Securities & Exchange Commission v. Wealth Management LLC
2010 U.S. App. LEXIS 24537
| 7th Cir. | 2010Background
- SEC enforcement action against Wealth Management LLC and two officers for misrepresentations and unlawful investments in six unregistered funds; funds included Gryphon, Watch Stone, Pantera, Palisade, L3, and Quetzal; approx. $131 million managed, ~$6.3 million recoverable for distribution; assets were commingled and largely illiquid; receiver proposed pro rata distribution with a May 31, 2008 redemption cutoff; objectors Wilson and Verhoeven challenged treatment of redeeming vs nonredeeming investors; district court approved plan, triggering interlocutory appeal and subsequent partial distributions; appellate review under collateral-order doctrine.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the district court’s distribution plan is reviewable on collateral appeal | SEC/Wilson objectors rely on collateral-order review. | District court decision is appealable under collateral-order doctrine. | Yes; collateral-order review applicable. |
| Whether the Verhoevens’ notice of appeal naming the trust suffices | Verhoevens’ individual status matters; trust name suffices for intent. | Technical naming issue; no prejudice to appellees. | Appeal not dismissed; technical misnaming allowed given clarity. |
| Whether equitable mootness justified dismissing/unwinding distributions | Equitable mootness supports affirming and not unwinding distributions. | Unwinding would be inequitable to nonobjecting investors and costly. | Court declined to resolve but affirmed on merits; equitable mootness not outcome-determinative. |
| Whether pro rata distribution is appropriate given commingled assets and investor types | Pro rata promotes equality of substantively identical equity claims. | Redemption receivership claims may deserve preference under equitable subordination. | Pro rata distribution approved; equality is equity; objectors not creditors. |
| Whether May 31, 2008 cutoff for offsets is reasonable | Cutoff reflects spike in redemptions after SEC disclosure. | Case-by-case analysis would be costly; fixed cutoff is fair. | May 31, 2008 cutoff affirmed; reasonable balancing of claims and costs. |
Key Cases Cited
- Cunningham v. Brown, 265 U.S. 1 (U.S. 1924) (equality is equity in receivership distributions)
- Forex Asset Mgmt., 242 F.3d 325 (5th Cir. 2001) (collateral review of distribution orders appropriate)
- SEC v. Byers, 637 F. Supp. 2d 166 (S.D.N.Y. 2009) (equitable subordination in securities cases)
- In re Envirodyne Indus., 79 F.3d 579 (7th Cir. 1996) (equitable considerations in receivership distributions)
- United States v. Vanguard Inv. Co., 6 F.3d 222 (4th Cir. 1993) (support for pro rata distribution to avoid preferences)
- Elliott v. SEC, 953 F.2d 1560 (11th Cir. 1992) (pro rata distribution favored where claims are substantively same)
- In re Reserve Fund Secs. & Derivative Litig., 673 F. Supp. 2d 182 (S.D.N.Y. 2009) (supporting equitable distribution approach)
- Capital Consultants, LLC, 397 F.3d 733 (9th Cir. 2005) (offset provisions and distribution planning)