Filed: Dec. 18, 2015
Latest Update: Mar. 02, 2020
Summary: 14-4261-cv Securities and Exchange Commission v. Miller, et al. In the United States Court of Appeals for the Second Circuit AUGUST TERM 2014 No. 14-4261-cv SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. DONALD R. MILLER, JR., in his capacity as the Independent Executor of the Will and Estate of Charles J. Wyly, Jr. also known as Charles J. Wyly, Jr., DAVID MATTHEWS, LISA WYLY, KELLY WYLY O’DONOVAN, ANDREW WYLY, CHARLES J. WYLY, III, JENNIFER WYLY LINCOLN, JAMES W. LINCOLN, CHERYL WY
Summary: 14-4261-cv Securities and Exchange Commission v. Miller, et al. In the United States Court of Appeals for the Second Circuit AUGUST TERM 2014 No. 14-4261-cv SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. DONALD R. MILLER, JR., in his capacity as the Independent Executor of the Will and Estate of Charles J. Wyly, Jr. also known as Charles J. Wyly, Jr., DAVID MATTHEWS, LISA WYLY, KELLY WYLY O’DONOVAN, ANDREW WYLY, CHARLES J. WYLY, III, JENNIFER WYLY LINCOLN, JAMES W. LINCOLN, CHERYL WYL..
More
14‐4261‐cv
Securities and Exchange Commission v. Miller, et al.
In the
United States Court of Appeals
for the Second Circuit
AUGUST TERM 2014
No. 14‐4261‐cv
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff‐Appellee,
v.
DONALD R. MILLER, JR., in his capacity as the Independent Executor
of the Will and Estate of Charles J. Wyly, Jr. also known as Charles J.
Wyly, Jr., DAVID MATTHEWS, LISA WYLY, KELLY WYLY O’DONOVAN,
ANDREW WYLY, CHARLES J. WYLY, III, JENNIFER WYLY LINCOLN,
JAMES W. LINCOLN, CHERYL WYLY, EVAN ACTON WYLY, LAURIE WYLY
MATTHEWS, MARTHA WYLY MILLER, DONALD R. MILLER, JR., EMILY
WYLY, CHRISTIANA WYLY, JOHN GRAHAM,
Defendants‐Appellants,
SAMUEL E. WYLY, LOUIS J. SCHAUFELE, III, MICHAEL C. FRENCH,
CAROLINE D. WYLY, EMILY WYLY LINDSEY,
Defendants.
Appeal from the United States District Court for the
Southern District of New York
No. 1:10‐cv‐5760—Shira A. Scheindlin, Judge
ARGUED: JUNE 24, 2015
DECIDED: DECEMBER 18, 2015
Before: CABRANES, POOLER, and DRONEY, Circuit Judges.
Appeal from a District Court order temporarily freezing assets
adjudged to be ill‐gotten gains from a securities fraud scheme
perpetrated by defendants Samuel and Charles Wyly. The question
presented is whether an asset freeze order obtained by the Securities
and Exchange Commission constituted an action to collect on an
anticipated money judgment and therefore violated the automatic
stay provision of the Bankruptcy Code, 11 U.S.C. § 362, and this
Court’s precedent in SEC v. Brennan, 230 F.3d 65 (2d Cir. 2000).
We hold that the entry of the asset freeze order by the United
States District Court for the Southern District of New York (Shira A.
2
Scheindlin, Judge) did not violate the Bankruptcy Code’s automatic
stay. The order fell within the “governmental unit” exception to the
automatic stay provision, did not constitute impermissible
“enforcement of a money judgment,” and did not run afoul of
Brennan. We also conclude that it was properly supported by a
showing of ill‐gotten gains as to nine of the sixteen Relief
Defendants. Accordingly, we AFFIRM in part the District Court’s
November 3, 2014 asset freeze order insofar as it restrained the
assets of these nine Relief Defendants. Because, however, we are
unable to determine on the record before us whether sufficient
evidence supports imposition of the order against the remaining
seven Relief Defendants, the cause is REMANDED to the District
Court, with instructions to conduct additional factual development
on that limited issue and such further proceedings as may be
appropriate and consistent with this opinion. In the interest of
judicial economy, any future appeals taken from the District Court’s
decisions shall be referred to this panel.
DANIEL STAROSELSKY (Anne K. Small,
Michael A. Conley, John W. Avery, Randall
W. Quinn, Hope Hall Augustini, on the
brief), Securities and Exchange
Commission, Washington, DC, for Plaintiff‐
Appellee.
DAVID L. KORNBLAU (Eric Hellerman, Evie
Spanos on the brief), Covington & Burling
3
LLP, New York, NY, for Defendants‐
Appellants.
JOSÉ A. CABRANES, Circuit Judge:
This appeal arises out of a civil enforcement action brought by
the Securities and Exchange Commission (“SEC”) against
defendants Samuel Wyly and Charles Wyly, Jr. (the “Wyly
Brothers”). After a jury found the Wyly Brothers liable for multiple
claims of securities fraud, the United States District Court for the
Southern District of New York (Shira A. Scheindlin, Judge) ordered
payment of approximately $300 million in disgorgement. Fearing
the dissipation of ill‐gotten gains among the Wyly Brothers’ family
members, the SEC requested that the District Court enter a
temporary asset freeze. While that request was pending before the
District Court, Samuel Wyly and the widow of Charles Wyly filed
petitions for Chapter 11 protection in Bankruptcy Court, triggering
the automatic stay provision of the Bankruptcy Code, 11 U.S.C.
§ 362. Shortly thereafter, the District Court entered the requested
order freezing the Wyly Brothers’ ill‐gotten gains, including assets
transferred to multiple family members, who are named Relief
Defendants in this action.
This appeal does not challenge the liability judgment against
the Wyly Brothers or the damages award. Instead, defendants‐
appellants challenge only the validity of the asset freeze order,
which they assert was issued in violation of the Bankruptcy Code’s
4
automatic stay provision, as interpreted by this Court in SEC v.
Brennan.1
We hold that the entry of the asset freeze order did not violate
the Bankruptcy Code’s automatic stay. The order fell within the
“governmental unit” exception to the automatic stay provision, did
not constitute impermissible “enforcement of a money judgment,”
and did not run afoul of Brennan. We also conclude that it was
properly supported by a showing of ill‐gotten gains as to nine of the
sixteen Relief Defendants. Accordingly, we AFFIRM in part the
District Court’s November 3, 2014 asset freeze order insofar as it
restrained the assets of these nine Relief Defendants. Because,
however, we are unable to determine on the record before us
whether sufficient evidence supports imposition of the order against
the remaining seven Relief Defendants, the cause is REMANDED to
the District Court, with instructions to conduct additional factual
development on that limited issue and such further proceedings as
may be appropriate and consistent with this opinion. In the interest
of judicial economy, any future appeals taken from the District
Court’s decisions shall be referred to this panel.
1 230 F.3d 65 (2d Cir. 2000).
5
BACKGROUND
I. Facts and Trial Evidence
Although the case against the Wyly Brothers was complex,2
the facts relevant to the instant appeal are relatively straightforward.
Samuel Wyly and Charles Wyly were officers, directors, and
shareholders of four publicly traded corporations. Beginning in the
early 1990s, the Wyly Brothers transferred millions of stock options
received from those corporations to an extensive system of offshore
trusts and subsidiary entities in the Isle of Man (“IOM”), a self‐
governing British Crown dependency in the Irish Sea. For the next
dozen years, the IOM trusts exercised those options and traded in
the securities, while the Wyly Brothers failed to properly disclose
their beneficial ownership. The undisclosed transactions numbered
in the hundreds and returned profits of more than $550 million.
On July 29, 2010, the SEC initiated a civil enforcement action
against the Wyly Brothers, asserting multiple claims of securities
fraud. The District Court bifurcated the liability and remedies
phases of the case. In May 2014, following a six‐week trial, a jury
returned a verdict finding the Wyly Brothers liable for nine claims of
securities fraud, involving the violation of multiple antifraud,
registration, and reporting provisions of federal law. Following a
See generally SEC v. Wyly, 33 F. Supp. 3d 290 (S.D.N.Y. 2014); SEC v.
2
Wyly, 950 F. Supp. 2d 547 (S.D.N.Y. 2013); SEC v. Wyly, 788 F. Supp. 2d 92
(S.D.N.Y. 2011).
6
separate bench proceeding, the District Court dismissed a tenth
claim of insider trading. According to trial evidence, the Wylys used
the IOM trusts from 1992 to 2005 to trade in secret without making
the requisite disclosures, to protect their assets from creditors, and to
avoid taxes on trading profits earned. Evidence adduced at trial also
indicated that some of the proceeds from the IOM trusts flowed to
family members of the Wyly Brothers.
II. Post‐Trial Procedural History
Following the jury’s liability determination, the District Court
entered a complex remedies phase to quantify the Wylys’ ill‐gotten
gains and to determine whether and how much the Wylys should be
required to disgorge. In the remedies phase, which was tried to the
bench, the SEC proposed seven theories pursuant to which the Wyly
Brothers should be required to pay disgorgement.
Ultimately, the District Court accepted two alternative
measures of the Wyly Brothers’ disgorgement liability in separate
opinions of September 24, 2014 (the “September disgorgement
opinion”) and December 19, 2014 (the “December disgorgement
opinion”).3 In its September disgorgement opinion, the District
Court treated as a reasonable measure of disgorgement the “amount
equivalent to the taxes avoided on the profits the Wylys realized on
The District Court rejected outright several other theories of
3
disgorgement as counterfactual or untimely, and the SEC voluntarily withdrew
one disgorgement theory.
7
the sale of Issuer securities.”4 The District Court emphasized that
the tax figure represented merely a “measure of disgorgement,” not
an independent assessment of the Wyly Brothers’ tax liability, which
the Court recognized would be determined in a separate “IRS civil
proceeding.”5 The September disgorgement opinion also ordered
disgorgement of a certain percentage on profits of trading
unregistered securities. In total, it ordered disgorgement of
$299,357,243.80.6
The December disgorgement opinion set forth an alternative
calculation, to be used only if the September disgorgement measure
later failed on appeal. This alternative calculation measured the
unjust enrichment as the difference between the Wyly Brothers’ rate
of return from their offshore trading and the average market rate of
return for those stocks during the relevant period. In other words,
this calculation “compare[d] the Wylys’ rate of return to that of an
average buy‐and‐hold investor,” and thereby “reasonably
approximate[d] the economic value of the Wylys’ securities
violations—their ability to trade in secret while having an
4 SEC v. Wyly, 56 F. Supp. 3d 394, 431 (S.D.N.Y. 2014).
Id. at 427, 431. The District Court explicitly indicated that “any amounts
5
disgorged in this case should be credited towards any subsequent tax liability
determined in an IRS civil proceeding as a matter of equity.” Id. at 427.
The September disgorgement opinion ordered disgorgement of
6
$187,233,693 in ill‐gotten gains, plus $112,123,550.80 in prejudgment interest, for
a total of $299,357,243.80. Id. at 434; J.A. 1584.
8
informational advantage over the investing public.”7 The District
Court made clear, however, that the measure of disgorgement
imposed by the September opinion “represents the best measure of
the Wylys’ ill‐gotten gains,” and thus held that the disgorgement
described in the December opinion “may only be imposed in the
event that a higher court disagrees with the measure of
disgorgement imposed by the September 25 Order.”8
Meanwhile, on October 8, 2014—shortly after the issuance of
the September disgorgement opinion—the SEC requested by pre‐
motion letter an order for a temporary asset freeze, expedited
financial discovery, an accounting of the Wyly Brothers’ assets, and
a freeze of those assets possessed by Wyly family members who had
allegedly received ill‐gotten gains traceable to the Wyly Brothers’
fraud.9 In its pre‐motion letter, the SEC expressed “particular[]
concern[] about the potential dissipation of assets” by “third parties,
such as the Wylys’ family members and the offshore trustees.”10
Accordingly, the SEC requested an asset freeze applicable not only
to Sam Wyly and the estate of Charles Wyly, but also extending to
third parties, including family members, heirs, agents, and
SEC v. Wyly, 71 F. Supp. 3d 399, 403‐04 (S.D.N.Y. 2014). The total
7
amount of disgorgement under this alternative measure was calculated to be
$174,967,561. SEC v. Wyly, No. 10 Civ. 5760 (SAS), 2015 WL 427423, at *3
(S.D.N.Y. Feb. 2, 2015).
8 Wyly, 71 F. Supp. 3d at 404.
9 J.A. at 1554‐55.
10 Id. at 1554.
9
trustees.11 By letter of October 14, 2014, counsel representing the
Wyly Brothers’ interests opposed any order binding upon Wyly
family members on the ground that the family members had not yet
been named as relief defendants.12 Counsel representing the Wyly
family members submitted letters on the same date joining in the
Wyly Brothers’ opposition to the SEC’s request.13
On October 19, 2014, while the SEC’s request for an asset
freeze was still pending, Samuel Wyly filed a petition in Bankruptcy
Court for Chapter 11 protection. On October 23, 2014, Caroline
Wyly, the widow of Charles Wyly and principal heir of his estate,
filed her own bankruptcy case. The Wylys immediately argued to
the District Court that the SEC’s then‐pending motion for an asset
freeze must be automatically stayed by operation of Bankruptcy
Code § 362.14
Before adjudicating the SEC’s motion for an asset freeze, the
District Court held multiple hearings and entertained written
submissions from all parties that would be affected by the freeze,
including non‐defendant family members not yet parties to this
action. On October 24, 2014, at the suggestion of the District Court
and after objections from defendants and their families, the SEC
11 Id.
12 Id. at 1569‐71.
13 Id. at 1578‐82.
14 Id. at 1678‐83, 2011‐14.
10
filed an amended complaint adding sixteen Wyly family members—
the wives, daughters, sons, and sons‐in‐law of Samuel and Charles
Wyly—as Relief Defendants.15 The amended complaint principally
alleged that the Relief Defendants are in possession of ill‐gotten
gains stemming from the Wyly Brothers’ fraud.16
On November 3, 2014, the District Court granted the SEC’s
requests for an asset freeze, expedited discovery, and an accounting
of the Wyly Brothers’ assets.17 The freeze order extended to assets of
the family‐member Relief Defendants “which were, at any time, the
property of the IOM Trusts and Companies” and any other assets
received from the Wyly Brothers after January 1, 2005.18 The asset
freeze explicitly exempted any income or assets not derived or
received from the IOM trusts or the Wylys.19 Additionally, the
freeze carved out living expenses of $15,000 per month ($180,000 per
annum) for each Relief Defendant except Caroline Wyly, in addition
to all medical expenses, all tuition and education‐related expenses,
all taxes, reasonable legal fees and expenses, and certain
bankruptcy‐related expenses.20 The freeze order also indicated that
the District Court would resolve on a case‐by‐case basis further
15 Id. at 1811‐28.
16 Id.
17 Special App’x at 1‐9.
18 Id. at 3.
19 Id. at 4‐5.
20 Id. at 5.
11
requests for exemptions regarding the Relief Defendants’ real estate
holdings.21 Since the entry of the asset freeze order, the District
Court has approved multiple further accommodations for the Relief
Defendants without objection from the SEC.
The District Court crafted the asset freeze order with an eye
towards “working harmoniously and cooperatively with the
bankruptcy court in Texas.”22 Accordingly, the Court ordered that
the asset freeze remain in place only “until such time as . . . [the]
assets have been scheduled and thereby are clearly under the control
of the Bankruptcy Court.”23 By its terms, the asset freeze “will
dissolve” as soon as the assets are under the Bankruptcy Court’s
control.24
Also on November 3, 2014, the District Court issued an
accompanying opinion explaining the legal basis for the asset freeze
order.25 In that opinion, the District Court held that the Bankruptcy
Code’s automatic stay provision did not preclude the entry of its
21 Id.
22 J.A. at 1792.
23 Special App’x at 4.
Id. Ultimately, it will be the task of the Bankruptcy Court, not this one,
24
to determine the scope of the bankruptcy estate. The asset freeze order thus
provides that, when the Bankruptcy Court establishes control over all the assets
contained within the estate, the order at issue will dissolve, and the Bankruptcy
Court will continue its work without the involvement of the District Court. Id.
25 SEC v. Wyly, 73 F. Supp. 3d 315 (S.D.N.Y. 2014).
12
asset freeze order, pursuant to this Court’s controlling precedent in
SEC v. Brennan.26 The District Court reasoned that, in seeking the
asset freeze order, the SEC was “acting in its police and regulatory
capacity,” and thus the Bankruptcy Code’s automatic stay did not
apply.27 Having found no legal bar to issuing the asset freeze, the
District Court further concluded that the freeze was warranted
because the bankruptcy proceedings, then in their infancy, had not
yet established control over the Wyly Brothers’ assets, which
remained at risk of transfer and dissipation, including by third
parties offshore.28 Finally, the District Court determined that the
SEC was likely to show that the family‐member Relief Defendants
had received ill‐gotten gains without any legitimate claim to those
assets, fulfilling the applicable standard set forth in SEC v.
Cavanagh.29
This appeal was then taken by all of the Relief Defendants
except Caroline Wyly, the widow of Charles Wyly and beneficiary of
his estate. She sought relief in the Bankruptcy Court instead. On
January 9, 2015, the Bankruptcy Court rejected Caroline Wyly’s
argument that the automatic stay barred the SEC’s action against her
as a relief defendant.30 Instead, the Bankruptcy Court ruled that, in
26 230 F.3d 65 (2d Cir. 2000).
27 Wyly, 73 F. Supp. 3d at 320.
28 Id. at 320‐21.
29 155 F.3d 129 (2d Cir. 1998).
30 In re Wyly, 526 B.R. 194 (Bankr. N.D. Tex. 2015).
13
seeking the asset freeze, the SEC was acting in its police and
regulatory capacity, and it declined to enforce the automatic stay
against the SEC.31
DISCUSSION
On appeal, the fifteen family‐member Relief Defendants
challenge the freeze of their assets on three grounds.
First, they argue that the freeze order violates the Bankruptcy
Code’s automatic stay provision, because it constitutes an action by
the SEC to collect an anticipated money judgment.
Second, they argue that, under the District Court’s “tax
avoidance” measure of disgorgement, the SEC has not shown as a
matter of law that any Relief Defendants received assets that
constitute “ill‐gotten gains.”
Third, they contend that the District Court erred or “abused its
discretion” in applying the freeze order to seven of the Relief
Defendants, because there is no record evidence that those
individuals received any ill‐gotten gains from the Wyly Brothers.
We review an asset freeze order for abuse of discretion.32 “A
district court has abused its discretion if it based its ruling on an
Id. at 201. In the bankruptcy proceeding, Samuel and Caroline Wyly
31
have filed schedules of assets and liabilities containing disclaimers that assets
from the IOM trusts are property of the debtors’ bankruptcy estates.
32 Smith v. SEC, 653 F.3d 121, 127 (2d Cir. 2011).
14
erroneous view of the law or on a clearly erroneous assessment of
the evidence, or rendered a decision that cannot be located within
the range of permissible decisions.”33 We review underlying
questions of fact for clear error, and underlying questions of law—
such as the application of the Bankruptcy Code’s automatic stay
provision to the freeze order—de novo.34 We consider in turn each of
these claims on appeal.
I. Asset Freeze Order and Automatic Stay
The Relief Defendants’ first (and principal) claim—that the
Bankruptcy Code’s automatic stay provision precluded the issuance
of the asset freeze order—tests the scope of this Court’s opinion in
SEC v. Brennan. To evaluate it, we must first explore the meaning of
the automatic stay provision, an exception to that provision, and an
exception to the exception.
A. Applicable Law
Bankruptcy Code § 362 automatically stays virtually all
proceedings against a debtor, including “any act to obtain
possession of property of the estate or of property from the estate or
In re Sims, 534 F.3d 117, 132 (2d Cir. 2008) (internal quotation marks,
33
alteration, and citations omitted); see also In re The City of New York, 607 F.3d 923,
943 n.21 (2d Cir. 2010) (explaining that “abuse” is a nonpejorative “term of art”).
34 Picard v. Fairfield Greenwich Ltd., 762 F.3d 199, 206 (2d Cir. 2014).
15
to exercise control over property of the estate.”35 The automatic stay
of Section 362 thus serves “one of the core purposes of bankruptcy,”
by enabling “the bankruptcy court to centralize all disputes
concerning property of the debtor’s estate so that reorganization can
proceed efficiently, unimpeded by uncoordinated proceedings in
other arenas.”36
As relevant here, the Code also contains an exception to
Section 362 known as the “governmental unit” exception, which
provides that the automatic stay provision does not extend to
the commencement or continuation of an action or
proceeding by a governmental unit . . . to enforce such
governmental unit’s or organization’s police and
regulatory power, including the enforcement of a
judgment other than a money judgment, obtained in an
action or proceeding by the governmental unit to
enforce such governmental unit’s or organization’s
police or regulatory power.37
As we explained in Brennan, the purpose of the governmental unit
exception “is to prevent a debtor from ‘frustrating necessary
11 U.S.C. § 362(a)(3). We assume without deciding that the non‐debtor
35
Relief Defendants may invoke the automatic stay provision in aid of their claims
on appeal.
In re U.S. Lines, Inc., 197 F.3d 631, 640 (2d Cir. 1999) (quoting In re
36
Ionosphere Clubs, Inc., 922 F.2d 984, 989 (2d Cir. 1990)).
37 11 U.S.C. § 362(b)(4) (emphasis added).
16
governmental functions by seeking refuge in bankruptcy court.’”38
As the legislative history makes plain, “where a governmental unit
is suing a debtor to prevent or stop [a] violation [constituting] fraud
. . . or attempting to fix damages for violation of such a law, the
action or proceeding is not stayed under the automatic stay.”39
In the instant case, all parties agree that the SEC’s regulatory
enforcement action against the Wyly Brothers falls within the
governmental unit exception.40 The Relief Defendants assert,
however, that this case falls under an exception to the governmental
unit exception. This “exception to the exception” provides that
actions to enforce money judgments are subject to the automatic
stay, even if they were otherwise pursued by a governmental unit in
furtherance of the government’s police or regulatory powers.41
Accordingly, the Relief Defendants argue that the asset freeze order
is subject to the automatic stay. The SEC counters that the asset
freeze order does not fall within the money judgment “exception to
the exception” and hence does not trigger the automatic stay. Both
parties invoke the case of SEC v. Brennan in aid of their positions.
230 F.3d at 71 (quoting City of New York v. Exxon Corp., 932 F.2d 1020,
38
1024 (2d Cir. 1991)).
H.R. REP. No. 95‐595, at 343 (1977), U.S. Code Cong. & Admin. News at
39
6299 (emphasis added); accord S. REP. No. 95‐989, at 52 (1978), U.S. Code Cong. &
Admin. News at 5838.
40 See Defs.’ Br. at 15; Pl. Br. at 23.
See Brennan, 230 F.3d at 71 (quoting Penn Terra Ltd. v. Dep’t of Envtl. Res.,
41
733 F.2d 267, 272 (3d Cir. 1984)).
17
That case, like this one, involved a defendant found liable for
securities fraud in an SEC enforcement action, who subsequently
filed for bankruptcy protection. Like the Relief Defendants here, the
defendant in Brennan then argued that an order in the SEC
enforcement action violated the Bankruptcy Code’s automatic stay
provision. The order at issue required the defendant to repatriate to
the United States assets held in offshore protection trusts and
deposit them in a court registry. We vacated the repatriation and
deposit order in Brennan. Calling the question “a close one,” we
nonetheless found that it constituted a step “preparatory to money
collection” that fit within the “exception to the exception” and was
thus foreclosed by the operative automatic stay provision.42
The critical question here is whether the asset freeze order at
issue was a permissible use of the government’s regulatory power
under the “governmental unit exception,” or whether, like its
analogue in Brennan, it was an impermissible action to enforce a
money judgment under the “exception to the exception.” The
District Court carefully analyzed our reasons for vacating the
repatriation and deposit order in Brennan and found that the asset
freeze at issue here was a permissible use of the government’s
regulatory power under the “governmental unit exception.”43
42 Id. at 71‐72 (internal quotation marks omitted).
43 Wyly, 73 F. Supp. 3d at 320.
18
We agree. On de novo review, we hold that the District Court
correctly interpreted our controlling precedent in SEC v. Brennan
and properly concluded that this asset freeze order is exempt from
the Bankruptcy Code’s automatic stay provision.
Factual, procedural, and policy considerations distinguish this
case from Brennan and lead to our conclusion that this asset freeze
order falls within the “governmental unit exception” but not within
the “exception to the exception” for actions to enforce a money
judgment. We explain each of these considerations below.
B. The Factual Nature of the Order
First, the order at issue here differs significantly from the
order in Brennan. There, we vacated an order directing the debtor to
repatriate assets held abroad and deposit them in a court registry.
Here, the applicable order is merely an asset freeze, which, unlike
the order in Brennan, neither transfers ownership, nor vests control
over assets in the courts, nor—given its numerous exemptions for
legal, medical, educational, and other uses, as well as generous
living expenses—entirely deprives the Relief Defendants of their
use. To be sure, the asset freeze order entered by the District Court
does temporarily burden the use of certain assets. It does not,
however, rise to the level of impermissible enforcement of a money
judgment. Unlike the repatriation and deposit order in Brennan, the
asset freeze seeks not to modify or transfer assets in any way, but
rather, merely to “preserve the status quo in anticipation of a final
19
judgment.”44 We regarded as “a close one” the question of whether
Brennan’s substantially more burdensome repatriation and deposit
order constituted enforcement of a money judgment.45 The
significantly less onerous asset freeze at issue here falls on the other
side of the line.
Relief Defendants attempt to characterize the freeze as an
impermissible “step []preparatory to money collection” that is
functionally equivalent to Brennan’s repatriation and registry
deposit order.46 The argument is strained and unpersuasive. By that
logic, many or most aspects of statutorily unstayed governmental
unit actions could be characterized as “steps preparatory to money
collection,” so long as the initial complaint sought monetary relief.
We decline to adopt the interpretation of the exception urged by
Relief Defendants, which would effectively swallow the rule.
C. Procedural Posture
As the District Court noted, the procedural posture of this
case also significantly differs from that of Brennan. There, the
repatriation and deposit order arose as part of the SEC’s post‐
44 Id.
45 Brennan, 230 F.3d at 71.
46 Defs.’ Br. at 15‐16.
20
judgment collection procedures.47 Here, the November 2014 asset
freeze order was imposed before the entry of final judgment on
February 26, 2015 as to the Wyly Brothers.48
In Brennan, we instructed that “the line between [unstayed]
police or regulatory power on the one hand, and [stayed]
enforcement of a money judgment on the other, [must] be drawn at
entry of judgment.”49 In other words, “up to the moment when
liability is definitively fixed by entry of judgment, the government is
acting in its police or regulatory capacity. . . . However, once
liability is fixed and a money judgment has been entered, the
government necessarily acts only to vindicate its own interest in
collecting its judgment.”50
The pre‐judgment asset freeze at issue here thus does not
implicate the same concerns as did the post‐judgment repatriation
and deposit order in Brennan. Moreover, the SEC persuasively
The repatriation and deposit order was issued after the SEC moved for
47
an ex parte order to show cause as to why Brennan should not be held in civil
contempt for failing to comply with the disgorgement order.
On July 7, 2015, the District Court denied the Wylys’ motion for
48
judgment as a matter of law pursuant to Federal Rule of Civil Procedure 50(b),
or, in the alternative, for a new trial pursuant to Federal Rule of Civil Procedure
59. On September 4, 2015, the Wylys filed a notice of appeal as to the February
26, 2015 final judgment and the July 7, 2015 order denying their Rule 50(b) and
Rule 59 motions.
49 230 F.3d at 72 (internal quotation marks and alteration omitted).
50 Id. at 73.
21
argues that the relevant judgment is not the one entered in February
2015 against the Wyly Brothers, but rather, the judgment which has
yet to be entered against the Relief Defendants, who only answered
the complaint against them in April 2015.
Even if the February 2015 judgment against the Wyly Brothers
were the operative judgment, however, the later‐occurring entry of
final judgment alone does not operate to transform a permissible
pre‐judgment asset freeze into an impermissible post‐judgment
enforcement act. We did not intend in Brennan to impose a one‐
factor timing test whereby orders entered pre‐judgment are always
exempt from the automatic stay provision while orders entered (or
with continuing force) post‐judgment are always subject to the stay.
As the Relief Defendants note, such a simplistic standard could
permit procedural end‐runs that would defeat the spirit and
purpose of the statute, whereby any manner of incursion would be
permitted so long as it technically predated the entry of a final
judgment. To be sure, the timing of the order’s entry constitutes a
crucial factor in our analysis, but it is not invariably dispositive.51
We note that the timing here neatly exemplifies the distinction between
51
the asset freeze order in this case and the repatriation and deposit order that
violated the automatic stay in Brennan. Asset freeze orders like the one entered
here are routinely issued pre‐judgment in actions for equitable remedies, well
before damages have been fixed or a money judgment entered. See, e.g., Gucci
Am., Inc. v. Weixing Li, 768 F.3d 122, 131 (2d Cir. 2014) (noting that district courts
have equitable power to issue a pre‐judgment asset freeze where such relief was
traditionally available). By contrast, repatriation and deposit orders, like the one
22
Consistent with the statutory imperative, our focus remains
whether a given order constitutes “enforcement of a judgment other
than a money judgment.”52 Here, the asset freeze did not enforce a
money judgment because, as of the date of issuance of the freeze
order, no judgment had yet been entered.
D. Policy Concerns
Finally, the policy concerns underlying the disposition in
Brennan weigh in favor of a different outcome here. In Brennan, we
concluded that “the policies behind § 362 as a whole weigh strongly
in favor of applying the automatic stay in these circumstances.”53
We cited two specific policies: (1) the general purpose of the
automatic stay “to allow the bankruptcy court to centralize all
disputes concerning property of the debtor’s estate so that
reorganization can proceed efficiently, unimpeded by
uncoordinated proceedings in other arenas,”54 and (2) the general
purpose of the governmental unit exception “to prevent a debtor
from ‘frustrating necessary governmental functions by seeking
refuge in bankruptcy court.’”55
vacated in Brennan, are typically reserved for post‐judgment collection
proceedings.
52 11 U.S.C. § 362(b)(4).
53 230 F.3d at 75.
54 Id. (quoting In re United States Lines, Inc., 197 F.3d at 640).
55 Id. (quoting Exxon Corp., 932 F.2d at 1024).
23
In this case, the asset freeze order does not jeopardize either of
these policy objectives; on the contrary, it complements both. In
Brennan, the SEC had tried and failed to obtain from the Bankruptcy
Court a repatriation order for the offshore trusts. Only after that
failure did the SEC seek in the district court precisely the same relief
that the Bankruptcy Court had previously rejected. Thus, the
specter of forum‐shopping and inefficient, uncoordinated
proceedings loomed large in our analysis of the policy concerns
presented in Brennan.
Not so here. No conflict exists between the proceedings in the
District Court and those in the Bankruptcy Court. This asset freeze
order is narrowly framed to exclude assets in the bankruptcy
proceeding and to be lifted as soon as the assets are clearly under the
control of the Bankruptcy Court. Indeed, the Bankruptcy Court
itself endorsed the freeze as “neatly avoiding duplication of judicial
effort between the SEC Action and these bankruptcy cases.”56 What
is more, the Bankruptcy Court determined that enforcing the
automatic stay “may ultimately accomplish little” since the SEC
would likely seek relief from the stay to proceed against the Relief
Defendants in its enforcement action.57 Though it stopped short of
deciding such a hypothetical motion, the Bankruptcy Court strongly
indicated its own inclination to avoid extending the automatic stay
to cover this case: “From the standpoint of judicial economy, it
56 In re Wyly, 526 B.R. at 196 n.4.
57 Id. at 202.
24
likely would make the most sense for the District Court, in one
coordinated proceeding, to liquidate the amount of alleged ill‐gotten
gains of the securities fraud that all relief defendants allegedly
received and still possess.”58
Under these circumstances, the entry of the asset freeze order
here does not contravene the first policy of “centraliz[ing] all
disputes concerning property of the debtor’s estate so that
reorganization can proceed efficiently, unimpeded by
uncoordinated proceedings in other arenas.”59 Moreover, the asset
freeze order is fully consistent with the second policy of
“prevent[ing] a debtor from frustrating necessary governmental
functions by seeking refuge in bankruptcy court.”60 The Wylys
initiated bankruptcy proceedings and invoked the automatic stay
mere days after the SEC filed its then‐pending motion for an asset
freeze. The timing speaks loudly for itself.
Finally, there is reason to doubt the Relief Defendants’
representation that the District Court’s involvement is unnecessary
because “the frozen assets are property of the bankruptcy estates [of
the Wyly Brothers] . . . [and therefore] are under the exclusive
jurisdiction of the Bankruptcy Court.”61 In their bankruptcy
58 Id.
59 Brennan, 230 F.3d at 75 (quoting In re United States Lines, Inc., 197 F.3d at
640).
60 Id. (quoting Exxon Corp., 932 F.2d at 1024).
61 Defs.’ Br. at 13‐14.
25
proceedings, Samuel and Caroline Wyly have refused to take a
position on whether they own the IOM trust assets, leaving in doubt
whether they fall within the bankruptcy court’s jurisdiction.62
Further, the Bankruptcy Court may not be able to address
dissipation of offshore assets by third parties, which some evidence
suggests may be already underway.63 Notwithstanding the ongoing
bankruptcy proceedings, there is a clear need for the independent
asset freeze to preserve the status quo.
In light of the legal, factual, procedural, and policy concerns at
issue here, we conclude that the asset freeze order is consistent with
the Bankruptcy Code’s automatic stay provision and our governing
precedent in Brennan.
II. Receipt of Ill‐Gotten Gains
We turn next to the Relief Defendants’ two‐part challenge to
the scope of the asset freeze order. Equitable relief against a third‐
party non‐wrongdoer may be entered where such an individual “(1)
has received ill‐gotten funds; and (2) does not have a legitimate
Wyly, 73 F. Supp. 3d at 321 & n.20. Similarly, in their briefing here,
62
Relief Defendants carefully avoid claiming (or disclaiming) the IOM trust assets
on behalf of the Wyly Brothers. See Defs.’ Br. at 13 (“The SEC takes the position
that assets transferred to the relief defendants by the Wyly Brothers or the
offshore entities are either owned or controlled by the Wyly Brothers. . . . Thus,
according to the SEC, the frozen assets are property of the bankruptcy estates of
Sam Wyly and Charles Wyly’s widow . . . .” (emphasis added)).
63 Wyly, 73 F. Supp. 3d at 320 & n.19.
26
claim to those funds.”64 Courts require a “lesser showing” to enter
an asset freeze order than is needed for other forms of equitable
relief.65 To obtain an asset freeze order, the SEC “must establish
only that it is likely to succeed on the merits.”66
It is undisputed that defendants have no legitimate claim to
the funds in the IOM trusts. Rather, the Relief Defendants focus
their arguments on the first prong of the Cavanagh test. First, they
contend that the SEC cannot show the receipt of ill‐gotten gains “as
a matter of law,” because the District Court measured disgorgement
by the amount of taxes avoided by the Wyly Brothers.67 Because tax
savings “are personal to the taxpayers,” the Relief Defendants assert
that the Wyly Brothers “did not—and as a matter of law could not—
transfer them to family members or anyone else.”68
This argument misunderstands the nature of the District
Court’s disgorgement order. As a general matter, disgorgement is
an “equitable obligation to return a sum equal to the amount
wrongfully obtained, rather than a requirement to replevy a specific
64 Cavanagh, 155 F.3d at 136.
65 Id. at 132.
Id. As noted above, see notes 32‐34 ante, we review an asset freeze order
66
for abuse of discretion, see Smith, 653 F.3d at 127; we review the underlying legal
conclusions de novo and factual determinations for clear error, see Cayuga Indian
Nation v. Seneca Cty., 761 F.3d 218, 220 (2d Cir. 2014).
67 Defs.’ Br. at 19‐20.
68 Id. at 20.
27
asset.”69 Understanding this distinction, the District Court explained
that it was not limited to ordering disgorgement of “the actual
property obtained by means of his wrongful act.”70
In its September opinion explaining its disgorgement order,
the District Court emphasized that “this is not a civil action for the
collection or recovery of taxes . . . . Rather, this is a civil action for
securities law violations, the remedy for which is measured by the
amount of taxes avoided as a result of the defendants’ securities
violations.”71 The Court made clear that “[m]easuring unjust
enrichment by approximating avoided taxes does not transform an
order of disgorgement into an assessment of tax liability.”72
Since the tax avoidance sum merely served the purpose of
quantifying the disgorgement remedy, rather than forming the basis
for liability itself, it is irrelevant that—or whether—tax liability is
Wyly, 56 F. Supp. 3d at 431 n.223 (quoting SEC v. Banner Fund Int’l, 211
69
F.3d 602, 617 (D.C. Cir. 2000)). As the D.C. Circuit has explained, to hold
otherwise “would lead to absurd results,” including, for example, enabling “a
defendant who was careful to spend all the proceeds of his fraudulent scheme,
while husbanding his other assets, [to be] immune from an order of
disgorgement.” Banner Fund Int’l, 211 F.3d at 617.
70 Wyly, 56 F. Supp. 3d at 430 (emphasis in original).
Id. at 425 (emphasis in original) (internal quotation marks omitted)
71
(quoting its own earlier summary judgment decision in SEC v. Wyly, No. 10 Civ.
5760 (SAS), 2013 WL 2951960, at *1 (S.D.N.Y. June 13, 2013)).
72 Id.
28
non‐transferable.73 What matters is that the gains received were ill‐
gotten in violation of securities laws, a determination that has
already been made by the jury at trial. That conclusion is not
disturbed by the particular measure used by the District Court to
order equitable relief. Here, the District Court’s adoption of two
alternative measures of disgorgement in its September and
December opinions makes the point even more salient.74 The Relief
Defendants challenge only the tax measure set forth in the
September opinion. In fact, the particular method of measurement
used is immaterial.
III. Receipt by Certain Relief Defendants
Finally, we address the Relief Defendants’ second challenge to
the scope of the asset freeze order, in which they argue that there is
insufficient evidence to show that seven of the Relief Defendants—
Andrew Wyly, Christiana Wyly, Charles J. Wyly, III, John Graham,
David Matthews, Donnie Miller, and Evan Wyly—received funds
from the IOM trusts or the Wyly Brothers directly. These seven
defendants request vacatur of the asset freeze order as to them.75
Though we need not reach the issue, we note that the SEC presents
73
countervailing arguments and precedent indicating that unlawful tax savings are
transferable. See Pl. Br. at 43‐45.
As previously noted, the alternative calculation set forth in the
74
December disgorgement opinion was only to be used if the September
disgorgement method failed on appeal.
75 Defs.’ Br. at 21‐22; Defs.’ Reply Br. at 11‐15.
29
Treating the Relief Defendants as being all similarly situated,
the District Court stated, without further elaboration or
individuation, that the IOM trusts “have made distributions to the
Family Members[;] [t]hus, the Family Members are likely in
possession of ill‐gotten funds.”76 Seven Relief Defendants challenge
this finding as baseless, and the SEC has presented no evidence of
the alleged distributions cited by the District Court as to these
defendants. Three Relief Defendants—Andrew Wyly, Christiana
Wyly, and Evan Wyly—are named beneficiaries of the IOM trusts,
but the record on appeal does not reflect distributions to them from
these trusts. Four other Relief Defendants—Charles J. Wyly, III,
Donald Miller, John Graham, and David Matthews—appear to have
possessed trust property, including jewelry, artwork, furnishings
and residences, but the District Court did not rely on this evidence
in fashioning its asset freeze order.
Unable to offer concrete evidence of these alleged
distributions, the SEC instead argues that these seven defendants
have nothing to complain of if they do not possess assets frozen by
the order. This argument must be rejected. We require a showing of
receipt of ill‐gotten gains consistent with Cavanagh before an
individual can be subject to an asset freeze order. The SEC’s
position would render the Cavanagh requirement meaningless and
would sever the very connection permitting relief defendants to be
76 Wyly, 73 F. Supp. 3d at 322.
30
joined to an action without an assertion of wrongdoing or other
grounds for subject matter jurisdiction over them.77
On this record, we cannot know, much less decide, whether
the District Court clearly erred in determining that the IOM trusts
“made distributions” to each of the Relief Defendants. We thus
think it prudent to remand the cause to the District Court for further
individualized findings regarding trust distributions to these seven
Relief Defendants. Given its greater familiarity with the record
evidence and the evidence adduced at trial, the District Court
should rely on specific facts from the record showing receipt of ill‐
gotten gains by these individual defendants or, to the extent it
deems necessary, undertake further fact‐finding. If the requisite
evidence does not exist with respect to any or all of the seven Relief
Defendants, the asset freeze order should be vacated as to those
individuals.
CONCLUSION
This case presents us with the opportunity to clarify and
delimit the scope of SEC v. Brennan. There, the facts and
circumstances weighed in favor of staying the order requiring the
defendant to repatriate assets and deposit them in a court registry.
See Commodity Futures Trading Comm’n v. Kimberlynn Creek Ranch, Inc.,
77
276 F.3d 187, 192 (4th Cir. 2002) (noting that a nominal defendant with no
ownership interest in the funds at issue “is part of a suit only as the holder of
assets that must be recovered in order to afford complete relief”).
31
Here, the balance of factors requires a different result. We therefore
hold as follows:
(1) The pre‐judgment asset freeze order imposed by the
District Court was exempt from the Bankruptcy Code’s
automatic stay provision. The asset freeze order at
issue here did not seek to enforce a money judgment
and thus fell within the “governmental unit” exception
to the stay provision, but not within the “exception to
the exception.”
(2) The order was properly supported by a showing of
receipt of ill‐gotten gains by nine of the sixteen Relief
Defendants.
Accordingly, we AFFIRM in part the District Court’s
November 3, 2014 asset freeze order insofar as it
restrained the assets of these nine Relief Defendants.
(3) We are unable to determine on this record whether
seven of the sixteen Relief Defendants personally
received ill‐gotten gains.
Accordingly, we REMAND the cause to the District
Court for additional factual development on the limited
issue of whether these seven Relief Defendants received
ill‐gotten gains.
In the interest of judicial economy, any future appeals taken
from the District Court’s decisions shall be referred to this panel.
32
