Opinion ID: 802495
Heading Depth: 2
Heading Rank: 3

Heading: The Default Order

Text: Rapoport did not respond to the OIP. On April 8, 2009, the Division moved for the ALJ to enter a default judgment against Rapoport. The motion was served on Kraut by Federal Express, although there is no indication it was served on Rapoport personally. Rapoport did not file an answer or opposition to the motion. The ALJ notified Rapoport of pre-hearing conferences by sending scheduling orders to his Moscow business address. Rapoport did not participate in those conferences. 6 On July 31, 2009, the ALJ entered the Default Order imposing sanctions on Rapoport and the other respondents. A copy of the Default Order was sent to Rapoport at his Moscow business address. When Rapoport entered the United States on October 23, 2009, a Customs officer personally served Rapoport with a copy of the Order. In the Order, the ALJ explained that when a party is in default, allegations in an OIP are deemed to be true as to that party. 17 C.F.R. § 201.155(a). The ALJ recited the facts pertaining to Rapoport almost verbatim from the OIP and added no new facts. He noted particularly that the OIP “alleged that . . . Rapoport willfully violated Section 15(a) of the Exchange Act” by soliciting securities transactions with U.S. investors without being registered. The ALJ reasoned that because he could take the facts alleged in the OIP as true, and because the OIP alleged that Rapoport willfully violated Section 15(a), he could find that Rapoport “functioned as an unregistered broker and willfully violated Section 15(a)(1) of the Exchange Act.” Based solely on that rationale and the facts alleged in the OIP, the ALJ imposed sanctions on Rapoport. He ordered Rapoport to cease and desist from committing Section 15(a) violations, barred Rapoport from association with any broker or dealer, and ordered Rapoport to provide an accounting of income so he could be ordered to disgorge his ill-gotten gains with prejudgment interest. The ALJ also imposed a civil monetary penalty on Rapoport under Exchange Act Section 21B(b), 15 U.S.C. § 78u-2(b). Section 21B(b) sets out three tiers of maximum penalties for “each [violative] act or omission.” The maximum penalty applies to each act or omission and does not cap the total penalty. To qualify for second tier penalties, the act or omission must have “involved fraud, deceit, manipulation, or deliberate 7 or reckless disregard of a regulatory requirement.” 15 U.S.C. § 78u-2(b)(2). The ALJ imposed second-tier penalties, which are capped at $65,000 for each act or omission committed by an individual after February 14, 2005, and $60,000 before that date. See 17 C.F.R. §§ 201.1002, .1003 (setting penalty amounts). The ALJ acknowledged that the OIP did not suggest how many individual violations Rapoport committed and stated that it was “necessary to determine how to appropriately parse up the violations committed by CI-New York, Rapoport, and [Rapoport’s colleague] Yenin [and] whether to treat the entire course of conduct as a single act or as a series of acts.” Immediately thereafter, without actually doing any parsing or making any determinations, the ALJ opined that the defaulting Respondents had acted recklessly or with deliberate disregard of the regulatory requirements, and, thus, it was appropriate to impose the maximum second tier penalties on them. He calculated those penalties by imposing one maximum penalty for each year of the violative conduct—not by adding up alleged individual acts or omissions (and, indeed, he could not do so because the Enforcement Division never listed any in the OIP). The ALJ ordered Rapoport to pay a total penalty of $550,000. However, the ALJ realized upon Rapoport’s later motion that he had miscalculated the sanctions and reduced Rapoport’s penalty to $315,000.