Zacharias v. Securities & Exchange Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 5, 2009 Decided June 23, 2009

No. 08-1134

CHRISTOPHER H. ZACHARIAS,
PETITIONER

v.

SECURITIES AND EXCHANGE COMMISSION,
RESPONDENT

Consolidated with 08-1136, 08-1141

On Petitions for Review of an Order
of the Securities & Exchange Commission

Jeffrey J. Scott argued the cause and filed the briefs for
petitioner Thomas A. Kaufmann.

David A. Zisser argued the cause and filed the briefs for
petitioner Christopher H. Zacharias.

Thomas D. Birge argued the cause and filed the briefs for
petitioner John A. Carley.
 2

Randall W. Quinn, Assistant General Counsel, Securities
& Exchange Commission, argued the cause for respondent.
With him on the brief were Andrew N. Vollmer, Acting
General Counsel, Jacob H. Stillman, Solicitor, and Benjamin
L. Schiffrin, Attorney. Brian G. Cartwright, Attorney, entered
an appearance.

Before: GINSBURG, Circuit Judge, and WILLIAMS and
RANDOLPH, Senior Circuit Judges.

Opinion for the Court filed PER CURIAM.

Opinion dissenting in part filed by Senior Circuit Judge
WILLIAMS.

PER CURIAM 1 : The petitioners are John A. Carley and
Christopher H. Zacharias, officers and directors of Starnet
Communications International, Inc., and Thomas A.
Kaufmann, a registered representative associated with Spencer
Edwards Inc., a United States registered broker-dealer. They
challenge the Securities and Exchange Commission’s finding
that their participation in certain sales of unregistered
securities violated §§ 5(a) and (c) of the Securities Act of
1933, as well as the Commission’s imposition of substantial
monetary disgorgement orders. See John A. Carley, Opinion
of the Commission and Order Imposing Remedial Sanctions,
Admin. Proc. File No. 3-11626, Securities Act Release No.
8888, 92 SEC Docket 1693 (Jan. 31, 2008)(“SEC Opinion”).
We affirm the SEC’s § 5 decision because the scheme at issue
clearly involved an “underwriter,” which refutes petitioners’
theory that they properly relied on the Regulation S and
§ 4(1 ½) exemptions. The SEC also found that petitioners

1
Parts I, II, III, and IV.A of the opinion are by Senior Judge
Williams; Part IV.B is by Senior Judge Randolph.
 3

Carley and Zacharias had failed to properly report the scheme
on Starnet’s annual reports and that this omission violated the
antifraud and reporting provisions of the securities laws. We
will remand this issue to the SEC for it to explain its finding
that the omissions involved a material fact.

Two minor housekeeping matters: First, petitioner
Zacharias was also found to have violated § 16(a) of the
Exchange Act for failing to file a single report relating to a
change in his share ownership. SEC Opinion at 34. The
Commission did not impose any sanction for this violation, id.
at 43 n.138, and Zacharias does not appeal the finding.
Second, the Commission found that petitioners Carley and
Zacharias committed a Rule 13a-11 violation, but it now
admits the rule does not apply to the filings at issue here. See
Respondent Br. at 50 (“The Commission’s mistaken finding
of a Rule 13a-11 violation . . . should be set aside.”). We
therefore set aside the finding.

In Part I of the opinion we set forth the scheme in broad
outline; Part II discusses the § 5 violations; Part III addresses
the fraud and reporting violations; finally, Part IV addresses
the SEC’s remedies.

I.

The scheme was quite complex. We will address factual
details where necessary in discussion of petitioners’ legal
claims, setting out here simply a bird’s eye view. On one
hand were seven foreign entities controlled by Alfred Peeper
(collectively, “the Peeper Entities”), owners of several million
shares in Starnet, which they had purchased and held pursuant
to Regulation S, and which they could lawfully resell to the
public. In addition, the Peeper Entities held warrants to
several additional million shares—warrants that they had yet
 4

to exercise and that, before the hatching of the scheme, they
seemed unlikely to exercise because the warrants’ purchase
prices exceeded the market price. Had the Peeper Entities
exercised these warrants without a view to the distribution of
the resulting shares to the public, then their resale of these
shares would likely have been legal as well.

On the other hand were petitioners Carley and Zacharias,
who at the outset of the story held options to buy several
hundred thousand Starnet shares. Sales to the public of shares
acquired by exercise of their options would have been illegal
unless a registration statement under § 5 had been in effect. A
simple sale to the Peeper Entities, by contrast, would likely
have been lawful had such a sale complied with certain
holding periods as outlined in the SEC’s rules and not been
part of any “chain of transactions . . . involving any public
offering.” 17 C.F.R. §§ 230.144 (a), (d).

Carley and Zacharias did not, however, have a
registration statement filed. Instead, they arranged with the
Peeper Entities that the latter would sell several million of
their original and warrant shares and would replace them with
shares from Carley and Zacharias, acquired by the latter
through exercise of their options. (Kaufmann, along with
Eugene G. Geiger, another registered representative
associated with Spencer Edwards, handled key aspects of the
sales.)

Analyzing the events, the SEC in effect collapsed the
transactions, and attributed the Peepers’ sales to petitioners.
Specifically, the SEC found that Starnet had extended the
period during which the Peeper Entities could exercise their
warrants to enable the Peeper Entities to participate in the
scheme. The Peeper Entities then exercised these warrants
and “resold those shares, along with [their original shares] . . .
in connection with a distribution in order to fund the option
 5

exercises of the Starnet Option Holders.” SEC Opinion at 14.
Because the Peeper Entities had exercised their warrants with
the intention of distributing them to the public, the SEC
concluded they were underwriters and were not exempt from
the registration requirements of the securities laws.
Furthermore, rather than view the option holders’ sales as
somehow separate from the Peeper Entities’ illegal sales to the
public, the SEC found that the option holders’ “sales to the
Peeper Entities were a necessary and critical step in the
overall distribution.” Id. at 15. Thus, because petitioners
Carley and Zacharias had sold their option shares to the
Peeper Entities and petitioner Kaufmann had executed these
sales, the SEC concluded that they should be held liable as
participants under §§ 5(a) and (c) of the Securities Act. As we
shall see, that decision was a triumph of substance over form.
Petitioners pose various legal challenges discussed below; to
the extent that they raise “substantial evidence” objections not
subsumed in the specific legal issues discussed, we reject such
objections as frivolous.

In addition, because Starnet did not disclose the existence
of the scheme in its annual report filed with the SEC, the
Commission found that Carley and Zacharias violated § 17(a)
of the Securities Act and § 10(b) of the Exchange Act (and
Rule 10b-5 promulgated thereunder) (collectively, the “fraud
violations”), as well as the reporting requirements of § 13(a)
of the Exchange Act and various rules thereunder. Both the
fraud and reporting violations turn on the SEC’s supposition
that the scheme was a material fact for purposes of that report.

All three petitioners now challenge the SEC’s
conclusions regarding § 5 and the resulting monetary
penalties. In addition, petitioners Carley and Zacharias
challenge the SEC’s finding that they violated the antifraud
and reporting requirements of the securities laws and its
cease-and-desist order.
 6

II.

We review the SEC’s findings of fact and legal
conclusions under the familiar principles of administrative
law. The findings of fact are subject to a review for
substantial evidence, see Wonsover v. SEC, 205 F.3d 408, 412
(D.C. Cir. 2000), and the “other conclusions may be set aside
only if arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law.” Graham v. SEC, 222
F.3d 994, 999-1000 (D.C. Cir. 2000) (internal quotation marks
omitted).

Sections 5(a) and (c) of the Securities Act prohibit the
“sale” and “offer for sale” of any securities unless a
registration statement is in effect or there is an applicable
exemption from registration. 15 U.S.C. §§ 77e(a),(c). There
is no dispute that the securities sold to the Peeper Entities and
those sold by the Peeper Entities to the public were not
registered under the Securities Act. SEC Opinion at 11.
Petitioners, however, did not actually distribute any shares
directly to the public. But we have previously held that for
the purposes of § 5 the petitioners do “not have to be involved
in the final step of the distribution to have participated in it.”
Geiger v. SEC, 363 F.3d 481, 487 (D.C. Cir. 2004). Here the
SEC, citing similar cases from other circuits, said that a
person who was a “necessary participant” or “substantial
factor” in the violation could be found liable. SEC Opinion at
17. Once participation in an unregistered sale has been
shown, the petitioners have the burden of proving an
exemption to the registration requirements. See SEC v.
Ralston Purina, 346 U.S. 119, 126 (1953) (“Keeping in mind
the broadly remedial purposes of federal securities legislation,
imposition of the burden of proof on an issuer who would
plead the exemption seems to us fair and reasonable”);
Geiger, 363 F.3d at 484 (same).
 7

Petitioners Zacharias and Carley claim exemption “under
Section 4(1) of the Securities Act . . . through operation of the
so-called ‘4(1 ½)’ exemption.” Zacharias Opening Br. 36. As
the Commission explained, “The Section 4(1 ½) exemption is
a ‘hybrid exemption’ not specifically provided for in the
Securities Act that basically allows affiliates to make private
sales of securities held by them so long as some of the
established criteria for sales under both Section 4(1) and
Section 4(2) of the Act are satisfied.” SEC Opinion at 14
(internal quotation marks omitted). The SEC contends, and
Zacharias and Carley accept, that the § 4 (1 ½) exemption will
not apply if an underwriter is in the picture. This is because,
although “the term ‘4 (1 ½) exemption’ adequately expresses
[the relationship between § 4(1) and § 4(2)],” the actual basis
“for private resales of restricted securities is § 4(1).”
Ackerberg v. Johnson, 892 F.2d 1328, 1335 n.6 (8th Cir.
1989). Section 4(1), in turn, exempts “transactions by any
person other than an issuer, underwriter, or dealer.” 15
U.S.C. § 77d(1) (emphasis added). Thus, if an underwriter is
present, the § 4(1) exemption, and by extension the 4(1 ½)
exemption, cannot apply. See SEC v. Kern, 425 F.3d 143, 152
(2d Cir. 2005) (“[I]f any person involved in a transaction is a
statutory underwriter, then none of the persons involved may
claim exemption under Section 4(1).”). So the § 4 (1 ½)
question boils down to Zacharias and Carley’s claim that the
Peeper Entities were not underwriters.

Petitioner Kaufmann also asserts an exemption that turns
on whether or not an underwriter was present. He claims that
the Peeper Entities’ sales to the public were exempt under
Regulation S. That regulation provides two safe harbors from
the registration requirements, one allowing for issuers to sell
unregistered securities in certain offshore transactions, and the
other for resales of such securities, as long as certain
requirements are met. See 17 C.F.R. §§ 230.901-904. The
SEC, in an attempt to combat abuses under Regulation S
 8

whereby issuers funnel securities through foreign entities back
to U.S. markets, has made clear that Regulation S will not
apply to “[p]ublic resales in the United States by persons that
would be deemed underwriters under Section 2(11) of the
Securities Act.” Problematic Practices Under Regulation S,
Securities Rel 33-7190 (June 27, 1995), 1995 WL 385849
n.17 (June 27, 1995). Thus, like § 4(1 ½), Regulation S turns
on whether an underwriter is involved in the transaction.

Unfortunately for petitioners, the SEC’s conclusion that
the Peeper Entities were statutory underwriters is amply
supported. Section 2(a)(11) of the Securities Act defines
“underwriter” as “any person who has purchased from an
issuer with a view to . . . the distribution of any security, or
participates . . . in any such undertaking.” 15 U.S.C.
§ 77b(a)(11). In the present case, the Peeper Entities
exercised warrants for Starnet shares and soon sold them to
the public, along with their remaining original stock. The
only reason the Peeper Entities were able to exercise these
warrants was the existence of the scheme, for the warrants
would have expired, completely worthless, had not Starnet
extended the time of their expiration. Though Zacharias and
Carley claim the SEC lacked substantial evidence to support
its finding that the warrant period was extended in order to
effectuate the scheme, the SEC reasoned that Starnet extended
the warrants’ term because the Peeper Entities’ original shares
were not enough to offset the anticipated number of shares to
be sold by Starnet’s option holders (including officers other
than Zacharias and Carley). See SEC Opinion at 7-8.
Petitioners, in fact, can point us to no other reason why
Starnet might have offered the Peeper Entities what proved to
be such a valuable extension. Furthermore, the Peeper
Entities’ initial sales to the public were occasioned by the
assurance that the shares would be replaced by those held by
the Starnet officers.
 9

Thus, the Peeper Entities clearly “purchased Starnet
common stock on the exercise of the warrants . . . with a view
to the distribution of such shares,” making them underwriters.
SEC Opinion at 14. Only by viewing the Peeper Entities’
sales to the public as somehow entirely separate from the
officers’ sales to them, as petitioners urge us to do, could the
Starnet officers’ sales possibly be considered “private.” But
the record provides ample evidence that all of the sales were
connected. See, e.g., Exhibit 67, Joint Appendix (“J.A.”) 956
(a memorandum from Peeper’s attorney, Dennis Brovarone,
explaining the details of the scheme). Thus we easily find
substantial evidence and adequate reasoning to support the
SEC’s conclusion that the Peeper Entities were underwriters.

Zacharias claims a want of substantial evidence for the
SEC’s finding that he “knew, or should have known” of the
Peeper Entities’ sales to the public; this, he says, brings the
§ 4(1 ½) exemption back into the picture. To support the
argument, he says that he did not know of the Peeper Entities’
later sale of the stock when he sold the shares, and believed
that his sale to the Peeper Entities was a legitimate private
transaction.

The SEC offers two arguments in response. First, it
claims that § 5 imposes strict liability on participants. In its
opinion below, however, it left the issue obscure. It stated at
the outset that “[a] showing of scienter is not required to
establish a violation of § 5.” SEC Opinion at 11 (citing
Swenson v. Engelstad, 626 F.2d 421, 424 (5th Cir. 1980), and
SEC v. Universal Major Indus. Corp., 546 F.2d 1044, 1046-47
(2d Cir. 1976)). But then it went on to find that “Carley and
Zacharias knew, or should have known, of the Peeper Entities
role as the conduit of shares of Starnet Common stock to the
public.” SEC Opinion at 15 (emphases added). If the SEC
were applying a strict liability standard, such a finding would
have been unnecessary.
 10

Ultimately, we need not resolve the question of whether
strict liability applies because we affirm the SEC’s finding
that petitioner Zacharias knew or should have known of the
Peeper Entities’ distribution to the public. Even if we accept
Zacharias’s argument that he was not aware that the Peeper
Entities would immediately resell his shares to the public, the
SEC found that he and Carley “sold their Plan Shares to the
Peeper entities to replace the Starnet shares that the Peeper
Entities had owned and previously sold to the public on behalf
of Starnet Option Holders.” SEC Opinion at 15. It was this
involvement that served as the “necessary and critical step” in
the scheme. Id. Zacharias’s only attack on the finding is a
claim that it is “illogic[al]” for the SEC to say that his
subsequent sale to the Peeper Entities was a necessary step in
a prior sale by those entities. But the supposed “illogic” of
this claim is undermined by the very presence of the scheme.
The Brovarone memorandum, see Exhibit 67, J.A. 956,
specifically lays out the process whereby the option holders’
subsequent sales to the Peeper Entities compensated the
Peeper Entities for the initial sales to the public. While
Zacharias notes that his sales were completed before the
Brovarone memorandum was written, the SEC’s argument is
not that the memorandum informed Zacharias but that it
summarized a pre-existing plan and that Zacharias’s
knowledge of the plan’s existence could be readily inferred.
The finding that Zacharias knew or should have known of the
sales to the public is therefore supported by substantial
evidence.

Thus, since we reject the application of the § 4(1 ½)
exemption and because petitioners Carley and Zacharias do
not contest the SEC’s finding that they were “substantial
factors” in the scheme, we may affirm the SEC’s conclusion
that Zacharias and Carley were liable as participants in the § 5
violations.
 11

Apart from his Regulation S exemption claim, Kaufmann
urges that the sales he executed from the Starnet officers to
the Peeper Entities were exempt as private resales under Rule
144. That Rule provides criteria for “determining whether a
person is not engaged in a distribution,” thus creating a “safe
harbor from the Section 2(a)(11) definition of ‘underwriter.’”
Preliminary Note to Rule 144, 17 C.F.R. § 230.144. It
explicitly limits the safe harbor to certain sales of “restricted
securities,” id. § 230.144(b)(1)(i), and in turn it limits
restricted securities to securities acquired from an issuer “in a
transaction or chain of transactions not involving any public
offering,” 17 C.F.R. § 230.144(a)(3)(i) (emphasis added).
There is no dispute in this case that the Peeper Entities offered
and sold their original Regulation S and warrant shares to the
public, and, as we said before, the SEC reasonably found that
the option holders’ “sales to the Peeper Entities were a
necessary and critical step in the overall distribution.” SEC
Opinion at 15. Rule 144 does not apply.

Petitioner Kaufmann advances several additional
arguments, independent of his exemption theories, as to why
he did not violate § 5. First, he argues that he was not a
statutory seller of securities for the purposes of § 5 because he
did not solicit the public to buy any of the shares from the
Peeper Entities accounts. Here he relies on Pinter v. Dahl,
486 U.S. 622 (1988), where the Court, interpreting the
language of § 12(1) of the Securities Act, making a § 5
violator liable in rescission “to the person purchasing [a]
security from him,” 15 U.S.C. § 77l(a), held that being
“merely a ‘substantial factor’ in causing the sale of
unregistered securities is not sufficient in itself to render a
defendant liable under §12(1).” Pinter, 486 U.S. at 654.
Because of the “purchas[e] . . . from” requirement, §12(1)
liability “extends only to the person who successfully solicits
the purchase, motivated at least in part by a desire to serve his
own financial interests or those of the securities owner.” Id. at
 12

647. As § 5 does not include the “purchas[e] . . . from”
language or any equivalent, Pinter is plainly of no use to
Kaufmann. SEC v. Phan, 500 F.3d 895, 906 n.13 (9th Cir.
2007). See also Geiger, 363 F.3d at 488 (expressing doubt
that “Pinter is on point” as applied to § 5 violations).

Kaufmann next argues that he was not a “substantial
factor” in the sale of the securities to the public because his
only role in the scheme was to sell the shares in the Starnet
officers’ accounts at Spencer Edwards. The SEC found him a
“substantial factor” because he accepted the orders to sell the
Starnet officers’ stock, completed the Forms 144 in
connection with these sales, and ensured that the Peeper
Entities and their attorney, Dennis Brovarone, had appropriate
funds wired to them. As the Peeper Entities would not have
sold the shares to the public absent the sale of the Starnet
officers’ stock to the Peeper Entities, and the Peeper Entities
could not have engaged in their additional sales to the public
without these transfers, the SEC’s finding is adequately
supported.

Kaufmann also claims that he properly relied on
attorneys’ opinions that the sales from the Starnet officers to
the Peeper Entities were proper and hence he did not willfully
violate §§ 5(a) and (c). It appears to be an open question in
this circuit whether reliance on the advice of counsel is a good
defense to a securities violation, see SEC v. Savoy Industries,
Inc., 665 F.2d 1310, 1315 n.28 (D.C. Cir. 1981), and the
parties have not pointed us to any cases resolving the issue.
Nor need we resolve it now, because even if counsel’s advice
is a valid defense Kaufmann could not show that he had met
the prerequisites, i.e., that he “(1) made a complete disclosure
to counsel; (2) requested counsel’s advice as to the legality of
the contemplated action; (3) received advice that it was legal;
and (4) relied in good faith on that advice.” Id. Kaufmann
points to several letters from various lawyers involved in the
 13

scheme opining on the legality of portions of the transactions
at issue in this case, but not one of them addresses the legality
of the swap transaction that enabled the option holders to
exercise their options through the Peeper Entities’ sales to the
public. There is only one letter in the record that discusses the
entirety of the transactions at issue here, one from attorney
Brovarone, and at no point in that letter does Brovarone
express any opinion on the legality of the scheme as a whole.
See Exhibit 67, J.A. 956-57; SEC Opinion at 20.

Finally, Kaufmann advances a procedural argument,
claiming that the SEC’s denial of his motion to sever his
proceedings from those of the other parties before the
Commission denied him due process and a fair trial.
Although “an agency does not have unlimited discretion to
consolidate cases,” Kaufmann must show “prejudice from the
Commission’s decision to consider his case along with those
of others involved in the alleged fraud.” Nassar and Co. v.
SEC, 566 F.2d 790, 792 n.4 (D.C. Cir. 1977). As evidence of
prejudice, Kaufmann says that in denying his motion to sever,
the SEC pointed to the fact that “Kaufmann has been charged
with aiding and abetting the violations of the other
Respondents,” John A. Carley, Order Denying Motion of
Thomas. A. Kaufmann to Sever Proceedings 2, Admin. Proc.
File No. 3-11626, Securities Exchange Act Rel. No. 50695
(Nov. 18, 2004), while in fact the aiding and abetting charge
was later rejected by the Administrative Law Judge. But the
SEC referred to the aiding and abetting charge simply in
determining that the case “involved common questions of law
and fact,” id.; as “all the Respondents were involved in an
integrated scheme to distribute unregistered securities,” id., it
did involve such questions.

Kaufmann also claims prejudice on the ground that the
evidence against him was “impossibly compromised by the
complex, sketchy and inconsistent evidence” against the other
 14

respondents. But in making that claim Kaufmann relies on a
proposition that torpedoes it, namely the ALJ’s
acknowledgement that “[n]o single witness could fully explain
the mechanics of the scheme.” John. A. Carley, Initial
Decision 16, Initial Decision Release No. 292, Admin. Proc.
File No. 3-11626 (July 18, 2005) (“Initial Decision”). The
charges against Kaufmann were based on that scheme just as
much as were those against the other respondents.

III.

Petitioners Carley and Zacharias advance numerous
arguments in response to the SEC’s findings of fraud and
reporting violations, only one of which we need to address
here. The SEC found that Zacharias and Carley “violated the
antifraud provisions of the federal securities laws when they
omitted to disclose as a related-party transaction in Starnet’s
1999 annual report the nature and extent of the plan to provide
Starnet officers and employees with a way in which to
exercise their [stock] options.” SEC Opinion at 33. In order
to prove a violation of the fraud prohibition, it is necessary to
show, among other things, that petitioners’ omission was of a
material fact. See § 17(a) of the Securities Act, 15 U.S.C.
§ 77q(a)(1); Section § 10(b) of the Exchange Act, 15 U.S.C.
§ 78j(b); Rule 10b-5, 17 C.F.R. § 240.10b-5. Similarly, the
basis for the SEC’s finding that Carley and Zacharias violated
the Commission’s reporting requirements was that they
“omitt[ed] material information from the applicable Starnet
reports.” SEC Opinion at 33 (emphasis added).

“[T]o fulfill the materiality requirement, there must be a
substantial likelihood that the disclosure of the omitted fact
would have been viewed by the reasonable investor as having
significantly altered the total mix of information made
available.” Basic Inc. v. Levinson, 485 U.S. 224, 231-32
 15

(1988) (internal quotation marks omitted). The SEC’s finding
of materiality was, in its entirety, as follows:

The omitted disclosures were material because they had
the effect of hiding the distribution through the Peeper
Entities sales of unregistered Starnet securities to
facilitate the exercise of options by Starnet officers in
violation of Securities Act Section 5. Thus, the
undisclosed sales could expose the company to claims of
rescission under Securities Act Section 12.

SEC Opinion at 32-33.

Contrary to the SEC’s blanket assertion, it is far from
clear that the scheme would have exposed Starnet to plausible
claims of rescission (or damages in lieu of rescission). As we
have seen, § 12(a)(1) of the Securities Act, 15 U.S.C.
77l(a)(1), does provide for a rescission remedy against
violators of § 5. But it provides that remedy only for “the
person purchasing such security from” the violator. 15 U.S.C.
77l(a). As a result, “remote purchasers are precluded from
bringing actions against remote sellers.” Pinter, 486 U.S. at
644 n.21.

Here the only direct purchasers from Starnet were the
officers and employees who exercised their options and the
Peeper Entities, which purchased stock via exercise of their
warrants. While the Starnet officers and directors would have
standing to bring a claim for damages in lieu of rescission, the
nature of the scheme renders the probability that Starnet
would have to pay any damages virtually nil. Section 12(a)
allows recovery of “the consideration paid for such security
with interest thereon, less the amount of any income received
thereon.” 15 U.S.C. § 77l(a). As the scheme enabled the
Starnet officers to resell and realize a substantial profit on the
shares substantially simultaneously with their purchases, the
 16

proper recovery would appear to be zero (even disregarding
the company’s potential defense that the officers’ hands were
unclean).

As to the Peeper Entities, the unclean hands defense
appears an insuperable obstacle. The SEC found that Mr.
Peeper helped develop the scheme at issue in this case, SEC
Opinion at 6, that he “controlled” the relevant Peeper Entities,
id., and that these entities acted as “a conduit . . . for the
distribution to the public [of Starnet shares],” id. at 14.
Apparently bearing “at least substantially equal responsibility
for the violations he seeks to redress,” Batemen Eichler, Hill
Richards, Inc. v. Berner, 472 U.S. 299, 310-11 (1985), Peeper
would appear barred unless preclusion of the suit would
“significantly interfere with the effective enforcement of the
securities laws and protection of the investing public,” id.
Nothing suggests that such preclusion is likely.

On appeal, the SEC offers no further explanation for why
Starnet would be exposed to claims of rescission. Instead it
argues that the “concealed dilution resulting from the public
distribution of Starnet shares” made the omission material.
See Respondent Br. at 40. As we do not accept appellate
counsel’s post hoc rationalizations, Burlington Truck Lines,
Inc. v. U.S., 371 U.S. 156, 168 (1962), this theory is not
properly before us.

We therefore grant the petition for review of the
Commission’s decision on the fraud and reporting allegations.
We leave it to the Commission on remand to address any of
the petitioners’ remaining arguments on those violations.
Furthermore, since the Commission based its cease-and-desist
orders against Carley and Zacharias in part on “[t]heir failures
to disclose material facts in violation of the antifraud
provisions,” SEC Opinion at 41, we also leave those issues to
 17

the Commission for such reconsideration as it may find
necessary.

IV.

As we uphold the SEC’s § 5 findings, and its monetary
sanctions against all three petitioners were based solely on the
§ 5 violations, SEC Opinion 44, we must turn to their
challenges to those remedies. We first consider Kaufmann’s
arguments, then Zacharias’s and Carley’s.

A.

The Commission barred Kaufmann from association with
any broker-dealer (with the right to reapply after five years),
but he does not attack that order (except insofar as he
challenges the Commission’s merits conclusion). He does
attack the Commission’s disgorgement order against him,
requiring him to disgorge half the total commissions received
by Spencer Edwards for all the sales at issue here, arguing that
it was excessive and not based on substantial evidence. He
admits that the Commission had substantial evidence of the
“total commissions generated by [the combined Peeper
Entities sales and Starnet option holder] sales at the brokerage
firm,” Kaufmann Reply Br. at 11-12, but claims the
Commission erred in finding a 50/50 split of the commissions
as between him and Geiger.

On the 50/50 split issue, the Commission based its order
on the ALJ’s finding of such a split. SEC Opinion at 45. The
ALJ in turn based his finding on two key pieces of evidence.
First, he cited a Commission decision in a prior case finding
that during 1996 “Geiger generally received a 50% split of the
joint commissions.” Initial Decision at 73 (citations omitted).
Second, the evidence proffered by Kaufmann, “an unsigned
 18

handwritten contract” that purported to show that his monthly
split ranged from 45% to 24%, id., also said that expenses
would be split in the same proportion; yet, as the ALJ pointed
out, Kaufmann claimed he paid 50% of the base salary of the
assistant he shared with Geiger. Id. The Commission’s 50/50
split decision was thus a “reasonable approximation [for
division] of profits causally connected to the violation,”
shifting the burden to Kaufmann to show otherwise. SEC v.
First City Financial Corp., Ltd, 890 F.2d 1215, 1231-32 (D.C.
Cir. 1989).

In support of his critique Kaufmann points to an exhibit
which illustrates that “Kaufmann handled the officers’ 144
trades . . . and Geiger handled the Peeper entities trades.”
Kaufmann Opening Br. at 32 (citing Exhibit TK-1, J.A. 522).
But that division of labor is not necessarily controlling on how
the commissions were split. Further, while Kaufmann asserts
alternative ways of splitting commissions, the assertions
appear mutually contradictory. He at one point claimed that
they were based on “who generated the business,” but at
another read the handwritten document as calling for splitting
commissions “on a sliding scale that varied from month to
month.” SEC Opinion, J.A. 261. Understandably, the SEC
affirmed the ALJ’s finding that Kaufmann’s alternate
explanations “lacked credibility,” id. at 46, and this court is
“least inclined to second guess such [credibility] findings
where, as here, the Commission affirmed the ALJ who, of
course, heard the testimony in question.” Whitney v. SEC,
604 F.2d 676, 683 (D.C. Cir. 1979). We affirm the SEC’s
disgorgement order.

Kaufmann also challenges the SEC’s imposition of a civil
penalty of $110,000. He argues first that he only received
$32,527 in commissions, an argument we have already
rejected. Next he argues that his case is similar to other SEC
decisions where a civil penalty was not imposed. But as we
 19

have said in the past, “The Commission is not obligated to
make its sanctions uniform, so we will not compare this
sanction to those imposed in previous cases.” Geiger, 363
F.3d at 488. Finally, he argues that the civil penalty was
inappropriate because it will not “remedy ‘the damage caused
to the harmed parties by the defendant’s action.’” Kaufmann
Brief 33 (quoting Johnson v. SEC, 87 F.3d 484, 488 (D.C. Cir.
1996)). But Johnson was directed at defining the word
“penalty” for the purposes of applying 28 U.S.C. § 2462,
which bars recovery of a “penalty” unless the action was
“commenced within five years from the date when the claim
first accrued.” See Johnson, 87 F.3d at 486-87 (internal
quotation marks omitted). Here the SEC said that it did “not
consider misconduct occurring before September 1, 1999, in
determining to impose bars or civil penalties, but rather [has]
based these sanctions exclusively on [Kaufmann’s] conduct
during the five-year period preceding the issuance of the
[charges against him].” SEC Opinion at 36. This would seem
to take Johnson’s standard out of the picture;yet Kaufmann
nowhere contradicts the SEC claim, nor offers any other
reason why the Commission must be limited to sanctions
designed to remedy “the damage caused to the harmed parties
by the defendant’s action.”

B.

Finally, we turn to the disgorgement orders imposed
against Zacharias and Carley. Under 28 U.S.C. § 2462,
agencies may not impose civil penalties in an enforcement
action initiated more than five years after the offender
committed the illegal act. 3M Co. v. Browner, 17 F.3d 1453,
1456-58 (D.C. Cir. 1994). The Commission initiated this
action on September 1, 2004, more than five years after
Zacharias and Carley’s illegal sales. Section 2462 therefore
prohibited the Commission from imposing civil penalties on
 20

either of them. The question is whether, as Zacharias and
Carley argue, the Commission’s order requiring them to
disgorge all profits (plus prejudgment interest) from their
illegal transactions imposes a civil penalty on them.

Zacharias and Carley think Johnson v. SEC, 87 F.3d 484
(D.C. Cir. 1996), supports their position. Johnson, a
brokerage firm manager, supervised brokers who stole
roughly $140,000 from customers. The Commission imposed
an order of censure and a six-month suspension on him in a
proceeding commenced more than five years after the theft.
Id. at 485-86. We held that the order was punitive, reasoning
that it was not causally related to the wrongdoing and went
well beyond restoring the stolen $140,000 to the customers.
Id. at 491-92. Quoting Johnson, Zacharias and Carley say the
disgorgement order against them was also punitive because it
did not “remedy[] the damage caused to the harmed parties by
the defendant’s action,” and did not wholly “restore the status
quo ante.” Id. at 488, 491.

Harm to third parties may be a useful measure of a
violator’s wrongdoing. But “[w]hether or not [Zacharias and
Carley’s] securities violations injured others is irrelevant to
the question whether disgorgement is appropriate. The
primary purpose of disgorgement is not to refund others for
losses suffered but rather to ‘deprive the wrongdoer of his ill-
gotten gain.’” SEC v. Bilzerian, 29 F.3d 689, 696 (D.C. Cir.
1994) (quoting SEC v. Blatt, 583 F.2d 1325, 1335 (5th Cir.
1978)); see SEC Opinion at 44-45.

Petitioners’ other quotation from Johnson is part of this
statement: “where the effect of the SEC’s action is to restore
the status quo ante, such as through a proceeding for
restitution or disgorgement of ill-gotten profits, § 2462 will
not apply.” Johnson, 87 F.3d at 491. The full statement
reflects the point – which petitioners ignore – that
 21

disgorgement restores the status quo ante by depriving
violators of ill-gotten profits. They also misread the statement
to mean that all remedial sanctions must restore violators to
the exact financial situation they were in before their wrongful
acts. As we recognized in Johnson and as the Commission
pointed out in this case, SEC Opinion at 44, the fact that
defendants may suffer some loss is not sufficient to render a
sanction punitive. Johnson, 87 F.3d at 488 (citing United
States v. Halper, 490 U.S. 435, 447 n.7 (1989)).

Our disgorgement cases uniformly hold that an “order to
disgorge is not a punitive measure; it is intended primarily to
prevent unjust enrichment.” SEC v. Banner Fund Int’l, 211
F.3d 602, 617 (D.C. Cir. 2000); see Bilzerian, 29 F.3d at 696;
SEC v. First City Fin. Corp., 890 F.2d 1215, 1231 (D.C. Cir.
1989); see also Blatt, 583 F.2d at 1335. Disgorgement
deprives wrongdoers of the profits obtained from their
violations. Bilzerian, 29 F.3d at 696; Blatt, 583 F.2d at 1335;
SEC v. Lorin, 869 F.Supp. 1117, 1123 (S.D.N.Y. 1994). In
theory, a disgorgement order might amount to a penalty if it
was not “causally related to the wrongdoing” at issue. First
City, 890 F.2d at 1231; cf. Am. Bus. Ass’n v. Slater, 231 F.3d
1, 6 (D.C. Cir. 2000). Petitioners do not dispute that the order
against them was causally related to their wrongdoing – the
amount they had to disgorge was measured by the profits from
their illegal transactions. Nor do they argue that the
Commission had the burden to determine the hypothetical
market value of the options they had been holding and then to
offset their disgorgement by that amount. They merely assert,
without factual support, that prior to the transaction they
“owned shares of Starnet actually worth the amount for which
it [sic] was sold.” Brief in Support of Petition for Review of
Respondent Christopher H. Zacharias at 18 (Oct. 17, 2005).
They make this statement in the context of their status quo
ante argument, which the Commission properly rejected. SEC
Opinion at 44-45.
 22

Our dissenting colleague would vacate the disgorgement
order because the Commission did not deduct the value of the
options from the disgorgement amount. Dissent at 4. But
petitioners never asked the Commission to value the options
or to perform the calculation the dissent contemplates, and
petitioners’ briefs in this court never mentioned the issue
discussed in the dissent. 2 We have no jurisdiction to consider
an objection a petitioner did not make in the agency
proceeding. 15 U.S.C. § 77i; see EEOC v. FLRA, 476 U.S.
19, 22-24 (1986) (indicating that exhaustion requirements are
jurisdictional and cannot be waived by the agency); Woelke &
Romero Framing, Inc. v. NLRB, 456 U.S. 645, 665-66 (1982)
(same). 3 More than that, disgorgement need only be a

2
The record suggests why petitioners never pursued such relief.
Securities laws in Canada, petitioners’ country of residence, barred
them indefinitely from selling the shares redeemed from exercise of
the options. The options were thus worth little or nothing to
petitioners, especially in the short term. This is why Zacharias and
his partners set up the illegal swap transaction. In addition, the
effect of complying with U.S. law would likely have been
substantial. Registration disclosures may have harmed Starnet’s
share price because its gambling enterprise was illegal in one of the
company’s principal places of business. A Canadian Mountie raid
occurring shortly after petitioners’ options transaction led to
Starnet’s share prices dropping sharply, never to recover.
3
The dissent views our decision as holding that “we are
jurisdictionally barred from considering petitioners’ contentions, or
at least some aspect of them.” Dissent at 6. But neither in this
court nor in the administrative proceedings did petitioners ever
make the “contentions” the dissent ascribes to them. Petitioners’
objection about the Commission’s failure to restore them to their
status quo ante position rested on their contention that they should
have been permitted to retain the entire value of the stock they
obtained during the illegal transaction. As stated in the text,
petitioners did not mention or even hint at the dissent’s contention
 23

reasonable approximation of the profits causally connected to
the violation. First City, 890 F.2d at 1231; Bilzerian, 29 F.3d
at 697. Courts often “require the violator to return all profits
made on the illegal trades.” First City, 890 F.2d at 1231; see
also Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 171 (2d
Cir. 1980). It was not the Commission’s burden, sua sponte,
to calculate the hypothetical value of the options and subtract
the value from petitioners’ profits. See First City, 890 F.2d at
1231. “Placing the burden on the petitioners of rebutting the
SEC’s showing of actual profits . . . may result, as it has in the
insider trader context, in actual profits becoming the typical
disgorgement measure.” Id. at 1232. But the well-established
principle is that the burden of uncertainty in calculating ill-
gotten gains falls on the wrongdoers who create that

that the Commission should have deducted the value, if any, of their
options.

Although Judge Williams quotes Carley mentioning his
options, he does not include the sentences immediately following,
where Carley argues that the Commission must “restore the
valuable property rights in Starnet stock which Carley held at the
time.” Carley Opening Br. at 19; see also Zacharias Opening Br. at
39 (“Returning Mr. Zacharias to the status quo ante would require
restoration of those shares [of Starnet] to him.”). The common
theme of petitioners’ arguments is that they should not have to
disgorge any money at all. To its credit, the dissent makes no such
argument. The reason for the discrepancy is that petitioners’
argument, unlike the dissent’s, was not aimed at the Commission’s
calculation of ill-gotten profits. Cf. Bilzerian, 29 F.3d at 697
(resolving challenge to calculation of disgorgement amount). Their
only argument was that in this particular case any disgorgement
remedy would be punitive and therefore barred by the five-year
statute of limitations. See, e.g., Zacharias Opening Br. at 37-40.
 24

uncertainty. Id.; Bilzerian, 29 F.3d at 697; see Johnson, 87
F.3d at 488.

For the foregoing reasons, we grant the petition for
review with respect to Zacharias and Carley’s fraud and
reporting violations, as well as the cease-and-desist orders
based thereon, and remand for further proceedings. We deny
the petition for review with respect to the § 5 violations and
associated penalties.
 WILLIAMS, Senior Circuit Judge, dissenting in part: I
respectfully dissent from Part IV.B of the court’s opinion,
which rejects Zacharias’s and Carley’s petition for review of
the SEC’s disgorgement order.

We have explained in the past that “disgorgement may
not be used punitively” and that it applies only to “property
causally related to the alleged wrongdoing.” SEC v. First City
Financial Corp., 890 F.2d 1215, 1231 (D.C. Cir. 1989). As a
result, “the SEC generally must distinguish between legally
and illegally obtained profits.” Id. See also Johnson v. SEC,
87 F.3d 484, 491 (D.C. Cir. 1996) (explaining that it is not a
punishment “where the effect of the SEC’s action is to restore
the status quo ante, such as through a proceeding for...
disgorgement of ill-gotten profits”). In First City we specified
a sequence to be followed in such matters. We said that “the
government’s showing of appellants’ actual profits on the
tainted transactions at least presumptively satisfied” the
government’s burden to show that “its disgorgement figure
reasonably approximates the amount of unjust enrichment.”
890 F.2d at 1232 (emphasis added). At that point, “the burden
of going forward shifted to [appellants, who] were then
obliged clearly to demonstrate that the disgorgement figure
was not a reasonable approximation.” Id. Here (contrary to
the panel’s assertion, Maj. Op. at 21), the SEC did not attempt
even a superficial showing of petitioners’ profits; instead it
pointed simply to their proceeds from the sales, after an
arbitrary deduction of some costs but not others. The case
should be remanded to the Commission to take the first step
prescribed by First City.

Our cases make clear that proceeds alone cannot normally
be regarded an approximation of profits. In First City
appellants had violated § 13(d) of the Exchange Act by
deliberately failing to disclose their accumulation of over five
 2

percent of a company’s stock within 10 days. 890 F.2d at
1217. As a result of their trades they received proceeds of
$134.1 million, “resulting in a $15.4 million profit.” Id. at
1220. The district court ordered disgorgement of a subset of
this profit, $2.7 million, excluding increases in stock value
occurring before appellants’ duty to reveal their purchases
arose. The district court saw that subset as causally related to
the violation, explaining that appellants’ purchases thereafter
were “at an artificially low price due to their failure to make
the section 13(d) disclosure.” Id. at 1221. We approved that
reasoning. Id. at 1230.

SEC v. Bilzerian, 29 F.3d 689 (D.C. Cir. 1994), is similar.
Bilzerian had concealed his stock holdings and his financing
capabilities in order “to create the impression that he was
ready, willing and able to mount hostile takeovers.” Id. at
692. As a result, he was found to have violated § 10(b) and
§ 13(d) of the Exchange Act. The district court found, and we
affirmed, that Bilzerian’s “misrepresentations inflated the
price he received from the sale of the securities.” Id. at 696.
As a result, the court “ordered Bilzerian to disgorge the
difference between the price he received for the sale of his
shares—inflated artificially by his false filings with the
SEC—and the price the shares would have brought were it not
for his untimely and misleading filings.” Id. at 697. Though
the defendant challenged the amount of disgorgement ordered
by the district court, we affirmed because the “court was
careful to order disgorgement of the profits caused by
[defendant’s] securities violations only.” Id. (emphasis
added). As had the court in First City, the district court had
started by subtracting the defendant’s purchase price of the
stock from his final sale price (before making a further
adjustment to avoid any disgorgement of legitimate
appreciation). Id.
 3

Thus, in both Bilzerian and First City we affirmed
disgorgement orders only when they were limited to an
approximation of the profits received by the defendants
attributable to their unlawful conduct. Neither First City nor
Bilzerian treats an initial calculation of mere proceeds as
adequate to force the defendants to provide an alternative
calculation of actual profits. Rather, in both cases the court
first deducted the entire cost of acquiring the stock used to
perpetuate the fraud from the wrongdoer’s final proceeds, and
then further reduced the disgorgement amount so that it
reasonably approximated the profits actually caused by the
fraud.

Here, in purporting to restore the status quo ante, and
even though it claimed to be following the sequential process
outlined in our cases, see John A. Carley, Opinion of the
Commission and Order Imposing Remedial Sanctions 43-44,
Admin. Proc. File No. 3-11626, Securities Act Release No.
8888, 92 SEC Docket 1693 (Jan. 31, 2008)(“SEC Opinion”),
the SEC took a far different approach. Rather than making
any attempt to deduct the entire cost of the stock or in any
way calculate how the § 5 violations affected petitioners’
selling price, it focused only on their proceeds. When
discussing petitioner Zacharias’s disgorgement order, it stated,
“Zacharias sold [stock] in violation of Section 5 of the
Securities Act. Disgorgement prevents Zacharias from
retaining the proceeds of these illegal sales and as such serves
a remedial rather than a punitive purpose.” See SEC Opinion
44 (emphasis added). Similarly, when discussing petitioner
Carley’s disgorgement order, the SEC stated, “The amounts
Carley received through these sales are therefore ill-gotten
gains that should be disgorged.” Id. (emphasis added). The
SEC made no finding, as we did in both Bilzerian and First
City, that petitioners’ conduct somehow influenced their
stock’s cost or selling price. Indeed, the only evidence in the
record that speaks to the price of the stock indicates that it was
 4

the general rise in the price of technology stocks, coupled with
Starnet’s drastic increase in net revenue, that led to its price
explosion. See John A. Carley, Initial Decision 6, Initial
Decision Release No. 292, Admin. Proc. File No. 3-11626
(July 18, 2005). Were the SEC’s reasoning sound, the
Commission in First City could have shifted the burden to
appellants merely by noting the proceeds of $134 million.

In essence, the SEC’s simulated computation of the status
quo ante disregarded the property that petitioners supplied in
return for the Starnet stock that was then sold in violation of
§ 5—the options that had been legally registered and issued to
them pursuant to Starnet’s Forms S-8. See SEC Opinion at 5.
The Commission made no attempt to explain why it did not
deduct the options’ value. Consider an economically
equivalent transaction: suppose that instead of being paid in
part with options, petitioners’ salaries had been equivalently
higher and they had used the incremental cash income to
purchase Starnet stock to funnel through the Peeper Entities to
the public. In such a scenario, the SEC’s failure to deduct the
cost would have represented a naked violation of the
principles of First City and Bilzerian.

To be sure, the fact that the cost of petitioners’ stock took
the form of options made it harder to compute a restoration of
the status quo ante. Application of those cases’ principle
would require a calculation of the value of the options that
petitioners could have legitimately and contemporaneously
realized. The calculation might well have been difficult, and
under our cases petitioners would have borne “the risk of
uncertainty.” First City, 890 F.2d at 1232. (I note, however,
that in order to show the effect of the employee stock options
on the company’s net income, Starnet filed reports stating the
fair value of the options calculated under methods approved
by the Commission. See, e.g., Exhibit 442, Joint Appendix
1332.) While the majority suggests various factors that might
 5

have justified the SEC in assigning the options a zero value,
see Maj. Op. at 22 n.2, the SEC Opinion’s pretend search for
the status quo ante makes no mention of petitioners’ costs and
simply asserts that their proceeds resulted from their § 5
violation. We can affirm only on the basis of the
Commission’s reasoning, see, e.g., SEC v. Chenery Corp., 318
U.S. 80, 88 (1943), not on my colleagues’ speculations,
however intuitively plausible and perhaps, in the end, correct.

Though the Commission consistently referred to its
disgorgement amount as an approximation of mere
“proceeds,” it evidently made a deduction for the exercise
price of the options and brokers’ fees, as the Commission only
ordered disgorgement of the final amounts actually remitted to
petitioners Carley and Zacharias in their brokerage accounts,
which were net of these costs. If anything, this makes the
Commission’s position even more obscure. The fact that it
deducted some costs for obtaining the stock provides no
answer for why it failed to deduct others. If the majority is
right, and the SEC can simply point to proceeds without any
explanation as to why certain costs of obtaining such proceeds
are irrelevant, then it can simply pull a profit estimate out of
thin air (e.g., gross proceeds) and thereby switch the burden to
the petitioners to refine that calculation. Our case law,
however, clearly requires that the SEC, on its own, make a
“reasonable approximation of profits,” First City, 890 F.2d at
1231, and not an entirely arbitrary one.

The majority relieves the SEC of its burden to value the
options on its own because “the burden of uncertainty in
calculating ill-gotten gains falls on the wrongdoers who create
that uncertainty.” Maj. Op. at 23-24. But none of the cases
cited by the majority supports the proposition that uncertainty
shifts the initial burden. Instead, the cases merely justify
imprecision in that attempt so long as the attempt itself was a
reasonable one. See First City, 890 F.2d at 1232 (explaining
 6

that “the risk of uncertainty should fall on the wrongdoer
whose illegal conduct created that uncertainty” only after the
SEC’s showing of a reasonable approximation of actual
profits); Bilzerian, 29 F.3d at 697 (same).

I am somewhat puzzled by the panel’s suggestion that we
are jurisdictionally barred from considering petitioners’
contentions, or at least some aspect of them. The court
concedes petitioners properly raised, both before us and the
SEC, the argument that the SEC’s order failed to restore the
status quo ante. See Maj. Op. at 21. As the Commission’s
“proceeds” analysis did not even allude to what petitioners’
gave up in exchange for the proceeds, it plainly made no
effort at all to approximate the status quo ante—at least no
non-frivolous effort.

Even assuming arguendo that the SEC’s superficial
discussion was enough to meet its burden under First City, the
panel’s claim that petitioners did not adequately raise the issue
of the consideration they provided turns on a quibble. Before
the Commission they argued that the disgorgement should be
zero, because they gave up their stock, which they asserted
was “actually worth the amount for which it was sold” and
whose value had been found by the administrative law judge
to be based on Starnet’s “dramatic business success.” Brief in
Support of Petition for Review of Respondent Christopher H.
Zacharias at 18 (Oct. 17, 2005). As my analysis above
indicates, I do not regard this analysis as complete, for it
doesn’t address the obstacles to petitioners’
contemporaneously and lawfully realizing that value. But the
Commission’s only response was to say that the stock was
sold illegally, so that (non sequitur of the day!) petitioners
must forego all proceeds. The Commission offered no
argument as to how compliance with the requirement of filing
a registration statement would have reduced petitioners’
proceeds; it stood simply on the raw fact of illegality. Before
 7

us, though the majority claims otherwise, Maj. Op. at 22 n.3,
petitioners’ attack on the SEC’s failure to restore the status
quo ante has drawn our attention also to the value of the
options, which were unequivocally theirs. “The options
issued to Carley were valid and . . . Carley had a valuable
property right in the options and then in the underlying stock
subject to the options.” Carley Opening Br. 19. And, as the
argument suggests, the value of the stock was mathematically
tied to the value of the options, the only difference being the
contractually prescribed exercise price. Even if we regard as
extreme petitioners’ alternative calculation (showing no
excess of illegitimate over legitimate proceeds), the SEC
never attacked their calculation by pointing to obstacles to
petitioners’ lawful realization of identical proceeds. Thus,
again assuming that the Commission met its initial First City
burden, petitioners’ claim was enough to switch the burden
back to the SEC to show why its order properly accounted for
all property legally owned prior to the scheme.

In discussing this same jurisdictional argument, the
majority seems to suggest that the petitioners’ attack on the
SEC’s order as failing to restore the status quo ante was
somehow “not aimed at the Commission’s calculation of ill-
gotten profits.” Maj. Op. at 23 n.3. But the majority correctly
states that the very reason disgorgement is not a penalty is
because “disgorgement restores the status quo ante by
depriving violators of ill-gotten profits.” Maj. Op. at 21
(emphases added). An attack on the SEC’s order as one that
failed to restore the status quo ante, which was indisputably
advanced below, see SEC Opinion at 44 (responding to the
argument that “disgorgement would not return Mr. Zacharias
to the status quo ante” (internal quotations omitted)), is
therefore by definition an attack on the SEC’s calculation of
ill-gotten profits. Petitioners’ argument, both before the
Commission and us, has been that the SEC’s calculation of ill-
gotten profits was flawed because petitioners would have
 8

received the same profits even if they had acted lawfully.
While it is true the petitioners argued they should not return
any of their proceeds, that was because they claimed that the
SEC’s calculation was inappropriate, not because of any
notion that disgorgement can never be properly applied in the
context of a § 5 violation, as the majority seems to suggest.
Thus, I fail to see anything meaningful in the distinction the
majority claims exists between the arguments advanced by
petitioners and the arguments discussed here, see Maj. Op. at
23 n.3, apart from the quibble over option value versus stock
value.

I would remand to the SEC for it either to explain why
the mere presence of options, as opposed to cash, justifies its
dispensing with the process outlined in First City and
Bilzerian, or to make an initial calculation of the value
petitioners could have legitimately and contemporaneously
realized from their options.