Free Motion for Order - 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 CASE NO. 01-CV-645-JLK SECURITIES AND EXCHANGE COMMISSION Plaintiff vs. KENNETH ROY WEARE aka ROY WEAVER, J&K GLOBAL MARKETING CORPORATION, and AAA-AUCTION.COM, INC. Defendants

RECEIVER'S UNOPPOSED MOTION FOR ORDER DETERMINING ASSETS OF J&K GLOBAL MARKETING CORPORATION AND AAA-AUCTION.COM, INC. LIABLE FOR OBLIGATIONS OF KENNETH ROY WEARE

COMES NOW, the Receiver, Patten, MacPhee & Associates, Inc., by and through its undersigned counsel, Christine J. Jobin, Esq., and respectfully moves the Court for its order determining the assets of defendants J&K Global Marketing Corporation and AAAAuction.com, Inc. are liable for the obligations of Kenneth Roy Weare ("Weare") for purposes of administration of this receivership estate. In support of this motion, the Receiver states as follows: I. INTRODUCTION On or about April 10, 2001, the Securities and Exchange Commission ("SEC") filed a complaint against the defendants Weare, J&K Global Marketing ("J&K") and AAAAuction.com, Inc. ("AAA-Auction") and alleged they were violating anti-fraud provisions of

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Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 (the "Complaint"). J&K is a Colorado corporation formed by Weare on June 24, 1999. AAA-Auction is another Colorado corporation formed by Weare on March 17, 1998. See Exhibit A incorporated by reference as if fully set forth. At that time, the SEC also sought and obtained an Ex Parte Temporary Restraining Order enjoining Weare and J&K from violating the securities registration provisions of Sections 5(a) and (c) of the Securities Act of 1933 by offering or selling securities in the form of memberships in defendant J&K's "Free Rent/Mortgage Program" because no registration statement was in effect (the "TRO"). The Complaint and TRO are incorporated herein by reference as if fully set forth. On January 8, 2002, the Court entered a Permanent Injunction by Default and Continued Assets Freeze Against Weare, J&K Global Marketing Corporation and AAA-Auction.Com, Inc. (the "Permanent Injunction"). The Permanent Injunction is incorporated herein by reference as if fully set forth. On January 15, 2002, the Court entered judgment in accordance with Fed.R.Civ.P. 54(b) which provides, in part, that: (1) Weare and J&K, jointly and severally disgorge $6,278,334.91 and pay pre-judgment interest of $486,848.02; (2) Weare and AAA-Auction, jointly and severally, disgorge $623,250.00 and pay pre-judgment interest of $142,724.40; (3) Weare and J&K each pay one civil penalty of $110,000; and (4) Weare pay a second civil penalty of $110,000 related to the sale of the AAA-Auction.com Merchandise Purchase Agreement (the "Judgment against Weare"). The Judgment against Weare is incorporated herein by reference as if fully set forth. The amounts of the respective disgorgement judgments against Weare, J&K 2

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and AAA-Auction represent the illegal gains that the defendants obtained as a result of the fraudulent schemes they perpetrated as alleged in the Complaint. Later, the SEC recovered more than $3 million of the funds obtained fraudulently by Weare, J&K and/or AAA-Auction. The funds are now on deposit in the registry of the Court. On October 26, 2005, the Court appointed Patten MacPhee & Associates, Inc. ("PMA") as Receiver to establish and administer the claims process for returning the recovered funds to investors. The Declaration of Susan L. Sipes Pursuant to 28 U.S.C. §1746 (the "Sipes Declaration"), the Declaration of Margaret Ann Cain Pursuant to 28 U.S.C. §1746 (the "Cain Declaration") and the Declaration of Dawn Anne Leporati Pursuant to 28 U.S.C. §1746 (the "Leporati Declaration"), copies of which are attached as Exhibits B, C and D, respectively, and incorporated by reference, identify and describe the bank accounts which were controlled by Weare and into which he deposited and/or transferred the funds obtained from the investors in the fraudulent schemes. Paragraph 12 of the Sipes Declaration provides that on January 4, 2001, the balance in account number 3-146-5503-538 in Weare's name at Dexia Banque Internationale A. Luxembourg (the "Luxembourg Account") was $2,877,515.79. The funds in the Luxembourg Account were the primary source of the funds the SEC recovered and which are now on deposit in the registry of the Court. The Receiver has examined the financial and bank records made available by the SEC and has determined that there was extensive commingling of funds in the bank accounts between and among various entities and persons identified in the Sipes Declaration, Leporati Declaration 3

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and Cain Declaration. The Receiver also has determined that Weare transferred or caused to be transferred funds obtained from investors in J&K to accounts in the name of AAA-Auction. As a result, the Receiver is not able, without expending significant time and resources, to unwind all of the transactions and determine what portion of the funds on deposit in the registry of the Court are attributable to J&K investors or to AAA-Auction investors. The Receiver believes that equity requires, given that the claimants against this estate were induced to invest in two strikingly similar schemes operated by Weare over a period of years, that the funds on deposit be treated as one fund to be distributed pro rata to all of the claimants with allowed claims against this receivership estate. The Receiver requests the Court to reverse pierce the respective corporate veils of J&K and AAA-Auction and to order that the remaining assets of these corporations, i.e. the funds on deposit in the registry of the Court, be used to satisfy, in part, the Judgment against Weare. The doctrine of reverse piercing provides the Receiver a basis which is now recognized under Colorado law to use the funds, whether they are attributable to J&K or to AAA-Auction, to be available for distribution pro rata to all claimants with allowed claims against this receivership estate. II. THE DOCTRINE OF REVERSE PIERCING OF THE CORPORATE VEIL Until June 26, 2006, Colorado law did not permit a court to reverse pierce the corporate veil and obtain funds from the corporation for the debts of a dominant shareholder or other corporate insider. But in In re Phillips, 139 P.3d 639 (Colo. 2006), the Colorado Supreme Court agreed to consider reverse piercing in a certified question and ruled that Colorado law permits

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outside reverse piercing claims when justice so requires. Outside reverse piercing occurs when an outsider with a claim against a corporate insider seeks to disregard the corporate entity to subject corporate assets to the claim. Outside reverse piercing permits the court to disregard the corporate form which, through the acts of a dominant shareholder or other corporate insider, is a legal fiction used to perpetuate a fraud or defeat a rightful claim of an outsider. The purpose of reverse piercing is to achieve an equitable result. Id. at 645. A court may reverse pierce the corporate veil and obtain the assets of a corporation for the obligations of a controlling shareholder upon a clear showing that: (1) the controlling insider and the corporation are alter egos of each other; (2) justice requires recognizing the substance of the relationship over the form because the corporate fiction is utilized to perpetuate a fraud or defeat a right claim; and (3) an equitable result is achieved by piercing. Id., cites omitted. To establish whether the controlling insider and the corporation are alter egos of each other, courts consider whether: (1) the corporation is operated as a distinct business entity; (2) funds and assets are commingled; (3) adequate corporate records are maintained; (4) the nature and form of the entity's ownership and control facilitate misuse by an insider; (5) the business is thinly capitalized; (6) the corporation is used as a "mere shell;" (7) shareholders disregard legal formalities; and (8) corporate funds or assets are used for non-corporate purposes. III. THE ASSETS OF J&K AND AAA-AUCTION ARE SUBJECT TO WEARE'S OBLIGATIONS Given the facts and circumstances of this receivership estate, Weare and J&K must be found to be the alter egos of one another. Similarly, Weare and AAA-Auction must be found to

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be the alter egos of one another. The Declarations of Sipes, Leporati and Cain establish that from November 1999 to early 2001, Weare and J&K engaged in a scheme to defraud investors by offering investments in the form of $375 memberships in J&K's Rent/Mortgage Free Program over Internet websites registered to Weare. The fraudulent scheme was carried out through materially false and misleading statements or omissions concerning use of investors' funds, the rate of return and risk. Weare controlled the investors' funds that he had deposited into and moved through J&K accounts at First Bank of Colorado and Bank One of Colorado, and Weare's account, the Luxembourg Account. Weare also controlled and directed investors' funds to and through accounts of King International Trading, Inc. at Bank of Nova Scotia or Lillian Malfara at Royal Bank in Concord, Ontario, Canada. Investors' funds were used to pay referral fees, were paid to Weare or other corporate insiders, and for personal and business expenses including child support payments. The same pattern of fraud appears with respect to the operations of AAA-Auction. During the period from October 1997 through at least May 1999, Weare and AAA-Auction raised at least $375,000 from at least seventeen investors. Exhibit D, Declaration of Leporati, paragraph 17. None of the investors received full payment of the promised returns or repayment of their principal investment which was a purported inventory purchase program pursuant to "Merchandise Purchase Resale Agreements." Weare and AAA-Auction paid 30 to 40 percent of the investors' funds in sales commissions to telemarketers, and used the majority of the funds for business expenses such as payments for computer equipment to operate the Internet website, and 6

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for Weare's personal expenses rather than for purchasing inventory for sale at auction. Also, Weare transferred funds from J&K to AAA-Auction and the other entities identified at paragraph 11 in the Sipes Declaration, Exhibit B, in the amount of $630,463.48 during the period February, 22, 2000 to December 29, 2000. Weare had sole signatory power over all J&K bank accounts and the Luxembourg Account. Weare had sole signatory power over the AAA-Auction accounts. Weare knew that the investors' funds were not being used for the purposes represented to the investors, but instead were being used for the expenses incurred to keep the fraudulent schemes alive and for Weare's personal expenses. The Receiver has not found documents evidencing that corporate records were maintained. There is no evidence that J&K and AAA-Auction were adequately capitalized or that the corporations were used for anything but the perpetuation of fraudulent investment scams, including a Ponzi scheme, over a period of years. Justice requires recognizing the substance of the relationship between Weare and J&K over the form. The same is true for the relationship between Weare and AAA-Auction. And as to the third factor the Court must consider, whether an equitable result will be achieved by reverse piercing, the Receiver is not aware of any creditors of J&K or AAA-Auction other than the investors in the schemes who have been identified to date. The Receiver also is not aware of assets in Weare's name or under his control that are available to satisfy the Judgment against Weare. If the funds on deposit in the registry of the court are what remain of the assets of J&K and AAA-Auction, and the Court reverse pierces these corporate entities, then the investors with allowed claims against this receivership estate will share those assets on a pro rata basis to 7

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satisfy, in part, the Judgment against Weare. The losses incurred by the investors in the two fraudulent schemes perpetrated by Weare are essentially of the same character. The Receiver is not aware of any basis to distinguish one group from the other or to afford priority to one over the other. The only difference between the two groups is that one group was induced to invest in one scheme which operated under the name of AAA-Auction earlier in time than the other group which was induced to invest in a later scheme operated under the name of J&K. As a result, equity requires that the assets of the two corporations be made available to the investors to be distributed pro rata to satisfy, in part, Weare's obligation to them as evidenced by the Judgment against Weare. III. CERTIFICATE OF COMPLIANCE Undersigned counsel has conferred with Leslie Hughes, counsel for the SEC, and has provided Ms. Hughes with a copy of this instant motion and Exhibits A through D prior to filing. Undersigned counsel is authorized to represent that Ms. Hughes does not oppose the instant Motion. WHEREFORE, the Receiver respectfully requests the Court to order that the doctrine of reverse piercing applies to the facts and circumstances of this receivership estate, to order that the assets of J&K Global Marketing and of AAA-Auction.com, Inc., which include the funds on deposit in the registry of the Court, are subject to the obligations of Kenneth Roy Weare to the investors in J&K Global Marketing and AAA-Auction.com, Inc., including the Judgment against Weare entered on January 15, 2002, and for such other and further relief as the Court deems just and proper. 8

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DATED this 22nd day of November, 2006.

s/Christine J. Jobin Christine J. Jobin, Esq. #12335 The Jobin Law Firm, P.C. 1900 Grant Street Suite 815 Denver, Colorado 80203 Telephone: (303) 839-1390 FAX: (303) 839-1113 E-mail: [email protected] Attorney for the Receiver CERTIFICATE OF SERVICE (CM/ECF) I hereby certify that on this 22nd day of November, 2006, I electronically filed the foregoing RECEIVER'S UNOPPOSED MOTION FOR ORDER DETERMINING ASSETS OF J&K GLOBAL MARKETING CORPORATION AND AAAAUCTION.COM, INC. LIABLE FOR OBLIGATIONS OF KENNETH ROY WEARE with the Clerk of the Court using the CM/ECF system which will send notification of such filing to the following e-mail addresses: [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] /s/ Christine J. Jobin Christine J. Jobin, Esq. #12335 Attorney for the Receiver The Jobin Law Firm, P.C. 1900 Grant Street Suite 815 Denver, Colorado 80203 Telephone: (303) 839-1390 FAX: (303) 839-1113 E-mail: [email protected]

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