Opinion ID: 750081
Heading Depth: 2
Heading Rank: 1

Heading: Disgorgement Principles

Text: 29 The crafting of a remedy for violations of the 1934 Act lies within the district court's broad equitable discretion. See, e.g., SEC v. First Jersey Securities, Inc., 101 F.3d 1450, 1474 (2d Cir.1996), cert. denied, --- U.S. ----, 118 S.Ct. 57, 139 L.Ed.2d 21 (1997); SEC v. Wang, 944 F.2d 80, 85 (2d Cir.1991); SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1103 (2d Cir.1972). As an exercise of its equity powers, the court may order wrongdoers to disgorge their fraudulently obtained profits. See, e.g., SEC v. Patel, 61 F.3d 137, 139 (2d Cir.1995); SEC v. Manor Nursing Centers, Inc., 458 F.2d at 1104. Once the profits have been disgorged, it remains within the court's discretion to determine how and to whom the money will be distributed, and the district court's distribution plan will not be disturbed on appeal unless that discretion has been abused. See, e.g., SEC v. Wang, 944 F.2d at 85; SEC v. Certain Unknown Purchasers of the Common Stock of and Call Options for the Common Stock of Santa Fe International Corp., 817 F.2d 1018, 1020 (2d Cir.1987) (Santa Fe ), cert. denied, 484 U.S. 1060, 108 S.Ct. 1013, 98 L.Ed.2d 979 (1988). 30 The primary purpose of disgorgement orders is to deter violations of the securities laws by depriving violators of their ill-gotten gains. See, e.g., SEC v. First Jersey Securities, Inc., 101 F.3d at 1474; SEC v. Wang, 944 F.2d at 85; SEC v. Tome, 833 F.2d 1086, 1096 (2d Cir.1987) (The paramount purpose of ... ordering disgorgement is to make sure that wrongdoers will not profit from their wrongdoing.), cert. denied, 486 U.S. 1014, 108 S.Ct. 1751, 100 L.Ed.2d 213 (1988). The effective enforcement of the federal securities laws requires that the SEC be able to make violations unprofitable. The deterrent effect of an SEC enforcement action would be greatly undermined if securities law violators were not required to disgorge illicit profits. SEC v. First Jersey Securities, Inc., 101 F.3d at 1474 (internal quotation marks omitted); see SEC v. Manor Nursing Centers, Inc., 458 F.2d at 1104; SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1308 (2d Cir.) (It would severely defeat the purposes of the [1934] Act if a violator of Rule 10b-5 were allowed to retain the profits from his violation.), cert. denied, 404 U.S. 1005, 92 S.Ct. 562, 30 L.Ed.2d 558 (1971). Although disgorged funds may often go to compensate securities fraud victims for their losses, such compensation is a distinctly secondary goal. See, e.g., SEC v. Commonwealth Chemical Securities, Inc., 574 F.2d 90, 102 (2d Cir.1978). Thus, the measure of disgorgement need not be tied to the losses suffered by defrauded investors, see, e.g., SEC v. First Jersey Securities, Inc., 101 F.3d at 1475; SEC v. Huffman, 996 F.2d 800, 802 (5th Cir.1993), and a district court may order disgorgement regardless of whether the disgorged funds will be paid to such investors as restitution, see, e.g., SEC v. Tome, 833 F.2d at 1096; SEC v. Blavin, 760 F.2d 706, 713 (6th Cir.1985) (per curiam); see also SEC v. Wang, 944 F.2d at 88 (affirming distribution plan that engaged in line-drawing[, ]which inevitably leaves out some potential claimants); Santa Fe, 817 F.2d at 1021 (affirming plan that compensated only those investors who suffered actual out-of-pocket losses). 31 Fischbach has not cited, and we have not located, any case in which a district court's exercise of its discretion to refuse to order that a disgorgement fund be paid out as restitution has been overturned. Given the above authorities, we conclude that although it is normally within the district court's discretion to order that disgorged funds be used to compensate securities fraud victims, there is no merit in Fischbach's contention that such an order is required.