The Securities and Exchange Commission brought an action against a corporation’s operators for allegedly conducting a classic “pump and dump” market manipulation scheme whereby they purchased for the corporation stock of another company, then disseminated false public information touting the company with the goal of selling their stock at an artificially higher price. One defendant, the controller of the corporation that purchased stock inaccordance with the scheme, consented to the entry of judgment as well as the imposition of certain relief against him, but disagreed with the SEC as to the monetary amount of the relief. After considering evidence the defendant had introduced supporting his view of the appropriate disgorgement and penalty amounts, the U.S. District Court for the Southern District of New York held the defendant failed to make the required showing and that the SEC’s calculation should be imposed.
Among other things, the court rejected the defendant’s argument that the corporation’s proceeds from the stock sales that were later used for the corporation’s general business expenses should be deducted from the defendant’s ill-gotten profits. Specifically, the court held that payments made to other directors of the corporation, payments made to repay corporate loans, and payments made to develop the corporate website were irrelevant “as general business expenses may not be subtracted from the disgorgement amount, and it does not matter how a defendant chooses to spend his ill-gotten gains.”
Further, the defendant argued that the disgorgement figure should be reduced by the amount previously held in a corporate brokerage account which the SEC had frozen. The account lost a great deal of value in the period of time in which it was frozen, and the defendant argued that he should not be prejudiced by the SEC’s delay in liquidating the account. The court rejected the defendant’s argument, holding that the sum liquidated was the amount that was disgorged and the defendant was not entitled to a greater credit by reason of the fact that the account previously had a higher value. (SEC v. Stone, 2009 WL 82661 (S.D.N.Y. Jan. 13, 2009))