Securities and Exchange Commission v. Legend Venture Partners, LLC

Background

The Securities and Exchange Commission (SEC) brought this action against Legend Venture Partners LLC, alleging violations of federal securities statutes, the Investment Advisers Act of 1940, and related rules. The complaint alleges that Legend defrauded investors from whom it raised more than $35 million.

The SEC sought appointment of a receiver over Legend and related entities to collect and preserve their assets. The court granted that request. Megan L. Cyganowski, the court-appointed receiver, then proposed a plan for distributing receivership property to investors. The court gave investors six weeks to review the plan and submit responses. Three objections were filed out of more than 300 investors.

Legal standard

The court stated that it has broad authority to create remedies for violations of federal securities laws, including approving a distribution plan proposed by a federal receiver. The plan could be approved if it was “fair and reasonable.” The court also said it could defer to the receiver’s choices about the plan’s details and should give substantial weight to the SEC’s views about the plan’s merits.

Objections to the plan

The first objection argued that the plan should distribute shares held by the receivership instead of liquidating them. The receiver explained that liquidation would simplify determining tax liability, generate cash to pay taxes, and be consistent with investor expectations. The court found that the objection offered no authority or argument undermining those reasons and rejected it.

The second objector appeared to seek withdrawal from the receivership of shares in something called Voyager Space in which he believed he had invested. The objector argued that holding the shares directly would be better and would avoid receivership costs. The court rejected distribution of shares rather than liquidation for the reasons given in response to the first objection. It also ruled that allowing this objector alone to avoid receivership costs would unfairly shift those costs to other investors.

The third objection proposed eliminating distributions to all investors of certain proceeds recovered by the receiver and using those proceeds to pay administrative expenses instead. The objector acknowledged that the change would provide a greater return to some investors at the expense of other investors and claimants. The court agreed with the receiver that this result would be inequitable.

The third objector also requested additional time to review and respond to the plan, arguing that a “Compendium of Information” had not been provided until a week before the objection deadline. The court concluded that the compendium did not contain information necessary to formulate an objection. The court also noted that the objector had already filed an objection and an alternative proposal and had not persuasively explained what additional time would accomplish.

Ruling

The court rejected all three objections and granted the receiver’s motion for approval of the proposed plan of distribution. The order does not reproduce the plan’s complete terms, but it addresses the plan’s proposed liquidation of certain shares, distribution of net proceeds, treatment of receivership costs, and allocation of certain recovered proceeds.

Judge Lewis A. Kaplan signed the order.