The opinion of the court was delivered by: Constance Baker Motley, United States District Judge
MEMORANDUM OPINION & ORDER
The Securities and Exchange Commission ("SEC" or "Commission") brought this action on April 24, 1997, charging Joseph C. Kane, Jr. (the "defendant") with defrauding multiple brokerage houses, misappropriating their funds, fraudulently misappropriating a total of approximately $595,000 of his customers' funds and securities, and forging signatures and fabricating documents to perpetuate and conceal this fraud, in violation of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.
Without admitting or denying the Commission's allegations against him, Kane consented to the entry of a Partial Final Consent Judgment ("Consent Judgment"), enjoining him from future violations of those statutes. The Consent Judgment required defendant to "disgorge his ill-gotten gains from the conduct alleged in the Complaint, plus prejudgment interest . . . in an amount to be determined by the parties or, failing that, by the Court" and to "pay civil penalties as a result of the conduct alleged in the Complaint in an amount to be determined by the parties or, failing that, by the Court."
Whereas the Commission subsequently determined that Kane had fully repaid his victims, with interest, and that Kane had no other ill-gotten gains related to acts alleged in the Complaint, only the amount of the civil judgment remained to be determined by the parties pursuant to the Consent Judgment. The parties having failed to agree on an amount for a civil penalty, the matter has now been submitted to the court for resolution, by means of a motion to set the amount of defendant's civil penalty, brought by the SEC.
The facts related to liability are essentially undisputed inasmuch as the defendant's agreements with the SEC prohibit him from denying the allegations in the Complaint. In cursory summary, Kane was a broker at Dean Witter Reynolds, Inc. ("Dean Witter") from 1983 through August 1995 and at Laidlaw Equities, Inc. ("Laidlaw") from 1995 through 1996. From January 1989 through April 1996, defendant defrauded four brokerage customers. During this period, defendant misappropriated approximately $595,000 of customer funds by misrepresenting investment opportunities, forging customer signatures, diverting money from one customer to repay another previously defrauded customer, and fabricating brokerage documents to conceal his activities.
Mr. Kane went to great lengths to perpetuate his fraudulent activities. As an example, Kane forged the signatures of a client pursuant to a plan to pledge $400,000 worth of the client's bonds as collateral for a $900,000 line of credit to Software Affiliates of America, Inc., a privately-held company based in California. When the client discovered that his bonds were pledged as collateral and demanded an explanation from his broker, Kane lied to him, telling his client that the bonds had been returned to his account. Mr. Kane presented his client with a fabricated, computer-generated document which purported to reflect that the bonds had been returned to his account. Mr. Kane went so far as to have a friend represent that he was Kane's supervisor at Dean Witter and to assure the client that his bonds would be returned.
The record, which the defendant does not dispute, indicates that the foregoing example is reflective and representative of a pattern of outrageous conduct by the defendant. Mr. Kane abused the trust his clients placed in their relationship with him and the firms for which he worked. He intentionally and willfully stole from his clients. He lied, forged, and falsified documents in furtherance of his fraudulent activities. He lied, forged, and falsified documents pursuant to his attempts to conceal his reprehensible conduct. His attempts were unsuccessful: Mr. Kane got caught.
On September 29, 1997, defendant was indicted in U.S. District Court for the Southern District of New York on charges mirroring the claims in the Commission's Complaint with respect to one of the four investors Kane defrauded. On July 15, 1998, defendant pled guilty to the criminal charges. On October 16, 1998, the criminal court fined Kane $4,000 and sentenced him to four years probation and 600 hours of community service. The court did not impose an order of restitution, as Kane had previously repaid his victims.
The SEC now seeks an order requiring Kane to pay a "substantial civil penalty"*fn1 pursuant to Section 20(d)(2)(C) of the Securities Act, 15 U.S.C. § 77t(d)(2)(C) and Section 21(d)(3)(B)(iii) of the Exchange Act, 15 U.S.C. § 78u(d)(3)(B)(iii). Congress promulgated these sections pursuant to the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the "Penalty Act"). "By enacting the Penalty Act, Congress sought to achieve the dual goals of punishment of the individual violator and deterrence of future violations." SEC v. Moran, 944 F. Supp. 286, 296 (S.D.N.Y. 1996); SEC v. Coates, 137 F. Supp.2d 413, 428 (S.D.N.Y. 2001); SEC v. Credit Bancorp. Ltd., 2002 WL 31422602 at *1 (S.D.N.Y. Oct 29, 2002) (quoting Moran). Where a securities law violation has been established, the court is authorized to impose civil monetary penalties, with the amount of any penalty to be "determined by the court in light of the facts and circumstances" of the particular case. 15 U.S.C. § 77t(d)(2)(A), 78u(d)(3)(B)(i).
Section 20(d)(2) of the Securities Act and Section 21(d)(3) of the Exchange Act provide for three tiers of maximum penalties for specified degrees of culpability. The third tier allows for a penalty for each violation of the Act of up to $100,000 for a natural person or the gross amount of pecuniary gain to a defendant as a result of the violation if the violation (1) involved "fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement" and (2) such violation directly or indirectly "resulted in . . . or created a significant risk of substantial losses" to other persons. See Credit Bacorp., Ltd., 2002 WL 31422602 at *2 (S.D.N.Y. Oct. 29, 2002) (citing ...