ORDER RE POST-TRIAL AND REMEDY MOTIONS
Re: Dkt. Nos. 170, 175
Plaintiff Securities and Exchange Commission (“SEC”) charge that Defendants Sasan Sabrdaran and Farhang Afsarpour engaged in insider trading in violation of the antifraud provisions of the Securities Exchange Act of 1934. Following a three-week trial, the jury returned a verdict in the SEC’s favor. Now pending before the Court are Defendants’ joint motion for judgment as a matter of law, or in the alternative, a new trial and the SEC’s post-trial remedies motion. (Dkt. Nos. 170, 175.
BACKGROUND
The SEC alleged that Defendants engaged in insider trading when Dr. Sa-brdaran, an employee of pharmaceutical company InterMune, Inc., tipped his longtime friend Afsarpour to material, nonpublic information about the progress through the European regulatory approval process of Esbriet, one of InterMune’s products, and Afsarpour then acted on that tip by engaging in transactions in connection with InterMune securities. After receiving the nonpublic information about Esbriet’s EU approval on the eve of the public announcement in December 2010, Afsarpour — who lives in the UK — placed certain online financial bets on the price changes in InterMune stock and options; specifically, he placed spread bets through a London-based company called IG Index and also bought InterMune stock via his stockbroker in New York. Afsarpour urged others to invest in InterMune as well, some of whom did.
Dr. Sabrdaran served on the InterMune team seeking marketing approval for Es-briet from the European Medicines Agency. Afsarpour is a close personal friend of Dr. Sabrdaran, and they communicated by phone, email, Faeebook and other means frequently to discuss developments in their lives, philosophy, and other personal issues. They also tried to visit each other when one of them was present in the other’s country. Afsarpour contended that he started placing spread bets on InterMune stock in November 2010 based on his own
' Early in the case, the Court granted in' part and denied in part Defendants’ motions to. dismiss and denied their motion to strike portions of the initial complaint. (Dkt. No. 36.) Defendants’argued, among other things,- that the transactions at issue involve spread bets, which are not “securities” for the purposes of a Section 10(b) and Rule 10(b)-5 violation. The Court concluded that the SEC, with minimal amendment, could plausibly allege that Afsarp-our’s spread bets were “in connection* with” securities by alleging.that IG Index had hedged his spread bets, which the SEC amended to do. After discovery, the Court denied the SEC’s motion for partial, summary judgment on the same issue, holding that to establish a securities violation under Section 10(b) and Rule 10(b)-5, the SEC need not necessarily.prove that Afsarpour subjectively knew that his fraudulent activity was “in connection with” the purchase or sale of a security, but that a reasonable trier of fact might not find that Afsarpour’s spread bets necessarily, met that test.
Trial began on October 17, 2016. The parties agreed that Defendants shared a. very close friendship; beyond that, the SEC and Defendants presented very different accounts. The SEC .elicited testimony and proffered documentary evidence connecting the confidential and public announcements about Esbriet, communications between Defendants, and Afsarpour’s trading activity. For example, there was testimony that Dr.’ Sabrdaran communicated with Afsarpour shortly after receiving a confidential, internal InterMune email stating that the European Medicines Agency had given the green light for Es-brief> — the “As Good As It Gets” email. There was testimony that Afsarpour executed very few trades on InterMuné until mid-December 2010, the eve of Esbriet’s imminent approval announcement; that the days leading up to the announcement he encouraged friends to invest heavily in InterMune; and that the day before the public announcement he invested more heavily than ever before, in more highly leveraged transactions than ever before, using credit'cards to fund , his bets, which he had never done-before,- The SEC entered emails into the record in which, the day before the public announcement, Af-sarpour wrote to friends telling them to get their money in that day before .it was too late.
In the SEC’s case-in-chief, the jury heard from Dan Welch, InterMune’s CEO, who described the company’s business and confidentiality policies’ generally. Steven Porter and Marianne Porter, doctors and InterMune executives, repeated .Inter-Mune’s confidentiality policies, explained the process of regulatory review before the European Medicines Agency generally and for Esbriet’ in particular, described Dr. Sabrdaran’s role in the group that worked on Esbriet’s drug safety, and discussed who. knew about its approval before the news became public. Dr. Spencer Hudson, another doctor on the Esbriet team, also testified about what he and the other members of the team knew as they shepherded the drug through the approval process. They testified that InterMune learned on December 10, 2010 that .the European Medicines Agency would announce Esbriet’s approval on December 17; 2010.
The company’s chief information officer, Jonathan Noble, also testified, further explaining how spread bets work. He also described Afsarpour’s IG Index spread bets and identified instances where IG Index hedged his bets, which he' stated it 'did for a majority of his transactions. He noted that, prior to December 10, 2010, Af-sarpour placed only three InterMune orders that were actually executed, whereas between then and December 17, 2010, he placed many more executed trades; and testified that Afsarpour made much riskier InterMune investments after December 10, 2010. As of the close of business on December 15, 2010, Afsarpour had approximately £145,000 on InterMune in his IG Index account. Of that amount, £20,000 pounds were deposited through credit cards that day. In contrast, Afsarpour made no credit card transactions from October 11 through December 9, 2010, Noble testified that an IG Index employee had telephone conversations with Afsarpour on December 13 and 14, 2010, and the jury heard recordings of those phone calls. As to hedging, Noble testified that IG Index did not itself purchase InterMune stock to hedge Afsarpour’s bets. Instead, for some of the spread bets IG Index entered into contracts for difference (“CFDs”) with a French brokerage in London called Cheu-vreux and instructed that company to trade in the underlying stock; Noble did not know if Cheuvreux actually purchased the underlying stock on a U.S. market. He testified that IG Index hedged other spread bets through similar transactions with a brokerage called Macquarie.
Stockbroker Michael Burkoff testified that Afsarpour purchased' 75 shares of In-terMune stock through him on December 16, 2010, that the purchase was Afsarp-our’s idea, and that Afsarpour had called him months earlier to discuss InterMune for the first time.
SEC investigative attorney Drew Panahi testified extensively about the agency’s investigation into Afsarpour’s InterMune trades. Through Panahi, the jury was shown charts of Afsarpour’s trades and his phone calls with Dr. Sabrdaran, which coincided, and his emails with the SEC where he denied knowing anyone at Inter-Mune. Panahi told the jury that Afsarp-our’s profits from spread bets placed between December IQ. and December 17, 2010 totaled $877,510.53. According to Panahi, Afsarpour said he knew IG Index would hedge his spread bets. An SEC economist, Dr. Carmen Taveras, also testified as an expert on the SEC’s behalf. The jury was shown charts she, prepared showing Afsarpour’s daily payments into his IG Index account and how the percentage of his IG Index accounts dedicated to Inter-Mune changed over time, largely after December 10,2010.
.The jury also heard from a number of Afsarpour’s friends — either live or via videotaped deposition — who testified to what Afsarpour told them about Inter-Mune and how they responded: by giving Afsarpour money to invest or opening their own brokerage accounts to do so. One invested $60,000 in InterMune on December 16, 2010 — her first and last time betting on stocks.
At the close of the SEC’s ease, both parties moved for judgment as a matter of
In Defendants’ cases-in-chief, the jury heard from expert witness Torben Voet-mann, a financial consultant, who opined that Afsarpour’s betting behavior was consistent with publicly available information — ie., that Afsarpour traded on Inter-Mune based on following signals from the market and publicly available information about the European Medicines Agency— and did not change before and after the December 10, 2010 phone call with Dr. Sabrdaran.
The jury also heard extensive testimony from Defendants themselves. Both testified that they communicate regularly about all sorts of topics, but not work. Afsarpour testified that he did not know Dr. Sabrdaran worked at InterMune when he made the investments and that he came across InterMune by accident when his daughter’s boyfriend, Tom Rogerson, asked him to look up a stock under the ticker symbol “ITNM,” and he mistakenly entered “ITMN” — InterMune’s symbol. Rogerson testified at trial that he did not remember any such request.
In any event, Afsarpour testified that he has long engaged in day trading, making daily investments based on following the markets and engaging in technical analysis to determine the performance of a stock. He further testified that Dr. Sabrdaran never disclosed qny non-public information about Esbriet’s approval process to him, that he instead made InterMune investments based on'his own research, and that it never came up in conversation that Af-sarpour was placing spread bets on Inter-Mune until after it happened. According to Afsarpour, Dr. Sabrdaran became very angry and upset with him once he learned that Afsarpour had invested in InterMune. During its investigation Afsarpour initially told the SEC he did not know anyone who worked at InterMune and removed Dr. Sabrdaran from his list of friends on Face-book before turning that list over to the SEC.
Dr. Sabrdaran testified that he always took seriously InterMune’s confidentiality policies and that he never discussed Inter-Mune, let alone Esbriet’s regulatory approval process, with Afsarpour. He offered explanations for the phone calls with Af-sarpour that had nothing to do with Inter-Mune or Esbriet. On cross-examination, Dr. Sabrdaran acknowledged that he erased the hard drive from his laptop and deleted certain Facebook messages from Afsarpour before turning his messages over to the SEC, but contended that he did so to protect his privacy, not to hide anything from the Commission. Dr. Sabrdaran explained that he ■ had since been fired from InterMune and had not found work as a physician or drug safety executive in the pharmaceutical industry.
The jury deliberated for one day then returned a verdict in favor of the SEC, answering all five questions on the verdict form in the affirmative. (Dkt. No. 165; see also Dkt. Nos. 161-1, 163-1.) Specifically, the jury found that (1) Dr. Sabrdaran breached a duty of trust and confidence to InterMune by intentionally disclosing material, non-public information concerning InterMune to Afsarpour; (2) Afsarpour knew, or should have known, that Dr. Sa-brdaran disclosed material, non-public information to him in violation of Dr. Sa-brdaran’s duty to maintain confidentiality; (3) Dr. Sabrdaran personally benefitted from the disclosure to Afsarpour; (4) Af-sarpour knew, or should have known, that Dr. Sabrdaran disclosed the material, nonpublic information to him for Dr. Sabrdar-an’s personal benefit; and (5) Afsarpour used the material, non-public information Dr. Sabrdaran disclosed to him to engage in transactions that were in connection with a purchase or sale of a security. (Id)
Defendants’ joint motion for judgment as a matter of law or, in the alternative, a new trial followed. (Dkt. No. 170.) The SEC thereafter filed its motion for remedies and final judgments to be imposed against Defendants. (Dkt. No. 175.) The Court agreed to hear the motions together. After oral argument, the SEC submitted notices of supplemental authority notifying the Court of insider trading cases where a court ordered joint and several disgorgement against a tipper who received no direct portion of the ill-gotten profits. (Dkt. Nos. 183, 187.) In addition, at the Court’s invitation, Defendants submitted a supplemental brief addressing, in part, the revised arguments and calculations that the SEC raised for the first time in its reply brief in support of its remedies motion. (Dkt. No. 188.)
DISCUSSION
I. Motion for Judgment as a Matter of Law, or in the Alternative, a New Trial
Defendants move for a new trial under Rules 50(b) and 59 on the grounds that the jury’s verdict was contrary to the weight of the evidence and that the Court erroneously instructed the jury on the “personal benefit” and “in connection with” requirements.
A. Legal Standard
A Rule 50(b) motion is appropriate when the evidence permits only one reasonable conclusion, and that conclusion is contrary to that of the jury. Martin v. Cal. Dep’t of Veterans Affairs,
Under Rule 59, a court has the discretion to grant a new trial “for any reason for which a new trial has heretofore been granted in an action at law in federal court.” Fed. R. Civ. P. 59(a)(1)(A). The grounds for a new trial include: (1) a verdict that is contrary to the weight of the evidence; (2) a verdict that is based on
When a Rule 59 motion for a new trial is based on insufficiency of the evidence, the court may weigh the evidence and assess the credibility of witnesses and need not view the evidence from the perspective most favorable to the prevailing party. See Landes Constr. Co. v. Royal Bank of Canada,
B, Analysis
1. The Jury’s Verdict that Dr. Sabrdaran Intentionally or Recklessly Disclosed Material, Non-Public Information to Afsarpour was not Contrary to the Weight of the Evidence
Defendants first contend that the Court should order a new trial because the jury’s finding that Dr. Sabrdaran tipped Afsarp-our is contrary to the weight of the evidence. Defendants urge that the SEC presented no direct evidence of a tip and the circumstantial evidence was weak, and thus that the verdict rested only on “strained inferences and speculation” of a tip.
Relevant here, Section 10(b) and Rule 10b-5 are violated under the “misappropriation theory” of insider trading when “an individual misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information.” O’Hagan,
While Defendants first fault the SEC for failing to present any direct evidence that Dr. Sabrdaran shared a tip, direct evidence is not necessary. See SEC v. Truong,
The SEC has met its burden. The timing of Defendants’ phone calls, Afsarpour’s trading activity, Afsarpour’s communications with other friends that emphasized the deadline to invest was
Defendants also argue that the SEC “made the jury and the defense guess-as to when the alleged tip actually occurred” and “waited until its ... rebuttal closing argument ... to reveal that if an actionable tip occurred in this case, it occurred on December 10, 2010.” (Dkt. No. 170 at 9-10 (record citation omitted).) Not so. The SEC’s theory from the beginning was that Dr. Sabrdaran shared information with Af-sarpour during their phone calls in the week leading up to the public Esbriet approval announcement. Indeed, the SEC’s expert witness, Dr. Taveras, testified that she reached her opinion that Afsarpour must have traded on inside information based on the assumption that the tip occurred on December 10,2010.
Defendants ■ identify evidence that supports their position that Afsarpour traded not on the' basis of material, non-public information, but based on his own technical analysis of InterMune stock and publicly available information about the timing of regulatory approval announcements in the European Medicines Agency. A reasonable factfinder could infer that there was no insider trading based on this evidence. But, taken in the context of the entire trial, and in particular given Defendants’ credibility problems and the weight of the circumstantial evidence, it does not leave the Court with the “definite and firm conviction” that the jury made a mistake in finding that there was insider trading. See Landes Constr. Co.,
2. The “Personal Benefit” Requirement
Defendants next argue that the Court’s instruction about the “personal benefit” requirement was improper and, in any event, the jury’s finding that Dr. Sabrdaran tipped Afsarpour for a personal benefit was contrary to the weight of the evidence,
a. The Court’s Instruction was Proper
The Court instructed 'the jury that to find that Defendants engaged in insider trading the SEC must prove by a preponderance of the evidence that they used a device, scheme or artifice to defraud in connection with the purchase or sale of a security and that they “acted intentionally.” (Dkt. No. 160 at 88; see also Dkt. No. 154 at 22 (Court’s Second Proposed Jury Instructions).) Explaining tipper and tip-pee liability, the Court instructed that “[a]s to Dr. Sabrdaran, the SEC must establish: .... [t]hat Dr. Sabrdaran breached his duty of trust and confidence to InterMune by disclosing material, nonpublic information to Mr. Afsarpour in exchange for a personal benefit.” (Dkt. No. 160 at 90-91 (emphasis added); see also
The Court defined “personal benefit” for the jury as follows:
A personal benefit for these purposes includes anything of value, including money or friendship, and may be inferred when an insider makes a gift of nonpublic information to a friend. Personal benefit includes not only monetary gain, such as a cut of the take or a gratuity from the tippee, but also a rep-utational benefit or the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend. The benefit does not need to be financial or tangible in nature; it could include, for example, maintaining a useful networking contact, improving the tipper’s reputation, obtaining future financial benefits, or making a gift of confidential information to a trading relative or friend.
(Dkt. No. 160 at 91-92; see also Dkt. No. 154 at 29.) The Court also gave instructions on the level of intentional conduct required to prove insider trading, explaining that:
To establish that Dr. Sabrdaran and Mr. Afsarpour acted with intent to deceive, manipulate, or defraud, the SEC must prove that Dr. Sabrdaran and Mr. Af-sarpour acted knowingly or recklessly and did not act inadvertently, carelessly, or by mistake. “Reckless” means highly unreasonable conduct that is an extreme departure from ordinary care, which is either known to the defendant or is so obvious that the defendant must have been aware of it.
(Dkt. No. 160 at 93-94; see also Dkt. No. 154 at 33.)
While Defendants disputed the personal benefit instruction and offered them own, they conceded in their pre-trial submission that the SEC’s proposed instruction— which the Court adopted in relevant part — “is consistent with the Ninth Circuit’s decision in United States v. Salman,
Shortly after trial, the Supreme Court decided United States v. Salman, — U.S. -,
Now, for the first time, Defendants focus on the absence of an instruction that the tipper intended to benefit the tippee. Defendants insist that Dirks and Salman establish two separate standards: one for a “direct” personal benefit and one for an “indirect” personal benefit. The “gift-giving principle” that Dirks and Salman recognized is an example of “indirect” personal benefit and, according to Defendants, it requires the SEC to establish the tipper’s intent to benefit the tippee. (Dkt. No. 170 at 14-19). Defendants thus argue that the “jury instructions erroneously suggested that an intent to benefit the recipient was not required to satisfy the personal benefit requirement in any way.” (Dkt. No. 170 at 13.) They then combine intent to benefit the tippee with the tipper’s personal benefit, contending that “the jury was improperly instructed that if Dr. Sabrdaran tipped [] Afsarpour without intending to benefit [] Afsarpour and in exchange for nothing but friendship itself, the jury could find that the personal benefit requirement was satisfied” and “[tjhat is not the law.” (Id. at 20.)
Defendants’ jury instruction challenge fails for several reasons. First, neither Dirks nor Salman requires an instruction about intent to benefit the recipient. To the contrary, the Supreme Court explained that the required personal benefit for the tipper can be inferred from various “objective facts and circumstances,” “ ‘such as a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the particular recipient.’ ”
Second, Defendants never objected to the personal benefit instruction on this ground before or during the trial; the only objection they raised was that the tipper’s personal benefit had to be financial or tangible, as in Newman. (See Dkt. No. 94 at 6-8 & n.1.) They never offered a proposed instruction that addressed their current position that Dirks requires instructing the jury that the tipper intended to benefit the tippee. Thus, Defendants waived the argument, see Fed. R. Civ. P. 51(c), and may only object to the instruction on the grounds that it constituted plain error. See Fed. R. Civ. P. 51(d)(2). It is not, for the reasons explained above.
Finally, in then- supplemental brief, Defendants cite the district court’s jury instructions in SEC v. Gowrish, No. C 09-5883 SI, Dkt. No. 143 at 6,
b. The Jury’s Verdict was not Contrary to the Weight of the Evidence
Defendants maintain that even if the jury instruction was proper, the jury’s finding that the SEC satisfied the personal benefit requirement was contrary to the weight of the evidence. Not so. The jury heard myriad evidence about Defendants’ extremely close friendship. Defendants talked to each other regularly about'many subjects, recommended self-help books and seminars to each other; gave each other advice, and made travel plans togethér. This was enough for the jury to conclude that Dr. Sabrdaran likely gave Afsarpour a gift of insider information to nurture their close relationship.
Defendants argue that the record “belies the notion [that] Dr. Sabrdaran disclosed. anything with intent to benefit Mr, Afsarpour” during the December 10, 2010 phone • call. .(Dkt. No.. 170 at 22.) Defendants highlight: (1) Dr. Sabrdaran’s testimony that he did not know that Afsarpour was trading in InterMune stocks at that time and Afsarpour’s testimony that he did not tell Dr. Sabrdaran that he was trading until December 17, 2010 (Dkt. No. 170 at 22; Dkt. Nos. 170-1 at 59, 71-72);
At bottom, all Defendants do is highlight evidence that conflicts with the jury’s verdict. Based on that evidence alone, Defendants insist that “loose talk between friends” is not enough to support the personal benefit required for insider trading liability. A reasonable factfinder might- have concluded that Dr. Sabrdaran was merely negligent in disclosing information about Esbriet’s imminent approval and, thus, that his “loose, talk” with Af-sarpour led to Afsarpour’s trades. But the evidence at trial supported both conclusions and, given the weight of the circumstantial evidence, Defendants’ innocent explanation is not the likelier story. When the jury is presented with competing evidence, it is not the Court’s role to substitute its own view for the conclusions the jury reached after hearing all the competing evidence. See Roy,
. c. The Court Declines to Grant Judgment as a Matter of Law Regarding Personal Benefit
Lastly, Defendants argue that because there is no evidence that Dr, Sabrdaran tipped- for a personal benefit, it follows that there is not substantial evidence that Afsarpour knew or had reason to know that Dr, Sabrdaran had done so. (Dkt. No. 170 at 23.) As discussed above, the jury’s finding that Dr. Sabrdaran tipped Afsarp-our for a personal benefit — ie., to nurture their friendship — was not contrary to the weight of the evidence because the jury heard significant testimony about the closeness of Defendants’ relationship and there is significant circumstantial evidence that a tip occurred. This combination is enough for a reasonable factfinder to conclude that Dr. Sabrdaran tipped for his personal benefit; indeed, the jury reasonably concluded as much.
* * *
Because the “personal benefit” jury instructions were proper, the verdict was not contrary to the weight of the evidence, and
3. The “In Connection With” Requirement
Trying a different tack, Defendants next argue that the jury instruction and evidence about whether Afsarpour’s transactions were “in connection with” the sale or purchase of securities warrants a new trial or judgment as a matter of law. The trial record reflects that Afsarpour engaged in three types of transactions: he purchased InterMune stock, made spread bets on InterMune stock, and placed spread bets on InterMune options.
a. The Court’s Instruction Was Proper
The Court instructed the jury that “in connection with” the purchase or sale of a security
means that there was some nexus or relationship between the allegedly fraudulent conduct and the sale or purchase of securities in the United States securities market. A defendant’s conduct may be in connection with a purchase or sale of a security even if the defendant did not actually participate in any securities transaction.
(Dkt. No. 160 at 89; Dkt. No. 54 at 24.)
Defendants first argue that the Court should have required the jury to address whether each type of transaction at issue was “in connection with” the sale and purchase of securities. Thus, Defendants are really crying foul about the verdict form rather than the jury instructions. “As a general rule, the court has complete discretion over whether to have the jury return a special verdict or a general verdict.” Floyd v. Laws,
The SEC argued that all of Af-sarpour’s transactions were part of a single scheme, device, or artifice to defraud. When discussing the proposed verdict form with counsel during the trial, the Court noted that whether each transaction was in connection with the sale of a security is a question of remedy, not liability, as long as the device or scheme to defraud is in connection with a security. (Dkt. No. 174-2 at 132.) When the Court mentioned that the jury need not “be unanimous on which particular transaction” is in connection with a security, Defendants did not disagree, and they repeatedly conceded that Afsarpour’s stock purchases were in connection with a security. (Id.) Indeed, in the context of criminal cases, courts have long held that a jury need not unanimously decide what underlying facts make up a particular element. See Richardson v. United States,
Defendants also argue that the instruction was improper because it did not require the jury to find that Afsarpour knew or intended that all of his transactions were in connection with the sale or purchase of a security. (Dkt. No. 170 at 25.) The Court rejected this argument in the context of resolving the SEC’s motion for partial summary judgment when it held that “to establish a securities violation under Section. 10(b) or Rule 10b-5, the SEC need not necessarily prove that Afsarpour subjectively knew that his fraudulent activity was ‘in connection with the purchase or sale of any security.’ ” (Dkt. No. 99 at 2.) The Court clarified that while “the SEC must prove that there was some nexus or relationship between the- spread bets on InterMune stocks and the purchase of the InterMune stocks themselves[,J ... Af-sarpour’s knowledge of that nexus or relationship — -that is, the connection to the purchase or sale of a security — while certainly potentially relevant, is not an element of the ‘in connection with’ requirement.” (Id. at 4) (citing Manual of Model Civil Jury Instructions for the District Courts of the Ninth Circuit, at 427 (2007 ed.) (Instruction 18.0).) Nothing in Defendants’ current motion — which relies on the same case that was the subject of supplemental briefing at the summary judgment stage — changes the Court’s conclusion.
Defendants also note, in a footnote, that the Court’s “in connection with” instruction derived from General Instruction 18.0 in the Ninth Circuit’s Manual of Model Civil Jury Instructions, which were written to apply to actions brought under Rule 10b-5(b) for false or misleading representations in connection with the purchase or sale of securities, not actions under Rule 10b-5(a) and (c) for operating a device, scheme, or artifice to defraud. The introductory comment , explains that the model instruction applies to Rule 10b-5 actions as opposed to private damages actions that carry separate statutory requirements; in other words, the important distinction is not the type of Rule 10b-5 action but that it is being brought by the SEC, as is this case. See Manual of Model Civil Jury Instructions for the District Courts of the Ninth Circuit, at 427 (2007 ed.) (Introductory Comment to Instruction 18.0). And indeed, the instructions say they “focus” on 10b-5 disclosure claims — i.e., Rule 10b-5(b) claims — but do not state that the rules
For each of these reasons, the Court declines to grant a new' trial on the grounds that the jury instruction or special verdict form were wrong on the “in connection with” a security requirement.'
b. The Jury’s Verdict was not Contrary to the Weight of the Evidence
Lastly, Defendants argue that even if they are wrong on the legal arguments, the Court must set aside the jury’s verdict because there is insufficient evidence that Afsarpour’s spread bets affected the U.S. securities market for InterMune common stock or options because the SEC’s documentary evidence of IG Index’s hedges was inadmissible hearsay and the testimony from the IG Index withesses did not establish that the company’s hedges affected the U.S. securities market.
Defendants first challenge the admission of the documentary evidence of IG Index’s hedging. Specifically, Defendants contend that Exhibits 218 and 219, spreadsheets that reflect client trades and IG’s hedges on InterMune stock by date and time, are-inadmissible hearsay rather than business records. Defendants made the same argument in them motion in limine, and the Court overruled the objection, noting that the declarations of IG Index employee Bridget Messer established that the information in the documents met the business records requirement because it (1) was extracted from IG Index’s trading activity database at or near the time of the’ hedging transaction, (2) the records were maintained as part of IG Index’s regularly conducted business activity, (3) making trading activity records was part of IG Index’s regular and routine business practice, (4) Messer was qualified to testify about the records, and (5) Defendants had hot shown that the records indicated a lack of trustworthiness. (Dkt. No. 107 at 1-2,4.)
At trial, IG employee Noble gave more color to the spreadsheets. He explained that .the spread bets and hedges are contemporaneously recorded in IG Index’s database. (Dkt. No. 170-1 at 16-18.) But the columns on the chart reflecting phone calls between the customer and IG Index are not; that information required listening to recordings of telephone calls after the fact to match each hedge to a particular client’s spread bet. (Id. at 17-18, 21.) Similarly, Noble explained that IG Index added a unique identification number for each spread bet and color coded the charts for the purposes of making the transaction history easier to understand. (Id. at 13-15.) In short, the underlying transaction data stems from IG Index’s contemporaneously recorded transactions database, but IG Index added some annotations after the fact that made the information easier for the jury to read and digest.
To the extent that the additional infprmation, like color boding and assignment of unique identifiers for each transaction, is not itself a business record, it was still appropriately before the jury as summary evidence pursuant to Federal Rule of Evidence 1006. Summary evidence is admissible if “the underlying materials upon which the summary is based. (1) are admissible and (2) 'were made available to the opposing party for inspection.” United States v. Aubrey,
The cases Defendants cite are inappo-site. See Paddack v. Dave Christensen, Inc.,
With that matter settled, there is no question that there was substantial evidence before the jury to find that Afsarp-our’s spread bets were “in connection with” the sale and purchase of a security. The jury heard testimony that InterMune stock traded only on exchángés in the United States. (Dkt. No. 174-2 at 2.) IG Index employee Noble testified that IG Index hedged 237 of Afsarpour’s spread bets on options and 50 of the spread bets on options placed by downstream tippee Balvinder Nijjar by purchasing the equivalent number of lots of InterMune contract options by purchasing 14,600 shares of InterMune stock from' a U.S. exchange. (Id. at 51, 56-57, 59, 97-99, 101; Dkt. No. 170-1 at 104-08, 102.) Noble clarified that IG Index used Cheuvreux, a French brokerage located in -London, to place' the hedging transactions on- the spread bets on InterMune common stock, -because IG Index itself is not a member of a U.S. exchange and thus cannot buy the underlying stock. (Dkt. No. 170-1 at 23-24.) Specifically, IG Index entered- a contract for difference with Cheuvreux, and IG Index instructed Cheuvreux to purchase, the underlying stock; Noble' did not know if Cheuvreux actually purchased InterMune stock. (Id. at 24-26.) To hedge the spread bets on options, Noble testified that IG Index traded with Macquarie. (See Dkt. No. 170-1 at 31.) The SEC did not introduce any records from Macquarie or other records evidencing IG’s hedging of spread bets on options. Instead, the SEC introduced a spreadsheet that IG Index- had prepared showing the transactions IG Index entered into with Cheuvreux and Mac-quarie. (Dkt. No. 170-1 at 112.) •
While this evidence is not sufficient to conclude that, on their own, every single one of Afsarpour’s spread bets was “in connection with” a security, that is not the test. The general scheme or artifice to defraud must “somehow touch[ ] upon” or have “some nexus with” “any securities transaction,” rather than every transaction at issue having a direct connection. (Dkt. No. 36 at 16 (citations omitted).) See also SEC v. Zandford,
Defendants emphasize that IG Index never received title to InterMune securities, and that Noble did not know if Cheu-vreux actually purchased the underlying InterMune stock as IG Index instructed it to do, and that the jury “could not have found that the contract for difference, itself, was a purchase or sale of a U.S. security, or that it affected the U.S. securities market for InterMune.” (Dkt. No. 170 at 26-27.) Not so. Even absent Cheu-vreux’s underlying purchase, IG Index’s purchases of contracts for difference— CFDs — were “in connection with” a U.S. security. In a similar insider trading case, one district court explained that “CFDs provide foreign investors with a way to access American exchange-traded securities without opening U.S. brokerage accounts.” SEC v. Compania Internacional Financiera S.A., No. 11 CIV 4904,
And perhaps most importantly, even if IG did not hedge any of the spread bets, the jury’s verdict would not be contrary to the weight of the evidence, as Afsarpour’s purchase of InterMune stock and options are, in and of themselves, a sufficient basis for the jury’s conclusion that Defendants’ scheme to defraud was “in connection with” U.S. securities. Defendants have not cited any authority that requires every transaction to be “in connection with” a security, and the Court has found none. Instead, it is the general scheme to defraud that must meet that
c. The Court Declines to Enter Judgment as a Matter of Law That Afsarp-our’s Spread Bets Were not “In Connection With” Securities
On the same grounds, Defendants ask the Court to enter judgment as a matter of law that Afsarpour’s spread bets were not “in connection with” securities. The Court declines to do so for the reasons explained above.
* * *
Because the Court’s jury instruction was appropriate and there was substantial evidence to support the jury’s finding that at least some of Afsarpour’s transactions, and thus Defendants’ overall scheme, was “in connection with” the purchase or sale of securities, the Court declines to order a new trial or enter judgment as a matter of law in Defendants’ favor. The Court thus DENIES Defendants’ motion for a new trial or, in the alternative, judgment as a matter of law. The jury’s verdict stands.
II. Remedies Motion
Having determined that the jury’s verdict should stand, the Court turns to the SEC’s motion for an order on remedies and a final judgment against each Defendant. The SEC requests that the Court permanently bar Dr. Sabrdaran from serving as an officer or director of a publicly traded company, order both Defendants to pay disgorgement and prejudgment interest, impose the maximum civil penalties available under the law against Dr. Sa-brdaran, and enjoin both Defendants from any further securities law violations.
As a preliminary matter, the Court must resolve an evidentiary dispute. In connection with its reply in support of its remedies motion, the SEC submitted new evidence. (Dkt. Nos. 180-1, 180-2.) Based on this evidence, the SEC substantially revised — and in particular, decreased — its disgorgement, prejudgment interest, and penalties calculations. (See id.) Defendants object to these reply materials. (Dkt. No. 181.) In general a court will not consider evidence submitted for the first time in a reply without giving the opposing party an opportunity to respond. See Provenz v. Miller,
A. Officer and Director Bar Against Dr. Sabrdaran
A district court “may prohibit, conditionally or unconditionally, and permanently or for such period of time as it shall determine,” any person “from acting as an officer or director [of a public company] if the person’s conduct demonstrates unfitness to serve as an officer or director.” 15 U.S.C. § 78u(d)(2). The decision whether to impose an officer and director bar is within the court’s discretion. See SEC v. First Pac. Bancorp.,
(1) the “egregiousness” of the underlying securities law violation; (2) the defendant’s “repeat offender” status; (3) the defendant’s “role” or position when he engaged in the fraud; (4) the defendant’s degree of scienter; (5) the defendant’s economic stake in the violation; and (6) the likelihood that misconduct will recur.
Id, (quoting 15 U.S.C. § 78u(d)(2)). Courts have also considered “whether a conditional bar (e.g., a bar limited to a particular industry) and/or a bar limited in time (e.g., a bar of five years) might [have been] sufficient, especially where there [was] no prior history of unfitness.” SEC v. Patel,
The parties dispute what the SEC’s burden is in seeking an officer and director bar; Dr. Sabrdaran urges that the SEC must' show his “substantial unfitness” to serve as an officer or director, while the SEC argues that the standard has been lowered to “unfitness,” and they propose different tests to meet each standard. (Compare Dkt. No. 177 at 30, with Dkt. No. 175 at 19.) In the Sarbanes-Oxley Act of 2002, Congress changed the statutory language of the SEC’s burden in seeking an officer and director bar from showing “substantial unfitness” to serve to showing “unfitness” to serve. SEC v. Levine,
Congress, however, did not provide any guidance on the meaning of the term unfitness or “whether its deletion of the word ‘substantial’ was meant to increase or reduce the government’s quantum of proof,” Id. at 144 (citation omitted). In Levine, the court noted that “[i]t is clear from the history of the legislation, however, that Congress’s intent was to reduce the government’s burden.” Id. at 144-45 (citations omitted). The SEC contends that the Court should apply the test adopted by the D.C. district court in Levine, which considered the same factors the Ninth Circuit recognized in First Pacific Bancorp along with two additional factors: (1) the defendant’s acknowledgement of wrongdoing and (2) the credibility of the defendant’s contrition. See Levine,
The first; second, fourth, and fifth factors weigh against a permanent bar. First, as for the “egregiousness” of Dr. Sabrdaran’s conduct, the (rial evidence indicates that Dr. Sabrdaran made a single tip on a single occasion to Afsarpour about a single company. While it is never appropriate to tip material, non-public information, and it is certainly a serious violation of Dr. Sabrdaran’s duty tó InterMune and harmful to its shareholders arid the market, it was not of a magnitude to warrant a finding of “egregiousness” that supports a permanent officer and director bar. Courts tend to relate egregiousness to the isolated versus recurrent nature of the misconduct and whether the defendant abused a position of trust to misleád the public. See, e.g., SEC v. Hilsenrath, No. C 03-03252 WHA,
■In contrast, the third and final factors both support imposing a permanent bar. As to Dr. Sabrdaran’s role at the time of the fraud, as the InterMune executive responsible for drug safety, Dr. Sabrdaran was one of a small number of people privy to information about Esbriet’s approval. While he was not serving as a statutory officer or director at the time, his role as drug safety officer involved monitoring clinical drug trials and reporting any issues that may arise; thus, a critical function of his role was to report back news when necessary. Put another way, candor was crucial to his role, but instead of being forthright with his company Dr. Sa-brdaran shared inside information with a friend. And while he continues to maintain that he never purposefully tipped Afsarp-our, he concedes that when he discovered his friend had traded in InterMune stock, instead of immediately informing his company he remained silent. Thus, Dr. Sa-brdaran’s role at the company supports a permanent officer and director bar.
The final factor — likelihood that that misconduct will recur — is the most important factor in the unique circumstances of this case. Dr. Sabrdaran’s conduct over the course of the SEC’s investigation and during trial establish that he is likely to engage in dishonest misconduct again. Time and time again, when faced with difficult questions, Dr, Sabrdaran. declined to tell the truth. When the SEC requested Dr. Sabrdaran’s Facebook messages with his friends, he deleted messages with Afsarp-our. When ,the SEC requested Dr. Sa-brdaran’s hard drive, he erased it. The Court accepts as true Da Sabrdaran’s explanation that he-did’'so not to hide anything related to an alleged tip, but rather because there was embarrassing personal information on his computer. But even so, his instinctual reaction to delete all files when things get uncomfortable — or, worsé yet, truly bad — is the opposite' of how an officer or director in a public company should respond.
But even putting that aside, most troubling is that Dr. Sabrdaran echoed the same conduct at trial six years after the alleged tip occurred and the SEC’s investigation began. On cross examination SEC counsel confronted Dr. Sabrdaran about an email he sent from Switzerland to his boss, Dr. Marianne Porter, on December 4, 2010. 0See Dkt. No. 159 at 52.) At the time, Dr. Sabrdaran was in Switzerland to spend the weekend with a woman named Del-phine with whom he was having a romantic relationship. (Id. at 50.) Dr. Porter had inquired as to why Dr. Sabrdaran had been unable to work that day. In response, Dr. Sabrdaran wrote that he had “just arrived to the hotel with my friends ... with whom we had gone skiing all day” and that “[t]his was a plan we/they had
At oral argument, Dr. Sabrdaran conceded that it was a “foolish and regrettable mistake” to delete some of his computer data and not be forthcoming with the SEC and urged the Court not to “penalize human frailty.” (Dkt. No. 186 at 67-68.) Dr. Sabrdaran’s conduct from 2010 to 2012— his lies to Dr. Porter and obfuscation in the early days of the SEC investigation— can fairly be seen as consequences of human frailty not worthy of an officer and director bar. But he was unable to explain why his testimony on the stand — the continued instinct to lie — does not render him unfit to serve as an officer and director of a public company. In his supplemental brief, Dr. Sabrdaran urges the Court to consider Dr. Sabrdaran’s testimony about his email to Dr. Porter “in context” — that is, in light of Dr. Porter’s testimony that she had no doubt that Dr. Sabrdaran would fulfill his obligations to InterMune while he was on vacation and that he in fact met her expectations, and that Dr. Sabrdaran received a promotion from director to senior director. (Dkt. No. 188 at 22 (record citations omitted).) This argument is not persuasive. First, to make the context truly complete, InterMune fired Dr. Sabrdaran when it learned of the SEC’s investigation into his alleged tip to Afsarpour. Moreover, Dr. Sabrdaran’s “context” argument fails to address his tendency to lie when confronted with a difficult situation, which existed while he was otherwise fulfilling his duties at Inter-Mune and remains to date.
In his supplemental brief Dr. Sabrdaran urges the Court to impose “no more than a limited” bar in this case. Other courts have concluded that “a permanent bar against serving as an officer or director of a publicly held company is far too draconian a remedy” where, as here, the defendant did not actually gain any money from his violation of the Exchange Act. Jasper,
Accordingly, although the insider trading conduct at issue here is not as egregious as other cases and involved an isolated event from which Dr. Sabrdaran earned
B. Disgorgement
Next, the SEC seeks an order finding Defendants jointly and severally liable for disgorgement and prejudgment interest. The Court has “broad equity powers to order the disgorgement of ill-gotten gains obtained through the violation of securities laws.” SEC v. First Pac. Bancorp,
Disgorgement need only be a “reasonable approximation of profits causally connected to the violation.” Platforms Wireless,
In its opening brief, the SEC sought an order directing both Defendants to disgorge the amount of profits from Afsarp-our and all downstream tippees’ Inter-Mune stock purchases as well as all their profits from all spread bets placed with IG Index for a total of $1,099,585.45. The SEC has shown that the amount sought reasonably approximates the ill-gotten gains from the insider trading scheme, so the burden shifts to Defendants to demonstrate that the amount sought is not appropriate. See Platforms Wireless,
In its reply, the SEC clarifies that, in the alternative to its initial higher request for disgorgement of all of Afsarpour’s spread bet profits, it seeks joint and several disgorgement of $926,280.35. (Dkt. No. 180 at 15, 27; Dkt. No. 180-2 IF 12.) Its new calculations were adjusted to account for some criticisms Defendants lodged in
The third change, however, is more controversial: the SEC departs from its initial calculation measuring profits gained from the spread bets themselves — based on IG Index’s records of the spread bets from Afsarpour’s and Nijjar’s spread betting accounts — to instead account for the profits gained from the underlying hedges by third-party entities, (See Dkt. No. 180-2 ¶¶ 6-9.) This new disgorgement calculation is based on the trial testimony of' Inter-Mune employees describing IG Index’s hedging activity generally, the testimony and declarations of SEC investigative attorney Drew Panahi, and certain documentary evidence gathered from Cheuvreux, Macquarie, and Barclay’s — the entities involved in carrying out the transactions related to IG Index’s hedging. (See id.; see also id. at 5-27.)
There are three questions before the Court when it comes to whether the SEC’s requested disgorgement amount is a reasonable approximation of -unjust enrichment in this case: (1) whether it should include profits from the spread bet transactions and, if so, whether the proper measure of profit is from the spread bets themselves or the underlying hedges; (3) whether disgorgement should include profits from downstream tippees; and, relatedly, (4) whether Dr. Sabrdaran should be 'held jointly and severally liable for the total amount. The Court will address each issue in turn.
1. Profits from Directly Hedged Spread Bets are Subject to Disgorgement
The SEC’s adjusted calculation of disgorgement includes profits made from the purchase by third-party entities of Inter-Mune stock and options to hedge spread bets placed by Afsarpour and downstream tippee Nijjar. Defendants argue that these profits cannot count towards disgorgement because spread bets themselves are not securities and the SEC has failed to establish at trial “that IG Index’s hedging transactions were domestic securities transactions that violated Section 10(b) and SEC Rule 10b-5, as Morrison [v. National Australia Bank, Ltd.,
The Court addressed each of these arguments in the context of Defendants’ motion to dismiss, but does so again here based not on the complaint allegations but the evidence adduced at trial. Earlier, the Court noted that “the upshot of Morrison is that Section 10(b) and Rule 10b-5 only apply to transactions involving securities listed in domestic exchanges, not foreign exchanges[,]” and “it is not the international spread bets themselves that are actionable under Section 10(b) and Rule 10b-5, but the fact that the spread bets are hedged by the broker’s purchase of underlying securities on domestic exchanges.” (Dkt. No.. 36 at 19.) At trial, as discussed above in the context of Defendants’ new
In support of its remedies motion, the SEC has now submitted records showing that as to the hedging, on spread bets on InterMune options, IG Index’s broker Macquarie had Barclay’s execute orders on the InterMune options. {See Dkt. No. 180-2 ¶¶ 8-9.) But there is no evidence in the record connecting the Barclay’s trades to Macquarie or IG Index, such as testimony from employees of Macquarie or Barclays describing why it engaged in certain transactions. Under these circumstances, the connection between the tip and the ultimate securities purchase is too far attenuated to meet the “in connection with” test: the five steps here — Dr. Sa-brdaran’s tip to Afsarpour’s spread bet to IG Index’s swap to Macquarie’s transaction with Barclay’s to Barclay’s purchase of InterMune stock — are too many, at least given the absence of evidence establishing a causal relationship- between Barclay’s eventual InterMune stock purchase and IG Index. Thus, the SEC has connected the dots between Dr. Sabrdaran’s tip and trades of InterMune securities on U.S. markets only with respect to the spread bets on InterMune stock, so the disgorgement figure should only include profits from those transactions.
To be sure, the connection-even between the spread bets on stock and the profits on U.S. securities is more attenuated here than it was in the cases on which the Court relied at the motion to dismiss stage. See, e.g., SEC v. Maillard, No. 13-cv-5299 (VEC),
2. Profits from Spread Bets or from Hedge Transactions
The next question is how to measure the disgorgement figure for the hedged spread bets on stock. In its opening brief, the SEC’s requested disgorgement amount calculated the amount of ill-gotten gains from the spread bets themselves — that is, the amount of profit that Afsarpour’s IG Index account earned as a result of his spread bets. The SEC offered an alternative in its reply, calculating disgorgement based on the profits earned on the underlying hedge transaction for each spread bet — that is, the amount that Cheu-vreux earned by purchasing InterMune stock after entering the contract for difference with IG Index. The Court concludes that the profits on the spread bets themselves are the appropriate measure.
The measure of disgorgement is the defendant’s ill-gotten gains obtained through the violation of the securities law and is meant to deprive the wrongdoer of unjust enrichment. See Platforms Wireless,
3. Scope of Disgorgement: Downstream Tippees
Defendants next argue that the SEC’s disgorgement calculation is improper because it seeks to order Defendants to disgorge more than the profits each personally earned from the insider trading scheme. Both Defendants argue that the SEC’s figure improperly includes profits from downstream tippees — individuals who traded in InterMune stocks or spread bets after speaking with Afsarpour
In this context, Afsarpour is like the tipper and the downstream tippees the tippee. The Ninth Circuit has emphasized that holding tippers responsible for the gains of downstream tippees is “a necessary deterrent to evasion of Rule 10b-5 liability by ... enriching a friend or relative[,]” as here. Clark,
The Second Circuit has observed that in the Ninth Circuit
a defendant’s obligation to disgorge all profits depends upon the defendant’s level of responsibility for the unlawful enrichment. Where an unjustly enriched defendant was unaware of the illicit conduct of the wrongdoing third party, the court limited the disgorgement to an amount “approximately equal to the unjust enrichment” enjoyed by the defendant. Hateley v. SEC,8 F.3d 653 , 656 (9th Cir. 1993). However, where a defendant had violated securities laws and enjoyed “substantial personal benefit from the infusion of the illegal obtained proceeds” into a third party’s account, the court concluded the violator could be required to disgorge the total profit from the illegal conduct.” SEC v. First. Pac. Bancorp.,142 F.3d 1186 , 1192 (9th Cir. 1998).
SEC v. Contorinis,
Here, the trial record reflects that the downstream tippees traded on the basis of Afsarpour’s encouragement. Nijjar placed spread bets on InterMune after speaking with Afsarpour, though he testified that he did some of his own research. Farahani opened her own account to trade after Afsarpour told her it was a good trade; it was the first time she took investment advice from him. Shahbodaghloo invested based on Afsarpour’s advice that Inter-Mune was a good company and its drugs
However, Bassir’s profits are yet another step removed from Afsarpour’s. The SEC has not cited any case ordering a non-insider tippee like Afsarpour to disgorge profits of downstream tippees once removed — ie,, profits of people that learned about the investment from another' person who learned about it from' that tippee. The Court has not found any either, Accordingly, Afsarpour need not disgorge Bassir’s profits, but he must disgorge His own profits — Included in this amount are the trades that Afsarpour executed in his IG Index account on behalf of friends who sent him money to do so — and those of Nijjar, Shahbodaghloo, and Fara-hani. : 1
4, Dr. Sabrdaran is Jointly and Severally Liable for Limited Disgorgement
The next question is whether the Court should order Dr. Sabrdaran to disgorge the same amount as Afsarpour — that is, all" profits that 'Afsarpour, Nijjar, Shábo-dahghloo, and Farahani reaped. The SEC seeks an order holding Sabrdaran jointly and severally liable for the full amount of disgorgement. Dr. Sabrdaran contends that, regardless of the disgorgement amount, he should not be jointly and severally liable with Afsarpour. {See Dkt. No. 177 at 20-22.)
One district court, has called deciding whether to o.rder joint and several liability in tipper-tippee insider trading cases the “most difficult issue concerning disgorgement....” Yun,
Aside from Clark, the SEC chiefly relies on the Second Circuit’s decision in Conto-rinis in its request for joint and several disgorgement against Dr. Sabrdaran. But Contorinis is distinguishable. There, the tipper defendant ran an investment fund and illegally traded on the basis of nonpublic information on behalf of the fund, earning illegal profit for third-party investors.
Other Ninth Circuit cases discussing joint and severally liability for securities fraud disgorgement tend to focus on the collaborative nature of the fraudulent scheme! “Where two or more individuals or entities collaborate or have a close relationship in engaging in the violations of the securities laws, they may be held jointly and severally liable for the disgorgement of illegally obtained proceeds.” SEC v. JT Wallenbrock & Assocs.,
There is authority from outside the Ninth Circuit to support holding Dr. Sa-brdaran jointly and severally liable. For example, in SEC v. Texas Gulf Sulphur,
[I]f a tipper’s communication resulted in profits to his direct tippee and to remote tippees as well, the Commission could obtain disgorgement from the tipper of the profits of both the direct and remote tippees.
H.R. Report 910, 100th Congress, 2d Session, 1988, 1988 U.S. Code Cong. And Admin. News 6043,
In its briefing, the SEC did not cite any Ninth Circuit cases, or district court cases from within the Circuit or elsewhere, addressing the circumstances present here: a request for joint and several liability to disgorge tippees’ profits where the tipper did not realize any profits himself from his own trades or the tippees.’ At oral argument the Court asked the SEC to identify such a case; the SEC responded “tippers are almost universally held liable for disgorgement” then cited cases where the tipper retained part of the proceeds from the insider trading scheme. (Dkt. No. 186 at 59-61.) After the hearing, the SEC filed notices of supplemental authority drawing the Court’s attention to three cases it contends fit the bill — that is, cases where the tipper was held jointly and severally liable for disgorgement despite not having retained any of the financial gains from the scheme: SEC v. Yun,
The SEC next cites Clay Capital Management, in which the court granted summary judgment on insider trading claims against a tipper given his earlier criminal conviction resulting from a guilty plea.
The SEC’s reliance on Verdiramo is misplaced. There, the securities fraud involved the unlawful sale of unregistered securities in violation of Section 5 of the Securities Act.
Principles of equity favor an imposition of some joint and several liability for disgorgement against Dr. Sabrdaran, but not the full amount of Afsarpour and the downstream tippees’ profits as the SEC urges.' Afsarpour’s profits are directly causally connected to Dr. Sabrdaran’s tip: the jury found that Afsarpour traded on the information Sabrdaran provided. Thus, Dr. • Sabrdaran was not only an integral part of the insider trading scheme, but its initial source, so his level of responsibility for others’ unjust enrichment is high and supports some .disgorgement. See Contorinis,
On the other hand, ordering Dr. Sabrdaran to disgorge all profits gained as a result of the tip would exceed unjust enrichment and instead operate contrary to its goal as a fine or punishment. See Hateley,
C. Prejudgment Interest
The SEC also argues that the Court should order Defendants to pay prejudgment interest on the money to be disgorged, calculated based on the rate provided in 26 U.S.C. § 6621 for tax underpayment. Dr. Sabrdaran asks the Court not to order him to pay prejudgment interest on any disgorgement he is ordered to pay. Afsarpour appears to concede that some prejudgment interest is appropriate, but argues that the award should be calculated based on the lower treasury-bill rate found at 28 U.S.C. § 1961, which is typically used to calculate pre-judgment interest. (Dkt. No. 178 at 17.)
The Second Circuit has cautioned that the “failure to securities law violators to enjoy a profit does not, standing alone, make it inequitable to compel them to' pay interest.” Contorinis,
the willfulness of the violation, the type and degree of the insider’s inadvertence, the position of the insider in the corporation, the length of time between the purchase and repayment, and other circumstances of the case. Bad faith need not be shown.
SEC v. Sargent,
Here, the balance of the equities weighs against awarding prejudgment interest against Dr. Sabrdaran. Dr. Sabrdar-an divulged inside information to Afsarp-our in breach of a fiduciary duty to his company, but he did so on a single occasion about a single event. Dr. Sabrdaran did not execute any trades himself, realize any financial profits from the trades, .or have access to Afsarpour’s profit. The SEC does not cite any authority where a Court ordered a tipper to pay prejudgment interest under similar circumstances — that is, where the only personal benefit was to enhance a friendship and the tipper did not enjoy any financial gains. The SEC relies heavily on Contorinis in its request for a prejudgment interest award against Dr. Sabrdaran, but that case is distinguishable. Although the defendant did not personally pocket the proceeds of the illegal trades, the court held that prejudgment interest .against him was still appropriate because he controlled and executed the trades and curried favor and business from his clients as a result. Contorinis,
But, as the defendant in Con-torinis, prejudgment interest is appropriate against Afsarpour: he executed trades and enjoyed a substantial financial profit which he then sought to hide from the SEC. As for the particular rate, “[ordinarily, 28 U.S.C. § 1961 ‘is to be used for
Ultimately, then, the appropriate rate depends on Afsarpour’s access to and use of the ill-gotten gains from the scheme. The record reflects that Afsarpour had no access to the profits the downstream tip-pees earned, so the default Section 1961 rate applies to these funds. The same is true of the profits Afsarpour earned from placing spread bets in his IG Index account on friends’ behalf using money they sent him: because he returned them profits to them, he did not have access to or use of their profits, so the default Section 1961 rate applies. Put simply, none of these funds operated as the equivalent of an ■ interest-free government loan to Af-sarpour.
In contrast, however, the higher Section 6621 rate applies to the profits Afsarpour made from his InterMune stock purchases and from the hedged spread bets on InterMune stock he placed with his own funds. While Afsarpour’s access to his profits was blocked for some time because IG Index froze his account when the SEC obtained a court order continuing the freeze, ultimately that freeze was lifted and Afsarpour had use of the funds.
D. Civil Penalties against Dr. Sabrdar-an
The SEC next requests that the Court assess against Dr. Sabrdaran the maximum civil penalty allowed by law: three times the proceeds of the illicit trading that took place, including spread bet profits. Dr. Sabrdaran argues that, at most, he should be assessed a “modest” or “minimal” civil penalty: either no penalty at all or some penalty limited to no more than three times the total profits gained only from Afsarpour’s purchase of InterMune stocks themselves — i.e., not from profits on spread bets.
The Insider Trading Sanctions Act of 1984, Section 21A of the Securities and Exchange Act, provides for civil penalties for insider trading. See 15 U.S.C. § 78u-1(a)(2). “The amount of the penalty which may be imposed ... shall be determined by the court in light of the facts and circumstances, but shall not exceed three times the profit gained or loss avoided” as a result of the unlawful conduct. Id. The Act defines “ ‘profit gained’ or ‘loss avoided’” as “the difference between the purchase or sale price of the security and the value of that security as measured by the trading price of the security a reasonable period after public dissemination of the nonpublic information.” Id. § 78u-l(e). In other words, the statutory penalty amount is tethered to the profits — the statute “make[s] the amount of financial liability to which a violator of the insider trading laws may be exposed directly proportional to the amount of the profit gained or the loss avoided” from the purchase or sale of a security. SEC v. Rosenthal,
(1) the egregiousness of the violations; (2) the isolated or repeated nature of the violations; (3) the defendant’s financial worth; (4) whether the defendant concealed his trading; (5) what other penalties arise as the result of the defendant’s conduct; and (6) whether the defendant is employed in the securities industry.
Gowrish,
The Court has already addressed some of these factors in the context of the officer-director bar. As to the first two factors, Dr. Sabrdaran’s conduct was not egregious in comparison with other insider trading cases; his violation consisted of a one-time tip to Afsarpour and, as explained above, he did not obtain any direct financial profit from the trades. While in Gowrish the court concluded that the tipper defendant’s conduct was egregious because “[h]e was an indispensable actor in the insider trading scheme and broke not only the law but also abused a position of trust[,]”
The third factor considers the deterrent effect of a penalty in light of a defendant’s financial worth. See Yun,
The fourth factor, whether the defendant concealed his trading, also supports a penalty. The focus of this factor tends to be concealment of the trading itself — for example, whether the defendant squirreled away the profits of his insider trades to an untraceable account. See, e.g., Sargent,
The fifth factor weighs against a penalty, Dr. Sabrdaran is ordered to disgorge more money than he earned from the insider trading scheme, and is permanently barred from serving as an officer or director of a public company; these consequences are likely sufficient to serve as a deterrent. The sixth factor also weighs against a civil penalty, as Dr. Sabrdaran does not work in the securities industry.
In short, all of the factors weigh against a civil penalty except two: ability to pay and concealment., But the Court has already taken Dr. Sabrdaran’s post-insider trading conduct into account in.imposing the serious penalty of a permanent officer and director bar. No further penalty is. necessary or warranted.
And, even if a penalty were appropriate, the Court would limit it to three times the amount of profits from Afsarpour’s direct InterMune securities purchases, "and not profits from spread bets, which all parties concede are not themselves securities. (Dkt. No. 177 at 27; see also Dkt. No. 180 at 30 (“[T]he SEC has not asked this Court to decide that UK spread bets are securities.”); Dkt. No. 186 at 72 (at oral argument, the Court noting that “[w]ith respect to civil penalties, we’re all in, agreement ... that those need come from the securities, themselves, because of the statute”),) The available amount is so limited because the ITSA measures profits gained as “the difference between the. purchase or sale price of [a] security and the value of that security” after dissemination of nonpublic information,” 15 U.S.C. § 78u-19e, And, for the same reasons discussed above in the context of disgorgement, ■ the profits from the downstream tippees’ purchases of InterMune securities are too attenuated from Dr,' Sabrdaran to support a civil penalty against him. Thus, the $1548. that Afsarpour profited from purchasing 75- shares of InterMune stock
E. Injunction against Further Securities Law Violations
Lastly,'the SEC requests that the Court permanently enjoin Defendants from future violations of Section 10(b) and Rule 10b-5. The SEC may bring an action in any district court of the United States to enjoin any person who it appears to the SEC “is engaged or about to engage in any acts or . practices which constitute or will constitute a.violation of’ the securities laws. 15 U.S.C. § 77t(b); see also id. § 78u(d)(l). “[U]pon a proper showing, a permanent or temporary injunction or restraining order shall be granted without bond.” Id. § 77t(b); see also id. § 78u(d)(l). The “purpose of injunctive relief against violators of the securities laws is to deter future violations, not to punish the violators.” SEC v. Randolph,
To obtáin a permanent injunction,' the 'SEC ha[s] the burden of showing that there [i]s a reasonable likelihood of future violations of the securities laws.... [TJhere is no per se rule requiring the issuance of an injunction upon the showing of a past violation, but ... the existence of past violations may give rise to an inference that there will be future violations; and the fact that the defendant is currently complying with the securities laws does not preclude an injunction.
In predicting the likelihood of future violations, [the court] must assess the ■totality of the circumstances surrounding the defendant and his violations, and [the court] considers] such factors as (1) the degree of scienter involved; (2) the isolated or recurrent nature of the infraction; -(3) the defendant’s recognition of the wrongful nature of his conduct; (4) the likelihood,- because of defendant’s professional occupation, that future violations might occur; (5) and the sincerity of his assurances against future violations.
Id. at 1295-96 (quotation marks, citations, and alterations omitted).
a. Degree of Scienter Involved ■
First, the Court considers “the degree of scienter involved” in Defendants’ violations. See id. at 1295. To demonstrate “a reasonable likelihood that the wrong will be repeated .... it will almost always be necessary for the [SEC] to demonstrate that the defendant’s past sins have been the result of more than negligence.” Aaron v. SEC,
As to Afsarpour, the SEC likewise proved that he knew or should have known that Dr. Sabrdaran tipped him in violation
There is sufficient evidence in the record to conclude that Afsarpour knew what he was doing was wrong. When the SEC asked Afsarpour if he knew anyone who worked at InterMune, Afsarpour lied and told them he did not. Likewise, when he gave the SEC his list of Facebook friends — which Afsarpour touts as evidence of his cooperation — he had removed Sabrdaran from the list. The Court agrees that the level of scienter here may not be as high as it would be if, for example, Afsarpour were a U.S.-based securities trader or a financial services attorney well-versed in securities regulations. But the SEC has proved, and the evidence supports, that Afsarpour knowingly traded on Dr. Sabrdaran’s inside information then withheld information from the SEC, which supports scienter.
For each of these reasons, scienter weighs somewhat in favor of imposing an injunction against both Defendants,
b. Isolated or Recurrent Nature of Infraction
In some instances, when the violation at issue is the only securities law violation by the defendant that the SEC identifies, this factor weighs against an injunction. See Fehn,
c. Recognition of Wrongful Nature of Conduct
Next, the Court considers the degree to which Defendants have recognized the wrongful nature of their conduct. See Fehn,
Here, both Defendants urge that they never engaged in a scheme to defraud. Dr. Sabrdaran appears to concede that this factor weighs against him. (See Dkt. No. 177 at 13.) Afsarpour contends that this factor weighs in his favor because he is “very remorseful” and if he had to do things over again would have immediately disclosed to the SEC that he knew Dr. Sabrdaran (Dkt. No. 187 at 8), but Afsarp-our’s declaration does not indicate as much. Instead, he states that he disagrees with the jury’s verdict, “still cannot fully understand why” the SEC investigated him, and is silent about lying to the SEC about Dr. Sabrdaran. (Dkt. No. 179 ¶¶ 3-4.) In short, Defendants continue to maintain that they did not commit insider trading, despite the jury’s clear findings to the contrary. This factor weighs in favor of an injunction. See, e.g., Gowrish,
d. Defendants’ Present Occupations
Fourth, the Court considers the likelihood that future offenses might occur due to Defendants’ occupations, age, and opportunities to engage in insider trading. See Fehn,
Dr. Sabrdaran, for his part, notes that the SEC has not presented any evidence that he is currently employed in a role that creates a risk of future violations as he is unemployed and testified that he has “lost his career” due to this case. He argues that it is unlikely that he will ever find a job at a pharmaceutical company with this judgment against him for a securities law violation. Dr. Sabrdaran relies only on one
Afsarpour, for his part, maintains that there is “no likelihood” that he will engage in future violations because he is a restaurant owner in the United Kingdom who does not regularly come into contact with confidential business information about public companies and does not have access to U.S. securities markets as someone living in the U.S. The Court has no, information about whether Afsarpour knows other people who work at public companies. But, at bottom, this factor generally considers the tipper* s role in publicly traded companies, not the tippee’s. Afsarpour’s role as a restaurant owner does not support an injunction.
e. Defendants’ Assurances Against Future Violations
“Promises of reformation and acts of contrition are relevant in deciding whether an injunction shall issue, but neither is conclusive or even necessarily persuasive, especially if no evidence of remorse surfaces until the violator is caught.” SEC v. Koracorp Indus., Inc.,
Here, Dr. Sabrdaran has not provided any assurances against future violations, which weighs in favor of entering an injunction against him, as 1 he appears to concede. (See Dkt. No. 177 at 13.) Afsarp-our avers that he has “learned important lessons from [his] mistakes and believe[s] that [he] will never repeat these mistakes in the future” and “will never again trade in securities or spread bets in companies where any of [his] family, friends or acquaintances work,” (Dkt. No, 179 ¶4.) “The sincerity of his assurances are weakened in part by the fact that he has not recognized the wrongfulness of his past conduct.” Gowrish,
f. Totality of the Circumstances
Thus, four factors weigh in favor of entering an injunction against Dr. Sabrdar-an, though one weighs only slightly, and one weighs against. As to Afsarpour, two factors support an injunction, one is neutral, and two weigh against. Still, the factors are not the end-all be-all of the inquiry; the Court is to consider the totality of the circumstances. See Murphy,
CONCLUSION
For the reasons described above, the Court DENIES Defendants’ motion for a new trial, or in the alternative, judgment as a matter of law. The Court GRANTS IN PART the SEC’s remedies motion as set forth above. The SEC shall submit a proposed judgment in accordance TOth the following.
1. Officer & Director Bar; The Court permanently bars Dr. Sabrdaran from serving as an officer or directly of a public company.
2. Disgorgement: The Court orders Afsarpour to disgorge the profits he made from purchasing- 75 shares of InterMune stock and from his hedged spread bets on InterMune stock, as well as the same profits from Nijjar, Shahbodaghloo, and Fara-hani. The Court orders Dr. Sabrdaran jointly and severally liable to disgorge Af-sarpour’s profits from his direct stock purchases and Afsarpour’s own hedged spread bets on InterMune stock, and not spread bets made by others or that Afsarpour made on behalf of others.
3. Prejudgment Interest: The Court declines to order Dr. Sabrdaran to pay prejudgment interest on the amount he is jointly and severally liable to disgorge. As for Afsarpour, the Court imposes prejudgment interest at the Section 1961 rate for profits in Afsarpour’s own spread betting account for trades he made on behalf of his friends and from the profits of trades by Nijjar, Shahbodaghloo, and Farahani. However, Afsarpour must pay prejudgment interest at the higher Section 6621 rate on the profits Afsarpour made from his InterMune stock purchases and frota his own hedged spread bets on InterMune stock.
4. Civil Penalties: The Court declines to impose a civil penalty against Dr. Sa-brdaran,
5. Injunction: The Court declines to enjoin Defendants from further securities fraud violations.
The SEC shall meet and confer with Defendants as to the proper calculation of the judgment amounts in light ■ of the Court’s ruling and shall submit a proposed judgment or judgments to the Court on or before May 26, 2017. Defendants’ approval as to form of the proposed judgment of course does not waive any of their arguments against the judgment or .its amount and remedies.
This Order disposes of Docket No. 170. Docket No. 175 will remain pending until the entry of judgment.
IT IS SO ORDERED.
Notes
. Record citations are to material in the Electronic Case File ("ECF”); pinpoint citations are to the ECF-generated page numbers at the top of the documents.
. Other downstream tippees also placed spread bets on InterMune stocks and options. The Court refers only to Afsarpour in this section, but the analysis applies to the spread bets these other individuals placed, as well.
. Defendants concede that a contract for difference is a security, but argue that the contract for difference at issue here was not listed or entered into in the U.S. so it does not qualify as "in connection with” securities. (See Dkt. No. 178 at 12; see also Dkt. No. 177 at 31 n.4 (Dr. Sabrdaran joins Afsarpour's motion).) Likewise, citing SEC v. Maillard, No. 13 CIV 5299,
. The SEC initially asked the Court to impose civil penalties against both Defendants but withdrew the request for penalties against Afsarpour in its reply, (See Dkt. No. 180 at 28 & n.30.)
. In his opposition, Afsarpour contended that this amount was $2,681 based on Panahi’s trial evidence. (Dkt. No. 178 at 9-10.) The Court assumes that Afsarpour would now contend that the proper disgorgement figure is only $1,548, the SEC’s recalculation of profits on Afsarpour's purchase of 75 shares of common stock based on the closing price per share on December 17, 2010 rather than the following Monday. (See Dkt. No. 180-2.)
. "Some courts have, in dicta, assumed, without analysis, that Section 929P(b) superseded Morrison.” SEC v. Chicago Convention Center, LLC,
the text of Section 929P(b), the legal context in which this amendment was drafted, legislative history, and the expressed purpose of the amendment all point to a congressional intent that, in actions brought by the SEC, Sections 10(b) and 17(a) should be applied to extraterritorial transactions to the extent that the conduct and effects test can be satisfied.
Id. at 1293-94,
. These individuals include Farahani, Shahb-odaghloo, Nijjar, and Bassir.
. In their opening brief, the SEC appears to contend that the downstream tippees’ profits total $222,074.92. (See Dkt. No. 175-2 (including only the profits from Nijjar, Shahb-odaghloo, Bassir, and Farahani).) However, in their reply the SEC maintains that the total profit from downstream tippees was $225,873.80. (Dkt. No. 180 at 26.) Some difference is attributable to the date at which profits were measured. At this point, the difference — -and the particular amount — is immaterial to the Court’s analysis.
. The SEC filed (hese notices of supplemental authority notwithstanding the Court’s statement at oral argument that the SEC should not submit any supplemental briefing or cases on disgorgement in the tipper/tippee scenario. (Dkt. No. 186 at 77.) As Defendants did not object to the notices and addressed the cases in their supplemental briefing (see Dkt. No. 188 at 18 & n.4), the Court addresses them here.
. At oral argument, the SEC also maintained that another factor relevant to the Court’s equitable consideration of whether to impose joint and several liability is the likely difficulty of collecting any disgorgement from Afsarp-our in the UK. (Dkt. No. 186 at 61.) The SEC has not cited any authority indicating that difficulty of collection is a relevant factor in the disgorgement analysis, so the Court does not consider it.
. Specifically, Afsarpour placed spread bets on behalf of Vasseghi, Anvarian, Sepahpour Fard, Rogerson, and Vasseghi, who sent him in total £77,200 — 28.5% of the 237 he invested in spread bets in total. (Dkt. No. 188-1 at 83-84.)
. Dr. Sabrdaran contends that courts do not consider deterrence in the context of civil penalties. (Dkt. No. 177 at 28.) Not so. The First Circuit cases that identify the relevant factors, including a case Dr. Sabrdaran cites, consider the deterrent effect of a civil penalty. See SEC v. Happ,