Opinion ID: 3163898
Heading Depth: 2
Heading Rank: 2

Heading: Receipt of Ill‐Gotten Gains

Text: 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 Wyly, 73 F. Supp. 3d at 321 & n.20. Similarly, in their briefing here, 62 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. 26 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. Id. As noted above, see notes 32‐34 ante, we review an asset freeze order 66 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. 27 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 Wyly, 56 F. Supp. 3d at 431 n.223 (quoting SEC v. Banner Fund Int’l, 211 69 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). Id. at 425 (emphasis in original) (internal quotation marks omitted) 71 (quoting its own earlier summary judgment decision in SEC v. Wyly, No. 10 Civ. 5760 (SAS), 2013 WL 2951960, at  (S.D.N.Y. June 13, 2013)). 72 Id. 28 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.