# United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 23, 2015 Decided July 10, 2015

No. 14-1126

M ONTFORD AND C OMPANY
, I NC
., DOING BUSINESS AS M ONTFORD A SSOCIATES AND E RNEST V. M ONTFORD
, S R
., P ETITIONERS

v.

S ECURITIES AND E XCHANGE C OMMISSION
, R ESPONDENT

On Petition for Review of an Order of the Securities & Exchange Commission

Ryan C. Morris argued the cause for petitioners. With
him on the briefs were Jeffrey T. Green

, Tobias S. LossEaton

, and Christopher R. Mills

.

Theodore J. Weiman , Senior Counsel, Securities and Exchange Commission, argued the cause for respondent.
With him on the brief were Michael A. Conley , Deputy General Counsel, Jacob H. Stillman , Solicitor, and Dominick2

V. Freda , Senior Litigation Counsel. Susan S. McDonald

, Attorney, entered an appearance.

Before: M ILLETT and P ILLARD
, Circuit Judges , and
S ENTELLE
, Senior Circuit Judge

.

Opinion for the Court filed by Senior Circuit Judge
S ENTELLE

.

S ENTELLE
, Senior Circuit Judge : Petitioners Montford and Company, Inc., and Ernest V. Montford, Sr., petition this
court for review of a final order of the Securities and Exchange Commission finding th at petitioners violated Sections 204, 206, and 207 of the Investment Advisors Act of 1940, 15 U.S.C. §§ 80b-4, 80b-6( 1)–(2), 80b-7, and Advisors Act Rule 204-1(a)(2), 17 C.F.R. § 275.204-1(a)(2). In re Montford & Co., Inc. , Investment Advisors Act Release No. 3829, 2014 WL 1744130 (May 2, 2 014). The Commission determined that, by failing to disclose $210,000 in fees
received from an investme nt manager, petitioners misrepresented that they we re providing independent and
conflict-free advice. The Co mmission imposed industry bars and cease-and-desist orders, orde red disgorgement, and levied a total of $650,000 in civil penaltie s. Petitioners challenge the order, arguing that the enfor cement action was untimely under
Section 4E of the Securities Exchange Act of 1934, 15 U.S.C. § 78d-5. Petitioners further co ntend that the Commission abused its discretion in imposing the disgorgement order and civil penalties. Holding th at the Commission reasonably interpreted Section 4E as not imposing a jurisdictional bar to late-filed actions, and that th e Commission acted reasonably in imposing its sanctions, we deny the petition for review.3

I. B ACKGROUND

A. Factual Background

In 1989, Ernest V. Montfo rd, Sr., (hereinafter “Montford”) founded Montford and Company, Inc. (does business as, and hereinafter, “Montford Associates”). Montford Associates operated as a registered investment
advisor to institutional investors. Montford Associates did
not execute securities transacti ons on behalf of its clients; rather, Montford Associates r ecommended various investment managers, monitored client portfolios, and periodically reported to its clients on the performance of their investments. During 2009 and 2010, Montfo rd Associates had approximately thirty clients, most of whom were pension funds, school endowments, hospitals, and non-profit organizations. The firm charged an annual advisory fee ranging from eight to twenty basis points of each client’s assets under management. Pe titioners “managed over $800 million in investment assets, earning gross revenues of $600,000 in 2009 and $830,000 in 2010.” Montford & Co., 2014 WL 1744130, at *2.

Montford advertised his firm as an “independent” and
“conflict-free” advisor that woul d provide “impartial” advice.
See id . at *2–*3. Commission rule s required Montford Associates, as a registered invest ment advisor, to file annually Form ADV, a uniform registra tion form and disclosure
statement. The firm’s 2009 and 2010 forms described the firm as an “independent inve stment advisor” that would “[a]void any material misrepre sentation in any...investment recommendation” and “[d]isclose to clients...all matters that reasonably could be expected to impair [the firm’s] ability to make unbiased and objective recommendations.” Id . at *2.
The firm further claimed that it did “not accept any fees from4

investment managers or mutual funds.” Id. at *3. Montford
Associates’ website linked to an article quoting Montford as stating that clients “need a stra tegy they can trust, because
investments...should be base d on merit, not...undisclosed compensation.” Id

.

The Commission’s action agai nst petitioners centers on Montford’s relationship with Stanley Kowalewski, an investment manager specializi ng in hedge funds. In 2003, Montford began recommending Kowalewski (then owner and operator of Phoenix Advisors, In c.) as an investment manager to his clients. In 2005, Ko walewski joined Columbia Partners, LLC Investment Ma nagement (“Columbia”). Montford subsequently advised his clients to transfer their
assets to Columbia and continued to recommend Kowalewski as an investment manager. By 2009, ten of Montford’s clients
had followed Kowalewski to Columbia. Id . at *4.

In June 2009, Kowalewski told Montford that he was leaving Columbia to start hi s own investment management firm, SJK Investment Management LLC (“SJK”). Montford
told Kowalewski that he would try to convince his clients to
transfer their Columbia investme nts to SJK and that he would assist in administering the transfers. Over the following months, Montford and his staff individually met with the ten
clients invested with Columb ia to recommend that they
transfer their assets to SJK. In August 2009, Montford called Kowalewski and told him, “I need to be paid for all this
work.” Id . Kowalewski agreed, but did not specify an amount. In October 2009, Kowalewski agreed to give petitioners an initial pa yment of $130,000. Montford maintained that he simply requested reimbursement for the
administrative costs his firm in curred in transferring client
investments from Columbia to SJK; Montford claimed that Columbia was uncooperative and SJK was understaffed, so5

his firm took on the bulk of the work. See id. at *15; Pet’rs’
Br. 7.

In November 2009, having yet to receive the agreed upon payment, Montford Associat es sent SJK an invoice for $130,000 for “Consulting Services for the SJK Investment Management LLC Launch July 15th–October 30, 2009.” Montford & Co., 2014 WL 1744130, at *5. Montford
Associates then sent a re vised invoice, which, at Kowalewski’s request, changed th e description of the services provided to “Marketing a nd Syndication Fee for SJK Investment Management LLC Launch July 15th–November 30, 2009.” Id . On January 4, 2010, SJK paid petitioners $130,000. In November 2010, Montford Associates requested a second payment from SJK, sending an $80,000 invoice which also described the pa yment as a “Marketing and Syndication Fee.” Id . Later that month, SJK wired petitioners $80,000. In addition to these payments, Kowalewski waived fees for Montford’s personal IRA, and went on a three-day fishing trip with Montford, paying for Montford’s transportation, food, and lodging. Id . at *8.

Montford ultimately convinced nine of his clients to transfer their investments to SJK; collectively, these clients invested $80 million in SJK. Id . at *5. Montford did not disclose to any of his clients that he had provided assistance to SJK, or that he requested or received fees from Kowalewski. Montford strongl y encouraged his clients to invest with Kowalewski and SJK, even when his clients expressed reservations with Kowalewski’s investment strategy, experience, and alleged misconduct. Id . at *6–*7.

In January 2011, the Commission filed a civil enforcement action against SJK and Kowalewski, charging them with securities fraud. The complaint alleged that6

Kowalewski had diverted to himself millions of dollars that
were invested in SJK. See SEC v. Kowalewski , Litigation Release No. 21800, 2011 WL 52096 (Jan. 7, 2011). At this time, the details of petitioners’ payment arrangement with SJK came to light. Many of Montford Associates’ clients terminated their business with the firm after learning of the payments. See Montford & Co. , 2014 WL 1744130, at *5.

B. Procedural Background

After discovering Kowale wski’s fraud, the Commission began investigating Montford and his firm. In March 2011, the Commission issued to petiti oners a “Wells notification,” a
letter in which Division of Enforcement staff advises the target of an ongoing investigat ion of the nature of the investigation and potential violations. See id. at *9 n.60. On September 7, 2011, 187 days after issuing the Wells notification, the Commission instituted administrative proceedings against petitioners. See In re Montford & Co.,
Inc. , Investment Advisors Act Release No. 3273, 2011 WL 3916057 (Sept. 7, 2011). The Commission’s Division of
Enforcement claimed that Montfo rd received undisclosed fees from SJK and Kowalewski for pr omoting SJK. Alleging that Montford Associates’ promoti onal materials and regulatory filings contained inaccuracies regarding the firm’s independence, the Division charge d that petitioners violated
the Investment Advisors Ac t’s reporting and antifraud provisions, 15 U.S.C. §§ 80b-4, 80b-6(1)–(2), 80b-7, and Advisors Act Rule 204-1(a)(2), 17 C.F.R. § 275.204-1(a)(2).

Section 4E of the Exchange Act, 15 U.S.C. § 78d-5(a)(1), provides that “[n]ot later than 180 days after the date on which Commission staff provide a written Wells notification to any person, the Commission staff shall either file an action against such person or provide notice to the Director of the7

Division of Enforcement of its in tent to not file an action.”
Petitioners filed a motion to dismiss the proceeding as timebarred under Section 4E because the Division failed to institute the action within 180 days after issuing a Wells notice. In response, the Divisi on submitted a declaration that
the Director had extended the deadline under 15 U.S.C. § 78d-5(a)(2), which allows the Director to extend the deadline “for certain complex actions.” The presiding Administrative Law Judge (ALJ ) denied petitioner’s motion
to dismiss for lack of jurisdiction, accepting the
Commission’s assertion that the deadline was properly
extended. See In re Montford & Co, Inc. , Investment Advisors Act Release No. 457, 2012 WL 1377372, at *11 (Apr. 20, 2012).

After a hearing, the ALJ issued an initial decision that petitioners violated Sec tions 204, 206, and 207 of the Advisors Act, 15 U.S.C. §§ 80b-4, 80b-6(1)–(2), 80b-7, and Advisors Act Rule 204-1(a)(2) , 17 C.F.R. § 275.204-1(a)(2).
See id. at *12–*15. The ALJ again rejected petitioners’ jurisdictional argument, concludi ng that because “the Director
extended the deadline...one can deduce that he/she made the [complexity] determination” required by the statute. Id . at *11. The ALJ barred Montford from the securities industry; ordered petitioners to cease and desist from future violations; ordered disgorgement of $210,000; and ordered Montford to pay $150,000 and Montford A ssociates to pay $500,000 in civil penalties. See id . at *22. Petitioners appealed to the full Commission, which conducted an independent review of the
record.

The Commission affirmed the ALJ’s findings and
sanctions. See Montford & Co ., 2014 WL 1744130. The Commission rejected petitioners ’ argument that Section 4E
barred the action. The Commissi on, construing Section 4E in8

“the first instance,” id . at *10, found that “dismissal of an action is not the appropriate remedy when the time periods set forth in Section 4E are exceeded,” id . at *12. The statute says nothing about the consequence for noncompliance, and
courts have been hesitant to infer a jurisdictional consequence for failure to comply with an internal deadline for federal agency action. Id . at *11.

The Commission also rejected Montford’s challenge to the disgorgement order and civil penalties. Petitioners argued that they should not disgorge the $210,000 in payments received from SJK “because ‘receipt of the money itself was [not] wrongful’ under the securities laws.” Id . at *22 (quoting Reply Br.). The Commission disagreed, determining that
there was a connection between the nondisclosure violations and the $210,000, as the payments from SJK were predicated on not disclosing those payments. Id . The Commission
further found that third-tier civi l penalties were appropriate, as petitioners’ misconduct “involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement” and “resul ted in substantial pecuniary gain.” Id . at *24.

Montford and Montford Associ ates petition this court for review of the Commission’s order. We will deny that petition
for the reasons stated below.

II. A NALYSIS

“The findings of the Commission as to the facts, if supported by substantial evidence, shall be conclusive.” 15 U.S.C. § 80b-13(a). The “int erpretation of the ambiguous
text” of a federal securities stat ute, “in the context of formal adjudication, is entitled to deference if it is reasonable.” SEC v. Zandford , 535 U.S. 813, 819–20 (2002). Our “review of9

the Commission’s remedial d ecisions is deferential.”
Kornman v. SEC , 592 F.3d 173, 176 (D.C. Cir. 2010).

A. Petitioners’ Challenge to the Timeliness of the Enforcement Action

Section 4E of the Exchange Ac t directs that “[n]ot later than 180 days after the date on which Commission staff provide a written Wells notif ication to any person, the Commission staff shall either file an action against such person or provide notice to the Director of the Division of
Enforcement of its intent to not file an action.” 15 U.S.C. § 78d-5(a)(1). The section also contains a procedure for extending the deadline for “certain complex actions.” Id

. § 78d-5(a)(2). The Commission brought an enforcement action against Montford and Montford Associates 187 days after issuing a Wells notice to petitioners. In a later declaration, an attorney with the Division of Enforcement
attested that the Director of the Division had extended the deadline. Petitioners argue that the Commission lacked jurisdiction to bring an enforcement action, as the Commission brought the action too late and did not follow the procedures for extending the deadline. We do not agree. We hold that the Commission’s interp retation of Section 4E, as not imposing a jurisdic tional bar, is reasona ble and entitled to
deference. We thus do not n eed to address the Commission’s alternative argument that it had properly extended the
deadline.

We defer to the Commission’s reasonable interpretation
of Section 4E. “The Commi ssion’s interpretation of its authorizing statutes is entitled to deference under the familiar two-pronged test set forth in Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984).” Kornman , 592
F.3d at 181. “When a court revi ews an agency’s construction10

of the statute which it administer s, it is confronted with two questions.” Chevron , 467 U.S. at 842. Fi rst, the court must determine “whether Congress has directly spoken to the precise question at issue. If the intent of C ongress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Id. at 842–43. But “if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute.” Id. at 843.

We do not owe the Commissi on’s interpretation any less deference because the Commission interprets the scope of its own jurisdiction. As the Supreme Court recently held, “a court need not pause to puzzl e over whether the interpretive question presented is ‘jurisdictiona l.’ If ‘the agency’s answer is based on a permissible constr uction of the stat ute,’ that is
the end of the matter.” City of Arlington v. FCC , 133 S. Ct. 1863, 1874–75 (2013) (quoting Chevron , 467 U.S. at 842).
Nor is it relevant that the Co mmission’s interpretation is the result of adjudication, rather than notice-and-comment rulemaking. “Within traditional agencies,” such as the SEC, “adjudication operates as an appropriate mechanism...for the exercise of delegated lawmaking powers, including lawmaking by interpretation.” Martin v. Occupational Safety
& Health Rev. Com’n , 499 U.S. 144, 152 (1991) (citing SEC v. Chenery Corp. , 332 U.S. 201–03 (1947)); see also Teicher
v. SEC , 177 F.3d 1016, 1019 (D.C. Cir. 1999) (extending
Chevron deference to Commission’s interpretation, expressed in an adjudicatory order, of th e Investment Advisors Act of 1940, 15 U.S.C. § 80b-3f).

We hold that Section 4E is ambiguous under Chevron Step 1. By not specifyi ng any consequence for the Commission’s failure to bring an enforcement action within11

180 days after issuing a Wells notification, Congress has not “directly spoken to the preci se question at issue.” Chevron

, 467 U.S. at 842. Petitioners argue that Section 4E’s “language, structure, purpose, and legislativ e history all
establish that the deadline is mandatory and jurisdictional.” Pet’rs’ Br. 13. Petitioners point to the statute’s use of “shall,”
the inclusion of a detailed ex tension process for complex cases, “which would be pointless if the deadline had no force,” id ., and the provision’s purpose of spurring the Commission to act promptly so that recipients of Wells
notices do not have the cloud of an investigation hanging over them, id . at 14. While these argume nts demonstrate that it might be reasonable to interp ret Section 4E as having a jurisdictional consequence, thes e arguments do not show that
the statute forecloses other interpretations. Since the “statute is silent...with respect to the sp ecific issue,” we turn to the question of “whether the agen cy’s answer is based on a permissible construction of the statute.” Chevron , 467 U.S. at
843.

We further hold that the Co mmission’s interpretation of
Section 4E is reasonable under Chevron Step 2. The Commission stated, “Based on the text and legislative history of Section 4E and Supreme Court precedent interpreting similar statutes, we find that the provision is intended to operate as an internal-timing di rective, designed to compel our staff to complete investigations, examinations, and inspections in a timely manne r and not as a statute of
limitations.” Montford & Co. , 2014 WL 1744130, at *12. The Commission’s interpretation of Section 4E relied on precedent holding “that congressional enactments that prescribe internal time periods for federal agency action without specifying any consequences for noncompliance do not necessitate dismissal of the action if the agency does not act within the time prescribed.” Id . at *11. The Commission12

discussed Brock v. Pierce County , 476 U.S. 253 (1986), and United States v. James Daniel Good Real Property , 510 U.S. 43 (1993). In Brock , the Court held that the Secretary of Labor’s failure to act by a 120-day deadline did not foreclose subsequent action, where the statute did not identify a consequence for missing the deadline. 476 U.S. at 259. The Court held that the statute’s use of “shall,” together with an express deadline “does not, standing alone, divest the [agency] of jurisdiction to act after [the deadline.]” Id . at 266.
In James Daniel Good , the Court held that when “a statute does not specify a consequence for noncompliance with statutory timing provisions, the federal courts will not in the ordinary course impose their own coercive sanction.” 510
U.S. at 63–64. The Commission found that Section 4E was
similar to the deadlines in Brock and James Daniel Good , and determined that it did not lack jurisdiction to bring an
enforcement action after th e 180-day deadline passed.

The Commission’s analysis of Supreme Court precedent, and its application of that prec edent to Section 4E, is sound. As the Supreme Court recently reminded us, time limitations for filings in statutes are pres umptively non-jurisdictional. See United States v. Kwai Fun Wong , 135 S. Ct. 1625, 1634– 35 (2015). Nothing in the text or structure of Section 4E overcomes the strong presumption that, where Congress has
not stated that an internal d eadline shall act as a statute of limitations, courts will not infer such a result. Cf. Barnhart v. Peabody Coal Co. , 537 U.S. 149, 158 (2003) (“Nor, since
Brock , have we ever constr ued a provision that the
Government ‘shall’ act within a specified time, without more, as a jurisdictional limit precluding action later.”). As in
Brock , “[t]here is simply no indication in the statute or its legislative history that Congr ess intended to remove the [Commission’s] enforcement po wers if” Commission staff
fails to file an action within 180 days of issuing a Wells13

notification. 476 U.S. at 266. At most, petitioners’ arguments to the contrary demonstrate that Section 4E is ambiguous; petitioners have not shown that the Commission’s interpretation is unreasonable. Accordingly, we defer to the Commission’s reasonable interp retation of the statute it
administers. See City of Arlington , 133 S. Ct. at 1874–75.

Because we hold that the 180-day time period is not jurisdictional, we need not deci de whether the Director of the Division of Enforcement properly extended the deadline per the statutorily prescribed procedures. See 15 U.S.C. § 78d5(a)(2).

B. Petitioners’ Challenge to the Disgorgement Order
and Civil Fines

In this petition, “Montford recognizes his wrongdoing, and he does not dispute that th e bar order, cease-and-desist order, and some financial penalt y are appropriate.” Pet’rs’ Br. 39. However, Montford contends that even if the Commission had jurisdiction to bring an enforcement action, “the disgorgement order is unlaw ful and the civil penalties are entirely disproportionate and arbitrary.” Id . We disagree and
affirm the Commission’s imposition of sanctions.

Petitioners argue that the di sgorgement order is unlawful
because there must be a cau sal connection between the misconduct and the funds to be disgorged. “Disgorgement deprives wrongdoers of the profits obtained from their
violations.” Zacharias v. SEC , 569 F.3d 458, 472 (D.C. Cir. 2009). Thus, “[t]he touchstone of a disgorgement calculation is identifying a causal link betw een the illegal activity and the profit sought to be disgorged.” SEC v. UNIOIL , 951 F.2d 1304, 1306 (D.C. Cir. 1991) (per curiam) (Edwards, J., concurring). The violations in this case, petitioners maintain,14

“arose not from Montford’s r eceipt of the payments from SJK, but rather from his failure to disclose those payments.”
Pet’rs’ Br. 41. Petitioners thus contend that there is no causal connection, as the payments from Kowalewski cannot have been caused by petitioners’ subs equent failure to disclose those payments; “it is impossible for the violations to have caused the payments because the latter preceded the former.”
Id. at 40.

We are not persuaded by this argument. The Commission has flexibility in or dering disgorgement, as it is “an equitable remedy designed to deprive a wrongdoer of his unjust enrichment and to dete r others from violating the
securities laws.” SEC v. First City Fin. Corp. , 890 F.2d 1215, 1230 (D.C. Cir. 1989). When calculating disgorgement, “separating legal from illegal prof its exactly may at times be a near-impossible task.” Id . at 1231. Thus, “disgorgement need only be a reasonable appr oximation of profits causally
connected to the violation.” Id. Under this standard, the
Commission identified a suffici ent causal connection between the payments from SJK and the petitioners’ violations. The Commission found that SJK paid Montford in part to persuade clients to invest with SJK. Montford & Co. , 2014 WL 1744130, at *15 (“Montford twice admitted that SJK paid him, at least in part, to convin ce clients to stay with SJK.”).
The Commission further determin ed that “[c]lient testimony demonstrated that, absent [petitioners’] deception and failure to disclose the conflict, SJK would not have paid [petitioners] the $210,000 because the clients would not have retained [petitioners] as their advisers an d would not have invested in
SJK.” Id . at *22. These conclusi ons are reasonable and supported by substantial evidence. We will thus uphold the Commission’s disgorgement order.15

Petitioners argue that the Commission erred when it imposed third-tier civil penalt ies, as the Commission did not make the required determinati on that petitio ners’ conduct “resulted in substantial pecuni ary gain.” 15 U.S.C. § 80b3(i)(2)(C). Petitioners conte nd that their co nduct did not result in substantial pecuniary gain for the same reason that the disgorgement order was unlawful: “the disclosure violations followed, and thus could not have caused, the undisclosed payments from SJK. Accordingly, the violations
cannot have ‘resulted in’ Mo ntford’s receipt of the payments.” Pet’rs’ Br. 43 (citation omitted). For the same reasons that we rejected petitioners’ disgorgement argument, we reject this argument. The petitioners further argue that “the penalties imposed by the Commission exceed its discretion because they are uns upported by the record and do not adequately account for mitigating facts.” Id . at 44. We reject this argument as well. The Commission considered and discussed the appropriate stat utory factors in reaching its
decision. See Montford & Co ., 2014 WL 1744130, at *24– *25 (discussing 15 U.S.C. § 80b- 3(i)(3)). It acknowledged Montford’s mitigation arguments, finding them unconvincing or “outweighed by the other public interest factors supporting a significant civil monetary penalty.” Id . at *24. Given that we owe “great deference to th e SEC’s decisions as to the choice of sanction,” Seghers v. SEC , 548 F.3d 129, 135 (D.C. Cir. 2008), we will affirm the Commission’s imposition of civil monetary penalties.

III. C ONCLUSION

While Section 4E of the Securities Exchange Act of 1940, 15 U.S.C. § 78d-5, directs the Securities and Exchange Commission to bring an enforcement action “[n]ot later than 180 days after the date on which Commission staff provide[s]
a written Wells notification to any person,” we defer to the16

Commission’s interpretation th at this provision does not deprive it of jurisdiction to bring an enforcement action brought more than 180 days after issuing a Wells notification.
We further hold that the Commi ssion established the required
causal connection to order th e disgorgement of the $210,000 in payments made by Kowalewski to petitioners, and that the
Commission did not abuse its di scretion or otherwise exceed its authority in imposing a to tal of $650,000 in civil monetary penalties on petitioners. Thus, we deny the petition for
review.
So ordered.