Ponzi Scheme Victims Prevail over SEC Receiver on Due Process Grounds

In SEC v. Torchia, 2019 WL 1911823 (11th Cir. Apr. 30, 2019), the Eleventh Circuit held in favor of investors victimized by a Ponzi scheme, concluding that the investors were permitted to appeal the district court’s interlocutory orders regarding receivership proceedings and that they had been denied a meaningful day in court.

The appeal arose from the SEC’s case against James Torchia charging that he orchestrated a Ponzi scheme. As part of Torchia’s alleged scheme, investors purchased life settlement policies. The district court froze the assets of one the entities used by Torchia to implement his scheme, CN Capital, and appointed a receiver to manage the assets and repay investors.

The district court eventually entered two orders related to the receivership proceedings. One order, dated July 12, 2017, required certain investors to either (1) pay CN Capital the insurance policy premiums plus the fair market value of other services that CN provided or (2) assign the policy to the receiver. Another order, dated August 7, 2017, approved the receiver’s distribution plan. The investors appealed these orders.

District Judge William T. Moore, Jr. of the Southern District of Georgia, sitting by designation, wrote the opinion. The court first considered whether the district court’s orders were appealable. The court held that it had jurisdiction over the July 12 order pursuant to 28 U.S.C. § 1292(a)(1), which provides appellate jurisdiction for certain interlocutory orders, including those “granting, continuing, modifying, refusing or dissolving injunctions.” The July 12 order, the court explained, fell within the purview of § 1292(a)(1) because, by requiring the investors to either pay the receiver or reassign their interest in the insurance policy to the receiver, it commanded an action concerning the merits of the receiver’s requested relief. The court rejected the receiver’s argument that the appeal was moot because the investors had already complied with the July 12 order by assigning the life insurance policy to him. Relying on U.S. Supreme Court precedent, the court stated that a case only becomes moot when it is impossible for a court to grant effectual relief to the prevailing party. In this case, the district court still could award monetary relief to compensate the investors for the loss of the insurance policy if the investors ultimately prevailed.

The court next turned to the August 7 order and considered an issue of first impression—whether a district court order approving a receiver’s distribution plan is appealable as a collateral order. The court acknowledged that other circuits have already addressed this issue. The Seventh, Fifth, and Sixth Circuits have held that such orders are appealable under the collateral order doctrine. The Eleventh Circuit agreed. Relying on the Fifth Circuit as persuasive authority, the court explained that an order approving a receiver’s distribution plan, such as the August 7 order, satisfies the collateral order doctrine’s three part test: (1) it conclusively determines the question in dispute (the distribution of receivership assets); (2) it resolves an important issue completely separate from and collateral to the merits of the action (asset distribution, an issue that is distinct from the merits of the SEC’s claim); and (3) it would effectively be unreviewable on appeal from the final judgment (the receivership assets will be distributed, and likely unrecoverable, before the action brought by the SEC is subject to appellate review).

After determining that it had jurisdiction to review the orders, the court took up the investors’ argument that the district court denied them due process by employing summary proceedings that did not allow them to present their claims and defenses or meaningfully challenge the receiver’s decisions. The court sided with the investors. The court reasoned that the receiver made many decisions regarding distribution of the assets, and the district court proceeded to enter orders without giving the investors “sufficient notice and/or a meaningful opportunity to be heard.” The lower court failed to address the arguments raised by the investors in opposition to the receiver’s demands and decisions, denied the investors’ requests for discovery, and did not allow the investors to meaningfully argue certain claims or defenses. For example, the investors were not able to meaningfully challenge the receiver’s methodologies and calculations because he presented no evidence to support his conclusions. Additionally, the court relied on an entirely unrelated prior order to reject an argument raised by the investors and improperly narrowed the scope of the objections and issues at oral argument that it would consider. The court concluded that “the need for expediency and a district court’s authority to utilize summary proceedings in receivership do not outweigh an investor’s right to due process.” Notably, the court declined to decide which specific procedures the investors must be permitted to use, such as discovery, finding that the district court would be in a better position to do so. The case was reversed and remanded.

Posted by Kamryn Deegan.

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