Free Brief in Opposition to Motion - 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-K-0645

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. SEC'S OPPOSITION TO WEARE'S MOTION TO RELEASE FUNDS FOR PAYMENT OF RESTITUTION Plaintiff Securities and Exchange Commission ("SEC") opposes defendant Kenneth Roy Weare's motion requesting that the Court release $577,965 from the registry of the court to pay restitution to 404 victims identified in the related criminal case, U.S. v. Weare, case number 03-cr-00121-EWN (August 3, 2005, D. Colo.). Mr. Weare has no claim to these funds which allows him to direct that they be used to satisfy the restitution order in the separate criminal case. Furthermore, the majority of the victims in the criminal case did not participate in the claims process authorized by this Court and therefore their claims are barred as untimely.1 To the extent that the Court considers transferring funds to pay restitution to the criminal victims, the amounts

Mr. Weare identifies 239 victims that filed claims in the civil action who were paid a total of $367,475. He identifies 404 victims who did not participate in the claims process, at least 358 of whom the Receiver sent either emails or correspondence about the civil claims process, 35 victims whose status is listed as "Unknown," and eleven of whom received emails and unsubscribed from further communications. See pages 1 through 12 of Weare's Attachment A for communications with 358 investors, and pages 12 through 14 for unknown status. He also identifies twelve victims that submitted claims totaling $16,525, which were denied by the Receiver based on records demonstrating that they had received repayments from J&K Global Marketing that exceeded the amounts of the victims' initial investments. See Weare's Attachment A at page 14, names identified in blue which start with Yusuf Ali and contain the notation "Denied-Made Money" in the Status column.

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listed by Mr. Weare were not reviewed by the Receiver or compared to the bank and business records of J&K Global Marketing Corporation to test their validity. It appears that some of the victims have overstated the amounts that they invested. For the reasons discussed below, the SEC respectfully requests that the Court deny Weare's motion and alternatively order that the funds remaining in the registry of the court be paid to the Department of the Treasury, subject to a small amount being retained for preparation, and payment of taxes, and to pay any outstanding checks issued as part of the civil claims process. I. Background On January 8, 2002, this Court entered a permanent injunction against Mr. Weare, J&K Global Marketing Corporation and AAA-Auction.com, Inc., which, among other things, ordered Mr. Weare and J&K Global Marketing, jointly and severally to pay disgorgement of $6,278,334.91 in ill-gotten gains plus an additional $486,848.02 in prejudgment interest. [Docket 31] The final judgment was entered on January 15, 2002. [Docket 32] The SEC pursued law suits in Grenada and Luxembourg to recover $803,728.492 and $2,916,343.98 respectively, which funds were deposited into the registry of the court on October 26, 2004 and November 16, 2005 respectively as partial satisfaction of the judgment. Neither Mr. Weare nor J&K Global Marketing have paid the remaining $2,558,262.44 in disgorgement, $486,848.02 in prejudgment interest, or any amounts that have accrued as post-judgment interest. On October 26, 2005, the Court appointed a Receiver to administer a claims process by which investors in either J&K Global Marketing or AAA-Acution.com could submit claims for the amounts they had invested as reduced by any repayments they had received. [Docket 106] The claims bar date was set by the Court for March 12,

The funds recovered from Grenada were in the form of money orders that had not been collected by Allied General Bank, Ltd. The recovered money orders were subsequently deposited into the registry of the court, which after processing by the bank was able to collect $803,728.49. See April 11, 2005 letter from Financial Supervisor. [Docket 91]

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2007,3 and the Court ordered on October 15, 2007, that no further requests for claims will be accepted by the Receiver. [Docket 196] After payment of all the claims submitted and approved in the claims process, and the various expenses and taxes through the end of 2007, there remains $1,428,212.80 in the registry of the court. On August 3, 2005, in the related criminal case, the Honorable Judge Nottingham ordered Mr. Weare to pay restitution in the amount of $1,199,355 to 643 investors, a subset of the investors identified in the SEC's civil case, who had responded to inquiries from the FBI for information about their investments with J&K Global Marketing.4 On May 23, 2007, Mr. Weare represented that he had made small payments of restitution in compliance with Judge Nottingham's order, and then sought a stay of his obligation to make further payments until resolution of the claims process in this civil case. See Weare's Motion to Modify Terms and Conditions of Supervised Release. [Docket 86 in 03-cr-00121] In his motion pending before this Court, Weare asserts that as part of the civil claims process, the Receiver paid claims totaling $367,475 to 239 of the victims identified in the criminal restitution order, and disallowed claims by twelve additional victims because they received repayments of more funds than they had initially invested. As to the remaining 404 victims who did not file claims in the civil case, Mr. Weare requests that $577,965 be transferred from the civil case to satisfy his obligation to pay restitution to the remaining 404 victims as ordered in the criminal case. II. Argument Mr. Weare's request for relief should be denied, because he has no legal or equitable basis to direct disgorgement, which was recovered by the SEC, to be used to
On July 31, 2007, the Court ordered claims of 1,743 investors totaling $2,214,980 be paid. [Docket 177-2, Exhibit A summarizing claims, and Docket 178, Order] This amount was adjusted when the Receiver identified eleven payees whose names appeared twice on the list, so that the final amount paid was $2,117,480. Subsequently, the Court authorized additional payments on late or disputed claims which payments totaled $89,475. [Docket 183, 184, 188, 191, 196] The minutes of the sentencing refer to the defendant paying restitution in the amount "of $1,199,355 to victims as listed in the PSI." See 03-cr-0121, Docket 80.
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satisfy his obligation to pay restitution ordered in the criminal case. The funds held in the registry of the Court are not the property of Mr. Weare. He lost title to the funds when the SEC collected them as partial satisfaction of its judgment. Where Mr. Weare has no legal title to the funds held in the registry of the Court, he has no legal basis to direct the disposition of those funds. Mr. Weare cites no cases in support of the proposition that funds collected by the SEC in satisfaction of its judgment against him should be redirected to pay restitution to victims in a related criminal case. The primary purpose of disgorgement is not to compensate investors. Rather it is a method of forcing a defendant to give up the amount by which he was unjustly enriched. SEC v. Commonwealth Chemical Securities, Inc., 574 F.2d 90, 102 (2d. Cir. 1978); SEC v. First Jersey Securities, Inc., 101 F.3d 1450, 1474 (2d Cir. 1996), cert. denied, 522 U.S. 312 (1997). Disgorgement, which deprives wrongdoers of their illgotten gains, deters violations of the law by making illegal activity unprofitable. U.S. v. Rx Depot, Inc., 38 F.3d 1052, 1061 (10th Cir. 2006), citing SEC v. Fischbach Corp., 133 F.2d 170, 175 (2d Cir. 1997). Once the primary purpose of disgorgement has been served by depriving the wrong-doer of ill-gotten gains, the district court has broad discretion in determining the disposition of the disgorged funds. SEC v. First Pacific Bancorp, 142 F.3d 1186, 1192 (9th Cir. 1998); see also United States SEC v. Maxxon, Inc., 465 F.3d 1174 (10th Cir. 2006) (The district court has broad discretion not only in determining whether or not to order disgorgement but also in calculating the amount to be disgorged."). The Tenth Circuit has recognized that pursuant to a statutory grant of general equity jurisdiction, the courts are authorized to use all traditional equitable powers, including an order for restitution. RxDepot, Inc., 38 F.3d at 1055-6 Courts have considered and reduced the amount of disgorgement by amounts defendants have paid in settlement with third-parties, First Jersey, 101 F.3d at 1475, or in restitution in criminal cases, SEC v. Palmisano, 135 F.3d 860, 863 (2d Cir. 1998). But see SEC v. 4

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J.T. Wallenbrock & Assocs., 440 F.3d 1109 (9th Cir. 2006), in which the Ninth Circuit upheld a district court's order requiring the defendant to disgorge the entire amount by which he and his co-defendants were unjustly enriched, even though he also had been ordered to pay more than $145 million in restitution to his victims as part of a separate criminal action. In view of these principles, it is not an abuse of discretion for this Court to deny a defendant's request for an offset. The 404 victims, for whom Mr. Weare advances these claims, have no right to the funds because, although given notice of the civil claims process, they did not submit timely claims5 and the deadline to submit claims expired on March 12, 2007, more than a year ago. [Docket 149] The amounts listed for the 404 victims that total the $577,965 have not been submitted to any kind of review by the Receiver or another party to determine whether the amounts should be reduced either because the bank records do not substantiate the amount invested or as a result of earlier repayments received from J&K Global Marketing. Furthermore, Mr. Weare's request on behalf of this victims is untimely. The Court discharged the Receiver from further duties by an Order entered on December 10, 2007. [Docket 201] Plaintiff's counsel requested that the former Receiver make a cursory review of four of the larger amounts claimed by the victims: Michael Harding claims $17,747, Willi Cairo claims $20,000, Jean Harding claims $17,747, and Ricardo Bonilla claims $43,125 (Attachment A at pp. 5, 8, 8, 10). Upon information and belief, the data base retained by the Receiver indicates that Michael Harding had five ID numbers assigned to his email address which each correspond to a bank deposit of $375 for a total of

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Of the 404 victims, all but 35 were sent communications either by email or mail. Eleven of the victims to whom emails were sent requested to unsubscribe from further communications with the Receiver; however, it is unclear whether these email addresses were currently used by same persons who were victims and investors in this case. The Receiver determined that twelve of the victims who submitted claims in the civil case were not entitled to repayment since the records showed they received back more than their initial investment through payments made while the fraudulent scheme was in operation. 5

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$1,875, but the bank records also show that he received payments from J&K of three checks of $375 each for a total repayment of $1,125. Under the process the Receiver used, subject to any further documentation that might be submitted by a claimant, Mr. Harding would have received a distribution in the civil claims process of approximately $750 had he submitted a claim. The amount submitted by Jean Harding, who is at the same address as Michael Harding, is the identical amount of $17,474. However, the bank records of J&K do not show that any deposits were received for Jane Harding. On the basis of the process the Receiver applied to other similar claims, Ms. Harding's claim would be denied unless she produced documents demonstrating she made payments to J&K. The Receiver's database contains a "William Cairo" which had ten ID numbers assigned to him under various names, which would indicate that he was entitled to claim $3,750 rather than the $20,000 listed in Attachment A. However, the bank records do not show the William Cairo made deposits of $3,750. Rather there is a payment of $750 from Mathew Cairo. Unless Mr. Cairo submitted additional documents, his claim would be denied based on the records in the possession of the Receiver. Mr. Bonilla is identified with ten ID numbers assigned to various individuals but all with the same email address. The bank records possessed by the receiver indicate that these ten ID numbers deposited $4,125 which sum is substantially less than the $43,125 that is listed in Attachment A. The cursory analysis of these four claims was not meant to be exhaustive, but was intended to demonstrate that Mr. Weare has not proposed any means to test the validity of the restitution numbers prior to the Clerk of the Court writing the checks. If the Court considers it appropriate to grant Mr. Weare's request, then the Plaintiff proposes that Mr. Weare present an analysis of the amounts submitted for 404 victims based on the comparison of Receiver's database of ID numbers and the bank records showing both deposits and repayments, before any funds be released. However, in considering the equities of the situation, where Mr. Weare has not paid the 6

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$2,558,262.44 in remaining disgorgement ordered by this Court, he should not be allowed to use funds he illegally obtained from investors to pay restitution to the victims in the criminal case. For the reasons discussed above, the Plaintiff requests that Weare's motion be denied. Dated April 30, 2008. s/ Leslie J Hughes Leslie J Hughes (Colo. 15043) Securities and Exchange Commission 1801 California Street, Suite 1500 Denver, Colorado 80202-2656 Telephone (303) 844-1086

CERTIFICATE OF SERVICE The undersigned hereby certifies that a true and correct copy of the foregoing PLAINTIFF'S OPPOSITION TO WEARE'S MOTION TO RELEASE FUNDS TO PAY RESTITUTION were served electronically by email through the ECF system to the persons at the emails listed below on April 30, 2008. Virginia L. Grady, Counsel for Kenneth Weare [email protected] Michael Burns, Esq., Counsel for Receiver [email protected]

s/Leslie J. Hughes

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