Securities Regulation Daily No estimate of ill-gotten gains means no disgorgement
Friday, April 14, 2017

No estimate of ill-gotten gains means no disgorgement

Rejecting the SEC’s request to order a former company chairman to disgorge $3.7 million in ill-gotten profits, a federal district court said the SEC had failed to meet its burden in reasonably approximating the amount of profit. Although the value of collateral to secure brokerage loans was not entirely clear, the court could not simply ignore that collateral was provided, as the SEC urged. While the court declined to order disgorgement, it did enter a permanent injunction against future violations, a 10-year officer and director bar, and a $225,000 civil monetary penalty (SEC v. Hall, April 13, 2017, Altonaga, C.).

Fraud. Christopher J. Hall, former chairman of a racetrack company, was found liable by a jury in February 2017 for fraud in obtaining millions of dollars in loans from a brokerage firm. Hall misrepresented the encumbered status of company stock and a real estate partnership interest he offered as collateral for the loans.

No disgorgement. Disgorgement is designed to deprive a wrongdoer of unjust enrichment and deter others from violating the securities laws, explained the court. Hall argued that disgorgement was not appropriate because he did not profit from the loans, because he gave the firm collateral worth almost four times the amount of money he received. The SEC responded that Hall’s statements about the collateral’s value were self-serving and urged the court to completely disregard the value of the collateral.

The court said that although it could not determine exactly how much profit Hall made, it could not ignore that Hall provided collateral at every transaction. For one loan, the brokerage firm acknowledged that the collateral was worth significantly more than the loan amount. Noting that disgorgement may not be used as a punitive or compensatory remedy, the court said the SEC had failed to meet its burden in reasonably approximating Hall’s ill-gotten profit. Because the court could not determine any reasonable disgorgement amount, it did not award any at all.

Permanent injunction. In an analysis of six factors, the court found that a permanent injunction against future violations of the securities laws was proper and necessary. Hall’s conduct in lying to obtain the loans was egregious, recurrent, and knowing, not mere recklessness or negligence. Further, said the court, because Hall currently supports himself through "investing, speculating, and risk-taking," it is highly likely he will encounter opportunities for future violations.

10-year bar. In response to the SEC’s request for a permanent officer and director bar, Hall argued that he was not acting in his capacity as an officer or director at the time of the alleged conduct and the SEC did not show he used his position as chairman to perpetrate the fraud. However, this was not relevant, only whether the bar would restrain acts of the same type or class or that could be fairly be anticipated from his past conduct.

Applying a six-factor test, the court concluded a 10-year bar was appropriate. This factored in the egregiousness and recurrence of Hall’s actions, as well as his apparent recognition he knowingly lied to receive large sums of money, while holding fast to the position he did not commit any securities violations.

Civil monetary penalty. Observing that Hall’s violations involved fraud and deceit but did not result in substantial losses to others, the court decided that a second-tier penalty under a federal civil penalties act was appropriate. Taking into account the egregiousness of the conduct and the goal of deterrence, the court awarded the maximum statutory penalty of $75,000 per violation for a civil monetary penalty of $225,000.

The case is No. 15-cv-23489 (OrderFinal Judgment).

Attorneys: Mark Oh for the SEC. Daniel Stuart Newman (Broad and Cassel LLP) for Christopher J. Hall.

MainStory: TopStory DirectorsOfficers Enforcement FraudManipulation FloridaNews

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