When defendants argue in federal court against the SEC’s calculation of a disgorgement figure, they hear a lot of this:
- “A district court has broad discretion to order disgorgement of profits obtained through violation of federal securities laws and, if ordered, in calculating the disgorgement amount. SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1474-75 (2d Cir. 1996).
- “[B]ecause of the difficulty of determining with certainty the extent to which a defendant’s gains resulted from his frauds . . . the court need not determine the amount of such gains with exactitude.” SEC v. Razmilovic, 738 F.3d 14, 31 (2d Cir. 2013).
- “The amount of disgorgement ordered need only be a reasonable approximation of profits causally connected to the violation. . . . [A]ny risk of uncertainty in calculating disgorgement should fall upon the wrongdoer whose illegal conduct created that uncertainty.” SEC v. Contorinis, 743 F.3d 296, 305 (2d Cir. 2014).
No fun for the defendants, right? With the playing field tilted that way, it almost seems like the SEC should never lose on the disgorgement calculation analysis. Put another way, if the SEC throws up almost anything rational, it should be able to convince the court to accept its calculation and impose that figure on a litigating defendant.
But not always. Just last week in SEC v. McGinn, Smith & Co., 1:10-cv-457-GLS (N.D.N.Y.), the SEC had asked for $124 million in disgorgement, but the court found the SEC’s submission on this point to be wholly lacking. Here’s what the court said:
In support of its assertion that $124 million is a reasonable approximation of “all proceeds of the offering fraud remaining unpaid to investors,” the SEC cites one paragraph of the Receiver’s declaration, which in turn cites no additional evidence supporting that calculation. The court cannot and will not rely on one sentence from the Receiver’s declaration and, willy-nilly, order $124 million to be disgorged; more explanation is necessary.
The court noted its disappointment with the SEC’s “haphazard filing” and its “utter failure to provide any specificity with respect to its requests for an order granting $124 million in disgorgement and $124 million in civil penalties.” But it also cited examples from when the Commission had done a much better job and carefully documented bank records, issuer records, and investor checks to establish the amounts properly at issue.
To me, the lesson for defendants is pretty clear: if you want to overcome the presumption in favor of the SEC’s disgorgement calculation, get your ducks in a row. If the case is appropriate, go through the tedious process of documenting where the money did and did not go. Advocate for your client at every stage and force the SEC to do the same. The presumption in favor of the SEC’s calculation is only that, a presumption. Though the defendants didn’t do so effectively here, that calculation can be rebutted and you can prevent an unsupported disgorgement figure from being imposed.