Securities & Exchange Commission v. Richard L. Goble

[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
MAY 29, 2012
No. 11-12059
JOHN LEY
________________________
CLERK
D.C. Docket No. 6:08-cv-00829-MSS-KRS
SECURITIES & EXCHANGE COMMISSION,
Plaintiff-Appellee,
versus
RICHARD L. GOBLE,
Defendant-Appellant.
________________________
Appeal from the United States District Court
for the Middle District of Florida
________________________
(May 29, 2012)
Before MARCUS, COX and SILER*, Circuit Judges.
COX, Circuit Judge:
The Securities and Exchange Commission (“SEC”) brought this civil
enforcement action against Richard L. Goble after he orchestrated a plan to
*
Honorable Eugene E. Siler, Jr., United States Circuit Judge for the Sixth Circuit, sitting by
designation.
manipulate the amount of money his company was required to set aside to safeguard
customer assets. The district court conducted a five-day bench trial to consider the
SEC’s claims. The court found Goble liable for committing securities fraud in
violation of § 10(b) of the Securities and Exchange Act of 1934 (the “Exchange
Act”), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. The court also
found that Goble aided and abetted violations of the Customer Protection Rule, 15
U.S.C. § 78o(c)(3); 17 C.F.R. § 240.15c3-3, and the books and records requirements
of the Exchange Act, 15 U.S.C. § 78q(a); 17 C.F.R. § 240.17a-3. According to the
court, Goble directed one of his employees to record a fake purchase of a money
market fund in his company’s books. And each of Goble’s violations arose out of this
single sham transaction. The court enjoined Goble from future violations of the
securities laws and permanently restrained him from seeking a securities license or
engaging in the securities business.
On appeal, Goble challenges the district court’s holding on liability and the
propriety of the resulting injunction. He argues that the district court erred by
concluding that he committed § 10(b) securities fraud. If we reverse this securities
fraud count, Goble believes his aiding and abetting violations must be reversed as
well. After reviewing the record and having the benefit of oral argument, we agree
with Goble that the facts as found by the district court do not support securities fraud
2
liability and we reverse the court’s judgment on this claim. However, it is also clear
from the district court’s factual findings that Goble aided and abetted violations of
the Exchange Act, so we affirm the judgment finding liability on these counts. Since
we reverse the court’s finding of securities fraud, we vacate the portion of the
injunction restraining Goble from violating § 10(b) of the Exchange Act and Rule
10b-5. We also vacate the injunction barring Goble from the securities business for
life. Goble contends that the remaining portions of the injunction are impermissible
“obey-the-law” commands. We agree in part and vacate these paragraphs of the
injunction for the reasons hereinafter set forth.
I. BACKGROUND
Goble founded North American Clearing, Inc. (“North American”), a securities
and clearing brokerage firm, in 1995. While he had no officially designated
regulatory or supervisory responsibilities at North American, he sat on the
corporation’s board of directors, actively participated in North American’s day-to-day
operations, and in effect controlled a 100% interest in the company. Clearing firms
like North American process trades for smaller and less capitalized brokers and
dealers. At the time the SEC filed its complaint, North American acted as the clearing
firm for about forty small brokerage firms and cleared transactions for more than
10,000 customer accounts valued at more than $500 million.
3
A variety of SEC regulations governed North American’s operations. Central
to this case is the Customer Protection Rule. This Rule is designed to protect broker-
dealer customers in the event the brokerage firm becomes insolvent. It requires that
brokerage firms establish a separate Reserve Bank Account (“Reserve Account”) to
hold an amount of cash adequate to reimburse customers if the firm fails.
17 C.F.R. § 240.15c3-3(e)(1). The Rule also dictates that firms use the regulation’s
Reserve Formula to calculate the balance they must maintain in the Reserve Account.
Id.
The specifics of the Reserve Formula are fairly arcane, but its operation is
straightforward. On a weekly basis, firms must balance customer credits against
customer debits. 17 C.F.R. § 240.15c3-3(e)(3). Subject to some adjustments, the
Rule requires that firms hold an amount equal to the excess of credits over debits in
the Reserve Account. 17 C.F.R. § 240.15c3-3a. As defined by the regulations,
“customer credits” captures the amount the firm owes its customers while “customer
debits” refers to amounts the customers owe the firm. If, after the firm makes the
reserve computation, it discovers that the Reserve Account balance is higher than the
amount required by the Reserve Formula, the firm may make a withdrawal from the
Reserve Account. 17 C.F.R. § 240.15c3-3(g).
4
During late 2007 and early 2008, North American faced declining revenues,
and it struggled to meet its operating expenses and make the required contributions
to the Reserve Account. To make up for the shortfall, North American drew on an
existing loan secured by customer securities. Because customer securities
collateralized the loan, however, the Reserve Formula dictated that North American
deposit more money into the Reserve Account when it increased the loan balance.
Thus, drawing on the loan only exacerbated North American’s cash flow problem.
In March of 2008, the Financial Industry Regulatory Authority, Inc. (“FINRA”)
began an on-site audit of North American and remained there as the events
precipitating this case transpired. During the audit, FINRA examiners uncovered
irregularities in North American’s reserve computations. Timothy Ward,1 North
American’s Chief Financial Officer who had responsibility for North American’s
financial reporting and preparing the weekly reserve computation, characterized these
irregularities as the result of his own mistakes and miscalculations. The examiners
helped Ward correct these mistakes, and they remained on-site conducting regular
reviews of North American’s books and records.
1
The SEC’s complaint charged Ward and Goble as codefendants. Prior to trial, however,
Ward settled with the SEC. He testified as a witness for the SEC at Goble’s trial.
5
By May of 2008, the cash flow problem at North American was severe. On
May 13, Goble sought a $5 million unsecured loan to rectify the firm’s negative
financial spiral. When Goble was unable to procure the loan, he directed Ward to
record a $5 million money market purchase in North American’s books. But no such
purchase had been made. The purpose of this sham transaction was to make it appear
on paper that North American could withdraw money from the Reserve Account.
Had there been a real purchase of money market funds, it would have decreased the
amount of the required balance in the Reserve Account. The day after Ward recorded
the sham purchase he made an interim reserve calculation using the faulty numbers
created by the sham transaction. This computation showed that North American
could withdraw $3.4 million from the Reserve Account. Bruce Blatman2 (North
American’s President and CEO) and Goble signed a wire request to move $3.4
million from the Reserve Account into North American’s settlement account. After
the funds transferred, the FINRA examiners quickly discovered a discrepancy created
by the sham money market purchase and demanded an explanation.
As a result, Ward and Blatman discussed the May 13th sham transaction with
the examiners. At the insistence of the examiners, Ward returned the $3.4 million to
2
Like Ward, Blatman was also named as a codefendant. He too settled with the SEC and
testified for the SEC at Goble’s trial.
6
the Reserve Account and prepared a revised reserve computation. The revised
computation showed that North American needed to deposit an additional $1.8
million into the Reserve Account. In the following days, it became clear that North
American could not meet the reserve requirement, and Ward and Blatman decided to
wind down North American’s affairs after consultation with FINRA and the SEC.
A few days later, the SEC filed its complaint in this case against North
American, Bruce Blatman, Timothy Ward, and Richard Goble for violations of the
securities regulations. The complaint alleged that North American violated the
Customer Protection Rule at § 15(c)(3) of the Exchange Act and Rule 15c3-3
thereunder, and that North American violated the Exchange Act’s books and records
requirements at § 17(a) and Rule 17a-3 thereunder. It maintained that Goble,
Blatman, and Ward aided and abetted these violations. The complaint also alleged
that each of the defendants violated the anti-fraud provision at § 10(b) of the
Exchange Act and Rule 10b-5 thereunder.
The SEC settled with North American, Blatman, and Ward, but the district
court held a five-day bench trial on the claims against Goble. The court concluded
that Goble aided and abetted North American’s Customer Protection Rule and books
and records violations. It also held that Goble’s actions concerning the sham money
market transaction violated § 10(b) of the Exchange Act and Rule 10b-5. The court
7
permanently enjoined Goble from obtaining a securities license or engaging in the
securities business. The injunction also permanently restrained Goble from violating
the Customer Protection Rule, the books and records requirements, § 10(b), and Rule
10b-5. Goble appeals, challenging the court’s decision on liability and the injunction.
II. ISSUES ON APPEAL
Goble raises the following five issues: (1) whether recording the fake money
market purchase in North American’s internal books violates § 10(b) and Rule 10b-5;
(2) whether he can be liable for aiding and abetting North American’s violations of
the Customer Protection Rule and the Exchange Act’s books and records
requirements if there is no underlying securities fraud; (3) whether the district court
abused its discretion by permanently enjoining him from engaging in the securities
business when the SEC did not seek this relief in its complaint; (4) whether the
portions of the injunction restraining him from violating the securities laws are
unenforceable “obey-the-law” commands; and (5) whether the district court should
have drawn an adverse inference against the SEC because of the spoliation of
evidence.
III. DISCUSSION
A. Section 10(b) Securities Fraud
8
The district court decided that Goble used the sham money market transaction
to conceal North American’s true financial condition and thereby violated § 10(b) and
Rule 10b-5.3 This determination is a conclusion of law, which we review de novo.4
See Commodity Futures Trading Comm’n v. Levy, 541 F.3d 1102, 1110 (11th Cir.
2008). “To prove a [§] 10(b) violation, the SEC must show (1) material
misrepresentations or materially misleading omissions, (2) in connection with the
purchase or sale of securities, (3) made with scienter.” SEC v. Merch. Capital, LLC,
483 F.3d 747, 766 (11th Cir. 2007) (citing Aaron v. SEC, 446 U.S. 680, 695, 100 S.
Ct. 1945, 1955 (1980)). Because this is a civil enforcement action brought by the
SEC, reliance, damages, and loss causation are not required elements. See SEC v.
Morgan Keegan & Co., --- F.3d --- , --- , No. 11-13992, 2012 WL 1520895, at *9
(11th Cir. May 2, 2012) (noting that “justifiable reliance” is not an element of an SEC
enforcement action); see also FindWhat Investor Grp. v. FindWhat.com, 658 F.3d
1282, 1295 (11th Cir. 2011) (listing reliance, damages, and loss causation as
3
Section 10(b) of the Exchange Act is codified at 15 U.S.C. § 78j(b). Rule 10b-5,
promulgated pursuant to this statutory provision, is codified at 17 C.F.R. § 240.10b-5. The scope
of liability under the two provisions is the same. SEC v. Merch. Capital, LLC, 483 F.3d 747, 766
n.17 (11th Cir. 2007) (citing SEC v. Zandford, 535 U.S. 813, 816 n.1, 122 S. Ct. 1899, 1901 n.1
(2002)). We will use § 10(b) to refer to both the statutory provision and the rule.
4
At trial, the SEC also argued that Goble violated § 10(b) by improperly sweeping money
market funds out of customer accounts. The district court decided that the SEC failed to prove this
allegation by a preponderance of the evidence. Before this court, the SEC has only argued that Goble
violated § 10(b) when he directed Ward to record the fake money market fund purchase in North
American’s books. Thus, we consider only whether this conduct violated § 10(b).
9
additional elements required for a § 10(b) claim by a private plaintiff (quoting
Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1236-37 (11th Cir. 2008))). Goble does
not dispute that he had the requisite scienter to commit securities fraud. Instead, he
maintains that he never made a material misrepresentation or omission in connection
with the purchase or sale of a security.
1. A “Material Misrepresentation”
According to the district court, the May 13th sham money market transaction
had the effect of misrepresenting North American’s true financial condition. It gave
“the appearance that the firm was either financially solvent when it was not or even
more solvent than it was.” (R.8-260 at 18.) The court found that reasonable investors
would want to know the truth about their broker-dealer’s financial condition so the
misrepresentation was material.
Goble claims that the district court’s reasoning misapplies the law on material
misrepresentations. He first notes that a violation of the securities regulations
standing alone cannot form the basis for § 10(b) securities fraud. Then, he maintains
that a material misrepresentation must be disclosed to customers or the public.
Because the May 13th sham money market transaction was only an internal record,
he argues that he never made a public misrepresentation. The SEC responds that a
public misrepresentation was not necessary in this case because reliance by customers
10
or the public is not an element of § 10(b) securities fraud in a civil enforcement
action. It also notes § 10(b) prohibits fraudulent schemes and that the sham
transaction was part of a scheme to defraud FINRA. Finally, the SEC contends that
the false transaction would have been material to investors using North American as
their clearing firm. In other words, the SEC argues that had investors known about
the misrepresentation they may have chosen a different broker-dealer to process their
transactions.
First, we can easily dispatch the district court’s and SEC’s theory that the sham
transaction would have been material to an investor’s choice of broker-dealers. This
court has said that “[t]he test for materiality in the securities fraud context is ‘whether
a reasonable man would attach importance to the fact misrepresented or omitted in
determining his course of action.’” Merch. Capital, LLC, 483 F.3d at 766 (quoting
SEC v. Carriba Air, 681 F.2d 1318, 1323 (11th Cir. 1982)). We understand this
“course of action” to mean an investment decision—not an individual’s choice of
broker-dealers.5 See id. at 766-72 (determining whether misrepresentations or
5
We recognize that in SEC v. Morgan Keegan & Co. we stated that a statement is material
“if there is a ‘substantial likelihood that the disclosure of the omitted fact would have been viewed
by the reasonable investor as having significantly altered the “total mix” of information made
available.’” Morgan Keegan & Co., --- F.3d at ---, 2012 WL 1520895, at *10 (quoting TSC Indus.,
Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S. Ct. 2126, 2132 (1976)). We also explained that
“[t]he role of the materiality inquiry is ‘to filter out essentially useless information that a reasonable
investor would not consider significant, even as part of a larger “mix” of factors to consider in
making his investment decision.’” Id. at ---, at *11 (quoting Basic Inc. v. Levinson, 485 U.S. 224,
11
omissions would affect decision to purchase interest in limited liability partnerships);
see also SEC v. Pirate Investor LLC, 580 F.3d 233, 240 (4th Cir. 2009) (“[A] fact
stated or omitted is material if there is a substantial likelihood that a reasonable
purchaser or seller of a security (1) would consider the fact important in deciding
whether to buy or sell the security . . . .” (alteration in original) (quoting Longman v.
Food Lion, Inc., 197 F.3d 675, 683 (4th Cir. 1999))); Grossman v. Novell, Inc., 120
F.3d 1112, 1119 (10th Cir. 1997) (“A statement or omission is only material if a
reasonable investor would consider it important in determining whether to buy or sell
stock.” (citations omitted)). We decline the SEC’s invitation to expand our definition
of materiality to capture Goble’s misrepresentation. We hold that a misrepresentation
that would only influence an individual’s choice of broker-dealers cannot form the
basis for § 10(b) securities fraud liability.
The SEC also highlights that under § 10(b) fraudulent schemes or deceptive
devices may form the basis for liability. See 17 C.F.R. § 240.10b-5(a), (c).6 The
234, 108 S. Ct. 978, 985 (1988)). Thus, the relevant “mix” of information is those facts an investor
would consider when making an investment decision. The “total mix” test for materiality is not
concerned with whether the misrepresentation would alter the mix of information available as the
investor chooses a broker-dealer. Cf. Basic Inc., 485 U.S. at 236, 108 S. Ct. at 986 (considering
materiality of information to the “trading decision of a reasonable investor”).
6
Rule 10b-5 states:
It shall be unlawful for any person, directly or indirectly, by the use
of any means or instrumentality of interstate commerce, or of the mails or of
any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
12
SEC’s portrayal of Goble’s fraudulent scheme has changed throughout this litigation.
In its brief to this court, the SEC writes that Goble engaged in a scheme to defraud
FINRA. Before the district court, the SEC suggested that the sham money market
transaction was part of a scheme to manipulate the Reserve Account and the reserve
computation. (R.14-254 at 126-27.) In essence, the SEC argues that Goble’s
intentional effort to evade the securities regulations was a fraudulent scheme.
However, when the SEC asserts that this scheme was material, it relies on the fact that
an investor would want to know that his or her broker-dealer made improper transfers
from the Reserve Account. As we just explained, this does not meet our test for
materiality. While this information might affect a reasonable investor’s choice of
broker-dealers, it would not affect the underlying investment decision.
2. “In Connection with the Purchase or Sale of Securities”
Even if we assume that Goble made a material misrepresentation or omission,
the misrepresentation was not made “in connection with the purchase or sale of
securities.” The district court found that the May 13th sham money market
(b) To make any untrue statement of a material fact or to omit to state
a material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not
misleading, or
(c) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.
13
transaction was not a misrepresentation in connection with the purchase or sale of a
particular security. This followed from the court’s decision that the money market
fund account at issue did not meet the definition of a security under the Exchange
Act.
Despite finding that the money market fund account was not a security, the
district court concluded that Goble’s sham transaction satisfied the “in connection
with” element based on a “fraud-on-the-market” theory. It held that Goble’s
deception amounted to a fraud on the market because a reasonable investor would
have been interested in North American’s financial troubles. Goble contends that the
district court misapplied the fraud-on-the-market doctrine. We agree. In the context
of a § 10(b) private cause of action, reliance by the plaintiff is an essential element
of the claim. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148,
159, 128 S. Ct. 761, 769 (2008). The fraud-on-the-market doctrine creates a
rebuttable presumption of reliance when a defendant makes misrepresentations
publicly. Id. Thus, the fraud-on-the-market doctrine, at least insofar as that doctrine
is traditionally understood, has no application to this case because this is a civil
enforcement action brought by the SEC, not a private cause of action. The SEC had
to demonstrate a connection between Goble’s misrepresentation and the purchase or
sale of securities, not investor reliance. See Morgan Keegan & Co., --- F.3d at ---,
14
2012 WL 1520895, at *9 (explaining that investor reliance is not an element of an
SEC enforcement action for violations of § 10(b)). Therefore, the fraud-on-the-
market theory does not apply in this case.7
The SEC maintains that it was unnecessary for the district court to engage in
its fraud-on-the-market analysis. It asserts that “[t]he simplest reason why Goble’s
fraud was in connection with the purchase or sale of securities is that the essential
first step in the scheme was recording fake purchases of $5 million worth of shares
of a money market mutual fund, which is a type of security.” (Appellee’s Br. at 38-
39.) We assume (without deciding) that the SEC has correctly identified the money
market fund as a security and that the district court erred in this regard. Nevertheless,
we hold that Goble’s misrepresentation was not made in connection with the
“purchase or sale” of securities.
The only “purchase” involved in the May 13th transaction was Goble’s
directing Ward to record a fake purchase in North American’s books. We must
decide whether “purchase or sale” as used in § 10(b) captures this sham transaction.
We note at the outset that the Supreme Court has instructed that § 10(b) and its “in
7
The SEC understands the district court’s use of the phrase “fraud on the market” to mean
that a misrepresentation may satisfy the “in connection with” requirement if it would influence an
investor’s decision to buy or sell securities. Even under this theory, however, Goble’s
misrepresentation does not satisfy the “in connection with” requirement because the
misrepresentation would not affect an investment decision.
15
connection with” requirement be construed “flexibly to effectuate its remedial
purposes.” SEC v. Zandford, 535 U.S. 813, 819, 122 S. Ct. 1899, 1903 (2002)
(quoting Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151, 92 S. Ct.
1456, 1471 (1972)) (internal quotation marks omitted). Therefore, the term
“purchase” as used in § 10(b) is not limited to “traditional face-to-face commercial
transactions.” Coffee v. Permian Corp., 434 F.2d 383, 385 (5th Cir. 1970) (quoting
Fidelis Corp. v. Litton Indus., Inc., 293 F. Supp. 164, 169-70 (S.D.N.Y. 1968)).8 We
must decide the meaning of “purchase” in the context of § 10(b) and should ask
whether the “alleged conduct is the type of fraudulent behavior which was meant to
be forbidden by the statute and the rule.” SEC v. Nat’l Sec., Inc., 393 U.S. 453, 466-
67, 89 S. Ct. 564, 572 (1969). In some instances a § 10(b) fraud may occur even
without an actual purchase or sale of securities. See Grippo v. Perazzo, 357 F.3d
1218, 1223-24 (11th Cir. 2004).
First, Goble did not engage in a “purchase” as we understood that term in
Grippo. There, we decided that a broker who accepts payment for securities he never
intends to deliver satisfies the “in connection with the purchase or sale of securities”
requirement. Id. So, we also said that a plaintiff can adequately plead § 10(b) fraud
8
In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.1981) (en banc), the Eleventh
Circuit adopted as binding precedent all Fifth Circuit decisions handed down prior to the close of
business on September 30, 1981.
16
without identifying the purchase of any particular security. Id. But, the SEC does not
argue that Goble engaged in the type of conduct at issue in Grippo. He never
accepted payment for a money market fund and then failed to deliver the security to
a customer.
Nor is the May 13th sham transaction the type of behavior meant to be
forbidden by § 10(b). The SEC has labeled Goble’s plan to make an improper
withdrawal from the Reserve Account as § 10(b) fraud. But, the securities regulations
directly implicated by this conduct are the Customer Protection Rule and books and
records requirements of the Exchange Act, not § 10(b). Section 10(b) was not
intended to protect investors from a broker-dealer’s inaccurate records or an
inadequate reserve fund. Because Goble’s behavior was not the type of conduct
meant to be forbidden by § 10(b), this weighs against finding that Goble’s fake
transaction was a “purchase” under § 10(b).
Furthermore, the alleged “purchase” did not involve a change of ownership, an
exchange of value, or a promise to purchase a security. And, recording a fake
transaction in North American’s books had no effect on the broader securities market
and would not impact an investor’s decision to purchase a security. In light of all
this, we do not consider the May 13th sham transaction to be a purchase within the
meaning of § 10(b). Therefore, we hold that Goble’s misrepresentation was not made
17
in connection with the purchase or sale of securities. Accordingly, the district court’s
judgment on the securities fraud claim must be reversed both because Goble’s
misrepresentation was not material and because it was not made in connection with
the purchase or sale of securities.
B. Aiding and Abetting Violations
The court also found Goble liable for aiding and abetting North American’s
violations of the Customer Protection Rule and the Exchange Act’s books and records
requirements. The Customer Protection Rule directs that a specific balance be
maintained in a segregated account. There is no question North American failed to
maintain the balance required by the Rule. The books and records requirements at
§ 17(a) of the Exchange Act, 15 U.S.C. § 78q(a), and Rule 17a-3, 17 C.F.R.
§ 240.17a-3 thereunder, required North American to maintain accurate records.
Goble does not dispute that North American failed to comply with these regulations.
Instead, he claims that no primary securities fraud violation supports his aiding and
abetting liability. But this argument misses the mark.
Exchange Act § 20(e), 15 U.S.C. § 78t(e), allows the imposition of aiding and
abetting liability against “any person that knowingly or recklessly provides
substantial assistance to another person in violation of a provision of [the Exchange
Act], or of any rule or regulation issued” thereunder. 15 U.S.C. § 78t(e). Thus, to
18
impose aiding and abetting liability under § 20(e) there must be: (1) a primary
violation of the securities laws; (2) the aider and abettor must have knowledge of the
primary violation; and (3) the aider and abettor must provide substantial assistance
in the commission of the primary violation. See VanCook v. SEC, 653 F.3d 130, 142
(2d Cir. 2011); SEC v. Shanahan, 646 F.3d 536, 547 (8th Cir. 2011). A primary
securities fraud violation is not an element of an aiding and abetting claim.
There is no question that primary violations of the Customer Protection Rule
and the books and records requirements occurred at North American. And, the
testimony offered at trial supports the district court’s finding that Goble had
knowledge of and assisted these primary violations. Ward testified that Goble
ordered him to enter the sham money market transaction in North American’s books
despite Ward’s counsel that this would violate the regulations. Goble also directed
Ward to complete the interim reserve computation after the sham transaction was on
the books. Based on this interim reserve computation, Goble signed a wire transfer
request to move money out of the reserve account.9 These facts clearly show that
Goble knew his actions surrounding the May 13th sham money market transaction
would violate the books and records requirements and the Customer Protection Rule
9
Goble contends that the court could not rely on this wire transfer because of spoliation of
evidence. As we discuss below, we reject Goble’s spoliation claim and the court was entitled to
consider Goble’s signature on the wire transfer.
19
and that he substantially assisted in the violation of these regulations. The district
court did not err by finding him liable for aiding and abetting these violations.
C. Spoliation of Evidence
At the SEC’s request a Receiver and a Securities Investor Protection
Corporation (“SIPC”) Trustee were appointed who had control of North American’s
books and records during the wind down of North American’s operations. Goble
alleges that after their appointment, and the district court’s restraining order to
preserve North American’s records, he found twenty-five bags of shredded
documents at North American’s offices. He contends that these destroyed documents
contained evidence that it was a customary business practice for him to sign off on
wire transfers. Because the documents were destroyed, he maintains that spoliation
of evidence occurred and that the district court failed to properly consider this claim.
“A district court’s decision regarding spoliation sanctions is reviewed for abuse
of discretion.” Eli Lilly & Co. v. Air Express Int’l USA, Inc., 615 F.3d 1305, 1313
(11th Cir. 2010) (citing Harris v. Chapman, 97 F.3d 499, 506 (11th Cir. 1996)).
“[A]n adverse inference is drawn from a party’s failure to preserve evidence only
when the absence of that evidence is predicated on bad faith.” Bashir v. Amtrak, 119
F.3d 929, 931 (11th Cir. 1997) (citing Vick v. Tex. Emp’t Comm’n, 514 F.2d 734, 737
(5th Cir. 1975)). Goble has presented no evidence that the SEC destroyed the
20
documents contained in the bags or made intentional efforts to withhold evidence at
trial. Because Goble did not demonstrate that the missing evidence resulted from the
SEC’s bad faith, we hold that the district court did not abuse its discretion by
rejecting Goble’s spoliation claim.
D. Injunction
The district court entered an injunction permanently barring Goble from the
securities business and enjoining him from violating the securities laws. Goble
challenges each of these restraints. “Our review is for an abuse of discretion, which
occurs when ‘the district court has made a clear error of judgment or has applied an
incorrect legal standard.’” SEC v. Ginsburg, 362 F.3d 1292, 1304 (11th Cir. 2004)
(quoting Doe v. Chiles, 136 F.3d 709, 713 (11th Cir. 1998)). We have explained that
the SEC is entitled to an injunction if it can show a “reasonable likelihood” that the
defendant will violate the securities laws in the future. Id. (citing Carriba Air, Inc.,
681 F.2d at 1322). We consider six factors when making this determination: “the
egregiousness of the defendant’s actions, the isolated or recurrent nature of the
infraction, the degree of scienter involved, the sincerity of the defendant’s assurances
against future violations, the defendant’s recognition of the wrongful nature of his
conduct, and the likelihood that the defendant’s occupation will present opportunities
21
for future violations.” Id. (quoting Carriba Air, Inc., 681 F.2d at 1322) (internal
quotation marks omitted).
1. Lifetime Bar from Securities Business
Goble argues that the district court abused its discretion by restraining him
from acquiring a securities license or engaging in the securities business because the
SEC did not seek this relief either in its complaint or in the pretrial statement. This
argument is unavailing. Federal Rule of Civil Procedure 54(c) states specifically that
except in cases of default, a “final judgment should grant the relief to which each
party is entitled, even if the party has not demanded that relief in its pleadings.” Fed.
R. Civ. P. 54(c) (emphasis added). While a limitation on this broad discretion may
exist “where the failure to demand the relief granted prejudiced the opposing party,”
Int’l Harvester Credit Corp. v. E. Coast Truck, 547 F.2d 888, 891 (5th Cir. 1977)
(citing Sapp v. Renfroe, 511 F.2d 172, 176 n.3 (5th Cir. 1975)), we need not resolve
whether Goble was prejudiced by the SEC’s failure to request the lifetime bar because
we vacate this portion of the injunction. We vacate the district court’s entry of this
part of the injunction because the court relied on its conclusion that Goble committed
securities fraud when granting the disbarment. We remand to the district court to
consider in the first instance whether Goble’s aiding and abetting violations standing
alone warrant the lifetime bar when it applies the “reasonable likelihood” factors we
22
announced in Ginsburg. The court should afford Goble an opportunity to be heard
on the propriety of this relief given that the SEC failed to request it.
2. Injunction Against Violations of the Securities Laws
The district court also restrained Goble from violating §§ 10(b), 15(c)(3), and
17(a) of the Exchange Act and the regulations promulgated pursuant to these statutes.
Goble contends that these portions of the injunction must be vacated because they are
impermissible “obey-the-law” commands, which violate Rule 65(d) of the Federal
Rules of Civil Procedure. Before reaching this issue, we first vacate the portion of
the court’s injunction restraining Goble from future violations of § 10(b) and Rule
10b-5. We have reversed the court’s judgment that Goble violated these provisions
and “an injunction based upon an erroneous conclusion of law is invalid.” Hughey
v. JMS Dev. Corp., 78 F.3d 1523, 1531 (11th Cir. 1996) (citing United States v.
Jefferson Cnty., 720 F.2d 1511, 1520 n.21 (11th Cir. 1983)).
That leaves for our consideration the restraints against violating §§ 15(c)(3)
and 17(a) and the accompanying regulations. We must decide whether an injunction
that only uses the language of the securities statutes satisfies Rule 65(d). Given the
importance of the text of the injunction to our analysis, we lay it out in toto. The
district court enjoined Goble as follows:
23
Section 15(c)(3) of the Exchange Act and Rule 15c3-3.
Defendant Goble is PERMANENTLY RESTRAINED AND
ENJOINED from directly or indirectly (by use of any means or
instrumentality of interstate commerce or of the mails) effecting
transactions in, or inducing or attempting to induce the purchase or sale
of, securities while in contravention of customer protection Rule 15c3-3,
which requires a broker-dealer to maintain a customer reserve account
with deposits in the amount computed in accordance with Rule 15c3-3a,
in violation of Section 15(c)(3) of the Exchange Act (15 U.S.C. §
78o(c)(3)) and Rule 15c3-3 (17 C.F.R. § 240.17a-3).
Section 17(a) of the Exchange Act and Rule 17a-3. Defendant
Goble is PERMANENTLY RESTRAINED AND ENJOINED from
directly or indirectly failing to make and keep current accurate books
and records relating to the securities business of North American or any
securities firm in violation of Section 17(a) of the Exchange Act (15
U.S.C. § 78q(a)) and Rule 17a-3 (17 C.F.R. § 240.17a-3).
(R.8-261 at 2.)
Goble correctly identifies these paragraphs as an “obey-the-law” injunction and
is rightly skeptical of their validity. As the name implies, an obey-the-law injunction
does little more than order the defendant to obey the law. We have repeatedly
questioned the enforceability of obey-the-law injunctions not only in the context of
securities cases but other cases as well. See, e.g., Burton v. City of Belle Glade, 178
F.3d 1175, 1201 (11th Cir. 1999) (stating that injunction which only instructed
defendant to “obey the law” would not satisfy the specificity requirements of Rule
65(d)); Hughey, 78 F.3d at 1531(“[A]ppellate courts will not countenance injunctions
that merely require someone to ‘obey the law.’” (citing Payne v. Travenol Labs., Inc.,
24
565 F.2d 895, 897-98 (5th Cir. 1974))). Most notably, in SEC v. Smyth, 420 F.3d
1225, 1233 n.14 (11th Cir. 2005), we went out of our way to condemn these
injunctions because they lack specificity and deprive defendants of the procedural
protections that would ordinarily accompany a future charge of a violation of the
securities laws.10
The SEC apparently recognizes that the district court’s injunction does little
more than order Goble to obey the law. Nonetheless, it maintains that in the context
of violations of securities regulations an injunction that uses the statutory language
is permissible. It raises three arguments to support this position. First, the SEC
points to the Exchange Act itself which states:
Whenever it shall appear to the Commission that any person is
engaged or is about to engage in acts or practices constituting a
violation of any provision of this chapter, [or] the rules or regulations
thereunder, . . . it may in its discretion bring an action in the proper
district court of the United States . . . to enjoin such acts or practices,
and upon a proper showing a permanent or temporary injunction or
restraining order shall be granted without bond.
15 U.S.C. § 78u(d)(1). It also relies upon the next subsection, which gives the district
courts jurisdiction to issue injunctions commanding any person to comply with the
10
For example, if the SEC suspects that the defendant has violated the obey-the-law
injunction it may initiate a criminal contempt proceeding. And, at this proceeding, the defendant has
no right to a trial by jury so long as the sentence imposed is less than six months. See Frank v.
United States, 395 U.S. 147, 150, 89 S. Ct. 1503, 1506 (1969).
25
provisions of the Exchange Act. 15 U.S.C. § 78u(e). Second, the SEC rests on our
decision in SEC v. Carriba Air, Inc., 681 F.2d 1318 (11th Cir. 1982), where we said
that “Congress specifically authorized an injunction to issue to prohibit the violation
of the securities laws.” Id. at 1321. Finally, the SEC says that injunctions sought by
government agencies may be of greater breadth than those sought by private litigants.
Glaringly absent from the SEC’s brief is any discussion explaining why the
district court’s injunction complied with the requirements of Rule 65. Rule 65(d)(1)
states that “Every order granting an injunction and every restraining order must: (A)
state the reasons why it issued; (B) state its terms specifically; and (C) describe in
reasonable detail—and not by referring to the complaint or other document—the act
or acts restrained or required.” Fed. R. Civ. P. 65(d)(1). We have never said that a
court may simply ignore these requirements because it is entering an injunction in a
securities case. While we upheld an injunction in Carriba Air that largely copied the
language of the securities laws, we did not discuss whether the injunction complied
with Rule 65(d), and the opinion provides no indication that this issue was raised by
the parties.
As we mentioned in Smyth, one of the primary problems with obey-the-law
injunctions is that they often lack the specificity required by Rule 65(d). As the
Supreme Court has explained, the specificity requirements of Rule 65(d) are
26
“designed to prevent uncertainty and confusion on the part of those faced with
injunctive orders, and to avoid the possible founding of a contempt citation on a
decree too vague to be understood.” Schmidt v. Lessard, 414 U.S. 473, 476, 94 S. Ct.
713, 715 (1974) (citations omitted). An injunction “should clearly let defendant
know what he is ordered to do or not to do. A court order should be phrased in terms
of objective actions, not legal conclusions.” Planetary Motion, Inc. v. Techsplosion,
Inc., 261 F.3d 1188, 1203 (11th Cir. 2001) (quoting John H. Harland Co. v. Clarke
Checks, Inc., 711 F.2d 966, 984-85 (11th Cir. 1983)). But, “the degree of
particularity required depends on the nature of the subject matter.” Id. at 1204 (citing
McComb v. Jacksonville Paper Co., 336 U.S. 187, 191-92, 69 S. Ct. 497, 499-500
(1949)).
Essentially, the SEC maintains that when the subject matter is securities an
injunction may simply use the statutory or regulatory language of the securities laws.
We reject the contention that Rule 65(d) provides the district court this discretion in
all circumstances involving an injunction against violations of the securities laws.
But, we also recognize that at times an injunction that orders a defendant to comply
with a statute may be appropriate; Supreme Court precedent dictates this.
In McComb v. Jacksonville Paper Co., the Supreme Court upheld a decree that
directed the defendants to obey the minimum wage, overtime, and record keeping
27
provisions of the Fair Labor Standards Act. 336 U.S. at 191-95, 69 S. Ct. at 500-01.
The SEC contends that Jacksonville Paper Co. validates the injunction here
(including the portions of the injunction prohibiting violations of § 10(b) and Rule
10b-5). While the decree in Jacksonville Paper Co. may have ordered compliance
with provisions of the Fair Labor Standards Act, see id. at 192, 69 S. Ct. at 500 (“By
its terms [the decree] enjoined any practices which were violations of those statutory
provisions”), the terms of that statute were relatively specific. For example, the
defendant knew the exact wage it was being ordered to pay, it knew the required
overtime pay rate, and it could easily discern the records it was required to keep. In
other words, while the decree enjoined violations of the statute, the terms of the
statute were specific, and the defendant clearly knew what conduct the injunction
addressed.
The same cannot be said for all orders enjoining violations of the securities
laws. For example, if an injunction simply used the language of § 10(b) of the
Exchange Act or Rule 10b-5, a defendant reading the injunction would have little
guidance on how to conform his conduct to the terms of the injunction. Indeed, that
defendant would need to review hundreds of pages of the Federal Reporters, law
reviews, and treatises before he could begin to grasp the conduct proscribed by
§ 10(b) and in turn the injunction. What’s more, the judicial gloss on § 10(b) is not
28
fixed. In this very case, the SEC took (and the district court accepted) a very
expansive view of the type of conduct prohibited by the statute. This ever-changing
judicial landscape would further complicate a defendant’s efforts to comply with an
injunction that recited the language of § 10(b). While the securities context may be
one where less particularity is required, we reject the SEC’s implied contention that
the injunction need not inform the defendant of precisely what conduct is forbidden.
The two restrictions before us present a different circumstance from a bare
command to comply with § 10(b). The Customer Protection Rule (at § 15(c)(3) of the
Exchange Act, 15 U.S.C. § 78o(c)(3), and Rule 15c3-3, 17 C.F.R. § 240.15c3-3) is
not vague. The Rule sets forth specific, objective criteria for compliance. Firms
subject to the Rule either have made the required reserve computation and set aside
the required balance in a reserve account or they have not. The same can be said for
§ 17(a) of the Exchange Act, 15 U.S.C. § 78q(a), and Rule 17a-3, 17 C.F.R.
§ 240.17a-3.11 Unlike a restraint on violating § 10(b) and Rule 10b-5, an injunction
forbidding the violation of these provisions is similar to the injunction the Supreme
Court upheld in Jacksonville Paper Co. Like the injunction there, these regulations
contain specific commands and a defendant restrained from violating these commands
11
Indeed, in Gulf King Shrimp Co. v. Wirtz, 407 F.2d 508, 517 (5th Cir. 1969), the former
Fifth Circuit found that an injunction which required compliance with the records requirements of
the Fair Labor Standards Act satisfied Rule 65(d).
29
would be able to determine what conduct the injunction addressed. Thus, while these
restraints may be broad in terms of the scope of the conduct captured by the
injunction, the “restrained party [has] fair notice of what conduct will risk contempt.”
Hughey, 78 F.3d at 1531(quoting Epstein Family P’ship v. Kmart Corp., 13 F.3d 762,
771 (3d Cir. 1994)); see also 11A Charles Alan Wright, Arthur R. Miller & Mary Kay
Kane, Federal Practice & Procedure § 2955 (2d ed. 1995) (“Broadness encompasses
the range of activity brought within the parameters of the decree; on the other hand,
a decree is vague when the delineation of the proscribed activity lacks particularity.”).
Permitting injunctions of some breadth in the context of civil enforcement
actions brought by the SEC is warranted. The Exchange Act grants the district court
broad discretion to enjoin violations of the Act. See 15 U.S.C. § 78u(d)(1). And,
where the public interest is involved, the court’s equitable power has a “broader and
more flexible character.” Commodity Futures Trading Comm’n, 541 F.3d at 1114
(quoting Porter v. Warner Holding Co., 328 U.S. 395, 398, 66 S. Ct. 1086, 1089
(1946)). Therefore, a broad, but properly drafted injunction, which largely uses the
statutory or regulatory language may satisfy the specificity requirement of Rule 65(d)
so long as it clearly lets the defendant know what he is ordered to do or not do.
What is troubling about the district court’s injunction in this case is that its
restrictions merely cross-reference the relevant statutes and regulations. In other
30
words, the injunctions do not even meet the standard the SEC advocates by
“track[ing] the statutory language.” (Appellee’s Br. at 47.) We have said that “[a]
person enjoined by court order should only be required to look within the four corners
of the injunction to determine what he must do or refrain from doing.” Hughey, 78
F.3d at 1532 n.12. But, we will not apply Rule 65(d) “rigidly,” and we “determine
the propriety of an injunctive order by inquiring into whether the parties subject
thereto understand their obligations under the order.” Planetary Motion, Inc., 261
F.3d at 1203 (citing Williams v. City of Dothan, 818 F.2d 755, 761 (11th Cir. 1987)).
Plainly, Goble would need to look beyond the four corners of the district
court’s injunction in order to comply with its strictures. The mere cross-reference to
provisions of the United States Code and Code of Federal Regulations does not
specifically describe the acts addressed by the injunction. And, without a
compendious knowledge of the codes, Goble has no way of understanding his
obligations under the injunction. Accordingly, we vacate these portions of the
injunction and remand for the district court to specifically describe the proscribed
conduct within the four corners of the injunction.
In sum, we emphasize that an injunction prohibiting violations of the securities
regulations must comply with Rule 65(d). In this case, we recognize that an
injunction enjoining violations of §§ 15(c)(3) and 17(a) of the Exchange Act and
31
Rules 15c3-3 and 17a-3 may comply with Rule 65(d). We do so because these
statutory and regulatory provisions specifically describe the acts required of the
person enjoined. We also find that given Congress’s authorization to enjoin
violations of the Exchange Act and the fact that this is a civil enforcement action
brought by the SEC, less particularity is required in this context. We caution,
however, that in some instances an injunction which merely tracks the language of
the securities statutes and regulations will not clearly and specifically describe
permissible and impermissible conduct. When copying the statutory language does
not specifically describe the acts restrained, the district court should craft terms that
provide the defendant fair notice of what conduct risks contempt and clearly inform
the defendant of what he is ordered to do or not do.
IV. CONCLUSION
We affirm the court’s judgment that Goble aided and abetted North American’s
violations of the Customer Protection Rule and books and records requirements of the
Exchange Act. We reverse the court’s conclusion that Goble committed securities
fraud in violation of § 10(b). In light of this reversal, we vacate the portions of the
court’s injunction that bar Goble from procuring a securities license, engaging in the
securities business, or violating § 10(b) or Rule 10b-5. We also vacate the portions
32
of the injunction addressing compliance with §§ 15(c)(3) and 17(a) of the Exchange
Act because these paragraphs simply cross-reference the statutes and regulations.
We remand to the district court for it to consider in the first instance whether
Goble’s violations of the Customer Protection Rule and books and records
requirements warrant the lifetime bar from the securities business. On remand, the
court should also afford Goble an opportunity to be heard on the propriety of this
relief. And, the court should draft an injunction addressing compliance with
§§ 15(c)(3) and 17(a) that allows Goble to understand his obligations under the
injunction.
AFFIRMED IN PART; REVERSED IN PART; VACATED AND
REMANDED.
33