United States Securities and Exchange Commission v. Crypto Traders Management, LLC et al
Filing
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MEMORANDUM DECISION AND ORDER. Defendants Second Motion for Limited Relief from Writ of Attachment and Motion for Relief from Temporary Restraining Order, andMotion for Leave to File for Chapter 11 Bankruptcy Relief (Case No. 2:20-cv-00352-BLW, Dkt. 54; Case No. 2:21-cv-00103-BLW, Dkt. 11 ) isDENIED without prejudice. Defendants Motion for Expedited Omnibus Hearing (Case No. 2:20- cv-00352-BLW, Dkt. 70; Case No. 2:21-cv-00103-BLW, Dkt. 26 ) isDENIED. Signed by Judge B. Lynn Winmill. ((alw)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO
UNITED STATES SECURITIES
AND EXCHANGE COMMISSION,
Case No. 2:21-cv-00103-BLW
MEMORANDUM DECISION
AND ORDER
Plaintiffs,
v.
SHAWN CUTTING,
Defendant,
and
CRYPTO TRADERS
MANAGEMENT, LLC, JANINE
CUTTING, GOLDEN CROSS
INVESTMENTS, LLC, LAKE VIEW
TRUST,
Relief Defendants.
INTRODUCTION
Before the Court is Defendants’ Second Motion for Limited Relief from
Writ of Attachment and Motion for Relief from Temporary Restraining Order, and
Motion for Leave to File for Chapter 11 Bankruptcy Relief, which was filed in
Powell v. Crypto Traders Management, LLC, Case No. 2:20-cv-00352-BLW (Dkt.
MEMORANDUM DECISION AND ORDER - 1
54) and United States Securities and Exchange Commission v. Cutting, et al., Case
No. 2:21-cv-00103-BLW. (Dkt. 11).1 The motion is fully briefed and at issue. The
Court has determined that oral argument will not significantly aid in ruling on the
motion. Since Defendants filed the motion in both cases, the Court will address the
motion in a single order, to be filed in both cases.
BACKGROUND
On February 4, 2021 this Court issued an Order granting the petition for a
writ of attachment filed by Plaintiffs Merav Knafo and David Powell in Powell v.
Crypto Traders Management, LLC. On March 15, 2021 the Court issued a writ of
attachment for property located in Bonner County, Idaho, including the Creekridge
Estates Lots 2 and 7 at issue here.
In United States Securities and Exchange Commission v. Cutting, et al. the
Court issued a temporary restraining order based on findings that the SEC
established a prima facie case that Cutting defrauded investors and a reasonable
likelihood of future violations of the antifraud provisions of the Securities Act of
1
Defendants and Plaintiffs have additional motions pending in Powell v. Crypto Traders
Management, LLC, Case No. 2:20-cv-00352-BLW that will be addressed by separate order in
that case.
MEMORANDUM DECISION AND ORDER - 2
1933 and the Securities Exchange Act of 1934. The TRO provided several forms
of relief, including freezing up to $13.8 million of Defendants’ and Relief
Defendants’ assets and prohibiting any transfer, encumbrance or distribution of
assets. Defendants later joined the SEC in a motion for entry of a Stipulated
Preliminary Injunction, Asset Freeze, and Order Granting Other Relief which
extends the relief granted in the TRO until a final disposition of the action or
further Court order. The Court entered the Stipulated Order on March 17, 2021.
Defendants now seek relief from both the writ of attachment and the
Stipulated Order for the purpose of selling the Creekridge Estates Lots 2 and 7 and
using sale proceeds to pay attorney’s fees. They also seek leave to file Chapter 11
Bankruptcy. Powell and Knafo oppose the motion for relief from the writ of
attachment and the motion for leave to file Chapter 11 Bankruptcy. The SEC does
not oppose an amendment to the Stipulated Order to allow the sale of the property,
but requests that the proceeds of the sale be deposited in an account subject to the
asset freeze. The SEC also opposes the motion for leave to file Chapter 11
Bankruptcy.
ANALYSIS
A.
Motion for Relief from Writ of Attachment and Temporary
Restraining Order
Defendants first seek relief from the writ of attachment issued in Powell v.
MEMORANDUM DECISION AND ORDER - 3
Crypto Traders Management, LLC and the TRO and Stipulated Order entered in
United States Securities and Exchange Commission v. Cutting, et al. in order to
sell Creekridge Estates Lots 2 and 7. They also ask the Court to release $75,000 of
the sale proceeds to pay attorney’s fees.
1. Motion for Relief from Writ of Attachment
First, the Court will address the motion for relief from the writ of attachment
issued in Powell v. Crypto Traders Management, LLC. Under Idaho law, a plaintiff
may obtain a prejudgment writ of attachment for property of a defendant “as
security for the satisfaction of any judgment that may be recovered” for an action
upon a contract and a claim of fraudulent conveyance. I.C. §§ 8-501 et seq., 55913, 55-916. Idaho law sets forth two ways a defendant may obtain relief from a
writ of attachment: (1) a “defendant may retain or require the return of all or any
portion of the property upon filing with the court a written undertaking;” or (2) a
defendant may move to discharge the writ of attachment if the writ was
“improperly or irregularly issued.” I.C. §§ 8-506C, 8-534.
The Court previously conducted a show cause hearing in Powell v. Crypto
Traders Management, LLC where the Defendants were given the opportunity to
show cause why a writ of attachment should not issue in that case. Following the
hearing, the Court determined that there is a reasonable probability that Powell and
MEMORANDUM DECISION AND ORDER - 4
Knafo would prevail on their claim that Defendants engaged in fraudulent transfers
and were entitled to a writ of attachment for Creekridge Estates Lots 2 and 7.
(Case. No. 2:20-cv-00352-BLW, Dkt. 40). Since Powell and Knafo established
they are entitled to attach the lots, the burden is on the Defendants to show they are
entitled to relief from the writ of attachment in order to sell the lots. However,
Defendants have not alleged here that the writ was improperly or irregularly issued
or filed a written undertaking with the Court to require the return of the lots.
Further, Defendants have not cited, and the Court has not located, any other
grounds upon which the Court may modify the writ of attachment to release the
lots for sale. Accordingly, the motion for relief from the writ of attachment is
denied without prejudice.
2. Motion for Relief from Temporary Restraining Order
Defendants also seek modification of the TRO and Stipulated Order entered
in United States Securities and Exchange Commission v. Cutting, et al. to permit
the sale of the Creekridge Estates Lots 2 and 7 and to allow them to use proceeds
from the sale to pay attorney’s fees. The SEC does not object to modification of
the TRO and Stipulated Order to permit Defendants to sell the Creekridge Estates
Lots if appropriate safeguards are in place. However, it appears that the SEC does
object to the release of funds from the sale to pay attorney’s fees.
MEMORANDUM DECISION AND ORDER - 5
A district court has discretion to permit payment of attorney’s fees out of
frozen assets. Commodity Futures Trading Comm’n v. Noble Metals Int’l, Inc., 67
F.3d 766, 775 (9th Cir. 1995). “In a civil action, including enforcement actions
brought by the SEC, a “defendant must establish that the funds he seeks to release
are untainted and that there are sufficient funds to satisfy any disgorgement remedy
that might be ordered in the event a violation is established.” SEC v. Santillo, No.
18-CV-5491 (JGK), 2018 WL 3392881, at *4 (S.D.N.Y. July 11, 2018). A request
for the release of frozen assets to pay attorney’s fees may be denied where the
frozen assets fall short of a potential disgorgement order – even where the funds
are from an untainted source. See Noble Metals, 67 F.3d at 775; SEC v. Current
Fin. Servs., 62 F. Supp. 2d 66, 68 (D.D.C. 1999).
Here, the Court froze up to $13.8 million of Defendants’ and Relief
Defendants’ assets. This amount was based on a potential award of disgorgement
in the amount of $6.9 million and a civil penalty for the same amount. The Court
also ordered Defendants to account for their assets. Defendants have not
established that there are sufficient frozen assets to satisfy the estimated
disgorgement. Therefore, the Court finds that a modification of the TRO and
Stipulated Order to permit the sale of the lots and release funds to pay attorney’s
fees is not warranted at this time.
MEMORANDUM DECISION AND ORDER - 6
B.
Motion for Leave to File Chapter 11 Bankruptcy
Defendants seek relief from the writ of attachment and the TRO and
Stipulated Order to file Chapter 11 Bankruptcy. Although the writ of attachment in
Powell v. Crypto Traders Management, LLC does not prohibit the filing of a
bankruptcy petition by Defendants without leave from the Court, the TRO issued
by the Court and the preliminary injunction stipulated to by the Defendants in
United States Securities and Exchange Commission v. Cutting, et al. both
expressly prohibit the defendants from filing bankruptcy.
The “central purpose of an asset freeze is to preserve funds to satisfy a
potential disgorgement order.” Santillo, 2018 WL 3392881, at *3. Modifying the
TRO and Stipulated Order to permit Defendants to file bankruptcy has the
potential to defeat the purpose of the asset freeze. Although Defendants assert that
filing a Chapter 11 bankruptcy petition would benefit all plaintiffs in these actions,
they have provided little evidence to support this claim. The Court does not have
sufficient information about Defendants’ financial condition or any intervening
change of circumstances that establish Defendants should be relieved from the
TRO issued by the Court or the bargained-for agreement in which the Defendants
agreed to forego their right to file bankruptcy. Accordingly, the motion for leave to
file Chapter 11 Bankruptcy will be denied.
MEMORANDUM DECISION AND ORDER - 7
ORDER
IT IS ORDERED that:
1.
Defendants’ Second Motion for Limited Relief from Writ of
Attachment and Motion for Relief from Temporary Restraining Order, and
Motion for Leave to File for Chapter 11 Bankruptcy Relief (Case No. 2:20cv-00352-BLW, Dkt. 54; Case No. 2:21-cv-00103-BLW, Dkt. 11) is
DENIED without prejudice.
2.
Defendants’ Motion for Expedited Omnibus Hearing (Case No. 2:20-
cv-00352-BLW, Dkt. 70; Case No. 2:21-cv-00103-BLW, Dkt. 26) is
DENIED.
3.
Defendant’s Second Motion for Expedited Omnibus Hearing (Case
No. 2:20-cv-00352-BLW, Dkt. 78) is DENIED.
DATED: July 13, 2021
_________________________
B. Lynn Winmill
U.S. District Court Judge
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