United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 16, 2011 Decided October 28, 2011
No. 10-5321
SECURITIES AND EXCHANGE COMMISSION,
APPELLEE
v.
DAVID E. WHITTEMORE AND
WHITTEMORE MANAGEMENT, INC.,
APPELLEES
PETER S. CAHILL,
APPELLANT
Appeal from the United States District Court
for the District of Columbia
(No. 1:05-cv-00869)
Russell G. Ryan argued the cause and filed the briefs for
appellant.
Nicholas J. Bronni, Attorney, Securities and Exchange
Commission, argued the cause for appellee Securities and
Exchange Commission. With him on the brief were Jacob H.
Stillman, Solicitor, and Hope Hall Augustini, Senior Litigation
Counsel. John D. Worland Jr., Attorney, entered an appearance.
2
Before: SENTELLE, Chief Judge, ROGERS and BROWN,
Circuit Judges.
Opinion for the Court by Circuit Judge ROGERS.
ROGERS, Circuit Judge: As part of a civil enforcement
action brought by the Securities and Exchange Commission, the
district court entered a disgorgement order against Peter S.
Cahill imposing joint and several liability for the full proceeds
of his sales of stock in a small, thinly traded corporation not
listed on a major stock exchange. Cahill challenges the order
principally on the grounds that the district court’s disgorgement
calculation was clearly erroneous in failing to account for a pre-
fraud value of 32 cents per share; the disgorgement order was
impermissibly punitive because it imposed liability for funds he
had transferred to co-defendants; and the district court also
abused its discretion in fashioning an equitable remedy by
imposing joint and several liability when there was no close
relationship between the defendants and apportionment was
warranted.
The allegations in the complaint and evidence presented by
the Commission showed that there was no reliable pre-fraud fair
market value for the shares. Cahill waived his right to contest
the allegations in the complaint, and he asserted his Fifth
Amendment right not to introduce evidence that might
incriminate him. Consequently, because Cahill presented no
evidence in rebuttal, the district court did not clearly err in
finding that the Commission had met its burden to show that his
ill-gotten gains were the full proceeds of his stock sales at
inflated prices resulting from a fraudulent “pump and dump”
scheme. Neither did the district court abuse its discretion in
crafting the disgorgement remedy. Inclusion of the transferred
funds was consistent with our precedent. Absent any rationale
for a different approach, we join other circuits in holding that the
3
imposition of joint and several liability for the amount ordered
to be disgorged does not require proof of a close relationship
among the defendants beyond their collaboration in the
fraudulent scheme in violation of the securities laws.
Accordingly, because Cahill’s evidentiary objections are also
unavailing, we affirm the order of disgorgement.
I.
Pursuant to 15 U.S.C. § 78u(d)(5) (2006),1 “the
Commission may seek, and any Federal court may grant, any
equitable relief that may be appropriate or necessary for the
benefit of investors.” Section 78j(b) of Title 15, 15 U.S.C. §
78j(b) (2006), (“Section 10(b)”) provides that it is unlawful for
any person to “use or employ . . . any manipulative or deceptive
device or contrivance in contravention of such rules and
regulations as the Commission may prescribe as necessary or
appropriate in the public interest or for the protection of
investors.” The Commission’s regulations at 17 C.F.R.
§ 240.10b-5(c) (2010) (“Rule 10b-5”) provide that it is unlawful
to “engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.”
This case arises from Cahill’s alleged participation in a
“pump and dump” scheme through which he sold a substantial
number of shares in an energy company’s stock at fraudulently
inflated prices. Cmpl. ¶¶ 1, 13. On May 3, 2005, the
Commission filed a civil enforcement action against Cahill and
others (“the Whittemore defendants”) seeking to permanently
enjoin them from engaging in this conduct in violation of
1
The relevant sections of the U.S. Code and Code of Federal
Regulations have not changed since 2005, when the conduct at issue
occurred.
4
Section 10(b) and Rule 10b-5, and to disgorge their ill-gotten
gains. According to the complaint, in July 2004, Cahill, who
had acquired a substantial number of the outstanding shares of
Triton American Energy Corporation (“Triton”), contacted
David E. Whittemore, the owner and sole employee of a
voicemail marketing firm, to engage his services in transmitting
voicemail messages touting Triton’s stock. Cmpl. ¶¶ 11, 12.
Triton is quoted on the Pink Sheets, a trading system that lists
small companies that do not meet the requirements of the major
stock exchanges. Cmpl. ¶ 9. The complaint alleged Cahill
transferred to Whittemore 594,000 Triton shares “for his
services,” but Whittemore returned them to Cahill in exchange
for $142,000. Cmpl. ¶ 11. In August and September 2004,
Whittemore broadcasted false and misleading voicemail
messages about Triton purporting to be left by accident on the
recipient’s answering machine. Cmpl. ¶ 12. Prior to the fraud,
Triton stock had last traded at 32 cents per share with a trading
volume of 10,000 shares on August 6, 2004. Cmpl. ¶ 13. As a
result of the fraud, Triton shares reached a high of 97 cents per
share with 756,000 shares traded on August 19, 2004. Cmpl.
¶ 13. Cahill sold 680,800 shares between August 23 and
September 14, 2004, generating gross proceeds of $508,056.
Cmpl. ¶ 14. Whittemore was also charged with similar
misconduct regarding another company unconnected to Cahill
and Triton. Cmpl. ¶¶ 15–17.
By a consent to entry of judgment, Cahill agreed that the
allegations of the complaint were true for purposes of the
Commission’s motion for disgorgement. See Consent Def. Peter
S. Cahill (Jan. 21, 2009 (“Cahill Consent”). He also agreed that
for purposes of the disgorgement proceeding, “the [c]ourt may
determine the issues raised in the motion on the basis of
affidavits, declarations, excerpts of sworn depositions or
investigative testimony, and documentary evidence, without
regard to the standards for summary judgment contained in Rule
5
56(c) of the Federal Rules of Civil Procedure.” Id ¶ 3. He
otherwise asserted his Fifth Amendment right not to present
evidence that might incriminate him. The district court entered
a judgment against Cahill on liability based on his consent, with
a disgorgement proceeding to follow. SEC v. Whittemore, 691
F. Supp. 2d 198, 200 (D.D.C. 2010). Whittemore, on behalf of
himself and his company, also consented to liability for the
conduct alleged in the complaint.
In support of its motion for disgorgement, the Commission
filed two declarations and a transcript. Andrea Bellaire, a
Commission senior counsel, declared that the proceeds of the
fraud were distributed through a lawyers’ trust account
(“IOLTA” account) on the authority of an attorney, Phillip W.
Offill. Decl. Andrea Bellaire ¶ 8, Apr. 9, 2009. Bellaire stated
that in August 2004, Cahill transferred 594,000 shares of Triton
stock to Whittemore “in advance for his services,” id. 12, which
Whittemore later returned to Cahill in exchange for a payment
of $92,000 plus an additional $50,000 for associated costs. Id.
¶¶ 12–14. Bellaire estimated that Cahill’s proceeds from his
sale of over one million Triton shares were $738,473. Id. ¶ 20.
She stated that Cahill wired $549,300 into the IOLTA account,
and that those funds were credited to Whittemore. Id. ¶ 21.
Bellaire also stated that one of Cahill’s attorneys wired an
additional $78,500 to the account of Tracy Whittemore, David
Whittemore’s wife, in April 2005. Id. ¶¶ 27–29. Robert W.
Lowry, a forensic securities expert, declared that “during the
five weeks prior to August 18, 2004,” the closing price for
TRAE (Triton’s trading symbol) “ranged from a low of $0.32
per share to a high of $0.50 per share,” characterizing the stock
as “thinly traded” and stating there was trading volume on only
five of these days, totaling 22,200 shares. Decl. Robert W.
Lowry ¶ 8, Apr. 3, 2009. Once the fraudulent voice messages
began, Lowry explained, Titron’s trading volume spiked,
exceeding 750,000 shares on one day, and the stock traded in a
6
price range from $0.50 to $1.50 per share. Id. ¶ 9. Lowry also
provided details on the $549,300 Cahill wired to the IOLTA
account for Whittemore, id. ¶ 14, as well as other information on
Triton’s trading price and volume, id. Ex. 1.
The transcript offered by the Commission was of testimony
of Louis N. Guidry, taken on July 28, 2005, before the Texas
State Securities Board. Guidry had testified under oath that in
May 2004, Cahill approached him with a proposal: If Guidry
agreed to purchase for $6,000 or $7,000 Cahill’s publicly traded
shell company, MilitaryCollections.com, Inc., the name could be
changed to Triton American Energy Corp., Guidry would be the
President and CEO, and Cahill could raise money for Guidry’s
oil and gas exploration efforts. See Guidry Tr. 8–11, Jul. 28,
2005. Guidry agreed, and Cahill engineered a reauthorization
for the issuance of 100 million public shares, taking as his fee
1.2 million of those shares. Guidry claimed that he had “no
idea” why Cahill transferred 594,000 shares to Whittemore, nor
why Cahill wrote Whittemore a check for $92,000. Guidry Tr.
31–32. Guidry professed ignorance of any scheme to pump up
Triton’s share price. Id. at 34.
The Commission argued that Cahill’s cost basis for the
Triton shares was zero, and that it had satisfied its burden to
show a reasonable approximation of the profits causally related
to the fraudulent “pump and dump” scheme by proving the gross
proceeds from Cahill’s sales of the shares. Noting it “had
virtually no discovery from [the defendants] on these matters,”
Mot. Hr’g. Tr. 6, Dec. 23, 2009, the Commission insisted the
burden was on Cahill to demonstrate that its calculation was not
a reasonable approximation of the profit causally related to the
fraud. Joint and several liability with the Whittemore
defendants for the amount of the Triton stock proceeds was
appropriate, the Commission argued, because Cahill was liable
for the full amount of the proceeds even if he used some of them
7
to pay Whittemore for his role in the fraudulent scheme. Id. at
15–17. Further, the Commission argued that “[t]o the extent that
there’s any ambiguity or vagueness in [the Commission’s]
ability to tick and tie the dollars [that were transferred among
the defendants], that burden . . . shifts to the defendant[s] [] for
an important policy reason[:] [Y]ou can’t reward complicated
b[yza]ntine frauds that by their very nature conceal paper and
money trails . . .” Id. at 12–13.
Cahill, in turn, argued that, assuming the truth of Lowry’s
declaration about the closing price of the stock prior to the fraud,
the district court should assume a pre-fraud value of 32 cents in
calculating the amount of profits causally connected to the fraud.
Joint and several liability was inappropriate, he added, because
it was clear to whom the proceeds went after the sale of shares
and because there was no evidence of a close relationship or
collaboration beyond the one transaction between Cahill and the
Whittemore defendants, id. at 30, 32–33. Whittemore, on the
other hand, argued that the record contained no evidence that he
ever received the proceeds from the IOLTA account into which
Cahill had placed the money. The Commission responded that
it did not know what had happened to the money after Cahill
transferred it: “[W]e don’t know what happened to the money
after that. We don’t know how much of it made a round trip
back into Mr. Cahill’s pocket.” Id. at 48.
The district court ordered Cahill to disgorge the gross
proceeds of his sales of Triton stock and imposed joint and
several liability with the Whittemore defendants. Whittemore,
691 F. Supp. 2d at 210. The district court concluded that the
Commission had met its burden to offer a prima facie reasonable
approximation of profits connected to the securities violation by
showing the gross proceeds of the stock sales, and that Cahill
had not satisfied his burden to rebut the showing inasmuch as he
asserted his Fifth Amendment privilege and did not offer any
8
evidence. Id. at 206. Because undisputed evidence indicated
that “[Cahill’s] investment was nil,” id., the district court found
that the sale proceeds were pure, ill-gotten profit. Drawing an
adverse inference from Cahill’s refusal to present evidence, the
district court noted that “this is a civil case and these
[d]efendants control the evidence.” Id. The district court also
observed that “[b]y invoking their Fifth Amendment privilege,
[the defendants] have failed to present evidence that might
refute the [Commission]’s allegation that they paid nothing for
their stock.” Id. The district court rejected Cahill’s argument
that he should not be liable for the proceeds used to pay off his
co-conspirators and imposed joint and several liability in view
of the defendants’ collaboration in the fraudulent “pump and
dump” stock scheme. Cahill’s motion for reconsideration was
denied; various accounting corrections were made to the order
of disgorgement. SEC v. Whittemore, 744 F. Supp. 2d 1 (D.D.C.
2010).
II.
On appeal, Cahill contends that the district court erred in
failing to deduct the pre-fraud value of the Triton shares from
his sale proceeds in calculating the disgorgement amount. He
characterizes Lowry’s declaration as “confirm[ing]” that Triton
had a pre-fraud market value of 32 to 50 cents per share,
Appellant’s Br. 5, and emphasizes, as the district court ruled,
that “the proper measure of disgorgement is the value by which
a stock increased during the fraudulent activity,” id. at 28
(quoting Whittemore, 691 F. Supp. 2d at 204). The Commission
responds that inasmuch as Cahill “had just created” the Triton
listing, “there was no real market for those shares that would
provide a reasonably ascertainable market value for the shares.”
Appellee’s Br. 16.
9
Our review of the district court’s disgorgement calculation
is for clear error. SEC v. Bilzerian, 29 F.3d 689, 697 (D.C. Cir.
1994). Acknowledging that “separating legal from illegal
profits exactly may at times be a near impossible task,” this
court held that “disgorgement need only be a reasonable
approximation of profits causally connected to the violation.”
SEC v. First City Fin. Corp., 890 F.2d 1215, 1231 (D.C. Cir.
1989). The court explained that “the government’s showing of
appellants’ actual profits on the tainted transactions at least
presumptively satisfied” the burden to show a reasonable
approximation of ill-gotten gains, thus shifting the burden to the
defendants to show why it was not a reasonable approximation.
Id. at 1232. In Zacharias v. SEC, 569 F.3d 458, 472–73 (D.C.
Cir. 2009), the court reaffirmed, at least in the absence of a
request by the defendants, that it was not the Commission’s
burden “to determine the hypothetical market value of the
[securities]” for purposes of offsetting the actual proceeds, and
that “the burden of uncertainty in calculating ill-gotten gains
falls on the wrongdoers who create that uncertainty,” id. at 473.
Recently, the Ninth Circuit held in SEC v. Platforms Wireless
International Corp., 617 F.3d 1072, 1081, 1096–97 (9th Cir.
2010), that the Commission had satisfied its initial burden by
showing the proceeds from sales of newly issued shares of a
Pink Sheet stock whose pre-fraud value, if any, was “speculative
and small,” id. at 1097, where the defendants failed to explain
what was not profit and there was no record evidence they paid
cash value.
The Commission based its claim for disgorgement of all of
Cahill’s sale proceeds on the absence of evidence of fair market
value (as distinct from closing trade prices) of the Triton stock
listed on the Pink Sheets. Cahill relies on the concurring
opinion in SEC v. UNIOIL, 951 F.2d 1304, 1305 (D.C. Cir.
1991) (Edwards, J., concurring), and the dissenting opinion in
Zacharias, 569 F.3d at 473 (Williams, J., dissenting in part), as
10
support for his position the Commission failed to meet its initial
burden of proof by relying on gross proceeds. But the separate
opinions assumed the existence of an ascertainable pre-fraud fair
market value, see Zacharias, 569 F.3d at 475 (Williams, J.,
dissenting); UNIOIL, 951 F.2d at 1306, 1308 (Edwards, J.,
concurring), and these cases did not involve Pink Sheet stocks
with no significant trading volume. As Commission counsel
noted during oral argument, the evidence showed that only a
small number of shares of Triton stock were traded during a 30-
day period, and there was no evidence that Cahill could have
sold a million shares at any price during that time. The
Commission therefore met its initial burden of showing a
reasonable approximation of profits causally connected to the
charged fraud by identifying the proceeds from Cahill’s sales of
Triton stocks. Zacharias, 569 F.3d at 473; see Platforms
Wireless, 617 F.3d at 1096–97.
The burden thus shifted to Cahill to demonstrate the value
of the Triton stock prior to the fraud. Cahill introduced no
independent evidence of the stock’s market value or the value he
in fact exchanged for his shares. On appeal Cahill relies on
Lowry’s declaration, which references five trades made in the
several weeks before the fraud, ranging in price from 32 to 50
cents per share and totaling only 22,200 shares. But Lowry only
discussed the low prices and trading volume of Triton stock for
purposes of contrasting them with the much higher prices and
volume following the fraudulent voicemail messages —
temporal evidence that the fraudulent scheme caused the rapid
rise in trading price and volume. See Lowry Decl. ¶¶ 8–9.
Lowry expressed no opinion on whether 32 or 50 cents per share
was a fair market value prior to the fraudulent scheme, and
Cahill never asked him if either was. Considering that in this
context the “burden of uncertainty . . . falls on the wrongdoers,”
Zacharias, 569 F.3d at 473, the Commission’s position, that
such low trading volume on an unregulated Pink Sheet stock is
11
insufficient to carry Cahill’s burden to demonstrate the stock’s
pre-fraud fair market value in rebuttal, is persuasive. The
Seventh Circuit explained in Eckstein v. Balcor Film Investors,
8 F.3d 1121, 1129–30 (7th Cir. 1993), that “[t]he price in an
open and developed market usually reflects all available
information because the price is an outcome of competition
among knowledgeable investors,” id. at 1129, whereas “[t]he
more thinly traded the stock, the less well the price reflects the
latest pieces of information,” id. at 1130.
For these reasons, we hold that the district court did not
clearly err in finding that the entire proceeds from Cahill’s
Triton sales were ill-gotten gains, based on the Commission’s
presentation of a prima facie reasonable approximation that
Cahill did not rebut.
III.
Cahill also contends that he should not be liable — jointly
or otherwise — for funds he transferred to Whittemore and
others after selling the Triton shares. Making him liable for
those funds, he maintains, would turn the disgorgement order
into an impermissible punitive sanction under SEC v. First City
Financial Corp., 890 F.2d 1215 (D.C. Cir. 1989). Cahill would
distinguish the cases relied on by the district court and the
Commission for the proposition that a defendant’s decision to
spend his ill-gotten gains is irrelevant to the disgorgement
analysis. Unlike SEC v. Levine, 517 F. Supp. 2d 121 (D.D.C.
2007), and SEC v. Banner Fund International, 211 F.3d 602
(D.C. Cir. 2000), he maintains, the sale proceeds were
transferred to Whittemore and others as “part and parcel of the
fraudulent scheme itself,” Appellant’s Br. 18, not as a result of
his choice to spend the money or to evade disgorgement
liability. Appellant’s Br. 14, 16–18. Joint and several liability
for the full proceeds was also inappropriate, Cahill contends,
12
because he had no close relationship with the Whittemore
defendants beyond the fraudulent “pump and dump” scheme.
These related contentions do not focus on the district court’s
factual findings in calculating the disgorgement amount, but
rather on its exercise of discretion in fashioning a disgorgement
remedy. Although the exclusion of transferred funds would
reduce the disgorgement amount, Cahill is attempting to draw a
legal distinction, based on undisputed facts, in urging this court
to hold that the district court’s determination of an equitable
disgorgement remedy was beyond the pale. See SEC v. First
Jersey Securities, Inc., 101 F.3d 1450, 1475 (2d Cir. 1996)
(citing SEC v. Posner, 16 F.3d 520, 522 (2d Cir. 1994)); Hateley
v. SEC, 8 F.3d 653, 655 (9th Cir. 1993). As other circuits have
held, the district court “has broad equitable power to fashion
appropriate remedies” for federal securities law violations, First
Jersey Securities, 101 F.3d at 1474, and “has broad discretion in
subjecting the offending parties on a joint-and-several basis to
the disgorgement order,” SEC v. Hughes Capital Corp., 124
F.3d 449, 455 (3d Cir. 1997) (citing First Jersey Securities, 101
F.3d at 1475). In cases cited by the parties, this court has
addressed challenges to the disgorgement amount and applied a
clearly erroneous standard of review to the district court’s
factual findings, see, e.g. Bilzerian, 29 F.3d at 696–97; UNIOIL,
951 F.2d at 1305; FED. R. CIV. P. 52(a)(6). Because Cahill’s
challenges here present a different question, implicating the
district court’s choice of an equitable remedy that is “intended
primarily to prevent unjust enrichment” Banner Fund, 211 F.3d
at 617 (citing First City Fin. Corp., 890 F.2d at 1231), our
review is for abuse of discretion, see First Jersey Securities, 101
F.3d at 1475 (citing SEC v. Posner, 16 F.3d 520, 522 (2d Cir.
1994)).
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A.
The transfer of funds. In Banner Fund, 211 F.3d at 617,
this court explained that a disgorgement order pertains to “a sum
equal to the amount wrongfully obtained, rather than a
requirement to replevy a specific asset,” and “establishes a
personal liability, which the defendant must satisfy regardless
[of] whether he retains the selfsame proceeds of his
wrongdoing.” Id. (citing SEC v. Shapiro, 494 F.2d 1301, 1309
(2d Cir. 1974)). As the Ninth Circuit similarly concluded in
Platforms Wireless, “[a] person who controls the distribution of
illegally obtained funds is liable for the funds he or she
dissipated as well as the funds he or she retained.” Platforms
Wireless, 617 F.3d at 1098.
The complaint alleged that Cahill instigated and directed the
fraudulent “pump and dump” scheme and profited from it by
selling his Triton shares at the resulting, highly inflated prices.
Cmpl. ¶¶ 11–14. Cahill agreed these allegations were true for
purposes of disgorgement, and neither evidence from Cahill nor
any other source showed that any money transferred from the
sale proceeds did not ultimately revert to Cahill. Banner Fund
therefore controls.
B.
Joint and several liability. Cahill contends for two
additional reasons that it was inappropriate for the district court
to impose joint and several liability for the full proceeds of his
Triton stock sales, including the amounts transferred to Offill’s
IOLTA account. His first reason is that it was “untimely and
unfairly prejudicial” for the Commission to request joint and
several liability after not doing so in the complaint. This ignores
not only that the Commission made the request for joint and
several liability in its motion for disgorgement, but also that the
cases on which he relies pertain to new causes of action not
stated in the complaint, not specific damages pertaining to a
14
well-pleaded claim. See Pinkley, Inc. v. City of Frederick, Md.,
191 F.3d 394, 399–401 (4th Cir. 1999); Rodriguez v. Doral
Mortg. Corp., 57 F.3d 1168, 1171–72 (1st Cir. 1995); In re
Rivinius, Inc., 977 F.2d 1171, 1176–77 (7th Cir. 1992); cf.
Campana v. Eller, 755 F.2d 212, 215–16 (1st Cir. 1985). The
consented-to allegations in the complaint made clear that the
Commission claimed Cahill and the Whittemore defendants
acted in concert in executing a single fraudulent scheme.
Compl. ¶¶ 1, 11, 19, 22–23; see also Compl. Prayer for Relief ¶
III; cf. Campana, 755 F.2d at 215.
Cahill’s second reason for maintaining that joint and several
liability is inappropriate presents a question of first impression
in this circuit. Although acknowledging that “[c]ourts have held
that joint-and-several liability is appropriate in securities cases
when two or more individuals or entities collaborate or have a
close relationships in engaging in the illegal conduct,” Hughes
Capital, 124 F.3d at 455 (emphasis added) (citing First Jersey
Securities, 101 F.3d at 1475; Hateley, 8 F.3d at 656); accord
SEC v. First Pac. Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998),
Cahill maintains that, despite this repeated disjunctive
articulation of the legal standard, “courts in practice require both
a close relationship between the defendants and collaboration in
the wrongdoing.” Appellant’s Br. 25.
Cahill cites three cases from other circuits affirming the
imposition of joint and several liability in disgorgement for the
proposition that, at least in practice, a very close relationship
between defendants is required. In Hateley, 8 F.3d at 656, the
Ninth Circuit referred to the fraudulent collaboration within a
three person firm and to a close relationship between the
president and executive vice president of the firm. In First
Jersey Securities, the Second Circuit affirmed where “a firm
ha[d] received gains through its unlawful conduct [and] . . . its
owner and chief executive officer ha[d] collaborated in that
15
conduct.” 101 F.3d at 1475 (2d Cir.). And in SEC v. Calvo,
378 F.3d 1211 (11th Cir. 2004), the Eleventh Circuit noted that
both defendants “engaged in securities laws violations” — one
was a “necessary participant and substantial factor” in the
other’s violation — and had “the requisite close relationship”
because Calvo and his family had founded and maintained a
50% ownership interest in the company with which he was held
joint and severally liable. Id. at 1216. By describing the close
relationship as “requisite,” id., at least where the defendant had
denied involvement in the stock sale following the “pump and
dump” scheme, Calvo provides the most support for Cahill’s
contention regarding the propriety of joint and several liability
in his case. The Ninth Circuit used the same language in
addressing a similar relationship in SEC v. JT Wallenbrock &
Associates, 440 F.3d 1109, 1117 (9th Cir. 2006).
These cases, and other circuit cases imposing joint and
several liability in disgorgement, however, have repeatedly
stated the requirements of collaboration and close relationship
in the disjunctive, and a reading of some of the opinions
suggests the courts’ references to the factual existence of both
requirements were descriptive rather than prescriptive. See,
e.g., First Jersey Securities, 101 F.3d at 1475–76 (summarizing
cases). To the extent the Ninth and Eleventh Circuit have taken
a different view, they offer no rationale for requiring the factual
existence of both requirements for joint and several liability.
Indeed, in SEC v. Hughes Capital Corp., 124 F.3d 449, 455 (3d
Cir. 1997), which Cahill also cites, the Third Circuit
emphasized that collaboration “in a single scheme to defraud”
can warrant imposition of joint and several liability and that the
burden is on the wrongdoer to establish that apportioned
liability is warranted, although the court went on to find both
collaboration and a close relationship existed in that case.
Cahill has cited no case in which a court refused to impose joint
and several liability because of the absence of a close
16
relationship beyond the defendants’ collaboration in the
fraudulent scheme, and he now fails to offer a rationale for such
a limitation. 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. This could lead to “absurd results” no
less than allowing the wrongdoer to avoid disgorgement by
spending the proceeds of the fraudulent scheme, Banner Fund,
211 F.3d at 617. Cahill essentially ignores the deterrent purpose
of disgorgement. See First City Fin. Corp., 890 F.2d at 1230.2
We join the circuits that view the requirements for joint and
several liability in the disjunctive.
The complaint alleged, and Cahill agreed, that Cahill
transferred shares between participants in the “pump and dump”
scheme, compensated Whittemore and his company for the false
voice messaging services, and sold stock at inflated prices
resulting from the fraudulent scheme. Compl. ¶¶ 11–14. Once
the Commission established the close collaboration between
Cahill and the Whittemore defendants in the fraudulent scheme,
the burden was on Cahill to establish that apportionment was
2
Cahill advances several policy reasons why a court should
hesitate to impose joint and several liability in a Commission civil
disgorgement action. In his view, the concerns underlying
apportionment among tortfeasors are irrelevant where the Commission
is seeking the equitable remedy of disgorgement in a law enforcement
context inasmuch as the Commission is not an injured victim and this
court has emphasized that the purpose of disgorgement is not to
compensate for losses but to deprive the wrongdoer of his ill-gotten
gain, see, e.g., Zacharias, 569 F.3d at 471. Congress has resolved the
policy question: “The dominant congressional purposes underlying the
Securities Exchange Act of 1934 were to promote free and open public
securities markets and to protect the investing public.” SEC v. Tex.
Gulf Sulphur Co., 401 F.2d 833, 858 (2d Cir. 1968) (en banc).
17
warranted, see Hughes Capital, 124 F.3d at 455, and Cahill
failed to do so. Placement of this burden on the defendant is
justified because, the Third Circuit explained, “[v]ery often
defendants move funds through various accounts to avoid
detection, use several nominees to hold securities or improperly
deprived [sic] profits, or intentionally fail to keep accurate
records and refuse to cooperate with investigators in identifying
illegal profits.” Id. The Bellaire and Lowry declarations
describing various wire transfers did not preclude such a
possibility here. In relying on the Lowry Declaration, which
described a series of wires sent by Cahill to Offill’s IOLTA
account, Cahill failed to rebut that, according to their attorney,
there was “no evidence in the record that the Whittemore
defendants received most of that money or that they benefitted
from it or that the money that they did receive was tied to . . .
the alleged fraud. . . . Mr. Lowry’s affidavit never concludes
that Mr. Whittemore actually received any of it.” Mot. Hr’g Tr.
43. Although there was evidence Cahill transferred some of the
proceeds for Whittemore’s benefit, see Bellaire Decl. ¶¶ 20–21,
Cahill never established where the ill-gotten gains finally came
to rest. Unlike in Hateley, where “the very agreement that
[was] the source of their liability” obligated the defendant to
pay the other defendants 90% of the ill-gotten gains, 8 F.3d at
655, no such arrangement was shown by Cahill, and he failed to
establish any alternative evidentiary basis for apportionment.
Because Cahill wrongfully obtained the proceeds of the
Triton stock sales and controlled the distribution, if any, of
those proceeds, and because he collaborated with the
Whittemore defendants in the fraudulent “pump and dump”
scheme, we hold that the district court did not abuse its
discretion in requiring a disgorgement of the gross proceeds of
Cahill’s sales of Triton stock and in imposing joint and several
liability.
18
IV.
Finally, Cahill contends that the district court improperly
“drew a heavy adverse inference” against him for his decision
to take the Fifth Amendment. Appellant’s Br. 41. The Fifth
Amendment, however, “has never been thought to be in itself a
substitute for evidence that would assist in meeting a burden of
production.” United States v. Rylander, 460 U.S. 752, 758
(1983). Cahill had the burden of rebutting the Commission’s
reasonable approximation of his ill-gotten gains with evidence
of the pre-fraud value of, or the value he exchanged for, his
Triton shares; his invocation of the Fifth Amendment could not
compensate for his failure to meet this burden, irrespective of
any adverse inference the district court might have drawn from
it. Cahill concedes that an adverse inference is permissible in
civil cases when “independent evidence exists of the fact to
which the party refuses to answer.” Appellant’s Br. 41 (quoting
Doe v. Glanzer, 232 F.3d 1258, 1264 (9th Cir. 2000)). In the
absence of Cahill’s production of any evidence to the contrary,
documentary or otherwise, the district court could properly
credit the Commission’s evidence to draw an adverse inference
from Cahill’s failure to discredit it. See, e.g., Nationwide Life
Ins. Co. v. Richards, 541 F.3d 903, 909, 914 (9th Cir. 2008).
Cahill maintains, however, that the Guidry transcript
offered by the Commission was inadmissible and
unauthenticated hearsay. He asserts that although Guidry was
available to testify, the Commission neither produced the
transcript during discovery nor sought to depose him. He also
focuses on “the unfairness associated with [the transcript’s]
13th-hour unveiling” by the Commission. Appellant’s Br. 45.
The Commission responds that Cahill has waived any hearsay
objection by consenting to the use of “affidavits, declarations,
excerpts of sworn depositions or investigative testimony, and
documentary evidence without regard to the standard for
19
judgment contained in Rule 56(c) of the Federal Rules of Civil
Procedure.” Appellee’s Br. 35; see Cahill Consent ¶ 3;
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249–50 (1986).
Even assuming Cahill presented a valid hearsay objection
not foreclosed by the consent agreement, he fails to show that
admission of Guidry’s testimony over his objection affected his
“substantial rights,” see 28 U.S.C. § 2111; FED. R. CIV. P. 61,
and therefore fails to show he is entitled to reversal of an
“otherwise valid judgment,” Whitbeck v. Vital Signs, Inc., 159
F.3d 1369, 1372 (D.C. Cir. 1998). The declarations offered by
the Commission and the allegations in the complaint identify
the proceeds from Cahill’s sales of Triton stock after the
broadcast of the false voicemails. See Bellaire Decl. ¶ 20;
Lowry Decl.¶ 13; Compl. ¶ 14. This other evidence established
the lack of an ascertainable pre-fraud fair market value for the
stock, see Compl. ¶ 13; Lowry Decl. ¶ 8, thereby satisfying the
Commission’s initial burden in reasonably approximating his
illegal profits. Because Cahill failed to meet his burden of
resolving any uncertainty regarding that value, or the value he
in fact exchanged for his shares, the district court could properly
accept as reasonable the Commission’s approximation of
Cahill’s ill-gotten gains without regard to Guidry’s testimony.
Indeed, this is what the district court did. See Whittemore, 691
F. Supp. 2d at 206–07. Because Guidry’s testimony was not
determinative in the district court’s disgorgement calculation,
its admission, if error, was harmless. See First City Fin. Corp.,
890 F.2d at 1225.
Accordingly, we affirm the order of disgorgement.