The opinion of the court was delivered by: Matthew F. Kennelly, United States District Judge
MEMORANDUM OPINION AND ORDER
According to the complaint filed by the Securities and Exchange Commission, the defendants in this securities fraud case participated, to one degree or another, in a fictitious "prime bank" investment program known as "The Gateway Association Inc." Gateway's investment program promised huge profits to lure more than 400 investors in, ultimately bilking them out of more than ten million dollars. Along with the scheme's mastermind, Richard J. Collins, the Association and other Association-related entities, the SEC named as defendants Jerome Coppage and Bill Wilson. According to the SEC, Coppage, an insurance agent, was "a partner in Gateway [who] signed investment agreements on behalf of Gateway" and was "a signatory on numerous bank accounts that held investor funds"; "[h]e attended investor meetings with other Gateway promoters, making numerous material misrepresentations and omitting to state material facts to investors in Gateway." Complaint, ¶ 12; Brief in Support of Disgorgement, Prejudgment Interest and Civil Penalties Against Defendants Jerome Coppage and Bill Wilson ("Damages Brief"), p. 3. Wilson was "the president of Gateway and signed investment agreements on behalf of Gateway," Complaint, ¶ 11; the SEC alleges that, like Coppage, Wilson "attended investor meetings with other Gateway promoters making numerous material misrepresentations and omitting to state material facts to investors in Gateway." Damages Brief, p. 3.
The SEC's complaint alleged that Coppage and Wilson, through their participation in the Gateway scheme, violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), Rule 10b-5, 17 C.F.R. § 240.10b-5, and sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, 15 U.S.C. § 77e(a), 77e(c) and 77q(a). The complaint sought permanent injunctions prohibiting Wilson and Coppage from directly or indirectly "offer[ing] and sell[ing] securities when no registration statement is filed or is in effect as to such securities and when no exemption from registration is available." Complaint, Relief Requested Section, ¶ IV. It also sought orders directing Wilson and Coppage to "disgorge all illegal gains, together with prejudgment interest" and to "pay civil money penalties, pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]." Id., ¶¶ V-VI.
On November 6, 2001 Coppage signed a Consent and Stipulation, agreeing to the entry of an order permanently enjoining him from violating Section 10(b) of the Exchange Act, Rule 10b-5 and Sections 5 and 17(a) of the Securities Act and granting the SEC other equitable relief, including disgorgement and civil penalties. See Consent & Stipulation of Jerome Coppage (attached as Exhibit F to the SEC's Damages Brief). Wilson signed a similar document on December 12, 2002. See Consent and Stipulation of Bill Wilson (attached as Exhibits H to the SEC's Damages Brief). In signing these documents, Coppage and Wilson admitted only the jurisdictional allegations of the complaint; they neither admitted nor denied the substantive allegations concerning their roles in the Gateway scheme, and in fact the Consents are completely silent as to what role either defendant played in the scheme. See Coppage Consent & Stipulation, ¶ 2; Wilson Consent & Stipulation, ¶ 2.
On November 17, 2001 and December 19, 2002, the Court entered "Orders of Permanent Injunction and Other Equitable Relief" against Coppage and Wilson respectively. Like the Consents, the Orders do not spell out what role, if any, the defendants played in the Gateway scheme; nor do they specify how the defendants violated the securities laws; the Orders simply describe the various types of relief awarded to the SEC against each defendant. In addition to permanently enjoining Coppage and Wilson from violating Section 10(b) of the Exchange Act, Rule 10b-5 and Sections 5 and 17(a) of the Securities Act, the Orders require Coppage and Wilson to "disgorge all ill-gotten gains received as a result of the conduct alleged in the Commission's Complaint, plus prejudgment interest on that amount." Order of Permanent Injunction and Other Equitable Relief Against Jerome Coppage, ¶ IV; Order of Permanent Injunction and Other Equitable Relief Against Bill Wilson, ¶ IV. They also provide that "the imposition of a civil penalty against Coppage [and Wilson] may be appropriate." Coppage Injunction Order, ¶ V; Wilson Injunction Order, ¶ V. The orders did not set the amounts to be disgorged or the amount of any interest or penalties; rather, the Orders provide that the Court would set those amounts "in a separate hearing upon due notice and motion by the Commission." Coppage Injunction Order, ¶¶ IV-V; Wilson Injunction Order, ¶¶ IV-V.
To facilitate resolution of the damages issues, on January 17, 2003, the SEC filed its Damages Brief, asking the Court to order Coppage "to pay disgorgement of $2,469,403.83, prejudgment interest of $1,323,589.44 through January 31, 2003, and a civil money penalty of $2,469,403.83" and asking the Court to order Wilson "to pay disgorgement of $146,649.23, prejudgment interest of $55,111.03 through January 31, 2003, and a civil money penalty of $146,649.23." Damages Brief, p. 11. To support these figures, the SEC submitted an affidavit from Norman H. Jones, an accountant in the SEC's enforcement division who reviewed the bank records and other documents obtained in the case. Jones stated that Coppage was the signatory on two Gateway accounts, that $4,278,304.34 in funds directly traceable to deposits from Gateway investors were deposited into these two accounts, that $772,569.57 was transferred from these two accounts to other defendants, that $1,036,330.94 was disbursed by order of the Court to the Court's registry, and that the remaining $2,469,403.80 represents ill-gotten gains received by Coppage, though Jones could not say who ultimately obtained possession of this money. Affidavit of Norman H. Jones in Support of Plaintiff's Brief in Support of Damages Against Defendants Jerome Coppage and Bill Wilson, ¶¶ 4-8 (attached as Exhibit B to the SEC's Damages Brief). With regard to Wilson, Jones stated that $146,649.23 in funds directly traceable to Gateway investors were deposited into three different Gateway accounts and then transferred to an account Wilson held jointly with his wife, and that this amount represents ill-gotten gains received by Wilson. Id., ¶¶ 9-14.
Coppage filed a brief in response to the SEC's Damages Brief, arguing that any money he received from Collins or from the Gateway accounts represented repayments of loans he previously made to Collins. Coppage provided no documentary evidence to support this claim, though the transcript of his testimony before the SEC is generally consistent with his explanation. See SEC's Damages Brief, Exhibit C. Wilson also filed a brief in response to the SEC's Damages Brief, arguing that any money he received from Gateway accounts represented salary and reimbursements for business-related expenses. He submitted an affidavit swearing under oath that this was true, and he provided copies of Visa and American Express statements and phone bills that purportedly reflected outlays he made on behalf of Gateway and its principals.
On February 13, 2003, the Court held a hearing to address the issues raised in the parties' damages briefs. The Court expressed some concern that the parties had failed to provide any analysis of the legal standards to be applied in assessing the equitable remedies requested and also that it was being asked to make findings concerning matters about which it had heard no evidence. At the hearing, the Court directed the parties to submit supplemental briefs on damages, specifically addressing key legal points, including the question of what constitutes "ill-gotten gains" within the meaning of the securities laws. The Court also directed the parties to address its evidentiary concerns and to advise the Court as to whether they thought the Court was required to hear evidence before fixing the damages amounts to be paid by the defendants.
Consistent with the Court's directives, the parties all filed supplemental briefs. In its supplemental brief, the SEC came down quite a bit off its disgorgement number for Coppage, seeking $183,914.31 m the amount the SEC contends "that it can prove with certainty were received by Defendant Coppage in connection with his involvement with Gateway." SEC's Supplement Brief in Support of Disgorgement, Prejudgment Interest and Civil Penalties Against Defendants Jerome Coppage and Bill Wilson ("Supplemental Damages Brief"), p. 3. The SEC supported its new disgorgement figure with a summary chart and with bank records showing the transfers made from Gateway accounts to accounts held by Coppage or by Sextant Administrative Medical Management, of which Coppage was the President and Secretary. Along with the disgorgement, the SEC asked the Court to order Coppage to pay prejudgment interest through February 28, 2003 in the amount of $81,632.88 and a third tier civil penalty in an amount equal to the disgorgement amount ($183,914.31). The SEC stood firm with respect to Wilson, repeating its request for a disgorgement order and a civil penalty in the amount of $146,649.23, plus prejudgment interest through February 28, 2003 in the amount of $55,111.03. Notably absent from the SEC's supplemental brief is any analysis of why these sums constitute "ill-gotten gains" or "unjust enrichment" subject to disgorgement. The second brief, like the initial Damages Brief, assumes without discussion or analysis that this is so.
Coppage's supplemental submission reiterates his claim that the money he received from Collins or Gateway represented repayments of loans and not ill-gotten gains. This time, Coppage submitted a declaration and copies of checks he had written to Collins between 1994 and September 1997, all before the Gateway scheme is alleged to have begun. See Second Declaration of Jerome Coppage and Exhibit 1 attached thereto (attached as Exhibit B to Supplemental Brief of Defendant Jerome Coppage in Opposition to the SEC's Request for Disgorgement, Prejudgment Interest and Civil Penalties). According to Coppage, the checks evidence that he lent Collins approximately $144,762.00, which means that the repayment of those loans cannot constitute ill-gotten gains. Coppage makes no argument concerning the remaining $39,152.31 the SEC says he received.
In his supplemental brief, Wilson concedes that he received $146,649.23, and he again claims that Gateway paid him the money as salary and to reimburse him for business-related expenses he had charged or incurred on behalf of Gateway principals. Wilson submitted a second affidavit, which says pretty much what the first affidavit said, along with some additional credit card itemizations and a partially hand-written summary document listing the salary payments and the expense reimbursements; he claims that $40,140.00 of the $146,649.23 was salary and the remaining $106,509.23 was reimbursements.
On March 11, 2003, the parties filed a second round of supplemental submissions. Coppage and the SEC submitted a joint filing stating that, because of some accidental double counting, the aggregate amount of the checks submitted in support of Coppage's position that he loaned Collins money is $103,966.00, not $144,762.00. See Joint Submission of Coppage and the SEC, p. 2. The SEC continues to take the position that none of the $183,914.31 paid to Coppage were loan repayments. With respect to Wilson, the March 11 submissions really do not change anything: Wilson and the SEC agree that Wilson received $146,649.23; Wilson argues that $40,140.00 of that was for salary and $106,509.23 was reimbursements for Gateway-related expenses; the SEC argues that Wilson should be required to disgorge the entire amount and that he should not receive credit for any of the charges reflected on credit card statements he submitted because those statements raise more questions than they answer. See Joint Submission of Wilson and the SEC, pp. 2-3.
Finally, in the March 11 submissions, the parties stated that no evidentiary hearing was necessary on the damages issues, and each waived any right they may have had to present further evidence on the nature and amount of damages to be ordered by the Court. See Joint Submission of Coppage and the SEC, p. 3; Joint Submission of Wilson and the SEC, p. 3. Thus, the parties all agree that the Court now has everything it needs to decide the damages questions; the purpose of this Memorandum Opinion and Order is to do just that.
We turn first to the SEC's request for orders of disgorgement. "Disgorgement is an equitable remedy designed to deprive a wrongdoer of his unjust enrichment and to deter others from violating the securities laws." SEC v. First City Financial Corp., Ltd., 890 F.2d 1215, 1230 (D.C. Cir. 1989) (citations omitted). The district court has broad discretion in deciding whether to award disgorgement at all and, if awarded, in fixing the amount to be disgorged. SEC v. First Jersey Securities, Inc., 101 F.3d 1450, 1474-75 (2d Cir. 1996); SEC v. Loren, 76 F.3d 458, 462 (2d Cir. 1996). If ordered, the disgorgement amount must be "a reasonable approximation of profits causally connection to the violation." SEC v. Patel, 61 F.3d 137, 139 (2d Cir. 1995) (citing First City Financial, 890 F.2d at 1231). The SEC bears the burden of proving that its disgorgement figure reasonably ...