Securities and Exchange Commission v. Rosenthal
426 F. App'x 1
| 2d Cir. | 2011Background
- SEC filed suit against Zvi and Amir Rosenthal and related relief defendants for insider trading and related securities-law violations; district court granted partial summary judgment ordering disgorgement, injunctive relief, and penalties; relief defendants’ disgorgement sought on funds commingled in Aragon Partners LP after illicit gains; ill-gotten gains were commingled and post-distribution balance less than illicit profits; Delaware law applied to assess legitimacy of distributions; district court used IRS underpayment rate for prejudgment interest; penalties under section 21A were imposed on Zvi and Amir; appeal challenged disgorgement against relief defendants, prejudgment interest method, and penalties, with related waivers and related arguments.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Disgorgement against relief defendants valid? | SEC: ill-gotten gains commingled; tracing not required. | Relief defendants: no legitimate claim to funds after distributions. | Disgorgement upheld against relief defendants. |
| Prejudgment interest rate proper? | IRS underpayment rate appropriate; within court’s discretion. | Lower short-term rates should apply. | IRS underpayment rate approved; no abuse of discretion. |
| Civil penalties under section 21A warranted? | Repeated, knowing violations justify penalties. | Financial hardship argued against penalties. | Penalties affirmed; proportional and within discretion. |
| Eighth Amendment excessive fines claim preserved? | Not applicable; defense raised late. | Fines unconstitutional as excessive. | Waived; no constitutional violation found on merits. |
Key Cases Cited
- SEC v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir. 1996) (disgorgement review and discretion)
- SEC v. Cavanagh, 155 F.3d 129 (2d Cir. 1998) (disgorgement without traceability where funds commingled)
- Commodity Futures Trading Comm’n v. Walsh, 618 F.3d 218 (2d Cir. 2010) (legitimate claim not necessary for disgorgement; gifts precedent)
- First Jersey Sec., Inc. v. SEC, 101 F.3d 1450 (2d Cir. 1996) (disgorgement framework and computation)
- SEC v. DiBella, 587 F.3d 553 (2d Cir. 2009) (abuse-of-discretion standard for penalties)
- In re Nortel Networks Corp. Sec. Litig., 539 F.3d 129 (2d Cir. 2008) (waiver of challenges raised on appeal)
- United States v. Sabhnani, 599 F.3d 215 (2d Cir. 2010) (Eighth Amendment proportionality review guidance)
- von Hofe v. United States, 492 F.3d 175 (2d Cir. 2007) (proportionality considerations in penalties)