Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-07-01478/USCOURTS-caDC-07-01478-0/pdf.json

Parties Involved:
Securities and Exchange Commission
Respondent
Conrad P. Seghers
Petitioner

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 6, 2008 Decided November 21, 2008

No. 07-1478

CONRAD P. SEGHERS,

PETITIONER

v.

SECURITIES AND EXCHANGE COMMISSION,

RESPONDENT

On Petition for Review of an Order 

of the Securities and Exchange Commission

Charles B. Manuel, Jr. argued the cause for the petitioner.

Shira Y. Rosenfeld was on brief.

Christopher Paik, Special Counsel, Securities and Exchange

Commission, argued the cause for the respondent. Brian G.

Cartwright, General Counsel, Andrew N. Vollmer, Deputy

General Counsel, and Jacob H. Stillman, Solicitor, were on

brief. Leslie E. Smith, Senior Litigation Counsel, entered an

appearance.

Before: SENTELLE, Chief Judge, and HENDERSON and

GARLAND, Circuit Judges.

Opinion for the court filed by Circuit Judge HENDERSON.

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KAREN LECRAFT HENDERSON, Circuit Judge: Conrad

Seghers petitions for review of the order of the Securities and

Exchange Commission (SEC or Commission) barring him from

future association with any investment adviser based on his

violation of section 17(a) of the Securities Act of 1933, 15

U.S.C. § 77q(a), section 10(b) of the Securities Exchange Act of

1934, 15 U.S.C. § 78j(b), Rule 10b-5, 17 C.F.R. § 240.10b-5,

and section 206(1) and (2) of the Investment Advisers Act of

1940, 15 U.S.C. § 80b-6(1) & 80b-6(2) (collectively the antifraud provisions). Seghers challenges the order primarily on the

ground that summary disposition was inappropriate because

genuine issues of material fact existed. He also claims the SEC

abused its discretion in imposing the permanent bar sanction.

For the reasons set forth below, we deny the petition for review.

I.

On June 16, 2004, the SEC brought a civil enforcement

action against Seghers in the United States District Court for the

Northern District of Texas, alleging violations of the Securities

Act of 1933, the Securities Exchange Act of 1934 and the

Investment Advisors Act of 1940. Complaint, SEC v. Seghers,

No. 3:04-CV-1320-K (N.D. Tex. Sept. 14, 2006). A jury

returned a verdict against Seghers on the SEC’s claims that he

had violated the anti-fraud provisions. SEC v. Seghers, No.

3:04-CV-1320-K, slip op. at 1 (N.D. Tex. Sept. 14, 2006)

(Memorandum Opinion). Seghers then filed a motion for

judgment as a matter of law. Id.

The district court found that the following facts supported

the jury’s verdict and denied Seghers’s motion. Id. Seghers

participated in the offer and sale of limited partnership interests

in three hedge funds. Id. at 2. The parties stipulated that

Seghers was acting as an investment advisor during the offer and

sale. Id. The assets in the hedge funds were invested at Morgan

Stanley Dean Witter (Morgan Stanley). Id. Olympia Capital

Associates, L.P. (Olympia) acted as administrator of the hedge

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1

The Fifth Circuit recently affirmed the judgment, vacated the

denial of disgorgement inter alia and remanded for further

proceedings. SEC v. Seghers, No. 06-11146, 2008 WL 4726248 (5th

Cir. Oct. 28, 2008). 

funds and sent periodic statements to investors. Id. Seghers

reported the values of the hedge funds to Olympia. Id. at 5.

Olympia relied on the values reported by Seghers in its periodic

statements to investors. Id. On June 6, 2001, Morgan Stanley

sent Seghers a letter stating that the hedge funds values it

reported to Seghers had been incorrect since February 2001 and

had “not accurately reflected the actual value of the accounts

during any of these periods.” Id. at 8. Even following receipt

of the letter, Seghers overstated the values of the hedge funds to

Olympia by approximately $29.5 million in June, $23.1 million

in July, $26.3 million in August and $27 million in September.

Id. at 5. Olympia relied on the overstated values in statements

issued to investors on June 30, July 31, August 31 and

September 30, 2001. Id. On July 13, 2001, Seghers sent a letter

to investors reporting “positive developments” and stating that

“amidst the volatility in the markets we have continued to post

respectable returns,” but on August 1, 2001, Seghers told his

lawyer that the hedge funds were “in the toilet.” Id. at 7, 9.

 The district court permanently enjoined Seghers from

violating the anti-fraud provisions based on its finding that

“there is a reasonable likelihood that Seghers will violate the

securities laws in the future.” Id. at 10; Amended Final

Judgment, SEC v. Seghers, No. 3:04-CV-1320-K (N.D. Tex.

Sept. 14, 2006) (Amended Final Judgment). The district court

ordered Seghers to pay a civil penalty but denied the SEC’s

request for disgorgement because Seghers had lost over

$900,000 of his own money in the hedge funds. Memorandum

Opinion at 11; Amended Final Judgment at 4-5. Seghers and the

SEC appealed the district court’s judgment.1

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On September 26, 2006, the SEC’s Division of Enforcement

(Division) instituted administrative proceedings against Seghers

pursuant to section 203(f) of the Investment Advisors Act of

1940, 15 U.S.C. § 80b-3(f). The SEC assigned the case to

administrative law judge (ALJ) Lillian McEwen. On October

31, 2006, ALJ McEwen denied the Division’s request for leave

to move for summary disposition. She also scheduled a hearing

to commence on December 13, 2006. On November 29, 2006,

the SEC reassigned the case to ALJ Robert Mahony because of

ALJ McEwen’s imminent retirement. ALJ Mahony held a

telephonic pre-hearing conference with counsel for the parties

on December 6, 2006. Following the conference, the ALJ

vacated the hearing date “with the agreement of the parties” and

granted leave to the Division to move for summary disposition.

Seghers responded with his own motion for summary

disposition along with supporting affidavits and accompanying

exhibits. On February 5, 2007, the ALJ granted the Division’s

motion for summary disposition, permanently barring Seghers

from associating with any investment advisor and the SEC

thereafter upheld the ALJ’s action. Conrad Seghers, S.E.C.

Release No. 2656 (Sept. 26, 2007) (SEC Opinion). Seghers now

petitions for review.

II.

We uphold the SEC’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).” Canady v.

SEC, 230 F.3d 362, 364 (D.C. Cir. 2000) (quoting Wonsover v.

SEC, 205 F.3d 408, 412 (D.C. Cir. 2000)). Its factual findings

are conclusive if supported by substantial evidence. 15 U.S.C.

§ 80b-13. 

A.

We first note that Seghers has waived the argument that he

has a general constitutional and a statutory right to a hearing

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before being permanently barred from associating with any

investment advisor. Section 203(f) of the Investment Advisers

Act provides:

The Commission, by order, shall censure or place

limitations on the activities of any person

associated . . . with an investment advisor, or suspend

for a period not exceeding twelve months or bar any

such person from being associated with an investment

advisor, if the Commission finds, on the record after

notice and opportunity for hearing, that such censure,

placing of limitations, suspension, or bar is in the

public interest and that such person . . . is enjoined

from any action, conduct, or practice specified in

paragraph (4) of subsection (e) of this section.

15 U.S.C. § 80b-3(f) (emphasis added). The “action, conduct,

or practice” specified in section 203(e)(4) includes “engaging in

or continuing any conduct or practice . . . in connection with the

purchase or sale of any security.” 15 U.S.C. § 80b-3(e)(4).

Rule 201.250(a) of the Commission’s Rules of Practice

provides:

After a respondent’s answer has been filed . . . the

respondent, or the interested division may make a

motion for summary disposition of any or all

allegations of the order instituting proceedings with

respect to that respondent. . . . The facts of the

pleadings of the party against whom the motion is

made shall be taken as true, except as modified by

stipulations or admissions made by that party, by

uncontested affidavits, or by facts officially noted

pursuant to § 201.323.

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17 C.F.R. § 201.250(a). The hearing officer is authorized to

“grant the motion for summary disposition if there is no genuine

issue with regard to any material fact and the party making the

motion is entitled to a summary disposition as a matter of law.”

17 C.F.R. § 201.250(b).

Seghers argued in his brief that the Constitution and section

203(f), 15 U.S.C. § 80b-3(f), require the SEC to conduct a

hearing before permanently barring an individual from

associating with any investment advisor. At oral argument,

however, Seghers’s counsel conceded that he has no

constitutional or statutory right to a hearing if there is no

genuine issue of material fact. In light of his concession, we

need not address the argument.

B.

We reject Seghers’s argument that ALJ Mahony was

without authority to vacate the scheduled hearing and reconsider

the Division’s motion for summary disposition. The SEC’s

Rules of Practice authorize the ALJ to “[r]egulat[e] the course

of a proceeding and the conduct of the parties and their

counsel.” 17 C.F.R. § 201.111. The ALJ was authorized—as

part of regulating the course of the proceeding—to consider the

Division’s motion for summary disposition notwithstanding his

predecessor’s denial thereof. 

C.

We also reject Seghers’s argument that the SEC applied the

incorrect legal standard in considering the summary disposition

motion. The SEC stated that “summary disposition may be

granted if ‘there is no genuine issue with regard to any material

fact and the party making the motion is entitled to a summary

disposition as a matter of law.’” SEC Opinion at 7 (quoting 17

C.F.R. § 201.250(b)). According to the Commission, “Seghers

must set forth specific facts establishing a genuine issue of

material fact and may not rely upon mere allegations in his

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pleadings to the law judge to create a genuine issue.” Id. at 8

n.25 (citing Frank P. Quattrone, S.E.C. Release No. 53,547,

2006 WL 768606, at *5 (2006) (respondent “did not rely on

mere conclusory allegations or speculation but instead offered

specific facts” in opposition to SEC’s summary disposition

motion)). 

Seghers claims that the SEC’s statement that he “may not

rely upon mere allegations in his pleadings” is at odds with 17

C.F.R. § 201.250(a), which states, “The facts of the pleadings of

the party against whom the motion is made shall be taken as

true, except as modified by stipulations or admissions made by

that party, by uncontested affidavits, or by facts officially noted

pursuant to § 201.323.” Section 201.323 permits the SEC to

take official notice of “any material fact which might be

judicially noticed by a district court of the United States,”

provided that “[i]f official notice is requested or taken of a

material fact not appearing in the evidence in the record, the

parties, upon timely request, shall be afforded an opportunity to

establish the contrary.” 17 C.F.R. § 201.323. The SEC applied

the correct standard despite its statement that Seghers could not

rely upon “mere allegations in his pleadings.” It took official

notice of the facts set forth in the district court’s Memorandum

Opinion. Seghers does not challenge the SEC’s authority under

17 C.F.R. § 201.323 to rely on facts found by the district court.

While the facts found by the district court and relied on by the

SEC are in part at odds with Seghers’s version of the facts, the

SEC is permitted to alter Seghers’s allegations based on the

district court’s findings pursuant to 17 C.F.R. § 201.250(a). 

D.

Seghers contends that genuine issues of material fact

existed that precluded the SEC from granting the Division’s

summary disposition motion. The SEC’s Rules of Practice

authorize the hearing officer to “grant the motion for summary

disposition if there is no genuine issue with regard to any

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material fact and the party making the motion is entitled to a

summary disposition as a matter of law.” 17 C.F.R.

§ 201.250(b). The Commission recognizes “that a respondent

may present genuine issues with respect to facts that could

mitigate his or her misconduct.” John S. Brownson, S.E.C.

Release No. 46,161, 77 SEC Docket 3097, 2002 WL 1438186,

at *4 n.12 (2002), aff’d, Brownson v. SEC, 66 Fed. Appx. 687

(9th Cir. 2003). It considers a number of factors in determining

appropriate sanctions, including “‘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 for future violations.’” Steadman v. SEC, 603

F.2d 1126, 1140 (5th Cir. 1979) (quoting SEC v. Blatt, 583 F.2d

1325, 1334 n.29 (5th Cir. 1978)). Seghers argues that several

genuine issues of material fact existed with respect to the above

factors.

First, Seghers asserts that his actions “were sparked by

third-party error, and not by his own deliberate actions to

defraud investors.” Pet’r Br. at 23. Seghers claims that this

evidence created a genuine issue of material fact regarding the

egregiousness of his conduct. We disagree. The fact that

Morgan Stanley reported incorrect hedge funds values to

Seghers was not disputed, as the Commission noted. SEC

Opinion at 3, 8. Seghers knew of Morgan Stanley’s errors as of

June 6, 2001, and the Commission based its findings of

securities law violations on conduct committed only after that

date. Memorandum Opinion at 5. The SEC was free to consider

Morgan Stanley’s role in determining the egregiousness of

Seghers’s conduct. Whether Morgan Stanley’s role supports a

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2

The Commission argues in the alternative that even if a genuine

issue of material fact exists regarding the role of third-party error in

Seghers’s actions, collateral estoppel bars him from pursuing this

argument. Resp’t Br. at 26; see also SEC Opinion at 8-9. Because we

conclude that no genuine issue of material fact exists, we need not

reach the collateral estoppel argument.

lesser sanction relates to the appropriateness of the sanction and

not the existence of a genuine issue of material fact.2

Second, Seghers seeks to introduce evidence that “his

purported delay of about a month in his definitive reporting to

investors was in fact the result of his conferring with top legal

and accounting professionals who were slow in responding.”

Pet’r Br. at 23. Such evidence would not create a genuine issue

of material fact regarding the egregiousness of Seghers’s

conduct. The district court found that Seghers overstated the

values of the hedge funds for over three months after he became

aware that the Morgan Stanley reports were erroneous.

Memorandum Opinion at 5-6. Seghers does not explain how

evidence explaining one month of false reporting would mitigate

his overstating the hedge funds’ values for several months.

Third, Seghers seeks to introduce evidence that he took

nothing from investors and that he lost his own investments in

the hedge funds. These facts, however, were undisputed and did

not require a hearing. SEC Opinion at 9. Seghers’s claim that

the SEC did not properly consider these factors relates to the

appropriateness of the sanction, not the necessity of a hearing.

Fourth, Seghers contends that genuine issues of material

fact existed regarding the necessity of a permanent bar to

prevent him from committing future violations and regarding his

recognition of the wrongfulness of his conduct. Seghers

declared in an affidavit that he did not intend to act as an

investment advisor but that he should not be precluded from

resuming his career as an investment advisor in the future.

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There is no genuine issue as to whether Seghers recognizes the

wrongfulness of his conduct. On the contrary, Seghers made it

clear to the SEC in his pleadings and affidavits that he contends

he did not do anything wrong.

E.

“We accord great deference to the SEC’s decisions as to

choice of sanction, inquiring only whether a sanction ‘was

arbitrary, capricious, an abuse of discretion, or otherwise not in

accordance with law.’” WHX Corp. v. SEC, 362 F.3d 854, 859

(D.C. Cir. 2004) (quoting KPMG, LLP v. SEC, 289 F.3d 109,

121 (D.C. Cir. 2002)). Seghers sets out three reasons that he

believes make the sanction grossly excessive.

First, Seghers argues that his conduct was relatively minor

when compared with the conduct of others whom the SEC has

permanently barred in the past. The Supreme Court has held

that an administrative sanction is “not rendered invalid in a

particular case because it is more severe than sanctions imposed

in other cases.” Butz v. Glover Livestock Comm’n Co., 411 U.S.

182, 187 (1973). The Eighth Circuit cited Butz in rejecting the

argument that a permanent bar for a first-time securities law

offender was inconsistent with other cases. Lowry v. SEC, 340

F.3d 501, 507 (8th Cir. 2003). The Second Circuit noted that

disproportionate penalties are irrelevant to the appropriateness

of a sanction if the sanction is within the SEC’s discretion.

Hiller v. SEC, 429 F.2d 856, 858-59 (2d Cir. 1970) (citing

Dlugash v. SEC, 373 F.2d 107, 110 (2d Cir. 1967)). We agree

with the Second Circuit and, accordingly, reject Seghers’s first

point. 

Second, Seghers claims that the SEC did not sufficiently

articulate reasons for a permanent bar. See Steadman, 603 F.2d

at 1140 (“[P]ermanent exclusion from the industry ‘is without

justification in fact’ unless the Commission specifically

articulates compelling reasons for such a sanction.”) (footnote

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omitted). We disagree. The SEC considered “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 for future violations” in determining a sanction

that protects the public interest. SEC Opinion at 11-12 (quoting

Steadman, 603 F.2d at 1140). It noted that Seghers knowingly

or recklessly defrauded investors by significantly overstating the

values of the hedge funds for several months. Id. at 12-13; see

Elliott v. SEC, 36 F.3d 86, 87 (11th Cir. 1994) (finding

conviction of serious violations of securities laws sufficient in

itself to support SEC’s conclusion that permanent bar was in

public interest). In support of its conclusion that Seghers will

have opportunities to violate the securities laws in the future, the

SEC noted that Seghers worked exclusively as an investment

advisor in the past, desired to keep that career option open in the

future and maintained contact with his former clients. Id. at 13.

It also found that Seghers had not demonstrated an

understanding of his duties as an investment advisor by his

failure to disclose the inaccuracy of the reported hedge funds

values to investors. Id. at 14. These facts support a permanent

bar.

Third, Seghers argues that the SEC ignored or gave

insufficient weight to potentially mitigating circumstances. On

the contrary, the SEC considered the fact that Seghers did not

benefit financially from his conduct. Id. at 15. It rejected as

irrelevant both Seghers’s plea of personal financial hardship as

well as the affidavits of investors maintaining that Seghers did

not defraud them. The SEC found that the need for a permanent

bar to protect the public interest outweighed the mitigating

factors. Id. A permanent bar is a statutorily authorized sanction

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3

Section 80b-3(f) authorizes a bar if a person “is enjoined from

any action, conduct, or practice specified in paragraph (4) of

subsection (e).” 15 U.S.C. § 80b-3(f). The district court enjoined

Seghers from violating the anti-fraud provisions in the offer or sale of

any security, Memorandum Opinion at 10-11, which constitutes an

“action, conduct, or practice” under section 203(e)(4). See supra p. 5.

 

for Seghers’s conduct. See 15 U.S.C. § 80b-3(f).3 The SEC did

not abuse its discretion in permanently barring Seghers from

associating with any investment advisor.

F.

Finally, Seghers argues that the SEC denied him due

process by not staying its proceedings while his Fifth Circuit

appeal was pending. Although he admits that the SEC is not

obligated to stay administrative proceedings while an appeal is

pending, he claims that the SEC punished him for exercising his

right to appeal by finding that his refusal to recognize the

wrongfulness of his conduct supported a permanent bar.

Seghers asserts that he could not recognize the wrongfulness of

his conduct without prejudicing his appeal. 

As the Supreme Court has observed, “not every burden on

the exercise of a constitutional right, and not every pressure or

encouragement to waive such a right, is invalid.” Corbitt v. New

Jersey, 439 U.S. 212, 218 (1978). In Corbitt, the defendant

turned down an offer to plead guilty, which would have

permitted the court to “impose either life imprisonment or a

term of up to 30 years,” while a trial on a first-degree murder

charge exposed him to a mandatory life sentence. Id. at 217-18.

The Court rejected the argument that Corbitt’s choice imposed

an unconstitutional burden on him. Id. at 218-19; see also SEC

v. Lipson, 278 F.3d 656, 664 (7th Cir. 2002) (court rejected

appellant’s argument that district court’s consideration of his

refusal to recognize wrongfulness of his conduct in determining

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4

Finally, Seghers's request—made for the first time at oral

argument—that we stay our decision pending the Fifth Circuit's action

is moot. See supra note 1.

sanction violated due process of law, noting that “acceptance of

responsibility for illegal conduct is a routine and

unexceptionable feature of criminal, let alone of civil,

punishment”). Before the district court, Seghers was given the

option of recognizing the wrongfulness of his conduct or

refusing to do so and risking more severe remedial action. He

chose the latter, a factor the district court cited in permanently

enjoining Seghers from violating the securities laws.

Memorandum Opinion at 10. The Commission, acknowledging

Seghers’s dilemma, gave Seghers a similar option and he once

again risked a more severe sanction by refusing to acknowledge

the wrongfulness of his conduct. The option did not

unconstitutionally burden Seghers in the district court, see

Lipson, 278 F.3d at 664, nor did it deny him due process before

the SEC.4

 For the foregoing reasons, the petition for review is

denied.

So ordered.

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