Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca7-15-01442/USCOURTS-ca7-15-01442-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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In the

United States Court of Appeals

For the Seventh Circuit ____________________

No. 15-1442

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff-Appellee,

v.

FRANK J. CUSTABLE, JR., et al.,

Defendants.

APPEAL OF BRAD HARE.

____________________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 03 C 2182 — Sharon Johnson Coleman, Judge.

____________________

ARGUED JULY 8, 2015 — DECIDED JULY 28, 2015

____________________

Before POSNER, SYKES, and HAMILTON, Circuit Judges.

POSNER, Circuit Judge. In 2003 the SEC filed a civil suit 

against Frank Custable, the principal defendant in this appeal and the only one we need discuss, charging him with 

fraud involving “penny stocks.” The term refers to very 

cheap stocks (no more than $5 per share). The typical pennystock fraud involves the purchase of quantities of penny 

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stocks and their resale to gullible investors at inflated prices. 

See generally “Penny Stock,” Wikipedia, https://en.wiki

pedia.org/wiki/Penny_stock#Regulation (visited July 24, 

2015). Custable’s fraud was alleged to have yielded him at 

least $4 million.

The civil suit was interrupted by criminal proceedings 

that resulted in a long prison sentence for Custable. But 

eventually the civil suit resumed and in 2010 he consented to 

the entry of a judgment against him that ordered him to pay 

a $120,000 penalty plus $6.4 million in disgorgement of profits. See 15 U.S.C. § 78u(d)(5); SEC v. Lipson, 278 F.3d 656, 

662–63 (7th Cir. 2002). The penalty, imposed pursuant to 15 

U.S.C. § 78u(d)(3), was to be paid to the U.S. Treasury “except as otherwise provided in [15 U.S.C. §] 7246” and another section not relevant here: § 78u(d)(3)(C)(i). Section 7246(a)

provides that “the amount of such civil penalty shall, on the 

motion or at the direction of the [Securities and Exchange] 

Commission, be added to and become part of a disgorgement fund or other fund established for the benefit of the 

victims of such violation.” See Official Committee of Unsecured 

Creditors of WorldCom, Inc. v. SEC, 467 F.3d 73, 76 (2d Cir. 

2006). The SEC is thus authorized either to remit the penalty

money (the $120,000) to the Treasury or to place it in the 

same fund as the disgorged profits. It decided on the former.

The civil judgment permitted the Commission to submit 

to the district court for approval a disbursement plan for 

those profits—more precisely for so much of the profits as 

could be found and seized. Deciding that locating the defrauded victims wouldn’t be feasible, the Commission asked 

the district court to allow it to pay to the Treasury all the 

disgorged profits that it had recovered (slightly more than 

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No. 15-1442 3

$500,000—a small fraction of the total profits of $6.4 million

that the SEC would have liked to recover). The Commission 

explained that distributing the funds to the victims was infeasible because there were so many of them, there was so 

little money in the fund, and the fraud was so old—it had 

begun in 2001.

Enter the appellant, Brad Hare. Though not a party in the 

district court—he did not move to intervene—he claimed to 

have an interest in the fund and asked the district court to 

allow him to respond to any motion to disburse money from 

it. The judge quite properly refused to permit Hare, a nonparty, to participate in the litigation. But at the same time the 

judge considered and rejected Hare’s argument that he was 

entitled to money in the fund, and granted the SEC’s motion 

to disburse the entire fund to the Treasury.

Whether or not the SEC should have been allowed to deny the victims of the fraud compensation from the fund is 

actually a side issue, because Hare was not a victim. True, he

claimed to have been defrauded by Custable before 2001, but 

that fraud had had nothing to do with penny stocks. Hare’s 

contention was that he had gone into business with Custable 

and that the latter had fraudulently diverted assets of the 

business to himself. Hare had brought a separate suit against 

Custable, based on the earlier fraud, which they settled in 

2014 with Custable agreeing to pay Hare almost $4.5 million—which Custable, sentenced to prison for more than 20 

years, didn’t have.

Hare appeals from the district court’s order allowing the 

SEC to give the Treasury the money in the fund intended for 

victims of the penny-stock fraud. As a victim of a Custable 

fraud, holding a large uncollectible judgment against him, 

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Hare contends that he’s a worthier recipient of assets of the 

fund than the Treasury.

There is a serious—in fact dispositive—question whether 

we can hear this appeal. Hare was not a party in the district 

court, and ordinarily only a party can appeal, Devlin v. 

Scardelletti, 536 U.S. 1, 7 (2002); In re Bergeron, 636 F.3d 882, 

883 (7th Cir. 2011); Bloom v. FDIC, 738 F.3d 58, 62 (2d Cir. 

2013), though there are exceptions—for example, a member 

of a class in a class action suit can appeal even if he is not 

one of the named plaintiffs. Devlin v. Scardelletti, supra, 536 

U.S. at 14. Hare might be thought to qualify for a different, a 

novel, exception. He could have become a party in the district court only if he’d moved to intervene in that court and

the court had granted the motion, which was highly unlikely, because Hare was not a victim of the penny-stock fraud. 

Still, had he moved to intervene he could have appealed 

from the denial of that motion—and if instead the district 

judge had granted the motion but then denied Hare relief on 

the merits, that ruling too would have set the stage for an 

appeal. So it’s not true that his only route to possible relief 

was to appeal the order handing over the fund to the Treasury, albeit the order extinguished any possibility of his collecting his judgment against Custable from money in the 

fund. Given what Hare wants—a shot at the disgorgedprofits fund—his failure to have sought intervention is incomprehensible.

He makes two arguments for our allowing him to appeal 

nevertheless. They’re unattractive arguments, both in their 

own right as we’re about to see and because moving to intervene would have been the proper way to get the case to 

us. Hare claims to be an indirect victim of the penny-stock 

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fraud, because, he contends, the commission of the fraud 

was financed in part by the money that Custable had obtained by his fraud against Hare. Hare’s other argument is 

that while the claims of the penny-stock victims may be too 

numerous and stale to be worth trying to sort out and compensate from the fund, as the SEC contended successfully in 

the district court, his claim is large and its amount liquidated: it is the amount stated in his settlement agreement with 

Custable. Of course Custable, being penniless (pun intended) now and in the foreseeable future, couldn’t have cared 

very much what he was agreeing to pay Hare. But since the 

district court (another district judge, in Hare’s suit against 

Custable) approved the agreement, we’ll assume that the 

amount of the settlement is reasonable, though as it far exceeds the disgorged-profits fund there is no way for Hare to 

obtain from the fund more than a pittance of what Custable 

has agreed to pay him. Hare’s second argument is factually 

strong, but legally weak because if he isn’t a victim of the 

penny-stock fraud it doesn’t matter how large and certain 

his claim for damages caused by a different fraud is.

As for the first, the indirect-victim claim, only if it were a 

certainty that the district judge would not have granted

Hare’s motion to intervene and that we would not have reversed her order denying his motion would an appeal from 

the district court’s order turning over the entire fund to the 

Treasury be the only avenue of relief open to him. In such 

circumstances of futility of trying to intervene, an appeal by 

a nonparty may be permissible. E.g., In re Bergeron, supra, 636 

F.3d at 883; SEC v. Enterprise Trust Co., 559 F.3d 649, 651–52 

(7th Cir. 2009). But the posited “circumstances” are speculative in the extreme. And anyway Hare’s indirect-victim argument makes no sense. It implies that Hare helped finance, 

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albeit unintentionally, Custable’s fraud against the purchasers of penny stocks—the money that Custable stole from 

Hare was used to finance the penny-stock fraud! Far from 

being a victim of the penny-stock fraud, Hare was an unwitting tool of the perpetrator. It would be absurd to think that 

he could claim money as a victim of a scheme which, however unwittingly, he had assisted in creating—especially 

since he was not a victim of that scheme.

We can imagine, if barely, Hare’s making a cy pres argument for obtaining money from the fund in order to recoup part of his loss from the fraud that Custable committed 

against him. The money paid into the court account was 

money that should in principle have gone to the victims of 

the penny-stock fraud; and when for some reason it’s infeasible to distribute the entire amount of a defendant’s wrongful gains to the victims of the defendant’s wrongdoing 

(maybe because the victims can’t be located, a feature of this 

case), the cy pres doctrine allows the court to award the leftover money to some person or institution that has a claim or 

need similar to that of the uncompensatable victims. And 

one might think of Hare in that light—a victim of the same 

criminal, yet a victim who unlike the other victims (i.e., the

victims of the penny-stock fraud) can feasibly be compensated from the fund that holds the criminal’s ill-gotten gains.

But Hare doesn't invoke cy pres, which probably is anyway unavailable given the district court’s authority to bypass victims of a fraud and send the disgorged profits and 

the penalty to the U.S. Treasury. See FTC v. Febre, 128 F.3d 

530, 537 (7th Cir. 1997); SEC v. Cavanagh, 445 F.3d 105, 116–

17 (2d Cir. 2006); SEC v. Blavin, 760 F.2d 706, 712–13 (6th Cir. 

1985). The implication is that Congress made payment to the 

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Treasury the cy pres alternative (“cy pres” means literally 

“nearly like” or “as near as”) to payment to victims of fraud 

when payment to the victims is infeasible.

That isn’t the only reason a cy pres argument would have 

failed in this case. The usual recipient of cy pres money is a 

charity, Hughes v. Kore of Indiana Enterprise, Inc., 731 F.3d 672, 

675–76 (7th Cir. 2013), and the money is supposed to be 

used, to the extent feasible, for the benefit of victims of the 

defendant’s wrongdoing. Holtzman v. Turza, 728 F.3d 682, 

689 (7th Cir. 2013). Hare is not a victim of the relevant 

wrongdoing, is not a charity, and has never intimated that 

he would use even one penny of any money that he obtained

from the victims’ fund to help the defrauded penny-stock 

investors. 

Hare has failed to establish that he is within an exception 

to the rule that forbids a nonparty to appeal. And the

grounds that he advances for relief are in any event frivolous. His appeal is therefore dismissed. Gautreaux v. Chicago 

Housing Authority, 475 F.3d 845, 850–51, 853 (7th Cir. 2007).

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