Securities and Exchange Commission v. O'Rourke
1:19-cv-04137
| E.D.N.Y | Nov 9, 2020Background
- SEC sued Garrett O’Rourke and a co‑defendant for a scheme (May 2016–July 2018) selling controlled-company stock to investors while concealing their stakes and targeting elderly retail investors.
- The court entered a temporary restraining order and asset freeze early in the case; parties later stipulated to allow limited living and counsel expenses.
- O’Rourke and the SEC settled; the court entered a consent judgment enjoining future violations and left disgorgement and prejudgment interest to be determined later.
- The SEC sought roughly $6.1M in disgorgement (later modestly revised); O’Rourke proposed disgorging about $5.214M and contesting roughly $1M of the SEC’s figure.
- Disputed categories: (1) $31,336 received for “sales leads,” (2) ~$48,864 of transfers between O’Rourke’s accounts traced to fraudulent proceeds, and (3) $787,668 paid out as commissions to co‑conspirators.
- Court ordered disgorgement of $5,315,186 and prejudgment interest at the IRS underpayment rate through July 31, 2019; SEC to submit interest calculation and O’Rourke may object.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are proceeds from "sales leads" subject to disgorgement? | Leads were lists of victims; proceeds derive from the fraud and are ill‑gotten. | Leads were independent sales and unconnected to the complained transactions. | Disgorgeable: lists’ value was causally connected to the fraud; $31,336 ordered disgorged. |
| Are transfers between O’Rourke’s accounts traceable and disgorgeable? | Forensic accounting ties transfers from WB21 to fraudulent stock sale proceeds. | Transfers are merely intra‑account moves and not traceable to fraud. | Disgorgeable: SEC’s tracing persuasive; $48,864 ordered disgorged. |
| Must O’Rourke disgorge funds he paid as commissions to co‑conspirators? | Payments are proceeds of the scheme and should be included. | Payments passed through O’Rourke and were not his retained profit; reducing disgorgement is appropriate. | Not disgorgeable from O’Rourke here: $787,668 treated as co‑conspirators’ receipts and deducted to avoid punitive effect. |
| What prejudgment interest is owed and for what period? | Interest at IRS underpayment rate on disgorgement amount. | O’Rourke objects to interest on amounts he paid out or transferred and argues interest should run only while he had use of funds. | Interest awarded at IRS underpayment rate on $5,315,186 through July 31, 2019 (date injunctive freeze began); no interest on commission amounts. SEC to calculate interest; parties may object. |
Key Cases Cited
- SEC v. Universal Exp., Inc., 646 F. Supp. 2d 552 (S.D.N.Y. 2009) (disgorgement seeks reasonable approximation of illicit profits; direct transaction costs may be deducted in discretion)
- SEC v. Fischbach Corp., 133 F.3d 170 (2d Cir. 1997) (district court discretion to determine disgorgement amount)
- SEC v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir. 1996) (courts may award prejudgment interest and select an appropriate rate)
- SEC v. Cavanagh, 445 F.3d 105 (2d Cir. 2006) (disgorgement is remedial, not punitive)
- SEC v. Patel, 61 F.3d 137 (2d Cir. 1995) (disgorgement need only be a reasonable approximation causally connected to the violation)
- SEC v. Contorinis, 743 F.3d 296 (2d Cir. 2014) (wrongdoer’s unlawful actions can create indirect illicit benefits)
- SEC v. Opulentica, LLC, 479 F. Supp. 2d 319 (S.D.N.Y. 2007) (burden shifts to defendant to rebut a reasonable disgorgement showing)
- SEC v. Moran, 944 F. Supp. 286 (S.D.N.Y. 1996) (purpose of prejudgment interest is to prevent benefit from interest‑free use of illicit funds)