Kimberly Springsteen-Abbott v. SEC ( 2021 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued December 1, 2020 Decided February 26, 2021
No. 20-1092
KIMBERLY SPRINGSTEEN-ABBOTT,
PETITIONER
v.
SECURITIES AND EXCHANGE COMMISSION,
RESPONDENT
On Petition for Review of an Order
of the Securities & Exchange Commission
Dominic E. Draye argued the cause for petitioner. With
him on the briefs was Steven M. Felsenstein.
Daniel Staroselsky, Senior Litigation Counsel,
Securities and Exchange Commission, argued the cause for
respondent. With him on the brief was John W. Avery, Deputy
Solicitor.
Before: MILLETT and RAO, Circuit Judges, and
SILBERMAN, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
SILBERMAN.
2
SILBERMAN, Senior Circuit Judge: The Financial
Institutions Regulatory Authority (“FINRA”) determined that
Petitioner Kimberly Springsteen-Abbott misused investor
funds and tried to cover it up. FINRA therefore barred
Petitioner from the securities industry, fined her, and ordered
her to disgorge certain misused expenses. The SEC affirmed
the industry bar and disgorgement order. Petitioner now
challenges the SEC’s decision, but her constitutional arguments
are forfeited, and the others are meritless.
I
This appeal arises from Springsteen-Abbot’s
mismanagement of two related businesses, Commonwealth
Capital and Commonwealth Securities. Commonwealth
Capital funds equipment leases and then bundles the leases into
investment funds. Commonwealth Securities (a subsidiary of
Commonwealth Capital) manages those funds and sells their
securities to investors through a network of retail broker-
dealers. Petitioner is the sole shareholder of Commonwealth
Capital. She also served as the Chair, CEO, and Chief
Compliance Officer of both companies.
Petitioner charged both her business and personal
expenses to a single American Express account issued to
Commonwealth Capital. Under what Springsteen-Abbott
admits was an “outdated” accounting system, Petitioner Br. 5,
Petitioner had the sole responsibility for later determining
whether the charges should be allocated to the investor funds,
her businesses, or (if personal expenses) herself. FINRA
received tips that expenses were being improperly allocated at
Petitioner’s businesses, and it initiated an investigation.
FINRA alleged that Petitioner improperly assigned 1,840
charges to investor funds amounting to $208,954.44.
According to FINRA’s Enforcement Department, this misuse
violated FINRA Rule 2010, which requires FINRA members
and associated persons (like Petitioner) to “observe high
3
standards of commercial honor and just and equitable
principles of trade.” FINRA’s National Adjudicatory Council
agreed, concluding that the evidence demonstrated Petitioner’s
“purposeful pattern and practice of improperly allocating
expenses to the Funds.” J.A. 7. FINRA based its conclusion
on specific proof offered for 109 of the expenses as well as an
unquantified number of control person expenses.1 As a result,
FINRA barred Petitioner from the securities industry, imposed
a fine of $50,000, and ordered disgorgement of $36,225.85
based on 84 of the specifically proven charges. Petitioner
appealed FINRA’s decision to the SEC. See 15 U.S.C.
§ 78s(d)(2).
The SEC first sustained the industry bar. Reviewing the
FINRA record, the SEC agreed that, in violation of FINRA
Rule 2010, Springsteen-Abbott
routinely misallocate[ed] personal expenses,
control person expenses, and expenses of other
businesses to the Funds. These were not isolated
oversights. [] Springsteen-Abbott’s use of the
[Commonwealth Capital] American Express
card for personal charges . . . allowed her to
conceal her misconduct from oversight for years.
Springsteen-Abbott demonstrated the extent of
1
Control person expenses—essentially the expenses of
individuals in senior or executive roles—were prohibited from being
charged to the funds by the offering documents. J.A. 2.
We also note that FINRA reached this conclusion after a
remand from the SEC. Following an initial decision of the National
Adjudicatory Council, the SEC was “unable to discharge [its] review
function because [FINRA’s] decision [was] unclear regarding what
conduct it found to violate FINRA Rule 2010.” J.A. 6 (citation
omitted). Accordingly, the SEC remanded for the Adjudicatory
Council to “clarify the basis on which it [was] upholding liability.”
J.A. 6 (citation omitted).
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her bad faith when she provided false business
justifications for numerous expenses to both
Enforcement and the Hearing Panel despite
documentary evidence that contradicted her
explanations.
J.A. 14.
This misconduct, the Commission explained, justified
barring Petitioner from the securities industry. In the SEC’s
view, were Petitioner allowed to associate with a FINRA
member firm, she “would present a risk to the integrity of the
markets and to investors.” J.A. 19. Springsteen-Abbott, the
Commission noted, unjustifiably enriched herself to the harm
of fund investors, and then provided false information in an
attempt to justify her expenses. And since the securities
industry “presents many opportunities for abuse and
overreaching and depends very heavily upon the integrity of its
participants,” removing Petitioner from the industry is
warranted to “prevent[] her from harming additional investors.”
J.A. 19 (citations omitted).
The Commission next turned its attention to the
disgorgement order and fine. It found that the amount of the
disgorgement order reasonably approximated Petitioner’s ill-
gotten gains, corresponding to 84 of the misallocated charges.
It therefore affirmed the disgorgement order. Yet, in light of
the other sanctions, the SEC concluded that the fine was
excessive and set it aside. Under the then-existing FINRA
Sanction Guidelines, the SEC explained that FINRA should
generally not impose a fine in cases involving the “improper
use of funds” where the Petitioner “is barred and [FINRA] has
ordered disgorgement.” J.A. 22–23 (citing FINRA Sanction
Guidelines at 10 (Mar. 2015 ed.)) (cleaned up).
Springsteen-Abbott then filed this petition challenging
the SEC’s order. See 15 U.S.C. § 78y(a)(1).
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II
Petitioner advances three arguments. First, starting from
the (contested) premise that FINRA is a state actor,
Springsteen-Abbott asserts its adjudication violated the
Appointments Clause as well as the Constitution’s Due Process
guarantee. Second, Petitioner argues that her lifetime bar is
impermissibly punitive. Then, Petitioner argues that the
disgorgement of continuing education expenses for her
employees was erroneous.
Petitioner’s ambitious constitutional arguments are futile
for a simple reason: Congress has prohibited us from
considering issues not raised before the SEC. As Respondent
rightly maintains, we may only entertain objections “urged
before the Commission” unless “there was reasonable ground
for failure to do so.” 15 U.S.C. § 78y(c)(1). Since Springsteen-
Abbott failed to raise her constitutional challenges before the
Commission, we may not consider them unless her failure was
reasonable.
In reply, Petitioner disputes the premise, asserting that she
actually raised her Due Process arguments below by
consistently “beg[ging] for due process” and making “many
pleas for constitutional adjudication.” Reply Br. 5–6. But this
is insufficient; the Petitioner must raise the substance of her
argument below. See N.Y. Rehab. Care Mgmt., LLC v. NLRB,
506 F.3d 1070, 1076 (D.C. Cir. 2007) (“It is not enough merely
to mention a possible argument in the most skeletal way.”).
Petitioner’s Due Process arguments focus on supposed
punishment for unproven allegations and inaccurate
allegations. But before the SEC, the Petitioner raised only three
issues: (1) The broker-dealer expense items were proper under
the business judgment rule; (2) The finding that she acted
unethically and in bad faith was clearly erroneous; and (3) The
sanctions were erroneous because FINRA Rule 2010 did not
apply, and it applied its sanctions guidance incorrectly.
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Petitioner therefore failed to previously raise any argument
akin to the Due Process concerns she now presses.2
There may have been a good argument that § 78y(c)(1)
does not apply to constitutional challenges to a statute—i.e., the
Petitioner’s Appointments Clause argument—or that there was
“reasonable ground” for the Petitioner not to urge such a
challenge before the Commission. After all, “regulatory
agencies are not free to declare an act of Congress
unconstitutional.” Meredith Corp. v. FCC, 809 F.2d 863, 872
(D.C. Cir. 1987) (citing Johnson v. Robison, 415 U.S. 361, 368
(1974)).
But this argument is precluded by our opinion in Jarkesy
v. SEC, 803 F.3d 9 (D.C. Cir. 2015). There, we confronted the
question of whether the Petitioner was required to urge a
constitutional non-delegation challenge to the statutory scheme
before the Commission. Applying § 78y(c)(1), we recognized
that “adjudication of the constitutionality of congressional
enactments has generally been thought beyond the jurisdiction
of administrative agencies.” Id. at 18 (quoting Thunder Basin
Coal Co. v. Reich, 510 U.S. 200, 215 (1994)). Nevertheless,
2
At oral argument, we repeatedly pressed Petitioner’s
counsel further on this question, asking him to direct the Court to
where the Due Process arguments were made before the SEC. Oral
Arg. at 2:04–7:55 (Dec. 1, 2020). Counsel first directed us to J.A. 73,
80, and 82, but none of these pages are even part of the argument
section of Petitioner’s brief to the SEC. See Am. Wildlands v.
Kempthorne, 530 F.3d 991, 1001 (D.C. Cir. 2008) (laying the factual
foundation for an argument is generally insufficient to avoid
forfeiture). Nor do we understand these pages to raise the substance
of Petitioner’s Due Process arguments. Counsel then directed us to
J.A. 247, but that page is a notice of appeal, not the substance of an
argument made to the SEC. Counsel finally directed us to J.A. 203—
actually an argument made to the SEC—but there, Petitioner simply
argued that FINRA applied the wrong burden of proof. This
argument is unrelated to the Due Process contentions before us.
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we explained that, under § 78y(c)(1), “so long as a court can
eventually pass upon the challenge, limits on an agency’s own
ability to make definitive pronouncements about a statute’s
constitutionality do not preclude requiring the challenge to go
through the administrative route.” Id. (quoting Elgin v. Dep’t
of Treasury, 567 U.S. 1, 17–18 (2012)). Thus, Springsteen-
Abbott was required to exhaust her constitutional claims before
the Commission. She has, moreover, not provided any
reasonable grounds that would excuse her failure to do so. A
constitutional argument does not categorically qualify as a
“reasonable ground.” See Stoiber v. SEC, 161 F.3d 745, 754
(D.C. Cir. 1998). Nor has there been an intervening change in
law that might have excused her failure to press these
contentions below. Id.Our opinion in Saad v. SEC, 980 F.3d 103 (D.C. Cir.
2020) (“Saad III”)—issued after briefing but before oral
argument in this case—decides the question of whether the
Petitioner’s lifetime bar is impermissibly punitive. FINRA is
generally prohibited from imposing “excessive or oppressive”
penalties, which we have held limits FINRA to remedial
sanctions. 15 U.S.C. § 78s(e)(2); see, e.g., Siegel v. SEC, 592
F.3d 147, 157 (D.C. Cir. 2010). And in Saad III, we held that,
if imposed to “protect the public,” an industry bar is
“remedial.” 980 F.3d at 107–08. The Petitioner’s argument—
focused on the applicability of Kokesh v. SEC, 137 S. Ct. 1635(2017)—was squarely rejected in Saad III. The SEC’s
remedial justification, previously described, finds adequate
support in the record.
Springsteen-Abbott next asserts that continuing education
expenses misallocated to the funds—rather than to her
companies—were not “net profit,” and thus not appropriate for
remedial disgorgement after Liu v. SEC, 140 S. Ct. 19368
(2020). We disagree.3 In Liu, the Supreme Court held that
equitable disgorgement is limited to the benefit to the
wrongdoer, or in other words, “the gains ‘made upon any
business or investment, when both the receipts and payments
are taken into the account.’” Id. at 1939 (quoting Providence
Rubber Co. v. Goodyear, 76 U.S. 788, 804 (1869)). Yet the
Court also acknowledged that so-called “expenses” may be
“wrongful gains ‘under another name.’” Id. at 1950 (quoting
Goodyear, 76 U.S. at 803). Here, by paying for continuing-
education expenses out of the funds, rather than her wholly-
owned business, Petitioner enriched herself by the amount of
the savings. After all, as Petitioner testified, “money that’s out
of Commonwealth’s pocket” is “[o]ut of my pocket” since she
is the sole shareholder. J.A. 22, 756.
In reply, Springsteen-Abbott challenges whether the
continuing education expenses were improper charges in the
first place. She argues that “there is no textual argument that
[the fund documents] prohibit reimbursement for employees’
compliance education,” leaving “a wide berth” for her
“business judgment.” Reply Br. 22–23. Thus, the SEC’s
approval of the disgorgement order was arbitrary and
capricious. But it was incumbent on the Petitioner to make this
point in the argument section of her opening brief. See Citizens
Ass’n of Georgetown v. FAA, 896 F.3d 425, 434 (D.C. Cir.
2018) (Arguments not made until reply, even if the factual
foundation is laid in the opening brief, are forfeited). So we,
again, do not consider it.
* * *
It’s rather puzzling that so many cases of alleged
forfeiture of constitutional arguments before an agency have
3
We assume, arguendo, that remedial disgorgement is
subject to the same limitations as equitable disgorgement that were
described in Liu.
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arisen recently all across the country. See, e.g., Gonnella v.
SEC, 954 F.3d 536, 543–46 (2d Cir. 2020); Malouf v. SEC, 933
F.3d 1248, 1255–58 (10th Cir. 2019). These cases cause
needless disputes at the threshold of judicial review of agency
action. The “specialized bar” should take care to either stay up
to date on broad appellate legal trends or consult those who do.
See Laurence H. Silberman, From the Bench: Plain Talk on
Appellate Advocacy, 20 LITIGATION 3 (Spring 1994).
The petition is dismissed in part and denied in part.
So ordered.