Securities and Exchange Commission v. Nadel et al

Filing 1202

Unopposed MOTION for miscellaneous relief, specifically Permission to Prosecute Appeal by Burton W. Wiand. (Attachments: # 1 Exhibit A, # 2 Exhibit B, # 3 Exhibit C, # 4 Exhibit D)(Morello, Gianluca)

EXHIBIT B

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UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
TAMPA DIVISION

BURTON W. WIAND, as Receiver for
VALHALLA INVESTMENT PARTNERS,
L.P.; VIKING FUND, LLC; VIKING IRA
FUND, LLC; VICTORY FUND, LTD.;
VICTORY IRA FUND, LTD., AND
SCOOP REAL ESTATE, L.P.,
Plaintiff,
v.

Case No. 8:10-CV-92-T-17MAP

DANCING $, LLC,
Defendant.
_______________________________________/
REPORT AND RECOMMENDATION
This clawback action is on remand from the court of appeals with instructions to the district
court to reevaluate its denial of prejudgment interest and to “identify and apply the Blasland factors
in order to determine whether the equitable considerations justify a denial or reduction of
prejudgment interest to the Receiver in light of Florida’s general rule that prejudgment interest is an
element of pecuniary damages.” Wiand v. Dancing $, LLC, No. 13-10851 (August 27, 2014) citing
Blasland, Bouck & Lee, Inc. v. City of N. Miami, 283 F.3d 1286, 1297 (11th Cir. 2002); see docs.
141 (opinion) and 142 (mandate).1 Both sides now agree that Blasland’s factors are inapplicable to
our circumstances; nonetheless, I have considered Blasland’s core message and recommend that
prejudgment interest be awarded from the date of the filing of the complaint.2
1

2

Wiand v. Dancing $, LLC is reported at 578 F. App’x 938 (11th Cir. 2014).

The district judge referred this matter to me for a report and recommendation. 28 U.S.C.
§ 636; Local Rule 6.01(a).

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A. Context – facts and procedural history
This case’s factual backdrop and procedural history have been reported extensively in this
Court’s Order adopting my report and recommendation (docs. 128 and 121) and in the Eleventh
Circuit’s opinion (doc. 141) affirming this Court’s judgment but for the denial of prejudgment
interest. I borrow from those efforts only as needed to give context for evaluating, in accordance
with the remand instructions, whether prejudgment interest should or should not be awarded.
In 1999 Arthur Nadel opened his first hedge fund to recruit investors; a decade later his
scheme collapsed when the Securities and Exchange Commission moved in with an enforcement
action, see SEC v. Arthur Nadel, et al., Case No. 8:09-cv-87-T-26TBM. By then, he had opened
other hedge funds (the receivership entities) and sucked in hundreds of unsuspecting investors to
dump their money into his scheme. The overwhelming majority lost their shirts, but some
serendipitously got back their principal and more. Dancing $, a Montana investment club, was one
of those fortunate few. In January and April 2008, the club received disbursements totaling
$107,172.11 above principal. Of course, its members, thinking they had invested smartly, presumed
that money was theirs to keep. Little did they know.
The enforcement judge appointed the Receiver (Wiand) at the SEC’s request, and he set
about clawing back the net-winning investors’ false profits, applying two tools that receivers
commonly resort to in such circumstances – the Uniform Fraudulent Transfer Act (“UFTA”), which
Florida has adopted (see Fla. Stat. § 726.105 et seq.) (“FUFTA”), and common law’s unjust
enrichment. See Complaint, doc. 1, filed January 13, 2010. This Court eventually issued a judgment
in the Receiver’s favor for the amount of the false profits but denied any prejudgment interest on that
amount in view of the equities of the case. See doc. 129. Both sides appealed. The Eleventh Circuit
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affirmed the judgment except for the denial of prejudgment interest, noting its earlier decision in a
companion clawback action, Wiand v. Lee, 753 F.3d 1194 (11th Cir. 2014), dictated the result.
Accordingly, the Dancing $ panel issued the same remand instructions as the Lee panel did:
identify and apply the Blasland factors in order to determine whether the equitable
considerations justify a denial or reduction of prejudgment interest to the Receiver
in light of Florida’s general rule that prejudgment interest is an element of pecuniary
damages.
See Lee, 753 F.3d at 1206.
B. Discussion
The remand directs the district court “to identify … the Blasland factors,” stack those against
the general rule, and “apply” the rule accordingly. Both sides now agree that none of Blasland’s
factors apply, which makes stacking them against the general rule uninformative. But this result is
inconsequential as Blasland clearly did not limit the equitable factors a court can consider to just
those Blasland identified. And although Blasland scoured Florida cases for factors, that exercise
here is not particularly helpful because our circumstances are unlike those Florida courts see when
deciding awards of prejudgment interest in typical FUFTA matters. Irrespective of all this,
Blasland’s core message remains the appropriate guide for evaluating the rule’s application to this
peculiar FUFTA action.
1. Blasland’s factors – an illustrative list
To appreciate Blasland’s factors, or how a factor became a “factor,” Blasland reminds us of
the core reason for an award of prejudgment interest: “to provide the prevailing party with the time
value of the money it should have had at the time it was wronged – to restore the party to an
unwronged position.” Blasland, 283 F.3d at 1299. That goal, however, is “not absolute and may

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depend on equitable considerations.” Id. at 1297, quoting Broward County v. Finlayson, 555 So.2d
1211, 1213 (Fla. 1990). Blasland, which dealt with a breach of contract as opposed to a FUFTA
matter, culled three so-called factors from its review of Florida cases: whether the delay between the
injury and judgment is the fault of the prevailing party; whether the prevailing party could have, but
failed to, mitigate damages; or whether in choosing between innocent victims it would be equitable
to put the burden of paying interest on the public. Id. at 1297-98 (citations omitted). But Blasland
clearly implied that its list was not exhaustive as it considered a fourth factor that its Florida survey
of cases had not uncovered (i.e., the City had a well-founded malpractice claim against Blasland
which precipitated the City’s breach). Id. at 1298-99. At most, Blasland’s list presents illustrative
examples where courts have considered particular circumstances for deciding if the equities
outweigh the proposition that money over time creates value and that value should be a compensable
feature of the winning party’s pecuniary damages. Id. 1298-99; see also Millennium Partners, L.P.
v. Colmar Storage, LLC, 494 F.3d 1293, 1305 (11th Cir. 2007) (recognizing there is “extensive
Florida caselaw making the right to recover prejudgment interest subject to equitable
considerations”) (citing Perdue Farms, Inc. v. Hook, 777 So. 2d 1047, 1054 (Fla. 1st DCA 2001))
(“Depending on the equities of a given case, an award of prejudgment interest may be a windfall to
the plaintiff and an unfair burden on the defendant.”)); Volkswagen of America, Inc. v. Smith, 690
So. 2d 1328, 1331 (Fla. 1st DCA 1997) (“The Argonaut decision did not establish an inflexible rule
that requires trial judges to assess prejudgment in every case regardless of circumstances.”) (citing
Finlayson, 555 So. 2d at 1213) (“Interest is not recovered according to a rigid theory of
compensation for money withheld, but is given in response to considerations of fairness. It is denied
when its exaction would be inequitable.”). Correctly striking that balance – the rule’s goal against
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the equities particular to the case – is Blasland’s succinct directive. While the rule’s purpose, to
restore the prevailing party from the date of the wrong, always informs the court’s consideration of
the equities at play, that goal does not always trump every identifiable equity. One case might fall
into the general rule box (owing to the rule’s presumption); another might not (owing to the
presumption’s rebuttal). No matter the outcome – to award prejudgment interest, or to reduce the
award, or to reject an award – the decision is the district judge’s to make within her sound discretion.
Blasland plainly says as much:
When a district court has discretion, there are usually a range of choices it may make
and still be affirmed; there is not only one right choice for the court to make.
Accordingly, in determining whether a district court has abused its discretion, we
sometimes will affirm even though, had the case been ours to decide in the first
instance, we would have reached a different result than the district court.
283 F.3d at 1298.
2. FUFTA, clawback peculiarities, and remand instructions
FUFTA speaks to a debtor’s fraudulent transfers, ones made with “actual intent to hinder,
delay, or defraud” the debtor’s creditor (actual fraud), or ones made without an appropriate quid pro
quo (constructive fraud). FLA. STAT. § 726.105(1)(a), (b). The usual example involves a debtor who
transfers assets to an insider. The collusive nature of the transaction connotes the obvious: a “badge
of fraud,” a rebuttal presumption FUFTA supplies for determining actual intent. See Fla. Stat. §
726.105(2)(a-k); see generally Amjad Munim, M.D., P.A. v. Azar, 648 So.2d 145, 152 (Fla. 4th DCA
1994) (discussing the statutory “badges of fraud”). For such transfers, the equities will rarely if ever
favor the insider-transferee, and courts (as they should) routinely measure prejudgment interest from
the date of the transfer. This result gives the creditor what he deserves – the time-value of money
that should have been his. The debtor’s obliging transferee gets his just deserts. In contrast, our
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transferee, Dancing $, is no insider. And although the transfers to it above its principal payment are
within FUFTA’s reach, Dancing $ nonetheless remains an unwitting participant in a fraudulent
event. That context, which informs the equities at stake, is a factor when considering the purpose
of Florida’s prejudgment rule.
Clawback cases borrow from UFTA’s logic, but the fit is far from intellectually perfect.
Despite the imperfection, clawbacks are a creature of the enforcement action aimed at serving that
proceeding’s equitable goals. In short, the Receiver serves as the enforcement court’s equitable tool,
and FUFTA serves as the Receiver’s legal tool to recoup false profits and receivership assets. This
partnership validates the enforcement action’s equitable existence – “the ratable distribution of
remaining assets among all defrauded investors.” Donell v. Kowell, 533 F.3d 762, 770 (9th Cir.
2008). And for this, equity justly demands that innocent winners in a Ponzi scheme should not be
permitted to enjoy an advantage over later investors “sucked into” the scheme who were not so
fortunate. Id. Thus, to do equity and achieve the desired result, courts in these types of cases create
a construct that fits UFTA into the factual mix of a Ponzi investment. The Receiver represents the
receivership entities (in our case – the hedge funds); the evil wrongdoer (Nadel) is removed from the
scene such that the receivership entities are no longer the Ponzi scheme principal’s “evil zombies.”
Scholes v. Lehmann, 56 F.3d 750, 754 (7th Cir. 1995). Freed from the principal’s “spell,” the entities
became entitled to the return of the moneys – not for the benefit of the principal, but for the innocent
investors whose funds the principal had diverted for unauthorized purposes. Id.
This context varies factually from the usual FUFTA prosecution in important respects. The
element of fraud, which FUFTA demands, takes a different route to the transfer. The evil wrongdoer
is not the usual evading FUFTA debtor, but the Ponzi schemer whom the court subtracts, save his
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intent, from its FUFTA calculus. Accordingly, while the usual FUFTA case looks for the statutory
“badges of fraud,” the Eleventh Circuit has said that scouring our facts for “badges of fraud” is
unnecessary because a transfer “made in furtherance of a Ponzi scheme establishes actual intent to
defraud under § 726.105(1)(a) without the need to consider the badges of fraud.” Dancing $, 578
F. App’x at 944, citing Lee, 753 F.3d at 1201. For these reasons, the obliging transferee’s motives
and character, which FUFTA typically demands be suspect, have no relevance even though he is as
innocent as any other debtor who is a victim to the scheme. The only difference between the two
is that the clawback transferee is just not as victimized as his unfortunate cohort. FUFTA permits
the innocent transferee to steer for the harbor of good faith, see Fla. Stat. 726.109(1), a defense that
simply reaffirms the good character of the transferee. For clawback actions, however, an innocent
investor’s intent is not a even a consideration. Dancing $ has no good faith claim to a sum above
what it paid in consideration (its principal) for the transfers. That above-the-principal sum was not
theirs to keep. Scholes, 56 F.3d at 757.
These peculiar applications of UFTA are unique to enforcement actions because the equitable
model justifies clawing back an investor’s false profits. But even limiting the claw back to the false
profits is an arbitrary construct. Every schemer’s transfer, whether to a net-winner or a net-loser,
serves the schemer’s effort to survive and avoid detection. Accordingly, some courts reason that all
transfers are avoidable and both principal and profits should be dumped back in the receivership
estate for pro rata distribution to all investors. See e.g., SEC v. George, 426 F.3d 786, 798-99 (6th
Cir. 2005) (winning investors should be required to return principal and profits). The overwhelming
number of courts find this approach inequitable, unless the winning investor spotted the scheme’s
red flags and jumped into the investment anyway. SEC v. Forte, Civil Nos. 09-63, 09-64, 2009 WL
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4809804 (E.D. Pa. Dec. 15, 2009).
This judicial evolution for dealing with massive Ponzi schemes halted by enforcement
actions is instructive because the decision to claw back transfers (whether profits or principal or
both) is a function of a district court’s wide latitude in meeting the enforcement action’s equitable
goal of compensating, as best it can, the receivership-estate’s claimants. And to apply Florida’s
prejudgement’s presumption across the board to all transferees would distort the equitable goal of
the enforcement action, particularly when the character of the transferee, which FUFTA takes into
account, is as innocent as his losing companion investor.
Unsurprisingly, neither side cites a Florida case with similar facts and I can find none. This
makes looking for pre-approved factors, as the Blasland court did, to then determine how, or
whether, a Florida court honors the notion that money over time should be credited as an element
of damages in this setting, with equity as our guide, an impossible exercise. And looking to Florida
cases for guidance, other than the usual rule Blasland informs, minimizes the equities here. If no
Florida case speaks to similar facts, how is this Court to appropriately consider Florida’s general rule
in the manner Florida courts would?3
The Eleventh Circuit’s remand cannot be read to say that the general rule is anything other
than general, or to say that this Court must rigidly adhere to the general rule thereby entitling the
Receiver to the interest calculated from the date of the clawed-back transfers. If so, the remand
would have simply instructed the Court to compute the sum. Nor can the remand be read to say that

3

In interpreting Florida law, this Court looks to case precedent from the Florida Supreme
Court, and where none is found, to Florida’s intermediate courts absent some persuasive argument
that the State’s highest court would decide otherwise. Winn-Dixie Stores, Inc. v. Dolgencorp, LLC,
746 F.3d 1008, 1021 (11th Cir. 2014).
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Blasland’s three factors (or four) are the only ones this Court should consider when Blasland plainly
states the factors recited are not exclusive.4 Of course this makes the remand’s instructions – to
“identify and apply the Blasland factors in order to determine whether the equitable considerations
justify a denial or reduction of prejudgment interest to the Receiver in light of Florida’s general rule
that prejudgment interest is an element of pecuniary damages” – more enigmatic, particularly when
both sides now agree that none of Blasland’s factors apply here. See doc. 144, p.6; doc. 146, p.2.
3. the arguments
The Receiver essentially asserts that no equity favors Dancing $ (or at least the type of equity
that Florida courts report) and no circumstance warrants deviating from Florida’s general rule. That
view sees a “general” rule that is substantially more inflexible than Blasland opines – something very
specific that universally applies except for those few inequitable situations Blasland covers. Because
Blasland’s factors are inapplicable, the Receiver posits the general rule applies: Nadel fraudulently
transferred false profits to Dancing $ on January 1, 2008 ($105,602.89), and April 9, 2008
($1,549.22); consequently, interest should be calculated as of then. See doc. 144, pp. 3-4. But, if the
Eleventh Circuit had determined as much, it would have so stated in its opinion and remanded the
matter solely for the Court’s computation. Dancing $, on the other hand, asks this Court to consider
its innocence. It was an unwitting investor duped like the others who through the vagaries of chance
happened to get out of the illegal scheme with more money in its pocket than it invested. This Court
recognized as much when first applying Blasland. And that rationale, in part, served as the reason
4

The Dancing $ opinion must be read in harmony with Blasland. To do otherwise would
conflict with circuit precedent. See Walker v. Mortham, 158 F.3d 1177, 1188 (11th Cir. 1998) (when
circuit authority is in conflict, the earlier line of authority controls because a decision of a prior panel
cannot be overturned by a later panel).
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for denying the Receiver any prejudgment interest, a decision the Eleventh Circuit rejected. In view
of the circuit’s remand, I cannot recommend that the district judge deny the Receiver any
prejudgment interest. Therefore, only the amount of prejudgment interest is at issue and that amount
depends on the starting dates for its computation – either the dates of the transfers or some other date
if the equities permit.
4. amount of prejudgment interest
Per Blasland, the weight of equitable considerations may warrant a reduction in the amount
of the prejudgment interest award. Blasland, at 1297. Having balanced the equities here, it would
be unfair to permit the Receiver to recover prejudgment interest from January 11, 2008, and April
11, 2008, the dates of the transfers to Dancing $, in the amount of $37,967.48 for the reasons I have
already stated. See Complaint (doc. 1, Exhibit A); Yip declaration (doc. 145). Instead, as other
courts have concluded in similar Ponzi scheme fraudulent transfer actions in which the transferee
had not engaged in culpable conduct, I find that equitable considerations justify a reduction of
prejudgment interest and conclude that prejudgment interest should be awarded from January 13,
2010, the date the Receiver filed this action against Dancing $ and the first time Dancing $ received
formal notice of the Receiver’s claim. See Broward Cnty v. Finlayson, 555 So. 2d 1211, 1212 (Fla.
1990) (adjusting prejudgment interest award commencement date based on equitable grounds). See
generally In re Nat’l Consumer Mort., LLC, case no. 2:10-cv-930-PMP-PAL, 2014 WL 1873960
(D. Nev. May 8, 2014) (concluding prejudgment interest should run from the date the Trustee filed
the adversary action, because there was no evidence the transferee actually knew of or participated
in the fraudulent scheme and because the transferee was apprised of the exact sum claimed due upon
the filing of the adversary complaint); LaBella v. Bains, case no. 2012 WL 1976972 (S.D. Cal. 2012)
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(citing In re Slatkin, 243 F. App’x 255, 259 (9th Cir. 2007)) (despite plaintiff’s demand for
prejudgment interest from dates of disbursements from Ponzi schemer, court awarded it from date
action commenced against innocent investor); In re Ramirez-Rodriguez, 209 B.R. 424 (S.D. Texas
1997) (Ponzi scheme trustee entitled to prejudgment interest from commencement of action).
This conclusion is not inconsistent with Florida’s general rule concerning the payment of
prejudgment interest: “once damages are liquidated, prejudgment interest is considered an element
of damages as a matter of law, and the plaintiff is to be made whole from the date of the loss.” See
Finlayson, 555 So .2d at 1211 (quoting Argonaut Ins. Co. v. May Plumbing Co., 474 So. 2d 212 (Fla.
1985)). In Finlayson, the Florida Supreme Court found it would be unfair to permit emergency
medical technicians to recover interest for the time period preceding the date of their first demand
for overtime compensation, and rejected the argument that prejudgment interest should date back
to when the wages accrued. Finlayson, at 1213-1214 (citing Ball v. Pub. Health Trust of Dade Cnty.,
491 So. 2d 608 (Fla. 3rd DCA 1986)) (allowing prejudgment interest but restricting it to date action
commenced or date demand for payment made and rejecting entitlement to prejudgment interest
from date of overpayment).5 See also Validsa, Inc. v. PDVSA Services, Inc., 424 F. App’x 862 (11th
Cir. 2011) (affirming district court’s denial of prejudgment interest where award would result in
windfall because Validsa suffered no deprivation of funds of the type prejudgment interest is
designed to remedy); Flack v. Graham, 461 So .2d 82 (Fla. 1984) (finding two innocent victims,
the state and Flack, and deciding it would be grossly inequitable to make the state pay interest when
5

In Ball, the Florida court rejected the trustee’s argument that it was entitled to interest from
the date it overpaid the appellee, explaining that had the appellee become aware before the demand
that it had been given money which did not belong to it then it would have retained the money
wrongfully and from that time forward it would have had obvious obligations to return it and pay
interest until it did. Ball, 491 So. 2d at 610.
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Flack has made a full recovery of her salary). Balancing the equities in this particular case, as the
Eleventh Circuit dictates I must, I recommend the award of prejudgment interest be reduced from
the sum sought by the Receiver and that the Receiver should be awarded prejudgment interest from
January 13, 2010, the date the Receiver filed this action against Dancing $. See Blasland, supra
(trial court has sound discretion to balance the equities); Millenium, supra (“Although it appears that
there is no Florida or Eleventh Circuit caselaw on point, there is extensive Florida caselaw making
the right to recover prejudgment interest subject to equitable considerations.”).
5. prejudgment interest rate
The applicable interest rate is mandated by Fla. Stat. § 55.03. The Florida Chief Financial
Officer sets the prevailing rates each year, and the new prevailing interest rate applies to the interest
accruing each year.
D. Conclusion
For the reasons set forth herein, I RECOMMENDED that prejudgment interest be awarded
for the time period of January 13, 2010, the date of the filing of the complaint, through the date of
the judgment, January 23, 2013. I also RECOMMEND that counsel be directed to compute the
prejudgment interest due and so notify the Court of their computations by written filing by April 10,
2015, with any objections to such computations due by April 24, 2015.
REPORTED in Tampa, Florida, on March 27, 2015.

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NOTICE TO PARTIES
Failure to file written objections to the proposed findings and recommendations contained
in this report within fourteen (14) days from the date of its service shall bar an aggrieved party from
attacking the factual findings on appeal. 28 U.S.C. § 636(b)(1).

cc:

Hon. Elizabeth A. Kovachevich
Counsel of Record

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