Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-12-01241/USCOURTS-caDC-12-01241-0/pdf.json

Parties Involved:
Matthew J. Collins
Petitioner
Securities and Exchange Commission
Respondent

Document Text:

United States Court of Appeals 

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 24, 2013 Decided November 26, 2013 

No. 12-1241 

MATTHEW J. COLLINS, 

PETITIONER

v. 

SECURITIES AND EXCHANGE COMMISSION, 

RESPONDENT

On Petition for Review of Order of 

the Securities & Exchange Commission 

Robert G. Heim argued the cause for the petitioner. With 

him on the briefs was Erik S. Jaffe. 

Paul G. Alvarez, Attorney, Securities and Exchange 

Commission, argued the cause for respondent. With him on 

the brief were Michael A. Conley, Deputy General Counsel, 

Jacob H. Stillman, Solicitor, and Mark Pennington, Assistant 

General Counsel.

Before: KAVANAUGH, Circuit Judge, and WILLIAMS and

SENTELLE, Senior Circuit Judges. 

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Opinion for the Court filed by Senior Circuit Judge

WILLIAMS. 

WILLIAMS, Senior Circuit Judge: The Securities and 

Exchange Commission found that Matthew J. Collins failed to 

supervise a subordinate who violated various securities laws. 

The SEC imposed a civil penalty of $310,000 under 

§ 15(b)(4)(E) of the Exchange Act, among other sanctions. 

Collins petitioned for review, arguing that the civil penalty 

was arbitrary and capricious and violated the Excessive Fines 

Clause of the Eighth Amendment. We uphold the 

Commission’s decision. 

* * * 

Collins does not challenge the factual findings in the 

Commission’s decision, and we draw our account of his 

behavior in substance from that decision or from supporting 

testimony. He started work at Prime Capital Services, an 

SEC-registered broker-dealer, in 2001, and in due course was 

assigned to be the supervisor for Eric Brown, who sold 

financial products, including variable annuities. Collins 

received training relevant to his role as a supervisor, and 

signed declarations that he understood his supervisory 

responsibilities under firm policy, as well as state and federal 

law. Among his supervisory responsibilities, Collins was 

expected to review and approve Brown’s transactions, and to 

complete a monthly report on Brown’s activities. 

The financial product in question, the variable annuity, is 

a hybrid, containing elements of an ordinary long-term 

investment in a security, an annuity, and life insurance. The 

contract owner, typically the annuitant, selects an investment, 

such as a mutual fund, for the purpose of growth. As with an 

ordinary mutual fund, the value of the investment depends on 

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the performance of the asset. However, as in an annuity, but 

unlike an ordinary mutual fund investment, a variable annuity 

begins to make periodic payments to the annuitant at a 

contractually set date. Moreover, taking a cue from a life 

insurance policy, if the annuitant dies before the payments 

begin, the variable annuity allows a beneficiary to receive the 

value of the original investment, less withdrawals, and the 

insurance company bears any losses in the underlying assets. 

See SEC, Variable Annuities: What You Should Know, 

available at http://www.sec.gov/investor/pubs/sec-guide-tovariable-annuities.pdf. 

 Signs of lapses in Collins’s supervisory responsibilities 

first appeared in August 2003, when the Florida Department 

of Financial Services filed an administrative complaint against 

Brown. The complaint alleged, among other violations, that 

Brown had guaranteed certain customers a six-to-eight percent 

return on their investments. Brown failed to respond to the 

complaint and, on December 4, 2003, Florida revoked his 

insurance license. Brown lied to Collins about the nature of 

the administrative sanction, suggesting that it related to a 

“mishap with the state of Massachusetts,” and that it was “no 

big deal.” In the Matter of Eric J. Brown, et al., 2012 SEC 

LEXIS 636, Admin. Proc. File No. 3-13532, at *11 (Feb. 27, 

2012) (“SEC Opinion”). Collins did not investigate; in fact he 

allowed Brown to continue marketing variable annuities, even 

after he learned in February 2004 that Florida had revoked 

Brown’s license. 

 After Brown appealed the license revocation, the state 

reinstated his license in April 2004, pending appeal, on the 

condition that he “not market annuities to individuals over the 

age of 65 years, who are not currently his clients.” Id. at *12. 

Despite the Florida restriction, Brown continued to market 

annuities to such individuals, and Collins tried to conceal 

Brown’s violations by falsely listing himself as the 

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representative on the sales. Although Collins claimed that the 

clients were his, not Brown’s, the Administrative Law Judge 

rejected this claim, pointing out that Brown’s handwriting 

appeared throughout the customer accounts’ documentation. 

And customers themselves testified that they had little or no 

interaction with Collins. An internal review by Prime Capital 

characterized Collins’s conduct as a “complete lack of 

supervision,” an assessment with which Collins agreed at the 

hearing. Id. at *14. 

The Commission found, in particular, that Brown sold 

variable annuities to five elderly customers during the period 

of his restricted license. One of the five later withdrew from 

the investment without penalty or other expense. Two 

evidently suffered no financial loss other than the cost of 

commissions collected by Collins. But two suffered 

substantial losses, first because of withdrawal penalties 

resulting from Brown’s unauthorized transfers of funds from 

their pre-existing investments (over $60,000 between the 

two), and second in the form of lost value increases in those 

prior investments (allegedly totaling $459,000). These two 

later filed a complaint with the National Association of 

Securities Dealers (“NASD”), which led to an investigation by 

the state of Florida. Collins settled the state’s administrative 

case by paying a $5,000 fine and by accepting a one-year 

probation on his insurance license. Prime Capital settled the 

NASD complaint with a payment of $125,000, towards which 

Collins contributed $25,000. 

In June 2009, the SEC instituted proceedings against 

Brown, Collins and other employees of Prime Capital 

pursuant to the body of antifraud provisions in the Securities 

Act of 1933, the Securities Exchange Act of 1934 (“Exchange 

Act”), and the Investment Advisers Act of 1940. There 

followed decisions by an ALJ and by the Commission, in 

which, ironically, the Commission absolved Collins of one 

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charge of which the ALJ had found him liable, and lowered 

the “tier” of punishment, yet imposed a much heavier civil 

penalty. The ALJ found him liable as a primary violator of 

the antifraud provisions, but the Commission reversed that 

finding. On the substantive charge of failing “reasonably to 

supervise” Brown under Exchange Act §§ 15(b)(4)(E) and 

15(b)(6)(A), the ALJ and the Commission agreed. Those 

sections create liability for a supervisor when his inadequate 

supervision is coupled with a violation by his supervisee. 15 

U.S.C. §§ 78o(b)(4)(E), (b)(6)(A). 

The ALJ and the Commission imposed (among other 

sanctions) a civil penalty under § 21B(a)(1) of the Exchange 

Act. Id. § 78u-2(a)(1). That provision authorizes a civil 

penalty in proceedings instituted pursuant to §§ 78o(b)(4) or 

78o(b)(6) where the penalty is in the “public interest.” 

Besides setting out six factors that the Commission “may 

consider,” which we address shortly, the Act establishes three 

tiers of maximum penalties “for each act or omission” that 

violates the relevant securities laws, id. § 78u-2(b); two of the 

tiers are relevant in this case. Second-tier penalties may be 

imposed when the act or omission “involved fraud, deceit, 

manipulation, or deliberate or reckless disregard of a 

regulatory requirement.” Id. § 78u-2(b)(2). Third-tier 

penalties may be imposed when, in addition, the act or 

omission “directly or indirectly resulted in substantial losses 

or created a significant risk of substantial losses to other 

persons or resulted in substantial pecuniary gain to the person 

who” violated securities laws. Id. § 78u-2(b)(3). 

The ALJ found that Collins’s acts satisfied the third-tier 

criteria, and imposed a single such penalty of $130,000. The 

Commission found that Collins was properly subject only to 

second-tier penalties. But it treated each of the five relevant 

sales as “distinct and separate” acts or omissions, resulting in 

five penalties aggregating $310,000. SEC Opinion at *60. It 

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also ordered him to disgorge $2,915, the total commissions on 

sales to two customers; it excused any disgorgement of the 

commissions (slightly exceeding $2000) paid by the two 

customers whose NASD claim Prime Capital had settled for 

$125,000, including $25,000 from Collins. 

* * * 

Collins challenges the Commission’s order on the 

grounds that (1) the Commission abused its discretion when it 

imposed a civil penalty of $310,000 without adequate 

explanation, see 5 U.S.C. § 706(2)(A); Motor Vehicle Mfrs. 

Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 

(1983), and (2) the civil penalty violates the Excessive Fines 

Clause of the Eighth Amendment. We consider these 

challenges in turn. 

The statute requires that for a second-tier penalty the 

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

deliberate or reckless disregard of a regulatory requirement,” 

15 U.S.C. § 78u-2(b)(2); Collins concedes satisfaction of this 

requirement. He also concedes that the Commission could 

lawfully treat each unlawful transaction with a customer as a 

particular “act or omission.” As for the “public interest,” 

Congress guides the Commission’s discretion by pointing to 

six factors: (1) “fraud,” etc., i.e., the feature required to be 

present for a second-tier penalty; (2) the harm to other 

persons; (3) the extent of unjust enrichment (taking into 

account restitution paid); (4) previous SEC findings of the 

violations by the offender; (5) the need to deter the offender 

“and other persons”; and (6) a catch-all, “such other matters as 

justice may require.” 15 U.S.C. § 78u-2(c). 

The most serious strand of Collins’s argument that the 

civil penalty was arbitrary or capricious is his characterization 

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of it as an unexplained departure from the Commission’s 

practice of linking the penalty more closely with the 

disgorgement amount. Here, the civil penalty is over 100 

times that amount ($2,915). 

In his original brief Collins invoked a set of federal court 

cases with fairly close approximation between penalty and 

disgorgement amount. E.g., SEC v. Yuen, 272 Fed. Appx. 

615, 618 (9th Cir. 2008) (district court “well within its 

discretion in setting the civil penalty equal to the 

disgorgement amount”); SEC v. CMKM Diamonds, Inc., 635 

F. Supp. 2d 1185, 1193-94 (D. Nev. 2009) (setting penalty 

equal to disgorgement amount). The Commission argues in 

its response that the cases in this set were governed by a 

different statutory cap on civil penalties, § 21(d)(3) of the 

Exchange Act, 15 U.S.C. § 78u(d)(3), which imposes ceilings 

(in various tiers) as the higher of a specified dollar amount 

(the same ceilings as under our statute) or the defendant’s 

pecuniary gains (a figure that disgorgement is likely to track). 

The SEC’s attempted distinction is unpersuasive: It is hard to 

see why, with the same numerical ceilings as those to which 

Collins was subject, the statute’s permission to break out 

above the numerical ceiling in order to match the perpetrator’s 

ill-gotten gains should result in a lower penalty-todisgorgement ratio than would the statute covering Collins. 

Nonetheless, Collins’s use of the district court cases fails 

to show any discrepancy in his treatment as he makes no 

effort to hold constant the many other factors relevant to 

determining civil penalties, which are discussed below. 

Indeed, Collins’s reply brief recognizes that the disgorgement 

amount is not the whole story, reframing his argument in far 

more general terms—as a contention that “there must be some 

sense of proportionality between the gain or injury and the 

penalties exacted.” Reply Br. at 19. 

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In any event, in administrative proceedings before the 

SEC, procedurally akin to the present matter, we seem to 

observe civil penalties ranging from roughly one-half of the 

disgorgement amount, In the Matter of Guy P. Riordan, 2009 

SEC LEXIS 4166, Admin. Proc. File No. 3-12829 (Dec. 11, 

2009) (ordering disgorgement of $938,353.78 and civil 

penalty of $500,000), to about 25 times the disgorgement 

amount, In the Matter of Maria T. Giesige, Admin. Proc. File 

No. 3-12747, 2009 SEC LEXIS 1756 (May 29, 2009) 

(ordering disgorgement of $21,105.03 and civil penalty of 

$500,000). Thus, if we focus solely on the disgorgement 

amount, the civil penalty here looks high relative to SEC 

precedents. 

The SEC tries a very broad defense of its action, citing 

statements in our cases to the effect that it need not follow a 

“‘mechanical formula’” when crafting sanctions, PAZ Secs., 

Inc. v. SEC, 566 F.3d 1172, 1175 (D.C. Cir. 2009) (quoting 

Blinder, Robinson & Co. v. SEC, 837 F.2d 1099, 1113 (D.C. 

Cir. 1988)), and that it is “not obligated to make its sanctions 

uniform,” Geiger v. SEC, 363 F.3d 481, 488 (D.C. Cir. 2004). 

But for a court not to require uniformity or “mechanical 

formulae” is not the same as for it to be oblivious to history 

and precedent. Review for whether an agency’s sanction is 

“arbitrary or capricious” requires consideration of whether the 

sanction is out of line with the agency’s decisions in other 

cases. Friedman v. Sebelius, 686 F.3d 813, 827-28 (D.C. Cir. 

2012). 

Recognizing this, we nonetheless find that the penalty’s 

relation to disgorgement does not render it arbitrary or 

capricious. First, the $2,915 disgorgement imposed directly 

on Collins understates his full disgorgement responsibility, as 

he was excused disgorgement of slightly more than $2000 in 

commissions because of the $25,000 he had contributed to 

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settlement of the NASD complaint brought by the customers 

involved. 

Second, disgorgement obviously doesn’t fully capture the 

“harm” side of the proportionality test that Collins’s reply 

brief invites us to consider—“proportionality between the gain 

or injury and the penalties exacted.” Full indicia of the injury 

inflicted by Collins and Brown, for example, include the 

entire $125,000 paid to settle the NASD complaint, of which 

Collins paid only $25,000. 

Third, the statute seems to demand that the Commission 

look beyond harm to victims or gains enjoyed by perpetrators. 

It lists harm to other persons as only one of five specific 

factors (plus the catch-all reference to “such other matters as 

justice may require”). In that context, the relation between the 

civil penalty and disgorgement (and other measures of injury) 

is informative, particularly in comparison with other cases, 

but hardly decisive. 

Looking more broadly, the Commission noted in its 

opinion, for instance, that Collins’s violation was “egregious,” 

and that he “displayed a blatant failure to deal fairly with 

elderly, unsophisticated customers and exhibited a clear 

disregard for . . . customers’ interests.” SEC Opinion at *59-

60. This conclusion rested, in part, on the fact that Collins 

falsified documents and otherwise failed completely to 

supervise Brown, “creat[ing] an environment where Brown 

could defraud his clients with impunity.” Id. at *42. And the 

Commission quite properly invoked the statutory interest in 

deterrence. 

Collins mentions a number of additional factors that he 

believes militate in favor of a lesser penalty, such as his clean 

disciplinary record and his separate fine paid to the state of 

Florida. Each of these to some degree weighs in favor of 

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leniency, but neither separately or together do they take us 

across the border to where we might properly find that the 

SEC abused its discretion or acted arbitrarily or capriciously. 

We further note that, under Commission Rule 630(a), a party 

may present evidence of an inability to pay in “any 

proceeding” potentially requiring penalties. 17 C.F.R. 

§ 201.630(a). Collins appears to have presented no such 

evidence. 

* * * 

 “Excessive bail shall not be required, nor excessive fines 

imposed, nor cruel and unusual punishments inflicted.” U.S. 

Const. amend. VIII. A civil penalty violates the Excessive 

Fines Clause if it “is grossly disproportional to the gravity of” 

the offense. United States v. Bajakajian, 524 U.S. 321, 334 

(1998). The Second Circuit has elaborated Bajakajian’s 

proportionality standard into four factors: (1) the essence of 

the crime and its relation to other criminal activity; (2) 

whether the defendant fit into the class of persons for whom 

the statute was principally designed; (3) the maximum 

sentence and fine that could have been imposed; and (4) the 

nature of the harm caused by the defendant's conduct. See 

United States v. Collado, 348 F.3d 323, 328 (2d Cir. 2003) 

(per curiam), citing Bajakajian, 524 U.S. at 337-39; see also 

United States v. Malewicka, 664 F.3d 1099, 1104 (7th Cir. 

2011). The SEC invokes these four factors, and Collins does 

not appear to object. We also note the Court’s admonition 

that, though this is a constitutional inquiry, “judgments about 

the appropriate punishment for an offense belong in the first 

instance to the legislature,” Bajakajian, 524 U.S. at 336. 

Our rejection of Collins’s claim that the Commission’s 

decision was arbitrary and capricious goes most of the way to 

compelling rejection of the constitutional claim. A penalty 

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that is not far out of line with similar penalties imposed on 

others and that generally meets the statutory objectives seems 

highly unlikely to qualify as excessive in constitutional terms. 

Although the four factors derived from Bajakajian hardly 

establish a discrete analytic process, we review them briefly to 

see if there are danger signals. There are not. First, for the 

reasons set forth above, Collins’s violations of securities laws 

were grave, involving deceit to enable the fraudulent actions 

of Brown. Second, Collins fits within the class of persons for 

whom the statute was designed—an individual supervising 

persons subject to securities laws. Third, though Collins’s 

penalty was at the upper end of the second-tier penalties, we 

cannot say that this is inappropriate. This factor mattered in 

Bajakajian. There, the defendant faced a maximum 

Sentencing Guidelines fine of $5,000 and six months in 

prison, which was well below the statutory maximum of 

$250,000 and five years in prison, suggesting that the 

forfeiture of $357,144 was excessive. Bajakajian, 524 U.S. at 

339 n.14. Here, by contrast, we have indications that Collins 

may have been eligible for an even larger penalty, as 

suggested by the ALJ’s application of a third-tier penalty. 

Fourth, Collins’s actions enabled Brown’s fraudulent actions, 

which targeted elderly customers considering complex 

financial products, with harm including withdrawal penalties 

of over $60,000 incurred by two of the victims. And the 

failures of supervision created a more general risk of 

wrongdoing in the office subject to Collins’s supervision. 

Thus, consideration of the four factors does not really help 

Collins’s cause. 

We note that Collins cites only two cases in which courts 

have set aside a fine for violating the Eighth Amendment, 

both featuring extremely large penalties contrasted with 

minimal harm. Bajakajian, 524 U.S. at 339 (1998) (holding 

invalid forfeiture of $357,000 for failing to report exported 

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currency, “affect[ing] only . . . the Government, and in a 

relatively minor way”); United States ex rel. Bunk v. Birkart 

Globistics GmbH & Co., 2012 WL 488256, at *5 (E.D. Va. 

Feb. 14, 2012) (invalidating penalty of $50 million for False 

Claims Act violations when no showing of resulting economic 

harm). The Commission’s penalty here does not belong in 

that small club. 

* * * 

The order of the Commission is therefore 

Affirmed. 

 

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