SEC v. Garfield Taylor, Inc., et al.: Section 20(d) used in Ponzi Scheme Judgment

In SEC v. Garfield Taylor, Inc., No. 11-2054 (RC), 2015 BL 313363 (D.D.C. Sept. 28, 2015), the United States District Court for the District of Columbia granted the Security and Exchange Commission’s (“SEC”) request to assess civil monetary penalties against Gibraltar Asset Management Group, LLC (“GAM”), Jeffrey A. King (“King”), and Garfield Taylor, Inc. (“GTI”) (collectively, “Defendants”). The court granted the SEC’s motion for entry of final judgment against proposed organizer GTI.

SEC alleged Defendants operated a Ponzi scheme that persuaded over 130 individuals and charitable organizations to invest in promissory notes GTI claimed would earn above-market interest rates and would carry little or no risk. Specifically, the SEC alleged GTI defrauded, through material misrepresentations and omissions, those investors in over $27 million in investments. SEC’s allegations stated GTI received $17,183,061.66 in pecuniary gains. On September 17, 2012, the court granted unopposed default judgments against Defendants and, therefore, viewed Defendant’s defaults as a concession to SEC’s allegations.

The SEC requested the court impose “substantial” civil monetary penalties against Defendant under Section 20(d) of the Securities Act of 1933 (the “Act”). The SEC alleged the conduct was severe enough to establish maximum 20(d) third-tier application. GTI contested the imposition of disgorgement, prejudgment interest, and the civil penalties assessed.

Section 20(d) of the Act allows the court to impose a penalty upon a person who violated the Act to deter future violations, and establishes three tiers of penalties. 15 USC 77t(d).  The third and most severe tier applies to violation(s) that involve fraud resulting in substantial loss or creation of financial risk loss to another. Under tier three, the court may impose a penalty for each violation not exceeding the greater of: (i) $150,000 for a natural person or $725,000 for any other person, including a corporate entity; or (ii) the gross amount of a defendant’s pecuniary gain resulting from violation. To determine a Section 20(d) penalty amount, courts consider a defendant’s conduct, knowledge, and financial condition. Additional factors include frequency of conduct and severity of loss to victims. A disgorgement amount is an approximation of any profits causally connected to an Act violation and enables plaintiffs to recover full amount of a defendants’ unjust enrichment.

The court found GTI’s conduct was both egregious and recurrent, arising from a single scheme and therefore imposed a third-tier penalty under Section 20(d) ($725,000 for GTI). While GTI’s gross pecuniary gain fell below the tier three requirement, the court found this penalty appropriate because GTI was central to the fraudulent conduct, and GTI failed to set forth any evidentiary support the SEC’s figure did not represent a reasonable approximation. The court acknowledged that civil monetary penalties provide a critical financial disincentive to engage in securities fraud that are not similarly served by a disgorgement judgment alone. Accordingly, the court granted the SEC’s assessment against GTI, GAM and King, and the final judgment against GTI.

The primary materials for this case may be found on the DU Corporate Governance website.