Securities Regulation Daily Kokesh casts no doubt on prior rulings on disgorgement in SEC enforcement proceedings
Tuesday, September 3, 2019

Kokesh casts no doubt on prior rulings on disgorgement in SEC enforcement proceedings

By Rodney F. Tonkovic, J.D.

An argument that disgorgement is no longer an authorized remedy after Kokesh failed to sway a Second Circuit panel.

A Second Circuit panel has affirmed a district court judgment ordering the payment of disgorgement. The court rejected the appellant's argument that the district court lacked the authority to impose disgorgement after Kokesh v. SEC and denied challenges to the remedies calculations (SEC v. de Maison, August 30, 2019, per curiam).

Pump-and-dump scheme. Angelique de Maison was part of a ring of individuals charged taking part in a pump-and-dump scheme involving a microcap company. According to the Commission, de Maison's husband, Izak Zirk de Maison F/K/A/ Izak Zirk Engelbrecht, orchestrated a scheme starting with the installation of associates as officers and directors of Gepco Ltd., a publicly traded microcap issuer, while he secretly ran the company and illegally transferred shares to the associates. The de Maisons then manipulated the market for Gepco's stock, with Angelique seeking out investors to purchase unregistered securities in two fraudulent issuers.

The Commission first brought this action in 2014. After an amended complaint was filed in July 2015, settlements were reached late that year with several of the defendants, including de Maison. Under the terms of the judgment and consent, de Maison agreed to pay disgorgement and a civil penalty, and the Commission moved for relief in January 2018. In July 2018, the district court ordered de Maison to disgorge $4,240,049.30, plus prejudgment interest, and to pay a third-tier civil penalty of $4,240,049.30.

Kokesh argument rejected. On appeal, de Maison's principal argument was that, after Kokesh v. SEC, the district court lacked the authority to impose disgorgement. She asserted that disgorgement is historically rooted in equity and that equitable relief does not include penalties. Kokesh, de Maison said, held that disgorgement in the securities context is always a penalty and is thus no longer an authorized remedy.

The panel rejected this argument. While a panel is not bound by the decision of a prior panel where an intervening Supreme Court decision casts doubt on the earlier ruling, that was not the case here. The panel noted that the Supreme Court in Kokesh explicitly said that was not opining on whether courts have authority to order disgorgement in SEC enforcement proceedings. Concluding that Kokesh did not disturb Second Circuit precedent on disgorgement in SEC enforcement proceedings, the panel stated that de Maison's argument must await consideration by an en banc court or by the Supreme Court.

Disgorgement affirmed. De Maison then challenged the district court's calculation of the disgorgement amount. Here, de Maison made several arguments regarding where the proceeds of the illegal sales went, but the court said that all this was a "collective distraction." De Maison, the court said, confused what made the gains "ill-gotten" in the first place: the fact that she was selling unregistered securities and was not a registered broker-dealer.

The judgment of the district court was accordingly affirmed. The ruling is by summary order and is without precedential effect.

The case is No. 18-2534.

Attorneys: John Boles Capehart for the SEC. Jeffrey Bruce Coopersmith (Davis Wright Tremaine LLP) for Angelique De Maison.

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