Judge Rules Against SEC in Carter Case : Investors Denied Bankrupt’s Cash

A bid by the Securities and Exchange Commission to return $4.6 million in cash to investors in a defunct Orange County medical factoring business has been rejected by a federal bankruptcy judge.

The decision came Wednesday as the SEC continued its protracted battle with bankruptcy trustees over disposition of the cash, seized when the commission shut down Orange County businessman Thomas D. Carter’s businesses in late 1983.

In his ruling Wednesday--the second time he has decided against the SEC--U.S. Bankruptcy Judge Ralph Pagter ruled that the SEC “failed to trace any investors’ monies into the funds on hand with the trustee.” The cash, he said, should remain as part of Carter’s estate.

The SEC has argued in several federal court motions that the cash belongs to 1,500 investors who lost between $40 million and $60 million invested in several of Carter’s businesses. In separate actions, both the SEC and the Orange County district attorney’s office have charged that Carter obtained the money by fraud. The Orange County case still is pending, but Carter settled with the SEC two years ago.

SEC’s Reaction

SEC attorneys said Thursday they have not decided whether to appeal Pagter’s decision. They complained that losing the case could undermine the commission’s ability to act as a watchdog for investors in fraudulent companies.

Carter, 34, has been charged with 22 counts of grand theft and 44 securities law violations by the Orange County district attorney. The charges were filed in connection with Carter’s investment program.

According to court records, Carter, who is free on bond, told investors his companies were involved in “medical factoring,” which purportedly worked by buying medical insurance claims at a discount and profiting if and when the claims were paid in full. However, the SEC and the district attorney’s office allege in separate court actions that the medical factoring business never existed.

Filed for Bankruptcy

Carter allegedly diverted investor funds to buy 82 acres in Las Vegas, expensive art and vacations, among other things. In December, 1983, without admitting guilt, he agreed to stop violating federal securities laws. Soon after, he and his companies filed for protection under Chapter 11 of the U.S. Bankruptcy Code.

“We take the position that the money came from investors and should be returned to investors,” James Shalvoy, the SEC attorney assigned to the Carter case, said Thursday. He said the commission must decide whether or not to appeal Pagter’s decision.

In an interview earlier this week, Irving Einhorn, regional administrator for the SEC, said the commission agreed to give bankruptcy trustees the cash seized from several of Carter’s Bank of America accounts so the trustees could prepare an accountant’s report.

Einhorn said the SEC agreed to release the funds because co-trustees Curt Danning and Joe Joseph signed an agreement to return the money to investors.

Favorable for Creditors

Theodore Stolman, attorney for the trustees, said he feels “wonderful” about the judge’s decision. “The trustees have contended the money should be available to all creditors,” said Stolman. In an interview Thursday, Mark Wray, personal attorney for Carter, said the bankruptcy trustees are considering converting Carter’s case from a Chapter 11 reorganization to a Chapter 7 liquidation, a move Carter opposes. Stolman confirmed that the conversion is being considered.

Meanwhile, Wray said Carter, whose criminal case is scheduled for a preliminary hearing in Harbor Municipal Court in Newport Beach on Nov. 13, is unemployed and depending on financial support from friends and relatives. Carter’s El Toro home is up for sale. His home in Corona del Mar has been sold, as have 15 luxury cars, including a Rolls-Royce.