http://blogs.abiworld.org/ ABI Bankruptcy Blog Exchange » Miami Florida Bankruptcy Law » May 13, 2009 Gregarius 0.5.4 en http://jbublick.blogspot.com/2009/05/freeze-order-continued-in-sec-action-in.html Wed, 13 May 2009 16:35:00 -0700 http://jbublick.blogspot.com/2009/05/freeze-order-continued-in-sec-action-in.html
On May 7th, 2009, Judge John E. Steele of the U.S. District Court of the Middle District of Florida issued an order in the case of "Securities and Exchange Commission, Plaintiff vs. Founding Partners Capital Management, and William L. Gunlicks Defendants, et al." This case involves a five-count securities fraud complaint filed by the SEC against Gunlicks, Founding Partners Capital Management Company ("Founding Partners") which is described as a management company registered as an investment advisor as well as six other "relief defendants".

The SEC alleges in its complaint that Gunlicks and Founding Partners operate three "hedge funds" and one mutual fund all of which made loans to two other relief defendant entities (Sun Capital, Inc. and Sun Capital Healthcare, Inc.) which in turn purchased commercial and healthcare accounts receivables at a discount. The SEC alleges in the complaint that Stable-Value", one of the four named "relief defendants" was the "primary fund". Interest was paid to "Stable-Value" at approximately 1.3% per month and Founding Partners charged the lender "Stable-Value" a 1.75% annualized management fee.

The SEC alleged that Gunlicks and Founding Partners solicited funds from investors upon the representation that the Stable-Value loans to the two Sun Capital entities constituted a "safe investment opportunity." It is alleged that Gunlicks and Founding Partners represented that receivable purchased by the two Sun Capital entities were short-term and highly liquid and that they fully secured the loans made to it by Stable-Value. The SEC further alleged that despite these representations to investors, Gunlicks and Founding Partners permitted the two Sun Capital entities to purchase less liquid and riskier longer-term receivables such as workers' compensation receivables, "Disproportionate Share (DSH) receivables", and loans to financially troubled hospitals. Gunlicks and Founding Partners were alleged to have continued to solicit investors without disclosing the changes in lending and the increased risks presented. It is further alleged that the two Sun Capital entities owe $550 million on the Stable-Value loans of which only 32% were invested in less risky, short-term receivables as described to investors by Gunlicks and Founding Partners. The SEC also alleged that Gunlicks and Founding Partners had failed to honor most of the recent significant number of redemption requests, that they falsely represented that the 2007 financial statements were audited, and failed to disclose a certain consent order, and that there was use of fund assets for personal expenses.

The case came before the court on its order to show cause as the continuation of the freeze order as to Gunlicks, Founding Partners and four of the six relief defendants. Gunlicks also moved to challenge the validity and scope of the "freeze order" and requested exemptions from the freeze order for asset preservation and living expenses and attorney fees.

The court found that it did have the authority to issue the freeze order as the SEC sought the equitable relief of disgorgment in its complaint. The court held that although it does not have the authority to issue an asset freeze order when the SEC only seeks money damages, it can enter a freeze order where equitable relief such as disgorgement is sought even if it is coupled with requests for money damages and civil penalty. The purpose of a freeze order is to ensure the adequacy of a disgorgement remedy.

The court also rejected Gunlicks' contention that the freeze order should be lifted on a questioning of the likelihood of success on the merits. The court found that the SEC satisfied its burden of establishing a likelihood of success on the merits and that it established a prima facie case. The court ordered that its ex parte temporary "freeze order" should remain in effect as to defendant Williams L Gunlicks until further order and denied Gunlicks' motion to amend or modify the "freeze order."

The court also disagreed with Gunlicks' challenge to the scope of the asset freeze order to his personal assets that were obtained prior to the alleged fraudulent conduct. The court held that a district court may enter an "order freezing all of a defendant's assets, even though the assets are not related to the alleged fraud and it is not certain whether disgorgement will be ordered or the amount of such disgorgement." The court further held that the freeze order may remain in effect until it can make a further informed determination. The court stated that although the SEC has the burden of showing the amount of assets subject to disgorgement, that its burden is light and that "[e]xactitude is not a requirement" in the SEC's demonstration of a "reasonable approximation of a defendant's illgotten gains..."

Due to a lack of a provision of a factual basis, the court also denied Gunlicks' request to modify the freeze order as to his personal assets to exempt payment related to the preservation of assets, living expenses, and attorneys' fees.Jordan E. Bublick, Miami, Florida, Attorney at Law, Practice Limited to Bankruptcy Law, Member of the Florida Bar since 1983 ]]>