Securities and Exchange Commission v. GPB Capital Holdings, LLC

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK --------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION, Plaintiff, MEMORANDUM & ORDER 21-CV-583 (MKB) (VMS) v. GPB CAPITAL HOLDINGS, LLC, ASCENDANT CAPITAL, LLC, ASCENDANT ALTERNATIVE STRATEGIES, LLC, DAVID GENTILE, JEFFRY SCHNEIDER, and JEFFREY LASH, Defendants. --------------------------------------------------------------- MARGO K. BRODIE, United States District Judge: Plaintiff Securities and Exchange Commission (the “SEC”) commenced the above- captioned action on February 4, 2021, against Defendants GPB Capital Holdings, LLC (“GPB”), Ascendant Capital, LLC (“Ascendant Capital”), Ascendant Alternative Strategies, LLC (“Ascendant Strategies”), David Gentile, Jeffry Schneider, and Jeffrey Lash (the “Individual Defendants”). (See Compl., Docket Entry No. 1.) The SEC alleged claims (1) against GPB, Ascendant Capital, Ascendant Strategies, Gentile, and Schneider for violations of the Securities Act, 15 U.S.C. § 77q(a); (2) against Gentile, Schneider, and Lash for aiding and abetting violations of the Securities Act, 15 U.S.C. § 77q(a) as controlling persons pursuant to 15 U.S.C. § 77o(b); (3) against GPB, Ascendant Capital, Ascendant Strategies, Gentile, and Schneider for violations of the Exchange Act, 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5; (4) against Gentile, Schneider, and Lash for aiding and abetting violations of 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5 pursuant to 15 U.S.C. § 78t(e); (5) against GPB and Gentile for violations of the Advisers Act, 15 U.S.C. §§ 80b-6(1) and 80b-6(2); (6) against Gentile for aiding and abetting violations of the Advisers Act, 15 U.S.C. §§ 80b-6(1) and 80b-6(2) pursuant to 15 U.S.C. §§ 80b-9(d) and 80b-9(f); and (7) against GPB for violations of the Advisers Act, 15 U.S.C. § 80b-6(4) and 17 C.F.R. § 275.206(4)-2, 15 U.S.C. § 80b-6(4) and 17 C.F.R. § 275.206(4)-7, 15 U.S.C. § 781(g), and 15 U.S.C. § 78u-6 and 17 C.F.R. § 240.21F-17(a).1 (See id.) On February 12, 2021, the Court appointed a monitor, Joseph T. Gardemal III (the “Monitor”), to oversee GPB, (Order Appointing Monitor (the “Order”), Docket Entry No. 23), and on April 14, 2021, on consent of the SEC and GPB, the Court amended the Order (the “Amended Order”), (Am. Order, Docket Entry No. 39). On May 31, 2022, Gentile moved for relief from the Amended Order, and on June 13, 2022, the SEC cross-moved to convert the monitorship into a receivership and impose a litigation injunction.

Currently before the Court is a report and recommendation dated July 28, 2023, from Magistrate Judge Vera M. Scanlon recommending that the Court (1) grant the SEC’s application to convert the monitorship into a receivership and impose a litigation injunction, and (2) deny Gentile’s motion as moot (the “R&R”). (R&R 33, Docket Entry No. 157.) On September 8, 2023, Schneider and Ascendant Capital filed an objection to the R&R, and Gentile filed a separate objection. On September 22, 2023, the SEC and GPB filed responses in support of the R&R, and on September 29, 2023, Gentile, Schneider, and Ascendant Capital filed replies.

For the reasons discussed below, the Court grants the SEC’s motion, adopts the Amended Proposed Order, and denies Gentile’s motion as moot.

I. Background a. Factual and procedural background GPB is a Delaware limited liability company with a principal place of business in New York, New York, which holds approximately $238,637,198 in assets under management. (Compl. ¶ 21.) Ascendant Strategies is a Delaware limited liability company with a principal place of business in New York, New York, and since March of 2017, “offers and sales of the interests in GPB Capital limited partnership funds have been sourced through [Ascendant Strategies].” (Id. ¶ 23.) Ascendant Capital is a Delaware limited liability company with a principal place of business in West Lake Hills, Texas, and serves as the placement agent for GPB. (Id. ¶ 22.) Ascendant Capital is a branch office of Ascendant Strategies. (Id. ¶ 23.)

Gentile is the founder, owner, and former CEO of GPB.2 (Id. ¶ 24.) Schneider is a minority owner of Ascendant Strategies and the sole owner and CEO of Ascendant Capital. (Id. ¶ 25.)

Lash served as managing partner of GPB from 2013 to early 2018 and was responsible for formulating GPB’s automotive retail strategy. (Id. ¶ 26.)

The SEC alleged in the Complaint that between April of 2014 and December of 2018, GPB served as the general partner and/or fund manager in five limited partnership funds: Automotive Portfolio, Holdings I, Holdings II, Waste Management, and Cold Storage (the “Funds”). (Id. ¶ 29.) GPB marketed its investments exclusively through Ascendant Capital, and Ascendant Strategies promoted the investments to dozens of broker-dealers nationwide. (Id. ¶ 31.) Investors in the Funds paid significant fees and expenses, including $79 million in

Starting “as early as August 2015,” instead of paying distributions based on operations of the portfolio companies, GPB used investor funds to cover the shortfall between the profits from operations of the Funds’ portfolio companies and the amounts needed for the distribution payments. (Id. ¶¶ 41–42.) The Individual Defendants3 “manipulated certain of the Funds’ financial statements to give the false appearance that the income [was being] earned by the Funds” rather than inform investors that the Funds were not performing as projected. (Id. ¶ 49.)

In addition, Gentile and Schneider engaged in conflicted transactions, including overpaying for acquisitions to inflate their own acquisition fees and otherwise inflating their own compensation without disclosing these conflicted transactions to investors. (Id. ¶¶ 71–73, 74.) Finally, the SEC alleged that GPB failed to comply with the applicable regulatory requirements, including by failing to deliver audited financial statements, (id. ¶¶ 77–81), failing to register certain of its Funds, (id. ¶¶ 82–83), requiring employees to sign termination agreements that restricted their ability to report misconduct at GPB, (id. ¶¶ 84–91), and retaliating against whistleblowers, (id. ¶¶ 92–111).

On February 12, 2021, the Court appointed the Monitor, and on April 14, 2021, amended the Order. (See Order; Am. Order.) On May 31, 2022, Gentile moved for relief from the Amended Order, arguing that the Monitor had completed his work and therefore the scope of his duties should be narrowed.4 (See Gentile’s Relief Mem. 6, 25.) In support of his motion, Gentile argued that GPB, its interim management, and the Monitor had “steadfastly blocked” his repeated efforts to assist the company and benefit its investors. (Id. at 16.) He contends that he saw “no other option . . . [than] to appoint new managers” in order to “carry out GPB’s business plan, instead of merely liquidating assets.” (Id. at 24.)

On June 13, 2022, the SEC moved for an order to show cause why the monitorship should not be converted into a receivership.5 (SEC’s Mot.) The SEC alleged that on or about

May 27, 2022, Gentile advised GPB’s CEO and sole manager, Rob Chmiel, that he had appointed three new managers. (SEC’s Mem. 5.) Gentile directed GPB’s CEO to cooperate with his newly-installed managers and “seek consensus” with them regarding GPB’s future course. (Id. at 5.) In addition, the SEC alleged that Gentile and the new managers modified GPB’s Operating Agreement6 so that it provided (1) Gentile and the new managers expanded information rights, (2) compensation packages for the new managers of up to $400,000 per year, (3) Gentile with the ability to unilaterally amend the Operating Agreement, (4) mandatory tax distributions to Gentile, (5) exclusive jurisdiction to the Delaware Chancery Court for all actions related to the Operating Agreement, and (6) advancement of expenses. (Id. at 5; see also Gardemal Decl. ¶ 21.) The SEC argued that Gentile’s “distortion of the factual record” in an effort to gain control of GPB “require[d] that a receiver be appointed to take exclusive managerial control over [GPB] and the GPB Funds . . . for the benefit of investors.” (SEC’s Mem. 7.) The SEC also argued that Gentile’s actions constituted a breach of the Amended Order and a separate basis for converting the monitorship to a receivership. (See id. at 5 n.6; SEC’s June 2, 2022 Letter 1–2, Docket Entry No. 85.) In addition to its motion, the SEC filed a proposed order that detailed its proposed terms of the receivership (the “Proposed Order”). (See Proposed Order, annexed to the Decl. of Neal Jacobson as Ex. 1, Docket Entry No. 91-1.)

By report and recommendation dated July 28, 2023, Judge Scanlon recommended that the Court (1) grant the SEC’s application to convert the monitorship into a receivership and impose a litigation injunction, and (2) deny Gentile’s motion as moot. (R&R 33.) Judge Scanlon also directed the SEC to submit a revised order that included certain minor revisions and

On September 8, 2023, Schneider and Ascendant Capital filed an objection to the R&R, and Gentile filed a separate objection (collectively, the “Objectors”). (See Schneider’s Objs.; Gentile’s Objs. to the R&R (“Gentile’s Objs.”), Docket Entry No. 168.) On September 22, 2023, the SEC and GPB filed responses urging the Court to adopt the R&R.7 (See SEC’s Resp. 18; GPB’s Resp. 23.) On September 29, 2023, Gentile, Schneider, and Ascendant Capital filed replies.8 (See Gentile’s Reply; Schneider’s Reply.) b. The R&R Judge Scanlon recommended that the Court grant the SEC’s motion to convert the monitorship to a receivership and impose a litigation injunction, subject to certain clarifications and amendments,9 and deny as moot Gentile’s motion for relief from the Amended Order. (R&R 33.)

In addressing the litigation injunction, Judge Scanlon concluded that it was “warranted in this case.” (Id. at 29.) She found SEC v. Wencke, 622 F.2d 1363, 1371, 1373 (9th Cir. 1980), and Liberte Cap. Grp. v. Capwill, 462 F.3d 543, 551–52 (6th Cir. 2006) “persuasive” as applied to the facts of this case given that “GPB and its [F]unds face a number of complicated litigations providing such clarification and submitted an amended proposed order. (SEC’s Aug. 2, 2023 Letter, Docket Entry No. 161; Am. Proposed Order.) that threaten to delay distributions to investors.” (Id. at 30.) Judge Scanlon determined that a litigation injunction “is necessary to centralize all claims to the assets before this Court” and “prevent potentially disparate actions in different courts that could affect the receivership assets subject to this Court’s jurisdiction and control.” (Id. (quoting SEC’s Mem. 13).)

c. Objections to the R&R Gentile objects to the R&R on the grounds that (1) the legal standard for appointing a receiver sets an “[e]xtremely [h]igh [b]ar” which has not been met by the circumstances of this case, (Gentile’s Objs. 5–20; see also Gentile’s Reply 5–8); (2) the litigation injunction would “run afoul” of rulings made in the Delaware Action and impose an “extreme burden” on the Court, (Gentile’s Objs. 23–24; see also Gentile’s Reply 10–11); and (3) the receiver should not be empowered to waive privilege, (Gentile’s Objs. 24–25.) In support of his argument that the legal standard for appointing a receiver has not been met in this case, Gentile argues that (1) his actions did not cause an “imminent danger” to GPB or its assets, (Gentile’s Objs. 7–9; see also Gentile’s Reply 6–8); (2) the conversion of the monitorship to a receivership “[t]hreatens to [d]isrupt the [s]tatus [q]uo” and will not conserve GPB’s assets, (Gentile’s Objs. 9–11); (3) the appointment of a receiver is not necessary to protect GPB’s investors’ interests and is an improper remedy to reach a distribution plan, (id. at 11–15); (4) there are less drastic alternative remedies available, (id. at 15–16); (5) Judge Scanlon did not properly analyze the likelihood of success on the merits and did not identify any allegedly fraudulent conduct by Gentile, (id. at 16–20); and (6) the probability of harm to Gentile outweighs the harm to GPB and its investors, (id. at 20–21).

Schneider and Ascendant Capital raise the same objections as Gentile with respect to whether the facts of this case warrant converting the monitorship into a receivership under the applicable legal standard. (Schneider’s Objs. 9–18.) Schneider and Ascendant Capital also argue that the Court lacks subject matter jurisdiction to impose a receivership over property that is not the subject of the Complaint. (Id. at 19–21.) Finally, Schneider and Ascendant Capital argue in the alternative that if the Court converts the monitorship into a receivership, the Court should hold an evidentiary hearing to determine whether the SEC has met its burden and should not empower the receiver to waive privilege. (Id. at 21–25; see also Schneider’s Reply 7–8.)

In opposing Gentile’s objections, the SEC argues that they “are contradicted by the record,” (SEC’s Resp. 3; see also GPB’s Resp. 3–10), a record that supports Judge Scanlon’s recommendation that “appointment of a receiver is the appropriate remedy for Gentile’s violations of the Amended Order,” and her independent recommendation that “appointment of a receiver and the imposition of a litigation injunction is warranted here to remedy violations of the federal securities laws,” (SEC’s Resp. 4–18). The SEC also argues that, as Judge Scanlon noted regarding Gentile’s violations of the Amended Order, “[i]t is not clear that Gentile or Schneider even have standing to object to the appointment of a receiver as a remedy for violations of the Amended Order.” (Id. at 2 n.3.) In addition, the SEC argues that Schneider’s jurisdictional argument is without merit because “the SEC clarified that all of the entities that would be subject to the receivership are GPB itself, are affiliates of or are controlled by GPB, and thus are the proper subject of the receivership.” (Id. at 16.) GPB raises many of the same arguments as the SEC and also argues that Judge Scanlon did not err by recommending a receivership without holding an evidentiary hearing. (See GPB’s Resp. 11–22.)

In response to the SEC’s and GPB’s submissions, Gentile reiterates many of his original objections, including that “the SEC has failed to meet its high burden of showing that appoint[ment] of a receivership is warranted,” (Gentile’s Reply 5–6), there was no threat of imminent financial harm to GPB because of Gentile’s appointment of managers, (id. at 6–7), and appointment of a receiver and an imposition of a litigation injunction would be “an extraordinary imposition on this Court’s time and resources,” (id. at 10). In addition, Gentile argues that there is no basis for the assertions by the SEC and GPB that Gentile’s actions “(i) disrupted the operations of GPB and its ability to begin the distribution process by causing ‘uncertainty in [its] corporate authority,’ or (ii) caused the expenditure of ‘substantial resources to determine which actions could be taken with or without manager authority,’” (id. at 7 (quoting SEC’s Resp. 3); see also GPB’s Resp. 6, 8–9, 13–16), and that appointment of a receiver cannot be “predicated on a belief that . . . Gentile may act similarly in the future if one is not appointed,” (Gentile’s Reply 8–10). Schneider and Ascendant Capital similarly reiterate their original objections. (See Schneider’s Reply.)

II. Discussion a. Standard of review A district court reviewing a magistrate judge’s recommended ruling “may accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate judge.” 28 U.S.C. § 636(b)(1). When a party submits a timely objection to a report and recommendation, the district court reviews de novo the parts of the report and recommendation to which the party objected. Id.; see also United States v. Romano, No. 15-CR-992, 2022 WL 402394, at *3 (2d Cir. Feb. 10, 2022) (citing United States v. Romano, 794 F.3d 317, 340 (2d Cir. 2015)). The district court may adopt those portions of the recommended ruling to which no timely objections have been made, provided no clear error is apparent from the face of the record. See S.J. v. N.Y.C. Dep’t of Educ., No. 21-CV-240, 2022 WL 1409578, at *1 n.1 (2d Cir. May 4, 2022) (noting that the district court applied correct legal standard in conducting de novo review of portions of the magistrate judge’s report to which specific objections were made and reviewing portions not objected to for clear error). The clear error standard also applies when a “party makes only conclusory or general objections, or simply reiterates his original arguments.” Miller v. Brightstar Asia, Ltd., 43 F.4th 112, 120 (2d Cir. 2022) (quoting Thomas v. Astrue, 674 F. Supp. 2d 507, 511 (S.D.N.Y. 2009)); Wu v. Good Samaritan Hosp. Med. Ctr., 815 F. App’x 575, 579 (2d Cir. 2020) (“Merely referring the court to previously filed papers or arguments does not constitute an adequate objection under . . . Fed. R. Civ. P. 72(b).” (quoting Mario v. P & C Food Mkts., Inc., 313 F.3d 758, 766 (2d Cir. 2002))); Fed. R. Civ. P. 72(b)(2) (“[A] party may serve and file specific written objections to the [magistrate judge’s] proposed findings and recommendations.”). Where, however, a party “t[akes] issue with a specific legal conclusion in the report and recommendation,” a district court reviews the objected-to portions of the report and recommendation de novo. Miller, 43 F.4th at 120–21 (concluding that the plaintiff’s objection, although revisiting an issue already argued, should have been reviewed de novo where the plaintiff objected to a “specific legal conclusion in the report and recommendation,” and noting that clear error is normally applied “when the objections are nonspecific or ‘merely perfunctory responses . . . argued in an attempt to engage the district court in a rehashing of the same arguments set forth in the original petition’” (quoting Edwards v. Fischer, 414 F. Supp. 2d 342, 346–47 (S.D.N.Y. 2006) (alteration in original))). b. The Court exercises its inherent equitable power to enforce a prior court order to convert the monitorship to a receivership “A court can take ‘any reasonable action . . . to secure compliance [with a court order],’ and the ‘scope of a district court’s equitable powers to remedy past wrongs is broad.’” In re Tronox Inc., 855 F.3d 84, 112 (2d Cir. 2017) (quoting Berger v. Heckler, 771 F.2d 1556, 1568 (2d Cir. 1985) (alteration in original)); Hunt v. Enzo Biochem, Inc., 904 F. Supp. 2d 337, 344 (S.D.N.Y. 2012) (“Courts have inherent power to enforce their orders.”). “[T]he power of a court to make an order carries with it the equal power to punish for a disobedience of that order.”

Hunt, 904 F. Supp. 2d at 344 (quoting In re Debs, 158 U.S. 564, 594 (1895) (alteration in original)); see also In re Lafayette Radio Elec. Corp., 761 F.2d 84, 93 (2d Cir. 1985) (“[A]ncillary jurisdiction is recognized as part of a court’s inherent power to prevent its judgments and orders from being ignored or avoided with impunity.”). “Moreover, courts have inherent power to issue orders designed to correct wrongs committed through its process.” Hunt, 904 F. Supp. 2d at 344 (citing Arkadelphia Milling Co. v. St. Louis Sw. Ry. Co., 249 U.S. 134, 146 (1919)); see also Arkadelphia Milling Co., 249 U.S. at 145–46 (“It is one of the equitable powers, inherent in every court of justice so long as it retains control of the subject-matter and of the parties, to correct that which has been wrongfully done by virtue of its process.”); In re Lafayette Radio Elec. Corp., 761 F.2d at 92–93 (“[I]t is established that a federal court sitting in equity that has jurisdiction to issue a decree necessarily has ancillary and supplemental jurisdiction to enter orders and judgments designed to effectuate that decree.” (first citing Dugas v. Am. Surety Co., 300 U.S. 414 (1937); and then citing Root v. Woolworth, 150 U.S. 401 (1893))). A “court’s choice of how to enforce the order is reviewed for abuse of discretion.” In re Tronox Inc., 855 F.3d at 112 (citing EEOC v. Local 580, Int’l Ass’n of Bridge, Structural & Ornamental Ironworkers, Joint Apprentice-Journeyman Educ. Fund, 925 F.2d 588, 595 (2d Cir. 1991)). i. Gentile’s actions caused GPB to violate the terms of the Amended Order The Court converts the monitorship into a receivership pursuant to the terms of the Amended Order based on GPB’s violations of the order, caused by Gentile’s actions, and GPB’s failure to cure the violations.

Gentile does not dispute that he appointed new managers and altered GPB’s Operating Agreement by, inter alia, giving compensation packages of up to $400,000 per year to these new managers. (See, e.g., Gentile’s Objs. 1 (stating that Gentile’s position has not changed in the time since he “sought to appoint three new managers to GPB . . . and amend certain aspects of the [c]ompany’s Operating Agreement”).) Instead, he argues that “there was nothing illegal, inappropriate or untoward” in his “appointment of additional managers” because (1) the Amended Order does not govern the type of managers he appointed, and (2) the Amended Order did not divest him of his appointment authority and GPB cannot limit his appointment authority without his consent.10 (Gentile’s Opp’n 9, 17.) The Court is not persuaded by either of Gentile’s arguments.

1. There is no meaningful distinction between “management-level professionals” and “managers” Gentile first argues that the Amended Order does not govern the type of managers he appointed, drawing a distinction between “management-level professionals,” as referred to in the Amended Order, and “managers,” as defined in the Operating Agreement. (Id. at 9.) Gentile argues that “[u]nder Delaware law, the ‘managers’ of a limited liability company such as GPB subject to the member’s appointment authority are akin to corporate directors — whose appointment is not subject to approval by the Monitor — and not individuals bearing operational

28, 2023 Letter 1, annexed to the Jeremias Decl. as Ex. 7, Docket Entry No. 168-8 (“Notwithstanding Mr. Gentile’s right as the sole member of GPB to make such lawful modifications and appointments to the Company’s management structure and amendments to the Operating Agreement[,] . . . Mr. Gentile has withdrawn the three Manager appointments and amendments to the Operating Agreement that were made on May 27, 2022.”).) responsibilities, whose appointment is subject to approval by the Monitor.”11 (Id.) Given the plain meaning of the terms of the Operating Agreement and the Amended Order and the purpose of the appointment of the Monitor, the Court is not persuaded that there is any meaningful distinction between the terms “manager” and “management-level professional.”

As a general rule, “words and phrases should be given their plain meaning.” Com.

Lubricants, LLC v. Safety-Kleen Sys., Inc., No. 14-CV-7483, 2017 WL 3432073, at *7 (E.D.N.Y. Aug. 8, 2017) (quoting Orchard Hill Master Fund Ltd. v. SBA Commc’ns Corp., 830 F.3d 152, 157 (2d Cir. 2016)); see also Briscoe v. City of New Haven, No. 09-CV-1642, 2010 WL 2794231, at *4 (D. Conn. July 12, 2010) (noting that, in response to the defendant’s motion for clarification of a prior court order, “the [c]ourt does not believe such clarification is necessary in light of the plain language of the opinion” but nevertheless providing such clarification).

The Operating Agreement uses the defined term “Manager.” (Operating Agreement 3 (defining “Manager” as “the Persons designated by the Members in Article VI, Section 1 hereof to act collectively as the manager of the Company within the meaning of the Delaware Act and shall include all successors appointed pursuant to the provisions of this Agreement”).) Black’s Law Dictionary defines a “manager” as “[s]omeone who administers or supervises the affairs of Gentile cites opinions of his expert — Jack B. Jacobs, former Justice of the Delaware Supreme Court — in support of his conclusion. (See, e.g., Gentile’s Opp’n 9 (citing Expert Opinion of Jack B. Jacobs (“Gentile’s Expert Op.”) ¶ 9, annexed to the Decl. of Daniel J.

Horwitz as Ex. F, Docket Entry No. 102-7 (“A ‘Manager’ of an LLC, analogous to a director of a corporation, is ‘a person who is named as a manager of [the LLC] pursuant to an [LLC] agreement.’” (quoting Del. Limited Liability Act, 6 Del. C. § 101(12)))); id. (citing Gentile’s Expert Op. ¶ 16 (“The Operating Agreement contains no provision that limits or otherwise qualifies or restricts the power legally conferred upon the Members holding a majority of the Distribution Percentages to determine the number of Managers or to fill any newly created Manager positions.”)); id. (citing Gentile’s Expert Op. ¶ 17 (concluding that “Gentile . . . was the person exclusively empowered to increase the number of its Manager positions and to fill the resulting Manager vacancies by written consent, so long as he satisfied the conditions prescribed by the Operating Agreement” and that “Gentile satisfied those conditions”)).) a business, office, or other organization.” Manager, Black’s Law Dictionary (11th ed. 2019).

Notably, the Operating Agreement specifies that “[t]he management of the Company’s business shall be vested in its Managers.” (Operating Agreement 9 (emphasis added); see also Gentile’s Expert Op. ¶ 13.) The Amended Order uses the term “management-level professional” without definition. (Am. Order ¶ 6(e).) Black’s Law Dictionary defines “management” as “[t]he people in an organization who are vested with a certain amount of discretion and independent judgment in managing its affairs” and “top management” as “[a] high level of company management at which major policy decisions and long-term business plans are made.” Management, Black’s Law Dictionary. Thus, the plain meaning of the terms “manager” and “management” — and the Operating Agreement’s own reference that managers are vested with the “management” of the business — support the Court’s finding that there is no textual distinction between the terms “manager” and “management-level professional” as used in the Operating Agreement and the Amended Order, respectively.

Contrary to Gentile’s arguments, Gentile’s expert opinion does not support any textual distinction between the terms “manager” and “management-level professional.” The expert opinion paragraphs Gentile cites either do not address this distinction, (Gentile’s Expert Op. ¶¶ 16–17), or do not support such a distinction, (id. ¶ 9). For example, in paragraph 9, Gentile’s expert recites the definition of a “manager” under Delaware law, but he does not take a position on whether a “manager” falls within the scope of a “management-level professional,” as referred to in the Amended Order. (Id.) In fact, the expert did not rely upon nor review the Amended Order in rendering his opinion. (Id. ¶¶ 5, 8; see also R&R 18.) The expert expressly stated that he “addressed only the application of Delaware law to the facts assumed in this specific setting and [his opinion] is not intended to express any view on matters of federal law or the law of any other state or jurisdiction.” (Gentile’s Expert Op. ¶ 18.; see also id. ¶ 16 (“To the extent the SEC’s contention presents a question of federal law, this Opinion expresses no view.”).) Thus, Gentile’s expert’s conclusions do not support Gentile’s argument.

The purpose of the appointment of the Monitor — to protect investors — further demonstrates that there is no textual distinction between the terms. (See Order 1 (“[T]he Court finds that . . . the appointment of a monitor in this action . . . is necessary and appropriate for the protection of investors.”).) The SEC moved to appoint a monitor12 to, inter alia, prevent Gentile from retaining control over GPB — whether on his own or through others selected by him — at the expense of investors. (SEC’s Emergency Mem. 2 (“Gentile and his handpicked management team should not have unchecked authority over incoming cash that could be used to redeem investors.”); id. (“In short, an independent monitor . . . would provide much-needed assurances to the investors . . . that an unbiased and qualified person who is not beholden to Gentile is vetting any significant transactions and decisions and looking out for the interests of investors.”); see also SEC’s June 2, 2022 Letter 1 (“Gentile’s Motion seeks to curtail the authority and powers of the Court-appointed Monitor and to have the Court retroactively approve Gentile’s installation . . . of himself and his hand-picked team as new management over GPB CH.”); GPB’s Resp. 5 (“The purpose of the Monitorship was thus . . . to protect Investors’ money from the threat posed by Gentile and those associated with him.”).) To protect investors, the Court appointed the Monitor, granting him the authority to review, approve, or disapprove material changes that would fundamentally affect the structure, assets, or liabilities of GPB. (Am. Order ¶ 6; R&R 17; see also Gentile’s Opp’n 8 (“The Monitor Order extends certain powers to the

Monitor, principally authorizing him to review, approve, or disapprove certain material actions by the GPB Businesses.”)).

Specifically, the Amended Order gives the Monitor “authority to approve or disapprove . . . any material change to compensation of any executive officer, affiliate, or related party of GPB, . . . [and] any retention by GPB . . . of any management-level professional or person. (Am. Order ¶ 6(d)–(e).) Paragraphs 6(d) and 6(e) are the only subparagraphs addressing the Monitor’s authority regarding leadership of GPB and their compensation. (Id. ¶ 6.) Pursuant to Gentile’s argument, the Monitor would only have authority to approve or disapprove individuals “bearing operational responsibilities,” but not any GPB leadership (i.e., corporate directors).13 (Gentile’s Opp’n 9.) To accept Gentile’s argument would require the Court to ignore the purpose of the Monitor and the repeated concerns raised by the SEC that Gentile would retain control of GPB through GPB’s leadership at the expense of investors. (SEC’s Emergency Mem. 2; see also SEC’s June 2, 2022 Letter 1.) In view of the fact that paragraphs 6(d) and 6(e) are the only references to the Monitor’s approval authority over GPB leadership, the Court finds that the Monitor must be able to exercise authority over key GPB leadership positions to prevent “Gentile and his handpicked management team [from having] unchecked authority over incoming cash that could be used to redeem investors.” (SEC’s Emergency Mem.

2.) As Judge Scanlon explained:

In order for the Monitor to exercise sufficient control to support the legal and operational integrity of GPB, it is necessary and consistent with the Monitor’s overall authority to bring within such authority oversight over all key leadership positions. To permit the dilution of centralized authority without the Monitor’s approval would be inconsistent with the overall structure of the Monitor’s powers and responsibilities. Mr. Gentile’s view that the voting authority of the sole manager could be diluted to one quarter of its current voting power, . . . without the Monitor’s approval is inconsistent with the stewardship and oversight responsibilities required of the Monitor by paragraph 6 and would undermine the entire Amended Order. (R&R 17–18.) Thus, based on the plain meaning of the terms of the Operating Agreement and the Amended Order and the purpose of the appointment of the Monitor, the Court finds that there is no meaningful distinction between “management-level professionals” and “managers.”

2. The Amended Order, not GPB, places limitations on Gentile’s appointment and amendment rights Gentile also argues that he “was duly authorized under Delaware law and the Operating Agreement to appoint additional managers and . . . [GPB] cannot limit — even in its consent to the [Amended] Order — those rights.” (Gentile’s Opp’n 17; see also id. at 9 (“[W]ithout Mr. Gentile’s consent, [GPB] has no authority to limit his appointment rights.”).) Gentile is mistaken. The Court, not GPB, has placed limits on Gentile’s right to appoint managers. As discussed above, the Amended Order provides the Monitor with the authority to review, approve, or disapprove GPB’s retention of any “management-level professional,” including the three managers Gentile appointed. (See supra Section II.b.i.) Whether Gentile was permitted to appoint managers under the Operating Agreement, as Gentile’s expert argues, is not the issue.

The issue is whether any such appointed managers may be retained by GPB without the Monitor’s approval. (R&R 16 (“The question is not whether Mr. Gentile can appoint managers under the [Operating] Agreement, but, rather, is whether any such managers may be retained by GPB; without the Monitor’s approval, the answer is no.”).) In May of 2022, Gentile appointed the new managers and instructed GPB’s CEO and sole manager to “cease any and all actions taken or to be taken in the capacity as [m]anager, and [to] seek consensus with [the new managers] regarding the course of GPB and any actions to be taken by the [new m]anagers,” (Gentile’s May 27, 2022 Letter 1, annexed to Gentile’s Opp’n as Ex. B, Docket Entry No. 102-3; see also SEC’s Mem. 5; GPB’s Resp. 6–7), and the new managers immediately exercised their managerial powers by modifying the Operating Agreement upon appointment, (SEC’s Mem. 5; GPB’s Resp. 6–7), all without the Monitor’s approval. As discussed above, the specific terms of the Amended Order and the purpose of the appointment of the Monitor do not support Gentile’s conclusion that he can retain managers without the approval of the Monitor. Therefore, the Court finds that Gentile’s actions caused GPB to violate the Amended Order when he appointed the new managers, instructed GPB’s CEO to recognize and work with the managers, and the new managers modified the Operating Agreement, all without the approval of the Monitor.

In addition, Gentile amended the Operating Agreement to, inter alia, provide compensation packages of up to $400,000 to each new purported manager. (SEC’s Mem. 5; GPB’s Resp. 1–2; see also Gardemal Decl. ¶ 21(b) (“GPB CH’s new managers would now be entitled to be paid between $10,000 and $35,000 per month, . . . so each of the three managers could be paid over $400,000 per year.”).) Under the Amended Order, the Monitor has approval authority over “any material change to compensation of any executive officer, affiliate, or related party of GPB.” (Am. Order ¶ 6(d).) Black’s Law Dictionary defines “material” as “significant” or “essential.” Material, Black’s Law Dictionary. The parties do not dispute that the creation of an entirely new compensation package qualifies as a “material change” in compensation, requiring approval by the Monitor under paragraph 6(d). Thus, the Court finds that Gentile’s actions caused GPB to violate the Amended Order when he and the three new managers amended the Operating Agreement to provide each new manager with a compensation package without the Monitor’s approval. ii. GPB failed to cure the violations caused by Gentile’s actions within ten business days of being notified of the violations Without the approval of the Monitor, Gentile’s actions caused GPB to violate the Amended Order. Under the Amended Order: 20. If the Monitor believes GPB is in some way not materially in compliance with the terms of this Order, upon notice of noncompliance to GPB, GPB shall have 10 business days in which to cure any claimed material noncompliance (the “Cure Period”).

21. If GPB does not comply with the above provisions and does not make requested changes within the Cure Period, upon motion of the SEC resulting in a Court Order, the Monitorship shall convert to a receivership. GPB shall be afforded an opportunity to oppose any such application by the SEC before conversion to a receivership. (Am. Order ¶¶ 20, 21.) Pursuant to the terms of the Amended Order, GPB’s violations would trigger the conversion of the monitorship to a receivership, upon the SEC’s motion, unless cured within ten days of being provided notice of such violations. (Id. ¶ 21.) The parties do not dispute that GPB was provided sufficient notice.14 (Monitor’s May 31, 2022 Letter, as annexed Gentile admits that GPB “was put on notice of a purported breach of the Amended Monitor Order by the Monitor and given ten business days to cure” and that he was “copied on the Monitor’s notice to GPB.” (Gentile’s Reply 3.) He nevertheless argues that he “was never given notice or an opportunity to cure by either the Monitor or the Magistrate [Judge].” (Id.) He further argues that he “was neither subject to nor could avail himself of the [Amended] Order’s provisions, thus vitiating any ability for him to ‘cure’ under its provisions,” pursuant to Judge Scanlon’s April 28, 2022 Order (the “April 2022 Order”). (Id.) Gentile misunderstands the April 2022 Order. Under the April 2022 Order, Judge Scanlon ruled that neither Gentile nor any non-party to the Amended Order could avail himself of the mediation provision “as it was drafted to provide only the entity that is actually being monitored, GPB, with a method for raising disputes regarding its oversight.” (Apr. 2022 Order.)

The April 2022 Order does not prevent Gentile from taking steps to remedy a violation that he caused by his unilateral action. The fact that Gentile cured his violations approximately one month after Judge Scanlon issued the R&R further undermines Gentile’s argument. (See Gentile’s Objs. 12 (“As of August 28, 2023, Mr. Gentile informed GPB, the Monitor, and the to Gentile’s Opp’n as Ex. E, Docket Entry No. 102-6.) At the time Judge Scanlon issued the R&R, there was no dispute that Gentile did not take any curative action within ten days of notification of the violations,15 although Gentile “alone was able to do so.” (GPB’s Resp. 7.)

Accordingly, GPB did not cure the violations caused by Gentile within ten days of being notified of such violations. Because of GPB’s violations and failure to cure, the Court has authority to convert the monitorship to a receivership pursuant to paragraph 21 of the Amended Order, and does so for the reasons discussed. c. The Court also exercises its statutory and equitable power to convert the monitorship to a receivership “In any action or proceeding brought or instituted by the Commission under any provision of the securities laws, the Commission may seek, and any Federal court may grant, any equitable relief that may be appropriate or necessary for the benefit of investors.” 15 U.S.C. § 78u(d)(5); see also SEC v. Byers, 609 F.3d 87, 92 (2d Cir. 2010) (“There is no question that district courts may appoint receivers as part of their broad power to remedy violations of federal securities laws.”); Eberhard v. Marcu, 530 F.3d 122, 131 (2d Cir. 2008) (“District courts possess broad power to remedy violations of federal securities laws.” (citing SEC v. Manor Nursing Ctrs., 458 F.2d 1082, 1103 (2d Cir. 1972), abrogated on other grounds by SEC v. Ahmed, 72

SEC that he had withdrawn the Appointments and Amendments.”); SEC’s Resp. 2 n.2; GPB’s Resp. 10–11.)

F.4th 379 (2d Cir. 2023))); SEC v. Friedlander, 49 F. App’x 358, 360 (2d Cir. 2002) (affirming the district court’s appointment of a receiver where the court “carefully considered the costs of a receiver, and weighed the equities with care”); SEC v. Am. Bd. of Trade, Inc., 830 F.2d 431, 436 (2d Cir. 1987) (noting that although “‘the appointment of . . . receivers[] should not follow requests by the SEC as a matter of course,’ a district court’s decision to appoint a . . . receiver may be disturbed on appeal only if the district court has abused its discretion” (quoting Manor Nursing Ctrs., Inc., 458 F.2d at 1105)); Manor Nursing Ctrs., 458 F.2d at 1105 (concluding that the district court “appropriate[ly] exercise[d] . . . its equity powers” to appoint a trustee and noting that “we repeatedly have upheld the appointment of trustees or receivers to effectuate the purposes of the federal securities laws” (citations omitted)); Ferguson v. Tabah, 288 F.2d 665, 673–74 (2d Cir. 1961) (affirming the district court’s appointment of a receiver since although receivership is a “drastic remedy,” it was “within the discretion of the court”); see also Zacarias v. Stanford Int’l Bank, Ltd., 945 F.3d 883, 895 (5th Cir. 2019) (“Exercising their jurisdiction under the securities laws, federal district courts can utilize a receivership where a troubled entity, bedeviled by their violation, will be unable to satisfy all of its liabilities to similarly situated investors in its securities.” (citing Capwill, 462 F.3d at 552–53)). “Although neither the Securities Act of 1933 nor the Securities Exchange Act of 1934 expressly vests the power to appoint receivers in the district courts, ‘courts have consistently held that such power exists, where necessary to prevent the dissipation of a defendant’s assets pending further action by the court.’” SEC v. Malek, 397 F. App’x 711, 713 (2d Cir. 2010) (quoting Am. Bd. of Trade, 830 F.2d at 436); Eberhard, 530 F.3d at 131 (same); see also Lankenau v. Coggeshall & Hicks, 350 F.2d 61, 63 (2d Cir. 1965) (“In appointing the receiver, the district court was . . . exercising its exclusive federal jurisdiction for the purpose of enforcing the Securities Exchange Act of 1934.

While it is true that the Act does not explicitly provide for appointment of receivers, there is little reason to doubt that equitable power to do so exists.” (internal citation omitted)).

“Receivers appointed at the SEC’s request are equipped with a variety of tools ‘to help preserve the status quo while the various transactions [are] unraveled . . . to obtain an accurate picture of what transpired.’” Eberhard, 530 F.3d at 131 (quoting Manor Nursing Ctrs., 458 F.2d at 1103 (alterations in original)). “[A] federal receiver is appointed, under the district court’s broad equitable discretion, ‘to restore to a defrauded entity or defrauded persons that which was fraudulently diverted from its or their custody and control.’” Malek, 397 F. App’x at 713 (quoting SEC v. Shiv, 379 F. Supp. 2d 609, 618 (S.D.N.Y. 2005)). Their responsibilities include, inter alia, “marshal[ing] the assets” of the defendant, “prevent[ing] the dissipation of [the] defendant’s assets pending further action by the court,” and, where the entity in receivership is a corporation, “report[ing] to the SEC and conven[ing] shareholder meetings on [the corporation’s] behalf.” Eberhard, 530 F.3d at 131–32 (first quoting Esbitt v. Dutch-Am. Mercantile Corp., 335 F.2d 141, 143 (2d Cir. 1964); then quoting Am. Bd. of Trade, 830 F.2d at 436; and then citing SEC v. Koenig, 469 F.2d 198, 202 (2d Cir. 1972) (third alteration in original)); see also Manor Nursing Ctrs., 458 F.2d at 1106 (affirming “the district court’s decision temporarily to freeze appellants’ assets”); Esbitt, 335 F.2d at 143 (noting that “[a] primary purpose of appointing a receiver is to conserve the existing estate”). “[T]he power of a securities receiver is not without limits.” Eberhard, 530 F.3d at 132. The Second Circuit has “expressed strong reservations as to the propriety of allowing a receiver to liquidate [an estate],” id. (quoting Lankenau, 350 F.2d at 63 (alteration in original)), has found that “receivership should not be used as an alternative to bankruptcy,” and has “disapproved of district courts using receivership as a means to process claim forms and set priorities among various classes of creditors,” see id. (citing Am. Bd. of Trade, 830 F.2d at 437–38). “‘[T]he appointment of a receiver is considered to be an extraordinary remedy,’ and . . . should be employed cautiously and granted only when clearly necessary to protect plaintiff’s interest in the property.” Rosen v. Siegel, 106 F.3d 28, 34 (2d Cir. 1997) (quoting Citibank, N.A. v. Nyland (CF8) Ltd., 839 F.2d 93, 97 (2d Cir. 1988) (alterations in original)). Even so, “[a] decision to appoint or not to appoint a receiver is committed to the sound discretion of the trial court.” Varsames v. Palazzolo, 96 F. Supp. 2d 361, 365 (S.D.N.Y. 2000) (citing Rosen, 106 F.3d at 34). In determining whether a receiver should be appointed, courts in this Circuit routinely consider the factors set forth in Charles A. Wright and Arthur R. Miller’s treatise Federal Practice and Procedure, including: [F]raudulent conduct on the part of defendant; the imminent danger of the property being lost, concealed, injured, diminished in value, or squandered; the inadequacy of the available legal remedies; the probability that harm to plaintiff by denial of the appointment would be greater than the injury to the parties opposing appointment; and, in more general terms, plaintiff’s probable success in the action and the possibility of irreparable injury to his interests in the property.

Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 2983 (1999) (the “Wright and Miller factors”); Varsames, 96 F. Supp. 2d at 365 (quoting the Wright and Miller factors); see also Carbone v. Martin, No. 18-CV-3509, 2023 WL 2477682, at *7 (E.D.N.Y. Mar.

13, 2023) (quoting Varsames, 96 F. Supp. 2d at 365); U.S. Bank Nat’l Ass’n v. Nesbitt Bellevue Prop. LLC, 859 F. Supp. 2d 602, 610 (S.D.N.Y. 2012) (quoting Varsames, 96 F. Supp. 2d at 365). A court reviews these factors by a preponderance of the evidence.16 The Objectors rely on two 2020 cases, Meisels v. Meisels, No. 19-CV-4767, 2020 WL 7000903 (E.D.N.Y. May 21, 2020), report and recommendation adopted by 2020 WL 6110827 (Oct. 16, 2020), and JDP Mortg. LLC v. Gosman, No. 19-CV-5968, 2020 WL 8082390 The Court finds that this case is “extraordinary” under the Wright and Miller factors and Second Circuit caselaw and independently converts the monitorship into a receivership pursuant to the Court’s statutory and equitable powers to enforce federal securities laws.17 See 15 U.S.C. § 78u(d)(5); Byers, 609 F.3d at 91; Eberhard, 530 F.3d at 131.

(E.D.N.Y. Dec. 21, 2020), report and recommendation adopted by 2021 WL 66290 (Jan. 7, 2021), to argue that the appropriate standard by which the Court should consider these factors is “clear and convincing evidence.” (Gentile’s Objs. 5; Schneider’s Objs. 9–10.) These cases rely, in part, on In re Oakland Lumber Co., a 1909 Second Circuit case reviewing an ex parte order appointing a receiver over an alleged bankrupt corporation. 174 F. 634 (2d Cir. 1909). In Oakland Lumber Co., the district court appointed a receiver based on the plaintiff’s moving papers and “without notice to the bankrupt [corporation] or the assignee.” Id. at 635. The Second Circuit vacated the appointment, explaining: The power to take from a man his property, without giving him an opportunity to be heard, is both arbitrary and drastic and should not be exercised except in the clearest cases. Congress recognized the necessity for caution by limiting the appointment of receivers to cases where it is “absolutely necessary” for the preservation of the estate. In other words the reason for such an interference with the rights of property must be clear, positive and certain. . . . [I]n no case should a remedy so far reaching in its effects be resorted to except upon clear and convincing proof. Id. at 636–37 (quoting Act of July 1, 1898, 30 Stat. 545). The statutory authority to appoint a receiver in Oakland Lumber Co. stemmed from the 1898 Bankruptcy Act, which was repealed in 1978, see Pub. L. No. 95-598, tit. IV, 92 Stat. 2682; id. at § 105(b), 92 Stat. 2555 (“[A] bankruptcy court may not appoint a receiver in a case under this title.”), and not federal securities laws, Oakland Lumber Co., 174 F. at 636. The Objectors have provided no arguments or caselaw to support application of the “clear and convincing” standard in this context. Rather, the appointment of a receiver “lies in the discretion of the court” and “the form and quantum of evidence required on a motion requesting the appointment of a receiver is a matter of judicial discretion.” Wright & Miller, Federal Practice and Procedure § 2983.

Second, the Court finds that there is an imminent risk that the assets of GPB will diminish in value — harming investors — based on Gentile’s prior conduct. “[T]he existence of any imminent danger of the diminution of the value of the propert[y] . . . is a critical factor in the the Court declines to consider Schneider’s belated argument. See, e.g., Gov. Emps. Ins. Co. v. Grody, No. 22-CV-6187, 2023 WL 6307340, at *2 (E.D.N.Y. Sept. 28, 2023) (“Even on de novo review, . . . the Court ‘will ordinarily refuse to consider arguments, case law and/or evidentiary material which could have been, but [were] not, presented to the Magistrate Judge in the first instance.’” (quoting Haynes v. Quality Mkts., No. 02-CV-250, 2003 WL 23610575, at *3 (E.D.N.Y. Sept. 22, 2003))); Saada v. Golan, No. 18-CV-5292, 2023 WL 1993538, at *2 (E.D.N.Y. Feb. 13, 2023) (stating the same).

¶ 14.)

Gentile argues that Judge Scanlon’s finding that there is “uncertainty” regarding “GPB’s position” is factually untrue because the “Monitor is currently supervising over $1 billion of GPB’s cash equivalents” and the “April 2023 Monitor Report also reported realized values of 195%, 213%, and 134% as a result of various mergers & acquisitions and other transactions.” (Gentile’s Objs. 7–8; see also April 2023 Monitor Report 24, 25, 27, Docket Entry No. 137.) As GPB clarifies, the three transactions cited in the April 2023 Monitor Report all pre-date Gentile’s appointment of the new managers and amendment of the Operating Agreement. (GPB’s Resp.

15 (“But what Gentile conveniently leaves out is that all three of the transactions cited in the Monitor’s Report pre-date his 2022 Memorial Day weekend takeover attempt; GPB Capital sold the three cited-to Portfolio Companies in November 2021, December 2021, and April 2022, respectively.” (emphasis in original)).)

The Court finds that, given Gentile’s previous (1) appointment of new managers, whose collective compensation could reach over $1.2 million annually to be paid by GPB, and (2) attempt to reinstate three terminated executives of a company directly overseen by GPB, whose collective compensation amounts to nearly $1.7 million annually to be paid by GPB, Gentile’s actions constituted a real and imminent threat of financial harm to GPB and its investors. (See Gardemal Decl. ¶ 21(b); Gardemal Suppl. Decl. ¶ 14; Hayes’ June 30, 2022 Letter 2; R&R 23, 26.)

Third, the Court finds that legal remedies are inadequate. Because Gentile’s actions caused GPB to violate the Amended Order, the Court is not persuaded that “a further amended monitor order . . . explicitly defin[ing] the limits of Mr. Gentile’s actions vis-à-vis GPB in his capacity as the owner and sole Member of GPB . . . [would] eliminat[e] any future action the SEC or Monitor may deem detrimental to GPB.” (Gentile’s Objs. 16.) In addition, it is unclear whether a financial penalty, such as one “under penalty of contempt of court” as suggested by Schneider, (see Schneider’s Reply 1), against Gentile would be an adequate, alternative legal remedy.

Fourth, the Court finds that the probability of harm to the SEC, GPB, and GPB’s investors by denial of the receivership would be greater than the injury to the Objectors. Judge Scanlon found that the SEC and, by extension, GPB’s investors, will obtain the benefit of having a receiver preserve the status quo, conserve the existing estate, prevent the dissipation of assets, and “protect the investors by preventing Mr. Gentile and the new purported managers from undermining GPB’s finances through improper access to funds and information,” (R&R 23–24), concluding that “[t]he investors’ and GPB’s interests outweigh Mr. Gentile’s interests,” (id. at 24). The Objectors argue that the “R&R failed to weigh the balance of harms” by ignoring that their constitutional rights would be violated if a receiver is appointed and a litigation injunction granted, because they are entitled to have the Delaware state court orders receive full faith and credit. (Gentile’s Objs. 20–22; Schneider’s Objs. 13–14; Schneider’s Reply 3–4.) Because the reimbursement procedures set forth in the Delaware state court orders are exempt from the proposed litigation injunction, (see infra Section II.d), any harm to the Objectors is outweighed by the harm to the SEC, GPB, and GPB’s investors.

Fifth, the Court finds that the SEC’s probability of success is unclear. The Objectors are correct that an indictment is “merely a statement of charges and not itself evidence.” (Gentile’s Objs. 19 (citing 1-29 Leonard B. Sand, Modern Federal Jury Instructions-Criminal, P. 3.01[1], Instruction 3-1).) But see Gabelli, 653 F.3d at 61 (reversing the district court’s dismissal of the SEC’s request for injunctive relief “since the complaint alleges that for almost three years [defendants] intentionally aided and abetted Advisers Act violations and since ‘fraudulent past conduct gives rise to an inference of a reasonable expectation of continued violations’” (quoting Manor Nursing Ctrs., 458 F.2d at 1100)); Tabah, 288 F.2d at 675 (noting that while the arrest of virtually all high company officials on fraud allegations “was not new ‘evidence’ of misdeeds, it did present a situation where there was a possible complete breakdown of the [company’s] high command,” a threat which the district judge found “sufficient to tip the balance in favor of a receiver”). Ultimately, at this time, the Court does not have enough information to determine the SEC’s probability of success in this action. None of the individual Wright and Miller factors, however, is dispositive. See, e.g., SEC v. Amerindo Inv. Advisors, Inc., No. 05-CV-5231, 2013 WL 1385013, at *13 (S.D.N.Y. Mar. 11, 2013) (appointing a receiver based on evidence of only three of the five Wright and Miller factors), aff’d, 639 F. App’x 752 (2d Cir. 2016).

Under these circumstances, the Court finds it appropriate to exercise its statutory and equitable power to convert the monitorship to a receivership. GPB has been under monitorship since February of 2021, during which time its more than 17,000 investors nationwide, approximately 4,000 of whom are seniors, have been unable to access their funds. (See SEC’s Mem. 3; SEC’s Resp. 1.) Accordingly, given the gravity of the allegations and that one of the Individual Defendants has already pled guilty to criminal charges, that GPB’s investors have been unable to access their funds for more than thirty-four months, and that GPB’s management and Gentile have proven unable to agree or work together to implement GPB’s future strategy, the Court exercises its equitable authority to convert the monitorship into a receivership. See, e.g., Friedlander, 49 F. App’x at 360 (affirming the district court’s appointment of a receiver where the court gave the manager of a hedge fund accused of fraud “the benefit of the doubt initially, and only . . . appoint[ed] a receiver after he failed to act in accordance with commitments he had made to the court”); Amerindo, 2013 WL 1385013, at *13 (appointing a receiver “[b]ased on the [i]ndividual [d]efendants’ extensive fraudulent conduct, the risk that the value of restrained assets will irreversibly dissipate, and the risk of harm to the SEC, the individual victims, and other investors”); see also 15 U.S.C. § 78u(d)(5); Eberhard, 530 F.3d at 131; Zacarias, 945 F.3d at 895. The Court does not exercise its discretion to convert the monitorship to a receivership lightly, but, given the extreme circumstances of this case, it finds that the requested relief is merited.19 See, e.g., Tabah, 288 F.2d at 674 (affirming the district court’s appointment of a receiver despite appointment of a receiver being “a drastic remedy usually imposed only where no lesser relief will be effective”). d. Imposition of a litigation injunction is appropriate based on the facts of this case “The Second Circuit has recognized that an anti-litigation injunction or litigation stay in a receiver order is a valid exercise of a district court’s equitable powers.” SEC. v. Callahan, 2 F. Supp. 3d 427, 436 (E.D.N.Y. 2014) (quoting SEC v. Illarramendi, No. 11-CV-78, 2012 WL 234016, at *4 (D. Conn. Jan. 25, 2012)); see also Byers, 609 F.3d at 92. Although district courts have “broad equitable powers in the context of an SEC receivership,” the power to impose a litigation injunction is one “to be exercised cautiously.” Byers, 609 F.3d at 91 (noting that “the authority of a district court to issue an order staying a non-party from bringing litigation derived from ‘the inherent power of a court of equity to fashion effective relief’” (quoting Wencke, 622

F.2d at 1369)). “An anti-litigation injunction is simply one of the tools available to courts to help further the goals of the receivership.” Byers, 609 F.3d at 92; SEC v. Ahmed, No. 15-CV- 675, 2022 WL 7508962, at *2 (D. Conn. Oct. 13, 2022) (same). “While such injunctions are to be used sparingly, there are situations in which they are entirely appropriate.” Byers, 609 F.3d at 92. One such situation is where a receiver must “maintain maximum control over the assets” of a large complex entity to “prevent[] small groups of creditors from placing some entities into bankruptcy, thereby removing assets from the receivership estate to the potential detriment of all.” Byers, 609 F.3d at 93; see also SEC v. Morgan, No. 19-CV-661, 2019 WL 2385395, at *12 (W.D.N.Y. June 5, 2019) (concluding that a litigation injunction was warranted “to protect against the potential for disparate actions in other courts that could ultimately have a negative impact on the assets” in the receivership estate); United States v. JHW Greentree Cap., L.P., No. 12-CV-116, 2014 WL 2608516, at *3–4 (D. Conn. June 11, 2014) (noting that “[a] receiver must be given a chance to do the important job of marshaling and untangling a company’s assets without being forced into court by every investor or claimant” (quoting United States v. Acorn Tech. Fund, L.P., 429 F.3d 438, 443 (3d Cir. 2005))).

Based on the facts of this case, the Court concludes that the imposition of a litigation injunction is appropriate, consistent with Judge Scanlon’s finding. (R&R 30). The Second Circuit has noted that “while [litigation] injunctions are to be used sparingly, there are situations in which they are entirely appropriate.” Byers, 609 F.3d at 92. Litigation injunctions “prevent[] small groups of creditors from placing some entities into bankruptcy, thereby removing assets from the receivership estate to the potential detriment of all.” Id. at 93.

The Amended Proposed Order contains a list of twenty-two litigations involving the receivership entities or their assets, (see Schedule 3 of Am. Proposed Order), and the Monitor notes that these “pending litigation proceedings, including class action litigation . . . will require potential reserves, and there are limited funds available for these purposes,” (Gardemal Decl.

¶ 29). Such litigations threaten to “remov[e] assets from the receivership estate to the potential detriment of all.” Byers, 609 F.3d at 93. Accordingly, keeping in mind the Second Circuit’s caution that such injunctions are to be applied “sparingly,” id. at 92, the Court nevertheless finds that the facts of this case warrant the imposition of a litigation injunction. See Morgan, 2019 WL 2385395, at *1, *12 (imposing a litigation injunction in a securities fraud case involving $80 million in investor funds); Callahan, 2 F. Supp. 3d at 439–40 (declining to lift a litigation injunction contained in a receiver order imposed pursuant to a securities fraud action involving a Ponzi scheme); see also Zacarias, 945 F.3d at 897, 902–03 (affirming the district court’s imposition of a litigation injunction with respect to a receiver’s settlement of a $5 billion Ponzi scheme and noting that a court’s powers in managing a receivership “can include . . . stays of claims in other courts against the receivership”).

The Objectors do not provide sufficient support for their argument that a litigation injunction will run afoul of orders in the Delaware Action. In support of his objections, Schneider provides the Court with copies of the judgments and orders in the Delaware Action, including the order granting summary judgment and the two advancement orders. (See Colton Decl. ¶ 10; Final Order Granting Summ. J.; Fitracks Order; Judicial Action Form.) Schneider contends that since April 20, 2022, he has been “duly submitting invoices for fees and expenses pursuant to the [Fitracks Order]” which “GPB has been reviewing,” and that “[t]he procedures set forth in the [Fitracks Order] have been working smoothly since April 2022.” (Colton Decl.

¶ 11.) Gentile makes the same arguments as Schneider pursuant to his advancement order from the Delaware Chancery Court.20 (Stipulation and Advancement Order.)

Schneider and Gentile do not indicate why their interests will not be protected by the terms of the Amended Proposed Order. The Amended Proposed Order does not prohibit the payment of Schneider’s legal expenses pursuant to the Fitracks Order or Gentile’s legal expenses pursuant to the Stipulation and Advancement Order because it permits the receiver to dissipate assets by payments ordered by the Court. (R&R 32; Am. Proposed Order ¶ 6(g) (authorizing payment without regard to a cap and without prior court order for “all other costs and expenses authorized by this Court pursuant to this Order or any other order of this Court”).) The terms of the Amended Proposed Order do not pose any bar to Schneider’s and Gentile’s rights under their advancement orders, since the receiver is required to comply with his legal obligations, including compliance of the existing orders of other courts.21 Accordingly, the Court finds that the objections by Gentile, Schneider, and Ascendant Capital to the imposition of a litigation injunction are without merit.

e. The Court adopts the Amended Proposed Order in its entirety The Objectors also argue that the Court should not adopt paragraph 28 of the Amended Proposed Order, which transfers to the receiver “[a]ny and all attorney-client privilege, work product protection, common interest or joint defense privilege, or other privilege or immunity (collectively, the ‘Privileges’) of the [r]eceivership [e]ntities” and empowers the receiver with

The Objectors do not provide legal support for their argument that (1) the power to waive GPB’s privileges is “unnecessary to address the alleged basis for the receiver, i.e., to preserve assets,”22 (Schneider’s Objs. 21; see also Gentile’s Objs. 24–25; Schneider’s Reply 9), and (2) “the only apparent basis for the SEC’s request is to achieve a tactical advantage in this case and the companion Criminal Action,” (Schneider’s Objs. 24–25; see also Schneider’s Reply 9).

Although a court will grant a receiver the power to waive privilege “only if there is some valid reason why the [r]eceiver needs to control [the corporation’s] attorney-client privilege,” Standard Forex, 882 F. Supp. at 43, courts have upheld privilege waivers by receivers who were performing their duties, Ryan, 747 F. Supp. 2d at 368 (finding that the receiver would have the power to waive privilege since he “was directed by the [p]reliminary [i]njunction to collect all business records” and “is within his rights to ask[] for these documents and data”); Shapiro, 2007 WL 2914218, at *6 & n.5 (rejecting the defendant’s argument that the receiver does not have the power to waive privilege since the order appointing the receiver directed him to “preserve the status quo” because, if interpreted literally, “the [r]eceiver would have been unable to act on most of his enumerated powers,” thus allowing the defendant and former officers “to ‘use the privilege as a shield’ to protect themselves from having to disgorge any ill-gotten gains” (emphasis omitted) (citing Weintraub, 471 U.S. at 353–54)); Standard Forex, 882 F. Supp. at 43 & n.3 (affirming the magistrate judge’s order to a corporation’s former attorney to turn over privileged pre-litigation files to the corporation’s receiver because, inter alia, “the broad scope of its order appointing the [r]eceiver evidence[d] an intent to include the attorney-client privilege with it”).

The Amended Proposed Order authorizes the receiver to, inter alia, ascertain the financial condition of the receivership entities and assets, oversee and manage the receivership

Schneider argues that the receiver cannot waive GPB’s common interest privilege because “[a] common-interest privilege ‘cannot be waived without the consent of all parties to the privilege.’” (Schneider’s Objs. 22 (quoting United States v. Napout, No. 15-CR-252, 2017 WL 980323, at *2 (E.D.N.Y. Mar. 10, 2017)).) However, because GPB is the holder of the common interest privilege with respect to its own privileged communications, it is free to exercise or waive its rights as it chooses. See Agnello, 135 F. Supp. 2d at 383 (“All that [the co- defendants] would be entitled to do, to the extent that a joint defense privilege did attach to the conversations, is stop [the privilege waiving defendant] from directly or indirectly revealing the privileged communications of other participants.” (first citing 2 Christopher B. Mueller & Laird C. Kirkpatrick, Federal Evidence § 188 (2d ed. 1994); and then citing In re Grand Jury Subpoena Duces Tecum, 112 F.3d at 922)). To the extent the receiver seeks to waive privileged conversations of others, the receiver is required to “comply with applicable law in the exercise of such privileges or immunities.” (R&R 33.) See, e.g., Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 319 F.R.D. 100, 110 (S.D.N.Y. 2017) (“[W]hen two or more clients are jointly represented by a single law firm concerning a matter of common interest, one of them cannot unilaterally waive the privilege that attaches to communications that they jointly made for the purpose of seeking legal advice.” (first citing Lugosch v. Congel, 219 F.R.D. 220, 238 (N.D.N.Y. 2003); and then citing Johnson Matthey, Inc. v. Rsch. Corp., No. 01-CV-8115, 2002 WL 1728566, at *6 (S.D.N.Y. July 24, 2002))); Hatfield, 2009 WL 3806300, at *12 (“A member of a joint defense agreement . . . typically cannot disclose privileged information received from other joint defense agreement members.” (citations omitted)).

The Court finds that GPB consented to appointment of the receiver and the entry of the Amended Proposed Order, including paragraph 28, which empowers the receiver to waive any and all privileges or immunities held by GPB. (Am. Proposed Order 2 (“[T]he Chief Executive Officer of GPB CH and Highline consents to entry of this Order.”).) Because a receiver can waive a corporation’s privileges and GPB consented to the appointment of the receiver, the objections by Gentile, Schneider, and Ascendant Capital to the Amended Proposed Order are without merit.23 III. Conclusion For the reasons stated above, the Court (1) grants the SEC’s motion to convert the monitorship into a receivership and impose a litigation injunction, (2) adopts the Amended Proposed Order, and (3) denies Gentile’s motion as moot.

Dated: December 7, 2023 Brooklyn, New York SO ORDERED:

s/ MKB MARGO K. BRODIE United States District Judge