Securities and Exchange Commission v. Byers
Rulings by summary order do not have precedential effect. Citation to a summary order filed on or after January 1, 2007, is permitted and is governed by Federal Rule of Appellate Procedure 32.1 and this court's Local Rule 32.1.1. When citing a summary order in a document filed with this court, a party must cite either the Federal Appendix or an electronic database (with the notation "summary order"). A party citing a summary order must serve a copy of it on any party not represented by counsel.
1 At a stated term of the United States Court of Appeals for the Second Circuit, held at the 2 Daniel Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of New York, on 3 the 25th day of October, two thousand ten.
5 PRESENT: RALPH K. WINTER 6 DEBRA ANN LIVINGSTON 7 GERARD E. LYNCH 8 Circuit Judges,
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND 31 DECREED that the judgment of the district court be AFFIRMED.
32 Claimant-Appellant Martin Malek ("Malek") appeals from an order entered July 24, 2009 33 in the United States District Court for the Southern District of New York (Chin, J.), approving a plan 34 of distribution of receivership assets (the "Distribution Plan") as proposed by Receiver-Appellee 35 Timothy J. Coleman ("Coleman" or "Receiver"). See SEC v. Byers, 637 F. Supp. 2d 166 (S.D.N.Y. 36 2009). This case arises out of the placement into receivership, after discovery of a large Ponzi 37 scheme, of the assets of several Wextrust companies and affiliated entities (together, the "Wextrust 1 Entities"). On appeal, Malek advances three claims of error. First, he asserts that the district court 2 erred in approving a distribution plan that included the assets of certain commodity-trading funds 3 (the "Commodity Funds") operated by one of the Wextrust Entities. Second, Malek asserts that the 4 district court exceeded its equitable authority in approving a distribution plan that effectively 5 liquidates the receivership estate. Lastly, Malek asserts that the district court erred in approving a 6 pro rata plan of distribution as to the Commodity Funds. We assume the parties' familiarity with 7 the underlying facts and procedural history of the case.
8 As an initial matter, the parties dispute the appropriate standard of review to be applied to 9 Malek's challenges. Malek asserts that the first two questions--as to the inclusion of the 10 Commodity Funds in the receivership estate and the approval of a plan liquidating that estate--are 11 properly characterized as questions of law, and should be reviewed de novo. Coleman, on the 12 contrary, argues that an abuse of discretion standard is appropriate. "According to the Supreme 13 Court, '[i]n shaping equity decrees, [a] trial court is vested with broad discretionary power; appellate 14 review is correspondingly narrow.'" SEC v. Certain Unknown Purchasers of the Common Stock of 15 and Call Options for the Common Stock of Santa Fe Int'l Corp., 817 F.2d 1018, 1020 (2d Cir. 1987) 16 (quoting Lemon v. Kurtzman, 411 U.S. 192, 200 (1973)). Moreover, we have stated that "[w]e 17 review [a] District Court's decision relating to the choice of distribution plan for the receivership 18 estate for abuse of discretion." SEC v. Credit Bancorp, Ltd., 290 F.3d 80, 87 (2d Cir. 2002). We 19 need not determine in this case whether these principles counsel in favor of de novo or abuse of 20 discretion review with regard to the issues identified by Malek. Regardless of the appropriate 21 standard of review, Malek's challenges fail.
I. Inclusion of the Commodity Funds in the Distribution Plan
First, Malek contends that the district court erred in approving the Distribution Plan due to 3 its inclusion of the Commodity Funds in the receivership estate subject to the Plan. Although neither 4 the Securities Act of 1933 nor the Securities Exchange Act of 1934 expressly vests the power to 5 appoint receivers in the district courts, "courts have consistently held that such power exists, where 6 necessary to prevent the dissipation of a defendant's assets pending further action by the court." 7 SEC v. Am. Bd. of Trade, Inc., 830 F.2d 431, 436 (2d Cir. 1987) (internal citation omitted). "A 8 primary purpose of appointing a receiver is to conserve the existing estate." Esbitt v. Dutch-Am. 9 Mercantile Grp., 335 F.2d 141, 143 (2d Cir. 1964). In furtherance of this goal, the district court 10 froze, and ultimately included in the receivership estate, all assets "held by, or under the direct or 11 indirect control of the [d]efendants, including, but not limited to, entities owned or controlled by, 12 related to, or associated or affiliated with the [d]efendant Wextrust Entities and the limited liability 13 companies they control or have an ownership interest in." J.A. 157. The Commodity Funds were 14 quite clearly included within this broad grant, and appropriately included in the receivership estate. 15 While "the power of a securities receiver is not without limits," Eberhard v. Marcu, 530 F.3d 16 122, 132 (2d Cir. 2008), a federal receiver is appointed, under the district court's broad equitable 17 discretion, "to restore to a defrauded entity or defrauded persons that which was fraudulently 18 diverted from its or their custody and control." SEC v. Shiv, 379 F. Supp. 2d 609, 618 (S.D.N.Y. 19 2005). Malek relies heavily on the proposition that, under federal regulations governing the 20 commodity futures trading industry, WexTrade Commodity Managers, LLC ("WCM"), the statutory 21 manager of the Commodity Funds, was not permitted to own any part of the Funds. See, e.g., 17 22 C.F.R. § 4.20(a)(1). As the record demonstrates, however, Wextrust and its principals paid little 4 1 regard to the letter of those regulations by, for example, regularly commingling the Commodity 2 Funds' assets with other Wextrust assets. See, e.g., J.A. 1082. As the district court appropriately 3 noted, Malek's arguments against the inclusion of the Commodity Funds in the receivership estate 4 are "premised on a misunderstanding of the Receiver's role," since the "Receiver is charged with 5 protecting the interests of all investors in the Wextrust [E]ntities, and he has the authority to assert 6 claims on behalf of any of those entities." Byers, 637 F. Supp. 2d at 181. Nor is there merit to 7 Malek's contention that the principals of the Wextrust Entities, specifically Steven Byers and Joseph 8 Shereshevsky, did not exercise control over the Commodity Funds. As discussed below, this 9 proposition is belied by the record.
11 II. Approval of a Distribution Plan Liquidating the Estate
12 Next, Malek argues that the district court exceeded its equitable authority in approving a 13 distribution plan that effectively liquidated the receivership estate. First, there is some merit to 14 Coleman's argument that Malek did not object to the district court's authority on this ground below, 15 and thus forfeited the argument on appeal. Neither Malek nor Harris Kay, former counsel to eight 16 Commodity Fund investors who sought to intervene in this matter below, objected to the Plan on the 17 ground that it exceeded the district court's equitable authority by effecting a liquidation, despite 18 multiple submissions and opportunities to address the court. Cf. SEC v. Forex Asset Mgmt. LLC, 19 242 F.3d 325, 332 (5th Cir. 2001) ("[Appellants] . . . did not raise this argument in the district court 20 when they objected to the distribution plan, and therefore this argument is forfeited."). In response, 21 Malek relies on extensive briefing provided to the district court by dozens of interested parties, some 22 of whom did object on this ground, as well as the district court's admonitions, addressing objectors' 5 1 oral statements in opposition to the Distribution Plan, that arguments ought not be repeated.
2 Whether or not Malek forfeited this argument, however, we find that the district court did not abuse 3 its equitable discretion in approving the Distribution Plan, despite its effective liquidation of the 4 receivership estate.
5 First, Malek's argument that the Plan, in liquidating the assets of the receivership, "exceeds 6 the intent of the SEC and of the District Court," Appellant's Br. 28, is contradicted by the express 7 language of the court's order appointing the Receiver, which authorized the Receiver, after notice 8 to all parties and creditors and approval by the court, to sell receivership assets. J.A. 654. In any 9 event, to the extent that Malek questions the court's intent to authorize the Receiver to liquidate the 10 estate, we reject that challenge because the court made its intent clear when it expressly approved 11 the Receiver's Plan to liquidate the estate. ...