Collins v. Securities & Exchange Commission , 736 F.3d 521 ( 2013 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 24, 2013 Decided November 26, 2013
No. 12-1241
MATTHEW J. COLLINS,
PETITIONER
v.
SECURITIES AND EXCHANGE COMMISSION,
RESPONDENT
On Petition for Review of Order of
the Securities & Exchange Commission
Robert G. Heim argued the cause for the petitioner. With
him on the briefs was Erik S. Jaffe.
Paul G. Alvarez, Attorney, Securities and Exchange
Commission, argued the cause for respondent. With him on
the brief were Michael A. Conley, Deputy General Counsel,
Jacob H. Stillman, Solicitor, and Mark Pennington, Assistant
General Counsel.
Before: KAVANAUGH, Circuit Judge, and WILLIAMS and
SENTELLE, Senior Circuit Judges.
2
Opinion for the Court filed by Senior Circuit Judge
WILLIAMS.
WILLIAMS, Senior Circuit Judge: The Securities and
Exchange Commission found that Matthew J. Collins failed to
supervise a subordinate who violated various securities laws.
The SEC imposed a civil penalty of $310,000 under
§ 15(b)(4)(E) of the Exchange Act, among other sanctions.
Collins petitioned for review, arguing that the civil penalty
was arbitrary and capricious and violated the Excessive Fines
Clause of the Eighth Amendment. We uphold the
Commission’s decision.
* * *
Collins does not challenge the factual findings in the
Commission’s decision, and we draw our account of his
behavior in substance from that decision or from supporting
testimony. He started work at Prime Capital Services, an
SEC-registered broker-dealer, in 2001, and in due course was
assigned to be the supervisor for Eric Brown, who sold
financial products, including variable annuities. Collins
received training relevant to his role as a supervisor, and
signed declarations that he understood his supervisory
responsibilities under firm policy, as well as state and federal
law. Among his supervisory responsibilities, Collins was
expected to review and approve Brown’s transactions, and to
complete a monthly report on Brown’s activities.
The financial product in question, the variable annuity, is
a hybrid, containing elements of an ordinary long-term
investment in a security, an annuity, and life insurance. The
contract owner, typically the annuitant, selects an investment,
such as a mutual fund, for the purpose of growth. As with an
ordinary mutual fund, the value of the investment depends on
3
the performance of the asset. However, as in an annuity, but
unlike an ordinary mutual fund investment, a variable annuity
begins to make periodic payments to the annuitant at a
contractually set date. Moreover, taking a cue from a life
insurance policy, if the annuitant dies before the payments
begin, the variable annuity allows a beneficiary to receive the
value of the original investment, less withdrawals, and the
insurance company bears any losses in the underlying assets.
See SEC, Variable Annuities: What You Should Know,
available at http://www.sec.gov/investor/pubs/sec-guide-to-
variable-annuities.pdf.
Signs of lapses in Collins’s supervisory responsibilities
first appeared in August 2003, when the Florida Department
of Financial Services filed an administrative complaint against
Brown. The complaint alleged, among other violations, that
Brown had guaranteed certain customers a six-to-eight percent
return on their investments. Brown failed to respond to the
complaint and, on December 4, 2003, Florida revoked his
insurance license. Brown lied to Collins about the nature of
the administrative sanction, suggesting that it related to a
“mishap with the state of Massachusetts,” and that it was “no
big deal.” In the Matter of Eric J. Brown, et al., 2012 SEC
LEXIS 636, Admin. Proc. File No. 3-13532, at *11 (Feb. 27,
2012) (“SEC Opinion”). Collins did not investigate; in fact he
allowed Brown to continue marketing variable annuities, even
after he learned in February 2004 that Florida had revoked
Brown’s license.
After Brown appealed the license revocation, the state
reinstated his license in April 2004, pending appeal, on the
condition that he “not market annuities to individuals over the
age of 65 years, who are not currently his clients.” Id. at *12.
Despite the Florida restriction, Brown continued to market
annuities to such individuals, and Collins tried to conceal
Brown’s violations by falsely listing himself as the
4
representative on the sales. Although Collins claimed that the
clients were his, not Brown’s, the Administrative Law Judge
rejected this claim, pointing out that Brown’s handwriting
appeared throughout the customer accounts’ documentation.
And customers themselves testified that they had little or no
interaction with Collins. An internal review by Prime Capital
characterized Collins’s conduct as a “complete lack of
supervision,” an assessment with which Collins agreed at the
hearing. Id. at *14.
The Commission found, in particular, that Brown sold
variable annuities to five elderly customers during the period
of his restricted license. One of the five later withdrew from
the investment without penalty or other expense. Two
evidently suffered no financial loss other than the cost of
commissions collected by Collins. But two suffered
substantial losses, first because of withdrawal penalties
resulting from Brown’s unauthorized transfers of funds from
their pre-existing investments (over $60,000 between the
two), and second in the form of lost value increases in those
prior investments (allegedly totaling $459,000). These two
later filed a complaint with the National Association of
Securities Dealers (“NASD”), which led to an investigation by
the state of Florida. Collins settled the state’s administrative
case by paying a $5,000 fine and by accepting a one-year
probation on his insurance license. Prime Capital settled the
NASD complaint with a payment of $125,000, towards which
Collins contributed $25,000.
In June 2009, the SEC instituted proceedings against
Brown, Collins and other employees of Prime Capital
pursuant to the body of antifraud provisions in the Securities
Act of 1933, the Securities Exchange Act of 1934 (“Exchange
Act”), and the Investment Advisers Act of 1940. There
followed decisions by an ALJ and by the Commission, in
which, ironically, the Commission absolved Collins of one
5
charge of which the ALJ had found him liable, and lowered
the “tier” of punishment, yet imposed a much heavier civil
penalty. The ALJ found him liable as a primary violator of
the antifraud provisions, but the Commission reversed that
finding. On the substantive charge of failing “reasonably to
supervise” Brown under Exchange Act §§ 15(b)(4)(E) and
15(b)(6)(A), the ALJ and the Commission agreed. Those
sections create liability for a supervisor when his inadequate
supervision is coupled with a violation by his supervisee. 15
U.S.C. §§ 78o(b)(4)(E), (b)(6)(A).
The ALJ and the Commission imposed (among other
sanctions) a civil penalty under § 21B(a)(1) of the Exchange
Act. Id. § 78u-2(a)(1). That provision authorizes a civil
penalty in proceedings instituted pursuant to §§ 78o(b)(4) or
78o(b)(6) where the penalty is in the “public interest.”
Besides setting out six factors that the Commission “may
consider,” which we address shortly, the Act establishes three
tiers of maximum penalties “for each act or omission” that
violates the relevant securities laws, id. § 78u-2(b); two of the
tiers are relevant in this case. Second-tier penalties may be
imposed when the act or omission “involved fraud, deceit,
manipulation, or deliberate or reckless disregard of a
regulatory requirement.” Id. § 78u-2(b)(2). Third-tier
penalties may be imposed when, in addition, the act or
omission “directly or indirectly resulted in substantial losses
or created a significant risk of substantial losses to other
persons or resulted in substantial pecuniary gain to the person
who” violated securities laws. Id. § 78u-2(b)(3).
The ALJ found that Collins’s acts satisfied the third-tier
criteria, and imposed a single such penalty of $130,000. The
Commission found that Collins was properly subject only to
second-tier penalties. But it treated each of the five relevant
sales as “distinct and separate” acts or omissions, resulting in
five penalties aggregating $310,000. SEC Opinion at *60. It
6
also ordered him to disgorge $2,915, the total commissions on
sales to two customers; it excused any disgorgement of the
commissions (slightly exceeding $2000) paid by the two
customers whose NASD claim Prime Capital had settled for
$125,000, including $25,000 from Collins.
* * *
Collins challenges the Commission’s order on the
grounds that (1) the Commission abused its discretion when it
imposed a civil penalty of $310,000 without adequate
explanation, see 5 U.S.C. § 706(2)(A); Motor Vehicle Mfrs.
Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43
(1983), and (2) the civil penalty violates the Excessive Fines
Clause of the Eighth Amendment. We consider these
challenges in turn.
The statute requires that for a second-tier penalty the
offense must have involved “fraud, deceit, manipulation, or
deliberate or reckless disregard of a regulatory requirement,”
15 U.S.C. § 78u-2(b)(2); Collins concedes satisfaction of this
requirement. He also concedes that the Commission could
lawfully treat each unlawful transaction with a customer as a
particular “act or omission.” As for the “public interest,”
Congress guides the Commission’s discretion by pointing to
six factors: (1) “fraud,” etc., i.e., the feature required to be
present for a second-tier penalty; (2) the harm to other
persons; (3) the extent of unjust enrichment (taking into
account restitution paid); (4) previous SEC findings of the
violations by the offender; (5) the need to deter the offender
“and other persons”; and (6) a catch-all, “such other matters as
justice may require.” 15 U.S.C. § 78u-2(c).
The most serious strand of Collins’s argument that the
civil penalty was arbitrary or capricious is his characterization
7
of it as an unexplained departure from the Commission’s
practice of linking the penalty more closely with the
disgorgement amount. Here, the civil penalty is over 100
times that amount ($2,915).
In his original brief Collins invoked a set of federal court
cases with fairly close approximation between penalty and
disgorgement amount. E.g., SEC v. Yuen, 272 Fed. Appx.
615, 618 (9th Cir. 2008) (district court “well within its
discretion in setting the civil penalty equal to the
disgorgement amount”); SEC v. CMKM Diamonds, Inc., 635
F. Supp. 2d 1185, 1193-94 (D. Nev. 2009) (setting penalty
equal to disgorgement amount). The Commission argues in
its response that the cases in this set were governed by a
different statutory cap on civil penalties, § 21(d)(3) of the
Exchange Act, 15 U.S.C. § 78u(d)(3), which imposes ceilings
(in various tiers) as the higher of a specified dollar amount
(the same ceilings as under our statute) or the defendant’s
pecuniary gains (a figure that disgorgement is likely to track).
The SEC’s attempted distinction is unpersuasive: It is hard to
see why, with the same numerical ceilings as those to which
Collins was subject, the statute’s permission to break out
above the numerical ceiling in order to match the perpetrator’s
ill-gotten gains should result in a lower penalty-to-
disgorgement ratio than would the statute covering Collins.
Nonetheless, Collins’s use of the district court cases fails
to show any discrepancy in his treatment as he makes no
effort to hold constant the many other factors relevant to
determining civil penalties, which are discussed below.
Indeed, Collins’s reply brief recognizes that the disgorgement
amount is not the whole story, reframing his argument in far
more general terms—as a contention that “there must be some
sense of proportionality between the gain or injury and the
penalties exacted.” Reply Br. at 19.
8
In any event, in administrative proceedings before the
SEC, procedurally akin to the present matter, we seem to
observe civil penalties ranging from roughly one-half of the
disgorgement amount, In the Matter of Guy P. Riordan, 2009
SEC LEXIS 4166, Admin. Proc. File No. 3-12829 (Dec. 11,
2009) (ordering disgorgement of $938,353.78 and civil
penalty of $500,000), to about 25 times the disgorgement
amount, In the Matter of Maria T. Giesige, Admin. Proc. File
No. 3-12747, 2009 SEC LEXIS 1756 (May 29, 2009)
(ordering disgorgement of $21,105.03 and civil penalty of
$500,000). Thus, if we focus solely on the disgorgement
amount, the civil penalty here looks high relative to SEC
precedents.
The SEC tries a very broad defense of its action, citing
statements in our cases to the effect that it need not follow a
“‘mechanical formula’” when crafting sanctions, PAZ Secs.,
Inc. v. SEC, 566 F.3d 1172, 1175 (D.C. Cir. 2009) (quoting
Blinder, Robinson & Co. v. SEC, 837 F.2d 1099, 1113 (D.C.
Cir. 1988)), and that it is “not obligated to make its sanctions
uniform,” Geiger v. SEC, 363 F.3d 481, 488 (D.C. Cir. 2004).
But for a court not to require uniformity or “mechanical
formulae” is not the same as for it to be oblivious to history
and precedent. Review for whether an agency’s sanction is
“arbitrary or capricious” requires consideration of whether the
sanction is out of line with the agency’s decisions in other
cases. Friedman v. Sebelius, 686 F.3d 813, 827-28 (D.C. Cir.
2012).
Recognizing this, we nonetheless find that the penalty’s
relation to disgorgement does not render it arbitrary or
capricious. First, the $2,915 disgorgement imposed directly
on Collins understates his full disgorgement responsibility, as
he was excused disgorgement of slightly more than $2000 in
commissions because of the $25,000 he had contributed to
9
settlement of the NASD complaint brought by the customers
involved.
Second, disgorgement obviously doesn’t fully capture the
“harm” side of the proportionality test that Collins’s reply
brief invites us to consider—“proportionality between the gain
or injury and the penalties exacted.” Full indicia of the injury
inflicted by Collins and Brown, for example, include the
entire $125,000 paid to settle the NASD complaint, of which
Collins paid only $25,000.
Third, the statute seems to demand that the Commission
look beyond harm to victims or gains enjoyed by perpetrators.
It lists harm to other persons as only one of five specific
factors (plus the catch-all reference to “such other matters as
justice may require”). In that context, the relation between the
civil penalty and disgorgement (and other measures of injury)
is informative, particularly in comparison with other cases,
but hardly decisive.
Looking more broadly, the Commission noted in its
opinion, for instance, that Collins’s violation was “egregious,”
and that he “displayed a blatant failure to deal fairly with
elderly, unsophisticated customers and exhibited a clear
disregard for . . . customers’ interests.” SEC Opinion at *59-
60. This conclusion rested, in part, on the fact that Collins
falsified documents and otherwise failed completely to
supervise Brown, “creat[ing] an environment where Brown
could defraud his clients with impunity.” Id. at *42. And the
Commission quite properly invoked the statutory interest in
deterrence.
Collins mentions a number of additional factors that he
believes militate in favor of a lesser penalty, such as his clean
disciplinary record and his separate fine paid to the state of
Florida. Each of these to some degree weighs in favor of
10
leniency, but neither separately or together do they take us
across the border to where we might properly find that the
SEC abused its discretion or acted arbitrarily or capriciously.
We further note that, under Commission Rule 630(a), a party
may present evidence of an inability to pay in “any
proceeding” potentially requiring penalties. 17 C.F.R.
§ 201.630(a). Collins appears to have presented no such
evidence.
* * *
“Excessive bail shall not be required, nor excessive fines
imposed, nor cruel and unusual punishments inflicted.” U.S.
Const. amend. VIII. A civil penalty violates the Excessive
Fines Clause if it “is grossly disproportional to the gravity of”
the offense. United States v. Bajakajian, 524 U.S. 321, 334
(1998). The Second Circuit has elaborated Bajakajian’s
proportionality standard into four factors: (1) the essence of
the crime and its relation to other criminal activity; (2)
whether the defendant fit into the class of persons for whom
the statute was principally designed; (3) the maximum
sentence and fine that could have been imposed; and (4) the
nature of the harm caused by the defendant's conduct. See
United States v. Collado, 348 F.3d 323, 328 (2d Cir. 2003)
(per curiam), citing Bajakajian, 524 U.S. at 337-39; see also
United States v. Malewicka, 664 F.3d 1099, 1104 (7th Cir.
2011). The SEC invokes these four factors, and Collins does
not appear to object. We also note the Court’s admonition
that, though this is a constitutional inquiry, “judgments about
the appropriate punishment for an offense belong in the first
instance to the legislature,” Bajakajian, 524 U.S. at 336.
Our rejection of Collins’s claim that the Commission’s
decision was arbitrary and capricious goes most of the way to
compelling rejection of the constitutional claim. A penalty
11
that is not far out of line with similar penalties imposed on
others and that generally meets the statutory objectives seems
highly unlikely to qualify as excessive in constitutional terms.
Although the four factors derived from Bajakajian hardly
establish a discrete analytic process, we review them briefly to
see if there are danger signals. There are not. First, for the
reasons set forth above, Collins’s violations of securities laws
were grave, involving deceit to enable the fraudulent actions
of Brown. Second, Collins fits within the class of persons for
whom the statute was designed—an individual supervising
persons subject to securities laws. Third, though Collins’s
penalty was at the upper end of the second-tier penalties, we
cannot say that this is inappropriate. This factor mattered in
Bajakajian. There, the defendant faced a maximum
Sentencing Guidelines fine of $5,000 and six months in
prison, which was well below the statutory maximum of
$250,000 and five years in prison, suggesting that the
forfeiture of $357,144 was excessive. Bajakajian, 524 U.S. at
339 n.14. Here, by contrast, we have indications that Collins
may have been eligible for an even larger penalty, as
suggested by the ALJ’s application of a third-tier penalty.
Fourth, Collins’s actions enabled Brown’s fraudulent actions,
which targeted elderly customers considering complex
financial products, with harm including withdrawal penalties
of over $60,000 incurred by two of the victims. And the
failures of supervision created a more general risk of
wrongdoing in the office subject to Collins’s supervision.
Thus, consideration of the four factors does not really help
Collins’s cause.
We note that Collins cites only two cases in which courts
have set aside a fine for violating the Eighth Amendment,
both featuring extremely large penalties contrasted with
minimal harm. Bajakajian, 524 U.S. at 339 (1998) (holding
invalid forfeiture of $357,000 for failing to report exported
12
currency, “affect[ing] only . . . the Government, and in a
relatively minor way”); United States ex rel. Bunk v. Birkart
Globistics GmbH & Co., 2012 WL 488256, at *5 (E.D. Va.
Feb. 14, 2012) (invalidating penalty of $50 million for False
Claims Act violations when no showing of resulting economic
harm). The Commission’s penalty here does not belong in
that small club.
* * *
The order of the Commission is therefore
Affirmed.