In January this year, England’s Court of Appeal provided a major boost
to the US Securities and Exchange Commission (SEC) effort to support
SEC enforcement activities outside the US. The Court of Appeal approved
the High Court’s decision to grant the SEC an order freezing the UK
assets of a UK citizen. Alex H. Rene (pictured) comments…
On 12 April 2007, the SEC filed an enforcement action in a US court against Lydia Capital LLC, a Boston-registered entity, and its two principals, Evan Anderson, also of Boston, and Glenn Manterfield, a UK citizen and resident of Sheffield, England.
The SEC alleged that Manterfield and Anderson had orchestrated a fraudulent investment fund affecting assets of around US$34m (€25.04m). The SEC sought two forms of relief in the US proceedings: first, that the defendants “disgorge their ill-gotten gains” by returning funds to investors; and secondly, that the defendants pay a civil penalty to the US government. Looking to secure Manterfield’s assets for the purposes of enforcement of the US relief, the SEC applied to the High Court for a freezing injunction in respect of his English assets, preventing him from using or disposing of them. The application was granted by the High Court at first instance, but Manterfield appealed to the Court of Appeal.
Freezing test
In order to obtain a freezing injunction an applicant must satisfy the court of two matters: firstly, the applicant must have a good arguable case in the underlying claim for which it seeks the freezing order; and secondly that there is evidence of a real risk that the respondent will dissipate his assets so that the judgment cannot be satisfied in full.
The SEC had satisfied the High Court of these two matters and Manterfield did not pursue them at appeal. Instead, he appealed on two further grounds.
The Courts of England and Wales have no jurisdiction to hear an action for the enforcement of a “penal, revenue or other public law of a foreign State” (the ‘penal rule’). This rule is based on the principle that the enforcement of such penal laws would be an unwarranted extension of the foreign state’s power into the English court’s jurisdiction.
Penal rule
Manterfield argued that the application sought in the US proceedings amounted to an attempt to enforce a foreign penal law, because one of the remedies sought was a civil penalty to be paid to the US government.
The Court of Appeal disagreed. It confirmed the High Court’s decision to sever the two forms of relief sought by the SEC, so that the UK assets would be frozen to satisfy the return of funds to investors but would not be used to pay the civil penalty to the US government. To ensure the penal rule was not breached, counsel for the SEC gave a formal undertaking to the court that the assets would not be used to pay sums to the US government.
The second grounds of his appeal were that, in England, an applicant who seeks an interim injunction must generally provide a “cross-undertaking in damages” to compensate the respondent if it is subsequently determined that the applicant was not entitled to the injunction. Manterfield argued that the High Court had wrongly exercised its discretion in permitting the SEC to obtain the freezing order without providing an unlimited cross-undertaking.
The Court of Appeal held that since the SEC had no statutory power to provide an unlimited undertaking, it would be wrong to prevent it from obtaining a freezing injunction on this basis alone. The High Court was therefore correct to dispense with this requirement.
A precedent is set
This decision is likely to enhance the SEC’s ability to seek enforcement of US judgments in Britain and other commonwealth countries. It has been hailed by one SEC special counsel as a “tremendous precedent” for the SEC. Expect more freezing injunctions to follow, particularly in areas of regulation with an international flavour, such as enforcement under the US Foreign Corrupt Practices Act and international securities regulation.
• Alex H. Rene is a partner and Sarah Thomas an associate in the global disputes practice at Fulbright & Jaworski International LLP in London
©2009 funds europe
