Courts: 10th Circuit Court of Appeals Opinion from July 28

The 10th Circuit Court of Appeals

Editor’s Note: Law Week Colorado edits court opinion summaries for style and, when necessary, length.

USSEC v. Young, et al.


These consolidated appeals arise from a U.S. Securities and Exchange Commission civil enforcement action in which the district court entered a preliminary injunction freezing the assets of Michael Young, Michael Stewart and Bryant Sewall. They moved to modify the injunction twice, specifically, to release some of those assets back to them to pay for counsel and living expenses. The district court denied both motions and they appealed from those orders.

In September 2019, the SEC filed a civil enforcement action in the U.S. District Court for the District of Colorado naming Young, Stewart and Sewall as primary defendants. The SEC named their wives as relief defendants. The SEC says Young, Stewart and Sewall raised at least $125 million from private investors, claiming the money would be pooled and invested using a highly profitable algorithmic trading strategy. But they allegedly diverted at least $35 million directly to themselves and used the money to buy luxury properties and vehicles. As for the money they actually invested, their strategy usually resulted in losses, but they represented otherwise to their investors through fictitious account statements purporting to show profits.

Upon filing the complaint, the SEC moved ex parte for a temporary restraining order freezing the assets of Young, Stewart and Sewall and their wives. Specifically, the SEC asked for an order freezing a little over $250 million, representing the roughly $125 million raised from private investors and an additional $125 million that the SEC planned to seek as a civil penalty.

The district court granted the ex parte order the next day. The district court explained that the freeze was “necessary to preserve the status quo and to protect [the] Court’s ability to award equitable relief in the form of disgorgement of illegal profits . . . as well as [to award] civil penalties.” The district court also ordered all defendants to appear in court in two weeks for a preliminary injunction hearing.

Ahead of the hearing, the parties stipulated that the district court could convert the TRO into a preliminary injunction, “subject to [defendants’] right to move the Court for relief from the asset freeze.” In effect, the parties stipulated to defer litigating the propriety of the asset freeze unless and until a defendant chose to challenge it.

The asset freeze extends up to about $250 million, but it’s unclear whether the defendants ever possessed that amount. A court-appointed receiver has since gained control over about $30 to $35 million in assets.

In November 2020, the three primary defendants, joined by their wives, each moved for partial relief from the asset freeze. Michael Young and Maria Young requested release of $60,000. They claimed that the asset freeze forced them and their children to live on government welfare, and they needed $60,000 to pay their attorney. They further argued that some of their jewelry and furniture, estimated to be worth about $28,000, shouldn’t have been frozen because they acquired them before the alleged fraudulent scheme began. They also claimed that Michael Young was unaware of any fraud (i.e., that he was just as much a victim as the investors). Finally, they asserted that $60,000 was a reasonable request because it was only 1% of the $6 million in frozen assets attributable to them — and $6 million was, in any event, far more than the SEC could ever require them to disgorge in light of a 2020 U.S. Supreme Court decision in Liu v. SEC.

Bryant Sewall and Hanna Sewall requested the release of $260,000 out of an unstated amount of frozen assets attributable to them to pay their attorney and for living expenses. They claimed that Bryant Sewall couldn’t work because he was in Ukraine with a Ukrainian citizen who hasn’t yet been issued a visa to accompany him to the U.S. They claimed that some of Bryant Sewall’s assets, estimated to be worth about $119,000, shouldn’t have been frozen because he acquired them before the alleged fraudulent scheme began.

Michael Stewart and Victoria Stewart requested $500,000 out of an unstated amount of frozen assets attributable to them to pay their attorney and for living expenses. They claimed Michael Stewart couldn’t work because he had become disabled due to injuries and associated surgeries. They also claimed that about $114,000 of Michael Stewart’s assets shouldn’t have been frozen because he acquired them before the alleged fraudulent scheme began.

The district court denied these motions in January 2021, offering several reasons. First, “[n]one of the motions for relief refutes [the SEC’s] contention that the assets currently available will be insufficient to compensate the defrauded investors in this case. Defendants’ motions are subject to denial on this basis alone.” Second, “none of these motions shows that the funds requested are untainted by the alleged underlying fraud. This, too, is an independent basis for denying the motions.” Third, “[t]he fact that Defendants owned some assets before their alleged fraudulent activity does not mean they are entitled to deduct the value of those assets from the currently frozen assets which Defendants have not shown to be untainted.” Fourth, the Youngs’ claim that Michael Young was unaware of the fraud didn’t matter because “he does not deny that such fraud occurred” and “protecting the victims of that fraud is the primary purpose of the asset freeze.” Finally, the defendants hadn’t explained the mismatch between the value of their allegedly untainted assets and the amounts they were requesting (e.g., the Youngs’ claimed about $28,000 in untainted assets but asked the court to unfreeze $60,000).

The Youngs appealed from the district court’s order. The Stewarts and Sewalls together filed a separate notice of appeal from the same order. 

The 10th Circuit Court of Appeals procedurally consolidated those appeals. Because it could only find one preserved issue on appeal — the district court’s September 2021 order denying the Stewarts’ and Sewalls’ renewed motion for partial relief from the asset freeze — the 10th Circuit affirmed both of the district court’s orders denying relief from the asset freeze. The court remanded the case back to the district court with instructions that it revisit whether to hold a hearing, as requested by the Stewarts and Sewalls.

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