Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-03-01062/USCOURTS-caDC-03-01062-0/pdf.json

Parties Involved:
Gene C. Geiger
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

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before the bound volumes go to press.

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 20, 2004 Decided April 9, 2004

No. 03-1062

GENE C. GEIGER,

PETITIONER

v.

SECURITIES AND EXCHANGE COMMISSION,

RESPONDENT

Consolidated with

No. 03-1063

On Petitions for Review of an Order of the

Securities and Exchange Commission

Jeffrey J. Scott argued the cause and filed the briefs for

petitioner Gene C. Geiger.

 Bills of costs must be filed within 14 days after entry of judgment.

The court looks with disfavor upon motions to file bills of costs out

of time.

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David A. Zisser argued the cause and filed the briefs for

petitioner Charles F. Kirby.

Randall W. Quinn, Assistant General Counsel, Securities

and Exchange Commission, argued the cause for respondent.

With him on the brief were Giovanni P. Prezioso, General

Counsel, Meyer Eisenberg, Deputy General Counsel, Jacob

H. Stillman, Solicitor, and Susan K. Straus, Attorney.

Before: HENDERSON, RANDOLPH, and GARLAND, Circuit

Judges.

Opinion for the Court filed by Circuit Judge RANDOLPH.

RANDOLPH, Circuit Judge: As a general rule, issuers of

securities must register their securities with the Securities

and Exchange Commission before offering or selling them to

the public. The Commission, finding that Gene C. Geiger and

Charles F. Kirby improperly sold to the public unregistered

securities, or participated in such a sale, sanctioned them for

violating § 5 of the Securities Act, 15 U.S.C. § 77e(a) & (c).1

In these petitions for judicial review, Geiger and Kirby claim

the transactions were exempt from the registration requirement and that the sanctions the Commission imposed were

improper.

I.

In 1995, Ron Knittle and Mary Erickson were the controlling shareholders and, respectively, the president and CEO,

and the secretary and treasurer, of Beneficial Capital Financial Services Corporation, then a shell corporation. That year

they changed the corporation’s name to Golden Eagle International, Inc. The newly-named company intended to acquire, develop, and operate mines. In three transactions,

nearly 3 million unregistered shares of Golden Eagle ended

up in the hands of the investing public.

The transactions consisted of three blocks of shares. The

first two blocks, totaling 633,000 shares, were nominally held

1 Section 5(a) prohibits selling unregistered securities; § 5(c)

prohibits offering to sell or offering to buy unregistered securities.

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by Kimi Hunsaker. Knittle and Erickson actually controlled

these shares. Hunsaker, a clerical employee of Golden Eagle, never paid for the shares and, at least initially, did not

know they were in her name. The certificate representing

500,000 of the Hunsaker shares bore a restrictive legend

stating that the shares could not be sold without registration.

The certificate representing the remaining 133,000 Hunsaker

shares also once bore a restrictive legend, but a new, unrestricted certificate had been issued when Knittle and Erickson acquired the company.

The third block consisted of 2.3 million shares held by

David Hills, a former Golden Eagle executive. Hills’ severance agreement required him to return 2.1 million of these

shares to Golden Eagle once the company satisfied certain

obligations. The certificates representing Hills’ shares bore

restrictive legends.

A. The Kirby–Hunsaker Transaction

In June 1995, Knittle approached petitioner Gene C. Geiger, then a salesman at the Colorado-based brokerage firm of

Spencer Edwards, Inc. He asked Geiger to find a buyer for

the 133,000 Hunsaker shares whose certificate did not have a

restrictive legend. Geiger offered the shares to petitioner

Charles F. Kirby, the head trader at Spencer Edwards.

Kirby agreed to buy the shares for $25,000 for the account of

CKC Partners, a partnership jointly owned by Kirby and a

trust he administered on behalf of his children. When Kirby

sought to pay for the shares, Geiger told him he was ‘‘unclear

as to who the seller was or who the check was to be made out

to.’’ Kirby therefore left the payee’s line on his check blank.

Geiger later filled in the line, making the check payable to

Erickson. In short order, Kirby resold the shares to the

public for $56,000.

That the shares Kirby sold were unregistered did not

necessarily render the transaction unlawful. The Securities

Act focuses primarily on initial offerings, rather than on

secondary transactions among members of the public. See 1

THOMAS LEE HAZEN, THE LAW OF SECURITIES REGULATION § 1.1

(4th ed. 2002); Blue Chip Stamps v. Manor Drug Stores, 421

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U.S. 723, 752 (1975). Section 4(1) of the Act thus exempts

from registration ‘‘transactions by any person other than an

issuer, underwriter, or dealer.’’ 15 U.S.C. § 77d(1). The

exemption did not apply, the Commission decided, because

Kirby was an ‘‘underwriter.’’ Kirby had the burden of proving otherwise. SEC v. Ralston Purina, 346 U.S. 119, 126

(1953).

Section 2(11) of the Act defines ‘‘underwriter’’ as ‘‘any

person who has purchased from an issuer with a view to, or

offers or sells for an issuer in connection with, the distribution of any security, or participates TTT in any such undertaking[.]’’ 15 U.S.C. § 77b(11). The term ‘‘issuer’’ includes not

only the issuing company, but also ‘‘any person directly or

indirectly controlling or controlled by the issuer.’’ Id. The

statute does not define ‘‘distribution.’’

Kirby purchased the shares from a ‘‘person TTT controlling

TTT the issuer,’’ and he intended to sell those shares to the

public, as he did. His argument is that he was not an

‘‘underwriter’’ excluded from the § 4(1) exemption because

his sale was not a ‘‘distribution’’ within the meaning of

§ 2(11). The sale was not a ‘‘distribution,’’ he claims, because

he sold only 0.5 percent of Golden Eagle’s more than 12

million shares. According to Kirby, a sale qualifies as a

‘‘distribution’’ only if it involves a ‘‘substantial’’ or ‘‘significant’’ percentage of the issuer’s outstanding shares.

Registration of securities protects ‘‘investors by promoting

full disclosure of information thought necessary to informed

investment decisions.’’ Ralston Purina, 346 U.S. at 124. To

the purchaser of securities, the potential loss – and the need

for disclosure – is the same regardless whether the securities

represent one percent, five percent, or ten percent of the

outstanding shares. The applicability of the § 4(1) exemption

turns not on the percentage of shares involved, but ‘‘on

whether the particular class of persons affected need the

protection of the Act.’’ Id. at 125. In Ralston Purina, the

Supreme Court relied on this reasoning to reject the notion

that the term ‘‘public offering,’’ as used in another exemption

to the registration requirement, 15 U.S.C. § 77d(2), contemUSCA Case #03-1062 Document #815083 Filed: 04/09/2004 Page 4 of 13
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plated any particular quantity of stock. The same reasoning

applies to ‘‘distributions’’ under § 2(11). Every court to

consider this question has so ruled. Ackerberg v. Johnson,

892 F.2d 1328, 1337 (8th Cir. 1989); SEC v. Dolnick, 501 F.2d

1279, 1282 (7th Cir. 1974); Quinn & Co. v. SEC, 452 F.2d 943,

946 (10th Cir. 1971); Gilligan, Will & Co. v. SEC, 267 F.2d

461, 467 (2d Cir. 1959).

In arguing to the contrary, Kirby cites two opinions supposedly supporting the idea that distributions must involve a

substantial percentage of the outstanding shares. The first

case, Pennaluna & Co. v. SEC, 410 F.2d 861, 865 (9th Cir.

1969), actually hurts rather than helps him. The Pennaluna

court upheld the Commission’s finding of a § 5 violation on

the basis of sales that amounted to a mere 0.25 percent of the

outstanding shares. 410 F.2d at 865, 867–68. The second

opinion, SEC v. American Beryllium & Oil Corp., 303 F.

Supp. 912 (S.D.N.Y. 1969), discussed the meaning of a regulation, not the term ‘‘distribution’’ in § 2(11). 303 F. Supp. at

915 n.3.

Kirby’s alternative argument is that even if the sale violated § 5(a) of the Act, he did not violate § 5(c), which makes it

‘‘unlawful for any person TTT to offer to sell TTT any [unregistered] security[.]’’ 15 U.S.C. § 77e(c). According to Kirby,

he did not ‘‘offer’’ to sell the 133,000 Hunsaker shares, but

merely accepted outstanding offers from market makers to

buy Golden Eagle shares at a particular price.2

 The argument fails under common law: price quotations are ‘‘commonly understood as inviting an offer rather than making one[.]’’

RESTATEMENT (SECOND) OF CONTRACTS § 26 cmt. c (1981). It

fails as well under the Securities Act, which is what governed

the legality of Kirby’s conduct. As used in § 5, ‘‘the term

‘offer to sell’ TTT shall include every attempt or offer to

dispose of, or solicitation of an offer to buy, a security or

interest in a security, for value.’’ 15 U.S.C. § 77b(3). There

2 A market maker continuously stands ready to buy or sell

particular stocks at particular prices. See 2 THE NEW PALGRAVE

DICTIONARY OF MONEY & FINANCE (Peter Newman et al. eds., 1992).

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is no doubt that Kirby’s sale of the shares constituted an

‘‘attempt TTT to dispose’’ of them.

Substantial evidence supports the Commission’s finding

that Kirby’s conduct was willful. True, there is no evidence

Kirby actually knew the shares were controlled by a statutory

issuer. The share certificate bore no restrictive legend, and

Geiger assured Kirby that the shares were ‘‘free-trading.’’

Kirby’s problem is that he failed to inquire sufficiently into

the circumstances of the transaction. Wonsover v. SEC, 205

F.3d 408, 415 (D.C. Cir. 2001) (citing Distribution by Broker–

Dealers of Unregistered Securities, Securities Act Rel. No.

4445, 1962 WL 69442 (Feb. 2, 1962)). ‘‘[W]hen a dealer is

offered a substantial block of a little-known security, either by

persons who appear reluctant to disclose exactly where the

securities came from, or where the surrounding circumstances raise a question TTT whether or not the ostensible

sellers may be merely intermediaries for controlling persons

or statutory underwriters, then searching inquiry is called

for.’’ Id. Even if, as Kirby argues, this sale was not

substantial, all the other warning signs were present. Golden

Eagle was little-known and lightly traded, and Geiger was

reluctant to disclose the true party in interest. If Kirby had

simply insisted on knowing the identity of the seller, he would

have uncovered the illegal nature of the transaction. By

giving Geiger a blank check, Kirby abandoned even the

pretense of due diligence.

B. The LaSalle–Hunsaker Transaction

In December 1995, Knittle approached Geiger again, hoping to dispose of the remaining 500,000 Hunsaker shares.

Geiger offered the shares to his client Alfred Peeper. Peeper

agreed to buy the stock on behalf of LaSalle Investment Ltd.,

an Irish corporation whose trading he controlled. The terms

of the deal were extremely favorable to LaSalle: it would buy

the shares at a substantial discount, even less than the

partnership – CKC – had paid. Geiger negotiated the terms

directly with Knittle before speaking to Hunsaker.

The certificate for these shares still bore a restrictive

legend. Commission Rule 144 allows persons affiliated with

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an issuer to sell unregistered securities without being deemed

underwriters if they meet certain conditions. See 17 C.F.R.

§ 230.144. Among the conditions is a minimum holding

period between the time the ‘‘affiliate’’ acquired the securities

and the time of the sale. 17 C.F.R. § 230.144(d). Geiger and

his partner Thomas Kaufmann submitted documents asking

the transfer agent3

 to issue a new, unrestricted certificate

pursuant to Rule 144 on the basis that Hunsaker satisfied the

holding period requirement. Although the shares had been

in her name for less than the required period, her holding

period could ‘‘tack’’ onto the holding periods of the previous

‘‘owners’’ (whom Knittle and Erickson also controlled).

When Geiger contacted Hunsaker, she told him she had

never paid for the securities. This made the shares ineligible

for the Rule 144 exemption. Geiger confronted Knittle with

the information. Knittle did not deny Hunsaker’s assertion.

Instead, he instructed Geiger to withhold payment until the

matter was resolved. Nevertheless, a new, unrestricted

share certificate was deposited in LaSalle’s Spencer Edwards

account. LaSalle later sold the shares at a substantial profit.

The Commission found that Geiger violated § 5 by participating in the distribution of the 500,000 Hunsaker shares.

Geiger argues that he is not liable for the sale because he

relied on the transfer agent’s determination that the shares

were unrestricted. The Commission called this argument

‘‘disingenuous.’’ It was generous. The transfer agent relied

on false documentation. Even if Kaufmann alone prepared

the documents, as Geiger claims, Geiger knew that Hunsaker

had not paid for the shares and thus did not qualify for the

Rule 144 exemption. In addition, Geiger – having negotiated

the entire transaction directly with Knittle – knew that

Hunsaker was not the real party in interest.

3 A transfer agent is ‘‘responsible for recording changes of ownership of securities, canceling obsolete certificates, and issuing new

ones.’’ THE RANDOM HOUSE DICTIONARY OF BUSINESS TERMS 286 (Jay

N. Nisberg ed., 1988).

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C. The LaSalle–Hills Transaction

About the same time as the last Hunsaker transaction,

Knittle and Hills separately approached Geiger to find a

buyer for the Hills shares. Geiger told Hills that before he

arranged the transaction, he would have to ‘‘work out some

details’’ with Knittle. Knittle urged Geiger to find a buyer

for the Hills stock. Geiger then informed Hills that LaSalle

would buy 666,000 of his shares for $156,000. But when Hills

delivered his certificate, Geiger told him Knittle had changed

the terms of the deal. Hills would now have to deliver all 2.3

million shares in exchange for $119,000. Hills agreed, and

the parties executed the sale on Knittle’s terms. Although

the sale closed on February 1, 1996, Geiger gave Hills a check

dated November 4, 1995. When Hills questioned the date,

Geiger assured him the check would clear. It did.

The certificates Hills delivered bore restrictive legends.

Geiger had asked an attorney to write an opinion letter for

the transfer agent stating that the restrictions could be

removed pursuant to the Commission’s Regulation S. Regulation S permits the sale of unregistered securities in certain

off-shore transactions, including sales to a ‘‘non-U.S. person’’

such as LaSalle. 17 C.F.R. §§ 230.901–904. At the time, the

regulation forbade the foreign buyer from reselling the

shares within the United States for 40 days. 17 C.F.R.

§ 230.903(c)(2)(iii) (1995). The attorney’s letter, dated February 5, 1996, stated that the parties to the transaction certified

that the sale closed ‘‘on or about November 10, 1995.’’ Based

on that representation, the attorney concluded that the restricted period ended – and new, unrestricted certificates

could issue – on or about December 20, 1995. New certificates issued, and LaSalle sold the shares at a substantial

profit.

As noted above, the sale actually closed on February 1,

1996. The attorney testified that Geiger was the one who

told him otherwise.

The Commission found that Geiger violated § 5 by participating in the sale of the Hills shares. Geiger’s first defense

is that Hills was no longer affiliated with Golden Eagle at the

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time of the sale and, therefore, the transaction was within the

§ 4(1) exemption for sales ‘‘by a person other than an issuer,

underwriter, or dealer.’’ The Commission rejected this defense on the ground that Knittle, a statutory issuer, actually

controlled the transaction. Substantial evidence supports this

finding. Geiger would not have proceeded with the sale

without Knittle’s permission, and Hills allowed Knittle to

dictate the terms of the deal. Just as important, the transaction primarily benefitted Golden Eagle. The company had

already committed to repurchase Hills’ shares in fulfillment of

its obligations under his severance agreement. Hills was

determined to sell his shares because it appeared Golden

Eagle might default on that agreement. Knittle feared the

sale would ‘‘crumble the market’’ in Golden Eagle stock. The

transaction with LaSalle alleviated Knittle’s fear and relieved

the company of some of its contractual obligations. Thus,

functionally, this transaction was a public offering by Golden

Eagle to retire its debt to Hills.

Geiger objects that even if Knittle and Golden Eagle were

the real sellers, he is not liable because he did not participate

in LaSalle’s ultimate sale of the shares to the public. Geiger’s premise is faulty. He did not have to be involved in the

final step of the distribution to have participated in it. ‘‘The

term ‘distribution’ refers to the entire process in a public

offering through which a block of securities is dispersed and

ultimately comes to rest in the hand of the investing public.’’

In re Wonsover, Exchange Act Release No. 41123, 1999 WL

100935 at *7 n.25 (Mar. 1, 1999), aff’d, 205 F.3d 408 (D.C. Cir.

2000). See also Ackerberg v. Johnson, 892 F.2d 1328, 1335–36

(8th Cir. 1989) (Congress intended ‘‘to cover all persons who

might operate as conduits for the transfer of securities to the

public’’) (citing 1 HAZEN, THE LAW OF SECURITIES REGULATION at

§ 4.24). It is true that ‘‘not everyone in the chain of intermediaries between a seller of securities and the ultimate buyer is

sufficiently involved in the process to make him responsible

for an unlawful distribution[.]’’ Owen v. Kane, Securities Act

Release No. 23827, 1986 WL 626043 at *3 (Nov. 20, 1986).

But someone who played a role as crucial as Geiger’s –

finding the buyer, negotiating the terms, facilitating the

resale – cannot escape liability by avoiding direct involvement

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in the final act. In any event, the evidence shows that Geiger

did participate in LaSalle’s resales. LaSalle could not resell

the shares back into the United States without new, unrestricted certificates. It was Geiger who procured those certificates by fraudulently obtaining the attorney’s opinion letter.

For the first time in his reply brief, Geiger argues that

Pinter v. Dahl, 486 U.S. 622 (1988), imposes additional requirements for § 5 liability. According to Geiger, Pinter

holds that he can be liable under § 5 only if he solicited a

buyer for LaSalle’s shares and received compensation for the

sale. We do not believe Pinter is on point, but even if it

were, Geiger waived the argument by failing to raise it before

the Commission and in his opening brief. See 15 U.S.C.

§ 78y(c)(1); Rollins Envtl. Servs. (NJ), Inc. v. EPA, 937 F.2d

649, 653 n.2 (D.C. Cir. 1991).

Geiger further argues that he should not be liable because

LaSalle did not actually sell the Hills shares until after the

restricted period had expired. The Commission disputes this

claim, arguing the sales occurred within the 40 days. We

need not resolve the issue. The Regulation S exemption does

not apply to transactions that, though in technical compliance,

are designed to evade the registration requirement. Offshore

Offers and Sales, Securities Act Release No. 6863, 1990 WL

311658 at *25 (Apr. 24, 1990). The Commission had good

reason to conclude that the sale of the Hills shares was such a

transaction. At the time, Peeper was not interested in holding Golden Eagle stock. He bought the shares for LaSalle at

a substantial discount and quickly resold them for a profit.

Geiger was so anxious to facilitate this quick resale that he

resorted to fraud. Peeper funneled much of LaSalle’s trading

profit back to Golden Eagle by buying Golden Eagle debentures and restricted stock. This evidence supports the Commission’s finding that the shares were never meant to ‘‘come

to rest abroad.’’

II.

The Commission barred Kirby and Geiger from associating

with any broker or dealer or participating in any penny stock

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offering, with the right to reapply in five years. It ordered

Kirby to disgorge $31,352.60 in illegal profits and pay a

$200,000 civil penalty. It ordered Geiger to disgorge

$15,202.48 and pay a civil penalty of $300,000. It also ordered

both men to cease and desist from committing any § 5

violations.

Kirby and Geiger complain that the sanctions are excessive

compared to other cases. See In re Wonsover, Exchange Act

Release No. 41123, 1999 WL 100935 (Mar. 1, 1999), aff’d, 205

F.3d 408 (D.C. Cir. 2000); In re Steen, Exchange Act Release

No. 40055, 1998 WL 278994 (June 2, 1998); In re Leigh,

Exchange Act Release No. 27667, 1990 WL 1104369 (Feb. 1,

1990). The Commission is not obligated to make its sanctions

uniform, so we will not compare this sanction to those imposed in previous cases. Butz v. Glover Livestock Comm’n

Co., 411 U.S. 182, 186–87 (1973). We must uphold the

sanction unless it is ‘‘unwarranted in law or TTT without

justification in fact TTT [.]’’ Id. at 185–86 (quoting American

Power Co. v. SEC, 329 U.S. 90, 112 (1946)). The sanctions

here satisfy that standard. Geiger’s conduct was, as the

Commission put it, egregious. It involved intentional misrepresentation and falsification of documents, and led to the

distribution of hundreds of thousands of unregistered securities. While Kirby’s conduct was not as bad, he ignored

obvious warning signs that the transaction was illegal. He

also has a disciplinary history, having twice been sanctioned

by the National Association of Securities Dealers.4

Both petitioners also challenge the disgorgement order,

claiming they did not profit from their respective transactions. Kirby argues that he and CKC Partnership are legally

separate, and that the Commission should not have attributed

CKC’s profit to him. The evidence is otherwise. The administrative law judge found, and the Commission agreed, that

Kirby and CKC were ‘‘one and the same.’’ Kirby was partowner of CKC and had total control over its account. The

4 Kirby objects to the consideration of his disciplinary history, but

he did not raise this objection before the Commission. See 15 U.S.C.

§ 78y(c)(1).

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other owner, CKC Family Trust, was a trust Kirby administered on behalf of his children. Kirby produced no evidence

to support his claim of legal separateness. He submitted no

documents showing how CKC was organized or managed, and

could not even say whether the CKC Family Trust was

irrevocable. For his part, Geiger argues there is no evidence

he ever received commissions from LaSalle’s sale of the

Golden Eagle stock. LaSalle’s Spencer Edwards account

lists a total of $62,889.45 under a column labeled ‘‘Commissions.’’ The reasonable inference is that this represented

commissions LaSalle paid Spencer Edwards. Geiger’s employment arrangement entitled him to 25% of those commissions. He offers no reason to think his compensation for

those trades did not conform to the usual arrangement.

Kirby also objects to the cease-and-desist order. He argues that his violation resulted from an unusual convergence

of factors, and there is no indication he is likely to repeat it.

But under Commission precedent, the existence of a violation

raises an inference that it will be repeated. See In re Trento,

Securities Act Release No. 8391, 2004 WL 329040 at *3 (Feb.

23, 2004); In re Richmark Capital Corp., Securities Act

Release No. 8333, 2003 WL 22570712 at *10 (Nov. 7, 2003).

The Commission reasonably found Kirby’s conduct ‘‘egregious,’’ which justifies the inference in this case. See KMPG

v. SEC, 289 F.3d 109, 125–26 (D.C. Cir. 2002). Kirby does

little to dispel it. As the Commission noted, Kirby still thinks

he did nothing wrong, which casts doubts on his promise that

he will mend his ways. Kirby replies that SEC v. First City

Financial Corp., 890 F.2d 1215 (D.C. Cir. 1989), forbids the

Commission from considering his lack of remorse. The case

stands for no such proposition. The majority of the panel in

First City sustained the Commission’s position. Id. at 1233

(Ruth Bader Ginsburg & Edwards, JJ., concurring). In

short, the Commission’s decision to impose a cease-and-desist

order was warranted.

* * *

The Commission properly found that Kirby and Geiger

violated § 5 of the Securities Act, and the sanctions it imUSCA Case #03-1062 Document #815083 Filed: 04/09/2004 Page 12 of 13
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posed were appropriate.5

 The petitions for review are denied.

So ordered.

5 Kirby complains that the Commission did not dispose of his case

within a reasonable time. That claim is moot. See Sierra Club v.

Thomas, 828 F.2d 783, 795 n.81 (D.C. Cir. 1987). Geiger argues

that he did not act ‘‘wilfully’’ because Spencer Edwards’ president

and compliance officer approved the transactions. We do not see

how this proves that Geiger did not have the state of mind required

to violate § 5. See Wonsover, 205 F.3d at 413–15. Still less can we

see how it would lead to a conclusion that the Commission’s findings

lack sufficient evidentiary support.

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