## Facts

- Purolator Products, a public auto-parts manufacturer, was the subject of acquisition negotiations by Mark IV Industries in 1994.
- J. Anthony Aldrich, a Purolator director, learned material nonpublic information about the negotiations.
- Aldrich shared the information with Dennis J. Shepard, his business associate in a consulting firm; Shepard agreed to keep the information confidential.
- On September 10, 1994, Shepard told his friend and dentist, Michael G. Sargent, that a company was “probably going to be bought” and that Shepard could not buy because he was “too close to the situation,” while identifying Aldrich’s board role.
- The next business day, Sargent researched Purolator through his broker and bought 20,400 shares; he also told his friend Robert Scharn, who bought 5,000 shares.
- After the tender offer became public, the stock price rose; Sargent’s trading profits were later found to be approximately $141,768.
- The SEC brought a civil enforcement action alleging violations of Exchange Act § 14(e) and Rule 14e-3; a jury found Shepard and Sargent liable.
- The district court ordered disgorgement of illicit profits but denied the SEC’s requests for a permanent injunction, prejudgment interest, and civil monetary penalties; the SEC appealed only those remedial denials.

## Issues

1. Whether the district court abused its discretion by denying a permanent injunction against future securities-law violations.
2. Whether the district court abused its discretion by denying prejudgment interest on the disgorgement amount.
3. Whether the district court abused its discretion by declining to impose civil penalties under the Insider Trading and Securities Fraud Enforcement Act.

## Decision

- The First Circuit affirmed.
- The court held the district court did not abuse its discretion in denying injunctive relief because the record supported a finding of no reasonable likelihood of future violations, including the isolated nature of the misconduct and the defendants’ non-market-professional roles.
- The court held the district court did not abuse its discretion in denying prejudgment interest because such interest is an equitable remedy and the denial was not so unfair or inequitable as to warrant reversal.
- The court held the district court did not abuse its discretion in denying civil penalties because penalties are discretionary, and the district court could reasonably treat full disgorgement, the limited scope of the misconduct, and defendants’ circumstances as sufficient.

## Legal Principles

- A permanent injunction in an SEC enforcement action requires a showing of a reasonable likelihood of future violations; the inquiry is forward-looking and depends on factors such as the egregiousness and recurrence of misconduct, scienter, recognition of wrongdoing, and future opportunity to violate.
- Prejudgment interest on disgorgement is equitable and discretionary; appellate review is deferential and reversal is warranted only when the denial is so unfair or inequitable as to require correction.
- Civil penalties for insider trading under ITSFEA are not automatic upon proof of a violation; district courts have broad discretion to calibrate penalties in light of deterrence goals and case-specific circumstances, including the extent of disgorgement and the nature of the conduct.
- Remedial determinations in SEC cases are reviewed for abuse of discretion, and are generally upheld when the district court considered relevant factors and reached a reasonable result.

## Conclusion

After a jury found Shepard and Sargent liable for tender-offer insider trading under § 14(e) and Rule 14e-3 and the district court ordered disgorgement, the First Circuit upheld the district court’s discretionary choice to deny additional remedies, concluding the record supported rejecting a permanent injunction, prejudgment interest, and civil penalties.


Securities & Exchange Commission v. Sargent, 329 F.3d 34 (1st Cir. 2003)