1

09- 3503- cv S E C v . C o lo n ia l In v . M

g m t., e t a l. UNITED STATE S COURT OF AP PEALS FO R T HE SE CO ND CI RC UI T 

### SUM M AR Y O RD ER

RULI NG S BY S UM M ARY ORD ER DO NOT HAVE P RECE DENT I AL EF F ECT . CI TAT I ON TO A S UM M ARY O RDER F I L E D ON OR A F T E R J AN UA RY 1 , 2 0 0 7 , I S P E RMI T T E D AN D I S GO VE RN E D B Y F E DE RA L R UL E OF APP ELLATE P RO CEDU RE 3 2 . 1 AND TH I S COU RT’ S LOCA L RULE 3 2 . 1 . 1 . W HEN CI TI NG A S UM M ARY ORD ER I N A D OCUM ENT F I LE D W I TH THI S COURT, A P ARTY M US T C I TE EI THE R T HE F EDE RAL AP P ENDI X OR AN EL ECT RONI C DAT ABAS E ( W I TH THE NOTA TI ON “ S UM M ARY ORD ER” ) . A P ARTY CI TI NG A S UM M ARY OR DER M US T S ERVE A C OPY OF I T ON AN Y PARTY NO T REPRES ENTED BY CO UNSEL. 1 At a stated t erm of the United States Court of Appeals for the Sec ond Circuit, hel d at the 2 Daniel Patri ck Moynihan United St ates Courthouse , 500 Pearl Stre et, in the Cit y of New York, 3 on the 17 day of June, two thousand and ten. th 4 5 PRESENT : 6 BARRING TON D. PA RKER, 7 DEBRAANN LIVING STON, 8 GERAR D E. LYNC H, 9 Ci rcu it J ud ges . 10 _________________________________________ 11 12 SECURITIES A

ND EXC HANGE COMMISSION, 13 14 Plain tif f-A pp ellee , 15 16 v. (09-3503-cv) 17 18 COLON IAL INVESTMENT MANAGEMEN T LLC, 19 COLON IAL FUND L LC, and CARYG. BROD Y, 20 21 De fen da nts -A

pp ell an ts

. 22

_________________________________________ 23 24 FOR DEF ENDAN TS-APPELLA NTS: I RA L EE S ORKI N (B rad leyM . Brown, Ke tev an 25 Kulidzhanova, on th e b rie f ), Dicks tein Shapir o LLP, 26 New York, NY. 272 1 FOR PLA INTIFF-APPELLEE: D AVI D L I SI TZA , S e n io r C o un s e l, (D a v id M

. B e c ke r, 2 Ge n. Co un sel ; Mark D. Cahn , D ep uty Ge n. Co un sel ; 3 Jac ob H. St ill m an , S oli cit or; Rand all W . Q uinn, As st. 4 Gen. Counsel, on thebr ief ), Securit ies and Exchange 5 Commission, W ashington, D.C. 6 7 Ap pe al f

rom a ju dg m ent of

the Un ite d S tat es D istric t C ourt f or t he S outhe rn Di str ict

o f N ew 8 York (Castel, J. ). 9 UPON D UE CON SIDERATION , it is hereby ORDERE D, A DJUDGED , AN D DECREED 10 that the j udgment of the district cour t be AFFIRMED. 11 Th e Se curit ies and E xc hang e Co mm iss ion

(“ SE C” ) b rou gh t th is a cti on ag ain st D ef

en dants

12 Appellant s Colonial Inves tment Management LLC, C olonial Fund LLC, and Cary G. Brody 13 (co lle cti ve ly “ Co lon ial ” o r “d ef en dants ”) f

or e ng ag ingin t

ran sac tio ns that th e S EC all eg ed vio lat ed 14 Rule 105 of Regulation M, 17 C.F.R

. § 24 2.105 (1997) (“Rule 105” ), promulgated under the 15 Se curit ies Ex ch an ge Act of 19 34 . F oll ow inga si x-d aybe nc h tr ial in M ay20 09 , th e Unit ed St ate s 16 DistrictCourt for the Southern Dis trictof New York (Castel, J. ) enter ed jud gm ent ag ain st 17 de fe nd ants o n July 17 , 20 09 , co nc lud ingin a tho rou ghset of fi nd ing s th at d ef

en dants ha d v iol ate d 18 Ru le 1 05 in e ightee n tr an sac tio ns be tw een 20 01 and 2004 . T he co urt pe rm an entlyen

joi ne d 19 de fe nd ants f

rom vio lat ingRu le 1 05 in t

he futur e an d o rde red

dis go rge m ent of

th e de fe nd ants’ pro fi ts 20 fr om

the trans act ion s, alo ng wi th p rej ud gm ent inter est

. Fi na lly , th e co urt im po sed a $ 45 0, 00 0 c ivi l 21 penalty on Defendant-Appellant Brody individual ly. Defendants appeal, chal lenging the j udgment 22 of liabilit y as to thi rt ee n of th e eighteen t ransacti ons at issue . Defendants also chal lenge the 23 injuncti ve relie f ordered by the district court and t he award of prejudgment interes t; defendant Brody 24 challenges the imposition of the indivi dual penalt y. W e assume the parties ’ famili ar it y with the 25 remaining facts and procedur al history of the case and with t he issues pr esented for revi ew.3 1 1. Li ab ili ty 2 Ini tia lly , we re jec t d ef en dants ’ c ontentio n that t he v ers ion

o f Ru le 10 5 pro m

ulg ate d a ft er 3 2007 wa s re tr oactivel y applied to t heir conduct . The SEC’s complaint charged viola tions of the 4 ve rsi on

of R ule 105 in pla ce at

the tim e o f t

he ch all en ge d tr an sac tio ns , and the dis tri ct c ourt c learly 5 ap p li e d

th a t v e rs io no f

th e R u le i ni ts f

in d in gs . T h e o n ly

q u e s ti o ni nth is a

p p e a l w it hr e s p e c t t o 6 liabil ity is whethe r there was sufficient evi dence to supportthe distr ict court ’s conclusi on that the 7 defendants violat ed the versi on of the Rule in place a t the ti me of their conduc t. 8 A. General Standards 9 In a civil enforcement proceeding, the SEC must prove a violat ion of the relevant statut e or 10 rule by a pre ponderance of the evi dence, see, e.g. , SE C v. Po sn er , 1 6 F .3 d 5 20 , 5 21 (2d Ci r. 1 99 4); 11 SE C v. Enters . S

olu tio ns , In c. , 14 2 F. S up p. 2d 56 1, 57 3 (S .D .N .Y . 2 00 1), m ean ingthat th e S EC in 12 thi s ca se h ad

the burde n to sh owthat it wa s “m ore lik ely

than n ot” that de fe nd ants v iol ate d R ule 13 105, see United Stat es v. Basciano , 5 99 F. 3d 184 , 20 2 (2d

Cir. 201 0). Be cau se th e dis tri ct c ourt’ s 14 conc lusi on that the de fendants violat ed Rule 105 is “pre dominantly . . . factual,” we revie w the 15 court’s findi ngs only for clearerror. In re Am . Express Merc hants’ Liti g. , 554 F.3d 300, 316 n.11 16 (2d Cir. 2009), va ca ted an d r em an de d o n oth er grou nd s su b no m. A m. E

xp res s Co

. v. Ita lia n C

olo rs 17 Rest. , No . 08 -14 73 , 20 10 W L 17 40 52 8 (U .S . May 3, 2 01 0); seea lso S

EC v . Ca ym an Is lan ds Re ins

. 18 Corp. , 73 4 F .2 d 1 18 , 1 19 (2d Ci r. 1 98 4) ( pe r curiam ). Und er this stand ard , w e o nly rev iewwh eth er 19 the distr ict court ’s “accountof the evidence is plausible in light of the recor d viewed in its entiret y,” 20 an d w e w ill on ly r ev ers e a f act ua l de ter m inatio n whe n w e h av e a “ de fi nit e an d f irm co nv ict ion

that 21 a m ist ak e h as b een co mm itt ed ,” Do e v. Men efe e , 3 91 F. 3d 14 7, 16 4 (2 d Cir. 20 04 ) (i nte rna l 22 qu otatio n m ark s o m itt ed ); this wi ll o nly tak e p lac e whe n a

fi nd ingis “ wi tho ut ad eq

uate s up po rt i n4 1 the re co rd” o r i s “a ga ins t th e cl ear we ight of

the ev ide nc e. ” Ez ekw o v. N.Y . C ityHe alt h & H os ps . 2 Corp. , 940 F.2d 775, 780 (2d Cir. 1991). 3 Until it w as am en de d in 20 07 , R ule 10 5 p rov ide d th at: 4 In connection with an of fering of securit ies for cash pursuant to a r eg is trati on 5 statement or a noti fication on Form 1-A . . . fil ed under the Secur ities Act , it shall be 6 unlawful for any person to cove r a short sale with offered secur ities pur chased from 7 anun de rwri te r o r b ro k e r o r d e a le r p art ic ip a ti n g i nth e o f f e ri n g , i f s u c hs h o rt s ale 8 occurred dur ing . . . [t]he period beginning f ive business days before the pricing of 9 the offered securit ies and ending wit h such prici ng . . . . 10 11 17 C. F. R. § 2 42 .1 05 (1 99 7). To “ co ve r a s ho rt sal e” m ean s to p urc ha se t he sec uri ty t

hat th e se lle r 12 has sold shortand return it to the lender of the security. Se e ATSI Commc’ns, Inc. v. Shaar Fund, 13 Ltd. , 4 93 F. 3d

87 , 9 6 n .1 (2d

Ci r. 2 00 7); seeals o L evi tin v. Pa ine Web be r, Inc

. , 159 F.3d 698, 700 14 (2d Cir. 1998) ( “[T ]he [s eller] ‘cove rs’ the s hort by buying ide ntical s tock and rest oring it t o the 15 bro ke r-l en de r.” ). T hu s th e S EC ha d th e b urd ento s ho w that th e se curit ies that defend ants w ere 16 all oc ate d in se co nd ary off eri ng s — rathe r than tho se th e def en dants purch ase d in

the op enm ark et 17 later i n the same day as the offerings — were used t o cover the defendan ts ’ sh or t po si ti on in the 18 stock. 19 B. Trades Involvi ng Banc of America Securi ties (BAS) 20 W e conclude tha t the dist rict cou rt d idn ot clearl y err in conc luding thatthe two of 21 de fe nd ants’ tra de s f aci lit ate d b y B AS as de fe nd ants’ prim e bro ke r vio lat ed Rul e 10 5. Th e d istric t 22 co urt

wa s entit led

to c red it the te sti m ony of Cl au dia Le wi s, a f

orm er p rim e b rok era ge co m pli an ce 23 manager at BAS who reviewed da ta c oncerning defendants’ trades. Lewis concluded that defendant 24 Colonial Fund LLC instruct ed BAS to us e the shar es al located t o defendants in seconda ry offerings 25 to c ov er C olo nia l’s sh ort po sit ion s in

the re lev ant sto ck . It w as B AS ’s p oli cyno t to co ve r a s ho rt 26 po sit ion

un les s sp eci fi cal ly i ns tru cte d b y th e cu sto m er t o d o s o. Th e d ist ric t court was entit led

to5 1 dis be lieve th e te sti m ony o f C olo nia l’s “b ack of fi ce p ers onne l” that C olo nia l gave no su ch 2 ins tru cti on s b eca

us e su chord ers ha d to have co m e f rom BA S’ s cus tom ers an d b eca us e th ese 3 “personnel” could not expla in how they knew alloca ted shares were not used to covershort posit ions 4 an d a dm itt ed

that th eydid

no thi ng to p rev ent it. Lewis also no ted that th e p ric es o f t

he sec uri tie s 5 Co lon ial us ed

to cov er its sho rt po sit ion s we re id entic al to the pr ice s at whic h C olo nia l pu rch ase d 6 all oc ate d s hares . F ina lly , B AS ’s d ata co nf irm ed that C olo nia l us ed

a “first in f

irs t out” ( “F IF O” ) 7 liquidat ion method; the di strictcourtdid not cl early err in cons idering the purported evidence to the 8 co ntr ary , o n whic h d ef en dants also relyon ap pe al, of lo w pr ob ati ve va lue . It wa s al so un dis puted 9 that Colonial acquired sha res from secondary of ferings before engaging in open-market tr ansactions 10 in t

he sam e st oc k. Thus the ev ide nc e su pp ort ed the co nc lus ion

that de fe nd ants “ co ve r[ ed ] . . . sh ort 11 sale[s] with offered securit ies” pri or to acquir ing new securit ies on t he o pe n market. 17 C.F.R. 12 § 242.105 (1997). 13 C. Trades Involving Goldman Sachs Exe cution and Cleari ng (GSEC) 1 4 Th e d istri c t c o urt s im il arl yd id

n o t c le arl ye rr

i nc o n c lu d in g th a t d e f

e n d an ts v io late d R

ule 15 105 on eleven occas ions in transactions execute d by GSEC. The co-manager of Client Services for 16 GS EC ’s p rim e b rok era ge bu sin ess David Mil ler stated in h is d ecl aratio n th at 17 [a ]l l bu

ys an d s ell s o f t

he sam e se curity i n the sam e b ase acc ount w ou ld b e n ett ed 18 against each ot her a nd any existing pos ition throughout the day such that t he account 19 would have one positi on . . . in the pa rt icul ar securi ty at the e nd of the trading 20 day. . . . G SE C’ s pra cti ce wa s that if a cu sto m er h ad

a sh ort po sit ion in a parti cu lar 21 sec uri ty i n a parti cu lar b ase acc ount and the cu sto m er p urc ha sed or o the rw ise 22 acq

uir ed sh are s o f t

hat se curity, tho se p urc ha ses an d re cei pts wo uld be ne tte d a ga ins t 23 the short pos ition unle ss the cust omer gave specific instructions othe rwise. 24 25 Mil ler

De cl. ¶ 20 (em

ph asi s ad de d). It w as u

nd isp ute d th at d ef

en dants gave no su ch“sp eci fi c 26 instruct ions,” alt hough they could have (but did not) use a specific type of account that would have6 1 prevented GSEC from covering short positions with allocat ed shares. Fi na lly , Co lon ial ’s p urc ha ses 2 of the a ll o c a te d

s h are s w e re th e f

ir s t p urc h a s e s o f

th e d ay , an d

G S E C u s e d

th e F IF O m eth od

to 3 liq uid ate Co lon ial ’s s ho rt p os iti on s. Th is, we co nc lud e, wa s su ff ici ent ev ide nc e take n to ge the r to 4 su pp ort the dis trict court’ s f

ind ing s. Th e co urt

wa s entit led

to d isb eli ev e d ef

en dants ’ inter

na l 5 records, which, de fendants contend, demonstrate t hat Colonial’ s short posi tions were cove re d by 6 shares purc ha se d in the open market, because t hese recor ds were inconsi stent and sl oppy and 7 because ther e was no evidence that defendants t old theirbrokers tha t alloca ted shares should not be 8 used to cover s hort posit ions. 9 2. Re m ed ies 10 Defen da nts r aise chal lenges to t hree of the remedies order ed by the dist rict cour t: the 11 permanent injunction againstfuture violat ions of Rule 105, the award of prejudgment inter est, and 12 the civ il p en alty im po sed on Br od y in div idually. We revie w t he rem ed ies ord ere d b y th e d istric t 13 court for abuse of discr etion. Se e S EC v. Man or Nu rsi ng Ct rs. , In c. , 4 58 F. 2d

1 08 2, 11 00 (2d

Ci r. 14 19 72 ) (i nju

nc tiv e re lie f) ; seeals o A dv an ce Pha rm ., Inc . v . U nited Sta tes , 3 91 F. 3d

37 7, 39 8 (2 d C ir. 15 2004) (monetary penalti es and injunct ive reli ef). 16 A. Permanent Injuncti on 17 A p erm an ent in jun cti on agai ns t futur e v iol ati on s o f t he sec uri tie s laws is w arr anted wh ere 18 “th e d ef

en dant’ s p ast

co nd uc t in dic ate s th at the re i s a r eas on ab le l ike lih oo d o f f urt he r vi olatio n in 19 the futur e. ” SE C v . C om mo nw ea lth Ch em . S

ec. , In c. , 574 F.2d 90, 99 (2d Cir . 1978) (alt eration a nd 2 0 in te rn a l q

u o tati o nm ark s o m itte d ). Ad is tr ic t c o urt m aytak e into a c c o un t t

h e f o ll o w in g f

a c to rs , 21 among others, in determining whether t o issue a per manent injunction: 22 the fact thatdefendant has been found liabl e for illegal c on du ct ; the degree of 23 sci enter

inv olv ed ; whe the r the infractio n is an“is olated oc curre nc e;” wh eth er7 1 de fe nd ant co nti nu es t o m aintai n that h is pa st co nd uc t w as blam ele ss; an d whe the r, 2 be cau se of his pro fe ssi on al o ccu

patio n, the de fe nd ant m ight be in a po sit ion wh ere 3 future violat ions could be ant icipate d. 4 5 Id. at 100 (quoti ng SE C v . C om mo nw ea lth Ch em . S

ec. , In c. , 410 F. S up p. 1002, 1020 (S.D.N.Y. 6 19 76 )); see also SEC v. Cavanagh , 1 55 F. 3d 12 9, 1 35 (2 d C ir. 19 98 ). A pp lyi ng the se f

act ors , it is 7 cle ar the dis tri ct c ourt d id n ot a bu se i ts d isc ret ion

in p erm an entlyen

joi nin g d ef

en dants fr om

futur e 8 vio lat ion s o f R

ule 10 5. Th e v iol ati on s at i ssu e h ere we re i n n o w ay“is olated ”; i nd eed , d ef en dants 9 ad mi tte d to seven viol ations of the Rule and wer e fou ndl iable for eight een. The pattern of 10 de fe nd ants’ trans act ion s, wh ich , th e d ist ric t co nc lud ed , w as i nte nd ed to m ask the de fendants’ 11 violati ons of the Rule, supported the court’s conclusion that defendants acted with a high degree of 12 sci enter . F ina lly , de fe nd ants m ak e no argum ent h ere th at co nv inc es us th e d ist ric t co urt cle arl y e rre d 13 in c on clu din g th at C olo nia l’s int ern al c om pli an ce m ech an ism s, put i n pla ce i n 2 00 4, are ina de qu ate 14 to prevent futur e violati ons. 15 B. Aw ar

d o f Prej ud gm en t In terest 16 De fe nd ants c onten d th at i t w as an a bu se o f d isc ret ion

fo r th e d istrict co urt

to award 17 pre

jud gm ent i nte res t on

the am ounts it o rde red

de fe nd ants t o d isg org e b eca us e th e S EC de lay ed

in 18 bringing the case agains t them. W e reject ed an identi cal argument in SE C v. Fi rst Jer sey Se cu rit ies , 19 Inc

. , 101 F.3d 1450 (2d Cir. 1996). Se e F irs t Je rse y , 101 F.3d at 1476-77. 20 C. Monetary Penalt y on Brody 21 The distri ct c ou rt i mposed a “Second tier” monetary penalt y on Brody in the amount of 22 $450,000, $25,000 per vi olation. Se e 15 U. S. C. § 7 8u (d) (3) (B )(i i) ( de fi nin g “ Se co nd tie r” 23 pe na lti es) . T he Ex ch an ge Ac t pr ov ide s th at the dis tri ct c ourts m ayim po se su chpe na lti es i n am ounts 24 de termined “in l ight of the fa cts an d c irc um stanc es. ” Id. § 7 8u (d) (3) (B )(i ); seeals o S EC v.8 1 Opulentica, LLC , 4 79 F. Su pp . 2 d 3 19 , 33 1 (S .D .N .Y . 2 00 7) ( de tai lin g a no n-e xc lus ive lis t of

fa cto rs 2 distri ct courts may consider in det ermining whether t o impose m onetary penal ties but e mphasizing 3 that “p art icu lar

fa cts and circ um stanc es” in eac h cas e wi ll be ar on the pro pri ety

of su chpe na lti es)

. 4 Th e “f

act s an d c irc um stanc es” fo un d b y th e d istric t co urt he re, inc lud ingth at Br od y w as C olo nia l’s 5 head traderat the re levant times and was “re sponsible for all of Coloni al’s tr ading and invest ment 6 de cis ion s, ” S pe c. Ap p’x at 11 , d em on str ate that th ere wa s n o a bu se o f d isc ret ion

in t he dis tri ct 7 co urt ’s award. Mo reo ve r, t he dis tri ct co urt

did no t ab us e it s d isc ret ion in awardi ng a “S eco nd

tie r” 8 pe na ltyas o pp os ed to a les ser on e, as the evid en ce cl ear ly e sta bli sh ed that B rod y e ng ag ed in c on du ct 9 that was, at t he very leas t, in “rec kless dis rega rd of [the] regulatory re quirement.” 15 U.S.C. § 10 78u(d)(3)( B)(ii). 11 3. Conclusion 12 W e h av e co ns ide red de fe nd ants’ rem ain ingargum ents on app eal and

con clu de that

the y are 13 without merit. For the foregoi ng reasons, the judgment of the districtcourt is AFFIRMED. 14 15 FOR THE COURT : 16 Cathe rin e O ’H ag anW olf e, Cl erk 17 18