Utah Bar Journal

The Appointment and Responsibilities of an SEC Receiver
An SEC receiver is appointed by a judge in an action that has been brought by the SEC against corporate entities, individuals, or both who have allegedly engaged in conduct prohibited by the various securities statutes. The receiver is an officer of the court, not an employee of the SEC, and ultimately answers to the judge who appoints him or her. Typically, the receiver is an attorney or accountant in private practice, who is compensated from the assets of the receivership. Court clerks, civil and military officers, and those employed by the U.S. Government or a judge are prohibited from service as a receiver. See 28 U.S.C. §§ 957; 958 (2000).

The SEC is a civil enforcement agency that will take action to prevent insider trading, fraud by broker dealers, prime bank schemes, and other forms of investment fraud. The U.S. Attorneys’ Office will bring separate criminal actions in appropriate circumstances. Receivership actions often arise in the context of a Ponzi scheme. A Ponzi scheme is an investment scheme where the money of new investors is used to pay older investors, thus creating the illusion of a viable investment opportunity and inducing additional individuals to invest. Ponzi schemes are inherently unstable and inevitably collapse. The SEC may bring an action in federal court to enjoin sales and to freeze the assets of the Ponzi participants before the collapse happens.

Once the assets have been frozen, the SEC may also request that a receiver be appointed to prevent the dissipation of those assets. While Federal Rule of Civil Procedure 66 explicitly provides for the appointment of a federal equity receiver, the federal courts also have equity powers to order ancillary relief to effectuate the purposes of the federal securities laws, to preserve investor funds, and to ensure that wrongdoers do not profit from their unlawful conduct. The appointment of a receiver is considered an extreme remedy invoked only in cases of clear fraud.

Not every action by the SEC warrants the appointment of a receiver. For example, there may be insufficient assets to justify the appointment of a receiver; or the violations may not be sufficiently egregious to warrant interference with corporate democracy. A court has the discretion to appoint a special agent with authority to monitor the actions of a company suspected of securities fraud, but without authority to control its operations. A court may consider the following factors in determining whether appointment of a receiver is appropriate:

1. Is the security adequate to satisfy the debt?

2. What is the financial position of the debtor?

3. Was there fraudulent conduct on defendant’s part?

4. Are there adequate legal remedies?

5. Is there imminent danger of the property being lost, concealed, injured, diminished in value, or squandered?

6. Is it probable that the harm to the moving party by denial of appointment would outweigh the injury to the parties opposing appointment?

7. What is the probability of the moving party’s success in the action and the possibility of irreparable injury to its interest in the property?

8. Will the interest sought to be protected in fact be well-served by receivership?

If appointed, the receiver is charged with marshaling the assets of the company and individuals in receivership for the benefit of the investors. If the scheme includes income-producing assets, then the receiver will operate them pending their sale. The receivership may own real or personal property, which the receiver will sell. Typically, a receiver will trace assets and seek to recover funds from investors who received more than they invested or from persons and entities who received money without giving commensurate compensation to the receivership entities.
It is tempting to equate an SEC receiver to a bankruptcy trustee. There are many similarities, but there are also substantial differences. Unlike a bankruptcy trustee, whose powers are governed by statute, the powers of a federal equity receiver are governed by the order of the court appointing him or her and are based on the equity powers of the court. The circumstances of receiverships are different, and the trial courts administering receiverships are granted wide discretion. If a receivership court determines that a bankruptcy analogy does not fit the circumstances of a particular receivership, it is free to disregard that analogy. The emphasis in a federal equity receivership is on the word equity. The court will typically favor pro rata distribution to investors, but it may choose a different allocation if warranted. Because of this wide discretion, it is difficult to draw conclusions about what is likely to happen in a particular receivership based on the outcome of other receiverships.

There are, however, a few statutes that govern a receiver’s actions. United States Code section 959 indicates that leave of court is not necessary to sue a receiver, but actions against a receiver are subject to the general equity powers of the court to reach the ends of justice. See 28 U.S.C. § 959 (2000). Section 959 also directs the receiver to manage and operate the property in his possession pursuant to the laws of the state where the property is located. See id. The sale of real property by a receiver is governed by section 2001. See id. § 2001 (2000). And section 754 governs what the receiver must do when there is property of the receivership in a state or district other than the one in which he is appointed. See id. § 754 (2000).

Generally, it is the receiver’s job to marshal the assets of the Ponzi scheme and hold them for SEC distribution to the investors. To effectuate the receiver’s duties, the court will typically grant the receiver very broad powers, including the authority to sue on behalf of the receivership and to place the receivership in bankruptcy. Essentially, the receiver takes control of all of the receivership company’s assets and is granted discretion to gather, manage, and liquidate those assets.

Dealing With Claims Against a Receiver
There are a few things to keep in mind if you are approached by someone who is either a former investor in a Ponzi scheme or who is involved in litigation with a federal equity receiver.

Federal Jurisdiction and Nationwide Service of Process
Often receivership property will be located in several different states. By statute, process may issue and be executed in any federal court to recover receivership property. See id. § 1692 (2000). As a practical matter, receivers may bring suit in the receivership court relating to property found anywhere in the United States. This is often preferable because the judge who appoints the receiver will be most familiar with the Ponzi scheme and can best exercise its equity powers to reach a fair result. A receiver may also take advantage of nationwide service of process.

Stay of Litigation
In connection with appointing a receiver, the court has the power to stay and prohibit litigation against the receivership entity, which will be effective against nonparties, even in the absence of notice.

Summary Proceedings
A receivership court may use summary proceedings to determine whether an asset is part of a receivership estate or to evaluate an objection to the proposed plan of distribution. It need not hold a plenary hearing. A summary proceeding satisfies due process if it provides the claimant an opportunity to be heard and to offer evidence where facts are in dispute.

The Claims Process
Depending on the nature of the receivership records, the receiver may require that claims be submitted. A receiver will more likely request claims forms when the records of the company in receivership make it difficult to determine the amount of investments. There is no standard claim form; rather, the form is tailored to the circumstances of each case. Typically, a claim form would ask for the amount invested in the receivership company, the amount the investor has received in interest or repayment of principal, and any documentation supporting the transactions. The claim form may also ask for copies of the materials the company in receivership provided to the investor.

The Plan of Distribution
After the receiver has marshaled the company’s assets, and determined the amount of the claims, a proposed plan of distribution will be filed with the receivership court. The order appointing the receiver will usually specify whether the receiver or the SEC will file the proposed plan. Generally, the proposed plan will identify the individuals who will receive money from the receivership and identify the amount they are to receive. Sometimes the plan will classify the recipients, seeking to exclude, for example, those who participated in the scheme or providing priority to one or more groups of recipients.

The proposed plan will provide a mechanism for objections. After resolving any objections, the receivership court issues a final plan of distribution. Because of the wide variety of circumstances in receivership cases, the receivership court has wide discretion in formulating a plan of distribution.

Understanding the general process of receivership proceedings is helpful in advising clients who may become part of the claims process. Unfortunately, receiverships rarely have sufficient assets to cover all of the former investor’s claims, often because those assets have been wasted. The sooner the SEC can bring an enforcement action and freeze the assets of a Ponzi scheme, the less opportunity the perpetrators have to dissipate assets and to bring additional victims into the scheme. Americans lose billions of dollars each year in investment schemes. Of course, prevention is the best advice; if a client asks about an investment that seems too good to be true or is otherwise questionable, it is advisable to contact the SEC at (801) 524-5796. The SEC can tell you whether an enforcement action is ongoing and can begin an investigation if necessary.