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Graham v. S.E.C.

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT.

CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007 IS

PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE

PROCEDURE 32.1 AND THIS COURT ʹ S LOCAL RULE 32.1.1. WHEN CITING A

SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY

MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE

(WITH THE NOTATION ʺ SUMMARY ORDER ʺ ). A PARTY CITING TO A

SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT

REPRESENTED BY COUNSEL.

At a stated term of the United States Court of Appeals for the Second

Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in

the City of New York, on the 19 th day of December, two thousand nineteen.

PRESENT: ROBERT D. SACK,

DENNY CHIN,

JOSEPH F. BIANCO,

Circuit Judges

.

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BRETT THOMAS GRAHAM,

Petitioner

,

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UNITED STATES SECURITIES AND

EXCHANGE COMMISSION,

Respondent

.

‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ x2 FOR PETITIONER: RALPH A. SICILIANO (Richard W. Trotter, on the

brief ), Tannenbaum Helpern Syracuse & Hirschtritt

LLP, New York, NY.

FOR RESPONDENT: SARAH R. PRINS, Senior Attorney (Theodore

Weiman, Senior Litigation Counsel, on the brief ), for

Robert B. Stebbins and John W. Avery, the United

States Securities and Exchange Commission,

Washington, DC.

Petitions for review of orders of the United States Securities and Exchange

Commission.

UPON DUE CONSIDERATION, IT IS ORDERED, ADJUDGED, AND

DECREED that the petitions for review are DENIED

.

Petitioner Brett Thomas Graham appeals two orders of the United States

Securities and Exchange Commission (the ʺ Commission ʺ ) relating to an order entered

by the Commission in 2015 barring him from the securities industry. First, Graham

contends that the Commission wrongfully denied his application for consent to

associate pursuant to 17 C.F.R. § 201.193 ( ʺ Rule 193 ʺ ). See S. App ʹ x at 1

‐ 9. Second, he

contends that the Commission wrongfully denied his request for modification pursuant

to Rule 506(d)(2)(ii) of the Securities Act of 1933 ( ʺ Rule 506 ʺ ). See J. App ʹ x at 319

‐ 35.

Graham also argues that the Commission ʹ s continued industry ban is excessive under

the Eighth Amendment of the United States Constitution. We assume the parties ʹ

familiarity with the underlying facts, the procedural history, and the issues presented

for review.3 Graham was the chief executive officer and principal owner of VCAP

Securities, LLC ( ʺ VCAP ʺ ), a broker

‐ dealer firm registered with the Commission. In

2013, the Commission began investigating Graham in connection with VCAP ʹ s

involvement in liquidating collateralized debt obligations. The Commission ʹ s

investigation revealed that VCAP was surreptitiously using an intermediary to bid in

the liquidation auctions it ran. Before any administrative proceedings were initiated,

Graham and the Commission entered into a settlement agreement that was

memorialized in a February 19, 2015 consent order (the ʺ Bar Order ʺ ). See J. App ʹ x at 28

‐

41. Under the agreement, Graham was barred from the securities industry and was

required to pay $327,733 in disgorgement and fines. He was permitted to continue

working for VCAP for one year in a limited, supervised capacity to wind down the

business. Though Graham ʹ s ban was indefinite, the Bar Order permitted him ʺ to apply

for reentry [to the securities industry] after three years. ʺ J. App ʹ x at 10.

Less than two years later, on January 10, 2017, Graham filed his Rule 506

motion to modify the Bar Order. The Rule 506 motion asked the Commission to remove

the provisions forbidding Graham from associating with investment advisers, brokers,

and dealers. It also asked the Commission for a waiver that would allow issuers to

associate with Graham without losing their ability to rely on Rule 506 ʹ s private offering

exemption. In April of 2018

‐‐ before the Commission ruled on Graham ʹ s Rule 506

motion but more than three years after his industry bar went into effect

‐‐ Graham filed4 his Rule 193 application for consent to associate. The Rule 193 application asked ʺ that

the bar provisions of the [Bar Order] be removed in their entirety. ʺ J. App ʹ x at 216.

Both the Rule 506 motion and Rule 193 application were denied. These consolidated

petitions for review followed.

I. Graham ʹ s Applications

We must affirm the Commission ʹ s findings of fact if they are supported by

ʺ substantial evidence. ʺ Mathis v. S.E.C.

, 671 F.3d 210, 215

‐ 16 (2d Cir. 2012). The

Commission ʹ s ʺ actions, findings, or conclusions of law ʺ will only be set aside ʺ if they are

ʹ arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. ʹʺ

Id. at 216 (quoting 5 U.S.C. § 706(2)(A)).

A. The Rule 193 Application

An applicant to the Commission for consent to associate must show that

his involvement in the securities industry ʺ would be consistent with the public interest. ʺ

17 C.F.R. § 201.193(c); see also Preliminary Note to 17 C.F.R. § 201.193 ( ʺ The nature of the

supervision that an applicant will receive or exercise as an associated person with a

registered entity is an important matter bearing upon the public interest. ʺ ). To make

such a showing, the applicant must file an affidavit addressing the following factors:

(1) The time period since the imposition of the bar; (2) Any

restitution or similar action taken by the applicant to

recompense any person injured by the misconduct that

resulted in the bar; (3) The applicant ʹ s compliance with the

order imposing the bar; (4) The applicant ʹ s employment

during the period subsequent to imposition of the bar;5 (5) The capacity or position in which the applicant proposes

to be associated; (6) The manner and extent of supervision to

be exercised over such applicant and, where applicable, by

such applicant; (7) Any relevant courses, seminars,

examinations or other actions completed by the applicant

subsequent to imposition of the bar to prepare for his or her

return to the securities business; and (8) Any other

information material to the application.

17 C.F.R. § 201.193(d). These factors are ʺ specifically required by the rule. ʺ Preliminary

Note to 17 C.F.R. § 201.193. In addition, the Commission will also ʺ consider the nature

of the findings that resulted in the bar. ʺ Preliminary Note to 17 C.F.R. § 201.193.

Finally, to show that an application is ʺ consistent with the public interest, the

application and supporting documentation must demonstrate that the proposed

supervision, procedures, or terms and conditions of employment are reasonably

designed to prevent a recurrence of the conduct that led to imposition of the bar. ʺ Id.

(emphasis added).

Graham argues that the Commission wrongfully denied his Rule 193

application based solely on the fact that he did not propose a specific employer. While

it is true that the Commission ʹ s order predominantly focused on Graham ʹ s failure to

specify such an employer, this was not ʺ arbitrary, capricious, an abuse of discretion, or

otherwise not in accordance with law. ʺ 5 U.S.C. § 706(2)(A). An applicant ʹ s supervision

upon returning to the securities industry is a concern accentuated in the Preliminary

Note to 17 C.F.R. § 201.193, explicitly required by two of the factors in 17 C.F.R. §

201.193(d), and supported by the Commission ʹ s precedent.6 First, the Preliminary Note to 17 C.F.R. § 201.193 stresses that ʺ [t]he nature

of the supervision ʺ of an applicant ʹ s involvement in the securities industry ʺ is an

important matter. ʺ Preliminary Note to 17 C.F.R. § 201.193. Applicants bear the burden

of showing they will be adequately supervised. Id. Moreover, the Preliminary Note

highlights the requirement of 17 C.F.R. § 201.193(d)(6), stressing the need for an

applicant ʹ s proposed supervision to ʺ prevent a recurrence of the conduct that led to the

imposition of the bar. ʺ Id.

Second, the rule itself states that applicants ʺ shall ʺ submit an affidavit that

addresses the ʺ capacity or position ʺ the applicant will hold, 17 C.F.R. § 201.193(d)(5), as

well as the ʺ supervision to be exercised over such applicant, ʺ 17 C.F.R. § 201.193(d)(6).

These factors particularly allow the Commission to assess whether it is in the public

interest to permit an applicant back into the securities industry. Graham, however, only

addressed his re

‐ entry in broad terms. He did not discuss in any meaningful detail how

he would be supervised; instead, he stated that he ʺ will assure that [any investment

adviser he works with] employs or otherwise engages a person responsible for

compliance with the securities laws. ʺ J. App ʹ x at 218.

Finally, the Commission ʹ s decision is consistent with its precedent.

Recently, the Commission rejected an application that was strikingly similar to

Graham ʹ s. See In the Matter of Eric David Wanger

, Exchange Act Release No. 81111, 2017

WL 2953369 (July 10, 2017). In Wanger

, the Commission denied relief because the7 applicant did not ʺ identify a proposed employer, the terms and conditions of his

planned employment, or the supervision, if any, that would be exercised over him in his

new position. ʺ Id. at *3. Here, Graham ʹ s application similarly did not provide any

information about who he would work for, and it did not indicate that he would be

supervised. The Commission, therefore, did not have enough information to properly

decide if removing the sanction would be in the public interest

‐‐ the overarching

concern of 17 C.F.R. § 201.193.

Accordingly, the Commission reasonably denied Graham ʹ s Rule 193

application.

B. The Rule 506 Application

For essentially the same reasons, the Commission ʹ s denial of Graham ʹ s

Rule 506 motion was not ʺ arbitrary, capricious, an abuse of discretion, or otherwise not

in accordance with law. ʺ 5 U.S.C. § 706(2)(A). As Graham acknowledges, the Rule 506

motion ʺ has (to some extent) been superseded by [the] Rule 193 Application. ʺ

Petitioner ʹ s Br. at 40. Moreover, the Commission only modifies bar orders in

ʺ compelling circumstances, ʺ In the Matter of Ciro Cozzolino

, Exchange Act Release No.

49001, 2003 WL 23094746 at *3 (Dec. 29, 2003), which is a more stringent standard than

the one applied to consent orders. The Commission ʹ s decision to deny Graham ʹ s Rule

506 application, which was filed before two years had elapsed, was reasonable.8 II. Graham ʹ s Indefinite Bar

We review Commission sanctions for abuse of discretion, focusing on the

particular facts of the case. McCarthy v. S.E.C.

, 406 F.3d 179, 188 (2d Cir. 2005); see also

Mathis

, 671 F.3d at 216 ( ʺ We will not disturb the SEC ʹ s choice of sanction unless it is

unwarranted in law or without justification in fact. ʺ (internal quotation marks and

citations omitted)). A sanction will be overturned only when it is ʺ palpably

disproportionate to the violation ʺ or unsupported by reason. McCarthy

, 406 F.3d at 188.

Comparing cases is of ʺ limited benefit ʺ because sanctions are ʺ highly fact

‐ dependent. ʺ

Id. Because Commission sanctions are remedial and not penal, the ʺ foremost

consideration ʺ is whether the ʺ sanction protects the trading public from further harm. ʺ

Id.

Graham contends that his indefinite bar from the securities industry is

excessive. The Commission disagrees. 1 The Commission based its decision to bar

Graham from the industry based on six instances of misconduct, which included using

inside information to bid on securities in auctions that he was running, by covertly

employing third

‐ party brokers. He also tipped off another bidder to cut its bid in half,

telling the bidder ʺ remember me. ʺ J. App ʹ x at 207. When Graham moved for consent to

1 Additionally, the Commission argues Graham forfeited his right to challenge the Bar Order when

he consented to it and that he failed to file a timely challenge. Graham, however, contends he consented

to a temporary ban when he signed the settlement agreement, not an indefinite one. While the language

of the agreement supports the Commission ʹ s reading, see J. App ʹ x at 36

‐ 37, we need not to resolve these

issues.9 associate, he failed to comply with all the requirements set forth in 17 C.F.R. § 201.193

and did not show that his ʺ proposed association would be consistent with the public

interest, ʺ and so the Commission denied his application. S. App ʹ x at 3. In light of

Graham ʹ s conduct and incomplete application, it is difficult to classify the Commission ʹ s

continued sanction as excessive or an abuse of discretion. This is especially true

considering that Graham is entitled to reapply and can modify his application to

include an explanation of how he will be supervised. Accordingly, we conclude that

the Commission ʹ s sanction is not excessive.

* * *

We have considered Graham ʹ s remaining arguments and conclude they

are without merit. For the foregoing reasons, we DENY the petitions for review.

FOR THE COURT:

Catherine O ʹ Hagan Wolfe, Clerk