and Submitted January 10, 2017 Pasadena, California
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.
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.
and Exchange Commission / Disgorgement
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.
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.
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
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.
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.
TALLMAN, Circuit Judge:
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.
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.
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.
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. 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.
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
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
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
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
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."
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 ...