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SECURITIES AND EXCHANGE COMMISSION v. BREED

April 29, 2004.

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, -against- ROBERT BREED, PATRICIA BREED, RICHARD BREED & KARINE GOVEIA BREED, Defendants


The opinion of the court was delivered by: ANDREW PECK, Magistrate Judge

REPORT AND RECOMMENDATION

Plaintiff Securities and Exchange Commission ("SEC") brought this action against defendant Robert Breed and relief defendants Patricia Breed, Richard Breed, and Karine Goveia Breed (Robert Breed's mother, brother, and wife, respectively) for violations of the federal securities laws, to wit, insider trading. On November 5, 2003, Judge Haight granted default permanent injunctions against defendant Robert Breed and the relief defendants (collectively, "defendants"), and held them liable for disgorgement (plus prejudgment interest) in amounts to be determined at inquest. (Dkt. Nos. 42-45.) By Order dated March 12, 2004, Judge Haight referred this case to me for an inquest. (Dkt. No. 54.) I directed the SEC to serve and file inquest papers by March 30, 2004, which it did (see Dkt. Nos. 57-58), and directed defendants to file opposition papers by April 15, 2004, which they did not. (Dkt. No. 55: 3/19/04 Order.) FACTS

"Where, as here, `the court determines that defendant is in default, the factual allegations of the complaint, except those relating to the amount of damages, will be taken as true.'" Chen v. Jenna Lane, Inc., 30 F. Supp.2d 622, 623 (S.D.N.Y. 1998) (Carter, D.J. & Peck, M.J.) (quoting 10A C. Wright, A. Miller & M. Kane, Federal Practice & Procedure: Civil 3d § 2688 at 58-59 (3d ed. 1998)).*fn1 The Amended Complaint alleges that from October 1996 through October 1997, Robert Breed received stock tips from his friend Jeffrey Streich "that contained material, nonpublic information concerning seven publicly traded companies," to wit, (1) Coram Healthcare, Inc., (2) Owen Healthcare, Inc., (3) Starsight Telecast, Inc., (4) Pacific Rehabilitation & Sport Medicine, Inc., (5) Reading & Bates Corp., (6) Rohr, Inc., and (7) Georgia-Pacific Corporation. (Dkt. No. 22: Am. Compl. ¶ 19; see also id. ¶¶ 12-18.) Streich in turn had received the information from Marisa Bardis, an attorney for Smith Barney (November 1993 to April 1997) and then Morgan Stanley (April 1997 to November 1997) with access to lists of companies about which the brokerage firms had material, non-public information, often about proposed acquisitions. (Am. Compl. ¶¶ 11, 20-21.) Robert "Breed knew that the tips Streich provided him were based on inside information." (Am. Compl. ¶ 20.)

  Robert "Breed traded, in his own account, six (Coram, Owen, Pacific Rehab, Starsight, Rohr, and Georgia-Pacific) of the seven securities that were the subjects of Streich's tips." (Am. Compl. ¶ 22.) "In addition, [Robert] Breed tipped, or directed the trading in the accounts of [relief defendants] Patricia Breed, Richard Breed, and Karine Breed." (Am. Compl. ¶ 23.) The specific trades are further detailed in the Amended Complaint in paragraphs 24-30.

  The Complaint asserts claims under Exchange Act § 10(b) and Rule 10b-5 (Am. Compl. ¶¶ 33-36), Exchange Act § 14(e) and Rule 14e-3 (Am. Compl. ¶¶ 37-39), Exchange Act § 7(c) and Regulation T (Am. Compl. ¶¶ 40-42), and also asserts a disgorgement claim against the relief defendants (Am. Compl. ¶¶ 43-46). ANALYSIS

  The Second Circuit has approved the holding of an inquest by affidavit, without an in-person court hearing, "`as long as [the Court has] ensured that there was a basis for the damages specified in the default judgment.'" Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 111 (2d Cir. 1997) (quoting Fustok v. ContiCommodity Servs., Inc., 873 F.2d 38, 40 (2d Cir. 1989)).*fn2

  A. Applicable Law Regarding Disgorgement

  "Once the district court has found federal securities law violations, it has broad equitable power to fashion appropriate remedies, including ordering that culpable defendants disgorge their profits." SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1474 (2d Cir. 1996), cert. denied, 522 U.S. 812, 118 S.Ct. 57 (1997); see also, e.g., SEC v. Fischbach Corp., 133 F.3d 170, 175 (2d Cir. 1997); SEC v. Lorin, 76 F.3d 458, 462 (2d Cir. 1996) (district court "must be given wide latitude in these matters") (quoting SEC v. Patel, 61 F.3d 137, 140 (2d Cir. 1995)); SEC v. Robinson, 00 Civ. 7452, 2002 WL 1552049 at *6 (S.D.N.Y. July 16, 2002) (Peck, M.J.); SEC v. McCaskey, 98 Civ. 6153, 2002 WL 850001 at *2 (S.D.N.Y. Mar. 26, 2002) (Peck, M.J.); SEC v. Rosenfeld, 97 Civ. 1467, 2001 WL 118612 at *1 (S.D.N.Y. Jan. 9, 2001); SEC v. Zubkis, 97 Civ. 8086, 2000 WL 218393 at *11 (S.D.N.Y. Feb. 23, 2000).

 
The Second Circuit has held that: The primary purpose of disgorgement as a remedy for violation of the securities laws is to deprive violators of their ill-gotten gains, thereby effectuating the deterrence objectives of those laws. See, e.g., SEC v. Wang, 944 F.2d 80, 85 (2d Cir. 1991); SEC v. Commonwealth Chemical Securities, Inc., 574 F.2d 90, 102 (2d Cir. 1978). "The effective enforcement of the federal securities laws requires that the SEC be able to make violations unprofitable. The deterrent effect of an SEC enforcement action would be greatly undermined if securities law violators were not required to disgorge illicit profits." SEC v. Manor Nursing Centers, Inc., 458 F.2d [1082.] 1104 [(2d Cir. 1972)]; see SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1308 (2d Cir. 1971) ("It would severely defeat the purposes of the Act if a violator of Rule 10b-5 were allowed to retain the profits from his violation.").
SEC v. First Jersey Sec., Inc., 101 F.3d at 1474: accord, e.g., SEC v. Robinson, 2002 WL 1552049 at *7; SEC v. McCaskey, 2002 WL 850001 at *3.*fn3

  Unlike damages, "the primary purpose of disgorgement [to the SEC] is not to compensate investors," but rather to force "a defendant to give up the amount by which he was unjustly enriched." SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90, 102 (2d Cir. 1978) (Friendly, C.J.); accord, e.g., SEC v. Tome, 833 F.2d at 1096; SEC v. Robinson, 2002 WL 1552049 at *7; SEC v. McCaskey, 2002 WL 850001 at *3; SEC v. McCaskey, 2001 WL 1029053 at *7 ("[T]he proper measure of disgorgement is the amount of the wrongdoer's unjust enrichment."); SEC v. Rosenfeld, 2001 WL 118612 at *1; SEC v. Bilzerian, 814 F. Supp. at 120-21. "It is well established that disgorgement is remedial rather than punitive, since a fundamental policy underlying disgorgement is to prevent the unjust enrichment of the wrongdoer rather than to punish him." SEC v. Grossman, 87 Civ. 1031, 1997 WL 231167 at *9(S.D.N.Y. May 6, 1997), aff'd in part, vacated in part on other grounds sub nom. SEC v. Hirshberg, Nos. 97-6171, 97-6259, 173 F.3d 846 (table), 1999 WL 163992 (2d Cir. Mar. 18, 1999).*fn4

  "The district court has broad discretion not only in determining whether or not to order disgorgement but also in calculating the amount to be disgorged." SEC v. First Jersey Sec., Inc., 101 F.3d at 1474-75; accord, e.g., SEC v. Robinson, 2002 WL 1552049 at *7; SEC v. McCaskey, 2002 WL 850001 at *4; see also, e.g., SEC v. Lorin, 76 F.3d at 462; SEC v. Posner, 16 F.3d 520, 522 (2d Cir. 1994) (upholding district court disgorgement order, since "[t]he [district] court has broad discretion to tailor the sanction to the wrongful conduct involved."); SEC v. Rosenfeld, 2001 WL 118612 at *2. The disgorged amount must be "`causally connected to the violation,'" but it need not be figured with exactitude. SEC v. First Jersey Sec., Inc., 101 F.3d at 1475 (quoting SEC v. Patel, 61 F.3d at 139);accord, e.g., SEC v. Robinson, 2002 WL 1552049 at *7; SEC v. McCaskey, 2002 WL 850001 at *4. The only requirement is that the disgorgement sought be a reasonable approximation of the profits causally related to the wrongdoing. SEC v. First Jersey Sec., Inc., 101 F.3d at 1475: accord, e.g., SEC v. Robinson, 2002 WL 1552049 at *7: SEC v. McCaskey, 2002 WL 850001 at *4; see also, e.g., SEC v. Patel, 61 F.3d at 139; SEC v. Rosenfeld, 2001 WL 118612 at *2; SEC v. Bilzerian, 814 F. Supp. at 121-22.

  "Where disgorgement calculations cannot be exact, `any risk of uncertainty . . . should fall on the wrongdoer whose illegal conduct created that uncertainty.'" SEC v. Lorin, 76 F.3d at 462 (quoting SEC v. Patel, 61 F.3d at 140); accord, e.g., SEC v. Robinson, 2002 WL 1552049 at *8: SEC v. McCaskey, 2002 WL 850001 at *4; see also, e.g., SEC v. First Jersey Sec., Inc., 101 F.3d at 1475; SEC v. First City Fin. Corp., 890 F.2d at 1232 (burden shifts to wrongdoer to show what transactions were unaffected by his offenses); SEC v. Bilzerian, 814 F. Supp. at 121. "Thus, once the Commission shows the existence of a fraudulent scheme in violation of federal securities laws, the burden shifts to the defendant to `demonstrat[e] that he received less than the full amount allegedly misappropriated and sought to be disgorged.'" SEC v. Rosenfeld, 2001 WL 118612 at *2 (quoting SEC v. Benson, 657 F. Supp. 1122, 1133 (S.D.N.Y. 1987) (Leval, D.J.)); accord, e.g., SEC v. Robinson, 2002 WL 1552049 at *8; SEC v. McCaskey, 2002 WL 850001 at *4; SEC v. Grossman, 1997 WL 231167 at *8 ("The SEC bears the burden of persuasion that its proposed disgorgement figure reasonably approximates the amount of unjust enrichment. . . . [O]nce the SEC has established that the proposed amount is reasonable, the burden shifts to the defendant to demonstrate that the amount requested is not a reasonable approximation of the unlawfully obtained profits."); SEC v. Bilzerian, 814 F. Supp. at 121. B. Application of Disgorgement Law to This Case

  Judge Haight already has ordered disgorgement; the purpose of the inquest is to determine the appropriate amount of the disgorgement. The Court has carefully examined the Declaration of Matthew B. Greiner (and its exhibits) submitted by the SEC to summarize defendant Robert Breed's and the relief defendants' trades and trading profits. (Dkt. No. 58.) The Court agrees that Greiner's declaration accurately summarizes the trading records.*fn5

  The appropriate disgorgement amounts, therefore, are as follows:
Disgorgement Amount
Robert Breed $54,710.00 Karine Breed $51,950.00 Patricia Breed $50,050.00 Richard Breed $32,982.00
(Dkt. No. 58: Greiner Dec. ¶¶ 9, 14, 28, 34; see also ...

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