Sunday, October 23, 2011
On November 1, the Ohio Supreme Court will hear oral argument in an important case that deals with the power of the Ohio Division of Securities to recover ill-gotten gains on behalf of defrauded investors. The lower court's opinion is Zurz v. Mayhew (2d Dist. Ct. App. Oct. 29, 2010).
Roy Dillabaugh ran a Ponzi scheme that bilked about 150 investors in Ohio and Indiana out of over $12 million. He purchased at least 34 life insurance policies that named his wife, son and secretary as beneficiaries. Before committing suicide, he left instructions to the beneficiaries telling them to use the insurance proceeds to repay his victims. They chose not to do so, however, and his wife was recipient of over $6.5 million. The Securities Division sued the beneficiaries in order to freeze the funds until a receiver could be appointed. The trial court ultimately held that the Division could compel the beneficiaries to return only the amount of the premiums and not the proceeds of the policies.
Upon appeal, the appellate court dealt a harder blow to the Division and held that it could not sue the beneficiaries at all, ruling that the state statute RC 1707.26 allows the Division only to sue those enumerated in the statute, i.e., the alleged violators of the statute and their "agents, employees, partners, officers, directors and shareholders." The court rejected the Division's reliance on the last clause in the statute, which allows it to seek "such other equitable relief as the facts warrant," stating that the clause did not expand the range of defendants.
On appeal, the Division makes two arguments. First, the appellate court erroneously reached an issue that was not before the court, since the defendants had not challenged the grant of temporary injunctive relief. Second, and most important, the appellate court's restrictive reading of the statute, if allowed to stand, creates a significant obstacle in the Division's power to act quickly to protect investors.