SEC v. Pentagon Capital Management, No. 12-1680 (2d Cir. 2013)
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After defendants were found liable for securities fraud stemming from their practice of late trading in the mutual fund market, the district court ordered disgorgement and imposed a civil penalty. The court affirmed the district court's determination of liability and there was no abuse of discretion in the amount of disgorgement award. The court concluded, however, that, in light of the Supreme Court's recent decision in Gabelli v. SEC, the court must vacate the district court's civil penalty award and remand for reconsideration. In Gabelli, the Supreme Court held that the so-called "discovery rule," which tolls a statute of limitations for crimes that were difficult to detect, did not apply to toll the five-year statue of limitations for fraud cases in SEC enforcement actions. The court also concluded that the language in 15 U.S.C. 77t(d)(2) did not permit the district court's interpretation that the civil penalty be imposed jointly and severally. Accordingly, the court reversed the district court's imposition of joint and several liability for the civil penalty, vacated the penalty, and remanded for further proceedings.
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12-1680-cv SEC v. Pentagon Capital Management 1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 August Term 2012 4 5 6 (Argued: April 9, 2013 Decided: August 8, 2013) Docket No. 12-1680-cv -----------------------------------------------------x 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 SECURITIES AND EXCHANGE COMMISSION, 22 B e f o r e : WALKER and CHIN, Circuit Judges, and RESTANI, Judge.* Plaintiff-Appellee, -- v. PENTAGON CAPITAL MANAGEMENT PLC, LEWIS CHESTER, Defendants-Appellants, PENTAGON SPECIAL PURPOSE FUND, LTD., Relief Defendant. -----------------------------------------------------x 23 Defendants-Appellants Pentagon Capital Management and Lewis 24 Chester appeal from the 2012 judgment of liability of the United 25 States District Court for the Southern District of New York (Sweet, 26 Judge). 27 liable for securities fraud under Section 17(a) of the Securities 28 Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, 29 and Rule 10b-5. 30 imposed a civil penalty. 31 and severally in the amount of $38,416,500. 32 the district court s determination of liability, its disgorgement After a bench trial, Defendants-Appellants were found The district court ordered disgorgement and Both monetary awards were imposed jointly We find no error in * The Honorable Jane A. Restani, of the United States Court of International Trade, sitting by designation. 1 award, or its decision to impose joint and several liability for 2 the disgorgement amount, but we reverse the district court s 3 imposition of joint and several liability for the civil penalty, 4 vacate that penalty, and remand for reconsideration of the amount 5 of the civil penalty in light of the Supreme Court s decision in 6 Gabelli v. SEC, 133 S. Ct. 1216 (2013). 7 in part, and REMANDED in part. 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 AFFIRMED in part, VACATED BENJAMIN L. SCHIFFRIN (Michael A. Conley, John W. Avery, Susan S. McDonald, David Lisitza, on the brief), Securities and Exchange Commission, Washington, DC, for Appellee. FRANK C. RAZZANO (Ivan B. Knauer, Matthew D. Foster, John C. Snodgrass, on the brief), Pepper Hamilton LLP, Washington, DC, for Defendants-Appellants. JOHN M. WALKER, JR., Circuit Judge: Defendants-Appellants Pentagon Capital Management and Lewis 23 Chester appeal from a judgment of the United States District Court 24 for the Southern District of New York (Sweet, Judge). 25 bench trial, the district court found the defendants liable for 26 securities fraud under Section 17(a) of the Securities Act of 1933 27 (the Securities Act ), Section 10(b) of the Securities Exchange 28 Act of 1934 (the Exchange Act ), and Rule 10b-5; ordered 29 disgorgement; and imposed a civil penalty. 30 imposed jointly and severally in the amount of $38,416,500. 2 After a Each monetary award was We 1 find no error in the district court s determination of liability, 2 the amount of its disgorgement award, and its decision to impose 3 that award jointly and severally. 4 court s imposition of joint and several liability for the civil 5 penalty, vacate that penalty, and remand for reconsideration of its 6 amount in light of the Supreme Court s decision in Gabelli v. SEC, 7 133 S. Ct. 1216 (2013). 8 But we reverse the district BACKGROUND 9 We assume the parties familiarity with the background of this 10 case and recite only those facts relevant on appeal. 11 additional detail, we refer the parties to the district court s 12 thorough opinion. 13 Supp. 2d 377 (S.D.N.Y. 2012). 14 imposition of fraud liability was the defendant s practice of late 15 trading in the mutual fund market. 16 the price of a mutual fund becomes fixed each day, an order is 17 placed and executed as though it occurred at or before the time the 18 price was determined, thereby allowing the purchaser to take 19 advantage of information released after the price becomes fixed but 20 before it can be adjusted the following day. 21 22 23 I. For See SEC v. Pentagon Capital Mgmt. PLC, 844 F. The basis for the district court s Late trading occurs when, after Mutual Funds and Late Trading Mutual fund shares are priced according to the fund s net asset value, or NAV. SEC Rule 22c-1, promulgated under the 3 1 Investment Company Act of 1940, requires that a mutual fund 2 calculate its NAV at least once per day, Monday through Friday. 3 C.F.R. § 270.22c-1(b)(1) (2013). 4 calculated by using the closing prices of portfolio securities on 5 the exchange or market on which the securities principally trade. 6 Disclosure Regarding Market Timing and Selective Disclosure of 7 Portfolio Holdings, 68 Fed. Reg. 70,402-01, 70,403 (proposed Dec. 8 17, 2003) (to be codified at 17 C.F.R. pts. 239, 274) (final rule 9 adopted in 69 Fed. Reg. 22,300). 17 A mutual fund s NAV is generally However, if the closing price of 10 a security held in a mutual fund s portfolio does not reflect its 11 current market value at the time of the fund s NAV calculation, a 12 mutual fund must calculate its NAV by using the fair value of that 13 security, as determined in good faith by the fund s board. 14 This could occur, for example, when some price-affecting event 15 occurs after the closing price is established but before the fund s 16 NAV calculation. 17 investor may take advantage of the disparity between the portfolio 18 securities last quoted prices and their fair value. 19 Id. If a mutual fund s shares are mispriced, an Id. Rule 22c-1 also requires that mutual funds sell and redeem 20 their shares at a price based on the NAV next computed after 21 receipt of an order, a practice called forward pricing. 22 (emphasis added); see also 17 C.F.R. § 270.22c-1(a). 23 pricing prevents dilution of mutual fund shares by keeping traders 4 Id. Forward 1 from profiting off of a stale share price. 2 investors, however, engage in late trading, the practice of 3 placing orders to buy or redeem mutual fund shares after 4 p.m., 4 Eastern time, as of which most funds calculate their [NAV], but 5 receiving the price based on the 4 p.m. NAV, instead of the next 6 day s NAV, as required by Rule 22c-1. 7 *70,402. 8 that such late trading violated Rule 22c-1. 9 II. 10 Some mutual fund Disclosure, 68 Fed. Reg. at In VanCook v. SEC, 653 F.3d 130 (2d Cir. 2011), we held Pentagon Capital Management Chester formed Pentagon Capital Management ( Pentagon ) in 11 1998 to facilitate mutual fund trading in the European markets with 12 a market timing strategy.1 13 the possibility of market timing and late trading in the United 14 States mutual fund market.2 1 In 1999, Chester and Pentagon explored To facilitate its trading in the United If a mutual fund misprices its shares, such as by failing to appropriately use fair value pricing, short-term traders have an arbitrage opportunity that they can use to exploit the fund and disadvantage the fund s long-term investors by extracting value from the fund without assuming any significant investment risk. This practice is known as market timing. Disclosure, 68 Fed. Reg. at 70,403. Because market timing can dilute the value of long-term shareholders interests in a mutual fund, many funds have imposed trading restrictions to minimize the practice, including identifying market timers and restricting their trading privileges or expelling them from the fund. Id. at 70,404. 2 International market timers can have an additional advantage because they profit from purchasing or redeeming fund shares based on events occurring after foreign market closing prices are established, but before the events have been reflected in the 5 1 States, Pentagon formed Pentagon Special Purpose Fund ( PSPF ), the 2 relief defendant in this case. 3 manager of three Delaware limited liability companies that were 4 established solely for Pentagon s use in trading mutual funds in 5 the United States. 6 was PSPF s investment advisor and made all of its trading 7 decisions. 8 9 PSPF was the sole member and At all times relevant to this case, Pentagon In the United States, unlike in Europe, Pentagon was required to trade through a broker. As relevant here, Pentagon primarily 10 used two individual brokers, James Wilson and Scott Christian, 11 first at other brokerage firms, and finally at Trautman, Wasserman 12 & Company ( Trautman ). 13 February 15, 2001. 14 Pentagon began trading through Trautman on Based on Pentagon s instructions, Wilson and Christian 15 executed Pentagon s trades through Bank of America, Trautman s 16 clearing broker. 17 at 4:00 p.m., Bank of America used a processing system for mutual 18 fund orders that allowed brokers to change an order until 5:15 p.m. 19 or 5:30 p.m. and later, until 6:30 p.m. Notwithstanding that the NAV was normally fixed fund s NAV. In order to turn a quick profit, market timers then reverse their positions by either redeeming or purchasing the fund s shares the next day when the events are reflected in the NAV. SEC v. Gabelli, 653 F.3d 49, 53 (2d Cir. 2011), rev d on other grounds, 133 S. Ct. 1216 (2013). 6 1 The parties do not dispute that Pentagon utilized Bank of 2 America s permissive clearing system to engage in late trading with 3 the assistance of Trautman s brokers. 4 accounts with Trautman, each of which could trade separately 5 without a mutual fund knowing they were related. 6 Christian registered the accounts with different broker numbers 7 with the effect that if a mutual fund detected late trading or 8 market timing and blocked one account from trading, other accounts 9 could remain active. Pentagon opened 67 different Wilson and Pentagon knew that various of its accounts 10 had been expelled from at least thirteen funds, but it continued to 11 trade in those funds using different accounts. 12 In April 2001, Chester sent an email to Wilson and Christian 13 detailing Pentagon s After Hours Trading Instructions. 14 instructed that Wilson and Christian would receive a target figure 15 on the Standard & Poors ( S&P ) future3 near the close of the 16 markets from a Pentagon employee; then, if the future exceeded or 17 fell below the target, the brokers were to contact Pentagon to ask 18 them what to do. 19 about the potential for late trading through Trautman: Chester Chester then emailed other executives at Pentagon 3 Black s Law Dictionary defines futures as standardized assets (such as commodities, stocks, or foreign currencies) bought or sold for future acceptance or delivery. Black s Law Dictionary 746 (9th ed. 2009). Whether an index future (like the S&P future) rises or falls depends on whether other investors believe the stocks comprising that index will rise or fall on a specified date in the future. 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 For this week only, [Trautman] can place or cancel any trades up to 5:00pm (10pm UK time). From next week [Trautman] to confirm the time will be 6:30pm (11:30 pm UK time). The significance of this is great. For instance, last night, the S & P future shot up at around 9:45pm [UK time]. Even though we hadn t placed any trades before 9pm [UK time], we STILL COULD HAVE PLACED THE TRADE after the bell, which we should have done given the marked rise in the future. I have been in Jimmy [Wilson s] office. Every day, whether we do a trade or not, they timestamp our trade sheets before 4pm, and then sit on them until they leave the office, at which point they will process them or not. Hence, the ability to place a buy order after the bell, even if we haven t done so before the bell. . . . This facility is VERY VALUABLE and we should utilize it accordingly. . . . It doesn t matter whether we place trades or not before the bell, we can do so afterwards, up to Trautman s time limits. Pentagon, 844 F. Supp. 2d at 400-01 (alterations omitted). Thereafter, Christian would create potential trade sheets for 37 Pentagon each day and time-stamp them before 4:00 p.m., 38 notwithstanding that the actual decision to place the order or not 39 would be made after 4:00 p.m. 40 Pentagon employee would email Christian the instructions for Then, sometime after 4:00 p.m., a 8 1 Pentagon s late trades for that day. 2 Pentagon realized profits of approximately $38,416,500 from the 3 U.S. mutual fund [late] trades they executed through [Trautman] 4 between February 15, 2001 and September 3, 2003. The district court found that Id. at 427. 5 Pentagon tried to conceal its late trading activities. 6 example, on July 30, 2002, Chester sent an email to a broker that 7 instructed him not to use the words market timing (which, viewed 8 broadly, includes late trading) on any correspondence, telling him 9 to label what we do . . . dynamic asset allocation, but never For 10 market timing! 11 another Pentagon employee to phone around First Union to see if 12 late trading was available because late trading is key, adding 13 [I] don t know how you find out about this [late trading] without 14 actually saying it. 15 Id. at 396. In August 2002, Chester instructed No doubt you ll work it out! Id. at 408. In September 2003, the New York Attorney General announced 16 that it had settled an enforcement action with Canary Capital 17 Partners for violations of the New York State securities laws, 18 including late trading. 19 request from an investor for a letter stating that Pentagon had not 20 engaged in late trading or any other illegal activity. 21 provided the letter, stating that Pentagon had never entered into 22 arrangements with any U.S. onshore Mutual Fund in order to trade 23 post-4:00pm EST for same-day NAV, and that all of Pentagon s Shortly thereafter, Chester received a 9 Chester 1 trading arrangements were in accordance with the relevant rules, 2 regulations, investment prospectus, and/or any other such relevant 3 documentation relating to the investment(s) concerned. 4 410. 5 Id. at On April 3, 2008, the SEC brought this enforcement action 6 against Pentagon. 7 timing and late trading activities violated Section 17(a) of the 8 Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5. 9 After a seventeen-day bench trial, the district court found Chester The complaint alleged that Pentagon s market 10 and Pentagon primarily liable for late trading.4 11 found that appellants did not act merely in reliance on their 12 broker-dealers . . . [but] directed, indeed micromanaged, the late 13 trading that [Trautman] performed on their behalf. 5 14 The district court entered an injunction prohibiting Pentagon from 15 late trading in the future. 16 PSPF jointly and severally liable for a $38,416,500 disgorgement The district court Id. at 421. It also held Pentagon, Chester, and 4 The district court found that because market timing is not illegal per se and because the SEC did not establish the funds particular market timing rules . . . or that Defendants in fact took actions that would have operated a fraud with respect to those rules, that the defendants were not liable under the securities laws for their market timing activities not involving late trading. SEC v. Pentagon Capital Mgmt. PLC, 844 F. Supp. 2d 377, 416 (S.D.N.Y. 2012). 5 With respect to late trading, because the district court made a finding of primary liability, it did not reach the question of whether defendants had aided and abetted Trautman in the late trading scheme. See id. at 423. Hence, the question of aider-andabettor liability is not presented on this appeal. 10 1 award and $38,416,500 in civil penalties. 2 $38,416,500 was based on the district court s valuation of the 3 profit Pentagon, Chester, and PSPF realized in late trading through 4 Trautman between February 15, 2001 and September 3, 2003. 5 appeal followed. 6 The amount of This DISCUSSION 7 On appeal, Pentagon and Chester argue that they cannot be held 8 liable because their actions involved no fraud or deceit and that 9 as investment advisors (as opposed to brokers), they cannot be held 10 primarily liable for securities fraud. 11 district court made various errors related to the monetary awards. 12 Following a bench trial, we review the district court s findings of 13 fact for clear error and its legal conclusions de novo. 14 Mayhew, 121 F.3d 44, 50 (2d Cir. 1997). 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 I. They further argue that the Primary Liability for Securities Fraud Section 17(a) of the Securities Act makes it unlawful for any person in the offer or sale of any securities . . . (1) (2) (3) to employ any device, scheme, or artifice to defraud, or to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or to engage in any transaction, practice, or course of business which operates or 11 SEC v. 1 2 3 4 15 U.S.C. § 77q(a) (2012). 5 relevant part, makes it unlawful for any person to use or employ, 6 in connection with the purchase or sale of any security registered 7 on a national securities exchange . . . any manipulative or 8 deceptive device or contrivance in contravention of such rules and 9 regulations as the Commission may prescribe. would operate as a fraud or deceit upon the purchaser. 10 (2012). 11 Section 10(b) of the Exchange Act, in 15 U.S.C. § 78j(b) three subsections: 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Finally, Rule 10b-5, implementing Section 10(b), includes It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) (b) (c) To employ any device, scheme, or artifice to defraud, To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5 (2013). We have held that to violate Section 10(b) and Rule 10b-5, a party must have (1) made a material misrepresentation or a 12 1 material omission as to which he had a duty to speak, or used a 2 fraudulent device; (2) with scienter; (3) in connection with the 3 purchase or sale of securities. 4 F.3d 295, 308 (2d Cir. 1999). 5 Section 17(a) apply only to a sale of securities but in other 6 respects are the same as Section 10(b) and Rule 10b-5, except that 7 no showing of scienter is required for the SEC to obtain an 8 injunction under [Section 17] (a)(2) or (a)(3). 9 SEC v. Monarch Funding Corp., 192 The requirements for a violation of Id. Pentagon and Chester do not deny that they engaged in late 10 trading. 11 deceit in their actions. 12 investment advisor as opposed to a broker may not be held liable 13 for securities fraud because the advisor is not responsible for 14 communicating the direction to late trade to the clearing broker. 15 We reject both arguments. 16 The defendants argue, however, that there was no fraud or The defendants also argue that an First, the defendants argument that their lack of fraudulent 17 or deceitful intent bars a finding of liability fails because 18 deceitful intent is inherent in the act of late trading. 19 trader places an order after the daily mutual fund price is set, 20 but receives the benefit of additional information that the earlier 21 price does not reflect. 22 trading violates all three subsections of Rule 10b-5 because, as 23 discussed above, it violates Rule 22c-1, the forward-pricing rule. The late For this reason, we have held that late 13 1 See VanCook, 653 F.3d at 138. 2 sought out a clearing broker that would allow him to clear late 3 trades, used time-stamped trade sheets as evidence that orders were 4 placed before 4 p.m. when they were not, and assured his employer 5 that he had not facilitated late trading. 6 scheme s] architect. 7 beyond making misrepresentations, taking a series of actions over 8 several years to implement a scheme that he devised. 9 these grounds, we held that VanCook s late trading violated all In VanCook, an individual broker Id. at 139. In short, he was [the We found that VanCook went Id. On 10 three subsections of Rule 10b-5. 11 issue in VanCook, the requirements for a violation of Section 12 17(a), as relevant here, are identical to the requirements for a 13 violation of Section 10(b). 14 that Section 17(a) is also implicated by late trading activity (so 15 long as some of the late trading involves the sale of securities). 16 Pentagon and Chester engaged in similarly deceitful behavior. Although Section 17(a) was not at Thus, we have no trouble concluding 17 They sought out brokers who would engage in late trading. 18 evidenced by Chester s email, they knew that the trade sheets were 19 time-stamped before 4 p.m., even though they had no intention of 20 trading before that time. 21 deceitful letter of assurance that they were not engaging in late 22 trading, similar to VanCook s false assurances to his employer. As Finally, they issued a false and 14 1 The defendants are not identically situated to VanCook, 2 however. 3 Rule 22c-1, which applies to issuers of securities, persons 4 authorized to consummate transactions in any such securit[ies], 5 principal underwriters, and dealers in securities. 6 § 270.22c-1(a). 7 in Rule 22c-1, but that is of no moment when the claims are brought 8 under Sections 17 and 10 and Rule 10b-5. 9 as much the architects of this scheme as VanCook was, and they VanCook was a broker, directly bound by the language of 17 C.F.R. Investment advisors are not explicitly mentioned Pentagon and Chester were 10 orchestrated the late trading program carried out by their brokers. 11 They are liable under Section 17(a), Section 10(b), and Rule 10b-5 12 because their actions caused the misrepresentations as to the time 13 of the trades and led to their concomitant deception.6 14 role as an investment advisor therefore does not shield it from 15 liability under the securities laws. 6 Pentagon s We endorse the reasoning of the district court in SEC v. Simpson Capital Management, Inc., 586 F. Supp. 2d 196 (S.D.N.Y. 2008), which dealt with the late trading activities of an investment advisor and the relevance of Rule 22c-1 in the context of a motion to dismiss. In Simpson, the SEC alleged that the investment advisor was responsible for all investment decisions[,] . . . carefully identified individuals . . . who agreed to participate in the late trading scheme[, and] . . . orchestrated late-trading schemes. Id. at 208. We endorse the district court s finding in Simpson that these allegations were sufficient to state a claim for primary 10b-5 liability against an investment advisor. Specifically, the district court reasoned that the existence of [Rule 22c-1] . . . provides the background for why the defendants . . . engaged in a scheme where they could obtain the prices that were set as of 4:00 p.m. ET, even though their transactions actually occurred at a later time. Id. at 203. 15 1 We also reject the defendants corollary argument that they 2 may not be held liable because they did not communicate directly 3 with the mutual funds. 4 Derivative Traders, 131 S. Ct. 2296 (2011), shareholders of Janus 5 Capital Group sued Janus Capital Group and Janus Capital Management 6 for making false statements in mutual fund prospectuses filed by 7 Janus Investment Fund. 8 ultimate control over the content of the prospectuses, the Supreme 9 Court held that Janus Capital Management could not be liable as a 10 In Janus Capital Group, Inc. v. First Because Janus Investment Fund retained maker of the statement under Rule 10b-5: 11 12 13 14 15 16 17 18 19 20 21 22 Id. at 2302. 23 analogy of the relationship between a speechwriter and a speaker. 24 Even when a speechwriter drafts a speech, the content is entirely 25 within the control of the person who delivers it. 26 and Chester argue that because they never communicated directly 27 with the mutual funds, they cannot be held liable as makers of 28 any false statements. For purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. Without control, a person or entity can merely suggest what to say, not make a statement in its own right. One who prepares or publishes a statement on behalf of another is not its maker. To illustrate its point, the Supreme Court used the 16 Id. Pentagon 1 To the extent that late trading requires a statement in the 2 form of a transmission to a clearing broker, we find that in this 3 case, Pentagon and Chester were as much makers of those 4 statements as were the brokers at Trautman. 5 been responsible for the act of communication, but Pentagon and 6 Chester retained ultimate control over both the content of the 7 communication and the decision to late trade. 8 The brokers may have Moreover, we reaffirm our holding in VanCook and find that the 9 defendants activities violated all three subsections of Rule 10b- 10 5, not just subsection (b), which was the only subsection at issue 11 in Janus. 12 communication of the trades themselves, included finding brokers 13 and a clearing system that would allow late trades, as well as the 14 specific coordination on a daily basis of the transmission of 15 instructions to buy or sell or refrain from doing so based on NAVs 16 and after-hours information. 17 activities independently satisfy the requirements of scheme 18 liability under Rule 10b-5(a) and (c) and Section 17(a). 19 Pentagon s late trading activity, beyond the In short, Pentagon s fraudulent We have considered the remainder of Pentagon s arguments and 20 find them to be unpersuasive. 21 of liability is affirmed. The district court s determination 17 1 2 II. Monetary Awards The district court imposed joint and several liability for a 3 disgorgement award and a civil penalty, each in the amount of 4 $38,416,500. 5 monetary awards would be imposed jointly and severally because the 6 defendants (including the relief defendant) collaborated on the 7 mutual fund trading scheme, and [Chester and Pentagon] exercised 8 complete control over PSPF s trading. 9 The district court then determined that a disgorgement award of The district court first determined that both 844 F. Supp. 2d at 425. 10 $38,416,500 was appropriate because it was a reasonable 11 approximation of the profit made through defendants late trades 12 with Trautman beginning in February 2001. 13 the civil penalty, the district court applied Section 20(d) of the 14 Securities Act and Section 21(d)(3) of the Exchange Act. 15 the violation involved fraud, deceit, manipulation or deliberate 16 or reckless disregard of a regulatory requirement and directly or 17 indirectly resulted in substantial losses or created a significant 18 risk of substantial losses to other persons, the district court 19 awarded the maximum penalty, in this case, the gross amount of the 20 pecuniary gain. 21 78u(d)(3)). 22 erred in setting the amounts and in imposing joint and several 23 liability. Turning to the amount of Because Id. at 427 (quoting 15 U.S.C. §§ 77t(d), On appeal, Pentagon argues that the district court 18 1 A. Civil Penalty 2 We review the district court s imposition of the civil penalty 3 for abuse of discretion. 4 Cir. 2005) ( The tier determines the maximum [civil] penalty, with 5 the actual amount of the penalty left up to the discretion of the 6 district court. ). 7 See SEC v. Kern, 425 F.3d 143, 153 (2d In light of the Supreme Court s recent decision in Gabelli, 8 133 S. Ct. 1216, rendered after the district court s decision, we 9 must vacate the district court s civil penalty award and remand it 10 for reconsideration. 11 so-called discovery rule, which tolls a statute of limitations 12 for crimes that are difficult to detect, does not apply to toll the 13 five-year statute of limitations for fraud cases in SEC enforcement 14 actions. 15 trading earlier than five years before the SEC instituted its suit 16 against the defendants may not be included as part of the civil 17 penalty. 18 In Gabelli, the Supreme Court held that the See id. at 1221-24. Thus, any profit earned through late All parties agree that remand on this issue is required. We also must reverse the district court s decision to impose 19 joint and several liability for the amount of the civil penalty as 20 an error of law. 21 F.3d 121, 125 (2d Cir. 2011) ( A court abuses its discretion when . 22 . . its decision rests on an error of law . . . . ) (per curiam). 23 The statutory language allowing a court to impose a civil penalty See Johnson v. Univ. of Rochester Med. Ctr., 642 19 1 plainly requires that such awards be based on the gross amount of 2 pecuniary gain to such defendant. 3 added). 4 court s interpretation that the civil penalty be imposed jointly 5 and severally.7 15 U.S.C. § 77t(d)(2) (emphasis This language does not provide room for the district 6 B. Disgorgement Award 7 The district court s disgorgement award is also reviewed for 8 abuse of discretion. 9 1998). 10 See SEC v. Warde, 151 F.3d 42, 49 (2d Cir. We find no abuse of discretion in the amount of the 11 disgorgement award, which reflected a reasonable approximation of 12 profits causally connected to the [late trading] violation. 13 v. First Jersey Sec., Inc., 101 F.3d 1450, 1475 (2d Cir. 1996) 14 (quotation marks omitted).8 15 court to consider the profit to PSPF as well as Chester and 16 Pentagon in light of the fact that PSPF existed only to enable SEC It was reasonable for the district 7 Although we vacate the civil penalty award, we find no error in the district court s methodology for calculating the maximum penalty by counting each late trade as a separate violation. See 15 U.S.C. § 77t(d)(2)(C) ( [T]he amount of penalty for each such violation shall not exceed the greater of (i) $100,000 for a natural person or $500,000 for any other person, or (ii) the gross amount of pecuniary gain to such defendant as a result of the violation. (emphasis added)). 8 Aside from appellants assertion that the disgorgement award should be considered a penalty because it incorporated profits earned by PSPF, an argument we reject, we do not understand the appellants to argue that a disgorgement award would be subject to the statute of limitations provided by 28 U.S.C. § 2642. 20 1 Pentagon s trading in the United States. 2 AbsoluteFuture.com, 393 F.3d 94, 96 (2d Cir. 2004) ( It is only 3 logical that the total disgorgement of multiple defendants be 4 determined by the total amount of profit realized by those 5 defendants. ) (per curiam). 6 See SEC v. We also affirm the district court s decision to impose the 7 disgorgement award jointly and severally on all defendants. 8 the civil penalty, there is no statutory requirement that a 9 disgorgement award be measured as to each individual defendant. Unlike 10 The district court found that relief defendant PSPF opened accounts 11 at Pentagon s direction and that defendants late-traded on PSPF s 12 behalf. 13 had collaborated on the late trading scheme, and concluded that 14 joint and several liability with respect to disgorgement was 15 warranted. 16 that joitn and several liability for combined profits on 17 collaborating . . . parties is appropriate ). 18 district court that, in light of their collaboration, Pentagon, 19 Chester, and PSPF should be held liable for the disgorgement award 20 on a joint and several basis. 21 76 (affirming district court s decision to impose joint and several 22 liability of disgorgement award). Hence, the district court found that defendants and PSPF See id. at 97 (in reviewing disgorgement award, holding We agree with the See First Jersey, 101 F.3d at 1475- 21 1 2 CONCLUSION For the foregoing reasons, the district court s rulings are 3 AFFIRMED in part, VACATED in part, and REMANDED in part for further 4 proceedings in accordance with this opinion. 22
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