802 F. Supp. 2d 293
D. Mass.2011Background
- At Prudential Securities in Boston, Druffner led the Druffner Group, including Ajro and Ficken, from Jan 2001 to Sept 2003.
- The group engaged in market timing via false statements and misrepresentations, evading restrictions by using multiple FA numbers and fictitious accounts.
- They used 13 FA numbers for only five customers and opened over 170 accounts under fictitious names to conceal trades.
- Despite blocks, they continued market timing by switching to unblocked FA numbers and accounts after mutual funds detected activity.
- Total market timing trades with 25 fund companies exceeded $900 million; net commissions amounted to $2,114,802 for Druffner and $231,846 for Ajro.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Disgorgement amount must be a reasonable approximation of gains | Net commissions reflect ill-gotten gains from market timing. | Not all commissions are causally connected to violations; discounts may be warranted. | Disgorgement approved as reasonable approximation: Druffner $1,000,000; Ajro $110,000. |
| Prejudgment interest period and rate | Award interest from Amended Complaint to final judgment using IRS underpayment rate. | Delay in filing warrants limited or different accrual considerations. | Interest awarded for Aug 1, 2004 to Sept 30, 2006 at IRS underpayment rate; amount to be recalculated. |
| Civil penalties | Penalties appropriate under securities statutes given violations and profits. | No civil penalties due to lack of ability to pay and cooperation; other sanctions suffice. | Civil penalties denied. |
Key Cases Cited
- SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2d Cir.1972) (disgorgement as equitable remedy to prevent unjust enrichment)
- SEC v. Happ, 392 F.3d 12 (1st Cir.2004) (disgorgement as reasonable approximation of profits)
- First Jersey Sec., Inc. v. Wright, 101 F.3d 1450 (2d Cir.1996) (court broad discretion in disgorgement; profits must be a reasonable approximation)
- SEC v. Sargent, 329 F.3d 34 (1st Cir.2003) (considerations for prejudgment interest in securities cases)
- SEC v. Druffner, 517 F. Supp. 2d 502 (D. Mass.2007) (prior finding of disgorgement baseline; context for current amount)