Free Motion for Disbursement of Funds - District Court of Colorado - Colorado

Case 1:01-cv-00645-JLK

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

Civil Action No. 01-cv-645-JLK SECURITIES AND EXCHANGE COMMISSION Plaintiff, v. KENNETH ROY WEARE a/k/a ROY WEAVER, J&K GLOBAL MARKETING CORPORATION, and AAA-AUCTION.COM, INC., Defendants.

RECEIVER'S FIFTH APPLICATION FOR FEES AND EXPENSES

Patten, MacPhee & Associates, Inc., the Court-appointed Receiver in this case, hereby applies to the Court for the payment of professional fees and expenses for the period from October 1, 2006 through December 31, 2006, in the amount of $36,631.56. In support thereof, the Receiver states as follows: 1. On October 26, 2005, the Court entered its Order Appointing Receiver, appointing

Patten, MacPhee & Associates, Inc. as Receiver in the above-captioned matter to, among other things, establish and administer a claims process for investors and propose a distribution plan to the Court for funds collected by the SEC from various bank accounts in the United States and abroad. 2. Detailed descriptions of the activities undertaken by the Receiver since its appoint-

ment by the Court through September 30, 2006 have been provided in the Receiver's quarterly

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reports for the calendar quarters ended December 31, 2005, March 31, 2006, June 30, 2006, and September 30, 2006. A detailed listing of the activities undertaken by the Receiver during the period covered by this fee application is set forth on pages 2-4 of Exhibit B, attached hereto. In addition, the Receiver anticipates filing with the Court the Receiver's Fifth Quarterly Report for the Quarter Ended December 31, 2006 within the next few days. 3. To date, the Court has approved payment to the Receiver of $97,650.00 for

professional fees and $36,160.72 for reimbursement of the Receiver's out-of-pocket expenses. 4. following: Exhibit A - List of Patten MacPhee & Associates, Inc.'s employees and their respective billing rates. Exhibit B - Summary of Billings, which includes Attachments 1 and 2. Attachment 1 to Exhibit B sets forth in detail, in chronological order, the time entries by employee, including a narrative description of the services rendered, during the period covered by this fee application. Attachment 1 also includes summaries, by employee and by category, of the hours and services for which the Receiver has billed. Each employee for whom the Receiver seeks payment of professional fees in connection with this matter has kept daily time records, and all work has been billed on an hourly basis. The Receiver has taken special care to ensure that duplication of time and services rendered has not occurred. In addition, it should be noted that while the undersigned has performed his professional responsibility to oversee and supervise this matter, to date he has not In support of this Fifth Application for Fees and Expenses, the Receiver attaches the

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charged for any of his time. Attachment 2 to Exhibit B sets forth detail regarding the out-of-pocket expenses incurred by the Receiver during the period covered by this fee application. 5. During the period of time covered by this fee application, the Receiver's employees

expended a total of 194.8 hours, for which the Receiver seeks payment in the amount of $25,205.00. As set forth in Exhibit B, 33.5 hours related to Claims Administration were billed as no charge ("NC") by the Receiver. Thus, the average hourly rate for which the Receiver seeks payment in this fee application is $129.39. 6. During the period of time covered by this fee application, the Receiver also incurred

out-of-pocket expenses in the amount of $11,426.56. As set forth in Attachment 2 to Exhibit B, those expenses primarily related to legal fees associated with the preparation and filing of two motions with the Court ($8,578.00) and the purchase of FormRouterTM software to assist with the electronic filing of claims by investors and the automatic collection of claims data ($2,400.00). 7. The Receiver believes that the services rendered and expenses incurred to date have

been necessary and reasonable, especially in light of the scope of activities undertaken and the number of potential claimants here. Nevertheless, the Court must be advised that, with this fee application, the amounts requested by the Receiver for both professional fees and expenses now exceed the Receiver's initial estimate of such fees and expenses set forth in its September 23, 2005 proposal in response to the SEC's request for proposals ("RFP"). For the Court's convenience, a copy of the Receiver's September 23, 2005 proposal is attached hereto at Exhibit C. 8. The Receiver has identified several reasons for its fees and expenses exceeding its

initial estimate. In explaining the reasons for the significant underestimation of fees and expenses -3-

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in its proposal, the Receiver is not "pointing fingers" or complaining. In fact, many of the issues and circumstances encountered by the Receiver in this matter have been rather unique and professionally challenging. Nevertheless, the Receiver would hope and expect to be reasonably compensated for the services it has performed in the past, as well as those it expects to perform over the next few months. 9. As set forth in Exhibit C, at the time of submitting its proposal, the Receiver

estimated its professional fees to complete this project at $100,000 and its out-of-pocket expenses to be $30,000, for a total of $130,000. (Ex. C, p. 3). The Receiver's proposal also stated: "It should be emphasized that the above amounts are only estimates. Given the number and magnitude of uncertainties related to this project, we cannot provide a flat fee proposal at this time. Of course, we would expect that any material change from the above estimates would be subject to the Court's approval." (Ex. C, p. 3). 10. The "uncertainties" expressed in the Receiver's proposal included the integrity and

reliability of the data to be provided by the SEC, as well as the number of valid e-mail addresses for investors contained in the database to be provided by the SEC. Specifically, the Receiver stated, at that time: "It should be noted that in estimating our fees and costs for this project below, we are assuming a significant degree of integrity and reliability in the data to be provided by the SEC. We are also assuming that the SEC database provides e-mail addresses, for a substantial number of investors. If those assumptions should prove invalid, our estimate of fees and costs to complete this project could increase significantly." (Ex. C, p. 2).

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11.

Those and other assumptions on which the Receiver based its good faith estimate of

fees and expenses proved invalid. For example, the e-mail address field of the Access database provided by the SEC contained as many as 24,269 unique entries. Of those entries, the Receiver determined 23,882 entries were in the form of an e-mail address, to which the Receiver assigned a unique six-digit number ("PMA No."). In April 2006, the Receiver sent at least two broadcast emails to each e-mail address assigned a unique PMA No. The e-mails related to 13,597, or 56.9%, of those PMA Nos. bounced, indicating that those e-mail addresses no longer, if ever, existed. Thus, of the 23,882 unique e-mail addresses contained in the Access database provided by the SEC, only 10,285, or 43.1%, proved to be valid e-mail addresses capable of notifying a potential claimant. 12. With respect to the more than 13,000 potential claimants identified with bounced e-

mails, the Receiver used the Access database to create both a U.S. and a foreign postal mailing list. Although importing the data from the Access database to an Excel spreadsheet required little effort, the quality of the data proved to be less than the Receiver had hoped. For example, the Receiver immediately noted missing and clearly inaccurate ZIP codes; addresses where the country, state or province that had been input by Defendants' employees was obviously wrong; and, clearly fictitious addresses, such as those of Donald Duck in Hollywood. As a result, significant time was expended in developing accurate and effective mailing lists for those potential claimants identified in the Access database with invalid e-mail addresses. In addition, the Receiver incurred substantial expense for printing and mailing paper notices to more than 8,000 potential claimants in the United States and more than 5,000 potential claimants in more than 90 other countries.

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13.

Prior to submitting its proposal, the Receiver was told by the SEC that the Access

database contained many foreign investors; however, no specific estimate of the number of foreign investors was provided. Subsequent to being appointed by the Court, the Receiver determined that more than 7,300 potential claimants included in the Access database reside outside the United States. This substantial number of foreign investors has increased the Receiver's out-of-pocket expenses significantly. 14. After being appointed by the Court and receiving the Access databases from the SEC,

the Receiver also discovered that the nature and structure of the Defendants' fraudulent scheme encouraged many investors to make multiple small investments ­ using variations of their own name, the names of family members and friends, and/or fictitious names ­ rather than a single, lump-sum investment. For example, it was discovered that an individual named "John Paul Anderson" might have invested with Defendants under the names "John Paul Anderson," "John P. Anderson," J. Paul Anderson" and "J.P. Anderson," in addition to the names of his wife, children, parents and friends. Moreover, each time that an investment was made under a different name, the investor was assigned a different six-digit number by the Defendants ("J&K ID No."). Thus, it was not uncommon for an investor to have more than one J&K ID No. in the database. In fact, the Receiver discovered early on that one potential claimant in California was included in the Access database more than 600 times, each time using a slight variation of his/her name or address. Although this example, represents the extreme, analysis of the database indicated that more than 4,000 potential claimants had more than one J&K ID No. associated with their unique e-mail address. As a result, the design

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and implementation of the Receiver's website was complicated, by necessity, doubling its cost when compared to the original estimates. 15. The Receiver's assumptions regarding the integrity and reliability of the data provided

by the SEC have also proven faulty. As a result, the Receiver's employees have devoted substantial time to normalizing, analyzing, testing and manipulating the data obtained by the SEC from the Defendants. At the same time, the Receiver has devoted considerable resources to the bank account records created by the SEC's staff. In addition to the databases described above, the SEC also provided the Receiver with several MS Excel workbooks, each containing numerous worksheets reflecting detailed monthly banking activity by Defendants. In order to make such data useful for validating claims, the Receiver consolidated the worksheets related to each bank account and combined the resulting worksheets into a single table. That table, which also includes data regarding the money orders seized by the SEC and ultimately deposited into the registry of the Court, as well as data related to Canadian bank accounts not previously summarized by the SEC, contains more than 23,000 records. To date, professional fees for such activities related to the databases and bank records have totaled more than $25,000, or approximately one-fourth of the Receiver's fees to date. 16. At the time of preparing its proposal, the Receiver hoped to take advantage of

technology to the greatest extent possible by collecting and validating investor information electronically. The Receiver knew that if it were required to input data manually and/or personally interact with more than 23,000 investors, its estimates of the time and costs to complete this project would increase significantly. Consequently, all decisions made and actions taken by the Receiver

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to date have taken into consideration this critical need for the electronic collection and validation of investor information. 17. On the other hand, technology has also increased the ease with which investors from

around the world can contact the Receiver, whether by e-mail, fax or telephone. The Receiver estimates that as much as $25,000 of the fees and out-of-pocket expenses for which it has sought payment from the Court over the past several months are related to e-mail and other communications from and to investors. 18. This civil action was filed by the SEC in April 2001. According to the press release

issued at that time, the Defendants had offered and sold the J&K Global Marketing Corp. investment since at least November 1999. In addition, the AAA-Auction.com, Inc. investment was described as a previous fraudulent offering that operated an Internet auction site in 1998 and 1999. Thus, by the time this receivership is completed, each investor will have parted with his/her money a minimum of six and as many nine years before. Without question, the passage of time from the date of investment to the date of the SEC filing, to the date of the appointment of a receiver, has added, and will continue to add, to the fees and costs necessary to perform the services required by the Court. 19. In summary, assumptions made by the Receiver with respect to the number of valid

e-mail addresses contained in the SEC's database, as well as the integrity and reliability of the data contained in the SEC's databases, in estimating its fees and out-of-pocket expenses have proven invalid. At the same time, the large number of foreign investors, the nature and structure of the Defendants' fraudulent schemes, and the significant passage of time from the investment of monies

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by potential claimants to the appointment of a receiver have all contributed to the Receiver's increased fees and costs. 20. At this time, the Receiver estimates its fees and out-of-pocket expenses, going

forward, will total between $40,000 and $60,000. To that end, the Receiver remains committed to providing high quality professional services while keeping its future fees and expenses within that estimated range. WHEREFORE, the Receiver respectfully requests that the Court enter an order granting it payment for professional fees and the reimbursement of out-of-pocket expenses for the period October 1, 2006 through December 31, 2006, in the total amount of $36,631.56. DATED this 31st day of January, 2007.

Patten, MacPhee & Associates, Inc.

s/Leslie A. Patten Leslie A. Patten, President 1775 Sherman Street, Suite 2900 Denver, Colorado 80203 Telephone: (303) 296-2900 Fax: (303) 296-4475

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