|
|
|
Are Summary Disgorgement proceedings permissible? By Davidson, Peter* Q: I have spoken to some other receivers who have told me that they
have brought summary disgorgement proceedings against parties who received
either unauthorized distributions from or ill gotten gains from entities
in receivership. I have spoken to my counsel about bringing such a
disgorgement motion but she thought there would be due process problems
with such a summary proceeding and that if I wanted to recover the funds I
need to file full blown lawsuits against the targeted individuals. Are
summary disgorgement proceedings permissible? In Securities and Exchange Commission v. Ross, 504 F. 3d 1130 (9th Cir. 2007) a receiver had been appointed in an SEC enforcement action over a corporation that sold investment opportunities in pay telephones and related services. The investment was actually a Ponzi scheme. The receiver filed a motion in the SEC case against a number of sales agents seeking to have them disgorge $21 million in commissions they received on the sale of the unregistered securities. The SEC joined the receiver's motion. The receiver requested that the Court allow the motion to proceed by way of a summary proceeding, which he argued was permissible in equity receivership cases. The SEC also argued that it was "well established" that the district court may order disgorgement by non-parties in an SEC enforcement action. Some of the agents opposed the motion arguing that the court lacked personal jurisdiction over them because they had not been served with a summons and that proceeding by way of a summary proceeding violated their right to due process. The district court rejected the sales agents' argument that they had not been properly served, holding that formal service was only required in an action. Because the receiver's disgorgement motion was not an independent action but simply "part of the receivership proceeding" and sought to recover funds the agents received, the agents were "nominal defendants" who were only entitled to receive notice of the motion and have a reasonable opportunity to be heard. The Ninth Circuit reversed, holding that the agents' due process rights were violated when the receiver proceeded to attempt to have the agents disgorge the funds they received by use of a summary proceeding. The Ninth Circuit held that before a court may exercise the state's coercive authority over a person or property it must obtain jurisdiction over the person (in personam jurisdiction) or the property (in rem jurisdiction). Service of process is the mechanism by which a court asserts jurisdiction over a person and is, therefore, the mechanism which gives the court the power to enforce a judgment against a person or his or her property. In order for the court to assert personal jurisdiction over the agents, the agents had to be properly served with a summons and complaint. The receiver never filed a complaint against the agents or had a summons issued and, therefore, the court never obtained personal jurisdiction over the agents. As a result, the receiver could not proceed in a summary fashion as he sought. The Ninth Circuit distinguished a number of prior cases where summary proceedings were allowed in equity receiverships. In those cases the parties subject to the summary proceedings had submitted themselves to the court's jurisdiction, such as where multiple creditors laid claims to receivership assets by filing claim in the receivership case, see for example, SEC v. Universal Financial, 760 F.2d 1034 (9th Cir. 1985), or where the parties had submitted to the court's jurisdiction either by intervening or by having participated in the receivership proceeding, see United States v. Arizona Fuels Corp., 739 F.2d 455 (9th Cir. 1984). The Ninth Circuit admonished the receiver and the SEC for trying to take improper shortcuts and concluded that if the receiver wanted to recover the purported improper distributions the receiver needed to file complaints against the agents and properly serve the agents with a summons and complaint. Based on the Ninth Circuit decision, therefore, summary disgorgement
proceedings in receivership cases are no longer permissible. If receivers
want to recover ill gotten gains or improper distributions arising out of
Ponzi schemes or other equity receivership cases they will have to proceed
by bringing fraudulent transfer or other similar lawsuits. |