Securities and Exchange Commission v. Blakstad

Background

The Securities and Exchange Commission sued Donald G. Blakstad, Energy Sources International Corporation, and Xact Holdings Corporation, alleging violations of federal securities laws. Eric Amos, an intervenor, was involved in a stock purchase and option agreement with Xact Holdings concerning XACT Technologies. Xact Holdings paid Amos $750,000 for 15% of XACT Technologies. The agreement gave Xact Holdings an option to buy more shares and gave Amos a right to return the $750,000 and regain full ownership if Xact Holdings did not exercise that option.

Xact Holdings did not exercise the option. Amos said he wanted to return the $750,000, but the SEC told him that the funds consisted of investments allegedly obtained through Blakstad’s fraud. Amos therefore asked to deposit the money with the court under Rule 22 of the Federal Rules of Civil Procedure, which permits an interpleader action when conflicting claims could expose a person to multiple liability.

Jurisdiction and Interpleader

The court held that the interpleader action had federal-question jurisdiction because the SEC’s potential claim to the funds arose from federal securities laws. The court also found venue proper in the Southern District of New York because the SEC alleged that Blakstad’s securities-law violations occurred there.

An interpleader action has two stages. The first determines whether the stakeholder may bring the action and deposit the property. The second determines the competing claimants’ rights to the property. The court emphasized that depositing funds is different from discharging the depositor from further liability. A deposit alone does not transfer ownership or resolve the parties’ claims.

Ruling

The court found that Amos had a reasonable fear of conflicting claims. Blakstad might claim the funds under the purchase agreement, while the SEC might seek the funds as part of a possible disgorgement order if it prevailed in the underlying action. The court held that potential adverse claims were enough at this stage, even though neither claim had become final.

The court rejected Blakstad’s arguments that the deposit would force a resale of XACT Technologies, that Amos had breached the purchase agreement, that the action lacked necessary parties, or that Blakstad did not currently want the money. Those issues did not prevent the deposit because the ruling did not determine ownership of the funds or the shares. The court also rejected Blakstad’s laches defense because he did not show that Amos’s delay caused prejudice.

Amos’s September 4 motion was granted. The court ordered that the $750,000 be deposited into its registry. The court did not decide whether Amos complied with the repurchase provision, whether he regained full ownership of XACT Technologies, or which party ultimately owns the funds. Because Amos was not granted a discharge from liability and no longer sought one, his request for attorney’s fees was denied.