Securities and Exchange Commission v. Lek Securities Corporation et al

Filing 584

MEMORANDUM OPINION AND ORDER re: 576 MOTION for Release of Funds To Pay Earned Legal Fees and Expenses. filed by Vali Management Partners. Accordingly, it is hereby ORDERED that the Defendants' April 10 motion is denied. SO ORDERED. (Signed by Judge Denise L. Cote on 6/5/2020) (jca)

Case 1:17-cv-01789-DLC Document 584 Filed 06/05/20 Page 1 of 6

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-----------------------------------SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
-vLEK SECURITIES CORPORATION, SAMUEL
LEK, VALI MANAGEMENT PARTNERS dba
AVALON FA LTD, NATHAN FAYYER, and
SERGEY PUSTELNIK,
Defendants.
-----------------------------------Appearances

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17cv1789 (DLC)
MEMORANDUM
OPINION AND
ORDER

For the plaintiff:
David J. Gottesman
Olivia S. Choe
Sarah S. Nilson
U.S. Securities and Exchange Commission
100 F Street N.E.
Washington, D.C. 20549
For the defendants:
James M. Wines
Law Office of James Wines
1802 Stirrup Lane
Alexandria, VA 22308
DENISE COTE, District Judge:
This case was filed on March 10, 2017.

On the same day,

the Court entered a temporary restraining order (the “freeze
order”) freezing approximately $5.5 million in assets (the
“frozen funds”) of defendant Vali Management Partners dba Avalon
FA Ltd (“Avalon”).

On November 12, 2019, following a trial, a

jury found that Nathan Fayyer, Sergey Pustelnik, and Avalon

Case 1:17-cv-01789-DLC Document 584 Filed 06/05/20 Page 2 of 6

(collectively, the “Defendants”) had violated several anti-fraud
and anti-manipulation provisions of the Securities Exchange Act
of 1934 and the Securities Act of 1933.

On March 20, 2020, the

Court largely granted plaintiff Securities and Exchange
Commission’s (the “SEC”) motion for judgement including
remedies.

Sec. & Exch. Comm’n v. Lek Sec. Corp., No. 17CV1789

(DLC), 2020 WL 1316911, at *1 (S.D.N.Y. Mar. 20, 2020) (the
“Remedies Opinion”).
On April 10, 2020, the Defendants filed a motion seeking
the release of $191,600 from the frozen funds to satisfy
outstanding legal expenses.

The SEC opposed the release of

funds to the Defendants’ counsel on April 24.

The motion became

fully submitted on May 1.
Meanwhile, the Court entered final judgment on April 14,
2020.

In addition to injunctive relief, the Court found the

defendants jointly and severally liable for $4,627,314 in
disgorgement and prejudgment interest.
assessed $5 million in civil penalties.

Each defendant was also
Approximately $1

million of the frozen assets remained after application of the
funds to disgorgement and prejudgment interest.

On April 28,

2020, the Clerk of Court distributed $2,633,146.32 of the frozen
assets and defendant Lek Securities Corporation surrendered
$2,650,452.29 of funds that were held in its accounts for the
benefit of Avalon and that were subject to the freeze order.
2

On

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May 27, 2020, the SEC acknowledged receipt of these funds and
represented that they satisfied the disgorgement amount,
prejudgment interest, and a portion of Avalon’s civil penalty.
Avalon remains liable for the remainder of its civil penalty -totaling $4,343,715.39 -- while Fayyer and Pustelnik are liable
for the full $5 million in civil penalties.
“It is well established that Section 22(a) of the
Securities Act of 1933 and Section 27 of the Securities Exchange
Act of 1934 confer general equity powers upon the district
courts that are invoked by a showing of a securities law
violation.”

Smith v. S.E.C., 653 F.3d 121, 127 (2d Cir. 2011)

(citation omitted).

“Once the equity jurisdiction of the

district court properly has been invoked, the court has power to
order all equitable relief necessary under the circumstances.”
Id. (citation omitted).

“The purpose of such an asset freeze is

to ensure that any funds that may become due can be collected.”
Id. (citation omitted).

Asset freeze orders in SEC enforcement

cases may be granted “in an amount sufficient to cover not just
the profits that might have to be disgorged but the civil
penalty.”

S.E.C. v. Unifund SAL, 910 F.2d 1028, 1041 (2d Cir.

1990); S.E.C. v. Compania Internacional Financiera S.A., No. 11
CIV 4904 DLC, 2011 WL 3251813, at *12 (S.D.N.Y. July 29, 2011)
(“[T]he Second Circuit has authorized an order freezing both the
amount of disgorgement and . . . civil penalt[ies].”).
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As this Court explained in denying Avalon’s motion to
access the frozen funds before trial to pay attorney’s fees,
“[t]o modify a temporary restraining order freezing assets to
permit the payment of attorney’s fees or expert fees, the
applicant must establish that such a modification is in the
interest of the defrauded investors.”

Sec. & Exch. Comm’n v.

Lek Sec. Corp., No. 17CV1789 (DLC), 2017 WL 1184318, at *1
(S.D.N.Y. Mar. 29, 2017) (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.”

Id. (emphasis supplied)

(citation omitted).
The Defendants’ April 10 motion is denied.

Defendants

apparently agree that the frozen funds can be used satisfy the
disgorgement award and the civil penalties set forth in the
April 14 final judgment.

They argue, however, that principles

of equity counsel in favor of allowing the Defendants to access
the frozen funds for outstanding legal fees.

They do not.

First, the Defendants do not suggest that the funds they
now seek to use for their personal legal debts were untainted by
illegality.

Although the frozen assets exceed the disgorgement

amount, they pale in comparison to the sum generated by the
Defendants’ illegal market manipulation; as described in the
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Case 1:17-cv-01789-DLC Document 584 Filed 06/05/20 Page 5 of 6

Remedies Opinion, the revenue that could be traced to illegal
activity exceeded $29 million. 1

Sec. & Exch. Comm’n v. Lek Sec.

Corp., 2020 WL 1316911, at *2.
Second, the Defendants offer no evidence that they are
unable to pay counsel.

In their brief in opposition to the

SEC’s motion for judgment including remedies, Fayyer and
Pustelnik asserted that they have limited resources.

Defendants

have not, at any stage, provided evidence of Avalon’s financial
condition.

Furthermore, as the Court explained in the Remedies

Opinion, Fayyer and Pustelnik’s current financial condition does
not foreclose their being able to satisfy the obligations that
they incurred as a result of their years-long schemes to
manipulate the securities markets.
Nor does denying access to the frozen funds imperil the
Defendants’ right to a fair trial.

In contrast to the cases

upon which the Defendants rely, they have not claimed that due
process demands that they have access to the funds to pay
counsel.

Having already been found liable by a jury with the

full benefit of their attorneys, their fair trial rights have
been fully vindicated.
Accordingly, it is hereby

The remainder of the revenue generated by the Defendants’
securities fraud was distributed to Avalon’s traders. Sec. &
Exch. Comm’n v. Lek Sec. Corp., 2020 WL 1316911, at *2.
1

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Case 1:17-cv-01789-DLC Document 584 Filed 06/05/20 Page 6 of 6

ORDERED that the Defendants’ April 10 motion is denied.
SO ORDERED:
Dated:

New York, New York
June 5, 2020
__________________________
DENISE COTE
United States District Judge

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