23-1071 SEC v. O’Brien
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
1 At a stated term of the United States Court of Appeals for the Second Circuit, 2 held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of 3 New York, on the 3rd day of June, two thousand twenty-four. 4 5 PRESENT: 6 RICHARD C. WESLEY, 7 MICHAEL H. PARK, 8 BETH ROBINSON, 9 Circuit Judges. 10 _____________________________________ 11 12 Securities and Exchange Commission, 13 14 Plaintiff-Appellee, 15 16 v. 23-1071 17 18 James David O’Brien, 19 20 Defendant-Appellant. 21 _____________________________________ 22 23 FOR PLAINTIFF-APPELLEE: Megan Barbero, General Counsel; Michael 24 A. Conley, Solicitor; Jeffrey A. Berger, 25 Assistant General Counsel; Allison Bitz, 26 Attorney, United States Securities and 27 Exchange Commission, Washington, D.C. 28
29 FOR DEFENDANT-APPELLANT: John M. Hanamirian, Hanamirian Law Firm, 30 PC, Moorestown, NJ.
1 Appeal from a judgment of the United States District Court for the Southern District of 2 New York (Cote, J.). 3 UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND 4 DECREED that the judgment of the district court is AFFIRMED. 5 The Securities and Exchange Commission (“SEC”) brought a civil enforcement action 6 against James David O’Brien in November 2021, alleging that he violated various securities laws 7 by engaging in “coordinated trading”—a strategy that involved using accounts at multiple 8 brokerage firms to manipulate stock prices. O’Brien settled; he did not admit or deny the SEC’s 9 allegations, but the parties agreed that the SEC could move for disgorgement and a civil penalty 10 and that the district court would “determine whether it is appropriate to order disgorgement of ill- 11 gotten gains and/or a civil penalty . . . and if so, the amount(s) of the disgorgement and/or civil 12 penalty.” App’x at 1586. O’Brien was “precluded from arguing that he did not violate the 13 federal securities laws as alleged.” Id. He also agreed that for the purposes of the SEC’s 14 motion, the SEC’s allegations would “be accepted as and deemed true by the Court except with 15 respect to the quantum of disgorgement, i.e., net profits.” Id. 16 The district court determined that the SEC’s allegations established violations of several 17 securities laws, and it ordered O’Brien to disgorge $5,197,322. This was the amount calculated 18 by the SEC’s expert as O’Brien’s net profit from the scheme after deducting expenses of $868,358, 19 the amount O’Brien had paid in fees and commissions. The district court also imposed a “third 20 tier” penalty of $10,315,065 under 15 U.S.C. § 77t(d)(2)(C) and 15 U.S.C. § 78u(d)(3)(B)(iii). 21 O’Brien now challenges both the disgorgement amount and the penalty. We assume the parties’ 22 familiarity with the underlying facts, procedural history of the case, and issues on appeal.
1 We review the district court’s choice of remedies after it has found federal securities law 2 violations for abuse of discretion. See SEC v. Fowler, 6 F.4th 255, 265 (2d Cir. 2021). Under 3 that standard, “we will reverse only if we have a definite and firm conviction that the court below 4 committed a clear error of judgment in the conclusion that it reached upon a weighing of the 5 relevant factors.” SEC v. Rajaratnam, 918 F.3d 36, 41 (2d Cir. 2019) (internal quotation marks 6 omitted). 7 As an initial matter, we note that much of O’Brien’s briefing—before both the district court 8 and this Court—violates his agreement with the SEC. He argues that his conduct did not violate 9 the law and that the SEC’s allegations are false. We do not consider these arguments and address 10 only those that are not precluded by O’Brien’s settlement agreement. 11 First, O’Brien claims that the district court erred by ordering disgorgement without first 12 finding that disgorgement was appropriate. But the district court evaluated O’Brien’s conduct as 13 alleged in the complaint and determined that it violated the law, thus meriting disgorgement. See 14 15 U.S.C. § 78u(d)(7) (“In any action or proceeding brought by the Commission under any 15 provision of the securities laws, the Commission may seek, and any Federal court may order, 16 disgorgement.”). 17 Second, O’Brien argues that the district court miscalculated the disgorgement amount, 18 which exceeded his net profits from the scheme. Disgorgement for violations of the Securities 19 Act and the Securities Exchange Act is limited to “net profits from the wrongdoing, that is, the 20 gain made upon any business or investment, when both the receipts and payments are taken into 21 the account.” Liu v. SEC, 591 U.S. 71, 83 (2020) (internal quotation marks omitted); see also 22 SEC v. Ahmed, 72 F.4th 379, 396–97 (2d Cir. 2023) (holding that Liu’s analysis applies to
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1 disgorgement under § 78u(d)(7)), pet. for cert. filed, No. 23-741 (S. Ct. Jan. 9, 2024), No. 23-987 2 (S. Ct. Mar. 11, 2024). Courts must “deduct legitimate expenses” associated with the defendant’s 3 proceeds from his wrongdoing. Liu, 591 U.S. at 91–92. But the “amount of disgorgement 4 ordered need only be a reasonable approximation of profits causally connected to the violation.” 5 SEC v. Razmilovic, 738 F.3d 14, 31 (2d Cir. 2013) (internal quotation marks omitted). Once the 6 SEC has established a reasonable approximation of the profits, the burden shifts to the defendant 7 to show that the calculation is inaccurate. Id. at 31–32. “[S]o long as the measure of 8 disgorgement is reasonable, any risk of uncertainty should fall on the wrongdoer whose illegal 9 conduct created that uncertainty.” Id. at 31 (internal quotation marks omitted). 10 The SEC reasonably approximated O’Brien’s net profits through expert analysis. Its 11 expert reviewed O’Brien’s trades, determined which of them constituted “coordinated trading” as 12 alleged in the complaint, and calculated O’Brien’s net gain from those trades. He then reduced 13 that figure to account for “legitimate expenses”—the commissions and fees that O’Brien paid to 14 place those trades. 15 O’Brien failed to rebut that calculation. Instead, he contested his liability, accused the 16 SEC of engaging in a “witch hunt,” Special App’x at 15, and presented an alternative calculation 17 that the district court aptly deemed “mystifying,” id. at 33. Limiting disgorgement to his total 18 taxable short-term capital gains during the relevant period would give him credit for losing money 19 on trades unrelated to the scheme. And excluding trades from one of his accounts based on his 20 assertion that he could not execute trades quickly enough from that account to contribute to the 21 scheme conflicted with his own testimony. Finally, he presented no authority supporting a 22 deduction for capital gains taxes. Even if he had done so, his calculation of the taxes paid on
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1 income earned during the scheme was mathematically unsound. For example, it included a large 2 reduction for a capital loss incurred the year before the scheme began and double-counted another 3 capital loss. The district court did not abuse its discretion in accepting the SEC’s calculation of 4 net profit and ordering disgorgement of that amount. 5 Third, O’Brien argues that the district court could not impose a third-tier penalty because 6 the record did not show that O’Brien acted with scienter or that his trading harmed any investors. 7 A district court may impose a third-tier penalty for a securities law violation when (1) “the 8 violation . . . involved fraud, deceit, manipulation, or deliberate or reckless disregard of a 9 regulatory requirement” and (2) “such violation directly or indirectly resulted in substantial losses 10 or created a significant risk of substantial losses to other persons.” 15 U.S.C. §§ 77t(d)(2)(C), 11 78u(d)(3)(B)(iii). The district court correctly determined that O’Brien’s conduct satisfied both 12 requirements. 13 The facts alleged in the complaint established that O’Brien’s scienter was “palpable.” 14 Special App’x at 39. O’Brien concealed his conduct by using numerous accounts at different 15 brokerage firms. He disregarded warnings from several firms that his conduct might violate the 16 securities laws. And when those firms asked about his trading strategy, he lied. These facts 17 sufficiently established that O’Brien’s manipulative conduct was deliberate. 18 The facts also showed that O’Brien’s conduct resulted in substantial losses to investors. 19 His coordinated trades helped move the prices of securities up or down as he intended. O’Brien’s 20 counterparties who purchased or sold at these manipulated prices were thus harmed. 21 In short, the district court did not abuse its discretion in ordering the third-tier civil penalty. 22 ***
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1 We have considered O’Brien’s remaining arguments and find they lack merit. For the 2 foregoing reasons, we AFFIRM the judgment of the district court.
3 FOR THE COURT: 4 Catherine O’Hagan Wolfe, Clerk of Court