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use of the information by others were all illegal acts. Although
Mr. Lee did not place any restrictions on use of the funds paid
to petitioner, under securities laws petitioner did not have a
claim of right or the appearance of an unrestricted right to the
money. He had then knowingly committed a crime, and he was
subject to criminal penalties and to the SEC’s remedy of
disgorgement.8 In 1988, petitioner’s disgorged profits were
placed in a receivership fund to be used as restitution for
investors who could show a loss due to petitioner’s and/or Mr.
Lee’s illegal actions. Under these circumstances, we hold that
petitioner does not pass the section 1341(a)(1) requirement and
that he is not entitled to section 1341 relief.
Petitioner argued that his circumstances were similar to
those of Barrett v. Commissioner, 96 T.C. 713 (1991). In that
case the taxpayer, a shareholder in a stock brokerage, purchased
stock options on the basis of insider information and realized
gain from the sale of the options. Although the taxpayer was not
criminally prosecuted, he was sued by the option brokers with
whom he had made the trades and profit due to insider
information. In a year subsequent to the option transactions,
8 Disgorgement is used as a deterrent and is intended to
make the improper use of security information unprofitable.
Hateley v. SEC, 8 F.3d 653, 655 (9th Cir. 1993); SEC v. Rind, 991
F.2d 1486, 1490 (9th Cir. 1993); SEC v. Wang, 944 F.2d 80, 85 (2d
Cir. 1991). The amount disgorged must be reasonable; i.e.,
approximately equal to the violator’s profits. Hateley v. SEC,
supra at 656.
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