Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 99 C 6895-Ronald A. Guzman, Judge.
The opinion of the court was delivered by: Ripple, Circuit Judge.
ARGUED SEPTEMBER 11, 2007
Before RIPPLE, MANION and WOOD, Circuit Judges.
In the underlying litigation, the Securities and Exchange Commission ("SEC") sought, and was granted, an order freezing the assets of Charles Homa. In this appeal, Paul Jones and David Pollock, nonparties to the underlying action, appeal a judgment of contempt for failing to comply with that freeze order.*fn1 Caribbean Ventures International, Inc. ("CVI2"), another nonparty, appeals a default judgment imposed as a sanction for failure to comply with discovery requests and the consequent appointment of Phillip Stenger as receiver over its assets.*fn2 For the reasons set forth in this opinion, we affirm the judgment of the district court.
Between 1995 and 1999, Charles Homa operated an automobile title lending business called Cash 4 Titles ("C4T"). Sunset Financial Services, Ltd., was the marketing company for the various C4T entities. The C4T entities actually operated a huge Ponzi scheme: the loss by innocent investors exceeded $165,000,000.
On October 15, 1999, the SEC filed a civil enforcement suit (the "SEC Action") against Mr. Homa; the suit accused Mr. Homa of civil fraud in violation of United States securities laws.*fn3 At that time, the United States Department of Justice also brought criminal charges against Mr. Homa for securities laws violations.*fn4
The SEC promptly sought freeze orders for all the C4T assets. The court granted the motions and issued two freeze orders. The first was entered on October 15, 1999. That order initially froze the assets of the defendants in the SEC Action.*fn5 A second freeze order, issued October 18, 1999, froze any bank account in which any of the defendants had signatory authority or beneficial interest, including C4T and Banc Caribe.
On November 2, 1999, Mr. Stenger was appointed receiver over the assets of Mr. Homa, Sunset Financial and other affiliated C4T entities, including the interests of any individuals or entities that constituted C4T property in Banc Caribe. The receiver's general mandate was to marshal receivership property for distribution to the injured investors.
Mr. Pollock and Mr. Jones met and became friends in 1978. Mr. Pollock is a citizen of the United States who maintained a Florida driver's license until at least September 26, 2004, and who currently resides in St. Lucia, an independent country within the British Commonwealth. From 1998 until 2002, Mr. Pollock resided in Dominica, another island nation in the Caribbean Sea. Mr. Pollock continuously maintained, through at least January of 2006, an accounting practice with a post office box address in Winter Park, Florida.
Paul Morgan Jones is a citizen of the United States who maintains a Florida driver's license. From 1998 until 2002, Mr. Jones also resided in Dominica. Mr. Jones carries both a United States and a Dominica passport.
In the early 1990s, Mark Ellison invited Mr. Pollock to Dominica to look at a large tract of land, Point Round, that Mr. Ellison sought to develop. The development did not occur. In 1995, Mr. Pollock learned from Reginald Shillingford, a part owner of Point Round, that Dominica had enacted new legislation permitting offshore banking and financial industry development. Mr. Pollock became interested in financing a bank in Dominica.
Mr. Pollock first learned of Mr. Homa through his brother. In March 1998, Mr. Pollock met in Florida with Mr. Homa and several other potential investors. They discussed the tract of land in Dominica and the possibility of starting a bank to assist in the development of the property.
Mr. Pollock then prepared a written document, the prospectus,*fn6 to solicit Mr. Homa's investment in the bank that he and Mr. Jones hoped to finance in Dominica, Banc Caribe. The prospectus contemplated a minimum of 500,000 shares at $10 per share for a total of $5,000,000,*fn7 and reflected an ultimate goal of raising a maximum of $15,000,000 in equity for the bank. Mr. Pollock again met with Mr. Homa on April 27, 1998, in Florida. At that time, Mr. Pollock presented Mr. Homa with the Banc Caribe prospectus.*fn8 Mr. Homa indicated that he was interested in the proposal and that he would like to meet Mr. Jones.
Mr. Pollock, Mr. Jones and Mr. Homa met together in May 1998. Shortly thereafter, Mr. Homa indicated that he would pursue the Banc Caribe plans with Mr. Pollock and Mr. Jones, but that he wanted no other partners or investors in the project. Mr. Pollock and Mr. Jones agreed.
The precise terms of Mr. Homa's investment in the Banc Caribe project are uncertain. The parties never signed a contract or otherwise reduced their agreement to writing. Moreover, as we shall discuss below, throughout the venture the parties ignored the terms of other documentation created during the Banc Caribe project. In the district court, Mr. Pollock identified at least three possible sources for determining the terms of the agreement between himself, Mr. Jones and Mr. Homa: the prospectus, the investment promissory notes and oral conversations with Mr. Homa. These three sources are in conflict regarding key terms of the agreement.*fn9
After Mr. Homa indicated his intention to go forward with Banc Caribe, Mr. Pollock and Mr. Jones worked quickly to establish an offshore account through which Mr. Homa could transfer large amounts of C4T money out of the United States. Mr. Pollock first created Caribbean Ventures International, Ltd. ("Caribbean Ventures") as a holding company for the bank's equity. The shares of Caribbean Ventures were held by Mr. Shillingford, who also was a director of Caribbean Ventures. Mr. Pollock and Mr. Jones filled the remaining director positions in Caribbean Ventures.
Mr. Pollock, Mr. Jones and Mr. Homa planned to put the funds from the offering into Caribbean Ventures and then have Caribbean Ventures apply for a banking license in Dominica so that Banc Caribe could become a legal entity. Then, the funds in Caribbean Ventures would be transferred to Banc Caribe and shares in the bank would be issued, possibly pursuant to the terms of the offering in the prospectus.*fn10 In accordance with this plan, on June 5, 1998, Mr. Homa, through Sunset Financial, wire transferred his initial $500,000 investment in Banc Caribe to the account of Caribbean Ventures at the Commercial Bank of Dominica. On March 16, 1999, Mr. Homa invested a second installment of $500,000 in the same manner.
Mr. Pollock then drafted an investment promissory note that documented Mr. Homa's first investment of $500,000 in Banc Caribe.*fn11 He later drafted a second note with identical terms for the second investment of $500,000. These notes served as the second alleged source of the terms of the agreement between Mr. Pollock, Mr. Jones and Mr. Homa. Notably, Mr. Homa took no part in the creation of the notes, never signed them and did not have possession of them. Mr. Jones also had no knowledge of the notes; he did not see them until 2004. The true purpose of the notes was to support the bank license application and to prove to the regulators in Dominica that Banc Caribe had met the minimum requirement of $1,000,000 in unrestricted capital.
On June 12, 1998, Mr. Pollock, Mr. Jones and Caribbean Ventures filed Banc Caribe's Articles of Incorporation with the Government of Dominica. On August 18, 1998, Banc Caribe filed its application with Dominica. When it applied for its license, Banc Caribe was funded with $1,000,000, the minimum capital requirement under the law of Dominica. It opened for business shortly thereafter.
Mr. Homa, through Sunset Financial, later paid an additional $2,000,000 to Caribbean Ventures, for a total investment of $3,000,000 in Banc Caribe. No other investment promissory notes were prepared to document this subsequent $2,000,000 investment from Mr. Homa. Banc Caribe did not receive a capital contribution from any source other than Mr. Homa. Caribbean Ventures owned all the stock of Banc Caribe.
Mr. Pollock identified the third source of the agreement between the parties as a series of conversations with Mr. Homa. Mr. Pollock was inconsistent in his representations to the court regarding which of these three sources of the agreement controlled on any given point, and the court found him to be entirely without credibility.*fn12
Banc Caribe began doing business in September 1998, subject to the banking laws of Dominica. Mr. Jones served as its president and secretary, and Mr. Pollock served as the managing director and chief financial officer. Mr. Pollock leased approximately 6,000 square feet of space for the bank, and its doors officially opened in October 1998. In January 1999, Mr. Homa was designated as the Chairman of the Board of Directors of Banc Caribe.
On October 15, 1999, the SEC brought a civil suit against Mr. Homa and C4T, the combined Ponzi-scheme entities. The district court entered the first freeze order against Mr. Homa and C4T on that day, and a second, clarifying order on October 18. By that time, Banc Caribe had between 100 and 150 accounts, and it had expanded to fifteen employees.
Sunset Financial, one of Mr. Homa's corporate entities that was specifically mentioned in the freeze orders, had an account at Banc Caribe.*fn13 Sunset Financial's account held approximately $5,793,000 of the $8,000,000 in total deposits in Banc Caribe. Mr. Homa also controlled other entities, however, including Caribbean Air and Caribbean Realty, that had accounts at Banc Caribe. The total funds that could be attributed to Mr. Homa, therefore, accounted for more than 90% of the deposits in the bank.
The record suggests that Mr. Pollock and Mr. Jones first became aware of Mr. Homa's legal trouble when, on October 17, 1999, Mr. Pollock saw an article in a Florida newspaper concerning the SEC action against Mr. Homa. That article described allegations that Mr. ...