14‐4261‐cv   

Securities and Exchange Commission v. Miller, et al.  

In the 

United States Court of Appeals 

for the Second Circuit    

AUGUST TERM 2014

   

No. 14‐4261‐cv

   

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff‐Appellee,

v.

DONALD R. MILLER, JR., in his capacity as the Independent Executor

of the Will and Estate of Charles J. Wyly, Jr. also known as Charles J.

Wyly, Jr., DAVID MATTHEWS, LISA WYLY, KELLY WYLY O’DONOVAN,

ANDREW WYLY, CHARLES J. WYLY, III, JENNIFER WYLY LINCOLN,

JAMES W. LINCOLN, CHERYL WYLY, EVAN ACTON WYLY, LAURIE WYLY

MATTHEWS, MARTHA WYLY MILLER, DONALD R. MILLER, JR., EMILY

WYLY, CHRISTIANA WYLY, JOHN GRAHAM,

Defendants‐Appellants,
2

SAMUEL E. WYLY, LOUIS J. SCHAUFELE, III, MICHAEL C. FRENCH,

CAROLINE D. WYLY, EMILY WYLY LINDSEY,

Defendants.

   

Appeal from the United States District Court for the

Southern District of New York

No. 1:10‐cv‐5760—Shira A. Scheindlin, Judge

   

ARGUED: JUNE 24, 2015

DECIDED: DECEMBER 18, 2015

   

Before: CABRANES, POOLER, and DRONEY, Circuit Judges.

   

Appeal from a District Court order temporarily freezing assets

adjudged to be ill‐gotten gains from a securities fraud scheme

perpetrated by defendants Samuel and Charles Wyly.  The question

presented is whether an asset freeze order obtained by the Securities

and Exchange Commission constituted an action to collect on an

anticipated money judgment and therefore violated the automatic

stay provision of the Bankruptcy Code, 11 U.S.C. § 362, and this

Court’s precedent in SEC v. Brennan, 230 F.3d 65 (2d Cir. 2000).   

We hold that the entry of the asset freeze order by the United

States District Court for the Southern District of New York (Shira A.
3

Scheindlin, Judge) did not violate the Bankruptcy Code’s automatic

stay.  The order fell within the “governmental unit” exception to the

automatic stay provision, did not constitute impermissible

“enforcement of a money judgment,” and did not run afoul of

Brennan.    We also conclude that it was properly supported by a

showing of ill‐gotten gains as to nine of the sixteen Relief

Defendants.   Accordingly, we AFFIRM in part the District Court’s

November 3, 2014 asset freeze order insofar as it restrained the

assets of these nine Relief Defendants.    Because, however, we are

unable to determine on the record before us whether sufficient

evidence supports imposition of the order against the remaining

seven Relief Defendants, the cause is REMANDED to the District

Court, with instructions to conduct additional factual development

on that limited issue and such further proceedings as may be

appropriate and consistent with this opinion.    In the interest of

judicial economy, any future appeals taken from the District Court’s

decisions shall be referred to this panel.

   

DANIEL STAROSELSKY (Anne K. Small,

Michael A. Conley, John W. Avery, Randall

W. Quinn, Hope Hall Augustini, on the

brief), Securities and Exchange

Commission, Washington, DC, for Plaintiff‐

Appellee.

DAVID L. KORNBLAU (Eric Hellerman, Evie

Spanos on the brief), Covington & Burling
4

LLP, New York, NY, for Defendants‐ 

Appellants.

   

JOSÉ A. CABRANES, Circuit Judge:

This appeal arises out of a civil enforcement action brought by

the Securities and Exchange Commission (“SEC”) against

defendants Samuel Wyly and Charles Wyly, Jr. (the “Wyly

Brothers”).  After a jury found the Wyly Brothers liable for multiple

claims of securities fraud, the United States District Court for the

Southern District of New York (Shira A. Scheindlin, Judge) ordered

payment of approximately $300 million in disgorgement.    Fearing

the dissipation of ill‐gotten gains among the Wyly Brothers’ family

members, the SEC requested that the District Court enter a

temporary asset freeze.  While that request was pending before the

District Court, Samuel Wyly and the widow of Charles Wyly filed

petitions for Chapter 11 protection in Bankruptcy Court, triggering

the automatic stay provision of the Bankruptcy Code, 11 U.S.C.

§ 362.    Shortly thereafter, the District Court entered the requested

order freezing the Wyly Brothers’ ill‐gotten gains, including assets

transferred to multiple family members, who are named Relief

Defendants in this action.

This appeal does not challenge the liability judgment against

the Wyly Brothers or the damages award.    Instead, defendants‐

appellants challenge only the validity of the asset freeze order,

which they assert was issued in violation of the Bankruptcy Code’s
5

automatic stay provision, as interpreted by this Court in SEC v.

Brennan.

1   

We hold that the entry of the asset freeze order did not violate

the Bankruptcy Code’s automatic stay.    The order fell within the

“governmental unit” exception to the automatic stay provision, did

not constitute impermissible “enforcement of a money judgment,”

and did not run afoul of Brennan.    We also conclude that it was

properly supported by a showing of ill‐gotten gains as to nine of the

sixteen Relief Defendants.    Accordingly, we AFFIRM in part the

District Court’s November 3, 2014 asset freeze order insofar as it

restrained the assets of these nine Relief Defendants.    Because,

however, we are unable to determine on the record before us

whether sufficient evidence supports imposition of the order against

the remaining seven Relief Defendants, the cause is REMANDED to

the District Court, with instructions to conduct additional factual

development on that limited issue and such further proceedings as

may be appropriate and consistent with this opinion.  In the interest

of judicial economy, any future appeals taken from the District

Court’s decisions shall be referred to this panel.

                                               1 230 F.3d 65 (2d Cir. 2000).
6

BACKGROUND

I.  Facts and Trial Evidence

Although the case against the Wyly Brothers was complex,2

the facts relevant to the instant appeal are relatively straightforward.  

Samuel Wyly and Charles Wyly were officers, directors, and

shareholders of four publicly traded corporations.  Beginning in the

early 1990s, the Wyly Brothers transferred millions of stock options

received from those corporations to an extensive system of offshore

trusts and subsidiary entities in the Isle of Man (“IOM”), a self‐

governing British Crown dependency in the Irish Sea.  For the next

dozen years, the IOM trusts exercised those options and traded in

the securities, while the Wyly Brothers failed to properly disclose

their beneficial ownership.  The undisclosed transactions numbered

in the hundreds and returned profits of more than $550 million.  

On July 29, 2010, the SEC initiated a civil enforcement action

against the Wyly Brothers, asserting multiple claims of securities

fraud.    The District Court bifurcated the liability and remedies

phases of the case.   In May 2014, following a six‐week trial, a jury

returned a verdict finding the Wyly Brothers liable for nine claims of

securities fraud, involving the violation of multiple antifraud,

registration, and reporting provisions of federal law.    Following a

                                               2 See generally SEC v. Wyly, 33 F. Supp. 3d 290 (S.D.N.Y. 2014); SEC v.

Wyly, 950 F. Supp. 2d 547 (S.D.N.Y. 2013); SEC v. Wyly, 788 F. Supp. 2d 92

(S.D.N.Y. 2011).
7

separate bench proceeding, the District Court dismissed a tenth

claim of insider trading.  According to trial evidence, the Wylys used

the IOM trusts from 1992 to 2005 to trade in secret without making

the requisite disclosures, to protect their assets from creditors, and to

avoid taxes on trading profits earned.  Evidence adduced at trial also

indicated that some of the proceeds from the IOM trusts flowed to

family members of the Wyly Brothers.

II.  Post‐Trial Procedural History

Following the jury’s liability determination, the District Court

entered a complex remedies phase to quantify the Wylys’ ill‐gotten

gains and to determine whether and how much the Wylys should be

required to disgorge.  In the remedies phase, which was tried to the

bench, the SEC proposed seven theories pursuant to which the Wyly

Brothers should be required to pay disgorgement.  

Ultimately, the District Court accepted two alternative

measures of the Wyly Brothers’ disgorgement liability in separate

opinions of September 24, 2014 (the “September disgorgement

opinion”) and December 19, 2014 (the “December disgorgement

opinion”).3    In its September disgorgement opinion, the District

Court treated as a reasonable measure of disgorgement the “amount

equivalent to the taxes avoided on the profits the Wylys realized on

                                               3 The District Court rejected outright several other theories of

disgorgement as counterfactual or untimely, and the SEC voluntarily withdrew

one disgorgement theory.
8

the sale of Issuer securities.”4   The District Court emphasized that

the tax figure represented merely a “measure of disgorgement,” not

an independent assessment of the Wyly Brothers’ tax liability, which

the Court recognized would be determined in a separate “IRS civil

proceeding.”5    The September disgorgement opinion also ordered

disgorgement of a certain percentage on profits of trading

unregistered securities.    In total, it ordered disgorgement of

$299,357,243.80.6  

The December disgorgement opinion set forth an alternative

calculation, to be used only if the September disgorgement measure

later failed on appeal.    This alternative calculation measured the

unjust enrichment as the difference between the Wyly Brothers’ rate

of return from their offshore trading and the average market rate of

return for those stocks during the relevant period.  In other words,

this calculation “compare[d] the Wylys’ rate of return to that of an

average buy‐and‐hold investor,” and thereby “reasonably

approximate[d] the economic value of the Wylys’ securities

violations—their ability to trade in secret while having an

                                               4 SEC v. Wyly, 56 F. Supp. 3d 394, 431 (S.D.N.Y. 2014).   

5 Id. at 427, 431.  The District Court explicitly indicated that “any amounts

disgorged in this case should be credited towards any subsequent tax liability

determined in an IRS civil proceeding as a matter of equity.”  Id. at 427.

6 The September disgorgement opinion ordered disgorgement of

$187,233,693 in ill‐gotten gains, plus $112,123,550.80 in prejudgment interest, for

a total of $299,357,243.80.  Id. at 434; J.A. 1584.
9

informational advantage over the investing public.”7    The District

Court made clear, however, that the measure of disgorgement

imposed by the September opinion “represents the best measure of

the Wylys’ ill‐gotten gains,” and thus held that the disgorgement

described in the December opinion “may only be imposed in the

event that a higher court disagrees with the measure of

disgorgement imposed by the September 25 Order.”8   

Meanwhile, on October 8, 2014—shortly after the issuance of

the September disgorgement opinion—the SEC requested by pre‐

motion letter an order for a temporary asset freeze, expedited

financial discovery, an accounting of the Wyly Brothers’ assets, and

a freeze of those assets possessed by Wyly family members who had

allegedly received ill‐gotten gains traceable to the Wyly Brothers’

fraud.9    In its pre‐motion letter, the SEC expressed “particular[]

concern[] about the potential dissipation of assets” by “third parties,

such as the Wylys’ family members and the offshore trustees.”10  

Accordingly, the SEC requested an asset freeze applicable not only

to Sam Wyly and the estate of Charles Wyly, but also extending to

third parties, including family members, heirs, agents, and

                                               7 SEC v. Wyly, 71 F. Supp. 3d 399, 403‐04 (S.D.N.Y. 2014).    The total

amount of disgorgement under this alternative measure was calculated to be

$174,967,561.    SEC v. Wyly, No. 10 Civ. 5760 (SAS), 2015 WL 427423, at *3

(S.D.N.Y. Feb. 2, 2015).

8 Wyly, 71 F. Supp. 3d at 404.

9 J.A. at 1554‐55.   

10 Id. at 1554.   
10

trustees.11    By letter of October 14, 2014, counsel representing the

Wyly Brothers’ interests opposed any order binding upon Wyly

family members on the ground that the family members had not yet

been named as relief defendants.12  Counsel representing the Wyly

family members submitted letters on the same date joining in the

Wyly Brothers’ opposition to the SEC’s request.13   

On October 19, 2014, while the SEC’s request for an asset

freeze was still pending, Samuel Wyly filed a petition in Bankruptcy

Court for Chapter 11 protection.    On October 23, 2014, Caroline

Wyly, the widow of Charles Wyly and principal heir of his estate,

filed her own bankruptcy case.  The Wylys immediately argued to

the District Court that the SEC’s then‐pending motion for an asset

freeze must be automatically stayed by operation of Bankruptcy

Code § 362.14   

Before adjudicating the SEC’s motion for an asset freeze, the

District Court held multiple hearings and entertained written

submissions from all parties that would be affected by the freeze,

including non‐defendant family members not yet parties to this

action.  On October 24, 2014, at the suggestion of the District Court

and after objections from defendants and their families, the SEC

                                               11 Id.   

12 Id. at 1569‐71.   

13 Id. at 1578‐82.

14 Id. at 1678‐83, 2011‐14.
11

filed an amended complaint adding sixteen Wyly family members—

the wives, daughters, sons, and sons‐in‐law of Samuel and Charles

Wyly—as Relief Defendants.15  The amended complaint principally

alleged that the Relief Defendants are in possession of ill‐gotten

gains stemming from the Wyly Brothers’ fraud.16  

On November 3, 2014, the District Court granted the SEC’s

requests for an asset freeze, expedited discovery, and an accounting

of the Wyly Brothers’ assets.17  The freeze order extended to assets of

the family‐member Relief Defendants “which were, at any time, the

property of the IOM Trusts and Companies” and any other assets

received from the Wyly Brothers after January 1, 2005.18  The asset

freeze explicitly exempted any income or assets not derived or

received from the IOM trusts or the Wylys.19    Additionally, the

freeze carved out living expenses of $15,000 per month ($180,000 per

annum) for each Relief Defendant except Caroline Wyly, in addition

to all medical expenses, all tuition and education‐related expenses,

all taxes, reasonable legal fees and expenses, and certain

bankruptcy‐related expenses.20  The freeze order also indicated that

the District Court would resolve on a case‐by‐case basis further

                                               15 Id. at 1811‐28.   

16 Id.

17 Special App’x at 1‐9.   

18 Id. at 3.  

19 Id. at 4‐5.   

20 Id. at 5.   
12

requests for exemptions regarding the Relief Defendants’ real estate

holdings.21    Since the entry of the asset freeze order, the District

Court has approved multiple further accommodations for the Relief

Defendants without objection from the SEC.    

The District Court crafted the asset freeze order with an eye

towards “working harmoniously and cooperatively with the

bankruptcy court in Texas.”22  Accordingly, the Court ordered that

the asset freeze remain in place only “until such time as . . . [the]

assets have been scheduled and thereby are clearly under the control

of the Bankruptcy Court.”23    By its terms, the asset freeze “will

dissolve” as soon as the assets are under the Bankruptcy Court’s

control.24   

Also on November 3, 2014, the District Court issued an

accompanying opinion explaining the legal basis for the asset freeze

order.25  In that opinion, the District Court held that the Bankruptcy

Code’s automatic stay provision did not preclude the entry of its

                                               21 Id.   

22 J.A. at 1792.   

23 Special App’x at 4.   

24 Id.  Ultimately, it will be the task of the Bankruptcy Court, not this one,

to determine the scope of the bankruptcy estate.    The asset freeze order thus

provides that, when the Bankruptcy Court establishes control over all the assets

contained within the estate, the order at issue will dissolve, and the Bankruptcy

Court will continue its work without the involvement of the District Court.  Id.

25 SEC v. Wyly, 73 F. Supp. 3d 315 (S.D.N.Y. 2014).  
13

asset freeze order, pursuant to this Court’s controlling precedent in

SEC v. Brennan.

26   The District Court reasoned that, in seeking the

asset freeze order, the SEC was “acting in its police and regulatory

capacity,” and thus the Bankruptcy Code’s automatic stay did not

apply.27  Having found no legal bar to issuing the asset freeze, the

District Court further concluded that the freeze was warranted

because the bankruptcy proceedings, then in their infancy, had not

yet established control over the Wyly Brothers’ assets, which

remained at risk of transfer and dissipation, including by third

parties offshore.28    Finally, the District Court determined that the

SEC was likely to show that the family‐member Relief Defendants

had received ill‐gotten gains without any legitimate claim to those

assets, fulfilling the applicable standard set forth in SEC v.

Cavanagh.

29   

This appeal was then taken by all of the Relief Defendants

except Caroline Wyly, the widow of Charles Wyly and beneficiary of

his estate.    She sought relief in the Bankruptcy Court instead.   On

January 9, 2015, the Bankruptcy Court rejected Caroline Wyly’s

argument that the automatic stay barred the SEC’s action against her

as a relief defendant.30  Instead, the Bankruptcy Court ruled that, in

                                               26 230 F.3d 65 (2d Cir. 2000).   

27 Wyly, 73 F. Supp. 3d at 320.   

28 Id. at 320‐21.   

29 155 F.3d 129 (2d Cir. 1998).     

30 In re Wyly, 526 B.R. 194 (Bankr. N.D. Tex. 2015).   
14

seeking the asset freeze, the SEC was acting in its police and

regulatory capacity, and it declined to enforce the automatic stay

against the SEC.31   

DISCUSSION

On appeal, the fifteen family‐member Relief Defendants

challenge the freeze of their assets on three grounds.

First, they argue that the freeze order violates the Bankruptcy

Code’s automatic stay provision, because it constitutes an action by

the SEC to collect an anticipated money judgment.   

Second, they argue that, under the District Court’s “tax

avoidance” measure of disgorgement, the SEC has not shown as a

matter of law that any Relief Defendants received assets that

constitute “ill‐gotten gains.”   

Third, they contend that the District Court erred or “abused its

discretion” in applying the freeze order to seven of the Relief

Defendants, because there is no record evidence that those

individuals received any ill‐gotten gains from the Wyly Brothers.

We review an asset freeze order for abuse of discretion.32  “A

district court has abused its discretion if it based its ruling on an

                                               31 Id. at 201.   In the bankruptcy proceeding, Samuel and Caroline Wyly

have filed schedules of assets and liabilities containing disclaimers that assets

from the IOM trusts are property of the debtors’ bankruptcy estates.

32 Smith v. SEC, 653 F.3d 121, 127 (2d Cir. 2011).
15

erroneous view of the law or on a clearly erroneous assessment of

the evidence, or rendered a decision that cannot be located within

the range of permissible decisions.”33    We review underlying

questions of fact for clear error, and underlying questions of law—

such as the application of the Bankruptcy Code’s automatic stay

provision to the freeze order—de novo.

34  We consider in turn each of

these claims on appeal.

I.  Asset Freeze Order and Automatic Stay

The Relief Defendants’ first (and principal) claim—that the

Bankruptcy Code’s automatic stay provision precluded the issuance

of the asset freeze order—tests the scope of this Court’s opinion in

SEC v. Brennan.  To evaluate it, we must first explore the meaning of

the automatic stay provision, an exception to that provision, and an

exception to the exception.

A.  Applicable Law

Bankruptcy Code § 362 automatically stays virtually all

proceedings against a debtor, including “any act to obtain

possession of property of the estate or of property from the estate or

                                               33 In re Sims, 534 F.3d 117, 132 (2d Cir. 2008) (internal quotation marks,

alteration, and citations omitted); see also In re The City of New York, 607 F.3d 923,

943 n.21 (2d Cir. 2010) (explaining that “abuse” is a nonpejorative “term of art”).   

34 Picard v. Fairfield Greenwich Ltd., 762 F.3d 199, 206 (2d Cir. 2014).
16

to exercise control over property of the estate.”35  The automatic stay

of Section 362 thus serves “one of the core purposes of bankruptcy,”

by enabling “the bankruptcy court to centralize all disputes

concerning property of the debtor’s estate so that reorganization can

proceed efficiently, unimpeded by uncoordinated proceedings in

other arenas.”36   

As relevant here, the Code also contains an exception to

Section 362 known as the “governmental unit” exception, which

provides that the automatic stay provision does not extend to  

the commencement or continuation of an action or

proceeding by a governmental unit . . . to enforce such

governmental unit’s or organization’s police and

regulatory power, including the enforcement of a

judgment other than a money judgment, obtained in an

action or proceeding by the governmental unit to

enforce such governmental unit’s or organization’s

police or regulatory power.37

As we explained in Brennan, the purpose of the governmental unit

exception “is to prevent a debtor from ‘frustrating necessary

                                               35 11 U.S.C. § 362(a)(3).  We assume without deciding that the non‐debtor

Relief Defendants may invoke the automatic stay provision in aid of their claims

on appeal.

36 In re U.S. Lines, Inc., 197 F.3d 631, 640 (2d Cir. 1999) (quoting In re

Ionosphere Clubs, Inc., 922 F.2d 984, 989 (2d Cir. 1990)).

37 11 U.S.C. § 362(b)(4) (emphasis added).   
17

governmental functions by seeking refuge in bankruptcy court.’”38  

As the legislative history makes plain, “where a governmental unit

is suing a debtor to prevent or stop [a] violation [constituting] fraud

. . . or attempting to fix damages for violation of such a law, the

action or proceeding is not stayed under the automatic stay.”39   

In the instant case, all parties agree that the SEC’s regulatory

enforcement action against the Wyly Brothers falls within the

governmental unit exception.40    The Relief Defendants assert,

however, that this case falls under an exception to the governmental

unit exception.    This “exception to the exception” provides that

actions to enforce money judgments are subject to the automatic

stay, even if they were otherwise pursued by a governmental unit in

furtherance of the government’s police or regulatory powers.41

Accordingly, the Relief Defendants argue that the asset freeze order

is subject to the automatic stay.    The SEC counters that the asset

freeze order does not fall within the money judgment “exception to

the exception” and hence does not trigger the automatic stay.  Both

parties invoke the case of SEC v. Brennan in aid of their positions.

                                               38 230 F.3d at 71 (quoting City of New York v. Exxon Corp., 932 F.2d 1020,

1024 (2d Cir. 1991)).   

39 H.R. REP. No. 95‐595, at 343 (1977), U.S. Code Cong. & Admin. News at

6299 (emphasis added); accord S. REP. No. 95‐989, at 52 (1978), U.S. Code Cong. &

Admin. News at 5838.

40 See Defs.’ Br. at 15; Pl. Br. at 23.   

41 See Brennan, 230 F.3d at 71 (quoting Penn Terra Ltd. v. Dep’t of Envtl. Res.,

733 F.2d 267, 272 (3d Cir. 1984)).
18

That case, like this one, involved a defendant found liable for

securities fraud in an SEC enforcement action, who subsequently

filed for bankruptcy protection.  Like the Relief Defendants here, the

defendant in Brennan then argued that an order in the SEC

enforcement action violated the Bankruptcy Code’s automatic stay

provision.  The order at issue required the defendant to repatriate to

the United States assets held in offshore protection trusts and

deposit them in a court registry.   We vacated the repatriation and

deposit order in Brennan.    Calling the question “a close one,” we

nonetheless found that it constituted a step “preparatory to money

collection” that fit within the “exception to the exception” and was

thus foreclosed by the operative automatic stay provision.42     

The critical question here is whether the asset freeze order at

issue was a permissible use of the government’s regulatory power

under the “governmental unit exception,” or whether, like its

analogue in Brennan, it was an impermissible action to enforce a

money judgment under the “exception to the exception.”    The

District Court carefully analyzed our reasons for vacating the

repatriation and deposit order in Brennan and found that the asset

freeze at issue here was a permissible use of the government’s

regulatory power under the “governmental unit exception.”43  

                                               42 Id. at 71‐72 (internal quotation marks omitted).

43 Wyly, 73 F. Supp. 3d at 320.
19

We agree.  On de novo review, we hold that the District Court

correctly interpreted our controlling precedent in SEC v. Brennan

and properly concluded that this asset freeze order is exempt from

the Bankruptcy Code’s automatic stay provision.  

Factual, procedural, and policy considerations distinguish this

case from Brennan and lead to our conclusion that this asset freeze

order falls within the “governmental unit exception” but not within

the “exception to the exception” for actions to enforce a money

judgment. We explain each of these considerations below.

B.  The Factual Nature of the Order

First, the order at issue here differs significantly from the

order in Brennan.  There, we vacated an order directing the debtor to

repatriate assets held abroad and deposit them in a court registry.  

Here, the applicable order is merely an asset freeze, which, unlike

the order in Brennan, neither transfers ownership, nor vests control

over assets in the courts, nor—given its numerous exemptions for

legal, medical, educational, and other uses, as well as generous

living expenses—entirely deprives the Relief Defendants of their

use.  To be sure, the asset freeze order entered by the District Court

does temporarily burden the use of certain assets.    It does not,

however, rise to the level of impermissible enforcement of a money

judgment.  Unlike the repatriation and deposit order in Brennan, the

asset freeze seeks not to modify or transfer assets in any way, but

rather, merely to “preserve the status quo in anticipation of a final
20

judgment.”44  We regarded as “a close one” the question of whether

Brennan’s substantially more burdensome repatriation and deposit

order constituted enforcement of a money judgment.45    The

significantly less onerous asset freeze at issue here falls on the other

side of the line.   

Relief Defendants attempt to characterize the freeze as an

impermissible “step []preparatory to money collection” that is

functionally equivalent to Brennan’s repatriation and registry

deposit order.46  The argument is strained and unpersuasive.  By that

logic, many or most aspects of statutorily unstayed governmental

unit actions could be characterized as “steps preparatory to money

collection,” so long as the initial complaint sought monetary relief.  

We decline to adopt the interpretation of the exception urged by

Relief Defendants, which would effectively swallow the rule.

C.  Procedural Posture

As the District Court noted, the procedural posture of this

case also significantly differs from that of Brennan.    There, the

repatriation and deposit order arose as part of the SEC’s post‐

                                               44 Id.   

45 Brennan, 230 F.3d at 71.   

46 Defs.’ Br. at 15‐16.   
21

judgment collection procedures.47    Here, the November 2014 asset

freeze order was imposed before the entry of final judgment on

February 26, 2015 as to the Wyly Brothers.48  

In Brennan, we instructed that “the line between [unstayed]

police or regulatory power on the one hand, and [stayed]

enforcement of a money judgment on the other, [must] be drawn at

entry of judgment.”49    In other words, “up to the moment when

liability is definitively fixed by entry of judgment, the government is

acting in its police or regulatory capacity. . . .    However, once

liability is fixed and a money judgment has been entered, the

government necessarily acts only to vindicate its own interest in

collecting its judgment.”50   

The pre‐judgment asset freeze at issue here thus does not

implicate the same concerns as did the post‐judgment repatriation

and deposit order in Brennan.    Moreover, the SEC persuasively

                                               47 The repatriation and deposit order was issued after the SEC moved for

an ex parte order to show cause as to why Brennan should not be held in civil

contempt for failing to comply with the disgorgement order.   

48 On July 7, 2015, the District Court denied the Wylys’ motion for

judgment as a matter of law pursuant to Federal Rule of Civil Procedure 50(b),

or, in the alternative, for a new trial pursuant to Federal Rule of Civil Procedure

59. On September 4, 2015, the Wylys filed a notice of appeal as to the February

26, 2015 final judgment and the July 7, 2015 order denying their Rule 50(b) and

Rule 59 motions.

49 230 F.3d at 72 (internal quotation marks and alteration omitted).   

50 Id. at 73.
22

argues that the relevant judgment is not the one entered in February

2015 against the Wyly Brothers, but rather, the judgment which has

yet to be entered against the Relief Defendants, who only answered

the complaint against them in April 2015.  

Even if the February 2015 judgment against the Wyly Brothers

were the operative judgment, however, the later‐occurring entry of

final judgment alone does not operate to transform a permissible

pre‐judgment asset freeze into an impermissible post‐judgment

enforcement act.    We did not intend in Brennan to impose a one‐

factor timing test whereby orders entered pre‐judgment are always

exempt from the automatic stay provision while orders entered (or

with continuing force) post‐judgment are always subject to the stay.  

As the Relief Defendants note, such a simplistic standard could

permit procedural end‐runs that would defeat the spirit and

purpose of the statute, whereby any manner of incursion would be

permitted so long as it technically predated the entry of a final

judgment.  To be sure, the timing of the order’s entry constitutes a

crucial factor in our analysis, but it is not invariably dispositive.51  

                                               51 We note that the timing here neatly exemplifies the distinction between

the asset freeze order in this case and the repatriation and deposit order that

violated the automatic stay in Brennan.  Asset freeze orders like the one entered

here are routinely issued pre‐judgment in actions for equitable remedies, well

before damages have been fixed or a money judgment entered.   See, e.g., Gucci

Am., Inc. v. Weixing Li, 768 F.3d 122, 131 (2d Cir. 2014) (noting that district courts

have equitable power to issue a pre‐judgment asset freeze where such relief was

traditionally available).  By contrast, repatriation and deposit orders, like the one
23

Consistent with the statutory imperative, our focus remains

whether a given order constitutes “enforcement of a judgment other

than a money judgment.”52  Here, the asset freeze did not enforce a

money judgment because, as of the date of issuance of the freeze

order, no judgment had yet been entered.

D.  Policy Concerns

Finally, the policy concerns underlying the disposition in

Brennan weigh in favor of a different outcome here.  In Brennan, we

concluded that “the policies behind § 362 as a whole weigh strongly

in favor of applying the automatic stay in these circumstances.”53  

We cited two specific policies: (1) the general purpose of the

automatic stay “to allow the bankruptcy court to centralize all

disputes concerning property of the debtor’s estate so that

reorganization can proceed efficiently, unimpeded by

uncoordinated proceedings in other arenas,”54 and (2) the general

purpose of the governmental unit exception “to prevent a debtor

from ‘frustrating necessary governmental functions by seeking

refuge in bankruptcy court.’”55     

                                                                                                                           

vacated in Brennan, are typically reserved for post‐judgment collection

proceedings.

52 11 U.S.C. § 362(b)(4).   

53 230 F.3d at 75.   

54 Id. (quoting In re United States Lines, Inc., 197 F.3d at 640).

55 Id. (quoting Exxon Corp., 932 F.2d at 1024).
24

In this case, the asset freeze order does not jeopardize either of

these policy objectives; on the contrary, it complements both.    In

Brennan, the SEC had tried and failed to obtain from the Bankruptcy

Court a repatriation order for the offshore trusts.    Only after that

failure did the SEC seek in the district court precisely the same relief

that the Bankruptcy Court had previously rejected.    Thus, the

specter of forum‐shopping and inefficient, uncoordinated

proceedings loomed large in our analysis of the policy concerns

presented in Brennan.

Not so here.  No conflict exists between the proceedings in the

District Court and those in the Bankruptcy Court.  This asset freeze

order is narrowly framed to exclude assets in the bankruptcy

proceeding and to be lifted as soon as the assets are clearly under the

control of the Bankruptcy Court.    Indeed, the Bankruptcy Court

itself endorsed the freeze as “neatly avoiding duplication of judicial

effort between the SEC Action and these bankruptcy cases.”56  What

is more, the Bankruptcy Court determined that enforcing the

automatic stay “may ultimately accomplish little” since the SEC

would likely seek relief from the stay to proceed against the Relief

Defendants in its enforcement action.57  Though it stopped short of

deciding such a hypothetical motion, the Bankruptcy Court strongly

indicated its own inclination to avoid extending the automatic stay

to cover this case:    “From the standpoint of judicial economy, it

                                               56 In re Wyly, 526 B.R. at 196 n.4.   

57 Id. at 202.   
25

likely would make the most sense for the District Court, in one

coordinated proceeding, to liquidate the amount of alleged ill‐gotten

gains of the securities fraud that all relief defendants allegedly

received and still possess.”58   

Under these circumstances, the entry of the asset freeze order

here does not contravene the first policy of “centraliz[ing] all

disputes concerning property of the debtor’s estate so that

reorganization can proceed efficiently, unimpeded by

uncoordinated proceedings in other arenas.”59  Moreover, the asset

freeze order is fully consistent with the second policy of

“prevent[ing] a debtor from frustrating necessary governmental

functions by seeking refuge in bankruptcy court.”60    The Wylys

initiated bankruptcy proceedings and invoked the automatic stay

mere days after the SEC filed its then‐pending motion for an asset

freeze.  The timing speaks loudly for itself.   

Finally, there is reason to doubt the Relief Defendants’

representation that the District Court’s involvement is unnecessary

because “the frozen assets are property of the bankruptcy estates [of

the Wyly Brothers] . . . [and therefore] are under the exclusive

jurisdiction of the Bankruptcy Court.”61    In their bankruptcy

                                               58 Id.

59 Brennan, 230 F.3d at 75 (quoting In re United States Lines, Inc., 197 F.3d at

640).   

60 Id. (quoting Exxon Corp., 932 F.2d at 1024).   

61 Defs.’ Br. at 13‐14.   
26

proceedings, Samuel and Caroline Wyly have refused to take a

position on whether they own the IOM trust assets, leaving in doubt

whether they fall within the bankruptcy court’s jurisdiction.62  

Further, the Bankruptcy Court may not be able to address

dissipation of offshore assets by third parties, which some evidence

suggests may be already underway.63  Notwithstanding the ongoing

bankruptcy proceedings, there is a clear need for the independent

asset freeze to preserve the status quo.   

In light of the legal, factual, procedural, and policy concerns at

issue here, we conclude that the asset freeze order is consistent with

the Bankruptcy Code’s automatic stay provision and our governing

precedent in Brennan.

II.  Receipt of Ill‐Gotten Gains

We turn next to the Relief Defendants’ two‐part challenge to

the scope of the asset freeze order.  Equitable relief against a third‐

party non‐wrongdoer may be entered where such an individual “(1)

has received ill‐gotten funds; and (2) does not have a legitimate

                                               62 Wyly, 73 F. Supp. 3d at 321 & n.20.    Similarly, in their briefing here,

Relief Defendants carefully avoid claiming (or disclaiming) the IOM trust assets

on behalf of the Wyly Brothers.  See Defs.’ Br. at 13 (“The SEC takes the position

that assets transferred to the relief defendants by the Wyly Brothers or the

offshore entities are either owned or controlled by the Wyly Brothers. . . .  Thus,

according to the SEC, the frozen assets are property of the bankruptcy estates of

Sam Wyly and Charles Wyly’s widow . . . .” (emphasis added)).

63 Wyly, 73 F. Supp. 3d at 320 & n.19.     
27

claim to those funds.”64  Courts require a “lesser showing” to enter

an asset freeze order than is needed for other forms of equitable

relief.65    To obtain an asset freeze order, the SEC “must establish

only that it is likely to succeed on the merits.”66   

It is undisputed that defendants have no legitimate claim to

the funds in the IOM trusts.    Rather, the Relief Defendants focus

their arguments on the first prong of the Cavanagh test.  First, they

contend that the SEC cannot show the receipt of ill‐gotten gains “as

a matter of law,” because the District Court measured disgorgement

by the amount of taxes avoided by the Wyly Brothers.67  Because tax

savings “are personal to the taxpayers,” the Relief Defendants assert

that the Wyly Brothers “did not—and as a matter of law could not—

transfer them to family members or anyone else.”68   

This argument misunderstands the nature of the District

Court’s disgorgement order.  As a general matter, disgorgement is

an “equitable obligation to return a sum equal to the amount

wrongfully obtained, rather than a requirement to replevy a specific

                                               64 Cavanagh, 155 F.3d at 136.   

65 Id. at 132.   

66 Id.  As noted above, see notes 32‐34 ante, we review an asset freeze order

for abuse of discretion, see Smith, 653 F.3d at 127; we review the underlying legal

conclusions de novo and factual determinations for clear error, see Cayuga Indian

Nation v. Seneca Cty., 761 F.3d 218, 220 (2d Cir. 2014).

67 Defs.’ Br. at 19‐20.   

68 Id. at 20.
28

asset.”69  Understanding this distinction, the District Court explained

that it was not limited to ordering disgorgement of “the actual

property obtained by means of his wrongful act.”70   

In its September opinion explaining its disgorgement order,

the District Court emphasized that “this is not a civil action for the

collection or recovery of taxes . . . .  Rather, this is a civil action for

securities law violations, the remedy for which is measured by the

amount of taxes avoided as a result of the defendants’ securities

violations.”71    The Court made clear that “[m]easuring unjust

enrichment by approximating avoided taxes does not transform an

order of disgorgement into an assessment of tax liability.”72   

Since the tax avoidance sum merely served the purpose of

quantifying the disgorgement remedy, rather than forming the basis

for liability itself, it is irrelevant that—or whether—tax liability is

                                               69 Wyly, 56 F. Supp. 3d at 431 n.223 (quoting SEC v. Banner Fund Int’l, 211

F.3d 602, 617 (D.C. Cir. 2000)).    As the D.C. Circuit has explained, to hold

otherwise “would lead to absurd results,” including, for example, enabling “a

defendant who was careful to spend all the proceeds of his fraudulent scheme,

while husbanding his other assets, [to be] immune from an order of

disgorgement.”  Banner Fund Int’l, 211 F.3d at 617.

70 Wyly, 56 F. Supp. 3d at 430 (emphasis in original).

71 Id. at 425 (emphasis in original) (internal quotation marks omitted)

(quoting its own earlier summary judgment decision in SEC v. Wyly, No. 10 Civ.

5760 (SAS), 2013 WL 2951960, at *1 (S.D.N.Y. June 13, 2013)).   

72 Id.
29

non‐transferable.73  What matters is that the gains received were ill‐

gotten in violation of securities laws, a determination that has

already been made by the jury at trial.    That conclusion is not

disturbed by the particular measure used by the District Court to

order equitable relief.    Here, the District Court’s adoption of two

alternative measures of disgorgement in its September and

December opinions makes the point even more salient.74  The Relief

Defendants challenge only the tax measure set forth in the

September opinion.  In fact, the particular method of measurement

used is immaterial.

III.  Receipt by Certain Relief Defendants

Finally, we address the Relief Defendants’ second challenge to

the scope of the asset freeze order, in which they argue that there is

insufficient evidence to show that seven of the Relief Defendants—

Andrew Wyly, Christiana Wyly, Charles J. Wyly, III, John Graham,

David Matthews, Donnie Miller, and Evan Wyly—received funds

from the IOM trusts or the Wyly Brothers directly.    These seven

defendants request vacatur of the asset freeze order as to them.75   

                                               73 Though we need not reach the issue, we note that the SEC presents

countervailing arguments and precedent indicating that unlawful tax savings are

transferable.  See Pl. Br. at 43‐45.   

74 As previously noted, the alternative calculation set forth in the

December disgorgement opinion was only to be used if the September

disgorgement method failed on appeal.

75 Defs.’ Br. at 21‐22; Defs.’ Reply Br. at 11‐15.
30

Treating the Relief Defendants as being all similarly situated,

the District Court stated, without further elaboration or

individuation, that the IOM trusts “have made distributions to the

Family Members[;] [t]hus, the Family Members are likely in

possession of ill‐gotten funds.”76  Seven Relief Defendants challenge

this finding as baseless, and the SEC has presented no evidence of

the alleged distributions cited by the District Court as to these

defendants.    Three Relief Defendants—Andrew Wyly, Christiana

Wyly, and Evan Wyly—are named beneficiaries of the IOM trusts,

but the record on appeal does not reflect distributions to them from

these trusts.    Four other Relief Defendants—Charles J. Wyly, III,

Donald Miller, John Graham, and David Matthews—appear to have

possessed trust property, including jewelry, artwork, furnishings

and residences, but the District Court did not rely on this evidence

in fashioning its asset freeze order.

Unable to offer concrete evidence of these alleged

distributions, the SEC instead argues that these seven defendants

have nothing to complain of if they do not possess assets frozen by

the order.  This argument must be rejected.  We require a showing of

receipt of ill‐gotten gains consistent with Cavanagh before an

individual can be subject to an asset freeze order.    The SEC’s

position would render the Cavanagh requirement meaningless and

would sever the very connection permitting relief defendants to be

                                               76 Wyly, 73 F. Supp. 3d at 322.   
31

joined to an action without an assertion of wrongdoing or other

grounds for subject matter jurisdiction over them.77   

On this record, we cannot know, much less decide, whether

the District Court clearly erred in determining that the IOM trusts

“made distributions” to each of the Relief Defendants.    We thus

think it prudent to remand the cause to the District Court for further

individualized findings regarding trust distributions to these seven

Relief Defendants.    Given its greater familiarity with the record

evidence and the evidence adduced at trial, the District Court

should rely on specific facts from the record showing receipt of ill‐

gotten gains by these individual defendants or, to the extent it

deems necessary, undertake further fact‐finding.    If the requisite

evidence does not exist with respect to any or all of the seven Relief

Defendants, the asset freeze order should be vacated as to those

individuals.

CONCLUSION

This case presents us with the opportunity to clarify and

delimit the scope of SEC v. Brennan.    There, the facts and

circumstances weighed in favor of staying the order requiring the

defendant to repatriate assets and deposit them in a court registry.  

                                               77 See Commodity Futures Trading Comm’n v. Kimberlynn Creek Ranch, Inc.,

276 F.3d 187, 192 (4th Cir. 2002) (noting that a nominal defendant with no

ownership interest in the funds at issue “is part of a suit only as the holder of

assets that must be recovered in order to afford complete relief”).
32

Here, the balance of factors requires a different result.  We therefore

hold as follows:

(1) The pre‐judgment asset freeze order imposed by the

District Court was exempt from the Bankruptcy Code’s

automatic stay provision.    The asset freeze order at

issue here did not seek to enforce a money judgment

and thus fell within the “governmental unit” exception

to the stay provision, but not within the “exception to

the exception.”   

(2) The order was properly supported by a showing of

receipt of ill‐gotten gains by nine of the sixteen Relief

Defendants.   

Accordingly, we AFFIRM in part the District Court’s

November 3, 2014 asset freeze order insofar as it

restrained the assets of these nine Relief Defendants.   

(3) We are unable to determine on this record whether

seven of the sixteen Relief Defendants personally

received ill‐gotten gains.

Accordingly, we REMAND the cause to the District

Court for additional factual development on the limited

issue of whether these seven Relief Defendants received

ill‐gotten gains.

In the interest of judicial economy, any future appeals taken

from the District Court’s decisions shall be referred to this panel.