technical niceties of the rule, we will excuse the failure because he is pro se and because the
Court is able to discern quite easily which paragraphs of the SEC’s 56.1 statement Morgenstern
disputes (paragraphs 2 and 33 - 36); to borrow the SEC’s phrase, we had no trouble finding “the
peanut.” The remaining paragraphs (paragraphs | and 3 - 32) are deemed admitted.

We turn to the substance of the motion and response. As we said, Morgenstern admits
that he received at least $1,700,000 from Gateway and/or Collins. He also admits that he has no
legal claim to this money. Morgenstern contends, however, that he returned all of this money to
Gateway, plus interest. As the Court understands his argument, Morgenstern claims that he
transferred money from AFCM’s Midland Bank account to a bank account in Switzerland in the
name of Slattocks Invest S.A. He then transferred money from the Slattocks account to an
account at Americas International Bank Corporation in the Bahamas in the name of Americas
Fidelity Reliance Company. He claims that Collins and Gateway controlled the AFRC account.
Morgenstern therefore claims that he has provided “credible evidence that these funds were
returned to Gateway, and at least in part, to Gateway investors.” Opposition brief, p. 10.

Bank statements for AFCM’s Midland Bank account confirm the $1,700,000 coming into
the account in two deposits (one on June 9, 1998 in the amount of $1,100,000 and one on June
10, 1998 in the amount of $600,000). They also confirm an $8,100,000 debit on August 26,
1998. Documents from the Canadian Imperial Bank of Commerce (Suisse) appear to confirm
that Slattocks received a credit of a little less than $8.1 million on August 27, 1998; the notation
on the credit notice shows that the money came from AFCM. The CIBC documents also show
that on December 16, 1998 Slattocks transferred a little over $2.5 million to AIBC, though the

pertinent CIBC document is somewhat ambiguous in that it indicates that the transfer was made


after a bank to recover money it no longer holds, and indeed, the SEC has not named in this
lawsuit Bank Atlantic, First Union, Bank of America, Midland Bank, or any of the other banks it
knows held ill-gotten funds at some point.

This ts not to suggest that a bank, trustee or other person typically afforded relief
defendant status is necessarily immune from suit once it releases the ill-gotten funds. We can
certainly envision a case in which a recipient of investor funds knowingly helps further the
underlying scheme or, as indicated earlier, commits a defalcation of his own by releasing the
funds to someone other than the depositor. But in such a case, the SEC presumably would
proceed against the trustee as a claim defendant, not as a relief defendant. See Cherif, 933 F.2d at
415 (if the relief defendant helped carry out the fraudulent scheme, it might be appropriate to
name him outright as a defendant). And in any event, the SEC has not alleged that Morgenstern
released ill-gotten funds to Collins knowing that Collins was going to convert the investor funds
to his own use; instead, the SEC has argued that Morgenstern never rcturned the moncy to
anyone associated with Gateway. Thus, under the circumstances of this case, the question of
whether Morgenstern returned the money is material to the ultimate question of whether he
should be ordered to disgorge any funds.

Conclusion

The Court finds that Morgenstern’s declaration, together with Collins’ affidavit and the
relevant bank records are sufficient to create a genuine issue of material fact as to whether
Morgenstern returned any ill-gotten funds he received and that this issue is enough to defeat the
SEC’s motion for summary judgment. The Court denies the SEC’s motion for summary

Judgment against David Morgenstern [Docket No. 82-1]. Morgenstern’s motion in opposition to


transferred from the Bank of America account to an account at Midland Bank in London held in
the name of Americas Fidelity Capital Management Ltd. Morgenstern was the executive director
of AFCM and the “beneficiary” of this account. Although the SEC does not define this term, the
Court assumes that it means something similar to signatory and implies some degree of control
over the funds in the account. Based on these facts, which the SEC has established through an
affidavit from Norman Jones, an accountant with the SEC’s enforcement division, the Court is
persuaded that Morgenstern reccived ill-gotten funds.’ Indeed, Morgenstern concedes as much.
See, e.g., Morgenstern’s opposition brief, p. 8 (where Morgenstern acknowledges receipt of
investor funds but disputes the amount claimed by the SEC; he claims he received a much
greater amount of money); éd., p. 10 (admitting receipt of at least $1,700,000). Morgenstern also
concedes that he had no legitimate claim to these funds. See id., p. 10 (“{Morgenstern] has also
never claimed that these funds were his.”’).

Before turning to the merits of Morgenstern’s response to the SEC’s molion, we note that,
along with its motion, the SEC served Morgenstern with the appropriate notice to a pro se parly
as required by Local Rule 56.2. Despite this notice, Morgenstern’s Local Rule 56.1 statement
does not comply with the local rules. Rather than responding to the numbered paragraphs in the
SEC’s statement, Morgenstern for the most part responded to the numbered paragraphs in Jones’
affidavit, which was cited extensively in and attached to the SEC’s Local Rule 56.1 statement.
Because of this, the SEC asks the Court to strike Morgenstern’s response and deem all facts

admitted. We decline to do so. To the extent Morgenstern’s statement fails to comport with the

'The SEC’s summary judgment papers also establish that the funds were obtained from
investors by fraud; Morgenstern, who is not claimed to have defrauded any investors, does not
dispute this.


“in favor of AFCM,” that is, the entity that appears to have been Morgenstern’s company. And it
is difficult from the records submitted by Morgenstern to trace the funds into AFRC’s account at
AIBC or to say definitively who that account belonged to.

Beyond the bank documents, the record also contains an affidavit signed by Richard
Collins, the mastermind behind the Gateway scheme, stating

[tJhat between April 1998 and October 1998, Gateway, by myself, deposited into

accounts controlled by AFCM, to Gateway’s order, the sum total of $2,346,000

(“the Said Funds”). The Said Funds, with interest thereon, in the amount of

$422,280 were returned in full to myself under my instructions on an incremental

basis, from September 1998 through to November 1999.
Affidavit of Richard J. Collins, March 6, 2000. Although the dates Collins references do not jibe
with the dates on the bank records discussed above, the affidavit nonetheless supports
Morgenstern’s story to some extent in that it says he returned (to Collins) all of the money
Gateway entrusted to him to invest on its behalf. Also in the record is a declaration from
Morgenstern, which states that he returned al! of the investor money to Collins and Gateway.
This evidence is sufficient to create an issuc of fact on the question of whether Morgenstern
returned the ill-gotten funds. Certainly it calls into question Jones’ statement that although lots
of money was transferred out of the Midland Bank account, “[nJone of these transfers served to
send money back to anyone associated with The Gateway Association, or to any investors in The
Gateway Association.” Jones Affidavit, {14 (emphasis added).

We recognize that returning moncy to Collins is not the same as returning money to the
defrauded investors. And it may not even be the same as returning the money to the Gateway

Association. Even if Morgenstern thought The Gateway Association was a legitimate program,

and even if he thought Collins obtained the investor money legitimately, his handing over those



the SEC’s summary judgment motion [Docket No. 94-1], which is really just a response brief, is

terminated.

Dated: March 17, 2003

U

MATTHEW F. KENNELLY/
United States District Judge



Mute Order Form (06/97)

United States District Court, Northern District of Illinois

Name of Assigned Judge Matthew F. Kennelly Sitting Judge if Other
or Magistrate Judge . than Assigned Judge
CASE NUMBER 01 C 3085 DATE 3/17/2003
CASE SEC vs. Collins
TITLE

[In the following box (a) indicate the party filing the motion, ¢.g., plaintiff, defendant, 3rd party plain&f?, and (b) state brielly the nature
oF the motion being presented.}

MOTION:

DOCKET ENTRY:

(1) O Filed motion of { use listing in “Motion” box above.]

(2) QO Brief in support of motion due

(3) QO Answer brief to motion due__. Reply to answer brief due

(4) a) Ruling/Hearing on set for at.

(5) i) Status hearing{held/continued to] [set for/re-set for]on set for at

(6) o Pretrial conference[held/continued to] [set for/re-set for]on set for at

(7) q Trial{set for/re-set for]on__at

(8) ao [Bench/Jury trial] [Hearing] held/continucd to at

(9) oO This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
COFRCP4(m) CLocai Rule 41.1 OFRCP41(a)(1) OO FRCP41(a)(2).

(10) [Other docket entry] For the reasons set forth on the attached Memorandum Opinion and Order, the

Court denies the SEC’s motion for summary judgment against David Morgenstern (82-1). Morgenstern’s motion
in opposition to the SEC’‘s summary judgment motion (94-1), which is really just a response bricf, is terminated
Parties waive evidentiary hearing on relief to be awarded against Coppage and Wilson. Court will rule by mail.
Telephone conference set to 3/25/03 at 9:00 a.m on claims against Morgenstern

(1) (For further detail see order attached to the original minute order.}

No notices required, advised in open court. Document

Number

a

No notices required.

guinger HAVER
MARTY CUS

Notices mailed by judge's staff:

Notified counsel by telephone.

oY | Docketing to mail notices
Mail AO 450 form.
Copy 10 yudge/magistrate judge. Lenag raplesiq gq
ge mated wotice
courtoom .
OR deputy's LS:
initials
ps -Daleytigre recgived in
ot ong” ating ep ns



funds to Collins personally could suggest some involvement in the underlying wrongdoing or a
separate defalcation on Morgenstern’s part. But based on the way the SEC has pled its case and
the theory on which it seeks summary judgment, what is significant is that Morgenstern
genuinely disputes the SEC’s claim that he is holding investor funds.

The question remains whether Morgenstern’s alleged transfer of the money has any
bearing on the SEC’s summary judgment motion. See Anderson v. Liberty Lobby, Inc., 477 U.S
242, 247-48 (1986) (“the mere existence of some alleged factual dispute between the parties will
not defeat an otherwise properly supported motion for summary judgment; the requirement is
that there be no genuine issue of material fact). The test for awarding equitable relief against
relicf defendants says nothing about continued possession of the money. Specifically, SEC v.
Cavanaugh requires the SEC to show that the relief defendant received ill-gotten funds, it does
not specifically require the SEC to show that he still has the money. But given the nature of the
claim against a relief defendant -- which alleges no securities law violations and claims only that
the defendant is the repository of ill-gotten funds — possession of the money would scem to be a
necessary component of an order requiring him to disgorge the money.

The SEC did not cite, and the Court could not find, any case involving a relief defendant
who claimed to have returned or disposed of the money. The typical relief defendant is a trustee
or a bank, which has received the ill-gotten funds from the person who actually committed the
securities violations and holds those funds in a custodial capacity only; the typical relicf
defendant cares little who ultimately gets those funds. See SEC v. Cherif, 933 F.2d 403, 414 (7"
Cir. 1991); SEC v. Colello, 139 F.3d 674, 676 (9" Cir. 1998). Certainly in such cases, present

possession is assumed or established. We can hardly imagine a situation in which the SEC goes


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

SECURITIES AND EXCHANGE
COMMISSION,

Plaintiff,
vs.

RICHARD J. COLLINS, d/b/a Capital
Investment Concepts, Ltd., Cutting Edge
Marketing, Light of the World, and
Midwest Financial Funds; BIL. WILSON;
JEROME COPPAGE; THE GATEWAY
ASSOCIATION; and THE GATEWAY
ASSOCIATION (ILLINOIS),

Defendants,
and
DAVID MORGENSTERN; WILLIAM J.
WINDSOR; LINDA A. FEHL; MALCOLM
SILVERMAN; JANET COLLINS; and
CHRISTINE TODD,

Relief Defendants.

we ee HS HS He Se YH He Se Se Se Se Se Se SS YS Se Ye SS SY

Case No. 01 C 3085

qocneres

WAR 49 200s

MEMORANDUM OPINION AND ORDER

MATTHEW F. KENNELLY, District Judge:

The defendants in this securities [raud case bilked investors out of millions of dollars

through a fictitious “prime bank” investment program known as The Gateway Association Inc.

that promised huge profits. The SEC sued the scheme’s mastermind, Richard J. Collins, and his

henchmen, along with certain “relief defendants,” people who are not alleged to have done

anything wrong, but who are claimed to have taken possession of investor funds. The SEC (
L

alleges that these relief defendants have no rightful claim to the money, and, as part of its effgr



to recover and return money to the defrauded investors, it seeks disgorgement of the fraudulently-
obtained funds placed within the relief defendants’ control. See Complaint 44; id. JVI of request
for relief, The SEC has moved for summary judgment against one of the relief defendants, David
Morgenstern, who appears pro se.

Summary judgment is proper only when “the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is entitled to a judgment as a
matter of law.” Fed. R. Civ. P. 56(c). In its motion, the SEC secks disgorgement from
Morgenstern in the amount of $1,700,000, plus interest. To obtain such relief, the SEC must
show that Morgenstern, who, at least in this case, is not accused of wrongdoing, “(1) has received
ill-gotten funds; and (2) does not have a legitimate claim to those funds.” SEC v. Cavanaugh,
155 F.3d 129, 136 (2d Cir. 1998)

As to the first element, the SEC alleges that between May 14, 1998 and May 27, 1998,
$2,428,250 in defrauded investor funds were deposited into two accounts held in the name of
The Gateway Association Inc. at Bank Atlantic and First Union Brokerage Services, Inc.
Morgenstern was a signatory on both of these accounts, which indicates that he had at least some
control over the money in them. Between May 27, 1998 and June 8, 1998, $2,279,812.83 was
transferred out of those two accounts and into an account held in the name of The Gateway
Association Inc. at Bank of America. Morgenstern was not a signatory on the Bank of America
account, but the bank statements were sent to the same address as the other two accounts. There
is no other evidence to suggest that Morgenstern had any control over the Bank of America

account, but, as we will see, that is of little consequence. On June 8 and 9, 1998, $1,700,000 was