11-3843-cv (L)

SEC v. Lynn A. Smith, et al.

1 UNITED STATES COURT OF APPEALS

2 FOR THE SECOND CIRCUIT

3 August Term, 2011

4 (Argued: March 13, 2012 Decided: March 18, 2013)

5 Docket Nos. 11-3843-cv(L), 11-3845-cv(con), 11-3848-cv (con), 

6 11-3851-cv(con), 11-4238-cv(con) 

7 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 8

9 SECURITIES AND EXCHANGE COMMISSION, 

10

11 Plaintiff-Appellee,

12

13 v.

14

15 LYNN A. SMITH, LAUREN T. SMITH, GEOFFREY R. SMITH, TRUSTEE OF

16 THE DAVID L. AND LYNN A. SMITH IRREVOCABLE TRUST U/A 8/04/04,

17

18 Defendants-Appellants,

19

20 JILL A. DUNN, DAVID M. WOJESKI,

21

22 Non-Party Appellants,

23

24 MCGINN, SMITH & COMPANY, INCORPORATED, MCGINN, SMITH ADVISORS,

25 LLC, MCGINN SMITH CAPITAL HOLDINGS CORPORATION, FIRST ADVISORY

26 INCOME NOTES, LLC, FIRST EXCELSIOR INCOME NOTES, LLC, FIRST

27 INDEPENDENT INCOME NOTES, LLC, THIRD ALBANY INCOME NOTES, LLC,

28 TIMOTHY M. MCGINN, DAVID L. SMITH, NANCY MCGINN,

29

30 Defendants.*

31

32 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 33

34 B e f o r e: WINTER, LIVINGSTON, Circuit Judges, and RAKOFF,

35 District Judge.**

36 __________

37

38 *The clerk of court is instructed to conform the caption in

39 accordance herewith.

40

41 **The Honorable Jed S. Rakoff of the United States District Court for

42 the Southern District of New York, sitting by designation.

43

1
1 Appeal from an order of the United States District Court

2 for the Northern District of New York (David Homer, Magistrate

3 Judge) imposing sanctions against several individual appellants

4 and authorizing a receiver to dispose of property owned by an

5 irrevocable trust. We dismiss in part, affirm in part, and

6 remand with regard to the disposition of the trust’s real

7 property.

8 

9 JAMES D. FEATHERSTONHAUGH,

10 Featherstonhaugh, Wiley & Clyne, LLP,

11 Albany, New York, for Defendant12 Appellant Lynn A. Smith.

13

14 STEPHEN B. HANSE, Featherstonhaugh,

15 Wiley & Clyne, LLP, Albany, New York,

16 for Defendants-Appellants Geoffrey R.

17 Smith, Trustee of the David L. and

18 Lynn A. Smith Irrevocable Trust U/A

19 8/04/04, Lauren T. Smith and Geoffrey

20 R. Smith.

21

22 BENJAMIN ZELERMYER, Steinberg &

23 Cavaliere, LLP, White Plains, New

24 York, for Non-Party Appellant Jill A.

25 Dunn, Esq.

26

27 FRED N. KNOPF, Wilson, Elser,

28 Moskowitz, Edelman & Dicker, LLP,

29 White Plains, New York, for Non-Party

30 Appellant David M. Wojeski.

31

32 KEVIN P. MCGRATH, Senior Trial

33 Counsel, Securities and Exchange

34 Commission, New York, New York, (Mark

35 D. Cahn, General Counsel, Michael A.

36 Conley, Deputy General Counsel, Jacob

37 H. Stillman, Solicitor, Christopher

38 Paik, Securities and Exchange

39 Commission, Washington, D.C. on the

40 brief), for Plaintiff-Appellee.

41

42

2
1 WINTER, Circuit Judge: 

2 This appeal arises out of a proceeding brought to remedy

3 securities fraud and recover assets -- to be distributed to

4 victims -- that were the fruits of the fraud. The issues

5 before us relate to enforcement of, and compliance with, an

6 order freezing various assets.

7 Appellants, the David L. and Lynn A. Smith Irrevocable

8 Trust U/A 8/04/04 (the “Trust”) and various individuals, appeal

from Magistrate Judge Homer’s1 9 order directing the disposition

10 of the Trust’s assets and sanctioning: (i) Lynn Smith, a

11 defendant in the action, and (ii) non-parties Jill Dunn,

12 attorney for the Trust, and David M. Wojeski, one-time trustee

13 of the Trust. The order against Lynn Smith provided that, in

14 the event of her failure to satisfy the sanctions against her,

15 a receiver would dispose of a piece of real property owned by

16 the Trust if doing so would maximize the return on that

17 property. 

18 This appeal raises questions concerning our jurisdiction

19 to hear interlocutory appeals of sanctions orders; the

20 propriety of the sanctions imposed; and whether it was error

21 for the magistrate judge to give the receiver authority to

22 dispose of Trust assets without first providing notice and an

23 opportunity for the Trust to be heard. 

1 The parties consented to have the issue of the asset freeze decided by

a magistrate as provided by 28 U.S.C. § 636(c). 

3
1 We dismiss the appeals of Jill Dunn and David Wojeski for

2 lack of jurisdiction, affirm the sanction order as to Lynn

3 Smith, and remand to allow the Trust to contest the court’s

4 order regarding the disposition of Trust property and for the

5 magistrate judge to give additional guidance to the receiver as

6 to disposition of the Trust property.

7 BACKGROUND

8 The origins and provisions of the Trust, which was created

9 in August 2004, are central to the issues on appeal. David and

10 Lynn Smith created the Trust with themselves as donors and

11 their adult children as beneficiaries. The Trust was funded by

12 100,000 shares of stock held in Lynn Smith’s name. The shares

13 were worth approximately $4.5 million. The shares were not

14 given outright to the Trust but were transferred pursuant to an

15 annuity agreement that would pay the Smiths approximately

16 $490,000 per year beginning in 2015 and ending either when both

17 David and Lynn Smith died or when the Trust’s assets were

18 exhausted. As discussed infra, contrary to the district

19 court’s orders, the existence of this annuity was not revealed

20 until late July 2010, and its discovery gave rise to the

21 sanctions imposed.

22 In April 2010, the SEC filed the present complaint against

23 David Smith and various related individuals and corporations

24 alleging violations of the securities laws. Lynn Smith, his

4
wife, was included in the action as a relief defendant2 1 and

2 later as a defendant under New York law who had received a

3 fraudulent conveyance. The SEC also moved to freeze the assets

4 of all of the defendants. In response, the district court

5 issued an order that, inter alia, froze Lynn Smith’s assets and

6 directed her to provide “an accounting [of her] own personal

7 assets, liabilities and general financial condition.” 

8 Lynn Smith’s April 29 statement of accounts and list of

9 assets included no mention of any interest in the Trust or in

10 the annuity that was to be paid to her and David Smith by the

11 Trust. On May 26, she filed an affidavit stating explicitly

12 that she and David Smith “had no interest in or expectation of

13 an interest in the [Trust]. It exists solely, exclusively and

14 permanently for the benefit of our children.” Finally, at a

15 hearing concerning the asset freeze on June 10, Lynn Smith

16 stated that she had no ownership interest in the stock that was

17 transferred to the trust and that the funds in the Trust were

18 solely for the benefit of her children. 

19 On July 7, 2010, after considering the blatantly

20 misleading information before it, the court released the freeze

21 on the Trust’s assets, concluding that David Smith had no

2 A relief defendant is an individual who “holds the subject matter of

the litigation in a . . . possessory capacity.” Commodities Futures Trading

Comm’n v. Walsh, 618 F.3d 218, 225 (2d Cir. 2010) (quoting SEC v. Colello, 139

F.3d 674, 676 (9th Cir. 1998)). In the context of securities enforcement

actions, relief defendants are individuals who are not accused of having

violated the securities laws themselves, but who are believed to be in

possession of profits from such violations. They are named as parties to aid

the recovery of funds to be paid to victims. See id.

5
1 beneficial ownership in the trust. Shortly after the lifting

2 of the freeze, the Trust made several expenditures. Jill Dunn,

3 the Trust’s attorney, received $101,096 for lawyer’s fees and

4 costs; David Wojeski, then the sole trustee, received $8,098.50

5 in fees for his work as trustee; and the Trust purchased a

6 vacation home in New York from Lynn Smith for $600,000.

7 On July 20, Wojeski received a fax containing an e-mail

8 from an individual at Southtowns Financial Group that stated,

9 “[t]he first four pages [attached] are from the annuity

10 contract. The three pages after that are documents that were

11 in the file that I thought might be relevant.” The pages that

12 followed included a “Policy Delivery Receipt” for a “PRIVATE

13 ANNUITY CONTRACT,” which was signed by David Smith; the first

14 page of a private annuity agreement, which identified David and

15 Lynn Smith as annuitants; and a page providing the key terms of

16 the contract. The next day, July 21, Wojeski forwarded the fax

17 to Dunn via e-mail. 

18 On July 22, during a teleconference with the court to

19 discuss the SEC’s intended motion to re-freeze the Trust’s

20 assets, the SEC attorneys informed the court that they were

21 going to offer evidence that the Smiths owed a significant

22 amount in gift taxes for transferring the stock to the Trust

23 and that the Trust also owed a capital gains tax. Dunn argued

24 that no gift tax was owed, but provided no supporting details

25 for that assertion. The SEC attorneys, David Stoelting and

6
1 Kevin McGrath, then called Dunn to inquire as to why she

2 believed that the Smiths did not owe gift taxes from the

3 transfer to the Trust. Stoelting testified that Dunn told them

4 that no tax was owed because of “a private annuity agreement.” 

5 Dunn, on the other hand, asserted that she told the attorneys

that the Trust was a “private annu-ity trust.”3 6 After the

7 call, the SEC attorneys contacted the original trustee for more

8 information, who sent a copy of the full annuity agreement to

9 the SEC and Dunn on July 27. 

10 After receiving the agreement, the SEC sought

11 reconsideration of the prior order lifting the freeze on the

12 Trust’s assets in view of the Smiths’ interest in the Trust. 

13 The Trust challenged the motion, arguing that reconsideration

14 was inappropriate because the SEC could have discovered the

15 annuity before the original proceeding to freeze the Trust’s

16 assets. In support, the Trust submitted affidavits from both

17 Dunn and Wojeski. Dunn’s affidavit asserted that she did not

18 disclose the agreement to the SEC on the telephone call of July

19 22. It stated that Dunn “could state with absolute certainty

20 that [she] did not make [the statement that there was a private

21 annuity agreement] because [she] did not know of the existence

22 of the private annuity agreement until [she] received it . . .

23 on July 27, 2010, the same day the SEC received it.” It

3 The other SEC attorney did not remember hearing Dunn say anything

about an annuity agreement. However, the SEC attorney also testified that he

was not paying attention during that part of the conversation. 

7
1 further stated that “[n]either I nor Mr. Wojeski had any

2 documents in our possession relating to the private annuity

3 other than the courtesy copy of the documents I received . . .

4 on July 27 . . . .” Wojeski’s affidavit stated that he first

5 learned of the existence of the annuity agreement in late July

6 when Dunn informed him that both she and the SEC had received

7 the agreement from the former trustee.

8 A hearing concerning the motion for reconsideration was

9 scheduled for November 16, 2010. The day before that hearing,

10 Dunn submitted a corrective affidavit stating that she had

11 recently discovered the July 21 e-mail from Wojeski containing

12 the documents referencing the annuity and that her prior

13 affidavit was incorrect. She stated that she did not recall

14 the documents when she composed her prior affidavit because, at

15 the time she received the e-mail, she was focusing her

16 attention on the Trust’s purchase of the New York vacation

17 home, other client matters, and personal issues. A day after

18 the hearing, Wojeski also submitted a corrective affidavit

19 stating that when he reviewed his first affidavit -- prepared

20 by Dunn -- he did not realize that the documents he had

21 received on July 20 were different from the contract produced

22 on July 27 and that he thought the two events had happened at

23 the same time. He also implied that the affidavit was not

24 incorrect, only imprecise, because he did learn of the annuity

25 in late July. 

8
1 The court granted the SEC’s motion and reinstated the

2 freeze on the Trust’s assets. The court found the SEC’s

3 evidence to be more credible. It specifically found that Dunn

4 had mentioned the annuity agreement during the telephone call

5 on July 22. Magistrate Judge Homer noted, inter alia, the

6 logical consistency and probability of a reference by Dunn to

7 the private annuity agreement being elicited by questions from

8 the SEC concerning the reason Dunn believed no gift tax was

9 owed by Smith. The court also granted the SEC leave to move

10 for sanctions, which the Commission did. 

11 After considering all parties’ arguments, the court

12 sanctioned Lynn Smith for her failure to disclose the annuity

13 in her list of accounts and assets and for her statements that

14 she had no present or future interest in the Trust. The court

15 found Lynn Smith’s argument that she had forgotten about the

16 annuity unconvincing in light of the considerable size of the

17 payments that she would receive from the annuity. The court

18 also found that Lynn’s efforts to preserve the assets of the

19 Trust were inconsistent with her alleged forgetfulness, noting

20 that no payments had been disbursed from the Trust to the named

21 trust beneficiaries, the Smith children, prior to 2010 and also

22 that Lynn had personally covered a year’s worth of her

23 daughter’s expenses even though they were of a type for which

24 the Trust was created. The court then sanctioned Lynn Smith

25 under both Rule 11(c)(3) and the inherent powers of the court. 

9
1 She was ordered to repay the Trust $944,848, which included the

2 $600,000 that the Trust paid to purchase the New York vacation

3 home, and to pay the SEC $51,232 in attorney and expert fees. 

4 The court also sanctioned Wojeski and Dunn for their

5 statements that they first learned of the annuity agreement on

6 July 27, rather than on July 20 and 21 respectively. The

7 magistrate judge found that it was not credible that Dunn

8 ignored a client’s e-mail for six days. Moreover, he found

9 that Dunn’s explanation that she did not remember reading the

10 e-mail to be incredible because the documents were of such

11 importance that Dunn must have immediately known their

12 significance. Finally, the court elaborated on its prior

13 finding that Dunn had told the SEC attorneys about the annuity

14 on July 22 by finding that the false statements were made

15 deliberately because: (i) it was improbable that Dunn had

16 ignored a client e-mail for at least six days, (ii) Dunn’s

17 first reference to a “private annuity trust” came the day after

18 Wojeski sent an e-mail disclosing the trust to her, and (iii)

19 the financial stakes for Dunn -- over $100,000 -- provided

20 ample motivation to conceal the Trust’s existence. Dunn was

10
sanctioned under Rule 11(c)(3),4

 28 U.S.C. § 1927,5 1 and the

2 inherent power of the court. She was ordered to pay $5,355,

3 the amount she had been paid by the Trust after July 21. She

4 was also publicly admonished and reported to the New York State

5 Bar. 

6 With regard to Wojeski, the court noted that his affidavit

7 had the effect of corroborating Dunn’s false affidavit. The

8 court also rejected Wojeski’s contention that the original

9 affidavit, in stating that he first learned of the agreement

10 from Dunn in late July, was simply imprecise rather than false. 

11 In doing so, the court noted that the original affidavit stated

12 not only that Wojeski had learned about the agreement in late

13 July, which was not necessarily incorrect, but also that he

14 learned that information from Dunn, which was clearly untrue. 

15 Therefore, the court found that not only had Wojeski made a

16 false statement in his original affidavit, but that it was

17 disingenuous for him to say that his original affidavit was an

18 imprecise reference to him receiving the fax on July 20. 

19 Wojeski was sanctioned under both Rule 11(c)(3) and the

4 By making a representation to the court, whether by pleading, written

motion, or other paper, one certifies that the “the factual contentions have

evidentiary support.” Fed. R. Civ. P. Rule 11(b). Rule 11(c)(3) provides,

“[o]n its own, the court may order an attorney, law firm, or party to show

cause why conduct specifically described in [an] order has not violated Rule

11(b).” If a court determines that a Rule 11(b) violation has occurred, it

may “impose an appropriate sanction on any attorney, law firm, or party that

violated the rule or is responsible for the violation.” Rule 11(c)(1).

5 Section 1927 provides, “Any attorney . . . of the United States . . .

who so multiplies the proceedings in any case unreasonably and vexatiously may

be required by the court to satisfy personally the excess costs, expenses, and

attorneys’ fees reasonably incurred because of such conduct.”

11
1 inherent power of the court. He was ordered to repay $13,384,

2 the amount he had received from the Trust in payment and

3 reimbursements after July 20; was publicly admonished; and was

4 reported to the state licensing authority for accountants.

5 Finally, the court authorized the receiver, who had

6 previously been appointed to oversee the corporations owned by

7 David Smith and his co-defendants, to proceed in whatever

8 manner he deemed best to maximize the return on the vacation

9 property that the Trust had purchased from Lynn Smith if she

10 did not repay the $600,000 by September 1, 2011. The order

11 stated:

12 [I]f Lynn Smith fails to return to the

13 Receiver by September 1, 2011 the full amount

14 of the $600,000.00 sale price of the property

15 plus closing costs, the Receiver may proceed

16 in whatever manner he deems economically most

17 feasible to maximize the return on this

18 property. This may include the sale or

19 rental of the property, or portions thereof,

20 depending on the receiver’s determination of

21 market conditions. Lynn Smith and the Trust

22 shall cooperate reasonably with the Receiver

23 and any designee to facilitate the sale or

24 rental of the property. 

25

26 This appeal followed.

27 DISCUSSION

28 a) Appellate Jurisdiction

29 Our appellate jurisdiction is generally limited to final

30 decisions of district courts, those that “end[] the litigation

31 on the merits and leave[] nothing for the court to do but

32 execute the judgment.” See Cunningham v. Hamilton Cnty., Ohio,

12
1 527 U.S. 198, 204 (1999) (quoting Van Cauwenberghe v. Biard,

2 486 U.S. 517, 521-22 (1988)). This limitation accords

3 deference to trial judges, prevents piecemeal litigation, and

4 conserves the resources of both the opposing party and the

5 judiciary by preventing numerous successive appeals. See

6 Firestone Tire & Rubber Co. v. Risjord, 449 U.S. 368, 374

7 (1981).

8 An exception to this general rule is the collateral order

9 doctrine, see Cunningham, 527 U.S. at 204, under which federal

10 appellate courts have jurisdiction over “decisions that are

11 conclusive, that resolve important questions separate from the

12 merits, and that are effectively unreviewable on appeal from

13 the final judgment in the underlying action.” Id. (quoting

14 Swint v. Chambers Cnty. Comm’n, 514 U.S. 35, 42 (1995)). 

15 However, the collateral order doctrine is not one requiring a

16 fact-specific, case-by-case analysis. Rather, it is applied

17 categorically. Therefore, even if a particular appeal

18 satisfies the three conditions, we still lack jurisdiction if

19 the appeal is of a type that does not generally fall within the

20 doctrine. See Cunningham, 527 U.S. at 206 (“Perhaps not every

21 discovery sanction will be inextricably intertwined with the

22 merits, but we have consistently eschewed a case-by-case

23 approach to deciding whether an order is sufficiently

24 collateral.”).

25

13
1 A statutory exception to the final order requirement is

2 found in 28 U.S.C. § 1292, which provides appellate

3 jurisdiction over appeals of preliminary injunctions. 

4 Jurisdiction under this provision extends to issues that are

5 “inextricably bound up with” those injunctions. Lamar Adver.

6 of Penn, LLC v. Town of Orchard Park, 356 F.3d 365, 371 (2d

7 Cir. 2004) (citing 28 U.S.C. § 1292(a)(1)). Review of such

8 issues is “a narrowly tailored exception to the final judgment

9 rule,” Amador v. Andrews, 655 F.3d 89, 95 (2d Cir. 2011), and

10 issues will be deemed inextricably intertwined with appellate

11 review of preliminary injunctions only where “review of ‘the

12 otherwise unappealable issue is necessary to ensure meaningful

13 review of the appealable one.’” Id. (quoting Britt v. Garcia,

14 457 F.3d 264, 273 (2d Cir. 2006)).

15 Applying these principles to the present matter, we agree

16 with the SEC that we lack jurisdiction over the appeals of Dunn

17 and Wojeski. However, we have jurisdiction over the appeal of

18 Lynn Smith. 

19 1. Appeals of Dunn and Wojeski

20 Dunn and Wojeski argue that we have jurisdiction over

21 their appeals under the collateral order doctrine.

22 In Cunningham, the Supreme Court, addressing an appeal of

sanctions imposed under Fed. R. Civ. P. 37(a),6 23 held that “a

6 Rule 37 provides for sanctions, including costs and reasonable

attorney’s fees, against parties or persons unjustifiably resisting discovery. 

See Rule 37 advisory committee’s note on 1970 amendments.

14
1 sanctions order imposed on an attorney is not a ‘final

2 decision’ under § 1291,” and is therefore not immediately

3 appealable. 527 U.S. at 202-03, 210. In reaching this

4 conclusion, the Court relied heavily on the fact that review of

5 sanctions orders could not remain entirely separate from the

6 merits of the underlying litigation because the propriety of

7 those orders may require courts to inquire into the importance

8 of information sought, the adequacy of responses, and the

9 truthfulness of those responses. See id. at 205-06. 

10 Therefore, review of the sanctions “would differ only

11 marginally from an inquiry into the merits.” Id. at 206.

12 The Court also pointed out that an attorney’s appeal from

13 a sanction order fails to satisfy the third prong of the

14 collateral order doctrine because those orders are not

15 unreviewable on appeal of a final judgment. See id. at 206-09. 

16 Despite the fact that attorneys are not parties to the

17 underlying case, the “effective congruence of interests between

18 clients and attorneys counsels against treating attorneys like

19 other nonparties for purposes of appeal.” Id. at 207. 

20 Moreover, unlike civil contempt orders for defiance of a

21 district court’s enforcement order, which are considered final

22 and therefore appealable, Dynegy Midstream Servs. v.

23 Trammochem, 451 F.3d 89, 92 (2d Cir. 2006), sanctions orders do

24 not seek to compel compliance with existing court orders, but

25 are available as a deterrent to delaying tactics and the

15
1 imposition of unnecessary costs on adversaries. Willy v.

2 Coastal Corp., 503 U.S. 131, 138-39 (1992). Allowing immediate

3 appeal of those orders would be counterproductive because it

4 would allow the sanctioned party to cause additional delays and

5 costs. Cunningham, 527 U.S. at 207-09. 

6 As noted, Cunningham addressed appellate jurisdiction only

7 with regard to Rule 37 sanctions. Therefore, our appellate

8 jurisdiction turns on whether the holding in Cunningham also

9 applies to sanctions imposed under Rule 11, 28 U.S.C. § 1927,

10 and the inherent power of the court.

11 Several other circuits have held that Cunningham precludes

12 interlocutory appeals of sanctions imposed under these other

13 sources of authority. See Douglas v. Merck & Co., 456 F. App’x

45 at *47 n.1 (2d Cir. Jan. 23, 2012)7 14 (Slip Op.) (citing

15 Stanley v. Woodford, 449 F.3d 1060, 1063-65 (9th Cir. 2006) (§

16 1927 and inherent power sanctions); Comuso v. National R.R.

17 Passenger Corp., 267 F.3d 331, 339 (3d Cir. 2001) (abrogating

18 precedent or appealability of Rule 11 and discovery sanctions

19 and holding inherent power sanctions not immediately

20 appealable); Empresas Omajede, Inc. v. Bennazar-Zequeira, 213

7 However, the panel in Douglas, which was faced with an interlocutory

appeal of sanctions imposed under the district court’s inherent power, chose

not to consider whether Cunningham categorically precluded interlocutory

appeals of inherent-power sanctions because the specific facts of that case

did not satisfy the collateral order test. See Douglas, 456 F. App’x 45 at

*47.

16
F.3d 6, 9 n.4 (1st Cir. 2000) (inherent power sanctions)).8 1 In

2 addition, we have also suggested that in the wake of Cunningham

3 “a sanctions order against an attorney does not satisfy the

4 requirements of the collateral order doctrine.” New Pac.

5 Overseas Grp. (U.S.A.) v. Excal Int’l Dev. Corp., 252 F.3d 667,

6 670 (2d Cir. 2001). However, like Cunningham, that case

directly addressed sanctions imposed only under Rule 37.9 7 See

8 id.

9 We conclude that Cunningham applies to appeals of

10 sanctions imposed under Rule 11 as well as under the district

11 court’s inherent powers because, like Rule 37 sanctions, these

12 appeals will often implicate the merits of the underlying

13 action. Sanctions based on these other authorities often

14 require courts to evaluate the completeness or truthfulness of

15 responses and whether a party’s claims are without merit. See

8 The reasoning for concluding that Cunningham precludes immediate

appeals of sanction orders has differed slightly among the circuits. For

example, the Third Circuit has asserted that the Supreme Court created “a per

se rule that sanctions orders are inextricably intertwined with the merits of

the case.” Comuso, 267 F.3d at 339. On the other hand, the Ninth Circuit has

looked to the rationale used by the Court in Cunningham and concluded that the

“reasons underlying Cunningham’s bar against immediate appeal from Rule 37(a)

sanctions orders apply equally” to other types of sanctions. Stanley, 449

F.3d at 1064 (quoting Cato v. Fresno City, 220 F.3d 1073, 1074 (9th Cir.

2000)). The latter reasoning leaves open the possibility that some types of

sanctions may be immediately appealable if the rationale underlying the

Cunningham decision does not apply. We need not address these issues because,

as discussed infra, the reasoning applied in Cunningham applies to the types

of sanctions present in this matter.

9 We note that, in a recent opinion, two members of a panel stated in

separate concurring opinions that we have jurisdiction over the immediate

appeal of Rule 11 sanctions. See Kiobel v. Millson, 592 F.3d 78, 87 (2d Cir.

2010) (Cabranes, J., concurring); id. at 107 (Jacobs, C.J., concurring). 

However, neither opinion discussed Cunningham, both relying entirely on

precedent preceding that decision. See id. at 87, 107.

17
1 e.g., Lawrence v. Richman Grp. of CT LLC, 620 F.3d 153, 156 (2d

2 Cir. 2010) (Rule 11); Revson v. Cinque & Cinque, P.C., 221 F.3d

3 71, 78-79 (2d Cir. 2000) (inherent powers and § 1927). 

4 The fact that the particular sanctions before us were

5 imposed in the context of an ancillary proceeding, and required

6 evaluation of the accuracy and truthfulness of appellants, does

7 not alter the analysis. Although the particular issue giving

8 rise to the sanctions here -- Lynn Smith’s monetary interest in

9 the Trust -- does not necessarily implicate the merits of the

10 underlying securities fraud prosecution, ancillary proceedings

11 often do implicate the underlying claims. See, e.g., Commodity

12 Futures Trading Comm’n v. Walsh, 618 F.3d 218, 225 (2d Cir.

13 2010) (to freeze the assets of a relief defendant the

14 government must show that they are likely to succeed in

15 disgorging the funds, which requires, in part, that the assets

16 are ill-gotten, which deals directly with the merits of the

17 underlying action). Therefore, sanctions in these contexts

18 also “often will be inextricably intertwined with the merits of

19 the action,” Cunningham, 527 U.S. at 205, and, even if that is

20 not necessarily the case here, the requisite categorical

21 analysis is not altered.

22 Finally, the particular sanctions here do not meet the

23 third prong of the collateral order doctrine. As was the case

24 in Cunningham, the fact that Dunn and Wojeski are not parties

25 to this action, and are no longer acting as the attorney and

18
1 trustee for the Trust does not render the issues unreviewable

2 on appeal. The Supreme Court squarely rejected a similar

3 concern with regard to the appeals of attorneys, see id. at

4 206-07, and its reasoning is equally applicable to Wojeski as a

5 trustee. Trustees, like attorneys, act on behalf of a party

6 and have a fiduciary duty to that party. See Black’s Law

7 Dictionary “trustee” (9th ed. 2009); Saltzman v. Comm’r, 131

8 F.3d 87, 90 (2d Cir. 1997) (“[P]ursuant to the inexorable

9 dictates of trust law, [the trustees] owed the trust

10 beneficiaries the absolute duty of undiluted loyalty.”). 

11 Therefore, the appeals of Dunn and Wojeski also fail to satisfy

12 the final prong of the collateral order doctrine. We,

therefore, dismiss these appeals.10 13 

14 2. Appeal of Lynn Smith

15 We conclude that we have jurisdiction over Lynn Smith’s

16 appeal under 28 U.S.C. § 1292(a)(1) because the sanctions order

17 against her is inextricably intertwined with the order of

18 injunction against the Trust.

19 An appeal is inextricably bound up with an injunction if

20 the court cannot resolve the issue of the injunction without

21 considering the additional appeal. See Lamar Adver., 356 F.3d

22 at 372. Here, the order directing the receiver to sell or

10 Like the Court in Cunningham, we recognize that our conclusion may

create hardships for Dunn and Wojeski. However, that fact does not serve to

grant jurisdiction. See Cunningham, 527 U.S. at 209-10 (“Should these

hardships be deemed to outweigh the desirability of restricting appeals to

‘final decisions,’ solutions other than an expansive interpretation of §

1291’s ‘final decision’ requirement remain available.”). 

19
1 rent the property owned by the Trust was contingent on whether

2 Lynn Smith satisfied the order of sanctions against her by the

3 specified date. Therefore, if the order of disgorgement

4 against Lynn Smith is invalid, the court’s order regarding the

5 disposal of the Trust’s property is moot. Lynn Smith’s appeal

6 is, therefore, inextricably bound up with the Trust’s appeal of

the injunction,11 7 and we have jurisdiction over her appeal.

8 b) Sanctions Against Lynn Smith

9 We review a lower court’s imposition of sanctions for

10 abuse of discretion. See Storey v. Cello Holdings, LLC, 347

11 F.3d 370, 387 (2d Cir. 2003). A court abuses its discretion

12 when it bases “its ruling on an erroneous view of the law or on

13 a clearly erroneous assessment of the evidence.” Id. at 387-88

14 (internal citations and quotations omitted). “An assessment of

15 the evidence is clearly erroneous where the reviewing court ‘is

16 left with the definite and firm conviction that a mistake has

17 been committed.’” Wolters Kluwer Fin. Servs., Inc. v.

18 Scivantage, 564 F.3d 110, 113 (2d Cir. 2009) (quoting Zervos v.

19 Verizon N.Y., Inc., 252 F.3d 163, 168 (2d Cir. 2001)), and the

20 imposition of sanctions was “made with[out] restraint and

21 discretion.” Schlaifer Nance & Co. v. Estate of Warhol, 194

22 F.3d 323, 334 (2d Cir. 1999). 

11 Wojeski also asserts that his appeal is inextricably bound up with

the injunction against the Trust; however, he does not explain how the order

of sanctions against him in any way affects the injunction against the Trust. 

His only argument is that the sanctions order was issued in the context of a

preliminary injunction proceeding. However, 28 U.S.C. § 1292(a) provides

jurisdiction over orders, not over proceedings, and there is nothing in

Wojeski’s briefs that would suggest that review of his appeal is vital to

deciding the appeal of the Trust.

20
1 Under Rule 11(c)(3) and the inherent power of the court,

2 sanctions are appropriate where an individual has made a false

3 statement to the court and has done so in bad faith. See In re

4 Pennie & Edmonds LLP, 323 F.3d 86, 90 (2d Cir. 2003) (Rule

5 11(c)(3)); DLC Mgmt. Corp. v. Town of Hyde Park, 163 F.3d 124,

6 136 (2d Cir. 1998) (inherent power). Lynn Smith argues that

7 she did not make any false statements, that there was

8 insufficient evidence that she acted in bad faith, and that

9 disgorgement is not an appropriate sanction. We address those

10 arguments in turn.

11 Whether Lynn Smith made false statements, and whether she

12 did so in bad faith, are questions of fact that will not be

13 disturbed unless clearly erroneous. See Agiwal v. Mid Island

14 Mortg. Corp., 555 F.3d 298, 302 (2d Cir. 2009). The findings

15 of the magistrate judge on these issues were certainly not

16 clearly erroneous. 

17 Lynn Smith was ordered to list her accounts and assets. 

18 The annuity in question is clearly an asset. See Black’s Law

19 Dictionary, “asset” (9th ed. 2009) (defined as something that

20 is owned and has value). The fact that her children were

21 listed as the sole beneficiaries of the Trust hardly means that

22 the Trust as arranged was for the sole benefit of the children. 

23 Viewing the Trust as a whole, it was undoubtedly created, at

24 least in part, to benefit Lynn and David Smith because, as Lynn

25 Smith acknowledges in her brief, it allowed them to defer

21
1 capital gains taxes. Similarly, the payments to Lynn Smith

2 under the annuity contract were contingent on the Trust

3 retaining sufficient assets to make those payments. These

4 facts clearly establish that Lynn Smith had an ongoing

5 substantial interest in the Trust whether or not it was

technically an ownership interest.12 6 

7 The court’s finding that Lynn Smith acted in bad faith in

8 not revealing her interest in the Trust is amply supported by

9 the record. First, the size of the annuity payments is easily

10 sufficient to support an inference that Lynn Smith did not

11 simply forget about the annuity, but rather purposely chose to

12 omit it. Second, Lynn Smith concededly supported her daughter

13 for approximately a year, despite the fact that the stated

14 purpose of the Trust was to provide financial assistance to the

15 Smiths’ children when needed. This provision of means to the

16 daughter supports a finding that Lynn Smith was seeking to

17 preserve the Trust’s assets so as to protect her future

18 payments under the annuity agreement and was fully aware of her

19 interest in the Trust. Finally, the fact that Lynn Smith sold

20 her vacation home to the Trust soon after the original asset

21 freeze was lifted indicates a motive to falsify the required

22 reports in order to gain access to the Trust’s funds. While

23 these facts may not compel as a matter of law a finding that

12 We have already upheld the freeze on the Trust's assets based on the

finding that the Trust was for the benefit of David Smith. See Smith v. SEC, 432 F. App'x 10, 12 (2d Cir. 2011).

22
1 Lynn Smith made false statements to the court in bad faith, we

2 are not “left with the definite and firm conviction that a

3 mistake has been committed.” Wolters Kluwer, 564 F.3d at 113

4 (internal quotations omitted). Indeed, the record carries a

5 circumstantial stench that only heroic credibility findings in

6 her favor would dissipate.

7 Finally, with regard to Lynn Smith’s claim that

8 disgorgement is not a proper sanction, we note that “[d]istrict

9 courts are given broad discretion in tailoring appropriate and

10 reasonable sanctions.” O’Malley v. N.Y.C. Transit Auth., 896

11 F.2d 704, 709 (2d Cir. 1990); Wright & Miller, Federal Practice

12 & Procedure § 1336.3 (“[F]ederal courts retain broad

13 discretionary power to fashion novel and unique sanctions to

14 fit the particular case.”). In the present context --

15 proceedings initiated to preserve assets in order to compensate

16 victims of the alleged fraud -- it was entirely appropriate for

17 the court to require Lynn Smith to disgorge herself of funds

18 she obtained after that freeze was lifted in substantial

19 reliance upon her false statements.

20 c) Order Authorizing the Disposition of Trust Property

21

22 The order authorizing the receiver to dispose of the

23 vacation home was issued as part of the sanction order. 

24 Therefore, it is also reviewed under an abuse of discretion

25 standard. See United States v. Seltzer, 227 F.3d 36, 39 (2d

26 Cir. 2000). 

23
1 The Trust argues that the lower court abused its

2 discretion because it did not provide the Trust with notice

3 that the court intended to give the receiver the authority to

4 dispose of Trust assets and an opportunity to be heard prior to

5 issuing the order. In addition, the Trust also makes various

6 substantive arguments that were not addressed in the district

7 court. Those arguments include the contention that this order

8 usurps the role of the trustee and forces the Trust to bear the

9 costs of Lynn Smith’s actions even though the Trust was not

10 accused of wrongdoing. In response, the SEC asserts that the

11 Trust will not bear any additional costs because the receiver

12 was instructed to dispose of the property only if doing so

13 would maximize the return on that property. The SEC also

14 asserts that the Trust’s other arguments are unavailing in

15 light of the fact that the veil of the Trust’s separate legal

16 existence has been pierced as to David Smith. 

17 The Trust also raises concerns that the order gives very

18 little direction to the receiver as to how he or she is to

19 determine what course of action to take. This, the Trust

20 argues, gives the receiver nearly complete discretion and

21 precludes effective judicial review. 

22 We believe it appropriate to allow the magistrate judge to

23 consider the Trust’s arguments in the first instance. We in no

24 way suggest that the district court should determine that its

25 prior order with regard to the Trust is inappropriate. We

24
1 leave that to its sound discretion. However, the court should

2 provide additional guidance to the receiver concerning how to

3 determine whether to dispose of the property, if at all. 

4 CONCLUSION

5 For the foregoing reasons, we dismiss the appeals of Dunn

6 and Wojeski, affirm the sanctions against Lynn Smith, and

7 remand for further proceedings in accordance with this opinion. 

8

25