United States: S.E.C. Asset Freezes - More Than Just Equitable Relief

The power of the federal courts to issue ex parte as well as preliminary provisional relief freezing a defendant’s assets, without full consideration of the merits of the case, is one of the most potent devices available to the courts. Such relief allows a plaintiff to impose draconian sanctions against a defendant on the basis of much lesser burdens of proof and evidentiary standards than those that the plaintiff would have to meet in order to succeed at trial. The effect of an asset freeze is no less drastic when the plaintiff is the government or an agency thereof.

The Securities and Exchange Commission ("SEC") is statutorily authorized to bring actions in the federal courts whenever it suspects that violations of the federal securities laws have occurred.¹ In situations involving imminent or ongoing violations of the securities laws, the SEC is entitled "upon proper showing [to] a permanent or temporary injunction or restraining order … without bond."² Often, as part of such relief, the SEC seeks and usually obtains a freeze over the assets of the suspected wrongdoer(s). In obtaining asset freezes, the SEC contends that such relief is necessary in order to preserve the status quo and to maintain the efficacy of disgorgement or penalty orders that may ultimately be entered in the case – orders which would otherwise be rendered impotent through the dissipation of the defendant’s assets.

While this contention may have visceral appeal, as discussed below, asset freezes contravene squarely applicable precedent of the United States Supreme Court. Since at least 1945, in DeBeers Consolidated Mines, Ltd. v. United States the Supreme Court has squarely held that absent specific statutory authorization, a federal district court does not possess the power to order an asset freeze as part of an injunction in a suit seeking equitable relief, even where the plaintiff is the government or an agency thereof.³ While the SEC’s ability to obtain an asset freeze may be an important tool that should be available to it, until Congress amends the securities laws appropriately, federal district courts are not empowered to grant such relief.

In DeBeers, the government brought suit against several corporations for alleged violations of the federal antitrust laws. In furtherance of its suit, the government sought, inter alia, a preliminary injunction restraining the defendants from removing their assets from the United States pending an adjudication of the merits. The government argued that unless an asset freeze was imposed, the defendants could withdraw their assets from the United States and thus prevent the enforcement of any final order that the district court might enter.⁴

The Supreme Court unequivocally rejected that argument and held that the requested preliminary injunction was beyond the power of the district court because it was not authorized by statute or the "usages of equity."⁵ More specifically, the Court held that:

[t]o sustain the [order freezing the defendants’ assets] would create a precedent of sweeping effect. This suit, as we have said, is not to be distinguished from any other suit in equity. What applies to it applies to all such. Every suitor who resorts to chancery for any sort of relief by injunction may, on a mere statement of belief that the defendant can easily make away with or transport his money or goods, impose an injunction on him, indefinite in duration, disabling him to use so much of his funds or property as the court deems necessary for security or compliance with its possible decree. And, if so, it is difficult to see why a plaintiff in any action for a personal judgment in tort or contract may not, also, apply to a chancellor for a so-called injunction sequestrating his opponent's assets pending recovery and satisfaction of a judgment in such a law action. No relief of this character has been thought justified in the long history of equity jurisprudence.⁶

The SEC’s statutory authority to obtain injunctions is no different or greater than the government's authority to obtain injunctions under Section 4 of the Sherman Act,⁷ which DeBeers held was insufficient to empower the issuance of an asset freeze. It is thus eminently clear that district courts are not empowered to grant the SEC’s requests for asset freezes.

Recently, the principle established by DeBeers was revisited by the Supreme Court in Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc.⁸ There, the Court held that in an action for money damages brought by a private party, a federal district court lacks the power to issue a preliminary injunction preventing the defendant from transferring assets in which no lien or equitable interest is claimed:

[b]ecause such a remedy was historically unavailable from a court of equity, we hold that the District Court had no authority to issue a preliminary injunction preventing petitioners from disposing of their assets pending adjudication of respondents' contract claim for money damages.⁹

Moreover, in Grupo Mexicano the Court expressly reaffirmed the holding of DeBeers on this point.¹⁰ In reaching its decision, the Supreme Court noted that the federal courts have substantially the same equity jurisdiction the English Court of Chancery had at the time that the Constitution was adopted and the Judiciary Act of 1889 was enacted. The Court dismissed the argument made by the United States, as amicus curiae, that there were exceptions to "the well established general rule that a judgment fixing the debt was necessary before a court in equity would interfere with the debtor’s use of his property."¹¹ The Court further noted that this general rule was not changed by the merger of law and equity, since the merger did not alter substantive rights.¹² The Supreme Court concluded that enjoining the debtor’s ability to dispose of his property at the instance of a nonjudgment creditor would be "incompatible with the [Court’s] traditionally cautious approach to equitable powers" and that such relief is available only where specific statutory authorization exists to do so.

Despite the DeBeers and Grupo Mexicano decisions, in a recent case, Securities and Exchange Commission v. Princeton Economic International, Ltd., the SEC steadfastly maintained that district courts could grant asset freezes in SEC enforcement actions even in the absence of express statutory authority.¹³ The SEC contended that Sections 20(b) and 22(a) of the Securities Act of 1933 and Section 21(d) and 27 of the Securities Exchange Act of 1934 grant the district courts "broad remedial powers" which necessarily must include the ability to freeze a defendant’s assets.¹⁴

This contention ignores the reasoning set forth in DeBeers and Grupo Mexicano. Moreover, the merit of the Supreme Court’s decisions must have been recognized by Congress when it passed the commodities equivalent of the federal securities law, i.e., Commodity Exchange Act (CEA"). Section 6c of that Act,¹⁵ expressly authorizes the Commodity Futures Trading Commission to seek an ex parte temporary restraining order which,

prohibits any person from withdrawing, transferring, removing, dissipating, or disposing of any funds, assets, or other property…

when it appears that any person "has engaged, is engaging, or is about to engage in … a violation of any provision of the [CEA]." It is necessary to consider why this provision exists. Nowhere is this power found in the Securities Act of 1933 or the Securities Exchange Act of 1934. If asset freezes before trial are truly within the equitable powers of the districts courts, as the SEC argues, the language of Section 6c of the CEA must be regarded as superfluous, a matter which the SEC’s argument ignored. The conclusion appears inescapable, therefore, that as the law now stands district courts are without the power or right to issue asset freezes before trial absent specific statutory authorization.

The power to freeze a defendant's assets before trial is, in the words of Justice Scalia, a "nuclear weapon," which a court of equity has "no authority to craft".¹⁶ Congress alone possesses the power to fashion such a remedy and it has seen fit to do so only in clearly defined and limited circumstances. See, e.g., 18 U.S.C. §1963(d)(1); 21 U.S.C. §853(e)(1); 18 U.S.C. §982(7)(B); 7 U.S.C. § 13a-1.

1. See e.g., Section 22(a), Securities Act of 1933 ("Securities Act"), 15 U.S.C. 77v(a); Section 27, Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. 78aa.

2. Section 20(b), Securities Act, 15 U.S.C. 77t(b); Section 21(d), Exchange Act, 15 U.S.C. 78u(d).

3. DeBeers Consolidated Mines, Ltd. v. United States, 325 U.S. 2112 (1945). The Supreme Court's reasoning should be equally applicable to an ex parte temporary restraining order.

4. Id. at 215. The government argued: "The injury to the United States of America from the withdrawal of said deposits, diamonds or other property would be irreparable because sequestration of said property is the only means of enforcing this Court's orders or decree against said foreign countries and they could withdraw their assets from the United States and so prevent enforcement of any order or decree which this Court may render."

5. Id. at 220-223.

6. Id.

7. 15 U.S.C. § 4.

8. 527 U.S. 308, 119 S. Ct. 1961 (1999).

9. Id. at 333.

10. Id. at 326-327.

11. Id. at 321.

12. Id. at 322. The Supreme Court recognized that the English Court of Chancery did not provide a prejudgment injunctive remedy until 1975 and that its decision to do so was a notable departure from its historical practice. Id at 327-328; see Mareva Compania Naviera S.A. v. International Bulkcarriers S.A., 2 Lloyd’s Rep. 509 (1975).

13. See generally Memorandum Of Law Of Securities and Exchange Commission In Opposition To Order To Show Cause By Defendant Armstrong To Strike Portion Of Temporary Restraining Order Freezing Defendants’ Assets, SEC v. Princeton Economic International Ltd., 99 Civ. 9967 (S.D.N.Y. 1999) (Owen, J.) The district court simply denied the motion without any written or oral opinion.

14. Id. at 8-9 (and cases cited therein).

15. 7 U.S.C. § 13a-1

16. Grupo Mexicano, 527 U.S. at 331.