Securities and Exchange Commission v. Lek Securities Corporation

Background

The Securities and Exchange Commission brought this enforcement case in 2017. The court entered a temporary restraining order freezing approximately $5.5 million in assets belonging to Vali Management Partners, doing business as Avalon FA Ltd. An asset freeze prevents specified property from being transferred or spent while the case is pending, generally to preserve funds that may be needed to satisfy a later judgment.

After a trial, a jury found Nathan Fayyer, Sergey Pustelnik, and Avalon liable for violating several anti-fraud and anti-manipulation provisions of the Securities Exchange Act of 1934 and the Securities Act of 1933. On April 14, 2020, the court entered final judgment. The defendants were jointly and severally liable for $4,627,314 in disgorgement and prejudgment interest, meaning repayment of specified gains and interest. Each defendant was also assessed a $5 million civil penalty.

After funds were applied and distributed, approximately $1 million of the frozen assets remained. The Securities and Exchange Commission reported that the transferred funds satisfied the disgorgement and prejudgment-interest amounts and part of Avalon’s civil penalty. Avalon remained liable for $4,343,715.39 in civil penalties, while Fayyer and Pustelnik remained liable for their full $5 million penalties.

Motion for Legal Fees

On April 10, 2020, the defendants moved to release $191,600 from the frozen funds to pay outstanding legal expenses. The Securities and Exchange Commission opposed the request. The motion was fully submitted on May 1, 2020.

The court relied on the principle that federal courts may use equitable powers—authority to order relief aimed at achieving fairness—after a securities-law violation is established. In that setting, an asset freeze may cover not only possible disgorgement but also civil penalties. The court had previously held that a request to modify the freeze to pay attorney’s or expert fees required the applicant to show that the modification would serve the interests of defrauded investors. The applicant also had to show that the funds were untainted and that enough money would remain to satisfy a possible disgorgement award.

Court’s Analysis

The court denied the motion because the defendants did not argue that the funds they wanted to use for personal legal debts were untainted by illegal activity. The court noted that the frozen assets were small compared with the more than $29 million in revenue traced to the defendants’ illegal market manipulation.

The court also found that the defendants offered no evidence that they were unable to pay their lawyers. Fayyer and Pustelnik had previously asserted that they had limited resources, but the defendants had not provided evidence of Avalon’s financial condition. The court further stated that Fayyer and Pustelnik’s current financial condition did not prevent them from being able to satisfy the obligations created by their securities-manipulation schemes.

Finally, the court rejected the argument that withholding the funds threatened the defendants’ right to a fair trial. The defendants had not claimed that due process required access to the frozen funds for counsel, and they had already been found liable by a jury after receiving the benefit of representation by attorneys.

Disposition

Judge Denise Cote ordered that the defendants’ April 10 motion was denied. The opinion did not state that the denial was with or without prejudice.