United States Securities and Exchange Commission v. Collector's Coffee Inc.

Background

The Securities and Exchange Commission brought the case against Mykalai Kontilai and Collector’s Coffee, Inc. After a trial, a verdict found the defendants violated federal securities laws. The parties then submitted briefing about the remedies the court should impose.

The Commission sought, among other remedies, a disgorgement award of $23,035,824. Disgorgement is an equitable remedy requiring a defendant to give up money obtained through unlawful conduct. The Commission had the initial burden of showing that its calculation reasonably approximated the defendants’ unjust enrichment—the benefit they gained from the unlawful conduct.

Issue with the Commission’s Calculation

The court reviewed a declaration from Jacqueline Moessner supporting the Commission’s calculation that the defendants raised $23,035,824 from investors after April 1, 2014. The declaration accounted for five payments the defendants made to investors, including a $50,015 payment connected to a 2015 stock purchase agreement that repurchased investors’ shares in Collector’s Coffee.

The declaration did not account for payments to investors Ed McLaughlin and Kirk Jensen under a 2017 settlement agreement. That agreement required the defendants to pay the investors $1,500,000 in three installments, plus interest. Jensen testified that the investors received the first two installments—50% and 25% of the total—but not the final installment. Although Jensen did not state the dollar amount at trial, the court said his testimony suggested the defendants returned approximately $1,134,375 to the investors.

The Commission argued that these payments should not reduce disgorgement because the 2017 settlement agreement was illegal and the payments therefore were illegitimate business expenses. The court rejected that reasoning for purposes of calculating disgorgement, explaining that the Commission appeared to confuse deductions for business expenses with payments that satisfy disgorgement. The court also noted that the Commission’s position was inconsistent because its calculation included the 2015 stock repurchase payment but excluded the 2017 settlement payments, even though both agreements contained illegal confidentiality provisions.

The court had previously held that both agreements violated Rule 21F-17 of the Securities Exchange Act because they barred investors from contacting or communicating with regulatory agencies.

Order

The court did not determine the final disgorgement award in this order. To allow an accurate calculation, it directed the Commission to file a response and a revised disgorgement calculation accounting for all payments the defendants made to investors after April 1, 2014. The Commission’s submission was due January 15, 2025, and the defendants could file a reply by January 29, 2025. The parties could also submit affidavits addressing only the defendants’ payments back to investors. Submissions other than disgorgement calculations could not exceed five pages.

Disposition

The court ordered additional briefing and a revised calculation; it did not grant or deny a final disgorgement award.