# U ni te d S ta te s Co ur t of A pp ea ls

For the Eig hth Circu it

__ __ __ __ __ __ __ __ __ __ __ __ __ _

No. 1 6- 10 72

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Uni te d S ta te s Se cu rit ie s an d Ex ch an ge Co m m is si on

ll ll ll ll ll ll ll ll ll ll l Pla in ti

ff - App el le e

v.

Mar lo n Qu an ; Aco rn Cap it al Grou p, LLC; Ste ward sh ip Inv es tm en t Ad vi so rs

, LLC; St eward sh ip Cred it Arbi tra ge Fu nd , LLC; Pu tn am Green , LLC; Liv in gs to n

Acres , LLC; ACG II, LLC; F lo ren ce Qu an

ll ll ll ll ll ll ll ll ll ll l Defe nd

an t s

Nig el Ch at te rjee; DZ Bank AG Deut sc he Zent ral -Gen os se ns ch aft sb an k, Fr an kf ur t

am Mai n; So ve rei gn Ban k

ll ll ll ll ll ll ll ll ll ll l In te rv en or s

Top wate r Exc lu si ve Fu nd III, LLC; F rees to ne Low Vo la ti li ty Partn ers , LP;

Free st on e Low Vo la ti li ty Q ua li fie d P art ne rs , LP

ll ll ll ll ll ll ll ll ll ll l In te rv en or s - Ap pe ll an ts

Gary Hans en

ll ll ll ll ll ll ll ll ll ll l Recei ver

- App el le e

__ __ __ __ __ __

App eal fro m

Uni te d S ta te s Di st ric t Co ur t

fo r th e Dis tri ct of M in ne so ta - Mi nn eap ol is

__ __ __ __ __ __Su bm it te d: May 9, 20 17

Fil ed : Au gu st 30 , 20 17

__ __ __ __ __ __

Befo re SM ITH, Chi ef J ud ge , COLLOTO N and KELLY , Cir cu it Ju dg es

.

__ __ __ __ __ __

KELLY, Cir cu it Ju dg e.

Thi s is th e se co nd ap pe al in an en fo rcem en t act io n br ou gh t b y t h e S ecu rit ie s

an d Exc ha ng e Co m

m is si on (SEC) ag ai ns t Mar lo n Qua n an d en ti ti es he co nt ro ll ed

,

in cl ud in g th e he dg e fu nd St eward sh ip Cred it Arb it rag e Fu nd

, LLC (SCAF ). 1 SCAF

was he av il y in ve st ed in lo an s to en ti ti es co nt ro ll ed by Tho m as Pet te rs

. Tho se

in ve st m en ts su ffer ed cat as tro ph ic lo ss es whe n th e Po nz i sc he m e su pp or ti ng Pet te rs ’

bu si ne ss es co ll ap se d.

In th e fir st ap pe al

, SEC v. Qua n

, 81 7 F.3d 58 3 (8t h Cir. 20 16 ), we affi rm ed a

jury ve r d i c t ag ai ns t Qua n an d cert ai n en ti ti es he co nt ro ll ed —b ut no t SCAF— fo r

se cu rit ie s la w vi ol at io ns ba se d on fal se st at em en ts an d m is le ad in g om is si on s m ad e

to he dg e fu nd in ve st or s. Mea nwh il e

, t h e di st ric t co ur t 2 pl aced SCAF’s rem ai ni ng

as se ts in rece iv ers hi p, ap pr ov ed th e rece iv er’s st ip ul at io n as to SCAF’s li ab il it y

, an d

ap pr ov ed a pl an to di s t r i b u t e S C AF’s as se ts to it s in ve st or s an d cred it or s. Thre e

in v e s t o r s in SCAF— Top wate r Exc lu si ve Fu nd III, LLC, Free st on e Low Vol at il it y

P a r t n ers

, LP, an d Free st on e Low Vol at il it y Qua li fie d Part ne rs

, LP (co ll ect iv el y

,

A ppe lla nts )— ap pe al or d ers en te red by th e di st ric t co ur t pe rta in in g to th e re ce ive rs hip

,

1 Unl es s ot he rwis e no te d, th e t e r m “ SCAF” in cl ud es SCAF’s who ll y -o wne d

su bs id ia rie s, Liv in gs to n Acres

, LLC (Liv in gs to n) an d Pu tn am Green

, LLC (Pu tn am

Green ).

2 The Hon or ab le Ann D. Mo nt go m ery, Uni t e d St at es Dis tri ct Ju dg e fo r th e

Dis tri ct of M in ne so ta

.

-2

-th e en try of jud gm en t ag ai ns t SC AF, an d t he pro rat a di st rib ut io n of SCAF’s ass et s

to in ve st or s. Be cau se App el la nt s h av e id en ti fie d n o re ve rs ib le erro r, we affi rm

.

I. Ba ck gr ou nd

In Mar ch 20 11

, th e SEC co m men c e d an en fo rcem en t act io n ag ai ns t Mar lo n

Qua n an d two in ve st m en t m an ag em en t en ti ti es th at he co nt ro ll ed : St eward sh ip

In ve st m en t Adv is or s (SIA) an d Aco rn Cap it al Gro up

, LLC (Aco rn ). The co m pl ai nt

al le ge d th at Qua n an d th e en ti ti es vi ol at ed se cu rit ie s la ws by: (1 ) frau du le nt ly se ll in g

in te res ts in two he dg e fu nd s— th e on sh or e SCAF an d th e of fs ho re St eward sh ip Cred it

Arb it rag e Fu nd

, Ltd .—t hr ou gh m ark et in g m at eri al s th at in cl ud ed m at eri al ly fal se or

m is le ad in g re pr es en ta ti on s ab ou t an ti -fra ud m eas ur es th at wou ld be us ed to pro te ct

th e in ve st m en ts ; an d (2 ) co nc eal in g de fau l t s on th e he dg e fu nd s’ co re in ve st m en ts

be gi nn in g in Decem

be r 20 07

, whe n th os e pr om is so ry no te s is su ed by Tho m as J.

Pet te rs (Pet te rs Not es ) be ga n fa il in g a s a r es ul t o f a Po nz i s ch em e.

Afte r th e Po nz i sc h e me c o l la ps ed , t he Pet te rs bu si ne ss es ’ as se ts were pl aced

in rece iv ers hi p an d se ve ral Pet te rs en ti ti es fil ed fo r ba nk ru pt cy

. Cert ai n Qua n en ti ti es

an d th ei r cred it or s reac he d a se tt le m en t wit h th e Pet te rs bu si ne ss es ’ ba nk ru pt cy an d

rece iv ers hi p es ta te s. On m ot io n by th e SEC, th e di st ric t cou rt fro ze the sh are of th e

as se ts fro m th is se tt le m en t th at were ap po rti on ed to SCAF. Ult im at el y

, th es e fro zen

a s s e t s a n d a d d i t i o n a l f r o z e n S C A F a s s e t s r e c o v e r e d f r o m o t h e r

ba nk ru pt ci es —t ot al in g ap pr ox im at el y $1 8 m il li on —wer e de po si te d wit h th e co ur t. 3

In Apr il 20 12

, th e di st ric t co ur t ap po in te d a rece iv er, Gary Han se n, to m an ag e

S C A F a nd it s fro zen fu nd s. The rece iv ers hi p or de r ga ve th e rece iv er th e po we r t o

“ ta ke an y act io n whi ch co ul d be tak en by th e of fic ers

, di rect or s, pa rtn ers

, m em be rs

,

3 Of th e ap pr ox im at el y $ 1 8 mi l li on de po si te d wit h th e co ur t, ro ug hl y $1 7

m il li on was re co ve red fro m SCAF’s i nv es tm en ts in th e Pet te rs Not es

.

-3

-sh areh ol de rs

, an d tru st ees ” of SCAF; “ res is t an d de fen d al l su it s, act io ns

, cl ai m s an d

de m an ds whi ch m ay no w be pe nd in g o r whi ch m ay be bro ug ht or as se rte d ag ai ns t”

SCAF; an d ta ke an y “ ne ces sa ry a n d a p p r o p ria te ” act io n to “ pr ev en t th e di ss ip at io n

. . . of an y fu nd s or as se ts or fo r th e pr es erv at io n of an y su ch fu nd s an d as se ts of ”

SCAF. Afte r th e en try of an or de r fo r di sg or ge m en t, th e rece iv er was res po ns ib le fo r

pr op os in g t o t he co ur t a c la im s an d d is tri bu ti on pro ces s fo r th e rec ei ve rs hi p a ss et s.

Sh or tl y th erea fte r, th e d is tri ct co ur t g ran te d t he SEC’s un op po se d m ot io n for

le av e to am en d th e co m

pl ai nt

, ad di ng SCAF as a de fen da nt

. SCAF was or ga ni zed as

a li m it ed li ab il it y co m

pa ny co nt ro ll ed by it s m a n a g i n g m em be r SIA, whi ch in tu rn

was co nt ro ll ed by Qua n. The Fi rs t Am en de d Co m pl ai nt st at ed cl ai m s ag ai ns t SCAF

fo r vi ol at io ns of Sect io n 10 (b ) of th e Secu rit ie s Exc ha ng e Act of 19 34 ( Ex c h a n g e

Act)

, 15 U.S.C. § 78

j(b), an d Ru le s 10 b- 5( a) an d (c) th ereu nd er, 17 C.F.R. § 24 0.1 0b

5( a)(c ), as well as Sect io ns 17 (a)( 1)

, (2 ) 4 & (3 ) of th e S e c ur it ie s Act of 19 33

(Sec ur it ie s Act ), 15 U.S.C. § 7 7q (a)( 1) –( 3)

.

App el la nt s, who are pr efer red in ve st or s in SCAF, m ov ed to in te rv en e in th e

act io n an d to m od ify th e rece iv ers hi p o r d e r to pe rm it an im m ed ia te cl ai m an d

di st rib ut io n p r o c e ss in acco rd an ce wit h SCAF’s op erat in g do cu m en ts

. The di st ric t

co ur t gr an te d th e m ot io n to in te rv en e, bu t d e ni ed th e m ot io n to m od ify th e

rece iv ers hi p. The co ur t co nc lu d e d t h a t SCAF co ul d be fo un d li ab le fo r frau d, an d

sh ou ld th at oc cu r, th e co ur t co ul d or de r di sg or ge m en t of th e rece iv ers hi p as se ts an d

dis tr ib ut e th os e fu nd s eq ui ta bl y

, rat he r th an ad he rin g t o SC A F’ s ope ra tin g doc um en ts

.

On Ju ne 6, 20 13

, th e rece iv er m ov ed fo r co ur t ap pr ov al of a st ip ul at io n (Fi rs t

St ip ul at io n) si gn ed by al l pa rti es ex cep t fo r th e in te rv en o r s

. The Fi rs t St ip ul at io n

ag reed th at SCAF wou ld no t be req ui red to res po nd to th e Fi rs t Am en de d Co m pl ai nt

,

4 Thi s cl ai m was br ou gh t on ly ag ai ns t SC A F, an d no t it s su bs id ia rie s Liv in gs to n

an d P ut na m

Green

.

-4

-to fil e su m

m ary jud gm en t b rie fs , or t o p art ic ip at e in th e up co m in g tri al

. Acco rd in g

to t h e s t i p u l a t i on

, th e rece iv er ha d ad jud ge d th at an act iv e de fen se of th e m at te r

w ou ld be co st ly an d wou ld de pl et e SCAF’s as se ts

, an d th at “ de te rm in at io n o f t h e

SEC’s cl ai m s ag ai ns t Qua n wil l as a pr act ic al m at te r go ve rn th e de te rm in at io n of th e

SEC’s cl ai m s ag ai ns t SCAF.” The Fi rs t St ip ul at io n pr ov id ed th at

, aft er res ol ut io n of

th e cl ai m s ag ai ns t Qua n, “ SCAF an d th e SEC sh al l en te r in t o a f u r t h er st ip ul at io n

ap pl y in g th at jud gm en t to th e cl ai m s ag ai ns t SCAF an d req ue st in g th e Co ur t to en te r

jud gm en t as to SCAF.” Ov er Ap pe ll an ts ’ ob jecti on , th e d is tri ct co ur t ap pr ov ed th e

Fi rs t St ip ul at io n, fin di ng it was wit hi n t h e r ecei ve r’s au th or it y

, pr op erl y pr es erv ed

SCAF’s as se ts , and di d n ot co m m it th e rec ei ve r to a fi na l s et tl em en t d is po si ti on

.

The di st ric t co ur t he ld a jury tri al on t h e c l a i ms a ga in st Qua n an d cert ai n

en ti ti es he co nt ro ll ed

, in cl ud in g SIA an d Aco rn

, bu t no t SCAF. As rel ev an t he re, th e

jury fo un d Qua n an d SIA li ab le fo r vi ol at io ns of Sect io n 10 (b ) of th e Secu rit ie s Act

an d Sect io ns 17 (a)( 2) an d (3 ) of th e Exc ha ng e Act. The jury di d no t fin d Qua n li ab le

fo r pe rs on al ly ai di ng an d ab et ti ng SCAF’s vi ol at io ns of Sect io n 10 (b ) an d Ru le 10 b- 5

t h e r e u nd er. The co ur t en te red fin al jud gm en t ag ai ns t th e tri al de fen da nt s i n t h e

am ou nt of a pp ro xi m at el y $9 5 m il li on

.

T he tr ia l de f

en da nt s ap pe al ed

, ch al le ng in g, am on g ot he r thi ngs, the co nsi ste nc y

o f t h e v e r d ic t. The tri al de fen da nt s arg ue d th at th e jury, as a m at te r of in te rn a l

in co ns is te nc y

, co ul d no t fin d th at Qua n “ pe rs on al ly vi ol at ed Ru le 10 b- 5, bu t di d no t

ai d an d ab et SCAF

. . . in vi ol at in g th e sa m e ru le ” be cau se “ he in di sp ut ab ly co nt ro ll ed

SCAF an d us ed it as ‘the ve hi cl e th ro ug h whi ch [h e] so ld th e se cu rit ie s at iss ue an d

co m m it te d frau d.’” Qua n

, 81 7 F.3 d at 59 1 (al te rat io n i n o r i g n a l). W e fo un d th e

jury’ s ve rd ic t reco nc il ab le be cau se SCAF di d no t pa rti ci pa te in th e tri al an d “ no ne of

th e ev id en ce sh owe d S CAF act iv el y do in g an y th in g” —ra th er, th e “ tri al fo cu se d on

Qua n’s ro le at th e ot h e r c o mp a ni es .” Id

. Thu s, “ th e jury m ay ha ve co nc lu de d th at

th ey la ck ed su ffi ci en t ev id en ce to de te rm in e Qua n’s ro le in SCAF” an d “ de cl in ed to

-5

-pi le on a fin di ng th at Qua n was al so li ab le fo r he lp in g [SCAF ], in so m e un sp eci fie d

way .” Id

.

W hi le th e ap pe al was pe nd in g, th e rece iv er an d th e SEC m ov ed fo r th e di st ric t

c o u r t t o a p p ro ve a Seco nd St ip ul at io n. In th at st ip ul at io n, SCAF co nc ed ed th at it s

co nd uc t vi ol at ed th e se cu rit ie s la ws, co ns en te d to th e en try of jud gm en t ag ai ns t it

, an d

ag reed th at it s as se ts wou ld be di sg or ge d. S p e c i f i c a l l y

, SCAF ad m it te d it m ad e

m at eri al m is rep res en ta ti on s in it s Pri va te Pl acement Mem or an da

, P owe rPo in t

pr es en ta ti on s, an d ne w s l e t t e r s by fal se ly pr om is in g to pr os pe ct iv e in ve st or s in th e

Pet te rs Not es th at SCAF wou ld us e a lo ck bo x acco un t, co nd uc t fu ll du e di li ge nc e of

th e lo an s, an d hi re an acco un ti ng fir m to au d i t i n t e rm ed ia rie s. The st ip ul at io n al so

ad m it te d th at SCAF de frau de d it s in ve st or s by co nc eal in g th e m ou nt in g de fau lt s i n

th e Pet te rs Not es

. Ove r App el la nt s’ ob jecti on s, th e di str ic t co ur t ap pr ov ed th e Seco nd

St ip ul at io n, en te red jud gm en t ag ai ns t SCAF, an d or de re d dis go rg em en t. It co nc lu de d

th at th e jury’ s fin di ng of no li ab il it y on th e a i d i n g a n d a be tt in g cl ai m ag ai ns t Qua n

“ do es no t co m

pe l th e co nc lu si on th at th e jury de te rm in ed th at SCAF di d no t co m m it

se cu rit ie s frau d.” It fu rth er fo un d th e Seco nd St i p ul at io n was wit hi n th e rece iv er’s

au th or it y an d was a reas on ab le an d p ru de nt ex erci se of t ha t au th or it y

.

The di st ric t cou rt als o gra nt ed th e rece iv er’s m ot io n— su pp or te d b y th e SEC,

but co nte ste d by App el la nt s— fo r ap pr ov al of a di st rib ut io n pl an fo r th e rece iv ers hi p’ s

as se ts

, whi ch at th at po in t to ta le d ap pr ox im at el y $1 8.9 m il li on

. Und er th e

di st rib ut io n pl an

, SCAF’s two se cu red cred it or s, DZ Ban k a n d So ve rie gn Ban k,

wou ld r e c e i v e 40 pe rcen t of th e fu nd

. The rem ai ni ng 60 pe rcen t— ap pr ox im at el y

$1 1.4 m il li on —wo ul d be di st rib ut ed pr o rat a to SCAF’s in ve st or s. The di st ric t co ur t

fo un d th e p l a n was fai r an d eq ui ta bl e an d ov erru le d App el la nt s’ ob jecti on th at th e

pl an di d no t acco un t for th e cl as s of inv es to r: Bot h Clas s P pr efer red in ve st or s, l ik e

App el la nt s, an d Cl as s A n o n

- p refe rred in ve st or s wou ld sh are eq ua ll y

. Fi na ll y

, th e

di st ric t co ur t o r d e red

, pu rs ua nt to th e rece iv er’s req ue st

, th at if a cl ai m an t

un su cces sf

ul ly ap pe al s th e di st rib ut io n pl an

, th e re c e i v e r’s le ga l fees an d co st s in

-6

-res po nd in g to th e ap pe al “ sh al l be d e d u c t ed fro m th e ch al le ng in g cl ai m an t’s

di st rib ut io n.”

App el la nt s ch al le ng e th e di st ric t co ur t’s ap pr o v a l of th e Fi rs t an d Seco nd

St ip ul at io ns

, ap pr ov al of th e pr o rat a di st rib ut io n of as se ts to SCAF’s in ve st or s, an d

or de r th at App el la nt s pa y th e rece iv e r ’s l eg al fees an d ex pe ns es if th ey are

un su cces sf

ul in th is ap pe al

.

II . Dis cus si on

A. Firs t Sti pul at io n

App el la nt s arg ue th at th e di st ric t co ur t erre d in ap pr ov in g th e Fi rs t St ip ul at io n

be cau se th e rece iv er was un de r two co nf li ct s of in te r e st

. W e rev ie w th e di st ric t

co ur t’s ov ers ig h t o f th e rece iv er an d it s ap pr ov al of th e st ip ul at io n fo r ab us e of

di sc re t i o n

. S e e SEC v. Ark

. Loa n & Thri ft Co rp

. , 42 7 F.2 d 11 71

, 11 72 (8 th Ci r.

19 70 ) (p er cu ria m ).

Fi rs t, App el la nt s arg ue th at th e rece iv er was un de r an “ in h eren t co nf li ct of

in te res t” be cau se he an d th e SEC wan te d SCAF to be fo un d li ab le fo r se cu rit ie s frau d,

as th en th ey wou ld “ g a i n mu c h g reat er au th or it y to reco m m en d an d im

pl em en t a

Dis tri bu ti on Pla n o f SCAF’s as se ts ” th at ig no red th e co nt ract ua l ri gh ts of p refe rred

in ve st or s. App el la nt s ci te no au th or it y fo r th ei r co nt en ti on th at th e rece iv er’s ab il it y

to st ip ul at e to li ab il it y co nf li ct s w i t h hi s ab il it y to pr op os e a di st rib ut io n pl an

.

Acco rd in g to th e rece iv ers hi p or de r, it was wit hi n th e rece iv er’s au th or it y to de fen d

or se tt le an y la wsu it s as well as to su bm it a reco m m en de d di st rib ut i o n p l a n

, an d

App el la nt s ne ve r ch al le ng ed th es e pr ov is io ns of th e rece iv ers hi p or de r. The re is no

ba si s to co nc lu de th at th e di st ric t co ur t ab us ed it s di sc ret io n in pe rm it ti ng th e rece iv er

bo th to de te rm in e SC A F ’s l i a b i l it y an d to pr op os e a di st rib ut io n pl an

, whi ch was

su bjec t to th e SEC’s po te nt ia l co un te r- p r o p o sa l an d th e rev ie w a nd ap pr ov al of th e

-7

-di st ric t co ur t. See SEC v. Lov in g Sp iri t Fo un d. In c.

, 39 2 F.3 d 48 6, 49 0 (D.C. Ci r.

20 04 ) (“ A rece iv er’s au th or it y

. . . is de fin ed so le ly by th e or de r of th e ap po in ti ng

co ur t, whi ch m ay pr ov id e fo r th e ad m in is tra ti on of th e rece iv ers hi p in an y way it se es

ap pr op ria te .” (i nt ern al qu ot at io ns om it te d) ).

Seco nd

, App el la nt s arg ue th at th e di st ric t co ur t sh ou ld no t ha ve ap pr ov ed th e

Fi rs t St ip ul at io n— whi ch t h e y c o nt en d ti ed SCAF’s li ab il it y to Qua n an d

SIA’s—b ecau se SCAF was de frau de d by Qua n an d SIA an d th ei r i n t e r es ts are

“ di am et ric al ly op po se d.” In st ead

, acco rd in g to App el la nt s, th e rece iv er sh ou ld ha ve

ha d SCAF ta ke an act iv e ro le in th e li ti ga ti on an d sh ou ld no t ha ve rel ie d on Qua n an d

SIA’s co un se l to pr ot ect it s in te res ts

. The di st ric t co ur t ap pr ov ed th e Fi rs t St ip ul at io n

be cau se it “ pr ev en te d th e un ne ces sa ry di ss ip at io n of rece iv ers hi p as se ts ” an d al lo wed

th e rece iv er to be ne fit fro m ul ti m at e res o l u t i o n o f th e cl ai m s ag ai ns t Qua n wit ho ut

“ pr ecl ud [in g] th e Rec ei ve r fro m rai si ng fu tu re de fen se s. ” W e co nc lu de th at th e

di st ric t c o ur t di d no t ab us e it s di sc ret io n in ap pr ov in g th e Fi rs t St ip ul at io n. The

rece iv er act ed wit hi n hi s br oa d au th or it y in de te rm in in g th at a se pa rat e de fen se was

un warra nt ed be cau se th ere was su ffi ci en t ov er la p be tw ee n SCAF an d Qua n an d SIA’s

de fen se s, an d be cau se it wou ld ha ve req ui red su bs ta nt ia l li ti ga ti on ex pe nd it ur es fro m

SCAF’s li m it ed as se ts

, whi ch wou ld ha ve ha rm ed al l of SCAF’s in ve st or s, in cl ud in g

App el la nt s. See SEC v. Ves co r Cap it al Co rp

. , 59 9 F.3 d 11 89

, 11 94 (1 0t h Ci r. 20 10 )

(aff irming th e di st ric t co ur t’s ad m in is tra ti on of th e rece iv ers hi p be cau se it “ pr op erl y

fo cu se d o n s afeg ua rd in g t he Vesc or in ve st or s’ ass et s as a who le ”).

Acco rd in gl y

, App el la nt s ha ve id en ti fie d no erro r in th e di str ic t co ur t’ s ap pr ov al

of th e Fi rs t St ip ul at io n, whi ch was wit hi n th e co ur t’s br oa d di sc ret io na ry po wer. See

S EC v. Hard y

, 80 3 F.2 d 10 34

, 10 37 (9 th Ci r. 19 86 ) (“ [A] di st ric t co ur t’s po w e r t o

su pe rv is e an eq ui ty rece iv ers hi p an d to de te rm in e th e ap pr op ria te act io n to be ta ke n

in th e ad m in is tra ti on of t he rece iv ers hi p i s ex tre m el y bro ad .”).

-8

-B. Seco nd Sti pul at io n

App el la nt s al so ch al le ng e th e Seco nd St ip ul at io n. The y a rg ue th at th e Fi rs t

St ip ul at io n— whi ch st at ed th at th e SEC an d SCAF “s h a ll en te r in to a fu rth er

st ip ul at io n ap pl y in g [th e fin al de te rm in at io n of th e cl ai m s ag ai ns t Qua n] to th e cl ai m s

ag ai ns t SCAF” —i nt erp ret ed in co nju nc ti on wit h th e jury’ s ve r di ct pr ev en te d th e

di st ric t co ur t fro m ap pr ov in g th e Seco nd St ip u l a ti on

, whi ch co ns en te d to SCAF’s

li ab il it y

. In pa rti cu la r, App el la nt s arg u e t h a t th e jury’ s ve rd ic t th at Qua n was no t

li ab le fo r ai di ng an d ab et ti ng SCAF’s vi ol at io n of Sect io n 10 (b ) of th e Exc ha ng e Act

ne ces sa ril y m ean s th at th e jury co nc lu de d th at SCAF di d no t vi ol at e an y se cu rit ie s

la ws. W e rev ie w th e m ean in g an d effe ct of th e st ip ul at io ns de no vo

, se e Brax to n v.

Uni te d St at es

, 50 0 U.S. 34 4, 35 0 (1 99 1)

, bu t we rev ie w th e di st ric t co ur t’s ap pr ov al

of th e Seco nd St ip ul at io n fo r ab us e of di sc ret io n, se e Ri tc hi e Cap it al Mg m t., LLC v.

Je ffri es , 65 3 F .3d 75 5, 7 60 (8t h C ir. 2 01 1)

.

The ju r y’s v e r d i ct on th e ai di ng an d ab et ti ng cl ai m do es no t pr ecl ud e th e

co nc lu si on th at SCAF was li ab le fo r se cu rit ie s frau d vi ol at io ns

. Acco rd in g to th e jury

in st ru ct io ns in th e Qua n tri al

, to ret ur n a gu il ty v e r d ic t on th e ai di ng an d ab et ti ng

cl ai m

, th e jury ha d to fin d th at : (1 ) SCAF v i o l a t ed Sect io n 10 (b ); (2 ) Qua n ha d

kn owl ed ge th at SCAF was vi ol at in g Sect io n 10 (b ); an d (3 ) Qua n pr ov id ed su bs ta nt ia l

as si st an ce to SCAF in it s vi ol at io n of Sect io n 10 (b ). The jury co ul d ha ve fo un d Qua n

no t li ab le on th is cl ai m wit ho ut reac hi ng an y co nc lu si on s ab ou t S C A F

. Thi s is

be cau se

, as we st at ed in th e pr io r ap pe al , S CAF “ di d no t p a rti ci pa te in th e tri al an d

no ne of th e ev id en ce sh owe d SCAF act iv el y do in g an y th in g.” Qua n

, 81 7 F.3 d at 59 1.

The jury al s o c o u ld ha ve fo un d th at th e ai di ng an d ab et ti ng el em en ts were

in su ffi ci en tl y pr ov en

. It co ul d ha ve co nc lu de d, fo r ex am pl e, th at it “ la ck ed su ffi ci en t

ev id en ce to de te r mi n e Qua n’s ro le ” in or as si st an ce in su pp or t of SCAF, “ an en ti ty

th at

, as far as th e jury he ard

, di d no th in g fo r it se lf an d was li tt le m or e th an a pi ece of

pa pe r.” Id

. Fo r t h e s e s a me reas on s, we reject App el la nt s’ arg um en t th at SCAF’s

li ab il it y , and th us th e Seco nd St ip ul at io n, is ba rred by i ss ue pr ecl us io n. See S.E.L.

-9

-Mad ur o (Fl a.), In c. v. M/ V Ant on io de Gas ta ne t a

, 8 33 F.2 d 14 77

, 14 83 (1 1t h Ci r.

19 87 ) (“ If th e jury co ul d ha ve pr em is ed it s ve rd ic t on on e or m or e of se ve ral is su es

,

th en co ll at eral est op pe l d oe s n ot act as a ba r . . . .”).

App el la nt s al so arg ue th at th e di st ric t co u r t e r r e d in ap pr ov in g th e Seco nd

St ip ul at io n be cau se SCAF— a he dg e fu nd an d li m it ed li ab il it y co m pa ny own ed by it s

in ve st or s an d who ll y co n t ro ll ed by Qua n an d SIA—c an no t be li ab le fo r

m is rep res en ta ti on s m ad e to in ve st or s. 5 Ap p e l l a nt s ci te no au th or it y fo r th is

pr op os it io n, whi ch ap pe ars to be co nt rary to ou r cas e la w. See, e.g

. , Dou d v. Toy Bo x

Dev

. Co

. , 79 8 F.3 d 70 9, 71 4 (8 th Ci r. 20 15 ) (aff irming su m

m ary jud gm en t ag ai ns t a

li m it ed li ab il it y co m

pa ny fo r Sect io n 10 (b ) vi ol at io ns ba se d on m is rep res en ta ti on s in

th e co m pa ny’ s of feri ng do cu m en t s )

. To th e ex te nt th at th is arg um en t pr es en ts a

de fen se th at th e rece iv er co ul d ha ve rai se d on be ha lf of SCAF, th e di st ric t co ur t act ed

wit hi n i t s b ro ad di sc ret io n in co nc lu di ng th at th e rece iv er’s de ci si on to st ip ul at e to

SCAF’s li ab il it y wit ho ut rai si ng an y de fen se s was a “ reas on ab le an d pr ud en t ex erci se

of th e rece iv er’s au t h o r i t y .” The co ur t fo un d th at th e rece iv er “ ha s an al y zed th e

res ul ts of th e [Qu an ] tri al ,” “ ha s m ad e an as se ss m en t of the ris ks ve rs us th e co st s of

su bjec ti ng [SCAF ] t o a t r i a l on th e m eri ts ,” an d “ ha s de te rm in ed th at a tri al on th e

cl ai m s ag ai ns t [SCAF ] wou ld li ke ly be de ci de d ag ai ns t [it ] an d th at de fen di ng ag ai ns t

th e cl ai m s wou ld di ss ip at e Rec ei ve rs hi p Ass et s th at al read y fal l far sh or t of th e cl ai m s

ag ai ns t th e Rec ei ve rs hi p.” W e fin d no ab us e of di sc ret io n in th e co ur t’s ap pr ov al of

th e Sec on d S ti pu la ti on

.

5 Ci ti ng Ja nu s Cap it al Gro up

, In c. v. Fi rs t Deri va ti ve Trad ers

, 56 4 U.S. 13 5, 14 2

(2 01 1)

, App el la nt s arg ue th at SCAF can no t be li ab le un de r Sect io n 10 (b ) be cau se it

di d no t “ m ak e” an un tru e st at em en t of m at eri al fact

. Bec au se th is arg um en t was no t

rai se d be fo re th e di st ric t co ur t, we do no t ad dr es s it he re. See St

. Pau l Fi re & Mar in e

In s. v . Com

pa q C om pu t. Co rp

. , 53 9 F .3d 80 9, 8 24 (8t h C ir. 2 00 8)

.

-1 0-C. Pro Ra ta Dis tri buti on

Afte r st ip ul at in g t o an or de r fo r di sg or ge m en t of SCAF’s as se ts , t he rece iv er

pr op os ed to th e di st ric t co ur t a di st rib ut io n pl an fo r th os e as se ts

, whi ch was su pp or te d

by th e SEC. The pr op os ed p l a n d i st rib ut ed 40 pe rcen t of th e $1 8.9 m il li on fu nd to

SCAF’s se cu red cred it or s, an d th e rem ai ni ng 60 pe rcen t to t h e in ve st or s pr o rat a.

App el la nt s o b

je c t e d to th e pr o rat a di st rib ut io n, arg ui ng th at as Cl as s P pr efer red

in ve st or s, th ey sh ou ld be fav or e d o v e r Cl as s A in ve st or s be cau se th ey ha d a

co nt ract ua l li qu id at io n pr e fere nc e an d ha d op te d to pu rch as e m or e co ns erv at iv e

sh are s

. The di st ric t co ur t reject ed App el la nt s’ ob jecti on

, co nc lu di ng th at th e

di st in ct io n be twee n Cl as s A an d P in ve st or s was im m at eri al be cau se “ in ve st or lo ss es

were no t cau se d by m ark et ris k,” bu t rat he r “ by Defen da nt s’ fal se pr om i s es ab ou t

an ti -fra ud pr ot ect io ns th at were n e v er im pl em en te d— a ris k th at no in ve st or

kn owi ng ly as su m ed .” Bec au se bo th cl a s s e s w e re “ eq ua ll y de frau de d” whe n th ey

in ve st ed in SCAF, th e di st ric t co ur t co nc lu de d th ey are “ en ti tl ed to sh are eq ua ll y ” in

th e fu nd

. 6

On ap pe al

, App el la nt s rai se t h e sa m e arg um en ts

, ex pl ai ni ng th at Cl as s P

in ve st or s so ug ht m in im

um ris k in th e fo rm of a gu aran te ed lo w rat e o f r e t ur n, in

ex ch an ge fo r a li qu id at io n pr efer en ce in th e ev en t o f di ss ol ut io n, whe reas Cl as s A

i n ve st or s ch os e ris ki er an d m or e va ria bl e in ve st m en ts

. App el la nt s as k us to va cat e

th e p o r t i o n of th e di st rib ut io n pl an al lo cat ed to in ve st or s an d rem an d wit h th e

di rect io n t ha t t he Cla ss P li qu id at io n p refe ren ce b e h on or ed

.

W e rev ie w th e di st r i c t c o u r t’s se le ct io n of a di st rib ut io n pl an fo r th e

rece iv ers hi p as se ts fo r ab us e of di sc ret io n. SEC v. W eal th Mg m t. LLC

, 62 8 F.3 d 32 3,

6 App el la nt s arg ue th e di st ric t co ur t’s re as on in g h as be en cri ti ci zed in SEC v.

Sp on ge te ch Deli ve ry Sy st em s, In c.

, 98 F. Su pp

. 3d 53 0, 54 9 (E.D.N.Y. 20 15 ). Tha t

cas e ad dr es se d on ly th e di st ric t co ur t’s d is cu ss io n o f di sg or ge m en t an d di st rib ut io n

as it rel at ed to se cu red cred it or s— a po rti on of th e pl an th at App el la nt s do no t ap pe al

.

-1 1-33 2– 33 (7 th Ci r. 20 10 ); SEC v. Cred it Ban co rp

, Ltd

. , 29 0 F.3 d 80

, 87 (2 d Ci r. 20 02 ).

The di st ric t co ur t h as “ br oa d eq ui ta bl e po wer” in ap pr ov in g a di st rib ut io n pl an , “ so

ap pe ll at e sc ru ti ny i s na rro w.” W eal th Mg m t. , 6 28 F.3 d at 33 2. “ [T]he p rimary job

of th e di st ric t co ur t is to en su re th a t t h e p r o p o s e d pl an of di st rib ut io n is fai r an d

reas on ab le .” Id

. The co ur t is no t req ui red to di st rib ut e th e as se ts in acco rd an ce wit h

th e co nt ract ua l rig ht s of th e pa rti es

. See Bro ad be nt v. Adv an ta ge So ftwa re, In c.

, 41 5

F. App ’x 73 , 78 –7 9 (1 0t h C ir. 2 01 1) ; Cred it Ban co rp , 29 0 F .3d at 8 9– 90

.

Co ur ts ha ve “ ro ut in el y en do rs ed ” th e pr o rat a di st rib ut io n of as se ts to in ve st or s

as th e m os t fai r an d eq ui ta bl e ap pr oa ch in frau d cas es

. W ea l t h M g mt

. , 6 2 8 F.3 d at

33 3; acco rd SEC v . Inf

in it y Grp

. Co

. , 22 6 F. App ’x 21 7, 21 8 (3d Ci r. 20 07 ); Cred it

Ban co rp

, 29 0 F.3 d at 88 –8 9 (“ Co ur ts ha ve fav or ed pr o ra ta di st rib ut io n o f a s s e t s

whe re, as he re, t h e f

u n d s o f th e de frau de d vi ct im s were co m m in gl ed an d whe re

vi ct im s were si m il arl y si tu at ed wit h res pe ct to th ei r rel at io ns hi p to th e de frau de rs .”).

W e fin d no ab us e of di sc ret io n in th e di st ric t co ur t’s ad op ti on of pr o rat a di st rib ut io n

as ap pl ie d t o S CAF’s in ve st or s.

Cl as s A an d P in ve st or s were frau du le nt l y i n d u c ed in to in ve st in g in SCAF

ba se d on th e sa m e m is rep res en ta ti on s, an d bo th un wit ti ng ly ha d th e m ajor it y of th ei r

in ve st m en ts fu nn el ed in to Pet te rs ’ Po nz i s ch em e, m ak in g m os t o f th ei r in ve st m en ts

an d th us m os t of the ir retu rn s ess en ti al ly fic ti ti ou s. Bo th cl as se s of in ve st or s “ were

si m il arl y si tu at ed in rel at io ns hi p to th e frau d, in rel at io ns h i p t o t h e lo ss es

, in

rel at io ns hi p to th e frau d s te rs , a nd in rel at io ns hi p to th e na tu re of th ei r in ve st m en ts

,

so th at a

. . . pr o rat a di st rib ut io n is eq ui ta bl e.” Co m m od it y Fu tu res Trad in g Co m m ’n

v. W al sh

, 71 2 F.3 d 73 5, 7 4 8 ( 2 d C ir. 20 13 ) (q uo ta ti on s an d em ph as is om it te d)

.

Bec au se no in ve st or kn owi ng ly ta ke s t h e ris k th at sh e wil l be de frau de d, th e

d i st rib ut io n pl an ne ed no t ta ke in to acco un t th e fact th at Cl as s P in ve st or s in i t i a l l y

p u rch as ed le ss ris ky in ve st m en ts

. See id

. at 75 1 (“ [M]ere ch oi ces of di ffer en t

in ve st m en t ve hi cl es di d no t m ean th at th e two gr ou ps of de frau de d in ve st or s

. . . were

m ean in gf ul ly di ss im il ar, gi ve n, in te r al ia

, th at bo th

. . . lo st m on ey be cau se th ey were

-1 2-de frau de d by th e sa m e in di vi du al who st ol e th ei r m on ey .” (q uo ta ti on s an d al te rat io ns

om it te d) ). Fi na ll y

, it was no t an ab us e of di sc ret io n fo r th e di st ric t co ur t to refu se to

en fo rce th e li qu id at io n pr efer en ce, whi ch was crea te d by th e de frau de r an d pr ov id ed

in th e ve ry sa m e do cu m en ts th at co nt ai ne d frau du le nt m is rep res en ta ti on s. See id

. at

74 9 (“ [A] rece iv er dev is in g a di st rib ut io n pl an is no t requ ire d to ap po rti on as se ts in

co nf or m it y wit h m is rep res en ta ti on s an d a rb it rary al lo cat io ns th at were m ad e b y th e

de frau de r, ‘oth erwi se

, th e whi m of th e de frau de r wou ld

. . . co nt ro l[] th e pr oc es s th at

is su pp os ed to un win d th e frau d.’” (s eco nd an d th ird al te rat io ns in or ig in al ) (q uo ti ng

In re Ber na rd L. Mad of

f In v. Se c. LLC , 65 4 F .3d 22 9, 2 38 n.7 (2d Cir . 20 11 ))).

App el la nt s ci te no cas e la w req ui rin g a di st ric t co ur t t o f a v o r on e cl as s of

in ve st or s ov er an ot he r in an eq u i t y r e c ei ve rs hi p co m pe ns at in g frau d vi ct im s. 7 W e

fin d no ba si s to co nc lu de th at th e di st ric t co ur t ab us ed it s di sc ret io n in ap pl y in g a pr o

rat a d is tri bu ti on to all in ve st or s.

D. Leg al Fees an d Ex pens es

Fi na ll y

, App el la nt s arg ue th at th e di st ric t co ur t erre d in or de rin g th em to be ar

th e rece iv er’s le ga l fees an d ex pe ns es if th ey are un su cces sf ul in th is ap pe al

. Bec au se

App el la nt s di d no t ob

ject to th e sh ift in g of th es e fees an d ex pe ns es be fo re th e di st ric t

co ur t, th e y h a v e waiv ed th is arg um en t. See Jo se ph v. All en

, 71 2 F.3 d 12 22

, 12 26

7 App el la nt s ci te cas es whe re a ppe lla te co ur ts, re vie w ing fo r a

bu se of di sc ret io n,

affi rm ed a di st ric t co ur t’s ap pr ov al of no n- pr o rat a di st rib ut io n pl an s, bu t th es e co ur ts

di d no t req ui re su ch an ap pr oa ch

. See, e.g

. , SEC v. Ent er. Tr. Co

. , 55 9 F.3 d 64 9, 65 2

(7 th Ci r. 20 09 ) (aff

irming ap pr ov al of pl an th at fav or ed ho ld ers of cu st od ia l acco un ts

ov er m an ag ed acco un ts be cau se cu st od ia l ho ld ers ha d no t au th or iz ed de fen da nt s t o

m an ag e th ei r m on ey an d th ey ha d “ no le gi ti m at e be ef”) ; SEC v. W an g

, 94 4 F.2 d 80

, 86 (2 d Ci r. 19 91 ) (ap pr ov in g pl an th at fav o r ed in ve st or s who as su m ed th e gr eat es t

ris k o f lo ss ).

-1 3-(8 th Cir . 20 13 ) (fai li ng to op po se an is su e be fo re the di st ric t co ur t re su lt s i n wai ve r

of th e is su e o n a pp eal ).

II I. Co ncl us io n

Fo r th e fo reg oi ng reas on s, we af fir m th e jud gm en t o f th e d is tri ct co ur t.

__ __ __ __ __ __ __ __ __ __ __ __ __ __ __

-1 4-