1

 The SEC alleges violations of Sections 5(a), (c) & 17(a) of the Securities Act of 1933, 15 U.S.C. §§ 77e(a),

(c) & 77q(a), Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange

Commission Rule 10b-5, 17 C.F.R. § 240.10b-5. 

IN THE UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

SECURITIES AND EXCHANGE §

COMMISSION §

§

Plaintiff, §

§

VS. § NO. 3-05-CV-1328-L 

§

MEGAFUND CORPORATION, §

ET AL. §

§

Defendants. §

FINDINGS AND RECOMMENDATION OF THE

UNITED STATES MAGISTRATE JUDGE

Michael J. Quilling, as Receiver for Sardaukar Holdings, IBC and related entities, has filed

a first amended motion to allow "A" claims and disallow potential "A" claims against the Sardaukar

Holdings Receivership Estate. For the reasons stated herein, the motion should be granted.

I.

This is a civil action brought by the Securities and Exchange Commission ("SEC") against

Bradley C. Stark, Stanley A. Leitner, James A. Rumpf and their respective companies, Sardaukar

Holdings, IBC ("Sardaukar"), Megafund Corporation ("Megafund"), and CIG, Ltd. ("CIG"). In its

complaint, the SEC alleges that the defendants raised approximately $13.8 million from at least 70

investors through the sale of unregistered securities by making false representations about the

expected rate of return on their investments and by promising that a portion of the profits generated

from the sale would be used to benefit charitable causes. This conduct, if proved, constitutes a

violation of the federal securities laws.1

 

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2

 By orders dated August 12, 2005 and January 20, 2006, the court authorized the Receiver to designate three

Receivership Estates for the purpose of handling claims and making distributions to defrauded investors: (1) the

Megafund Receivership Estate; (2) the Sardaukar Holdings Receivership Estate; and (3) the Lancorp Financial Group

Receivership Estate. The Receiver is still in the process of reviewing claims against the Megafund and Lancorp

Financial Group Receivership Estates. Those claims will be the subject of other motions. 

On July 5, 2005, the court appointed Michael J. Quilling as the receiver for the various

defendants and relief defendants, including Stark and Sardaukar. In that capacity, Quilling was

authorized to:

take[ ] exclusive jurisdiction and possession of the assets, monies,

securities, claims in action, and properties, real and personal, tangible

and intangible, of whatever kind and description, wherever situated,

of [Stark and Sardaukar] and any entities they control ("Receivership

Assets"), and the books and records of Defendants and Relief

Defendant ("Receivership Records").

See Order, 7/5/05 at 2, ¶ I(1)). To date, the Receiver has collected more than $2.7 million in assets

traceable to Sardaukar and related entities.

The Receiver was previously ordered to send court-approved claim forms to all known and

possible claimants of the Sardaukar Holdings Receivership Estate.2

 The forms were to be completed

and returned to the Receiver within 60 days of mailing. See Order, 8/19/05 at 2. On January 12,

2007, the Receiver filed the instant motion seeking approval of six claims totaling $6,288,266.38 

and disallowance of any claims not filed. The Receiver was ordered to post a copy of the motion on

 his website with notice to all interested parties that any objections to a proposed allowed or

disallowed claim must be filed with the court by February 2, 2007. John W. Stark, Jr. and Barbara

Stark ("the Starks") timely filed a "limited objection" to the motion. No other objections have been

received. The SEC, through its regional counsel, has consented to the motion. 

II.

The Starks object to that part of the motion disallowing any claims that have not yet been

filed against the Sardaukar Holdings Receivership Estate. In support of their objection, the Starks

 

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point out that they are defendants in a civil action brought by the Receiver to recover more than

$173,000.00 of investor funds allegedly transferred to them by their son, Brad, and his wife, Pamela,

from Sardaukar accounts. The Starks contend that they received these payments from Sardaukar in

good faith and in exchange for reasonably equivalent value. However, if the Receiver is successful

in his suit to recover these funds, the Starks want to assert a claim against the Estate for:

$26,432.78 Salary earned by John Stark and paid by Sardaukar for

the period from April 1, 2005 through June 24, 2005

($23,001.13), plus unpaid salary earned for the period

from June 25, 2005 through July 5, 2005 ($3,431.65)

$3,000.00 Military social security obligations paid by Sardaukar

on behalf of John Stark

$24,042.24 Rent paid by Brad and Pamela Stark for living at the

Riverside, California home owned by John and

Barbara Stark, together with expenses for operating

Sardaukar out of the home

$95,154.43 Compensation as repayment of a $90,000.00 loan to

Brad Stark for his business use and as further

consideration for Sardaukar's use of the Riverside,

California home

$3,999.33 Travel expenses paid by Sardaukar for John Stark

$12,744.25 Travel expenses paid by Sardaukar for Barbara Stark

$13,000.00 Salary earned by Barbara Stark and paid by Pamela

Stark, owner of Tesori Fine Arts and Collectibles, for

the period from April 1, 2005 through June 20, 2005

($10,400.00), plus unpaid salary earned for the period

from June 21, 2005 through July 5, 2005 ($2,600.00)

These are the same claims made by the Starks in the lawsuit brought by the Receiver. In a separate

ruling issued today in that case, the court has granted summary judgment in favor of the Receiver,

holding that the Starks failed to prove that they accepted any of these payments from Sardaukar in

good faith. See Quilling v. Stark, No. 3-05-CV-1976-BD, op. at 8 (N.D. Tex. Feb. 7, 2007). That

 

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ruling effectively precludes the Starks from asserting a claim against the Sardaukar Holdings

Receivership Estate for a "pro rata reimbursement" of any amounts collected by the Receiver in the

ancillary litigation. 

The Starks also object to the $6,063,266.38 claim filed by the Receiver on behalf of CIG,

Ltd. and Megafund. As the Receiver explains in his motion, CIG made four payments totaling

$9,500,000.00 to Sardaukar from November 19, 2004 to April 11, 2005. In March and April 2005,

a total of $3,436,733.62 was repaid by Sardaukar to CIG, Megafund, and related entities. That

leaves net claim of $6,063,266.38. Other than complaining about the amount of this claim, the

Starks offer nothing to suggest that CIG and Megafund, each of whom have their own investors, are

not entitled to the monies paid to Sardaukar. This objection should be overruled. 

III.

After considering the evidence and the written submissions of the parties, the court

determines that the following claims should be allowed or disallowed as requested by the Receiver:

 Claimant Amount of Claim Recommended Action

Michael J. Quilling, 

as Receiver for CIG, Ltd.

$6,063,266.38 Allowed

Lynn Atkinson 

d/b/a Rose of Avalon, LLC

$100,000.00 Allowed

Norman D. Spahr $50,000.00 Allowed

Stephen T. Hood $ 50,000.00 Allowed

Bruce Beeley 

d/b/a Performance Management Group

$10,000.00 Allowed

Dvora Adams $15,000.00 Allowed

CDB&B Investors, Inc.

c/o Ralph Schaefer

$953,425.52 Disallowed

Harriette Reibman $60,000.00 Disallowed

 

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Robin Schaefer $150,000.00 Disallowed

Clover Investment, LLC

c/o Jill Erikson

$75,000.00 Disallowed

Ag Financial Services, Ltd.

c/o Amin Ramji

$390,000.00 Disallowed

Tony Plotkin $10,000.00 Disallowed

Investment World, Inc.

c/o Kelly Christensen

$50,000.00 Disallowed

Kerry Semon $23,000.00 Disallowed

Gus Schvarckpof $50,000.00 Disallowed

Steven Anderson $10,000.00 Disallowed

Grainaissance, Inc. and 

Grainaissance Profit Sharing

$200,000.00 Disallowed

Mack Ellery, LLC $50,000.00 Disallowed

International Consultants & Referrals $466,238.73 Disallowed

Paul Sugar $10,000.00 Disallowed

Linda Gramlich $15,000.00 Disallowed

Jesse and Margaret Morse $10,000.00 Disallowed

Daniel Cleary $10,000.00 Disallowed

William Wesson $2,000.00 Disallowed

Myrtle Jones $2,500.00 Disallowed

Maureen Rafael $10,000.00 Disallowed

Universal One Club, LLC $150,000.00 Disallowed

Barr Chase, S.A. $50,000.00 Disallowed

K&R Development, LLC 

c/o DeWayne Long

$20,000.00 Disallowed

Clara Neil Hollaway

a/k/a Clara Neil Heard

$7,422.16 Disallowed

Brain Fabin $39,000.00 Disallowed

Peter Kaiser $110,000.00 Disallowed

 

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Covenant Faith Advisor $60,000.00 Disallowed

In addition, the court should disallow claims totaling $178,373.03 filed by John W. Stark, Jr. and

Barbara Stark. The priority of payment of the allowed claims will be the subject of future orders.

RECOMMENDATION

The Receiver's first amended motion to allow "A" claims and disallow potential "A" claims

against the Sardaukar Holdings Receivership Estate [Doc. #250] should be granted. The court

should allow the claims of : 

1. Michael J. Quilling, as Receiver for CIG, Ltd. $6,063,266.38

2. Lynn Atkinson d/b/a Rose of Avalon, LLC $100,000.00

3. Norman D. Spahr $50,000.00

4. Stephen T. Hood $ 50,000.00

5. Bruce Beeley d/b/a Performance Mgt. Group $10,000.00

6. Dvora Adams $15,000.00. 

The court should disallow claims totaling $178,373.03 filed by John W. Stark, Jr. and

Barbara Stark, and any claims not filed to date, including claims filed by the 27 individuals and

entities identified herein.

A copy of this report and recommendation shall be served on all parties in the manner

provided by law. Any party may file written objections to the recommendation within 10 days after

being served with a copy. See 28 U.S.C. § 636(b)(1); FED. R. CIV. P. 72(b). The failure to file

written objections will bar the aggrieved party from appealing the factual findings and legal

conclusions of the magistrate judge that are accepted or adopted by the district court, except upon

grounds of plain error. See Douglass v. United Services Automobile Ass'n, 79 F.3d 1415, 1417 (5th

Cir. 1996).

 

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DATED: February 7, 2007.

 

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