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United States Securities and Exchange Commission v. Ahmed

United States District Court, D. Connecticut

September 6, 2018

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
IFTIKAR AHMED, Defendant, and IFTIKAR ALI AHMED SOLE PROP; I-CUBED DOMAINS, LLC; SHALINI AHMED; SHALINI AHMED 2014 GRANTOR RETAINED ANNUNITY TRUST; DIYA HOLDINGS LLC; DIYA REAL HOLDINGS, LLC; I.I. 1, a minor child, by and through his next friends IFTIKAR and SHALINI AHMED, his parents; I.I. 2, a minor child, by and through his next friends IFTIKAR and SHALINI AHMED, his parents; and I.I. 3, a minor child, by and through his next friends IFTIKAR and SHALINI AHMED, his parents, Relief Defendants.

          RULING ON PLAINTIFF'S MOTION FOR REMEDIES AND JUDGMENT

          JANET BOND ARTERTON, U.S.D.J.

         This Court found [Doc. # 835] on summary judgment that Defendant Iftikar Ahmed was liable for violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Section 206 of the Investment Advisers Act ("Advisers Act"). See SEC v. Ahmed, 308 F.Supp.3d 628, 636-37 (D. Conn. 2018) (hereinafter "Ahmed 77"). Plaintiff, the United States Securities and Exchange Commission ("SEC") now moves [Doc. # 886] for Remedies and Judgment against Defendant, seeking: (1) a permanent injunction; (2) disgorgement of Defendant's fraudulent proceeds in the amount of $43, 920, 639; (3) disgorgement of prejudgment interest on those proceeds in the amount of $1, 520, 953 along with interest earned on all frozen assets during the pendency of freeze; (4) civil penalties in the amount of $43, 920, 639; (5) an Order specifically finding that the assets listed on the Asset Schedule (Ex. 1 [Doc. # 888-1] to Pl.'s Mem. Supp. Mot. for Judgment) belong to Defendant and can be used to satisfy a judgment against him; (6) the appointment of a receiver; (7) the establishment of a Fair Fund; and (8) any other relief that the Court may deem appropriate. (Pl.'s Mem. Supp. Mot. for Judgment [Doc. # 888] at 2.)

         For the following reasons, the Court grants the SEC's Motion, with modification.

         I. Background

         The Court assumes the parties' familiarity with the facts and procedural history of this case. A detailed discussion of the facts underlying Defendant's violations can be found in the Court's Ruling granting summary judgment on the issue of Defendant's liability. See Ahmed II, 308 F.Supp.3d 628. A brief summary of relevant facts and findings relating to Relief Defendants' claims of ownership over assets listed in the Asset Schedule follows.

         In opposition to the SEC's request for a preliminary injunction freezing assets, Relief Defendant Shalini Ahmed and her children made a claim to only three assets: (1) $7.5 million in proceeds from the Company C transaction that was held by I-Cubed and placed into the 2014 Grantor Retained Annuity Trust (the "GRAT"); (2) income earned from a Park Avenue condominium held in the name of DIYA that was purchased for approximately $9.5 million ("Unit 12A"); and (3) any income earned from a second Park Avenue condominium held in the name of DIYA Real that was purchased for approximately $8.7 million ("Unit 12F"). (See, e.g., [Docs. ## 69, 96].) The Court rejected Ms. Ahmed's request, finding that she was a nominal owner for each requested asset and thus her ownership claims were not credible. See SEC v. Ahmed, 123 F.Supp.3d 301, 313 (D. Conn. 2015) (hereinafter "Ahmed F), aff'd sub nom. Sec. & Exch. Comm'n v. I-Cubed Domains, LLC, 664 Fed.Appx. 53 (2d Cir. 2016). However, the Court agreed to "entertain any application to release assets identifiable as [Ms. Ahmed's], and not tainted." Sec. & Exch. Comm'n v. I-Cubed Domains, LLC, 664 Fed.Appx. 53, 57 (2d Cir. 2016) (internal quotations omitted)

         Relief Defendants chose to take an interlocutory appeal of the Asset Freeze Order, arguing, inter alia, that the asset freeze was overbroad as to assets in Ms. Ahmed's name that the Court had not individually analyzed. See I-Cubed Domains, LLC, 664 Fed.Appx. at 55. The Second Circuit deemed the argument "merifless" and instructed that, even with assets held in their name, Relief Defendants needed to first "identify any improperly frozen assets" and apply for their release before the SEC would be "required to carry its burden of demonstrating that any such identified assets are either ill-gotten gains to which Relief Defendants do not have a legitimate claim or that Iftikar in fact owns the assets in question." Id. at 57 (citing Smith v. SEC, 653 F.3d 121, 128 (2d Cir. 2011)). "If Relief Defendants cannot prove that any frozen assets legitimately belong to them, then necessarily none of their assets are being improperly frozen to satisfy the civil penalties alleged to apply to Iftikar's conduct." Id. at 57 n.3. Relief Defendants subsequently hired an expert "to counter the Commission's argument that the Relief Defendants are mere nominees." ([Doc. # 340] at 7.)

         Since the Second Circuit's ruling, Ms. Ahmed has identified only two allegedly improperly frozen assets: 1) $250, 000.00 in rental proceeds from Unit 12A that was previously placed in Fidelity x7540; and (2) nine 1-kilogram gold bars discovered in jointly-owned safety deposit boxes. (See [Doc. # 442].) The Court rejected these requests, finding that neither asset belonged to her: "Ms. Ahmed is not entitled to proceeds of Unit 12A because she was only a nominal owner of the condominium" and "[e]ven Relief Defendants' Motion does not contain an explicit allegation of Ms. Ahmed's ownership of the Gold Bars, and the SEC has pointed to testimony which demonstrates that Ms. Ahmed had no knowledge of the existence of the bars." ([Doc. # 658] at 3-5.)

         Following the Court's Summary Judgment Ruling on Liability, Relief Defendants were ordered to-and agreed to- "provide a list identifying all assets they claim belong to them, and the reasons why they claim such ownership." ([Doc. # 842] at 3.) On April 27, 2018, Relief Defendants filed the required list. (See Relief Defendant's Asset List [Doc. # 862]). Despite having made claims to only five frozen assets during the preceding three years of litigation (all of which were rejected), Ms. Ahmed and her young children now claim to own more than $85 million in frozen assets. Id. Neither Relief Defendants' Asset List, nor any other submissions to the Court, explain how Relief Defendants controlled the assets or how they were acquired. Nor do they provide any argument that goods or services were provided in exchange for the assets, or any expert analysis demonstrating the SEC's nominee allegations are inaccurate.

         II. Discussion

         A. Plaintiffs Motion is Procedurally Sound

         Defendants fault the SEC for filing a Motion for Judgment instead of a motion for summary judgment on damages.[1] The SEC responds that summary judgment is not appropriate given that it is not seeking damages, but rather is requesting that the Court enter judgment against Defendant awarding certain equitable remedies, which cannot be decided at a trial. See, e.g., Broadnax v. City of New Haven, 415 F.3d 265, 271 (2d Cir. 2005). Relief Defendants cry foul, claiming entitlement to a jury on the question of whether specific assets belong to them, or are in fact owned by Mr. Ahmed.

         Relief Defendants provide no convincing authority supporting their position that ownership of the assets in this context is a question of fact that must be determined by a jury. They attempt to characterize the SEC's theory of recovery against Relief Defendants as one of fraudulent conveyance, a question of common law rather than equity, in order to show entitlement to a jury trial. However, their sole cited case involves a private lawsuit in which the government intervened to enforce tax liens against two defendants by proceeding against a third defendant under the theory that it was a nominee for the first two. See Iantosca v. Benistar Admin. Svcs., Inc, 843 F.Supp.2d 148, 153-54 (D. Mass. 2012). The court reasoned that "suits seeking ... to compel the defendant to pay a sum of money to the plaintiff are suits for money damages . . . [a]nd money damages are, of course, the classic form of legal relief," therefore finding that the defendants were entitled to a jury trial with respect to the government's nominee claim. Id. at 153.

         Iantosca, which unlike here was a private lawsuit, is not persuasive in light of the overwhelming case law cited by the SEC in which district courts have used their equitable power in the context of securities enforcement actions to order the turnover of assets nominally held by third parties. See SEC v. Soflpoint, Inc., No. 95- CV-2951, 2012 WL 1681167 at* 3 (S.D.N.Y. May 9, 2012) (where the defendant could use corporation's money at will and "attributed the assets to [the corporation] in order to retain their use while fraudulently protecting them from creditors[, ]" the court found that the corporation's assets belonged to the defendant); SEC v. Zubkis, No. 97 Civ. 8086 (JGK), 2005 WL 1560489 at *4 (S.D.N.Y. June 30, 2005) ("The Court may use [its] broad equitable power to order the turnover of assets nominally held by third parties where the third party lacks a legitimate claim to the assets."); SEC v. Martino, 255 F.Supp.2d 268, 288 (S.D.N.Y. 2003) (ordering the sale of a yacht placed in the name of a relief defendant but paid for by the defendant because "the disgorgement of unjustly retained wealth is a long-standing remed[y] that [is] within a court's equity powers" and this inherent equitable power "certainly extends to a person who, although not accused of wrongdoing, received ill-gotten funds and does not have a legitimate claim to those funds" (internal quotation marks and citations omitted)).[2], [3]

         B. Remedies

         1. Permanent Injunction

         Section 21(d)(1) of the Exchange Act, Section 20(b) of the Securities Act, and Section 209(d) of the Advisers Act allow the Commission to obtain permanent injunctive relief upon a showing that the defendant has violated the securities laws and there is a reasonable likelihood that the defendant will violate the securities laws in the future. See SEC v. Commonwealth Chemical Sees., Inc., 574 F.2d 90, 99 (2d Cir. 1978) (injunction should be granted if the defendant's past conduct indicates "a reasonable likelihood of further violation in the future"); see also S.E.C. v. Rabinovich & Assocs., LP, No. 07-cv-10547(GEL), 2008 WL 4937360, at *5 (S.D.N.Y. Nov. 18, 2008). In evaluating that likelihood, a court may consider such factors as the degree of scienter involved; the sincerity of the defendant's assurances against future violations; the recurrent or isolated nature of the infraction; the defendant's recognition of the wrongful nature of his conduct; and the likelihood, given defendant's occupation, that future violations may occur. SEC v. Universal Major Indus. Corp., 546 F.2d 1044, 1048 (2d Cir. 1976).

         Defendant claims that "[g]iven the very public nature of this case, which has already been widely reported both by the print, television and online media, it is implausible that Defendant will be employed in the securities industry ever again." He further "disavows any interest in ever returning to the securities industry[, ]" and complains that an injunction would only serve to stigmatize his current educational, charitable, and non-profit activities. (Def.'s Opp'n at 40.) Despite these noble proclamations, the above factors weigh in favor of issuing an injunction here.

         Defendant's violation was not an isolated incident, rather he continuously violated the securities laws for nearly a decade while employed at Oak. Moreover, Defendant committed these violations with the highest degree of scienter-"Defendant opened bank accounts he alone controlled that were deceptively titled in the name of Oak and its portfolio companies, which he then used to divert monies intended for Oak funds or its portfolio companies into his and his wife's personal bank accounts." Ahmed II, 308 F.Supp.3d at 638. Defendant has never admitted his wrongful conduct or accepted any responsibility whatsoever for his fraud, and indeed fled the country shortly after this case began, prior to the July 2015 Preliminary Injunction hearing. Although his current employment may not at all be related to the securities industry, he nonetheless retains the skills and capacity to work in that field if given the opportunity.

         On these facts, the Court finds that there is a "reasonable likelihood" that Defendant will violate the securities laws in the future. See SEC v. First Jersey Sec, Inc., 101 F.3d 1450, 1477 (2d Cir. 1996) (An "injunction is particularly within the court's discretion where a violation was founded on systematic wrongdoing, rather than an isolated occurrence, and where the court views the defendant's degree of culpability and continued protestations of innocence as indications that injunctive relief is warranted..."). Thus, Defendant is permanently enjoined from violating 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 thereunder (17 C.F.R. § 240.10b-5), and Sections 206(1), 206(2), 206(3), and 206(4) of the Advisers Act (15 U.S.C. §§ 80b-6(1), 80b-6(2), and 80b-6(3)) and Rule 206(4)-8 thereunder (17 C.F.R. § 275.206(4)-8).

         2. 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." S.E.C. v. Razmilovic, 738 F.3d 14, 31 (2d Cir. 2013), as amended (Nov. 26, 2013). The equitable remedy of disgorgement "consists of fact finding by a district court to determine the amount of money acquired through wrongdoing - a process sometimes called 'accounting' - and an order compelling the wrongdoer to pay that amount plus interest to the court." SEC v. Cavanagh, 445 F.3d 105, 116 (2d Cir. 2006) ("Cavanagh IF) (footnote omitted); see also SEC v. Commonwealth Chemical Securities, Inc., 574 F.2d 90, 102 (2d Cir. 1978) (Disgorgement "is a method of forcing a defendant to give up the amount by which he was unjustly enriched.").

         Courts may only order disgorgement for profits which were illegally derived, but given the difficulty in determining exactly which of a defendant's gains resulted from his frauds, "'[t]he amount of disgorgement ordered need only be a reasonable approximation of profits causally connected to the violation."' Razmilovic, 738 F.3d at 31 (quoting First Jersey, 101 F.3d at 1475). Thus, courts have found that "[s]o long as the measure of disgorgement is reasonable, any risk of uncertainty should fall on the wrongdoer whose illegal conduct created that uncertainty." SEC v. Warde, 151 F.3d 42, 50 (2d Cir. 1998) (internal quotation marks omitted). Obviously, as discussed above, disgorgement cannot be avoided by transferring ill-gotten gains to third parties. See, e.g., Cavanagh I, 155 F.3d at 137 ("Allowing [Defendant's wife] to now claim valid ownership of those proceeds would allow almost any defendant to circumvent the SEC's power to recapture fraud proceeds, by the simple procedure of giving stock to friends and relatives, without even their knowledge.")

         a. The Court's Authority to Order Disgorgement

         Defendants contend that after Kokesh v. SEC, 137 S.Ct. 1635, 1644 (2017) the SEC cannot seek disgorgement against any party because it is a penalty for all purposes. However, Kokesh made clear it was addressing a narrow issue-whether disgorgement is a "penalty within the meaning" of the statute of limitations in § 2462- and explicitly warned that" [n] othing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings..." Kokesh, 137 S.Ct. at 1643, 1642 n.3. Since Kokesh was decided, courts have declined to endorse similar arguments as here, that the SEC has no authority to seek disgorgement at all. As one district court explained in rejecting that same argument, "Kokesh is best seen as a decision clarifying the statutory scope of § 2462, rather than one redefining the essential attributes of disgorgement." SEC v. Jammin Java Corp., 2017 WL 4286180, at *3 (CD, Cal. Sept. 14, 2017). That is because "at every step of the analysis, the Court reinforce[d] [that] it [was] discussing penalties in the context of a specific provision and for statute of limitations purposes." SEC v. Brooks, 2017 WL 3315137, at *6-8 (S.D. Fla. Aug. 3, 2017) (reasoning that "Kokesh's holding cannot be plucked from the statutory context that gives it force" and determining that, despite Kokesh, disgorgement is an equitable remedy that is remedial for purposes of determining whether a claim survives the defendant's death). Consistent with this view, the Second Circuit has upheld a disgorgement award post-Kokesh, holding that courts have "broad discretion" in ordering disgorgement. SEC v. Metter, 706 Fed.Appx. 699, 702 (2d Cir. 2017).

         Thus, nothing in Kokesh disturbed Second Circuit precedent that disgorgement is a proper equitable remedy. See SEC v. Cope et al, No. 14CV7575 (DLC), 2018 WL 3628899, at *4 (S.D.N.Y. July 30, 2018); see also Cavanagh II, 445 F.3d at 118 (explaining that disgorgement serves the equitable purpose of "preventing] wrongdoers from unjustly enriching themselves through violations" and that "[t]he emphasis on public protection, as opposed to simple compensatory relief, illustrates the equitable nature of the remedy" (citing SEC v. Commonwealth Chem. Sec, Inc., 574 F.2d 90, 102 (2d Cir. 1978))).[4]

         b. The Total Amount to be Disgorged

         Contrary to Relief Defendants' argument, the SEC has not conflated disgorgement with restitution. The Court's findings in the Summary Judgment Ruling on Liability focused on Defendant's fraudulent gains and did not address Oak's losses from Defendant's conduct. The Court's findings detail the specific sums Defendant diverted into his and his wife's bank accounts, totaling approximately $67 million, $43, 920, 639.00 of which was acquired within five years of the initiation of this case. See Ahmed, 308 F.Supp.3d at 638-48.

         That being said, with respect to the second Company C transaction ("C2"), the Ruling on Summary Judgment, which focused specifically on liability, only calculated gross sales revenues from the sale of Company C shares and did not address Defendant's initial cost of purchasing the Company C shares through I-Cubed, which was $2 million. (See Ex. 4 (Ames' Decl.) ¶ 29(b).) Thus, Defendants appropriately dispute the amount that should be disgorged relating to this transaction. Their argument that the first Company C transaction ("CI") similarly was not properly calculated though, is meritless.

         Relief Defendants claim that the SEC's overall disgorgement request must be reduced by $8.9 million because Mr. Ahmed had no ill-gotten gains relating to the CI transaction. (R. Def.'s Opp'n at 8.) As the SEC notes, Defendant's conflict of interest in the transaction, where he concealed from both parties "that he (as opposed to the BVI Company, which was an Oak portfolio company) was the seller of [the] Company C shares and that he would personally profit by more than $8 million upon Oak Fund XIII's $25 million investment" in Company C violates Advisers Act Section 206(3). Accordingly, it is appropriate for the Court to order disgorged "all profits reaped through [t]his securities law violation[]," which is the $8.9 million Defendant made by selling the shares for nearly $11 million after he purchased them for only $2 million, Ahmed II, 308 F.Supp. at 640-41. See SEC v. Cavanaugh, 445 F.3d 105, 109 (2d Cir. 2006).

         The C2 transaction is another instance in which Mr. Ahmed concealed the fact that he was on both sides of the deal-as the sole member of Relief Defendant I-Cubed, Defendant sold shares of Company C (which had previously been purchased by I-Cubed, i.e., Mr. Ahmed) to an Oak Fund. Ahmed, 308 F.Supp.3d at 641-42. In its Ruling, the Court found that the gross revenue from the $7.5 million sale was then distributed into an account on which Mr. Ahmed is listed as the sole signatory, which he had opened by representing that he was a member of I-Cubed. See Id. at 642 n.9.

         Because the Court is authorized to disgorge only "profits reaped through [Defendant's] securities law violations," the Court concludes that $5.5 million is the appropriate amount of disgorgement for the C2 transaction. See Cavanaugh, 445 F.3d at 109 (emphasis added). Accordingly, the total amount the SEC seeks to have disgorged of $43, 920, 639.00 must be reduced by $2 million. Defendants have not established with respect to any other transaction that the Court's Ruling on Liability improperly calculated profits Defendant derived from his misconduct, and therefore the Court orders Defendant to disgorge $41, 920, 639.00, representing his ill-gotten profits.

         3. Prejudgment Interest and Interest/Gains Accrued on Frozen Assets

         As with disgorgement, an award of prejudgment interest lies within the discretion of the court. See First Jersey, 101 F.3d at 1476. Generally, "an award of prejudgment interest may be needed in order to ensure that the defendant not enjoy a windfall as a result of its wrongdoing." Slupinski v. First Unum Life Ins. Co., 554 F.3d 38, 54 (2d Cir. 2009). In deciding whether an award of prejudgment interest is warranted, a court should consider (i) the need to fully compensate the wronged party for actual damages suffered, (ii) considerations of fairness and the relative equities of the award, (iii) the remedial purpose of the statute involved, and/or (iv) such other general principles as are deemed relevant by the court. First Jersey, 101 F.3d at 1476 (internal citation omitted). It is within the "discretion of a court to award prejudgment interest on the disgorgement amount for the period during which a defendant had use of [its] illegal profits." Razmilovic, 738 F.3d at 36.[5]

         Here, prejudgment interest on the amount to be disgorged is appropriate for the period prior to the asset freeze, since without it Defendant would be allowed to "obtain [ ] the benefit of what amounts to an interest free loan procured as a result of illegal activity." SEC v. Moran,944 F.Supp. 286, 295 (S.D.N.Y. 1996). The SEC represents, ...


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