Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-10-05321/USCOURTS-caDC-10-05321-0/pdf.json

Parties Involved:
Peter S. Cahill
Appellant
Securities and Exchange Commission
Appellee
David E. Whittemore
Appellee
Whittemore Management, Inc.
Appellee

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 16, 2011 Decided October 28, 2011

No. 10-5321

SECURITIES AND EXCHANGE COMMISSION,

APPELLEE

v.

DAVID E. WHITTEMORE AND

WHITTEMORE MANAGEMENT, INC.,

APPELLEES

PETER S. CAHILL,

APPELLANT

Appeal from the United States District Court

for the District of Columbia

(No. 1:05-cv-00869)

Russell G. Ryan argued the cause and filed the briefs for

appellant.

Nicholas J. Bronni, Attorney, Securities and Exchange

Commission, argued the cause for appellee Securities and

Exchange Commission. With him on the brief were Jacob H.

Stillman, Solicitor, and Hope Hall Augustini, Senior Litigation

Counsel. John D. Worland Jr., Attorney, entered an appearance.

USCA Case #10-5321 Document #1338476 Filed: 10/28/2011 Page 1 of 19
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Before: SENTELLE, Chief Judge, ROGERS and BROWN,

Circuit Judges.

Opinion for the Court by Circuit Judge ROGERS.

ROGERS, Circuit Judge: As part of a civil enforcement

action brought by the Securities and Exchange Commission, the

district court entered a disgorgement order against Peter S.

Cahill imposing joint and several liability for the full proceeds

of his sales of stock in a small, thinly traded corporation not

listed on a major stock exchange. Cahill challenges the order

principally on the grounds that the district court’s disgorgement

calculation was clearly erroneous in failing to account for a prefraud value of 32 cents per share; the disgorgement order was

impermissibly punitive because it imposed liability for funds he

had transferred to co-defendants; and the district court also

abused its discretion in fashioning an equitable remedy by

imposing joint and several liability when there was no close

relationship between the defendants and apportionment was

warranted.

 

The allegations in the complaint and evidence presented by

the Commission showed that there was no reliable pre-fraud fair

market value for the shares. Cahill waived his right to contest

the allegations in the complaint, and he asserted his Fifth

Amendment right not to introduce evidence that might

incriminate him. Consequently, because Cahill presented no

evidence in rebuttal, the district court did not clearly err in

finding that the Commission had met its burden to show that his

ill-gotten gains were the full proceeds of his stock sales at

inflated prices resulting from a fraudulent “pump and dump”

scheme. Neither did the district court abuse its discretion in

crafting the disgorgement remedy. Inclusion of the transferred

funds was consistent with our precedent. Absent any rationale

for a different approach, we join other circuits in holding that the

USCA Case #10-5321 Document #1338476 Filed: 10/28/2011 Page 2 of 19
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imposition of joint and several liability for the amount ordered

to be disgorged does not require proof of a close relationship

among the defendants beyond their collaboration in the

fraudulent scheme in violation of the securities laws. 

Accordingly, because Cahill’s evidentiary objections are also

unavailing, we affirm the order of disgorgement.

I.

Pursuant to 15 U.S.C. § 78u(d)(5) (2006),1

 “the

Commission may seek, and any Federal court may grant, any

equitable relief that may be appropriate or necessary for the

benefit of investors.” Section 78j(b) of Title 15, 15 U.S.C. §

78j(b) (2006), (“Section 10(b)”) provides that it is unlawful for

any person to “use or employ . . . any manipulative or deceptive

device or contrivance in contravention of such rules and

regulations as the Commission may prescribe as necessary or

appropriate in the public interest or for the protection of

investors.” The Commission’s regulations at 17 C.F.R.

§ 240.10b-5(c) (2010) (“Rule 10b-5”) provide that it is unlawful

to “engage in any act, practice, or course of business which

operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.” 

This case arises from Cahill’s alleged participation in a

“pump and dump” scheme through which he sold a substantial

number of shares in an energy company’s stock at fraudulently

inflated prices. Cmpl. ¶¶ 1, 13. On May 3, 2005, the

Commission filed a civil enforcement action against Cahill and

others (“the Whittemore defendants”) seeking to permanently

enjoin them from engaging in this conduct in violation of

1

 The relevant sections of the U.S. Code and Code of Federal

Regulations have not changed since 2005, when the conduct at issue

occurred.

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Section 10(b) and Rule 10b-5, and to disgorge their ill-gotten

gains. According to the complaint, in July 2004, Cahill, who

had acquired a substantial number of the outstanding shares of

Triton American Energy Corporation (“Triton”), contacted

David E. Whittemore, the owner and sole employee of a

voicemail marketing firm, to engage his services in transmitting

voicemail messages touting Triton’s stock. Cmpl. ¶¶ 11, 12. 

Triton is quoted on the Pink Sheets, a trading system that lists

small companies that do not meet the requirements of the major

stock exchanges. Cmpl. ¶ 9. The complaint alleged Cahill

transferred to Whittemore 594,000 Triton shares “for his

services,” but Whittemore returned them to Cahill in exchange

for $142,000. Cmpl. ¶ 11. In August and September 2004,

Whittemore broadcasted false and misleading voicemail

messages about Triton purporting to be left by accident on the

recipient’s answering machine. Cmpl. ¶ 12. Prior to the fraud,

Triton stock had last traded at 32 cents per share with a trading

volume of 10,000 shares on August 6, 2004. Cmpl. ¶ 13. As a

result of the fraud, Triton shares reached a high of 97 cents per

share with 756,000 shares traded on August 19, 2004. Cmpl.

¶ 13. Cahill sold 680,800 shares between August 23 and

September 14, 2004, generating gross proceeds of $508,056. 

Cmpl. ¶ 14. Whittemore was also charged with similar

misconduct regarding another company unconnected to Cahill

and Triton. Cmpl. ¶¶ 15–17.

By a consent to entry of judgment, Cahill agreed that the

allegations of the complaint were true for purposes of the

Commission’s motion for disgorgement. See Consent Def. Peter

S. Cahill (Jan. 21, 2009 (“Cahill Consent”). He also agreed that

for purposes of the disgorgement proceeding, “the [c]ourt may

determine the issues raised in the motion on the basis of

affidavits, declarations, excerpts of sworn depositions or

investigative testimony, and documentary evidence, without

regard to the standards for summary judgment contained in Rule

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56(c) of the Federal Rules of Civil Procedure.” Id ¶ 3. He

otherwise asserted his Fifth Amendment right not to present

evidence that might incriminate him. The district court entered

a judgment against Cahill on liability based on his consent, with

a disgorgement proceeding to follow. SEC v. Whittemore, 691

F. Supp. 2d 198, 200 (D.D.C. 2010). Whittemore, on behalf of

himself and his company, also consented to liability for the

conduct alleged in the complaint.

In support of its motion for disgorgement, the Commission

filed two declarations and a transcript. Andrea Bellaire, a

Commission senior counsel, declared that the proceeds of the

fraud were distributed through a lawyers’ trust account

(“IOLTA” account) on the authority of an attorney, Phillip W.

Offill. Decl. Andrea Bellaire ¶ 8, Apr. 9, 2009. Bellaire stated

that in August 2004, Cahill transferred 594,000 shares of Triton

stock to Whittemore “in advance for his services,” id. 12, which

Whittemore later returned to Cahill in exchange for a payment

of $92,000 plus an additional $50,000 for associated costs. Id.

¶¶ 12–14. Bellaire estimated that Cahill’s proceeds from his

sale of over one million Triton shares were $738,473. Id. ¶ 20. 

She stated that Cahill wired $549,300 into the IOLTA account,

and that those funds were credited to Whittemore. Id. ¶ 21. 

Bellaire also stated that one of Cahill’s attorneys wired an

additional $78,500 to the account of Tracy Whittemore, David

Whittemore’s wife, in April 2005. Id. ¶¶ 27–29. Robert W.

Lowry, a forensic securities expert, declared that “during the

five weeks prior to August 18, 2004,” the closing price for

TRAE (Triton’s trading symbol) “ranged from a low of $0.32

per share to a high of $0.50 per share,” characterizing the stock

as “thinly traded” and stating there was trading volume on only

five of these days, totaling 22,200 shares. Decl. Robert W.

Lowry ¶ 8, Apr. 3, 2009. Once the fraudulent voice messages

began, Lowry explained, Titron’s trading volume spiked,

exceeding 750,000 shares on one day, and the stock traded in a

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price range from $0.50 to $1.50 per share. Id. ¶ 9. Lowry also

provided details on the $549,300 Cahill wired to the IOLTA

account for Whittemore, id. ¶ 14, as well as other information on

Triton’s trading price and volume, id. Ex. 1.

The transcript offered by the Commission was of testimony

of Louis N. Guidry, taken on July 28, 2005, before the Texas

State Securities Board. Guidry had testified under oath that in

May 2004, Cahill approached him with a proposal: If Guidry

agreed to purchase for $6,000 or $7,000 Cahill’s publicly traded

shell company, MilitaryCollections.com, Inc., the name could be

changed to Triton American Energy Corp., Guidry would be the

President and CEO, and Cahill could raise money for Guidry’s

oil and gas exploration efforts. See Guidry Tr. 8–11, Jul. 28,

2005. Guidry agreed, and Cahill engineered a reauthorization

for the issuance of 100 million public shares, taking as his fee

1.2 million of those shares. Guidry claimed that he had “no

idea” why Cahill transferred 594,000 shares to Whittemore, nor

why Cahill wrote Whittemore a check for $92,000. Guidry Tr.

31–32. Guidry professed ignorance of any scheme to pump up

Triton’s share price. Id. at 34.

The Commission argued that Cahill’s cost basis for the

Triton shares was zero, and that it had satisfied its burden to

show a reasonable approximation of the profits causally related

to the fraudulent “pump and dump” scheme by proving the gross

proceeds from Cahill’s sales of the shares. Noting it “had

virtually no discovery from [the defendants] on these matters,”

Mot. Hr’g. Tr. 6, Dec. 23, 2009, the Commission insisted the

burden was on Cahill to demonstrate that its calculation was not

a reasonable approximation of the profit causally related to the

fraud. Joint and several liability with the Whittemore

defendants for the amount of the Triton stock proceeds was

appropriate, the Commission argued, because Cahill was liable

for the full amount of the proceeds even if he used some of them

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to pay Whittemore for his role in the fraudulent scheme. Id. at

15–17. Further, the Commission argued that “[t]o the extent that

there’s any ambiguity or vagueness in [the Commission’s]

ability to tick and tie the dollars [that were transferred among

the defendants], that burden . . . shifts to the defendant[s] [] for

an important policy reason[:] [Y]ou can’t reward complicated

b[yza]ntine frauds that by their very nature conceal paper and

money trails . . .” Id. at 12–13. 

Cahill, in turn, argued that, assuming the truth of Lowry’s

declaration about the closing price of the stock prior to the fraud,

the district court should assume a pre-fraud value of 32 cents in

calculating the amount of profits causally connected to the fraud. 

Joint and several liability was inappropriate, he added, because

it was clear to whom the proceeds went after the sale of shares

and because there was no evidence of a close relationship or

collaboration beyond the one transaction between Cahill and the

Whittemore defendants, id. at 30, 32–33. Whittemore, on the

other hand, argued that the record contained no evidence that he

ever received the proceeds from the IOLTA account into which

Cahill had placed the money. The Commission responded that

it did not know what had happened to the money after Cahill

transferred it: “[W]e don’t know what happened to the money

after that. We don’t know how much of it made a round trip

back into Mr. Cahill’s pocket.” Id. at 48.

The district court ordered Cahill to disgorge the gross

proceeds of his sales of Triton stock and imposed joint and

several liability with the Whittemore defendants. Whittemore,

691 F. Supp. 2d at 210. The district court concluded that the

Commission had met its burden to offer a prima facie reasonable

approximation of profits connected to the securities violation by

showing the gross proceeds of the stock sales, and that Cahill

had not satisfied his burden to rebut the showing inasmuch as he

asserted his Fifth Amendment privilege and did not offer any

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evidence. Id. at 206. Because undisputed evidence indicated

that “[Cahill’s] investment was nil,” id., the district court found

that the sale proceeds were pure, ill-gotten profit. Drawing an

adverse inference from Cahill’s refusal to present evidence, the

district court noted that “this is a civil case and these

[d]efendants control the evidence.” Id. The district court also

observed that “[b]y invoking their Fifth Amendment privilege,

[the defendants] have failed to present evidence that might

refute the [Commission]’s allegation that they paid nothing for

their stock.” Id. The district court rejected Cahill’s argument

that he should not be liable for the proceeds used to pay off his

co-conspirators and imposed joint and several liability in view

of the defendants’ collaboration in the fraudulent “pump and

dump” stock scheme. Cahill’s motion for reconsideration was

denied; various accounting corrections were made to the order

of disgorgement. SEC v. Whittemore, 744 F. Supp. 2d 1 (D.D.C.

2010).

II. 

On appeal, Cahill contends that the district court erred in

failing to deduct the pre-fraud value of the Triton shares from

his sale proceeds in calculating the disgorgement amount. He

characterizes Lowry’s declaration as “confirm[ing]” that Triton

had a pre-fraud market value of 32 to 50 cents per share,

Appellant’s Br. 5, and emphasizes, as the district court ruled,

that “the proper measure of disgorgement is the value by which

a stock increased during the fraudulent activity,” id. at 28

(quoting Whittemore, 691 F. Supp. 2d at 204). The Commission

responds that inasmuch as Cahill “had just created” the Triton

listing, “there was no real market for those shares that would

provide a reasonably ascertainable market value for the shares.” 

Appellee’s Br. 16. 

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Our review of the district court’s disgorgement calculation

is for clear error. SEC v. Bilzerian, 29 F.3d 689, 697 (D.C. Cir.

1994). Acknowledging that “separating legal from illegal

profits exactly may at times be a near impossible task,” this

court held that “disgorgement need only be a reasonable

approximation of profits causally connected to the violation.” 

SEC v. First City Fin. Corp., 890 F.2d 1215, 1231 (D.C. Cir.

1989). The court explained that “the government’s showing of

appellants’ actual profits on the tainted transactions at least

presumptively satisfied” the burden to show a reasonable

approximation of ill-gotten gains, thus shifting the burden to the

defendants to show why it was not a reasonable approximation. 

Id. at 1232. In Zacharias v. SEC, 569 F.3d 458, 472–73 (D.C.

Cir. 2009), the court reaffirmed, at least in the absence of a

request by the defendants, that it was not the Commission’s

burden “to determine the hypothetical market value of the

[securities]” for purposes of offsetting the actual proceeds, and

that “the burden of uncertainty in calculating ill-gotten gains

falls on the wrongdoers who create that uncertainty,” id. at 473. 

Recently, the Ninth Circuit held in SEC v. Platforms Wireless

International Corp., 617 F.3d 1072, 1081, 1096–97 (9th Cir.

2010), that the Commission had satisfied its initial burden by

showing the proceeds from sales of newly issued shares of a

Pink Sheet stock whose pre-fraud value, if any, was “speculative

and small,” id. at 1097, where the defendants failed to explain

what was not profit and there was no record evidence they paid

cash value.

The Commission based its claim for disgorgement of all of

Cahill’s sale proceeds on the absence of evidence of fair market

value (as distinct from closing trade prices) of the Triton stock

listed on the Pink Sheets. Cahill relies on the concurring

opinion in SEC v. UNIOIL, 951 F.2d 1304, 1305 (D.C. Cir.

1991) (Edwards, J., concurring), and the dissenting opinion in

Zacharias, 569 F.3d at 473 (Williams, J., dissenting in part), as

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support for his position the Commission failed to meet its initial

burden of proof by relying on gross proceeds. But the separate

opinions assumed the existence of an ascertainable pre-fraud fair

market value, see Zacharias, 569 F.3d at 475 (Williams, J.,

dissenting); UNIOIL, 951 F.2d at 1306, 1308 (Edwards, J.,

concurring), and these cases did not involve Pink Sheet stocks

with no significant trading volume. As Commission counsel

noted during oral argument, the evidence showed that only a

small number of shares of Triton stock were traded during a 30-

day period, and there was no evidence that Cahill could have

sold a million shares at any price during that time. The

Commission therefore met its initial burden of showing a

reasonable approximation of profits causally connected to the

charged fraud by identifying the proceeds from Cahill’s sales of

Triton stocks. Zacharias, 569 F.3d at 473; see Platforms

Wireless, 617 F.3d at 1096–97.

The burden thus shifted to Cahill to demonstrate the value

of the Triton stock prior to the fraud. Cahill introduced no

independent evidence of the stock’s market value or the value he

in fact exchanged for his shares. On appeal Cahill relies on

Lowry’s declaration, which references five trades made in the

several weeks before the fraud, ranging in price from 32 to 50

cents per share and totaling only 22,200 shares. But Lowry only

discussed the low prices and trading volume of Triton stock for

purposes of contrasting them with the much higher prices and 

volume following the fraudulent voicemail messages —

temporal evidence that the fraudulent scheme caused the rapid

rise in trading price and volume. See Lowry Decl. ¶¶ 8–9. 

Lowry expressed no opinion on whether 32 or 50 cents per share

was a fair market value prior to the fraudulent scheme, and

Cahill never asked him if either was. Considering that in this

context the “burden of uncertainty . . . falls on the wrongdoers,”

Zacharias, 569 F.3d at 473, the Commission’s position, that

such low trading volume on an unregulated Pink Sheet stock is

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insufficient to carry Cahill’s burden to demonstrate the stock’s

pre-fraud fair market value in rebuttal, is persuasive. The

Seventh Circuit explained in Eckstein v. Balcor Film Investors,

8 F.3d 1121, 1129–30 (7th Cir. 1993), that “[t]he price in an

open and developed market usually reflects all available

information because the price is an outcome of competition

among knowledgeable investors,” id. at 1129, whereas “[t]he

more thinly traded the stock, the less well the price reflects the

latest pieces of information,” id. at 1130. 

For these reasons, we hold that the district court did not

clearly err in finding that the entire proceeds from Cahill’s

Triton sales were ill-gotten gains, based on the Commission’s

presentation of a prima facie reasonable approximation that

Cahill did not rebut.

III.

Cahill also contends that he should not be liable — jointly

or otherwise — for funds he transferred to Whittemore and

others after selling the Triton shares. Making him liable for

those funds, he maintains, would turn the disgorgement order

into an impermissible punitive sanction under SEC v. First City

Financial Corp., 890 F.2d 1215 (D.C. Cir. 1989). Cahill would

distinguish the cases relied on by the district court and the

Commission for the proposition that a defendant’s decision to

spend his ill-gotten gains is irrelevant to the disgorgement

analysis. Unlike SEC v. Levine, 517 F. Supp. 2d 121 (D.D.C.

2007), and SEC v. Banner Fund International, 211 F.3d 602

(D.C. Cir. 2000), he maintains, the sale proceeds were

transferred to Whittemore and others as “part and parcel of the

fraudulent scheme itself,” Appellant’s Br. 18, not as a result of

his choice to spend the money or to evade disgorgement

liability. Appellant’s Br. 14, 16–18. Joint and several liability

for the full proceeds was also inappropriate, Cahill contends,

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because he had no close relationship with the Whittemore

defendants beyond the fraudulent “pump and dump” scheme.

These related contentions do not focus on the district court’s

factual findings in calculating the disgorgement amount, but

rather on its exercise of discretion in fashioning a disgorgement

remedy. Although the exclusion of transferred funds would

reduce the disgorgement amount, Cahill is attempting to draw a

legal distinction, based on undisputed facts, in urging this court

to hold that the district court’s determination of an equitable

disgorgement remedy was beyond the pale. See SEC v. First

Jersey Securities, Inc., 101 F.3d 1450, 1475 (2d Cir. 1996)

(citing SEC v. Posner, 16 F.3d 520, 522 (2d Cir. 1994)); Hateley

v. SEC, 8 F.3d 653, 655 (9th Cir. 1993). As other circuits have

held, the district court “has broad equitable power to fashion

appropriate remedies” for federal securities law violations, First

Jersey Securities, 101 F.3d at 1474, and “has broad discretion in

subjecting the offending parties on a joint-and-several basis to

the disgorgement order,” SEC v. Hughes Capital Corp., 124

F.3d 449, 455 (3d Cir. 1997) (citing First Jersey Securities, 101

F.3d at 1475). In cases cited by the parties, this court has

addressed challenges to the disgorgement amount and applied a

clearly erroneous standard of review to the district court’s

factual findings, see, e.g. Bilzerian, 29 F.3d at 696–97; UNIOIL,

951 F.2d at 1305; FED. R. CIV. P. 52(a)(6). Because Cahill’s

challenges here present a different question, implicating the

district court’s choice of an equitable remedy that is “intended

primarily to prevent unjust enrichment” Banner Fund, 211 F.3d

at 617 (citing First City Fin. Corp., 890 F.2d at 1231), our

review is for abuse of discretion, see First Jersey Securities, 101

F.3d at 1475 (citing SEC v. Posner, 16 F.3d 520, 522 (2d Cir.

1994)).

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A. 

The transfer of funds. In Banner Fund, 211 F.3d at 617,

this court explained that a disgorgement order pertains to “a sum

equal to the amount wrongfully obtained, rather than a

requirement to replevy a specific asset,” and “establishes a

personal liability, which the defendant must satisfy regardless

[of] whether he retains the selfsame proceeds of his

wrongdoing.” Id. (citing SEC v. Shapiro, 494 F.2d 1301, 1309

(2d Cir. 1974)). As the Ninth Circuit similarly concluded in

Platforms Wireless, “[a] person who controls the distribution of

illegally obtained funds is liable for the funds he or she

dissipated as well as the funds he or she retained.” Platforms

Wireless, 617 F.3d at 1098. 

The complaint alleged that Cahill instigated and directed the

fraudulent “pump and dump” scheme and profited from it by

selling his Triton shares at the resulting, highly inflated prices. 

Cmpl. ¶¶ 11–14. Cahill agreed these allegations were true for

purposes of disgorgement, and neither evidence from Cahill nor

any other source showed that any money transferred from the

sale proceeds did not ultimately revert to Cahill. Banner Fund

therefore controls.

B.

Joint and several liability. Cahill contends for two

additional reasons that it was inappropriate for the district court

to impose joint and several liability for the full proceeds of his

Triton stock sales, including the amounts transferred to Offill’s

IOLTA account. His first reason is that it was “untimely and

unfairly prejudicial” for the Commission to request joint and

several liability after not doing so in the complaint. This ignores

not only that the Commission made the request for joint and

several liability in its motion for disgorgement, but also that the

cases on which he relies pertain to new causes of action not

stated in the complaint, not specific damages pertaining to a

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well-pleaded claim. See Pinkley, Inc. v. City of Frederick, Md.,

191 F.3d 394, 399–401 (4th Cir. 1999); Rodriguez v. Doral

Mortg. Corp., 57 F.3d 1168, 1171–72 (1st Cir. 1995); In re

Rivinius, Inc., 977 F.2d 1171, 1176–77 (7th Cir. 1992); cf.

Campana v. Eller, 755 F.2d 212, 215–16 (1st Cir. 1985). The

consented-to allegations in the complaint made clear that the

Commission claimed Cahill and the Whittemore defendants

acted in concert in executing a single fraudulent scheme. 

Compl. ¶¶ 1, 11, 19, 22–23; see also Compl. Prayer for Relief ¶

III; cf. Campana, 755 F.2d at 215.

Cahill’s second reason for maintaining that joint and several

liability is inappropriate presents a question of first impression

in this circuit. Although acknowledging that “[c]ourts have held

that joint-and-several liability is appropriate in securities cases

when two or more individuals or entities collaborate or have a

close relationships in engaging in the illegal conduct,” Hughes

Capital, 124 F.3d at 455 (emphasis added) (citing First Jersey

Securities, 101 F.3d at 1475; Hateley, 8 F.3d at 656); accord

SEC v. First Pac. Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998),

Cahill maintains that, despite this repeated disjunctive

articulation of the legal standard, “courts in practice require both

a close relationship between the defendants and collaboration in

the wrongdoing.” Appellant’s Br. 25. 

Cahill cites three cases from other circuits affirming the

imposition of joint and several liability in disgorgement for the

proposition that, at least in practice, a very close relationship

between defendants is required. In Hateley, 8 F.3d at 656, the

Ninth Circuit referred to the fraudulent collaboration within a

three person firm and to a close relationship between the

president and executive vice president of the firm. In First

Jersey Securities, the Second Circuit affirmed where “a firm

ha[d] received gains through its unlawful conduct [and] . . . its

owner and chief executive officer ha[d] collaborated in that

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conduct.” 101 F.3d at 1475 (2d Cir.). And in SEC v. Calvo,

378 F.3d 1211 (11th Cir. 2004), the Eleventh Circuit noted that

both defendants “engaged in securities laws violations” — one

was a “necessary participant and substantial factor” in the

other’s violation — and had “the requisite close relationship”

because Calvo and his family had founded and maintained a

50% ownership interest in the company with which he was held

joint and severally liable. Id. at 1216. By describing the close

relationship as “requisite,” id., at least where the defendant had

denied involvement in the stock sale following the “pump and

dump” scheme, Calvo provides the most support for Cahill’s

contention regarding the propriety of joint and several liability

in his case. The Ninth Circuit used the same language in

addressing a similar relationship in SEC v. JT Wallenbrock &

Associates, 440 F.3d 1109, 1117 (9th Cir. 2006). 

These cases, and other circuit cases imposing joint and

several liability in disgorgement, however, have repeatedly

stated the requirements of collaboration and close relationship

in the disjunctive, and a reading of some of the opinions

suggests the courts’ references to the factual existence of both

requirements were descriptive rather than prescriptive. See,

e.g., First Jersey Securities, 101 F.3d at 1475–76 (summarizing

cases). To the extent the Ninth and Eleventh Circuit have taken

a different view, they offer no rationale for requiring the factual

existence of both requirements for joint and several liability. 

Indeed, in SEC v. Hughes Capital Corp., 124 F.3d 449, 455 (3d

Cir. 1997), which Cahill also cites, the Third Circuit

emphasized that collaboration “in a single scheme to defraud”

can warrant imposition of joint and several liability and that the

burden is on the wrongdoer to establish that apportioned

liability is warranted, although the court went on to find both

collaboration and a close relationship existed in that case. 

Cahill has cited no case in which a court refused to impose joint

and several liability because of the absence of a close

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relationship beyond the defendants’ collaboration in the

fraudulent scheme, and he now fails to offer a rationale for such

a limitation. His approach would allow strangers who

collaboratively engage in a fraudulent scheme in violation of the

securities laws to escape joint and several liability merely

because they were unrelated by blood or marriage or did not

have the same employer. This could lead to “absurd results” no

less than allowing the wrongdoer to avoid disgorgement by

spending the proceeds of the fraudulent scheme, Banner Fund,

211 F.3d at 617. Cahill essentially ignores the deterrent purpose

of disgorgement. See First City Fin. Corp., 890 F.2d at 1230.2

We join the circuits that view the requirements for joint and

several liability in the disjunctive.

The complaint alleged, and Cahill agreed, that Cahill

transferred shares between participants in the “pump and dump”

scheme, compensated Whittemore and his company for the false

voice messaging services, and sold stock at inflated prices

resulting from the fraudulent scheme. Compl. ¶¶ 11–14. Once

the Commission established the close collaboration between

Cahill and the Whittemore defendants in the fraudulent scheme,

the burden was on Cahill to establish that apportionment was

2

 Cahill advances several policy reasons why a court should

hesitate to impose joint and several liability in a Commission civil

disgorgement action. In his view, the concerns underlying

apportionment among tortfeasors are irrelevant where the Commission

is seeking the equitable remedy of disgorgement in a law enforcement

context inasmuch as the Commission is not an injured victim and this

court has emphasized that the purpose of disgorgement is not to

compensate for losses but to deprive the wrongdoer of his ill-gotten

gain, see, e.g., Zacharias, 569 F.3d at 471. Congress has resolved the

policy question: “The dominant congressional purposes underlying the

Securities Exchange Act of 1934 were to promote free and open public

securities markets and to protect the investing public.” SEC v. Tex.

Gulf Sulphur Co., 401 F.2d 833, 858 (2d Cir. 1968) (en banc). 

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warranted, see Hughes Capital, 124 F.3d at 455, and Cahill

failed to do so. Placement of this burden on the defendant is

justified because, the Third Circuit explained, “[v]ery often

defendants move funds through various accounts to avoid

detection, use several nominees to hold securities or improperly

deprived [sic] profits, or intentionally fail to keep accurate

records and refuse to cooperate with investigators in identifying

illegal profits.” Id. The Bellaire and Lowry declarations

describing various wire transfers did not preclude such a

possibility here. In relying on the Lowry Declaration, which

described a series of wires sent by Cahill to Offill’s IOLTA

account, Cahill failed to rebut that, according to their attorney,

there was “no evidence in the record that the Whittemore

defendants received most of that money or that they benefitted

from it or that the money that they did receive was tied to . . .

the alleged fraud. . . . Mr. Lowry’s affidavit never concludes

that Mr. Whittemore actually received any of it.” Mot. Hr’g Tr.

43. Although there was evidence Cahill transferred some of the

proceeds for Whittemore’s benefit, see Bellaire Decl. ¶¶ 20–21,

Cahill never established where the ill-gotten gains finally came

to rest. Unlike in Hateley, where “the very agreement that

[was] the source of their liability” obligated the defendant to

pay the other defendants 90% of the ill-gotten gains, 8 F.3d at

655, no such arrangement was shown by Cahill, and he failed to

establish any alternative evidentiary basis for apportionment. 

Because Cahill wrongfully obtained the proceeds of the

Triton stock sales and controlled the distribution, if any, of

those proceeds, and because he collaborated with the

Whittemore defendants in the fraudulent “pump and dump”

scheme, we hold that the district court did not abuse its

discretion in requiring a disgorgement of the gross proceeds of

Cahill’s sales of Triton stock and in imposing joint and several

liability. 

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IV.

Finally, Cahill contends that the district court improperly

“drew a heavy adverse inference” against him for his decision

to take the Fifth Amendment. Appellant’s Br. 41. The Fifth

Amendment, however, “has never been thought to be in itself a

substitute for evidence that would assist in meeting a burden of

production.” United States v. Rylander, 460 U.S. 752, 758

(1983). Cahill had the burden of rebutting the Commission’s

reasonable approximation of his ill-gotten gains with evidence

of the pre-fraud value of, or the value he exchanged for, his

Triton shares; his invocation of the Fifth Amendment could not

compensate for his failure to meet this burden, irrespective of

any adverse inference the district court might have drawn from

it. Cahill concedes that an adverse inference is permissible in

civil cases when “independent evidence exists of the fact to

which the party refuses to answer.” Appellant’s Br. 41 (quoting

Doe v. Glanzer, 232 F.3d 1258, 1264 (9th Cir. 2000)). In the

absence of Cahill’s production of any evidence to the contrary,

documentary or otherwise, the district court could properly

credit the Commission’s evidence to draw an adverse inference

from Cahill’s failure to discredit it. See, e.g., Nationwide Life

Ins. Co. v. Richards, 541 F.3d 903, 909, 914 (9th Cir. 2008). 

Cahill maintains, however, that the Guidry transcript

offered by the Commission was inadmissible and

unauthenticated hearsay. He asserts that although Guidry was

available to testify, the Commission neither produced the

transcript during discovery nor sought to depose him. He also

focuses on “the unfairness associated with [the transcript’s]

13th-hour unveiling” by the Commission. Appellant’s Br. 45. 

The Commission responds that Cahill has waived any hearsay

objection by consenting to the use of “affidavits, declarations,

excerpts of sworn depositions or investigative testimony, and

documentary evidence without regard to the standard for

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judgment contained in Rule 56(c) of the Federal Rules of Civil

Procedure.” Appellee’s Br. 35; see Cahill Consent ¶ 3;

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249–50 (1986).

Even assuming Cahill presented a valid hearsay objection

not foreclosed by the consent agreement, he fails to show that

admission of Guidry’s testimony over his objection affected his

“substantial rights,” see 28 U.S.C. § 2111; FED. R. CIV. P. 61,

and therefore fails to show he is entitled to reversal of an

“otherwise valid judgment,” Whitbeck v. Vital Signs, Inc., 159

F.3d 1369, 1372 (D.C. Cir. 1998). The declarations offered by

the Commission and the allegations in the complaint identify

the proceeds from Cahill’s sales of Triton stock after the

broadcast of the false voicemails. See Bellaire Decl. ¶ 20;

Lowry Decl.¶ 13; Compl. ¶ 14. This other evidence established

the lack of an ascertainable pre-fraud fair market value for the

stock, see Compl. ¶ 13; Lowry Decl. ¶ 8, thereby satisfying the

Commission’s initial burden in reasonably approximating his

illegal profits. Because Cahill failed to meet his burden of

resolving any uncertainty regarding that value, or the value he

in fact exchanged for his shares, the district court could properly

accept as reasonable the Commission’s approximation of

Cahill’s ill-gotten gains without regard to Guidry’s testimony. 

Indeed, this is what the district court did. See Whittemore, 691

F. Supp. 2d at 206–07. Because Guidry’s testimony was not

determinative in the district court’s disgorgement calculation,

its admission, if error, was harmless. See First City Fin. Corp.,

890 F.2d at 1225.

Accordingly, we affirm the order of disgorgement.

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