Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 1 of 37

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1 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 1 of 37 THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF, vs. BRIAN A. BJORK, THE ESTATE OF JOEL DAVID SALINAS, J. DAVID GROUP OF COMPANIES, INC., J. DAVID FINANCIAL GROUP, LP, SELECT ASSET MANAGEMENT, LLC, SELECT ASSET CAPITAL MANAGEMENT, LLC, SELECT ASSET FUND I, LLC, AND SELECT ASSET PRIME INDEX FUND, LLC, DEFENDANTS. CIVIL ACTION NO. 4:11 CV BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY

2 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 2 of 37 TABLE OF CONTENTS I. NATURE AND STAGE OF THE PROCEEDING... 2 II. STATEMENT OF ISSUES TO BE RULED UPON BY THE COURT... 3 III. SUMMARY PROCEDURES... 7 IV. UNCONTESTED FACTS... 8 V. EVIDENCE VI. SHORT SUMMARY OF THE ARGUMENT VII. ARGUMENTS AND AUTHORITIES VIII. ATTORNEYS FEES IX. CONCLUSION MHDocs _ i

3 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 3 of 37 TABLE OF AUTHORITIES CASES Page(s) Bank One, Texas, N.A. v. Taylor, 970 F.2d 16 (5th Cir. 1992)...16 Blum v. Stenson, 465 U.S. 886 (1984)...29 Braniff Airways, Inc. v. Exxon Company, U.S.A., 814 F.2d 1030 (5th Cir. 1987) Brook Mays Organ Co. v. Sondock, 551 S.W.2d 160 (Tex. Civ. App. Beaumont 1977, writ ref d n.r.e.)...17 Carrieri v. Jobs.com, Inc., 393 F.3d 508 (5th Cir. 2004)...16 CFTC v. Foreign Fund, 2007 WL (M.D. Tenn. June 25, 2007)...28 Dallas/Fort Worth Airport Bank v. Dallas Bank & Trust Co., 667 S.W.2d 572 (Tex. App. Dallas 1984, no writ)...17 Federal Deposit Insurance Corp. v. Texarkana Nat l Bank, 874 F.2d 264 (5th Cir. 1989), cert. denied, 493 U.S (1990)...17 Federal Deposit Insurance Corp. v Cardinal Oilwell Servicing Co., 837 F.2d 1369 (5th Cir. 1988) Hartnett v. Adams & Holmes Mort. Co., 539 S.W.2d 181 (Tex. Civ. App. Texarkana 1976, no writ)....14, 16 Hensley v. Eckerhart, 461 U.S. 424 (1983)...29 In re Agric. Research & Tech. Group, Inc., 916 F.2d 528 (9th Cir. 1990) In re Braniff Airways, Inc., 42 B.R. 443 (Bankr. N.D. Tex. 1984)...17 In re El Paso Refining, Inc., 192 B.R. 144 (1996)...14 MHDocs _ ii

4 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 4 of 37 In re The Heritage Org., LLC, 413 B.R. 438 (Bankr. N.D. Tex. 2009, no pet.) In re Indep. Clearing House Co., 77 B.R. 843 (D. Utah 1987)) In re Manhattan Inv. Fund Ltd., 397 B.R. 1 (S.D.N.Y. 2007)...23 In re Ramirez Rodriguez, 209 B.R. 424 (Bankr. S.D. Tex. 1997) , 27 Johnson v. Georgia Hwy. Express, Inc., 488 F.2d 714 (5th Cir. 1974) Reed v. Israel Nat l Oil Co., Ltd., 681 S.W.2d 228 (Tex. App. Houston [1st Dist.] 1984, no writ)...17 Roland v. U.S., 838 F.2d 1400 (5th Cir. 1988)...25 Rollins v. Metropolitan Life Insurance Co., 863 F.2d 1346 (7th Cir. 1988)...28 SEC v. Byers, 2009 WL (S.D.N.Y. Jan 7, 2009)...28 SEC v. Blatt, 583 F.2d 1325 (5th Cir. 1978)...11 SEC v. Cherif, 933 F.2d 403 (7th Cir. 1991)...28 SEC v. Collelo, 139 F.3d 674 (9th Cir. 1998)...28 SEC v. Forex Asset Mgmt., 242 F.3d 325 (5th Cir. 2001) SEC v. Manor Nursing Centers, 458 F.2d 1082 (2d Cir. 1972)...11 SEC v. Res. Dev. Int'l, LLC, 487 F.3d 295 (5th Cir. 2007) SEC v. Sharp Capital, 315 F.3d 541 (5th Cir. 2003)... 7, MHDocs _ iii

5 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 5 of 37 Soo Line R.R. Co. v. Escanabe Superior R.R. Co., 840 F.2d 546 (7th Cir. 1988)...17 Stenson v. Blum, 476 F.Supp (1979)...29 Studley v. Boylston Nat l Bank, 229 U.S. 523 (1913)...17 United States Fidelity & Guar. Co. v. Wooldridge, 268 U.S. 234 (1925) United States v. Cannistraro, 694 F.Supp.62 (D.J.N. 1988), modified on other grounds, 871 F.2d 1210 (3rd Cir. 1989)...28 Warfield v. Byron, 436 F.3d 551 (5th Cir. 2006) STATUTES TEX. BUS. & COMM. CODE ANN TEX. BUS. & COMM. CODE ANN TEX. BUS. & COMM. CODE ANN (b)...25 TEX. FIN. CODE , 9 TEX. FIN. CODE (b), (a)...12 OTHER AUTHORITIES CIVIL ACTION NO. 4:11 CV Exhibit 5-A...29 Rule 56 of the Federal Rules of Civil procedure LR MHDocs _ iv

6 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 6 of 37 TO THE HONORABLE KEITH P. ELLISON, UNITED STATES DISTRICT COURT: Receiver Steven A. Harr ( Receiver ) files this, his Brief in Support of his Motion for Judgment against Respondents Gasaway Properties, LP ( Properties ) and Richard C. Gasaway, individually, ( Gasaway ) in conformity with the Honorable Court s April 19, 2012, Order denying Receiver s Motion for Show Cause Order and Related Relief (DKT #63) (the Order ). 1 The Order permitted the Receiver to utilize summary procedures to determine the Receivership Estate s rights against third parties, such as Properties and Gasaway (collectively, Respondents ). 2 In support of his Motion for Judgment ( Motion ), the Receiver respectfully states: I. NATURE AND STAGE OF THE PROCEEDING 1. On August 1, 2011, the Securities and Exchange Commission ( SEC ) filed its Complaint against Defendants. In conjunction therewith, the SEC sought, and by Order Appointing Receiver, the Court appointed, Steven A. Harr as the Receiver for Brian A. Bjork, The Estate of Joel David Salinas ( Salinas ), J. David Group of Companies, Inc., J. David Financial Group, LP (collectively, J. David ), Select Asset Management, LLC ( SAM ), Select Capital Management, LLC ( Select Capital ), Select Asset Fund I, LLC ( Fund I ), and Select Asset Prime Index Fund, LLC ( Prime Fund ) (collectively, the Receivership Entities ). 2. The Receiver was authorized to have complete and exclusive control, possession, and custody of all Receivership Assets and Receivership Records of Defendants. Receivership Assets and Receivership Records were defined in the Order as assets, monies, securities, properties, real and personal, tangible and intangible, of whatever kind and description, wherever 1 A true and correct copy of the Order is attached as pages and is incorporated by reference. 2 See Exhibit 1, p. 003 attached hereto. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 2 OF 33 MHDOCS _

7 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 7 of 37 located, and the legally recognized privileges (with regard to the entities), of the [Receivership Entities] and all entities they own or control..., and the books and records, client lists, account statements, financial and accounting documents, computers, computer hard drives, computer disks, internet exchange servers, telephones, personal digital devices, and other informational resources of or in possession of the [Receivership Entities] or issued by [Receivership Entities] and in possession of any agent or employee of the [Receivership Entities] The Receiver has acted and fulfilled his duties as Receiver since his appointment and has conducted various investigations of the Receivership Entities with the intent to marshal the Receivership assets for the benefit of the Receivership Entities investors and creditors. These efforts have included identifying debts owed to the Receivership Entities, which include, but are not limited to, debts owed by third parties who have defaulted on loans made by certain Receivership Entities. The Receiver has also hired outside forensic accountants to assist him with the Receivership Entities accounting records. II. STATEMENT OF ISSUES TO BE RULED UPON BY THE COURT 4. Respondents have defaulted on loans totaling approximately $276, with interest accruing daily. The Receiver seeks by this Motion to collect on these loans. Respondents have no defense to the debt but needlessly complicate the Receiver s efforts with erroneous claims of setoff and fraud. Alternatively, in the unlikely event that Respondents are entitled to setoff an equity investment in one of the Receivership Entities (defined below) against these loans, the Receiver is entitled to claw back $286, that Respondents received in excess of their total investments in J. David Financial Group of Companies and SAM under 3 See Order Appointing Receiver (DKT #11), 1. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 3 OF 33 MHDOCS _

8 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 8 of 37 theories of fraudulent transfer and equitable disgorgement. Pursuant to the Order, the Receiver moves for judgment on his claims. Defaulted Loan The business records of the three Receivership Entities involved are confusing. Regardless, money was loaned to Properties and Gasaway that has not been repaid. Specifically, a loan was funded through a bank account in the name of SAM to Properties ( Loan 1 ). Loan 1 is evidenced by a Promissory Note (the Note ) made payable to Prime Fund, dated January 28, 2010, and in the amount of $155, Although these advances were made from a bank account in the name of SAM, and evidenced by the Note payable to Prime Fund, they were recorded in the contemporaneous accounting records of Fund I in an account entitled, Note Receivable- Gasaway Prop. 5 Simply stated, the Loan 1 money was funded by Fund I even though it passed through a SAM account and is evidenced by the Note made payable to Prime Fund. 6. The Note was personally guaranteed by Gasaway when he signed a Guaranty Agreement dated the same date as the Note ( Guaranty Agreement ). 6 The Guaranty Agreement is unconditional, covers all indebtedness that relates to the Note and does not require a default by or action against Properties in order for Gasaway to be liable. 7 The Note matured on February 5, 2011, leaving a balance of principal, interest, and late penalties due. 8 It is the Receiver s position that Loan 1 began to accrue interest of 7% per annum on January 28, 2010, (the day the Note was signed) despite the fact that four advances were made before the Note s execution. The Receiver is not attempting to collect interest on the first four advances preceding the Note s execution. The first four advances were made to Gasaway on October 14, 2009, November 10, 4 A true and correct copy of the Note is attached as pages and is incorporated by reference. 5 See pages and pages attached hereto. 6 A true and correct copy of the Guaranty Agreement is attached as pages and is incorporated by reference. 7 Id. 8 See pages attached hereto. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 4 OF 33 MHDOCS _

9 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 9 of , December 14, 2009, and January 14, The fifth advance was made on January 29, The sixth advance was made on February 12, 2010, and began to accrue interest of 7% per annum on that date. 7. Further, default interest at a rate of 18% began to accrue on Loan 1 s principal as of February 5, 2011, the date of the Note s maturity. Defaulted Loan In addition, Prime Fund advanced $65,000 ($45,000 on September 28, 2010, and $20,000 on December 30, 2010) to Properties ( Loan 2 ). These advances were made from the bank account of Prime Fund and recorded in an account titled, Note Receivable-Select Fund I in the contemporaneous accounting records of Prime Fund. 9 In the contemporaneous accounting records of Fund I, these advances were recorded as additions to the account titled, Note Receivable-Gasaway Prop with a corresponding increase to an account titled, Short-Term Borrowings. 10 There is no evidence that Properties has repaid the $65,000. As the amount of the Note in Loan 1 is stated to be only $155,000, it is the Receiver s position that Loan 2 began to accrue interest of 6% on February 19, 2012, or 30 days after demand was made by Counsel for Receiver as called for under state law. 11 Total Indebtedness. 9. Collectively, Loans 1 and 2 are hereinafter referred to as the Loans. The total outstanding debt on the Loans, including interest and penalties, is $276, as of August 14, Per diem interest of $76.44 continues to accrue for Loan 1 and $10.68 per diem interest 9 See pages Id. 11 See TEX. FIN. CODE 302. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 5 OF 33 MHDOCS _

10 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 10 of 37 continues to accrue on Loan The Loans were made to Properties and guaranteed by Gasaway under the terms of his Guaranty Agreement. Gasaway s Investment in SAM. 10. SAM issued 30,000 shares of stock to Gasaway individually on January 1, Approximately two and a half weeks later, on January 19, 2007, Properties made a payment to SAM in the amount of $300,000 for capital stock. 14 On March 9, 2011, SAM paid a shareholder dividend to Properties in the amount of $15, Neither Respondent invested in Prime Fund or Fund I. 16 As such, neither Respondent can claim the investment in SAM as a setoff against their indebtedness on the Loans made by Prime Fund as explained further infra. Receiver s Claw back of J. David and SAM Funds Received by Gasaway. 11. At all times material to the transactions involving Gasaway and Properties, J. David was insolvent. 17 Fifth Circuit law is clear that in federal equitable receiverships and under theories of fraudulent transfer and equitable disgorgement, the Receiver is entitled to claw back any amounts paid to Gasaway and/or Properties in excess of what they invested with J. David and SAM. As explained more fully below, Gasaway invested approximately $500,000 with J. David. 18 Properties and/or Gasaway invested approximately $300,000 in SAM. 19 The accounting records establish that J. David made payments to Gasaway and Properties directly, or with funds sent to a bank on Gasaway s behalf totaling approximately $771, The 12 See pages See page 218 attached hereto. 14 See pages attached hereto. 15 Id. 16 See Gasaway Properties, LP and Richard C. Gasaway s Original Complaint, pages , p. 3, 14, which is attached hereto and incorporated by reference. 17 See pages See pages attached hereto. 19 Id. 20 Id. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 6 OF 33 MHDOCS _

11 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 11 of 37 records further show that SAM paid Properties a $15,000 dividend. 21 In the unlikely event that Gasaway and Properties demonstrate that they are entitled to offset their $300,000 investment in SAM against the amounts due under Loan 1 and Loan 2, the Receiver is entitled to claw back the net winner payments made to Gasaway and Properties that are in excess of the investments made in J. David. Assuming the SAM investment of $300,000 is a complete offset to the amounts due on the Loans, and onsidering only the J. David transactions, Gasaway, either individually or through Properties, received a profit of $286, ($786, $500,000). 22 Furthermore, the $15,000 dividend to Properties was paid while SAM was at the peak of its fraudulent activities, which justifies a claw back of that amount. 23 Thus, the Receiver is either entitled to collect on the Loans in the amount of $276, which are accruing interest, or if the Loans are offset by the equity investment in SAM, to claw back approximately $286, The standard of review for this Motion is whether the Court abused its discretion. 24 To the extent the Court s ruling addresses the issues of how the claims process in this proceeding impacts the Respondents claim, the standard of review is likewise whether the court abused its discretion. 25 III. SUMMARY PROCEDURES 13. The Order (DKT #63) authorizes the Receiver to utilize summary procedures to determine the rights of third parties, such as Properties and Gasaway, identified in Receiver s 21 See pages at l. 31 attached hereto. 22 Id. 23 See pages attached hereto. 24 SEC v. Sharp Capital, 315 F.3d 541, 542, 545 (5th Cir. 2003). 25 SEC v. Forex Asset Mgmt., 242 F.3d 325, 331 (5th Cir. 2001). BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 7 OF 33 MHDOCS _

12 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 12 of 37 previous motions and briefs. 26 Specifically, the Order states that the Court will allow the Receiver to proceed against debtors by utilizing the summary judgment-type procedure approved in Sharp Capital. 27 The Receiver, as the moving party, is to file a motion setting out his evidence and reasons for believing that each third-party debtor is in possession of receivership property. 28 He must serve his motion, along with a copy of the Court s Order, on the third-party debtors, and provide some proof of service to the Court. 29 Upon receiving a copy of the motion, the third-party debtors will have 21 days to file a response that should provide the facts and legal authorities on which the Respondents rely to show that the Receiver is not entitled to the money due as alleged in the motion. 30 The response is to include citation to affidavits, declarations, or other material proper under Rule 56 of the Federal Rules of Civil procedure and admissible in evidence. 31 Additionally, the response is to include any requests for discovery, with specification as to the discovery sought and the information expected to be obtained. 32 If necessary, the Court will schedule an evidentiary hearing and/or allow the parties an opportunity for oral argument on any such discovery requests at a later date. 33 IV. UNCONTESTED FACTS 14. The following facts are uncontested: The Court appointed Steven A. Harr as the Receiver for all Receivership Entities on August 1, Order, Page 003; see also Receiver s Supplemental Brief in Support of Motion for Show Cause Order and Related Relief (DKT #58), 3, n Order, Page 004 attached hereto. 28 Id., Page 005 attached hereto. 29 Id. 30 Id. 31 Id. 32 Id. 33 Id. 34 See Pages attached hereto. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 8 OF 33 MHDOCS _

13 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 13 of 37 On January 28, 2010, Properties signed a promissory note (Note ) in the original principal amount of $155,000, plus interest ( Loan 1 ). 35 Gasaway signed the Guaranty Agreement under which he personally guaranteed the Note. 36 Prime Fund is the payee of the $155,000 Note executed by Properties. 37 Prime Fund also advanced $65,000 to Properties. 38 Properties and Gasaway have failed to pay the Note. 39 Properties and Gasaway have failed to repay the $65,000 advanced by Prime Fund. 40 The Receiver has made a demand for payment in full on Properties and Gasaway for the Loans. 41 Gasaway and Properties invested in J. David and SAM not Prime Fund nor Fund I. 42 Prime Fund and Fund I are separate entities from SAM, the entity with respect to which Properties and Gasaway claim a setoff. 43 A claims process for investor losses, if any, has been established through this Receivership and approved by this Court to address any claims by Properties and Gasaway of fraud with respect to SAM, or any other Receivership Entity. 44 Interest and penalties have accrued as provided under the terms of the Note and Guaranty Agreement for Loan 1 as follows: 7% interest per annum from January 28, 2010 (the date of the Note), for the $80,000, which is the total for the advances made to Gasaway on October 14, 2009, November 10, 2009, December 14, 2009, and January 14, 2010; See Pages attached hereto. 36 See Pages attached hereto. 37 Id. 38 See Pages , See Page Id. 41 See Pages attached hereto. 42 See Pages attached hereto. 43 See Pages attached hereto. 44 See Pages attached hereto. 45 See Pages attached hereto. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 9 OF 33 MHDOCS _

14 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 14 of 37 7% interest per annum on the $55,000 advance made on January 29, 2010; 46 and 7% interest per annum on the $20,000 advance made on February 12, The last two advances of $45,000 and $20,000 were made on September 28, 2010, and December 30, 2010, respectively, and carry an interest rate of 6% per annum which began to accrue 30 days after demand was made upon Properties and Gasaway, or on February 19, In addition, the default interest rate of 18% began to accrue on the principal of Loan 1 as of February 5, 2011, the date of the Note s maturity. 49 The balance due, as of August 14, 2012, on the Loans including accrued interest and penalties is $276, Per diem interest of $76.44 continues to accrue on the balance of Loan 1, and per diem interest of $10.68 continues to accrue on Loan At all times material to all of these transactions, J. David and SAM were insolvent. 51 Respondents invested $500,000 in J. David and $300,000 in SAM, and were repaid a total of approximately $786, between June 2001 and March Respondents claim that the $300,000 invested in SAM stock is an offset to the Loans. Gasaway invested $500,000 in J. David and was repaid $786,925.39, resulting in a return of $286, Id. 47 Id. 48 See TEX. FIN. CODE Id. 50 See Pages attached hereto. 51 See Pages See Pages attached hereto. 53 See Pages attached hereto. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 10 OF 33 MHDOCS _

15 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 15 of 37 The Receiver has incurred attorneys fees as a result of Properties and Gasaway s defaults, unsuccessful settlement negotiations, communications with counsel regarding same, and the Receiver s drafting and arguing of this Brief in Support of Motion for Judgment, the Motion for Judgment, the Motion for Leave to Exceed the Court s 25-Page Motion Limit, and the Receiver s Motion to Dismiss Gasaway s Original Complaint. 54 V. EVIDENCE 15. In support of his Motion, the Receiver refers the Court to the following evidence which is attached and incorporated by reference: Order Appointing Receiver for his authority to pursue this action and the Order setting forth this procedure, true and correct copies of which are attached as Exhibit 1 or Pages ; Gasaway Properties, LP and Richard C. Gasaway s Original Complaint against Steven A. Harr, et al., a true and correct copy of which is attached as Exhibit 2 or Pages ; the Note, a true and correct copy of which is attached as Exhibit 3 or Pages ; the Guaranty Agreement, a true and correct copy of which is attached as Exhibit 4 or Pages ; the Affidavit of Steven A. Harr ( Harr Affidavit ), a true and correct copy of which is attached as Exhibit 5 or Pages ; the Affidavit of Christopher D. DeMeo ( DeMeo Affidavit ), a true and correct copy of which is attached as Exhibit 6 or Pages ; the Affidavit of Jesse M. Daves ( Daves Affidavit ), who is the forensic accountant hired by the Receiver to assist the Receivership Estate, a true and correct copy of which is attached as Exhibit 7 or Pages ; the Demand Letter from Christopher D. DeMeo to Gasaway, a true and correct copy of which is attached as Exhibit 8 or Pages ; 54 See Pages attached hereto. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 11 OF 33 MHDOCS _

16 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 16 of 37 BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 12 OF 33 MHDOCS _ Gasaway s Counsel s response to the Demand Letter from Christopher D. DeMeo to Gasaway, a true and correct copy of which is attached as Exhibit 9 or Pages ; Gasaway s Letter to Christopher D. DeMeo, explaining Gasaway s investment with SAM, a true and correct copy of which is attached as Exhibit 10 or Pages ; Christopher D. DeMeo s Letter to Gasaway, explaining lack of mutuality of obligations between SAM, Prime Fund, and Fund I, a true and correct copy of which is attached as Exhibit 11 or Page 099; Spreadsheets and supporting voluminous records with affidavits listing transactions between Gasaway, Properties, J. David and SAM, true and correct copies of which are attached as Exhibit 12 or Pages ; An Investment Advisory Agreement executed by Gasaway with SAM, a true and correct copy of which is attached as Exhibit 13 or Pages ; Transfer Sheets for Certificates 11 and 60, issued by SAM to Gasaway, true and correct copies of which are attached as Exhibit 14 or Pages ; A PPM Share Analysis for SAM, which shows 30,000 shares issued to Properties, a true and correct copy of which is attached as Exhibit 15 or Page 217; and SAM Stock Certificate No. 11, which exhibits 30,000 shares issued to Gasaway, a true and correct copy of which is attached as Exhibit 16 or Page 218. VI. SHORT SUMMARY OF THE ARGUMENT 16. The arguments of the Receiver are summarized in Section II above and will not be restated here to avoid duplicity. VII. ARGUMENTS AND AUTHORITIES 17. In receiverships, federal courts have broad equitable powers enabling them to fashion appropriate ancillary remedies necessary to grant full relief. SEC v. Blatt, 583 F.2d

17 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 17 of , (5th Cir. 1978); SEC v. Manor Nursing Centers, 458 F.2d 1082, (2d Cir. 1972). In this regard, the Fifth Circuit has ruled that the use of summary judgment-type proceedings to resolve issues of ownership of claims against third parties is preferred in receivership matters. 55 Further, this Court, by virtue of the Order, has authorized the use of summary procedures for the Receiver to establish the liabilities of third parties to the Receivership Estate. 56 Grounds for Judgment. 18. There are no genuine issues of material fact necessary to establish Receiver s claims against Properties and Gasaway, and the Receiver is entitled, as a matter of law, to judgment against them. The Receiver moves for judgment against Properties and Gasaway, jointly and severally, for recovery on the Loans, or alternatively for the net winner payments under theories of fraudulent transfer and equitable disgorgement. Default on Promissory Note. 19. Properties was loaned $220,000 as evidenced by the Note and based on the records of Prime Fund showing additional advances beyond the stated amount of the Note. Properties and Gasaway admit in their Complaint filed in the United States District Court for the Southern District of Texas that the principal amount of $220,000 was loaned. 57 The Note matured on February 5, 2011, leaving (i) unpaid principal; (ii) unpaid note interest; (iii) 5% late payment penalties on each late payment that was more than 10 days past due; and (iv) default 55 SEC v. Sharp Capital, 315 F.3d 541, 545 (5th Cir. 2003) (a summary proceeding is similar to a summary judgment procedure where, once the moving party establishes that no evidence in the record supports the nonmovant s claims, the burden shifts to the nonmovant to come forward with evidence to create a genuine issue of material fact). 56 See Pages attached hereto. 57 See Pages See also the statements made in a Complaint filed by Properties and Gasaway in the Southern District of Texas against the Receiver and his entities attached as Pages where Properties and Gasaway admit to the advance of principal in the amount of $220,000. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 13 OF 33 MHDOCS _

18 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 18 of 37 interest at the rate of 18% from the date of maturity until paid. 58 The Note is a valid and enforceable contract entitling the Receiver, on behalf of Prime Fund, to recover against Properties for principal, interest, and penalties due. 59 Breach of Obligation to Repay $65, The Receivership Entities records demonstrate that Prime Fund advanced $45,000 on September 28, 2010, and $20,000 on December 30, 2010, to Properties. These advances were made from the bank account of Prime Fund and recorded in an account titled, Note Receivable-Select Fund I in the contemporaneous accounting records of Prime Fund. 60 In the contemporaneous accounting records of Fund I, these advances were recorded as additions to the account titled, Note Receivable-Gasaway Prop with a corresponding increase to an account titled, Short-Term Borrowings. 61 Properties has not paid the $65,000. Gasaway acknowledged this debt in his letter dated January 28, 2012, and in his Complaint. 62 Breach of Guaranty Agreement. 21. The Guaranty Agreement is a valid and enforceable debt obligation against Gasaway. It obligates Gasaway to pay all amounts advanced by Prime Fund to Properties that relate to Loan 1. Specifically, the Guaranty Agreement states that the Guarantor unconditionally and absolutely guarantees to Creditor the prompt and full payment of all indebtedness and obligations, whether arising by notes, guaranties, or in any other manner, which may owe pursuant to or in any way arising in connection with the Note of $155, The Guaranty 58 See id. at 2, 3. With respect to default interest, the Note calls for default interest at the highest rate allowed under the law. The highest rate allowed under the law is 18%. TEX. FIN. CODE (b), (a). 59 E.g., Federal Deposit Insurance Corp. v Cardinal Oilwell Servicing Co., 837 F.2d 1369, 1371 (5th Cir. 1988). 60 See Pages attached hereto. 61 Id. 62 See Pages attached hereto. 63 See Pages BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 14 OF 33 MHDOCS _

19 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 19 of 37 Agreement is unconditional and the holder of the Note can pursue the Guarantor without first seeking relief against the borrower: Guarantors, jointly and severally if more than one, hereby unconditionally and absolutely guarantee to Creditor the prompt and full payment, when due, of all indebtedness and obligations, fixed or contingent, whether arising by notes, guaranties, discounts, overdrafts, or in any other manner, which Gasaway Properties, LP, or one or more of them (hereinafter called Debtor ) may now or at any time hereafter owe Creditor pursuant, under, related to, or in any way arising in connection with that certain Promissory Note of even date herewith in the original principal amount of ONE HUNDRED FIFTY FIVE THOUSAND AND 00/100 DOLLARS ($155,000), executed by Debtor and payable to the Order of Creditor (the Note ), and all interest and collection costs specified in any document evidencing, securing or pertaining to any such Note, indebtedness and obligations (said indebtedness and obligations being hereinafter collectively called the Indebtedness ). 64 **** [C]reditor shall not be required to pursue any other remedies before invoking the benefits of this Guaranty; specifically, Creditor shall not be required to take any action against Debtor or any other person, to exhaust its remedies against endorsers, collateral and other security, or to resort to any balance of any deposit account or credit on the books of Creditor in favor of Debtor or any other person The Receiver can therefore pursue Gasaway directly on the Loans without seeking relief from Properties. 66 Gasaway has not paid the demand of the Receiver justifying judgment for the full amounts advanced and now past due. 64 Id. 65 See id. at In re El Paso Refining, Inc., 192 B.R. 144, 148 (Bankr.W.D.Tex.1996) (Independent obligation of general partner on its guarantee of partnership obligation was not affected by partnership s bankruptcy filing because the guarantor of payment is directly and primarily liable, there is no requirement that the creditor take action against the primary obligor as a condition precedent to the guarantor s liability) citing Hartnett v. Adams & Holmes Mort. Co., 539 S.W.2d 181, 183 (Tex. Civ. App. Texarkana 1976, no writ). BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 15 OF 33 MHDOCS _

20 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 20 of 37 Receiver is Entitled to Relief. 23. The Receiver, as receiver for Prime Fund and Fund I, is the current owner, holder, payee, assignee and/or transferee of the Note and Guaranty Agreement for Loan 1, and the rights to collect amounts due under Loan 2 per the Guaranty Agreement. 67 Further, the Receiver has not endorsed the Note and/or Guaranty Agreement to any third party nor transferred the claim of Loan 2 to any third party. 68 In addition, all conditions precedent to recovery under the terms of the Note and Guaranty Agreement have been performed or have occurred. 24. By letter dated January 20, 2012, the Receiver made formal written demand on Properties and Gasaway for immediate payment of their obligations under the Note and Guaranty Agreement for Loan 1 and under the terms and Guaranty Agreement for Loan Despite such demand, Properties and Gasaway have failed to pay the amounts due to the Receivership Estate. Interest has been accruing on the Loans at the rates set out in this Motion and the affidavits attached. 70 The total amount of Properties and Gasaway s liability including interest and penalties is $276, as of August 14, 2012, with an additional $76.44 accruing each day thereafter until paid on Loan 1 and an additional $10.68 accruing each day thereafter until paid on Loan The Receiver seeks judgment against Properties and Gasaway, jointly and severally, for the total amounts due under both Loans. Setoff is Not Allowed Under These Facts 25. Properties and Gasaway are not entitled to a setoff for money invested in SAM because an essential element of the defense is not present; there is no mutuality of obligation to support a claim of setoff. Properties, Gasaway, or both, invested approximately $300,000 in 67 See Pages and Pages ; see also Order Appointing Receiver (DKT #11) 68 See Pages attached hereto. 69 A true and correct copy of this letter is attached as Pages and is incorporated by reference. 70 See Page 035 attached hereto. 71 See Pages attached hereto. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 16 OF 33 MHDOCS _

21 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 21 of 37 SAM, but neither invested in Prime Fund nor Fund I. 72 The Receiver has, since the beginning of the Receivership, separated Prime Fund and Fund I from SAM and J. David in his reports to the Court. 73 He has accounted for their money and assets separately. 74 SAM and J. David perpetuated a Ponzi Scheme and both are separate entities from Prime Fund and Fund I It is clear that either Gasaway, Properties, or both, made an equity investment in SAM by purchasing stock, which is, per se, not a debt. 76 On March 9, 2011, Gasaway executed an Investment Advisory Agreement with SAM, whereby Gasaway agreed to employ SAM as an investment advisor for all assets of Properties. 77 Further, there is more than ample evidence establishing Properties s payment for and Gasaway s receipt of stock in SAM - see the Stock Transfer Sheet 11, dated January 1, 2007, in the amount of 30,000 shares to Gasaway, and Stock Transfer Sheet 60, dated March 31, 2009, in the amount of 45,000 shares to Properties. 78 A SAM PPM Share Analysis is also attached demonstrating Properties s purchase of 30,000 shares of SAM on January 19, Finally, a true and correct copy of Stock Certificate No. 11, issued by SAM to Gasaway for 30,000 shares, and dated January 1, 2007, is attached hereto In addition to the lack of identity between the obligated parties, for setoff to apply the obligations to be offset must be debts presently owing. 81 The investment of $300,000 in SAM is not a debt nor an obligation that is presently owed to the Respondents. The 72 See Pages and Pages attached hereto. 73 Receiver s Preliminary Report (DKT # 25), pp. 6-7, Receiver s Second Interim Report (DKT #35), pp , Receiver s Third Interim Report (DKT #47), p. 10, and Receiver s Fourth Interim Report (DKT #72), p Id. 75 See Pages Carrieri v. Jobs.com, Inc., 393 F.3d 508, (5th Cir. 2004). 77 See Pages attached hereto. 78 See Pages attached hereto. 79 See Page 217 attached hereto. 80 See Page 218 attached hereto. 81 Carrieri v. Jobs.com, Inc., 393 F.3d 508, (5th Cir. 2004). BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 17 OF 33 MHDOCS _

22 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 22 of 37 Respondents equity investment in SAM is not a demand obligation. 82 Gasaway himself admits that he invested in SAM and not Prime Fund nor Fund I. 83 Setoff is not allowed by the Fifth Circuit based on these facts. 28. The Fifth Circuit has defined setoff as the doctrine of bringing into the presence of each other the obligation of A to B and B to A and by the judicial action of the court making each obligation extinguish the other. 84 Setoff arose as a practical tool to eliminate unnecessary transactions between parties holding mutual debts. 85 Case law is clear that a setoff must be based on claims existing between the plaintiff and defendant, both of whom are acting in the same capacity or right in which they appear as plaintiff and defendant in the suit. 86 This requirement is known as mutuality of obligation. 87 As a result, setoff is justified only if the two claims or demands mutually exist between the same parties The U.S. Supreme Court s opinion in United States Fidelity & Guar. Co. v. Wooldridge is particularly instructive. 89 In Wooldridge, an insurer issued two bonds regarding a bank. One was a fidelity bond, indemnifying the bank against fraud by its president, and the other insured a particular depositor s account at the bank. 90 When the bank became insolvent through the fraud of its president and went into receivership, the insurer paid the depositor and, 82 Bank One, Texas, N.A. v. Taylor, 970 F.2d 16 (5th Cir. 1992). 83 See Pages attached hereto. 84 Braniff Airways, Inc. v. Exxon Company, U.S.A., 814 F.2d 1030, 1035 (5th Cir. 1987); Reed v. Israel Nat l Oil Co., Ltd., 681 S.W.2d 228, 240 (Tex. App. Houston [1st Dist.] 1984, no writ). 85 Studley v. Boylston Nat l Bank, 229 U.S. 523, 528 (1913). 86 Id. 87 Brook Mays Organ Co. v. Sondock, 551 S.W.2d 160, 166 (Tex. Civ. App. Beaumont 1977, writ ref d n.r.e.); see also In re Braniff Airways, Inc., 42 B.R. 443, 449 (Bankr. N.D. Tex. 1984) (for one demand to be set off against another, both demands must mutually exist between the same parties, in the same right or capacity, and must be of the same kind of quality). 88 FDIC v. Texarkana Nat l Bank, 874 F.2d 264, 269 (5th Cir. 1989), cert. denied, 493 U.S (1990) (quoting Dallas/Fort Worth Airport Bank v. Dallas Bank & Trust Co., 667 S.W.2d 572, 575 (Tex. App. Dallas 1984, no writ); see also Soo Line R.R. Co. v. Escanabe Superior R.R. Co., 840 F.2d 546, 551 (7th Cir. 1988). 89 United States Fidelity & Guar. Co. v. Wooldridge, 268 U.S. 234 (1925). 90 Id. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 18 OF 33 MHDOCS _

23 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 23 of 37 as subrogree of the depositor, tried to setoff this amount against its obligation on the fidelity bond. 91 The Court concluded that the two bonds were wholly independent transactions such that there was no mutuality among the insurer s obligation to the bank, the insurer s obligation to the depositor and the bank s obligation to the insurer as the depositor s subrogree. The Court theorized that had the depositor insured against the bank president s fraud, the depositor could reduce its insurance payment by the amount of its deposit lost by the bank as a result of the fraud As such, setoff cannot be ordered unless the parties involved are holding mutual debts. 93 In the instant case, however, the lack of mutuality is easily demonstrated as follows: Properties Loan 1 Prime Fund Debt Obligation Properties Loan 2 Prime Fund Gasaway Gasaway, Properties Debt Obligation Guaranty of Loans 1&2 Equity Interest Prime Fund SAM 31. Under these facts, Properties was indebted to Prime Fund on the Loans, and Gasaway was indebted to Prime Fund on the Loans via the Guaranty Agreement; neither was indebted to SAM. By contrast, while Gasaway or Properties may have an equity interest in SAM, neither can setoff such equity against its debt because the equity obligation is not due. 91 Id. 92 Id. 93 Braniff Airways, Inc. v. Exxon Company, U.S.A., 814 F.2d 1030 (5th Cir. 1987). BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 19 OF 33 MHDOCS _

24 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 24 of 37 Examining pages 205 through 218 attached hereto, there is more than ample evidence that mutuality of debts does not exist between the parties, so setoff is inappropriate. Gasaway Must Follow the Claims Process. 32. Respondents claim that they have been defrauded in their investment in SAM is not a valid defense. The Receiver does agree that either Gasaway, Properties, or both, invested in SAM. 94 However, a separate claims process has been established by the Court for claims related to such investments, fraudulent or not, and Fifth Circuit law supports that such claims shall be made to the Receiver for Court approval and paid on a pro-rata distribution from the assets available so as to treat all affected victims equally As stated repeatedly in the Receiver s Reports to the Court, 96 Prime Fund and Fund I have not been collapsed into the J. David and SAM pool of assets. 97 The Receiver has accounted for all Prime Fund and Fund I monies separately from the other J. David related entities for the reason that it is believed the fraudulent scheme occurred in J. David and SAM and not Fund I and Prime Fund. 98 It would be improper and inconsistent in this matter for Gasaway and Properties to be paid their claims for the alleged fraud of SAM through an alleged setoff against the Prime Fund/Fund I pool of assets. 34. Furthermore, to allow Respondents the right to setoff their debt to Prime Fund with the $300,000 equity in SAM would be to prefer them over other investors. They would in essence be paid 100 cents on the dollar for that investment. The Fifth Circuit is clear that in Ponzi schemes, receivership assets are pooled together and claimants are to be paid from that 94 See Pages attached hereto. 95 SEC v. Forex Asset Mgmt., 242 F.3d 325, (5th Cir. 2001). 96 Receiver s Preliminary Report (DKT # 25), pp. 6-7, Receiver s Second Interim Report (DKT #35), pp , Receiver s Third Interim Report (DKT #47), p. 10, and Receiver s Fourth Interim Report (DKT #72), p See Pages attached hereto. 98 See Pages BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 20 OF 33 MHDOCS _

25 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 25 of 37 pool on a pro rata basis. 99 Looking at pages 100 through 204, Respondents have already received $786, on the $500,000 invested in J. David and $15,000 on the $300,000 invested in SAM. 100 Allowing an additional $300,000 setoff would put Respondents in the position of receiving $1,086, for the $800,000 total put into J. David and SAM, thus ensuring a 35% profit whereas other investors will not even recoup half of their money. This kind of preference of Gasaway and Properties would simply be inequitable to all of the other affected victims in this proceeding. 35. The SEC v. Forex Mgmt. case is instructive. 101 In Forex, the SEC brought an enforcement action against Forex, which had engaged in a scheme to defraud investors. 102 Forex s assets were frozen and a Receiver was appointed. 103 The Forex Receiver marshaled assets of the fraudulent entity and prepared a distribution plan for approval by the Court. 104 Two Forex investors objected to the plan because it proposed to treat them similarly to all other investors for distribution purposes, even though $800,000 of what they invested in Forex had been deposited in a separate account and was therefore still traceable at the time Forex s assets were frozen. 105 The Fifth Circuit held that the district court did not abuse its discretion in determining that the investors $800,000 be added to the general pool and distributed to Forex investors generally, despite its traceability. 106 The Forex Court concluded: The district court carefully considered the [investors ] arguments and the position of the other fraud victims. Further, the district court determined that the facts did not support a remedy that would elevate the [investors ] claim above the other victims, and SEC v. Forex Mgmt., 242 F.3d 325, (5th Cir. 2001). See Pages Forex, 242 F.3d at Id. at Id. (emphasis added) 104 Id. 105 Id. 106 See id. at 331. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 21 OF 33 MHDOCS _

26 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 26 of 37 accordingly determined that a pro rata distribution would provide a fair and equitable remedy. Thus, the district court used its discretion in a logical way to divide the money, and, therefore, did not abuse its discretion in approving the plan For these reasons, there is no need for additional discovery on this matter and the Court should proceed directly to judgment in favor of the Receiver. Respondents claim of setoff is meritless and their failure to follow the claims process buttresses the granting of the Motion. In the Alternative, the Receiver is entitled to Claw back and Disgorge $286, from Gasaway. 37. Based on the legal theories of fraudulent transfer and equitable disgorgement, the Receiver is entitled to claw back and disgorge funds received by Respondents from the insolvent Receivership Entities that are in excess of the amounts invested. In this case, Respondents invested approximately $500,000 in J. David and were paid $771, between June 27, 2001, and March 9, 2011, by J. David, all at times when J. David was insolvent. 108 These transfers are shown on pages 100 through 204. The money paid to Respondents was other investors money since by being insolvent, J. David had no funds of its own to pay Respondents. 109 SAM paid Respondents $15,000 at a time when it was insolvent. 110 Because Gasaway only invested $500,000 in J. David, he received a return of other investors money in the amount of $286, This means Gasaway received a 154% return on his investment with J. David at a time when it was insolvent. 112 In the unlikely event that the Court determines that Respondents are entitled to the offset on the Loans as claimed, the Receiver moves to disgorge these amounts totaling $286, for the benefit of the Receivership Estate. 107 In light of the Fifth Circuit s deference to discretion of the trial court in Forex, it is clear that the 5th Circuit would allow for the recovery of any ill-gotten gains had the trial court allowed the Forex plaintiffs to recover the $800, See Pages attached hereto. 109 Id. 110 See Pages attached hereto. 111 See Pages attached hereto. 112 Id. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 22 OF 33 MHDOCS _

27 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 27 of 37 Fraudulent Transfer. 38. The Receiver s independent forensic analysis confirm that Salinas and his affiliates operated a fraudulent scheme through J. David and SAM whereby the money of new investors was used to pay old investors, creating the illusion of a viable investment opportunity and inducing additional investors. 113 The Receiver is entitled to disgorgement because the aforementioned transfers constitute fraudulent conveyances. 39. The Texas Fraudulent Transfer Act (hereinafter the Act ) deems several types of transfers by a debtor to be invalid as to creditors. 114 Most importantly, any transfer that prefers one defrauded investor over another is a transaction where Salinas had the requisite fraudulent intent. Under Section (a) of the Act, an actual fraudulent transfer occurs when: (1) a debtor makes a transfer with the "actual intent to hinder, delay, or defraud any creditor of the debtor," whether the creditor s claim arose before or after the transfer was made; (2) the debtor does not receive reasonably equivalent value in exchange; and (3) the debtor either: (i) engaged or was about to engage in a business or transaction for which the remaining assets of the debtor were unreasonably small in relation to the transaction; or (ii) the debtor intended to incur, or reasonably should have believed would incur, debts beyond the debtor's ability to pay as they became overdue." 115 A thorough analysis of the facts and circumstances surrounding the payments to Respondents conclusively establishes that J. David s and SAM s payments constitute fraudulent transfers. (1) Fraudulent Intent 40. There are two methods to prove fraudulent intent without direct evidence. First, the mere existence of a Ponzi scheme triggers a legal presumption that provides a transfer made 113 See Pages See TEX. BUS. & COMM. CODE ANN See TEX. BUS. & COMM. CODE ANN BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 23 OF 33 MHDOCS _

28 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 28 of 37 in furtherance of that scheme is made with fraudulent intent. 116 Second, the Act provides eleven non-exclusive factors, commonly known as the "badges of fraud," in order to identify circumstantial evidence sufficient to support a finding of actual intent. (a) Applying the Ponzi Presumption 41. Courts hold that the payments made during the course of a Ponzi scheme are essentially a continuous series of fraudulent transfers because a Ponzi schemer must have known that investors at the end of the line would lose their money. 117 In other words, the fraudulent intent of the Ponzi schemer is obvious: One can infer an intent to defraud future undertakers from the mere fact that a debtor was running a Ponzi scheme. Indeed, no other reasonable inference is possible. A Ponzi scheme cannot work forever. The investor pool is a limited resource and will eventually run dry. The perpetrator must know that the scheme will eventually collapse as a result of the inability to attract new investors. The perpetrator nevertheless makes payments to present investors, which, by definition, are meant to attract new investors. He must know all along, from the very nature of his activities, that investors at the end of the line will lose their money. Knowledge to a substantial certainty constitutes intent in the eyes of the law, and a debtor's knowledge that future investors will not be paid is sufficient to establish his actual intent to defraud them The Fifth Circuit, along with other circuit courts, have applied this presumption and has held the existence of a fraudulent scheme itself is sufficient to find that a transfer made 116 SEC v. Res. Dev. Int'l, LLC, 487 F.3d 295, 301 (5th Cir. 2007) ( Proving that IERC operated as a Ponzi scheme establishes the fraudulent intent behind the transfer it made. ); Warfield v. Byron, 436 F.3d 551, 558 (5th Cir. 2006) ( The Receiver s proof that RDI operated as a Ponzi scheme established the fraudulent intent behind transfer made by RDI. ); In re Agric. Research & Tech. Group, Inc., 916 F.2d 528, (9th Cir. 1990) ( The debtor s actual intent to hinder, delay or defraud its creditors may be inferred from the mere existence of a Ponzi scheme. ); see also In re Ramirez Rodriguez, 209 B.R. 424, 433 (Bankr. S.D. Tex. 1997). 117 In re Manhattan Inv. Fund Ltd., 397 B.R. 1, 12 (S.D.N.Y. 2007) (citing to In re Indep. Clearing House Co., 77 B.R. 843, 860 (D. Utah 1987)). 118 Id. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 24 OF 33 MHDOCS _

29 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 29 of 37 in furtherance of that scheme is made with fraudulent intent. 119 Proof of a Ponzi scheme is therefore circumstantial proof of the fraudulent intent element of a fraudulent transfer claim Here, there is no question that at the time of his death and for many years prior, Salinas was operating a full-blown Ponzi scheme. J. David and SAM operated an inherently fraudulent scheme under which the debtor-transferor utilized after-acquired investments to pay off previous investors in order to avoid disclosure of the fraud. 121 The scheme functioned by taking money from investors with the intent and knowledge that those investors would never be repaid. 122 Thus, the fraudulent conveyance was made with the knowledge and intent that money taken from some investors would never be repaid. 123 (b) Badges of Fraud 44. Secondly, a finding of intent may also be premised upon the factor test set forth in the Act. The Act provides eleven non-exclusive factors, commonly known as the "badges of fraud," to determine whether a debtor actually intended to defraud creditors. These various factors are outlined and discussed below. Pursuant to the Act, the following nonexclusive factors are considered to establish fraudulent intent: (1) the transfer or obligation was to an insider; (2) the debtor retained possession or control of the property transferred after the transfer; (3) the transfer or obligation was concealed; 119 SEC v. Res. Dev. Int'l, LLC, 487 F.3d 295, 301 (5th Cir. 2007) ( Proving that IERC operated as a Ponzi scheme establishes the fraudulent intent behind the transfer it made. ); Warfield v. Byron, 436 F.3d 551, 558 (5th Cir. 2006) ( The Receiver s proof that RDI operated as a Ponzi scheme established the fraudulent intent behind transfer made by RDI. ); In re Agric. Research & Tech. Group, Inc., 916 F.2d 528, (9th Cir. 1990) ( The debtor s actual intent to hinder, delay or defraud its creditors may be inferred from the mere existence of a Ponzi scheme. ); see also In re Ramirez Rodriguez, 209 B.R. 424, 433 (Bankr. S.D. Tex. 1997). 120 There is a small class of transfers that would not be within the presumption, such as a purchase by the Ponzi schemer of an asset from a bona fide third party. This case, however, involves preferring one small group of investors over the others, and therefore is plainly a part of the overall scheme. 121 See Pages Id. 123 Id. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 25 OF 33 MHDOCS _

30 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 30 of 37 (4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit; (5) the transfer was of substantially all of the debtor's assets; (6) the debtor absconded; (7) the debtor removed or concealed assets; (8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred; (9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred; (10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and (11) the debtor transferred the essential assets of the business to a lienor who transferred assets to an insider of the debtor Texas authority is clear: not all, or even a majority of the badges of fraud must exist for a party to successfully plead and prove a fraudulent conveyance. 125 Instead, when several of these indicia of fraud are found, such factors can serve as a sufficient basis to create an inference of fraud. 126 The "badges of fraud" are not exclusive a trial court may consider other factors, such as reckless financial decision-making in determining fraudulent intent. 127 Here, a number of the badges of fraud are implicated by the facts and circumstances surrounding the fraudulent conveyance at issue. (i) Threat of Future Lawsuits 46. Salinas operated his Ponzi scheme through J. David and SAM for many years. At present, it is clear these entities were insolvent dating back at least to At and around the time of his suicide, Salinas was aware the end was near. Not only did Salinas know the SEC was conducting an investigation and analysis of his business operation, he knew he lacked the funds to continue to perpetrate the scheme, his scheme was on the verge of failing, and that the SEC 124 See TEX. BUS. & COMM. CODE ANN (b). 125 Roland v. U.S. 838 F.2d 1400, 1403 (5th Cir. 1988). 126 Id. 127 In re The Heritage Org., LLC, 413 B.R. 438, (Bankr. N.D. Tex. 2009, no pet.). 128 See Pages attached hereto. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 26 OF 33 MHDOCS _

31 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 31 of 37 would act and disclose his fraudulent operation. There is no doubt that Salinas foresaw future lawsuits. (ii) Transfer of Substantially all of Debtor s Assets 47. Forensic accounting establishes that the Ponzi scheme could no longer function because the funds necessary to perpetuate it weren't available. 129 At the times monies were transferred to Gasaway, as shown on Pages 100 through 204, the only assets J. David and SAM had were a few pieces of heavily-indebted real estate and a few life insurance policies. 130 At every point that funds were transferred to Gasaway per Pages 100 through 204, J. David and SAM were insolvent and, therefore, all transfers exceeded the limited assets of J. David and SAM. 131 (iii) Debtor Absconded 48. Salinas committed suicide days before the SEC filed this lawsuit against him and the other defendants. Salinas knew not only that he would have to face civil and criminal penalties, but that his fraudulent scheme was on the verge of failure and exposure. The facts and circumstances surrounding the last few weeks of Salinas s life, and his intentional death, effectively implicate this badge of fraud. (iv) Insolvency 49. A Ponzi scheme is an insolvent operation by definition. 132 Salinas operated an inherently fraudulent operation in which he utilized after-acquired investment funds to pay off previous investors in order to create the illusion of a viable investment vehicle. 133 Like any other 129 See Pages See Pages attached hereto. 131 Id. 132 In re Ramirez Rodriguez, 209 B.R. 424, 431 (Bankr. S.D. Tex. 1997). 133 See Pages BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 27 OF 33 MHDOCS _

32 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 32 of 37 Ponzi scheme, Salinas s scheme was insolvent for many years, and became increasingly more insolvent each day of operation In summary, the Receiver can establish fraudulent intent through: (1) the Ponzi presumption; (2) the badges of fraud ; or (3) through the actual forensic analysis done by accountants for the Receiver. (2) Reasonably Equivalent Value 51. Neither the records of the Receivership Entities nor any interviewed former employees can provide evidence of any payments made on the Loans. 135 In fact, nowhere in Respondent s Complaint do they state any payments were made on these loans. 136 It is clear that J. David and SAM received no value in return for the net winner monies transferred to Properties and Gasaway. 137 Accordingly, the Receiver can establish this element of fraudulent conveyance. (3) Debts Beyond Ability to Pay 52. At the time the net winner monies were conveyed to Properties and Gasaway, J. David and SAM were insolvent. 138 Being insolvent, their debts were beyond their ability to pay. Accordingly, the Receiver has established this element of fraudulent conveyance. 53. Because the Receiver can establish (1) fraudulent intent, (2) a lack of reasonably equivalent value, and (3) debts beyond ability to pay, the Receiver can prove that the net winner transfers between J. David and SAM to Properties and Gasaway constitute fraudulent conveyances. 134 See id. 135 See Pages See Pages attached hereto. 137 Id. 138 See Pages attached hereto. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 28 OF 33 MHDOCS _

33 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 33 of 37 Equitable Disgorgement. 54. With respect to third parties holding proceeds of the fraud, the Court has the power to direct disgorgement of these proceeds, which constitute the assets of a single constructive trust, merely upon a showing that the third party has possession of the fraud proceeds and no legitimate claim to them. 139 In other words, Gasaway s ignorance of the Ponzi scheme is not a defense to the Receiver s ability to claw back and disgorge the monies Gasaway received from J. David and SAM On the facts as shown above, the remedy of disgorgement is plainly appropriate to restore to the Receivership Estate the funds improperly obtained by Respondents from J. David and SAM during the course of the scheme. VIII. ATTORNEYS FEES 56. The Receiver has retained the law firm of Munsch Hardt Kopf & Harr, P.C. ( MHKH ) to represent him in the collection of the amounts due under the Loans, and has agreed to pay the firm s reasonable attorneys fees for this representation, which total $35, as of July 31, However, despite the actual time and effort of the Receiver s counsel, the Receiver herein requests that the Court award reasonable attorneys fees only in the amount of $25, The Receiver further requests an additional amount of $30,000 for reasonable and 139 SEC v. Cherif, 933 F.2d 403, 414, n.11 (7th Cir. 1991); SEC v. Collelo, 139 F.3d 674, 679 (9th Cir. 1998); United States v. Cannistraro, 694 F.Supp.62, 72, n.11 (D.J.N. 1988) ( The courts impose the remedy of constructive trust where, rightfully or wrongfully, a party has obtained property which unjustly enriches him. ), modified on other grounds, 871 F.2d 1210 (3rd Cir. 1989); see also Rollins v. Metropolitan Life Insurance Co., 863 F.2d 1346, 1354 (7th Cir. 1988) ( a constructive trust may be invoked even where the unjustly enriched party is blameless ). 140 SEC v. Byers, 2009 WL 33434, at *2-3 (S.D.N.Y. Jan 7, 2009) (the Court found the relief defendants lacked legitimate claims to the property because the property was inextricably intertwined with the defendant s allegedly fraudulent business dealings even if the relief defendants were unaware of the scheme); CFTC v. Foreign Fund, 2007 WL , at *5-*7 (M.D. Tenn. June 25, 2007) (Court granted motion for summary judgment against third party defendant, and ordered disgorgement of profits, because the funds sent to third party were during the course of the fraudulent scheme and third party defendants did not generate any issues of material rebuttal facts). 141 See Pages attached hereto. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 29 OF 33 MHDOCS _

34 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 34 of 37 necessary attorneys fees in the event of Properties and Gasaway s unsuccessful appeal to the Fifth Circuit Court of Appeals, and an additional $25,000 for reasonable and necessary attorneys fees in the event of an appeal to the U.S. Supreme Court As stated by the Sixth Circuit Court of Appeals in Reed v. Rhodes, [t]he primary concern in an attorneys fee case is that the fee awarded be reasonable. 179 F.3d 453, 471 (6th Cir. 1999) (citing Blum v. Stenson, 465 U.S. 886, (1984)). A reasonable fee is one that is adequate to attract competent counsel Blum v. Stenson, 465 U.S. at 893 (Stenson v. Blum 476 F.Supp. 1331, 1335 (1979)). Under the twelve factor test enunciated by the Fifth Circuit in Johnson v. Georgia Hwy. Express, Inc., 488 F.2d 714, (5th Cir. 1974), and adopted by the Supreme Court in Hensley v. Eckerhart, 461 U.S. 424, 434 (1983), a court must first determine the lodestar amount by multiplying the reasonable number of hours billed by a reasonable billing rate. Johnson, 488 F.2d at 717. That amount can then be adjusted by the following Johnson Factors : (a) time and labor required; (b) the novelty and difficulty of the questions; (c) the requisite skill to perform the service; (d) the preclusion of other employment due to acceptance of the case; (e) the customary fee; (f) whether the fee is fixed or contingent; (g) the limitations imposed by the client and other circumstances; (h) the amount involved and the results obtained; (i) the experience, reputation, and ability of the attorneys; (j) the undesirability of the case; (k) the nature and length of the professional relationship with the client; and (l) awards in similar cases. Id. The Harr Affidavit, Exhibit 5, and itemized billings attached thereto, Exhibit 5-A, or pages 033 through 052, establish the lodestar amount and the Johnson Factors in favor of an award of attorneys fees. 142 Id. at 24. BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 30 OF 33 MHDOCS _

35 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 35 of Pursuant to Local Rule LR 7.2, the Receiver advises the Court that the Plaintiff SEC does not oppose this Motion. The Defendant entities are all controlled by the Receiver. IX. CONCLUSION 59. Properties has defaulted on the Loans and Gasaway has breached his Guaranty Agreement on the Loans. The Receiver, as receiver for Prime Fund, the holder of the Note and creditor under the Guaranty Agreement, as well as the party that funded Loan 2, seeks judgment under this Court s summary procedures for the amount due under the terms of both Loans, or in event that the Court determines that the Respondents are entitled to an offset against the Loans, judgment under fraudulent transfer and equitable disgorgement theories for the net winner payments received by Respondents, plus reasonable and necessary attorneys fees for having to pursue this Motion. WHEREFORE, Receiver prays that the Court, after the summary procedures ordered are complete and if the Court determines it necessary, set this Motion for hearing with due notice to all parties, and that upon final hearing, the Court award Receiver: (1) judgment against Respondents under the terms of the Loans and Guaranty Agreement in the principal amount of $220,000, plus interest which has accrued through August 14, 2012, in the amount of $56, and late fees of $ for a total of $276,048.80, with default interest continuing to accrue thereafter at the current per diem rate of $76.44 until paid on Loan 1, 6% interest continuing to accrue thereafter at the current per diem rate of $10.68 until paid on Loan 2, and post judgment interest at the highest rate allowed by law on all amounts awarded herein until paid; (2) alternatively, judgment against Respondents totaling $286,925.39, which represents the disgorgement of net winner proceeds they have received from J. David and SAM as a return BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 31 OF 33 MHDOCS _

36 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 36 of 37 on their investment, plus all prejudgment interest on same; (3) reasonable attorneys fees in the amount of $25,00.00 for the filing of this motion and such additional attorney s fees as may be supplemented before a final decision depending on the additional time that is required for this matter; and (4) such other and further relief, at law or in equity, to which he may be justly entitled. If Judgment through Summary Proceedings is not rendered in favor of Receiver for all relief prayed for herein and additional proceedings are necessary, Receiver moves that the Court, at the consideration of this Motion, by examining the evidence and pleadings before it, and by interrogating counsel, to ascertain what material facts are actually controverted in good faith and according to law and then enter an Order granting a judgment which specifies the controverted facts and directs such other and further proceedings in this action which are justly required. Respectfully submitted, /s/ Randy A. Canché Steven A. Harr, Federal Bar # Christopher D. DeMeo, Federal Bar # Randy A. Canché, Federal Bar # MUNSCH HARDT KOPF & HARR, P.C. 700 Louisiana, Suite 4600 Houston, Texas (713) (telephone) (713) (telecopy) rcanche@munsch.com THE RECEIVER AND HIS COUNSEL BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 32 OF 33 MHDOCS _

37 Case 4:11-cv Document 94 Filed in TXSD on 08/21/12 Page 37 of 37 CERTIFICATE OF CONFERENCE On August 21, 2012, I conferred with Tim McCole and he advised that the Securities and Exchange Commission is not opposed to the relief sought in this motion. In light of the fact this Motion is brought in conjunction with claims against Gasaway and Properties, I also conferred with Counsel for Gasaway and Properties, Millard Johnson. Gasaway and Properties are opposed to the Motion. /s/ Randy A. Canché CERTIFICATE OF SERVICE I certify that on August 21, 2012, a copy of the foregoing was served on Millard Johnson of Johnson, DeLuca, Kurisky & Gould, PC, 4 Houston Center, Suite 1000, 1221 Lamar Street, Houston, Texas, 77010, attorney for Respondents Richard C. Gasaway and Gasaway Properties, LP, by certified mail return receipt requested. /s/ Randy A. Canché Randy A. Canché BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY PAGE 33 OF 33 MHDOCS _

38 Case 4:11-cv Document 94-1 Filed in TXSD on 08/21/12 Page 1 of 3 HE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF, vs. BRIAN A. BJORK, THE ESTATE OF JOEL DAVID SALINAS, J. DAVID GROUP OF COMPANIES, INC., J. DAVID FINANCIAL GROUP, LP, SELECT ASSET MANAGEMENT, LLC, SELECT ASSET CAPITAL MANAGEMENT, LLC, SELECT ASSET FUND I, LLC, AND SELECT ASSET PRIME INDEX FUND, LLC, DEFENDANTS. CIVIL ACTION NO. 4:11 CV APPENDIX TO BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY TO THE HONORABLE KEITH P. ELLISON, UNITED STATES DISTICT COURT: COMES NOW Receiver Steven A. Harr and files this Appendix to Brief in Support of Receiver s Motion for Judgment Against Gasaway Properties, LP and Richard Gasaway. Contents of Appendix to Brief in Support of Receiver s Motion for Judgment Against Gasaway Properties, LP and Richard C. Gasaway Exhibit Description Page Numbering 1 Order Appointing Receiver Gasaway Properties, LP and Richard C. Gasaway s Original Complaint 3 Promissory Note dated January 28, Guaranty Agreement dated January 28, Affidavit of Steven A. Harr Affidavit of Christopher D. DeMeo APPENDIX TO BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY - PAGE 1 OF 3 MHDocs _

39 Case 4:11-cv Document 94-1 Filed in TXSD on 08/21/12 Page 2 of 3 Exhibit Description Page Numbering 7 Affidavit of Jesse M. Daves Letter from Chris DeMeo to Richard Gasaway dated January 20, Letter from Millard A. Johnson to Chris DeMeo dated May 1, Letter from Richard Gasaway to Chris DeMeo dated January 28, Letter from Chris DeMeo to Richard Gasaway dated February 3, Spreadsheets and supporting voluminous records with affidavits listing transactions between Gasaway Properties, J. David and SAM 13 Select Asset Management, LLC Investment Advisory Agreement dated March 9, Transfer Sheet for Certificates 11 and Select Asset Management, LLC PPM Share Analysis Select Asset Management, LLC Stock Certificate 0218 Respectfully submitted, /s/ Randy A. Canché Steven A. Harr, Federal Bar # Christopher D. DeMeo, Federal Bar # Randy A. Canché, Federal Bar # MUNSCH HARDT KOPF & HARR, P.C. 700 Louisiana, Suite 4600 Houston, Texas (713) (telephone) (713) (telecopy) rcanche@munsch.com THE RECEIVER AND HIS COUNSEL APPENDIX TO BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY - PAGE 2 OF 3 MHDocs _

40 Case 4:11-cv Document 94-1 Filed in TXSD on 08/21/12 Page 3 of 3 CERTIFICATE OF SERVICE I certify that on August 21, 2012, a copy of the foregoing was served on Millard Johnson of Johnson, DeLuca, Kurisky & Gould, PC, 4 Houston Center, Suite 1000, 1221 Lamar Street, Houston, Texas, 77010, attorney for Respondents Richard C. Gasaway and Gasaway Properties, LP, by certified mail return receipt requested. /s/ Randy A. Canché Randy A. Canché APPENDIX TO BRIEF IN SUPPORT OF RECEIVER S MOTION FOR JUDGMENT AGAINST GASAWAY PROPERTIES, LP AND RICHARD C. GASAWAY - PAGE 3 OF 3 MHDocs _

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74 Case 4:11-cv Document 94-6 Filed in TXSD on 08/21/12 Page 2 of On August 1,2011, this Court appointed me to act as Receiver for Brian A. Bjork, The Estate of Joel David Salinas, J. David Group of Companies, Inc., J. David Financial Group LP, Select Asset Management, LLC, Select Capital Management, LLC, Select Asset Fund I, LLC, and Select Asset Prime Index Fund, LLC (collectively, the "Receivership Entities") in this case. The details of my appointment are set out in the Court's Order Appointing Receiver (DKT #11). 4. In my appointment as Receiver and based on my review of all of the Receivership Entities' records, it has become evident that J. David Group of Companies, Inc., J. David Financial Group, LP, (collectively "J. David") and Select Asset Management, LLC ("SAM") operated an inherently fraudulent scheme under which the debtor-transferor utilized afteracquired investments to payoff previous investors in order to avoid disclosure of the fraud. The scheme functioned by taking money from investors with the intent and knowledge that those investors would never be repaid. Payments to investors and others with investors' money were made with the knowledge and intent that money taken from investors would never be repaid. At this time, I believe that these actions occurred in the various Receivership Entities other than Select Asset Fund I LLC ("Fund I") and Select Asset Prime Fund LLC ("Prime Fund"). Neither Fund I nor Prime Fund have been collapsed into the J. David Group pool of assets. I have accounted for and have directed the accounting team I have hired to keep all Fund I and Prime Fund monies separately from other J. David-related entities. 5. I have also identified debts owed to the Receivership Entities, which include, but are not limited to, debts owed to the Receivership Entities by third parties as a result of defaulted loans and, I have reviewed pertinent documents in the loan files and accounting records of the Receivership Entities related to such debts. In that regard, I have authorized the filing of a 2 MHDocs _

75 Case 4:11-cv Document 94-6 Filed in TXSD on 08/21/12 Page 3 of 20 Motion for Judgment against Gasaway Properties, LP ("Properties") and Richard C. Gasaway ("Gasaway") (the "Motion"), as a Guarantor of one of the defaulted loans. 6. The first loan at issue, referred to in the Motion as Loan 1, was funded through an account in the name of Select Asset Management, LLC ("SAM"), a Receivership Entity, to Properties in the amount of $155,000. Properties' obligation to repay the loan is evidenced by a Promissory Note ("Note") made payable to Prime Fund, dated January 28,2010. Simply stated, the money was funded by Fund I even though it came through a SAM account and is evidenced by a Note payable to Prime Fund. In my role as Receiver, I obtained the Note from the files of Prime Fund and based on my discussions with the principals of Prime Fund, I have determined it is a true and accurate record of Prime Fund. A true and correct copy of the Note is attached to the Motion as Exhibit "3". 7. I have also obtained a copy of a Guaranty Agreement signed by Gasaway personally guaranteeing the Note. Based on the same inquiry set forth above, I have determined that the Guaranty Agreement signed by Gasaway is a true and accurate record of Prime Fund. A true and correct copy ofthe Guaranty Agreement is attached to the Motion as Exhibit "4". 8. In addition, I have reviewed Receivership Entities' records demonstrating that Prime Fund advanced $65,000 to Properties. This transaction is referred to in the Motion as Loan 2. These advances were made from the bank account of Prime Fund and recorded in an account entitled, "Note Receivable-Select Fund I" in the contemporaneous account records of Prime Fund. 9. Neither the records of the Receivership Entities nor any interviewed former employees demonstrate that any payments made on Loan 1 or Loan I have further seized, subpoenaed, and have maintained the accounting records used to construct Exhibit "12" to the Motion. The accounting records used to construct Exhibit 3 MHDocs _

76 Case 4:11-cv Document 94-6 Filed in TXSD on 08/21/12 Page 4 of 20 "12" were taken from the operations of 1. David and SAM. I have interviewed the accountant for J. David and SAM, Chris Peden ("Peden"), to verify that the accounting records for J. David and SAM used to construct Exhibit "12" were regularly kept in the ordinary course of business for J. David and SAM, that Peden performed periodic reviews of the accounting records, and that Peden filed tax returns based on the accounting records. Based on my discussions with the accountant for J. David and SAM, and my accountant's forensic analysis of these records and the actual bank records subpoenaed, neither the source of information nor the method or circumstances of their preparation indicate that the numbers presented in Exhibit" 12" are other than what actually happened in this case. 11. Further, I have obtained and reviewed internal records of SAM regarding Gasaway and Properties's investment in that company. These records are attached to the Motion as Exhibits "13" through "16". Based on my investigation of this matter in my role as Receiver, I have determined that these documents are true and correct copies of the records of SAM. 12. Neither Fund I nor Prime Fund have endorsed the Note or the Guaranty Agreement to any third party. 13. With respect to attorneys' fees, I am qualified to testify on the reasonableness and necessity of attorneys' fees in this case based on my education, knowledge and professional experience as an attorney licensed in Texas since I am admitted to practice in the Southern District of Texas practicing primarily in the field of complex commercial litigation in both Federal and State courts and I have personal knowledge of the facts surrounding the attorneys' fees in this matter. 14. As the Receiver in this case, I retained the law firm of Munsch Hardt Kopf Harr, PC ("MHKH") to represent the Receivership Estate in this case. I am familiar with the services that MHKH's attorneys and legal assistants have provided regarding this matter. Additionally, I 4 MHDocs _'

77 Case 4:11-cv Document 94-6 Filed in TXSD on 08/21/12 Page 5 of 20 have knowledge of the hours spent by such attorneys and legal assistants on behalf of the Receivership, and of the books and records of such hours kept by the MHKH firm that have been prepared in the ordinary course of business. It is the regular practice of the attorneys and legal assistants at MHKH to record the time spent and services rendered in such records. 15. MHKH bills the Receivership Estate at discounted standard hourly rates, and MHKH's discounted standard hourly rates are billed in tenths of an hour. MHKH'S actual monthly billing statements through July 31, 2012, are attached to this Affidavit as Exhibit "A" and are incorporated by reference. These billing statements contain a detailed itemization of the services rendered by the attorneys and paralegals of MHKH, and contain separate detailed descriptions of the activities performed, including the subject matter of the activity and the time involved. Items not related to the settlement attempts with Properties and Gasaway, communications with his counsel, and the research and drafting of this Motion are redacted. Exhibit "A" also contains descriptions of the costs charged in connection with this matter. 16. In addition to my knowledge, skill, education, training and experience in these matters, and the facts set out in the Motion and this Affidavit, my opinions regarding attorneys' fees are based on the 12 factors articulated by the Fifth Circuit in Johnson v. Georgia Hwy. Express, Inc., 488 F.2d 714, 717 (5th Cir. 1974) (the "Johnson Factors"), which are addressed below. 17. The time and labor required. Exhibit "A" details the involvement of MHKH attorneys, the accountants in this case and the Receiver related to negotiations, conferences, correspondence to, and the drafting of the Motion against Properties and Gasaway which total hours of attorney, staff, and Receiver time as of the date of the invoice. 18. The novelty and difficulty of the questions. The Receivership action as a whole deals with a complex, multi-faceted Ponzi scheme involving numerous complicated legal and 5 MHDocs _

78 Case 4:11-cv Document 94-6 Filed in TXSD on 08/21/12 Page 6 of 20 factual issues. In this context, the collection action against Properties and Gasaway involves factual and legal questions of above-average complexity. The issues associated with this Motion include the analysis of pertinent documents and preparation for negotiations and possible litigation over the Note and Guaranty Agreement and analysis of the issues raised by the Defendants in response to the Receiver's demands. 19. The requisite skill to perform the service. As Receiver, I believe that the services performed in this case have required individuals possessing considerable experience in business transactions, investment fraud, insurance, workouts, litigation, tax, equity receiverships, real estate, and lending. The Receiver and the MHKH attorneys assigned to the case have considerable experience in these areas. 20. The preclusion of other employment due to the acceptance of the case. Neither the Receiver nor the MHKH attorneys involved in this matter have declined any representation solely because of services as Receiver or as counsel for the Receiver. 21. The customary fee. The hourly rates sought herein are at least commensurate with the rates charged by other practitioners of similar experience levels in the Southern District of Texas. In the case of the MHKH attorneys working on this case and the Receiver, the rates are below the standard hourly rates charged to other clients, discounted by at least ten percent (10%). During the time period covered by the Motion, the following lawyers at MHKH have performed legal services on behalf of the Receivership Estate with respect to these proceedings. Steven A. Harr $ per hour Licensed in Texas in 1980 and admitted to (Receiver) practice law before all state and federal courts in the State of Texas. Randy A. Canche $ per hour Licensed in Texas in 2005 and admitted to (general issues) practice law before all state and federal courts in the State of Texas. 6 MHDocs _

79 Case 4:11-cv Document 94-6 Filed in TXSD on 08/21/12 Page 7 of 20 Christopher D. $ per hour Licensed in Texas in 1996 and admitted to DeMeo practice before all state and federal courts (general issues) in the State of Texas. Tere Robinson $ per hour Paralegal who has rendered assistance with (general issues) general receivership issues. 22. Whether the fee is fixed or contingent. The fees are fixed insofar as monies exist by way of Receivership assets from which to pay such fees. Payment of such fees, however, is subject to Court approval. 23. Time limitations imposed by the Client or other circumstances. With respect to the collection action against Properties and Gasaway, there have been no specific time limitations imposed other than the urgency to build the Receivership Estate for potential distribution to investors. 24. The amount involved and the results obtained. The work for which this Affidavit is offered in support of attorneys' fees, the Receiver and his lawyers and paralegals have handled the following matters: 1. Obtain and review the legal documents establishing the debt obligations of the various parties, including communications with representatives of Prime Fund and Fund I regarding the details of the transactions in order to develop a plan for collection; 11. Evaluate whether adequate financial information is available to determine the actual extent of liabilities to creditors and investors; 111. Negotiate with Properties and Gasaway and their counsel through formal correspondence, telephone calls and other communications in an effort to reach a settlement agreement between the parties for the monies owed by them to Prime Fund and Fund I; IV. Seek a show cause order for the debtors on the defaulted loans, or alternatively summary proceedings, including the development of legal authority for such relief and the preparation and filing of motions and supplemental briefs in support of such relief; and v. Pursue this Motion as authorized by the Court. 7 MHDocs _

80 Case 4:11-cv Document 94-6 Filed in TXSD on 08/21/12 Page 8 of The experience, reputation and ability of the attorneys. MHKH is a broad-based commercial firm with vast experience in the handling of matters generally related to civil trial law, dispute resolution, bankruptcy, corporate, real estate, and general workout matters. The practice of the attorneys specifically in this case regularly includes the representation of investors and other persons involved in business transactions in which the investors or other parties are victims or aggrieved in some fashion. The Receiver and other attorneys at MHKH have also served as Receiver and counsel in other large SEC Receiverships involving investor fraud on a worldwide basis. The reputation of the Receiver and MHKH attorneys is recognized and respected in their community in Texas. 26. The undesirability of the case. The service as Receiver and the representation of the Receiver incident to this case has not been undesirable. 27. The nature and length of the professional relationship with the client. MHKH did not represent the Receiver in these proceedings prior to being retained in these proceedings. 28. Award in similar cases. MHKH believes that the fees requested in this matter are less than or equal to those which have been awarded in similar cases in this district. 29. As a trial attorney practicing since 1980, I am familiar with reasonable and customary charges for similar legal services. As of July 31, 2012, MHKH has rendered approximately hours of professional services regarding this matter, for which MHKH billed the Receivership Estate $35, Despite the time and effort actually invested in this matter, the Receiver herein requests that the Court award reasonable attorneys' fees in the amount of $25,000. The Receiver further contends that an additional amount of $30,000 constitutes reasonable attorneys' fees in the event of Properties and Gasaway's unsuccessful appeal to the Fifth Circuit Court of Appeals, and an additional amount of $25,000 in the event to the United States Supreme Court. It is my opinion that the fees and expenses charged by MHKH 8 MHDocs _

81 Case 4:11-cv Document 94-6 Filed in TXSD on 08/21/12 Page 9 of 20 for services rendered in this matter are reasonable, necessary, usual and customary attorneys' fees for this work performed in the Southern District of Texas. (ijl fi;4lljri~ Steven A. Harr, Receiver 7,\\1111" ~~~!.y~~~~-... ~CHEL~E WYSONG f':~:"'s Notary Public, State of Texas \1'~.:~i My Commission Expires ~,tf,f.!.1~~'" December 07,2013 ~\--- Subscribed and sworn before me this ::;..\ -- day of August MHDocs _

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