Administrator and “does not seek to interfere with the

Receiver’s duties, or otherwise disrupt the current asset freeze or the SEC’s priority claim to

the frozen assets.” (Id. at 3.) Defendant Iftikar Ahmed opposed the joinder [Doc. #1967];

then-Receiver Horwitt took no position on the motion because it “[did] not believe that the
granting of relief sought . . . would impact the Receiver’s ability to complete his duties.” (See

Receiver’s Response to Oak Management Corporation’s Motion to Adopt and Join In NonParty Tracy Klestadt’s Motion to Lift the Litigation Stay [Doc. # 1969].)

Mr. Ahmed moved to have the PA’s initial motion to lift the litigation stay declared

moot because he argues the Plan Administrator no longer has any interest in the bankruptcy
proceeding after assigning the claims to Oak. (See [Doc. # 1968].) His separate contempt
motions allege that the settlement between Oak and the Plan Administrator, the assignment

of claims from Oak to the Plan Administrator, and Oak’s motion for relief in the bankruptcy

proceeding violated the Court’s stay order. (See Oak Contempt Mot. at 4-5; PA Contempt Mot.
2-3.)

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II.

Discussion
A.

Plan Administrator’s Motion to Lift the Stay

“The

Second

Circuit

has

recognized

that

an anti-litigation injunction or

litigation stay in a receiver order is a valid exercise of a district court's equitable powers,”
S.E.C. v. Illarramendi, No. 3:11CV78 JBA, 2012 WL 234016, at *4 (D. Conn. Jan. 25, 2012), and

a litigation stay is “simply one of the tools available to courts to help further the goals of the
receivership.” SEC v. Byers, 609 F.3d 87, 92 (2d Cir. 2010). Litigation stays in the receivership

context are enforceable against non-parties. United States v. JHW Greentree Cap., L.P., No.

3:12-CV-00116 VLB, 2014 WL 2608516, at *4 (D. Conn. June 11, 2014). However, “an
appropriate escape valve, which allows potential litigants to petition the court for

permission to sue, is necessary so that litigants are not denied a day in court during a lengthy
stay.” Id. (quoting United States v. Acorn Tech. Fund, L.P., 429 F.3d 438, 443 (3d Cir.2005)).

The Second Circuit has adopted the three-pronged test first articulated in SEC v. Wencke, 742
F.2d 1230 (9th Cir.1984) to evaluate motions for relief from a litigation stay. See SEC v.
Byers, 592 F. Supp. 2d 532, 536–37 (S.D.N.Y.2008) aff'd 609 F.3d 87, 91–92. Under the

Wencke test, courts should consider “(1) whether refusing to lift the stay genuinely

preserves the status quo or whether the moving party will suffer substantial injury if not
permitted to proceed; (2) the time in the course of the receivership at which the motion for

relief from the stay is made; and (3) the merit of the moving party's underlying claim.” “The

first Wencke factor balances the interests of the Receiver in preserving the status quo against
the interests of the moving party.” Illarramendi, 2012 WL 234016 at *5.

The Plan Administrator makes various arguments in favor of lifting the litigation stay

based on the three Wencke factors; however, they were made before the Plan Administrator
reached a settlement with Oak assigning it all claims against Defendant Ahmed, modifying or

mooting many of them. Because the Plan Administrator has no remaining interest in the
litigation, it necessarily cannot suffer substantial injury, nor can the Court evaluate the merit
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of the “moving party’s underlying claim” when the underlying claims are no longer tied to
the moving party. The motion is denied as to the Plan Administrator.
B.

Oak’s Motion to Adopt and Join the Motion to Lift the Stay

Oak’s motion seeks to lift the stay as well, and asserts that the balance of the three

Wencke factors “should not be different as a result of the transfer of the Plan Administrator’s
claims to Oak,” because its motion to substitute in the Bankruptcy Proceeding means “Oak is
simply stepping in the shoes of the Plan Administrator in the Bankruptcy Proceeding.” (Mot.
to Join [1920] at 1.) However, Mr. Ahmed argues that even if the Court grants Oak’s motion

to substitute, it should be required to file a separate motion to lift the stay on its pursuit of

the claims against Mr. Ahmed to allow for evaluation of the merits, (see Def. I. Ahmed’s Resp.

to Mot. for Joinder [Doc. # 1967]); the Receiver also appears to assume a separate motion

would be necessary even if the motion to substitute was granted, noting in a footnote that he
“anticipates that Oak may, at the appropriate time, make such filing(s) as may be necessary

to seek leave from this Court to prosecute the SDNY Proceeding.” (Receiver’s Resp. to Mot.

for Joinder [Doc. # 1969] at 6). The Court agrees that it cannot fully evaluate the three
Wencke factors without additional information from Oak that addresses whether it will be

caused substantial injury absent a lift of the stay, and whether the evaluation of the merits

should be different based on its substitution or other developments in the case. Its motion to

join and adopt is denied to the extent it seeks a lift of the litigation stay; even if the motion to
substitute is granted by the bankruptcy court, Oak must file a separate motion with this Court

if it seeks to lift the litigation stay and prosecute any claims against Mr. Ahmed in connection
with the bankruptcy proceeding.

Oak also asks this Court to issue an order clarifying that the litigation stay does not

apply to its motion to substitute for the PA in the SDNY proceeding because the Bankruptcy
Court declined to rule on Oak’s motion to substitute until this Court either ordered that the
“litigation stay, no longer applies to this adversary proceeding, or that Oak has leave of the
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Connecticut court to proceed with its motion to substitute.” (Oak’s Mot. to Join at 2.) Receiver
views “filing of and seeking a hearing on the Motion to Substitute is purely an administrative,

ministerial type action, which provides notice to the Bankruptcy Court and parties-ininterest in the SDNY Proceeding of Oak’s assumption of the Plan Administrator’s claims in
the SDNY Proceeding.” (Receiver’s Resp. to Joinder.)

While the motion to substitute is an “action” that is “in connection with” an ancillary

proceeding against a Defendant in this case in the most literal sense, this Court has already
explained that the purpose of the litigation stay was to halt legal proceedings that might

endanger the assets of the receivership. See United States Sec. & Exch. Comm'n v. Ahmed, No.

3:15CV675 (JBA), 2020 WL 4333570, at *3 (D. Conn. July 28, 2020) (holding that “if
Defendant does not seek “to obtain possession of property of the Receivership Estate,” then

his arbitration . . . is not prohibited by the Litigation Stay, and he need not seek this Court's

leave to pursue it.). The motion to substitute does nothing to further the bankruptcy
proceedings beyond providing notice to the Bankruptcy Court of the true party in interest,

especially in light of Receiver’s representation that Oak does not intend to prosecute the case
unless this Court lifts the stay on the action. Because this Court’s intent in issuing the stay

was to protect the assets of the receivership, not to micromanage the actions of private

parties and the dockets of other courts, the Court clarifies that the litigation stay does not
apply to Oak’s motion to substitute in the Bankruptcy Proceeding.
C.

Contempt Motion against PA and Oak

Mr. Ahmed contends that the litigation stay’s injunction extends to the PA’s and Oak’s

settlement and assignment of claims, and thus by proceeding with both without the leave of

this Court, PA and Oak violated the stay. The Receiver took the position that the assignment
of claims from the Plan Administrator to Oak did not violate the Appointment Order, because
it is a “private settlement” that “in no way implicates the Receivership Estate or Receivership

Assets.” (Receiver’s Resp. to Mot. to Join at 4-5). The Court agrees; as explained above, the
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litigation stay does not extend so far as to prohibit the actions of private parties, or

administrative motions such as the motion to substitute, that do not commence or advance
a legal action against the receivership assets. Because neither Oak’s nor the PA’s challenged

actions violated the litigation stay, Defendant’s motions for contempt against both parties
are denied.
III.

Conclusion

For the reasons set forth above, the motion to lift the stay [Doc. # 1652] is DENIED,

and Defendant Iftikar Ahmed’s motion to preclude as moot [Doc. # 1968] is GRANTED; Oak’s

motion to join and adopt is GRANTED in part and DENIED in part [Doc. # 1920], and
Defendant Iftikar Ahmed’s motions for contempt [Doc. # 1784 and 1785] are DENIED.
IT IS SO ORDERED.

_/s/__________________________________________

Janet Bond Arterton, U.S.D.J.

Dated at New Haven, Connecticut this 13th day of October, 2022.

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