661 F. App'x 52
2d Cir.2016Background
- SEC obtained a default judgment against defendants Lee Cole and Linden Boyne (British citizens, former CEO/CFO/directors of Electronic Game Card, Inc. (EGMI)) in a securities-fraud enforcement action.
- The district court entered a final judgment ordering disgorgement (~$14.7M including prejudgment interest) jointly and severally, individual civil penalties of $7.5M each, and nonmonetary relief (permanent injunctions, officer/director and penny-stock bars).
- Defendants did not challenge the default judgment’s factual allegations that they controlled or directed disposition of shares held by interrelated Gibraltar entities.
- SEC supported disgorgement with extensive documentary exhibits tying the Gibraltar entities and fraudulent EGMI transactions to defendants; district court found this sufficient to shift burden to defendants.
- Defendants argued on appeal only that (1) there was no proof they personally benefitted, (2) penalties exceeded permissible gains, and (3) nonmonetary sanctions were improper.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Disgorgement amount & joint-and-several liability | SEC: complaint allegations + exhibits show defendants controlled Gibraltar entities and scheme; disgorgement may be joint and several for collaborating parties | Cole/Boyne: no proof they personally benefited; cannot be held liable for full Gibraltar proceeds | Affirmed. Default judgment’s allegations accepted as true; documentary evidence justified shifting burden; disgorgement may be joint-and-several and need only be a reasonable approximation of profits causally connected to violation |
| Prejudgment interest included in disgorgement | SEC: interest appropriate to make investors whole | Defendants: contest amount as tied to full illicit proceeds they didn’t personally receive | Affirmed as part of disgorgement award; no abuse of discretion |
| Civil penalties (each $7.5M) | SEC: third-tier penalties appropriate where fraud caused substantial losses; each defendant can be penalized for the same dollar of gain where both benefited; defendants’ noncooperation justified allocating uncertainty to them | Defendants: penalties exceed any plausible measure of their individual gains | Affirmed. District court reasonably calculated scheme gain (~$12.2M) and exercised discretion to impose individual third-tier penalties given collaboration, concealment, noncooperation, and investor harm |
| Nonmonetary sanctions (injunctions, bars) | SEC: equitable relief and bars appropriate to protect investors and markets | Defendants: challenge these sanctions (raised perfunctorily) | Affirmed. Challenges deemed waived; injunctions and bars within district court’s discretion |
Key Cases Cited
- SEC v. Contorinis, 743 F.3d 296 (2d Cir. 2014) (standard for disgorgement and allocation of uncertainty to wrongdoer)
- Finkel v. Romanowicz, 577 F.3d 79 (2d Cir. 2009) (default judgment: court accepts complaint allegations as true)
- SEC v. AbsoluteFuture.com, 393 F.3d 94 (2d Cir. 2004) (joint-and-several liability for collaborating parties’ combined profits)
- SEC v. Razmilovic, 738 F.3d 14 (2d Cir. 2013) (disgorgement as reasonable approximation; third-tier penalty guidance)
- SEC v. Pentagon Capital Mgmt. PLC, 725 F.3d 279 (2d Cir. 2013) (civil penalties cannot be imposed jointly and severally)
- Trans World Airlines, Inc. v. Hughes, 449 F.2d 51 (2d Cir. 1971) (party who blocks discovery bears risk of uncertainty)
- SEC v. Bankosky, 716 F.3d 45 (2d Cir. 2013) (standard for imposition of officer/director bars)
- SEC v. First Jersey Sec., Inc., 101 F.3d 1450 (3d Cir. 1996) (standards for permanent injunctions in SEC enforcement)