Key Points

  • The Tenth Circuit affirmed a preliminary injunction and asset freeze the SEC obtained against Reven Holdings Inc., its affiliates and its three principals, and remanded for further proceedings.
  • The district court did not abuse its discretion by ruling without an evidentiary hearing, because the defendants joined a motion to vacate the scheduled hearing and never asked for a new one.
  • Under Starbucks Corp. v. McKinney, SEC requests for preliminary injunctions are governed by the four-factor Winter test, with a heightened showing where the injunction alters the status quo.
  • The district court reasonably refused to lift the freeze entirely because its targeted modifications protected the frozen assets.
  • The panel denied a motion to add to the appendix an email to the district judge, holding that correspondence outside the docket is not part of the record on appeal.

A federal appeals court on Oct. 14 upheld an order freezing the assets of the biotechnology company Reven Holdings Inc. and its three principals, whom the Securities and Exchange Commission has accused of misleading investors about executive pay, a nonexistent audit and a pending lawsuit. The court rejected the executives' argument that the trial judge had to hold an evidentiary hearing before imposing the freeze.

The U.S. Court of Appeals for the Tenth Circuit affirmed a preliminary injunction that the U.S. District Court for the District of Colorado entered in March 2024. Chief Judge Holmes wrote the published opinion for a panel that also included Judges Kelly and Federico. The injunction bars the offer or sale of Reven Holdings securities and keeps the defendants' assets frozen, with exceptions the trial court later added.

The panel held that the executives, having joined a request to cancel the scheduled injunction hearing and never having asked for a new one, could not fault the judge for deciding on the written record. The opinion also applies a 2024 Supreme Court decision, Starbucks Corp. v. McKinney, to SEC injunction requests and rejects, on a question the panel said it did not appear to have confronted before, the claim that a freeze must end because it destroys the value it was meant to preserve.

Brian Denomme, Peter Lange and Michael Volk manage Reven, which has been developing a "cardiovascular intravenous drug treatment" called RJX that the Food and Drug Administration has not approved. The SEC sued in December 2022 under the antifraud provisions of the federal securities laws.

According to the opinion, Reven's private placement memoranda reported that the three principals together were paid $1.62 million for 2019, $1.98 million for 2020 and $2.16 million for 2021. An SEC accountant reviewing bank records found they received $5.35 million, $3.36 million and $6.65 million.

Mr. Volk wrote to investors in December 2019, "We are currently undergoing our first audit now." Later slide decks said the company "has the minimum required two years of audited financial statements ending August 2021." The record showed that Reven never retained an auditing firm, the court wrote. Reven also told investors it faced no litigation while the guardian of an elderly investor was suing it in Florida, a case it settled for $2.75 million in October 2021.

The district court froze Reven's assets on Jan. 3, 2023, and set an injunction hearing for Jan. 13. Two days before the hearing, the SEC and the defendants jointly asked to cancel it because Reven's newly hired lawyers needed "additional time to learn the facts of the case." The judge granted the request, said the court might later reset the hearing and ruled on the papers more than a year later.

"Appellants requested the district court cancel the PI hearing it had scheduled, and Appellants chose not to request that the district court schedule a new hearing," Chief Judge Holmes wrote, explaining why the panel could "quickly dispense" with the argument. The panel quoted a 1998 circuit precedent: "Ordinarily, a district court does not abuse its discretion in deciding not to hold an evidentiary hearing when no such request is ever made."

The panel also refused to add to the appellate record an email Reven's lawyers had sent the trial judge, holding that correspondence outside the district court docket is not part of the record on appeal. Even if considered, the court wrote, the email asked only whether the court had everything it needed.

On the governing standard, the panel rejected Reven's proposed six-factor test and held that Starbucks "definitively clarifies that a PI, even one used to enforce securities laws, is governed by the traditional four-factor Winter test." That test requires a likely win on the merits, irreparable harm, a favorable balance of hardships and consistency with the public interest. The panel agreed with Reven that the SEC faced a heavier burden because the injunction's ban on future violations changed the status quo, and it held that the SEC met that burden.

The panel upheld the trial court's finding that the SEC was likely to prove the statements were false, material and made with scienter, the mental state required for securities fraud, which includes recklessness. Of Mr. Volk's 2019 email, the court wrote, "A prospective reading of this statement is simply not possible."

Reven had told the district court that the freeze was "wasting valuable patent life, and blocking the Company's ability to move forward with critical drug trials, thereby decimating (not preserving) investor assets." The SEC countered that lifting it would give the defendants "a blank check to deplete the frozen assets." In July 2024, the district judge let third parties pay Reven's expenses, permitted licensing of its intellectual property and allowed the principals to earn outside income and borrow individually for patent upkeep and legal fees.

"We do not appear to have confronted a challenge to an asset freeze on this basis," the panel wrote, before holding that the trial court "went to significant lengths to address the harms Appellants alleged and to protect the assets subject to the asset freeze."

"At bottom, Appellants' business is a gamble (albeit one with conceivable public benefits if the gamble pays off)," Chief Judge Holmes wrote. "The court reasonably could conclude that investors' remaining assets should not be freed up to continue staking Appellants' gamble." Reven's concerns, the panel held, "did not justify returning control over all their assets to the same individuals who likely committed fraud."

John E. Schreiber of Winston & Strawn LLP represented Reven and its executives. The SEC was represented by Paul G. Álvarez of the commission's Office of the General Counsel.

The panel affirmed the injunction and freeze and sent the case back to the District of Colorado for further proceedings, where the SEC's fraud claims remain to be decided on the merits.