United States District Court, N.D. Illinois, Eastern Division
CHARLES P. KOCORAS, District Judge.
This matter comes before the Court on the motion for disgorgement, penalties and other relief of Plaintiff United States Securities and Exchange Commission ("SEC") against Defendants Patrick G. Rooney ("Rooney") and Solaris Management, LLC ("Solaris Management") (collectively "Defendants"). For the following reasons, the Court orders disgorgement of $715, 700 plus prejudgment interest of $166, 476 against Defendants on a joint and several basis, a civil penalty of $715, 700 against Rooney, and a conditional officer and director bar against Rooney.
The following facts are drawn from the SEC's complaint, which Defendants agreed they would not contest pursuant to the consent judgment. According to the complaint, Rooney is the founder, sole owner, and managing partner of Solaris Management. Solaris Management served as the investment adviser to Solaris Opportunity Fund, and the Solaris Offshore Fund (collectively the "Fund"). The Fund was promoted and sold to investors as a "non-directional" fund, meaning its strategy was to use options and futures to offset risk and capitalize on shorter timeframes.
The complaint states that Rooney deceived investors by abandoning the Fund's non-directional strategy and funneling all the Fund's money into a publicly owned penny stock company called Positron Corporation ("Positron"), where Rooney served as Chairman since 2004 and Chief Executive Officer since 2009. Rooney received a salary and compensation from Positron. However, Rooney failed to disclose his roles at Positron to the Fund's investors.
Beginning in February 2005 and continuing through November 2008, Rooney funneled over $3 million of undisclosed loans into Positron, many of which Rooney later converted into Positron preferred stock. In 2007 and 2008, Rooney significantly increased the Fund's investment in Positron. Rooney did all of this without disclosing to investors that he was deviating from the non-directional strategy or that he had a conflict of interest. By November 2008, the Fund owned sixty percent of Positron's shares. Rooney failed to file the proper notification with the SEC once the Fund became a majority shareholder of Positron.
Defendants' misconduct not only deprived the Fund and its investors of impartial advice, but also helped maintain Positron's viability as a public company even though the company was in severe debt. During the time of the Fund's investments, Positron reported significant losses-a $3.8 million net loss in 2005, a $6.6 million net loss in 2006, a $7.8 million net loss in 2007, and a $8.9 million net loss in 2008.
On November 18, 2011, the SEC brought this lawsuit against Defendants alleging violations of the antifraud provisions of the Investment Advisers Act of 1940 (the "Advisers Act"), the Securities Act of 1933 (the "Securities Act"), and the Securities Exchange Act of 1934 (the "Exchange Act"). On December 19, 2013, this Court entered a partial judgment against Defendants permanently enjoining Defendants from violating securities laws. The consent judgment also provides that the Court shall determine: (i) whether it is appropriate to order disgorgement of ill-gotten gains and a civil penalty from Defendants, and if so, the amounts of disgorgement and civil penalty; and (ii) whether Rooney should be prohibited from acting as an officer and director of a public company. The consent judgment further provides that Defendants are precluded from: (i) arguing that they did not violate securities laws as alleged in the complaint; (ii) challenging the validity of the consent judgment; (iii) contesting the allegations in the complaint for purposes of this disgorgement motion.
In the instant motion, the SEC seeks a final order for the following: (i) disgorgement of $715, 700 against Defendants on a joint and several basis; (ii) prejudgment interest of $166, 476 against Defendants on a joint and several basis; (iii) a civil penalty of $715, 700 against Rooney; and (iv) an officer and director bar against Rooney.
I. Disgorgement Plus Prejudgment Interest
Pursuant to the consent judgment, the Court will accept the allegations in the complaint as true for the purpose of determining appropriate relief. The SEC seeks disgorgement of $715, 700 against Defendants jointly and severally for fees paid by the Fund to Defendants since January 1, 2008 (the "Fees"). Disgorgement plus interest are remedies available to prevent defendants from profiting from their illegal securities activities. 15 U.S.C. §§ 77t(d), 78u(d)(3). Disgorgement is an equitable remedy that takes ill-gotten gains from a wrongdoer so that he does not profit from his misconduct. See SEC v. Lipson, 278 F.3d 656, 662-63 (7th Cir. 2002). "The simple question is whether the profits, fees, and other compensation derived from wrongdoing." SEC v. Capital Solutions Monthly Income Fund, LP, CIV. 10-3995 DWF/JJK, 2014 WL 2922644 (D. Minn. June 27, 2014) (internal quotation marks and citations omitted). The SEC bears the burden of proving that its disgorgement figure reasonably approximates the amount of profits causally connected to the violation. SEC v. Michel, 521 F.Supp.2d 795, 830-31 (N.D. Ill. 2007). The burden shifts to Defendants to prove the approximation is inaccurate. SEC v. Black, 04 C 7377, 2009 WL 1181480, at *2 (N.D. Ill. Apr. 30, 2009).
Defendants insist that the SEC does not satisfy its burden of establishing that the Fees are related, or causally connected, to Defendants' alleged misconduct because Solaris Management was entitled to the Fees regardless of what investments the Fund made. Defendants also contest the $715, 700 amount and claim that Solaris Management only collected part of its 2007 fees that year and thus, the remainder of the 2007 fees should be subtracted because they were paid to Solaris Management in 2008 instead. Based on these calculations, Defendants state that $224, 666 is the most they should be required to disgorge.
Moreover, Defendants assert that the Positron investment did not generate any additional management or incentive fees that Solaris Management would not have received otherwise. Defendants also aver that the SEC provides no evidence that indicates that the Solaris Management investors would have refused to pay the management and incentive fees had they learned earlier about the Positron investments. In ...