Court: District Court, D. Connecticut; August 12, 2015; Federal District Court
The District Court, presided by Judge Janet Bond Arterton, granted the SEC's motion for a preliminary injunction to continue an asset freeze against Defendant Iftikar Ahmed and Relief Defendants. The SEC alleges that Ahmed engaged in a decade-long fraudulent scheme that misappropriated approximately $65 million from Oak Management Corporation and its investors through various deceptive practices, including misrepresentation of investment prices, fraudulent invoices, and self-dealing. Ahmed reportedly funneled the proceeds into accounts he secretly controlled at Bank of America.
The procedural history reveals that the SEC filed an emergency motion on May 6, 2015, leading to a temporary restraining order issued on May 7, 2015, which froze Ahmed’s assets. Following a stipulation between the SEC and Ahmed to maintain the asset freeze, Ahmed allegedly fled the U.S. The SEC amended its complaint on June 12, 2015, adding new allegations and additional relief defendants, including Ahmed's wife, Shalini Ahmed. A preliminary injunction hearing was conducted on July 28 and 30, 2015, after which the SEC sought to freeze assets totaling up to $118 million to cover illicit profits, prejudgment interest, and civil penalties. The SEC identified approximately $47 million in liquid assets and $20 million in real estate subject to the asset freeze.
Nineteen transactions were identified as fraudulent in the Commission's Amended Complaint, but Relief Defendants contested only one: the October 2014 sale of Company C shares from I-Cubed to Oak for $7.5 million. They argued that additional unfrozen funds in Mr. Ahmed's "carried interest account" could satisfy any judgment and sought the unfreezing of certain assets. Evidence at the preliminary injunction hearing supported the Court's prior findings. In October 2013, based on Mr. Ahmed’s recommendation, Oak invested $25 million in Company C. During this process, Mr. Ahmed falsely claimed he had no personal investment in Company C, failing to disclose that he had formed I-Cubed and purchased shares a year earlier. He transferred his interest in I-Cubed to his wife before Oak's initial investment. In October 2014, Mr. Ahmed recommended a further $7.5 million investment in Company C shares held by I-Cubed but did not disclose his transfer of interest. Mr. Ahmed executed a Stock Purchase Agreement with I-Cubed, signed by Richard N. Kimball, who had resigned a month prior, and whose signature was later confirmed as forged. The $7.5 million was wired to Mr. Ahmed's personal Bank of America account, opened shortly before the transaction, and subsequently transferred to Relief Defendants. Mr. Ahmed's private emails indicated he had doubts about Company C's viability prior to the purchase but did not share these concerns with Oak. The shares, valued at only $876,193.72 two months earlier, were sold for $7.5 million, further complicating the legitimacy of the transaction. The SEC's authority under the Securities Act of 1933 and the Securities Exchange Act of 1934 allows it to seek civil actions for unlawful acts without needing to prove irreparable harm, merely requiring a substantial likelihood of success on current violations and risk of repetition.
A less stringent standard is applied by the SEC when seeking to freeze assets, requiring only a likelihood of success on the merits or an inference of violation of federal securities laws. An asset freeze is a provisional remedy aimed at preserving the status quo and ensuring funds are available for potential judgments against the defendant. To establish a violation of Section 10(b) of the Exchange Act and Rule 10b-5, the SEC must demonstrate that the defendant: 1) made a material misrepresentation or omission, or used a fraudulent device; 2) acted with scienter; and 3) did so in connection with securities transactions. Similar requirements apply under Section 17(a) of the Securities Act and Section 206 of the Advisers Act, although scienter is not required under Section 17(a)(2). Facts supporting a violation of Section 17(a) or 10(b) by an investment adviser also support a Section 206 violation.
Federal courts possess broad powers to order asset freezes, extending beyond assets held solely by the alleged wrongdoer to those held by individuals who received ill-gotten funds without a legitimate claim. However, this broader test does not apply when assets claimed by a relief defendant are also considered the defendant's assets. Factors determining ownership include the defendant's control over the asset, duration of holding, benefits derived, asset transfers, initial contributions, and any fund withdrawals.
Relief Defendants argue against the continuation of the asset freeze, seeking allowances for legal fees and living expenses. Regarding the Company C transaction, they initially claimed that the SEC was unlikely to succeed on its related claim due to Mr. Ahmed's transfer of interest to his wife just before a sale. However, this argument was not maintained in their post-hearing brief. Evidence indicates the SEC is likely to succeed in proving the transaction was fraudulent, as Mr. Ahmed retained control over the company’s finances despite the nominal transfer, and Mrs. Ahmed had minimal involvement in the sale negotiations.
Mr. Ahmed failed to inform Oak that the shares it purchased for $7.5 million had been valued at under $900,000 just two months earlier, and he had expressed doubts regarding the company's viability right before recommending further investment. This lack of disclosure indicates potential violations of securities law, particularly under 15 U.S.C. § 80b-6(3), prohibiting investment advisers from engaging in transactions without disclosing their role and obtaining client consent.
Regarding disgorgement, the SEC seeks to recover the $7.5 million, arguing that disgorgement is appropriate regardless of whether Oak suffered a loss, as it aims to eliminate the profits from illegal conduct. Disgorgement serves as a remedy for violations, focusing on the defendant's unjust enrichment rather than victim compensation. The Relief Defendants' assertion that disgorgement is only warranted when a victim experiences a loss is incorrect. Relevant case law supports that a court can order disgorgement if there is evidence of fraud, irrespective of actual damages to victims.
Mrs. Ahmed seeks to exclude certain assets from the Asset Freeze Order, claiming ownership of $7.5 million in proceeds from the Company C transaction. However, evidence indicates that these funds originated from fraudulent activities, suggesting that Mrs. Ahmed was merely a nominal owner of Mr. Ahmed’s assets.
Mrs. Ahmed asserts she is the manager and beneficial owner of DIYA Holdings LLC and DIYA Real Holdings LLC, which own condominiums in New York City that generate substantial rental income. She claims entitlement to the rental income from both properties. However, the SEC argues that these properties are actually owned by Mr. Ahmed and acquired with fraudulent proceeds. Evidence indicates that Mr. Ahmed funded the purchase of Unit 12A with $8.7 million from a joint account, linked to a fraudulent transaction, and then transferred ownership to DIYA Holdings LLC, in which Mrs. Ahmed holds a 99% interest without contributing goods or services. Similarly, Unit 12F was purchased mainly with funds from Mr. Ahmed's alleged fraudulent activities.
The SEC maintains that Mr. Ahmed is the true owner of both properties, despite Mrs. Ahmed's claims. The Relief Defendants argue that even if the properties were acquired with fraudulent funds, any income generated is "untainted" and not subject to disgorgement. The Second Circuit has established that while a court can order the return of profits from fraudulent transactions, it cannot demand a full accounting of all profits earned on such funds, to avoid unfairly penalizing prudent investors. However, rental income could still be frozen to ensure funds are available for potential judgments.
Additionally, Mrs. Ahmed contests the inclusion of her net income from Goldman Sachs in the Asset Freeze Order, claiming it is improperly affected. Yet, there is no evidence that this income was kept separate from Mr. Ahmed’s assets, as established in a precedent where the SEC successfully sought disgorgement from relief defendants who received commingled funds from a partnership.
Imposing a tracing requirement for disgorgement in insider trading cases could enable defendants to avoid repaying illicit gains by depleting such profits while safeguarding legitimate assets. The account's post-distribution balance being less than the illicit profits indicates that the distributions included funds subject to disgorgement. Denying disgorgement due to the SEC's inability to trace funds contradicts its purpose of preventing unjust enrichment. Relief Defendants argue that their situation differs from Rosenthal, where funds were commingled by the primary defendant, asserting that here, legitimate funds were mixed with illicit gains from the husband. This distinction is unconvincing, as both cases involve claims from relief defendants seeking untainted assets mixed with tainted ones. Previous cases cited by the Relief Defendants, where courts declined to disgorge payments to relief defendants for services, involved non-commingled salaries that were legitimately earned. The court finds that Mrs. Ahmed's salary, last received in 2012, has not been segregated from Mr. Ahmed's tainted assets, thus falling under the Asset Freeze Order.
Regarding the size of the asset freeze, the Relief Defendants assert that sufficient assets are frozen to protect investors, allowing for Mrs. Ahmed's legal and personal expenses. Their argument relies on including $23 million from Mr. Ahmed's capital account while excluding funds intended for civil penalties. Disputes arose over whether the funds in the capital account are available for freezing, with claims that Mr. Ahmed’s interest represents an uncertain entitlement to future income. Given the uncertainty surrounding this account, the court cannot assume its availability for victim recovery. Additionally, the Relief Defendants argue against freezing assets for potential civil penalties; however, the Second Circuit permits freezing funds for both disgorgement and civil penalties to preserve the SEC's ability to collect funds after a trial, as established in relevant case law.
The SEC can secure an asset freeze to preserve its disgorgement remedy and civil monetary penalties, provided it demonstrates adequate grounds. Relief Defendants reference S.E.C. v. Heden, arguing that a relief defendant's assets cannot be frozen for penalty payment. In Heden, the court declined to freeze a relief defendant's assets because the funds were deemed hers, and she was not accused of wrongdoing. In contrast, the current case shows that the SEC has sufficiently established that the frozen assets belong to the Defendant, justifying the freeze.
Relief Defendants argue that potential civil penalties may be lower than $44 million, citing that civil penalties should promote deterrence and that significant penalties may be unnecessary when disgorgement amounts are substantial. They reference S.E.C. v. Wyly, where the court opted against imposing civil penalties due to excessive disgorgement figures, noting that disgorgement alone does not serve as an economic penalty or deterrent.
Relief Defendants seek release of funds for legal fees, monthly living expenses, property taxes, and maintenance, along with an offset for funds used for necessary expenses. The court has the authority to both freeze and release assets, balancing the need to protect defrauded investors against the potential harm of asset freezes. The court's focus is on equity, requiring that any released funds be untainted and sufficient to satisfy potential disgorgement orders. Requests may be denied if the moving party has other income sources or requests funds for non-essential purposes.
Mrs. Ahmed's request to unfreeze her funds has been deemed premature. The SEC has consented to release nearly $300,000 in assets directly linked to her, which are not associated with the alleged fraud. However, Mrs. Ahmed has not demonstrated that this amount is inadequate for her immediate needs or that she lacks alternative financial support or earning capacity. The SEC's strong evidence suggests that the assets she seeks to unfreeze are derived from wrongful actions affecting the victims of the Defendant, indicating that the balance of equities does not favor lifting the asset freeze.
The Court concludes the following:
1. Jurisdiction exists over the subject matter and the involved parties.
2. The SEC has sufficiently established a likelihood of success on the merits, showing that the Defendant has committed multiple violations of the Securities Act and the Advisers Act.
3. There is a good cause to believe that without a court order, the Defendant and Relief Defendants might dissipate or conceal assets that could be subject to disgorgement or civil penalties.
Consequently, the SEC's Motion for a Preliminary Injunction is granted. All assets controlled by Defendant Iftikar Ahmed and related Relief Defendants, totaling up to $118,246,186, are to be frozen. These parties are ordered to maintain control over their assets and prevent any disposal or transfer of value.
Any bank, financial institution, or entity holding assets of Defendant Iftikar Ahmed or associated Relief Defendants must maintain control over these assets and prohibit any withdrawal, transfer, or disposal. No actions, including lawsuits or bankruptcy filings, may interfere with this asset freeze, although parties may request permission from the court to act. The Commission is authorized to record this order with land records for properties linked to the Defendants, including specific real estate in New York and Connecticut. The Defendants are prohibited from selling, transferring, or encumbering these properties, and they must not destroy or alter any related documents. All parties who receive notice of this order are restrained from tampering with documents related to the transactions mentioned in the Commission’s Amended Complaint.
"Document" encompasses the original and all non-identical copies of written or graphic materials, including tangible records and electronic data compilations, such as emails, correspondence, reports, contracts, and existing drafts. Service of the Order can be executed by various methods, including facsimile, mail, e-mail, or personal delivery by SEC employees not involved as counsel, in accordance with Rule 5 of the Federal Rules of Civil Procedure.
In the case, alleged fraud emerged following Mr. Ahmed's arrest for insider trading. After posting bail, he fled to India, where he was detained. Mr. Ahmed did not respond to the SEC's complaint, prompting the SEC to seek a default judgment. An attorney later entered an appearance for Mr. Ahmed, opposing the motion for default and requesting an extension to respond to the amended complaint, though he did not oppose a preliminary injunction. He also sought the release of funds from an Asset Freeze Order for legal expenses.
Mrs. Ahmed's interest in an entity was transferred to a trust, and she claims that her primary residence could yield $9.6 million if sold; however, this property was forfeited due to Mr. Ahmed's flight. The SEC indicated that it is uncertain whether the proceeds from this forfeiture will be available to compensate victims. Additionally, Mrs. Ahmed testified that around $2 million in assets, including jewelry and art, are held by her attorneys, but the SEC states that the Relief Defendants have not provided sufficient details about these assets, creating uncertainty regarding their availability for victim compensation.
Profits from insider trading were frozen as they were classified as "ill-gotten gains." Mrs. Ahmed admitted to transferring $671,000 from an unfrozen account to her lawyer before being designated as a Relief Defendant. The transferred funds were utilized for overdue bills, school expenses, a modest retainer for her Connecticut attorney, and to secure a $500,000 bond to alleviate her home confinement conditions related to Mr. Ahmed’s insider trading case, where she is a key witness. The SEC argues that the funds were held by Mrs. Ahmed as a nominee for Mr. Ahmed and are traceable to his fraudulent activities. They assert that her transfer of funds without prior notice to the SEC or court approval breached the Asset Freeze Order, although the SEC has not sought any relief from the court. Additionally, the Order Setting Condition of Release for Mrs. Ahmed stipulates that she may seek employment, but not in the financial services sector.
