In the Courts

The SEC alleged that DeYoung used the cash to purchase unsecured promissory notes and to fund other speculations with friends. DeYoung allegedly concealed his embezzlement by falsifying “IRA account statements to assure that the funds missing from the master account would reconcile with the cash APS reported to be in the IRA account owner's [sic] accounts.” He was sentenced to 10 years in prison and agreed to pay $29.9 million in disgorgement and interest and an as-yet-undetermined civil penalty.

In the SEC's February 2014 action against APS and DeYoung, the district court appointed a receiver to gather and manage the assets of APS and DeYoung. The court also gave the receiver the authority to “pursue, resist and defend all suits, claims and demands.” In May 2014, the receiver initiated negotiations with First Utah regarding its potential liability for failing to “take necessary steps to assure the IRA Account Owners' deposits were safe.”

The receiver and First Utah reached a settlement agreement in which the bank agreed to pay $5 million to settle all DeYoung-related claims in return for a claims bar order that barred all other IRA-related claims against First Utah. The bank would only have to pay $2 million, while the other $3 million would be covered under an insurance policy.

The district court approved the settlement, finding that it offered the highest potential recovery for the IRA owners. The court also found that the claims bar order was necessary to the settlement. Part of the district court's logic focused on First Utah's inability to pay any more than the $2 million it will pay under the settlement: “First Utah is a highly regulated, small Utah community bank with only seven branches. It has limited capital that it can use to fund its portion of the settlement amount.” Further, the insurance policy that would cover $3 million of the settlement was a “wasting policy,” meaning that if the case went to trial, the policy would pay litigation costs before satisfying any judgment. In other words, the district court reasoned that account owners simply were not going to get a better deal.

Almost all of the roughly 5,500 IRA account owners were satisfied with the settlement, but three challenged the claims bar order and demanded the right to file separate suits against First Utah. After the district court approved the claims bar order, the three objectors appealed to the Tenth Circuit.

On appeal, the objectors argued that the Anti-Injunction Act prohibited the district court from “enjoining state court proceedings.” The Tenth Circuit responded that the Anti-Injunction Act only applies when there are pending state court suits, which there were not in this case. The three objectors had not yet filed any individual suits. The objectors suggested that the injunction was what prevented them from filing any action in state court, but the Tenth Circuit remained unconvinced.

The objectors also argued that the district court lacked authority to issue the bar as the receiver lacked standing to bring claims on behalf of the investors and that the claims bar order “rests on unsupported factual findings.” The Tenth Circuit rejected these assertions as well, stating that the receiver derived standing to sue from the receivership entity, APS, and that the receiver undertook a thorough investigation into all potential claims and First Utah's financial health. The panel reasoned that Judge Shelby considered a number of factors in finding that the settlement was the best the IRA account owners could hope for. Therefore, the panel held that the district court's decision was not clearly erroneous.

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In the Courts was written by Dennis Mahoney, an associate at Mayer Brown in Washington, DC.

Tenth Circuit Affirms Claims Bar Order in $24 Million Case

On March 9, 2017, a three-judge panel of the U.S. Court of Appeals for the Tenth Circuit affirmed U.S. District Judge Robert Shelby's approval of a settlement that barred several IRA account owners from filing individual claims against the custodian bank. The case revolved around the fallout from a $24 million IRA fund embezzlement scheme by a former American Pension Services (APS) executive.

Beginning in 1992, APS, a third-party administrator of IRAs, employed First Utah Bank to act as custodian for roughly 5,500 IRAs. APS comingled all 5,500 of the account owners' funds into a single master account maintained by First Utah. In September 2016, former APS CEO Curtis DeYoung pled guilty to misappropriating $24 million from the master account.

The SEC alleged that DeYoung used the cash to purchase unsecured promissory notes and to fund other speculations with friends. DeYoung allegedly concealed his embezzlement by falsifying “IRA account statements to assure that the funds missing from the master account would reconcile with the cash APS reported to be in the IRA account owner's [sic] accounts.” He was sentenced to 10 years in prison and agreed to pay $29.9 million in disgorgement and interest and an as-yet-undetermined civil penalty.

In the SEC's February 2014 action against APS and DeYoung, the district court appointed a receiver to gather and manage the assets of APS and DeYoung. The court also gave the receiver the authority to “pursue, resist and defend all suits, claims and demands.” In May 2014, the receiver initiated negotiations with First Utah regarding its potential liability for failing to “take necessary steps to assure the IRA Account Owners' deposits were safe.”

The receiver and First Utah reached a settlement agreement in which the bank agreed to pay $5 million to settle all DeYoung-related claims in return for a claims bar order that barred all other IRA-related claims against First Utah. The bank would only have to pay $2 million, while the other $3 million would be covered under an insurance policy.

The district court approved the settlement, finding that it offered the highest potential recovery for the IRA owners. The court also found that the claims bar order was necessary to the settlement. Part of the district court's logic focused on First Utah's inability to pay any more than the $2 million it will pay under the settlement: “First Utah is a highly regulated, small Utah community bank with only seven branches. It has limited capital that it can use to fund its portion of the settlement amount.” Further, the insurance policy that would cover $3 million of the settlement was a “wasting policy,” meaning that if the case went to trial, the policy would pay litigation costs before satisfying any judgment. In other words, the district court reasoned that account owners simply were not going to get a better deal.

Almost all of the roughly 5,500 IRA account owners were satisfied with the settlement, but three challenged the claims bar order and demanded the right to file separate suits against First Utah. After the district court approved the claims bar order, the three objectors appealed to the Tenth Circuit.

On appeal, the objectors argued that the Anti-Injunction Act prohibited the district court from “enjoining state court proceedings.” The Tenth Circuit responded that the Anti-Injunction Act only applies when there are pending state court suits, which there were not in this case. The three objectors had not yet filed any individual suits. The objectors suggested that the injunction was what prevented them from filing any action in state court, but the Tenth Circuit remained unconvinced.

The objectors also argued that the district court lacked authority to issue the bar as the receiver lacked standing to bring claims on behalf of the investors and that the claims bar order “rests on unsupported factual findings.” The Tenth Circuit rejected these assertions as well, stating that the receiver derived standing to sue from the receivership entity, APS, and that the receiver undertook a thorough investigation into all potential claims and First Utah's financial health. The panel reasoned that Judge Shelby considered a number of factors in finding that the settlement was the best the IRA account owners could hope for. Therefore, the panel held that the district court's decision was not clearly erroneous.

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In the Courts was written by Dennis Mahoney, an associate at Mayer Brown in Washington, DC.