Hedge Fund Manager Must Pay $81M Penalty, 8th Cir. Affirms

Securities Law Daily provides daily coverage of developments in the regulation of federal, state, and international securities and futures trading, with objective coverage of the...

By Cameron Finch

March 22 — Connecticut hedge fund manager Marlon Quan lost his bid March 22 to overturn a “contradictory” jury verdict and subsequent district court judgment ordering him to disgorge almost $81 million dollars based on his role in Minnesota businessman Thomas Petters' $3.7 billion Ponzi scheme.

Quan argued that the jury verdict was inconsistent because it held him liable under 1934 Securities Exchange Act Rule 10b-5, but not under 1933 Securities Act Section 17(a)(1). The U.S. Court of Appeals for the Eighth Circuit didn't agree. The verdict was consistent with the jury instructions that a higher degree of scienter—or culpable intent—is required to find liability under Section 17(a)(1), Judge William Jay Riley said.

Mixed Verdict

In March 2011, the SEC alleged that Quan and his firms invested more than half of their investors' funds in Petters' scam, pocketing more than $90 million in fees . According to the complaint, Quan and his firms falsely assured investors that their funds would be safeguarded by “lock box accounts” to protect them against defaults.

A jury returned a mixed verdict in February 2014 finding Quan and his firms liable for securities fraud and absolving him of liability under 1933 Act Section 17(a)(1).

The district court denied Quan's motion for a new trial and ordered him to pay approximately $80.6 million in disgorgement and prejudgment interest. The court didn't impose civil monetary penalties.

On appeal, Quan also argued that the district court couldn't order disgorgement because it was only authorized to grant equitable relief. He contended that disgorgement is a legal remedy unless it is limited to specific assets traced back to a violation.

“Quan's position finds no support in our precedent or elsewhere in the extensive body of case law on securities fraud,” the Eighth Circuit said. The appeals court upheld the judgment and sent the case back to district court for further proceedings.

To contact the reporter on this story: Cameron Finch in Washington at cfinch@bna.com.

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com.