Opinion ID: 700615
Heading Depth: 2
Heading Rank: 2

Heading: Injunction Against Service as Officer and Director

Text: 14 For violations of the antifraud provisions of the securities laws, 15 the court may prohibit, conditionally or unconditionally, and permanently or for such period of time as it shall determine, any person who violated [the applicable provisions] from acting as an officer or director [of a public company] if the person's conduct demonstrates substantial unfitness to serve as an officer or director.... 16 15 U.S.C. Secs. 77t(e) and 78u(d)(2) (enacted in 1990). 17 In permanently enjoining Patel from serving as an officer or director of any public company at the behest of the SEC, the district court necessarily determined that Patel was substantially unfit to hold such positions. The court identified six factors that it considered in resolving the issue of substantial unfitness: (1) the 'egregiousness' of the underlying securities law violation; (2) the defendant's 'repeat offender' status; (3) the defendant's 'role' or position when he engaged in the fraud; (4) the defendant's degree of scienter; (5) the defendant's economic stake in the violation; and (6) the likelihood that misconduct will recur. These factors were suggested in a law review article by Jayne W. Barnard entitled When is a Corporate Executive Substantially Unfit to Serve?, 70 N.C.L.Rev. 1489, 1492-93 (1992). 18 Applying the factors suggested by Professor Barnard, the district court found: that Patel's violations were not egregious in comparison with those of others and in view of the size of the loss avoided; that Patel was a first-time offender; that in his position as officer and director of Par, Patel allowed the false Application to be submitted and obstructed the FDA investigation of the Application by providing a switched sample of Maxzide to an FDA inspector; that Patel showed some scienter in his actions, although he did not engage in clandestine trading; that he was the sole economic beneficiary of his insider trading; and that, because he was a founder of Par and abused his position as officer and director, the likelihood of future misconduct is sufficient to warrant the imposition of the injunctive relief requested. 19 Patel contends that the district court improperly applied the factors it considered by 'mixing' Patel's 'insider trading' with Par's submission of the false [Application] to the FDA. He further contends that, although his conduct in the Maxzide affair gave rise to his 'insider' knowledge, it was not part of any 'scheme' to commit the securities law violation[s], and is not relevant to an analysis of his conduct in respect of the violations. Patel claims that the district court's application of the six-factor test results in an almost even split between those factors that cut in his favor and those factors that cut against him. Moreover, Patel thinks that the district court should have taken into account the fact that criminal sanctions were imposed upon him and that he voluntarily settled the class action suit brought against him. 20 The district court properly considered Patel's involvement in the Maxzide affair as part and parcel of his conduct in the securities law violations. His deception of the FDA, although perhaps not originally designed to obtain profits or avoid losses in the sale of his stock, set in motion the scheme that culminated in his breach of fiduciary duties and in the resultant detriment to investors. Also, the district court properly took into account the six factors that it identified in evaluating substantial unfitness. These factors are useful in making the unfitness assessment, although we do not mean to say that they are the only factors that may be taken into account or even that it is necessary to apply all these factors in every case. A district court should be afforded substantial discretion in deciding whether to impose a bar to employment in a public company. 21 We do find a problem in this case, however, with the district court's finding regarding the likelihood of future misconduct, which is always an important element in deciding whether the substantial unfitness found justifies the imposition of a lifetime ban. The only findings that the district court made in this regard were that Patel was a founder of Par and used his position as an officer and director to engage in misconduct. This is merely a general statement of events and can in no way justify the prediction that future misconduct will occur. 22 Moreover, we think that it was error for the district court to say that the likelihood of future misconduct based on the foregoing statement is sufficient to warrant the imposition of the injunctive relief requested. The loss of livelihood and the stigma attached to permanent exclusion from the corporate suite certainly requires more. In a case in which we approved lifetime banishment as a common law remedy, we noted that the defendants had committed securities law violations with a 'high degree of scienter' and that their past securities law violations and lack of assurances against future violations demonstrated that such violations were likely to continue. Posner, 16 F.3d at 521-22. Although it is not essential for a lifetime ban that there be past violations, we think that it is essential, in the absence of such violations, that a district court articulate the factual basis for a finding of the likelihood of recurrence. 23 Finally, we take note of the fact that the governing statute provides that a bar on service as an officer or director that is based on substantial unfitness may be imposed conditionally or unconditionally and permanently or for such period of time as [the court] shall determine. We take these provisions to suggest that, before imposing a permanent bar, the court should consider whether a conditional bar (e.g., a bar limited to a particular industry) and/or a bar limited in time (e.g., a bar of five years) might be sufficient, especially where there is no prior history of unfitness. In this connection, we do not think that it would be improper for the district court to take into account any prior punishment that may have been imposed in a criminal proceeding. If the district court decides that a conditional ban or a ban limited in time is not warranted, it should give reasons why a lifetime injunction is imposed.