Securities & Exchange Commission v. Kaleta et al

Filing 248

MEMORANDUM AND ORDER GRANTED 241 MOTION for Approval of SETTLEMENT WITH BARRINGTON FINANCIAL ADVISORS, INC. AND WILLIAM C. HEATH (Signed by Judge Nancy F. Atlas) Parties notified.(sashabranner, )

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,
et al.,
Defendants,
BUSINESSRADIO NETWORK, L.P.
/d/b/a BizRadio and DANIEL
FRISHBERG FINANCIAL SERVICES,
INC., d/b/a DFFS CAPITAL
MANAGEMENT, INC.,
Relief Defendants.

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CIVIL ACTION NO. H-09-3674

MEMORANDUM AND ORDER

____________________________________________________________________
THOMAS L. TAYLOR, III, solely in his §
capacity as court-appointed receiver
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for KALETA CAPITAL MANAGEMENT, §
INC., BUSINESSRADIO NETWORK, LP §
d/b/a Biz Radio, and DANIEL
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FRISHBERG FINANCIAL SERVICES
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d/b/a DFFS CAPITAL MANAGEMENT, §
INC.,
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Plaintiff,
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v.
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DANIEL S. FRISHBERG, ELISEA T.
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FRISHBERG, ALBERT FASE KALETA §
BARRINGTON FINANCIAL ADVISORS, §
INC., and WILLIAM C. HEATH,
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Defendants.
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CIVIL ACTION NO. H-12-1491

MEMORANDUM AND ORDER
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The Court has before it a Motion to Approve Settlement with Defendants
Barrington Financial Advisors, Inc. (“Barrington”) and William C. Heath (“Heath”)
(collectively, the “Barrington Defendants”) [Doc. # 241] (“Motion”) filed by Courtappointed receiver Thomas L. Taylor, III (the “Receiver”). Various investors who
invested funds through the Barrington Defendants have filed objections [Doc. # 245]
(“Objections”) to the settlement.1 The Receiver has filed a response to the Objections
[Doc. # 246] (“Response”).

The matter is ripe for decision.

After careful

consideration of the Motion, the Objections, and the Response, as well as applicable
law and earlier proceedings in this case, the Court holds that the settlement should be
approved.
I.

BACKGROUND
The factual background of this case and creation of the Receivership are set

forth in detail in several Memoranda and Orders of this Court. See Docs. #170, # 205,
and # 235. The detailed facts and procedural history will not be repeated here.

1

The objecting investors (collectively, the “Objectors”) are Ronald & Lavonne Ellisor,
Richard Kadlick, Sailaja Uri Konduri, Robert Ficks, Larry Mullins, Kohur
Subramanian, Timothy Koehl, Martin Grosbol, Doug & Kay Shaffer, Alisa K. Jones,
Kevin Deering, Ed & Helena Gray, Johnny & Betty Gauntt, Tony Huerta, Marcus
Erickson, Kurt Everson, George & Marene Tompkins, Richard Burkhart, James &
Patricia Stewart, Bob & Kathy Horlander, Don Keil, Dr. Gerald Crouch, Paul &
Simona Williams, Steve Cook, Florence Reiley, Carlos Barbieri, Raymond Warner,
and John Willis.

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A.

The Receivership

In brief, on November 13, 2009, the Securities and Exchange Commission (the
“SEC”) commenced this case against Albert F. Kaleta (“Kaleta”) and Kaleta Capital
Management (“KCM”), alleging violations of the antifraud provisions of the federal
securities laws arising from the fraudulent offering of promissory-note securities (the
“Enforcement Action”).2

According to the SEC, Kaleta, Daniel Frishberg

(“Frishberg”), and KCM perpetrated several frauds related to promissory-note
securities. In one such scheme, these individuals and entities solicited investors, to
make loans to various entities related to a radio station (collectively, “BizRadio”).
On December 2, 2009, this Court appointed Thomas L. Taylor, III, as Receiver
for KCM. On June 17, 2010, this Court expanded the Receivership Estate to include
Relief Defendants BizRadio and DFFS.3 The Court authorized the Receiver (1) to
take and have complete and exclusive control, possession, and custody of the
Receivership Estate;4 (2) to collect all sums of money due or owing to the

2

See Enforcement Action Doc. # 1.

3

See Agreed Order Appointing Receiver [Enforcement Action Doc. # 7] (“Receiver
Order”) and Order Modifying Order Appointing Receiver [Enforcement Action Doc.
# 34] (collectively, “Modified Receiver Order”).

4

The “Receivership Estate” consists of the Receivership Assets and the Receivership
Records. Receiver Order, ¶ 2. “Receivership Assets” are “the assets, monies,
securities, properties, real and personal, tangible and intangible, of whatever kind and
description, wherever located, and the legally recognized privileges (with regard to
the entities), of the Defendant and all entities it owns or controls.” Id. ¶ 1; Modified
Receiver Order, at 1-2. “Receivership Records” are “the books and records, client
(continued...)

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Receivership Estate; (3) to institute actions to obtain possession and/or recover
judgments with respect to persons or entities who received assets traceable to the
Receivership Estate; (4) to contract and negotiate with any claimants against the
Receivership for purposes of compromising or settling any claim; (5) to institute,
prosecute, or compromise such actions that the Receiver deems necessary and
advisable to carry out the Receiver’s mandate; and (6) to preserve the Receivership
Estate and minimize expenses in furtherance of maximum and timely disbursement
to claimants.5

4

(...continued)
lists, account statements, financial and accounting documents, computers, computer
hard drives, computer disks, internet exchange servers telephones, personal digital
devices and other informational resources of or in possession of the Defendant, or
issued by Defendant and in possession of any agent or employee of the Defendant.”
Receiver Order, ¶ 1; Modified Receiver Order, at 2.

5

Receiver Order, ¶¶ 4, 5(i), 5(j), and passim. On March 25, 2011, the Commission
commenced the action styled SEC v. Daniel Shalom Frishberg, No. 4:11-cv-1097
(S.D. Tex. Mar. 29, 2011), in the United States District Court for the Southern District
of Texas, alleging direct violations and the aiding and abetting of violations of §
206(1) and (2) of the Investment Advisers Act of 1940 (the “Advisers Act”), 15
U.S.C. § 80b-6(1), 80b-6(2). Pursuant to an agreed final judgment, civil penalties
were ordered against Frishberg in the amount of $65,000 and Frishberg was
permanently enjoined from violating § 206 of the Advisers Act. Frishberg was also
barred from association with any investment adviser pursuant to § 203(f) of the
Advisers Act, 15 U.S.C. § 80b-3(f). See Order Instituting Administrative Proceedings,
SEC Administrative Proceeding File No. 3-14393, Release No. 3206, May 16, 2011.

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B.

Litigation by the Receiver Against Barrington and Heath

On August 23, 2011, the Receiver commenced litigation against Receivership
Entity owners, officers, and employees Daniel and Elisea Frishberg (the “Frishbergs”)
and Kaleta, and against Barrington and its principal Heath (the “Ancillary Action”).6
The Receiver alleges inter alia that the Barrington Defendants fraudulently transferred
assets from DFFS and Frishberg to the Barrington Defendants, tortiously interfered
with DFFS contracts, and aided and abetted Frishberg’s breaches of fiduciary duty to
DFFS.7 On May 2, 2012, for ease of administration, the Court severed the Ancillary
Action from the Enforcement Action.
The Receiver sought and obtained this Court’s approval of a proposed
settlement with Kaleta.8 The Receiver has not settled his claims against the Frishbergs
and their entities. The Receiver reports that he currently plans to pursue all these
claims, including claims arising out of the alleged transfer of assets to the Barrington
Defendants.

6

Enforcement Action Doc. # 105.

7

Ancillary Action Complaint [Doc. # 1], ¶¶ 132-147 (Counts IX, X, XI). The
Ancillary Action is styled Taylor v. Frishberg, et al., Civil Action No. 4:12-cv-1491,
and is pending before this Court.

8

See Memorandum and Order [Enforcement Action Doc. # 235], dated May 31, 2013.

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C.

Analysis of the Proposed Settlement
On behalf of the Receivership Estate and all persons who have a substantive

claim against the Receivership Estate, the Receiver has reached a proposed settlement
with the Barrington Defendants.9 The basic terms of the agreement are:
(1)

the Barrington Defendants will pay to the Receivership Estate the sum
of $50,000 in ten equal monthly installments;10

(2)

the Barrington Defendants will release the Receivership Estate from any
and all claims as of the date of the Settlement; and

(3)

the Receiver will release the Barrington Defendants from any and all
claims of the Receivership Estate as of the date of the Settlement.

The Receiver urges that the proposed Settlement is fair, equitable, and reasonable, and
is in the best interests of the Receivership Estate and all claimants to Estate assets.
The Objectors complain that the “settlement amount is very low for the claims
asserted against Barrington and Heath [personally]”;11 that the Receiver “has yet to
adequately investigate the claims to be compromised and related to claims against

9

See Enforcement Action Doc. # 241, Exh. A.

10

Should Barrington, default on these payments, the release and discharge to which the
parties agree will become null and void, and the Receiver may proceed against both
Barrington Defendants. The Court retains jurisdiction over this matter until the
conclusion of the payment period. See id.

11

Objections, at 2-3.

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Daniel Frishberg for transfer of the accounts at issue”12; and that the Objectors “should
be permitted the opportunity to explore means to a higher recovery from the advisory
accounts transferred to Barrington and Heath and the management fees earned
therefrom.”13 For the reasons set forth below, the Court is unpersuaded by any of the
Objectors’ contentions and concludes that approval of the proposed settlement is
warranted.
The Receiver has done a careful and effective evaluation of the claims, defenses
and collection issues relating to the causes of action asserted against the Barrington
Defendants. The Receiver has presented a fulsome explanation of evidence adduced
during discovery of these claims and has given a pithy and effective explanation of his
analysis of the legal issues that may affect recovery from the Barrington Defendants.
The Receiver’s responses to the Objectors’ points demonstrate that he also has
considered the Barrington Defendants’ assets, has evaluated associated collection
issues, and has carefully evaluated the litigation options.14 Heath, as recited in the
12

Id. at 3-4.

13

Id. at 4-5.

14

There is no doubt that the Receiver has authority to negotiate and propose the
settlement under consideration, in performance of his duty to “[p]reserve the
Receivership Estate and minimize expenses in furtherance of maximum and timely
disbursement thereof to claimants.” Receiver Order, ¶ 5(j). The Receiver contends
that the Order Appointing Receiver authorizes the Receiver to resolve the matter
without Court approval. The Court concludes that its oversight responsibilities are
(continued...)

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settlement agreement, represents that the Barrington Defendants have very limited
assets. The Receiver urges, for strong reasons, that the settlement provides a recovery
as large or larger than what likely could be collected by the Estate after litigation with
these Defendants. The Receiver also points out that the Objectors are able to pursue
claims they may have against the Barrington Defendants.15
Notably, the Receiver is an individual with extensive business and receivership
experience. The settlement is the result of detailed arms’ length negotiations with the
Barrington Defendants. The Court recognizes that the money to be paid by the
Barrington Defendants in settlement is not very large. However, the Court concludes
that there is a likelihood of potentially significant litigation expenses, as well as large
attorneys’ and Receivers’ fees, were this case to be litigated fully. These fees and
expenses would seriously deplete any recovery that likely could be obtained from
litigation. There appear to be meaningful litigation and collection risks inherent in the
claims the Receiver asserts against the Barrington Defendants. The settlement, on the
other hand, has the advantage of providing greater likelihood of collection of the
settlement sum. The Court therefore finds that the proposed settlement is fair,
equitable, and reasonable, and is in the Receivership Estate’s and its claimants’ best
14

(...continued)
better served by review of the settlement.

15

The Objectors have not filed any factual or legal rebuttal to this analysis.

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interests.
IV.

CONCLUSION AND ORDER
After careful consideration of the record and applicable law, the Court agrees

with the Receiver that the proposed settlement with the Barrington Defendants is a
good option for certain recovery of assets and to maximize the value of the
Receivership Estate, while minimizing expenses in recovery of these assets. The
Court accordingly approves the settlement as fair, equitable, reasonable, and in the
best interests of the Receivership Estate and those who could claim rights to the
Estate’s assets. It is therefore
ORDERED that the Receiver’s Motion to Approve Settlement with Barrington
Financial Advisors, Inc. and William C. Heath [Doc. # 245] is GRANTED. It is
further
ORDERED that this Memorandum and Order will be filed in Civil Case
Nos. 4:09-cv-3674 and 4:12-cv-1491.
SIGNED at Houston, Texas, this 23rd day of July, 2013.

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