Court Upholds Disgorgement Order In SEC Enforcement ActionA federal appeals court in Washington has upheld as lawful a judge's ruling that a Houston businessman must pay about $1 million for his role in a national stock price manipulation scheme.
Federal securities regulators alleged the businessman, Peter Cahill, participated in a "pump-and-dump" scheme in which shares of a Texas-based oil and gas exploration and production company were artificially inflated through thousands of false and misleading phone calls.
The U.S. Securities and Exchange Commission filed civil charges against Cahill and others in 2005 in Washington federal district court. U.S. District Judge Rosemary Collyer last year ordered Cahill, who controlled Clearlake Venture Group, to disgorge the money he made in selling the shares.
Cahill's lawyer, King & Spalding partner Russell Ryan in Washington, said the case presented a chance for the D.C. Circuit to clarify the limits on disgorgement in civil enforcement actions. Cahill consented to judgment against him in the SEC enforcement action. He did not admit or deny the allegations in the complaint.
The disgorgement order, Ryan said, was unfairly punitive because it held Cahill accountable for money he transferred to co-defendants. Ryan also argued the trial judge did not account for the pre-fraud value of the stock.
But the appeals court, in its unanimous ruling, said there was no reliable pre-fraud value of the shares. Chief Judge David Sentelle heard the case with judges Judith Rogers and Janice Rogers Brown. Rogers wrote the opinion for the court.
In the court's ruling, Rogers noted that Cahill, citing his right against self-incrimination, did not offer evidence to rebut the SEC's presentation of the value of the shares at issue.
The SEC's Nicholas Bronni, who argued the case for the government, said Cahill had the burden to show the gross proceeds from the sale of the shares. It remains unknown, the SEC argued, what happened to the money after Cahill transferred it into a lawyer's trust account.
Ryan, who practices in special matters and government investigations, was not immediately reached for comment this afternoon.
In the appeals court, Ryan argued that joint and several liability was inappropriate. He said Cahill did not have both a close relationship to other alleged conspirators and did not collaborate in the misconduct. Ryan said that, at the very least, a close relationship among participants is needed to impose joint and several liability.
Pointing to other circuits, the D.C. Circuit, which grappled with the issue for the first time, said when it comes to disgorgement, either a close relationship or collaboration is required. Not both.
"His approach would allow strangers who collaboratively engage in a fraudulent scheme in violation of the securities laws to escape joint and several liability merely because they were unrelated by blood or marriage or did not have the same employer," Rogers said in the appellate ruling.
Cahill, the appeals court said, had the burden to establish why the disgorgement order should be spread out among alleged participants in the stock price scheme.
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