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United States Securities and Exchange Commission v. Ahmed

United States District Court, D. Connecticut

December 20, 2018

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
IFTIKAR AHMED, Defendant, and IFTIKAR ALI AHMED SOLE PROP; I-CUBED DOMAINS, LLC; SHALINI AHMED; SHALINI AHMED 2014 GRANTOR RETAINED ANNUNITY TRUST; DIYA HOLDINGS LLC; DIYA REAL HOLDINGS, LLC; LI. 1, a minor child, by and through his next friends IFTIKAR and SHALINI AHMED, his parents; I.I. 2, a minor child, by and through his next friends IFTIKAR and SHALINI AHMED, his parents; and LI. 3, a minor child, by and through his next friends IFTIKAR and SHALINI AHMED, his parents, Relief Defendants.

          ORDER APPOINTING RECEIVER

          JANET BOND ARTERTON, U.S.D.J.

         Judgment was entered against the Defendant and Relief Defendants, holding Mr. Ahmed liable for disgorgement of $41, 920, 639 plus prejudgment interest of $1, 491, 064.01 and any interest or gains accrued on disgorged frozen assets from the date of the Court's freeze order, and a civil penalty of $21, 000, 000. (Amended Final J. [Doc. # 1054] at 4.) The judgment in this case has been stayed only insofar as no assets will be distributed in satisfaction of the judgment while appeals are pending. (See Id. at 9; Ruling on Def.'s Mot. to Stay the Judgment [Doc. # 1052] at 5-7.) The "process of preparing for any post-appeal distribution of assets to satisfy the judgment, including but not limited to appointment of a receiver or other process for valuing and liquidating frozen assets, the valuation of those assets, and any liquidation of illiquid frozen assets needed to secure the judgment, is not stayed." (Ruling on Def.'s Mot. to Stay at 7.)

         I. DISCUSSION

         A. BACKGROUND

         The parties briefed issues related to enforcement of the judgment, including the possible appointment of a receiver or other process for valuing, liquidating, and, if necessary, distributing assets in satisfaction of that judgment. A hearing was held on November 28, 2018 at which the SEC and the Relief Defendants made proposals as to the proper method of enforcing the judgment and presented potential receiver candidates. (See Tr. of Nov. 28 Hearing [Doc. # 1043]; see also Def.'s Resp. to Hearing [Doc. # 1057]; SEC's Post-Hearing Brief [Doc. # 1059].)

         Counsel for the SEC represented that it is "not asking to give these [disgorged] funds to victims now," but argues that funds sufficient to satisfy the judgment should be liquidated and/or transferred "in cash . . . into a court-monitored account." (Tr. at 102:21-24.) The SEC asks the Court to "liquidate sufficient assets to obtain the amount of the judgment" in order to "guarantee that the SEC is going to be no worse off if the judgment is affirmed on appeal. (Id. at 104:1-9.) Under the SEC's proposal, "any other funds that remain" after the amount of the judgment is secured in cash "are released from the asset freeze." (Id. at 104:15-18.) The SEC argues that a receiver should be appointed to (i) "value the [frozen] assets ... to determine which assets need to be liquidated to satisfy the judgment," "start[ing] with the most liquid" assets and continuing "until you get an amount to satisfy the judgment"; (ii) "take control of the assets, especially those that are subject to risk of decline or need monitoring"; (iii) "determine how to manage these assets"; (iv) "pay any necessary taxes upon liquidation and wind down the entities holding the assets"; and (v) to liquidate assets in an amount sufficient to satisfy the judgment and place them in a court-monitored account for holding while appeals are pending. (Id. at 110:3-113:6.)

         Relief Defendants propose (i) that the judgment be secured by "liquidat[ing] assets to secure cash of $46.4 million" which would "secure the disgorgement and the prejudgment interest amount in full"; (ii) "the New York apartments, the farm, and the assets at Oak would be valued by a mutually-agreed third party . .. and would be used to secure the remainder of the judgment for the SEC"; (iii) $3 million be released from the asset freeze to pay legal expenses for appeals and living expenses; and (iv) because "at that point, the SEC would be secured, the remaining assets would be released." (Id. at 117:15-119:3.) Relief Defendants argue that, because assets sufficient to secure the judgment would either be in cash or remain frozen, "we don't need a large receivership at this time." (Id. at 119:1-3.) Under the Relief Defendants' proposal, the proper role of any receiver or third party would only be to value the assets used to secure the remainder of the judgment. Any liquidation of assets needed to secure the $46.4 million in cash would be conducted by the Defendant or the Relief Defendants themselves. (Id. at 117:20-21.)

         Defendant argues that a receiver is not "necessary in this case." (Def.'s Resp. to Hearing at 17.) He suggests that only an "evidentiary hearing on the value of the non-forfeited Oak assets and independent appraisals . . . [of] the two NYC apartments and the farm" are needed at this time, and that "a receiver is not needed for these valuation exercises." (Id.) Instead of appointing a receiver to value and liquidate assets to secure the judgment, Mr. Ahmed urges the Court (i) to apply the value of those non-forfeited Oak assets to the disgorgement award, reducing the award by that amount; and (ii) "then [] and only then" to "discuss how to secure the judgment for the SEC, as the rest of the judgment amount depends on this critical determination first." (Id. at 6.) Instead of enlisting a receiver or third party to value and liquidate assets, Mr. Ahmed proposes that (i) the asset freeze remain in place to secure the judgment; (ii) a receiver be appointed for the "limited purposes of valuing" the two New York apartments, the farm, and all non-forfeited assets at Oak; (iii) Relief Defendants "will start opportunistically monetizing all stock, bonds, and securities held at the various brokerage houses," which will be completed within 90 days of a court order, and the cash from which sales would "stay in their respective accounts as they are today"; (iv) "the SEC will consent to the immediate release of $500K for the Relief Defendants' appellate counsel of their choice"; (v) there shall be "no distributions pending appeal(s)" but the three properties should be rented out if possible to generate cash flow "to pay the Relief Defendant's living expenses and legal counsel." (Id. at 38-39.) Mr. Ahmed also requests that, if his proposal is "not acceptable" to the Court, a mediator be appointed "to try and determine a mutual and consensual agreement... between all parties before this esteemed Court rules" on the appropriate next steps to enforce the judgment. (Id. at 40.)

         B. APPOINTMENT OF RECEIVER

         Appointment of a receiver in an SEC enforcement action is within the Court's equitable discretion. See S.E.C. v. Am. Bd. of Trade, Inc., 830 F.2d 431, 436 (2d Cir. 1987) ("Although neither the Securities Act of 1933 nor the Securities Exchange Act of 1934 explicitly vests district courts with the power to appoint trustees or receivers, courts have consistently held that such power exists ... where necessary to prevent the dissipation of a defendant's assets pending further action by the court." (internal citation omitted)); Lankenau v. Coggeshall & Hicks, 350 F.2d 61, 63 (2d Cir. 1065) ("While it is true that the Act does not explicitly provide for appointment of receivers, there is little reason to doubt that equitable power to do so exists.").

         A receiver may perform functions like "preserv[ing] the status quo" and avoiding "difficulty in] implement[ing] the court's order to refund the misappropriated proceeds" to victims. S.E.C. v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1105 (2d Cir. 1972). Moreover, where a defendant has engaged in "fraudulent conduct," it is "not unreasonable for the court to conclude that it could not rely" on the defendant to assist in effectuating the judgment and to instead appoint a receiver to do so. Id.

         This case involves a substantial collection of currently frozen assets which must be managed, valued, and/or liquidated while appeals are pending, and distributed should the SEC prevail on appeal. The Court recognizes the parties' concerns regarding the potential cost of a receiver and shares their desire to avoid unnecessary or high receivership costs. Nonetheless, given the need to value the frozen assets and avoid over-freezing, to secure the judgment for the SEC, to manage and maximize the value of frozen assets under the guidance of a neutral third party, and to take necessary steps toward effectuating the judgment, the Court will appoint a receiver. In the absence of any authority in support of the Defendants' position that the SEC should pay for the costs of a receiver, all costs of the receivership in this case will be paid from among the assets of the Receivership Estate.

         At the November 28 hearing, the SEC presented three receiver candidates: Jed Horwitt of Zeisler & Zeisler, P.C.; Mark Conlan of Gibbons P.C.; and William Edwards of Goldin Associates LLC. The Relief Defendants presented Robert Holzberg, Retired Judge of the Connecticut Superior Court, now of Pullman & Comley LLC. Relief Defendants also acknowledged that the candidates proffered by the SEC were "all capable" and could serve as a "mutually-agreed third party" in this case. (Tr. at 118:9, 121:12-19.) Mr. Ahmed has not proposed any receiver candidates but did express questions and concerns with regard to the SEC's proposed candidates and, "if there were to be a receiver appointed, the Defendant prefers Judge Holzberg." (See Def.'s Resp. at 17-27.) The Court recognizes that all four proffered candidates are well qualified, as each has relevant experience and spoke knowledgeably about the role of a receiver in this case.

         The Court appoints Jed Horwitt of Ziesler & Zeisler, P.C. as receiver in recognition of his breadth of experience in securities, bankruptcy, and insolvency cases; the experience and knowledge of others at his firm; and his longstanding contacts with outside experts and advisers who may be of assistance in carrying out the duties of the receiver in this case. Mr. Horwitt's fee structure was also the most cost-efficient of those proposed by the four receiver candidates. The Court also appoints Zeisler & Zeisler, P.C. as counsel for the Receiver.

         C. POWERS AND DUTIES OF RECEIVER

         General Powers and Duties

         1. The Receiver shall control the operation of the Receivership Estate.

         2. The Receivership Estate includes all assets subject to the Court's asset freeze order [Doc. # 113] as modified throughout this litigation.

         3. The Defendant and Relief Defendants shall have no authority with respect to the Receivership Estate's assets, except to the extent such authority existed previously under the Court's asset freeze order or as may be hereafter expressly granted by the Receiver or the Court.

         4. The Receiver shall have all powers, authorities, rights, and privileges possessed by the Defendant or Relief Defendants with regard to the assets of the Receivership Estate under applicable state and federal law, by the governing charters, by-laws, articles, and/or agreements in addition to all powers and authority of a receiver at equity, and all powers conferred upon a receiver by 28 U.S.C. §§ 754, 959 and 1692, and Fed.R.Civ.P. 66, to the extent necessary to accomplish the Receiver's duties. Nothing herein shall be construed as a requirement that the receiver must take possession, custody, or control of any particular asset in the course of executing his duties as Receiver.

         5. The Receiver shall have the following general powers and duties:

a. To use reasonable efforts to determine the nature, location, and value of property interests of the Receivership Estate;
b. To take possession, custody, and control of all records and property of the Receivership Estate;
c. Upon the submission by the Relief Defendants of a written request accompanied by appropriate documentation, to approve the payment of Relief Defendants' reasonable living expenses consistent with the Orders issued by this Court;
d. To manage, in consultation with qualified business advisors, and taking into consideration the wishes of Defendant and Relief Defendants, and with the dual objects of maximizing the realizable value of the assets of the Receivership Estate and minimizing the expense charged thereto, the assets of the Receivership Estate, pending further order of the Court or until such time that the Receivership Estate can be liquidated or modified, including but not limited to management of investments and rental and maintenance of real property;
e. To engage and employ persons in his discretion, as reasonably necessary, consistent with the dual objects of maximizing the value of the assets of the Receivership Estate and minimizing the expenses charged thereto, to assist him in carrying out his duties and responsibilities hereunder, including, but not limited to, accountants, attorneys, securities traders, registered representatives, financial advisers, liquidating agents, real estate agents and forensic experts;
f. To use property of the Receivership Estate for the benefit of the Receivership Estate, making payments and disbursements and incurring expenses as may be necessary or advisable in the ordinary course of business in discharging his duties as Receiver;
g. To take any action (whether or not in the ordinary course of business) which, prior to the asset freeze in this case, could have been taken by the Defendant or Relief Defendants with ...

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