Court Opinion

ID: 801222
Source: CourtListenerOpinion
Date Created: 2012-05-30 18:27:07+00
Date Added: 2024-06-11T17:59:59.377252
License: Public Domain

[PUBLISH]

                  IN THE UNITED STATES COURT OF APPEALS

                             FOR THE ELEVENTH CIRCUIT           FILED
                              ________________________ U.S. COURT OF APPEALS
                                                                          ELEVENTH CIRCUIT
                                                                             MAY 29, 2012
                                      No. 11-12059
                                                                              JOHN LEY
                                ________________________
                                                                               CLERK

                       D.C. Docket No. 6:08-cv-00829-MSS-KRS

SECURITIES & EXCHANGE COMMISSION,

                                                                     Plaintiff-Appellee,

                                              versus

RICHARD L. GOBLE,

                                                                     Defendant-Appellant.

                                ________________________

                       Appeal from the United States District Court
                           for the Middle District of Florida
                             ________________________
                                     (May 29, 2012)

Before MARCUS, COX and SILER*, Circuit Judges.

COX, Circuit Judge:

       The Securities and Exchange Commission (“SEC”) brought this civil

enforcement action against Richard L. Goble after he orchestrated a plan to

       *
        Honorable Eugene E. Siler, Jr., United States Circuit Judge for the Sixth Circuit, sitting by
designation.
manipulate the amount of money his company was required to set aside to safeguard

customer assets. The district court conducted a five-day bench trial to consider the

SEC’s claims. The court found Goble liable for committing securities fraud in

violation of § 10(b) of the Securities and Exchange Act of 1934 (the “Exchange

Act”), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. The court also

found that Goble aided and abetted violations of the Customer Protection Rule, 15

U.S.C. § 78o(c)(3); 17 C.F.R. § 240.15c3-3, and the books and records requirements

of the Exchange Act, 15 U.S.C. § 78q(a); 17 C.F.R. § 240.17a-3. According to the

court, Goble directed one of his employees to record a fake purchase of a money

market fund in his company’s books. And each of Goble’s violations arose out of this

single sham transaction. The court enjoined Goble from future violations of the

securities laws and permanently restrained him from seeking a securities license or

engaging in the securities business.

      On appeal, Goble challenges the district court’s holding on liability and the

propriety of the resulting injunction. He argues that the district court erred by

concluding that he committed § 10(b) securities fraud. If we reverse this securities

fraud count, Goble believes his aiding and abetting violations must be reversed as

well. After reviewing the record and having the benefit of oral argument, we agree

with Goble that the facts as found by the district court do not support securities fraud

                                           2
liability and we reverse the court’s judgment on this claim. However, it is also clear

from the district court’s factual findings that Goble aided and abetted violations of

the Exchange Act, so we affirm the judgment finding liability on these counts. Since

we reverse the court’s finding of securities fraud, we vacate the portion of the

injunction restraining Goble from violating § 10(b) of the Exchange Act and Rule

10b-5. We also vacate the injunction barring Goble from the securities business for

life. Goble contends that the remaining portions of the injunction are impermissible

“obey-the-law” commands. We agree in part and vacate these paragraphs of the

injunction for the reasons hereinafter set forth.

                                 I. BACKGROUND

      Goble founded North American Clearing, Inc. (“North American”), a securities

and clearing brokerage firm, in 1995. While he had no officially designated

regulatory or supervisory responsibilities at North American, he sat on the

corporation’s board of directors, actively participated in North American’s day-to-day

operations, and in effect controlled a 100% interest in the company. Clearing firms

like North American process trades for smaller and less capitalized brokers and

dealers. At the time the SEC filed its complaint, North American acted as the clearing

firm for about forty small brokerage firms and cleared transactions for more than

10,000 customer accounts valued at more than $500 million.

                                           3
      A variety of SEC regulations governed North American’s operations. Central

to this case is the Customer Protection Rule. This Rule is designed to protect broker-

dealer customers in the event the brokerage firm becomes insolvent. It requires that

brokerage firms establish a separate Reserve Bank Account (“Reserve Account”) to

hold an amount of cash adequate to reimburse customers if the firm fails.

17 C.F.R. § 240.15c3-3(e)(1). The Rule also dictates that firms use the regulation’s

Reserve Formula to calculate the balance they must maintain in the Reserve Account.

Id.

      The specifics of the Reserve Formula are fairly arcane, but its operation is

straightforward. On a weekly basis, firms must balance customer credits against

customer debits. 17 C.F.R. § 240.15c3-3(e)(3). Subject to some adjustments, the

Rule requires that firms hold an amount equal to the excess of credits over debits in

the Reserve Account. 17 C.F.R. § 240.15c3-3a. As defined by the regulations,

“customer credits” captures the amount the firm owes its customers while “customer

debits” refers to amounts the customers owe the firm. If, after the firm makes the

reserve computation, it discovers that the Reserve Account balance is higher than the

amount required by the Reserve Formula, the firm may make a withdrawal from the

Reserve Account. 17 C.F.R. § 240.15c3-3(g).

                                          4
       During late 2007 and early 2008, North American faced declining revenues,

and it struggled to meet its operating expenses and make the required contributions

to the Reserve Account. To make up for the shortfall, North American drew on an

existing loan secured by customer securities.              Because customer securities

collateralized the loan, however, the Reserve Formula dictated that North American

deposit more money into the Reserve Account when it increased the loan balance.

Thus, drawing on the loan only exacerbated North American’s cash flow problem.

       In March of 2008, the Financial Industry Regulatory Authority, Inc. (“FINRA”)

began an on-site audit of North American and remained there as the events

precipitating this case transpired. During the audit, FINRA examiners uncovered

irregularities in North American’s reserve computations. Timothy Ward,1 North

American’s Chief Financial Officer who had responsibility for North American’s

financial reporting and preparing the weekly reserve computation, characterized these

irregularities as the result of his own mistakes and miscalculations. The examiners

helped Ward correct these mistakes, and they remained on-site conducting regular

reviews of North American’s books and records.

       1
         The SEC’s complaint charged Ward and Goble as codefendants. Prior to trial, however,
Ward settled with the SEC. He testified as a witness for the SEC at Goble’s trial.

                                             5
       By May of 2008, the cash flow problem at North American was severe. On

May 13, Goble sought a $5 million unsecured loan to rectify the firm’s negative

financial spiral. When Goble was unable to procure the loan, he directed Ward to

record a $5 million money market purchase in North American’s books. But no such

purchase had been made. The purpose of this sham transaction was to make it appear

on paper that North American could withdraw money from the Reserve Account.

Had there been a real purchase of money market funds, it would have decreased the

amount of the required balance in the Reserve Account. The day after Ward recorded

the sham purchase he made an interim reserve calculation using the faulty numbers

created by the sham transaction. This computation showed that North American

could withdraw $3.4 million from the Reserve Account. Bruce Blatman2 (North

American’s President and CEO) and Goble signed a wire request to move $3.4

million from the Reserve Account into North American’s settlement account. After

the funds transferred, the FINRA examiners quickly discovered a discrepancy created

by the sham money market purchase and demanded an explanation.

       As a result, Ward and Blatman discussed the May 13th sham transaction with

the examiners. At the insistence of the examiners, Ward returned the $3.4 million to

       2
           Like Ward, Blatman was also named as a codefendant. He too settled with the SEC and
testified for the SEC at Goble’s trial.

                                              6
the Reserve Account and prepared a revised reserve computation. The revised

computation showed that North American needed to deposit an additional $1.8

million into the Reserve Account. In the following days, it became clear that North

American could not meet the reserve requirement, and Ward and Blatman decided to

wind down North American’s affairs after consultation with FINRA and the SEC.

      A few days later, the SEC filed its complaint in this case against North

American, Bruce Blatman, Timothy Ward, and Richard Goble for violations of the

securities regulations. The complaint alleged that North American violated the

Customer Protection Rule at § 15(c)(3) of the Exchange Act and Rule 15c3-3

thereunder, and that North American violated the Exchange Act’s books and records

requirements at § 17(a) and Rule 17a-3 thereunder. It maintained that Goble,

Blatman, and Ward aided and abetted these violations. The complaint also alleged

that each of the defendants violated the anti-fraud provision at § 10(b) of the

Exchange Act and Rule 10b-5 thereunder.

      The SEC settled with North American, Blatman, and Ward, but the district

court held a five-day bench trial on the claims against Goble. The court concluded

that Goble aided and abetted North American’s Customer Protection Rule and books

and records violations. It also held that Goble’s actions concerning the sham money

market transaction violated § 10(b) of the Exchange Act and Rule 10b-5. The court

                                         7
permanently enjoined Goble from obtaining a securities license or engaging in the

securities business. The injunction also permanently restrained Goble from violating

the Customer Protection Rule, the books and records requirements, § 10(b), and Rule

10b-5. Goble appeals, challenging the court’s decision on liability and the injunction.

                             II. ISSUES ON APPEAL

      Goble raises the following five issues: (1) whether recording the fake money

market purchase in North American’s internal books violates § 10(b) and Rule 10b-5;

(2) whether he can be liable for aiding and abetting North American’s violations of

the Customer Protection Rule and the Exchange Act’s books and records

requirements if there is no underlying securities fraud; (3) whether the district court

abused its discretion by permanently enjoining him from engaging in the securities

business when the SEC did not seek this relief in its complaint; (4) whether the

portions of the injunction restraining him from violating the securities laws are

unenforceable “obey-the-law” commands; and (5) whether the district court should

have drawn an adverse inference against the SEC because of the spoliation of

evidence.

                                 III. DISCUSSION

      A. Section 10(b) Securities Fraud

                                          8
       The district court decided that Goble used the sham money market transaction

to conceal North American’s true financial condition and thereby violated § 10(b) and

Rule 10b-5.3 This determination is a conclusion of law, which we review de novo.4

See Commodity Futures Trading Comm’n v. Levy, 541 F.3d 1102, 1110 (11th Cir.

2008).     “To prove a [§] 10(b) violation, the SEC must show (1) material

misrepresentations or materially misleading omissions, (2) in connection with the

purchase or sale of securities, (3) made with scienter.” SEC v. Merch. Capital, LLC,

483 F.3d 747, 766 (11th Cir. 2007) (citing Aaron v. SEC, 446 U.S. 680, 695, 100 S.

Ct. 1945, 1955 (1980)). Because this is a civil enforcement action brought by the

SEC, reliance, damages, and loss causation are not required elements. See SEC v.

Morgan Keegan & Co., --- F.3d --- , --- , No. 11-13992, 2012 WL 1520895, at *9

(11th Cir. May 2, 2012) (noting that “justifiable reliance” is not an element of an SEC

enforcement action); see also FindWhat Investor Grp. v. FindWhat.com, 658 F.3d
1282, 1295 (11th Cir. 2011) (listing reliance, damages, and loss causation as

       3
            Section 10(b) of the Exchange Act is codified at 15 U.S.C. § 78j(b). Rule 10b-5,
promulgated pursuant to this statutory provision, is codified at 17 C.F.R. § 240.10b-5. The scope
of liability under the two provisions is the same. SEC v. Merch. Capital, LLC, 483 F.3d 747, 766
n.17 (11th Cir. 2007) (citing SEC v. Zandford, 535 U.S. 813, 816 n.1, 122 S. Ct. 1899, 1901 n.1
(2002)). We will use § 10(b) to refer to both the statutory provision and the rule.
       4
          At trial, the SEC also argued that Goble violated § 10(b) by improperly sweeping money
market funds out of customer accounts. The district court decided that the SEC failed to prove this
allegation by a preponderance of the evidence. Before this court, the SEC has only argued that Goble
violated § 10(b) when he directed Ward to record the fake money market fund purchase in North
American’s books. Thus, we consider only whether this conduct violated § 10(b).

                                                 9
additional elements required for a § 10(b) claim by a private plaintiff (quoting

Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1236-37 (11th Cir. 2008))). Goble does

not dispute that he had the requisite scienter to commit securities fraud. Instead, he

maintains that he never made a material misrepresentation or omission in connection

with the purchase or sale of a security.

      1. A “Material Misrepresentation”

      According to the district court, the May 13th sham money market transaction

had the effect of misrepresenting North American’s true financial condition. It gave

“the appearance that the firm was either financially solvent when it was not or even

more solvent than it was.” (R.8-260 at 18.) The court found that reasonable investors

would want to know the truth about their broker-dealer’s financial condition so the

misrepresentation was material.

      Goble claims that the district court’s reasoning misapplies the law on material

misrepresentations. He first notes that a violation of the securities regulations

standing alone cannot form the basis for § 10(b) securities fraud. Then, he maintains

that a material misrepresentation must be disclosed to customers or the public.

Because the May 13th sham money market transaction was only an internal record,

he argues that he never made a public misrepresentation. The SEC responds that a

public misrepresentation was not necessary in this case because reliance by customers

                                           10
or the public is not an element of § 10(b) securities fraud in a civil enforcement

action. It also notes § 10(b) prohibits fraudulent schemes and that the sham

transaction was part of a scheme to defraud FINRA. Finally, the SEC contends that

the false transaction would have been material to investors using North American as

their clearing firm. In other words, the SEC argues that had investors known about

the misrepresentation they may have chosen a different broker-dealer to process their

transactions.

        First, we can easily dispatch the district court’s and SEC’s theory that the sham

transaction would have been material to an investor’s choice of broker-dealers. This

court has said that “[t]he test for materiality in the securities fraud context is ‘whether

a reasonable man would attach importance to the fact misrepresented or omitted in

determining his course of action.’” Merch. Capital, LLC, 483 F.3d at 766 (quoting

SEC v. Carriba Air, 681 F.2d 1318, 1323 (11th Cir. 1982)). We understand this

“course of action” to mean an investment decision—not an individual’s choice of

broker-dealers.5 See id. at 766-72 (determining whether misrepresentations or

        5
           We recognize that in SEC v. Morgan Keegan & Co. we stated that a statement is material
“if there is a ‘substantial likelihood that the disclosure of the omitted fact would have been viewed
by the reasonable investor as having significantly altered the “total mix” of information made
available.’” Morgan Keegan & Co., --- F.3d at ---, 2012 WL 1520895, at *10 (quoting TSC Indus.,
Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S. Ct. 2126, 2132 (1976)). We also explained that
“[t]he role of the materiality inquiry is ‘to filter out essentially useless information that a reasonable
investor would not consider significant, even as part of a larger “mix” of factors to consider in
making his investment decision.’” Id. at ---, at *11 (quoting Basic Inc. v. Levinson, 485 U.S. 224,

                                                   11
omissions would affect decision to purchase interest in limited liability partnerships);

see also SEC v. Pirate Investor LLC, 580 F.3d 233, 240 (4th Cir. 2009) (“[A] fact

stated or omitted is material if there is a substantial likelihood that a reasonable

purchaser or seller of a security (1) would consider the fact important in deciding

whether to buy or sell the security . . . .” (alteration in original) (quoting Longman v.

Food Lion, Inc., 197 F.3d 675, 683 (4th Cir. 1999))); Grossman v. Novell, Inc., 120
F.3d 1112, 1119 (10th Cir. 1997) (“A statement or omission is only material if a

reasonable investor would consider it important in determining whether to buy or sell

stock.” (citations omitted)). We decline the SEC’s invitation to expand our definition

of materiality to capture Goble’s misrepresentation. We hold that a misrepresentation

that would only influence an individual’s choice of broker-dealers cannot form the

basis for § 10(b) securities fraud liability.

       The SEC also highlights that under § 10(b) fraudulent schemes or deceptive

devices may form the basis for liability. See 17 C.F.R. § 240.10b-5(a), (c).6 The

234, 108 S. Ct. 978, 985 (1988)). Thus, the relevant “mix” of information is those facts an investor
would consider when making an investment decision. The “total mix” test for materiality is not
concerned with whether the misrepresentation would alter the mix of information available as the
investor chooses a broker-dealer. Cf. Basic Inc., 485 U.S. at 236, 108 S. Ct. at 986 (considering
materiality of information to the “trading decision of a reasonable investor”).
       6
           Rule 10b-5 states:
                       It shall be unlawful for any person, directly or indirectly, by the use
                of any means or instrumentality of interstate commerce, or of the mails or of
                any facility of any national securities exchange,
                       (a) To employ any device, scheme, or artifice to defraud,

                                                  12
SEC’s portrayal of Goble’s fraudulent scheme has changed throughout this litigation.

In its brief to this court, the SEC writes that Goble engaged in a scheme to defraud

FINRA. Before the district court, the SEC suggested that the sham money market

transaction was part of a scheme to manipulate the Reserve Account and the reserve

computation. (R.14-254 at 126-27.) In essence, the SEC argues that Goble’s

intentional effort to evade the securities regulations was a fraudulent scheme.

However, when the SEC asserts that this scheme was material, it relies on the fact that

an investor would want to know that his or her broker-dealer made improper transfers

from the Reserve Account. As we just explained, this does not meet our test for

materiality. While this information might affect a reasonable investor’s choice of

broker-dealers, it would not affect the underlying investment decision.

       2. “In Connection with the Purchase or Sale of Securities”

       Even if we assume that Goble made a material misrepresentation or omission,

the misrepresentation was not made “in connection with the purchase or sale of

securities.”    The district court found that the May 13th sham money market

                     (b) To make any untrue statement of a material fact or to omit to state
                     a material fact necessary in order to make the statements made, in the
                     light of the circumstances under which they were made, not
                     misleading, or
                     (c) To engage in any act, practice, or course of business which
                     operates or would operate as a fraud or deceit upon any person,
              in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.

                                                13
transaction was not a misrepresentation in connection with the purchase or sale of a

particular security. This followed from the court’s decision that the money market

fund account at issue did not meet the definition of a security under the Exchange

Act.

       Despite finding that the money market fund account was not a security, the

district court concluded that Goble’s sham transaction satisfied the “in connection

with” element based on a “fraud-on-the-market” theory. It held that Goble’s

deception amounted to a fraud on the market because a reasonable investor would

have been interested in North American’s financial troubles. Goble contends that the

district court misapplied the fraud-on-the-market doctrine. We agree. In the context

of a § 10(b) private cause of action, reliance by the plaintiff is an essential element

of the claim. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148,

159, 128 S. Ct. 761, 769 (2008). The fraud-on-the-market doctrine creates a

rebuttable presumption of reliance when a defendant makes misrepresentations

publicly. Id. Thus, the fraud-on-the-market doctrine, at least insofar as that doctrine

is traditionally understood, has no application to this case because this is a civil

enforcement action brought by the SEC, not a private cause of action. The SEC had

to demonstrate a connection between Goble’s misrepresentation and the purchase or

sale of securities, not investor reliance. See Morgan Keegan & Co., --- F.3d at ---,

                                          14
2012 WL 1520895, at *9 (explaining that investor reliance is not an element of an

SEC enforcement action for violations of § 10(b)). Therefore, the fraud-on-the-

market theory does not apply in this case.7

       The SEC maintains that it was unnecessary for the district court to engage in

its fraud-on-the-market analysis. It asserts that “[t]he simplest reason why Goble’s

fraud was in connection with the purchase or sale of securities is that the essential

first step in the scheme was recording fake purchases of $5 million worth of shares

of a money market mutual fund, which is a type of security.” (Appellee’s Br. at 38-

39.) We assume (without deciding) that the SEC has correctly identified the money

market fund as a security and that the district court erred in this regard. Nevertheless,

we hold that Goble’s misrepresentation was not made in connection with the

“purchase or sale” of securities.

       The only “purchase” involved in the May 13th transaction was Goble’s

directing Ward to record a fake purchase in North American’s books. We must

decide whether “purchase or sale” as used in § 10(b) captures this sham transaction.

We note at the outset that the Supreme Court has instructed that § 10(b) and its “in

       7
          The SEC understands the district court’s use of the phrase “fraud on the market” to mean
that a misrepresentation may satisfy the “in connection with” requirement if it would influence an
investor’s decision to buy or sell securities. Even under this theory, however, Goble’s
misrepresentation does not satisfy the “in connection with” requirement because the
misrepresentation would not affect an investment decision.

                                               15
connection with” requirement be construed “flexibly to effectuate its remedial

purposes.” SEC v. Zandford, 535 U.S. 813, 819, 122 S. Ct. 1899, 1903 (2002)

(quoting Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151, 92 S. Ct.
1456, 1471 (1972)) (internal quotation marks omitted).                    Therefore, the term

“purchase” as used in § 10(b) is not limited to “traditional face-to-face commercial

transactions.” Coffee v. Permian Corp., 434 F.2d 383, 385 (5th Cir. 1970) (quoting

Fidelis Corp. v. Litton Indus., Inc., 293 F. Supp. 164, 169-70 (S.D.N.Y. 1968)).8 We

must decide the meaning of “purchase” in the context of § 10(b) and should ask

whether the “alleged conduct is the type of fraudulent behavior which was meant to

be forbidden by the statute and the rule.” SEC v. Nat’l Sec., Inc., 393 U.S. 453, 466-

67, 89 S. Ct. 564, 572 (1969). In some instances a § 10(b) fraud may occur even

without an actual purchase or sale of securities. See Grippo v. Perazzo, 357 F.3d
1218, 1223-24 (11th Cir. 2004).

       First, Goble did not engage in a “purchase” as we understood that term in

Grippo. There, we decided that a broker who accepts payment for securities he never

intends to deliver satisfies the “in connection with the purchase or sale of securities”

requirement. Id. So, we also said that a plaintiff can adequately plead § 10(b) fraud

       8
         In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.1981) (en banc), the Eleventh
Circuit adopted as binding precedent all Fifth Circuit decisions handed down prior to the close of
business on September 30, 1981.

                                                16
without identifying the purchase of any particular security. Id. But, the SEC does not

argue that Goble engaged in the type of conduct at issue in Grippo. He never

accepted payment for a money market fund and then failed to deliver the security to

a customer.

      Nor is the May 13th sham transaction the type of behavior meant to be

forbidden by § 10(b). The SEC has labeled Goble’s plan to make an improper

withdrawal from the Reserve Account as § 10(b) fraud. But, the securities regulations

directly implicated by this conduct are the Customer Protection Rule and books and

records requirements of the Exchange Act, not § 10(b). Section 10(b) was not

intended to protect investors from a broker-dealer’s inaccurate records or an

inadequate reserve fund. Because Goble’s behavior was not the type of conduct

meant to be forbidden by § 10(b), this weighs against finding that Goble’s fake

transaction was a “purchase” under § 10(b).

      Furthermore, the alleged “purchase” did not involve a change of ownership, an

exchange of value, or a promise to purchase a security. And, recording a fake

transaction in North American’s books had no effect on the broader securities market

and would not impact an investor’s decision to purchase a security. In light of all

this, we do not consider the May 13th sham transaction to be a purchase within the

meaning of § 10(b). Therefore, we hold that Goble’s misrepresentation was not made

                                         17
in connection with the purchase or sale of securities. Accordingly, the district court’s

judgment on the securities fraud claim must be reversed both because Goble’s

misrepresentation was not material and because it was not made in connection with

the purchase or sale of securities.

      B. Aiding and Abetting Violations

      The court also found Goble liable for aiding and abetting North American’s

violations of the Customer Protection Rule and the Exchange Act’s books and records

requirements. The Customer Protection Rule directs that a specific balance be

maintained in a segregated account. There is no question North American failed to

maintain the balance required by the Rule. The books and records requirements at

§ 17(a) of the Exchange Act, 15 U.S.C. § 78q(a), and Rule 17a-3, 17 C.F.R.

§ 240.17a-3 thereunder, required North American to maintain accurate records.

Goble does not dispute that North American failed to comply with these regulations.

Instead, he claims that no primary securities fraud violation supports his aiding and

abetting liability. But this argument misses the mark.

      Exchange Act § 20(e), 15 U.S.C. § 78t(e), allows the imposition of aiding and

abetting liability against “any person that knowingly or recklessly provides

substantial assistance to another person in violation of a provision of [the Exchange

Act], or of any rule or regulation issued” thereunder. 15 U.S.C. § 78t(e). Thus, to

                                          18
impose aiding and abetting liability under § 20(e) there must be: (1) a primary

violation of the securities laws; (2) the aider and abettor must have knowledge of the

primary violation; and (3) the aider and abettor must provide substantial assistance

in the commission of the primary violation. See VanCook v. SEC, 653 F.3d 130, 142

(2d Cir. 2011); SEC v. Shanahan, 646 F.3d 536, 547 (8th Cir. 2011). A primary

securities fraud violation is not an element of an aiding and abetting claim.

       There is no question that primary violations of the Customer Protection Rule

and the books and records requirements occurred at North American. And, the

testimony offered at trial supports the district court’s finding that Goble had

knowledge of and assisted these primary violations. Ward testified that Goble

ordered him to enter the sham money market transaction in North American’s books

despite Ward’s counsel that this would violate the regulations. Goble also directed

Ward to complete the interim reserve computation after the sham transaction was on

the books. Based on this interim reserve computation, Goble signed a wire transfer

request to move money out of the reserve account.9 These facts clearly show that

Goble knew his actions surrounding the May 13th sham money market transaction

would violate the books and records requirements and the Customer Protection Rule

       9
         Goble contends that the court could not rely on this wire transfer because of spoliation of
evidence. As we discuss below, we reject Goble’s spoliation claim and the court was entitled to
consider Goble’s signature on the wire transfer.

                                                19
and that he substantially assisted in the violation of these regulations. The district

court did not err by finding him liable for aiding and abetting these violations.

      C. Spoliation of Evidence

      At the SEC’s request a Receiver and a Securities Investor Protection

Corporation (“SIPC”) Trustee were appointed who had control of North American’s

books and records during the wind down of North American’s operations. Goble

alleges that after their appointment, and the district court’s restraining order to

preserve North American’s records, he found twenty-five bags of shredded

documents at North American’s offices. He contends that these destroyed documents

contained evidence that it was a customary business practice for him to sign off on

wire transfers. Because the documents were destroyed, he maintains that spoliation

of evidence occurred and that the district court failed to properly consider this claim.

      “A district court’s decision regarding spoliation sanctions is reviewed for abuse

of discretion.” Eli Lilly & Co. v. Air Express Int’l USA, Inc., 615 F.3d 1305, 1313

(11th Cir. 2010) (citing Harris v. Chapman, 97 F.3d 499, 506 (11th Cir. 1996)).

“[A]n adverse inference is drawn from a party’s failure to preserve evidence only

when the absence of that evidence is predicated on bad faith.” Bashir v. Amtrak, 119
F.3d 929, 931 (11th Cir. 1997) (citing Vick v. Tex. Emp’t Comm’n, 514 F.2d 734, 737

(5th Cir. 1975)). Goble has presented no evidence that the SEC destroyed the

                                          20
documents contained in the bags or made intentional efforts to withhold evidence at

trial. Because Goble did not demonstrate that the missing evidence resulted from the

SEC’s bad faith, we hold that the district court did not abuse its discretion by

rejecting Goble’s spoliation claim.

      D. Injunction

      The district court entered an injunction permanently barring Goble from the

securities business and enjoining him from violating the securities laws. Goble

challenges each of these restraints. “Our review is for an abuse of discretion, which

occurs when ‘the district court has made a clear error of judgment or has applied an

incorrect legal standard.’” SEC v. Ginsburg, 362 F.3d 1292, 1304 (11th Cir. 2004)

(quoting Doe v. Chiles, 136 F.3d 709, 713 (11th Cir. 1998)). We have explained that

the SEC is entitled to an injunction if it can show a “reasonable likelihood” that the

defendant will violate the securities laws in the future. Id. (citing Carriba Air, Inc.,
681 F.2d at 1322). We consider six factors when making this determination: “the

egregiousness of the defendant’s actions, the isolated or recurrent nature of the

infraction, the degree of scienter involved, the sincerity of the defendant’s assurances

against future violations, the defendant’s recognition of the wrongful nature of his

conduct, and the likelihood that the defendant’s occupation will present opportunities

                                          21
for future violations.” Id. (quoting Carriba Air, Inc., 681 F.2d at 1322) (internal

quotation marks omitted).

      1. Lifetime Bar from Securities Business

      Goble argues that the district court abused its discretion by restraining him

from acquiring a securities license or engaging in the securities business because the

SEC did not seek this relief either in its complaint or in the pretrial statement. This

argument is unavailing. Federal Rule of Civil Procedure 54(c) states specifically that

except in cases of default, a “final judgment should grant the relief to which each

party is entitled, even if the party has not demanded that relief in its pleadings.” Fed.

R. Civ. P. 54(c) (emphasis added). While a limitation on this broad discretion may

exist “where the failure to demand the relief granted prejudiced the opposing party,”

Int’l Harvester Credit Corp. v. E. Coast Truck, 547 F.2d 888, 891 (5th Cir. 1977)

(citing Sapp v. Renfroe, 511 F.2d 172, 176 n.3 (5th Cir. 1975)), we need not resolve

whether Goble was prejudiced by the SEC’s failure to request the lifetime bar because

we vacate this portion of the injunction. We vacate the district court’s entry of this

part of the injunction because the court relied on its conclusion that Goble committed

securities fraud when granting the disbarment. We remand to the district court to

consider in the first instance whether Goble’s aiding and abetting violations standing

alone warrant the lifetime bar when it applies the “reasonable likelihood” factors we

                                           22
announced in Ginsburg. The court should afford Goble an opportunity to be heard

on the propriety of this relief given that the SEC failed to request it.

      2. Injunction Against Violations of the Securities Laws

      The district court also restrained Goble from violating §§ 10(b), 15(c)(3), and

17(a) of the Exchange Act and the regulations promulgated pursuant to these statutes.

Goble contends that these portions of the injunction must be vacated because they are

impermissible “obey-the-law” commands, which violate Rule 65(d) of the Federal

Rules of Civil Procedure. Before reaching this issue, we first vacate the portion of

the court’s injunction restraining Goble from future violations of § 10(b) and Rule

10b-5. We have reversed the court’s judgment that Goble violated these provisions

and “an injunction based upon an erroneous conclusion of law is invalid.” Hughey

v. JMS Dev. Corp., 78 F.3d 1523, 1531 (11th Cir. 1996) (citing United States v.

Jefferson Cnty., 720 F.2d 1511, 1520 n.21 (11th Cir. 1983)).

      That leaves for our consideration the restraints against violating §§ 15(c)(3)

and 17(a) and the accompanying regulations. We must decide whether an injunction

that only uses the language of the securities statutes satisfies Rule 65(d). Given the

importance of the text of the injunction to our analysis, we lay it out in toto. The

district court enjoined Goble as follows:

                                            23
             Section 15(c)(3) of the Exchange Act and Rule 15c3-3.
      Defendant Goble is PERMANENTLY RESTRAINED AND
      ENJOINED from directly or indirectly (by use of any means or
      instrumentality of interstate commerce or of the mails) effecting
      transactions in, or inducing or attempting to induce the purchase or sale
      of, securities while in contravention of customer protection Rule 15c3-3,
      which requires a broker-dealer to maintain a customer reserve account
      with deposits in the amount computed in accordance with Rule 15c3-3a,
      in violation of Section 15(c)(3) of the Exchange Act (15 U.S.C. §
      78o(c)(3)) and Rule 15c3-3 (17 C.F.R. § 240.17a-3).
             Section 17(a) of the Exchange Act and Rule 17a-3. Defendant
      Goble is PERMANENTLY RESTRAINED AND ENJOINED from
      directly or indirectly failing to make and keep current accurate books
      and records relating to the securities business of North American or any
      securities firm in violation of Section 17(a) of the Exchange Act (15
      U.S.C. § 78q(a)) and Rule 17a-3 (17 C.F.R. § 240.17a-3).

(R.8-261 at 2.)

      Goble correctly identifies these paragraphs as an “obey-the-law” injunction and

is rightly skeptical of their validity. As the name implies, an obey-the-law injunction

does little more than order the defendant to obey the law. We have repeatedly

questioned the enforceability of obey-the-law injunctions not only in the context of

securities cases but other cases as well. See, e.g., Burton v. City of Belle Glade, 178
F.3d 1175, 1201 (11th Cir. 1999) (stating that injunction which only instructed

defendant to “obey the law” would not satisfy the specificity requirements of Rule

65(d)); Hughey, 78 F.3d at 1531(“[A]ppellate courts will not countenance injunctions

that merely require someone to ‘obey the law.’” (citing Payne v. Travenol Labs., Inc.,

                                          24
565 F.2d 895, 897-98 (5th Cir. 1974))). Most notably, in SEC v. Smyth, 420 F.3d
1225, 1233 n.14 (11th Cir. 2005), we went out of our way to condemn these

injunctions because they lack specificity and deprive defendants of the procedural

protections that would ordinarily accompany a future charge of a violation of the

securities laws.10

       The SEC apparently recognizes that the district court’s injunction does little

more than order Goble to obey the law. Nonetheless, it maintains that in the context

of violations of securities regulations an injunction that uses the statutory language

is permissible. It raises three arguments to support this position. First, the SEC

points to the Exchange Act itself which states:

            Whenever it shall appear to the Commission that any person is
            engaged or is about to engage in acts or practices constituting a
            violation of any provision of this chapter, [or] the rules or regulations
            thereunder, . . . it may in its discretion bring an action in the proper
            district court of the United States . . . to enjoin such acts or practices,
            and upon a proper showing a permanent or temporary injunction or
            restraining order shall be granted without bond.

15 U.S.C. § 78u(d)(1). It also relies upon the next subsection, which gives the district

courts jurisdiction to issue injunctions commanding any person to comply with the

       10
            For example, if the SEC suspects that the defendant has violated the obey-the-law
injunction it may initiate a criminal contempt proceeding. And, at this proceeding, the defendant has
no right to a trial by jury so long as the sentence imposed is less than six months. See Frank v.
United States, 395 U.S. 147, 150, 89 S. Ct. 1503, 1506 (1969).

                                                 25
provisions of the Exchange Act. 15 U.S.C. § 78u(e). Second, the SEC rests on our

decision in SEC v. Carriba Air, Inc., 681 F.2d 1318 (11th Cir. 1982), where we said

that “Congress specifically authorized an injunction to issue to prohibit the violation

of the securities laws.” Id. at 1321. Finally, the SEC says that injunctions sought by

government agencies may be of greater breadth than those sought by private litigants.

      Glaringly absent from the SEC’s brief is any discussion explaining why the

district court’s injunction complied with the requirements of Rule 65. Rule 65(d)(1)

states that “Every order granting an injunction and every restraining order must: (A)

state the reasons why it issued; (B) state its terms specifically; and (C) describe in

reasonable detail—and not by referring to the complaint or other document—the act

or acts restrained or required.” Fed. R. Civ. P. 65(d)(1). We have never said that a

court may simply ignore these requirements because it is entering an injunction in a

securities case. While we upheld an injunction in Carriba Air that largely copied the

language of the securities laws, we did not discuss whether the injunction complied

with Rule 65(d), and the opinion provides no indication that this issue was raised by

the parties.

      As we mentioned in Smyth, one of the primary problems with obey-the-law

injunctions is that they often lack the specificity required by Rule 65(d). As the

Supreme Court has explained, the specificity requirements of Rule 65(d) are

                                          26
“designed to prevent uncertainty and confusion on the part of those faced with

injunctive orders, and to avoid the possible founding of a contempt citation on a

decree too vague to be understood.” Schmidt v. Lessard, 414 U.S. 473, 476, 94 S. Ct.
713, 715 (1974) (citations omitted). An injunction “should clearly let defendant

know what he is ordered to do or not to do. A court order should be phrased in terms

of objective actions, not legal conclusions.” Planetary Motion, Inc. v. Techsplosion,

Inc., 261 F.3d 1188, 1203 (11th Cir. 2001) (quoting John H. Harland Co. v. Clarke

Checks, Inc., 711 F.2d 966, 984-85 (11th Cir. 1983)).            But, “the degree of

particularity required depends on the nature of the subject matter.” Id. at 1204 (citing

McComb v. Jacksonville Paper Co., 336 U.S. 187, 191-92, 69 S. Ct. 497, 499-500

(1949)).

      Essentially, the SEC maintains that when the subject matter is securities an

injunction may simply use the statutory or regulatory language of the securities laws.

We reject the contention that Rule 65(d) provides the district court this discretion in

all circumstances involving an injunction against violations of the securities laws.

But, we also recognize that at times an injunction that orders a defendant to comply

with a statute may be appropriate; Supreme Court precedent dictates this.

      In McComb v. Jacksonville Paper Co., the Supreme Court upheld a decree that

directed the defendants to obey the minimum wage, overtime, and record keeping

                                          27
provisions of the Fair Labor Standards Act. 336 U.S. at 191-95, 69 S. Ct. at 500-01.

The SEC contends that Jacksonville Paper Co. validates the injunction here

(including the portions of the injunction prohibiting violations of § 10(b) and Rule

10b-5). While the decree in Jacksonville Paper Co. may have ordered compliance

with provisions of the Fair Labor Standards Act, see id. at 192, 69 S. Ct. at 500 (“By

its terms [the decree] enjoined any practices which were violations of those statutory

provisions”), the terms of that statute were relatively specific. For example, the

defendant knew the exact wage it was being ordered to pay, it knew the required

overtime pay rate, and it could easily discern the records it was required to keep. In

other words, while the decree enjoined violations of the statute, the terms of the

statute were specific, and the defendant clearly knew what conduct the injunction

addressed.

      The same cannot be said for all orders enjoining violations of the securities

laws. For example, if an injunction simply used the language of § 10(b) of the

Exchange Act or Rule 10b-5, a defendant reading the injunction would have little

guidance on how to conform his conduct to the terms of the injunction. Indeed, that

defendant would need to review hundreds of pages of the Federal Reporters, law

reviews, and treatises before he could begin to grasp the conduct proscribed by

§ 10(b) and in turn the injunction. What’s more, the judicial gloss on § 10(b) is not

                                         28
fixed. In this very case, the SEC took (and the district court accepted) a very

expansive view of the type of conduct prohibited by the statute. This ever-changing

judicial landscape would further complicate a defendant’s efforts to comply with an

injunction that recited the language of § 10(b). While the securities context may be

one where less particularity is required, we reject the SEC’s implied contention that

the injunction need not inform the defendant of precisely what conduct is forbidden.

       The two restrictions before us present a different circumstance from a bare

command to comply with § 10(b). The Customer Protection Rule (at § 15(c)(3) of the

Exchange Act, 15 U.S.C. § 78o(c)(3), and Rule 15c3-3, 17 C.F.R. § 240.15c3-3) is

not vague. The Rule sets forth specific, objective criteria for compliance. Firms

subject to the Rule either have made the required reserve computation and set aside

the required balance in a reserve account or they have not. The same can be said for

§ 17(a) of the Exchange Act, 15 U.S.C. § 78q(a), and Rule 17a-3, 17 C.F.R.

§ 240.17a-3.11 Unlike a restraint on violating § 10(b) and Rule 10b-5, an injunction

forbidding the violation of these provisions is similar to the injunction the Supreme

Court upheld in Jacksonville Paper Co. Like the injunction there, these regulations

contain specific commands and a defendant restrained from violating these commands

       11
           Indeed, in Gulf King Shrimp Co. v. Wirtz, 407 F.2d 508, 517 (5th Cir. 1969), the former
Fifth Circuit found that an injunction which required compliance with the records requirements of
the Fair Labor Standards Act satisfied Rule 65(d).

                                               29
would be able to determine what conduct the injunction addressed. Thus, while these

restraints may be broad in terms of the scope of the conduct captured by the

injunction, the “restrained party [has] fair notice of what conduct will risk contempt.”

Hughey, 78 F.3d at 1531(quoting Epstein Family P’ship v. Kmart Corp., 13 F.3d 762,

771 (3d Cir. 1994)); see also 11A Charles Alan Wright, Arthur R. Miller & Mary Kay

Kane, Federal Practice & Procedure § 2955 (2d ed. 1995) (“Broadness encompasses

the range of activity brought within the parameters of the decree; on the other hand,

a decree is vague when the delineation of the proscribed activity lacks particularity.”).

      Permitting injunctions of some breadth in the context of civil enforcement

actions brought by the SEC is warranted. The Exchange Act grants the district court

broad discretion to enjoin violations of the Act. See 15 U.S.C. § 78u(d)(1). And,

where the public interest is involved, the court’s equitable power has a “broader and

more flexible character.” Commodity Futures Trading Comm’n, 541 F.3d at 1114

(quoting Porter v. Warner Holding Co., 328 U.S. 395, 398, 66 S. Ct. 1086, 1089

(1946)). Therefore, a broad, but properly drafted injunction, which largely uses the

statutory or regulatory language may satisfy the specificity requirement of Rule 65(d)

so long as it clearly lets the defendant know what he is ordered to do or not do.

      What is troubling about the district court’s injunction in this case is that its

restrictions merely cross-reference the relevant statutes and regulations. In other

                                           30
words, the injunctions do not even meet the standard the SEC advocates by

“track[ing] the statutory language.” (Appellee’s Br. at 47.) We have said that “[a]

person enjoined by court order should only be required to look within the four corners

of the injunction to determine what he must do or refrain from doing.” Hughey, 78
F.3d at 1532 n.12. But, we will not apply Rule 65(d) “rigidly,” and we “determine

the propriety of an injunctive order by inquiring into whether the parties subject

thereto understand their obligations under the order.” Planetary Motion, Inc., 261
F.3d at 1203 (citing Williams v. City of Dothan, 818 F.2d 755, 761 (11th Cir. 1987)).

      Plainly, Goble would need to look beyond the four corners of the district

court’s injunction in order to comply with its strictures. The mere cross-reference to

provisions of the United States Code and Code of Federal Regulations does not

specifically describe the acts addressed by the injunction.         And, without a

compendious knowledge of the codes, Goble has no way of understanding his

obligations under the injunction. Accordingly, we vacate these portions of the

injunction and remand for the district court to specifically describe the proscribed

conduct within the four corners of the injunction.

      In sum, we emphasize that an injunction prohibiting violations of the securities

regulations must comply with Rule 65(d). In this case, we recognize that an

injunction enjoining violations of §§ 15(c)(3) and 17(a) of the Exchange Act and

                                         31
Rules 15c3-3 and 17a-3 may comply with Rule 65(d). We do so because these

statutory and regulatory provisions specifically describe the acts required of the

person enjoined.     We also find that given Congress’s authorization to enjoin

violations of the Exchange Act and the fact that this is a civil enforcement action

brought by the SEC, less particularity is required in this context. We caution,

however, that in some instances an injunction which merely tracks the language of

the securities statutes and regulations will not clearly and specifically describe

permissible and impermissible conduct. When copying the statutory language does

not specifically describe the acts restrained, the district court should craft terms that

provide the defendant fair notice of what conduct risks contempt and clearly inform

the defendant of what he is ordered to do or not do.

                                 IV. CONCLUSION

      We affirm the court’s judgment that Goble aided and abetted North American’s

violations of the Customer Protection Rule and books and records requirements of the

Exchange Act. We reverse the court’s conclusion that Goble committed securities

fraud in violation of § 10(b). In light of this reversal, we vacate the portions of the

court’s injunction that bar Goble from procuring a securities license, engaging in the

securities business, or violating § 10(b) or Rule 10b-5. We also vacate the portions

                                           32
of the injunction addressing compliance with §§ 15(c)(3) and 17(a) of the Exchange

Act because these paragraphs simply cross-reference the statutes and regulations.

      We remand to the district court for it to consider in the first instance whether

Goble’s violations of the Customer Protection Rule and books and records

requirements warrant the lifetime bar from the securities business. On remand, the

court should also afford Goble an opportunity to be heard on the propriety of this

relief. And, the court should draft an injunction addressing compliance with

§§ 15(c)(3) and 17(a) that allows Goble to understand his obligations under the

injunction.

      AFFIRMED IN PART; REVERSED IN PART; VACATED AND

REMANDED.

                                         33