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Bars Based on Criminal Convictions Upheld

David G. Ghysels and Kenneth E. Mahaffy, Jr., Exchange Act Rel. 62937, September 20, 2010

Time since appeal filed – 8 months
Time since last brief – 1 month 17 days

Ghysels and Mahaffy appealed the ALJs initial decision barring them from association with any investment advisor, broker, or dealer based on their criminal convictions for conspiracy to commit securities fraud. Not surprisingly, the Commission upheld the sanctions.

The convictions were based on charges that Ghysels and Mahaffy provided day traders to confidential information transmitted over their firm’s internal speaker system in exchange for cash payments and commissions. Mahaffy was sentenced to two years incarceration and Ghysels to three years probation.

The Commission takes the view that respondents are collaterally estopped from challenging “issues that were essential to the verdict” as set forth in the indictment and jury instructions.

As it does routinely, the Commission deemed respondents’ failure to concede wrongdoing as an aggravating factor arguing that this raises serious concern about the likelihood of future violations. It cites a single DC Circuit case Seghers v. SEC, 548 F.3d 129, 137 (2008) in support of this practice. While perhaps constitutional, such a practice is profoundly unfair and unnecessary. The Commission could easily uphold the bar based on the actual conduct for which the respondents were convicted.

Commission policy is to bar convicted individuals absent extraordinary mitigating circumstances. This application of the grandmother test (would you want this person handling your grandmother’s money?) is entirely appropriate.