A federal judge on Wednesday denied a request by the U.S. Securities and Exchange Commission to freeze the assets of Rochester developer Robert C. Morgan as the government pursues its securities fraud case against him.
But U.S. District Court Judge Elizabeth Wolford allowed other protections, including issuing a temporary restraining order barring litigation against Morgan's investment funds and fund manager, as well as appointing an independent receiver to manage them.
The judge denied the agency's request to freeze Morgan's assets because she said it would cause more harm than was needed, especially if it interfered with transactions that could make investors whole or prevented Morgan from hiring attorneys to defend himself against "a pretty significant criminal case."
"While the SEC established the likelihood of success, the implementing of an asset freeze could be catastrophic," said Wolford.
She also questioned the agency's accusations that Morgan had run a "Ponzi-scheme-like" operation by using money from later investors to pay off earlier investors and prior loans, because the fund documents did not expressly prohibit that. That represents two of the three primary examples that the agency used in its lawsuit accusing Morgan of securities fraud.
"There's a lot of discretion given to the fund manager," she said.
At the same time, Wolford said, the SEC's "strongest argument" concerned the promise of an 11 percent return for investors that was cited in later fund documents, based on the past performance of the funds and the properties they invested in. She suggested that Morgan had failed to disclose that his past success in making those payments actually was based in part on using money from later investors.
"That is a pretty critical piece of information that the fund manager, Mr. Morgan, might have been obligated to disclose," she said.
Wolford scheduled a hearing for a preliminary injunction for 9:30 a.m. on June 28 in Rochester, where she is based.
The SEC case against Morgan was filed on the same day last month as federal prosecutors unsealed a 114-count criminal indictment alleging mortgage, insurance and wire fraud charges against Morgan, his son, his former finance chief and a Buffalo mortgage broker. All four have pleaded not guilty.
Meanwhile, Morgan's attorneys disclosed in court that the developer had reached an agreement in principle to transfer management of his properties to another real estate firm based in King of Prussia, Pa. That followed the collapse late last week of a potential deal with Harbor Group International of Norfolk, Va.
The other firm – named Morgan Properties but which officials said is not connected or related to Rochester-based Morgan Communities – plans to invest at least $100 million in Morgan's business, and will allow some of that money to be put back into Morgan's investment funds. Details are still being finalized, and the deal is expected to close in the third or fourth quarter, the attorneys said.