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Conrad P. Seghers, Investment Advisers Act Rel. 2656, September 26, 2007

Injunction as basis for IA Act sanction, summary disposition.

Time from appeal to decision - 6 months, 25 days.
Time from last brief to decision - 4 months 9 days.
Pages - 16


Respondent appealed an ALJ's initial decision barring him from association with any investment adviser.  He was permanently enjoined from violating the anti-fraud provisions of the securities laws in 2006 after a trial before a jury.  Both the SEC and defendant appealed to the court of appeals.  Respondent had solicited investments in a fund and provided inflated valuations of fund assets that were incorporated into monthly statements sent to fund investors.  The overvaluations reported to investors ranged from 47% to 77% for four months in 2001 and totaled between $23 and $24 million.  Respondent also personally invested in the funds, eventually losing more than $900,000.  The district court found that he acted "knowingly and recklessly."

The ALJ granted the Division of Enforcement's motion for summary disposition.  

Respondent made three arguments on appeal.  1) the proceeding should be stayed pending disposition of his appeal of the district court injunction; 2) summary disposition was wrong, he should have had an evidentiary hearing; and 3) the sanction was excessive.
As to the first claim, the Commission noted that it has statutory jurisdiction regardless of whether an appeal is pending of the inunction that forms the jurisdictional basis for the proceeding.

Respondent claimed that summary disposition is inconsistent with the statutory right that sanctions be "on the record after notice and opportunity for hearing."  The Commission ruled that the statute does not require a evidentiary hearing.  Summary disposition is appropriate in administrative proceedings where there are no genuine issues of fact in dispute (citing First Second, Ninth, and D.C. Circuit cases).  It did note that in proceedings based on injunctions or convictions, that an evidentiary hearing might be appropriate in the rare  situation where there are genuine factual issues concerning facts that could mitigate Respondent's conduct.  It found Respondent here did not meet that burden because he could show no specific evidence of mitigation likely to result fro such a hearing.  The facts he suggested were relevant were an apparent attempt to contest the district court's findings, which are not properly subject to collateral attack.  Respondent is collaterally estopped from challenging both the injunction and the underlying factual findings upon which the injunction was based.  The fact that investors would have testified in Respondent's favor was not contested by the Division and was therefore considered in determining the appropriate sanction does not entitle him to a hearing.     

The permanent bar imposed by the ALJ was upheld.  Respondent's conduct was egregious.  Respondent engaged in fraud in his role as an investment adviser, a role which involves the an affirmative duty to act as a fiduciary. His claims to have learned from this experience such that  he no longer represents a danger to investors is outweighed by the seriousness of his previous violations.  


The opinion's disposal of Respondent's argument that he was unfairly charged with lack of remorse by the Division of Enforcement for pursuing his appeal involves limited discussion and analysis, and a statement by the Commission that he is nevertheless entitled to vigorously defend himself.   This ipse dixit pronouncement, without analysis is a concern as the Commission continues to adopt a seemingly inconsistent position.  One the one hand, lack of remorse is a "public interest" factor evaluated in determining sanctions.  One the other, the Commission claims that a respondent may nevertheless vigorously defend himself without penalty.  This opinion is not helpful in reconciling these positions.

Key Points
  • Unless it is vacated, a permanent injunction is a valid statutory basis for administrative proceedings, regardless of whether an appeal is pending.  citing, among other cases, Michael T. Studer, Exchange Act Rel. 50411 (9/20/04), 83 SEC Docket 2853, 2859 ("[T]he fact that [a respondent] is still litigating [an injunctive] action does not affect our statutory authority to conduct this proceeding.").
  • While one factor the Commission considers in assessing sanctions is the respondent's recognition of the wrongful nature of his conduct, failure to acknowledge conduct as wrongful is consistent with the right to defend against the charges.
  • Summary disposition is usually appropriate when a proceeding is based on an underlying injunction or criminal conviction.
  • A Respondent may be entitled to an evidentiary hearing where a proceeding is based on an injunction or criminal conviction in the rare instance where he can put forward specific evidence that could mitigate his conduct.  Respondent has the burden of specifying such evidence in  order to be entitled to a hearing and will not be permitted to collaterally attack findings in the underlying proceeding.
  • The IA Act prohibits both affirmative fraud and failure to disclose.
  • False representations about the performance of an investment fund by an investment adviser constitutes a "serious abuse of trust."
  • Because the sanctions are not intended to punish, but to protect the public, the fact that Respondent lost large amounts of his personal investments is not relevant in determining the sanction as it is designed to protect the public from repeat violations by Respondent as well as to deter others from similar violations.  
  • Evidence from individual investors that they did not think Respondent defrauded them is irrelevant as the Commission considers the welfare of investors as a class, and not the interests of a particular set of investors.
  • General deterrence by itself does not justify a sanction, but it is a factor that may properly be considered.