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February 3, 1992


The opinion of the court was delivered by: STANLEY S. HARRIS

 This matter is before the Court on the motion of defendant Current Financial Services, Inc. (Current), for modification of the Court's December 5, 1991, Temporary Restraining Order (TRO) and on the motion of plaintiff, the Securities and Exchange Commission (SEC), for the appointment of a receiver. On consideration of the entire record, the Court denies defendant's motion and grants plaintiff's motion.


 This is an SEC enforcement action. Defendant Current was in the business of factoring medical accounts receivable. According to the uncontradicted evidence submitted by the SEC in support of its motion for a TRO, Current engaged in a campaign to raise capital through the offer and sale of unregistered debt securities. Current sold the securities to a group of subissuers, who then sold their own debt securities to the investing public. *fn1" Current, its subissuers, and a number of individual defendants conducted the sale of debt securities in violation of the registration and antifraud provisions of the federal securities laws. *fn2" The SEC filed this action seeking a permanent injunction prohibiting defendants from engaging in further violations of the securities laws, disgorgement of profits earned through securities violations, and restitution or rescission in favor of the investors. *fn3"

 Current did not contest the entry on December 5, 1991, of a TRO prohibiting further sales of unregistered securities. *fn4" The Court also issued an order freezing Current's assets, requiring it to provide an accounting, and appointing a disbursement agent to approve all payments on Current's behalf. *fn5" On December 27, 1991, after a two-week extension of time, Current filed its accounting. On December 31, 1991, Current filed the pending motion for modification of the TRO on the grounds that such a modification would be in the best interests of the purchasers of its debt securities. *fn6" Current requests permission to resume its underlying business of factoring medical accounts receivable under the supervision of the court-appointed disbursement agent. Current also seeks an order requiring the disbursement agent to approve interest payments to its investors and to reimburse Current's officers for expenses incurred prior to the entry of the TRO. The SEC opposes such modifications and moves for the appointment of a receiver with the authority to take control of Current's business, to pursue any outstanding claims, and to liquidate the corporation or to declare bankruptcy, if necessary.


 A district court in an SEC enforcement action has the authority, through its equitable jurisdiction, to fashion an appropriate remedy on a proper showing of a securities violation. SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1103 (2d Cir. 1973). The ultimate remedies available to the court include disgorgement, restitution, and rescission. See Manor Nursing, 458 F.2d at 1100-1106. To preserve a basis for such remedies, the district court may impose an interim asset freeze. See SEC v. Unifund SAL, 910 F.2d 1028, 1041 (2d Cir. 1990); SEC v. American Bd. of Trade, Inc., 830 F.2d 431 (2d Cir. 1987), cert. denied, sub nom Economou v. SEC, 485 U.S. 938, 99 L. Ed. 2d 278 , 108 S. Ct. 1118 (1988); Manor Nursing, 458 F.2d at 1105; International Loan Network, 770 F. Supp. at 696. An asset freeze "assures that any funds that may become due can be collected." Unifund SAL, 910 F.2d at 1041; accord SEC v. General Refractories Co., 400 F. Supp. 1248, 1259 (D.D.C. 1975). In determining whether to order an asset freeze, the court must weigh "the deleterious effects" the freeze may have on the defendants' business against "the considerations indicating tee need for such relief." Manor Nursing, 458 F.2d at 1106; International Loan Network, 770 F. Supp. at 696. *fn7"

 The district court also may appoint a receiver at the request of the SEC if necessary "to effectuate the purposes of the federal securities laws." Manor Nursing, 458 F.2d at 1105; see also SEC v. First Financial Group of Texas, 645 F.2d 429, 438 & n.14 (5th Cir. 1981) (citing cases). Thus, the court may appoint a trustee to preserve the status quo while arranging a defendant's complicated business records. See, e.g., Manor Nursing, 458 F.2d 1082 (approving the appointment of a receiver to unravel complicated transactions and to trace investors). The court also may appoint a receiver on a "prima facie showing of fraud and mismanagement." SEC v. Keller Corp., 323 F.2d 397, 403 (7th Cir. 1963). A receiver is "particularly necessary in instances in which the corporate defendant, through its management, has defrauded members of the investing public; in such cases it is likely that, in the absence of the appointment of a receiver to maintain the status quo, the corporate assets will be subject to diversion." First Financial Group, 645 F.2d at 438.

 The SEC made a strong showing of the alleged securities violations in support of its motion for a TRO. Cf. Unifund SAL, 910 F.2d at 1041 (partially reversing freeze order where SEC's showing not substantial). Current has not countered any of the SEC's proffered evidence, nor does it contest that the SEC's showing is adequate to support some interim relief. *fn8" Current argues that the freeze on its underlying business is not necessary to protect its investors or to preserve its assets for potential remedies in the future.

 Several factors weigh in favor of continuing the freeze order as it applies to Current's underlying business. First, Current has not maintained accounting records sufficient to evidence its financial condition. (See Wogan dec. at 6-7: Balhoff dec. at 5.) Second, to the extent Current's financial condition can be determined, the SEC has demonstrated that it is on the brink of insolvency. Third, Current's underlying business involves a high level of risk, and therefore resuming operations would jeopardize whatever assets Current now has.

 The accounting Current submitted in compliance with the TRO shows that the company earned a profit of $ 491,097.14 during the period immediately prior to the entry of the TRO from July 1, 1991, to November 30, 1991. To reach this figure, however, Current did not deduct executive salaries totalling $ 97,000.00 or interest owed to investors totalling $ 862,000.00. (Estabrook dec.) Current also failed to indicate a reserve for uncollectible receivables. Taking those items into consideration, Current's accounting would reveal a loss of $ 468,000.00 for the period from July through November. (Estabrook dec.)

 Current's Chief Executive Officer concedes that the corporation is insolvent, although he signed the accounting which indicates that the corporation is solvent. (Plaintiff's ex. B., Hope dep. at p.33.) According to both the court-appointed disbursement agent and the certified public accounting firm that he retained to review Current's finances, Current overvalued several of the items which it listed in its accounting as assets. For example, Current's largest asset, designated "Account receivable -- HIC," was valued above $ 3.9 million. Under Generally Accepted Accounting Principles (GAAP), the HIC account should be assigned no value. (Wogan dec. at 6-7; Balhoff dec. at 5.) *fn9" Current similarly inflated the value of other accounts receivable listed among its assets. (Wogan dec. at 7-9.) Current now disavows the accuracy of the accounting it submitted, apparently conceding its weak financial position and its lack of orderly records. *fn10"

 Current's underlying business involves a level of risk that is inconsistent with the purpose of preserving its existing assets for the benefit of its public investors. Current concedes that banks consider the receivables it purchases to be insufficient collateral for financing. (Plaintiff's ex. B., Hope dep. at p. 165.) The inherent level of risk was exacerbated by Current's manner of conducting business. Current dealt primarily with start-up companies, that are unable to obtain traditional financing. Many of those companies are now insolvent. (Plaintiff's ex. A, Vinson dep; ex. C, PMG dep.; ex. H, Zeringue dep.; & ex. F, Watson dep.) In many cases, Current failed to verify that insurance coverage was available for the receivables it purchased. (Plaintiff's ex. D, Goff dep. at 164; ex. B, Hope dep. at 52 & 105-06; ex. A, Vinson dep. at 2.) In fact, Current included a group of fictitious receivables among the assets it listed in its accounting. (Hunter dec. at para. 9.) Finally, Current extended loans to companies owned in whole or part by its own officers. (Plaintiff's ex. B, Hope dep. at 77.) The overall picture indicates that Current engaged in few transactions that were both arms-length and secure.

 Current probably will not be able to restore its business if it is not permitted to resume purchasing medical accounts receivable. It will lose the goodwill of the companies whose receivables it purchases and who rely on it to provide cash for their day-to-day operations. Nevertheless, there does not appear to be any low-risk portion of Current's business for it to resume. Even if the monitoring agent could limit Current to "safe" transactions, a role that would be extremely time-consuming, its business is not lucrative enough to warrant the risk of further depleting its assets. On balance, the Court concludes that the likelihood of a ...

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