daniel wadley (utah state bar no. 10358) thomas m. melton...

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 of 11

mailto:[email protected]�


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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


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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


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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


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.


6

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).


7

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.


8

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.


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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


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.”


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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




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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

18

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


19

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?


20

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.


21

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


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


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


24

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.


25

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


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?


27

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


28

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?


29

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 --


30

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


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


32

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.


33

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,


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.


35

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


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


37

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


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


39

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


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


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.


42

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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Case 2:11-cv-01165-BSJ Document 24-2 Filed 12/23/11 Page 10 of 10Case 2:11-cv-01165-BSJ Document 51-2 Filed 01/09/12 Page 1 of 1

daniel wadley (utah state bar no. 10358) thomas m. melton...

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