SECURITIES AND EXCHANGE COMMISSION v. John Gardner BLACK; Devon Capital Management, Inc.; Financial Management Sciences, Inc., South Butler County School District; Daniel Boone Area School District; Tyrone Area School District; Blacklick Valley School District; Harmony Area School District; Penn Cambria School District; Penns Manor School District; Northern Lebanon School District, Appellants
No. 98-3345
United States Court of Appeals, Third Circuit
Decided Dec. 17, 1998
Argued Sept. 14, 1998.
C. Are Williams’ ERISA and State Contract Claims Also Barred?
At oral argument, Williams conceded that the success of his ERISA and state law contract claims hinges on the outcome of his section 301 claim. Thus, Williams acknowledged that these additional claims must fail if he cannot show that he in fact was terminated in violation of the collective bargaining agreement. Williams cannot make this showing unless we reverse the finding that his section 301 claim was not timely. Inasmuch as we already have concluded that Williams cannot succeed in his section 301 claim because it is time-barred, we reject his ERISA and state law contract claims. In the circumstances, we do not decide whether they were time-barred, as the district court ruled, or whether they were preempted by section 301, as suggested by Chrysler in its brief.
V. CONCLUSION
We will affirm the district court‘s order entered January 8, 1998, granting summary judgment to Chrysler and the Union on all of Williams’ claims.
Richard R. Nelson, II (Argued), Cohen & Grigsby, Pittsburgh, PA, for appellants.
Richard A. Finberg, Malakoff, Doyle & Finberg, Pittsburgh, PA, for appellant, South Butler County School District.
David A. Gradwohl, Fox, Rothschild, O‘Brien & Frankel, Lansdale, PA, for appellant, Daniel Boone Area School District.
Michael J. Betts, Betts & Perry, Pittsburgh, PA, for appellant, Tyrone Area School District.
James H. McConomy, David G. Oberdick, Titus & McConomy, Pittsburgh, PA, for appellant, Blacklick Valley School District.
Mark A. Rush, Kilpatrick & Lockhart, Pittsburgh, PA, for appellees.
Dennis M. Sheedy (Argued), George M. Medved, Sharon F. DiPaolo, Pepper, Hamilton & Scheetz, Pittsburgh, PA, Attorneys for intervenor-appellee, Richland School District.
Thomas A. French Rhoads & Sinon, Harrisburg, PA, for intervenors-appellees, Bellefonte Area School, Cornwall Lebanon School District, Cumberland Valley, Fleetwood Area School.
Michael J. Witherel, Pittsburgh, PA, Attorney for intervenor-appellee, North Hills School District.
Timothy P. Ryan, Eckert, Seamans, Cherin & Mellott, Pittsburgh, PA, for intervenors-appellees, Harrisburg Authority, City of Harrisburg.
Joseph F. McDonough, Mary-Jo Rebelo, Manion, McDonough & Lucas, Pittsburgh, PA, Attorneys for intervenor-appellee, St. Johns Welfare.
Philip A. Erickson, Thru, Maatsch & Nordberg, Lansing, MI, for intervenors-appellees, Lincoln Consoladated School, Nice Community School, Yale Public School.
Alan J. Steinberg, Horty, Springer & Mattern, Pittsburgh, PA, for intervenor-appellee, Bradford Regional Medical Center.
George J. Arnold, Palos Heights, IL, for intervenor-appellee, Ravenswood Hospital Medical.
Charles B. Gibbons, Klett, Lieber, Rooney & Schorling, Pittsburgh, PA, for intervenor-appellee, University of Scranton.
Kevin M. French, Hartman, Underhill & Brubaker, Lancaster, PA, for Amici-appellees, Penn Manor School District, School District of Lancaster.
Before: SLOVITER, ALITO, RENDELL, Circuit Judges.
OPINION OF THE COURT
RENDELL, Circuit Judge.
We are asked on this appeal to determine whether the District Court erred in releasing the funds of certain investors from a freeze order entered in the context of receivership proceedings instituted by the Securities and Exchange Commission. Appellants are several Pennsylvania school districts who invested funds with defendants. They contend that the District Court orders of May 11 and May 22, 1998 improperly released funds of other investors, denied appellants certain procedural rights in connection with the court proceedings attendant thereto, and also erred in its award of attorneys’ fees to the equity receiver appointed in the case. Appellees not only counter these positions, but also challenge our jurisdiction to hear this appeal.
Appellants appeal from five orders entered by the District Court in the ongoing receivership proceedings instituted by the SEC against John Gardner Black (“Black“), Devon Capital Management, Inc. (“Devon“), and Financial Management Sciences, Inc. (“FMS“) under the provisions of Section 20(b) of the Securities Act,
For the reasons set forth below, we will affirm the procedural orders and the orders lifting the freeze.
I. BACKGROUND
In August 1997, during a routine investigation of Devon, the SEC discovered that Devon was carrying assets on its books at materially inflated values and had incurred massive trading losses totaling at least $50 million of the $345 million entrusted to it by its investment clients. The investigation also determined that Devon and Black1 were concealing the losses from their clients, most of whom were school districts and governmental entities, and were continuing to accept funds from new investment clients without disclosing information regarding these losses. The SEC believed that Devon was seeking new clients so as to use their funds to fulfill obligations to existing clients under their investment advisory agreements. On September 26, 1997, the SEC filed an action in the United States District Court for the Western District of Pennsylvania against Black, Devon and FMS seeking to enjoin their illegal conduct and freeze their assets pending an investigation. The SEC alleged violations of Section 17(a) of the Securities Act,
The District Court granted the SEC‘s motion for entry of a temporary restraining order whereby all assets “presently held by [defendants], under their control or over which they exercise actual or apparent investment or other authority, in whatever form such assets may presently exist and wherever located” were to be immediately frozen. The order was entered pursuant to
The court appointed Richard Thornburgh as the equity receiver (“Trustee“), and he employed Price Waterhouse, LLP to provide accounting and auditing services for the ensuing investigation. The Trustee identified four general categories of investment relationships between defendants and their investor clients. Category A clients entered into an investment advisory and management relationship with Devon whereby Devon had authority to direct the purchase and sale of securities investments held in the name of the client at the client‘s custodian bank. Category A includes clients who entered into investment management arrangements whereby the client bore the risk and benefit of performance of investments, clients with investment advisor arrangements with a guaranteed minimum rate of return whereby Devon bore the risk of investments, and clients with investment advisor arrangements with a fixed rate of return whereby Devon bore the risk, and would reap the benefit, of investments. Category B includes those clients who entered into Repurchase Agreements (“Repos“) and Non-Pooled Collateralized Investment Agreements (“CIAs“) with defendants. Under Repos, Devon used client funds to buy securities, chosen by Devon, at a set price, and later would re-sell the securities at a set, higher price, providing an assured return. The securities were held in the interim in the client‘s name by a custodian bank which held a promise of Devon‘s repurchase obligation. The Repos required Devon to provide additional securities on behalf of the client if the securities’ value fell below the set purchase price. Under non-pooled CIAs, Devon used clients’ funds to invest in FMS “units” that were credited to the client‘s account. FMS promised a fixed rate of return to the client and granted the client a security interest in securities held by a custodian bank. Category C clients entered into agreements with Devon similar to B non-pooled CIAs, except that the securities serving as collateral for the FMS “units” were pooled in one account in the name of FMS at Mid-State Bank (“MSB“). Category D clients entered into investment management arrangements with Devon similar to the A clients, except that MSB served as the custodian of the D accounts. As with the A and B accounts, the D accounts were held in the clients’ names. Pursuant to the foregoing agreements, the defendants managed the accounts of A, B and D clients, while the actual funds or securities of those clients remained either in their own names or with a custodian bank named by them, other than MSB. The funds and/or securities invested by clients of the C accounts were maintained in a pooled account in the name of FMS in its principal depository bank, MSB. The present shortfall in assets is primarily in the pooled account at MSB. As of September 30, 1997, although approximately $156,000,000 had been invested in pooled CIAs on behalf of the C clients, the value of the collateral underlying the pooled account was only approximately $86,000,000.
After assessing the different types of contractual arrangements that existed, the Trustee investigated the extent to which defendants used the pooled account holding the C clients’ funds in order to sell securities to, purchase securities from, or grant collateral to, clients that were in the other categories of investment relationships with defendants. The Trustee believes that through the use of the pooled account, defendants may have used certain funds deposited by the C clients for the benefit of the A, B and D clients. The Trustee has attempted to identify and quantify examples of such transactions, using the term “cash taints” to refer to cash transfers from the pooled account to accounts of non-pooled clients without the receipt of consideration, and the term “securities taints” to refer to transfers of securities between pooled and non-pooled clients at non-market prices, benefitting the non-pooled clients at the expense of the pooled account.2 In addition, evidence suggests that defendants used
Following the initial freeze order, the Trustee and the SEC jointly filed a motion on October 27, 1997 to modify the freeze to allow a distribution to the A, B and D clients of 50% of the market value of the funds held in their name, and to allow a distribution to the C clients of 50% of the market value of their pro rata share of the assets held in the pooled account. The District Court entered an order to allow this proposed distribution. On March 10, 1998, the Trustee filed a motion for further modification of the freeze to permit a second distribution to the investment advisory clients. This motion proposed a distribution to the A, B and D clients of 90% of the assets held in their name, reduced by the estimated total dollar value of whatever “taints” were identified by the Trustee, and a distribution to the C clients of 90% of their pro rata share of the remaining market value of the assets in the pooled account. The Trustee requested that funds sufficient to cover the alleged tainted transactions remain subject to the freeze pending a final resolution by the court concerning the entitlement to such funds. On March 18, 1998, the District Court entered an order setting an April 29, 1998 hearing date on the motion for the proposed second interim distribution. The court also allowed all investment clients to file any objections to the motion with the Trustee and the SEC. On April 22, 1998 the District Court entered a hearing management order setting forth the procedures to be followed during the April 29, 1998 hearing. In response to an emergency motion filed by several of appellants, the court revised these procedures in an April 27 order. The District Court conducted a hearing on the motion for a second distribution on April 29 and April 30. In a Memorandum Opinion entered May 11, 1998, the District Court directed the Trustee to release the funds of all A, B and D clients from the freeze, and to distribute to the C clients 90% of each client‘s pro rata share of the remaining pooled assets. The order also granted the C clients permission to initiate actions against the A, B and D clients to recover alleged taints. The District Court revised the May 11 order in an order entered May 22, whereby the court discussed the method of distribution of funds to the C clients and granted all C clients the right to intervene in this action. In addition, on April 7, 1998, the District Court issued an order approving the Trustee‘s application for payment of attorneys’ fees and expenses of approximately $1.6 million.
The District Court receivership proceedings are still pending. On July 7, 1998, several of the C clients, representing a subset of appellants, instituted involuntary Chapter 7 bankruptcy proceedings against Devon and FMS in the United States Bankruptcy Court for the Western District of Pennsylvania. Although the Trustee moved to dismiss the Bankruptcy Court proceedings based upon his view that the receivership before the District Court was adequate, the Bankruptcy Court declined to do so, ruling that:
In spite of the arguments by the trustee, we are not sufficiently persuaded that dismissal at this time would better serve the interests of debtors and their creditors. We instead find it advisable to permit these bankruptcy cases to proceed to determine whether they provide a better process for resolving issues left unresolved by the district court.
The appeals before us have resulted in a flurry of activity and filings by various parties, including motions on behalf of many of the A, B and D investors to intervene, which we granted. In addition to appellants’ brief, the School District of Lancaster and Penn Manor School District have filed an amicus brief requesting that the orders lifting the freeze be affirmed. Intervenors Bellefonte Area School District, Cornwall-Lebanon School District, Cumberland Valley School District, Fleetwood Area School District, and Richland School District filed a brief urging that the instant appeal be dismissed or that the District Court orders appealed from be affirmed. Intervenor North Hills School District filed a brief urging that the appeal
II. JURISDICTION
We first address the contested issue of our jurisdiction to review the orders of the District Court from which this appeal has been taken.
In view of the continued existence and effectiveness of the restraining order for several months from and after September 1997, we conclude that it had effectively matured into a preliminary injunction. See Nutrasweet Co. v. Vit-Mar Enter., 112 F.3d 689, 692 (3d Cir.1997) (holding that a TRO in effect for 77 days was equivalent to a preliminary injunction); see also Sampson v. Murray, 415 U.S. 61, 88, 94 S.Ct. 937, 39 L.Ed.2d 166 (1974) (holding that the continuation of a TRO beyond its authorization had the same effect as a preliminary injunction); In re Arthur Treacher‘s Franchisee Litig., 689 F.2d 1150, 1153-54 (3d Cir.1982) (holding that the TRO in effect beyond its statutory limits was effectively a preliminary injunction even though the parties consented to its extension). The orders lifting the freeze, therefore, constituted orders modifying an injunction, from which an interlocutory appeal is permissible under
Further, insofar as the appeals from the procedural orders complain of the denial of appellants’ procedural rights in connection with the hearing which culminated in the modification of the freeze order, we view them as appealable along with, and as part of, the appeal from the orders lifting the freeze. See Energy Action Educ. Found. v. Andrus, 654 F.2d 735, 745 n. 54 (D.C.Cir. 1980) (explaining that appellate review under
The appeal of the fee order entered during the receivership stands on a different jurisdictional footing, and, we find, lacks a satisfactory footing. Appellants claim juris-
Further,
We will therefore only address the propriety of the orders lifting the freeze and the procedural orders entered by the District Court in connection therewith. We review the District Court‘s application of law with regard to the equitable receivership de novo, and its decisions relating to procedures it will follow in connection with the receivership proceedings for abuse of discretion. See American Telephone & Telegraph Co. v. Winback & Conserve Program, Inc., 42 F.3d 1421, 1427 (3d Cir.1994).
III. STANDING
Before proceeding to the merits of the appeal, we must address intervenors’ challenge to appellants’ right to bring this appeal based on the fact that appellants were not parties to the underlying District Court action and were not granted intervenor status until the District Court‘s May 22, 1998 order. Intervenors base their argument on Marino v. Ortiz, 484 U.S. 301, 108 S.Ct. 586, 98 L.Ed.2d 629 (1988) (affirming judgments dismissing appeals of nonparties because of nonparty status). Marino is not controlling
IV. PROPRIETY OF THE ORDERS LIFTING THE FREEZE
In its May 11, 1998 and May 22, 1998 orders, the District Court lifted the freeze as to the A, B and D clients’ funds. We hold that the District Court did not err in so doing. We reject appellants’ characterization of the District Court‘s May 11, 1998 and May 22, 1998 orders lifting the freeze. Contrary to appellants’ urgings, the court did not, pursuant to these orders, adjudicate claims and decide that the A, B and D clients “are entitled to receive all of their funds” or that the C clients “should bear all of the $70,000,000 in losses.” The court‘s orders did not distribute property, decide claims, or bar consideration of alleged taints. The order is clear that it did not decide claims, stating, “this Order does not constitute a final adjudication of any claims by or between investment advisory clients.” Rather, the District Court only determined that, based upon the factual record regarding the relationship of the A, B, C and D accounts to the defendants, the court lacked power over the A, B and D funds. The Trustee‘s investigation revealed that the injunction initially imposed pursuant to the freeze order was overly broad, and the District Court therefore modified the terms of the restraint. The District Court did this after it was convinced “that the Defendants did not have ‘control’ over funds maintained by Category A, B, or D clients ... so as to permit this Court to freeze the funds pursuant to
The SEC argues in its brief that the District Court had the authority to impose and to continue the asset freeze over the A, B and D accounts pursuant to
In addition, appellants do not argue complicity by the A, B and D investors, but contend that, under a “common enterprise” theory, the A, B and D accounts are liable for funds expended from the C accounts and used to the benefit of the investors having funds in A, B and D accounts. While we recognize the potential for recovery for the C investors from A, B and D investors who allegedly benefitted, this situation does not contain the level of complicity or involvement in wrongdoing on behalf of the A, B and D investors that is necessary to support the unilateral freeze of assets under the statute as occurred here. See, e.g., Cherif, 933 F.2d at 413-14 (district court not authorized to freeze the assets of a non-party against whom no wrongdoing is alleged under
Further, appellants’ characterization of the District Court as having “refused” to decide the issue of who should bear the loss of the alleged “taints” is not entirely accurate. The District Court did not refuse to decide the “taints” issue, but, rather, this issue is, as it should be, reserved for another day. Nothing in the relinquishment of the freeze over the A, B and D accounts prevents the Trustee from pursuing the issue of “taints.”7 Fur-
We ... find it advisable to permit these bankruptcy cases to proceed to determine whether they provide a better process for resolving issues left unresolved by the district court.
We read in these words an appropriate concern that assets are properly marshaled and distributions properly ordered in connection with a reorganization or liquidation of these debtors.
Appellants also object to the method of distribution of any funds released from the freeze. Appellants argue that the released funds should be divided pro rata among all categories of investors, as opposed to among only the A, B and D investors, and, more importantly, that the losses in the pooled account should be borne by all of defendants’ clients, as opposed to just the C clients. Intervenors argue that the District Court‘s orders were proper, with the A, B and D investors getting back 100% of their principal, and the losses in the pooled account being divided pro rata among the C investors only. Since the District Court orders re-garding the distribution of the released funds state clearly that they do “not constitute a final adjudication of any claims by or between investment advisory clients,” and leave for another day the pursuit of claims against various holders of assets, which would in essence result in a redistribution of assets, the orders we have been asked to review do not constitute final rulings on asset distribution, and this issue, therefore, is not properly before us on this appeal.9
In summary, the District Court‘s orders lifting the freeze as to the A, B and D accounts were based upon a sound legal footing. Further, in issuing these orders, it did not determine claims, foreclose pursuit of taints, or in any way resolve disputes or final distributions among the parties.
V. PROPRIETY OF THE PROCEDURAL ORDERS
Appellants also complain that the procedural orders entered by the District Court denied them discovery and prevented them from introducing evidence during the hearing which culminated in the orders lifting the freeze. The proceedings at issue spanned two days. A designated representative from each category of investors was permitted to raise objections to the modification of the freeze and was given a set amount of time for oral argument. In addition, a representative from each category of investors was allowed to cross-examine a designated witness regarding the Price Waterhouse accounting
We note that where there is a receiver with equitable power in a proceeding before it, the District Court has wide discretion as to how to proceed. See Elliott, 953 F.2d at 1566 (noting court‘s wide discretion to determine relief in equity receivership); SEC v. Hardy, 803 F.2d 1034, 1040 (9th Cir.1986) (noting that a court may use summary proceedings to determine relief in equity receivership). Appellants have failed to advance a theory or posit a relevant rule or case precedent that would have been the basis for continuing the freeze if they had not been thwarted in their effort to obtain the necessary proof. Even assuming that appellants had an arguable right to the procedural protections they seek, they have failed to show how they were prejudiced or harmed by the summary proceedings, since they have articulated no theory whereby a freeze could possibly have been appropriate as to the A, B or D funds. See Elliott, 953 F.2d at 1567 (stating that “appellants must show how they were prejudiced by the summary proceedings and how they would have been better able to defend their interests in a plenary proceeding“); Wencke, 783 F.2d at 837-38 (holding that summary proceedings are sufficient where party failed to show how he was prejudiced by such proceedings).
Again, the fact that appellants may wish to pursue a cause of action for recovery of taints, even under a common enterprise theory, does not constitute a basis for a freeze of assets ex parte at the behest of the SEC. Since legal action in pursuit of the taints is clearly contemplated in the receivership or the bankruptcy proceedings, no harm has been done by the court‘s implementation of certain procedures for the conduct of the April 29 hearing.
Accordingly, we find that the District Court did not abuse its discretion in conducting the hearing in the manner it did.
VI. CONCLUSION
For the reasons stated above, as pertaining to the freeze orders and the procedural orders, the District Court orders are affirmed. This appeal from the fee order is dismissed for lack of jurisdiction.
RENDELL
CIRCUIT JUDGE