Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_09-cv-00665/USCOURTS-caed-2_09-cv-00665-105/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:77 Securities Fraud

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26 Securities & Exchange Commission. 1

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UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

SECURITIES AND EXCHANGE

COMMISSION,

NO. CIV. S-09-0665 LKK/DAD

Plaintiff,

v.

O R D E R

ANTHONY VASSALLO, KENNETH

KENITZER, and EQUITY 

INVESTMENT MANAGEMENT AND

TRAINING, INC.,

Defendants.

 /

The Receiver in this SEC enforcement action has moved for the 1

disgorgement of $2.5 million from non-parties J.R. Trust, Global

Mergers & Acquisitions, Inc., William A. Hayward, RAAR Investments,

Ltd., Jack Miller and Richard J. Schotts, Jr. (collectively, “the

non-parties”). The Receiver alleges that $2.5 million in investor

funds were transferred, without consideration, from Equity

Investment Management and Trading, Inc. (“EIMT”), to J.R. Trust and

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 There are three Wencke’s (so far). The cited case is the 2

third in the series.

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from there, to other non-parties. None of the non-parties has

appeared or opposed the motion.

SUMMARY

1. The Receiver has made a prima facie showing that J.R.

Trust, RAAR Investments, Jack Miller and Richard J. Schott, Jr.,

each received or controlled defrauded investor funds, and that

none of the four had any legitimate claim to the money. The

Ninth Circuit authorizes summary proceedings to recover

defrauded investor funds in this way. See SEC v. Wencke, 783

F.2d 829 (9th Cir. 1986) (Wencke III) (authorizing summary 2

proceedings instituted by receiver), cert. denied sub nom.

DeLusignan v. Gould, 479 U.S. 818 (1986); SEC v. Colello, 139

F.3d 674 (9th Cir. 1998) (authorizing SEC recovery of defrauded

investor funds from non-culpable “nominal defendants”). 

Accordingly, the Receiver’s motion is GRANTED as to these four

non-parties.

2. However, the Receiver has not alleged, nor made a prima

facie showing, that Global Mergers & Acquisitions, Inc. or

William A. Hayward ever received or controlled any investor

funds. Rather, the Receiver alleges that these two (with

Schott), “swindled” Vassallo and EIMT out of the $2.5 million. 

The remedy of disgorgement only applies to avoid unjust

enrichment, and can only be imposed on a person who has, at

least at some point, possessed or controlled the funds to be

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 Vassallo and Kenitzer have both consented to permanent 3

“obey-the-law” injunctions (Dkt. Nos. 127 & 228), in which they

“neither admit nor deny” the allegations of the complaint, from

which the following account is taken.

The Receiver refers to it as a “Prime Bank” securities scam. 4

It is unclear if defendant Vassallo was himself the victim of a

scam, or if he was a party to it.

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disgorged. Accordingly, the Receiver’s motion is DENIED WITHOUT

PREJUDICE as to these two non-parties.

I. BACKGROUND

According to the complaint, EIMT was a company operated by

defendants Anthony Vassallo and Kenneth Kenitzer. The company 3

collected $40 million from investors, who were told they were

investing in a “hedge fund.” The company did some securities

trading for a time, but ultimately stopped trading entirely. In

an all-too-familiar story, the company nevertheless reported

fictional “returns” to its investors. Like any “Ponzi scheme,”

the company’s pay-outs to investors came from other investors’

money, not from investment returns.

At some point, William A. Hayward (on behalf of Global

Mergers & Acquisitions, Inc.), and Richard J. Schotts, Jr. (on

behalf of J.R. Trust), “convinced Vassallo to transfer

$2.5 million” of EIMT funds – the money the Receiver now seeks

to recover – to J.R. Trust. Vassallo transferred the funds,

apparently believing that he was investing in a “Private

Placement Trade Program,” but which turned out to be just

another investment scam. Upon receiving EITM’s funds, J.R. 4

Trust at Schotts’s direction, spent the money, or transferred it

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 The Receiver could not locate some of the transferees, and 5

they are not involved in this motion.

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to RAAR, Miller and others, none of whom had any right to 5

EIMT’s funds. EIMT got nothing for the $2.5 million

transferred to the non-parties. On March 11, 2009, the SEC

filed this civil enforcement action against Vassallo, Kenitzer

and EIMT, alleging sales of unregistered securities, securities

fraud, and other charges.

On July 31, 2009, this court appointed a permanent Receiver

for EIMT, to marshal and recover its assets, namely, the

defrauded investor funds. See SEC v. Wencke, 577 F.2d 619, 623

(9th Cir. 1978) (Wenke I) (district court acted within its

discretion in appointing a receiver to protect the public

investors); 15 U.S.C. § 78u(d)(5) (authoring the district court

to grant equitable relief necessary for the benefit of

investors); 28 U.S.C. § 754 (governing the appointment of

receivers in federal courts).

On July 28, 2011, the Receiver filed this motion seeking

disgorgement of the $2.5 million that was initially transferred

to J.R. Trust. The motion is supported by declarations showing

what happened to the $2.5 million, and the role of the nonparties. It is also supported by the Receiver’s Certificate of

Service averring that each of the non-parties had been served

with the motion and its accompanying papers. To date, none of

the non-parties has appeared or otherwise opposed the motion.

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 Citing SEC v. First Pacific Bancorp, 142 F.3d 1186, 1191 6

(9th Cir. 1998), cert. denied, 525 U.S. 1121 (1999).

 Citing SEC v. Colello, 139 F.3d 674, 675 (9th Cir. 1998) 7

(SEC may sue “nominal defendants”). Ross also helpfully cites “SEC

v. Hickey, 322 F.3d 1123, 1130–32 (9th Cir. 2003) (upholding the

district court's exercise of jurisdiction over a corporation

nominally owned by the defendant's mother and into which the

defendant had channeled proceeds of his securities law violations);

Wencke III, 783 F.2d 829, 838 (9th Cir. 1986) (holding that the

district court had jurisdiction over the assets of a corporation

into which the defendant in the underlying enforcement action had

funneled proceeds of his securities law violations),” and SEC v.

Cherif, 933 F.2d 403, 414 (7th Cir. 1991) (discussing “nominal

defendants”).

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II. DISGORGEMENT: AUTHORITY AND STANDARD

“[T]he district court has broad equity powers to order the

disgorgement of ‘ill-gotten gains’ obtained through the

violation of federal securities laws.” S.E.C. v. JT Wallenbrock

& Associates, 440 F.3d 1109, 1113-14 (9th Cir. 2006). These 6

powers come expressly from the federal securities laws, 15

U.S.C. § 78u(d)(5) (district court may grant “any equitable

relief that may be appropriate or necessary for the benefit of

investors”), but more generally, from “common law principles of

equity.” See FTC v. Network Services Depot, Inc., 617 F.3d

1127, 1141-1142 (9th Cir. 2010).

In the Ninth Circuit, this equity power extends to nonparties, often called “nominal defendants,” who are “in

possession of funds to which they have no rightful claim, such

as money that has been fraudulently transferred by the defendant

in the underlying securities enforcement action.” SEC v. Ross,

504 F.3d 1130, 1141 (9th Cir. 2007).7

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 In Ross, the Ninth Circuit found that summary proceedings 8

were not proper because the sole basis for the disgorgement was the

wrong-doing of the non-parties. 504 F.3d at 1144 (the purpose of

summary proceedings is “simply to ‘obtain equitable relief from a

non-party against whom no wrongdoing is alleged’”).

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A disgorgement order will issue against a non-party “if it

is established that the non-party possesses illegally obtained

profits but has no legitimate claim to them.” SEC v. Ross, 504

F.3d 1130, 1144 (9th Cir. 2007) (citation and internal

quotations omitted). Although the federal securities laws 8

expressly provide for whatever “equitable remedy” is needed to

benefit the defrauded investors, the Ninth Circuit looks to the

principles of the common law in determining whether disgorgement

is appropriate. See FTC v. Network Services Depot, Inc., 617

F.3d at 1141-1142. The remedy applicable in these cases is the

“constructive trust”:

Constructive trust is a form of remedy that is

“flexibly fashioned in equity to provide relief where

a balancing of interests in the context of a

particular case seems to call for it.” In re N. Am.

Coin & Currency, Ltd., 767 F.2d 1573, 1575 (9th

Cir. 1985). It is a creature of the common law, rather

than any federal statute.

FTC v. Network Services Depot, Inc., 617 F.3d 1127, 1141-1142

(9th Cir. 2010). As applicable to these cases,

At common law, where property has been obtained by fraud, a

court in equity “has jurisdiction to reach the property

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either in the hands of the original wrong-doer, or in the

hands of any subsequent holder” and to convey that property

to “the one who is truly and equitably entitled to the

same.” Harris Trust & Sav. Bank v. Salomon Smith Barney,

Inc., 530 U.S. 238, 251 (2000). 

Id., 617 F.3d at 1141-1142.

The non-parties have not appeared or responded to the

motion for disgorgement. Accordingly, as in a default judgment

situation, it will be sufficient for the Receiver to make a

prima facie showing of his entitlement to the disgorgement: that

defendants committed a securities law violation; that defrauded

investor funds from that violation were transferred to the nonparties; and that the non-parties have no legitimate claim to

the funds.

III. SUMMARY PROCEEDINGS

The Ninth Circuit has recognized “a truncated form of

process vis-a-vis ‘a non-party depository as a nominal defendant

to effect full relief in the marshaling of assets that are the

fruit of the underlying fraud.’” Ross, 504 F.3d at 1141;

Wencke III, 783 F.2d 829 (confirming the district court’s

authority to use summary disgorgement proceedings, initiated by

the receiver, to marshal investor assets – namely, defrauded

investor funds – in hands of non-parties). In upholding the use

of this type of summary proceeding, the Ninth Circuit has relied

on the fact that the district courts have afforded the non-party

from whom disgorgement is sought, substantially all of the

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 In any event, this court has already ruled on the 9

sufficiency of summary proceedings, see also SEC v. Vassallo, 2010

WL 3835729 at *2 (E.D. Cal. September 29, 2010) (Karlton, J.)

(unpublished) (citing Topworth), and it is now the law of the case.

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procedural and evidentiary protections that would be provided in

a plenary proceeding. See CFTC v. Topworth Intern., Ltd., 205

F.3d 1107, 1113 (9th Cir. 1999); SEC v. Universal Financial, 760

F.2d 1034, 1037 (9th Cir. 1985).9

On August 20, 2009, this court established a standard for

summary proceedings for the recovery of EIMT assets by the

Receiver. Dkt. No. 116. First, the Receiver shall file a

noticed motion for disgorgement and serve said motion upon all

interested parties. Interested parties may file an opposition

brief, in response to which the Receiver may file a reply brief. 

The order also provides that, “Upon a showing of good cause, the

Court may order limited discovery concerning the particular

asset.” Additionally, if “the Court determines there is a

disputed issue(s) of fact concerning the disgorgement of a

particular asset, the Court shall set an evidentiary hearing to

resolve the issue(s).” The court orders disgorgement of an

asset where the Receiver shows that the asset belongs to EIMT.

Accordingly, the summary proceeding order provides the due

process protections that the Ninth Circuit has identified as

important in such proceedings: notice, discovery, participation

in briefing and oral argument, and application of the Federal

Rules of Evidence and Civil Procedure. See Wencke III, 783 F.2d

at 836-837. In addition, the order provides for an evidentiary

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 Even if the “hedge fund” did trade at the beginning, the 10

Receiver’s evidence shows that at some point there was no trading,

no returns, and only fraudulent representations about the

investors’ non-existent “returns.”

 The Receiver views this evidence as supporting a 11

constructive trust under California law. The court has no reason

to doubt that it does, nor to question whether such an approach

would be proper. However, since this is an SEC enforcement case,

the court believes that it is more appropriate to examine the

evidence in light of the federal securities laws and the law of

disgorgement applicable specifically to SEC enforcement cases.

 See Anderson Decl. ¶ 10. 12

 See Anderson Decl. ¶¶ 12-13. 13

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hearing to resolve disputed issues of fact.

IV. ANALYSIS

A. Recipients of EIMT Funds

The Receiver has made a prima facie showing that defendant

Vassallo solicited investors for a fraudulent securities 

investment scheme, obtained investor funds by means of these 10

solicitations and lied to the investors about their “returns,”11

all in violation of the federal securities laws as set forth in

the complaint. See Anderson Decl. ¶¶ 3-5 (Dkt. No. 417). The

Receiver’s evidence further shows the following: (i) Vassallo

transferred $2.5 million of the investors’ funds to non-party

J.R. Trust in August 2008; (ii) at Schott’s direction, J.R. 12

Trust transferred $1,879,000 to an account in the United

Kingdom; (iii) J.R. Trust transferred $228,387.50 of those funds

to non-party RAAR; (iv) J.R. Trust, of whom Schott was a 13

Trustee, and RAAR, for which Schott was a bank signatory,

transferred $167,317.01 of those funds to non-party Jack

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Miller. The evidence further shows that none of the above non- 14

parties did anything to earn the funds or otherwise justify the

transfer of the funds to them. See Anderson Decl. ¶¶ 6-18.

Accordingly, the Receiver has shown his entitlement to:

(i) disgorgement of the $2.5 million in defrauded investor funds

from J.R. Trust; (ii) disgorgement of $228,387.50 from non-party

RAAR; and (iii) disgorgement of $167,317.01 from non-party Jack

Miller.

B. Non-Recipients of EIMT Funds

The Receiver also seeks disgorgement from non-parties

Global Mergers & Acquisitions, Inc. and William A. Hayward. 

However, the Receiver’s evidence does not make a prima facie

showing that either of these two non-parties received or

controlled defrauded investor funds from EIMT. Instead, these

non-parties are alleged to be wrong-doers who “swindled”

Vassallo into transferring EIMT funds to J.R. Trust. See

Anderson Decl. ¶ 7.

The problem for the Receiver is that whether he proceeds

under federal law or California law of “disgorgement” or

“constructive trust,” the basic requirement of the remedy of

disgorgement is that the person against whom the order would

issue be, or at some point have been, in possession or control

of the funds to be disgorged. There is at present no showing

that Global Mergers or Hayward ever possessed or controlled any

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 If the Receiver obtains evidence that Global Mergers and/or 15

Hayward received or controlled defrauded investor funds, he may

renew his motion as to them. Otherwise, he is free to file a

motion seeking relief other than disgorgement, if he believes it

is appropriate for resolution in a summary proceeding. Of course,

he is always free to file a plenary action to recover the funds he

alleges these two “swindled” out of Vassallo.

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defrauded investor funds, and accordingly, no order of

disgorgement can issue against them at this time.

V. CONCLUSION

For the foregoing reasons:

(1) The Receiver’s motion for disgorgement as to J.R.

Trust, RAAR Investments, Ltd., Jack Miller and Richard J.

Schott, Jr., is GRANTED;

(2) The Receiver’s motion for disgorgement as to Global

Mergers & Acquisitions, Inc. and William A. Hayward is DENIED

WITHOUT PREJUDICE.

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The court further orders that within twenty (20) days of

the issuance of this order:

(3) Non-parties J.R. Trust and Richard J. Schott, Jr. shall

DISGORGE to the Receiver the $2.5 million transferred to J.R.

Trust by defendant EIMT, including but not limited to, anything

purchased with that $2.5 million and any profits therefrom, but

subject to an offset of any amounts actually disgorged by RAAR

and Miller;

(4) Non-party RAAR Investments, Ltd. shall DISGORGE to the

Receiver the $228,387.50 of EIMT funds it received from J.R.

Trust;

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(5) Non-party Jack Miller shall DISGORGE to the Receiver

the $167,317.01 of EIMT funds he received from J.R. Trust and

RAAR; and

(6) J.R. Trust, RAAR, Miller and Schott shall each provide

a full accounting of all funds they received from EIMT or from

any recipient of EIMT funds.

IT IS SO ORDERED.

DATED: August 31, 2011.

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