Court Opinion

ID: 859066
Source: CourtListenerOpinion
Date Created: 2013-04-25 15:25:07.543992+00
Date Added: 2024-06-11T13:22:08.982837
License: Public Domain

United States Court of Appeals
                             For the Eighth Circuit
                         ___________________________

                                 No. 11-3482
                         ___________________________

                              United States of America

                        lllllllllllllllllllll Plaintiff - Appellee

                                           v.

                                  Bryan S. Behrens

                       lllllllllllllllllllll Defendant - Appellant
                                       ____________

                     Appeal from United States District Court
                      for the District of Nebraska - Omaha
                                 ____________

                            Submitted: January 15, 2013
                               Filed: April 25, 2013
                                  ____________

Before RILEY, Chief Judge, COLLOTON and GRUENDER, Circuit Judges.
                              ____________

GRUENDER, Circuit Judge.

      Bryan Behrens pled guilty to one count of securities fraud in violation of 15
U.S.C. §§ 78j(b), 78ff and 17 C.F.R. § 240.10b-5 (“Rule 10b-5”). The district court1
sentenced Behrens to five years’ imprisonment, three years of supervised release, and

      1
      The Honorable Lyle E. Strom, United States District Judge for the District of
Nebraska.
restitution in the amount of $6,841,921.90. Behrens appeals his sentence, arguing
that because he had no knowledge his conduct violated Rule 10b-5, imprisonment is
not a permissible sentencing option. We affirm the district court’s sentence.

                                          I.

       Behrens owned and operated 21st Century Financial Group, Inc., a life
insurance agency and financial investment advising business. He later expanded his
business dealings by becoming the sole owner and operator of National Investments,
Inc. (“NII”). Behrens promoted NII to his clients as a safe and lucrative investment
opportunity. In exchange for their loans to NII, Behrens issued the investors
promissory notes, which indicated the bearer would receive a seven to nine percent
fixed rate of return. However, Behrens did not invest NII’s funds in real estate as
promised. Instead, he effectuated a Ponzi scheme, using investor funds to prop up his
other business interests and support his profligate spending habits. After an SEC
investigation, a federal grand jury returned a twenty-one-count indictment in April
2009.

       Behrens and the Government reached a plea agreement, but it did not include
a provision regarding Behrens’s final sentence. The presentence investigation report
calculated the advisory guidelines imprisonment range as 121-151 months. At the
sentencing hearing, Behrens argued he was ineligible for imprisonment under
§ 78ff(a)’s “no knowledge” defense. Section 78ff(a) imposes criminal liability for
“[w]illful violations” of securities laws or SEC rules or regulations but allows
defendants who prove they had “no knowledge” of the rule or regulation they violated
to avoid imprisonment:

      Any person who willfully violates any provision of this chapter . . . or
      any rule or regulation thereunder . . . shall upon conviction be fined not
      more than $5,000,000, or imprisoned not more than 20 years . . . but no

                                         -2-
      person shall be subject to imprisonment under this section for the
      violation of any rule or regulation if he proves that he had no knowledge
      of such rule or regulation.

       The district court initially ruled that the “no knowledge” defense applies only
to those convicted of violating SEC rules, rather than securities statutes, and because
Behrens had pled guilty to violating the latter (§ 78j(b)), he accordingly could not
take advantage of the “no knowledge” provision. We vacated the district court’s
imposition of sixty months’ imprisonment, holding that individuals who are charged
with violating both § 78j(b) and Rule 10b-5 are still “entitled to assert the no-
knowledge defense to imprisonment at sentencing” because one of the elements of
the conduct proscribed by § 78j(b) is the violation of an SEC rule or regulation.2
United States v. Behrens, 644 F.3d 754, 757 (8th Cir. 2011). We noted that Behrens
bore the “burden of showing no knowledge” and remanded the matter to the district
court for consideration of that question in the first instance. Id.

       On remand, the district court imposed the same sentence. The court found that,
because Behrens “was aware of the verbatim provisions of Rule 10b-5 and that they
proscribed illegal conduct,” he could not meet his burden of proving he had no
knowledge of Rule 10b-5. On appeal, Behrens argues that even if he was aware of
the provisions of Rule 10b-5 as they relate to securities, he can still obtain shelter
under the “no knowledge” defense if he can show that he did not know the
promissory notes he issued through NII constituted securities within the scope of
Rule 10b-5. In effect, Behrens insists he had “no knowledge” of Rule 10b-5 because
he was ignorant of its applicability to his conduct. The Government, in contrast,
interprets the no-knowledge provision as allowing Behrens to avoid prison only if he

      2
       15 U.S.C. § 78j(b) prohibits the “use or employ[ment], in connection with the
purchase or sale of any security[,] . . . [of] any manipulative or deceptive device or
contrivance in contravention of [SEC] rules and regulations.”

                                         -3-
can show by a preponderance of the evidence that he was unaware of Rule 10b-5’s
very existence.

                                          II.

       “As with any question of statutory interpretation, our analysis begins with the
plain language of the statute.” Behrens, 644 F.3d at 755 (quoting United States v.
Jeanpierre, 636 F.3d 416, 425 (8th Cir. 2011)). The level of knowledge referenced
in § 78ff(a)’s “no knowledge” defense to imprisonment is a matter of first impression
for us, but we do not approach this topic upon a blank slate. “Statutory language
must be read in context and a phrase ‘gathers meaning from the words around it.’”
Jones v. United States, 527 U.S. 373, 389 (1999) (quoting Jarecki v. G.D. Searle &
Co., 367 U.S. 303, 307 (1961)). Section 78ff(a) first makes imprisonment a
possibility for “[a]ny person who willfully violates” an SEC rule or regulation but
then carves out a safe harbor for those with “no knowledge of such rule or
regulation.” We have interpreted “willfully violates” in this context as requiring
proof of “the intentional doing of the wrongful acts,” but not as requiring proof that
the defendant knew of a particular securities law or SEC rule prohibiting his actions.
United States v. O’Hagan, 139 F.3d 641, 647 (8th Cir. 1998); accord United States
v. Tarallo, 380 F.3d 1174, 1187 & n.3 (9th Cir. 2004). “A person can willfully
violate an SEC rule even if he does not know of its existence,” so long as “the act be
wrongful under the securities laws” and “the knowingly wrongful act involve a
significant risk of effecting the violation that has occurred.” United States v. Peltz,
433 F.2d 48, 54-55 (2d Cir. 1970). In order for it to be meaningful, then, the “no
knowledge” defense must offer at least some but not all of these willful violators the
added protection of avoiding imprisonment. Cf. Ratzlaf v. United States, 510 U.S.
135, 140-41 (1994) (describing how judges should “hesitate” to treat statutory terms
as surplusage). The question before us concerns the precise scope of this subset.

                                         -4-
       There is some initial appeal to the Government’s plain meaning interpretation
of “no knowledge of such rule or regulation” as requiring a complete absence of
knowledge of the pertinent SEC rule or regulation; in other words, no knowledge of
its very existence. However, language from the Supreme Court’s opinion in United
States v. O’Hagan, 521 U.S. 642 (1997), indicates we should read the no-knowledge
provision more broadly. O’Hagan involved whether trading on misappropriated
information violated Rule 10b-5 because it constituted “deceptive” conduct “in
connection with” securities transactions. Id. at 653. After concluding that such
conduct did violate Rule 10b-5 and therefore could lead to criminal liability under
§ 78ff(a), the O’Hagan Court characterized the “no knowledge” defense as one of
two “sturdy safeguards Congress has provided regarding scienter” for criminal
convictions for securities fraud. Id. at 665. If the “no knowledge” defense to
imprisonment were available only to those who deal in securities with a complete lack
of awareness of the existence of an SEC rule or regulation, it would hardly be a
“sturdy safeguard[] . . . regarding scienter.” As a result, “no knowledge” cannot be
limited, as the Government urges, to no knowledge of the existence of the pertinent
SEC rule or regulation.

       At the same time, there is little support for Behrens’s highly specific
interpretation of “no knowledge” as no knowledge that one’s conduct actually
violates the particular SEC rule he is convicted of transgressing. The meaning of
“willfully violates” in § 78ff(a) is consistent with the traditional principle that
“ignorance of the law is no excuse.” Bryan v. United States, 524 U.S. 184, 193-96
(1998) (rejecting petitioner’s proposed definition of the willfulness requirement in 18
U.S.C. § 924(1)(D) as creating an exception to this traditional rule by “requir[ing]
knowledge of the law”). The “no knowledge” defense, by requiring some level of
regulatory awareness, undeniably departs from this traditional rule; the only question
is how broadly the exception sweeps. We will not “interpolate words into a statute
when the Congress has not seen fit to use such words itself.” Ark. Valley Indus., Inc.
v. Freeman, 415 F.2d 713, 718 (8th Cir. 1969). Section 78ff(a) does not say that

                                         -5-
defendants can avoid imprisonment if they can prove they had no knowledge that
their conduct actually violated the pertinent SEC rule or regulation. If Congress so
intended, it could have chosen to say, for example, that no person shall be imprisoned
“if he proves that he had no knowledge he was violating such rule or regulation.”
Instead, § 78ff(a) simply speaks of “no knowledge of such rule or regulation.”
Therefore, we believe the better reading of the no-knowledge provision is to allow
individuals to avoid a sentence of imprisonment if they can establish that they did not
know the substance of the SEC rule or regulation they allegedly violated, regardless
of whether they understood its particular application to their conduct.

       Our interpretation accords with the majority of other courts to have addressed
the issue. The Ninth Circuit has reviewed a similar challenge to the mens rea
required under the “no knowledge” defense. United States v. Reyes, 577 F.3d 1069,
1080-82 (9th Cir. 2009). After concluding that the jury convicted one of the
defendants of violating Rule 13b2-1, which prohibits the falsification of books and
records, the district court at sentencing had to determine whether the defendant fell
within the purview of the “no knowledge” defense. Id. at 1074. The analogue to the
Government’s suggested interpretation of the no-knowledge provision would have
been to ask whether the defendant was aware of the existence of Rule 13b2-1; the
analogue to Behrens’s suggested interpretation would have been to ask whether the
defendant knew that her conduct violated Rule 13b2-1. In lieu of either approach, the
district court identified the relevant question as “whether [the defendant] has satisfied
her burden of proving by a preponderance that she was unaware of a SEC rule or
regulation prohibiting the falsification of books and records.” Id. at 1081 (quoting
United States v. Jensen, 537 F. Supp. 2d 1069, 1075 (N.D. Cal. 2008)). The Ninth
Circuit confirmed “[t]his was the proper formulation,” id., in effect approving the
interpretation of “no knowledge” we adopt today.3 A defendant seeking to take

      3
       The Reyes court went on to cite United States v. Schwartz, 464 F.2d 499 (2d
Cir. 1972), for the proposition that proof of “no knowledge” “can only mean proof

                                          -6-
advantage of the no-knowledge provision need not prove that he was unaware of the
existence of the SEC rule or regulation he is accused of violating, but it is insufficient
to show that, although he was aware of the substance of a rule, he simply did not
know that it applied to his particular course of conduct. Instead, a defendant will
succeed in establishing the no-knowledge defense if he can show that he had no
knowledge of the substance of the SEC rule or regulation he is convicted of violating.
See also United States v. Johnson, 413 F. App’x 151, 154-55 (11th Cir. 2011)
(affirming imposition of prison sentence where sufficient evidence indicated that the
defendant “was aware of the general substance of the securities laws and regulations”
he had been convicted of violating).

      This rule protects from imprisonment individuals who truly are unaware of the
substance of an SEC rule or regulation, but it does not go so far as to completely

of an ignorance of the substance of the rule, proof that the defendant did not know
that [his or her] conduct was contrary to law.” Reyes, 577 F.3d at 1081 (alteration in
original) (quoting Schwartz, 464 F.2d at 509 n.16). This sentence contains mixed
signals. While the former clause appears to be a straightforward summary of the
“substance rule” we adopt today, the latter clause could be read as advancing
Behrens’s proposed interpretation of the no-knowledge provision. We nonetheless
interpret the Ninth Circuit as adopting the substance rule for two reasons. First, as
described above, the Reyes court specifically approved the district court’s analysis,
which was most closely aligned with the substance rule. Second, this sentence’s
original context indicates that the first clause more accurately reflects the tenor of the
intended rule. Schwartz involved the mens rea required to satisfy the “willfully
violates” requirement of § 78ff(a). The Second Circuit added the aforementioned
sentence to a footnote, lifting it from United States v. Lilley, 291 F. Supp. 989 (S.D.
Tex. 1968). After this remark, the Lilley court went on to explain, “The ‘no
knowledge’ requirement of § 78ff(a) is not met by proof that defendants did not know
that their specific conduct was within the prohibition of the rule,” rather, the critical
question is whether the “defendants were familiar with the import of the rule.” Lilley,
291 F. Supp. at 993. Because “the defendants admitted that they knew securities
fraud was prohibited, which is the substance of Rule 10b-5,” they could be
imprisoned; “[n]o more knowledge [was] required.” Id. at 994.

                                           -7-
vitiate the principle that ignorance of the law is no defense. Behrens asks that we
fully depart from this principle and hold that only those with a specific intent to
violate a particular SEC rule or regulation are eligible for imprisonment. In certain
narrow circumstances, such as when interpreting criminal tax statutes, the Supreme
Court has adopted such a definition of the term “willfully.” See, e.g., Cheek v. United
States, 498 U.S. 192, 200-02 (1991) (holding that willfully “requires the Government
to prove that the law imposed a duty on the defendant, that the defendant knew of this
duty, and that he voluntarily and intentionally violated that duty”). The difference
between the mens rea requirement the Court adopted in Cheek and the one we adopt
today is that under our interpretation of the “no knowledge” defense, a defendant
cannot raise a claimed good faith misunderstanding of the duties imposed on him, so
long as he understands the substance of the SEC rule he was convicted of violating.
To the extent the Court’s heightened mens rea requirement in criminal tax cases is
driven by concerns related to the risks of “convicting individuals engaged in
apparently innocent activity,” Bryan, 524 U.S. at 195, the same fears do not animate
our interpretation of the no-knowledge provision. For the most part, we are not
confronted with “average citizen[s]” who must struggle to understand “the extent of
the duties and obligations imposed by” securities laws. Cf. Cheek, 498 U.S. at 199-
200. Individuals must pass licensing exams in order to lawfully deal in securities and
related products; Behrens himself held four securities licenses (Series 6, 26, 63, and
65). For those laymen who—intentionally or otherwise—dabble in securities and run
afoul of SEC rules or regulations, their rudimentary training would tend not to
provide them with the requisite knowledge of the substance of the regulatory
provisions they violated, therefore protecting them from imprisonment. Behrens’s
interpretation would offer added protection primarily to relatively savvy individuals
who have a baseline understanding of SEC rules and regulations but who claim to
misunderstand some nuanced application of these rules. The purpose of the no-
knowledge provision is certainly to “soften[] the impact of the common-law

                                         -8-
presumption” that “mistake of law is no defense,” cf. id. at 199, but Behrens’s
interpretation deviates too far from this deeply rooted principle.4

      Behrens, therefore, is ineligible for a term of imprisonment if he can prove by
a preponderance of the evidence that he had no knowledge of the substance of Rule
10b-5. We review the district court’s factual findings for clear error. United States
v. Hyatt, 207 F.3d 1036, 1038 (8th Cir. 2000). During the resentencing hearing, the
Government questioned Behrens about each of Rule 10b-5’s subsections.

            Q [Government]. Right. In any event, based on your experience,
      you knew that it was illegal to fraudulently take money from investors
      in connection with the purchase or sale of a security, didn’t you?

             A [Behrens]. Yes.

            Q. You knew that it was illegal to make a misrepresentation of a
      material fact or an omission of a material fact related to the sale or
      purchase of a security, didn’t you?

             A. As it relates to a security, yes.

      4
        “Canons of interpretation ‘are quite often useful in close cases . . . .’” Corley
v. United States, 556 U.S. 303, 325 (2009). One such canon is to interpret a statute
in a way that “will advance [Congress’s] remedy and repress the wrong” Congress
sought to correct. Stevens v. Nave-McCord Mercantile Co., 150 F. 71, 75 (8th Cir.
1906). As other courts have explained, Congress added the no-knowledge provision
to § 78ff(a) out of a “fear that the [SEC] might adopt or amend rules and regulations
without notice, thereby subjecting innocent persons to a harsh criminal penalty.”
Lilley, 291 F. Supp. at 992; accord United States v. Sloan, 399 F. Supp. 982, 984
(S.D.N.Y. 1975). The rule we adopt today continues to “repress the wrong” by
upholding § 78ff(a)’s clear purpose of dealing harshly with those convicted of
securities fraud, but it also advances Congress’s remedy by protecting those who can
prove no knowledge of the substance of the rule or regulation they violated from
serving prison time as a consequence of their misconduct.

                                          -9-
            Q. You know that it was illegal to engage in a course of conduct
      which operates as a fraud or deceit upon a person relating to the
      purchase or sale of a security, didn’t you?

             A. As it relates to securities, yes.

            Q. And you know that—do you know what I’ve just read to you
      is Rule 10b-5?

             A. As it relates to securities.

Based on Behrens’s responses, the district court concluded that Behrens “had
knowledge of the existence of a SEC rule or regulation addressing the illegal conduct
memorialized in the provisions of 10b-5.” His admissions are sufficient to support
the district court’s conclusion that Behrens had knowledge of the substance of Rule
10b-5. See Lilley, 291 F. Supp. at 993-94 (“[D]efendants were familiar with the
import of the rule. . . . [D]efendants admitted that they knew securities fraud was
prohibited, which is the substance of Rule 10b-5. No more knowledge is required.”).
It is of no moment that, as Behrens claims, he did not know NII’s promissory notes
were securities for purposes of Rule 10b-5, because we refuse to go so far as to hold
that Behrens had “no knowledge” so long as he did not know that his specific conduct
actually violated Rule 10b-5. Behrens admitted to knowing the substance of Rule
10b-5, and this removes him from the protection of the no-knowledge provision.

      Because Behrens failed to carry his burden of showing that he had no
knowledge of the substance of Rule 10b-5, we affirm the district court’s sentence of
imprisonment.

                       ______________________________

                                          -10-