Securities and Exchange Commission v. Alleca et al

Filing 144

OPINION AND ORDER denying The Meyers Group, Inc.'s Motion for Court Conference 132 and granting the Receiver's Motion to Modify Distribution 133 . Signed by Judge William S. Duffey, Jr on 11/16/17. (ddm)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
v.

1:12-cv-3261-WSD

ANGELO A. ALLECA, SUMMIT
WEALTH MANAGEMENT, INC.,
SUMMIT INVESTMENT FUND,
LP, ASSET CLASS
DIVERSIFICATION FUND, LP,
and PRIVATE CREDIT
OPPORTUNITIES FUND, LLC,
Defendants.

OPINION AND ORDER
This matter is before the Court on The Meyers Group, Inc.’s (“TMG”)
Motion for Court Conference [132] and Receiver Robert D. Terry’s (the
“Receiver”) Motion to Modify the Distribution Plan [133].
I.

BACKGROUND
A.

The Appointment of the Receiver

On September 18, 2012, the SEC filed its Complaint [1], asserting securities
fraud claims against Defendants Angelo A. Alleca (“Alleca”), Summit Wealth
Management, Inc (“SWM”), Summit Investment Fund, LP (“SIF”), Asset Class

Diversification Fund, LP (“ACDF”) and Private Credit Opportunities Fund, LLC
(“PCOF” and together with SIF and ACDF, the “Summit Funds”). The next day,
the Court froze Defendants’ assets and enjoined Defendants from violating the
securities laws. ([7]). On September 21, 2012, the Court appointed Robert D.
Terry as receiver for the estate of SWM and the Summit Funds (the “Receivership
Entities.”) ([9] at 2).
B.

The Receiver’s Distribution Plan

On June 6, 2017, the Receiver filed his original plan of distribution ([120],
as amended [125], the “Original Plan”), proposing to distribute the receivership
assets pursuant to the “rising tide” methodology. Under this allocation method:
[T]he Receiver will deduct the amount of a Claimant’s
pre-receivership withdrawals after calculating the investor’s pro rata
share of any distribution. If the result is negative—meaning that the
Claimant has already received pre-receivership withdrawals in excess
of his or her calculated pro rata share of a distribution—that Claimant
will not participate in that distribution, although he or she may
participate in later distributions. This method preserves assets for
those Claimants who have received nothing thus far and recognizes
that some Claimants have already recovered a substantial percentage
of their investment.
([120] at 18); see Commodity Futures Trading Comm’n v. Equity Fin. Grp., Inc.,
No. 04-cv-1512, 2005 WL 2143975, at *24 (D.N.J. Sept. 2, 2005) (discussing the
rising tide methodology). “If approved, after taking into account any money
received by investors prior to the Receivership, this distribution [plan] will
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represent a minimum recovery percentage among included Claimants of [14.5%].”
([120] at 14; [125] at 3; [125.1] at 1). On July 17, 2017, the Receiver filed minor
amendments to his Original Plan. ([125]).
As of the filing of the Receiver’s motion to approve the Original Plan, the
receivership had approximately $1,811,065 in cash, of which the Receiver sought
to distribute $1,394,736.25 to the claimants. ([120] at 14; [129] at 3). The
Receiver further sought to retain the remaining $416,328.75 “for the purposes of
paying accrued but unpaid expenses of the receivership (including the expenses of
the Receiver, his counsel and his accountants), to cover the cost of disposing of
Receivership Assets, terminating the Receivership, and other administrative costs.”
([120] at 14; [129] at 3).
C.

The September 19, 2017, Hearing

On September 19, 2017, the Court held a hearing on the Receiver’s Original
Plan, his Motion for Special Distribution, and Alexandria Capital’s Objection to
the Original Plan. Only the Receiver and his counsel attended the hearing. The
Receiver told the Court that his proposed Original Plan should be modified (the
“Modified Plan”) to ensure that claimants are treated consistently. (Plan of
Distribution Hearing Transcript (Sept. 19, 2017) (“Tr.”) at 3). Specifically, the
Receiver sought to cancel his proposed distributions to TMG and the Bank of
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North Georgia (“BNG”).1
The Original Plan proposed distributing $123,829.67 to TMG and
$28,722.08 to BNG. ([125.1] at 6). Both claims are based on promissory notes
under which Defendants agreed to pay the TMG and BNG a certain sum of money.
(Tr. at 3). Before the Receiver was appointed, Defendants paid some, but not all,
of the money owed to TMG and BNG under the promissory notes. The Original
Plan reduces the value of TMG’s and BNG’s “allowed claims”—that is, the
amount from which they are entitled to a 14.5% recovery—by the amount of the
partial payments they previously received. ([125.1] at 6). The Receiver argued at
the hearing that, to conform to his treatment of other claimants, the partial
payments should be deemed “pre-receivership withdrawals” rather than amounts
by which the “allowed claims” are reduced. The Receiver stated that, if the partial
payments constitute pre-receivership withdrawals, TMG and BNG are not entitled
to any distributions because they previously received more than 14.5% of the value
of their promissory notes. (Tr. at 3-4, 7-8, 10). The Receiver asked the Court to
approve the Original Plan except for the proposed distributions to TMG and BNG.
The Receiver provided further information about TMG to illustrate the basis
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Claimant 485 is the Bank of North Georgia. (Tr. at 8). The Receiver has not
disclosed the identity of Claimant 470 but it appears to be The Meyers Group, Inc.
(See [120] at 25; Tr. at 7 (referring to Claimant 470 generally as an “entity”)).
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of his request. He stated that, in 2010, TMG sold several brokerage accounts to
Defendants for $1,221,582. Defendants agreed to pay this purchase price in three
installments of $407,194. Defendants made the first payment but defaulted on the
remaining payments required under the promissory note. The Original Plan
reduces TMG’s $1,221,582 claim by $407,194, the amount of the payment that
TMG previously received from Defendants. This produces an allowed claim of
$814,338, from which the Original Plan proposed to distribute at least $118,086, or
14.5%, to TMG. (See [120] at 25; [125]). The Receiver argued at the hearing that
the allowed claim should be the full price of the promissory note, $1,221,582, and
that the $407,194 payment previously received by TMG should be deemed a
pre-receivership withdrawal. Because that prior payment ($407,194) exceeds
14.5% of the allowed claim ($1,221,582), the Receiver argued that TMG is not
entitled to receive a distribution.
D.

The September 21, 2017, Order

On September 21, 2017, the Court issued an order [131] (the “September 21
Order”) granting the Receiver’s Motion to Approve Plan of Distribution but
ordering the Receiver to withhold distributions to TMG and BNG. The Court
further ordered that the Receiver file a formal motion to modify the Original Plan
in order to allow TMG and BNG sufficient notice and opportunity to be heard.
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The Court admonished that if TMG or BNG failed to respond by October 26, 2017,
the Court may determine not to make a distribution to them.2
E.

The Motions

On October 4, 2017, TMG filed its Motion for a Court Conference. ([132]).
TMG seeks a Rule 1 conference to request (1) a stay of the September 21 Order to
allow TMG more time to object to the Modified Plan; (2) discovery prior to
objecting to the Modified Plan; (3) leave of court to file an action against the
Receiver for breach of fiduciary duty; and (4) a court-ordered settlement
conference.
On October 5, 2017, the Receiver filed his motion to modify the Original
Plan. ([137]). In seeking Court approval for its Modified Plan, the Receiver
repeated his position that a more equitable approach to TMG’s and BNG’s
distributions would be to calculate their allowed claims as the amount of their
original notes, as opposed to their original notes minus payments received prior to
the appointment of the Receiver. Both BNG and TMG would be entitled to a
distribution of zero because both claimants have received an amount of pre-

2

As of that date, BNG had not filed an Objection to the Modified Plan. The
modification as to BNG’s claim is approved.
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receivership payments in excess of the rising tide percentage (14.5%) of the
allowed claim.
Both motions were briefed simultaneously.
II.

DISCUSSION
A.

Legal Standard

“In equity receiverships resulting from SEC enforcement actions, district
courts have very broad powers and wide discretion to fashion remedies and
determine to whom and how the assets of the Receivership Estate will be
distributed.” SEC v. Homeland Commc’ns Corp., No. 07-cv-80802, 2010 WL
2035326, at *2 (S.D. Fla. May 24, 2010); see SEC v. Elliot, 953 F.2d 1560, 1566
(11th Cir. 1992) (“The district court has broad powers and wide discretion to
determine relief in an equity receivership. This discretion derives from the
inherent powers of an equity court to fashion relief.”) (citations omitted); see also
Bendall v. Lancer Mgmt. Grp., LLC, 523 F. App’x 554, 557 (11th Cir. 2013)
(“Any action by a trial court in supervising an equity receivership is committed to
his sound discretion and will not be disturbed unless there is a clear showing of
abuse.”) (citation and internal quotation marks omitted). “A distribution plan that
is supported by both the SEC and the receiver is entitled to deference from the
Court.” SEC v. Quan, No. 11-cv-723, 2015 WL 8328050, at *6 (D. Minn.
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Dec. 8, 2015), aff’d sub nom. SEC v. Quan, ___ F.3d ___, 2017 WL 3722453
(8th Cir. Aug. 30, 2017); see SEC v. Byers, 637 F. Supp. 2d 166, 175 (S.D.N.Y.
2009) (giving deference to a distribution plan proposed by the receiver and
supported by the SEC).
“[N]o specific distribution scheme is mandated so long as the distribution is
fair and equitable.” Homeland, 2010 WL 2035326, at *2. “[W]hen victims
seeking restitution occupy similar positions, a pro rata distribution is preferred.”
SEC v. Drucker, 318 F. Supp. 2d 1205, 1206 (N.D. Ga. 2004). “Thus, where a
victim seeking preferential treatment cannot materially distinguish his situation
from that of other victims, a pro rata distribution is recognized as the most
equitable solution.” Id. at 1207. “A ‘rising tide’ allocation, which the . . . Receiver
proposes here, results in a pro rata distribution of available assets to victims.”
SEC v. Detroit Mem’l Partners, LLC, No. 1:13-cv-1817, 2016 WL 6595942, at *5
(N.D. Ga. Nov. 8, 2016); see SEC v. Par., No. 2:07-cv-00919, 2010 WL 5394736,
at *3 (D.S.C. Feb. 10, 2010) (discussing “pro-rata payments based on the Rising
Tide calculation”).
B.

Analysis
1.

TMG’s Motion for a Conference

TMG moves the Court for a “Rule 1 conference” to discuss several requests
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that TMG would like heard prior to this Court’s approval of the Modified Plan,
including a stay of the September 21 Order, discovery into the Receiver’s
processes, leave of court to bring a negligence action against the Receiver, and a
court-ordered settlement conference. This Court’s standing order states that
“[s]cheduling, discovery, pre-trial and settlement conferences are efficient ways to
structure the processing of a case. The Court encourages the parties to request
them when counsel believes the conference will promote the goals of Rule 1 of the
Federal Rules of Civil Procedure.” (Standing Instructions Regarding Civil
Litigation, at 3). The goals of Rule 1 are “to secure the just, speedy, and
inexpensive determination of every action and proceeding.” Fed. R. Civ. P. 1.
The Court finds that a conference will not further the goals of Rule 1 but
instead will prolong the administration of the receivership. Formal motion practice
is adequate to address the arguments TMG raises in its Motion for Court
Conference.
First, TMG argues that the Court should use its inherent power to stay the
September 21 Order because its ability to object to the Plan “has been removed.”
([132] at 3). But the Court expressly provided TMG with an opportunity to object
to the Modified Plan. At the September 19th Plan of Distribution Hearing, the
Receiver moved for the modification orally, but the Court stated that TMG and
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BNG needed proper notice and an opportunity to be heard. The Court instructed
the Receiver to file a formal motion to modify his plan as to TMG and BNG, and
provided a briefing schedule for TMG and BNG, should they wish to object to the
modifications. Further, the Court ordered the Receiver to ensure that TMG and
BNG receive a copy of the September 21st Order and a copy of the Receiver’s
motion to modify the Distribution. The Court made clear that it would approve the
plan as to all claimants other than TMG and BNG.
In considering staying the September 21 Order, the Court considers the
prejudice to claimants other than TMG. The Court noted in its September 21
Order that its partial approval of the Original Plan allowed claimants other than the
TMG and BNG to receive distributions without further delay. The other claimants
have waited over five years to recover for their losses related to the underlying
Alleca Ponzi scheme. It would be unfair to further delay the recovery of these
victims in order to hear TMG’s objection. Furthermore, as the SEC points out,
“The Receivership will have assets exceeding the value of the recovery that TMG
seeks if the Court determines its objections to the Receiver’s recently proposed
amendment to the distribution plan to be meritorious, especially where the
Receivership will have retained assets exceeding the recovery that TMG seeks.”
([134] at 2).
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TMG also seeks discovery to aid its response to the Receiver’s Motion to
Modify the Distribution. ([132]). Specifically, TMG seeks discovery into the
factual allegations made in the Receiver’s original motion to approve its plan of
distribution and the current Motion to Modify. TMG states that “[h]ad the
Receiver sought to exclude TMG back in June . . . . TMG would have sought
discovery from the Receiver on how it calculated the ‘pre-receivership
withdrawals’ and why 2 of nearly 20 ‘trade creditors’ should be treated
differently.” ([132] at 3-4).
TMG links its purported need for discovery to the absence of affidavits
supporting the Receiver’s Modified Plan as purportedly required by Local Rule
7.1.A(1), which provides: “If allegations of fact are relied upon, supporting
affidavits must be attached to the memorandum of law.” The parties dispute the
scope and applicability of the Local Rules and whether TMG is a “party” to this
action in the traditional sense, thus warranting strict adherence to this Court’s
Standing Order and the Local Rules. As the Receiver correctly points out, the
Local Rules further hold that a court, “in its discretion, may” decline to consider a
motion that fails to conform to those rules. Further, as a general principle, “a
district court has extremely broad discretion in supervising an equity receivership
and in determining the appropriate procedures to be used in its administration.”
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FDIC v. Bernstein, 786 F.Supp. 170, 177-78 (E.D.N.Y. 1992). In the exercise of
that discretion, this Court finds that TMG has not stated a sufficient basis to
warrant the expense and delay attendant to discovery into the Receiver’s work
administering the Receivership.
Next, TMG seeks leave of court to file a breach of fiduciary duty action
against the Receiver. TMG claims that at the time that it reviewed the Original
Plan, it “decided not to bring a negligence action against the Receiver for its
incompetence in administering the estate.” ([132] ¶ 5). Thus, TMG admits that it
had considered bringing suit earlier in the administration of the receivership, but
only now raises the issue because it does not like the outcome of the process. Any
dispute about the Receiver’s administration of the receivership could have been
raised at any time. TMG has not set forth a sufficient factual basis for obtaining
leave of Court to sue the Receiver for his handling of TMG’s claims. Further,
TMG’s allegations related to the Receiver’s sale of the pieces of the Summit
business have been previously addressed by the Court. (See [85] at 3). TMG’s
request for leave to file suit against the Receiver is denied.
Finally, TMG requests that the Court order the Receiver and TMG to engage
in a settlement conference. The Court denies this request. TMG is free to contact
the Receiver and initiate settlement discussions on its own without court
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involvement.
2.

The Receiver’s Motion to Modify

Under the Modified Plan, the Receiver proposes to calculate TMG’s
distribution using what the Receiver feels is a more appropriate and equitable
measure of TMG’s “allowed claim.” The Receiver seeks to revise TMG’s allowed
claim to the amount of the promissory note, $1,221,583, as opposed to
$855,107.40 under the original plan, (which consisted of the $814,388 principal
balance remaining, plus fees, after one payment). The result of this change is that
after subtracting TMG’s pre-receivership payment, it would be awarded a
distribution of zero because TMG has received an amount of pre-receivership
payments in excess of the rising tide percentage (14.5%) of the allowed claim.
TMG objects to this modification. The substance of TMG’s objection is the
notion that the Receiver “failed to meet its burden” to explain why the SWF estate
should be combined with that of the Summit Funds. ([137] at 2-3). It argues that
claimants of SMW should be segregated from those of the Summit Funds because
SWF’s operations were sufficiently separate from the Summit Funds. In other
words, TMG claims that the assets of the receivership should be divided into
distinct pools, and that assets belonging to or recovered on behalf of SWF should
only be used to pay creditors of SWF, while claimants who were investors in the
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Summit Funds should only be able to recover assets distinctly belonging to each
fund. According to TMG, because the pre-receivership payment TMG received on
its promissory note was from SWM and not the Summit Funds, it was not a “fruit
of the Ponzi scheme.” TMG asserts that the purpose of excluding pre-receivership
payments is to decrease payments to those that invested voluntarily in the Summit
Funds, not trade creditors. TMG also objects that it is improper for the Receiver
to group trade creditors with Ponzi scheme victims.
TMG has not sufficiently articulated why, as a trade creditor, it should
receive preferential treatment over investor claimants. Indeed, its brief does not
cite any authority to support its argument that the Receivership should be divided
into distinct pools. Pooling was proper here, especially given that the claims
against the Summit Funds are intertwined with the liability of SWF. Here, the
Receiver has established that pooling all the funds is the most fair and equitable
means of administering the Receivership. See, e.g., SEC v. Founding Partners
Capital Management, 2014 WL 2993780, *6 (M.D Fla. 2009) (courts may
authorize the treatment of various receivership entities as one substantively pooled
estate for the purpose of distribution, upon good cause shown), citing SEC v. One
Equity Corp., 2:08–CV–667, 2011 WL 1002702, *1 (S.D. Ohio Mar.16, 2011)
(permitting pooling of six receivership entities upon good cause shown).
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III.

CONCLUSION
For the foregoing reasons,
IT IS HEREBY ORDERED that The Meyers Group, Inc.’s Motion for

Court Conference [132] is DENIED.
IT IS FURTHER ORDERED that the Receiver’s Motion to Modify
Distribution [133] is GRANTED.

SO ORDERED this 16th day of November, 2017.

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