Commodity Futures Trading Commission v. Walsh
658 F.3d 194
2d Cir.2011Background
- CFTC and SEC sought disgorgement from Janet Schaberg related to proceeds of a Ponzi scheme tied to Stephen Walsh.
- District court granted preliminary injunctions freezing most of Schaberg's assets, pending resolution.
- This court previously certified two questions to New York Court of Appeals after Walsh I.
- New York Court of Appeals in Walsh II held that proceeds of fraud can be marital property and that a divorced spouse may be a bona fide purchaser for value under certain circumstances, depending on fair consideration.
- Walsh II also held that consideration cannot be predicated solely on relinquishment of a larger share of fraud proceeds, but reaffirmed a presumption of fair consideration in divorce settlements; it left open exact application to the assets at issue.
- Because Walsh II changed the legal footing, the district court’s orders restraining Schaberg were vacated and the matter remanded for proceedings consistent with the opinion.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does Walsh II undermine the district court's basis for the injunctions? | Walsh II supports restraining ill-gotten assets via divorce-related claims. | Walsh II undermines the district court by rejecting a blanket approach based on proceeds of fraud. | Yes; Walsh II undermines district court's basis and vacates the injunctions. |
| May a divorce decree cleanse the taint of fraudulent proceeds? | If the decree can cleanse taint via fair consideration, restraint may be improper. | Divorce settlements can provide fair consideration, potentially preserving assets from disgorgement. | Divorce decree may cleanse taint where good faith and fair consideration apply. |
| Is there a presumption of fair consideration in divorce settlements despite fraud proceeds? | Presumption of fair consideration should not apply to the entire estate if proceeds are fraud. | There is a presumption of fair consideration that may protect at least some assets. | There is a presumption of fair consideration that can apply to some assets, depending on facts. |
| Can Schaberg be a bona fide purchaser for value with respect to some portion of assets? | If the entire estate is proceeds of fraud, she cannot be a bona fide purchaser for value. | Fair consideration may render her a bona fide purchaser for at least some assets. | Schaberg may be a bona fide purchaser for value with respect to some portion of assets. |
| What is the proper disposition of the district court's orders on remand? | Orders should be upheld or renewed based on Walsh II’s framework. | Orders should be vacated and reconsidered under New York law applicable to fair consideration. | Vacate and remand for further proceedings consistent with Walsh II. |
Key Cases Cited
- CFTC v. Walsh, 618 F.3d 218 (2d Cir. 2010) (initial disposition of disgorgement and relief defendant issues)
- Walsh II, 17 N.Y.3d 162 (2011) (proceeds of fraud can be marital property; presumption of fair consideration; bona fide purchaser for value)
- SEC v. Cavanagh, 155 F.3d 129 (2d Cir. 1998) (relief defendant disgorgement framework; need lack of legitimate claim)
- NXIVM Corp. v. Ross Inst., 364 F.3d 471 (2d Cir. 2004) (affirming relief on any ground supported by the record in preliminary injunctions)