operations or management of the firms." Defendant's Post-Trial Brief, p. 12. Accordingly, based on the totality of circumstances, the court finds that Moran Sr., Moran Asset, and Moran Brokerage should be permanently enjoined from violating each of the statutes and Rules for which they were found to be liable.
The SEC seeks disgorgement from Moran Sr. for the illegal profit he made as a result of his violation of Section 206(2) of the Advisers Act. Disgorgement is "designed to deprive a wrongdoer of his unjust enrichment and to deter others from violating the securities laws." SEC v. First City Fin. Corp., Ltd., 281 U.S. App. D.C. 410, 890 F.2d 1215, 1230 (D.C. Cir. 1989). As heretofore noted, "the effective enforcement of the federal securities laws requires that the SEC be able to make violations unprofitable." SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1104 (2d Cir. 1972). There is no doubt that Moran Sr. made a profit at his client's expense when he negligently purchased stock for his personal accounts before buying the same stock for all of his clients. Accordingly, disgorgement is entirely appropriate in this case. It is noteworthy that even Moran Sr., in his post trial brief and reply, does not contest the disgorgement request made by the SEC.
The parties have stipulated that the difference between the cost incurred by Moran Sr.'s clients and the cost incurred by Moran Sr.'s personal and family accounts for the Liberty shares amounts to $ 9551.17. Hence, the court will order disgorgement in that amount, which represents profits made by Moran Sr. at the expense of his clients. The court, in its discretion, will further order payment of prejudgment interest. Rolf v. Blyth, Eastman Dillon & Co., Inc., 637 F.2d 77, 86 (2d Cir. 1980); SEC v. Stephenson, 732 F. Supp. 438, 439 (S.D.N.Y. 1990). Requiring payment of interest prevents a defendant from obtaining the benefit of what amounts to an interest free loan procured as a result of illegal activity. The calculation of interest is to be calculated through March 31, 1996 and in accordance with the delinquent tax rate determined by the Internal Revenue Service. 26 U.S.C. § 6621(a)(2); SEC v. First Jersey Securities, Inc., 890 F. Supp. 1185, 1212 (S.D.N.Y. 1995)(utilizing the IRS rate for interest on amounts disgorged); Lorin, 877 F. Supp. at 201(same); Drexel Burnham Lambert, 837 F. Supp. at 612 n. 8(same).
The SEC additionally asks the court to impose civil penalties pursuant to the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 ("Penalty Act"). See The Exchange Act, § 21(d)(3) and The Adviser Act § 209(e)
Specifically, the SEC argues that each of the violations of the defendants should fall under the Second Tier of Civil Penalties. For Moran Sr.'s four violations of securities statutes and two Rules thereunder, the SEC seeks the imposition of an aggregate penalty amounting to $ 25,000 for each statutory violation, thereby requesting a total penalty of $ 100,000 upon Moran Sr. personally. The SEC recommends a total civil penalty of $ 50,000 to be imposed upon Moran Asset for its violation of two sections of the Advisers Act and one Rule thereunder. Lastly, the SEC seeks a penalty in the amount of $ 25,000 against Moran Brokerage for violating one section of the Exchange Act and one Rule thereunder. Thus, the total amount of penalties sought from the defendants constitutes $ 175,000. Defendants argue that because of the extreme hardship Moran Sr. and his companies have endured since this investigation commences, the court should not award civil penalties. After reviewing all of the evidence the court finds that civil penalties are warranted in this matter.
By enacting the Penalty Act, Congress sought to achieve the dual goals of punishment of the individual violator and deterrence of future violations. Indeed, the House Report on the Penalty Act made clear its intention, stating:
The Committee believes that the money penalties proposed in this legislation are needed to provide financial disincentives to securities law violations other than insider trading . . . . Absent a criminal prosecution or a private suit for damages. . . even the defendant who makes a deliberate decision to violate the law and causes significant harm to the markets does not risk any monetary sanction more severe than an order of disgorgement. Disgorgement merely requires the return of wrongfully obtained profits; it does not result in any actual economic penalty or act as a financial disincentive to engage in securities fraud. A violator who avoids detection is able to keep the profits resulting from illicit activities. Currently, even a violator who is caught is required merely to give back his gains with interest, leaving him no worse off financially than if he had not violated the law. The Committee therefore concluded that authority to seek or impose substantial money penalties, in addition to the disgorgement of profits, is necessary for the deterrence of securities law violations that otherwise may provide great financial returns to the violator.
H.R. Rep. No. 101-616, 101st Cong., 2d Sess., reprinted in 1990 U.S. Code Cong. & Admin. News 1379, 1384-86. Both the Exchange Act and the Advisers Act provide that any civil penalty is to be determined by the Court "in light of the facts and circumstances" of the particular case. 15 U.S.C. § 78u(d)(3) and § 80 (b)-9(e) (Exchange Act) and (Advisers Act). Here, the actions of Moran Sr. blaming others, including the SEC for his own conduct, his downplaying of the violations for which he is liable, the loss of money by Moran Sr.'s clients, and the intentional nature of most of Moran Sr.'s violations, warrant the imposition of civil penalties.
While recognizing that the SEC seeks significantly less than potential maximum aggregate penalty of $ 1,800,000
, the court feels that the SEC's request is nonetheless too severe under the circumstances of this case. In making this determination the court considers the personal suffering which Moran Sr. has experienced, the substantial loss of business incurred by Moran Sr.'s firms, the other measures imposed by the court, and the nature of Moran Sr.'s violations. Taking into account all of the facts and circumstances in this case, the court imposes civil penalties in the amount of $ 25,000 for Moran Sr.'s aggregate violations, $ 50,000 for the conduct of Moran Asset, and $ 25,000 for the violations of Moran Brokerage. The amount of civil penalties then, totals $ 100,000.
Both sides have offered substantial authority in the form of prior cases, to support their views of the appropriate civil penalty herein. Considering the discretionary nature of the civil penalty framework, prior decisions and consent decrees are of little comparative value for any individual matter. Each case, of course, has its own particular facts and circumstances which determine the appropriate penalty to be imposed. The court, however, recognizes the usefulness of utilizing these cases to put the current matter in a clearer perspective. Careful review of these other matters demonstrate that the penalties to be invoked in this case are commensurate or even more lenient than those previously imposed. See e.g., In the Matter of Account Management Corp., 1995 SEC LEXIS 2554 (September 24, 1995)($ 100,000 civil penalty appropriate because defendant favored certain clients over others)
; In the Matter of Kenneth Von Kohorn et al., 1995 SEC LEXIS 354 (February 22, 1995)(failure to fully disclose management fees and timely file Form ADVs warranted imposition of $ 250,000 civil penalty); SEC v. Strategic Management Inc., SEC Litigation Release, No. 13,710 (N.D. Tex. July 9, 1993)(total penalty of $ 200,000 assessed on defendants for failing to disclose their potential profit for assigning their advisory contract).
In those cases cited where lesser penalties were assessed, there were circumstances, not present in this matter, which warranted such an extreme degree of leniency. See SEC v. Patel, 1994 U.S. Dist. LEXIS 9479 (S.D.N.Y. July 12, 1994), aff'd in part, rev'd in part, remanded, 61 F.3d 137 (2d Cir. 1995); In the Matter of Hazel B. Canham, Investment Advisers Act Release No. 1386 (September 30, 1993). In Patel, no civil penalties were assessed when the defendant had already paid a criminal fine, disgorged illegal profits, and transferred substantial assets to settle a private securities action. Here, only disgorgement has been imposed upon Moran Sr., thus his circumstances are inapposite to the situation in Patel. Similarly, in Canham, while the defendant was ordered to pay a $ 5000 civil penalty for her Adviser Act liability, her business was only worth $ 20,000. Considering that Moran Sr.'s businesses still maintain a combined worth of some five million dollars, the penalty in Canham was far more severe.
As previously discussed, the court finds that contrary to Moran Sr.'s protestations, his violation of Section 206(2) of the Advisers Act constituted a fraud upon his clients. Notwithstanding such a finding, Moran acted with negligence and apparently had no intent to violate the law. Accordingly, the court finds that the violations of Section 206(2) by Moran Sr. and Moran Asset constitute a First Tier violation, rather than a Second Tier violation, as urged by the SEC. While the language of the statute describing the Second Tier penalty includes fraudulent conduct, there is an unmistakable difference between conduct which negligently operates as a fraud when compared to conduct engaged in with the intent to defraud clients. It is illogical to view negligent actions in the same light as intentional wrongdoing.
Although not rising to the level of a Second Tier violation, the seriousness of the conduct of Moran Sr. and Moran Asset cannot be understated. Investment advisers are entrusted with the responsibility and duty to act in the best interest of their clients. Here, the defendants obviously breached their duty. Moreover, Moran Sr. did not transfer the money from his personal accounts to rectify the shortage to his clients' accounts. His failure to recognize the harm that his negligence caused, coupled with apparent lack of understanding of the significance of his actions, warrant the imposition of the maximum penalty permitted under the First Tier for Moran Sr. Due to the extreme loss of business suffered by Moran Asset, the court will not impose upon it the maximum penalty of $ 50,000. Accordingly, the court imposes civil penalties in the amount of $ 5,000 and $ 25,000 upon Moran Sr. and Moran Brokerage for their respective violations of Section 206(2) of the Advisers Act.
Considering the willful and intentional conduct engaged in by the defendants regarding the filings of the Forms ADV and BD, the court agrees that these transgressions rise to the level of Second Tier violations. As the court has previously found, the information regarding directors is material. Moran I, 922 F. Supp. at 899. The failure to provide accurate information regarding the directors of the company precluded any potential client from accurately learning "who has corporate control and influence on the management of the firm, whether there is director independence, and whether the directors bring any potential conflict of interest to the firm." Id. Together with the fact that the violations continued over a period of years, Moran Sr.'s seeming refusal to acknowledge the gravity of his actions, and his repeated attempts to push the blame on to others, the court believes that civil penalties are particularly appropriate.
Under the circumstances of this case, although the failure to accurately disclose the directors of his firms violates three statutory provisions and two rules, Moran Sr.'s actions constitute only two transgressions: the misrepresentation of the directorships of Moran Asset and the same misrepresentation affecting Moran Brokerage. Nevertheless, the court is mindful of the financial losses and pain personally suffered by Moran Sr. The court, therefore, will impose upon Moran Sr. a penalty in the amount of $ 10,000 for his violations relating to the Forms ADV, and a penalty in the amount of $ 10,000 for his violations relating to the Forms BD.
The court has found Moran Asset and Moran Brokerage liable for misrepresenting the directorships of each firm, in deliberate disregard of the regulatory requirements. As previously explained, although the conduct at issue involves four statutory and two Rule violations, the conduct actually involves simply two acts. Specifically, the misrepresentation of the directorships Moran Asset and the same misrepresentations respecting to Moran Brokerage. Consequently, the court will assess civil penalties in the amount of $ 25,000 each against Moran Asset and Moran Brokerage. The court believes that this amount of penalty, while taking into account the specific circumstances of Moran Sr and his firms, is necessary for the protection of investors, the market, and to deter future violations by Moran Sr. and his firms.
Having previously determined the liability of the defendants in this matter, the court hereby incorporates the previous findings contain in its opinion of April 2, 1996 and orders that:
(1) Frederick A. Moran and Moran Asset Management Inc. be permanently enjoined from violating Section 206(2) of the Advisers Act [ 15 U.S.C. § 80b-6(2)]; Section 204 of the Advisers Act and Rule 204-1(b)(1) thereunder [ 15 U.S.C. § 80b-4; 17 C.F.R. § 275.204-1(b)(1)]; and Section 207 of the Advisers Act [ 15 U.S.C. § 80b-7];
(2) Frederick A. Moran and Moran & Associates, Inc., Securities Brokerage be permanently enjoined from violating Section 15(b) of the Exchange Act and Rule 15b3-1 thereunder [ 15 U.S.C. § 78o(b); 17 C.F.R. § 240.15b3-1];
(3) Frederick A. Moran disgorge $ 9551.17 plus prejudgment interest calculated to March 31, 1996 to the United States Treasury;
(4) Frederick A. Moran pay a civil money penalty in the amount of $ 25,000 dollars to the United States Treasury;
(5) Moran Asset Management Inc. pay a civil money penalty in the amount of $ 50,000 to the United States Treasury; and
(6) Moran & Associates, Inc. Securities Brokerage pay a civil money penalty in the amount of $ 25,000 to the United States Treasury
The Clerk of the Court is directed to enter judgment accordingly.
IT IS SO ORDERED
Dated: November 1, 1996
New York, New York
Bernard Newman, U.S.D.J., by designation