Yesterday, Atlanta Attorney Mario A. Williams sent a Rule 11 Sanctions Letter to the lawyers for the SEC demanding that they immediately dismiss the lawsuit the agency filed on September 1st against Donald V. Watkins, Masada Resource Group, LLC, Watkins Pencor, LLC, and Donald V. Watkins, P.C. “Attorney Williams did an incredible job of pointing out all of the egregious violations of Rule 11 that were committed by the SEC when it filed the lawsuit”, said Watkins.
If the complaint is not dismissed within 21 days from September 13th, as required by Rule 11 of the Federal Rules of Civil Procedure, then Watkins and the other Defendants will ask the Court for sanctions against the SEC and its attorneys, including monetary relief.
“The lawsuit was an attempted high-tech lynching of the Defendants by the SEC, and it has backfired on the rogue agents who tried to pull it off”, said Watkins.
The full text of Attorney Mario A. Williams’ Rule 11 Sanctions Letter to the SEC appears below:
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
U.S. 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. (“DVWPC”)—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 attorneys who are signatories on the Complaint and the SEC officials who approved the filing of the Complaint.
- 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.
- 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 Barnes, 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 Barnes in this transaction.
Plaintiff knew that Masada and Barnes 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-Barnes Operating Agreement specifically provided a formula for calculating Barnes’ 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 a 10-facility deployment plan with WMI over a 5-year period that had an estimated economic value to Masada of $2 to $4 billion.
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 Barnes 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 Vice 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 turned out, he could not.
Plaintiff knew that Masada-Barnes, 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.
- 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 knew from documents in Plaintiff’s 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.
- Plaintiff has misled the Court into deeming facts true that Plaintiff knows are false because Plaintiff intentionally 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 attorneys, 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 conduct 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 Acquisition”
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 Count 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:
- 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.
- 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 case, 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.
- 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 untarnished 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. The SEC’s 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.”
- 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.
- 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.
II. Facts 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 Relating 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 due.
- The applicable and controlling Masada corporate governance documents in this case were drafted 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 Parties”).
- 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 loan 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, 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 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 diversification initiatives. The airplane was used for business purposes only.
- Masada Clean Earth Solutions-Saudi Arabia, LLC, is Masada’s joint venture company with Dr. Amin Ghanem, which was formed to deploy waste-to-energy projects in Saudi Arabia under a strategic alliance agreement with His Royal Highness Prince Abdulaziz bin Meshaal bin Abdulaziz Al Saoud ("HRH"), who is the CEO of the Riyadh-based Al Shoula Group.
Dr. Ghanem, or his designee company, also holds the CES OxyNol licensing rights on a non-exclusive basis for Morocco, Spain, Germany, Indonesia, and the countries that form the Gulf Coast States in the Middle East.
- Plaintiff knew from documents in its possession that the Masada-HRH agreement was authenticated with the U.S. State Department in February 2013.
- From December 29, 2005, Watkins has maintained a permanent data room that houses all Masada-related financial transactions, business records, tax returns, partnership agreements, vendor contracts, invoices, regulatory filings, patent information, FEL plans and specifications, environmental permit applications, asset diversification documents, carbon credit analyses, and other business records that were available to Plaintiff. The entire data room was made available for Plaintiff’s inspection and review, but Plaintiff chose not to review the documents in the data room.
- Contrary to the false and misleading allegations in Plaintiff’s complaint, Masada is an ongoing privately owned business enterprise that is fully implementing its business plan in the international marketplace, to the extent possible and practicable in light of the distractions experienced by the TGG lawsuit and the frivolous SEC litigation.
- All of the Masada companies are pre-revenue project development companies. All Masada affiliate companies are special purpose entities formed to hold title to individual development projects. Economic value will be extracted from these companies at a planned liquidation event with a strategic alliance partner.
- The most recent business plan template for Masada is dated January 29, 2014. This template is adaptable, depending on location and market conditions. Watkins Pencor also has developed variations of Masada’s core business plans for Saudi Arabia, Vietnam, South Korea, South Africa, India, Ecuador, and Sierra Leone.
- To this day, Masada enjoys a sustained competitive advantage in the global waste-to-energy technology space.
III. Facts Relating to Masada Business Valuations that Were Available to Plaintiff Prior to Filing Its Lawsuit
- In April, 1999, Watkins’ equity in POC had an estimated enterprise value of $5.9 million which was accepted by the Alabama State Banking Department and Federal Deposit Insurance Corporation. This valuation was assigned before Masada secured the first Title V Air Permit and Part 360 Solid Waste Permits ever issued to a municipal solid waste-to-ethanol technology company in North America, before Masada developed its proprietary WinGEMS CES OxyNol mass balance software and technology platform, before Masada obtained the first ever system performance insurance policy in the face amount of $225 million for its proprietary CES OxyNol waste conversion technology, before Masada had perfected its international patents, and before Masada had obtained carbon credit eligibility for the international deployment of its CES OxyNol process in Kyoto Protocol signatory countries. This information was made available to Plaintiff.
- Through substantial internal funding by the company’s principals after the 1999 valuation was issued, Masada developed and acquired valuable and marketable assets in several broad categories: (a) environmental permits, (b) WinGEMS CES OxyNol platform, (c) government-guaranteed long-term waste management/disposal contracts, (d) nine domestic patents, (e) sixty international patents, (f) licensing initiatives, (g) exclusive national concessions, (h) service fees and product off-take arrangements, (i) commercial-scale FEL engineering plans and specifications, which are adaptable for municipal solid waste-to-ethanol facilities worldwide, (j) revenue entitlements, and (k) carbon credit eligibility.
- In October 2003, Masada’s then CEO and CFO worked with investment bankers to develop business valuation assumptions and a 10-year development plan with supporting financial projection summaries. Watkins executed this development plan after he took over as CEO in 2005.
- By the time of the 2003 valuation report, Masada had secured the first Title V Air Permit and Part 360 Solid Waste Permits ever issued to a municipal solid waste-to-ethanol technology company in North America; Masada had developed its proprietary WinGEMS CES OxyNol mass balance software and technology platform with worldwide commercial deployment capability; Masada had obtained the first ever system performance insurance policy in the face amount of $225 million for its proprietary CES OxyNol waste conversion technology; Masada had perfected its international patents; and Masada had developed carbon credit eligibility for the international deployment of its CES OxyNol process in Kyoto Protocol countries.
- In addition to the patent filings referenced above, Masada executed an exclusive worldwide license agreement with Auburn University (Auburn, AL) for intellectual property related to co-fermentation of prehydrolyzates, mill sludge to ethanol, and chemical treatment of pulp mill sludge for cellulase enzyme production. On August 20, 2010, Masada filed a Patent Cooperation Treaty application (PCT/US2010/046161) for international patent protection for "Fermentation and Chemical Treatment of Pulp and Paper Mill Sludge" developed by Auburn University. Masada filed its US provisional patent applications (Nos. 61/235,894 and 61/235,877) for this technology on August 21, 2009.
- JP Morgan was Masada’s investment bank of record when the 2003 valuation report and 10-year development plan were prepared, and remains so today.
- The 2003 Masada valuation report was covered by the SEC subpoenas and was made available to Plaintiff in Masada’s data room, but Plaintiff failed and refused to review and inspect it.
- The WP/Masada assets were first presented to the National Football League in 2007. After a review by the NFL Commissioner’s Office in 2008, Watkins was provided the NFL’s Owners Background Form, which he completed in connection with a future ownership opportunity.
- The WP/Masada assets qualified Watkins as a bidder for the purchase of the St. Louis Rams NFL team when it was put on the market in 2009. These assets were formally presented in writing to Goldman Sachs, acting as the Rams’ agent for the sales transaction, in NYC on June 25, 2009.
- Following the June 25 presentation, Goldman Sachs invited Watkins to submit a written, non-binding offer for the Rams. On August 17, 2009, Watkins submitted his offer, along with a copy of an August 17, 2009, loan commitment letter for $400 million secured from Seymour Pierce Limited, a leading independent London-based investment bank at the time. The loan commitment was to be secured by certain Masada-related assets.
- On October 12, 2009, Goldman Sachs notified Watkins that it had been authorized to invite Watkins to submit a written, binding offer for the Rams. Watkins submitted his offer on October 22 and October 29, 2009, in the form and with the content specified by Goldman Sachs. The binding bid submitted by Watkins was accompanied by a non-contingent commitment letter from Seymour Pierce Limited for $500 million, $250 million of which was to be secured by loan proceeds guaranteed by Watkins and $250 million secured from limited partners in the event Watkins was selected as the purchaser.
- On November 18, 2009, the San Francisco-based Black Emerald Group, Ltd., issued a valuation report on Masada in connection with the NFL transaction. Black Emerald, which was a leading financial advisory firm in the waste-to-energy space at the time, opined that the total enterprise value of Masada, as of that date, was between $2.9 billion and $3.6 billion.
- At the time the Black Emerald valuation report was prepared, Watkins had executed a purchase agreement for the Johnson family interest in Masada and had in place an agreement to split, on an equal basis, the Harms family interests in the company in exchange for funding Masada’s worldwide operations.
- In the end, the Rams were not sold to an outside purchaser. The existing 40% limited partner, Stan Kroenke, exercised his right of first refusal in April 2010 to purchase the offered 60% equity stake in the Rams and became the 100% owner of the team in September 2010.
Facts Relating to the WP Economic Participation Agreements that Were Available to Plaintiff Prior to Filing Its Lawsuit
- The WP economic participation purchase transactions are private party contracts that are authorized by all of the applicable Masada operating agreements referenced in the purchase agreements. The total number of WP economic interests purchased since 2001 is twenty-nine. Before the first economic participation was sold, Plaintiff acknowledged to Watkins that they were exempt from SEC regulatory oversight.
- WP did not advertise or solicit the purchase transactions. Each purchaser was given the opportunity to buy his/her/its economic interest because of his/her/its personal relationship with Watkins. The purchasers include family members, life-long friends, former pro athletes who are now executives in Watkins’ businesses, former judges, seasoned lawyers, CEOs of local, national and international businesses, accomplished doctors, experienced businessmen/women, and other highly intelligent individuals who believe in Watkins’ businesses, work ethic, and integrity.
- Even the athletes who Plaintiff claims were “duped” are personal friends of Watkins who had financial advisors at the time of their transactions. Mr. Heim’s client was represented in his transaction by a high-powered Wall Street investment bank.
- Watkins personally explained each paragraph of the purchase agreement to each purchaser. Each purchaser acknowledged that Watkins was selling a portion of his interest in WP to include the purchaser as an economic participant in exchange for the monetary consideration specified in the purchase agreement. Each purchaser acknowledged that he/she/it was not a shareholder in Masada. Each purchaser acknowledged that he/she/it was paying the purchase price to DVWPC, not to Masada or any other Masada member. Each purchaser knew and acknowledged that the Defendants were in the process of implementing Masada’s business plan, whether he/she/it joined WP as an economic participant or not.
- The economic interest that was purchased was broader than a profit interest. It allowed the purchaser to participate in WP’s upside from a sale, merger, acquisition or global licensing transaction between Masada and another entity. Masada’s business plan called for the company to develop project opportunities, bundle them, and sale or license the bundled opportunities to a qualified and capable purchaser or licensee.
- All purchasers knew that the purchase money would be reported on Watkins’ tax returns, not Masada’s. All purchasers knew that the purchase money was reported under the Birmingham, Alabama business license code as the receipts of DVWPC, not Masada.
- The economic participants who consummated their purchases after January 1, 2007 (who Plaintiff alleges were “duped”), were specifically advised at the point of sale that Watkins, WP and/or DVWPC were the sole sources of funding for Masada’s market and project development activities worldwide. All evidence in this case makes this a true fact. All purchasers knew that Watkins was exponentially increasing their economic interest by systematically executing purchase agreements with Masada members to secure 100% control and ownership of Masada. This fact is true.
- The purchasers who were allegedly “duped” knew that Masada had tangible and valuable assets at the time of their purchase transaction. They knew, for example, that Masada’s CES OxyNol waste-to-ethanol technology had a system performance insurance value of $225 million, as established by one of the world’s leading industrial insurers. They also knew that Masada FEL plans and specifications cost $4.8 million and are adaptable worldwide.
- The purchasers were kept abreast of Masada’s market expansion and growth in periodic updates that contained hundreds of factual representations regarding the progression of the business plan. The purchasers had full and complete access to Watkins to answer any all questions they had about their economic interest.
- The purchasers knew that Watkins grew the business in a way that added value and allowed it to withstand the market forces that collapsed scores of competitors during the Great Recession of 2008.
- The purchasers knew that JP Morgan was Masada’s investment bank of record at the time of their purchase, a status the bank has held since September 4, 2001.
- The purchasers knew that Watkins had secured project financing offers from accredited financial institutions in the form of: (a) a credit arrangement letter from JP Morgan NYC) in the amount of $229 million on December 28, 2006, (b) $25 million in loan guarantees from U.S. Department of Agriculture on May 14, 2008; (c) a €100 million government bond issue arranged by Global Emerging Markets or GEM Capital (NYC) on February 10, 2009; and (d) a $1 million project development grant from the Inter-American Development Bank on May 14, 2009, among other financing offers that directly impacted Masada’s business plans.
- The purchasers knew that WP planned on diversifying Masada’s asset holdings and leveraging a portion of them into synergistic businesses to benefit Masada members and WP economic participants, as permitted and authorized under the applicable Masada operating agreements. The effort to acquire the St. Louis Rams was an example of asset diversification.
- All purchasers knew and acknowledged that they had no rights in the management of WP, Masada, or DVWPC. All purchasers after December 29, 2005, knew that Watkins, in his capacity as owner of WP and POC, was the Manager of Masada and was cloaked with all of the authority and power of the Manager, including the power to pay executives and any and all financial obligations incurred on behalf of WP and Masada.
- All purchasers knew, prior to and after the purchase, that Watkins used his private airplane to conduct WP and Masada business. Some of the allegedly “duped” purchasers have actually flown with Watkins on Masada-related business trips.
- All purchasers knew, prior to and after the purchase, that Watkins devoted his full-time to developing and growing Masada and that Watkins was entitled under the MRG Operating Agreement (and other applicable Masada operating agreements) to loan repayments and compensation as Manager, within his sole discretion.
- Except for one economic participant who holds a 10% economic participation in Watkins’ block of Masada equity, the economic participants contributed no further money to WP beyond their initial purchase price. Their downside was capped at their purchase price, but their upside was replicated each time Masada entered into a business alliance covering new markets in different countries, at no cost to them.
- Of these the 29 purchases, only eleven have occurred since 2007. Watkins sold no economic participation in WP after September 1, 2010. The aggregate amount of the purchases never reached $5 million in any single year or 12-month period.
- The purchase transactions are documented by a written contract where the purchaser acknowledged his/her/its ability to bear the economic risk involved in the business venture. These factors were spelled out for each purchaser. The contract specifically references the document that identifies the risk factors associated with the waste-to-energy industry.
- Each purchaser, except for Mr. Heim’s client, has had and continues to enjoy access to information normally provided in a prospectus. The purchaser represented by Mr. Heim had his previous access to Masada-related information terminated after he violated the terms of the confidentiality agreement he executed with WP by its filing a public complaint in August 2013, that contained some of Masada’s proprietary company information and documents.
- Each purchaser received written reports on the business development activities.
- Each purchaser has had unfettered access to the permanent Watkins Pencor/Masada data room before, during, and after his/her/its purchase. Each purchaser had full access to the financial books and records of each Defendant in this case. This access to documents included, but was not limited to: (a) QuickBooks financial reports; (b) financial summaries; (c) bank statements and cancelled checks; (d) travel records, (e) corporate and personal tax returns; (f) paid and unpaid invoices; (g) business plans; (h) business valuation documents, Masada-related operating agreements, and domestic and international patent information; (i) WinGems documents; (j) FEL plans and specifications, (k) correspondence with vendors, independent contractors and strategic partners; (l) carbon credits work; (m) the Rams NFL transaction, among other categories of documents.
- Section 4.1 of the MRG Operating Agreement requires the tax returns and financial records of the Defendants to be maintained for the three most recent years. Watkins has maintained such records for the benefit of his stakeholders for the entire time he has been CEO of Masada.
- Only four purchasers have ever asked to see the financial records of the Defendants. The records were gathered, organized and made available for these purchasers. For reasons unknown to the Defendants, these purchasers never scheduled a time or date to visit the corporate headquarters to inspect or review them.
- The Defendants encouraged all purchasers to review and inspect the records maintained in the data room, including the domestic and international patents Plaintiff falsely suggests may not exist.
- Each purchaser, including TGG, has signed a confidentiality provision regarding this information. Watkins Pencor/Masada maintains a permanent data room that has been continuously available to each purchaser. Each purchaser is bound by restrictions on the transfer on his/her economic interest to members of the general public.
- The purchase agreements are straightforward and simple. They state in plain language that the seller of the economic participation is Watkins Pencor (an entity wholly owned by Watkins), not Masada Resource Group, LLC. The purchase money was the consideration each purchaser paid for acquiring an irrevocable assignment of a tangible and defined stakeholder property interest in WP’s portion of the Masada family of companies.
- Each purchaser knew that he/she/it was becoming a stakeholder of record in WP only. Watkins was the Masada member who was diluting his property interest to accommodate their inclusion in the growth of Masada.
- The money was paid to DVWPC (a company wholly owned by Watkins), not to Masada.
- This purchase money was declared on Watkins’ income tax returns, not Masada’s corporate tax returns.
- The economic participation agreements did not contain a “use of proceeds” provision. The reason is simple. Watkins was selling a portion of his personal WP assets, as permitted under the applicable Masada operating agreements referenced in agreements. The purchase money belonged to Watkins, to use as he saw fit.
- Only one purchaser has initiated litigation over any issue with a WP economic participation agreement. Even then, this litigation was in response to an arbitration petition filed against the purchaser by Watkins and WP.
IV. Facts Relating to the Two Promissory Notes Executed With the Lender Referenced in Paragraphs 59 to 67 that Were Available to Plaintiff Prior to Filing Its Lawsuit
- No WP economic participant has made a loan to Masada.
- 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 knew from documents in its possession that no economic interest in WP was sold by Watkins after September 1, 2010.
- The Lender referenced in the complaint is a long-time personal friend of Watkins and has provided Watkins financial assistance on several occasions. He is a business partner with Watkins in other ventures. On multiple occasions, this lender had given Watkins permission to use DVWPC loan proceeds however Watkins saw fit. Watkins has rewarded this lender’s personal loyalty by awarding him additional equity from his portion of the Masada assets.
- Based upon records made available to Plaintiff by the Defendants, Plaintiff knew that the Defendants had engaged professionals to assist Masada in the WMI transaction, including but not limited to: (a) a San Francisco-based financial advisory, (b) a san Francisco-based acquisition consultant, (c) a highly respected New York-based financial modeling expert, and (d) an Atlanta law firm. Masada already had JP Morgan as its investment bank of record. Plaintiff knew that most of these experts were already engaged on the WMI transaction prior to May 13, 2011.
- The loans referenced in the complaint were made to DVWPC. This entity is not a member or economic participant in WP or Masada. Furthermore, one loan was made in 2010, before the formation of Masada-Barnes, LLC. The second loan was made on May 18, 2011, which was 15 days after Mr. Barnes executed his agreement with Masada to lead a transaction with WMI to deploy Masada facilities throughout the United States and internationally.
- This lender who holds two $1 million promissory notes with DVWPC does not view any actions by DVWPC, with respect to the use loan proceeds, as fraud.
V. Facts Relating to the Masada-Waste Management Transaction that Were Available to Plaintiff Prior to Filing Its Lawsuit
- Waste Management was once an adversary and competitor of Masada in upstate New York.
- As mentioned earlier, Masada and Ben Barnes formed a partnership on May 3, 2011, to pursue the commercial deployment of Masada waste-to-ethanol facilities domestically and internationally in a strategic business alliance with WMI and WCA. Extensive due-diligence documents on Masada were delivered to the Ben Barnes Group, LLC in 2011 and 2012 for delivery to WMI and WCA.
- Tom Fatjo, the CEO of WCA worked with the Masada-Barnes team to present Masada to WMI. The Barnes team was the primary source for the information contained in Watkins’ updates to WP stakeholders about the WMI transaction.
- The Masada documents subpoenaed by Plaintiff present the full and true picture of the Masada, Masada-Barnes, WCA, and WMI transaction. Plaintiff failed to review these documents because it wanted to present a false version of the actual events. This false portrayal was buttressed by the improper alterations Plaintiff made to the Watkins correspondence that was quoted in its complaint.
Facts Relating to the SEC’s Impermissible “Twisting” Conduct
- During the course of its investigation of the Defendants, the SEC interviewed various economic participants in this case. Based upon the false and misleading allegations in Plaintiff’s complaint and other information available to the Defendants, Plaintiff deliberately twisted the plain language of the transactional documents to give the false and misleading impression that Watkins had “duped” these purchasers. Plaintiff suggested to these witnesses that Watkins had wrongfully diverted their purchase money for personal use with no justification in the transactional documents for doing so. Plaintiff led the purchasers to believe that WP/Masada had no assets or economic value at the time of their purchase. Plaintiff led at least one purchaser to believe that he was lending money to Masada, even though his loan documents state otherwise. Plaintiff trashed Watkins’ personal and business reputation during the interview process. Plaintiff deliberately misrepresented the state of financial affairs of the Defendants. Plaintiff never told the purchasers that their overall stake in WP had actually increased exponentially based upon the increase in Watkins’ equity position;
- Unlike Watkins, Plaintiff never disclosed to the purchasers that Watkins is a substantial creditor of Masada. Plaintiff never disclosed to the witnesses that Watkins’ loan to Masada was callable on demand, per the MRG Operating Agreement. Plaintiff failed to make this disclosure to purchasers because it wanted to create the false and misleading impression that Watkins was diverting Masada funds for personal use.
- Watkins wrote Plaintiff on June 26, 2014, and asked that the impermissible “twisting” conduct stop. Plaintiff simply ignored this request.
- In addition to “twisting”, Plaintiff also tried to get Watkins to violate one of its rules against the dissemination of the Formal Order of the “non-public” inquiry in this case. Watkins refused and so advised the SEC in writing.
Based upon the foregoing violations of Rule 11, the Defendants demand that Plaintiff immediately dismiss its complaint, with prejudice.
Sincerely,
/s/ Mario A. Williams
Mario A. Williams
Counsel for Defendants
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