Receiver for Rex Ventures Grp v. Banca Comerciala Victoriabank

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 17-1770
SECURITIES & EXCHANGE COMMISSION,
Plaintiff,
v.
RECEIVER FOR REX VENTURES GROUP, LLC,
Defendant – Appellant,
v.
BANCA COMERCIALA VICTORIABANK SA
Party-in-Interest – Appellee,
and
REX VENTURE GROUP, LLC, d/b/a Zeekrewards.com; PAUL R. BURKS;
TRUDY GILMOND; KELLIE KING; BBVA COMPASS,
Defendants.
Appeal from the United States District Court for the Western District of North Carolina,
at Charlotte. Graham C. Mullen, Senior District Judge. (3:12-cv-00519-GCM)
Argued: October 26, 2017 Decided: March 26, 2018
Before GREGORY, Chief Judge, KEENAN, Circuit Judge, and SHEDD, Senior Circuit
Judge.
Reversed and remanded by unpublished per curiam opinion.
ARGUED: Kenneth D. Bell, MCGUIREWOODS, LLP, Charlotte, North Carolina, for
Appellant. Kiran H. Mehta, TROUTMAN SANDERS LLP, Charlotte, North Carolina,
for Appellee. ON BRIEF: Irving M. Brenner, Amanda W. Abshire,
MCGUIREWOODS, LLP, Charlotte, North Carolina, for Appellant. Lindsey B. Mann,
Kathleen Campbell, TROUTMAN SANDERS LLP, Atlanta, Georgia, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
2
PER CURIAM:
Kenneth D. Bell, the appointed receiver for Rex Venture Group, LLC d/b/a
ZeekRewards.com (RVG), appeals the district court’s conclusion that it lacked personal
jurisdiction over Banca Comerciala Victoriabank SA (Victoriabank), a Moldovan bank.
Because the district court erred in requiring the Receiver to prove jurisdiction by a
preponderance of the evidence, we reverse.
I.
RVG operated ZeekRewards, a combined Ponzi and pyramid scheme that solicited
investors to participate in an advertising division for a penny auction website. 1 On
August 17, 2012, the Securities and Exchange Commission filed a civil enforcement
action against RVG and its principal, Paul Burks. On the same day, the district court filed
an order freezing all of RVG’s assets (the Freeze Order) and appointing Bell as the
Receiver. The Freeze Order obligates persons and financial institutions to freeze funds
that RVG owned or could make a claim on and return these funds to the Receiver.
This appeal arises from the Receiver’s efforts to recover more than $13 million of
RVG assets held at Victoriabank at the time of the Freeze Order. Victoriabank is a
commercial bank with its headquarters and principal place of business in the country of
Moldova. To further understand the facts relevant to the question before us—whether the
1
RVG received money from more than 800,000 individuals and obtained funds in
excess of $800 million.
3
district court has personal jurisdiction over Victoriabank—we must examine how funds
flowed in the ZeekRewards scheme.
A.
Money was transferred to and from ZeekRewards through various digital wallet
companies, 2 including a company called Payza. Payza used multiple payment-processing
entities, each named “PaymentWorld,” and their sponsoring banks to service these
transactions. Initially, PaymentWorld, LLC (“PW-USA”), a California-based merchant
service provider, identified Payza as needing payment-processing services. But PW-USA
directly processed with only U.S. banks, and Payza was TMF-listed, 3 meaning no U.S.
bank would agree to do business with it. PW-USA therefore referred Payza to
PaymentWorld Limited (“PW-HK”), a Hong Kong-based internet payment service
processor. PW-HK connected Payza with two Russian banks, Master Bank and Tusar
Bank. Master Bank agreed to serve as Payza’s acquiring bank, 4 and Tusar Bank served as
2
Digital wallet companies are companies that allow investors to deposit and
remove funds electronically.
3
TMF, which stands for “Terminated Merchant File,” is a database that lists
merchants that have been terminated for cause and functions as a blacklist that banks use
to screen high-risk merchants.
4
An acquiring bank maintains a merchant’s bank account and, as a member of a
card association (e.g., Visa, MasterCard), enables the merchant to accept credit-card
payments. Acquiring banks also bear the risk of fund reversals, such as refunds, cancelled
transactions, and chargebacks.
4
the settlement bank for all payments processed through PW-HK and Master Bank. 5 PW-
USA kept itself involved in the processing chain by serving as Payza’s merchant service
provider and the payment gateway through which Payza interacted with PW-HK and the
acquiring and settlement banks.
In practice, when an investor used Payza to make a payment to ZeekRewards,
PW-USA transmitted the transaction information to Master Bank, Master Bank acquired
the funds from the credit-card company, and PW-HK transferred those funds from Master
Bank to Tusar Bank for settlement and then shifted them to Payza.
In May 2012, Master Bank informed PW-USA and PW-HK that it would no
longer process payments from Payza. PW-USA and PW-HK therefore needed a new
acquiring bank for Payza. According to an affidavit submitted by the CEO and owner of
PW-USA, Roman Balanko, he and the sole owner of PW-HK, Alexander Korkin, met
with the “owner and majority shareholder” of Victoriabank, Vyacheslav Platon, in
Moldova to discuss using Victoriabank as Payza’s acquiring bank. “Mr. Platon agreed
that Victoriabank could process transactions so long as he too could participate in the
processing chain as an additional settling entity called ICS Payment World SRL” (“PW-
5
A settlement bank facilitates credit-card transactions between consumers and
merchants by taking information about each transaction and ensuring that the correct
amount of money is exchanged between the issuing bank (i.e., the bank that issued the
credit card to the consumer) and the acquiring bank.
5
Moldova”). 6 After Platon formed PW-Moldova, Victoriabank replaced Master Bank as
Payza’s acquiring bank.
A percentage of each Payza transaction was held in reserve in PW-Moldova’s
account at Victoriabank to cover any chargebacks, reversals, or other potential risks.
According to the Receiver’s calculations, Victoriabank held $13,174,015.48 in RVG
assets when the district court issued the Freeze Order.
After the district court entered the Freeze Order, Balanko called and emailed
Victoriabank to inform it of the Freeze Order. The Receiver also sent written notice of the
Freeze Order to Victoriabank no later than September 17, 2012, informing
Victoriabank—in bold, underlined font—that “The Receivership Assets in the ICS
[PW-Moldova] Account are subject to the Freeze Order”. (J.A. 344). The written
notice was not in Romanian (the official language of Moldova), and the Freeze Order was
never domesticated in Moldovan court.
On September 25, 2012, $15.5 million was transferred from PW-Moldova’s
Victoriabank account, routed through Victoriabank’s correspondent bank account at Bank
of New York Mellon (BNYM), and sent to a PW-HK account with the Tusar Bank. The
money was then transferred again to an account for Payment World Limited Russian
6
The exact timing of this meeting, and the creation of PW-Moldova, is unclear.
6
Federation at Master Bank. 7 Master Bank has since closed, and it appears those funds are
effectively beyond recovery.
Victoriabank opened its BNYM correspondent account in 2008. “A correspondent
bank account is a domestic bank account held by a foreign bank, similar to a personal
checking account used for deposits, payments and transfers of funds.” Licci v. Lebanese
Canadian Bank, 732 F.3d 161, 165 n.3 (2d Cir. 2013) (internal quotation marks omitted).
These accounts “facilitate the flow of money worldwide, often for transactions that
otherwise have no other connection to New York, or indeed the United States.” Id.
(internal quotation marks omitted). Victoriabank’s correspondent account averages
roughly 1,500 transactions per month totaling around $200 million in credits and debits.
B.
In 2016, after the Receiver made several unsuccessful attempts to obtain the PW-
Moldova funds, the district court granted the Receiver’s motion for contempt and froze
$13,174,015 held in Victoriabank’s BNYM correspondent account as substitute assets for
the money transferred from PW-Moldova’s account. Victoriabank promptly moved to
dissolve the order, arguing that the district court lacked personal jurisdiction over it. The
Receiver moved in opposition and requested jurisdictional discovery. The district court
denied the request for full jurisdictional discovery but allowed the Receiver to (1) get
7
The parties vigorously dispute the interrelation of the PaymentWorld entities and
Victoriabank. The district court noted these relationships were “murk[y]” (J.A. 740), but
we need not delve into this murkiness to decide the appeal.
7
document production in the United States in the form of third-party subpoenas from
BNYM and (2) depose Balanko.
After the Receiver conducted this limited discovery, both sides filed supplemental
briefs on personal jurisdiction. The district court held a hearing on the issue and, at the
close of that hearing, granted Victoriabank’s motion to dissolve the order. The court
began by holding that, because the Receiver had conducted some jurisdictional discovery,
it had to prove personal jurisdiction by the preponderance of the evidence. The court then
found that the Receiver’s evidence fell short of that standard. First, the court held that
Victoriabank’s alleged violation of the Freeze Order did not give rise to jurisdiction
because that order was never domesticated in Moldova. Second, the court held that
Victoriabank’s maintenance of a correspondent bank account did not give rise to specific
personal jurisdiction. The district court stayed its order pending appeal, noting that the
case was “unclear” and that this Court should have the opportunity to “review the case
and weigh in on the disputed issues.” (J.A. 752).
II.
We review the district court’s determination that it lacks personal jurisdiction over
Victoriabank de novo. Carefirst of Maryland, Inc. v. Carefirst Pregnancy Ctrs., Inc., 334
F.3d 390, 396 (4th Cir. 2003). The Receiver argues that the district court erred in
applying a preponderance of the evidence standard to prove jurisdiction at this
preliminary stage. For the following reasons, we agree.
Although personal jurisdiction is an affirmative defense, once Victoriabank raised
it, the Receiver had the burden of showing personal jurisdiction “at every stage.”
8
Grayson v. Anderson, 816 F.3d 262, 267 (4th Cir. 2016). That burden, however, changes
depending upon the “stage” of the litigation. If a district court looks only at the initial
court filings, “a plaintiff need only make a prima facie showing” that personal
jurisdiction exists. Id. at 268. That approach is disfavored, and the “better course is for
the district court to follow a procedure that allows it to dispose of the motion as a
preliminary matter” applying a preponderance of the evidence standard. Id. An
evidentiary hearing is not required before the preponderance standard attaches, but we do
require district courts to “afford the parties a fair opportunity to present both the relevant
jurisdictional evidence and their legal arguments,” id., using “procedures that provide the
parties with a fair opportunity to present to the court the relevant facts,” id. at 269. See
also Walk Haydel & Assoc. v. Coastal Power Prod. Co., 517 F.3d 235, 242 (5th Cir.
2008) (noting that before preponderance standard applies “both parties must be allowed
to submit affidavits and to employ all forms of discovery, subject to the district court’s
discretion”). 8
Applying this framework in Grayson, we affirmed the district court’s use of the
preponderance of the evidence standard because the parties had engaged in a “full
discovery process,” and “[n]o party ever claimed that the record was inadequately
8
In Walk Haydel, the Fifth Circuit explained that when a court “receive[s] only
affidavits or affidavits plus discovery materials,” requiring proof of personal jurisdiction
“by a preponderance of the evidence would permit a defendant to obtain a dismissal
simply by controverting the facts established by a plaintiff through his own affidavit and
supporting materials.” 517 F.3d at 241 (quoting Data Disc., Inc. v. Sys. Tech. Assocs.,
557 F.2d 1280, 1285 (9th Cir. 1977)).
9
developed, that relevant evidence was missing, or that it was unable to fairly present its
position.” Grayson, 816 F.3d at 269.
The Receiver contends that the district court erred in applying the preponderance
standard in this case because “full discovery” did not occur, and the Receiver did “claim
that the record was inadequately developed.” We agree. In contrast to Grayson, the
Receiver did complain that the record was incomplete and that the full discovery process
had not occurred. During one hearing, the Receiver stated:
[Victoriabank] keeps saying we have now completed jurisdictional
discovery. We have not. We have not been permitted to obtain any
discovery from Victoriabank . . . [W]e haven’t finished all that can be done
to establish jurisdiction.
(J.A. 734).
The Receiver reiterated this complaint in its district court filings, explaining he
lacked “meaningful information regarding Victoriabank’s contacts and business dealings
with the United States, including ‘PaymentWorld U.S.,’ which controlled the account in
Moldova that is at issue.” Securities and Exchange Commission v. Rex Venture Group,
3:12-cv-00519, CM/ECF No. 521, at 9. When a district court significantly limits
jurisdictional discovery, it has not given both sides the “opportunity to present their cases
fully” and should apply a prima facie standard of proof. Walk Haydel, 517 F.3d at 242.
Accordingly, we find that the district court erred in requiring the Receiver to prove
personal jurisdiction by preponderance of the evidence because it substantially curtailed
jurisdictional discovery. We leave it to the district court in the first instance to determine
whether to review the parties’ initial filings and apply the lower standard of proof or
10
permit additional discovery to create a fuller evidentiary record before requiring the
Receiver to prove jurisdiction by a preponderance of the evidence. 9 Should the court
employ the lower standard, it “must construe all relevant pleading allegations in the light
most favorable to the plaintiff, assume credibility, and draw the most favorable inferences
for the existence of jurisdiction.” Combs v. Bakker, 886 F.2d 673, 676 (4th Cir. 1989).
III.
For the reasons stated above, we reverse the district court’s dismissal of the freeze
order against Victoriabank and remand for further proceedings consistent with our
opinion.
REVERSED AND REMANDED
9
Remanding to the district court, rather than applying a prima facie standard in the
first instance, is particularly appropriate here given the murky factual record and the
district court’s familiarity with the entire SEC enforcement action against RVG.
11