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  • Writer's pictureDonald V. Watkins

Judge Hands SEC “Gift” Ruling

By Donald V. Watkins ©Copyrighted and Published on June 29, 2018

Yesterday, a federal judge in Atlanta handed the Securities and Exchange Commission (“SEC”) a “gift” ruling on one of the claims in its September 1, 2016 “securities fraud” lawsuit against three of my companies and me. In issuing its ruling, the Court distanced itself from documentation that was timely and properly submitted by the defendants that disputed and refuted this claim.

In a dismissive fashion, the Court said it would not “troll a 20-page statement of facts, 25-page declaration, and more than 400 pages of attachments to divine what facts Defendants intend to rely on” in opposing the SEC’s December 2017 motion for a partial summary judgment. No trolling was necessary, as the 25-page declaration provided the Court with the specific facts and proper citations to the 400-pages of supporting documentation that directly disputed the SEC’s claims. Click here to read the declaration.

The SEC’s motion focused on three loans I obtained from former NBA player Charles Barkley to grow my businesses. Barkley is one of a small number of economic participants in theses businesses. He was also a creditor.

By employing a hyper-technical interpretation of the Court's local procedural rules to justify its refusal to consider the defendants’ opposing evidence, the Court freed itself to rely solely upon the documents submitted by the SEC in support of its ruling. Of course, the SEC's documentation ignored my legal authority to borrow money from Barkley and to expend these funds for business purposes related to Masada Resources Group, LLC, and affiliated entities/persons.

In a footnote, the Court made a passing reference to the cornerstone Masada Operating Agreement. This document was expressly incorporated into the two-page purchase agreement that assigned Barkley a defined percentage of my economic participation in the Masada family of companies.

According to the Court, “[t]he document does not, as Defendants argue, state that Mr. Barkley “agreed to be bound by all of the terms and conditions of the Masada Operating Agreement.” Yet, in plain language, the Operating Agreement in question specifically states in Section 13.3 that: “Each assignee…. shall, by his or her acceptance of a Membership Interest, be deemed to be bound by all of the terms and conditions of this Agreement…”.

The Court further observed: “Indeed, there is no indication Mr. Barkley ever saw the 1998 Masada Operating Agreement on which Defendants’ entire argument hinges.” In making this excuse for Barkley, the Court completely ignored the undisputed evidence that Charles Barkley’s financial adviser at Wachovia Securities (who later moved to investment banking giant Raymond James) handled the due diligence, loan documentation, and subsequent communications for each one of the financial transactions in question. Furthermore, this financial adviser actually signed the Watkins-Barkley purchase agreement on behalf of Barkley. Again, this rebuttal information was furnished to the Court in the 25-page declaration, but was ignored by the Court.

Interestingly, neither the SEC, nor the Court, made any claim that Masada is not an ongoing international business enterprise, or that Barkley has lost any money in connection with this venture. Neither entity mentioned the undisputed fact that: (a) I served as CEO of Masada for more than 12 years without taking a dime of the Manager’s compensation that was expressly authorized in the Operating Agreement; (b) I permitted Masada to maintain its headquarters in my Southside office building during this time period without paying any rent; and (c) I voluntarily deferred millions of dollars in authorized expense reimbursements owed to me during this time period in order to grow the company into an industry leader.

To project the appearance that I used Barkley’s loan proceeds for personal use, the Court cited a couple of transactions involving payments to my ex-wife and my ex-girlfriend from the Barkley loans. However, the Court completely ignored the undisputed facts presented in the 25-page declaration that: (a) my ex-wife was a Masada creditor who was entitled to periodic repayments; (b) my ex-girlfriend was a Masada vendor who was entitled to be paid, along with other creditors; (c) the Masada Operating Agreement authorized me to make payments to creditors and vendors in the regular course of business, including those individuals with whom I had a personal relationship; and (d) Barkley received the increased economic participation that he requested in exchange for making the loans (which said increase he retains to this day).

Every transaction challenged by the SEC and cited in the Court's ruling was specifically authorized in the Masada Operating Agreement. Every one of them was presented to the Court in its proper context in the 25-page declaration. Furthermore, the Operating Agreement was written and adopted eight years before I became CEO of the Masada family of companies.

The Court’s ruling also claimed that I misrepresented or omitted pertinent factual information during my solicitation of the loans in question. Yet, Barkley testified under oath that: (a) his financial adviser handled the loan transactions for him; (b) he personally never read or relied upon any of the loan-related correspondence at issue; and (c) he was a pre-existing Masada business associate of mine who made the loans because he was seeking to increase his economic interest in my businesses, which occurred. The Court made no reference to these facts.

Once the Court divorced the Barkley transactions from the core documents that formed the business relationship and governed my conduct as the company’s Manager, the Court was then free to characterize the loan transactions and expenditures in the truncated and grossly misleading context that was presented in the SEC’s motion for partial summary judgment. In doing so, the Court erred as a matter of law and fact in ruling that Barkley had been “defrauded” and that the expenditures in question had no business purpose.

By objective standards, the Court’s ruling was a “gift” to the SEC. The personal animus and character assassination embedded throughout the Court’s ruling suggests that the road to vindication in this case will be a long and difficult one.

Regardless, my attorneys will take the appropriate legal steps to challenge the Court’s erroneous ruling. In the end, we will prevail.

PHOTO: Charles Barkley.

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