The Receiver would like the investors/claimants to be aware of several significant developments which have occurred with respect to the progress of the Receivership.

Sale of Radio Station KTEK

As previously reported, the Receiver sought the District Court’s approval for procedures for the sale of Radio Station KTEK (the “Station”), an asset of the Receivership Estate. On April 4, 2011 the District Court entered an Order approving the proposed sale procedures. In summary, the Receiver was authorized to enter into a “stalking horse” agreement with South Texas Broadcasting (“STB”) and then to seek higher “topping bids” through an auction process.  The “stalking horse” sale of the Station provided for a consideration of $1,000,000 in cash and the discharge of approximately $1,500,000 in secured indebtedness held by STB. As ordered by the Court, the Receiver gave notice of the sale through publication in the Houston Chronicle. In addition to the notices required by the Court, the Receiver also advertised the proposed sale of the Station in two widely circulated trade publications/websites. The Receiver also contacted media brokers who had expressed interest in the Station. Notwithstanding these efforts, no “topping bids” were received by the deadline established in the Procedures Order and, accordingly, the Receiver sought confirmation of the sale of the Station to STB, pursuant to the “stalking horse” contract.

Prior to the hearing on Receiver’s Motion for Confirmation of the Sale, a group of investors, through counsel, objected to the sale on a variety of grounds and asserted that based upon documentation they had received in connection with their investments in BizRadio promissory notes, they held security interests in the Station assets superior to the security interest held by STB. They also contended that the hearing on the Sale to STB should be postponed because others who held potential interests in the Station had not been noticed. At the hearing on Motion for Confirmation, after hearing legal arguments with respect to the competing claims, the District Court determined that additional efforts to notify potentially interested parties should be undertaken. Subsequently, based upon the efforts of the Objectors and on the part of the Receiver, a comprehensive list of 172 potentially interested persons was compiled and on August 8, 2011 Receiver served the Motion for Confirmation and supporting papers on all of those persons.

The Court then received arguments with respect to the competing claims of security interests and entered an Order [Doc. # 120] extending the time period to receive additional bids for the Station.  After no qualified bids were received[1], all objections to the sale of the Station to South Texas were withdrawn; however certain claims for priority interest over other Estate claimants in the proceeds of the sale were then argued before the Court.  On December 2, 2011 the Court entered a Memorandum and Order rejecting the priority claims of the objecting investors to the proceeds from the sale of the Station [Doc. # 156].

On October 27, 2011 the Court entered a confirmation Order approving the sale of the Station to South Texas [Doc. # 146].  Following the deadline for appeal of the confirmation Order on November 28, 2011, the Receiver and South Texas finalized the closing of the sale of the Station and the transfer of the FCC license on December 21, 2011.

Settlement of Claims with Wallace Bajjali Related Parties

Following protracted negotiations with David Wallace, Costa Bajjali and the Wallace Bajjali affiliated entities, the Receiver reached settlement terms with respect to funds borrowed from KCM by those entities and their principals and, based upon the inclusion of BizRadio in the Receivership Estate, with respect to potential liability of the Wallace Bajjali entities and their principals related to investments by members of the public in BizRadio.  Subject to this Court’s approval, the Receiver and the Wallace Bajjali parties executed the Settlement Agreement as of September 12, 2011.

Per the terms of the settlement, the Wallace Bajjali entities which received proceeds from the KCM note offerings were to pay all amounts received (totaling $1,177,755.77) ( plus accruing interest) by February 29, 2012.  Pursuant to the Settlement Agreements, David Wallace and Costa Bajjali were required to personally guarantee the payouts notwithstanding that they had not personally guaranteed re-payment of the amounts when the loans occurred.  Additionally, Wallace Bajjali Development Partners are to pay the Receivership Estate $300,000 to $450,000 in fees earned from its Amarillo development project depending upon the timing of payment to the Receivership Estate.  Pursuant to the Settlement Agreement, the parties would mutually release all claims against each other, with the exception of certain of the Wallace Bajjali entities’ claims to any future distribution of Receivership Assets, which would benefit investors who purchased limited partnership interests in those entities.  David Wallace and Costa Bajjali specifically would release any monetary claims against the Estate they may have had in their individual capacities.  As a condition to the settlement, the Receiver has asked for a Claim Bar Order, barring claims of any BizRadio note holders who purchased their notes through Wallace Bajjali as their agent, against any of the Wallace Bajjali entities.  The Receiver moved the Court for approval of the Settlement on September 12, 2011 [Doc. # 113].

Materially the same investors who objected to the sale of the Station to South Texas also interposed Objections to the Wallace Bajjali settlement [Doc. # 124]. The Receiver responded to those Objections [Doc. # 142] and the Objectors failed to file a Reply.  On February 7, 2012, the Court entered a Memorandum and Order approving the settlement, including the Claim Bar Order, with the Wallace Bajjali parties [Doc. # 170].  The Objectors subsequently filed a Motion for Reconsideration of the Memorandum and Order approving the settlement [Doc. # 179].  Following the Receiver’s Response [Doc. # 182] and the Objectors’ Reply thereto [Doc. # 188], on May 2, 2012 the Court held a conference on the Motion for Reconsideration, which, along with the settlement, remains pending before the Court.  A second conference before the Court is scheduled to be held on August 1, 2012.

Receiver v. the Frishbergs, Kaleta, Barrington Financial Advisors, Inc. and William C. Heath

On August 23, 2011, the Receiver commenced an action in the U.S. District Court against Daniel and Elisea Frishberg, Albert Kaleta, Barrington Financial Advisors, Inc. (“Barrington”), and William C. Heath, Barrington’s president and CEO.  The suit alleges that the Frishbergs and Kaleta breached the fiduciary duties of loyalty and care which they owed to KCM, BizRadio, and DFFS as officers and directors, and seeks damages commensurate with the liabilities that the Receivership Entities were exposed to as a result of those breaches of fiduciary duty -- namely claims against the Receivership Estate by defrauded investors.  The suit also seeks the return of all KCM and BizRadio Note proceeds received, directly or indirectly, by the Frishbergs and Kaleta as fraudulent transfers from the Receivership Entities.

The Receiver further seeks damages from Barrington and Heath for their participation with Frishberg in the tortious interference with, and transfer of, DFFS client accounts to Barrington, which commenced prior to the Receiver’s efforts to place DFFS into the Receivership Estate.  As alleged in the Complaint, this transfer represented substantially all of the assets of DFFS and was effectuated to deprive DFFS creditors (namely KCM and Estate claimants) of satisfaction of their debts.  Frishberg has received payments from Barrington for these DFFS assets and Barrington has profited from their transfer; by his Complaint the Receiver seeks the return of those payments to the Receivership Estate.

Following the filing of Motions to Dismiss by Barrington, Heath and the Frishbergs, and a First Amended Complaint by the Receiver, the Court denied the Motions to Dismiss as to all causes of action save one (against Daniel Frishberg) [Doc. # 180].  All defendants other than Kaleta filed Answers to the First Amended Complaint [Docs. # 186, 187].

On the deadline date to file his Answer, Kaleta filed a voluntary Chapter 7 bankruptcy petition in the US Bankruptcy Court for the Southern District of Texas; In re Albert F. and Connie T. Kaleta, Case No. 4:12-bk-30558.  The Receiver subsequently commenced an adversary proceeding against Kaleta in the Bankruptcy Court; Thomas L. Taylor III, Solely in His Capacity as Court Appointed Receiver for Kaleta Capital Management, Inc., BusinessRadio Network, L.P. d/b/a BizRadio and Daniel Frishberg Financial Services, Inc., d/b/a DFFS Capital Management, Inc. v. Albert Fase Kaleta, Case No. 4:12-ap-3209.  In his Adversary Complaint, the Receiver incorporated the First Amended Complaint cited above in addition to seeking the determination of non-dischargeability of debts owed to the Receivership Estate by Kaleta, including his liability as alleged in the First Amended Complaint.  The Receiver subsequently filed a Motion for Withdrawal of the Reference, seeking to bring Kaleta back before the District Court with his co-defendants.  Kaleta, appearing pro se, filed an Answer to the Adversary Complaint on May 16, 2012.  Kaleta has not filed a Response to the Motion for Withdrawal of the Reference at this time, and a hearing on the Motion is set before Judge Bohm on August 7, 1012.

The ancillary action against the Frishbergs, Kaleta, Barrington and Heath was severed from the Receivership action on May 10, 2012 [Doc. # 199], into Civil Action No. 4:12-cv-01491.

DFFS E&O Insurance Policy

The Receiver has asserted the Receivership Estate's right to proceeds of a DFFS Errors & Omissions insurance policy issued by American International Specialty Line Insurance Company Policy # 01-766-06-09 (the “Policy”).  In this regard, the Receiver has acted to stay multiple private actions seeking recoveries from Daniel Frishberg as a named insured under the Policy.  After securing stays of the private litigation, the Receiver coordinated with counsel for the carrier, as well as plaintiffs’ counsel, to facilitate a global resolution to claims against the Policy which would include a monetary distribution to the Estate.  Prior to an agreed upon mediation between the Receiver, the carrier and claimants, counsel for Mr. Frishberg produced a letter identifying numerous additional claimants that purportedly asserted timely claims on the Policy. These additional claims clearly implicate potentially covered claims against DFFS itself -- in addition to Mr. Frishberg. Counsel for the carrier requested additional time to evaluate these new claims and to determine its coverage position.  The Receiver has continued to press the carrier for an overall resolution which would serve at least a portion of the Policy proceeds for the benefit of the Receivership Estate.  Negotiations are ongoing.  If necessary, the Receiver will file a motion seeking turnover of the Policy proceeds to the Receivership Estate.

On March 16, 2012 certain former DFFS clients, whose state court case against Daniel Frishberg was stayed pursuant to the Order Appointing Receiver, filed a Motion to Lift Stay as to their litigation [Doc. # 181].  The Receiver has Responded to the Motion [Doc. # 190], to which the movants Replied [Doc. # 191]; the Motion to Lift Stay is currently pending before the Court.