Court Opinion

ID: 4258252
Source: CourtListenerOpinion
Date Created: 2018-03-26 19:00:17.443388+00
Date Added: 2024-06-11T14:28:22.726586
License: Public Domain

UNPUBLISHED

                          UNITED STATES COURT OF APPEALS
                              FOR THE FOURTH CIRCUIT

                                     No. 17-1770

SECURITIES & EXCHANGE COMMISSION,

             Plaintiff,

      v.

RECEIVER FOR REX VENTURES GROUP, LLC,

            Defendant – Appellant,

      v.

BANCA COMERCIALA VICTORIABANK SA

            Party-in-Interest – Appellee,

      and

REX VENTURE GROUP, LLC, d/b/a Zeekrewards.com; PAUL R. BURKS;
TRUDY GILMOND; KELLIE KING; BBVA COMPASS,

            Defendants.

Appeal from the United States District Court for the Western District of North Carolina,
at Charlotte. Graham C. Mullen, Senior District Judge. (3:12-cv-00519-GCM)

Argued: October 26, 2017                                     Decided: March 26, 2018

Before GREGORY, Chief Judge, KEENAN, Circuit Judge, and SHEDD, Senior Circuit
Judge.
Reversed and remanded by unpublished per curiam opinion.

ARGUED: Kenneth D. Bell, MCGUIREWOODS, LLP, Charlotte, North Carolina, for
Appellant. Kiran H. Mehta, TROUTMAN SANDERS LLP, Charlotte, North Carolina,
for Appellee.     ON BRIEF:      Irving M. Brenner, Amanda W. Abshire,
MCGUIREWOODS, LLP, Charlotte, North Carolina, for Appellant. Lindsey B. Mann,
Kathleen Campbell, TROUTMAN SANDERS LLP, Atlanta, Georgia, for Appellee.

Unpublished opinions are not binding precedent in this circuit.

                                            2
PER CURIAM:

       Kenneth D. Bell, the appointed receiver for Rex Venture Group, LLC d/b/a

ZeekRewards.com (RVG), appeals the district court’s conclusion that it lacked personal

jurisdiction over Banca Comerciala Victoriabank SA (Victoriabank), a Moldovan bank.

Because the district court erred in requiring the Receiver to prove jurisdiction by a

preponderance of the evidence, we reverse.

                                             I.

       RVG operated ZeekRewards, a combined Ponzi and pyramid scheme that solicited

investors to participate in an advertising division for a penny auction website. 1 On

August 17, 2012, the Securities and Exchange Commission filed a civil enforcement

action against RVG and its principal, Paul Burks. On the same day, the district court filed

an order freezing all of RVG’s assets (the Freeze Order) and appointing Bell as the

Receiver. The Freeze Order obligates persons and financial institutions to freeze funds

that RVG owned or could make a claim on and return these funds to the Receiver.

       This appeal arises from the Receiver’s efforts to recover more than $13 million of

RVG assets held at Victoriabank at the time of the Freeze Order. Victoriabank is a

commercial bank with its headquarters and principal place of business in the country of

Moldova. To further understand the facts relevant to the question before us—whether the

       1
        RVG received money from more than 800,000 individuals and obtained funds in
excess of $800 million.

                                             3
district court has personal jurisdiction over Victoriabank—we must examine how funds

flowed in the ZeekRewards scheme.

                                                A.

      Money was transferred to and from ZeekRewards through various digital wallet

companies, 2 including a company called Payza. Payza used multiple payment-processing

entities, each named “PaymentWorld,” and their sponsoring banks to service these

transactions. Initially, PaymentWorld, LLC (“PW-USA”), a California-based merchant

service provider, identified Payza as needing payment-processing services. But PW-USA

directly processed with only U.S. banks, and Payza was TMF-listed, 3 meaning no U.S.

bank would agree to do business with it. PW-USA therefore referred Payza to

PaymentWorld Limited (“PW-HK”), a Hong Kong-based internet payment service

processor. PW-HK connected Payza with two Russian banks, Master Bank and Tusar

Bank. Master Bank agreed to serve as Payza’s acquiring bank, 4 and Tusar Bank served as

      2
        Digital wallet companies are companies that allow investors to deposit and
remove funds electronically.
      3
         TMF, which stands for “Terminated Merchant File,” is a database that lists
merchants that have been terminated for cause and functions as a blacklist that banks use
to screen high-risk merchants.
      4
         An acquiring bank maintains a merchant’s bank account and, as a member of a
card association (e.g., Visa, MasterCard), enables the merchant to accept credit-card
payments. Acquiring banks also bear the risk of fund reversals, such as refunds, cancelled
transactions, and chargebacks.

                                            4
the settlement bank for all payments processed through PW-HK and Master Bank. 5 PW-

USA kept itself involved in the processing chain by serving as Payza’s merchant service

provider and the payment gateway through which Payza interacted with PW-HK and the

acquiring and settlement banks.

      In practice, when an investor used Payza to make a payment to ZeekRewards,

PW-USA transmitted the transaction information to Master Bank, Master Bank acquired

the funds from the credit-card company, and PW-HK transferred those funds from Master

Bank to Tusar Bank for settlement and then shifted them to Payza.

      In May 2012, Master Bank informed PW-USA and PW-HK that it would no

longer process payments from Payza. PW-USA and PW-HK therefore needed a new

acquiring bank for Payza. According to an affidavit submitted by the CEO and owner of

PW-USA, Roman Balanko, he and the sole owner of PW-HK, Alexander Korkin, met

with the “owner and majority shareholder” of Victoriabank, Vyacheslav Platon, in

Moldova to discuss using Victoriabank as Payza’s acquiring bank. “Mr. Platon agreed

that Victoriabank could process transactions so long as he too could participate in the

processing chain as an additional settling entity called ICS Payment World SRL” (“PW-

      5
         A settlement bank facilitates credit-card transactions between consumers and
merchants by taking information about each transaction and ensuring that the correct
amount of money is exchanged between the issuing bank (i.e., the bank that issued the
credit card to the consumer) and the acquiring bank.

                                           5
Moldova”). 6 After Platon formed PW-Moldova, Victoriabank replaced Master Bank as

Payza’s acquiring bank.

       A percentage of each Payza transaction was held in reserve in PW-Moldova’s

account at Victoriabank to cover any chargebacks, reversals, or other potential risks.

According to the Receiver’s calculations, Victoriabank held $13,174,015.48 in RVG

assets when the district court issued the Freeze Order.

       After the district court entered the Freeze Order, Balanko called and emailed

Victoriabank to inform it of the Freeze Order. The Receiver also sent written notice of the

Freeze Order to Victoriabank no later than September 17, 2012, informing

Victoriabank—in bold, underlined font—that “The Receivership Assets in the ICS

[PW-Moldova] Account are subject to the Freeze Order”. (J.A. 344). The written

notice was not in Romanian (the official language of Moldova), and the Freeze Order was

never domesticated in Moldovan court.

       On September 25, 2012, $15.5 million was transferred from PW-Moldova’s

Victoriabank account, routed through Victoriabank’s correspondent bank account at Bank

of New York Mellon (BNYM), and sent to a PW-HK account with the Tusar Bank. The

money was then transferred again to an account for Payment World Limited Russian

       6
           The exact timing of this meeting, and the creation of PW-Moldova, is unclear.

                                              6
Federation at Master Bank. 7 Master Bank has since closed, and it appears those funds are

effectively beyond recovery.

       Victoriabank opened its BNYM correspondent account in 2008. “A correspondent

bank account is a domestic bank account held by a foreign bank, similar to a personal

checking account used for deposits, payments and transfers of funds.” Licci v. Lebanese

Canadian Bank, 732 F.3d 161, 165 n.3 (2d Cir. 2013) (internal quotation marks omitted).

These accounts “facilitate the flow of money worldwide, often for transactions that

otherwise have no other connection to New York, or indeed the United States.” Id.

(internal quotation marks omitted). Victoriabank’s correspondent account averages

roughly 1,500 transactions per month totaling around $200 million in credits and debits.

                                                 B.

       In 2016, after the Receiver made several unsuccessful attempts to obtain the PW-

Moldova funds, the district court granted the Receiver’s motion for contempt and froze

$13,174,015 held in Victoriabank’s BNYM correspondent account as substitute assets for

the money transferred from PW-Moldova’s account. Victoriabank promptly moved to

dissolve the order, arguing that the district court lacked personal jurisdiction over it. The

Receiver moved in opposition and requested jurisdictional discovery. The district court

denied the request for full jurisdictional discovery but allowed the Receiver to (1) get

       7
        The parties vigorously dispute the interrelation of the PaymentWorld entities and
Victoriabank. The district court noted these relationships were “murk[y]” (J.A. 740), but
we need not delve into this murkiness to decide the appeal.

                                             7
document production in the United States in the form of third-party subpoenas from

BNYM and (2) depose Balanko.

       After the Receiver conducted this limited discovery, both sides filed supplemental

briefs on personal jurisdiction. The district court held a hearing on the issue and, at the

close of that hearing, granted Victoriabank’s motion to dissolve the order. The court

began by holding that, because the Receiver had conducted some jurisdictional discovery,

it had to prove personal jurisdiction by the preponderance of the evidence. The court then

found that the Receiver’s evidence fell short of that standard. First, the court held that

Victoriabank’s alleged violation of the Freeze Order did not give rise to jurisdiction

because that order was never domesticated in Moldova. Second, the court held that

Victoriabank’s maintenance of a correspondent bank account did not give rise to specific

personal jurisdiction. The district court stayed its order pending appeal, noting that the

case was “unclear” and that this Court should have the opportunity to “review the case

and weigh in on the disputed issues.” (J.A. 752).

                                            II.

       We review the district court’s determination that it lacks personal jurisdiction over

Victoriabank de novo. Carefirst of Maryland, Inc. v. Carefirst Pregnancy Ctrs., Inc., 334
F.3d 390, 396 (4th Cir. 2003). The Receiver argues that the district court erred in

applying a preponderance of the evidence standard to prove jurisdiction at this

preliminary stage. For the following reasons, we agree.

       Although personal jurisdiction is an affirmative defense, once Victoriabank raised

it, the Receiver had the burden of showing personal jurisdiction “at every stage.”

                                             8
Grayson v. Anderson, 816 F.3d 262, 267 (4th Cir. 2016). That burden, however, changes

depending upon the “stage” of the litigation. If a district court looks only at the initial

court filings, “a plaintiff need only make a prima facie showing” that personal

jurisdiction exists. Id. at 268. That approach is disfavored, and the “better course is for

the district court to follow a procedure that allows it to dispose of the motion as a

preliminary matter” applying a preponderance of the evidence standard. Id. An

evidentiary hearing is not required before the preponderance standard attaches, but we do

require district courts to “afford the parties a fair opportunity to present both the relevant

jurisdictional evidence and their legal arguments,” id., using “procedures that provide the

parties with a fair opportunity to present to the court the relevant facts,” id. at 269. See

also Walk Haydel & Assoc. v. Coastal Power Prod. Co., 517 F.3d 235, 242 (5th Cir.

2008) (noting that before preponderance standard applies “both parties must be allowed

to submit affidavits and to employ all forms of discovery, subject to the district court’s

discretion”). 8

       Applying this framework in Grayson, we affirmed the district court’s use of the

preponderance of the evidence standard because the parties had engaged in a “full

discovery process,” and “[n]o party ever claimed that the record was inadequately

       8
         In Walk Haydel, the Fifth Circuit explained that when a court “receive[s] only
affidavits or affidavits plus discovery materials,” requiring proof of personal jurisdiction
“by a preponderance of the evidence would permit a defendant to obtain a dismissal
simply by controverting the facts established by a plaintiff through his own affidavit and
supporting materials.” 517 F.3d at 241 (quoting Data Disc., Inc. v. Sys. Tech. Assocs.,
557 F.2d 1280, 1285 (9th Cir. 1977)).

                                              9
developed, that relevant evidence was missing, or that it was unable to fairly present its

position.” Grayson, 816 F.3d at 269.

       The Receiver contends that the district court erred in applying the preponderance

standard in this case because “full discovery” did not occur, and the Receiver did “claim

that the record was inadequately developed.” We agree. In contrast to Grayson, the

Receiver did complain that the record was incomplete and that the full discovery process

had not occurred. During one hearing, the Receiver stated:

       [Victoriabank] keeps saying we have now completed jurisdictional
       discovery. We have not. We have not been permitted to obtain any
       discovery from Victoriabank . . . [W]e haven’t finished all that can be done
       to establish jurisdiction.

(J.A. 734).

       The Receiver reiterated this complaint in its district court filings, explaining he

lacked “meaningful information regarding Victoriabank’s contacts and business dealings

with the United States, including ‘PaymentWorld U.S.,’ which controlled the account in

Moldova that is at issue.” Securities and Exchange Commission v. Rex Venture Group,

3:12-cv-00519, CM/ECF No. 521, at 9. When a district court significantly limits

jurisdictional discovery, it has not given both sides the “opportunity to present their cases

fully” and should apply a prima facie standard of proof. Walk Haydel, 517 F.3d at 242.

       Accordingly, we find that the district court erred in requiring the Receiver to prove

personal jurisdiction by preponderance of the evidence because it substantially curtailed

jurisdictional discovery. We leave it to the district court in the first instance to determine

whether to review the parties’ initial filings and apply the lower standard of proof or

                                             10
permit additional discovery to create a fuller evidentiary record before requiring the

Receiver to prove jurisdiction by a preponderance of the evidence. 9 Should the court

employ the lower standard, it “must construe all relevant pleading allegations in the light

most favorable to the plaintiff, assume credibility, and draw the most favorable inferences

for the existence of jurisdiction.” Combs v. Bakker, 886 F.2d 673, 676 (4th Cir. 1989).

                                            III.

       For the reasons stated above, we reverse the district court’s dismissal of the freeze

order against Victoriabank and remand for further proceedings consistent with our

opinion.

                                                            REVERSED AND REMANDED

       9
          Remanding to the district court, rather than applying a prima facie standard in the
first instance, is particularly appropriate here given the murky factual record and the
district court’s familiarity with the entire SEC enforcement action against RVG.

                                             11