United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 6, 2008 Decided November 21, 2008
No. 07-1478
CONRAD P. SEGHERS,
PETITIONER
v.
SECURITIES AND EXCHANGE COMMISSION,
RESPONDENT
On Petition for Review of an Order
of the Securities and Exchange Commission
Charles B. Manuel, Jr. argued the cause for the petitioner.
Shira Y. Rosenfeld was on brief.
Christopher Paik, Special Counsel, Securities and Exchange
Commission, argued the cause for the respondent. Brian G.
Cartwright, General Counsel, Andrew N. Vollmer, Deputy
General Counsel, and Jacob H. Stillman, Solicitor, were on
brief. Leslie E. Smith, Senior Litigation Counsel, entered an
appearance.
Before: SENTELLE, Chief Judge, and HENDERSON and
GARLAND, Circuit Judges.
Opinion for the court filed by Circuit Judge HENDERSON.
2
KAREN LECRAFT HENDERSON, Circuit Judge: Conrad
Seghers petitions for review of the order of the Securities and
Exchange Commission (SEC or Commission) barring him from
future association with any investment adviser based on his
violation of section 17(a) of the Securities Act of 1933, 15
U.S.C. § 77q(a), section 10(b) of the Securities Exchange Act of
1934, 15 U.S.C. § 78j(b), Rule 10b-5, 17 C.F.R. § 240.10b-5,
and section 206(1) and (2) of the Investment Advisers Act of
1940, 15 U.S.C. § 80b-6(1) & 80b-6(2) (collectively the anti-
fraud provisions). Seghers challenges the order primarily on the
ground that summary disposition was inappropriate because
genuine issues of material fact existed. He also claims the SEC
abused its discretion in imposing the permanent bar sanction.
For the reasons set forth below, we deny the petition for review.
I.
On June 16, 2004, the SEC brought a civil enforcement
action against Seghers in the United States District Court for the
Northern District of Texas, alleging violations of the Securities
Act of 1933, the Securities Exchange Act of 1934 and the
Investment Advisors Act of 1940. Complaint, SEC v. Seghers,
No. 3:04-CV-1320-K (N.D. Tex. Sept. 14, 2006). A jury
returned a verdict against Seghers on the SEC’s claims that he
had violated the anti-fraud provisions. SEC v. Seghers, No.
3:04-CV-1320-K, slip op. at 1 (N.D. Tex. Sept. 14, 2006)
(Memorandum Opinion). Seghers then filed a motion for
judgment as a matter of law. Id.
The district court found that the following facts supported
the jury’s verdict and denied Seghers’s motion. Id. Seghers
participated in the offer and sale of limited partnership interests
in three hedge funds. Id. at 2. The parties stipulated that
Seghers was acting as an investment advisor during the offer and
sale. Id. The assets in the hedge funds were invested at Morgan
Stanley Dean Witter (Morgan Stanley). Id. Olympia Capital
Associates, L.P. (Olympia) acted as administrator of the hedge
3
funds and sent periodic statements to investors. Id. Seghers
reported the values of the hedge funds to Olympia. Id. at 5.
Olympia relied on the values reported by Seghers in its periodic
statements to investors. Id. On June 6, 2001, Morgan Stanley
sent Seghers a letter stating that the hedge funds values it
reported to Seghers had been incorrect since February 2001 and
had “not accurately reflected the actual value of the accounts
during any of these periods.” Id. at 8. Even following receipt
of the letter, Seghers overstated the values of the hedge funds to
Olympia by approximately $29.5 million in June, $23.1 million
in July, $26.3 million in August and $27 million in September.
Id. at 5. Olympia relied on the overstated values in statements
issued to investors on June 30, July 31, August 31 and
September 30, 2001. Id. On July 13, 2001, Seghers sent a letter
to investors reporting “positive developments” and stating that
“amidst the volatility in the markets we have continued to post
respectable returns,” but on August 1, 2001, Seghers told his
lawyer that the hedge funds were “in the toilet.” Id. at 7, 9.
The district court permanently enjoined Seghers from
violating the anti-fraud provisions based on its finding that
“there is a reasonable likelihood that Seghers will violate the
securities laws in the future.” Id. at 10; Amended Final
Judgment, SEC v. Seghers, No. 3:04-CV-1320-K (N.D. Tex.
Sept. 14, 2006) (Amended Final Judgment). The district court
ordered Seghers to pay a civil penalty but denied the SEC’s
request for disgorgement because Seghers had lost over
$900,000 of his own money in the hedge funds. Memorandum
Opinion at 11; Amended Final Judgment at 4-5. Seghers and the
SEC appealed the district court’s judgment.1
1
The Fifth Circuit recently affirmed the judgment, vacated the
denial of disgorgement inter alia and remanded for further
proceedings. SEC v. Seghers, No. 06-11146, 2008 WL 4726248 (5th
Cir. Oct. 28, 2008).
4
On September 26, 2006, the SEC’s Division of Enforcement
(Division) instituted administrative proceedings against Seghers
pursuant to section 203(f) of the Investment Advisors Act of
1940, 15 U.S.C. § 80b-3(f). The SEC assigned the case to
administrative law judge (ALJ) Lillian McEwen. On October
31, 2006, ALJ McEwen denied the Division’s request for leave
to move for summary disposition. She also scheduled a hearing
to commence on December 13, 2006. On November 29, 2006,
the SEC reassigned the case to ALJ Robert Mahony because of
ALJ McEwen’s imminent retirement. ALJ Mahony held a
telephonic pre-hearing conference with counsel for the parties
on December 6, 2006. Following the conference, the ALJ
vacated the hearing date “with the agreement of the parties” and
granted leave to the Division to move for summary disposition.
Seghers responded with his own motion for summary
disposition along with supporting affidavits and accompanying
exhibits. On February 5, 2007, the ALJ granted the Division’s
motion for summary disposition, permanently barring Seghers
from associating with any investment advisor and the SEC
thereafter upheld the ALJ’s action. Conrad Seghers, S.E.C.
Release No. 2656 (Sept. 26, 2007) (SEC Opinion). Seghers now
petitions for review.
II.
We uphold the SEC’s legal conclusions unless they are
“‘arbitrary, capricious, an abuse of discretion, or otherwise not
in accordance with law,’ 5 U.S.C. § 706(2)(A).” Canady v.
SEC, 230 F.3d 362, 364 (D.C. Cir. 2000) (quoting Wonsover v.
SEC, 205 F.3d 408, 412 (D.C. Cir. 2000)). Its factual findings
are conclusive if supported by substantial evidence. 15 U.S.C.
§ 80b-13.
A.
We first note that Seghers has waived the argument that he
has a general constitutional and a statutory right to a hearing
5
before being permanently barred from associating with any
investment advisor. Section 203(f) of the Investment Advisers
Act provides:
The Commission, by order, shall censure or place
limitations on the activities of any person
associated . . . with an investment advisor, or suspend
for a period not exceeding twelve months or bar any
such person from being associated with an investment
advisor, if the Commission finds, on the record after
notice and opportunity for hearing, that such censure,
placing of limitations, suspension, or bar is in the
public interest and that such person . . . is enjoined
from any action, conduct, or practice specified in
paragraph (4) of subsection (e) of this section.
15 U.S.C. § 80b-3(f) (emphasis added). The “action, conduct,
or practice” specified in section 203(e)(4) includes “engaging in
or continuing any conduct or practice . . . in connection with the
purchase or sale of any security.” 15 U.S.C. § 80b-3(e)(4).
Rule 201.250(a) of the Commission’s Rules of Practice
provides:
After a respondent’s answer has been filed . . . the
respondent, or the interested division may make a
motion for summary disposition of any or all
allegations of the order instituting proceedings with
respect to that respondent. . . . The facts of the
pleadings of the party against whom the motion is
made shall be taken as true, except as modified by
stipulations or admissions made by that party, by
uncontested affidavits, or by facts officially noted
pursuant to § 201.323.
6
17 C.F.R. § 201.250(a). The hearing officer is authorized to
“grant the motion for summary disposition if there is no genuine
issue with regard to any material fact and the party making the
motion is entitled to a summary disposition as a matter of law.”
17 C.F.R. § 201.250(b).
Seghers argued in his brief that the Constitution and section
203(f), 15 U.S.C. § 80b-3(f), require the SEC to conduct a
hearing before permanently barring an individual from
associating with any investment advisor. At oral argument,
however, Seghers’s counsel conceded that he has no
constitutional or statutory right to a hearing if there is no
genuine issue of material fact. In light of his concession, we
need not address the argument.
B.
We reject Seghers’s argument that ALJ Mahony was
without authority to vacate the scheduled hearing and reconsider
the Division’s motion for summary disposition. The SEC’s
Rules of Practice authorize the ALJ to “[r]egulat[e] the course
of a proceeding and the conduct of the parties and their
counsel.” 17 C.F.R. § 201.111. The ALJ was authorized—as
part of regulating the course of the proceeding—to consider the
Division’s motion for summary disposition notwithstanding his
predecessor’s denial thereof.
C.
We also reject Seghers’s argument that the SEC applied the
incorrect legal standard in considering the summary disposition
motion. The SEC stated that “summary disposition may be
granted if ‘there is no genuine issue with regard to any material
fact and the party making the motion is entitled to a summary
disposition as a matter of law.’” SEC Opinion at 7 (quoting 17
C.F.R. § 201.250(b)). According to the Commission, “Seghers
must set forth specific facts establishing a genuine issue of
material fact and may not rely upon mere allegations in his
7
pleadings to the law judge to create a genuine issue.” Id. at 8
n.25 (citing Frank P. Quattrone, S.E.C. Release No. 53,547,
2006 WL 768606, at *5 (2006) (respondent “did not rely on
mere conclusory allegations or speculation but instead offered
specific facts” in opposition to SEC’s summary disposition
motion)).
Seghers claims that the SEC’s statement that he “may not
rely upon mere allegations in his pleadings” is at odds with 17
C.F.R. § 201.250(a), which states, “The facts of the pleadings of
the party against whom the motion is made shall be taken as
true, except as modified by stipulations or admissions made by
that party, by uncontested affidavits, or by facts officially noted
pursuant to § 201.323.” Section 201.323 permits the SEC to
take official notice of “any material fact which might be
judicially noticed by a district court of the United States,”
provided that “[i]f official notice is requested or taken of a
material fact not appearing in the evidence in the record, the
parties, upon timely request, shall be afforded an opportunity to
establish the contrary.” 17 C.F.R. § 201.323. The SEC applied
the correct standard despite its statement that Seghers could not
rely upon “mere allegations in his pleadings.” It took official
notice of the facts set forth in the district court’s Memorandum
Opinion. Seghers does not challenge the SEC’s authority under
17 C.F.R. § 201.323 to rely on facts found by the district court.
While the facts found by the district court and relied on by the
SEC are in part at odds with Seghers’s version of the facts, the
SEC is permitted to alter Seghers’s allegations based on the
district court’s findings pursuant to 17 C.F.R. § 201.250(a).
D.
Seghers contends that genuine issues of material fact
existed that precluded the SEC from granting the Division’s
summary disposition motion. The SEC’s Rules of Practice
authorize the hearing officer to “grant the motion for summary
disposition if there is no genuine issue with regard to any
8
material fact and the party making the motion is entitled to a
summary disposition as a matter of law.” 17 C.F.R.
§ 201.250(b). The Commission recognizes “that a respondent
may present genuine issues with respect to facts that could
mitigate his or her misconduct.” John S. Brownson, S.E.C.
Release No. 46,161, 77 SEC Docket 3097, 2002 WL 1438186,
at *4 n.12 (2002), aff’d, Brownson v. SEC, 66 Fed. Appx. 687
(9th Cir. 2003). It considers a number of factors in determining
appropriate sanctions, including “‘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 for future violations.’” Steadman v. SEC, 603
F.2d 1126, 1140 (5th Cir. 1979) (quoting SEC v. Blatt, 583 F.2d
1325, 1334 n.29 (5th Cir. 1978)). Seghers argues that several
genuine issues of material fact existed with respect to the above
factors.
First, Seghers asserts that his actions “were sparked by
third-party error, and not by his own deliberate actions to
defraud investors.” Pet’r Br. at 23. Seghers claims that this
evidence created a genuine issue of material fact regarding the
egregiousness of his conduct. We disagree. The fact that
Morgan Stanley reported incorrect hedge funds values to
Seghers was not disputed, as the Commission noted. SEC
Opinion at 3, 8. Seghers knew of Morgan Stanley’s errors as of
June 6, 2001, and the Commission based its findings of
securities law violations on conduct committed only after that
date. Memorandum Opinion at 5. The SEC was free to consider
Morgan Stanley’s role in determining the egregiousness of
Seghers’s conduct. Whether Morgan Stanley’s role supports a
9
lesser sanction relates to the appropriateness of the sanction and
not the existence of a genuine issue of material fact.2
Second, Seghers seeks to introduce evidence that “his
purported delay of about a month in his definitive reporting to
investors was in fact the result of his conferring with top legal
and accounting professionals who were slow in responding.”
Pet’r Br. at 23. Such evidence would not create a genuine issue
of material fact regarding the egregiousness of Seghers’s
conduct. The district court found that Seghers overstated the
values of the hedge funds for over three months after he became
aware that the Morgan Stanley reports were erroneous.
Memorandum Opinion at 5-6. Seghers does not explain how
evidence explaining one month of false reporting would mitigate
his overstating the hedge funds’ values for several months.
Third, Seghers seeks to introduce evidence that he took
nothing from investors and that he lost his own investments in
the hedge funds. These facts, however, were undisputed and did
not require a hearing. SEC Opinion at 9. Seghers’s claim that
the SEC did not properly consider these factors relates to the
appropriateness of the sanction, not the necessity of a hearing.
Fourth, Seghers contends that genuine issues of material
fact existed regarding the necessity of a permanent bar to
prevent him from committing future violations and regarding his
recognition of the wrongfulness of his conduct. Seghers
declared in an affidavit that he did not intend to act as an
investment advisor but that he should not be precluded from
resuming his career as an investment advisor in the future.
2
The Commission argues in the alternative that even if a genuine
issue of material fact exists regarding the role of third-party error in
Seghers’s actions, collateral estoppel bars him from pursuing this
argument. Resp’t Br. at 26; see also SEC Opinion at 8-9. Because we
conclude that no genuine issue of material fact exists, we need not
reach the collateral estoppel argument.
10
There is no genuine issue as to whether Seghers recognizes the
wrongfulness of his conduct. On the contrary, Seghers made it
clear to the SEC in his pleadings and affidavits that he contends
he did not do anything wrong.
E.
“We accord great deference to the SEC’s decisions as to
choice of sanction, inquiring only whether a sanction ‘was
arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law.’” WHX Corp. v. SEC, 362 F.3d 854, 859
(D.C. Cir. 2004) (quoting KPMG, LLP v. SEC, 289 F.3d 109,
121 (D.C. Cir. 2002)). Seghers sets out three reasons that he
believes make the sanction grossly excessive.
First, Seghers argues that his conduct was relatively minor
when compared with the conduct of others whom the SEC has
permanently barred in the past. The Supreme Court has held
that an administrative sanction is “not rendered invalid in a
particular case because it is more severe than sanctions imposed
in other cases.” Butz v. Glover Livestock Comm’n Co., 411 U.S.
182, 187 (1973). The Eighth Circuit cited Butz in rejecting the
argument that a permanent bar for a first-time securities law
offender was inconsistent with other cases. Lowry v. SEC, 340
F.3d 501, 507 (8th Cir. 2003). The Second Circuit noted that
disproportionate penalties are irrelevant to the appropriateness
of a sanction if the sanction is within the SEC’s discretion.
Hiller v. SEC, 429 F.2d 856, 858-59 (2d Cir. 1970) (citing
Dlugash v. SEC, 373 F.2d 107, 110 (2d Cir. 1967)). We agree
with the Second Circuit and, accordingly, reject Seghers’s first
point.
Second, Seghers claims that the SEC did not sufficiently
articulate reasons for a permanent bar. See Steadman, 603 F.2d
at 1140 (“[P]ermanent exclusion from the industry ‘is without
justification in fact’ unless the Commission specifically
articulates compelling reasons for such a sanction.”) (footnote
11
omitted). We disagree. The SEC considered “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 for future violations” in determining a sanction
that protects the public interest. SEC Opinion at 11-12 (quoting
Steadman, 603 F.2d at 1140). It noted that Seghers knowingly
or recklessly defrauded investors by significantly overstating the
values of the hedge funds for several months. Id. at 12-13; see
Elliott v. SEC, 36 F.3d 86, 87 (11th Cir. 1994) (finding
conviction of serious violations of securities laws sufficient in
itself to support SEC’s conclusion that permanent bar was in
public interest). In support of its conclusion that Seghers will
have opportunities to violate the securities laws in the future, the
SEC noted that Seghers worked exclusively as an investment
advisor in the past, desired to keep that career option open in the
future and maintained contact with his former clients. Id. at 13.
It also found that Seghers had not demonstrated an
understanding of his duties as an investment advisor by his
failure to disclose the inaccuracy of the reported hedge funds
values to investors. Id. at 14. These facts support a permanent
bar.
Third, Seghers argues that the SEC ignored or gave
insufficient weight to potentially mitigating circumstances. On
the contrary, the SEC considered the fact that Seghers did not
benefit financially from his conduct. Id. at 15. It rejected as
irrelevant both Seghers’s plea of personal financial hardship as
well as the affidavits of investors maintaining that Seghers did
not defraud them. The SEC found that the need for a permanent
bar to protect the public interest outweighed the mitigating
factors. Id. A permanent bar is a statutorily authorized sanction
12
for Seghers’s conduct. See 15 U.S.C. § 80b-3(f).3 The SEC did
not abuse its discretion in permanently barring Seghers from
associating with any investment advisor.
F.
Finally, Seghers argues that the SEC denied him due
process by not staying its proceedings while his Fifth Circuit
appeal was pending. Although he admits that the SEC is not
obligated to stay administrative proceedings while an appeal is
pending, he claims that the SEC punished him for exercising his
right to appeal by finding that his refusal to recognize the
wrongfulness of his conduct supported a permanent bar.
Seghers asserts that he could not recognize the wrongfulness of
his conduct without prejudicing his appeal.
As the Supreme Court has observed, “not every burden on
the exercise of a constitutional right, and not every pressure or
encouragement to waive such a right, is invalid.” Corbitt v. New
Jersey, 439 U.S. 212, 218 (1978). In Corbitt, the defendant
turned down an offer to plead guilty, which would have
permitted the court to “impose either life imprisonment or a
term of up to 30 years,” while a trial on a first-degree murder
charge exposed him to a mandatory life sentence. Id. at 217-18.
The Court rejected the argument that Corbitt’s choice imposed
an unconstitutional burden on him. Id. at 218-19; see also SEC
v. Lipson, 278 F.3d 656, 664 (7th Cir. 2002) (court rejected
appellant’s argument that district court’s consideration of his
refusal to recognize wrongfulness of his conduct in determining
3
Section 80b-3(f) authorizes a bar if a person “is enjoined from
any action, conduct, or practice specified in paragraph (4) of
subsection (e).” 15 U.S.C. § 80b-3(f). The district court enjoined
Seghers from violating the anti-fraud provisions in the offer or sale of
any security, Memorandum Opinion at 10-11, which constitutes an
“action, conduct, or practice” under section 203(e)(4). See supra p. 5.
13
sanction violated due process of law, noting that “acceptance of
responsibility for illegal conduct is a routine and
unexceptionable feature of criminal, let alone of civil,
punishment”). Before the district court, Seghers was given the
option of recognizing the wrongfulness of his conduct or
refusing to do so and risking more severe remedial action. He
chose the latter, a factor the district court cited in permanently
enjoining Seghers from violating the securities laws.
Memorandum Opinion at 10. The Commission, acknowledging
Seghers’s dilemma, gave Seghers a similar option and he once
again risked a more severe sanction by refusing to acknowledge
the wrongfulness of his conduct. The option did not
unconstitutionally burden Seghers in the district court, see
Lipson, 278 F.3d at 664, nor did it deny him due process before
the SEC.4
For the foregoing reasons, the petition for review is
denied.
So ordered.
4
Finally, Seghers's request—made for the first time at oral
argument—that we stay our decision pending the Fifth Circuit's action
is moot. See supra note 1.