In 2006, the Securities and Exchange Commission brought a civil action against the defendant, alleging a conspiracy to fraudulently manipulate the prices of 24 stocks. On the same day, the defendant was arrested in connection with a parallel criminal investigation, and, after a jury trial, was found guilty of securities fraud. After the defendant was sentenced, the SEC sought (i) an order permanently enjoining the defendant from violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5; (ii) an order requiring the defendant to disgorge his gains from the allegedly fraudulent scheme; and (iii) a civil penalty. The SEC made a summary judgment motion, contending that it was entitled to summary judgment because all of the material facts that would entitle it to the relief it sought were litigated against the defendant in the criminal proceeding. The court stated that because the defendant had an opportunity to contest the securities fraud charges at his criminal trial, he could not relitigate whether he had engaged in securities fraud as outlined in the indictment. However, the court rejected the SEC’s argument that its findings at sentencing had preclusive effect. Nevertheless, the court granted the partial summary judgment for the SEC.
The court noted that for the SEC to get injunctive relief to proscribe future violations of securities laws, it must demonstrate that there is a substantial likelihood of future violations of illegal securities conduct. The court held that the fact that the defendant was convicted of 15 counts of securities fraud demonstrated that the defendant’s securities violations were not isolated, and he therefore had a substantial likelihood of future violations. The court further held the defendant should be disgorged of $290,193.14 of profits because disgorgement need only be a reasonable approximation of profits causally connected to the violation, and it was undisputed that the defendant realized at least that amount in fraudulent gains. The court rejected the SEC’s argument that disgorgement should be approximately $621,000, the amount of profits the court found at sentencing, because the sentencing findings could not be given preclusive effect. Finally, the court decided that pursuant to 15 U.S.C. § 77t(d)(1), which provides that the SEC may seek civil penalties, the defendant was eligible for a civil penalty as high as $100,000 for each of his violations. The court imposed a civil penalty of $290,193.14 because the defendant’s conduct was egregious, the conduct was not isolated, and the defendant acted with clear knowledge that he was engaged in wrongdoing. (SEC v. Zafar, 2009 WL 129492 (E.D.N.Y. January 20, 2009))