would constitute a windfall because the company's new management at one time considered suing Victor Posner, but decided against it, and because distribution to Fischbach would provide no benefit to those who were directly injured by whatever derelictions the Posners may have been guilty of.
In cases of securities law violations, the District Court "has broad equitable power to fashion appropriate remedies, including ordering that culpable defendants disgorge their profits." SEC v. First Jersey Securities, Inc., 101 F.3d 1450, 1474 (2d Cir. 1996). As part of this broad equitable power, the District Court also "has broad discretion in approving a proposed plan of distribution of such funds." SEC v. Levine, 689 F. Supp. 317, 320 (S.D.N.Y. 1988), rev'd on other grounds, 881 F.2d 1165 (2d Cir. 1989); see also Louis Loss & Joel Seligman, Securities Regulation 3745 (3d ed. 1991) ("The courts exercise considerable discretion both in fixing the quantum of disgorgement and in deciding who gets it.").
The disgorgement remedy is not intended to compensate investors; rather, it is intended to deprive the violator of unjust enrichment, thereby furthering the deterrence objectives of the securities laws. First Jersey, 101 F.3d at 1474; see also SEC v. Commonwealth Chemical Securities, Inc., 574 F.2d 90, 102 (2d Cir. 1978) (Friendly, J.) ("The primary purpose of disgorgement is not to compensate investors. Unlike damages, it is a method of forcing a defendant to give up the amount by which he was unjustly enriched."). This purpose distinguishes disgorgement from the similar remedy of restitution. While some cases have equated the two remedies, see, e.g., Tull v. United States, 481 U.S. 412, 424, 95 L. Ed. 2d 365, 107 S. Ct. 1831 (1987), they are distinct in that restitution aims to make the damaged persons whole, while disgorgement aims to deprive the wrongdoer of ill-gotten gains. SEC v. Huffman, 996 F.2d 800, 802 (5th Cir. 1993); see also SEC v. Tome, 833 F.2d 1086, 1096 (2d Cir. 1987). Thus, an order requiring a securities laws violator to disgorge illegal profits might require the disgorgement of "an amount more or less than that required to make the victims whole." Id. ; see also First Jersey, 101 F.3d at 1475 (holding that disgorgement amount should be calculated by measuring illegal profits, not the amount needed to reimburse defrauded investors).
Once the illegal profits have been disgorged, the District Court must make an equitable distribution of the funds. In many cases, once the primary purpose of disgorgement has been served by depriving the wrongdoer of illegal profits, the equitable result is to return the money to the victims of the violation. Such a distribution is not required by statute, however, and may not be appropriate where, for example, "numerous victims suffered relatively small amounts . . . ; where the victims cannot be identified . . . ; [or] where there are no victims entitled to damages." SEC v. Lorin, 869 F. Supp. 1117, 1129 (S.D.N.Y. 1994), aff'd 76 F.3d 458 (2d Cir. 1996). Where distribution to identifiable injured parties is not feasible or appropriate, the money disgorged by the defendant is paid to the Treasury. See, e.g., SEC v. Dimensional Entertainment Corp., 1996 U.S. Dist. LEXIS 2824, 1996 WL 107290 (S.D.N.Y. 1996); SEC v. Marcus Schloss & Co., Inc., 714 F. Supp. 100 (S.D.N.Y. 1989).
It bears emphasis that the securities law violations proved at trial consisted of the Posners' failure to disclose their arrangement with Milken and Boesky, While those violations presumably caused distortions in the market for Fischback stock from the time Boesky started accumulating it on Posners' behalf, quantifying that distortion would be conjectural, as would be identifying "victims" of the nondisclosure.
Thus the task presently before the Court is to make an equitable distribution of the Fund, based on the facts and circumstances of this case. The Fund represents money looted by the Posners from Fischbach, and consequently Fischbach argues that the money should be paid to it. Fischbach, however, has no equitable claim to the Fund. The damage done to Fischbach by the Posners occurred before AIG acquired Fischbach. Awarding the Fund to Fischbach would thus be a windfall to AIG, and would do nothing to compensate those persons directly damaged by the Posners' looting of Fischbach. Fischbach's equitable position is further weakened by the fact that after the purchase by AIG, Fischbach's new management considered suing Victor Posner, but decided not to do so. The fact that the SEC had already brought this action does not excuse Fischbach's failure to act. The SEC does not seek to vindicate discrete private rights, and an SEC action does not preclude private parties from bringing their own actions. Having let "the government pay the bill for the lawsuit," Marcus Schloss, 714 F. Supp. at 102, Fischbach is now seeking a windfall. An ancient maxim of equity holds that "equity aids the vigilant, not those who slumber on their rights." See 11A Wright & Miller, Federal Practice and Procedure § 2946 at 113 (2d ed. 1995). Thus, even if Fischbach had a colorable legal claim against the Posners, it has no equitable claim to the Fund
The persons damaged by the Posners' looting of Fischbach were the minority shareholders who held Fischbach stock during the years the Posners controlled the company. It would be difficult and costly to identify and locate these shareholders, and it would be difficult to devise a coherent formula for distributing money among them. It would therefore be impracticable to pay the Fund to the minority shareholders. It bears emphasis that this case differs from the typical securities fraud case in that the money disgorged represented money looted from a corporation and it would be difficult if not impossible to construct a distribution that would restore the status quo. SEC v. Courtois, [1984-85 Transfer Binder] Fed.Sec.L.Rep. (CCH) P92,000 (S.D.N.Y. April 11, 1985) (disgorgement paid to Treasury in view of difficulty of identifying particular claimants and likelihood that distribution would result in only nominal distribution to claimants),
The trustee for PEC also has no equitable claim to the Fund. The trustee's submission fails to show how PEC was damaged by the Posners' looting of Fischbach. The trustee also reached a settlement with the Posners covering all claims that could be asserted by the trustee against the Posners, and the trustee would therefore realize a double recovery if he received any part of the disgorgement. Based on the findings made in the SEC enforcement action, the Court granted summary judgment on liability in favor of Mark L. Glosser, the bankruptcy trustee for Pennsylvannia Engineering Corporation in his action against Victor Posner. In re Ivan F. Boesky Securities Litigation, 848 F. Supp. 1119 (S.D.N.Y. 1994). Because, as already mentioned, he has through settlement with Posner, already recovered all damages that could be attributed to the violations proved in the SEC action, he is not entitled to any portion of the disgorgement money.
Fischbach and PEC have no equitable claims to the Fund, and finding that it would be impracticable to pay the Fund to those parties damaged by the Posners' looting of Fischbach, the Fund should be paid to the Treasury. This result is particularly fitting in this case in light of the Posners' long and inglorious history of preying on public companies and the many times the government has sought to compel their compliance with the law. Paying the money to the Treasury will help defray the cost of those efforts.
Under all the particular facts and circumstances of this case, the Court, in the exercise of an informed discretion, agrees with the SEC that the Fund should be paid to the Treasury. The motion of the SEC is granted and payment of the Fund is directed to be made to the United States Treasury, as set forth in the accompanying order hereon.
Dated: February 25, 1997
New York, NY
Senior U.S. District Judge