SEC v. Vincent Messina ( 2017 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
SECURITIES AND EXCHANGE No. 15-55325
COMMISSION,
Plaintiff-Appellee, D.C. No.
2:14-cv-02334-
v. JFW-MRW
WORLD CAPITAL MARKET, INC.;
WCM777 INC.; WCM777 LTD., OPINION
DBA WCM777 Enterprises, Inc.;
MING XU, AKA Phil Ming Xu,
Defendants,
and
VINCENT J. MESSINA, Relief
Defendant; INTERNATIONAL
MARKET VENTURES, Relief
Defendant,
Defendants-Appellants.
Appeal from the United States District Court
for the Central District of California
John F. Walter, District Judge, Presiding
Argued and Submitted January 10, 2017
Pasadena, California
Filed March 21, 2017
2 SEC V. MESSINA
Before: Richard C. Tallman and Michelle T. Friedland,
Circuit Judges, and David A. Faber,* District Judge.
Opinion by Judge Tallman
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
*
The Honorable David A. Faber, United States District Judge for the
Southern District of West Virginia, sitting by designation.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
SEC V. MESSINA 3
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.
COUNSEL
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
4 SEC V. MESSINA
K. Small, General Counsel; Securities and Exchange
Commission, Washington, D.C.; for Plaintiff-Appellee.
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.
SEC V. MESSINA 5
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
6 SEC V. MESSINA
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
1
The term “Ponzi scheme” originates from a fraudulent investment
scheme created by Charles Ponzi in December 1919 in Boston. See
Cunningham v. Brown, 265 U.S. 1, 7 (1924). The SEC defines a Ponzi
scheme as “an investment fraud that involves the payment of purported
returns to existing investors from funds contributed by new investors.”
Fast Answers – Ponzi Schemes, U.S. Securities and Exchange
Commission, http://www.sec.gov/answers/ponzi.htm (last visited Mar. 14,
2017).
2
To avoid confusion, we refer to Gary Messina by his full name and
to Vincent Messina as “Messina.”
SEC V. MESSINA 7
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 US 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.
3
An undated Statement of Account provided by Messina lists
$121,800 due and owing for his work related to Xu’s PAC. Messina has
not explained why he commingled $200,000 in earned fees by depositing
the funds into a trust account, typically employed to hold client funds to
cover future legal work.
8 SEC V. MESSINA
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 and executed a
document Messina characterizes as a loan agreement the day
after the transfer which, in its entirety, reads:
This Agreement (“Agreement”) is entered into
on February 27, 2014, between Vincent J.
Messina and Ming Xu.
FOR VALUE RECEIVED, Vincent J.
Messina promises to pay to Ming Xu without
recourse the sum of Five Million Dollars
($5,000,000) with interest computed at five
percent (5%) per annum, interest and principal
due on January 2, 2019 at his place of
business.
That transfer from Xu to Messina was recorded as an
“uncategorized expense” in ToPacific’s books and a payee
was not specified. Messina testified before the district court
that the loan was in furtherance of previously discussed
proposals to set up a fund for future investments in Africa, the
“no recourse” language in the agreement meant that he could
do whatever he wanted with the money in terms of
investment ventures, and he had no personal legal obligation
to repay Xu, although he had a “moral obligation” to do so.
SEC V. MESSINA 9
Nine days after Xu transferred the $5 million to Messina,
Xu sent a text message to him requesting the return of the
money to help fund a settlement with the SEC. Messina
refused, stating: “The money has already been wired out and
is i[n] accordance with the note I signed.” In actuality, as of
March 6, 2014—when Xu requested the recall of funds—
Messina still held almost all of the $5 million in a series of
personal and client trust accounts and had transferred only
$125,000 to IMV and $100,000 to Mohammed el Fatih
Saeed, who was in charge of IMV’s correspondent office in
the United Arab Emirates. Despite Xu’s request, Messina
went on to use seven different bank accounts to distribute
approximately $3 million of the funds to various business
partners and associates. Relevant here are Messina’s
additional transfers of $125,000 to IMV on March 10, 2014;
$350,000 on March 24, 2014; and $400,000 on March 29,
2014.
According to Gary Messina’s testimony, $100,000 of the
close to $1 million IMV received from Messina during this
time represented fees for IMV’s services under the January
2014 PAC Consulting Agreement and the remainder “related
to a potential business venture that would be undertaken as
part of an agreement with CNC Consulting.”4 On April 1,
2014, acting on instructions from Messina, Gary Messina
wired $840,485 of the funds to a bank account in Canada
maintained by Andrew Savor. Gary Messina testified that
Savor was the agent for CNC Consulting in Canada.
4
CNC Consulting was another entity affiliated with IMV and
WCM—in this case through Scott Choi, a senior vice president at IMV
who was slated to run WCM’s operations in Hong Kong.
10 SEC V. MESSINA
Meanwhile, the SEC initiated enforcement proceedings
against Xu and WCM in Los Angeles district court. On
March 27, 2014, the Commission filed its complaint against
Xu and WCM, and the court appointed a statutory receiver
and issued a temporary restraining order freezing all of Xu’s
and WCM’s assets and accounts (including ToPacific’s
accounts). After discovering Xu’s February 26 transfer of
$5 million to Messina, the receiver contacted Messina on
March 30 and provided him with a copy of the temporary
restraining order. Subsequent negotiations between
Messina’s attorney at Thompson Hine LLP, the receiver, and
the SEC resulted in Messina’s transfer of the approximately
$2 million remaining from the funds he had received from Xu
to Thompson Hine’s client trust account to hold in escrow
pending further order of the court. Gary Messina also wired
$100,000 of Xu’s funds to Thompson Hine’s trust account.
The SEC amended its complaint against Xu and WCM on
May 7, 2014, adding Messina and IMV as relief defendants.
On May 21, the district court ordered Messina and IMV’s
assets frozen and authorized expedited discovery. Messina
and IMV filed a motion to dismiss on June 2, 2014, arguing
they were not proper relief defendants because they had a
legitimate claim to the $5 million they received from Xu.
The district court denied the motion to dismiss on July 10, but
ordered a Rule 12(b)(1) evidentiary hearing to resolve
disputed issues of fact related to the legitimacy of Messina
and IMV’s claims to the funds. On July 30, 2014, Xu
separately consented to the entry of judgment against him and
SEC V. MESSINA 11
disgorgement and a civil penalty in an amount to be
determined by the court upon motion by the SEC.5
Following expedited discovery, the district court held its
Rule 12(b)(1) evidentiary hearing on September 5 and 17,
2014, during which it heard testimony from six witnesses,
including Vincent and Gary Messina. One hundred thirty-
eight exhibits offered by the SEC and twenty-five exhibits
offered by the relief defendants were admitted into evidence.
The district court made an adverse credibility finding against
Vincent Messina, noting that his testimony seemed “contrived
and evasive” and that his “long, rambling, non-responsive
answers to simple, straightforward questions were designed
to avoid directly answering questions that would be harmful
to his position.” Ultimately, the court concluded after
listening to the witness that it was left “with the distinct
impression that Vincent Messina was prepared to say
whatever he deemed necessary in an attempt to hold on to the
$5 million.” The court ruled that Messina had no legitimate
claim to the $5 million because the loan agreement with Xu
was a sham and that IMV likewise had no legitimate claim to
$941,505 of the $1,050,000 it received from Messina. The
court also concluded, however, that the SEC had failed to
carry its burden to demonstrate Messina and IMV were not
entitled, respectively, to $200,000 and $108,495 for their
work related to Xu’s requested PAC.
5
The district court entered final judgment against Xu on December
6, 2016, in the amount of $57,260,683.88, from which any sums
ultimately disgorged from Messina and IMV as relief defendants were to
be deducted. Xu did not appear in court to contest the amount of
judgment. The district court entered final judgment against WCM on
November 23, 2016, in the amount of $87,793,384.02.
12 SEC V. MESSINA
On January 12, 2015, the SEC filed a motion for an order
of disgorgement against Messina and IMV. After full
briefing, the district court granted the motion without further
hearing on February 4, 2015, and ordered Messina to
disgorge $5 million, with IMV jointly liable for $941,505 of
that amount. Final judgment against Messina and IMV was
entered on February 20, 2015, and they timely appealed. We
have jurisdiction under 28 U.S.C. § 1291.
II
Messina and IMV’s primary contention on appeal is that
the district court lacked subject matter jurisdiction to
determine the legitimacy of their claim to the $5 million
Messina received from Xu. They also argue the district court
erred in its factual findings, improperly ordered
disgorgement, and denied them due process.
We review a district court’s exercise of subject matter
jurisdiction over relief defendants de novo. See SEC v.
Colello, 139 F.3d 674, 675 (9th Cir. 1998). We review the
district court’s underlying factual findings on jurisdictional
issues, however, for clear error. See United States ex rel.
Hartpence v. Kinetic Concepts, Inc., 792 F.3d 1121, 1126–27
(9th Cir. 2015) (en banc) (“Where the district court relied on
findings of fact to draw its conclusions about subject-matter
jurisdiction, we review those factual findings for clear
error.”); see also Commodity Futures Trading Comm’n v.
Kimberlynn Creek Ranch, Inc., 276 F.3d 187, 192 (4th Cir.
2002) (reviewing for clear error factual findings entered after
a hearing to determine the legitimacy of a relief defendant’s
claim to the disputed funds).
SEC V. MESSINA 13
Generally, a district court’s decision to award
disgorgement is reviewed for abuse of discretion. Colello,
139 F.3d at 675. The court’s order of disgorgement in this
case, however, resulted in part from its conclusion that the
undisputed forensic evidence tracing the investor money
demonstrated as a matter of law that the funds Xu transferred
to Messina were ill gotten. We review that conclusion de
novo because it involves the application of law to facts not
disputed at the hearing.6 Id.
III
The SEC is authorized by both the Securities Act of 1933
and the Securities Exchange Act of 1934 to bring civil
enforcement actions seeking equitable relief in the form of
injunctions against those committing violations of the Acts.
See 15 U.S.C. §§ 77t(b), 78u(d)(1). In such actions, federal
courts may grant “any equitable relief that may be appropriate
or necessary for the benefit of investors,” 15 U.S.C.
§ 78u(d)(5), including disgorgement of the gains obtained
from securities law violations. See, e.g., SEC v. Platforms
Wireless Int’l Corp., 617 F.3d 1072, 1096 (9th Cir. 2010).
Courts may also exercise their broad equitable powers to
order disgorgement from non-violating third parties who have
received proceeds of others’ violations to which the third
parties have no legitimate claim. In such circumstances,
these non-violating third parties are referred to as “relief
defendants” or “nominal defendants.” Colello, 139 F.3d at
676.
6
Consistent with that approach, the district court treated the SEC’s
motion for disgorgement as one for summary judgment, and the parties
agree that this court accordingly should review the resulting order de
novo. See id.
14 SEC V. MESSINA
In the context of an SEC enforcement action, a relief
defendant “is a person who ‘holds the subject matter of the
litigation in a subordinate or possessory capacity as to which
there is no dispute.’” Id. (quoting SEC v. Cherif, 933 F.2d
403, 414 (7th Cir. 1991)). Accordingly, a relief defendant is
“not a real party in interest,” id., and “can be joined to aid the
recovery of relief without the assertion of subject matter
jurisdiction” because he or she “has no ownership interest in
the property which is the subject of litigation,” Cherif,
933 F.2d at 414. As we have previously recognized, “the
paradigmatic example of a nominal defendant is ‘a bank or
trustee [that] has only a custodial claim to the property,’”
however “the term is broad enough to encompass persons
who are in possession of funds to which they have no rightful
claim, such as money that has been fraudulently transferred
by the defendant in the underlying securities enforcement
action.” SEC v. Ross, 504 F.3d 1130, 1141 (9th Cir. 2007)
(quoting Colello, 139 F.3d at 677).
To assert jurisdiction over—and ultimately obtain
disgorgement from—Messina and IMV as relief defendants,
the SEC was required to demonstrate that Messina and IMV
(1) received ill-gotten funds and (2) do not have a legitimate
claim to those funds. Colello, 139 F.3d at 677. We agree
with the district court that the SEC made both of the required
showings in this case and we hold that asserting jurisdiction
over Messina and IMV as relief defendants was proper.
A
Messina and IMV contend that once they advanced a
facially colorable claim to the disputed funds as loan
proceeds, the district court was immediately divested of
jurisdiction to adjudicate the legitimacy of their claim and
SEC V. MESSINA 15
proceed any further against them as relief defendants. They
insist they would have to be named as defendants either in the
SEC’s underlying civil enforcement action against Xu and the
Xu-related entities or in a stand-alone lawsuit, with all of the
rights attending a civil action. We disagree.
Messina and IMV filed a Rule 12(b)(1) motion to dismiss
for lack of subject matter jurisdiction, challenging the factual
predicate for the court’s relief-defendant jurisdiction—
namely, the legitimacy of their claim to the $5 million
received from Xu. In adjudicating a motion to dismiss under
Federal Rule of Civil Procedure 12(b)(1), “if the existence of
jurisdiction turns on disputed factual issues, the district court
may resolve those factual disputes itself.” Leite v. Crane Co.,
749 F.3d 1117, 1121–22 (9th Cir. 2014). We see no reason
to treat a factual dispute any differently in the context of a
relief defendant proceeding. We therefore conclude that the
district court properly conducted a Rule 12(b)(1) evidentiary
hearing to evaluate the legitimacy of Messina and IMV’s
claims to the funds at issue.
In Messina’s contrary view, the putative loan agreement
gave him “presumptive title” to the money and the receiver
therefore could not proceed against him as a relief defendant;
rather, the receiver could disgorge the $5 million only by
demonstrating that Messina himself had violated the
securities laws. See Ross, 504 F.3d at 1142. But this position
begs the question because it necessarily assumes the loan was
not a sham—the very issue the district court resolved in the
Rule 12(b)(1) hearing in deciding whether to allow the
proceedings against Messina and IMV as relief defendants to
continue. See Colello, 139 F.3d at 677 (“[T]he lack of a
legitimate claim to the funds is the defining element of a
nominal defendant.”). Relief defendants cannot defeat
16 SEC V. MESSINA
jurisdiction simply by asserting an ownership interest in the
disputed funds; rather, as the Fourth Circuit has explained,
they must assert an interest both “recognized in law” and
“valid in fact.” Kimberlynn Creek Ranch, Inc., 276 F.3d at
192 (rejecting relief defendant’s ownership claim as “not
factually valid”). We join the Fourth Circuit in so holding.
Otherwise, any third party with a custodial claim to the
proceeds of securities violations committed by others would
be able to defeat relief defendant jurisdiction “simply by
stating a claim of ownership, however specious.” Id.
Our holding in Ross does not compel a different
conclusion. In that case, it was undisputed that the purported
relief defendant, a salesman for the company accused of
violating securities laws, received funds in the form of
commissions on his sales of unregistered securities—that is,
“he received compensation in return for services rendered.”
504 F.3d at 1142. We recognized that the salesman had
presumptive title to the funds just as “any other employee or
vendor,” and it was on that basis that we reversed the district
court’s exercise of jurisdiction over him as a relief defendant.
Id. Here, by contrast, the facts demonstrating presumptive
title are disputed; indeed, whether the $5 million Messina
received represented the proceeds of a valid loan or was
instead an attempt to make Xu’s assets “seem less” was hotly
contested. Messina and IMV’s reliance on U.S. Commodity
Futures Trading Commission v. WeCorp, Inc., 848 F. Supp.
2d 1195 (D. Haw. 2012), is similarly misplaced. In WeCorp,
the district court found an attorney had a legitimate claim to
funds received following the circulation of an email offering
legal services because the undisputed evidence demonstrated
the attorney had actually performed work in exchange for the
payment. See id. at 1201–03. No such undisputed evidence
is present here.
SEC V. MESSINA 17
Nor are we persuaded by the cases Messina and IMV cite
to support their argument that the purported existence of a
loan agreement, without more, is sufficient to establish
presumptive title and destroy relief defendant jurisdiction.
Those cases are inapposite because, just as in Ross and
WeCorp, each rests on an undisputed underlying factual
premise of legitimacy missing in this case. In SEC v.
Founding Partners Capital Management, for example, it was
“undisputed that [the purported relief defendant] received the
loan proceeds pursuant to written loan agreements”
establishing a valid debtor-creditor relationship executed
eight years prior to the SEC enforcement action. 639 F.
Supp. 2d 1291, 1294 (M.D. Fla. 2009). Similarly, in Janvey
v. Adams, it was “undisputed that the [purported relief
defendants] received the [funds] pursuant to written
certificate of deposit agreements . . . well before the
underlying SEC enforcement action.” 588 F.3d 831, 834–35
(5th Cir. 2009).
Here, the relevant facts were disputed; the district court
received extensive documentary evidence and heard
considerable testimony regarding Messina’s dealings with
Xu, WCM, and IMV, including evidence about the creation
of the disputed loan agreement, and ultimately determined
that Messina’s ownership claim was not factually valid—i.e.,
it was not a legitimate loan upon which to base a cognizable
claim. To conclude that the district court lacks jurisdiction to
engage in such factfinding after the mere invocation of a
claim of entitlement to the funds would effectively eliminate
the relief defendant procedure in SEC enforcement actions in
any case involving a disputed claim to funds alleged to be the
proceeds of securities fraud. We decline to take such a step,
and hold that the district court appropriately adjudicated the
legal and factual validity of Messina and IMV’s claim to the
18 SEC V. MESSINA
$5 million to determine whether it had jurisdiction over them
as relief defendants.
B
Having concluded that it was proper for the district court
to adjudicate the legitimacy of Messina and IMV’s claim, we
next hold that there was no clear error in the district court’s
finding that the $5 million transfer from Xu to Messina as a
loan was a sham. Over the course of a two-day evidentiary
hearing, the court assessed more than 150 exhibits and heard
testimony from six witnesses, including Vincent Messina and
Gary Messina, whose credibility the court was in the unique
position to evaluate. See Valenzuela v. Michel, 736 F.3d
1173, 1176 (9th Cir. 2013) (noting that where findings of fact
turn on credibility determinations, “the findings receive
heightened deference in light of the fact finder’s unique
opportunity to observe the demeanor of the witnesses”
(internal quotation marks omitted)). We will not disturb the
district court’s factual findings absent a “definite and firm
conviction that a mistake has been committed.” McClure v.
Thompson, 323 F.3d 1233, 1240 (9th Cir. 2003). Our review
of the record yields no such conviction.
In concluding the loan agreement was a ruse designed to
keep $5 million of Xu’s money out of the reach of the SEC,
the district court relied not just on its rejection of Messina’s
incredible testimony, but also on impeaching evidence such
as: Messina’s text message to Xu advising him to delay the
SEC negotiations so that they could make his assets “seem
less”; Xu’s transfer of the $5 million less than three weeks
later, before any discussion of a potential loan, along with a
contemporaneous request for Messina to “hold” the money;
the cursory agreement prepared by Messina after the transfer,
SEC V. MESSINA 19
which lacked the normal provisions of a valid loan
agreement; ToPacific’s record of the transfer as an
“uncategorized expense” without a listed payee; the
agreement’s promise to repay Xu rather than ToPacific;
Messina’s testimony that he had no personal legal obligation
to repay the $5 million; and Xu’s request to Messina to return
the $5 million just nine days after the transfer. The court did
not clearly err in evaluating this evidence and, accordingly,
we affirm its finding that the loan transaction was a sham.
C
In its February 4, 2015, disgorgement order, the district
court concluded that the $5 million transferred from Xu to
Messina and the $941,505 Messina subsequently transferred
to IMV were ill gotten as a matter of law. We affirm because
the unrebutted forensic analysis traced the source of the
transferred funds. There was no error in the court’s ultimate
conclusion that the monies were the proceeds of unlawful
activity or that IMV should be held jointly liable for the
$941,505 of those funds it received.
The SEC provided unrebutted declarations from the
receiver and the SEC accountant responsible for the
Commission’s forensic accounting investigation showing that
the only significant source of funds in Xu and WCM’s bank
accounts, including the ToPacific account from which funds
were transferred to Messina and then on to IMV, were
proceeds from Xu and WCM’s fraudulent investment scheme.
For example, the SEC accountant’s sworn declaration filed on
August 22, 2014, describing her work in tracing the deposits
of investor funds and transfers between Xu and WCM
accounts, supported her conclusion that the records showed
no “appreciable source of revenue other than apparent
20 SEC V. MESSINA
payments from investors in the WCM777 offerings.”
Likewise, the receiver swore in her August 22, 2014,
declaration that she had found no evidence that “the
Receivership Entities had any actual revenue-generating
business operations related to the WCM777 or ToPacific
programs, other than the pyramid-like scheme for raising
money.”7
Messina and IMV did not offer any evidence to controvert
the SEC’s analysis of Xu’s and Messina’s bank accounts, nor
did they proffer any evidence potentially available to them
through additional discovery that could raise a triable issue of
fact regarding the source of the funds ultimately transferred
to Messina and IMV. Although they now argue the receiver’s
final forensic accounting report filed on February 27, 2015,
was not available to them before the district court entered its
order of disgorgement, Messina and IMV point to no
information in the final report that creates a triable issue of
fact questioning the source of the funds. Indeed, that report
largely restates the earlier information provided to the district
court in the receiver’s numerous interim reports, and in the
receiver and SEC accountant’s pre-hearing declarations and
live testimony during the evidentiary hearing. That record
amply supports the district court’s conclusion that the funds
transferred to Messina and IMV were ill gotten as a matter of
law.
7
Similar evidence was presented in an earlier declaration by the SEC
accountant filed on March 31, 2014, which detailed her analysis of Xu and
WCM accounts in support of the SEC’s application for a preliminary
injunction. The SEC also filed a second declaration by the receiver in
support of its motion for an order of disgorgement on January 12, 2015,
in which the receiver confirmed her prior findings regarding the source of
the funds in the Xu and WCM accounts and provided additional
supporting information characterizing the money in the ToPacific account.
SEC V. MESSINA 21
The district court likewise did not err in holding IMV
jointly liable for the portion of those ill-gotten funds that it
received. The relief defendants argue that IMV neither
possesses nor benefitted from the funds it received and
subsequently transferred, and that it therefore should not be
subject to the disgorgement order. The district court was free
to reject this argument because ongoing possession of the
funds is not required for disgorgement. See Platforms
Wireless, 617 F.3d at 1098 (“A person who controls the
distribution of illegally obtained funds is liable for the funds
he or she dissipated as well as the funds he or she retained.”);
SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109, 1116 (9th
Cir. 2006) (“The manner in which [the recipient of ill-gotten
funds] chose to spend the illegally obtained funds has no
relevance to the disgorgement calculation.”); see also Colello,
139 F.3d at 677 (approving the use of relief defendant
procedures even where the disputed funds were “paid over to
others” by the relief defendant after their receipt). The
district court also found that the equities weigh in favor of
holding IMV jointly liable because Gary Messina willingly
dissipated the funds despite knowing they were the subject of
an ongoing SEC investigation and a dispute between Messina
and Xu. The evidence—including the evidence showing the
extent to which IMV was intertwined with Xu, WCM, and
Messina—substantially supports the district court’s
conclusion.
IV
In addition to contesting the amount of disgorgement
ordered by the district court, Messina and IMV also mount a
series of procedural challenges to the manner in which the
district court adjudicated the disgorgement proceedings.
Essentially, Messina and IMV argue that the district court
22 SEC V. MESSINA
abused its discretion by refusing to extend the briefing
schedule or to adjourn its ruling until after the receiver’s final
report was issued. They argue that as a result, the district
court did not yet know the total amount of the fraud, the
amount of fraudulent gains outstanding, or the amount over
which the SEC would ultimately be able to establish
territorial jurisdiction.
First, we reject Messina and IMV’s argument that the
district court erred in ordering disgorgement from them as
relief defendants before entry of a final judgment of the total
amount to be disgorged by Xu. They point to no authority in
support of their argument and, regardless, ignore the wealth
of undisputed evidence available to the district court
demonstrating that close to $60 million of investor funds
were collected as “deposits into the United States dollar
portion of” the Xu and WCM bank accounts as a result of
Xu’s scheme. Xu had already consented to entry of judgment
against him for his alleged securities violations, and all that
remained was for the district court to determine the total
amount of the investor funds Xu would be ordered to
disgorge.8 Once the district court found that Messina and
IMV were proper relief defendants, it was not an abuse of
discretion to order them to disgorge this small fraction of
these proceeds.
8
That number ultimately was fixed at $57,260,683.88. To the extent
the relief defendants are concerned with the potential for double recovery
by the SEC, that concern is assuaged by the district court’s provision that
“Xu shall receive a credit for any sums paid by [the relief defendants] on
their disgorgement and/or prejudgment interest obligations.”
SEC V. MESSINA 23
Nor did the district court err in rejecting the relief
defendants’ related extra-territoriality argument.9 Messina
and IMV assert that under Morrison v. National Australia
Bank Ltd., 561 U.S. 247 (2010), Section 10(b) of the
Exchange Act, 15 U.S.C. § 78j(b), applies only to domestic
transactions, and that the district court did not know at the
time it entered the order of disgorgement against the relief
defendants what percentage of Xu’s ill-gotten funds derived
from securities transactions in the United States.10 Even
assuming that the SEC can only seek disgorgement of funds
related to domestic securities transactions, the undisputed
evidence here shows that far more than $5 million in investor
transactions took place in the United States. See Absolute
Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 69
(2d Cir. 2012) (explaining that under Morrison, “a securities
transaction is domestic when the parties incur irrevocable
liability to carry out the transaction within the United States
9
Given that relief defendants are not real parties in interest, Ross,
504 F.3d at 1141, it is not apparent that a relief defendant would have
standing to challenge generally the SEC’s territorial jurisdiction over the
funds at issue in the underlying enforcement action. But Messina and
IMV frame their extra-territoriality argument as a complaint about the
manner in which the district court handled the disgorgement proceedings
against them. Specifically, they argued that the district court abused its
discretion by ordering disgorgement before the receiver’s final report
issued because the court had not yet determined the total amount of ill-
gotten gains at issue in the underlying SEC action. We address the
argument in that posture.
10
The SEC argues in response that Congress overrode the Morrison
decision when it enacted Section 929P(b) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat.
1376. The SEC did not raise this argument below, and we need not
address it here. See Arduini v. Hart, 774 F.3d 622, 634 n.12 (9th Cir.
2014) (“We generally do not consider issues raised for the first time on
appeal.”).
24 SEC V. MESSINA
or when title is passed within the United States”).11
Accordingly, the district court properly exercised its
discretion in ordering the relief defendants to disgorge the
$5 million they had received from Xu. We therefore affirm
the disgorgement order in its entirety.
V
Messina and IMV were afforded sufficient due process
during the relief defendant proceedings before the district
court. Our precedent recognizes “a truncated form of process
vis-à-vis” relief defendants. Ross, 504 F.3d at 1141. No less
importantly, the process afforded Messina and IMV here was
substantial. Messina was contacted by the receiver on April
1, 2014—just four days after the SEC filed its case against Xu
and WCM—and Messina, represented by counsel, entered
into negotiations with the receiver and the SEC over the next
few days that resulted in his deposit of the remaining
contested funds into escrow. Messina therefore had notice of
the underlying action against Xu and WCM almost
immediately and cannot claim he was unaware of his own
potential liability by April 2014. Messina and IMV were
formally named by the SEC as relief defendants and served
with the First Amended Complaint a month later. They were
granted expedited discovery, and they participated fully in the
Rule 12(b)(1) evidentiary hearing, where they were
represented by able counsel, and where they testified,
11
We have yet to address what constitutes a domestic transaction
under Morrison, but the Second Circuit’s analysis of this issue in Ficeto
is instructive. Given the undisputed evidence regarding the scale and
scope of Xu and WCM’s operations in the United States, we consider it
beyond peradventure that far in excess of $5 million was raised via
domestic transactions under any reasonable interpretation of Morrison.
SEC V. MESSINA 25
examined witnesses, and offered documentary evidence. We
hold that Messina and IMV were provided a constitutionally
sufficient opportunity to litigate their rights.
Messina and IMV again point to their late receipt of the
receiver’s forensic accounting report as proof that the
proceedings were unfair. Again, we disagree. Even if it was
error to enter the disgorgement order before the final forensic
report issued, Messina and IMV have not explained how they
were prejudiced by that error. Throughout the proceedings
before the district court, Messina and IMV had unfettered
access to the receiver’s numerous interim reports as well as
the receiver and SEC accountant’s detailed declarations and
testimony. The final forensic accounting report largely
restates and further corroborates the previously disclosed
interim conclusions demonstrating the existence and
functioning of a large and successful Ponzi scheme
orchestrated by Xu. Moreover, we see no exculpatory
information helpful to the relief defendants’ position in the
final report, nor have relief defendants identified anything in
the report that would have materially assisted their positions
during the evidentiary hearing or in resisting disgorgement.
As the district court correctly noted, the relief defendants
“had more than an adequate opportunity to conduct
discovery” and “failed to identify the particular facts [] they
reasonably expect[ed] to obtain with further discovery, or
explain why those facts would preclude granting the SEC’s
Motion for Order of Disgorgement.” On the facts before us,
we hold the relief defendants were provided adequate due
process to litigate their claims.
26 SEC V. MESSINA
VI
The Final Judgment as to relief defendants Vincent J.
Messina and International Market Ventures is AFFIRMED.
Costs on appeal are awarded to the Securities and Exchange
Commission.