SEC Disgorgement: A Path For Reform?

One of the guiding principles of the current SEC Enforcement program is to “Impose Sanctions That Most Effectively Further Enforcement Goals.” SEC Division of Enforcement Annual Report 2017. Yet just months prior to the issuance of that Report, the Supreme Court handed down its decision in Kokesh v. SEC, 137 S.Ct. 1635 (2017), rejecting the SEC’s long stated position that its disgorgement remedy is equitable and imposed to preclude a wrongdoer from retaining ill-gotten gains. The Court went on to hold that the SEC’s version of disgorgement is in fact penal. In a footnote the Court reserved questions about the manner in which the SEC calculates disgorgement and if the agency can seek its version of the remedy absent a statutory predicate for the claim. If the SEC is going to in fact seek effective remedies as its Annual Report suggests, the agency might do well to re-examine its requests for disgorgement. The manner in which disgorgement is calculated was the central issue in U.S. v. Metro, No. 16-3813 (3rd Cir. Feb. 14, 2018), although the decision turns on the construction of the federal sentencing guidelines.

The decision

Steven Metro was a clerk at a prominent New York City law firm. From February 2009 through January 2013 he disclosed inside information to his friend, Frank Tamayo, about pending take-over transactions. Mr. Tamayo, in each instance, transmitted the information to broker Vladimir Eydelman who placed trades for his client, himself, his family and other clients. Total trading profits for all of the trades were $5,573,682.

Messrs. Metro and Tamayo both pleaded guilty. Specifically, Mr. Metro pleaded guilty to one count of conspiracy and one count of securities fraud. At his sentencing, Mr. Metro objected to using the entire $5.5 million amount of trading profits in the sentencing calculation, arguing that he was unaware of the broker and his trading activity despite the fact that Mr. Eydelman’s name was included in the conspiracy count to which he pleaded guilty. The government, relying on the transcript of a conversation between Mr. Metro and his friend, Defendant Tamayo, claimed that in fact he was aware of the broker who was mentioned – although not by name – in the transcript. The taped conversation took place one year after the last trade by the broker based on inside information transmitted through Mr. Tamayo who, after he was caught, agreed to cooperate and recorded the discussion. The district court overruled Defendant Metro’s objection and, based on the $5.5 million in trading profits, sentenced him to serve 46 months in prison. This appeal followed.

The Circuit Court reversed, finding that the district court made insufficient factual findings to support the attribution of all the trading profits to Appellant Metro. Under the sentencing guidelines all of the gains from illegal insider trading can be attributed to a defendant which he or she realized, from those to whom the defendant provided information, and from those with whom he or she is found to have been acting in concert, the Court stated.

In this case Mr. Metro objected to the attribution of those trading profits which came from the broker, his family and his clients. The pre-sentence report attributed those profits to Mr. Metro despite the objection. The district court appeared to have attributed those trading profits to Mr. Metro on a theory that he acted in concert with those persons. The court did not, however, make specific factual findings to that effect. While the indictment alleged in the conspiracy count that Defendant Metro acted in concert with the broker and others, that is not sufficient the Court held: “We have thus explained that the conduct a defendant is typically held responsible for under the guidelines ‘is not coextensive with conspiracy law,’ quoting United States v. Mannio, 212 F. 3d 835, 842 (3rd Cir. 2000).” Accordingly, it is essential that the sentencing judge conduct a hearing and make a “searching and individualized inquiry into the circumstances surrounding each defendant’s involvement . . .” (internal citation omitted) in a conspiracy to ensure that the sentence reflects accurately the person’s role. That was not done in this case.

In conducting a sentencing hearing, and before attributing gains to a defendant, the district court should “first identify the scope of conduct for which the defendant can fairly be held accountable for sentencing purposes . . . then analyze the conduct to determine whom the defendant acted in concert with and those [to] whom he provided inside information. . . That may lead the court to attribute to a defendant gains realized by downstream trading emanating from the defendant’s tips, but, depending on the facts established at sentencing, it may not.” (internal citations omitted). This is contrary to the strict liability approach the government advocated on appeal (and which is contrary to its position in the district court).

Here the district court failed to conduct the required inquiry and make the necessary factual findings. To the contrary, the entire $5.5 million in illicit trading profits was simply allocated to Defendant Metro. Accordingly, the sentence was vacated and the case remanded for resentencing.


Since the holding in Metro is based on the criminal sentencing guidelines, it does not directly govern disgorgement in Commission enforcement actions which are essentially a hybrid of civil and criminal proceedings. Nevertheless, the analysis of the Circuit Court provides a principled approach to ascribing illegal trading profits to a particular defendant which is the root issue of an SEC disgorgement claim if the goal is to deny the wrong doer the benefits of his or her wrongful conduct rather than to punish. Viewed in that context Metro employs the kind of analysis which might at least be the beginning of any disgorgement claim in a Commission enforcement action. This is particularly true since it is that kind of analysis which Kokesh found absent in concluding that SEC disgorgement claims are a penalty.

The Commission can of course argue that the “penalty” finding in Kokesh is only for purposes of the statute of limitations and that the footnote reserving issues is not determinative. Employing this rationale the agency can continue to rely on numerous court decisions that have accepted its claim that SEC disgorgement is equitable. Kokesh, however, fairly read, should serve as notice to the Commission that “the times they are a changing” to borrow a line from Bob Dylan. The only real question moving forward appears to be whether the SEC is going to reform its approach or simply wait for the courts to do it.

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