Sec. & Exch. Comm'n v. Kaleta
| Decision Date | 31 May 2013 |
| Docket Number | CIVIL ACTION NO. H-09-3674 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. ALBERT FASE KALETA and KALETA CAPITAL MANAGEMENT, et al., Defendants, BUSINESSRADIO NETWORK, L.P. /d/b/a BizRadio and DANIEL FRISHBERG FINANCIAL SERVICES, INC., d/b/a DFFS CAPITAL MANAGEMENT, INC., Relief Defendants. |
| Court | U.S. District Court — Southern District of Texas |
The Court has before it two motions. The first is a Motion to Approve Settlement Regarding Certain Insurance Proceeds [Doc. # 234] ("Insurance Settlement Motion") filed by the Court-appointed receiver, Thomas L. Taylor, III (the "Receiver"), to which Daniel S. Frishberg and Elisea Firshberg, pro se, object [Doc. # 238].1 The second is the Receiver's Motion to Approve Settlement with Albert F. Kaleta ("Kaleta Settlement Motion") [Doc. # 235] to which no objections have been filed.
By way of overview, in the Insurance Settlement Motion, the Receiver seeks approval of a settlement agreement2 between the Receiver and American International Specialty Lines Insurance Company; Chartis, Inc.; Chartis Claims, Inc.; and American International Companies (collectively, the "Insurance Company") regarding the remaining proceeds of an errors and omissions insurance policy purchased by DFFS (the "Policy")3 relating to claims against BusinessRadio Network, L.P. ("BizRadio"), Daniel Frishberg Financial Services, Inc. ("DFFS"), and all entities they own or control (the "Receivership Entities"). The Receiver further moves the Court to approve the proposed plan for the allocation of the Insurance Settlement proceeds among the Receivership Estate and the fourteen parties who made timely claims against the "Policy Claimants."4
In his second Motion, the Receiver seeks to settle his claims against Alfred Fase Kaleta ("Kaleta"), a principal in two or more of the Receivership Entities. The Court will discuss the Kaleta claims and the related issues separately.
According to the Securities and Exchange Commission ("SEC") pleadings, Albert Kaleta ("Kaleta"), Daniel Frishberg ("Frishberg"), and Kaleta Capital Management ("KCM") allegedly perpetrated several frauds related to promissory-notesecurities. In one such scheme, these individuals and entities solicited investors, to make loans to various entities related to a radio station (collectively, "BizRadio"). On November 13, 2009, the SEC commenced an enforcement action against Kaleta, Frishberg, and KCM, captioned SEC v. Kaleta, et al., No. 4:09-cv-3674, alleging violations of the anti-fraud provisions of the federal securities laws.5 The Court appointed Taylor as receiver over KCM on December 2, 2009. On June 17, 2010 the Court expanded the Receivership Estate to include "Relief Defendants" BizRadio and DFFS.6
Under the Court's orders, the Receiver is authorized: (1) to take and have complete and exclusive control, possession, and custody of the Receivership Estate;7 (2) to collect all sums of money due or owing to the Receivership Estate; (3) to institute actions to obtain possession and/or recover judgment with respect to personsor entities who received assets traceable to the Receivership Estate; (4) to contract and negotiate with any claimants against the Receivership for purposes of compromising or settling any claim; (5) to institute, prosecute, or compromise such actions that the Receiver deems necessary and advisable to carry out the Receiver's mandate; and (6) to preserve the Receivership Estate and minimize expenses in furtherance of maximum and timely disbursement to claimants.8
On March 25, 2011, the Commission commenced the action styled SEC v. Daniel Shalom Frishberg, No. 4:11-cv-1097 (S.D. Tex. Mar. 29, 2011), in the United States District Court for the Southern District of Texas, alleging direct violations and the aiding and abetting of violations of § 206(1) and (2) of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6(1), 80b-6(2). Pursuant to an agreed final judgment, civil penalties were ordered against Frishberg in the amount of $65,000 and Frishberg was permanently enjoined from violating § 206 of the Advisors Act.9 Frishberg was also barred from association with any investment adviser pursuant to § 203(f) of the Advisers Act, 15 U.S.C. § 80b-3(f).10
The Policy is an "Investment Management Insurance Policy" issued to "Daniel Frishberg Financial Services Inc. DBA: Frishberg, Jordan & Stewart Advisors" (the "Named Insured")11 for the period of April 1, 2009 to April 1, 2010 (the "PolicyPeriod"), having a limit of liability of $1,000,000 available to cover "all Coverages Combined And Including Defense Costs."12 Approximately $940,000 remains available under the Policy.13
The Policy is a "claims made and reported" policy, covering only those "claims first made . . . and reported in writing to the [Insurance] Company during the Policy Period."14 It is an "eroding limits" policy, in which "the limit of liability available to pay judgments or settlements shall be reduced by amounts incurred for defense costs."15 Coverage under the Policy extends to "any past, present or future partner, officer, director, trustee or employee of the Named Insured . . . against whom a claim is made in their capacity as such partner, officer, director, trustee or employee" (collectively with the Named Insured, the "Policy Insured").16
The Policy contains several potentially pertinent exclusions from coverage, which exclusions the Receiver asserts are material to his fairness assessment of the Insurance Settlement as a whole. These exclusions include: (1) the exclusion of "any claim arising out of investment in . . . LIMITED PARTNERSHIPS [and] PRIVATEPLACEMENTS"17 ; (2) "any claim arising out of, based upon or attributable to the committing in fact of any criminal or deliberate fraudulent act, or any knowing or willful violation of any statute"18 ; and (3) "any claim arising out of, based upon or attributable to the gaining in fact of any profit or advantage to which any [Policy] Insured was not legally entitled."19 The Receiver reports that the Insurance Company strongly has invoked these exclusions during settlement negotiations as a basis to deny coverage altogether. Although the Receiver does not concede the validity of these exclusions, he must—and has—taken them into account.
On July 24, 2009, Daniel S. Frishberg ("Frishberg"), Elisea Frishberg ("Mrs. Frishberg" and, together, the "Frishbergs"), DFFS and others were sued in a lawsuit styled Barbara Doreen House v. Daniel Frishberg a/k/a "The Money Man"; Elisea T. Frishberg d/b/a Frishberg, Jordan, Stewart & Kaleta Advisors; Daniel Frishberg Financial Services, Inc. d/b/a Frishberg & Kaleta Advisors; Frishberg & Jordan Advisors; Albert Kaleta; BusinessRadio Partners, LP; BusinessRadio Partners Dallas, LP; BusinessRadio Partners Houston, LP; BusinessRadio, Inc.; BusinessRadio Network, LP; and BusinessRadio Network GP, LLC, No. 46559 (234th Judicial District, Harris County, Tex. July 24, 2009) (the "House Lawsuit"). On March 9, 2010, Frishberg was sued in a lawsuit styled David A. Selter and Joanne M. Cassidy v. Daniel Frishberg, No. 15157 (270th Judicial District, Harris County, Tex. Mar. 9, 2010) (the "Selter Lawsuit"). Damages alleged on the face of the pleadings in these two suits total $1,850,000. The two suits have been stayed by this Court inorder to preserve the status quo and the assets of the Receivership Estate.
The Frishbergs have demanded insurance coverage under the Policy for the House and Selter Lawsuits, apparently seeking reimbursement of defense costs and indemnity. In March 2010, counsel for DFFS and the Frishbergs sent a notice of claims letter to the Insurance Company20 identifying an additional twelve (12) claimants alleging wrongful acts in the rendering of or failure to render "Investment Advisory Services" by DFFS. These additional twelve claims total approximately $14,400,000.21 Thus, there are in excess of $15,000,000 in third-party claims against the Frishbergs, DFFS, and others.
Due to the multiple claims against the Policy Insureds by Policy Claimants totaling more than fifteen times the $1,000,000 Policy limit, the Receiver, as Receiver for the Policy's Named Insured DFFS, has made demand on the Insurance Company to tender the balance of the Policy to the Receivership Estate so that it may be distributed ratably for the benefit of the Receivership Estate and investors/claimants.
The Receiver contends that the Policy is an asset of the Receivership Estate, and therefore equity requires the Receiver to attempt to avoid the Policy being diminished to fund the defense of the Policy Injureds. The Receiver instead has negotiated to make the funds available through settlement for distribution to harmed investors, who are claimants in the Receivership Estate.
On behalf of the Receivership Estate and all persons who have substantive claims against that Estate, including the Policy Claimants, the Receiver has enteredinto the proposed Insurance Settlement with the Insurance Company. The essential terms of that Settlement are:
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