United States District Court, D. Connecticut
SUPPLEMENTAL RULING ON REMEDIES
BOND ARTERTON, U.S.D.J.
Court's Ruling on Plaintiffs Motion for Remedies and
Judgment [Doc. # 955] calculated the value of the
disgorgement and civil penalty awards in this case. The
parties subsequently dispute whether Mr. Ahmed must turn over
any interest or gains on assets used to satisfy that
disgorgement award and, if so, whether he must turn over the
actual gains on those assets or an amount calculated by
applying the "checking account" interest rate to
the disgorgement amount.
argues that 1) Defendant must turn over interest or gains on
the disgorged assets under both SEC v. Razmilovic,
738 F.3d 14 (2d Cir. 2013), and this Court's remedies
ruling; and 2) the proper measure of that amount owed by Mr.
Ahmed is the actual gains or returns on the disgorged assets,
in other words, the amount by which the value of the
disgorged assets has increased from the outset of the asset
freeze until the time the assets are used to satisfy the
judgment. Defendant and Relief Defendants argue that 1)
Defendant is not obligated to turn over any interest or gains
on the disgorged assets; but 2) if he is so obligated, the
interest owed should be calculated by applying the
"checking account" interest rate to the amount of
the disgorgement award. The parties agree that, if any
interest or gains are awarded, it shall be only on the
disgorged assets, not on assets used to satisfy the civil
earlier remedies ruling, the Court ruled that, "as
instructed by the Second Circuit in Razmilovic, ...
the actual returns on the frozen assets, the amount of which
have not yet been determined, must also be disgorged."
([Doc. # 955] at 14.) The Razmilovic court held that
the defendant has had some or all of his assets frozen at the
behest of the government in connection with the enforcement
action, an award of prejudgment interest relating to those
funds would be inappropriate with respect to the period
covered by the freeze order, for the defendant has already,
for that period, been denied use of those assets. In such a
case, after a final order of disgorgement, the funds
previously frozen would presumably be turned over to the
government in complete or partial satisfaction of the
disgorgement order, along with any interest that has accrued
on them during the freeze period.
738 F.3d at 36. The Second Circuit rejected a
percentage-based interest calculation in favor of the actual
"interest that has accrued" during the freeze, i.e.
the amount by which the value of those assets increased
during the freeze. See Id. (rejecting district
court's award of prejudgment interest at IRS underpayment
rate as "inappropriate with respect to" disgorged
frozen assets). Under Razmilovic s reasoning, Mr.
Ahmed is required to turn over the actual gains or returns on
disgorged assets accrued during the asset freeze. The primary
purpose of disgorgement-to "deprive violators [of
securities laws] of their ill-gotten gains, thereby
effectuating the deterrence objectives of those laws,"
SEC v. First Jersey Sees., Inc., 101 F.3d 1450, 1474
(2d Cir. 1996)-also supports this result, since permitting
violators of securities laws to keep the accrued interest or
gains on disgorged assets would not effectively deprive them
of all ill-gotten gains.
district court in this circuit applied Razmilovic
and reached a similar conclusion in determining the proper
measure of interest owed on disgorged assets which were
frozen during an SEC enforcement action. SEC v.
Tavella, 77 F.Supp.3d 353 (S.D.N.Y. 2015). That court
held that Razmilovic required the defendant turn
over "any actual return on the frozen assets,"
reasoning that "otherwise, a defendant might perversely
benefit from the asset freeze by pocketing accumulated
returns on the frozen principal." Id. at
support of their arguments, Defendant and the Relief
Defendants cite SEC v. Manor Nursing Centers, Inc.,
458 F.2d 1082 (2d Cir. 1972), in which the Second Circuit
declined to order "the disgorging of profits and income
earned on" the defendants' ill-gotten gains, finding
that such an order would be an improper penalty assessment.
However, as discussed below, because the reasons articulated
by the Second Circuit in support of that decision do not
apply to Mr. Ahmed's circumstances, the Court concludes
that Manor Nursing does not control here.
the Second Circuit reasoned that disgorging more from those
defendants who had "invested [their ill-gotten gains]
wisely" than from those defendants who had not invested
so wisely would be "artibrar[yj" and, "[i]n
balance," not necessary to deter future violations of
securities laws. Manor Nursing, 458 F.2d at 1104-05
("While compelling the transfer of the profits on the
proceeds arguably might add to the deterrent effect of the
court's order, this in our view does not justify
arbitrarily requiring those appellants who invested wisely to
refund substantially more than other appellants.").
Unlike the multiple defendants in Manor Nursing, Mr.
Ahmed is the sole defendant in this case, and thus ordering
Mr. Ahmed to turn over gains accrued on disgorged assets
during the asset freeze presents no similar issue of
the Manor Nursing court based its decision in part
on whether an award of indirect income earned on the
defendants' ill-gotten gains would be appropriate to
compensate the victims of the defendants' fraud.
Id. at 1104. However, the Second Circuit's
current view of disgorgement is as a remedy whose
"primary purpose" is to "forc[e] the defendant
to give up the amount by which he was unjustly
enriched," "not to compensate" victims.
SEC v. Commonwealth Chem. Sees., Inc., 574 F.2d 90,
102 (2d Cir. 1978) (rejecting as "immaterial" the
argument that the appropriateness of disgorgement depends on
whether the unjust enrichment "came from another party
to the scheme rather than from the public"); see
also SEC v. Tome, 833 F.2d 1086, 1096 (2d Cir. 1987)
(rejecting a victim restitution purpose of disgorgement,
explaining that "[w]hether or not any investors may be
entitled to money damages is immaterial" because the
"paramount purpose of enforcing the prohibition against
insider trading by ordering disgorgement is to make sure that
wrongdoers will not profit from their wrongdoing");
Razmilovic, 738 F.3d at 31 ("Disgorgement
'is a method of forcing a defendant to give up the amount
by which he was unjustly enriched.'") (quoting
Commonwealth Chem Sees., 573 F.2d at 102).
the relevant factual differences between Manor
Nursing and this case and the Second Circuit's
approach to disgorgement, the Court finds the Defendants'
analogy to Manor Nursing unconvincing.
support of their argument that Mr. Ahmed should instead pay
interest at the "checking account rate," he and the
Relief Defendants cite no authority. Instead, they argue that
Razmilovic and Tavella are inapposite
because in those cases, the amount of the judgment against
the defendants exceeded the value of the frozen assets.
However, neither court's reasoning suggests that fact was
influential in its holding, and the Court sees no reason why
that factual distinction would mandate a different outcome
in addition to the disgorgement of $41, 920, 639.00 already
awarded, Mr. Ahmed is also liable for any actual interest
accrued or gains earned on the ...