Disgorgement and Penalties Upheld – Will Be Inevitable Where There Is Egregious Fraud Regardless Of Inability To Pay

Maria T. Giesige, Exchange Act Rel. 60000, May 29, 2009


Time since appeal filed – 6 months 30 days
Time since last brief filed – 4 months 24 days
Pages – 13
Footnotes – 27

This is an important decision. Although the Commission could have imposed the monetary sanctions because the evidence was not introduced at trial it ruled that due to the egregious nature of the fraud penalties and disgorgement would have been imposed in any event.

The Commission ruled that disgorgement is appropriate, regardless of respondent's inability to pay because she "received this money as compensation for the very transactions that constituted the violations . . . ." It also upheld third tier penalties of $500,000 noting that inability to pay is "but one factor" to be considered. "Where the egregiousness of [the] conduct outweighs any consideration of . . . inability to pay . . . the public interest requires that the civil penalty be imposed."

This appears to be a significant tightening of the Commission's position. This case means that inability to pay will not automatically result in the Commission deciding not to impose disgorgement or penalties and that when there is significant fraud disgorgement and penalties are all but inevitable.

Giesige was associated with a broker-dealer and later registered as an investment adviser. The ALJ found that she made material misstatements and omitted material facts in selling securities of Carolina Development Co., sold unregistered securities, and also acted as an unregistered broker-dealer because because she sold away by not notifying her employer of her sales. The ALJ entered a cease and desist order, barred from association with a broker, dealer, or investment adviser, ordered disgorgement of $21,000 and ordered her to pay a $500,000 penalty.

The Commission upheld the ALJ's findings and sanctions. Giesige did not challenge the findings of violations on appeal. Nor did she challenge the cease and desist order or the bars. She asked that the disgorgement and penalty amounts be removed due to her inability to pay.

Discussion

Giesige was a rep from 1986 until 2007. In 2005 and 2006 on her recommendation fifty of her clients bought $1.49 million of Carolina Development securities. Giesige and her husband personally invested $29,000 in Carolina. Carolina purported to be in the real estate development business and touted the prospect of an impending public offering of its stock. It never registered its securities with the SEC and it took no steps to consummate an IPO. Its securities traded on the OTC bulletin board. In late 2005 the Commission sued Carolina and obtained a preliminary injunction and the appointment of a receiver. The receiver found that Carolina had no business revenues. Its only source of money was new investors from whom it had raised $52 million. Its only assets were real estate and it had no financial books and records. The receiver liquidated the company for $8 million.

Giesige gave offering materials to customers that she admitted she did not understand. She made no effort to verify any of the information. Although the company claimed its financial statements were audited she never obtained a copy of the audited financials. Some of her customers testified that in recommending Carolina securities she gave the impression she had done substantial due diligence. Giesige received $21,000 in commissions and 13,900 shares of Carolina stock in sales commissions. She also claimed that an IPO at $9 per share was imminent despite knowing that the stock was quoted in the pink sheets for $.30 per share. She also made price projections – claiming that the price of the stock would rise from $3 to $9 per share in a few months. Most of her customers were unsophisticated and had limited income and savings. Many borrowed against their IRAs to fund their investments. She did not notify her broker-dealer employer of her sales of Carolina stock.

Despite being represented by counsel Giesige offered no evidence at the trial of her inability to pay disgorgement or penalties. She tried to introduce evidence of her financial condition in her post-trial brief. The ALJ refused to allow this evidence as untimely. The Commission specifically upheld this ruling by the ALJ based on Commission Rule 340(b) that requires post-trial submissions to cite to evidence in the trial record. Inability to pay must be introduced at trial in order to allow the Division of Enforcement to contest it.

Finally, the Commission found that Giesige's conduct was so egregious that it would not waive disgorgement or penalties in any event. It found her fraud knowing or extremely reckless.

Comment

The Commission announces that it will not waive disgorgement or penalties based on inability to pay where the fraudulent conduct was knowing or extremely reckless. Practitioners should also note that the Commission will not consider inability to pay evidence that is not introduced at trial. Attempting to introduce such evidence in post–trial briefs will not be countenanced.

David Disraeli and Lifeplan Associates, Inc., Exchange Act Rel. 56045, July 11, 2007

Order denying motion to take SEC staff depositions

Summary

The Commission denied respondent's motion requesting that the Commission order the depositions of two staff members.  The Commission's Rules of Practice are very restrictive and permit depositions only under specific limited circumstances.  Rule 233 permits depositions only when the witness will be unable to attend the hearing due to age, sickness, infirmity, imprisonment, or absence from the U.S.  Depositions are also permitted in the "interests of justice." 

Depositions in SEC proceedings are not intended as a discovery mechanism.  The hearing had already been concluded.  Under Rule 452, leave to adduce additional evidence after the hearing closes is permitted under very limited circumstances.  Here, respondents failed to explain their failure to subpoena the staff members in question to testify at the hearing itself.  Further, respondents claimed that their purpose in seeking the testimony of an enforcement attorney was to show that the staff's investigation was not objective.  The Commission dismissed this argument noting that the ALJ's initial decision was based on the evidence submitted during the hearing, not the underlying investigation.  Their request to depose a staff accountant was denied because she testified at the hearing and was available for cross examination. 

Comment 

Please note that the Commission seems to regularly post decisions to its web site a long time after those decisions are actually rendered.  They are posted in chronological order by date of decision, not date of posting.   This, and several other decisions have only recently been posted.  Thus, one must go back through the posted decisions on a regular basis to determine if old decisions have only recently been posted.  That is the reason you see July decisions with October posting dates.