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SEC v. Rosenthal

United States Court of Appeals for the Second Circuit

June 9, 2011, Decided

Nos. 10-1204-cv (L); 10-1253 (con)

Opinion

 [*2]  SUMMARY ORDER

ON CONSIDERATION WHEREOF, IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that the judgment of the district court is AFFIRMED in part and VACATED in part.

Defendants-Appellants appeal from the judgment of the United States District Court for the Southern District of New York (Maas, Mag. J.), entered on February 1, 2010, granting partial summary judgment to Plaintiff-Appellee Securities and Exchange Commission ("SEC"), ordering disgorgement, granting injunctive  [**2] relief against Defendants-Appellants Zvi and Amir Rosenthal, and imposing penalties on Defendants-Appellants Zvi, Amir, and Ayal Rosenthal. On appeal, Defendants-Appellants Oren, Efrat, and Rivka Rosenthal (collectively, "relief defendants") challenge the district court's order of disgorgement  [*3]  against them and use of the Internal Revenue Service's ("IRS") underpayment rate to calculate prejudgment interest.1 Zvi and Amir Rosenthal challenge the district court's imposition of penalties under section 21A of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78u-1.2 We assume the parties' familiarity with the facts and procedural history of the case.

] "The district court has broad discretion not only in determining whether or not to order disgorgement  [**3] but also in calculating the amount to be disgorged," and we accordingly review a disgorgement order for abuse of discretion. SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1474-75 (2d Cir. 1996). ] Disgorgement may be ordered "against a person who is not accused of wrongdoing in a securities enforcement action where that person: (1) has received ill-gotten funds; and (2) does not have a legitimate claim to those funds." SEC v. Cavanagh, 155 F.3d 129, 136 (2d Cir. 1998).

With respect to the first prong of the Cavanagh test, the relief defendants contend that although their limited partnership, Aragon Partners LP ("Aragon"), admittedly received $962,905.58 in illicit insider trading profits in 2004, these profits cannot be traced to the distributions that they received in May 2006. They emphasize that Aragon held more than $1.5 million in legitimately obtained assets prior to the illicit trades in 2004, and that it continued to make legitimate trades, both profitably and unprofitably, after that period of illicit trading. However, it is undisputed that the ill-gotten gains of the insider trading were commingled in the Aragon account. The SEC is not required to trace specific funds to their  [**4] ultimate recipients in such a situation. Cf. SEC v. Banner Fund Int'l, 211 F.3d 602, 617, 341 U.S. App. D.C. 175 (D.C. Cir. 2000) (reasoning that ] "disgorgement is an equitable obligation to return a sum equal to the amount wrongfully obtained, rather than a requirement to replevy a specific asset"). Imposing such a tracing requirement would allow an insider trading defendant to escape disgorgement by spending down illicit gains while protecting legitimately obtained assets or, as was the case here, by commingling and transferring such profits. Because the balance in the account after the distributions was less than the amount of illicit profits, the distributions must necessarily have contained funds subject to disgorgement. Denying disgorgement in such a situation because of the SEC's inability to trace the funds would be inconsistent with disgorgement's purpose "to prevent unjust enrichment." Id.

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426 Fed. Appx. 1 *; 2011 U.S. App. LEXIS 11732 **; Fed. Sec. L. Rep. (CCH) P96,331

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, -v - ZVI ROSENTHAL, AMIR ROSENTHAL, AYAL ROSENTHAL, OREN ROSENTHAL, EFRAT ROSENTHAL, RIVKA ROSENTHAL, Defendants-Appellants, ARAGON CAPITAL MANAGEMENT, LLC, ARAGON PARTNERS, LP, NOGA DELSHAD, Defendants.

Notice: PLEASE REFER TO FEDERAL RULES OF APPELLATE PROCEDURE RULE 32.1 GOVERNING THE CITATION TO UNPUBLISHED OPINIONS.

Subsequent History: Motion granted by, Motion granted by, in part, Motion denied by, in part, Claim dismissed by SEC v. Aragon Capital Advisors, LLC, 2011 U.S. Dist. LEXIS 82531 (S.D.N.Y., July 25, 2011)

Prior History:  [**1] Appeal from the United States District Court for the Southern District of New York (Maas, Mag. J.).

SEC v. Aragon Capital Mgmt., 672 F. Supp. 2d 421, 2009 U.S. Dist. LEXIS 112656 (S.D.N.Y., 2009)

CORE TERMS

disgorgement, district court, profits, legitimate claim, illicit, trading, funds, Defendants-Appellants, distributions

Civil Procedure, Appeals, Standards of Review, Abuse of Discretion, Securities Law, Civil Liability Considerations, Remedies, Equitable Relief, Securities Exchange Act of 1934 Actions, Insider Trading, Disgorgement of Profits, Judgment Interest, Prejudgment Interest, Tax Law, Tax Credits & Liabilities, Interest on Assessments & Penalties, Underpayment of Taxes, General Overview, Penalties, Regulators, US Securities & Exchange Commission, Penalties for Knowing & Willful Violations, De Novo Review, Constitutional Law, Bill of Rights, Fundamental Rights, Cruel & Unusual Punishment, Reviewability of Lower Court Decisions, Preservation for Review