Court Opinion

ID: 70772
Source: CourtListenerOpinion
Date Created: 2010-04-26 07:07:20+00
Date Added: 2024-06-11T08:37:14.914961
License: Public Domain

Case: 09-60435     Document: 00511003345          Page: 1    Date Filed: 01/13/2010

              IN THE UNITED STATES COURT OF APPEALS
                       FOR THE FIFTH CIRCUIT   United States Court of Appeals
                                                                                 Fifth Circuit

                                                                             FILED
                                                                           January 13, 2010
                                     No. 09-60435                      Charles R. Fulbruge III
                                   Summary Calendar                            Clerk

SCOTT B GANN,

                                                   Petitioner
v.

SECURITIES AND EXCHANGE COMMISSION,

                                                   Respondent

                      On Petition for Review of an Order of the
                       Securities and Exchange Commission
                           Admin. Proc. File No. 3-13009

Before KING, STEWART, and HAYNES, Circuit Judges.
PER CURIAM:*
        Petitioner Scott B. Gann seeks review of an order of the Securities and
Exchange      Commission        (“Commission”),       which      imposed     a     permanent
associational bar against him for violating § 10b (“Section 10b”) of the Securities
Exchange Act of 1934 (“the Exchange Act”) and Rule 10b-5 promulgated
thereunder. Gann asserts that the Commission’s order is unsupported by the
record and is an abuse of the Commission’s discretion.                   We find that the

        *
         Pursuant to 5TH CIR . R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR .
R. 47.5.4.
  Case: 09-60435         Document: 00511003345         Page: 2    Date Filed: 01/13/2010

                                        No. 09-60435

Commission’s decision was supported by the record and was not an abuse of
discretion. Accordingly, we AFFIRM.
               I. FACTUAL AND PROCEDURAL BACKGROUND
      The facts of this case have been exhaustively stated in the opinions arising
from the underlying civil enforcement action against Gann. SEC v. Gann, No.
3:05-CV-0063-L, 2008 WL 857633, *1–*8 (N.D. Tex. March 31, 2008), aff’d, 565
F.3d 932, 934–35 (5th Cir. 2009). Here, we recite only those facts that are
necessary to provide a framework for this opinion.
      Gann is a stockbroker, and he was formerly employed in that capacity at
Southwest Securities, Inc. (“SWS”). While at SWS, Gann partnered with a co-
worker, George Fasciano, to engage in market timing trades on behalf of Haidar
Capital Management and Capital Advisor (“HCM”).1
      Before engaging in any trading on behalf of HCM, Gann and Fasciano
conducted extensive research. They contacted various mutual fund companies
to determine their rules regarding market timing. They learned that some fund
companies prohibited market timing trades and that the funds would send
“block notices” prohibiting traders from continuing to engage in such trades if
the trades were in violation of the fund companies’ rules. To circumvent the
mutual funds’ rules and block notices, Gann and Fasciano were told by a fellow
stockbroker at SWS that they would have to fly “under the radar” by using
multiple account and representative numbers; Gann and Fasciano also learned
that HCM employed the same multiple number strategy to “avoid being shut
down” by the mutual funds that prohibited market timing trades.
      After they began trading on HCM’s behalf, Gann and Fasciano received
sixty-nine block notices from thirty-four mutual funds. These block notices,
however, did not stop Gann and Fasciano from continuing to engage in market

      1
          For a discussion on market timing, see our explanation in Gann, 565 F.3d at 934– 35.

                                               2
   Case: 09-60435        Document: 00511003345            Page: 3      Date Filed: 01/13/2010

                                         No. 09-60435

timing trades; instead, Gann and Fasciano employed the number changing
strategy they had learned from HCM and others to continue executing market
timing trades in various mutual funds, even though those funds had prohibited
them from engaging in such trades. Because of their conduct, the Commission
filed a civil enforcement action in federal district court against Gann and
Fasciano, alleging that their actions violated Section 10(b), 15 U.S.C. § 78j(b),
and Rule 10b-5, 17 C.F.R. § 240.10b-5.
       The Commission succeeded in its civil enforcement action against Gann.2
The district court found that Gann’s use of different account and registered
representative numbers were material misstatements designed to deceive the
mutual funds that sought to prevent him from engaging in market timing
trades. Based on its findings, the district court held that Gann violated Section
10b and Rule 10b-5. Gann, 2008 WL 857633 at *12. We affirmed the district
court’s holding and findings of fact.3 Gann, 565 F.3d at 934.
       Based on the civil enforcement action, the Commission brought an
administrative action against Gann in which it sought to bar him under Section
15(b) of the Exchange Act (“Section 15(b)”) and Section 203(f) of the Advisers
Act4 (“Section 203(f)”) from associating with any broker, dealer, or investment
adviser. Finding that Gann was subject to sanction, an Administrative Law
Judge (“ALJ”) issued an order entering a permanent associational bar against
Gann. Gann appealed the ALJ’s decision to the Commission. The Commission

       2
           Fasciano settled with the Commission before trial.
       3
            Because the factual issues in this case were fully litigated and resolved in the district
court, we treat the district court’s findings of fact as conclusive and binding on the parties.
See United States v. Shanbaum, 10 F.3d 305, 311 (5th Cir. 1994) (“Issue preclusion, or
collateral estoppel . . . promotes the interests of judicial economy by treating specific issues
of fact . . . that are validly and necessarily determined between two parties [in a prior action]
as final and conclusive.”).
       4
           Investment Advisers Act of 1940 [15 U.S.C. § 80b-1 et seq.].

                                                 3
   Case: 09-60435    Document: 00511003345      Page: 4   Date Filed: 01/13/2010

                                  No. 09-60435

conducted an independent review and reached the same conclusion as the ALJ.
This appeal followed.
                               II. DISCUSSION
      Gann raises two issues on appeal.        First, whether the Commission’s
decision to permanently bar him from associating with any broker, dealer, or
investment adviser is supported by the record. Second, whether the Commission
abused its discretion by permanently barring him instead of suspending him for
one year. We find that the Commission’s decision to impose a permanent bar
was supported by the record, and we do not reach Gann’s second issue because
he failed to raise it before the Commission.         Accordingly, we affirm the
Commission’s decision.
A. Standard of Review
      We review the Commission’s decision to impose sanctions for an abuse of
discretion. Meadows v. SEC, 119 F.3d 1219, 1224 (5th Cir. 1997) (quoting 5
U.S.C. § 706(2)(A)). We will uphold the Commission’s findings of fact if they are
supported by “substantial evidence.”        15 U.S.C. § 78y(a)(4).   “‘Substantial
evidence is such relevant evidence as a reasonable mind might accept to support
a conclusion. It is more than a mere scintilla [but] less than a preponderance.’”
Meadows, 119 F.3d at 1224 (quoting Ripley v. Chater, 67 F.3d 552, 555 (5th Cir.
1995)). “It is not the function of an appellate court to reweigh the evidence or to
substitute its judgment for that of the Commission.” Id.
B. The Commission’s Findings of Fact
      Gann asserts that the Commission’s findings of fact, which form the basis
of its decision, are not supported by the record and, therefore, the Commission’s
imposition of a permanent bar based on those facts was arbitrary and an abuse
of discretion. Gann challenges the following facts that the Commission found in
support of its decision to impose a permanent associational bar: (1) Gann’s
market timing trades on behalf of HCM were egregious and recurrent violations

                                        4
   Case: 09-60435    Document: 00511003345      Page: 5   Date Filed: 01/13/2010

                                  No. 09-60435

of the law; (2) Gann acted with a high degree of scienter; and (3) Gann’s
continued employment in the securities industry will provide him future
opportunities for violations.    We conclude that these findings of fact are
supported by “substantial evidence” in the record; therefore, they must be
upheld. 15 U.S.C. § 78y(a)(4); Meadows, 119 F.3d at 1224.
      The record supports the finding that Gann’s actions were egregious and
recurrent. Gann received a number of “block notices” that he knew prohibited
him from continuing to engage in market timing trades, but, instead of heeding
those notices, Gann continued to engage in market timing trades and evaded
detection by using different account and representative numbers. Gann, 2008
WL 857633 at *5–8. The record shows that Gann engaged in over one hundred
prohibited trades in at least six different mutual funds after the funds had sent
him “block notices.” Id. These facts show that Gann engaged in numerous and
repeated acts of deception, such that the Commission’s finding that Gann’s
actions were egregious and recurrent is supported by substantial evidence. See
Lowry v. SEC, 340 F.3d 501, 505 (8th Cir. 2003) (finding that a petitioner’s
conduct was egregious when he knowingly engaged in a series of deceptive acts).
      The record also supports the Commission’s finding that Gann acted with
such a “high degree of scienter” as to warrant the imposition of sanctions. To
support the imposition of sanctions, a finding of “intent to deceive, manipulate,
or defraud” or “severe recklessness” is sufficient. Meadows, 119 F.3d at 1228;
Rizek v. SEC, 215 F.3d 157, 162 (1st Cir. 2000); see Southland Sec. Corp. v.
Inspire Ins. Solutions, Inc., 365 F.3d 353, 366 (5th Cir. 2004) (defining scienter
as an “‘intent to deceive, manipulate, or defraud’ or ‘that severe recklessness’ in
which the ‘danger of misleading buyers or sellers is either known to the
defendant or is so obvious that the defendant must have been aware of it.’”
(quoting Broad v. Rockwell Int’l Corp., 642 F.2d 929, 961–62 (5th Cir. 1981))).
The issue of Gann’s scienter was fully litigated in the civil enforcement action

                                        5
   Case: 09-60435     Document: 00511003345       Page: 6    Date Filed: 01/13/2010

                                   No. 09-60435

brought against him, and, in that action, the district court found that Gann
acted with “the intent to deceive or defraud the mutual funds with which he
traded on behalf of HCM.” Gann, 2008 WL 857633 at *11.
      As Gann acknowledges, the district court’s finding is binding on the
parties. However, he argues that the district court found only “scienter” and not
its “degree.” He also argues that our prior holding that the evidence in support
of scienter and that opposing it were in “equipoise” requires a conclusion that
there was not a “high” degree of scienter. See Gann, 565 F.3d at 939. The
district   court    found   that   Gann       engaged   in   intentional,   knowing
misrepresentations that occurred over several months and included numerous
trades. These facts are sufficient to support a finding that Gann acted with a
“high degree of scienter.” Our statement about the amount of evidence on each
side was followed by the conclusion that the credibility of that evidence was for
the trier of fact. Thus, while there might have been equal amounts of evidence,
they were not equally credible or compelling. We conclude that substantial
evidence supports the Commission’s finding of a “high degree of scienter.”
      The Commission’s finding that Gann’s continued employment in the
securities industry will provide opportunities for future violations is also
supported by the record. See also Gann, 565 F.3d at 940 (“The question is
whether his job provides opportunities for future infractions. Gann is still a
stockbroker, so whether or not he trades mutual funds, his job certainly permits
him the opportunity to do so.”). The record shows that Gann continues to be
employed as a stockbroker and that his job affords him the opportunity to trade
mutual funds. It is also noteworthy that, despite two courts and the Commission
finding that Gann acted wrongfully, he still contends he did nothing wrong. The
Commission could certainly weigh this myopia about his own behavior as a
factor against Gann – if he doesn’t know right from wrong in this industry, how
can he avoid wrongdoing in the future? The Commission’s finding that Gann’s

                                          6
   Case: 09-60435       Document: 00511003345           Page: 7     Date Filed: 01/13/2010

                                        No. 09-60435

continued employment will present opportunities for future violations is
                                           5
supported by substantial evidence.
       Because a review of the record shows that the Commission’s findings of
fact are supported by “substantial evidence,” we find that the Commission’s
decision to impose permanent bar based on its findings was not arbitrary or an
abuse of discretion.
C. The Commission’s Choice of Sanction
       Gann also appeals the Commission’s choice of a permanent associational
bar instead of a twelve-month suspension. We may not consider an “objection
to an order . . . of the Commission . . . unless it was urged before the
Commission.” 15 U.S.C. § 78y(c)(1) (emphasis added). Gann never argued in the
administrative proceedings below that a twelve-month suspension should be
imposed in lieu of a permanent associational bar. As a consequence, we cannot
consider this issue.6 See MFS Securities Corp. v. SEC, 380 F.3d 611, 620–21 (2d
Cir. 2004) (finding that the court could not consider an argument that the
petitioner did not raise before the Commission); Geiger v. SEC, 363 F.3d 481, 488

       5
          Although the record shows that Gann’s continued employment will provide him
future opportunities to violate the law, Gann makes numerous assurances that he will not
violate the law in the future. To lend credibility to his assurances, Gann cites to the fact that
he has not committed another violation since he stopped trading mutual funds for HCM, that
he has no intention of ever trading mutual funds again, and that he is willing to forgo his
Series 65 license, which allows him to trade mutual funds. The Commission could and did
weigh these facts in Gann’s favor, but it ultimately found these facts unpersuasive because of
Gann’s continuing refusal to admit that he did anything wrong. Our job is not to reweigh the
evidence. Meadows, 119 F.3d at 1224. As stated earlier, we will only overturn the
Commission’s decision if we find that it abused its discretion, and these facts do not show that
the Commission abused its discretion in concluding that Gann’s continued employment in the
field provides opportunities for future violations.
       6
           Before the Commission, Gann only argued that the ALJ’s findings of fact and
conclusions did not support the imposition of a permanent associational bar. He never argued
that the ALJ’s findings of fact and conclusion supported the imposition of a lesser sanction.
While Gann’s failure to raise this argument could be excused if “there was a reasonable ground
for [his] failure to do so,” Gann has not shown such grounds. 15 U.S.C. § 78y(c)(1).

                                               7
   Case: 09-60435   Document: 00511003345     Page: 8    Date Filed: 01/13/2010

                                 No. 09-60435

(D.C. Cir. 2004) (finding that “Geiger waived the argument by failing to raise it
before the Commission”); C.E. Carlson, Inc. v. SEC, 859 F.2d 1429, 1439
(“Moreover, in fairness to the SEC, petitioners should not be heard to offer this
new theory on appeal [when] such concerns could have been addressed below.”).
      AFFIRMED.

                                       8