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Nonparty's Assets at Risk in SEC Fraud Receivership By Pasternak, David* In a recent securities fraud receivership case, the Ninth Circuit Court of Appeals held that the inherent equitable power of a federal court allows it to freeze the assets of a nonparty when that nonparty is dominated and controlled by a defendant against whom relief has been obtained in a securities fraud enforcement action. Securities and Exchange Commission v. Hickey, 2003 DJDAR 7451 (July 8, 2003). The SEC sued John Hickey, Mamie Tang and several corporate entities controlled by Hickey and Tang, alleging that they had defrauded investors in a limited partnership. The District Court appointed a receiver over the limited partnership on the day the complaint was filed. Later, the SEC obtained a summary judgment ordering Hickey to disgorge $1.1 million. The SEC thereafter brought a contempt proceeding against Hickey for his failure to pay the $1.1 million summary judgment. The Court held Hickey in contempt, finding that a real estate brokerage owned in the name of Hickey’s mother was actually operated under Hickey’s control. The brokerage had apparently been created after the filing of the SEC suit. The District Court then froze the real estate brokerage’s assets, allowing it to pay rent, utilities, wages, and insurance without limitation. The brokerage appealed, asserting that the District Court abused its discretion when it froze the brokerage’s assets. The Court of Appeals agreed that the brokerage was not Hickey’s alter ego under California law because Hickey did not own any portion of the brokerage. He merely controlled it. Under California law, control without ownership is insufficient to establish an alter ego relationship. Riddle v. Leuschner, 51 Cal. Id 574 (1959). Instead, the Court of Appeals held that a federal court has inherent equitable power to reach third parties in securities fraud enforcement cases. In doing so, the Court of Appeals emphasized Hickey’s total dominance and control over the brokerage. He controlled the entire business, and not just its cash. Hickey raises a number of interesting questions. First, while the Court of Appeals repeatedly emphasized that its holding was based in part on the nature of the case as a governmental enforcement action, one can question whether the holding should be limited to SEC cases. Why can’t a receiver appointed in a federal securities fraud case at the behest of defrauded individuals similarly reach assets in the hands of third parties controlled by the wrongdoers to satisfy a disgorgement judgment? Similarly, while the Hickey court repeatedly mentioned its reliance on securities fraud cases, the same logic could extend to cases brought by the Federal Trade Commission, the Commodities Futures Trading Commission, or other similar federal regulatory agencies. In short, Hickey may prove useful for both plaintiffs and receivers to
reach third party assets in future federal cases beyond SEC enforcement
actions. |