Court Opinion

ID: 9470238
Source: CourtListenerOpinion
Date Created: 2023-08-05 03:00:07.931617+00
Date Added: 2024-06-11T17:41:47.715383
License: Public Domain

COFFIN, Chief Judge, with whom BOWNES, Circuit Judge,
joins, dissenting in part.
I join the panel’s opinion on the issues relating to liability. I disagree with the holding of the court en banc that a district court may not, absent special circumstances, require an insider who fraudulently trades on the basis of undisclosed material information to disgorge all of his ill-gotten gains in a suit by the SEC.
The court’s opinion seems to me unanswerable if we view the case as one between two private individuals, one defrauded and the other defrauding. It does not, however, seem persuasive to me in this case in which the opposed interests are the investing community as a whole, represented by the SEC, and an individual who has seriously broken the rules of that community to his significant advantage. I concede that there is no case or other authority clearly sanctioning full disgorgement as “equitable”. But to analyze this case in terms of a seller’s ability to repurchase securities after the public disclosure of inside information seems to me to assume that the public instrumentality created to monitor the securities markets for the good of all stands in shoes no larger than those of a defrauded individual. Although what we might call private equity can give adequate protection to the individual, it seems to me that public equity in the contemporary world should permit a court, in the exercise of its discretion under 15 U.S.C. § 78u(d), to safeguard the integrity of the securities markets as a whole by imposing, in a proper case, the civil sanction of full disgorgement of the actual profits of an illegal bargain. I see no authority barring this result and every reason of public policy justifying it.
Unlike a private plaintiff, the SEC does not sue for injury to itself; nor does it sue solely for the losses of sellers immediately injured by the defendant’s fraud. Rather, it sues for the whole injury inflicted by the fraud. That injury includes the damage done to investor confidence and the integrity of the nation’s capital markets, and is necessarily greater than the profits at issue in a private suit. I agree that the SEC in a civil enforcement action may seek only “remedial” and not punitive relief. But even if disgorgement must be strictly “compensatory” to be “remedial” (and I believe it need not be), society simply is not made whole by the court’s measure of disgorgement. Although the broader social damage of an inside trade is diffuse, even diffuse damage may be large in the' aggregate,1 and it is a settled principle of even private *56equity that where the nature of a wrong makes damage calculations difficult, as here, it is better to give the plaintiff a windfall than to permit the wrongdoer to profit from his wrong. See Janigan v. Taylor, 344 F.2d 781, 786 (1st Cir.), cert. denied, 382 U.S. 879, 86 S.Ct. 163, 15 L.Ed.2d 120 (1968), approved in Affiliated Ute Citizens v. United States, 406 U.S. 128, 155, 92 S.Ct. 1456, 1473, 31 L.Ed.2d 741 (1972).2 At the very least, the burden is on the wrongdoer to prove the appropriateness of a lower measure. These principles apply with added force here, for the plaintiff is not a private party pursuing a personal windfall, but a public agency enforcing broad public interests.
My disagreement with the court’s measure of disgorgement is sharpened by my view of its inadequacy as a deterrent.3 Since disgorgement only deprives the wrongdoer of his profit, even full disgorgement, without more, cannot deter all insider trading, for the risk of detection is less than 100 per cent and the insider can never lose more than he stands to gain. Full disgorgement will, however, deter insiders like appellant where, as here, the additional profits subject to disgorgement under a full disgorgement rule are substantial. Under the court’s approach, an insider like appellant who anticipates $1 per share in profit from inside information and $5 per share in later appreciation has nothing to lose from inside trading, because he keeps $5 in profit even if he is caught. A rational insider would not engage in inside trading, however, if he faced full disgorgement, for he would not rationally risk $5 in otherwise lawful profits for the sake of an extra $1 in ill-gotten gain.4
I find the SEC enforcement cases cited by the court to be no barrier to the approach I urge. In Texas Gulf, disgorgement was not an issue; moreover, there is no negative pregnant to be derived from the sanction of partial disgorgement imposed there.5 As for Shapiro, ignoring losses after disclosure of the inside information does not require that gains after disclosure also be ignored. The purpose of the Shapiro rule is to avoid giving the wrongdoer an incentive to wrongdoing — to avoid giving him a “heads-I-win-tails-you-lose” opportunity by allowing him to “keep subsequent profits but not suffer subsequent losses”. 494 F.2d at 1309. Given this purpose, I see no reason not to put the SEC in the position of winning whether the wrongdoing is followed by losses or profits. Finally, Manor Nursing is not on point, for it involved *57neither insider trading nor the proper time for measuring damages in such a case. To the extent it is persuasive to all, it supports full disgorgement here, for it is premised on a measure of disgorgement adequate to provide “sufficient deterrence to further violations”.6 458 F.2d at 1104.
Nor does the court’s reliance on the ALI’s proposed Federal Securities Code persuade me. First, the provisions cited by the court deal with private damage actions, not suits in equity by the SEC. Second, although the Code states that a defrauded seller’s damages should generally be determined by the value of the securities at the end of a reasonable period following full disclosure, the Code also authorizes a district court to award 150 per cent of the ordinary figure to provide a deterrent against trading which fouls the public marketplace where, as here, an insider has fraudulently traded on the basis of inside information. ALI Federal Securities Code § 1708(b)(4) (1981 Supp.) & comment 2. Moreover, under section 1702(e), a seller victimized by a “non-fraud-type” violation may recover as damages the value of the security on the date of the judgment, less the amount he received for the security. In effect, the innocent party has a right to rescind the transaction.7 Like the 150 per cent provision of section 1708, the aim. of section 1702 is to deter violations. ALI Federal Securities Code § 1708 introductory comment 5(d). From the SEC’s perspective, a transaction is just as illegal whether it is a fraud-type violation or a non-fraud-type violation. In addition, once the principle of deterrence is recognized, section 1708’s suggested limitation of 150 per cent of profits to the time of disclosure is arbitrary: although such a cap may be appropriate in a private suit, where deterrence and enforcement incentives must be balanced against the inequity of giving a plaintiff an undue windfall, an artificial limit on disgorgement is wholly inappropriate in a public enforcement action by the SEC, where the policy against windfall awards is absent. Without attempting a formula for all cases, I would hold that on this record a district court should have power to order disgorgement of any amount up to the wrongdoer’s full actual profits from the fraudulently acquired securities, its discretion in exercising that power to depend on the particular need for deterrence presented by the offender and the offense, and the equities of the case. Indeed, the Code explicitly recognizes a district court’s power generally to adjust damages in this fashion. § 1723(e). Finally, full disgorgement leaves the wrongdoer in exactly the same financial position as rescission; if rescission is equitable, so is full disgorgement.
In the present case, it is not unreasonable to view all of appellant’s profits as “ill gotten”. Absent an opportunity to trade on inside information, there is no evidence in the record that appellant would ever have purchased the stock. Having made the illegal purchase, appellant may have decided to hold the stock to take advantage of capital gains treatment under the tax laws, to avoid disgorgement of short-swing profits under 15 U.S.C. § 78p(b), to diminish the risk of detection, or to avoid an appearance of disloyalty to his company — reasons unrelated to the sort of independent investment decision posited by the court. Janigan dictates that this uncertainty be resolved against the fraudulent party.
In short, I see more vitality than my brothers in Janigan, where the court held that once it is found that a defendant acquired property by fraud, “[i]t is more appropriate to give the defrauded party the benefit even of windfalls than to let the fraudulent party keep them.” 344 F.2d at *58786. Although, as the court notes, several courts have refused to apply Janigan in private damage actions where the fraudulently purchased securities are publicly traded, the SEC’s remedial powers are not so restricted. The possibility that a defrauded seller could hedge his losses by reinvesting after full disclosure does not transform the profits subsequently made by the buyer as a result of the illegal trade into legitimate gains. In an SEC enforcement action, a court can legitimately seek to “disgorge ill-gotten gains or to restore the status quo, or to accomplish both objectives”, SEC v. Commonwealth Chemical Securities, Inc., 574 F.2d 90, 95, 102 (2d Cir.1978) (Friendly, J.); see also SEC v. Penn Central Co., 450 F.Supp. 908, 916 (E.D.Pa.1978), or to deter future violations of the securities laws, see, e.g., Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 390-91 (2d Cir.), cert. denied, 414 U.S. 910, 94 S.Ct. 232, 38 L.Ed.2d 148 (1973).
Perhaps the real difference between my approach and the court’s is merely a matter of burden of proof. Perhaps, in a given case, full disgorgement would be inappropriate, inequitable even in a public sense. But in such a case it seems only fair for the burden to be on the wrongdoer. Here, there is no question but that serious, willful wrong was done, with no mitigating circumstances. I see no reason why the SEC should, as the court evidently contemplates, have the burden of proving a negative (i.e., lack of independent investment motive) where it has already proven a serious infringement of public trust. I respectfully dissent.

. Indeed, this larger social damage is a major, even overriding object of the prohibition of inside trading. See Rochelle v. Marine Midland Trust Co. of New York, 535 F.2d 523, 532 (9th Cir.1976); United States v. Chiarella, 588 F.2d 1358, 1365 (2d Cir.1978), rev’d on other grounds, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980).

. Accord, Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 265-66, 66 S.Ct. 574, 580, 90 L.Ed. 652 (1946) (“ancient” and “most elementary conceptions of justice and public policy require that the wrongdoer shall bear the risk of the uncertainty which his own wrong has created”) (anti-trust case; noting principle’s wide applicability in other areas as well); Hamilton-Brown Shoe Co. v. Wolf Bros. & Co., 240 U.S. 251, 261-62, 36 S.Ct. 269, 272-273, 60 L.Ed. 629 (1916) (“established principled of equity” that a defendant may not defeat full recovery by “confusing his own gains with those which belong to plaintiff, or because of the inherent impossibility of making an approximate apportionment”) (trademark infringement); D. Dobbs, Handbook of the Law of Remedies 276 (principle especially applicable where, as here, violation is willful). While these authorities deal with areas of the law other than securities, the public interest in investment and the integrity of the nation’s capital markets is at least as strong.

. Contrary to the court’s assertion, deterrence is not penalty, but a legitimate and recognized end of equity in cases of conscious wrongdoing. See, e.g., Restatement of Restitution § 202 comment c at 821.

. Appellant purchased 100 shares of RIT at $4.25/share and 9,600 shares at $4.625. The price jumped to $5.50 after disclosure of the inside information, closed a few days later at $5.75, and averaged over $10 when appellant sold a year later. The actual deterrent impact of any disgorgement remedy, partial or full, of course will to a substantial extent depend on the insider’s expectations at the time of his purchase, and his perception of the probability of detection and enforcement, rather than on what subsequently befalls him.

. Moreover, the district court’s disgorgement order was not strictly limited to the insider’s own profits, for the court ordered the insider to disgorge profits made by his tippees as well, on the theory that such disgorgement was necessary as a deterrent, lest the prohibition on inside trading be evaded by wholesale reciprocal tipping.

. SEC v. Blatt is likewise off point. In that case, a panel of the Fifth Circuit reversed an order directing the wrongdoers, who had been required to disgorge funds, to pay in addition the expenses of trustees in collecting and disbursing those funds. Not only was the court’s focus, therefore, on a sanction in addition to disgorgement, but its rote recitation of authorities offers little in persuasive analysis and sheds little light on the problem presented here.

. Present law is equally if not more emphatic, declaring “void” all contracts “made in violation of any provision” of the Securities Exchange Act. 15 U.S.C. § 78cc(b).