The US District Court for the Southern District of New York recently held that it was within the court’s equitable power to sustain a writ of garnishment and a writ of attachment in a securities case. On March 13, 2014, the Securities and Exchange Commission filed suit against Defendant John Babikian. The SEC accused Babikian of securities fraud relating to an alleged “pump and dump” scheme in which Babikian bought shares in a penny stock, sent an email to 700,000 people touting the pick, and then sold off his entire position. The District Court signed a Temporary Restraining Order and two prejudgment writs: one garnishing proceeds from the sale of securities and another attaching properties owned by Babikian. The SEC later moved for a preliminary injunction to preserve all relief granted by the District Court. Babikian claimed that the garnishment and attachment were inappropriate because the Federal Debt Collection Procedure Act (FDCPA) did not authorize the relief. In contrast, the SEC argued that the FDCPA authorizes garnishment and attachment as prejudgment remedies for cases that assert claims for a debt, and contended that the relief sought – penalties and disgorgement – was a claim for a debt in which the FDCPA would apply.
The District Court acknowledged that there was a lack of authority on this issue, but without deciding whether the FDCPA authorized prejudgment remedies against Babikian before he owed a debt to the United States, the District Court sustained the writs on equitable grounds. Noting that Section 22(a) of the Securities Act of 1933 and Section 27 of the Securities Exchange Act of 1934 “confer general powers upon the district courts that are invoked by a showing of a securities law violation,” the District Court held that the prejudgment remedies were reasonable to preserve the status quo, and authorized by equitable principles.
Securities and Exchange Commission v. Babikian, No. 14 Civ. 1740 (PAC) (S.D.N.Y. Apr. 21, 2014).