Opinion ID: 750081
Heading Depth: 2
Heading Rank: 4

Heading: The Distribution of the Disgorged Funds

Text: 19 In December 1996, some six months after the Posners had finally complied with the disgorgement ordered by the 1993 Judgment, the SEC submitted to the district court its proposed plan for distributing the disgorged funds, requesting that the funds be paid to the Treasury. The SEC noted that Fischbach had urged the agency to propose that the disgorged funds be paid to Fischbach, as restitution of the moneys the company had paid the Posners. In its memorandum to the court in support of its proposal that the funds go instead to the Treasury, the SEC explained that it opposed payment to Fischbach because such a payment would benefit only AIG, the current owner[ ] of Fischbach, which was not entitled to the disgorgement proceeds because the battering [Fischbach] had taken was reflected in the price AIG had paid for the stock. (SEC Memorandum in Support of Motion for Order Directing Payment of Posner Disgorgement to the United States Treasury dated December 20, 1996, at 11.) Noting the sharp decline in the per-share price of Fischbach stock from approximately $35 when the Posners acquired control of the company, to $11 by the time of AIG's acquisition of the company, the SEC argued that the persons actually injured by the Posners' looting were the minority shareholders. (See id. at 10-11.) The SEC stated that although its policy wherever possible [is] to recommend a distribution plan by which a defendant's unlawful gains are paid out to defrauded investors, the circumstances of this case made identification and location of those persons, and quantification of their claims, impracticable. (Id. at 2.) 20 Fischbach submitted papers to the court opposing the SEC's proposal and argued that the company should receive the funds as restitution on the ground that Fischbach is indisputably the person injured by payment of the excessive compensation that the Posners have now disgorged. (Fischbach Memorandum Supporting Entry of an Order Directing Payment of the Posner Disgorgement Fund to Fischbach dated January 9, 1997, at 2.) Fischbach contended that [r]eturn of the Posners' compensation to Fischbach would not be a windfall to AIG, but simply the return of funds the Posners obtained from Fischbach in violation of federal securities laws. (Id. at 11-12.) 21 In an opinion reported sub nom. SEC v. Drexel Burnham Lambert, Inc., 956 F.Supp. 503 (1997) (Drexel II ), the district court granted the SEC's motion and ordered that the disgorgement fund be paid to the Treasury. The court began by noting that disgorgement and restitution were distinct remedies in that restitution aims to make the damaged persons whole, while disgorgement aims to deprive the wrongdoer of ill-gotten gains. Drexel II, 956 F.Supp. at 507. Stating that determining an appropriate distribution of disgorged funds is within the court's broad equitable power to fashion appropriate remedies, id. (internal quotation marks omitted), the court found that Fischbach had 22 no equitable claim to the Fund. The damage done to Fischbach by the Posners occurred before AIG acquired Fischbach. Awarding the Fund to Fischbach would thus be a windfall to AIG, and would do nothing to compensate those persons directly damaged by the Posners' looting of Fischbach,id. at 507-08. According to the district court, 23 [t]he persons damaged by the Posners' looting of Fischbach were the minority shareholders who held Fischbach stock during the years the Posners controlled the company. It would be difficult and costly to identify and locate these shareholders, and it would be difficult to devise a coherent formula for distributing money among them. It would therefore be impracticable to pay the Fund to the minority shareholders. 24 Id. at 508. The court found Fischbach's equitable position to be further weakened by the company's failure to sue Posner directly: 25 The fact that the SEC had already brought this action does not excuse Fischbach's failure to act. The SEC does not seek to vindicate discrete private rights, and an SEC action does not preclude private parties from bringing their own actions. Having let the government pay the bill for the lawsuit ... Fischbach is now seeking a windfall. 26 Id. (internal quotation marks omitted). 27 The court thus ordered that the disgorged funds be paid to the Treasury. This appeal followed.