Ralph Janvey v. James Alguire , 588 F.3d 831 ( 2009 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
November 13, 2009
No. 09-10761 Charles R. Fulbruge III
Clerk
RALPH S. JANVEY,
Plaintiff – Appellant – Cross-Appellee
v.
GAINES D. ADAMS ET AL.,
Defendants – Appellees – Cross-Appellants
JAMES R. ALGUIRE ET AL.,
Defendants – Appellees
Consolidated with
No. 09-10765
RALPH S. JANVEY, in His Capacity as Court-Appointed Receiver,
Plaintiff – Appellant
v.
JIM LETSOS ET AL.,
Defendants – Appellees
Appeal from the United States District Court
for the Northern District of Texas
No. 09-10761
Before GARWOOD, DENNIS, and PRADO, Circuit Judges.
DENNIS, Circuit Judge:
This is an appeal from the denial in part of a preliminary injunction
pursuant to 28 U.S.C. § 1292(a)(1). The underlying case is ancillary to a
securities fraud action by the SEC against a bank and related companies. SEC
v. Stanford Int’l Bank, Ltd., No. 3-09-0298-N (N.D. Tex.).
This case arises out of an alleged multi-billion-dollar Ponzi scheme
perpetrated by the Stanford companies (“Stanford”), a network of some 130
entities in 14 countries controlled by R. Allen Stanford. According to the SEC,
the companies’ core objective was to sell certificates of deposit (“CD”s) issued by
Stanford International Bank Limited in Antigua (“Stanford Bank”). Stanford
achieved and maintained a high volume of CD sales by promising above-market
returns and falsely assuring investors that the CDs were backed by safe, liquid
investments. For almost 15 years, the Bank represented that it consistently
earned high returns on its investment of CD sales proceeds, ranging from 12.7%
in 2007 to 13.93% in 1994. In fact, however, the Bank had to use new CD sales
proceeds to make interest and redemption payments on pre-existing CDs,
because it did not have sufficient assets, reserves and investments to cover its
liabilities.
The SEC filed suit against R. Allen Stanford, the Stanford Bank, and
related companies on February 16, 2009. At the SEC’s request, the district court
issued a temporary order restraining the payment or expenditure of funds
belonging to the Stanford parties. The district court also appointed Ralph S.
Janvey as Receiver for the Stanford interests and granted him the power to
conserve, hold, manage, and preserve the value of the receivership estate. On
March 2, 2009, the district court issued a preliminary injunction prohibiting any
disbursement of funds or securities in the name, on behalf of, or for the benefit
of the Stanford entities.
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No. 09-10761
As a result of the receivership order and the preliminary injunction,
Stanford customers’ investment accounts were frozen at the investment firms
of Pershing, LLC, JP Morgan Clearing Corp., and SEI Private Trust Company.
On March 27, 2009, the district court adopted procedures for the Receiver’s
review and release of any accounts that did not include proceeds from Stanford
CDs. By late June, 97% of the investor accounts had been released from the
freeze order. On June 29, 2009, the district court ordered the Receiver to
complete his account review process within five weeks. The court specified that
the freeze of all remaining accounts would expire at noon on August 3 unless the
Receiver asserted claims against the account owners and obtained injunctive
relief pending those claims.
Between June 22 and July 28, 2009, the Receiver filed the claims that led
to this appeal. The Receiver named as “relief defendants” several hundred
investors ( the “Investor Defendants”) who had received proceeds from Stanford
CDs which were paid into their customer accounts at Pershing, JP Morgan, and
SEI prior to the underlying SEC enforcement action, the restraining order, and
the receivership. The Receiver did not accuse the Investor Defendants of any
wrongdoing. Some of them had redeemed their CDs, while others had not, but
they all had received payments of purported interest. The Receiver moved for
authority to recover these funds as assets of the Receivership Estate and to
distribute them pro rata to all victims of Stanford’s fraud. The Receiver also
sought a preliminary injunction continuing the freeze of the Investor
Defendants’ accounts until the claims were finally resolved. The SEC argued to
the district court that it would be inequitable to allow the Receiver to bring
what are commonly referred to as “clawback” claims against the innocent
Investor Defendants. After a hearing on July 31, the district court denied the
Receiver’s motion to continue the freeze as to “return of principal” on the
redeemed CDs, but continued the freeze of the Investor Defendants’ accounts as
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to interest payments they had received on their CDs. The Receiver appealed and
the Investor Defendants answered the appeal as appellees; some of them also
cross-appealed. The SEC has filed an amicus brief siding with the appellees. On
August 11, we issued a stay maintaining the freeze on both principal and
interest in the Investor Defendants’ accounts pending this appeal.
The resolution of the issues on appeal depends on the nature of a “relief
defendant.” 1 A relief defendant, sometimes referred to as a “nominal defendant,”
has no ownership interest in the property that is the subject of litigation but may
be joined in the lawsuit to aid the recovery of relief. SEC v. Cavanagh, 445 F.3d
105, 109 n.7 (2d Cir. 2006). A relief defendant is not accused of wrongdoing, but
a federal court may order equitable relief against such a person where that
person (1) has received ill-gotten funds, and (2) does not have a legitimate claim
to those funds. SEC v. Colello, 139 F.3d 674, 677 (9th Cir. 1998). The court in
CFTC v. Kimberlynn Creek Ranch, Inc., 276 F.3d 187 (4th Cir. 2002), discussed
the theory behind this “obscure common law concept”:
A ‘nominal defendant’ is a person who can be joined to aid the
recovery of relief without an additional assertion of subject matter
jurisdiction only because he has no ownership interest in the
property which is the subject of litigation. Because a nominal
defendant has no ownership interest in the funds at issue, once the
district court has acquired subject matter jurisdiction over the
litigation regarding the conduct that produced the funds, it is not
necessary for the court to separately obtain subject matter
jurisdiction over the claim to the funds held by the nominal
defendant; rather, the nominal defendant is joined purely as a
means of facilitating collection. In short, a nominal defendant is
part of a suit only as the holder of assets that must be recovered in
order to afford complete relief; no cause of action is asserted against
a nominal defendant.
1
We have borrowed from the succinct explanation of this issue given by the district
court in SEC v. Founding Partners Capital Management, 639 F. Supp. 2d 1291 (M.D. Fla.
2009) and SEC v. Sun Capital, Inc., 2009 WL 1362634 (M.D. Fla. May 13, 2009).
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No. 09-10761
Kimberlynn Creek Ranch, 276 F.3d at 191-92 (citations and quotation marks
omitted).
We conclude that the Receiver has satisfied the first requirement — that
the payments the Investor Defendants received came from funds that had been
ill-gotten by the Stanford interests. However, the Receiver has failed to
establish that the Investor Defendants lack a legitimate claim to the CD
proceeds they received from the Stanford Bank. They are therefore not proper
relief defendants.
The jurisprudence requires only an “ownership interest” to preclude an
entity from being a proper relief defendant. Kimberlynn Creek Ranch, 276 F.3d
at 191; SEC v. Cherif, 933 F.2d 403, 414 (7th Cir.1991); SEC v. Founding
Partners Capital Mgmt., 639 F. Supp. 2d 1291, 1294 (M.D. Fla. 2009). It is
undisputed that the Investor Defendants received the CD proceeds pursuant to
written certificate of deposit agreements with the Stanford Bank, which granted
them certain rights and obligations. There was a debtor-creditor relationship
between the Investor Defendants and the Stanford Bank based on written
agreements well before the underlying SEC enforcement action against Stanford
and the resulting receivership and restraining order. This constitutes a
sufficient legitimate ownership interest to preclude treating the Investor
Defendants as relief defendants. See Founding Partners Capital Mgmt., 639 F.
Supp. 2d at 1294; cf. Kimberlynn Creek Ranch, 276 F.3d at 192 (“[R]eceipt of
funds as payment for services rendered to an employer constitutes one type of
ownership interest and would preclude proceeding against the holder of the
funds as a nominal defendant.”). The Investor Defendants are a far cry from the
“paradigmatic” nominal defendant — a trustee, agent or depository. See SEC v.
Colello, 139 F.3d 674, 676 (9th Cir. 1998). The Investor Defendants have
legitimate ownership interests in their CD proceeds, and therefore cannot be
considered proper relief defendants. Consequently, the district court lacked
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No. 09-10761
authority to freeze the Investor Defendants’ assets. Therefore, the Receiver’s
claims and motions as to the Investor Defendants should have been denied
completely.2
For these reasons, the district court’s judgment is: (1) AFFIRMED insofar
as it rejected the Receiver’s motion to freeze the Investor Defendants’ Stanford
CD proceeds as to the return of their principal; (2) REVERSED to the extent it
granted the Receiver’s motion to continue the freeze of the Investor Defendants’
CD proceeds as to the payment of interest. Furthermore, the stay order issued
by this court pending this appeal is LIFTED, and this case is REMANDED for
further proceedings consistent with this opinion.
2
The Receiver’s reliance upon SEC v. George, 426 F.3d 786 (6th Cir. 2005), is
misplaced. George twice reaffirmed the principles we apply here:
A relief defendant (sometimes referred to as a nominal defendant) may “be
joined to aid the recovery of relief” and “has no ownership interest in the
property which is the subject of litigation.” SEC v. Cherif, 933 F.2d 403, 414
(7th Cir. 1991); see also SEC v. Cavanagh, 155 F.3d 129, 136 (2d Cir. 1998).
“Federal courts may order equitable relief against [such] a person who is not
accused of wrongdoing in a securities enforcement action where that person: (1)
has received ill-gotten funds; and (2) does not have a legitimate claim to those
funds.” Cavanagh, 155 F.3d at 136; see also Commodity Futures Trading
Comm’n v. Kimberlynn Creek Ranch, Inc., 276 F.3d 187, 192 (4th Cir. 2002);
SEC v. Colello, 139 F.3d 674, 677 (9th Cir. 1998).
George, 426 F.3d at 798. The George court did not indicate any intention to depart from the
precedents on which it relied. The opinion does not cast any doubt upon our conclusion that
the Investor Defendants here, against whom no wrongdoing has been alleged, have ownership
interests in and legitimate claims to the proceeds of the CDs that they purchased from the
Stanford Bank just as thousands of other innocent investors have done.
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