Securities and Exchange Commission v. Milan Group, Inc.
124 F. Supp. 3d 21
D.D.C.2015Background
- The SEC sued Milan Group, its principals, and attorney Brynee K. Baylor alleging a multi‑person “prime bank” fraud scheme and violations of Sections 17(a), 10(b)/Rule 10b‑5, Sections 5(a)/5(c), and Section 15(a).
- This Court granted summary judgment for the SEC (Aug. 26, 2013), finding Baylor liable for fraud, unregistered securities sales, and acting without broker‑dealer registration; ordered disgorgement and a joint-and-several third‑tier penalty totaling $746,266 against Baylor and her firm Baylor & Jackson.
- The D.C. Circuit affirmed liability and disgorgement but vacated and remanded the joint‑and‑several civil penalty, noting textual arguments that penalties should not be joint and several and citing the Second Circuit’s Pentagon Capital decision.
- On remand, the SEC sought third‑tier penalties only against Baylor: $150,000 per violation (four primary violations) totaling $600,000; it no longer sought penalties against Baylor & Jackson (firm defunct).
- Baylor opposed, arguing her conduct was isolated and not intentional, she lacks ability to pay, and disgorgement suffices; she also asked for joint‑and‑several liability if any penalty is imposed. Baylor did not respond to the Court’s order to show cause about the firm’s assets.
- The Court found Baylor’s conduct egregious and extremely reckless, causing substantial investor losses over 14 months, rejected Baylor’s inability‑to‑pay claim for lack of evidence, declined joint‑and‑several penalties, and imposed a $600,000 third‑tier civil penalty against Baylor alone.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether to impose third‑tier civil penalties on Baylor | Baylor’s conduct meets third‑tier criteria (fraud/recklessness, substantial losses, recurrent misconduct); $150,000 per violation (4 violations) = $600,000 appropriate | No penalty: conduct isolated, not intentional, disgorgement is sufficient, cannot pay | Court imposed $600,000 third‑tier penalty against Baylor (statutory criteria met; egregious/recurrent conduct; no proof of inability to pay) |
| Whether penalty may be imposed jointly and severally on Baylor & Baylor & Jackson | SEC: seek penalty only against Baylor because firm is defunct | Baylor: if penalty imposed, require joint‑and‑several liability with firm | Court denied joint‑and‑several penalty; followed Pentagon Capital reasoning that civil penalties must be assessed against individual defendants, not jointly and severally; removed Baylor & Jackson from penalty order |
| Whether disgorgement alone obviates need for civil penalty | Penalty serves punishment and broader deterrence beyond disgorgement; penalty less than Baylor’s pecuniary gain | Disgorgement already achieves deterrence and is sufficient | Court held penalty is appropriate in addition to disgorgement to punish and deter; not duplicative |
| Whether Baylor established inability to pay such that penalty should be reduced or withheld | N/A (SEC sought full amount) | Baylor claimed lack of assets and disbarment, needs career rebuild; requested reduction/denial | Court required evidence of inability to pay by preponderance; Baylor provided none and failed to respond to show‑cause; court declined to reduce penalty |
Key Cases Cited
- SEC v. Pentagon Capital Mgmt. PLC, 725 F.3d 279 (2d Cir. 2013) (civil penalties may not be imposed on a joint‑and‑several basis; penalties must be assessed against individual defendants)
- SEC v. Daly, 572 F. Supp. 2d 129 (D.D.C. 2008) (civil penalties serve punishment and deterrence in addition to disgorgement)
- SEC v. Moran, 944 F. Supp. 286 (S.D.N.Y. 1996) (Congress authorized penalties beyond disgorgement to deter lucrative securities violations)
- SEC v. Levine, 517 F. Supp. 2d 121 (D.D.C. 2007) (district court decision discussing remedies; does not address joint‑and‑several penalty propriety)
- SEC v. One Or More Unknown Traders in the Common Stock of Certain Issuers, 825 F. Supp. 2d 26 (D.D.C. 2010) (discussing purpose of civil penalties)
- Huffman v. SEC, 996 F.2d 800 (5th Cir. 1993) (burden on defendant to prove inability to pay by preponderance)