Simultaneous with the Securities and Exchange Commission’s filing of a complaint alleging massive securities fraud perpetrated by Joseph Shereshevsky and companies with which he was associated, the SEC obtained an order freezing the defendants’ assets. Among the assets covered by the order was a house occupied by Joseph’s brother and sister-in-law (intervenors). Thereafter, intervenors filed a motion to release their house from the freeze.
As described by the court, Mr. Shereshevsky’s sister purchased the house in question in 1991 “exclusively for the benefit and use of” the intervenors. In 2004, Mr. Shereshevsky’s sister deeded the house to Elka Shereshevsky, his wife, with the understanding that the house “would continue to be the property of [intervenors]”. Thereafter, Mrs. Shereshevsky refinanced the house with a mortgage that included a rider requiring that she use the house as her second home and not enter into any shared ownership arrangements. According to the receiver appointed to oversee defendants’ assets, at least some of the funds used to pay the mortgage on the house were drawn from accounts defendants allegedly used as part of their fraud. One month before the SEC filed its complaint against the defendants, Mrs. Shereshevsky purportedly conveyed the house, subject to the outstanding mortgage, to intervenors for $1.00. Notwithstanding the purported conveyance, Mrs. Shereshevsky made the mortgage payment on the house in the month following the purported conveyance.
In denying intervenors’ motion, the court first ruled that it had authority to freeze the assets of a third party who was not accused of wrongdoing if such third party (i) had received ill-gotten funds, and (ii) did not have a legitimate claim to such funds. The court then concluded that the SEC had satisfied both prongs. With respect to the first prong, the court ruled that evidence in the record that some of the mortgage payments on the house were made from accounts involved in the defendants’ alleged fraud was sufficient. With respect to the second prong, the court ruled that the “suspicious circumstances” relating to the intervenors obtaining title to the house sufficed to raised an inference that intervenors did not have a legitimate claim to such title. (SEC v. Byers, 2009 WL 33434 (S.D.N.Y. Jan. 7, 2009))