United States Securities and Exchange Commission v. Collector's Coffee Inc.

Background

In May 2019, the United States Securities and Exchange Commission (SEC) brought civil fraud charges against Mykalai Kontilai and Collector’s Coffee Inc. The case included an asset-freeze order that required the defendants to retain and prevent the disposal of assets, funds, or other property held by or under their direct or indirect control, up to $46,121,649.68. The order also prohibited actions that could interfere with the freeze, including filing lawsuits affecting frozen property, while allowing a party or non-party to seek permission to obtain relief from the order.

Kontilai sought clarification about whether he could continue two lawsuits: one involving a wrongful-death claim related to his mother and one involving legal-malpractice claims. The SEC argued that the right to bring or continue a lawsuit was an asset covered by the freeze and that Kontilai had to seek permission before proceeding. The defendants argued that filing a lawsuit was not an asset covered by the order.

Magistrate Judge’s Report and Recommendation

Magistrate Judge Gabriel Gorenstein concluded that the right to file a lawsuit is a property interest and that the asset-freeze order covered Kontilai’s two lawsuits because the claims arose before the freeze and Kontilai had at least indirect control or an indirect beneficial interest in them. He clarified that the defendants could not pursue lawsuits based on pre-freeze claims without obtaining relief from the freeze.

Judge Gorenstein recommended enforcing the asset freeze against the defendants’ participation in the two lawsuits. He did not recommend granting the SEC’s requested additional relief, including judicial monitoring of the wrongful-death action. Instead, he directed the parties to try to agree on the specific terms needed to implement the enforcement ruling.

District Court’s Analysis

The defendants objected that the court lacked authority to freeze untainted assets before judgment. The court rejected that argument for two reasons. First, it held that the defendants had stipulated to an asset freeze covering their funds, assets, and other things of value under their control, including untainted assets. The court also noted that the defendants had not shown that the expected proceeds from the wrongful-death action were untainted.

Second, the court held that it had statutory authority under 15 U.S.C. § 78u(d) to freeze untainted assets before judgment in a securities case seeking equitable relief. The court explained that the Supreme Court’s decision in Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc. did not bar equitable prejudgment remedies in a case seeking injunctions and disgorgement, rather than only money damages. The court found persuasive Judge Gorenstein’s conclusion that Grupo Mexicano did not eliminate the statutory authority recognized by the Second Circuit in S.E.C. v. Unifund SAL.

Disposition

The court concluded that the asset freeze was enforceable as to the defendants’ untainted assets and agreed that the defendants’ participation in the two lawsuits violated the freeze. After reviewing the portions of the report and recommendation to which the defendants had not objected, the court found no clear error or legal error. The court therefore adopted the report and recommendation in its entirety as its decision on the matter.

The court denied Mykalai Kontilai and Collector’s Coffee Inc.’s objections to the report and recommendation. It returned the case to Magistrate Judge Gabriel Gorenstein to effectuate the ruling.