## Facts

- First Jersey Securities, Inc. operated as a discount broker-dealer focused on low-priced, over-the-counter securities, with extensive domestic and foreign branch offices and a large retail customer base.
- The firm used cold-calling and monthly “focus” securities selected for aggressive promotion; sales representatives used scripted pitches and did not disclose material risks to customers.
- First Jersey carried out a coordinated scheme to induce customers to buy designated securities from the firm at excessive prices disconnected from prevailing market prices, producing over $27 million in unlawful profits.
- A recurring practice involved a sell–repurchase–resell cycle: customers were urged to buy a security, then soon resell it back to First Jersey at a small profit; First Jersey then split the position and resold it to other customers at substantially higher prices.
- The SEC brought a civil enforcement action alleging fraudulent markups and deceptive sales practices violating Securities Act § 17(a), Exchange Act § 10(b), and SEC Rule 10b-5.
- Robert E. Brennan, the firm’s chief executive officer, president, and sole shareholder, was found to have directed and benefitted from the scheme and was held liable both as a primary violator and as a controlling person under Exchange Act § 20.

## Issues

1. Whether the SEC’s enforcement action was barred by res judicata due to earlier proceedings involving the defendants.
2. Whether the evidence supported liability under Securities Act § 17(a), Exchange Act § 10(b), and Rule 10b-5, including the requisite state of mind where applicable.
3. Whether Brennan was properly held individually liable and liable as a controlling person under Exchange Act § 20.
4. Whether the district court acted within its equitable authority in ordering disgorgement, prejudgment interest, and joint-and-several liability.
5. Whether the district court had authority to appoint a Special Agent to investigate potential additional violations beyond those adjudicated.

## Decision

- The Second Circuit affirmed the district court’s judgment on liability under § 17(a), § 10(b), and Rule 10b-5.
- The court rejected the res judicata defense and held the SEC’s enforcement action was not precluded.
- The court affirmed findings that Brennan controlled the firm and could be held responsible under Exchange Act § 20, as well as for primary violations.
- The court affirmed disgorgement of $22,288,099 and prejudgment interest of $52,689,894, imposed jointly and severally on First Jersey and Brennan, and affirmed a permanent injunction.
- The court reversed only the portion of the judgment appointing a Special Agent to investigate additional potential violations.

## Legal Principles

- Upon proof of federal securities-law violations, district courts possess broad equitable authority to craft remedies, including ordering disgorgement of ill-gotten gains.
- Disgorgement is remedial in purpose: it aims to deprive violators of unlawful profits rather than to punish.
- For disgorgement, the SEC must provide a reasonable approximation of profits causally connected to the wrongdoing; the burden then shifts to defendants to show the approximation is not reasonable.
- Prejudgment interest may be awarded in equity to prevent defendants from retaining the time value of unlawful gains.
- A controlling person who directs and benefits from violations may be held jointly and severally liable for disgorgement with the controlled entity.
- A remedial order in an SEC enforcement action must remain within the court’s equitable authority; investigative appointments exceeding that scope may be vacated.

## Conclusion

The Second Circuit largely upheld liability and substantial equitable relief for a broker-dealer’s fraudulent markup scheme, confirming courts’ authority to order disgorgement with prejudgment interest and to impose joint-and-several liability on a controlling owner, while limiting remedies by vacating the appointment of an investigative Special Agent.


S.E.C. v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir. 1996)