In re Wiand

IN RE BURTON W. WIAND, as Receiver for VALHALLA INVESTMENT PARTNERS, L.P.; VIKING FUND, LLC; VIKING IRA FUND, LLC; VICTORY FUND, LTD.; VICTORY IRA FUND, LTD., and SCOOP REAL ESTATE, L.P.

Case No.: 8:10-CV-71-T-17MAP, et al

UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF FLORIDA TAMPA DIVISION

Dated: September 29, 2011

Case No.: 8:10-CV-71-T-17MAP, et al¹

ORDER ADOPTING REPORT AND RECOMMENDATION IN TOTO

This CAUSE is before this Court on the Omnibus Report and Recommendation ("R&R") entered by Magistrate Judge Mark A. Pizzo on June 8, 2011. (Doc. 41 in 10-cv-71). Judge Pizzo recommends that this Court grant the Defendants' motions to compel arbitration, direct the parties to proceed to arbitration in accordance with their respective arguments, stay each action, and direct the Clerk to terminate any pending motions and administratively close these cases.

Pursuant to Rule 6.03, Rules of the Unites States District Court for the Middle District of Florida, the parties had fourteen (14) days after service to file written objections to the proposed findings and recommendations, or be barred from attacking the factual Findings on appeal. Nettles v. Wainwright, 677 F.2d 404 (5th Cir. 1982) (en banc). Timely objections have been filed by both the Receiver and the Defendants.

The objections filed by the Defendants are as follows. Defendant WORLD OPPORTUNITY FUND, L.P. ("WOP") and Defendants represented by Bush Ross, P.A. ("Bush Ross Defendants") have filed objections (Docs. 41 in 10-cv-203, 43 in 10-cv-71) to the factual background set forth in the R&R and argue that the arbitrator should be the ultimate finder of facts.² The Receiver has filed a response (Doc. 45 in 10-cv-71). In addition, both WOP (Doc. 44 in 10-cv-203) and the Bush Ross Defendants (Doc. 46 in 10-cv-7I) have filed responses to the arguments raised by the Receiver in the Receiver's objection to the R&R (Doc. 44 in 10-cv-71). After consideration of the R&R, all motions and responses, and for the reasons set forth below, this Court will adopt Judge Pizzo's R&R in tola.

I. Standard of Review

When a party makes a timely and specific objection to a finding of fact in a report and recommendation, the district court should make a de novo review of the record with respect to the factual issues. 28 U.S.C. §636(b)(l); U.S. v. Raddatz, 447 U.S. 667 (1980);Jeffreys, v. State Board of Education of Stale of Georgia, 896 F.2d 507 (11th Cir.1990). The standard of review applied by a district court upon review of a Magistrate Judge's report and recommendation is set forth in the United States Code as follows:

Within fourteen days after being served with a copy, any party may serve and file written objections to such proposed findings and recommendations as provided by rules of court. A judge of the court shall make a de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is made. A judge of the court may accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate judge. The judge may also receive further evidence or recommit the matter to the magistrate judge with instructions.

28 U.S.C. §636(b)(l). This Court will now review the Receiver's objections to Judge Pizzo's R&R and the Defendants' limited objections de novo.

II. Background

The cases presently before this Court emanate from a Securities and Exchange Commission enforcement action dealing with a Ponzi scheme perpetrated by a hedge fund manager, Arthur Nadel ("Nadel")³ . Nadel plead guilty on February 24, 2010, to a criminal indictment charging him with using purported hedge funds, and the now receivership entities, Valhalla Investment Partners, L.P. ("Valhalla"); Viking Fund, LLC ("Viking"); Viking IRA Fund, LLC ("Viking IRA"); and Scoop Real Estate, L.P. ("Scoop") (collectively, the "HedgeFunds"), and their purported managers. Valhalla Management, Inc. ("Valhalla Fund Manager"); Viking Management, LLC ("Viking Fund Manager"); and Scoop Management, Inc. and Scoop Capital, LLC (collectively "Scoop Fund Managers," and collectively with Valhalla Fund Manager and Viking Fund Manager, the "Fund Managers"), to perpetrate a massive and continuous Ponzi scheme from some time in 1999 until January of 2009. The indictment charged Nadel with six (6) counts of securities fraud, one (1) count of mail fraud, and eight (8) counts of wire fraud for perpetrating a Ponzi scheme using the same Hedge Funds that underlie the cases currently before this Court.

The appointed receiver, Burton W. Wiand ("Receiver"), has been charged with rounding up assets and the Receiver has sued over one hundred and fifty (150) investors demanding a return of "false profits." Such suits are commonly referred to as "clawback cases." Twenty three (23) of these investors now point to arbitration provisions and move this Court to compel arbitration pursuant to the Federal Arbitration Act ("FAA"). The issue presently before this Court, and addressed by Judge Pizzo in his R&R is straightforward: in which forum should these actions be heard? Judge Pizzo recommends to this Court that an arbitral forum is appropriate and that this Court should grant the Defendants' motions to compel arbitration.

Judge Pizzo's R&R sets forth a factual background to provide these cases with the necessary context. In light of such, WOP and the Bush Ross Defendants have filed limited objections to the R&R. maintaining that any factual findings that relate to the merits of the Receiver's claims should be left for an arbitrator.⁴ The objection by the Bush Ross Defendants (Doc. 43 inl0-cv-71) adopts the arguments made to the R&R filed by WOP in Wiand v. World Opportunity Fund, L.P., Case No. 8:10-CV-203-EAK-MAP (M.D. Fla. (Doc. 41)); specifically, that the R&R could be construed as finding true established facts, which only thus far have been alleged by the Receiver. The Defendants' limited objections are well taken.

Adams v. Dyer, 223 F.App'x 757, 763 (10th Cir.2007), notes the possibility of waiver for failure to object to the "magistrate judge's unfavorable recitation of the 'undisputed facts,'" and Hunish v. Assisted Living Concepts, Inc. 2010 WL 1838427, at *8 (D.N.J. May 6, 2010), notes that "...if the arbitrator were ultimately bound by the findings of this Court, then Plaintiffs would successfully have thwarted the arbitration requirement." The factual background set forth in theR&R was required for contextual purposes, of which Judge Pizzo was undoubtedly well aware. Judge Pizzo's intention was not to make factual findings as to the merits of the Receiver's claims, but, instead, merely to recite the allegations as he perceived them. These cases will be sent to an arbitrator for resolution and the facts will ultimately be established during arbitration.

This Court has found no inconsistencies with Judge Pizzo's factual background as set forth in the R&R and the background information contained within the record. As such, this Court adopts Judge Pizzo's "Background" section for contextual purposes only and in order to properly discuss the Receiver's objections and Defendants' responses thereto. What are found to be facts, as compared to mere allegations, will be decided during arbitration. Judge Pizzo's "Background" section is set forth below⁵ :

A. Background

I. the scheme

Arthur G. Nadel, from his base in Sarasota and under the umbrella of two investment management companies, Scoop Capita!, LLC and Scoop Management, Inc., managed six hedge funds over a course of time: Valhalla Investment Partners, L.P., ("Valhalla Investment Fund"), Viking Fund, LLC ("Viking Fund"), Viking IRA Fund, LLC ("Victory IRA Fund"),Victory Fund, Ltd. ("Victory Fund"), Victory IRA Fund, Ltd. ("Victory IRA Fund"), and Scoop Real Estate, L.P. ("Scoop Real Estate Fund") (collectively referred to as the "Hedge Funds").⁶ Unfortunately, Nadel kept the books and also kept his investors in the dark about the true state of their investments. All the Hedge Funds were undercapitalized and over hyped. Instead of a reported value of hundreds of millions, their worth was more like $500,000. Instead of earning profits as their accountstatements in 2008 and 2009 repeatedly stated, they lost money. Like every Ponzi schemer, Nadel robbed Peter to pay Paul.⁷

2. the enforcement action

In January 2009, the SEC brought an emergency enforcement action against Nadel, Scoop Capital, and Scoop Management (identified as "defendants" in that action) and the Hedge Funds (denominated as "relief defendants") contending the defendants had violated Section 17(a) of the Securities Act of 1933 (15 U.S.C. § 77e(a)), Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78j(b)), and Rule 10b-5 (17 C.F.R. § 240.10b-5).⁸ SeeSECv. ArthurNadel, elal., Case No. 8:09-cv-87-T-26TBM. Not only did the SEC seek declaratory and injunctive relief, an asset freeze, disgorgement, and civil money penalties, it also moved for the appointment of a receiver to manage and preserve all assets belonging to the defendants and the relief defendants. The district judge appointed Burton W. Wiand ("Wiand") as the receiver for the Hedge Funds and eventually entered a permanent injunction as to Nadel. Seeid. at docs. 8, 140,460.

3. clawbacks and arbitration clauses

Since his appointment. Wiand has filed more than 150 clawback actions to recover "false profits" from Hedge Funds investors. All these cases rely on the same two theories, Florida's Uniform Fraudulent Transfer Act ("FUFTA," see Fla. Stat. § 726.101, etseq.) and an equitable disgorgement claim based on unjust enrichment. And all these cases strike

the same theme – an investor defendant received Fledge Funds disbursements in excess of his or her principal investment (hence, the claim of a "false profit").⁹ These investors, Wiand says, are to be distinguished from the larger group of investors who suffered net losses, and to allow the winners to retain their false profits at the expense...