Court Opinion

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Opinions of the United
1998 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

12-17-1998

SEC v. Black
Precedential or Non-Precedential:

Docket 98-3345

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Recommended Citation
"SEC v. Black" (1998). 1998 Decisions. Paper 278.
http://digitalcommons.law.villanova.edu/thirdcircuit_1998/278

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Filed December 17, 1998

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 98-3345

SECURITIES AND EXCHANGE COMMISSION

v.

JOHN GARDNER BLACK; DEVON CAPITAL
MANAGEMENT, INC.; FINANCIAL MANAGEMENT
SCIENCES, INC.

SOUTH BUTLER COUNTY SCHOOL DISTRICT; DANIEL
BOONE AREA SCHOOL DISTRICT; TYRONE AREA
SCHOOL DISTRICT; BLACKLICK VALLEY SCHOOL
DISTRICT; HARMONY AREA SCHOOL DISTRICT; PENN
CAMBRIA SCHOOL DISTRICT; PENNS MANOR SCHOOL
DISTRICT; NORTHERN LEBANON SCHOOL DISTRICT*,
(*Pursuant to Rule 12(a), F.R.A.P.),
       Appellants

BELLEFONTE AREA SCHOOL; CORNWALL-LEBANON
SCHOOL DISTRICT; CUMBERLAND VALLEY;
FLEETWOOD AREA SCHOOL; NORTH HILLS SCHOOL
DISTRICT; HARRISBURG AUTHORITY; CITY OF
HARRISBURG; ST JOHNS WELFARE; LINCOLN
CONSOLIDATED SCHOOL; NICE COMMUNITY SCHOOL;
YALE PUBLIC SCHOOL; BRADFORD REGIONAL MEDICAL
CENTER; RAVENSWOOD HOSPITAL MEDICAL CENTER;
UNIVERSITY OF SCRANTON*
(*Intervenors-Appellees see order of 8/11/98)

PENN MANOR SCHOOL DISTRICT;
SCHOOL DISTRICT OF LANCASTER*
(*Amici-Appellees see order of 8/19/98)

Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. 97-cv-02257)
Argued September 14, 1998

Before: SLOVITER, ALITO, RENDELL Circuit Judges

(Filed December 17, 1998)

       Richard R. Nelson, II, Esq. (Argued)
       Cohen & Grigsby
       11 Stanwix Street
       15th Floor
       Pittsburgh, PA 15222-3115
        Attorney for appellants

       Richard A. Finberg, Esq.
       Malakoff, Doyle & Finberg
       The Frick Building
       Suite 200
       Pittsburgh, PA 15219
        Attorney for appellant,
        South Butler County School
        District

       David A. Gradwohl, Esq.
       Fox, Rothschild, O'Brien & Frankel
       1250 South Broad Street
       P.O. Box 431, Suite 1000
       Lansdale, PA 19446
        Attorney for appellant,
        Daniel Boone Area School District

       Michael J. Betts, Esq.
       Betts & Perry
       235 Alpha Drive
       Pittsburgh, PA 15238
        Attorney for appellant,
        Tyrone Area School District

                               2
James H. McConomy, Esq.
David G. Oberdick, Esq.
Titus & McConomy
Four Gateway Center
20th Floor
Pittsburgh, PA 15222
 Attorneys for appellant,
 Blacklick Valley School District

Mark A. Rush, Esq.
Kilpatrick & Lockhart
1500 Oliver Building
Pittsburgh, PA 15222
 Attorney for appellees

Dennis M. Sheedy, Esq. (Argued)
George M. Medved, Esq.
Sharon F. DiPaolo, Esq.
Pepper, Hamilton & Scheetz
500 Grant Street
5000 One Mellon Bank Center
Pittsburgh, PA 15219
 Attorneys for intervenor-appellee,
 Richland School District

Thomas A. French, Esq.
Rhoads & Sinon
One South Market Square
12th Floor
P.O. Box 1146
Harrisburg, PA 17108-1146
 Attorney for intervenors-appellees,
 Bellefonte Area School, Cornwall
 Lebanon School District,
 Cumberland Valley, Fleetwood
 Area School

Michael J. Witherel, Esq
966 Perry Highway
Pittsburgh, PA 15237
 Attorney for intervenor-appellee,
 North Hills School District

                          3
Timothy P. Ryan, Esq.
Eckert, Seamans, Cherin & Mellott
600 Grant Street
42nd Floor
Pittsburgh, PA 15219
 Attorney for intervenors-appellees,
 Harrisburg Authority, City of
 Harrisburg

Joseph F. McDonough, Esq.
Mary-Jo Rebelo, Esq.
Manion, McDonough & Lucas
600 Grant Street
Suite 882
Pittsburgh, PA 15219
 Attorneys for intervenor-appellee,
 St. Johns Welfare

Philip A. Erickson, Esq.
Thru, Maatsch & Norberg
501 South Capitol Avenue
Suite 500
Lansing, MI 48901-7899
 Attorney for intervenors-appellees,
 Lincoln Consoladated School, Nice
 Community School, Yale Public
 School

Alan J. Steinberg, Esq.
Horty, Springer & Mattern
4614 Fifth Avenue
Pittsburgh, PA 15213
 Attorney for intervenor-appellee,
 Bradford Regional Medical Center

George J. Arnold, Esq.
Sosin & Lawler
11800 South 75th Avenue
Suite 300
Palos Heights, IL 60463
 Attorney for intervenor-appellee,
 Ravenswood Hospital Medical

                        4
       Charles B. Gibbons, Esq.
       Klett, Lieber, Rooney & Schorling
       One Oxford Centre
       40th Floor
       Pittsburgh, PA 15219-6498
        Attorney for intervenor-appellee,
        University of Scranton

       Kevin M. French, Esq.
       Hartman, Underhill & Brubaker
       221 East Chestnut Street
       Lancaster, PA 17602
        Attorney for Amici-appellees, Penn
        Manor School District, School
        District of Lancaster

OPINION OF THE COURT

RENDELL, Circuit Judge

We are asked on this appeal to determine whether the
District Court erred in releasing the funds of certain
investors from a freeze order entered in the context of
receivership proceedings instituted by the Securities and
Exchange Commission. Appellants are several Pennsylvania
school districts who invested funds with defendants. They
contend that the District Court orders of May 11 and May
22, 1998 improperly released funds of other investors,
denied appellants certain procedural rights in connection
with the court proceedings attendant thereto, and also
erred in its award of attorneys' fees to the equity receiver
appointed in the case. Appellees not only counter these
positions, but also challenge our jurisdiction to hear this
appeal.

Appellants appeal from five orders entered by the District
Court in the ongoing receivership proceedings instituted by
the SEC against John Gardner Black ("Black"), Devon
Capital Management, Inc. ("Devon"), and Financial
Management Sciences, Inc. ("FMS") under the provisions of
Section 20(b) of the Securities Act, 15 U.S.C. S 77t(b),
Sections 21(d) and (e) of the Exchange Act, 15 U.S.C.

                               5
S 78u(d), (e), and Section 209(d) of the Advisors Act, 15
U.S.C. S 80b-9(d). The five orders at issue include an April
7, 1998 order approving payment of attorneys' fees and
expenses ("fee order"), an April 22, 1998 order adopting
procedures for a hearing regarding the distribution of funds
and an April 27, 1998 order modifying the April 22 order
("procedural orders"), and a May 11, 1998 order modifying
a freeze order and a May 22, 1998 order modifying the May
11 order ("orders lifting the freeze").

For the reasons set forth below, we will affirm the
procedural orders and the orders lifting the freeze.

I. BACKGROUND

In August 1997, during a routine investigation of Devon,
the SEC discovered that Devon was carrying assets on its
books at materially inflated values and had incurred
massive trading losses totaling at least $50 million of the
$345 million entrusted to it by its investment clients. The
investigation also determined that Devon and Black 1 were
concealing the losses from their clients, most of whom were
school districts and governmental entities, and were
continuing to accept funds from new investment clients
without disclosing information regarding these losses. The
SEC believed that Devon was seeking new clients so as to
use their funds to fulfill obligations to existing clients under
their investment advisory agreements. On September 26,
1997, the SEC filed an action in the United States District
Court for the Western District of Pennsylvania against
Black, Devon and FMS seeking to enjoin their illegal
conduct and freeze their assets pending an investigation.
The SEC alleged violations of Section 17(a) of the Securities
Act, 15 U.S.C. S 77q(a), Section 10(b) of the Exchange Act,
15 U.S.C. S 78j(b), and Rule 10b-5, 17 C.F.R.S 240.10b-5,
promulgated thereunder against Black, Devon and FMS,
and violations of Sections 206(1), (2) and (4) of the
Investment Advisers Act of 1940, 15 U.S.C. SS 80b-6(1),
_________________________________________________________________

1. Black was the president, portfolio manager, and sole shareholder of
Devon, a registered investment adviser, headquartered in Tyrone,
Pennsylvania. Black was also the owner of FMS, an entity affiliated with
Devon and incorporated in Pennsylvania.

                               6
80b-6(2), 80b-6(4), and Rule 206(4)-2, 17 C.F.R.
S 275.206(4)-2, promulgated thereunder against Black and
Devon.

The District Court granted the SEC's motion for entry of
a temporary restraining order whereby all assets "presently
held by [defendants], under their control or over which they
exercise actual or apparent investment or other authority,
in whatever form such assets may presently exist and
wherever located" were to be immediately frozen. The order
was entered pursuant to Section 20(b) of the Securities Act,
15 U.S.C. S 77t(b), Sections 21(d) and (e) of the Exchange
Act, 15 U.S.C. S 78u(d), (e), and Section 209(d) of the
Advisors Act, 15 U.S.C. S 80b-9(d). Pursuant to this order,
the customer accounts later categorized as A, B, C and D
were frozen.

The court appointed Richard Thornburgh as the equity
receiver ("Trustee"), and he employed Price Waterhouse, LLP
to provide accounting and auditing services for the ensuing
investigation. The Trustee identified four general categories
of investment relationships between defendants and their
investor clients. Category A clients entered into an
investment advisory and management relationship with
Devon whereby Devon had authority to direct the purchase
and sale of securities investments held in the name of the
client at the client's custodian bank. Category A includes
clients who entered into investment management
arrangements whereby the client bore the risk and benefit
of performance of investments, clients with investment
advisor arrangements with a guaranteed minimum rate of
return whereby Devon bore the risk of investments, and
clients with investment advisor arrangements with afixed
rate of return whereby Devon bore the risk, and would reap
the benefit, of investments. Category B includes those
clients who entered into Repurchase Agreements ("Repos")
and Non-Pooled Collateralized Investment Agreements
("CIAs") with defendants. Under Repos, Devon used client
funds to buy securities, chosen by Devon, at a set price,
and later would re-sell the securities at a set, higher price,
providing an assured return. The securities were held in the
interim in the client's name by a custodian bank which
held a promise of Devon's repurchase obligation. The Repos

                               7
required Devon to provide additional securities on behalf of
the client if the securities' value fell below the set purchase
price. Under non-pooled CIAs, Devon used clients' funds to
invest in FMS "units" that were credited to the client's
account. FMS promised a fixed rate of return to the client
and granted the client a security interest in securities held
by a custodian bank. Category C clients entered into
agreements with Devon similar to B non-pooled CIAs,
except that the securities serving as collateral for the FMS
"units" were pooled in one account in the name of FMS at
Mid-State Bank ("MSB"). Category D clients entered into
investment management arrangements with Devon similar
to the A clients, except that MSB served as the custodian
of the D accounts. As with the A and B accounts, the D
accounts were held in the clients' names. Pursuant to the
foregoing agreements, the defendants managed the
accounts of A, B and D clients, while the actual funds or
securities of those clients remained either in their own
names or with a custodian bank named by them, other
than MSB. The funds and/or securities invested by clients
of the C accounts were maintained in a pooled account in
the name of FMS in its principal depository bank, MSB. The
present shortfall in assets is primarily in the pooled
account at MSB. As of September 30, 1997, although
approximately $156,000,000 had been invested in pooled
CIAs on behalf of the C clients, the value of the collateral
underlying the pooled account was only approximately
$86,000,000.

After assessing the different types of contractual
arrangements that existed, the Trustee investigated the
extent to which defendants used the pooled account
holding the C clients' funds in order to sell securities to,
purchase securities from, or grant collateral to, clients that
were in the other categories of investment relationships
with defendants. The Trustee believes that through the use
of the pooled account, defendants may have used certain
funds deposited by the C clients for the benefit of the A, B
and D clients. The Trustee has attempted to identify and
quantify examples of such transactions, using the term
"cash taints" to refer to cash transfers from the pooled
account to accounts of non-pooled clients without the
receipt of consideration, and the term "securities taints" to

                               8
refer to transfers of securities between pooled and non-
pooled clients at non-market prices, benefitting the non-
pooled clients at the expense of the pooled account. 2 In
addition, evidence suggests that defendants used the
pooled account to fund lawsuits, settle complaints, and pay
FMS's operational expenses. The Trustee has not alleged
any complicity or actual involvement of the holders of the
A, B and D accounts in this allegedly fraudulent scheme
under investigation by the SEC.

Following the initial freeze order, the Trustee and the
SEC jointly filed a motion on October 27, 1997 to modify
the freeze to allow a distribution to the A, B and D clients
of 50% of the market value of the funds held in their name,
and to allow a distribution to the C clients of 50% of the
market value of their pro rata share of the assets held in
the pooled account. The District Court entered an order to
allow this proposed distribution. On March 10, 1998, the
Trustee filed a motion for further modification of the freeze
to permit a second distribution to the investment advisory
clients. This motion proposed a distribution to the A, B and
D clients of 90% of the assets held in their name, reduced
by the estimated total dollar value of whatever "taints" were
identified by the Trustee, and a distribution to the C clients
of 90% of their pro rata share of the remaining market
value of the assets in the pooled account. The Trustee
requested that funds sufficient to cover the alleged tainted
transactions remain subject to the freeze pending afinal
resolution by the court concerning the entitlement to such
funds. On March 18, 1998, the District Court entered an
order setting an April 29, 1998 hearing date on the motion
for the proposed second interim distribution. The court also
allowed all investment clients to file any objections to the
motion with the Trustee and the SEC. On April 22, 1998
the District Court entered a hearing management order
setting forth the procedures to be followed during the April
29, 1998 hearing. In response to an emergency motionfiled
by several of appellants, the court revised these procedures
in an April 27 order. The District Court conducted a
_________________________________________________________________

2. Spread sheets prepared by Price Waterhouse indicated possible cash
taints totaling approximately $3.1 million and possible securities taints
totaling approximately $20.8 million.

                               9
hearing on the motion for a second distribution on April 29
and April 30. In a Memorandum Opinion entered May 11,
1998, the District Court directed the Trustee to release the
funds of all A, B and D clients from the freeze, and to
distribute to the C clients 90% of each client's pro rata
share of the remaining pooled assets. The order also
granted the C clients permission to initiate actions against
the A, B and D clients to recover alleged taints. The District
Court revised the May 11 order in an order entered May 22,
whereby the court discussed the method of distribution of
funds to the C clients and granted all C clients the right to
intervene in this action. In addition, on April 7, 1998, the
District Court issued an order approving the Trustee's
application for payment of attorneys' fees and expenses of
approximately $1.6 million.

The District Court receivership proceedings are still
pending. On July 7, 1998, several of the C clients,
representing a subset of appellants, instituted involuntary
Chapter 7 bankruptcy proceedings against Devon and FMS
in the United States Bankruptcy Court for the Western
District of Pennsylvania. Although the Trustee moved to
dismiss the Bankruptcy Court proceedings based upon his
view that the receivership before the District Court was
adequate, the Bankruptcy Court declined to do so, ruling
that:

       In spite of the arguments by the trustee, we are not
       sufficiently persuaded that dismissal at this time would
       better serve the interests of debtors and their creditors.
       We instead find it advisable to permit these bankruptcy
       cases to proceed to determine whether they provide a
       better process for resolving issues left unresolved by
       the district court.

The appeals before us have resulted in a flurry of activity
and filings by various parties, including motions on behalf
of many of the A, B and D investors to intervene, which we
granted. In addition to appellants' brief, the School District
of Lancaster and Penn Manor School District havefiled an
amicus brief requesting that the orders lifting the freeze be
affirmed. Intervenors Bellefonte Area School District,
Cornwall-Lebanon School District, Cumberland Valley
School District, Fleetwood Area School District, and

                               10
Richland School District filed a brief urging that the instant
appeal be dismissed or that the District Court orders
appealed from be affirmed. Intervenor North Hills School
District filed a brief urging that the appeal be dismissed or
that the orders appealed from be affirmed. Intervenor
Richland School District filed a brief urging this court to
affirm the orders lifting the freeze and to reverse the fee
order, except to the extent that such reversal would require
Richland to contribute in payment of such fees. Intervenors
St. Johns Welfare Federation, The Harrisburg Authority and
The City of Harrisburg, The University of Scranton, and
Bradford Regional Medical Center filed a brief urging this
court to affirm the orders lifting the freeze. We requested
the filing of a brief by the SEC. The only party not actually
before us on this appeal is the Trustee.3

II. JURISDICTION

We first address the contested issue of our jurisdiction to
review the orders of the District Court from which this
appeal has been taken.

In view of the continued existence and effectiveness of the
restraining order for several months from and after
September 1997, we conclude that it had effectively
matured into a preliminary injunction. See Nutrasweet Co.
v. Vit-Mar Enter., 112 F.3d 689, 692 (3d Cir. 1997) (holding
that a TRO in effect for 77 days was equivalent to a
preliminary injunction); see also Sampson v. Murray, 415
U.S. 61, 88 (1974) (holding that the continuation of a TRO
beyond its authorization had the same effect as a
preliminary injunction); In re Arthur Treacher's Franchisee
Litig., 689 F.2d 1150, 1153-54 (3d Cir. 1982) (holding that
the TRO in effect beyond its statutory limits was effectively
a preliminary injunction even though the parties consented
to its extension). The orders lifting the freeze, therefore,
_________________________________________________________________

3. The District Court determined, for reasons not apparent to us on the
record before us, that the Trustee had a conflict of interest in this
matter
and disqualified the Trustee from being a party to the matter on appeal.
Although we would have welcomed the Trustee's views with respect to
this matter, we believe that we have an adequate record based upon the
briefs and argument of those parties to this appeal.

                               11
constituted orders modifying an injunction, from which an
interlocutory appeal is permissible under 28 U.S.C.
S 1292(a)(1), which provides jurisdiction over appeals from
"[i]nterlocutory orders of the district courts . . . modifying
. . . injunctions . . . ." Despite the characterization of this
order by various parties as a "turnover" order and the
District Court's own use of the phrase "return of 100% of
the principal," the court's May 11 and May 22, 1998 orders
merely lifted the freeze previously imposed on all funds,
such that a freeze was no longer imposed on the A, B and
D funds, but remained in effect on the C funds. 4 We,
therefore, have jurisdiction to review the orders lifting the
freeze.

Further, insofar as the appeals from the procedural
orders complain of the denial of appellants' procedural
rights in connection with the hearing which culminated in
the modification of the freeze order, we view them as
appealable along with, and as part of, the appeal from the
orders lifting the freeze. See Energy Action Educ. Found. v.
Andrus, 654 F.2d 735, 745 n.54 (D.C. Cir. 1980)
(explaining that appellate review under S 1292(a)(1) extends
to "all matters inextricably bound up with the[preliminary
injunction]"), rev'd on other grounds sub nom., Watt v.
Energy Action Educ. Found., 454 U.S. 151 (1981); see also
16 Charles Alan Wright & Arthur R. Miller, Federal Practice
and Procedure S 3921.1 (2d ed. 1987) (stating that review
under S 1292(a)(1) "is not rigidly limited" but "properly
extends to all matters inextricably bound up with the
injunction decision").

The appeal of the fee order entered during the
receivership stands on a different jurisdictional footing,
and, we find, lacks a satisfactory footing. Appellants claim
_________________________________________________________________

4. As stated in the September 26 freeze order, the freeze order did not
involve an actual transfer of funds out of any accounts, but only involved
notifying the financial institutions holding any frozen funds that they
must "retain within [their] control and prohibit the withdrawal, removal,
transfer or other disposal of any such funds or other assets." As such,
the lifting of the freeze did not result in any movement or transfer of
funds, but only removed the prohibition on the use or movement of these
funds and notified the same financial institutions that they were now
permitted to allow access to the previously frozen funds.

                               12
jurisdiction based on 28 U.S.C. S 1292(a)(2), the practical
finality doctrine, and/or the collateral order doctrine. The
practical finality doctrine does not provide jurisdiction for
review since this doctrine only allows appellate review of
judgments that are final except for ministerial or
mechanical tasks and that conclusively determine the
rights of the parties. See Forgay v. Conrad, 47 U.S. 201
(1848). In this case, the fee order awarding approximately
$1.6 million in fees, which we assume would be paid from
the pooled account, does not determine the rights of the
parties to this litigation since the District Court has not yet
determined ownership of the pooled account funds or
ordered a final distribution of the receivership assets.5 See
also Apex Fountain Sales, Inc. v. Kleinfeld, 27 F.3d 931,
935-36 (3d Cir. 1994) (holding that the practicalfinality
doctrine did not apply to the order at issue since the court
still had to determine the highly contested issue of the
amount of damages and thus, more than merely ministerial
tasks remained). The collateral order doctrine does not
provide jurisdiction for review since this order is not, as
required by this narrow doctrine, "separate from the merits"
and "effectively unreviewable on appeal from afinal
judgment." Firestone Tire & Rubber Co. v. Risjord, 449 U.S.
368, 375 (1981). Instead, this order, or at least the
practical effect of this order, is intimately related to the
undecided issue of the ownership of the pooled account
funds and a final distribution of the receivership assets. In
addition, there is no reason why this fee order could not be
reviewed following a final judgment. See, e.g. , Law Offices
of Beryl A. Birndorf v. Joffe, 930 F.2d 25 (7th Cir. 1991)
(holding that a fee award is not appealable under the
collateral order doctrine as it could be effectively reviewed
following a final judgment because it did not cause
irreparable harm in the interim).
_________________________________________________________________

5. By addressing what appellants term "the practical finality doctrine,"
we do not intend to advance this doctrine as a viable means of obtaining
appellate jurisdiction. As we noted in Kelly v. Mellon Bank E. Nat'l
Assoc.
(In re Kelly), 876 F.2d 14, 15 (3d Cir. 1989), the practical finality
doctrine as explained in Gillespie v. United States Steel Corp., 379 U.S.
148 (1964) has, at best, very limited viability.

                               13
Further, S 1292(a)(2) does not provide jurisdiction for the
appeal from the fee order since this provision is interpreted
narrowly to permit appeals only from the three discrete
categories of receivership orders specified in the statute,
namely orders appointing a receiver, orders refusing to
wind up a receivership, and orders refusing to take steps to
accomplish the purposes of winding up a receivership. See
State St. Bank v. Brockrim, Inc., 87 F.3d 1487, 1490 (1st
Cir. 1996) (holding that an order was not appealable under
S 1292(a)(2) since it did not come within one of the three
discrete categories described in the statute); SEC v.
American Principal Holdings, Inc., 817 F.2d 1349, 1350 (9th
Cir. 1987) (holding that an order confirming compensation
payment to a receiver was not appealable under
S 1292(a)(2)). This fee order is not of the same character as
other orders that have been held to fit within the scope of
S 1292(a)(2).

We will therefore only address the propriety of the orders
lifting the freeze and the procedural orders entered by the
District Court in connection therewith. We review the
District Court's application of law with regard to the
equitable receivership de novo, and its decisions relating to
procedures it will follow in connection with the receivership
proceedings for abuse of discretion. See American Telephone
& Telegraph Co. v. Winback & Conserve Program, Inc., 42
F.3d 1421,1427 (3d Cir. 1994).

III. STANDING

Before proceeding to the merits of the appeal, we must
address intervenors' challenge to appellants' right to bring
this appeal based on the fact that appellants were not
parties to the underlying District Court action and were not
granted intervenor status until the District Court's May 22,
1998 order. Intervenors base their argument on Marino v.
Ortiz, 484 U.S. 301 (1988) (affirming judgments dismissing
appeals of nonparties because of nonparty status). Marino
is not controlling in this instance, however, since the
nonparties at issue in Marino chose not to move to
intervene, whereas in this case, appellants did so move.
Marino only requires that a court deny an appeal from
nonparties who have not obtained or sought intervenor

                               14
status, and that such nonparties "seek intervention for
purposes of appeal." Id. at 304. The case at hand is also
distinguishable from the other case cited by intervenors,
SEC v. Wozniak, 33 F.3d 13, 15 (7th Cir. 1994). In
Wozniak, the court held it had no jurisdiction over an
appeal of two nonparties where one party never moved to
intervene and the other party failed to appeal the denial of
his motion to intervene. We find that appellants, who
sought and were granted intervenor status as a matter of
right in the District Court's May 22, 1998 order, have
standing to bring this appeal. See Kowal v. Malkemus, 965
F.2d 1136, 1141 (1st Cir. 1992) ("Permission to intervene
as of right endows the intervenor with appellate standing to
challenge an adverse judgment entered in the adversary
proceeding.").

IV. PROPRIETY OF THE ORDERS LIFTING THE FREEZE

In its May 11, 1998 and May 22, 1998 orders, the
District Court lifted the freeze as to the A, B and D clients'
funds. We hold that the District Court did not err in so
doing. We reject appellants' characterization of the District
Court's May 11, 1998 and May 22, 1998 orders lifting the
freeze. Contrary to appellants' urgings, the court did not,
pursuant to these orders, adjudicate claims and decide that
the A, B and D clients "are entitled to receive all of their
funds" or that the C clients "should bear all of the
$70,000,000 in losses." The court's orders did not
distribute property, decide claims, or bar consideration of
alleged taints. The order is clear that it did not decide
claims, stating, "this Order does not constitute a final
adjudication of any claims by or between investment
advisory clients." Rather, the District Court only determined
that, based upon the factual record regarding the
relationship of the A, B, C and D accounts to the
defendants, the court lacked power over the A, B and D
funds. The Trustee's investigation revealed that the
injunction initially imposed pursuant to the freeze order
was overly broad, and the District Court therefore modified
the terms of the restraint. The District Court did this after
it was convinced "that the Defendants did not have `control'
over funds maintained by Category A, B, or D clients. . .

                               15
so as to permit this Court to freeze the funds pursuant to
15 U.S.C. SS 78u(d) and (e)." Implicit in the District Court's
ruling was a finding that the Trustee's investigation had not
adduced any proof either that the Category A, B or D funds
were, or could be deemed, assets of the defendants, or that
the investors themselves were implicated as "wrongdoers"
and thus within the purview of 15 U.S.C. SS 78u(d) and (e).6

The SEC argues in its brief that the District Court had
the authority to impose and to continue the asset freeze
over the A, B and D accounts pursuant to Federal Rule of
Civil Procedure 66 since the freeze was part of an ongoing
receivership proceeding governed by the jurisdictional
provisions of the federal securities laws. 15 U.S.C.
SS 77v(a), 78aa, 80b-14. However, the case law cited by the
SEC actually supports the District Court's determination
that the freeze as to these funds was improper because in
no case referenced by the SEC has it been granted a freeze
ex parte of assets where those assets were anything other
than property, or deemed property, of a defendant or of a
culpable third party. See, e.g., SEC v. Cherif, 933 F.2d 403,
413-14 (7th Cir. 1991) ("Nothing in the statute or case law
suggests that 15 U.S.C. S 78u(d) or (e) authorizes a court to
freeze the assets of a non-party, one against whom no
wrongdoing is alleged."). Although the SEC and appellants
cite many cases that they claim stand for the proposition
that the SEC can freeze assets of a nonculpable third party,
all of these cases are distinguishable from the case at hand.
For example, in Deckert v. Independence Shares Corp., 311
U.S. 282, 284 (1940), where assets frozen were in the
hands of a third party, the assets were clearly en route to
the defendant and actually belonged to the defendant. In In
re San Vicente Med. Partners Ltd., 962 F.2d 1402, (9th Cir.
1992), the frozen third-party assets at issue were owned by
a limited partnership, whose general partner was a
subsidiary of the defendant and thus, the defendant
_________________________________________________________________

6. Although not stated, we assume it was crucial to the court's view that
the C accounts should remain subject to the freeze, that these accounts
were not merely accounts in the names of individual investors, but,
rather, were commingled funds in a pooled account in the name of FMS
at Mid-State Bank. They, clearly, were funds over which the defendants
had control.

                                16
controlled the third party's property as a matter of law. See
also SEC v. Colello, 139 F.3d 674 (9th Cir. 1998) (allowing
the court to name an innocent third party as a "nominal
defendant" in order to recover proceeds of fraud); SEC v.
Wencke, 783 F.2d 829, 834 (9th Cir. 1986) (discussing
claim of a nonparty based only on the decreased value of
the nonparty's assets, not on the freezing of assets or a
disgorgement order affecting the nonparty); SEC v.
Universal Financial, 760 F.2d 1034 (9th Cir. 1985)
(inapplicable because it relates to a stay of legal
proceedings, as opposed to a freeze of assets, applicable to
a nonparty); Tcherepnin v. Franz, 485 F.2d 1251, 1257 (7th
Cir. 1973) (stating that the court could assume jurisdiction
over land held by nonparties where the nonparties were not
good faith purchasers for value and were instruments in
defendants' fraudulent scheme); SEC v. Comcoa, Ltd., 887
F. Supp. 1521 (S.D. Fla.) (holding that funds in a trust
account held by defendants' lawyer on behalf of defendants
were subject to freeze), aff'd sub nom. Levine v. Comcoa,
Ltd., 70 F.3d 1191 (11th Cir. 1995); SEC v. Antar, 831 F.
Supp. 380 (D.N.J. 1993) (stating that the court could
assume jurisdiction over illegal profits where such profits
were held by the wife and children of defendant). The SEC
also cites as support for its argument SEC v. Institutional
Treasury Management, Inc., No. 91-6715 RG, 1991 SEC
LEXIS 2791 (C.D. Cal. Dec. 12, 1991). This case does not
support the SEC's argument, however, since in this case
too the court released the funds of the innocent investors.
See SEC v. Institutional Treasury Management, Inc., No. 91-
6715 RG, 1991 SEC LEXIS 2915 (C.D. Cal. Dec. 23, 1991).

In addition, appellants do not argue complicity by the A,
B and D investors, but contend that, under a "common
enterprise" theory, the A, B and D accounts are liable for
funds expended from the C accounts and used to the
benefit of the investors having funds in A, B and D
accounts. While we recognize the potential for recovery for
the C investors from A, B and D investors who allegedly
benefitted, this situation does not contain the level of
complicity or involvement in wrongdoing on behalf of the A,
B and D investors that is necessary to support the
unilateral freeze of assets under the statute as occurred
here. See, e.g., Cherif, 933 F.2d at 413-14 (district court

                               17
not authorized to freeze the assets of a non-party against
whom no wrongdoing is alleged under 15 U.S.C. S 78u(d) or
(e)). Although the Trustee's report discussed the existence
of evidence showing commingling and transfers between the
pooled and non-pooled accounts, there is no evidence that
this was done by anyone other than defendants. Transfers
or invasion of the pooled account for the benefit of others
accomplished by FMS or Devon do not implicate the A, B
and D investors in such a way as to make their assets the
proper subject of a freeze based on defendants' wrongdoing.

Further, appellants' characterization of the District Court
as having "refused" to decide the issue of who should bear
the loss of the alleged "taints" is not entirely accurate. The
District Court did not refuse to decide the "taints" issue,
but, rather, this issue is, as it should be, reserved for
another day. Nothing in the relinquishment of the freeze
over the A, B and D accounts prevents the Trustee from
pursuing the issue of "taints."7 Further, as has become
clear from our review of the record of proceedings before the
District Court and the Bankruptcy Court, the Trustee's
pursuit of these causes of action to recover the taints from
the A, B and D account holders has not been cast aside,
but remains of key concern. These causes of action may
well constitute important assets, the pursuit of which is at
_________________________________________________________________

7. The Trustee, too, objected to lifting the freeze as to any of the
allegedly
tainted funds in the A, B and D accounts. However, assuming that the
Trustee's argument in this regard would be similar to that of the SEC,
which filed a brief and argued before us, we see no merit in this
position.
It appears that the Trustee's position is based primarily upon the desire
to pursue causes of action against these allegedly tainted funds, but, as
we have indicated, we view that as an issue separate and apart from the
issue as to whether the court had power over these assets initially,
sufficient to justify the issuance of the ex parte order. The fact that
the
Trustee wants to have these assets under his control in order to claim
recovery from them does not constitute legal support for their continued
freeze pursuant to the initial ex parte order. We also note that no party
has argued that lifting the freeze would result in the dissipation or
removal of assets from the jurisdiction of the court. To the contrary, the
investors whose funds are in these accounts are school districts
presumably with ample funding, who are available to receive service of
process.

                               18
the very heart of these proceedings.8 In fact, we note and
applaud the Bankruptcy Judge's concern for this issue as
reflected in his refusal to dismiss the bankruptcy case,
stating:

       We . . . find it advisable to permit these bankruptcy
       cases to proceed to determine whether they provide a
       better process for resolving issues left unresolved by
       the district court.

We read in these words an appropriate concern that assets
are properly marshaled and distributions properly ordered
in connection with a reorganization or liquidation of these
debtors.

Appellants also object to the method of distribution of
any funds released from the freeze. Appellants argue that
the released funds should be divided pro rata among all
categories of investors, as opposed to among only the A, B
and D investors, and, more importantly, that the losses in
the pooled account should be borne by all of defendants'
clients, as opposed to just the C clients. Intervenors argue
that the District Court's orders were proper, with the A, B
and D investors getting back 100% of their principal, and
the losses in the pooled account being divided pro rata
among the C investors only. Since the District Court orders
regarding the distribution of the released funds state clearly
that they do "not constitute a final adjudication of any
claims by or between investment advisory clients," and
leave for another day the pursuit of claims against various
holders of assets, which would in essence result in a
redistribution of assets, the orders we have been asked to
review do not constitute final rulings on asset distribution,
and this issue, therefore, is not properly before us on this
appeal.

In summary, the District Court's orders lifting the freeze
as to the A, B and D accounts were based upon a sound
legal footing.9 Further, in issuing these orders, it did not
_________________________________________________________________

8. We express no opinion as to which forum is appropriate for this
pursuit but assume that the best interests of all creditors and the
Trustee's fulfillment of his fiduciary and statutory duties will guide the
proceedings.

9. The fact that the court, although stating that it did not propose to
address the freeze at that time, nonetheless sua sponte dissolved the

                                19
determine claims, foreclose pursuit of taints, or in any way
resolve disputes or final distributions among the parties.

V. PROPRIETY OF THE PROCEDURAL ORDERS

Appellants also complain that the procedural orders
entered by the District Court denied them discovery and
prevented them from introducing evidence during the
hearing which culminated in the orders lifting the freeze.
The proceedings at issue spanned two days. A designated
representative from each category of investors was
permitted to raise objections to the modification of the
freeze and was given a set amount of time for oral
argument. In addition, a representative from each category
of investors was allowed to cross-examine a designated
witness regarding the Price Waterhouse accounting
analysis, as well as the SEC official who oversaw the
investigation of defendants, and was permitted to present
testimony by way of an affidavit or expert report in support
of any filed objections. Also, the legal position appellants
urge, which was the position advanced by the Trustee and
the SEC that assets subject to the alleged taints should
remain subject to the freeze, had been fully briefed by the
Trustee and the SEC prior to the time that the District
Court issued its May 11 order lifting the freeze from these
assets.

We note that where there is a receiver with equitable
power in a proceeding before it, the District Court has wide
discretion as to how to proceed. See Elliott, 953 F.2d at
_________________________________________________________________

freeze as to the A, B and D accounts following the April 29 hearing
regarding the Trustee's motion to modify the restraining order does not
change this analysis. As discussed infra, the court has wide discretion in
fashioning proceedings with regard to an equitable receivership. SEC v.
Elliott, 953 F.2d 1560, 1566 (11th Cir. 1992) (noting court's wide
discretion to determine relief in equity receivership), rev'd in part on
other
grounds, 998 F.2d 922 (11th Cir. 1993). Further, this issue had been
fully briefed by the SEC and the Trustee, with the Trustee taking
appellants' position that the court should not release these funds.
Appellants have not argued how further factual development of this issue
would have led to a different result since it had already been adequately
developed.

                               20
1566 (noting court's wide discretion to determine relief in
equity receivership); SEC v. Hardy, 803 F.2d 1034, 1040
(9th Cir. 1986) (noting that a court may use summary
proceedings to determine relief in equity receivership).
Appellants have failed to advance a theory or posit a
relevant rule or case precedent that would have been the
basis for continuing the freeze if they had not been
thwarted in their effort to obtain the necessary proof. Even
assuming that appellants had an arguable right to the
procedural protections they seek, they have failed to show
how they were prejudiced or harmed by the summary
proceedings, since they have articulated no theory whereby
a freeze could possibly have been appropriate as to the A,
B or D funds. See Elliott, 953 F.2d at 1567 (stating that
"appellants must show how they were prejudiced by the
summary proceedings and how they would have been better
able to defend their interests in a plenary proceeding");
Wencke, 783 F.2d at 837-38 (holding that summary
proceedings are sufficient where party failed to show how
he was prejudiced by such proceedings).

Again, the fact that appellants may wish to pursue a
cause of action for recovery of taints, even under a common
enterprise theory, does not constitute a basis for a freeze of
assets ex parte at the behest of the SEC. Since legal action
in pursuit of the taints is clearly contemplated in the
receivership or the bankruptcy proceedings, no harm has
been done by the court's implementation of certain
procedures for the conduct of the April 29 hearing.

Accordingly, we find that the District Court did not abuse
its discretion in conducting the hearing in the manner it
did.

VI. CONCLUSION

For the reasons stated above, as pertaining to the freeze
orders and the procedural orders, the District Court orders
are affirmed. This appeal from the fee order is dismissed for
lack of jurisdiction.

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A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

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