The Securities and Exchange Commission brought an action against several individuals and related investment entities (the Wextrust Entities) who allegedly participated in a Ponzi scheme that purportedly defrauded over 1,000 investors of approximately $255 million. Contemporaneous with the filing of the lawsuit, the District Court issued an order (i) appointing a temporary receiver to ascertain the financial condition and manage the assets of the Wextrust Entities, and (ii) enjoining any person or entity from taking action that would interfere with the assets of the Wextrust Entities, including filing any lawsuits, liens, encumbrances or bankruptcy petitions.
Creditors of the Wextrust Entities challenged the enforceability of the order, arguing that the District Court did not have authority to enjoin them, as non-parties, from filing involuntary bankruptcy petitions against the Wextrust Entities.
After noting that there was no Second Circuit authority directly addressing the issue, the District Court found support for its injunction in decisions issued by the Ninth and Sixth Circuits. Drawing from those decisions, the District Court found that its authority to enjoin the non-parties arose from its power over the assets placed in receivership, reasoning that if it could not enjoin them from bringing suit and otherwise contesting receivership assets, the purpose of the receivership would be undermined because the receiver would be unable to control and protect the assets. The District Court further supported its authority to issue the injunction by invoking the rule in the Second Circuit that “once the equity jurisdiction of the district court has been properly invoked by a showing of a securities law violation, the court possesses the necessary power to fashion an appropriate remedy.” (Securities and Exchange Commission v. Byers, 2008 WL 5236644 (S.D.N.Y.))