US Commodity Futures Trading Commission v. RFF GP LLC et al

Filing 82

REPORT AND RECOMMENDATION OF UNITED STATE MAGISTRATE JUDGE REGARDING DISTIBUTION PLAN re 44 MOTION PETITION NO. 3 - Receiver's Proposed Liquidation and Distribution Plan filed by Kelly M. Crawford. Signed by Magistrate Judge Don D. Bush on 2/4/2014. (baf, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TEXAS
SHERMAN DIVISION
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RFF GP, LLC, KGW CAPITAL
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MANAGEMENT, LLC, and KEVIN G.
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Case No.: 4:13-cv-382
WHITE,
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Defendants,
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REVELATION FOREX FUND, LP,
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MERIDIAN PROPANE LP, and
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W CORPORATE REAL ESTATE, LP d/b/a
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KGW REAL ESTATE,
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Relief Defendants.
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SECURITIES AND EXCHANGE COMMISSION,
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Plaintiff,
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v.
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Case No.: 4:13-cv-383
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KEVIN G. WHITE,
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KGW CAPITAL MANAGEMENT, LLC,
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REVELATION FOREX FUND, L.P., and
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RFF GP, LLC,
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Defendants,
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and
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MERIDIAN PROPANE, L.P., and
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W CORPORATE REAL ESTATE L.P. d/b/a
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KGW REAL ESTATE,
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Relief Defendants.
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U.S. COMMODITY FUTURES TRADING
COMMISSION,
Plaintiff,
v.

REPORT AND RECOMMENDATION OF
UNITED STATE MAGISTRATE JUDGE REGARDING DISTRIBUTION PLAN
Kelly M. Crawford, as the Court Appointed Receiver in these companion cases, has
submitted a Distribution Plan (see Dkt. 44 in 4:13cv382 and Dkt. 49 in 4:13cv383).1 There was only

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The Court, by separate order, has already addressed the Receiver’s unopposed Proposed
Liquidation Plan.
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one objection to the plan filed by Community Trust Bank (CTB).
On December 5, 2013, the Court held a hearing on CTB’s objections to the proposed
Distribution Plan. Having heard the argument of counsel for both the Receiver and CTB and
considered the record herein, the Court finds as follows:
CTB originally filed a secured claim of $91,419.90 arising out of a promissory note dated
May 19, 2011 in the original principal amount of $100,000 executed by Defendant W Corporate Real
Estate LP d/b/a KGW Real Estate. The note was secured by a security interest in all inventory,
chattel paper, accounts, equipment, general intangibles, commissions, furniture and fixtures of the
defendant, as well a commercial guaranty signed by Kevin White. The Receiver has recommended
that $700.16 on deposit with CTB be turned over and that the remaining balance be allowed as an
unsecured claim.
The Receiver has proposed a pro-rata distribution to investors because the investors each
invested monies in the same fraudulent scheme and said monies were co-mingled into a single
trading account at FXCM in the name of Revelation Forex. The pro-rata distribution is based
proportionately on the amount invested by each of the investors. The long and short of White’s
scheme was that he represented that his company had made astonishing returns in foreign exchange
investments, when it had not, and that he utilized approximately $1.7 million dollars of the investors’
monies for his own personal expenses.2
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White has since pled guilty to wire fraud for which the statutory range is up to 20 years
in prison. In his Statement of Facts supporting the plea, he admits he owned and controlled
KGW Capital Management which controlled the Revelation Forex Fund. See Dkt. 11 in
4:13cr258. He acknowledges that he sold limited partnerships in the Fund. To induce
investments, White made several misleading statements, including that RFF’s trading and returns
were audited, that RFF had three full time brokers, and that the money invested was used to
purchase limited partnership interests when in fact White used the money for personal
expenditures. He also issued false statements which hid his embezzlement scheme as well as
trading losses. White received $7,442,267 from investors and lost about 28% of those funds in
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CTB objects to the Receiver’s plan to pay investors on a pro-rata basis before paying any
amounts to non-investor creditors. CTB does not object to a pro-rata distribution but rather objects
to the prioritization of investors over it as a creditor. CTB complains that, after following the
Receiver’s plan, there will be no monies left to pay it as a creditor.3
District courts considering how to treat the investors who have bought into schemes such as
White’s must determine the most equitable remedy, and they are “vested with broad discretionary
power” to do so. SEC v. Forex Asset Mgmt. LLC, 242 F.3d 325, 331 (5th Cir. 2001) (quotations and
alterations omitted). “Sitting in equity, the district court is a ‘court of conscience.”” U.S. v.Durham,
86 F.3d 70, 73 (quoting Wilson v. Wall, 73 U.S. (6 Wall.) 83, 90, 18 L.Ed. 727 (1867)). When a
portion of funds to be distributed from the assets of a receivership estate can be traced, it is
permissible to apply tracing; however, it is also permissible to allow a pro-rata distribution. See
Durham, 86 F.3d at 73; Forex, 242 F.3d at 331. The Court must therefore determine which type of
distribution is most equitable under the facts of this case.
Here, no investor or creditor argues for anything other than a pro-rata distribution.
Fortunately, there were a limited number of investors who made significant investments. Only one
investor received its contribution back, but that investor, or a related entity, also invested substantial
amounts of monies which it did not receive back. Since all investors agree to the Receiver’s plan,

his RFF account as well as converting about 24% for non investor uses such as dog training, etc.
Approximately 41% of the duped investors’ monies has been recovered by the Receiver.
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CTB says that it relied on a note, lien, and guaranty to protect its interests but that the
investors were told that there were risks with any investment. CTB believes that the investors
should not be treated in a preferred manner. There is some merit to this argument. In this day,
most investors willing and able to plunk down several hundred thousand dollars ought to be wary
of any deal which promises such high rates of return. Yet, the bank could also have done its due
diligence on White and discovered personal bankruptcy, federal tax liens, and a checkered past.
The complaints filed by the SEC and CFTC in these civil cases are filed for the protection of
investors, not creditors.
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the Court finds that pro-rata distribution is fair.
The only lingering question is whether distributions to investors should take priority over that
of the creditor CTB. Likewise, the Court must find that the Receiver’s plan as to prioritization is
also equitable. It is not an easy call, and CTB makes a compelling argument on its behalf.
However, courts regularly grant defrauded investors a higher priority than defrauded creditors, and
there is persuasive authority supporting this view. For instance, in Quilling v. Trade Partners, Inc.,
2006 WL 3694629 (W.D. Mich. 2006), the U.S. District Court for the Western District of Michigan
adopted a magistrate judge’s recommendation to reject the objection to a receiver’s distribution plan
that was filed by a creditor. The magistrate judge noted that as “an equitable matter in receivership
proceedings arising out of a securities fraud, the class of fraud victims takes priority over the class
of general creditors with respect to proceeds traceable to the fraud.” Id. at *1.
CTB fails to link any fraudulent conduct committed by White to its losses. There is no
evidence that White took any monies from CTB and put the same in his trading account. CTB is a
financial institution whose business it is to scrutinize and collateralize those with whom it does
business. CTB has simply failed to show any nexus between its loan and the fraud committed on
investors.
RECOMMENDATION
For the reasons set forth herein, the Court recommends that CTB’s objections be overruled
and it should be ordered that the Receiver’s Proposed Distribution Plan as set forth in Petition No.
3 in 4:13cv382 (see Dkt. 44) and Petition No. 4 in 4:13cv383 (see Dkt. 49) be APPROVED.
Within fourteen (14) days after service of the magistrate judge’s report, any party may serve
and file written objections to the findings and recommendations of the magistrate judge. 28
U.S.C.A. § 636(b)(1)(C).
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A party is entitled to a de novo review by the district court of the findings and conclusions
contained in this report only if specific objections are made, and failure to timely file written
objections to any proposed findings, conclusions, and recommendations contained in this report shall
bar an aggrieved party from appellate review of those factual findings and legal conclusions accepted
by the district court, except on grounds of plain error, provided that the party has been served with
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notice that such consequences will result from a failure to object. Id.; Thomas v. Arn, 474 U.S. 140,
148 (1985); Douglass v. United Servs. Auto Ass’n, 79 F.3d 1415, 1417 (5th Cir. 1996) (en banc),
superseded by statute on other grounds, 28 U.S.C. § 636(b)(1) (extending the time to file objections
from ten to fourteen days).
SIGNED this 4th day of February, 2014.
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DON D. BUSH
UNITED STATES MAGISTRATE JUDGE

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