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Securities and Exchange Commission v. World Capital Market, Inc.

United States Court of Appeals, Ninth Circuit

March 21, 2017

Securities and Exchange Commission, Plaintiff-Appellee,
v.
World Capital Market, Inc.; WCM777 INC.; WCM777 LTD., DBA WCM777 Enterprises, Inc.; Ming Xu, AKA Phil Ming Xu, Defendants, and Vincent J. Messina, Relief Defendant; International Market Ventures, Relief Defendant, Defendants-Appellants.

          Argued and Submitted January 10, 2017 Pasadena, California

         Appeal from the United States District Court for the Central District of California, D.C. No. 2:14-cv-02334-JFW-MRW John F. Walter, District Judge, Presiding

          Maranda E. Fritz (argued) and Tammy P. Bieber, Thompson Hine LLP, New York, New York, for Defendants-Appellants.

          Daniel Staroselsky (argued), Senior Counsel; Randall W. Quinn, Assistant Attorney General; Jacob H. Stillman, Solicitor; Michael A. Conley, Deputy General Counsel; Anne K. Small, General Counsel; Securities and Exchange Commission, Washington, D.C.; for Plaintiff-Appellee.

          Before: Richard C. Tallman and Michelle T. Friedland, Circuit Judges, and David A. Faber, [*] District Judge.

         SUMMARY[**]

         Securities and Exchange Commission / Disgorgement

         The panel affirmed the district court's final judgment as to appellants Vincent J. Messina and International Market Ventures, who contested their liability as "relief defendants" arising from the Securities and Exchange Commission's ("SEC") enforcement action against Phil Ming Xu and Xu-related entities for federal securities law violations arising out of a fraudulent investment scheme.

         The SEC file a motion for an order of disgorgement against appellants, alleging they received $5 million of the tens of millions of dollars Xu unlawfully raised through investor deposits worldwide. Appellants alleged that they received those funds as a loan.

         The panel held that the district court properly asserted jurisdiction over appellants as relief defendants to determine the legal and factual legitimacy of appellants' claim to the $5 million. The panel held that the SEC made the required showing that: (1) appellants received ill-gotten gains; and (2) appellants did not have a legitimate claim to those funds. The panel rejected appellants' contention that once they advanced a facially colorable claim to the disputed funds as loan proceeds, the court was immediately divested of jurisdiction to adjudicate the legitimacy of their claim.

         The panel held that the district court did not clearly err in finding that the $5 million transfer from Xu to Messina as a loan was a sham. The panel also held that the record amply supported the district court's conclusion that the funds transferred to Messina and International Market Ventures were ill gotten as a matter of law. The panel further held that the district court did not err in holding International Market Ventures jointly liable for the portion of those ill-gotten funds that it received.

         The panel rejected appellants' procedural challenges to the manner in which the district court adjudicated the disgorgement proceedings. The panel also held that appellants were afforded sufficient due process during the relief defendant proceedings before the district court.

          OPINION

          TALLMAN, Circuit Judge:

         We address an issue of first impression involving the Securities and Exchange Commission's ability to disgorge ill-gotten funds from so-called "relief defendants." Victor Messina and International Market Ventures ("IMV"), contest their liability as relief defendants in the SEC's enforcement action against Phil Ming Xu and various Xu-related entities for federal securities law violations arising out of a fraudulent investment scheme. The SEC claims that Messina and IMV received $5 million of the tens of millions of dollars Xu unlawfully raised through investor deposits worldwide, but Messina and IMV assert that they received those funds as a loan.

         The question presented is whether putative relief defendants may divest a district court of jurisdiction to proceed against them using summary procedures simply by asserting a claim of entitlement to the disputed funds in their possession. Messina and IMV argue that a facially colorable claim is sufficient to destroy relief defendant jurisdiction, and that to seek disgorgement from them, due process requires the SEC either to join them as party defendants or bring a separate action against them. Messina and IMV also argue that the SEC failed to show that the funds the district court ordered disgorged are proceeds of monies unlawfully collected from United States investors.

         We conclude the district court properly exercised its jurisdiction to determine the legal and factual legitimacy of Messina and IMV's claim to the $5 million. The court acted correctly under our precedent approving the invocation of relief defendant procedures in SEC enforcement actions and did not clearly err in finding, following a two-day evidentiary hearing, that Messina and IMV had no legitimate claim to the funds. The evidence demonstrates that far more than $5 million was raised by Xu and his various entities in the United States, and the court correctly concluded that the funds sought were proceeds of illegal activity and subject to disgorgement. Finally, the district court did not abuse its discretion in later ordering disgorgement from Messina and IMV as relief defendants. We have jurisdiction and affirm.

         I

         Phil Ming Xu, together with his corporations including World Capital Market, Inc., WCM777 Inc., and WCM777 Ltd. (collectively, "WCM"), ran a multi-level marketing business ostensibly selling investors membership units providing access to cloud computing services. Xu and WCM promised investors returns of up to 60 percent over a 100-day period. WCM did not provide any actual products or services and had no significant legitimate revenue-generating business operations. Instead, Xu and WCM used money from new investors to pay existing investors and to buy real property and golf courses for Xu and associated third parties. Forensic accountants established that investor funds deposited into various Xu- and WCM-affiliated bank accounts between January 2013 and March 2014 totaled $57, 175, 385. Xu was the mastermind who controlled the Ponzi scheme.[1] He later stipulated to liability for securities law violations, and judgment in favor of the SEC was ultimately entered against Xu in the amount of $57, 260, 683.88.

         Relief defendant Vincent Messina began working with Xu in June 2013, providing legal advice regarding tax, corporate, and immigration matters. During this time, Messina was also general counsel to relief defendant IMV in Washington, D.C. IMV's President, Gary Messina, is Vincent Messina's nephew.[2]

         By the fall of 2013, Messina was well aware that Xu and WCM were under investigation by the SEC for securities law violations. Xu instructed WCM's chief operating officer to keep Messina apprised of the Commission's investigation "so that Mr. Messina could help Mr. Xu protect his assets." On December 17, 2013, WCM disbursed $200, 000 to Messina, who deposited it into a lawyers trust account at Wells Fargo Bank. Although no contract reflects the purpose of this transfer, according to Messina the funds represented fees for his services related to the formation of a political action committee ("PAC") requested by Xu.[3] Messina signed a Consulting Contract with IMV on January 10, 2014, retaining Gary Messina and IMV to assist with work related to the formation of the PAC. The fees for IMV's services were listed as "Two Hundred Thousand Dollars consisting of two payments: (1) One Hundred Thousand Dollars upon the execution of this agreement and (2) One Hundred Thousand Dollars on June 1st 2014." No money was transferred to IMV on the date of the execution of the agreement.

         By February 2014, Xu's outside securities law counsel, Scott Warren, was in settlement discussions with the SEC on behalf of Xu and WCM. Messina, learning that Warren had recommended settling with the SEC for $64 million, texted Xu on February 6, 2014, advising him to "drop Scott" because the proposed settlement sum was "ridiculous." Messina also wrote:

By the way the SEC does not have the power to bring a criminal charge. That is the decision of the U.S. Attorney which is entirely separate from the SEC. Perhaps the new counsel can delay the negotiations so that your assets seem less. I have tried to look at your transactions from the standpoint of rearranging them, but have not been able to get the required information.

Xu responded: "Ok."

         Three weeks after this text exchange, Xu transferred $5 million from the bank account of ToPacific Inc. (another Xu entity funded by WCM investor deposits) into Messina's Bank of America attorney-client trust account. Xu was ToPacific Inc.'s sole director and the signatory on its bank account. Xu asked Messina to hold the funds for future business endeavors. Messina responded that he would not simply hold the funds, and instead prepared ...


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