Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-11-01082/USCOURTS-caDC-11-01082-0/pdf.json

Parties Involved:
Dan Rapoport
Petitioner
Securities and Exchange Commission
Respondent

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 6, 2012 Decided June 19, 2012

No. 11-1082

DAN RAPOPORT,

PETITIONER

v.

SECURITIES AND EXCHANGE COMMISSION,

RESPONDENT

On Petition for Review of an Order

 of the Securities & Exchange Commission

Michael Hanin argued the cause for petitioner. With him

on the briefs was Leigh McMullan-Bellas. 

Jeffrey A. Berger, Senior Counsel, 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 John W. Avery, Deputy Solicitor.

Before: SENTELLE, Chief Judge, GRIFFITH, Circuit Judge,

and WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Chief Judge SENTELLE. 

SENTELLE, Chief Judge: Dan Rapoport, a Russian citizen,

petitions this Court to review the Default Order the Securities

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and Exchange Commission (SEC or the Commission) entered

against him for failing to respond to administrative proceedings

initiated by the Commission on allegations that Rapoport

violated Section 15(a) of the Securities Exchange Act of 1934

(Exchange Act). Among other things, Section 15(a) prohibits

brokers and dealers from soliciting U.S. customers to engage in

any securities transaction unless the broker or dealer is

registered with the SEC or a U.S. self-regulatory organization. 

Rapoport argues that the Commission arbitrarily applied

Exchange Act Rule 155(b), 17 C.F.R. § 201.155(b), which gives

the Commission discretion to set aside default orders “for good

cause shown.” 

We agree with Rapoport that the Commission’s application

of Rule 155(b) was inconsistent with its precedent and therefore

arbitrary. Accordingly, we grant the petition for review, vacate

the Commission’s order denying Rapoport’s motion to set aside

the default entered against him, and remand for further

proceedings.

I. Background

Because the procedural background of this case lies at the

heart of Rapoport’s petition, we provide here a detailed

summary of the events culminating in our review of this matter. 

A. The Order Instituting Proceedings

 

On December 8, 2008, the SEC Division of Enforcement

filed an Order Instituting Proceedings (OIP) against OOOCentreInvest Securities (CI-Moscow), a Moscow-based brokerdealer specializing in the sale of second-tier Russian equities. 

The Division alleged violations of SEC registration, reporting,

and record-keeping requirements from 2003 through 2007. The

OIP also named as respondents CI-Moscow’s United States

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affiliate, CentreInvest, Inc. (CI-New York), along with several

of the companies’ United States and Russian employees,

including Dan Rapoport. The allegations contained in the OIP

form the entirety of the Commission’s case against Rapoport. 

They are as follows:

The OIP alleges that Rapoport, a Russian resident, joined

CI-Moscow in 1995, and in 1999, relocated to New York City

to work as a managing director of CI-New York. Rapoport

returned to CI-Moscow in 2003, where he oversaw both CIMoscow and CI-New York’s brokerage operations. At some

point, he was promoted to executive director of CI-Moscow. 

The OIP alleges that from 2003 until at least November

2007, “CI-New York was under the control of CI-Moscow.” It

further alleges that “CI-Moscow and Rapoport controlled” the

New York entity by, inter alia, supervising and directing the

staff of CI-New York and controlling its budget and finances. 

It further states that employees of CI-New York referred to

Rapoport as the “boss” and to the Moscow entity as the “parent

broker-dealer” of CI-New York. 

The OIP alleges that CI-Moscow never registered as a

foreign broker-dealer with the SEC. While Rapoport was

working in New York, he was a registered representative, but

after his return to Moscow, he was not registered or licensed to

sell securities in the United States. Further, from “about 2003

until November 2007,” CI-Moscow and Rapoport “solicited

institutional investors in the United States to purchase and sell

thinly-traded stocks of Russian companies . . . without

registering as a broker-dealer as required by Section 15(a) of the

Exchange Act” or meeting the requirements for exemption from

registration for foreign broker-dealers under Exchange Act Rule

15a-6(a). The OIP alleges that Rapoport instructed CI-New

York’s employees to solicit U.S. institutional investors to

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transact in the securities and to direct the investors to CIMoscow to complete the transaction, and in some cases,

Rapoport solicited the investors directly. It states that Rapoport

knew that any CI-Moscow representative soliciting U.S.

investors would have to be registered with the Commission or

a U.S. self-regulatory organization.

 The OIP concludes: “As a result of the conduct described

above, CI-Moscow and Rapoport willfully violated Section

15(a) of the Exchange Act . . . .” The OIP alleges more

generally that all of the respondents benefitted financially from

these transactions.

Although the OIP leveled somewhat more specific

allegations regarding the conduct of other CI-New York

employees, the allegations described above represent the extent

of the Enforcement Division’s statements in the OIP about

Rapoport. It did not cite a single specific instance in which

Rapoport or the other respondents solicited a U.S. investor. 

B. Service Procedures

In December 2008, the Enforcement Division served the

OIP on CI-New York and on attorneys for the other U.S.

respondents. On December 15, 2008, the Division moved to

serve the OIP on Rapoport and the other Russian respondents

through their U.S. counsel because Russian authorities refuse to

execute U.S. requests for service of process. The Division’s

motion relied on SEC Rule of Practice 141(a)(2)(iv), which

provides that “[n]otice of a proceeding to a person in a foreign

country may be made . . . by any . . . method reasonably

calculated to give notice, provided that the method of service

used is not prohibited by the law of the foreign country.”

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New York attorney Richard Kraut filed a memorandum in

opposition to the Division’s motion to serve Rapoport via Kraut. 

The memorandum included a footnote stating that Kraut

“appear[s] solely for the purpose of opposing the Division’s

motion. By submitting this Memorandum, [Rapoport] do[es]

not admit to the Commission’s jurisdiction over [him].”

The Administrative Law Judge (ALJ) granted the

Enforcement Division’s motion to serve foreign representatives

by serving their U.S. counsel. Thereafter, Rapoport moved for

vacatur or reconsideration. On February 5, 2009, the ALJ

denied the motion for vacatur or reconsideration and ordered

that the service of the OIP on Rapoport and another Russian

respondent be considered effective as of January 8, 2009, the

last date on which the “Foreign Respondents received the OIP

as confirmed by return receipt of certified mail.” On February

12, 2009, Kraut filed notice of his withdrawal of his

representation of Rapoport, effective February 5, 2009.

Rapoport never suggested that he did not receive actual notice

of the issuance of the OIP or the February 5, 2009 order. At oral

argument, Rapoport’s current counsel confirmed that Rapoport

does not contend that he was unaware of the SEC proceedings. 

C. The Default Order

Rapoport did not respond to the OIP. On April 8, 2009, the

Division moved for the ALJ to enter a default judgment against

Rapoport. The motion was served on Kraut by Federal Express,

although there is no indication it was served on Rapoport

personally. Rapoport did not file an answer or opposition to the

motion. The ALJ notified Rapoport of pre-hearing conferences

by sending scheduling orders to his Moscow business address. 

Rapoport did not participate in those conferences. 

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On July 31, 2009, the ALJ entered the Default Order

imposing sanctions on Rapoport and the other respondents. A

copy of the Default Order was sent to Rapoport at his Moscow

business address. When Rapoport entered the United States on

October 23, 2009, a Customs officer personally served Rapoport

with a copy of the Order.

In the Order, the ALJ explained that when a party is in

default, allegations in an OIP are deemed to be true as to that

party. 17 C.F.R. § 201.155(a). The ALJ recited the facts

pertaining to Rapoport almost verbatim from the OIP and added

no new facts. He noted particularly that the OIP “alleged that

. . . Rapoport willfully violated Section 15(a) of the Exchange

Act” by soliciting securities transactions with U.S. investors

without being registered. The ALJ reasoned that because he

could take the facts alleged in the OIP as true, and because the

OIP alleged that Rapoport willfully violated Section 15(a), he

could find that Rapoport “functioned as an unregistered broker

and willfully violated Section 15(a)(1) of the Exchange Act.”

Based solely on that rationale and the facts alleged in the

OIP, the ALJ imposed sanctions on Rapoport. He ordered

Rapoport to cease and desist from committing Section 15(a)

violations, barred Rapoport from association with any broker or

dealer, and ordered Rapoport to provide an accounting of

income so he could be ordered to disgorge his ill-gotten gains

with prejudgment interest.

The ALJ also imposed a civil monetary penalty on Rapoport

under Exchange Act Section 21B(b), 15 U.S.C. § 78u-2(b). 

Section 21B(b) sets out three tiers of maximum penalties for

“each [violative] act or omission.” The maximum penalty

applies to each act or omission and does not cap the total

penalty. To qualify for second tier penalties, the act or omission

must have “involved fraud, deceit, manipulation, or deliberate

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or reckless disregard of a regulatory requirement.” 15 U.S.C.

§ 78u-2(b)(2). The ALJ imposed second-tier penalties, which

are capped at $65,000 for each act or omission committed by an

individual after February 14, 2005, and $60,000 before that date.

See 17 C.F.R. §§ 201.1002, .1003 (setting penalty amounts). 

The ALJ acknowledged that the OIP did not suggest how many

individual violations Rapoport committed and stated that it was

“necessary to determine how to appropriately parse up the

violations committed by CI-New York, Rapoport, and

[Rapoport’s colleague] Yenin [and] whether to treat the entire

course of conduct as a single act or as a series of acts.”

Immediately thereafter, without actually doing any parsing

or making any determinations, the ALJ opined that the

defaulting Respondents had acted recklessly or with deliberate

disregard of the regulatory requirements, and, thus, it was

appropriate to impose the maximum second tier penalties on

them. He calculated those penalties by imposing one maximum

penalty for each year of the violative conduct—not by adding up

alleged individual acts or omissions (and, indeed, he could not

do so because the Enforcement Division never listed any in the

OIP). The ALJ ordered Rapoport to pay a total penalty of

$550,000. However, the ALJ realized upon Rapoport’s later

motion that he had miscalculated the sanctions and reduced

Rapoport’s penalty to $315,000.

D. First Motion to Set Aside: ALJ Review

 On December 23, 2009, Rapoport’s new counsel entered his

notice of appearance and moved to set aside the default

judgment as to Rapoport pursuant to Exchange Act Rule 155(b),

which allows an ALJ or the Commission to set aside a default

“for good cause shown.” 17 C.F.R. § 201.155(b). Under Rule

155(b), a defaulting party’s motion must meet three

requirements: it must be filed “within a reasonable time”; it

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must state his reasons for failing to defend the underlying

proceeding; and it must specify the nature of the defenses he

proposes to mount against the underlying proceeding. Id. 

On March 22, 2010, the ALJ denied Rapoport’s motion on

the grounds that Rapoport did not file his motion “within a

reasonable amount of time,” nor did Rapoport adequately

explain why he had failed to defend the OIP. The ALJ reviewed

each of Rapoport’s proposed defenses to the OIP, including his

denial of the allegations in the OIP. At this late point, the ALJ

cited record evidence to show that Rapoport had in fact solicited

U.S. investors without registering with the Commission. After

reviewing and countering all of Rapoport’s proposed defenses,

the ALJ concluded that they had “no likelihood of success under

the Commission case law,” so setting aside the Default Order

was not necessary to prevent injustice. As mentioned above, the

ALJ did recalculate the second-tier sanctions but otherwise

denied Rapoport’s motion to set aside the Order.

E. Second Motion to Set Aside: Commission Review

Next, Rapoport filed a motion with the SEC to set aside the

Default Order, which it denied on January 2, 2011. The

Commission provided a condensed version of the facts alleged

in the OIP that were included in the Default Order, and recited

the events culminating in the entry of the Default Order and the

law judge’s refusal to set aside the Order.

The Commission examined Rapoport’s asserted reasons for

failing to defend the proceeding and found that those reasons did

not support setting aside the Default Order. The Commission

also found that Rapoport did not file his Motion to Set Aside in

a reasonable amount of time. The Commission looked to the

date of service of the OIP—January 8, 2009—as the first date

Rapoport could have been put on notice that default was a

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possibility. The Commission recognized that Rapoport actually

went into default on March 2, 2009, when he failed to file his

answer to the Division’s default motion. The Commission then

looked to the date the ALJ entered the Default Order—July 31,

2009—to determine that Rapoport waited almost five months to

file the motion. The Commission also mentioned the date that

the customs officer served Rapoport personally with the Default

Order. 

The Commission recognized that the text of Rule 155(b)

requires a party moving to set aside a default order to state his

proposed defenses. It reasoned, however, that “[i]f Rapoport

had established that his reasons for the failure to defend the

proceeding supported setting aside the Default order, and that

Motion to Set Aside I was filed within a reasonable time, then

we would consider whether his proposed defenses had potential

merit.” But because Rapoport did not file his motion within a

reasonable time and had offered no good reason for failing to

defend the proceedings, the Commission decided that

“[e]valuating the merits of his defenses would in effect grant

him the hearing that he chose to forego by failing to defend the

proceeding.” Instead, the Commission opined, respondents

should be motivated to participate in proceedings knowing that

a default order can be entered on the basis of allegations in the

OIP.

The Commission concluded that it was “not unjust” for the

ALJ to issue the Default Order or to impose the sanctions.

Rapoport now petitions this Court to review the Commission’s

application of Rule 155(b), as well as the Commission’s

imposition of sanctions on him. 

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II. Standard of Review

Under the Administrative Procedure Act, we must uphold

the Commission’s legal conclusions unless they are “arbitrary,

capricious, an abuse of discretion, or otherwise not in

accordance with law.” 5 U.S.C. § 706(2)(A); see Rockies Fund,

Inc. v. SEC, 428 F.3d 1088, 1092-93 (D.C. Cir. 2005). We

defer to the Commission’s factual findings if they are supported

by substantial evidence. 15 U.S.C. § 78(a)(4).

III. SEC Rule 155(b)

Securities and Exchange Commission Rule 155(b) states:

 A motion to set aside a default shall be made within a

reasonable time, state the reasons for the failure to appear

or defend, and specify the nature of the proposed defense in

the proceeding. In order to prevent injustice and on such

conditions as may be appropriate, the [ALJ], at any time

prior to the filing of the initial decision, or the Commission,

at any time, may for good cause shown set aside a default. 

17 C.F.R. § 201.155(b). 

Rapoport first posits that because Rule 155(b) includes

wording similar to Federal Rule of Civil Procedure 55(c), which

provides that “[t]he court may set aside an entry of default for

good cause . . .,” the SEC must interpret the term “good cause”

in the same way that federal courts have interpreted the term. 

Specifically, he argues that before declining to set aside a

default order, the Commission must consider three factors,

including (1) the willfulness of the default; (2) whether setting

aside the default order would prejudice the Commission; and (3)

whether the defaulting party has offered a meritorious defense. 

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See, e.g., Keegel v. Key West & Caribbean Trading Co., 627

F.2d 372, 373 (D.C. Cir. 1980). Rapoport contends that,

because the Commission did not consider those three factors, we

must set aside the entry of the Default Order against him. 

If an agency adopts a rule of practice similar to a longestablished and much-used federal rule, it would assist persons

subject to the agency’s jurisdiction, as well as the administrative

law judges and commissioners who must apply the rule, if that

agency would explain how its rule is to be understood and

highlight significant deviations from the federal standard. The

Commission, however, is not bound to interpret its own rule in

the same way federal courts interpret their rule, even if the two

rules are worded similarly. The SEC is “free to fashion [its]

own rules of procedure.” Vermont Yankee Nuclear Power Corp.

v. Natural Resources Def. Council, Inc., 435 U.S. 519, 543

(1978). It may tailor those rules “to the peculiarities of the

industry and the tasks of the agency involved.” FCC v.

Schreiber, 381 U.S. 279, 290 (1965). We defer to the

Commission’s interpretations of its own rules unless they are

“plainly erroneous or inconsistent” with its regulations. Auer v.

Robbins, 519 U.S. 452, 461 (1997); Cement Kiln Recycling

Coalition v. EPA, 493 F.3d 207, 220 (D.C. Cir. 2007). See also

Dixon v. Love, 431 U.S. 105, 115 (1977) (“[P]rocedural due

process in the administrative setting does not always require

application of the judicial model.”); McClelland v. Andrus, 606

F.2d 1278, 1285 (D.C. Cir. 1979) (“[A]gencies need not observe

all the rules and formalities applicable to courtroom

proceedings.”).

 

 That said, agencies must apply their rules consistently. 

They may not depart from their precedent without explaining

why. If they do, “we have no choice but to remand for a

reasoned explanation.” Verizon Tel. Cos. v. FCC, 570 F.3d 294,

304-05 (D.C. Cir. 2009). The Supreme Court has explained that

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“[i]f the administrative action is to be tested by the basis upon

which it purports to rest, that basis must be set forth with such

clarity as to be understandable. It will not do for a court to be

compelled to guess at the theory underlying the agency’s action;

nor can a court be expected to chisel that which must be precise

from what the agency has left vague and indecisive.” SEC v.

Chenery Corp., 332 U.S. 194, 196-97 (1947). 

In this case, the SEC has both departed from its own

precedent and left its Rule 155(b) interpretation “vague and

indecisive” in at least two ways—first, with regard to which

requirements the Commission must consider in rendering a

decision under Rule 155(b), and second, with regard to the rule’s

timing requirement. 

1. Rule 155(b) Requirements

Rule 155(b) establishes three requirements for motions to

set aside defaults. They must (1) “be made within a reasonable

time”; (2) “state the reasons for the failure to appear or defend”

the original proceeding; and (3) “specify the nature of the

proposed defense” to the original proceeding. 17 C.F.R.

§ 201.155(b). If the Commission determines that the petitioner

has shown “good cause” for setting aside the default, then the

Commission may do so at its discretion at any time. Id. 

Here, the Commission determined that Rapoport filed his

first motion to set aside the default after an unreasonable amount

of time had passed—a determination we discuss below. It also

concluded that Rapoport’s reasons for failing to defend the OIP

lacked merit. Then the Commission reasoned that because

Rapoport failed to meet the timeliness requirement and had not

offered a satisfactory explanation for why he failed to defend the

OIP, the Commission would not consider Rapoport’s proposed

defenses to the OIP because “[e]valuating the merits of his

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defenses would in effect grant him the hearing that he chose to

forego by failing to defend the proceeding.”

Rapoport contends that the Commission should be required

to consider all three requirements of Rule 155(b). In its main

brief, the Commission argues that in previous cases “the

Commission has declined to consider proposed defenses when

defaulting parties cannot justify their failure to answer or do not

timely move to set aside the default.” Respondent’s Br. at 21. 

To support this argument, the Commission cites In re Hellen, 55

S.E.C. 248 (2001); In re Ainbinder, 1997 SEC LEXIS 2062

(Oct. 1, 1997); In re Bullard, 1995 SEC LEXIS 3049 (Nov. 9,

1995); and In re Richards, 1994 SEC LEXIS 2663 (Aug. 29,

1994). The problem is, not one of these cases actually supports

that argument. In none of these cases did the Commission

choose to ignore a petitioner’s proposed defenses because the

petitioner failed to meet the first two requirements of Rule

155(b).

In Hellen and Richards, the SEC found that the petitioners

did not timely file their motions, and did not present valid

reasons for failing to defend the OIPs, but neither Hellen nor

Richards included any proposed defenses in their motions. 55

S.E.C. at 249-50; 1994 SEC LEXIS 2663, at *8. In those cases,

the Commission could not decline to consider what the parties

did not provide.

In Ainbinder, the SEC found that Ainbinder did not file his

motion within a reasonable time and that his reason for failing

to respond to the OIP was insufficient. 1997 SEC LEXIS 2062,

at *2-3. The Commission did not state whether Ainbinder

proposed any defenses. See id. 

 In Bullard, the Commission found that Bullard timely filed

his motion but did not present sufficient reasons for failing to

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respond to the proceedings. Nor did he specify any defenses. 

1995 SEC LEXIS 3049, at *3-4. 

In the hope of obtaining greater clarity on this issue, during

oral argument, we asked counsel to supplement their main briefs

with a discussion of the past application of Rule 155(b),

specifically regarding whether the Commission previously has

refused to consider a petitioner’s proposed defenses included in

his Rule 155(b) motion. The Commission submitted a

supplemental brief containing every Commission decision it

could find addressing a motion to set aside a default, which

included the four decisions discussed above and three additional

decisions. 

The first additional decision, In re Birman Managed Care,

2008 SEC LEXIS 2810 (Sept. 23, 2008), appears to be an ALJ

order, not a binding Commission decision; thus, we do not

consider it here. In the second, In re Rolandi Securities Corp.,

1972 SEC LEXIS 738 (Apr. 12, 1972), the Commission granted

a motion to set aside a default because the Division of

Enforcement consented to the motion. It is therefore irrelevant

to this case. In the final decision, the Commission granted the

petitioner’s motion to set aside a default. In re Kern, 2005 SEC

LEXIS 744, at *3-5 (Feb. 1, 2005). It found that the motion was

timely, and, without discussing any details of the proposed

defenses, the Commission decided to “accept the proposed

answer as an appropriate response” and set aside the default. Id.

Retreating from its position that the Commission previously

had refused to consider proposed defenses in cases in which

petitioners failed to meet the first two Rule 155(b) requirements,

the Commission characterized the seven cases as standing for

the broader proposition that when petitioners fail to meet any

one of the three requirements, the Commission customarily has

declined to consider whether the petitioner has met the other

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two. Once again, the SEC mischaracterizes its precedent. As

discussed above, in Hellen, Richards, and Bullard, the petitioner

did not state any defenses; in Ainbinder, we do not know if the

petitioner stated defenses; and in Kern, the Commission granted

the motion and accepted the proposed defenses without

explaining what those defenses were or what reasons for the

petitioner’s failure to respond to the OIP constituted a sufficient

explanation. 

We do not suggest that the Commission could not interpret

Rule 155(b) in the manner it now proposes. Rather, we hold that

the Commission has not provided a consistent interpretation of

the Rule nor justified the apparent inconsistency of its

application. Although the Commission is not bound to follow

its precedent, it may not depart from its precedent without

offering a reasoned explanation. See Verizon Tel. Cos., 570 F.3d

at 304-05. It has not provided such an explanation here. 

2. Timing

The Commission also has failed to provide any intelligible

standard to assess what constitutes a “reasonable” amount of

time for filing a motion to set aside a default under Rule 155(b).

In Ainbinder, the Commission started the clock on the date the

default order was entered and tolled it four years later when the

Commission received Ainbinder’s motion. 1997 SEC LEXIS

2062, at *1-3. Because Ainbinder went to the Commission’s

New York office six months after the default was ordered to

confirm the default, however, the Commission also suggested

that it might look to the date of the confirmation to start the

clock—but even so, Ainbinder did not act in a reasonable

amount of time. 1997 SEC LEXIS 2062, at *3.

 In Richards, the Commission found that the twenty-one

years that elapsed between the entry of the default order and the

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filing of the petitioner’s motion to set aside the default did not

constitute a reasonable amount of time. 1994 SEC LEXIS 2663,

at *1, *4. In Hellen, the Commission also started the

“reasonable time” clock on the date the default order was

entered. It tolled the clock the day Hellen requested to set

aside the default, almost a year later, which the Commission

found to be an unreasonable amount of time. 55 S.E.C. at 248-

49. In Bullard and Kern, the Commission started the clock on

the day the default was entered, and found the petitioners’

motions, filed five days and fourteen days later, respectively, to

be timely. 1995 SEC LEXIS 3049, at *2-3; 2005 SEC LEXIS

744, at *4.

Here, the Commission looked to several dates to start the

clock. The Commission explained that to determine whether

Rapoport acted within a reasonable amount of time, “we look at

more than just the date that he was personally served with the

Default Order.” This statement thus suggests that the

Commission did, in some fashion, look to the date Rapoport was

personally served, which was not a consideration in any

previous SEC decision.

The Commission went on to suggest that the OIP itself put

Rapoport on notice of the possibility of default. The

Commission also noted that the Enforcement Division filed its

Default Motion on April 9, 2009, and that the judge waited until

July 31, 2009, more than three months later, to issue the Default

Order, which was mailed to Rapoport that same day in Moscow. 

The Commission reasoned that not only did Rapoport wait five

months to file his motion after the Default Order was entered, he

had “been on notice of the possibility of default for more than

eleven months . . . and had been in default for more than nine

months (since he failed to file his answer by March 2).” The

Commission added that under the circumstances just described,

it found that Rapoport did not move to set aside the Default

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Order within a reasonable time “when he filed Motion to Set

Aside I two months after he was personally served with the

Default Order.”

We are not able to discern that the Commission has set forth

a principled way in which to determine on what date the

“reasonable time” clock starts running. The Commission

generally looks to the entry of a default order, but it might also

look to the date a petitioner shows up in its branch office to

confirm a default, as in Ainbinder, or it might look to the date

the OIP was served, the date the Enforcement Division filed its

motion for default, or the date that a petitioner was personally

served with the default order—all of which the Commission

cited here—to inform its decision. 

The Commission also has not stated with any clarity how it

determined the reasonableness of the time by which a petitioner

must file a motion to set aside a default. From Hellen, we know

that a one-year time lapse between the entry of the default order

and the petitioner’s motion was an unreasonable amount of time

on the facts of that case. In Kern, it found that fourteen days

was reasonable. But the Commission decision before us cites

the eleven months that elapsed since the filing of the OIP, the

nine months Rapoport actually was in default, the five months

from the entry of the Default Order, and the two months that

elapsed after Rapoport was personally served as possible

unreasonable amounts of time. Although agencies have

flexibility in interpreting their own rules, their interpretations

must not be “vague and indecisive.” See Chenery Corp., 332

U.S. at 197. As we have stated before, “We cannot defer to

what we cannot perceive.” Int’l Longshoreman’s Ass’n v. Nat’l

Mediation Bd., 870 F.2d 733, 736 (D.C. Cir. 1989). The

Commission has left “vague and indecisive” the date that starts

the “reasonable time” clock, as well as the amount of time

considered reasonable. 

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IV. Sanctions

As an alternative argument, Rapoport has requested that we

vacate the sanctions imposed on him by the Commission. In

considering its further disposition of Rapoport’s motion after our

remand, we suggest that the Commission should give careful

review to the law judge’s analysis in the Default Order, which

the Commission apparently relied upon in its earlier disposition.

That analysis was inaccurate as well as inadequate to support the

maximum second-tier civil penalties, even given our

extraordinarily deferential review of SEC sanctions. See Butz

v. Glover Livestock Comm’n Co., 411 U.S. 182, 185-86 (1973)

(SEC sanctions are not to be disturbed unless they are

“unwarranted in law or . . . without justification in fact.”).

The law judge’s reasoning was inaccurate because he

applied a faulty formula to calculate the penalties. Under 15

U.S.C. § 78u-2(a), the Commission may assess civil monetary

penalties against any person the Commission finds has “willfully

violated” various securities regulations. If the violation

“involved fraud, deceit, manipulation, or deliberate or reckless

disregard of a regulatory requirement,” the Commission may

impose “second tier” penalties. The Commission periodically

adjusts the maximum penalty amounts. From 2001 to February

15, 2005, the maximum penalty per violative act or omission

was $60,000. 17 C.F.R. § 201.1002. From February 15, 2005,

to the conclusion of the relevant events alleged in the OIP in

2007, the maximum amount was increased to $65,000 for each

violation. 17 C.F.R. § 201.1003.

In the Default Order, the ALJ explained that the Division’s

OIP “gives no indication as to the number of violations it

believes CI-New York, Rapoport, and [Rapoport’s colleague]

Yenin committed in the course of the improper solicitation of

U.S. investors, occurring over the course of five years.” 

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Therefore, the ALJ reasoned, “it is necessary to determine how

to appropriately parse up the violations committed by CI-New

York, Rapoport, and Yenin; whether to treat the entire course of

conduct as a single act or as a series of acts, as to which multiple

penalties would be appropriate.”

Having said that, the ALJ did not undertake any such

parsing. Immediately after stating that parsing needed to be

done, he wrote: “In this case, the actions of the defaulting

Respondents demonstrate deliberate or reckless disregard of

regulatory requirements. Accordingly, it is appropriate that each

of the defaulting Respondents shall pay a second-tier penalty.” 

He imposed the maximum penalty on each respondent five

times—once for each year the alleged solicitations occurred. 

In his order denying Rapoport’s Motion to Set Aside the

Default Order, the ALJ confirmed that the original Default

Order provides “that the civil penalty was to be calculated to

reflect the assessment of maximum second-tier penalties of

$60,000 each year for conduct that occurred in 2003 and 2004

and $65,000 each year for 2005, 2006, and 2007,” resulting in

a sanction of $315,000. 

These calculations do not follow the formula set by the

statute. To impose second-tier penalties, the Commission must

determine how many violations occurred and how many

violations are attributable to each person, as the statute instructs.

Further, to impose second-tier penalties at all (much less the

maximum penalty), the Commission must find that Rapoport

“willfully” violated Exchange Act Section 15(a) and that he did

so with “deliberate or reckless disregard” of the registration

requirements. See 15 U.S.C. § 78u-2(a). The only statements

in the OIP that support the second-tier penalties are several

conclusory allegations that Rapoport “willfully violated Section

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15(a) of the Exchange Act” and that he “knew” that CI-Moscow

employees soliciting U.S. investors had to be registered.

Although the ALJ could deem as true allegations in the OIP

once Rapoport defaulted, see 17 C.F.R. § 201.155(a), these

conclusory allegations that Rapoport willfully committed these

violations are not enough to justify imposing maximum secondtier penalties without further explanation. As we have held

before, the SEC must provide some meaningful explanation for

imposing sanctions. Once again, as in Rockies Fund, the

Commission’s analysis, via the ALJ, “was not just superficial;

it was nonexistent.” See 428 F.3d at 1099. 

V. Conclusion

For the foregoing reasons, we grant Rapoport’s petition for

review, vacate the Commission’s order, and remand to the

Commission for further proceedings.

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