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Conviction For Lying Under 18 U.S.C. § 1001 Grounds For Bar - Double Jeopardy Defense Rejected

Gary M. Kornman, Exchange Act Rel. 59403, February 13, 2009

Time since appeal filed – 1 year 3 months 14 days
Time since last brief – 9 months 4 days
Pages – 25
Footnotes – 88


Kornman pled guilty in federal court of lying to the SEC in violation of 18 U.S.C. § 1001 in July 2007. The Commission upheld the ALJ's bar from associating with any investment adviser, broker, or dealer.

The decision is significant as it reiterates the fact that an administrative bar is not punishment for purposes of double jeopardy purposes.


Kornman was part owner and a registered rep with Heritage Securities a registered broker-dealer that sold variable life insurance and annuities. He was also the manager of an investment adviser that managed two hedge funds. According to his plea agreement Kornman told SEC staff in a telephone interview that he did not know who had trading authority over the brokerage accounts that traded on behalf of the hedge funds despite knowing that he personally had such trading authority. In his plea he admitted the statement was intentionally false, material and made for the purpose of misleading the Commission in its investigation of his trading activity. He was sentenced to two years supervised probation. He was ordered to pay a $143,000 fine.

Exchange Act § 15(b) authorizes disciplinary proceedings based on, among other things, any felony that "involves . . . the purchase or sale of any security, the taking of a false oath, the making of a false report . . . arises out of the business conduct of a broker, dealer, . . . [or] investment adviser . . . . [or] involves the violation of . . . chapter . . . 47 of title 18, United States Code . . . ." The Commission noted that § 1001 is a part of chapter 47 of title 18 of the United States Code. Further, since the Commission's investigation involved possible insider trading in the brokerage account of the hedge funds he managed Kornman's conduct arose out of the conduct of the business of a broker, dealer, or investment adviser.

Kornman was associated with an investment adviser because he was the general partner of a hedge fund. The Commission may sanction persons who are investment advisers even if they are exempt from registration under the Advisers Act. Teicher v. SEC, 177 F.3d 1016, 1017-18 (D.C. Cir. 1999).

Kornman's defense was based on an argument that the Commission had no jurisdiction because his offense was not in connection with the purchase or sale of securities. The Commission rejected this claim based on the fact that the statute does not require that the conviction involve either securities fraud or be "in connection with" the purchase or sale of a security.

The Commission also rejected Kornman's argument that it had no jurisdiction because by the time the proceedings were instituted he was no longer associated with a regulated entity at the time of his conviction. This argument was rejected because the statute requires only that the person be associated at the time of the conduct, here the false statements to SEC staff.

Kornman also made numerous arguments that were collateral attacks on his conviction and the admissions he made in his plea agreement. He is collaterally estopped from attacking either in this proceeding.

Kornman claimed his due process rights were violated because the ALJ ruled against him based on a motion for summary disposition and did not hold an evidentiary hearing. There is no due process right to a hearing before an administrative body when there are no contested issues of fact.

Kornman argued that the bar was a violation of the double jeopardy clause because the bar was tantamount to a second criminal punishment. The Commission has previously rejected this argument – see William F. Lincoln, 53 S.E.C. 459. Further the courts have long held that an industry bar and other regulatory sanctions not to be criminal punishment for double jeopardy purposes. See, e.g., Cox v. CFTC, 138 F.3d 268, 272 (7th Cir. 1998)(industry bar); SEC v. Palmisano, 135 F.3d 860, 864-865 (2d Cir. 1998)(disgorgement and civil penalty).

Last Kornman argued that because the SEC appeared at his sentencing and requested a penalty in lieu of disgorgement in its then pending civil case res judicata prevented a subsequent proceeding. There was no claim preclusion here because the two causes of action are not identical and there was no privity between the Department of Justice and the SEC. Further, Kornman's plea acknowledged that the Commission could bring future administrative proceedings against him.


This proceeding was clearly delayed substantially by the Commission's insistence that Kornman be given an oral argument on his claims. It is passing strange that the Commission would approve the ALJ's granting of a motion for summary disposition – rejecting Kornman's claim that he was required to be given an evidentiary hearing – and at the same time delay its own resolution of the appeal by insisting on giving Kornman an oral argument. The Commission has long insisted on allowing oral arguments on appeal when the case clearly raises no novel or unique issues. It is well known among defense counsel that a sure way to delay resolution of a Commission administrative case is to request oral argument. The Commission should stop granting oral arguments as a matter of routine and reserve them for the truly rare cases that raise difficult factual or legal issues. Indeed this case is a perfect example of why oral argument is not appropriate in routine cases. Here, the Commission's decision was issued a mere one month and six days after the oral argument.