GRAY H. MILLER, District Judge.
Pending before the court is a motion to approve a plan of distribution (Dkt. 133), which was filed by the court-appointed receiver, Thomas L. Taylor, III ("Receiver"). Certain investors in an offering by PrivateFX Global One ("Global One Investors") have filed an objection to the proposed plan. Dkt. 138. Wells Fargo Bank, N.A., which is a creditor of defendant Daniel J. Petroski, also filed an objection. Dkt. 139. Additionally, the Global One Investors have filed a motion to intervene. Dkt. 138. Having considered the motion to approve the plan of distribution, the content of the proposed plan, which is contained within the motion, the objections, and the applicable law, the court is of the opinion that the motion to approve the plan (Dkt. 133) should be GRANTED, the objections (Dkts. 138, 139) OVERRULED, and the plan APPROVED. Additionally, the Global One Investors' motion to intervene (Dkt. 138) should be DENIED.
The Securities and Exchange Commission ("SEC") and the Commodity Futures Trading Commission ("CFTC") each filed a complaint against defendants which alleged violations of certain securities and commodities laws. Dkt. 55. The court consolidated the SEC and CFTC cases. Dkt. 11. The court found good cause to believe that defendants Global One, 36 Holdings Ltd., Robert D. Watson, and Daniel J. Petroski engaged in acts and practices constituting violations of Commodity Exchange Act and the Securities Exchange Act. Dkts. 10, 12, 13. The court therefore froze the assets owned, controlled, managed, or held by or for the benefit of these defendants and appointed the Receiver. Id. The court eventually entered consent orders of preliminary injunctions as to these same defendants. Dkts. 28-31.
The defendants and the CFTC reached an agreement and consented to the entry of a permanent injunction.
The Receiver determined that there are approximately 135 defrauded investors in these schemes, and the defrauded investors have asserted claims exceeding $85 million. Dkt. 133. According to the Receiver, defendant 36 Holdings was "the fulcrum in a number of continuing forex trading schemes" and that "Global One ... was the latest vehicle employed in the ongoing fraud and its investors were the most recently defrauded by Defendants' trading schemes which have victimized numerous other investors." Id.
The Receiver has recovered approximately $15 million from the receivership estate, which consists of assets of the defendants and related entities ("Receivership Estate"). Dkts. 15, 51, 133. The Receiver requests that the court authorize an interim distribution of $12 million, which he proposes should be distributed to each investor on a pro rata basis, "based upon their net out-of-pocket loss as a percentage of the total out-of-pocket losses of all of the Investors." Dkt. 133 at 12. The Receiver proposes to retain approximately $1,630,000 "to use to protect the Receivership Estate's interests in assets and conclude the efforts of the Receiver," including taxes, administration of the wind down of the Receivership Estate, and conclusion of litigation and asset sales that will benefit the Estate. Id. The Receiver proposes to make an additional distribution at the conclusion of the Receivership. Id. at 12-13.
The Global One Investors are opposed to the Receiver's plan of distribution. They hired a forensic accountant who declares that at least $10.6 million of the funds in the Receivership Estate were contributed by the Global One Investors, were originally placed in separate and distinct bank accounts, have always remained under the separate control of Global One in those accounts, and remained separate until the Receiver took possession of all of the defendants' assets. Dkt. 138 at 2. The Global One Investors assert that these assets should be returned to them rather than distributed under the Receiver's plan, as the other investors who would benefit from the funds if distributed on a pro rata basis did not invest in a distinct investment program and cannot trace the assets they contributed. Id. The Global One Investors advocate for the adoption of a plan prepared by their forensic accountant, which allows for a pro rata distribution to the Global One Investors of the funds that the forensic accountant determined had remained segregated in the Global One accounts and a pro rata distribution of the remaining funds at the discretion of the Receiver. Id. & Dkt. 138, Exh. A.
The Receiver argues that a pro rata distribution is appropriate in this case because providing later investors in a Ponzi-type scheme "the opportunity to recover a larger portion of the funds would elevate positions of investors based merely on the `actions of the defrauders.'" Dkt. 143 at 12 (quoting United States v. Durham, 86 F.3d 70, 72 (5th Cir.1996)). The Receiver claims that pro rata distribution "ensures equity and is the only fair way to treat all the investors harmed by the Defendants' fraud." Id. at 8.
In 1924, the Supreme Court issued an opinion in an appeal of six suits brought by
The six cases on appeal involved investors who were able to withdraw their investments, which had been deposited at the Hanover Trust Company, after the Ponzi scheme was revealed to the public but four months before Ponzi filed for bankruptcy. Id. The lower courts determined that the investors, by withdrawing the original funds they invested rather than the amount of the promissory notes, had rescinded their loan contracts for fraud, and that the investors who had failed to do so were merely creditors of the bankruptcy estate. Id. at 9, 44 S.Ct. 424. The Supreme Court disagreed, noting that Ponzi had "adopted the practice of permitting any who did not wish to leave his money for 45 days to receive it back in full without interest," and the six defendants were merely taking advantage of this agreement. Id. at 10, 44 S.Ct. 424. The Supreme Court held that the six defrauded lenders were merely creditors of the estate, noting that after the date on which the news media declared Ponzi insolvent, "the victims of Ponzi were not to be divided into two classes, those who rescinded for fraud and those who were relying on his contract to pay them. They were all one class, actuated by the same purpose to save themselves from the effect of Ponzi's insolvency .... [T]hey were, in their inability to identify their payments, creditors and nothing more. It is a case the circumstances of which call strongly for the principle that equality is equity ...." Id. at 12-13, 44 S.Ct. 424.
Ponzi's scheme was unfortunately only the beginning of many different variations of the same type of fraud. District courts considering how to treat the investors who have bought into such schemes must determine the most equitable remedy, and they are "vested with broad discretionary power" to do so. SEC v. Forex Asset Mgmt. LLC, 242 F.3d 325, 331 (5th Cir.2001) (quotations and alterations omitted). "Sitting in equity, the district court is a `court of conscience.'" Durham, 86 F.3d at 73 (quoting Wilson v. Wall, 73 U.S. (6 Wall.) 83, 90, 18 L.Ed. 727 (1867)). When a portion of funds to be distributed from the assets of a receivership estate can be traced, it is permissible to apply tracing; however, it is also permissible to allow a pro rata distribution. See Durham, 86 F.3d at 73; Forex, 242 F.3d at 331. The court must therefore determine which type of distribution is most equitable under the facts of this case.
The Global One Investors claim that it would be inequitable to allow the funds they invested that were always in a discrete account to be distributed among
The investors seeking return of the post-freeze deposits appealed, and the Fourth Circuit reversed. Id. The Fourth Circuit acknowledged that it "is well settled that `in an action brought to enforce the requirements of remedial statutes as [the Commodity Exchange Act], a district court has broad discretion to fashion appropriate relief.'" Id. (quoting CFTC v. Muller, 570 F.2d 1296, 1300 (5th Cir.1978)). However, the Fourth Circuit held that law and equity dictated that the post-freeze deposits should be returned in full because the freeze order froze the status of the account so as to "preserve the status quo of the investors." Id. at 80. Thus, the funds deposited after the freeze order were deposited after the cessation of business and should "not be included in the assets to be distributed on a pro-rata basis." Id. at 80-81. Here, the Global One Investors' funds were not deposited after Global One's accounts were frozen, so the Fourth Circuit's reasoning in Anderson simply does not apply to the facts of this case.
In P.B. Ventures, P.B. Ventures established an investment club in 1973 in which investors invested cash in exchange for notes guaranteeing an annual return of 24%. P.B. Ventures, 1991 WL 269982, at *1. The investments were deposited in an account at Advest, Inc. Id. In 1989, the defendants offered a second investment option, soliciting shares of stock in exchange for notes promising investors an annual return of 10%. Id. This stock investment option was known as "P.B. Ventures II." Id. P.B. Ventures characterized the investments of cash and stocks as "loans." Id. The investors in P.B. Ventures II "endorsed their stock certificates to P.B. Ventures II, and signed stock authorization forms permitting Advest to place the stock certifications in `street name' for margin purposes," but they were told that they would continue to own the stock and receive dividends. Id. However, P.B. Ventures' agreement with Advest, Inc. allowed Advest to sell the stock at any time, and Advest sold the stock, pursuant to this agreement, after the instigation of the SEC investigation. Id. at *2. After deducting the amount owed to Advest by P.B. Ventures from the proceeds of the stock sale, $399,000 was placed in an interest bearing account. Id. The district court ordered that these funds be returned to the investors. Id. The SEC recommended that the proceeds be distributed pro rata among all investors, but the court-appointed trustee recommended that priority should be given to the P.B. Ventures II investors, as the funds from the stocks they invested could be directly traced to the Advest account. Id. The court determined
The P.B. Ventures court specifically acknowledges that "[n]o specific distribution scheme is mandated so long as the distribution is `fair and equitable.'" Id. at *2. This court makes no finding with regard to the fairness of the P.B. Ventures court's decision, but if the court were to agree that the P.B. Ventures court's decision was fair and equitable under the facts of that case, it certainly would not lead to the conclusion that a similar result is fair and equitable in this case. This case is different from P.B. Ventures because the Global One Investors invested cash, a fungible asset, not stock shares that they believed would never be sold. The investment of stock, as opposed to cash, distinguished the P.B. Ventures II investors from the original P.B. Ventures investors in a more concrete way than the distinction the Global One Investors wish this court to make between them and the other investors. The Global One Investors claim that the funds from the Global One account should be returned solely to the Global One Investors because their funds were placed in separate and distinct bank accounts that were under the separate control of Global One. The forensic accountant indeed determined that $10,628,321.83 of the funds left in the Global One account when the assets were placed into receivership "is directly traceable on a dollar-for-dollar basis to investor deposits made directly to Global One SA accounts at third party institutions... and had been consistently maintained in bank accounts of Global One SA, separately from 36 Holdings, Ltd." Dkt. 138, Exh. A ¶ 4. However, she also noted that "$2,033,072.20 is attributable to transfers from 36 Holdings, Ltd." and that, from the inception of Global One SA, "Global One SA transferred $5,026,799.37 to 36 Holdings, Ltd. and received transfers from 36 Holdings, Ltd. of $2,033,072.20." Id. ¶¶ 4, 10. Thus, while some of the funds remaining when the accounts were frozen can be traced to the Global One Investors, it is clear that their funds were being used in the same fraudulent scheme as the funds from other investors and that the Global One Investors have only been able to trace the $10.6 million because the perpetrators of the fraud did not use their money before the scheme was stopped.
United States v. Durham and SEC v. Forex Asset Management LLC, Fifth Circuit cases that are binding on this court, are more on point. In Durham, the defendants operated an advance fee loan financing business in which they obtained money from consumers by representing that they could obtain financing for large projects or, in some cases, directly finance the projects. Durham, 86 F.3d at 71. They received $806,750 from 13 entities or individuals, and only $83,495.52 was left when the FBI discovered the scheme and arrested the defendants. Id. The defendants were indicted, and the district court froze the defendants' assets and proposed to distribute the remaining funds to all 13 investors. See id. The bulk of the funds could be traced to seven individuals, four of whom filed claims. See id. at 72. The defendants had already "deposited and withdrawn almost all of the money defrauded from the other claimants." Id. The district court decided to distribute the funds pro rata rather than giving the bulk of the funds to the victims whose funds had been traced, even though, if tracing were applied, $70,970.13 of the $83,495.52 would go
Claremont appealed the district court's decision. The Fifth Circuit stated that "tracing would have been permissible under the circumstances of this case" and that "Claremont identified its funds and had a right to seek imposition of a constructive trust on the traced funds. ... However, the court, in exercising its discretionary authority in equity, was not obliged to apply tracing." Id. at 73. The Fifth Circuit affirmed the district court's decision, noting that "the lower court in the instant case rationally considered the positions of the victims and held that following the tracing principle would be inequitable." Id.
Here, the Global One Investors, like Claremont, stand to receive the bulk of the remaining funds if the court allows the funds from the Global One account to be reserved for the Global One Investors. This would leave the other investors, who were duped just like the Global One Investors, without a significant recovery. It would be inequitable to elevate the position of the Global One Investors over the other investors simply because the defrauders had not depleted the funds in the Global One account before the scheme was stopped.
SEC v. Forex Asset Management LLC, further bolsters this conclusion. In Forex, Michael and Donna Whitbeck initially invested $100,000 in an alleged foreign currency investment opportunity offered by Forex Asset Management, L.L.C. Forex, 242 F.3d at 327. They received a statement showing a profitable return on the $100,000, and decided to invest $800,000 more. See id. The individual who controlled Forex, Kosova, deposited the $800,000 check into an account held by FAM Preferred Trading Corporation at NationsBank. See id. It is the only check that was deposited in that account. See id. Kosova then transferred $750,000 from the FAM Preferred Trading account into a brokerage account with Rosenthal Collins Group, L.P. See id. This $750,000 was the only deposit made into that account. See id. The SEC filed a complaint against Kosova and Forex for allegedly engaging in a scheme to defraud investors, and their assets were frozen. Id. at 327-28. A receiver was appointed, and the receiver determined that a pro rata distribution of the assets was appropriate because the there were no secured claims. Id. at 328.
The Whitbecks objected to the plan, arguing that the $800,000 check was deposited in a segregated account and that they should receive all of the funds that remained in that account. Id. The district court affirmed the receiver's plan, noting that it was "`the most equitable means of addressing all of the victim's harms[,] ... [and] the Whitbecks [did] not present[] any facts that would elevate their claims above those of the other investors.'" Id. (quoting the district court). The Whitbecks appealed. The Fifth Circuit noted that tracing is permissible but that a district court may also determine that tracing is inequitable after considering "the positions of the various investors and applying its discretion." Id. at 331 (citing Durham, 86 F.3d at 72-73). The Fifth Circuit held that the district court did not abuse its discretion when it rejected the Whitbecks'
The Whitbecks argued that the court should not rely on its previous decision in Durham because Durham involved tracing, and their funds were actually in a separate account and never commingled. Id. The Fifth Circuit stated that this was "a distinction without a difference." Id. It noted that "it may have been permissible in Durham for the district court to have traced the funds, and ... it may have been permissible in the present case for the district court to have allocated all of the segregated funds to the Whitbecks, [but] in neither case was the district court required to choose the remedy requested by" the investors opposed to the pro rata distribution. Id. at 331-32.
The Global One Investors claim that Forex is not on point because they claim that the Fifth Circuit did not address the issue regarding whether, when a scheme involves more than one investment program, the investors in each program are entitled to priority in the assets from that particular program because the argument was not raised in the district court. Dkt. 138. The Global One Investors then state, "[b]ecause of this defect, the Fifth Circuit affirmed the district court's approval of the receiver's plan of distribution." Id. at 11. However, the Fifth Circuit actually affirmed because it determined that the district court considered the Whitbecks' arguments and used its discretion to divide the money in a logical way. While the Whitbecks did not raise their argument relating to fraudulent schemes with more than one investment program before the district court, the Whitbecks did argue that they should receive all of the funds because their check was placed in a segregated account. See Forex, 242 F.3d at 328 (discussing the arguments made before the district court). The district court decided, notwithstanding the separate account that only contained funds from the Whitbecks' investment, that it was fair and equitable to include those funds in a general pro rata distribution for all investors, and the Fifth Circuit affirmed. It is likewise fair and equitable in this case to include the funds from the Global One account in a pro rata distribution to all investors, including the Global One Investors, because even though the Global One Investors only invested in the Global One accounts, it would be unfair for them to receive the bulk of the funds left from the fraudulent scheme of which the Global One accounts were a part simply because the funds they invested had not yet been dissipated.
The court acknowledges that $10.6 million of the $12 million that the Receiver proposes to distribute at this juncture can
The Global One Investors also request to intervene. They claim that intervention is mandatory under Federal Rule of Civil Procedure 24(a). Alternatively, they request permissive intervention under Federal Rule of Civil Procedure 24(b). See Dkt. 138. The Receiver claims that intervention is not proper under either rule. See Dkt. 143.
Under Rule 24(a), the court must permit anyone to intervene who "claims an interest relating to the property or transaction that is the subject of the action, and is so situated that disposing of the action may as a practical matter impair or impede the movant's ability to protect its interest, unless existing parties adequately represent that interest." Fed.R.Civ.P. 24(a). In the Fifth Circuit, a party seeking intervention as a matter of right must show the following: "(1) the application for intervention must be timely; (2) the applicant must have an interest relating to the property or transaction which is the subject of the action; (3) the applicant must be so situated that the disposition of the action may, as a practical matter, impair his ability to protect that interest; [and] (4) the applicant's interest must be inadequately represented by the existing parties to the suit." Taylor Commc'ns Grp., Inc. v. Sw. Bell Tel. Co., 172 F.3d 385, 386 (5th Cir.1999). "Failure to meet any one of these requirements is fatal to a claim of intervention as of right." Id.
The motion to intervene is timely, as the Global One Investors filed it within a reasonable time after the Receiver filed the proposed plan that allegedly infringes upon their right to the funds to which they claim they are entitled. The second prong is also met, as the Global One Investors unquestionably have an interest in the property that is the subject of this action. The Global One Investors, however, cannot meet their burden with regard to the third and fourth prongs. The Global One Investors cannot show that their ability to protect their interests is impaired by not being an actual party to this litigation. The Global One Investors have been given the opportunity to object to the planned disbursement of the funds to which they claim they are entitled, and the Fifth Circuit has ruled, in Forex, that investors like the Global One Investors have standing to appeal.
Under Rule 24(b), the court may, on a timely motion, permit intervention to anyone who is either "given a conditional right to intervene by a federal statute; or... has a claim or defense that shares with the main action a common question of law or fact." Fed.R.Civ.P. 24(b). Permissive intervention is "wholly discretionary" with the Court even if all elements are met. New Orleans Pub. Serv., Inc. v. United Gas Pipe Line Co., 732 F.2d 452, 471 (5th Cir.1984). Moreover, in exercising that discretion, "the court must consider whether the intervention will unduly delay or prejudice the adjudication of the original parties' rights." Fed.R.Civ.P. 24(b)(3). "In acting on a request for permissive intervention, it is proper to consider, among other things, `whether the intervenors' interests are adequately represented by other parties,' ... whether they `will significantly contribute to the full development of the underlying factual issues in the suit,'" "`the nature and extent of intervenors' interest,' ... and `their standing to raise relevant legal issues.'" Id. at 472 & n. 40 (quoting Spangler v. Pasadena City Bd. of Educ., 552 F.2d 1326, 1329 (9th Cir.1977)).
Here, the Global One Investors have a claim that shares a common question of law or fact with the claims of the SEC, CFTC, and the Receiver, all of which are involved in this action to protect the interests of those who invested in defendants' fraudulent scheme, including the Global One Investors. The Receiver claims that allowing the Global One Investors to intervene "would cause unnecessary delay in the adjudication of the underlying dispute, additional expense, and complication to the Receivership Estate." Dkt. 143. Specifically, the Receiver claims that the intervention would delay "the proposal of a final distribution plan ..., [consume] the assets available for distribution" and lead to other investors seeking to intervene, which would change an otherwise orderly process into "a morass of competing investor claims consuming significantly more of the Receiver's ... time." Id. Taking into consideration these arguments as well as the points that the Global One Investors' interests are already being protected,
Wells Fargo extended a $500,000 line of credit to defendant Daniel J. Petroski in April 2006. Dkt. 139. Petroski defaulted on the loan agreement, and, as of June 28, 2010, owes Wells Fargo $508,143.82. Wells Fargo submitted a notice of claim to the Receiver in an effort to recover the funds. The Receiver's distribution plan proposes distributing $12 million to investors, and it does not provide for the compensation of creditors like Wells Fargo. Wells Fargo argues that it, like the investors, is a victim of fraud, as Petroski allegedly misrepresented his ability to pay back the line of credit. Dkt. 139. Wells Fargo claims that allowing creditors to receive part of the distribution will only reduce the investors' claims slightly, but failing to include creditors in the distribution will result in extreme prejudice to creditors, who will receive none of the $12 million and who "will be left with almost nothing at the end of the day." Id. Thus, Wells Fargo contends that it and other similarly situated creditors should receive equitable distributions just like the investors. Id. Wells Fargo, however, did not cite any caselaw to support its position.
The Receiver argues that courts regularly grant defrauded investors a higher priority than defrauded creditors, and it cites persuasive authority supporting this view. Dkt. 142. For instance, in Quilling v. Trade Partners, Inc., No. 1:03-CV-0236, 2006 WL 3694629 (W.D.Mich. Dec. 14, 2006), the U.S. District Court for the Western District of Michigan adopted a magistrate judge's recommendation to reject the objection to a receiver's distribution plan that was filed by a creditor. The magistrate judge noted that as "an equitable matter in receivership proceedings arising out of a securities fraud, the class of fraud victims takes priority over the class of general creditors with respect to proceeds traceable to the fraud." Quilling, 2006 WL 3694629, at *1.
As discussed above, the court must determine whether the Receiver's plan is equitable. The Receiver proposes to distribute the funds to the direct victims of the fraud that is at issue in this proceeding. Wells Fargo makes a conclusory allegation that it, too, is the victim of fraud, and argues that it should therefore be on equal footing with the investors.
The Global One Investors' and Well Fargo's objections to the Receiver's plan (Dkts. 138, 139) are
