Opinion ID: 4538282
Heading Depth: 2
Heading Rank: 2

Heading: Disgorgement Order

Text: Defendants challenge the district court’s disgorgement awards. “[D]isgorgement is a form of ‘restitution measured by the defendant’s wrongful gain.’” Kokesh, 137 S. Ct. at 1640 (quoting Restatement (Third) of Restitution and Unjust Enrichment § 51, cmt. a, p. 204 (Am. Law Inst. 2010) (original brackets omitted) (hereafter, the Restatement)). It “is by nature an equitable remedy as to which a trial court is vested with broad discretionary powers.” S.E.C. v. Maxxon, Inc., 465 F.3d 1174, 1179 (10th Cir. 2006) (internal quotation marks omitted). The district court held Defendants jointly and severally liable for disgorgement of $50,025,480, with the maximum for each Defendant set at the amount of gross receipts received by that Defendant from the solar-energy scheme; Johnson was liable for the full amount, RaPower’s limit was set at $25,874,066, IAS’s limit was $5,438,089, and Shepard’s was $702,001. The court did not deduct operating expenses of the companies, quoting the Restatement § 51(5)(c) for the proposition that a defendant “will not be allowed any credit of operating expenses to ‘carry[ ] on the business that is the source of the profit subject to disgorgement.’” RaPower-3, 343 F. Supp. 3d at 1196 & n.633.1 1 The Restatement provision states: A conscious wrongdoer or a defaulting fiduciary may be allowed a credit for money expended in acquiring or preserving the property or in carrying on the business that is the source of the profit subject to disgorgement. By contrast, such a defendant will ordinarily be denied any credit for contributions in the form of services, or for expenditures incurred directly in the commission of a wrong to the claimant. 17 We review for clear error the computation of the disgorgement amount and we review de novo the method for determining that amount. See Klein-Becker USA, LLC v. Englert, 711 F.3d 1153, 1162 (10th Cir. 2013) (disgorgement award under the Lanham Act). Defendants raise several arguments against the awards. First, they contend that they did not intentionally defraud investors because they “encouraged . . . customers to seek their own tax advice.” Aplt. Br. at 26. But, as with their challenge to the ruling that they had engaged in a fraudulent scheme, their argument is inadequate. They do not specifically challenge any relevant findings of the district court, address the evidence relied on by the court, or even include in the record the testimony and other evidence that would enable us to make an independent judgment of the sufficiency of the evidence. Defendants also complain about the district court’s finding that they had damaged the United States Treasury in the amount of $14,207,517 through tax benefits claimed by lens customers between 2013 and 2016. But it does not appear that the district court used that figure in computing disgorgement amounts. Another complaint by Defendants is that the awards permit double recovery against them. But there can be no double recovery. Although Defendants are jointly liable for certain amounts, the government cannot collect the sum of the separate awards against them. To the extent that two of them are jointly and severally liable for the same amount, the government can collect from either, but not both. For example, if RaPower Restatement 3d, § 51(5)(c). 18 paid the full $25,874,066 it owes, that amount would be subtracted from Johnson’s liability. Defendants’ principal complaint is the amount of the disgorgement awards. We have stated that the plaintiff has the burden of showing gross receipts, while the defendant has the burden of proving any claimed deduction. See Klein-Becker, 711 F.3d at 1163. The Restatement § 51 cmt. i observes that “the precise amount of the defendant’s unjust enrichment may be difficult or impossible to ascertain.” But “a claimant who is prepared to show a causal connection between defendant’s wrongdoing and a measurable increase in the defendant’s net assets will satisfy the burden of proof as ordinarily understood.” Id. “[P]laintiffs must generally establish damages with specificity,” although “some estimation is acceptable if necessitated in part by the [d]efendant’s poor record keeping.” Klein-Becker, 711 F.3d at 1163 (original brackets and internal quotation marks omitted). Any uncertainty is resolved against the “conscious wrongdoer,” in keeping with the rule that “‘when damages are at some unascertainable amount below an upper limit and when the uncertainty arises from the defendant’s wrong, the upper limit will be taken as the proper amount.’” Restatement § 51 cmt. i (quoting Gratz v. Claughton, 187 F.2d 46, 51–52 (2d Cir. 1951) (L. Hand, J.)). Defendants argue that the district court should have subtracted operating expenses from the gross receipts to determine the amount that should be disgorged. But they acknowledge that “a defendant is not allowed to deduct business expenses from the disgorgement amount if the business was created and run to ‘defraud investors.’” Aplt. 19 Br. at 25. They simply assert that “Plaintiff did not show Defendants intentionally defrauded investors.” Id. But they do not muster an adequate challenge to the sufficiency of the evidence on that score. Defendants further complain that the government at various times suggested a wide range of possible damages. But they fail to explain how the government’s earlier suggestions could have improperly influenced the court’s award. Finally, Defendants challenge the way the district court computed the gross receipts from their enterprises. The court relied on Defendants’ customer database, which apparently included transactions almost up to the time of trial, and showed that they sold 49,415 lenses and customers paid in $50,025,480 through February 28, 2018. This was less than what would have come in if customers had made only the down payment on each lens. The down payment from customers was to be $9,000 from 2006 through 2009 and $1,050 after 2009. Multiplying the lower down payment of $1,050 by the number of lenses sold gives a figure of $51,885,750. The court said that its award was also supported by the government’s bank-deposit analysis for deposits through 2016. Defendants argue that the customer database was misinterpreted, leading to an excessively high figure. But it was their database and they would know better than anyone how to interpret the data; yet they offered no testimony regarding the database. Nor have they pointed to any errors by the court that appear on the face of the database. For example, their reply brief states that the database “contains entries listing a small down payment, some entries show a partial down payment, some of those payments bounced (but could not be deleted from the database), some orders were canceled (but 20 could not be deleted), and some amounts are refunded (but cannot be deleted) and all contracts offered a full refund.” Aplt. Rep. Br. at 7. The brief, however, does not identify any specific entries supporting their assertion, nor do they identify any evidence in the record supporting the claim that certain entries could not be deleted from the database. This failure to support their arguments with evidence is not just a lapse on appeal; they failed at trial as well. As the district court said, “Defendants—who are the ones in possession of the best evidence of a reasonable approximation of their gross receipts—failed to rebut the United States’ evidence of this reasonable approximation, and introduced no credible evidence of their own on the point.” RaPower-3, 343 F. Supp. 3d at 1195. Similarly, although it is not clear to us from the limited appellate record whether the district court’s gross-receipts estimate is well-supported by the bankdeposit evidence (the record contains document summaries but no testimony explaining them), the failure of Defendants to include the bank-deposit testimony in the appellate record makes it impossible for us to evaluate the bank-deposit evidence; and, in any event, Defendants, as with so many other issues, do not adequately argue the matter in their briefs. In our view, the district court’s computation was not clearly erroneous because it was a reasonable approximation. It used Defendants’ own business records to determine how many lenses were sold, and multiplied that by a conservative estimate of the amount paid for each lens. Defendants argue about ambiguities in their own records that led the court to calculate an excessively high gross-receipts figure; but they bore the risk of uncertainty, particularly when caused by their own record keeping, obstruction of 21 discovery (further discussed below), and decision not to put on any evidence or call any witnesses who could have helped the court reach a more precise estimate of their receipts or any legitimate expenses. We affirm the disgorgement awards against Defendants.