Court Opinion

ID: 2977587
Source: CourtListenerOpinion
Date Created: 2015-09-22 18:10:46.768962+00
Date Added: 2024-06-11T15:02:38.093350
License: Public Domain

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION

                                   File Name: 09a0193n.06

                                    Filed: March 11, 2009

                                          No. 08-3377

                         UNITED STATES COURT OF APPEALS
                              FOR THE SIXTH CIRCUIT

JEFFREY L. GIBSON,

       Petitioner,

v.                                                  ON PETITION FOR REVIEW OF AN
                                                    ORDER OF THE SECURITIES AND
SECURITIES AND EXCHANGE                             EXCHANGE COMMISSION
COMMISSION,

       Respondent.

                                          /

BEFORE:       GUY, CLAY, and COOK, Circuit Judges.

       CLAY, Circuit Judge. Jeffrey L. Gibson seeks review of the February 4, 2008 order of

the Securities and Exchange Commission, which affirmed the administrative law judge’s

issuance of a lifetime bar precluding Gibson from associating with any broker or dealer pursuant

to § 15(b) of the Securities Exchange Act of 1934 and from associating with any investment

adviser pursuant to § 203(f) of the Investment Advisers Act of 1940. For the reasons that follow,

we DENY Gibson’s petition for review.

                                       BACKGROUND

       A.     Procedural History
                                           No. 08-3377

       On August 5, 2005, the SEC Division of Enforcement (“the Division”) filed a civil action

against Jeffrey L. Gibson and Investment Property Management, LLC, (“IPM”) in the United

States District Court for the Northern District of Georgia, alleging that Gibson misappropriated

approximately $450,000 of investor funds generated from the sale of limited partnership interests

in American Car Wash Fund, LP.

       On February 9, 2006, Gibson signed a consent agreement, in which he agreed to the entry

of a final judgment holding Gibson and IPM jointly and severally liable for the disgorgement of

$427,701.73 in investor funds. It was agreed that the judgment would impose a civil penalty of

$25,000 pursuant to § 20(d) of the Securities Act of 1933 (“Securities Act”) and § 21(d)(3) of the

Securities Exchange Act of 1934 (“Exchange Act”), and that it would permanently enjoin

Gibson from violating § 17(a) of the Securities Act, 14 U.S.C. 77q(a) (fraud in the offer or sale

of securities); § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) (manipulative and deceptive

devices); Exchange Act Rule 10b-5, 17 C.F.R. 240.10b-5 (fraud in connection with the purchase

or sale of securities); and § 206 of the Investment Advisers Act of 1940 (“Advisers Act”), 15

U.S.C. § 80b-6 (fraud by an investment adviser). The district court entered final judgment

against Gibson in accordance with the terms set forth in the consent agreement.

       On June 5, 2006, the Division filed an order instituting a follow-on administrative

proceeding before the Securities and Exchange Commission, seeking remedial sanctions against

Gibson pursuant to pursuant to § 15(b) of the Exchange Act and § 203(f) of the Advisers Act.1

       1
         This type of administrative proceeding, in which the Division seeks to impose sanctions
after an individual is enjoined from acts involving securities or investment fraud in federal court,

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                                           No. 08-3377

After two pre-hearing conferences, the Division filed a motion for summary disposition, and on

September 22, 2006, an administrative law judge (“ALJ”) granted the Division’s motion,

imposing a lifetime bar precluding Gibson from associating any securities broker, dealer, or

investment adviser. Gibson appealed that decision to a panel of the Securities and Exchange

Commission (“the Commission”), and the Commission affirmed the ALJ’s decision on February

4, 2008.2    Gibson filed a timely notice of appeal, seeking this Court’s review of the

Commission’s judgment.

       B.      Substantive Facts

       In the consent agreement signed by Gibson in the underlying federal court proceedings,

Gibson acknowledged that “the Court’s entry of a permanent injunction may have collateral

consequences” and agreed that “[i]n any disciplinary proceeding before the Commission based

on the entry of the injunction in this action, [he] shall not be permitted to contest the factual

is commonly called a “follow-on” proceeding. Exchange Act §§ 15(b)(6) and 15(b)(c)(4) and
Advisers Act §§ 203(f) and 203(e)(4) authorize the Securities and Exchange Commission to sanction
any person associated with a broker, dealer, or investment advisor who has been enjoined from
“engaging in or continuing any conduct or practice in connection with the purchase or sale of any
security.” 15 U.S.C. §§ 78o(b) and 80b-3.
       2
        The procedural background of this case is somewhat complicated, so we will reiterate and
summarize the relevant proceedings and terminology. The SEC Division of Enforcement (“the
Division”) filed and prosecuted a civil suit in United States District Court. After receiving a
favorable judgment, the Division filed and prosecuted a follow-on administrative proceeding seeking
remedial sanctions in front of an Administrative Law Judge (“ALJ”) of the Securities and Exchange
Commission. The ALJ imposed sanctions, and that decision was appealed to a panel of the
Securities and Exchange Commission (“the Commission”). It is the Commission’s judgment that
is now being considered by this Court. For purposes of clarity, we will use the term “Division”
when referring to the Securities and Exchange Commission in its prosecutorial role and the term
“Commission” when referring to the appellate review panel of the Securities and Exchange
Commission.

                                               -3-
                                           No. 08-3377

allegations of the Complaint [filed in district court] in this action.” (Joint Appendix (“J.A.”) at

58.) As a result, we will take the facts alleged in the aforementioned district court complaint

(“the Complaint”) as true for purposes of our review.

        The Complaint alleged that Gibson, a resident of Tennessee, was a certified financial

planner, a registered representative of a broker-dealer, and part owner of IPM, a limited liability

company. In November 2002, Gibson formed American Car Wash Fund, LP (“ACW”) to buy

and manage coin-operated car-wash operations in northern Georgia. Through IPM, Gibson sold

43 limited-partnership interests in ACW, raising approximately $875,000. Approximately 38 of

the limited partners were also clients of Gibson’s advisory business.

        Gibson provided a private placement memorandum (“PPM”) to prospective investors

which stated that after organizational expenses were satisfied, investors’ funds would be invested

in money market funds or government securities until the funds could be invested in projects.

According to the Complaint, however, almost as soon as Gibson began selling interests in ACW,

he began misappropriating investor funds for his own use. Gibson wrote checks payable to cash

on ACW bank accounts, misappropriating approximately $450,000. The Complaint stated that

Gibson’s actions were contrary to representations made by Gibson and exceeded any payments

to which Gibson and IPM may have been entitled under the PPM. The PPM was never amended

to reflect the actual use of the funds.

        The Complaint alleged that the misappropriations continued up to the time the Complaint

was filed. The Complaint also alleged that subsequent to selling the partnership interests in

ACW, Gibson and IPM sought to “lull investors into believing that their investments [were]

profitable and to conceal the misappropriation of funds” by sending letters to the investors

                                                -4-
                                             No. 08-3377

describing “annualized rates of return, dividends and purchases of various properties,” without

disclosing “the ongoing misuse of proceeds by” Gibson and IPM. (J.A. at 43.)

       After Gibson executed a consent agreement, the district court permanently enjoined

Gibson from violating the antifraud provisions of the securities laws, ordered him to pay a civil

penalty of $25,000 and to disgorge $427,701.73 in misappropriated funds, and enjoined Gibson

and IPM from serving as a general partner or otherwise controlling ACW. Gibson subsequently

liquidated assets purchased with the misappropriated investors’ funds and used the proceeds to

pay the court-ordered civil penalty and disgorgement.

       On June 6, 2006, the Division initiated a follow-on administrative proceeding before the

Securities and Exchange Commission pursuant to Exchange Act § 15(b) and Advisers Act §

203(f). After two pre-hearing conferences, the Division moved for summary disposition pursuant

to Commission Rule of Practice 250, relying on the allegations of the aforementioned district

court Complaint. Gibson filed a response, attaching his own declaration and declarations from

31 ACW investors. Gibson’s declaration stated that he had a clean disciplinary record, that he

cooperated with the Commission’s investigation, and that he paid the fine and disgorgement

ordered by the district court. In each individual investor declaration, the investor indicated that

he or she had reviewed Gibson’s answer to the Complaint, agreed to “approve and ratify” all of

Gibson’s actions with respect to ACW, and wanted Gibson to continue to act on his or her behalf

as investment adviser. (J.A. at 162.) These declarations appear to be preprinted forms that allow

only for the investors’ initials and signatures.

       The ALJ granted the Division’s motion for summary disposition, finding that Gibson had

failed to create a genuine dispute of material fact. After concluding that Gibson’s

                                                   -5-
                                           No. 08-3377

misappropriation of investor funds demonstrated a lack of honesty and judgment which made

him unsuited to function in the securities industry, the ALJ held that the public interest required

that Gibson be barred.

       Gibson appealed the ALJ’s decision to a panel of the Securities and Exchange

Commission (“the Commission”). After discussing the uncontested factual allegations in the

Complaint (which were in turn, taken as true by the ALJ and the Commission) and the relevant

statutory provisions, the Commission concluded that there were significant doubts about

Gibson’s fitness to remain in the securities industry.      The Commission held that the ALJ

correctly concluded that there was no issue with regard to any material fact and that imposing a

lifetime bar against Gibson would serve the public interest. The Commission therefore affirmed

the ALJ’s issuance of a lifetime bar precluding Gibson from associating with any securities

broker, dealer, or investment adviser pursuant to § 15(b) of the Exchange Act and § 203(f) of the

Advisers Act. Gibson now seeks our review of the Commission’s order.

                                         DISCUSSION

I.     The Grant of Summary Disposition

       A.      Standard of Review

       Our review of an order of the Commission is governed by the Administrative Procedure

Act, 5 U.S.C. § 701, et seq. See MFS Sec. Corp. v. SEC, 380 F.3d 611, 617 (2d Cir. 2004). This

Court must affirm if the Commission’s findings of facts are supported by substantial evidence.

Id. We uphold the Commission’s legal conclusions unless they are “‘arbitrary, capricious, an

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                                           No. 08-3377

abuse of discretion, or otherwise not in accordance with law[.]’”        Id. (quoting 5 U.S.C. §

706(2)(A)); see also Seghers v. SEC, 548 F.3d 129, 132 (D.C. Cir. 2008).

       B.      Analysis

       Gibson first argues that the Commission committed reversible error by affirming

summary disposition in the case against him without first holding an evidentiary hearing.

       SEC Rule 201.250 of the Commission’s Rules of Practice (“Rule 250”) provides that a

hearing officer is entitled to “grant the motion for summary disposition if there is no genuine

issue with regard to any material fact and the party making the motion is entitled to a summary

disposition as a matter of law.” 17 C.F.R. § 201.250 (2009).

       Gibson argues that summary disposition of disciplinary cases is normally not appropriate

under Rule 250, and that it was not appropriate here, because there was a genuine issue with

regard to facts that mitigate his misconduct. He cites to the commentary to Rule 250, which

provides as follows:

               Motions for disposition prior to hearing may provide particular
               benefits in regulatory proceedings. Enforcement or disciplinary
               proceedings in which a motion for disposition prior to hearing
               would be appropriate are likely to be less common. Typically,
               enforcement and disciplinary proceedings that reach litigation
               involve genuine disagreement between the parties as to the
               material facts. Where a genuine issue as to material facts clearly
               exists as to an issue, it would be inappropriate for a party to seek
               leave to file a motion for summary disposition or for a hearing
               officer to grant the motion. While partial disposition may be
               appropriate in some cases, a hearing will still often be necessary in
               order to determine a respondent’s state of mind and the need for
               remedial sanctions if liability is found.

                                               -7-
                                            No. 08-3377

17 C.F.R. § 201.250 (2009); accord In re Melvin Mullin, 61 S.E.C. Docket 2517, 1996 WL
281717 (May 17, 1996).

       Gibson’s position is unconvincing for several reasons. First, the Commission has held,

contrary to Gibson’s assertions, that summary disposition is not disfavored in follow-on

disciplinary proceedings. See In re Conrad P. Seghers, 91 SEC Docket 1945, 2007 WL 2790633

(Sept. 26, 2007) (explaining that when a respondent seeks to mitigate his or her misconduct in a

follow-on proceeding involving fraud, summary disposition would be inappropriate only in “rare

circumstances”). As the Division properly notes, this Court has affirmed permanent injunctions

entered on summary judgment. See, e.g., SEC v. George, 426 F.3d 786, 790-91 (6th Cir. 2005);

SEC v. Waco Financial Inc., 751 F.2d 831, 833-34 (6th Cir. 1985).

       Second, as discussed above, Gibson agreed not to dispute the facts alleged in the original

district court Complaint. The Complaint alleged that Gibson misappropriated investor funds of

approximately $450,000, that he misrepresented his actions to investors, and that his conduct was

repeated and ongoing. When the facts underlying Gibson’s relevant misconduct are undisputed, it

stands to reason that there is no genuine issue of fact.

       Third, Exchange Act §§ 15(b)(6) and 15(b)(c)(4) and Advisers Act §§ 203(f) and

203(e)(4) authorize the Commission to sanction any person associated with a broker, dealer, or

investment advisor who has been enjoined from “engaging in or continuing any conduct or

practice in connection with the purchase or sale of any security.” 15 U.S.C. §§ 78o(b) and 80b-3.

Gibson does not dispute that he was associated with a broker-dealer and an investment advisor,

and that the district court enjoined him from engaging in relevant conduct. Consequently, the

                                                  -8-
                                          No. 08-3377

Commission properly determined that the statutory requirements for the imposition of sanctions

were satisfied.

       The only evidence that Gibson submitted on his behalf is evidence that he claims

mitigates his misconduct. As discussed above, in Gibson’s opposition to the motion for summary

disposition, which he filed before the ALJ, Gibson provided his own declaration and declarations

from 31 ACW investors. Gibson’s declaration attested to his prior clean disciplinary record, his

cooperation with the Division’s investigation, and his prompt payment of the civil penalty and

disgorgement. These attestations were not disputed by the Division, and both the ALJ and the

Commission took them as true for purposes of these proceedings.          It was not arbitrary or

capricious for the Commission to find that they did not create a genuine issue of fact as to

whether disciplinary action was warranted. See SEC v. Management Dynamics, Inc., 515 F.2d
801, 807 (2d Cir. 1975) (stating that cessation of illegal activity or disclaimer of an intent to

violate the law in the future are not sufficient to justify the denial of an injunction); SEC v.

Bilzerian, 29 F.3d 689, 695 (D.C. Cir. 1994) (holding that an evidentiary hearing was not required

to issue a permanent injunction despite a party’s assurances that he would not violate securities

laws in the future).

       With respect to the investor declarations submitted by Gibson, each individual declaration

stated that the investor had reviewed Gibson’s answer to the complaint, that the investor ratified

Gibson’s actions, and that the investor wanted Gibson to continue to serve as his or her

investment advisor. Again, the ALJ and the Commission took these declarations as true and

found a bar appropriate notwithstanding the evidence.        We agree with the Commission’s

                                               -9-
                                           No. 08-3377

observation that “it is difficult to see how live testimony regarding the investors’ attitude toward

Gibson would affect the sanctioning determination.” (J.A. at 245.)

       Because the investor declarations, like Gibson’s own declaration, do not create a material

issue of fact, and because Gibson proffered no additional evidence that he hoped to prove at a

hearing, we hold that the Commission did not err in granting the Division’s motion for summary

disposition without requiring a full evidentiary hearing.

II.    Remedial Sanctions

       A.      Standard of Review

       “Unless a gross abuse of discretion on the part of the Commission is shown, the

Commission’s determination of the sanctions necessary to protect the public interest will not be

disturbed.” Armstrong, Jones & Co. v. SEC, 421 F.2d 359, 365 (6th Cir. 1970); see also Lowry v.

SEC, 340 F.3d 501 (8th Cir. 2003) (applying “gross abuse of discretion” standard when reviewing

SEC sanctions); Orkin v. SEC, 31 F.3d 1056, 1066 (11th Cir. 1994) (same). This standard

recognizes that there is a “range of choice within which we will not reverse . . . even if we might

have reached a different decision.” Siebert v. Allen, 506 F.3d 1047, 1049 n.2 (11th Cir. 2009)

(quotation marks and citations omitted).

       The Fifth Circuit’s decision in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), is

recognized as the leading case that establishes the standard courts should use when evaluating

administrative actions involving disciplinary sanctions. See, e.g., Seghers, 548 F.3d at 134;

Lowry 340 F.3d at 504. Under Steadman, a court must consider a number of factors when

imposing disciplinary sanctions: (1) the egregiousness of the defendant’s actions; (2) the isolated

                                                -10-
                                           No. 08-3377

or recurrent nature of the infraction, (3) the degree of scienter involved, (4) the sincerity of the

defendant’s assurances against future violations, (5) the defendant’s recognition of the wrongful

nature of his conduct, and (6) the likelihood that the defendant's occupation will present

opportunities for future violations. 603 F.2d at 1140.

       B.      Analysis

       Gibson argues that, applying the Steadman factors to this case and considering the

substantial mitigating evidence favoring Gibson, a lifetime bar is an excessive disciplinary

sanction that should be reversed.

         We find that the Commission appropriately considered each of the Steadman factors, as

well as the mitigating evidence submitted by Gibson, before affirming the ALJ’s imposition of

remedial sanctions. First, the Commission found that Gibson’s conduct was egregious, because

he misappropriated approximately $450,000 from a group of investors, many of whom were

clients to whom he owed a fiduciary duty, all the while sending the investors “lulling

communications.” The Commission next found that the infractions were recurrent and ongoing

and that they involved several different types of misconduct and a large number of clients. Third,

the Commission found that Gibson’s actions demonstrated a high degree of scienter, that he took

actions to disguise his conduct, and that he failed to discontinue the conduct until the Division

filed a complaint in district court. As to the fourth and fifth factors, the Commission stated that

“[w]hile we do not dispute Gibson’s assertions regarding his acknowledgment of wrongdoing and

his assurances against future misconduct, those assertions do not overcome the other factors that

indicate the gravity of the threat to investors that Gibson would present if he were permitted to

                                               -11-
                                            No. 08-3377

remain in the securities industry.” (J.A. at 241.) Finally, the Commission found that if Gibson

were not barred, he would be presented with further opportunities to engage in misconduct, and

that his breach of fiduciary duty as an investment advisor demonstrated a lack of fitness to remain

in the industry.

        The Commission has held that “the fact that a person has been enjoined from violating

antifraud provisions ‘has especially serious implications for the public interest.’” In re Michael

T. Struder, Exchange Act Rel. No. 50411, 83 SEC Docket 2853, 2861 (Sept. 20, 2004); see also

In re Marshall E. Melton, Advisers Act Rel. No. 2151, 56 SEC Docket 695, 713 (July 25, 2003)

(“Based on our experience enforcing federal securities laws, we believe that ordinarily, and in

absence of evidence to the contrary, it will be in the public interest to . . . suspend or bar from

participation in the securities industry . . . a respondent who is enjoined from violating the

antifraud provisions.”)

        In light of this precedent and the Commission’s analysis of the Steadman factors, we

conclude that the Commission did not grossly abuse its discretion in determining that Gibson’s

lifetime bar was necessary to serve the public interest.

                                          CONCLUSION

      For the reasons stated above, we DENY Gibson’s petition for review.

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