Securities & Exchange Commission v. I-Cubed Domains, LLC

15-2658-cv
SEC v. I-Cubed Domains, LLC
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED
BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1.
WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY
MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE
NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A
COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second Circuit, held
at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New
York, on the 4th day of November, two thousand sixteen.
PRESENT: PIERRE N. LEVAL,
ROBERT D. SACK,
REENA RAGGI,
Circuit Judges.
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SECURITIES AND EXCHANGE COMMISSION,
Plaintiff-Appellee,
v. No. 15-2658-cv
I-CUBED DOMAINS, LLC, SHALINI AHMED,
SHALINI AHMED 2014 GRANTOR RETAINED
ANNUITY TRUST, DIYA HOLDINGS, LLC, DIYA
REAL HOLDINGS, LLC, I.I. 1, I.I. 2, I.I. 3,
Relief Defendants-Appellants,
IFTIKAR AHMED,
Defendant,
IFTIKAR ALI AHMED SOLE PROP,
Relief Defendant.1
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The Clerk of Court is directed to amend the caption as set forth above.
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APPEARING FOR APPELLANTS: DAVID B. DEITCH (Jonathan A. Harris,
Harris, O’Brien, St. Laurent & Chaudhry LLP,
New York, New York; Paul E. Knag, Murtha
Cullina, LLP, Stamford, Connecticut, on the
brief), Harris, O’Brien, St. Laurent & Chaudhry
LLP, New York, New York.
APPEARING FOR APPELLEE: STEPHEN G. YODER, Senior Litigation
Counsel (Anne K. Small, General Counsel;
Sanket J. Bulsara, Deputy General Counsel;
John W. Avery, Deputy Solicitor, on the brief),
Securities and Exchange Commission,
Washington, D.C.
Appeal from an order of the United States District Court for the District of
Connecticut (Janet Bond Arterton, Judge).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED,
AND DECREED that the order entered on August 12, 2015, is AFFIRMED.
In this civil enforcement action, relief defendants I-Cubed Domains, LLC
(“I-Cubed”), Shalini Ahmed (“Shalini”), Shalini Ahmed 2014 Grantor Retained Annuity
Trust (“GRAT”), DIYA Holdings, LLC (“DIYA”), DIYA Real Holdings, LLC (“DIYA
Real”), I.I. 1, I.I. 2, and I.I. 3 (together, “Relief Defendants”) appeal from a preliminary
injunction freezing their assets, as well as those of defendant Iftikar Ahmed (“Iftikar”),
up to $118,246,186 to prevent dissipation of funds to which the SEC asserts it would be
entitled upon judgment against Iftikar, whose alleged fraudulent conduct underlies the
enforcement proceeding.2 See SEC v. Ahmed, 123 F. Supp. 3d 301 (D. Conn. 2015).
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Shalini is the wife of Iftikar; I.I. 1, I.I. 2, and I.I. 3 are their children. Iftikar is
“alleged to have engaged in a decade-long fraud that resulted in the misappropriation of
tens of millions of dollars from his former employer Oak Management Corporation . . .
and its investors.” SEC v. Ahmed, 123 F. Supp. 3d 301, 305 (D. Conn. 2015). Iftikar
2
On appeal, Relief Defendants do not challenge the preliminary injunction as against
Iftikar. Instead, they argue that the district court abused its discretion in freezing certain
of their specific assets because the SEC failed to prove either (1) that Iftikar was in fact
the equitable owner of such assets, rendering Relief Defendants nominees; or (2) that the
assets satisfied the test set forth in SEC v. Cavanagh, 155 F.3d 129 (2d Cir. 1998), which
permits freezing the assets of relief defendants who have received ill-gotten gains to
which they have no legitimate claim. Alternatively, Relief Defendants contend that the
injunction is overbroad because the SEC carried its burden only as to a portion of the
frozen assets. We assume the parties’ familiarity with the facts and record of prior
proceedings, which we reference only as necessary to explain our decision to affirm.
We review a preliminary injunction freezing assets—an “asset freeze”—for abuse
of discretion. See CFTC v. Walsh, 618 F.3d 218, 225 (2d Cir. 2010). A district court
abuses its discretion if it applies the incorrect legal standard or relies upon clearly
erroneous findings of fact. See id. To obtain an asset-freeze order, the SEC must
establish only that it is likely to succeed on the merits, a lesser showing than is necessary
for other forms of equitable relief. See SEC v. Miller, 808 F.3d 623, 635 (2d Cir. 2015).
Moreover, “[t]he plenary powers of a federal court to order an asset freeze are not limited
to assets held solely by an alleged wrongdoer, who is sued as a defendant in an
enforcement action.” Smith v. SEC, 653 F.3d 121, 128 (2d Cir. 2011). Those powers
extend as well to a person not accused of wrongdoing, a relief defendant, “where that
was purportedly arrested on unrelated charges of insider trading in April 2015, and fled
the country to India the following month. See id. at 306 n.1.
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person: (1) has received ill-gotten funds; and (2) does not have a legitimate claim to those
funds.” SEC v. Cavanagh, 155 F.3d at 136. The receipt of property as a gift without
payment of consideration does not create a legitimate claim under the Cavanagh test.
See CFTC v. Walsh, 618 F.3d at 226.
The parties agree that the Cavanagh standard does not apply where an asset
claimed to belong to a relief defendant is actually owned by a defendant, such that the
relief defendant is a “nominee” for the defendant. See SEC v. Hedén, 51 F. Supp. 2d
296, 299 (S.D.N.Y. 1999); accord Smith v. SEC, 432 F. App’x 10, 13 (2d Cir. 2011).
Relief Defendants, however, argue that the SEC failed to show that they were nominees
for Iftikar. We need not decide that issue because the specific assets satisfy the
Cavanagh test in any event. See Figueroa v. Mazza, 825 F.3d 89, 99 (2d Cir. 2016)
(noting that judgment can be affirmed on any ground supported by record).
1. Asset Freeze of Particular Property
a. Proceeds from I-Cubed Transaction
The first asset at issue is the proceeds of a sale of stock in “Company C” from
Relief Defendant I-Cubed to Iftikar’s former employer, Oak Management Corporation
(“Oak”). Relief Defendants do not challenge the district court’s determination that the
SEC was likely to show that this transaction was fraudulent. Nor do they dispute that
most of the proceeds ultimately went to the GRAT, for which Shalini served as grantor
and trustee, with the remainder going to Shalini. Shalini concedes that she provided
nothing of value in return for the transferred proceeds. The record thus satisfies the
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Cavanagh test as to proceeds from the I-Cubed transaction and supports the asset freeze
of this property.
b. Park Avenue Apartments
Relief Defendants also challenge the asset freeze of two apartments—Unit 12A
and Unit 12F at 530 Park Avenue—owned by Relief Defendants DIYA and DIYA Real,
respectively.
The record supports—and Relief Defendants do not contest—the district court’s
findings that the funds used to purchase each apartment derived from Iftikar’s alleged
fraudulent dealings. The record also supports—and Relief Defendants also do not
contest—findings that DIYA, DIYA Real, and Shalini did not provide any goods or
services in exchange for the apartments. This was sufficient to show the Relief
Defendants’ likely receipt of ill-gotten assets to which they had no legitimate claim and,
therefore, to support an asset freeze under Cavanagh. Shalini’s involvement in the
management of the properties after they were acquired is not relevant to this
determination.
c. Shalini’s Goldman Sachs Salary
Shalini contends that the asset freeze inappropriately covered approximately $1.2
million in income she earned while employed at Goldman Sachs between 2004 and 2011.
Shalini admits that this income was held in various joint accounts, which she shared with
Iftikar. At this stage of the litigation, no evidence has been adduced by Relief
Defendants that would allow the SEC to determine whether funds remaining in these
accounts up to the total amount of Shalini’s earned income represent her legitimately
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obtained assets or Iftikar’s ill-gotten gains. Because the purpose of an asset freeze is to
ensure that any funds that may become due after judgment can be collected, Smith v.
SEC, 653 F.3d at 127, the district court cannot be said to have abused its discretion in
failing to carve out Shalini’s income from assets in the joint accounts. In SEC v.
Rosenthal, 426 F. App’x 1 (2d Cir. 2011), cited by the district court to support the freeze,
a panel of this court stated that, where ill-gotten funds are commingled with a relief
defendant’s legitimately obtained funds, “[t]he SEC is not required to trace specific funds
to their ultimate recipients” because “[i]mposing such a tracing requirement would allow
an insider trading defendant to escape disgorgement by spending down illicit gains while
protecting legitimately obtained assets or . . . by commingling and transferring such
profits,” id. at 3; see also CFTC v. Walsh, 618 F.3d at 226 n.4 (“[W]hether frozen funds
can be traced to the proceeds of the alleged fraudulent scheme is not necessarily
dispositive.”); SEC v. Byers, No. 08 Civ. 7104 (DC), 2009 WL 33434, at *3 (S.D.N.Y.
Jan. 7, 2009) (Chin, J.) (“[A] freeze order need not be limited only to funds that can be
directly traced to defendant’s illegal activity for the reason that the defendant should not
benefit from the fact that he commingled his illegal profits with other assets.” (internal
quotation marks omitted)). Thus, the district court’s actions fell within its discretion.
Relief Defendants’ argument for release of Iftikar’s legitimately earned salary also
fails, not only because these assets are similarly commingled with fraudulently obtained
funds, but also because those funds are Iftikar’s and subject to an asset freeze to preserve
his ability to pay any eventual judgment in any event.
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2. Injunction Overbreadth
Relief Defendants argue that insufficient evidence of nominee status renders the
asset freeze overbroad. The argument fails because Relief Defendants have been unable
to point to any improperly frozen assets.
In response to one of the SEC’s discovery requests, Shalini stated:
[T]he asset freeze is inappropriate with respect to
[1] compensation she earned over the course of her
employment, [2] including grants of stock and retirement
account contributions; [3] her personal contributions to the
marital estate; [4] the [GRAT]; [5] the assets of DIYA
Holdings, LLC; the assets of DIYA Real Holdings, LLC; [6]
her and her children’s reasonable legal expenses; [and] her
and her children’s reasonable living expenses.
Suppl. App’x 303. For reasons already discussed, the district court acted within its
discretion in freezing the first, fourth, and fifth enumerated assets. As to the second, the
SEC has consented to release $300,000 in Shalini’s stock options and retirement
accounts. As to the third, Shalini has failed to identify any other particular contributions
to the marital estate. Finally, the district court has provided, on application, substantial
carve-outs from the freeze for her legal and living expenses, including over $200,000 for
the payment of legal fees in a separate criminal matter and $8,245 per month for her and
her children’s living expenses. Accordingly, she fails to show that the preliminary
injunction is overbroad in these respects.
That conclusion is only reinforced by the district court’s statement during a
September 2015 telephone conference indicating that it would entertain any application
to release assets “identifiable as [Shalini’s], and not tainted.” Id. at 344. During
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another hearing in December 2015, the district court similarly invited Relief Defendants’
counsel to request an evidentiary hearing as to which untainted assets belonged to his
clients, but counsel expressly declined to do so on the understanding that legal and living
expenses could be made available even if such funds needed to be taken from tainted
accounts. Indeed, at the injunction hearing itself, Shalini acknowledged that many of
her most valuable assets were funded by “money coming from [Iftikar’s] line of work.”
J.A. 810. Thus, the district court reasonably concluded that Relief Defendants had
failed to show that any assets should be excluded from the freeze. See SEC v. Ahmed,
123 F. Supp. 3d at 310–11. No different conclusion is warranted by Relief Defendants’
assertion, in their reply brief, that the district court purportedly found them to be
nominees of several frozen assets without hearing any evidence supporting that
conclusion. Issues raised for the first time in a reply brief are considered waived and
normally will not be addressed on appeal. See Bishop v. Wells Fargo & Co., 823 F.3d
35, 50 (2d Cir. 2016). There is no reason to depart from that rule here where Relief
Defendants do not allege that the referenced assets—a Fidelity account in Shalini’s name
and several trust accounts—properly belong to Relief Defendants, much less that they do
not include proceeds of Iftikar’s fraud. Indeed, the SEC adduced evidence that at least
one of the assets, Shalini’s Fidelity account, was largely funded by proceeds from one of
Iftikar’s fraudulent transactions so as to support a freeze under Cavanagh.
Insofar as Relief Defendants are able to identify any improperly frozen
assets—including those mentioned in their reply brief—they can apply to the district
court to release them in the first instance. The SEC would then be required to carry its
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burden of demonstrating that any such identified assets are either ill-gotten gains to
which Relief Defendants do not have a legitimate claim or that Iftikar in fact owns the
assets in question. See Smith v. SEC, 653 F.3d at 128. But on the present record, their
overbreadth challenge is meritless.3
3. Conclusion
We have considered Relief Defendants’ other arguments and conclude that they
are without merit. Accordingly, we AFFIRM the district court’s preliminary injunction.
FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk of Court
3
Insofar as Relief Defendants argue that the value of their frozen assets improperly
exceeds the amount of disgorgement sought—because the SEC would necessarily be
freezing their assets for purposes of satisfying Iftikar’s civil penalties—this argument
fails. If Relief Defendants cannot prove that any frozen assets legitimately belong to
them, then necessarily none of their assets are being improperly frozen to satisfy the civil
penalties alleged to apply to Iftikar’s conduct.
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