665 F. App'x 78
2d Cir.2016Background
- Defendant Fredric H. Aaron conceded liability in an SEC enforcement action arising from a $26 million fraud operation; remaining issues were monetary relief (disgorgement and civil penalties).
- The district court ordered briefing on monetary relief after waiting over a year for a related criminal case to resolve; Aaron challenged that procedure as violative of a settlement briefing provision.
- The court imposed disgorgement of: $282,580 (payments to Aaron from investor-funded accounts) and $212,500 (fair-market value of Aaron’s Interlink shares), and allocated $1,053,175 jointly and severally for transfers to unknown payees.
- The district court also imposed a $250,000 civil penalty (second-tier under the securities statutes) after assessing egregiousness, scienter, investor harm risk, recurrence, and Aaron’s ability to pay.
- Aaron appealed, arguing the district court abused its discretion in ordering briefing, in calculating and allocating disgorgement (including unrealized gains), in imposing joint and several liability, and in setting the civil penalty.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether district court abused discretion by ordering briefing on monetary relief instead of waiting for criminal case | SEC: court may manage docket and proceed after reasonable wait | Aaron: settlement briefing provision required a different procedure / delay | Held: No abuse; court has inherent docket-management power and Aaron showed no cognizable prejudice |
| Disgorgement of $282,580 paid from investor-funded accounts | SEC: payments are profits causally connected to the fraud | Aaron: some work was legitimate, so not all payments are ill-gotten | Held: No abuse; working for an organization built on fraud causally connects pay to ill-gotten gains |
| Disgorgement of $212,500 (Interlink shares, unrealized gains) | SEC: fair-market value of shares reflects ill-gotten benefit | Aaron: unrealized gains should not be disgorged because not converted to cash | Held: No abuse; disgorgement of unrealized/paper gains can be appropriate |
| Joint and several liability for $1,053,175 transferred to unknown payees | SEC: defendants closely collaborated and shared profits; joint liability appropriate | Aaron: as a secondary violator, joint and several liability is inappropriate | Held: No abuse; secondary status does not preclude joint and several liability given collaboration evidence |
| Appropriateness of $250,000 civil penalty | SEC: penalty within statutory limit and supported by egregious conduct, scienter, harm risk | Aaron: penalty excessive and ignored ability to pay | Held: No abuse; penalty was a portion of gross gains, court considered misconduct and ability to pay |
Key Cases Cited
- In re World Trade Ctr. Disaster Site Litig., 722 F.3d 483 (2d Cir. 2013) (district courts’ inherent docket-management power)
- Link v. Wabash R.R. Co., 370 U.S. 626 (U.S. 1962) (courts’ authority to manage their dockets)
- United States v. Apple, Inc., 791 F.3d 290 (2d Cir. 2015) (consent judgments construed as contracts)
- SEC v. Citigroup Glob. Mkts., Inc., 752 F.3d 285 (2d Cir. 2014) (scope of court approval of consent agreements)
- Geller v. Branic Int’l Realty Corp., 212 F.3d 734 (2d Cir. 2000) (duty to enforce approved stipulations)
- City of Hartford v. Chase, 942 F.2d 130 (2d Cir. 1991) (interpretation of consent/confidentiality orders)
- Louis Vuitton Malletier S.A. v. LY USA Inc., 676 F.3d 83 (2d Cir. 2012) (no absolute right to avoid civil testimony while invoking Fifth Amendment)
- SEC v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir. 1996) (equitable disgorgement authority in securities cases)
- SEC v. Razmilovic, 738 F.3d 14 (2d Cir. 2013) (reasonable approximation standard for disgorgement; penalty discretion)
- SEC v. Lorin, 76 F.3d 458 (2d Cir. 1996) (burden shift once SEC shows reasonable approximation of profits)
- SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90 (2d Cir. 1978) (disgorgement of unrealized/paper gains justified)
- SEC v. Shapiro, 494 F.2d 1301 (2d Cir. 1974) (upholding disgorgement of paper profits)
- SEC v. AbsoluteFuture.com, 393 F.3d 94 (2d Cir. 2004) (district court discretion to impose joint and several liability)
- SEC v. Kern, 425 F.3d 143 (2d Cir. 2005) (review of disgorgement and penalty determinations)
- SEC v. Warde, 151 F.3d 42 (2d Cir. 1998) (review standards for equitable remedies)
Accordingly, the Second Circuit affirmed the district court’s judgment in all respects.