Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-09-01074/USCOURTS-caDC-09-01074-0/pdf.json

Parties Involved:
Gary M. Kornman
Petitioner
Securities and Exchange Commission
Respondent

Document Text:

Notice: This opinion is subject to formal revision before publication in the

Federal Reporter or U.S.App.D.C. Reports. Users are requested to notify the

Clerk of any formal errors in order that corrections may be made before the

bound volumes go to press. 

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 22, 2009 Decided January 15, 2010

No. 09-1074

GARY M. KORNMAN,

PETITIONER

v.

SECURITIES AND EXCHANGE COMMISSION,

RESPONDENT

On Petition for Review of an Order 

of the Securities & Exchange Commission

Barry S. Pollack argued the cause and filed the briefs

for petitioner. Jeffrey M. Karp entered an appearance.

Dominick V. Freda, Senior Counsel, Securities and

Exchange Commission, argued the cause for respondent. With

him on the brief was David M. Becker, General Counsel, Jacob

H. Stillman, Solicitor, and Randall W. Quinn, Assistant General

Counsel. William K. Shirey II, Counsel, entered an appearance.

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Before: ROGERS, GARLAND and KAVANAUGH, Circuit

Judges.

Opinion for the Court by Circuit Judge ROGERS.

ROGERS, Circuit Judge: The Securities and Exchange

Commission permanently barred Gary M. Kornman from

association with any broker, dealer, or investment adviser

pursuant to section 15(b) of the Securities and Exchange Act of

1934 and section 203(f) of the Investment Advisers Act of 1940.

Kornman challenges the Commission’s decision to bar his

association as an investment adviser on two principal grounds:

first, there was not substantial evidence in the record to support

the finding that he was an investment adviser at the time of the

“alleged misconduct,” and, second, the Commission abused its

discretion by giving inadequate consideration to mitigating

factors and to whether lesser sanctions would serve the public

interest. The court’s review of the Commission’s remedial

decisions is deferential, see Horning v. SEC, 570 F.3d 337, 343

(D.C. Cir. 2009), and we deny the petition. 

I.

In December 2006, Kornman was indicted in the Northern

District of Texas, on two counts of securities fraud involving

alleged insider trading, one count of providing false statements

to the Commission, and one count of obstruction of justice. He

entered a plea to one count of making a false statement in

violation of 18 U.S.C. § 1001, for which he could have been

sentenced to five years’ imprisonment, followed by three years’

supervised release, and ordered to pay a $250,000 fine, to make

restitution, and to pay any costs of incarceration and

supervision. As part of his plea agreement Kornman stipulated

in a Factual Resume that during a telephone conversation with

Commission investigators on October 29, 2003, he falsely stated

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1

 The Division alleged:

 A. From May 1992 to October 2006, Kornman

owned Heritage Securities Corporation, a registered

broker-dealer. In addition, Kornman individually held

Series 6 and 63 securities licenses and was a

registered representative of Heritage Securities

Corporation. He also controlled a limited liability

company that served as an investment adviser to two

Kornman-controlled hedge funds. Kornman, 63 years

old, is a resident of Dallas, Texas.

 B. On April 9, 2007, Kornman pled guilty to one

count of making a false statement to the SEC in

that he did not know who possessed trading authority over the

brokerage account for a hedge fund through which he conducted

trading activity in publicly traded stock. He further stipulated

that he “knew that he personally possessed [that] authority.”

Factual Resume 2. His stipulation continued: “In addition, the

defendant made the statement intentionally, knowing that it was

false. Further, the statement was material. Finally, the

defendant made the false statement for the purpose of

misleading the Securities and Exchange Commission in its

investigation into his trading activity.” Id.

On July 11, 2007, the district court sentenced Kornman to

two years’ supervised probation and ordered him to pay a fine

of $143,465, the amount the government claimed was unjust

enrichment from insider trading, along with a $100 special

assessment. The district court dismissed the remaining counts

upon motion of the United States. 

On July 30, 2007, the Commission instituted administrative

proceedings based on three allegations by the Division of

Enforcement (“Division”).1

 In response, Kornman admitted: he

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connection with its investigation into his trades in

MiniMed common stock, in violation of Title 18

United States Code, Section 1001. Kornman entered

his guilty plea before the United States District Court

for the Northern District of Texas, in United States v.

Gary M. Kornman, Crim. No. 3:05-CR-0298-P. On

July 11, 2007, a judgment of conviction in the

criminal case was entered against Kornman. He was

sentenced to two years of supervised probation and

ordered to pay $ 143,465.

 C. The criminal count to which Kornman pled

guilty alleged that Kornman stated falsely to the

[Commission] that he did not know who possessed

trading authority over the brokerage account for a

hedge fund through which he conducted trading in

MiniMed stock in February 2001. In the factual

resume accompanying the plea agreement, Kornman

admitted that: the statement was false; he knew that

he personally possessed trading authority over the

brokerage account; he made the statement

intentionally, knowing that it was both false and

material to the [Commission]’s investigation; and he

made the false and material statement for the purpose

of misleading the [Commission] in its investigation

into his MiniMed trading activity. 

Order Instituting Administrative Proceedings 1–2.

owned an ownership interest in Heritage Security Corporation

and was a registered representative of it; he held Series 6 and 63

securities licenses; and he controlled a limited liability company

and had participated in trades for “two hedge-type funds.”

Answer to Corrected Order Instituting Administrative

Proceedings ¶ 6. He also admitted pleading guilty to making “a

single false statement,” and that “a factual resume accompanied

his plea agreement, the content of which speaks for itself.” Id.

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2

 The eleven exhibits were:

Exhibit 1: Heritage Securities Corporation registration,

granted May 29, 1992, on file in the State of Delaware October 18,

2006. 

Exhibit 2: Certificate of Limited Partnership of Heritage

Capital Partners, I, L.P., filed October 6, 1998, listing Heritage

Advisory Group, L.L.C. as the general partner of Capital Partners I,

and Delaware Certificate of Good Standing for Heritage Capital

Partners, I, L.P., filed June 9, 2005.

Exhibit 3: Certificate of Limited Partnership of Heritage

Capital Opportunities Fund I, L.P., filed September 13, 1999, listing

Heritage Advisory Group as the general partner of the Fund, and

Certificate of Good Standing for Heritage Capital Opportunities Fund

I, L.P., filed June 9, 2005.

Exhibit 4: Deposition of Gary M. Kornman before the

American Arbitration Association of Dallas, Texas, January 29, 2004.

Exhibit 5: Declaration of Cory D. Childs, August 30, 2007.

Exhibit 5A: Heritage Capital Partners I, L.P. Private Offering

Memorandum for Offering of Limited Partnership Interests ($250,000

Minimum Investment) of October 6, 1998, listing Heritage Advisory

Group as the general partner managing Capital Partners I.

Exhibit 5B: Heritage Capital Opportunities Fund I, L.P.

Private Offering Memorandum for Offering of Limited Partnership

at ¶ 8. He denied, however, “any implication that his statement

to [the Commission] attorneys [during the October 29, 2003

telephone call] interfered with their investigation or otherwise

affected any investor.” Id. Additionally, he argued that

mitigating factors required rejection in whole or in part of the

request for relief and raised various affirmative defenses,

including double jeopardy.

The Division moved for summary disposition pursuant to

Rule 250 of the Commission’s Rules of Practice, 17 C.F.R.

§ 201.250. It attached eleven exhibits to the motion relating to

Kornman’s business associations and his criminal conviction.2

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Interests ($250,000 Minimum Investment) of October 17, 1999, listing

Heritage Advisory Group as general partner managing the Fund. 

Exhibit 6: Indictment and superceding indictments filed in the

United States District Court for the Northern District of Texas, Dallas

Division, December 20, 2006.

Exhibit 7: Plea Agreement, filed April 9, 2007.

Exhibit 8: Judgment of conviction, filed July 13, 2007.

Exhibit 9: Factual Resume, filed with Plea Agreement on

April 9, 2007.

Exhibit 10: Transcript of sentencing hearing of July 11, 2007.

Exhibit 11: Testimony of Cory D. Childs at Commission

hearing on March 9, 2004.

3

 The Division cited: John S. Brownson, Release No. 46,161,

77 SEC Docket 3097, 2002 WL 1438186 at *2 (July 3, 2002), pet.

denied, Brownson v. SEC, 66 Fed. Appx. 687 (9th Cir. 2003); Richard

P. Capillari and Thomas J. Connolly, Release No. 237, 81 SEC

Docket 633, 2003 WL 22250402 at *2 (Sept. 30, 2003); see Adoption

of Amendments to the Rules of Practice and Related Provisions,

Release No. 52846, 86 SEC Docket 1931, 2005 WL 3199273 at *3

(Apr. 21, 2005) (noting that motions for summary disposition are often

made where a respondent has been criminally convicted or an

injunction has been entered and the conviction or injunction provides

the basis for an administrative order against the respondent).

Citing Commission precedent that summary disposition was

well suited to proceedings based on a respondent’s criminal

conviction,3 particularly in light of Commission precedent “not

permit[ting] criminal convictions to be collaterally attacked in

its administrative proceedings,” Jose P. Zollino, Release No.

308, 2006 WL 507940 at *3 (Mar. 2, 2006), the Division argued

that a permanent bar on association should be imposed in light

of Kornman’s admissions of his association with the Heritage

Security Corporation, a broker-dealer, and of his control of

Heritage Advisory Group, a limited liability company that

managed “two hedge-type funds,” and the evidence the hedge

funds were in good standing through at least June 9, 2005. The

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4

 Kornman sought discovery of documents and other evidence

reflecting whether the Commission attorneys who participated in the

October 29, 2003 telephone call: (1) knew that he was represented by

counsel in pending matters, (2) were working with criminal

investigators at the time of the call, and (3) had the information they

were requesting from him during the telephone call. He also sought

discovery on “when and how government attorneys became aware that

at least one witness on whom the government relied coached any

witnesses against [] Kornman,” and the attorneys’ notes “from the

telephone conversation.” Opp’n to Mot. for Summ. Disposition 10.

Division argued that the only reasonable conclusion to be drawn

from the evidence was that Kornman continued to act as a

broker-dealer through the Heritage Security Corporation and as

an investment adviser, for compensation, through his association

with the Heritage Advisory Group at the time of the October 29,

2003 telephone conversation with Commission investigators

when he falsely denied knowing who managed one of the hedge

fund portfolios. Consistent with the factors set forth in

Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), the

Division argued that in view of his conviction it was in the

public interest to impose a permanent bar.

Kornman filed an opposition. He argued that he had a

statutory right to a hearing and that discovery was necessary

regarding the conduct of the Commission staff involved in the

October 29, 2003 telephone call.4

 He asserted that he was no

longer associated with a broker or dealer at the time of his 2007

conviction and that he was no longer acting as or associated with

an investment adviser for compensation at the time of the

telephone conversation. He also argued, in view of evidence in

mitigation, that the Division had failed to show that no lesser

sanction than a permanent bar would satisfy the public interest.

Kornman attached various documents to his opposition,

including a partial transcript of the October 29, 2003 telephone

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5

 The other documents were: Martindale-Hubbell profiles of

the Commission investigators; the State of Texas Rules of Disciplinary

Procedure on restrictions on lawyers’ communication with parties; a

document indicating that a lawyer in Pennsylvania had received only

a one-year disbarment upon conviction of 18 U.S.C. § 1001 for failing

to disclose to the Commission during an investigation; and a segment

from a district court opinion granting Kornman limited discovery in

the civil enforcement proceeding then pending against him in the

Northern District of Texas. Also attached were a call log entry and

handwritten notes regarding a government witness and one of

Kornman’s former co-workers; a declaration of Philip Asquith, who

did business with MiniMed, which was a subject of the insider trading

investigation; and a newspaper article about a lawsuit against Jack

Pratt, a government witness, regarding his business dealings with

Hollywood Casino, which was also a subject of the insider trading

investigation.

6

 At the beginning of the telephone call the Commission

investigators offered Kornman the opportunity to confer with counsel

before they asked him any questions or he continued to speak with

them. (Ex. 12 at 5–6.). The transcript also indicates Kornman was

aware that he could refuse at any time to continue speaking with the

investigators. (Ex. 12 at 20, 25, 27–28).

call and letters attesting to his good character.5 He also attached

his affidavit admitting the underlying conduct, expressing regret

for his conduct, accepting “full responsibility for the misconduct

during the telephone call,” and promising “not [to] repeat

anything of the sort in the future,” Kornman Aff. ¶¶ 8–15. The

Division responded that Kornman’s requests for discovery to

present mitigating circumstances were irrelevant and sought to

relitigate facts previously established in the criminal record, and

that his ethical attacks on the Commission investigators were

baseless and inaccurate, as evidenced in the complete transcript

of the telephone call, which the Division attached as Exhibit 12.6

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An administrative law judge (“ALJ”) granted the Division’s

motion for summary disposition and permanently barred

Kornman from association with any broker-dealer or investment

adviser, based on his 2007 conviction for violating 18 U.S.C.

§ 1001. Gary M. Kornman, Release No. 335, 91 SEC Docket

2234 (Oct. 9, 2007) (“Initial Decision”). The ALJ found the

evidence showed that Kornman was associated with Heritage

Securities Corporation, a registered broker-dealer from 1992 to

October 2006, and that he was associated with the Heritage

Advisory Group, a limited liability company that was the

general partner of two hedge funds — Heritage Capital Partners

I, L.P. and Heritage Capital Opportunities Fund I, L.P. (See

supra note 2, Exs. 5A at 10, 17 & 5B at 10, 17.) The ALJ also

found that the hedge funds’ respective 1998 and 1999 private

offering memoranda included provisions for payment of fees for

managing the hedge funds’ portfolios. (See id., Exs. 5A at

18–19, 5B at 18–19.) Further, the ALJ found that the

certificates by the Secretary of the State of Delaware showed the

hedge funds were still in existence as of June 2005. (See id.,

Exs. 2 & 3.) The ALJ noted: “Kornman does not take issue with

this material fact. In fact, he avoids doing so by stating

obliquely, ‘Nothing in the record suggests that trades of Heritage

Advisory Services in the open market did not cease before the

telephone call at issue.’ Opposition at 19.” Initial Decision at

5 n.3. The ALJ rejected Kornman’s legal defenses, including

double jeopardy, and concluded that a permanent bar was

required because “Kornman’s conviction involved dishonesty

and opportunities for dishonesty recur constantly in the

securities industry.” Id. at 9. 

Kornman petitioned for review by the Commission on

several grounds, including: (1) he had been denied his statutory

right to a hearing because the ALJ had failed to take as true all

the facts in his pleadings, specifically his vow not to repeat his

misconduct; (2) the ALJ had failed “to review the sufficiency of

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evidence supposedly reflecting that, at the time of the October

29, 2003, telephone call at issue, Mr. Kornman or any entity

with which he was associated was actually ‘for compensation

engage[ing] [sic] in the business of advising others’ regarding

securities investments,” Pet. for Review at 3–4; and (3) a

permanent bar was inappropriate in view of the evidence in

mitigation, including that this was a solitary blemish on his

business activities over three decades. The Division opposed the

petition and attached the twelve exhibits that were before the

ALJ. 

Upon “independent review” of the disputed record

evidence, the Commission concluded it was in the public interest

to permanently bar Kornman from association with any broker,

dealer, or investment adviser. Gary M. Kornman, Release No.

2840 at 1–2, 25, 2009 WL 367635 (Feb. 13, 2009)(“Decision”).

The Commission affirmed that under section 15(b)(6)(A) of the

Exchange Act and section 203(f) of the Advisers Act, the

relevant date for purposes of its jurisdiction with regard to “the

time of the alleged misconduct” was “October 29, 2003, the day

on which [Kornman] provided his false statement to

Commission investigators.” Id. at 9. The Commission found

there was undisputed evidence of Kornman’s status as a brokerdealer and investment adviser, by virtue of his association with

the Heritage Advisory Group, when he made the false statement,

and thus it had jurisdiction to sanction him upon determining it

was in the public interest to do so. The Commission noted that

“[t]he record, including private offering memoranda from the

[h]edge [f]unds, reflects that [the] Heritage Advisory [Group]

served as the general partner to the [h]edge [f]unds, managing

their investment portfolios and earning fees and other

compensation for such services.” Id. at 6–7. Referencing the

hedge funds’ quarterly and annual fees that Kornman received

for managing their portfolios, the Commission observed, in

responding to Kornman’s challenge to the sufficiency of the

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evidence that the Heritage Advisory Group was an investment

adviser for compensation on October 28, 2003: 

Kornman provides no evidence for his claim that the

[h]edge [f]unds ceased operating or receiving these

fees by October 2003. To the contrary, certificates

from Delaware’s Secretary of State show that the

Hedge Funds remained active and in good standing in

that State through at least June 9, 2005, and that

Heritage Advisory [Group] remained manager of the

[h]edge [f]unds as their general partner.

Id. at 9–10 (internal quotations omitted). Addressing the factors

set forth in Steadman, 603 F.2d. at 1140, while noting that its

inquiry is “a flexible one, and no one factor is dispositive,”

Decision at 10, the Commission concluded:

The conduct underlying Kornman’s conviction

was egregious. His conviction was for making a

material false statement to a federal official, and he

admitted he did so intentionally and for the purpose of

misleading our investigation. As we have stated: “The

securities industry presents a great many opportunities

for abuse and overreaching, and depends very heavily

on the integrity of its participants.” Indeed, the

importance of honesty for a securities professional is

so paramount that we have barred individuals even

when the conviction was based on dishonest conduct

unrelated to securities transactions or securities

business. Here, the egregiousness of Kornman’s

dishonest behavior is compounded because he made

his false statement to Commission staff during an

ongoing investigation into possible insider trading

violations. Providing information to investigators is

important to the effectiveness of the regulatory system,

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and the information provided must be truthful. We

have consistently held that deliberate deception of

regulatory authorities justifies the severest of sanctions.

Id. at 10–11(internal citations omitted). The Commission also

noted his conduct exhibited “a high degree of scienter,” id. at 11,

referencing his stipulation in the Factual Resume accompanying

his plea. The Commission rejected Kornman’s other legal

challenges and found inapposite the cases he cited in urging that

only a censure should be imposed. Kornman petitions for

review.

II.

Kornman’s contentions about his right to a hearing and the

lack of substantial evidence to support the Commission’s finding

that he was an “investment adviser” at the time of the “alleged

misconduct” present two issues of statutory interpretation. We

address them first, before turning to his challenge to the

sufficiency of the record evidence before the Commission. 

Section 203(f) of the Investment Advisers Act limits the

jurisdiction for the Commission to issue sanctions related to a

party’s future association as an “investment adviser.” It

provides, in relevant part:

The Commission, by order, shall censure or place

limitations on the activities of any person associated,

seeking to become associated, or, at the time of the

alleged misconduct, associated or seeking to become

associated with an investment adviser, or suspend for

a period not exceeding twelve months or bar any such

person from being associated with an investment

adviser, if the Commission finds, on the record after

notice and opportunity for hearing, that such censure,

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placing of limitations, suspension, or bar is in the

public interest . . . . 

15 U.S.C. § 80b-3(f)(emphasis added). An “investment adviser”

is defined as

any person who, for compensation, engages in the

business of advising others, either directly or through

publications or writings, as to the value of securities or

as to the advisability of investing in, purchasing, or

selling securities, or who, for compensation and as part

of a regular business, issues or promulgates analyses or

reports concerning securities . . . .

Id. § 80b-2(a)(11).

A. 

The Commission’s interpretation of its authorizing statutes

is entitled to deference under the familiar two-pronged test set

forth in Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc.,

467 U.S. 837 (1984). Where Congress has made its intent clear,

that is the end of the matter, but if the statute is ambiguous, the

court must determine whether the agency’s interpretation is

permissible. Id. at 842–843; see also SEC v. Zandford, 535 U.S.

813, 819–20 (2002). Similarly, the court will defer to an

agency’s reasonable interpretation of its regulations. See Auer

v. Robbins, 519 U.S. 452, 461 (1997).

1. The Commission interpreted the phrase “on the record

after notice and opportunity for hearing” in section 203(f) of the

Advisers Act, 15 U.S.C. § 80b-3(f), to allow summary

proceedings. Decision at 17–18. This is at least a “permissible

construction of the statute.” Chevron, 467 U.S. at 843. Rule

250 of the Commission’s Rules of Practice provides for

summary disposition in the absence of a genuine issue of

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material fact. Under Rule 250, a motion for summary

disposition may be granted where 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). The Rule also provides that “[t]he 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.” Id. § 201.250(a). Further, the hearing

officer “shall deny or defer the motion” if “it appears that a

party, for good cause shown, cannot present by affidavit prior to

hearing facts essential to justify opposition to the motion.” Id.

§ 201.250(b). The Commission modeled Rule 250 on Rule 56

of the Federal Rules of Civil Procedure. See Jeffrey L. Gibson,

Rel. No. 57266, 92 SEC Docket 2104 at 2112 n. 26 (Feb. 4,

2008). 

 The plain text of section 80b-3(f) requires the “opportunity

for hearing” without defining the word “hearing.” The

Commission’s rule reflects a well-established distinction

between a hearing on the pleadings and an evidentiary hearing

at which witnesses testify and are subject to cross-examination.

See, e.g., Costle v. Pac. Legal Found., 445 U.S. 198, 213–14

(1980); United States v. Storer Broad. Co., 351 U.S. 192, 202,

205 (1956) . For example, in Weinberger v. Hynson, Westcott

& Dunning, Inc., 412 U.S. 609, 621 (1973), the Supreme Court

construed text virtually identical to the Advisers Act in

concluding that the phrase “notice and opportunity for hearing

to the applicant” did not always require an evidentiary hearing

because “[w]e cannot impute to Congress the design of

requiring, nor does due process demand, a hearing when it

appears conclusively from the applicant’s ‘pleadings’ that the

application cannot succeed.” Although this court has not

previously decided whether the Advisers Act requires an

evidentiary hearing in all cases, Seghers v. SEC, 548 F.3d 129,

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133–34 (D.C. Cir. 2008), it has interpreted similar language in

the Food Drug and Cosmetic Act, 21 U.S.C. § 355(e)(3), not to

require an evidentiary hearing where there is “no genuine and

substantial issue of fact that requires a hearing.” John D.

Copanos & Sons, Inc. v. Food & Drug Admin., 854 F.2d 510,

518 (D.C. Cir. 1988); see also Crestview Parke Care Ctr. v.

Thompson, 373 F.3d 743, 750 (6th Cir. 2004); Puerto Rico

Aqueduct & Sewer Auth. v. EPA, 35 F.3d 600, 606 (1st Cir.

1994), cert. denied, 115 S. Ct. 1096 (1995); 1 RICHARD J.

PIERCE,JR., ADMINISTRATIVE LAW TREATISE § 8.3, pp. 542–43

(4th ed. 2002). 

For these reasons, Kornman’s contention that the plain

language requires an evidentiary hearing in all cases is not

supportable. In promulgating Rule 250 the Commission

explained that summary disposition would be available in

disciplinary cases, although noting that such cases “are likely to

be less common” than in regulatory proceedings because

“[t]ypically, enforcement and disciplinary proceedings that

reach litigation involve genuine disagreement between the

parties as to material facts.” Rules of Practice, 60 Fed. Reg.

32738-01, 32,767 (Jun. 23, 1995). However, in later amending

Rule 250, the Commission acknowledged that in practice

“[m]otions for summary dispositions are often made in cases

where a respondent has been criminally convicted.” Adoption

of Amendments to Rules of Practice, 70 Fed. Reg. 72566-01,

72567 (Dec. 5, 2005). For example, in John S. Brownson,

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

at *2 (July 3, 2002), pet. denied, Brownson v. SEC, 66 Fed.

Appx. 687 (9th Cir. 2003), the Commission had stated that

“[s]ummary disposition is particularly appropriate where, as

here, a respondent has pled guilty to securities fraud.” See also

supra note 3. Presumably this is so because in most instances

the criminal proceeding has resolved the central issue

concerning the nature of the “alleged misconduct” and only the

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7

 The Commission ordered additional briefing “regarding the

impact of Kornman’s conviction of a felony involving the violation of

chapter 47 of title 18 of the United States Code on the Commission’s

authority to institute this proceeding.” Order Directing the Filing of

Additional Briefs 1 (Apr. 24, 2008). The Division responded, citing

section 15(b)(4)(B)(iv) of the Exchange Act of 1934 and section

230(e)(2)(D) of the Advisers Act, that a conviction of fraud was

unnecessary because a violation of 18 U.S.C. § 1001 falls within

Chapter 47 where the misconduct arises out of the conduct of the

business of a broker-dealer or investment adviser. Kornman does not

challenge this legal conclusion. 

question of the appropriate sanction remains. For certain types

of criminal conduct, the Commission has warned that only

“extraordinary mitigating circumstances” are likely to affect its

determination of the sanction required in the public interest.

Brownson, 77 SEC Docket 3097, 2002 WL 1438186 at *2. 

Kornman cannot successfully deny that he was afforded the

“opportunity for hearing.” The Commission informed him in

writing of the allegations against him, and he filed a written

response to the allegations. He also had the opportunity to

challenge the arguments and evidence proffered by the Division

in moving for summary disposition pursuant to Rule 250, and he

did so by filing an opposition and attaching documents.

Kornman does not suggest he was denied an opportunity to set

forth all of his evidence, challenges, and defenses in his

pleadings before the ALJ’s Initial Decision and the

Commission’s subsequent Decision. Because the Commission

proceedings against Kornman were based on the record in his

criminal case that disposed of the central issue regarding the

nature of his “alleged misconduct” for administrative

enforcement purposes, a summary proceeding was appropriate

under Commission precedent.7

 See, e.g., Brownson, 77 SEC

Docket 3097, 2002 WL 1438186 at *2; Capillari, 81 SEC

Docket 633, 2003 WL 22250402 at *2. 

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8

 The Senate Report states that amending the statute to read

“at the time of the alleged misconduct” in Exchange Act section

15(b)(6) and Advisers Act section 203(f) was meant to “make clear

Congress’ original intent that misconduct during a past association . . .

as well as during a present . . . association, subjects a person to

administrative proceedings and sanctions.” S. Rep. No. 100–105, at

2111 (emphasis in original).

2. The Commission interpreted the phrase “at the time of

the alleged misconduct” in section 203(f) of the Advisers’ Act,

15 U.S.C. § 80b-3(f), to refer not to Kornman’s 2007 conviction,

as Kornman urged, but to his false statement to Commission

investigators during the October 29, 2003 telephone call on

which his conviction under 18 U.S.C § 1001 was based.

Decision at 9. This interpretation reflects the plain text of the

statute, id. at 9 & n.22, and is, in any event, reasonable even if

the text is ambiguous, cf. Teicher v. SEC, 177 F.3d 1016, 1021

(D.C. Cir 1999). The Commission noted that section 80b-3(f)

refers to the “alleged misconduct,” not the “alleged event” as

Kornman’s interpretation implied. Decision at 9. The

Commission also relied on legislative history indicating that

Congress had enacted the current text to make clear its original

intent that misconduct during a past association as well as during

a present occasion subjects a person to administrative

proceedings and sanctions under the Exchange and Advisers

Acts. Id. at 9 n.23 (citing S. Rep. No. 100–105, at 2111

(1987)).8

 The Commission pointed to its precedent explaining

that to hold otherwise “would allow persons who violate the law

while employed in the securities business to avoid

administrative sanctions simply by leaving the business.” John

Kilpatrick, Release No. 23251, 35 SEC Docket 914, 1986 WL

626187 at * 5 (May 19, 1986).

The Commission properly relied on the ordinary meaning

of alleged “misconduct,” which refers to allegedly “unlawful or

USCA Case #09-1074 Document #1225900 Filed: 01/15/2010 Page 17 of 27
18

improper behavior,” Black’s Law Dictionary 1013 (7th ed.

1999). See Limtiaco v. Comacho, 549 U.S. 483, 488-89 (2007);

cf. Gonzales v. Oregon, 546 U.S. 243, 274 (2006). So too, it

could properly rely on the legislative history, see Chevron, 467

U.S. at 843 n.9, 845, and on its own precedent interpreting

congressional intent. 

Kornman’s contention that after his conviction his

misconduct was no longer “alleged misconduct” is

“nonsensical.” Resp’t Br. 15. It would mean no conviction that

establishes the central issues regarding the “alleged misconduct”

as violations of law would ever satisfy the statutory text. Yet,

as the Commission noted, Congress has authorized the

Commission to discipline persons who have been convicted of

crimes that suggest a lack of fitness to remain in the securities

industry. Decision at 5 & n. 11 and 6 n. 13; see 15 U.S.C.

§ 80b-3(e)(3)(A); § 80b-3(f). The misconduct thus remains

“alleged” for purposes of the Commission’s enforcement

proceedings even after a criminal conviction based on the same

underlying conduct. Kornman’s contrary interpretation would

undermine Congress’ intent to ensure that past associations are

subject to Commission authority. 

B.

Turning to Kornman’s challenge to the sufficiency of the

evidence, the court not only “must uphold [the Commission’s]

[legal] determinations unless they are arbitrary, capricious, an

abuse of discretion, or otherwise not in accordance with law,”

Horning, 570 F.3d at 343 (internal quotations omitted), but it

must also treat the Commission’s findings of fact as final if they

are supported by substantial evidence in the record, id.

“Substantial evidence is more than a mere scintilla. It means

such relevant evidence as a reasonable mind might accept as

adequate to support a conclusion.” Consolidated Edison Co. v.

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NLRB, 305 U.S. 197, 229 (1938); see Steadman v. SEC, 450

U.S. 91, 101 n.21 (1981).

The Commission’s finding that on October 29, 2003,

Kornman was associated with an “investment adviser” as the

organizer of the Heritage Advisory Group, L.L.C., which

managed the portfolios of two hedge funds, is supported by

substantial evidence in the record. In responding to the

Division’s allegations, Kornman admitted that he controlled a

limited liability company and had traded for “two hedge-type

funds.” In opposing summary disposition, he proffered no

evidence to contradict either his admissions or the Division’s

evidence. The undisputed record evidence before the

Commission showed that Kornman organized the Heritage

Advisory Group as a limited liability company, which served as

the general partner of the two hedge funds, (see supra note 2,

Exs. 2, 3, 5A & 5B) and according to official state records, the

two hedge funds remained in good standing at least through June

2005, (see id. Exs. 2 & 3) a status in part dependent upon the

funds having paid any state taxes that were due, DEL. CODE

ANN. tit. 6, § 17-203 (2009). The hedge funds’ private offering

memoranda required the payment of quarterly and annual fees

for management of the funds’ portfolios. (See supra note 2, Exs.

5A at 18–19 & 5B at 18–19.) Cory D. Childs, a former

employee of the Heritage Advisory Group, provided sworn

statements describing how Kornman managed the portfolios of

the two hedge funds at least until June 2003 when Childs left his

job. (See id., Exs. 5 and 11.)

It is true, as Kornman points out, that there was no record

evidence that either of the hedge funds were still engaged in

trading in October 2003. But under Rule 250, which the

Commission modeled on Federal Rule of Civil Procedure 56, the

burden on the Division was to proffer evidence to demonstrate

why summary disposition was appropriate. To do so the

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Division did not have to proffer evidence of actual trades in

October 2003 if the evidence proffered sufficed to raise a

reasonable inference that Kornman continued, for compensation,

to manage the funds’ portfolios. Cf. Celotex v. Catrett, 477 U.S.

317, 322-23 (1986); FED.R.CIV. P. 56(c)(2). The hedge funds’

private offering memoranda did not establish a trading schedule.

(See supra note 2, Exs.5A & 5B.) The absence of trading around

the time of the October 29, 2003 telephone call would,

moreover, be consistent with Childs’ deposition about how

Kornman managed the hedge funds’ portfolios: Kornman would

call Childs from time to time to make trades for “whichever

[fund] had the money at the time”; there was no set schedule for

trading. Ex. 11 at 23–24, supra note 2. Because the evidence

proffered by the Division sufficed to support the reasonable

inference that the hedge funds remained active until at least June

2005, the burden under Rule 250, as under Civil Rule 56, shifted

to Kornman to proffer evidence that trading had ceased before

the October 29, 2003 telephone call. Cf. Anderson v. Liberty

Lobby, Inc. 477 U.S. 242, 252 (1986); FED. R. CIV. P. 56(e)(2).

Contrary to Kornman’s contention on brief, there was no

record evidence that the Heritage Advisory Group ceased to

function for compensation as an investment adviser for the two

hedge funds after June 2003. Childs described Kornman’s

active involvement in managing their portfolios during Childs’

employment, which began in March 2000 and ended in June

2003. (See supra note 2, Ex. 11 at 19.) Nothing in Childs’

sworn statements, or other evidence before the Commission,

suggested that Childs’ leaving his job was related to the end of

Kornman’s active management of the hedge funds’ portfolios.

Instead, Childs’ sworn statements indicated that when he left to

pursue other interests, he was leaving an ongoing trading

operation managed by Kornman. The state certificates showing

that the hedge funds remained in good standing as of June 2005

supported the inference from Childs’ sworn statements that

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21

trading continued and Kornman continued in his role as the

Heritage Advisory Group manager of the funds’ portfolios. (See

id., Exs. 2, 3, 5A & 5B.) In addition, Kornman did not deny the

ongoing existence of the two hedge funds in his response to the

Division’s allegations. Similarly, in his affidavit submitted in

opposing the Division’s Rule 250 motion he did not state that

the hedge funds ceased paying him management fees prior to

October 29, 2003 or that the funds had ceased to trade by then.

The record of the criminal proceedings also did not indicate that

he was no longer associated with the Heritage Advisory Group

or did not provide, for compensation, investment advice to the

hedge funds in October 2003. (See id., Exs. 7, 9, 10.) Indeed,

Kornman’s sworn deposition in 2004 confirmed that at least one

of the funds was still in existence — “One of those [funds] has

assets and one is — is basically nothing,” Ex. 4 at 23, supra

note 2, and did not state the funds had ceased trading by October

2003. At most, Kornman’s unsworn statement during the

October 29, 2003 telephone call indicated that Heritage Capital

Partners I, L.P. was not in business, but he did not mention,

much less resolve, the status of Heritage Capital Opportunities

Fund I, L.P. (See id., Ex. 12 at 7.)

The Commission, and the ALJ, noted that Kornman had

made assertions that the two hedge funds had ceased trading

prior to October 2003 but had proffered no evidence to support

his assertions. For example, he proffered neither certificates of

dissolution of the hedge funds nor evidence of cancellation of

the contractual fees, much less quarterly or annual statements

documenting the absence of any trades by the hedge funds.

Moreover, he never claimed that he would be unable to produce

documentation to show there was no trading activity by the

hedge funds in October 2003 until an evidentiary hearing was

held. See Rule 250(b). Given the record evidence, the

Commission could reasonably find that Kornman continued to

be associated with an entity that provided investment advice for

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22

compensation at the time he made a false statement to

Commission investigators on October 29, 2003. 

Kornman’s contention, then, that he was entitled to an

evidentiary hearing even in the absence of evidence of a material

issue of disputed fact is flawed as a matter of statutory

interpretation, as is his interpretation of “at the time of the

alleged misconduct,” and reflects a misunderstanding of the

record evidence before the Commission. Although there may be

circumstances when the Commission would be required to hold

an evidentiary hearing even where there is a criminal conviction

involving a willful intent to mislead Commission investigators,

Kornman’s admissions and the undisputed record evidence

allowed the Commission to proceed pursuant to Rule 250.

Kornman, in turn, fails to show that there is not substantial

record evidence to support the Commission’s finding that he

was an “investment adviser” on October 29, 2003. 

III. 

“It is a fundamental principle . . . that where Congress has

entrusted an administrative agency with the responsibility of

selecting the means of achieving the statutory policy the relation

of remedy to policy is peculiarly a matter for administrative

competence.” Am. Power & Light Co. v. SEC, 329 U.S. 90, 112

(1946) (internal quotations omitted). Because of the

Commission’s “accumulated experience and knowledge[,] . . .

[i]ts judgment is entitled to the greatest weight. While

recognizing that the Commission’s discretion must square with

its responsibility, only if the remedy chosen is unwarranted in

law or is without justification in fact should a court attempt to

intervene.” Id. at 112–13; see also Horning, 570 F.3d at 343.

Moreover, the Commission is not required to follow any

mechanistic formula in determining an appropriate sanction.

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

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9

 The Commission cited as examples Ahmed Mohamed

Soliman, 52 S.E.C. 227, 230–31 (1995); Bruce Paul, 48 S.E.C. 126,

128–29 (1985); Benjamin Levy Sec., Inc., 46 S.E.C. 1145, 1146–47

(1978); cf. Paul K. Grassi, Jr., Exchange Act Rel. No. 52858 (Nov.

30, 2005), 86 S.E.C. 2494; Boleslaw Wolny, 53 SEC 590 (1998); see

The Commission concluded that “Kornman’s deliberate

attempt to deceive Commission investigators during an

investigation into insider trading indicates a lack of honesty and

integrity, as well as a fundamental unfitness to transact business

associated with a broker or dealer and to advise clients as a

fiduciary.” Decision at 12. Kornman contends the Commission

failed to appreciate that not every conviction involving

dishonesty requires a permanent bar. He maintains the

Commission imposed an automatic bar without “show[ing] with

particularity the facts and policies that support those sanctions

and why less severe action would not serve to protect

investors.” Pet’r’s Br. at 16 (citing Steadman, 603 F.2d at 1137)

(emphasis in original). He also faults the Commission for not

allowing him to present testimony at an evidentiary hearing to

rebut the assertion by the Division that a less severe sanction

would not protect the public. We conclude Kornman fails to

show either reversal or remand is required. 

The Commission explained why, as a matter of policy,

Kornman’s particular misconduct warranted a bar: his

conviction indicated his dishonesty was egregious because he

admitted it was knowing and intentional, and, moreover, his

false statement was made in the course of the Commission’s

investigation of wrongdoing in the industry. The Commission

observed that “the importance of honesty for a securities

professional is so paramount that [the Commission has] barred

individuals even when the conviction was based on dishonest

conduct unrelated to securities transactions or securities

business.” Decision at 11.9

 Further, the Commission noted it

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also John F. Yakimczyk, 51 S.E.C. 56, 58 (1992); Joseph P. D’Angelo,

46 S.E.C. 736, 737 (1976), aff’d without opinion, 559 F.2d 1202 (2d

Cir. 1977).

10 As examples, the Commission cited Peter W. Schellenbach,

50 S.E.C. 798, 803 (1991), aff’d, 989 F.2d 907 (7th Cir. 1993); Rita

Delaney, 48 S.E.C. 886, 890 (1987); Walter B. Bull, Jr., 48 S.E.C.

113, 116–17 (1985).

11 Because Kornman has conceded he is estopped from

collaterally attacking the facts underlying his plea, we need not

has “consistently held that deliberate deception of regulatory

authorities justifies the severest of sanctions.” Id.

10 The

Commission acknowledged Kornman’s prior unblemished

business record, his regret about making the false statement, his

vow not to do so again, and even that he was personally

convinced he would not repeat his misconduct. However the

Commission emphasized that “[t]he securities industry presents

a great many opportunities for abuse and overreaching, and

depends very heavily on the integrity of its participants.” Id. at

10–11 (internal quotations omitted). 

Insofar as Kornman contends the Commission abused its

discretion by imposing an automatic bar because the ALJ found

that “a conviction involving dishonesty requires a bar,” Initial

Decision at 9, the Commission did not embrace this portion of

the ALJ’s analysis. Instead the Commission imposed the bar

only after considering the mitigating factors pursuant to an

analysis of the Steadman factors, 603 F.2d at 1140. Observing,

however, that Kornman’s mitigation arguments were

“essentially collateral attacks on his conviction,” Decision at 12,

the Commission ruled he was estopped from doing so because

the validity of Kornman’s plea was not at issue and he had

admitted the materiality of his false statement, a legal ruling

Kornman does not challenge.11 By pleading guilty to violating

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address the question left open in Otherson v. Dep’t of Justice, 711

F.2d 267, 275 n.8, 277 n.11 (D.C. Cir. 1983).

18 U.S.C. § 1001, Kornman admitted to “knowingly and

willfully -- (1) falsif[ying] . . . a material fact; (2) mak[ing] a[]

materially false . . . statement or representation” “in any matter

within the jurisdiction of the executive . . . branch of the

Government of the United States.” Id. § 1001(a). The

Commission concluded that because willfulness was not at

issue, the “exculpatory no” doctrine, see United States v.

Wiener, 96 F.3d 35, 37 (2d Cir. 1996), was inapplicable, noting

as well rejection of the doctrine in Brogan v. United States, 522

U.S. 398, 402–05 (1998); see also id. at 408–12 (Ginsburg, J.

concurring). It also could reasonably reject, in view of the

criminal record, Kornman’s attempts to minimize the gravity of

his false statement as trivial or dilatory in nature and his mental

state as less than intentional. 

As to other mitigation arguments — that Kornman was 63

years old, winding down his professional career, and had no

prior criminal or disciplinary history — the Commission

explained they did not alleviate its concern that his occupation

presented opportunities for future misconduct. The Commission

was also unpersuaded that, as Kornman argued, neither the

Commission nor the public suffered any harm as a result of his

misconduct, given the importance of integrity to the regulatory

process. Neither, in the Commission’s view, did Kornman’s

substantial financial losses mitigate the gravity of his conduct,

particularly because the district court in sentencing him had

taken into account that a permanent bar would likely be sought

in the administrative hearings before the Commission. 

On this record, Kornman cannot show either that the

Commission’s chosen remedy was unwarranted as a matter of

policy or without justification in fact, or that the Commission

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gave inadequate consideration to the evidence offered in

mitigation. Although having discretion to impose a lesser

sanction, “[t]he Commission is not obligated to make its

sanctions uniform,” and the court “will not compare this

sanction to those imposed in previous cases.” Geiger v. SEC,

363 F.3d 481, 488 (D.C. Cir. 2004) (citing Butz v. Glover

Livestock Comm’n Co., 411 U.S. 182, 186-87 (1973)). Because

Kornman presented no ground for an evidentiary hearing on

mitigation — for example, he did not proffer by affidavit or

other evidence that he had initiated prompt efforts to correct his

false statement or otherwise proffered evidence of conduct that

the Commission might have deemed “extraordinary mitigating

circumstances,” Brownson, 77 SEC Docket 3097, 2002 WL

1438186 at *2 — the Commission could reasonably conclude

that an evidentiary hearing on mitigation was unnecessary. 

Kornman’s attempt to invoke double jeopardy concerns

misses the mark. The Supreme Court has long distinguished

between civil sanctions and a criminal penalty based on a

common underlying event. See Helvering v. Mitchell, 303 U.S.

391, 399 (1938). In Hudson v. United States, 522 U.S. 93

(1997), the Court held that the Double Jeopardy Clause does not

prohibit bringing a criminal prosecution against a person

debarred from the banking industry for the same misconduct

during a prior civil administrative proceeding. Id. at 97–99. So

too the reverse must be true as well. See DiCola v. Food and

Drug Admin., 77 F.3d 504, 505, 507-08 (D.C. Cir. 1996). By

authorizing the Commission to debar investment advisers to

protect the investing public, 15 U.S.C. § 80b-3(f), Congress

signaled its intent that the bar be civil, see Hudson, 522 U.S. at

103, and Kornman has not demonstrated by the “clearest proof”

that his sanction is “‘so punitive in form and effect as to render

[the sanction] criminal despite Congress’ intent to the

contrary,’” id. at 104 (quoting United States v. Ursery, 518 U.S.

267, 290 (1996)). The “‘revocation of a privilege voluntarily

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granted,’ such as a debarment, ‘is characteristically free of the

punitive criminal element.’” Id. at 104 (quoting Helvering, 303

U.S. at 399 & n.2). That it “will deter others from emulating

[the respondent’s] conduct . . . is insufficient to render a sanction

criminal, as deterrence ‘may serve civil as well as criminal

goals.’” Id. at 105 (quoting Ursery, 518 U.S. at 292); see also

DiCola, 77 F.3d at 508. As the Commission observed,

Kornman’s sanction is remedial in nature because it “is designed

to protect the public, and the sanction is not historically viewed

as punishment,” Decision at 22. Given the record in the

criminal proceeding, the Commission’s concern about allowing

Kornman to continue as an investment adviser was a legitimate

prophylactic remedy consistent with its statutory obligations. 

Accordingly, we deny the petition for review.

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