Court Opinion

ID: 867759
Source: CourtListenerOpinion
Date Created: 2013-05-14 14:59:49.33148+00
Date Added: 2024-06-11T15:27:01.071696
License: Public Domain

12-2943-cv
SEC v. Bankosky

                      U NITED S TATES C OURT OF A PPEALS
                           FOR THE S ECOND C IRCUIT

                               August Term 2012

    (Argued:      April 9, 2013                    Decided: May 14, 2013)

                         Docket No. 12-2943-cv

                   S ECURITIES      AND   E XCHANGE C OMMISSION ,

                                                Plaintiff-Appellee,

                                           v.

                              B RENT C. B ANKOSKY ,

                                                Defendant-Appellant,

Before:
                    W ALKER   AND   C HIN , Circuit Judges,
                              AND   R ESTANI , Judge. *

             Appeal from a post-judgment order of the United

States District Court for the Southern District of New York

(Baer, J.), barring defendant-appellant from acting as an

*
     The Honorable Jane A. Restani, of the United States Court
of International Trade, sitting by designation.
officer or director of a public company for ten years,

pursuant to section 21(d)(2) of the Securities Exchange Act

of 1934, 15 U.S.C. § 78u(d)(2).

             A FFIRMED .

                           A LLAN A. C APUTE , Special Counsel to the
                                 Solicitor, for Michael A. Conley,
                                 Deputy General Counsel and Jacob H.
                                 Stillman, Solicitor, Securities and
                                 Exchange Commission, Washington,
                                 D.C., for Plaintiff-Appellee.

                           R OBERT G. H EIM , Meyers & Heim LLP, New
                                 York, New York, for Defendant-
                                 Appellant.

P ER C URIAM :

             In this case, the Securities and Exchange Commission

(the "SEC") accused defendant-appellant Brent C. Bankosky of

engaging in insider trading, in violation of sections 10(b)

and 14(e) of the Securities Exchange Act of 1934 (the

"Exchange Act"), 15 U.S.C. §§ 78j(b), 78n(e), and SEC Rules

10b-5 and 14e-3.           After the entry of a consent judgment, in

which Bankosky neither admitted nor denied the allegations

in the complaint, the SEC moved for an officer and director

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bar pursuant to section 21(d)(2) of the Exchange Act, 15

U.S.C. § 78u(d)(2).   Relying on the factors in SEC v.

Patel, 61 F.3d 137 (2d Cir. 1995), the district court found

Bankosky "unfit" to serve as an officer or director of a

public company and barred him from acting as one for ten

years.   Bankosky appeals from the post-judgment opinion and

order, arguing that the district court erred in balancing

the Patel factors.    We affirm.

                          BACKGROUND

          The parties stipulated in the consent judgment

that the following factual allegations in the complaint are

to be deemed as true solely for the purpose of deciding the

SEC's motion for an officer and director bar:

          From January 2008 until his resignation in May

2011, Bankosky worked for the pharmaceutical company Takeda

Pharmaceuticals International, Inc. ("Takeda"), first as a

director of Global Licensing and Business Development and

then as a senior director.    In these positions, Bankosky

had access to, and did obtain, material non-public

information regarding Takeda's discussions with outside

companies about strategic alliances, mergers, and product

                             - 3 -
acquisitions.   Despite a company policy prohibiting trading

on such inside information, from 2008 to 2011 Bankosky

bought call options in the shares of four companies in

advance of anticipated deal announcements between these

companies and Takeda.   After deals with two of the

companies were publicly announced, Bankosky sold the

options in those companies and realized profits of $63,000.

His option investments in the other two companies netted no

gain.

          On February 9, 2012, the SEC filed this action

below.   The consent judgment was entered March 15, 2012,

imposing a permanent injunction against further violations,

ordering disgorgement of $63,000 plus pre -judgment

interest, and imposing a civil penalty of $63,000.

          On March 30, 2012, the SEC moved for the district

court to bar Bankosky permanently from serving as an

officer or director of any company whose shares are

registered under the Exchange Act.   In support of its

motion, the SEC attached excerpts of Bankosky's sworn

testimony before the SEC and emails that Bankosky sent

while working at Takeda.   In the testimony, Bankosky denied

                            - 4 -
having any knowledge about Takeda's entry into a strategic

global alliance with Cell Genesys before the public

announcement.   But emails referenced in the complaint and

attached as exhibits to the SEC's motion demonstrate that

Bankosky was aware of the confidential negotiations with

Cell Genesys and even worked on the project before it went

public.

          In a May 21, 2012 opinion and order, the district

court evaluated Bankosky's fitness to serve as an officer

or director, applying the six factors set out in SEC v.

Patel, 61 F.3d 137 (2d Cir. 1995).      See SEC v. Bankosky,

No. 12 Civ. 1012, 2012 WL 1849000, at *1-3 (S.D.N.Y. May

21, 2012).   In Bankosky's favor, the district court noted

that his conduct, though "undeniably serious and not

isolated," was not the sort typically considered egregious

and the fact that he was not a repeat offender was

"particularly relevant."   Id. at *2.     On the other hand,

the court made the following findings against him:

Bankosky, though not an officer or director, was "acting in

a corporate or fiduciary capacity . . . where he and his

colleagues were involved in the due diligence and

                            - 5 -
negotiations for deals with other pharmaceutical

companies"; he knowingly engaged in insider trading; his

misleading SEC testimony was particularly troubling; he had

a personal economic stake in the trades; and, given his

continued effort to contest the wrongfulness of his

actions, there were no "assurances against future

misconduct."     Id. at *2-3 (quotation omitted).     Balancing

all of these factors, the court prohibited Bankosky from

acting as an officer or director of any public company for

ten years.     Id. at *4.

            This appeal followed.

                            DISCUSSION

A.   Applicable Law

            The district court has "substantial discretion in

deciding whether to impose a bar to employment in a public

company."    Patel, 61 F.3d at 141.      Accordingly, we review

the district court's issuance of an officer and director

bar for abuse of discretion.     See SEC v. Posner, 16 F.3d

520, 521 (2d Cir. 1994).     Under this standard, "we will

reverse only if we have 'a definite and firm conviction

that the court below committed a clear error of judgment in

                              - 6 -
the conclusion that it reached upon a weighing of the

relevant factors.'"   Anderson v. Beland (In re Am. Express

Fin. Advisors Sec. Litig.), 672 F.3d 113, 129 (2d Cir.

2011) (quoting Silivanch v. Celebrity Cruises, Inc., 333

F.3d 355, 362 (2d Cir. 2003)).

         Section 21(d)(2) of the Exchange Act provides

that:

             the court may prohibit,
             conditionally or unconditionally,
             and permanently or for such period
             of time as it shall determine, any
             person who violated section [10(b)]
             of this title or the rules or
             regulations thereunder from acting
             as an officer or director of any
             issuer that has a class of
             securities registered pursuant to
             section [12] of this title or that
             is required to file reports pursuant
             to section [15(d)] of this title if
             the person's conduct demonstrates
             unfitness to serve as an officer or
             director of any such issuer.

15 U.S.C. § 78u(d)(2).   In SEC v. Patel, we identified six

non-exclusive factors that were "useful in making the

unfitness assessment":

             (1) the egregiousness of the
             underlying securities law violation;
             (2) the defendant's repeat offender
             status; (3) the defendant's role or

                            - 7 -
                position when he engaged in the
                fraud; (4) the defendant's degree of
                scienter; (5) the defendant's
                economic stake in the violation; and
                (6) the likelihood that misconduct
                will recur.

Patel, 61 F.3d at 141 (quotation omitted) (citing Jayne W.

Barnard, When Is a Corporate Executive "Substantially Unfit to

Serve"?, 70 N.C. L. Rev. 1489, 1492-93 (1992)).   We clarified,

however, that these are not "the only factors that may be

taken into account" and that it was not "necessary to apply

all these factors in every case."     Id.

         Patel interpreted an earlier version of section

21(d)(2), which permitted a ban only "'if the person's

conduct demonstrates substantial unfitness to serve as an

officer or director.'"    Id. at 140-41 (emphasis added)

(quoting 15 U.S.C. § 78u(d)(2) (1990)).     In 2002, Congress

replaced "substantial unfitness" with simply "unfitness."

See Sarbanes-Oxley Act of 2002 § 305(a), Pub. L. No. 107 -

204, 116 Stat. 745, 778-79 (2002) (amending 15 U.S.C.

§ 78u(d)(2)).    Although textually this change is ambiguous,

the legislative history demonstrates that Congress's intent

was to lower the threshold of misconduct for which courts

                              - 8 -
may impose director and officer bans.    See S. Rep. No. 107-

205, at 27 (2002), available at 2002 WL 1443523 (explaining

that standard was changed to "unfitness" because

"'substantial unfitness' standard . . . [was] inordinately

high, causing courts to refrain from imposing bars even in

cases of egregious misconduct"); see also SEC v. Levine,

517 F. Supp. 2d 121, 144-45 (D.D.C. 2007), aff'd on other

grounds, 279 F. App'x 6 (D.C. Cir. 2008); Jayne W. Barnard,

Rule 10b-5 and the "Unfitness" Question, 47 Ariz. L. Rev.

9, 20 (2005); Jon Carlson, Note, Securities Fraud, Officer

and Director Bars, and the "Unfitness" Inquiry After

Sarbanes-Oxley, 14 Fordham J. Corp. & Fin. L. 679, 693-94

(2009).    On appeal, although it argues for affirming the

ten-year ban, the SEC contends that the Patel factors are

"no longer applicable" because of the change in the

statute.

B.   Application

           We hold that the district court did not err in

relying on the six Patel factors in this case.     The 2002

Amendment, by lowering the threshold of misconduct required

to impose the officer and director bar, did not undermine

                             - 9 -
the usefulness of the Patel factors, which indicate where

evidence of unfitness might be found in a defendant's

misconduct.   Whatever the contours of the new standard,

"unfitness" is clearly a lower hurdle than "substantial

unfitness."   See S. Rep. No. 107-205, at 27 (2002).     It

necessarily follows that a person who is "substantially

unfit" under the Patel analysis is also "unfit" under the

revised statute.   Thus, the Patel factors are just as

relevant to determining "unfitness" as they were to

determining "substantial unfitness."   See SEC v.

iShopNoMarkup.com, Inc., No. 04-cv-4057, 2012 WL 716928, at

*3 n.2 (E.D.N.Y. Mar. 3, 2012); SEC v. Miller, 744 F. Supp.

2d 1325, 1347 (N.D. Ga. 2010); SEC v. DiBella, No. 3:04-cv-

1342, 2008 WL 6965807, at *9 n.12 (D. Conn. Mar. 13, 2008).

Moreover, the Patel factors are neither mandatory nor

exclusive; a district court may determine that some of

those factors are inapplicable in a particular case and it

may take other relevant factors into account as it

exercises its "substantial discretion" in deciding whether

to impose the bar and, if so, the duration, so long as any

bar imposed is accompanied with some indication of the

                            - 10 -
factual support for each factor that is relied upon.

Patel, 61 F.3d at 141.

         The six Patel factors were derived from a law review

article by Professor Jayne W. Barnard, who, subsequent to the

2002 Amendment, proposed a new set of nine, non-exhaustive

factors to guide the determination of "unfitness":

                 (1) the nature and complexity of the
                 scheme; (2) the defendant's role in the
                 scheme; (3) the use of corporate
                 resources in executing the scheme;
                 (4) the defendant's financial gain (or
                 loss avoidance) from the scheme;
                 (5) the loss to investors and others as
                 a result of the scheme; (6) whether the
                 scheme represents an isolated
                 occurrence or a pattern of misconduct;
                 (7) the defendant's use of stealth and
                 concealment; (8) the defendant's
                 history of business and related
                 misconduct; and (9) the defendant's
                 acknowledgement of wrongdoing and the
                 credibility of his contrition.

Barnard, Rule 10b-5 and the "Unfitness" Question, 47 Ariz. L.

Rev. at 46; see also Patel, 61 F.3d at 141 (citing Barnard, When

Is a Corporate Executive "Substantially Unfit to Serve"?, 70

N.C. L. Rev. at 1492-93).    These nine factors have been

considered in a handful of cases in conjunction with the six

Patel factors.    See, e.g., Miller, 744 F. Supp. 2d at 1347-48;

Levine, 517 F. Supp. 2d at 145.    For the most part, however,

district courts in this and other circuits have continued to

                               - 11 -
rely on the Patel factors for guidance.   See, e.g., SEC v.

Wilde, No. SACV 11-0315, 2012 WL 6621747, at *17 (C.D. Cal. Dec.

17, 2012); SEC v. Metcalf, No. 11 Civ. 493, 2012 WL 5519358, at

*4 (S.D.N.Y. Nov. 13, 2012).

         The SEC, in its brief, opposed the adoption of

Professor Barnard's nine-factor test and, at oral argument,

indicated its preference for the set of factors cited in

Steadman v. SEC, 603 F.2d 1126 (5th Cir. 1979), which are used

to decide the propriety of injunctive relief in light of a

defendant's past violations of the securities laws:

              [1] the egregiousness of the
              defendant's actions, [2] the isolated
              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.

Steadman, 603 F.2d at 1140 (citing SEC v. Blatt, 583 F.2d

1325, 1334 n.29 (5th Cir. 1978)).       But we also read the

Steadman factors, which closely resemble the Patel factors,

as suggestive and non-exclusive indicators of unfitness to

serve as a fiduciary.

                               - 12 -
          Ultimately, we find no "clear error of judgment in

the conclusion that [the district court] reached upon a

weighing of the relevant factors."   In re Am. Express Fin.

Advisors Sec. Litig., 672 F.3d at 129 (quotation omitted).

Apart from the district court's findings, we are also

troubled by the fact that Bankosky was buying call options

in shares of Millennium Pharmaceuticals, Inc., a company

that his employer was in negotiations to acquire.   The call

option purchases could have increased trading demand for

the target company's shares and share price, making the

acquisition bid more costly or even pricing a deal beyond

reach.   This conduct betrays an impulse to place self -

interest ahead of his employer's and its shareholders'

interests and further demonstrates unfitness to serve as a

corporate fiduciary.   Cf. McCrae Assoc., LLC v. Universal

Capital Mgmt., Inc., 746 F. Supp. 2d 389, 400 (D. Conn.

2010) ("The duty of loyalty mandates that the best interest

of the corporation and its shareholders takes precedence

over any interest possessed by a director, officer or

controlling shareholder and not shared by the stockholders

generally.") (quotation and alteration omitted).    In light

                            - 13 -
of the circumstances presented, the district court

reasonably determined that a ten-year ban was warranted.

Hence, it did not abuse its discretion.

                        CONCLUSION

         For the foregoing reasons, the order of the

district court is AFFIRMED.

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