U.S. Securities & Exchange Commission v. Metter
706 F. App'x 699
2d Cir.2017Background
- Defendant Michael Metter entered a consent judgment admitting the Complaint’s factual allegations for purposes of remedies and surrendering the right to contest liability.
- The SEC alleged Metter, with others, controlled RM Enterprises and used it to receive approximately $52.2 million from a pump-and-dump fraud involving Spongetech.
- The district court ordered joint-and-several disgorgement of $52,236,995 (plus prejudgment interest) and a civil penalty of $6,133,540.
- Metter appealed, arguing (1) he did not control RM Enterprises, (2) the disgorgement and penalty amounts were improper (including dispute over a $5 million transfer), and (3) the disgorgement violated the Eighth Amendment’s Excessive Fines Clause.
- The Second Circuit reviewed disgorgement and penalty for abuse of discretion and Eighth Amendment issues de novo (fact findings reviewed for clear error).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Effect of consent judgment | Consent precludes Metter from denying Complaint allegations, including control of RM Enterprises | Metter contends he did not control RM Enterprises and may challenge relevant facts | Court enforced consent terms; Metter cannot relitigate facts surrendered in the consent judgment |
| Disgorgement amount | Disgorgement should approximate profits causally connected to the fraud; SEC sought ≈ $52.3M flowing into RM Enterprises | Metter argued First Jersey’s broad标准 inappropriate; cited Honeycutt to limit disgorgement to what he personally acquired | No abuse of discretion: record showed $52,236,995 flowed into RM Enterprises and Metter had conceded control; disgorgement upheld |
| Inclusion of $5M transfer in civil penalty calculation | SEC included $5M transfer from RM Enterprises to BusinessTalkRadio.net (president: Metter) as personal enrichment | Metter argued the transfer discharged personally guaranteed debt and should not be counted; claimed financial hardship | Court upheld inclusion of the $5M as part of Metter’s enrichment and rejected hardship claim; penalty affirmed |
| Excessive Fines Clause challenge | SEC: disgorgement approximated gains and remedied investor harm; not grossly disproportional | Metter: disgorgement (and penal effect) violated Eighth Amendment as grossly disproportional | Assuming disgorgement is a "fine," applying Bajakajian factors, court found no gross disproportionality and affirmed disgorgement |
Key Cases Cited
- SEC v. Contorinis, 743 F.3d 296 (2d Cir.) (standard of review for disgorgement)
- SEC v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir. 1996) (disgorgement need only be reasonable approximation of profits; uncertainty falls on wrongdoer)
- SEC v. Razmilovic, 738 F.3d 14 (2d Cir. 2013) (civil-penalty review standard)
- United States v. Viloski, 814 F.3d 104 (2d Cir. 2016) (Eighth Amendment analysis for forfeiture/fines and Bajakajian factors)
- United States v. Bajakajian, 524 U.S. 321 (1998) (gross disproportionality test under Excessive Fines Clause)
- Kokesh v. SEC, 137 S. Ct. 1635 (2017) (disgorgement characterized as remedial or punitive for certain purposes)
- Honeycutt v. United States, 137 S. Ct. 1626 (2017) (limiting criminal forfeiture to defendant’s interest in proceeds)