U.S. Securities and Exchange v. Topwater Exclusive Fund III
2017 U.S. App. LEXIS 16663
| 8th Cir. | 2017

Background

  • SEC brought enforcement action against Marlon Quan and entities he controlled after losses from investments in Thomas Petters’ Ponzi scheme; SCAF (a Quan-controlled hedge fund) held significant Petters notes and its assets were frozen and placed in receivership (~$18–18.9M).
  • Receiver Gary Hansen was appointed with authority to defend or settle claims and to propose a distribution plan; SEC amended its complaint to add SCAF as a defendant for securities violations.
  • Intervenor preferred investors (Appellants) sought immediate distribution per SCAF’s operating agreement; the district court denied modification and allowed the receiver to manage litigation strategy.
  • Receiver negotiated two stipulations: the First allowed SCAF to refrain from active participation pending resolution of claims against Quan; the Second conceded SCAF’s liability, consented to disgorgement, and produced a proposed distribution plan.
  • District court approved both stipulations, entered judgment against SCAF, and adopted a distribution plan allocating 40% to secured creditors and 60% pro rata to all investors (Class A and preferred Class P equally). Appellants objected and appealed.
  • The Eighth Circuit affirmed: it found no abuse of discretion in approving the stipulations, rejected collateral-estoppel and other defenses to SCAF liability, upheld pro rata distribution among investors, and deemed Appellants’ challenge to fee-shifting waived.

Issues

Issue Plaintiff's Argument (SEC/Receiver) Defendant's Argument (Appellants) Held
Approval of First Stipulation authorizing receiver to avoid active defense and rely on Quan/SIA resolution Receiver acted within receivership authority to preserve assets and avoid depletion by costly litigation Receiver conflicted; should litigate because SCAF’s interests opposed Quan/SIA Affirmed — district court did not abuse discretion; receiver authorized to settle/avoid costly defense
Approval of Second Stipulation (SCAF consents to liability & disgorgement) Receiver reasonably concluded litigation would likely fail and stipulation preserved assets for victims Jury’s verdict (Quan not liable for aiding/abetting) and issue preclusion bar SCAF liability; SCAF cannot "make" misrepresentations Affirmed — aiding-and-abetting verdict didn’t preclude SCAF liability; receiver’s stipulation was a reasonable exercise of authority
Distribution plan: pro rata distribution to Class A and Class P investors Pro rata is fair where victims were equally defrauded and funds commingled Class P had contractual liquidation preference and chose lower-risk shares so should be prioritized Affirmed — court has broad equitable power; pro rata distribution appropriate because both classes were equally defrauded and preference was created by the defrauder
Fee-shifting order requiring unsuccessful appellants to pay receiver’s appellate fees Order was made below and enforceable Appellants contend it’s improper to impose fees on appeal Waived on appeal — appellants failed to object below, so argument forfeited

Key Cases Cited

  • SEC v. Quan, 817 F.3d 583 (8th Cir.) (prior appeal explaining jury did not adjudicate SCAF because it did not participate at trial)
  • SEC v. Ark. Loan & Thrift Corp., 427 F.2d 1171 (8th Cir. 1970) (standard of appellate review for receivership oversight)
  • SEC v. Vescor Capital Corp., 599 F.3d 1189 (10th Cir. 2010) (receiver’s duty to safeguard investor assets supports settlement decisions)
  • SEC v. Loving Spirit Found. Inc., 392 F.3d 486 (D.C. Cir. 2004) (receiver’s authority derives from appointing order)
  • Braxton v. United States, 500 U.S. 344 (1991) (de novo review of stipulations’ meaning)
  • Ritchie Capital Mgmt., LLC v. Jeffries, 653 F.3d 755 (8th Cir. 2011) (abuse-of-discretion review for approving stipulations)
  • Doud v. Toy Box Dev. Co., 798 F.3d 709 (8th Cir. 2015) (LLC can be liable under Section 10(b) for offering-document misrepresentations)
  • SEC v. Wealth Mgmt. LLC, 628 F.3d 323 (7th Cir. 2010) (pro rata distribution commonly fair in fraud receiverships)
  • Credit Bancorp, Ltd. v. SEC, 290 F.3d 80 (2d Cir. 2002) (district court not required to follow contractual priorities in receivership distributions)
  • Commodity Futures Trading Comm’n v. Walsh, 712 F.3d 735 (2d Cir. 2013) (similarly situated defrauded investors justify pro rata distribution)
  • In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011) (receiver need not let defrauder’s allocations control unwinding of fraud)
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