Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—2ndCir: Order freezing assets held by wife of weight loss marketer upheld, (Jun 21, 2013)

By William Zale, J.D.

The U.S. Court of Appeals in New York City has affirmed an order freezing assets held by the wife of a marketer of weight loss supplements in an action brought by the FTC and the State of Connecticut alleging misleading practices, the U.S. Court of Appeals in New York City has ruled (FTC v. Strano, June 20, 2013, Per Curiam).

Relief defendant Angelina Strano, spouse of the defendant Boris Mizhen, appealed from an order freezing certain assets owned by Strano pending litigation of claims against Mizhen and affiliated entities for violating the FTC Act and Connecticut’s Unfair Trade Practices Act (CUTPA). After Mizhen stipulated to an order enjoining him from engaging in listed business practices and freezing all assets owned or controlled by him or held for his benefit, the plaintiffs secured an order restraining certain assets nominally owned by Strano or entities she owned but that plaintiffs contended fell within the existing asset freeze order as to Mizhen.

Subject matter jurisdiction. Contrary to Strano’s contention of lack of subject matter jurisdiction, the authority to freeze assets emanated from the statutes, the court observed. Implicit in FTC Act Section 13(b)’s injunction authority is the power of courts to grant ancillary equitable relief, and Conn. Gen. Stat. § 42-110m(a) authorized equitable relief.

The plenary powers of a federal court to order an asset freeze are not limited to assets held solely by an alleged wrongdoer; the powers extend to assets of duly named “nominal” or “relief” defendants like Strano. Because no substantive claim was asserted against Strano, it was unnecessary to obtain subject matter jurisdiction over her once jurisdiction over Mizhen was established, according to the court.

Asset freeze. Strano argued that identified accounts and property were legitimately hers and that she was improperly named as a relief defendant. To obtain a preliminary injunction freezing the assets of such a relief defendant, the FTC and State of Connecticut had to demonstrate only that they are likely ultimately to succeed in disgorging the frozen funds, the court said. The plaintiffs were not required as a condition of securing the challenged asset freeze to show that Mizhen actively managed the accounts and property, but rather to demonstrate only that Mizhen treated the assets as his own.

Relying on the affidavit of an FTC forensic accountant, the district court described in detail the creation of the accounts at issue and their funding with $7 million from an entity owned and operated by Mizhen. In concluding that Mizhen controlled the Fellsmere accounts, the district court rejected as insufficiently documented or lacking in credibility Strano’s claims of contributing $1.6 million received in irregular, lump-sum “salary” payments from Mizhen or from other sources of income. The freezing of the accounts was permissible, the court concluded.

The same conclusion applied to the real property at issue, which the district court froze on the theory that it was purchased with Mizhen’s funds and transferred to Strano for no consideration shortly thereafter. Strano maintained that the property could not be restrained without evidence that Mizhen purchased it with fraudulent proceeds or exercised control over the property after its transfer. In concluding otherwise, the district court noted the absence of any explanation by Strano for the transfer that would rebut the inference that it was undertaken to shield the property from potential creditors.

The preliminary injunction freezing the assets was affirmed.

The case is No. 13-653-cv.

Attorneys: David N. Wynn (Arent Fox LLP) for Angelina Strano. Michael D. Bergman for the FTC. Matthew F. Fitzsimmons for the State of Connecticut.

Companies: LeanSpa LLC; NutriSlim LLC

Cases: ConsumerProtection StateUnfairTradePractices ConnecticutNews NewYorkNews VermontNews