Court Opinion

ID: 857075
Source: CourtListenerOpinion
Date Created: 2013-04-03 14:30:35.758606+00
Date Added: 2024-06-11T13:08:34.353518
License: Public Domain

11-1516-cv(L)
     CFTC v. 3M Employee Welfare Benefit Association Trust I, et al.

 1                                  UNITED STATES COURT OF APPEALS

 2                                         FOR THE SECOND CIRCUIT

 3                                                       ------

 4                                                August Term, 2011

 5   (Argued: May 16, 2012                                              Decided:   April 3, 2013)

 6                            Docket Nos. 11-1516-cv(L), 11-1517-cv, 11-1738-cv,
 7                            11-1741-cv, 11-1859-cv, 11-1879-cv

 8   _________________________________________________________

 9   COMMODITY FUTURES TRADING COMMISSION,

10                                     Plaintiff-Appellee-Cross-Appellee,

11   SECURITIES AND EXCHANGE COMMISSION,

12                                     Plaintiff-Appellee,

13   ROBB EVANS & ASSOCIATES LLC,

14                                     Receiver-Appellee-Cross-Appellee,

15                                             - v. -

16   STEPHEN WALSH, PAUL GREENWOOD, WESTRIDGE CAPITAL
17   MANAGEMENT, INC., WG TRADING INVESTORS, LP, WGIA, LLC, WG
18   TRADING COMPANY LP,

19                                     Defendants,

20   WESTRIDGE CAPITAL MANAGEMENT ENHANCEMENT FUNDS INC.,
21   WGI LLC, K&L INVESTMENTS, ROBIN GREENWOOD, JANET WALSH,

22                                     Relief Defendants.
 1   3M EMPLOYEE WELFARE BENEFIT ASSOCIATION TRUST I,
 2   3M EMPLOYEE WELFARE BENEFIT ASSOCIATION TRUST II,
 3   3M EMPLOYEE WELFARE BENEFIT ASSOCIATION TRUST III,
 4   MINNESOTA MINING AND MANUFACTURING EMPLOYEE
 5   RETIREMENT INCOME PLAN TRUST, BLUE CROSS AND BLUE SHIELD
 6   ASSOCIATION NATIONAL RETIREMENT TRUST, NORTH DAKOTA
 7   STATE INVESTMENT BOARD, SACRAMENTO COUNTY EMPLOYEES'
 8   RETIREMENT SYSTEM, SAN DIEGO COUNTY EMPLOYEES
 9   RETIREMENT ASSOCIATION, KAISER ALUMINUM & CHEMICAL
10   CORPORATION ASBESTOS PERSONAL INJURY TRUST, ALEXANDER
11   DAWSON FOUNDATION, ALEXANDER DAWSON, INC.,

12                                  Interested Parties-Appellants-Cross-Appellees,

13   KERN COUNTY EMPLOYEES' RETIREMENT ASSOCIATION,

14                                  Interested Party-Appellee-Cross-Appellant,

15   ACUMENT GLOBAL TECHNOLOGIES, INC., WELLS FARGO & CO.
16   MASTER PENSION TRUST, CBS MASTER TRUST, CARNEGIE MELLON
17   UNIVERSITY, H-E-B BRAND SAVINGS & RETIREMENT PLAN TRUST,
18   HOUSTON MUNICIPAL EMPLOYEES PENSION SYSTEM, OHIO
19   NORTHERN UNIVERSITY, THE TIMKEN COMPANY COLLECTIVE
20   INVESTMENT TRUST FOR RETIREMENT TRUSTS, UNIVERSITY OF
21   PITTSBURGH - OF THE COMMONWEALTH SYSTEM OF HIGHER
22   EDUCATION, VULCAN MATERIALS COMPANY,

23                           Interested Parties-Appellees-Cross-Appellees.*
24   _________________________________________________________

25   Before: KEARSE, POOLER, and LIVINGSTON, Circuit Judges.

26                  Appeal and cross-appeal from an order of the United States District Court for the

27   Southern District of New York, George B. Daniels, Judge, approving court-appointed receiver's plan

28   for pro rata, net-investment-based distribution of funds recovered from securities-fraud perpetrators

29   and associated entities, and ordering distribution.

30                  Affirmed.

     *      The Clerk of the Court is directed to further amend the official caption to
            conform with the above.

                                                       2
 1   Dan M. Berkovitz, General Counsel, Jonathan L. Marcus,
 2   Deputy General Counsel, Nancy R. Doyle, Assistant General
 3   Counsel, Commodity Futures Trading Commission,
 4   Washington, D.C., submitted briefs for Plaintiff-Appellee-
 5   Cross-Appellee.

 6   Mark D. Cahn, General Counsel, Michael A. Conley, Deputy
 7   General Counsel, Jacob H. Stillman, Solicitor, John W. Avery,
 8   Deputy Solicitor, David Lisitza, Senior Counsel, Securities and
 9   Exchange Commission, Washington, D.C., submitted a brief
10   for Plaintiff-Appellee.

11   THOMAS S. ARTHUR, Los Angeles, California (Craig A.
12   Welin, Frandzel Robins Bloom & Csato, Los Angeles,
13   California; Gary Owen Caris, Lesley Anne Hawes, McKenna
14   Long & Aldridge, Los Angeles, California; Christopher F.
15   Graham, McKenna Long & Aldridge, New York, New York,
16   on the brief), for Receiver-Appellee-Cross-Appellee.

17   RICHARD F. ZIEGLER, New York, New York (Elizabeth A.
18   Edmondson, Michael W. Ross, Jenner & Block, New York,
19   New York, for 3M Employee Welfare Benefit Association
20   Trust I, 3M Employee Welfare Benefit Association Trust II,
21   3M Employee Welfare Benefit Association Trust III,
22   Minnesota Mining and Manufacturing Employee Retirement
23   Income Plan Trust, Blue Cross and Blue Shield Association
24   National Retirement Trust, Sacramento County Employees'
25   Retirement System, and San Diego County Employees
26   Retirement Association; Richard F. Ziegler, Elizabeth A.
27   Edmondson, Michael W. Ross, New York, New York, as
28   Special Assistant Attorneys General for the State of North
29   Dakota, for North Dakota State Investment Board; Lawrence
30   Leo Ginsburg, Moses & Singer, New York, New York, for
31   Kaiser Aluminum & Chemical Corporation Asbestos Personal
32   Injury Trust; Steven F. Molo, MoloLamken, New York, New
33   York, for Alexander Dawson Foundation and Alexander
34   Dawson, Inc., on the brief), for Interested Parties-Appellants-
35   Cross-Appellees.

36   BENJAMIN G. SHATZ, Los Angeles, California (Manatt,
37   Phelps & Phillips, Los Angeles, California, on the brief), for
38   Interested Party-Appellee-Cross-Appellant.

39   KEITH W. MILLER, Perkins Coie, New York, New York
40   (Adrienne C. Baranowicz, Paul Hastings, New York, New
41   York, for Acument Global Technologies, Inc., and Wells Fargo

                        3
 1                                 & Co. Master Pension Trust; Scott Humphries, Gibbs & Bruns,
 2                                 Houston, Texas, for Carnegie Mellon University; Kristi A.
 3                                 Davidson, Buchanan Ingersoll & Rooney, New York, New
 4                                 York, Zakarij O. Thomas, Buchanan Ingersoll & Rooney,
 5                                 Pittsburgh, Pennsylvania, for University of Pittsburgh - Of the
 6                                 Commonwealth System of Higher Education; Patrick L.
 7                                 Robson, Shawn Patrick Regan, Hunton & Williams, New York,
 8                                 New York, for Vulcan Materials Company; Hamish P.M.
 9                                 Hume, Boies, Schiller & Flexner, Washington, D.C., Rosanne
10                                 C. Baxter, Boies, Schiller & Flexner, Armonk, New York, for
11                                 CBS Master Trust; Robert A. Bell, Jr., Vorys, Sater, Seymour
12                                 & Pease, Columbus, Ohio, for Ohio Northern University;
13                                 Joseph N. Froehlich, Locke Lord, New York, New York, for
14                                 Houston Municipal Employees Pension System; Steven
15                                 Paradise, Vinson & Elkins, New York, New York, for H-E-B
16                                 Brand Savings & Retirement Plan Trust; Jeffrey David Zimon,
17                                 Benesch Friedlander Coplan & Aronoff, Cleveland, Ohio, for
18                                 The Timken Company Collective Investment Trust for
19                                 Retirement Trusts, on the brief), for Interested Parties-
20                                 Appellees-Cross-Appellees.

21          KEARSE, Circuit Judge:

22                  In these two civil enforcement actions for securities fraud--brought, respectively, by

23   the Commodity Futures Trading Commission ("CFTC") and the Securities Exchange Commission

24   ("SEC") against defendants Stephen Walsh and Paul Greenwood, et al., and consolidated by this Court

25   for appeal--various entities that were defrauded by the defendants appeal from a March 21, 2011 order

26   ("Order") of the United States District Court for the Southern District of New York, George B.

27   Daniels, Judge, approving initial pro rata distributions on April 20, 2011, totaling $815,000,000

28   recovered from defendants and associated entities by receiver Robb Evans & Associates LLC ("Robb

29   Evans" or the "Receiver"), in accordance with the plan proposed by the Receiver ("Plan" or

30   "Receiver's Proposed Initial Distribution Plan"). Interested-Parties-Appellants-Cross-Appellees 3M

31   Employee Welfare Benefit Association Trusts I, II, and III, et al. (collectively, the "3M Benefits

32   Group" or "3M Group"), contend principally that the district court should have rejected the proposed

                                                      4
 1   pro rata distributions because under the Plan, fraud victims who chose allegedly safer investments fare

 2   no better than victims whose investments were riskier. Interested-Party-Appellee-Cross-Appellant

 3   Kern County Employees' Retirement Association ("KCERA") contends that the district court should

 4   have rejected the proposed Plan because it did not provide an adjustment for inflation to compensate

 5   longer-term investors. For the reasons that follow, we conclude that the district court did not abuse

 6   its discretion in approving the Receiver's Plan, and we therefore affirm the Order.

 7                                            I. BACKGROUND

 8                  The factual background, for purposes of these appeals, is undisputed. For more than

 9   13 years, beginning prior to 1996, defendants conducted their business--which offered various

10   investment vehicles for pursuing an index arbitrage strategy--as a Ponzi scheme. Defendants issued

11   fraudulent account statements to their investors, withdrew invested moneys in order to spend lavishly

12   on themselves, and funded investor withdrawals with moneys received from other investors when

13   there were no earnings. (See United States v. Greenwood, No. 09 Cr. 722 (S.D.N.Y., Transcript of

14   Guilty Plea of Paul Greenwood, July 28, 2010 ("Greenwood Plea Allocution Tr."), at 23-27).) In

15   pleading guilty to securities fraud, wire fraud, conspiracy to commit those offenses, commodities

16   fraud, and money laundering (see id. at 5-9, 31), Greenwood admitted, inter alia, as follows:

17                         Q. . . . "[W]hat is it that you cheated the investors in? . . . [W]hat is it
18                  that you didn't make return on?

19                         A. On all the money that was lost in . . . investments that were made
20                  and didn't produce the returns that we expected them to produce and in money
21                  that we took out personally for basically our own use.

22                         Q. That is, you treated these partnerships as your own personal bank
23                  account?

                                                        5
 1           A. Correct.

 2           Q. And you drew as you wished?

 3           A. Correct.

 4           Q. What is it that you reported to your investors?

 5           A. Well, we treated the money that we took out as a loan so we would-
 6   -

 7           Q. On your own books, you mean?

 8          A. On the books of--yes, yes. So we would report to the investors the
 9   same rate of return that we earned on the . . . index arbitrage trading.

10           Q. And that was simply flatly untrue?

11           A. Correct.

12          Q. That is, you did not make that money that you reported to investors
13   that you made?

14           A. That's correct.

15           Q. And none of your investors asked for the money?

16           A. When they asked for the money we would give them money back
17   so in some sense--

18           Q. So this was a Ponzi scheme, as it is loosely called?

19           A. Well, sort of, because we actually had--

20           Q. You were using other monies to make up for what you couldn't
21   give?

22           A. That's correct.

23           Q. But, of course, you never could make it up entirely?

24          A. Well, initially we thought we could and as time went on the hole
25   got bigger and bigger and at a point we couldn't.

26          Q. Well, if you were taking money out for yourselves, you could never
27   make it up, right, unless you made huge profits?

                                       6
 1                          A. That's correct.

 2                         Q. And you knew that from the beginning, . . . if you were taking it for
 3                  personal use?

 4                          ....

 5                         A. Early on after the partnership was established and the investors had
 6                  given us the money, it became apparent we couldn't give back the money we
 7                  were taking out.

 8   (Greenwood Plea Allocution Tr. 24-25.)

 9                  On February 25, 2009, the CFTC and the SEC commenced the present civil

10   enforcement actions against Greenwood, Walsh, and their related entities, alleging violations of

11   various federal securities laws, seeking disgorgement of the proceeds of the frauds and restitution for

12   the fraud victims, and obtaining a preliminary injunction enjoining any diversion of defendants' assets.

13   The court appointed Robb Evans as temporary receiver of the defendants' assets on that date and

14   continued its appointment as Receiver in an order entered in May 2009. The following descriptions

15   of the fraudulent scheme are taken largely from reports to the district court by Robb Evans in May

16   2009 ("2009 Report" or "Receiver's 2009 Report") and June 2010 ("2010 Report" or "Receiver's 2010

17   Report"), which the parties to these appeals have not disputed.

18   A. Details of the Fraud

19                  Greenwood and Walsh created several entities to offer investment vehicles to the

20   pension funds or investment arms of governmental entities and other large institutions. The

21   Greenwood and Walsh entities included defendant Westridge Capital Management, Inc.

22   ("Westridge"), a Delaware corporation; defendant WG Trading Company LP ("WGTC"), a Delaware

23   limited partnership; and defendant WG Trading Investors, LP ("WGTI"), a Delaware limited

                                                        7
 1   partnership that was itself a limited partner in WGTC. Greenwood and Walsh were the managing

 2   general partners of WGTC and WGTI.

 3                  Greenwood and Walsh represented to potential investors that Westridge, a registered

 4   investment adviser regulated by the SEC, provided various investment vehicles for pursuing an S&P

 5   500 index arbitrage strategy that they called an "Enhanced Equity Index" program, and which they

 6   described as having outperformed the S&P 500. (See Receiver's 2009 Report at 4-5.) Westridge was

 7   to hold approximately 15% of each investor's cash investment in reserve "to support a leveraged

 8   futures position" and the investor would direct the remaining 85% of its cash investment to another

 9   affiliated entity, usually either WGTC or WGTI. (Id. at 5.) By choosing the former, the investor

10   would become a limited partner in WGTC, a broker/dealer that was subject to independent audits and

11   was regulated by, inter alia, the SEC, the Financial Industry Regulatory Authority ("FINRA"), and

12   the CFTC. (See id.) "WGTC was engaged primarily in computer-directed index arbitrage trading

13   strategies seeking profit opportunities by exploring relationships among stock index futures contracts,

14   stock market indexes upon which the futures contracts were based, the stocks included in the indexes,

15   and the cost (e.g. interest expense) and benefits (e.g. dividend income) of carrying the instruments."

16   (Id. at 7.)

17                  Alternatively, the investor could direct the non-reserved 85% of its cash investment

18   to WGTI, a nonpublic entity that was not subject to either independent audits or government

19   regulation, and that issued senior promissory notes. (See 2009 Report at 5.) An investor could

20   become a WGTI noteholder either directly by purchasing those notes or indirectly by purchasing non-

21   voting shares in Westridge Capital Management Enhancement Funds, Inc., a British Virgin Islands

22   company that would purchase the WGTI promissory notes. (See id.) Prospective WGTI investors

                                                       8
 1   were told that "the only business of WGTI is to invest in WGTC" (id. at 6), and that "the proceeds of

 2   the senior promissory notes issued by WGTI would be sent to WGTC" (id.). Further, prospective

 3   investors in WGTI were told that their returns would be indexed to the returns of the limited partners

 4   of WGTC:

 5                  For purposes of determining the interest accruing and payable on the
 6                  promissory notes, the index was the performance of a hypothetical investment
 7                  equal in amounts to the principal of the promissory notes invested in the
 8                  limited partnership interest of WGTC.

 9   (Id. at 11.) Thus, WGTI was to earn money when WGTC's trading strategies were successful, and

10   investors in WGTI were told they would profit as WGTC did. Consistent with these representations

11   as to the calculation of earnings, "the returns of investments in WGTI were computed exactly the

12   same as that in WGTC." (Id.)

13                  Nonetheless, WGTI investors were also assured that, as senior promissory note holders,

14   their returns would not match those of the WGTC limited partners if WGTC's returns were negative.

15   The WGTI promissory notes, after describing the indexing process as indicated above,

16                  provided that, notwithstanding the actual performance of an investment in a
17                  limited partnership interest in the Partnership, the Index shall not be less than
18                  zero.

19   (3M Benefits Group's objection to the Receiver's motion for approval of Receiver's Proposed Initial

20   Distribution Plan ("3M Objection to Receiver's Plan"), Exhibit B (emphasis ours).) "In other words,

21   the return [that was] promised to the WGTI Noteholders would reflect any positive returns generated

22   by WGTC, but would not reflect any negative returns" (3M Group brief on appeal at 11), i.e., the

23   WGTI noteholders would not lose their investments even if WGTC lost money.

24                  Although WGTC and WGTI had been created "as two separate limited partnerships

25   and were presented to their investors as two stand-alone entities" (Receiver's 2010 Report at 1),

                                                       9
 1   "WGTC and WGTI in reality were financially inseparable" (id.). The Receiver noted, inter alia, that

 2                  #       WGTC received funds from WGTI's investors.

 3                  #       WGTC made payments to or for WGTI's investors.

 4                  #       WGTC's investors received funds from WGTI.

 5                  #       WGTC's investors made payments to WGTI.

 6   (Id. at 5.) Ironically, WGTC and WGTI "had to be operated as a single entity to support the myth that

 7   they were stand-alone entities" (id. at 1), because from January 1, 1996, onward, "neither entity could

 8   have survived without the financial support of investor funds raised by the other" (id. at 3; see, e.g.,

 9   id. at 7 ("when WGTC was short of funds, WGTI advanced the funds to WGTC"); Receiver's 2009

10   Report at 16 ("WGTI paid $200 million to a limited partner of WGTC on July 5, 2005, as the WGTC's

11   balance of funds available for immediate use at July 5, 2005 was only approximately $127 million.")).

12   The Receiver reported that WGTC and WGTI had

13                  a long history of . . . com[m]ingling funds, operating with utter disregard for
14                  corporate governance, and employing fraudulent accounting practices in an
15                  apparent attempt to conceal the true financial condition of the entities from
16                  investors, potential investors and, in the case of WGTC, its regulators.

17   (2009 Report at 2; see also 2010 Report at 8 (charting hundreds of millions of dollars that investors

18   had directed to WGTC that were in fact received by WGTI and were only later sent on to WGTC, and

19   charting hundreds of millions of dollars that WGTI paid to WGTC investors, which WGTC did not

20   repay to WGTI for many weeks).)

21                  While Greenwood and Walsh, over the life of the fraud, consistently reported to

22   investors that their investments had made gains, the investment entities did not have the earnings they

23   reported (see, e.g., Greenwood Plea Allocution Tr. 24) and were in fact undercapitalized as capital

24   accounts were debited for ordinary losses or expenses (see, e.g., 2009 Report at 8-10, 11-17). For

                                                       10
 1   example, when WGTC lost approximately $121 million from its investments in and financing of a

 2   company called Signal Apparel Company (of which Greenwood and Walsh were the directors (see

 3   id. at 19)), WGTC charged that loss against WGTI's capital account in WGTC (see 2010 Report at 2,

 4   5). When WGTC made employee "advances" to or for Greenwood and Walsh (id.), WGTC also

 5   charged those sums to WGTI's capital account, thereby reducing WGTI's investment in WGTC (see

 6   id. at 5, 9).

 7                   Between January 1, 1996, and October 31, 2003, WGTC advances to Greenwood and

 8   Walsh totaled approximately $36 million. (See 2010 Report at 5.) In addition, WGTI, from

 9   2002-2009, paid a company owned by Greenwood's wife an estimated $22 million for the

10   maintenance of the company's 286.2-acre horse farm in Brewster, New York, and its 92 hunter ponies.

11   (See Exhibit Tab 11 to 2010 Report.) In addition, Greenwood and Walsh had a WGTC employee

12   transfer money--ultimately totaling hundreds of millions of dollars--directly from WGTI to the

13   personal bank accounts of Greenwood and Walsh and to third parties to cover their personal

14   expenditures. The personal expenses funded by these transfers included payments to Walsh's ex-wife

15   totaling nearly $20 million (see 2009 Report at 36); more than $10 million for Greenwood's wife's

16   hunter-pony farm (see Exhibit Tab 11 to 2010 Report); and Greenwood's purchase, for more than $3

17   million, of a collection of 1,348 teddy bears (see 2009 Report at 26).

18                   Greenwood and Walsh eventually signed promissory notes to reflect the moneys

19   transferred from WGTI to their personal bank accounts. (See 2009 Report at 14.) At the time of the

20   Receiver's first report to the district court, the "outstanding notes receivable due from Mr. Greenwood

21   and Mr. Walsh to WGTI totaled" more than a half billion dollars. (Id.)

                                                       11
 1                   Given the entities' investment losses and the diversion of investment funds to the

 2   personal accounts of Greenwood and Walsh, defendants, in order to report to investors that there were

 3   gains, used newly invested money to meet other investors' withdrawal requests. "For example,

 4   between January 1, 1999 and February 25, 2009, WGTI had income of $70.3 million but paid interest,

 5   distributions, operating expenses, and other payments totaling to $381.5 million during that same time

 6   period. . . . [T]he cash shortfall during this period was financed by either WGTC's or WGTI's current

 7   investors." (Receiver's 2009 Report at 2.) "The shortfall of net earnings allocations to [WGTC and

 8   WGTI] investors" totaled "approximately $651 million" as of 2008, and "could not have been paid

 9   without raising additional capital from investors." (Receiver's 2010 Report at 19-20.)

10                   When the fraudulent scheme unraveled, defrauded investors asserted claims totaling

11   some $1.5 billion. (See 2009 Report at 2.) By the time of the proposed initial distribution, the claims

12   total--reflecting investors' investments minus their withdrawals--had been reduced to approximately

13   $959 million.

14   B. The Receiver's Plan for Initial Distributions

15                   The district court approved a claims administration procedure in which (a) investors

16   and other interested persons would be invited to submit to the court proposals for the distribution of

17   money collected by the Receiver from defendants and their associated entities; (b) the CFTC and the

18   SEC would then be allowed to express their views as to an appropriate distribution plan; and (c) the

19   Receiver would then submit its distribution plan. The Receiver gave investors and other interested

20   persons notice of this procedure. In October 2010, distribution proposals were received from

21   numerous defrauded investors; only two investor proposals are at issue on these appeals.

                                                        12
 1                    The 3M Benefits Group, comprising the limited partners in WGTC who were not

 2   associated with Greenwood and Walsh, proposed that since the 3M Group members' capital accounts,

 3   as shown in WGTC records when the Receiver was appointed, totaled some $807 million, it would

 4   be fair and reasonable for the Receiver to distribute that sum to the 3M Group (see 3M Group

 5   Objection to Receiver's Plan at 23 (describing 3M Group's October 2010 proposal))--leaving only

 6   some $8 million for the WGTI investors. Alternatively, the 3M Group argued that the distributions

 7   should not be pro rata and that larger shares should be distributed to the 3M Group than to investors

 8   in the unregulated WGTI, in order to reward the 3M Group for its prudence in investing in a regulated

 9   entity (referred to as the requested "prudence premium") and in order not to encourage those who

10   invested in unregulated entities by compensating them the same as investors who sought safer

11   investments (described as avoiding the "moral hazard" of causing persons who deliberately minimize

12   their risks to subsidize persons who deliberately take risks). (Id. at 23-25.)

13                   KCERA proposed that the Receiver use a "constant dollar" approach, which would

14   distribute larger shares to earlier investors than to more recent investors in order to account for

15   inflation.

16                   In December 2010, the CFTC and the SEC jointly submitted a recommendation to the

17   district court, urging it to adopt--at least for the initial distribution of $815,000,000--"a net investment

18   pro rata distribution plan." (U.S. Commodity Futures Trading Commission's and U.S. Securities and

19   Exchange Commission's Joint Notice of Recommendation for a Distribution Plan ("CFTC/SEC

20   Recommendation" or "Joint Recommendation") at 10.) After quoting some of Greenwood's plea

21   allocution admissions (see CFTC/SEC Recommendation at 16-17), the Joint Recommendation stated

22   that

                                                         13
 1                  [a] qualitative analysis of the totality of the circumstances shows that
 2                  Greenwood's and Walsh's fraud had the elements of a Ponzi scheme. Thus, the
 3                  use of a net investment, pro-rata, distribution plan is "especially appropriate"
 4                  under such circumstances. See [SEC v. ]Credit Bancorp[, Ltd.], 290 F.3d [80,]
 5                  89 [(2d Cir. 2002)] (affirming use of pro rata distribution plan where "earlier
 6                  investors' returns are generated by the influx of fresh capital from unwitting
 7                  newcomers rather than through legitimate investment activity.").

 8                         ....

 9                          . . . . A net investment approach looks solely at dollars in and dollars
10                  out and makes distribution to the victims based on their net contributions. It
11                  also demands a return of funds from those investors who received more funds
12                  than they contributed, i.e., Ponzi winners, either by offsets or clawback actions
13                  against fully redeemed investors.

14   (CFTC/SEC Recommendation at 17; see also id. at 17 n.9. (noting that the Receiver had initiated

15   clawback actions against alleged Ponzi winners).)

16                  The CFTC and the SEC stated that their own investigations had confirmed the accuracy

17   of the Receiver's 2009 and 2010 Reports to the court analyzing the evidence as to defendants' fraud.

18   (See CFTC/SEC Recommendation at 6.) Noting that the fraud was "massive [in] scope" (id. at 7) and

19   involved commingling of the accounts and assets of WGTC and WGTI that could not be reliably

20   unraveled (see id. at 17 ("the Defendants' records are unreliable to substantiate customer claims for

21   profits and inadequate to identify the owners of contracts with losses due to the massive fraud,

22   improper commingling, and intentionally deceptive accounting employed by Walsh and

23   Greenwood")), the agencies opposed giving distributional preferences to investors in WGTC over

24   investors in WGTI:

25                          The evidence in the record shows that substantial commingling
26                  occurred . . . and that the funds held in the various entities were transferred,
27                  dissipated, diverted, and/or misappropriated and then other investor funds were
28                  used to cover up the fraud. These commingled investor funds were dispersed
29                  without regard for corporate formalities or distinctions. This scheme resulted
30                  in clients not having their funds held or invested where Defendants represented

                                                       14
 1                  they would be held or invested. In fact, the government's and Receiver's
 2                  investigations uncovered that even as the Defendants represented to a client
 3                  that his or her particular funds would be deposited in WGTI's account, it was
 4                  actually deposited in WGTC's accounts and vice-versa. Further, it is clear that
 5                  transactions were run through WGTI's accounts that were not transactions on
 6                  behalf of WGTI investors and similarly transactions were run through WGTC's
 7                  accounts that are not transactions on behalf of WGTC investors. Defendants
 8                  used both WGTI's accounts and WGTC's accounts as if they were
 9                  interchangeable. This commingling of funds was part and parcel of the
10                  mechanism by which the Ponzi scheme to misappropriate clients' funds
11                  worked. This evidence of substantial commingling militates against any claim
12                  that the assets of any entity, including WGTC or WGTI, are wholly or
13                  substantially intact or that any asset is exclusively an asset of either company.

14   (CFTC/SEC Recommendation at 8-9 (emphases added).)

15                  The CFTC and the SEC also opposed any suggestion that the Receiver's initial

16   distribution increase long-term investors' shares to account for inflation:

17                          The civil agencies believe net investment--dollar in, dollar out--pro rata
18                  distribution plan is the best and most fair approach under the circumstances of
19                  this Ponzi-scheme case because it yields a substantial recovery for all
20                  investors. Some long-term investors have advocated that rather than
21                  employing a net investment model, the Court should instead implement a
22                  constant dollar approach--adding an inflation adjuster--when calculating an
23                  investor's distribution. Although the use of a constant dollar approach may be
24                  appropriate in certain instances, the facts of this matter do not, at the outset,
25                  warrant its use here. Currently, the Receiver has marshaled sufficient assets
26                  so that under a pro rata distribution method, it will distribute to each investor
27                  approximately 89% of their net contributions or investment. The CFTC and
28                  SEC believe that these funds should be distributed without an inflation
29                  adjustment.

30                          The SEC and CFTC hope, however, that the Receiver will be able to
31                  obtain additional funds through the liquidation of various assets owned by the
32                  Defendants and Relief Defendants, as well as through several clawback actions
33                  the Receiver has filed. In the event that the Receiver acquires funds to
34                  distribute in excess of 100% of the net contributions of investors, the Court
35                  may wish to consider ordering a hybrid approach where future distributions in
36                  excess of 100% of the net contributions be [sic] calculated on a pro rata basis
37                  and adjusted to give effect to inflation.

38   (CFTC/SEC Recommendation at 19-20 (footnote omitted).)

                                                       15
 1                  In January 2011, the Receiver submitted its Plan to the district court, moving for

 2   approval of an initial pro rata distribution of $815,000,000 to current WGTC and WGTI investors

 3   based on each investor's net investment at the time the fraud was discovered (the "Motion"). These

 4   distributions were not to include any interest, earnings, or other compensation based on the time value

 5   of money. In this initial distribution, each investor would receive approximately 85% of its net

 6   investment.

 7                  Consistent with the Joint Recommendation submitted earlier, the CFTC and the SEC,

 8   which noted their "duty in these civil enforcement actions to proceed in the best interests of the public

 9   and the defrauded investors" and "to ensure a fair and equitable return of funds to all investors" (U.S.

10   Commodity Futures Trading Commission's and U.S. Securities and Exchange Commission's Brief in

11   Support of Receiver's Proposed Initial Distribution Plan ("CFTC/SEC Endorsement of Receiver's

12   Plan" or "CFTC/SEC Endorsement") at 3), supported the Receiver's proposal:

13                  As set forth in the SEC's and CFTC's Joint Notice of Recommendation for a
14                  Distribution Plan, the agencies believe that the most fair and equitable method
15                  of distribution of the assets held by the Receiver is a net investment pro rata
16                  distribution plan.

17   (Id. at 2 (emphasis added).) Stating that the Receiver's proposed distribution "squarely meets" the

18   agencies' goals of distributions "that will most closely afford complete relief" and would further "the

19   salutary purposes of the Commodity Exchange Act and the Federal securities laws" (id.), the

20   CFTC/SEC Endorsement stated:

21                            The Receiver's Motion sets forth detailed findings, in pertinent part,
22                  that (i) there was significant and extensive commingling of funds between . . .
23                  []WGTC[] and . . . []WGTI[], entities under the control of defendants Paul
24                  Greenwood and Stephen Walsh and through which the various investors
25                  invested funds, and that neither company could have continued to operate
26                  without the other; (ii) the investors of WGTC and WGTI were similarly
27                  situated with respect to their relationship with Greenwood and Walsh; and (iii)
28                  that WGTC and WGTI were operated as a ponzi scheme.

                                                        16
 1   (Id.) While reiterating the view that the court might wish to consider having a subsequent distribution

 2   make some adjustment for inflation in the event that the total funds recovered by the Receiver reached

 3   a level exceeding the defrauded investors' total net contributions (see id. at 3 & n.1), the CFTC/SEC

4    Endorsement concluded that the Receiver's proposal for the initial pro rata distribution without any

 5   adjustment for inflation was "[t]he fairest and most reasonable approach" (id. at 3).

 6   C. The Decision of the District Court

 7                  In March 2011, the district court held a hearing at which the Receiver, the SEC and

8    CFTC, and persons interested in the proposed distributions orally presented their views. (See Hearing

9    Transcript, March 16, 2011 ("Hearing Tr.").) The 3M Benefits Group pursued its contention that

10   persons who invested in regulated entities were entitled to a prudence premium above any pro rata

11   amounts to be distributed to persons who invested in entities that were unaudited and unregulated.

12   (See, e.g., id. at 41-43, 53-54.) The 3M Group contended that investors in WGTC were not situated

13   similarly to investors in WGTI because WGTC was regulated and WGTI was not; that WGTC had

14   been managed largely as Greenwood and Walsh had promised; that the vast majority of the investor

15   funds pilfered and misappropriated by Greenwood and Walsh had been taken from WGTI; and that

16   when the receivership began, the Receiver found much more money at WGTC than at WGTI. (See

17   id. at 39, 37.) The 3M Group argued that "[i]f the WGTI noteholders had not chosen th[e] indirect

18   manner of investing with Walsh and Greenwood, but had insisted on investing in the audited,

19   regulated entity, this fraud could not have occurred in the way it did" (id. at 37-38), and that it was

20   the WGTI investors' "conscious choice . . . to go and put their money at greater risk" that "permitted

21   Walsh and Greenwood to steal their money" (id. at 67). Despite stating that "of course we were

                                                       17
 1   defrauded" (id. at 40), counsel for the 3M Group argued "that the looting here did not occur

 2   principally out of WGTC" (id. at 40-41), that "the looting occurred in the unregulated, [un]audited

 3   entity" (id. at 116), and that Greenwood and Walsh "didn't really steal our money" (id. at 68 (emphasis

 4   added)). Counsel stated that when the Receiver was appointed, WGTC records revealed a total of

 5   $807 million in the 3M Group's accounts. (See id. at 56.)

 6                   The 3M Group argued that it was only because WGTC was a regulated and audited

 7   entity "that there was any money to be distributed" to investors. (Hearing Tr. 37.) The district court,

 8   however, pointed out that

 9                   regardless of what the investment vehicle was, . . . . [e]veryone was
10                   defrauded. . . . [B]oth [groups of investors] lost money because you were
11                   defrauded by the same individual who stole your money, and neither one of
12                   you could find out for a decade. . . . Your funds were not segregated in a way
13                   that I can examine this record and determine that your funds were untouched
14                   and the other people's fungible dollars were stolen.

15   (Id. at 38-40.) The 3M Group persisted that it would be "unfair and inequitable [where] people . . .

16   took greater risk and consciously chose to avoid and isolate themselves and distanced themselves

17   from the outfit that actually really did legitimate things, . . . to have them share and share alike" with

18   those who sought to avoid risk. (Id. at 67.)

19                   When pressed for specificity as to the amount of its desired premium, the 3M Group

20   suggested that it should receive one-third more than the amount proposed in the Receiver's Plan, both

21   "to vindicate the public policy in favor of regulation and independent auditing" (Hearing Tr. 60) and

22   to avoid the "moral hazard" of "telling the world of investing fiduciaries that it doesn't matter if they

23   explicitly go out of their way to go offshore and put their money in an unregulated entity" (id. at 61).

24   The proposed one-third premium would have given the 3M Group approximately $75 million more

25   in the initial distribution than the $225 million it was to receive under the Receiver's Plan (see id.

                                                        18
 1   at 60); the one-third figure was randomly chosen, not tied to any identifiable basis (see id. at 60-61).

 2   Alternatively, on the hypothesis that only "28 percent" of the WGTI investors' money "actually ended

3    up being managed in the legitimate side of Walsh and Greenwood's business, WGTC" (id. at 61-62),

4    the 3M Group proposed that only 28% of the funds collected by the Receiver should be distributed

5    to the WGTI investors, with 72% being distributed to the WGTC investors. This alternative would

6    have given the 3M Group some $145 million more than it was to receive under the Receiver's Plan.

 7   (See id. at 62.) As its least preferred alternative, the 3M Group proposed that, "[t]o vindicate the

 8   importance in the capital markets of regulation and auditing," the 3M Group should be granted a

 9   premium of 10% of the total funds recovered by the Receiver, i.e., $81.5 million, "on top of whatever

10   the pro rata would be." (Id. at 68-69.) The 3M Group conceded that the 10% figure was "equally

11   random to the 33 percent increment." (Id. at 69.) Although counsel for the 3M Group stated that

12   "[w]e are not seeking a penny of earnings" (id. at 63), he acknowledged that he did not mean that "the

13   ceiling should be the amount [the 3M Group's members] contributed" (id. at 66).

14                   Also at the hearing, KCERA pressed its contention that the Receiver's initial

15   distribution should use a constant-dollar approach in order to account for inflation, weighting the

16   distribution in favor of those who had longer-term investments than others. KCERA's counsel

17   opposed the prudence premium requested by the 3M Group, stating, inter alia, "we don't as a factual

18   matter know whose money was stolen when, and that is a part of the whole consideration here."

19   (Hearing Tr. 94; see id. at 95 ("As to whose [money] was taken when and how, nobody really

20   knows.").)

21                   However, counsel argued, "[t]hat money was stolen all along. And people who were

22   in this investment at an earlier stage, there was more opportunity to steal their funds . . . ." (Id. at 95.)

                                                          19
 1   Reasoning that the real value of a dollar invested long ago is greater than the value of a dollar invested

 2   more recently, KCERA argued that the distribution must include "an inflation adjustment" in order

 3   not to "treat the long-term investors dissimilarly from the short-term investors because they have been

 4   in longer." (Id. at 97.)

 5                   Most of the Greenwood and Walsh victims opposed both KCERA's and the 3M

 6   Group's distribution proposals. (See, e.g., Hearing Tr. 99, 132.) Counsel for Carnegie Mellon

 7   University ("Carnegie Mellon")--an indirect WGTI noteholder--"speak[ing] also on behalf of the other

8    16 investors" that favored the Receiver's Plan (id. at 99), objected to KCERA's inflation-adjustment

9    proposal on the ground that such an adjustment would, before other victims had recovered their net

10   investments, result in a distribution to KCERA of more money than it had invested (see id. at 105-06).

11   As to the 3M Group's prudence premium proposal, counsel disputed the supposition that the WGTI

12   noteholders had sought to distance themselves from regulation, pointing out, inter alia, that the

13   noteholders had "invested in a fund that was advised by Westridge Capital Management, which is a

14   registered investment adviser under the Investment Advisers Act of 1940 . . . . and is in fact regulated

15   by the Securities and Exchange Commission." (Id. at 100-01.) Carnegie Mellon argued in favor of

16   the Receiver's proposed pro rata distribution on the ground that the WGTI and WGTC assets had been

17   commingled and the fraud victims were similarly situated. (See id. at 103.)

18                   Similarly, counsel for the University of Pittsburgh--a direct WGTI noteholder--argued

19   that

20                           [t]he investors are, in fact, similarly situated with respect to this fraud,
21                   and the distinctions that Mr. Z[ie]gler [counsel for the 3M Group] urges upon
22                   the Court, quite frankly, are cosmetic for purposes of this proceeding.

23                          All of the investors were defrauded in the same way, and Mr.
24                   Z[ie]gler's group ignores all of the connections among the Westridge
25                   defendants and ignores how they were intertwined and how they operated.

                                                         20
 1                          All of the investors, including all of the clients that Mr. Z[ie]gler
 2                  represents and my client, had investment management agreements with
 3                  Westridge Capital Management. They were all invested in the same enhanced
 4                  equity index strategy. They were all sold by the same folks. They were all
 5                  operated by the same folks. The entities had the same offices and the same
 6                  personnel.

 7                         The[ 3M Group] seem[s] to somehow assume the integrity of the
 8                  organizational boundaries between Westridge Trading Co. and Westridge
 9                  Trading Investors. In fact, we know that's not true.

10                         They asked the Court to give weight to the account statements that we
11                  know are demonstrably false, and they ignore the unified scheme to defraud
12                  that was perpetrated on all of the investors in this room.

13   (Hearing Tr. 109; see id. at 110, 108-09 (stating that the 3M Group's arguments that only investors

14   who were not members of the 3M Group lost money "are based on investor statements that we know

15   are fictitious, that in the words of the SEC and the CFTC are demonstrably false").)

16                  After hearing all of the arguments, the district court rejected all of the proposals that

17   differed from that of the Receiver. (See Hearing Tr. 130-33.) Referring to "the issues that we've

18   discussed with regard to both the constant dollar adjustment" advocated by KCERA "and the prudence

19   premium issues" advocated by the 3M Benefits Group, the district court stated that neither adjustment

20   would result in "a fairer distribution for either the most victims or a large number of victims." (Id.

21   at 132.)

22                  With regard to the position of the 3M Group, the court found that the record was

23   sufficient "to demonstrate that there was commingling of funds" (id. at 130) and that the investors in

24   WGTC and WGTI

25                  were similarly situated in relationship to the fraud, in relationship to the losses,
26                  in relationship to the fraudsters, and in relationship to the nature of their
27                  investments, so that a net pro rata distribution is equitable. It is a fair and
28                  reasonable and an equitable way to make this initial distribution to investors.

                                                        21
 1                          There clearly was a uniform Ponzi scheme here. . . . From the
 2                  fraudster's point of view, no distinction was made in terms of who would be
 3                  the victims, where the money would come from. . . . [W]hat defines the
 4                  scheme[ is] not the nature of the investments, not the nature of the victims, and
 5                  not the nature of any particular relationship between Westridge or WG Trading
 6                  that predominates or defines this activity.

 7   (Id. at 130-31 (emphases added); see also id. at 38 ("The money was commingled. . . . There may

 8   have been circumstances where it was easier to account for in certain places than other places. But

 9   there's nothing about . . . the regulations that oversaw" WGTC "that was particularly beneficial"; it

10   took "a decade to uncover this fraud.").)

11                  Rejecting the KCERA request for an inflation adjustment, the district court indicated

12   that it viewed such an adjustment as skewing the distribution to favor "a more limited number of

13   investors." (Hearing Tr. 131-32.) The court stated that

14                  it may be on the one hand less equitable to those people who had money in the
15                  fund earlier [if] they don't get credit for those dollars, adjustment for those
16                  dollars. But it is similarly, and therefore balances out, inequitable for those
17                  people who . . . are sharing the burden of the entire amount that has been stolen
18                  . . . despite the fact that for those people who recently came in they were in the
19                  fund at a time when probably the smallest percentage of money was taken if
20                  you look at it over the years.

21   (Id. at 96.)

22                  The district court noted in addition that

23                          [i]t is also important to me that both the SEC and the CFTC and the
24                  majority of investors who were trying to see the greatest return on their
25                  principal have in the majority backed the receiver's plan of distribution, not
26                  because they feel that it is a perfect plan of distribution, but they feel as a
27                  choice between this method of distribution and the other methods of
28                  distribution that have been suggested that it is the preferable choice for all to
29                  maximize the return for the greatest number of investors in a fair and
30                  reasonable and equitable manner.

                                                       22
1    (Hearing Tr. 132 (emphasis added).) The court concluded that the Receiver's proposed pro rata initial

2    distribution "most closely mirrors what would be an equal and equitable distribution of the principal

3    contributions of each of the investors." (Id. at 133.)

4                   As the March 16 hearing drew to a close, the court stated that it would enter an order

5    within a few days, approving the Receiver's Plan and ordering that the initial distributions be made

 6   on the 30th day after the date of the order. (See, e.g., id. at 136.) The court stated that it would not

 7   grant a stay of the distribution, and that if any interested party wanted a stay it would need to make

 8   a motion in the court of appeals. (See id. at 134, 137-40, 143.)

 9                  The district court's Order approving the Receiver's Plan and ordering that the initial

10   distributions be made on April 20, 2011, was entered on March 21, 2011. On April 18, the 3M Group

11   filed its notice of appeal and moved in this Court for a "Partial Conditional Stay." The motion was

12   denied.

13                                             II. DISCUSSION

14                  In its appeal, the 3M Group pursues its contention that the district court should have

15   required the Receiver to include in the initial distribution to WGTC investors a prudence premium

16   because they invested in a regulated entity, whereas other investors chose to invest in the allegedly

17   riskier, unregulated entity, WGTI. On the cross-appeal, KCERA pursues its contention that the

18   Receiver's initial distribution should have been calculated in constant dollars in order to account for

19   inflation. For the reasons that follow, we reject both contentions.

                                                       23
 1                  A district court assessing a receiver's plan for compensation of victims of a fraudulent

 2   scheme has "equitable authority . . . to treat all the fraud victims alike (in proportion to their

 3   investments) and order a pro rata distribution." SEC v. Credit Bancorp, Ltd., 290 F.3d 80, 88 (2d Cir.

 4   2002) ("Credit Bancorp"). "[T]he use of a pro rata distribution has been deemed especially

 5   appropriate for fraud victims of a 'Ponzi scheme,'" id. at 89, "where . . . the funds of the defrauded

 6   victims were commingled and where victims were similarly situated with respect to their relationship

 7   to the defrauders," id. at 88-89.

 8                  "Fraud is endlessly resourceful and the unraveling of weaved-up sins may sometimes

 9   require the grant of a measure of latitude" to a trustee charged with distributing defrauders' assets to

10   fraud victims. In re Bernard L. Madoff Investment Securities LLC, 654 F.3d 229, 238 n.7 (2d Cir.

11   2011) ("In re Madoff"). In any event, a trustee or receiver devising a distribution plan is not required

12   to apportion assets in conformity with misrepresentations and arbitrary allocations that were made by

13   the defrauder, "otherwise, the whim of the defrauder would . . . control[] the process that is supposed

14   to unwind the fraud." Id. at 241.

15                  The decision of a district court as to "the choice of distribution plan for [a] receivership

16   estate" is reviewed "for abuse of discretion." Credit Bancorp, 290 F.3d at 87. "A district court has

17   'abuse[d] its discretion if it based its ruling on an erroneous view of the law or on a clearly erroneous

18   assessment of the evidence,' Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405 . . . (1990), or

19   rendered a decision that 'cannot be located within the range of permissible decisions,' Zervos v.

20   Verizon N.Y., Inc., 252 F.3d 163, 169 (2d Cir.2001)." Sims v. Blot, 534 F.3d 117, 132 (2d Cir. 2008).

21   In considering whether there has been an abuse of discretion, we review "de novo . . . [the] district

22   court['s] rulings of law," In re Grand Jury Subpoena Issued June 18, 2009, 593 F.3d 155, 157 (2d Cir.

                                                        24
 1   2010) (internal quotation marks omitted), and we review factual findings for clear error, see, e.g.,

2    Cooter & Gell, 496 U.S. at 401 ("[w]hen an appellate court reviews a district court's factual findings,

3    the abuse-of-discretion and clearly erroneous standards are indistinguishable").

4    A. The 3M Group's Appeal

5                   The 3M Benefits Group contends that the district court committed legal error by

 6   interpreting the "similarly situated" standard for equitable distributions "as requiring merely that all

7    claimants were defrauded" (3M Group brief on appeal at 29 (emphasis added)), i.e., by ruling that "the

8    only relevant feature of the relationship between investor and defrauder is that the investor was

9    defrauded" (id. at 23). The 3M Group argues that

10                  the District Court did not even address the [3M Group's] argument that moral
11                  hazard would result from allowing investors who purposely chose to isolate
12                  their investment from regulation and auditing to recover the identical degree
13                  as investors who chose the protections of regulation and auditing. To the
14                  extent that the District Court considered the public interest at all, it defined that
15                  interest overly narrowly to include solely the equitable concern for maximizing
16                  overall return to most investors, to the exclusion of any other public interests
17                  or policies. In doing so, the District Court failed to balance all the relevant
18                  equitable considerations as is required to reach a fair and reasonable plan.

19   (Id. at 24-25 (emphases added).) The 3M Group also contends that the court's factual finding that the

20   WGTC investors and the WGTI investors were similarly situated was clearly erroneous. (See id.

21   at 53-59.) None of these contentions has merit.

22                  First, the record does not support the 3M Group's characterization of the district court

23   as adopting a principle that all investors are similarly situated "merely" when all have been defrauded.

24   Rather, the court stated that victims may properly be considered similarly situated for purposes of a

25   pro rata distribution plan when they "were similarly situated in relationship to the fraud, in

                                                        25
 1   relationship to the losses, in relationship to the fraudsters, and in relationship to the nature of their

 2   investments," in what "clearly was a uniform Ponzi scheme." (Hearing Tr. 130-31.) This ruling was

 3   entirely consistent with the principles enunciated in Credit Bancorp, see 290 F.3d at 88-89.

 4                  Second, we see no indication that the district court either ignored the 3M Group's

 5   argument that investors in an unregulated entity deserve less compensation than investors in a

 6   regulated entity or considered government regulation in general to be irrelevant. In delivering its

 7   decision, the court expressly referred to the discussion of the prudence premium issues during the

 8   hearing (see Hearing Tr. 132), and as indicated in the colloquy quoted in Part I.C. above, the court

 9   expressed the view that the fact that an entity is regulated does not provide assurance that money

10   invested in it will not be stolen (see, e.g., id. at 37-39, 43-44, 66). That view of the regulation to

11   which WGTC was subject as a broker/dealer, relied on by the 3M Group, is supported by the view

12   of the SEC--one of the regulators--that "[b]roker-dealer regulation is designed to protect brokerage

13   customers, not broker-dealers' owners" (SEC brief on appeal at 10; see id. (the 3M Group members'

14   "limited partnership interests in WGTC . . . made them owners of a broker-dealer" and as such they

15   "do not have a superiority of interest based on protection afforded under the securities laws to

16   customers of registered broker-dealers" (emphases in original))). Thus, although the 3M Group

17   characterizes its members as having prudently "chose[n] the protections of regulation" (3M Group

18   brief on appeal at 24), they chose protections that were designed not for their benefit but for the

19   benefit of others. We see no error in the district court's determination that the mere choices of

20   different investment vehicles did not mean that the two groups of defrauded investors in this case were

21   meaningfully dissimilar, given, inter alia, that both the WGTI and WGTC investors "lost money

22   because [they] were defrauded by the same individual who stole [their] money," and no one, whether

                                                        26
 1   they had invested in the regulated or the unregulated entity, "could find out for a decade" (Hearing

 2   Tr. 39).

 3                  We are not persuaded to reach the contrary conclusion by SEC v. Enterprise Trust Co.,

 4   559 F.3d 649 (7th Cir. 2009) ("Enterprise Trust"), on which the 3M Group relies for the proposition

 5   that victims of fraud should be awarded different percentages of their losses "'on the basis of the

 6   nature of the risk explicitly assumed by the client'" (3M Group brief on appeal at 36 (quoting SEC v.

 7   Enterprise Trust Co., No. 08-cv-1260, 2008 WL 4534154, at *2-3 (N.D. Ill. Oct. 7, 2008) (emphasis

 8   ours))). The 3M Group's reliance on Enterprise Trust is misplaced for several reasons.

9                   To begin with, the Seventh Circuit in Enterprise Trust did not purport to state

10   overarching legal principles as to circumstances in which a pro rata distribution plan would not be

11   within the proper bounds of discretion. Rather, it simply ruled that the district court in that case had

12   not abused its discretion in approving the layered, non-pro rata, distribution plan presented to it. See

13   559 F.3d at 652.

14                  Further, the factual circumstances of Enterprise Trust were quite different from those

15   here. The fraud victims in that case included not only investors who had opened "managed accounts"

16   for which Enterprise Trust was supposed to purchase securities, but also "customers [who] used

17   Enterprise only for custodial services (that is, to hold securities that the customers had purchased)."

18   559 F.3d at 650 (emphases added). Plainly, those two groups were not similarly situated, as the

19   custodial customers did not enter into any agreement that entailed a market or trading risk. Thus, the

20   Seventh Circuit noted that

21                          [t]he receiver had three principal reasons to give a preference to the
22                  custodial investors: first, they did not authorize Enterprise to change or pledge
23                  their assets in any way; second, they were in the dark about the fact that
24                  Enterprise had used their assets as collateral (while the investors in managed

                                                       27
 1                  accounts knew, or could have learned from reading the statements Enterprise
 2                  sent them, that risky investments had been made in their accounts); third, if
 3                  [Enterprise Trust's principal manager's] strategy had succeeded, the investors
 4                  in managed accounts (and [the manager] himself) would have reaped [all of]
 5                  the gains. Because they had been subjected to involuntary and uncompensated
 6                  risk, the receiver concluded, the custodial investors deserved a larger cut of the
 7                  remaining pie . . . .

 8   559 F.3d at 652.

 9                  None of the Enterprise Trust rationales for a layered distribution is applicable to the

10   present case. As the district court noted here, the members of the 3M Group did not have custodial

11   accounts. (See Hearing Tr. 45.) Rather, they bought limited partnerships in WGTC precisely for the

12   purpose of achieving market gains through WGTC's index arbitrage strategy. The investors in WGTI

13   likewise, though taking the different route of directly or indirectly purchasing senior notes issued by

14   WGTI, sought market gains through the index arbitrage strategy of WGTC. And each group of

15   investors was to profit if the WGTC strategy was successful.

16                  The 3M Group also argues that, apart from the custodial accounts, the Enterprise Trust

17   court approved disparate distributions between investors in the managed accounts. (See 3M Group

18   brief on appeal at 36-37.) However, that disparity was based on the facts that some investors had

19   imposed restrictions on how their accounts were to be managed, whereas others had given Enterprise

20   Trust "carte blanche." 559 F.3d at 652. That difference has no analog here. The record does not

21   indicate that any of WGTC's limited partners--whether WGTI or members of the 3M Group--placed

22   any constraints on WGTC's pursuit of the index arbitrage strategy.

23                  Further, the manner in which defendants operated WGTC and WGTI--consistent with

24   the market-gains goal of both groups of investors--was to show the investors in each group equivalent

25   returns on their respective investments. Thus, the "investment documents" given to WGTI investors

                                                       28
1    stated that "the interest payable" on the promissory notes would be calculated on the hypothesis that

2    their principal had purchased "a limited partner interest of WGTC." (Receiver's 2009 Report at 6.)

3    And in fact thereafter, "the returns o[n] investments in WGTI" and the returns of investments in

 4   WGTC "were computed exactly the same." (Id. at 11.)

 5                  Thus, we also find inapt the 3M Group's citation of the principle that "'[e]quality

 6   among creditors who have lawfully bargained for different treatment is not equity but its opposite'"

7    (3M Group brief on appeal at 34 (quoting Chemical Bank New York Trust Co. v. Kheel, 369 F.2d

 8   845, 848 (2d Cir. 1966) (Friendly, J., concurring) (emphasis ours))). Counsel for the 3M Group,

 9   disclaiming any notion that the WGTC investors had contracted for different market risk, stated that

10   its members had sought, by investment in a regulated entity, to avoid the risks of mismanagement and

11   fraud. But the decision to seek gains through investing in a regulated entity was not tantamount to

12   a bargain for different "treatment." Both groups of investors sought the same treatment: receipt of

13   gains from the WGTC index arbitrage strategy.

14                  Moreover, the premise of the 3M Group's moral hazard argument is that the WGTI

15   investors "purposely chose to isolate their investment from regulation" (3M Group brief on appeal

16   at 24; see also id. at 41, 43; Hearing Tr. 67 ("consciously chose to avoid and isolate themselves and

17   distanced themselves from the outfit that actually really did legitimate things" (emphasis added))).

18   The record belies the accuracy of this premise. First, both WGTC and WGTI had been marketed as

19   being under the umbrella of Westridge, which was itself a regulated entity. The WGTI investors, like

20   the WGTC investors, committed 15% of their investments to Westridge. Second, Greenwood and

21   Walsh

22                  promoted the structure of the Westridge Group with Westridge as a registered
23                  investment advisor, regulated by the SEC and with WG Trading as a

                                                      29
 1                  broker/dealer regulated by the SEC, FINRA, CFTC, NFA, DOL, which was
 2                  subject to independent annual audits.

 3   (2009 Report at 5 (attaching as Exhibit Tab 2 "Page one from the Westridge Power Point

 4   presentation").) The profits sought by the WGTI investors were, explicitly, to be generated by the

 5   index arbitrage strategy employed by WGTC, the same regulated entity in which the 3M Group

 6   became limited partners seeking profits from WGTC's use of that strategy. And thereafter, every

 7   statement of account sent by defendants, "whether or not the investment was a limited partnership

 8   interest with WGTC, a direct note placement with WGTI, or an indirect note placement through stock

 9   ownership in one of the two BVI companies," bore the following heading: "Scheduled below is an

10   analysis of the changes in your capital account in WG Trading Company LP." (2009 Report at 6-7

11   (bolding in original statement).) Finally, at least one set of investment documents in the record shows

12   that, far from distancing itself from WGTC, a WGTI investor not only received a WGTI promissory

13   note but also entered into a letter agreement with Greenwood, Walsh, Westridge, WGTI, and WGTC

14   containing, inter alia, representations, agreements, and covenants by WGTC and signed by, inter alia,

15   WGTC (see, e.g., Attachment 4 to Declaration of Patricia Gomersall, a CFTC Senior Futures Trading

16   Investigator, dated February 27, 2009). Given all of the above facts, we see no error in the district

17   court's refusal to credit the 3M Group's characterizations of the WGTI investors as attempting to

18   isolate themselves from WGTC.

19                  Nor was the district court required to accept the 3M Group's argument that it should

20   receive a premium on the basis that the Receiver found much more money at WGTC than at WGTI

21   (see, e.g., Hearing Tr. 37). The Receiver observed that WGTC and WGTI had "a long history" (2009

22   Report at 2; see also Greenwood Plea Allocution Tr. 24-27) of not only commingling funds, but also

23   "employing fraudulent accounting practices in an apparent attempt to conceal the true financial

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 1   condition of the entities from," among others, their investors (2009 Report at 2). Thus, WGTC

 2   received money from WGTI's investors; WGTI received money from WGTC's investors; WGTC

 3   made payments to or for WGTI's investors; WGTI made payments to WGTC's investors. (See

 4   Receiver's 2010 Report at 5 & Exhibit Tabs 1, 1A.) At the behest of WGTI, WGTC made employee

 5   advances to Greenwood and Walsh and charged WGTI's capital account. When WGTC lost $121

 6   million by financing and investing in Signal Apparel Company, WGTC charged those losses against

 7   the capital account of WGTI. (See 2010 Report at 2, 5.) And "when WGTC was short of funds,

 8   WGTI advanced the funds to WGTC" (id. at 7); "neither entity could have survived without the

 9   financial support of investor funds raised by the other" (id. at 3). "WGTC allocated actual yearly

10   earnings to its limited partners based on an arbitrary earnings rate and then allocated the remaining

11   income or loss to WGTI." (2009 Report at 2 (emphasis added).) Given the long history of

12   commingling, defendants' operation of WGTC and WGTI as if they were a single entity, and

13   defendants' employment of fraudulent accounting practices, the record supported the view of the

14   CFTC and the SEC that the assets of WGTC and WGTI could not be reliably unraveled. Acceptance

15   of the 3M Group's argument that the court should grant its requested premium on the theory that the

16   financial records found by the Receiver were accurate would, in the words of In re Madoff, let "the

17   whim of the defrauder . . . control[] the process that is supposed to unwind the fraud," 654 F.3d at 241.

18                   Lastly, we note that although the 3M Group characterized market risk as "inevitabl[e]"

19   (Hearing Tr. 44), the record suggests that prospective investors chose the WGTI senior-promissory-

20   note route as a means of limiting the risk of market loss, given that the terms of those notes stated that

21   "the return promised to the WGTI Noteholders would reflect any positive returns generated by

22   WGTC, but would not reflect any negative returns" (3M Group brief on appeal at 11). That provision

                                                        31
 1   in the notes did indeed create a difference between the WGTI noteholders and the limited partners in

 2   WGTC who had no such protection against losses. But, as the SEC points out, "it is difficult to see

 3   why such a provision would be reason to give preferential treatment to the WGTC claimants rather

 4   than the notes company claimants" (SEC brief on appeal at 12 n.4 (emphasis in original)).

 5                  In sum, the record demonstrates that the WGTC and the WGTI investors had the same

 6   goal of profiting from WGTC's index arbitrage strategy; that both groups of investors were solicited

 7   as investors by the same defendants; that both groups had agreements with Westridge and with

 8   WGTC; that both groups were treated economically the same in defendants' arbitrary account

 9   statements; that the assets of WGTC and WGTI were commingled and were run as a massive Ponzi

10   scheme for more than a decade; that the 3M Group as well as the investors in WGTI were defrauded;

11   and that the commingled assets could not be unraveled reliably. We conclude that the district court

12   neither made an error of law nor made erroneous factual findings in determining that, in the material

13   respects, the investors in WGTC and WGTI were similarly situated.

14                  Finally, we see no basis for any suggestion that the district court's approval of the

15   Receiver's pro rata distribution plan was beyond the range of permissible decisions. As the investors

16   in both entities were permissibly found to be similarly situated, it was well within the district court's

17   equitable authority to reject the 3M Group's requested premium distributions. Under the Receiver's

18   pro rata distribution plan, each member of the 3M Group, like each WGTI investor, was to receive

19   approximately 85% of the net amount it had invested. Giving the 3M Group any of the premiums it

20   requested would have meant that the distributions to the other fraud victims would be reduced to

21   64-76% of their net investments, while the 3M Group members would receive more money than they

22   had invested--their largest requested premium presenting them with a profit of nearly 40%. It was

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 1   well within the district court's discretion to conclude that, as a matter of equity, some of the similarly

 2   situated victims should not profit at the expense of the other victims.

 3   B. The KCERA Cross-Appeal

 4                   KCERA, while observing, in opposition to the appeal by the 3M Group, that the district

 5   court has broad discretion to adopt any distribution that is fair and reasonable (see KCERA brief on

 6   appeal at 13), and that the district court correctly held that the funds in this case should be distributed

 7   pro rata, given that the funds were commingled and the investors were similarly situated (see, e.g.,

 8   id. at 14-16), pursues on its cross-appeal the contention that the pro rata distributions should have

 9   been adjusted for inflation to compensate long-term investors such as KCERA (see id. at 25). We see

10   no abuse of discretion in the district court's approval of the Receiver's Plan without requiring the

11   requested inflation adjustment.

12                   KCERA has not cited any authority that supports the proposition that an inflation

13   adjustment is required as a matter of law when there is to be a distribution of assets to a group of

14   similarly situated victims and those assets are insufficient to make all of the victims whole. Although

15   KCERA argues that "the Supreme Court has made clear [that] to satisfy the goal of treating 'similarly

16   situated creditors similarly' by applying sound 'objective economic analysis,' creditors should receive

17   compensation for 'the time value of their money,'" (KCERA brief on appeal at 27 (quoting Till v. SCS

18   Credit Corp., 541 U.S. 465, 477 (2004) (emphasis in brief))), Till involved a bankruptcy case and a

19   statutory provision, 11 U.S.C. § 1325(a)(5), "[t]he text of [which wa]s consistent with the view that

20   the appropriate discount rate [for use in a bankruptcy cramdown proceeding] should reflect . . . the

21   time value of money," 541 U.S. at 483 n.25 (internal quotation marks omitted). There is no such

22   statutory provision governing enforcement actions such as those at issue here.

                                                         33
 1                  Nor are the other cases cited by KCERA as requiring calculations to account for the

 2   time value of money applicable here. They involved such issues as the adequacy of a state tax refund

 3   or, in private civil actions, the proper calculation of the amount of damages needed to make the

 4   claimant whole. None of them involved governmental enforcement actions in which there are

 5   numerous victims and insufficient assets to provide complete compensation.

 6                  KCERA's argument that "the SEC repeatedly urg[ed] an inflation adjustment in the

 7   Madoff litigation" (KCERA brief on appeal at 25) is beside the point. The inflation issue was not

 8   ruled on in the bankruptcy court in that litigation, see In re Madoff, 654 F.3d at 234, and this Court

 9   expressly declined to opine as to whether such an adjustment should be made, see id. at 235 n.6.

10                  Finally, we note that the distribution at issue on these appeals is the "Receiver's

11   Proposed Initial Distribution Plan" (emphasis added). As the CFTC and the SEC stated in the district

12   court, it is possible that the Receiver will recover additional funds in, for example, its pending

13   clawback actions against investors who had withdrawn their entire investments prior to the

14   commencement of these enforcement actions (see, e.g., CFTC/SEC Recommendation at 17 n.9)--some

15   of whom were likely paid using newly invested funds that defendants received from other investors.

16   The agencies have taken the position that, although there should be no adjustment for inflation at this

17   stage since the funds that the Receiver had collected were insufficient to make all of the victims

18   whole, an inflation adjustment may become appropriate if the clawback actions result in the Receiver's

19   collecting more than 100% of the net amounts invested by the victims. (See id. at 19-20; CFTC/SEC

20   Endorsement of Receiver's Plan at 3 & n.1.)

21                  In the event that the Receiver does recover sufficient funds to provide all of the fraud

22   victims with more than their respective net investments, the district court will be free to consider

23   whether to approve an inflation adjustment if the Receiver proposes one, or to consider whether to

                                                       34
1   require such an adjustment if it is not proposed. In the present circumstances, we see no abuse of

2   discretion in the district court's refusal to require such an adjustment in the initial distribution.

3                                                   CONCLUSION

4                   We have considered all of the contentions of the 3M Group and KCERA in support

5   of their respective appeals and have found them to be without merit. The March 21, 2011 Order of

6   the district court is affirmed.

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