Enjoined Rep Barred

Phillip J. Milligan, Exchange Act Rel. 61790, March 26, 2010

Time since appeal–6 months 10 days
Time since last brief–2 months 7 days

This was a no brainer. Milligan had been criminally convicted and enjoined after taking $93,600 in secret payments from a promoter (bribes) to recommend a stock to his customers. His conviction was 12 years ago. The SEC's injunctive action was brought in 2009. Although one has to wonder why it took the SEC so long to bring both the injunctive action and this proceeding, the results are not surprising.

Enjoined Rep Barred After Involvement In Mutual Fund Frequent Market Timing Trades

Scott B. Gann, Exchange Act Rel. 59-729, April 8, 2009

Time since appeal filed – 6 months 10 days
Time since last brief – 3 months 23 days
Pages – 9
Footnotes – 23

Summary

Gann was a senior vice-president of Southwest Securities a registered broker-dealer and investment adviser. He was enjoined from further anti-fraud violations and as a result was barred by the ALJ from association with a broker-dealer or investment adviser. The Commission affirmed the bar on appeal. Gann's injunction came in a Commission action that alleged he had facilitated frequent market timing mutual fund trades by a firm client. Among other things, the district court found that Gann continued to facilitate the timing trades after the mutual funds attempted to block the client from further trading. The Commission opinion noted that this was strong evidence of scienter. The Commission rejected Gann's argument that his conduct had not been recurring, noting that it spanned eight months and involved $650 million of trades at 165 mutual funds.

Comment

Why does the Commission continue to issue opinions in these cases when it has the ability to summarily affirm the ALJ's decision? It has previously ruled that "ordinarily, and in the absence of evidence to the contrary, it will be in the public interest to . . . bar from participation in the securities industry . . . a respondent who is enjoined from violating the anti-fraud provisions."  What was not ordinary about this case such that an opinion was needed?

Enjoined Rep and Investment Adviser Barred

Justin F. Ficken, Exchange Act Rel. 58802 (October 17, 2008)

Time since appeal filed - 7 months 4 days

Time since last brief - 25 days

Pages - 9

Footnotes - 37

Summary

Ficken was associated with Prudential Securities.  He was enjoined from violations of the anti--fraud provisions in 2007 based on allegations he had assisted customers in market timing of mutual funds.  He was also ordered to pay disgorgement of $589,000.  His appeal is pending in the First Circuit.  In 2008 he pled guilty to two counts of securities fraud arising from the same conduct.  An ALJ barred Ficken based on the injunction.  The Commission sustained the sanction on appeal. 

Discussion

Ficken had five clients, but used more than 170 brokerage accounts to evade mutual fund restrictions on frequent trading.  When funds blocked trades by Ficken controlled accounts, he opened new accounts to evade the funds' trading restrictions.  The trial court found Ficken acted with a high degree of scienter and that his fraudulent conduct extended over an extended period.  

The Commission noted the appropriateness of a bar where the previous violations involve fraud as "the securities business is one in which opportunities for dishonesty recur constantly." The Commission cited Ficken's numerous emails to clients advising them how to evade mutual fund trading restrictions.

The opinion rejected Ficken's attempt to lessen the sanction by comparing his situation with a sanctions in other settled market timing cases. The Commission reiterated its long standing policy that settled matters should not serve as a guide in evaluating sanctions against persons who do not settle.

Comment

The Commission has recently been stepping up the speed of opinions since three new Commissioners came on the scene.  This is important if sustained as it will reduce the incentive of respondents to file meritless appeals due to the anticipation of a lengthy stay pending appeal.  The Commission could of course speed up the resolution of routine cases such as this by summarily affirming the ALJ.  

The Commission will rarely impose any sanction less than a bar where an individual has been enjoined based on fraud.

Given the egregious violations it is unfortunate that the Commission continues its penchant for justifying sanctions based on Ficken's "failure to acknowledge the wrongful nature of his actions or show remorse . . . ."  It just isn't right to appear to sanction someone for vigorously defending himself. 

Bar For Enjoined IA - No Investor Losses

Jeffrey L. Gibson, Exchange Act Release 57266

Time between appeal and decision - 1 year, 3 months, 22 days.

Time between last brief and decision - 1 year 17 days.

Time since oral argument - 5 days.

Pages - 11

Footnotes - 33

Summary

Gibson was barred from investment adviser or broker-dealer association by the ALJ based on a previous injunction for violations of the anti-fraud provisions of the securities laws.  He sold 43 limited partnership interests to 38 investors for about $875,000 in a business that intended to buy and operate coin operated car washes.

Instead of investing the funds as specified, Gibson misappropriated about $450,000 of the money he had raised from investors by investing the funds in other commercial real estate. Gibson had also told investors that investor funds would be invested in money market funds until car washes could be acquired.  Gibson also sent post-investment lulling letters to investors the purported to describe rates of returns from various properties, without telling investors that the funds had not been used as claimed in the offering materials.

He consented to a district court injunction and he was ordered to pay a penalty of $25,000 and to disgorge $427,000 to investors.  He liquidated the commercial real estate to pay the penalty and disgorgement amounts.

At the trial before the ALJ the Division of Enforcement moved for summary disposition.  Thirty-one investors filed substantially identical declarations claiming to "ratify" Gibson's actions and stating they wished him to remain their investment adviser.  The ALJ granted the Division's motion.

Using the standard factors set out in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979) in determining what sanctions are in the public interest, the Commission upheld the ALJ's bar.  Here, the Commission found that Gibson's misappropriation occurred over a three year period, involved several types of misconduct, and involved a large number of his clients.  It also concluded that Gibson's conduct exhibited a high degree of scienter.

Comment

Again the lesson is simple.  Enjoined investment advisers who have court orders prohibiting anti-fraud violations will be barred even when there are no investor losses.

Further, the Commission will ignore the wishes of investors.  Indeed, it found that Gibson's ability to retain the confidence of his investors was testament to his persuasiveness and hence his potential ability to engage in similar misconduct in the future.

One must wonder why the Commission exercised its discretion to hear oral argument in this matter as no novel or significant issues are presented for decision.  Indeed, the Commission rejected Gibson's objection to the ALJ's granting of summary disposition finding summary disposition to be appropriate because "there is no genuine issue with regard to any material fact. . . ."  The lack of novel factual or legal issues is further underscored by the fact that the opinion was rendered only five days after the argument.  Under these circumstances, the Commission's decision to wait one year and 12 days to hear oral argument is puzzling.  If there were no issues of material fact confronting the trial judge, and the opinion itself relies on extensive Commission precedent, it is puzzling that: 1) the Commission even decided to hear oral argument; and 2) it took more than a year to schedule the oral argument.