The opinion of the court was delivered by: Hon. Gonzalo P. Curiel United States District Judge
ORDER GRANTING PLAINTIFF'S INJUNCTION AND FOR AN ORDER PARTIALLY FREEZING ASSETS OF ABS MANAGER AND THE FUNDS, PRESERVING DOCUMENTS AND REQUIRING AN ACCOUNTING; AND DENYING PLAINTIFF'S MOTION FOR AN ORDER FREEZING ALL FUNDS' ASSETS AND PERSONAL ASSETS; AND AN ORDER APPOINTING A RECEIVER MOTION FOR PRELIMINARY [Dkt. No. 5.]
Before the Court is Plaintiff's motion for preliminary injunction and an order freezing assets, appointing a receiver, preserving documents and requiring an accounting. (Dkt. No. 5.) Defendants filed an opposition on March 6, 2013. (Dkt. No. 25.) Plaintiff filed a reply on March 11, 2013. (Dkt. No. 28.) On March 15, 2013, Defendants filed a sur-reply. (Dkt. No. 29.) A hearing was held on March 19, 2013. (Dkt. No. 30.) Lynn Dean, Esq. and Sam Puathasnanon, Esq. appeared on behalf of Plaintiff and Timothy Pestotnik, Esq. and Mark Chester, Esq. appeared on behalf of Defendants. After a review of the parties' briefs, applicable law, hearing oral argument, and Defendants' consent to some of the relief sought, the Court GRANTS Plaintiff's motion for a preliminary injunction and an order freezing the assets of ABS Manager and the Funds, with the exception of distributions to non-affiliated investors*fn1 as calculated by the Funds' third-party accountant, and with five (5) business days notice to the SEC; and GRANTS Plaintiff's motion prohibiting the destruction of and requiring the preservation of documents; and requiring an accounting. The Court also DENIES Plaintiff's motion for an order freezing Price's personal assets and all the Funds' assets. The Court also DENIES Plaintiff's motion for an order appointing a receiver.
On February 8, 2013, Plaintiff Securities and Exchange Commission ("SEC") filed a complaint along with an ex parte application for a temporary restraining order ("TRO") and order freezing assets; appointing a receiver over defendant ABS Manager, LLC and the entities it controls and manages; prohibiting the destruction of documents; granting expedited discovery; and requiring an accounting. (Dkt. Nos. 1, 2.) The SEC also filed an ex parte application, without notice, for an order temporarily sealing the entire file until the asset freeze is served or until February 26, 2013, whichever is sooner. (Dkt. No. 2.) The complaint alleges violations of sections 206(a) and 206(2) of the Investment Advisors Act of 1940; violation of section 206(4) of the Investment Advisors Act of 1940 and Rule 206(4)-8; violations of section 17(a) of the Securities Act of 1933; violations of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5; and violations of section 20(a) of the Securities Exchange Act of 1934. (Dkt. No. 1.)
On February 11, 2013, the Court denied Plaintiff's ex parte application for TRO and denied Plaintiffs' ex parte application to temporarily file entire case under seal. (Dkt. No. 3.) On February 19, 2013, Plaintiff filed a motion for preliminary injunction along with an ex parte motion to shorten time for hearing on the motion for preliminary injunction. (Dkt. No. 5.) After briefing by both parties, on February 27, 2013, the Court granted Plaintiffs' ex parte motion and set the matter for hearing. Plaintiff seeks to enjoin Defendants from committing violations of the antifraud provisions of the federal securities laws. It also moves for an order freezing assets, appointing a receiver, preserving documents and requiring an accounting.
In opposition, Defendants consent to the preliminary injunction and portions of other relief sought by Plaintiff. (Dkt. No. 25 at 7.) They also consent to relief not sought by the SEC. Specifically, Defendants consent to a preliminary injunction against future violations of Section 17(a) of the Securities Act; Section 10(b) of the Exchange Act and Rule 10b-5; and Sections 206(1), 206(2), and 206(4) of the Advisers Act (Commission's Proposed Order at Sections II, III, IV, and V). Defendants also agree to an asset freeze over the assets of ABS Manager and the Funds*fn2 , but not over Price's personal accounts or over distributions to non-affiliated investors, (id. Sections VI and VII); and agree to an order prohibiting the destruction of and requiring the preservation of documents, and an order requiring an accounting, (id. Sections IX, XX and XVIII).
Defendants consented to relief not even requested by the Commission which include an order prohibiting Price, ABS Manager and the Funds from accepting any additional investment into the Funds or any other investment vehicle from non-affiliated investors pending resolution of this matter on the merits; and an order prohibiting Price, ABS Manager and the Funds from making any distribution or paying any management fees, except allowing them to make distributions to non-affiliated investors as expressly calculated by the Funds' third-party accountant, with five business days advance notice to the Commission. (Dkt. No. 25 at 7.)
According to Plaintiff, two disputed issues remain. First, whether all of ABS Manager and the Funds' assets and Price's personal assets should be frozen. Second, whether a receiver should be appointed over ABS Manager and the Funds.
According to the Complaint Defendant George Charles Cody Price ("Price"), through his unregistered investment advisory company, Defendant ABS Manager, LLC ("ABS Manager"), raised about $18.8 million dollars from about 35 investors nationwide to invest in three funds (collectively known as the "Funds") - Relief Defendants ABS Fund, LLC in Arizona ("ABS Fund"), ABS Fund, LLC in California ("Platinum Fund"), and Capital Access, LLC in Nevada ("Capital Access Fund"). (Dkt. No. 1, Compl. ¶ 2.)
In March 2009, Defendant Price formed ABS Manager and continues to operate and control the firm today. (Dkt. No. 5-3, Doran Decl., Ex. 1 at 6 (ABS Fund Private Placement Memorandum ("PPM"), Ex. 2 at 17 (Platinum Fund PPM); Ex. 3 at 9-10 (Capital Access Fund PPM); Dkt. No. 15-1, Price Decl. ¶ 3.)
For each fund offering, Defendants distributed a Private Placement Memorandum, ("PPM"), which described the terms of each Fund's offering. (Dkt. No. 1, Compl. ¶ 22.) Starting in March 2009, Defendants first offered investment in the ABS Fund. (Id. ¶ 23.) ABS Fund's PPM stated that the proceeds from its offering would be used to purchase collateralized mortgage obligations ("CMOs"). (Id.) CMOs are mortgage based securities that pay the investors, depending on the "class" or "tranche" of CMO they hold, the cash flows generated from the principal and interest payments on a pool of mortgages. (Id. ¶ 3.) However, the Funds did not buy ordinary CMOs but bought "Interest Only ("IOs") and "Inverse Interest Only" ("Inverse IOs") CMO tranches. (Id. ¶ 4.) These types of CMOs are among the riskiest forms of CMOs. (Id.) They only receive interest payments from the underlying mortgages and not the principal. (Id.) As the mortgages in the pool are prepaid, paid down, re-financed or defaulted, the interest-only income stream from those mortgages stop. (Id.)
Since at least 2010, Defendants have claimed that the ABS Fund earned annual returns of 18% and the Platinum Fund and Capital Access Fund would earn annual returns of 12.5%. (Dkt. No. 5-3, Doran Decl., Ex. 2 at 13; Ex. 3 at 3, 14.) The investors' monthly account statements indicate that each CMO held in the Funds was performing at 18% or better or 12% or better. (Id., Ex. 19 at 2-6; Ex. 20 at 2-4; Ex. 21 at 2-4; Ex. 22 at 2-3.) Moreover, in an October 2010 email to investors, Price wrote that all bonds were making well over 18% and as of January 2013, the Capital Access Fund website shows monthly returns of 1.04% (12.5% annualized) from January 2010 through June 2012. (Id., Ex. 35 at 1; Ex. 12 at 10.) Lastly, on radio shows, Price stated that the Funds earned "extraordinary" and "double-digit" returns. (Id., Ex. 6 at 23, 32.)
Plaintiff alleges that the representations about the Funds' performance were false and misleading because the Funds were not performing at these rates of return. From 2010 to 2012, although the Funds received interest payments from the securities they held in excess of 12% to 18%, the underlying value of these securities decreased significantly during this time. (Dkt. No. 5-2, Shau Decl. ¶¶ 6-8.) According to the SEC's analysis, in 2010, 2011 and 2012, the IOs and Inverse IOs that the Funds owned ...