Securities and Exchange Commission v. Nadel et al

Filing 1061

ORDER ATTACHED overruling objection to and affirming denial of Claim 445. Signed by Judge Richard A. Lazzara on 8/29/2013. (CCB)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
TAMPA DIVISION
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
v.

CASE NO: 8:09-cv-87-T-26TBM

ARTHUR NADEL; SCOOP CAPITAL, LLC;
and SCOOP MANAGEMENT, INC.,
Defendants,
SCOOP REAL ESTATE, L.P.;
VALHALLA INVESTMENT PARTNERS, L.P.;
VALHALLA MANAGEMENT, INC.;
VICTORY IRA FUND, LTD.; VICTORY FUND, LTD.;
VIKING IRA FUND, LLC; VIKING FUND, LLC;
and VIKING MANAGEMENT, LLC,
Relief Defendants.
/
ORDER
This cause comes before the Court pursuant to an adopted procedure to resolve the
objection to Claim Number 445.1 For this Court’s review in resolving the objection, in
additional to the record, is the Joint Statement of Undisputed Facts (Dkt. 1038), Fulcrum
Distressed Opportunities Fund I, LP’s Memorandum of Law in Support of its Objection
to the Receiver’s Proposed Treatment of Claim Number 445 (Dkt. 1048), and the

1

See docket 1034, Order dated July 3, 3013, which establishes the procedure to
resolve the objection to Claim Number 445.

Receiver’s Response (Dkt. 1051). After careful consideration of the objection, the
submissions and the entire record, the Court concludes that the final determination with
respect to Claim Number 445 is affirmed and the objection is overruled.
BACKGROUND
Claim 445 was timely filed by the claims bar date of September 2, 2010.2 Canrol
Finance Limited (Canrol) filed its Proof of Claim form, claiming a loss of $1,195,000.00
as nominee for the account of two investment funds: Genium AI Fund Series 1 Ltd.
Standard Portfolio and Genium Trading Company Ltd.3 The Genium entities had
invested that amount in Hedge Fund Valhalla Investment Partners, L.P., in July 2008.4
The Receiver responded to Canrol’s Proof of Claim form by letter in February 2011,
stating that the investment appeared to be a custodial arrangement requiring the disclosure
of the identity of the beneficial owner.5 Canrol submitted a revised Proof of Claim form
stating that Canrol was acting as nominee for the Genium entities, but did “not intend to
provide/disclose the requested information.”6

2

See docket 391 (Court’s Order dated April 21, 2010, setting claims bar date of 120
days from entry of order or 90 days from mailing proof of claim form to claimants, whichever
is later). September 2, 2010, is ninety days from June 4, 2010, the date the Receiver mailed the
claims package.
3

See docket 1038, paras. 1, 2 & 10, Exh. C.

4

See docket 1038, para. 1.

5

See docket 1038, para. 11, Exh. D.

6

See docket 1038, para. 12, Exh. E.

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Until the point in time when Canrol filed the Amended Proof of Claim form, the
Receiver had dealt only with Canrol. Thereafter, beginning in May 2011, the Receiver
was contacted by Fulcrum Distressed Opportunities Fund I, LP (the Fulcrum Fund),
which is the entity that now opposes the determination of Claim 445.7 The Fulcrum Fund
unsuccessfully requested the Receiver’s consent to transfer the rights and title to Claim
445 from the Genium entities to the Fulcrum Fund.8 The Receiver noted in his letter of
June 10, 2011, that while Canrol identified the Genium entities as the beneficial owners,
it did not identify any individuals with a legal interest in the beneficial owners, stating
that it did “not intend to provide/divulge the requested information.”9 The Receiver
reiterated that failure to disclose the beneficial owners would result in his denial of Claim
445.10
Correspondence followed in which the Fulcrum Fund raised the requirement of a
confidentiality agreement if disclosure was made.11 Emails between the parties
continued.12 The Receiver concluded on June 28, 2011, that Canrol had not complied
with the requirements of the Proofs of Claim and that the time for providing additional

7

See docket 1038, para. 13.

8

See docket 1038, paras. 13 & 14, Exh. F.

9

See docket 1038, para. 14, Exh. F.

10

See docket 1038, para. 14, Exh. F.

11

See docket 1038, para. 15, Exh. G.

12

See docket 1038, para. 16, Exhs. H, I & J.

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information in the claims process had passed.13 Thereafter, on December 7, 2011, the
Receiver filed his motion seeking the approval of the determination and priority of
claims, the pooling of receivership assets and liabilities, the approval of a plan of
distribution, and the establishment of an objection procedure.14 The motion
recommended denial of Claim 445 based on the failure of Canrol to divulge the specific
identity of the beneficial owners.15 In response to the motion, the Fulcrum Fund emailed
the Receiver an Evidence of Transfer, which reflected a May 2011 agreement by the

13

See docket 1038, para. 17, Exh. M.

14

See docket 675.

15

See docket 675 at p. 23 & Exh. G. The motion provides in pertinent part as follows:
[Canrol responded to the deficiency letter and] provided some
information but wrote on the Proof of Claim Form that the
beneficial owners, which appear to be investment funds, “do not
intend to provide/divulge the requested information.” (See Claim
No. 445.) This answer was given in response to Question 3 on the
Proof of Claim Form (see Exhibit A) which states: “If this form is
being completed on behalf of an entity, please provide the full
name of the entity and all of its trustees, officers, directors,
managing agents, shareholders, partners, beneficiaries, and any
other party with an interest in the entity.”
Exhibit G attached to the motion provided further as follows:
The director of an investment fund returned an Amended Proof of
Claim Form identifying two investment funds as entities with an
interest in this account, but stated that he would not provide the
names of the trustees, officers, directors, managing agents,
shareholders, partners, beneficiaries, or any other party with an
interest in the entities. The Claimant’s failure and refusal to
provide the requested information has impeded the Receiver from
assessing whether the Claimant has submitted an allowable claim.
Because the Receiver cannot be sure that the beneficial owners of
this account did not hold other Investor Accounts, receive False
Profits in connection with such other accounts, otherwise receive
additional money from Receivership Entities, or were not
“insiders,” this claim should be denied.

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Genium entities to transfer all rights to and title in Claim 445 to the Fulcrum Fund.16 The
Fulcrum Fund also provided a list of shareholders for five Genium funds, although the list
does not indicate the beneficial ownership in 2008.17 The list does not include, however,
the interest holders of Genium Trading Company, Ltd. That same day counsel for the
Receiver responded by email as follows:
[T]he Receiver finalized his claim review and determinations,
submitted those determinations to the Court, and proposed a
procedure for the submission of claimants’ objections. The
Receiver’s claim determinations, including with respect to the
claims underlying your email, were complete as of prior to the
filing of that motion.
Once the Court issues an order on that motion and institutes
an objection procedure, your client will have the opportunity
to submit its objection in accordance with the terms of the
objection procedure ultimately established by the Court. At
this time, however, no objection procedure is in place and the
Receiver is not engaging in any discussions relating to
objections. Again, the Receiver’s claim determinations are
complete, and at the appropriate time objections may be
submitted in accordance with the procedure ultimately
adopted by the Court. As such, please note that your email
and its attachments will not be considered by the Receiver.
Of course, you remain free to resubmit any information
provided in your email in accordance with the objection
procedure ultimately established by the Court.18

16

See docket 1038, para. 20, Exhs. N & O.

17

See docket 1038, para. 21, Exh. P.

18

See docket 1038, para. 22, Exh. Q.

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This Court approved the denial of Claim 445 on March 2, 2012.19 Four days later,
the Receiver received an objection to the claim determination from the Fulcrum Fund.20
The Receiver responded in writing to the objection, explaining his reasons in detail for
the recommendation of denial of the claim, which included the Genium entities’ status as
one of professional institutional investors.21 After many months, the resolution of the
objection without the Court’s intervention proved unsuccessful. The Court will now
decide the merits of the objection to the denial of Claim 445.
STANDARD FOR OBJECTION PROCEDURE
The standard by which this Court will decide the merits of the parties’ dispute and
resolve the objection to Claim Number 445 is the summary judgment standard provided
for in Rule 56 of the Federal Rules of Civil Procedure.22 Summary judgment is
appropriate if “the movant shows that there is no genuine dispute as to any material fact
and the movant is entitled to judgment as matter of law.” Fed.R.Civ.P. 56(a). The Court
must draw all inferences from the underlying facts in the light most favorable to the nonmoving party, which in this case is the Receiver. See Matsushita Elec. Indus. Co. v.
Zenith Radio Corp., 475 U.S. 574, 587-88, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 548 (1986)

19

See docket 776.

20

See docket 1038, para. 24, Exh. R..

21

See docket 1038, para. 25, Exh. S.

22

See docket 1034, Order dated July 3, 2013, establishing the procedure to resolve the
Objection to Claim 445.

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(quoting United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d
176 (1962)); Welch v. Celotex, 951 F.2d 1235, 1237 (11th Cir. 1992).
ANALYSIS
The Fulcrum Fund relies on bankruptcy law to place the burden of proof of
showing the claim should remain denied, or if allowed then subordinated, on the
Receiver. It claims that it timely cured the deficiency in Canrol’s Amended Proof of
Claim by offering to identify the beneficial owners pursuant to a confidentiality
agreement, which the Receiver refused. The Fulcrum Fund further asserts that it provided
sufficient information regarding the beneficial owners after the motion to determine
claims was filed. With respect to the Receiver’s determination that the Genium entities
constituted sophisticated investors that should have known of the fraudulent scheme, the
Fulcrum Fund argues that they are no different than any other investors and therefore
presumably acted in good faith and their claim should not be subordinated. For the
following reasons, the Court finds the Fulcrum Fund’s assertions without merit and the
Receiver’s position well-taken.
Burden of Proof
Earlier in the course of this receivership, this Court compared a receivership
arising from an appointment by a federal court sitting in equity with a receivership in
bankruptcy court:
The appointment of a receiver by a federal court applying
equity, as opposed to statutory law, is governed by Federal
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Rule of Civil Procedure 66. [footnote omitted]. Because
statute governs the appointment and course of receiverships in
bankruptcy court, Rule 66 does not always apply to receivers
in bankruptcy. See Fed. R. Civ. P. 66 advisory committee’s
note. The bankruptcy courts, however, may rely on federal
equitable law outside the bankruptcy scheme when those
equitable principles are applicable to the general conduct of
receivers. [citation omitted]. Conversely, although federal
district courts presiding over federal equity receiverships,
such as this SEC case, may look for guidance from
bankruptcy law, they are not restricted by the dictates of
bankruptcy law. See Quilling v. Trade Partners, Inc., 2007
WL 107669, * 1 (W.D. Mich. 2007) (citing SEC v. Forex
Asset Mgmt. LLC, 242 F.3d 325, 332 (5th Cir. 2001)).
[footnotes omitted].23
Any attempted analogy between the significance of a proof of claim under bankruptcy
law with respect to any presumption of its validity and one submitted in the course of this
equity receivership is unavailing. This Court’s order approving the claims determination
established the objection procedure and specifically found the procedure to be “logical,
fair, and reasonable.”24 It further provided that “any and all objections to claim
determinations, claim priorities, or the plan of distribution shall be presented to the
Receiver in accordance with the Proposed Objection Procedure as set forth in Section V
of the motion.” Section V A. (h) of the motion states that “t[]he Claimant shall have the
burden of proof.”25 Absent any binding authority to the contrary, the burden of proof in

23

See docket 822, pp. 12-13.

24

See docket 776, p. 3.

25

See docket 675, p. 82.

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this proceeding lies on the claimant who filed the proof of claim pursuant to the objection
procedure approved by this Court.
Timeliness and Sufficiency of Cure
The Fulcrum Fund argues that not only was Canrol’s Proof of Claim timely filed
by the claims bar date of September 2, 2010, but it was thereafter timely amended, relying
on In re International Horizons, Inc., 751 F.2d 1213, 1216 (11th Cir. 1985). The
International Horizons case is an appeal from a judgment of a district court affirming the
decision of a bankruptcy court. The Eleventh Circuit affirmed the lower courts’ finding
that a proof of claim with respect to corporate income taxes was never filed by the IRS
before the claims bar date in bankruptcy and, furthermore, that an informal proof of claim
was never made. The bankruptcy and district courts were found to have properly
exercised discretion in forbidding an amendment to a proof of claim that would have
essentially added a new claim altogether for corporate income taxes, as opposed to other
taxes. The instant case does not involve this issue. In this case, the Proof of Claim filed
by Canrol, as well as the Amended Proof of Claim, did not properly identify the claimants
by failing to identify the beneficial owners of the Genium entities.
The Proof of Claim Form in this receivership requires that an entity submitting the
form must list all of its trustees, officers, directors, managing agents, shareholders,
partners, beneficiaries, and any other party holding an interest in the entity. Without
knowing the identities of the beneficial owners of the claim, the Receiver was unable to

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perform his court-ordered task of determining whether Claim 445 was valid. At least
three scenarios warrant the necessity of naming the beneficial owners: (1) one beneficial
owner may have held several accounts with Receivership Entities, which would require
the accounts to be combined so that any profits in one account would offset losses in
another; (2) a beneficial owner could have received money from Receivership Entities
through transfers not specifically tied to the performance of the investment, for example,
commissions for referring other investors; and (3) a beneficial owner could have been an
“insider” in the scheme or in the Receivership Entity or in another position, which would
have affected the beneficial owner’s right to receive distributions at all.
In both the Proof of Claim submitted in September 2010 and the Amended Proof
of Claim submitted in March 2011, Canrol refused to identify the beneficial owners. It
was not until the Receiver informed the Fulcrum Fund in June 2011 that Claim 445 would
be denied unless the beneficial owners were disclosed, that even a hint of disclosure
might be forthcoming. The Fulcrum Fund responded that disclosure would be made only
on the condition that the Receiver enter into a confidentiality agreement, an agreement the
Receiver could not honor in the conduct of his duties to all investors. Faced with the
claimant’s unwillingness to unconditionally reveal the names and the potential transfer of
the claim, the Receiver informed the Fulcrum Fund that he would make his determination
regarding Claim 445 on the materials already made available to him.

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The identities of the beneficial owners were never disclosed before December 7,
2011, when the Receiver filed his motion for determination of claims in which he
recommended denial based on the absence of such crucial and fundamental information.
It was not until the Receiver filed the motion for claim determination that the Fulcrum
Fund attempted to disclose the identity of the beneficial owners, and even then, the
disclosure did not reveal the interest holder in Genium Trading Company, Ltd., and did
not reveal whether the purported owners were also owners at the time when the Genium
entities invested from 2008 through early 2009. Almost one year passed from the
Receiver’s request for the identities in early February 2011 to the time any names were
actually revealed in late December 2011, which was after the Receiver had recommended
to the Court that Claim 445 be denied. No exceptional circumstances have been
presented to this Court warranting such late consideration of still deficient information in
the Proof of Claim.
Sophisticated Status and Subordination
Even assuming the late-submitted information provided by the Fulcrum Fund
actually cured the deficiencies in the Proof of Claim, the Court finds, nevertheless, that
the objection must be overruled on the basis of the Genium entities’ status as
sophisticated institutional investors. In the conduct of the claims process, similarlysituated claimants must be treated equally. See SEC v. Homeland Commc’ns Corp., 2010
WL 2035326, at *2 (S.D. Fla. 2010). Whether the claimant acted in good faith is a

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consideration in the claims process. See SEC v. Megafund Corp., 2007 WL 1099640, at
*2 (N.D. Tex. 2007). Good faith is an objective standard, measured by whether the
claimants were on actual or inquiry notice of the fraud. See Terry v. June, 432 F.Supp.2d
635, 641 (W.D. Va. 2006) (interpreting Florida law, citing United States v. Romano, 757
F.Supp. 1331, 1338 (M.D. Fla. 1989)). The investor bears the burden of showing that
“red flags” were not ignored when they invested their money in what is later realized as a
Ponzi scheme. See SEC v. Forte, 2010 WL 939042, at *6 (E.D. Pa. 2010); SEC v.
Megafund Corp., 2007 WL 1099640, at *2 (N.D. Tex. 2007) (disallowing claim because
claimants did not show they acted in good faith).
Many red flags were waving in 2008. As set forth in detail in the Receiver’s
response, there were many indicia that would lead a sophisticated institutional investor to
question the prudence of investing in Valhalla. Not only had Nadel been disbarred from
the practice of law in New York for dishonesty and fraud, but many judgments were
outstanding against him in Sarasota County, Florida, along with divorce proceedings that
alleged his defrauding of numerous individuals.26 With respect to Valhalla, a person
disclosed in the private placement memorandum was Michael Zucker, the subject of a
cease and desist order.27 Based on the record in these proceedings, there is no doubt that

26

See docket 1038, paras. 27-30, Exhs. T & U.

27

See docket 1038, para. 31, Exh. V.

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institutional investors like the Genium entities were placed on inquiry notice and cannot
show good faith.28
Based on the applicable law and the facts, the objection to the denial of Claim 445
is overruled. It is therefore ORDERED AND ADJUDGED that the denial of Claim 445
is hereby affirmed.
DONE AND ORDERED at Tampa, Florida, on August 29, 2013.

s/Richard A. Lazzara
RICHARD A. LAZZARA
UNITED STATES DISTRICT JUDGE
COPIES FURNISHED TO:

Counsel of Record

28

The Court need not reach the issue of subordination in detail. The Court finds it
sufficient to simply note that the Genium entities’ status as institutional investors differentiates
them from Class 1 investors for purposes of claim determination.

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