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    Letter sent to SEC from Donald Watkins' attorney demanding dismissal of lawsuit.

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    Letter sent to SEC from Donald Watkins' attorney demanding dismissal of lawsuit.

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    4K views19 pages

    Watkins SEC Letter

    Uploaded by

    KentFaulk
    Letter sent to SEC from Donald Watkins' attorney demanding dismissal of lawsuit.

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 19
    WILLIAMS OINONEN LLC THE GRANT BUILDING, SUITE 200, 44 BROAD STREET, NW ATLANTA, GA 30303 Lerpswwv.cOODGEORGIALAWYER.COM "Te os) 654-0268 Fax: (404) 392.6225 September 13, 2016 DELIVERED VIA EMAIL Mr. Paul Kim, Esq, Senior Trial Counsel U.S. Securities and Exchange Commission 950 East Paces Ferry Road, N.E. Suite 900 Atlanta, GA 30326 kimpau@sec.gov Mr. M. Graham Loomis, Esq. Regional Trial Counsel USS. Securities and Exchange Commission 950 East Paces Ferry Road, N.E. Suite 900 Atlanta, GA 30326 loomism@sec.gov Mr. Walter Jospin, Esq. Regional Director, Atlanta Regional Office U.S. Securities and Exchange Commission 950 East Paces Ferry Road, N.E. Suite 900 Atlanta, GA 30326 jospinw@sec.gov Re: SEC v. Watkins, et al, Rule 11 Sanctions Letter Dear Messrs. Paul Kim, Graham Loomis, and Walter Jospin, ‘The Defendants in this case—Donald V. Watkins, Sr. (“Watkins”), Watkins Pencor, LLC (-WP”), Masada Resource Group, LLC (“MRG” or “Masada”), and Donald V. Watkins, P.C. (“DV WPC”)—demand that Plaintiff immediately dismiss its September 1, 2016, case against the Defendants, pursuant to Rule 11 of the Federal Rules of Civil Procedure. This letter is directed to the attomeys who are signatories on the Complaint and the SEC officials who approved the filing of the Complaint. 1. Rule 11 Standard Regarding Sanctions that Defendants will seek against Plaintiff By filing its Complaint, Plaintiff certified under Rule 11(b) that, “to the best of the [Plaintiff's] knowledge, information, and belief, formed after an inquiry reasonable under the circumstances”, the complaint is not being filed for any improper purpose, such as (a) to harass the Defendants, (b) cause unnecessary delay with respect to the Court’s disposition of the companion lawsuit filed by the Defendants against Plaintiff on October 22, 2015, or (c) needlessly increase the cost of the litigation involving the parties. See Fed R. Civ. P. 11 Here, Plaintiff has allegedly investigated the conduct of the Defendants for more than two years prior to the filing of its complaint. Plaintiff had a team of experienced investigators and attorneys developing the so-called “facts” that were presented in its Complaint. Therefore the following facts were either known or should have been known pursuant to a reasonable investigation by Plaintiff, a reasonable investigation that encompassed access to thousands upon thousands of subpoenaed documents and also deposition testimony. 2. Despite Plaintiff knowing that the opportunity for WMI acquiring Masada was so real that former Lt. Governor Barnes joined with Defendants to form an actual company for the purpose of pursuing it, Defendants nevertheless made patently false representations throughout its complaint regarding WMI's genuine interest in possibly acquiring Masada. Plaintiff knew from documents in its possession that former Texas Lt. Governor Ben Bares, a well-known and respected businessman, formed a limited liability company with Masada on May 3, 2011,! for the specific purpose of pursuing the deployment of Masada waste- to-ethanol facilities throughout the United States and internationally in an alliance with WMI and Waste Corporation of America (“WCA"). Plaintiff also knew that: (a) Barnes was the lead partner on getting the WMI-Masada strategic alliance deal done, and (b) WCA CEO Tom Fatjo ‘was assisting Bames in this transaction. Plaintiff knew that Masada and Bames believed in good faith that the value of the contemplated WMI business alliance or acquisition transaction could exceed $2 billion because Section 4.6(c) of the Masada-Bames Operating Agreement specifically provided a formula for calculating Bares’ compensation for a WMI investment or acquisition transaction in excess of $2 billion. Additionally, Plaintiff knew that Barnes received voluminous due-diligence documents on Masada that were transmitted to WCA and WMI, including detailed financial modeling prepared by a New York City financial analyst with impeccable credentials and no relationship with Watkins. The financial model entailed 10-facility deployment plan with WMI over a 5-year period that had an estimated economic value to Masada of $2 to $4 billion, 1 This date represents a mere week before Plaintiff—in its complaint—refers to representation made by Defendants to a well-known former NBA athlete. We will seek the maximum amount of damages, including attomey fees in this case. Plaintiff also knew that the pace of the Masada-WMI transaction was impacted by three developments beyond the Defendants’ control: (a) Watkins’ reluctance to pay Barnes additional compensation beyond what was required under the parties’ May 3, 2011 Operating Agreement; (b) the time and effort it took Masada to produce the due diligence documents requested by the Bares team, including the financial model for 10 waste-to-energy facilities; and (c) the WMI's announced departure of Carl Rush from WMI in September 2012. Rush was WMI’s senior President for Organic growth. His sudden and unexpected departure was announced shortly after Barnes advised the Defendants that WMI was arranging a second meeting with Masada for the purpose of presenting the contemplated transaction with WMI's CEO and Lead Director in late August or early September 2012. Even then, Barnes conveyed to Watkins in writing that Rush could still get the Masada-WMI deal done from outside of WMI. As it tumed out, he could not. Plaintiff knew that Masada-Bames, LLC, was formed before Watkins had loan renewals discussions with any economic participant/lender in 2011. Yet, Plaintiff falsely alleged that the Defendants misrepresented the nature and scope of their dealings with WMI to lender(s). The representations made by the Defendants are consistent with the content of the documents that were generated by the parties to the WMI transaction in real time and the representations made by the Barnes Group, which the Defendants found to be credible. Plaintiff failed and refused to review thousands of pages of Masada documents that were subpoenaed by Plaintiff and made available to Plaintiff that flatly contradict Plaintiff's allegations that Defendants defrauded economic participants, lenders, or anyone else. 3. Plaintiff's other intentional, false and misleading assertions Plaintiff knew at the time of filing its Complaint, that absolutely no statement about WMI ‘was made in connection with the sale or purchase of the 29 economic purchase transactions at issue in this case — because the evidence that has been in Plaintiff's possession for two years demonstrates, unambiguously, that every single one of those 29 transactions occurred years prior to WMI and Masada discussing, in any manner, a potential alliance transaction between the ‘two companies. Plaintiff also falsely stated that, “Beginning as of at least early April 2011, Defendants in connection with the offer or sale of the ‘economic interest’, the promissory notes and the renewals thereof, began misrepresenting that Watkins Pencor, Masada and the Masada affiliates were undergoing due-diligence by Waste Management.” When Plaintiff made this false assertion, it Anew from documents in Plaintiffs possession that no economic interest in WP was sold by Watkins after September 1, 2010. Meaning, Plaintiff knew that no issue related to WMI formed the basis of the selling and purchasing of the economic interest at issue in this case, yet Plaintiff has misled the Court into believing that the WMI negotiations induced purchasers into entering into contractual relationships with Defendants. 4, Plaintiff has misled the Court into deeming facts true that Plaintiff knows are truncated evidentiary statements while intentionally failing to designate the omissions for the Court Plaintiff intentionally altered the text of what it claims is key correspondence from ‘Watkins to induce an economic purchaser/lender to make a loan renewal in 2011. Plaintiff omitted an entire section of the correspondence without denoting this deletion for the Court. The intentional deletion distorted the context of the correspondence, as well as the message that was actually being conveyed. Under a motion to dismiss standard, Plaintiff knowingly asserted a false “fact” that Plaintiff knows the Court is bound to accept as true. A senior trial attorney, a regional trial attorney and the Atlanta Regional Director of the SEC filed Plaintiff's complaint. These lawyers are not neophyte SEC attorneys. Based upon the egregious nature of the Rule 11 violations and the experience level of the signatory attomeys, the Defendants have no choice but to request that sanctions be levied against the signatory attorneys in their individual capacities (as members of the Georgia Bar Association), and not against U.S. taxpayers. The Defendants will request the Court to assess any monetary sanctions imposed for the Rule 11 violations on the SEC, as an agency. Plaintiff's complaint achieved its intended result. It damaged the Defendants’ businesses and hard-earned good reputations in the general public and among business partners worldwide Defendants will seek the proper recourse in an attempt to make them whole under the law. I. Overview of Rule 11 Violations by Plaintiff In its lawsuit, the SEC, by and through the signatory attorneys on the complaint, outlined three general categories of fraudulent conduet by Defendants Watkins, WP, and MRG: The SEC says: They engaged in a fraudulent offering of economic interests and promissory notes; They diverted and misused “Masada Investors’ Money”; and, They engaged in “misrepresentations regarding the Waste Management Acq ion” ‘These purported violations, and the allegations of “facts” supposedly supporting them, led the SEC to assert the following alleged civil violations of the Securities and Exchange Act against the Defendants Watkins, WP, and MRG: Count I-Fraud under Section 17(a)(1) of the Securities Act; Count II-Fraud under Sections 17(a)(2) and 17(a)(3) of the Securities Act; and uunt III- Fraud under Section 10(b) of the Exchange Act. The SEC added fourth Count against DVWPC as a relief Defendant only for what the SEC alleges was unjust enrichment by this Defendant. For the reasons stated below, the SEC's allegations of fraudulent conduct by the Defendants are patently false, frivolous, malicious, and defamatory in nature. What is more, the SEC knew, or should have known from public records and subpoenaed documents made available to Plaintiff, that its allegations of fraud, as well as the so-called “facts” supporting them, were false, frivolous, malicious, and defamatory in nature at the time Plaintiff filed its lawsuit against the Defendants. Additionally, Plaintiff altered the language of correspondence Watkins had with a lender to give a false impression of the content and context of the correspondence. With knowledge of the false, frivolous, malicious, and defamatory nature of the claims asserted, Plaintiff elected to proceed with the filing of this lawsuit based upon a reckless disregard for the truth and the bad faith motivations discussed herein: 1. This investigation started in 2013 or 2014 with false and misleading information provided by former SEC New York City Assistant Regional Director Robert Heim to his colleagues in the SEC’s Atlanta Regional Office. At the time, Mr. Heim represented a private plaintiff who was the respondent in a mandatory American Arbitration Association arbitration proceeding initiated by Watkins and WP in June 2013. Watkins commenced the arbitration proceedings after he refused a shakedown demand for $1 million by Mr. Heim in May 2013. Mr. Heim’s client responded to the commencement of the arbitration proceeding by filing a lawsuit in New Jersey federal court seeking to stay these arbitration proceedings. The New Jersey lawsuit raised the same alleged SEC violations parroted by Plaintiff in paragraphs 36-38 of the complaint, The SEC’s June 2014 subpoenas to Defendants tracked the precise allegations advanced in the New Jersey lawsuit. The SEC’s September 1, 2016 lawsuit was filed against the Defendants to give a much-needed lift to the New Jersey lawsuit, which had lost its wind during more than 3 years of litigation in court. The SEC lawsuit is predicated upon a flawed investigation that is riddled with undisclosed conflicts of interest and impermissible abuses of government resources. In essence, the SEC has used the agency and its resources to aid and abet a former SEC colleague and friend in his attempt to achieve financial gain in his private litigation against the Defendants. The investigation was also an accommodation to influential third parties who are personal adversaries of Watkins and who had access to top officials in the Atlanta Regional Office. This access allowed these third parties to improperly impact the course and outcome of the investigation, 3. Negative racial stereotypes held by top officials within the SEC’s Atlanta Regional Office contributed to Plaintiff’s manipulation of the pre-litigation investigation to support, a pre-determined adverse outcome for Watkins and his companies. Plaintiff manipulated what should have been an objective investigation by: (a) subpoenaing thousands of pages of the Defendants’ corporate records that directly related to the alleged acts of fraud, but failing to review and inspect them after the Defendants worked for months to gather and organize these documents for Plaintiff because the SEC knew these documents negated Plaintiff's allegations of fraud; (b) engaging in impermissible “twisting” conduct in which SEC investigators interviewed witnesses with leading questions and statements that suggested the Defendants had done something wrong or committed various fraudulent acts; (c) ignoring the plain language of purchase contracts and loan documents at the center of the SEC’s ease, as well as other transactional documents in Plaintiff's possession that flatly contradict Plaintiff's allegations of fraudulent conduct; (d) ignoring records in the public domain that contradicted Plaintiff's allegations of fraud, including records on file with federal agencies. 4, Plaintiff intended to defame the good name and reputations of Watkins, WP, MRG, and DVWPC by filing of its lawsuit. The Watkins family name has been untamished since 1847. This name has endured the horrors of slavery in America, one hundred years of Jim Crow in the South, decades of massive resistance to the desegregation of public institutions and accommodations in the South, and rampant discrimination in all facets of black life. Through it all, the only entity that has ever tarnished this name is the SEC. Plaintiff accomplished this result by disseminating a national press release when it filed the September 1, 2016, lawsuit. The press release, which regurgitated the false, frivolous, malicious, and defamatory allegations against the Defendants that appear in the agency's complaint, states: “The Securities and Exchange Commission today charged Alabama attorney Donald Watkins and companies he controls with defrauding professional athletes and other investors out of millions of dollars, much of which he spent on his girlfriend and to cover personal expenses like alimony, past due taxes and credit card bills. ‘The Commission's complaint, filed in federal district court in Atlanta, alleges that Watkins and his companies, Watkins Pencor LLC and Masada Resource Group LLC falsely told investors that their funds would be used to support waste-to- energy ventures The complaint further alleges that the defendants falsely claimed that Waste Management Inc., a large, international waste treatment company, was seriously considering acquiring Watkins Pencor, Masada, and its affiliated companies in a multi-billion-dollar transaction. According to the complaint, Waste ‘Management's “interest” in Masada never advanced past a brief initial meeting in August 2012, more than a year after the defendants began telling investors that negotiations were progressing and that the acquisition was imminent. “We allege that Watkins duped investors into believing that there was a lucrative transaction on the horizon, when in fact there was none,” said Walter Jospin, Regional Director of the SEC’s Atlanta Regional Office. The SEC charges the defendants with violating the antifraud provisions of the federal securities laws and a related SEC antifraud rule. The SEC’s complaint seeks permanent injunctions, penalties and return of allegedly ill-gotten gains with prejudgment interest. complaint alleges that Watkins’ law firm, Donald V. Watkins, P.C., received investor monies and charged the firm as a relief defendant for purposes of recovering the allegedly ill-gotten gains it received.” 5. The September 1, 2016, lawsuit was an act of retaliation for the lawsuit Watkins, WP, MRG and DVWPC filed against Plaintiff on October 22, 2015. It was also meant to cause unnecessary delay and increased cost to the litigation the Defendants commenced against Plaintiff in October. 6. Throughout the SEC's pre-litigation investigation, the Defendants repeatedly notified Plaintiff that its conduct was impermissible on many fronts and was a departure from due process requirements. This correspondence is on file with the agency and is the subject of the Defendants’ 2015 case against the SEC, Plaintiff ignored the protestations of the Defendants. Faets Plaintiff Knew, or Should Have Known, Prior to Filing its Frivolous Lawsuit Prior to filing its lawsuit, Plaintiff investigated the personal affairs of Watkins and the business affairs of the corporate Defendants for more than two years. Plaintiff conducted scores of interviews with witnesses, subpoenaed records from third parties who have had an affiliation with the Defendants, subpoenaed personal and corporate records from the Defendants, and had access to a host of records in the public domain, including those on file with various federal agencies. Against this backdrop, the attorneys who signed the complaint on behalf of the SEC, knew, or should have known by the exercise of reasonable pre-litigation discovery, the following material facts: Facts Rel l jing to Watkins’ Business Relationship With Masada Watkins’ business relationship with Masada started with his July 31, 1998 purchase of Pencor Orange Corp. (“POC”) for $600,000. POC is a Class A member in and designated “Co-Manager” of Pencor Masada OxyNol (“PMO”). POC owned 25% of PMO and 10% of other Masada affiliate entities. POC also held a preferential right to purchase the Class A membership interests from other Class A members in the Masada family of companies. On December 29, 2005, POC became the designated “Manager” of MRG and all of ‘Masada affiliates in existence at the time and to be formed in the future. The designation is irrevocable, except with the consent or resignation of POC or removal for cause. The designation authorized POC to exercise all rights granted to the Manager under the MRG ‘Operating Agreement and other Masada-related operating agreements, Watkins and WP had no role in drafting or approving the MRG Operating Agreement. As Manager of the Masada family of companies, all of the managerial actions taken by ‘Watkins complied in letter and spirit with the authority vested in POC under Section 8.1 of the MRG Amended and Restated Operating Agreement, dated December 31, 1998, including Watkins’ authority to reimburse or indemnify any member, manager, or employee of the company where reimbursement or indemnification was/is duc. ‘The applicable and controlling Masada corporate governance documents in this case were Grafted and executed in 1998, well before Watkins became CEO and Manager of the Masada family of companies in 2005. Plaintiff had possession of these documents before it filed its lawsuit against the Defendants, WP wholly owns Pencor Orange Corp. Watkins owns WP. In addition to the Class A membership shares held in the Masada family of companies by Virtue of his ownership of WP, Watkins has executed purchase agreements for all of the Class A ownership interests in all Masada-related companies held by the Estate of Daryl E, Harms, Deceased, together with various Harms family trusts and legatees (collectively referred to as the “Harms Parties”) and Terry Johnson, as well as various Johnson family trusts (collectively referred to as the “Johnson Parti: ‘The Watkins-Johnson Parties purchase agreement was executed on May 16, 2007, The Watkins-Harms Parties purchase agreement was executed March 3, 2014. The Watkins- Harms Parties purchase agreement supersedes a December 29, 2005, agreement in which Watkins and the Harms Parties agreed to equally share their Class A interests in the ‘Masada family of companies in exchange for equal capital contributions and Watkins” assumption of the CEO/Manager’s role going forward. Both the Harms and Johnson Parties were founding Class A members of Masada and its predecessor companies. Watkins’ Class A equity position in Masada is derived from his 1998 acquisition of Pencor Orange Corp. and the December 29, 2005 equity sharing and capital contribution agreement between Watkins and the Harms Parties, among other documents. . The death of Daryl Harms in July 2005, together with the open status of his probatable estate since that time, caused the parties to delay formal modifications to the 1998 Masada Operating Agreement to reflect the December 29, 2005, Class A equity sharing agreement between the Estate and Watkins. On March 3, 2014, the Watkins and the Harms Parties replaced the equal equity and capital calls sharing agreement with a buy- out agreement in which Watkins agreed to purchase all of the Harms Parties’ equity interests in the Masada entities for a return of their original capital investment by December 31, 2016. The new agreement accommodated the desire of Harms’ widow and children to relieve themselves of Masada-related capital calls, The Johnson Parties had reached the same decision on May 16, 2007 and executed a similar buy-out at that time. . The restructured Class A equity arrangements between the Watkins, Johnson, and Harms Parties has been reported to various government agencies, including the U.S, Department of Energy, since December 29, 2005. . In 2003, Watkins expanded his business relationship with Masada to become one of its principal creditors. That year, Watkins loaned MRG $1 million for working capital, The Joan was drawn down in seven installments. The loan was intended to serve as a bridge credit facility that was repayable by Masada at Watkins” call. Evidence of this loan transaction was made available to Plaintiff in the production of subpoenaed documents, 13, 14, 15. 16. 19. 20. 21. and in the subpoenaed documents Plaintiff refused to inspect at the Defendants headquarters. Section 9.4 of the MRG Operating Agreement provides that “Company Loans” may be secured and unsecured as the Member and Company determine, shall bear interest at the rate of twenty-five (25%) percent per annum compounded monthly, and shall be payable on demand. This documentation was made available to the SEC. In 2004, Watkins extended further credit to Masada by forbearing on a January 30, 2016, court-recorded certificate of judgment in Watkins’ favor in the amount of $753,942.37, plus $366.00 in court costs. Post judgment interest of 12% per year has run on the judgment since January 30, 2016. The certificate of judgment was revived for an additional 10-year period by a court order dated May 4, 2016. After Watkins assumed the role of CEO of the Masada entities, he deferred charging Masada rent for its headquarters in Watkins’ Class A office building in Birmingham, Alabama. Prior to Watkins becoming CEO, Masada’s office rental obligation was $17,051.22 per month, ‘Watkins assumed the role of Chairman and CEO of the Masada entities on December 29, 2005. Watkins deferred taking a salary for serving in this full-time capacity. The position of CEO or “Manager” is entitled to monetary compensation under the controlling governance documents that were in the possession of the SEC. Watkins’ predecessor took compensation for serving in this role. From 2005 to 2007, Watkins paid the vast majority of all invoices the Masada entities incurred for vendors and independent contractors who serve in executive capacities. ‘These payments were made by DVWPC, which served as the funding agent for Masada- related operations and expenditures. . From late 2007 through the present, the Defendants have funded all Masada business activities worldwide. ‘The first Masada international project was a joint-venture in Santo Domingo, Dominican Republic under the W2E Resources, S.A. Memorandum of Understanding executed between Raphael Zapata and Watkins, dated November 28, 2009. Watkins, individually, holds the Class A membership interests in W2E that were allocated to Masada. The strategic partnership encompassed in W2E covers 2,000 to 3,000 tons per day of municipal solid waste with an established waste provider. Since the formation of W2E, Watkins has vetted, negotiated and executed strategic alliances with 18 strategic partners that cover a pipeline of market development and projects in 47 countries across four continents. The partnerships resulted from multiple trips by Masada executives to the country location of the strategic partners. The partnerships were consummated only after the local partners conducted thorough due 22. 23, 24, 25. 26. 28. diligence on Masada, its management capabilities, financial partners, and core technology. Masada’s global expansion occurred during the Great Recession of 2008, which crippled global financing markets. The recession also caused many of Masada’s competitors to collapse and/or go into bankruptcy. Masada avoided both. Plaintiff knew from documents in its possession that Watkins, WP, and DVWPC funded Masada’s entire international market and project development activities. From 2007 to 2014, Masada grew its market reach from one foreign country to 47 countries. One of the most important tools for achieving this phenomenal growth was Watkins’ ownership of Alamerica Bank. Foreign governments and international business partners alike knew that Watkins’ ownership of a FDIC-regulated U.S. bank meant that he had already been subjected to intense scrutiny on his finances, background, and fitness and character. This credential allowed Watkins to accelerate the development and formation of strategic partnerships in the international marketplace. It also resulted in Masada developing a global business presence on four continents in record time. Business credit cards were used to pay for flights, hotels, meals, ground transportation, office expenses, vendor payments, and a host of in-country expenses, as Masada executives traveled around the U.S. and the world to develop and grow the company’s business. As stated above, Watkins financed Masada’s entire global expansion, before, during, and after the 2008 global recession, Watkins used his private airplane to transport Masada executives, staffers, lawyers, vendors, independent contractors, and other business associates to Montevideo, Uruguay, Guayaquil, Ecuador, Bogota, Columbia, Santo Domingo, Dominican Republic, Aruba, Kingston, Jamaica, Freetown, Sierra Leone, San Salvador, El Salvador, Managua, Nicaragua, the Azores Islands of Portugal, and a host of other foreign and domestic locations where Masada was exploring waste-to-energy market opportunities and asset

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