ACAP Financial, Inc. v. United States Securities & Exchange Commission , 783 F.3d 763 ( 2015 )

FILED
United States Court of Appeals
Tenth Circuit
April 3, 2015
PUBLISH
Elisabeth A. Shumaker
UNITED STATES COURT OF APPEALS Clerk of Court
TENTH CIRCUIT
ACAP FINANCIAL, INC.; GARY
HUME,
Petitioners,
v. No. 13-9592
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION,
Respondent.
Petition for Review of an Order of the
Securities and Exchange Commission
(SEC No. 3-15080)
Timothy R. Pack (Brent R. Baker and D. Loren Washburn with him on the briefs),
of Clyde Snow & Sessions, Salt Lake City, Utah, for Petitioners.
Benjamin L. Schiffrin, Senior Litigation Counsel (Anne K. Small, General
Counsel, Michael A. Conley, Deputy General Counsel, John W. Avery, Deputy
Solicitor, and Christopher Paik, Special Counsel, with him on the brief), of the
Securities and Exchange Commission, Washington, D.C., for Respondent.
Before GORSUCH, MURPHY, and MORITZ, Circuit Judges.
GORSUCH, Circuit Judge.
Greyfield Capital was a defunct Canadian company. That is, until a couple
of con men got their hands on a signature stamp belonging to the company’s
former president. The men made liberal use of that stamp, employing it to
appoint themselves corporate officers, issue millions of unregistered shares in
their names, and then embark on a classic penny stock pump-and-dump scheme.
They issued press releases touting Greyfield as a “premium automobile
dealership” experiencing “explosive growth” and “quickly becoming the
largest . . . in western Canada” — even though they never owned more than two
used car lots between them. For a while the scheme worked well: the stock’s
price rose and the con men made out selling their shares to the public. But as
these things usually go, the truth couldn’t be kept at bay forever and when it
emerged the stock’s value dropped, investors lost out, and authorities stepped in.
While the Greyfield culprits faced their problems, the investigation didn’t
end with them. Regulators began looking for those who had helped facilitate the
sale of Greyfield’s unregistered shares. And that eventually brought them to
ACAP and Gary Hume. ACAP is a penny stock brokerage firm in Salt Lake City
and Gary Hume was its head trader and compliance manager. Those behind the
Greyfield scheme kept accounts at ACAP and used the firm to sell their shares
and make their ill-gotten gains. The Financial Industry Regulatory Authority
(FINRA), a quasi-governmental agency responsible for overseeing the securities
brokerage industry, was none too pleased. Normally, a securities dealer may not
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sell a company’s stock to the public unless a registration statement disclosing the
details of its financial condition is first on file with the Securities and Exchange
Commission. See 15 U.S.C. §§ 77d-77g, 77aa. Of course, exceptions exist.
Sometimes, for example, a company may sell unregistered shares to “accredited
investors” considered sophisticated enough by virtue of their assets and
experience that they don’t need so much protection. Id. §§ 77b(a)(15), 77d(a)(5).
But, FINRA found, no exception to the registration requirement applied here so
the sales of unregistered Greyfield securities violated federal law. And, as
securities industry professionals, ACAP and Mr. Hume violated FINRA rules by
failing to take sufficient steps to guard against the firm’s involvement in the
unlawful trading of unregistered shares. See NASD Conduct R. 2110, 3010 (rules
in effect at the time of the violation).
ACAP and Mr. Hume don’t dispute their liability: the only questions
before us relate to remedy. After consulting its administrative “Sanction
Guidelines,” FINRA decided to fine ACAP $100,000 and Mr. Hume $25,000, and
to suspend Mr. Hume from the securities industry for six months. See FINRA,
Sanction Guidelines (2011). For its part, the SEC reviewed and sustained these
sanctions. See ACAP Fin., Inc., Exchange Act Release No. 70046, 2013 WL
3864512 (SEC July 26, 2013); see also 15 U.S.C. § 78s(d). Now ACAP and Mr.
Hume ask us to undo the decision. That is of course their right, though under
current law our review is seriously circumscribed. It’s sometimes said that we
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may “interfere with” a sanction imposed by the SEC pursuant to its statutory
authority only if it is “beyond the law,” “unsupported factually,” or “completely
lack[ing] reasonableness such that it is an abuse of the SEC’s discretion.” Rooms
v. SEC, 444 F.3d 1208, 1212 (10th Cir. 2006); see also Am. Power & Light Co. v.
SEC, 329 U.S. 90, 112-13 (1946) (instructing that the SEC’s choice of remedy is
“peculiarly a matter for administrative competence”). No one before us disputes
that these confining standards do and should control our review.
Instead, ACAP and Mr. Hume argue that they can satisfy them because
FINRA’s Sanction Guidelines reserve a six-month, all-capacity suspension like
Mr. Hume’s for “egregious” cases. Sanction Guidelines, supra, at 103. And, as
ACAP and Mr. Hume tell it, the SEC has defined “egregious” conduct to denote
the intentional or knowing violation of a regulatory duty or the breach of a
fiduciary duty — something that didn’t happen here. It’s an argument that sounds
promising on first encounter. After all, courts routinely fault agencies for
“arbitrary and capricious” decisionmaking when they change an administrative
policy without explanation. See 5 U.S.C. § 706(2)(A); FCC v. Fox Television
Stations, Inc., 556 U.S. 502, 515 (2009).
But it’s an argument that fails in this case in its essential premise. ACAP
and Mr. Hume do not identify any administrative rule or decision indicating that
the SEC has ever concluded that intentional or knowing violations, or breaches of
fiduciary duties, are necessary to a finding of “egregious” conduct. Instead, the
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administrative cases they cite suggest such behavior is sufficient to trigger that
vituperative epithet’s application. The agency’s case law leaves more than
enough room for the possibility that other forms of misbehavior might qualify as
“egregious.” And that means the petitioners’ argument fails on its own terms for
they cannot show that the agency has changed preexisting policy. See, e.g., SEC
v. First Pac. Bancorp, 142 F.3d 1186, 1193-94 (9th Cir. 1998); Kaminski,
Exchange Act Release No. 65347, 2011 WL 4336702, at *11 (SEC Sept. 16,
2011); Dawson, Investment Advisers Act Release No. 3057, 2010 WL 2886183, at
*3 (SEC July 23, 2010).
Confirming our conclusion on this score is World Trade Financial Corp.,
Exchange Act Release No. 66114, 2012 WL 32121 (SEC Jan. 6, 2012). In
deeming the supervisory failures in that case “egregious,” the SEC relied on the
fact that the parties had “ignored the obvious need for inquiry” into particular
trades despite a number of “red flags.” Id. at *14. The Ninth Circuit affirmed the
agency’s holding, expressing its view that the supervisors had “made no
reasonable efforts to carry out their legal duties.” World Trade Fin. Corp. v.
SEC, 739 F.3d 1243, 1250 (9th Cir. 2014). World Trade, then, found “egregious”
conduct in circumstances that didn’t involve the intentional or knowing violation
of a regulatory duty or the breach of a fiduciary duty. If anything, the errors there
were committed recklessly or maybe even negligently. The case, too, involved
conduct strikingly similar to Mr. Hume’s: like the World Trade supervisors, Mr.
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Hume ignored a number of warning signs that the Greyfield sales were illegal.
See ACAP, 2013 WL 3864512, at *10, 12. We readily acknowledge that World
Trade was decided after the events in this case took place. But all the same it
reveals that another circuit shares our understanding that the agency has never
understood the term “egregious” to require proof of intent, knowledge, or a
breach of a fiduciary duty as ACAP and Mr. Hume suppose.
Reading ACAP and Mr. Hume’s opening brief at times we wondered
whether they meant to pursue not only this argument but broader ones as well. In
places their brief appears to fault the SEC for having failed to give sufficient
content to the term “egregious” in past adjudicative proceedings, leaving
members of the securities industry without fair warning about when their conduct
might invite the epithet’s application. Certainly close cousins in the law’s large
clan of vituperative epithets (“wanton,” “wicked,” and “gross” come quickly to
mind) have proven anything but self-defining. See, e.g., Steamboat New World v.
King, 57 U.S. (16 How.) 469, 474 (1853); Daniels v. Williams, 474 U.S. 327, 334
(1986); Wilson v. Brett, (1843) 152 Eng. Rep. 737 (Exch.) 739 (opinion of Rolfe,
J.). Reading the opening brief we wondered, too, whether the petitioners meant to
suggest that it was arbitrary and capricious for the agency to use this adjudicative
proceeding to expand its definition of the term “egregious” beyond intentional
and knowing misconduct and breaches of fiduciary duties and then apply its
newly expanded definition retroactively to Mr. Hume. That’s certainly a species
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of argument with a long provenance of its own. See, e.g., SEC v. Chenery Corp.,
332 U.S. 194, 216-17 (1947) (Jackson, J., dissenting); Henry J. Friendly, The
Federal Administrative Agencies: The Need for Better Definition of Standards, 75
Harv. L. Rev. 863, 867 (1962); Stewart Capital Corp. v. Andrus, 701 F.2d 846,
848 (10th Cir. 1983) (identifying circumstances in which retroactive agency
adjudication can be an abuse of discretion).
But in their reply brief ACAP and Mr. Hume clarify that they aren’t
seeking to pursue any argument along these lines — and they even disclaim the
attempt. In their reply, they concede that the agency is permitted to flesh out the
meaning of the term “egregious” in successive adjudications; that its
administrative case law already “has fleshed out the contours of what constitutes
‘egregious’ conduct”; and that the SEC simply applied the epithet in this case in a
manner at odds with that definition. Pet’rs’ Reply Br. 3. So it is we are left with
no occasion to pass on any of the meatier arguments we imagined might be before
us and all that remains is the claim that the SEC has defined “egregious” to
require a showing of intentional or knowing misconduct or a breach of a fiduciary
duty and deviated from that definition here — a claim that as we’ve seen is easily
dispelled.
Attempting a different tack, ACAP and Mr. Hume next suggest that the
SEC acted arbitrarily by failing to consider certain mitigating factors identified in
FINRA’s Sanction Guidelines. And here again, in principle at least, they might
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have something: an agency’s unexplained failure to consult its own decisional
guidelines can be the makings of a claim of arbitrary decisionmaking and the
basis for reversal. See, e.g., Cotton Petroleum Corp. v. U.S. Dep’t of the Interior,
870 F.2d 1515, 1527 (10th Cir. 1989) (overturning a decision by the Secretary of
the Interior in part because “the Secretary simply failed to set forth, discuss and
analyze all of the factors his own guidelines . . . required of him”).
But in this instance it’s the record that stands in the way. Before the SEC,
ACAP and Mr. Hume pursued five mitigating arguments so we must limit our
analysis to them. See 15 U.S.C. § 78y(c)(1). And the record reveals that the SEC
considered them all. Take ACAP and Mr. Hume’s argument that they accepted
responsibility for their actions and implemented enhanced compliance procedures.
These are indeed listed as mitigating factors in the Sanction Guidelines. But the
SEC found that the petitioners accepted responsibility and sought to ensure
compliance only after FINRA launched disciplinary proceedings against them.
Meanwhile, the guidelines instruct the agency to ask whether a party took steps
toward responsibility and remediation “prior to detection.” Sanction Guidelines,
supra, at 6 (emphasis added). ACAP and Mr. Hume next point to the low price at
which the Greyfield stocks sold and the low value of the commissions the sales
generated, also mitigating factors mentioned in the guidelines. But the SEC
reasoned that these relatively modest figures were outweighed by the danger
posed by the large quantity of unregistered shares traded without supervision —
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an aggravating factor mentioned in the guidelines too. Id. at 24 (listing the
“[s]hare volume” as a relevant consideration); see also id. at 6 (noting that the
factors listed in the guidelines can be aggravating, mitigating, or both, and
directing adjudicators to weigh them as appropriate). Finally, ACAP suggests it
can’t afford the fines imposed on it. Yet the SEC rejected this argument because
ACAP didn’t provide the agency information about its financial circumstances.
Of course, the SEC didn’t buy the petitioners’ mitigation arguments. But
the duty to hear an argument doesn’t entail the duty to swallow it. Neither do
ACAP and Mr. Hume suggest that the agency should be forbidden from
“balancing” competing mitigating and aggravating sentencing factors and
assigning one or another greater or lesser weight (as it did here in deciding, for
example, that the quantity of shares involved outweighed their dollar value). Nor
do the petitioners argue that the agency is forbidden from making its balancing
judgments retroactively applicable to litigants like them. Instead and again,
ACAP and Mr. Hume present us only with a narrow challenge, disputing whether
the SEC offered a reasoned explanation for its decision to reject their mitigation
arguments. At least that much the agency did.
The cases on which ACAP and Mr. Hume most seek to rely underscore the
point. In PAZ Securities, Inc. v. SEC, 494 F.3d 1059 (D.C. Cir. 2007), the court
concluded that the SEC “mischaracterized the petitioners’ argument” in favor of
mitigation. Id. at 1065. In Saad v. SEC, 718 F.3d 904 (D.C. Cir. 2013), the court
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found that the SEC failed to discuss certain mitigating factors at all, dispensing
with them in a “blanket statement.” Id. at 914. Quite unlike in those cases, the
agency in this case analyzed each of the mitigation arguments presented to it and
offered particularized grounds for rejecting them. So it seems Mr. Hume’s cases
are perhaps instructive more as studies in contrast than resemblance to our own.
Moving to their final argument, ACAP and Mr. Hume suggest that the
remedies the SEC endorsed were too harsh. By statute, the SEC must set aside or
reduce any FINRA sanction that is “not necessary or appropriate in furtherance of
the purposes of [the act] or is excessive or oppressive.” 15 U.S.C. § 78s(e)(2).
For his part, Mr. Hume contends that the SEC’s decision to impose a six-month,
all-capacity suspension was inappropriate because his violations occurred only in
his role as a supervisor. But given the unrebutted evidence of extensive
supervisory failures in this case the agency concluded that Mr. Hume’s conduct
went so far as to cast doubt on his ability to carry out his obligations as a
securities professional in any capacity. No one before us disputes this much can
sometimes happen. See, e.g., Horning v. SEC, 570 F.3d 337, 346 (D.C. Cir. 2009)
(acknowledging that “problems in one area” can be “indicative of future risk in a
different area”). And, in fact, the six-month, all-capacity suspension the agency
issued is comparable to sanctions it has imposed in other cases with similar facts.
See, e.g., ACAP, 2013 WL 3864512, at *18 n.171 (collecting cases). Neither does
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Mr. Hume pursue any larger argument suggesting, say, that the agency’s past
practices themselves violate the statutory standard governing remedial sanctions.
Turning to the fines, ACAP and Mr. Hume argue that the amounts imposed
were excessive because they outstrip the commissions the firm earned on its
unlawful Greyfield sales. The problem here is that the profit to the firm or
individual under investigation is, once more, only one factor among many that the
SEC balances when fashioning a remedial sanction:
The seriousness of the offense, the corresponding harm to the trading
public, the potential gain to the broker for disobeying the rules, the
potential for repetition in light of the current regulatory and
enforcement regime, and the deterrent value to the offending broker
and others are all relevant factors to be considered in deciding
whether the sanction is appropriately remedial and not excessive and
punitive.
McCarthy v. SEC, 406 F.3d 179, 190 (2d Cir. 2005); accord, e.g., Siegel v. SEC,
592 F.3d 147, 158 (D.C. Cir. 2010). Neither, once more, do ACAP and Mr. Hume
challenge the SEC’s ability to employ multi-factor balancing tests in
adjudications when deciding what sanctions to issue (retroactively) to the case at
hand. They don’t dispute the fact that, applying its balancing test for setting
fines, the agency has in the past approved sanctions that greatly exceed any profit
earned by the party to be disciplined. See, e.g., World Trade, 2012 WL 32121, at
*4, 13, 15, petition for review denied, 739 F.3d 1243 (9th Cir. 2014) ($110,000 in
total fines for $9,270 in commissions); Busacca v. SEC, 449 F. App’x 886, 888-
89 (11th Cir. 2011) (per curiam) ($30,000 in fines for operational failures with no
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mention of profit or commissions); Midas Sec., LLC, Exchange Act Release No.
66200, 2012 WL 169138, at *5, 7, 17 (SEC Jan. 20, 2012) ($130,000 in total fines
for $2,200 in commissions). And they don’t dispute that the fines issued here
were well within the baseline range suggested by the Sanction Guidelines even for
“nonegregious” cases. Given all this, we again cannot see how we might overturn
the agency’s decision.
No doubt the open-ended nature of the multi-factor balancing tests the SEC
uses when setting sanctions could be attacked on a variety of potential grounds.
But the petitioners before us have repeatedly demurred when presented with the
opportunity to challenge the propriety of the SEC’s decisionmaking processes,
asking us only to decide much narrower questions — such as the consistency of
the results reached here with those in earlier cases. And when it comes to those
narrower questions, we are unable to discern any basis on which we might deem
the agency’s decision impermissible under the standards of review that cabin our
involvement in this case. The petition for review is denied.
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