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ORIGINAL HlllllllllllllllllllVIIIIII )1104r)0u1104»r0144 QM n; W l BEFORE THE ARIZONA CORPORATION COMMISSION 2 Arizona Corporation Commission 3 COMMISSIONERS DOCKETED 4 TOM FORESE - Chairman BOB BURNS DEC 28 2017 5 ANDY TOBIN BOYD DUNN 6 JUSTIN OLSON 7 In the matter of: ) DOCKET no. S-20988A-16-0354 ) 8 WMF Management, LLC, a Delaware limited ) SECURITIES DMSION'S RESPONSE liability company, ) TO WOODBRIDGE'S MOTION TO STAY 9 ) ALL PROCEEDINGS IN THIS DOCKET Woodbridge Group of Companies, LLC, a ) 10 Delaware limited liability company, ) ) l l Woodbridge Mortgage Investment Fund l, LLC, ) a Delaware limited liability company, ) 12 ) Woodbridge Mortgage Investment Fund 2, LLC, ) 13 a Delaware limited liability company, ) ) 14 Woodbridge Mortgage Investment Fund 3, LLC, ) a Delaware limited liability company, ) > 15 D r ) : Woodbridge Mortgage Investment Fund PA, cum ) 1 : 1 can: 16 LLC, a Delaware limited liability company, ( 1 1 :<:o2O ) FT m - o g ) N -I o 17 o f m o m Robert H. Shapiro, an unmarried man, ) c;»3_'< :Hz rn ) ..-1 XC) 18 Robert W. Carfagno, Senior. (CRD no. ) jJ(./) F .)m 238'/162), and Debra L. Carfagno, husband and ) 19 o ' CJ wife, ) c o ) 20 AIO Financial LLC, an Arizona limited liability ) company, ) 21 ) William M. Holliday (CRD no. 4930333), and > 22 Guadalupe A. Holliday, husband and wife, ) ) 23 Respondents. ) ) 24 25 On December 20, 2017, Respondents WMF Management, LLC, Woodbridge Group of 26 Companies, LLC, Woodbridge Mortgage Investment Fund l, LLC, Woodbridge Mortgage i Docket No. S-20988A-16-0354 l Investment Fund 2, LLC, Woodbridge Mortgage Investment Fund 3, LLC, Woodbridge Mortgage 2 Investment Fund PA, and Robert H. Shapiro (collectively "Woodbridge") filed a Motion to Stay All 3 Proceedings In This Docket ("Motion"). Woodbridge is effectively seeking an indefinite 4 continuance of the hearing in this case. A hearing may only be continued on a showing of good 5 cause. A.A.C. R14-3-l 09(Q). Woodbridge's Motion should be denied because Woodbridge has 6 failed to make a showing of good cause. 7 I. Congress Intended That Cases Such As This Not Bc Stayed During Bankruptcy 8 Proceedings 9 Congress created a sweeping provision that automatically stays many proceedings against 10 bankruptcy petitioners, however, Congress intentionally crafted this provision to avoid staying cases l l like the present case. The automatic stay does not apply to actions by a governmental unit to enforce 12 its police and regulatory power. l l U.S.C. § 362(b)(4). The legislative history of this exception to 13 the automatic stay explains that it applies to a government unit when it "is suing a debtor to prevent 14 or stop violation of fraud, consumer protection, or similar police or regulatory laws, Q 15 attempting to fix damages for violations of such a law ...."' The Securities Division ("Division") 16 seeks an order of restitution and penalties in this case.2 An order of restitution and penalties would 17 be the equivalent of fixing Woodbridge's damages for its violations of the Arizona Securities Act 18 ("Act"). That makes it exactly the kind of action that Congress did not want to be stayed during a 19 bankruptcy proceeding. The fact that Woodbridge wants to directly contradict Congress's stated 20 intention for cases such as this shows that it lacks good cause for a stay. 21 II. Woodbridge's Arguments About the Cost and Effort of Litigating Arc Misplaced 22 Woodbridge argues that the present case should be stayed to allow Woodbridge to focus its 23 resources and efforts on its bankruptcy. However, the present case should not be that concerning to 24 | S.Rep. No. 95-989 at 52 (1977),reprinted in 1978 U.S.C.C.A.N. 5787, 5838,H.R.Rep. No. 95- 25 at 343 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6299 (emphasis added). 26 2 53 the Division's August 21, 2017, Amended Notice of Opportunity for Hearing, Requested Relief, 14112-3. 2 Docket No. S-20988A-16-0354 l Woodbridge. On December 20, 2017, the Securities and Exchange Commission ("SEC") filed a 2 complaint against Woodbridge containing very serious allegations Compared to the magnitude of 3 the SEC's allegations, the resources and effort needed to defend Woodbridge in the upcoming 4 hearing in the present case should be minimal and are not good cause for a stay. 5 III. The State of Arizona Has Important Interests At Stake in This Case 6 This case involves public interests important to the State of Arizona. Although Woodbridge 7 has repeatedly claimed that it has repaid all Arizona investors in Woodbridge's First Position 8 Commercial Mortgage product ("FPCM"), Woodbridge has never offered any objective evidence of 9 such repayments. Woodbridge's Motion repeats the same claim, still with no evidence cited. Even 10 if this claim was true, Woodbridge's Motion concedes that it still owes $740,000 to investors outside l l Arizona who were referred by an Arizona resident. The State of Arizona has a strong interest in 12 protecting even non-Arizona investors from salespersons in Arizona. " [A] state has an interest in 13 seeing that its territory is not used as a base of operations to conduct illegal sales in other states. 14 Thus, the host state has an interest in protecting its reputation as not being a center for illegal or 15 questionable securities activity." 12 Blue Sky Law § 4:25. Similarly, the Arizona Court of Appeals 16 has noted that the State of Arizona "does have an important interest in keeping itself free of 17 enterprises which offer questionable investment opportunities." Shorev v. Arizona Corp. Com'n, 18 238 Ariz. 253, 263, 1139 (App. 2015) (internal quotation omitted). Therefore, the State of Arizona 19 has an important interest in correcting securities violations against all Arizona-related FPCM 20 investors in this case. 21 3 Exhibit A, December 20, 20] 7, Complaint for Injunctive and Other Relief. Arizona Rule of 22 Evidence 20 l(b), which is incorporated into the Commission's Rules of Practice and Procedure by A.A.C. R14-3-109(T)(5), allows judicial notice to be taken of facts "not subject to reasonable 23 dispute" and capable of being "accurately and readily determined from sources whose accuracy cannot reasonably be questioned." This Tribunal may take official notice of the fact that the SEC's 24 case against Woodbridge exists and of the allegations the SEC has made, but not the truth or falsity of those allegations. In Re Ronwin, 139 Ariz. 576, 580 n.4 (1983) ("We take notice that the cases 25 exist, that allegations are made, etc. We cannot and do not take notice of the truth or falsity of 26 specific allegations except as established by final judgment."). 3 Docket No. S-20988A-16-0354 l The comments that Woodbridge cites by the judge in the Woodbridge bankruptcy case 2 disregard the State of Arizona's important interests in this case. The Division has a mandate to 3 enforce the Act and to protect Arizona-related investors. Other securities regulators have similar 4 mandates. Congress intentionally allowed such regulatory actions to proceed during bankruptcy 5 proceedings, and Congress's express intent on this issue should be honored. 6 IV. This Case Is the Best Way to Protect Investors, Not the Bankruptcy Case 7 Woodbridge argues that the Bankruptcy case is the best way to protect the interests of FPCM 8 investors, but this argument ignores Woodbridge's stated legal position in the bankruptcy case. The 9 FPCMs are nominally secured by assignments to the investors of Woodbridge's interest in real estate 10 mortgages. However, Woodbridge's new manager has stated that Woodbridge intends "to l l commence adversary proceedings seeking the avoidance of these security interests," on the theory 12 that the FPCM investors failed to perfect their security interests.4 This shows that Woodbridge does 13 not seek to protect its FPCM investors at all, and instead seeks to minimize its liability to its FPCM 14 investors. 15 This administrative case is the best way to protect the interests of Woodbridge's Arizona- 16 related FPCM investors. If the Arizona Corporation Commission ("Commission") orders restitution l 17 in this case, that restitution liability will not be dischargeable in bankruptcy. 8; l l U.S.C. § 18 523(a)(l9)(A)(i) (no discharge of debts from the violation of state securities law), ll U.S.C. § 19 523(a)(l9)(B)(i) (no discharge of debts from any order of a State administrative proceeding). Such 20 a restitution order would effectively prevent Woodbridge from minimizing its liability to its FPCM 21 investors. 22 v. Abatement Does Not Apply Because There Is Only One Action 23 This case does not meet the test for abatement. The test for abatement is whether two actions 24 in Arizona state courts amount to the same cause of action by having substantially identical parties, 25 26 4 Exhibit B, Excerpt from the Declaration of Lawrence R. Perkins In Support of Debtors' Chapter l l Petitions and Requests for First Day Relief, 11 18, n.9 4 Docket No. S-20988A-16-0354 1 substantially identical subject matter, substantially identical issues involved, and substantially 2 identical relief demanded. Allen v. Superior Court of Maricopa Countv, 86 Ariz. 205, 209 (1959). 3 Even assuming the present case counts as a state court action for purposes of abatement, there is no 4 second action. Woodbridge argues that the Division's investigation of possible securities sales by 5 third parties counts as the second action, but an investigation is clearly not a court action.

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