Commodity Futures Trading Comm'n v. Topworth Int'l

• Decision Date: 23 March 2000
• Docket Number: INTERVENOR-APPELLANT,98-55673,AND,DEFENDANTS-APPELLEES,Nos. 97-56590,RECEIVER-APPELLEE,RECEIVER-APPELLE,DEFENDANTS-APPELLANTS,s. 97-56590
• Citation: 205 F.3d 1107
• Parties: (9th Cir. 1999) COMMODITY FUTURES TRADING COMMISSION; THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, PLAINTIFFS, AND NEIL ADVANI, AKA, ANIL ADVANI,, v. TOPWORTH INTERNATIONAL, LTD, AKA, SEAL A; LIDA INTERNATIONAL FINANCIAL DATA, INC., AKA, SEAL B; WORTH FINANCIAL DATA, INC., AKA, SEAL C,, v. RICHARD V. HOEGH,COMMODITY FUTURES TRADING COMMISSION; THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, AKA, SEAL 2, PLAINTIFFS, v. TOPWORTH INTERNATIONAL, LTD, AKA, SEAL B; WORTH FINANCIAL DATA, INC., AKA, SEAL C; FRED A. WONG,, v. RICHARD B. HOEGH,LIDA INTERNATIONAL FINANCIAL DATA, INC., DEFENDANT
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1107

205 F.3d 1107 (9th Cir. 1999)

COMMODITY FUTURES TRADING COMMISSION; THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, PLAINTIFFS, AND NEIL ADVANI, AKA, ANIL ADVANI, INTERVENOR-APPELLANT, v. TOPWORTH INTERNATIONAL, LTD, AKA, SEAL A; LIDA INTERNATIONAL FINANCIAL DATA, INC., AKA, SEAL B; WORTH FINANCIAL DATA, INC., AKA, SEAL C, DEFENDANTS-APPELLEES, v. RICHARD V. HOEGH, RECEIVER-APPELLEE. COMMODITY FUTURES TRADING COMMISSION; THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, AKA, SEAL 2, PLAINTIFFS, v. TOPWORTH INTERNATIONAL, LTD, AKA, SEAL B; WORTH FINANCIAL DATA, INC., AKA, SEAL C; FRED A. WONG, DEFENDANTS-APPELLANTS, v. RICHARD B. HOEGH, RECEIVER-APPELLEE, AND LIDA INTERNATIONAL FINANCIAL DATA, INC., DEFENDANT.

Nos. 97-56590, 98-55673

U.S. Court of Appeals, Ninth Circuit

Argued and Submitted April 12, 1999

Decided June 28, 1999

As Amended March 23, 2000

Stanley L. Friedman, Beverly Hills, California, for appellants Fred A. Wong, Topworth International Ltd. and World Noon.

Michael R. Barbee, Hughes, Hubbard & Reed, Los Angeles, California, for receiver-appellee Richard V. Hoegh.

Victor J. Daniels, Los Angeles, California, for the Intervenor-Appellant Neil Advani, aka Anil Advani.

Appeals from the United States District Court for the Central District of California A. Andrew Hauk, District Judge, Presiding D.C. No. CV-94-01256-AAH.

Before: Robert Boochever, Diarmuid F. O'Scannlain and A. Wallace Tashima, Circuit Judges.

BOOCHEVER, Circuit Judge

The Commodities Futures Trading Commission brought suit against Topworth International, Inc., and two related companies for violations of the Commodities Exchange Act. Topworth defaulted, and the district court entered an order permanently enjoining Topworth from continuing operation, and requiring Topworth to disgorge the money obtained in violation of the Act. The district court appointed a permanent receiver, who filed a plan distributing any remaining assets to investors pro rata according to their net investment. Neil Advani, an individual investor, appeals this method of apportionment. After settlement negotiations failed, the permanent receiver brought an application for a restraining order and an order to show cause why funds held in the trust account of Topworth's attorney should not be turned over to the permanent receiver. The district court granted the order, and Topworth, Topworth's attorney, and a shareholder appeal the turnover of funds.

FACTS

On February 28, 1994, the Commodities Futures Trading Commission ("CFTC") and the California Department of Corporations filed a complaint for a restraining order, preliminary injunction, and other relief against three companies: Topworth International, Inc. ("Topworth"), a Hong Kong corporation; Lida International Financial Data, Inc. ("Lida"), a California corporation; and Worth Financial Data, Inc. ("Worth"), a California corporation. The complaint alleged that each company "offered and is offering to the investing public the opportunity to speculate in price changes in various precious metals (gold and silver) and foreign currencies by offering to them contracts for the purchase or sale of precious metals and foreign currencies for future delivery." Such activity violated the Commodities Exchange Act ("CEA"), 7 U.S.C.S 6(a), and the California Commodity Law of 1990, Cal. Corp. Code S 29520. Section 6(a) makes it unlawful to deal in contracts for the purchase or sale of a commodity for future delivery, unless such a transaction is conducted under the rules of a board of trade designated by the Commission as a "contract market" and is properly recorded. Cal. Corp. CodeS 29520 prohibits entering into commodity transactions unless one of the parties is registered with the CFTC, among other exceptions. See Cal. Corp. Code SS 29530, 29531, 29532. None of the companies conducted business under the rules of a board of trade and none was registered with the CFTC.

Lida and Worth consented to the entry of a preliminary injunction restraining the companies from continuing to violate the CEA. Topworth defaulted. Later, the court entered an order for a permanent injunction and for disgorgement by default against Topworth. The order set the total amount to be paid by Topworth at approximately $6 million.

The court appointed a permanent receiver ("the Receiver") to take charge of the companies' assets and protect the funds from further dissipation. The Receiver subpoenaed bank records from the Bank of China, and when the bank did not produce the records, brought a motion to compel. He eventually obtained some bank records, although he never obtained any records from Topworth. Customers did send documentation they had received from Topworth, but this information was not reflected in any of the defendants' records.

The Receiver found no evidence that Topworth actually executed its customers' orders on a commodity exchange, although the company sent statements to its customers purporting to document such purchases and sales. The state of the records was consistent with a type of " `bucketed trades' in which Topworth would take into its own account the opposite side of a given trade without executing the order on an exchange." See Purdy v. Commodity Futures Trading Comm'n, 968 F.2d 510, 520 (5th Cir. 1992) ("bucketing" in futures trading is the "method of doing business wherein orders of customers for the purchase or sale of commodities for future delivery, instead of being executed by bonafide purchases and sales with other traders, are simply matched and offset in the soliciting firm's own office and the firm itself takes the opposite side of customers' orders" (quotations omitted)). The Receiver also concluded that Worth and Lida commingled investors' funds with general operating funds, and then transferred the money to Topworth's Hong Kong bank accounts, where it was promptly withdrawn. The funds turned over by Lida's and Worth's banks thus contained no equity balances of the companies' customers. Individual accounts were untraceable.

THE DISTRIBUTION PLAN

On July 25, 1997, the Receiver filed a "Petition for Approval of Proposed Claims Review and Allowance Process and Plan of Distribution of Receivership Assets" of Lida, Worth, and Topworth. Because each entity appeared to be the alter ego of the other, the plan treated the three companies as one fund for the purposes of paying claims. The Receiver proposed three classes of creditors: first, the Receiver and fees associated with the receivership; second, the allowed claims of public investors in the companies; and third, the claims of all other creditors. The plan provided:

"The Receiver will base the approved amount of the claims of public investors, Class Two, on the claimant's "Net Investment"--defined as the total amount deposited by the claimant with the Receivership Entities less amounts returned to the claimant by the Receivership Entities and less any illegal trading profits reinvested by or credited to the claimant. This recission[sic]-and-restitution theory of recovery best furthers public policy and the cost-effective administration of the receivership estate. To allow claims based on profits made in the illegal trading operations would tend to legitimize those illegal trading operations contrary to public policy."

The receivership would serve on all claimants a schedule of the proposed treatment of each claim and a hearing would follow. Claimants wishing to object to the proposed treatment of their claims had 30 days after service of the schedule to file written objections.

The district court signed an order granting the petition for approval.

SETTLEMENT NEGOTIATIONS

While formulating the distribution plan, the Receiver had attempted to take custody and possession of all Topworth's assets, pursuant to the disgorgement ordered by the preliminary injunction, and had engaged in settlement Discussions with Fred Wong, the attorney of record for Topworth. Wong also conducted negotiations on behalf of World Noon, Ltd., a Hong Kong corporation and a fifty-percent shareholder of Topworth. The other half of Topworth's shares was owned by another Hong Kong corporation. World Noon's director, Yu Kwai Yee, was one of the two authorized signatories of Topworth's Bank of China account, and Yu's signature appeared on nearly every document authorizing withdrawals from the account. The bank records showed a practice of withdrawing deposits from Topworth's account as soon as the money arrived from the United States.

In November 1995, the Receiver traveled to Hong Kong to attempt to settle the receivership claim against Topworth. The parties signed an agreement under which Topworth would pay $1.1 million to the receivership and to Topworth's investors in exchange for releases. The money never was paid.

Toward the end of 1996, settlement Discussions resumed, and Topworth agreed to pay $600,000. Wong informed the Receiver that $300,000 would be payable immediately. On November 12, 1996, World Noon wired $300,000 to Wong's trust account.

THE RESTRAINING ORDER AND TURNOVER

Almost a year later, in late September 1997, the distribution plan was approved and the Receiver brought an ex parte application for a temporary restraining order to freeze the $300,000 in Wong's trust account, as well as an order to show cause why the money should not be turned over to the receivership. The district court granted the restraining order and scheduled a hearing on the order to show cause. Wong filed an opposing declaration stating that the funds in his trust account belonged to Topworth's shareholders, not Topworth.

At the hearing, Wong insisted that the $300,000 was not Topworth's, but property of Topworth's shareholders. The court ordered him to deposit the $300,000 into the court's registry and scheduled a later hearing to determine the final destination of the $300,000.

At the later hearing, Wong again stated that "the money at issue does not...