139 F.3d 674 (9th Cir. 1998), 95-56688, S.E.C. v. Colello

Docket Nº:95-56688.
Citation:139 F.3d 674
Party Name:, 98 Cal. Daily Op. Serv. 1915, 98 Daily Journal D.A.R. 2681 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Michael J. COLELLO, Defendant-Appellant, Cross Financial Svc., Inc.; Owen R. Fox; Carroll E. Siemens; Bruce Franklin; Douglas S. Cross, Defendants.
Case Date:March 18, 1998
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

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139 F.3d 674 (9th Cir. 1998)

, 98 Cal. Daily Op. Serv. 1915,

98 Daily Journal D.A.R. 2681



Michael J. COLELLO, Defendant-Appellant,

Cross Financial Svc., Inc.; Owen R. Fox; Carroll E.

Siemens; Bruce Franklin; Douglas S. Cross, Defendants.

No. 95-56688.

United States Court of Appeals, Ninth Circuit

March 18, 1998

Argued and Submitted Jan. 6, 1998.

Page 675

Frederick D. Friedman and Edward A. Klein, O'Neill, Lysaght & Sun, Santa Monica, California, for defendant-appellant.

Richard M. Humes and Noran J. Camp, Securities and Exchange Commission, Washington, DC, for plaintiff-appellee.

Appeal from the United States District Court for the Central District of California Richard Paez, District Judge, Presiding. D.C. No. CV-94-4228-RAP.

Before: LAY, [*] GOODWIN and SCHROEDER, Circuit Judges.

GOODWIN, Circuit Judge:

This appeal challenges the right of the Securities and Exchange Commission (the "SEC") to recover, from a non-party to a fraud, investor funds traced to the "nominal defendant" in an action in personam. In the district court proceedings against a number of defendants, the SEC named Michael Colello as a nominal defendant after he had been dismissed as a party to the fraud. Upon a motion for summary judgment, the district court ordered Colello to disgorge over $2.6 million. On appeal, Colello argues that the district court lacked subject matter jurisdiction and that, in any event, summary judgment was in error. We have jurisdiction pursuant to 28 U.S.C. § 1291 and we affirm.

Facts and Procedural Background

This case arises from a scheme whereby a company called Cross Financial Services, Inc. ("CFS") and a number of individuals defrauded more than 700 public investors out of more than $21 million. The SEC claims that Colello received approximately $2.9 million of the $21 million. Colello claims that the money he received was to obtain letters of credit for CFS, that he did not keep most of it, and that what he did retain was payment for services rendered.

The SEC sued the perpetrators, initially naming Colello as a participant in the scheme to defraud. After losing on a motion for a preliminary injunction against Colello, the SEC amended its complaint to name Colello as a defendant "solely for the purpose of obtaining full relief." The SEC and Colello then cross-filed motions for summary judgment. The district court granted the SEC's motion for summary judgment and ordered Colello to disgorge $2,620,598.00 and pay $276,954.63 in interest. Judgments were also entered against the other defendants, who are not involved in this appeal. Colello failed to pay the judgment against him on the order to disgorge. In a post-judgment proceeding, the district court found Colello in contempt for noncompliance. The district court ordered Colello to pay the judgment or surrender himself for arrest. It then stayed the arrest warrant pending Colello's submission of supplemental evidence that he is unable to comply with the district court's order.

Standard of Review

This court reviews de novo both the grant of the SEC's summary judgment motion and the denial of Colello's. Oregon Natural Resources Council v. Lowe, 109 F.3d 521, 526 (9th Cir.1997). We likewise review the district court's exercise of subject matter jurisdiction and its denial of Colello's motion to dismiss for failure to state a claim. San Francisco County Democratic Cent. Comm. v. Eu, 826 F.2d 814, 818 n. 3 (9th Cir.1987). This court reviews the disgorgement order for abuse of discretion. SEC v. Clark, 915 F.2d 439, 453 (9th Cir.1990).



Two district courts have allowed the SEC to sue a "nominal defendant" to recover

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fraud proceeds, SEC v. Egan, 856 F.Supp. 401 (N.D.Ill.1993); SEC v. Antar, 831 F.Supp. 380 (D.N.J.1993), and the Seventh Circuit has endorsed such actions in SEC v. Cherif, 933 F.2d 403 (7th Cir.1991). This circuit has not yet spoken on the subject.

A nominal defendant is a person who "holds the subject matter of the litigation in a subordinate or possessory capacity as to which there is no dispute." Cherif, 933 F.2d at 414 (internal quotations and citation omitted). The paradigmatic nominal defendant is "a trustee, agent, or depositary ... [who is] joined purely as a means of facilitating collection." Id. (internal quotations and citation omitted). As the nominal defendant has no legitimate claim to the disputed property, he is not a real party in interest. Id. Accordingly, "there is no claim against him and it is unnecessary to obtain subject matter jurisdiction over him once jurisdiction of the defendant is established." 1 Id.

Colello asks this court to reject per se the use of nominal defendants. He relies upon such cases as Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 191, 114 S.Ct. 1439, 1455, 128 L.Ed.2d 119 (1994) (The text of the securities laws does not provide for aider and abettor liability.) and Pinter v. Dahl, 486 U.S. 622, 650, 108 S.Ct. 2063, 2079-80, 100 L.Ed.2d 658 (1988) (refusing to expand the term "seller" because such expansion is not supported by the text). Each of these cases stands for the proposition that causes of action under the securities laws must have a basis in the text of the statute. Colello correctly notes that the text of the securities laws does not mention the use of nominal defendants.

Nevertheless, there is law to support the use of nominal defendants in securities' actions to collect the proceeds of fraud. While no precedent speaks directly to this point, ample authority supports the proposition that the broad equitable powers of the federal courts can be employed to recover ill gotten gains for the benefit of the victims of wrongdoing, whether held by the original wrongdoer or by one who has received the proceeds after the wrong. For example, the Supreme Court has held that a plaintiff who has a cause of action under the securities laws can enforce those rights "by such legal or equitable actions or procedures as would normally be available to him." Deckert v. Independence Shares Corp., 311 U.S. 282, 287-88, 61 S.Ct. 229, 232-33, 85 L.Ed. 189 (1940). 2 This court has declared that "federal courts have inherent equitable authority to issue a variety of 'ancillary relief' measures in actions brought by the SEC to enforce the federal securities laws." SEC v. Wencke, 622 F.2d 1363, 1369 (9th Cir.1980) ("Wencke II "). This broad power extends over third parties to the action. Wencke II, 622 F.2d at 1369 (District court has power to enjoin non-parties from suing a receivership in securities' action.).

The Supreme Court's hostility to causes of action without textual support and precedent supporting broad equitable powers can be reconciled by distinguishing between causes of action and forms of relief, a distinction drawn by the Supreme Court. See Davis v. Passman, 442 U.S. 228, 239, 99 S.Ct. 2264, 2273-74, 60 L.Ed.2d 846 (1979) ("[T]he question whether a litigant has a 'cause of action' is analytically distinct and prior to the question of what relief, if any, a litigant may be entitled to receive."). See also SEC v. Sands, 902 F.Supp. 1149, 1158 (C.D.Cal.1995) ("The Central Bank decision does not renounce the once predominant view that courts may invoke whatever rights and remedies they deem appropriate to effectuate the purposes of the securities laws.") (internal quotations and alteration omitted). Accordingly,

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we conclude that the SEC may name a non-party depository as a nominal defendant to effect full relief in the marshalling of assets that are the fruit of the underlying fraud.


Colello also argues...

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