Securities and Exchange Commission v. Watermark Financial Services Group, Inc. et al

Filing 234

ORDER CREATING A FAIR FUND, APPOINTING DISTRIBUTION AGENT AND ADOPTING DISTRIBUTION PLAN. Signed by William M. Skretny, Chief Judge U.S.D.C. on 4/30/2013. (CMD)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK
SECURITIES AND EXCHANGE COMMISSION,
08 CV 361S

Plaintiff,
v.
WATERMARK FINANCIAL SERVICES GROUP, INC.,
WATERMARK M-ONE HOLDINGS, INC., M-ONE
FINANCIAL SERVICES, LLC, WATERMARK CAPITAL
GROUP, LLC, GUY W. GANE, JR., LORENZO
ALTADONNA, THOMAS BRICK, and
DEBORAH GALAS,
Defendants,
and
GUY W. GANE, III, JENNA GANE, DENKON, INC., and
KONSTANTINOS SAMOUILIDIS,
Relief Defendants.

ORDER CREATING A FAIR FUND, APPOINTING
DISTRIBUTION AGENT AND ADOPTING DISTRIBUTION PLAN
WHEREAS, the Court has entered the following judgments and orders requiring
payments to the Court’s Registry Fund:
1. Order Fixing Amount of Disgorgement and Prejudgment Interest as to Defendant
Lorenzo Altadonna, entered April 4, 2011 (Dkt. 196), ordering Altadonna to pay
disgorgement of $1,866,867.90, plus prejudgment interest of $205,486.37, for a total of
$2,072,354.27;
2. Final Judgment as to Defendants Guy W. Gane, Jr., Watermark Financial Services
Group, Inc., Watermark M-One Holdings, Inc., M-One Financial Services, LLC, and
Watermark Capital Group, LLC, entered February 16, 2012 (Dkt. 202), ordering Gane
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and the Watermark entities to be jointly and severally liable, along with Thomas Brick
and Deborah Galas, for disgorgement of $5,835,425.70, reduced by payments made by
other parties, for a total of $5,299,478.21, plus prejudgment interest of $788,979.68, for a
total amount of $6,088,457.89;
3. Order Fixing Amount of Disgorgement and Prejudgment Interest as to Defendants
Thomas Brick and Deborah Galas, entered February 16, 2012 (Dkt. 203), ordered that
Brick and Galas are jointly and severally liable with the other defendants for
disgorgement of $5,835,425.70, reduced by payments made by other parties, for a total of
$5,299,478.21, together with prejudgment interest of $788,979.68, for a total of
$6,088,457.89, and that Brick and Galas each pay civil penalties of $100,000; and
4. Final Judgment as to Relief Defendants Konstantinos Samouilidis and Denkon Inc.,
entered February 16, 2012 (Dkt. 204), ordering that Samouilidis and Denkon are jointly
and severally liable for disgorgement of $972,000, reduced by the amount previously
paid, $482,545.17, for a total of $489,454.83, plus prejudgment interest of $67,184.29.
WHEREAS, pursuant to the aforementioned orders and judgments, as of April 11, 2013, the
Court’s Registry Fund in the Action contains $540,299.30; and
WHEREAS, the Court, having reviewed this Order Creating a Fair Fund, Appointing
Distribution Agent and Adopting Distribution Plan, and upon all prior proceedings and
submissions, and for good cause shown,
IT IS HEREBY ORDERED THAT, the Commission’s Motion for an Order Creating a
Fair Fund, Appointing a Distribution Agent, and Adopting a Distribution Plan (Docket No. 233)
is GRANTED.

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IT IS FURHER ORDERED THAT:
1.

The Watermark Fair Fund (“Fair Fund”) is hereby established pursuant to the Fair

Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended. The
Watermark Fair Fund shall consist of all funds deposited into the Court Registry in connection
with this action, inclusive of interest. The Watermark Fair Fund may also include funds received
from any proceeding brought by the United States Attorney’s Office relating to conduct arising
from the same violations alleged in this action.
2.

The Distribution Plan of the Fair Fund, set forth below, is hereby APPROVED.

3.

David Stoelting, of the Enforcement Division of the Securities and Exchange

Commission’s New York Regional Office, is hereby APPOINTED as the Distribution Agent for the
Fair Fund under this Distribution Plan.
DISTRIBUTION PLAN OF THE WATERMARK FAIR FUND

I. Overview
The Plan seeks to achieve the prompt, fair, and efficient allocation of the Fair Fund to
those injured investors that suffered a loss as a result of their investment with Watermark
Financial Services Group, Inc., Watermark M-One Holdings, Inc., M-One Financial Services,
LLC, and/or Watermark Capital Group, LLC (“Watermark Entities”). An investor who has
received back all of his or her initial investment is not entitled to any distribution under this Plan.
The Fair Fund includes all of the funds in the Registry Fund account established in this
action and any other amounts that may be subsequently paid into that account, including the
disgorgement, prejudgment interest, and civil penalty paid by the defendants, and any interest
earned on such amounts.
The Distribution Agent has identified the injured investors based on the Commission’s
review and analysis of the records of the Watermark Entities. The Distribution Agent will notify
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the injured investors that they may be entitled to a recovery from the Watermark Fair Fund and
the amount of their total loss. An injured investor so notified who agrees with the amount of the
loss does not have to do anything else in order to become eligible to recover from the Watermark
Fair Fund. Those investors not satisfied with the determination, whether as to the amount of the
recovery or as to their right to recover at all, or those investors who are not notified by the
Distribution Agent that they may be entitled to participate in the distribution, will have the option
of submitting a Proof of Claim Form. After evaluating all claims received, the Distribution
Agent will make a final determination concerning investors entitled to recover from the
Watermark Fair Fund and will provide the Court a report of its findings, including a list of
investors entitled to recovery1 and the portion of the funds that they will receive in the form of a
check. The Distribution Agent will then request that the Court authorize the Clerk of the Court
to prepare checks in the amounts determined by the Distribution Agent, and to mail those checks
to the injured investors.
II. Definitions
The following definitions shall apply to this Distribution Plan:
“Action” means the matter captioned Securities and Exchange Commission v. Watermark
Financial Services Group, Inc., et al., 08 CV 361(S) (W.D.N.Y.).
“Approved Claim” means the final amount of an Eligible Claimant’s claim that is
ultimately approved pursuant to the Distribution Plan.
“Available Distribution” means the Fair Fund, less any amounts expended or to be
expended for administering the Fair Fund (e.g., reasonable fees and expenses incurred or to be
incurred in administering the Distribution Plan and the payment of taxes on the Fair Fund).
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All investor personal information, including names and other identifying information will
be kept confidential in public filings.
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“Claims Packet” means all the materials to be provided to Pre-Qualified Claimants, and
to Potentially Eligible Claimants who request such, including a copy of the Distribution Plan
Notice and Proof of Claim Form (together with instructions for completion of Proof of Claim
Form).
“Claims Bar Date” means the date established in accordance with the Distribution Plan
by which a Potentially Eligible Claimant must file a Proof of Claim Form to avoid the barring of
any right of Potentially Eligible Claimants to participate in any distribution from the Fair Fund.
It is also the date established in accordance with the Distribution Plan by which a Pre-Qualified
Claimant may file a request for review of the determination of the investor’s eligibility to
participate in any distribution from the Fair Fund and/or the amount of the investor’s Eligible
Loss. The Claims Bar Date shall be no later than 90 days after the date of entry of an order
approving the Distribution Plan.
“Claim Deficiency Notice” means the notice sent by the Distribution Agent to a
Potentially Eligible Claimant or to a Pre-Qualified Claimant whose claim is deficient in one or
more ways such as, for example, failure to provide required information or documentation. The
Claim Deficiency Notice shall advise the claimant of the reason or reasons for the deficiency and
the opportunity to cure such deficiency. A Claim Deficiency Notice shall be provided no later
than 90 days after the Claims Bar Date.
“Court” means the United States District Court for the Western District of New York.
“Covered Period” means the period of time commencing on January 1, 2005 and
continuing through May 15, 2008.
“Days” means calendar days.

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“Distribution Agent” means David Stoelting, Senior Trial Counsel, Securities and
Exchange Commission, 3 World Financial Center, Room 400, New York, NY 10281.
“Distribution Plan Notice” means the notice given to Pre-Qualified Claimants and
Potentially Eligible Claimants of their potential right to participate in the distribution of the Fair
Fund and whether they need to file a Proof of Claim Form in order to so participate. The
Distribution Agent shall design the Distribution Plan Notice consistent with the provisions of the
Distribution Plan, and such notice shall include, at a minimum, a description of the Watermark
Entities scheme and the means of obtaining Claims Packets (including Proof of Claim Forms,
instructions for submitting Proof of Claim Forms, and the Claims Bar Date).
“Eligible Claimant” means (a) any Pre-Qualified Claimant, (b) any Pre-Qualified
Claimant that asserts a claim in a different amount than the amount identified by the
Commission, which claim is allowed following the filing of a Proof of Claim Form, and (c) any
Potentially Eligible Claimant with a claim allowed following the filing of a Proof of Claim Form.
Eligible Claimant does not include, in any event:
 Any Watermark Investor that fully recovered the principal amount invested with
Watermark Entities;
 Any defendant or relief defendant in the Action, and any heir, assign, distributee, spouse,
parent, child, or relative of such defendant or relief defendant;
 Any present or former officer, director, or employee of the Watermark Entities, and any
heir, assign, distributee, spouse, parent, child, relative, agent, attorney, or controlled
entity of any present or former officer, director, or employee of Watermark; and
 Any Person who, on or before the Claims Bar Date was the subject of any criminal action
or proceeding related to the violations alleged in the Commission’s complaint in this

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action, other than a Person fully found not guilty of any such criminal charges or as to
whom any such criminal charges were fully dismissed with prejudice as of the Claims
Bar Date, and any heir, assign, distributee, spouse, parent, child, relative, agent, attorney,
or controlled entity of any such Person.
“Eligible Loss” means the amount of loss an Eligible Claimant has incurred through the
investment with Watermark Entities during the Covered Period. The Eligible Loss shall be
calculated using the methodology selected by the Distribution Agent. The Eligible Loss shall be
the difference, if any, between the principal amount invested with the Watermark Entities during
the Covered Period, less any amounts received back from the Watermark Entities. Amounts
received by an investor from other sources, such as pursuant to judgments and restitution orders
in related cases brought by the United States Attorney’s Office, may also be taken into account.
Any “reinvestment” of principal shall be disallowed for the purpose of calculating the Eligible
Loss.
“Person” means natural individuals as well as legal entities including corporations,
partnerships, associations, limited liability entities, and governmental entities. All nouns,
pronouns, and any variations thereof in this Distribution Plan shall be deemed to refer to the
masculine, feminine, neuter, singular, or plural as the context may require.
“Potentially Eligible Claimant” means any Watermark Investor who may have a claim
to recover from the Fair Fund other than a Pre-Qualified Claimant.
“Pre-Qualified Claimant” means any Watermark Investor that the Distribution Agent
has identified as potentially eligible for a distribution from the Fair Fund under the Distribution
Plan and is not required to file a Proof of Claim Form in order to participate in the distribution.
If a Pre-Qualified Claimant does not agree with the Eligible Loss amount pre-determined by the

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Distribution Agent, such Person must file a Proof of Claim Form seeking the amount that Person
claims.
“Proof of Claim Form” means the form designed by the Distribution Agent in
accordance with the Distribution Plan for the filing of a proof of a claim, which form shall
require, at a minimum, sufficient documentation reflecting an investment with the Watermark
Entities during the Covered Period.
“Public Notice” means the notice published in a Buffalo, NY newspaper. Such notice
shall include, at a minimum, a statement that the Watermark Fair Fund relates to investments
with the Watermark Entities during the Covered Period and the means of obtaining a Claims
Packet.
“Tax Administrator” means Damasco & Associates, LLP, the Court-appointed Tax
Administrator in the Action pursuant to the Order Appointing Tax Administrator filed February
15, 2013 (Docket 227).
“Watermark Entities” means Watermark Financial Services Group, Inc., Watermark
M-One Holdings, Inc., M-One Financial Services, LLC, and Watermark Capital Group, LLC.
“Watermark Fair Fund” means all amounts paid or to be paid into the Registry Fund in
this matter, including accumulated interest. The Watermark Fair Fund may also include any
funds received from any proceeding brought by the United States Attorney’s Office related to
conduct arising from the same violations alleged in this action.
“Watermark Investor” means any Person who invested funds with the Watermark
Entities in connection with any offering alleged in the Amended Complaint during the Covered
Period.
III. Administration of the Claims Procedure

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A. General Administrative Provisions
The Distribution Agent shall oversee the administration of the claims, procedures, and
distribution as provided in this Distribution Plan. The Distribution Agent shall review the claims
of Potentially Eligible Claimants and Pre-Qualified Claimants, if any, and make determinations
under the criteria identified in this Distribution Plan as to such claimants’ eligibility to recover
and the amount of money to be distributed from the Fair Fund to Eligible Claimants in
accordance with the provisions of the Distribution Plan.
Any claim asserted by a Potentially Eligible Claimant or Pre-Qualified Claimant shall be
in writing and shall provide adequate documentary evidence to substantiate the claim, including
all documentary evidence which the Distribution Agent deems necessary or appropriate,
including but not limited to available account statements, copies of checks paid and received, and
investment certificates. All claims must be signed under penalty of perjury under the laws of the
United States.
The proceeds of the Fair Fund will be paid to the Eligible Claimants who have been
determined by the Distribution Agent to be eligible for a distribution from the Watermark Fair
Fund pursuant to the Distribution Plan as adopted by the Court.
The Distribution Agent, with the assistance of the Clerk of Court in issuing checks, shall
make pro rata distributions to Eligible Claimants taking into account each Eligible Claimant’s
Eligible Loss and the Available Distribution.
Payments shall be issued to Eligible Claimants who are entitled to receive a pro rata
distribution of at least $15.00. In determining the amount of the distribution for the purposes of
this paragraph, the Distribution Agent may aggregate the accounts held by a Person. Payments
will be issued to Eligible Claimants by check.

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To carry out the purposes of the Distribution Plan, the Distribution Agent may make
adjustments to the Distribution Plan, consistent with the purposes of the Distribution Plan. Any
such adjustments must be approved by the Court.
All determinations of the Distribution Agent that are made in accordance with the
provisions of the Distribution Plan are final and not subject to appeal.
B. Identification of and Notice to Claimants
1. Pre-Qualified Claimants
The Distribution Agent has identified Pre-Qualified Claimants through the review and
analysis of the records of the Watermark Entities.
Within 30 days following the entry by the Court of an order approving the Distribution
Plan, the Distribution Agent shall send by United States First Class Mail, a Claims Packet to
those Pre-Qualified Claimants known to the Distribution Agent.
For Pre-Qualified Claimants, the Claims Packet shall also include a notice that indicates
that they have either been determined to be: (a) eligible for a distribution from the Watermark
Fair Fund and the amount of their Eligible Loss; or (b) ineligible for a distribution from the
Watermark Fair Fund. This notice shall also inform Pre-Qualified Claimants of the rationale for
such determination and of their option to submit, by the Claims Bar Date, a Proof of Claim Form
seeking the reevaluation of the findings.
2. Potentially Eligible Claimants
To ensure that all injured investors are identified, and have the opportunity to file a claim,
the Distribution Agent shall, at the same time he is mailing Claims Packets to Pre-Qualified
Claimants, also publish a Public Notice in a Buffalo, NY newspaper (where the fraud occurred)
for a length of time he deems appropriate. In addition, the Distribution Agent shall post the

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Public Notice and other information relating to the distribution on the Commission’s web site,
www.sec.gov.
The Distribution Agent shall provide a Claims Packet to Potentially Eligible Claimants
upon request. Requests for a Claims Packet may be submitted by mail to Tracey A. Crichlow,
Securities and Exchange Commission, 3 World Financial Center, Suite 400, New York, NY
10281-1022, or by email to [e-mail].
C. Submission of Proof of Claim Form and Opportunity to Cure Claim
To avoid being barred from asserting a claim, all Proof of Claim Forms must be
submitted to the Distribution Agent by the Claims Bar Date.
The Distribution Agent shall review the claims of Potentially Eligible Claimants and PreQualified Claimants, if any, that are submitted by the Claims Bar Date and make determinations
under the criteria identified in this Distribution Plan as to the eligibility of such claimants to
recover monies and the amount of money to be distributed from the Fair Fund to Eligible
Claimants in accordance with the provisions of the Distribution Plan. The Distribution Agent
shall provide to each Pre-Qualified Claimant and each Potentially Eligible Claimant whose claim
is deficient in whole or in part, a Claim Deficiency Notice setting forth the reason or reasons why
the claim is deficient. The Claim Deficiency Notice shall be provided to affected Pre-Qualified
Claimants and Potentially Eligible Claimants not later than 90 days after the Claims Bar Date.
Any Pre-Qualified Claimant and Potentially Eligible Claimant who has received a Claim
Deficiency Notice shall have 30 days from the date of the Claim Deficiency Notice to cure any
identified deficiencies.

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The burden shall be on the claimant to ensure that all documents, including, but not
limited to, the Proof of Claim Form, have been properly and timely received by the Distribution
Agent.
D. Payment of Approved Claims
Within 180 days following the Claims Bar Date, the Distribution Agent shall prepare a
list of all Eligible Claimants and the Approved Claim for each Eligible Claimant. The
Distribution Agent shall petition the Court for the authority to distribute a specified distributable
amount from the Fair Fund to the Eligible Claimants. In recommending such distributable
amount to the Court, the Distribution Agent shall hold back a prudent reserve to take into
account any federal, state or local taxes payable in connection with the Distribution Plan, and for
the fees and expenses of the Tax Administrator.
Upon the Court’s approval to distribute the Fair Fund to the Eligible Claimants, the
Distribution Agent shall request the Clerk of the Court to distribute the proceeds of the Fair Fund
by issuing the distribution checks to Eligible Claimants. The Distribution Agent shall provide
the Clerk with all necessary information to effectuate the distribution including the names,
addresses and distribution amounts to be disbursed.
The Clerk shall make payments by check to each Eligible Claimant. All payments to
Eligible Claimants shall be preceded or accompanied by a communication that includes, as
appropriate:


a statement that the payment is a distribution of the Watermark Fair Fund
established by the Court in this action on motion of the Commission, in accordance
with Section 308(a) of the Sarbanes-Oxley Act;

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

a statement that the tax treatment of the distribution is the responsibility of
each recipient and that the recipient should consult his or her tax advisor for advice
regarding the tax treatment of the distribution;



a statement on all checks that checks will be valid for one year; and



the name of a person or entity to contact if the Eligible Claimant has any
questions regarding distribution.

Upon receipt and deposit of the distribution payment by an Eligible Claimant, such
Eligible Claimant shall be deemed to have released any and all claims that such Eligible
Claimant may have against the Commission, its employees, agents, and attorneys, in connection
with the Distribution Plan, and shall be deemed enjoined from prosecuting or asserting any such
claims.
Ninety (90) days after the remittance of the checks, the Distribution Agent shall obtain
information from the Clerk of the Court concerning checks that have not been negotiated. The
Distribution Agent shall then undertake good faith efforts for ninety (90) days to locate and
contact the intended recipients of the uncashed checks to ensure that the intended recipients have
a reasonable opportunity to participate in the distribution.
After one year from the date on the distribution checks, the Commission staff shall
contact the Clerk to obtain information regarding the amount of all uncashed checks. Checks
that are not negotiated within the one year period shall be voided, and the amounts shall be
placed in a residual account within the Fair Fund. If an Eligible Claimant’s check has not been
negotiated before the stale date and has been voided, that Eligible Claimant’s claim shall be
extinguished upon the occurrence of the stale date.

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If any portion of the Watermark Fair Fund remains undisbursed, the Distribution
Agent shall seek an order of the Court for approval of either: (a) a secondary distribution to
Eligible Claimants who have cashed their initial distribution check on a pro rata basis, provided
the remaining funds in the Fair Fund are sufficient to warrant the additional administrative cost
of a secondary distribution; or (b) sending of the remaining funds to the Commission for transfer
to the United States Treasury.
Following any secondary distribution to Eligible Claimants, any remaining funds shall be
sent to the Commission for transfer to the United States Treasury as described in Section E
below.
E. Fund Termination
The Distribution Agent shall make arrangements with the Tax Administrator for the final
payments of taxes and tax-related fees and the Distribution Agent shall submit a final accounting
to the Court. The Fair Fund shall be eligible for termination, and the Distribution Agent shall be
discharged, after all of the following have occurred: (1) all taxes, fees, and expenses have been
paid; (2) the final accounting has been submitted by the Distribution Agent for approval of, and
has been approved by, the Court; and (3) any amount remaining in the Fair Fund has been paid to
the Commission for transfer to the United States Treasury.
If for any reason funds remain in the Fair Fund six months after the Court has approved
the final accounting, the Clerk of the Court shall send the balance remaining, less Court fees, by
check to the order of the United States Securities and Exchange Commission. The check shall be
delivered or mailed to Enterprise Services Center, Accounts Receivable Branch, 6500 South
MacArthur Boulevard, Oklahoma City, OK 73169, under cover of a letter copied to the
Commission’s counsel of record that identifies the caption and number of this case and the name

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of this Court, and that indicates that the funds are being paid for deposit by the Comptroller,
United States Securities and Exchange Commission, into the United States Treasury, and, upon
receipt of such funds, the Office of Financial Management, United States Securities and
Exchange Commission, shall remit the funds to the United States Treasury. An additional copy
of said cover letter shall be sent to Robert J. Keyes, Associate Regional Director and Chief of
Regional Office Operations, U.S. Securities and Exchange Commission, Suite 400, 3 World
Financial Center, New York, NY 10281-1022.
IV. Responsibilities of the Distribution Agent
As a Commission employee, the Distribution Agent shall receive no compensation, other
than his regular salary, for his services in administering the Watermark Fair Fund. The Distribution
Agent shall be responsible for, among other things, overseeing the administration of the Watermark
Fair Fund, preparing accountings, cooperating with the Tax Administrator in providing the
information necessary to accomplish income tax compliance, distributing the Watermark Fair Fund
to the Eligible Claimant(s) in accordance with the Distribution Plan, and preparing a final
accounting.
V. Responsibilities of the Tax Administrator
The Watermark Fair Fund is a Qualified Settlement Fund (“QSF”) within the meaning of the
regulations issued under Section 468B(g) of the Internal Revenue Code of 1986, as amended. The
Tax Administrator is the administrator of such QSF, for purposes of Treas. Reg. § 1.468B-2(k)(3)(I),
and shall satisfy the tax related administrative requirements imposed by Treas. Reg. § 1.468B-2,
including, but not limited to:


Obtaining a tax payer identification number;

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

Making timely requests for funds necessary for the timely paying of all applicable
taxes, the timely payment of taxes for which the Tax Administrator has received
funds, and the filing of applicable returns; and



Fulfilling any information reporting or withholding requirements required for
distributions from the Watermark Far Fund.

The Distribution Agent shall cooperate with the Tax Administrator in providing any information
necessary to ensure income tax compliance.
VI. Payment of Costs, Fees, and Taxes, and Filing of Reports and Accountings
All taxes and the reasonable costs and fees of the Tax Administrator, and costs associated
with the administration of the Distribution Plan, including but not limited costs to publish
notices, shall be paid from the Fair Fund upon approval of the Court.
The Distribution Agent shall file a final report when his duties are completed. The report
shall include, among other things, an accounting of all monies received and distributed in
connection with the administration of the Distribution Plan.
VII. Other Rights and Powers
The Distribution Agent is entitled to rely on all outstanding rules of law and Court orders,
and shall not be liable to anyone for any action taken or omitted in connection with this
distribution plan except upon a finding by the Court that it, in bad faith or in reckless disregard
of its duties under the Distribution Plan, acted or failed to act. The Court retains exclusive
jurisdiction over all claims arising in connection with the distribution of the Fair Fund, including,
but not limited to, claims against the Distribution Agent asserting liability for violation of any
duty imposed under this Distribution Plan.
The Court reserves the right to amend the Distribution Plan from time to time, at the
request of the Distribution Agent, or at its own initiative, and retains jurisdiction over this matter
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for this purpose and for any and all other matters that may arise under or relate to the
Distribution Plan.
SO ORDERED.
Dated:

April 30, 2013
Buffalo, NY

s/William M. Skretny
WILLIAM M. SKRETNY
Chief Judge
United States District Court

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