Case: 3:15-cv-00045-jdp Document #: 19 Filed: 01/26/15 Page 1 of 10

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF WISCONSIN
__________________________________________
:
UNITED STATES SECURITIES
:
AND EXCHANGE COMMISSION,
:
:
Plaintiff,
:
:
CASE NO. 15-cv-45
v.
:
:
Judge James D. Peterson
LOREN W. HOLZHUETER, and ISC, Inc. :
(d/b/a Insurance Service Center),
:
:
Defendants, and
:
:
HONEFI, LLC,
:
:
Relief Defendant.
:
_________________________________________ :
DEFENDANTS MOTION AND BRIEF IN SUPPORT OF ENTRY OF THEIR
PROPOSED TEMPORARY RESTRAINING ORDER
The United States Securities and Exchange Commission (the SEC or
Commission) filed its complaint (Dkt. 1) in the above-captioned matter on January
21, 2015 at 3:50 p.m. along with Plaintiffs Emergency Motion for Temporary
Restraining Order, Asset Freeze, Appointment of an Independent Monitor and Other
Relief and supporting materials. (Dkt. 4, 13.) The SEC informed defense counsel at
4:15 p.m. that it would be filing its emergency motion and intended to have that
motion heard at 9 a.m. the next morning.
The Defendants scrambled to get to Madison on time for the hearing.
There was significant communication with the SEC and some of the lawyers who
filed the motion prior to January 21, but there was no indication during those
discussions that an emergency TRO would be filed. The SEC knew Defendants were

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represented by Milwaukee counsel. Defense counsel arrived to appear in front of

Judge Peterson at 9 a.m. on January 22 for the hearing on the Commissions
emergency motion. At the courthouse, and then before Judge Peterson when the
hearing convened at 10 a.m., counsel for the parties engaged in negotiations on the
terms of a temporary restraining order (TRO or the Order) that the Court could
enter in this case. Defense counsel denied liability, but acknowledged that the SEC
filing was a prima facie 1 showing of securities violations by Loren Holzhueter
(Holzhueter). Judge Peterson agreed, and entered an oral order requiring the
parties to confer on the terms of a TRO, stating that he would be available to referee
any unresolved issues. The Court stated that he would entertain a TRO that did not
affect the lawful operation of ISC, as the Court (with the Parties agreement) stated
that the profitability of ISC is the cornerstone of repayment.
Since leaving court, counsel for the parties have conferred multiple
times about the terms of the TRO and have made progress. However, it appears due
to the Commissions rigid policies concerning drafting language and limited
discretion in negotiations, the SEC cannot depart from wording and language in their
form TRO used in other cases that is both imprecise and inapplicable to the facts
here. A much simpler, more direct version of the TRO was provided to the SEC, but
the SECs response was to only slightly alter its version, which then still retained the
imprecise and inapplicable patois of the forms they use. There remain gaps where
1

The preamble to the SECs proposed order states [t]here is good cause to believe that the Commission will
ultimately succeed in establishing that Defendants have engaged in and are likely to engage in transactions, practices
and courses of business that violate securities laws. (SECs Proposed TRO.) However, the SEC does not have this
burden for seeking a TRO and argued to the Court that it only needed to demonstrate (1) a prima facie case that a
violation of the securities laws occurred; and (2) a reasonable likelihood that a violation will occur again in the
future. (Dkt. 13, p. 17.) In its draft order, the Commission attempts to shoehorn in a broader determination than
the burden of proof they met. This court made no finding of likely success on the merits, and it didnt need to.

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the parties cannot agree on common sense language and inclusions. This Court must
now determine whether the proposed TRO from the SEC or from the Defendants
should be entered.
TRO AREAS OF AGREEMENT
The parties and the Court agreed during the January 22 hearing that a
TRO would be entered. Critically, the Court and parties agreed that the ongoing
legal operation of ISC and maintaining its profitability was the cornerstone of
repaying the unsecured creditors. 2 To facilitate the on-going lawful operation of ISC,
the terms of the TRO must be carefully crafted to avoid triggering a rush on the
company by its clients, the unsecured creditors, and/or the insurance carriers that
ISC contracts with as an agent.
The Parties agree that there is no major issue with the language
proposed by the SEC for an order enjoining the Defendants from violating Section
17(a) of the Securities Act, Section 10(b) of the Exchange Act, Rule 10b-5(a-c), and
Section 20(a) of the Exchange Act. (Dkt. 4, 7; Defendants Proposed TRO, I.A.
and I.B.) That language is carried forward in Defendants TRO version. There is no
dispute that the TRO will bar future solicitation of the types of unsecured
transactions that Holzhueter entered into on behalf of ISC. (SECs 1/21/15 Proposed
TRO, II.A.; Defendants Proposed TRO, II.) The Defendants have no objection to
the Document Preservation Order requested by the SEC, as slightly modified for
clarity in Defendants proposed TRO (Dkt. 4, 7; Defendants Proposed TRO, V.)

The SEC refers to these unsecured creditors as investors throughout its pleadings. (E.g., Dkt. 1, 3.) The
Defendants maintain that these were unsecured lenders. For purposes of this brief, the neutral term unsecured
creditors may be used in places to describe these individuals.

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The Defendants proposed Order only alters these sections for their applicability to
attorneys, removing reference to attorneys from the first two sections of the
Defendants Proposed TRO and modifying it in Section V. 3
A Court-imposed TRO preventing repayment of investors is agreed for
this TRO. (Defendants Proposed TRO, II.) This includes an order prohibiting the
Defendants from repaying any investors until a plan is in place and approved by the
Court. The Defendants added language to the end of Section II only to clarify that
[t]his prohibition is meant to apply to any further solicitation of loans by investors
to ISC, or acceptance of unsecured loans from investors by ISC.

(Id.)

The

Defendants have also agreed to provide the Commission with an accounting of the
ISC and HONEFI, LLC assets.

(Defendants Proposed TRO, IV.)

This is all

covered in clear language in the Defendants version of the TRO.

The Defendants Proposed TRO, filed contemporaneously with this brief
in support of its entry, addresses and incorporates each of these specific areas of
agreement with precision, using direct and not arcane form language.
TRO AREAS NEEDING COURT DETERMINATION
The proposed Orders from the SEC and the Defendants contain
significant overlap. The Defendants for purposes of this TRO are agreeing to provide
almost all of the relief sought by the SEC.

However, the TRO sought by the

Commission goes too far in certain areas and not far enough in others.

The

Defendants Proposed Order accounts for the nuanced issues that are critical to
3

Offhandedly entering an order against attorneys is unjustified on the facts (no attorney misconduct is alleged)
and problematic. Private attorneys yearly must provide answers to malpractice insurer questions, one of which is
always whether the attorney to be insured is under any kind of court order to do anything. The court order offered by
the SEC puts undefined attorneys under this court order. That reference must be removed.

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protecting ISCs continued operations and, with it, the clearest path to repaying the
unsecured creditors/investors.
I.

FREEZING HOLZHUETERS ASSETS.

The parties have come very close to an agreement on how to treat

Holzhueters personal assets. Mr. Holzhueter should not be ordered to make any
affirmative representation to the SEC pursuant by this TRO because of the inherent
risk of waiving his Fifth Amendment right in the ongoing parallel criminal
investigation. 4
To cover this area, Defendants proposed Order requires that
Holzhueter shall not divest himself, encumber, or dispose of his assets other than
for ordinary and necessary living expenses, attorney fees and costs. (Defendants
Proposed TRO, III.)
Defendants recognize and appreciate the SECs statement on the record
to the Court that any asset freeze and/or limitation on access to finances would
exclude Medicare in light of Holzhueters medical conditions. Mr. Holzhueter suffers
from an advanced case of pulmonary fibrosis. Defendants proposed TRO offers a
requirement that [i]n the event Loren Holzhueter dies, all insurance companies
with a policy of insurance on Loren Holzhueters life shall be notified of this TRO,
4

The IRS criminal investigation search warrants were filed by the SEC in their January 21 pleadings. There is
complete overlap on the areas of civil and criminal inquiry in this matter. Forcing a Hobsons choice on defending
the civil action and waiving Fifth Amendment protection is contrary to the interests of justice. See National
Acceptance Co. of America v. Bathalter, 705 F.2d 924, 929-30 (7th Cir. 1983); LaSalle Bank Lake View v. Seguban,
54 F.3d 387, 389 (7th Cir. 1995) (recognizing this situation as a Constitutional dilemma).The Fifth Amendment
privilege in civil litigation applies not only at trial, but also to the pleading and discovery stages. Bathalter, 705
F.2d at 927 citing United States v. Kordel, 397 U.S. 1 (1970); In re Sterling-Harris Ford, Inc., 315 F.2d 277, 279
(7th Cir. 1963), cert denied, 375 U.S. 814 (1963). The Fifth Amendment protects an individual against involuntarily
becoming a witness against himself and from being required to answer questions in a civil case when the answers
might incriminate him in the criminal proceeding. Requiring Mr. Holzhueter to produce personal financial records
would compel him to act in a manner that could be used against him in the pending criminal case. See Bathalter,
705 F.2d at 927, n.5.

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and are then enjoined from payout of insurance proceeds pending agreement of the
Parties or further order of this Court. (Id.)
II.

OVERSIGHT.

ISC agrees to engage, at its own expense, an independent third party

first to audit and compile financial statements for ISC, and then, if the Parties agree,
to oversee certain financial transactions of ISC. (Defendants Proposed TRO, VII.)
Such oversight, in tandem with a forensic accountants analysis of the company
pursuant to the accounting requirements of Defendants Proposed TRO (Id. at IV),
will allow the Commission and an independent third party to have insight into the
ISC finances and operations so that they, in conjunction with ISCs management
team, can ensure ISCs continued future profitability and the availability of funds for
repayment of the unsecured creditors.
In trying to accommodate the needs and limitations of the SEC, the
Defendants proposed Order makes clear that [n]othing in this TRO requires the
SEC to direct, or be responsible for, the ongoing operations of ISC and whether it
operates at a profit or loss. The Defendants shall allow access to the SEC of all ISC
information to determine whether the provisions of this Order are being complied
with. (Defendants Proposed TRO, VII.)
We ask this Court to appreciate a business reality that the SEC does
not. For ISC to continue to be viable, it cannot lose its contracts with insurance
carriers. A sample provision of one such contract was provided to the SEC but the
SEC draft did not change. The Defendants address this concern as part of their
proposed oversight order. The terms of, or entry of, this TRO may not be used as
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evidence to support termination of contracts any person or entity has with ISC.
(Id.)

Losing the agency contracts that allow ISC to sell for various insurance

companies might effectively kill ISC as a viable company. Any TRO entered by this
Court must acknowledge that it is not the goal of the parties or the Court to alter
ISCs legitimate business operations.
III.

LITIGATION BAR.

Absent from the Commissions proposed Order is any type of litigation

bar preventing any other civil suits against the Defendants or HONEFI, LLC related
to secured or unsecured transactions.

The Defendants proposed TRO includes a

litigation bar (Defendants Proposed TRO, VI) that is based on language from an
order entered in SEC v. Byers, et al., No. 08 Civ. 7104 (SWK) (S.D.N.Y. August 11,
2008) by Judge Richard J. Sullivan.
Including a civil litigation bar in the TRO approved by the Court will
protect ISC from the risk of litigation from both secured and unsecured creditors who
as of the date of entry of this TRO, and by its terms, will no longer be paid their
regular interest and/or principal payments. The risk of a sudden rush of litigation
brought against ISC could be enough to spook employees and customers to look for
other insurance opportunities. A litigation bar as drafted in the Defendants proposed
TRO avoids creditor litigation for now, to give the Parties the time and space needed
to craft the plan for operation and fair payment to all classes of creditors.
IV.

PRELIMINARY INJUNCTION HEARING.

The Defendants Proposed TRO applies this Courts Procedures to be

Followed on Motions for Injunctive Relief (the Procedure) to the SECs request,
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except that the Parties shall be allowed 30 days from the date of entry of this Order
before the requirements of the Procedure become operative, so that the Parties have
adequate time to negotiate a resolution. (Defendants Proposed TRO, VIII.A.)
The SEC-proposed TRO sets times and obligations without regard to this Courts
Procedures. In fact, the Defendants intend to negotiate in good faith to the same end
as the SEC (and the U.S. Attorney) put in place the best possible repayment
scenario for the unsecured creditors/investors, while still operating the business in a
manner that maximizes such payments. Arbitrary dates set by the SEC will not give
enough time to accomplish this, and are not necessary if the Defendants Proposed
TRO is entered.
Defendants want to work out a complete resolution to this civil matter,
including an agreed plan for repayment of the unsecured creditors/investors, to the
satisfaction of all arms of the federal government now bearing down upon them. Such
a plan must include the U.S. Attorney (and possibly the IRS) in crafting that
resolution without being on too rushed of a timeline. Thirty days instead of 5 or 7 to
get this started, and hopefully done, is hardly a stretch.
This Court stated that it did not understand why the SEC felt the need
to rush this process when a criminal investigation has been going on for more than a
year and the Commission just started investigating. The SECs response was that it
did not want to risk further harm to investors/unsecured creditors. The Defendants
Proposed Order serves the Parties mutual goal of protecting the interests of the
unsecured creditors and the continued viability of ISC. The protections in place
under the SECs proposal are matched (and exceeded) by the Defendants proposal.
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CONCLUSION
The Court has two proposed TROs to consider.

The Defendants

proposed Order adopts much of the SECs proposed Order in terms of areas covered
and language used, and virtually all of the SECs language on its bread and butter
injunction against violating securities laws.

The Defendants proposal better

accounts for the specific issues involved with keeping ISC going and limiting the
fallout of this litigation on ISCs ongoing legitimate business. The SEC proposes
using a blunt instrument where precision is necessary.

The Commission is

constrained by its rigid policies and requirements, but the Court is not. The
Defendants proposed TRO goes far beyond the relief normally available on a TRO,
and reflects Defendants shared willingness to cooperate to get the unsecured
creditors paid. Frankly, Defendants have been more than responsive to the surprise
filing. It was surprising and disappointing that the matter could not be worked out
before the SECs precipitous filing, which irrespective of what the Parties agree to
now puts at risk repayment to the very victims they purport to protect.
For the foregoing reasons, we respectfully request that this Court enter
the Defendants Proposed Temporary Restraining Order.
Dated this 26th day of January, 2015.
KRAVIT, HOVEL & KRAWCZYK S.C.
s/Stephen E. Kravit
Stephen E. Kravit
Benjamin J. Glicksman
Brian T. Fahl
Attorneys for Defendants
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Kravit, Hovel & Krawczyk s.c.

825 North Jefferson - Fifth Floor
Milwaukee, WI 53202
(414) 271-7100 - Telephone
(414) 271-8135 - Facsimile
kravit@kravitlaw.com
Co-Counsel:
Paul Swanson
Steinhilber, Swanson, Mares, Marone, & McDermott
107 Church Ave.
Oshkosh, WI 54901
(920) 235-6690 - Telephone
(920) 426-5530 Facsimile
pswanson@oshkoshlawyers.com

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