Wiand v. Lee et al

Filing 169

ORDER adopting 163 REPORT AND RECOMMENDATION and incorporating by reference; the objections of both parties [164, 166] be overruled; the Receiver's motion for summary judgment 126 be granted; the Clerk is directed to enter judgment for th e Receiver and against the Lee Defendants in the amount of $935,631.51; the Receiver's renewed motion for partial summary judgment 97 be found to be moot; the Receiver's motion to strike report of Defendants' designated expert, Harold McFarland, and to Preclude His Testimony at Trial 136 be denied; the defendant's motion for summary judgment relating to statute of limitations 129 be denied; and the Receiver's request for pre-judgment interest be denied. The Clerk of Court is directed to close this case and to terminate any other pending motions. Signed by Judge Elizabeth A. Kovachevich on 1/23/2013. (SN)

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,
vs..

Case No. 8:10-CV-210-T-EAK-MAP

VERNON M. LEE, individually and as Trustee
of the VERNON M. LEE TRUST,
Defendants.
_______________________________________/

ORDER ADOPTING REPORT AND RECOMMENDATION

This cause is before the Court on the report and recommendation (R&R) issued by
Magistrate Judge Mark A. Pizzo on December 13, 2012 (Doc. 163). The magistrate judge
recommended that: 1) the Receiver’s motion for summary judgment (Doc. 126) be granted and
that the Clerk be directed to enter judgment for the Receiver and against the Lee Defendants in
the amount of $935,631.51; 2) the Receiver’s renewed motion for partial summary judgment
(Doc. 97) be found to be moot; 3) the Receiver’s motion to strike report of Defendants’
designated expert, Harold McFarland, and to Preclude His Testimony at Trial (Doc. 136) be
denied; 4) the Lee Defendants’ motion for summary judgment relating to statute of limitations
(Doc. 89) be denied; 5) all pending motions be denied; and 6) the Clerk be directed to close the

case. The R&R also recommended that the Receiver’s request for pre-judgment interest be
denied.
Pursuant to Rule 6.02, Rules of the United States District Court for the Middle District of
Florida, the parties had fourteen (14) days after service to file written objections to the proposed
findings and recommendations, or be barred from attacking the factual findings on appeal.
Objections and responses to objections to the report and recommendation were filed (Docs. 164,
166, 167 and 168).

STANDARD OF REVIEW
Under the Federal Magistrate’s Act (the “Act”), Congress vested Article III judges with
the power to authorize a United States Magistrate Judge to conduct evidentiary hearings. 28
U.S.C. § 636. A District Court Judge may designate a United States Magistrate Judge to conduct
hearings, including evidentiary hearings, in order to submit proposed findings of fact and
recommendations (i.e. R & R) for the disposition of motions for injunctive relief. 28 U.S.C. §
636(b)(1)(B). Section 636(b)(1) also states that a judge of the court shall make a de novo
determination of those portions of the R & R to which objection is made. 28 U.S.C. § 636(b)(1).
When a party makes a timely and specific objection to a finding of fact in the report and
recommendation, the district court should make a de novo review of the record with respect to
that factual issue. 28 U.S.C. § 636(b)(1); U.S. v. Raddatz, 447 U.S. 667 (1980); Jeffrey S. v.
State Board of Education of State of Georgia, 896 f.2d 507 (11th Cir. 1990). However, when
no timely and specific objections are filed, case law indicates that the court should review the
findings using a clearly erroneous standard. Gropp v. United Airlines, Inc., 817 F.Supp. 1558,
1562 (M.D. Fla. 1993).

DISCUSSION
A. Background
The Magistrate Judge filed an excellent Report and Recommendation, which this Court
incorporates by reference. Therein he outlined the basics of this cause. He stated:
This is one of many cases in this division emanating from a Securities Exchange
Commission enforcement action aimed at dealing with the aftermath of a massive ponzi
scheme perpetrated by Arthur Nadel, a hedge fund manager. See S.E.C. v. Arthur Nadel,
et al., Case No. 8:09-cv-87-T-26TBM. After the SEC’s action and the appointment of
Burton Wiand as the Receiver, Nadel pled guilty in the Southern District of New York to
a fifteen count indictment charging him with securities fraud, mail fraud, and wire fraud
surrounding the events precipitating the enforcement action. The Receiver has sued
numerous hedge fund investors, including Vernon M. Lee, individually and as Trustee of
the Vernon M. Lee Trust (“Lee Defendants”), seeking to claw back “false profits” under
two theories grounded on the same illegal scheme the indictment tracks: avoidance of
fraudulent transfers under Florida’s Uniform Fraudulent Transfer Act, Fla. Stat. §§
726.101, et seq. (“FUFTA”), and unjust enrichment.1 Currently, the Receiver moves for
summary judgment on a precise but critical issue to the determination of this action –
Nadel operated the hedge funds and Traders as a ponzi scheme during the distributions of
“false profits” to the Lee Defendants (see docs. 97, 126). (R&R pgs. 1-2).
Further, the R&R concisely set out the question before the Court: “...the case-specific questions
should be: Did Nadel operate the hedge funds and Traders as ponzi scheme when he made the
distributions to the Lee Defendants and if so, is the evidence so one-sided that the Receiver is
entitled to summary judgment on this issue as a matter of law?” (R&R pg. 5).
The R&R sets out the following information as to the position of these defendants, the
Lee Defendants, in the activity of Mr. Nadel:

1

These types of cases are often called “clawback” actions.

The Lee Defendants, like other investors, experienced a net gain or “false profits.”
According to Yip, the Lee Defendants’ investments included Lee’s personal accounts and
Lee’s Trust accounts. The following accounts had distributions that exceeded
contributions: Lee IRA into Traders ($327,493), Lee IRA into Valhalla ($93,262), Lee
IRA into Victory IRA ($186,738), Lee Roth IRA into Victory IRA ($338,086), Lee Trust
into Traders ($73,424), Lee Trust into Victory ($250,000).2 Conversely, the Lee Trust
contributed $200,000 more into the Scoop Real Estate account than it received in
distributions. See Amended Complaint, doc. 25, Ex. A; Yip Decl.¶ 3, Ex. 1 and 3, Sept.
28, 2012. Hence, these “false profits” amount to $1,069,002.60 (the amount received
from the scheme in excess of the amounts invested). Because the Receiver has already
recovered $133,371.09 from Kelvin Lee, the Receiver seeks to recover $935,631.51 in
this case. See Yip Decl. ¶ 3, Sept. 28, 2012; Receiver’s motion for summary judgment,
doc. 126 at p.1, n.1; n.4, supra. There is no genuine issue as to whether the Lee
Defendants invested in Traders and the hedge funds and received transfers from Traders
and the hedge funds in connection with his investments. See Morello Decl. ¶5, Ex. D and
E (Lee Defendants’ responses to Receiver’s First Set of Requests for Admissions), Sept.
28, 2012 (doc. 128). (R&R pgs. 20-21).
The Receiver seeks judgment from this Court in the amount of $935,631.51, the amount of the
“false profits,” and the Magistrate Judge recommends that the Court grant the request. The
Magistrate Judge succinctly says:
[T]he summary judgment record overwhelmingly points to the fact that Nadel operated
the hedge funds as a ponzi scheme by the time the Lee Defendants received their first
distribution in 2000. In sum, the Receiver’s forensic accountant confirms what Nadel
admitted in his criminal proceedings and that court adjudicated. Even when the summary
judgment record is viewed in the Lee Defendants’ favor, the Lee Defendants offer little to
overcome the Receiver’s properly supported motion. (R&R pgs. 13-14).
B. Objections
The Receiver filed objections to the R&R (Doc. 164) only as to the recommendation of
the Magistrate Judge that the request for pre-judgment interest be denied. The Receiver makes
arguments not raised before the Magistrate Judge but the Court is not persuaded by those
arguments. The Court agrees with the R&R that:

2

Nadel created and controlled Traders, an investment club, beginning in 1999. Wiand
Decl. ¶¶ 21 (doc. 98); Amended Complaint, ¶¶ 73-77 (Doc. 25).

An award (of prejudgment interest), however, is grounded in equity and not absolute.
Blasland, Bouck & Lee, Inc. v. City of North Miami, 283 F.3d 1286, 1297-98 (11th Cir.
2002) (applying Florida law). Florida courts apply various considerations when
evaluating the equities: the extent the plaintiff’s conduct contributed to the delay between
the injury and judgment; whether the prevailing party failed to mitigate damages; in
matters involving public bodies, and in choosing between innocent victims, it is
inequitable to put the burden of paying interest on the public. Id. The list is obviously
illustrative as each case is different. But the driving focus demands balancing the
equities at hand. As the Florida supreme court (sic) has said: “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.” Flack
v. Graham, 461 So.2d 82, 84 (Fla. 1984) quoting Board of Commissioners of Jackson
County v. United States, 308 U.S. 343, 352 (1939). (R&R pgs. 37-38).
The Court find that the equities support the denial of the request for prejudgment interest.
The Defendant filed objections to the report and recommendation (Doc. 166) and the
Receiver responded thereto (Doc. 168). The Defendant seeks denial of the motion for summary
judgment on two bases: 1) the money transferred to the defendant was not “property” of Nadel
under Florida Uniform Fraudulent Transfer Act (FUFTA), Section 726.101, et seq, Fla. Stat.; 2)
whether reasonably equivalent value is exchanged for a transfer is a “fact intensive question for
the jury;” and 3) the judgment amount is incorrect and should be reduced. The Court finds the
excellent analysis of the Report and Recommendation and the arguments of the Receiver
persuasive on all of the issues raised in the objections of the defendant and incorporates them by
reference herein.
The Court finds this case, along with the other Wiand cases, to be unfortunate all the way
around. The people involved with Mr. Nadel and his schemes were many. Ms Yip opined that:
...Nadel, in combination with Christopher Moody and Neil Moody, raised $327 million
from investors in connection with more than 700 investor accounts between May 1999
and January 2009. See Yip Decl. ¶¶ 47-48, March 23, 2012; Revisions to Yip Decl. ¶8,
July 19, 2012... (R&R pg.17).

These people were injured and may never be made whole. The role of the Receiver in
this case, and similar cases, is to “to bring suits under UFTA against ponzi scheme investors to
the extent that investors have received payments in excess of the amounts invested and those
payments are avoidable as fraudulent transfers. Donell v. Kowell, 533 F.3d 762, 770 (9th Cir.
2008) (‘the policy justification is ratable distribution of remaining assets among all defrauded
investors’). Hence, the innocent ‘winners’ in a ponzi scheme should not be permitted to ‘enjoy
an advantage over later investors sucked into the ponzi scheme who were not so lucky.’ Id.
citing In re United Energy Corp., 944 F.2d 589, 596 (9th Cir. 1991).” (R&R pgs. 9-10).
The Court has reviewed the report and recommendation and made an independent review
of the record. Upon due consideration, the Court concurs with the report and recommendation.
Accordingly, it is
ORDERED that the report and recommendation, December 13, 2012 (Doc. 163) be
adopted and incorporated by reference; the objections of both parties (Docs.164 and 166) be
overruled; the Receiver’s motion for summary judgment (Doc. 126) be granted; the Clerk is
directed to enter judgment for the Receiver and against the Lee Defendants in the amount of
$935,631.51; the Receiver's renewed motion for partial summary judgment (Doc. 97) be found
to be moot; the Receiver’s motion to strike report of Defendants’ designated expert, Harold
McFarland, and to Preclude His Testimony at Trial (Doc. 136) be denied; the defendant’s
motion

for summary judgment relating to statute of limitations (Doc. 129) be denied; and the Receiver’s
request for pre-judgment interest be denied. The Clerk of Court is directed to close this case and
to terminate any other pending motions.
DONE and ORDERED in Chambers, in Tampa, Florida, this 23rd day of January,
2013.

Copies to:
All parties and counsel of record
Assigned Magistrate Judge