Investors and Employees as Relief Defendants in Investment Fraud Receiverships: Promoting Efficiency by Following the Plain Meaning of Legitimate Claim or Ownership Interest

Relief defendants are nominal, innocent parties who hold funds traceable to the receivership but have no legitimate claim or ownership interest in them. These nominal parties, as opposed to full or primary defendants, have no cause of action asserted against them, and if they show no legitimate claim to the funds traced to the receivership, the funds are disgorged — generally at summary judgment. This seemingly simple relief defendant tool is used by receivers and regulatory agencies to quickly recover receivership funds for ultimate distribution to creditors. Recently, however, conflict has arisen in federal courts concerning the meaning of “legitimate claim or ownership interest.” Where courts fail to uphold the plain meaning of those words, confusion and unpredictability ensue, leading to enormous costs for creditors as receivers, on the receivership’s dime, attempt to claw back funds from relief defendants. To prevent such unnecessary costs in the future, the plain meaning of “legitimate claim or ownership interest” must be reinforced to protect, at minimum, the amount of investors’ returned principal and the amount of employees’ reasonable compensation