547 F.Supp.3d 157
D. Conn.
2021
Read the full case

Background

  • Defendants Westport Capital Markets, LLC and its owner/CEO Christopher McClure invested advisory clients in two undisclosed streams of third‑party compensation: (1) "selling dealer" principal transactions (buying allocations at a discount and reselling to clients at public price, earning concessions) and (2) mutual‑fund 12b‑1 distribution fees.
  • The SEC brought five counts under the Investment Advisers Act; the court granted summary judgment for the SEC on Counts 2, 3, and 4, and a jury found for the SEC on Counts 1 and 5 (finding scienter/willfulness for nondisclosure and false Forms ADV answers).
  • The SEC sought a permanent injunction, disgorgement of $632,954 (profits) plus prejudgment interest, and civil penalties of $1,100,000 (Westport) and $225,000 (McClure).
  • The court found defendants earned substantial undisclosed profits (about $546,019 from selling‑dealer transactions and $86,935 from 12b‑1 fees), ceased principal trades in 2015, and made a FINRA disclosure; Westport was closing and McClure’s future supervisory authority was curtailed.
  • Ruling: court denied the SEC’s request for a permanent injunction; granted disgorgement in full ($632,954) plus $187,807 prejudgment interest (total $820,761), joint and several against Westport and McClure; imposed civil penalties reduced from the SEC’s request to $500,000 (Westport) and $200,000 (McClure).

Issues

Issue Plaintiff's Argument Defendant's Argument Held
Whether to enter a permanent injunction for future Advisers Act violations Injunction necessary because defendants engaged in pervasive, scienter‑based violations and to support future SEC regulatory action No substantial risk of future violations; defendants lost business, ceased principal trading, self‑reported to FINRA, and injunction would cause severe collateral consequences Denied — court found insufficient likelihood of future violations and significant collateral consequences; Cavanagh factors weigh against injunction
Whether disgorgement of profits from selling‑dealer and 12b‑1 transactions is appropriate Disgorgement deprives defendants of ill‑gotten gains and will be returned to harmed investors; amounts are a reasonable approximation of net profits Disgorgement improper for selling‑dealer income because income came from underwriters, not clients, and does not reflect investor loss Granted in full — disgorgement of $632,954 (net profits) approved under Liu as equitable relief, to be used for investors; joint and several liability imposed
Whether prejudgment interest should be added to disgorgement Prejudgment interest compensates for time value and prevents benefit of interest‑free use of illicit gains No specific opposition offered Granted — $187,807 prejudgment interest awarded using IRS underpayment rate
Amount and tiers of civil penalties to impose SEC sought maximum second‑ and third‑tier penalties reflecting fraud, scienter, recurrence, and investor risk Defendants argued inability to pay and that penalties are unnecessary or disproportionate Partially granted — court imposed significant but reduced penalties ($200,000 and $50,000 for 12b‑1 second‑tier; $300,000 and $150,000 for selling‑dealer third‑tier), totaling $500,000 (Westport) and $200,000 (McClure); financial condition reduced but did not eliminate penalties

Key Cases Cited

  • SEC v. Cavanagh, 155 F.3d 129 (2d Cir. 1998) (factors for injunctive relief under securities laws)
  • Liu v. SEC, 140 S. Ct. 1936 (2020) (disgorgement limited to wrongdoer’s net profits awarded for victims)
  • SEC v. Contorinis, 743 F.3d 296 (2d Cir. 2014) (disgorgement as equitable remedy; district court discretion)
  • SEC v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir. 1996) (approach to calculating disgorgement; reasonable approximation standard)
  • SEC v. Rajaratnam, 918 F.3d 36 (2d Cir. 2019) (factors for civil‑penalty determinations)
  • Pentagon Capital Mgmt. PLC v. SEC, 725 F.3d 279 (2d Cir. 2013) (civil penalties must be imposed separately on each defendant)
  • SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2d Cir. 1972) (equitable considerations and collateral effects relevant to injunction)
  • Hecht Co. v. Bowles, 321 U.S. 321 (1944) (injunctive process aimed at deterrence, not punishment)
Read the full case