S.E.C. v. Hickey

Decision Date07 March 2003
Docket NumberNo. 01-17027.,No. 01-17214.,01-17027.,01-17214.
Citation322 F.3d 1123
CourtU.S. Court of Appeals — Ninth Circuit
PartiesSECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. John A. HICKEY, Defendant-Appellant, and Mamie Tang, Continental Capital Financial Group, Inc.; Continental Capital Income Fund II; JM Regional, Inc.; Continental Capital Properties I, Inc.; Continental Capital Securities Group, Inc.; Continental Capital Investments, Inc.; Continental Capital Employees, Inc.; Continental Capital Secured Principal with Income Fund I; Continental Capital Private Equity Fund I; D.E. Frey & Company, Inc., Defendants. Securities and Exchange Commission, Plaintiff-Appellee, v. John A. Hickey, Defendant, and John Hickey Brokerage, Third-Party Appellant.

David J. Cohen, Cohen & Paik, San Francisco, CA, for defendant-appellant, John A. Hickey.

Curtis F. Dowling, Dillingham & Murphy LLP, San Francisco, CA, for third-party appellant, John Hickey Brokerage Co.

Michael A. Conley and Rada Potts, Securities and Exchange Commission, Washington, DC, for plaintiff-appellee, Securities and Exchange Commission.

Appeals from the United States District Court for the Northern District of California; William H. Alsup, District Judge, Presiding. D.C. No. CV-94-03336-WHA.

Before HAWKINS, GRABER, and TALLMAN, Circuit Judges.

OPINION

TALLMAN, Circuit Judge.

This case presents us with the important and intriguing question of when a court may freeze assets of a nonparty to effectuate relief granted in a securities fraud enforcement action. We conclude that the inherent equitable power of a district court allows it to freeze the assets of a nonparty when that nonparty is dominated and controlled by a defendant against whom relief has been obtained in a securities fraud enforcement action.

I

These consolidated appeals arise from a scheme that defrauded investors in a limited partnership of $15 million. Legal proceedings began in September 1994 when the Securities and Exchange Commission ("SEC") filed a complaint against John Hickey, Mamie Tang, and several corporate entities controlled by Hickey and Tang. This matter has traveled a long and winding path since 1994, and the trail continues to lengthen as Hickey is currently awaiting trial on a related federal criminal indictment.

Hickey and Tang collected money from investors by promising to develop property in California's Napa and Sonoma Valleys. The SEC complaint alleged that Hickey and Tang offered unregistered limited partnerships in Continental Capital Income Fund II ("Continental"), promising that the partnership would commercially develop the wine country lands. In doing so, Hickey and Tang violated federal securities laws. In particular, they illegally offered for sale unregistered securities and made material misrepresentations in the prospectus distributed to investors. The material misrepresentations included false statements about their net worth (which was supposed to secure the investments) and the status of title to the California property.

On the day the complaint was filed, the district court appointed a receiver to assume control of Continental. On December 2, 1994, the district court entered a default judgment against Hickey when he failed to timely answer the complaint. In February 1995, the default was vacated when Hickey and the SEC entered into a consent decree. In the consent decree, Hickey admitted violating securities laws and pledged that he "shall not assert" that he did not violate federal securities laws if the SEC sought disgorgement in the future.

The SEC's pursuit of Hickey by civil means stalled while the parallel criminal investigation commenced. On October 21, 1999, the SEC finally moved for summary judgment against Hickey on the disgorgement issue. In a written order filed on February 18, 2000, the district court granted the SEC's motion for summary judgment and ordered Hickey to disgorge $1.1 million. The court retained jurisdiction "for the purpose of enforcing its judgment, including approval of any distribution plan for the investors."

Hickey failed to disgorge any of his unlawful gains. On April 24, 2001, the SEC moved for an order directing Hickey to show cause why he should not be held in contempt. The district court granted the motion and set a hearing on the order to show cause.

The court held a two-day contempt hearing. The SEC presented evidence that Hickey had failed to satisfy the clear disgorgement order. The court agreed with the SEC's prima facie argument, holding "that the S.E.C. has carried that burden and shown that not one penny has been paid by Mr. Hickey under the February 2000 order as amended or prior thereto." The court then stated that "the burden has shifted under the law to Mr. Hickey to demonstrate why he was unable to comply with the order." Hickey and the SEC quarreled at the hearing over whether the assets of the John Hickey Brokerage Co. ("Brokerage") — a Bay Area real estate brokerage, which was owned by Hickey's mother, Dorothy Hickey, and founded after the SEC filed its complaint — should be considered available to Hickey as means to satisfy the disgorgement order.

The district court thought that it was entitled to hold Hickey in contempt at the hearing, but decided that it would not "do that at this moment." Instead, the court stated that it "want[ed] to bend over backwards to make sure that Mr. Hickey has the procedural due process that anyone could possibly argue for" and, accordingly, set another hearing for August 2001 to address the "[B]rokerage's ability to pay and, in turn, Mr. Hickey's derivative ability to pay," including whether the Brokerage was in fact Hickey's alter ego.

The court also directed Hickey to conduct discovery and disclose a list of witnesses for the August 2001 hearing. In the interim, the SEC deposed Dorothy Hickey to explore John Hickey's control of the Brokerage. Yet, John Hickey failed to conduct any discovery during this time and did not produce any witness list for the August 2001 hearing.

On August 10, and again on August 22, 2001, the district court considered evidence and heard oral argument on the issues of Hickey's ability to pay the disgorgement amount and Hickey's relationship with the Brokerage. Hickey presented no evidence establishing his inability to pay the disgorgement. Nonetheless, the district court allowed Hickey's counsel to designate portions of the deposition of Dorothy Hickey for consideration by the court.

The SEC designated portions of depositions from two witnesses and called four live witnesses to testify about the workings of the Brokerage. The SEC's evidence included Hickey's employment agreement with the Brokerage, which provided that the Brokerage would pay "[a]ll business and/or personal expenses [incurred by Hickey] as deemed appropriate by [Hickey] ... whether or not business related and any and all other expenses as deemed appropriate by [Hickey]." Dorothy Hickey, John's elderly mother residing in Chicago and the nominal owner of the Brokerage, testified by deposition that "I assigned all — anything, any questioning or any running of the business to John. I didn't cope with it." Other witnesses testified that the Brokerage was a profitable business with several hundred thousand dollars in cash on hand. The SEC demonstrated that Dorothy Hickey delegated the day-to-day operations of the Brokerage to Hickey, to the point where Hickey literally used a rubber stamp with the owner's signature to validate documents requiring an owner's signature. Evidence was also adduced that John Hickey registered with the California Department of Real Estate as the Brokerage's "administrative manager" and "designated broker." Neither Hickey nor the Brokerage rebutted the SEC's evidence concerning John Hickey's absolute control over the Brokerage.

On September 7, 2001, the district court issued an order holding John Hickey in contempt and freezing the Brokerage's assets. The court found that Hickey had access to the Brokerage's assets by virtue of his unqualified right to use Brokerage funds for his personal expenses. The court also found that Hickey was the true controller of the Brokerage and that the nominal owner "never exercised any meaningful supervision." The district court's order froze the Brokerage's assets, but allowed the Brokerage to pay rent, utilities, wages, and insurance without limitation. The order required the Brokerage to secure the SEC's permission for the payment of other business expenses.

The district court's order also set a payment schedule for Hickey. The schedule required Hickey to pay $20,000 per month for the remaining three months of 2001 and $40,000 per month thereafter. The court stated that "Mr. Hickey is being given the opportunity to purge himself over the next three months, failing which he must report for custody."

Both Hickey and the Brokerage filed timely notices of appeal of the contempt order and asset freeze.

II

The SEC contends that we lack jurisdiction over Hickey's appeal related to the contempt order entered on September 7, 2001. "Orders of civil contempt entered against a party during the course of a pending civil action are not appealable until final judgment." SEC v. Elmas Trading Corp., 824 F.2d 732 (9th Cir.1987). Even if the underlying action has proceeded to a final judgment, "an adjudication of civil contempt is not appealable until sanctions have been imposed." Donovan v. Mazzola, 761 F.2d 1411, 1417 (9th Cir. 1985) (emphasis added).

Here, the district court never imposed sanctions pursuant to its contempt order, and Hickey appealed before the end of the period during which he could purge the contempt. The district court's contempt order provided Hickey an opportunity to purge himself if he made three payments of $20,000 by the end of 2001. Hickey appealed the contempt order on October 1, 2001, long before the expiration of the period in which he could...

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