courts have the equitable power to use ancillary remedies to
preserve assets, as conferred by Sections 20(b) and 22(a) of the
Securities Act of 1933, 15 U.S.C. § 77t(b), 77v(a), and by
Section 21(d) of the Securities Exchange Act of 1934,
15 U.S.C. § 78u(e). See SEC v. United Communications, 899 F. Supp. 9, 11-12
(D.D.C. 1995). "It has been specifically recognized that a freeze
of assets may be appropriate to assure compensation to those who
are victims of a securities fraud." SEC v. General Refractories
Co., 400 F. Supp. 1248, 1260 (D.D.C. 1975). See Michael T.
Prior, Comment, SEC v. Unifund SAL: A Thaw in the SEC's Use of
the Asset Freeze To Prosecute Offshore Fraud, 17 Brook. J. Int'l.
L. 665, 671 (1991) ("An asset freeze order has the immediate
effect of preserving a fund for any potential recovery. . . .").
To ensure compensation to the victims in this case, the Court
finds it reasonable to maintain the freeze order because
plaintiff has demonstrated that the potential disgorgement it
could receive in this case far exceeds the amount that is frozen
in the account. See SEC v. Grossman, 887 F. Supp. 649, 661
(S.D.N.Y. 1995) ("it is irrelevant whether the funds affected by
the Asset Freeze are traceable to the illegal activity").
Plaintiff has calculated that a reasonable approximation of
Rayburn's and CFSM's profits is $156,997.28, which does not
include prejudgment interest and penalties that may be awarded.
Pl.'s Surrep. at 4. Approximately $44,000 is currently frozen in
CFSM's account. The frozen assets clearly do not exceed
plaintiff's approximation of liability, and thus, the Court will
continue the freeze order. See SEC v. Bremont, 954 F. Supp. 726,
733 (S.D.N.Y. 1997).
Even if the circumstances required that only funds traceable to
the fraud be frozen, Rayburn has not persuaded the Court that the
frozen account contains personal funds. See Coates, 1994 WL
455558 at *4 (requiring a hearing to determine the extent to
which defendants' personal assets are traceable to the alleged
fraud). Nearly all of Rayburn's supporting documentation is
inconclusive, or even detrimental, as to his claim that the
frozen account contains personal funds. Rayburn submits documents
regarding two personal loans he took from Pike National Bank,
arguing that proceeds from these loans were improperly frozen.
However, the documents regarding the first loan, taken out on
October 11, 1991, clearly indicate on their face that the entire
loan amount of $7,864.77 was paid directly to General Motors
Acceptance Corporation ("GMAC"). See Ex. B. to Def.'s Rep.,
"Itemization of Amount Financed" for Loan # 8266113. The
documents regarding the second loan, taken out on February 18,
1992, clearly indicate on their face that the entire loan amount
of $7,587.87 was used to pay off the first loan. See Ex. B to
Def.'s Rep., "Itemization of Amount Financed" for Loan #
8275738.*fn3 Thus, these documents do not support Rayburn's
claim of personal funds in the frozen account.
Rayburn also submits documents for a $10,279.08 promissory
note, issued November 26, 1990, although he does not make any
reference to this note in his motion. However, this note was made
to Academy Financial Services of Mississippi (the former name of
CFSM), not Rayburn personally. As plaintiff points out, Rayburn's
deposition indicated that those funds were subsequently used by
CFSM. See Ex. 2 at 62-66, Hunter Dec. to Pl.'s Surrep. These
documents do not support Rayburn's claim that the frozen funds
contain personal assets.
Finally, Rayburn submits a contract, effective June 18, 1991,
to provide collection services to Dillon's Medical Clinic,
arguing that the proceeds are improperly frozen in the CFSM
account. The Court finds that
this contract similarly does not justify a release of funds from
the frozen account. The contract is between Dr. Dillon and CFSM,
not Rayburn personally, and the Court's Freeze Order covers all
funds "under the direct or indirect control of defendant CFSM."
Order, Feb. 13, 1992; at ¶ IV; Order, Dec. 5, 1991, at ¶ IV.
Furthermore, Rayburn's motion does not indicate how much money
received from this collection contract remained in the account at
the time it was frozen on December 5, 1991. Plaintiff's surreply,
however, clarifies any question as to the amount of profits
received from these services. Plaintiff indicates that, in a
November 1992 deposition, Rayburn stated that CFSM made a profit
of approximately $4,750, and that CFSM's records, as provided by
defendants to plaintiff, indicate that approximately $4,500 was
deposited into the CFSM accounts in August and September 1991,
while an additional $1,000 was deposited in January 1992. See
Pl.'s Surrep. at 6. Plaintiff argues that the $4,500 was so
commingled with CFSM's investor activities that Rayburn cannot
show that these funds presently represent personal funds. See
SEC v. Glauberman, 1992 WL 175270 at *2 (S.D.N.Y. 1992) (funds
in question were deposited either at the time when defendant was
making insider profits or when he knew the SEC was on his trail,
and "when [defendant's] total disgorgement liability exceeds his
net worth, he cannot take refuge in having commingled his profits
with other personal funds. . . ."). The $1,000, however, was
deposited after CFSM's and Rayburn's investor activities were
enjoined, and plaintiff admits that these funds arguably may not
represent investor funds; however, the amount of money defrauded
from the investors heavily outweighs the amount of money in the
frozen account, and therefore, the Court finds it irrelevant that
the funds are not traceable to investor funds.
The Court finds that Rayburn is not entitled to a release of
funds for attorney's fees. "A defendant is not entitled to foot
his legal bill with funds that are tainted by his fraud."
Coates, 1994 WL 455558 at *3. See also SEC v. Quinn,
997 F.2d 287, 289 (7th Cir. 1993) ("Just as a bank robber cannot use the
loot to wage the best defense money can buy, so a swindler in
securities markets cannot use the victims' assets to hire counsel
who will help him retain the gleanings of crime."); Bremont,
954 F. Supp. at 733. Accordingly, the Court denies Rayburn's
The Court also notes on June 1, 1998, plaintiff filed a motion
for summary judgment against several defendants, including
Rayburn and CFSM. Although Rayburn, who is proceeding pro se,
submitted an opposition to plaintiff's motion for summary
judgment on behalf of himself and CFSM, corporations may not
proceed pro se, and the Court's October 27, 1998, Order called
upon CFSM to obtain legal counsel. In response, Rayburn filed
this Motion for Release of Funds. Because the Court denies the
motion, the Court reminds Rayburn of CFSM's obligation to obtain
legal counsel and submit an opposition to plaintiff's motion
within 30 days of the date of this Order, or the Court will treat
plaintiff's motion as to CFSM as conceded.
An appropriate Order accompanies this Memorandum Opinion.
For the reasons stated in the accompanying Memorandum Opinion,
it hereby is ORDERED, that defendant Douglas R. Rayburn's motion
is denied. It hereby further is
ORDERED, that defendant Current Financial Services of
Mississippi (CFSM) shall obtain legal counsel and submit an
opposition to plaintiff's motion for summary judgment within 30
days of the date of this Order, or plaintiff's motion shall be
treated as conceded as to CFSM.