Practice Areas

Introduction

Where actions are brought by the Securities and Exchange Commission to enjoin the continuation of conduct prohibited under the various acts the Commission is charged with enforcing, the Commission frequently seeks appointment of a Receiver to assist in marshalling assets on behalf of injured investors.  For reasons discussed in detail in this Receivership Sourcebook, utilization of a federal-court equity receivership can prove particularly useful to the Commission and beneficial to Investors.  However, despite numerous cases addressing both federal receiverships in general, and SEC-requested receivers in particular, there is virtually no current source to which one can turn to find summarization of the various issues that must be addressed in such receiverships.¹

The SEC-initiated receivership frequently arises in connection with combined Ponzi-Pyramid Marketing Schemes.  In such situations, there are frequently multiple perpetrators, as well as various “fellow travelers:” marketers, and possibly cooperating financial institutions, accountants and attorneys, with varying levels of involvement in the scheme.  There are usually assets that must be traced, including the assertion of claims on behalf of the Investors, some of which must be raised by the receiver directly.  Often there will be businesses that must be run, either temporarily until a rapid liquidation can be conducted or for some ongoing period if restoration of proper operating practices is critical to realizing the true value of the assets.  The asset marshalling process in this type of case usually involves assets of many types, from cash to active businesses, realty (both commercial and residential, developed, undeveloped and in-between), artwork, boats and jet airplanes, not to mention causes of action.  The assets may also be located throughout the United States, and, quite commonly, overseas, often under the “protection” of foreign secrecy laws.  In addition, hundreds to thousands of Investors will frequently have been affected by the scam; and individual (and class action) lawsuits against the perpetrators and their assets, now under the control of the receiver, are quite common, complicating and potentially interfering with both the conduct of the receivership and the actual benefit of the Investors.  Note also that the claims of investors and trade creditors will generally exceed the value of the receivership assets and that potential conflicts are common among various classes of investors and trade creditors.

In dealing with these potential problem areas, note how everyone is benefited by the following attributes of an SEC-initiated receivership:

1. All defendants and their assets, including affiliated entities, may be dealt with in a single action in a single location.
2. The Receiver may bring suit in the Receivership Court against anyone, anywhere.
3. Summary procedures may be utilized in resolving various claims, both against and on behalf of the receivership entities, so long as basic principles of due process are honored.
4. Broad stay powers protect the receiver and give breathing room against crippling duties of defense in other actions.
5. Great flexibility is given the Receivership Court in ordering disgorgement and setting claims verification and payment procedures, including developing an appropriate plan of distribution.

This Receivership Sourcebook is an effort to address certain of the most common issues arising in connection with SEC-initiated receiverships, including the practical problems that must be addressed by the receiver, as well as by the Commission staff in working with the Receiver.  The author hopes to supplement and expand on this Receivership Sourcebook in the future.