Commodity Futures Trading Commission v. Walsh

Commodity Futures Trading Comm'n et al. v. 3M Employee Welfare Benefit Assoc. Trust I, et al., Case No. 11-1516-cv(L) (2d Cir. Apr. 3, 2013)
The Second Circuit affirmed the District Court's decision. The Second Circuit held that (1) securities fraud victims may be considered "similarly situated" for purposes of a pro rata distribution when they were similarly situated in relationship to the fraud, losses, fraudsters, and nature of their investments in a uniform Ponzi scheme, (2) absent further disparate treatment of the victim-investors, for purposes of distribution, there is no difference between victims that invested in a regulated entity versus a related non-regulated entity, as the protections afforded by regulation were designed not for the victim-investors' benefit, but for the benefit of others, and (3) Till v. SCS Credit Corp., 541 U.S. 465, 477 (2004) does not apply in the securities fraud context, and no statutory provision exists, to require the Receiver to adjust distributions on account of inflation.
Procedural context:
Appeal and cross-appeal from decision by the United States District Court for the Southern District of New York ("District Court"), approving the court-appointed receiver's plan for pro rata, net-investment-based distribution of funds recovered from securities-fraud perpetrators and associated entities, and ordering distribution.
Defendants Stephen Walsh and Paul Greenwood, operated investment vehicles (also named co-defendants) as a Ponzi scheme. Notably, defendants Walsh and Greenwood were the managing general partners of two investment vehicles, WG Trading Company LP ("WGTC") and WG Trading Investors, LP ("WGTI"). Investors directed investments to either WGTC, an entity regulated by the SEC, FINRA and the CFTC, or WGTI, a nonpublic entity not subject to audits or government regulation. The Commodity Futures Trading Commission ("CFTC") and the Securities Exchange Commission ("SEC") commenced two civil enforcement actions for securities fraud against the defendants and the District Court appointed a temporary receiver of the defendants' assets (the "Receiver"). As was determined by the Receiver, and not disputed by the defendants, although created as two separate limited partnerships, WGTC and WGTI were financially inseparable and neither entity could have survived without the financial support of investor funds raised by the other. The District Court approved a claims administration procedure in which (a) investors and other interested persons would be invited to submit to the court proposals for the distribution of money collected by the Receiver from defendants and their associated entities; (b) the CFTC and the SEC would then be allowed to express their views as to an appropriate distribution plan; and (c) the Receiver would then submit its distribution plan for approval by the District Court. Despite two separate proposals, one by the entities known as the 3M Group (appellant) and the other by Kern County Employees' Retirement Association (the cross-appellant, and together with 3M Group, the "Interested Parties"), the CFTC and SEC jointly submitted a recommendation urging the adoption of a "net investment pro rata distribution plan" and the Receiver submitted the plan to the District Court, asserting that, given the inseparable nature of the defendant-entities, the pro rata distribution was the most fair and reasonable approach. The District Court approved the Receiver's plan. By the Interested Parties' appeal and cross-appeal, the Interested Parties contend principally that the district court should have rejected the proposed distribution because the plan (1) should have included a premium for fraud victims that chose allegedly safer investment (by investing in the regulated entity) and not for those whose investments were riskier (by investing in the unregulated entity) and (2) does not provide an adjustment for inflation to compensate longer-term investors.
Kearse, Pooler, and Livingston.

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