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Court Limits Scope of SEC Disgorgement In Case Involving Failure to Disclose Beneficial Interests

Just last week, Judge Scheindlin from the Southern District of New York precluded the SEC from seeking wide-ranging disgorgement in an order issued in the SEC v. Wyly, 10-cv-5760 (S.D.N.Y.) case.

The decision came as part of the damages phase being conducted after the jury found that the Wyly brothers violated Section 10(b) and Section 17(a) in failing to disclose beneficial ownership of securities held by offshore trusts that they created. As part of the damages phase, the SEC sought to recover all the profits earned by the offshore trusts by selling these securities.

In rejecting this theory of disgorgement, the court held that unless a scheme to hide beneficial ownership by failing to make the disclosures required by Sections 13(d) and 16(a) resulted in “market distortion, price impact, or profit tied to the violation,” the SEC could not seek all profits earned from those trades as disgorgement. The court stated that “[t]o hold otherwise would create a per se rule requiring disgorgement of all profits made by those who fail to properly disclose their beneficial ownership of securities – regardless of whether that failure resulted in unlawful trading, market manipulation, or distortion.”

The court expressed concern that without causally linking disgorgement to the violation, the SEC could use the disgorgement remedy as a punitive measure in cases where its ability to seek civil penalties was limited by the statute of limitations.  Specifically, the court stated that the SEC's disgorgement calculation "is all the more troubling because the SEC is time-barred from seeking a penalty as to many of these transactions.”


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Breton Leone-Quick is an attorney who advises Mintz clients in the financial services industry in litigation matters and regulatory investigations. He leverages his understanding of federal securities laws and Delaware corporate laws to navigate complex crises and disputes.