UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
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v.
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Civil Action No. 1:19-cv-11655-IT
COMMONWEALTH EQUITY SERVICES,
LLC d/b/a COMMONWEALTH
FINANCIAL NETWORK,
Defendant.
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MEMORANDUM & ORDER
March 29, 2024
TALWANI, D.J.
Pending before the court are Plaintiff Securities and Exchange Commission’s (“SEC”)
Motion for Entry of Final Judgment [Doc. No. 121] and Motion to Strike the Declaration of Alex
J. Russell [Doc. No. 128]. For the following reasons, Plaintiff’s Motion to Strike is GRANTED
and its Motion for Entry of Final Judgment is GRANTED in part and DENIED in part.
I. Background
SEC sued Commonwealth Equity Services, LLC d/b/a Commonwealth Financial
Network (“Commonwealth”) in 2019 alleging violations of Sections 206(2) and 206(4) of the
Investment Advisers Act of 1940 (“Advisers Act”), and Rule 206(4)-(7) thereunder. SEC
claimed that Commonwealth negligently failed to disclose material conflicts of interest to its
advisory clients and failed to adopt and implement policies and procedures as required by the
Advisers Act and its regulations.
The court recited the facts of this dispute in its Memorandum and Order [Doc. No. 109]
and incorporates that discussion herein. The facts essential to the instant motion are as follows:
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Commonwealth is an SEC-registered investment adviser that offers its advisory services
to clients through approximately 2,300 investment adviser representatives (“IARs”). The
conflicts of interest at issue involved Commonwealth’s contracts with its clearing broker,
National Financial Services, LLC (“NFS”). NFS provides its account holders access to a mutual
fund supermarket run by Fidelity FundsNetwork. Through the funds network, customers can
purchase, sell, or exchange mutual fund shares.
NFS has service agreements with mutual fund families to make the funds available to
NFS customers. These agreements offer mutual fund families two primary options for
distributing their shares: (1) the No Transaction Fee (“NTF”) program, through which mutual
fund families may offer fund shares to NFS account customers who can purchase or sell NTF
program shares without paying a transaction fee, and (2) the Transaction Fee (“TF”) program,
through which mutual fund families may offer fund shares to NFS account customers who can
purchase or sell TF program shares with payment of a transaction fee.
The crux of SEC’s allegation was that Commonwealth had agreements with NFS to
receive portions of the fees received by NFS’s NTF and TF programs; that the mutual fund
shares for which Commonwealth received those fees were sometimes more expensive for clients
than shares of the same funds that did not generate fees for Commonwealth; that Commonwealth
knew of the lower-cost alternatives to these share classes, their availability to clients, and that
those lower-cost alternatives would generate less or no revenue for Commonwealth; and that
Commonwealth failed to make robust disclosures regarding the revenue it generated from the
higher-cost shares.
SEC moved for summary judgment on liability, asking the court to find that
Commonwealth violated the Advisers Act by not disclosing to its clients information regarding
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the payments that mutual fund companies paid to NFS which were, in turn, shared with
Commonwealth. This court granted summary judgment in SEC’s favor, finding that
Commonwealth violated Sections 206(2) and 206(4), and Rule 206(4)-(7) thereunder.
Specifically, the court found that Commonwealth violated these provisions by failing to (1)
adequately disclose that Commonwealth had a potential conflict of interest where it received
revenue sharing payments on NTF mutual fund class shares that had higher expenses as
compared to other mutual fund class shares or that class shares of the same fund existed with
lower internal expenses; (2) disclose its receipt of TF revenue sharing, and (3) adopt and
implement written policies and procedures reasonably designed to prevent violation of the
Advisers Act. Mem. & Order 28, 30 [Doc. No. 109].
SEC now moves for entry of final judgment, see Pl. Securities and Exchange
Commission’s Mot. for Entry of Final J. (“SEC Final J. Mot.”) [Doc. No. 121], seeking
disgorgement of Commonwealth’s incremental revenues causally connected to its failures to
disclose, plus pre-judgment interest, and that Commonwealth pay a civil penalty and be enjoined
from future violations. In support of its motion, SEC provides the Second Declaration of Evgeny
(Eugene) Orlov, Ph.D. (“Second Orlov Decl.”) [Doc. No. 121-1], Third Declaration of Evgeny
(Eugene) Orlov, Ph.D. (“Third Orlov Decl.”) [Doc. No. 126-1], and the Declaration of Richard
Harper (“Harper Decl.”) [Doc. No. 121-2].
Commonwealth opposes the motion, see Def.’s Mem. Opposing Pl.’s Mot. for Entry of
Final J. (“Commonwealth Final J. Opp.”) [Doc. No. 136]. In support of its opposition,
Commonwealth offers the Declaration of Alex J. Russell (“Russell Decl.”) [Doc. No. 124-1],
Declaration of Mark E. Potter, Ph.D. (“Potter Decl.”) [Doc. No. 124-2], and Declaration of C.A.
Trapnell (“Trap”) Kloman (“Kloman Decl.”) [Doc. No. 136-1].
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II. Discussion
A. Motion to Strike
SEC seeks to strike the Russell Declaration on the ground that Russell disclosed new
opinions long after the July 2021 deadline for expert disclosures under the operative scheduling
order, see Elec. Order [Doc. No. 53], and that this late disclosure precluded SEC from
sufficiently examining or responding to Russell’s new opinions. See Plaintiff’s Mot. to Strike the
Decl. of Alex J. Russell 1-2 (“Mot. to Strike”) [Doc. No. 128].
Commonwealth responds that any allegedly undisclosed opinions offered by Russell were
in response to undisclosed opinions offered by Orlov, SEC’s expert. See Def.’s Mem. Opposing
Pl.’s Motion to Strike Decl. of Alex J. Russell 1 (“Commonwealth Strike Opp.”) [Doc. No. 130].
Commonwealth also states that it reached out to SEC following the disclosure of Orlov’s
opinions on disgorgement, and “offered [] SEC an opportunity to depose Russell on several
alternative dates along with a stipulated proposed pause in the proceeding to allow [] SEC to
make any further response after the deposition.” Id. at 2; see id., Ex. A (Greenberg Email
8/4/2023) [Doc. No. 130-1]. Moreover, Commonwealth contends that SEC’s substantive
objections are both faulty and not a basis for exclusion. Id. at 3.
In reply, SEC asserts: (1) the deposition offer came a week after SEC moved to strike the
declaration, would result in months of delay, and would reward Commonwealth’s tactical
choices in withholding discovery; (2) Commonwealth mischaracterizes the Second Orlov
Declaration, which merely presents “a simple mathematical calculation” that takes Orlov’s
previously disclosed lower-cost share analysis based on a sample of funds and extrapolates that
result to the entirety of Commonwealth’s mutual fund revenue sharing; (3) Russell’s declaration,
by contrast, attempts to rebut the accuracy of the underlying lower-cost share analysis and offer a
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new analysis two years too late; and (4) Commonwealth purports to support this new analysis
with account-level data never disclosed to SEC during discovery. Reply Brief ISO Pl.’s Mot. to
Strike Decl. of Alex J. Russell (“SEC Reply”) 1-2 [Doc. No. 133].
1. Legal Standard
The admissibility of expert evidence is governed by Federal Rule of Evidence 702. Under
Rule 702, a proponent of expert evidence must demonstrate that it is more likely than not that:
(1) “the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to
understand the evidence or to determine a fact in issue;” (2) the expert’s “testimony is based on
sufficient facts or data;” (3) “the testimony is the product of reliable principles and methods;”
and (4) “the expert’s opinion reflects a reliable application of the principles and methods to the
facts of the case.” Fed. R. Evid. 702.
Fed. R. Civ. P. 26(a)(2) governs the disclosure of expert testimony. A party must disclose
the identity of any expert witnesses it may call at trial and provide a written report containing “a
complete statement of all opinions the witness will express and the basis and reasons for them[.]”
Fed. R. Civ. P. 26(a)(2)(A)-(B). Fed. R. Civ. P. 26(a)(2)(D) provides that disclosure of expert
testimony must be made “at the times and in the sequence that the court orders.” If a party fails
to abide by the requirements of Rule 26(a), it shall be precluded from using “that information or
witness to supply evidence on a motion, at a hearing, or at a trial, unless the failure was
substantially justified or is harmless.” Fed. R. Civ. P. 37(c)(1). “[P]reclusion is not automatic,”
however, and a failure to disclose may be excused if a court determines that a different remedy is
more appropriate under the circumstances. See Genereux v. Raytheon Co., 754 F.3d 51, 59 (1st
Cir. 2014); Fed. R. Civ. P. 37(c)(1)(C).
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“[A] ‘late’ expert declaration submitted in response to criticisms of the expert’s opinion
or methodology contained in a Daubert motion or motion for summary judgment is permissible
as long as it is consistent with the overall opinion or methodology in the original report and
merely provides additional subsidiary details, support, or elaboration.” Mass. Mutual Life Ins.
Co. v. DB Structured Prods., Inc., 2015 WL 12990692, at *4 (D. Mass. Mar. 31, 2015).
However, if a declaration submitted after expert discovery has closed “offers a whole new
theory, opinion, or methodology” or is “outside of the scope or general scheme of the report,”
then supplementation is improper. Id. (citing Curet-Velazquez v. ACEMLA De Puerto Rico,
Inc., 656 F.3d 47, 56 (1st Cir. 2011)). In considering whether to allow supplementation,
“[s]urprise and prejudice are important integers” a court contemplates. Curet-Velazquez, 656
F.3d at 56 (internal citation omitted).
2. Discussion
There is no dispute that the expert declaration at issue has been offered years after the
deadline for expert disclosures. The question is whether the lower-cost share analysis (and
resultant disgorgement figure) that Russell offers in his declaration is a “new” opinion, theory, or
methodology, or a permissible supplementation of opinions contemplated by the scope of his
original disclosures. After reviewing the declaration in conjunction with Russell’s original expert
report, and Orlov’s original report, declaration, and supplemental declarations, the court agrees
with SEC that the alternative lower-cost share analysis Russell submits in his declaration is a
new opinion.
If an untimely report “consists of new opinions, new bases for [expert] opinions, or new
findings, then it should rightly be excluded as an impermissible supplementary report.” Zeolla v.
Ford Motor Co., 2013 WL 308968, at *11 (D. Mass. Jan. 24, 2013) (citing Fail-Safe, L.L.C. v.
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A. O. Smith Corp., 744 F. Supp. 2d 870, 878-79 (E. D. Wis. 2010) (excluding an expert’s report
that added new sections not included in expert’s original report and offered new opinions,
including calculations based on different numbers and a different methodological model, from
that used in original report)). Russell’s declaration submitted in opposition to the motion for
entry of final judgment offers, for the first time, his lower-cost share analysis.
Compare Russell’s declaration to the expert report at issue in Zeolla. In that case,
defendant’s expert submitted a supplemental affidavit in conjunction with defendant’s opposition
to a motion in limine. Zeolla, 2013 WL 308968, at *11. The court declined to grant plaintiff’s
motion to strike the affidavit, finding that “much of the affidavit [was] devoted to detailing
where in [the] report, deposition, or attached exhibits [the expert] already addressed issues that
plaintiff contend[ed] [the expert] did not adequately explain.” Id. (emphasis in original).
Russell’s declaration, in contrast to Zeolla, does not reference his earlier report or declarations or
seek to address criticism of his reliability or credibility.
Alternatively, consider the disputed reports in Mass Mutual Life Ins. There, plaintiff
sought to strike four expert declarations submitted in opposition to defendants’ Daubert motions.
Mass Mutual Life Ins., 2015 WL 12990692, at *2. Defendants moved to strike the declarations
on the grounds that they contained new and previously undisclosed opinions and methodologies;
plaintiff responded that the declarations were responses to defendants’ criticisms of plaintiff’s
experts. Id. at *2-3. The court determined that “most of the content in the four declarations
constitute[d] proper expert supplementation in response to new criticisms raised after the experts
provided their original reports.” Id. at *4. However, the court found that some areas of the
reports, including new analysis using guidelines which could have been used in the initial
reports, new calculations of certain statistics, and extrapolations of findings based on different
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models than were used in the original reports, were all improper supplementations. Id. Like those
supplementations, which the Mass. Mutual court deemed “new” material, the lower-cost share
analysis and resultant disgorgement calculations included in the Russell Declaration exceed the
scope of his original report.
While it is true that some courts have permitted new opinions or information offered in
supplemental expert reports, see Zeolla, 2013 WL 308968, at *11, those courts have emphasized
that new opinions are proper only where offered to support the reliability or credibility of
challenged expert testimony. See id.; see also Hearts of Fire Company, LLC v. Circa, Inc., 2017
WL 4364405, at *3 (D. Mass. Sept. 29, 2017); Garg v. VHS Acquisition Subsidiary Number 7,
2023 WL 3308949, at *9-10 (D. Mass. May 8, 2023); Advanced Analytics, Inc. v. Citigroup
Global Markets, Inc., 301 F.R.D. 31, 42-43 (S.D.N.Y. 2014).
Courts also consider whether the allegedly “new” opinions address merits issues or non-
merits issues that could not be known when Rule 26(a)(2) disclosures were required. Advanced
Analytics, 301 F.R.D. at 42. “In most cases, merits-related issues are capable of being known
from the inception of the case[,]” and where those issues have always been identifiable, parties
should address them at the time Rule 26(a)(2) disclosures are due. Id.; see also Mass. Mutual
Life Ins., 2015 WL 12990692, at *3.
Here, the new opinions in Russell’s declaration were not offered to rebut accusations that
his original report was unreliable. As SEC points out, the declaration does not even reference
Russell’s expert disclosures. Mot. to Strike 4 n.1 [Doc. No. 128]; see also id., Ex. B (Expert
Report of Alex J. Russell) [Doc. No. 128-2]. Instead, the new, alternative lower-cost share
analysis offered by Russell in his declaration falls squarely in the category of a new theory,
opinion, or methodology. Moreover, both parties could foresee from the inception of this case
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that disgorgement would be a question if Commonwealth was found liable for violations of the
Advisers Act. Thus, if Commonwealth wanted to offer its own expert’s lower-cost share class
analysis, or to critique the methodology or conclusions of Orlov’s lower-cost share analysis, it
should have done so in rebuttal to Orlov’s original report in 2021.
Commonwealth does not dispute that Russell’s declaration offers new opinions. Instead,
it contends that these new opinions are permissible because “simple fairness dictates that
Commonwealth be allowed to respond” to what it characterizes as new opinions offered by
Orlov—namely, the extrapolation calculations. Commonwealth Strike Opp. 2 [Doc. No. 130]. It
cites no case in support of this proposition.
Commonwealth is correct that the “extrapolation” portions of Orlov’s second declaration
are new. But the proper remedy if these portions were an improper supplementation would have
been a motion to strike, not a new report. Commonwealth did not bring such a motion,
presumably because, as SEC contends, the extrapolated disgorgement calculation “is a simple
mathematical calculation that takes the previously disclosed result of the sample lower-cost share
class analysis.” SEC Reply 1 [Doc. No. 133] (emphasis in original).
Accordingly, SEC’s Motion to Strike the Declaration of Alex J. Russell [Doc. No. 128] is
GRANTED.
B. Motion for Entry of Final Judgment
In light of the court’s summary judgment order on liability [Doc. No. 109], SEC now
requests that (1) Commonwealth “disgorge incremental revenues
[1]
causally connected to its
1
“Incremental revenue” here means the difference between the revenue Commonwealth received
by allowing clients to hold higher-cost NTF and TF share classes of funds and Commonwealth’s
revenue had clients moved their investments to the lower-cost share classes of those funds that
paid less or no fees via revenue sharing to Commonwealth.
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failure to disclose its conflicts of interest, plus prejudgment interest;” (2) Commonwealth “pay a
civil penalty as a sanction and for deterrent effect;” and (3) Commonwealth be enjoined from
future violations. SEC Final J. Mot. 1 [Doc. No. 121].
1. Disgorgement
“In any action or proceeding brought by the [Securities and Exchange] Commission
under any provision of the securities laws, the Commission may seek, and any Federal court may
order, disgorgement.” 15 U.S.C. § 78u(d)(7). “Disgorgement forces the defendant to give up the
amount by which he was unjustly enriched, ‘even if it exceeds actual damages to victims.’” SEC
v. Present, 2018 WL 1701972, at *2 (D. Mass. Mar. 20, 2018) (quoting SEC v. Cavanaugh, 445
F.3d 105, 117 (2d Cir. 2006)). It is SEC’s burden to show that the amount it seeks in
disgorgement reasonably approximates the profits causally connected to defendant’s violations.
See SEC v. Happ, 392 F.3d 12, 31-32 (1st Cir. 2004). Once SEC has demonstrated the
disgorgement is a reasonable approximation, the burden shifts to the defendant to demonstrate
that the amount of disgorgement is not reasonable. Id. at 31. Any “risk of uncertainty” in a
disgorgement calculation “should fall on the wrongdoer whose illegal conduct created that
uncertainty.” Id.
SEC seeks disgorgement from Commonwealth of $68,705,409, representing incremental
revenue causally connected to Commonwealth’s failures to disclose its conflicts of interest as
required by the Advisers Act. Pl.’s Mem. of Law ISO Mot. for Entry of Final J. (“SEC Final J.
Mem.”) 7 [Doc. No. 122].
2
Commonwealth does not dispute that disgorgement is an appropriate
2
SEC notes that “[b]y calculating disgorgement based on incremental revenue gain,
Commonwealth is not liable for disgorgement of revenue sharing it received for advisory client
holdings in mutual fund share classes that did not have lower-cost alternatives.” SEC Final J.
Mem. 5 [Doc. No. 122]. SEC also reduced the disgorgement amount for any revenue sharing
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remedy, rather, Commonwealth contends that (1) SEC cannot show that the amount it seeks to
disgorge is causally connected to Commonwealth’s failures to disclose, and (2) even if SEC has
demonstrated causality, its disgorgement figure is “grossly inflated[.]” Commonwealth Final J.
Opp. 1-4 [Doc. No. 136].
a. Causality
SEC asserts that the causal connection between Commonwealth’s failures to disclose to
its advisory clients that it had conflicts of interest derived from revenue-sharing arrangements
with NTF and TF share classes and its receipt of incremental revenue is “readily apparent[.]”
SEC Final J. Mem. 2 [Doc. No. 122]. Had Commonwealth disclosed its economic self-interest in
having clients hold more expensive shares of NTF and TF funds when lower cost shares of the
exact same funds were available, its clients would have “clear economic incentive” to convert
their holdings to the lower-cost share options that paid less or no revenue to Commonwealth. Id.
Commonwealth disagrees, arguing that “proof of [a] causal connection” between
Commonwealth’s Advisers Act violations and purported unjust enrichment is “entirely absent
here.” Commonwealth Final J. Opp. 1 [Doc. No. 136]. Commonwealth maintains that SEC’s
“readily apparent” theory of causality “is tantamount to an admission that ‘[SEC] do[es]n’t have
any actual evidence supporting it.’” Id. at 2.
SEC cites SEC v. Westport Capital Markets, 547 F. Supp. 3d 157 (D. Conn. 2021), and
SEC v. Ambassador Advisors, LLC, 2022 WL 4097327 (E.D. Pa. Sept. 7, 2022), in support of its
position on causality. SEC Final J. Mem. 3-4 [Doc. No. 122]. In Ambassador Advisors, SEC
alleged that defendants violated § 206(2) and § 206(4) of the Advisers Act by investing client
Commonwealth would have received on holdings in lower-cost share alternatives where
available. Id.
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money in mutual fund share classes that charged 12b-1 fees when their clients were eligible for
share classes in the same fund that did not have 12b-1 fees and by failing to disclose their
attendant conflicts of interest. 2022 WL 4097327, at *1-2. Following a summary judgment
decision and jury verdict finding defendants liable for all alleged violations, SEC moved for
entry of final judgment, seeking, inter alia, disgorgement. Id. at *1. In opposition to the motion,
defendants argued in part that SEC had failed to show causality. Id. at *6. Namely, defendants
contended that SEC had not adequately shown that their clients would have refused to pay the
fees even if they had been disclosed. Id.
The court squarely rejected this argument, finding it defied both “common sense” and
basic economics. Id. The court noted that defendants provided no evidence that their clients
would have willingly paid an additional fee if told about it. Id. It further observed:
Defendants’ speculation that their clients would have gladly paid more for their
services is also entirely inconsistent with fundamental market principles. Had
Defendants either properly disclosed the fact that they were increasing their
clients’ costs—and their own revenues—by investing in 12b-1 fee share classes or
simply increased their own advisory fee by a commensurate amount, then their
pricing would be less competitive in the market. Common sense dictates that at
least some clients would have opted for a lower cost alternative.
Id.
Westport involved a similar set of allegations, including failure to disclose a conflict of
interest. 547 F.3d at 162. The court and a jury found defendants liable on all counts, and the SEC
moved for entry of final judgment. Id. at 165. The court ordered that all profits from the 12b-1
fees and selling dealer transactions be disgorged. Id. at 171. Defendants did not dispute
disgorgement as to the 12b-1 fees, but contended that disgorgement was an inappropriate remedy
for the selling dealer arrangements in part because there was no “reasonable relationship”
between defendants’ gains and SEC’s disgorgement figure. Id. at 168-69. The court disagreed,
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finding it was “beyond dispute that [Defendants] earned profits from wrongdoing by engaging in
selling dealer transactions,” and “the disgorgement request represent[ed] income defendants
earned when they intentionally or recklessly engaged in selling dealer transactions without
legally required disclosures.” Id. at 169.
3
The case on which Commonwealth principally relies—In re Robare Grp., Ltd.,
Investment Advisers Act of 1940 Release No. 4566, 2016 WL 6596009 (Nov. 7, 2016), vacated
in part on other grounds, Robare Group, Ltd. v. SEC, 922 F.3d 468 (D.C. Cir. 2019), is
inapposite here. In Robare, the Securities Exchange Commission, on an appeal of an ALJ
determination, found that the registered investment advisers had violated § 206(2) of the
Advisers Act by failing to adequately disclose conflicts of interest inherent in an arrangement
whereby the advisers received compensation from their clients’ investment custodian for
maintaining client assets in certain investments. 2016 WL 6596009, at *1. In a footnote, the
Commission denied the Division of Enforcement’s request for disgorgement because the
3
Commonwealth attempts to distinguish Westport and Ambassador Advisors because the
investment advisors interacting with clients in those cases were aware of the revenue sharing
agreements, while here it is “undisputed [] that the Commonwealth IARs did not know about
Commonwealth’s revenue sharing arrangement . . . much less receive any portion of the
revenue.” Commonwealth Final J. Opp. 3 [Doc. No. 136] (emphasis in original). This is merely a
different flavor of the argument Commonwealth has made twice now, on summary judgment and
on reconsideration, that its IAR’s insulation from knowledge of the revenue sharing agreement
meant that no harm came to its clients from the failure to disclose those agreements. The court
has repeatedly rejected this reasoning and does not credit it now. The court determined on
summary judgment that, regardless of the knowledge that Commonwealth’s client-facing
advisors had of the revenue sharing agreements, Commonwealth itself is an investment adviser
for purposes of the Advisers Act and had a duty to disclose its conflicts of interests. See Mem. &
Order 22-23 [Doc. No. 109]. Commonwealth’s failures to disclose deprived its clients of the
ability to make informed decisions about where their money was invested, regardless of whether
its IARs knew of Commonwealth’s failures. See Ambassador Advisors, 2022 WL 4097327, at *7
(“Because [d]efendants did not make their clients aware of the true cost of their services, they
deprived their clients of an opportunity to make an informed decision about which adviser to
invest with.”).
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Division had not established a causal connection between the failure to disclose the arrangement
and the fees received from the custodian. See id. at *12 n.56. “Specifically,” the Commission
wrote, “there is no evidence in the record that, absent [the advisers’] failure to disclose the
conflicts of interest, they would not have received the Fidelity fees either because their clients
would have decided to withdraw their money or would have insisted upon investments that did
not pay the fees.” Id.
Crucially, there were no allegations in Robare that clients were invested in higher-cost
shares of mutual funds for which lower-cost shares of the same fund existed. In other words, the
Commission declined to order disgorgement where SEC did not establish that clients would have
moved their money from Fund A to Fund B (or C, or D, etc.) had the conflicts of interest been
disclosed. This makes sense, given there are myriad reasons why an investor might choose to
place their money in one mutual fund versus another. But the violation here is that
Commonwealth’s failure to disclose its conflicts of interest kept clients invested in higher-cost
shares of Fund A rather than lower-cost shares also of Fund A. The causality in this scenario, as
explained by the Ambassador Advisors court, is self-evident.
Commonwealth points to a lack of testimony from clients stating that they would have
selected different share classes had Commonwealth disclosed its revenue-sharing agreements.
Commonwealth Final J. Opp. 2 [Doc. No. 136]. It also notes that, though SEC presented IAR
testimony that some advisers shifted client holdings into lower-expense share classes of funds,
“no IAR (much less any investor) testified that we would have made this shift if only the
revenue-sharing arrangement had been properly disclosed.” Id. (emphasis in original).
Commonwealth argues that SEC’s failure to present client testimony precludes it from receiving
the disgorgement it seeks. Id. (citing Montford and Co., Inc. v. SEC, 793 F.3d 76 (D. C. Cir.
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2015)). In Montford, the court found that SEC had identified a sufficient causal connection in
part by offering client testimony that, absent defendants’ deception and failure to disclose
conflicts, they would have made different investment decisions. Id. at 84. However, nothing in
Montford suggests that direct client testimony is the only or even a necessary means of proving
disgorgement, or that causality cannot be found without client testimony. Montford is also
distinguishable where clients may have chosen to waive a conflict and proceeded with the
recommended investment adviser had it been properly disclosed, while here, the nondisclosure
involves identical investment opportunities at a lower fee.
This court finds the reasoning of both Ambassador Advisors and Westport sound. At
bottom, Commonwealth’s negligent failure to disclose its conflicts of interest as to its revenue
sharing agreements had the same effect as the failures to disclose by the defendants in Westport
and Ambassador Advisors: clients were deprived of relevant information and therefore of their
ability to give informed consent to the conflicts. Had Commonwealth’s clients known they were
invested in higher-cost shares of funds for which lower-cost shares existed, and that the higher
cost resulted in greater profit for Commonwealth, there is reason to believe that at least some of
those clients would have elected to move their money to the lower-cost funds. Accordingly, the
court finds that SEC has established that the disgorgement it seeks is causally related to
Commonwealth’s wrongdoing.
4
4
After briefing on the pending motions was complete, Commonwealth offered, via a Notice of
Supplemental Authority [Doc. No. 134], a recent case, SEC v. Govil, 86 F.4th 89 (2d Cir. 2023),
to support its argument that SEC has not demonstrated a connection between harm suffered by
Commonwealth’s clients and any unjust enrichment by Commonwealth. In Govil, the Second
Circuit held that the district court erred in not determining whether defrauded investors had
suffered any pecuniary harm before awarding disgorgement and remanded for that
determination. Govil, 86 F.4th at 102. Here, the court finds that SEC has demonstrated that
Commonwealth’s clients suffered pecuniary harm, namely, the difference between the higher
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b. Disgorgement Calculation
Having established that SEC has sufficiently demonstrated causality, the next question is
whether its requested disgorgement amount of $68,705,409 reasonably approximates
Commonwealth’s net profits gained from Commonwealth’s violations. The district court has
“broad discretion not only in determining whether or not to order disgorgement but also in
calculating the amount to be disgorged.” SEC v. Druffner, 802 F. Supp. 2d 293, 297 (D. Mass.
2011) (citing SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1474-75 (2d Cir. 1996)). As noted, it
is SEC’s responsibility to show that the disgorgement sought is a reasonable approximation of
profits Commonwealth earned as a result of its wrongdoing. See Happ, 392 F.3d at 31. The
burden then shifts to Commonwealth to demonstrate that the amount sought is not reasonable. Id.
SEC proposes that disgorgement be calculated based on incremental revenue. SEC Final
J. Mem. 4-5 [Doc. No. 122]. That is, SEC does not seek disgorgement of all NTF and TF
revenue sharing received by Commonwealth between July 2014 and December 2018, and
“includes only the specific gains tied to Commonwealth’s failure to disclose its conflicts of
interest and its clients’ economic interest to hold cheaper share classes[.]” Id. at 4-5.
The Second Orlov Decl. [Doc. No. 121-1] recaps the lower-cost share analysis Orlov
performed in his initial expert report. In that analysis, Orlov looked at NTF share classes and
identified the top ten mutual fund families that generated the highest amount of revenue sharing
for Commonwealth from July 2014 through December 2018. Second Orlov Decl. ¶ 2 [Doc. No.
121-1] (citing First Orlov. Decl. ¶ 4 [Doc. 72-74]; id., Ex. A (Expert Report of Evgeny (Eugene)
Orlov, Ph.D.) ¶ 25). Within those top ten fund families, Orlov identified the highest revenue
fees associated with the share classes they were invested in and the fees associated with the
lower cost share classes of the same funds that were available.
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generating NTF fund share classes that accounted for 80 percent of Commonwealth’s revenue
from these fund families. Second Orlov Decl. ¶ 3 (citing First Orlov. Decl. ¶ 5; id., Ex. A ¶ 25).
Orlov then compared the sample to lower-cost or lower-expense ratio alternative share classes of
the same funds that were listed as available to Commonwealth clients, excluding share classes
that charged sales loads or had their sales load charges waived, potential alternative share classes
that were limited to specific types of accounts, such as retirement share classes and 529 plan
share classes, and potential alternatives if it failed to have an expense ratio lower than the NTF
share class. Second Orlov Decl. ¶¶ 5-8 (citing First Orlov. Decl. ¶¶ 7-10; id., Ex. A ¶¶ 23, 25,
and Exs. 4 & 5). Orlov then calculated the incremental revenue—the difference between the
revenue sharing Commonwealth generated from client participation in higher cost share classes
and the revenue sharing had those clients held lower-cost shares. Second Orlov Decl. ¶¶ 10-13
(citing First Orlov. Decl. ¶¶ 13-31; id., Ex. A, Exs. 4, 5, 7 & 8). For NTF share classes, Orlov
calculated the incremental revenue received by Commonwealth to be $16,927,828, or
approximately $16.9 million. Second Orlov Decl. ¶ 14 (citing First Orlov. Decl. ¶ 30).
For TF and iNTF program share classes, Orlov performed a similar calculation, starting
with the five mutual fund families that generated the highest amount of revenue for
Commonwealth during the same period. Second Orlov Decl. ¶¶ 17-18 (citing First Orlov. Decl.,
Ex. A ¶¶ 21-26, 32-36 and Exs. 7 & 8). Orlov calculated the incremental revenue to
Commonwealth from investing in higher-cost TF and iNTF share classes in the top five fund
families as $9,867,838, or approximately $9.9 million. Id. ¶ 20 (citing First Orlov. Decl., Ex. A,
¶ 36 and Ex. 8).
To calculate disgorgement, Orlov used the incremental revenue calculations he
performed on the sample of revenue sharing funds (which he concluded comprised holdings
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corresponding to approximately 39.92% of the total NTF revenue and 31.37% of total TF/iNTF
revenue to Commonwealth) and “extrapolate[ed] that result to the entirety of Commonwealth’s
NTF revenue from advisory client holdings for the relevant period” by taking the sample
incremental revenue and dividing it by the ratio between Commonwealth’s revenue attributable
to the sample and Commonwealth’s total incremental revenue. SEC Final J. Mem. 6 [Doc. No.
122]; Second Orlov Decl. ¶¶ 15, 21 [Doc. No. 121-1]. Orlov, after performing these calculations,
concludes that the total incremental NTF revenue for the July 2014 through December 2018
period is $42,405,921, or approximately $42.4 million, and the total incremental TF and iNTF
revenue is $31,451,658, or approximately $31.5 million. Second Orlov Decl. ¶¶ 16, 21 [Doc. No.
121-1]. SEC also calculated the incremental NTF revenue for the period from July 2014 through
March 2018 to be $37,253,832, or approximately $37.3 million, and requests that lower amount
so as not to seek disgorgement of incremental NTF revenues Commonwealth received after April
2018 when it made its first share-class based disclosure related to NTF revenue. SEC Final J.
Mem. 6 [Doc. No. 122]; Second Orlov Decl. ¶ 16 [Doc. No. 121-1]. In total, SEC seeks
$68,705,409 in incremental revenue be disgorged from Commonwealth. SEC Final J. Mem 7
[Doc. No. 122].
SEC notes that the disgorgement it seeks would benefit Commonwealth’s harmed clients,
that the disgorgement and penalty amounts (discussed below) may be combined for distribution
under the Fair Fund provisions of the Sarbanes-Oaxley Act
5
subject to the court’s approval of
SEC’s distribution plan, and that, through discovery, SEC identified the particular advisory
accounts holding higher-cost TF and NTF share classes, and with additional information from
5
Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 308(a), 116 Stat. 745, 784 (2002).
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Commonwealth as to the names and contact information of the account holders, distribution
could feasibly be made to the harmed advisory clients. Id. at 8-9.
Commonwealth does not dispute SEC’s ability to distribute the funds to its harmed
clients, nor does it contest that disgorgement would help harmed clients. Commonwealth’s
fundamental complaint is that the disgorgement figure is “grossly inflated,” and that this figure
was calculated based on flawed methodology. Commonwealth Final J. Opp. 4 [Doc. No. 136].
Specifically, Commonwealth contends: (1) SEC’s analysis is based on a “cherry-picked” sample
of funds not representative of the entire universe of funds that paid revenue-sharing to
Commonwealth; (2) SEC incorrectly assumes that an IAR was involved in recommending or
selecting a share class for every mutual fund position, and thus funds from programs that did not
involve an IAR, and mutual fund positions clients purchased at other firms and then transferred
to Commonwealth, should be excluded from the analysis; (3) SEC’s analysis assumes that fund
companies that offered funds with institutional share classes would have waived investment
minimums for every investor and purchase; (4) SEC fails to account for transaction fees charged
on all transactions in a TF fund; and (5) SEC ignores that certain fees for clients who held
positions in TF funds were rebated. Id. at 5-7. The court takes each of Commonwealth’s
objections in turn.
First, Commonwealth’s assertion that SEC “cherry-picked” the sample of funds on which
it based its disgorgement extrapolations by focusing on 229 funds in fifteen families that
generated the highest amount of revenue sharing from Commonwealth, rather than analyzing all
twelve thousand funds or selecting a random sample, is unfounded. Without any evidence that
SEC’s expert had foreknowledge of what this sample would show as to whether there were lower
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cost alternatives and, if so, what those differences would be, the criticism is wholly
unwarranted.
6
Second, Commonwealth asserts that (1) funds from programs that did not involve an
IAR, (2) mutual fund positions purchased by clients at other firms and then transferred to
Commonwealth, and (3) holdings where there were no IAR recommendations during the 2014-
2018 period should be excluded from the disgorgement analysis. But the involvement of an IAR
is irrelevant to whether Commonwealth received revenue sharing from a particular fund that it
failed to disclose. Revenue sharing for Commonwealth was based on client holdings, regardless
of the holding’s origination or the involvement of an IAR. See Mem. & Order 6 [Doc. No. 109]
(“In September 2014, NFS and Commonwealth executed an agreement that Commonwealth’s
portion of NFS program revenue would be 80% of ‘gross’ NTF and TF revenue received by NFS
based on assets or positions invested in non-Fidelity funds and held in Commonwealth customer
accounts”).
Commonwealth’s third objection is that SEC failed to consider that not all fund
companies that offered funds with institutional share classes would have waived investment
minimums for every investor purchase. Commonwealth Final J. Opp. 7 [Doc. No. 136]. SEC
explained on summary judgment that it determined investment minimum waivers by looking at
executed trades below the stated minimums. See Pl.’s LR 56.1 Statement of Facts ISO its Mot.
for Summ. J. ¶¶ 80-83 [Doc. No. 68-1]. Commonwealth did not dispute that description or
method on summary judgment, and here offers only the anodyne statement that “just because a
6
Relatedly, Commonwealth asserts that the sample included more Zero Paying Cusips than
appear more generally, but this new criticism is untimely. As noted above, the fund sample
analysis on which Orlov’s disgorgement figure extrapolation is based was disclosed in his first
report in 2021. If Commonwealth sought to challenge the representativeness of the fund sample,
the time to do so was in 2021 when Commonwealth’s expert rebuttal reports were due.
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purchase was accepted in certain instances does not mean that the fund company would have
ignored the investment minimums . . . during the entire relevant period.” Commonwealth Final J.
Opp. 7 [Doc. No. 136]. This assertion does not meet Commonwealth’s burden to demonstrate
that the amount of disgorgement is not a reasonable approximation of the profits it received as a
result of its violation.
Commonwealth’s fourth and fifth objection are that SEC did not consider certain
account-level details—namely transaction charges and rebates—in performing its disgorgement
calculation. And for the account-level detail, Commonwealth merely insists that SEC’s expert
ignored the total cost of ownership of one fund compared to another and that some funds were
rebated to clients and that these things should have been considered in the disgorgement
calculation. Id.
SEC’s expert addresses the last two of Commonwealth’s objections as to ownership costs
and rebates in the Third Orlov Decl. [Doc. No. 126-1]. Orlov assessed the impact of transaction
fees and rebates on his initial disgorgement calculation and determined that consideration of
transaction fees could reduce the total extrapolated NTF incremental revenue from $37.3 million
(before consideration of fees) to $34,137,248. Third Orlov Decl. ¶¶ 18-20. Orlov also determined
that consideration of potential 12b-1 rebates actually increased the amount of TF incremental
revenue to $9,087,015. The court adopts the $34,137,248 figure as a reasonable approximation of
the amount to be disgorged for the NTF incremental revenue and otherwise overrules
Commonwealth’s objections to the disgorgement calculation.
7
7
To the extent that Commonwealth seeks to rely on the calculations in the Russell Declaration
for an alternative disgorgement proposal, the court has stricken that Declaration for reasons
discussed above. However, even if the Russell Declaration were properly before the court, the
court would not adopt Russell’s proposed award. Russell limited the universe of funds on which
he based his calculation to holdings in PPS Custom accounts that were purchased by IARs.
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In sum, the court finds that SEC’s proposed disgorgement figure, with the modification
set forth above based on the Third Orlov Declaration, reasonably approximates the revenue that
Commonwealth received as a result of its wrongdoing, and that Commonwealth’s objections to
SEC’s analysis have not demonstrated that the amount sought is unreasonable. Accordingly, the
court orders $65,588,906 be disgorged from Commonwealth.
c. Expenses
“Courts may not enter disgorgement awards that exceed the gains made upon any
business or investment, when both the receipts and payments are taken into the account.
Accordingly, courts must deduct legitimate expenses before ordering disgorgement[.]” Liu v.
SEC, 140 S. Ct. 1936, 1949-50 (2020) (internal quotations and citations omitted). “Legitimate
expenses” are those “unrelated to the wrongdoing.” SEC v. Navellier & Assocs., Inc., 2021 WL
5072975, at *4 (D. Mass. Sept. 21, 2021).
Relying on Liu, Commonwealth asks that $49.5 million be deducted from any
disgorgement award for various costs associated with supporting accounts maintained at NFS,
including, inter alia, changes to account features, account maintenance, client and advisor phone
support, processing of client fees, and maintenance of account profiles. Commonwealth Final J.
Opp. 11-12 [Doc. No. 136].
SEC counters that the kind of expense deduction discussed in Liu is inapplicable here. In
Liu, investor proceeds were used for a mix of lawful and unlawful activities, and the Supreme
Court held that any disgorgement award had to deduct expenses that were put toward defendant’s
Russell Decl. ¶ 3 [Doc. No. 124-1]. As noted, Commonwealth received revenue sharing whether
funds were purchased by its IARs or not. Both fund shares that were purchased without IAR
involvement and fund shares purchased by clients and then transferred to Commonwealth
generated revenue for Commonwealth. A disgorgement award that includes only revenue
generated by funds purchased by Commonwealth IARs would be incomplete.
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legitimate business activities. 140 S. Ct. at 1950. Here, by contrast, SEC has limited its
disgorgement request to incremental revenue Commonwealth received due to its failures to
disclose conflicts of interest, which are, in their entirety, unlawful gain. SEC Final J. Reply 7-8
[Doc. No. 126].
SEC is right. Where the entirety of the disgorgement award is based on “ill-gotten gains,”
the court is not required to deduct Commonwealth’s overhead expenses. See Ambassador
Advisors, 2022 WL 4097327, at *7. Allowing Commonwealth to pay down expenses with profit
obtained by denying its clients the ability to make informed decisions about their investments
would be to reward that withholding. Accordingly, the court declines to deduct any of
Commonwealth’s expenses from the disgorgement award.
2. Prejudgment Interest
“Prejudgment interest, like disgorgement, prevents a defendant from profiting from his
securities violations.” SEC v. Sargent, 329 F.3d 34, 40 (1st Cir. 2003) (internal quotations
omitted). Despite having similar aims, disgorgement and prejudgment interest are distinct
remedies, and the court has broad discretion in determining whether to award prejudgment
interest. Druffner, 802 F. Supp. 2d at 297-98. “An award of prejudgment interest is based on
consideration of a variety of factors, including the remedial purpose of the statute [involved], the
goal of depriving culpable defendants of their unlawful gains, and . . . unfairness to defendants.”
Sargent, 329 F.3d at 40 (citing SEC v. First Jersey Securities, 101 F.3d 1450, 1477 (2d Cir.
1996)).
SEC asks the court to award prejudgment interest on the entire disgorgement award from
Commonwealth’s receipt of the ill-gotten gains through entry of final judgment based on the
Internal Revenue Service rate for underpayment of penalties. SEC Final J. Mem. 10 [Doc. No.
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122]. Because NTF and TF revenue sharing was paid to Commonwealth on a monthly basis,
SEC calculated prejudgment interest from the month following each NTF and TF revenue
sharing payment, respectively July 2014 through March 2018 and July 2014 through December
2018, through June 30, 2023, the end of the month in which SEC filed its Motion for Entry of
Final Judgment [Doc. No. 121]. Id. at 11; Second Orlov Decl. ¶¶ 25-39 [Doc. No. 121-1]. In total
for both NTF and TF revenue sharing, SEC seeks $22,191,790 in prejudgment interest. SEC
Final J. Mem. 11 [Doc. No. 122].
The court agrees that prejudgment interest should be assessed in this case to “prevent
defendants from receiving the benefit of what would otherwise be an interest-free loan,”
Druffner, 802 F. Supp. 2d at 298, and that the appropriate basis for calculation is the IRS
underpayment rate, see SEC v. Esposito, 260 F. Supp. 3d 79, 92 (D. Mass. 2017). Accordingly,
the court will order prejudgment interest.
3. Civil Penalty
SEC also asks the court to impose a penalty on Commonwealth under Section 209(e) of
the Advisers Act. SEC Final J. Mem. 11 [Doc. No. 122].
Section 209(e) provides that SEC may seek penalties for violations of the Advisers Act
under a three-tiered scheme. First-tier penalties may be imposed for any violation of the Act.
Second-tier penalties may be imposed if a violation involved fraud, deceit, manipulation, or
deliberate or reckless disregard of regulatory requirements. Third-tier penalties are appropriate
where a defendant meets the requirements for the second tier and a violation directly or
indirectly resulted in substantial losses or created a significant risk of substantial losses to other
persons. Under the statute, the court may impose a penalty on an entity defendant of up to the
greater of “the gross amount of pecuniary gain to such defendant as a result of the violation” or
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$50,000 for the first tier, $250,000 for the second tier, and $500,000 for the third tier. 15 U.S.C.
§ 80b-9(e).
SEC characterizes Commonwealth’s conduct as a second tier violation and seeks a
penalty of $20.6 million, calculated as approximately 30% of Commonwealth’s gross amount of
pecuniary gain from the violation. SEC Final J. Mem. 13 [Doc. No. 122]. Commonwealth
contends that it received no pecuniary gain as a result of its violation, and that only a first tier
penalty of $50,000, plus interest, for a total of $111,614 may be imposed because none of the
aggravating criteria for second-tier penalties are warranted by the evidence. Commonwealth
Final J. Opp. 13 [Doc. No. 136].
As explained above, contrary to Commonwealth’s claim, the pecuniary gain to
Commonwealth was $65,588,906. The court finds further that imposing a flat dollar penalty
without regard to the pecuniary gain would in no way reflect the seriousness of the violation.
Accordingly, the court turns next to the appropriate penalty up to the $65,588,906
Commonwealth gained “as a result of the violation.” 15 U.S.C. § 80b-9(e)(2).
The court determines the precise amount of the penalty “in light of the facts and
circumstances.” 15 U.S.C. § 80b-9(e)(2)(A). The tier 1 and tier 2 framework focuses on the
egregiousness of the violation and the degree of scienter involved (whether the violation
involved fraud, deceit, manipulation, or deliberate or reckless disregard of regulatory
requirements). SEC asserts that “[i]n failing to make full and fair disclosure of its economic
conflicts of interest and the material fact that clients could have chosen lower-cost share classes
that paid less or no revenue sharing to Commonwealth, Commonwealth deceived and defrauded
its advisory clients.” SEC Final J. Mem. 12 [Doc. No. 122]. Commonwealth counters that this
court’s finding on summary judgment that Commonwealth was “negligent in its failure to fully
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disclose its economic conflicts,” Mem. & Order 29 [Doc. No. 109], means that the conduct here
does not meet the requirements for a second-tier penalty. Commonwealth Final J. Opp. 12 [Doc.
No. 136].
The court finds a second-tier penalty is warranted. In cases involving violations similar to
Commonwealth’s, including material misstatements and omissions in promotional materials, see
SEC v. Eiten, 2014 WL 4965102, at *2 (D. Mass. Sept. 30, 2014), and SEC v. Locke Capital
Management, 794 F. Supp. 2d 355, 370 (D. R. I. 2011), misrepresentations to fund investors, see
SEC v. Manterfield, 2009 WL 935953, at *2 (D. Mass. Apr. 8, 2009), and failures to disclose
conflicts of interest to clients, see Ambassador Advisors, 2022 WL 4097327, at *8, courts have
found those violations to constitute deceit or recklessness as required by § 209(e). In contrast, in
SEC v. Tropikgadget FZE, 2016 WL 4582248 (D. Mass. Aug. 31, 2016), the court imposed a tier
1 penalty where defendants participated in and unjustly profited from a fraudulent pyramid
scheme but did not create or control the illegal scheme. Id. at *7.
Commonwealth’s failures to disclose were egregious. The court determined that
Commonwealth was aware that lower-cost share classes of funds in which its clients were
invested were available, knew that it was generating revenue from keeping its clients in the
higher cost share classes, and failed to disclose any of this to its clients. This is a fundamental
violation of an investment advisers’ fiduciary duty to act in the best interest of its clients. The
egregiousness of Commonwealth’s actions is compounded by its failure to keep its Chief
Compliance Officer—which it was required to appoint under the Advisers Act—adequately
apprised of any conflicts of interest regarding Commonwealth’s revenue-sharing agreements
with NFS. See Mem. & Order 8 [Doc. No. 109].
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Regardless of whether the conduct at issue crosses the line between a tier 1 and tier 2
violation, when determining the precise penalty based on gain from the violation (as permissible
for both tier 1 and tier 2), courts may also consider (1) the defendant’s willingness or failure to
admit wrongdoing; (2) the defendant’s cooperation with authorities; (3) the isolated or repeated
nature of the violations; and (4) the defendant’s financial condition. Esposito, 260 F. Supp. 3d at
93. Courts also consider whether the violation resulted in substantial loss or risk of loss to others,
Locke Capital Management, Inc., 794 F. Supp. 2d at 370, as required for a tier 3 violation.
The court finds that each of these additional factors weigh in favor of a considerable
penalty. First, although the court declines to hold Commonwealth’s history with FINRA
regulatory actions against it, the court notes that Commonwealth still has not accepted
responsibility for its actions (though the court does acknowledge that Commonwealth altered its
disclosure practices starting in 2019). Second, while the fact of litigation itself does not
demonstrate a lack of cooperation with authorities, Commonwealth has delayed the litigation by
refusing to produce certain account-level data discovery to SEC (data on which it now seeks to
rely) and by seeking reconsideration without sufficient grounds. Third, Commonwealth’s
violations were ongoing over a four-year period. Fourth, given Commonwealth’s net income—
starting at approximately $56.5 million annual net income in 2014 and up to $119.4 million
annual net income by 2018— only a significant sum will have a deterrent effect. And, finally,
Commonwealth’s violation caused a substantial loss to others when the individual losses are
aggregated.
In sum, a substantial penalty is warranted here based on the egregiousness of
Commonwealth’s conduct, the four-year duration of Commonwealth’s violations,
Commonwealth’s failure to accept responsibility, and Commonwealth’s finances. That said, in
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light of the $65,588,906 disgorgement award, the court finds a $6,500,000 penalty
(approximately 10 percent of that amount) to be appropriate.
4. Injunctive Relief
SEC’s final request is that the court issue a permanent injunction against Commonwealth
from further violations of the Advisers Act “to ensure that Commonwealth will (i) not engage in
transactions, practices, and courses of business, like the ones in this case, that operate as fraud or
deceit upon its advisory clients, and (ii) adopt and implement written policies and procedures
reasonably designed to prevent breaches of fiduciary duty in failing to disclose economic
conflicts of interest.” SEC Final J. Mem. 20 [Doc. No. 122]. Commonwealth contends that SEC
has not demonstrated a likelihood of future violations as required to justify a permanent
injunction. Commonwealth Final J. Opp. 15 [Doc. No. 136].
Section 209(d) of the Advisers Act authorizes courts to enjoin future violations of the Act
upon a showing that a person has engaged or will engage in practices violating the Act. 15
U.S.C. § 80b-9(d). Injunctive relief is appropriate where there is a “reasonable likelihood of
recidivism.” Sargent, 329 F.3d at 39.
SEC emphasizes Commonwealth’s “history of regulatory failures.” SEC Final J. Mem.
20 [Doc. No. 122]. But “[p]ast violations of securities law do not provide, ipso facto, a basis for
issuance of an injunction, because they are not in and of themselves indicative of future
misconduct.” SEC v. John Adams Trust Corp., 697 F.Supp. 573, 577 (D. Mass. 1988). And,
though SEC brushes aside Commonwealth’s compliance with the operative regulations since
2019, the court finds the compliance itself must be taken into account.
In determining whether injunctive relief is appropriate, “[c]ourts consider, among other
things, the nature of the violation, including its egregiousness and its isolated or repeated nature,
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as well as whether the defendants will, owing to their occupation be in a position to violate
again.” Sargent, 329 F.3d at 39. Courts also consider whether a defendant has recognized the
wrongfulness of their conduct. Id. Considering these factors, in the absence of the substantial
disgorgement award and civil penalty imposed, a permanent injunction would be warranted. But
here, the court is imposing those remedies and finds that they will reduce the actual risk of harm,
such that a permanent injunction in addition would be unduly punitive. See Ambassador
Advisors, 2022 WL 4097327, at *2 (“Injunctions cannot be used to punish, so an injunction must
be denied as a matter of equitable discretion if it cannot be supported by a meaningful showing
of actual risk of harm.”) (internal quotations omitted).
Accordingly, SEC’s request that a permanent injunction issue against Commonwealth
from future violations of the Advisers Act is denied.
III. Conclusion
For the forgoing reasons, SEC’s Motion to Strike [Doc. No. 128] is GRANTED and
SEC’s Motion for Entry of Final Judgment [Doc. No. 121] is GRANTED in part and DENIED in
part. The court will order Commonwealth to pay $65,588,906 in disgorgement plus prejudgment
interest. The court will also impose on Commonwealth a civil penalty of $6,500,000. The court
declines to issue a permanent injunction against Commonwealth. A separate final judgment will
follow.
IT IS SO ORDERED
March 29, 2024 /s/
United States District Judge
I
ndira Talwani
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