The opinion of the court was delivered by: KRAM
SHIRLEY WOHL KRAM, U.S.D.J.
On August 15, 1986, this Court entered an order temporarily freezing all assets, funds, and other property of defendants' (collectively referred to as "ABT") unregistered notes program and preliminarily enjoining defendants from disipating, liquidating, encumbering or otherwise disposing of any funds, assets, or other property of their unregistered notes program. Securities and Exchange Commission v. american Board of Trade, No. 83 Civ. 6213 (SWK), slip op. at 9 (S.D.N.Y August 15, 1986).
In its opinion, the Court found that as of May 19, 1986, the last date for which ABT financial information had been produced, approximately 9,100 public investors held in excess of $80 million of defendants' commercial paper and that defendants held less than $24 million in liquid assets. The Court also found that defendants' assets had been depleted by $5 million in the six weeks prior to the opinion. The Court ruled that in light of the preliminary injunction prohibiting ABT from issuing or redeeming commercial paper and the impending wind-down of defendants' commercial paper program, the freeze order was necessary to preserve the assets of the commercial paper program which belong to the paper holders.
This case is currently before the Court on the Securities and Exchange Commission's ("SEC") motion for an order appointing a receiver to approve, in advance and in writing, all expenditures and disbursements of defendants and enjoining the commercial program from incurring or paying any expenses without having obtained the prior approval of such receiver. After hearing oral argument on this motion on August 15, 1986, the Court ordered that the Special Master in this case approve of all defendants' disbursements pending the Court's decision.
"The appointment of a receiver is an extraordinary remedy to be invoked only in cases of necessity and upon a clear showing that an emergency exists." Petersen v. Federated Development Co., 387 F. Supp. 355, 361 (S.D.N.Y. 1974). A federal district court has the equity power to appoint a receiver when necessary "to prevent diversion or wast of assets to the detriment of those for whose benefit, in some measure, this injunctive action is brought." Securities and Exchange Commission v. H.S. Simmons and Co., 190 F. Supp. 432-433 (S.D.N.Y. 1961). Although the Court has frozen all of defendants' assets, and has required the Special Master to approve all expenditures, it is clear for a number of reasons that the freeze will not prevent the continued diversion and waste of defendants' assets. A receiver is thus necessary to prevent further depletion of paper holders' assets.
First, defendant Arthur N. Economou admitted to the Court on August 15, 1986 that he redeemed the commercial paper of over 100 commercial paper holders after July 18, 1986, the date the Second circuit lifted its stay on this Court's order prohibiting redemption and issuance of commercial paper. He did so willfully, with full knowledge the Second Circuit had lifted the stay. Furthermore, on August 19, 1986, ABT mailed an eight page "Bulletin" about this case to all commercial paper holders. Affidavit of Caryn Miller, sworn to on August 25, 1986, Exhibit A. Defendants apparently did not seek authorization for this expenditure from the Special Master or the Court. Based on these willful and knowing violations of court orders, it is clear that only direct supervision will prevent defendants from diverting ABT assets.
Second, Economou's court-ordered disclosure of all ABT disbursements and expenditures since June 1, 1986, raises many problems. See Affidavits of Arthur N. Economou, sworn to on August 13, 1986, and August 22, 1986, and attached exhibits. While the exhibits list when and to whom the disbursements were made, they do not describe the reason they were made. When pressed by the Special Master at a conference on August 14, 1986 to explain the expenditures, Economou was evasive and did not sufficiently do so. Thus, over $5 million in expenditures in six weeks is unexplained.
Economou also admitted to the Special Master at the conference that he and his wife have "borrowed" money from ABT each year to pay their taxes. These loans have totalled approximately $500,000 over 17 years, and are still outstanding.
Finally, the financial disclosures indicate numerous and significant cash transfers from defendants' commercial paper operations to other ABT entities, raising the possibility that ABT commercial paper assets are being used to operate other ABT entities. For example, between July 28 and August 4, 1986, $15,500 was transferred from ABT Service, Inc., a commercial paper entity, to Arthur N. Economou & Co., Inc. ("ANE"), another ABT entity, apparently not involved in commercial paper. ANE's expenses between July 28 and August 11, 1986 were approximately $17,000. When the Special Master asked Economou to explain the relationship among the various ABT entities and to explain how and why the money is transferred among them, he did not do so adequately.
Third, the Court is concerned with Economou's intransigence, unwillingness to adhere to the Court's freeze order, and failure to cooperate with the Special Master's attempts to authorize expenditures.
Economou threatened to walk out of the August 14, 1986 conference before the Special Master after the Master informed him he would seek to prevent Economou from sending obstructive and inaccurate bulletins about this case to paper holders. Instead, as described above, Economou mailed the Bulletin to shareholders on August 19, 1986, without authorization from the Master. While the Court expects Economou to present a defense in this case, it is concerned that paper holders' assets not be diverted to unnecessary and inaccurate bulletins and advertisements. Finally, Economou has failed to cooperate with the Special Master's efforts to authorize ABT disbursements.
Based on the Court's findings in its August 8, 1986 opinion, particularly that nearly $5 million in ABT assets had been expended between July 1 and August 11, 1986, and the Court's findings in this opinion that ABT willfully and knowingly redeemed paper despite this Court's order prohibiting it from doing so, that ABT expended assets on a bulletin despite the freeze order and without the required authorization from the Master, the probability that commercial paper assets are being used to fund other ABT entities' operating expenses, the confusion created by defendants' own recordkeeping and accounting methods, and defendant Economou's own behavior in this case and in failing to repay loans from ABT, the Court rules that an expansion of the freeze order and the appointment of a receiver are necessary to prevent the further diversion of commercial paper assets. Accordingly, it is hereby
ORDERED that pending further order of this Court, all assets, funds and other property of all ABT entities listed in Appendix A to this opinion are temporarily frozen and defendants, their agents, officers, employees, servants, and attorneys and those persons ni active concert or participation with them, and each of them, be and hereby are preliminarily enjoined from dissipating, liquidating, assigning, transferring, encumbering or otherwise disposing of any funds, assets or other property, of all ABT entities, including but not limited to all of the assets delineated in Exhibit B annexed to the affidavit of Arthur Economou dated May 20, 1986; and it is further
ORDERED that until he files his report, Special Master Milton Gould is appointed interim receiver of all ABT entities as listed in Appendix A. The interim receiver shall have full powers of an equity receiver, including, but not limited to, all powers set forth in the July 31, 1986 Order of this Court appointing Milton S. Gould, Esq. as Special Master, and full powers over all funds, assets, premises (whether owned, leased occupied or otherwise controlled), choses in action and other property belonging to or in the possession or control of defendants or any of their affiliates listed in Appendix A to this opinion, or any property, assets or funds over which defendants or any of their affiliates listed on Appendix A have power of attorney or the authority to deposit or withdraw funds; and it is further
ORDERED that defendants, their affiliates listed in Appendix A, their respective officers, agents, servants, employees, attorneys and those persons in active participation with them, to cooperate fully with the interim receiver; and it is further
ORDERED that defendants, their affiliates listed in Appendix A, their respective officers, agents, servants, employees, attorneys and those persons in active participation with them, turn over to the interim receiver all of the assets, books, records and other property of said defendants and affiliates. Furthermore, Arthur Economou, Phyllis Economou, and Benjamin Bayoneto are to submit an affidavit to the Court by September 8, 1986 listing ...