Opinion ID: 2816868
Heading Depth: 2
Heading Rank: 1

Heading: application of law & sufficiency of evidence

Text: Koch’s primary argument on appeal is that the Commission’s decision applied the wrong legal standard and is not supported by substantial evidence. We think the contrary is true: The Commission applied the correct standard and properly concluded that there is ample evidence Koch manipulated the market by marking the close. As explained, the Exchange Act and the Advisers Act prohibit fraudulent and manipulative conduct. Market-manipulative behavior is “intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities.” Ernst & Ernst, 425 U.S. at 199. Under Commission precedent, a charge of marking the close consists of two elements: (1) “conduct evidencing a scheme to mark the close—i.e., trading at or near the close of the market so as to influence the price of a security”; and (2) “scienter, defined as a mental state embracing intent to deceive, manipulate, or defraud.” Order, 2014 WL 1998524, at  & n.97 (collecting cases). 1 1 Liability under the Advisers Act can also be premised on negligence. See SEC v. Steadman, 967 F.2d 636, 643 n.5 (D.C. Cir. 1992) (citing SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195 (1963)). Because neither party claims the Commission’s decision turned on negligence, we assess Koch’s manipulative intent. 8 The Commission relied on the following evidence to conclude that Koch marked the close for High Country stock on September 30 and December 31, 2009. On September 30, KAM purchased nearly 2,000 shares of High Country stock, “the vast majority in the last four minutes of trading.” Id. at . These were the only trades that day involving High Country and they pushed the stock’s closing price to $23.50 per share. Tellingly, High Country stock never traded above $20 again in 2009. In addition, Koch emailed Christanell on September 30 and told him to “move last [High Country] trade right before 3pm up to as near $25 as possible without appearing manipulative.” Id. at  (emphasis added). Koch attempts to downplay this smoking gun by arguing that he only meant to tell Christanell to not “place large orders that could disturb the [stock’s] price.” Pet’r’s Br. 41. Yet, as the Commission rightly noted, “Koch’s instruction contains no information at all about the size of incremental purchases that Christanell should make.” Order, 2014 WL 1998524, at . And if Koch were in fact concerned only with the size of the purchases, it made little sense to include a gratuitous warning to avoid appearing manipulative. His professed lawful intent is also contradicted by Christanell’s testimony (which the SEC credited) that Christanell placed last-minute bids for High Country “to get the price up to where Koch asked him to get it.” Id. (alterations omitted). In short, Koch’s explanation is implausible. Likewise, on December 31, KAM purchased 3,200 shares of High Country stock “all within the last five minutes of trading.” Id. This pushed the High Country closing price to $19.50 on December 31, even though every other trade of High Country stock that day was priced no higher than $17.50. This evidence of marking the close is again buttressed by 9 Koch’s emails to Christanell. On December 28, Koch directed Christanell “to buy High Country 30 minutes to an hour before the close of market for the year” and explained that he wanted “to get a closing price for High Country in the 20–25 [dollar] range, but certainly above 20.” Id. (alterations omitted). Koch’s intent could not have been plainer: buy stock right before trading closes in order to drive up the price. In other words, mark the close. Moreover, a series of recorded phone calls between Koch and Christanell on December 31 reinforces Koch’s intent. Koch told Christanell that “my parameters for High Country are—if you need 5,000 shares, do whatever you have to do—I need to get it above 20, you know, 20 to 25, I’m happy.” Id. at  (emphasis added; alterations omitted). Koch also instructed Christanell to “just create prints,” which Christanell testified he understood to mean “get the stock price up for the last trade of the day.” Id. (quotation marks omitted). When Christanell failed to get the price high enough before the market closed, he apologized to Koch and said, “I know you wanted it higher and I tried.” Id. As with the High Country stock, there is abundant evidence to support the Commission’s conclusion that Koch marked the close for Cheviot and Carver stock on December 31. Christanell, at Koch’s direction, engaged in a flurry of trades for Cheviot stock only minutes before the market closed on December 31. As the Commission explained: Christanell placed orders for several thousand shares of Cheviot in the final three minutes of trading. KAM’s last execution from these orders was a purchase of 200 shares at a price of $7.99 just seven seconds before 3 p.m., Central time, but a later non-KAM trade for Cheviot set the closing price for 10 the stock at $7.39. At nine seconds after 3 p.m., Christanell placed another KAM order for additional Cheviot shares, which almost immediately resulted in three executions—two at $8.00 and one at $8.19. These final three trades, however, came after the official close of the market and therefore none of them set the closing price. Id. This burst of trading cannot be explained by anything other than intent to mark the close. True, Christanell’s final three trades ultimately failed to set the closing price. But successful market manipulation is not equivalent to intent to manipulate the market. See Markowski v. SEC, 274 F.3d 525, 529 (D.C. Cir. 2001) (“Just because a manipulator loses money doesn’t mean he wasn’t trying [to manipulate].”). And intent—not success—is all that must accompany manipulative conduct to prove a violation of the Exchange Act and its implementing regulations. See id. (the Congress has “determin[ed] that ‘manipulation’ can be illegal solely because of the actor’s purpose” (emphasis added)); accord Kuehnert v. Texstar Corp., 412 F.2d 700, 704 (5th Cir. 1969) (“The statutory phrase ‘any manipulative or deceptive device,’ seems broad enough to encompass conduct irrespective of its outcome.” (emphasis added; citation omitted)). Additionally, phone calls between Koch and Christanell on December 31 confirm Koch’s intent to mark the close on Cheviot stock. Early in the day, Christanell told Koch that the “bid-ask spread for Cheviot was $7.20 to $7.48.” Order, 2014 WL 1998524, at . After learning this, Koch told Christanell to “move it to above 8—8, 8 and a quarter by the end of the day.” Id. (quotation marks omitted). Koch thought the move would be easy because Cheviot stock “trades so little [and] I think you’ll be able to get it up pretty fast.” Id. When Christanell was unable to set the closing price at $8.00, 11 Koch expressed disappointment but told Christanell, “Okay, you did the best you can.” Id. Koch’s trading of Carver stock on December 31 followed the same path. KAM purchased 200 shares of Carver stock, the last of them “one-and-a-half minutes before the market closed.” Id. The evidence before the Commission indicated that KAM’s 200-share purchase was the only time that Carver stock traded that day. In a give-and-take that by now sounds familiar, Christanell informed Koch on December 31 that the spread for Carver stock was $8.10 to $9.05. Koch then told Christanell to “at the end of the day . . . pop that one [i.e., Carver]—to 9.05, if you have to.” Id. at 13 (alterations in original). When Christanell proposed buying 300 shares of Carver stock at $9.05 a share, Koch said, “That’s perfect. Just make sure you get a print.” Id. (Recall, Christanell testified that getting a “print” means getting a stock’s price up for the last trade of the day, supra p. 9.) Before the ALJ, Christanell testified that he purchased Carver stock on December 31 because “[Koch] wanted it to close at $9.05.” Id. (alterations omitted). In the face of this strong evidence that Koch marked the close, Koch claims that the Commission committed three specific errors. We are not convinced. First, Koch claims that the Commission failed to find he had the intent to deceive or manipulate the market. We are puzzled by this claim because the Commission’s order repeatedly made such findings. See id. at  (email is “compelling direct evidence of [Koch’s] intent to mark the close of High Country stock on September 30, 2009”); id. (certain emails “offer strong support for [Koch’s] intent to mark the close of High Country stock on December 31, 2009”); id. at  (“The recorded telephone conversations between 12 Koch and Christanell on December 31, 2009, bolster the already strong evidence of intent.”); id. at  (“[T]elephone conversations are persuasive direct evidence of [Koch’s] intent to mark the close of Cheviot stock on December 31, 2009.”); id. at  (“We find further that [Koch] acted with scienter in [his] purchase of Carver stock in the final minutes of the trading day on December 31, 2009.”). Koch repackages his argument by asserting that the SEC presumed manipulative intent based solely on the fact that he raised each stock’s price. Not true. As discussed, supra pp. 8–11, the Commission examined trading data, emails and phone calls on September 30 and December 31 to determine whether Koch intended to mark the close. The Commission’s exhaustive review of the record refutes the notion that it applied any conclusive presumption. In fact, the Commission even acknowledged that “some of the trading at issue here, standing alone, [could be seen] as consistent with legitimate attempts to obtain illiquid stocks.” Order, 2014 WL 1998524, at . The Commission’s acknowledgment that some of Koch’s trades appeared legitimate “standing alone” highlights that it applied no conclusive presumption to his case. Second, Koch claims that the Commission ignored evidence that he wanted “the most favorable terms [i.e., prices] reasonably available” for the stocks—“best execution,” in industry-speak. Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 270 (3d Cir. 1998). As the Commission noted, Christanell did testify that he thought the trades “represented best execution.” Order, 2014 WL 1998524, at  n.189 (quotation marks omitted). But the Commission also pointed out that this testimony “cannot be squared fully with [Christanell’s] testimony that these trades were different from typical trading because they did not involve trying to purchase [stocks] at the best price we can.” 13 Id. (quotation marks and alteration omitted). Moreover, Christanell’s understanding of best execution cannot override the abundant direct and circumstantial evidence of Koch’s manipulative intent. See supra pp. 8–11. The trading data, emails and recorded phone conversations demonstrate that Koch intended to raise the price of securities before the market closed—an intent that is inconsistent with a desire to seek best execution. 2 Third, Koch claims he could not be liable under the Exchange Act and the Advisers Act unless the Commission found that his trades had a “market impact.” Pet’r’s Br. 46. Koch’s only authority for this proposition is Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 476 (1977). But Santa Fe says nothing of the sort. All the Court said was that “manipulation” is a “term of art” that refers to practices “intended to mislead investors by artificially affecting market activity.” Id. The Court did not, by this language, require the SEC to prove actual market impact, as opposed to intent to affect the market, before finding liability for manipulative trading practices. Had the Court wished to impose such a requirement, it would have said so clearly. Nevertheless, assuming arguendo that Santa Fe imposes a market impact requirement, it is met here. The entire premise of marking the close is to increase a share’s price to an “artificially high level.” Black, 418 F.3d at 206. That is consistent with the Court’s 2 Koch’s opening brief also claims that the Commission ignored contradictory evidence from three witnesses regarding best execution. Although Koch identifies the three witnesses by name, he does not identify the pages in the record where the contradictory testimony for two of them can be found. And while he explains what he thinks is the contradictory evidence presented by the third witness, Professor Jarrell, we agree with the Commission that his testimony is flawed. See Order, 2014 WL 1998524, at –17. 14 definition of manipulation in Santa Fe, i.e., a practice designed to “artificially affect[] market activity.” 430 U.S. at 476. Accordingly, because there is substantial evidence that Koch marked the close, there is also substantial evidence that he “artificially affect[ed] market activity.” Id.; see also Order, 2014 WL 1998524, at –12 (explaining the inflated prices Koch achieved on September 30 and December 31). Much of Koch’s brief simply takes issue with how the Commission interpreted the evidence before it. The SEC saw a manipulative scheme to mark the close; Koch professes it was an honest attempt to deal with a small and illiquid market. We need not pick between these competing narratives. Although Koch urges us to read the record differently, we may not “supplant the agency’s findings merely by identifying alternative findings that could be supported by substantial evidence.” Arkansas v. Oklahoma, 503 U.S. 91, 113 (1992). As we have remarked many times before, an agency’s conclusion “may be supported by substantial evidence even though a plausible alternative interpretation of the evidence would support a contrary view.” Robinson v. NTSB, 28 F.3d 210, 215 (D.C. Cir. 1994); see also Domestic Sec. v. SEC, 333 F.3d 239, 249 (D.C. Cir. 2003) (“[T]he resolution of conflicting evidence is for the Commission, not the court.”). Consequently, it is the “rare” case in which we conclude that an agency’s decision is not supported by substantial evidence. Rossello ex rel. Rossello v. Astrue, 529 F.3d 1181, 1185 (D.C. Cir. 2008); see also id. (“Substantial-evidence review is highly deferential to the agency fact-finder.”). This case is not one of them. We conclude that the Commission applied the correct legal standard and that there is substantial evidence to support its decision. 15