650 F.3d 156 (2nd Cir. 2011), 10-1204-cv(L), S.E.C. v. Rosenthal

Docket Nº:10-1204-cv(L); 10-1253(con).
Citation:650 F.3d 156
Opinion Judge:KATZMANN, Circuit Judge:
Party Name:SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Zvi ROSENTHAL, Amir Rosenthal, Ayal Rosenthal, Oren Rosenthal, Efrat Rosenthal, Rivka Rosenthal, Defendants-Appellants, Aragon Capital Management, LLC, Aragon Partners, LP, Noga Delshad, Defendants.
Attorney:Amir Rosenthal, pro se (Zvi Rosenthal, Otisville, N.Y., Ayal Rosenthal, Tel Aviv-Yafo, Israel, on the brief), New York, N.Y., for Defendants-Appellants Zvi, Amir, and Ayal Rosenthal. Robert Knuts, Park & Jensen LLP, New York, N.Y., for Defendants-Appellants Oren, Efrat, and Rivka Rosenthal. Trace...
Judge Panel:Before: SACK, KATZMANN, and CHIN, Circuit Judges.
Case Date:June 09, 2011
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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650 F.3d 156 (2nd Cir. 2011)

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee,

v.

Zvi ROSENTHAL, Amir Rosenthal, Ayal Rosenthal, Oren Rosenthal, Efrat Rosenthal, Rivka Rosenthal, Defendants-Appellants,

Aragon Capital Management, LLC, Aragon Partners, LP, Noga Delshad, Defendants.

Nos. 10-1204-cv(L); 10-1253(con).

United States Court of Appeals, Second Circuit.

June 9, 2011

Argued: March 18, 2011.

Amir Rosenthal, pro se (Zvi Rosenthal, Otisville, N.Y., Ayal Rosenthal, Tel Aviv-Yafo, Israel, on the brief), New York, N.Y.,

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for Defendants-Appellants Zvi, Amir, and Ayal Rosenthal.

Robert Knuts, Park & Jensen LLP, New York, N.Y., for Defendants-Appellants Oren, Efrat, and Rivka Rosenthal.

Tracey A. Hardin, Senior Counsel (David M. Becker, General Counsel; Mark D. Cahn, Deputy General Counsel; Jacob H. Stillman, Solicitor; Randall W. Quinn, Assistant General Counsel, on the brief), Securities & Exchange Commission, Washington, D.C., for Plaintiff-Appellee.

Before: SACK, KATZMANN, and CHIN, Circuit Judges.

KATZMANN, Circuit Judge:

Defendants-Appellants Amir and Ayal Rosenthal (" Amir" and " Ayal" ; collectively " defendants" ) appeal from the judgment of the United States District Court for the Southern District of New York (Maas, Mag. J. ), entered on February 1, 2010, granting the motion of Plaintiff-Appellee Securities and Exchange Commission (" SEC" ) for partial summary judgment, ordering disgorgement, granting injunctive relief against Zvi and Amir Rosenthal, and imposing penalties on Zvi, Amir, and Ayal Rosenthal. In this opinion, we consider Amir and Ayal's challenge to the imposition of penalties on them pursuant to section 21(d)(3) of the Securities Exchange Act of 1934 (" Exchange Act" ), 15 U.S.C. § 78u(d)(3), for their insider trading violations. 1 We hold that civil monetary penalties for insider trading are not available under section 21(d)(3) of the Exchange Act. For the reasons stated herein and in the accompanying summary order, the judgment of the district court is AFFIRMED in part and VACATED in part.

BACKGROUND

The following factual recitation, which is not in dispute, is limited to those facts that are necessary to the resolution of the issue addressed in this opinion.

Zvi and Rivka Rosenthal are the parents of Amir, Ayal, Oren, and Efrat Rosenthal. In June 2003, Amir formed Aragon Partners LP (" Aragon" ), a limited partnership, to pool and trade funds on behalf of the Rosenthal family members. Amir contemporaneously founded Aragon Capital Management LLC, which he controlled and in the trading account of which he placed all Aragon trades.

In April 2005, in the course of his employment as an accountant at Ernst & Young, David Heyman, a Rosenthal family friend, learned of the proposed acquisition of a public company by a second company that was an Ernst & Young client. Heyman disclosed this proposed transaction to Amir, who sold the target company's " put" options through the Aragon account (" Project AA trades" ). Amir, who was at that time an associate at a large law firm, also passed the tip on to his supervisor, who purchased " call" options. The acquisition ultimately did not occur, and Amir's Project AA trades did not result in any profits or permit him to avoid losses.

In May 2005, in the course of his employment as an accountant at PricewaterhouseCoopers (" PwC" ), Ayal learned of a proposed merger involving a PwC client as the target. Ayal communicated this confidential information to Amir, who sold the

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target company's put options through the Aragon account (" Project Victor trades" ) and tipped his supervisor, who again bought call options. Ayal later informed Amir that the merger would not occur, and Amir liquidated Aragon's position. Neither Ayal nor Amir generated profits or avoided losses from the Project Victor trades.

On February 8, 2007, Amir, Ayal, and Heyman pleaded guilty to a one-count criminal information alleging that they had conspired to commit securities fraud. Amir admitted to trading on material, nonpublic information and to tipping others. Heyman and Ayal also admitted to tipping Amir.

The SEC instituted this civil enforcement action in February 2007 and filed an amended complaint on March 22, 2007, which alleged that, inter alia, Amir, Ayal, and Heyman violated section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and section 17(a) of the Securities Act of 1933 by engaging in insider trading. The parties consented to proceeding before Magistrate Judge Frank Maas. On October 1, 2008, the SEC moved for partial summary judgment on the basis of the guilty pleas in the criminal case. On November 24, 2009, the district court granted summary judgment against Amir and Ayal with respect to the Project Victor trades and against Amir with respect to the Project AA trades and imposed " third tier" civil penalties 2 in connection with those trades pursuant to section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3). The court imposed the statutory maximum penalty of $600,000 on Amir for his five violations— trading on one tip from Heyman and two tips from Ayal and twice tipping his law firm supervisor— and imposed a penalty of $120,000 on Ayal for his two tips to Amir. See 15 U.S.C. § 78u(d)(3)(B)(iii); 17 C.F.R. § 201.1002.

DISCUSSION

We review de novo the district court's interpretation of a federal statute. See, e.g., United States v. Fuller, 627 F.3d 499, 503 (2d Cir.2010).

Amir and Ayal challenge the district court's imposition of penalties pursuant to section 21(d)(3) of the Exchange Act, which provides in pertinent part:

Whenever it shall appear to the Commission that any person has violated any provision of this chapter, [or] the rules or regulations thereunder, ... other than by committing a violation subject to a penalty pursuant to section 78u-1 of this title, the Commission may bring an action in a United States district court to seek, and the court...

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