16

‐ 1739

‐ cv

Harris v. SEC



### 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 = 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 A SUMMARY

ORDER @ ). 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 25 th day of October, two thousand

seventeen.

PRESENT:

DENNIS JACOBS, JOSÉ A. CABRANES,

RAYMOND J. LOHIER, JR.,

Circuit Judges

.

___________________ __________________

Talman Harris,

Petitioner,

v. 16

‐ 1739United States Securities and Exchange Commission,

Respondent

.

___________________ __________________

FOR PETITIONER: Paula D. Shaffner (Amy E. Sparrow,

Scott H. Bernstein, on the brief),

Stradley Ronon Stevens & Young,

LLP, Philadelphia, PA.

FOR RESPONDENT: Benjamin Vetter, Senior Counsel for

Sanket J. Bulsara, Acting General

Counsel(Michael A. Conley, Solicitor,

Tracey A. Hardin, Assistant General

Counsel, on the brief), Securities and

Exchange Commission, Washington,

D.C.

Petition for a review of a decision of the United States Securities and

Exchange Commission.

UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,

ADJUDGED, AND DECREED that the petition for review is DENIED

.

Petitioner Talman Harris petitions for a review of a March 31, 2016 decision

issued by the United States Securities and Exchange Commission (“SEC”)

sustaining the findings of the Financial Industry Regulatory Authority (“FINRA”)

and FINRA’s National Adjudicatory Council (“NAC”). FINRA found that

Harris and his business partner, William Scholander, violated Section 10(b) of the

Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and FINRA Rules 2010 and

2020, by recommending that customers purchase shares of Deer Consumer

Products, Inc. (“DEER”), without disclosing that they had received a $350,000

“advisory fee” from DEER two months earlier. Joint App’x at 21. In light of the

violations and the presence of several aggravating factors, FINRA determined

that Harris and Scholander should be permanently barred from associating with

any member firm. On appeal, Harris argues that: (1) his failure to disclose the3 $350,000 payment did not violate Exchange Act Section 10(b); (2) even if he did

commit a 10(b) violation, the permanent bar is an oppressive and excessive

sanction; and (3) the SEC should have reviewed the sanctions deemed

appropriate, but not imposed, by the NAC for violating NASD Rule 3030 and

FINRA Rule 2010. We assume the parties’ familiarity with the underlying facts,

the procedural history, and the issues presented for review.

1. “In order to establish primary liability under §10(b) and Rule 10b

‐ 5”

the SEC must show “that in connection with the purchase or sale of a security the

defendant, acting with scienter, made a material misrepresentation (or a material

omission if the defendant had a duty to speak) or used a fraudulent device.” SEC

v. First Jersey Sec., Inc., 101 F.3d 1450, 1467 (2d Cir. 1996).

Harris contends that, under Press v. Chemical Investment Services Corp.,

166 F.3d 529, 536 (2d Cir. 1999), he had a duty to disclose the DEER payment to

customers only if: (1) the $350,000 payment was dependent on the sale of DEER

securities and (2) the customers to whom he recommended the DEER securities

purchased them. Absent such a “transactional nexus,” Harris disclaims a duty to

disclose.

Although “there is no general fiduciary duty inherent in an ordinary

broker/customer relationship, a relationship of trust and confidence does exist

between a broker and a customer with respect to those matters that have been

entrusted to the broker.” United States v. Szur, 289 F.3d 200, 211 (2d Cir. 2002)

(internal citations and quotation marks omitted). When a broker makes a

securities purchase recommendation, the “broker assume[s] a position of trust

and confidence with respect to the recommendation such that his clients would

expect him to disclose all material information in his possession that would affect

his client’s decision regarding the recommended transaction.” United States v.

Santoro, 302 F.3d 76, 81 (2d Cir. 2002); see also de Kwiatkowski v. Bear, Stearns &

Co., 306 F.3d 1293, 1302 (2d Cir. 2002); Szur, 289 F.3d at 211; Chasins v. Smith,

Barney & Co., 438 F.2d 1167, 1172 (2d Cir. 1970).

The $350,000 payment, made by a securities issuer less than two months

prior to recommending its stock, and used to set up the brokerage itself, was4 material information because there is “a substantial likelihood that the disclosure

of the omitted fact would have been viewed by the reasonable investor as having

significantly altered the ‘total mix’ of information made available.” Basic Inc. v.

Levinson, 485 U.S. 224, 231–32 (1988)(internal citation and quotation marks

omitted); see also Chasins, 438 F.2d at 1172 (failure to disclose that broker

‐ dealer

was a market maker in the stock it recommended was a material omission).

Harris identifies no precedent for a requirement that there be a

“transactional nexus” before a position of trust and confidence arises between

broker and customer. A broker who chooses which stocks to recommend to

clients is required to disclose all material information that could affect his client’s

purchase decision. Santoro, 302 F.3d at 81; see also United States v. Laurienti, 731

F.3d 967, 974 (9th Cir. 2013)(expressly adopting this Circuit’s reasoning in Santoro

to rule that “the professional discretion [a broker] exercise[s] in selecting which

securities to recommend, and the deference his recommendations receive[] in

light of his special knowledge and expertise, afford[] him a position of trust”).

Press, on which Harris relies, does not assist him: Press concluded that a broker’s

failure to disclose a $158 markup on $102,000 T

‐ bill at maturity fell in a gray area

of disclosure because the broker’s sole function was to execute the trade, not to

make a recommendation on buying the T

‐ bill. 166 F.3d at 536

‐ 537.

Harris argues that, in any event, he lacked the requisite scienter for a 10(b)

violation since he acted in a gray area of the law. “Scienter, as used in connection

with the securities fraud statutes, means intent to deceive, manipulate, or

defraud; or at least knowing misconduct.” First Jersey Sec., 101 F.3d at 1467

(internal citation omitted). The scienter requirement is satisfied by recklessness,

which “represents an extreme departure from the standards of ordinary care to

the extent that the danger was either known to the defendant or so obvious that

the defendant must have been aware of it.” Rolf v. Blyth, Eastman Dillon & Co.,

570 F.2d 38, 47 (2d Cir. 1978) (internal citation, alteration, and quotation marks

omitted). “Proof of scienter need not be direct, but may be a matter of inference

from circumstantial evidence.” Wechsler v. Steinberg, 733 F.2d 1054, 1058 (2d Cir.

1984) (internal quotation marks omitted). Because scienter is a fact question,

“[t]he findings of the Commission,

. . . if supported by substantial evidence, shall5 be conclusive.” 15 U.S.C. § 80b–13(a).

The SEC’s findings are supported by substantial evidence. Harris is a

seasoned broker who should have known he had a duty to disclose this

information. See S. Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98, 109 (2d

Cir. 2009). Harris points out that (1) his colleagues did not disclose the payments

either and (2) he did not hide the DEER payment. Harris ʹ (at least) reckless

failure to fulfill his duty to disclose is not refuted or mitigated by his colleagues ʹ

failure to do so as well, or by his disclosure of the payment to his colleagues. 1

2. Harris also argues that FINRA’s permanent bar is excessive and

oppressive, and the SEC’s decision to uphold the penalty should be reversed

because: (1) the SEC did not properly consider mitigating factors under the

FINRA Sanction Guidelines; and (2) the sanctions are not in line with the general

remedial purpose of sanctions. None of Harris’ arguments merit relief.

FINRA, not the Commission, decides what sanction to impose on its

members for violating securities laws or FINRA’s rules. 15 U.S.C. § 78s(e)(2).

The SEC “must sustain the sanction chosen by [FINRA], even if [the Commission]

would not have imposed the sanction in the first instance” unless the SEC finds

that the sanction is “excessive or oppressive or imposes an inappropriate or

unnecessary burden on competition.” Edward John McCarthy, Exchange Act. Rel.

No. 53138, 2006 WL 126703 at *1 (Jan. 18, 2006) (internal quotation marks

omitted). When reviewing FINRA sanctions, the Commission looks at “[t]he

seriousness of the offense, the corresponding harm to the trading public, the

potential gain to the broker for disobeying the rules, the potential for repetition in

light of the current regulatory and enforcement regime, and the deterrent value to

the offending broker and others.” McCarthy v. SEC, 406 F.3d 179, 190 (2d Cir.

2005).

1 Harris contends he could not have acted recklessly because a First Merger

lawyer knew of the payment. However, Harris established none of the elements

required to show reliance on the advice of counsel. “Even where these

prerequisites are satisfied, such reliance is not a complete defense, but only one

factor for consideration.” Markowski v. SEC, 34 F.3d 99, 105 (2d Cir. 1994).6 For intentional or reckless material omissions of the kind Harris engaged

in, the then

‐ effective FINRA Sanction Guidelines recommended a fine ranging

from $10,000 to $100,000, a suspension ranging from 10 days to two years, or, in

egregious cases, a bar. The SEC considered the following aggravating factors:

 Harris and Scholander sold nearly $1 million in DEER securities without

disclosing the payment to at least 42 different customers between February

and November 2010;

 Harris profited from the misconduct because he (1) gained a benefit from

the use of the DEER payment to acquire and open First Merger, and (2) he

and Scholander collected $13,700 in gross commissions on customers’

subsequent purchases of DEER securities.

Additionally, the SEC justified the bar on the ground that Harris provided

inaccurate or misleading information, and “provid[ed] inaccurate or misleading

testimony to FINRA investigators.” Joint App’x at 33; see also Id. at 29

‐ 30, 32.

The SEC has previously ruled that “supplying false information to [FINRA]

during an investigation” creates a substantial “risk of harm to investors and the

markets,” and makes a member “presumptively unfit for employment in the

securities industry.” Geoffrey Ortiz, Exchange Act Rel. No. 58416, 2008 WL

3891311 at * 9 (Aug. 22, 2008). Harris does not contest the finding that he

testified falsely.

The mitigating factors cited by Harris are: (1) the ability to aggregate, or

batch, the various violations for a single sanction; (2) an alleged lack of customer

harm; and (3) lesser sanctions were imposed in similar cases. Notwithstanding

these contentions, the Commission considered each of these factors at his hearing,

and explained why they were unavailing.

Next, Harris argues that the SEC failed to articulate an adequate remedial

basis for barring him from the securities industry, but this contention is also

incorrect. The SEC determined that the bar was remedial because it would

“protect the investing public by encouraging brokers to disclose all material

adverse facts and conflicts of interest when they recommend securities to their

customers.” Joint App’x at 35. The SEC need only offer “[s]ome explanation7 addressing the nature of the violation and the mitigating factors presented in the

record.” McCarthy, 406 F.3d at 190. The SEC noted the seriousness of the offense

(Joint App’x at 24

‐ 26), Harris’ profit (id. at 23, 32), the repeated failure of

disclosure over a period of nine months (id. at 21), Harris’ false and misleading

testimony to FINRA (id. at 29

‐ 30, 32

‐ 33), and the need to protect investors (id. at

35). This is an adequate explanation for why the bar was needed and is

remedial.

3. Finally, Harris argues that the Commission should have reviewed

sanctions that FINRA considered but chose not to apply. In light of the bar,

FINRA decided to forgo certain sanctions (a three

‐ month suspension and a

$15,000 fine) for Harris’ failure to report outside business activities, in violation of

NASD Rule 3030, while he was associated with a prior brokerage firm. The

Commission “may cancel, reduce, or require the remission” of FINRA sanctions

only if the Commission finds that the sanction imposed is “excessive or

oppressive.” 15 U.S.C. § 78s(e)(2). The Commission correctly decided not to

review the sanctions that FINRA did not actually impose.

Accordingly, we DENY the petition for review.

FOR THE COURT:

CATHERINE O’HAGAN WOLFE, CLERK