612 F.Supp.3d 287
S.D.N.Y.2020Background
- Avalon was a foreign day‑trading firm (traders mainly in Eastern Europe and Asia); Nathan Fayyer and Sergey Pustelnik controlled Avalon and worked through broker‑dealer Lek Securities. Lek settled separately with the SEC prior to trial. The SEC froze $5.5 million in Avalon accounts.
- From March 2012 through September 2016 Avalon, Fayyer, and Pustelnik ran two manipulative schemes: (1) layering (placing canceling ‘‘loud‑side’’ orders and opposite ‘‘quiet‑side’’ orders) and (2) a Cross‑Market Strategy (trading stock to move option prices and profiting on options). The jury found both schemes manipulative and the defendants liable under Sections 10(b)/Rule 10b‑5, Sections 17(a)(1) & (3), Section 9(a)(2), and control‑person provisions.
- The schemes spanned years, involved hundreds of thousands of manipulative instances (≈675,504 layering instances; 668 cross‑market instances), and were recurrent and coordinated with recruited traders and technology changes to evade detection.
- Experts attributed over $29 million in revenue to the schemes; the three defendants retained about $4.495 million of that revenue while most was paid to Avalon’s traders.
- After the jury verdict, the SEC sought remedies: permanent injunctions, disgorgement of $4,495,564 plus prejudgment interest, and third‑tier civil penalties of $13.8 million per defendant. Defendants opposed disgorgement post‑Kokesh, challenged the SEC experts’ transaction identification, and sought much smaller penalties.
- The court ordered joint-and‑several disgorgement of $4,495,564 plus $131,750 prejudgment interest, a $5 million civil penalty against each defendant (subject to increase if disgorgement cannot be enforced), and permanent injunctive relief.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Availability of disgorgement after Kokesh | Disgorgement remains an equitable remedy; SEC seeks disgorgement of profits. | Kokesh classified disgorgement as a "penalty," so it precludes disgorgement here. | Court follows 2d Cir. precedent allowing disgorgement in SEC enforcement; grants disgorgement of $4,495,564. |
| Sufficiency of proof tying profits to manipulative trades | SEC experts provided a conservative, reasonable approximation identifying instances and revenue to be disgorged. | Experts could not identify single trades as manipulative; SEC failed to tie specific profits to violations. | Court accepts experts’ methodology as reliable and adequate; plaintiff met burden; uncertainty falls on defendants. |
| Prejudgment interest | Interest needed so defendants do not get an interest‑free benefit; SEC calculated interest to freeze date. | Same Kokesh‑based objection to disgorgement/interest. | Court awards prejudgment interest of $131,750 (using established methodology/period). |
| Civil penalty metric & amount | Seek maximum third‑tier penalties by counting each month of illegality (92 months) → $13.8M per defendant. | Propose one penalty per scheme (far smaller totals); point to Lek settlement and proportionality. | Court finds conduct egregious, intentional, recurrent, and causing losses; selects intermediate third‑tier penalty of $5M per defendant (increases to $7.5M if disgorgement unenforceable). |
Key Cases Cited
- SEC v. Cavanagh, 445 F.3d 105 (2d Cir.) (disgorgement as equitable remedy in securities enforcement)
- SEC v. Contorinis, 743 F.3d 296 (2d Cir.) (reasonable approximation standard for disgorgement)
- SEC v. Razmilovic, 738 F.3d 14 (2d Cir.) (SEC burden to approximate profits and penalty tiers)
- Kokesh v. SEC, 137 S. Ct. 1635 (2017) (characterizing disgorgement as a "penalty" for §2462 limitations discussion)
- First Jersey Sec., Inc. v. (appeal citation), 101 F.3d 1450 (court approval of IRS underpayment rate as baseline for prejudgment interest)
- SEC v. AbsoluteFuture.com, 393 F.3d 94 (2d Cir.) (joint and several liability for combined profits)
- SEC v. Rajaratnam, 918 F.3d 36 (2d Cir.) (factors for assessing civil penalties; scope/duration relevance)
- Haligiannis (S.D.N.Y.), 470 F. Supp. 2d 373 (S.D.N.Y.) (framework for penalty assessment and factors)