United States District Court, D. Arizona
ASSET FREEZE ORDER
Stephen M. McNamee Senior United States District Judge
Pending before the Court is Plaintiff Securities and Exchange Commission’s (“SEC”) notice of application and application for an asset freeze order. (Doc. 88.) The SEC applies for an order to freeze the assets of Defendants Janus Spectrum LLC (“Janus Spectrum”), David Alcorn (“Alcorn”), and David Alcorn Professional Corporation (“DAPC”) (collectively “Defendants”). The motion is fully briefed and the parties presented oral argument to the Court. (Docs. 94, 96-97, 99.)
The Court finds that the SEC has met the standard for obtaining an asset freeze and will grant the SEC’s motion. The Court will require the Bankruptcy Trustee for the Bankruptcy Court for the District of Arizona to turn over the assets of Debtor Janus Spectrum LLC to the registry account of this Court pursuant to LRCiv 67.1.
Defendants Janus Spectrum, David Alcorn, Kent Maerki, and the Fundraising Entity Defendants,  are allegedly responsible for planning and operating an investment scheme to obtain and monetize FCC licenses that Alcorn and his accomplice, Maerki, knew or should have known had little value. Alcorn founded Janus Spectrum in October 2011; it filed for bankruptcy in March 2014. (Doc. 89, Exhibits 2 and 7.) Alcorn is also the president and sole owner of DAPC, an Arizona professional corporation that became the sole owner of Janus Spectrum in January 2014, before it filed for bankruptcy protection. (Doc. 89, Exhibits 8, 12.)
The FCC regulates wireless communications; it oversees the various frequencies that comprise the country’s available wireless capacity or spectrum. (Doc. 88-1 at 10-11; Doc. 89, Exhibits 10, 11.) The FCC issues licenses to own and use various frequencies throughout the country. (Doc. 88-1 at 11.) In 2004, the FCC adopted a plan to reconfigure the 800 MHz wireless spectrum band. (Id.) Public safety operations were moved to the lower portion of the 800 MHz band and commercial wireless systems were moved to the higher portion of the band. (Doc. 89, Exhibit 10.) As part of its plan, the FCC designated the expansion band and guard band to maintain separation between public safety and cellular operations on the 800 MHz band. (Doc. 89, Exhibit 11.) FCC rules specify that a license using either the expansion band or the guard band is only authorized to use a maximum bandwidth of 20 kHz. (Id.) Major wireless carriers require a minimum bandwidth of 1.25 to 1.4 MHz. (Id.) Major wireless carriers could not operate their cellular services on the 800 MHz expansion band or guard band because those cellular services would not fit within the FCC’s authorized maximum bandwidth of 20 kHz. (Id.)
The SEC alleges that Janus Spectrum operated as a business seeking to obtain and resell FCC licenses in the expansion and guard band. (Doc. 88-1 at 11.) Janus Spectrum held itself out as a company that prepares applications for FCC cellular spectrum licenses on behalf of third-party clients, which included individuals and fundraising entities. (Doc. 89, Exhibit 12.) Janus Spectrum’s business involved offering and providing FCC license application services to over 20 fundraising entities, which Janus Spectrum called “clients.” (Doc. 89, Exhibit 13.) These application services included working with third parties, such as engineers and attorneys, to prepare and file spectrum applications with the FCC for 800 MHz spectrum licenses in the expansion and guard band. (Doc. 89, Exhibits 13-14.)
The SEC alleges that Janus Spectrum’s business also involved encouraging investors to invest in the fundraising entities. (Doc. 105 at 10-11.) According to the SEC, Janus Spectrum, Alcorn, and Maerki, structured the business relationships and written agreements with the fundraising entities to avoid the appearance that Janus Spectrum was offering securities. (Doc. 89, Exhibits 14-15; see also Doc. 97-3.) Janus Spectrum and Alcorn relied on the fundraising entities to offer membership interests in an attempt to shield themselves from registration requirements and potential liability associated with offering securities. (Doc. 89, Exhibit 15.)
The SEC alleges that the Fundraising Entity Defendants solicited investors to invest in entities by entering into investment contracts. Investors received membership interests in exchange for their investment. (Doc. 89, Exhibit 14.) The SEC alleges that the entities then used a small portion of investor money to apply for FCC spectrum licenses, pocketing or sending Janus Spectrum the remainder of the money. (Doc. 89, Exhibits 14, 15.) Investors were told that once the entities obtained the licenses, they could expect profits derived from selling or leasing the licenses to major cellular companies. (See Doc. 89, Exhibit 14.)
Janus Spectrum and Alcorn solicited and referred potential investors to the Fundraising Entity Defendants. (Doc. 89, Exhibits 19-23.) Alcorn also emailed and met with investors, answered investor questions, and encouraged the Fundraising Entity Defendants to use him and Maerki to close sales. (Doc. 89, Exhibits 19-22.) Janus Spectrum and Alcorn played an active role in promoting the sale of the membership interests by providing promotional videos for use in soliciting investors using such titles as “Money From Thin Air, ” assisting with drafting marketing materials, providing sample offering documents, training salespeople, participating in investor presentations or meetings for each fundraising entity, answering potential investors questions, and making investor referrals to the fundraising entities. (Doc. 89, Exhibits 16-23, 26, 30.)
The SEC alleges that Alcorn received information from Janus Spectrum’s primary engineer and a Sprint representative, and both he and Maerki received questions and advice from third parties, indicating that the 800 MHz spectrum in the expansion and guard band could not be used by major wireless carriers. (See Doc. 89, Exhibit 12 at 339-41, Exhibit 24, Exhibit 25 at 42-46, and Exhibit 44.) The SEC alleges that Janus Spectrum and Alcorn failed to follow up on this information and continued to market to investors that the spectrum licenses as tremendously valuable to major wireless carriers. (Doc. 105 at 10-13.)
Janus Spectrum sold each application for $40, 000. (Doc. 89, Exhibit 38.) The SEC alleges that Janus Spectrum, Alcorn, and Maerki misrepresented to investors that the majority of the application costs were used to pay overhead and fees associated with the preparation and filing of the applications. (See id.) In reality, the SEC alleges that the cost of preparing and filing an FCC license application was significantly less than the amount Janus Spectrum was charging per application. (See Doc. 89, Exhibits 26-27, 38, 43.)
The SEC alleges that Defendants raised over $12.4 million dollars from hundreds of investors. (Doc. 89 at 2.) The SEC further alleges that Janus Spectrum, Alcorn, and Maerki funneled investor funds to themselves. From May 2012 to October 2014, Janus Spectrum received at least $6, 834, 700 of investor funds from the Fundraising Entity Defendants. (Id.) Of that amount, DAPC received approximately $3.1 million, Alcorn received at least $514, 996, and Maerki received at least $867, 665 of the investor funds. (Id.) According to the SEC, the FCC licenses obtained have not earned any money.
On March 3, 2014, Janus Spectrum filed for relief under Chapter 11 of the United States Bankruptcy Code. (Doc. 89, Exhibit 2.) In re: Janus Spectrum LLC, Case No. 2:14-bk-02682-GBN, is pending in the United States Bankruptcy Court for the District of Arizona. Until July 2015, when the bankruptcy court appointed a Chapter 11 Trustee to administer the case, Janus Spectrum operated its business as debtor-in-possession under the management of Alcorn. (Doc. 89, Exhibit 2.) Alcorn was both the debtor’s responsible person in charge of the bankruptcy and its sole principal. (Id.)
The SEC alleges that Janus Spectrum did not seek bankruptcy court approval to pay any estate funds to Alcorn until September 8, 2014, when it filed a motion to have the estate assume an executory contract with Alcorn, which purportedly justified those payments. (Doc. 89, Exhibit 6 (Bk. Doc. 142).) By September 8, 2014, Alcorn had paid himself $474, 638 in “commissions” from estate funds. (Doc. 89, Exhibit 4 (showing multiple payments to DAPC as “Commissions”). He then paid himself an additional $184, 593 in estate funds between the filing of the motion and the hearing on that motion which took place on January 28, 2015. (Doc. 89 at 2, and Doc. 89, Exhibit 4 (Bk. Docs. 174, 192, 200).) The bankruptcy court denied the motion at the hearing, and Janus Spectrum, three months later, filed another motion requesting that the court assume a new contract to justify the payments. (Doc. 89, Exhibit 28.) While the new motion was pending, Alcorn paid himself an additional $147, 932 from estate assets without the court’s authorization. (Doc. 89 at 2 and Exhibit 4 (Bk. Docs. 230, 267, 278, 311).) In total, from April 2014 to May 2015, and all without court approval, Alcorn paid himself $807, 143 from estate assets. (SEC’s Response to Chapter 11 Trustee’s Motion to Dismiss Bankruptcy Case, In re: Janus Spectrum LLC, No. 2:14-bk-02682-GBN, (Bankr. D. Ariz. Dec. 22, 2015) (Doc. 341). The estate now holds only $324, 092.75. (Doc. 89, Exhibit 3 at 5 (Bk. Doc. 333).)
The bankruptcy court ultimately denied the motion to assume an executory contract with Alcorn based on its finding that there was not enough evidence showing that Alcorn’s retention and compensation benefitted the bankruptcy estate. (Doc. 89, Exhibit 5.) During oral argument on June 25, 2015 relating to the motion, the court denied the motion, it also appointed the Chapter 11 Trustee, finding the operation of the debtor unacceptable. (Id.)
Subsequently, the Chapter 11 Trustee filed a motion to dismiss the bankruptcy proceeding. (Doc. 89, Exhibit 3.) Among the reasons was her concern that the debtor was operating a business which may later be found to be unlawful. (Id.) The Trustee further stated in her motion that she “quickly concluded that in light of the serious SEC allegations that Debtor’s fundamental business model was unlawful and Debtor [was] a knowing or negligent participant in a fraudulent scheme, operating the Debtor was not a viable option” and acknowledged that ...