Full opinion text
OPINION AND ORDER SHIRA A. SCHEINDLIN, District Judge: I. INTRODUCTION The Securities and Exchange Commission (“SEC”) brought this civil enforcement action against Samuel Wyly and Donald R. Miller, Jr. as the Independent Executor of the Will and Estate of Charles J. Wyly Jr. (“Charles Wyly” and, together with Samuel Wyly, the ‘Wylys”). The SEC alleged ten securities violations arising from a scheme in which the Wylys established a group of offshore trusts and subsidiary entities in the Isle of Man (“IOM”), used those offshore entities to trade in shares of four public companies (the “Issuers”) on whose boards the Wylys sat, and failed to properly disclose their beneficial ownership of that stock. The liabilities and remedies phases of the trial were bifurcated. I presided over a jury trial on nine of the ten claims from March 31 to May 7, 2014. On May 12, 2014, the jury returned a verdict against both Sam and Charles Wyly on all nine claims. Following the jury verdict, I set a discovery and trial schedule for the remedies phase. The SEC now seeks an order of disgorgement against Sam and Charles Wyly in the total amount of $619,298,512.45. The SEC also seeks a civil penalty and injunctive relief against Sam Wyly. From August 4 to August 12, 2014, I held a bench trial on all remedies issues except the SEC’s alternative disgorgement calculation based on trading profits from the sale of registered securities. For the benefit of all parties, I will now render a partial Opinion and Order addressing the remedies issues tried in August. Pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, I make the following findings of fact and conclusions of law. In reaching these findings and conclusions, I considered the testimony admitted during the jury and remedies trials, examined the documentary evidence, and reviewed the arguments and submissions of counsel, including a statement of interest filed on behalf of the United States government on August 9, 2014. II. APPLICABLE LAW A. Disgorgement “Disgorgement serves to remedy securities law violations by depriving violators of the fruits of their illegal conduct.” “[D]isgorgement forces a defendant to account for all profits reaped through his securities law violations and to transfer all such money to the court.” Because disgorgement is an equitable remedy, “[t]he district court has broad discretion not only in determining whether or not to order disgorgement but also in calculating the amount to be disgorged.” “In determining the amount of disgorgement to be ordered, a court must focus on the extent to which a defendant has profited from his” violation. Disgorgement, being an equitable remedy, is not subject to the five year statute of limitations under 28 U.S.C. § 2462. Under section 2462, “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be . entertained unless commenced within five years from the date when the claim first accrued .... ” While the Second Circuit has not addressed the issue of whether disgorgement constitutes a civil forfeiture, it has specifically held that, due to its remedial nature, disgorgement does not constitute a penalty, and is not analogous to criminal forfeiture. Thus, “the great weight of the case law in this jurisdiction” supports the conclusion that disgorgement is “exempted from [s]ection 2462’s limitations period.” “Because of the difficulty of determining with certainty the extent to which a defendant’s gains resulted from his frauds ... the court n’eed not determine the amount of such gains with exactitude.” Under Second Circuit law, “ ‘[t]he amount of disgorgement ordered need only be a reasonable approximation of profits causally connected to the violation.’ ” Disgorgement awards can include both “direct pecuniary benefit[s]” and “illicit benefits ... that are indirect or intangible.” However, because “disgorgement does not serve a punitive function, the disgorgement amount may not exceed the amount obtained through the wrongdoing.” The SEC does not need to establish that the securities violations were the proximate cause of gains in order to satisfy the' “causal connection” requirement. Unlike private plaintiffs, who must demonstrate that the defendants’ misstatements or omissions were a proximate cause of their injury at the liability stage, the SEC has no such burden. Thus, the Second Circuit has held that “ ‘[p]roximate cause’ is the language of private tort actions[.] [I]t derives from the need of a private plaintiff, seeking compensation, to show that his injury was proximately caused by the defendants’ actions. But, in an enforcement action ... there is no requirement that the government prove injury, because the purpose of such actions is deterrence, not compensation.” The same principles that led the Second Circuit to conclude that proximate cause is irrelevant in SEC enforcer ment actions at the liability phase apply to disgorgement. Disgorgement is “a distinctly public-regarding remedy, available only to government entities seeking to enforce explicit statutory provisions.” “[T]he primary purpose of disgorgement is not to compensate investors. Unlike damages, it is a method of forcing a defendant to give up the amount by which he was unjustly enriched.” Courts can compel defendants to disgorge all unlawful gains “even if [that figure] exceeds actual damages to victims.” Imposing a proximate cause requirement on the SEC at this stage of an enforcement proceeding and in light of this remedial framework would be inappropriate. Nevertheless, because disgorgement is not punitive, the' securities violations and the allegedly unlawful gains must be causally connected. This does not mean that a court is required to order disgorgement of all gains causally connected to the violations. For example, the Second Circuit has rejected disgorgement of income earned on unlawful proceeds, as unduly punitive. But the Second Circuit has held that district courts are not required to “trace specific funds” to specific violations when ordering disgorgement. Rather, the appropriate inquiry is whether, and by how much, defendants “were unjustly enriched” by their securities law violations. A recent Second Circuit case, SEC v. DiBella, is illustrative. Paul Silvester, the Connecticut State Treasurer, agreed to invest the state pension fund’s money with an asset management firm in return for that firm agreeing to pay a “finder’s fee” to Thomas DiBella, a former State Senator, who started his own consulting practice. “Silvester thought that allowing Di-Bella to be part of the ... investment would ... solidify[ ] a future business and political relationship.” After Silvester pled guilty to federal racketeering charges, the SEC brought an enforcement action against DiBella and his consulting company for aiding and abetting Silvester’s securities fraud violations and the investment firm’s violation of the Investment Advisers Act. The theory of liability for the primary violations was that Silvester and the investment firm defrauded the pension fund by failing to disclose the finder’s fee arrangement. A jury found DiBella and his company liable for aiding and abetting all violations, and the district court ordered disgorgement of the finder’s fees. On appeal, defendants argued that disgorgement was inappropriate because the finder’s fee did not result directly from the securities laws violations. That is, because the finder’s fee was paid by the investment firm, and did not come from the pension fund itself, it could not have been “reaped through [the] securities laws violations.” The Second Circuit rejected defendants’ theory, finding that DiBella.was “unjustly enriched by aiding and abetting the [securities] violations,” because “the fraud ... was the linchpin necessary to ensure that [he] w[as] compensated.” Absent the fraud, DiBella “would not have been paid the fee at issue.” In other words, DiBella endorses a “but for” standard of causation. This method is consistent with the district court’s analysis in Razmilovic, which was approved by the Second Circuit. In that case, the defendant perpetrated a massive accounting fraud in his company while-he served as Chief Operating Officer and Chief Executive Officer. The district court ordered disgorgement of the defendant’s bonuses because payment of bonuses was tied to the financial performance . of the company. The court found that disgorgement of Razmilo-vic’s bonuses was appropriate because the company’s “restated earnings would not have met the target earnings amounts for performance-related bonuses in either year that he received those bonuses.” That is — but for the defendant’s fraud, the company would not have paid out bonuses. The court declined to award disgorgement of Razmilovic’s entire salary based on similar reasoning. Because Razmilovic also provided legitimate services to the company, his fraud was not a “but for” cause of the receipt of his entire compensation package. In declining to order disgorgement of the entire salary, the court distinguished other cases where “the fraud committed by th[e] defendants extended the life of the employer-company and, therefore, the defendants would not have received any compensation from a company that would not have existed but for their fraud.” “Once the SEC has met the burden of establishing a reasonable approximation of the profits causally related to the fraud, the burden shifts to the defendant to show that his gains ‘were unaffected by his offenses.’ ” Defendants are “entitled to prove that the [ ] measure is inaccurate,” but the “ ‘risk of uncertainty in calculating disgorgement should fall upon the wrongdoer whose illegal conduct created that uncertainty.’ ” Ultimately, however, the final decision as to the amount of disgorgement rests with the district.court. “For purposes of calculating disgorgement, financial hardship does not preclude the imposition of an order of disgorgement.” “[W]hether or not the defendant may have squandered and/or hidden ill-gotten profits should not determine the amount disgorged; similarly, the likelihood that the SEC will in fact be repaid is unrelated to the amount by which a wrongdoer was improperly enriched.” “Where an individual or entity has collaborated or worked closely with another individual or entity to violate the securities laws, those individuals and/or entities may be held jointly and severally liable for any disgorgement.” “In such situations, the joint tortfeasors bear the burden of demonstrating that their liability can be reasonably apportioned.” B. Prejudgment Interest The court also has discretion to order payment of prejudgment interest on any disgorged gains. Requiring the payment of interest prevents a defendant from obtaining the benefit of “ ‘what amounts to an interest free loan procured as a result of illegal activity.’ ” “In deciding whether an award of prejudgment interest is warranted, a court should [take into account] ... considerations of fairness and the relative equities of the award, [ ] the remedial purpose of the statute involved, and/or [ ] such other general principles as are deemed relevant by the court.” C. Civil Penalty The Securities Act and the Exchange Act authorize three tiers of civil penalties. The parties agree that tier two penalties are appropriate because the violations found by the jury “involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement.” “The amount of the penalty for each such violation shall not exceed the greater of [$60,000] or (ii) the gross amount of pecuniary gain to such defendant as a result of the violation.” “[CJourts in this [district have calculated the number of violations based upon the number of acts taken that violate the securities laws, and the Second Circuit has endorsed that analysis.” For purposes of calculating a defendant’s “gross pecuniary gain,” the court ' “may consider gains only from frauds occurring within the five-year statute of limitations for civil penalties.” Otherwise, the calculation of “gross pecuniary gain” is similar to the calculation of disgorgement. “Beyond setting maximum penalties, the statutes leave ‘the actual amount of the penalty ... up to the discretion of the district court.’ ”. “[T]he civil penalty framework is of a ‘discretionary nature’ and each case ‘has its own particular facts and circumstances which determine the appropriate penalty to be imposed.’ ” In determining whether civil penalties should be imposed, and the amount of the fine, courts look to a number of factors, including (1) the egregiousness of the defendant’s conduct; (2) the degree of the defendant’s scienter; (3) whether the defendant’s conduct created substantial losses or the risk of substantial losses to other persons; (4) whether the defendant’s conduct was isolated or recurrent; and (5) whether the penalty should be reduced due to the defendant’s demonstrated current and future financial condition. D. Injunction The Securities Act and the Exchange Act authorize courts to permanently enjoin defendants from future violations of securities laws. “An injunction prohibiting a party from violating statutory provisions is appropriate where ‘there ,is a likelihood that, unless enjoined, the violations will continue.’ ” Courts consider the following factors in determining whether a permanent injunction is appropriate relief: the fact that defendant has been found liable for illegal conduct; the degree of scienter involved; whether the infraction is an isolated occurrence; whether defendant continues to maintain that his past conduct was blameless; and whether, because of his professional occupation, the defendant might be in a position where future violations could be anticipated. E. Grantor Trust Rules and Common Law Doctrines “A grantor trust is created when a person contributes cash or property to a trust but retains certain interests such that he is treated as the owner of the trust.” “In determining the settlors of a trust, [a court] look[s] beyond the named grantors to the economic realities to determine the true grantor.” “Assets held in a grantor trust are considered the property of the grantor .... thus making the trust assets taxable to the grantor, until those trust assets are distributed” to a beneficiary. Sections 671-679 of Title 26 of the United States Code (the “Tax Code”) govern the circumstances under which a grantor trust is created and taxed. “The main thrust of the grantor trust provisions is that the trust will be ignored and the grantor treated as the appropriate taxpayer whenever the grantor has substantially unfettered powers of disposition.” A trust does not become taxable “solely on the grounds of [the grantor’s] dominion and control over the trust ... except as specified in” these provisions. 1. Section 674 Under section 674(a), a grantor is “treated as the owner of any portion of a trust in respect of which the beneficial enjoyment of the [trust’s] corpus or [ ] income ... is subject to a power of disposition, exercisable by the grantor or a nonadverse party, or both, without the approval or consent of any adverse party.” In simpler terms, “the grantor is treated as the owner in every case in which he or a nonadverse party can affect the beneficial enjoyment of a portion of a trust,” subject to certain exceptions. Specifically, section 674(c), titled “Exception for certain powers of independent trustees” states [s]ubsection (a) shall not apply to a power solely exercisable (without the approval or consent of any other person) by a trustee or trustees, none of whom is the grantor, and no more than half of whom are related or subordinate parties who are subservient to the wishes of the grantor&emdash; (1) to distribute, apportion, or accumulate income to or for a beneficiary or beneficiaries, or to, for, or within a class of beneficiaries; or (2) to pay out corpus to or for a beneficiary or beneficiaries or to or for a class of beneficiaries (whether or not income beneficiaries). Thus, “a grantor is not treated as owning the trust property when his beneficial enjoyment of the trust corpus or income is subject to the control of an independent trustee.” However, “[a] power in the grantor to remove, substitute, or add trustees ... may prevent a trust from qualifying under section 674(c),” unless that power “is limited so that its exercise could not alter the trust in a manner that would disqualify it under section 674(c).” Further, section 674(c) does not apply “if any person has a power to add to the beneficiary or beneficiaries or to a class of beneficiaries 'designated to receive the income or corpus, except where such action is to provide for after-born or after-adopted children.” 2. Section 679 Under section 679(a), “[a] United States person who directly or indirectly transfers property to a foreign trust ... shall be treated as the owner for his taxable year of the portion of such trust attributable to such property if for such year there is a United States beneficiary of any portion of such trust,” unless the transfer is made for fair market value. “In general, the term ‘fair market value’ is understood to mean ‘the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.’ ” “A trust shall be treated as having a United States beneficiary for the taxable year unless ... under the terms of the trust, no part of the income or corpus of the trust may be paid or accumulated during the taxable year to or for the benefit of a United States person.” In 2010, Congress amended the statute to clarify that “an amount shall be treated as accumulated for the benefit of a United States person even if the United States person’s interest in the trust is contingent on a future event.” 3. Substance Over Form The “substance over form” doctrine codifies the principle that “even if a transaction’s form matches ‘the dictionary definitions of each term used in the statutory definition’ of the tax provision, ‘it does not follow that Congress meant to cover such a transaction’ and allow it a tax benefit.” In the context of trusts, courts look to the following facts to determine whether a trust had economic substance: (1) whether the taxpayer’s relationship to the transferred property differed materially before and after the trust’s creation; (2) whether the trust had an independent trustee; (3) whether an economic interest passed to other trust beneficiaries; and (4) whether the taxpayer respected restrictions imposed on the trust’s operation as set forth in the trust documents or by the law of trusts. “In applying this doctrine of substance over form, [courts] ha[ve] looked to the objective economic realities of a transaction rather than to the particular form the parties employed.... [and] ha[ve] never regarded the simple expedient of drawing up papers, as controlling for tax purposes when the objective economic realities are to the contrary.” Courts are not “bound by a meaningless label (or a mislabel) that the parties to an agreement give to any or all parts of the agreement, but [must] decide the true nature of the agreement by looking to its substance and to the intention of the parties.” The substance over form doctrine is applicable to the entire body of federal tax law, including the grantor trust provisions. Thus, even when a trust is not a “sham”&emdash;that is, where it has legitimate economic substance&emdash;it may still be taxable as a grantor trust because it satisfies an exception within the grantor trust provisions only in form. III. FINDINGS OF FACT A. Undisputed Facts and Jury Findings Between 1992 and 1996, Sam and Charles Wyly created a number of IOM trusts, each of which owned several subsidiary companies. Michael French, the Wylys’ family attorney, Sharyl Robertson, the Chief Financial Officer (“CFO”) of the Wyly family office, and Michelle Boucher, the CFO of the Irish Trust Company, a Wyly-related entity in the Cayman Islands, served as protectors of the IOM trusts. French, Robertson, and Boucher conveyed the Wylys’ investment recommendations to the trust management companies administering the Wylys’ IOM trusts (the “IOM trustees”). All of the IOM trustees’ securities transactions were based on the Wylys’ recommendations and the IOM trustees never declined to follow a Wyly recommendation. The Wylys served as directors of Mi-chaels Stores, Sterling Software, Sterling Commerce, and Scottish Annuity and Life Holdings, Ltd. (“Scottish Re”). As part of their compensation, the Wylys received stock options and warrants. “Between 1992 and 1999, Sam and Charles Wyly sold or transferred to the [IOM] trusts and companies stock options in Michaels Stores, Sterling Software and Sterling Commerce” in exchange for private annuities while simultaneously disclaiming beneficial ownership over the securities in public filings with the SEC. Between 1995 and 2005, the IOM trusts and companies exercised these options and warrants, separately acquired options and stock in all four companies, and sold the shares, without filing disclosures. The jury found that the Wylys were beneficial owners of the Issuer securities transferred to, held, and sold by the IOM trusts because the Wylys, directly or indirectly, had or shared voting and/or investment power over these securities. Thus, the jury concluded that the Wylys failed to accurately disclose the extent of their beneficial ownership in the Issuer securities under sections 13(d) and 16(a) of the Securities Exchange Act (the “Exchange Act”). The jury also found that the Wylys caused the Issuers to violate section 14(a) of the Exchange Act, because the Wylys misrepresented the extent of their beneficial ownership to the Issuers in their Director and Officer (“D & O”) questionnaires, which were incorporated by the Issuers in proxy statements. In addition to these disclosure violations, the Wylys were found liable for securities fraud in violation of section 10(b) of the Exchange Act and section 17(a) of the Securities Act of 1933 (the “Securities Act”), and for aiding and abetting the Issuers’ and the IOM trusts’ securities law violations. Finally, the jury found the Wylys liable for selling unregistered securities in violation of section 5 of the Securities Act for certain sales of Mi-chaels Stores stock. B. The Creation of the Offshore System In early to mid-1991, Sam Wyly asked Robertson to attend a seminar held by lawyer and trust promoter David Tedder on the use of foreign trusts as a method of asset protection and tax deferral. Shortly thereafter, the Wylys, Robertson, and French attended another Tedder seminar in New Orleans. Tedder, French, and the Wylys then had a private meeting at Sam Wyly’s house in Malibu, California. At that meeting, Tedder “talked about establishing trusts that would provide tax deferral, and how the Wylys could transfer assets to those trusts and get tax deferral on the growth of those assets.” Specifically, Tedder recommended transferring the Wylys’ stock options in Sterling Software and Michaels Stores to a foreign trust in exchange for a private annuity “in a tax-free kind of transaction.” Under Tedder’s plan, it was “expressly intended that [the Wylys] ... irrevocably surrender the enjoyment, control, ownership, and all economic benefits attributable to the ownership of the [options] which are sold in exchange for the private annuity.” The Wylys pursued the offshore program primarily for its tax advantages. However, because Tedder suggested transferring stock options in publicly traded companies — Sterling Software and Mi-chaels Stores — any such transaction would implicate the securities laws. French testified that he raised concerns about whether the Wylys would continue to have filing obligations as directors of Sterling Software and Michaels Stores, even after the ■transfers. Tedder responded that making SEC filings could threaten the Wylys’ tax benefits, because “disclosure of the offshore trusts in SEC filings may lead the IRS to discover and investigate the tax issue, and ... the IRS might use the Wylys’ SEC filings against them if the tax issue was ever litigated.” Defendants argue that French’s testimony is not credible because his recollection of Tedder’s statements came only after French reached a favorable settlement with the SEC on the eve of this trial. Standing alone, French’s testimony might not be credible. But Sam Wyly corroborated French’s account by testifying that Tedder told him that SEC filings “could trigger tax problems if you had these things on file and [were] reporting the trust shares on [Schedule] 13Ds.” Further, it would be logical to draw an inference that the Wylys would have been concerned about taking inconsistent positions in their SEC and IRS filings when millions of dollars of tax savings were at stake. The jury found that the Wylys always had beneficial ownership over the options, warrants, and securities held by the IOM trusts. Thus, the Wylys were obligated to disclose, on the filings required by sections 13 and 16, any time they or the trusts transacted in those securities. Because beneficial ownership under the securities laws turns on having voting and/or investment power, truthful SEC filings would have forced the Wylys to admit having some element of control over the securities held by the trusts. To the Wylys, this would mean conceding some element of control over the trustees. But the Wylys believed — rightly or wrongly — that it was critical to conceal their control of the trustees in order to maintain the tax-free status of the trusts, including income from transactions in the Issuer securities. Because the Wylys made public filings showing the transfer of options to foreign trusts, and at other times publicized their relationship to the foreign trusts, the Wylys also took affirmative steps to minimize the trusts’ SEC filings to conceal the ultimate exercise and sale of those options. For example, the Wyly family office tracked the percentage of ownership each trust management company had in a particular Issuer to avoid triggering mandatory SEC reporting. Thus, as Sam Wyly testified, not making SEC filings was logically “something that consistently went on” throughout the duration of the offshore system. Even when it would have been otherwise helpful to assert beneficial ownership over the stock held by the foreign trusts, such as during Sam Wyly’s proxy battle for control of Computer Associates (the acquirer of Sterling Software) in February 2002, the Wylys chose not to do it in fear of inconsistent tax positions. From these facts, it is logical to draw the inference that making misleading statements in SEC filings, or not making SEC filings at all, was part of the Wylys’ plan to maintain the appearance of separation and independence from the foreign trusts. 1. The Bulldog Trusts The Wylys ultimately hired Tedder to help establish the first group of offshore trusts and subsidiary companies in 1992 (together with the Plaquemines Trust, the “Bulldog Trusts”). These trusts were settled by Sam or Charles Wyly and had beneficiaries including the Wylys’ wives and children and several charitable organizations. The trust deeds permitted the protectors to “add[] or substitute]” a charitable organization “by notice in writing to the trustees.” These trusts were explicitly set up as “non-grantor trust[s] rather than [ ] grantor trust[s] under Section 671-678 of the Code.” Under the terms of the trusts, no United States beneficiary could receive a distribution from the trust until two years after the settlor’s death. 2. The Bessie Trusts In 1993, French approached the law firm of Morgan, Lewis & Brockius (“Morgan Lewis”) to discuss whether the Bulldog Trust was a “grantor or non-grantor trust.” Morgan Lewis prepared a memorandum concluding 1) that there was a “significant risk that the [Bulldog] Trust will be characterized as a grantor trust under § 679 [because] income is being currently accumulated for the benefit of U.S. beneficiaries,” and 2) that “[i]t is also likely that the Trustee’s power to add or substitute other foreign charities (within the class [of beneficiaries]) causes the Trust to be characterized as a grantor trust under § 674.” Charles Lubar, the partner at Morgan Lewis retained to work on this matter, gave the memorandum to French and spoke with him about its conclusions. The following year, French asked Lubar to advise the Wylys about whether a trust settled by “a foreign person who had done business with Sam Wyly” would be treated as a grantor trust. Lubar advised that “as long as there wasn’t an indirect transfer of assets by the U.S. person and the foreign person put the money up, and there were certain powers in the trust, then it would be a foreign grantor trust, and the distributions then would not be taxable.” For the purposes of rendering his opinion, Lubar assumed that the foreign grantor would be the “sole trans-feror of property to the trust[],” unless the taxpayers transferred funds “on an ‘arm’s length’ basis.” In 1994 and 1995, two foreign citizens established several trusts for the benefit of the Wylys and their families (collectively, the “Bessie Trusts”). The Bessie Trust and the Tyler Trust were purportedly settled by Keith King, an individual associated with Ronald Buchanan, an IOM trustee selected by the Wylys, with initial contributions of $25;000 each. However, no such contribution was ever made. The trusts “were settled with a factual dollar bill ... plus an indebtedness of $24,999 each on the part of Keith King as set-tlor.” That indebtedness was immediately forgiven. The La Fourche Trust and the Red Mountain Trusts were purportedly settled by Shaun Cairns, another individual associated with Buchanan, also with initial contributions of $25,000 each. Cairns testified that French prepared letters stating that Cairns was establishing the trusts “to show [his] gratitude for [the Wylys’] loyalty to our mutual ventures and [their] personal support and friendship,” and asked Cairns to sign them. In truth, Cairns had never met nor dealt with the Wylys before establishing the trusts, and had provided only $100 towards the trusts. Shortly after these trusts were settled, Cairns’s trust management company was hired to serve as trustee for some of the Wylys’ IOM trusts. These transactions were shams intended to circumvent the grantor trust rules. French and Buchanan, acting as the Wy-lys’ agents, recruited King and Cairns to create a falsified record of a gratuitous foreign grantor trust. The trust documents are admittedly false — King and Cairns never contributed $25,000 towards the initial settlement. Yet defendants argue that King and Cairns can still be considered grantors with contributions of $1 and $100, respectively, if those transfers were gratuitous and were never directly reimbursed by the Wylys. There were no gratuitous transfers here. First, I am doubtful that King provided even the factual $1 towards the trusts. In a November 26, 1995 fax to French, Buchanan writes that “Keith never produced the money.” Buchanan explains that the King-related trusts “were settled with a factual dollar bill” only so that “there [was] no question of the[] [trusts] being voidable by reason of the absence of assets” pending the Wylys’ transfer of options. Even if King had contributed the $1, the premise that an unreimbursed dollar bill is sufficient to establish a tax-free foreign grantor trust cannot be taken seriously. Second, Cairns’s transfer of $100 cannot be considered gratuitous because shortly after settling these trusts, he received lucrative work from the Wylys as trustee. Finally, in light of the falsified trust deeds and supporting documentation surrounding these trusts, it would be unjust to consider anyone but the Wylys to be the true grantors of these trusts. 3. The Trustees The trusts were administered by professional asset management companies located on the Isle of Man. The trustees were selected by the Wylys or the protectors. The protectors, all of whom were Wyly agents, had the authority to remove and replace trustees. As mentioned earlier, the protectors also transmitted the Wylys’ investment recommendations to the trustees. Defendants have presented no evidence of an investment made by the IOM trusts that did not originate with the Wy-lys ’ recommendations. Nor have defendants presented evidence of an IOM trustee rejecting a Wyly recommendation. The SEC, on the other hand, has identified several transactions where the Wylys bypassed the trustees altogether. In October 2001, Keeley Hennington, who replaced Robertson as the head of the Wyly family office in June 2000, called Lehman Brothers and directed it to sell 100,000 shares of Michaels Stores held by Quayle Limited, an IOM company, at Charles Wyly’s request. Neither Wyly nor Hen-nington contacted the trustees before placing the sell order. On another occasion in June 2002, Sam Wyly contacted a broker directly and instructed him to “hold on” to 100,000 shares of TYCO stock, overriding a previous order from the IOM trustee, based on an earlier Wyly recommendation, to sell all TYCO shares. The SEC also presented evidence of transactions that no independent trustee would reasonably initiate. For example, on September 26, 1998, Boucher contacted an IOM trust to recommend a ten million dollar investment in the Edinburgh Fund. On September 28, Boucher told the trustee for the first time that the Edinburgh Fund was a fund run by Sam Wyly’s son-in-law and that it did not have a prospectus or subscription documents. Despite knowing nothing about the investment beyond its connection to the Wyly family, the trustee agreed to “forward the necessary instructions to Lehman Brothers.” One day later, Boucher followed up with the trustee “to ask for an update on progress with regard to making funds available for the proposed investment in the Edinburgh Fund.... [Boucher] mentioned that the Fund had already commenced trading and that the funds would therefore be required urgently.” Some of the Wylys’ recommendations had nothing to do with securities at all. Among the many personal purchases, loans, and investments the Wylys directed the IOM trustees to make, were businesses for Wyly children and family members, real estate, artwork, jewelry, collectibles, and furniture. 4. Transfer and Sale of Issuer Options “In April 1992, Sam and Charles Wyly transferred 960,000 Michaels Stores options and 1,988,588 Sterling Software options to ten Nevada companies indirectly owned by two Isle of Man trusts in exchange for deferred private annuity agreements.” In 1995 and 1996, the Wylys transferred 1,350,000 Michaels Stores options, 2,650,000 Sterling Software options, and 4,600,000 Sterling Commerce options to the IOM trusts, also in exchange for annuities. In June 1997, French approached Morgan Lewis to discuss the tax consequences of the private annuity transaction. Lubar remembers that he was “really concerned about the transaction” and “worried that the transfer of the options to a company that didn’t have any other assets in exchange for a private annuity raised a question about whether that was an arms-length transfer.” However, Lubar acknowledged that “other tax lawyers would look at a transfer of a private annuity in different ways.” After studying the issue, Lubar advised French that the transfers created potential problems under sections 674 and 679, amongst other provisions. C. Persuading Issuers Not to File Forms 1099 or W2 Ordinarily, a company granting stock options as compensation issues a Form 1099 or W2 reporting income to the director or officer and takes a corresponding deduction, for the compensation expense when the option is exercised. When the Wylys transferred their stock options to the IOM trusts in exchange for private annuities, the Issuers of the options — that is, Sterling Software and Michaels Stores — had to decide whether that transfer was a taxable event that required issuing a Form 1099 or W2 to report incomé to the Wylys. To address these concerns, Tedder sent an opinion letter to both companies explaining that the Wylys should not have to recognize income because the annuity did not require payment until a date certain in the future. Jeannette Meier, general counsel of Sterling Software, asked French’s law firm, Jackson Walker, to give a “back up” tax opinion to support Tedder’s letter. French provided a draft opinion, but never finalized the letter. Nevertheless, based on French and Tedder’s representations, Sterling Software decided not to issue a Form 1099 to the Wylys and declined to take a corresponding deduction for compensation expense. But Meier testified that the company was “concerned about ... whether, not having gotten a backup opinion from Jackson Walker, [it] was on good ground not to have to put [the compensation expense] in the [Section] 10-Q [financial statements.]” The value of the options was “a big number” and “would have affected the accuracy of the public filings” if Sterling Software had decided to report it as compensation. Michaels Stores treated the transfer of options identically. In addition, French instructed Mark Beasley, general counsel for Michaels Stores, not to issue Form 1099s for any of the foreign trust entities upon those companies’ exercise of stock options. In March 2000, SBC Communications Inc. (“SBC”) acquired Sterling Commerce, which had been spun off from Sterling Software in 1995. “As part of [the] acquisition ... all outstanding options to purchase shares of Sterling [Commerce] were canceled. All option holders received cash ... based on the excess of the stock purchase price over the option price.” On January 11, 2001, SBC notified the Wylys that it was planning “to issue a Form 1099 to [the respective Wylys]/[their] trusts showing taxable income” in the total amount of $73,912,500. The Wylys, through Boucher and Robertson, reached out to Rodney Owens, a partner at the Meadows Owens law firm in Dallas, to write a memo to SBC explaining why a 1099 should not be issued. On January 26, 2001, Owens wrote in a letter to SBC that “it is not appropriate for SBC to file a 1099 or any other reporting papers regarding this transaction because [the IOM entity] is a foreign corporation, and the income from the purchase of the stock is not subject to U.S. taxation.” After receiving the letter, SBC sought additional information about the private annuity transaction, including whether the transfer of options had been recognized as a taxable event at the time of the original transaction, and if not, what the schedule of annuity payments was. Although Frenchis relationship with the Wylys had broken down by this point, he agreed to write a memorandum supporting the tax treatment of the annuities. All in all, between 1992 and 2004, the Issuers never reported income related to the exercise of options or warrants transferred to the foreign trusts. Their decision not to report was a result of the Wylys’ deceptive behavior and affirmative misrepresentations. Because the Wylys disclaimed beneficial ownership of the options upon transfer, convinced the Issuers that the private annuity transactions were not taxable events, and did not disclose their beneficial ownership of the securities held by the IOM trusts in their Director and Officer questionnaires, the Issuers did not attribute taxable income to the Wylys. D. Concerns about Taxation of Annuity Payments The annuity payments for the original option transfers had been due to commence in the late 1990s, but that period was extended to 2004. In early 2003, Boucher and Hennington approached Lu-bar to discuss potential issues arising from the upcoming annuity payments. Lubar told Hennington and Boucher that, as he explained to French years before, he believed the trusts were grantor trusts under either sections 674 or 679 and should have been taxable to the Wylys all along. Further, Lubar believed the IRS would challenge the private annuity transactions. Lubar and other Morgan Lewis attorneys suggested approaching the IRS “on a no-name basis” to see “where the negotiations with the IRS might lead” in the event the Wylys wanted to pursue a voluntary disclosure. Boucher and Hennington summarized Lubar’s advice in a July 2, 2003 memorandum to Sam Wyly, Charles Wyly, Evan Wyly, and Donald Miller. The memorandum addressed several concerns about the “logistical problems of paying the annuities.” Hennington and Boucher were concerned that “[i]t is almost certain given the large amount of these payments that the reporting will result in an IRS audit. [Further], [t]here is also a high likelihood that as a result of this audit the entire structure of the foreign system will be audited by the IRS.” Additionally, Hen-nington and Boucher reported that [t]he annuity payments will bankrupt several of the IOM companies, which could bring the validity of the annuity transaction into question. [And] [a]fter a few years of payments, [other] companies will be left with non-liquid assets, which will result in payments being made in kind .... [which] may also call into question the validity of the transaction and the ‘arms length’ nature of the transaction. On August 13, 2003, several attorneys representing the Wyly family met with Internal Revenue Service (“IRS”) officials. Lubar gave the IRS some details about the trusts, and admitted that there was a “serious risk [that] they were grantor trusts from the beginning.” Lubar also explained the private annuity transactions, and told the IRS, after questioning, that the options were for stock in publicly traded corporations, that no income was reported upon exercise, and that the corporations claimed no deductions. According to attorney notes memorializing the meeting, an IRS officer asked if the taxpayers were “significant enough shareholders that their holdings would be listed on SEC filings” and asked if the “SEC filings show[ed] beneficial interest in shares.” Lubar said that he believed they were significant enough shareholders for “at least [the] first two [companies]” but did not know if the filings showed beneficial ownership. Hennington and Boucher reported to the Wylys that the IRS was primarily interested in the structure of the annuity, but added that one of the IRS representatives “seemed very interested in any SEC reporting of the initial transactions [even though] [t]his seems out of their area of expertise or control.” E. IRS Audit The Wylys did not proceed with Morgan Lewis on a voluntary disclosure path. But by February 2, 2004, Charles Wyly received a notice of audit. Shortly thereafter, Sam Wyly asked Hennington, Boucher, and Charles Pulman, another attorney at Meadows Owens, “to explore what happens [for purposes of taxation] if he is not a U.S. citizen.” The firm concluded that an expatriate U.S. citizen who has a net worth of more than $622,000 “will be treated as having a principal purpose of tax avoidance” and will continue to be taxed pursuant to several special provisions. From May to August 2004, the IRS sent a number of information document requests (“IDRs”) to both Sam and Charles Wyly. In at least one .of the IDRs, the IRS requested additional information about a transfer of Michaels Stores options to an independent trust, such as “the identity of all original and current beneficiaries, including their nationality, place of residence, and current mailing address” as well as the identity of “the grantor(s) of the trust(s).” At an October 21, 2004 meeting between attorneys representing the Wyly family and the IRS, an IRS agent said that the IDRs regarding the options transfers were .based on information “pulled from SEC filings.” At that meeting, the IRS agents also asked questions about the trusts, including about why Keith King set up the Tyler Trust. The SEC has not shown that the Wylys’ or Issuers’ SEC filings launched the IRS audit of the Wylys and the offshore system,' or even that accurate filings would have been likely to trigger an earlier examination. However, it is evident from the IDRs and from the October 2004 meeting, that once the IRS investigation was under way, agents and investigators were consulting SEC filings as part of their fact finding process and identified numerous issues and misstatements. F. Purchase and Sale of Unregistered Michaels Stores Stock 1. The Transactions On March 29, 1996, Michaels Stores announced that it had entered into several private agreements to sell two million shares of unregistered stock, at $12.50 per share, to “independent trusts of which Wyly family members are beneficiaries.” On April 5, 1996, the trusts actually purchased those shares. On December 26, 1996, Michaels Stores announced that it had entered into private agreements to sell two million options to' purchase shares of unregistered stock to “independent trusts of which, Wyly family members are beneficiaries.” On January 7, 1997, the Wall Street Journal reported on the purchase as a positive sign for Michaels Stores. Between the date of the options purchase and the day after the Wall Street Journal article appeared, share price rose from $10.50 to $13.125. The options were transferred on February 25, 1997, and exercised on March 10, 1997. On that date, Michaels Stores closed at $17.625. The IOM trusts sold 1.8 million shares of unregistered stock between June and December 1997, at prices ranging from approximately $21 per share in the summer to approximately $35 per share in the fall. The trusts sold 200,000 of these shares less than one year after the December 1996 private placement, in violation of the terms of the purchase agreement. In 1998, the IOM trusts sold a small number of shares at approximately $32 per share. In 2000 and 2001, the IOM trusts sold approximately 1.2 million shares at prices ranging from approximately $40 per share in September 2000 to approximately $55 per share in November 2001. 2. The Economic Value of Registration While the IOM trusts filed Forms 144 disclosing the sale of the shares, those forms did not disclose that the trusts were “affiliates” of Michaels Stores by virtue of being commonly controlled by the Wy-lys. Nor did the Wylys or the trusts demand that Michaels Stores file a Form S-3 shelf registration statement for these securities prior to the sales. However, at the time of these transactions, Michaels Stores had effective Form S-l registration statements, which disclosed the financial background of the company, and other critical information about the value of the investments, including a prospectus. The Form S-3 shelf registration statements, if completed accurately, would have revealed no additional information about Michaels Stores, but would have disclosed the Wy-lys ’ beneficial ownership of these shares. Defendants argue that the proper measure of disgorgement for sale of unregistered securities in this context should be the economic benefit attributable to the Wylys’ failures to 1) cause Michaels Stores to register the securities and 2) file disclosures after the sales. Defendants attempted to calculate that economic benefit with expert testimony from Professor John J. McConnell, of the Purdue School of Management. McConnell relied upon three academic studies — a 2000 study by David Aboody and Baruch Lev, a 2001 study by Joseph Lakonishok and Inmoo Lee, and a 2010 study by Francois Brochet — all of which purport to examine the economic impact of trading disclosures by officers and directors. These studies concluded that the adverse effect on share price associated with SEC filings disclosing insider sales ranges from .17 percent to .61 percent. McConnell explained this fairly low price impact by concluding that while [t]here is a general recognition that insiders are more likely to have additional information that is not available to other market participants, .... [ijnsiders [also] appear to sell shares for reasons having nothing to do with adverse information that’s about to be released or will be released in the near future. McConnell applied these studies to the Wyly trades by first assuming that Mi-chaels Stores filed Form S-3 statements registering the shares, and that such statements were deemed effective by the SEC. McConnell then assigned hypothetical filing dates for the Wylys’ required disclosures under sections 13 and 16 based on the actual trade dates. McConnell applied each study’s adverse impact figure to the profits earned by the Wylys on each transaction to determine the dollar value of a hypothetical disclosure. Finally, McConnell calculated the total economic impact of the hypothetical disclosure by extending the price effect over a period of 90, 180, and 360 days. McConnell’s estimated economic valuation of the Wylys’ failure to register and disclose the sale of Michaels Stores shares ranged from $1.28 million to $6.44 million, based on the applicable study and the duration of the price effect. The SEC challenges McConnell’s conclusions as speculative because they are based on assumptions about the Wylys’ hypothetical compliance with the securities laws. It is true that, like all experts, McConnell makes certain assumptions of fact. However, these assumptions — that the Wylys 1) caused Michaels Stores to register the shares, and 2) made appropriate disclosures following the sales — are not offered to speculate about a counter-factual universe. Rather, McConnell makes these assumptions in order to calculate the economic benefit the Wylys received for failing to do those things. Nevertheless, McConnell’s methodology is irredeemably flawed because the underlying studies he relies on are not applicable to the facts of this case. First, the studies evaluate the impact of disclosure by “garden variety” insiders — that is, ordinary officers and directors. However, the Wylys were anything but “garden variety” insiders. During this time period, the Wy-lys owned over forty percent of the common stock in Michaels Stores, and controlled five of the seven seats on the Board of Directors. McConnell’s statement that he had “no basis to conclude that the market reaction to the sale of the Wylys would have been significantly different than the average reaction identified in the economic literature” is indefensible in light of these facts. At best, McConnell may argue that there was minimal market reaction to seventeen instances where the Wylys sold Michaels Stores stock domestically between 1993 and 2004 and extrapolate that the Wylys were “garden variety” insiders. But I cannot draw conclusions from the small number of onshore transactions relative to the large volume of offshore (and undisclosed) transactions at issue here, Alternatively, McConnell points to the fact that there was minimal market reaction to the February 2005 disclosure that the Wylys were under investigation by the Manhattan District Attorneys’ Office, and ,the April 2005 disclosure that the Wylys intended to amend their Schedule 13D filings to claim beneficial ownership of the shares remaining in the IOM trusts. But by this time the Wylys’ joint holdings constituted only eight percent of the outstanding Michaels Stores common stock, so the impact of any disclosure would likely be lower. More importantly, these disclosures — of a criminal investigation and of an insider’s beneficial ownership over additional shares held by foreign trusts — are entirely different from the disclosures that would have been made in 1997-1998. Acknowledging beneficial ownership over common stock held by a trust is not comparable to an insider disclosing his sale of millions of shares. Second, McConnell’s calculation of price impact does not take into account the significantly discounted price at which the Wylys bought the unregistered securities. The discount is evident for the April 1996 private placement, and can thus be inferred for the December 1996 option purchase. Michaels Stores closed trading on March 28,1996 at $14.25. The Wylys entered into an agreement to purchase two million shares on March 29, the same day as the press release announcing the cash infusion. By the time the Wylys actually purchased the shares on April 5, the price had risen to $15.35. Thus, the Wylys bought the shares at a 22.8% discount, a figure consistent with academic studies finding that “[ajverage discounts on unregistered shares are sizable, ranging from 20% to 35%.” For both of these reasons, I reject McConnell’s methodology and valuation. IV, CONCLUSIONS OF LAW A. Disgorgement Based on Unpaid Taxes The SEC arrives at its proposed measure of disgorgement by 1) calculating the total profits earned on the sale of the Issuer securities by the IOM trusts, and 2) approximating the amount of taxes that would have been paid on those profits had the Wylys accurately disclosed beneficial ownership of the securities. For the following reasons, I conclude that this is an appropriate measure. 1. Using Unpaid Taxes as a Measure of Disgorgement Does Not Violate Section 7401 On June 13, 2013, I held that the SEC was not foreclosed, as a matter of law, from seeking disgorgement in an amount equivalent to the federal income taxes the Wylys would have been required to pay if they properly disclosed beneficial ownership over the Issuer securities. “There is no explicit prohibition, either in the Tax Code or in the Exchange Act, on using tax benefits as a measure of unjust enrichment in other contexts” and no “express limitation on the SEC’s authority to calculate and disgorge any “reasonable approximation of profits causally connected to the violation.” ” Defendants urge that I revisit this ruling and determine that ordering disgorgement measured by unpaid taxes is not permitted by the Tax Code. Congress has granted exclusive authority to the Secretary of the Treasury to assess and “collect the taxes imposed by the internal revenue laws,” who has, in turn, delegated that authority to the IRS. Section 7401 of the Tax Code states that “[n]o civil action for the collection or recovery of taxes, or of any fine, penalty or forfeiture, shall be commenced unless the Secretary authorizes or sanctions the proceedings and the Attorney General [of the United States] or his delegates directs that the action be commenced.” As I previously held, “this is not a civil action for the collection or recovery of taxes.... Rather, this is a civil action for securities law violations, the remedy for which is measured by the amoupt of taxes avoided” as a result of the defendants’ securities violations. “[A] tax is an enforced contribution to provide for the support of the government.” Disgorgement is a discretionary and equitable remedy aimed at preventing unjust enrichment. Measuring unjust enrichment by approximating avoided taxes does not transform an order of disgorgement into an assessment of tax liability. Citing United States v. Helmsley, defendants argue that any money judgment based on a calculation of unpaid taxes is equivalent to an assessment of tax. In Helmsley, the issue was whether restitution may be imposed in a criminal tax evasion case. The Second Circuit concluded that while “[i]t is true that the government may pursue a tax evader for unpaid taxes, penalties, and interest in a civil proceeding ... any amount paid as restitution for taxes owed must be deducted from any judgment entered for unpaid taxes in such a civil proceeding. Restitution is in fact and law a payment of unpaid taxes.” Helmsley merely stands for the proposition that the government should credit any amount it recovered as restitution in a criminal tax case towards any subsequent tax liability assessed in a civil proceeding. But this action is not a civil or criminal tax. case. While it would be equitable to credit the amount disgorged in this SEC enforcement action towards any tax liability assessed in the future arising out of the same conduct, treating such amount as an offset does not transform the disgorged amount; into a tax. Defendants contend that “no court has ever before approved the use of ... any analogous indirect measure of unjust profits.” _ But the Second Circuit recently held that defendants can be ordered to disgorge “direct pecuniary benefits]” and “illicit benefits” that happen to be “indirect.” Disgorgement compels defendants to “give up the amount by which [they were] unjustly enriched.” The measure of unjust enrichment for any given securities violation depends on the nature of the violations and the defendants’ wrongful conduct. Thus, unlawful gains may be measured in any number of different ways. For example, courts commonly order defendants to disgorge not only the proceeds of a fraud or the profits of an unlawful trade, but also salary and bonuses earned during the period, of a fraud, and amounts equivalent to losses avoided as a result of the securities violations. Disgorgement “is a remedy that gives courts flexibility” to determine the appropriate remedy “to fit the wrongful conduct.” Defendants raise two other arguments to urge this Court not to apply a tax-based measure of disgorgement. First, defendants argue that the “tax issues raised by the [defendants’ offshore trusts are novel and complicated” and “even if section 7401 d[oes] not literally apply, the legislative concerns that [animated] section 7401 are magnified where someone other [than] the IRS seeks to litigate a highly complex tax issue.” I disagree. This ease, like many others litigated before this Court, involves statutory interpretation and application of common law doctrines. To be certain, the grantor trust provisions are complicated, but the issues here are not so complex as to be unresolvable. Moreover, the remedies issues can be decided largely by the same evidence introduced to the jury during the liability phase. Second, defendants argue that calculating disgotgement based on unpaid taxes creates the potential for duplicative recovery or conflicting orders because the Wy-lys are currently under an IRS audit covering some of the years of the securities fraud. As I mentioned earlier, any amounts disgorged in this case should be credited towards any subsequent tax liability' determined in an IRS civil proceeding as a matter of equity. 2. Trading Profits Earned by IOM Trusts were Taxable Under Section 674 a. Bessie Trusts Defendants must concede that if I conclude that the Wylys were the real grantors of the Bessie Trusts, then the profits earned on the sale of Issuer securities by those trusts are taxable to the Wylys, not the purported foreign grantors. Because I conclude that the purported foreign grantors made no gratuitous contributions, “the trusts at issue [are] clearly grantor trusts taxable to the domestic grantors.” b. Bulldog Trusts Section 674(a) provides that: “[t]he grantor shall be treated as the owner of any portion of a trust in respect of which the beneficial enjoyment of the corpus or the income therefrom is subject to a power of disposition, exercisable by the grantor or a nonadverse party, or both, without the approval or consent of any adverse party.” Quoting a prominent tax treatise, defendants concede that the “power of disposition” includes “powers to ‘effect such major changes in the enjoyment of a trust’s income, and corpus as the addition and elimination of beneficiaries’ as well as ‘minor and customary power[s]’ over income and corpus distribution.” Because a non-beneficiary trustee is considered a non-adverse party under the statute, “[s]ection 674(a) captures virtually every trust, including the [IOM] trusts.” Thus, defendants concede that “[u]ltimate liability under [s]ection 674[ ] ... turns on whether any of the statutory exceptions apply.” According to defendan