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United States Securities and Exchange Commission v. Quan

United States Court of Appeals, Eighth Circuit

August 30, 2017

United States Securities and Exchange Commission Plaintiff-Appellee
Marlon Quan; Acorn Capital Group, LLC; Stewardship Investment Advisors, LLC; Stewardship Credit Arbitrage Fund, LLC; Putnam Green, LLC; Livingston Acres, LLC; ACG II, LLC; Florence Quan Defendants Nigel Chatterjee; DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main; Sovereign Bank Intervenors Topwater Exclusive Fund III, LLC; Freestone Low Volatility Partners, LP; Freestone Low Volatility Qualified Partners, LP Intervenors-Appellants Gary Hansen Receiver-Appellee

          Submitted: May 9, 2017

         Appeal from United States District Court for the District of Minnesota - Minneapolis

          Before SMITH, Chief Judge, COLLOTON and KELLY, Circuit Judges.


         This is the second appeal in an enforcement action brought by the Securities and Exchange Commission (SEC) against Marlon Quan and entities he controlled, including the hedge fund Stewardship Credit Arbitrage Fund, LLC (SCAF).[1] SCAF was heavily invested in loans to entities controlled by Thomas Petters. Those investments suffered catastrophic losses when the Ponzi scheme supporting Petters' businesses collapsed.

         In the first appeal, SEC v. Quan, 817 F.3d 583 (8th Cir. 2016), we affirmed a jury verdict against Quan and certain entities he controlled-but not SCAF-for securities law violations based on false statements and misleading omissions made to hedge fund investors. Meanwhile, the district court[2] placed SCAF's remaining assets in receivership, approved the receiver's stipulation as to SCAF's liability, and approved a plan to distribute SCAF's assets to its investors and creditors. Three investors in SCAF-Topwater Exclusive Fund III, LLC, Freestone Low Volatility Partners, LP, and Freestone Low Volatility Qualified Partners, LP (collectively, Appellants)-appeal orders entered by the district court pertaining to the receivership, the entry of judgment against SCAF, and the pro rata distribution of SCAF's assets to investors. Because Appellants have identified no reversible error, we affirm.

         I. Background

         In March 2011, the SEC commenced an enforcement action against Marlon Quan and two investment management entities that he controlled: Stewardship Investment Advisors (SIA) and Acorn Capital Group, LLC (Acorn). The complaint alleged that Quan and the entities violated securities laws by: (1) fraudulently selling interests in two hedge funds-the onshore SCAF and the offshore Stewardship Credit Arbitrage Fund, Ltd.-through marketing materials that included materially false or misleading representations about anti-fraud measures that would be used to protect the investments; and (2) concealing defaults on the hedge funds' core investments beginning in December 2007, when those promissory notes issued by Thomas J. Petters (Petters Notes) began failing as a result of a Ponzi scheme.

         After the Ponzi scheme collapsed, the Petters businesses' assets were placed in receivership and several Petters entities filed for bankruptcy. Certain Quan entities and their creditors reached a settlement with the Petters businesses' bankruptcy and receivership estates. On motion by the SEC, the district court froze the share of the assets from this settlement that were apportioned to SCAF. Ultimately, these frozen assets and additional frozen SCAF assets recovered from other bankruptcies-totaling approximately $18 million-were deposited with the court.[3]

         In April 2012, the district court appointed a receiver, Gary Hansen, to manage SCAF and its frozen funds. The receivership order gave the receiver the power to "take any action which could be taken by the officers, directors, partners, members, shareholders, and trustees" of SCAF; "resist and defend all suits, actions, claims and demands which may now be pending or which may be brought or asserted against" SCAF; and take any "necessary and appropriate" action to "prevent the dissipation . . . of any funds or assets or for the preservation of any such funds and assets of" SCAF. After the entry of an order for disgorgement, the receiver was responsible for proposing to the court a claims and distribution process for the receivership assets.

         Shortly thereafter, the district court granted the SEC's unopposed motion for leave to amend the complaint, adding SCAF as a defendant. SCAF was organized as a limited liability company controlled by its managing member SIA, which in turn was controlled by Quan. The First Amended Complaint stated claims against SCAF for violations of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78j(b), and Rules 10b-5(a) and (c) thereunder, 17 C.F.R. § 240.10b-5(a)(c), as well as Sections 17(a)(1), (2)[4] & (3) of the Securities Act of 1933 (Securities Act), 15 U.S.C. § 77q(a)(1)-(3).

         Appellants, who are preferred investors in SCAF, moved to intervene in the action and to modify the receivership order to permit an immediate claim and distribution process in accordance with SCAF's operating documents. The district court granted the motion to intervene, but denied the motion to modify the receivership. The court concluded that SCAF could be found liable for fraud, and should that occur, the court could order disgorgement of the receivership assets and distribute those funds equitably, rather than adhering to SCAF's operating documents.

         On June 6, 2013, the receiver moved for court approval of a stipulation (First Stipulation) signed by all parties except for the intervenors. The First Stipulation agreed that SCAF would not be required to respond to the First Amended Complaint, to file summary judgment briefs, or to participate in the upcoming trial. According to the stipulation, the receiver had adjudged that an active defense of the matter would be costly and would deplete SCAF's assets, and that "determination of the SEC's claims against Quan will as a practical matter govern the determination of the SEC's claims against SCAF." The First Stipulation provided that, after resolution of the claims against Quan, "SCAF and the SEC shall enter into a further stipulation applying that judgment to the claims against SCAF and requesting the Court to enter judgment as to SCAF." Over Appellants' objection, the district court approved the First Stipulation, finding it was within the receiver's authority, properly preserved SCAF's assets, and did not commit the receiver to a final settlement disposition.

         The district court held a jury trial on the claims against Quan and certain entities he controlled, including SIA and Acorn, but not SCAF. As relevant here, the jury found Quan and SIA liable for violations of Section 10(b) of the Securities Act and Sections 17(a)(2) and (3) of the Exchange Act. The jury did not find Quan liable for personally aiding and abetting SCAF's violations of Section 10(b) and Rule 10b-5 ...

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