By James Hamilton, J.D., LL.M.
In an interesting case written up in the Wall Street Journal of Feb 27, 2007, a federal judge rejected an SEC disgorgement claim against two senior executives of an investment adviser to mutual funds. In an enforcement action brought under Section 206 of the Advisers Act, the SEC alleged that the defendants aided and abetted the adviser’s violation. The SEC said that materials provided to the funds’ boards, prepared by one officer and reviewed by the other, did not disclose the adviser’s leveraging the funds’ transfer agent business to obtain reciprocal business and revenue guarantees benefiting only the funds’ sponsor. SEC v. Thomas Jones and Lewis Daidone, SD NY, 05 Civ. 7044, Feb 26, 2007.
The investment adviser was a business unit of Citigroup, Inc., and provided advisory and management services to Citigroup-sponsored mutual funds. The Commission sought to disgorge the amount of money by which defendants were enriched as a result of their alleged misrepresentations relating to the transfer agent proposal. However, ruled Judge Richard Conway Casey, the Commission was unable to set forth any evidence of specific
profits subject to disgorgement.
The only evidence the Commission offered in support of its disgorgement action against one defendant was that his compensation was based on how he performed on significant projects, that the transfer agent initiative was a large project, and that his compensation might have been affected by the initiative. In sum, the SEC did not provide the court with any guideposts for determining the proper amount of compensation subject to disgorgement.