Sec. & Exch. Comm'n v. Bergin

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. DANIEL BERGIN, Defendant.

No. 3:13-CV-1940-M

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION

July 15, 2015

MEMORANDUM OPINION AND ORDER

Before the Court is Plaintiff's Motion for Monetary Remedies and Entry of Final Judgment [Dkt. No. 32]. The Motion is GRANTED in part. For the reasons discussed herein, the Defendant is ORDERED to pay $235,397 in disgorgement, a $500,000 civil penalty, prejudgment interest on the disgorgement sum from December 31, 2012 until the date of judgment, less seven days for the period of time Bergin's assets were frozen pursuant to the May 23, 2013 Order Freezing Assets, and postjudgment interest on the disgorgement sum pursuant to 28 U.S.C. § 1961.

FACTUAL AND PROCEDURAL BACKGROUND

On May 23, 2013, Plaintiff Securities and Exchange Commission ("the SEC") filed this action against Defendant Daniel Bergin ("Bergin"), alleging Bergin engaged in illegal front-running and insider trading that resulted in illegal trading profits of at least $1.7 million.¹ For the purposes of the SEC's Motion for Monetary Remedies and Entry of Final Judgment, and pursuant to the Agreed Partial Judgment, which preclude Bergin from denying the allegations in the SEC's Complaint, the relevant facts are:

Beginning in at least 2011 and continuing through the present (the "relevant period"), Bergin defrauded [Cushing MLP Asset Management, LP ("Cushing")] and its clients, including registered investment company clients ("Funds"), by using Cushing's confidential trading information to trade on and ahead of hundreds of Cushing's client trades in master limited partnership ("MLP") issuers, MLP-related securities, and other energy-income securities (collectively referred to as "MLP/Energy securities"). He concealed his trading activity by failing to disclose his trades or the existence of his wife's brokerage accounts to Cushing as required by [SEC] Rules and Cushing's internal policies and by falsifying at least six internal reports during the relevant period. As Cushing's primary equity trader, Bergin was privy to material, nonpublic information regarding the size and timing of securities trades Cushing intended to make for its clients in various MLP/Energy securities. In breach of his duties to Cushing and of his fiduciary duties to its clients, on at least 400 occasions that are currently known to Plaintiff, Bergin used this information to trade in his wife's undisclosed brokerage accounts in the same securities and on the same day he placed Cushing's client trades ("same day trading"), and in over 130 of those cases, front-running the firm's client trades. During the relevant period, he reaped illegal trading profits of at least $1.7 million.²

On July 10, 2013, without admitting or denying the allegations against him, Bergin consented to the entry of an Agreed Partial Judgment, which included a permanent injunction and ordered Bergin to:

[P]ay disgorgement of ill-gotten gains, prejudgment interest thereon, and a civil penalty pursuant to Sections 21(d)(3) and 21A of the Exchange Act [15 U.S.C. §§ 78u(d)(3) and 78u-1] and Section 42(e) of the Investment Company Act [15 U.S.C. § 80a-41(e)]. The Court shall determine the amounts of disgorgement and civil penalty upon motion of the [SEC]. Prejudgment interest shall be calculated from January 1, 2011, based on the rate of interest used by the Internal Revenue Service for the underpayment of federal income tax as set forth in 26 U.S.C. § 6621(a)(2).³

According to the Agreed Partial Judgment, the Court may determine the amount of disgorgement, civil penalty, and prejudgment interest based on affidavits, declarations, excerpts of sworn deposition or investigative testimony, and documentary evidence, without regard to the standard for summary judgment set forth in Fed. R. Civ. P. 56(c).⁴

On June 6, 2014, the SEC filed its Motion for Monetary Remedies and Entry of Final Judgment as to Defendant Bergin.⁵ On June 24, 2015, the Court stayed the deadline for Bergin to respond to the SEC's Motion, pending resolution of his criminal case, in which he was indicted by a grand jury for securities fraud arising from the same set of facts that underlie this civil action, except that the criminal indictment encompassed a period from January 2010 until May 2013.⁶ On July 24, 2014, Bergin pled guilty to one count of securities fraud.⁷ As part of his plea agreement, Bergin agreed to forfeit a 2012 Porsche and an amount equal to his proceeds from the front-running scheme described in the Indictment, to be determined at sentencing.⁸ On April 24, 2015, the Court sentenced Bergin to thirty months of imprisonment, two years of supervised release, a $100 mandatory special assessment, and a $500,000 fine.⁹ Bergin was also ordered to forfeit $1,384,603 in trading gains and the 2012 Porsche.¹⁰

On May 8, 2015, Bergin filed his Response to the SEC's Motion for Monetary Remedies and Final Judgment, and the SEC filed its Reply on May 22, 2015.¹¹ On May 27, 2015, the Court granted the SEC's Motion to Dismiss Relief Defendant Jacqueline Zaun (Bergin's wife), finding that all monetary relief sought against Zaun had been fully satisfied.¹²

The only remaining issues to be decided by the Court are the amounts of (1) disgorgement; (2) civil penalty; (3) and prejudgment interest payable on the disgorgement sum by Bergin.¹³

ANALYSIS

I. Disgorgement

The SEC argues that Bergin should be ordered to disgorge the entire $1.7 million identified in the Complaint as ill-gotten gains from his securities fraud. Bergin disagrees, arguing that the Court should exercise its discretion and offset the disgorgement with the amounts he forfeited as part of his criminal sentence, including $1,384,603 and the 2012 Porsche. Bergin also asks the Court to deduct $595,000 in short-term capital gains taxes Bergin paid during the relevant time period.

Disgorgement is a means of "wrest[ing] ill-gotten gains from the hands of a wrongdoer." S.E.C. v. Huffman, 996 F.2d 800, 802 (5th Cir. 1993). "It is an equitable remedy meant to prevent the wrongdoer from enriching himself by his wrongs." Id. Because disgorgement serves a remedial purpose, it must be "causally related to the wrongdoing" at issue. Allstate Ins. Co. v. Receivable Fin. Co., 501 F.3d 398, 413 (5th Cir. 2007).

When the SEC brings a civil action for a securities violation, "disgorgement need only be a reasonable approximation of the profits causally connected to the violation." Id. Once the SEC shows that "its disgorgement figure reasonably approximates the amount of unjust enrichment," the burden shifts to the defendant to "demonstrate the disgorgement figure [is] not a reasonable approximation." SEC v. AmeriFirst Funding, Inc., 2008 U.S. Dist. LEXIS 36782, at *5 (N.D. Tex. May 5, 2008). However, the defendant may not plead financial hardship as aground for denying disgorgement. S.E.C. v. Druffner, 517 F. Supp. 2d 502, 512 (D. Mass. 2007), aff'd sub nom., S.E.C. v. Ficken, 546 F.3d 45 (1st Cir. 2008) (citing S.E.C. v. McCaskey, 2002 WL 850001, at *5 (S.D.N.Y. Mar. 26, 2002)). Furthermore, "any risk of uncertainty in calculating the amount 'should fall on the wrongdoer whose illegal conduct created that uncertainty.'" S.E.C. v. Svoboda, 409 F. Supp. 2d 331, 344 (S.D.N.Y. 2006) (quoting S.E.C. v. Patel, 61 F.3d 137, 140 (2d Cir. 1995)). Finally, "a defendant may be required in a criminal proceeding to pay a fine and forfeiture and be required in a civil enforcement proceeding to disgorge his unlawful gains." S.E.C. v. Razmilovic, 738 F.3d 14, 37 (2d Cir. 2013), as amended (Nov. 26, 2013), cert. denied, 134 S. Ct. 1564, 188 L. Ed. 2d 561 (2014) (citing S.E.C. v. Palmisano, 135 F.3d 860, 865-66 (2d Cir. 1998)).

The SEC alleged in its Complaint, which Bergin cannot challenge for the purposes of the SEC's Motion, that Bergin's ill-gotten profits approximated $1.7 million during the relevant period, from January 2011 until May 2013. However, Bergin argues that he should receive a credit against this amount for the $1,384,603 in ill-gotten gains and $80,000 Porsche he was ordered to forfeit in his criminal case. He notes that the underlying facts of this case and the criminal case are the same, only this civil case covers a shorter period of time than the criminal case.¹⁴ Thus, Bergin contends that refusing offsets for the amounts he forfeited in his criminal case would, in effect, require Bergin to pay far more than he was enriched. Additionally, Bergin asks that the Court exercise its discretion to deduct $595,000 in short-term capital gains taxes he paid on his profits during the relevant time period.

The Court finds that the SEC has met its initial burden of showing that $1.7 million is a reasonable approximation of the profits Bergin earned from January 2011 until May 2013.¹⁵ Accordingly, the burden shifts to Bergin to show $1.7 million is not a reasonable approximation. Although Bergin does not directly argue that $1.7 million is not a reasonable approximation, Bergin has demonstrated that he already forfeited $1,384,603 and the 2012 Porsche in connection with his criminal sentencing.¹⁶ See Svoboda, 409 F. Supp. 2d at 344 (finding disgorgement award of $1,039,252 warranted after defendants incurred only $500,000 in criminal penalties and retained most, if not all, of their illegal profits).

The SEC does not argue that Bergin has retained $1.7 million in profits after his criminal sentencing. Rather, the SEC argues that Bergin's proposed offsets are unwarranted because, in calculating the criminal forfeiture amount, this Court took into account the prospect that Bergin would be ordered to disgorge $1.7 million in this case. The SEC also contends that the profit calculations are distinct in the civil and criminal matters. According to the SEC, the criminal forfeiture order was calculated using particular types of trades, i.e. same-day, same-direction front funning, whereas the ill-gotten gains in...