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Bradley T. Smith, Exchange Act Rel. 55771 (May 16, 2007)

Sanctions based on civil injunction

Time between appeal and decision - 6 months, 30 days.
Time between last brief and decision - 4 months, 21 days.
Pages - 12


Respondent was barred from association with an investment adviser or broker-dealer by the administrative law judge based on a December 2005 permanent injunction (based on the SEC's summary judgment motion) in a civil action that prohibited, among other things, securities fraud in connection with private securities offerings. Respondent was ordered to pay a penalty of $120,000 and joint and several disgorgement and prejudgment interest with other defendants totaling $2.2 million. The Sixth Circuit upheld the judgment in December 2006. Respondent was formerly the president of an investment adviser registered in Ohio and a broker-dealer registered with the Commission.

The ALJ held a three day hearing. Why? This would seem to be a matter ripe for summary disposition. The Commission opinion does not indicate that the Division of Enforcement moved for summary affirmance of the ALJ's initial decision. Why not? This was a routine matter, yet both the Division, the ALJ, and the Commission spent substantial time and effort on a matter that could have been disposed of summarily. Summary disposition of this matter was particularly appropriate as respondent did not dispute the factual basis of the district court's injunctive order.

Key Points

  • The Division of Enforcement introduced evidence concerning three offerings that were not subject of the district court injunctive action.
  • In upholding the bars, the Commission found that respondent acted with scienter and egregiously as he diverted investor funds to purposes different from those discussed in the offering materials.
  • Deterrence of others is an appropriate factor to consider in determining whether the sanction is appropriate.
  • The Commission rejected a claim by respondent that the sanctions should be lessened because the district court found that he acted recklessly in concluding that he acted with scienter.
  • Respondent did himself no favor by admitting at the hearing that his conduct amounted to "cutting corners" while at the same time arguing that he had accepted responsibility for his conduct.
  • Respondent claimed that he was no longer in charge of the entities involved and that if he was permitted to reassociate there was no opportunity for future violations due to various procedures in place at the companies. The Commission rejected this claim, noting that nothing would prevent respondent from changing those arrangements or associating with different entities that did not have such safeguards.


The underlying violations involved series of five private placement offerings that were directed by respondent. The offerings purported to raise funds from investors, of which 80 percent would be invested in stocks of small community banks. In the first offering, only 9 percent was invested in bank stocks. In the second offering, only 21 percent was invested in bank stocks. The Commission adopted factual findings made by the district court concerning these offerings.

There were also three additional offerings by respondent. These offerings raised a total of about $1.7 million, of which none, 25 percent, and a less than 1 percent, respectively were invested in bank stocks.

In all five offerings, respondent spent considerable amounts on personal expenses. At the hearing before the ALJ, respondent expressed a desire to continue in the securities business.

The opinion applies the familiar Steadman v. SEC, 603 F.2d 1126 (5th Cir. 1979), aff'd other grounds, 450 U.S. 91 (1982) in finding the sanctions appropriate.

Respondent's primary argument against the bar was based on the testimony of officers and directors of the companies he formerly controlled that his guidance and expertise was necessary for the companies to continue in operation and that innocent shareholders would be damaged. The Commission rejected this argument due to the seriousness of the underlying violations and a finding that nothing would prevent the companies from finding other persons to provide the necessary expertise and advice. Further, the Commission found that the companies had sought bankruptcy protection and were operating at a loss.