Securities — $1.2 Million Civil Penalty Imposed Under § 20(d) of the Securities Act and § 21(d) of the Securities Exchange Act — Factors Affecting Quantum

An individual defendant in SEC v. AmeriFirst Funding, Inc., 2008 U.S. Dist. LEXIS 36782 (N.D. Tex. May 5, 2008) committed violations involving fraud or deceit under both the Securities Act and the Securities Exchange Act. The SEC requested that the final judgment against him (Bruteyn) include third-tier civil penalties under § 20(d) of the Securities Act and § 21(d) of the Exchange Act. The Court’s analysis:

"Civil penalties are designed to punish the individual violator and deter future violations of the securities laws." SEC v. Opulentica, LLC, 479 F.Supp.2d 319, 331 (S.D.N.Y. 2007). "Without civil penalties, the only financial risk to violators is the forfeiture of their ill-gotten gains." SEC v. Koenig, 532 F.Supp.2d 987, 995 (N.D. Ill. 2007). Section 20(d) of the Securities Act permits the court to impose a penalty of up to $ 120,000 on a defendant for a securities violation that "involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement" and "directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons." 15 U.S.C. § 77t(d)(2)(C)(i), (ii); 17 C.F.R. § 201.1003 (2007) (raising the maximum penalty amount to $ 120,000 for individuals). On the same basis, § 21 of the Exchange Act permits the court to impose a penalty of up to $ 120,000 on a defendant for each violation of the securities laws. 15 U.S.C. § 78u(d)(3)(B)(iii)(aa), (bb); 17 C.F.R. § 201.1003 (2007) (raising the maximum penalty amount to $ 120,000 for individuals).

Neither § 20(d) of the Securities Act nor § 21(d) of the Exchange Act provides any guidance as to the proper amount of the civil penalty. A number of courts, however, have relied on the same principles in making this decision.

In determining whether civil penalties should be imposed, and the amount of the fine, courts look to a number of factors, including (1) the egregiousness of the defendant's conduct; (2) the degree of the defendant's scienter; (3) whether the defendant's conduct created substantial losses or the risk of substantial losses to other persons; (4) whether the defendant's conduct was isolated or recurrent; and (5) whether the penalty should be reduced due to the defendant's demonstrated current and future financial condition.

[Citations omitted.] Other courts have considered such additional factors as the cooperation of the defendant with law enforcement authorities and the adequacy of other criminal or civil sanctions to punish the defendant. [Citations omitted.] "While these factors are helpful in characterizing a particular defendant's actions, the civil penalty framework is of a discretionary nature and each case has its own particular facts and circumstances which determine the appropriate penalty to be imposed." [Citation omitted.]

... Some courts have taken a per violation approach to computing the total civil penalty, ...while others have based the total civil penalty on the number of investors, in the context of an illegal offering of securities.... [Citations omitted.]

Held, “the court concludes that it should impose a $ 2,000 penalty for each investment that defendants received, because each such payment constitutes a separate violation of the securities laws. The Receiver has verified that defendants received 589 total investments during their scheme to defraud. The court therefore assesses a civil penalty against Bruteyn in the sum of $ 1,178,000.”

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