United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 18, 2007 Decided January 11, 2008
No. 06-1319
DOLPHIN AND BRADBURY, INCORPORATED AND
ROBERT J. BRADBURY,
PETITIONERS
v.
SECURITIES AND EXCHANGE COMMISSION,
RESPONDENT
On Petition for Review of an Order of the
Securities and Exchange Commission
Philip G. Kircher argued the cause and filed the briefs for
petitioners.
Rada Lynn Potts, Senior Litigation Counsel, Securities &
Exchange Commission, argued the cause for respondent. With
her on the brief were Brian G. Cartwright, General Counsel,
Andrew N. Vollmer, Deputy General Counsel, and Jacob H.
Stillman, Solicitor.
Before: GINSBURG, Chief Judge, and BROWN and GRIFFITH,
Circuit Judges.
Opinion for the court filed by Circuit Judge BROWN.
2
BROWN, Circuit Judge: Dolphin & Bradbury, Inc. and
Robert J. Bradbury petition for review of a Securities and
Exchange Commission order holding them liable for violations
of multiple securities laws. Petitioners claim they lacked the
requisite intent. We disagree and deny the petition for review.
I
Petitioner Dolphin & Bradbury, Inc., a registered broker-
dealer, served as underwriter for the municipal bonds issued by
the Dauphin County General Authority (DCGA) to finance the
purchase of Forum Place, an office building in Harrisburg,
Pennsylvania. Petitioner Robert J. Bradbury is the chairman,
chief executive officer, chief operating officer, and 38% owner
of Dolphin & Bradbury.1
When the bonds were offered in July 1998, the Pennsylva-
nia Department of Transportation (PennDOT) occupied a
substantial portion of Forum Place.2 PennDOT’s lease was
scheduled to (and did) expire in November 2001—well before
the bonds’ maturity dates, which ranged from 2003 to 2025.
PennDOT leased this space because of environmental problems
and fire damage to its own building, but planned to move once
its building was renovated or replaced. Bradbury believed the
move would probably occur around 2001 or 2002.3 The key
1
For convenience, we refer to the petitioners collectively as
“Bradbury.”
2
The Pennsylvania Department of General Services formally held
the lease, but PennDOT occupied the office space. We thus refer to
the lease as “PennDOT’s lease.”
3
We refer to PennDOT’s planned departure—the key fact in this
case—as “the PennDOT information.”
3
participants—Bradbury (underwriter), O’Neill (underwriter’s
counsel), Fowler (DCGA’s financial advisor), and Sweet
(DCGA’s bond counsel)—all had extensive municipal bond
experience, and all except O’Neill knew the PennDOT informa-
tion.
On June 30, 1998, in the run-up to the bond offering, the
Secretary of the Department of General Services told Fowler
and Sweet he expected the state government to use Forum Place
as temporary “swing space” for other state employees after
PennDOT moved, but he made no commitments or guarantees.
Fowler and Sweet informed Bradbury. On July 8, 1998, DCGA
voted to proceed with the bond offering and Forum Place
acquisition. PennDOT’s plans were discussed at this DCGA
meeting, which Bradbury did not attend.
Despite the critical importance of PennDOT’s planned
departure, Bradbury generally failed to disclose this information
to prospective investors.4 Instead, he attempted to assure them
about Forum Place’s future by referring to the state govern-
ment’s swing space needs. The Official Statement—the key
disclosure document—included some disclaimers and caution-
ary language, but it did not disclose that PennDOT actually
planned to leave Forum Place. Moreover, financial projections
prepared by Fowler, reviewed by Bradbury, and provided to
investors assumed the Forum Place leases would continue at the
same lease rates until at least 2008.
When the Forum Place transaction closed on July 31, 1998,
PennDOT’s old building had not been demolished and site
4
Putnam Investments, the only investor to whom Bradbury
disclosed the PennDOT information, still purchased almost $27
million of bonds. The Commission imposed no liability for bonds
sold to Putnam.
4
preparation for the new building had not yet begun. However,
just one day later, PennDOT’s old building was imploded.
Construction began on the new PennDOT building. In late
2000, PennDOT vacated most of its Forum Place space, but
continued to pay rent until its lease expired in November 2001.
By December, 55% of Forum Place lay vacant, and bondholders
forced Forum Place into receivership in 2003.
The ALJ and the Commission found Bradbury violated
various securities laws and regulations by failing to disclose the
central fact of PennDOT’s planned departure. Bradbury
challenges the Commission’s finding that he acted with scienter.
II
A
The Commission found Bradbury violated section 17(a) of
the Securities Act of 1933 (Securities Act), 15 U.S.C. § 77q(a),
as well as section 10(b) of the Securities Exchange Act of 1934
(Exchange Act), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R.
§ 240.10b-5. We have subject matter jurisdiction to review the
Commission’s order pursuant to a “direct-review statute,”
namely, section 9 of the Securities Act and section 25 of the
Exchange Act. See Watts v. SEC, 482 F.3d 501, 505 (D.C. Cir.
2007) (discussing 15 U.S.C. §§ 77i(a), 78y(a)(1)).
“The antifraud provisions of the federal securities laws
prohibit fraudulent or deceptive practices in the offer and sale of
municipal securities.” Disclosure Obligations, Securities Act
Release No. 7049, Exchange Act Release No. 33,741, 56 SEC
Docket 479 (Mar. 9, 1994), 1994 WL 73628, at *5. Rule 10b-5
renders it unlawful for someone in Bradbury’s position “[t]o
make any untrue statement of a material fact or to omit to state
a material fact necessary in order to make the statements made,
5
in light of the circumstances under which they were made, not
misleading.” 17 C.F.R. § 240.10b-5. In this context, an omitted
fact is material if a “reasonable investor” would have viewed it
as “significantly alter[ing] the total mix of information made
available.” Disclosure Obligations, 1994 WL 73628, at *5
(brackets omitted) (quoting TSC Indus. v. Northway, Inc., 426
U.S. 438, 449 (1976)).
Bradbury only disputes whether he acted with scienter, see
SEC v. Steadman, 967 F.2d 636, 641 (D.C. Cir. 1992), which is
a factual determination.5 See Howard v. SEC, 376 F.3d 1136,
1149 (D.C. Cir. 2004); Graham v. SEC, 222 F.3d 994, 1005
(D.C. Cir. 2000). Section 17(a)(1) of the Securities Act, section
10(b) of the Exchange Act, and Rule 10b-5 require proof of
scienter. See Aaron v. SEC, 446 U.S. 680, 697 (1980); Ernst &
Ernst v. Hochfelder, 425 U.S. 185, 193 (1976).
To prove Bradbury acted with scienter, the SEC must
establish “‘an intent to deceive, manipulate, or defraud.’”
Steadman, 967 F.2d at 641 (quoting Aaron, 446 U.S. at 686 n.5).
“[E]xtreme recklessness” can satisfy this scienter requirement.
Id. Extreme recklessness “is not merely a heightened form of
ordinary negligence,” id., and does not involve a “should have
known” standard, see id. at 641–42. Rather, “it is an ‘extreme
departure from the standards of ordinary care . . . which presents
a danger of misleading buyers or sellers that is either known to
the defendant or is so obvious that the actor must have been
aware of it.’” Id. (emphasis added) (quoting Sundstrand Corp.
v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)). It is,
5
The Commission properly found that both petitioners violated
Municipal Securities Rulemaking Board Rule G-17; that Dolphin &
Bradbury violated section 15B(c)(1) of the Exchange Act, 15 U.S.C.
§ 78o-4(c)(1); and that Robert Bradbury aided and abetted Dolphin &
Bradbury’s section 15B(c)(1) violation.
6
in fact, “‘a lesser form of intent,’” id. at 642, implying the
danger was so obvious that the actor was aware of it and
consciously disregarded it.
The Commission’s finding that Bradbury acted with
scienter is conclusive if, under our “very deferential” substantial
evidence standard, Nat’l Ass’n of Sec. Dealers v. SEC, 801 F.2d
1415, 1419 (D.C. Cir. 1986), “a reasonable mind might accept
[the] evidentiary record as adequate to support [the Commis-
sion’s] conclusion,” Dickinson v. Zurko, 527 U.S. 150, 162
(1999) (quotation marks omitted). See Graham, 222 F.3d at 999
(citing 15 U.S.C. § 78y(a)(4)). Because the notion of extreme
recklessness “belies the existence of a bright line test for when
the scienter threshold has been crossed,” 3 THOMAS LEE HAZEN,
THE LAW OF SECURITIES REGULATION § 12.8[3] (5th ed. 2005),
this case requires a fact-intensive inquiry.
B
Bradbury contends the Commission’s scienter finding is not
supported by substantial evidence. We disagree. First,
Bradbury did not disclose PennDOT’s actual plans to move out
of Forum Place. Second, he tries to hide his extreme
recklessness by misstating the role of an underwriter. We
address each point in turn.
(1)
PennDOT’s lease was crucial because PennDOT occupied
79% of Forum Place and generated 60% of its lease revenues,6
and the bonds’ tax-exempt status depended on continuing
6
Forum Place’s revenues were the sole source of bond repayment
funds.
7
occupancy by public agencies such as PennDOT. Bradbury
claims he adequately disclosed the risks of PennDOT leaving
Forum Place. He points to cautionary statements in the offering
documents to show he did not act recklessly. Most significantly,
the Official Statement warned, in boldface capital letters: “The
office leases are scheduled to expire prior to the maturity of the
1998 bonds; there is no commitment, requirement, or guarantee
that the Commonwealth [of Pennsylvania] will renew or extend
any of the office leases.” It also disclosed the square footage
and lease rate of the PennDOT lease and explained “[t]he 1998
Bonds are limited obligations of the Authority and are secured
by and payable solely from the revenues derived from lease
payments and [facilities] fees.”7
But substantial evidence supports the Commission’s
conclusion that Bradbury’s cautionary statements were so
deficient he must have known investors would be misled by the
offering documents. The Commission noted the critical
distinction between disclosing the risk a future event might
occur and disclosing actual knowledge the event will occur.
Bradbury’s cautionary language only disclosed a risk that
tenants might leave Forum Place—not his knowledge that
PennDOT actually planned to do so in the near future.
Bradbury also argues his discussions with investors about the
state government’s swing space needs show he did not act with
scienter. However, this argument again misses the point:
discussing swing space only implies that a tenant might leave
Forum Place—not that the largest tenant actually had plans to
leave.
Bradbury’s “[c]autionary words about future risk cannot
insulate from liability the failure to disclose that the risk” had
7
Bradbury’s counsel (O’Neill) prepared the Official Statement;
Bradbury used it to market the bonds.
8
already “transpired.” Rombach v. Chang, 355 F.3d 164, 173 (2d
Cir. 2004). Bradbury in effect asks us to apply the scienter
standard in a way that would protect “‘someone who warns his
hiking companion to walk slowly because there might be a ditch
ahead when he knows with near certainty that the Grand Canyon
lies one foot away.’” See id. (emphases added) (quoting In re
Prudential Sec. Inc. P’ships Litig., 930 F. Supp. 68, 72
(S.D.N.Y. 1996)). We refuse to do so, especially since
Bradbury’s role as an underwriter is really that of a trail
guide—not a mere hiking companion.
The manifest danger of misleading investors is underscored
by the enormous significance of PennDOT’s planned departure
and the near certainty with which Bradbury knew the departure
would occur. Here, Bradbury knew PennDOT would leave
Forum Place once its new building was completed.
Furthermore, the PennDOT information had enormous
significance because it dramatically affected the tax-exempt
status of the bonds and put the bonds’ repayment at risk.
PennDOT’s planned departure was an unusually important piece
of information, and Bradbury “is an experienced professional
who has an independent duty to use diligence ‘where there are
any unusual factors.’” See Graham, 222 F.3d at 1005 (quoting
Commission decisions).
The financial projections Bradbury used to market the
bonds were flawed because they assumed the PennDOT lease
would continue (or that PennDOT would be replaced by a
similar tenant) through 2008. The projections were so deeply
flawed that Bradbury must have been aware they would mislead
investors. See Eisenberg v. Gagnon, 766 F.2d 770, 775–76 (3d
Cir. 1985) (concluding that financial projections are actionable
under Exchange Act section 10(b) and Rule 10b-5 and
explaining that “[w]hen a representation is made by
professionals or those with greater access to information or
9
having a special relationship to investors making use of the
information, there is an obligation to disclose data indicating
that the opinion or forecast may be doubtful”). Because
Bradbury could not have had a genuine belief in the projections’
completeness and accuracy, his use of them to market the bonds
supports the Commission’s scienter finding.
Bradbury offers two additional reasons that his disclosures
show he did not act with scienter. We reject them both. First,
Bradbury maintains he knew PennDOT planned to depart, but
did not know precisely when. However, Bradbury’s lack of
perfect knowledge did not relieve him of his duty to disclose
those material facts he did know. Second, Bradbury notes the
PennDOT information was technically in the public domain,
partly due to a local newspaper article and a discussion at a
public DCGA meeting. But substantial evidence supports the
Commission’s finding that Bradbury still had a duty to disclose
the PennDOT information, because this information was not
reasonably available to investors. See United Paperworkers
Int’l Union v. Int’l Paper Co., 985 F.2d 1190, 1199 (2d Cir.
1993) (“[S]poradic news reports do[] not give . . . sufficient
notice . . . .”).
(2)
Bradbury attempts to paint his state of mind in a favorable
light by simultaneously understating and overstating his role as
an underwriter. On the one hand, Bradbury understates—and
nearly abdicates—his independent responsibilities, arguing he
escapes liability because nobody told him to disclose the
PennDOT information. On the other hand, he overstates his role
in the process by arrogating the role of an investor in evaluating
material facts and weighing expected risks. We reject both of
these attempts to mischaracterize an underwriter’s role.
10
An underwriter “occupies a vital position” in a securities
offering because investors rely on its reputation, integrity,
independence, and expertise. Municipal Securities Disclosure,
Exchange Act Release No. 26,100, 41 SEC Docket 1131 (Sept.
22, 1988), 1988 WL 999989, at *6, *20–21. “By participating
in an offering, an underwriter makes an implied
recommendation about the securities [that it] . . . has a
reasonable basis for belief in the truthfulness and completeness
of the key representations made in any disclosure documents
used in the offerings.” Id. at *20 (emphasis added); see, e.g.,
Hanly v. SEC, 415 F.2d 589, 596 (2d Cir. 1969) (“A securities
dealer occupies a special relationship to a buyer of securities in
that by his position he implicitly represents he has an adequate
basis for the opinions he renders.”); Disclosure Obligations,
1994 WL 73628, at *17.
An underwriter must investigate and disclose material facts
that are known or “reasonably ascertainable.” Municipal
Securities Disclosure, 1988 WL 999989, at *20 (quoting Hanly,
415 F.2d at 597); cf. SEC v. Dain Rauscher, Inc., 254 F.3d 852,
858 (9th Cir. 2001) (holding an underwriter “had a duty to make
an investigation that would provide him with a reasonable basis
for a belief that the key representations in the statements . . .
were truthful and complete”). Although other broker-dealers
may have the same responsibilities in certain contexts,
underwriters have a “heightened obligation” to ensure adequate
disclosure. Municipal Securities Disclosure, 1988 WL 999989,
at *21 & n.74. Moreover, these duties do not disappear simply
because “customers may be sophisticated and knowledgeable.”
See Hanly, 415 F.2d at 596. Indeed, the doctrine of caveat
emptor has little application in this context. SEC v. Capital
Gains Research Bureau, Inc., 375 U.S. 180, 186 (1963).
Bradbury claims his reliance on his counsel (O’Neill),
DCGA’s bond counsel (Sweet) and financial advisor (Fowler),
11
and the silence of investors negates any scienter finding. He
assumed others would raise any disclosure issues with him.
Substantial evidence supports the Commission’s conclusion that
Bradbury cannot rely on the silence of others to absolve himself
of responsibility when non-disclosure presented such an obvious
danger of misleading investors.8
First, Bradbury failed to disclose the PennDOT information
to O’Neill, who lacked independent knowledge of this
information. Although reliance on counsel is “a relevant
consideration in evaluating a defendant’s scienter,” Howard v.
SEC, 376 F.3d 1136, 1147 (D.C. Cir. 2004), Bradbury’s failure
to disclose PennDOT’s plans to O’Neill substantially undercuts
his argument. See Douglas W. Hawes & Thomas J. Sherrard,
Reliance on Advice of Counsel as a Defense in Corporate and
Securities Cases, 62 VA. L. REV. 1, 29 (1976) (“Reliance on
advice of counsel will not be available to the defendant if he
failed to disclose all relevant facts to the attorney.”); United
States v. Fin. Comm. to Re-Elect the President, 507 F.2d 1194,
1198 (D.C. Cir. 1974) (similar principle in the criminal context);
cf. Municipal Securities Disclosure, 1988 WL 999989, at *24
(reliance on others “whose duties have given them knowledge
of particular facts” affects the reasonableness of an
underwriter’s belief) . Moreover, Bradbury’s
reliance-on-counsel argument is much weaker than the one in
SEC v. Steadman, a case in which defendants failed to register
securities because their attorney formally and unqualifiedly told
them they need not do so. See Steadman, 967 F.2d 636, 642
(D.C. Cir. 1992).
8
Although not cited by the Commission, Bradbury’s own expert
acknowledged an underwriter “cannot delegate” his responsibilities to
others.
12
Second, Bradbury blindly relied on DCGA’s financial
advisor (Fowler) and bond counsel (Sweet). Yet an underwriter
may not “blindly” rely on information provided by the issuer.
Hanly, 415 F.2d at 597; see Municipal Securities Disclosure,
1988 WL 999989, at *25 (“Sole reliance on the representations
of the issuer would not suffice.”). Bradbury tries to shift blame
to Fowler’s incomplete financial projections, but the obviously
faulty assumptions underlying those projections left Bradbury’s
duties to investigate and disclose intact. See id. at *26 & n.92.
Bradbury also claims he relied on an opinion letter drafted by
Sweet, but the Commission reasonably rejected this argument.
Sweet’s opinion letter did not even approve the most relevant
cautionary language in the Official Statement.
Third, Bradbury also understates his role by relying on
investors’ silence. He asserts he would have disclosed the
PennDOT information to investors if they had only asked him
the right questions. This may be true. However, underwriters
have a “heightened obligation” to ensure adequate
disclosure—not just to answer questions when an investor has
the perceptiveness and ambition to identify an important
undisclosed issue and doggedly pursue it.9 See id. at *21 &
n.74.
We reject Bradbury’s attempts to negate his scienter by
understating his role—especially given the patently obvious
danger of not disclosing the PennDOT information. It certainly
would have bolstered the Commission’s scienter finding if
Bradbury had ignored explicit warnings from other key players
9
The alleged mismanagement of Forum Place following the bond
offering is irrelevant to our scienter inquiry; taking this into account
would improperly rely on “the blazing light of hindsight.” See
Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 n.19 (7th
Cir. 1977).
13
in the bond offering. In the end, however, we conclude a
“reasonable mind might accept” the Commission’s rejection of
Bradbury’s reliance arguments. See Dickinson v. Zurko, 527
U.S. 150, 162 (1999) (describing the substantial evidence test).
At the same time Bradbury understates his role in certain
respects, he also overstates it by arrogating the role of an
investor in evaluating material facts and weighing expected
risks. Each investor must have the opportunity to make
decisions based on a singular (and perhaps idiosyncratic)
preference for balancing risk and return, taking into account its
unique investment portfolio. Bradbury’s role was to facilitate
each investor’s individualized balancing of risk and return—not
to strike the balance on his own without revealing a critically
important fact.
Because of the state government’s vaguely expressed
intention to use Forum Place as swing space, Bradbury decided
PennDOT’s departure plans should not affect investors’ bond
purchasing decisions. Thus, he contends discussing swing space
issues with investors obviated the need to disclose PennDOT’s
departure plans. This misconceives an underwriter’s role. As
the standard for materiality makes clear, “investor[s]” must have
the opportunity to assess the “‘total mix’ of information.” See
TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976)
(emphasis added). Moreover, the offering documents should
have “accurately reflect[ed] all material facts which a prudent
investor should know”—not material facts Bradbury personally
found to be dispositive. See Municipal Securities Disclosure,
1988 WL 999989, at *22 n.76 (emphasis added). Accordingly,
Bradbury should have disclosed both PennDOT’s departure
plans and the state government’s swing space needs. Then,
prospective investors could have made fully informed decisions.
14
Putnam Investments purchased $27 million in bonds, even
after being fully informed. Bradbury argues this shows the
danger of non-disclosure was not obvious. The Commission
rejected his argument. We do too. First, Bradbury only
disclosed the PennDOT information to Putnam because
Putnam’s analyst persisted until she got answers. The very fact
that Putnam was intent on finding out this type of information
actually undercuts Bradbury’s argument; it shows Bradbury
“must have known” the information was important to investors.
Second, Putnam’s purchase does not mean the PennDOT
information was not essential. Indeed, Putnam’s analyst
considered the information “critical” and other investors labeled
it “very material” and “very critical.” Third, Bradbury’s
argument ignores the fact that different investors make very
different decisions. For example, Putnam might have strongly
desired tax-exempt bonds, while others might have been very
averse to significant bond-repayment risk.
For the foregoing reasons, we hold substantial evidence
supports the Commission’s finding that Bradbury acted with
scienter.
III
Were we writing on a blank slate, this would be a very close
case, because the scienter threshold is high. But we need not
decide how to sketch the contours of extreme recklessness on a
blank slate, because Congress has directed us to uphold the
Commission’s factual findings if supported by substantial
evidence. See 15 U.S.C. §§ 77i(a), 78y(a)(4). And, when
viewed through that deferential lens, we conclude a “reasonable
mind might accept” the evidence as “adequate” to support the
Commission’s scienter finding. See Dickinson, 527 U.S. at 162.
Substantial evidence supports the Commission’s finding that
Bradbury’s non-disclosure created a danger of misleading
15
buyers that was so obvious he must have known about it.
Accordingly, we deny the petition for review and affirm the
Commission’s order.
So ordered.