Bloomfield v. U.S. Securities & Exchange Commission , 649 F. App'x 546 ( 2016 )

FILED
NOT FOR PUBLICATION
MAY 04 2016
UNITED STATES COURT OF APPEALS MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
RONALD S. BLOOMFIELD; ) No. 14-71133
JOHN EARL MARTIN, Sr., )
) SEC No. 3-13871
Petitioners, )
) MEMORANDUM*
v. )
)
U.S. SECURITIES & EXCHANGE )
COMMISSION, )
)
Respondent. )
)
On Petition for Review of an Order of the
Securities & Exchange Commission
Argued and Submitted April 6, 2016
Pasadena, California
Before: FERNANDEZ and BEA, Circuit Judges, and GONZALEZ ROGERS,**
District Judge.
Ronald Bloomfield (“Bloomfield”) and John Martin (“Martin”)
(collectively, “Petitioners”) petition for review of an order of the Securities and
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
**
The Honorable Yvonne Gonzalez Rogers, District Judge for the U.S.
District Court for the Northern District of California, sitting by designation.
Exchange Commission (the “Commission”) which imposed sanctions,
disgorgement remedies, and penalties upon Petitioners for their violations of the
Securities Act of 19331 and the Securities Exchange Act of 1934.2 We deny their
petition.
(1) Bloomfield and Martin were, at all relevant times, stock brokers
employed by Leeb Brokerage Services, Inc. (“Leeb”). Petitioners assert that the
evidence before the Commission was insufficient3 to support the Commission’s
determination that Petitioners violated Section 5 of the 1933 Securities Act by
selling unregistered securities in interstate commerce (without an exemption).4
Petitioners claim entitlement to the Section 4(a)(4) “Broker’s Exemption,” which
exempts from Section 5’s registration requirement “transactions by a broker in
1
15 U.S.C. §§ 77a–77aa (“Securities Act”).
2
15 U.S.C. §§ 78a–78pp (“Exchange Act”).
3
See World Trade Fin. Corp. v. SEC, 739 F.3d 1243, 1247 (9th Cir. 2014).
4
See 15 U.S.C. § 77e(a), (c) (hereafter all references to section numbers are
to 15 U.S.C. unless otherwise stated). We have previously held that “[t]o establish
a prima facie case for violation of Section 5, the SEC must show [only] that (1) no
registration statement was in effect as to the securities; (2) the defendant directly or
indirectly sold or offered to sell securities; and (3) the sale or offer was made
through interstate commerce.” See SEC v. CMKM Diamonds, Inc., 729 F.3d 1248,
1255 (9th Cir. 2013). “Once the SEC introduces evidence that a defendant [sold or
offered an unregistered security through means of interstate commerce] the
defendant then has the burden of proof in showing entitlement to an exemption.”
Id.2
which such broker . . . . [a]fter reasonable inquiry is not aware of circumstances
indicating that the person for whose account the securities are sold is an
underwriter with respect to the securities or that the transaction is a part of a
distribution of securities of the issuer.” 17 C.F.R. § 230.144(g) (emphases added).
Petitioners argue that the Commission, as part of its prima facie case, bore
the burden of showing that Petitioners do not qualify for the Broker’s Exemption.
We reject this argument as contrary to controlling precedent. See, e.g., World
Trade Fin. Corp. v. S.E.C., 739 F.3d 1243, 1247 (9th Cir. 2014); see also supra,
n.4.
Petitioners relatedly argue that there is no substantial evidence to support the
Commission’s finding that Petitioners were not entitled to the Broker’s Exemption
because there is no evidence that Appellants’ customers were in fact underwriters
or were in fact distributing securities on behalf of an issuer in violation of Section
5. We reject this argument as well. It is clear from World Trade that the
touchstone of the Broker’s Exemption is whether the broker’s inquiry into the
nature and source of the shares he sold was “reasonable” under the circumstances
of a given transaction—not whether the broker’s customers were actually acting as
underwriters. Id. at 1247–50. Here, there was substantial evidence to support the
Commission’s determination that neither Bloomfield nor Martin conducted the
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kind of “reasonable inquiry” required to qualify for the Broker’s Exemption with
respect to Petitioners’ transactions in the nine unregistered securities as to which
Petitioners have been charged with Section 5 violations. The record contained
evidence of many “red flags” that the Commission reasonably concluded should
have alerted Bloomfield and Martin to the need to conduct a “searching inquiry.”
Id. at 1248. There is also substantial evidence to support the Commission’s
determination that Petitioners, instead, did next to nothing. Petitioners’ suggestion
that they could, or properly did, rely upon others to investigate for them is contrary
to our holding in World Trade. Id. at 1248–49 (“[B]rokers rely on third-parties at
their own peril, and will not avoid liability through that reliance when the duty of
reasonable inquiry rests with the brokers.”). The Commission did not err.
(2) Bloomfield and Martin next assert that the evidence was insufficient
to support the Commission’s determination that they had violated the Exchange
Act by aiding and abetting5 the failure of Leeb, the broker-dealer at which
Petitioners were registered representatives, to file Suspicious Activity Reports
(“SARs”).6 Again we disagree. Preliminarily, if Leeb violated the SARs
5
See Ponce v. SEC, 345 F.3d 722, 737 (9th Cir. 2003); see also § 78t(e).
6
See § 78q(a); 17 C.F.R. § 240.17a-8; 31 C.F.R. § 1023.320(a)(1), (2); see
also 31 C.F.R. § 103.19 (a)(1), (2) (2005).
(continued...)
4
requirements, it was not necessary that Leeb, the principal, be charged in order to
establish the aiding and abetting liability of Bloomfield and Martin. See, e.g.,
United States v. Mann, 811 F.2d 495, 497 (9th Cir. 1987); see also United States v.
Lynch, 437 F.3d 902, 915 (9th Cir. 2006) (en banc) (per curiam). Moreover,
substantial evidence supports the Commission’s determination that the numerous
transactions engaged in by Bloomfield and Martin on behalf of their customers
constituted suspicious activity7 and that Leeb was required to file SARs regarding
that activity.8 Here, again, there were many red flags indicative of potential
Exchange Act violations: for example, that the securities involved were penny
stocks,9 that entities were buying certain securities while associated entities were
selling them,10 that the entities selling the securities were receiving those shares in
6
(...continued)
7
See Nat’l Ass’n of Sec. Dealers, Inc. (NASD), Special NASD Notice to
Members 02-21, Anti-Money Laundering 10–11 (2002) (hereafter “NASD
Notice”).
8
See 17 C.F.R. § 240.17a-8; Requirement that Brokers or Dealers in
Securities Report Suspicious Transactions, 67 Fed. Reg. 44,048, 44,050–51 (Jul. 1,
2002); Requirement of Brokers or Dealers in Securities to Report Suspicious
Transactions, 66 Fed. Reg. 67,670, 67,672–73 (proposed Dec. 31, 2001).
9
See NASD Notice at 11; see also § 78c(a)(51)(A); 17 C.F.R. § 240.3a51-1.
10
See NASD Notice at 10–11.
5
the form of large “deliveries” from unknown and thinly traded issuers, and that
proceeds from a large number of security transactions were being sent to a foreign
tax-haven.11
The evidence also supports the Commission’s determination that Bloomfield
and Martin intentionally, or at least recklessly, aided and abetted Leeb in its SAR
violations. Petitioners were undoubtedly the front line in the detection and
screening of suspicious transactions. There is substantial evidence to support the
SEC’s factual determination that Martin and Bloomfield knew or reasonably
should have known of the red flags listed above, and knowingly or recklessly
failed to investigate or take reasonable steps to ensure Leeb’s compliance with
SAR filing requirements.12
(3) Finally, Bloomfield and Martin assert that the penalties imposed upon
them were so disproportionate to their offenses that the Eighth Amendment to the
United States Constitution was violated. See United States v. Bajakajian, 524 U.S.
321, 327–28, 334 (1998); see also Balice v. U.S. Dep’t of Agric., 203 F.3d 684,
11
See id. at 11.
12
See Cohen v. NVIDIA Corp. (In re NVIDIA Corp. Sec. Litig.), 768 F.3d
1046, 1053 (9th Cir. 2014), cert. denied, __ U.S. __, 135 S. Ct. 2349, 192 L. Ed.
2d 143 (2015); Siracusano v. Matrixx Initiatives, Inc., 585 F.3d 1167, 1180 (9th
Cir. 2009); Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568–69 (9th Cir.
1990) (en banc).
6
698–99 (9th Cir. 2000). While the penalties were substantial, on the facts of this
case we disagree with their contentions. Their offenses were
extensive—Bloomfield and Martin engaged in a large number of transactions in
unregistered securities over a period of several years without investigating whether
the transactions in unregistered securities were lawful. The laws precluding that
kind of activity were well known to them, were specifically applicable to
individuals in their positions, and were largely ignored by them with the excuse
that others could stop the transactions.
Moreover, the penalty structure for this genre of offenses was carefully
graduated or tiered by Congress.13 And within that structure, the Commission is
given a good deal of flexibility. In fact, the Commission could have assessed a
separate penalty for each of the many sales involved, but, instead, limited itself to
one penalty per named security (nine of them) rather than one per sale. It also
added just one penalty for all of the SAR violations, regardless of the total number.
Finally, Bloomfield and Martin point out that the Commission did not show
the total loss to members of the public who were placed at risk by the improper
dealing. However, they ignore the inherent damage to the whole regulatory regime
13
See 15 U.S.C. § 78u-2(a), (b); see also 17 C.F.R. § 201.1003; 17 C.F.R. pt.
201, subpart E, tbl.III (2005).
7
that the Commission is obligated to protect and the harm that their participation in
the machinations of their customers could do to public confidence in the securities
market in general. Cf. Balice, 203 F.3d at 699. In sum, the Commission did not
abuse its discretion in applying its penalty structure to Petitioners’ offenses; nor
were the penalties so excessive as to violate the Eighth Amendment.
Petition DENIED.
8