Securities And Exchange Commission v. San Francisco Regional Center LLC

Background

Berkeley Healthcare Dynamics, LLC (BHD), a former relief defendant, asked the court to reopen or change a judgment entered against it more than a year earlier. It relied on Federal Rule of Civil Procedure 60(b)(6), which allows a court to grant relief from a final judgment for an extraordinary reason that justifies doing so.

The earlier judgment concerned approximately $5.4 million in two portions. One portion—approximately $2.7 million used to purchase a warehouse owned by BHD—was not challenged. Another approximately $2.7 million consisted of money transferred to BHD from other entities to cover expenses. The court’s earlier summary-judgment order concluded that those funds came from or were mixed with misdirected investor funds and therefore could be recovered.

BHD also had disputed the SEC’s claim to approximately $17.4 million in diverted investor funds that the SEC had not shown were ever in BHD’s possession. That issue had been resolved in BHD’s favor and was not part of the Rule 60(b)(6) motion.

BHD’s Argument

BHD relied on the Supreme Court’s June 2020 decision in Liu v. Securities & Exchange Commission. Liu held that the SEC could not recover a wrongdoer’s gross profits and could recover only net profits after deducting legitimate business expenses.

BHD argued that Liu meant most or all of the additional approximately $2.7 million it received for what it described as legitimate business expenses was not subject to recovery.

Court’s Analysis

The court held that Liu did not affect the basis of BHD’s judgment. Liu addressed profit-based remedies against defendants who committed wrongdoing. BHD was not a defendant accused of wrongdoing and was not required to surrender gross or net profits.

Instead, BHD was treated as a relief defendant. A relief defendant holds disputed property without being accused of the underlying wrongdoing. Under the authorities applied by the court, recovery from a relief defendant requires proof that the defendant received illegally obtained funds and had no legitimate claim to retain them.

The court concluded that the earlier judgment against BHD was based on that relief-defendant theory, not on a finding that BHD earned unlawful profits. The court also noted that any challenge to the earlier court’s factual or legal conclusion about whether BHD had a legitimate claim to some of the funds was too late. Because Liu was not a relevant change in law for purposes of BHD’s judgment, the court did not need to decide whether other factors concerning finality and diligence favored BHD.

Disposition

The court denied BHD’s motion for relief from the judgment. It also denied BHD’s pending motion for a temporary restraining order as moot. Judge Richard Seeborg entered the order on August 7, 2020.