Securities & Exchange Commission v. DeYoung

850 F.3d 1172, 2017 WL 927764
CourtCourt of Appeals for the Tenth Circuit
DecidedMarch 9, 2017
Docket16-4013
StatusPublished
Cited by14 cases

This text of 850 F.3d 1172 (Securities & Exchange Commission v. DeYoung) is published on Counsel Stack Legal Research, covering Court of Appeals for the Tenth Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Securities & Exchange Commission v. DeYoung, 850 F.3d 1172, 2017 WL 927764 (10th Cir. 2017).

Opinion

SEYMOUR, Circuit Judge.

The Securities and Exchange Commission (“SEC”) brought this civil action against American Pension Services (“APS”), a third-party administrator of self-directed individual retirement and 401(k) accounts (collectively “IRA Accounts”), and its President and CEO, Curtis DeYoung. The SEC alleged that DeY-oung misappropriated $24 million in APS customer funds that APS had commingled in a Master Trust Account at First Utah Bank (“First Utah”), custodian of the funds. The district court appointed a Receiver, who ultimately entered into a Settlement Agreement with First Utah. The settlement included a Claims Bar Order, which barred all other claims against First Utah relating to any IRA Accounts established with APS. Three of the approximately 5,500 APS clients (collectively “IRA Account Owners”) who had a financial stake in the receivership entity intervened and contended that the court could not bar them from filing their own claims against First Utah. The district court disagreed and approved the settlement. Intervenors appeal, and we affirm.

I

In 1992, APS requested that First Utah act as custodian for the IRA Accounts it held for the benefit of its IRA Account Owners because APS was not a bank and did not qualify to serve as custodian under the Internal Revenue Code. APS entered into a Custodian Agreement with First Utah that described each of their duties and established a depository account titled the Master Trust Account. APS’s CEO, Curtis DeYoung, was the sole signatory with authority to withdraw money from the Master Trust Account. ■

In 2009, APS and First Utah renewed the 1992 Custodian Agreement. Both custodian agreements delegated to APS the duty to provide all accounting services for IRA Account Owners with respect to their individual accounts with APS. The agreements included an indemnity provision that arguably entitled First Utah and its officers and directors to indemnity from all claims in connection with APS’s performance under the agreements. APS commingled all of the IRA Account Owners’ cash into the Master Account at First Utah and maintained all the records reflecting individualized ownership of the IRA Account Owner funds.

The district court found that between 2000 and 2014, DeYoung misappropriated approximately $24 million from the APS investors. In so doing, DeYoung falsified “IRA account statements to assure that the funds missing from the Master Accounts would reconcile with the cash APS reported to be in the IRA Account Owner’s [sic] accounts.”1 Aplt. App., vol. 3 at 475, D. Ct. Findings at ¶ 17.

[1176]*1176The SEC instituted this action against APS and DeYoung. The district court subsequently appointed a receiver to gather and manage the assets of APS and DeY-oung. The Receiver was given the power to, among other things, “pursue, resist and defend all suits, claims and demands which may now be pending or which may be brought by or asserted against the Receivership Estates.” Id. at ¶ 20 (quoting Order Appointing Receiver).

In May 2014, the Receiver initiated discussions with First Utah regarding its potential liability with respect to the misappropriation of $24 million of IRA Account Owner funds from the Master Account. The Receiver took depositions and had access to APS’s records, “including documents, agreements, and records pertaining to the relationship among APS, First Utah, and the IRA Account Owners, and financial information regarding First Utah, including the Written Agreement with the Federal Revenue Bank of San Francisco ... and insurance policies potentially insuring First Utah.” Id. at ¶ 29. In furtherance of these discussions, the Receiver provided First Utah with a draft complaint setting forth the nature of the claims the Receiver intended to pursue against First Utah on behalf of APS and for the benefit of the IRA Account Owners. All of the claims, in some form, focused on First Utah’s “failure to take necessary steps to assure the IRA Account Owners’ deposits were safe.” Aplt. App., vol. 2 at 346.

First Utah responded by asserting numerous defenses and counterclaims it intended to argue if the Receiver or any IRA Account Owner filed an action against it based on its role as custodian, including fraudulent inducement by APS and DeY-oung, statute of limitations, rescission, comparative negligence, and First Utah’s right to indemnification under the 2009 Agreement. The district court noted that “[ejxtensive investigation, discovery and research were conducted regarding the claims and defenses raised by First Utah, Everest [National Insurance Company, First Utah’s insurance provider], and the Receiver on behalf of APS.” D. Ct. Findings at ¶ 33. Moreover, the district court found the following with regard to the Receiver’s claims against First Utah:

35. The Receiver’s claims on behalf of APS against First Utah are substantially identical to the claims the IRA Account Owners could assert against First Utah if filed separately. The defenses and counter claims asserted by First Utah in defense of such claims are substantially identical to the defenses and counter claims that could be asserted against the IRA Account Owners claims. The claims are all from the same loss, from the same entities, relating to the same conduct, and arising out of the same transactions and occurrences by the same actors.
36. After several months of arm’s length negotiations between the Receiver on behalf of APS and First Utah, and Everest, including three days of.mediation with a professional mediator, all under plain view of the SEC, the SEC, the Receiver, First Utah and Everest determined it to be in their respective best interests, to be fair and reasonable, and in the best interests of the Receivership Estate, to resolve the claims, defenses, and counter-claims by entering into the Settlement Agreement.

Id. at ¶ ¶ 35, 36. The district court also noted the importance of all parties reaching a settlement in the case:

40. The claims, defenses and counter claims of the Receiver, the IRA Account Owners, the Receivership Estate and First Utah are complex and so inextricably intertwined such that a determination of each party’s liabilities and rights [1177]*1177independently may be impossible or, at a minimum, impracticable without extensive litigation.

Id. at ¶ 40.

With respect to the financial condition of First Utah at the time of the settlement negotiations, the district court found:

51. The Receiver undertook an analysis of the financial condition of First Utah, including reviewing publicly available financial reports and meeting with and discussing First Utah’s financial condition with key bank personnel and the Receiver’s independent banking consultants.
52. First Utah is a highly regulated, small Utah community bank with only seven branches, all in Salt Lake County, Utah. It has limited capital that it can use to fund its portion of the settlement amount. See Written Agreement; financial call reports publicly filed by First Utah with the Utah Department of Financial Institutions.
53. On February 23, 2009, First Utah became subject to a Written Agreement with the Federal Reserve under the Board of Governors Federal Reserve System, Docket No. 09-130-WA-RB-SM. Under the Written Agreement, First Utah was required to increase its capital.

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Bluebook (online)
850 F.3d 1172, 2017 WL 927764, Counsel Stack Legal Research, https://law.counselstack.com/opinion/securities-exchange-commission-v-deyoung-ca10-2017.