Securities and Exchange Commission v. Lek Securities Corporation et al

Filing 48

MEMORANDUM OPINION AND ORDER....Avalons March 17, 2017 motion to access frozen funds is denied. (Signed by Judge Denise L. Cote on 3/29/2017) (gr)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------- X
:
SECURITIES AND EXCHANGE COMMISSION,
:
:
Plaintiff,
:
:
-v:
:
LEK SECURITIES CORPORATION, SAMUEL
:
LEK, VALI MANAGEMENT PARTNERS d/b/a
:
AVALON FA, LTD, NATHAN FAYYER and
:
SERGEY PUSTELNIK, a/k/a SERGE
:
PUSTELNIK
:
:
Defendants.
:
-------------------------------------- X

17cv1789 (DLC)
MEMORANDUM OPINION
AND ORDER

APPEARANCES
For the Securities and Exchange Commission:
David J. Gottesman
Robert A. Cohen
Olivia S. Choe
Sarah S. Nilson
U.S. Securities and Exchange Commission
100 F Street N.E.
Washington, DC 20549
For Avalon FA Ltd:
James M. Wines
Law Office of James M. Wines
1802 Stirrup Lane
Alexandria, VA 22308
For Avalon FA Ltd:
Steven Barentzen
Law Office of Steven Barentzen
375 Park Avenue, Suite 2607
New York, NY 10152
DENISE COTE, District Judge:
This motion arises out of an action by the SEC alleging
that defendants Lek Securities Corporation, Samuel Lek, Vali

Management Partners d/b/a Avalon FA Ltd (“Avalon”), Nathan
Fayyer, and Sergey Pustelnik engaged in layering and crossmarket manipulation schemes in violation of the Securities Act
of 1933 and the Securities Exchange Act of 1934.

On March 10,

2017, the Court entered an ex parte temporary restraining order
(“TRO”) with respect to the layering scheme, freezing certain
Avalon assets.

At a conference on March 13, the parties

requested that the preliminary injunction hearing be held on
August 2, 2017.

On March 17, Avalon moved to modify the TRO to

permit the release of funds in advance of the hearing to pay for
attorney’s fees and expenses and expert fees and expenses.
SEC filed its opposition on March 23.

The

For the following

reasons, Avalon’s motion is denied.
DISCUSSION
“The deterrent effect of an SEC enforcement action would be
greatly undermined if securities law violators were not required
to disgorge illicit profits.”

SEC v. Manor Nursing Ctrs., Inc.,

458 F.2d 1082, 1104 (2d Cir. 1972).

It is well settled that

district courts have authority, “upon a proper showing,” to
temporarily freeze assets that Congress has “determined are
appropriate for forfeiture.”

SEC v. Unifund SAL, 910 F.2d 1028,

1041-42 (2d Cir. 1990); see also Manor Nursing, 458 F.2d at
1106.

To modify a temporary restraining order freezing assets

to permit the payment of attorney’s fees or expert fees, the
2

applicant must establish that “such a modification is in the
interest of the defrauded investors.”

SEC v. Credit Bancorp

Ltd., 99cv11395, 2010 WL 768944, at *4 (S.D.N.Y. Mar. 8, 2010)
(citation omitted).

The applicant must establish both 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 at trial.”
SEC v. Stein, 07cv3125, 2009 WL 1181061, at *1 (S.D.N.Y. Apr.
30, 2009).

Applicants have no general right to use frozen

assets to pay legal fees, even if those funds are the only way
that they would be able to retain the attorney of their choice.
Credit Bancorp, 2010 WL 768944, at *3; see also SEC v. Coates,
94cv5361, 1994 WL 455558, at *3 (S.D.N.Y. Aug. 23, 1994).
Avalon has not met its burden of establishing that a
modification of the TRO is in the interest of investors.

The

amount of potential disgorgement for the alleged layering scheme
-- which the SEC estimates at more than $21 million –- far
exceeds the approximately $5.37 million in frozen assets.

To

avoid further depletion of funds, it is necessary to maintain
the freeze order pending the preliminary injunction hearing.
Avalon principally argues that the SEC will be unable to
show at the preliminary injunction hearing that Avalon or its
co-defendants violated federal securities law.

According to

Avalon, the SEC is seeking “an unprecedented and unwarranted
3

expansion of ‘manipulation’ liability.”

As discussed at some

length at the March 13 conference, the preliminary injunction
hearing will address not only the factual basis for the SEC’s
lawsuit but also the validity of its theory of liability.

The

parties agreed that expert testimony was essential for the
hearing, that expert reports should be exchanged in advance of
the hearing, and that the preliminary injunction hearing would
be held on August 2.

Accordingly, it is premature to revisit

the adequacy of the SEC’s showing of a violation.
CONCLUSION
Avalon’s March 17, 2017 motion to access frozen funds is
denied.
Dated:

New York, New York
March 29, 2017
________________________________
DENISE COTE
United States District Judge

4