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The Right Of Third Parties To Intervene In The SEC Action
It is very common for third parties, usually creditors of the defendants in the SEC action, to petition the Court to allow it to intervene pursuant to Federal Rule of Civil Procedure 24 for the purpose of protecting its interests in the defendants’ property. Section 21(g) of the Securities and Exchange Commission Act of 1934, 15 U.S.C. §78u(g) states:
Notwithstanding the provisions of Section 1407(a) of title 28, United States Code, or any provision of law, no action for equitable relief instituted by the Commission pursuant to the securities laws shall be consolidated or coordinated with other actions not brought by the Commission, even though such other actions may involve common questions of fact, unless such consolidation is consented by the Commission.
In Securities and Exchange Commission v. Michael D. Wozniak ,1993 U.S. Dist. LEXIS 1241, Civ. No. 92-4691(N.D. Ill . Feb 5, 1993), the Court denied the motion to intervene stating that the movant was prohibited from intervening in the lawsuit by the “impenetrable wall” of Section 21(g) of the Exchange Act. As stated by the Court in Wozniak, the United States Supreme Court has confirmed this provision of the Exchange Act in Parklane Hosiery Co. v. Shore, 439 U.S. 322, 332 n.17 (1979) and Aaron v. SEC, 446 U.S. 680, 717 n. 9 (1980).
A movant may intervene as a matter of right pursuant to Rule 24(a) of the Federal Rules of Civil Procedure or at the discretion of the court under Rule 24(b). To intervene as a matter of right, a movant must satisfy the four requirements of Rule 24(a). These requirements are: 1) the application must be timely; 2) the movant must have an interest relating to the property or transaction which is the subject of the action; 3) the movant must be so situated that the disposition of the action, as a practical matter, may impede or impair his ability to protect the interest; and 4) the movant must demonstrate that his interest is inadequately represented by the existing parties to the suit. “Failure to satisfy even one of these requirements is sufficient to warrant denial of a motion to intervene as a matter of right.” Commodity Futures Trading Commission v. Heritage Capital Advisory Services, 736 F. 2d 384, 386 (7th Cir. 1984)(emphasis added).
A district court may permit intervention under Rule 24(b) when the putative intervenor's claims have common questions of law or fact with the underlying claims in the case.
Allowing a party to intervene in a SEC action would make the conduct of the Sec enforcement action much more complicated and, as a result, the SEC will vigorously oppose any motion to intervene on the basis of Section 21(g) of the Exchange Act. However, not all courts agree that Section 21(g) is an impenetrable wall and therefore the SEC and the Receiver need to lay the ground work to defeat intervention under FRCP 24.
Perhaps the best defense to intervening creditors is for the Receiver to set up a process whereby a creditor can present his claim, have the claim adjudicated, and have the opportunity to share with the other creditors in the distribution of assets. In this way the creditor cannot argue that the disposition of the action will impair his interest, thus defeating the third paragraph of FRCP 24(a)
