## Facts

- Ratilal K. Patel was the founder, a director, and senior vice president for R&D of Par Pharmaceutical, Inc., a generic-drug manufacturer.
- Par submitted an FDA application for a generic version of Maxzide that falsely represented the product tested in required bioequivalence studies; a certificate of analysis was backdated, and testing had used a different formulation.
- Patel knew of the falsity and, in February and March 1988, sold 75,000 shares of Par stock at about $21 per share, receiving approximately $1.576 million.
- In 1988–1989, investigations and disclosures concerning Par and its Maxzide product became public; Par announced a recall on July 24, 1989, after which the stock traded around $7.625 per share.
- Patel resigned from Par and later pleaded guilty to conspiracy to defraud the FDA.
- The SEC sued in the Southern District of New York alleging securities fraud and insider trading based on Patel’s stock sales while possessing material nonpublic information.
- The district court permanently enjoined Patel from future violations, ordered disgorgement of $453,203 plus prejudgment interest (treated as “avoided losses”), and imposed a lifetime bar on serving as an officer or director of any public company.

## Issues

1. Whether the disgorgement award was permissible where it rested on a reasonable approximation of gains or “losses avoided” causally connected to Patel’s misconduct.
2. Whether the district court abused its discretion by imposing a lifetime officer-and-director bar without considering a conditional or time-limited bar and without a proper analysis of “unfitness” under Exchange Act § 21(d)(2).

## Decision

- The disgorgement award and permanent injunction were affirmed.
- The lifetime officer-and-director bar was vacated and remanded for reconsideration.
- Disgorgement may include avoided losses where the SEC provides a reasonable approximation tied to the violation, and uncertainty created by the wrongdoing is allocated against the wrongdoer.
- A lifetime officer-and-director bar requires careful justification, including consideration of whether a conditional or time-limited bar would adequately protect investors.

## Legal Principles

- Disgorgement in SEC enforcement actions is an equitable remedy designed to deprive violators of ill-gotten gains and deter future violations.
- Disgorgement need only be a reasonable approximation of profits (including losses avoided) causally connected to the violation; precision is not required.
- Once the SEC makes a prima facie showing of a reasonable approximation, the burden shifts to the defendant to demonstrate the amount is not a reasonable approximation.
- Under Exchange Act § 21(d)(2), an officer-and-director bar turns on “unfitness” and may be imposed conditionally or unconditionally and for a period deemed appropriate.
- In determining whether to impose a bar and its scope, relevant considerations include: egregiousness, repeat-offender status, role and scienter, economic stake, likelihood of recurrence, and other circumstances bearing on unfitness.
- Before imposing a lifetime bar, a court should consider whether a conditional or time-limited bar would sufficiently protect investors, particularly where there is no prior record of securities-law violations.

## Conclusion

The Second Circuit sustained equitable disgorgement based on avoided losses supported by a reasonable causal approximation, but required a more searching, factor-based explanation—and consideration of lesser alternatives—before a court may impose the extreme remedy of a lifetime officer-and-director bar.


S.E.C. v. Patel, 61 F.3d 137 (2d Cir. 1995)