$230M in overseas funds tainted by domestic Ponzi scheme tests SEC’s reach

A $230 million Securities and Exchange Commission fraud case is testing the agency’s reach.  In January the SEC charged Francisco Illarramendi with running a Ponzi scheme through his unregistered investment advisory firm Michael Kenwood Capital Management.  Later this year Highview Point Partners LLC was added as a relief defendant because it was alleged to hold tainted funds from the scheme.  The SEC requested to freeze Highview’s funds. Highview’s counsel argued that the SEC had no authority to freeze its assets because “the Highview Offshore Funds are offshore entities, organized and existing under the laws of the Cayman Islands… [and] the funds’ assets are held in an offshore bank account in Amsterdam.” Highview’s counsel explained that the SEC’s authority to freeze assets under Section 21 of the Securities and Exchange Act “allows the commission to obtain equitable relief, as appropriate, to enforce United States securities laws, but cannot be applied extraterritorially to reach a foreign defendant that does not trade in domestic securities.” They cited last year’s Supreme Court decision Morrison v. National Australia Bank, which held that the Securities and Exchange Act had no extraterritorial effect. Judge Janet Bond Arterton rejected this interpretation, and ordered the assets frozen and returned to the United States. She explained

“While Morrison focuses on whether the Exchange Act can proscribe securities trading conduct abroad, Section 21 of the Act, under which the SEC brings its claim for injunctive relief against the Highview Funds, focuses on what relief the commission may obtain to protect investors…There is no claim that the conduct itself occurred extraterritorially. Since Morrison does not limit the commission’s authority to seek equitable extraterritorial relief to protect investors who are the victims of U.S.-based securities laws violations, Section 21 of the Exchange Act provides proper authority for relief of the commission." 

David J. Marshall, a partner at Katz Banks Kumin who represents SEC whistleblowers, applauds the freezing of the assets. “As more employees in the finance sector learn about the SEC whistleblower program,” Marshall said, “the public will see a significant increase in the SEC’s ability to uncover such scams and to take action to return ill-gotten gains to the investor.”