Securities & Exchange Commission v. Whittemore
659 F.3d 1
D.C. Cir.2011Background
- Cahill participated in a pump-and-dump scheme involving Triton American Energy Corp. (Triton) stock and sold 680,800 shares at inflated prices, generating substantial proceeds.
- Triton was a thinly traded pink-sheet stock with little pre-fraud trading activity; the stock's pre-fraud market value was not reliably ascertainable.
- Cahill consented to the Commission's disgorgement proceeding and waived contest of the complaint's allegations for purposes of the disgorgement motion.
- Proceeds were routed through an IOLTA account controlled by an attorney, Offill, with Cahill wiring substantial funds; some transfers may have benefited Whittemore and his wife.
- The district court found Cahill's proceeds were ill-gotten gains and imposed joint and several liability with Whittemore for the total disgorged amount, citing lack of evidence of a pre-fraud value and Cahill's control over funds.
- Cahill appealed challenging the method of calculating disgorgement, the inclusion of transferred funds, the joint liability, and the use of certain evidence at the hearing.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether pre-fraud value should be deducted from Cahill's disgorgement | Cahill argues pre-fraud value (32 cents) should reduce profits | Whittemore argues no reliable pre-fraud value; offset not feasible | No clear error; entire proceeds presumed ill-gotten; no deduction for pre-fraud value |
| Whether funds Cahill transferred to Whittemore/IOLTA may be excluded from disgorgement | Disgorgement should reach all ill-gotten gains, including transfers | Transferred funds should be excluded if not linked to ill-gotten proceeds | Transferred funds may be included; Banner Fund supports joint liability for dissipated funds |
| Whether joint and several liability was appropriate given Cahill's relationship with Whittemore | Joint liability warranted due to collaboration in scheme | Close relationship/apportionment required for joint liability | Court affirmed joint and several liability under disjunctive standard for collaboration or close relationship |
| Whether Cahill's Fifth Amendment invocation affected the disgorgement ruling | Fifth Amendment should not excuse failure to rebut profits | Fifth Amendment privilege justified adverse inference absence of evidence | Adverse inference permissible; Guidry testimony harmless error in context of record |
Key Cases Cited
- SEC v. Bilzerian, 29 F.3d 689 (D.C. Cir. 1994) (review for clear error; disgorgement as reasonable approximation)
- SEC v. First City Fin. Corp., 890 F.2d 1215 (D.C. Cir. 1989) (disgorgement need only be a reasonable approximation of profits)
- Zacharias v. SEC, 569 F.3d 458 (D.C. Cir. 2009) (burden to show pre-fraud value falls on wrongdoers; does not require hypothetical market value)
- SEC v. Platforms Wireless Int’l Corp., 617 F.3d 1072 (9th Cir. 2010) (initial burden satisfied by proceeds; pre-fraud value speculative and small)
- Banner Fund Int’l, 211 F.3d 602 (9th Cir. 2000) (disgorgement establishes personal liability for dissipated funds)
- SEC v. Hughes Capital Corp., 124 F.3d 449 (3d Cir. 1997) (collaboration can warrant joint liability; burden on wrongdoer to apportion)
- First Jersey Sec., Inc., 101 F.3d 1475 (2d Cir. 1996) (emphasizes broad equitable power to fashion disgorgement remedies)
- Hateley v. SEC, 8 F.3d 653 (9th Cir. 1993) (illustrates close-relationship and collaboration concepts in disgorgement)
- Calvo v. SEC, 378 F.3d 1211 (11th Cir. 2004) (close relationship as factor in joint liability in certain cases)