SEC v. Hayter: Granting Civil Penalty and the Calculation of Civil Penalties
In 2010, the SEC filed a civil enforcement action against, among others, Edward Hayter, Wayne Burmaster, North Bay South Corporation (“North Bay”), the Caddo Corporation, and Beaver Creek Financial Corporation (collectively, the “Defendants”) for an alleged “pump and dump” scheme involving BIH Corporation’s (“BIH”) stock. (See Press Release here).
With respect to North Bay, the United States District Court for the Middle District of Florida granted the Commission’s motion for final judgment against North Bay after it defaulted by failing to respond. The district court enjoined North Bay from “committing further securities law violations; ordering it to pay disgorgement; and imposing a civil penalty in an amount to be determined by the Court upon a motion by the Commission.” (See SEC v. Hayter, at 3).
The only issue remaining before the court, therefore, was the amount of the civil penalty. The purpose of civil penalties is to punish security violations and deter future violations. In order to determine the amount of the civil penalty, the court classified the violation in accordance with the statutory procedure.
The Securities Exchange Act (“ Exchange Act”) provides three tiers of civil monetary penalties for violations. The first tier applies to all violations of the Exchange Act, the second tier to those violations involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement, and the third to all violations meeting the second-tier criteria that also resulting in a substantial loss or creating significant risk of substantial losses to other persons. For third tier violations, the maximum penalty a court may impose is the greater of $130,000 or the violator’s pecuniary gain. (See SEC v. Hayter, at 5).
In determining the appropriate penalty, the court first found that the “pump and dump” scheme involved fraud. Accordingly, North Bay was subject to either a second or third tier penalty. In addition, however, the court found that $1.1 million loss resulting from the pump and dump scheme constituted a substantial loss. As a result, North Bay’s behavior qualified for the third-tier.
The Commission sought a penalty equal to the pecuniary gain obtained by North Bay. A Commission accountant valued North Bay’s pecuniary gain at $86,557. Agreeing with the valuation, the court ordered North Bay pay a civil penalty in the amount of $86,557.
The primary materials for this case can be found on the DU Corporate Governance website.