Case 1:08-cv DC Document 61 Filed 10/21/2008 Page 1 of 3

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1 Case 108-cv DC Document 61 Filed 10/21/2008 Page 1 of 3 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK X SECURITIES AND EXCHANGE COMMISSION, 08 Civ (DC) Plaintiff, -against- STEVEN BYERS, JOSEPH SHERESHEVSKY, WEXTRUST CAPITAL, LLC., WEXTRUST EQUITY PARTNERS, LLC., WEXTRUST DEVELOPMENT GROUP, LLC., WEXTRUST SECURITIES, LLC., and AXELA HOSPITALITY, LLC., Defendants, and ELKA SHERESHEVSKY, Relief Defendant, and AVROHOM SHERESHEVSKY, and CHANA SHERESHEVSKY, Intervening Defendants X (PROPOSED) MOTION AND NOTICE OF MOTION TO RELEASE PROPERTY FROM TEMPORARY ASSET FREEZE ORDER. TO ALL PARTIES AND THEIR COUNSEL Please take notice that on October 30, 2008 at 1000 A.M., or as soon thereafter as counsel can be heard Intervening Defendants Avrohom Shereshevsky, and Chana Shereshevsky, will move the Court at courtroom 11A, United States Courthouse, 500 Pearl Street, New York, New York, for an order releasing the Temporary Asset Freeze Order of August 28, 2008 recorded with the Ocean County New Jersey Clerk by the Plaintiff Securities and Exchange Commission on the

2 Case 108-cv DC Document 61 Filed 10/21/2008 Page 2 of 3 chain of title of their Martial Home, commonly known as th Street, Lakewood, New Jersey 08701, presently encumbering their property (the Marital Home). This Motion is grounded on the fact that 1. Intervening Defendants have not been accused of any wrongdoing by the Commission in any pleading filed with this Court, including, but not limited to, its First Amended Complaint. 2. The Intervening Defendants have not been joined in this Action as Relief or Nominal Defendants and there is no assertion that their Marital Home was acquired with proceeds traceable to the alleged illegal conduct of the named Claim Defendants herein. 3. This Court lacks subject matter jurisdiction over the Intervening Defendants and their property. 4. The Commission has failed to allege or establish that Intervening Defendants title in the Marital Home is not bona fide. 5. This Court lacks the judicial power under the operative facts to exercise its equitable jurisdiction over the Intervening Defendants or their property. This Motion is based on the Memorandum of Law in Support hereof, the affidavits of Intervening Defendants Avrohom Shereshevsky, Chana Shereshevsky, and Hadassah Horowitz, the exhibits attached thereto, and all pleadings and exhibits filed in this Action.

3 Case 108-cv DC Document 61 Filed 10/21/2008 Page 3 of 3 Dated Brooklyn, New York October 21, 2008 Respectfully Submitted, s/john C. Meringolo(3487) John C. Meringolo, Esq. Meringolo & Associates, P.C. Attorneys for Intervening Defendants Avrohom Shereshevsky and Chana Shereshevsky 116 West 23 rd Street, Suite 500 New York, New York Phone (347) Fax (212)

4 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK X SECURITIES AND EXCHANGE COMMISSION, 08 Civ (DC) Plaintiff, -against- STEVEN BYERS, JOSEPH SHERESHEVSKY, WEXTRUST CAPITAL, LLC., WEXTRUST EQUITY PARTNERS, LLC., WEXTRUST DEVELOPMENT GROUP, LLC., WEXTRUST SECURITIES, LLC., and AXELA HOSPITALITY, LLC., Defendants, and ELKA SHERESHEVSKY, Relief Defendant, and AVROHOM SHERESHEVSKY, and CHANA SHERESHEVSKY, Intervening Defendants X MEMORANDUM OF LAW IN SUPPORT OF MOTION TO RELEASE PROPERTY FROM TEMPORARY ASSET FREEZE ORDER.

5 TABLE OF CONTENTS Table of Authorities... iii Cover Page 1 Relevant Factual and Procedural Background.. 2 The Marital Home.. 2 Procedural History.. 4 Argument.. 6 A. The Court lacks subject matter jurisdiction.. 6 B. The Commission cannot establish its right to freeze Movant s Marital Home. 8 C. The Commission cannot establish the burden imposed by US v. Regan 9 Conclusion ii

6 TABLE OF AUTHORITIES Cases Commodity Futures v. Kimber-Lynn Creek Ranch, 276 F. 3d 187 (4th Cir. 2002) Securities and Exchange Commission v. Cavanaugh, 155 F. 3d 129 (2d Cir. 1998)... 8,9 Securities and Exchange Commission v. Cherif, 933 F.2d 403 (7th Cir. 1991) United States v. Regan, 858 F.2d 115 (2d Cir. 1988)... 9 iii

7 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK X SECURITIES AND EXCHANGE COMMISSION, 08 Civ (DC) Plaintiff, -against- STEVEN BYERS, JOSEPH SHERESHEVSKY, WEXTRUST CAPITAL, LLC., WEXTRUST EQUITY PARTNERS, LLC., WEXTRUST DEVELOPMENT GROUP, LLC., WEXTRUST SECURITIES, LLC., and AXELA HOSPITALITY, LLC., Defendants, and ELKA SHERESHEVSKY, Relief Defendant, and AVROHOM SHERESHEVSKY, and CHANA SHERESHEVSKY, Intervening Defendants X Memorandum of Law NOW COMES Intervening Defendants, Avroham Shereshevsky and Chana Shereshevsky, his wife, (hereinafter jointly referred to as Intervenors ) by and through their attorneys, Meringolo and Associates, P.C., and in support of their motion to this Court to Release Property from the Temporary Asset Freeze Order of August 28, 2008, files the following Memorandum of Law. 1

8 RELEVANT FACTUAL AND PROCEDURAL BACKGROUND The Marital Home It has always been the collective desire of the expanded Shereshevsky Family that Intervenors have a house of their own for themselves and their large family. In furtherance of this objective, in March of 1991 relatives of Intervenor Avrohom Shereshevsky (Exhibit A) and Chana Shereshevsky (Exhibit B) in the United States, Hadassah Horowitz (Exhibit C) in Canada, and others in Israel, pooled certain funds for a down payment on commonly known as th street, Lakewood, New Jersey, (Intervenors Affs. Para 6; Horowitz Aff para 2) (hereinafter referred to Marital Home ). With those proceeds and a GMAC a mortgage in the principal amount of $60,000, the Marital Home was acquired by deed dated March 4, 1991, and titled putatively in the name of Intervenor Avrohom Shereshevsky s sister Hadassah Horowitz, of Montreal, Canada. (Exhibit D, id Para 30) At the time of its purchase the Marital Home was too small to accommodate Intervenors large family, and, consequently, Intervenors invested approximately $70,000 into the property, adding a second story to the structure. (Interventor affs. Para 4). On or about June 2, 1998, Hadassah Horowitz, the putative owner of the Marital Home, refinanced the property with a new GMAC mortgage in the principal amount of $57,300.00, which paid off the original $60, mortgage. (Exhibit E, id para. 5). From March 1991 until August 2004, Hadassah Horowitz solely and exclusively made all the mortgage payments on the Marital Home. (id. at 5; Intervenors affs. Para 9) There came a time in 2004 when Hadassah Horowitz and her husband desired to be relieved of the obligations represented by the Marital Home. In order to continue to accomplish the underlying desire of the Shereshevsky Family to provide Intervenors with the Marital Home, 2

9 it was arranged that the property would be titularily conveyed to Interventors sister-in-law, Relief Defendant Elka Shereshevsky. Accordingly, by deed dated July 2, 2004, recorded July 23, 2004, Hadassah Horowitz transferred the Marital Home to Relief Defendant, Elka Shereshevsky. (Exhibit F). In keeping with the family purpose performed by the Marital Home, although the July 2, 2004 deed reflects a purchase price of $178,000, in truth Relief Defendant Elka Shereshevsky paid no consideration to Hadassah Horowitz for the conveyance, and no money is claimed to be owing. (Horowitz aff. Para 7). In connection with the titular conveyance to her of the Marital Home, on July 12, 2004 Relief Defendant Elka Shereshevsky refinanced the property with a $100,000 first mortgage in favor of First Financial Equities, Inc, which mortgage was recorded July 23, 2004 (Exhibit G). With a portion of the 2004 $100,000 mortgage loan proceeds, Relief Defendant Elka Shereshevsky paid off the principal balance on the 1998 GMAC mortgage of approximately $50, The satisfaction of the 1997 $57, GMAC Mortgage is documented by an instrument recorded July26, 2004 (Exhibit H). (The documents evidencing this payoff have been seized by the Receiver and are not available to Intervenors.) Accordingly, Relief Defendant, Elka Shereshevsky, as of July 2004, had a surplus of $50, in mortgage loan proceeds to use toward the monthly payments due on the $100, first mortgage which she paid through July Consistent with the underlying objective served by the Marital Home, by deed executed on July 3, 2008, recorded July 9, 2008, Relief Defendant, Elka Shereshevsky conveyed the Marital Home subject to the outstanding first mortgage, to the Intervenors for $1.00 (Exhibit I). On August 27, 2008, the Court Appointed Receiver represented to this Court the balance owing 3

10 on this 30 year mortgage is $90, with 26 years remaining on its term. It is presently owned by National City. (Declaration of Receiver Coleman, Exhibit D, August 27, 2008) At no time did Defendant Joseph Shereshevsky or Relief Defendant Elka Shereshevsky even reside in or otherwise use the Marital Home for their own benefit. Since the completion of the addition in 1992 through the present, the Marital Home has been the personal residence of Intervenors and their children, who have been solely responsible for its maintenance and up keep (Intervenors aff. Para 15). Procedural History Intervenors are before this count as innocent third parties to Plaintiff Securities and Exchange Commission s (hereinafter referred to as the Commission ) underlying Enforcement Action which was originally instituted against the named claim Defendants pursuant to a Complaint filed August 11, Thereafter, on August 28, 2008, the Commission filed its First Amended Complaint adding Elka Shereshevsky, the wife of claim defendant, Joseph Shereshevsky as Relief Defendant. On the same date, August 28, 2008, based in part on the Declaration of Timothy J. Coleman, Receiver, and the Memorandum of Law in Support of Application for Emergency Relief, this Court granted the Commission a Temporary Asset Freeze Order which provided in salient part IT IS FURTHER ORDERED that, pending a hearing and determination of the Commission s Application for Preliminary Asset Freeze over Relief Defendant E. Shereshevsky s assets, Relief Defendant E. Shereshevsky and each of her financial and brokerage institutions, officers, agents, servants, employees, attorneys-in-fact, and all other persons or entities who actually receive actual notice or participation with them hold and retain within their control, and otherwise prevent, any withdrawal, transfer, pledge, encumbrance, assignment, dissipation, concealment, or other disposal of any assets, funds, or other property of, held by, or under the direct or indirect control of Relief Defendant E. Shereshevsky. (Emphasis Supplied) 4

11 Intervenors are not named as relief defendants in the First Amended Complaint, nor are they referred to in the body of its allegations as having received ill-gotten gains or profits or having otherwise benefited from the fraudulent activities allegedly conducted by the individual claim defendants through the instrumentalities of the defendant limited liability entities. Furthermore, the Commission does not alleged that Intervenors have been unjustly enriched by the diversion of assets into their name by any named defendant. Exhibit D attached to receive Coleman s Declaration in Support of the Temporary Asset Freeze of Relief Defendant Elka Shereshevsky, is described to be a Wextrust Document listing personal banking and investment accounts controlled by Elka Shereshevsky as of August 19, Id at para 10. In fact the referenced Exhibit D contains on its second, unemunerated page entitled Real Estate Mortgages a reference under the column Property to the address th Street, Lakewood with the footnote. (x) Deed in the names of Avroham (sic) & Chani (sic) Shereshevsky. There is no representation in the pleadings of the Commission or of the Receiver to this Court that the Marital Home was an asset acquired with ill-gotten gains derived from the alleged fraudulent activities which are the subject of the underlying Action, or that the Intervenors were holding the Marital Home nominally for the benefit of claim defendant, Joseph Shereshevsky. The only reference is to the fact Relief Defendant Elka Shereshevsky is obligated on a mortgage recorded against the property. Thus, based in the pleadings presented to the Court the Marital Home represents, not an asset of Relief Defendant Elka Shereshevsky, by which she has been unjustly enriched, but only a liability. Nevertheless, knowing the Marital Home was titled in the name of the non-party Intervenors the Commission encumbered the Marital Home by the recording the August 28,

12 Temporary Asset Freeze Order on its chain of title, thereby effectively diverting Intervenors of their lawful rights to alienate or hypothecate their property as they see fit. Accordingly, based on the argument set forth below, they petition the Court to enter an order releasing the Marital Home from the operation of the Court s Temporary Asset Freeze Order of August 28, 2008, and restore their unrestricted rights as property owners. ARGUMENT A. THE COURT LACKS SUBJECT MATTER JURISDICTION. It is a tenet of federal jurisdiction that it is presumptively limited. This Court, therefore, may only exercise its judicial power in matters in which it retains subject matter jurisdiction over the parties and their property. As demonstrated in the following discussion, at the time it entered into the Temporary Asset Freeze Order, this Court lacked the requisite subject matter jurisdiction over the Intervenors, and, accordingly its Order freezing their Marital Home was inprovidently executed. The Intervenors have not been accused of violating the securities law by the Commission nor has the Commission alleged, let alone established, that the Marital Home was acquired with ill-gotten gains generated by the fraudulent activities of the named claim defendants. Nor has it alleged Intervenors have no legitimate right to the title to the Marital Home. Accordingly, unlike Relief Defendant Elka Shereshevsky, they have not been joined by the Commission as nominal defendants, that is A person who can be joined to aid the recovery of relief without an additional assertion of subject matter jurisdiction only because he has no ownership interest in the property which is the subject of litigation. Commodity Futures v. Kimber-Lynn Creek Ranch, 276 F. 3d 187, 191 (4 th C.R. 2002), quoting, S.E.C. v. Cherif, 933 F. 2d 403, 414 (7 th Cir 1991). 6

13 In SEC v. Cherif, supra, a nominal defendant against whom no specific allegations were made, appealed the lower court s freeze of his personal bank accounts on the grounds the Court lacked subject matter jurisdiction over him; and his property. The Appellate Court, based on the record before it agreed, holding at 414 Nothing in the statute or case law suggest that 15 U.S.C. 78 u(d) or (e) authorizes a court to freeze the assets of a non-party, one against whom no wrongdoing is alleged. (Emphasis Supplied) Significantly, Cherif court by way of footnote observed that the district court could obtain equitable relief from a non-party against whom no wrongdoing is alleged if it is established that the non-party possesses illegally obtained profits but has no legitimate claim to them. The court definitively remarked however The SEC s assertion of Sawchou s nominal status cannot justify the entry of a freeze order. The injunction was properly issued against Sawchou only if the court on remand finds that the Complaint s characterization of Sawchou as a Nominal Defendant is correct because Sawchou has no prior claim to his accounts. Id (Emphasis Supplied) In the matter before the Court, the Commission has failed to allege any wrongdoing against Intervenors or joined Intervenors as nominal parties, with the mandatory requisite allegations. Accordingly, the court lacks subject matter jurisdiction over them and their property and the filing of the Temporary Asset Freeze of their Marital Home should be vacated and the property released. 7

14 B. THE COMMISSION CANNOT ESTABLISH ITS RIGHT TO FREEZE MOVANTS MARITAL HOME. Assuming, arguendo, it is the unarticulated position of the Commission Intervenors represent relief or nominal defendants whose property is thereby appropriately subject to the Court s equitable Temporary Freeze Order, because the operative facts fail to establish the conditions needed to satisfy, as a matter of law, this characterization, the Temporary Freeze Order as applied to Intervenors Marital Home should be vacated and released. As observed above, in a securities fraud enforcement action, the Court may impose equitable injunctive relief freezing assets held in the name of joined parties not accused of wrongdoing, but only upon a proper showing by the Commission that the nominal party has no legitimate claim to the property. The governing test was set down by the Second Circuit in S.E.C. v Cavanaugh, 155 F. 3d 129, 136, where the Court held Federal Courts may order equitable relief against a person who is not accused of wrongdoing in a securities enforcement action where that person (1) has received ill-gotten funds; and (2) does not have a legitimate claim to those funds. (Emphasis Supplied) With respect to the Intervenors Marital Home the Commission cannot substantively establish either component of the criteria. As demonstrated by the affidavits and exhibits attached and cited above, the acquisition of the Marital Home was financed with contributions from Intervenors relatives and mortgage funds. It was expressly purchased solely and exclusively for the benefit of Intervenors who have invested in it, occupied it, and maintained it for over 16 years. The Marital Home has never been occupied or used by any of the named defendants in the underlying Action. The Commission has not documented the flow of any ill-gotten gains from the allegedly fraudulent activities of the Defendants into the Marital Home. Finally, the Commission has not alleged or established that 8

15 based on the documented history of the property that the Intervenors title in the Marital Home is not superior to any other party. Accordingly, the Commission has not sustained its burden of proof justifying the restraining encumbrance it has placed on the Marital Home. C. THE COMMISSION CANNOT ESTABLISH THE BURDEN IMPOSED BY U.S. v. REGAN. In addition to the conventional burden imposed on the Commission under the two prong standard of Cavanaugh, because Intervenors and their property are clearly innocent third parties to the underlined controversy, the Commission is subject to the further burden imposed on it by the Second Circuit s decision in U.S. v Regan, 858 F.2d 115 (2 nd Cir 1988). In Regan, the Appellate Court addresses the impact of a Temporary Restraining Order on the property rights of innocent non-parties in the context RICO prosecution, and held at 121 Nevertheless, orders directed at third parties are strong medicine and should not be used where measures that are adequate and less burdensome on third parties are available. xxxxx We believe, therefore, that where the nature of the defendants forfeitable property makes the imposition of a restraining order burdensome on third parties, the district court should, as an alternative, restrain assets of the defendant equal in value to that of the unrestrained forfeitable property. (Emphasis Supplied) In light of the fact there are hundreds of millions of dollars, and multimillion dollar operating entities identified by the Commission in these Proceedings, it is impossible for the Commission to assert that there are no other adequate measures available to it to accommodate the policy of asset freeze except to seize the Marital Home of the Intervenors. 9

16 CONCLUSION Based on the foregoing the Intervenors urge this Court to enter an order releasing their Marital Home from the operation of the Temporary Asset Freeze Order of August 28, 2008 and restore their unrestricted property rights. Dated Brooklyn, New York October 21, 2008 Respectfully Submitted, /s/john C. Meringolo (3487) John C. Meringolo, Esq. Meringolo & Associates, P.C. Attorneys for Intervening Defendants Avrohom Shereshevsky and Chana Shereshevsky 116 West 23 rd Street, Suite 500 New York, New York Phone (347) Fax (212)