Timothy P. Pedgregon, Jr., Exchange Act Rel. 61791
Time since appeal–6 months 24 days
Time since last brief–3 months 19 days
A Finra member firm sought a ruling from Finra that it could employ Pedgregon as a principal and compliance officer and still remain a member. Pedgregon is statutorily disqualified due to a felony conviction for two counts of online solicitation of a minor for sexual contact. As a result Pedgregon is subject to the 10 year statutory disqualification. He is not permitted to associate with a Finra member without permission. Likewise, under Finra rules a firm is not permitted to allow a disqualified person to associate with it without Finra permission. Finra denied the application. Under Exchange Act Section 19(f) the Commission must dismiss appeals of such Finra actions if it finds that Finra's action was: 1) based on existing facts; 2) the action was in compliance with Finra rules; and 3) the rules were applied in a manner consistent with the purposes of the Exchange Act. The Commission therefore dismissed the appeal.
The Commission rejected Pedgegon's argument that Finra's action was unlawful because his felony did not involve securities related conduct. In doing so it noted that Congress in 1990 specifically amended the statutory bar language to give Finra discretion to base an exclusion order on any felony not otherwise specified in the statute.
Lexisnexis
Showing posts with label Criminal conviction. Show all posts
Showing posts with label Criminal conviction. Show all posts
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
Summary
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.
Discussion
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.
Comment
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.
Time since appeal filed – 1 year 3 months 14 days
Time since last brief – 9 months 4 days
Pages – 25
Footnotes – 88
Summary
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.
Discussion
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.
Comment
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.
Terry Harris, Investment Advisers Rel. 2622, July 26, 2007
Dismissal of Proceedings, criminal conviction
Pages - 4
The ALJ barred Harris from association with an investment adviser based on the Division of Enforcement's motion for summary disposition. The proceedings were based on his criminal conviction in Alabama. Since Harris' criminal conviction was reversed on appeal, it could no longer serve as a basis for proceedings under the Investment Advisers Act. There was insufficient evidence in the record to determine whether an Alabama cease and desist order against Harris was final (which could have been al alternative jurisdictional basis for the proceeding). The ALJ did not rely on that order in entering her order and made no finding of whether it was final. Therefore the proceedings cannot be based on that order. The proceedings were therefore dismissed.
Jose P. Zollino, Exchange Act Rel. 55107 (January 16, 2007)
Bar from association based on criminal conviction and permanent injunction prohibiting federal securities law antifraud violations.
Days between appeal and decision – 9 months, 6 days.
Days between last brief and decision – 5 months, 30 days.
Pages – 12
Comment
Respondent was criminally convicted and permanently enjoined. The ALJ found there was no genuine issue of material fact, and determined that Respondent had caused "enormous losses" to investors, that his conduct was "recurring and egregious", and evidenced a "high degree of scienter." The ALJ barred respondent from association with a broker-dealer or investment adviser. The ALJ's decision was based on the Division of Enforcement's motion for summary disposition. Thus, there was no evidentiary hearing.
One has to wonder why there was no summary affirmance here by the Commission of the ALJ's initial decision. The opinion itself recognizes that the Commission has previously ruled that "absent 'extraordinary mitigating circumstances,' an individual who has been criminally convicted in connection with activities related to the purchase or sale of securities cannot be permitted to remain in the securities industry."
Days between appeal and decision – 9 months, 6 days.
Days between last brief and decision – 5 months, 30 days.
Pages – 12
Comment
Respondent was criminally convicted and permanently enjoined. The ALJ found there was no genuine issue of material fact, and determined that Respondent had caused "enormous losses" to investors, that his conduct was "recurring and egregious", and evidenced a "high degree of scienter." The ALJ barred respondent from association with a broker-dealer or investment adviser. The ALJ's decision was based on the Division of Enforcement's motion for summary disposition. Thus, there was no evidentiary hearing.
One has to wonder why there was no summary affirmance here by the Commission of the ALJ's initial decision. The opinion itself recognizes that the Commission has previously ruled that "absent 'extraordinary mitigating circumstances,' an individual who has been criminally convicted in connection with activities related to the purchase or sale of securities cannot be permitted to remain in the securities industry."
The Commission reasoned that one reason a bar was necessary was that the Respondent had failed to show remorse and consequently there is a strong likelihood that he is capable of repeating his misconduct. Query as to why the Commission makes this argument given the fact that it could be applied to any Respondent who contests the allegations of the Division of Enforcement.
Key points
- A prosecutor's statement of fact at criminal plea proceeding may be used in determining sanction in Commission administrative proceeding based on a criminal conviction.
A court's entry of summary judgment may form the factual or legal basis for imposing sanctions. - Sanctions may be based on a criminal conviction and civil injunctive order and the respondent may not use this forum to collaterally challenge those previous proceedings. The parties are free to offer evidence concerning the "circumstances surrounding" those matters as public interest factors in determining an appropriate sanction.
- A pending appeal of a criminal conviction that is in part the basis of the sanction does not prohibit the Commission from entering an appropriate sanction.
- A respondent may not expand the issues on appeal beyond those stated in his petition for review by "incorporating" in his appeal briefs "all issues" previously raised before the ALJ.
- Respondent's failure to acknowledge his wrongdoing or show remorse or acknowledgment of his guilt shows a significant risk he would repeat his conduct and supports the imposition of a bar from association.
Summary
This is the second time this matter has been before the Commission. In September 2004 an Administrative Law Judge barred respondent, but on appeal in April 2005 the Commission remanded because Respondent claimed that he had not had sufficient time to review the investigative file and the ALJ's failure to hold a prehearing conference. On remand the ALJ barred respondent based on the Division of Enforcement's motion for summary disposition. The ALJ found there was no genuine issue of material fact, and determined that Respondent had caused "enormous losses" to investors, that his conduct was "recurring and egregious", and evidenced a "high degree of scienter." The Commission found nothing in the record to dispute these conclusions.
The respondent was formerly an associated person of broker-dealer and investment adviser and was criminally convicted for conspiracy to commit fraud, and money laundering. He was also enjoined permanently from violating antifraud provisions. The Commission upheld the ALJ's decision imposing a bar from association with any broker, dealer, or investment adviser. Respondent was pro se.
Respondent raised $470 million from 1,000 investors claiming he would invest in CDs and U.S. Treasury instruments. Instead he invested in highly speculative emerging market investments. He was ordered in the criminal case to make restitution to investors of $342 million.
Respondent stated at the hearing on his criminal guilty plea that he agreed that the government could prove that facts alleged at the hearing with the exception that he disputed the government estimate of the amount of the loss.
The Commission obtained its permanent injunction based on the guilty plea. Respondent claims to have a pending appeal challenging his conviction, but the Division of Enforcement disputed that claim.
Respondent may not challenge the underlying criminal conviction or permanent injunction in this proceeding.
The Commission found a bar appropriate because Respondent acted with a high degree of scienter and that his conduct was egregious.
Subscribe to:
Posts (Atom)