The United States Securities and Exchange Commission v Manterfield

This is an appeal from the decision of Sir Charles Gray sitting as a Deputy High Court Judge given on 16^th May 2008 by which he continued a worldwide freezing order granted by Openshaw J on 29^th February 2008. That order had been obtained by the respondents the United States Securities and Exchange Commission (SEC) over the assets of the Appellant. Before Sir Charles Gray a number of points arose, including the question whether there was a good arguable case, but on the appeal only two points were argued (1) as to whether the SEC are seeking to enforce a foreign penal law and whether the English court should thus decline jurisdiction; and (2) whether the judge was right to dispense with a cross-undertaking in damages.

Those being the only points it is possible to set out the background relatively briefly. On 12^th April 2007 the SEC commenced proceedings in the United States District Court of Massachusetts against three defendants, Lydia Capital LLC and, as the original complaint alleged, “its two principals, . . .Glenn Manterfield (“Manterfield”) and Evan Anderson (“Anderson”)”. The original complaint alleged that the defendants were involved in an on-going fraudulent investment scheme involving sales to investors in Taiwan of “limited partnership interests” in an unregistered fund, Lydia Capital Investment Fund LP (“the Fund”). The complaint alleged that the defendants “are offering and selling hedge fund interests to investors and potential investors and not disclosing material facts . . . including, but not limited to the fact, that the Fund’s principal underlying assets - i.e. life insurance policies - may be either worthless or virtually worthless”. The complaint was later amended to provide greater detail of the alleged fraud. Putting it broadly, (and making it clear that any fraud is strenuously denied by those charged), the allegation is that during the period June 2006 through to April 2007 Manterfield and Anderson, through Lydia Capital LLC, fraudulently induced over 60 investors, all of whom were Taiwanese, to invest approximately $34 million in the fund. It is alleged that the two men misappropriated millions of dollars, withdrawing $8 million of which it is alleged Manterfield received $2.35 million.

In the District Court of Massachusetts the SEC obtained interim injunctions including interim freezing orders. Such freezing orders, although on their face covering assets in England, would not (it is common ground) be enforceable in relation to those assets.

Manterfield’s assets in England were for a period the subject of a restraint order imposed by His Honour Judge Keen QC at the Sheffield Crown Court on 1^st February 2007 in relation to criminal proceedings at that stage contemplated in the English courts. However, on 26^th February 2008 Manterfield was informed that no charges would be brought and the restraint order was discharged on 29^th February 2008. On the same day the SEC made its application to the English court for interim freezing orders in support of their proceedings in Massachusetts, relying on Section 25(1) of the Civil Jurisdiction and Judgments Act 1982.

Section 25(1) originally gave the English court the power to grant interim relief only where the foreign litigation was in a country which was party to the Brussels and Lugano Conventions and where the litigation related to a civil or commercial matter. But those limitations were removed by the Civil Jurisdiction and Judgments Act 1982 (Interim Relief) Order 1997 and thus it is accepted by Mr Fisher QC for Manterfield that as a general rule interim relief may be granted by the English court in relation to proceedings commenced or to be commenced anywhere in the world. But what Mr Fisher emphasised is that the 1997 Order did not abolish what he describes as the “fundamental rule of private international law . . . that the English courts will not assist any action by a foreign state in civil proceedings to enforce a foreign penal or revenue law”. Mr Wolfson for the SEC did not, as I understood his arguments, suggest that it did.

The first point taken by Mr Fisher can thus be articulated in this way. He cited Rule 3 from Dicey Morris & Collins The Conflict of Laws 14^th Edition Vol 1 (“Dicey”) page 100 which is in the following terms:-

“English courts have no jurisdiction to entertain an action:

(1)

for the enforcement, either directly or indirectly, of a penal, revenue or other public law of a foreign state; or

(2)

founded upon an act of state.”

He argued, as he argued before the Judge, that the SEC’s action in Massachusetts was seeking to enforce a “penal law” and that thus any judgment obtained in Massachusetts would be unenforceable in England. On that basis he argued no freezing order should be made at the interim stage which had as its object the enforcement of the penal law of a foreign state.

The second point on the appeal relates to the judge’s decision to dispense with a cross-undertaking in damages. Mr Wolfson informed the judge, as indeed he informed us, that the SEC had no power to offer an unlimited cross-undertaking in damages. Furthermore, he explained that although there were circumstances in which a limited undertaking could be given if the Commission authorised the same, no authority had been given and if it were given the limit of any such undertaking would be very low. His argument was that the case was one in which an undertaking should be dispensed with as he suggested it would be if an English regulatory body were pursuing a similar claim in England and he relied on SIB v Lloyd-Wright [1994] 4 All ER 210.

Before the judge Mr Fisher did not contest Mr Wolfson’s explanation as to the SEC’s power to provide a cross-undertaking. Furthermore he did not seek to obtain some limited undertaking by providing some form of assessment as to the losses that his client might suffer. His case before the judge was that the court only dispensed with a cross-undertaking in very limited circumstances and, whatever difficulties the SEC might have in giving a cross-undertaking, these were not the circumstances, even if SEC was a domestic regulatory body dealing with a domestic situation. In addition he submitted the fact that the SEC was a foreign body and the action was not concerned with a domestic situation and, since the damage his client might suffer if a freezing order was continued could be very serious, this was even more clearly not a case for dispensing with a cross-undertaking.

The judge was persuaded to dispense with any cross-undertaking in damages. That decision was an exercise of discretion by the judge and thus the question on appeal is whether the judge erred in principle or made a decision with which this court not only disagrees but which is outside the boundaries where reasonable disagreement is possible; [see Lord Fraser in G v G [1985] 1 WLR 647 at 652].

Certain points are common ground. The best explanation as to the basis for Rule 3 in Dicey rests upon the principle that enforcement of such claims would amount to an unwarranted extension of the sovereign power which imposed the tax or penal offence by one state within the territory of another [see paragraph 5.020 of Dicey and the authorities there referred to]. Whether the foreign law constitutes a penal law which the English courts will not enforce is a matter of English law, and thus whether the foreign law regards the law in question as a penal law or a public law is irrelevant [see the same paragraph in Dicey and the authorities there cited].

Mr Fisher took us to the complaint as filed in the District Court of Massachusetts as amended and in particular the prayer for relief which contains the following two paragraphs:-

“C. Require Defendants to disgorge their ill-gotten gains and unjust enrichment, plus pre-judgment interest, with said monies to be distributed in accordance with a plan of distribution to be ordered by the Court;

D. Order Defendants to pay an appropriate civil monetary penalty pursuant to Section 20(d) of the Securities Act [15 U.S.C. para 78u(d)(3)], and Section 209(e) of the Advisers Act [15 U.S.C. para 80b-9(e)];”

He then took us as an example of the provisions referred to in D above to the Securities Exchange Act of 1934 section 21(d)(3) which commences in these terms:-

“(A)

AUTHORITY OF COMMISSION – Whenever it shall appear to the Commission that any person has violated any provision of this title, the rules or regulations thereunder, or a cease-and-desist order entered into by the Commission pursuant to section 21C of this title, other than by committing a violation subject to a penalty pursuant to section 21A, the Commission may bring an action in a United States district court to seek, and the court shall have jurisdiction to impose, upon a proper showing ,a civil penalty to be paid by the person who committed such violation.”

Subsection (B) then provides for the amount of any penalty in three tiers depending on the seriousness of the breach. Subsection (C) provides for payment of the penalty to the Treasury “except as otherwise provided in section 308 of the Sarbanes-Oxley Act of 2002.”

Mr Fisher accepted that the relief claimed in C above claimed “disgorgement” in addition to D, the claim to a civil penalty. He did not dispute the explanation given by Mr Fontes, in his statement in support of the SEC’s claim to interim relief, as to the relief which the Commission would seek in the US proceedings and as to the way any assets seized by the Commission would be dealt with. What Mr Fontes stated was that if the SEC succeeded in its action it would request as relief from the court “disgorgement and a civil penalty”. He stated that all frozen funds would first be attributed to disgorgement and any remaining funds to civil penalty. Historically he said the Commission and its staff have “sought (where it is practicable) to have all disgorged funds returned to injured investors”. Sometimes (he explained) that was not possible because investors were, for example, no longer alive or because the recovery was so small that it did not make sense to expend time and resources distributing such small amounts. He also said that since 2002 the Commission had had statutory authority to distribute funds obtained as civil penalties to harmed investors. [This, as I understand it, is a reference to the Sarbanes-Oxley Act above referred to]. He said the staff had “stand-by authority” to seek distribution of both disgorgement and civil penalties to injured investors.

Mr Fisher argued that the action in the Massachusetts court had to be looked at in the round and that an English court should take the view that the action was about recovering penalties and that thus a judgment from that court would not be enforced in England. That, he submitted, led to the conclusion that it would be wrong to grant a freezing order so as to preserve assets against which enforcement would not be ordered.

Before the judge Mr Wolfson for the SEC undertook that the SEC would not seek to enforce in England any judgment relating to penalties. This was an undertaking confirmed before us, although Mr Wolfson made clear that the SEC were giving the undertaking because the assets available would be unlikely to meet even the sum to be disgorged and distributed to investors. There would, thus, be no assets against which to enforce any judgment for a penalty. He made clear that he should not be taken on behalf of the SEC as conceding that a judgment for penalties which were to be distributed to investors as in this case would necessarily fall foul of rule 3. But, he submitted, the undertaking in this case could save argument on that point because (as he submitted to the judge and the judge accepted) that with that undertaking the court was concerned with the disgorgement aspect alone.

The main point taken by of Mr Fisher before us was that the judge should not have been influenced by the undertaking as he indeed was. Mr Fisher maintained the argument that the action had to be looked at in the round; there was no room, he submitted, for “severance” and thus, since a critical part of the claim in Massachusetts was to seek penalties, the judgment would fall foul of Rule 3.

Both Mr Fisher and Mr Wolfson referred us to Huntington v Attrill [1893] AC 150 which, as appears from Dicey, was the principle authority for Rule 3 when it was first formulated. They also referred us to more recent authorities which seem to me to have a more direct bearing on this first issue. I take first a decision of the Court of Appeal of New South Wales in Robb Evans of Robb Evans Associates v European Bank Limited [2004] NSWCA 82. In that case the Court held that a receiver, appointed by the US Federal Trade Commission could sue in New South Wales, to recover the proceeds of a credit card fraud. One of the points taken was that although the order of the foreign court would order the fraudsters to disgorge any unjust enrichment, since funds not paid to consumers would be paid to the US Treasury it was right to characterise the proceedings as falling foul of Rule 3. The Court of Appeal took into account the likelihood that what would be recovered would be less than the amount by which consumers had been defrauded and that “this aspect of the scheme [the fact that a payment might be made to the US Treasury] is not of such significance as to form the basis for characterising the proceedings.” [See paragraph 81]. The head note accurately summarises the decision of the Court of Appeal so far as material in these words:-

“B. Whether the enforcement of a statute constitutes a governmental interest of the relevant kind depends upon the scope, nature and purpose of the provisions being enforced and the substance, rather than the form, of the proceedings. Not all statutes which serve the public interest fall within the exclusionary rule. [42], [44], [45], [59], [60], [63]

C. In the sphere of consumer protection, regulatory regimes may serve a public interest and be classified as public laws, without constituting a governmental interest of the relevant kind. [48], [62], [85]

Huntington v Attrill [1893] AC 150, Loucks v Standard Oil Co of New York (1918) 120 NE 198 discussed. Rich v Australian Securities and Investments Commission [2003] NSWCA 342 referred to.

D. The exclusionary rule does not apply in this case. The Appellant as receiver of Benford Limited sought, in substance, to recover funds for the compensatory purpose of reimbursing defrauded credit card holders. Neither the possibility of any undistributed surplus being returned to the United States Treasury, nor the fact that recouped funds will first be pooled, rather than directly refunded to particular defrauded credit card holders, should alter that characterisation of the proceedings. [83], [86], [87], [88], [89]

Schemmer v Property Resources Limited [1975] Ch 273 distinguished.”

It is worth also noting paragraph 89 of the judgment which is in these terms:-

“89.

The recoupment of funds with a view to their return to persons deprived of those funds is a normal consequence of the application of the civil law. In my opinion, as a matter of substance, that is what is occurring in the present proceedings. There is nothing in this case of the character of a governmental interest in the sense in which that concept is applied in the Australian authorities, i.e. as the exercise of a power peculiar to government. In my opinion the particular proceedings before the Court should not be characterised in that manner. The exclusionary rule does not apply and this Court should not decline jurisdiction.”

Robb, and the reasoning of the Court of Appeal of New South Wales, has been approved and adopted in the Court of Appeal here in Govt of the Islamic Republic of Iran v Barakat Galleries Ltd [2007] EWCA Civ 1374 [see in particular paragraphs 124 and 125]

Mr Fisher sought to distinguish Robb on two grounds. First, he submitted the action was being brought by a receiver and thus was between two private litigants. Second, he submitted that Robb was not a case in which, in the foreign action, penalties were being claimed. In that context, he repeated his submission that severance was not permissible.

I would reject the distinction based on the fact that it was a receiver suing. The reality was no different from the situation in the instant case – a regulatory body seeking to obtain “disgorgement” or to seek protection until an order for disgorgement could be obtained.

So far as severance is concerned it seems to me that one of the earlier authorities supports the view that, once a judgment has been obtained, the court will look to see what part is being sought to be enforced. If in reality that part of the judgment is, in substance, a claim for damages which in England might have been brought in a civil case, the fact that it is all part of a judgment in a criminal case will not bring it within Rule 3; see Raulin v Fischer [1911] 2KB 93. Further support for the view that it is the substance of what is being sought to be enforced, which is important for the purposes of the rule, flows from the reasoning in Robb and indeed in Barakat. The substance of what the SEC will seek to enforce (if they prevail in the action), and in relation to which they seek to preserve the assets, is the disgorgement of what they allege to be the proceeds of fraud. They also intend to seek orders, which will provide for the same to be returned to the investors. In my view the judge was right in his conclusion that such a judgment, if obtained, will not fall foul of Rule 3.

The judge considered this aspect in the context of examining whether it was appropriate to grant a freezing order at all. He did that because the position being taken by the SEC was that it had no power to give an unlimited undertaking and neither they, nor those acting for Manterfield, had suggested that a limited undertaking could be given. So the approach of both parties was that no cross-undertaking could be offered. On the one side Mr Wolfson for the SEC was arguing that it was right to dispense with such an undertaking so as to enable a freezing order to be made. On the other side Mr Fisher, for Manterfield, was arguing that the case was not within the area where dispensation was granted and thus without a cross-undertaking no freezing order ought to be made.

The judge in my view was right to start from the position that this was a case in which a cross-undertaking which would protect Manterfield from any possible loss flowing from the grant of a freezing order would not be given. He was also right to consider thus whether the case was one in which he should dispense with a cross-undertaking and grant the freezing order or refuse to dispense with the cross-undertaking with the result that the freezing order would not continue. This approach is also, as it seems to me, supported by the reasoning of Neuberger J in Customs Comrs v Anchor Foods Ltd [1999] 1 WLR 1139 particularly at 1151D-F.

Before the judge Mr Fisher ran an argument based on Article 6 of the Convention on Human Rights. That was an argument which the judge dealt with at some length but it was rightly not pursued by Mr Fisher in the Court of Appeal. Mr Fisher’s argument in the Court of Appeal was simply that the court, in the exercise of its discretion, should have refused an injunction without a cross-undertaking in damages on the grounds that the case did not fall within that exceptional area where a cross-undertaking would be dispensed with. He further relied (as he did before the judge) on the fact that the SEC was abroad and not funded by the British tax payer; the subject matter of the substantive action took place outside the United Kingdom and no allegation was made that the interests of United Kingdom citizens were adversely affected by the matters complained of in the substantive action.

It was common ground that the starting point in any application for an interim injunction is that it will not normally be made unless the claimant gives a cross-undertaking in damages [see Hoffman La-Roche & Co AG v Secretary of State for Trade and Industry [1975] AC 295 per Lord Reid at 341, Lord Morris at 351, Lord Wilberforce at 356 and Lord Diplock at 360].

It is further common ground that the court has in certain circumstances exercised its discretion to dispense with a cross-undertaking. Mr Fisher would emphasise that such cases have so far always been in the domestic context and (subject to one possible exception) are cases in which a local government or a regulatory body is pursuing a law enforcement claim the common features of which are (a) civil proceedings have been commenced by a public authority to prevent a respondent from continuing to act in alleged breach of the law; (b) the commencement of proceedings is regarded by the claimant as the most expedient way of preventing the respondent continuing to act unlawfully and (c) the public interest benefits from the prevention of further alleged breaches of the law taking place, [see e.g. Kirklees Metropolitan Borough Council v Wickes Building Supplies Ltd [1993] AC 227, where the local authority was seeking to restrain breaches of the law relating to Sunday trading, although the lawfulness of that law was under attack].

The possible exception still within the domestic context is Savings and Investment Board v Lloyd-Wright [1993] 4 AER 210. In that case the SIB pursuant to its statutory powers sought interim injunctions three of which were to prevent continued breaches (as alleged) of the law but the fourth of which was a freezing order (a Mareva as it was then called). It was argued that although it might be right to dispense with a cross-undertaking in damages in relation to the first three injunctions, a Mareva was quite different and that “such an order was draconian in its nature, and not strictly law enforcement.”

Morritt J (as he then was) relied on a decision of Megarry V-C in Re Highfield Commodities Ltd [1984] BCLC 623, where the Vice Chancellor had held that a cross-undertaking might not be required where “The Secretary of State was seeking to enforce the law, or was acting selflessly in the performance of a public duty directly or impliedly imposed by statute . . .”. Morritt J then held that, since (a) the SIB was authorised by statute “to claim monetary restitution for the benefit of those who may have suffered losses as a result of the unauthorised business”, and, since (b) the remedy whether monetary or injunctive was “one provided by statute and is provided to the [SIB], not for [their] own benefit but for the benefit of the public at large or those who have suffered from the infringement . . .”, it seemed to him appropriate for there to be no cross-undertaking in damages. It seemed to him that in each case the granting of an injunction was law enforcement and that the fact that a Mareva was draconian did not prevent it being law enforcement but merely reflected the worldwide nature of the defendants’ activities.

Mr Fisher sought to suggest that because in that case the Mareva was additional to other injunctions which were conceded to be law enforcement, that distinguished the case from the instant case. That is inconsistent with Morritt J’s reasoning and I would reject that argument. He submitted in the alternative that Lloyd-Wright should be overruled. I would also reject that submission. Not only does the case seem to me to be rightly decided but it has the support of Neuberger J in Customs Comrs v Anchor.

Mr Fisher then argued that, if Lloyd-Smith might otherwise apply, it should only do so in the domestic context and he reverted to the argument that it should have no application where the SEC was abroad and not funded by the British tax payer, the substantive action was concerned with matters outside the United Kingdom and no UK citizens were adversely affected. The judge rejected that argument in the following terms:-

“27.

. . . It is incontrovertible that fraudulent activity of the kind allegedly engaged in by Mr Manterfield is an international problem requiring international co-operation to prevent such wrong-doing and to penalize those who engage in it. In this very case all but one of the allegedly defrauded investors were, as I have said, Taiwanese nationals. Bodies like the SEC in the US and comparable institutions in other countries exist in order to further the objective of combating fraudulent conduct. In these circumstances it seems to me nothing to the point that the SEC is not funded by the British taxpayer and that the fraud took place in the United States and did not affect UK citizens. Such parochial considerations do not require me in the exercise of my discretion to refuse the relief sought.”

Not only can I detect no error of principle in the judge’s approach, but his conclusion and reasoning is one with which I would entirely agree.

I would accordingly dismiss the appeal.

I agree.

I also agree.