In a case that may test the global reach of the U.S. Securities and Exchange Commission, the agency announced on Tuesday that it had $230 million held in a hedge fund's offshore account returned to the United States, where it will remain frozen while the agency's fraud case proceeds.
The SEC in January charged Francisco Illarramendi and his unregistered investment advisory firm Michael Kenwood Capital Management with running a Ponzi scheme in a case filed in U.S. District Court for the District of Connecticut. The agency went on to add Stamford, Conn.-based Highview Point Partners LLC as a relief defendant for allegedly holding funds tainted by the Ponzi scheme.
Highview, represented by Kevin O’Connor and James Needham of Bracewell & Guiliani and Harry Davis and Michael Swartz of Schulte Roth & Zabel, protested vigorously that the SEC couldn’t freeze the money because the agency lacks international jurisdiction.
“The Highview Offshore Funds are offshore entities, organized and existing under the laws of the Cayman Islands... [and] the funds’ assets are held in an offshore bank account in Amsterdam,” O’Connor wrote in court papers filed in May.
The SEC’s request to freeze the funds was made under Section 21 of the Securities Exchange Act of 1934, which O’Connor argued “allows the commission to obtain equitable relief, as appropriate, to enforce United States securities laws, but, it cannot be applied extraterritorially to reach a foreign defendant that does not trade in domestic securities.”
Last year, the U.S. Supreme Court in Morrison v. National Australia Bank Ltd. held that the Exchange Act does not have any extraterritorial effect, O’Connor stressed. Therefore, the SEC “cannot sustain its cause of action against the Highview Offshore Funds, according to Morrison.”
But Judge Janet Bond Arterton read the decision more narrowly. “While Morrison focuses on whether the Exchange Act can proscribe securities trading conduct abroad, Section 21 of the Act, under which the SEC brings its claim for injunctive relief against the Highview Funds, focuses on what relief the commission may obtain to protect investors,” she wrote.
“There is no claim that the conduct itself occurred extraterritorially. Since Morrison does not limit the commission’s authority to seek equitable extraterritorial relief to protect investors who are the victims of U.S.–based securities laws violations, Section 21 of the Exchange Act provides proper authority for the relief sought by the commission,” she held.
Arterton ordered the assets returned to the United States and frozen. The receiver, John Carney, is represented by lawyers from Baker & Hostetler led by Christina Tsesmelis.
“In this case, the ability to freeze and repatriate the alleged financial crime proceeds was critical to the SEC’s effective enforcement of the U.S. securities laws,” Ethiopis Tafara, director of the SEC’s Office of International Affairs, said in a news release.
The SEC’s litigation effort is being led by Rua Kelly and Kathleen Shields.
Defendant Illarramendi was represented by a team including Colleen O’Loughlin of Bingham McCutcheon and Fernando Koatz of Gleason & Koatz. Illarramendi pled guilty to criminal charges in March.
Investment advisory firm Michael Kenwood Capital Management was represented by Adam Reinhart and Richard Jacobson of Arnold & Porter and continues to be represented by Thomas Goldberg of Day Pitney.