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The Schaberg ruling

The Schaberg ruling

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Published by DealBook

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Categories:Types, Business/Law
Published by: DealBook on Jun 24, 2011
Copyright:Attribution Non-commercial


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=================================================================This opinion is uncorrected and subject to revision beforepublication in the New York Reports.-----------------------------------------------------------------No. 91Commodity Futures TradingCommission,Respondent,v.Stephen Walsh, et al.,Defendants,Janet Walsh,Appellant.--------------------------------Securities and ExchangeCommission,Respondent,v.WG Trading Investors, L.P., etal.,Defendants,Robin Greenwood,Relief Defendant,Janet Walsh,Appellant.Steven L. Kessler, for appellant.Allan A. Capute, for respondent Securities and ExchangeCommission.Nancy R. Doyle, for respondent Commodity FuturesTrading Commission.Elliott Scheinberg et al., amici curiae.GRAFFEO, J.:Stephen Walsh is a defendant in related actions broughtby plaintiffs Commodity Futures Trading Commission and Securitiesand Exchange Commission (the Agencies) alleging violations of theanti-fraud provisions of the Commodity Exchange Act and the- 1 -
- 2 -No. 91Securities Exchange Act. The Agencies claim that between 1996and 2009, Walsh and his codefendant, Paul Greenwood,misappropriated more than $550 million from funds they managedfor various public and private institutional investors.
The Agencies also pursued disgorgement efforts againstJanet Schaberg, the former spouse of Walsh, seeking to recoverany proceeds she held of the fraud perpetuated by Walsh.Although there is no indication that she was aware of orparticipated in any wrongdoing related to her ex-husband'sfraudulent scheme, the Agencies allege that a sizable amount ofproperty derived from Walsh's illegal securities activities wentinto Schaberg's possession under the parties' separationagreement and divorce decree.The United States Court of Appeals for the SecondCircuit asks us two questions to assist it in discerning whetherSchaberg has a legitimate claim to those funds, which wouldprevent the Agencies from obtaining disgorgement from her. Thesequestions involve the interplay of the Domestic Relations Law andthe Debtor and Creditor Law and implicate significant publicpolicy considerations.BackgroundWalsh and Schaberg were married in 1982 and have twochildren. Over the course of their 25-year marriage, Walsh was a
Greenwood pleaded guilty to securities fraud charges in2010. Walsh's criminal prosecution remains pending.- 2 -
- 3 -No. 91substantial shareholder in or a management partner of a number ofsuccessful business enterprises, such as Champion Sportswear andTanger Malls/Prime Outlets. As a couple, they acquired a numberof homes, including condominiums in Florida and New York City,and a house in Port Washington, New York. Schaberg did not haveoutside employment during the marriage, but she volunteered at anumber of charitable organizations.In 2004, Schaberg and Walsh separated and divorceproceedings were initiated in early 2005. They entered into a"Stipulation of Settlement and Agreement" in November 2006pursuant to Domestic Relations Law § 236 (B) (3). Under theterms of the agreement, Schaberg conveyed her ownership interestin the Port Washington marital residence (with an alleged valueof about $7.5 million) to Walsh and she received sole ownershipof the condominiums in New York City and Florida (with an allegedvalue of approximately $6.7 million). The agreement alsoprovided that Schaberg would retain nearly $5 million held inseveral checking accounts and Walsh waived all claims to suchmonies. Walsh further agreed to pay Schaberg a distributiveaward of $12.5 million, payable in biannual installment paymentsthrough 2020.
As part of the settlement, Schaberg furtherwaived any claim for maintenance based on the parties' lengthy
Schaberg had received $3 million in installment paymentswhen Walsh ceased making the payments in 2009 as a result of arestraining order imposed on his assets.- 3 -

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