S.E.C. v. Infinity Group Co.

• Decision Date: 25 November 1998
• Docket Number: Civil Action No. 97-5458.
• Citation: 27 F.Supp.2d 559
• Parties: SECURITIES AND EXCHANGE COMMISSION v. THE INFINITY GROUP COMPANY, et al.
• Court: U.S. District Court — Eastern District of Pennsylvania

27 F.Supp.2d 559

SECURITIES AND EXCHANGE COMMISSION v. THE INFINITY GROUP COMPANY, et al.

Civil Action No. 97-5458.

United States District Court, E.D. Pennsylvania.

November 25, 1998.

Kingdon Kase, U.S. S.E.C., Philadelphia, PA, for S.E.C.

J. Bradford McIlvain, Dilworth Paxson, Philadelphia, PA, for Trustee.

Mark A. Klugheit, Dechert Price and Rhoads, Philadelphia, PA, for Claimant Bailey.

MEMORANDUM

DALZELL, District Judge.

Now before us is one of the final chapters of an epic which the Securities and Exchange Commission (hereinafter "SEC") began in August of 1997.

Because we already have issued many Orders and two published opinions in this matter,¹ we will only rehearse the facts here briefly. On August 27, 1997, the SEC filed a civil enforcement action against several defendants and relief defendants, including Geoffrey P. Benson and The Infinity Group Company (hereinafter "TIGC"), alleging in essence that TIGC engaged in a Ponzi scheme to defraud public investors through the offer and sale of securities and, in the process, violated the federal securities laws. After a preliminary injunction hearing, on September 5, 1997, we appointed Robert F. Sanville (hereinafter "Sanville" or "Trustee") as Trustee of TIGC and empowered him to take control and possession of all of TIGC's assets, funds, and other property. See September 5, 1997 Order. In that Order, we empowered Sanville to "pursue such causes of action as deemed necessary and appropriate and in the interests of the estate to recover assets of TIGC, or assert any right on behalf of investors who purchased securities from defendants." Id. at 6. We confirmed these powers in the Trustee in our Final Injunction, which we issued on February 6, 1998, after a four-day final injunction hearing.

Now before us is Sanville's motion (1) to compel turnover of assets held by one William W. Bailey (hereinafter "Bailey"); (2) to void notes issued to Bailey; and (3) to void real property mortgages granted to Bailey.

The transfers at the heart of the instant motion represent returns on investments Bailey allegedly made in TIGC's Ponzi scheme.² The transfers from TIGC to Bailey at issue are: a payment of $100,000 on December 17, 1996; a payment of $300,000 on May 9, 1997; a payment of $226,000 on August 22, 1997;³ and a payment of $37,000 on an as yet undetermined date. Also at issue are four promissory notes that TIGC issued to Bailey totaling obligations of $1.5 million, and four mortgages, totaling more than a million dollars, that TIGC issued to Bailey for real estate located in Ohio.

We have subject matter jurisdiction over Sanville's claim against Bailey under the Securities Exchange Act of 1934 and the Securities Act of 1933. See 15 U.S.C. § 78aa ("The district courts ... shall have exclusive jurisdiction of ... all suits in equity and actions at law brought to enforce any liability or duty [under this chapter]"); 15 U.S.C. § 77t(b) (noting that the SEC may bring an action in the district court to enjoin acts or practices which violate the Securities Act); 15 U.S.C. § 77v(a) ("The district courts ... shall have jurisdiction ... to enforce any liability or duty created by this subchapter."). See also TIGC I, supra n. 1.

Because we have subject matter jurisdiction, we have "authority to grant the full panoply of equitable remedies so that the [victims] can obtain complete relief." S.E.C. v. Antar, 831 F.Supp. 380, 398 (D.N.J.1993), citing S.E.C. v. Materia, 745 F.2d 197, 200 (2d Cir.1984), cert. denied, 471 U.S. 1053, 105 S.Ct. 2112, 85 L.Ed.2d 477 (1985). These remedies include disgorgement, asset freezes, appointments of receivers, repatriation of assets, constructive trusts, and restitution. See id.

Our jurisdiction extends not only to the defendants and relief defendants who the SEC named in the suit, but also to people such as Bailey.⁴ The district court in Antar noted that "the securities statutes vest federal courts with jurisdiction over claims against non-violators." Id; see also Deckert v. Independence Shares Corp., 311 U.S. 282, 288-89, 61 S.Ct. 229, 85 L.Ed. 189 (1940) (holding that a federal court had jurisdiction over a claim in a securities fraud action seeking relief from a non-party who held funds sought by the plaintiffs); International Controls Corp. v. Vesco, 490 F.2d 1334, 1338-39 (2d Cir.1974), cert. denied, 417 U.S. 932, 94 S.Ct. 2644, 41 L.Ed.2d 236 (1974) (noting that the Securities Exchange Act gave the district court jurisdiction to restrain non-violators from disposing of assets claimed by plaintiffs).

Thus, it is clear that we have subject matter jurisdiction over Sanville's claim against Bailey.

Bailey raises a number of arguments in response to Sanville's motion. We will deal with two issues in this Memorandum, Bailey's arguments as to personal jurisdiction and choice-of-law. We will address the remainder of his arguments when we reconvene for a hearing on the motion next month.⁵

A. Personal Jurisdiction Over Bailey

Bailey argues that we are without personal jurisdiction over him and his assets. We disagree, for several reasons.

First, Bailey consented to our jurisdiction when he filed a proof-of-claim form with the Trustee in an attempt to recover a $24,000 investment he purportedly made in TIGC.⁶ We agree with the reasoning of the bankruptcy court in In re Schwinn Bicycle Co., 182 B.R. 526, 530 (Bankr.N.D.Ill.1995). In Schwinn Bicycle, the bankruptcy court held that a proof-of-claim form was tantamount to a complaint, and that a party filing such a claim "will necessarily be viewed as having submitted to personal jurisdiction in that forum for all possible grounds of counterclaim." The court specifically noted that "by filing a proof of claim in a ... bankruptcy case, a creditor consents to personal jurisdiction in all possible counterclaims brought by the estate." Id. at 531, citing In re American Export Group Int'l Servs., Inc., 167 B.R. 311, 314 (Bankr.D.D.C.1994).

Bailey relies on In re Carnell Const. Co., 424 F.2d 296, 298-99 (3d Cir.1970) to argue that he has not consented to our jurisdiction. In Carnell, a debtor owed money to a bank on two separate loans. The bank filed a proof-of-claim form for only one of the loans. Our Court of Appeals held that the bank had not submitted to personal jurisdiction on the loan for which it had not filed a proof-of-claim. The court noted that "`a creditor who files his claim in the Bankruptcy Court impliedly consents to be sued on counterclaims arising out of the same transaction, but ... such a filing does not constitute implied consent to be sued on an alleged cause of action arising out of a different subject matter.'" Id. at 298, quoting In re Beasley-Gilbert's, Inc., 285 F.Supp. 359, 361 (S.D.Ohio, 1968).

Here, Bailey cannot plausibly argue that his proof-of claim and the Trustee's claims against him arise out of "different subject matter." Both Bailey's and Sanville's claims arise from Bailey's alleged participation in TIGC's Ponzi scheme and his many dealings with TIGC and its principals in furtherance thereof. We have no problem holding that Bailey's and Sanville's claims arise out of the same transaction and, therefore, that Bailey has submitted to the jurisdiction of this Court. To hold otherwise would be to allow Bailey to invoke our jurisdiction only for his own personal benefit.

Second, even if Bailey had not consented to our jurisdiction, we would have jurisdiction over him by virtue of the federal securities laws. 15 U.S.C. § 78aa and 15 U.S.C. § 77v give the federal district courts jurisdiction to enforce "any liability or duty" created by the Securities Exchange Act of 1934 and the Securities Act of 1933. Furthermore, these sections of the securities laws authorize nationwide service of process. See, e.g., City of Harrisburg v. Bradford Trust Co., 621 F.Supp. 463, 467 (M.D.Pa. 1985). "`[W]hen a federal court is attempting to exercise personal jurisdiction over a defendant in a suit based upon a federal statute providing for nationwide service of process, the relevant inquiry is whether the defendant has had minimum contacts with the United States'" rather than with any particular state. Sovereign Bank, F.S.B. v. Rochester Community Savings Bank, 907 F.Supp. 123, 125 (E.D.Pa.1995), quoting Busch v. Buchman, Buchman & O'Brien, 11 F.3d 1255, 1258 (5th Cir.1994). There is absolutely no doubt that Bailey, a Virginia resident, has minimum contacts with the United States. Thus, we hold that we have jurisdiction over Bailey pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934.

A third source of jurisdiction over Bailey is our broad equitable power to remedy violations of the federal securities laws. We have the power to impose equitable relief even on a third party against whom no wrongdoing is alleged⁷ if it is established that the third party possesses illegally obtained profits to which he has no legitimate claim. See S.E.C. v. Cherif, 933 F.2d 403, 414 n. 11 (7th Cir.1991) (noting that courts "have jurisdiction to decide the legitimacy of ownership claims made by non-parties to assets alleged to be proceeds from securities laws violations"); see also S.E.C. v. Wencke, 783 F.2d 829 (9th Cir.1986), cert. denied, 479 U.S. 818, 107 S.Ct. 77, 93 L.Ed.2d 33 (1986); Antar, 831 F.Supp. at 398 (noting that "the securities statutes vest federal courts with jurisdiction over claims against non-violators").

Bailey argues that the Trustee's failure to comply with the federal receiver statute, 28 U.S.C. § 754, divests him of jurisdiction in this matter. This section allows a court-appointed receiver to assert control over receivership property in a district other than the district in which he was appointed by filing, within ten days of his appointment, a copy of the complaint and the order of appointment in the district where the property is located. The statute says that "failure to file such copies in any district shall divest the...