United States District Court, S.D. New York
For Securities and Exchange Commisison, Plaintiff: Charles D. Riely, LEAD ATTORNEY, Securities and Exchange Commission (NYC), New York, NY; David Stuart Brown, LEAD ATTORNEY, Securities and Exchange Commission, Los Angeles, CA; Megan Molloy Bergstrom, LEAD ATTORNEY, PRO HAC VICE, U.S. Securities & Exchange Commission, Los Angeles, CA; Sanjay Wadhwa, U.S. Securities and Exchange Commission (3 World Financial), New York, NY.
For Wells Fargo Company 401(k) Plan, ADR Provider: Craig Carpenito, LEAD ATTORNEY, Alston & Bird, LLP (NYC), New York, NY; Elizabeth Wilson Vaughan, Alston & Bird LLP (GA), Atlanta, GA.
OPINION AND ORDER
KATHERINE POLK FAILLA, United States District Judge.
Non-party Wells Fargo & Company 401(k) Plan (the " Plan" ) moves for reconsideration of or, in the alternative, relief from this Court's January 7, 2014 Order entering a final judgment against Defendant Waldyr Silva Prado Neto. tat Order, among other things, imposed a civil penalty and required the disgorgement of certain profits obtained by Prado from insider trading in securities; the Court ordered that the penalty and disgorgement could be satisfied by, among other assets, funds ostensibly representing Defendant's liquidated assets in the Plan (the " Funds" ). The Order further required that the Funds be transmitted by the Plan and by Wells Fargo Bank, N.A., the financial institution at which the Funds are being kept (the " Bank" ), to Plaintiff Securities and Exchange Commission (the " SEC" ).
The Plan now seeks relief from the Court under Local Civil Rule 6.3 and Federal Rule of Civil Procedure 60(b), arguing that the Employment Retirement Income Security Act of 1974 (" ERISA" ), Pub. L. 93-406, 88 Stat. 829, prohibits it from transferring the Funds to Plaintiff. Indeed, the Plan argues, if it does transfer those funds, it will lose its tax-qualified status. The Plan's motion under Rule 60(b) is denied because it lacks standing to pursue that motion. The Plan's motion for reconsideration is denied because the Plan has failed to demonstrate that the Funds are Plan assets subject to ERISA's anti-alienation provision.
A. Procedural Background
On September 20, 2012, Plaintiff SEC filed a complaint against Defendant Prado that alleged violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. § § 78j(b) & 78n(e), and Exchange Act Rules 10b-5 and 14e-3, 17 C.F.R. § § 240.10b-5 & 240.14e-3, predicated on Prado's insider trading in the securities of Burger King Holdings, Inc. (Dkt. #1). That same day, Plaintiff sought ex parte emergent relief from the Court, filing a temporary restraining order, order to show cause, order freezing assets, and other requests for relief against Defendant. ( See Dkt. #3).
Plaintiff's ex parte application was granted that day, and Defendant was ordered to show cause why a preliminary injunction and asset freeze should not be granted in accordance with Plaintiff's application. (Dkt. #3). Defendant did not respond to the order to show cause, and on October 10, 2012, the Court granted Plaintiff's request for a preliminary injunction freezing Defendant's assets, including assets contained in accounts maintained by the Bank, Wells Fargo Advisors, LLC, and the Plan. (Dkt. #15).
On January 7, 2014, after Defendant defaulted, the Court entered a final judgment (the " Final Judgment" ) holding Defendant liable for disgorgement of $397,110.01, representing profits gained as a result of the conduct alleged in the complaint, together with prejudgment interest thereon in the amount of $41,622.90; the Court further found that Defendant was liable for a civil penalty of $5,195,500 pursuant to Section 21A of the Exchange Act, 15 U.S.C. § 78u(a). (Dkt. #46). The Court further ordered that the judgment against Defendant could be satisfied by relinquishing all legal and equitable right, title, and interest in the assets and funds frozen subject to the Court's asset freeze orders, including, as relevant to the pending motion, the Funds. ( Id.). To that end, the Court ordered the Bank and the Plan to transmit the Funds to Plaintiff within 14 days of the Final Judgment. ( Id.).
B. Defendant's 401(k) Plan Account
Defendant Prado was a former employee of Wells Fargo Advisors, LLC, and, in that capacity, maintained an ERISA-governed retirement plan account with the Plan. (Holland Decl. ¶ 9). On September 6, 2012 -- immediately prior to (and presumably in expectation of) the actions taken by the SEC -- Prado submitted or caused to be submitted a request to the Plan to liquidate his assets in the Plan, and to distribute to him the resulting proceeds. (Brown Decl. ¶ 24). Pursuant to that request, on September 7, 2012, the Plan liquidated Defendant's assets, resulting in a cash balance of $162,431.74. ( Id.). Thereafter, on September 11, 2012, a check in the amount of $130,292.53 (net of withholdings for federal taxes) made payable to Defendant was issued and sent to Defendant. ( Id.; see also Holland Decl. ¶ 10).
Plaintiff was informed that Defendant received the check. (Brown Decl. ¶ 20). The check, however, was not negotiated before the Court entered its order freezing Defendant's assets on September 20, 2012. (Holland Decl. ¶ 10). Currently, Funds totaling $162,431.74, consisting of $130,292.53 that was payable (and paid) to Defendant and $32,139.21 that was withheld for the IRS, are being held in a clearing account at the Bank. ( Id. at ¶ 11).
C. Procedural History
On January 22, 2014, the Plan filed a motion for reconsideration of, or in the alternative, relief from the Court's Final Judgment. (Dkt. #50). Among other things, it requested that " [i]f the Court finds that Mr. Prado's 401(k) retirement plan funds are plan assets that are subject to ERISA's anti-alienation provision . . . the Court clarify the Preliminary Injunction Order dated October 5, 2012, regarding the freeze on Mr. Prado's assets." (Plan Br. 2). In support of this motion, Dee Dee Holland averred on behalf of the Plan that the Plan is governed by ERISA, and that it is also a tax-qualified plan, in compliance with the Internal Review Code (" IRC" ). (Holland Decl. ¶ ¶ 5-6). Plaintiff filed its opposition on February 5, 2014 (Dkt. #59), and the motion was fully submitted on February 18, 2014, when the Plan filed its reply (Dkt. #62).
In light of certain deficiencies in the record, the Court convened oral argument in the matter on June 5, 2014; counsel for the Plan and for Plaintiff SEC attended. At oral argument, the Court requested proof -- be it Plan documents, ERISA provisions,
or interpretive regulations and case law -- that the Funds had not been " distributed" (since distribution would vitiate the anti-alienation provision), in spite of the liquidation of Defendant Prado's 401(k) account and the subsequent issuance to him of a check reflecting those benefits. Counsel for the Fund contended that " [i]t's pretty clear, we believe, from the [P]lan's position and from the Department of Labor and the available case law that until that money is actually in Mr. Prado's hands, it is subject to ERISA and the plan, and its fiduciaries are legally responsible for those funds." (June 5 Tr. 4). Counsel noted, however, that she did not believe there was a Plan provision specifically addressing uncashed distribution checks. ( Id. at 3).
Counsel for Plaintiff disputed the underlying factual premise of the Plan's arguments, namely that the Funds had not been " distributed" :
It raises the question that calls into doubt whether the funds are within the plan's control, which is the representation that was made here today. The funds are being held in a noninterest bearing account at Wells Fargo Bank only because the plan had to put the money somewhere, pending a final determination from this Court as to what to do with that. So I believe that it is a misapplication and mischaracterization of the facts in this case to say that ERISA applies at all because the fund[s] had been withdrawn from the account and, but for the asset freeze, [Defendant] probably would have gotten them.
Wells Fargo as an entity had to put the cash somewhere and chose to put it in a noninterest-bearing checking account. I believe it is a red [herring] to say that the anti-alienation clause of ERISA protects these funds at all because they are not held in the plan.
(June 5 Tr. 13; see also id. at 16 (" The only reason they have not left Wells Fargo as an entity is because of the asset freeze, not because of any obligation for them to remain at Wells Fargo because of the plan." )). As support for Plaintiff's argument, counsel introduced an October 5, 2012 letter from Lawrence J. Brundick, Senior Counsel in Wells Fargo's Law Department, to Plaintiff (the " Brundick Letter" ); in it, Brundick suggested that the Funds be " returned to Mr. Prado's 401(k) Plan account" -- a suggestion obviated by this Court's asset freeze order.
One day after the oral argument, on June 6, 2014, counsel for the Plan submitted a letter to the Court correcting a misstatement made during the argument. (Dkt. #92). In particular, counsel noted that the Plan in fact contained a provision for uncashed checks, and included that excerpt from the Plan documents. Of significance to the instant motion, counsel did not attempt in the letter to provide substitute legal or documentary support for the arguments she had made at oral argument, which arguments were predicated, in varying degrees, on her erroneous recollection of Plan provisions. Counsel for Plaintiff responded by letter dated June 10, 2014, arguing that the language of the Plan provision for uncashed checks " underscores the fact that funds are removed from the Plan when the check is issued" (Dkt. #94 at 1), and, further, that the Plan's language regarding distributions dovetailed with Plaintiff's interpretation of the Brundick Letter.
A word about these two documents, the Plan and the Brundick Letter, is in order. Section 10.19 of the Plan is entitled " Uncashed Checks or Inability to Locate Distributee." (Holland Decl., Ex. A § 10.19). With respect to the former category, Section 10.19(a) proposes ...