Bradley T. Smith, Exchange Act Rel. 55771 (May 16, 2007)

Sanctions based on civil injunction

Time between appeal and decision - 6 months, 30 days.
Time between last brief and decision - 4 months, 21 days.
Pages - 12

Comment

Respondent was barred from association with an investment adviser or broker-dealer by the administrative law judge based on a December 2005 permanent injunction (based on the SEC's summary judgment motion) in a civil action that prohibited, among other things, securities fraud in connection with private securities offerings. Respondent was ordered to pay a penalty of $120,000 and joint and several disgorgement and prejudgment interest with other defendants totaling $2.2 million. The Sixth Circuit upheld the judgment in December 2006. Respondent was formerly the president of an investment adviser registered in Ohio and a broker-dealer registered with the Commission.

The ALJ held a three day hearing. Why? This would seem to be a matter ripe for summary disposition. The Commission opinion does not indicate that the Division of Enforcement moved for summary affirmance of the ALJ's initial decision. Why not? This was a routine matter, yet both the Division, the ALJ, and the Commission spent substantial time and effort on a matter that could have been disposed of summarily. Summary disposition of this matter was particularly appropriate as respondent did not dispute the factual basis of the district court's injunctive order.

Key Points

• The Division of Enforcement introduced evidence concerning three offerings that were not subject of the district court injunctive action.
• In upholding the bars, the Commission found that respondent acted with scienter and egregiously as he diverted investor funds to purposes different from those discussed in the offering materials.
• Deterrence of others is an appropriate factor to consider in determining whether the sanction is appropriate.
• The Commission rejected a claim by respondent that the sanctions should be lessened because the district court found that he acted recklessly in concluding that he acted with scienter.
• Respondent did himself no favor by admitting at the hearing that his conduct amounted to "cutting corners" while at the same time arguing that he had accepted responsibility for his conduct.
• Respondent claimed that he was no longer in charge of the entities involved and that if he was permitted to reassociate there was no opportunity for future violations due to various procedures in place at the companies. The Commission rejected this claim, noting that nothing would prevent respondent from changing those arrangements or associating with different entities that did not have such safeguards.

Summary

The underlying violations involved series of five private placement offerings that were directed by respondent. The offerings purported to raise funds from investors, of which 80 percent would be invested in stocks of small community banks. In the first offering, only 9 percent was invested in bank stocks. In the second offering, only 21 percent was invested in bank stocks. The Commission adopted factual findings made by the district court concerning these offerings.

There were also three additional offerings by respondent. These offerings raised a total of about $1.7 million, of which none, 25 percent, and a less than 1 percent, respectively were invested in bank stocks.

In all five offerings, respondent spent considerable amounts on personal expenses. At the hearing before the ALJ, respondent expressed a desire to continue in the securities business.

The opinion applies the familiar Steadman v. SEC, 603 F.2d 1126 (5th Cir. 1979), aff'd other grounds, 450 U.S. 91 (1982) in finding the sanctions appropriate.

Respondent's primary argument against the bar was based on the testimony of officers and directors of the companies he formerly controlled that his guidance and expertise was necessary for the companies to continue in operation and that innocent shareholders would be damaged. The Commission rejected this argument due to the seriousness of the underlying violations and a finding that nothing would prevent the companies from finding other persons to provide the necessary expertise and advice. Further, the Commission found that the companies had sought bankruptcy protection and were operating at a loss.

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."

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.