Securities and Exchange Commission v. Aequitas Management, LLC

Troy Greenfield, OSB #892534

Email: tgreenfield@schwabe.com

Alex I. Poust, OSB #925155

Email: apoust@schwabe.com

Lawrence R. Ream (Admitted Pro Hac Vice)

Email: lream@schwabe.com

SCHWABE, WILLIAMSON & WYATT, P.C.

1211 SW 5th Avenue, Suite 1900

Portland, OR 97204

Telephone: 503.222.9981

Facsimile: 503.796.2900

Ivan B. Knauer (Admitted Pro Hac Vice)

Email: iknauer@swlaw.com

SNELL & WILMER LLP

1101 Pennsylvania Avenue, N.W., Suite 300

Washington, DC 20004

Telephone: 202.802.9770

Facsimile: 202.688.2201

Attorneys for Receiver for Defendants

AEQUITAS MANAGEMENT, LLC; AEQUITAS HOLDINGS, LLC;

AEQUITAS COMMERCIAL FINANCE, LLC; AEQUITAS

CAPITAL MANAGEMENT, INC.; AEQUITAS INVESTMENT

MANAGEMENT, LLC

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF OREGON

PORTLAND DIVISION

SECURITIES AND EXCHANGE No. 3:16-cv-00438-JR

COMMISSION,

Plaintiff,

v.

FINDINGS OF FACT AND

AEQUITAS MANAGEMENT, LLC; CONCLUSIONS OF LAW

AEQUITAS HOLDINGS, LLC;

AEQUITAS COMMERCIAL FINANCE,

LLC; AEQUITAS CAPITAL

MANAGEMENT, INC.; AEQUITAS

INVESTMENT MANAGEMENT, LLC;

ROBERT J. JESENIK; BRIAN A. OLIVER;

and N. SCOTT GILLIS,

Defendants.

in this Court against the Entity Defendants and three individual defendants, Robert J. Jesenik,

Brian A. Oliver, and N. Scott Gillis. In the following weeks, this Court appointed Ronald F.

Greenspan as Receiver; he continues in that capacity.

On December 31, 2019, the Receiver filed his Motion to Approve Receiver’s Distribution

Plan and Determination of a Ponzi Scheme (the “Distribution/Ponzi Determination Motion”)

[Dkt. No. 787].1 For the reasons stated below, the Court finds by a preponderance of the

evidence that a Ponzi scheme existed. Further, the Court finds by a preponderance of the

evidence that Receiver’s distribution plan is fair and equitable, as clarified and modified to

address two matters: the resolution of one objection and one housekeeping matter. As addressed

below, this Court adopts the Receiver’s proposed distribution plan and authorizes the Receiver to

commence distributions.

FINDINGS

The Court has considered the record in this case, including the Distribution/Ponzi

Determination Motion as well as materials relating to that motion—namely, materials cited in the

Distribution/Ponzi Determination Motion; submissions filed in support of that distribution plan

by the SEC [Dkt. No. 794], and one interested party [Dkt. No. 798]; the resolved objection filed

by Brett M. Brown [Dkt. No. 799]; the Receiver’s reply in support of the Distribution/Ponzi

Determination Motion [Dkt. No. 807]; the Receiver’s declaration [Dkt. No. 808]; and testimony

proffered and argument made by interested parties at the March 31, 2020 hearing on the

Receiver’s Distribution/Ponzi Determination Motion. The Court makes the following findings of

fact.

1 Capitalized terms not otherwise defined herein shall have the meanings ascribed to them

in the Distribution/Ponzi Determination Motion [Dkt. No. 787].

1. On March 10, 2016, the SEC filed the above-captioned action, alleging violations

of federal securities law by certain individuals who controlled the Aequitas Enterprise. Those

Individual Defendants are: Robert J. Jesenik, Brian A. Oliver, and N. Scott Gillis. The SEC

alleged that these individuals—through the Aequitas Enterprise for which they were principals—

executed a “Ponzi-like” scheme.2 The Individual Defendants, according to the SEC, defrauded

Investors, who were led to believe that they were purchasing indirect interests in consumer credit

receivables.3 Rather than purchasing such indirect interests, the SEC alleged, the Defendants

were misusing the bulk of raised funds to pay operating expenses and to repay earlier Investors.4

The SEC further alleged that “[b]y the end of 2015, [Aequitas] owed Investors $312.0 million

and had virtually no operating income to repay them.”5

2. The SEC Enforcement Action against the Receivership Entities has been resolved

as to the liability claims in the complaint, but unresolved as to monetary relief.6

3. The Receiver was appointed for the Entity Defendants and various affiliated

entities—initially on an interim basis on March 16, 2016,7 and later, on April 14, 2016, on an

enduring basis.8 When the Receiver was appointed, the Receivership Estate consisted of the

Entity Defendants as well as 43 other related entities,9 and interests in the additional nine

2 Complaint [Dkt. No. 1], ¶¶ 3, 56.

3 Id. at ¶¶ 1-7.

4 Id.

5 Id. at ¶ 5.

6 Dkt. No. 192.

7 Stipulated Interim Order Appointing Receiver [Dkt. No. 30].

8 Order Appointing Receiver [Dkt. No. 156].

9 Collectively defined in the Appendix to the Distribution/Ponzi Determination Motion as

the “Aequitas Entities.”

to cooperate with the Receiver.10

4. Consistent with that role and the powers authorized by the Court, the Receiver

has, among other activities, operated the Receivership Estate, performed reporting obligations,

made records available to Investors for use in litigation, and substantially monetized the assets of

the Receivership Estate.11

5. Notwithstanding those efforts and the resulting benefit to the Receivership Estate,

which have been significant, the Receivership Estate’s liabilities are extensive and significantly

exceed the Receivership Estate’s assets, as found below.

6. The Receiver has also investigated the Aequitas Enterprise’s pre-Receivership

conduct of its financial and business affairs. The findings of that investigation were set forth in

the Receiver’s Report Regarding the Investigation of the Receivership Entity’s Business Conduct

(the “Forensic Report”).12

7. Relating to both the Receiver’s findings set forth in the Forensic Report and the

vast disparity between the Receivership Estate’s assets and liabilities, on December 31, 2019, the

Receiver filed the Distribution/Ponzi Determination Motion.

8. On the Receiver’s separate motion,13 the Court entered an order establishing a

notice procedure to provide fair notice to interested parties of the Receiver’s Distribution/Ponzi

10 See Dkt. No. 156, Exhibit B.

11 See generally the Receiver’s Quarterly Reports.

12 Dkt. No. 663.

13 Receiver’s Motion for Order (1) Approving Form and Manner of Notice Regarding

Approval of Proposed Distribution Plan and Ponzi Determination, (2) Approving Procedures and

Deadlines, (3) Setting a Hearing, and for Related Relief [Dkt. No. 785].

interested parties, the Receiver stipulated to twice extending the objection deadline, which was

allowed by the Court.15

9. The SEC and another interested party filed statements in support of the Receiver’s

Distribution/Ponzi Determination Motion.16

10. On February 20, 2020, former Aequitas employee Brett M. Brown submitted a

letter to the Court [Dkt. No. 799] objecting that the Distribution/Ponzi Determination Motion

misclassified him—specifically, he was identified by name in the Distribution/Ponzi

Determination Motion on a list of past and present officers and directors of the Aequitas-

affiliated companies.17

11. On March 20, 2020, the Receiver filed a reply to Mr. Brown’s objection, which

resolved that objection and identified a related limited clarification to the proposed distribution

plan, which is addressed below.

12. On March 31, 2020, the Court held a telephonic hearing on the Receiver’s

Distribution/Ponzi Determination Motion, and responses and objections thereto. Interested

parties appeared and presented argument and testimony, as recorded in the transcript of that

hearing.

B. The Receiver’s Investigation

13. This is a complex case. The Aequitas Enterprise had grown to include over 57

14 Order Approving the Procedures for Consideration of the Proposed Distribution Plan

and Request for a Finding of a Ponzi Scheme [Dkt. No. 790].

15 Dkt Nos. 797 and 802.

16 See SEC’s Response to Motion to Approve the Receiver’s Distribution Plan and

Determination of a Ponzi Scheme [Dkt. No. 794]; Wiltjer Letter Response [Dkt. No. 798].

17 Distribution/Ponzi Determination Motion [Dkt. No. 787] at 57-58 n. 174 & App. A,

8-9.

In just over two years preceding the appointment of the Receiver, the company had completed at

least $1.3 billion in intercompany cash transfers.19

14. The Receiver investigated the operations of the Aequitas Enterprise for the period

from January 1, 2014 through March 10, 2016.20 That investigation is detailed in the Forensic

Report. The Receiver concluded that the Aequitas Enterprise was insolvent by not later than July

3, 2014. The Receiver fairly summarized pertinent findings of the forensic investigation in the

Distribution/Ponzi Determination Motion. Among those facts, for example, were that after July

3, 2014, the Aequitas Enterprise:

a. “Was dependent on continued infusion of new money from Defrauded

Investors to pay operating expenses;”

b. “Did not use Defrauded Investor money for the purposes represented by

the Aequitas Enterprise;”

c. “Used a significant portion of new money from Defrauded Investors to

execute transfers to earlier Investors, supposedly in the form of returns and

principal;”

d. “Did not generate sufficient (any) profits to pay the promised returns to

Investors;”

e. “Created numerous, self-described “Manufactured Notes,” which

purported to create liabilities among the entities and which frequently did

not reflect the actual receipt of funds by the entities issuing such notes;”

and

f. “Converted liabilities between entities—i.e., undertook a non-cash journal

entry, intended to transfer an asset or liability from one Aequitas Entity to

another without cash consideration—to favor specific Investors even when

18 See generally Distribution/Ponzi Determination Motion [Dkt. No. 787] at Appendix C

(Aequitas Organization Chart).

19 Forensic Report [Dkt. No. 663] at 8 and 9, n.13 (period January 1, 2014 to March 10,

2016).

20 Id. at 5.

liability.”21

15. Given that no party has disputed that summary or any aspect of the Forensic

Report, the Court adopts the Receiver’s Forensic Report, as well as the summary the Receiver

provided on pages 24 through 30 of the Distribution/Ponzi Determination Motion as findings of

fact regarding the operation of the Aequitas Enterprise.

C. The Receiver’s Distribution Plan

16. As disclosed in Quarterly Reports and the Distribution/Ponzi Determination

Motion, the Receivership Estate’s liabilities far exceed its assets.

17. The following classes of Claimants have asserted claims against the Receivership

Estate: Defrauded Investors (composed of Direct Investors and Fund Investors); Pass-through

Investors; Non-Officer Former Employee Claims; Taxing authorities; and Creditor Claims.

Further, there are claims associated with the operation of the Receivership: Administrative

Claims; and Professional Claims.

18. In the Distribution/Ponzi Determination Motion, the Receiver estimated Total

Investment from Defrauded Investors to total approximately $557 million and other total non-

duplicative, non-Defrauded Investor Claims asserted against the Receivership Estate are

estimated to exceed $89 million.22 Those estimates are subject to the caveats expressed in the

Distribution/Ponzi Determination Motion [Dkt. No. 787] and are without prejudice to the

Receiver’s right to object to any individual claim. No party has objected to or disputed those

estimates, and the Court finds by a preponderance of the evidence based on the record before it

that those estimates are reasonable.

21 Distribution/Ponzi Determination Motion [Dkt. No. 787] at 26 (citing Forensic Report

[Dkt. No. 663] at 8 and 9, n.16).

22 Distribution/Ponzi Determination Motion [Dkt. No. 787] at 23-24.

marshalled and liquidated assets of the Receivership Estate and its interests in the Extended

Entities, investigated and litigated claims, and timely reported to this Court about the current

status of the Receivership Estate. In the Distribution/Ponzi Determination Motion and Quarterly

Reports, the Receiver has summarized the Receivership Estate’s assets, including cash and

outstanding claims by the Receivership against third parties. In particular, the Receiver has noted

that the Receivership Estate’s liabilities exceed its assets by hundreds of millions of dollars.23

20. No party has objected to or disputed that factual conclusion, and the Court finds

from the record before it that fact by a preponderance of the evidence.

21. Under these circumstances, the Court finds that Investors and other Claimants

with Allowed Claims against the Receivership Estate cannot be made whole from the estate’s

available assets. The Court faces challenging decisions regarding how to allocate those assets

overseen by this Court in connection with the Receivership amongst the many deserving

claimants.

22. In the Distribution/Ponzi Determination Motion—as clarified and modified

thereafter—the Receiver detailed his proposed distribution of assets (the “Distribution Plan”).24

Aspects of the plan are addressed in the Conclusions of Law, below.

23. The resolved objection, filed by Mr. Brown, related to his employment status as a

Non-Officer Former Employee. Mr. Brown was identified by name in the Distribution/Ponzi

Determination Motion in a list of past and present officers and directors of the Aequitas-affiliated

companies who, as proposed by the Receiver, would be precluded from holding a Non-Officer

23 See Distribution/Ponzi Determination Motion [Dkt. No. 787].

24 See e.g., id. at 4-7 (summarizing plan).

who was a Senior Vice President, was ultimately excluded from the Aequitas Enterprise’s

executive management organizational chart; and (b) individuals with the title Senior Vice

President likely should not be considered executive level.26 Relatedly, the Receiver proposed

omitting from the list of individuals precluded from holding a Non-Officer Former Employee

Claim the following individuals: Brett Brown; Patricia Brown; Bill Malloy; and Thomas

Szabo.27 The Court finds that change is reasonable and supported by the facts.

24. As a housekeeping matter, on page 41 of the Distribution/Ponzi Determination

Motion [Dkt. No. 787], the sentence beginning “In the event of transfers of an investment

between investors or any other type of investment ownership or control changes,” the second

clause should omit “is” in favor of “may be” such that the clause now states “all of the pre-

transfer activity of the transferor associated with the transferred investment during the relevant

time period may, in the exercise of the Receiver’s discretion, be attributed to the transferee.” As

modified, the Receiver has discretion when determining, on equitable grounds, whether and to

what extent the prior activity of the transferor should or should not be attributed to the transferee.

The Court finds that change is reasonable and supported by the facts.

CONCLUSIONS OF LAW

A receivership is appropriate where, for example, there is a need to “marshal and

preserve assets from further misappropriation and dissipation” and “clarify the financial affairs

25 Distribution/Ponzi Determination Motion [Dkt. No. 787] at 57-58 n. 174 & App. A,

8-9.

26 Receiver’s Reply ISO Distribution/Ponzi Determination Motion [Dkt. No. 807] at 2-3.

27 Compare Distribution/Ponzi Determination Motion [Dkt. No. 787] at 57-58 n. 174 &

App. A, 8-9 (addressing Non-Officer Former Employee Claims) with Receiver’s Reply ISO

Distribution/Ponzi Determination Motion [Dkt. No. 807] at 2-3 (showing change to same).

“determin[ing] the appropriate action to be taken in the administration of the receivership.”29

That “authority derives from the inherent power of a court of equity to fashion effective relief,”

and the exercise of that power is particularly appropriate “where a federal agency seeks

enforcement in the public interest.”30

This Court’s power and its related “wide discretion” extend to “determin[ing] the

appropriate relief in an equity receivership.”31 In part, because every fraudulent situation is

different, “[t]here are no hard rules governing a district court’s [distribution] decisions in [federal

equity receiverships].”32 That is, a distribution plan is subject to approval if it is “fair and

reasonable.”33 Indeed, the Ninth Circuit will uphold any “‘reasonable procedures instituted by

the district court that serve the purpose of orderly and efficient administration of the receivership

for the benefit of creditors.”34 Such broad deference is warranted, according to the Ninth Circuit,

because “most receiverships involve multiple parties and complex transactions.”35

Here, as set forth below, the Court concludes that the Aequitas Enterprise operated as a

28 SEC v. Schooler, No. 12-2164, 2012 U.S. Dist. LEXIS 188994, at *11 (S.D. Cal. Nov.

30, 2012).

29 SEC v. Hardy, 803 F.2d 1034, 1037 (9th Cir. 1986).

30 SEC v. Wencke, 622 F.2d 1363, 1369, 1371 (9th Cir. 1980).

31 SEC v. Lincoln Thrift Ass’n, 577 F.2d 600, 606 (9th Cir. 1978). See also SEC v. Capital

Consultants, LLC, 397 F.3d 733, 738 (9th Cir. 2005) (quoting same).

32 SEC v. Enter. Tr. Co., No. 08 C 1260, 2008 U.S. Dist. LEXIS 79731, at *10 (N.D. Ill.

Oct. 7, 2008).

33 See SEC v. Copeland, No. CV 11-8607-R, 2014 U.S. Dist. LEXIS 195315, at *5 (C.D.

Cal. May 19, 2014) (“With respect to the motion to approve the distribution of CWM Realty,

‘the primary job of the district court is to ensure that the proposed plan of distribution is fair and

reasonable.’” (Quoting S.E.C. v. Wealth Management LLC, 628 F.3d 323, 332 (7th Cir. 2010))).

34 CFTC. v. Topworth Int’l, Ltd., 205 F.3d 1107, 1115 (9th Cir. 1999) (quoting Hardy,

803 F.2d at 1037-38).

35 Hardy, 803 F.2d at 1037.

determine how to compensate claimants. Relatedly, the Court concludes that the Distribution

Plan, as proposed by the Receiver, provides an equitable means of distributing the Receivership

Estate’s assets to holders of Allowed Claims.

A. Ponzi Determination

1. A Ponzi scheme is “a phony investment plan in which monies paid by later

investors are used to pay artificially high returns to the initial investors, with the goal of

attracting more investors.”36 A finding that a Ponzi scheme was perpetrated creates a so-called

“Ponzi presumption,” by which a court may infer the perpetrator’s intention to hinder, delay, or

defraud for purposes of voiding transfers.37 That is because a Ponzi scheme is insolvent.38

2. Proof of a Ponzi scheme is commonly understood to involve proof that

“(1) deposits were made by investors; (2) the Debtor conducted little or no legitimate business

operations as represented to investors; (3) the purported business operations of the Debtor

produced little or no profits or earnings; and (4) the source of payments to investors was from

cash infused by new investors.”39 That said, there are many other factors that courts will

consider, including many that are commonly recognized as badges of fraud.40

36 Santa Barbara Capital Mgmt. v. Neilson (In re Slatkin), 525 F.3d 805, 809 n.1 (9th Cir.

2008) (quoting Alexander v. Compton (In re Bonham), 229 F.3d 750, 759 n.1 (9th Cir. 2000)).

37 See, e.g., In re Slatkin, 525 F.3d at 814 (“We hold that once the existence of a Ponzi

scheme is established, payments received by investors as purported profits—i.e., funds

transferred to the investor that exceed that investor’s initial ‘investment’—are deemed to be

fraudulent transfers as a matter of law.”).

38 See, e.g., Scholes v. Lehmann, 56 F.3d 750, 755 (7th Cir. 1995) (Posner, J.) (remarking

that the perpetrator’s Ponzi scheme was “insolvent from the outset”); In re Independent Clearing

House, 77 B.R. 843, 871 (D. Utah 1987) (“By definition, an enterprise engaged in a Ponzi

scheme is insolvent from day one.”); In re Randy, 189 B.R. 425, 441 (N.D. Ill. 1995) (“Having

been convicted of a Ponzi scheme, Randy was insolvent from its inception as a matter of law.”).

39 Phelps, The Ponzi Book at § 2.03 (quoting Rieser v. Hayslip (In re Canyon Sys. Corp.),

343 B.R. 615, 630 (Bankr. S.D. Ohio 2006) (citation omitted). See also Hayes v. Palm Seedlings

(continued on next page)

scheme at least as early as July 1, 2014 through March 16, 2016 (the “Ponzi Period). In

Partners-A (In re Agric. Research & Tech. Grp., Inc.), 916 F.2d 528, 536 (9th Cir. 1990)

(“Distributing funds to earlier investors from the receipt of monies from later investors is the

hallmark of Ponzi schemes.”).

40 The author of The Ponzi Book: Unraveling Ponzi Schemes § 2.03 (2012), identified the

following:

(1) The Ponzi perpetrator did not have any legitimate business

operation to which its alleged investment program is connected.

(2) The Ponzi perpetrator made unrealistic promises of returns on

their investments.

(3) “[N]ew investor money was being used to pay old investors’

and ‘money was commingled.’”

(4) The perpetrator recruited agents to sell its products and paid

commissions to perpetuate the scheme.

(5) The perpetrator paid the brokers high commissions to induce

them to continue the sales and keep the cash flowing in.

(6) The commission structure with the sales people provided

incentives “to discourage investors from requesting withdrawals.”

(7) Excessively large fees were taken by the perpetrator from the

customers’ “investment” funds.

(8) There were inconsistencies between debtors’ bank statements

and “false statements issued to customers.”

(9) The perpetrator failed to invest all of the investors’ funds in

promised investments.

(10) The perpetrator used customer funds “for non-customer

purposes.”

(11) Later investors received lower returns than earlier investors.

(12) Investors were encouraged to roll over or extend their

investments rather than receive back their principal.

(13) The perpetrator “mischaracterize[s] the nature of the …

investment opportunities and any risk associated with making an

investment.”

(14) The perpetrator overstated its investment returns and

understated its losses.

(15) Investors’ monies were commingled.

(Footnotes omitted.)

It is incontrovertible with respect to the Aequitas Enterprise that:

(i)moneys were transferred to it by Defrauded Investors as

putative investments; (ii) the Aequitas Enterprise acquired

significant portfolios of consumer accounts receivable; (iii) the

Aequitas Enterprise acquired significant and sometimes controlling

interests in numerous businesses both related to and independent of

the consumer accounts receivable; and (iv) that due to the

exceptionally high leverage, high cost of capital, high operating,

overhead and marketing costs, and generally poor performance of

these various investments, a substantial portion of the transfers

back to Investors (purportedly as principal and interest) between

January 1, 2014, and March 10, 2016, was possible only because

of new funds from Defrauded Investors. Moreover, … at least

since July 2014, the Aequitas Enterprise was insolvent, and the

actual financial condition of the Aequitas Enterprise and activities

undertaken were not accurately disclosed to Defrauded Investors.

The Aequitas Enterprise’s collapse was all-but inevitable after July

3, 2014, for at least four interrelated reasons—each consistent with

the existence of a Ponzi scheme. First, the Aequitas Enterprise had

inadequate funds to pay existing Investors as of at least July 3,

2014, which led the perpetrators to obtain new investments from

Defrauded Investors. Second, in relation to the representations

made to Defrauded Investors about how their moneys would be

used, the Aequitas Enterprise used little of their moneys for those

purposes. Third, the Aequitas Enterprise’s numerous actual

business operations generally produced no profits or, more often,

produced significant losses, especially on an after debt-service

basis because entities were capitalized almost entirely with debt.

And fourth, indebtedness to earlier Investors (as well as operating

expenses) were being paid with cash infused by new Defrauded

Investors.

The conclusion that the Aequitas Enterprise was a Ponzi scheme is

further cemented by considering additional factors commonly

considered by courts in assessing whether a Ponzi scheme was

being operated.

First, Defrauded Investors’ moneys were commingled, a factor

consistent with a Ponzi scheme. …

Second, even though the Aequitas Enterprise supplied the

appearance of legitimate business operations, the operations were

both money losing and rendered illegitimate because they were

sustained only by moneys from Defrauded Investors.

returns. …

Fourth, agents were recruited to sell the Aequitas Enterprise’s

products and commissions, consulting fees, bonuses, and other

consideration were provided to agents to perpetuate the Ponzi

scheme. …

Fifth, Defrauded Investors’ moneys were not invested as promised.

…

Sixth, Defrauded Investors were misled, for example, about the

nature of investments and associated risk, investment returns, and

losses as well as whether Defrauded Investor money was primarily

being used to purchase receivables.

Taken together, the evidence overwhelmingly supports the

conclusion that the Aequitas Enterprise was operated as a Ponzi

scheme.41

4. Upon review of the evidence before this Court, the Court accepts the

uncontroverted evidence presented by the Receiver and concludes that “[t]aken together, the

evidence overwhelmingly supports the conclusion that the Aequitas Enterprise was operated as a

Ponzi scheme.”42

B. Distribution Plan

5. The Distribution Plan has many interrelated components, some of which this

Court addresses with particularity.

6. Equity can displace an investor’s claim to “benefit of the bargain” recoveries.43

Under such circumstances, it can be appropriate to craft a formula for investor claims that relies

41 Distribution/Ponzi Determination Motion [Dkt. No. 787] at 32-38 (footnotes omitted).

42 Id. at 38-9.

43 See In re Tedlock Cattle Company, Inc., 552 F.2d 1351, 1352 (9th Cir. 1977) (holding

in a Ponzi scheme that equity cannot sanction early investors, who may already have been repaid

their principal with later investors’ money to recover paper profits that were “never earned,”

when those “false profit[s]” would “unfairly” reduce and defeat claims of later investors who had

received none of their principal back).

why he proposes rejecting “benefit of the bargain” recoveries in favor of a formula for

addressing investor claims and a related equitable distribution model. This Court concludes that

equity and the collective interests of Defrauded Investors are best served by precluding “benefit

of the bargain” recoveries in favor of the Receiver’s proposal.

7. Ponzi schemes often feature a commingling of investor funds. As such, it is

typically inequitable to endeavor to “trace” any investor’s transferred money—whether to a

particular account, entity, collateral, or asset—to provide some investors recourse at the expense

of other Ponzi victims for whom “tracing” is impossible or yields a less favorable distribution.45

Instead, federal equity receiverships generally support equitable pooling of the receivership

entities’ assets to enable equal treatment of all defrauded investors.46 Here, the Receiver has

identified that not all assets associated with the Aequitas Enterprise should be combined for all

purposes because certain entities’ assets were not commingled and the Investors in those entities

were not defrauded.47 The Receiver has detailed and explained the basis for distinguishing

44 Id. at 1352, 1354 (upholding what that trustee described as a “cash-in-cash-out plan”).

45 See Cunningham, Trustee of Ponzi v. Brown, 265 U.S. 1, 12-13 (1924) (rejecting

“tracing” in Ponzi scheme because equity demands that all victims of the fraud be treated

equally).

46 See, e.g., S.E.C. v. Forex Asset Mgmt. LLC, 242 F.3d 325, 328 (5th Cir. 2001)

(rejecting investor’s argument that its funds could be traced to a segregated account); United

States v. Durham, 86 F.3d 70, 72 (5th Cir. 1996) (rejecting tracing where investment was in

commingled account); S.E.C. v. Elliott, 953 F.2d 1560, 1569, 1570 (11th Cir. 1992) (rejecting

tracing because “[a]s all of the former securities owners occupied the same legal position, it

would not be equitable to give some of them preferential treatment in equity”); S.E.C. v. Bivona,

No. 16-cv-01386-EMC, 2017 U.S. Dist. LEXIS 148575, at *3 (N.D. Cal. Sep. 13, 2017)

(ordering consolidation for purposes of distributing receivership assets without reference to

bankruptcy case law); Commodity Futures Trading Comm’n v. Eustace, No. 05-2973, 2008 U.S.

Dist. LEXIS 11810, at *17 (E.D. Pa. Feb. 15, 2008) (holding that bankruptcy authority regarding

substantive consolidation is not controlling in equitable receivership).

47 Distribution/Ponzi Determination Motion [Dkt. No. 787] at 41-45.

plan for pooling certain assets and not others for purposes of the Distribution Plan is equitable.

8. There are two generally recognized distribution methodologies for allocating

limited funds among defrauded investors in a Ponzi scheme: net loss and rising tide. “Rising tide

appears to be the method most commonly used (and judicially approved) for apportioning

receivership assets.”48 Under this method, distributions are made with the purpose of equalizing

the percentage of invested funds that are returned to each Ponzi-scheme investor without regard

for whether those funds were returned by the perpetrators of the fraud before the scheme

collapsed or as part of a distribution plan. Stated differently, the goal is for all investors to

ultimately receive a distribution equal to the same percentage of their cumulative investment,

irrespective of whether the distribution was made directly by the Ponzi scheme or by a receiver

from the assets remaining from the Ponzi scheme. Here, the Receiver has proposed using the

rising tide method.49 The Receiver has detailed and explained the basis for selecting that method,

including by comparing it to the net loss method and explaining the characteristics of Defrauded

Investor Claims that are benefited by each method. The Court concludes that the use of the rising

tide method in the Distribution Plan is equitable.

9. Other courts have recognized that—to prevent disparate outcomes between a

Defrauded Investor with a single account and similarly situated Defrauded Investors who may

hold multiple accounts, each with different pre-Receivership recovery rates—consolidating

multiple “accounts” associated with the same person is equitable.50 Here, the Receiver has

48 SEC v. Huber, 702 F.3d 903, 906 (7th Cir. 2012) (Posner, J.) (citing authority).

49 Distribution/Ponzi Determination Motion [Dkt. No. 787] at 45-55.

50 See CFTC v. Equity Fin. Grp., LLC, No. 04-1512-RBK-AMD, 2005 U.S. Dist. LEXIS

20001, at *88 (D.N.J. Sep. 2, 2005) (failing to consolidate “would permit an investor who used

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Defrauded Investor for purposes of calculating claim amounts and distributions.51 The Court

concludes that the Receiver’s plan is equitable.

10. Under both federal bankruptcy law and the Oregon Receivership Code, certain

former employee claims receive a priority claim for a certain amount.52 Here, the Receiver,

although not compelled by law to do so, proposes that the Court accord priority to Non-Officer

Former Employee Claims that accrued prior to the Aequitas Enterprise being placed in

different investment vehicles and received funds in one account to obtain a disproportionately

large distribution when compared to other single account investors.”).

51 Distribution/Ponzi Determination Motion [Dkt. No. 787] at 55-57.

52 Under 11 U.S.C. § 507(4), wage claims have administrative priority:

but only to the extent of [$12,850] for each individual or

corporation, as the case may be, earned within 180 days before the

date of the filing of the petition or the date of the cessation of the

debtor’s business, whichever occurs first, for—

(A) wages, salaries, or commissions, including vacation,

severance, and sick leave pay earned by an individual; or

(B) sales commissions earned by an individual or by a corporation

with only 1 employee, acting as an independent contractor in the

sale of goods or services for the debtor in the ordinary course of

the debtor’s business if, and only if, during the 12 months

preceding that date, at least 75 percent of the amount that the

individual or corporation earned by acting as an independent

contractor in the sale of goods or services was earned from the

debtor.

(Dollar amount modified per Judicial Conference of the United States, by notice dated Feb. 16,

2016, 81 F.R. 8748, effective Apr. 1, 2016.)

The Oregon Receivership Code, set forth at O.R.S. Ch. 37, also places a high priority on wage

claims. Under O.R.S. § 37.370(g), priority is afforded:

claims for wages, salaries or commissions, including vacation,

severance and sick leave pay, or contributions to an employee

benefit plan, earned by the claimant within 180 days of the earlier

of the date of appointment of the receiver and the cessation of the

estate’s business, but only to the extent of $12,850 in aggregate for

each claimant.

plan in this regard is equitable.

11. The Receiver has proposed a classification and treatment of claims.54 The Court

has reviewed that proposal and concludes that the Receiver’s plan in that regard is equitable.

12. The Receiver has summarized various tax considerations.55 The Court has

reviewed that aspect of the Receiver’s plan and has not identified any inequity.

13. The Court has reviewed the sections of the Receiver’s Distribution/Ponzi

Determination Motion captioned “Miscellaneous Provisions” and “Retention of Jurisdiction” and

concluded that those aspects of the Receiver’s plan contribute to the overall equity of the

Distribution Plan.

14. In sum, the Court has reviewed the Distribution Plan, as proposed by the Receiver

and with the modifications herein expressly adopted. This Court concludes that it is fair,

reasonable, and serves the purpose of the orderly and efficient administration of this

Receivership. Because it is equitable and in the best interests of Defrauded Investors and other

Claimants, the Court adopts and approves the Distribution Plan with the modifications expressly

adopted herein.

ORDER

IT IS HEREBY ORDERED AND DECREED as follows:

1. The Receiver’s Distribution/Ponzi Determination Motion [Dkt. No. 787], as

expressly modified by the Receiver and acknowledged herein, is granted.

2. All objections to the Receiver’s Distribution/Ponzi Determination Motion that

53 Distribution/Ponzi Determination Motion [Dkt. No. 787] at 57-58.

54 Id. at 62-67.

55 Id. at 67-72.

Order are overruled.

3. The Receiver may commence with distributions consistent with the terms of the

Distribution Plan without further order by the Court. All distributions shall be free and clear of

any and all liens, claims, interests, and encumbrances.

4. Each Defrauded Investor and other Claimant is directed to cooperate and supply

such information and documentation as is requested by the Receiver and his professionals to

effectuate the Distribution Plan.

5. This Court shall retain exclusive jurisdiction over all issues, as described in the

Distribution/Ponzi Determination Motion.

6. This Order shall be binding in all respects on all creditors and interest holders of

the Receivership Entity and their successors and assigns.

IT IS SO ORDERED.

Dated this 31st day of March, 2020.

/s/ Jolie A. Russo

United States Magistrate Judge Jolie A. Russo

SUBMITTED BY:

SCHWABE, WILLIAMSON & WYATT, P.C.

By: s/ Troy Greenfield

Troy Greenfield, OSB #892534

Email: tgreenfield@schwabe.com

Alex I. Poust, OSB #925155

Email: apoust@schwabe.com

Lawrence R. Ream (Admitted Pro Hac Vice)

Email: lream@schwabe.com

Telephone: 503.222.9981

Facsimile: 503.796.2900

Email: iknauer@swlaw.com

SNELL & WILMER LLP

1001 Pennsylvania Avenue NW, Suite 300

Washington, D.C. 20004

Telephone: 202.802.9770

Attorneys for Receiver for Defendants

Aequitas Management, LLC, Aequitas

Holdings, LLC, Aequitas Commercial

Finance, LLC, Aequitas Capital

Management, Inc., and Aequitas

Investment Management, LLC