United States District Court, D. Nevada
JAMES C. MAHAN, District Judge.
Presently before the court is the Securities and Exchange Commission's (hereinafter "SEC") motion for judgment against defendants Edwin Fujinaga ("Fujinaga") and MRI International, Inc. ("MRI") (collectively "defendants"). (Doc. # 178). Defendants filed a response, (doc. # 184), and the SEC filed a reply, (doc. # 185).
In its motion, the SEC seeks disgorgement in the amount of $442, 229, 611.70 on a joint and several basis; prejudgment interest in the amount of $102, 129, 752.38 on a joint and several basis; a civil money penalty of $20, 000, 000.00 as to each defendant; and permanent injunctions. (Doc. # 178).
The instant case arises from a Ponzi scheme perpetrated by defendants. Defendants collected hundreds of millions of dollars for purported investments in medical accounts receivable. Defendants used these funds to repay earlier investments as well as for their own personal expenses. By May 2013, defendants had entirely depleted the invested funds. (Doc. # 118).
On September 11, 2013, the SEC filed a civil enforcement action against defendants. (Doc. #2). On October 7, 2013, the parties stipulated to the entry of a preliminary injunction. (Doc. #20). On December 11, 2013, defendants filed an answer to plaintiff's complaint. (Doc. #27). The parties completed discovery by July 8, 2014. (Doc. #138).
On July 16, 2014, the SEC filed a motion for summary judgment on liability. (Doc. # 113). On October 3, 2014, the court granted the SEC's motion. (Doc. #156). The SEC then filed the instant motion for judgment.
II. Legal Standard
"The district court has broad equity powers to order the disgorgement of ill-gotten gains' obtained through the violation of the securities laws." SEC v. First P. Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998). "[T]he amount of disgorgement should include all gains flowing from the illegal activities." SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109, 1114 (9th Cir. 2006) (citations and quotation marks omitted).
"A disgorgement calculation requires only a reasonable approximation of profits causally connected to the violation...." Id. at 1113-14. "The SEC bears the ultimate burden of persuasion that its disgorgement figure reasonably approximates the amount of unjust enrichment." SEC v. Platforms Wireless Intern. Corp., 617 F.3d 1072, 1096 (9th Cir. 2010) (citations and quotation marks omitted). However, the SEC need not trace every dollar of a defendant's ill-gotten gains, and a detailed accounting is not required. First P. Bancorp, 142 F.3d at 1192 n.6.
"Once the SEC establishes a reasonable approximation of defendants' actual profits... the burden shifts to the defendants to demonstrate that the disgorgement figure was not a reasonable approximation." Id. Because "[t]he defendants are more likely than the SEC to have access to evidence establishing what they paid for the securities... the risk of uncertainty should fall on the wrongdoer whose illegal conduct created that uncertainty." Id.
B. Prejudgment interest
Disgorgement remedies for securities should include prejudgment interest to ensure that the defendants do not profit from any illegal activity. SEC v. Henke, 130 Fed.App'x 173, 174 (9th Cir. 2005). Prejudgment interest may be calculated based on the rate provided in 28 U.S.C. § 1961 for post-judgment interest on money judgments in civil cases, or by the rate provided in 26 U.S.C. § 6621 for tax underpayment. Platforms Wireless, 617 F.3d at 1099.
C. Joint and several liability
"[W]here two or more individuals or entities collaborate or have a close relationship in engaging in the violations of the securities laws, they have been held jointly and severally liable for the disgorgement of illegally obtained proceeds." SEC v. First P. Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998).
D. Civil monetary penalties
The court has jurisdiction to impose one of three tiers of civil penalties in cases of securities violations. 15 U.S.C. § 77t(d). "The amount of the penalty shall be determined by the court in light of the facts and circumstances." 15 U.S.C. § 77t(d)(2)(A).
First-tier penalties are available for any violation of the Exchange Act. 15 U.S.C. § 77t(d)(2)(A). The court may impose second-tier penalties for violations involving "fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement." 15 U.S.C. § 77t(d)(2)(B).
Third-tier penalties may be imposed for violations that (1) involve "fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement, " and (2) "directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons." 15 U.S.C. § 77t(d)(2)(C).
In determining the appropriate civil penalty, courts may consider the following factors:
(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 the defendant's professional occupation, that future violations might occur; (5) and ...