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Securities and Exchange Commission v. Kelley

United States District Court, D. New Jersey

August 21, 2019

S. PAUL KELLEY, et al., Defendants.



         This matter comes before the Court upon the motion filed by Plaintiff, the United States Securities and Exchange Commission (“SEC”), for an order setting remedies and entering final judgment against Defendant Shawn A. Becker (“Becker”) pursuant to Federal Rule of Civil Procedure 54(b). Becker, appearing pro se, has opposed the motion. Additionally, with leave of Court, Becker filed a sur-reply to address certain statements made by the SEC in its reply. The Court has considered all papers filed by the parties. It proceeds to rule based on the written submissions and without oral argument, pursuant to Federal Rule of Civil Procedure 78.

         I. Background

         The claims against Becker arise from his violation of federal securities laws in connection with a scheme to inflate the stock value of three companies traded publicly in the United States securities market. This motion for remedies and final judgment is predicated on a settlement entered into by the SEC and Becker, wherein the truth of the allegations against Becker has been admitted for purposes of ordering appropriate remedies. The Court will summarize the allegations briefly, as follows:

         Becker engaged in fraudulent schemes in which he solicited investors in three Chinese companies, which had been taken public in the United States, and manipulated the market to boost the stock price and trading volume of these companies. As compensation for his participation in these illegal schemes, Becker received stock in the three Chinese companies. He later sold the stock at a profit. Moreover, he acted as an unregistered broker and offered and sold unregistered securities. For the foregoing conduct, this civil enforcement action brought by the SEC charged Becker with violations of the Securities Act of 1933 (“Securities Act”), the Securities and Exchange Act of 1934 (“Exchange Act”), and the Exchange Act's implementing regulations.

         Defendant Becker consented to entry of judgment against him, consisting of, among other things, a permanent injunction. Becker also “agree[d] that the Court shall order disgorgement of ill-gotten gains, prejudgment interest thereon, and a civil penalty pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)].” Consent of Defendant Shawn A. Becker, April 3, 2013 (“Becker Consent”), ¶ 3 (ECF 31-1). The settlement between the SEC and Becker provides that the amounts of the disgorgement and civil penalty would be determined by the Court at a later date. Becker further agreed that, upon the SEC's motion for a determination of appropriate remedies, he would be precluded from arguing that he did not violate the federal securities laws as alleged in the Complaint and that “for the purposes of such motion, the allegations of the Complaint shall be accepted as and deemed true by the Court.” (Id.)

         Predicated on the consent given by Becker and the aforementioned settlement agreement, the Court entered judgment against Becker on July 21, 2015. The judgement enjoins him from engaging in certain conduct in violation of the Securities Act, the Exchange Act, and federal securities regulations and from participating in the offer of penny stocks. The SEC and Becker thereafter conducted discovery in an attempt to determine the appropriate monetary penalties. The parties failed, however, to agree as to the amount of monetary remedies.

         Thus, in accordance with the parties' agreement and the Court's July 21, 2015 Judgment, the SEC now brings the instant motion for a determination of the amounts of disgorgement, related prejudgment interest, and civil penalties to be imposed on Becker in a final order of judgment against him. The Court will address each remedy sought in turn.

         II. Discussion

         A. Disgorgement

         The SEC seeks disgorgement of the profits Becker received as a result of the misconduct alleged in the Complaint.

         Where a party violates federal securities laws, a district court is authorized to order the disgorgement of any ill-gotten gains and to determine the amount to be disgorged. SEC v. Universal Express, Inc., 646 F.Supp.2d 552, 562-63 (S.D.N.Y. 2009), aff'd, 438 Fed.Appx. 23 (2d Cir. 2011).; see also SEC v. McCaskey, No. 98 Civ. 6153, 2001 U.S. Dist. LEXIS 13571, at *21 (S.D.N.Y. Sept. 6, 2001) (“Disgorgement of illicit profits is a proper equitable remedy for securities fraud . . . designed to deprive wrongdoers of the profits of their wrongdoing.”) (citations omitted). Disgorgement is not a punitive measure. SEC v. Antar, 97 F.Supp.2d 576, 578 (D.N.J. 2000) (citing SEC v. Hughes Capital Corp., 917 F.Supp. 1080, 1085 (D.N.J. 1996), aff'd, 124 F.3d 499 (3d Cir. 1997)). Rather, it serves the primary purpose of depriving one who violates securities laws from enriching himself by his wrongs. Antar, 97 F.Supp.2d at 578. It is an equitable remedy, and therefore a district court “has broad discretion in fashioning an appropriate disgorgement order.” Id. (citing Hughes Capital, 917 F.Supp. at 1085). The SEC, as the plaintiff in a civil enforcement action, bears the burden of establishing that the amount of disgorgement sought is a “reasonable approximation of unlawful profits.” Id. It need not, however, prove the precise amount of profits derived as a result of the securities laws violations. Id. (citing Hughes Capital, 917 F.Supp. at 1085) (“plaintiff is not required to trace every dollar of proceeds misappropriated by the defendants . . . nor is plaintiff required to identify monies which have been comingled by them.”). Once the plaintiff satisfies the burden of demonstrating the approximate amount of the defendant's unlawful profits, the burden of proof shifts to the defendant to “‘demonstrate that the disgorgement figure is not a reasonable approximation.'” Id. (quoting Hughes Capital, 917 F.Supp. at 1085).

         Here, the SEC has demonstrated that Becker received stock in the three companies involved in the illegal scheme and profited from his sale of that stock. It has established that Becker's profits totaled approximately $2, 268, 332, a fact which Becker does not dispute. Becker's opposition, rather, consists of his assertions that ordering disgorgement would be unjust because he suffers from poor health and because he finds himself in a precarious financial situation which renders him unable to pay. Putting aside, for the moment, the fact that Becker has not substantiated his claims that he is gravely ill and destitute, Becker's arguments are completely unavailing to defeat the disgorgement sought by the SEC. A defendant's “financial hardship is not grounds for denying disgorgement.” SEC v. McCaskey, No. 98 Civ. 6153, 2002 U.S. Dist. LEXIS 4915, at *17 (S.D.N.Y. Mar. 26, 2002). A wrongdoer's present inability to pay is irrelevant to the issues of whether disgorgement is warranted and how much money a defendant should be ordered to pay. Id. The “Court may order disgorgement in the amount of the wrongdoer's total gross profits, without giving consideration to whether or not the defendant may have squandered and/or hidden the ill-gotten profits.” SEC v. Rosenfeld, No. 97 Civ 1467, 2001 U.S. Dist. LEXIS 166, at *2 (S.D.N.Y. Jan. 9, 2001). This approach is not intended to be punitive but rather is designed to promote the deterrent effect of the disgorgement remedy by making securities violations unprofitable. SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1474 (2d Cir. 1996) (“The deterrent effect of an SEC enforcement action would be greatly undermined if securities law violators were not required to disgorge illicit profits.”) (quoting SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1104 (2d Cir. 1972)).

         In short, the SEC has properly and adequately supported its application for an order of disgorgement. It has provided uncontroverted proof that Becker profited approximately $2, 268, 332 from the sale of stock he received in compensation for his participation in the securities fraud schemes. Accordingly, and in its discretion, the Court finds that it is appropriate to ...

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