Third Party Recipients of Fraudulently Acquired Funds Found Liable as “Relief Defendants”

In SEC v. World Capital Market, No. 15-55325, 2017 BL 87566 (9th Cir. Mar. 21, 2017), considered as a matter of first impression whether a relief defendant could divest the district court of jurisdiction by advancing “a facially colorable claim to the disputed funds as loan proceeds.” The Ninth Circuit held that the district court properly asserted jurisdiction over Victor Messina (Messina) and International Market Ventures (“IMV”) (collectively, Defendants) as relief defendants and declined to find that jurisdiction was divested as a result of the existence of a “colorable claim.” 


The SEC conducted an investigation of Phil Ming Xu (“Xu”) and his corporations for allegedly acquiring funds through a fraudulent investment scheme. According to the SEC, Messina acted as counsel to Xu and provided “legal advice regarding tax, corporate, and immigration matters.” Xu transferred Messina $5 million to hold for “future business endeavors” in accordance with an agreement providing that the amount would be repaid in 2019. 


When Xu began settlement negotiations with the SEC, he requested a return of the money. Messina, however, refused, claiming that the money had already been disbursed per their agreement. After initiating an enforcement action against Xu, the SEC filed a complaint against Messina and IMV. Defendants sought dismissal of the complaint on the grounds that they were not proper “relief defendants” because they had a “legitimate claim” to the funds.  


The district court held an evidentiary hearing and concluded that the Defendants “had no legitimate claim to the $5 million because the loan agreement with Xu was a sham. . . “ Subsequently, the SEC filed a motion to disgorge Defendants of the $5 million. Defendants appealed to the Ninth Circuit claiming the district court did not have subject matter jurisdiction.


Under 15 U.S.C. §§77t(b), 78u(d)(1), the courts have “broad equitable power to order disgorgement from non-violating third parties who have received proceeds of others’ violations to which the third parties have no legitimate claim.” Therefore, the court may exercise jurisdiction if facts show the funds were “ill-gotten” and the “third parties have no legitimate claim to [the] funds.”


The Ninth Circuit concluded that the existence of a colorable claim to the funds did not divest the district court of jurisdiction over the relief defendants. Instead, the court was authorized to engage in fact finding to determine whether Defendants had a “cognizable claim” to the funds. The Ninth Circuit further determined that the record did not reveal “clear error” in the lower court’s determination that the loan was “a sham” and upheld the disgorgement order. 


For the above reasons, the United States Court of Appeals for the Ninth Circuit affirmed the district court’s judgement, holding Defendants jointly liable as “relief defendants.”


The primary materials for this case may be found on the DU Corporate Governance Website.