                              In the

United States Court of Appeals
               For the Seventh Circuit

Nos. 08-3798 & 08-3852

S ECURITIES AND E XCHANGE C OMMISSION,
                                                               Plaintiff,
                                  v.

E NTERPRISE T RUST C OMPANY,
JOHN H. L OHMEIER, and
R EBECCA A. T OWNSEND ,
                                                            Defendants.
A PPEALS OF:

   D ONALD D EC HRISTOPHER,
   M ARTHA D EC HRISTOPHER,
   and D AVID S. C OCHRAN


            Appeals from the United States District Court
        for the Northern District of Illinois, Eastern Division.
                No. 08 C 1260—James B. Zagel, Judge.



    A RGUED F EBRUARY 12, 2009—D ECIDED M ARCH 18, 2009




 Before E ASTERBROOK, Chief Judge, and F LAUM and
M ANION, Circuit Judges.
  E ASTERBROOK, Chief Judge. Enterprise Trust Company
opened for business in 2006 and closed about two years
2                                   Nos. 08-3798 & 08-3852

later when the district court froze its assets in re-
sponse to a complaint by the Securities and Exchange
Commission. During its short life, Enterprise managed
more than $100 million in almost 1,200 accounts. Some of
its customers used Enterprise only for custodial services
(that is, to hold securities that the customers had pur-
chased), while others relied on Enterprise to select securi-
ties. John H. Lohmeier, Enterprise’s principal manager,
did not honor customers’ instructions. He purchased
options, engaged in short sales, and made other risky
trades in managed accounts that were supposed to be
invested conservatively. If these lost money, Lohmeier
played double-or-nothing with customers’ capital. Stock-
brokers demanded additional collateral, which Lohmeier
supplied by using the assets in custodial accounts (need-
less to say, without those investors’ knowledge). By the
time the SEC stepped in, Lohmeier had managed to lose
more than half of the money entrusted to Enterprise.
  At the SEC’s request, the district court appointed a
receiver, who proposed a plan for distributing Enterprise’s
remaining assets. The receiver concluded that, as of
June 30, 2008, Enterprise held approximately $23 million
in liquid securities, $5 million in cash, and $9 million in
real estate and illiquid securities, while investors’ claims
exceeded $100 million. He proposed to distribute these
assets so that the custodial investors would receive ap-
proximately 60% of their original capital, while investors
who permitted Enterprise to exercise some control over
their assets would receive less (between 25% and 50%).
These estimates precede the decline of the stock market
since the plan’s date; actual payouts will be lower. The
Nos. 08-3798 & 08-3852                                        3

plan values real estate and illiquid securities at acqui-
sition cost, so the discount for these assets will be espe-
cially steep. Illiquid assets are predom inantly
assigned to the owners of managed accounts, which
means that as a practical matter their proportionate
distribution will be less than the percentages in the plan
imply.
  Several owners of managed accounts contended that
all investors should be treated the same, but the district
judge sided with the receiver and approved the plan.
2008 U.S. Dist. L EXIS 79731 (N.D. Ill. Oct. 7, 2008). Three
of the protesting investors have appealed. Appellate
jurisdiction is the first question. We held in SEC v. Wozniak,
33 F.3d 13 (7th Cir. 1994), that investors affected by
a receiver’s plan of distribution can’t appeal without
intervening and becoming formal parties to the litiga-
tion—and none of these three investors intervened. The
receiver accordingly has asked us to dismiss the appeals.
  Wozniak understood Marino v. Ortiz, 484 U.S. 301 (1988),
to hold that only parties may appeal. In Felzen v. Andreas,
134 F.3d 873 (7th Cir. 1998), affirmed by an equally divided
Court under the name California Public Employees’ Retire-
ment System v. Felzen, 525 U.S. 315 (1999), we extended
Wozniak to an appeal by a member of a certified class
who is dissatisfied by the outcome, holding that a class
member must intervene in order to appeal. See also
In re Navigant Consulting, Inc., Securities Litigation, 275 F.3d
616 (7th Cir. 2001). But Devlin v. Scardelletti, 536 U.S. 1
(2002), holds that class members may appeal without
becoming parties in their own right, and this calls
Wozniak into question.
4                                  Nos. 08-3798 & 08-3852

   Let us go back to Marino, the foundation for Wozniak.
Police officers who contended that a test for promotion
within the ranks had a disparate impact on black and
Hispanic employees filed a suit against New York City
under Title VII of the Civil Rights Act of 1964. That suit
ended with a consent decree providing for additional
promotions of black and Hispanic officers. White officers
who claimed to be adversely affected by that settlement
filed an appeal, but the Supreme Court held that the
white officers’ failure to become parties prevented them
from appealing.
   In Devlin the Court concluded that Marino turned on the
fact that the white officers were not bound by the decree;
if the settlement made them worse off, they were free
to file their own suit and demand relief. Members of a
certified class, by contrast, are bound by the suit’s out-
come. The Court analogized class members to other
persons who have been allowed to appeal because a
decree effectively resolved their rights. As examples, the
Court pointed to bidders at a foreclosure sale, who may
appeal from an order confirming the sale. Blossom v.
Milwaukee & Chicago R.R., 68 U.S. (1 Wall.) 655 (1864),
discussed in Devlin, 536 U.S. at 7–8. The Court also men-
tioned Hinckley v. Gilman, Clinton & Springfield R.R., 94
U.S. 467 (1877), which held that a receiver may appeal
from an order fixing the amount of his compensation.
And it might have added that a creditor who files a
claim in bankruptcy need not intervene as a party in
order to appeal from an order rejecting that claim or
reducing its amount. See In re Dykes, 10 F.3d 184 (3d Cir.
1993); In re Urban Broadcast Corp., 401 F.3d 236 (4th Cir.
2005).
Nos. 08-3798 & 08-3852                                       5

  What these situations have in common is that the
judicial decision concludes the rights of the affected
person, who cannot litigate the issue in some other forum.
And that is equally true of persons whose rights to the
property marshaled by a receiver are resolved in the
receivership proceeding. People whose money was
under management at Enterprise Trust Co., like creditors
of a debtor in bankruptcy, must accept the distribution
that the court believes appropriate. As with an in rem
proceeding (where a court divvies up stakes in a fixed
asset), they can’t file another suit seeking more from the
pool of assets administered in the receivership (or the
bankruptcy). We therefore conclude that Wozniak is
incompatible with Devlin and must be overruled. This
eliminates a conflict among the circuits—for other courts
permit investors to appeal in receivership proceedings
without intervening, and no circuit has followed Wozniak.
See SEC v. Forex Asset Management LLC, 242 F.3d 325
(5th Cir. 2001); SEC v. Basic Energy & Affiliated Resources,
Inc., 273 F.3d 657, 665 (6th Cir. 2001). See also Unsecured
Creditors of WorldCom, Inc. v. SEC, 467 F.3d 73 (2d Cir.
2006).
  The merits are easier than the jurisdictional question.
District judges possess discretion to classify claims sensibly
in receivership proceedings. See SEC v. Wang, 944 F.2d 80,
84–85 (2d Cir. 1991); SEC v. Elliott, 953 F.2d 1560, 1566 (11th
Cir. 1992); Forex Asset Management, 242 F.3d at 331;
Basic Energy, 273 F.3d at 670–71. The district court did not
abuse that discretion when approving the receiver’s
proposal.
6                                    Nos. 08-3798 & 08-3852

  The receiver had three principal reasons to give a prefer-
ence to the custodial investors: first, they did not authorize
Enterprise to change or pledge their assets in any way;
second, they were in the dark about the fact that Enter-
prise had used their assets as collateral (while the investors
in managed accounts knew, or could have learned from
reading the statements Enterprise sent them, that risky
investments had been made in their accounts); third, if
Lohmeier’s strategy had succeeded, the investors in
managed accounts (and Lohmeier himself) would have
reaped the gains. Because they had been subjected to
involuntary and uncompensated risk, the receiver con-
cluded, the custodial investors deserved a larger cut of
the remaining pie (and to be paid in liquid assets to the
extent possible).
  Appellants reply that they did not authorize Lohmeier to
take as much risk as he did—which is true, but the fact
remains that they authorized him to make decisions
about their investments and stood to gain if the strategy
had succeeded, while the custodial investors neither
authorized risk-taking nor had any prospect of gaining
from those risks. The receiver allocated losses to the
investors who could have gained; that’s sensible. It
would have been better still to match the payouts to the
trading gains and losses in particular accounts, but the
way Enterprise kept (or did not keep) records made
that impossible.
  Our appellants say that, if any distinction is allowed,
they should be grouped with the custodial investors, or
at least with the managed accounts in the 50% class, rather
Nos. 08-3798 & 08-3852                                   7

than with the managed accounts in the 25% class. The
receiver put approximately 100 accounts in the 25%
payout class. These accounts were distinctive, in the
receiver’s eyes, because the investors knew that Lohmeier
personally would decide how to invest their funds, and
all of them gave him carte blanche.
   Appellants say that this is not so. David Cochran, one
of the three, filed an affidavit stating that he told
Lohmeier to manage his account conservatively, because
it represented retirement savings. Yet he signed papers
directing Lohmeier to manage his account for “maximum
growth.” Enterprise Trust sent Cochran monthly state-
ments showing short sales and purchases of options, plus
margin loans to purchase more stock than the balance of
Cochran’s investment—magnifying gains if the market
moved in the right direction but also magnifying losses
if it did not. (The statements falsely minimized the losses
that Cochran’s account had experienced.) Cochran, a
septuagenarian lawyer, asserts that he did not read the
statements because his wife had a terminal illness that
consumed his mental energy. Yet the facts remain:
He authorized Lohmeier to trade freely in quest of “maxi-
mum growth,” and he ignored actual notice that the
investments were anything but conservative. Cochran
would have kept the gains had Lohmeier’s strategy
succeeded; this means that losses likewise must be allo-
cated to him when the strategy failed.
  Owners of custodial accounts would have a stronger
objection to the plan. The receiver initially planned to
pay 100¢ on the dollar to the victims of Lohmeier’s theft
8                                    Nos. 08-3798 & 08-3852

(there is no polite word for what he did to the custodial
accounts’ assets) and decided otherwise only after
realizing that this would mean that many investors in
managed accounts would receive nothing. The absolute
priority rule in bankruptcy means that one class of credi-
tors may be paid in full before junior creditors get any-
thing; a similar approach might have been appropriate
here. But none of the custodial investors has appealed.
  Appellants say that the district court should have held
an evidentiary hearing before ruling on the receiver’s plan
of distribution. But hearings are required only when
material facts are in dispute. What we have just said about
Cochran shows that there was no need to resolve a
material dispute. (Much the same could be said about
the DeChristophers, the other appellants.)
  One final dispute needs to be wrapped up. Howrey LLP,
which performed legal services for Enterprise Trust,
submitted a bill for about $300,000. The receiver recom-
mended that the law firm receive $75,000, which it agreed
to accept in satisfaction of the bill. (Neither the law firm
nor the receiver was keen to consume the estate’s assets
by litigation.) The district court approved this distribu-
tion. Appellants say that the $75,000 should have gone
to the investors. But Howrey, which worked in advance
of payment, thus extending credit, is as much an investor
in Enterprise Trust as appellants are, and Howrey ended
up in the same 25% payout class as appellants did. They
have no legitimate beef.
                                                 A FFIRMED

                           3-18-09
