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Bar of Enjoined Investment Adviser Upheld

Sherwin Brown and JAmerica Financial, Inc., IA Act Rel. 3217, June 17, 2011

Brown was a half owner and president of JAmerica, a registered investment adviser. In 2008 the district court issued a summary judgment order enjoining Brown and JAmerica. The court found that they had 250 clients and that Brown had misappropriated at used almost $900,000 of investor funds for non-investment purposes over and above his normal fees. In other words, he misappropriated investor funds. In the civil action the court prohibited Brown from submitting responses to the Commission's summary judgment motion as a sanction for his asserting the Fifth Amendment at a deposition.

The court found that Brown and JAmerica had violated the anti-fraud provisions of the Securities and Exchange Acts and the Advisers Act. In addition to the injunction, the court ordered Brown and JAmerica to disgorge $869,000, plus prejudgment interest of $226,000 and imposed a total of $480,000 of penalties against the two defendants.

The ALJ revoked JAmerica's adviser registration and barred Brown and JAmerica from associating with any adviser after finding that the conduct was egregious and recurrent.

Brown made various arguments contesting the district court proceedings upon which this case was based. The Commission takes the position that challenges to the findings of the district court in an earlier civil action are collaterally estopped and refuses to entertain them.

The Commission also rejected Brown's challenge to the summary disposition of the matter without an evidentiary hearing by the ALJ. It upheld the ALJ's decision based on Rule 250(b) that permits this if "there is no genuine issue with regard to any material fact and the party making the motion is entitled to a summary disposition as a matter of law." It noted that Brown's response to the motion did not create any genuine issues of fact necessitating an evidentiary hearing.

In upholding the sanctions the Commission noted:

We have held that antifraud injunctions merit the most stringent sanctions and that our "foremost consideration must . . . be whether [the] sanction protects the trading public from further harm." Thus, "an antifraud injunction can . . . indicate the appropriateness in the public interest" of a bar from participation in the securities industry and that "ordinarily, and in the absence of evidence to the contrary, it will be in the public interest to revoke the registration of, or suspend or bar from participation in the securities industry . . . a respondent who is enjoined from violating the antifraud provisions." (footnotes omitted)

In an interesting aside, the opinion noted that the Commission is not obligated to make its sanctions uniform on a case-by-case basis.