Securities and Exchange Commission v. Rubera et al
Filing
1124
Opinion and Order. The Court awards the Receiver $292,419.50 in fees and $1,428.81 in costs. Offset against the $256,447.94 the Receiver took in "unauthorized advances" results in a balance of $37,400.37 owed to the Re ceiver. The Court awards Allen Matkins $473,586.36 in fees and $38,770.23 in costs. The Court awards Foster Pepper $47,802.76 in fees and $2,814.79 in costs. The Court awards Barclay $65,049.26 in fees and $202.56 in costs. The Court awards LECG $34,542.50 in fees and $235.56 in costs. Signed on 3/6/2013 by Judge Owen M. Panner. (dkj)
UNITED STATES DISTRICT COURT
DISTRICT OF OREGON
IN RE ALPHA TELCOM,
INC., et al.
. 03:01-cv-1283-PA
OPINION AND ORDER
PANNER, J.
Before the Court are final fee applications of the Receiver
and his professionals.
The Court will issue another Order
regarding the Distribution Plan.
Overview
Thomas F. Lennon, the Receiver appointed 1 to manage the
affairs of Alpha Telcom,
Inc. and its sister companies, advised
the Court that further efforts to recover additional assets were
unlikely to generate sufficient revenue to justify the expense
and recommended this "case be closed following final distribution
to investors, the Receiver, and his Professionals."
On August 14, 2008, the Court entered an
# 712) accepting that recommendation.
o~der
(docket
The Court concluded that
On October 30, 2009, the Receiver was replaced by a
Distribution Agent.
Order Replacing Receiver Thomas F. Lennon
with Michael A. Grassmueck as Distribution Agent (docket # 956).
1 - OPINION AND ORDER
"[f]urther activity by the Receiver and his attorneys would
merely risk squandering, on legal fees and other expenses, what
little money remains.
Winding up the Receivership is the best
option, compared to the alternatives."
Id., p. 2.
The next consideration was how to distribute the limited
funds remaining in the Receivership.
The Receiver recommended
that the first priority be to pay "administrative expenses,"
including applications
~or
fees and expenses by the Receiver, his
attorneys, and accountants, totaling approximately $1.31 million
(excluding amounts previously paid as interim awards of fees and
expenses).
A further $50,000 was to be set aside to cover the
anticipated costs of winding up the Receivership, such as
preparing final accountings and tax returns, destroying
documents, and distributing any remaining funds.
The Receiver
estimated that after payment of administrative expenses, less
than $500,000 would remain to distribute to the thousands of
payphone investors.
Background
In reading hundreds of comment forms received by the Court,
it is apparent that many payphone investors have difficulty
understanding that their investment is gone and why.
deserve an explanation.
They
Those facts also are germane to the
Court's resolution of the issues remaining in this case.
Alpha Telcom began as a modest-sized company operating pay
telephones and providing some business telephone services.
2 - OPINION AND ORDER
The company subsequently changed its business model.
Alpha
Telcom and its sister companies and subsidiaries (collectively
referred to here as "Alpha Telcom")
telephones, priced at $5,000 each. 3
2
began "selling" pay
What buyers unwittingly
purchased was in fact not a payphone or a "business opportunity,"
as Alpha sought to characterize it, but rather an unregistered
security.
See SEC v. Rubera, 187 F. Supp. 2d 1250, 1258-60
(D. Or. 2002)
("Rubera"), aff'd, 350 F. 3d 1084
(9th Cir. 2003).
Alpha Telcom promised to furnish the payphone, find it a
suitable location, install and maintain it, negotiate contracts
and obtain regulatory approvals, collect revenues, pay the
monthly utility and telephone bills, and then remit to the
investor 30% of the net revenue from that particular pay
telephone.
Alpha Telcom would retain the other 70% as
compensation for its services.
Rubera, 187 F. Supp. 2d at 1255.
2
For legal and accounting reasons, Alpha and its owner
Paul·Rubera eventually divided functions among two entities.
Though presented as a package, most investors signed a "Telephone
Equipment Purchase Agreement" with, and paid money to, American
Telecommunications Company, Inc. ( "ATC") .
Investors also signed
a "Telephone Services Agreement" with Alpha Telcom, Inc., which
managed the payphone operations, collected revenues, and paid
'profits' to investors. ATC was created, funded, and at all
relevant times owned and controlled, by Alpha and/or Rubera.
Money flowed freely between the companies, with little if any
actual separation. Alpha Telcom also controlled Florida Pay
Phone Systems, Inc., New York Pay Phone Systems, Inc., and
Pacific Telcom, Inc. A sepirate company, Strategic Partnership
Alliance, LLC ("SPA"), recruited, trained, and supervised a sales
force and developed marketing materials.
This Opinion generally
will not distinguish among these companies unless required for
clarity.
3
The price was $4,000 when the program first began.
3 - OPINION AND ORDER
i
..
Alpha would make all decisions and do all the work.
The investor
need only cash the check that would arrive by mail each month.
Prospective investors were assured that the investor's share
of net revenues from a payphone (priced at $5,000) would be at
least $58.34 a month, with Alpha Telcom covering any shortfall.
Id.
Regardless of whether a particular payphone earned a profit
or even lost money, the investor still would receive at least
$58.34 a month (i.e., $700 a year, or 14 percent per annum) for
each $5,000 that person invested in the Alpha Telcom program.
The Alpha Telcom package also included a "buyback" option.
An investor could sell the payphone (or more accurately, the
unregistered security) back to Alpha Telcom for the original
purchase price, less a penalty if the option was exercised before
thirty-six months.
Id.
Beginning around May 2000, Alpha Telcom
represented that all new sales would include "buyback insurance"
guaranteeing an investor would be paid even if Alpha Telcom
itself was unable to repurchase the phqnes.
Id.
Many investors
were even told that Lloyds of London was among the insurers. 4
A fourteen percent return on a risk-free investment appeared
very attractive, at a time when certificates of deposit and other
safe investments were paying much lower returns.
Hundreds of sales agents (whether styled as financial
planners, estate planners, or other titles) aggressively promoted
Around mid-December 2000, the references to Lloyds of
London were eliminated.
4 - OPINION AND ORDER
-'
the Alpha Telcom product and received a large commission on each
sale the agent made.
SPA, the company that recruited and
supervised the sales agents, also made a substantial profit on
each sale.
Misrepresentations were made to encourage sales.
Many elderly persons, and those otherwise dependent on investment
income, were persuaded to take money out of relatively safe
investments and invest in what was at best an extremely risky
venture and at worst a Ponzi scheme.
1130, 1133 (9th Cir. 2007)
See SEC v. Ross, 504 F.3d
("while Alpha Telcom's business plan
was curiously anachronistic-selling service contracts on pay
phones-its business model was timeless: the Ponzi scheme.")
In less than three years, Alpha Telcom obtained at least
$133 million from payphone investors.
Decl.
of Christopher R.
Barclay (# 168, "Barclay Decl."), p.2; Debtors' Motion for Order
Establishing Auction Sale, etc.
( Bktcy. # 2 58) , p. 9.
For a
time, the company maintained the appearance of profitability.
Yet when a Receivership was imposed in 2001, it was determined
that Alpha Telcom had relatively few assets of value.
Indeed,
Alpha Telcom filed for bankruptcy protection shortly before the
SEC filed this action.
The Receiver immediately discovered Alpha Telcom's records
were
~
shambles and its financial controls severely deficient.
The Receiver's firm and accountants devoted considerable time
tow~rd
obtaining an accurate financial picture, though some
figures can only be estimated.
5 - OPINION AND ORDER
Approximately $17.9 million in payphone "profits" were paid
to payphone investors during the three year period from July 1,
1998 to June 30, 2001.
Decl., pp. 3-5.
Rubera, 187 F. Supp.2d at 1257; Barclay
During that time, Alpha Telcom's payphone
operations actually operated at a loss, even if solely
considering just the direct costs of operating the payphones.
Rubera, 187 F. Supp.2d at 1257.
The $17.9 million in phantom "payphone profits" was derived
by cannibalizing the funds Alpha Telcom received from payphone
investors.
The supposedly risk-free principal actually was being
used to pay the promised 14% return on investment.
The sales agents and marketers received approximately twenty
five percent of the gross proceeds from sales of the Alpha Telcom
product.
The Receiver's accountants estimate those commission
payments totaled around $37 million. Barclay Decl., pp. 3, 5.
Overhead consumed about another $33 million.
Alpha was a poorly run business.
Id. at 5.
Inventory and accounting
systems were inferior and key personnel inexperienced or
incompetent.
Rubera, 187 F. Supp. 2d at 1256.
These
deficiencies also left opportunity for potential malfeasance.
Alpha paid over $22 million to acquire existing payphone
"routes" from other companies.
Another $9 million was used to
acquire telephones and other equipment and inventory, a fleet of
vehicles (214 when the Receiver took control, though of limited
value because of outstanding loans), and other items.
6 - OPINION AND ORDER
Millions
of dollars went to owners and insiders of Alpha Telcom and its
inter-related companies.
Millions more went to investors who
exercised the buyback option or canceled orders.
Beneath the facade of profitability, Alpha Telcom was
hemorrhaging red ink.
And the situation was growing worse.
The payphone industry was in decline, as cell phones and
other portable communication devices became prevalent.
per phone were falling.
Revenues
Saturation also was a problem, as many
desirable locations already had one or more phones.
Acquiring payphones from the manufacturer, identifying a
good location, entering into necessary contracts, installing
phones, and attending to other details was time consuming and
costly.
Geography also mattered.
If payphone sites were too
widely scattered, the cost of installing and maintaining the
phones might be too high to justify the revenues obtained.
By Fall 2001, Alpha had a very large backlog of unfilled
orders.
sites.
Id.
Alpha hired a company (ATMN/EMI) to acquire new
The owners of SPA, marketers of the Alpha Telcom product,
were secretly principals in ATMN/EMI.
for each site acquired.
Alpha paid ATMN/EMI $350
Many sites proved worihless.
Some
purported sites were in burned-out buildings, vacant lots, other
unsuitable locations, or simply did not exist.
Id.
The backlog of unfilled orders continued to grow, even as
sales of the Alpha Telcom product continued at a rapid rate.
By
Spring 2001, Alpha Telcom had accepted money from investors for
7 - OPINION AND ORDER
thousands of payphones that did not exist or were not installed
and operating, although the investor to whom the phone nominally
was assigned may have been told otherwise.
Many of those
investors received monthly payments of $58.34 anyway. 5
In the
Alpha Telcom's business model was not sustainable.
short run, the company might survive by inducing more persons to
invest or existing investors to risk more money.
Yet the more
From
payphones Alpha "sold," the more money the company lost.
July 1, 1998 through June 30, 2001 Alpha Telcom actually lost
over $100,000 simply by operating its payphones.
Id. at 1257. On
top of the direct operating losses, Alpha Telcom returned
$17,000,000 to payphone investors during that time period.
Id.
Alpha Telcom could not continue paying 14% a year regardless of
whether a phone actually earned that much profit.
But if the 14%
payments ended, the flow of new money would dry up and many
investors would exercise the buyback option, compounding Alpha
Telcom's losses.
Several states were investigating Alpha Telcom for selling
an unregistered security (the Alpha Telcom program) or had
determined that what they were selling was a security.
requests increased.
Buyback
Alpha honored some but quickly ran short of
money to pay buybacks, make monthly payments to investors, pay
5
Alpha briefly paid 7% "interest" to some investors for
phones that did not yet exist or had not been installed, though
some others apparently were paid 14%. Alpha's internal controls
were so poor that the status of a phone might be incorrectly
recorded or payments made regardless of the phone's status.
8 - OPINION AND ORDER
vendors and overhead, and to install and operate payphones.
Alpha Telcom used various means to dissuade investors from
exercising the buyback option, including letters of assurance and
reminders that the investment was fully protected by buyback
insurance.
Investors who bought into the Alpha Telcom program
prior to May 2000, when buyback insurance was first added, were
offered a buyback insurance "addendum."
The cost was ten percent
of the original price paid for each phone to be covered, i.e.,
$500 if the original price paid was $5,000. 6
If an investor insisted upon exercising the buyback option,
the contract required that the investor be paid within 30 days.
Alpha devised ways to delay those payments. 7
These tactics merely delayed the inevitable.
By June 2001,
to meet the $58.34 a month standard, Alpha Telcom would have to
pay investors an estimated $1.3 million a month ($15 million a
year) in non-existent "profits" from payphone operations.
Alpha Telcom did not make the June payment.
More investors
6
Selling insurance addendums was a high priority, because
an investor who bought an addendum would then rescind the buyback
demand.
Consequently, only $50 of the $500 per phone fee was
kept by Alpha Telcom.
The remainder was retained as a commission
by SPA and the agent who sold the insurance addendum.
For example, Alpha Telcom invoked a provision in the
buyback agreement requiring a returned phone to be free of
encumbrances or liens. Alpha argued the "Telephone Services
Agreement" by which Alpha agreed to manage and service the phone,
was such an encumbrance.
Accordingly, Alpha claimed an investor
first had to give Alpha 90 days notice to terminate their
contract before the investor would be eligible to exercise the
buyback option (and then had to wait 30 more days to be paid).
9 - OPINION AND ORDER
exercised the buyback option, but Alpha Telcom lacked the funds
to buy back the phones, i.e., to repay the investment principal.
Nor, without a continuous influx of new money, could Alpha Telcom
pay its large overhead and other expenses. The house of cards
quickly crumbled.
The buyback insurance proved a sham.
The primary insurer,
Northern & Western Insurance Company ("N&W"), was an "offshore"
company established by persons closely affiliated with Alpha
Telcom.
N&W's assets never were enough to cover more than a tiny
fraction of the sums purportedly insured.
Alpha was to maintain an escrow account, known as a '"sinking
fund," to cover the first two million dollars in buyback claims.
At one time, sufficient funds had been in that account, but most
of the money was then diverted to other purposes.
The Receivership
In August 2001, Alpha Telcom filed for bankruptcy
protection.
The SEC filed this action in September 2001.
The
Court appointed a Receiver, Thomas Lennon, to manage the affairs
of Alpha Telcom.
Lennon had extensive experience as a Receiver
in situations of this kind, as did the attorneys, accountants,
and some of the other persons who assisted him.
The SEC (and Receiver) did not cause the investors to lose
their money, but simply exposed the Alpha Telcom program for what
it was and prevented more persons from becoming victims.
Unfortunately, by the time the SEC filed action in September
10 - OPINION AND ORDER
2001, the payphone investors' money already was gone.
For simplicity, the Court generally will refer to actions by
the "Receiver" even if the task actually was performed by, or
with the assistance of, his accountants, attorneys, and staff. 8
Much of the initial efforts by the Receiver were directed at
stabilizing the company and striving to preserve whatever value
there was in the existing payphone installations.
The Receiver had to unravel Alpha Telcom's complex and
poorly documented finances,
ascertain Alpha's assets and
liabilities, determine what bank accounts, offices, warehouses,
and other facilities the company had, take control of these
assets, and attempt to reorganize the company's operations.
Report of Receiver Thomas F. Lennon as of October 18, 2001
(docket ## 59, 86)
("Receiver's October 2001 Report").
The Receiver implemented accounting and cash management
controls that had largely been absent at Alpha Telcom prior to
the Receivership.
He made sure essentials such as workers
compensation and liability insurance were in place and premiums
paid.
Id., pp. 6-14.
Revenues owed to Alpha Telcom had to be
collected and accounted for, telephones serviced, and the vendors
and site owners paid.
Id., pp. 8-13.
A further priority was to understand the status of the
company and analyze the viability of continuing to operate Alpha
At times, the Receiver also benefitted from documents
the SEC obtained, or investigations SEC staff had conducted.
11 - OPINION AND ORDER
Telcom and how best to preserve any value for the investors.
Id.
The Receiver concluded that if any value remained in the
company, it was in the existing site locations and payphone
"routes"
(aka "networks") where payphones already were installed,
and Alpha Telcom had contracts to operate phones.
Id., p. 16.
The Receiver cautioned that "[i]f the payphones are disconnected
for any significant period, their value will be lost because site
owners will remove and replace the pay phones."
Id.
Upon assuming control of the company, the Receiver and his
staff found that many site owners had not been paid, and some had
even removed the Alpha Telcom payphones.
Id., pp. 9, 12-13.
Other vendors, such as companies that provide the actual
telephone service, also had gone unpaid and were wary of
providing additional services without assurance of payment.
The
Receiver negotiated with the vendors to continue providing
service, and with site owners to keep phones in place.
Alpha's owner admittedly had hired too many of his friends,
creating an "enormous and unnecessary payroll obligation," while
"key personnel were incompetent."
Brief (# 148), pp. 3-4.
Defendant Rubera's Post-Trial
To pay that overhead and other-expenses,
;Alpha had relied on a continuous influx of new money from
payphone investors.
Once deprived of that revenue source, Alpha
could not pay its bills.
When the Receiver was appointed, Alpha had approximately
12 - OPINION AND ORDER
$6,000,000 in unpaid trade creditor claims 9 but only $476,786 in
its bank accounts.
~
5.
Barclay Decl. in Support of Sale (# 175),
Most of that cash was depleted within the first few weeks
just paying the salaries of Alpha's employees and the premiums
for required insurance such as workers compensation and coverage
for the vehicles Alpha operated. Id.
The Receiver consolidated Alpha's offices and other
facilities located around the country.
employees by almost 40%
He cut the number of
(beyond the many positions eliminated in
the months just before the Receiver was appointed).
258, p. 11).
(Bktcy #
Alpha had over 200 vehicles, many heavily
encumbered by loans used to acquire them and all of which had to
be insured.
The Receiver returned nearly half of them.
Alpha lacked contracts to operate large numbers of payphones
for particular locations or customers.
Instead, Alpha had about
4,000 different site contracts throughout 43 states, requiring
Alpha to interact with, and make payments to, numerous site
owners and tax authorities.
That the payphones were dispersed
over a wide area greatly increased the cost of servicing the
phones.
Trying to reduce costs enough to keep the company
afloat, the Receiver began disconnecting some unprofitable phones
and narrowing the geographic area where the company,operated.
Despite efforts to reorganize the business, reduce overhead,
9
This category does not include such things as salaries,
buyback or other obligations to payphone investors, or future
payments due on loans or other debts.
13 - OPINION AND ORDER
and make the company profitable, it soon became apparent that
there was little prospect for a successful turnaround.
The American payphone industry was contracting rapidly.
An
industry trade group summarized the situation in an April 15,
2002 letter to the Federal Communications Commission ("FCC"):
As the Commission is well aware, the sharp and steady
annual increases in wireless phone use have caused a
debilitating decline in payphone call volumes and
payphone industry profits. 10
"Dial-around" services (such as calling cards, toll-free
numbers, and other methods) also were proliferating.
Payphone
operators complained the FCC had set compensation rates much too
low, and made it procedurally very difficult to collect the money
owed.
Barclay Decl.
( Bktcy. # 2 60) , '!! 8. 11
The FCC estimated the number of operating payphones declined
by over 200,000 from March 31, 1999 to Mar 31, 2001, and by
another 208,579 payphones in the year ending March 31, 2002.
This trend continued in subsequent years:
10
Letter to William F. Caton, Acting Sec'y of the FCC,
from attorneys for American Public Communications Council
("APCC"), p. 12, available at
http://ecfsdocs.fcc.gov/filings/2002/04/18/5508339748.html See also
Comments of APCC, before U.S. Dep't of Justice, CRT Docket No.
20D4-DRS01 (May 31, 2005), p. 6 ([The] number of payphones
deployed decreased 31% from 1998 to 2003, largely because of the
increased use of cell phones.
Revenues are declining, in some
cases precipitously, and many PSPs [payphone service providers]
have gone out of business .
. ")
11
The FCC eventually made changes, but Alpha Telcom was
out of business by then.
FCC Report and Order 04-182, August 12,
2004 (''In the Matter of Request To Update Default Compensation
Rate For Dial-Around Calls From Payphones"), available at
http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-04-182Al.pdf
14 - OPINION AND ORDER
Year (all data
as of March 31)
Total Operating
Payphonesln
United States
Year (all data
as ofMarch 31)
Total Operating
Payphonesln
United States
1999
2,121,526
2005
1,216,175
2000
2,063,718
2006
1,006,802
2001
1,919,640
2007
872.256
2002
1,711,061
2008
700,826
2003
1,495,786
2009
555,128
2004
1,344,999
FCC, Trends in Telephone Service (Sept. 2G10), Table 7.6.
12
Estimated payphone revenues in the United States also were
rapidly declining:
Year
Gross Revenues
(millions of dollars)
Year
Gross Revenues
(millions of dollars)
Year
1998
2,536
2002
1,192
2006
659
1999
2,218
2003
1,063
2007
470
2000
1,932
2004
1,002
2008
379
2001
1,585
2005
924
Gross Revenues
(millions of dollars)
Trends in Telephone Service, Table 15.2.
Some payphone companies had enough capital, management
skills, and other advantages to survive the downturn.
Telcom did not.
Alpha
The Receiver concluded Alpha Telcom could not
generate enough profit from payphone operations to survive as an
ongoing entity.
(# 176),
p.2;
Lennon Decl in support of selling phones, etc.
(Bktcy # 258).
12
Among the reasons cited were:
The 2010 Report, and earlier versions, are available at:
http://transition.fcc.gov/wcb/iatd/trends.html
15 - OPINION AND ORDER
a.
Many of the phones have never made a profit and it does
not appear to be possible for Alpha to generate a profit
from these phones.
It appears that Alpha's accumulations of
phones in this case was focused almost entirely on the need
to acquire more phones as opposed to acquiring pro£itable
phones.
b.
The Phones owned by Alpha are spread over a very large
geographic area with very few phones in any one location.
As a result, there is virtually no cost effective way to
manage these phones or to manage independent contractors.
c.
Alpha lacks the internal expertise to adequately
reprogram phones on an ongoing basis in order to remain
competitive in the industry.
The Receiver's efforts
to locate qualified people have been unsuccessful in
light of the ongoing bankruptcy and the likely short
term nature of the assignment.
Barclay Decl in support of selling phones
(Bktcy # 260), pp. 4-5.
In early 2002, the Receiver advised the Court that Alpha
lacked funds to operate its payphones for much longer.
168, 176).
(## 166,
Recognizing that disconnecting the payphones would
result in loss of site location contracts and any resale value,
the Receiver recommended an immediate sale of Alpha's payphone
routes while they still retained at
l~ast
some value.
With the approval of both this Court and the Bankruptcy
Court, the Receiver organized a proposed sale of assets and
identified prospective buyers for some assets and tentative
prices and terms for those sales.
258-61).
(See, e.g, Bktcy. ## 181-83,
An auction was held in July 2002 and any sales
confirmed in early August 2002.
(Bktcy. ## 283, 682-87,
690).
With the industry rapidly contracting, the market was awash
16 - OPINION AND ORDER
in payphone routes and used payphone equipment.
routes were unprofitable.
Many of Alpha's
Alpha also was in arrears on site
commissions and payments to telephone service providers and
others.
Some buyers agreed to assume the ''cure costs"--and the
sale price reflected that.
The nominal sale price was higher if
the Receiver agreed to pay any "cure costs," but that expense
substantially reduced the net proceeds to the Receivership.
The Receiver eventually was able to sell approximately 6,000
payphones.
According to the Receiver's November 15, 2003 Report,
those sales netted just $397,578 - roughly $66 per phone - after
payment of post-bankruptcy lease obligations.
(# 213 at p. 3).
The Receiver considered removing the remaining telephone
equipment and trying to sell it, but concluded the cost of
removal and sale would greatly exceed the anticipated revenues.
(Bktcy # 698, p. 2).
Considering the payphone market at that
time, the Receiver's conclusion came as no surprise.
In short,
many of the payphones and payphone routes were worthless.
The Bankruptcy Court authorized the Receiver to abandon the
payphones he was unable to sell, reject those site contracts, and
liquidate remaining assets such as inventory.
(Bktcy ## 714 and
717-18).
By the end of September 2002, the company had been closed
and most assets liquidated.
With that phase of the case
concluded, the Bankruptcy Court proceedings were dismissed.
remaining matters would be handled in this Court.
17 - OPINION AND ORDER
All
Attention then shifted to the remaining potential sources of
substantial revenue.
The SEC had obtained a judgment against
Alpha Telcom's owner, Paul Rubera.
The judgment proved difficult
to collect upon, but the Receiver eventually gained control over
and sold a Connecticut property.
$180,000 from that sale.
(#
The Receivership netted around
439, p. 16).
Alpha Telcom (and its affiliates) had reported non-existent
profits in its financial statements and paid corporate income
taxes on those profits.
The Receiver negotiated with the IRS and
state tax authorities and eventually obtained approximately $1.5
million in tax refunds for the Receivership.
The largest remaining source of potential revenue was the
estimated $37 million in commissions received by those who sold
the Alpha Telcom product.
This Court had determined the Alpha
Telcom product was an unregistered security.
Securities laws
prohibit selling an unregistered security.
The Receiver (with the SEC's endorsement) sought to compel
the agents to repay those sales commissions.
The Receiver and
SEC argued, and this Court subsequently agreed, that each agent
legally was obligated to return ("disgorge") to the Receivership
the amount that agent had received in commissions.
The Receiver (and his attorneys and accountants) spent
considerable time identifying which sales agents had received
commissions and how much.
Those agents then had to be located
and a determination made whether it seemed feasible to collect
18 - OPINION AND ORDER
from that agent.
The sums received by some agents did not
justify the anticipated cost of legal proceedings.
agents had died,
Some other
filed for bankruptcy, or used various means of
concealing or shielding assets.
The Receiver eventually identified a list of agents to
pursue.
Some agents entered into settlement agreements with the
Receiver, and some others voluntarily made restitution to persons
to whom they had sold the Alpha Telcom product.
The Receiver
then asked this Court to enter judgment against the remaining
agents.
After considerable litigation, in which many sales
agents vigorously participated, the Court entered a judgment for
over $20 million against those sales agents.
(#
385).
Considerable effortS' were then made to collect on that judgment,
with significant expense but limited success.
The former sales agents, led by Ernest Bustos, appealed.
The purpose of the appeal was to prevent the sales agents - such
as Bustos - from having to repay to payphone investors tens of
millions of dollars in commissions that the agents received for
selling the Alpha Telcom product.
An appellate court panel
reversed the judgment against the agents.
1130 (9th Cir. 2007)
2008.
(#
SEC v. Ross, 504 F.3d
That decision became final in February
710).
The Receiver's attorneys had not served a "summons" upon
each agent, but instead had filed a disgorgement motion in the
ongoing Alpha Telcom litigation and sent a copy to each agent.
19 - OPINION AND ORDER
It was undisputed that most agents had received actual notice of
the motion.
Many sales agents affirmatively intervened as
parties to the action, vigorously litigated the disgorgement
motion on the merits, but lost.
3142555 (D. Or.)
In re Alpha Telcom, 2004 WL
(# 321).
Nevertheless, the appellate court concluded that because the
Receiver's attorneys did not serve a formal "summons" upon each
agent, this Court never acquired "personal jurisdiction" over
them, and the judgment therefore was void.
The Receiver not only
couldn't enforce the judgment, but had to return to some agents
money obtained from them under authority of the voided Judgment.
In re Alpha Telcom, 2009 WL 1882834
(D. Or.)
Telcom, 2009 WL 2828495 (D. Or.)
930).
(#
(#
904); In re Alpha
The Receiver decided that the cost to relitigate the matter
and obtain a new judgment against the former sales agents, and
then attempt to collect on that judgment, was too high to justify
the expected revenue.
(# 711).
This Court agreed.
(#
712).
The Receiver then submitted a proposed plan for winding up
the Receivership and distributing the meager funds that would
remain after payment of fees and expenses incurred by the
Receiver and his attorneys and accountants.
(## 714, 715).
Receiver's Medical Condition and "Unauthorized Advances"
In August 2009, Receiver Thomas Lennon suffered an
incapacitating stroke.
Further inquiry revealed he had a stroke
in November 2001 and some unnoticed smaller vascular events prior
20 - OPINION AND ORDER
to the August 2009 event.
Just after the 2009 stroke, the Receiver's attorneys learned
Lennon had taken "advances" of fees and expenses he anticipated
being awarded for the work his firm had performed in some
receiverships.
Lennon took the "advances" prior to receiving
authorization to do so from the court overseeing the
Receivership.
Alpha Telcom was among the cases in which Lennon
took "unauthorized advances."
These revelations understandably
raise some concerns.
Lennon resigned.
(#
960).
The Court appointed Michael
Grassmueck as the Distribution Agent to assist in winding up this
case.
A.
(#
966).
Whether Lennon's Medical Condition Adversely Affected the
Results of this Case
The Court does not believe Lennon's medical condition while
Receiver adversely affected the results of this case.
There is
no credible evidence Lennon's mental acuity was significantly
impaired when he was making important decisions or
recommendations concerning this case.
was required for key decisions.
Moreover, court approval
After 2002, Lennon's direct
personal involvement was less frequent, due to the nature of the
tasks performed.
Regardless, the investors' money already was
gone before the Receivership was imposed.
As detailed above, the
payphone operations were unprofitable, and the payphone industry
was rapidly declining.
21 - OPINION AND ORDER
Alpha Telcom had filed for bankruptcy.
Little could be done to alter those facts.
The only prospect of
a significant recovery for investors was disgorgement from those
who profited from Alpha Telcom.
Important decisions and recommendations by the Receiver were
primarily made in 2001 and 2002 and, to a much lesser extent, in
2003.
The Receiver's October 18, 2001 Report (#59), which
preceded the 2001 stroke, discusses his efforts to reorganize and
stabilize the company, identify and marshal assets, and offers a
preliminary analysis of the situation.
Reports filed in the
Bankruptcy Court also detail activities by the Receiver preceding
the 2001 stroke.
By late January 2002, the Receiver had
submitted~a
more
detailed analysis, recommended immediate commencement of
preparations for selling all Alpha Telcom's assets, and explained
why that step was warranted.
(## 166, 168).
By the end of
September 2002--little more than a year after the Receiver was
appointed and less than a year after his 2001 stroke--Alpha
Telcom had been closed and most of its assets liquidated.
Additionally, the Receiver's decisions and recommendations
were not made in isolation.
Lennon worked with experienced
attorneys and accountants, and a staff of project managers,
assistant project managers, and others.
Additional professionals
were retained as needed.
Major decisions required approval from the Bankruptcy Court,
this Court, or both, after considering any opposition to the
22 - OPINION AND ORDER
proposed action and exercising independent judgment.
After September 2002, what remained to be done was mostly
the disgorgement proceedings against sales agents who profited
from Alpha Telcom, pursuing assets that had been concealed or
transferred and, eventually, deciding who would receive any funds
the Receiver was able to recover.
While some of that activity was labor intensive, it mostly
involved work by the Receiver's attorneys, accountants, and staff
acting under the Receiver's direction and supervision.
Answering
inquiries from thousands of investors and creditors also was a
labor intensive task best handled on a day-to-day basis by the
Receiver's staff.
The billing records reflect this division of labor and the
various phases of the Receivership.
The largest number of hours
Lennon billed for work he performed was in 2001
just over four months).
(90.4 hours in
The Receivership was new, much work had
to be completed and decisions made within a short time, and
Lennon's extensive experience was regularly required.
As the case progressed, there was less need for Lennon's
direct involvement on a day-to-day basis.
Ill/
Ill/
Ill/
/Ill
23 - OPINION AND ORDER
Year
Hours Lennon
Personally
Billed
Year
Hours Lennon
Personally
Billed
Year
Hours Lennon
Personally
Billed
2001
90.4
2004
15.9
2007
0.9
2002
55.6
2005
18.3
2008
0.5
2003
4 7. 7
2006
2. 7
2009
0.0
[ 13]
After 2001, the Receivership had moved into a different
phase.
Major decisions had been made and a course established,
and Lennon's managers and professionals were knowledgeable about
the case and able to handle routine matters.
attorneys summarized his law firms'
One of Lennon's
interactions with Lennon:
At the outset of cases, where Mr. Lennon's strategic
input was required, communications were more frequent.
As the case progressed and there were mostly day-to-day
operational issues to be addressed * * * [we] worked
primarily through Mr. Lennon's staff members except
when it was necessary to involve Mr. Lennon to address
an important issue in connection with the case.
Zaro Decl.
(#
972), p. 3.
After 2001,
the majority of hours billed by Lennon's firm
(other than for paralegal-style tasks) was for work performed by
William "Bill" Johnston, who had worked extensively with Lennon 14
and served as Project Manager in Alpha Telcom.
13
Lennon has not billed for any hours his firm incurred
after April 2008.
14
For instance, from September 2000 through January 2002
Johnston billed 1,724 hours and Lennon 1,340 hours for their work
in SEC v. Capital Consultants, LLC, Case No. 3:00-cv-1290-KI (D.
Or.).
First Interim Fee Application of Thomas F. Lennon, Ex. B
(Cap. Consult. # 170); Second Interim Fee Application of Thomas
F. Lennon, Ex. A (Cap. Consult. # 1043).
24 - OPINION AND ORDER
2001
2002
2003
2004
2005
2006
2007
2008
w.
Johnston
hours
124.8
373.7
671.3
474.8
434.4
198.7
130.8
33.0
All others
billing
over $100/hr,
including
Lennon
189.5
68.3
246.6
223.2
24.3
3.8
0.9
0.5
Johnston % of
all hours
>$100/hr
39.7 %
84.5%
73.1%
68.0%
94.7%
98.4%
99.3%
98.5%
Lennon seems to have made a strong recovery from his
November 2001 stroke.
He continued to interact with this Court
and the Bankruptcy Court, and with attorneys, accountants, staff,
and other professionals in this and other receiverships,
including Capital Consultants overseen by Judge King here in the
District of Oregon.
Karen Matteson, an SEC attorney, knew Lennon had suffered a
stroke in 2001.
Although Lennon had some speech difficulties
following the 2001 stroke, Matteson stated Lennon's speech
June 6, 2012 Matteson Decl.
improved over time.
~
5.
More
importantly, Matteson stated that Lennon "did not seem to have
any difficulty understanding or responding ton Matteson's
questions.
Id.
Over the next few years, Matteson interacted
with Lennon's professionals more often than she interacted with
Lennon himself.
Following the 2001 stroke, Lennon noticed he occasionally
was laughing or crying where such a response was inappropriate.
Donald Adema Decl.
~
4 (# 967).
25 - OPINION AND ORDER
These symptoms, sometimes
referred to as emotional lability or pseudobulbar affect, are not
unusual in stroke survivors and can also occur in patients with
other neurological conditions such as multiple sclerosis.
Lennon's doctor prescribed a common drug unlikely to impair
Lennon's congnitive functioning.
well to that treatment.
In fact,
Lennon reportedly responded
"[n]eurologists and rehab
staff were amazed" with Lennon's recovery.
Id. at 'II 3.
Lennon's daughter recalls an incident around May 2002 when
Lennon became frustrated with the lack of help a store clerk was
providing and uncharacteristically uttered an expletive.
Jessica
Lennon Decl.
( # 1004) 'II 5.
that event.
It does not establish that he was unable to perform
There can be many explanations for
his duties as Receiver. 15
In October 2009, Matteson learned Lennon had suffered a
severe stroke in August of that year and that Lennon could no
longer continue as
Receiver~
June 6, 2012 Matteson Decl. at 'II 3.
Unfortunately, Lennon's "second major stroke in 2009 was
devastating, and his ability to make safe and sound decisions
rapidly diminished."
Donald Adema Decl.
(#1002) 'II 6.
Closer to
August 2009, it is possible the Receiver may have begun to
experience some problems due to undetected smaller vascular
events or other reasons.
15
By then, Lennon's personal involvement
In evaluating the statements by Lennon's daughter, the
Court recognizes they were made not only with the benefit of
hindsight, knowing the final result, but by a loving daughter
seeking a medical explanation for why the father she respects
began taking "unauthorized advances."
26 - OPINION AND ORDER
in this case was limited and had been for several years. 16
As
noted, any significant recommendations or decisions by the
Receiver or his attorneys during that time period were reviewed
by this Court, and a few overruled.
of June 26, 2009
(# 930)
See, e.g., Opinion and Order
(# 904) and Opinion and Order of Sept. 1, 2009
(rejecting arguments asserted by the Receiver's counsel).
The Court is confident that any impairment the Receiver may
have experienced did not impact the outcome for the payphone
investors and creditors.
Whether by design or otherwise, Alpha
Telcom was operating as a ponzi-style scheme.
By the time a
Receivership was imposed, the investors' money was already gone
)
and the company's situation hopeless.
The only real chance of
recovering any significant amounts for the investors was through
disgorgement proceedings against the sales agents and others who
profited from the Alpha Telcom scheme.
The payphones were unprofitable, a fact the Receiver soon
recognized he could not change.
He tried to stem the company's
losses and to salvage what he could for the investors by selling
the payphone routes.
However, unprofitable payphone routes and
used phone equipment scattered around the country were of little
value in a rapidly declining industry.
The Receiver didn't create those facts.
He inherited them
from the people who had operated Alpha Telcom and who,
16
in return
As noted above, Lennon had very little direct involvement
in this case after 2003.
From 2006 on, Lennon billed only 4.1
hours for work performed.
27 - OPINION AND ORDER
for a large percentage of every sale, induced thousands of people
to invest $133 million ln a "too good to be true" scheme and then
used a variety of tactics to avoid repaying that money.
Lennon's resignation in October 2009 (and the circumstances
surrounding it) were among multiple issues that have contributed
to the delay in closing this case.
Neither the Receiver's firm,
nor his attorneys or accountants, have asked to be compensated
for any fees or expenses incurred since April 2008.
A
Distribution Agent has been retained to perform various tasks
necessary to wind up the Receivership, but such closing expenses
already were anticipated in the budget submitted to the Court in
October 2008
(# 714).
In conclusion, there is no reason to believe the results in
this case would have been more favorable for the investors or
creditors but for the Receiver's medical condition.
B.
The Receiver's "Unauthorized Advances"
1.
The Discovery of the "Unauthorized Advances"
The Allen Matkins law firm represented Lennon in federal
receivership cases sincy approximately 1997.
In August 2009,
while winding up the Tuco Trading receivership,
17
Allen Matkins
received an accounting that mentioned an "advance."
(# 972), p.
4, Zaro Decl. # 955, p.2.
Zaro Decl.
Further inquiry revealed
Lennon had taken "advances" of fees ·and expenses he anticipated
17
SEC v. Tuco Trading, LLC, Case No. 08-cv-00400-DMS (S.D.
Calif.)
28 - OPINION AND ORDER
being awarded for work performed in Tuco Trading.
Unfortunately,
Lennon took the "advances" prior to receiving any authorization
from the court.
Receivers may work hundreds or thousands of hours on a case
and incur expenses such as photocopying, travel, or salaries for
employees who assist the receiver.
Attorneys and accountants for
a receiver also incur many "billable hours" and other expenses.
They understandably anticipate payment for time and expenses
reasonably incurred, but are not permitted to simply pay
themselves whatever they think appropriate.
Rather, the court
overseeing a receivership decides what compensation will be paid
and when.
Sometimes this can impose a hardship.
A receiver, and his
attorneys and accountants, may have to wait several years or
longer to be paid for work performed and expenses incurred.
However, anyone experienced in receiverships knows the rules.
Moreover, there are procedures for seeking an "interim" award of
fees and expenses in certain circumstances. 18
While inquiring about the advances, Allen Matkins learned of
Lennon's recent stroke.
(# 955, p. 2).
Allen Matkins informed
counsel for the SEC in Tuco Trading about Lennon's illness and
the financial irregularities.
18
(# 955, p. 3).
Allen Matkins
In Capital Consultants, Lennon submitted six such
applications in the first six years, but the available cash on
hand was more than enough to accommodate those requests.
Memorandum in Support of Fee Application (Cap. Cons~lt. # 171),
p.6.
The Alpha Telcom Receivership had no such surplus.
29 - OPINION AND ORDER
eventually was able to speak with Lennon, who agreed to return
all outstanding "advances" in Tuco Trading, totaling $60,101. 19
Allen Matkins initially was aware only of "advances" taken
in Tuco Trading.
(# 955, p. 3; # 972, p. 5).
Upon further
investigation, however, Allen Matkins learned of other advances.
After several weeks o_f work, compounded by the fact that Lennon
was hospitalized, Lennon's staff provided Allen Matkins detailed
information about the specific cases and amounts taken.
2.
The "Unauthorized Advances" in Alpha Telcom
A spreadsheet provided by Lennon's staff shows the amounts
Lennon is believed to have "advanced" in the Alpha Telcom
Receivership and related Bankruptcy proceeding (the figures are
combined), and where the funds apparently went.
Report by
Plaintiff SEC Regarding Receipt of Monies by Former Receiver
(# 984), Ex. 1 to Decl of Lorraine Pearson.
The Spreadsheet shows that as of September 2009, Lennon and
his firm had been judicially authorized to receive $1,162,104.82
as compensation for fees and expenses, but actually had taken
$1,408.156.95, a difference of $246,052.13.
Id.
An SEC accountant reviewed the Spreadsheet, available bank
19
On September 4, 2009, Allen Matkins informed the court
overseeing that receivership.
Notice of Corrections to
Application for Approval and Payment of Fees and Costs to Thomas
F. Lennon (Tuco # 163).
The Notice stated Lennon had now
"returned the advances to the Tuco estate together with interest
that would have been earned on the amounts advanced." Id., p. 1.
On September 10, 2009, Lennon was awarded the full amount of fees
and expenses he had requested.
Order on Final Fee Applications
Of Receiver and His Professionals (Tuco # 165) .
. 30 - OPINION AND ORDER
records, and other documents.
She concluded the Spreadsheet
seemed substantially accurate, except for two additional
withdrawals totaling $10,395.81.
( # 984) .
Decl. of Lorraine Pearson
The net amount taken in Alpha Telcom was $256,477.94.
The first "unauthorized advance" in the Alpha Telcom cases
was in November 2001, to pay a project manager or assistant
project manager working on these cases.
managers as independent contractors.
Lennon classified his
Unlike the attorneys and
accountants, who had to wait and apply to the Court for payment
of fees and expenses, Lennon appears to have paid these managers
directly.
Lennon then included their hours in the fee
applications his firm submitted to the Court. 20
In January 2002, Lennon took an "unauthorized draw" of
$68,485.00 to reimburse his company 'tor payments it had made to
two managers from August through October 2001.
By the end of
June 2003, Lennon had taken $325,216.95 in "unauthorized
advances"
(or draws), all of which apparently was used to pay
managers working for Lennon on Alpha Telcom matters.
In July and August 2003, Lennon "drew" a total of $62,000
and paid it to his firm, perhaps anticipating the Bankruptcy
Court would soon grant his pending fee request.
By August 2003,
Lennon had taken at least $401;466.95 in unauthorized "draws" and
20
Lennon billed their hours at a higher hourly rate than
he paid the manager, an accepted practice in many professions.
31 - OPINION AND ORDER
"advances. " 21
That is a large sum, albeit less than half what
Lennon expected he eventually would be paid for work done and
expenses incurred to that point.
In September 2003, the Bankruptcy Court authorized payment
to Lennon of $932,217.32 in fees and costs for his firm's work in
the bankruptcy proceeding.
Lennon did not immediately pay
himself the entire amount awarded by the Bankruptcy Court,
possibly because Alpha Telcom's available cash was very limited.
During September 2003, Lennon paid himself $217,401.44 in
addition to the usual payments to his managers.
Even when added
to the money Lennon previously had taken, he still had a credit
of approximately $300,000.
For over a year, Lennon remained "in the black," entitled to
be paid more money than he actually had taken.
Lennon gradually
used up that credit, however, paying some to himself as fees and
some in monthly payments to his managers.
In December 2004, Lennon paid himself $148,510.32 in
addition to the payments to his managers.
Lennon now was in the
red again, having taken about $84,500 more than authorized.
From
April through November 2005, Lennon took an additional $293,500
in "unauthorized draws" in addition to the usual monthly
"unauthorized advances" to pay his project manager.
In October 2005, Lennon asked this Court to award him
21
The exact amount depends on the timing of the
$10,395.81 in additional payments identified by the SEC
accountant.
32 - OPINION AND ORDER
$459,775.00 for fees and $5,391.16 for expenses incurred through
December 2004.
(## 436-38).
Lennon did not disclose he already
had taken at least $382,399.63 in "unauthorized" draws and
advances beyond what the Bankruptcy Court had authorized him to
take.
Instead, Lennon let this Court believe that he, his
attorneys and accountants, had all been working without payment
since August 2001
Bankruptcy Court).
(apart from any compensation from the
From all indications, the law firms and
accountants did go unpaid during that time.
Lennon (and his
managers) did not.
The SEC also was deceived.
See Statement by Plaintiff SEC
Regarding Interim Fee Applications of Receiver and his
Professionals (# 680), p. 4 ("Although the Receiver and his
professionals did receive fees in the related bankruptcy .
the Receiver and his professionals have not been paid anything
for their work in this action, which has been pending for four
and one-half years").
By September 2006, Lennon had taken at least $451,532.08
more than he was authorized to (after deducting the sums awarded
by the Bankruptcy Court).
During the five years since his
appointment, Lennon had taken over $850,000 in "unauthorized
advances," though some of that money eventually became
"authorized" when the Bankruptcy Court awarded Lennon fees.
Had this Court awarded Lennon the entire $465,166.16 he
requested (and from prior experience he likely expected to
33 - OPINION AND ORDER
receive), it would have been sufficient, albeit not by much, to
cover the amount Lennon had taken.
This Court did not rubber-stamp Lennon's fee application.
Instead, in October 2006, the Court awarded Lennon interim fees
of only $229,887.50, i.e., 50% of what the Lennon had requested,
and interim costs of $5,391.16.
3085616 (D. Or. 2006)
more.
(#
706).
In re Alpha Telcorn, 2006 WL
Lennon had already taken far
The interim award reduced the net unauthorized advances as
of that date to $216,253.42
(or $226,649.23, depending on the
timing of the additional payments identified by the SEC).
Thereafter, Lennon limited his "advances" from Alpha Telcorn.
He did take "unauthorized advances" every month to pay his
project manager, a practice that continued up until Lennon became
incapacitated and the "advances" carne to light.
3.
How the Unauthorized Advances Impacted the Receivership
The Receivership did not lose very much in interest revenue,
considering (i) the relatively small sums the Receivership had
(or was supposed to have) during the relevant time period,
(ii)
very low interest rates in recent years, and (iii) the kinds of
investments or accounts Receivership funds typically are kept in,
which generally emphasize safety and (if appropriate)
liquidity.
When the Bankruptcy Court awarded the Receiver fees and
costs, he did not immediately take the full amount due, but left
$300,000 behind, which he gradually drew over a 15 month period.
The Court also observes it was not until late October 2006 that
34 - OPINION AND ORDER
the Court ruled on the Receiver's request for fees dating back as
far as August 2001, and then the Court awarded only half the
amount requested.
It is now 2013 and the Court is first ruling
on the Receiver's request for fees dating back as far as January
2005 and a renewed request for fees dating back to August 2001.
The Receiver and his attorneys share some responsibility for
those delays, but not all.
Interest was not and will not be paid
to the former Receiver for any fees or expenses he is awarded.
The ''interestn issue thus cuts both ways.
The Court also has considered whether the unauthorized
advances taken by the Receiver had a substantial adverse impact
in other ways upon the Receivership, such as diminution of
capital.
Lack of capital was an issue in the first year of the
Receivership, when Alpha lacked funds to continue operating the
payphones.
However, given the rate Alpha was burning through
-cash, and how much was needed to keep the payphones operating,
the unauthorized advances made little if any difference. 22
It
also does not seem likely that the Bankruptcy Court would have
authorized spending all remaining capital in a desperate effort
to keep the payphones operational for another month or so, if
that were possible, leaving nothing in reserve for payment of
22
When the Receiver recommended an immediate sale of Alpha
Telcom's payphone routes, the total amount of unauthorized
advances to date was under $100,000.
By the time the payphone
routes had been sold or abandoned, and the company closed, the
total unauthorized advances had reached approximately $200,000.
That would not have made much difference in the outcome.
35 - OPINION AND ORDER
fees incurred by the Receiver, and his attorneys and accountants.
Acts that call into doubt the Receiver's honesty in one area
can give rise to questions about his conduct in other areas.
A
receiver may: handle substantial sums of cash, valuable inventory
or other assets; be in a position to recommend which claims be
paid or compromised, which contracts be rejected or retained, and
which employees to retain, terminate, or hire; negotiate asset
sales; and more.
wrongdoing.
There can be considerable potential for
However, the Court has found no indication of any
such wrongdoing here.
Additionally, as noted above, Karen Matteson of the SEC,
following a thorough review and audit of the Receivership,
concluded that other than time and resources spent by the SEC
investigating this matter, "it does not appear [Lennon's] actions
damaged the receivership estate itself beyond the amounts
advanced."
July 6, 2012 Matteson Decl.
~
10.
The Court concurs
with Matteson's conclusion.
Outstanding Fee Petitions
For present purposes, the Court will not attempt to
understand why Lennon took unauthorized advances.
Two points
bear emphasis.
First, unauthorized advances by a receiver are unacceptable.
It does not matter why it was done.
Second, after careful
consideration, and as described above, the Court does not believe
Lennon.'s medical condition while Receiver or his taking of
36 - OPINION AND ORDER
unauthorized advancements had a substantial adverse affect on the
results in this case.
That said, they did cause some delay in
closing the case and distributing the remaining assets.
To date, Lennon has not repaid the money taken from the
Alpha Telcom receivership.
On October 31, 2011, the Court
ordered Lennon to show cause why he should not be required to
return the $256,447.94 he drew and/or advanced to himself without
approval by this Court.
At the time the Court learned of
Lennon's "unauthorized advances," the Court had under advisement
•
application for:
(1) $182,993.91 in fees for services performed from January
1, 2005 through April 30, 2008 and $1,428.81 in costs for that
period; and
(2)
$206,898.75 in fees for services performed prior to
January 1, 2005, which the Court previously withheld.
The Court previously noted the Receiver and his attorneys
thus far had recovered very little money for the investors, and
that fees sought by the Receiver, lawyers, and accountants might
consume all remaining funds,
leaving nothing for the investors.
In re Alpha Telcom, 2006 WL 3085616 (# 706) .
The Receiver and
his attorneys have since agreed to reduce their fee requests.
The $182,993.91 the Receiver requested for services after
January 1, 2005, and the $206,898.75 the Receiver requested for
services before that date, are ten percent less than originally
was sought (for the fees prior to 2005) or originally billed (for
37 - OPINION AND ORDER _
These reductions total $43,162.65.
services after 2004).
The
Receiver's offer to accept this reduction was not a response to
the revelations of unauthorized advances but was made well before
that information emerged.
The total amount requested by the Receiver is $389,892.66.
The total outstanding "unauthorized advances" is $256,447.94.
The difference between the two amounts is $133,444.72.
As
described above, the Court concludes that neither Lennon's
medical condition nor the "unauthorized advances" impacted the
amount left to distribute to the payphone investors.
The Court
therefore turns now to the pending fee requests.
Standards
The court appointing the receiver has full power to fix the
compensation of such receiver and the compensation of the
receiver's attorney or attorneys.
v. Webster,
69 F.2d 416, 418
Drilling & Exploration Corp.
(9th Cir. 1934).
Many factors enter
into that calculus.
See, e.g. United States v. Code Products
Corp., 362 F.2d 669,
673 (3d Cir. 1966)
(primary considerations
in fixing receiver's compensation are the fair value of his time,
labor and skill measured by conservative business standards; the
degree of activity, integrity and dispatch with which work is
conducted; and the result obtained, the last being a "critical
factor");
In re Imperial '400' National,
(3d Cir. 1970)
Inc.,
432 F.2d 232, 237
(court should consider economy of administration,
the burden the estate may safely be able to bear, the amount of
38 - OPINION AND ORDER
time required to perform the necessary services, and the overall
value of those services to the estate) .
In short, the court has considerable discretion in
fashioning a fee award that is appropriate under the
circumstances, Gaskill v. Gordon, 27 F.3d 248, 253
(7th Cir.
1994), and that will reasonably, but not excessively, compensate
the professionals for their efforts.
Litig.,
962 F.2d 566, 572-73
In re Continental Ill. Sec.
(7th Cir. 1992).
Discussion
As the Court noted in the Order on the interim fee
applications, when a receiver reasonably and diligently
discharges his duties, the receiver is entitled to fair
compensation for those efforts.
1577
SEC v. Elliott, 953 F.2d 1560,
(11th Cir. 1992); Donovan v. Robbins, 588 F. Supp. 1268,
1273 (N.D. Ill. 1984).
factor."
The result obtained is always a "critical
Elliott, 953 F.2d at 1577.
As detailed above, the Receiver faced numerous hurdles in
securing any distribution at all for the payphone investors.
The
Receiver had to obtain an accurate financial outlook for Alpha
Telcom by wading through woefully inadequate corporate records.
By the time the Receiver was appointed, Alpha Telcom had filed
for bankruptcy, possessing under $500,000 despite facing nearly
$6,000,000 in unpaid trade creditor claims.
Support of Sale (# 175)
~
5.
Barclay Decl. in
Unfortunately, the money was
already gone before the SEC filed this complaint.
39 - OPINION AND ORDER
The Receiver cannot be faulted for the expenses incurred
operating Alpha Telcom's business pending the outcome of the
trial.
This Court denied the Receiver's motion, supported by the
SEC, to immediately shut down Alpha Telcom's operations.
noted above, Alpha Telcom's operations
site contracts in 43 states.
invol~ed
As
4,000 different
Operating Alpha Telcom's business
pending the outcome of the trial proved costly, although the
Receiver took steps - outlined above - to trim expenses and
reduce operating losses.
Following trial,. the Receiver liquidated Alpha Telcom's
remaining assets.
Unfortunately, and through no fault of the
Receiver, many of Alpha Telcom's payphones and
no bids at auction and proved worthless.
~routes"
fetched
Still, the Receiver
incurred significant expenses in winding up the affairs of Alpha
Telcom.
Taken in context, the Receiver obtained decent results in
The Receiver obtained $1,500,000 through negotiations
this case.
with the IRS. The Receiver also negotiated settlements with many
of the agents who sold investors the Alpha Telcom payphone
program.
The Receiver obtained a judgment from this Court for
the disgorgement of over $20,000,000 in commissions from former
sales agents.
SEC v. Ross,
As noted, that judgment was reversed on appeal.
504 F.3d 1130 (9th Cir. 2007).
In hindsight, the
Receiver should have properly served the former investors.
That
said, this Court, as well as the SEC, believed the Receiver's
40 - OPINION AND ORDER
.
'
attempts sufficient to justify the disgorgement order.
Unfortunately for the payphone investors, the Ninth Circuit Court
of Appeals disagreed.
Many of the fees requested involve work performed in the
course of the appeal of the disgorgement order.
Recovering the
ill-gained commissions provided the last remaining chance for any
significant recovery for the investors.
lasted three years.
The protracted appeal
That the Ninth Circuit ultimately reversed
the order granting the motion for disgorgement does not render
the hours spent defending the appeal unnecessary or unreasonable.
Shortly after the Ninth Circuit ruled on the appeal, the
Receiver recommended closing the Receivership.
The Court agreed
and ordered the Receiver to file a final plan for distribution.
Multiple events then delayed the final distribution.
First, the Court spent much time dealing with Ernest Bustos.
The Court's views on Bustos and the Payphone Owners Legal Fund
are well documented, most recently in a April 18, 2012 Order (#
1026) . 23
Recent documents received during the Notice and Comment
period establish that Bustos continues to solicit funds from
investors.
Second, the Court learned of Lennon's August 2009 stroke and
of the "unauthorized advances."
As described above, the Court
concludes neither Lennon's medical condition, nor the
23
The April 18, 2012 Order is also posted online at
http://www.alphatelcom.com/
41 - OPINION AND ORDER
.
•.
"unauthorized advances" had a material affect on the outcome of
this case.
Although the Court will not order Lennon to disgorge
any of the fees advanced, any fees advanced will of course be
deducted from the awarded fees.
The SEC reviewed the fee requests and,
following discounts
taken by the Receiver and his attorneys, recommends granting the
fee requests.
( # 803) .
The SEC has extensive experience in
similar cases involving a Receivership and the Court therefore
takes the SEC's recommendations into consideration.
The Court also notes the many comments received from
investors.
The Court received over 1000 comment forms and read
each and every form received.
The comments reveal that many
investors were elderly and counted on this "safe" investment for
fixed income during retirement.
savings.
Many investors lost their life
Many investors incorrectly believe the Receiver or the
SEC took their investments.
As noted, the money was gone before
the SEC filed this action.
Of the comments received, slightly less than half stated the
Receiver was entitled to some compensation for work performed,
but not the full amount requested.
About the same amount opposed
the request for fees and expenses in its entirety.
About 15%
supported the request for fees and expenses in its entirety.
Sadly - but not surprisingly - the Court soon learned that
Ernest Bustos once again used the opportunity for notice and
comment to solicit funds from the investors.
42 - OPINION AND ORDER
Not long after the
original yellow comment forms arrived, the Court began receiving
white comment forms marked with a handwritten "Amended" at the
top.
Many of the "Amended" comments state the options are
unacceptable and demand to be made whole by holding the Receiver
responsible for the losses.
The comments mirror recommendations
provided in Bustos's July 27, 2012 letter to some investors.
As detailed above, neither Lennon's medical condition nor
the "unauthorized advances" had a material affect on the outcome
of this matter.
By the time the Court appointed the Receiver,
the investors' money was already gone.
In fact,
it is likely
that absent the Receiver's actions in this case, no funds would
remain for any distribution at all.
Additionally, had the SEC
not intervened, countless more investors would have been conned.
That said, results are always a critical factor.
Although
the hourly fees requested by the Receiver are reasonable, the
Court must take all the circumstances involved in this matter
into account. There is no excuse for taking "unauthorized
advances."
Additionally, many of the fees were incurred during
the disgorgement proceedings, after Alpha Telcom's affairs were
wound down.
unsuccessful.
As noted, the disgorgement proceedings were
Considering that the result achieved is a critical
factor, but taking all of the unique circumstances involved in
this matter into account, the Court will reduce the Receiver's
fees and Allen Matkins' fees by 25%.
43 - OPINION AND ORDER
The 25% reduction is on top
of the 10% reduction already voluntarily made by the Receiver and
the 20% reduction voluntarily made by Allen Matkins.
The Court
finds no reason to discount the accountants' fees by 25% as the
accountants bear little responsibility for the failed
disgorgement proceedings.
The Court provided an extensive background of the case,
which includes descriptions of the extensive amount of work
required in this case.
The Court will not rehash that summary
below, but took all the factors involved in this unique situation
into account when reviewing the requests for fees.
The Court
inquired as to all of the hours documented and submitted.
The
Court reviewed the hourly fees sought, taking into account the
Receiver and his professionals' experience working in similar
matters, the complexity of this case, and hourly fee awards in
other receiverships. Other than the meager result ultimately
obtained in this matter, the Receiver and his professionals
performed adequately and the hours and rates requested are
reasonable.
With the exception of the failed disgorgement
proceedings, the meager result obtained was due to the facts the
Receiver inherited.
The Court notes the opinion of the SEC that
the fee requests and hours of work performed here are indeed
reasonable.
·See docket #803, pp 4-9.
Finally, the Court
reviewed documents submitted in the bankruptcy proceedings but
found no accounts of "double billing."
44 - OPINION AND ORDER
....•-
The Receiver
The ~eceiver seeks $206,898.75 in fees previously withheld
by the Court
(for work performed up to December 31, 2004) and
$182,993.91 for work performed since January 1, 2005.
Both
requests include the Receiver's voluntary 10% reduction.
total amount in fees currently sought is $389,892.66.
The
75% of
$389,892.66 is $292,419.50, which is what the Court awards the
Receiver in fees.
in costs.
The Court also awards the Receiver $1,428.81
The total amount of fees and costs now awarded to the
Receiver is $293,848.31.
Offset against the $256,447.94 the
Receiver took in "unauthorized advances" results in a balance of
$37,400.37 owed to the Receiver.
Allen Matkins
Allen Matkins seeks $381,316.08 for fees previously withheld
and $297,935.20 for fees incurred as of January 1, 2005, for a
total amount of $679,251.28 in fees.
Matkins' voluntary 20% reduction.
This amount reflects Allen
The Court subtracts the fees
sought by Foster Pepper from the award to Allen Matkins.
Foster
Pepper worked as local counsel on this case and seeks $47,802.76
in outstanding fees.
The Receiver's decision to employ out-of-
state counsel in this matter should not result in a diminished
return to the investors.
Instead, any fees incurred due to the
need for local counsel are to be borne by Allen Matkins.
Deducting $47,802.76 from $679,251.28 equals $631,448.52.
For
similar reasons as noted above, the Court deducts an additional
45 - OPINION AND ORDER
25%, largely due to the meager results obtained in this case.
Therefore, the Court awards Allen Matkins $473,586.39 in fees.
The Court grants Allen Matkins' request for $11,998.90 in costs
previously withheld and $26,771.33 in costs incurred since
January 1, 2005 for a total award of $38,770.23 in costs.
Foster Pepper
Foster Pepper seeks $26,433.26 in fees previously withheld
and $21,369.50 for fees incurred since January 1, 2005.
The
requested amount included a reserve of $2,000 for winding down
the case.
Foster Pepper seeks $2,814.79 in costs.
After
reviewing the documents submitted, the Court finds the requests
reasonable and grants Foster Pepper's request for $47,802.76 in
fees and $2,814.79 in costs.
The Court finds no justification
for cutting Foster Pepper's request by %25 due to the results
obtained.
Barclay
Barclay seeks $47,343.97 in fees previously withheld and
$17,706 for fees incurred since January 1, 2005 for a total of
$65,049.26.
Barclay also seeks $202.56 in costs.
The Court
finds the requests reasonable and grants Barclay's request for
$65,049.26 in fees and $202.56 in costs.
The Court finds no
justification for cutting Barclay's request by %25 due to the
results obtained.
LECG
LECG seeks $34,542.50 in fees.
46 - OPINION AND ORDER
That amount includes a
$10,000.00 reserve for fees anticipated to be incurred in winding
down the case and properly disposing of records.
$235.56 in costs.
LECG also seeks
The Court finds the requests reasonable and
grants LECG's request for $34,542.50 in fees and $235.56 in
costs.
The Court finds no justification for cutting LECG's
request by %25 due to the results obtained.
CONCLUSION
The Court awards the Receiver $292,419.50 ln fees and
$1,428.81 in costs.
Offset against the $256,447.94 the Receiver
took in "unauthorized advances" results in a balance of
$37,400.37 owed to the Receiver. The Court awards Allen Matkins
$473,586.39 in fees and $38,770.23 in costs.
The Court awards
Foster Pepper $47,802.76 in fees and $2,814.79 in costs.
The
Court awards Barclay $65,049.26 in fees and $202.56 in costs.
The Court awards LECG $34,542.50 in fees and $235.56 in costs.
IT IS SO ORDERED.
DATED this
Le
day of March, 2013.
OWEN M. PANNER
U.S. Senior District Judge
47 - OPINION AND ORDBR
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?