United States District Court

Southern District of New York

DEFENDANT JOHN BABIKIANS REPLY TO THE SECURITIES AND EXCHANGE
COMMISSIONS OPPOSTION TO HIS MOTION FOR RECONSIDERATION OF THE
COURTS RULING REGARDING PREJUDGMENT ASSET FREEZE AND ISSUING
WRITS TO SATISFY PLAINTIFFS
CLAIMS FOR PUNITIVE DAMAGES BASED ON ERROR OF LAW





CORRIGAN & MORRIS, LLP
201 Santa Monica Blvd., Suite 475
Santa Monica, CA 90401
(310) 394-2828 Tel.
(310) 394-2825 Fax

Attorneys for John Babikian



Securities and Exchange Commission,

Plaintiff,


v.

John Babikian,

Defendant






14 Civ. 1740 PAC


Case 1:14-cv-01740-PAC Document 38 Filed 05/16/14 Page 1 of 16
i

TABLE OF CONTENTS



Page
I. INTRODUCTION.....

1
II. ARGUMENT.........................................

3
A. Babikian Did Not Stipulate to Garnishment... 33
B. Grupo Supreme Court Changed the Law Upon Which The PI Order
Relied.

3

C. Civil Penalties Are a Claim at Law; Not in Equity........................................ 3

D. The Freeze Order Cannot Exceed Ill-Gotten Gain Proven by the SEC...5

E. Grupo Supreme Court Mandates Restraint And Warns Against
Omnipotence.....

7

F. The FDCPA Does Not Authorize Prejudgment Remedies, Writs of
Attachment or Writs of Garnishment to Secure Disputed Claims At Law
For Civil Penalties.....


7

III. CONCLUSION..... 10



Case 1:14-cv-01740-PAC Document 38 Filed 05/16/14 Page 2 of 16
ii

TABLE OF AUTHORITIES
CASES

United States Supreme Court Authority


Page
Grupo Mexicano De Desarrollo, S.A., et al. v. Alliance Bond Fund, Inc., et al.,
(Grupo Supreme Court)
527 U.S. 308, 340-41 (1999)..................


1, 2,7
Tull v. United States
482 U.S. 412, 422 (1987)...

4
Gabelli v. SEC
__ U.S. __, 33 S. Ct. 1216, 1220, n1 (2013)..

4

Lower Court Authority

C.F.T.C. v. British American Commodity Options Corp.
788 F.2d 92, 93-94 (2d Cir.)...

6
Federal Trade Commission v. Bronson Partners, LLC
654 F.3d 359, 372 (2d Cir. 2011)..

5
Johnson v. SEC
87 F.3d 484 (D.C. Cir. 1996).

4
Malasky v. IAC/lnterActiveCorp
2005 WL 549548, at 1 (S.D.N.Y. Mar. 7, 2005)..

4
SEC v. Benson
657 F. Supp. 1122, 1133 (S.D.N.Y. 1987)

12
SEC. v. Blatt
583 F.2d 1325, 1335 (5th Cir. 1978)..

5
SEC v. Bravata
763 F. Supp.2d 891, 919-20 (E.D. Mich. 2011).

3
SEC v. Cavanaugh
445 F.3d 105 (2d Cir. 2006).

8,9
SEC v. Commonwealth Chem. Secs., Inc.
574 F.2d 90, 102 (2d Cir. 1978).

4
SEC v. ETS Payphones, Inc.
408 F.3d 727 (11th Cir. 2005)....

3
SEC v. First City Financial Corp.
890 F.2d at 1215

5
SEC v. First Jersey Securities, Inc.
101 F.3d 1450, 1474 (2d Cir. 1996)

5
SEC v. Haligiannis
470 F. Supp. 2d 373, 386 (S.D.N.Y. 2007)

4
SEC v. Hasho
784 F. Supp. 1059, 1111 (S.D.N.Y. 1992)

12
SEC v. ICP Asset Management, LLC
(S.D.N.Y. 2012), 2012 U.S. Dist. LEXIS 8226 *9-16...

9, 10

Case 1:14-cv-01740-PAC Document 38 Filed 05/16/14 Page 3 of 16
iii

SEC v. Jones
476 F. Supp. 2d 374, 386 (S.D.N.Y. 2007)....
6
SEC v. Kopsky
537 F. Supp. 2d 1023, 1026 (E.D. Mo. 2008).
4
SEC v. Manor Nursing Centers, Inc.
458 F.2d 1082, 1104 (2d Cir. 1972)

6
SEC v. Patel
61 F.3d at 139 (2d Cir. 1995).

5
SEC v. Pentagon Capital Mgmt. PLC
725 F.3d 279, 288 (2d Cir. 2013)..

4,5
SEC v. Platforms Wireless Int'l Corp.
617 F.3d 1072, 1096 (9th Cir. 2010).

5
SEC v. Reynolds
2008 WL 4107528 at 7.

5
SEC v. Stein
No. 07 Civ. 3125, 2008 U.S. Dist. LEXIS 108604, 2009 WL 1181061, at 1
(S.D.N.Y. Apr. 30, 2008)


6
SEC v. Teo
746 F.3d 90 (3d Cir. 2014).

5
SEC v. Wang
944 F.2d 80, 85 (2d Cir. 1991)

5
SEC v. Warde
151 F.3d 42, 50 (2d Cir. 1998)

6
S.E.C. v. Wyly
950 F. Supp. 2d 547 (S.D.N.Y. 2013)....

4
US v. Cap Quality Care, Inc.
400 F.Supp. 2d 295, 299 (D. Maine 2005).........................

9
United States ex rel. Rahman v. Oncology Associates, P.C.
198 F.3d 489, 496-99 (4th Cir. 1999).....

3

STATUTES AND OTHER AUTHORITIES

Federal Debt Collection Procedures Act
28 U.S.C.S. 3001 et seq.......................................................................................
1, 4, 8,
10, 12
Federal Debt Collection Procedures Act
28 U.S.C. 3101(b)...

8
Federal Debt Collection Procedures Act
28 U.S.C. 3002(3)(A) and (B).

8
15 U.S.C. 78u(d)(3)(B).....10
15 U.S.C. 77t(d).. 4
15 U.S.C. 78u(d)(3). 4-5
R. Ough & W. Flenley, The Mareva Injunction and Anton Piller Order: Practice and
Precedents xi (2d ed. 1993)

7



Case 1:14-cv-01740-PAC Document 38 Filed 05/16/14 Page 4 of 16
Page 1

Defendant, J ohn Babikian, respectfully replies to the opposition (Docket Entry DE 37,
the SECs Opposition) of the Securities and Exchange Commission (SEC) to Defendants
motion for reconsideration of this Courts April 21, 2014 Order (DE 31) (the PI Order).
I. INTRODUCTION
The SEC created a mess when it obtained ex parte writs of garnishment and attachment
to secure the SECs legal claim for civil penalties, citing as its sole authority the Federal Debt
Collection Procedures Act (FDCPA). See DE 5, 6. The SEC did not warn the Court of the
snake pit it would be stepping into in granting those writs. There was no warning in the SECs
application papers that the FDCPA, on its face, did not apply; that there were no reported
decisions supporting the SECs extraordinary request; or that in the 24 years since the FDCPA
was enacted in 1990, the SEC had rarely if ever relied on the FDCPA for prejudgment writs of
garnishment or attachment. Now, belatedly, in the SECs Opposition, the SEC admits that it is
true that there are no reported cases authorizing the use of the FDCPAs prejudgment remedies
to secure civil penalties in an SEC Enforcement action. DE 37, p. 12. As a result, this Court
applied the FDCPA erroneously to issue prejudgment writs of attachment and garnishment over
$2,545,289.55 in cash, plus over $11 million in real estate, to secure a relatively meager civil
penalties claim at law of $1,916,670, which claim was disputed, unliquidated and contingent and
subject to the right to a jury trial on civil fraud charges prior to being adjudicated. For purposes
of the instant motion for reconsideration, it is important to note that the SEC did NOT apply for
such writs based on equitable powers, being aware that since 1999 the Supreme Court has
foreclosed the Second Circuits past practices of permitting the use of equitable powers to grant
prejudgment remedies to secure claims at law in Grupo Mexicano De Desarrollo, S.A., et al. v.
Alliance Bond Fund, Inc., et al., 527 U.S. 308, 340-41 (1999) (Grupo Supreme Court).
At the hearing on the PI Order, Defendants counsel, in his first opportunity to do so,
explained that the FDCPA did not support the writs because the SECs prayer for civil penalties
does not constitute a debt owing to the United States a statutory prerequisite to such
prejudgment relief under the FDCPA. (28 USC 3002(3)(B)) The Court understood the problem
Case 1:14-cv-01740-PAC Document 38 Filed 05/16/14 Page 5 of 16
Page 2

with the basis for its writs, but declined to unwind the writs issued based on that mistake of law.
Rather than simply vacate writs that should never have been issued, as requested by Mr.
Babikian, the Court attempted in its PI Order to clean up the mess created by the SECs writ
applications. The PI Order finds that the writs were nevertheless valid exercises of the equitable
powers of the Court. The Courts creative solution to the SECs problem, however, runs afoul of
Grupo Supreme Court.
The SECs Opposition tries to support the Courts unanticipated ruling, citing post Grupo
Supreme Court case law. A careful review of that case law reveals that it offers no support.
It is well settled law that the SECs disgorgement claim is limited to the actual profits
from the transactions at issue in the Complaint; and that the SEC bears the burden of showing a
reasonable approximation of its disgorgement claim. The SEC admits that it is correct that the
Commission has calculated the disgorgement remedy to be at least $1,915,670, plus prejudgment
interest. DE 37, p. 8. That amount is not only the least the SEC has calculated, it is also the
most and the SEC has calculated in support of its disgorgement claim. It is indeed the only
approximation offered by the SEC as to the amount of its disgorgement claim. Thus, the Court
must, as a matter of law, limit its asset freeze to $1,915,670, plus prejudgment interest.
The PI Order and the SEC hope to increase that number to infinity, by suggesting that all
of Mr. Babikians assets should be frozen until he comes to the Court and proves that any and all
of his assets above $1,916,670 are not tainted. As explained below, equity does not
countenance that approach. The SEC has alleged that Mr. Babikian profited improperly from
specific transactions identified in the Complaint. It has alleged specifically the amount of those
profits. The SECs application for a temporary restraining order proved up only those
transactions. The SEC cannot obtain more relief than it has sought or proven, based on pure
speculation that the disgorgement amount could be greater if it had better evidence.
The SEC asks this Court to grant it a special exemption from the limits of Grupo
Supreme Court based on its status as the government. Once again, the SEC invites the Court
Case 1:14-cv-01740-PAC Document 38 Filed 05/16/14 Page 6 of 16
Page 3

create new law that is wrong and violates Grupo Supreme Court. This Court should decline that
invitation and instead grant reconsideration to correct error discussed below.
II. ARGUMENT
A. Babikian Did Not Stipulate To Garnishment.
The third error upon which the Motion for Reconsideration is based was the
mischaracterization of Mr. Babikians Stipulation at DE 25. The PI Order, at page 6, recites that:
The garnishment was stipulated by the parties and the garnishee. Mr. Babikian stipulated to
allow the garnishee to deposit the improperly garnished sums into the Court registry, no more.
The SEC does not dispute that error. The Motion should be granted to correct that error.

B. Grupo Supreme Court Changed The Law Upon Which The PI Order Relied.
The SEC joins the Courts position at footnote 3, p. 6 of the PI Order -- that the
limitations on the Courts equitable powers in Supreme Court Grupo do not apply where the
plaintiff seeks equitable and legal remedies, DE 37 pp.10-11, citing SEC v. ETS Payphones, Inc.,
408 F.3d 727 (11th Cir. 2005); United States ex rel. Rahman v. Oncology Associates, P.C., 198
F.3d 489, 496-99 (4th Cir. 1999); and SEC v. Bravata, 763 F. Supp.2d 891, 919-20 (E.D. Mich.
2011).
As explained in the moving papers, reliance on ETS Payphones, Inc., 408 F.3d 727 (11th
Cir. 2005) is misplaced. ETS Payphones; Oncology Associates, P.C. and Bravata do not hold
that this Court can ignore Grupo Supreme Court, so long as an equitable remedy is added to the
case. That interpretation flips the rulings on their head. These cases simply and rationally hold
that when a plaintiff seeks both equitable and legal relief, as the SEC has done in this case, the
Court may grant pretrial equitable relief so that the Court can afford the plaintiff final equitable
relief sought in the case. None of these cases allowed a freeze order to ensure collection of the
legal claims asserted in those cases. In other words, none of these cases defied the Supreme
Courts clear mandates in Grupo Supreme Court, as the PI Order does and the SEC urges the
Court to do.
Case 1:14-cv-01740-PAC Document 38 Filed 05/16/14 Page 7 of 16
Page 4

C. Civil Penalties Are A Claim At Law; Not In Equity.

The SEC argues that its request for civil penalties should not be treated as a legal claim,
but part of its equitable disgorgement claim for purposes of the freeze order. That argument is
foreclosed by two United States Supreme Court decisions: Tull v. United States, 481 U.S. 412,
422 (U.S. 1987); and United States Supreme Court: Gabelli v. SEC, __ U.S. __, 33 S. Ct. 1216,
1220, n1 (2013). A civil penalty was a type of remedy at common law that could only be
enforced in courts of law. Remedies intended to punish culpable individuals, as opposed to those
intended simply to extract compensation or restore the status quo, were issued by courts of law,
not courts of equity. Tull v. United States, 481 U.S. 412, 422 (U.S. 1987). In Johnson v. SEC,
87 F.3d 484 (D.C. Cir. 1996), the Court of Appeals defined a penalty, as the term is used by
Section 2462, as a form of punishment imposed by the government for unlawful or proscribed
conduct, which goes beyond remedying the damage caused to the harmed parties by the
defendant's action. Id., 87 F.3d at 488.
Gabelli v. SEC, like this case, involved an SEC civil penalty claim and represents the
Supreme Courts position as recently as 2013. There, the Supreme Court made abundantly clear
that the SECs claim at law for civil penalties is very different from its equitable claims for
disgorgement. The SECs civil penalties are intended to punish culpable individuals, not to
extract compensation or restore the status quo. Gabelli v. SEC, 133 S. Ct. at 1223, citing Tull v.
United States, 481 U.S. at 422. See also Pentagon Capital Mgmt. PLC, 725 F.3d at 287
(vacating a civil penalties award in light of Gabelli); S.E.C. v. Wyly, 950 F. Supp. 2d 547
(S.D.N.Y. 2013) (denying civil penalties in light of Gabelli); SEC v. Haligiannis, 470 F. Supp.
2d 373, 386 (S.D.N.Y. 2007) (civil penalties are designed to punish).
The SEC is well aware of this law, as reflected by the fact that the SEC sought its writs
under the FDCPA, not the Courts equitable powers. Indeed, the SEC itself has argued that the
SEC is entitled to Seventh Amendment jury trial rights under Tull because its civil penalty claim
is at law, not in equity. SEC v. Kopsky, 537 F. Supp. 2d 1023, 1026 (E.D. Mo. 2008).
Case 1:14-cv-01740-PAC Document 38 Filed 05/16/14 Page 8 of 16
Page 5

The SEC seeks the highest level of civil penalties in this case: third tier penalties, up to
one times the ill-gotten gains, which are limited to violations that involved fraud, deceit,
manipulation or deliberate or reckless disregard of a regulatory requirement and directly or
indirectly resulted in substantial losses or created a significant risk of substantial losses to other
persons. 15 U.S.C. 77t(d); 15 U.S.C. 78u(d)(3). Here, the SEC would need to prevail at trial
before a jury, and secure a finding of fraud against Mr. Babikian, before it could be entitled to
third tier civil penalties. Only then could this Court assess the appropriate amount of those
penalties, statutorily capped at the amount of the disgorgement award. 15 U.S.C. 78u(d)(3).
Despite the clear law on point, the SEC did find one post-Grupo Supreme Court trial
court decision out of Texas that made the mistake it is asking this Court to make. See SEC v.
Reynolds, 2008 WL 4107528, at 2 (N.D. Tex. Aug. 22, 2008). There, the district court allowed
an asset freeze to be maintained for $1.1 million upon a showing by the SEC of $966,514.27 in
ill-gotten gains. Without discussing or considering Grupo Supreme Court, the court speculated
that the remaining $133,485.73 was civil penalties and, based thereon, found the $1.1 million
freeze amount to be reasonable. The decision is simply wrong and the amount at issue was likely
too small to appeal. The freeze order should have been reduced to the $966,514.27 of ill-gotten
gains proven by the SEC in that case. The excess freeze amount is not supported by analysis or
existing law.
D. The Freeze Order Cannot Exceed Ill-Gotten Gains Proven By The SEC.
Disgorgement is a form of equitable relief. SEC v. Wang, 944 F.2d 80, 85 (2d Cir. 1991);
SEC v. First Jersey Securities, Inc., 101 F.3d 1450, 1474 (2d Cir. 1996). The Court, in equity,
can order disgorgement as "a method of forcing a defendant to give up the amount by which he
was unjustly enriched." Federal Trade Commission v. Bronson Partners, LLC, 654 F.3d 359,
372 (2d Cir. 2011) (quoting SEC v. Commonwealth Chem. Secs., Inc., 574 F.2d 90, 102 (2d Cir.
1978)); see also SEC v. Blatt, 583 F.2d 1325 (5th Cir. 1978).
The disgorgement amount must reflect a reasonable approximation of the profits causally
connected to the violation (the Disgorgement Amount). SEC v. Pentagon Capital Mgmt. PLC,
Case 1:14-cv-01740-PAC Document 38 Filed 05/16/14 Page 9 of 16
Page 6

725 F.3d 279, 288 (2d Cir. 2013); see also SEC v. Patel, 61 F.3d 137, 139 (2d Cir. 1995); SEC v.
Teo, 746 F.3d 90 (3d Cir. 2014); SEC v. First City Fin. Corp., 890 F.2d 1215, 1232 (D.C. 1989);
SEC v. Platforms Wireless Int'l Corp., 617 F.3d 1072, 1096 (9th Cir. 2010).
The amount of assets frozen is limited to the Disgorgement Amount proven by the SEC.
Id.; see also SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2nd Cir. 1972); and SEC v.
Blatt, 583 F.2d at 1335. Beyond that, a freeze order would be punitive, and thus in excess of the
Courts equitable powers. See, SEC v. First City Fin. Corp., 890 F.2d at 1231.
The SEC bears the burden of demonstrating the Disgorgement Amount. CFTC v. British
Am. Commodity Options Corp., 788 F.2d 92, 93 (2nd Cir.), cert. denied, 479 U.S. 853 (1986);
SEC v. First City Financial Corp., 890 F.2d at 1215. The burden of showing that the amount
subject to an asset freeze is a reasonable approximation of the profits received rests squarely on
the Plaintiff. SEC v. Reynolds, 2008 WL 4107528 *7. While the SECs burden does not require
exactitude, it must provide the Court with evidence of specific profits subject to disgorgement.
SEC v. Jones, 476 F. Supp. 2d 374, 386 (S.D.N.Y. 2007). The SECs methodology must
reasonably approximate the profits causally connected to the alleged violation. SEC v. Patel, 61
F.3d at 139; SEC v. Warde, 151 F.3d 42, 50 (2d Cir. 1998).
The SEC argues, based on SEC v. Bravata, 763 F. Supp.2d 891, 919-20 (E.D. Mich.
2011); and SEC v. Stein, No. 07 Civ. 3125, 2008 U.S. Dist. LEXIS 108604, 2009 WL 1181061,
at 1 (S.D.N.Y. 2008), that Mr. Babikian carries the burden of showing that the disgorgement
claim is fully secured and that the remainder of his assets are not tainted (i.e. connected to the
alleged wrongdoing). The SECs position, however, would impermissibly invert the parties
burdens. The SEC must prove an approximation of the ill-gotten profits and their nexus to the
property. Once it does so, the defendant bears the burden of refuting such proof.
In each of the cases cited by the SEC, the frozen assets were insufficient to ensure
payment of the disgorgement claim, or there was a dispute over the nexus between the violation
and the property frozen. This case is distinguishable because Mr. Babikian has stipulated to a
deposit of cash in the full amount of the disgorgement claim on deposit with the Court registry.
Case 1:14-cv-01740-PAC Document 38 Filed 05/16/14 Page 10 of 16
Page 7

Mr. Babikian has not endeavored to leave the disgorgement claim undersecured or challenged
the nexus between his alleged wrongdoing and the cash on deposit with the Court (although there
has been no effort by the SEC to prove such nexus.) The SEC is already fully secured by cash to
ensure collection of its disgorgement claim. The remaining assets of Mr. Babikian, those not
already on deposit with the Court registry, whether tainted or clean, are irrelevant to the Courts
legitimate equitable power to ensure that the SEC has sufficient assets to provide full relief on its
disgorgement claim, because the cash in the Courts registrar fully satisfies that purpose.
Mr. Babikian asks that the Court determine the Disgorgement Amount that is, make a
specific finding based on the evidence offered by the SEC (i.e. hearsay and unauthenticated
documents) as to the reasonable approximation of the ill-gotten gains realized by Mr. Babikian
from the alleged trades. Mr. Babikian asks, and equity demands, that the Court limit the freeze
order to that Disgorgement Amount against the cash on deposit with the Court registry, expunge
the remainder of its writs of garnishment and attachment and vacate its freeze any and all other
assets presently subject to the Courts limitless freeze order.
E. Grupo Supreme Court Mandates Restraint And Warns Against Omnipotence.
As the Supreme Court explained in Grupo Supreme Court, there are good reasons not to
vest courts of equity with the power to freeze assets to secure claims at law before a judgment is
entered. Such a procedure was characterized as a nuclear weapon of the law. Grupo Supreme
Court, 527 U.S. at 329 (citing R. Ough & W. Flenley, The Mareva Injunction and Anton Piller
Order: Practice and Precedents xi (2d ed. 1993). When wielded by Courts in equity, such a
nuclear weapon is an act not of flexibility but of omnipotence and a wrenching departure
from past practice. Emphasis added. Grupo Supreme Court, 527 U.S. at 322. Equity does not
permit the Court to freeze all of Mr. Babikians assets, especially where cash on deposit with the
Court registry fully secures the proven Disgorgement Amount. Such relief is not afforded by the
FDCPA and flies in the face of the restraint mandated by Grupo Supreme Court.
F. The FDCPA Does Not Authorize Prejudgment Remedies, Writs of Attachment
or Writs of Garnishment to Secure Disputed Claims At Law For Civil Penalties.
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Page 8

The SECs Opposition takes a second stab at supporting the original writs issued by this
Court under the FDCPA. The SEC is understandably insecure that the Courts unsolicited
replacement of such writs wrongfully secured under the FDCPA with writs of attachment and
garnishment wrongfully issued in equity in violation of Grupo Supreme Court, would not survive
scrutiny. The SECs FDCPA argument is no more persuasive the second time around.
As detailed above, the SECs civil penalties are claims at law, not in equity. Mr.
Babikian is entitled to a jury trial on that claim at law, and no such jury trial has occurred. Thus,
the Court cannot determine an amount [that] is owing to the United States, which is a pre-
requisite to the imposition of prejudgment remedies under the FDCPA. See 28 USC 3002(3)(B).
Grupo Supreme Court details the history of prejudgment remedies at law, and explains
that they are a departure from centuries of jurisprudence requiring a judgment to be secured in a
civil action before a plaintiff is allowed to interfere with the private property rights of a
defendant. Courts are authorized to issue prejudgment remedies at law only if the statutes upon
which they are sought very clearly apply and no further than the bounds of such statutes permit.
The problem with the SECs application of the prejudgment FDCPA statutes in
Subchapter B is that no amount of debt is owing to the United States on its disputed civil
penalties claim. Section 3101 of Title 28, titled Prejudgment remedies provides, in part:
(a) Application. (1) The United States may or at any time after the filing of a
civil action on a claim for a debt, make application under oath to a court to issue any
prejudgment remedy.
(c) Affidavit. (1) The application under subsection (a) shall include an affidavit
(2) [stating]-- (A) specifically the amount of the debt claimed by the United
States and any interest or costs attributable to such debt.
Debt is defined at 28 USC 3002(3)(B) as an amount that is owing to the United States on
account of a fee, duty, lease, rent, service, sale of real or personal property, overpayment, fine,
assessment, penalty, (emphasis added).
Here, no amount of debt is owing to the United States. 28 USC 3002(3)(B). Thus, the
SEC cannot submit the requisite affidavit to obtain relief under Section 3101 of the FDCPA.
Case 1:14-cv-01740-PAC Document 38 Filed 05/16/14 Page 12 of 16
Page 9

The SEC concedes that there are no reported cases authorizing the use of the FDCPAs
prejudgment remedies to secure civil penalties in an SEC enforcement action. DE 37, p.l2.
That is because, on its face, the statute does not apply to an unliquidated, disputed claim to be
determined later by a jury for civil penalties. US v. Cap Quality Care, Inc, 400 F.Supp. 2d 295,
299 (D. Maine 2005) (holding that penalties and fines sought by the government for the first time
in the underlying action are not debts within the meaning of the FDCPA.)
In SEC v. ICP Asset Management, LLC, 2012 U.S. Dist. LEXIS 8226 (S.D.N.Y. 2012),
the District Court distinguishes between the term debt as applied in connection with
Subchapter B of the FDCPA pertaining to prejudgment remedies; and Subchapter D of the
FDCPA pertaining to fraudulent transfers.
The FDCPA is divided into four subchapters. Subchapter A includes definitions
for the entire chapter and general provisions. Subchapter B addresses pre-
judgment remedies, Subchapter C postjudgment remedies, and Subchapter D --
under which the SECs claims against Smyers are brought -- fraudulent transfer
claims. The latter includes definitions that apply only to fraudulent transfer
actions.
Although the use of the present tense in the definition of debt [fn. 29 Id. 3002]
appears to support Smyers' argument that a present or outstanding debt must exist
to proceed under Section 3304(b), other provisions in the FDCPA suggest that the
term debt includes contingent claims, at least in the fraudulent transfer context.
Indeed, Section 3304, which is part of Subchapter D, addresses the fact that
actionable fraudulent transfers can be made before a "debt" arises and states that
"a transfer is fraudulent as to a debt to the United States, whether such debt arises
before or after the transfer is made . . . [if such transfer is de-signed to] hinder,
delay, or defraud a creditor." [fn. 30 Id. 3304(b)(1) (emphasis added).]
In contrast, all of the cases that Smyers relied upon to support his narrow
reading of the FDCPA's definition of debt construe claims brought under
Subchapters A-C of the Act -- subchapters in which the terms "claim" or
creditor are not defined or applicable. [fn. 45 See United States v. Dearborn
Refining Co., 777 F. Supp. 2d 1077 (E.D. Mich. 2011) (involving Subchapter C);
Gonzalez v. Dep't of Labor, 603 F. Supp. 2d 137 (D.D.C. 2009) (involving both
Subchapters B and C); United States v. Cap Quality Care, Inc., 400 F. Supp. 2d
295 (D. Me. 2005) (involving Sub-chapter B).]
Case 1:14-cv-01740-PAC Document 38 Filed 05/16/14 Page 13 of 16
Page 10

SEC v. ICP Asset Management, LLC, (S.D.N.Y. 2012), 2012 U.S. Dist. LEXIS 8226 *9-16.
The distinction drawn between debt as used in Subchapter B relating to prejudgment
remedies and Subchapter D pertaining to a claim to avoid a fraudulent transfer, articulated in
SEC v. ICP, makes practical sense. If the fraudulent transfer action could only be brought to
recover transfers that took place after a judgment becomes final, the debtor would have until the
minute before the appeal period lapses to transfer his assets without risk of avoidance under the
fraudulent transfer statutes. The fraudulent transfer statutes would not achieve their purpose.
That is not the same as the Subchapter B prejudgment remedies debt. Before a
plaintiff can garnish a defendants paycheck, impose a lien on his real property rights, grab
money out of escrow, etc., and surcharge the defendant a 10% collection fee, the FDCPA
requires that a debt is owing, not that the United States has merely asserted a disputed
unliquidated claim for civil penalties. That is not only fair, but it is consistent with Grupo
Supreme Court and centuries of jurisprudence requiring a judgment on a debt at law before
prejudgment remedies would issue.
Importantly, if the SECs interpretation of the FDCPAs Subchapter B was correct, the
SEC would automatically exceed the statutory limits on its right to civil penalties from the very
outset of the case. The amount of civil penalties that the SEC may claim against Mr. Babikian is
statutorily defined: the amount of the penalty shall not exceed the greater of (II) the gross
amount of pecuniary gain to such defendant as a result of the violation.) 15 U.S.C.
78u(d)(3)(B). The SEC would have this Court exceed that statutory limit by a 10% surcharge as
a collection fee on the maximum civil penalties under section 78u(d)(3)(B), even before they are
adjudicated and awarded. This conflict in the statutes cannot have been intended by Congress
and should not be created by this Courts misapplication of the FDCPA.
III. CONCLUSION
Defendant respectfully requests that the Court remove the incorrect recital in its PI Order,
reduce the freeze order to the Disgorgement Amount proven by the SEC; order the excess
deposit in the Courts registry returned and expunge all writs and excess freeze provisions.
Case 1:14-cv-01740-PAC Document 38 Filed 05/16/14 Page 14 of 16
Page 11

May 15, 2014 Respectfully submitted,

CORRIGAN & MORRIS, LLP
By:/S/ Stanley C. Morris__________
Stanley C. Morris (SM 5814)
(scm@cormorllp.com)
Corrigan & Morris LLP
201 Santa Monica Blvd., Suite 475
Santa Monica, CA 90401
(310) 394-2828 Tel.
(310) 394-2825 Fax

Attorneys for John Babikian



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