the trades he recommended for his brother. Neither the Warde Trust nor Ann Brockhurst are truly "third parties". Warde, although not the trustee of the Trust at the time of his Kidde trades, was and remains the trust's stated beneficiary. PX 57. With respect to Brockhurst's trades, Warde himself opened the account on July 6 -- the day before Kidde's public announcement -- directed the purchases of Kidde warrants, Tr. 368-70, and had discretionary authority over the account. PX 27. Considering the degree of control that Warde exercised over the Brockhurst account, the profits on Kidde transactions in that account should be characterized as profits that accrued to Warde, and therefore must be disgorged.
Gregory Warde's profits present a different issue, however. The jury found that Warde violated the securities laws when he tipped Gregory Warde on three occasions in July 1987. The SEC therefore concludes that Warde should disgorge the profits realized by his brother as profits connected to Warde's violation of the securities laws. However, the SEC has failed to show how Warde benefitted in any way from his brother's trades. As noted above, the remedy of disgorgement is designed to prevent the unjust enrichment of the violator ; here, the SEC has failed to show how Warde was enriched by his brother's trades. Absent such evidence, and keeping in mind that the goal of disgorgement is not to punish but to return ill-gotten gains, I decline to order Warde to disgorge the profits of Gregory Warde's trades.
C. Prejudgment Interest
The decision of whether and at what rate to grant prejudgment interest are matters confided to the district court's broad discretion. SEC. v. First Jersey, 101 F.3d at 1477. Warde asserts that he should not be liable for the total amount of prejudgment interest requested by the SEC because the SEC itself was responsible for extensive delays in bringing this case to trial.
This assertion is inaccurate in part and irrelevant in its entirety. First, as a factual matter, Warde and Downe themselves created a substantial delay in the progress of this action, stonewalling the SEC's investigation by asserting their Fifth Amendment privilege until 1992. Second, the Court of Appeals has already rejected the argument Warde makes here. In First Jersey, the Court of Appeals found the award of prejudgment interest for the entire period from the illicit gains to the entry of judgment to be appropriate, "even if defendants were correct that the present litigation was protracted through some fault of the SEC." 101 F.3d 1450, 1476-77 (2d Cir. 1996). The Court so concluded because "defendants plainly had the use of their unlawful profits for the entire period." Id. The same result obtains here. Succinctly stated, Warde is not entitled to a 10-year interest free loan in the amount of his illicit profits. Therefore, Warde must pay a total of $ 1,264,501 in interest, based on the Internal Revenue Service rate used for underpayment of taxes.
D. Civil Penalty
Finally, the SEC seeks a civil penalty of three times the illicit profits attributable to Warde's trades in his brokerage accounts and the account of Ann Brockhurst pursuant to the Insider Trading Sanctions Act of 1984 ("ITSA"), codified at 15 U.S.C. § 78u(d)(2).
In enacting ITSA, Congress sought to remedy the "inadequate deterrent provided by present enforcement remedies for insider trading," and observed that an "injunction . . . serves only a remedial function and does not penalize a defendant for the illegal conduct [and] disgorgement . . . merely restores a defendant to his original position without extracting a real penalty for his illegal behavior." H.R. Rep. No. 98-355, at 7-8 (1983), reprinted in 1984 U.S.C.C.A.N. 2274, 2280-81. The ITSA provides that "the amount of such penalty shall be determined by the court in light of the facts and circumstances, but shall not exceed three times the profit gained or loss avoided as a result of such unlawful purchase or sale." 15 U.S.C. § 78u(d)(2)(A).
While I find that Warde's conduct justifies the imposition of a civil penalty, I do not find that the 300 percent penalty requested by the SEC is warranted. Warde did not attempt to conceal his trades by trading under fictitious names or in offshore accounts; rather he invested in his own accounts and in the account of his wife. He has no prior history of insider trading violations, and his illicit transactions with respect to Kidde, although repeated, involved only one security.
These facts notwithstanding, some penalty must be assessed to deter Warde and others like him from engaging in such conduct in the future. Based on the facts and circumstances, a 100 percent penalty is appropriate. Warde made repeated trades in Kidde warrants, delayed the SEC's investigation by asserting the Fifth Amendment, and gave conflicting testimony throughout the course of the litigation to cover up his fraud. Moreover, he was found by the jury to have tipped his half-brother Gregory Warde. Therefore, while I decline to impose a 300 percent penalty, I impose a civil penalty of 100 percent of Warde's illicit profits.
For the foregoing reasons, defendant's motion for judgment as a matter of law is denied. A permanent injunction will issue against Warde. Warde must also disgorge $ 871,725, on which Warde will pay prejudgment interest of $ 1,264,501, based on the Internal Revenue Service rate used for underpayment of taxes. Finally, Warde must pay a civil penalty of $ 871,725.
Shira A. Scheindlin
Dated: New York, New York
June 17, 1997