Securities & Exchange Commission v. Pentagon Capital Management PLC
2013 U.S. App. LEXIS 16402
| 2d Cir. | 2013Background
- Pentagon Capital Management and Chester were found liable for late trading in US mutual funds, violating Section 17(a), Section 10(b), and Rule 10b-5.
- Disgorgement and civil penalties were imposed, with joint and several liability for both awards totaling $38,416,500.
- Defendants allegedly directed brokers and used multiple accounts to conceal late trading through Trautman.
- The district court relied on Rule 22c-1 forward pricing and the architects of the scheme to establish liability.
- On appeal, the court upheld liability and disgorgement but remanded civil penalties post Gabelli v. SEC for recalculation and reversed joint-and-several liability for penalties.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Primary liability under securities laws | Pentagon and Chester devised and executed a late-trading scheme violating 10b-5 and 17(a). | They lacked fraud or deceit and as an advisor group should not bear primary liability. | Liable under 17(a), 10b-5, and 10b-5(a)/(c) as architects and facilitators of the deceit. |
| Advisor liability vs broker-liability framework | Investment advisors can be liable for aiding and abetting or primary liability in late trading. | Advisors are not directly communicators with funds and cannot be makers of statements. | Advisors can be liable; Pentagon and Chester were makers of the statements and liable as primary violators. |
| Civil penalty and Gabelli remand | Penalty should be the gross pecuniary gain, potentially joint and severally applied. | Joint and several liability for penalties is improper; apply five-year discovery framework. | Remanded for recalculation under Gabelli; reverse joint-and-several liability for the penalty. |
| Disgorgement amount allocation | Total profits from late trading should be disgorged, including PSPF profits. | Disgorgement should reflect profits attributable to each defendant. | Disgorgement affirmed as a reasonable approximation, joint and several among defendants and PSPF. |
Key Cases Cited
- VanCook v. SEC, 653 F.3d 130 (2d Cir. 2011) (architect of late-trading scheme liable under Rule 10b-5)
- Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (S. Ct. 2011) (maker of a statement requires ultimate authority over content)
- Monarch Funding Corp., 192 F.3d 295 (2d Cir. 1999) (elements for violation of Section 10(b)/Rule 10b-5)
- First Jersey Sec., Inc. v. W. B. Greenbaum, 101 F.3d 1450 (2d Cir. 1996) (disgorgement standards for mixed defendant liability)
- Gabelli v. SEC, 133 S. Ct. 1216 (S. Ct. 2013) (discovery rule does not toll statute of limitations for SEC fraud actions)
- Johnson v. Univ. of Rochester Med. Ctr., 642 F.3d 121 (2d Cir. 2011) (administrative law abuse of discretion standard for penalties)
- AbsoluteFuture.com, 393 F.3d 94 (2d Cir. 2004) (disgorgement logical limits when multiple defendants share profits)