Authority to Withdraw Funds Equals Pecuniary Interest: Second Circuit Affirms §16(b) Disgorgement and Endorses IRS Underpayment Rate for Prejudgment Interest

Case: Avalon Holdings Corp. v. Gentile, Nos. 24-999 (L), 24-1002 (Con)

Court: United States Court of Appeals for the Second Circuit

Panel: Judges Lynch, Sullivan, Menashi

Date: October 28, 2025

Disposition: Affirmed (Summary Order)

Introduction

In this consolidated appeal, the Second Circuit affirmed final judgments requiring Guy Gentile to disgorge more than $12.3 million in short-swing profits under Section 16(b) of the Securities Exchange Act of 1934, plus prejudgment interest, to Avalon Holdings Corporation and New Concept Energy, Inc. The case stems from the high-frequency day trading of MintBroker International, Ltd., a Bahamian broker-dealer founded and controlled by Gentile, conducted through a clearing account at Interactive Brokers.

The central legal issues on appeal were: (1) whether the summary judgment record established that Gentile had a “pecuniary interest” in the Avalon and New Concept trades within the meaning of Rule 16a-1; (2) whether the district court properly rejected Gentile’s late-produced trading records and expert opinions at the damages phase as an impermissible attempt to relitigate liability; and (3) whether awarding prejudgment interest—and selecting the IRS underpayment rate—was within the district court’s discretion in a private §16(b) action.

Although issued as a nonprecedential summary order, the decision is significant for practitioners because it:

Reinforces that a control person’s authority to withdraw funds from a brokerage account—and evidence of actually doing so—constitutes “pecuniary interest” in securities traded through that account under Rule 16a-1(a)(2)(i).
Confirms that defendants cannot use the damages phase to relitigate liability issues via late-produced trading data; the proper lens is reconsideration, which requires diligence and more than mere tactical delay.
Approves awarding prejudgment interest in §16(b) cases without a predicate finding of insider information abuse, and endorses use of the IRS underpayment rate to measure the time value of ill-gotten gains.

Summary of the Opinion

The Second Circuit affirmed the Southern District of New York’s judgments against Gentile:

Liability: The court upheld the grant of summary judgment, concluding that undisputed facts showed Gentile had a pecuniary interest in the Avalon and New Concept shares traded through MintBroker’s Interactive Brokers accounts. He stipulated that the relevant accounts were MintBroker’s proprietary accounts (and subaccounts) and did not dispute that he had authority to, and did, withdraw all cash and marketable securities from those accounts.
Damages: The court rejected Gentile’s attempt to introduce new, line-by-line trading records—produced only after the liability ruling—to show trades were on behalf of customers and to reduce or eliminate profits. Because the records could have been obtained earlier with reasonable diligence, the district court correctly treated the request under the reconsideration standard and excluded the evidence and expert testimony (also inadmissible under Rule 702) as incompatible with the summary judgment ruling.
Prejudgment Interest: The court held it was not an abuse of discretion to award prejudgment interest without a finding of insider information misuse and to use the IRS underpayment rate as the metric, noting §16(b)’s constructive trust rationale and the need to strip wrongful gains.

The court also noted that any argument challenging Article III standing in §16(b) cases is foreclosed in this Circuit by recent precedent.

Analysis

Precedents Cited and Their Influence

Roth ex rel. Estée Lauder Cos. v. LAL Family Corp., 138 F.4th 696 (2d Cir. 2025): The panel relied on Roth for the principle that §16(b) liability attaches only to transactions in which the insider has a “pecuniary interest,” defined by SEC Rule 16a-1(a)(2)(i) as the opportunity to profit, directly or indirectly, from a transaction. The court applied that definition to conclude that Gentile’s authority over and withdrawals from the Interactive Brokers accounts established such an opportunity to profit.
17 C.F.R. § 240.16a-1(a)(2)(i): The regulation’s definition of “pecuniary interest”—opportunity to profit or share in profits—anchored the court’s conclusion that control over the brokerage accounts (and actual extraction of value) sufficed.
Packer ex rel. 1-800-Flowers.Com, Inc. v. Raging Capital Mgmt., LLC, 105 F.4th 46 (2d Cir. 2024): Foreclosed Gentile’s subject-matter jurisdiction challenge premised on Article III standing, affirming that §16(b) claims are justiciable in federal court.
McBride v. BIC Consumer Prod. Mfg. Co., 583 F.3d 92 (2d Cir. 2009): Restated the de novo summary judgment standard, guiding the appellate review of the district court’s liability ruling.
Henry v. Oluwole, 108 F.4th 45 (2d Cir. 2024): Provided the standard for reviewing findings related to damages (clear error) and questions of law (de novo).
Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063 (2d Cir. 1995): Set the abuse-of-discretion framework governing awards of prejudgment interest and the selection of rates.
JLM Couture, Inc. v. Gutman, 91 F.4th 91 (2d Cir. 2024) and Virgin Atl. Airways v. Nat’l Mediation Bd., 956 F.2d 1245 (2d Cir. 1992): These decisions undergirded the “law of the case” and reconsideration standards. The panel affirmed that post-liability attempts to introduce evidence that could have been timely obtained are disfavored absent an intervening change in law, genuinely new evidence, or a need to correct clear error/manifest injustice.
Morales v. Freund, 163 F.3d 763 (2d Cir. 1999) and Blau v. Lehman, 368 U.S. 403 (1962): Confirmed that prejudgment interest is “generally awarded” in §16(b) cases and rests on equitable fairness, not a rigid requirement of insider-information misuse.
Jones v. UNUM Life Ins. Co. of Am., 223 F.3d 130 (2d Cir. 2000): Listed factors guiding a court’s discretion on prejudgment interest awards, supporting the district court’s exercise of equitable judgment.
SEC v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir. 1996): Approved the IRS underpayment rate for disgorgement interest in SEC cases, reasoning that it approximates the benefit of retaining wrongful gains. The panel extended that rationale to private §16(b) actions.
Donoghue v. Bulldog Investments Gen. P’ship, 696 F.3d 170 (2d Cir. 2012): Described §16(b) insiders as “constructive trustees” of the corporation’s short-swing profits, supporting both disgorgement and the use of a rate that removes the time value of those profits.

Legal Reasoning

Pecuniary Interest Under §16(b) and Rule 16a-1

Section 16(b) imposes a strict liability regime on statutory insiders (including beneficial owners exceeding 10% of an issuer’s equity) who realize profits from purchase and sale (or sale and purchase) of the issuer’s securities within a six-month window. Liability is limited to transactions in which the insider has a “pecuniary interest,” meaning an opportunity to profit from the transaction.

The court focused on two undisputed facts: (1) Gentile had authority to withdraw the cash and securities in MintBroker’s Interactive Brokers accounts (which were expressly characterized as “proprietary” and subaccounts), and (2) he actually withdrew funds equal to the cash balance and the value of marketable securities, transferring them to an account he owned and controlled. Those facts satisfied Rule 16a-1’s “opportunity to profit” standard. The panel did not require tracing to specific trades or parsing whether particular executions were for customers; the dispositive issue was control and ready access to the economic benefit of the account’s positions and proceeds.

Equally important, the court accepted the district court’s prior determinations that MintBroker and Gentile crossed the 10% beneficial ownership threshold during the relevant intervals in both issuers, a conclusion consistent with their own disclosures and the trading in the Interactive Brokers accounts.

Damages Phase Is Not a Second Bite at Liability

After summary judgment on liability, Gentile produced previously undisclosed, line-by-line internal trading data and offered experts to recast the trades as customer transactions. The magistrate judge and district court rejected this gambit as incompatible with the liability rulings (beneficial ownership and pecuniary interest had already been decided) and as failing the standards for reconsideration: the records were not newly discovered; they could have been obtained with reasonable diligence before the summary judgment decision; and consideration was not necessary to avoid manifest injustice.

The panel agreed. It emphasized adherence to the “law of the case,” explaining that once liability is decided, the damages inquiry cannot be used to re-open settled questions. It also affirmed exclusion of the expert reports under Rule 702 because they were premised on a factual theory that contradicted the liability holdings and did not “fit” the resolved issues being tried at damages.

Prejudgment Interest and Interest Rate Selection

The court reaffirmed that prejudgment interest is generally appropriate in §16(b) cases to ensure full disgorgement of wrongful gains. It rejected the notion that a court must specifically find insider-information misuse before awarding interest; equitable fairness and the remedial aims of §16(b) suffice.

On rate selection, the court endorsed using the IRS underpayment rate, reasoning by analogy to SEC disgorgement cases that the rate approximates the benefit derived from retaining the money and thus serves the goal of stripping the defendant of the full time value of ill-gotten profits. The district court also noted Gentile’s non-inadvertence and litigation delays—factors that further supported applying a robust prejudgment interest rate.

Impact

Control Equals Pecuniary Interest: For §16(b) purposes, a control person’s authority to access and withdraw funds and securities from a brokerage or clearing account is powerful evidence of “pecuniary interest,” even where trades are later characterized as customer-directed. Firms and principals should assume that real-time dominion over omnibus or proprietary accounts can satisfy Rule 16a-1(a)(2).
No Post-Liability Reboot via Late Evidence: Parties must marshal trading data and expert analysis before summary judgment. Attempting to reframe transactions as non-proprietary at the damages phase will be treated as a reconsideration motion and denied absent true new evidence, a change in law, or manifest injustice.
Prejudgment Interest Is the Norm in §16(b): The decision confirms that prejudgment interest can be awarded without findings of insider-information abuse. Courts in the Second Circuit remain likely to use the IRS underpayment rate in both SEC and private disgorgement contexts.
Litigation Conduct Matters: Findings of delay or tactical maneuvering can influence both the decision to award interest and the choice of rate, increasing exposure materially.
Standing Is Settled in This Circuit: Challenges to Article III standing for §16(b) claims are foreclosed by Packer; defendants should not expect traction for such jurisdictional arguments in the Second Circuit.
Practical Compliance Takeaways:
- Maintain clear segregation between proprietary and customer positions; avoid commingling in omnibus accounts where control persons can extract value.
- Document roles, authorities, and withdrawal rights; anticipate that control rights will be scrutinized under the “opportunity to profit” test.
- Produce trading data timely; late-record “surprises” can be excluded and may backfire.
- Expect prejudgment interest at IRS underpayment rates; factor this into settlement and risk assessments.

Note: As a summary order, the decision has no precedential effect under FRAP 32.1 and Local Rule 32.1.1. Nonetheless, it offers persuasive guidance on how Second Circuit panels are likely to analyze these recurring §16(b) issues.

Complex Concepts Simplified

Section 16(b) Short-Swing Liability: A strict-liability rule requiring “statutory insiders” (e.g., 10% beneficial owners, directors, officers) to disgorge profits from buying and selling (or selling and buying) the issuer’s stock within six months. No intent or use of inside information is required.
Beneficial Owner: Someone who, directly or indirectly, has voting or investment power or other forms of control over securities. For §16(b), crossing the 10% threshold triggers insider status.
Pecuniary Interest (Rule 16a-1): The opportunity to profit or share in the profits from a transaction. Authority to access, control, or withdraw the economic value of an account is strong evidence of such an opportunity.
Disgorgement: A remedy requiring surrender of wrongfully obtained profits to prevent unjust enrichment, here paid to the issuer.
Prejudgment Interest: Interest awarded for the period before judgment to compensate for the time value of money wrongfully held by the defendant. Courts in this context often use the IRS underpayment rate.
IRS Underpayment Rate: A rate set by the IRS for interest on tax underpayments, often used in disgorgement cases as a proxy for the benefit of retaining money over time.
Law of the Case/Reconsideration: Once a court decides an issue, it generally adheres to that decision throughout the case. Reconsideration requires showing an intervening change in law, genuinely new evidence that could not have been discovered with reasonable diligence, or a need to correct clear error or prevent manifest injustice.
Rule 702 (Expert Testimony): Expert opinions must be relevant and reliable and must fit the issues actually being decided. Opinions premised on facts that contradict settled rulings are subject to exclusion.

Conclusion

The Second Circuit’s summary order in Avalon Holdings Corp. v. Gentile offers clear, practice-oriented guidance on three fronts. First, a control person’s authority to extract value from a brokerage account—and actual withdrawals—establishes “pecuniary interest” under Rule 16a-1, supporting §16(b) liability when the 10% threshold is crossed. Second, parties cannot repurpose the damages phase to revisit liability via late-disclosed trading data or expert theories that could have been presented earlier; the proper, stringent reconsideration standards apply. Third, prejudgment interest remains an integral part of §16(b) remedies, and the IRS underpayment rate is an appropriate measure to fully deprive insiders of the time value of short-swing profits.

While nonprecedential, the decision reinforces the Second Circuit’s consistent approach to §16(b): emphasize control and opportunity to profit over formal labels, insist on procedural diligence, and use equitable tools like prejudgment interest to ensure full disgorgement. For trading firms, broker-dealers, and their principals, the message is straightforward—maintain rigorous separations between proprietary and customer activity, ensure transparent and timely production of trading records, and recognize that control over account proceeds is likely to be dispositive of pecuniary interest.