Monday, April 18th, 2016

Second Circuit Updates – April 18, 2016

No published opinions today, and only one notable summary order involving an SEC civil enforcement action.

SEC v. DAVID SMITH, LYNN SMITH, et al., Nos. 15-1314-cv(L), 15-1317-cv(con), 15-1354-cv(con) (Summary Order of April 18, 2016) (Pooler, Park, and Livingston). This summary affirmance addressed multiple disgorgement orders by a district court in a civil enforcement action relating to violations of the securities laws.

Defendant David Smith, who was ordered to return $87,433,218 obtained from investors, claimed that collateral estoppel limited the disgorgement amount in the SEC case to the amount awarded in restitution in a preceding criminal action. The court disagreed and noted that the SEC allegations proven spanned from 2003 to 2009, whereas the criminal cases addressed only from 2006 to 2009. In addition, the court declared that disgorgement and restitution are “separate remedies with separate goals, and need not be treated the same.”

Defendants David and Lynn Smith together also challenged the district court’s order of disgorgement order as to (1) $4.5 million used to fund an annuity in their names; and (2) certain money transfers to their children, which were deemed fraudulent.  As to the former, the court held that it is against public policy to permit a settlor beneficiary to tie up her own property in a manner that allows her to continue to enjoy it, but can prevent creditors from reaching it.  As to the latter, the court confirmed the fraudulent nature of transfers based upon “badges of fraud” that included the suspicious timing of first-time transfers of money to their children, which was later used to purchase the family’s vacation home from Lynn Smith.

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