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Daniel Wadley (Utah State Bar No. 10358) [email protected] Thomas M. Melton (Utah State Bar No. 4999) [email protected] Attorneys for Plaintiff Securities & Exchange Commission 15 West South Temple, Suite 1800 Salt Lake City, Utah 84101 Telephone: 801-524-5796 Facsimile: 801-524-5262
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH
SECURITIES AND EXCHANGE COMMISSION,
PLAINTIFF,
v.
MANAGEMENT SOLUTIONS, INC., a Texas Corporation; WENDELL A. JACOBSON; and ALLEN R. JACOBSON,
DEFENDANTS.
)))))))))))))))
MEMORANDUM IN OPPOSITION TO
MOTION TO VACATE ORDER APPOINTING RECEIVER AS TO DEFENDANT ALLEN R.
JACOBSON
Civil No. 2:11-cv-01165 Judge Bruce S. Jenkins
Plaintiff Securities and Exchange Commission respectfully submits this Memorandum in
Opposition to the Motion to Vacate Order Appointing Receiver as to Defendant Allen R.
Jacobson (“Jacobson”) (Docket # 36). This Motion is without basis in the facts of this case and
the Order Appointing Receiver (Docket # 4) clearly authorized the Receiver’s action in this
matter. Jacobson’s consent to the entry of the Order, consent which was memorialized in open
court and by later stipulation of the parties, eviscerates his attenuated constitutional claims.
Further, Allen Jacobson has attempted to secrete assets and violate the Court-ordered asset
freeze, providing additional justification for the maintenance of the receivership over his assets.
Case 2:11-cv-01165-BSJ Document 51 Filed 01/09/12 Page 1 of 11
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ARGUMENT
I. JACOBSON CONSENTED TO THE ENTRY OF THE ORDER APPOINTING RECEIVER
This matter was commenced by the Securities and Exchange Commission on December
15, 2011. At a hearing before the Court on that day, Jacobson, through counsel, consented to the
entry of the Order Appointing Receiver. No fewer than three lawyers appeared on behalf of
Jacobson, all affiliated with the firm of Ray, Quinney & Nebeker. At the hearing, Jacobson’s
counsel consented to the entry of the Order Appointing Receiver. Counsel for the Commission
summarized the agreement of the parties:
The parties have agreed to the appointment of the receiver and not to contest the order that has already been signed by your Honor, pursuant to which all bank accounts identified for the L.L.C.s, the individual L.L.C.s and other companies that are identified in our motion and the order itself would be transferred to the receiver. They would all be frozen initially until transfer can be made to the receiver. … The personal assets of the defendants will be frozen. The defendants will approach the receiver and the S.E.C. with necessary living expenses as far as estimates and whatever is necessary and we would consider making an allowance from the asset freeze or asking the Court to lift the asset freeze as to the necessary living expenses of the defendants.
Transcript of Motion Hearing, P.M. Hearing, December 15, 2011. (Docket # 45), attached as
Exhibit “A.”
The agreement of the parties was further memorialized by the parties in a Stipulation
Regarding Amendment to Temporary Restraining Order, Order Accelerating Discovery, and
Order to Show Cause and Order Appointing Receiver, Freezing Assets and Other Relief dated
December 19, 2011 (“Stipulation”) (Docket # 11). Jacobson, through counsel, consented to the
Order that expressly acknowledged that the Receiver would “assume control and management of
Case 2:11-cv-01165-BSJ Document 51 Filed 01/09/12 Page 2 of 11
3
all entities and accounts identified in the Receivership Order . . . or that fall within the definition
of Receivership Defendants as described therein. . . .” Stipulation, p. 2. That Stipulation as
entered as an Order by the Court on December 20, 2011 (Docket # 15).
Jacobson’s consent ameliorates any Constitutional concerns he might have. In fact,
Jacobson acknowledges that the Order authorizes the Receiver to take possession of his assets,
and does not contest the asset freeze itself. (Memorandum, p. 2). Although Jacobson now cavils
with the scope of the Receivership Order, his pleadings fail to acknowledge that he consented to
the entry of the Order on at least two occasions. He cannot now claim that his constitutional
rights have been impinged.
II. THE ORDER APPOINTING THE RECEIVER IS NECESSARY AND APPROPRIATE
A. The Cour t has the Author ity to Appoint a Receiver over Jacobson’s Assets
Jacobson does not dispute that the Court has the authority to appoint a receiver in
Commission enforcement actions. Courts routinely appoint receivers, including receivers over
the assets of an individual defendant. See, e.g., SEC v. Art Intellect, et al., Civil No. 2:11 cv
00357 (TC) (D. Utah) (Court appointed a receiver over assets of two individual defendants who
were principals of the corporate defendant); SEC v. John Scott Clark, et al., Civil No. 2:11 cv
0046 (DK) (D. Utah) (court appointed a receiver over assets of individual defendant as well as
his corporation); SEC v. Ashbury Capital Partners, et al. 2001 U.S.Dist. LEXIS 7094 (May 31,
2001) (court appointed a receiver over the assets of an individual defendant and granted the
receiver control over receivership assets in possession of the defendant’s ex-girlfriend); SEC v.
Eberhard, 03 Civ 813 (S.D.N.Y.) (April 18, 2003) (court appointed receiver over assets of
individual defendant). Courts have even appointed receivers over individuals themselves, in
Case 2:11-cv-01165-BSJ Document 51 Filed 01/09/12 Page 3 of 11
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addition to their assets. SEC v. Accelerated Funding Mortgage Corp., 1998 U.S.Dist. LEXIS
15993 (N.D.Texas, Dallas Division).
The powers granted to equity receivers, such as those appointed in regulatory enforcement
actions are broad and are designed preserve the status quo while various transactions are being
unraveled in order to determine an accurate picture of the fraudulent conduct. SEC v. Manor
Nursing Centers, Inc., 458 F.2d 1082, 1105 (2d Cir. 1972). They are also appropriate in
situations where it is important to prevent the dissipation of a defendant’s assets pending further
action by the Court. SEC v. American Board of Trade, Inc., 830 F.2d 431, 436 (2d Cir. 1987).
A receiver is particularly important where, as in this case, the defendant’s assets already are
subject to an asset freeze. The purpose of an asset freeze is to ensure that sufficient funds are
available to satisfy any final judgments the court might enter against Jacobson ordering the
payment of disgorgement, prejudgment interest or civil penalties. SEC v. Unifund SAL, 910
F.2d 1028, 104-42 (2d. Cir. 1990). In this case, the receivership over Jacobson’s assets will not
encumber additional property, and it ensures that Jacobson will not dissipate assets in violation
of the asset freeze.
B. The Cour t Applied the Proper Standard in Enter ing the Receivership Order
This court is vested with inherent equitable power to appoint a receiver under the facts of this
case. The prima facie showing of fraud is enough to call into play the equitable powers of the
court. SEC v. Keller Corp., 323 RF.2d 397, 401 (7th Cir. 1963); SEC v. Bowler, 427 F.2d 190
(4th Cir. 1970). In Commission enforcement actions the appointment of a receiver becomes a
necessary implementation of injunctive relief. SEC v. Materia, 745 F.2d 197, 200) (2d Cir.
1984) (“any form of ancillary relief may be granted when necessary to effectuate the purposes of
Case 2:11-cv-01165-BSJ Document 51 Filed 01/09/12 Page 4 of 11
5
the statutory scheme.”). Jacobson acknowledges the propriety of the ancillary relief entered by
the Court by not challenging the other equitable relief imposed, specifically the asset freeze.
Jacobson argues that the Commission did not provide a valid basis for the appointment of a
receiver over his assets. He falsely claims that the Declaration of Scott Frost, filed in support of
the Commission’s prayer for relief, is sealed. A simple review of the docket for this matter would
have revealed that Docket Entry 8 contains the Declaration of Scott Frost. Further, the Frost
Declaration and all exhibits were provided to Allen Jacobson’s counsel at approximately 11:30
a.m., December 15, 2011, the day the case was filed.
Similarly, a cursory review of the Frost Declaration demonstrates that Allen was an active
participant in the Management solutions scheme. Frost details how investors were told by Allen
Jacobson that their funds were to be used in specific apartment complexes. Declaration of Scott
R. Frost, dated December 14, 2011, ¶ 11 (hereinafter, “Frost Declaration”).1
In addition to his solicitation activities, many of the checks were signed by Allen Jacobson,
thus demonstrating that he had signatory control over bank accounts. Id. at Exhibit “O.” Finally,
Frost also testifies
that Allen Jacobson told investors they would receive a 5-8% annual return. Id. at ¶ 12. He
provides evidence how the investor funds were used to pay for the expenses of Allen Jacobson as
well as Ponzi payments. Id. at ¶ 19. Not only does Frost provide general evidence about the
abuse of investor funds by Jacobson, he specifically details the Tennessee Park transaction which
provides an example of the fraudulent conduct by Allen Jacobson. Further, he provides specific
evidence that Allen Jacobson was the control person over a marketing entity, Caddis Partners,
which continued to solicit investors until the filing of the Commission’s enforcement action. Id.
at ¶ 48.
1 Indeed, many of the investors who invested with Management Solutions only spoke with Allen Jacobson. Frost Declaration, Exhibits C, D and E.
Case 2:11-cv-01165-BSJ Document 51 Filed 01/09/12 Page 5 of 11
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his withdrawal of $245,000 in funds as a “capital draw” on December 14, 2011, demonstrates his
participation in the scheme. In sum, there is ample evidence to provide the prima facie basis
necessary to enter an order both freezing Jacobson’s assets and appointing a receiver over those
assets.
C. The Receivership Order Does Not Violate Jacobson’s Constitutional Rights
Jacobson’s constitutional rights were not violated by the entry of the Receivership Order.
Jacobson’s brief is devoid of any citation to a case where a receiver’s authority under a properly
entered order, after notice and a hearing on the merits, is limited in the manner Jacobson
requests. As the Supreme Court has noted, “reasonableness is the ultimate standard under the
Fourth Amendment.” Sodal v. Cook County, Illinois, 506 U.S. 56 (1992). The Sodal Court
held, “[a]ssuming, for example, that the officers were acting pursuant to a court order, as in
Specht v. Jensen, 832 F.2d 1516 (10th Cir. 1987), or Fuentes v. Shevin, 407 U.S. 67 (1972), and,
as often would be the case, a showing of unreasonableness on these facts would be a laborious
task indeed.” Sodal at 71. Jacobson has not met that heavy burden.
Instead, Jacobson attempts to import the criminal standard of “probable cause” into this civil
action. Significantly, it is only the search that Jacobson finds offensive to his Fourth
Amendment rights. He does not allege that there was any unreasonable seizure. It will well-
settled that the statutory authority of court-appointed receivers is as broad as the receiver order.
A trustee, receiver, or manager appointed in any cause pending in any court of the United States, including a debtor in possession, shall manage and operate the property in his possession as such trustee, receiver or manager according to the requirements of the valid laws of the State in which such property is situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof.
28 U.S.C. § 959(b) (emphasis supplied).
Case 2:11-cv-01165-BSJ Document 51 Filed 01/09/12 Page 6 of 11
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Jacobson’s Fourth Amendment challenge has been rejected by the courts interpreting the
powers of receivers appointed in Commission enforcement action. In U.S. v. Setser, 568 F.3d
482 (5th Cir. 2009), the Fifth Circuit Court of Appeals held that a “receiver was authorized to
seize all the named categories of assets and records of the identified defendants. Because the
receiver was taking possession of everything in those categories for whom the receivership was
authorized, further particularity would have served no purpose.” The individual in the Stetser
case also argued that “many of the documents and items taken by the receiver, particularly those
from various residences, exceeded the scope of the receiver’s mandate.” The Stetser court
disagreed, finding that the materials taken from personal residences, including wedding invoices,
credit card bills, calendars and letters of recommendation, were not outside the scope of the
receiver’s power to search and remove. Id. at 489.
Court-appointed receivers are not like criminal agents or other police authorities. Court-
appointed receivers “because of the nature of the regulated business may be permitted on their
own and without prior court approval to make broadly intrusive and unannounced inspections in
order to assure compliance with the state’s rules. A receiver takes over property only after a
court has agreed with the arguments and evidence that such a takeover is necessary.” Id. at 487.
“No court has ever held that the equivalent of a warrant must be issued in order for a receiver to
be permitted to seize the property of the subject entity.” Id. at 488.2
2 Indeed, one Court authorized a receiver to “enter and fully inspect forthwith the Frozen Properties (including personal residences), including the inspection of any and all inside and outside areas, safes, secret hideaways or compartments or hollowed structures, whether such areas, hideaways, compartments or structures are open, locked, accessible or inaccessible.” SEC v. Beckman, 2011 U.S. Dist. LEXIS 23304, *6-7 (D. Minn. 2009).
In this case, Jacobson was
not only informed of, and consented to, the appointment of a receiver over his assets, he was
informed of the receiver’s request to enter his house. Significantly, he did not file any objection
to the receiver’s inventory with the Court until more than ten days later.
Case 2:11-cv-01165-BSJ Document 51 Filed 01/09/12 Page 7 of 11
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A receiver may share information with law enforcement officials, and, by extension, with
the Commission.3
Similarly, the Receivership Order does not violate Jacobson’s Fifth Amendment rights.
As in all civil cases, Jacobson may invoke his Fifth Amendment rights when questioned by the
Receiver and counsel for the Commission. As in any civil matter, Jacobson may invoke his Fifth
Amendment right against self-incrimination, but if he does so, that decision has consequences.
The Supreme Court has held that, “the Fifth Amendment does not forbid adverse inferences
against parties to civil actions when they refuse to testify in response to probative evidence
offered against them.” Baxter v. Palmigiano, 425 U.S. 308, 318 (1976). “[A]s Mr. Justice
Brandeis declared, speaking for a unanimous court in the Tod case … ‘Silence is often evidence
of the most persuasive character.’” Id. at 319. (quoting United States ex rel. Bilokumsky v. Tod,
263 U.S. 149, 153-154 (1923)). “‘Failure to contest an assertion . . . is considered evidence of
acquiescence . . . if it would have been natural under the circumstances to object to the assertion
in question.’” Id. (quoting United States v. Hale, 422 U.S. 171, 176 (1975)).
United States v. Gray, 751 F.2d 733, 737 (5th Cir. 1985). As noted above, a
receiver is appointed in order to effectuate the enforcement of the securities law. Therefore, the
Commission is entitled to review information obtained from Jacobson’s residence in the
possession of the receiver. Jacobson’s request for a protective order should be denied.
He must, however, assert that right, he cannot merely proffer in a pleading that he may
assert those rights, or that a Fifth Amendment assertion will be proper in all circumstances.
Roach v. National Transp. Safety Bd., 804 F.2d 1147, 1151 (10th Cir. 1986) (citations and
quotations omitted). Entities do not have Fifth Amendment testimonial privileges. Curcio v.
3 To reach his conclusion that a protective order is appropriate, Jacobson resorts to conflating the Commission, the Department of Justice and the Internal Revenue Service. His reliance on SEC v. Merrill Scott, et al., fails. In that matter, the Court entered an order prohibiting the Commission from sharing tax return information with the Department of Justice. It does not stand for the proposition that evidence produced to a receiver may not be shared with the very agency requesting the appointment of the receiver.
Case 2:11-cv-01165-BSJ Document 51 Filed 01/09/12 Page 8 of 11
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United States, 354 U.S. 118, 120-22 & 125 (1957); SEC v. Dunlap, 253 F.3d 768,775-76 (4th
Cir. 2001). Nor can a custodian or control person may not invoke his personal Fifth Amendment
right to avoid producing records, or a court-ordered accounting, on the company’s behalf. Id.
Finally, Jacobson argues that the receiver may infringe upon his rights under the Third
Amendment. This argument is specious and without foundation in fact or law. First, Jacobson
has not been dispossessed of his home, and there are no troops quartered in his home. Thus, any
claim of a Third Amendment violation is not ripe for decision. Second, Jacobson currently has
no possessory interest in his home since it is under the control of the Court-appointed receiver.
United States v. Buettner-Janusch, 646 F.2d 759 (2d Cir. 1981). Consequently, this argument,
like almost all other Third Amendment jurisprudence, is creative, but wide of the mark. See e.g.
Securities Investor Protection Corp. v. Executive Securities Corp., 433 F.Supp. 470, 473, n. 2
(S.D.N.Y. 1972); and United States v. Valenzuela, 95 F.Supp. 363, 366 (S.D. Cal. 1951) (“The
1947 Housing and Rent Act as amended and extended is and always was the incubator and
hatchery of swarms of bureaucrats to be quartered as storm troopers upon the people in violation
of Amendment III of the United States Constitution.”)
D. A Receiver is Necessary and Appropr iate in this Case
The protections afforded by a court-appointed receiver are necessary and appropriate under
the facts of this case. Jacobson argues that a receiver over his property is unnecessary given the
other injunctive relief imposed in this matter. Jacobson’s conduct after the entry of the
temporary restraining order, asset freeze and receivership orders in this case demonstrate just the
opposite.
Jacobson has already attempted to violate the Court-appointed asset freeze. On December
15, 2011, at 2:24 p.m., Jacobson drew a cashier’s check on funds deposited at Utah Community
Case 2:11-cv-01165-BSJ Document 51 Filed 01/09/12 Page 9 of 11
10
Bank, made payable to Den Glen/Lake Charlestonian, LLC, both entities controlled by Jacobson,
and subject to the asset freeze order. See Exhibit “B” attached hereto.4 Jacobson then took the
cashier’s check to Zion’s Bank, N.A. for payment.5
Jacobson continues to hold possession of funds that should be turned over to the court-
appointed receiver. On December 23, 2011, the receiver learned that Jacobson absconded with
$245,000, noting it as a distribution into his capital account.”
All of these actions occurred after the entry
of the asset freeze order at approximately 11:30 a.m. on December 15, 2011. By 2:24 p.m. on
December 15, 2011, counsel for Jacobson had already appeared in Court on his behalf and
represented to Commission counsel that he had informed his clients of the pending enforcement
action, asset freeze and receivership order. Jacobson’s actions in trying to obtain $225,000 in
violation of the asset freeze demonstrate why closer scrutiny of his activity is necessary.
6 On December 28, 2011,
Jacobson’s counsel confirmed that Jacobson had obtained $245,000 from Management
Solutions, Inc, and further informed the receiver that Jacobson remained in possession of
approximately $88,000.7
CONCLUSION
To date, Jacobson has provided no accounting of those funds, and only
returned $43,400 to the Receiver. Those funds, withdrawn by Jacobson on December 14, 2011,
are the property of the receiver. His continued control of funds that belong to the receiver
demonstrate why a receiver is necessary over his personal assets.
Jacobson consented to the entry of the Receivership order. Further, the appointment of a
receiver, after notice and a hearing, does not constitute a violation of Jacobson’s rights under the
4 These documents were a part of Utah Community’s Bank’s Memorandum in Support of Motion to Intervene, Docket # 24. 5 Id. 6 Email dated December 23, 2011 from John Beckstead to Neil A. Kaplan, attached hereto as Exhibit “C.” 7 Letter dated December 28, 2011 from Neil A. Kaplan, counsel to Allen R. Jacobson, to John A. Beckstead, Receiver. Attached hereto as Exhibit “D.”
Case 2:11-cv-01165-BSJ Document 51 Filed 01/09/12 Page 10 of 11
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third, Fourth or Fifth Amendments to the Constitution. His motion to set aside the receiver for
his assets and for a protective order should be denied.
Respectfully submitted this 9th day of January, 2012.
_/s/ Thomas M. Melton_____________ Thomas M. Melton (Utah Bar No. 4999) [email protected] Daniel Wadley (Utah State Bar No. 10358) [email protected] Attorneys for Plaintiff Securities and Exchange Commission 15 West South Temple, Suite 1800 Salt Lake City, Utah 84101 Tel.: 801-524-5796 Fax: 801-524-5262
Case 2:11-cv-01165-BSJ Document 51 Filed 01/09/12 Page 11 of 11
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1 IN THE UNITED STATES DISTRICT COURT
2 DISTRICT OF UTAH
3 CENTRAL DIVISION
4
5 SECURITIES AND EXCHANGE )
6 COMMISSION, )
7 Plaintiff, )
8 vs. ) CASE NO. 2:11-CV-1165BSJ
9 MANAGEMENT SOLUTIONS, INC., a )
10 Texas Corporation, WENDELL A. )
11 JACOBSON and ALLEN R. JACOBSON,)
12 Defendants. )
13 _______________________________)
14
15
16 BEFORE THE HONORABLE BRUCE S. JENKINS
17 -------------------------------------
18 December 15, 2011
19
20
21
22
23 Motion Hearing
24 P.M. Hearing
25
Case 2:11-cv-01165-BSJ Document 51-1 Filed 01/09/12 Page 1 of 26
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1 A P P E A R A N C E S
2
3
4 For Plaintiff: DANIEL WADLEY THOMAS M. MELTON
5 15 West South Temple Suite 1800
6 Salt Lake City, Utah
7
8
9
10 For Defendant: MARK PUGSLEY
11 LOREN WEISS MATTHEW LEWIS
12 36 South State Street Suite 1400
13 Salt Lake City, Utah
14
15
16
17
18
19
20
21
22 Court Reporter: Ed Young 247 U.S. Courthouse
23 350 South Main Street Salt Lake City, Utah
24 (801) 328-3202
25
Case 2:11-cv-01165-BSJ Document 51-1 Filed 01/09/12 Page 2 of 26
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1 December 15, 2011 1:30 p.m.
2 P R O C E E D I N G S
3
4 THE COURT: Let's return to Securities and
5 Exchange Commission versus Management Solutions, Inc., a
6 Texas corporation, Wendell A. Jacobson and Allen R.
7 Jacobson. It is 11-C-1165. It had appearances made this
8 morning on behalf of plaintiff, and the Court on its own
9 motion continued the matter in part until this time and
10 place, and those who are making appearances, if at this
11 point you will be kind enough to make a record for us, and
12 tell us who you are and whom you represent.
13 MR. WADLEY: Daniel Wadley and Thomas Melton on
14 behalf of the Securities and Exchange Commission.
15 MR. PUGSLEY: Good afternoon, Your Honor. Mark
16 Pugsley, Matt Lewis and Larry Weiss from the firm of Ray
17 Quinney & Nebeker on behalf of the defendants.
18 THE COURT: I have heretofore entered a T.R.O. and
19 a related order freezing assets, and recognizing that the
20 time constraints were fairly short, and suggested that
21 knowing that you fellas existed, that we ought to have you
22 come on down here and see if you're really interested in
23 supplying everything that they have asked for in the next
24 three days, and if --
25 MR. PUGSLEY: May I be heard, Your Honor?
Case 2:11-cv-01165-BSJ Document 51-1 Filed 01/09/12 Page 3 of 26
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1 THE COURT: Yes.
2 MR. PUGSLEY: Thank you.
3 I am happy to be here and I am frustrated, Your
4 Honor, on a number of levels. This investigation is not a
5 new one. We have been very well aware of it for
6 approximately six months. Our clients have been cooperating
7 fully with the Securities and Exchange Commission and
8 providing documents, so it is not like we just found out
9 about this.
10 Significantly, Your Honor, it is not like that
11 they just found out that we represent them. They have known
12 the whole time.
13 If I may approach, Your Honor?
14 THE COURT: Sure.
15 MR. PUGSLEY: This is a letter, Your Honor, that I
16 sent to the lead counsel for the S.E.C. on October 7th
17 specifically asking for advance notice if a hearing like
18 this was to take place. I also would direct the Court, if I
19 may, to Rule 65 of the Federal Rules of Civil Procedure.
20 Subpart B of that requires that the adverse party --
21 THE COURT: The supplemental petition, and I don't
22 know whether you have seen that or not --
23 MR. PUGSLEY: I got it about five minutes ago,
24 Your Honor. I don't think --
25 THE COURT: That is about when I got it.
Case 2:11-cv-01165-BSJ Document 51-1 Filed 01/09/12 Page 4 of 26
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1 MR. PUGSLEY: There has to be a certification in a
2 complaint or by affidavit. The supplemental document does
3 not comply with Rule 65(b). They knew we existed. They
4 certainly know where I work. I deal with them on multiple
5 cases. They could have given us notice of the hearing this
6 morning and they chose not to. The supplemental document,
7 which is not an affidavit and does not comply with the
8 rule -- I'm sorry, the rule also permits a verified
9 complaint, which also is not present in this case.
10 The supplemental document appears to make some
11 generalized statements about cases, other cases the S.E.C.
12 has brought where they gave notice, and all of a sudden all
13 the money disappeared. I would submit, Your Honor, that
14 that is not sufficient to comply with the rule. Certainly
15 if my clients wanted to dissipate funds, they could have
16 done so six months ago. There is no evidence that they did
17 so.
18 THE COURT: If you have problems with the order
19 that has been entered --
20 MR. PUGSLEY: Yes, Your Honor.
21 THE COURT: -- then your process there is within
22 an appropriate time to file an appropriate motion.
23 MR. PUGSLEY: What we would ask the Court to do,
24 Your Honor, and I understand there has been another hearing
25 set on the 23rd, and what I would like to move is that the
Case 2:11-cv-01165-BSJ Document 51-1 Filed 01/09/12 Page 5 of 26
22
1 Court vacate the order that was entered today, and have a
2 normal noticed hearing on the 23rd on the temporary
3 restraining order. We can do that and we can prepare, and I
4 can tell you generally, Your Honor, that this is not a case
5 where there are assets that are just sitting in accounts
6 somewhere. The assets in this case are in real estate.
7 Approximately -- I'm not sure of the exact number -- 7,000
8 units of apartment buildings throughout the country. The
9 assets are not able to be dispossessed of or liquidated in
10 any short order. In fact, they are not in the process of
11 liquidating, except for the purpose of getting out of this
12 business.
13 The affiliate of Management Solutions in Texas
14 that manages these apartments -- it is an intensive process.
15 If you have ever owned an apartment building, you'll know
16 that the management of an apartment building is extremely
17 work intensive. There are approximately 300 employees in
18 Texas who are managing all these. There is nothing that is
19 going to get dissipated, Your Honor.
20 Moreover, it would be enormously expensive to
21 appoint a receiver at this juncture, because the complexity
22 of this operation is such that it would be a complete waste
23 of these investors' time to have a receiver get up to speed
24 and learn how to manage it.
25 If I may approach again, Your Honor, I have an
Case 2:11-cv-01165-BSJ Document 51-1 Filed 01/09/12 Page 6 of 26
23
1 e-mail that I sent to Mr. Melton yesterday. In this e-mail,
2 Your Honor, I suggested to Mr. Melton that we get together
3 and talk about a potential resolution and a potential
4 settlement. He had that before they moved this morning and
5 he never responded to me. We have been fully cooperative in
6 this investigation.
7 In fact, the purpose of our meeting was to work
8 out an arrangement whereby we would submit to jurisdiction
9 of a receiver. We have already hired, Your Honor, Gil
10 Miller. Gil Miller, as you probably know, is the premiere
11 receivership expert in the state. He does more cases for
12 the S.E.C. than probably anyone else. I work with him on
13 other cases. We have hired Gil to oversee the operations of
14 our company. We would like, Your Honor, to continue to
15 operate our company and to continue to do so under the
16 jurisdiction of Mr. Miller who will ensure that no
17 dissipation takes place, and with regular reports to the
18 Securities and Exchange Commission.
19 This is not a case where someone is, you know,
20 putting money in foreign bank accounts. These are apartment
21 buildings. This company has been in operation for more than
22 20 years. They are not some fly-by-night company. They
23 live in Fountain Green, Utah. They are well established.
24 They have hundreds of investors who are well known to the
25 Court, prominent members of the legislature and the church
Case 2:11-cv-01165-BSJ Document 51-1 Filed 01/09/12 Page 7 of 26
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1 here. They have many, many happy investors and have no
2 intention of dissipating assets. I'll be happy to put Mr.
3 Jacobson on the stand at the temporary restraining hearing
4 on the 23rd and let him talk about that. Your Honor, this
5 is not a case like the other cases that the S.E.C. has
6 filed. There are no risks of dissipation. I would submit,
7 Your Honor, that there is no evidence of dissipation of
8 assets in Mr. Frost's affidavit or in the supplemental
9 document.
10 Again, we would request that the Court vacate the
11 order that it rendered this morning for failure to comply
12 with Rule 65(b), and set a noticed hearing on the 23rd, and
13 I will be happy to represent to the Court that no assets
14 will be dissipated and nothing will happen. We'll cease
15 operations in the meantime and let's have a hearing, and we
16 are all big boys here and we don't need to come in ex parte,
17 particularly when we requested notice.
18 MR. WADLEY: Your Honor, as you requested, this
19 morning we filed our supplemental motion in which we cited
20 to the declaration of Mr. Scott Frost, in which he explained
21 the immediate harm that would result to shareholders and
22 other individuals unless emergency relief is granted. I
23 explained in the document as per the rule why notice was not
24 appropriate in this particular instance. We have complied
25 expressly with the terms of the rule as you have requested.
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1 With respect to the concerns raised by
2 Mr. Pugsley, obviously I understand why he would have
3 preferred to receive notice. He did request in an earlier
4 letter that if we decided to move forward with emergency
5 action, that we provide him notice. In many instances and
6 in most instances that is appropriate. Under the
7 circumstances of this particular case, notice was not
8 proper. As we have explained in our moving papers, Mr.
9 Pugsley represented to us in early October that no further
10 fund-raising would be done by his client's company. None.
11 Since that time millions of dollars have been raised by his
12 client under false pretenses and additional money has been
13 solicited. This is an ongoing fraud.
14 With respect to the dissipation issue, where
15 Mr. Pugsley says there is no concern about dissipation, Your
16 Honor, every month this company pays out millions of dollars
17 in, quote, returns to its investors. With respect to all of
18 the assets allegedly being tied up in real estate, Your
19 Honor, we have already discussed that in one month alone $45
20 million flowed through one single account.
21 Now, although the majority of the assets may be
22 tied up in real estate, certainly not all of the assets are.
23 The S.E.C. in seeking emergency action both in the form of a
24 temporary restraining order and in the form of an asset
25 freeze and the appointment of a receiver is not in any way
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26
1 trying to eliminate or dissolve the company right now. What
2 we are trying to do is preserve the company.
3 As Mr. Pugsley has already explained, it sounds
4 like he is more than willing to move forward with a
5 receiver. He has himself proposed Mr. Gil Miller to act as
6 receiver. Obviously the notion of appointing a receiver is
7 not the problem here. Mr. Pugsley has not raised one
8 concern with respect to the receiver that has been proposed,
9 Mr. John Beckstead, as to his qualifications or the
10 appropriateness of having a receiver in this case.
11 Certainly 300 employees in a management company down in
12 Texas, that is a big deal, and as far as I know Mr.
13 Beckstead has no plans to lay off or otherwise dispose of
14 those employees. Certainly this is a huge operation.
15 Again, this is the Court appointed receiver. The
16 receiver will not do anything unless and until the Court
17 approves it. Your Honor has already signed the temporary
18 restraining order and recognizes the importance of the
19 issues here, and has already signed the order appointing the
20 receiver, and the defendants have already acknowledged the
21 need for a receiver in this case. What we need is to
22 preserve and marshal the assets pending subsequent hearings,
23 which is exactly what the Commission is requesting.
24 THE COURT: Counsel.
25 MR. PUGSLEY: May I clarify myself, Your Honor?
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1 THE COURT: Sure.
2 MR. PUGSLEY: I apologize. I didn't mean to imply
3 that we wanted Gil to be a receiver. I also didn't mean to
4 imply that we were conceding that a receiver needed to be
5 appointed. I'm sorry and I was a little bit exercised and I
6 may have misspoken. What I meant is that Mr. Miller has
7 been reviewing this company's business for several months
8 now and he is already up to speed. What we would suggest,
9 Your Honor, is that Mr. Miller be used in effect as a
10 trustee, that our clients continue to operate the business
11 as they always have been, and we will have Mr. Miller
12 certify or I will certify or the client will certify that no
13 more monies will be -- no more interest payments will be
14 made to clients. I don't think that this dissipation of
15 assets is the same as paying interest payments to investors.
16 I don't think that that is dissipation.
17 There is no evidence that Mr. Jacobson or his son
18 Allen Jacobson are going to abscond to the Netherlands or
19 wherever with this money. That is not in the record.
20 Certainly that is not going to happen. We would suggest
21 that Mr. Miller simply exercise an oversight role, if just
22 in the next week until we can have a hearing. That is all
23 I'm saying.
24 THE COURT: Who signs the checks?
25 MR. PUGSLEY: Who signs the checks? Mr. Jacobson
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1 does or one of his staff.
2 THE COURT: Who signs the checks in reference to
3 the 300 employees that you refer to?
4 MR. PUGSLEY: The 300 employees are employed by a
5 Texas company, not this one. They are not, I don't believe,
6 employees of Management Solutions, Inc. Those management
7 fees I believe are paid by that company. I mean, this is an
8 apartment building management company. They take a fee
9 every month for managing these apartments based on the
10 number of units. My understanding, and I am not 100-percent
11 up to speed on who signs what checks in that company,
12 because we don't represent that company, but it is not Mr.
13 Jacobson. I know that.
14 MR. WADLEY: Your Honor, it is run by his brother,
15 Evan K. Jacobson.
16 MR. PUGSLEY: I don't represent him, Your Honor.
17 THE COURT: Is there an ownership interest?
18 MR. PUGSLEY: Not that I know of. No. It is an
19 independent company, that I know of.
20 I am hearing whispering from the bench behind me,
21 but I don't believe -- I am not aware of what ownership -- I
22 am not aware, Your Honor. I would have to check into that.
23 I apologize if I have --
24 THE COURT: That company deals with maintenance
25 primarily?
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1 MR. PUGSLEY: Correct, and rentals and, you know,
2 making sure that the units are filled and making sure that
3 the lights go on and that sort of thing.
4 THE COURT: From what source does it obtain funds?
5 MR. PUGSLEY: The management company in Texas,
6 Your Honor?
7 THE COURT: Yes.
8 MR. PUGSLEY: That obtains funds that are coming
9 from the rental income on the apartment buildings
10 themselves.
11 THE COURT: How does it account to Management
12 Solutions, Inc.?
13 MR. PUGSLEY: I don't know, Your Honor. They
14 charge a percentage fee, I believe, of the rentals. I am
15 not sure.
16 THE COURT: Do all of the rentals flow through
17 that company?
18 MR. PUGSLEY: As we understand it, Your Honor,
19 each apartment building has a bank account where the rents
20 come in and then they pay the management company. That is
21 our understanding. Again, this is a hugely complex
22 operation. Our concern is that the appointment of a
23 receiver would take months and months, and in the meantime,
24 with the freezing of assets, the buildings themselves would
25 all go into default and we wouldn't be able to pay --
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1 THE COURT: That depends on the nature of the
2 assets that are frozen.
3 MR. PUGSLEY: Correct. And the scope of this
4 order is quite broad.
5 THE COURT: If there is rental income that flows
6 into the management company and they currently make payments
7 and current maintenance costs --
8 MR. PUGSLEY: Not only that, but they have to pay
9 the mortgages on the buildings themselves, so we don't want
10 the buildings to go into foreclosure either.
11 MR. WADLEY: Your Honor, Parkwood Management,
12 which is the Texas entity that we're referring to here,
13 holds out Wendell Jacobson as a member of that entity. Mr.
14 Jacobson, as is our understanding, has authority over the
15 accounts of Parkwood Management just like he does over all
16 of the bank accounts. Money flows into Parkwood and
17 immediately flows up to M.S.I. I mean, there is absolutely
18 no distinction between these entities as far as Wendell
19 Jacobson is concerned.
20 MR. PUGSLEY: Your Honor, Parkwood is not named in
21 the complaint, and I think if we want to expand that and
22 serve those folks in Texas, we could certainly do that. We
23 would be happy to bring Mr. Jacobson in to explain for
24 himself how the process works.
25 MR. WADLEY: It is named in our motion for the
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31
1 receivership, Your Honor, and to be kept within the umbrella
2 of the other Jacobson entities.
3 THE COURT: Well, it depends. That requires
4 definition on an item specific basis.
5 MR. WADLEY: Your Honor, if Mr. Jacobson has
6 authority over the funds of Parkwood Management, we're
7 talking millions of dollars a month, and we understand Your
8 Honor's concern with respect to many of these entities as to
9 whether or not they are or are not under the control of
10 Wendell Jacobson.
11 THE COURT: Sure. I am concerned also with the
12 200 plus people that may be employed who are currently in
13 the midst of an interesting season, and --
14 MR. PUGSLEY: Another concern, Your Honor, is
15 these buildings are actually -- the investors that the
16 S.E.C. purports to be concerned about, if the buildings go
17 into foreclosure and are lost, that is going to cause far
18 more harm than anything Mr. Jacobson has ever caused, if
19 anything.
20 MR. WADLEY: Well, Your Honor, perhaps the most
21 efficient way to go forward would be to ask Mr. Beckstead,
22 who would be the court appointed receiver, to respond with
23 his thoughts as to how he would treat Parkwood Management
24 and other L.L.C.s together with the funds that would be
25 marshaled on a going forward basis as we explore these
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1 important issues.
2 With respect to the foreclosure action, Your
3 Honor, any potential foreclosure action -- we have asked
4 for, in the order that you have signed already, a freeze on
5 all litigation, so foreclosure proceedings would not be a
6 concern.
7 THE COURT: Well, that is what it says.
8 MR. PUGSLEY: We're willing to agree to reasonable
9 restrictions that no assets will be dissipated, and in the
10 interim we are asking simply to continue this hearing until
11 the 23rd so that we can review -- I have not even had a
12 chance to read Mr. Frost's affidavit yet. I am not prepared
13 to deal with that. I would like to be heard on it, Your
14 Honor. I think it is premature at this point. They have
15 not complied with --
16 THE COURT: Well, we have got a couple of orders
17 that have been entered.
18 MR. PUGSLEY: And I am asking you to vacate them.
19 THE COURT: And you're interested in having me
20 review those in some fashion.
21 MR. PUGSLEY: I am interested in having you vacate
22 them, Your Honor, until the hearing on the 23rd.
23 THE COURT: And the answer to vacating is of
24 course no at this point. If you have an appropriate motion,
25 you should file it.
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1 MR. PUGSLEY: We heard about it an hour ago, Your
2 Honor.
3 THE COURT: We'll set the matter down and hear it.
4 As a practical matter, what we have got are a couple of
5 orders that have been entered. Whether they were
6 appropriately entered or not is another question. That is
7 something that at this point is an accomplished fact. I set
8 the matter down to deal with the question of a preliminary
9 injunction which is somewhat academic, if we set it up for
10 the 23rd of December because, as you point out, there are
11 complexities that exist in this series of relationships, and
12 you may find that it is the kind of order that, as a
13 practical matter, people are incapable of honoring as far as
14 the time constraints go.
15 Now, I have no problem with in effect making sure
16 that no assets, in quotation marks, are dissipated, in
17 quotation marks. I think everybody has an interest in
18 making sure that whatever values are there, particularly on
19 a going concern basis, remain as best people can during a
20 difficult period.
21 There is a suggestion from the S.E.C. that if we
22 reaffirm the receiver, that he works with people in a
23 cooperative way to make sure that values are maintained and
24 that oversight exists, and that those down the line that are
25 concerned with online activities, maintenance, lights,
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34
1 mowing the lawn, collecting rent, continue so that things
2 are not just abruptly chopped and where we are ending up in
3 essentially a fast liquidation of some kind.
4 It may be that you and counsel can take a few
5 minutes, and I am willing to have you do that, and I can
6 recess for a few minutes and you and counsel can take
7 advantage of the jury room or here in the courtroom and in
8 conjunction with the receiver, or the receiver-in-waiting,
9 whatever you want to call him at this point, can end up with
10 a simple order that is helpful to people all the way around.
11 At this point what I have got are a couple of
12 orders that we entered, and your comments as to the
13 proprietary of the orders, but I think everyone is
14 interested in making sure that what values are there are
15 capable of being maintained. There are some extremely
16 interesting questions as to the two or 300 entities that,
17 purportedly, in which the defendants have some kind of a
18 proprietary interest.
19 I don't know whether that is useful or not, Mr.
20 Pugsley.
21 MR. PUGSLEY: My concern, Your Honor, is that the
22 orders as entered really don't preserve the status quo.
23 They really upset the status quo. My understanding is that
24 the F.B.I. has already been in my clients' offices today and
25 seized all their records.
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1 THE COURT: Well, I am not concerned about them.
2 I'm only concerned with what is here.
3 MR. PUGSLEY: Well, in order to preserve the
4 assets we need to be able to continue the business that is
5 going on, and that is really the preservation of --
6 THE COURT: I am suggesting that you may want to
7 sit down and chat with these fellas for a few minutes and
8 see if you can achieve an agreeable --
9 MR. PUGSLEY: We are happy to.
10 THE COURT: -- form of order that at least in part
11 accomplishes some of the things that you are interested in
12 accomplishing.
13 MR. WADLEY: We are happy to do so.
14 THE COURT: I am happy to have you use the
15 courtroom or the conference room or the jury room, whichever
16 you prefer.
17 Why don't I give you 30 minutes to see what you
18 can do.
19 MR. PUGSLEY: Thank you, Your Honor.
20 MR. WADLEY: Thank you, Your Honor.
21 THE COURT: I will be back in here in about 30
22 minutes.
23 It may be, at least from the stack of material
24 that I was given, and as I was going through it, and it may
25 be that there are some things that have not yet arrived on
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36
1 your desk that you may find of value.
2 We'll be in recess for 30 minutes.
3 (Recess)
4 THE COURT: It looks like we are all here.
5 Where are we?
6 MR. WADLEY: Your Honor, we were able to make
7 substantial progress on the remaining issues that were
8 raised. I'll articulate it and, Mr. Pugsley, if you will
9 correct me if I get any of this wrong.
10 The parties have agreed to the appointment of the
11 receiver and not to contest the order that has already been
12 signed by Your Honor, pursuant to which all bank accounts
13 identified for the L.L.C.s, the individual L.L.C.s and other
14 companies that are identified in our motion and the order
15 itself would be transferred to the receiver. They would all
16 be frozen initially until transfer can be made to the
17 receiver.
18 All operations of the entity will continue with
19 all current employees -- no terminations of any employees,
20 and that if the receiver deems it appropriate to make a
21 change in the employment status of any of the employees, he
22 will first approach the parties and if the parties stipulate
23 to it, great, and if not, we will move the Court for
24 approval to terminate the employment status of any of the
25 employees. And that all payments for all of the properties
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1 will continue to be made timely, to the extent that there is
2 sufficient revenue, rental revenue to make those payments on
3 the properties themselves.
4 The personal assets of the defendants will be
5 frozen. The defendants will approach the receiver and the
6 S.E.C. with necessary living expenses as far as estimates
7 and whatever is necessary and we would consider making an
8 allowance from the asset freeze or asking the Court to lift
9 the asset freeze as to the necessary living expenses of the
10 defendants.
11 I believe that is it.
12 Anything else?
13 THE COURT: Have you talked at all about an
14 appropriate hearing date --
15 MR. WADLEY: We did, Your Honor.
16 THE COURT: -- in reference to your motion for a
17 preliminary injunction?
18 MR. WADLEY: We did, Your Honor.
19 The defendants agreed to extend the temporary
20 restraining order through Friday, February 3rd. Obviously
21 that is subject to Your Honor's calendar. That would then
22 give the parties sufficient time to prepare for a hearing on
23 a preliminary injunction or to simply stipulate to the entry
24 of a preliminary injunction.
25 THE COURT: And you're talking about February 3rd
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38
1 as a response date or a --
2 MR. WADLEY: Friday, February 3rd for the hearing,
3 Your Honor, for the preliminary --
4 THE COURT: I see. Okay. Then in the interim
5 whatever discovery is done is done?
6 MR. WADLEY: Correct, Your Honor. Yes.
7 THE COURT: The T.R.O. had a very truncated
8 response time, and we talked about a response time not three
9 days but some other day prior to the 3rd of February.
10 MR. WADLEY: Your Honor, we did not talk about
11 those time frames, but I would propose extending the
12 three-day turnaround time for discovery, for example, for
13 interrogatories and such, perhaps to a ten-day turn around
14 time to the extent any discovery is --
15 MR. PUGSLEY: Written discovery.
16 MR. WADLEY: Written discovery.
17 MR. PUGSLEY: That is fine.
18 MR. WADLEY: Yes. It would be a ten-day
19 turnaround for written discovery, and then perhaps one-week
20 notice for any depositions.
21 THE COURT: Okay.
22 MR. PUGSLEY: We'll try to reduce this to writing.
23 THE COURT: Pardon?
24 MR. PUGSLEY: We'll try to reduce this to writing.
25 THE COURT: I intend to have you do that. I
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1 intend to have you do that.
2 How long do you visualize the preliminary
3 injunction hearing would last?
4 MR. PUGSLEY: I don't know, Your Honor. It could
5 be days.
6 THE COURT: Well, if we are dealing with two or
7 300 entities --
8 MR. PUGSLEY: There is a lot going on here.
9 THE COURT: -- it may run a very long time.
10 What if we set pretrial on the 3rd and set the
11 actual hearing on the 13th?
12 MR. WADLEY: That works for me, Your Honor.
13 MR. PUGSLEY: What time on the 3rd, Your Honor?
14 THE COURT: 9:30 in the morning for pretrial.
15 MR. PUGSLEY: February 3rd?
16 THE COURT: Yes. That way we will provisionally
17 set a hearing on the motion for preliminary injunction for
18 9:30 on February 13th, and that is a Monday, if that works.
19 MR. PUGSLEY: I have not looked at my calendar,
20 but we'll make that work.
21 THE COURT: As I understand it, the temporary
22 orders and the asset order modified in accordance with your
23 agreement would run through at least the 13th.
24 MR. WADLEY: How about it will terminate at the
25 conclusion of the hearing on the preliminary injunction
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40
1 beginning February the 13th?
2 THE COURT: Is that your deal?
3 MR. PUGSLEY: I'm sorry. What did you just say?
4 MR. WADLEY: That the temporary restraining order
5 will be extended through the conclusion of the hearing for
6 the preliminary injunction which begins on the 13th.
7 MR. PUGSLEY: That is fine, Your Honor, subject to
8 the terms that we will put on the record. I do have a
9 comment, if I may, whenever you're ready.
10 THE COURT: Fine. But as recited by counsel, that
11 is your arrangement?
12 MR. PUGSLEY: I'm sorry. I have two people
13 talking to me.
14 Yes, Your Honor.
15 THE COURT: I just wanted to make sure that as
16 recited by counsel that is your arrangement?
17 MR. PUGSLEY: Yes. I do want to say, Your Honor,
18 that we want to reserve our right to propose an alternative
19 to the receivership. We will do that in writing.
20 THE COURT: I am happy to receive any appropriate
21 motions.
22 MR. PUGSLEY: Thank you.
23 We are concerned about the cost. This is a very
24 expensive receivership, as you may know, and we're going to
25 talk about that and if appropriate, we'll make an
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41
1 appropriate motion.
2 THE COURT: That is fine. The costs are of
3 concern to the Court as well. I don't think anybody need
4 feel that anybody has written a blank check. They are all
5 subject to review and appropriate authorization.
6 MR. PUGSLEY: I am glad the receiver is here to
7 hear that. Thank you, Your Honor.
8 THE COURT: How soon can you fellas get me a
9 written stipulation?
10 MR. WADLEY: We are available. Probably no later
11 than tomorrow.
12 MR. PUGSLEY: Yes. I'll be here.
13 MR. WADLEY: We'll draft it and submit it to
14 counsel for the defendants for review and then get it out
15 tomorrow.
16 THE COURT: Tell me again the time.
17 MR. WADLEY: Tomorrow.
18 THE COURT: Okay.
19 MR. WADLEY: Would you like us to submit it by
20 e-mail to you, Your Honor?
21 THE COURT: Well, I'm interested in having you
22 fellas agree to it. I'm always interested in something
23 other than electronic signatures.
24 MR. WADLEY: We'll have it signed and brought down
25 to you, Your Honor.
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1 MR. PUGSLEY: We are only a block away from each
2 other.
3 THE COURT: We'll look for a proposed order that
4 tracks what you're suggesting and we'll see if it is okay.
5 Anything else we need to talk about at this point?
6 MR. WADLEY: No.
7 MR. PUGSLEY: No.
8 THE COURT: Okay. Thanks a lot. Appreciate your
9 help.
10 MR. WADLEY: Thank you, Your Honor.
11 THE COURT: We'll be in recess.
12 (Proceedings concluded.)
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