Commodity Futures Trading Comm'n v. Walsh

• Decision Date: 03 April 2013
• Docket Number: Docket Nos. 11–1516–cv(L), 11–1517–cv, 11–1738–cv, 11–1741–cv, 11–1859–cv, 11–1879–cv.
• Citation: 712 F.3d 735
• Court: U.S. Court of Appeals — Second Circuit
• Parties: COMMODITY FUTURES TRADING COMMISSION, Plaintiff–Appellee–Cross–Appellee, Securities and Exchange Commission, Plaintiff–Appellee, Robb Evans & Associates LLC, Receiver–Appellee–Cross–Appellee, v. Stephen WALSH, Paul Greenwood, Westridge Capital Management, Inc., WG Trading Investors, LP, WGIA, LLC, WG Trading Company LP, Defendants, Westridge Capital Management Enhancement Funds Inc., WGI LLC, K & L Investments, Robin Greenwood, Janet Walsh, Relief Defendants. 3M Employee Welfare Benefit Association Trust I, 3M Employee Welfare Benefit Association Trust II, 3M Employee Welfare Benefit Association Trust III, Minnesota Mining and Manufacturing Employee Retirement Income Plan Trust, Blue Cross and Blue Shield Association National Retirement Trust, North Dakota State Investment Board, Sacramento County Employees' Retirement System, San Diego County Employees Retirement Association, Kaiser Aluminum & Chemical Corporation Asbestos Personal Injury Trust, Alexander Dawson Foundation, Alexander Dawson, Inc., Interested Parties–Appellants–Cross–Appellees, Kern County Employees' Retirement Association, Interested Party–Appellee–Cross–Appellant, Acument Global Technologies, Inc., Wells Fargo & Co. Master Pension Trust, CBS Master Trust, Carnegie Mellon University, H–E–B Brand Savings & Retirement Plan Trust, Houston Municipal Employees Pension System, Ohio Northern University, The Timken Company Collective Investment Trust for Retirement Trusts, University of Pittsburgh—of the Commonwealth System of Higher Education, Vulcan Materials Company, Interested Parties–Appellees–Cross–Appellees.

712 F.3d 735

COMMODITY FUTURES TRADING COMMISSION, Plaintiff–Appellee–Cross–Appellee,Securities and Exchange Commission, Plaintiff–Appellee,Robb Evans & Associates LLC, Receiver–Appellee–Cross–Appellee,

v. Stephen WALSH, Paul Greenwood, Westridge Capital Management, Inc., WG Trading Investors, LP, WGIA, LLC, WG Trading Company LP, Defendants,Westridge Capital Management Enhancement Funds Inc., WGI LLC, K & L Investments, Robin Greenwood, Janet Walsh, Relief Defendants.3M Employee Welfare Benefit Association Trust I, 3M Employee Welfare Benefit Association Trust II, 3M Employee Welfare Benefit Association Trust III, Minnesota Mining and Manufacturing Employee Retirement Income Plan Trust, Blue Cross and Blue Shield Association National Retirement Trust, North Dakota State Investment Board, Sacramento County Employees' Retirement System, San Diego County Employees Retirement Association, Kaiser Aluminum & Chemical Corporation Asbestos Personal Injury Trust, Alexander Dawson Foundation, Alexander Dawson, Inc., Interested Parties–Appellants–Cross–Appellees,Kern County Employees' Retirement Association, Interested Party–Appellee–Cross–Appellant,Acument Global Technologies, Inc., Wells Fargo & Co. Master Pension Trust, CBS Master Trust, Carnegie Mellon University, H–E–B Brand Savings & Retirement Plan Trust, Houston Municipal Employees Pension System, Ohio Northern University, The Timken Company Collective Investment Trust for Retirement Trusts, University of Pittsburgh—of the Commonwealth System of Higher Education, Vulcan Materials Company, Interested Parties–Appellees–Cross–Appellees.^*

Docket Nos. 11–1516–cv(L), 11–1517–cv, 11–1738–cv, 11–1741–cv, 11–1859–cv, 11–1879–cv.

United States Court of Appeals, Second Circuit.

Argued: May 16, 2012.

Decided: April 3, 2013.

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

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

Thomas S. Arthur, Los Angeles, CA (Craig A. Welin, Frandzel Robins Bloom & Csato, Los Angeles, CA; Gary Owen Caris, Lesley Anne Hawes, McKenna Long & Aldridge, Los Angeles, CA; Christopher F. Graham, McKenna Long & Aldridge, New York, NY, on the brief), for Receiver–Appellee–Cross–Appellee.

Richard F. Ziegler, New York, NY (Elizabeth A. Edmondson, Michael W. Ross, Jenner & Block, New York, NY, for 3M Employee Welfare Benefit Association Trust I, 3M Employee Welfare Benefit Association Trust II, 3M Employee Welfare Benefit Association Trust III, Minnesota Mining and Manufacturing Employee Retirement Income Plan Trust, Blue Cross and Blue Shield Association National Retirement Trust, Sacramento County Employees' Retirement System, and San Diego County Employees Retirement Association; Richard F. Ziegler, Elizabeth A. Edmondson, Michael W. Ross, New York, NY, as Special Assistant Attorneys General for the State of North Dakota, for North Dakota State Investment Board; Lawrence Leo Ginsburg, Moses & Singer, New York, NY, for Kaiser Aluminum & Chemical Corporation Asbestos Personal Injury Trust; Steven F. Molo, MoloLamken, New York, NY, for Alexander Dawson Foundation and Alexander Dawson, Inc., on the brief), for Interested Parties–Appellants–Cross–Appellees.

Benjamin G. Shatz, Los Angeles, CA (Manatt, Phelps & Phillips, Los Angeles, CA, on the brief), for Interested Party–Appellee–Cross–Appellant.

Keith W. Miller, Perkins Coie, New York, NY (Adrienne C. Baranowicz, Paul Hastings, New York, NY, for Acument Global Technologies, Inc., and Wells Fargo & Co. Master Pension Trust; Scott Humphries, Gibbs & Bruns, Houston, TX, for Carnegie Mellon University; Kristi A. Davidson, Buchanan Ingersoll & Rooney, New York, NY, Zakarij O. Thomas, Buchanan Ingersoll & Rooney, Pittsburgh, PA, for University of Pittsburgh—of the Commonwealth System of Higher Education; Patrick L. Robson, Shawn Patrick Regan, Hunton & Williams, New York, NY, for Vulcan Materials Company; Hamish P.M. Hume, Boies, Schiller & Flexner, Washington, D.C., Rosanne C. Baxter, Boies, Schiller & Flexner, Armonk, NY, for CBS Master Trust; Robert A. Bell, Jr., Vorys, Sater, Seymour & Pease, Columbus, OH, for Ohio Northern University; Joseph N. Froehlich, Locke Lord, New York, NY, for Houston Municipal Employees Pension System; Steven Paradise, Vinson & Elkins, New York, NY, for H–E–B Brand Savings & Retirement Plan Trust; Jeffrey David Zimon, Benesch Friedlander Coplan & Aronoff, Cleveland, OH, for The Timken Company Collective Investment Trust for Retirement Trusts, on the brief), for Interested Parties–Appellees–Cross–Appellees.

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

KEARSE, Circuit Judge:

In these two civil enforcement actions for securities fraud—brought, respectively, by the Commodity Futures Trading Commission (“CFTC”) and the Securities Exchange Commission (“SEC”) against defendants Stephen Walsh and Paul Greenwood, et al., and consolidated by this Court for appeal—various entities that were defrauded by the defendants appeal from a March 21, 2011 order (“Order”) of the United States District Court for the Southern District of New York, George B. Daniels, Judge, approving initial pro rata distributions on April 20, 2011, totaling $815,000,000 recovered from defendants and associated entities by receiver Robb Evans & Associates LLC (“Robb Evans” or the “Receiver”), in accordance with the plan proposed by the Receiver (“Plan” or “Receiver's Proposed Initial Distribution Plan”). Interested–Parties–Appellants–Cross–Appellees 3M Employee Welfare Benefit Association Trusts I, II, and III, et al. (collectively, the “3M Benefits Group” or “3M Group”), contend principally that the district court should have rejected the proposed pro rata distributions because under the Plan, fraud victims who chose allegedly safer investments fare no better than victims whose investments were riskier. Interested–Party–Appellee–Cross–Appellant Kern County Employees' Retirement Association (“KCERA”) contends that the district court should have rejected the proposed Plan because it did not provide an adjustment for inflation to compensate longer-term investors. For the reasons that follow, we conclude that the district court did not abuse its discretion in approving the Receiver's Plan, and we therefore affirm the Order.

I. BACKGROUND

The factual background, for purposes of these appeals, is undisputed. For more than 13 years, beginning prior to 1996, defendants conducted their business—which offered various investment vehicles for pursuing an index arbitrage strategy—as a Ponzi scheme. Defendants issued fraudulent account statements to their investors, withdrew invested moneys in order to spend lavishly on themselves, and funded investor withdrawals with moneys received from other investors when there were no earnings. ( See United States v. Greenwood, No. 09 Cr. 722 (S.D.N.Y., Transcript of Guilty Plea of Paul Greenwood, July 28, 2010 (“Greenwood Plea Allocution Tr.”), at 23–27).) In pleading guilty to securities fraud, wire fraud, conspiracy to commit those offenses, commodities fraud, and money laundering ( see id. at 5–9, 31), Greenwood admitted, inter alia, as follows:

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

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

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

A. Correct.

Q. And you drew as you wished?

A. Correct.

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

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

Q. On your own books, you mean?

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

Q. And that was simply flatly untrue?

A. Correct.

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

A. That's correct.

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

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

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

A. Well, sort of, because we actually had—

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

A. That's correct.

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

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

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

A. That's correct.

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

....

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

(Greenwood Plea Allocution Tr. 24–25.)

On February 25, 2009, the CFTC and the SEC commenced the present civil enforcement actions against Greenwood, Walsh, and their related entities, alleging violations of various federal securities laws, seeking disgorgement of the proceedsof the frauds and restitution for the fraud victims, and obtaining a preliminary injunction enjoining any diversion of defendants' assets. The court appointed Robb Evans as temporary receiver of the defendants' assets on that date and continued its appointment as Receiver in an order entered in May 2009. The following descriptions of the fraudulent scheme are taken largely from reports to the district court by Robb Evans in May...