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 motion to make an interim distribution to claimants of 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

 

 Case 3:05-cv-01328-L Document 286 Filed 02/14/07 Page 1 of 5 PageID 2311
2

 Currently pending before the court is the Receiver's fourth interim application for payment of $112,439.00

in attorney's fees, $4,714.42 in expenses, and $3,160.00 in accounting fees incurred from July 1, 2006 through January

31, 2007. If no objections are filed, that motion will be ripe for determination after March 2, 2007.

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

defendants and relief defendants, including 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

Defendants ("Receivership Records").

See Order, 7/5/05 at 1-2, ¶ I(1). As of today, the Receiver has $2,227,146.73 in cash and other assets

on hand available for distribution to six claimants of the Sardaukar Holdings Receivership Estate.

Of this sum, the Receiver proposes distributing $1,900,000.00 to claimants on a pro rata basis and

reserving $327,146.73 for payment of attorney's fees, accounting fees, and other expenses.2 That

means each claimant would received approximately 30.22% of their claim.

The Receiver was previously ordered to post a copy of his proposed interim distribution plan

on his website with notice to all interested parties that any objections must be filed with the court

by February 12, 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.

As grounds for their objection, the Starks argue that they are entitled to compensation from

Sardaukar for "prior value given," and that the distribution of proceeds to defrauded investors will

prejudice their ability to receive such compensation. On February 2, 2007, the Starks filed claims

against the Sardaukar Holdings Receivership Estate for:

 

 Case 3:05-cv-01328-L Document 286 Filed 02/14/07 Page 2 of 5 PageID 2312
3

 The Starks asserted the same claims in a lawsuit brought by the Receiver to recover more that $173,000.00

of investor funds allegedly transferred to them by their son, Brad, and his wife, Pamela, from Sardaukar accounts. On

February 7, 2007, the court 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,

2007 WL 415351 at *4 (N.D. Tex. Feb. 7, 2007). 

$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)

The magistrate judge has recommended that those claims be disallowed because "the Starks failed

to prove that they accepted any of these payments from Sardaukar in good faith." See SEC v.

Megafund Corp., No. 3-05-CV-1328-L, rec. at 3 (N.D. Tex. Feb. 7, 2007).3

 Although the Starks

now contend that they are entitled to compensation from Sardaukar even if ordered to return the

funds to the Estate, no authority is cited for that novel proposition. 

 

 Case 3:05-cv-01328-L Document 286 Filed 02/14/07 Page 3 of 5 PageID 2313
Moreover, even if the claims could somehow be allowed, the Starks are not eligible for

payment until all investor claims are paid in full. It is widely accepted that:

Where a receiver is presented with competing claims to property, the

order of priority of payment is (1) administrative expenses; (2) return

of third-party property held in trust or otherwise by the defendant; (3)

payment of priority government claims; (4) payment of secured

parties from secured assets; (5) payment to creditors securing the

appointment of the receiver as equity may require; (6) pro rata

payment to general creditors; (7) surplus to the defendant for whom

the receiver was appointed.

III Clark on Receivers § 667 at 1198 (3d ed. 1959). See also Quilling v. Trade Partners, Inc., No.

1:03-CV-0236, 2006 WL 3694629 at *1 (W.D. Mich. Dec. 14, 2006) ("As an equitable matter in

receivership proceedings arising out of a securities fraud, the class of fraud victims takes priority

over the class of general creditors with respect to proceeds traceable to the fraud."). The assets

recovered to date by the Receiver are all traceable to investor funds. Thus, to the extent the Starks

have valid claims against Sardaukar, they are general creditors who will not be paid until all

defrauded investors are fully compensated. This objection should be overruled. 

 III.

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

determines that the Receiver's proposed interim distribution plan should be approved. The Receiver

currently has $2,227,146.73 in cash and other assets on hand. Of this sum, the Receiver asks to

reserve $327,146.73 to cover past and future expenses, including attorney's fees and accounting fees.

The court finds that this sum should be reserved from funds available for interim distribution.

The court previously approved six claims totaling $6,288,266.38. If $327,146.73 is reserved

from the $2,227,146.73 on hand, $1,900,000.00 remains available for immediate distribution to

claimants on a pro rata basis. See SEC v. Forex Asset Management LLC, 242 F.3d 325, 331 (5th Cir.

2001) (approving pro rata distribution to investors). Therefore, each claimant should be paid in

 

 Case 3:05-cv-01328-L Document 286 Filed 02/14/07 Page 4 of 5 PageID 2314
accordance with the schedule attached as Exhibit "1" to the Receiver's motion. The Receiver should

issue interim distribution checks to each claimant in the amounts set forth in the schedule. The

checks shall be void if not cashed within 45 days from the date of issuance.

RECOMMENDATION

The Receiver's motion to make an interim distribution to claimants of the Sardaukar

Holdings Receivership Estate [Doc. #255] should be granted. The court should approve the

Receiver's interim distribution plan in accordance with the above recommendation.

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).

DATED: February 14, 2007.

 

 Case 3:05-cv-01328-L Document 286 Filed 02/14/07 Page 5 of 5 PageID 2315