Opinion ID: 757739
Heading Depth: 2
Heading Rank: 2

Heading: Tamar Lehmann

Text: 25 Lehmann, a relief or nominal defendant, appeals from the provision of the injunction that freezes, for possible disgorgement, the proceeds from the sale of the stock that were deposited in her bank account. 35 The SEC does not accuse Lehmann of any wrongdoing. Federal courts may order equitable relief against a person who is not accused of wrongdoing in a securities enforcement action where that person: (1) has received ill-gotten funds; and (2) does not have a legitimate claim to those funds. 36 Lehmann does not dispute that she received proceeds from the sale of EOSC stock transferred to her (on behalf of her husband) by Cavanagh, who has been enjoined for fraud in connection with those shares. Thus, the issue is whether Lehmann has a legitimate claim to the EOSC shares or their proceeds. 26 As a threshold matter, this court reviews the district court's grant of a preliminary injunction for an abuse of discretion. 37 The standard of review for an injunction freezing assets of a relief defendant is whether the SEC has shown that it is likely to succeed on the merits; the SEC need not make any showing that a future violation is likely, because it is not accusing the nominal defendant of any wrongdoing. 38 Lehmann argues that the SEC should have to make a clear and substantial showing of success on the merits, citing Tom Doherty Associates, Inc. v. Saban Entertainment, Inc. 39 However, the injunction in Tom Doherty required the defendant to perform a positive act--namely, to offer to the plaintiff the rights to publish a book. 40 This court has said that the court should require a more substantial showing of likelihood of success ... whenever the relief sought is more than preservation of the status quo. 41 In this case, the injunction merely freezes the status quo. 27 Lehmann also argues that the SEC was required to show that there were no adequate and less burdensome measures for obtaining relief other than by freezing her accounts. In United States v. Regan, 42 this court required the government to make such a showing before enjoining a partnership from engaging in certain transactions and subjecting its affairs to review by a government monitor. In holding the government to such a high standard of proof, this court noted that the partnership was largely owned by innocent persons, not named in the RICO suit, and the government had no interest in the partnership beyond the defendants' individual interests. 43 In this case, the injunction does not affect property rights of someone not a party in the proceeding. Lehmann is named, if only as a relief defendant, and thus has full opportunity to litigate her rights. Moreover, the frozen assets are limited to the proceeds of the stock at issue, and the preliminary injunction has no effect on any assets of Lehmann's that are not the product of the alleged securities law violations. Lehmann additionally claims, citing Hsu v. Roslyn Free School District, 44 that a heightened standard is required because the injunction grants the SEC all the relief it could ever obtain from Lehmann. This argument rests on an incorrect premise. If the SEC prevails, it will receive the proceeds. For the time being, the proceeds are merely frozen. 28 The district court concluded that neither Lehmann nor her husband has a legitimate claim to the proceeds because the SEC is likely to be able to show that he gave no consideration for the EOSC shares and thus received them as a gift. The district court found that Mrs. Lehmann stands in the shoes of her husband with respect to any rights she has to the EOSC shares. Cavanagh gave the stock to Mr. Lehmann, a business associate who has now been named as a defendant to fraud charges in the SEC's amended complaint. 45 Mr. Lehmann directed that the stock be deposited in his wife's account. Mrs. Lehmann admitted under oath that, until the SEC filed this action, she did not even know she had received the stock, that the stock had been sold, or that $500,000 in proceeds had been transferred to her bank account. Allowing her to now claim valid ownership of those proceeds would allow almost any defendant to circumvent the SEC's power to recapture fraud proceeds, by the simple procedure of giving stock to friends and relatives, without even their knowledge. The district court was within its discretion in granting the preliminary injunction freezing the proceeds from the stocks. 29 For the foregoing reasons, the order of the district court is AFFIRMED.