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Securities and Exchange Commission v. First Jersey Securities, Inc.

Citation. SEC v. First Jersey Sec., Inc., 101 F.3d 1450, Fed. Sec. L. Rep. (CCH) P99,367 (2d Cir. N.Y. Dec. 10, 1996)
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Brief Fact Summary.

First Jersey Securities (First Jersey) (Defendant) used a large and coordinated system of fraudulent practices to persuade its clients to purchase specific securities from First Jersey at extremely high prices not correlated to current market prices, argued the Securities and Exchange Commission (SEC) (Plaintiff).

Synopsis of Rule of Law.

Upon federal securities law violations being discovered by a district court, the court has broad equitable power tocreate suitable remedies, inclusive of ordering disgorgement of profits byguilty defendants.


A discount broker-dealer, First Jersey Securities (First Jersey), sold securities via 1,200 representatives, a majority of which had no experience selling securities. The sales were a discount broker-dealer, sold securities through 1,200 representatives, most of whom had no prior securities sales experience. Its sales were made by cold calling prospective clients. The branch manager would provide the reps with the security that First Jersey was suggesting to investors, this took place during the fourth week of each month. At that time, the representatives were provided a scripted sales pitch, and sometimes the sales people were given reports concerning the suggested security, although they were not privy to the related risks.Usually First Jersey would have a client purchase a security and then have its representative suggest the client resell that security back to First Jersey, allowing First Jersey to split the units and resell them at considerably exaggerated prices.  The First Jersey chief executive officer, president and sole shareholder wasBrennan.Purporting violations of § 17(a), § 10{b), and Rule 10b-5 (due to First Jersey’s practices constituting unlawful markups and fraud, the SEC initiated suit. First Jersey and Brennan were held jointly and severally liable for the violations by the district court and it was decided that Brennan was a “controlling person†for § 20 of the Securities Exchange Act of 1934 purposes.  A permanent injunction was issued by the court, prohibiting defendants from additional violations, the disgorgement of $22,288,099 was ordered plus$52,689,894, in prejudgment interest, and appointed a special agent to decide if more violations had been discovered. Brennan and First Jersey appealed.


Upon federal securities law violations being discovered by a district court, does the court have broad equitable power to create suitable remedies?


(Kearse, J.) Yes.Upon federal securities law violations being discovered by a district court, the court has broad equitable power to create suitable remedies, inclusive of ordering disgorgement of profits by guilty defendants. The central reason behind requiring disgorgement is deterrence by preventing unfair enrichment of the offender.  In line with its authority, the district court may decide if the remedy of disgorgement is appropriate, and the suitable amount of that disgorgement. A reasonable estimate of the earnings procured from the violation is what the total to be disgorged should be, and should not constitute punitive damages. When a party does not prove a good faith defense under § 20(a), the “controlling person†of a corporation may have joint and several liability imposed upon them by the court. Brennan was appropriately held jointly and severally liable for its unlawful profits seeing as Brennan was the president, sole shareholder and CEO of First Jersey. An injunction is appropriately issued when it is highly likely that violations will happen in the future, where the violation was repetitive, and where the court decides that such a remedy is necessitated by a violator’s level of accountability. In this case, the record shows that Brennan and First Jersey had a past laden with fraudulent violations.  Furthermore, the current cases violations were founded on repetitive and systematic fraudulent practices, so the district court appropriately issued the permanent injunction.  The district court was erroneous in appointing a special agent for the extra past fraudulent activities investigation. The SEC may properly appoint a special agent to investigate possible violations of its regulations, this particular appointment was issued by the district court.  Special masters may be properly appointed by the district court in order to manage compliance with its orders, but in this case the appointment of a special agent was to investigate past violations, not ensuring future order compliance. Reversed in part and affirmed in part.


Apart from the remedies already mentioned, state and federal law offer additional penalties. A party permanently enjoined from future violations could be subject to a ban stopping it from participating in future securities ventures altogether, without previous authorization by the proper agency.  A private class action for injuries could be sustained by shareholders. The most troublesome of the remedies allow either the court or the SEC to use power over potential corporation behavior, much like in this case, through appointment of a special agent.

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