Securities and Exchange Commission v. Path America, LLC et al, No. 2:2015cv01350 - Document 375 (W.D. Wash. 2016)
Court Description: ORDER GRANTING MOTION TO MODIFY RECEIVERSHIP ORDER by Judge James L. Robart. The court GRANTS the SEC's 244 motion to place Relief Defendants Dargey Development, Dargey Enterprises, Path Farmer's Market, and Dargey Holdings into the existing Receivership. (AD)
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Securities and Exchange Commission v. Path America, LLC et al Doc. 375 1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE 8 9 10 SECURITIES AND EXCHANGE COMMISSION, CASE NO. C15-1350JLR 11 ORDER GRANTING MOTION TO MODIFY RECEIVERSHIP ORDER Plaintiff, 12 v. 13 PATH AMERICA, LLC, et al., 14 Defendants, and 15 POTALA SHORELINE, LLC, et al., 16 Relief Defendants. 17 I. 18 19 20 INTRODUCTION Before the court is Plaintiff Securities and Exchange Commission’s (“SEC”) motion to modify the order appointing a receiver to include additional relief defendants. 1 21 1 The SEC’s motion also sought leave to file a second amended complaint. (Mot. at 3-6.) 22 The court previously granted this request because Defendants did not oppose that portion of the ORDER- 1 Dockets.Justia.com 1 (Mot. (Dkt. # 244).) Specifically, the SEC moves to modify the court’s order appointing 2 a receiver to add the following Relief Defendants into the Receivership: (1) Dargey 3 Development, LLC, (2) Dargey Enterprises, LLC, (3) Path Farmer’s Market, LLC, and 4 (4) Dargey Holdings, LLC. (Id. at 7-9.) Defendant Lobsang Dargey, and Relief 5 Defendants Dargey Development, Dargey Enterprises, Path Farmer’s Market, Dargey 6 Holdings, and Path Othello, LLC (collectively, “Defendants”) oppose the SEC’s motion. 7 (Resp. (Dkt. # 250); Def. Supp. Resp. (Dkt. # 349).) 8 On May 19, 2016, the court heard the argument of counsel concerning the SEC’s 9 motion. (See 5/12/16 Order (Dkt. # 289) at 2; Min. Entry (Dkt. # 331).) On May 24, 10 2016, the court issued an order “direct[ing] the parties to submit additional briefing and, 11 if appropriate, evidentiary materials concerning the SEC’s motion.” (5/24/16 Order (Dkt. 12 # 338) at 2.) In response to the court’s order, the SEC filed a supplemental brief and 13 additional evidentiary materials on June 7, 2016. (SEC Supp. Br. (Dkt. # 345); 14 Gadawski Decl. (Dkt. # 346); LaMarca Decl. (Dkt. # 347).) Defendants filed a 15 supplemental responsive brief and additional evidentiary materials on June 14, 2016. 16 (Def. Supp. Resp.; Larsen-Bright Decl. (Dkt. # 350).) On June 21, 2016, the SEC filed a 17 supplemental reply memorandum. (SEC Supp. Reply (Dkt. # 353).) 18 // 19 // 20 21 22 SEC’s motion. (5/12/16 Order (Dkt. # 289).) The SEC filed its second amended complaint on May 16, 2016. (SAC (Dkt. # 307).) ORDER- 2 1 The court has considered the SEC’s motion, all submissions filed in support of the 2 motion and in opposition thereto, the relevant portions of the record, and the applicable 3 law. Being fully advised, 2 the court GRANTS the SEC’s motion for the reasons stated 4 below. 5 6 II. BACKGROUND The SEC filed this action on August 24, 2015, and sought a temporary restraining 7 order (“TRO”) against Mr. Dargey and nine of the corporate entities that he controls: 8 Defendants (1) Path America, LLC, (2) Path America SnoCo, LLC, (3) Path America 9 Farmer’s Market, LP, (4) Path America KingCo, LLC, (5) Path America Tower, LP, (6) 10 Path Tower Seattle, LP, (7) Potala Tower Seattle, LLC, and Relief Defendants (8) Potala 11 Shoreline, LLC, and (9) Potala Village Kirkland, LLC. (Compl. (Dkt. # 1); TRO Mot. 12 (Dkt. # 2).) The court entered a TRO that same day (TRO (Dkt. # 9)) and converted the 13 TRO into a preliminary injunction on October 6, 2015 (PI (Dkt. # 68)). 14 The SEC alleges that Defendants exploited a federal visa program to defraud 15 investors seeking financial returns and a path to United States residency. (SAC ¶ 1.) 16 Defendants allegedly raised at least $125 million through the sale of securities to 250 17 investors, along with at least $11 million in additional fees. (Id.) The SEC alleges that 18 Defendants solicited investments predominantly from Chinese citizens, claiming the 19 20 2 In their supplemental response, Defendants request additional oral argument on the SEC’s motion. (See Def. Supp. Resp. at title page.) The court, however, has already heard the 21 argument of counsel and ordered supplemental briefing. (See Min. Entry; 5/24/16 Order at 2.) The court does not deem further oral argument to be necessary for disposition of this matter. See 22 Local Rules W.D. Wash. LCR 7(b)(4). ORDER- 3 1 investments would qualify under the EB-5 Program administered by the United States 2 Citizenship and Immigration Services (“USCIS”). (Id. ¶ 2.) The EB-5 Program provides 3 that foreign nationals may qualify for United States residency if they make a qualified 4 investment of $500,000.00 or more in a specified project that is determined to have 5 created or preserved at least 10 jobs in the United States. (See id.) The SEC further 6 alleges that using the lure of the EB-5 Program and the promise of investment returns, 7 Defendants targeted Chinese nationals in a scheme to sell securities to finance two real 8 estate development projects: (1) a skyscraper in downtown Seattle (“the Tower Project”), 9 and (2) a mixed-use commercial and residential development containing a farmer’s 10 market in Everett, Washington (“the Farmer’s Market Project”). (Id. ¶ 3.) The SEC 11 alleges that rather than use the investors’ money solely for these two projects, Mr. Dargey 12 misappropriated or diverted millions of dollars from these investors for other projects or 13 for his personal use. (Id.) 14 On September 21, 2015, in response to the court’s TRO, Defendants filed an 15 accounting with the court. (Accounting (Dkt. ## 31-32).) On September 22, 2015, the 16 SEC moved to appoint a receiver over the nine Dargey-related corporate entities named 17 in the initial complaint. (Rec. Mot. (Dkt. # 38).) On October 22, 2015, the court granted 18 the SEC’s motion. (Rec. Ord. (Dkt. # 88).) 19 On October 2, 2015, the SEC filed a first amended complaint adding three 20 additional Relief Defendants that were identified in Defendants’ accounting. (FAC (Dkt. 21 # 59).) These new Relief Defendants, however, were not initially included in the 22 Receivership. The SEC now seeks to add two of the Relief Defendants named in the first ORDER- 4 1 amended complaint to the Receivership: Dargey Development and Dargey Enterprises. 2 (Mot. at 8.) The SEC argues that these two entities were recipients of “substantial 3 funds . . . transferred from Receivership Entities.” (See Rec. Int. Rep. (Dkt # 148) at 12.) 4 Dargey Development provided “management, bookkeeping and other services for 5 virtually all affiliated real estate development projects, including the [Tower and 6 Farmer’s Market] Projects.” (Id.) Indeed, the Receiver has reported that “[t]he fact that 7 Dargey Development is not a Receivership Entity has . . . hampered the Receiver’s 8 complete understanding of the business and financial activities of the Receivership 9 Entities, in substantial part because he lacks sufficient access to certain records and key 10 employees.” (Id.) Thus, the SEC argues that the Receiver needs the information 11 contained in Dargey Enterprises and Dargey Development to determine the fate of the 12 EB-5 investor funds that were transferred from Receivership entities to Dargey 13 Development and Dargey Enterprises. 14 On May 16, 2016, the SEC filed a second amended complaint adding Path 15 Farmer’s Market and Dargey Holdings as additional Relief Defendants. (See SAC.) The 16 SEC now also seeks to add these two Relief Defendants to the Receivership as well. 17 (Mot. at 8.) The SEC seeks to add these two entities because they purport to either own 18 outright or own controlling equity in title to the real estate that underlies the Tower 19 Project and the Farmer’s Market Project. (Id.) Although EB-5 investors provided the 20 funds to purchase the real estate involved in the Farmer’s Market Project, Mr. Dargey 21 arranged for title to be held in the name of Path Farmer’s Market. (Rec. Int. Rep. Ex. C.) 22 In addition, although EB-5 investors’ funds were also used to purchase the real property ORDER- 5 1 for the Tower Project, Defendants assert that Dargey Holdings nevertheless “owns 80% 2 of the equity in the Tower Project.” (Def. Resp to Rec. Mot. for Auth. to Market and Sell 3 Assets (Dkt. # 215) at 5.) Dargey Holdings’s assertion of an 80% ownership interest in 4 the Tower Project is based on its 80% interest in Defendant Potala Tower Seattle—the 5 entity that holds title to the underlying real property for the Tower Project. (See Rec. Int. 6 Rep. Ex. C.) Because Path Farmer’s Market and Dargey Holdings claim to hold legal 7 title to the real property underlying the Tower and Farmer’s Market Projects, the SEC 8 seeks to add these two entities to the Receivership. 9 Defendants oppose adding these four Relief Defendants into the Receivership. 10 (See generally Resp.; Def. Supp. Resp.) Defendants argue that there is no need to place 11 Dargey Holdings or Path Farmer’s Market into the Receivership because all of the assets 12 of these entities are already frozen by court order 3 and the Receiver already controls the 13 two projects at issue without adding these entities to the Receivership. (See Resp. at 10.) 14 Defendants also argue that the SEC presents no evidence of any assets going missing or 15 being misappropriated since the time the Receivership was established. (See id.) 16 As noted above, the court held a hearing addressing the SEC’s motion on May, 19, 17 2016. (See Min. Entry.) As a result of this hearing, the court deferred ruling on the 18 SEC’s motion and ordered the parties to submit additional briefing and, if appropriate, 19 evidentiary materials. (See 5/24/16 Order at 8.) In particular, the court requested that the 20 SEC provide briefing and evidentiary support regarding three topics raised in the parties’ 21 3 (See Mot. at 5 n.1 (stating that Mr. Dargey’s interest in Dargey Holdings “is subject to 22 the asset freeze in the [c]ourt’s Order Granting Preliminary Injunction”).) ORDER- 6 1 prior briefing and at the May 19, 2016, hearing: (1) any evidence of asset dissipation or 2 misallocation by the four Relief Defendants at issue since the imposition of the asset 3 freeze and the creation of the Receivership; (2) why the Receiver is hampered in his 4 understanding of the business and financial activities of the Receivership Entities due to 5 the absence of the four Relief Defendants; and (3) any other evidence that would adi the 6 court in its determination. (Id. at 7.) The parties’ supplemental submissions are now 7 complete (see SEC Supp. Br.; Gadawski Decl.; LaMarca Decl.; Def. Supp. Resp.; 8 Larsen-Bright Decl.; SEC Supp. Reply), and the court considers the SEC’s motion. 9 10 III. ANALYSIS The Ninth Circuit counsels that “appointing a ‘receiver is an extraordinary 11 equitable remedy,’ which should be applied with caution.” Canada Life Assur. Co. v. 12 LaPeter, 563 F.3d 837, 844 (9th Cir. 2009) (quoting Aviation Supply Corp. v. R.S.B.I. 13 Aerospace, Inc., 999 F.2d 314, 316 (8th Cir. 1993)). The Ninth Circuit lists seven factors 14 that the court may consider when placing a company into receivership: (1) “whether [the 15 party] seeking the appointment has a valid claim”; (2) “whether there is fraudulent 16 conduct or the probability of fraudulent conduct” by the defendant; (3) whether the 17 property is in imminent danger of “being lost, concealed, injured, diminished in value, or 18 squandered”; (4) whether legal remedies are inadequate; (5) whether the harm to the 19 plaintiff by denial of the appointment would outweigh injury to the party opposing 20 appointment; (6) “the plaintiff’s probable success in the action and the possibility of 21 irreparable injury to the plaintiff’s interest in the property”; and (7) “whether [the] 22 plaintiff’s interests sought to be protected will in fact be well-served by receivership.” Id. ORDER- 7 1 Nevertheless, the Ninth Circuit recognizes “the broad nature of a court’s equitable 2 powers in determining whether or not to appoint a receiver.” Id. at 845. Further, the 3 Ninth Circuit cautions that “there is no precise formula for determining when a receiver 4 may be appointed,” and “federal courts consider a variety of factors in making this 5 determination.” Id. at 844-45. Indeed, the Ninth Circuit specifically “recognize[s] a 6 court’s authority to appoint a receiver regardless of these factors.” Id. at 845. Thus, the 7 court is guided by the factors listed by the Ninth Circuit but will not necessarily consider 8 each of those factors or limit its analysis to those factors alone. 9 1. Evidence of the Diversion of EB-5 Investor Funds to the Four Relief Defendants at Issue 10 In its supplemental briefing , the SEC asserts and points to evidence in the record 11 indicating that the four Relief Defendants at issue were the wrongful recipients of 12 ill-gotten money from EB-5 investors. First, Path Farmer’s Market is the entity that holds 13 title to the underlying real property for the Farmer’s Market Project (Rec. Int. Rep. Ex. 14 C), and evidence in the record indicates that this property was purchased with funds 15 diverted from EB-5 investors (see SEC Resp. to Mot. to Mod. TRO (Dkt. # 44) at 5 16 (citing 9/23/15 Smyth Decl. (Dkt. # 45) Ex. 6) & Accounting Ex. B at 242)). Further, 17 although Path Farmer’s Market holds title to the underlying property, Receivership 18 Defendant Path America Farmer’s Market, LP (“PAFM”) is the sole member of Path 19 Farmer’s Market. (Gadawski Decl. ¶¶ 5-6.) EB-5 investor funds from PAFM’s account 20 paid all of Path Farmer’s Market’s expenses including Path Farmer’s Market’s debt to 21 Voya Investment Management. (Dunne Decl. (Dkt. # 65) Ex. A (attaching deed of trust 22 ORDER- 8 1 between Path Farmer’s Market, LLC and Voya); Accounting at 224, 226, 242, 244 2 (referencing payments to Voya and Newmark Realty from PAFM’s account).) 3 Second, the SEC asserts and points to evidence in the record indicating that the 4 underlying real property for the Tower Project was also purchased with funds diverted 5 from EB-5 sources. (SEC Resp. to Mot. to Mod. TRO at 4-5 (citing Accounting Ex. B at 6 121, 211, 239).) In addition, Mr. Dargey transferred an 80% “ownership” interest in the 7 Potala Tower to Dargey Holdings although there is no evidence that the entity provided 8 anything in return. (See Gadawski Decl. ¶ 4.) 9 Similarly, evidence in the record indicates that Dargey Enterprises and its 10 successor, Dargey Development, received millions of dollars of diverted EB-5 investor 11 funds. The Receiver’s forensic accountant estimates that “[a]pproximately 83% of all 12 deposits made in [Dargey] Enterprises” and “[o]ver 99% of all deposits in [Dargey] 13 Development came from PAFM and Potala Tower.” (Id. ¶¶ 9, 13.) Even assuming that 14 the payment of “development fees” was disclosed to EB-5 investors and otherwise 15 appropriate as Defendants argue, the amount paid to Dargey Enterprises and Dargey 16 Development, and ascribed to the Farmer’s Market Project, exceeded any allowable 17 amounts by nearly a million dollars. (See id. ¶ 7 (“. . . PAFM overpaid development fees 18 in the amount of approximately $974,560.”).) Similarly, calculating “development fees” 19 for the Tower Project results in an overpayment in excess of $4 million. (Id. ¶ 12.) 20 Defendants respond that the foregoing evidence relates solely to pre-receivership 21 diversions “which are completely irrelevant to the current motion.” (Def. Supp. Resp. at 22 4.) Defendants assert that “[b]y focusing on pre-receivership events, the SEC effectively ORDER- 9 1 concedes that it is not aware of any alleged dissipation of investor funds since the asset 2 freeze and receivership orders,” and thus, “[t]he answer to the [c]ourt’s first question is: 3 ‘No,’ there is no evidence of dissipation or misallocation since the court initiated the 4 Receivership.” (Id. at 5 (underlining in original).) 5 The court disagrees that the evidence the SEC presents is irrelevant. Although the 6 SEC has not presented evidence of further dissipation of assets since the asset freeze and 7 Receivership was initiated, the SEC nevertheless substantiates by specific reference to 8 evidence in the record its prior assertions that the four entities at issue were involved in 9 either misallocation of EB-5 investor funds prior to the asset freeze or in the control or 10 ownership of assets purchased with diverted EB-5 investor funds by specific reference to 11 evidence in the record. Further, the SEC provides evidence that the absence of these 12 entities from the Receivership is hampering the Receiver in accomplishing his primary 13 task of marshaling and preserving all Recoverable Assets. 14 Finally, although the Receiver may have accounted for investor funds in the nine 15 entities that are already in the Receivership, EB-5 investor funds placed in the additional 16 four entities at issue are not yet accounted for. (See SEC Supp. Reply at 3.) Defendants 17 assert that the SEC is asking the court to expand the Receivership “based on speculation 18 that there might be some missing investor funds somewhere.” (Def. Supp. Resp. at 5.) 19 Given, however, the evidence the SEC points to in the record of past dissipation of EB-5 20 investor funds, the court does not view as far-fetched the idea that there may be 21 additional missing investor funds in the four entities at issue. Indeed, the Receiver 22 recently found an account for $64,002.64 that was in the name of Path Farmer’s Market. ORDER- 10 1 (4/29/16 Quarterly Rep. (Dkt. # 284) at 6.) Further, based on Defendants’ own 2 Accounting, Dargey Enterprises still owes the Farmer’s Market Project significant sums. 3 (See, e.g., Accounting Ex. B at 196 (indicating 10/30/12 check written on Farmer’s 4 Market account for $609,954.84 to “Potala Village” with note “Due from DE (for PV)”).) 5 As the SEC notes, these sums have yet to be paid back. (SEC Supp. Reply at at 4-5.) 6 The court finds that the SEC’s evidence is relevant to the court’s present determination 7 and that it weighs in favor of adding the four Relief Defendants to the Receivership. 8 2. Evidence of Lost Emails or Documents by Two of the Relief Defendants at Issue 9 In addition to the foregoing evidence of the diversion of EB-5 investor funds, 10 Dargey Development and Dargey Enterprises failed to maintain certain emails for the 11 majority of their employees. Mr. Dargey’s counsel acknowledges that in late October 12 2015, after the appointment of the Receiver, Dargey Development terminated its 13 Microsoft Exchange email accounts and failed to make the necessary payments to 14 maintain the email accounts for all employees other than Mr. Dargey, Sam Kanner, and 15 Kami Erickson. (LaMarca Decl. ¶¶ 2-5.) Microsoft purged the cloud-based account 16 information thirty days after the accounts were deactivated or terminated, and as a result 17 those files are no longer available from Microsoft. (Id.) Further, no one from Dargey 18 Development or its former attorneys copied the cloud-based server information that was 19 // 20 // 21 // 22 ORDER- 11 1 generated after August 24, 2015. 4 (Id. ¶ 4.) Thus, the SEC asserts that information 2 related to employee emails after August 24, 2015, has been irretrievably lost. (See id. 3 ¶¶ 2-5.) 4 Defendants do not deny the foregoing chain of events, although their present 5 attorneys state they “are not aware of any facts indicating that anyone understood at the 6 time that deactivation of former employee email accounts (to avoid additional charges) 7 could result in any purging of data by Microsoft . . . .” (Larsen-Bright Decl. ¶ 15.) 8 Defendants also insist that “[t]here is no evidence that any relevant information has been 9 lost,” and that “[m]any factors suggest that no relevant information was lost.” (Def. 10 Supp. Resp. at 6-7 (bolding and capitalization omitted); see also Larsen-Bright Decl. ¶ 11 15.) The point, however, is that now neither the court nor the parties can be sure of this 12 fact. Even if, as Defendants suggest, the parties may be able to retrieve from other 13 sources or locations some or all of the emails that Defendants failed to maintain, there is 14 no way to be certain that the universe of recovered emails is complete. Further, the 15 failure to maintain the email accounts has, at a minimum, rendered recovering the emails 16 more difficult, time-consuming, and costly. Dargey Development and Dargey 17 Enterprises have a track record of at least being careless concerning the retention of 18 relevant information. Bringing them into the Receivership would protect against similar 19 mishaps in the future by requiring them “to preserve and turn over to the Receiver 20 21 4 The Federal Bureau of Investigation imaged employees’ computers, including email accounts, for several (but not all) Dargey-entity employees when it executed a search warrant on 22 August 24, 2015. (LaMarca Decl. ¶ 5.) ORDER- 12 1 forthwith all paper and electronic information of, and/or relating to, the Receivership 2 Defendants, the Receivership Relief Defendants, and/or all Receivership Property.” 3 (Rec. Ord. at 5.) 4 3. Evidence that the Receiver’s Work is Hampered 5 The Receiver has been assigned the duty of marshalling and preserving all 6 “Recoverable Assets” as defined in the Order Appointing Receiver. (Id. at 2.) His ability 7 to accomplish this task has been hampered by Mr. Dargey’s disregard for accounting and 8 corporate formalities and the Receiver’s lack of control over intertwining entities which 9 are involved in the control or ownership of Receivership Assets. Specifically, the 10 Receiver has reported to the court as follows: 11 12 13 14 15 16 The interrelationships between these entities have complicated the Receiver’s analysis. Specifically, while the majority of the entities the Receiver has identified are not part of the receivership estate, many appear to have been implicated in the control or ownership of Receivership Assets, including the Projects, in the pre-receivership period. For example, Dargey Development, a non-receivership entity, provided management, bookkeeping and other services for virtually all affiliated real estate development projects, including the Projects. The fact that Dargey Development is not a Receivership Entity has therefore hampered the Receiver’s complete understanding of the business and financial activities of the Receivership Entities, in substantial part because he lacks sufficient access to certain records and key employees. 17 (Rec. Int. Rep. at 12.) Further, the Receiver determined that the myriad transfers to 18 Dargey Development and Dargey Enterprises could not be further traced: 19 20 21 22 [S]ubstantial funds were transferred from the Receivership Entities to Dargey Development, Dargey Enterprises, LLC, and other entities affiliated with Mr. Dargey. The structure of the relationships between the Dargey controlled entities means that it is presently impossible for the Receiver to determine the ultimate fate of these funds after their initial transfers, meaning that the Receiver cannot currently determine whether there are ORDER- 13 1 additional Receivership Assets available for recovery associated with these transfers. 2 (Id. at 12-13.) 3 To assist him in the task of tracing and marshalling asserts, the Receiver retained a 4 forensic accountant. (Gadawski Decl. ¶ 3.) However, the Receiver only has access to 5 information relating to the nine Dargey-related entities that are part of the Receivership. 6 (See Rec. Ord. at 4-6.) The Receiver does not have access to the four entities at issue 7 here and “has received very limited data regarding [Dargey] Holdings, [Dargey] 8 Enterprises, and [Dargey] Development.” (Gadawski Decl. ¶ 14.) Indeed, “when the 9 receiver team visited the FBI offices to review seized documents,” the team “was not 10 permitted to review or copy any of the documents” for Dargey Holdings, Dargey 11 Enterprises, or Dargey Development, because they were not part of the Receivership. 12 (Id.) Thus, the Receiver’s forensic accountant concludes that the “Receiver has virtually 13 no data for [Dargey] Holdings,” and the “data provided to date for [Dargey] Enterprises 14 and [Dargey] Development has primarily been limited to the incomplete ‘Accounting’ 15 filed by Defendants on September 21, 2015.” (Id. ¶ 15.) 5 As the Receiver’s forensic 16 accountant states: 17 18 The lack of access to corporate records, complete books and accounting, and related source documents has caused the Receiver to incur additional 19 5 The individuals who prepared Defendants’ Accounting conceded that it was incomplete, specifying that the preparers did not have access to four bank accounts related to the Farmer’s 21 Market Project and did not include certain bank account information for Dargey Enterprises and Potala Village. (Accounting ¶ 6; id. Ex. A at 6; id. Ex. B at 8-9.) Further, the Accounting is devoid of information related to Dargey Holdings, and it fails to identify or account for a Path 22 Farmer’s Market bank account that the Receiver recently located. (SEC Supp. Reply at 3.) 20 ORDER- 14 1 costs to investigate the diversion of funds, hampered the Receiver’s ability to identify potential assets that are traceable to EB-5 investor funds, and hindered efforts to recover funds for the benefit of the estate. 2 3 (Id. ¶ 15.) 4 Defendants counter that the absence of the four Relief Defendants from the 5 Receivership does not hamper the Receiver because he could obtain the information he 6 seeks by conducting discovery against the FBI. (See Def. Supp. Resp. at 6.) As the SEC 7 points out, however, the FBI is not the only source of relevant information in the search 8 for assets. The Receiver has identified multiple potential sources, including Defendants, 9 the United States Attorney’s Office, the FBI, pre-receivership counsel, business affiliates 10 of Dargey entities, and other third-parties. (4/29/16 Quarterly Rep. at 2.) Adding the 11 four entities at issue to the Receivership will give the Receiver automatic access to all 12 their books, records, accounts, and other sources of information. (Rec. Ord. §§ II, III, 13 IV.) Allowing the Receiver access to all the books, records, accounts, and other 14 information under the control of the four entities at issue is more efficient and would 15 cause less harm to EB-5 investors than depleting Receivership Assets through costly 16 discovery and motions practice. The court agrees with the SEC that it makes no sense to 17 grant the Receiver access to the records and information of the nine entities currently in 18 the Receivership, but deny the same access with respect to the four Relief Defendants at 19 issue. The court sees no basis for differentiating these two sets of entities, and 20 Defendants offer none. 21 // 22 // ORDER- 15 1 4. The Proposal to Restructure the Tower Project 2 Defendants assert that the SEC’s real motivation is “a heavy-handed attempt . . . to 3 prevent Mr. Dargey from defending himself in this case and having proper representation 4 in the pending [Department of Justice] investigation.” (Def. Supp. Resp. at 9.) The SEC 5 argues that 6 [Mr.] Dargey has used his purported ownership [in Dargey Holdings] to inject himself into the transaction [to restructure the Tower Project] itself. If [Dargey] Holdings were made a part of the [R]eceivership, Defendant would retain the right to object, but he would no longer be able to insert himself inappropriately into negotiations, or to unilaterally prevent the sale for his own personal interests, including to secure $1.8 million in attorney’s fees. 7 8 9 10 (SEC Supp. Br. at 7.) Defendants assert that the SEC’s motion “is part of an ongoing 11 effort by the SEC and the [R]eceiver to turn this pre-trial equity receivership into a 12 post-judgment liquidation of [Mr.] Dargey’s two largest projects.” (Def. Supp. Resp. at 13 10.) 14 The court, however, is unaware of any effort by the Receiver to “sell off” the 15 Farmer’s Market Project. (See id.) Indeed, in his last report, the Receiver stated that he 16 “hope[d] to file a motion in the next quarter seeking approval of his plan for completion 17 of the project.” (4/29/16 Quarterly Rep. at 4; see also Rec. Mot. to Proceed with Bus. 18 Plan for Potala Marketplace (Dkt. # 373).) With respect to the pending proposal to 19 restructure the Tower Project, the SEC acknowledges that “Defendant would retain the 20 right to object” to any change in the deal as presently proposed and that placing Dargey 21 Holdings within the Receivership will not prevent Mr. Dargey from getting $1.8 million 22 to pay his attorneys “because the [c]ourt ultimately has the final say on that issue, ORDER- 16 1 regardless of whether or not Dargey Holdings is added to the Receivership.” (SEC Supp. 2 Reply at 5.) The court agrees that the issue of the proposal to restructure the Tower 3 Project and the provision of $1.8 million as a part of that deal to pay Mr. Dargey’s 4 attorneys is a separate issue from the issues raised by the SEC’s present motion and that it 5 is not a reason to deny the SEC’s motion. 6 6 5. Prejudice to Relief Defendants 7 The SEC asserts and the court agrees that adding these Relief Defendants to The 8 Receivership will not unduly prejudice them because it will not disrupt any ongoing 9 business activities. According to Defendants, Dargey Holdings “is a non-operating 10 holding company” that “has no employees or operations.” (Larsen-Bright Decl. ¶ 3.) 11 Similarly, Defendants assert that Path Farmer’s Market, LLC is “non-operational” and a 12 ‘“disregarded entity’ for income tax and financial report purposes.” (Id. ¶ 5.) And 13 Dargey Enterprises and Dargey Development “no longer [have] any ongoing operations, 14 and [their] bank accounts are frozen.” (Id. ¶¶ 6, 7.) The court weighs the lack of 15 prejudice, as well as the foregoing evidence of asset dissipation, destruction of 16 evidence—whether inadvertent or otherwise—and hampering of the Receiver’s work to 17 marshal and preserve all Recoverable Assets, and finds that Relief Defendants Dargey 18 Development, Dargey Enterprises, Path Farmer’s Market, and Dargey Holdings should 19 20 6 The court notes that, based on the present record, it is disinclined to alter the present proposal to restructure the Tower Project with respect to the provision of a pool of funds to be 21 used for Mr. Dargey’s legal fees. The court will address this issue further in its order on the Receiver’s motion for final approval of the disposition of Tower related assets. (See Rec. Mot. 22 for Final Approval of Disposition of Tower Assets (Dkt. # 356).) ORDER- 17 1 be added to the Receivership for the purpose of making sure that all Recoverable Assets 2 are marshaled and preserved pending the resolution of this case. 3 4 IV. CONCLUSION Based on the foregoing analysis, the court GRANTS the SEC’s motion to place 5 Relief Defendants Dargey Development, Dargey Enterprises, Path Farmer’s Market, and 6 Dargey Holdings into the existing Receivership (Dkt. # 244). 7 Dated this 15th day of July, 2016. 8 10 A 11 JAMES L. ROBART United States District Judge 9 12 13 14 15 16 17 18 19 20 21 22 ORDER- 18
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