Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-08-01038/USCOURTS-caDC-08-01038-0/pdf.json

Parties Involved:
Stephen J. Horning
Petitioner
Securities and Exchange Commission
Respondent

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 13, 2008 Decided June 26, 2009

No. 08-1038

STEPHEN J. HORNING,

PETITIONER

v.

SECURITIES AND EXCHANGE COMMISSION,

RESPONDENT

On Petition for Review of an Order 

of the Securities & Exchange Commission

Thomas D. Birge argued the cause and filed the briefs for

petitioner.

Dominick V. Freda, Senior Counsel, Securities & Exchange

Commission, argued the cause for respondent. With him on the

brief were Brian G. Cartwright, General Counsel, Andrew N.

Vollmer, Deputy General Counsel, Jacob H. Stillman, Solicitor,

and Randall W. Quinn, Assistant General Counsel.

Before: GARLAND and BROWN, Circuit Judges, and

WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge GARLAND.

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GARLAND, Circuit Judge: Stephen J. Horning, the former

president and director of Rocky Mountain Securities &

Investments, petitions for review of an order of the Securities

and Exchange Commission (SEC). The Commission found that

Horning failed to exercise reasonable supervision over two

employees who violated the securities laws, and that he caused

his firm to commit numerous statutory and regulatory violations.

The Commission permanently barred Horning from associating

with any broker or dealer in a supervisory capacity and

suspended him for twelve months from associating with any

broker or dealer in any capacity. Horning contends that these

sanctions were arbitrary and capricious, that he was denied due

process in his administrative hearing, and that a provision of the

Securities Investor Protection Act of 1970 under which he was

sanctioned is unconstitutionally vague. Because we conclude

that the Commission’s order was reasonable and supported by

substantial evidence, and because Horning’s other challenges are

without merit, we deny the petition.

I

In 1980, Horning founded Rocky Mountain as a pennystock firm in Denver, Colorado. By the turn of the 21st century,

Rocky Mountain had grown into a medium-sized broker-dealer,

with approximately fifty registered representatives and more

than 5,500 customer accounts. From 1981 to 2003, Horning

served as president, director, financial and operations principal,

compliance officer, and registered representative at Rocky

Mountain. He was also the largest equity owner, holding nearly

40% of the shares at the time the firm closed.

Horning exercised substantial control over virtually every

aspect of Rocky Mountain. He managed the firm, set policy,

and oversaw daily operations. He had authority to hire and fire

employees. He bore primary responsibility for ensuring

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compliance with the SEC’s net capital, customer reserve, and

reporting requirements. He established the firm’s supervisory

procedures and oversaw their implementation, and he alone

supervised the operations and trading departments. 

The first unmistakable sign that something was amiss at

Rocky Mountain appeared in early 2001, when a routine SEC

staff examination revealed that, from May 2000 to February

2001, the firm’s head trader, Judy Clarke, had failed to

document trades as required and the firm had suffered over

$600,000 in unreported losses. Each time Clarke bought and

sold stocks in Rocky Mountain accounts and executed trades on

behalf of its customers, she was supposed to chronicle the

transaction on a “trade ticket” and submit it to Horning for

approval and to the accounting department for recordkeeping.

The examination disclosed that Clarke had ignored these

procedures for more than $800,000 in purchases. Two other

Rocky Mountain employees -- Leslie Andrade, the head of

operations, and Tammy Steffen, the assistant director of

compliance -- knew about Clarke’s unrecorded trades but did

not tell Horning. Andrade was responsible for keeping the

firm’s books and records, working with its auditor, and

preparing the Financial and Operational Combined Uniform

Single Reports (FOCUS Reports) that broker-dealers must file

regularly with the SEC. See 17 C.F.R. § 240.17a-5. Andrade

reported to Steffen until the latter left the firm in the spring of

2001; from that time on, both Andrade and Clarke reported

exclusively to Horning.

In March 2001, following the staff examination, the SEC’s

Central Regional Office sent Horning, in his capacity as

president of Rocky Mountain, a deficiency letter outlining

numerous concerns that required “immediate corrective action

or response, without regard to any other actions that the

Commission may take or require to be taken as a result of the

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examination.” J.A. 696. Among other material deficiencies, the

letter stated that Rocky Mountain had failed to: (1) calculate

properly its net capital and customer reserves; (2) maintain

accurate records of its assets and liabilities; (3) file accurate net

capital computations in its annual audit reports; and (4) establish

and employ adequate supervisory procedures for the preparation

of its financial statements. In light of these failures, the letter

indicated, Rocky Mountain had violated the federal securities

laws.

The deficiency letter also pointed to troubling language in

the annual evaluations prepared by Rocky Mountain’s auditor,

Mortland & Co., a one-person company run by Horning’s

college friend, Herbert Mortland. Every year since the early

1980s, Mortland’s reports had highlighted weaknesses in Rocky

Mountain’s internal controls and warned that they “result in

more than a relatively low risk that errors or irregularities in

amounts that would be material . . . may occur and not be

detected within a timely period.” E.g., J.A. 674. The deficiency

letter advised that, notwithstanding these warnings, Mortland’s

audits had been inadequate in scope to detect the firm’s many

net capital and reserve requirement failings. This, too, violated

SEC rules.

Horning responded to the deficiency letter approximately

one month later. His brief missive to the SEC struck a defiant

tone. “In response to the alleged violations regarding [the rules

discussed in the deficiency letter],” Horning began, “we can

only say, that, after 20 years in business, we are obviously aware

of the above referenced rules and how such things as firm

related trading errors, improperly classified securities positions,

and the resultant inaccurate clearing account reconciliations can

impact all of them in a negative way.” J.A. 697. Horning

continued:

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The only comment that we would like to make at this

time is that these items certainly did not go undetected,

as you say in your letter, and also that we would

disagree with your statement that we do not have

adequate written supervisory procedures to detect any

inaccuracies in our clearing account reconciliations. In

reality, the exact opposite was and is true.

Id. The letter concluded by assuring the SEC that “[t]he people

at Rocky Mountain . . . responsible for these actions have been

spoken to and dealt with,” and that “[t]he deficiencies and

concerns addressed in your letter have all been remedied.” Id.

at 698.

Horning did take some remedial measures in response to the

deficiency letter. For example, he reduced the percentage return

that Clarke received on profitable trades. And he instructed

Andrade to prepare daily “reconciliation reports” documenting

that all executed trades were properly recorded and balanced in

Rocky Mountain’s books, along with daily “trade error reports”

documenting any trading irregularities or unreconciled trades

that had occurred.

For the most part, however, Horning preserved the

operational status quo. Although he later testified that the

conduct of Andrade and Clarke had been “[b]asically”

dishonest, J.A. 287, he declined to fire them, fine them, or

restrict their activities. Clarke continued to execute trades in the

firm’s proprietary account at her discretion, just as before.

Andrade continued to manage all of the firm’s books and

records, just as before. Horning did not establish any procedures

to monitor Clarke’s trading or to check the accuracy of

Andrade’s recordkeeping. Nor did he put in place any kind of

operations manual. Similarly, although Horning testified that he

was “very angry” at Mortland for failing to identify the

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problems flagged in the deficiency letter and that Mortland was

“partially at fault,” id. at 283, Horning declined to fire Mortland

or to demand new procedures for his subsequent audits. And he

continued to take no action in response to Mortland’s warnings

about inadequate internal controls. 

Moreover, Horning’s implementation of those supervisory

procedures that did exist was often perfunctory. Horning

testified that he spent only two minutes reviewing each FOCUS

Report he signed, and that he reviewed the reconciliation reports

one day a week, for just ten seconds. Rocky Mountain kept

some customers’ funds in an omnibus money market account

managed by a brokerage firm named Reich & Tang Services,

which sent daily reports of transactions in the account. Horning

never checked whether the figures in Andrade’s daily reports or

the firm’s books matched the figures sent by Reich & Tang.

Nor did he review executed trades, seek to verify the trade error

reports, or inquire into whether the errors identified in the

reports had been corrected.

This laissez-faire approach to supervision turned out to be

a costly mistake, as Andrade and Clarke soon began to commit

serious fraud. From April 2002 through January 2003, the two

conspired to conceal approximately $6.5 million in losses that

Clarke accrued in unreported, unauthorized trading in Rocky

Mountain’s accounts. They did this by entering fictitious

profitable trades into the Rocky Mountain record system,

omitting unprofitable trades, and then plundering $4.5 million

in customer funds from the Reich & Tang account (as well as a

substantial amount of firm funds) to pay for the losses. The

firm’s books, records, and reports became increasingly

unmoored from reality. For more than six months in 2002, the

reconciliation reports and financial statements prepared by

Andrade never matched the daily reports sent by Reich & Tang.

In the months immediately preceding January 2003, Rocky

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Mountain’s records listed the Reich & Tang account as having

a value of greater than $4 million, while the Reich & Tang

reports themselves showed that the account was in fact worth

less than $100,000.

Horning testified that he was entirely ignorant of this

scheme until January 2003, when Rocky Mountain’s bank

informed him that the firm’s account was overdrawn.

According to Horning, no one at Rocky Mountain apart from

Andrade and Clarke had noticed the discrepancy between the

firm’s records and the Reich & Tang reports. He further

testified that, upon learning of Andrade and Clarke’s scheme, he

immediately connected it to the “basically” dishonest activities

revealed by the SEC staff examination. “I guess we’re back to

2001,” Horning remarked to the two of them. J.A. 433.

In February 2003, the SEC and the Securities Investor

Protection Corporation (SIPC) sued Rocky Mountain for

violating provisions of the Securities Exchange Act of 1934, 15

U.S.C. § 78a et seq. (“Exchange Act”). A trustee was

appointed; the firm was liquidated; and SIPC advanced more

than $5 million to the estate to compensate customers for their

losses. Andrade and Clarke were ultimately convicted of wire

fraud and sentenced to prison.

Just days before Rocky Mountain ceased doing business,

another college friend of Horning’s, Edward Moloney, hired

Horning and twenty-one other individuals associated with

Rocky Mountain to join his broker-dealer, Moloney Securities

Co. Horning became a director and regional vice president of

Moloney Securities. At the time the Commission issued the

decision challenged here, Horning was responsible for

supervising twenty-seven representatives, among them Mark

Depew and Buzz Massee, who had also worked for Horning at

Rocky Mountain.

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In February 2003, Horning learned that Depew and Massee

had loaned Clarke money the previous year without notifying

him, and that Clarke had repaid them in part with firm funds

generated by fictitious trades. At his administrative hearing,

Horning acknowledged that Depew and Massee should have

realized that some of those trades were fictitious because they

were made at “outlandish prices,” and that the conduct of

Depew and Massee in accepting Clarke’s repayments without

telling him had been “[p]robably” dishonest. J.A. 298-99.

Although Horning withheld from Depew and Massee the trading

profits they had purportedly earned in January 2003, he did not

investigate their dealings with Clarke or place them under any

form of heightened supervision at Moloney Securities.

In January 2006, the SEC instituted proceedings against

Horning. An administrative law judge (ALJ) held a hearing for

three days. Horning’s own expert witness, Larry Hayden,

testified that he was unaware of any other instance in which

employees who caused an unauthorized $600,000 loss to a firm

-- as Andrade and Clarke did in 2000-2001 -- had not been fired,

J.A. 482; that heightened supervision of Andrade and Clarke

“would probably have been appropriate” after March 2001, id.;

that reconciliation reports initialed by Horning contained

“obvious” mistakes, id. at 494-95; and that it was improper for

Rocky Mountain not to have a procedure in place to verify that

the Reich & Tang reports matched the firm’s internal records, id.

at 496-98. Hayden’s testimony on cross-examination

culminated in the following exchange regarding Horning’s

oversight of the Reich & Tang account:

Counsel for SEC: [A]nd yet you still conclude that

Mr. Horning’s supervision was reasonable; is that

right?

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Hayden: It was reasonable when I wrote my

report.

Counsel for SEC: Is it still reasonable today?

Hayden: I would alter my opinion in that regard.

. . . .

Counsel for SEC: And you agree, therefore, [that]

the supervision was inadequate?

Hayden: I would agree, based on this information,

that it probably wasn’t adequate.

Id. at 499, 501.

Section 15(b) of the Exchange Act authorizes the

Commission to sanction a person associated with a broker or

dealer who “has failed reasonably to supervise, with a view to

preventing violations of the provisions of [the securities laws

and rules and regulations thereunder], another person who

commits such a violation, if such other person is subject to his

supervision.” 15 U.S.C. § 78o(b)(4)(E); see id. § 78o(b)(6)(A).

The ALJ found that Andrade and Clarke violated Exchange Act

§ 10(b) and SEC Rule 10b-5, and that Horning failed reasonably

to supervise Andrade and Clarke as required by Exchange Act

§ 15(b). Stephen J. Horning, Initial Decision Release No. 318,

88 S.E.C. Docket 2932, 2006 WL 2682464 (Sept. 19, 2006)

[hereinafter Initial Decision].

Exchange Act § 15(c)(3) requires that brokers and dealers

observe SEC rules prescribed to provide safeguards for the

broker or dealer’s financial responsibility when effecting the

purchase or sale of securities, 15 U.S.C. § 78o(c)(3)(A); section

17(a) provides that brokers and dealers must make and keep

records and reports required by SEC rules “for the protection of

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investors,” id. § 78q(a)(1); and section 17(e) requires that

brokers and dealers file annual statements certified by

independent public accountants, id. § 78q(e)(1)(a). The ALJ

found that Rocky Mountain violated sections 15(c)(3), 17(a),

and 17(e), and SEC rules thereunder, regarding net capital,

customer reserve, and recordkeeping and reporting

requirements. Under Exchange Act § 21C(a), a person can be

found to have caused such violations if he was responsible for

an act or omission that he knew or should have known would

contribute to such violations. Id. § 78u-3(a). The ALJ

determined that Horning was a cause of Rocky Mountain’s

violations pursuant to that provision.

Finally, Exchange Act § 15(b) specifically authorizes the

Commission to “suspend for a period not exceeding 12 months,

or bar . . . from being associated with a broker or dealer,” a

person who “has failed reasonably to supervise” another person

as required by that section, if the Commission finds that such

sanction “is in the public interest.” 15 U.S.C. § 78o(b)(6)(A),

(b)(4)(E). Section 14(b) of the Securities Investor Protection

Act of 1970 (SIPA) authorizes the Commission “to bar or

suspend for any period” any officer of any broker or dealer for

which a trustee has been appointed from being associated with

a broker or dealer if “the Commission . . . determine[s] such bar

or suspension to be in the public interest.” Id. § 78jjj(b).

Pursuant to these sections, the ALJ permanently barred Horning

from associating with any broker or dealer in a supervisory

capacity and suspended him for twelve months from associating

with any broker or dealer in any capacity. However, the ALJ

rejected the Enforcement Division’s recommendation of a

$250,000 civil penalty as unnecessary and punitive.

In the order now on review, the Commission affirmed all of

the ALJ’s key factual and legal findings and sustained her

choice of sanctions. Stephen J. Horning, Exchange Act Release

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No. 56886, Investor Protection Act Release No. 167, 92 S.E.C.

Docket 179, 2007 WL 4236161 (Dec. 3, 2007) [hereinafter

Commission Opinion].

II

Horning challenges the Commission’s order on three

principal grounds: (1) that the sanctions it applied to him were

arbitrary and capricious; (2) that the Enforcement Division’s

mid-hearing change to its sanctions request violated his due

process and statutory rights; and (3) that section 14(b) of SIPA

is unconstitutionally vague. We consider these challenges in

turn. 

A

An appellate court must uphold the Commission’s findings

of fact if they are supported by substantial evidence. 15 U.S.C.

§ 78y(a)(4); Graham v. SEC, 222 F.3d 994, 999 (D.C. Cir.

2000). We must uphold its other determinations unless they are

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

accordance with law.” 5 U.S.C. § 706(2)(A); Graham, 222 F.3d

at 999-1000. And we may not “disturb the Commission’s

choice of sanction unless it is either ‘unwarranted in law or . . .

without justification in fact.’” Wonsover v. SEC, 205 F.3d 408,

413 (D.C. Cir. 2000) (quoting Butz v. Glover Livestock Comm’n

Co., 411 U.S. 182, 185-86 (1973) (ellipsis in original)). We

therefore “accord great deference to the SEC’s [remedial]

decisions.” WHX Corp. v. SEC, 362 F.3d 854, 859 (D.C. Cir.

2004).

Horning does not contest any of the Commission’s relevant

factual findings, its legal conclusion that he was a “cause” under

Exchange Act § 21C(a) of Rocky Mountain’s various securities

violations, or its legal authority to impose the sanctions it chose.

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Nevertheless, he argues that the SEC’s sanctions decision was

arbitrary and capricious because the Commission failed to

address evidence of his character and experience, misconstrued

the auditor’s annual reports and the SEC’s 2001 deficiency

letter, and imposed unnecessarily broad sanctions.

Each of these arguments is fundamentally flawed. Each

fixates on a minor, discrete piece of the record while

disregarding the larger context. In reviewing the Commission’s

comprehensive evaluation of his conduct, Horning would have

us ignore the overall picture of his supervisory record and focus

instead on a few isolated pixels. We reject the gambit.

First, Horning chides the Commission for ignoring evidence

of his “long and successful career” and of his “skill and

trustworthiness” -- in particular, testimony by Moloney, his

friend and current employer, and by another friend who was a

Colorado state judge. Pet’r Br. 13-14. But the Commission’s

decision does not depend on discrediting Horning’s general skill

or trustworthiness. It rests instead on his patent failure to fulfill

his supervisory responsibilities.

The Commission found, on the basis of the overwhelming

evidence that we have detailed in Part I, that Horning was

negligent as a supervisor and principal and that he refused to

accept responsibility for his actions. As the Commission

observed, Horning did not only fail to take any steps to verify

the underlying information reflected in Rocky Mountain’s

books, records, and filings; he also routinely failed to notice

inconsistencies in the materials he did review. Every single

reconciliation report examined by the Commission contained

visible errors. Commission Opinion, at *4. To take just one

example: Horning initialed a report that states on its summary

page that $567,783.32 plus $953,821.54 equals $521,614.86.

Id.; J.A. 829. Horning saw nothing wrong in this arithmetic --

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no doubt because the ten-second review he acknowledged giving

the document was not enough time even to look at the numbers.

The Commission further found that, in light of the “prior

misconduct” of Andrade and Clarke and “the numerous red flags

that served to warn Horning that he could not rely on these

employees,” Horning should have placed them under heightened

supervision. Commission Opinion, at *10. Instead, he largely

abdicated his supervisory responsibilities. The new procedures

he implemented in 2001 were unhelpful, if not

counterproductive, as they gave Clarke an incentive to trade

more frequently and gave both Clarke and Andrade an incentive

to conceal unreconciled trades. Id. at *9 (describing Clarke’s

reduced commission per trade and the increased financial

penalties imposed for unreconciled trades). Horning’s review of

Andrade’s reports “was so superficial as to be worthless.” Id.

And it escaped Horning’s notice altogether that Andrade had

engineered an informal coup within the operations department,

removing two other employees from their role in reviewing the

Reich & Tang account. Andrade and Clarke’s fraudulent

scheme was “not particularly well concealed,” the Commission

noted. Id. Horning could have uncovered it -- and staved off

the demise of Rocky Mountain -- had he caught any of the

“numerous blatant errors” in the reconciliation reports, “taken

basic steps to ensure that the firm’s records were consistent with

those of its clearing agent,” or checked the information sent

daily by Reich & Tang against the firm’s internal records. Id. at

*9, *10.

Hence, while it is true that the Commission’s opinion does

not discuss Horning’s professional accomplishments or the

views of his character witnesses -- apart from one reference to

Moloney’s testimony that “he trusted Horning to fulfill his

supervisory duties,” id. at *13 -- these points were simply

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immaterial in light of the substantial evidence of Horning’s

actual negligence as a supervisor at Rocky Mountain.

Second, Horning argues that “[t]he Commission’s opinion

relies heavily on the assertion that the auditor’s reports provided

warnings to Horning which he ignored,” and that this was error

because, according to Horning’s reading, their “conclusion was

just the opposite.” Pet’r Br. 14-15. At oral argument, counsel

for Horning explained that it was unreasonable for the

Commission to conclude that the following passage -- repeated

year in and year out in the audit reports -- provided any kind of

relevant warning to Horning:

The Company’s plan of organization did not include

adequate separation of duties related to daily cash

receipt and cash disbursement activities.

Appropriate supervisory review procedures were

not instituted to provide reasonable assurance that

adopted policies and prescribed procedures were

adhered to.

E.g., J.A. 674, 692. According to Horning’s counsel, the second

sentence in this passage describes not a general failure of

supervisory procedures, as the Commission’s opinion intimated,

but only a failure of procedures related to cash receipt and

disbursement activities. Because Andrade and Clarke’s scheme

did not involve those activities, and because the audit reports

said that other procedures at Rocky Mountain were “adequate,”

id., Horning claims there was nothing remiss in his lackadaisical

response.

Notwithstanding Horning’s construction of the passage

from the audit reports, it was certainly reasonable for the

Commission to read those two sentences as referring to two

separate problems: the company’s failure to maintain adequate

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separation of duties related to daily cash receipt and

disbursement activities, and, more generally, its failure to

institute appropriate supervisory review procedures to provide

reasonable assurance that policies and procedures were adhered

to. More important, it is not true that the Commission’s opinion

relies heavily on the audit reports or that its reading of them

“pervades its entire opinion.” Pet’r Reply Br. 1. Throughout its

lengthy discussion of whether Horning violated the Exchange

Act and which sanctions were appropriate, the opinion mentions

the reports in only two sentences. Commission Opinion, at *8,

*13. Both times, the Commission cites Horning’s failure to

respond as just one item on a long list of supervisory

deficiencies.

Horning’s similar contention about the SEC’s 2001

deficiency letter fails for similar reasons. Horning maintains

that the Commission erred in viewing the deficiency letter as a

warning, because the letter “did not detect any internal control

problems with what eventually caused the collapse of Rocky

Mountain, the controls over the Reich & Tang account,” Pet’r

Br. 15 n.11, and because the SEC did not find at that time that

Andrade or Clarke had committed fraud or recommend

enforcement action against them, id. at 22-23. Once again,

Horning overstates the Commission’s reliance on one piece of

evidence and proposes an unrealistic standard for what counts as

a relevant warning. Even if Andrade and Clarke’s 2000-2001

misdeeds were not precisely of the same type or extent as their

2002-2003 misdeeds, the deficiency letter clearly raised a red

flag, and Horning’s weak response clearly reflected a casual

approach toward supervision.

Third, Horning contends that the Commission’s decision to

impose a lifetime bar from supervisory positions was excessive

and punitive. In choosing this sanction, he asserts, the

Commission “painted with too broad a brush” and “failed to

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articulate why a more narrow brush would still not serve to

protect the public interest.” Pet’r Br. 18. He further insists that

it was arbitrary and capricious for the Commission to refuse to

confine the supervisory bar and the twelve-month suspension to

finance and operations, the areas in which he committed

violations at Rocky Mountain. In Horning’s view, the

Commission never explained “the quantum leap of extrapolating

violations in one distinct area (financial and operational) to the

remaining 7 categories of principals that function in a brokerdealer.” Id. at 20. We disagree.

In the opinion on review, the Commission found that

Horning’s supervisory failures were egregious and recurrent,

amounting to an “abdicat[ion] [of] his responsibility”; that he

“acted recklessly by failing to implement basic supervisory

procedures when confronted with previous misconduct”; that he

provided no reliable assurances against future violations and, to

the contrary, refused to acknowledge his own culpability; and

that his “continued association in a supervisory capacity with

Moloney Securities presents opportunities for future violations.”

Commission Opinion, at *13. In response to Horning’s

argument for carving out sales activities from the supervisory

bar, the Commission further found that his decision not to place

Depew or Massee under heightened supervision at Moloney

Securities, his prior “supervisory failures[,] and his fundamental

misunderstanding of the duties of a supervisor present[ed] too

great a risk to investors to allow him to remain in the industry as

a supervisor.” Id. The Commission therefore determined that

a full supervisory bar, coupled with a twelve-month suspension

from any association with a broker or dealer, was needed to

protect the investing public. Id. at *13-*14.

Every piece of this analysis is sound. The Commission

thoroughly evaluated Horning’s actions at Rocky Mountain, as

well as his statements on the witness stand, and drew plausible

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inferences about his expected future conduct. It then articulated

a reasonable, protective rationale for the penalties it selected.

Cf. PAZ Sec., Inc. v. SEC, No. 08-1188, --- F.3d ---, --- (D.C.

Cir. May 29, 2009) (“[P]etitioners err in arguing the

Commission must, in order to justify [its chosen sanction] as

remedial, state why a lesser sanction would be insufficient.”).

Although Horning refuses to accept responsibility for Rocky

Mountain’s demise, he does not seriously contest that he

effectively ignored the SEC’s 2001 deficiency letter, that he

failed to notice glaring errors during his perfunctory review of

important documents, that he could have uncovered Andrade

and Clarke’s plot with minimal effort, and that he took only

limited action in response to the evidence of misconduct by

Depew and Massee. Indeed, the record in this case is devoid of

a single example in which Horning actually identified an

operational problem or an unreconciled trade, reduced the

responsibilities of an employee, asked for an explanation before

signing a document, or endeavored to confirm the accuracy of

information his subordinates gave him. It is no surprise, then,

that Horning’s own expert witness agreed that Horning’s

supervision had been inadequate.

Contrary to Horning’s suggestion, the Commission is not

obligated to tailor its remedies to the precise job functions that

a defendant failed to perform, and it may regard past supervisory

problems in one area (e.g., finance and operations) as indicative

of future risk in a different area (e.g., sales) where similar

supervisory obligations apply. This case provides a good

example why that is so. Given Horning’s record at Rocky

Mountain, it requires not so much a “quantum leap,” Pet’r Br.

20, as a hop, skip, and a jump from the proof of his pervasive

supervisory failures to the conclusion that he would pose a risk

to the public in any supervisory capacity.

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B

In its pretrial brief to the ALJ, the SEC’s Enforcement

Division requested that Horning be barred from “supervisory,

non-supervised” positions in the industry. During the second

day of the hearing -- after the Division had completed its casein-chief and after Horning had begun his -- the Division changed

the relief it requested to a bar from all supervisory positions,

whether those positions are themselves supervised or not.

Horning asserts that the Division’s mid-trial correction -- not in

the charge against him but in the sanction the SEC sought --

deprived him of his constitutional right to due process and of his

statutory right to appropriate “notice and opportunity for a

hearing” before the imposition of sanctions, 15 U.S.C. §

78o(b)(6)(A); see also id. § 78jjj(b).

It is true, as Horning points out, that in In re Ruffalo the

Supreme Court held that a change in the charges against a

petitioner during “quasi-criminal” proceedings before the Ohio

Board of Bar Commissioners violated due process. 390 U.S.

544, 551 (1968). But as the Court subsequently explained in

Zauderer v. Office of Disciplinary Counsel, “the feature of

[Ruffalo] that was particularly offensive was that the change was

such that the very evidence put on by the petitioner in defense

of the original charges became, under the revised charges,

inculpatory.” 471 U.S. 626, 655 n.18 (1985). In Zauderer, by

contrast, the court found no due process violation where “the

variance [in] the theory” relied on by “the Board of Bar

Commissioners had no such prejudicial effect on appellant.” Id.

Nor was there any such prejudicial effect in this case.

Unlike the petitioner in Ruffalo, Horning had notice from the

outset of the nature of the charges against him. As the SEC

noted, “Horning was aware [all along] that the issue in the case

was the reasonableness of his supervision and that one of the

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sanctions being sought by the Division was a supervisory bar.”

Commission Opinion, at *14. The evidence that Horning

presented did not become inculpatory after the specific sanction

the Division sought was changed. Horning does not suggest that

anything stopped him from reorienting his defense during the

remainder of his trial presentation, or from doing so in his

subsequent administrative appeal to the Commission. And even

on this appeal, Horning does not explain how he was prejudiced

by the change in sanction request -- or even suggest a single

thing he would have done differently had that change not taken

place.

In the absence of any suggestion of prejudice, we cannot

conclude that Horning was deprived either of procedural due

process or of appropriate “notice and opportunity for a hearing.”

15 U.S.C. § 78o(b)(6)(A). Indeed, if there were any error at all,

it was at most a harmless one. See 5 U.S.C. § 706 (directing

reviewing courts to take “due account” of “the rule of prejudicial

error”); U.S. Telecom Ass’n v. FCC, 400 F.3d 29, 41 (D.C. Cir.

2005) (finding harmless error when petitioners failed to identify

additional arguments they would have raised before the agency

had the alleged procedural defect not occurred); PDK Labs. Inc.

v. U.S. DEA, 362 F.3d 786, 799 (D.C. Cir. 2004) (stating that,

under the harmless error rule, “[i]f the agency’s mistake did not

affect the outcome, if it did not prejudice the petitioner, it would

be senseless to vacate and remand for reconsideration”).

C

Finally, Horning contends that the SEC’s sanctions

determination was unlawful because section 14(b) of SIPA is

unconstitutionally vague. That section grants the Commission

authority to bar or suspend an officer or director of a broker or

dealer for which a trustee has been appointed if “the

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Commission . . . determine[s] such bar or suspension to be in the

public interest.” 15 U.S.C. § 78jjj(b).

Horning acknowledges that this court rejected a void-forvagueness challenge to section 14(b) in Dirks v. SEC, in which

we held that the SEC’s “narrowing and clarifying interpretation”

of that provision “to require a showing of negligence”

“eliminates any uncertainty that might otherwise have infected

section 14(b).” 802 F.2d 1468, 1471 (1986). He nonetheless

contends that this “narrowing gloss . . . provides no notice to a

respondent in Horning’s situation where the evidence supports

the conclusion that Horning reasonably believed that the firm

was in good financial condition.” Pet’r Br. 24. Horning’s

challenge has two flaws.

First, the evidence in this case does not support the

conclusion that Horning’s belief that Rocky Mountain was in

good financial condition was reasonable. Instead, the evidence

shows that Horning could persist in that patently false belief

only because of his own unreasonably deficient supervision. As

the SEC found, “Horning failed to exercise reasonable diligence

in his supervision of Clarke and Andrade and in performing his

duties with respect to the firm’s net capital, customer reserve,

and books and records requirements which resulted in the

collapse of the firm.” Commission Opinion, at *14.

Second, Horning’s attack on section 14(b) of SIPA is

legally irrelevant because section 15(b) of the Exchange Act, 15

U.S.C. § 78o(b), provides an independent ground for the

sanctions the Commission levied. Section 15(b) authorizes the

Commission, inter alia, to “suspend for a period not exceeding

12 months, or bar . . . from being associated with a broker or

dealer” a person who “has failed reasonably to supervise, with

a view to preventing violations of the provisions of [the

securities laws and regulations], another person who commits

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such a violation, if such other person is subject to his

supervision” and if the Commission finds that such sanction “is

in the public interest.” Id. § 78o(b)(6)(A), (b)(4)(E) (emphasis

added). As counsel for Horning conceded at oral argument, the

Commission based Horning’s sanctions independently upon

both SIPA and the Exchange Act, and Horning does not claim

that the latter has a vagueness problem. Thus, counsel

acknowledged, Horning’s void-for-vagueness challenge “only

makes a difference if the court decides that the sanction can’t be

upheld under the [Exchange] Act.” Oral Arg. Recording at

2:01-08; see Initial Decision, at *19 (explaining that “Section

15(b)(6) of the Exchange Act authorizes a [supervisory] bar”

and that “Section 14(b) of SIPA provides an independent basis

for barring Horning” (emphasis added)). Because we have

determined that Horning’s sanctions can -- and will -- be upheld

under the Exchange Act, his challenge to SIPA § 14(b) is

without consequence.

III

For the foregoing reasons, the order of the Commission is

Affirmed.

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