By Anthony Biraglia

In the civil case of Grayson v. Anderson, the Fourth Circuit affirmed two district court judgments arising out of litigation over a South Carolina-based Ponzi scheme. In a published opinion released on March 7, 2016, the Court first affirmed the district court’s judgment that it did not have personal jurisdiction over a Cypriot company, finding that the district court had identified the correct standard of proof on the jurisdictional issue. Second, the Court agreed with the district court that South Carolina does not recognize a cause of action for aiding and abetting fraud.

The Ponzi Scheme and Underlying Litigation

Beginning in 1997, Derivium Capital (“Derivium”) ran a program through which borrowers could use stocks as collateral to receive loans of up to 90% of the stock’s market value. When the loan matured, borrowers had two options: surrender the stock, or pay off the loan and demand return of the stock. What Derivium did not disclose to borrowers was that two of its principals were selling the stock in order to fund risky venture capital investments. When most of these investments failed, Derivium continued to solicit stocks from new borrowers in order to cover the losses that left it unable to pay back the stock as the loans came to maturity. Derivium continued to do this for years after it knew the scheme would eventually fail. The scheme collapsed in 2005, and by 2007 the defrauded parties had filed lawsuits that included more than 50 named defendants. The ultimate result was a judgment of $150 million for the plaintiffs. Subsequently, the plaintiffs in the appeal before the Court began pursuing certain claims that had been stayed pending the outcome of the litigation.

One issue in these resumed cases was whether defendant Vision International (“Vision”), a Cypriot company that allegedly took part in the Ponzi scheme, was subject to personal jurisdiction in South Carolina. The parties filed motions that included deposition excerpts and affidavits, but neither presented any live testimony at a hearing on the motion. The district court granted Vision’s 12(b)(2) motion to dismiss for lack of personal jurisdiction on the grounds that the plaintiffs had failed to prove by a preponderance of the evidence facts demonstrating personal jurisdiction over Vision. After a trial, the district court also granted the defendant’s motion for judgment as a matter of law on plaintiff’s aiding and abetting fraud claims, reasoning that no such cause of action existed in South Carolina. The plaintiffs challenged each decision in a separate appeal, which the Fourth Circuit consolidated and considered in this opinion.

No Personal Jurisdiction over Vision

 The plaintiffs argued that, in deciding Vision’s 12(b)(2) motion, the district court erred by applying a preponderance of the evidence standard rather than a prima facie showing standard. According to the plaintiffs, the district court did not hold the evidentiary hearing required to apply the preponderance of the evidence standard. The Fourth Circuit found, however, that the lack of live testimony at the hearing on the 12(b)(2) motion did not prevent that hearing from being evidentiary for the purposes of deciding which standard to apply. All that is required to allow for the preponderance of the evidence standard is that the district court give the parties a fair opportunity to present to the court the relevant facts and legal arguments.

In this case, the parties were able to present to the court, after full discovery, deposition excerpts, affidavits, exhibits, interrogatory answers, and other similar evidence prior to a hearing. At that hearing, neither party offered, nor did the district court request, any further evidence. The Court presumed that this lack of further evidence showed that the parties considered all relevant matters to be before the district court. The Fourth Circuit found no deficiency in the district court’s procedures, and thus concluded that it properly applied the preponderance of the evidence standard.

The Court also took no issue with the district court’s factual findings. While Vision’s employee’s had done some work relating to the Ponzi scheme, the company itself had insufficient contacts with both South Carolina and the United States more generally. Finally, the Fourth Circuit rejected an argument that Federal Rule of Civil Procedure 4(k)(2) provided for personal jurisdiction over Vision for the plaintiff’s federal claims.

South Carolina Does Not Recognize A Cause of Action for Aiding and Abetting Fraud

The plaintiffs also challenged the district court’s decision to grant the defendant’s judgment as a matter of law on their aiding and abetting fraud claims. In asserting that South Carolina recognized such a claim, the plaintiffs chiefly relied on the 1929 case of Connelly v. State Co. In Connelly, the South Carolina Supreme Court held that an action against defendants charged jointly with libel could be brought in the home county of either defendant. This decision supposedly applied to the case at bar because of language that stated that “[A]ll who aid, advise, countenance, or assist the commission of a tort are wrongdoers.” However, the Connelly court also stated that its holding in that case concerned only the issue of where an action could be brought when two persons were accused of jointly composing libelous articles.

The Fourth Circuit found that the plaintiff’s argument that Connelly provided support for a cause of action for aiding and abetting fraud bordered on frivolous. The language upon which the plaintiffs relied was actually from the trial court’s opinion in that case, and the South Carolina Supreme Court specifically limited its holding to the narrow issue before it. Even if the district court or the Fourth Circuit found that Connelly indirectly supported a cause of action for aiding and abetting fraud, it is not permissible for a federal court sitting in diversity to surmise on the expansion of state law. Rather, the court must apply the state law as it actually exists.


The Fourth Circuit affirmed the judgment of the district court as to its lack of personal jurisdiction over Vision, as well as its judgment as a matter of law on plaintiff’s aiding and abetting fraud claim.