Dembski v. SEC

17-1553
Dembski v. SEC
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY
FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT=S LOCAL RULE 32.1.1. WHEN
CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE
EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION
“SUMMARY ORDER”). A PARTY CITING TO A SUMMARY ORDER MUST SERVE A COPY OF IT ON
ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second
Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley
Square, in the City of New York, on the 27th day of February, two thousand
eighteen.
PRESENT:
BARRINGTON D. PARKER,
PETER W. HALL,
RAYMOND J. LOHIER, JR.,
Circuit Judges.
TIMOTHY S. DEMBSKI,
Petitioner,
v. No. 17-1553-ag
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION,
Respondent.
For Petitioner: Paul Batista, Paul Batista, P.C., New York, NY.
For Respondent: Michael A. Conley, Solicitor, Dominick V. Freda,
Assistant General Counsel, John B. Capehart, Senior
Counsel, for Robert B. Stebbins, General Counsel,
Securities and Exchange Commission, Washington, D.C.
1
Petition for a review of a decision of the United States Securities and Exchange
Commission.
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,
ADJUDGED, AND DECREED that the petition for review is DENIED.
Petitioner Timothy S. Dembski petitions for review of a March 24, 2017
decision issued by the United States Securities and Exchange Commission (“SEC” or
the “Commission”) finding that he violated, and aided, abetted, and caused violations
of antifraud provisions of the federal securities laws and imposing remedial
sanctions. The SEC initiated an investigation of Dembski and his investment
advising firm, Reliance Financial Advisors, LLC, and then upheld an Administrative
Law Judge’s findings that Dembski violated Section 17(a)(2) of the Securities Act of
1933, Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule
10b-5, and that Dembski violated Section 206 of the Investment Advisers Act of 1940
and Advisers Act Rule 206(4)-8, by making material misstatements and omissions in
the offer and sale of securities. The SEC barred Dembski for life from the securities
industry, ordered him to cease-and-desist from further securities law violations, and
imposed disgorgement plus prejudgment interest and two third-tier civil monetary
penalties. We assume the parties’ familiarity with the underlying facts, the
procedural history of the case, and the issues on appeal.
We will affirm the Commission’s findings of fact if they are supported by
substantial evidence. VanCook v. SEC, 653 F.3d 130, 137 (2d Cir. 2011); see MFS Sec.
Corp. v. SEC, 380 F.3d 611, 617 (2d Cir. 2004). “Substantial evidence” is evidence
2
that amounts to “more than a mere scintilla,” and has been defined as “such relevant
evidence as a reasonable mind might accept as adequate to support a conclusion.”
Richardson v. Perales, 402 U.S. 389, 401 (1971) (quoting Consolidated Edison Co. v.
NLRB, 305 U.S. 197, 229 (1938)). Under the Administrative Procedure Act, which
applies to our review of Commission orders, we will set aside the actions, findings, or
conclusions of law only if they are “arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A); see D’Alessio v. SEC, 380
F.3d 112, 120 (2d Cir. 2004). We will not disturb the Commission’s choice of sanction
unless it is “unwarranted in law or without justification in fact.” VanCook, 653 F.3d
at 137 (quoting Butz v. Glover Livestock Comm’n Co., 411 U.S. 182, 186 (1973)).
In order to establish primary liability under Section 10(b) and Rule 10b‐5, the
SEC must show “that in connection with the purchase or sale of a security the
defendant [here Dembski], acting with scienter, made a material misrepresentation
(or a material omission if the defendant had a duty to speak) or used a fraudulent
device.” SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1467 (2d Cir. 1996). A violation
under Section 17(a)(2) does not require scienter. In re David Henry Disraeli, Release
No. 2686, 2007 WL 4481515, at *5 (Dec. 21, 2007). Facts supporting a Securities Act
Section 17(a) or an Exchange Act Section 10(b) violation by an investment adviser
will also support a showing of a Section 206 violation under the Advisers Act. SEC v.
Haligiannis, 470 F. Supp. 2d 373, 383 (S.D.N.Y. 2007). Advisers Act Section 206
therefore “prohibits failures to disclose material information, not just affirmative
frauds.” Disraeli, 2007 WL 4481515, at *8; see also SEC v. Capital Gains Research
3
Bureau, Inc., 375 U.S. 180, 191–92 (1963). Scienter is required for a Section 206(1)
violation but need not be found for a violation of Sections 206(2) or (4). Disraeli, 2007
WL 4481515, at *8.
At the initial hearing, the ALJ heard eleven fact witnesses, one expert witness,
and admitted 296 exhibits. See In re Reliance Financial Advisors, LLC, SEC Release
No. 941, 2016 WL 123127, at *1 (ALJ Jan. 11, 2016). Substantial and probative
evidence supports the Commission’s findings that Dembski made, or caused to be
made, a significant number of false statements or misrepresentations to his client-
investors. Eight of the nineteen client-investor witnesses all provided consistent and
overlapping accounts of the multiple misrepresentations that Dembski made to them
regarding investing in the Prestige Fund (the Fund) and the “tested and proven” low-
risk associated therewith. See id. at *2, *7–13; see also Markowski v. SEC, 34 F.3d
99, 104–05 (2d Cir. 1994). Those misrepresentations included, but were not limited
to, informing the client-investors that the Fund was FDIC-insured, that Dembski was
working on patenting the algorithm, that backtesting of the algorithm involved real
trades and orders and was tested and proven to demonstrate losses would be limited
to 1%, that investments in the Fund could be withdrawn at any time, and that the
Fund’s daily trading would be run by someone with significant experience in
securities trading. Reliance Financial Advisors, 2016 WL 123127, at *13–14.
Substantial evidence also supports the Commission’s findings that the
misrepresentations were material and that Dembski made them with scienter or
recklessly. See Basic Inc. v. Levinson, 485 U.S. 224, 231–32 (1988) (stating a
4
misrepresentation 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” (internal quotation
marks omitted)); First Jersey Sec., Inc., 101 F.3d at 1467 (“Scienter, as used in
connection with the securities fraud statutes, means intent to deceive, manipulate,
or defraud; or at least knowing misconduct.” (citations omitted)). The client-investor
testimony was corroborated by the testimony of Dembski’s partners in Reliance and
the Fund, who confirmed Dembski made the false statements knowingly or
negligently with the intent to induce his clients to invest in the Fund. See Reliance
Financial Advisors, 2016 WL 123127, at *3–6, *13–14. The documentary exhibits
further demonstrated that Dembski knowingly submitted false information about
Stephan’s work experience to be included in the private placement memorandum for
the same purpose. The witness testimony and the documentary evidence constitute
substantial evidence supporting the Commission’s findings that Dembski, with intent
to deceive, manipulate, or defraud, made material misrepresentations either
recklessly or with scienter. VanCook, 653 F.3d at 137; First Jersey Sec., Inc., 101 F.3d
at 1467. As both co-founder and managing member of the Fund, Dembski was liable
for his own material misrepresentations and those of the Fund that were made in his
capacity as an investment adviser. See Abrahamson v. Fleschner, 568 F.2d 862, 870
(2d Cir. 1977).
In challenging the Commission’s Opinion and Order, Dembski asserts that
every witness, other than he, who took the stand at the hearing before the ALJ
5
committed perjury. We decline, however, to disturb credibility determinations on
appeal absent a showing that the factfinder’s decision was “arbitrary, capricious, an
abuse of discretion, or otherwise not in accordance with law.” See D’Alessio, 380 F.3d
at 120 (quoting 5 U.S.C. § 706(2)). Dembski makes no such showing here.
Dembski’s reliance on advice of his counsel is similarly unavailing. To invoke
this principle, Dembski would need to show “that he made complete disclosure to
counsel, sought advice as to the legality of his conduct, received advice that his
conduct was legal, and relied on that advice in good faith.” Markowski, 34 F.3d at
104–05. Dembski does not meet that test here. And even if these prerequisites were
satisfied, such reliance is not a complete defense, but only one factor for consideration.
Id. In light of the substantial evidence supporting the Commission’s findings in this
case, Dembski’s reliance upon advice of counsel, even if established, would not furnish
a ground for reversal.
Finally, Dembski challenges the sanctions as too severe and contends that the
Commission abused its discretion in affirming the sanctions but increasing the civil
penalty. However, we will not overturn the setting of sanctions by an administrative
body unless the sanctions are “unwarranted in law or without justification in fact.”
VanCook, 653 F.3d at 137  (quoting Butz, 411 U.S. at 186). The Commission found
that the egregiousness of Dembski’s misconduct and the need for appropriate
deterrence warranted the sanctions imposed. We affirm the sanctions as both
warranted in law and justified in fact.
6
Accordingly, we DENY the petition for review.
FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk
7