Securities & Exchange Commission v. Kaleta et al

Filing 205

MEMORANDUM AND ORDER DENIED 181 MOTION to Lift Stay ( Status Report due by 8/30/2012)the Receiver must report the status of his claim for theDFFS Policy proceeds by August 30, 2012 and file a status report every fourmonths thereafter(Signed by Judge Nancy F. Atlas) Parties notified.(sashabranner, )

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
v.
ALBERT FASE KALETA and
KALETA CAPITAL,
MANAGEMENT INC. et al.,
Defendants,
and
BUSINESSRADIO NETWORK, L.P.
d/b/a BizRadio and DANIEL
FRISHBERG FINANCIAL
SERVICES, INC., d/b/a DFFS
CAPITAL MANAGEMENT, INC.,
Relief Defendants.

§
§
§
§
§
§
§
§
§
§
§
§
§
§
§
§
§
§
§

CIVIL ACTION NO. 4:09-3674

MEMORANDUM AND ORDER
Before the Court in this receivership proceeding is a Motion to Lift Stay
[Doc. # 181] filed by investors David Selter and Joanne Cassidy (collectively,
“Movants”).

Movants are plaintiffs in a state suit against Daniel Frishberg.

Movants request this Court to lift an anti-litigation injunction issued in December
2009 so that their state suit may proceed. Because the equities favor maintaining
the stay, the Court DENIES the Motion to Lift Stay.

P:\ORDERS\11-2009\3674MLift.docx.7.3.2012.15:55:11

I.

BACKGROUND
In November 2009, the Securities and Exchange Commission (“SEC”)

commenced this action against Kaleta Capital Management, Inc. (“KCM”) and
Albert Kaleta. Compl. [Doc. # 1]. Subsequently, the Court appointed Thomas L.
Taylor III, Esq., as the Receiver for Kaleta Capital Management, Inc. (“KCM”)
and Relief Defendants BusinessRadio Network, L.P. d/b/a BizRadio (“BizRadio”)
and Daniel Frishberg Financial Services, Inc. d/b/a DFFS Capital Management,
Inc. (“DFFS”) (collectively, the “Receivership Entities”). See Receivership Order
[Doc. # 7]; Order Modifying Receivership Order [Doc. # 34]. The Receivership
Order enjoins, except in this Court,
the commencement or continuation, including the issuance or
employment of process, of any judicial, administrative, or other
proceeding against the Receiver, the Defendant, the Receivership
Estate, or any agent, officer, or employee related to the Receivership
Estate, arising from the subject matter of this civil action.
Receivership Order, ¶ 7(a).1
On January 14, 2011, the Court denied a motion to lift stay filed by another
investor, Barbara House, who sought to pursue state court claims against Daniel
and Elisea Frishberg. See Order [Doc. # 54] (“House Order”), at 1-2. The Court
held, inter alia, that the anti-litigation injunction applied to House’s state suit
1

On August 23, 2011, the Receiver filed an ancillary action against Daniel
Frishberg and others. See Compl. [Doc. # 105]. The Court granted the Receiver’s
Unopposed Motion to Sever the Ancillary Action on May 10, 2012. See Order [Doc.
#199].

2
P:\ORDERS\11-2009\3674MLift.docx.7.3.2012.15:55:11

against Daniel Frishberg (“D. Frishberg”) because he was an officer of DFFS, and
House’s state suit arose from the same subject matter of the instant case. See id., at
3. The Court denied House’s request to lift the stay because the equities favored
maintaining the status quo. Id., at 4.
Shortly after the Court’s ruling, Movants filed an Agreed Motion to Abate
their state suit against D. Frishberg in the 270th Judicial District Court in Harris
County, Texas. See Motion to Lift Stay [Doc. # 181], ¶¶ 2, 5. Movants’ state suit
arises from investment advice that D. Frishberg allegedly gave them in 2006. See
id., ¶¶ 17-20. According to Movants, D. Frishberg recommended that Plaintiffs
invest $100,000 in BizRadio2 despite agreeing that the Movants’ funds would only
be made in low-risk investments. See id., ¶ 18. D. Frishberg allegedly also
recommended that Movants invest another $100,000 in a real estate investment
firm, W.C. Perry Properties, LP (“Perry Properties”), but failed to disclose his
affiliation with Perry Properties. See id., ¶ 19. Movants seek to recover damages
under an Errors & Omissions Policy # 01-766-0906-09 issued to DFFS (“DFFS
Policy”) by American International Specialty Line Insurance Company. See Resp.
[Doc. # 190], at 3. According to the Receiver, the DFFS Policy is an asset of the
Receivership Estate, against which multiple investors—including Movants—have

2

Movants do not specify the exact BizRadio entity or entities in which they
invested.

3
P:\ORDERS\11-2009\3674MLift.docx.7.3.2012.15:55:11

filed timely claims. See id.
On March 16, 2012 Movants filed the instant Motion to Lift Stay (“Motion”)
[Doc. # 181].

The Receiver timely filed a Response [Doc. # 190], to which

Movants filed a Reply [Doc. # 191]. The Motion is now ripe for decision.
II.

LEGAL STANDARDS
In determining whether to lift a litigation stay imposed by a court overseeing

an equity receivership, courts are to consider:
(1)

Whether refusing to lift the stay genuinely preserves the status
quo or whether the moving party will suffer substantial injury if
not permitted to proceed;

(2)

The time in the course of the receivership at which the motion
for relief from the stay is made; and

(3)

The merit of the moving party’s underlying claim.

SEC v. Stanford Int’l Bank Ltd., 424 Fed. App’x 338, 341 (5th Cir. 2011)
(unpublished) (citing SEC v. Wencke, 742 F.2d 1230, 1231 (9th Cir. 1984)). “The
interests of the Receiver are very broad and include not only protection of the
receivership res, but also protection of defrauded investors and considerations of
judicial economy.” SEC v. Univ. Fin., 760 F.2d 1034, 1038 (9th Cir. 1985) (citing
SEC v. Wencke, 622 F.2d 1034, 1372-73 (9th Cir. 1980)). The Movant bears the
burden to show that the stay should be lifted. U.S. v. Acorn Tech. Fund, L.P.,
429 F.3d 438, 450 (3d Cir. 2005).

4
P:\ORDERS\11-2009\3674MLift.docx.7.3.2012.15:55:11

III.

DISCUSSION
Movants offer several reasons3 why their state suit should be permitted to

proceed: (1) The Receiver has not yet recovered on the DFFS Policy, despite
having over two years to do so since the Receiver’s appointment in December
2009, Motion, ¶¶ 11, 12, 15, 16; (2) The Movants continue to be harmed, id. ¶ 14;
(3) The Movants have meritorious claims against Daniel Frishberg, id. ¶¶ 17-20;
(4) The Receiver has not timely provided information or evidence of his progress
in obtaining proceeds, Reply, ¶¶ 6-9; and (5) The Movants’ claims do not arise
from the same BizRadio promissory note fraud that is the subject of the SEC
action, id., ¶¶ 10-12.
The Court begins by addressing Movants’ last contention, essentially that
Movants’ claims are exempt from the Court’s litigation stay. The Receivership
Order explicitly restrains judicial action against an “officer or employee related to
the Receivership Estate.” Receivership Order [Doc. # 7], ¶ 7(a); see also House
Order [Doc. # 54], at 3. The Receiver’s Complaint in the now-severed suit against
D. Frishberg alleges that the latter was an “owner, employee, partner, director,
and/or officer of DFFS, BizRadio, and their related entities,” see First Am. Compl.
[Doc. # 150], ¶ 22, and the assets and records of DFFS and BizRadio are part of
the Receivership Estate. See Order Modifying Receivership Order [Doc. # 34], at
3

Some, but not all, of these arguments relate to the first Wencke factor.

5
P:\ORDERS\11-2009\3674MLift.docx.7.3.2012.15:55:11

1-2.
Regarding the first Wencke factor, Movants’ claims also arise from the same
subject matter as this case. Movants’ descriptions of their BizRadio investment
indicate Movants’ claims are within the fraudulent scheme that led to the
Receivership and harmed dozens of investors similarly situated to Movants. See
Motion, ¶ 18. Movants argue that their investment in Perry Properties is unrelated
to the promissory note frauds at the center of the SEC action, see Reply, ¶ 12, but
they have submitted no evidence or explanation of how the Perry investment is
distinct.4 Moreover, the investment schemes orchestrated by Frishberg, Kaleta,
and the entities controlled or owned by them are highly interrelated.5 Movants’
claims appear to arise from events or transactions related to the subject matter of
this case.
The Court also denies Movants’ request to lift the stay because the equities
continue to favor maintenance of the status quo. If Movants’ suit were permitted
to proceed, Movants in effect would be granted priority over other investors who
4

In their Reply, Movants argue that their “claims do not arise out of the promissory
note scheme of Frishberg and Kaleta. Their investments were in BIZ Radio and in Perry
Properties—not the SEC notes.” Reply [Doc. # 191], ¶ 11. This assertion is
unpersuasive; Movants’ BizRadio investments are the subject matter of the SEC action
and the Receiver’s suit against Frishberg and others.
5

For example, the SEC alleges that Kaleta owned approximately 44% of DFFS and
served as DFFS’s vice president and chief compliance officer. See Compl. [Doc. # 1],
¶ 12. In the suit against Frishberg, the Receiver alleges that Kaleta was an owner and
officer of DFFS and BizRadio. See First Am. Compl. [Doc. # 150], ¶ 2.

6
P:\ORDERS\11-2009\3674MLift.docx.7.3.2012.15:55:11

were victimized by the same fraudulent scheme. This likely would deplete the
DFFS insurance proceeds through expenditure of defense costs the Policy must
cover in litigation or an early negotiated settlement. It also would disrupt the
Receiver’s negotiations with DFFS’s carrier, and force costly, potentially
unnecessary, litigation regarding coverage issues under the Policy.6 In either case,
the status quo would be disrupted to the detriment of the Receivership.
In addition, although Movants argue that “harm to [them] continues,” see
Motion, ¶ 14, they have not identified any specific injury sufficient to lift the stay.
See Acorn Tech., 429 F.3d at 449. Despite Movants’ contentions, it is apparent
that, even if the stay were lifted, Movants would need to litigate and/or negotiate to
recover any insurance proceeds, processes requiring significant time and largely
duplicative efforts of the Receiver. Moreover, the Receiver already has taken
some steps towards collection of the insurance claims.7 See Resp., at 5. It is far
from clear that lifting the stay would allow Movants to recover their alleged share
of these proceeds more quickly. Accordingly, the first Wencke factor weighs in

6

The Receiver states that other victimized investors have timely filed claims against
DFFS that implicate the DFFS Policy. Resp. at 3, 4 n.1 (“[The claims against DFFS]
trigger[] DFFS’s—and thereby the Receivership Estate’s—right to indemnification under
the [DFFS] Policy and bolster the Receiver’s contention that the proceeds of the [DFFS]
Policy were a Receivership Asset and should be tendered to the Estate for the benefit of
all aggrieved investors.”).
7

The Receiver reports that he has submitted to the insurance carrier a formal
demand letter for Policy proceeds. Resp., at 5.

7
P:\ORDERS\11-2009\3674MLift.docx.7.3.2012.15:55:11

favor of maintaining the stay and none of Movants’ contentions are persuasive.
The second Wencke factor, the timing of the request, also weighs in favor of
maintaining the stay. Although the Receiver was appointed in December 2009, he
continues to pursue various Estate claims and thus is not yet prepared to distribute
Estate assets. See id., at 9. If Movants’ state suit against Frishberg were permitted
to proceed, the Receiver would lose necessary control over Estate assets for
purposes of administering Receivership. See id.
The Court expresses no opinion on the third factor, the merits of Movants’
claims in their state court suit. Even if those claims are meritorious, they
undoubtedly are contested. This factor does not outweigh the equities set forth
above, which weigh heavily in favor of the stay.
Last, Movants’ request for periodic reports by the Receiver on the status of
the claim against the DFFS Policy proceeds is not unreasonable. The Receiver
now states that the insurance carrier “is actively working to structure a settlement.”
See id., at 5. The Court will establish a schedule for the Receiver to report the
status of these matters. The absence of formal reports to date, however, is not a
basis for lifting the stay.
For all of the foregoing reasons, it is
ORDERED that Movants’ Motion to Lift Stay [Doc. # 181] is DENIED. It
is further
8
P:\ORDERS\11-2009\3674MLift.docx.7.3.2012.15:55:11

ORDERED that the Receiver must report the status of his claim for the
DFFS Policy proceeds by August 30, 2012 and file a status report every four
months thereafter.
SIGNED at Houston, Texas, this 3rd day of July, 2012.

9
P:\ORDERS\11-2009\3674MLift.docx.7.3.2012.15:55:11