Opinion
No. C-01-21073 RMW.
November 8, 2008
ORDER GRANTING THE SEC'S MOTION TO DISBURSE DISGORGEMENT [Re Docket No. 73]
This SEC enforcement action parallels a criminal case for insider trading against defendant Atul Bhagat. Following Bhagat's criminal conviction, the court granted the SEC's motion for summary judgment. See Docket No. 49 (Apr. 18, 2003). The court then stayed any inquiry into remedies during the pendency of Bhagat's appeal of his conviction. See Docket No. 51 (Jun. 9, 2003). Following the appellate court's affirmance, the court lifted the stay and held a hearing on remedies. See Docket No. 64 (Jun. 6, 2007) (lifting stay); Docket No. 70 (Aug. 2, 2007) (hearing minutes). The court ordered Bhagat to disgorge $64,188.50 in ill-gotten gains, which Bhagat paid to the court on November 19, 2007. See Docket No. 72 (Nov. 8, 2007).
The SEC now moves for the court to disburse the $64,188.50 to the United States Treasury. Bhagat does not oppose the motion, though this is not surprising given that he no longer possesses any interest in the money. The court has reviewed the papers. See Civil L.R. 7-1(b). For the following reasons, the court grants the motion.
Disgorgement aims to recoup the "ill-gotten gains" resulting from a violation of the law and thus deter misconduct by removing the possibility that a wrongdoer might profit from violating the securities laws. SEC v. First Pac. Bancorp, 142 F.3d 1186, 1191-92 (9th Cir. 1998). Disgorgement is not a fine or punishment though, as it must bear some relation to the wrongdoer's gains. Hateley v. SEC, 8 F.3d 653, 656 (9th Cir. 1993); see also SEC. v. First Jersey Securities, Inc., 101 F.3d 1450, 1476 (2d Cir. 1996) ("No more than the total amount of First Jersey's unlawful profits, plus interest on those amounts, is to be disgorged"); SEC v. First City Fin. Corp., Ltd., 890 F.2d 1215, 1231 (D.C. Cir. 1989) ("[D]isgorgement may not be used punitively."). Therefore, disgorged monies should not necessarily flow to the United States Treasury. But disgorgement is not restitution either, meaning that it need not compensate investors. SEC v. Fischbach Corp., 133 F.3d 170, 175-76 (2d Cir. 1997); SEC v. Drexel Burnham Lambert, Inc., 956 F. Supp. 503, 507 (S.D.N.Y. 1997). This unusual nature of the disgorgement remedy makes it unclear who should received disgorged monies. Drexel Burnham Lambert, 956 F. Supp. at 507 (noting that the court "must make an equitable distribution of the funds" and that no statute compels any outcome).
Nevertheless, a general practice of awarding disgorged funds to the victims of the illegal conduct appears to have emerged. Fischbach, 133 F.3d at 175; see, e.g., SEC v. Lund, 570 F. Supp. 1397, 1404-05 (C.D. Cal. 1983) (creating an escrow account for $12,500 in disgorged funds to be distributed to investors). One treatise notes, however, that:
[a]lthough distribution of the disgorgement proceeds to investors may be appropriate in many cases, disgorgement is not appropriate when there are a large number of investors with relatively small claims. The SEC simply is not equipped to act as a collection agency in every case that results in compensable losses to investors.
Thomas Lee Hazen, 5 Treatise on the Law of Securities Regulation 26 (2005). For that reason, courts permit the United States Treasury to receive monies that cannot be distributed to investors. See, e.g., Lund, 570 F. Supp. at 1405. In other words, the court should disburse the disgorged monies to the Treasury when "distribution to identifiable injured parties is not feasible or appropriate." Drexel Burnham Lambert, 956 F. Supp. at 507.
In this case, the SEC argues that any attempt at distributing the $64,188.50 to the aggrieved investors would consume the funds and thus not "be reasonably productive." The aggrieved shareholders would likely comprise all of the "contemporaneous" net sellers of the stock. See 15 U.S.C. § 78t-1(a); In re Fed. Nat'l Mortg. Ass'n Securities, Derivative, and "ERISA" Litig., 503 F. Supp. 2d 25, 46-47 (D.D.C. 2007) (interpreting "contemporaneous" as occurring one day after the insider trading); Alfus v. Pyramid Tech. Corp., 745 F. Supp. 1511, 1522-23 (N.D. Cal. 1990) ("contemporaneous" must be less than "a few days"). The SEC points out that on the date of Bhagat's insider trading, the stock had a transaction volume of over 10 million shares. From this, the SEC roughly estimates that distributing Bhagat's disgorgement monies to the investors would entitle each seller to approximately 6/10 of a cent per share.
The court agrees that attempting to distribute Bhagat's less than $65,000 to such a broad class of investors would produce more waste than benefit. Even if all sales were made in 1,000 share blocks, each seller would be entitled to a mere $6.00. Identifying those sellers, communicating with them, and making out a check would likely incur $6.00 in transaction costs. Accordingly, the court grants the SEC's motion. The clerk of the court shall disburse the $64,188.50 and any accrued interest to the United States Treasury.
This assumption is conservatively based in part on the transaction volumes of the defendants. Atul Bhagat purchased 1,000 shares, his co-defendant purchased 75.