Wednesday, March 03, 2021

Appellate panel affirms CFTC disgorgement calculation despite limits imposed by recent Supreme Court decision in Liu

By Brad Rosen, J.D.

An Eleventh Circuit Court of Appeals panel upheld a district court rulings in favor of the CFTC finding that the lower court appropriately calculated the disgorgement of ill-gotten gains based on defendant Husam Tayeh’s violations of the CEA, as well as releasing a pallet of currency held by the FBI to the CFTC. The currency was as an offset against the final judgment imposed against the defendant (CFTC v. Tayeh, March 2, 2021, per curiam).

Abuse of discretion claim buttressed by recent Supreme Court ruling in Liu. After a bench trial, the CFTC obtained a final judgment imposing $22.6 million in disgorgement, as well as a civil monetary penalties of $140,00 against an Tayeh and his two companies in connection with a fraudulent foreign currency (forex) scheme. On appeal, Tayeh argued that the district court abused its discretion as it failed to deduct his legitimate business expenses from the amount of disgorgement.

In reaching its decision, the appellate court considered the recent Supreme Court decision Liu v. Securities and Exchange Commission, 140 S. Ct. 1936 (2020), which required the agency to consider the deduction of legitimate business expenses when calculating a disgorgement amount. Specifically, the Liu Court held that, under principles of equity, the SEC was precluded from recovering a defendant’s gross profits and could only recover net profits which accounted for and deducted legitimate business expenses.

Appellate court effectively sidesteps Liu. The appellate court noted that the district court decision in this case was issued shortly before the Supreme Court rendered its decision in Liu, but that the district court foresaw the ruling in that case. In particular, the lower court concluded that the legal issue of whether a disgorgement amount must account for legitimate business expenses was ultimately irrelevant to the disposition of the subject case as the defendant would need to introduce credible evidence of his expenses, and he had failed to do so. Specifically, the lower court found:
  • Tayeh failed to provide any credible evidence that would allow the court to consider reducing the stipulated total gain amount with his legitimate business expenses;
  • Tayeh’s testimony was not credible, noting further Tayeh provided only hazy and uncertain estimates of how much he spent on legitimate business transactions;
  • Tayeh testified that he was “not very good at recordkeeping or managing stuff,” and claimed to have had multiple employees, but he could not recall filing any employee-employer tax forms and did not testify about how much he paid them;
  • Tayeh personally withdrew millions in cash from bank accounts and direct-transferred millions more to high-end jewelers; and
  • Tayeh provided no travel records, government documents, shipping receipts, witness testimony, or passport stamps to corroborate his testimony about using untraceable cash and jewelry to purchase large amounts of currency overseas.
In crediting the lower court findings, the appellate panel specifically found that the district court did not abuse its discretion when it set the disgorgement amount equal to the stipulated gain of the defendants. The appellate panel also found that the CFTC had provided a reasonable approximation of the defendants’ ill-gotten gains based on expert testimony and the records provided by the defendants.

Lower court’s release of impounded currency was appropriate. Tayeh also claimed that the district court erred when it ordered the release of the foreign currency held by the FBI to the CFTC. Tayeh argued that the compromise settlement from the related civil forfeiture action, United States v. One Parcel of Property, dictated that the United States would neither initiate nor seek judicial forfeiture proceedings and the currency had been released pursuant to the resolution of that matter.

The appellate panel found that the district court did not err when it ordered that the $2.5 million in foreign currency be released to the CFTC as an offset against the final judgment. The appellate body also concluded that nothing in the record demonstrated that the United States (in a related criminal proceeding) or the CFTC sought or initiated judicial forfeiture proceedings. The CFTC was entitled to and sought release of the foreign currency to offset the amount that Tayeh was liable to the agency under the final judgment.

In reaching its decision on this issue, the appellate panel concluded that the government had the same common law right of offset as any other creditor and could “apply the unappropriated moneys of his debtor, in his hands, in extinguishment of the debts due him.” The court further reasoned that the settlement agreement was a contract governed by principles of general contract law, and accordingly, its terms were entitled their plain and ordinary meaning.

The case is No. 20-11017.