United States Court of Appeals

For the Eighth Circuit

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No. 16-1072

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United States Securities and Exchange Commission

lllllllllllllllllllll Plaintiff - Appellee

v.

Marlon Quan; Acorn Capital Group, LLC; Stewardship Investment Advisors,

LLC; Stewardship Credit Arbitrage Fund, LLC; Putnam Green, LLC; Livingston

Acres, LLC; ACG II, LLC; Florence Quan

lllllllllllllllllllll Defendants

Nigel Chatterjee; DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt

am Main; Sovereign Bank

lllllllllllllllllllllIntervenors

Topwater Exclusive Fund III, LLC; Freestone Low Volatility Partners, LP;

Freestone Low Volatility Qualified Partners, LP

lllllllllllllllllllllIntervenors - Appellants

Gary Hansen

lllllllllllllllllllllReceiver - Appellee

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Appeal from United States District Court 

for the District of Minnesota - Minneapolis

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 Submitted: May 9, 2017

 Filed: August 30, 2017

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Before SMITH, Chief Judge, COLLOTON and KELLY, Circuit Judges.

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KELLY, Circuit Judge.

This is the second appeal in an enforcement action brought by the Securities

and Exchange Commission (SEC) against Marlon Quan and entities he controlled,

including the hedge fund Stewardship Credit Arbitrage Fund, LLC (SCAF).1 SCAF

was heavily invested in loans to entities controlled by Thomas Petters. Those

investments suffered catastrophic losses when the Ponzi scheme supporting Petters’

businesses collapsed. 

In the first appeal, SEC v. Quan, 817 F.3d 583 (8th Cir. 2016), we affirmed a

jury verdict against Quan and certain entities he controlled—but not SCAF—for

securities law violations based on false statements and misleading omissions made

to hedge fund investors. Meanwhile, the district court

2

placed SCAF’s remaining

assets in receivership, approved the receiver’s stipulation as to SCAF’s liability, and

approved a plan to distribute SCAF’s assets to its investors and creditors. Three

investors in SCAF—Topwater Exclusive Fund III, LLC, Freestone Low Volatility

Partners, LP, and Freestone Low Volatility Qualified Partners, LP (collectively,

Appellants)—appeal orders entered by the district court pertaining to the receivership,

1Unless otherwise noted, the term “SCAF” includes SCAF’s wholly-owned

subsidiaries, Livingston Acres, LLC (Livingston) and Putnam Green, LLC (Putnam

Green).

2The Honorable Ann D. Montgomery, United States District Judge for the

District of Minnesota.

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the entry of judgment against SCAF, and the pro rata distribution of SCAF’s assets

to investors. Because Appellants have identified no reversible error, we affirm. 

I. Background

In March 2011, the SEC commenced an enforcement action against Marlon

Quan and two investment management entities that he controlled: Stewardship

Investment Advisors (SIA) and Acorn Capital Group, LLC (Acorn). The complaint

alleged that Quan and the entities violated securitieslaws by: (1) fraudulently selling

interestsin two hedge funds—the onshore SCAF and the offshore StewardshipCredit

Arbitrage Fund, Ltd.—through marketing materials that included materially false or

misleading representations about anti-fraud measures that would be used to protect

the investments; and (2) concealing defaults on the hedge funds’ core investments

beginning in December 2007, when those promissory notes issued by Thomas J.

Petters (Petters Notes) began failing as a result of a Ponzi scheme. 

After the Ponzi scheme collapsed, the Petters businesses’ assets were placed

in receivership and several Petters entitiesfiled for bankruptcy. Certain Quan entities

and their creditors reached a settlement with the Petters businesses’ bankruptcy and

receivership estates. On motion by the SEC, the district court froze the share of the

assets from this settlement that were apportioned to SCAF. Ultimately, these frozen

assets and additional frozen SCAF assets recovered from other

bankruptcies—totaling approximately $18 million—were deposited with the court.3

In April 2012, the district court appointed a receiver, Gary Hansen, to manage

SCAF and its frozen funds. The receivership order gave the receiver the power to

“take any action which could be taken by the officers, directors, partners, members,

3Of the approximately $18 million deposited with the court, roughly $17

million was recovered from SCAF’s investments in the Petters Notes.

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shareholders, and trustees” of SCAF; “resist and defend all suits, actions, claims and

demands which may now be pending or which may be brought or asserted against”

SCAF; and take any “necessary and appropriate” action to “prevent the dissipation

. . . of any funds or assets or for the preservation of any such funds and assets of”

SCAF. After the entry of an order for disgorgement, the receiver was responsible for

proposing to the court a claims and distribution process for the receivership assets.

Shortly thereafter, the district court granted the SEC’s unopposed motion for

leave to amend the complaint, adding SCAF as a defendant. SCAF was organized as

a limited liability company controlled by its managing member SIA, which in turn

was controlled by Quan. The First Amended Complaint stated claims against SCAF

for violations of Section 10(b) of the Securities Exchange Act of 1934 (Exchange

Act), 15 U.S.C. § 78j(b), and Rules 10b-5(a) and (c) thereunder, 17 C.F.R. § 240.10b5(a)(c), as well as Sections 17(a)(1), (2)

4 & (3) of the Securities Act of 1933

(Securities Act), 15 U.S.C. § 77q(a)(1)–(3). 

Appellants, who are preferred investors in SCAF, moved to intervene in the

action and to modify the receivership order to permit an immediate claim and

distribution process in accordance with SCAF’s operating documents. The district

court granted the motion to intervene, but denied the motion to modify the

receivership. The court concluded that SCAF could be found liable for fraud, and

should that occur, the court could order disgorgement of the receivership assets and

distribute those funds equitably, rather than adhering to SCAF’s operating documents.

On June 6, 2013, the receiver moved for court approval of a stipulation (First

Stipulation) signed by all parties except for the intervenors. The First Stipulation

agreed that SCAF would not be required to respond to the First Amended Complaint,

4This claimwas brought only against SCAF, and not its subsidiaries Livingston

and Putnam Green.

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to file summary judgment briefs, or to participate in the upcoming trial. According

to the stipulation, the receiver had adjudged that an active defense of the matter

would be costly and would deplete SCAF’s assets, and that “determination of the

SEC’s claims against Quan will as a practical matter govern the determination of the

SEC’s claims against SCAF.” The First Stipulation provided that, after resolution of

the claims against Quan, “SCAF and the SEC shall enter into a further stipulation

applying that judgment to the claims against SCAF and requesting the Court to enter

judgment as to SCAF.” Over Appellants’ objection, the district court approved the

First Stipulation, finding it was within the receiver’s authority, properly preserved

SCAF’s assets, and did not commit the receiver to a final settlement disposition. 

The district court held a jury trial on the claims against Quan and certain

entities he controlled, including SIA and Acorn, but not SCAF. As relevant here, the

jury found Quan and SIA liable for violations of Section 10(b) of the Securities Act

and Sections 17(a)(2) and (3) of the Exchange Act. The jury did not find Quan liable

for personally aiding and abetting SCAF’s violations of Section 10(b) andRule 10b-5

thereunder. The court entered final judgment against the trial defendants in the

amount of approximately $95 million.

The trial defendants appealed, challenging, among other things,the consistency

of the verdict. The trial defendants argued that the jury, as a matter of internal

inconsistency, could not find that Quan “personally violated Rule 10b-5, but did not

aid and abet SCAF . . . in violating the same rule” because “he indisputably controlled

SCAF and used it as ‘the vehicle through which [he] sold the securities at issue and

committed fraud.’” Quan, 817 F.3d at 591 (alteration in orignal). We found the

jury’s verdict reconcilable because SCAF did not participate in the trial and “none of

the evidence showed SCAF actively doing anything”—rather, the “trial focused on

Quan’s role at the other companies.” Id. Thus, “the jury may have concluded that

they lacked sufficient evidence to determine Quan’s role in SCAF” and “declined to

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pile on a finding that Quan was also liable for helping [SCAF], in some unspecified

way.” Id.

While the appeal was pending, the receiver and the SEC moved for the district

court to approve a Second Stipulation. In that stipulation, SCAF conceded that its

conduct violated the securities laws, consented to the entry ofjudgment against it, and

agreed that its assets would be disgorged. Specifically, SCAF admitted it made

material misrepresentations in its Private Placement Memoranda, PowerPoint

presentations, and newsletters by falsely promising to prospective investors in the

Petters Notes that SCAF would use a lockbox account, conduct full due diligence of

the loans, and hire an accounting firm to audit intermediaries. The stipulation also

admitted that SCAF defrauded its investors by concealing the mounting defaults in

the Petters Notes. Over Appellants’ objections, the district court approved the Second

Stipulation, entered judgment against SCAF, and ordered disgorgement. It concluded

that the jury’s finding of no liability on the aiding and abetting claim against Quan

“does not compel the conclusion that the jury determined that SCAF did not commit

securities fraud.” It further found the Second Stipulation was within the receiver’s

authority and was a reasonable and prudent exercise of that authority.

The district court also granted the receiver’s motion—supported by the SEC,

but contested by Appellants—for approval of a distribution plan for the receivership’s

assets, which at that point totaled approximately $18.9 million. Under the

distribution plan, SCAF’s two secured creditors, DZ Bank and Soveriegn Bank,

would receive 40 percent of the fund. The remaining 60 percent—approximately

$11.4 million—would be distributed pro rata to SCAF’s investors. The district court

found the plan was fair and equitable and overruled Appellants’ objection that the

plan did not account for the class of investor: Both Class P preferred investors, like

Appellants, and Class A non-preferred investors would share equally. Finally, the

district court ordered, pursuant to the receiver’s request, that if a claimant

unsuccessfully appeals the distribution plan, the receiver’s legal fees and costs in

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responding to the appeal “shall be deducted from the challenging claimant’s

distribution.” 

Appellants challenge the district court’s approval of the First and Second

Stipulations, approval of the pro rata distribution of assets to SCAF’s investors, and

order that Appellants pay the receiver’s legal fees and expenses if they are

unsuccessful in this appeal.

II. Discussion

A. First Stipulation

Appellants argue that the district court erred in approving the First Stipulation

because the receiver was under two conflicts of interest. We review the district

court’s oversight of the receiver and its approval of the stipulation for abuse of

discretion. See SEC v. Ark. Loan & Thrift Corp., 427 F.2d 1171, 1172 (8th Cir.

1970) (per curiam).

First, Appellants argue that the receiver was under an “inherent conflict of

interest” because he and the SEC wanted SCAF to be found liable for securities fraud,

as then they would “gain much greater authority to recommend and implement a

Distribution Plan of SCAF’s assets” that ignored the contractual rights of preferred

investors. Appellants cite no authority for their contention that the receiver’s ability

to stipulate to liability conflicts with his ability to propose a distribution plan.

According to the receivership order, it was within the receiver’s authority to defend

or settle any lawsuits as well as to submit a recommended distribution plan, and

Appellants never challenged these provisions of the receivership order. There is no

basisto conclude that the district court abused its discretion in permitting the receiver

both to determine SCAF’s liability and to propose a distribution plan, which was

subject to the SEC’s potential counter-proposal and the review and approval of the

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district court. See SEC v. Loving Spirit Found. Inc., 392 F.3d 486, 490 (D.C. Cir.

2004) (“A receiver’s authority . . . is defined solely by the order of the appointing

court, which may provide for the administration of the receivership in any way itsees

appropriate.” (internal quotations omitted)). 

Second, Appellants argue that the district court should not have approved the

First Stipulation—which they contend tied SCAF’s liability to Quan and

SIA’s—because SCAF was defrauded by Quan and SIA and their interests are

“diametrically opposed.” Instead, according to Appellants, the receiver should have

had SCAF take an active role in the litigation and should not have relied on Quan and

SIA’s counsel to protect its interests. The district court approved the First Stipulation

because it “prevented the unnecessary dissipation ofreceivership assets” and allowed

the receiver to benefit from ultimate resolution of the claims against Quan without

“preclud[ing] the Receiver from raising future defenses.” We conclude that the

district court did not abuse its discretion in approving the First Stipulation. The

receiver acted within his broad authority in determining that a separate defense was

unwarranted because there wassufficient overlap between SCAF and Quan and SIA’s

defenses, and because it would have required substantial litigation expendituresfrom

SCAF’slimited assets, which would have harmed all of SCAF’s investors, including

Appellants. See SEC v. Vescor Capital Corp., 599 F.3d 1189, 1194 (10th Cir. 2010)

(affirming the district court’s administration of the receivership because it “properly

focused on safeguarding the Vescor investors’ assets as a whole”).

Accordingly,Appellants have identified no error in the district court’s approval

of the First Stipulation, which was within the court’s broad discretionary power. See

SEC v. Hardy, 803 F.2d 1034, 1037 (9th Cir. 1986) (“[A] district court’s power to

supervise an equity receivership and to determine the appropriate action to be taken

in the administration of the receivership is extremely broad.”). 

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B. Second Stipulation

Appellants also challenge the Second Stipulation. They argue that the First

Stipulation—which stated that the SEC and SCAF “shall enter into a further

stipulation applying [the final determination of the claims against Quan] to the claims

against SCAF”—interpreted in conjunction with the jury’s verdict prevented the

district court from approving the Second Stipulation, which consented to SCAF’s

liability. In particular, Appellants argue that the jury’s verdict that Quan was not

liable for aiding and abetting SCAF’s violation of Section 10(b) of the Exchange Act

necessarily means that the jury concluded that SCAF did not violate any securities

laws. We review the meaning and effect of the stipulations de novo, see Braxton v.

United States, 500 U.S. 344, 350 (1991), but we review the district court’s approval

of the Second Stipulation for abuse of discretion, see Ritchie Capital Mgmt., LLC v.

Jeffries, 653 F.3d 755, 760 (8th Cir. 2011).

The jury’s verdict on the aiding and abetting claim does not preclude the

conclusion that SCAF wasliable forsecurities fraud violations. According to the jury

instructions in the Quan trial, to return a guilty verdict on the aiding and abetting

claim, the jury had to find that: (1) SCAF violated Section 10(b); (2) Quan had

knowledge that SCAF was violating Section 10(b); and (3) Quan provided substantial

assistance to SCAF in its violation of Section 10(b). The jury could have found Quan

not liable on this claim without reaching any conclusions about SCAF. This is

because, as we stated in the prior appeal, SCAF “did not participate in the trial and

none of the evidence showed SCAF actively doing anything.” Quan, 817 F.3d at 591.

The jury also could have found that the aiding and abetting elements were

insufficiently proven. It could have concluded, for example, that it “lacked sufficient

evidence to determine Quan’s role” in or assistance in support of SCAF, “an entity

that, as far as the jury heard, did nothing for itself and was little more than a piece of

paper.” Id. For these same reasons, we reject Appellants’ argument that SCAF’s

liability, and thus the Second Stipulation, is barred by issue preclusion. See S.E.L.

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Maduro (Fla.), Inc. v. M/V Antonio de Gastaneta, 833 F.2d 1477, 1483 (11th Cir.

1987) (“If the jury could have premised its verdict on one or more of several issues,

then collateral estoppel does not act as a bar . . . .”).

Appellants also argue that the district court erred in approving the Second

Stipulation because SCAF—a hedge fund and limited liability company owned by its

investors and wholly controlled by Quan and SIA—cannot be liable for

misrepresentations made to investors.5 Appellants cite no authority for this

proposition, which appearsto be contrary to our case law. See, e.g., Doud v. Toy Box

Dev. Co., 798 F.3d 709, 714 (8th Cir. 2015) (affirming summary judgment against a

limited liability company for Section 10(b) violations based on misrepresentationsin

the company’s offering documents). To the extent that this argument presents a

defense that the receiver could have raised on behalf of SCAF, the district court acted

within its broad discretion in concluding that the receiver’s decision to stipulate to

SCAF’sliabilitywithoutraising any defenses was a “reasonable and prudent exercise

of the receiver’s authority.” The court found that the receiver “has analyzed the

results of the [Quan] trial,” “has made an assessment of the risks versus the costs of

subjecting [SCAF] to a trial on the merits,” and “has determined that a trial on the

claims against [SCAF] would likely be decided against[it] and that defending against

the claims would dissipate Receivership Assets that already fallfar short ofthe claims

against the Receivership.” We find no abuse of discretion in the court’s approval of

the Second Stipulation.

5Citing JanusCapital Group,Inc. v. First Derivative Traders, 564 U.S. 135, 142

(2011), Appellants argue that SCAF cannot be liable under Section 10(b) because it

did not “make” an untrue statement of material fact. Because this argument was not

raised before the district court, we do not address it here. See St. Paul Fire & Marine

Ins. v. Compaq Comput. Corp., 539 F.3d 809, 824 (8th Cir. 2008).

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C. Pro Rata Distribution

After stipulating to an order for disgorgement of SCAF’s assets, the receiver

proposed to the district court a distribution plan for those assets, which wassupported

by the SEC. The proposed plan distributed 40 percent of the $18.9 million fund to

SCAF’s secured creditors, and the remaining 60 percent to the investors pro rata.

Appellants objected to the pro rata distribution, arguing that as Class P preferred

investors, they should be favored over Class A investors because they had a

contractual liquidation preference and had opted to purchase more conservative

shares. The district court rejected Appellants’ objection, concluding that the

distinction between Class A and P investors wasimmaterial because “investor losses

were not caused by market risk,” but rather “by Defendants’ false promises about

anti-fraud protections that were never implemented—a risk that no investor

knowingly assumed.” Because both classes were “equally defrauded” when they

invested in SCAF, the district court concluded they are “entitled to share equally” in

the fund.

6

On appeal, Appellants raise the same arguments, explaining that Class P

investors sought minimum risk in the form of a guaranteed low rate of return, in

exchange for a liquidation preference in the event of dissolution, whereas Class A

investors chose riskier and more variable investments. Appellants ask us to vacate

the portion of the distribution plan allocated to investors and remand with the

direction that the Class P liquidation preference be honored. 

We review the district court’s selection of a distribution plan for the

receivership assetsfor abuse of discretion. SEC v. Wealth Mgmt. LLC, 628 F.3d 323,

6Appellants argue the district court’s reasoning has been criticized in SEC v.

Spongetech Delivery Systems, Inc., 98 F. Supp. 3d 530, 549 (E.D.N.Y. 2015). That

case addressed only the district court’s discussion of disgorgement and distribution

as it related to secured creditors—a portion of the plan that Appellants do not appeal.

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332–33 (7th Cir. 2010); SEC v. Credit Bancorp, Ltd., 290 F.3d 80, 87 (2d Cir. 2002).

The district court has “broad equitable power” in approving a distribution plan, “so

appellate scrutiny is narrow.” Wealth Mgmt., 628 F.3d at 332. “[T]he primary job

of the district court is to ensure that the proposed plan of distribution is fair and

reasonable.” Id. The court is not required to distribute the assets in accordance with

the contractual rights of the parties. See Broadbent v. Advantage Software, Inc., 415

F. App’x 73, 78–79 (10th Cir. 2011); Credit Bancorp, 290 F.3d at 89–90.

Courts have “routinely endorsed” the pro rata distribution of assetsto investors

as the most fair and equitable approach in fraud cases. Wealth Mgmt., 628 F.3d at

333; accord SEC v. Infinity Grp. Co., 226 F. App’x 217, 218 (3d Cir. 2007); Credit

Bancorp, 290 F.3d at 88–89 (“Courts have favored pro rata distribution of assets

where, as here, the funds of the defrauded victims were commingled and where

victims were similarly situated with respect to their relationship to the defrauders.”).

We find no abuse of discretion in the district court’s adoption of pro rata distribution

as applied to SCAF’s investors. 

Class A and P investors were fraudulently induced into investing in SCAF

based on the same misrepresentations, and both unwittingly had the majority of their

investments funneled into Petters’ Ponzi scheme, making most of their investments

and thus most of their returns essentially fictitious. Both classes of investors “were

similarly situated in relationship to the fraud, in relationship to the losses, in

relationship to the fraudsters, and in relationship to the nature of their investments,

so that a . . . pro rata distribution is equitable.” Commodity Futures Trading Comm’n

v. Walsh, 712 F.3d 735, 748 (2d Cir. 2013) (quotations and emphasis omitted).

Because no investor knowingly takes the risk that she will be defrauded, the

distribution plan need not take into account the fact that Class P investors initially

purchased less risky investments. See id. at 751 (“[M]ere choices of different

investment vehicles did not mean that the two groups of defrauded investors . . . were

meaningfully dissimilar, given, inter alia, that both . . . lost money because they were

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defrauded by the same individual who stole their money.” (quotations and alterations

omitted)). Finally, it was not an abuse of discretion for the district court to refuse to

enforce the liquidation preference, which was created by the defrauder and provided

in the very same documents that contained fraudulent misrepresentations. See id. at

749 (“[A] receiver devising a distribution plan is not required to apportion assets in

conformity with misrepresentations and arbitrary allocations that were made by the

defrauder, ‘otherwise, the whim of the defrauder would . . . control[] the process that

is supposed to unwind the fraud.’” (second and third alterations in original) (quoting

In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 238 n.7 (2d Cir. 2011))).

Appellants cite no case law requiring a district court to favor one class of

investors over another in an equity receivership compensating fraud victims.7 We

find no basis to conclude that the district court abused its discretion in applying a pro

rata distribution to all investors. 

D. Legal Fees and Expenses

Finally, Appellants argue that the district court erred in ordering them to bear

the receiver’s legal fees and expensesif they are unsuccessful in this appeal. Because

Appellants did not object to the shifting of these fees and expenses before the district

court, they have waived this argument. See Joseph v. Allen, 712 F.3d 1222, 1226

7Appellants cite cases where appellate courts,reviewing for abuse of discretion,

affirmed a district court’s approval of non-pro rata distribution plans, but these courts

did not require such an approach. See, e.g., SEC v. Enter. Tr. Co., 559 F.3d 649, 652

(7th Cir. 2009) (affirming approval of plan that favored holders of custodial accounts

over managed accounts because custodial holders had not authorized defendants to

manage their money and they had “no legitimate beef”); SEC v. Wang, 944 F.2d 80,

86 (2d Cir. 1991) (approving plan that favored investors who assumed the greatest

risk of loss). 

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(8th Cir. 2013) (failing to oppose an issue before the district court results in waiver

of the issue on appeal).

III. Conclusion

For the foregoing reasons, we affirm the judgment of the district court.

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