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Securities and Exchange Commission v. Falor

September 24, 2010

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
ROBERT D. FALOR, DEFENDANT, AND JENNIFER L. FALOR, RELIEF DEFENDANT.



The opinion of the court was delivered by: Joan B. Gottschall United States District Judge

Judge Joan B. Gottschall

MEMORANDUM OPINION AND ORDER

Plaintiff, the Securities and Exchange Commission (the "SEC"), brought this action against Defendant Robert Falor ("Robert"), seeking injunctive relief, civil penalties, disgorgement, and prejudgment interest for alleged violations of the Securities Act, 15 U.S.C. § 77 et seq., and the Securities Exchange Act, 15 U.S.C. § 78(a) et seq. (Compl., Doc. No. 1.) This matter comes before the court on Marie Falor's ("Marie") Motion for Leave to Intervene as Judgment Creditor.

I. BACKGROUND

The SEC alleges that Robert ran a multi-million dollar investment fraud scheme which defrauded approximately 55 investors of approximately $9 million. (SEC Compl. ¶ 1.) See also SEC v. Falor, No. 1:09-CV-5644, 2010 WL 3385510 (N.D. Ill. Aug. 19, 2010) (denying motion to dismiss). In its complaint, the SEC also named Jennifer Falor ("Jennifer") as Relief Defendant,*fn1 seeking disgorgement of money she received from the alleged fraud of Robert. (SEC Compl. ¶¶ 75-79.) Because of a $52,404,066.54 New York state court judgment against Jennifer, won by Hotel 71 Mezz Lender, LLC ("Hotel 71"),*fn2 Jennifer filed a motion for leave to deposit $500,000 with the Clerk of Court pursuant to Federal Rule of Civil Procedure 67(a). (Mot. for Leave to Deposit Funds, Doc. No. 11.) Jennifer anticipates a dispute between the SEC and Hotel 71 concerning priority in the funds. The court granted the motion. (October 15, 2009 Order, Doc. No. 16.)

Marie has moved to intervene as of right under Federal Rule of Civil Procedure 24(a)(2).*fn3

(See generally Mot. for Leave to Intervene as J. Creditor ("Mot. to Intervene"), Doc. No. 26.) Marie Falor's Complaint in Intervention alleges that a judgment against Robert that was entered in the Circuit Court of Cook County, Illinois for the amount of $3,600,000 on October 31, 2008 remains unsatisfied. (Compl. in Intervention ¶¶ 3, 5, Doc. No. 26-2.) This judgment was based upon findings of "conversion, actual fraud and defalcation" by Robert and The Falor Companies ("TFC") while acting in a fiduciary capacity (Id. ¶ 4); Marie was, and is, a shareholder of TFC. (Mot. to Intervene ¶ 2.) Marie Falor's Complaint in Intervention further alleges that Robert fraudulently transferred money to Jennifer. (Id. ¶¶ 11-12.) Marie contends that she has priority over the SEC to Robert's funds, or to any funds he transferred to Jennifer because Jennifer holds any such funds in a constructive trust for Marie. (Id. ¶¶ 9-12.)

The SEC, Robert, and Jennifer, all oppose Marie's Motion to Intervene.

II. STANDARD

In deciding a motion to intervene, the court must accept as true the non-conclusory allegations of the movant's motion and complaint. Reich v. ABC/York-Estes Corp., 64 F.3d 316, 321 (7th Cir. 1995). A motion to intervene as a matter of right "should not be dismissed unless it appears to a certainty that the intervenor is not entitled to relief under any set of facts which could be proved under the complaint." Id. (quoting Lake Investors Dev. Grp. v. Egidi Dev. Grp., 715 F.2d 1256, 1258 (7th Cir. 1983)).

III. ANALYSIS

In three separate briefs, the parties opposing intervention argue that section 21(g) of the Securities Exchange Act "erects an 'impenetrable wall" that prohibits a private party from intervening in an SEC enforcement action, that Marie does not have a sufficient interest to intervene under Rule 24(a)(2), that Marie's complaint in intervention fails to plead fraud with particularity as required by Federal Rule of Civil Procedure 9(b), and that a constructive trust over Jennifer's assets cannot be shown because the funds are not traceable.

A. Section 21(g) of the Securities Exchange Act

The SEC argues that section 21(g) of the Securities Exchange Act precludes a private party from intervening without SEC's consent.*fn4 (Pl.'s ...


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