United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 18, 2007 Decided January 11, 2008

No. 06-1319

DOLPHIN AND BRADBURY, INCORPORATED AND

ROBERT J. BRADBURY,

PETITIONERS

v.

SECURITIES AND EXCHANGE COMMISSION,

RESPONDENT

On Petition for Review of an Order of the

Securities and Exchange Commission

Philip G. Kircher argued the cause and filed the briefs for

petitioners.

Rada Lynn Potts, Senior Litigation Counsel, Securities &

Exchange Commission, argued the cause for respondent. With

her on the brief were Brian G. Cartwright, General Counsel,

Andrew N. Vollmer, Deputy General Counsel, and Jacob H.

Stillman, Solicitor.

Before: GINSBURG, Chief Judge, and BROWN and GRIFFITH,

Circuit Judges.

Opinion for the court filed by Circuit Judge BROWN.
2

1 For convenience, we refer to the petitioners collectively as

“Bradbury.”

2The Pennsylvania Department of General Services formally held

the lease, but PennDOT occupied the office space. We thus refer to

the lease as “PennDOT’s lease.”

3We refer to PennDOT’s planned departure—the key fact in this

case—as “the PennDOT information.”

BROWN, Circuit Judge: Dolphin & Bradbury, Inc. and

Robert J. Bradbury petition for review of a Securities and

Exchange Commission order holding them liable for violations

of multiple securities laws. Petitioners claim they lacked the

requisite intent. We disagree and deny the petition for review.

I

Petitioner Dolphin & Bradbury, Inc., a registered brokerdealer, served as underwriter for the municipal bonds issued by

the Dauphin County General Authority (DCGA) to finance the

purchase of Forum Place, an office building in Harrisburg,

Pennsylvania. Petitioner Robert J. Bradbury is the chairman,

chief executive officer, chief operating officer, and 38% owner

of Dolphin & Bradbury.1

When the bonds were offered in July 1998, the Pennsylvania Department of Transportation (PennDOT) occupied a

substantial portion of Forum Place.2

 PennDOT’s lease was

scheduled to (and did) expire in November 2001—well before

the bonds’ maturity dates, which ranged from 2003 to 2025.

PennDOT leased this space because of environmental problems

and fire damage to its own building, but planned to move once

its building was renovated or replaced. Bradbury believed the

move would probably occur around 2001 or 2002.3 The key
3

4 Putnam Investments, the only investor to whom Bradbury

disclosed the PennDOT information, still purchased almost $27

million of bonds. The Commission imposed no liability for bonds

sold to Putnam.

participants—Bradbury (underwriter), O’Neill (underwriter’s

counsel), Fowler (DCGA’s financial advisor), and Sweet

(DCGA’s bond counsel)—all had extensive municipal bond

experience, and all except O’Neill knew the PennDOT information.

On June 30, 1998, in the run-up to the bond offering, the

Secretary of the Department of General Services told Fowler

and Sweet he expected the state government to use Forum Place

as temporary “swing space” for other state employees after

PennDOT moved, but he made no commitments or guarantees.

Fowler and Sweet informed Bradbury. On July 8, 1998, DCGA

voted to proceed with the bond offering and Forum Place

acquisition. PennDOT’s plans were discussed at this DCGA

meeting, which Bradbury did not attend.

Despite the critical importance of PennDOT’s planned

departure, Bradbury generally failed to disclose this information

to prospective investors.4

 Instead, he attempted to assure them

about Forum Place’s future by referring to the state government’s swing space needs. The Official Statement—the key

disclosure document—included some disclaimers and cautionary language, but it did not disclose that PennDOT actually

planned to leave Forum Place. Moreover, financial projections

prepared by Fowler, reviewed by Bradbury, and provided to

investors assumed the Forum Place leases would continue at the

same lease rates until at least 2008.

When the Forum Place transaction closed on July 31, 1998,

PennDOT’s old building had not been demolished and site
4

preparation for the new building had not yet begun. However,

just one day later, PennDOT’s old building was imploded.

Construction began on the new PennDOT building. In late

2000, PennDOT vacated most of its Forum Place space, but

continued to pay rent until its lease expired in November 2001.

By December, 55% of Forum Place lay vacant, and bondholders

forced Forum Place into receivership in 2003.

The ALJ and the Commission found Bradbury violated

various securities laws and regulations by failing to disclose the

central fact of PennDOT’s planned departure. Bradbury

challenges the Commission’s finding that he acted with scienter.

II

A

The Commission found Bradbury violated section 17(a) of

the Securities Act of 1933 (Securities Act), 15 U.S.C. § 77q(a),

as well as section 10(b) of the Securities Exchange Act of 1934

(Exchange Act), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R.

§ 240.10b-5. We have subject matter jurisdiction to review the

Commission’s order pursuant to a “direct-review statute,”

namely, section 9 of the Securities Act and section 25 of the

Exchange Act. See Watts v. SEC, 482 F.3d 501, 505 (D.C. Cir.

2007) (discussing 15 U.S.C. §§ 77i(a), 78y(a)(1)).

“The antifraud provisions of the federal securities laws

prohibit fraudulent or deceptive practices in the offer and sale of

municipal securities.” Disclosure Obligations, Securities Act

Release No. 7049, Exchange Act Release No. 33,741, 56 SEC

Docket 479 (Mar. 9, 1994), 1994 WL 73628, at *5. Rule 10b-5

renders it unlawful for someone in Bradbury’s position “[t]o

make any untrue statement of a material fact or to omit to state

a material fact necessary in order to make the statements made,
5

5The Commission properly found that both petitioners violated

Municipal Securities Rulemaking Board Rule G-17; that Dolphin &

Bradbury violated section 15B(c)(1) of the Exchange Act, 15 U.S.C.

§ 78o-4(c)(1); and that Robert Bradbury aided and abetted Dolphin &

Bradbury’s section 15B(c)(1) violation.

in light of the circumstances under which they were made, not

misleading.” 17 C.F.R. § 240.10b-5. In this context, an omitted

fact is material if a “reasonable investor” would have viewed it

as “significantly alter[ing] the total mix of information made

available.” Disclosure Obligations, 1994 WL 73628, at *5

(brackets omitted) (quoting TSC Indus. v. Northway, Inc., 426

U.S. 438, 449 (1976)).

Bradbury only disputes whether he acted with scienter, see

SEC v. Steadman, 967 F.2d 636, 641 (D.C. Cir. 1992), which is

a factual determination.5 See Howard v. SEC, 376 F.3d 1136,

1149 (D.C. Cir. 2004); Graham v. SEC, 222 F.3d 994, 1005

(D.C. Cir. 2000). Section 17(a)(1) of the Securities Act, section

10(b) of the Exchange Act, and Rule 10b-5 require proof of

scienter. See Aaron v. SEC, 446 U.S. 680, 697 (1980); Ernst &

Ernst v. Hochfelder, 425 U.S. 185, 193 (1976).

To prove Bradbury acted with scienter, the SEC must

establish “‘an intent to deceive, manipulate, or defraud.’”

Steadman, 967 F.2d at 641 (quoting Aaron, 446 U.S. at 686 n.5).

“[E]xtreme recklessness” can satisfy this scienter requirement.

Id. Extreme recklessness “is not merely a heightened form of

ordinary negligence,” id., and does not involve a “should have

known” standard, see id. at 641–42. Rather, “it is an ‘extreme

departure from the standards of ordinary care . . . which presents

a danger of misleading buyers or sellers that is either known to

the defendant or is so obvious that the actor must have been

aware of it.’” Id. (emphasis added) (quoting Sundstrand Corp.

v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)). It is,
6

6 Forum Place’s revenues were the sole source of bond repayment

funds.

in fact, “‘a lesser form of intent,’” id. at 642, implying the

danger was so obvious that the actor was aware of it and

consciously disregarded it.

The Commission’s finding that Bradbury acted with

scienter is conclusive if, under our “very deferential” substantial

evidence standard, Nat’l Ass’n of Sec. Dealers v. SEC, 801 F.2d

1415, 1419 (D.C. Cir. 1986), “a reasonable mind might accept

[the] evidentiary record as adequate to support [the Commission’s] conclusion,” Dickinson v. Zurko, 527 U.S. 150, 162

(1999) (quotation marks omitted). See Graham, 222 F.3d at 999

(citing 15 U.S.C. § 78y(a)(4)). Because the notion of extreme

recklessness “belies the existence of a bright line test for when

the scienter threshold has been crossed,” 3 THOMAS LEE HAZEN,

THE LAW OF SECURITIES REGULATION § 12.8[3] (5th ed. 2005),

this case requires a fact-intensive inquiry.

B

Bradbury contends the Commission’s scienter finding is not

supported by substantial evidence. We disagree. First,

Bradbury did not disclose PennDOT’s actual plans to move out

of Forum Place. Second, he tries to hide his extreme

recklessness by misstating the role of an underwriter. We

address each point in turn.

(1)

PennDOT’s lease was crucial because PennDOT occupied

79% of Forum Place and generated 60% of its lease revenues,6

and the bonds’ tax-exempt status depended on continuing
7

7Bradbury’s counsel (O’Neill) prepared the Official Statement;

Bradbury used it to market the bonds.

occupancy by public agencies such as PennDOT. Bradbury

claims he adequately disclosed the risks of PennDOT leaving

Forum Place. He points to cautionary statements in the offering

documents to show he did not act recklessly. Most significantly,

the Official Statement warned, in boldface capital letters: “The

office leases are scheduled to expire prior to the maturity of the

1998 bonds; there is no commitment, requirement, or guarantee

that the Commonwealth [of Pennsylvania] will renew or extend

any of the office leases.” It also disclosed the square footage

and lease rate of the PennDOT lease and explained “[t]he 1998

Bonds are limited obligations of the Authority and are secured

by and payable solely from the revenues derived from lease

payments and [facilities] fees.”7

But substantial evidence supports the Commission’s

conclusion that Bradbury’s cautionary statements were so

deficient he must have known investors would be misled by the

offering documents. The Commission noted the critical

distinction between disclosing the risk a future event might

occur and disclosing actual knowledge the event will occur.

Bradbury’s cautionary language only disclosed a risk that

tenants might leave Forum Place—not his knowledge that

PennDOT actually planned to do so in the near future.

Bradbury also argues his discussions with investors about the

state government’s swing space needs show he did not act with

scienter. However, this argument again misses the point:

discussing swing space only implies that a tenant might leave

Forum Place—not that the largest tenant actually had plans to

leave.

Bradbury’s “[c]autionary words about future risk cannot

insulate from liability the failure to disclose that the risk” had
8

already “transpired.” Rombach v. Chang, 355 F.3d 164, 173 (2d

Cir. 2004). Bradbury in effect asks us to apply the scienter

standard in a way that would protect “‘someone who warns his

hiking companion to walk slowly because there might be a ditch

ahead when he knows with near certainty that the Grand Canyon

lies one foot away.’” See id. (emphases added) (quoting In re

Prudential Sec. Inc. P’ships Litig., 930 F. Supp. 68, 72

(S.D.N.Y. 1996)). We refuse to do so, especially since

Bradbury’s role as an underwriter is really that of a trail

guide—not a mere hiking companion.

The manifest danger of misleading investors is underscored

by the enormous significance of PennDOT’s planned departure

and the near certainty with which Bradbury knew the departure

would occur. Here, Bradbury knew PennDOT would leave

Forum Place once its new building was completed.

Furthermore, the PennDOT information had enormous

significance because it dramatically affected the tax-exempt

status of the bonds and put the bonds’ repayment at risk.

PennDOT’s planned departure was an unusually important piece

of information, and Bradbury “is an experienced professional

who has an independent duty to use diligence ‘where there are

any unusual factors.’” See Graham, 222 F.3d at 1005 (quoting

Commission decisions).

The financial projections Bradbury used to market the

bonds were flawed because they assumed the PennDOT lease

would continue (or that PennDOT would be replaced by a

similar tenant) through 2008. The projections were so deeply

flawed that Bradbury must have been aware they would mislead

investors. See Eisenberg v. Gagnon, 766 F.2d 770, 775–76 (3d

Cir. 1985) (concluding that financial projections are actionable

under Exchange Act section 10(b) and Rule 10b-5 and

explaining that “[w]hen a representation is made by

professionals or those with greater access to information or
9

having a special relationship to investors making use of the

information, there is an obligation to disclose data indicating

that the opinion or forecast may be doubtful”). Because

Bradbury could not have had a genuine belief in the projections’

completeness and accuracy, his use of them to market the bonds

supports the Commission’s scienter finding.

Bradbury offers two additional reasons that his disclosures

show he did not act with scienter. We reject them both. First,

Bradbury maintains he knew PennDOT planned to depart, but

did not know precisely when. However, Bradbury’s lack of

perfect knowledge did not relieve him of his duty to disclose

those material facts he did know. Second, Bradbury notes the

PennDOT information was technically in the public domain,

partly due to a local newspaper article and a discussion at a

public DCGA meeting. But substantial evidence supports the

Commission’s finding that Bradbury still had a duty to disclose

the PennDOT information, because this information was not

reasonably available to investors. See United Paperworkers

Int’l Union v. Int’l Paper Co., 985 F.2d 1190, 1199 (2d Cir.

1993) (“[S]poradic news reports do[] not give . . . sufficient

notice . . . .”).

(2)

Bradbury attempts to paint his state of mind in a favorable

light by simultaneously understating and overstating his role as

an underwriter. On the one hand, Bradbury understates—and

nearly abdicates—his independent responsibilities, arguing he

escapes liability because nobody told him to disclose the

PennDOT information. On the other hand, he overstates his role

in the process by arrogating the role of an investor in evaluating

material facts and weighing expected risks. We reject both of

these attempts to mischaracterize an underwriter’s role.
10

An underwriter “occupies a vital position” in a securities

offering because investors rely on its reputation, integrity,

independence, and expertise. Municipal Securities Disclosure,

Exchange Act Release No. 26,100, 41 SEC Docket 1131 (Sept.

22, 1988), 1988 WL 999989, at *6, *20–21. “By participating

in an offering, an underwriter makes an implied

recommendation about the securities [that it] . . . has a

reasonable basis for belief in the truthfulness and completeness

of the key representations made in any disclosure documents

used in the offerings.” Id. at *20 (emphasis added); see, e.g.,

Hanly v. SEC, 415 F.2d 589, 596 (2d Cir. 1969) (“A securities

dealer occupies a special relationship to a buyer of securities in

that by his position he implicitly represents he has an adequate

basis for the opinions he renders.”); Disclosure Obligations,

1994 WL 73628, at *17.

An underwriter must investigate and disclose material facts

that are known or “reasonably ascertainable.” Municipal

Securities Disclosure, 1988 WL 999989, at *20 (quoting Hanly,

415 F.2d at 597); cf. SEC v. Dain Rauscher, Inc., 254 F.3d 852,

858 (9th Cir. 2001) (holding an underwriter “had a duty to make

an investigation that would provide him with a reasonable basis

for a belief that the key representations in the statements . . .

were truthful and complete”). Although other broker-dealers

may have the same responsibilities in certain contexts,

underwriters have a “heightened obligation” to ensure adequate

disclosure. Municipal Securities Disclosure, 1988 WL 999989,

at *21 & n.74. Moreover, these duties do not disappear simply

because “customers may be sophisticated and knowledgeable.”

See Hanly, 415 F.2d at 596. Indeed, the doctrine of caveat

emptor has little application in this context. SEC v. Capital

Gains Research Bureau, Inc., 375 U.S. 180, 186 (1963).

Bradbury claims his reliance on his counsel (O’Neill),

DCGA’s bond counsel (Sweet) and financial advisor (Fowler),
11

8Although not cited by the Commission, Bradbury’s own expert

acknowledged an underwriter “cannot delegate” his responsibilities to

others.

and the silence of investors negates any scienter finding. He

assumed others would raise any disclosure issues with him.

Substantial evidence supports the Commission’s conclusion that

Bradbury cannot rely on the silence of others to absolve himself

of responsibility when non-disclosure presented such an obvious

danger of misleading investors.8

First, Bradbury failed to disclose the PennDOT information

to O’Neill, who lacked independent knowledge of this

information. Although reliance on counsel is “a relevant

consideration in evaluating a defendant’s scienter,” Howard v.

SEC, 376 F.3d 1136, 1147 (D.C. Cir. 2004), Bradbury’s failure

to disclose PennDOT’s plans to O’Neill substantially undercuts

his argument. See Douglas W. Hawes & Thomas J. Sherrard,

Reliance on Advice of Counsel as a Defense in Corporate and

Securities Cases, 62 VA. L. REV. 1, 29 (1976) (“Reliance on

advice of counsel will not be available to the defendant if he

failed to disclose all relevant facts to the attorney.”); United

States v. Fin. Comm. to Re-Elect the President, 507 F.2d 1194,

1198 (D.C. Cir. 1974) (similar principle in the criminal context);

cf. Municipal Securities Disclosure, 1988 WL 999989, at *24

(reliance on others “whose duties have given them knowledge

of particular facts” affects the reasonableness of an

underwriter’s belief). Moreover, Bradbury’s

reliance-on-counsel argument is much weaker than the one in

SEC v. Steadman, a case in which defendants failed to register

securities because their attorney formally and unqualifiedly told

them they need not do so. See Steadman, 967 F.2d 636, 642

(D.C. Cir. 1992).
12

9The alleged mismanagement of Forum Place following the bond

offering is irrelevant to our scienter inquiry; taking this into account

would improperly rely on “the blazing light of hindsight.” See

Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 n.19 (7th

Cir. 1977).

Second, Bradbury blindly relied on DCGA’s financial

advisor (Fowler) and bond counsel (Sweet). Yet an underwriter

may not “blindly” rely on information provided by the issuer.

Hanly, 415 F.2d at 597; see Municipal Securities Disclosure,

1988 WL 999989, at *25 (“Sole reliance on the representations

of the issuer would not suffice.”). Bradbury tries to shift blame

to Fowler’s incomplete financial projections, but the obviously

faulty assumptions underlying those projections left Bradbury’s

duties to investigate and disclose intact. See id. at *26 & n.92.

Bradbury also claims he relied on an opinion letter drafted by

Sweet, but the Commission reasonably rejected this argument.

Sweet’s opinion letter did not even approve the most relevant

cautionary language in the Official Statement.

Third, Bradbury also understates his role by relying on

investors’ silence. He asserts he would have disclosed the

PennDOT information to investors if they had only asked him

the right questions. This may be true. However, underwriters

have a “heightened obligation” to ensure adequate

disclosure—not just to answer questions when an investor has

the perceptiveness and ambition to identify an important

undisclosed issue and doggedly pursue it.9

 See id. at *21 &

n.74.

We reject Bradbury’s attempts to negate his scienter by

understating his role—especially given the patently obvious

danger of not disclosing the PennDOT information. It certainly

would have bolstered the Commission’s scienter finding if

Bradbury had ignored explicit warnings from other key players
13

in the bond offering. In the end, however, we conclude a

“reasonable mind might accept” the Commission’s rejection of

Bradbury’s reliance arguments. See Dickinson v. Zurko, 527

U.S. 150, 162 (1999) (describing the substantial evidence test).

At the same time Bradbury understates his role in certain

respects, he also overstates it by arrogating the role of an

investor in evaluating material facts and weighing expected

risks. Each investor must have the opportunity to make

decisions based on a singular (and perhaps idiosyncratic)

preference for balancing risk and return, taking into account its

unique investment portfolio. Bradbury’s role was to facilitate

each investor’s individualized balancing of risk and return—not

to strike the balance on his own without revealing a critically

important fact.

Because of the state government’s vaguely expressed

intention to use Forum Place as swing space, Bradbury decided

PennDOT’s departure plans should not affect investors’ bond

purchasing decisions. Thus, he contends discussing swing space

issues with investors obviated the need to disclose PennDOT’s

departure plans. This misconceives an underwriter’s role. As

the standard for materiality makes clear, “investor[s]” must have

the opportunity to assess the “‘total mix’ of information.” See

TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976)

(emphasis added). Moreover, the offering documents should

have “accurately reflect[ed] all material facts which a prudent

investor should know”—not material facts Bradbury personally

found to be dispositive. See Municipal Securities Disclosure,

1988 WL 999989, at *22 n.76 (emphasis added). Accordingly,

Bradbury should have disclosed both PennDOT’s departure

plans and the state government’s swing space needs. Then,

prospective investors could have made fully informed decisions.
14

Putnam Investments purchased $27 million in bonds, even

after being fully informed. Bradbury argues this shows the

danger of non-disclosure was not obvious. The Commission

rejected his argument. We do too. First, Bradbury only

disclosed the PennDOT information to Putnam because

Putnam’s analyst persisted until she got answers. The very fact

that Putnam was intent on finding out this type of information

actually undercuts Bradbury’s argument; it shows Bradbury

“must have known” the information was important to investors.

Second, Putnam’s purchase does not mean the PennDOT

information was not essential. Indeed, Putnam’s analyst

considered the information “critical” and other investors labeled

it “very material” and “very critical.” Third, Bradbury’s

argument ignores the fact that different investors make very

different decisions. For example, Putnam might have strongly

desired tax-exempt bonds, while others might have been very

averse to significant bond-repayment risk.

For the foregoing reasons, we hold substantial evidence

supports the Commission’s finding that Bradbury acted with

scienter.

III

Were we writing on a blank slate, this would be a very close

case, because the scienter threshold is high. But we need not

decide how to sketch the contours of extreme recklessness on a

blank slate, because Congress has directed us to uphold the

Commission’s factual findings if supported by substantial

evidence. See 15 U.S.C. §§ 77i(a), 78y(a)(4). And, when

viewed through that deferential lens, we conclude a “reasonable

mind might accept” the evidence as “adequate” to support the

Commission’s scienter finding. See Dickinson, 527 U.S. at 162.

Substantial evidence supports the Commission’s finding that

Bradbury’s non-disclosure created a danger of misleading
15

buyers that was so obvious he must have known about it.

Accordingly, we deny the petition for review and affirm the

Commission’s order.

So ordered.